United States: Federal Circuit Rules Presence Of Google Servers In District Insufficient To Establish Venue

On February 13, 2020, the U.S. Court of Appeals for the Federal Circuit reversed the Eastern District of Texas' ruling that venue was proper in In re Google, 2019-126, halting for now the line of precedent finding that servers located on shelves in third-party datacenters within the district constitute a "regular and established place of business" under the patent venue statute.

Background

On August 7, 2019, the Eastern District of Texas, consistent with its precedent in SEVEN Networks v. Google, ruled that Google was subject to venue in the district based on the presence of Google's servers located in datacenters owned by third party internet service providers; Google appealed thereafter. This was the second time in less than a year that Google had petitioned the Federal Circuit to tackle this issue. The court previously denied Google's writ of mandamus in October 2018, and rehearing en banc in February 2019, after the Eastern District of Texas in SEVEN found that the same type of servers, deployed in the same fashion, satisfied the patent venue statute. In denying mandamus without oral argument in SEVEN, the court ruled that Google had failed to show that the district court's ruling "implicate[d] the 'special circumstances justifying mandamus review of certain basic, unsettled, recurring legal issues over which there is considerable litigation producing disparate results.'" The majority opinion, composed of Judges Dyk and Taranto, determined "it would be appropriate to allow the issue to percolate in the district courts so as to more clearly define the importance, scope and nature of the issue for us to review."

EDTX is Not a Proper Venue

Mandamus Warranted

Despite its determination less than a year prior that Google had not shown that the district court's ruling implicated the "special circumstances justifying mandamus review," the court concluded that mandamus was now appropriate based on "three related developments." First, there are many conflicting district court decisions on the present legal issues. Second, the likelihood of these issues being preserved and presented in the regular appellate process was slim. Third, during the time that the legal issues had "percolate[d] in the district courts," the resulting decisions, although conflicting, added clarity as to (i) whether a rented space, such as a shelf or rack, can be a "place of business," and (ii) whether a "regular and established place of business" requires the regular presence of an employee or agent of the defendant conducting the business.

Regular and Established Places of Business Require an Employee or Agent

The court next considered whether Google's servers could constitute a regular and established place of business, ultimately concluding that, consistent with its analysis in In re Cray, 871 F.3d 1355 (Fed. Cir. 2017), and under the present facts, they could not.

Under Cray, a defendant has a regular and established place of business if it is: (1) a physical place in the district, (2) a regular and established place of business and (3) a place of the defendant. In addressing this first factor, the court found that leased space on a shelf or rack, such as that at issue, can serve as a "place" under § 1400(b). The understanding of "place" need not focus on whether the defendant has an ownership or leasehold interest in real property, the court explained; the statute can be satisfied by any physical space a party could possess or control.

However, the court found that the second factor of the Cray test was not met because a "place of business" requires the regular, physical presence of an employee or other agent of the defendant conducting the defendant's business. In reaching this conclusion, the court analyzed the service statute for patent cases, 28 U.S.C. §1694, which was enacted with and expressly linked to the venue provision. Both provisions required the defendant to "have a regular and established place of business" and the service statute assumed the physical presence of an agent at the place of business. The court reasoned that the service provision must inform the proper interpretation of the same phrase in the venue statute and, accordingly, the venue statute also requires that a defendant's "regular and established place of business" include an agent engaged in conducting such business. Though no one disputed that Google did not have an employee conducting business in the Eastern District of Texas, the final question for the court to assess was whether the ISPs acted as Google's agent consistent with the patent venue statute.

Upon review and analysis of the contracts between Google and the ISPs, specifically the three functions or roles of the ISPs contemplated therein, the court determined that the ISPs were not agents of Google. First, the contracts required the ISPs to provide the Google servers with network access, but, because Google had no right of interim control, the ISPs were not agents on this basis. The contracts also required the ISPs to perform installation of the servers, but since the installation was a one-time event for each server, it likewise did not render the ISPs agents consistent with the statute. Lastly, the contracts provided that Google could request that the ISPs perform services such as maintenance in connection with the servers. Though this maintenance provision could possibly be suggestive of an agency relationship, the court found that the plaintiff had not established that the ISPs performing maintenance were conducting Google's business within the meaning of the statute. The court stated that "the venue statute should be read to exclude agents' activities, such as maintenance, that are merely connected to, but do not themselves constitute, the defendant's conduct of business in the sense of production, storage, transport, and exchange of goods or services."

Takeaways

The Federal Circuit decision provides useful guidance for companies planning their business activities. The common business arrangement of placing a server on a rack at an ISP site by itself should not provide an anchor for lawsuits at each ISP site.

The Federal Circuit also provided further helpful guidance on the notion of agency under the venue statute, noting that currently the physical presence of an agent is required.

Moving forward, the Federal Circuit suggested that if the permitted vehicles for service of process change to recognize non-human agents, that may require revisiting this analysis as well.

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