By: Jinming Zhang  [6/2/22]

The Federal Circuit has further narrowed the scope of patent venue statute in In re Volkswagen Group of America, Inc., holding that the requisite control a defendant must exercise over an in-district agent to establish patent venue is “interim control” – day-to-day control over the operation of the agent to carry out some specific services for which the alleged agency relationship exists. Nos. 2022-108, 2022-109, 2022 U.S. App. LEXIS 6094 (Fed. Cir. Mar. 9, 2022). This decision by the Federal Circuit follows the trend set by the Supreme Court’s decision in T.C. Heartland LLC v. Kraft Foods Group Brands LLC, 137 S.Ct. 1514 (2017), and tightened the venue rules to further limit a patent owners’ options on where to bring a patent infringement suit. 

Disputes over “whether this Court is the proper venue?” can be crucial in patent litigations. Parties often want to litigate in forums most favorable to them. While patent owners have the advantage of selecting the initial forum, the alleged infringer can always challenge the selection on jurisdictional or venue grounds. Although a federal district court may have personal jurisdiction over the alleged infringer, it may still decline to hear the case because it is not the proper venue.

In most federal civil litigations, determining proper venue is governed by the general venue statute at Section 1391(c) of Title 28 of the U.S. Code. The proper venue for patent litigations, however, is defined by Section 1400(b) of Title 28 of the U.S. Code, which provides that “[a]ny civil action for patent infringement may be brought in the judicial district [1] where the defendant resides, or [2] where the defendant commits acts of infringement and has a regular and established place of business.”

In its 2017 TC Heartland decision, the Supreme Court made clear that § 1400(b), instead of the general venue provision of § 1391(c), controls the definition of proper venue in patent litigation. 137 S.Ct. 1514 (2017). The Supreme Court also specifically clarified the first prong of § 1400(b) by holding that a corporate defendant can only “reside” in its incorporation state. Id. at 1521. The TC Heartland decision thus specifically narrowed the patent venue to defendant’s state of incorporation or any districts where the defendant “commits acts of infringement and has a regular and established place of business.”

Although TC Heartland defined the first prong of § 1400(b), the question regarding the second prong of § 1400(b) remained the same: what constitutes a “regular and established place of business?” The Federal Circuit provided guidance in In re Cray, 871 F.3d 1355 (Fed. Cir. 2017), and three factors should be considered in determining whether the defendant has a “regular and established place of business”: (1) there must be a physical place in the district, meaning a physical, geographic location where the defendant conducts business in the district; (2) the presence must be regular and established, meaning there is some steady, permanent business presence in the district; and (3) the place must be that of the defendant. Id. at 1360. Applying the test, the Court determined that a remote employee’s presence in the judicial district was insufficient to establish a “regular and established place of business.”

The 3-factor test in Cray, however, left an important question of whether an agent of the alleged infringer in the judicial district can establish a “regular and established place of business.” The Federal Circuit answered in the positive in In re Google, 949 F.3d 1338 (Fed. Cir. 2020). In In re Google, the Court considered whether factors (1) and (2) of the Cray 3-factor test could be established by computer servers owned by an agent of the defendant in the judicial district. The Federal Circuit first found that the defendant does not have to own or lease the premises in question when the defendant controlled or possessed the premises through a contract with the company maintaining the premises. The Court also determined that the premises in question is a defendant’s “regular and established place of business” when it is one where defendant’s agents or employees conduct the defendant’s business. Background maintenance work on the servers was not the business contemplated by the statute and thus could not establish a “regular and established place of business.”

Following the decision in Google, the Federal Circuit, in In re Volkswagen Group of America, Inc. provide clarification on the requisite level of control for establishing the agency relationship in evaluating whether the defendant has a “regular and established place of business.” Nos. 2022-108, 2022-109, 2022 U.S. App. LEXIS 6094 (Fed. Cir. Mar. 9, 2022). At issue before the Court was a pair of recent cases from the Western District of Texas, where plaintiff StratosAudio, Inc. sued Volkswagen and Hyundai, asserting patent infringement. See StratosAudio, Inc. v. Volkswagen Group of America, Inc., No. 6:20-CV-01131 (W.D. Tex. Sep 20, 2021) and StratosAudio, Inc. v. Hyundai Motor America, No. 6:20-CV-01125 (W.D. Tex. Sep. 17, 2021). In both cases, Stratos alleged patent venue based on independent car dealerships located in the district that sell and service cars after purchasing them from Volkswagen and Hyundai. The district court, in both cases, found the venue proper over Volkswagen and Hyundai by finding that the franchise agreements granted Volkswagen and Hyundai highly level of control over the dealership, including aspects of the dealerships’ premises and facilities, inventory, price and payment for vehicles, term and scope of vehicle warranties, reporting requirements, and personnel requirements. The district court believed that the agreements established sufficient control over the dealership such that the dealerships are agents of Volkswagen and Hyundai and that the dealerships established regular and established places of business for venue purposes.

The Federal Circuit, however, disagreed with the district court, holding that the level and aspects of control exercised by Volkswagen and Hyundai did not establish an agency relationship “for the purpose of (i) selling cars to consumers and (ii) providing warranty services to consumers.” The Court, relying on In re Google, first recognized the narrow scope of agency relationship such that “a party may be a principal’s agent for a particular purpose does not mean that the party is the principal’s agent for another.” Nos. 2022-108, 2022-109, 2022 U.S. App. LEXIS 6094, at *10 (Fed. Cir. Mar. 9, 2022). Accordingly, the analysis of whether an agency relationship exists for the purpose of establishing a “regular and established place of business” must be evaluated separately for each business purpose of the defendant the alleged agent is performing in the judicial district and those purposes were selling cars and performing warranty services.

The Court then determined that the control required in an agency relationship is one of “interim control,” characterized by day-to-day control over the agent’s operations wherein specific and direct step-by-step instructions were given by the defendant instead of mere constraints on how a service is provided. The Court determined that Stratos only showed that the alleged infringers set initial parameters for performance (such as minimum inventory, sales staff, displaying the parent company’s logo, providing sales reports, etc.) while the daily manner of conducting business was entirely within the dealerships’ control. Accordingly, the Court held that no agency relationship exists between the alleged infringers and the dealerships for the purpose of establishing a “regular and established place of business.” The cases were thus remanded to the district court to address whether to dismiss or transfer the cases.

The In re Volkswagen decision marks another step by the Federal Circuit to tighten patent venue scope further. This decision further limits a potential plaintiff’s options to bring a patent infringement suit. The strict requirement of “interim control” for establishing agency relationships further swings the negotiating leverage away from patent owners and in favor of accused infringers. Therefore, there are a few key takeaways in view of this case:

First, potential litigants must be aware of a court’s willingness to establish patent venue through an agency relationship, but the court has stringent rules on establishing the agency relationship.

Second, a potential plaintiff should be careful in choosing the venue to bring a case as a mere franchise or dealership may not be sufficient to support proper venue.

Third, a potential defendant should also be aware of the possibility that the presence of an agent, a franchise, or a dealership in a judicial district could subject it to litigation in that district. Any contracts or agreements involved in such business relationships should be carefully reviewed under the lens of “interim control.”

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Posted in: Intellectual Property - Patents, Litigation & Disputes

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