“Their proposal of a narrow, fixed rule for determining venue based on a “physical place” is an obvious ploy to create a rule that favors their types of virtual businesses”
by: Nick Gross, special guest contributor | August 4, 2017
In Part 1 of my discussion on this topic, I outlined Judge Gilstrap’s new proposed 4-factor test for venue set out in Raytheon v Cray CV-01554 from the Eastern District of Texas (EDTX) which is now the subject of a mandamus petition to the CAFC.
Below I address the merits of the briefs proffered by Cray and the Amici brief by HTIA.
Cray’s Mandamus Brief
Cray’s petition primarily complains loudly about the District Court’s “no physical presence required” methodology. They focus heavily on cases where activities by a single employee in a district were not considered sufficient as rising to the level of a “regular and established place of business.” Cray tries to distinguish the CAFC’s 1987 Cordis opinion on the basis that in the latter case the employee’s home activities in that case were effectively substitutes for a formal office/store. An additional table of facts distinguishing Cordis are presented as well by Cray.
Predictably though, Cray also goes on to take exception with Judge Gilstrap’s new 4 factor test-guidance on venue. While it was not applied in their particular fact pattern, they blatantly parade the “no physical presence required” rationale front and center as a scare tactic to convince the CAFC to take on the case for consideration, because as they put it, the guidance “…will soon influence the analysis of venue in hundreds” of pending cases.
In addition, as expected Judge Gilstrap’s four factor test was also attacked in an amicus brief filed by the “High Tech Inventors Alliance” (an Orewellian-esque misnamed entity if there ever was one). The bulk of the entities making up this alliance are multi-billion $ e-commerce, and/or software companies serving hundreds of millions of customers in every corner of the U.S. They were clearly disturbed by the Judge’s implication that the lack of a physical brick and mortar facility was not going to immunize them from suit in districts where they conduct (significant) electronic business.
The agenda of these companies to carve out an exception for e-commerce companies is readily transparent with bright line arguments like these:
“…Administrability counsels giving the phrase “regular and established place of business” its ordinary meaning – a physical place, the existence of which can be easily determined.
The district court’s four factors, or “guideposts,” are also a clear departure from the statute itself, and they threaten to undo TC Heartland, which eliminated nationwide venue for patent cases and reestablished the strict limits enacted by Congress.”
The HTIA clearly wants to exploit the Cray mandamus as a tool to immunize its non-brick and mortar members from future lawsuits. Their proposal of a narrow, fixed rule for determining venue based on a “physical place” is an obvious ploy to create a rule that favors their types of virtual businesses over others.
What Is The CAFC Likely To Do?
The CAFC has many options at this time. For one, it can clearly defer the topic for now, and deny mandamus until it sees further how the cases from EDTX (and other districts) develop. While it may be a close call, Cray, on its face, does not deviate too far from Cordis and could be reconciled on that basis.
Even if the CAFC reviews Cray, it could very well pass on making any comment about Judge Gilstrap’s proposed 4-factor test as the issue is clearly not ripe yet for review. There is no party – yet – who has been aggrieved by his methodology.
Nonetheless should the CAFC decide to say more about the issue, I suspect there will be some amusement by the Justices at the suggestion that Judge Gilstrap’s proposed “totality of circumstances” test somehow violates any aspect of TC Heartland’s core. The latter opinion dealt exclusively with where companies “reside” and makes no mention or hint of the alternative test for venue.
To make their case appear more compelling, the HTIA claims that the Judges’ test is an attempt to make an end run around the “residence” requirement for corporations. But “residence” is at best a weak connection to districts, since many companies “reside” in their incorporation jurisdictions only superficially at best, with little or no facilities beyond paperwork parked in a filing cabinet. So attacking the venue analysis as an unfair end run around the “resides” test – when the latter can be satisfied by generic/form incorporation papers and a registered agent – seems tangential/irrelevant.
Moreover the bulk of these billion dollar enterprises have argued vehemently in the past in patent cases against the type of bright line rule they now propose. Their protestations against a flexible test should set off alarm bells at the CAFC, which has seen numerous SCOTUS rulings in the past decade expressly embracing Judge Gilstrap’s approach in several areas of patent law.
For example, in considering injunction relief under 35 USC 283 in EBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 395 (2006) Judge Kennedy’s concurrence expressly notes:
“…courts should apply the well-established, four-factor test—without resort to categorical rules—in deciding whether to grant injunctive relief in patent cases”
In interpreting the similarly strict “exceptional” language in 35 USC 285 in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S.Ct. 1749 (2014) the Court noted:
“District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances…”
The Brooks Furniture framework is unduly rigid and impermissibly encumbers the statutory grant of discretion to district courts”
More recently in considering 35 USC 284 the same admonition was made by the SCOTUS in Halo Electronics Inc. v. Pulse Electronics Inc. against an onerous, rigid test for the awarding of attorneys’ fees to a prevailing party in a patent infringement lawsuit.
“The Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases. That test, however, “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”
The CAFC Should Reject Efforts By Big Infringers To Impose Rigid Patent Venue Rules
In this author’s opinion, the HTIA and Cray could not have picked a worse time to suggest that a patent related statute should be construed narrowly by the CAFC and using rigid bright lines. To the contrary, every recent word of SCOTUS jurisprudence validates Judge Gilstrap’s flexible approach which maintains latitude and discretion at the District Courts to assess threshold patent issues.
Stripped to its core, what these big e-commerce companies are asking for is a blatant judicial exception in the form of a different rule for businesses that transact virtual goods/services, versus entities that rely on physical goods/inventories. The venue statute however contains no such hint or suggestion that certain types of businesses should be favored over others when considering what it means to have a “regular and established place of business.” A plain reading of the statute is that it is business-neutral and contemplates a world in which different businesses may have “regular and established” places of business in accordance with different models.
Moreover, the notion that a “physical” location somehow connotes a business that is more “established” in a particular district is plainly false in the Internet era.
The electronic storefronts set up by these billion dollar entities in physical “places” such as our smartphones, tablets, laptops and desktops create more of a “regular and established” business presence than most brick and mortar stores.
While the CAFC would be well justified to turn back the assault in Cray on the reasonable test advocated by Judge Gilstrap, it is readily apparent from recent legal regulatory challenges and Congressional hearings that this will not be the last of these attempts by e-commerce and large software companies to obtain a business advantage over their physical-based counterparts. It is just a matter of time when another case with another fact pattern (invariably one involving no physical employees) comes up that they will bring out the guns again to try and legislate obtain a safe harbor for their conduct through the Courts. The CAFC should resist these well-financed lobby efforts to immunize and favor selected giant companies from suit simply based on their business model.