Corporations Cannot Be Sued for Patent Infringement in a Judicial District Simply Because Their Employees Happen to Work from Home There

Brandon Scruggs

By Brandon Scruggs. A member of our Litigation Practice Group

October 2017 IP Update

In its May 2017 decision in TC Heartland v. Kraft Foods, the Supreme Court dramatically restricted where patent lawsuits can be brought.  As we discussed at the time, patent owners had long been able to sue a corporation wherever  it was subject to personal jurisdiction, which often meant anywhere that products accused of infringement were sold.  In a shift, the court ruled that patent owners can file such suits only in a state: 1) where the defendant is incorporated; or 2) where the defendant has committed acts of infringement and has a regular and established place of business.

A study published by RPX Corporation, which offers protection against certain patent infringement suits, shows that patent litigation has undergone a sea change in the few months since TC Heartland was decided.  Before that decision, the Eastern District of Texas was the court in which by far most patent plaintiffs, particularly non-practicing entities (NPEs), chose to bring suit.

For example, in the 20 weeks before TC Heartland, the Eastern District of Texas accounted for 57% of new NPE litigation versus just 28% in the nine weeks after that decision.  By contrast, the District of Delaware, the Northern District of Illinois, and the Northern District of California have all seen a significant increase in patent case filings.

Shortly after TC Heartland, a judge in the Eastern District of Texas denied a corporate defendant’s motion to transfer the case to the Western District of Wisconsin where it maintains facilities related to its supercomputer business.  In that case, Raytheon Company v. Cray, Inc., Judge Gilstrap ruled that the presence in the Eastern District of Texas of two Cray employees who worked remotely from their homes was enough to establish venue.

The judge relied on the substantial amount of business attributable to those employees – over $345 million – to conclude that Cray maintained a place of business in his district. The judge suggested that, notwithstanding the Supreme Court’s TC Heartland decision despite, he would still allow many patent suits to be filed in his court.

The Federal Circuit hastened to set Judge Gilstrap straight. In In re Cray, it reversed Judge Gilstrap’s ruling and clarified that two working-from-home employees did not meet the “regular and established place of business” standard.  The case ultimately was transferred to the Western District of Wisconsin.

The Federal Circuit explained that courts should look to three requirements to determine whether a defendant has a “regular and established place of business” in a judicial district:  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 last requirement proved crucial in this case.  A location where the defendant’s employee simply owns a home where he conducts some of his employment responsibilities does not meet the “place of the defendant” requirement.

Here, there was no indication that Cray owned, leased, or rented any portion of these employees’ homes.  There was no evidence that Cray played a part in selecting the homes’ location, stored inventory or conducted demonstrations there, or conditioned the employment of those employees on their maintaining residences in the Eastern District of Texas.  Those employees were free to live wherever they chose and could have moved to another judicial district without Cray’s consent. These circumstances mean that the employee’s home cannot be considered his employer’s place of business. It must be the place of the defendant, not just of the defendant’s employee.

The Federal Circuit’s decision will likely accelerate the growing trend of patent cases leaving the Eastern District of Texas. It will be harder for patent owners to file suit in Texas, likely leading to further migration to Delaware, California, and Illinois, where many companies are incorporated.