United States: How Does TC Heartland Affect Venue For Digital Distribution Companies?

Digital distribution, gaming, and entertainment companies employ a business model that differs substantially from companies that have a brick-and-mortar presence. Digital distribution companies may distribute products on a global scale through the internet, have an online presence that reaches practically everyone with an internet connection, and have little in terms of physical retail presence. Leaders in such companies may find it jarring when their company is sued in a remote location and unreasonable when the company's witnesses have to travel hundreds of miles to testify at trial.

Before the Supreme Court's recent decision in TC Heartland LLC v. Kraft Foods Grp. Brands LLC, being sued for patent infringement in a faraway district was often the norm. A corporation could be sued in a state merely because it had "minimum contacts" with the state sufficient to establish personal jurisdiction. As the term "minimum" appropriately implies, this test was often easy to meet. Some statistics show, for instance, that more than one-third of all newly filed patent cases in 2016 were filed in the Eastern District of Texas. Many of these cases were filed on the basis that the sale and distribution of accused products in the Eastern District of Texas was enough to establish "minimum contacts."

TC Heartland changed this dramatically. It clarified the patent venue statute, holding that minimum contacts alone are no longer sufficient. Instead, a company may only be sued for patent infringement where it is either: (1) incorporated; or (2) has a regularly established place of business and has committed acts of infringement.

TC Heartland's impact on digital distribution companies is particularly pronounced given their unique business models and lack of physical presence. Several recent decisions illustrate the effect TC Heartland has already had on digital distribution, gaming, and entertainment companies. The following cases provide a glimpse into TC Heartland's potential effect on these companies and highlight considerations that counsel for these companies may wish to keep in mind:

  • Digital distribution companies can expect greater success in limiting patent lawsuits to their state of incorporation or headquarters following TC Heartland;
  • and Counsel for companies with both digital and physical products should carefully consider corporate structure and its potential effect on patent venue.

TC Heartland

The patent venue statute set forth in 28 U.S.C. § 1400(b) provides two tests for venue. A patent infringement action may be brought only in: (1) the judicial district where the defendant resides; or (2) where the defendant has committed acts of infringement and has a regular and established place of business. The Supreme Court previously ruled that § 1400(b) is the sole and exclusive venue provision for patent infringement actions. Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 229 (1957).

Before TC Heartland, the first test (district where the defendant resides) was easy to meet. Patent venue was expansive. This was because the Federal Circuit had found that a corporation "resides" under § 1400(b) in any judicial district in which the corporation is subject to personal jurisdiction. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1584 (Fed. Cir. 1990). The personal jurisdiction standard was based on a "minimum contacts:" test that was easy to satisfy. E.g., Electronics for Imaging, Inc. v. Coyle, 340 F.3d 1344, 1350 (Fed. Cir. 2003). For companies that rely on digital distribution of content, this test could often be met anywhere in the U.S. As a result, defendants rarely raised an improper venue defense when plaintiffs brought actions in locations other than their principal places of business. For example, in the 10 years prior to TC Heartland in the Eastern District of Texas, only 10 defendants moved to transfer based on improper venue. In the eight months after TC Heartland, more than 70 defendants have brought motions to transfer for improper venue, according to Docket Navigator.

TC Heartland significantly narrowed patent venue. The Supreme Court held in TC Heartland that residence in the patent venue statute (the first test) refers only to the state of incorporation of a domestic corporation. 137 S.Ct. 1514, 1515 (2017). This was a pivotal change. Rather than potentially residing anywhere in the U.S., as could be the case for a domestic company that digitally distributes content, a company only resides in one state, its state of incorporation. To bring a lawsuit elsewhere, plaintiffs must now satisfy the second test (where the defendant has committed acts of infringement and has a regular and established place of business).

Thus, defendants can now argue that venue is improper in a district even though that district has personal jurisdiction over the defendant. In combination with 28 U.S.C. § 1406, which requires a district court to dismiss or transfer a case if venue is improper, defendants—for the first time in 27 years—can now exercise greater control over where they can be sued. Following TC Heartland, many digital entertainment companies, including gaming companies, have successfully transferred their cases away from historically popular patent venues to their home districts. These initial cases suggest that digital entertainment companies can expect greater success in moving cases to their home districts, as plaintiffs will face the difficult task of satisfying the second test under § 1400(b): showing the defendant has a regular and established place of business and has committed acts of infringement outside of the company's state of incorporation.

Recent Decisions

A number of recent decisions illustrate the particular impact of TC Heartland on digital distribution and entertainment companies. Companies that rely on digital distribution of content (e.g., games, movies) often do not have a physical presence in multiple states. As a result, these companies may not satisfy the second test under § 1400(b) ("where the defendant has committed acts of infringement and has a regular and established place of business") outside of their state of incorporation. In such cases, the state of incorporation would be the only state in which a patentee can sue for patent infringement.

The Federal Circuit in In re Cray, Inc., 871 F.3d 1355, 1359-60 (Fed. Cir. 2017), provided further guidance as to the factors courts should consider when determining what constitutes a "regular and established place of business" under the patent venue statute. The three factors are: "(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." Notable for digital distribution companies, as to the first of these factors, the Federal Circuit stated that the statute "cannot be read to refer merely to a virtual space or to electronic communications from one person to another."

Treehouse Avatar LLC v. Valve Corp.

Valve Corporation in November 2017 successfully transferred a lawsuit brought by Treehouse Avatar LLC to the Western District of Washington. Report and Recommendation, Treehouse Avatar LLC v. Valve Corp., D. Del., 15-cv-00427, case transferred 11/20/17. Valve is a digital entertainment company that produces and markets many popular video games including "Team Fortress 2," "Dota 2," and "Portal 2." In addition, Valve operates an online platform called Steam that sells and distributes electronic content, primarily focused on video games.

Avatar initially sued Valve in a remote district, the District of Delaware. In the wake of TC Heartland, Valve moved to transfer to its state of incorporation, Washington. Because there was no dispute that Valve was not incorporated in Delaware, the court analyzed the second prong under § 1400(b): whether Valve had committed acts of infringement and had a regular and established place of business in Delaware.

Treehouse argued that the majority of Valve's business takes place online and Valve's internet activities through its players should constitute a regular and established place of business. According to Treehouse, "players acting as Valve surrogates [provide] networks for other players to connect [to] and play" and should therefore be considered a regular and established place of business. The court disagreed, explaining that Valve did not have offices or employees in Delaware and, therefore, Valve did not have a regular and established place of business in Delaware. Regarding Valve's internet activities as a regular and established place of business would, according to the court, raise concerns of "essentially turning any cell phone, laptop, or computer into a regular and established place of business for a company." (internal quotations omitted).

In a separate proceeding, Valve was also successful in transferring a case from the Northern District of Georgia to its state of incorporation. Ironburg Inventions Ltd. v. Valve Corp., N.D. Ga., 15-cv-04219, case transferred 8/3/17. On the merits of Valve's motion, the court did ''not see[] any evidence'' that Valve had a regular and established place of business in the Northern District of Georgia, nor had it committed acts of infringement in the district.

These cases illustrate the particular effect of TC Heartland on gaming companies, which often distribute their products electronically online, without a physical presence in many states.

Symbology Innovations, LLC v. Lego Sys., Inc.

Lego Systems, a company incorporated in Delaware and headquartered in Connecticut, successfully transferred a case to Connecticut in September 2017. Symbology Innovations, LLC v. Lego Sys., Inc., E.D. Va., 17-cv-00086, case transferred 9/28/17.

Symbology brought suit in Virginia against Lego based on four patents directed to QR codes. Lego moved to transfer after TC Heartland, citing that it had no retail stores in Virginia or anywhere else. Lego, however, had a subsidiary, Lego Brand Retail Inc., that operates Lego stores in 30 states, including three stores in Virginia.

In ordering transfer, the court analyzed § 1400(b). First, the court found that the first prong (residence) was not satisfied in Virginia because Lego's state of incorporation is Delaware. Next, the court found that Lego did not have a regular and established place of business in Virginia. In particular, the court did not impute the three retail stores operated by Lego's subsidiary on Lego. The court noted that Lego and its subsidiary had formal corporate separateness, having separate finances, assets, offices, and records. The court also noted that the subsidiary was not an exclusive distributor of Lego products. As a result, the court found that Lego did not have a regular established place of business in Virginia and concluded that venue was improper there.

In a similar case, a defendant who sold physical products via Amazon Fulfillment Centers in California successfully moved to dismiss a case based on improper venue. Reeflection, LLC v. Spire Collective LLC, S.D. Cal., 17-cv-01603, 1/5/18. The defendant there was incorporated in Pennsylvania, and only sold physical products in California through a third party (Amazon), which the court found was insufficient to satisfy the patent venue statute.

The Symbology and Reeflection cases highlight the importance of corporate separateness in the venue analysis. For companies that both manufacture and sell products, having a separate corporate entity responsible for selling the products at retail locations could be dispositive in terms of venue. This same principle would apply to digital entertainment companies that want a retail presence.

Takeaways

Companies that rely on digital distribution of their products possess a unique advantage over other companies when attempting to rebut a claim that the company has a "regular and established place of business" in a district other than the company's state of incorporation. As a result, such companies can expect greater success in moving to transfer patent infringement suits to its home state. For digital entertainment companies that also have a retail presence, careful consideration of corporate structure and maintenance of corporate separateness is also important to controlling venue in patent infringement suits.

Conclusion

Although it will take more time to fully understand the effects of TC Heartland on the patent venue landscape, change has already occurred with respect to patent venue, and numerous defendants have successfully transferred cases to their home districts.

Originally published in BNA's Patent, Trademark & Copyright Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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