Treehouse Avatar LLC v. Valve Corporation

Filing 114

REPORT AND RECOMMENDATIONS- re 76 MOTION Transfer Venue or Motion for Leave to Amend Answer. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Objections (no longer tha n ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 12/7/2017. Signed by Judge Sherry R. Fallon on 11/20/2017. (lih)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
TREEHOUSE AVATAR LLC,
Plaintiff,
v.

VALVE CORPORATION,
Defendant.

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Civil Action No. 15-427-JFB-SRF

REPORT AND RECOMMENDATION
I.

INTRODUCTION
Presently before the court in this patent infringement action is the motion to dismiss or

transfer venue pursuant to Rule 12(b)(3) of the Federal Rules of Civil Procedure and 28 U.S.C. §
1406(a), as well as the motion for leave to amend the answer pursuant to Rules 15(a) and
16(b)(4), filed by defendant Valve Corporation ("Valve"). (D.I. 76) For the following reasons, I
recommend that the court grant Valve's motion to transfer this action to the Western District of
Washington, and deny without prejudice Valve's motion to amend its answer.

II.

BACKGROUND

A. Parties
On May 27, 2015, plaintiffTreehouse Avatar LLC ("Treehouse"), a Delaware
corporation headquartered in Ottawa, Canada, filed the present patent infringement action
against Valve, alleging infringement of U.S. Patent No. 8,180,858 ("the '858 patent"). (D.I. 1 at
~

7) Valve is a Washington corporation headquartered in Bellevue, Washington. (Id at ~ 2)

Valve produces and markets video games including "Team Fortress 2," "Dota 2," and "Portal 2,"
among others. (Id

at~

13)

B. Patent-In-Suit
The '858 patent, entitled "Method And System For Presenting Data Over A Network
Based On Network User Choices And Collecting Real-Time Data Related To Said Choices," was
issued on May 15, 2012 to Treehouse as the assignee of inventors Ian N. Robb, Michael B.
Madlener, and Ken J. McGuire. (Id at ir 7) The '858 patent is directed to methods of collecting
data from an information network in response to user choices of a plurality of users navigating
character-enabled ("CE") network sites on the network. (Id at ir 9) For example, in networked
video games used through a web browser or computer application accessing a server through the
internet, users may select characters and character attributes from data presented to the users in
one embodiment. (Id)

C. Procedural History
In response to the filing of the complaint on May 27, 2015, Valve filed a motion to
dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on August 7, 2015.
(D.I. 11) On October 30, 2015, Valve filed a motion to transfer venue in accordance with 28
U.S.C. § 1404(a). 1 (D.I. 17) Judge Robinson issued a memorandum opinion on March 22, 2016,
denying the motfon to dismiss and the motion to transfer. (D.I. 24; D.I. 25) Valve filed its
answer on April 5, 2016. (D.I. 26) The deadline to amend pleadings passed on December 9,
2016. (D.I. 31) Presently before the court is Valve's motion to dismiss or transfer venue
pursuant to Rule 12(b)(3) and 28 U.S.C. § 1406(a), and motion for leave to amend its answer
pursuant to Rules 15(a) and 16(b)(4), which was filed on May 26, 2017. (D.I. 76)
1

It is well-established that a motion to transfer venue pursuant to § 1404(a) is based on the
convenience of the parties, and is not based on a contention that venue is improper. See
Emguschowa v. NY Steak & Seafood, 1997 WL 27103, at *1 (E.D. Pa. Jan. 22, 1997) (noting
that a§ 1404(a) motion to transfer venue "is analytically and procedurally distinct from an
improper venue defense.").
2

III.

LEGAL STANDARD
A. Venue
"The district court of a district in which is filed a case laying venue in the wrong division

or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or
division in which it could have been brought." 28 U.S.C. § 1406(a). In patent infringement
actions, venue is proper "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." 28 U.S.C. § 1400(b); see TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S.
Ct. 1514, 1516 (2017). In Fourco Glass Co. v. Transmirra Products Corp., the Supreme Court
concluded that a domestic corporation "resides" only in its state of incorporation for purposes of
the first prong of§ 1400(b). 353 U.S. 222, 229 (1957). The Supreme Court recently reaffirmed
the decision in Fourco, concluding that a corporation resides only in its state of incorporation.

TC Heartland, 137 S. Ct. at 1520. In determining whether a defendant has a "regular and
established place of business" in Delaware under the second prong of§ l 400(b), the words of the
statute provide clear guidance, and the Supreme Court has stated that the provisions of§ 1400(b)
are not to be liberally construed. See Boston Sci. Corp. v. Cook Grp. Inc., C.A. No. 15-980-LPSCJB, _

F. Supp. 3d _ _, 2017 WL 3996110, at *10 (D. Del. Sept. 11, 2017).

Federal Rule of Civil Procedure 12(b)(3) permits a defendant to file a motion to dismiss
for improper venue, although the defense may be waived under Rule 12(h)(l) if it is omitted
from a motion filed under Rule 12(g)(2). Fed. R. Civ. P. 12(b)(3); 12(h)(l); 12(g)(2). Following
the Supreme Court's recent decision in TC Heartland, many district courts faced circumstances
similar to those presently before the court, in which a defendant filed a Rule 12(b) motion prior
to the Supreme Court's ruling in TC Heartland, and subsequently moved to dismiss for improper.
3

venue under Rule 12(b)(3) by applying the standard set forth in TC Heartland. A split emerged
among district courts as to whether the defendant in such circumstances had waived its right to
challenge venue, or whether the intervening law exception should apply to permit the Rule
12(b)(3) motion. The Federal Circuit recently resolved the split of authority in In re Micron

Technology, Inc., unequivocally stating that "[t]he Supreme Court changed the controlling law
when it decided TC Heartland in May 2017." 2017 WL 5474215, at *6 (Fed. Cir. Nov. 15,
2017) (concluding that "the venue objection was not available until the Supreme Court decided

TC Heartland because, before then, it would have been improper, given controlling precedent,
·for the district court to dismiss or to transfer for lack of venue.").
The Federal Circuit opened the door to another timeliness challenge in the context of the
venue inquiry in In re Micron, suggesting that the trial court may use its inherent powers and
standard procedural devices to facilitate "the just, speedy, and inexpensive resolution of
disputes" in accordance with Rule 1 and the Supreme Court's decision in Dietz v. Bouldin, Inc.,
136 S. Ct. 1885, 1891 (2016). In re Micron, 2017 WL 5474215, at *6. The court's exercise of
its inherent power "must be a reasonable response to the problems and needs confronting the
court's fair administration of justice," and "cannot be contrary to any express grant of or
limitation on the district court's power contained in a rule or statute." Dietz, 136 S. Ct. at 1892
(internal citations and quotation marks omitted). The Federal Circuit noted that "Congress has
provided express statutory confirmation of judicial authority to consider the timeliness and
adequacy of a venue objection: 28 U.S.C. § 1406(b) provides that '[n]othing in this chapter shall
impair the jurisdiction of a district court of any matter involving a party who does not interpose
timely and sufficient objection to the venue."' In re Micron, 2017 WL 5474215, at *7 (quoting
28 U.S.C. § 1406(b)).
4

B. Amended Pleading
Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that after a responsive
pleading has been filed, a party may amend its pleading "only with the opposing party's written
consent or the court's leave," and "[t]he court should freely give leave when justice so requires." .
Fed. R. Civ. P. 15(a)(2). The decision to grant or deny leave to amend lies within the discretion
of the court. See Foman v. Davis, 371 U.S. 178, 182 (1962); In re Burlington Coat Factory Secs.

Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). The Third Circuit has adopted a liber~l approach to
the amendment of pleadings. See Dole v. Arco, 921F.2d484, 487 (3d Cir. 1990). In the absence
of undue delay, bad faith, or dilatory motives on the part of the moving party, the amendment
should be freely granted, unless it is futile or unfairly prejudicial to the non-moving party. See

Foman, 371 U.S. at 182; In re Burlington, 114 F.3d at 1434. Pursuant to Rule 16(b)(4), the court
may modify the deadline to amend pleadings upon a showing of good cause. Fed. R. Civ. P.
16(b)(4).

IV.

DISCUSSION
A. Venue
As a preliminary matter, the court addresses whether Valve's motion is properly before

the court. The Federal Circuit's decision in In re Micron establishes that Valve did not waive its
venue defense under Rule 12(h)(l) and Rule 12(g)(2) because the Supreme Court's decision in

TC Heartland represents an intervening change in the law. In re Micron, 2017 WL 5474215, at
*6. Consequently, Treehouse's argument that Valve waived its right to challenge venue under§
1400(b) fails as a matter of law.

5

Application of the forfeiture test set forth in In re Micron pursuant to Rule 1 and the
Supreme Court's decision in Dietz does not alter this conclusion. 2 The present record reflects
that trial is not scheduled to take place until July 2019, and the court does not find that Valve
failed to seasonably assert its venue defense, having previously contested venue in its October
30, 2015 motion to transfer under§ 1404(a), and having filed the present motion promptly after
the Supreme Court's issuance of its decision in TC Heartland. See Neirbo Co. v. Bethlehem

Shipbuilding Corp., 308 U.S. 165, 168 (1939); see also In re Micron, 2017 WL 5474215, at *8
(noting that, although "[w]e have not provided a precedential answer to the question whether the
timeliness determination may take account of factors other than the sheer time from when the
defense becomes available to when it is asserted," the proximity of trial is a consideration).
Given the circumstances of the present case schedule and the Federal Circuit's caution that "the
lee-way to find such forfeiture" is not broad, the court concludes that Valve's motion cannot
properly be denied on grounds relating to its timeliness. See In re Micron, 2017 WL 5474215, at
*8.
Having concluded that Valve's venue challenge is timely, the court must next determine
whether venue is proper under § 1400(b). It is uncontested that Valve is incorporated in
Washington, and "[a] domestic corporation 'resides' only in its State of incorporation for
purposes of the patent venue statute." TC Heartland, 137 S. Ct. at 1517. Consequently, the first
prong of the inquiry under § 1400(b) is not met.
The court must next consider whether Valve satisfies the second prong of § 1400(b),
which requires the court to determine whether Valve maintains a regular and established place of
business in Delaware. "[I]n determining whether a corporate defendant has a regular and
2

The parties did not present briefing on this line of argument.
6

established place of business in a district, the appropriate inquiry is whether the corporate
defendant does its business in that district through a permanent and continuous presence there
and not ... whether it has a fixed physical presence in the sense of a formal office or store." In

re Cordis, 769 F.3d 733, 737 (Fed. Cir. 1985). However, "[o]n its face, the statutory language
requires that the defendant at least have a [physical] 'place' in which it does business in the
district-e.g., a place authorized by the defendant where some part of the defendant's business is
done." Boston Sci., 2017 WL 3996110, at* 12. "[S]imply doing business in a district or being
registered to do business in a district is insufficient, without more, to make that district a regular
and established place of business for any particular entity." Id. at *13. Moreover, establishing
that a defendant has minimum contacts with a district under the personal jurisdiction inquiry is
not sufficient to prove the existence of a regular and established place of business in the district.

Id.
Treehouse argues that "[t]he vast majority of Valve's business takes place on the
internet," and "[t]here is constant communication between a player's computer and Valve's
servers while someone is playing one of Valve's games." (D.I. 81 at 15) According to
Treehouse, players acting as Valve surrogates to provide networks for other players to connect
and play Valve's games constitute a "regular and established" place of business in the internet
age, noting that, "[a]s business evolves, it is important that the law regarding what constitutes a
'regular and established place of business' evolves also to reflect the reality of how business is
conducted today." (D.I. 81 at 17)
The record reflects that Valve maintains its principal place of business in Bellevue,
Washington, where substantially all of its employees work, and has no offices or employees in
Delaware. (D.I. 19 at,, 3-5) Valve's business model, which otherwise has very few "physical"
7

aspects, admittedly does not fit neatly into the legal framework provided under § 1400(b).
Although maintaining a website allowing customers to purchase a defendant's products within
the district is not sufficient to qualify as a regular and established place of business in the district,

see Boston Sci., 2017 WL 3996110, at *13, Valve's internet gaming platform is integral to its
business dealings in a manner incomparable to a typical commercial website offering physical
products for sale.
However, Valve's business dealings give rise to similar concerns of "essentially tum[ing]
any cell phone, laptop, or computer into a regular and established place of business" for a
company. Id. Treehouse relies on the independent activities of Valve's customers to establish
Valve's physical presence in Delaware, observing that Valve "allows players, including players
in Delaware, to

~ost

a server on their computer." (D.I. 81 at 16 n.8) The location of a server

hosted not by Valve, but by its customer, is too remote to establish the physical presence
required under§ 1400(b) and raises questions as to the permanence of Valve's presence.
In addition, "simply doing business in a district or being registered to do business in a
district is insufficient, without more, to make that district a regular and established place of
business for any particular entity." Boston Sci., 2017 WL 3996110, at *13. The facts relied
upon by Treehouse do not identify how Valve's activities and presence in Delaware go beyond
its business dealings in the district. Treehouse places emphasis on the global nature of Valve's
operations, the volume of customers utilizing its games in Delaware and elsewhere, and
communications between a customer's computer and Valve's numerous servers, but Treehouse
cites no authority suggesting that the volume of customers in a given district is sufficient to
establish a company's physical presence there for purposes of the venue inquiry under § 1400(b).
Instead, these facts merely illustrate Valve's standard.method of doing business. Permitting such
8

activities to qualify as a regular and established place of business under the second prong of §
1400(b) would effectively swallow the first prong, which uses the word "resides" to "negat[e]
any intention to make corporations suable, in patent infringement cases, where they are merely
'doing business."' See TC Heartland, 137 S. Ct. at 1519 (quoting Fourco, 353 U.S. at 226).
Consequently, Valve's activities in Delaware are not adequate to satisfy the second prong
of§ 1400(b). For the foregoing reasons, I recommend that the court grant Valve's motion to
transfer this action to the Western District of Washington.

B. Amended Pleading
Having concluded that transfer is warranted, I recommend that this court deny without
prejudice Valve's motion to amend, which is properly resolved by the transferee court. 3

V.

CONCLUSION
For the foregoing reasons, I recommend that the court grant Valve's motion to transfer

venue to the Western District of Washington, and deny without prejudice Valve's motion to
amend its answer. (D.I. 76)
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(l)(B), Fed. R.
Civ. P. 72(b)(l), and D. Del. LR 72.1. The parties may serve and file specific written objections
within fourteen (14) days after being served with a copy of this Report and Recommendation.
Fed. R. Civ. P. 72(b)(2). The objections and responses to the objections are limited to ten (10)

3

Treehouse contends that transfer is not warranted because Delaware is the only proper venue
for Valve's counterclaims against Treehouse. (D.I. 81 at 18) However,§ 1400(b) applies only
to civil actions for "patent infringement," and does not extend to Valve's counterclaims for
declaratory judgment of non-infringement and invalidity. See VE Holding Corp. v. Johnson Gas
Appliance Co., 917 F.2d 1574, 1583 (Fed. Cir. 1990), abrogated on other grounds by TC
Heartland, 137 S. Ct. 1514 (2017) ("It has long been held that a declaratory judgment action
alleging that a patent is invalid and not infringed-the mirror image of a suit for patent
infringement-is governed by the general venue statutes, not by § l 400(b). ").
9

pages each. The failure of a party to object to legal conclusions may result in the loss of the right
to de novo review in the District Court. See Sincavage v. Barnhart, 171 F. App'x 924, 925 n.1
(3d Cir. 2006); Henderson v. Carlson, 812 F.2d 874, 878-79 (3d Cir. 1987).
The parties are directed to the court's Standing Order For Objections Filed Under Fed. R.
Civ. P. 72, dated October 9, 2013, a copy of which is available on the court's website,
http://www.ded.uscourts.gov.

Dated: November

?O, 2017
GISTRATE JUDGE

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