How Courts Have Applied Cray Patent Venue Test
In May 2017, the U.S. Supreme Court issued its decision TC Heartland LLC v. Kraft Foods Group Brands LLC,[1] which narrowed the scope of venue under the first prong of 35 U.S.C. § 1400(b). The natural result was that the second prong of § 1400(b) — “where the defendant has committed acts of infringement and has a regular and established place of business” — became relevant and more regularly litigated. In In re Cray, the Federal Circuit established a test for finding a “regular and established place of business”: “(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.”[2]
This article analyzes how courts have applied the Cray test. In short, courts have been reluctant to find proper venue without a physical building in the district that is owned or leased by the defendant.
Prong 1: “A Physical Place in the District”
In Cray, the Federal Circuit explained that “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.”[3] In determining whether there is a physical place, courts generally look for an ongoing and consistent physical presence in the district.[4] For example, a number of courts have found fixed stores and home based offices of employees to be sufficient to constitute a physical place in the district.[5]
Merely occasional or transitory contacts with the district are generally insufficient to establish a physical place in the district. For instance, employees that do not reside in the district but occasionally visit the district do not meet this requirement because their occasional visits do not amount to a “fixed physical presence” in the district.[6] Likewise, transitory promotional events have been found to be insufficient.[7]
Courts have also wrestled with whether the location of a defendant’s equipment can satisfy the first prong. For example, two decisions in the Eastern District of Texas reached different conclusions regarding whether Google Inc.’s warehousing and distribution servers constituted “a physical place in the district.”
In Personal Audio LLC v. Google Inc., the court found that the servers did not constitute a physical place in the district.”[8] Relying on the Federal Circuit’s statement in Cray that “the [venue] statute ... cannot be read to refer merely to a virtual space or electronic communications”,[9] the court explained that the servers were not sufficient because they were, at best, a “virtual place” that operates the internet and were not a building or a “physical quarters” of any kind.[10] The court also noted that Google did not own or lease the rooms the servers occupied.[11]
In contrast, the same court in Seven Networks LLC v. Google LLC rejected the decision in Personal Audio and instead interpreted the Federal Circuit’s statements in Cray to mean that, while a virtual space alone is insufficient, “a virtual space with more is sufficient” under the first prong.[12] Applying it to the facts, the court determined that the servers occupied a physical place (server room) and therefore satisfied the first prong. The court noted that the servers were more than just a virtual space due to the amount of control Google exercised over this physical place.[13]
Prong 2: “Regular and Established Place of Business”
In order to be a “regular and established place of business,” the physical place in the district must be both “regular” and “established.” The Federal Circuit in Cray explained that a “business may be ‘regular,’ for example, if it operates in a steady, uniform, orderly, and methodical manner, . . . sporadic activity cannot create venue.”[14] To be “established,” the place of business cannot be transient, but “must be settled certainly, or fixed permanently.”[15] Regarding whether business is being conducted, courts look to, for example, whether employees are accepting orders, making business decisions, or soliciting clients from that location.[16]
In Peerless Network Inc. v. Blitz Telecom Consulting LLC, the court determined that a rented shelf in the district did not constitute a regular and established place of business because the defendant did not engage in business from the location, specifically noting that the employees do not accept orders, make business decisions, or solicit clients from the shelf.[17] However, in RegenLab USA LLC v. Estar Technologies Ltd., the court found a regular and established place of business to be employees’ homes where the employees took sales orders and contacted prospective customers from home offices.[18]
Even if business is being conducted from the location, the business must be regular and established. A court has found that sales and marketing employees traveling to a location in a district a few times a year is too sporadic for the location to be considered regular and established.[19] While no court has decided how often business must be conducted at the place in the district, a few visitations is typically insufficient while conducting ongoing business from a location, for example, an employee’s house or a brick and motor store, is typically sufficient.
Prong 3: “Place of the Defendant”
The final requirement is that the regular and established place of business must be a “place of the defendant.” To satisfy this requirement, the Federal Circuit in Cray stated that “the defendant must establish or ratify the place of business.” The Federal Circuit said factors that may be considered include “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place” and “defendant's representations that it has a place of business in the district” by, for example, “list[ing] the alleged place of business on a website, or in a telephone or other directory; or plac[ing] its name on a sign associated with or on the building itself.”[20]
Applying these factors, courts have generally refused to find “a place of the defendant” where the place in question is not owned or leased by the defendant and is instead the place of another, separate entity. In this regard, courts typically will not find that the place of a related entity is “of the defendant” where corporate formalities are maintained.[21] This is true even where the subsidiary’s building in the district has signage with the name of the defendant parent,[22] the defendant sources products for related-entity retail stores in the district,[23] or the parent corporation pays the defendant subsidiary’s legal expenses.[24]
Along these lines, courts have consistently held that the place of an independent distributor is not the “place of the defendant.” Courts have taken this position even where the distributor was a “preferred partner,”[25] the distributor was “necessary” to defendant’s business,[26] the defendant showed a willingness to help distributors[27] or hold sales and educational events in the stores,[28] distributors were listed on defendant’s website[29] or where distributor has a nonexclusive trademark license agreement with the defendant to use defendant’s name.[30] In an interesting topical example, courts have also refused to find an Amazon.com Inc. fulfillment center distributing the infringing product to be the “place of the defendant.”[31]
One related issue where courts are split is whether the locations of independent automobile dealerships are “places of” automobile companies. In West View Research LLC v. BMW of North America LLC, the Southern District of California held that BMW dealerships in the district were not “places of” defendant BMW of North America because corporate formalities were maintained.[32] In doing so, the court relied on Symbology Innovations LLC v. Lego Systems Inc., where the Eastern District of Virginia held that the location of Lego Brand Retail stores in the district were not “places of” defendant Lego Systems Inc. because corporate formalities were maintained.
A few months later, the Eastern District of Texas came to a different conclusion with seemingly identical facts. In Blitzsafe Texas, LLC v. Bayerische Motoren Werke AG, the court held that independent dealership franchises were “places of” defendant BMWNA.[xxxiii] In doing so the court acknowledged that corporate separatedness was maintained, but imputed the location of dealerships to BMWNA for two independent reasons. First, the court held that BMWNA and the dealers functioned as one for the purpose of selling cars in the district. In this regard, the court noted that the BMWNA website directs customers to “authorized” dealers to purchase cars. The court also noted that BMWNA makes all of its sales in the district through these dealers. Second, the court noted that BMWNA provisioned new vehicle warranties through the dealerships, which it held was an independent basis (and not just another factor) for the dealerships being “places of” BMWNA.
One “place” not owned or leased by the defendant that Cray expressly stated may, in some circumstances, qualify as the “place of the defendant” is the home of an employee. The Federal Circuit in Cray stated that that relevant considerations include “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” or whether demonstrations were conducted from the home.[34]
Following Cray’s guidance, courts have generally refused to find an employee’s home to be a “place of the defendant,” noting, for example, that the defendant did not condition employment on the employee living in the district.[35] At least one court, however, found that an employee’s home qualified, and in this case the defendant merely “preferred” that the salesperson live in the district.[36]
Regarding storing materials in the home, courts generally look at whether the employee maintains an inventory of products that are sold to customers. Courts have held that small amounts of product used for demonstrative purposes are not sufficient because the products are not available for sale to customer.[37] Similarly, courts have held that an inventory of company brochures is not sufficient.[38]
It is not sufficient that the employee make representations that the home is a place of business in the district — the defendant itself must make these representations. For example, courts have not given much weight to an employee’s business cards listing the home phone number as the business number, particularly where the defendant did not ask the employee to obtain the business cards.[39] A court may also consider whether the employee answers the phone number listed on the business card in his/her own name or in the name of the defendant.[40] Courts have similarly given little weight to social media profiles listing the district as the employee’s place of business.[41]
Courts have generally not placed a lot of weight on a defendant providing support for the employee by, for example, providing a company car in the district[42] or providing the employee with laptops, phones and other supplies.[43] At least one court has required that the resident must be an employee of the defendant, refusing to find that the home qualified even though the resident was an employee of a subsidiary dedicated to sales and marketing of the defendant’s products.[44] Another court, however, suggested that the fact that the resident was an independent sales representative, and not an employee of the defendant, would not preclude such a finding.[45]
Another factor that courts have considered is whether the work performed by the employee is “consumer-facing.” In VoIP-Pal.com Inc. v. Twitter Inc., the court found that an engineer working from home in the district is insufficient because “there is no evidence that his work is consumer-facing, which [is] critical for a finding that Defendant represents that it does business in the forum.” The court’s finding focused on whether the “public has access to the defendant corporation through an employee or office located in the district,” and in this case found it did not.[46]
As discussed above, courts so far have been reluctant to confer venue on a defendant based on a physical place that the defendant does not own or lease. In an attempt to find proper venue, plaintiffs may look to the Eastern District of Texas’ reasoning in the Blitzsafe Texas case, and argue that the defendant and another entity act as one in selling a product. In the case of employees working from home, proper venue may turn on whether the defendant requires the employee to live in the district, but may also require other evidence of the defendant “ratifying” the home as its place of business.
“How Courts Have Applied Cray Patent Venue Test,” by Gregory Herrman and Jonathan England was published in Law360 on January 7, 2019. Reprinted with permission.
[1] TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S.Ct. 1514 (2017).
[2] In re Cray, 871 F.3d 1355 (Fed. Cir. 2017)
[3] Cray, 871 F.3d at 1362.
[4] See CDx Diagnostic, Inc. v. US Endoscopy Grp., Inc., No. 13-CV-5669(NSR), 2018 WL 2388534, at *3 (S.D.N.Y. May 24, 2018) (finding storage units are likely physical places).
[5] Intellectual Ventures II LLC v. FedEx Corp., No. 2:16-CV-00980-JRG, 2017 WL 5630023, at *6-7 (E.D. Tex. Nov. 22, 2017); RegenLab USA LLC v. Estar Techs. Ltd., No. 16-cv-08771 (ALC), 2018 WL 3910823, at *14 (S.D.N.Y. Aug. 15, 2018).
[6] See CAO Lighting, Inc. v. Light Efficient Design, No. 4:16-CV-00482-DCN, 2017 WL 4556717, at *3 (D. Idaho Oct. 11, 2017).
[7] See Symbology Innovations, LLC v. Lego Sys., Inc., 158 F. Supp. 3d 916, 931 (E.D.Va. 2017).
[8] Personal Audio, LLC v. Google, Inc., 280 F. Supp. 3d 922, 934 (E.D. Tex. 2017).
[9] Cray, 871 F.3d at 1362.
[10] See id.
[11] See id.
[12] Seven Networks, LLC v. Google LLC, 315 F. Supp. 933, 950-51 (E.D. Tex. 2018).
[13] See id. at 952 (“This level of control in the physical world exemplifies how the physical presence of the GCC server within this District constitutes more than ‘merely’ a virtual space of [ ] electronic communications from one person to another.”).
[14] Cray, 871 F.3d at 1362 (internal citations and quotations omitted).
[15] Id. at 1363.
[16] See, e.g., Peerless Network, Inc. v. Blitz Telecom Consulting, LLC, No. 17-CV-1725 (JPO), 2018 WL 1478047, at *4 (S.D.N.Y. Mar. 26, 2018);
[17] See id. at *4.
[18] RegenLab, 2018 WL 3910823, at *15.
[19] See Nike, Inc. v. Skechers U.S.A., Inc., No. 3:16-cv-007-PK, 2017 WL 7275389, at *6 (D. Ore. Nov. 14, 2017).
[20] Cray, 871 F.3d at 1363-64.
[21] See, e.g., Infinity Computer Prods., Inc. v. OKI Data Americas, Inc., No. 12-6797, 2018 WL 1035793 (E.D.Pa. Feb. 23, 2018); Soverain IP, LLC v. AT&T, Inc., No. 2:17-CV-00293-RWS-RSP, 2017 WL 5126158 (E.D. Tex. Oct. 31, 2017).
[22] See, e.g., Bd. of Regents v. Medtronic PLC, No. A-17-CV-0942-LY, 2018 WL 4179080, at *2 (W.D. Tex. July 19, 2018); Post Consumer Brands, LLC v. General Mills, Inc., No. 4:17-CV-2471 SNLJ, 2017 WL 4865936, at *2 (E.D. Missouri Oct. 27, 2017).
[23] Unity Opto Tech. Co., Ltd. v. Lowe’s Home Centers, LLC, No. 18-cv-27-jdp, 2018 WL 2087250, at*3 (W.D. Wis. May 4, 2018).
[24] Xodus Med., Inc. v. Allen Med. Sys., Inc., No. 2:17-cv-00581, 2018 WL 2338763, at *2-3 (W.D. Pa. May 22, 2018).
[25] CAO Lighting, 2017 WL 4556717, at *2-3.
[26] Emed Techs. Corp. v. Repro-Med Sys., Inc., No. 2:17-CV-728-WCB-RSP, 2018 WL 2544564, at *3-4 (E.D. Tex. Jun. 4, 2018).
[27] Fox Factory, Inc. v. SRAM, LLC, No. 3:15-cv-00506, 2018 WL 317839, at *4 (N.D. Cal. Jan. 8, 2018).
[28] Susan McKnight, Inc. v. United Indus. Corp., No. 2:16-cv-2534-JPM-tmp, 2018 WL 4688768, at *2-3 (W.D. Tenn. Feb. 27, 2018).
[29] CAO Lighting, 2017 WL 4556717, at * 2-3.
[30] Green Fitness Equip. Co., LLC v. Precor Inc., No. 18-CV-00820-JST, 2018 WL 3207967, at *4 (N.D. Cal. June 29, 2018).
[31] SportPet Designs Inc. v. Cat1st Corp., No. 17-CV-0554, 2018 WL 1157925, at *3-4 (E.D. Wis. Mar. 2, 2018); Reflection, LLC v. Spire Collective LLC, No. 17CV1603-GPC(BGS), 2018 WL 310184, at *4 (S.D. Cal. Jan. 5, 2018).
[32] West View Research, LLC v. BMW of N. Am., LLC, No. 16-CV-2590 JLS (AGS), 2018 WL 4367378, at *8 (S.D. Cal. Feb. 5, 2018).
[33] Blitzsafe Texas, LLC v. Bayerische Motoren Werke AG, No. 2:17-CV-00418-JRG, 2018 WL 4849345, at * 8 (E.D. Tex. Sept. 6, 2018).
[34] Cray, 871 F.3d at 1363.
[35] See, e.g., VoIP-Pal.com, Inc. v. Twitter, Inc., No. 2:16-CV-02338-RFB-CWH, 2018 WL 3543031, at *4 (D. Nev. July 23, 2018); Precision Fabrics Grp., Inc. v. Tietex Int’l, Ltd., No. 1:13-CV-645, 2017 WL 5176355, at *12 (M.D.N.C. Nov. 7, 2017); BillingNetwork Patent, Inc. v. Modernizing Medicine, Inc., No. 17 C 5636, 2017 WL 5146008 at *1 (N.D. Ill. Nov. 6, 2017); Regents of the University of Minn. v. Gilead Sciences, Inc., 299 F. Supp. 3d 1034, 1044 (D. Minn. 2017); Automated Packaging Sys., Inc. v. Free-Flow Packaging Int’l, Inc., No. 5:14-CV-2022, 2018 WL 400326, at *8 (N.D. Ohio Jan. 12, 2018); Niazi v. St. Jude Med. S.C., Inc., No. 17-CV-183-jdp, 2017 WL 5159784, at *4 (W.D. Wis. Nov. 7, 2017).
[36] RegenLab, 2018 WL 3910823, at *16-17.
[37] Automated Packaging Sys., 2018 WL 400326, at *8-10; Precision Fabrics Grp., 2017 WL 5176355, at *11-12.
[38] Precision Fabrics Grp, 2017 WL 5176355, at *11-12; Regents of the University of Minn., 299 F. Supp. 3d at 1043-44.
[39] Precision Fabrics Grp., 2017 WL 5176355, at *12; Nike, 2017 WL 7275389, at *7.
[40] Automated Packaging Sys., 2018 WL 400326, at *8.
[41] Id. at *9-10 (social media profile stating that the employee services 500 customers in the district).
[42] Precision Fabrics Grp., 2017 WL 5176355, at *11.
[43] Automated Packaging Sys., 2018 WL 400326, at *9.
[44] Galderma Labs., L.P. v. Teva Pharms. USA, Inc., 290 F. Supp. 3d 599, 612-13 (N.D. Tex. 2017).
[45] Nike, 2017 WL 7275389, at *6-7.
[46] VoIP-Pal.com, 2018 WL 3543031, at *4.