General Publications August 18, 2017

“Survey of Post-‘TC Heartland’ Venue: An Implicit Validation of ‘Cray’?” Corporate Counsel, August 18, 2017.

Following the U.S. Supreme Court's ruling in TC Heartland, Judge Rodney Gilstrap of the Eastern District of Texas made the first (and so far only) in-depth effort to define the contours of what constitutes a "regular and established place of business" under the second prong of 28 U.S.C. Section 1400(b). In June's Raytheon v. Cray, he found Cray's employment of local sales executives a sufficient basis for venue, notwithstanding its lack of physical presence. He drew parallels to the Federal Circuit's most recent discussion of this issue, 1985's In re Cordis, which declined to overturn a district court's finding of proper venue based on the defendant's local sales employees. He noted the Federal Circuit's conclusion that the appropriate inquiry is whether the defendant has a "permanent and continuous presence" and not whether it has "a physical presence in the sense of a formal office or store."

After finding venue proper, Judge Gilstrap provided a "totality of circumstances" test as guidance for venue under the second prong, based on four factors: 1) physical presence in the district, 2) representations concerning the district, 3) benefits received from the district, and 4) targeted interactions with the district. Cray has appealed to the Federal Circuit, which remains pending.

Although Cray presents the most comprehensive post-TC Heartland venue analysis to date, a number of other courts have made rulings that are instructive. Some courts have indicated that certain factors are persuasive, while others should not be given weight. A survey of recent rulings reveals what may be an implicit validation of the Cray test.

Physical presence
There is little doubt that a "physical presence" in the district will be a cornerstone of any venue test the Federal Circuit adopts. Whatever it decides, however, the exact contours of what constitutes a physical presence has already been, and will likely continue to be, litigated in lower courts. Last week, the District of Delaware, in Prowire v. Apple, held that venue was proper based on the presence of a single retail store owned by the defendant in the district. Similarly, just days before in Westech Aerosol v. 3M, the Western District of Washington allowed a plaintiff to amend its complaint to add allegations of the defendant's business locations in the district, noting that venue may be proper "depending on the building type and operations conducted therein (such as whether it's a sales office, storage facility, distribution center, etc.)." These cases reflect consistency with the Cray test, which noted that the presence of "a retail store, warehouse, or other facility in the district" should weigh "strongly in favor" of venue.

Local employees and the nature of their activities
In Cray, Judge Gilstrap found that local sales employees and interactions with the district weighed in favor of finding venue proper, which goes to the heart of the issue now on appeal. Although other courts have reached an opposite conclusion when considering this factor, their reasoning appears consistent with the Cray rationale. In July's Hand Held Products v. Code, the District of South Carolina found venue improper even though the defendant had an employee who worked in the district. But, unlike in Cordis and Cray, the local employee was simply a vendor manager who made no sales and had no interactions with customers in the district. Given the nature of this position, the court held his presence was "insufficient to qualify as a 'regular and established place of business.'" Similarly, in last week's Prolacta Bioscience v. Ni-Q, the plaintiff relied on the defendant CEO's residence in the district, but because he commuted to an office outside the district and no evidence was presented that he conducted business at home, the Central District of California held his "mere presence" insufficient. These two cases arguably apply the reasoning of the second and third Cray factors because neither found venue proper since the defendant did not represent it did business in the district and the employee's interactions with the district failed to provide a benefit to the business.

In addition to guidance on these highly relevant factors, courts have indicated a reluctance to give weight to certain other evidence.

Internet sales or web-based interactions

With near uniformity, courts have discounted evidence of sales to or interactions with customers in the district when made over the internet. For example, last week the Eastern District of Virginia, in Glasser v. Barboza, granted dismissal because venue was based on a "product [made] available online." This reflects an implicit consideration of the fourth Cray factor, because general internet sales are not targeted interactions.

Sales by or presence of third-party distributors
Courts have also been reluctant to consider evidence relating to the presence or actions of third-party distributors. For example, in Hand Held Products, the court noted that "the presence of a third-party distributing [the defendant's] products" is "irrelevant." Similarly, in June's Logantree v. Garmin International, the Western District of Texas held that selling products to distributors in the district "will not establish venue" and that "the mere presence of independent sales representatives does not constitute a 'regular and established place of business.'" This reasoning is consistent with multiple Cray factors, including lack of presence, local employees and targeted interactions.

Until the Federal Circuit provides updated guidance, the Cray test and its rationale will likely continue to weigh heavily, whether expressly referenced or not. For defendants seeking transfer from what may be a proper venue based on physical presence or local employees, Section 1404(a) remains available as an alternative argument based on convenience.

Reprinted with permission from the August 18, 2017 edition of Corporate Counsel. © 2017 ALM Media Properties, LLC. All rights reserved.
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