Surviving the battle controlling where businesses can be sued for patent infringement

November 2017 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

November 2017 Issue

In a landmark decision earlier this year, the US Supreme Court overturned the longstanding rule controlling where a domestic business can be sued for patent infringement. This triggered disagreement among trial courts across the country. Some created rules making suits in distant forums easy, while others protected companies from them. In September, an appellate court resolved this disagreement by creating a test to determine where a lawsuit is proper. Domestic businesses should therefore understand this test before deciding whether to expand operations into a new area of the country.

The rise of the Eastern District of Texas

While the US patent statute allows foreign companies to be sued for patent infringement anywhere where infringement occurs, domestic companies may only be sued where they reside or have a regular and established place of business. In 1957, the Supreme Court held that a company resides only in the state where it was incorporated. When Congress amended the patent statute, courts considered whether the amendment expanded the definition of “reside”. In 1990, an appellate court concluded the amendment expanded the definition so a company resides anywhere it makes sales. For decades, trial courts applied that broad definition of “reside” and allowed plaintiffs wide latitude when selecting where to file patent suits.

Plaintiffs soon began picking where to file their lawsuit based on where they thought the court would favour their client or claim. Over time, plaintiffs began flocking to an out of the way district in Texas, encompassing a handful of small cites not particularly known for technology – the Eastern District of Texas. In 2016, this small district led the nation with 1662 patent infringement cases – nearly 37 percent of all infringement cases filed. Of those, 1119 cases were brought before judge Rodney Gilstrap, who presided over more new patent cases than the next 10 judges. In parallel with the rise of the Eastern District of Texas, more companies became incorporated solely for the purpose of filing patent lawsuits and extracting money from accused infringers. As these plaintiffs gravitated towards the Eastern District of Texas, it quickly became known as the forum of choice for so-called ‘patent trolls’.

The TC Heartland decision

In December 2016, the Supreme Court weighed in and agreed to hear a case addressing where a patent lawsuit could be brought. In TC Heartland LLC v. Kraft Foods Group Brands LLC, the defendant argued that the Federal Circuit’s 1990 opinion incorrectly interpreted the patent statute. The Supreme Court agreed. On 22 May 2017, it held that a domestic corporation “resides” only in the state where it is incorporated. Thus, patent infringement lawsuits must be filed where an accused infringer is incorporated or where it has an established place of business. This has the potential to dramatically shift patent litigation from the Eastern District of Texas, in which few companies are incorporated or established, to venues such as the Northern District of California and the District of Delaware, where many companies are located or incorporated.

In the 38 days before the TC Heartland decision, 161 patent suits were filed in the Eastern District of Texas, or 32 percent of all infringement suits filed during that period. In the same period after the decision, only 61 patent cases were filed in the district, or 14 percent of all new cases. Conversely, the number of suits filed in Delaware grew from 10 percent of all cases, to 27 percent. Likewise, in the North District of California, home to many technology companies, more than twice as many suits were filed after the TC Heartland decision as were filed before.

Defining “an established place of business”

Because TC Heartland focused on the definition of corporate residence, it did not address what “an established place of business” was – the alternative way to establish patent venue. It left this for lower courts to interpret. Recently, the Eastern District of Texas created an expansive test to determine whether a company has an established place of business in Texas. In June of this year, judge Gilstrap crafted a four factor test for determining whether cases will remain in his district. The test analysed both a company’s physical presence and the activities it directed at the district. But the test did not require a physical presence in the district to establish proper venue.

When applying the test, judge Gilstrap found that Cray Inc., based in Seattle, Washington, had an established place of business in the Eastern District of Texas because it had a sales representative who worked from home in the district, even though the company had no physical facilities in the district and sold no products there. He cited that the sales executive, who left the company in 2016, was reimbursed for his cell phone and internet fees, and his office telephone number had an East Texas area code.

This ruling immediately sparked concern in Congress, where Rep. Darrell Issa, R-Calif., chairman of the House Intellectual Property Subcommittee, said judge Gilstrap appeared to be driven by a desire to “ensure[] that as many of the cases as possible will remain in his courtroom” and aid the local economy. Rep. Issa called the ruling “an act that I find reprehensible by that judge”. Cray itself responded by petitioning the Court of Appeals for a writ of mandamus immediately ordering the reversal of judge Gilstrap’s decision.

Other districts have taken an opposite approach to determining whether venue is proper. For example, the District of Delaware held that “some physical presence is needed”. If a company is “registered to do business [in Delaware], or only maintains a website that is accessible in Delaware, or simply ships goods to unaffiliated individuals or third-party entities here, then this district is an improper venue for the lawsuit.” Likewise, the Middle District of Florida expressly “decline[d] to adopt [judge Gilstrap’s] standard” and instead found it was clear from the evidence that Brooks Sports Inc., headquartered in Seattle, Washington, has no regular and established place of business in Florida, particularly when the acts of alleged “infringement (i.e., development of the Brooks DNA material and technolog[y]) occurred at the Defendant’s headquarters in Washington or overseas”.

The Central District of California declined to apply a broad test for determining whether a company has an established place of business in the district and found that the location of the chief executive’s home was insufficient.

On 21 September 2017, the Court of Appeals for the Federal Circuit – which hears all patent appeals – stepped in to resolve the split within the trial courts. The court found that the Eastern District of Texas “abused its discretion by applying an incorrect legal standard” and ordered Cray’s lawsuit transferred out of that district. The Court of Appeals recognised that in this era, “not all corporations operate under a brick-and-mortar model. Business can be conducted virtually. Employees increasingly telecommute. Products may not, as a rule, be warehoused by retailers, and the just-in-time delivery paradigm has eliminated the need for storing some inventory”. But it nonetheless created a three-part test requiring a physical presence before a company could be sued in a particular district. First, there must be a physical place in the district. Second, it must be a regular and established place of business. Third, it must be the place of the defendant. In application, this test will undoubtedly reduce the number of lawsuits against domestic companies that can be brought in the Eastern District of Texas. It will not, however, eliminate them.

What businesses can do to protect themselves

Before TC Heartland, a domestic company’s only option to avoid being called to a distant venue to defend a patent claim was to avoid sales in that district. The new and narrower reading of the patent statute now offers companies more flexibility. Unless a domestic company creates “an established place of business” in a judicial district (or is incorporated there), it can avoid suit in that district. But even with the guidance of the new three-part test, companies should be aware that the line is not clear cut.

Court’s will look to the scope in which a company has a physical place in the district. It need not be a formal office or store, but it must be more than virtual space. Courts will also look at the amount of business conducted in the district. For example, the semi-annual display of products at a trade show is likely insufficient, while a five-year continual presence in the district is. Finally, courts will distinguish between a company’s place of business, and that of its employees. Activities such as listing the location on a corporate website or placing the company’s sign on a building suggests the location is associated with the company.

In general, the more activities a company has within a particular district, the greater the likelihood a court in that district will determine venue is proper there. Before proceeding into jurisdictions that may present a greater risk of patent infringement suits, companies should carefully weigh the potential benefits of operating in that jurisdiction against the risk of being pulled there to defend an infringement claim.

Benjamin J. Byer is a partner at Davis Wright Tremaine LLP. He can be contacted on +1 (206) 757 8105 or by email: benbyer@dwt.com.

Benjamin J. Byer

Davis Wright Tremaine LLP