In a closely watched case, the Court of Appeals for the Federal Circuit has issued an order that should see many more patent cases leaving the Eastern District of Texas. The order in In re Cray, together with the Supreme Court’s recent decision in TC Heartland v. Kraft Foods, should make it much more difficult for patent owners to pick and choose among various courts in the country. In particular, it should drastically limit the ability of patent trolls to file in their preferred venue: the Eastern District of Texas.
“Venue” is a legal doctrine that relates to where cases can be heard. Prior to 1990, the Supreme Court had long held that in patent cases, the statute found at 28 U.S.C. § 1400 controlled where a patent case could be filed. This statute says that venue in patent cases is proper either (1) where the defendant “resides” or (2) where the defendant has “committed acts of infringement and has a regular and established place of business.” However, in 1990 in a case called VE Holding, the Federal Circuit held that a small technical amendment to another statute—28 U.S.C. § 1391—abrogated this long line of cases. VE Holding, together with another case called Beverly Hills Fan, essentially meant that companies that sold products nationwide could be hauled into any court in the country on charges of patent infringement, regardless of how tenuous the connection to that forum.
In May, 2017, the Supreme Court reaffirmed that the more specific statute, 28 U.S.C. § 1400, controls where a patent case can be filed. TC Heartland ruled that the term “resides” referred to a historical meaning, and was limited to the state of the defendant’s incorporation. However, TC Heartland did not discuss what was meant by the second prong of the venue statute, i.e. when defendants could be considered to have a “regular and established place of business.”
In light of TC Heartland, many patent owners shifted their arguments, and pointed to the “regular and established place of business” in a district as the basis for bringing suit there. Because that term had not been applied for some time, courts have variously determined what, exactly, constitutes a “regular and established place of business.”
One decision, Raytheon Co. v. Cray, Inc., written by Judge Gilstrap (a judge who at one point had ~25% of all patent cases in the entire country before him) appeared to take a broad view of what it meant to have a “regular and established place of business.” Judge Gilstrap held that “a fixed physical location in the district is not a prerequisite to proper venue.” More concerningly, Judge Gilstrap announced his own four-factor “test” that created greater possibilities that venue would be proper in the Eastern District.
The Federal Circuit has now rejected both that test and Judge Gilstrap’s finding that a physical location in the district is not necessary. The Federal Circuit specifically noted that the venue statute “cannot be read to refer merely to a virtual space or to electronic communications from one person to another.” Importantly, the Federal Circuit also held that it is not enough that an employee may live in the district. What is important is whether the alleged infringer has itself (as opposed to the employee) established a place of business in the district. The Federal Circuit did stress, however, that every case should be judged on its own facts. Based on the facts of Cray’s relationship to the district, the Federal Circuit ordered Judge Gilstrap to transfer the case out of the Eastern District.
This is a good ruling for many defendants who may find themselves sued in the Eastern District or any other district they may be only loosely connected with. When patent owners can drag defendants into court in far-flung corners of the country it can cause significant harm, especially for those who are on the receiving end of a frivolous lawsuit. Patent owners can pick a forum that is less inclined to grant fees, keep costs down, or stay cases. As a result, oftentimes it is cheaper to settle even a frivolous case than to fight. Between TC Heartland and now In re Cray, the ability of patent trolls to extort settlements based on cost of litigation rather than merit has been curtailed.