Observations in the Wake of Narrowing of Patent Venue in 'TC Heartland'

June 7, 2017

Delaware Business Court Insider

In a recent unanimous decision that is still reverberating throughout the patent litigation world, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Federal Circuit's broad interpretation of the patent venue statute, limiting a corporation's residence for the purpose of venue in patent cases to "only the state of incorporation." This is significant because the patent venue statute provides for proper venue where a defendant "resides," and for almost 30 years corporate residence in patent cases has been where the corporation was subject to personal jurisdiction—essentially anywhere in most cases. This broad interpretation of patent venue led to the concentration of cases in a few select plaintiff-friendly districts, such as the Eastern District of Texas.

In light of the Supreme Court's narrowing of patent venue, many defendants are now looking for guidance on where venue is appropriate and how and when to get there.

Below are three observations on these issues.

• Venue is also proper "where the defendant has committed acts of infringement and has a regular and established place of business."

Under 1400(b), venue is proper is one of two ways: "where the defendant resides," or "where the defendant has committed acts of infringement and has a regular and established place of business." Under the Federal Circuit's now-reversed broad interpretation of "resides" in VE Holding v. Johnson Gas Appliance , 917 F.2d 1574 (Fed. Cir. 1990)), the scope of the first prong of 1400(b) was so broad that the second prong was rendered superfluous. Now that the Supreme Court has limited the first prong to only the state of incorporation for domestic corporations, the second prong will once again be relevant.

One issue sure to see its share of litigation is the scope of "regular and established place of business." Because this portion of 1400(b) has not been relevant for 30 years, there is no recent caselaw on the issue. Prior to VE Holding, the Federal Circuit addressed this issue in In re Cordis, 769 F.2d 733 (Fed. Cir. 1985), where it endorsed a line of regional circuit cases holding that the appropriate inquiry for "regular and established place of business" is not the existence of a "fixed physical presence," but is instead whether a defendant's presence in the jurisdiction is "permanent and continuous" and is related to the alleged infringing acts. In that case, the Federal Circuit upheld the district court's finding of a "regular and established place of business" where employees worked from home offices and sold the accused products from stock kept in their homes. In doing so, the court distinguished cases finding venue was improper where the employees worked from home but the orders were made to, and shipped from, the home office in another district.

The Supreme Court has addressed this issue as well, though over a century ago, in W.S. Tyler v. Ludlow-Saylor Wire , 236 U.S. 723 (1915). In that case, the court affirmed a district court decision finding neither "a regular and established place of business" nor "an act of infringement." In a short opinion the Supreme Court held that an office in the district did not constitute a "regular established place of business" where the lone employee in the district also worked for another corporation, the office was shared by both companies and orders taken in the district were forwarded outside of the district to be fulfilled. The court also found that no act of infringement occurred in the district based primarily on the fact that the only sale was consummated outside of the district.

While there is still much uncertainty surrounding the scope of "regular and established place of business," these cases show that one factor considered to be important by both the Supreme Court and Federal Circuit is whether the place of business receives and fulfills the order, or whether the order is sent outside the district.

• Foreign corporations can still be sued in any district, but joinder of foreign defendant cannot be used as a basis for venue for domestic corporations.

Some have argued that limiting corporate residence would create a loophole that allows some foreign defendants to avoid patent litigation in the United States, and the court in TC Heartland acknowledged that the parties raised issues about the impact of its decision on foreign defendants. It seems unlikely, however, that the TC Heartland decision will have any significant impact on venue for foreign defendants.

The general venue statute Section 1391(c)(3) states that "a defendant not resident in the United States"—i.e., foreign corporations—"may be sued in any judicial district." The Supreme Court in Brunette Machine Works v. Kockum Industries , 406 U.S. 706 (1972), confirmed that this portion of Section 1391 applies to patent case," while acknowledging that it previously held in Fourco (and Stonite ) that "Section 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions. In Brunette Machine Works, the court found that Congress intended a broad application of the venue rule, unlike the definition of residence where Congress has never expressed an intent that it apply to patent cases.

Importantly, Section 1391(c)(3) also states, regarding a foreign defendant, that "the joinder of such a defendant shall be disregarded in determining where the action may be brought with respect to other defendants." Thus, a plaintiff will not be able to rely on the joinder of a foreign parent, for example, to sue the U.S. subsidiary in a district where venue is not otherwise proper for the U.S. subsidiary.

• Defendants that already answered may not have waived venue.

Defendants that find themselves in districts that are not a proper venue under either prong of Section 1400(b) need to know how to raise the issue with the court and move to a district where venue is proper. A motion to dismiss for improper venue under FRCP 12(b)(3) must be filed before the answer. For defendants that have not yet responded to the complaint, the answer therefore is easy: move to dismiss for improper venue under FRCP 12(b)(3).

But those defendants that have already answered the complaint are left wondering if any objection to venue has been waived. Some courts have held that a motion to dismiss or transfer can be filed after the answer under 28 U.S.C. Section 1406 if an objection to venue was made in the answer. See, e.g., Broadcasting of the Carolinas v. Flair Broadcasting , 892 F.2d 372, 374 (4th Cir. 1989); Jaliwa v. Concerned Citizens of South Centrak Los Angeles (S.D. Cal. July 10, 2007); Shaw v. United States, 422 F. Supp. 339 (S.D.N.Y. 1976). Some of these cases point to the lack of prejudice suffered by the plaintiff as a reason for allowing the post-answer motion.

Even if an objection to venue was not raised in the answer, defendants may argue that the defense of improper venue was not available when the answer was filed, and it was therefore not waived. As the Second Circuit stated, "a party cannot be deemed to have waived objections or defenses which were not known to be available at the time they could first have been made, especially when it does raise the objections as soon as their cognizability is made apparent," as in Holzsager v. Valley Hospital , 646 F.2d 792, 796 (2d Cir. 1981). In that case, the court held that another Rule 12 defense—personal jurisdiction—was not waived and allowed a motion to dismiss to be filed after the answer where the Supreme Court issued an opinion after the answer was filed that changed the law regarding personal jurisdiction.

Where venue is improper, Section 1406(a) provides courts the discretion to decide whether to dismiss or transfer "in the interests of justice." Courts generally favor transfer over dismissal, see Wolf Network v. AML Diagnostics (N.D. Tex. Apr. 5, 2016); Willis v. Green Tree Servicing, 156 F. Supp. 3d 121, 123 (D.D.C. 2015), and have exercised their discretion to transfer instead of dismiss to avoid duplication of effort, additional expense and delay. See, e.g., Srour v. Department of Homeland Security (E.D. Va. 2009); Stutes v. Tipto , 540 F. Supp. 2d 516, 522 (D. Vt. 2008).

In short, defendants should at least argue that venue is not waived because the recent TC Heartland decision provides a defense that could not have been raised previously. In addition, defendants may argue that venue is preserved if raised in the answer.

Understanding the scope of proper venue and whether it can be raised are issues on the minds of many, and which are sure to be litigated in the near future. The three observations above provide guidance to parties trying to navigate these issues in the aftermath of TC Heartland.

Observations in the Wake of Narrowing of Patent Venue in 'TC Heartland,’” by S. Gregory Herrman was published in the Delaware Business Court Insider on June 7, 2017. To view the article online, please click here.

Reprinted with permission from the June 7, 2017, edition of the Delaware Business Court Insider © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.