In May 2017, the U.S. Supreme Court issued its decision TC Heartland LLC v. Kraft Foods Group Brands LLC,[1] which narrowed the scope of venue under the first prong of 35 U.S.C. § 1400(b). The natural result was that the second prong of § 1400(b) — “where the defendant has committed acts of infringement and has a regular and established place of business” — became relevant and more regularly litigated. In In re Cray, the Federal Circuit established a test for finding a “regular and established place of business”: “(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.”[2]
This article analyzes how courts have applied the Cray test. In short, courts have been reluctant to find proper venue without a physical building in the district that is owned or leased by the defendant.
Prong 1: “A Physical Place in the District”
In Cray, the Federal Circuit explained that “while the ‘place’ need not be a ‘fixed physical presence in the sense of a formal office or store,’ there must still be a physical, geographical location in the district from which the business of the defendant is carried out.”[3] In determining whether there is a physical place, courts generally look for an ongoing and consistent physical presence in the district.[4] For example, a number of courts have found fixed stores and home based offices of employees to be sufficient to constitute a physical place in the district.[5]
Merely occasional or transitory contacts with the district are generally insufficient to establish a physical place in the district. For instance, employees that do not reside in the district but occasionally visit the district do not meet this requirement because their occasional visits do not amount to a “fixed physical presence” in the district.[6] Likewise, transitory promotional events have been found to be insufficient.[7]
Courts have also wrestled with whether the location of a defendant’s equipment can satisfy the first prong. For example, two decisions in the Eastern District of Texas reached different conclusions regarding whether Google Inc.’s warehousing and distribution servers constituted “a physical place in the district.”
In Personal Audio LLC v. Google Inc., the court found that the servers did not constitute a physical place in the district.”[8] Relying on the Federal Circuit’s statement in Cray that “the [venue] statute ... cannot be read to refer merely to a virtual space or electronic communications”,[9] the court explained that the servers were not sufficient because they were, at best, a “virtual place” that operates the internet and were not a building or a “physical quarters” of any kind.[10] The court also noted that Google did not own or lease the rooms the servers occupied.[11]
In contrast, the same court in Seven Networks LLC v. Google LLC rejected the decision in Personal Audio and instead interpreted the Federal Circuit’s statements in Cray to mean that, while a virtual space alone is insufficient, “a virtual space with more is sufficient” under the first prong.[12] Applying it to the facts, the court determined that the servers occupied a physical place (server room) and therefore satisfied the first prong. The court noted that the servers were more than just a virtual space due to the amount of control Google exercised over this physical place.[13]
Prong 2: “Regular and Established Place of Business”
In order to be a “regular and established place of business,” the physical place in the district must be both “regular” and “established.” The Federal Circuit in Cray explained that a “business may be ‘regular,’ for example, if it operates in a steady, uniform, orderly, and methodical manner, . . . sporadic activity cannot create venue.”[14] To be “established,” the place of business cannot be transient, but “must be settled certainly, or fixed permanently.”[15] Regarding whether business is being conducted, courts look to, for example, whether employees are accepting orders, making business decisions, or soliciting clients from that location.[16]
In Peerless Network Inc. v. Blitz Telecom Consulting LLC, the court determined that a rented shelf in the district did not constitute a regular and established place of business because the defendant did not engage in business from the location, specifically noting that the employees do not accept orders, make business decisions, or solicit clients from the shelf.[17] However, in RegenLab USA LLC v. Estar Technologies Ltd., the court found a regular and established place of business to be employees’ homes where the employees took sales orders and contacted prospective customers from home offices.[18]
Even if business is being conducted from the location, the business must be regular and established. A court has found that sales and marketing employees traveling to a location in a district a few times a year is too sporadic for the location to be considered regular and established.[19] While no court has decided how often business must be conducted at the place in the district, a few visitations is typically insufficient while conducting ongoing business from a location, for example, an employee’s house or a brick and motor store, is typically sufficient.
Prong 3: “Place of the Defendant”
The final requirement is that the regular and established place of business must be a “place of the defendant.” To satisfy this requirement, the Federal Circuit in Cray stated that “the defendant must establish or ratify the place of business.” The Federal Circuit said factors that may be considered include “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place” and “defendant's representations that it has a place of business in the district” by, for example, “list[ing] the alleged place of business on a website, or in a telephone or other directory; or plac[ing] its name on a sign associated with or on the building itself.”[20]
Applying these factors, courts have generally refused to find “a place of the defendant” where the place in question is not owned or leased by the defendant and is instead the place of another, separate entity. In this regard, courts typically will not find that the place of a related entity is “of the defendant” where corporate formalities are maintained.[21] This is true even where the subsidiary’s building in the district has signage with the name of the defendant parent,[22] the defendant sources products for related-entity retail stores in the district,[23] or the parent corporation pays the defendant subsidiary’s legal expenses.[24]
Along these lines, courts have consistently held that the place of an independent distributor is not the “place of the defendant.” Courts have taken this position even where the distributor was a “preferred partner,”[25] the distributor was “necessary” to defendant’s business,[26] the defendant showed a willingness to help distributors[27] or hold sales and educational events in the stores,[28] distributors were listed on defendant’s website[29] or where distributor has a nonexclusive trademark license agreement with the defendant to use defendant’s name.[30] In an interesting topical example, courts have also refused to find an Amazon.com Inc. fulfillment center distributing the infringing product to be the “place of the defendant.”[31]
One related issue where courts are split is whether the locations of independent...
