In Re Cray—Another Blow To East Texas’ Patent Docket: Employees Working From Home Are Generally Not Enough To Confer Venue Upon A District In Patent Cases

On September 21, 2017, the Federal Circuit issued its decision in In re Cray Inc. (available here). As I noted in an earlier post, after the Supreme Court’s TC Heartland decision, the only proper venue for a patent-infringement case against a domestic defendant is (i) where the defendant resides (which, per the Supreme Court, is the defendant’s state of incorporation), or (ii) where the defendant both (a) has a regular and established place of business and (b) has committed acts of infringement. See 28 U. S. C. § 1400(b).

Because there is no dispute about where a defendant’s state of incorporation is, the real focus is on where a defendant has “a regular and established place of business.” In In re Cray, East Texas’ Judge Gilstrap had taken an expansive view of the phrase “a regular and established place of business,” finding that an employee who worked from home in East Texas constituted “a regular and established place of business” of the defendant. In In re Cray, the Federal Circuit reversed, finding that the district court had abused its discretion and ordered the district court to grant the motion to dismiss and transfer the case to an appropriate venue.

The Federal Circuit first articulated the relevant venue test with respect to “a regular and established place of business”:

[There are] 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 district court’s opinion had set forth “four factors” to consider in the inquiry—i.e., (i) physical presence, defendant’s representations, benefits received, and targeted interactions with the district. The Federal Circuit found that “[t]he 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.”

Instead, per the Federal Circuit:

  • “The regular and established place of business standard requires more than the minimum contacts necessary for establishing personal jurisdiction or for satisfying the doing business standard of the general venue provision.”
  • “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. The statute thus cannot be read to refer merely to a virtual space or to electronic communications from one person to another. . . . While the ‘place’ need not be a ‘fixed physical presence in the sense of a formal office or store,’ there must still be a physical, geographical location in the district from which the business of the defendant is carried out.”
  • “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.”
  • “[W]hile a business can certainly move its location, it must for a meaningful time period be stable, established. On the other hand, if an employee can move his or her home out of the district at his or her own instigation, without the approval of the defendant, that would cut against the employee’s home being considered a place of business of the defendant.”
  • “[T]he third requirement when determining venue is that ‘the regular and established place of business’ must be ‘the 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. One can also recognize that a small business might operate from a home; if that is a place of business of the defendant, that can be a place of business satisfying the requirement of the statute. 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. 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.”
  • “The district court is correct that a defendant’s representations that it has a place of business in the district are relevant to the inquiry. Potentially relevant inquiries include whether the defendant lists the alleged place of business on a website, or in a telephone or other directory; or places its name on a sign associated with or on the building itself. 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. A further consideration for this requirement might be the nature and activity of the alleged place of business of the defendant in the district in comparison with that of other places of business of the defendant in other venues. Such a comparison might reveal that the alleged place of business is not really a place of business at all.”

(citations and quotations omitted).

In the instant case, the Federal Circuit found that the district court erred in finding that an employee’s home, located in East Texas, constituted “a regular and established place of business” of the defendant:

The fact that Cray allowed its employees to work from the Eastern District of Texas is insufficient. There is no indication that Cray owns, leases, or rents any portion of Mr. Harless’s home in the Eastern District of Texas. 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. . . .

The statute clearly requires that venue be laid where ‘the defendant has a regular and established place of business,’ not where the defendant’s employee owns a home in which he carries on some of the work that he does for the defendant.

(citations and quotations omitted).

The Federal Circuit did note, however, that a defendant may have a business model “whereby many employees’ homes are used by the business as a place of business of the defendant.” But, in the run-of-the-mill situation where a one-off employee is working from home for the employee’s convenience, that is clearly not sufficient to constitute “a regular and established place of business” for venue purposes under In re Cray.

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