SEVEN Networks, LLC v. Apple Inc
The Federal Circuit recently resolved a long-simmering district court split over a controversial venue rule in In re: Google, rejecting a prior decision that the presence of certain Google servers in an ISP data center each qualified as a “regular and established place of business”. Rather, the appeals court held that the “regular, physical presence of an employee or other agent of the defendant conducting the defendant’s business” is required “at the alleged ‘place of business’”—though it clarified that it was not deciding whether a machine could serve as an agent, nor the related question of whether a machine can accept service. NPE Personalized Media Communications, LLC (PMC) has since seized on this language, asserting in another campaign that similarly located Google servers qualify as agents under the Federal Circuit’s holding. Now, both Google and campaign codefendant Netflix have argued to the contrary, countering that machines presently lack the capacity to “consent” to act on behalf of a principal.
The Federal Circuit’s Evolution on Servers and Venue
As recently detailed by RPX, the Federal Circuit’s In re: Google decision was not the first time that the court has rebuked District Judge Rodney Gilstrap of the Eastern District of Texas for issuing what it has deemed an overly broad interpretation of the patent venue statute. In 2017, the appeals court rejected Judge Gilstrap’s attempt to establish a four-part, “totality of the circumstances” test for determining whether a defendant has a “regular and established place of business” in a district, holding in In re: Cray that Judge Gilstrap’s test deviated too far from the text of the statute.
The Federal Circuit—both a panel and the full court—initially declined to review the decision that led to In re: Google, issued in July 2018 in litigation filed by Seven Networks LLC (an NPE linked to Fortress Investment Group LLC) against Google. This caused some uncertainty among district courts, several of which issued a series of rulings that came to different conclusions from one another on venue with respect to the same Google Global Cache (GGC) servers at issue in the Seven Networks decision. The rejection of Google’s mandamus petition came over heated dissents from Circuit Judge Jimmie Reyna (one issued alongside the panel’s rejection of that petition, and another when the full court declined to step in), who warned that Judge Gilstrap’s decision could “reestablish nationwide venue” for many companies using computer hardware in their businesses.
The Federal Circuit returned to the issue after Judge Gilstrap denied a Google venue challenge filed in another litigation campaign, this one waged by Acacia Research Corporation’s Super Interconnect Technologies LLC (SIT), once again finding that venue was proper due to the presence of the same GGC servers in the Eastern District. This prompted Google to file another mandamus petition that the appeals court granted in February, acknowledging that Judge Reyna and Circuit Judge Alan D. Lourie (who joined one of Judge Reyna’s dissents) had correctly predicted the district court split and ruling that the defendant’s agents must be regularly present at a place of business (among other factors) for venue to be proper. Applying the facts to Google, the court then held that the servers at issue did not establish venue.
Gilstrap Orders Supplemental Briefing on Impact of In re: Google
On February 13, the same day that the Federal Circuit issued its In re: Google decision, Judge Gilstrap ordered the parties in PMC’s lawsuit against Google and Netflix to brief the impact of that ruling on the defendants’ pending motions to dismiss for improper venue. Judge Gilstrap asked the parties to brief three issues: 1) the source of law that the court should apply in determining the relevant agency relationships; 2) whether Google and Netflix each have a “regular, physical presence of an employee or other agent of the defendant conducting the defendant’s business at the alleged place of business”; and 3) “[u]nder what conditions . . . ‘a machine could be an agent,’ and whether any such agent of Netflix or Google exists within the Eastern District of Texas”. Briefs were filed in sealed form on February 20 and in redacted form on February 24.
PMC filed one brief per defendant, as permitted by Judge Gilstrap’s order. In its brief focusing on Google, the NPE argues that the defendant’s GGC servers qualified as agents under the In re: Google decision, which stated that “[a]n agency relationship is a ‘fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to act’”. As to the “person” requirement, PMC asserts that “Congress has never distinguished between automated methods of conducting business and business conducted by humans”, citing statutory language in the America Invents Act providing that an automated teller machine (ATM) shall not be considered a “regular and established place of business” as well as the July 2018 Seven Networks decision, in which Judge Gilstrap held that the statute does not, and cannot, include a human-centric activity requirement: “Any reading of the statutory requirements of § 1400(b) that inserts an extra-statutory requirement of human-centric activity at the ‘regular and established place of business’ necessarily renders this express exemption superfluous”. (The Federal Circuit explicitly declined to reach the ATM issue in In re: Google, apart from stating that it did “not see why this amendment, which makes no mention of an employment or agent requirement, should alter our analysis”.)
PMC asserts that the GGC servers are Google’s agents based on several alleged factors. These include the “close association between Google’s business model and the GGCs’ function”, which according to the NPE “reflects the underlying fiduciary purpose of the principal-agent relationship: Google deploys GGCs to act in Google’s interest and on Google’s behalf.” PMC also addresses the patent service statute, 28 U.S.C. Section 1694, though without reference to the text of that provision itself—which establishes that for a district where a defendant does not reside but has a “regular and established place of business”, service of the “defendant may be made upon his agent or agents conducting such business”. “Any such requirement would be satisfied here”, argues PMC, because Rule 4 of the Federal Rules of Civil Procedure permits service according to the law of the state where the district is located. Since Texas law allows service on anyone 16 years or older at the defendant’s place of business, or “in any other manner that the affidavit or other evidence before the court shows will be reasonably effective to give the defendant notice of the suit”, the NPE asserts that “leaving a summons with an employee at an ISP location hosting a GGC server, or following any other method for effecting service that the court considers reasonable, would satisfy the requirement” of the patent service statute (notwithstanding the Federal Circuit’s holding, in In re: Google, that under the facts of that case, GGC servers are not “regular and established place[s] of business”, and that ISP employees were not agents of Google).
Meanwhile, Google’s brief (at least, the portions publicly available) begins with the choice of law question (which is not addressed in the unredacted portions of PMC’s Google brief). The company argues that because Federal Circuit law governs the initial analysis of the requirements of the patent venue statute—and because assessing whether an “agen[cy]” relationship exists within the meaning of the patent service statute . . . is one component of determining whether a ‘regular and established place of business’ exists that can give rise to venue under Section 1400(b)”—it is appropriate to apply Federal Circuit law to the agency question as well. As a result, under the Federal Circuit’s In re: Google opinion, “the meaning of the term ‘agent’ is informed by the ‘essential elements of agency’ derived from the generic principles embodied in the Restatement (Third) of Agency” and can be further clarified through Supreme Court precedent, though Google cautioned the court against applying definitions of the term “agent” as applied in “other statutes and substantive areas of federal law”, given that the term may defined differently based on context. Google also argues that the court “must . . . consider whether the agent has a ‘regular, physical presence’ and is ‘regularly conducting’ the defendant’s business” under the In re: Google test, questions that it asserts are best resolved under Federal Circuit law.
Later in its brief, after addressing the question of whether its GGC servers (as in the other relevant cases against it) each count as a “regular and established place of business”, Google returned to the agency issue and argued that the language cited by PMC—questioning, in part, whether a machine can be an agent—is merely dicta. The reason, it explained, is that the language can be removed without affecting the court’s venue determination, and that it only affects hypothetical future cases.
As for such future cases, Google argues that the core tenets of an agency relationship must still apply under the described circumstances—and to that end, “a machine could only qualify as an ‘agent’ if technology and the law advanced to a place where a machine could ‘consent’ to be controlled by the principal. That technological and legal future has not yet arrived” (emphasis added). In any event, Google observed that the Federal Circuit conditioned the hypothetical, future determination of a machine as an agent on the “recognition that service could be made on a machine pursuant to” the patent service statute, arguing that the Federal Rules of Civil Procedure only contemplate service on an individual in their present form.
PMC’s brief addressing Netflix, in contrast to its Google brief, based its agency arguments primarily on the manner in which employees of the ISP interact with Netflix Open Connect Appliances (OCAs), servers that are also located within ISP facilities in order to localize network traffic. While portions of these arguments are redacted, PMC asserts that the record reflects “a sound basis for holding that ISPs act as Netflix’s agents”. This is based, in part, on the extent to which ISP employees are allegedly designated to perform various tasks related to logistics and network infrastructure for Netflix. Here, PMC distinguished the facts in this case from those in which the court found no agency relationship between ISP employees and Google, arguing that for Netflix, ISP employees perform more than “basic maintenance” and play a more active role in installing and/or operating the OCAs to an extent that is necessary for Netflix content delivery. This, PMC argued, is not “ancillary to” Netflix’s business—that is Netflix’s business”.
Netflix’s own brief, after asserting that the federal common law of agency should govern here, argues that ISP employees are not its agents. The company asserts that the facts pertaining to that issue are sufficiently similar to those found to preclude an agency finding in In re: Google, citing in part how its agreements with ISPs limit its ability to direct and control various activities.
Turning then to the question of whether machines can be agents, Netflix argued that they cannot, as an agent “must have capacity to (1) act on the principal’s behalf and subject to the principal’s control and (2) manifest assent or otherwise consents to act”. While acknowledging that a machine may be controlled, Netflix explained that “it lacks sufficient cognizance to voluntarily consent to act on behalf of a principal and to appreciate the implications of fiduciary responsibilities arising from an agency relationship. Only sentient beings can voluntarily give (or not give) consent. Thus, treating machines as agents would be a significant departure from longstanding agency principles.” (Emphasis added.) Similarly, Netflix asserted that machines cannot accept service of process under the patent service statute in its current form and as applied, noting that the legislative history of that 19th-century statute does not contemplate service on machines, while observing that no court appears to have ever held that a machine can be an agent.
For a detailed overview of the In re: Google decision, see RPX’s prior coverage: “Google Servers Do Not Establish Venue, Federal Circuit Holds—Rejecting Another Gilstrap Venue Rule”.
The US Supreme Court’s 2017 decision in TC Heartland significantly changed the distribution of patent suits through its ruling that a corporation “resides” for venue purposes in its state of incorporation. However, tension remained over the other, unaffected prong of the patent venue statute, under which venue is proper in part where a defendant “has a regular and established place of business”. District Judge Rodney Gilstrap of the Eastern District of Texas has since pushed an expansive reading of that prong, holding in 2018 (in Seven Networks v. Google) that certain Google servers maintained in an ISP data center were enough to establish venue. A subsequent decision with the same rationale has now been rejected by the Federal Circuit, which on February 13 held in In re: Google (2019-0126) that the “regular, physical presence of an employee or other agent of the defendant conducting the defendant’s business” is required “at the alleged ‘place of business’”. This decision is not the first in which the Federal Circuit has rebuffed an attempt by Judge Gilstrap to push a broad interpretation of that statutory prong.
Gilstrap’s Venue Rulemaking: Cray and Seven Networks
That earlier rejection came in Cray v. Raytheon (2:15-cv-01127), in which Judge Gilstrap sought to establish a four-part, “totality of the circumstances” test for determining whether a defendant has a “regular and established place of business” in a district. As detailed previously by RPX, the Federal Circuit overturned that ruling in In re: Cray, holding in September 2017 that Judge Gilstrap’s test deviated too far from the text of the statute. Instead, the court held that under a correct reading, a defendant must have “a physical place in the district”; that place of business must be “regular”, meaning “transient activity” is not enough; “established”, meaning that the business location must have been stable and established for a “reasonable period of time”; and “of the defendant”, meaning a place not solely controlled by an employee.
The Cray decision would then shape the trajectory of Google’s venue challenge against Seven Networks LLC (an NPE linked to Fortress Investment Group LLC), which had sued the company in the Eastern District of Texas (2:17-cv-00442) along with Samsung (2:17-cv-00441) and ZTE (2:17-cv-00440). Google argued that it lacked a place of business in the Eastern District of Texas altogether under the Cray decision, “much less one that is regular and established”. However, Seven Networks asserted in opposition, after successfully seeking discovery on venue in light of Cray, that venue is proper because the Google Global Cache (GGC) servers located in that district constitute such places of business. Those servers, which function as local caches for Google data, are owned by Google but are housed within third-party Internet service provider (ISP) facilities in spaces that Google leases. The servers cache “only a small portion of content that is popular with nearby users but can serve that content at lower latency—which translates to shorter wait times—than Google’s central server infrastructure” (as later summarized by the Federal Circuit), due to their physical proximity to ISP servers.
Ruling on Google’s venue challenge in July 2018, Judge Gilstrap held in part that the GGC servers constituted a “regular and established place of business” under the facts presented, based on the extent of Google’s control over those servers under the relevant contracts with the ISPs, as well as the extent to which keeping the GGC servers in the Eastern District benefit both the ISPs themselves through saved bandwidth/transport costs and end users through faster delivery of content.
The Federal Circuit Initially Declines to Revisit Seven Networks—Twice
Google filed a petition for writ of mandamus challenging that ruling the following month, which the Federal Circuit majority denied later that year. The majority declined to hold that Judge Gilstrap’s decision implicated the sort of “basic, unsettled, recurring legal issues” that would have justified mandamus review. In reaching that conclusion, the majority cited the extent to which Judge Gilstrap had based his ruling on the specific factual details of “Google’s arrangements and activities”, an analysis of the statute and Cray, and a variety of supporting caselaw, “including authority concerning warehouses and authority concerning machines that serve customers without their owner’s employees (or indeed any human attendants) on site”. Circuit Judge Jimmie Reyna dissented, arguing that Google and its amici had raised “significant questions as to whether” Judge Gilstrap’s ruling exceeded the intended scope of the patent statute as interpreted in Cray, noting that courts had already been ruling differently from one another on the same facts—including cases concerning the same GGC servers.
The full Federal Circuit then denied Google’s petition for rehearing in February 2019, prompting an even sharper rebuke from Judge Reyna—who highlighted the “growing uncertainty among district courts and litigants as to the requirements of § 1400(b) when conducting business virtually through servers and similar equipment in the district”. Judge Gilstrap’s decision can be read as more expansive than his own ruling that the Federal Circuit overturned in Cray, argued Judge Reyna, and could “reestablish nationwide venue” for many companies “by standing for the proposition that owning and controlling computer hardware involved in some aspect of company business (e.g., transmitting data) alone is sufficient”.
Google Files Another Appeal After Judge Gilstrap Again Finds Venue Through GGC Servers
In August 2019, Judge Gilstrap denied a Google venue challenge filed in another litigation campaign, this one waged by Acacia Research Corporation’s Super Interconnect Technologies LLC (SIT), finding that venue had been proper based on the same GGC servers at issue in Seven Networks. The following month, Google filed a mandamus petition seeking to overturn that ruling, arguing that other district courts have since “persuasively” rejected the Seven Networks rule. The company underscored the potentially far-reaching consequences of that rule, arguing that it could possibly establish venue anywhere a “physical object belonging to the company . . . were located”. Google’s concerns were echoed in an amicus brief filed in support of its petition by 18 other companies, most of which are either engaged in e-commerce or offer online services. Those amici argued that filing patterns have already been distorted by Seven Networks, in that it has caused “numerous lawsuits” to be filed in the Eastern District on “equipment-based theories”. The resulting uncertainty has even caused some companies to “decommission . . . equipment” in that district in order to avoid future litigation, warned the amici—including Google, which noted in its petition that it had removed its GGC servers from the Eastern District of Texas (though conceding that this removal did “not impact venue in this case”).
The Federal Circuit Overturns the Seven Networks Rule
A Federal Circuit majority granted Google’s petition in a February 13 order, acknowledging Judge Reyna’s two Seven Networks dissents (the second of which was joined by Circuit Judge Alan D. Lourie) and stating that mandamus was now warranted for three reasons. “First, the prediction of our dissenting colleagues has proven accurate, and there are now a significant number of district court decisions that adopt conflicting views on the basic legal issues presented in this case. . . . Second, experience has shown that it is unlikely that, as these cases proceed to trial, these issues will be preserved and presented to this court through the regular appellate process”. Third, the majority continued, “the wisdom of our decision to allow the issues to ‘percolate in the district courts’ has been borne out”, with subsequently issuing decisions having “crystallized” and “brought clarity” to the underlying issues: “(1) whether a server rack, a shelf, or analogous space can be a ‘place of business’ and (2) whether a ‘regular and established place of business’ requires the regular presence of an employee or agent of the defendant conducting the business”. Mandamus review is justified, held the majority, because those district court decisions are in conflict with one another, and because they concern a “fundamental and recurring issue of patent law”.
Turning to the substance of the petition, the majority noted that Google had based its appeal on the first two of the three required elements of Cray: that “there must be a physical place in the district”, and that “it must be a regular and established place of business”. Google raised two arguments that the majority addressed in turn. First, as to whether GGC servers constitute a “place” under Cray, the majority declined to focus its analysis on “whether the defendant has real property ownership or a leasehold interest in real property” as Google had argued, “hold[ing] that a ‘place’ need not have such attributes”—since under Cray, a “place or business” does not have to be owned or leased.
However, the majority “agree[d] . . . with Google’s alternative argument that under the second Cray factor, a ‘place of business’ generally requires an employee or agent of the defendant to be conducting business at that place”. This, the majority held, was “apparent from the service statute for patent cases”, as also highlighted in Google’s petition. The statute provides (in its current form) that for defendants with a “regular and established place of business” in a district, service of that defendant “may be made upon his agent or agents conducting such business”.
That provision, as originally codified, came in the form of “the second sentence of a two-sentence statutory section whose first sentence is now the patent venue statute”. As a result, the majority observed that “the venue and service provisions were not just enacted together but expressly linked, and both have always required that the defendant have a ‘regular and established place of business’”. Under Supreme Court precedent, the “[i]nterpretation of a provision must take due account of ‘neighboring statutory provisions’”, under the presumption “that the same language in related statutes carries a consistent meaning” (citations omitted). For that reason, since the service statute “plainly assumes that the defendant will have a ‘regular and established place of business’ within the meaning of the venue statute only if the defendant also has an ‘agent . . . engaged in conducting such business’”—and furthermore, since the “‘regular and established’ character of the business assumes the regular, physical presence of an agent at the place of business”—those same “assumptions must govern the venue statute as well”. Such a reading was also supported by the venue statute’s legislative history, as the enacting Congress stated that the statute’s “main purpose” was to “give original jurisdiction to the court where a permanent agency transacting the business is located” (emphasis added by the majority)—thereby “reinforc[ing] the applicability to venue of the agent requirement of the neighboring service provision”.
The majority then applied the “employee or agent” requirement to Google under the facts of this case, focusing on the question of whether the ISPs were acting as the company’s agents (since Google undisputedly had no employees conducting business in the district). Here, the majority focused on three particular requirements of the relevant GGC server hosting contracts. First, the majority found that the ISPs’ obligation to provide network access to Google does not constitute an agency relationship, as Google does not exert any “interim control” over that service beyond requiring that it be maintained for certain inbound and outbound networking ports. Second, the majority found that the installation of GGC servers by ISP employees did not render them Google’s agents; though this was “suggestive of an agency relationship”, the court found that this was not “regular and established” business due to the one-time nature of the installation. Third was the requirement that ISP employees conduct periodic maintenance. While the majority found that this was also reminiscent of an agency relationship, the majority concluded that SIT had not shown that the “specified maintenance functions are conducting Google’s business within the meaning of the statute. The better reading of the statute is that the maintenance activities cannot, standing alone, be considered the conduct of Google’s business”. The reason, the majority explained, is that equipment maintenance is “meaningfully different from—as only ancillary to—the actual producing, storing, and furnishing to customers of what the business offers”. As a result, the majority ruled that venue had not been proper against Google in the Eastern District of Texas, ordering that the case be either dismissed or transferred.
More broadly, the majority justified its holding in light of prior Supreme Court holdings “caution[ing] against a broad reading of the venue statute”, based on the “importance of relatively clear rules” to minimize the use of resources on “threshold, non-merits issues” like venue, and in consideration of Congressional intent to restrict venue to places “where the defendant resides or is conducting business at a regular and established place of business”. The majority further distilled its holding as to agency requirements as follows: “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.” Addressing those who may feel “dissatisfaction” with its holding, the majority underscored that such a remedy for such “dissatisfaction” with statutory policy must come from Congress.
Finally, the majority briefly addressed the limits of its decision, emphasizing that it had not held that “a ‘regular and established place of business’ will always require the regular presence of a human agent, that is, whether a machine could be an ‘agent’”—as “[s]uch a theory would require recognition that service could be made on a machine pursuant to” the patent service statute. Relatedly, it also declined to address SIT’s counterargument that amendments made to the venue statute by the America Invents Act—clarifying that “an automated teller machine shall not be deemed to be a regular and established place of business”—established that no employee or agent must be present at a “regular and established place of business”.
Circuit Judge Evan J. Wallach joined the majority opinion but filed a concurrence, stating that district courts must “determine whether Google’s end users become agents of Google in furtherance of its business by virtue of voluntarily or involuntarily sharing information generated on Google’s servers”.
For more details on the SIT campaign, including a recent setback for the plaintiff and the revival of its corporate parent Acacia, see “Acacia to Appeal Dismissal in Rebooted Flash Storage Campaign” (January 2020).
Following dismissals in cases against Alphabet (Google) and Samsung, Fortress Investment Group LLC affiliate Seven Networks LLC has added an Eastern District of Texas case against Apple (2:19-cv-00115) to the litigation campaign that it began in May 2017. Sixteen patents are asserted in the new complaint, each with original development work done by Seven Networks Inc. (f/k/a Leap Corporation), a mobile email company that converted to the current Fortress LLC in July 2015. A wide range of Apple products and services are targeted, in various overlapping groups across the allegations of infringement of the 16 patents-in-suit.
View full article with free 30-day trial
The US Supreme Court’s decision in TC Heartland caused a dramatic realignment in patent venue through its holding that a corporation “resides” for venue purposes in its state of incorporation. However, while TC Heartland provided some much-needed clarity as to that first prong of the patent venue statute (28 USC Section 1400(b)), courts have split as to the statute’s second prong, which provides that venue is proper where a defendant “has committed acts of infringement and has a regular and established place of business”. One such ruling applying that prong, handed down last July by District Judge Rodney Gilstrap, has highlighted the tension in this area of venue law. In that order, issued in a case that Fortress Investment Group LLC affiliate Seven Networks LLC brought against Google, Judge Gilstrap denied the defendant’s venue challenge, holding that certain Google servers maintained within third-party facilities in the Eastern District of Texas constituted a “regular and established place of business”. On February 5, the full Federal Circuit declined to revisit that decision for a second time, following its October denial of Google’s petition for mandamus review—once again prompting a sharp rebuke from dissenting Circuit Judge Jimmie Reyna (2018-0152).
View full article with free 30-day trial
Seven Networks LLC, an affiliate of Fortress Investment Group LLC, has refreshed its sole active litigation campaign with a pair of new lawsuits against existing defendants Alphabet (Google) (2:18-cv-00477) and Samsung (2:18-cv-00474), asserting six patents not previously seen in litigation. The NPE accuses the companies of infringement through the provision of certain models of the Google Pixel smartphone and certain Samsung Galaxy smartphones and tablets. At issue are the devices’ features designed to maintain a network connection; manage apps and processes differently when a device is in use versus idle; enter a power save mode when the device has been idle for a period of time; disable certain network connections when the device is idle; and allow the user to manually enter a power save mode. These new complaints come on the heels of a recent, split Federal Circuit opinion that denied Google’s improper venue challenge in another Seven Networks lawsuit.
View full article with free 30-day trial