Court: District Court, E.D. Virginia; September 28, 2017; Federal District Court
Judge Arenda L. Wright Allen presides over a patent infringement case involving Symbology Innovations, LLC ("Symbology") and Lego Systems, Inc. ("Lego Systems") in the Eastern District of Virginia. This venue choice reflects a trend of forum shopping in patent litigation that has evolved over the past three decades, allowing defendants to be sued in jurisdictions unrelated to the alleged infringement. Recent rulings in TC Heartland and In re Cray have restricted acceptable venues for patent cases, indicating that the Eastern District of Virginia is not appropriate for this suit. Therefore, the case is to be transferred to the District of Connecticut under 28 U.S.C. 1406(a).
Symbology asserts claims of patent infringement concerning four patents related to QR code technology, specifically methods for presenting information about an object on a portable electronic device. These patents are numbered 7,992,773, 8,424,752, 8,651,369, and 8,936,190. Symbology has filed approximately ninety similar lawsuits since 2015, yet no decisions have been reported in those cases. The patents focus on specific techniques for utilizing digital devices to read QR codes, which link printed materials to digital data via encoded URLs that require a QR code reader application on a smartphone for access.
Lego Systems is a Danish company incorporated in Delaware and based in Enfield, Connecticut, specializing in the creation and sale of Lego construction toys, all of which are manufactured outside Virginia. The company designs advertisements and packaging for its American products in Billund, Denmark, and Enfield, Connecticut. While some packaging includes QR codes, Lego Systems does not create these codes or offer software to process them; consumers must rely on third-party software for such functionality. Symbology alleges that Lego Systems induces patent infringement by including QR codes on its packaging and directly infringed by testing an app related to these codes. Despite its headquarters being outside Virginia, Lego Systems has significant contacts with the Eastern District of Virginia, including revenue from sales, promotional events, and registration as a foreign corporation with a registered agent for service of process. However, Lego Systems does not operate retail stores in the district; this function is performed by its subsidiary, Lego Brand Retail, Inc., which operates stores in Virginia. The two entities are distinct, with separate management, financial records, and assets, and do not share any joint assets.
On January 3, 2017, Symbology initiated five patent infringement lawsuits in the Eastern District of Virginia, of which only one remains active. This case was transferred from the Richmond Division to the Norfolk Division for consolidation. Lego Systems responded by filing motions to dismiss, contesting the adequacy of Symbology's initial and amended complaints, and seeking to transfer the case to the District of Connecticut due to forum inconvenience. Lego Systems indicated its intent to preserve the venue challenge in light of the Supreme Court's pending decision in TC Heartland, which later reaffirmed that a corporation "resides" only in its state of incorporation under the patent venue statute. Following the Supreme Court's ruling, the Court ordered supplemental briefing on venue issues, allowing both parties to present their arguments regarding venue propriety. Currently, Lego Systems contends that the venue is either improper or inconvenient, requesting dismissal or transfer to Connecticut if improper, or transfer if deemed inconvenient. Symbology maintains that the venue is proper and argues against the necessity of a transfer, suggesting Delaware as an alternative if a transfer is warranted.
In patent infringement cases, the Federal Circuit's law governs patent-specific matters, while the Fourth Circuit's law applies to procedural issues not unique to patent law. District courts can transfer cases under two federal statutes: 28 U.S.C. § 1406(a) for improper venue and 28 U.S.C. § 1404(a) for inconvenient venue. A challenge to improper venue is treated as a motion under Federal Rule of Civil Procedure 12(b)(3), allowing a district court to consider facts outside the complaint. The burden is on the plaintiff to prove proper venue, which requires a prima facie showing unless an evidentiary hearing is held, in which case the burden increases to a preponderance of the evidence.
For transfers under § 1404(a), the court must determine whether the initial venue is proper but inconvenient. The movant seeking transfer under this section bears the burden of proof, and the decision to transfer is at the district court's discretion. The plaintiff's choice of forum is generally respected unless the balance of convenience strongly favors the defendant, acknowledging that while such transfers are rare, they are not impossible.
Lego Systems seeks a determination from the Court regarding the proper venue for its lawsuit in the Eastern District of Virginia. If the venue is deemed improper, Lego requests the Court to either transfer or dismiss the case under 28 U.S.C. § 1406(a). Should the venue be appropriate, Lego still seeks a transfer to a more convenient forum under § 1404(a). The Court has concluded that the venue is improper and will transfer the action under § 1406(a), thereby not addressing the § 1404(a) request. The concept of venue pertains to the appropriate geographic location for civil litigation, aimed at ensuring lawsuits are heard in convenient courts based on the involved parties and matters. Venue is recognized as a waivable personal privilege for defendants. Federal venue statutes apply universally to civil actions in federal district courts, with the proper venue determined by general and special venue statutes. Intellectual property lawsuits, particularly patent infringement cases, are specifically governed by special venue rules outlined in 28 U.S.C. § 1400, with § 1400(b) detailing the venue for such cases.
Lego Systems initially moved to dismiss under Rule 12(b)(6) and sought a transfer under 28 U.S.C. § 1404(a) without raising a challenge to improper venue under Rule 12(b)(3). Typically, defendants must assert any venue challenge in their first Rule 12(b) motion or risk waiving that defense. Although some courts interpret the Supreme Court's decision in TC Heartland as a change in the law regarding venue, this Court does not. Instead, it views TC Heartland as a clarification of existing law rather than a change. Importantly, Lego Systems did not waive the improper venue issue, as it explicitly reserved this challenge and was permitted to address it in supplemental briefing. The Court acknowledges Rule 15's liberal amendment policy, which allows parties to amend filings with court permission when justice requires. The pending Motion to Transfer by Lego Systems was grounded in the forum's inconvenience, necessitating a proper venue for such a transfer under § 1404(a). A ruling of waiver would have left Lego Systems unable to transfer the case based on inconvenience, thus creating an inequitable outcome. Given these circumstances, the Court finds that any waiver is excused, allowing for a consideration of the merits of the improper venue challenge.
Venue in the Eastern District of Virginia is governed by 28 U.S.C. § 1400(b), which allows patent infringement suits to be brought in the district where the defendant resides or where acts of infringement occurred and the defendant has a regular place of business. For domestic corporations, "residence" refers solely to the state of incorporation, as established in TC Heartland, 137 S.Ct. at 1521. Lego Systems, incorporated in Delaware, does not reside in this District, so venue depends on whether it committed acts of infringement here and has a regular and established place of business.
To establish proper venue, Lego Systems must have committed acts of infringement in this District. Courts have ruled that an allegation of infringement suffices to establish venue, negating the need for proof of actual infringement. Acts contributing to or inducing infringement within the forum also support venue. The Amended Complaint claims that employees at Lego's three Virginia store locations have engaged in activities involving the testing and processing of QR codes on advertisements and packaging, which, while potentially disputed, fulfill the "acts of infringement" requirement under § 1400(b).
A proper venue for patent infringement claims requires that the defendant, here Lego Systems, maintains a regular and established place of business within the district. The application of the patent venue statute is strictly construed, with courts emphasizing its limited scope. Historically, patent cases followed general venue rules, allowing plaintiffs to sue defendants in any district where they could be served, which led to significant abuses and difficulties for defendants. In response, Congress enacted the predecessor to 1400(b) in 1897 to restrict such practices, mandating that venue lies where the defendant has a permanent business presence and where infringement occurs, rather than based on mere transient presence. The intent was to confine patent venue to jurisdictions where the defendant's presence is stable. As such, recent judicial interpretations, including In re Cray, have clarified that the "regular and established place of business" should be understood in relation to this intent. The Court has rejected the four-factor test from Raytheon Co. v. Cray, determining it inadequately aligns with statutory requirements.
Section 1400(b) delineates three criteria for establishing a "regular and established place of business": (1) a physical location in the district, (2) that it is a regular and established place of business, and (3) that it is the defendant's place of business. Venue is deemed improper if any of these criteria are unmet. Courts must apply this standard carefully, distinguishing it from other legal standards, notably the minimum contacts test for personal jurisdiction, which is less stringent. The terms "regular" and "established" necessitate more than mere business activity in the forum; they exclude irregular or unestablished business presences from venue consideration.
In this case, Symbology argues that Lego Systems has a regular and established place of business in the district by pointing to its revenue from sales, promotional events, foreign corporation registration, and an appointed agent for service of process. However, Lego Systems does not operate retail stores in the district, although its subsidiary, Lego Brand Retail, has three stores there. The revenue and foreign registration do not fulfill the physical presence requirement necessary for proper venue under 1400(b). Additionally, the presence of an appointed agent is not relevant, as the statute aims to prevent abusive venue practices. Symbology's reference to Lego Systems hosting events in Virginia also fails to demonstrate a physical business location, as these events are transitory and do not indicate a permanent presence. The three Lego stores are operated by a different corporate entity, further negating the claim for proper venue under 1400(b).
Lego Systems and Lego Brand Retail must maintain formal corporate separateness for Lego Stores to be considered as Lego Systems' "regular and established places of business" in the District, which is necessary for venue. A high legal standard applies, as courts typically will not treat one corporation's business as that of another if they are formally separate. The Supreme Court case Cannon Manufacturing Co. v. Cudahy Packing Co. established that a parent corporation cannot be deemed "doing business" in a state merely due to a subsidiary's presence, as long as they maintain distinct corporate identities—including separate finances, assets, management, and operational records. The current situation reflects this, as Lego Systems and Lego Brand Retail operate as separate entities, with no exclusive distribution agreement in Virginia. Previous case law, such as Shapiro v. Ford Motor Co., further confirms that venue cannot be established over one entity by virtue of the other's business activities if they are formally separate. Symbology's argument for a more flexible interpretation based on modern business practices lacks support, as the Federal Circuit has rejected the proposed Raytheon test. Consequently, the three Lego Store locations in the District cannot be attributed to Lego Systems, leading to the conclusion that Lego Systems does not have a regular and established place of business there, and venue under the second clause of 1400(b) is not appropriate.
Symbology requests venue-specific discovery to strengthen its position in the case, but Lego Systems argues this request lacks justification and a factual basis. The court retains broad discretion under the Federal Rules of Civil Procedure to order such discovery. However, previous rulings indicate that mere speculation or conclusory assertions about a defendant's contacts with a forum are insufficient to warrant jurisdictional discovery. Symbology has provided minimal factual support for its claims regarding Lego Systems' presence in the forum, including revenue and service agent details, which do not demonstrate a continuous business presence. There is no evidence of impropriety in Lego Systems' sworn declarations, nor has Symbology offered information that could alter the court's assessment of Lego Systems' established place of business. Additionally, allowing discovery requests based on weak grounds could lead to inconveniences contrary to the principles of venue rules. Consequently, the court denies Symbology's request for venue-specific discovery, deeming it a "fishing expedition." Furthermore, Symbology seeks leave to file a second amended complaint to meet the Raytheon four-factor test, but there are significant issues with this request that remain unaddressed.
The proposed amendment to Symbology's complaint is deemed futile because both the Federal Circuit and the Court reject the Raytheon test, as established in *In re Cray*. Additionally, amending the complaint to assert venue is unnecessary since Symbology had the opportunity to provide factual support for venue through affidavits or exhibits when opposing Lego Systems' motions. As a result, Symbology's request to amend the complaint is denied.
Regarding the disposition of the case under 28 U.S.C. § 1406(a), Symbology has not sufficiently demonstrated that venue is appropriate in this District or that it warrants discovery. Consequently, the case must either be dismissed or transferred. Lego Systems requests transfer to the District of Connecticut, while Symbology prefers the District of Delaware, a favored forum for patent plaintiffs.
The Court must first determine whether to transfer or dismiss the case. Federal law favors transfer over dismissal unless there is evidence of bad faith or harassment in venue selection. Although the Court has concerns about the good-faith basis for Symbology's venue allegations, it concludes that there is no evidence of bad faith in choosing the Eastern District of Virginia. Therefore, the Court decides to transfer the case in the interests of justice.
The next issue is determining the appropriate transferee court. Transfer to the District of Connecticut is permissible if venue is proper there under 28 U.S.C. § 1400(b), which requires that Lego Systems must have committed acts of infringement and maintained a regular place of business in Connecticut. Symbology asserts that its amended complaint does not allege any acts of infringement in Connecticut; however, the Court finds this assertion untrue.
Symbology argues that venue is improper in the District of Connecticut due to Lego Systems' denial of direct infringement. However, a well-pled allegation of infringement can establish venue despite such disputes. Lego Systems is recognized to have its principal place of business in Connecticut, qualifying the location as a "regular and established place of business," thus making venue appropriate in that district. Additionally, personal jurisdiction is established in Connecticut since Lego Systems has continuous and systematic affiliations with the state, being "at home" there.
Symbology suggests transferring the case to the District of Delaware, claiming it is a more suitable venue since Lego Systems is incorporated there. However, the court emphasizes that allowing such a transfer based on a secondary venue choice would undermine the efficiency and intent of jurisdictional doctrines, potentially leading to improper venue selections. Since Symbology initially chose an improper venue, its request is deemed inadequate. Ultimately, the court finds it is in the interests of justice to transfer the case to the District of Connecticut, where venue and personal jurisdiction are properly established.
Lego Systems' motions (ECF Nos. 16, 18, 25) are partially granted, leading to the transfer of the case to the United States District Court for the District of Connecticut under 28 U.S.C. § 1406(a). The venue transfer reflects Lego's request, although the District of Connecticut is not the sole viable option. The excerpt also mentions Lego Systems' Notice of Supplemental Authority (ECF No. 36) concerning a Federal Circuit ruling on the patent venue statute (In re Cray, Inc., 871 F.3d 1335, 2017 WL 4201535). The burden of establishing venue remains a contentious issue among different circuits. Established Fourth Circuit rules are cited, along with references to several relevant cases and principles regarding the binding nature of Supreme Court precedents and the limitations of lower courts in altering those precedents. The excerpt underscores the finality of Supreme Court decisions, emphasizing that only the Supreme Court has the authority to overrule its own precedents.
Lego Systems' entitlement to a transfer under 1404(a) is assumed without a definitive ruling. The court finds that the allegations in Paragraph 40 are sufficient, leaving the status of Paragraph 39 unresolved. The court refrains from deciding if allegations should be accepted when contradicted by a defendant's affidavit or if they must meet standards from Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal regarding plausibility. It notes that service of process can establish personal jurisdiction, and the VE Holding rule allowed broader venue options than the previous 1400(b) framework intended. Legislative intent emphasized that venue should be based on a permanent agency engaged in patent infringement, not isolated incidents. The court expresses disapproval of the Raytheon decision, stating it failed to consider the statutory purpose of 1400(b) and rendered it ineffective, potentially as part of a strategy to attract patent cases to the Eastern District of Texas. The court clarifies that Cannon Mfg. relates to personal jurisdiction, not venue, and highlights that Symbology did not argue for piercing the corporate veil between Lego Systems and Lego Brand Retail. Fourth Circuit law governs procedural issues, and the court applies its jurisdictional discovery standard due to a lack of specific precedent. The court suggests that venue considerations extend beyond the pleadings and questions the credibility of Symbology's claims that infringement was limited to Virginia, noting the nationwide presence of Lego products.
