Judge Albright Grants Motion to Dismiss for Improper Venue: Holds That Leased Shelf Space Alone is Not Enough to Qualify as a "Regular and Established Place of Business"

July 20, 2021 – Article

On June 22, 2021, Judge Albright granted Defendant PEAG, LLC’s motion to dismiss for improper venue under Rule 12(b)(3), finding that venue in the Western District of Texas was improper.

By way of background, Koss Corporation filed suit against PEAG, LLC in the Western District of Texas on July 22, 2020. PEAG is incorporated in the State of Delaware with its principal place of business located in Carlsbad, California. In its Complaint, Koss alleged direct and indirect infringement of four patents related to wireless and wearable headphone products, alleging that PEAG infringed each patent by selling wireless headphone products and that venue was proper in the Western District of Texas because PEAG has transacted business in the district.  PEAG filed a motion to dismiss for improper venue or, in the alternative, to transfer venue based on the convenience of the parties.  Specifically, PEAG argued that it neither resides in the Western District of Texas nor has a “regular and established place of business” in Texas.

Where a patent case may be brought is governed by a specific patent-venue statue, 28 U.S.C. § 1400(b).  The statue allows an infringement action to be brought either (1) in a district where the defendant resides, which for a corporation is its state of incorporation; or (2) in a district “where the defendant has committed acts of infringement and has a regular and established place of business.”  The Federal Circuit has clarified that a defendant’s regular and established place of business must be (1) a physical place in the district; (2) a regular and established place of business; and (3) the “place of the defendant.”  In re Cray Inc., 871 F.3d 1355, 1360 (Fed. Cir. 2017).

In opposition to PEAG’s motion to dismiss, Koss argued that PEAG met the “regular and established place of business” requirement from § 1400(b) by possessing or controlling a physical place of business in the district, specifically, by exercising control over leased shelf space in various retail stores in the District.

Judge Albright in his June 22, 2021 order disagreed, stating that Koss had “failed to prove that PEAG has a regular and established place of business in this District because (1) PEAG does not lease or own any real property in the Western District of Texas; and (2) PEAG does not possess or control any physical place in this district.”

Judge Albright noted that while PEAG leased the shelf space in retail stores, it did not have employees actually residing in the district and was not in charge of stocking the shelves or maintaining the shelf space.  Here, PEAG would merely ship its products to third-party retail stores, and the retail store employees would ultimately be in charge of placing the product on the shelves.  Judge Albright used this fact to distinguish the present case from Tinnus Enters., LLC v. Telebrands Corp., 2018 U.S. Dist. LEXIS 78342 (E.D. Tex. May 2, 2018), where an Eastern District of Texas Court previously found that leased shelf space was an appropriate basis for venue in a patent case, because the defendant’s agent was responsible for sales-related operations, such as restocking, affixing pricing stickers, and arranging lots.  Ultimately, Judge Albright concluded that “[l]eased shelf space can only serve as a ‘regular and established place of business’ under the patent venue statute if the defendant also has an employee or agent conducting business in that district.”

Whether other district courts and the Federal Circuit will ultimately agree with Judge Albright’s conclusion that leased shelf space alone is not enough to satisfy the “regular and established place of business” prong of the patent venue statute remains to be seen.  But this decision may be an important and useful guide for any company that ships products into the Western District of Texas without an employee or agent in the district assisting with that process. The decision also represents one of a few recent decisions from Judge Albright where defendants have successfully avoiding litigating in the Western District of Texas.  Stakeholders and practitioners can look to these cases for useful insights into the facts and arguments that work (or don’t work) when arguing for a transfer out of Waco, and we plan to follow-up with a much more in-depth look at these decisions in the near future.