Raytheon Co. v. Cray, Inc.

Citation: 258 F. Supp. 3d 781Docket: Civil Action No. 2:15-CV-01554-JRG

Court: District Court, E.D. Texas; June 29, 2017; Federal District Court

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The Court denied Cray, Inc.'s motion to transfer the case under 28 U.S.C. § 1406(a). Raytheon Company filed a complaint against Cray on September 25, 2015, alleging infringement of four patents, claiming Cray directly infringed two patents through high-performance computing products sold in Texas and indirectly infringed by inducing others to use these products. Cray previously sought to dismiss the case for lack of personal jurisdiction and improper venue, but Raytheon countered with evidence of Cray's sales executive, Douglas Harless, working in the Eastern District of Texas for over seven years, managing key accounts, and selling an accused supercomputer to the University of Texas System. The Magistrate Judge found venue proper and personal jurisdiction appropriate based on these circumstances. Discovery revealed further connections, including Harless's role in significant sales to local customers, generating over $345 million in revenue, and his operational support from Cray’s Minnesota office. Harless managed various key accounts, implicating Cray's substantial business activities in the district, which supported the Court's decision to retain jurisdiction.

Cray employed Mr. Troy Testa as a Senior Territory Manager in the Eastern District of Texas from 2010 to 2011, where he successfully sold a $132,000 HPC system and closed six new customers, generating a sales pipeline exceeding $6 million. On June 1, 2017, shortly before trial, Cray moved to transfer the case, claiming improper venue based on the Supreme Court's TC Heartland decision. Cray argued it does not "reside" in the district and has not committed acts of infringement or established a regular business presence there. Under 28 U.S.C. 1400(b), patent infringement cases can be filed where the defendant resides or has committed infringement with a regular business presence. The TC Heartland ruling clarified that a corporation resides only in its state of incorporation for patent cases, contrary to the broader residency definition in 28 U.S.C. 1391(c). The burden of proof in venue disputes is inconsistently determined among circuit and district courts, with some courts placing the burden on the plaintiff to prove venue is proper, while others assign it to the movant to demonstrate why venue is improper.

Langton references a Southern District of Texas case that clarifies the plaintiff's responsibility to demonstrate the court's jurisdiction over defendants, as established in K.J. Schwartzbaum, Inc. v. Evans, Inc. Other cases, such as Hoover Group Inc. v. Custom Metalcraft, Inc. and Myers v. American Dental Association, highlight differing views on whether the plaintiff or defendant bears the burden of proving proper venue. A motion to dismiss for improper venue does not question the court's jurisdiction but serves as an affirmative defense based on convenience, with the right to object to venue considered a privilege for defendants. Courts generally agree that a plaintiff does not need to plead facts establishing proper venue, thereby placing the burden on the defendant when challenging venue under Rule 12. The excerpt notes that while the burden of proof regarding venue remains undecided in this case, Raytheon has sufficiently met any potential burden based on the complaint and discovery evidence.

Additionally, the excerpt discusses the criteria for determining a defendant’s regular and established place of business under the patent venue statute, establishing that venue is proper if the defendant had such a place at the time the cause of action accrued. The Court adopts this position, proceeding to analyze the requirements under 28 U.S.C. § 1400(b), which includes examining where the defendant resides and where acts of infringement occurred. In patent cases, a domestic corporation is considered to reside only in its state of incorporation; therefore, Cray, incorporated in Washington, does not reside in the current district as per § 1400(b).

Cray's residency outside the Eastern District of Texas prompts the court to evaluate whether acts of infringement occurred within the district and if Cray has a regular and established place of business there, as per 28 U.S.C. § 1400(b). Legal precedent establishes that an allegation of infringement suffices to establish venue without requiring proof of actual infringement. Under 35 U.S.C. § 271, an "act of infringement" encompasses making, using, offering to sell, or selling a patented invention, including inducing such actions.

Cray contends that the sale of the XC40 supercomputer to the University of Texas does not constitute infringement in the Eastern District since it was delivered to the Austin campus. Additionally, it argues that Mr. Harless did not engage in infringing activities within the district. However, the court clarifies that determining whether Cray's actions constitute infringement is a substantive question that should not be resolved at this stage.

The court accepts Raytheon's allegation that Cray induced users in the district to infringe the asserted patents, which meets the venue requirement. Raytheon claims Cray was aware the XC40 supercomputer would be used across the University of Texas system, including within the district. Cray admits that the Texas Advanced Computer Center (TACC), where the supercomputer was sold, is part of the University of Texas but focuses on the sale rather than the broader usage implications. Evidence indicates that the XC40 supports not only the Austin campus but also extends its usability to the entire University of Texas system and partner institutions, establishing sufficient grounds for induced infringement claims within the district.

Mr. Harless's offers to sell accused products while working in the Eastern District of Texas are contested by Cray, which claims these offers do not constitute infringement since they were not made directly to customers in this District. However, offers to sell are not restricted by the installation location of products, particularly when the buyer is a university system with multiple sites intending to utilize the purchased products. The Supreme Court case IMS. Tyler Co. v. Ludlow-Saylor Wire Co. established that a sale initiated in one location and finalized in another does not result in infringement where the suit is filed, but this precedent predates the expansion of infringement definitions by Congress under 35 U.S.C. 271(a), which includes offers to sell. 

The Federal Circuit’s rulings, particularly in Transocean Offshore Deepwater Drilling, emphasized that the focus should be on the future sale's location rather than the offer's site, especially concerning foreign sales. However, this presumption against extraterritoriality does not apply in this case, as the transactions are between domestic entities. According to North American Philips Corp. v. American Vending Sales, an offer to sell can occur at various locations, including the buyer's or seller's location.

Evidence suggests Mr. Harless made multiple offers to sell within the Eastern District of Texas and served as the account manager for at least twenty-one sales of the accused products to nine customers, generating over $345 million in revenue. Cray contends that offers originate from its Minnesota corporate office and undergo multiple technical vetting processes, arguing this negates the claim that Mr. Harless made offers from his home.

Mr. Harless's price quotations to customers include essential details such as the date, expiration date, product description, quoted price, and information about the account executive and the preparer. Specifically, Mr. Harless is identified as both the account executive and the preparer, with his contact information included. These quotations signify a willingness to enter into a bargain, qualifying them as "offers to sell" under relevant legal precedents. As such, they are considered acts of infringement since Raytheon alleges that Mr. Harless made these offers while working for Cray in the Eastern District of Texas. His actions are further tied to his professional gain, although he may contest the characterization of these sales. 

The excerpt also addresses the broader legal question of whether a defendant’s acts of infringement must be connected to their established place of business. Historical case law presents conflicting views on this issue, with some courts requiring a relationship between the accused item and the business location, while others argue that no such connection is necessary. The Federal Circuit has not directly ruled on this, but the Fifth Circuit has previously determined that a connection is not required for establishing venue, stating that the totality of circumstances suffices.

The court adheres to prior rulings indicating that a statute does not necessitate a connection between infringement acts and a defendant's regular and established place of business. The parties involved do not contest whether Mr. Harless's sales offers relate to Cray's established business location in the Eastern District of Texas, leading the court to refrain from addressing this issue. Section 1400(b) lacks a definition for "a regular and established place of business," and historical case law has produced conflicting interpretations, particularly before the VE Holding decision, which reduced emphasis on this criterion. 

Several cases suggest a physical presence in the district is necessary, while others allow for venue even without it. Some courts assert that the physical presence must be owned, leased, or controlled by the defendant or constitute a significant part of their business. The Federal Circuit's decision in In re Cordis Corp. clarified these ambiguities by establishing that venue is proper when a defendant employs sales representatives in the district, as demonstrated in Cordis, where employees worked exclusively for the defendant and utilized a local secretarial service for business operations.

Two employees stored Cordis literature and products in their home offices, despite Cordis not being registered or owning property in Minnesota. Products could be ordered from Florida or via a Minnesota sales representative. These representatives also acted as technical consultants during surgeries and provided post-implantation support. The Federal Circuit denied Cordis’s petition for a writ of mandamus, stating that a corporate defendant's business presence is assessed by its continuous operations rather than a formal office. The present case mirrors Cordis, as Mr. Harless worked as a sales executive for Cray in the Eastern District of Texas for over seven years. Cray paid him a salary and outlined his territory online. A Cray presentation identified Mr. Harless as a “Named Account Manager” in Athens, Texas. Although Cray did not provide a company car, Mr. Harless received reimbursements for business-related expenses. He was also supported by Cray’s Minnesota office while working from Texas, using a local office phone number for customer contact. Invoices and sales proposals featured his Texas phone number. Although he did not store products at home due to their size, Cray acknowledged this limitation. Mr. Harless had access to online sales materials for customer distribution and was involved in new account development and key account management across various industries.

Key distinctions in this case arise from the comparison to Tyler, where the representative had limited authority and was employed by another corporation, as opposed to Cray’s situation. Cray's assertion that Tyler prohibits finding a remote employee with a home office as meeting the "regular and established place of business" standard contradicts the Federal Circuit's Cordis decision. The Court views Cray's activities as sufficiently similar to those in Cordis to satisfy the requirements of 1400(b).

Post-TC Heartland, there has been a surge in motions regarding improper venue, revealing uncertainty around the "regular and established place of business" terminology among litigants. Various cases have been cited, each applying different analyses, leading to confusion and requests for venue-related discovery. A thorough review of existing case law shows that courts have used diverse factual inquiries to determine the presence of a regular and established place of business. Notably, one frustrated court acknowledged the lack of a uniform approach regarding home offices as business locations.

This Court criticizes the focus on excessive factual details, which can lead to gamesmanship and costly discovery, distracting from the case's merits. Citing the Supreme Court's guidance in Hertz Corp. v. Friend, the Court emphasizes that administration of venue statutes should remain straightforward, avoiding the convoluted interpretations seen in various circuit courts concerning "principal place of business."

A complex inquiry into legal matters can hinder administrative simplicity, prompting the Court to develop a more straightforward but not infallible framework for analysis. While acknowledging that difficult cases, particularly those involving telecommuting, will persist, the Court aims to provide a unified direction for venue analysis. The evolving nature of business and technology requires a flexible approach that adapts to future developments, emphasizing the importance of a tailored set of factors that promote administrative simplicity without overriding statutory language. This framework is influenced by the recognition that technology has significantly transformed commercial interactions, making cyberspace the primary venue for exchanges. Courts have increasingly interpreted laws in light of technological advancements, reflecting the reality that modern communication and transportation ease the burden of defending lawsuits across state lines. Notable cases highlight an adaptive judicial response to these changes, ensuring that legal interpretations remain relevant in the context of contemporary technological environments.

Advances in technology may influence the evaluation of factors in the 28 U.S.C. § 1404 convenience analysis, as courts recognize the significance of technological progress in business. The Court aims to refine the analysis of a "regular and established place of business" to streamline the discovery process and maintain administrative simplicity while adapting to evolving business practices.

Factor One, Physical Presence, examines the degree of a defendant's physical presence in the district, encompassing property, inventory, infrastructure, or personnel. A retail store or warehouse significantly supports the notion of a regular and established place of business, but the absence of a physical building is not a definitive barrier. Previous case law suggests that a narrow interpretation requiring a fixed location could lead to manipulative venue shopping. Thus, a fixed physical location, while persuasive, is not mandatory for venue establishment. Other indicators of physical presence may strengthen the case, including inventory, equipment, or infrastructure used for customer services, and the presence of employees in the district. Overall, such physical presence factors favor the conclusion that a defendant maintains a regular and established place of business in the district.

The Court evaluates a defendant's representations about its presence in a district, focusing on whether the defendant has an established place of business. This analysis is grounded in historical case law, notably Judge Learned Hand's reasoning in *Chadeloid Chemical Co. v. Chicago Wood Finishing Co.*, where the defendant could not deny its business presence due to its advertisements and the representation of a local agent. Such admissions are significant in establishing a regular business location.

Additionally, the Court considers the benefits a defendant derives from its presence in the district, particularly through sales revenue. Courts have recognized substantial annual sales as evidence of a regular business presence.

Furthermore, the Court examines how a defendant interacts with customers in the district, including localized support, contractual relationships, and targeted marketing efforts. For instance, in *Cordis*, the defendant's employees acted as technical consultants during surgeries, illustrating active engagement in the district. Ongoing contracts with local entities, as noted in *CompuServe, Inc. v. Patterson*, also suggest a continuous business presence. While such relationships are not conclusive, they contribute to the argument for establishing a regular business presence. Efforts to enhance brand visibility through local marketing or sponsorships, even without direct revenue, further indicate a commitment to the district.

Domestic corporations often allocate annual budgets for business development, and expenditures within a specific district can indicate a defendant's regular and established place of business there. While localized customer interactions support this finding, no single factor is determinative; the overall context must be evaluated. Courts should assess whether a business is actively pursuing its objectives in a district continuously, avoiding rigid rules and focusing on the totality of circumstances. 

In the case at hand, the court concluded that venue is appropriate in the Eastern District of Texas, as Cray has both engaged in acts of infringement and established a business presence in the area. The ever-evolving nature of technology necessitates an adaptable approach to determining patent venue, informed by historical insights yet responsive to contemporary realities. 

The court denied Cray's motion to transfer venue, citing its failure to meet discovery obligations. Cray did not produce relevant documents during the venue briefing and withheld information that contradicted its claims. Specifically, Cray's assertion that only one employee resided in the district was challenged by independent research revealing additional employees. Furthermore, Cray's designee acknowledged the existence of unproduced documents relevant to the case, such as internal sales territory plans.

Compensation plans for employees include details about their territories or assignments, with Mr. Harliss's plan maintained online in Seattle by the human resources department. Venue determination in legal cases is discussed, referencing various cases that establish the burden of proof regarding venue. Generally, the burden is on the defendant to prove that the venue is improper unless the plaintiff has made a sufficient showing of proper venue. The excerpt cites multiple cases to illustrate these principles, including the distinction that, once a defendant objects to venue, the plaintiff must demonstrate that the chosen district is appropriate. It notes that under Federal Rule of Civil Procedure 12(b)(6), all allegations are subject to a plausibility inquiry, which is not conducted in this context. The University of Texas System and Texas A&M campuses are mentioned as being within the relevant district. The text also references VE Holding, which clarifies that a corporation's residence for venue purposes includes any location where it is subject to personal jurisdiction at the time of the action. The excerpt concludes that distinctions in employment relationships are not significant for venue considerations, emphasizing the evolving nature of American commerce since 1985.

A technical distinction between employee classifications, such as employee, independent contractor, or agent, risks encouraging gamesmanship and could lead to significant resource expenditure by the court and parties in determining the appropriate classification rather than addressing the case's merits. Complex jurisdictional tests can complicate proceedings and divert focus from substantive claims. In the current case, evidence from an internal presentation indicates that Cray recognized Mr. Harless as a Named Account Manager based in Athens, Texas, suggesting that Cray has established a regular place of business there. While this evidence alone is not determinative, it can support a conclusion regarding the existence of a business presence in the district. The court notes that factors used in personal jurisdiction analyses are insufficient to establish a regular place of business and emphasizes the distinction between venue and jurisdiction. Although the case is nearing trial, this timing does not alter the analysis or outcome. The court acknowledges that the parties lacked guidance on the relevant factors but finds that the existing precedent is sufficient to support its decision, suggesting that a different analysis would yield the same result.