Every day, courts must address questions that from a technical perspective simply make no sense. One of the most basic is: “Where is the Internet?”

If a copyrighted file is copied on a computer in California, broken into pieces and distributed over hundreds of computers across the globe on a peer-to-peer network and finally downloaded (from all of those computers at once) to a machine in New York, where did the infringement take place? What was the physical location of the file at the time of infringement? What was the site of the injury?

From its earliest origins, the Internet was designed with a distributed structure; it was designed to make certain the answer to that question would be: “Who cares?” Unfortunately, as is so often the case, the law lacks that kind of flexibility. It requires an answer.

Some of the thorniest questions in technology litigation arise when traditional notions of limited personal jurisdiction clash with the global reach of the Internet. In the context of intellectual property infringement — where the concept of “injury” can be complex — these issues become even more difficult.

New York’s long-arm jurisdiction statute, for example, includes a multi-part test for personal jurisdiction over non-residents that can be a challenge to apply even in relatively straightforward cases. It is thus no surprise that courts have struggled to come up with a consistent set of standards applicable to claims of infringement over the Internet.

What is surprising is how stark the differences in interpretation can be, and how difficult the cases become at the margins. Two recent decisions from the Southern District of New York make this clear. Both are well-reasoned, carefully considered opinions from judges sitting on the same bench, but they reflect radically different views of the scope of New York’s jurisdiction over foreign infringers and reach diametrically opposite results.

In federal cases based on diversity jurisdiction or federal statutes that have no specific jurisdictional provisions, jurisdiction is based on the state’s jurisdictional statute. In New York, for non-domiciliaries (entities or persons not “present” in the state), that statute is CPLR §302. Section 302 contemplates several different bases for “long-arm” jurisdiction, including the commission of torts within the state by non-residents [CPLR §302(a)(2)] and the commission of torts by non-residents with substantial contact with the state, if the tort arises out of those contacts [CPLR §302(a)(1)]. The most complicated of §302′s provisions, and the one often used to assert jurisdiction in Internet cases, is §302(a)(3), which provides for jurisdiction over a non-domiciliary who:

Commits a tortious act without the state causing injury to person or property within the state … if he

(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or

(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce.

In addition to analyzing all of the statutory requirements, a court seeking to assert jurisdiction over a non-resident must also ensure that the non-resident has sufficient minimum contacts with the state to satisfy Constitutional due process requirements.

Thus, a New York court examining whether, for example, an out-of-state Web site operator is subject to suit in New York has a number of options. If the site has made substantial sales in New York, and those sales are the basis of the action, §302(a)(1) may provide a basis for jurisdiction — the defendant has “reached in” to New York for the purpose of transacting business here, and that business is the basis for the suit, so that provides a basis to bring the defendant into court in New York. But if there are no direct transactions with New York — if the only connection between the site and New York is that the Web is global and the injured party happens to reside in New York — then the court must look to §302(a)(3), governing acts committed outside the state, and that is where the courts are divided.

THE BROAD VIEW

In Andy Stroud, Inc. v. Brown,[FOOTNOTE 1] the U.S. District Court for the Southern District considered various claims relating to sound recordings of the late jazz singer Nina Simone. Simone’s estate and her recordings have been the subject of a great deal of litigation, and in this action plaintiff brought various claims against defendant alleging that defendant had falsely asserted ownership over those recordings.

Defendant was not “present” in New York for jurisdictional purposes — he was a non-domiciliary — so jurisdiction was asserted on §302 grounds.

Some of plaintiff’s claims in Brown were simple tort claims arising out of defendant’s alleged interference with settlement negotiations that physically took place in New York. For purposes of those claims, the court held that plaintiff had sufficiently alleged at least a prima facie showing of jurisdiction under §302(a)(1).

Plaintiff also alleged claims of copyright infringement and false designation of origin, however, based on defendant’s allegedly unauthorized grants of licenses in certain of Simone’s recordings. This conduct concededly did not occur in New York — the licenses were granted in California. Thus, the court undertook an analysis under CPLR §302(a)(3).

Section 302 may apply to any person who “commits a tortious act without the state causing injury to person or property within the state.” The Brown Court first noted that the first two prongs of the test had been satisfied: plaintiff alleged that defendant had committed various torts and had done so outside of New York.

The first serious question for the court was whether the injury (in this case injury arising out of the infringement or misuse of copyrights and related intellectual property) had been caused “in New York” or elsewhere, for example in California, where the offending licenses had been negotiated and executed.

At first blush this seems like a simple question: If the injured company is located in New York, then the act would appear to have caused injury to person or property within the state. But such attenuated economic harm is not generally sufficient to form the basis for jurisdiction.

The state Court of Appeals has written that “the residence or domicile of the injured party within a State is not a sufficient predicate for jurisdiction, which must be based upon a more direct injury within the State and a closer expectation of consequences within the State than the indirect financial loss resulting from the fact that the injured person resides or is domiciled there.”[FOOTNOTE 2] The question is thus more complex, particularly in the intellectual property context, where it apparently has no clear answer.

In Brown, the court wrote: “this Court finds it worth noting that there appears to be significant disagreement within this District regarding the locus of an injury in intellectual property cases.”[FOOTNOTE 3] The court then enumerated two major lines of cases: one in which courts have found that torts of copyright and trademark infringement “cause injury in the state where the allegedly infringed intellectual property is held,” and another holding that “the mere fact that the plaintiff [the intellectual property holder] resides in New York and therefore ultimately experiences a financial loss there is not a sufficient basis for jurisdiction.”

The court noted that, in the latter line of cases, facts such as the location in which licenses were executed or infringing performances took place were more important factors than the domicile of the copyright holder in determining the locus of the injury.

The Brown Court found that it did not have to choose between these two interpretations, because the facts of the case satisfied either standard. The plaintiff was a New York resident and held its intellectual property there, satisfying the broad standard for injury “in New York.” But the court also noted that plaintiffs had put in a declaration stating that copies of infringing materials had been “marketed and sold” in New York and that their attorney had even bought such materials in New York. The court held that the attorneys purchase and the potential for other New York purchases (even without the allegation of actual injury from any such purchases) was sufficient to establish injury in New York even under the more narrow standard.

It is important to understand that, despite the court’s assertion to the contrary, this is essentially an adoption of the broadest standard in the intellectual property context, particularly where digital intellectual property is concerned.

If infringing content can be digitized and offered or marketed over the Internet, there is always the potential that it can be purchased or downloaded in any given state, and plaintiffs will always be able to manufacture “injury” by directing their counsel to make a purchase or download. Thus, the adoption of such a broad interpretation of the “narrow” rule effectively converts it into the broad rule: as a practical the situs of the injury will always be plaintiff’s home state.

The court next turned to the second half of CPLR §302(a)(3), which requires that, in addition to causing an injury occurring in New York, a defendant either (i) regularly do business in, or derive substantial revenue from, the state; or (ii) derive substantial revenue from interstate commerce and reasonable be able to expect that his acts will have consequence in the state. In this case, the court found that the “foreseeability” requirement of §302(a)(3)(ii) is automatically satisfied when a defendant infringes the intellectual property of a New York company: “[i]t is reasonably foreseeable that the provision of materials that infringe the copyrights … of a New York company will have consequences in New York.”[FOOTNOTE 4]

The net result of this analysis is that, at least in cases of infringement of intellectual property on the Internet (which was not explicitly at issue in Brown) jurisdiction will always be available in New York to a New York plaintiff: the first half of §302(a)(3) will be satisfied by the potential for New York sales, the second half by the presumption of foreseeability.

THE NARROW VIEW

About a month later, however, another judge of the same bench explicitly rejected the reasoning in Brown and came up with a different result. In Penguin Group (USA) Inc. v. American Buddha,[FOOTNOTE 5] the Southern District considered another issue of jurisdiction over infringement claims against an out-of-state defendant. In that case, plaintiff alleged that several of its copyrighted publications had been scanned and posted on the Web site of a not-for-profit organization in Oregon.

Plaintiff alleged that defendant’s site encouraged users to download their copyrighted works and, once again, that their counsel had successfully done so in New York. Relying in part on Brown, plaintiffs asserted jurisdiction over defendant for his infringement. Importantly, the only infringement claimed in the complaint was defendant’s copying and posting of the materials on his site — all of which conduct concededly took place in Oregon.

The court recognized that, under the broad rule set out in Brown and the cases enumerated in it, jurisdiction would likely be appropriate, however the court rejected that analysis, noting that a rule as broad as that set out by the Brown court would effectively establish jurisdiction in any intellectual property case in which plaintiff resided in New York.

Citing Fantis Foods,[FOOTNOTE 6] the court pointed out that such a rule would not be appropriate: The mere presence of a plaintiff in New York is generally not sufficient to establish injury in state.

The court noted three possible places where the injury might have occurred: (1) any place the plaintiff does business; (2) the plaintiff’s principal place of business; or (3) the place where plaintiff actually lost business.

The first, the court found, would be unfair to defendants as a large multinational corporation would be able to sue anywhere in the world. The second, though better, would not necessarily be “predictable” to defendants. The court found the third to be the most appropriate because a defendant would reasonably expect suit in the place where plaintiff lost business.[FOOTNOTE 7]

The court then suggested, as an analytical matter, that the Internet be removed from the equation: that the case be thought of “as if defendant had made an unauthorized photocopy of a copyright book in Oregon.”

The court wrote: “Although the advent of the Internet — and the resulting ubiquitousness of material posted on a web site displayed over the internet — has no doubt added additional layers of depth to personal jurisdiction jurisprudence, it plays no role in determining the situs of the plaintiff’s alleged injury.”[FOOTNOTE 8]

In light of that analysis, the court found no injury in New York sufficient to satisfy §302(a)(3) and therefore dismissed for lack of personal jurisdiction.

CONCLUSION

Brown and Penguin Group are both well-reasoned opinions with compelling policy justifications behind their analyses. It is certainly the case, as a practical matter, that New York intellectual property holders suffer injury to their business in New York when infringement takes place, no matter where the infringer happens to be.

As a practical matter, most infringers probably understand that in the modern world, intellectual property enforcement is national (if not international in scope). On the other hand, limitations on personal jurisdiction exist for a reason, and if there is any case in which they should apply in the intellectual property context, Penguin Group presents it. The judge’s analogy to a table full of photocopied books is, on the somewhat anomalous facts of that case, an apt one: if not for the fact of the Web site, which plaintiffs could not allege anyone had actually used outside of Oregon, one would be hard-pressed to describe any injury in New York. If a plaintiff claims he has lost sales to that table of photocopied books in Oregon, surely the customers it has lost are in Oregon, not New York.

In almost all cases, plaintiffs should be able to plead around this issue. In the vast majority of non-frivolous Internet infringement cases, plaintiffs will be able to plead with specificity substantial sales and other injury occurring in New York, and thus will easily satisfy either §§302(a)(3), 302(a)(2) or even 302(a)(1). However, to the extent §302(a)(3) is to accomplish its purpose and place at least some limitations on jurisdiction over out-of-state torts, the narrower view is probably more analytically sound.

Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex intellectual property litigation.

::::FOOTNOTES::::

FN1 No. 08 Civ. 8246(HB), 2009 WL 539863 (S.D.N.Y. Mar. 4, 2009).

FN2 Fantis Foods, Inc. v. Standard Importing Co., Inc., 49 N.Y.2d 317, 326-327, 425 N.Y.S.2d 783, 787 (N.Y. 1980).

FN3 2009 WL 539863, at * 6.

FN4 2009 WL 539863, at *7, quoting McGraw-Hill Cos., Inc. v. Ingenium Techs. Corp., 375 F.Supp.2d 252, 256 (S.D.N.Y. 2005).

FN5 No. 09 Civ. 528(GEL), 2009 WL 1069158 (S.D.N.Y. April 21, 2009).

FN6 Supra at n. 2.

FN7 2009 WL 1069158, at *3, citing AM Eutectic Welding Alloy Sales Co. v. Dytron Alloys Corp., 439 F.2d 428, 433 (2d Cir. 1971).

FN8 Id. at *4.