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Intellectual Property Law

Beware of Clients with an Internet Presence: Decision Could Drag Them into an Undesirable Forum

By Alan Field

A new world has emerged in recent years that arguably has no borders or physical boundaries to mark the way. The only boundaries are computer screens and passwords that separate the virtual world from the "real world" as we know it. This new world with no apparent boundaries is the Internet, and courts are just beginning to struggle with resolving disputes arising in this new environment.

The most dynamic area of law in this cyberworld is personal jurisdiction, the power of any one court to enter a binding judgment against a particular person or entity by using proper notice and basis requirements. One of the most abstract theories used to justify basis has concerned how to determine the sufficient number of minimum contacts that a defendant has with a forum state so as to compel him or her into its court.

The proliferation of Internet technology has raised new questions about the validity of traditional theories of personal jurisdiction. International Shoe’s "minimum contacts" test and its progeny have shown surprising resilience in resolving two recent cases involving trademark law that resulted in opposite results. The first case is CompuServe Inc. v. Richard S. Patterson, decided this past July in the federal district court of Ohio. It held that a software provider of shareware, who lived in Texas, could be sued in Ohio. The other case, Bensusan Restaurant Corp. v. Richard B. King d/b/a The Blue Note, held that a Missouri resident who owned a local music performance venue with the identical name of the famous Blue Note Jazz Club, could not be sued in New York.

In comparing the two cases, the long-arm statute involved determined how the courts approached the issue of jurisdiction. In Ohio, because the statute expressly states that it extends its protection to the limits of the Due Process Clause, only a constitutional analysis based on minimum contacts need be discussed. But in New York, because of its broader protection granted to out-of-state defendants, the case must first be analyzed through the statute and then, only if there is a finding of personal jurisdiction, is the court obligated to discuss the due process minimum-contacts test.

Although the long-arm statutes in each of the forums where the courts sat were different, the opinions are wholly consistent with each other because they both (1) took great care in weighing the facts and applying the law to those facts, (2) considered the relative sophistication of the parties involved, and (3) emphasized the nature and quality of the defendant’s contacts with the forum state, rather than the raw numbers, to determine if a proper basis existed.

The Patterson case was a declaratory judgment action based on a trademark infringement claim regarding CompuServe’s shareware service. Shareware is software made available to online service members, who are expected to compensate the creator of the software—through CompuServe, for example—which then takes a 15 percent fee before forwarding the balance to the creator. One of the creators of the many offerings, Richard Patterson, was the defendant in this case. CompuServe operates its shareware service by requiring all software creators to enter into a "Shareware Registration Agreement."

Patterson, a Texas resident, entered into this agreement while online and transmitted his assent to CompuServe’s main computer system located in Ohio. Patterson used the shareware service from 1991 to 1994 by electronically transmitting thirty-two software files to CompuServe, as well as advertising his software on the CompuServe system.

The trademark issue originated from CompuServe’s marketing of a software product similar to that of Patterson’s, who promptly complained through e-mail to CompuServe of its various trademark infringements and deceptive trade practices against his product, FlashPoint Windows Navigator. When Patterson demanded $100,000 to settle his potential claims, CompuServe filed a declaratory judgment action in the District Court for the Southern District of Ohio. The district court granted Patterson’s motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2) of the Federal Rules of Civil Procedure.

The Sixth Circuit Court of Appeals reversed, finding that CompuServe did make a prima facie showing that Patterson had minimum contacts with Ohio. The court first justified jurisdiction under Ohio’s long-arm statute. The circuit court disagreed with the district court’s holding that there was no minimal course of dealing evident from the facts. Patterson’s role as a software provider and marketer for CompuServe was crucial in determining that the contacts were substantial because of his purposeful actions online toward CompuServe in Ohio.

Reversing the district court on the issue of whether CompuServe’s cause of action arose from Patterson’s activities, the circuit court held that placing his software on CompuServe’s Ohio-based system, advertising and selling it online, having all profits of the sales relayed to him from Ohio, and ultimately his own threats to commence legal action, led to this trademark infringement cause of action involving the very same software.

The case of Bensusan Restaurant Corp. v. Richard B. King d/b/a the Blue Note turned out quite differently from Patterson. Here, King, a club owner in Missouri, posted a site on the Internet to promote his club. A site is an Internet address that permits users to exchange digital information with a particular "host" computer. Anyone with Internet access could view this site, which described general ticket information and events at the club. New York Blue Note owner Bensusan commenced the lawsuit in New York alleging trademark infringement, trademark dilution, and unfair competition. Like Patterson, King moved to dismiss for lack of personal jurisdiction.

This court, like the court in Patterson, analyzed the forum state’s long-arm statute, but in this instance found no personal jurisdiction. Because New York’s statute gives broader protection to out-of-state defendants than Ohio’s statute or what the U.S. Constitution would ordinarily allow, the court examined the provision permitting a court to exercise personal jurisdiction over any nondomiciliary who "commits a tortious act within the state" as long as the cause of action asserted arises from the tortious act.

The issue here was whether or not King "offered to sell" tickets to his venue in the State of New York. In New York trademark actions, courts have found that an offering for sale of just one copy of an infringing product in New York, even if no sale results, is sufficient to vest a court with jurisdiction over the alleged infringer. No jurisdiction was found on this ground because of the number of affirmative steps a New York resident would have to complete in order to purchase tickets from King’s establishment.

Relying on King’s affidavit that he derived 99 percent of his attendance and ticket sales from local residents of Columbia, Missouri, the court rejected Bensusan’s arguments that mere participation in interstate commerce would be sufficient to find personal jurisdiction. Under this provision, substantial revenue must have been derived from the state.

A finding against personal jurisdiction on the New York long-arm statute would have been enough to dismiss the action, but the court also noted that even without the statute, no minimum contacts under constitutional due process would have been found.

Alan Field is a consultant with Counsel Connect in New York City.

This article is an abridged and edited version of one that originally appeared on page 3 in IPL Newsletter, Fall 1996 issue (15:1).

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