State of incorporation doesn’t control litigation venue

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By Correy Stephenson
Dolan Newswires

A recent decision from the Federal Circuit may make it easier for suits against companies incorporated in Delaware to be transferred outside the state.

Incorporating in business friendly Delaware is a common practice, even by companies that may have no other ties to the state. But in In re Link_A_Media Devices Corp., the Federal Circuit held that incorporation by itself does not control the location of litigation involving a company.

The decision is the latest in a series of cases addressing federal courts’ exercise of discretion when considering a motion to transfer or dismiss in forum disputes, said Jerry Cohen, a partner with an intellectual property practice in the Boston office of Burns & Levinson.

The result, said Charles Everingham, a partner and patent litigator at Akin Gump in Longview, Texas, is that courts will view motions to transfer venue more favorably.

Cohen agreed.

While the case before the Federal Circuit involved a patent dispute, the statute at issue concerns federal jurisdiction generally, so “it will be considered by judges in all kinds of federal cases,” he said.

California-bound

Marvell International, based in Bermuda, filed suit against competitor Link_A_Media Devices (LAMD) in Delaware federal court, where LAMD is incorporated.

LAMD moved to transfer the suit to the Northern District of California, where it maintains its principal place of business. The company argued Delaware “had no discernible connection to this case” other than as its state of incorporation.

A U.S. District Court denied the motion.

LAMD filed a writ of mandamus, and the Federal Circuit reversed, holding that the judge abused her discretion by failing to appropriately balance all the factors to be considered in a 28 U.S.C. §1404(a) transfer analysis.

By emphasizing Marvell’s choice of forum and the fact of LAMD’s incorporation in Delaware, the judge made those factors “effectively dispositive” of the inquiry. But the state of incorporation “is certainly not a dispositive fact in the venue transfer analysis,” the Federal Circuit said.

Instead, the judge should have considered factors such as the convenience of witnesses and the location of books and records, the court said.

Nearly all of LAMD’s 130 employees work in its Northern California-based headquarters, and none work in Delaware. Further, the inventors of the patents involved in the suit work in an office three miles away from LAMD headquarters.

“Aside from LAMD’s incorporation in Delaware, that forum has no ties to the dispute or to either party,” the court concluded, granting the writ of mandamus and directing the transfer of the suit to the Northern District of California.

Calculus changed

Plaintiffs have historically viewed Delaware as a friendly forum, said Darren Donnelly, a partner at Fenwick and West in Mountain View, Calif. who focuses on intellectual property and patent litigation.

While there wasn’t a rigid rule that a defendant’s state of incorporation dictated the location of any litigation, the majority of cases remained in the state even if the witness or sources of proof were elsewhere, Donnelly said.

“This decision changes that calculus,” he noted.  In recent cases, “the Federal Circuit [is] trying to manage and locate cases in a way which is sensible for the dispute. … Practitioners should keep an eye on that trend.”

Cohen said there has been a concern in recent years that parties in patent disputes were looking for “patent-friendly” courts to file in.

The case before the Federal Circuit is a good example of the problem.

“There was no quibble that this case could be filed in Delaware, but the center of gravity was wholly based in the California bay area,” Cohen noted.

Marvell argued that advances in technology mitigated any problems in conducting a lawsuit far away from the parties’ primary place of business.

But while the Federal Circuit acknowledged that “advances in technology may alter the weight” given to factors such as the location of records and witnesses, it concluded that it was “improper” to ignore those factors entirely.

What this means, said Everingham, is that “the court is … going to rely upon where the actual witnesses are located and where the documents and sources of proof can be found.

Lawyers filing … cases in Delaware should not rely wholesale on the fact that the opposing party is incorporated there and should pay careful attention to the location of business operations.”

Because the decision is not limited to patent cases, Cohen said any company incorporated in Delaware must be prepared to defend a case outside of the state.

“Companies that have been incorporated [in Delaware] for half a century are not going to move out” because of the decision, he said, but it’s important to be aware of its implications.