Google Servers Do Not Establish Venue, Federal Circuit Holds—Rejecting Another Gilstrap Venue Rule

February 13, 2020

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).