The first big post-TC Heartland shoe has dropped on the patent world.
U.S. District Judge Rodney Gilstrap of the Eastern District of Texas set down ground rules last week for maintaining cases in the district following the Supreme Court’s decision in TC Heartland v. Kraft Foods resetting venue rules.
Gilstrap laid out four factors he will consider when deciding whether a company has a “regular and established place of business” that gives rise to venue. While a fixed physical presence such as a store or office will tend to be persuasive, “that is not a prerequisite to proper venue,” Gilstrap wrote. His rules appear to open the door for internet companies to continue being sued in the Eastern District in some circumstances.
Although Gilstrap ruled in a case between two competitors, many nonpracticing entities file their cases in the Eastern District, making it far and away the most popular forum for patent infringement cases in the country. That makes Gilstrap’s interpretation of TC Heartland especially important, unless and until the U.S. Court of Appeals for the Federal Circuit weighs in.
“Technological advances have significantly changed the way businesses operate throughout our nation,” Gilstrap wrote. Courts should employ analytical methods that are “rooted in the wisdom of the past, but which also embrace the future’s changes.”
Gilstrap’s Thursday ruling in Raytheon v. Cray was prompted by the U.S. Supreme Court decision in May that overruled a 1990 Federal Circuit decision that had made it possible to sue for patent infringement almost anywhere. The Supreme Court reinstated the requirements that had been in place before, which are limited to the district where the defendant is incorporated or where it has a regular and established place of business and infringement occurs. The decision has already led to a drop in filings in Eastern Texas and a rise in the District of Delaware.
But as Gilstrap pointed out, a lot has changed in the way businesses operate since 1990. And even back then courts found the meaning of “regular and established” perplexing. “We can discern nothing even remotely approximating a uniform approach” Gilstrap quotes one district judge as saying in 1989.
Gilstrap drew up a list of four factors he would consider when deciding transfer motions for improper venue.
A physical presence such as a retail store, warehouse or other facility in the district will weigh strongly for venue, he wrote, while the presence of inventory, property or employees also will be considered. Secondly, Gilstrap will consider “the extent to which a defendant represents, internally or externally, that it has a presence in the district,” such as by advertising the location of its agents there.
Factor three is “the extent to which a defendant derives benefits from its presence in the district, including but not limited to sales revenue.” Finally, Gilstrap will consider “targeted interactions within the district,” including localized customer support, ongoing contractual relationships or targeted marketing efforts. He cited a 1996 case, which held that CompuServe was properly sued in Texas by a customer who lived there and who sold software over the CompuServe network.
“Many domestic corporations budget annual expenditures for ‘business development,’ and the use of these funds within a particular district may be a reasonable area of inquiry,” Gilstrap added.
None of the four factors should alone be dispositive, Gilstrap wrote. Instead, judges should weigh the totality of the circumstances to determine whether a company sought to “materially further its commercial goals within a specific district through ways and means that are ongoing and continuous.”
In the Raytheon case, that meant Raytheon could sue Minnesota-based competitor Cray Inc. in the Eastern District in large part because Cray employed a sales executive working out of his home in the Eastern District who sold supercomputers, including to the University of Texas.
Ropes & Gray counsel Matthew Rizzolo said the “benefits received” and “targeted interactions” factors seem to leave companies without a physical presence in the district still potentially subject to suit there.
“At the very least,” he said, targeted interactions “might be used as hook for ED-Tex plaintiffs to impose initial discovery costs on defendants. For example, they could try to convince the court to order early discovery on such relationships in response to a venue challenge.”
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