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Patent Owners May Look to Business Ties After Venue Ruling

Feb. 21, 2020, 4:58 PM

Patent owners may start digging deeper into business relationships to steer cases to certain venues after the Federal Circuit ruled that a lawsuit against Alphabet Inc. subsidiary Google LLC couldn’t be heard in the Eastern District of Texas.

The U.S. Court of Appeals for the Federal Circuit opened a potential new line of dispute in patent venue fights when it ruled recently that a place of business requires the physical presence of an employee or agent. Having cache servers in the Eastern District, as Google does, wasn’t enough without the presence of an employee or agent doing company business, it said.

Patent owners focused on keeping lawsuits in their preferred district may scour business relationships, looking for people who are conducting the company’s business in the area.

“In the wake of this decision I think we’re going to see a new area of focus in evaluating whether an employee or agent of the defendant is present in order to establish a place of business,” Megan Whyman Olesek, an attorney at Turner Boyd LLP who represents Silicon Valley tech companies, said.

Company Agent

The Federal Circuit, ordering a lower court to either dismiss or transfer the lawsuit, said internet service providers Cable One and Suddenlink were not agents of the Google—even though they maintained and installed the technology giant’s servers.

“The venue statute should be read to exclude agents’ activities, such as maintenance, that are merely connected to, but do not themselves constitute, the defendant’s conduct of business in the sense of production, storage, transport, and exchange of goods or services,” the court said.

Attorneys who expect future disputes over the meaning of “agent,” though, say there is still room for venue rules to be fine-tuned.

“It really comes down to the facts and what people are conducting that business,” Joseph Re, a Knobbe Martens Olson & Bear LLP attorney who litigates tech cases, said.

Patent owners are expected to test the boundaries of agency relationships, a question that hasn’t been heavily litigated in venue fights. U.S. District Judge Rodney Gilstrap, who heard the Google case, has already requested briefing in at least one other case about the issue.

The disputes could be fact-specific, according to attorneys, who noted the Federal Circuit took a close look at the contracts between Google and its service providers. That could lead to more requests for depositions and document demands early in cases.

Still, some questioned how much success patent owners will have. The definition of agency relationship used by the Federal Circuit includes the term “fiduciary relationship.” Fiduciaries are often thought of as executives, or people like lawyers and accountants.

“I don’t see very many business relationships that are going to meet that standard, and thus it will be difficult to find any instances where a third party is going to satisfy the test for having a manned regular and established place of business,” David Elkins, leader of the intellectual property and technology practice group at Squire Patton Boggs (US) LLP, said.

The Federal Circuit, too, explicitly left open the possibility that a machine could be an agent. That could potentially arise in situations involving fully automated businesses, like a self-service car wash or an unmanned coffee bar, attorneys said.

Place of Business

Companies’ places of business became more important in patent disputes after the U.S. Supreme Court in TC Heartland v. Kraft tightened venue rules for such cases. Under the 2017 ruling, one way to establish venue is to show the defendant has a place of business in the district.

But questions about what constitutes a place of business have lingered in lower courts, frustrating internet and cloud-computing businesses like Netflix Inc. and Twitter Inc., who told the Federal Circuit uncertainties about what might tie them to a particular district made it difficult to plan for the possibility of litigation.

“That seems to be where the district courts are struggling to try to define what it actually means to have a ‘regular and established place of business,’ when the business is distributed over the internet,” Crowell & Moring LLP trial lawyer Mark Supko said in an interview shortly before the Federal Circuit ruling.

Even Eastern District of Texas judges have differed. Gilstrap, the district’s chief judge, had found Google servers constituted a place of business. Another judge in a different case found the servers did not represent a place of business.

The Federal Circuit’s ruling is also is important for wireless providers and other companies that have equipment scattered around the country.

“I believe the Federal Circuit’s opinion provides a lot more clarity regarding what constitutes a proper venue, particularly in cases where the defendant only has some sort of infrastructure in the district, such as servers, cell towers, pipelines, etc.,” Vera Elson, an IP litigator at Wilson Sonsini Goodrich & Rosati, said in an email.

Loosening the Grip

The Eastern District of Texas has a reputation as being plaintiff-friendly—and protective of its jurisdiction.

Since 2017, East Texas judges have granted just over 48% of motions to transfer based on improper venue, according to an analysis by Crowell & Moring. The national average during that time was above 60%.

This isn’t the first time the Federal Circuit has corrected the East Texas’ interpretation of venue rules since TC Heartland. The court in 2017 said a remote worker in the district isn’t typically enough to establish create venue, overturning another Gilstrap ruling.

Elkins said the Google decision could be the “Federal Circuit sending a message to the Eastern District of Texas, but also other courts that are perhaps a little bit too quick to embrace unusual circumstances as a basis to deny a transfer motion, or a motion to dismiss for a lack of venue.”

For others, the ruling illustrates the potential challenges when technology developments outpace changes in the law. The Federal Circuit in its ruling looked back to a law from the late 1800s.

“They’re working with horse and buggy statutes and trying to apply it to the modern server world,” Lowenstein & Weatherwax LLP founding partner Kenneth Weatherwax said.

To contact the reporter on this story: Matthew Bultman in New York at mbultman@correspondent.bloomberglaw.com

To contact the editors responsible for this story: Melissa B. Robinson at mrobinson@bloomberglaw.com, Keith Perine at kperine@bloomberglaw.com

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