By Ryley Bennett, a 2017 Judge K.K. Legett Fellow at Washington Legal Foundation who will be entering her third year at Texas Tech University School of Law in the fall.
The US District Court for the Eastern District of Texas (EDTX) is known as one of the federal judiciary’s most patent-plaintiff-friendly districts. With TC Heartland LLC v. Kraft Food Groups Brand LLC, 137 S. Ct. 1514 (2017), the US Supreme Court recently cut off one avenue for filing patent-infringement claims there. It ruled in that patent-infringement lawsuits may be brought only in the infringer’s home state or else in a federal district where it maintains a regular place of business. But like the resilient, mythical Hydra, when one head is cut off, more grow back. In a recent decision, Eastern District of Texas Judge Rodney Gilstrap developed a broadly-sweeping four-factor “totality” test seemingly aimed at keeping patent-infringement suits in his jurisdiction.
Patent-infringement venue is distinct from general venue. In 1897, Congress enacted a specific patent-venue statute giving patent-infringement cases a unique place in the US Code, outside of general venue principles—recodifed in 1948 as 28 U.S.C. § 1400. Soon after, in Fourco Glass Co. v. Transmirra Products Corp., the Supreme Court affirmed that “1400(b) is the sole and exclusive provision controlling venue in patent infringement actions,” and it was not intended to be supplemented by provisions of 28 U.S.C. § 1391(c) (the general venue statute). TC Heartland addressed the first part of § 1400(b) (the part that permits an alleged infringer to be sued where it “resides”) when it affirmed the holding in Fourco, finding that Congress had done nothing since that ruling to alter the meaning of § 1400(b). The Court concluded that despite the general venue statute’s extremely broad definition of corporate residency, “resides” as used in the first part of § 1400(b) refers only to the state of incorporation and not to any or all states where a corporation sells its allegedly infringing products.
In the EDTX case, the defendant filed a motion to dismiss for improper venue. Under 28 U.S.C. § 1400(b), plaintiffs can establish venue in patent-infringement cases in two ways. First, “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides.” Second, an infringement action can be brought “where the defendant has committed acts of infringement and has a regular and established place of business.”
After the Supreme Court eliminated the EDTX’s primary avenue for its becoming a patent-suit magnet—interpreting § 1400(b) residency as including any state in which a defendant corporation sells its products—plaintiffs and judges looked for an alternative. Judge Gilstrap purported to find that alternative in the second part of § 1400(b). He held that venue was proper under the second avenue in § 1400(b)—when the defendant committed infringing acts and has a regular and established place of business in the district—by comparing the facts in the case before him to a 1985 Federal Circuit case, In re Cordis Co. In that case, the defendant, Cordis, incorporated in Florida, contested having a “regular and established place of business” in Minnesota giving rise to venue. The court found that venue was proper because Cordis employed two employees who were paid salary and commission in Minnesota; maintained phone numbers with the district’s area code; stored and distributed Cordis literature; acted as technical consultants in the district; and used a Minnesota secretarial service to help maintain business operations, such as receiving messages, providing typing services, and mailing and receiving Cordis literature.
Judge Gilstrap found venue proper because, similar to Cordis, the defendant had a sales executive working in the district for the last seven years; maintained a salary and received reimbursements for cell phone and internet-related use, along with travel expenses; had access to online sales brochures that could be distributed to potential customers; and the company executive contacted and sold various products to customers using an office telephone number that had an EDTX area code. The opinion could have ended there, but instead Judge Gilstrap took it upon himself to produce a four-part test to determine what “regular and established place of business” means under § 1400(b).
To determine whether a defendant has a “regular and established place of business,” Judge Gilstrap counseled courts to look at the totality of the circumstances based on four factors: physical presence, defendant’s representations, benefits received, and targeted interaction with the district. Under this broad four-factor totality test, out-of-state defendants are essentially back to answering patent-infringement claims anywhere in the country (especially in the EDTX).
According to Judge Gilstrap, to demonstrate that a defendant maintains a regular and established place of business, there does not have to be a physical presence or place at all—that’s just a persuasive factor for the court to consider. Inventory, under this analysis, is persuasive in finding a regular and established place of business. Thus, under Judge Gilstrap’s interpretation, a plaintiff can secure its venue of choice by using downstream targets. Even when a corporation does not have property in the EDTX, under this test, if the corporation has remote (work-from-home) employees—who are reimbursed for business expenses such as cell phone and internet use, along with travel reimbursement—it can be subject to venue in a district where any of its remote employees resides.
Further, under Judge Gilstrap’s second factor, a defendant’s “representations” can be a mere advertisement about what the company does or where it is located, even if the company is located in a different state. Ironically, although Judge Gilstrap repeatedly stated that the business world has changed since the adoption of § 1400 and it should be adjusted accordingly, he cited a 1910 decision when stating that customer inquiries directed at an agent who happens to be in the EDTX should be considered persuasive when determining if there is a regular and established place of business there.
Judge Gilstrap’s third factor—benefits received—is not limited to sales revenues; rather, any benefit that the defendant derives from presence in the EDTX should be considered. Does this mean that a happenstance conversation in a restaurant with a person who then becomes a customer outweighs other factors and gives rise to a regular and established place of business? Under Judge Gilstrap’s third factor of his test, it does.
In explaining the final factor—targeted interactions—Judge Gilstrap cited a Sixth Circuit personal jurisdiction case as support that existing or potential customers, customer support, or targeted marketing efforts give rise to a regular and established place of business—the same type of personal jurisdiction considerations that the Supreme Court in TC Heartland said did not apply to venue determinations.
In the end there is little difference between the broad general-venue rules established by § 1391 and Judge Gilstrap’s new four-factor test, one that can help the Eastern District of Texas keep a strong hold on patent cases.