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Foreign company’s sales subject it to jurisdiction

‘Sizeable, continuing commerce’ is enough

Decision a ‘close call’

Decision a ‘close call’

In what it noted was a “close call,” the 1st U.S. Circuit Court of Appeals ruled that it did not offend the Due Process Clause of the Constitution to exercise specific personal jurisdiction against a German corporation that derived income from customers in the United States.

In the absence of clear guidance from U.S. Supreme Court, the 1st Circuit said it was deliberately avoiding creating any broad rules. To the extent the Supreme Court had spoken to the issue of whether online activities can translate into contacts for the purposes of the minimum contacts analysis, it had done so in far different factual scenarios, the 1st Circuit said.

Writing for the court, Judge Sandra L. Lynch noted the “baseline principle” that had emerged: that a website operator “does not necessarily purposefully avail itself of the benefits and protections of every state in which its website is accessible.”

But the District Court judge below had observed that the defendant had gone further than making its website available, engaging in “sizeable and continuing commerce with United States customers.”

If it did not want U.S. customers, the defendant had options, like designing its site to not interact with American users or posting a disclaimer that its service was not intended for U.S. users, the 1st Circuit noted. This defendant, however, had accepted payment from and voluntarily served U.S. customers for three and a half years.

The court also rejected the defendant’s argument that it could not reasonably anticipate specific jurisdiction because it did not specifically target the United States with its business, an argument premised on the Supreme Court’s 2011 decision in J. McIntyre Mach., Ltd. v. Nicastro.

The 24-page decision is Plixer International, Inc. v. Scrutinizer GmbH.

Options available

Even though the 1st Circuit took pains to limit its decision to the facts before it, there are lessons to be taken from the ruling, practitioners say.

The plaintiff’s attorney, James G. Goggin of Portland, Maine, pointed to the significance the 1st Circuit placed on the defendant’s failure to restrict access to its website. Other companies may want to heed the admonition about using geo-blocking software or, at a minimum, put disclaimers on their websites that make clear they are not trying to do business in a particular jurisdiction, he said.

He declined to comment further, citing the ongoing nature of the case.

The defendant’s attorneys, Edward J. Sackman of Manchester, New Hampshire, and John A. Woodcock III of Portland, Maine, did not respond to requests for comment.

The issue of jurisdiction in the internet age has been “plaguing courts for a while,” said Stacey P. Nakasian of Providence, Rhode Island.

The Plixer decision “certainly expands our understanding of jurisdiction” in cases of web-based commerce, even as the court limited its holding to the specific facts before it, she said.

“The key here is to find a federal claim,” Nakasian said. “That’s what gave traction to the plaintiff.”

Future plaintiffs will now look for federal claims, given the Plixer precedent, she added.

Boston attorney Joseph M. Cacace said another takeaway is the importance for a plaintiff to take early discovery, if necessary, to establish the quality and quantity of the business the defendant is doing in a particular forum.

Nakasian said it is fairly standard now, at least in the 1st Circuit’s federal District Courts, for judges to allow such discovery while being careful not to let the discovery bleed into other issues and make the process cumbersome.

Though the Supreme Court weighing in would be helpful, Cacace said the Plixer decision helps define what beyond having an accessible website will subject a defendant to jurisdiction — and the answer is not much.

Here, the sales were “more than de minimis,” but not “massive” either, and the German company had no presence in the United States beyond selling its services on the internet, Cacace said.

That the court did not feel bound by the plurality decision in the Nicastro case is perhaps unsurprising, given that two of the four members of that plurality, Justices Anthony M. Kennedy and Antonin G. Scalia, are no longer on the Supreme Court, Boston attorney Scott A. Birnbaum said. Plixer instructs future defendants that, in the 1st Circuit at least, they will not be able to rely on Nicastro to get a case dismissed on jurisdictional grounds.

The law, in terms of jurisdictional jurisprudence, has not yet caught up with the relatively new phenomenon of online sales, he added.

Boston attorney Michael F. Connolly agreed. Ten or 15 years ago, the burden of compelling the defendant to travel to defend itself in a U.S. court and the forum selection clause in its contract might have carried the day, he said.

Catherine I. Rajwani said the defendant also was not helped by the fact that it had filed a Section 1(a) application for registration of the trademark of its name, indicating that it had been using the trademark in the United States for a number of years.

“While maybe that didn’t tip the scales, given the U.S. sales, I think that was a very bad fact for them. I was surprised that while there was a litigation ongoing, that that decision would have been made,” said Rajwani, who practices in Northborough, Massachusetts.

Nakasian agreed.

“That showed Scrutinizer knew it was doing business here and supported a finding of intent of doing business here,” she said.

Rajwani also found it curious that the defendant’s total worldwide sales were not part of the record.

“To me, if those [U.S.] sales represented a relatively small portion of their sales — certainly 5 percent or less — I think that that would have really mattered to the court in their overall analysis,” she said.

The plaintiff’s attorney said companies may want to heed the admonition about using geo-blocking software or, at a minimum, put disclaimers on their websites that make clear they are not trying to do business in a particular jurisdiction.

Scrutinizer under scrutiny

Defendant Scrutinizer GmbH1, a German corporation with its principal place of business in Kassel, Germany, runs a “self-service platform” that helps customers build better software.

Although the website is in English, customers who contract to use Scrutinizer’s global online service can pay only in euros. The company’s standard contract contains forum-selection and choice-of-law clauses that provide that all lawsuits relating to the contract be brought in German courts and under German law.

Scrutinizer maintains no U.S. office, phone number or agent for service of process. It apparently directs no advertising at the United States, and its employees do not go to the United States on business.

Scrutinzer claims on its website to be a partner on over 5,000 projects with companies around the world. Between January 2014 and June 2017, Scrutinizer had served 156 U.S. customers in 30 states, bringing in just under the equivalent of $200,000, according to information provided in discovery.

Two of Scrutinizer’s customers hailed from Maine, home base to plaintiff Plixer International, which sued Scrutinizer for allegedly infringing on its U.S. registered mark “Scrutinizer” in federal District Court in Maine on Nov. 21, 2016.

Though Plixer filed for the trademark in July 2015, its application indicated that Plixer began using the mark as early as November 2005 in relation to computer software and hardware used in the field of information technology “for analyzing, reporting and responding to malware infections and application performance problems.”

Plixer argued that the identical names and similarities between the products would cause consumer confusion, dilute its rights, and interfere with its use of the mark.

One of the two bases Plixer gave for personal jurisdiction was that Scrutinizer’s nationwide contacts with the United States supported specific jurisdiction under Federal Rule of Civil Procedure 4(k)(2).

After rejecting an initial motion to dismiss, the District Court judge allowed limited jurisdictional discovery.

For reasons unclear in the record, Scrutinizer filed a U.S. trademark application for “Scrutinizer” in January 2017.

On prima facie review, U.S. District Court Judge D. Brock Hornby found that the court could constitutionally exercise specific personal jurisdiction over Scrutinizer under Rule 4(k)(2).

As part of his analysis, Hornby found that while Scrutinizer’s application for U.S. trademark protection was not conclusive, “it does confirm [Scrutinizer’s] desire to deal with the American market.”

Given the lack of Supreme Court guidance on the issue, however, Hornby believed an interlocutory appeal was warranted.

The 1st Circuit agreed and granted the appeal.

‘Nicastro’ under microscope

As for why it did not feel bound to follow the guidance of the plurality of the Supreme Court in Nicastro, Lynch explained that, given the fragmented nature of the decision (none of the rationales for the result enjoyed the assent of five justices), the holding “may be viewed as that position taken by those members who concurred in the judgment on the narrowest grounds,” citing Marks v. United States.

In this particular instance, it led the 1st Circuit to agree with the conclusion of Justice Stephen G. Breyer that “the plurality’s seemingly strict no-jurisdiction rule” was unnecessary.

At the other end of the spectrum, Breyer was also critical of New Jersey’s test, which would liberally subject a foreign defendant to jurisdiction, if it “knows or reasonably should know that its products are distributed through a nationwide distribution system that might lead to those products being sold in any of the fifty states.”

The 1st Circuit said it did not need to adopt such a broad rule to uphold the exercise of specific personal jurisdiction over Scrutinizer.

“Ultimately, although a close call, we conclude that the German company could have ‘reasonably anticipated’ the exercise of specific personal jurisdiction based on its U.S. contacts,” Lynch wrote.

Though the record did not reveal what percentage of Scrutinizer’s business came from the United States, it did show that Scrutinizer used its website to obtain nearly $200,000 in U.S. customer contracts over three and a half years.

“This is not a situation where a defendant merely made a website accessible in the forum,” Lynch wrote. “Instead, Scrutinizer’s voluntary service of the U.S. market and its not insubstantial income from that market show that it could have ‘reasonably anticipated’ being haled into U.S. court.”

The 1st Circuit noted that its holding was consistent with the Supreme Court’s opinion in Keeton v. Hustler Magazine, post-Nicastro rulings from around the country, and decisions from its sister circuits.

The court also stated that it believed it was free to consider Scrutinizer’s U.S. trademark application, despite the fact that it was filed after the litigation began.

Ultimately, the 1st Circuit decided it agreed with the District Court judge that the trademark application confirmed Scrutinizer’s desire to deal with the U.S. market but did not “tip the scales.”

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