Eastern District of Texas Judge Rodney Gilstrap has sparred with the Federal Circuit over patent venue on several occasions in recent years, and according to a new appeal he has again strayed from its precedent. On November 1, Netflix argued in a mandamus petition that Judge Gilstrap erred in upholding a recommendation that its improper venue challenge be denied because certain Netflix content servers constituted “regular and established places of business” for venue purposes. That ruling, the company claims, violates a key Federal Circuit decision providing that such servers cannot form the basis for venue.

This latest dispute over venue follows several notable shifts in the law governing venue in patent cases in the past few years. Among the most significant of those changes was the US Supreme Court’s 2017 decision in TC Heartland, which significantly altered the distribution of patent suits through its ruling that a corporation “resides” for venue purposes in its state of incorporation—ending the reign of the Eastern District of Texas as the most popular district for NPE litigation. However, tension remained over the other prong of the patent venue statute not addressed in TC Heartland, under which venue is proper in part where a defendant “has a regular and established place of business”. Judge Gilstrap has since pushed an expansive reading of that prong, holding in 2018 (in Seven Networks v. Google) that certain Google servers maintained in an Internet service provider (ISP) data center were enough to establish venue. A district court split then developed over the proper application of this prong in the wake of the Seven Networks decision, despite which the Federal Circuit twice declined to review the case on mandamus—both times over dissents from Circuit Judge Jimmie Reyna.

But in February 2020, the Federal Circuit overturned a subsequent, underlying decision that used the same rationale, holding 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’”. The decision turned on whether the ISPs were acting as Google’s agents under the “employee or other agent” requirement, based in part on whether the provision of Internet service to Google, the installation of the servers by ISP employees, and the requirement that ISP employees conduct server maintenance involved sufficient control by Google to establish an agency relationship. The Federal Circuit concluded for each of those scenarios that Google did not exercise sufficient control.

Both of those appellate rulings would later factor into the case now on appeal, which was filed against Netflix by two subsidiaries of Broadcom (Avago Technologies and CA) in March 2021 (2:21-cv-00080). The complaint alleged that venue was proper against Netflix due to the presence of certain Netflix servers used to host local caches of streaming content (known as “Open Connect Appliances”, or “OCAs”). Netflix moved to dismiss the case due to improper venue in May, arguing that the facts used to allege venue mirrored those that the Federal Circuit found insufficient to establish venue in Google: that “(1) Netflix contracts with ISPs to connect servers to residents of the District . . . ; (2) Netflix confirms that the ISP meets certain network requirements . . . ; (3) Netflix performs maintenance activities . . .; and (4) the ISPs connect servers to the Internet to deliver cached content to residents in this District” (citations omitted). Netflix further asserted that certain facts weighed even further against a finding that the OCAs are each a “physical place” that are “of [the] Defendant” than the facts in Google, including that Netflix’s agreements with ISPs irrevocably transferred ownership of the servers to the ISPs, and that Netflix did not lease any physical space in ISP facilities, with ISPs free to place servers where they choose. The company also argued in the alternative that the case should be transferred to the Northern District of California on convenience grounds. With no ruling on that venue motion having yet issued by late September, Netflix then filed a mandamus petition seeking to force the district court to stay the case pending its decision.

Two days later, on September 26, Magistrate Judge Roy S. Payne issued a report and recommendation concluding that the motion should be denied, largely agreeing with the Broadcom plaintiffs’ interpretation of the facts. With respect to whether the OCAs were places “of” Netflix, Judge Payne agreed with the plaintiffs that Netflix in fact retained “a great deal of control over the OCAs”. In particular, Judge Payne favorably cited the plaintiffs’ contention that Netflix’s transfer of title for the OCAs to the ISPs was “illusory”, as the defendant still have ownership of their preloaded software and merely grant the ISPs a license. Also significant, continued Judge Payne, was that Netflix “continuously monitor[s], updat[es], and maintain[s] the OCA[s]”; that it retains the “ability to remotely delete software and even redistribute the hardware itself” from one ISP center to another when withdrawn for repairs; and that it refers to the OCAs as “Netflix Servers” in marketing materials. These facts, Judge Payne held, mean “that Defendant has sufficient possession and control over the OCAs for venue purposes”.

Judge Payne also found that the ISPs were acting as agents of Netflix, determining that the facts showed that certain tasks required of ISP employees went beyond the “basic maintenance activities” that the Federal Circuit found insufficient to establish an agency relationship in Google. Rather, Judge Payne noted that the Google court distinguished such maintenance as “meaningfully different from—as only ancillary to—the actual producing, storing, and furnishing to customers of what the business offers” (quoting Google). Some of the ISP employees’ duties fell into the latter category, found Judge Payne—primarily, a requirement that they work “with Netflix to troubleshoot routing and other configuration issues that might arise”. “Troubleshooting goes above and beyond mere maintenance”, Judge Payne held. Combined with other requirements that ISP employees work closely with Netflix legal representatives and remain in contact with other members of the Netflix team, Judge Payne found “that the ISPs are acting as Defendant’s agents”, and concluded that venue was proper. Judge Payne also declined to transfer the case on convenience grounds, ruling that the applicable factors either weigh against transfer or are neutral.

On October 25, Judge Gilstrap summarily adopted that report and recommendation over Netflix’s objection. The Federal Circuit denied the company’s mandamus petition later that day.

Netflix then challenged Judge Gilstrap’s order in another petition for writ of mandamus filed on November 1 (2022-0110), arguing that the ruling violated TC Heartland, Google, and the Federal Circuit’s intervening decision from In re: Cray. First, the company argues that a plaintiff must show that “defendant had a place of business” (emphasis in original) under TC Heartland, and that such a place must be a “fixed,” “physical, geographical location . . . from which the business of the defendant is carried out” under Cray. Neither requirement is met under the facts here, Netflix asserts. In particular, the company notes that a “computer server is an object, not a place”, and that unlike in Google, it does not lease the space the OCAs occupy. Moreover, the defendant alleges that the “ISP has complete control over where each OCA is placed; it can be placed in a single location, or moved between several locations”. Furthermore, Netflix argued that the district court erred by determining that the OCAs were “Netflix’s places” (emphasis in original). While Judge Payne had cited Netflix’s marketing materials for his contrary conclusion, the company asserts that similar marketing materials were at issue in Google. Furthermore, Netflix argues that contrary to the district court’s decision, it does not actually conduct its business from the OCAs. Although acknowledging that it does benefit from the OCAs, Netflix reiterates that the ISPs own the OCAs, claiming that the ISPs use them “because they improve the operation of the ISPs’ networks. . . . And they are free to use them for any purpose they want”.

Additionally, Netflix asserts that the district court abused its discretion by concluding that the ISPs are its agents, rejecting Judge Payne’s distinction between basic maintenance and other activities. Rather, the defendant argues that Netflix’s ISP contracts differ from those at issue in Google “only in form, but not in substance”, countering that they essentially require the same three activities: providing servers with network access, installing the servers, and providing “‘certain services’ involving ‘basic maintenance activities’ with respect to” the servers. Netflix further claimed that Judge Payne was wrong to distinguish the Netflix servers from Google in that they “‘stor[e] and furnish’ Netflix’s content to customers”, alleging instead that “an OCA’s provision of content to the network does not distinguish this case from Google, where a GGC stored and delivered cached Google content to customers in identical fashion. . . . In both cases, the ISP does what ISPs do—provide and maintain the hardware required to deliver content from third parties to their customers. As Google makes clear, that is not enough.”

Netflix also argues that the district court erred with respect to its determination that Netflix has the “right to direct and control the ISPs’ employees”. For instance, the company alleges that the activities performed by these employees are analogous to those in Google—such as the duties of the “Network Engineer” position described in the record, which are allegedly akin to the Google ISP employees’ provision of “network access, configuration, and routing to their network”.

Moreover, the company asserts that the troubleshooting flagged by Judge Payne does not amount to the conduct of Netflix business: “Troubleshooting the OCAs is ‘connected to, but do[es] not [itself] constitute’ Netflix’s conduct of business in the Eastern District. . . . Troubleshooting servers or network connectivity is not ‘the actual producing, storing, and furnishing to customers’ of what Netflix offers: streaming television and movie content”. Nor does the interaction between legal representatives establish an agency relationship, claims the defendant: indeed, “[t]hat Netflix and the ISPs have their own, separate legal representatives, who negotiate arm’s length contracts on behalf of the separate and independent interests of each party, is instead evidence that the ISPs are not Netflix’s agents but rather independent businesses with their own interests” (emphasis in original).

Netflix based an additional lack-of-control argument on the Federal Circuit’s decision in Andra Group v. Victoria’s Secret Stores et al., which issued the month before Judge Payne’s report and recommendation. In Andra, the court considered a relationship between related companies operating stores under the Victoria’s Secret brand. The Federal Circuit found improper venue as to some of the defendants that managed the company’s website and parent company but not the stores, as those defendants did not have control (such as hiring and firing authority) over store employees despite sharing a “Code of Conduct” with the other defendants—rejecting arguments that the employees were the agents of the “non-store” defendants. In this case, Netflix asserts that it has much less control over the ISPs than the relationship considered in Andra: “If a subsidiary company isn’t an agent of its parent, it is hard to imagine that one of two completely independent companies that sign a contract to act as partners for a specific business transaction to serve their mutual customers becomes the agent of the other”.

The Federal Circuit has directed the appellees to respond to the petition by November 9.