Cloud Computing and Unexpected FCPA Jurisdiction
Note: This story has been updated for clarity.
A recent opinion from the Southern District of New York interpreting the use of instrumentalities under the Foreign Corrupt Practices Act (FCPA), has opened the door for the United States federal judiciary to exercise jurisdiction over unexpected volumes of Internet communication, even when the communication both originates and terminates outside the physical jurisdiction of the U.S.
In a Memorandum and Order issued in Securities and Exchange Commission v. Straub (S.D.N.Y, February 8, 2013), District Court Judge Richard J. Sullivan opined on the issue of first impression of the elements of use of mails, means, or use of an instrumentality of interstate commerce in the context of a FCPA claim. In Straub, the SEC alleged that individual defendants, who are principals of Magyar Telekom PLC, a Hungarian telecommunications company, bribed public officials in Macedonia. The SEC asserted that the FCPA was violated in part based upon emails sent from Hungary to Macedonia. Specifically, the SEC claimed that the element of the FCPA that requires use of instrumentalities of interstate commerce was satisfied by sending these emails because they were routed through or [had] been stored on network servers located within the United States. Judge Sullivan agreed with the SEC and concluded that the allegation that emails sent from locations outside the United States but routed through and/or stored on network servers located within the United States was a sufficient allegation to satisfy the use of instrumentality of interstate commerce element of an FCPA claim.
The seemingly logical inclusion of data flowing through or stored on networks and computers located in the U.S. as use of an instrumentality of interstate commerce inadvertently opens the door to unanticipated volumes of Internet communication qualifying as the use of an instrumentality of interstate commerce under the FCPA (and perhaps other statutes that include the use of an instrumentality of interstate commerce as an element) based on the increasing use of cloud computing. The Straub opinion may subject persons who inadvertently use United States servers and networks via cloud computing while conducting otherwise wholly-foreign communications to the jurisdiction of the court under the Straub analysis.
Users of Online Services May Have No Idea Where their Data is Actually Located
The increasing ubiquity of cloud computing exposes the flaw in the implementation of the Straub analysis. The National Institute of Standards and Technology (NIST) defines cloud computing as a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. More simply stated, cloud computing generally refers to the new paradigm of accessing software, platforms, and services over the Internet. These services are available irrespective of the users physical location or the device used to access the service, and are on-demand, pooled, and often rapidly scalable to transparently meet surges in customer power or storage need.
Cloud computing allows users to access data or services and offload the computational or storage load to a remote system or systems of which the user remains agnostic. Many enterprises use so-called co-location facilities to host a redundant copy of their data in case of a disaster. In the cloud computing model, a clients data can be held in any location to which the cloud has access; data may be distributed across multiple machines in multiple countries, and may be highly dynamic (i.e., actively transferred from machine to machine), but that distribution of data is totally transparent and typically unknown by the user. Thus, a non-U.S. Internet user who uses a cloud computing solution may unwittingly have his or her data stored in the United States, even for a period of time, which under Judge Sullivans Straub analysis would qualify for the instrumentality of interstate commerce element of the FCPA.
Cloud computing is not just limited to the use of cloud storage systems and/or cloud-based email and similar communication systems. Many retailers use the flexibility of cloud computing to scale up their processing and storage power during the winter holiday season to accommodate peak demand for purchasing from their online e-commerce sites. The Amazon EC2, or Amazon Cluster is the largest example of cloud computing for hire.
The Amazon Cluster reduces the time required to obtain and boot new server instances to minutes, allowing you to quickly scale capacity, both up and down, as your computing requirements change. Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you actually use. See Amazon EC2 FAQ (last accessed 3/29/13). The actual computers that comprise the Amazon Cluster are dispersed across eight separate global regions, including three separate locations in the U.S. See Amazon EC2 FAQ (last accessed 3/29/13). Hypothetically, a retailer outside of the United States could use Amazon Cluster resources to process a sale made to a customer located outside of the United States, and both parties would have fulfilled the factual element of use of an instrument of interstate commerce for an FCPA claim.
Straub is up for review
On April 18, 2013, the Straub defendants filed their motion to appeal the Memorandum and Order, which remains pending. The Second Circuit should closely examine the Memorandum and Order to determine whether upholding Judge Sullivans reasoning would inadvertently introduce a massive expansion of jurisdiction over foreign Internet-based communications and commerce, or whether the courts opinion represents an intentional foray into more expansive exercises of jurisdiction by the federal courts.
Andrew D. Drew Hinkes is an associate in the Fort Lauderdale, Florida, office of Berger Singerman. His practice concerns complex commercial litigation. Hinkes concentrates his practice in contract litigation, business torts, real estate-related litigation, representation of court- appointed receivers, employment-related litigation, and construction litigation. He also advises clients regarding document retention issues, management of electronically stored information production and conducting incoming electronic discovery analysis in state and federal litigation. He can be contacted at AHinkes@bergersingerman.com.