Eastern District of Texas Provides Further Guidance on the Meaning of A “Regular and Established Place of Business”
On 28 August 2017, in Kranos IP Corp. v. Riddell, Inc., the Eastern District of Texas issued a decision that denied the defendant’s motion to dismiss or transfer based on improper venue. No. 2:17-cv-443 (E.D. Tex. Aug. 28, 2017). The parties did not dispute whether there had been an act of infringement in the district, and thus, the court focused on whether the defendant has a "regular and established place of business" in the district. In making that determination, the court viewed the four factors identified in Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG (E.D. Tex. June 29, 2017) "as the most significant guideposts for analyzing whether a defendant has a regular and established place of business in a particular judicial district.
1. Summary of Raytheon v. Cray
In Raytheon Co. v. Cray, Inc., the court acknowledged that there is "uncertainty among the litigants" over the meaning of "regular and established place of business." To clarify, the court laid out the following four factors to help determine a “regular and established place of business”: (i) the defendant’s physical presence in the district, as well as having inventory, property, or employees in the district; (ii) the extent to which the defendant represents that it has a presence in the district; (iii) the extent to which the defendant derives benefits from its presence in the district; and (iv) the defendant’s targeted interactions within the district. None of the four factors were held to be dispositive, and the opinion emphasized that “[c]ourts should endeavor to determine whether a domestic business enterprise seeks to materially further its commercial goals within a specific district through ways and means that are ongoing and continuous.” The court held that venue was proper because, inter alia, the defendant had a sales executive in the district that (1) received a salary, reimbursement for cell phone use, internet fees, and mileage or other costs for business travel, (2) received administrative support from the Minnesota office, (3) was deemed a “named account manager” in the district, and (4) was responsible for new account development in the district.
2. Application of Raytheon v. Cray Factors in Kranos IP v. Riddell
Similarly, in Kranos IP Corp. v. Riddell, Inc., the court applied the facts to the same set of factors and found that venue was proper based, in part, on the presence of two full-time sales representatives living and conducting business in the district.
Factor 1: Defendant’s Physical Presence
The court found that the defendant has a substantial physical presence in the district because of its two full-time sales representatives who work exclusively for the defendant and out of their personal residences in the district. Based out of their home offices, the representatives submit purchase orders to the defendant’s manufacturing and distribution facility in Ohio. Of particular importance to its analysis, the court found that the following facts supported a finding of proper venue: (i) one of the employees listed a local phone number and identified the district as his location on LinkedIn, and (ii) the representatives receive the allegedly infringing products in the district, keep samples in the district, and display those samples in the district. The court also pointed out that the representatives give sales presentations in the district and provide promotional materials about the allegedly infringing products. Based on these facts, the court held that “[t]his factor therefore weighs in favor of finding that Defendant’s place of business in this District is a regular and established place of business.”
Factor 2: Defendant’s Representation
The court explained that this factor “stems from an equitable concern that a defendant should not be permitted to portray itself as a local provider or local business, then deny such representations when they become inconvenient.” The court found that the defendant holds out its direct sales representatives in the district as local contact persons. The court pointed out that, in fact, the defendant has advertised that it “manufactures and distributes all of their products through its own direct sales force and a select number of dealers,” with “over 230 full-time salesmen / saleswomen.” The court emphasized that the defendant’s business strategy of having identified, local sales representatives was an intended point of interaction between the public and the defendant in each region. It was thus held that the second factor “weighs in favor of finding that Riddell’s place of business in this District is regular and established.”
Factor 3: Defendant’s Derived Benefits From Its Presence in the District
The court explained that “significant sales revenue from a district suggests that the defendant’s place of business there is indeed ‘regular and established.’” But the court acknowledged that no factor is dispositive and that “even significant revenue generated from a particular district will not typically be alone sufficient to find a regular and established place of business within that district.” The court then held that the allegations under this factor did not impact the venue analysis because the (i) plaintiff’s allegations were not tailored to benefits the defendant received from the district specifically, as opposed to the State of Texas, and (ii) broad allegations of significant sales, without more, are insufficient to be given much weight. This factor was thus found to be neutral to the venue analysis.
Factor 4: Defendant’s Targeted Interactions With Existing Customers
The court emphasized that the purpose of the fourth factor is “to identify how a defendant has specifically targeted the distinct communities within a particular district.” The court acknowledged that the mere fact that the defendant advertises in the district is not, on its own, sufficient to prevail on this factor, and that general, nationwide marketing efforts are insufficient to sway the factor in favor of finding venue. The court nevertheless found the following facts as “some evidence that Riddell has intentionally targeted customers in this District”: the defendant (i) maintains showrooms in the district displaying samples of the accused products and (ii) has representatives that give sales presentations in the district. The court thus held that the intentional targeting of customers in the district weighed in the favor of showing proper venue.
Guidance from In re Cordis
The court explained that the four factors are merely a general distillation of the reasoning found in In re Cordis, 769 F.2d 733 (Fed. Cir. 1985) and other earlier district court decisions, as opposed to an entirely new framework. The court held that, even if the court were to solely rely on the framework set forth in In re Cordis, its holding would not have changed.
The court explained that, although it found the home office in this case to be a regular and established place of business, that may not be the case in other factual scenarios. In Kranos IP, in sum, the Eastern District of Texas held that venue could be proper without an “official” physical presence in the district as long as the defendant’s interactions with the district through its local representatives were sufficiently targeted and represented.