In re Cray Inc. (Fed. Cir. 2017)

Judge Gilstrap's Short-lived Venue Calculus

By Kevin E. Noonan --

The Federal Circuit has spent more than a decade as the Supreme Court's favorite judicial whipping boy, usually because the Court apprehended that their appellate inferior had strayed from the Court's own precedential appreciation of U.S. patent law.  One area where the Court has recently imposed judicial discipline is venue under 28 U.S.C. § 1400(b), in last term's TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (2017), decision.  In that case, the Court severely restricted the Federal Circuit's interpretation of the rules of patent trial venue, no doubt in large part due to the imprecations of accused infringers unhappy at being haled into court in putatively patent-friendly jurisdictions, most notably the Eastern District of Texas.  So when defendant Cray petitioned for a writ of mandamus to overturn Judge Gilstrap's decision in its patent infringement suit brought by Raytheon Company, denying its motion to transfer venue from the Eastern District of Texas to the Western District of Wisconsin (where Cray had an unrefuted corporate presence), the Federal Circuit took reliable refuge in the last place left: the language of the statute, in reversing the District Court and issuing Cray's requested mandamus writ ordering transfer.

The facts are straightforward.  Raytheon sued Cray for infringing patents related to advanced supercomputers and Cray moved to transfer venue on the grounds that 1) it is incorporated in Washington State; 2) it has offices in Bloomington, MN, Chippewa Falls, WI, Pleasanton, and San Jose, CA, and Austin and Houston, TX (which are not in the Eastern District).  Cray's "presence" in the Eastern District is limited to two employees who work remotely from their homes.  One of these employees was a senior territory manager and the other as a sales executive (credited with an excess of $345 million in supercomputer sales).  He received compensation for expenses ancillary to his work for Cray (business use of a cell phone, Internet access, and mileage costs), but not for the use of his home.  He kept no products there or even product literature, and his home was not advertised as a Cray place of business.

Cray argued that transfer was proper under the Supreme Court's TC Heartland decision because it had not "maintained a regular and established place of business within that district."  The District Court applied Federal Circuit precedent, In re Cordis Corp, 769 F.2d 733 (Fed. Cir. 1985), to reject Cray's motion and did not (according to the Federal Circuit's Order issued today) consider the sales representative's activities in the district.  In addition, the Court set forth a four factor test for deciding whether venue transfer in patent cases was proper with regard to establishing whether a defendant maintained a regular and established place of business in the district:

1) Physical presence;
2) Defendants' representation;
3) Benefits received from presence in the district; and
4) Targeted interactions within the district

(although the District Court also failed to apply this purported test to the facts in this case).

In its Order, Judge Lourie (joined by Judges Reyna and Stoll) grounded its decision on the District Court having "misunderstood the scope and effect of our decision in Cordis, and its misplaced reliance on that precedent led the court to deny the motion to transfer," which the Federal Circuit considered an abuse of the District Court's discretion.  The TC Heartland decision refocused the inquiry on satisfaction of the maintenance of a regular and established place of business in the district, which the Order notes the Cordis panel addressed but sparsely in deciding not to grant the writ.  The Order also asserts that "the world has changed" since 1985 and "not all corporations operate under a brick-and-mortar model."  But even so, the Federal Circuit asserted that it is the language of the statute that must be considered, and that consideration was not made by the Court in the Cordis case.

Turning to the statute, the Order focused on "the only question before the court": whether Cray's activities satisfy the "regular and established place of business" requirement.  The Federal Circuit recognizes three requirements to be considered (and all of which must be satisfied for venue to be proper): "(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."  The panel recognized that the evolution of venue law in patent cases reflects a balance between a restrictive standard (where the infringer was incorporated) and a liberal standard (wherever a defendant could be served).  The Order specifically notes that patent venue is a more restrictive standard than, for example, personal jurisdiction or general venue statutes based on "doing business" in the district.

The Order parses the statutory language:

The noun in this phrase is "place," and "regular" and "established" are adjectives modifying the noun "place."  The following words, "of business," indicate the nature and purpose of the "place," and the preceding words, "the defendant," indicate that it must be that of the defendant.

And notes that "[t]he district court's four-factor test is not sufficiently tethered to this statutory language and thus it fails to inform each of the necessary requirements of the statute."

The panel found specific instances of error in the District Court's analysis, including that "a fixed physical location" was not required, because the statute requires a "place" from which its business is conducted (relying on dictionary definitions from the time the statute was first enacted).  Important to the decision (and the modern era), the statute cannot be satisfied "merely [with reference] to a virtual space or to electronic communications from one person to another."  The Order emphasizes that there must be a specific geographical location within the district for this statutory requirement to be satisfied.

The second specific error by the District Court identified in the Order is a failure to find that Cray's activities in the district were "regular," defined (again with reference to ancient dictionaries) as operating in "a 'steady[,] uniform[,] orderly[, and] methodical' manner" and specifically excluding "sporadic" activity.  This regularity requirement is reinforced by the "established" limitation, which the Order relates to a showing of sufficient permanence to justify venue in a district and excluding transient activity in the district and (illustrated by Knapp-Monarch Co. v. Casco Prods. Corp., 342 F.2d 622, 625 (7th Cir. 1965), regarding semiannual display of products at trade shows).  The capacity for Cray's sales representative to move his residence out of the district at any time without Cray's approval vitiates for the Federal Circuit the permanence required by the venue statute.

Finally, the Federal Circuit's test for establishing proper venue is expressly directed at the presence of the defendant (here, Cray) and not simply the presence of an employee; after all as the Order notes, "[e]mployees change jobs."  Factors that might permit an employee's residence in the district to satisfy this prong of the test for her employer include whether continued employment was conditions on residence in the district, or whether sale items were stored so they could be distributed within the district.  Mere representations by a defendant are not enough; the defendant must actually engage in business from the location in the district.

Applying these factors to the case, the Federal Circuit agreed with Cray that the District Court erred in not transferring the case to the Western District of Wisconsin.  For this panel, the third factor was dispositive; the facts did not support a conclusion that the employee's home was an established place of business for Cray:

There is no indication that Cray owns, leases, or rents any portion of [the employee's] home in the Eastern District of Texas.  No evidence indicates that Cray played a part in selecting the place's location, stored inventory or conducted demonstrations there, or conditioned [either employee's] employment or support on the maintenance of an Eastern District of Texas location.  No evidence shows that Cray believed a location within the Eastern District of Texas to be important to the business performed, or that it had any intention to maintain some place of business in that district in the event [either employee] decided to terminate their residences as a place where they conducted business.

Further relevant to the panel's decision were distinctions between the facts here and in the Cordis case, such as Cray providing no administrative of other support (such as secretarial services) within the district, nor there being any condition that its employees reside in the district to obtain such support.

The panel is careful to note that it is not creating any bright line rules, stating that "no one fact is controlling" in making venue determinations.  But as a consequence of this decision, neither Judge Gilstrap nor any other district court judge will be able to craft venue rules (either in favor of or against either party) outside the scope of the analytical framework announced by the Federal Circuit today.

In re Cray Inc. (Fed. Cir. 2017)
Panel: Circuit Judges Lourie, Reyna, and Stoll
Order by Circuit Judge Lourie

Comments

[skeptical]

Under agency theory, this point is rather puzzling:

The capacity for Cray's sales representative to move his residence out of the district at any time without Cray's approval vitiates for the Federal Circuit the permanence required by the venue statute.

That's pointing to a meaningless fact. The important fact is that the agent of Cray DID HAVE an established business presence.

Cray's direct "ownership" is a red herring.

[Paul F. Morgan]

Additionally, the “$350 million in sales over the past 7 years” allegedly developed by 2 Cray sales executives allowed to work from home in E.D. TX [instead of at their office outside E.D.TX] is not even asserted to be any sales of any Cray products to anyone in E.D. TX, and the recited facts suggest otherwise.

[skeptical]

What does "any sales of any Cray products to anyone in E.D. TX" have to do with anything?