For Venue Purposes in Patent Lawsuits, Unincorporated Entities May Reside in Their State of Organization

September 14th, 2018

Summary: For purposes of the patent venue statute, district courts are likely to find an unincorporated entity resides in the state under whose laws the entity is organized, with the entity’s principal place of business establishing the particular judicial district in which the entity resides if the state has more than one judicial district.  Parties in patent lawsuits should bear in mind that venue also is proper where the defendant has committed acts of infringement and has a regular and established place of business.

A district court recently held that, for purposes of venue in patent litigation, the residence of unincorporated entities should be determined in the same way as the residence of corporations under TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (2017). Inhale, Inc. v. Gravitron, LLC, No. CV 18-3883 PSG (KSx), slip op. at 4 (C.D. Cal. Sept. 5, 2018); see also Maxchief Invest. Ltd. v. Plastic Dev. Grp., LLC, No. 3:16-cv-63, 2017 U.S. Dist. LEXIS 128432, at *4–5 (E.D. Tenn. Aug. 14, 2017) (finding no reason to treat unincorporated associations differently than corporations for purposes of venue in patent cases).  Thus, a limited liability company (“LLC”) resides in the state under whose laws the LLC is organized, with the LLC’s principal place of business determining the particular judicial district within that state in which venue is proper. Inhale, No. CV 18-3883 PSG (KSx), slip op. at 4.

Gravitron, LLC (“Gravitron”) is a Texas LLC with a principal place of business in Austin, Texas. Id. at 1 (citations omitted).  Gravitron sells products through its website and distribution channels across the country. Id. at 1 (citation omitted).  In particular, Gravitron’s website identifies twelve locations within the Central District of California that allegedly carry Gravitron’s products. Id. at 6 (citations omitted).  Inhale, Inc. (“Inhale”), a California corporation, sued Gravitron in the United States District Court for the Central District of California, alleging Gravitron’s “GRAV Grinder” infringes Inhale’s U.S. Patent No. 8,393,563 titled “Handheld tobacco grinder with windows.” Id. at 1 (citations omitted).  However, Gravitron moved to dismiss Inhale’s lawsuit for improper venue. Id. at 1 (citation omitted).

Venue in patent lawsuits is determined by statute: “Any civil action for patent infringement may be brought 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.” 28 U.S.C. § 1400(b) (2012).  If a party timely objects and venue is improper, the court “shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” Id. § 1406(a).

Recently, with respect to the first prong of § 1400(b), the United States Supreme Court reaffirmed that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.” TC Heartland, 137 S. Ct. at 1517.  However, the Court stated its analysis was “confine[d] . . . to the proper venue for corporations” and, thus, did not address proper venue for unincorporated entities. Id. at 1517 n.1.

Meanwhile, with respect to the second prong of § 1400(b), the United States Court of Appeals for the Federal Circuit has provided guidance for determining where a defendant “has a regular and established place of business.”  First, the Federal Circuit has stated that, to establish venue, the defendant’s place of business “must [] be a physical, geographical location in the district from which the business of the defendant is carried out.” In re Cray Inc., 871 F.3d 1355, 1362 (Fed. Cir. 2017).  Further, a regular and established place of business is not temporary or transient but “operates in a ‘steady[,] uniform[,] orderly[, and] methodical’ manner.” Id. at 1362–63 (quoting Phillips v. Baker, 121 F.2d 752, 756 (9th Cir. 1941); William Dwight Whitney, The Century Dictionary, 5050 (Benjamin E. Smith ed., 1911) (alterations in Cray)).  Finally, relevant considerations for determining whether it is a place of the defendant include “whether the defendant owns or leases the place[] or exercises other attributes of possession or control over the place.” Id. at 1363.  “But the mere fact that a defendant has advertised that it has a place of business or has even set up an office is not sufficient; the defendant must actually engage in business from that location.” Id. at 1364.

In Inhale, the court determined Gravitron satisfied neither prong of § 1400(b) and transferred the case to the United States District Court for the Western District of Texas. No. CV 18-3883 PSG (KSx), slip op. at 4, 7–8.  First, the court held that the Supreme Court’s definition of “resides” for purposes of § 1400(b) stated in TC Heartland should be extended to unincorporated entities, acknowledging that at least one other district court has reached the same conclusion. Id. at 3–4 (citing Maxchief, 2017 U.S. Dist. LEXIS 128432).  In reaching its holding, the court found Inhale failed to present any convincing rationale for treating unincorporated entities differently from corporations under TC Heartland. Id. at 4.  In fact, the court noted that “LLCs have been generally treated like corporations for purposes of venue even before TC Heartland.” Id.  Additionally, the court found that it would be illogical to conclude LLCs, which are analogous to corporations, should be subject to patent infringement lawsuits wherever LLCs could be found while the same lawsuits against corporations are allowed only in their states of incorporation. Id.  Thus, the court applied the definition of “resides” stated in TC Heartland, finding an LLC resides in the state under whose laws the LLC is organized and, within that state, in the judicial district in which the LLC has its principal place of business. See id. at 4 (citing Maxchief, 2017 U.S. Dist. LEXIS 128432).  Because Gravitron is a Texas LLC, the court concluded Gravitron does not reside in the Central District of California, and therefore, venue was improper under the first prong of § 1400(b). Id. (citations omitted).

Turning to the second prong of § 1400(b), the court first acknowledged that “allegations that a defendant has committed acts of infringement within the judicial district are sufficient for venue purposes,” and thus, Inhale’s allegations satisfied the “where the defendant has committed acts of infringement” portion of the second prong. Id. at 5 (citing Plexxicon Inc. v. Novartis Pharm. Corp., No. 17-cv-04405-HSG, 2017 WL 6389674, at *1 (N.D. Cal. Dec. 7, 2017)).  However, Inhale failed to establish that Gravitron had a regular and established place of business in the Central District of California. Id. at 7.  Specifically, Gravitron’s founder and Chief Executive Officer averred that Gravitron does not own, lease, or exercise control over any real estate, lacks any agents or employees, and is not affiliated with any retail or wholesale stores. Id. at 5 (citation omitted).  In particular, Gravitron’s founder averred he could not guarantee that the twelve stores identified on Gravitron’s website currently sell or have sold any of its products. Id. at 6 (citation omitted).  Further, Inhale failed to allege any facts to demonstrate that Gravitron “has any control over those twelve stores.” Id.  As a result, the court found that the twelve locations within the judicial district identified on Gravitron’s website were insufficient to demonstrate Gravitron has a “physical place” in the district because “selling [a] defendant’s products through an independent distributor is not sufficient to satisfy the patent venue statute.” Id.  Moreover, Inhale failed to present evidence suggesting Gravitron “steadily conducts business through these stores” and supporting its allegation that Gravitron “retains its imported products in a location within the district from which it distributes to stores owned, affiliated, or controlled by [Gravitron].” Id. at 6–7.  Therefore, the court concluded Gravitron does not have a “regular and established place of business” in the Central District of California, and thus, venue also was improper under the second prong of § 1400(b). Id. at 7 (quoting § 1400(b)).

Finally, the court held transfer rather than dismissal of the case was proper because “how the patent venue statute applies to unincorporated entities had not been settled when [Inhale] filed the complaint in this district.” Id. at 8; see § 1406(a).  Accordingly, the court ordered the action transferred to the Western District of Texas because Gravitron is a Texas LLC with a principal place of business in Austin, Texas. Id.

Following the reasoning set out by the Supreme Court in TC Heartland, other lower courts may likely extend its holding to unincorporated entities.  In particular, for purposes of § 1400(b), district courts are likely to find an unincorporated entity resides in the state under whose laws the entity is organized, with the entity’s principal place of business establishing the particular judicial district in which the entity resides if the state has more than one judicial district.  In addition to the defendant’s residence, plaintiffs have a second avenue to establish venue in patent lawsuits––where the defendant has committed acts of infringement and has a regular and established place of business.