Custom Servers Pin Netflix In the Eastern District of Texas

Patent owners searching for an appropriate venue for cases against alleged infringers may be able to point to the activity of an infringer’s agents, based on a new decision from the Eastern District of Texas. In recommending denial of a Netflix motion to dismiss, Magistrate Judge Payne explained that the nature and extent of Netflix’s relationship with internet service providers (“ISPs”) within the district gives rise to proper venue as a regular and established place of business of Netflix. CA, Inc. v. Netflix, Inc., No. 2:21-cv-00080, Dkt. No. 110, E.D. Tex. (Sept. 27, 2021). There, MJ Payne found that Netflix’s use of content delivery networks utilizing “Open Connect Appliances” (“OCAs”) at local ISPs within the district gave rise to a regular and established place of business based on the considerable control Netflix maintained over the OCAs and its collaborative relationship with ISPs.

In patent infringement cases, venue is appropriate “where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” 28 U.S.C. § 1400(b). When making determinations about whether a defendant has a regular and established place of business within a venue, courts apply the Cray factors: “(1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.” In re Cray Inc., 871 F.3d 1355, 1360 (Fed. Cir. 2017). The crux of the parties’ dispute in CA, Inc. v. Netflix, Inc. was whether the OCAs are a place “of the defendant” and whether “regular and established” business was conducted within the district.

MJ Payne agreed with plaintiffs that despite Netflix transferring ownership and title of the OCAs to the ISPs and only entering into a licensing agreement with the ISPs related to the software on the OCAs, Netflix maintained significant control over the OCAs such that the OCAs remained “of the defendant.” (Dkt. No. 110 at 12). In particular the court identified Netflix’s: control over modifications, upgrades, and repairs to the OCAs; continually monitoring the OCAs; ability to remotely wipe the software loaded on the OCAs; and frequently referring to the OCAs at ISP locations as “Netflix OCAs” in its marketing materials. These were found to be relevant in determining that Netflix maintained sufficient possession and control over the OCAs for them to be a place of business of the defendant. (Dkt. No. 110 at 12).

MJ Payne also found that Netflix satisfied the regular and established business element. Differentiating other situations where ISPs were found to be insufficient due to a more passive relationship between a defendant and an ISP (see In re Google), here MJ Payne determined that significant on-going and continuing actions were undertaken by ISPs on Netflix’s behalf. The court found that a collaborative arrangement therefore existed between the ISPs and Netflix, which referred to ISPs as “partners,” establishing “that the ISPs are acting as the Defendant’s agents.” (Dkt. No. 110 at 19).

This decision reinforces the fact-intensive nature of the “regular and established place of business” analysis. Courts will look at the extent of control exerted on a service provider like an ISP to determine whether an action can be brought against a party in that venue. Per MJ Payne, transferring title of equipment to service providers alone is not sufficient to avoid litigation in district courts where the equipment is located. As patent owners find more ways to keep alleged infringers in favorable jurisdictions, expect this approach to be used more broadly.

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