In Reid v. Siniscalchi, No. 2874-VCS, 2018 Del. Ch. LEXIS 37 (Del. Ch. Jan. 30, 2018), the Delaware Court of Chancery dismissed plaintiff Dennis A. Reid’s derivative action against Italian satellite manufacturers Finmeccanica, SpA, Alcatel Alenia Space Italia SpA and Alenia Spazio (hereafter referred to as “the foreign defendants”) for lack of personal jurisdiction. As the court held, the factual basis for Reid’s “conspiracy theory” of personal jurisdiction, pursuant to which a non-resident defendant can be haled into court based on actions undertaken in the forum by the defendant’s alleged co-conspirators, was disproven by the foreign defendants. Reid did not appeal this dismissal, and the case is now closed.
Were that the entire story, the case would be largely unremarkable. Yet, as Vice Chancellor Joseph A. Slights III expressed in a colorful 44-page decision, Reid misled the court for eleven years by taking his own conspiratorial actions and projecting them onto the foreign defendants, all for purposes of avoiding the parties’ England-based forum selection and choice of law clauses and asserting claims in a U.S. court. Thus, the court found that Reid did not innocently advance charges of conspiracy which were ultimately proven incorrect; he lied to the court over several years by asserting that the foreign defendants engaged in wrongful conspiratorial activity which, in reality, he himself undertook.
The circumstances addressed in Reid v. Siniscalchi accentuate the widely-discussed Due Process concerns attendant to conspiracy theory jurisdiction. Reid also highlights an additional concern: the vulnerability of this theory to abuse by overzealous plaintiffs willing to misrepresent the facts in an effort to avoid litigating in proper, although unfavorable, jurisdictions. For all of these reasons, to the extent conspiracy theory jurisdiction remains viable in any state, plaintiffs must be held to heightened pleading and evidentiary standards, even at the outset of the proceeding.
Background of Reid
“Down the Rabbit Hole”
–Lewis Carroll, Alice's Adventures in Wonderland
Reid’s action in Delaware represented his second attempt to advance claims in a U.S. court in connection with a potential joint venture to commercialize Russian satellite orbital slots pursued by U.S. Russian Telecommunications L.L.C. (USRT) and defendant Finmeccanica SpA (FIN). Although the operative memorandum of agreement between USRT and FIN contained forum selection and choice of law provisions requiring the resolution of disputes in London in accordance with English law, and virtually all of the underlying events and circumstances took place in Italy and Russia, Reid chose to advance his claims in a U.S. court, where he believed his allegations would be viewed more favorably. Reid sought to avoid the parties’ forum selection clause by naming Giorgio Capra and Davide Siniscalchi as co-defendants, neither of whom were signatories to the memorandum of agreement, and alleging that FIN conspired with Capra and Siniscalchi to usurp a valuable business opportunity from USRT. Reid also alleged the existence of an oral joint venture agreement to commercialize Russian satellite orbital slots.
Reid first pursued litigation in Texas. After Reid conducted months of jurisdictional discovery, the foreign defendants’ application to dismiss for lack of personal jurisdiction was ultimately granted, as there was an absence of minimum contacts sufficient to require the Italian companies to defend Reid’s claims in Texas. Alenia Spazio, S.p.A. v. Reid, 130 S.W.3d 201, 222-23 (Tex. App. 2003), cert. denied, 549 U.S. 821, 127 S. Ct. 136, 166 L. Ed. 2d 36 (2006). After exhausting all appeals over a period of five years, Reid sought another bite at the apple; he re-filed his case in Delaware’s Chancery Court. While the dispute had at least a de minimus connection to Texas, the same could not be said with respect to Delaware, where the foreign defendants had absolutely no minimum contacts.
In an attempt to establish a nexus with Delaware, Reid asserted the existence of a Delaware-based conspiracy supposedly “engineered” by FIN. Reid’s verified complaint contained allegations that FIN conspired with defendants Capra and Siniscalchi, each of whom was an officer of USRT, to misappropriate a Russian satellite project from USRT by inducing USRT’s former members to transfer ownership and control of USRT to USRT Holdings, LLC, a Delaware entity formed by Siniscalchi and wholly-owned by Capra. According to Reid, upon obtaining control of USRT in Delaware, Capra caused USRT to refrain from enforcing its rights against FIN, and thereby allowed FIN to misappropriate the satellite project from USRT. Since Holdings was formed in Delaware, and that single act was supposedly undertaken at the instruction or with the knowledge of the foreign defendants in furtherance of the conspiracy, Reid insisted that the Court must exercise personal jurisdiction over the foreign defendants under Delaware’s “conspiracy theory.”
The Conspiracy Theory of Personal Jurisdiction
“Everyone loves a conspiracy.”
–Dan Brown, The Da Vinci Code
Since its inception, the conspiracy theory of jurisdiction has been the subject of significant criticism. See, e.g., Ann Althouse, The Use of Conspiracy Theory to Establish In Personam Jurisdiction: A Due Process Analysis, 52 Fordham L. Rev. 234 (1983). The conspiracy theory has been said to “short-circuit” the Due Process analysis by “avoiding consideration of the individual defendant’s contact with the forum state -- the very essence of jurisdiction.” Id. at 253 (citations omitted). This theory has also been criticized for unfairly subjecting defendants to the burden of litigating the merits of a dispute at the jurisdictional phase. Since issues relevant to conspiracy theory jurisdiction are enmeshed with the merits of a suit, jurisdictional discovery is often as extensive and burdensome as merits discovery.
Despite these concerns, many states recognize conspiracy theory jurisdiction. For instance, to establish conspiracy-based personal jurisdiction in Delaware, the following elements must be present:
(1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.
Istituto Bancario Italiano SpA v. Hunter Engineering Co., 449 A.2d 210, 225 (Del. 1982).
Conspiracy theory jurisdiction is said to be “narrowly and strictly construed” by Delaware courts in order to prevent plaintiffs from “circumvent[ing] the minimum contacts requirement of International Shoe.” Dassen v. Boland, No. S09C-06-042, 2011 Del. Super. LEXIS 137, at *21 (Del. Super. Ct. Mar. 23, 2011) (citations omitted). Yet, to obtain jurisdictional discovery, a plaintiff is only required to assert a “non-frivolous basis for jurisdiction over the defendant.” Reid v. Siniscalchi, No. 2874-VCN, 2011 Del. Ch. LEXIS 15, at *38 (Del. Ch. Jan. 31, 2011). Likewise, to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff, even after obtaining jurisdictional discovery, need not prove the Istituto Bancario elements by a preponderance of the evidence; it must only “assert specific facts” constituting prima facie evidence of each element. Hartsel v. Vanguard Grp., Inc., No. 5394-VCP, 2011 Del. Ch. LEXIS 89, at *38 (Del. Ch. June 15, 2011).
Reid’s Use of Conspiracy Theory Jurisdiction
“Jarndyce and Jarndyce drones on.”
–Charles Dickens, Bleak House
Reid took advantage of Delaware’s lenient evidentiary standard applicable at the motion to dismiss stage and advanced a fabricated claim of conspiracy, ultimately forcing the foreign defendants to engage in extensive jurisdictional and merits discovery in order to disprove Reid’s conspiracy allegations.
The foreign defendants moved to dismiss Reid’s complaint for lack of personal jurisdiction. Prior to entertaining the motion, the court granted Reid leave to conduct discovery, and five years of jurisdictional discovery ensued. Reid, 2011 Del. Ch. LEXIS 15, at *11. The foreign defendants produced over 23,000 pages of documents and responded to over 35 interrogatories. Reid took six out-of-state depositions.
In their renewed motion to dismiss following jurisdictional discovery, the foreign defendants again urged the Court to reject Plaintiff’s conspiracy theory. In response, Reid relied on supposed evidentiary “inferences,” which he insisted could be drawn from the facts as Reid alleged them. The court denied the foreign defendants’ motion, finding that Reid “alleged facts” which, if proven, could support a conspiracy involving the foreign defendants. Reid v. Siniscalchi, No. 2874-VCN, 2014 Del. Ch. LEXIS 237, at *40-41 (Del. Ch. Nov. 20, 2014). Although the Court determined that Reid’s evidence was “not especially strong” and “Finmeccanica’s arguments are logical,” “legitimate,” and may even be “more probable,” it concluded that it could not yet weigh the evidence or resolve purported motives and conspiracy theories at the motion to dismiss stage. Id. at *23, *25, *27, *33, *35 n.81, *41. The Court did not make any conclusive evidentiary findings and contemplated that the issue of personal jurisdiction could be revisited after further development of the record. See id.
The parties thereafter engaged in three years of merits discovery. The bulk of this discovery was undertaken by the foreign defendants, which were compelled to obtain documents and sworn testimony from Reid and five non-parties. Many items obtained in response to merits discovery requests were not previously produced; much of this evidence included admissions implicating Reid and disproving the existence of any conspiracy.
The Delaware Court Rejects Reid’s Use of Conspiracy Theory Jurisdiction
“You yourself are the criminal you seek.”
–Sophocles, Oedipus Rex
Citing overwhelming evidence elicited by the foreign defendants, the court granted their motion for summary judgment. The court concluded that Reid’s conspiracy theory was a myth and found that it was Reid himself who secretly led a conspiracy to usurp control over USRT to the detriment of USRT’s members. Reid, 2018 Del. Ch. LEXIS 37, at *29–34. After months of covert planning, Reid, using Capra/Siniscalchi as conduits, pressured and ultimately convinced USRT’s former members to transfer all of their equity in USRT to Holdings. Promptly after the change of USRT control, Capra/Siniscalchi appointed Reid as USRT’s CFO and issued him equity in Holdings. Reid thereafter devised a scheme to exclude USRT’s former members from receiving any payments pursuant the parties’ acquisition agreement and sought to destroy the evidence. The foreign defendants had no involvement in, and no knowledge of, any of these activities. Reid had imputed his own wrongful actions to the foreign defendants, all for purposes of advancing his claims in Delaware.
More than a decade after the inception of the litigation, the court dismissed the action for lack of personal jurisdiction. In holding that Reid’s conspiracy theory was a “fiction” and a “sham,” the court admonished Reid for intentionally misleading the court:
As we approach the eleven-year anniversary of the initiation of this action, Reid v, Siniscalchi has readily secured its place as a candidate for the Jarndyce award for interminable legal proceedings…after more than eight years of jurisdictional and merits discovery, it is now abundantly clear that the theory of personal jurisdiction asserted in Plaintiff’s various pleadings, and pressed successfully by Plaintiff in response to an early-stage Rule 12(b)(2) motion to dismiss, is, in fact, a myth. That Plaintiff has managed to trade this myth as the truth for more than a decade is troubling.
. . . Apparently perceiving that the parties’ choice of law and choice of forum/arbitration were no longer satisfactory, Plaintiff devised a fantasy Delaware-based conspiracy among the Defendants and pled those facts in his verified complaint as a basis to argue that this Court could exercise personal jurisdiction over the non-resident defendants. With implicit assurances that the evidence would bear out his claim, he then convinced the Court…to follow him down a rabbit hole to a conspiracy “wonderland” where the Court and the parties have resided ever since. It is now time to return to reality.
. . . .
. . . As if to reveal the shocking twist in the final pages of a lengthy thriller novel, the now-developed evidence demonstrates that Plaintiff has managed for eleven years to misdirect the Court by projecting onto FIN his own scheme to exclude the former members of USRT from the satellite project’s benefits.
Reid, 2018 Del. Ch. LEXIS 37, at *1–2, *6–7, *13.
In finding that Reid’s conspiracy theory “has been exposed as a falsehood” and “[d]ebunked” through merits discovery, the court underscored the egregiousness of Reid’s behavior and the overriding Due Process concerns:
With the light of overwhelming evidence bearing down on his jurisdictional position, it is now clear that Reid misled the Court by crying “victim” of a Delaware-based conspiracy, when, in fact, he was an architect of the very wrongdoing that he claimed provided a basis for the Court to exercise long-arm jurisdiction over FIN. This, alone, is grounds to enter judgment in favor of FIN, since the exercise of jurisdiction over FIN under these circumstances would “offend traditional notions of fair play and substantial justice.”
Id. at *7, *18, *33.
Finally, the court took note of Reid’s forum shopping, observing that the plaintiff “chose to ignore the dispute resolution provision” and “clearly came to Delaware in hopes that a Delaware judge might ignore the parties’ [England] choice of law and forum/arbitration, apply more favorable Delaware law and then allow his claims to be adjudicated on the merits against foreign defendants.” Id. at *25 n.125.
Conclusion: Suggested Protective Measures Against Plaintiff Abuse of Conspiracy Theory Jurisdiction
The extraordinary circumstances of Reid highlight a layer of concern on top of the Due Process criticisms attendant to conspiracy theory jurisdiction. This theory is prone to manipulation by plaintiffs willing to play fast and loose with “alleged facts” at the early stages of a proceeding, in the hopes that non-resident defendants, facing years of discovery and motion practice addressing threshold jurisdictional issues, will opt to settle the dispute in lieu of incurring substantial time and expense disproving the conspiracy in an unrelated and unfamiliar forum. A forum selection agreement does not guarantee protection against such folly; Reid employed this very strategy notwithstanding the parties’ London choice of forum provision.
The potential for plaintiff malfeasance, coupled with long-recognized Due Process concerns, underscores the need for courts to strictly construe each element of conspiracy theory jurisdiction at the outset of the proceeding. This analysis should be employed in any review of a plaintiff’s complaint and any motion to dismiss challenging personal jurisdiction. Even at these early stages, plaintiffs should be held to: (1) a heightened pleading standard, akin to the Federal Rules of Civil Procedure requirements for alleging a claim for fraud, such that a plaintiff must assert with particularity specific facts in support of its conspiracy allegations; and (2) a strict evidentiary standard at the motion to dismiss stage, such that plaintiffs must present specific proven facts and strong evidence supporting the exercise of personal jurisdiction over foreign defendants based on actions undertaken by others in the forum state. In all events, after a plaintiff obtains jurisdictional discovery it must be required to prove all elements of its “conspiracy theory” by a preponderance of the evidence.
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