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Article: June 2018: New Questions on Patent Venue Arise in the Wake of TC Heartland

Business Litigation Reports

Last year in TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (May 22, 2017), the
Supreme Court dramatically changed the venue landscape for patent cases. Prior to TC Heartland, venue in patent cases was proper in any federal court with personal jurisdiction over the defendant. After TC Heartland, however, venue for cases against domestic parties is proper only in: (1) the district “where the defendant resides” which, in the case of corporate defendants, was held to be the corporation’s state of incorporation; or (2) a district where the defendant “has committed acts of infringement and has a regular and established place of business.” As a result of this change, which significantly limited the number of districts where a corporation “resides,” focus has moved to interpreting the remainder of the patent venue statute (28 U.S.C. §1400(b)). This article attempts to identify some of the issues that have arisen since and as a result of the TC Heartland decision.

Background
Venue for patent cases is governed by 28 U.S.C. § 1400(b), which provides that a patent infringement action may brought either “in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” Prior to TC Heartland, a defendant was said to “reside” in any district with personal jurisdiction over the defendant. Following TC Heartland, however, a domestic corporate defendant is now said to “reside” only in its state of incorporation, thus significantly narrowing the number of jurisdictions where a domestic corporation can be sued for patent infringement. With this narrowing of the interpretation of “resides,” renewed attention has been placed on the alternative criteria for venue under Section 1400(b)—those districts where a defendant has both a “regular and established place of business” and “has committed acts of infringement.” Against this backdrop, the courts have been required to address a number of long dormant questions surrounding patent venue determinations.

The Question of Waiver
One of the first questions to arise in the wake of TC Heartland was what to do about the cases that had been filed in (now improper) venues pre-TC Heartland. Had defendants in those cases waived their right to challenge venue by failing to move to dismiss under Rule 12(b)(3) months or even years before the Supreme Court decided TC Heartland? The majority of district courts initially concluded that no waiver had taken place because of Fed. R. Civ. P. 12(g)(2), which provides that a defendant must raise all “defense[s] or objection[s] that w[ere] available to the party” at the time it makes its first defensive move (i.e., an Answer or Rule 12 motion). In the view of those courts, the improper venue defense was not “available” prior to TC Heartland because the Supreme Court announced new venue law, thus making the waiver under Rule 12(g)(2) inapplicable. But several district courts, including both the Eastern District of Texas and the District of Delaware, reached the opposite conclusion and held that, as TC Heartland merely reaffirmed pre-existing venue law (including the Supreme Court’s 1957 decision in Fourco Glass Co. v. Transmirra Products), the improper venue defense always had been “available,” even prior to TC Heartland.

The waiver question ultimately reached the Federal Circuit in In re Micron Technology, Inc., 875 F.3d 1091 (Fed. Cir. Nov. 15, 2017). In that case, the defendant Micron had been sued in the District of Massachusetts and begun litigating the merits of its case prior to TC Heartland’s issuance. When Micron later moved to dismiss for improper venue in the wake of TC Heartland, the district court found that Micron had waived the defense by failing to make it in an initial Rule 12 motion and that, because TC Heartland merely reaffirmed the Supreme Court’s prior ruling in Fourco, the defense had been “available” to Micron under Rule 12(g)(2) all along. Micron subsequently petitioned the Federal Circuit for a writ of mandamus.

On November 15, 2017 the Federal Circuit granted Micron’s petition, holding that “TC Heartland changed the controlling law in the relevant sense . . . the venue defense now raised by Micron (and others) based on TC Heartland’s interpretation of the venue statute was not ‘available,’ thus making the waiver rule of Rule 12(g)(2) and (h)(1)(A) inapplicable.” Although the Federal Circuit thus resolved the issue of Rule 12 waiver, it left the door open to two additional types of waiver deriving from district courts’ “inherent power” to manage their dockets. The first would turn on a case’s proximity to trial, allowing a district court to continue to find waiver where a case had progressed to the eve of trial. The second would look to whether the defendant had engaged in a “tactical wait-and-see bypassing of an opportunity to declare a desire for a different forum, where the course of proceedings might well have been altered by such a declaration.” But beyond these broad pronouncements, the Federal Circuit declined to explain further how and when these categories of waiver might apply. On remand from the Federal Circuit, Micron’s case was transferred to Delaware and later settled without further analysis of the venue issues.

The Meaning of Section 1400(b)’s “Regular and Established Place of Business” Standard
Unsurprisingly, another question that arose immediately after TC Heartland issued was how to define 28 U.S.C. § 1400(b)’s requirement of a “regular and established place of business.” Because the definition of “resides” was previously construed broadly, courts had little reason to construe the “regular and established place of business” clause prior to TC Heartland. The last appellate decision to discuss the “regular and established place of business” standard was the Federal Circuit’s 1985 decision in In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985). In Cordis, the defendant had two employees in the district. These employees worked out of offices within their homes and stored company literature, documents, and products there. Cordis, for its part, hired a local secretarial service to support both employees and listed the employees’ homes in the public telephone directory under Cordis’s name. Under these facts, the district court had found that these home offices constituted a “regular and established place of business” for purposes of Section 1400(b) despite the fact that they were not traditional storefronts. When Cordis sought mandamus review from the Federal Circuit, the Court declined to provide an exact test for determining whether a “regular and established place of business” existed but simply held that the facts of Cordis did not meet the standard for mandamus relief. The Federal Circuit did note, however, that “the appropriate inquiry is whether the corporate defendant does its business in that district through a permanent and continuous presence there and not as Cordis argues, whether it has a fixed physical presence in the sense of a formal office or store.”

In the wake of TC Heartland, district courts initially looked to Cordis when assessing whether a “regular and established place of business” existed for the purposes of patent venue. Some courts took an expansive view of the “regular and established place of business” standard. For example, Judge Gilstrap of the Eastern District of Texas found that the standard was met simply because the defendant had employees who lived in the District. Kranos IP v. Ridell, Inc., No. 17-cv-443, 2017 WL 3704762, at *9 (E.D. Tex. Aug. 28, 2017). At the other end of the spectrum, a court in the Western District of Wisconsin found that the standard expressly required “some sort of office or location from which employees work on a regular basis.” Cellular Dynamics International, Inc. v. Lonza Walkersville, Inc., No. 17-cv-27, 2017 WL 4046348, at *6 (W.D. Wisc. Sept. 12, 2017). In September 2017 however, the Federal Circuit handed down its decision in In re Cray Inc., 871 F.3d 1355 (Fed. Cir. Sept. 21, 2017) and offered guidance on this issue. The Federal Circuit broke the “regular and established place of business” standard into three components.

First, the Federal Circuit noted that to meet the “regular and established place of business” requirement there must be a “physical place in the district.” The court defined “place” as “a building or a part of a building set apart for any purpose or quarters of any kind from which business is conducted” and expressly excluded any “virtual space or [] electronic communications from one person to another.” Second, the Federal Circuit held that there must be a “regular and established” place of business, meaning that the business must “operate in a steady, uniform, orderly, and methodical manner” and must be “settled certainly, or fixed permanently.” Finally, the Federal Circuit explained that the place at issue “must be the place of the defendant.” The Federal Circuit identified relevant considerations as including “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place,” whether the company products or marketing materials were stored there, and whether a defendant listed the alleged place of business on a website, or in a telephone or other directory.

Although Cray provided significant direction on the “regular and established place of business” standard, courts continue to forge new ground in this area. For example, in Peerless Network, Inc. v. Blitz Telecomm Consulting, LLC, Judge Oetken of the Southern District of New York rejected the argument that “networking equipment” could constitute a “regular and established place of business” for a telecommunications company. No. 17-cv-1725, 2018 WL 1478047, at *4 (S.D.N.Y. Mar. 26, 2018). Although the defendant’s business in the district may have been conducted through the networking equipment, no business was conducted from the site where the equipment was located (i.e., the telecommunications center where it was hosted). The Court acknowledged that Cray’s limitations on venue could lead to an “unsatisfying” outcome in the age of widespread digital commerce, but found that Cray and its interpretation of Section 1400(b) foreclose basing venue on a mere digital presence in the district.

Post-Cray courts have also struggled to determine the extent to which a third party’s facility in the District can constitute a “regular and established place of business” for the defendant. For example, in Reflection, LLC v. Spire Collective LLC, a court in the Southern District of California considered whether Amazon’s fulfillment centers in the district could satisfy the requirement for a defendant that distributed products from those facilities. The court found that this argument failed all three prongs of Cray because the defendant exercised no control over Amazon’s facilities and the parties had only a contractual relationship. No. 17-cv-1603, 2018 WL 310184, at *3 (S.D. Cal. Jan. 5, 2018).

Who Bears the Burden of Proving (Improper) Venue?
Another question that arose in the wake of TC Heartland is which party bears the burden of proof on the venue question. Many of the regional circuit courts of appeal have addressed this issue in the context of non-patent cases, with the First, Second, Fourth, Seventh, and Ninth Circuits all holding that the plaintiff bears the burden while the Third and Eighth Circuits have reached the opposite conclusion. While district courts initially reached differing conclusions regarding the question of burden, the Federal Circuit has just recently weighed in to settle the question. On May 14, 2018, the Federal Circuit issued an opinion in In re ZTE Corp., No. 2018-113, which held that “upon motion by the Defendant challenging venue in a patent case, the Plaintiff bears the burden of establishing proper venue” and noting that “[s]uch a holding best aligns with the weight of historical authority among the circuits and best furthers public policy.” As a practical matter, it remains to be seen how this shift in burden will affect Rule 12(b)(3) motions going forward.

Where Does “An Act of Infringement” Occur for Purposes of 28 U.S.C. § 271(E)(2)?
Courts have also begun to confront the question of where an “act of infringement” occurs for the purposes of infringement under 28 U.S.C. § 271(e)(2). Section 271(e)(2) allows a plaintiff to allege infringement based on the filing of an Abbreviated New Drug Application (ANDA) with the FDA. As the name suggests, a defendant in an ANDA case has merely applied to use, make, sell, or offer for sale an infringing product, pending FDA approval.

For venue purposes, this creates an interesting question. Where do the “acts of infringement” occur for the purposes of Section 271(e)(2)? One answer could be that the filing of the ANDA with the U.S. Food and Drug Administration (FDA) in Maryland would supply the “act of infringement,” possibly creating venue in Maryland if the defendant also had a regular and established place of business there. A different approach suggested by the plaintiff in Bristol-Myers Squibb Co. v. Mylan Pharmaceuticals Inc., No. 1:17-cv-379 (D. Del.), is that an “act of infringement” could be said to occur wherever the defendant intends to sell the potentially infringing product, should it succeed in the litigation. In that case, the plaintiff analogized the question of venue to that of personal jurisdiction, pointing to a recent Federal Circuit decision (Acorda Therapeutics v. Mylan Pharmaceuticals Inc., 817 F.3d 755 (Fed. Cir. 2016)) holding that intent to sell the allegedly infringing product in the jurisdiction is sufficient to establish personal jurisdiction. Chief Judge Stark accepted Bristol-Myers’ argument regarding the acts of infringement clause of the statute and ordered further venue discovery relating to the issue of whether Mylan had a regular and established place of business in the District of Delaware. Likewise, the District of New Jersey recently adopted the Bristol-Myers Squibb rationale in finding that the “acts of infringement” take place anywhere the accused product is intended to be sold. Celgene Corp. v. Hetero Labs Ltd., No. 17-cv-3387, 2018 WL 1135334, at *3 (D.N.J. Mar. 2, 2018).

However this prospective view of where infringement has occurred has not been universally accepted. For example, the Northern District of Texas recently criticized the holding in Bristol-Myers Squibb, commenting that “the Delaware court’s approach to venue in ANDA cases is a liberal interpretation of the venue statute and, thus, inconsistent with the Federal Circuit’s guidance” in Cray. Galderma Labs, L.P. v. Teva Pharmaceuticals USA, Inc., No. 3:17-cv-1076, 2017 WL 6505793, at *6 (N.D. Tex. Nov. 17, 2017). This split in opinion regarding this clause of the patent venue statute will likely be resolved by the Federal Circuit as a result of an appeal from one of these early cases.

Conclusion
TC Heartland’s change to the law of patent venue has given rise to a host of related questions that courts at both the district and appellate levels continue to grapple with. While the Federal Circuit’s decisions in Cray and Micron have resolved certain threshold issues, many more remain and it may be some time before litigants know with certainty where they can and cannot be sued for patent infringement.