Data Centers Complicate Patent Venue Standards

April 30, 2019

(as published by Law360)

As businesses continue to move away from traditional brick and mortar facilities in favor of the cloud, judicial conceptions of “regular and established” places of business have been challenged. This ongoing move toward automation and virtual communication presents complications with applying the patent venue statute[1] in light of the U.S. Supreme Court’s 2017 decision in TC Heartland LLC v. Kraft Foods Group Brands LLC [2] and the U.S. Court of Appeals for the Federal Circuit’s 2017 decision in In re Cray.[3]

These issues recently came to the forefront in Seven Networks LLC v. Google LLC, [4] where the U.S. District Court of the Eastern District of Texas concluded that the presence of Google’s servers within a third-party operated data center is a sufficient “regular and established” place of business in the district. The Federal Circuit declined to disturb this finding, denying Google’s mandamus petition and subsequent request for rehearing en banc.

Acceptance of this interpretation would be significant for internet-based companies — whose geographic presence may be tied in part to the location of their servers — because the scope of their exposure to litigation could be greatly expanded.

The 2017 Sea Change in Patent Venue

The Supreme Court’s 2017 decision in TC Heartland and the Federal Circuit’s 2017 decision in In re Cray provided some clarity on the application of the patent venue statute. They also set the stage for the present uncertainty.

In TC Heartland, the Supreme Court reminded litigants that an action for patent infringement may be brought only in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.[5] The Supreme Court clarified the meaning of “resides,” holding that, for purposes of patent venue, a corporation resides only in its state of incorporation.[6]

Following TC Heartland, the Federal Circuit’s decision in In re Cray identified three general requirements to determine whether a defendant has a regular and established place of business in a district.[7]

First, there must exist a “physical place” within the district. Relevant to the present uncertainty, Cray explained that “[t]he statute ... cannot be read to refer merely to a virtual space or to electronic communications from one person to another.” Second, the district “must be a regular and established place of business,” meaning that “sporadic activity cannot create venue.”

Finally, the district “must be the place of the defendant,” meaning the defendant corporation itself “must establish or ratify the place of business.” Relevant questions in assessing the third factor include “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place.”

When these three criteria are met, the venue is proper for patent litigation, according to the Federal Circuit.

The Decision in Seven Networks

In Seven Networks, the plaintiff filed suit in the Eastern District of Texas accusing Google of infringing 10 of its patents. Google moved to dismiss the suit for lack of venue, arguing that it had no regular and established place of business in the Eastern District. U.S. District Judge Rodney Gilstrap disagreed, finding the presence of Google’s servers confined within a relatively small space in a third-party operated data center sufficient to establish proper venue in the district where the data center is located.[8]

The court opined that these servers are not “merely a virtual space”; instead, each is a “physical server occupying a physical space.” [9] Because Google owns and operates these servers, exercises exclusive control over them, and uses the servers to deliver content to residents of the district, the court found that a regular and established place of business was present in the Eastern District.

After the decision, Google petitioned for a writ of mandamus and for a panel rehearing or rehearing en banc. Both were denied.[10] In support of its conclusion that the case did not present the “basic, unsettled, recurring legal issues” that can justify mandamus review, the Federal Circuit relied on the specific facts of the case that the district court found:

Google owns and wholly controls the servers, located in the district under specific contracts with ISPs—which may not even tighten a screw without Google’s instruction. The location of the servers in the district serves Google’s business interests—by serving interests of Google’s ISP customers (e.g., in saving transport costs), Google’s end-user customers (e.g., in quick delivery of content), or both.[11]

Emphasizing the district court’s finding that Google has “very strong control” over servers used to deliver content within the district, the Federal Circuit held subsequent review was not warranted.

The Dissent From In re Google

Both the district court’s decision finding venue proper and the Federal Circuit’s decision denying mandamus review were met with hearty skepticism by Judges Jimmie Reyna, Alan Lourie and Pauline Newman.

Writing in dissent to the denial to rehear the mandamus petition, Judge Reyna (joined by Judges Lourie and Newman) reasoned that the district court’s interpretation of the patent venue statute could impermissibly broaden patent venue back to pre-TC Heartland levels, effectively creating nationwide venue for e-commerce providers and other internet-based companies.[12] Judge Reyna noted that Google’s servers “have no physical interaction with Google employees or customers,” and reasoned that “exclusive ownership and control over the servers may be insufficient under Cray.” [13]

Although the dissent did not expressly opine on the issue of whether venue was proper, Judge Reyna implied that the district court applied the incorrect legal standard regarding venue and reached the erroneous conclusion that venue was proper here.

Inconsistent Standards at the District Court Level

Districts courts, even those within Texas’ borders, have met the same or similar fact pattern and produced seemingly inconsistent rulings.

In Personal Audio LLC v. Google Inc.[14], the Eastern District of Texas was faced with the exact same question: whether Google’s “series of electronic data warehousing and distribution servers ... establish a regular and established place of business” in the district.[15] In that case, U.S. District Judge Ron Clark found that these servers were “not places of Google” as required by the first Cray factor, nor did Google exercise sufficient control over the servers to meet the third factor.[16] As such, venue was improper in the district. Judge Clark noted that to rule otherwise “would have far-reaching consequences that distort the scope of the statute.” [17]

Another Texas court, this time in the Northern District, faced a similar fact pattern and came to the opposite conclusion as the court in Seven Networks, ruling in line with Personal Audio. In CUPP Cybersecurity LLC v. Symantec Corporation, the court answered the question of “whether the presence of ... servers at a data center owned by a third party constitutes a regular and established place of business”[18] in the negative.[19] Focusing on the first Cray factor, the district court there found that the business conducted from the servers involves “electronic communications, which the Federal Circuit specifically stated cannot constitute a place.”[20]

District courts outside of Texas appear to be at odds with Seven Networks as well. The U.S. District Court for the Southern District of New York has ruled in Peerless Network Inc. v. Blitz Telecom Consulting LLC that the presence of voice-over-internet protocol routers installed in a third-party facility is insufficient to establish venue.[21] Outside of the data server context, the U.S. District Court for the Northern District of Ohio rejected the argument in Automated Packaging Systems Inc. v. Free-Flow Packaging International Inc. that the presence of a defendant’s equipment at customer facilities within the district could constitute a regular and established place of business.[22]

Each of these cases, Seven Networks included, exemplify what the Northern District of Ohio asserted directly: “It would be a considerable understatement to suggest that the legal landscape surrounding the issues of venue ... has been in a state of flux.” [23]

The Need for Clarity Moving Forward

Given the differing conclusions district courts have reached on the question of whether server space in a district is sufficient to establish proper venue, and given the importance of the question for companies whose business is online, many hope and expect that the Federal Circuit will provide more definitive guidance on the application of 35 U.S.C. § 1400(b) to circumstances where a company merely has equipment or data storage and communication capabilities in the district.

Absent such guidance, internet-based companies may have to operate in a world reminiscent of the one that existed before TC Heartland. Until the Federal Circuit says otherwise, companies should be prepared to defend against patent lawsuits, at least in the Eastern District of Texas, if their contacts in the district mirror those in Seven Networks.

For plaintiffs, uncertainty as to which forum is appropriate to maintain an action looms over their choice of venue. For defendants, it will prove difficult to predict whether the forum they find themselves in will rule in line with Seven Networks, or with Personal Audio and CUPP Cybersecurity.

It will be challenging for litigants to operate with this level of uncertainty in the long term. As the dissent in In re Google noted, waiting to address the issue runs the risk that “dozens of cases will proceed through motion practice, discovery, claim construction, or trial” while the question remains open. [24] The dissent saw “no justification ... to sit idly by while uncertainty builds and litigants and courts expend their resources on issues that [the Federal Circuit] could have provided guidance on.” [25]

Regardless of which side of the “v.” a litigant finds itself on, this uncertainty may prove costly both in terms of time and resources. Clearer guidance would begin to answer some of the lingering questions left behind in the wake of TC Heartland and In re Cray.

[1] 35 U.S.C. § 1400(b).

[2] TC Heartland LLC v. Kraft Foods Group Brands LLC , 137 S. Ct. 1514 (2017).

[3] In re Cray , 871 F.3d 1355 (Fed. Cir. 2017).

[4] Seven Networks LLC v. Google LLC , 315 F. Supp. 3d 933 (E.D. Tex. 2018).

[5] 137 S. Ct. at 1516-17.

[6] Id. at 1517.

[7] 871 F.3d at 1360-64.

[8] 315 F. Supp. 3d at 954-66.

[9] Id. at 951.

[10] In re. Google, No. 2018-152, 2018 WL 5536478 (Fed. Cir. Oct. 29, 2018), rehearing denied, 914 F.3d 1377 (Fed. Cir. 2019).

[11] In re Google, 2018 WL 5536478, at *2.

[12] 914 F.3d at 1381 (Reyna, J., dissenting).

[13] Id. at 1378, 1381.

[14] Personal Audio LLC v. Google Inc. , 280 F. Supp. 3d 922 (E.D. Tex. 2017).

[15] Id. at 933-34 (internal quotations omitted).

[16] Id. at 935.

[17] Id. at 934.

[18] CUPP Cybersecurity LLC v. Symantec Corporation , No. 3:18-CV-01554-M, 2019 WL 1070869, at *2 (N.D. Tex. Jan. 16, 2019).

[19] Id. at *2-3

[20] Id. at *3 (quoting Cray, 871 F.3d at 1362).

[21] Peerless Network Inc. v. Blitz Telecom Consulting LLC , No. 17-CV-1725, 2018 WL 1478047, at *3-4 (S.D.N.Y. Mar. 26, 2018) (slip).

[22] Automated Packaging Systems Inc. v. Free-Flow Packaging International Inc. , No. 5:14-CV-2022, 2018 WL 400326, at *9 (N.D. Ohio Jan. 12, 2018)

[23] Id. at *2.

[24] In re Google, 914 F.3d at 1381 (Reyna, J., dissenting)

[25] Id. at 1382.