Does the Federal Circuit's In re Cray Decision Suggest a New Business Model for Savvy Infringers?

By Kevin E. Noonan --

Patent law has always been tasked with interpreting law in an ever-shifting factual environment, where well-established principles need to be applied to new technology.  Twenty years ago, the Federal Circuit grappled with the application of the written description requirement to biotechnology inventions, in seminal cases beginning with Regents of the University of California v. Eli Lilly & Co. (1996), and culminating in Ariad v. Eli Lilly (2010) (en banc).  More recently (and with the Supreme Court taking an active interest, less certainly) the contours of subject matter eligibility has bedeviled patent applicants and patentees.

The Supreme Court in Bilski v. Kappos was aware of the risk of making rules perfectly adequate for present technological circumstances but that could impede progress (and patenting) for new technologies.  Justice Kennedy's plurality opinion stated:

It is true that patents for inventions that did not satisfy the machine-or-transformation test were rarely granted in earlier eras, especially in the Industrial Age.  . . .  But times change.  Technology and other innovations progress in unexpected ways.  For example, it was once forcefully argued that until recent times, "well-established principles of patent law probably would have prevented the issuance of a valid patent on almost any conceivable computer program."  Diehr, 450 U. S., at 195 (STEVENS, J., dissenting).  But this fact does not mean that unforeseen innovations such as computer programs are always unpatentable.  Section 101 is a "dynamic provision designed to encompass new and unforeseen inventions."  A categorical rule denying patent protection for "inventions in areas not contemplated by Congress . . . would frustrate the purposes of the patent law" [citations omitted].

The Federal Circuit's recent decision in In re Cray regarding application of the patent venue statute, 28 U.S.C. § 1400(b), raises (albeit obliquely) similar questions.  The Court, based on an exegesis of the statutory language based on dictionary definitions from the time the statute was first enacted at the turn of the last century, determined that because the statute requires a "place" from which its business is conducted, it was error for the District Court to decide the venue question on the basis that "a fixed physical location" was not required.  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" and that there must be a specific geographical location within the district for this statutory requirement to be satisfied.

Similarly, the Court decided that the presence of defendant Cray's employee in the Eastern District of Texas was insufficient to satisfy what the Court recognized was the patent venue standard (which was more stringent that personal jurisdiction or general "doing business" standards appropriate in other contexts):

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.

Relevant to the question of the response to patent law to changing technology, the dispositive considerations enunciated by the Court apparently disregard or fly in the face of changes in the way companies do business in the 21st Century.  It is certainly the case that many retailers, following a model pioneered thirty years ago by Amazon, sell the bulk of their products on-line and never set foot in any state except the one of incorporation; indeed, "presence" in the incorporating state is unnecessary in many instances.  Insofar as the company's products are "virtual" (software, for example) there is no need for there to be a presence in any U.S. state because servers and other instrumentalities of their business can be situated somewhere offshore.  Similarly, many companies' personnel are employed in call centers or customer service roles, with it being commonplace for those employees to be globally dispersed.

These circumstances, which will undoubtedly only become more frequent, raise an issue for patentees when attempting to sue an infringer.  Under the Cray analysis, the fact that there may be a salesforce or other representation in a district is not enough; it is unlikely that any individual salesperson would be any more tied to a district than were Cray's employees, nor is it likely that a company (particularly one in the virtual marketplace) would pay for a "brick-and-mortar" presence that is the employees home.  All employees are able to "change jobs" as the Cray Court found, and as virtual companies become more and more present nowhere other than the Internet there will be even less of a need for the type of administrative and secretarial support found lacking to support venue in the Cray case.

This raises the likelihood that there may be no district (except perhaps the district where the infringer is incorporated) in which an infringer can be sued.  The Federal Circuit recognized that one reason for enactment of the patent venue statute was to make more liberal the standard existing at that time, which limited venue to an infringing corporation's incorporation states.  Yet, just such a strict venue requirement seems to be an increasing likely consequence of the Federal Circuit's Cray decision.  It seems likely that, as in so many areas of patent law, the only remedy for this state of affairs will be if Congress steps in and changes the statute to again liberalize where proper venue in patent cases can be found.

Comments

[Paul F. Morgan]

Re: "..the likelihood that there may be no district (except perhaps the district where the infringer is incorporated)" ???
Cray and most other major businesses [and most patent suit defendants are major businesses] including the many software companies in N.D.CA, DO have one or more "regular and established places of business" where they CAN be sued with proper venue.

[Kevin E Noonan]

They do now. But that was the point - the trend is for the world to be more and more virtual. From the Court's analysis an Amazon distribution center may not be enough, and for more esoteric businesses their servers and support personnel may be overseas and all they may have is a sales representative in a state. The statement was forward-looking; here of course there were alternatives.