IN BRIEF
- Does a federal court have personal jurisdiction over foreign professional sports teams that recruit and employ U.S.-based professional athletes?
- A recent case out of Pennsylvania says “yes,” but is the same true for the team’s parent company?
- The door has been opened if certain circumstances are met, and is a major turning point for players’ rights.
A federal district court has opened the door for professional athletes to file lawsuits in the United States against foreign professional sports teams—and potentially the international conglomerates that own them—to resolve employment disputes.
In Lutz v. Rakuten, Inc. et al., Civ. Action No. 17-3895 (U.S.D.C. E.D. Pa.), Zach Lutz, a former Major League Baseball (MLB) player for the New York Mets, filed suit against Rakuten Baseball, Inc., a Japanese baseball company that owns and operates the Tohoku Rakuten Golden Eagles (the Golden Eagles), and Rakuten Inc., a Japanese e-commerce company and corporate parent of the Golden Eagles (Rakuten), for reneging on an agreed-upon contract for Lutz to play for the Golden Eagles for the 2015 season.
The Golden Eagles are a Japanese professional baseball team that plays in Nippon Professional Baseball’s Pacific League, one of two Japanese professional baseball leagues and the Japanese equivalent of MLB. The Golden Eagles are a wholly owned subsidiary of Rakuten, a Tokyo-based holding company that is often referred to as the “Amazon of Japan.” Through its subsidiaries and affiliates, Rakuten operates numerous e-commerce and internet services companies globally. In 2018, Rakuten’s consolidated businesses earned revenues of 1.1 trillion Japanese yen—close to 10 billion U.S. dollars. Although Rakuten may not be a household name in the United States, basketball and soccer fans may recognize Rakuten as the jersey sponsor of the NBA’s Golden State Warriors and La Liga’s FC Barcelona.
Lutz played for the Golden Eagles in 2014, but after injuring his thumb during the season, he returned to his home in Pottstown, Pennsylvania. During that time, the Golden Eagles monitored Lutz’s injury, subsequent surgery, and rehabilitation and began negotiating a new contract for the 2015 season (and beyond). For several months, Lutz and the Golden Eagles exchanged numerous communications via text message, e-mail, and telephone concerning his physical condition and the new contract. The Golden Eagles requested medical records from Lutz’s doctors in the United States, which he provided, and paid for Lutz’s medical insurance for physical therapy and rehabilitation during this period.
In December 2014, Lutz and the Golden Eagles agreed to a one-year deal for the 2015 season, which guaranteed Lutz $700,000 in base salary plus incentive bonuses and reimbursement for expenses. On December 4, 2014, a written contract was e-mailed to Lutz in Pennsylvania, and he signed and returned it to the Golden Eagles two days later.
However, the Golden Eagles never countersigned the contract. Lutz alleged that weeks after returning the signed contract, the Golden Eagles reneged on the deal and instead signed Gaby Sanchez, a better-known MLB player. Lutz remained on the team’s “reserve list,” which under the Nippon Professional Baseball Organization’s rules meant that he was barred from negotiating a new contract with any team in the world. Lutz remained on the reserve list for several weeks before he was released and eventually signed a contract with the Doosan Bears of the Korean Baseball Organization for $550,000—$150,000 less than his Golden Eagles contract, with no incentive bonuses or paid expenses, and a less attractive deal overall than the one he had accepted from the Golden Eagles.
In August 2017, Lutz filed suit in the U.S. District Court for the Eastern District of Pennsylvania against Rakuten and the Golden Eagles alleging fraud, negligent misrepresentation, and promissory estoppel. Rakuten and the Golden Eagles moved to dismiss Lutz’s complaint under Rule 12(b)(2) for lack of personal jurisdiction, and under Rule 12(b)(6) for failure to state a claim. Rakuten and the Golden Eagles primarily argued that the federal court lacked both general and specific personal jurisdiction over both entities such that litigation in a Pennsylvania court would violate the constitutional principles of due process. Specific jurisdiction requires that a defendant have sufficient “minimum contacts” with the forum and that the claims arise out of those contacts. General jurisdiction, on the other hand, subjects a foreign defendant to the court’s jurisdiction if its nonclaim-related contacts with the forum state are so continuous and systematic that the defendant can be considered “at home” there.
Rakuten and the Golden Eagles argued that the court lacked specific personal jurisdiction over them because neither entity conducts business or has a physical location in Pennsylvania, and because the Golden Eagles representatives did not set foot in Pennsylvania to negotiate or communicate with Lutz; in Rakuten’s case, its representatives were not involved in the contract negotiations with Lutz. The Golden Eagles argued that their contacts with Lutz were location-agnostic; they sent e-mails and text messages not knowing where Lutz was physically located at the time. Rakuten asserted that general personal jurisdiction over it was improper because, as an international conglomerate based in Japan, it does not engage in business that directly targets or solicits Pennsylvania residents.
In opposition, Lutz argued that specific personal jurisdiction was proper because representatives from the Golden Eagles communicated directly and frequently with him in Pennsylvania concerning his injury and a new contract for the 2015 season. Lutz argued that general personal jurisdiction over Rakuten was appropriate because Rakuten overtly promotes on its website that all of its business endeavors, including owning and operating the Golden Eagles, are part of an integrated global “ecosystem” that markets the Rakuten brand internationally, including in Pennsylvania.
On April 22, 2019, U.S. District Judge Chad F. Kenney issued a detailed opinion, holding that the federal court had personal jurisdiction over the Golden Eagles but lacked personal jurisdiction over Rakuten. Judge Kenney found that the Golden Eagles “knowingly reached into Pennsylvania to recruit and employ [Lutz] to play baseball for the Golden Eagles.” The court found specific personal jurisdiction over the Golden Eagles because it “purposefully directed its activities at Pennsylvania” by: (1) knowing that Lutz was a Pennsylvania resident, evidenced by the fact that they wired money to his Pennsylvania bank account for his 2014 salary; (2) communicating via e-mail, text message, and telephone with him while he was in Pennsylvania regarding his recovery and the 2015 contract; and (3) paying for his medical insurance for his physical therapy and rehabilitation, most of which occurred in Pennsylvania.
The court determined that it lacked personal jurisdiction over Rakuten, however. There was no specific personal jurisdiction because Lutz’s allegations implicated only the Golden Eagles and not Rakuten. The court also found that general personal jurisdiction was lacking because Rakuten, as a holding company, does not (1) sell any goods or services in Pennsylvania, (2) have any locations in Pennsylvania, or (3) directly target or solicit Pennsylvania citizens. Instead, the court applied the test set forth in Zippo in finding that Rakuten passively marketed its global “ecosystem” and “is more akin to an advertisement of the overall Rakuten brand.” The court refused to attribute the activity of websites managed by third parties, who were affiliates but not wholly owned subsidiaries of Rakuten, to Rakuten itself even though such websites bear the Rakuten name and logo and promote the overarching Rakuten brand.
Although Judge Kenney’s opinion dismissed Rakuten, the court denied the defendants’ Rule 12(b)(6) motion, allowing Lutz’s claims against the Golden Eagles to proceed. Even though he dismissed Rakuten, Judge Kenney implicitly endorsed the notion that an international conglomerate such as Rakuten could be subject to personal jurisdiction in a federal district court if its marketing strategy targets citizens of a particular state and is central to its business.
This decision should send shockwaves to foreign professional sports teams because it opens the door for U.S.-based professional athletes to litigate employment disputes in American courts. By actively reaching into the forum state to recruit and employ an athlete, such actions may be considered to be “purposefully directed” at the forum and may subject the foreign teams to jurisdiction there. This is a crucial development for the legal rights of U.S.-based professional athletes for two primary reasons.
First, litigating in foreign jurisdictions is cost prohibitive and logistically challenging for individual plaintiffs. Judge Kenney acknowledged that it would pose a significant burden on Lutz to bring his claims in Japan, whereas the Golden Eagles would face a “substantially smaller burden” to defend itself in Pennsylvania. In addition, international courts and foreign alternative dispute resolution options (e.g., arbitration) often do not protect the same rights and provide the same relief as American courts. As a result, foreign professional teams have avoided making contractual payments to players without much (or any) redress.
Second, foreign professional sports teams are frequently owned by international conglomerates, such as Rakuten, that use the team to promote the overall brand through the team’s exposure to consumers and active content marketing and distribution networks. To the extent that these foreign entities target American consumers through their global branding strategies, they may be subject to personal jurisdiction in American courts. In September 2017, Rakuten entered into a sponsorship deal reportedly worth $60 million with the Golden State Warriors to promote its global “ecosystem” by displaying its logo on the front of the team’s jerseys, arguably targeting consumers in each of the 27 American cities where the Warriors play (including Philadelphia, Pennsylvania) and in millions of households worldwide through television and other media. By sponsoring the Warriors—the most prominent, superstar-packed team in the NBA with more nationally televised games than any NBA team and a massive media and social media following—Rakuten undoubtedly knew that it would gain immense exposure in the United States. A November 2017 Forbes article covering the deal suggested that the Warriors used complex analytics to value such exposure and justify the exorbitant cost of the deal (twice the cost of the next highest NBA team jersey patch deal).
On the other hand, as the defendants raised in their moving papers, had Lutz alleged contract claims against the Golden Eagles, he would have had to contend with a forum selection clause, choice-of-law provisions, and a requirement to arbitrate, all of which would have forced Lutz to resolve this dispute in Japan according to Japanese procedures. Creative pleading allowed Lutz to sidestep any potential contract law issues, but other putative plaintiffs whose claims arise under contract law may not reap the benefits of the Lutz decision. In addition, as Lutz demonstrated, imputing personal jurisdiction on a parent holding company that had no direct involvement in the claim is an uphill battle for a plaintiff. Parent companies often run their businesses through operating subsidiaries specifically to avoid the situation Rakuten confronted (and prevailed on) in this litigation, i.e., opening its deep pockets to resolve a dispute it had no direct role in creating. Moreover, if a plaintiff successfully surpasses the personal jurisdictional threshold, it must still prove that the corporate parent is somehow liable to the plaintiff under a joint-employment or some other legal theory—another uphill battle.
While the Golden Eagles may have had grounds to seek an interlocutory appeal of the court's denial of their Rule 12(b)(2) motion, seeking to dismiss the entire case, they opted to file an Answer to Lutz's complaint and move the case forward. This may have been a prudent move as Lutz likely would have cross-appealed, challenging the court's dismissal of Rakuten – a risk that Rakuten might prefer to avoid as it would allow the appellate court to take a closer look at the record evidence of Rakuten’s deep business entwinement with its subsidiaries, including the Golden Eagles. However, depending on the outcome of the case, an appeal could remain an option, albeit still a risky one. . On a broader scale, although it was persuasive, Judge Kenney’s decision is not binding on other courts. Thus, any appeal by the Golden Eagles runs the risk that the Court of Appeals for the Third Circuit will affirm Judge Kenney’s opinion, thereby setting a precedent for all federal courts in Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands, in addition to creating a persuasive decision for all other federal courts. For now, however, Lutz’s case will proceed and Judge Kenney’s decision will inevitably serve as a guidepost for professional athletes to pursue lawsuits in the U.S. against foreign professional sports teams, a major turning point for player rights.