Virtual Contacts and Personal Jurisdiction

Since the 2007 New York Court of Appeals decision in Fischbarg v. Doucet , 9 N.Y.3d 375 (2007), aff'g, 38 A.D.3d 270 (1st Dept. 2007) ( Fischbarg ), courts in New York and around the country have continued to grapple with personal jurisdiction issues involving electronic contacts such as Web sites, e-mails and instant messages (collectively, e-contacts). In previous articles in the New York Law Journal (NYLJ) in 2007 and 2008 (see, Robert S. Friedman and Mark E. McGrath, “Think Remote, Electronic Contacts Will Keep Jurisdiction Away?”, NYLJ, June 18, 2007, Litigation Special Section, at S4, and Robert S. Friedman and Mark E. McGrath, “E-Contacts and New York's Long Arm Statute,” NYLJ, April 7, 2008, Litigation Special Section, at S3), we discussed many of the decisions of interest, and we provide an update here in this ever-evolving area.

In addition, this article analyzes how courts are handling jurisdictional questions attendant to the next generation of technology, such as forms of “cloud computing,” including virtual data rooms and social networks. As these technologies continue to develop and opportunities arise to increase revenue, companies risk having to defend themselves in far-off jurisdictions never before contemplated.

'Fischbarg' Progeny

The past year has seen several interesting decisions interpreting Fischbarg in analyzing e-contacts.

Two months ago, Judge Robert Patterson, in Stone v. Patchett, No. 08 CV 5171(RPP), 2009 WL 1108596 (S.D.N.Y. April 23, 2009), relying on Fischbarg and Deutsche Bank Securities Inc. v. Montana Board of Investments , 7 N.Y.3d 65 (2006) (this case is discussed at length in our 2007 article), held that the combined contacts of defendants, an Illinois attorney and his firm, and non-parties, including a “continuous stream of phone calls, e-mails, and faxes between the parties” were sufficient for personal jurisdiction, pursuant to '302(a)(1) of the Civil Practice Law Rules (“CPLR”) over the defendants because they, together with co-counsel, “repeatedly and systematically transacted business with [the New York attorney] in New York for the express purpose of prosecuting the class action.” 2009 WL 1108596, at 10. (CPLR '302(a)(1) provides, in pertinent part, that “[a]s to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, who in person or through an agent: 1) transacts any business within the state or contracts anywhere to supply goods or services in the state '”)

The case, which had a complicated procedural history, involved a dispute between a New York attorney and his firm, on the one hand, and one of three Illinois attorneys and his firm on the other, all of whom had served, along with several other Illinois lawyers, as co-counsel in a class action that was brought in Illinois state court. All of the attorneys had entered into a written fee-sharing agreement on the letterhead of the New York attorney, which was signed by all of the Illinois attorneys in Illinois and faxed to New York.

After the Illinois state court approved a settlement of the class action, all of the attorneys apparently tried to reach an agreement on the fee splitting but were unsuccessful. Eventually, the New York attorney and his firm commenced an action in New York against some of the Illinois attorneys and those parties arbitrated the dispute in Georgia. After the New York attorney and his firm prevailed at the arbitration, he confirmed the award in Georgia and then filed a new action against one of the Illinois attorneys and his firm, neither of whom had participated in the arbitration, to enforce the arbitration award.

The Illinois attorney and his firm then filed a motion to dismiss for, among other things, lack of personal jurisdiction, culminating in Judge Patterson's ruling.

In addition to the agreement that all of the attorneys had signed, plaintiff alleged that he had numerous communications with all of the Illinois attorneys, including faxes, e-mails and telephone. As indicated, the court exercised personal jurisdiction despite the named defendant never setting foot in New York. See, Id. at 2-3. (Judge Patterson looked at defendants' contacts as well as a non-party Illinois attorney's contacts because they were partners in the matter and, thus, agency principles applied.)

'Substantial Business'

In Centrifugal Force Inc. v. Softnet Comnications Inc., No. 08 Civ. 5463(CM)(GWG), 2009 WL 1059647 (S.D.N.Y. April 17, 2009), plaintiff sued a number of defendants, including PowerLine Computers (PowerLine), a Polish entity, for copyright and trademark infringement. PowerLine was hired by, among others, defendant Softnet Communications Inc. (Softnet), a New York corporation, to help develop and produce a software program.

PowerLine worked 18,360 hours on the development of the software, and was paid $186,580. PowerLine and Softnet used e-mail to “regularly” communicate about the development and requests from a customer. PowerLine also sent computer files to Softnet, uploaded versions of the software for Softnet, asked Softnet to send it licensed versions of a program to aid in the development, and asked Softnet to get customer feedback.

PowerLine moved to dismiss for lack of personal jurisdiction. Judge Colleen McMahon, emphasizing how technology had changed the jurisdictional analysis, relied on Best Van Lines Inc. v. Walker , 490 F.3d 239 (2d Cir. 2007) (this case is discussed in our 2008 article), Fischbarg and Deutsche Bank to hold that PowerLine was subject to jurisdiction under CPLR '302(a)(1) because “[b]ased on the totality of circumstances, the [c]ourt concludes that the defendant entered into a substantial business transaction in New York” and the claims arose out of that transaction. 2009 WL 1059647, at 6.

There are limits, however, even with e-contacts. In Overseas Media Inc. v. Skvortsov, Nos. 06-4095-cv (l), 07-2952-cv (CON), 2008 WL 1994981 (2d Cir. May 8, 2008), the Second Circuit affirmed the district court's dismissal of a copyright and trademark infringement case for lack of personal jurisdiction under both the general and specific jurisdiction statutes. There, the corporate defendant, which was located in Russia, made occasional attempts via e-mail and telephone to sell rights to certain television programs to plaintiff. These attempts apparently did not include the infringing program (see, 2008 WL 1994981, at 1), even though plaintiff alleged that it received two offers from the defendants (the corporate defendant and certain of its representatives) for that program. Id. at 2.

The president of the corporate defendant did limited work for the company in New York, and the company derived less than 2% of its revenue from outside Russia, only 0.022% of the total revenue being attributed to New York. The Second Circuit held that this was not sufficient to show “continuous, permanent, or substantial course of business” to justify the exercise of general jurisdiction under '301 of the CPLR. Id. at 1 (citation omitted). The Second Circuit also affirmed the district court's dismissal based on a lack of personal jurisdiction under '302(a)(2) or (a)(3) because there was no tortious act committed in New York and plaintiff failed to show actual injury as opposed to anticipated injury. See, Id. at 2.

Web Site Redux

Web site jurisdictional questions continued to occupy courts over the past year.

In M. Shanken Communications Inc. v. Cigar500.com, No. 07 Civ. 7371(JGK), 2008 WL 2696168 (S.D.N.Y. July 7, 2008), plaintiff sued defendants, all of whom were residents of Canada, in the Southern District of New York for, inter alia, copyright and trademark infringement. Plaintiff alleged that defendants, who had advertised with plaintiff's magazine, Cigar Aficionado, used the mark and portions of an issue of the magazine on their Web site to promote the sale of Cuban cigars. The Cigar500 Web site allowed consumers to create a password protected personal account, place and complete orders, request a catalog, and contact customer service by “an automatically prompted e-mail.” Id. at 5.

Judge John Koeltl, relying on the sliding-scale framework set forth in Citigroup Inc. v. City Holding Co. , 97 F. Supp. 2d 549, 565 (S.D.N.Y. 2000) (citations omitted) (this framework is based on Zippo Mfg. Co. v. Zippo Dot Com Inc. , 952 F. Supp. 1119 (W.D. Pa. 1997), which test has not been fully adopted by courts in New York) and Best Van Lines found that the Web site was “clearly interactive” and held that since the defendant company received 10% of its revenue from New York, it was “'transacting business'” in New York and was subject to personal jurisdiction under CPLR '302(a)(1). See, Id. at 4-5. See also, Soci't' des Bains de Mer et du Cercle des Etrangers ' Monaco v. MGM Mirage, No. 08cv03157(HB), 2008 WL 4974800 (S.D.N.Y. Nov. 24, 2008) (jurisdiction lies where defendants operated interactive Web sites that allowed consumers to book hotel rooms, flights and vacations packages, and enter personal information to open a “players club” account and receive personal information). Cf. Penguin Group (USA) Inc. v. American Buddha, No. 09 Civ. 528(GEL), 2009 WL 1069158 (S.D.N.Y. April 21, 2009) (holding that even though defendant allegedly infringed plaintiff's copyrights in four works by publishing the works on its Web site, plaintiff's failure to allege infringement in New York and its claim of injury in New York were not sufficient to establish personal jurisdiction under CPLR '302(a)(3).)

Number of Sales Not Important

Energy Brands Inc. v. Spiritual Brands Inc. , 571 F. Supp. 2d 458 (S.D.N.Y. 2008), is an interesting decision in the area of Web site jurisdiction. Plaintiff, the maker of the Glac'au water products, sued Spiritual Brands Inc. (Spiritual Brands) and its principal, for trade dress infringement and unfair competition. Spiritual Brands makes a competing product, Spiritual Water.

Florida-based Spiritual Brands operated a Web site that allowed distributors, retailers and consumers to purchase Spiritual Water for a three-month period from October through December 2007. During that time, Spiritual Brands sold 29 bottles of water to 14 customers in New York, which resulted in total sales of $158.53. The Web site also contained testimonials including two from individuals located in New York.

After plaintiff commenced the action, Spiritual Brands changed the Web site to eliminate sales through it. See, Id. at 463-64. Judge Denny Chin denied defendants' motion to dismiss for lack of jurisdiction because the Web site was interactive and resulted in direct sales to New York customers, which required the exchange of billing, shipping and contact information. See, Id. at 469-70. The fact that there were just over 12 sales was of no consequence because if a defendant purposefully directs activity to New York at least once, that activity “is sufficient to create jurisdiction” under CPLR '302(a)(1). Id. at 469 (citation omitted). (Judge Chin also found that jurisdiction existed under CPLR '302(a)(3)(ii) in part due to the court's determination that defendants failed to produce complete documents regarding sales to New York.)

Compare Energy Brands with Pitbull Productions Inc. v. Universal Netmedia Inc., No. 07 Civ. 1784(EMB)(GWG), 2008 WL 1700196 (S.D.N.Y. April 4, 2008). In Pitbull, plaintiff sued Netmedia Inc. (Netmedia) and certain of its alleged officers in the Southern District of New York for, inter alia, copyright, trademark and trade dress infringement. Plaintiff alleged that Netmedia hosted and operated a Web site targeted at the gay community. The site allegedly used postings of images and links to downloads of DVDs owned and produced by plaintiff, which files were available for download. See, Id. at 1.

On defendants' motion to dismiss for lack of personal jurisdiction, the court found that Netmedia's Web site was in the middle of the spectrum set forth in Citigroup because it contained a blog and a message board. See, Id. at 5-6. The sole support for plaintiff's argument that defendants “derive substantial revenue from New York” under CPLR '302(a)(3)(i) was that “Netmedia's 'main advertiser is Streetlife Studios,' a New York company operating as a gay-oriented Web site.” Id. However, defendants claimed that advertising revenue from Streetlife Studios was only $297.88 in 2007.

Judge Richard Berman found defendants' argument that “for such a pittance, it cannot be fundamentally fair to subject [Netmedia] to suit” in New York was “persuasive[]” and held that plaintiff failed to establish jurisdiction over defendants under '302(a)(3)(i). Id. at 7. The court did grant plaintiff the right to conduct discovery regarding revenues and deferred final briefing on the motion. See, Id. at 9. Section 302(a)(3)(ii) also did not provide a basis for jurisdiction over defendants because the court held it was not “reasonably foreseeable that Netmedia would be subjected to New York jurisdiction” since Netmedia did not advertise its Web site or sell anything through it. Id. at 7 (citations omitted).

Personal Jurisdiction
In the Clouds

“Cloud computing” and search engine optimization promise to be the next battleground in the case of personal jurisdiction. Courts have already started considering difficult issues involving shared files, offsite data centers and complicated methods to increase Internet traffic.

A recent cloud computing case is instructive. Forward Food LLC v. Next Proteins Inc. , 21 Misc. 3d 1113(a), 2008 WL 4602345 (Sup. Ct. N.Y. Cty. Oct. 15, 2008), involved the Nevada plaintiff Forward Food's purchase of a business from California defendant Next Proteins, LLC (Next Proteins). The other plaintiff, Emigrant Capital Corporation (Emigrant), a Delaware corporation with its principal place of business in New York, owned 94% of the voting interests in Forward Food and participated extensively in the due diligence for the transaction.

Next Proteins hired a Massachusetts company to create a password protected “virtual data room” and Next Proteins uploaded documents to that virtual data room so that potential purchasers could review and download the documents for due diligence. Emigrant performed its due diligence in New York and occasionally requested additional documents. Although the deal terms were negotiated almost entirely outside New York, a representative of Next Proteins traveled to New York and met with Emigrant to discuss the business and continue to negotiate a potential transaction.

Eventually, the parties closed the transaction. Shortly thereafter, plaintiffs commenced an action against Next Proteins, one of its principals and one of its wholly owned subsidiaries, and defendants subsequently moved to dismiss for, inter alia, lack of personal jurisdiction. See, Id. at 1-2. The court held that defendants' contacts, which were limited to a single visit to New York, the virtual data room and several e-mails, were sufficient to exercise personal jurisdiction over defendants under CPLR '302(a)(1). See, Id. at 3.

In Capitol Records, LLC v. VideoEgg Inc., No. 08 CV 5831(HB), 2009 WL 614727 (S.D.N.Y. March 9, 2009), the court considered both cloud computing and traditional Web site jurisdiction issues. Plaintiffs, three record companies and 10 music publishers, brought an action against defendants, Hi5 Networks Inc. (Hi5) and VideoEgg Inc., for copyright infringement relating to 254 videos, at least five of which were uploaded by New York users, that were viewed hundreds of thousands of times on Hi5's Web site.

Hi5, located in California, owned and operated a social networking site that allowed users to create a free account and “share photos, send messages[,] ' join discussion groups, explore music and videos, and more.” Id. at 1. Hi5's Web site had over 80 million registered users in over 200 countries and almost 50 million individual users per month, all of which use was generated by word of mouth from the users because Hi5 did not advertise its site.

Hi5's interaction with the users was limited to: 1) making the Web site available; 2) the registration process; and 3) providing technical support. Hi5 generated revenue by selling advertising displayed to users on the site, either in the form of banner ads or ads at the end of a video. New York users viewed enough ads “in a single month to generate substantial monthly advertising revenue,” and Hi5 communicated with potential advertisers in New York and received “substantial advertising revenue from companies located in New York.” Id. at 2.

Hi5 moved to dismiss for, inter alia, lack of personal jurisdiction. Judge Harold Baer found that whether Hi5 “transacts business” in New York under CPLR '302(a)(1) “is complicated by the fact that Hi5 does not sell products or services to its users, but rather 'sells' the users' attention to advertisers.” Id. at 5. The court observed that “Hi5's interaction with its New York users ' lacks the traditional indicia of 'purposeful availment' because it is neither volitional nor distinguishable from its interaction with users located in any other jurisdiction.” Id.

The court focused on the fact that Hi5 did not: 1) advertise its Web site; 2) charge user fees; or 3) create much, if any, of the content on the site. Judge Baer held that “[t]he 'sheer availability' of allegedly infringing video files on the Hi5 Web site is thus insufficient to support jurisdiction under Section 302(a)(1) because the video files were uploaded by unsolicited registered users acting unilaterally and were equally available to all other Hi5 users regardless of their location.” Id. (citation omitted).

However, turning to the more traditional revenue inquiry, Judge Baer held that Hi5's advertising sales to New York companies and efforts to participate in advertising campaigns directed at New York were sufficient to establish personal jurisdiction under CPLR '302(a)(1). See, Id. at 6. (The court also found that jurisdiction existed under '302(a)(3)(ii) based on these same factors and Hi5's large user base in New York. See, Id. at 7-9.) Judge Baer focused on evidence that Hi5 actively sought and sold advertising to New York companies, hyped its New York user base to potential advertisers, and responded directly to inquiries from New York-based companies seeking to advertise. In a case outside New York, Chang v. Virgin Mobile USA, LLC, Civil Action No. 3:07-CV-1767-D, 2009 WL 111570 (N.D. Tex. Jan. 16, 2009), defendant Virgin Mobile Pty Ltd. (Virgin Australia), an Australian cell phone company, downloaded a photo of young girl from Flickr, the public photo-sharing Web site owned by Yahoo!, and used the image in its advertising campaign on Australian bus stands. The photo was taken by the girl's church counselor and then posted to Flickr under the most unrestricted license agreement. In response to Virgin Australia's motion for lack of personal jurisdiction, plaintiffs argued that Virgin Australia was subject to jurisdiction because it downloaded the image from a Texas server. However, the court held that plaintiffs failed to show that “the Texas servers were actually or necessarily used to process, transmit, or store images for Flickr users at the time Virgin Australia acquired the photograph.” Id. at 3. Equally as important, the court held that even if Virgin Australia had contacted a Texas server, plaintiffs “cannot rely on the fortuitous location of Flickr's servers to establish personal jurisdiction over Virgin Australia.” Id.

Conclusion

As technology develops, courts will continue to adapt and expand the analysis to reach issues never contemplated even a year earlier.

While it appears that courts in New York are using the frameworks enunciated in Citigroup and Best Van Lines to determine the interactivity of Web sites, courts are also drilling down on the nature of these contacts, the amount of revenue, if any, generated from sales and advertising from New York and the percentage of revenue attributable to those sales and advertising.

We now have seen decisions expanding these principles to the virtual presence emblematic in cloud computing. This appears to be the next frontier of personal jurisdiction.