Personal Jurisdiction in the Internet World Redux

In this Blog post, we look at two recent Judge Ellis decisions on personal jurisdiction: Zaletel v. Prisma Labs, Inc., 226 F.Supp.3d 599 (E.D. Va. 2016), and Thousand Oaks Barrel Co., LLC v. Deep South Barrels LLC, 2017 WL 1074936 (E.D. Va. 2017).

It seems that the Alexandria federal court’s Friday Motions Docket often has at least one personal jurisdiction motion.  You might think that a simple test for personal jurisdiction could be applied to greatly reduce the frequency that this issue comes before the courts.  But think again.  Pulitzer Prize winner Thomas Friedman contends in his recent best-seller, Thank You for Being Late, that the pace of technological change has for at least the last 10 years been accelerating faster than we can adapt.  Why, then, should we expect the law of personal jurisdiction to keep up with the changing technology landscape?   As Friedman argues, it is not just technology per se that is accelerating, it is everything that is driven by technology that is also accelerating at unsettling speeds.  This understandably includes the exploding e-commerce world.

Zippo: a 20-year old Precedent for the Internet World   

The most widely cited case on personal jurisdiction in the Internet world is now 20 years old.  In Zippo Manufacturing Co. v. Zippo Dot Com, Inc. Co., 952 F.Supp. 1119 (W.D. Pa. 1997), the court divided Internet activities into three kinds – active, passive, and interactive.  The jurisdictional question was decided based on where a website fell within these categories.  Think back to 1997, the year of the Zippo decision. The leading ISP was AOL, and the majority of online users joined the Internet via dial-up access.  Amazon (first known as Cadabra, Inc.) was just getting started and was only beginning to sell books online.  The leading web browser was Netscape, and e-commerce was not much more than a handful of infrequently accessed “storefronts.”   Times have changed.

Fourth Circuit Law on Personal Jurisdiction in the Internet World

The controlling law in the Fourth Circuit is from 2002 – ALS Scan, Inc. v. Digital Service Consultants, Inc., 293 F.3d 707 (4th Cir. 2002).   In that case, now 15 years old, Judge Niemeyer wrote, “the convergence of commerce and technology thus tends to push the analysis to include a ‘stream-of-commerce’ concept under which each person who puts an article into commerce is held to anticipate suit in any jurisdiction where the stream takes the article.”  The Court lamented that the Supreme Court had not provided updated guidance.  Absent such controlling authority, Judge Niemeyer settled on the model developed in Zippo.

Zippo provides a three-part test:  A state may, “consistent with due process, exercise judicial power over a person outside of the state when that person (1) directs electronic activity into the state, (2) with the manifested intent of engaging in business or other interactions within the state, and (3) that activity creates, in a person within the state a potential cause of action cognizable in the state’s courts.”  ALS Scan, 293 F.3d at 714.

Later, in 2013, the Fourth Circuit revisited ALS Scan in Unspam Technologies, Inc. v. Chernuk, 716 F.3d 322 (4th Cir. 2013).   In Chernuk, the defendants were four foreign banks that were alleged to have financed the credit card operations for illegal prescription pharmacies.  They were sued as part of an alleged global conspiracy to market and sell pharmaceuticals online.  Chernuk adopted with minor adjustments the three-part test from ALS Scan.  Relying on some interim Supreme Court guidance, the Fourth Circuit added that “it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.”

Zaletel v. Prisma Labs—70 Million Downloads, but no Personal Jurisdiction

In Zaletel, a 2016 trademark case involving s photo-filtering app known as “Prisma,” Judge Ellis applies a somewhat modified ALS Scan test.  Before getting to the core of the legal analysis, Judge Ellis walks us through International Shoe and the difference between general jurisdiction and specific jurisdiction.  He then introduces the central issue with a quote from Chernuk.  The Fourth Circuit has adopted the three-part inquiry “to determine whether a defendant is subject to jurisdiction in a State because of its electronic transmissions to that State.”   That inquiry, the judge writes, should consider: “(1) the extent to which the defendant purposely availed itself of the privilege of conducting activities in the forum state; (2) whether the plaintiff’s claims arose out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.”

Judge Ellis refers to the first part of this test as the “purposeful availment” prong, which he explains “is grounded on the traditional due process concept of minimal contacts.”  To determine whether a foreign defendant has purposely availed itself of the privilege of conducting business in a state, the court should ask whether “the defendant’s conduct in connection with the forum state are such that he could reasonably anticipate being haled into court there.”  To satisfy this standard, “a defendant outside the forum state must have at least ‘aimed’ its challenged conduct at the forum state.”  Chernuk at 328.

The defendant in Zaletel had no Virginia presence and did not sell its app directly into Virginia.  The app, however, could be downloaded from the Google Store.  Judge Ellis reverted to the more general “stream of commerce” theory.  Simply placing products into the stream of commerce, even with the expectation that they would be purchased in the forum state, is not enough to constitute “activity purposely directed” at the forum state.  The Prisma Labs app was downloaded more than 70 million times, but apparently not specifically aimed at Virginia.  Due process requires that a defendant be haled into court in a forum state based on his own affiliation with the state, and “not based on the ’random, fortuitous, or attenuated’ contacts he makes by interacting with other persons affiliated with the State.”  The Zaletel court must have recognized that some percentage of the 70 million downloads likely landed in Virginia, it was not by defendant’s doing.  Something more is required.

Thousand Oaks Barrel Co.—99 Shipments Supports Personal Jurisdiction

Three months after Zaletel, Judge Ellis again addressed personal jurisdiction in a trademark/copyright case.  Thousand Oaks Barrel sued Deep South Barrels, a Texas company that made and sold oak mini-barrels similar to the Thousand Oaks Barrel product, claiming trademark and copyright violations in Virginia.  Judge Ellis applied the now familiar ALS Scan test with specific reference to Zippo.  Restated again with minor adjustments in this decision, the three-part test is that a State can exercise personal jurisdiction over a nonresident defendant when that defendant “(1) directs electronic activity into the state, (2) with the manifested intent of engaging in business or other interactions within the state, and (3) that activity creates, in a person within the state, a potential cause of action cognizable in the state’s courts.”

Judge Ellis concluded first that Plaintiff Thousand Oaks established a prima facie case of personal jurisdiction over Deep South Barrels by showing that “Deep South Barrels directed electronic activity into Virginia with the manifest intent to do business with Virginia residents when it set up an interactive e-commerce website accessible to Virginia residents and used that website to fulfill Virginia customers’ Internet purchases.”  The facts established that website customers in Virginia could purchase the Deep South mini-barrels directly over the website, and that approximately 99 shipments originated from website sales to Virginia customers.  The judge found that Deep South Barrels’s use of an interactive e-commerce website to sell even a modest quantity of products to Virginia residents was sufficient to show that the defendant “purposely availed itself of the privilege of conducting activities [in Virginia].”

Summary

The center of the test for personal check jurisdiction in Internet or cyberspace transactions is whether there has been “purposeful availment” by the defendant, which requires that the commerce in question be aimed at the forum state.  The Zippo test addresses the relatively easy questions of personal jurisdiction with passive websites (no personal jurisdiction) and sales from highly active website (personal jurisdiction).   By the broad swath of middle-ground interactivity remains uncertain territory.

The current Fourth Circuit test yields what might tactfully be described as uneven results.  In Zaletel, 70 million downloads of the defendant’s app – of which some percentage were certainly to Virginia customers – did not support personal jurisdiction because the defendant did not aim at Virginia.  Yet the same judge only three months later and applying the same test concluded that 99 shipments of oak mini-barrels was sufficient for personal jurisdiction.

Judge Ellis’s analysis seems to be consistent between the two cases.  The problem is that the legal test for personal jurisdiction in the Internet world is from a bygone era, leaving us with no clear test of the critical “purposeful availment” analysis.