Getting Sued Where Your Servers Are: A Lesson from Netflix

"Netflix CARNAGE" by Ross Catrow is licensed under CC BY-SA 2.0

A federal magistrate judge recently suggested that Netflix could be sued in the Eastern District of Texas because it uses servers there.

The case of CA, Inc. v. Netflix, Inc. involves a dispute over whether Netflix is infringing CA’s patents. Among other things, the parties have been fighting over whether the case should be heard in Texas or in the Northern District of California (where Netflix is located).

CA sued Netflix in the Eastern District of Texas. As the Houston Chronicle notes,

Businesses and individuals filed 747 patent complaints in Texas during the first six months of 2020 – double the number from a year earlier and twice as many as any other state so far this year.

According to Bloomberg, “The Eastern District has a reputation for being more favorable to patent holders than other courts in the country.”

As JD Supra explains,

For years, the Eastern District of Texas was the venue of choice for thousands of patent owner plaintiffs, particularly non-practicing entities. In 2015, over four times as many patent suits were filed in the Eastern District (over 2,500) than the District of Delaware (less than 550), the district with the next largest number of filed patent suits. But that changed in 2017 when the Supreme Court issued its ruling in TC Heartland, which substantially tightened the venue requirements for patent cases by requiring alleged infringers to be sued either where they have a physical presence or in their state of incorporation. This made it more difficult to sue in districts where a defendant has no physical presence.

However, Texas again became very popular after Alan D. Albright, a judge with patent law experience, joined the bench in the Western District of Texas.

As Bloomberg notes,

The U.S. District Court for the Western District of Texas’s Waco Division has become a popular forum for patent litigation as technology companies have started opening offices in Austin. The division’s one judge, Alan D. Albright, has put rules in place to speed up such cases.

Under US patent law (28 U.S.C. § 1400(b)):

Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

Netflix tried to get the Texas case dismissed or at least transferred to the Northern District of California.

Netflix obviously has subscribers all over the world, but where can it be said to “do business”?

As the court noted,

A “place of business” does not require “real property ownership or a leasehold interest in real property” and “leased shelf space or rack space can serve as a ‘place’ under the statute.

Also,

For § 1400(b) venue by a regular and established place of business, “(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.”

The court noted that Netflix, the defendant,

uses a content delivery network called “Open Connect” to deliver Defendant’s content to its subscribers worldwide, including in this District. … The building blocks of Open Connect are custom Netflix servers that store Netflix video content called “Open Connect Appliances” (“OCAs”). … Defendant installs OCAs in significant Netflix markets throughout the world to localize its video content by providing OCAs directly to local internet service providers (“ISPs”). … Defendant provides the server hardware and the ISPs provide power, space, and connectivity…. Defendant contracts with ISPs and installs OCAs with those ISPs in physical facilities in this District and Defendant retains control of its OCAs “by monitoring, updating, and maintaining the OCA, as well as supplying it with specific video content.”

The court concluded:

Most of the factors in the convenience transfer analysis either weigh against transfer or are neutral. Thus, Defendant has not met its burden to show that the Northern District of California is “clearly more convenient” than the Eastern District of Texas.