Federal Circuit Opines on Post-TC Heartland Venue in Cray

The Court of Appeals for the Federal Circuit issued an opinion in a venue case, IN RE: CRAY INC., No. 17-129, where the Court reversed Judge Gilstrap of the Eastern District of Texas and nullified the district court’s proffered venue rules.

Here are some invaluable quotes from the Opinion:

Although the district court found that Cordis resolved this case, the district court then went on “[f]or the benefit of” other litigants and counsel to set out four factors for inquiries into what constitutes a regular and established places of business “in the modern era,” including physical presence, defendant’s representations, benefits received, and targeted interactions with the district…

That is the circumstance here: the district court misunderstood the scope and effect of our decision in Cordis, and its misplaced reliance on that precedent led the court to deny the motion to transfer, which we find to have been an abuse of discretion.

Question:

Therefore, the question presented today is whether discovery is necessary to determine that [either defendant] ‘has a regular and established place of business’ here.”

Precedent:

Cordis found that “a rational and substantial argument may be made in support of the court’s order denying Cordis’ motion to dismiss for lack of proper venue.” Id. at 737. It thus held in those circumstances that “we decline to issue the writ.” Id. The court did state that the “appropriate inquiry” is not “whether [Cordis] has a fixed physical presence in the sense of a formal office or store.” Id. But, notably, the court did not, in its opinion, evaluate venue in light of the statutory language of § 1400(b).

…in the wake of the Supreme Court’s holding in TC Heartland, effectively reviving Section 1400(b) as the focus of venue in patent cases, we must focus on the full and unchanged language of the statute, as Cordis did not consider itself obliged to do.

Moreover, district courts, including the trial court in this case, have noted the uncertainty surrounding and the need for greater uniformity on this issue…Although the law was unclear and the error understandable, the district court abused its discretion by applying an incorrect legal standard, which we now clarify in this opinion.

The Rule:

As discussed in greater detail below, our analysis of the case law and statute reveal three general requirements relevant to the inquiry:

(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. If any statutory requirement is not satisfied, venue is improper under § 1400(b).

The statutory language we need to interpret is “where the defendant . . . has a regular and established place of business.” 28 U.S.C. § 1400(b). The noun in this phrase is “place,” and “regular” and “established” are adjectives modifying the noun “place.” The following words, “of business,” indicate the nature and purpose of the “place,” and the preceding words, “the defendant,” indicate that it must be that of the defendant. Thus, § 1400(b) requires that “a defendant has” a “place of business” that is “regular” and “established.” All of these requirements must be present. 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.

“Place”

…when determining venue, the first requirement is that there “must be a physical place in the district.” The district court erred as a matter of law in holding that “a fixed physical location in the district is not a prerequisite to proper venue.” [] This interpretation impermissibly expands the statute. The statute requires a “place,” i.e., “[a] building or a part of a building set apart for any purpose” or “quarters of any kind” from which business is conducted. William Dwight Whitney, The Century Dictionary, 732 (Benjamin E. Smith, ed. 1911); see also Place, Black’s Law Dictionary (1st ed. 1891) (defining place as a “locality, limited by boundaries”). The statute thus cannot be read to refer merely to a virtual space or to electronic communications from one person to another. But such “places” would seemingly be authorized under the district court’s test.

“Regular and established place of business”

The second requirement for determining venue is that the place “must be a regular and established place of business.” The district court’s test fails to recognize that the place of business must be “regular.” A business may be “regular,” for example, if it operates in a “steady[,] uniform[,] orderly[, and] methodical” manner…In other words, sporadic activity cannot create venue

The “established” limitation bolsters this conclusion. The word contains the root “stable,” indicating that the place of business is not transient. It directs that the place in question must be “settle[d] certainly, or fix[ed] permanently.” Establish, Black’s Law Dictionary (1st ed. 1891). To make “permanent” clearly accords with the “main purpose” identified in the predecessor statute’s legislative history…As an example, one court held that a business that semiannually displayed its products at a trade show in the district had only a temporary presence…On the other hand, a five-year continuous presence in the district demonstrates that the business was established for purposes of venue…

“Place of the defendant”

As the statute indicates, it must be a place of the defendant, not solely a place of the defendant’s employee. Employees change jobs. Thus, the defendant must establish or ratify the place of business. It is not enough that the employee does so on his or her own. Relevant considerations include whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place… Another consideration might be whether the defendant conditioned employment on an employee’s continued residence in the district or the storing of materials at a place in the district so that they can be distributed or sold from that place. See, e.g., Cordis

Marketing or advertisements also may be relevant, but only to the extent they indicate that the defendant itself holds out a place for its business…But the mere fact that a defendant has advertised that it has a place of business or has even set up an office is not sufficient; the defendant must actually engage in business from that location. In the final analysis, the court must identify a physical place, of business, of the defendant…

Application in Cray

The third requirement identified above, that the regular and established place of business must be “the place of the defendant,” is crucial here. The facts presented cannot support a finding that Mr. Harless’s home was a regular and established place of business of Cray. The same is true as to Mr. Testa, to the extent he is relevant to this analysis. The fact that Cray allowed its employees to work from the Eastern District of Texas is insufficient…

No evidence indicates that Cray played a part in selecting the place’s location, stored inventory or conducted demonstrations there, or conditioned Mr. Harless or Mr. Testa’s employment or support on the maintenance of an Eastern District of Texas location. No evidence shows that Cray believed a location within the Eastern District of Texas to be important to the business performed, or that it had any intention to maintain some place of business in that district in the event Mr. Harless or Mr. Testa decided to terminate their residences as a place where they conducted business…

And even if Mr. Harless performed work for Cray beyond sales, nothing suggests that Mr. Harless’s work on “new sales and new account development” or “management of key accounts” changes the analysis above…Our decision here comports with a number of appellate court decisions concerning employees working from their homes.

Conclusion and Transfer

We stress that no one fact is controlling. But taken together, the facts cannot support a finding that Cray established a place of business in the Eastern District of Texas. Thus venue cannot exist there under § 1400(b). Because venue is lacking in the Eastern District of Texas, Cray seeks transfer to the Western District of Wisconsin. Raytheon responds that it prefers transfer to the United States District Court for the Western District of Texas. Section 1406(a) provides that “[t]he district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” Because the district court determined that venue was proper, it did not address the parties’ arguments regarding where the case should be transferred. We leave that determination for the district court on remand.

More commentary to come…