The Profound Effect of TC Heartland on Patent Litigation

Notably, that same issue was decided by the Supreme Court 60 years ago in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 226 (1957). In Fourco, the Supreme Court held that the patent venue statute is the exclusive venue statute in patent infringement actions, specifically rejecting the argument that the patent venue statute incorporates the broad definition of “resides” contained in the general venue statute. Under Fourco, for purposes of venue under §1400(b), a domestic corporate defendant resides only in its state of incorporation. However, based on subsequent amendments to the general venue statute, the Federal Circuit held in 1990 in VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), that the general venue statute applies to and modifies the patent venue statute such that patent cases can be brought in any district having personal jurisdiction over the defendant. Consequently, for nearly three decades, district courts throughout the United States have interpreted “resides” in the patent venue statute to include not only where a defendant is incorporated but also any district where a defendant is subject to personal jurisdiction, i.e., virtually any district where a defendant's accused products or services could be found.

In TC Heartland, the Supreme Court again addressed the question of whether the patent venue statute is the exclusive venue statute for patent infringement actions. The Supreme Court reasserted its Fourco holding that venue in patent infringement cases is controlled exclusively by the patent venue statute. The Supreme Court ultimately decided again that the general venue statute does not modify the patent venue statute. Once again, for purposes of patent venue under 28 U.S.C. §1400(b), a domestic corporate defendant only resides in its state of incorporation.

Impact on New Patent Infringement Filings

The impact of TC Heartland on the demographics of patent infringement litigation has been profound. In the months following the TC Heartland decision, the Eastern District of Texas, the most popular venue for patent holders for the better part of the last decade, experienced a dramatic decrease in the number of new patent case filings. From May 22, 2016 to September 19, 2016, the Eastern District of Texas accounted for 39.61% of patent infringement actions that were filed in the United States. See, “A Look at District Court Filing Trends 120 Days after TC Heartland.”

During that same time period following TC Heartland in 2017, the Eastern District of Texas accounted for only 15.04%.

On the other hand, the District of Delaware, where more than half of all publicly traded domestic companies are incorporated, experienced a significant increase in the number of new patent case filings. From May 22, 2016 to Sept. 19, 2016, the District of Delaware accounted for only 12.06% of patent infringement actions that were filed across the United States. Id. During that same time period following TC Heartland in 2017, the District of Delaware accounted for 27.91%. Id. Delaware now sits atop the list of most popular venues for patent litigation.

The impact has not only been felt in Delaware and Texas but also in several other jurisdictions across the country. The Central and Northern Districts of California have both experienced a noticeable increase in new patent case filings since TC Heartland. So has the Northern District of Illinois.

While the Eastern District of Texas' reign as the most popular venue for patent cases is over, its influence over patent law is not likely to decrease dramatically. Despite the nosedive in new patent case filings in the Eastern District of Texas following TC Heartland, the Eastern District of Texas remains the second most popular venue for patent cases. While the Eastern District of Texas is no longer a viable venue for many corporate defendants under the first prong of the venue statute, it should continue to be a popular destination for asserting patents against foreign corporations (TC Heartland's holding is limited to domestic corporations) and for pursuing venue under the second prong of the patent venue statute as discussed below.

Impact on Pending Patent Infringement Cases

The jurisdictional shift following TC Heartland has not only been felt in new patent case filings but also in patent cases pending across the country. Following TC Heartland, defendants in patent cases pending across the country filed motions challenging venue, often for the first time, regardless of how long a case had been pending. Those defendants relied on the commonly recognized exception to the general rule of waiver, which provides that a party cannot be deemed to have waived a defense when an intervening change in law recognizes an issue that was not previously available to the party. One issue that has plagued district courts since TC Heartland is whether the Supreme Court's decision constitutes a change in law that would excuse waiver of an improper venue defense in cases pending when TC Heartland was decided.

District courts have been split on whether TC Heartland constitutes an intervening change in law excusing waiver of a venue defense. Many district courts have held that the Supreme Court merely reasserted its 1957 decision in Fourco. Thus, just as the venue defense was available to the defendant in TC Heartland, it was also available to other defendants (e.g., Cobalt Boats, LLC, v. Sea Ray Boats, Inc., 254 F.Supp.3d 836 (E.D.Va. 2017)). Those courts deemed the venue defense waived and denied motions challenging venue or motions to transfer waived even if venue was clearly improper under TC Heartland.

Many district courts reached the opposite conclusion, holding that TC Heartland upended nearly 30 years of patent venue precedent, and to find that TC Heartland is not an intervening change in law “effectively ignores reality” (e.g. Valspar Corp. v. PRG Industries, Inc., 2017 WL 3382063 (D.Minn. Aug. 4, 2017)). Those courts excused waiver of the venue defense and often granted motions to transfer, in some instances no matter how long the case had been pending and no matter how prejudicial transfer would be to the plaintiff. One case that dealt with such a harsh conclusion was Columbia Sportswear North America, Inc. v. Seirus Innovative Accessories, Inc., 2017 U.S. Dist. LEXIS 143016 (D. Or. Sept. 5, 2017). In Columbia Sportswear, the case had been pending for over two years before TC Heartland was decided. Discovery was completed. The court had decided several motions for partial summary judgment. The parties had submitted several pre-trial filings. Then the defendant moved to transfer venue in light of TC Heartland. The court concluded that TC Heartland was an intervening change in law that excused the defendant's waiver of a venue defense. The court believed it was left with two options following TC Heartland, either transfer the case to an appropriate venue or dismiss the case (both of which the court acknowledged would be prejudicial to the plaintiff). The court decided that transferring the case would be less prejudicial than dismissing the case.

Notably, even judges within the same district were split on whether TC Heartland was an intervening change in law. In Columbia Sportswear, the court acknowledged that another judge in the District of Oregon had previously held TC Heartland was not an intervening change in law excusing waiver. (See, Reebok Int'l Ltd. V. TRB Acquisitions LLC, 2017 WL 3016034 (D.Or. July 14, 2017)). A similar split existed in the District of Delaware where TC Heartland was found not to be an intervening change in law excusing waiver in Koninklijke Philips N.V. v. ASUSTeK Computer Inc., 2017 WL 3055517 (D.Del. July 19, 2017), but was found to be an intervening change in law excusing waiver in Boston Scientific Corp. et al v. Cook Group Inc. et al., 2017 WL 3996100 (D.Del. Sept. 11, 2017).

Fortunately, the Federal Circuit resolved the split on November 15, 2017, in In re Micron Technology, Inc., 875 F.3d 1091 (Fed. Cir. Nov. 15, 2017), and concluded TC Heartland constitutes an intervening change in law excusing waiver. The Federal Circuit reasoned that prior to TC Heartland, it would have been improper for a district court to dismiss or transfer for lack of venue given the controlling precedent. Notwithstanding its conclusion that TC Heartland constitutes an intervening change in law, the Federal Circuit clarified that circumstances may exist in which a district court can find that a defendant has forfeited its venue defense despite the intervening change in law. The Federal Circuit relied on what it calls the “Dietz framework,” which is based off a 2016 Supreme Court case. In Dietz v. Bouldin, 136 S.Ct. 1885 (June 9, 2016), the Supreme Court stated that the Federal Rules of Civil Procedure “are not all encompassing” and that there are “many other standard procedural devices trial courts around the country use every day in service of Rule 1's paramount command: the just, speedy, and inexpensive resolution of disputes.” The Federal Circuit saw no reason why the Dietz framework would be inapplicable to venue objections, but noted that applying the framework in the venue context must rest on sound determinations of untimeliness or consent.

In light of the Federal Circuit's holding in Micron, more defendants may be inclined to move to transfer pending cases; however, whether the case should be transferred will depend on more than just the intervening change in law as district courts must also consider the interests of justice, including the impact a venue change will have on the case and the parties.

Additional Limits on Patent Venue

While the focus of TC Heartland was on the first prong of the patent venue statute, the focus of many venue disputes following TC Heartland has been on the second prong of the patent venue statute. As mentioned above, a defendant can be sued under 28 U.S.C. §1400(b) in its state of incorporation or, alternatively, in a district in which the defendant has a regular and established place of business and has committed acts of infringement.

For a plaintiff that wants to litigate a patent dispute outside of a defendant's state of incorporation, the plaintiff must rely on the second prong of the patent venue statute and therefore must identify a district where the defendant has a “regular and established place of business.” But what constitutes a regular and established place of business under the patent venue statute? Prior to TC Heartland, the scope of the first prong of the patent venue statute was so broad that plaintiffs had little reason to rely on, and courts had little reason to interpret, the second prong of the patent venue statute. However, with TC Heartland substantially narrowing the scope of the first prong of the patent venue statute, the scope of the second prong has become the more popular battle ground for patent venue disputes. Fortunately, the Federal Circuit recently offered some guidance on the second prong in In re Cray, 871 F.3d 1355 (Fed. Cir. 2017).

At issue in Cray was the meaning of the §1400(b)'s phrase, “where the defendant … has a regular and established place of business.” The Cray lawsuit was filed in the Eastern District of Texas in 2015 by Raytheon Company alleging patent infringement by Cray Inc. Cray is a Washington corporation with its principal place of business located in Washington. Cray also has facilities in Minnesota, Wisconsin, California and Texas. Cray did not rent or own any property in the Eastern District of Texas, but two of its employees worked remotely in that district. One of those employees listed his home address as his business address on Cray's internal documents. However, that employee did not maintain Cray products in his home, and Cray never paid for the use of his home as a business or publicly advertised that his home residence was a place of business.

During the pleadings phase of the lawsuit, Cray filed a motion to dismiss for lack of personal jurisdiction and improper venue. The district court found that it had personal jurisdiction and venue was proper under the Federal Circuit's VE Holding precedent. Nearly two years later, on June 1, 2017, Cray filed a motion to transfer the case in light of TC Heartland. The district court denied that motion and held venue was proper in the Eastern District of Texas under the second prong of the patent venue statute due to the employee conducting business out of his personal residence in the district.

On appeal, the Federal Circuit reversed the district court order that held an employee's personal residence satisfied the second prong of the patent venue statute. The Federal Circuit held that the second prong of the patent venue statute prescribes three distinct requirements relevant to the inquiry of whether a defendant has 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.” If any of those requirements are not met, then venue is not proper under the second prong of the patent venue statute.

On the first requirement that there “must be a physical presence in the district,” the Federal Circuit held that a fixed physical location in the district is a prerequisite to proper venue. The Federal Circuit elaborated 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 conducted. The Federal Circuit further clarified that the second prong of the patent venue statute “cannot be read to refer merely to a virtual space or to electronic communications from one person to another.” In Cray's case, the only potential physical location in the district was its employee's house.

On the second requirement that the place must be a regular and established place of business, the Federal Circuit held “a business may be regular, for example, if it operates in a steady, uniform, orderly and methodical manner.” In other words, sporadic activity cannot create venue. The Federal Circuit determined that Cray's employees could move his home out of the district at his own instigation without the approval of the defendant, which cut against the employee's home being considered “a regular and established place of business” of Cray's.

On the third requirement that the regular and established place of business “be a place of the defendant,” the Federal Circuit held that “it must be a place of the defendant, not solely a place of the defendant's employee.” The Federal Circuit clarified that the relevant considerations for this issue include whether the defendant owns or leases the place, or exercise other attributes of possession or control over the place. The Federal Circuit also noted that it may be relevant to consider whether the employee's employment is conditioned on the employee's continued residence in the district and whether marketing and advertising materials indicate that the defendant holds itself out as having a place of business in the district. None of those considerations applied to Cray's employee living in the district.

Ultimately, Cray did not own, lease or rent any portion of its employee's home; did not have any role in selecting where its employee lived; did not require its employee to reside in the district; and did not publicly identify its employee's home as a place for transacting business. Accordingly, the Federal Circuit held Cray did not have a regular and established place of business in the Eastern District of Texas under the second prong of the venue statute.

The Cray decision provides much needed guidance on the scope of the second prong of the patent venue statute, but it also further narrows the scope of where plaintiffs can file patent infringement lawsuits. While future cases will no doubt raise new issues and questions regarding the second prong of the patent venue statute, the current filing trends are likely to continue as the impact of TC Heartland and its progeny resonates through district courts across the country.

***** Gregory Parker is a member at Bass, Berry & Sims in Nashville, Tennessee. He counsels clients in the procurement and enforcement of intellectual property rights. He can be reached at [email protected]. Andy Rittenhouse is an associate at Bass, Berry & Sims in Memphis, Tennessee. He advises clients in the protection of their intellectual property assets. He can be reached at [email protected].