CAFC Disagrees with Judge Gilstrap’s Post-TC Heartland Venue Analysis

Written by: Alyssa R.M. Pugh

On September 21, 2017, the Federal Circuit in In re Cray Inc. rejected Judge Gilstrap’s (E.D. Tex.) interpretation of the meaning of “where the defendant … has a regular and established place of business” for purposes of venue in patent infringement actions under 28 U.S.C. § 1400(b). On a petition for writ of mandamus, the panel of Judges Lourie, Reyna, and Stoll determined that Judge Gilstrap’s denial of Cray Inc.’s (“Cray”) motion to transfer for improper venue was an abuse of discretion.

Cray, a Washington corporation, was sued by Raytheon Company (“Raytheon”) in the Eastern District of Texas for patent infringement. Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG, 2017 WL 2813896 (E.D. Tex. June 29, 2017). Cray moved to transfer the action on the basis that venue was improper, arguing that it neither resided within the Eastern District of Texas, and that it had not committed acts of infringement within the district and did not have a “regular and established place of business” within the district under 28 U.S.C. § 1400(b).

The district court agreed with Cray that it did not “reside” within the district (TC Heartland confirmed that “resides” means place of incorporation). However, Judge Gilstrap applied the Federal Circuit’s decision in In re Cordis Corp. to reject Cray’s argument on the basis that Cray had a “regular and established place of business” within the District and that venue was proper. Judge Gilstrap also set forth a “four-factor” inquiry for determining if a defendant has a “regular and established place of business” within the meaning of § 1400(b), factors including “physical presence, defendant’s representations, benefits received, and targeted interactions with the district.”

The Federal Circuit acknowledged that venue disputes in the aftermath of TC Heartland increasingly turn on the determination of whether the defendant has a “regular and established place of business” in the relevant district. However, the Federal Circuit determined that in this matter, “the district court misunderstood the scope and effect of our decision in Cordis,” and found creation of the “four-factor” inquiry to be improper and erroneous.

The Federal Circuit explained that Cordis did not explicitly address the meaning of a “regular and established place of business,” and countered the improper “four-factor” inquiry with a general “three requirement” test. Applying a strict interpretation of § 1400(b)’s statutory language with respect to “where the defendant … has a regular and established place of business,” the court found that venue is only proper where each of three requirements is met: “(1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.” The Federal Circuit also stated that the “district court’s four-factor test is not sufficiently tethered to this statutory language and thus it fails to inform each of the necessary requirements of the statute.”

In the case at bar, Cray did not own or lease any property within the Eastern District of Texas, and only employed two individuals who worked from their homes within the district, Harless and Testa. Focusing on the residence of Harless (as Testa had left Cray prior to Raytheon’s filing suit), the Federal Circuit stressed that Cray neither conditioned Harless’ employment on continued residence within the Eastern District of Texas, nor stored any inventory or marketing materials on its behalf in Harless’ residence. Cray did not contribute to the maintenance of Harless’ home, and there were no public indications that Harless’ home was affiliated with the business pursuits of Cray. Cordis (in which the defendant’s “business specifically depended on employees being physically present at places in the district”) was inapposite to the situation presented in Raytheon Co. v. Cray, Inc.

Since there was no place of business “of the defendant’s” as required by the language of the statute, the Federal Circuit held that “the facts cannot support a finding that Cray established a place of business in the Eastern District of Texas,” and determined that “venue cannot exist there under § 1400(b).”