Penguin v. American Buddha: Will the Long-Arm Statute Adapt to the Digital World?

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Plaintiffs have long chosen to litigate copyright and trademark cases in the federal courts in New York because that is where much of the content and distribution industries are based. But those plaintiffs who seek to litigate in New York for infringing conduct that took place outside that state may lose their chosen forum depending on how the New York Court of Appeals decides a novel issue referred to it last week by the Second Circuit Court of Appeals in Penguin Group. v. American Buddha.

The Split Regarding the Location of Injury Resulting from Infringement

The issue concerns the location (or “situs”) of the injury suffered by a copyright holder from infringement. The federal courts in New York are divided on this issue. One line of cases holds the location of injury is the jurisdiction where the infringing conduct took place. These courts reason that the copyright owner suffers injury in that jurisdiction because that is where the sales related to the intellectual property are lost.   The other line holds that the situs of injury is the location of the copyright holder or of its intellectual property because that is where the holder experiences the harm caused by the infringement.

The Significance of the Issue before the New York Court

This issue impacts on personal jurisdiction. A plaintiff suing a non-resident infringer in New York for infringing conduct that took place outside that state must satisfy CPLR §302 (a)(3) (ii) of New York’s long-arm statute. That statute requires plaintiff demonstrate it was injured by the infringing conduct in New York.

If the New York Court of Appeals follows the line of cases holding that the situs of injury is the location of the copyright holder or its intellectual property, New York-based copyright holders will be able to continue to litigate against non-resident infringers in that state.

But if the New York Court of Appeals follows the other line of cases, then New York-based copyright holders will be forced to bring their infringement actions in the jurisdiction where the infringing activity occurred. Determining that jurisdiction  may not be easy. Infringement may result from unauthorized uploading of copyrighted material on one or more inter-connected servers operating throughout the world.  Further, if the server sits in a foreign jurisdiction with little respect for intellectual property, the plaintiff will be effectively without a remedy.

The Internet Complicates the Analysis

Personal jurisdiction has traditionally been based on “presence” or “transacting business” in the state where the litigation was commenced. But these notions have little relevance in the virtual world. Where is an interactive web site present if it may be accessed globally? Where is an online retailer transacting business if it targets , advertises and ships to consumers in all 50 states? Is a geographical nexus with the forum required where the harm occurs anywhere the Internet is accessible?  There are some of the questions that may be implicated by the jurisdictional issue the New York Court of Appeals has been asked to decide in Penguin. Here is its background.

The District Court Decision

The district court in Penguin followed the line of cases holding that the situs of injury is where the infringing activity took place. In Penguin that activity occurred either in Oregon or Arizona where defendant American Buddha without authorization, uploaded to its online libraries four of Penguin’s works and made them available free of charge on its servers housed in those states.

Because the district court determined that defendant’s infringing conduct had injured Penguin outside New York, the court dismissed the action for lack of personal jurisdiction. The district court found Penguin’s “purely derivative economic injury” was insufficient. The court added the Internet played no role in the court’s resolution because Penguin alleged only a single incident of infringement that occurred in Oregon or Arizona.

The Second Circuit Decision

On appeal, Penguin aptly argued that the “restrictive reading of the long-arm statute under the line of cases followed by the District Court would substantially—and unnecessarily– stack the deck against [New York plaintiffs] … in the accelerating struggle against Internet piracy, allowing pirates with the entire 21st-century arsenal of digital infringement tools to shelter behind a 19th-century personal jurisdiction model.”

Penguin’s main and reply briefs are here; American Buddha’s brief is here.

But the Second Circuit declined to follow either line of cases, finding “insufficient guidance” from the language of the long-arm statute, its legislative history or New York case law. Instead, the Second Circuit asked the New York Court of Appeals to decide:

In copyright infringement cases is the situs of injury for purposes of determining long-arm jurisdiction under CPLR §302 (a)(3) (ii) the location of the infringing action or the residence or location of the principal place of business of the copyright holder?

The Second Circuit added its thoughts to the expected debate on this issue that will take place in the New York Court of Appeals. Judge Sack, writing for the circuit court, stated that simply suffering economic damages in New York does not create a ‘direct injury” which satisfies the long-arm statute. But Judge Sack added that when “something more is alleged, as in Sybron Corp. v. Wetzel, some New York courts have determined the situs of injury to be the place where plaintiff is located and conducts business.” In Sybron, plaintiff was not only domiciled in New York but “had additional ties to the State, such as the presence of the trade secrets and the threatened loss” “of a New York-specific customer base.” The Second Circuit noted:

Sybron does raise a reasonable likelihood that the New York Court of Appeals may interpret the alleged wrong here—which is analogous to a commercial tort and involves both the presumptive presence of … [Penguin’s] intellectual property rights in the State, and the likely ability of the plaintiff to foresee that the distribution of the copyrighted material in issue will cause loss beyond that caused by the initial unauthorized uploading of the copyrighted works—to involve more than derivative economic harm with the State.

The Second Circuit also suggested that the “speed and ease with which the Internet may allow out of state actions to cause injury to copyright holders in New York” “may be relevant to the definition of the situs of injury.”

Will, the New York Court of Appeals interpret the long-arm statute to permit its residents continued access to the New York courts without offending due process?

Stay tuned.

Interested in learning more about the application of a companion long-arm statute, CPLR §302 (a)(1), in a trademark counterfeiting case. Please see my posts discussing the Second Circuit’s opinion in Chloé v. Queen Bee and the unresolved questions the case raises here and here.

Updated as of March 25, The Court of Appeals rules for Penguin; see my latest post on this case here

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3 Responses to “Penguin v. American Buddha: Will the Long-Arm Statute Adapt to the Digital World?”

  1. Actually, the “two lines of authority” argument is inaccurate. There is no line of District Court of New York authority holding that bare infringement occurs in New York. If it had merely been the case of picking between two lines of divergent District Court law, the 2nd Circuit would simply have picked one, said that was the right course, and not certified anything. As I noted in American Buddha’s brief to the Second Circuit: “The fact is, the divergent statements in both McGraw-Hill and Design Tex — that intellectual property infringement in New York equals injury in New York — appear to be dictum, because both cases involved significant physical entry of either persons or material into New York in order to transact an infringing sale. In McGraw-Hill Cos. v. Ingenium Techs. Corp., 375 F. Supp. 2d 252 (S.D.N.Y. 2005), defendant’s representative met with plaintiff’s employees “at McGraw-Hill’s offices in New York several times each year [and there] were numerous other contacts with New York as well; for example, Ingenium each month e-mailed to a McGraw-Hill employee based in New York a revenue and expense report relating to their arrangements.” Design Tex Group, Inc. v. U.S. Vinyl Mfg. Corp., 2005 U.S. Dist. LEXIS 2143 (S.D.N.Y. Feb. 14, 2005) involved the deliberate delivery by a Georgia company of infringing vinyl wall covering designs to a New York company in response to a specific request from within New York to send the designs to New York. Accordingly, just like Andy Stroud itself, each of these cases involved actual commercial transactions consummated in the forum state, and could have been decided under the analysis applied by the District Court in Freeplay and in the case at bar. The proper construction of this line of opinions would identify dictum as dictum and eliminate a perceived split in district court personal jurisdictional analysis.”

  2. Charles your comments raise some interesting questions. Let me respond to the comments in the order you made them.

    You first state that “there is no line of District Court of New York authority holding that bare infringement occurs in New York.

    If what you mean to say is that there are no cases finding injury to be where the allegedly infringed intellectual property is held, you are incorrect. The cases you cite, McGraw-Hill Cos. v. Ingenium Techs. Corp., 375 F. Supp. 2d 252 (S.D.N.Y. 2005) and Design Tex Group, Inc. v. U.S. Vinyl Mfg. Corp., 2005 U.S. Dist. LEXIS 2143 (S.D.N.Y. Feb. 14, 2005) (both decided by Judge Rakoff) say exactly that. For instance, Design Tex holds: “Here, because the plaintiffs (and their intellectual property) are based in New York, the injury is felt within the state no matter where the infringement takes place.”

    You then state that the 2d Circuit could “simply have picked one [of the two divergent line of cases], said that was the right course, and not certified anything.”

    Again, I think you are incorrect. It was appropriate for the 2d Circuit to certify the jurisdictional issue to the New York Court of Appeals for at least the following reasons that Penguin noted: (a) the “two competing lines of authority interpreting section 302(a)(3)(ii)”; (b) the 2d Circuit’s recognition that a determination of which line to follow “requires analysis of state law and policy considerations that” the 2d Circuit “is ill-suited to make;” (c) “neither the New York Court of Appeals nor” the 2d Circuit “has decided what the situs of injury is in an intellectual property case;” (d) the “statute’s plain language does not indicate the answer” to the jurisdictional issue; and (e) “determination of the issue by the Court of Appeals will control the outcome of the case.”

    You finally state that the language in McGraw-Hill and Design Tex, finding injury where the infringed intellectual property is held, “appears to be dictum.”

    Again I respectfully disagree. Although you are correct that in each case the defendant had contacts with NY, Judge Rakoff found the situs of injury in those cases based solely on where the copyrighted works were located. Thus, McGraw-Hill held (citing to Design Tex) “the torts of copyright and trademark infringement cause injury in the state where the allegedly infringed intellectual property is held.” I don’t think you can fairly characterize that statement as dictum.

    In any case good luck going forward. The decision by the Court of Appeals will have wide impact.

  3. Andrew:

    My understanding of dictum has always been “any statement of law unnecessary to decide the case at bar.” Since both McGraw Hill and Design Tex were properly decided under the established rule that (a) shipping products from outside New York, and causing (b) a sale inside New York were in fact (a’) the act outside the State causing (b’) an effect inside the State, the assertion that trademark infringement outside State per se causes injury to the trademark holder in the State, is dictum.

    Second, it’s worth noting that both these cases involved trademark claims, although McGraw Hill included copyright allegations. Trademark injury, being quite similar to trade libel in its tendency to degrade the business goodwill of the plaintiff, makes a much better argument for action outside the state causing injury within the state, because it is an attack on the identity of the trademark-holder and its goodwill, both of which are easily identified as resident within the state. This is not the case for copyright, an intangible with no situs that is at best an item of property owned by the plaintiff, and the infringement of which does not constitute an attack on the identity or goodwill of the plaintiff, but at most, a “mere economic loss” an insufficient jurisdictional predicate.

    Thank you for discussing the case and for your good wishes.

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