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22 September 2017Patents

Gilstrap abused discretion on patent venue rules, says Federal Circuit

The US Court of Appeals for the Federal Circuit has overturned a decision by District Judge Rodney Gilstrap, finding that he committed an “abuse of discretion” by refusing to transfer a patent lawsuit.

In a precedential decision, handed down yesterday, September 21, the Federal Circuit ordered Gilstrap, a judge at the US District Court for the Eastern District of Texas, to transfer a dispute from the district to the US District Court for the Western District of Wisconsin.

Supercomputer manufacturer Cray had petitioned for a writ of mandamus to vacate Gilstrap’s order that denied Cray’s motion to transfer the case to the Western District of Wisconsin.

“The district court misinterpreted the scope and effect of our precedent in determining that Cray maintained ‘a regular and established place of business’ in the Eastern District of Texas within the meaning of 28 USC section 1400(b),” said the Federal Circuit.

Section 1400(b), the patent venue statute, provides that patent infringement actions “may be brought in the judicial district where the defendant resides”.

Raytheon had sued Cray in the Eastern District of Texas, claiming that Cray’s sale of advanced supercomputers infringed Raytheon’s patents.

Cray is a Washington-based company with its principal place of business there, but it also maintains facilities in a number of places.

Although the company doesn’t rent or own any property in the Eastern District of Texas, it allowed two employees to work remotely from their respective homes in that district.

One of the employees, Douglas Harless, worked as a sales executive in the area, but, according to the court, Harless didn’t have any of Cray’s products or literature at his home.

“It is undisputed that Cray never paid Harless for the use of his home to operate its business, or publicly advertised or otherwise indicated that his home residence was a Cray place of business,” said Circuit Judge Alan Lourie, on behalf of the court.

Cray moved to transfer this suit under 28 USC section 1406(a).

The section provides that if a case has been filed in the wrong district, the district court where it's been filed can dismiss or transfer the case to any district in which it could have been brought.

Cray claimed that it doesn’t “reside” in the Eastern District of Texas, in light of the US Supreme Court’s decision in TC Heartland v Kraft Foods.

The company further argued that the venue was improper because it hadn’t committed acts of infringement and hadn’t maintained a regular and established place of business within that district.

Although the district court agreed that Cray didn’t reside in the district, it rejected Cray’s second argument.

“The court found that Harless’s activities were factually similar to the activities performed by the representatives in In re Cordis, in which this court rejected a mandamus request to reverse an order denying transfer for improper venue,” said Lourie.

The district court then went on to set out four factors for enquiries into what constitutes a regular and established places of business “in the modern era”. This included physical presence, defendant’s representations, benefits received, and targeted interactions with the district.

According to the Federal Circuit, the district court misunderstood the scope and effect of the Cordis decision, and its “misplaced reliance on that precedent led the court to deny the motion to transfer”.

Lourie added: “We recognise that the world has changed since 1985 when the Cordis decision issued. In this new era, not all corporations operate under a brick-and-mortar model.”

The court then turned to section 1400(b), stating that the “only question” before the court is whether Cray has a “regular and established place of business” in the Eastern District of Texas.

“The district court’s four-factor test is not sufficiently tethered to this statutory language and thus it fails to inform each of the necessary requirements of the statute,” explained the Federal Circuit.

Christopher Loh, partner at Fitzpatrick, Cella, Harper & Scinto, said: “It’s clear from the Cray decision that the Federal Circuit has received the Supreme Court’s message: stick close to what the statute and existing case law say.”

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