Appeals Court Tells Texas Judge to Transfer Cray Patent Case

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By Tony Dutra and Malathi Nayak

The U.S. Court of Appeals for the Federal Circuit Sept. 21 rejected an attempt by a federal district judge in East Texas to maintain a hefty load of patent infringement cases ( In re Cray Inc. , 2017 BL 334363, Fed. Cir., 2017-129, 9/21/17 ).

The Federal Circuit ordered U.S. District Judge Rodney Gilstrap of the Eastern District of Texas to transfer an infringement case filed by Raytheon Co. against supercomputer maker Cray Inc.—after Gilstrap had previously denied Cray’s motion to transfer the case because a Cray work-at-home salesperson lived in district.

The court said a home office, for venue purposes, wasn’t enough of a physical business presence to keep the case in the Eastern District. It remanded the case to Gilstrap to decide where to transfer Raytheon’s complaint. Raytheon prefers the Western District of Texas; Cray wants it in the Western District of Wisconsin.

Gilstrap’s court, which has a reputation for being favorable to patent owners, had been the go-to location for filing infringement lawsuits for the past few years until the Supreme Court May 22 in TC Heartland LLC v. Kraft Foods Grp. Brands LLC limited patentees venue options for filing infringement lawsuits. Since that ruling, patent complaint filings in the district have fallen by nearly half, according to Bloomberg Law data.

The Federal Circuit’s ruling means patent owners won’t be able to use an alleged infringer’s telecommuting employees or web-based sales in a district to justify that venue choice. However, plaintiffs looking to sue large companies with retail locations or warehouses in a district, such as Apple Inc. or Amazon.com Inc., may still have a wider choice of venues .

Many cases in E.D. Texas involved software technology tied to e-commerce, Brian Love, an assistant professor at the Santa Clara University School of Law, said. “Now we know quite clearly, if the company doesn’t have a physical location within the bounds of E.D. Texas, unless they are incorporated there, they are not subject to patent suits there.”

Gilstrap’s Test Rejected

Patent owners’ choices for where they can file infringement complaints are limited by 28 U.S.C. §1400(b) to “where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”

Federal Circuit law had, until the TC Heartland decision, liberally defined “resides” in a way that allowed lawsuits to be filed in the East Texas court even if the alleged infringer only sold a single product in that district. TC Heartland removed that option, limiting “resides” to the defendant’s state of incorporation.

The last time the Federal Circuit interpreted “a regular and established place of business” was in 1985 in In re Cordis Corp . In denying Cray’s motion to dismiss, Gilstrap set out a four-factor test that would bring Cordis into the “modern era” of commerce. A physical presence was one factor, but lack of one could be overcome. The test easily allowed a salesman’s presence to matter and, though it wasn’t at issue in this case, left a path for patent holders to claim that defendants had a virtual business presence in the district.

The Federal Circuit rejected Gilstrap’s test—even though it agreed that the world has changed since 1985. “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,” it said.

The Section 1400(b) language is clear, the court said: "(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.”

Crucially, the court said, the “place” must be Cray’s presence—not the salesman’s. Allowing an employee to work from his home in the district is insufficient, it said. Nor would a “virtual space” or a location serving as a base for electronic communications qualify.

Must Own, Control Place

The court conceded that the statutory requirements leave a gray area. For example, a small business operating out of a founder’s home can be sufficient. Courts entertaining motions to transfer must consider whether the defendant owns the place “or exercises other attributes of possession or control over the place,” it said.

The ruling is likely to compound the impact of the TC Heartland decision on where patent infringement complaints are filed.

“This means there should be less cases in E.D. Texas, which means more will be filed in places like Delaware and the Northern District of California,” William Atkins, a partner at Pillsbury Winthrop Shaw Pittman LLP, told Bloomberg BNA. Patent cases “will now be spread out throughout the country. It will be a good thing for the patent bar because you get a diversity of judges handling patent cases.”

Small companies will be the primary beneficiaries of the ruling, Shawn Ambwani, chief operating officer of Unified Patents, a group of technology companies that pool resources to defend against patent claims, said.

“A lot of small companies were getting sued in E.D. Texas even though they had no contact with it except that they had a website where they sold something,” he said. “That’s something that is definitely going to be reducing.”

Judge Alan D. Lourie wrote the court’s order, which was joined by Judges Jimmie V. Reyna and Kara F. Stoll.

Counsel for the parties didn’t immediately respond to Bloomberg BNA’s request for comments. Fenwick & West LLP represented Cray. Steptoe & Johnson LLP represented Raytheon.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com; Malathi Nayak in Washington at mnayak@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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