2014 International Law Update, Volume 20, Number 1 (January - February - March)

2014 International Law Update, Volume 20, Number 1 (January - February - March)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com. 

ARBITRATION

In convoluted proceeding involving arbitration and related legal proceedings in Germany, as well as related lawsuit in U.S. District Court, Seventh Circuit grants limited discovery in U.S. proceeding despite claims that the discovered evidence may be used in the German arbitration proceeding; admissibility of such evidence is a matter for the German arbitral tribunal to decide; Court grants motion to seal certain documents in U.S. proceedings because of German arbitration rule requiring confidentiality of such documents

GEA is a German engineering company that in 2004 agreed to sell one of its subsidiaries, Dynamit Nobel Kunststoff (DNK), to Flex-N-Gate, a U.S. auto parts manufacturer. The deal fell through and GEA had to sell DNK at a much lower price to a Swedish company. GEA initiated arbitration in Germany before the Arbitral Tribunal of the German Institution of Arbitration (see www.disarb.de) to resolve the dispute. The procedural history became quite convoluted because of the arbitration and a related court proceeding in Germany, as well as the present U.S. court case.

In 2009, while the arbitration was pending in Germany, GEA filed a related lawsuit in the U.S. District Court in Illinois, naming Flex-N-Gate and its controlling shareholder Shahid Khan as Defendants. While GEA’s complaint did not mention the pending German arbitration, it did allege that the Defendants had fraudulently induced GEA to enter into the contract for the sale of DNK, and that Khan had drained Flex-N-Gate’s assets so that it would be unable to satisfy any arbitration award.

The Defendants’ Answer and Counterclaims claim that Flex-N-Gate was in fact the victim. GEA moved to stay discovery, which the District Court denied. In March 2010, GEA appealed the District Court’s order partially lifting the stay of discovery, only a few days after the German Arbitral Tribunal awarded it about $293 million in damages. The U.S. Court of Appeals for the Seventh Circuit dismissed GEA’s appeal as moot, but Flex-N-Gate got the Higher Regional Court in Frankfurt, Germany, to order a new arbitration. GEA appealed to the German Federal Court of Justice, which declined to hear the appeal.

GEA renewed its motion for a stay of discovery pending the outcome of the second German arbitration proceeding, which the U.S. District Court denied. GEA again appealed. The U.S. Court of Appeals reversed the District Court, holding that all proceedings should be stayed pending resolution of all arbitration proceedings. After the German Federal Court of Justice declined to hear GEA’s appeal, Flex-N-Gate moved to reopen discovery in this case. At the hearing before the District Court, GEA explained that discovery should be stayed because the sole purpose of the U.S. proceeding was to ensure that GEA could collect any unpaid arbitration award from Khan. Consequently, discovery was premature until there is a final arbitration award. The District Court granted Khan’s motion to conduct discovery aimed at preserving evidence that may be important to his defense. GEA again appeals.

The U.S. Court of Appeals for the Seventh Circuit affirms the District Court in part. The key issue here is whether the District Court had authority to allow any discovery to proceed when the resulting evidence may be used in the foreign arbitration proceeding.

“Coming at last to the merits, we think that what the district judge did on remand in allowing Khan to conduct discovery was not only reasonable but eminently sensible. GEA should not have brought this suit. To the extent that it duplicates the arbitration by charging Khan, Flex-N-Gate’s CEO, with responsibility for the breakdown of the contract, thus offering GEA a second bite at the same apple, it appears to violate the arbitration clause of GEA’s contract with Flex-N-Gate. And to the extent that GEA seeks by this suit to protect itself against ending up with a worthless award if Khan has spirited away Flex-N-Gate’s assets, the suit may well be premature. If GEA loses the arbitration, Flex-N-Gate’s ability to satisfy an arbitration award is irrelevant and the case moot. And likewise if GEA obtains an award and Flex-N-Gate pays it in full. If GEA obtains an award and Flex-N-Gate doesn’t pay it, GEA can sue Khan for fraudulent conveyance or as Flex-N-Gate’s alter ego. There cannot be any serious doubt of Khan’s ability to pay such an award.”

“But there’s a rub: GEA argues that if it waits to sue Khan for fraudulent conveyance (now often called fraudulent transfer) until a ‘final final’ arbitration award is issued (which, in Germany at least, can take a long time, as we now know), the statute of limitations governing such a suit may have expired. The statute of limitations in both the Uniform Fraudulent Transfer Act and Illinois’s version of the Act is only four years, see 740 ILCS 160/10, and begins to run on the date of the transfer (or within a year after the plaintiff discovered the transfer if he had not and could not through reasonable diligence have discovered it at least a year before the four-year period expired) if the transfer was made with fraudulent intent … So the statute of limitations might (or might not — see below) have run had GEA waited any longer to sue. GEA contends that Khan began transferring Flex-N-Gate assets shortly after the aborted contract of sale was signed, which was in 2004. It would have been perilous for GEA to have waited beyond 2009 to sue Khan for engineering a fraudulent conveyance.” […]

“Being allowed to sue as a potential judgment creditor in order to prevent or rescind a fraudulent transfer is different from being forced to sue that early on pain of being held to be time-barred if one waits to sue until one has a judgment. Although an injury alleged when one is still only a potential judgment creditor can only be a probability of injury, because there may be no judgment (no award, if it is an arbitral rather than adjudicative proceeding), ‘a probabilistic harm, if nontrivial, can support standing.’ Walters v. Edgar, 163 F.3d 430, 434 (7th Cir. 1998), quoted in Jackson v. Pollion, 733 F.3d 786, 790 (7th Cir.2013). If a postjudgment suit to recover assets that had earlier been fraudulently conveyed might prove futile — if the assets might by then have been concealed, or been dissipated, or have otherwise been placed beyond the reach of the judgment creditor — the potential judgment creditor faces a probabilistic harm that may entitle him to injunctive relief; ‘the conveyance of his property by a tort-defendant, made with intent to defraud the tort-plaintiff, is subject to invalidation as a fraudulent conveyance, even though the liability to the prospective tort-creditor has not matured into a judgment at the time of the transfer.’ United States v. Chapman, 756 F.2d 1237, 1241 (5th Cir.1985) (emphasis added).”

“It doesn’t follow, however, that the statute of limitations begins to run as soon as the plaintiff discovers or should through the exercise of reasonable diligence have discovered the conveyance. There is not yet a national consensus on whether it starts to run that soon, or a definitive ruling in Illinois law. (Anyway forfeiture of a ground of appeal is not redeemed by a post-argument letter to the court.) But Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 416-17 (3d Cir. 2003), like the Cortez decision that we cited earlier, sensibly *418 holds that the statute of limitations does not begin to run as long as the creditor’s claim has not yet matured, is still merely potential. And if this is wrong and it does start to run then, we can’t understand why having filed such a claim GEA has not sought injunctive relief — why instead it has sought to stay all proceedings in its suit, which would include a request by it for preliminary relief pending the outcome of the arbitration. If Khan is seeking to place Flex-N-Gate’s assets beyond GEA’s reach, GEA by failing to seek injunctive relief and instead seeking to freeze its suit — its own suit — is assisting Khan to do so. Put differently, the only reason GEA could have for filing its suit when it did was to enjoin Khan from taking steps that might make it impossible for GEA to collect an arbitration award from Flex-N-Gate.”

“Not only has GEA sought no injunctive relief; it waited two years after discovering the alleged fraudulent conveyance to file suit at all. Were it to wake up at this late date (four years after suing) and seek injunctive relief, the doctrine of laches would be an insurmountable barrier. …”

“The statute of limitations could in any event have had no effect on the alter ego claim that appears in GEA’s complaint, or its claim that Khan fraudulently induced Flex-N-Gate to breach its contract with GEA. For neither claim arises out of the alleged shuffling of Flex-N-Gate’s assets to other provinces of Khan’s commercial kingdom. If it’s true that Flex-N-Gate is, in contemplation of law, Khan, then if GEA wins and Flex-N-Gate doesn’t pay the award he will be liable. The statute of limitations has a possible effect only on GEA’s alternative charge against him of fraudulent conveyancing of Flex-N-Gate’s assets.”

“All this turns out to be rather a side issue, however; for the ground for reversal that GEA urges on us, in its briefs at least, is unrelated to fears, quixotic or otherwise, of the statute of limitations. The ground is that Khan will convey the fruits of his discovery to Flex-N-Gate for use against GEA in the do-over arbitration proceeding. But that is not a proper concern of the district court, or of this court. It is the concern of the foreign arbitrators and the foreign courts. Should Flex-N-Gate try to inject evidence into the arbitration from discovery conducted by Khan in the district court suit, GEA can object and the arbitrators will decide. What business is it of an American court? It was GEA that invoked German arbitration. By doing so, it subjected its claim of breach of contract to the German arbitrators and judiciary. If the arbitrators allow the fruits of Khan’s discovery into the arbitration, and in doing that they are violating German law, there is always the Higher Regional Court in Frankfurt, and, if necessary, the Federal Court of Justice, for GEA to appeal to.” [740 F.3d at 416-418]

Finally, the Court considers the Parties’ motion to seal certain documents.

“The parties have agreed in asking us to seal certain documents that have been introduced in the arbitration proceeding. Their agreement is not binding on us. Secrecy in judicial proceedings is disfavored, as it makes it difficult for the public (including the bar) to understand why a case was brought (and fought) and what exactly was at stake in it and was the outcome proper. The interest in allowing public access to the judicial record is thus a social interest rather than a concern solely of the litigants. That is why their agreement to seal does not bind us, and, more broadly, why ‘documents that affect the disposition *420 of federal litigation are presumptively open to public view.’ In re Specht, 622 F.3d 697, 701 (7th Cir.2010) ….”

“But the presumption can be overridden by competing interests, as in cases involving trade secrets — arguably in some cases involving settlement agreements — uncontroversially in most cases in which the plaintiff is a child victim of sexual abuse. It’s overridden in this case as well, for the simple reason (related to our earlier discussion of the difference it may make that this case involves foreign arbitration) that parties to a German arbitration may not disclose evidence presented in the arbitration. DIS-Arbitration Rules, supra, § 43.1. That may be a good rule or a bad rule, but it is a rule that United States courts should respect as a matter of comity … — the respect that independent sovereigns owe one another — and also because ‘we [Americans] are not so provincial as to say that every solution of a problem is wrong because we deal with it otherwise at home.’ Loucks v. Standard Oil Co., 224 N.Y. 99, 120 N.E. 198, 201 (1918) (Cardozo, J.). It was lawful for the parties to agree to arbitrate their dispute in Germany, and we have no authority to rewrite the rules of German arbitration.” [740 F.3d 419-420]

The Court grants the motion to seal, and affirms the district court’s order partially lifting the stay of discovery.

Citation: GEA Group AG v. Flex-N-Gate Corporation, 740 F.3d 411 (7th Cir. 2014).

COPYRIGHT

European Court of Justice holds that internet service provider (ISP) can be ordered to prevent access to copyright-infringing website; an ISP is an intermediary within the meaning of the EU Directive on copyright and thus injunctions can issue against it

The European Court of Justice (ECJ) has held that an internet service provider (ISP) may be ordered to block access to a website with copyright-infringing material.

Constantin Film Verleih (“Constantin Film”) is a German company that holds rights to various movies, including “Vicky the Viking” and “Pandorum,” at issue in this case. Wega Filmproduktionsgesellschaft (“Wega”) is an Austrian company that holds rights to the movie “The White Ribbon,” also at issue in this case. Both companies became aware that their movies could be viewed (and possibly downloaded) from the website www.kino.to (which was later shut down after a multinational police raid in June 2011). In 2011, upon petition of the two companies, the Austrian Commercial Court in Vienna (Handelsgericht Wien) issued an injunction against the internet service provider (ISP) UPC Telekabel Wien (“UPC Telekabel”), ordering it to block access to www.kino.to. The Court specified that UPC Telekabel had to block access to the website and the current Internet Protocol (IP) address of www.kino.to. UPC Telekabel opposed the injunction, arguing that it did not have any business relationship with www.kino.to, and that there was no proof that its customers acted unlawfully.

On appeal, the Higher Regional Court Vienna (Oberlandesgericht Wien) issued an Order on October 27, 2011, partially reversing the Order of the Commercial Court. UPC Telekabel is in fact an intermediary whose services were used to infringe copyrights, so that Constantin Film and Wega were entitled to an injunction. The lower court, however, wrongly specified the specific measures that UPC Telekabel had to take to prevent access to the www.kino.to website. The ISP is free to decide how to block such access.

UPC Telekabel appealed to the Supreme Court of Austria (Oberster Gerichtshof), which on May 11, 2012 requested the ECJ to interpret the European Union (EU) Copyright Directive (Directive 2001/29/EC … on the harmonization of certain aspects of copyright and related rights in the information society, 2001 O.J. L 167, page 10). The EU Directive does permit injunctions against intermediaries whose services are used by a third party for infringements (Article 8, paragraph 3, of the EU Directive). UPC Telekabel denies that it is an intermediary within the meaning of the EU Directive.

The specific questions of the Austrian Supreme Court to the ECJ are:

1. Is Article 8(3) of Directive 2001/29 … to be interpreted as meaning that a person who makes protected subject-matter available on the internet without the rightholder’s consent [for the purpose of Article 3(2) of Directive 2001/29] is using the services of the [internet] access providers of persons seeking access to that protected subject-matter?

If the answer to the first question is in the negative:

2. Are reproduction for private use [within the meaning of Article 5(2)(b) of Directive 2001/29] and transient and incidental reproduction [within the meaning of Article 5(1) of Directive 2001/29] permissible only if the original of the reproduction was lawfully reproduced, distributed or made available to the public?

If the answer to the first question or the second question is in the affirmative and an injunction is therefore to be issued against the user’s [internet] access provider in accordance with Article 8(3) of [Directive 2001/29]:

3. Is it compatible with Union law, in particular with the necessary balance between the parties’ fundamental rights, to prohibit in general terms an [internet] access provider from allowing its customers access to a certain website (thus without ordering specific measures) as long as the material available on that website is provided exclusively or predominantly without the rightholder’s consent, if the access provider can avoid incurring coercive penalties for breach of the prohibition by showing that it had nevertheless taken all reasonable measures?

If the answer to the third question is in the negative:

4. Is it compatible with Union law, in particular with the necessary balance between the parties’ fundamental rights, to require an [internet] access provider to take specific measures to make it more difficult for its customers to access a website containing material that is made available unlawfully if those measures require not inconsiderable costs and can easily be circumvented without any special technical knowledge?

Responding to the Austrian Supreme Court, the ECJ explains that a person who makes protected subject matter available to the public on a website without the agreement of the rightholder is using the services of the business which provides internet access to persons accessing that subject-matter. Therefore, an ISP, such as UPC Telekabel, which allows its customers to access protected subject-matter made available to the public through the internet by a third party, is an intermediary whose services are used to infringe a copyright.

The EU Directive does not require a specific relationship between the infringer and the intermediary against whom the injunction is issued. Neither is it necessary to prove that the ISP customers actually access the protected subject-matter made accessible on a third party’s website. The purpose of the EU Directive is not only to end copyright violations, but also to prevent them.

In particular, the ECJ finds:

“23 By its first question, the referring court asks, essentially, whether Article 8(3) of Directive 2001/29 must be interpreted as meaning that a person who makes protected subject-matter available to the public on a website without the agreement of the rightholder, for the purpose of Article 3(2) of that directive, is using the services of the internet service provider of the persons accessing that subject-matter, which is to be regarded as an intermediary within the meaning of Article 8(3) of Directive 2001/29. […]

25 Given that, according to that provision, rightholders have the exclusive right to authorise or prohibit any act of making available to the public, it must be stated that an act of making protected subject-matter available to the public on a website without the rightholders’ consent infringes copyright and related rights.

26 In order to remedy such a situation of infringement of the rights at issue, Article 8(3) of Directive 2001/29 provides for the possibility for rightholders to apply for an injunction against intermediaries whose services are used by a third party to infringe one of their rights.

27 As Recital 59 in the preamble to Directive 2001/29 states, since the services of intermediaries are increasingly used for infringing copyright or related rights, such intermediaries are, in many cases, best placed to bring such infringing activities to an end.

28 In the present case, the Handelsgericht Wien and then the Oberlandesgericht Wien ordered UPC Telekabel, the internet service provider addressed by the injunction at issue in the main proceedings, to bring the infringement of the rights of Constantin Film and of Wega to an end.

29 However, UPC Telekabel disputes that it may be considered, for the purposes of Article 8(3) of Directive 2001/29, to be an intermediary whose services are used to infringe a copyright or related right.

30 In this respect, it follows from Recital 59 in the preamble to Directive 2001/29 that the term ‘intermediary’ used in Article 8(3) of that directive covers any person who carries a third party’s infringement of a protected work or other subject-matter in a network. […]

32 Accordingly, given that the internet service provider is an inevitable actor in any transmission of an infringement over the internet between one of its customers and a third party, since, in granting access to the network, it makes that transmission possible (see, to that effect, the order in Case C557/07 LSG-Gesellschaft zur Wahrnehmung von Leistungsschutzrechten [2009] ECR I1227, paragraph 44), it must be held that an internet service provider, such as that at issue in the main proceedings, which allows its customers to access protected subject-matter made available to the public on the internet by a third party is an intermediary whose services are used to infringe a copyright or related right within the meaning of Article 8(3) of Directive 2001/29.

33 Such a conclusion is borne out by the objective pursued by Directive 2001/29. To exclude internet service providers from the scope of Article 8(3) of Directive 2001/29 would substantially diminish the protection of rightholders sought by that directive (see, to that effect, order in LSG-Gesellschaft zur Wahrnehmung von Leistungsschutzrechten, paragraph 45). […]

35 Neither the wording of Article 8(3) nor any other provision of Directive 2001/29 indicates that a specific relationship between the person infringing copyright or a related right and the intermediary is required. Furthermore, that requirement cannot be inferred from the objectives pursued by that directive, given that to admit such a requirement would reduce the legal protection afforded to the rightholders at issue, whereas the objective of that directive, as is apparent inter alia from Recital 9 in its preamble, is precisely to guarantee them a high level of protection.

36 Nor is the conclusion reached by the Court in paragraph 30 of this judgment invalidated by the assertion that, in order to obtain the issue of an injunction against an internet service provider, the holders of a copyright or of a related right must show that some of the customers of that provider actually access, on the website at issue, the protected subject-matter made available to the public without the agreement of the rightholders.

37 Directive 2001/29 requires that the measures which the Member States must take in order to conform to that directive are aimed not only at bringing to an end infringements of copyright and of related rights, but also at preventing them (see, to that effect, Case C70/10 Scarlet Extended [2011] ECR I11959, paragraph 31, and Case C360/10 SABAM [2012] ECR, paragraph 29). […]

40 In view of the above, the answer to the first question is that Article 8(3) of Directive 2001/29 must be interpreted as meaning that a person who makes protected subject-matter available to the public on a website without the agreement of the rightholder, for the purpose of Article 3(2) of that directive, is using the services of the internet service provider of the persons accessing that subject-matter, which must be regarded as an intermediary within the meaning of Article 8(3) of Directive 2001/29. […]

41 In the light of the reply to the first question, it is not necessary to reply to the second question.”

As for the Austrian Supreme Court’s question whether a national court may enjoin an ISP from allowing access to a website with infringing content, the ECJ notes that rights may conflict. Intellectual property rights may conflict with the freedom of information of internet users. Where several such fundamental rights are implicated, Member States must strike a fair balance among those fundamental rights.

An injunction to prevent access to infringing web content does not infringe upon an ISP’s freedom to conduct business. The injunction leaves it to the recipient to determine the specific measures to be taken in order to achieve the relief sought. The ISP can decide which resources and technical abilities to apply, and avoid liability by proving that it has taken all reasonable measures to prevent access to the infringing website content.

In particular, the ECJ explains:

“42 By its third question, the referring court asks, essentially, whether the fundamental rights recognised by EU law must be interpreted as precluding a court injunction prohibiting an internet service provider from allowing its customers access to a website placing protected subject-matter online without the agreement of the rightholders when that injunction does not specify the measures which that access provider must take and when that access provider can avoid incurring coercive penalties for breach of that injunction by showing that it has taken all reasonable measures.

43 In this respect, as is apparent from Recital 59 in the preamble to Directive 2001/29, the rules for the injunctions which the Member States must lay down pursuant to Article 8(3) of the directive, such as those relating to the conditions to be met and the procedure to be followed, are a matter for national law.

44 That said, those national rules, and likewise their application by the national courts, must observe the limitations arising from Directive 2001/29 and from the sources of law to which Recital 3 in its preamble refers (see, to that effect, Scarlet Extended, paragraph 33 and the case-law cited there).

45 In order to assess whether an injunction such as that at issue in the main proceedings, taken on the basis of Article 8(3) of Directive 2001/29, is consistent with EU law, it is therefore necessary to take account in particular of the requirements that stem from the protection of the applicable fundamental rights, and to do so in accordance with Article 51 of the Charter of Fundamental Rights of the European Union (‘the Charter’) (see, to that effect, Scarlet Extended, paragraph 41).

46 The Court has already ruled that, where several fundamental rights are at issue, the Member States must, when transposing a directive, ensure that they rely on an interpretation of the directive which allows a fair balance to be struck between the applicable fundamental rights protected by the European Union legal order. Then, when implementing the measures transposing that directive, the authorities and courts of the Member States must not only interpret their national law in a manner consistent with that directive but also ensure that they do not rely on an interpretation of it which would be in conflict with those fundamental rights or with the other general principles of EU law, such as the principle of proportionality (see, to that effect, Case C275/06 Promusicae [2008] ECR I271, paragraph 68).

47 In the present case, it must be observed that an injunction such as that at issue in the main proceedings, taken on the basis of Article 8(3) of Directive 2001/29, makes it necessary to strike a balance, primarily, between (i) copyrights and related rights, which are intellectual property and are therefore protected under Article 17(2) of the Charter, (ii) the freedom to conduct a business, which economic agents such as internet service providers enjoy under Article 16 of the Charter, and (iii) the freedom of information of internet users, whose protection is ensured by Article 11 of the Charter.

48 As regards the freedom to conduct a business, the adoption of an injunction such as that at issue in the main proceedings restricts that freedom.

49 The freedom to conduct a business includes, inter alia, the right for any business to be able to freely use, within the limits of its liability for its own acts, the economic, technical and financial resources available to it.

50 An injunction such as that at issue in the main proceedings constrains its addressee in a manner which restricts the free use of the resources at his disposal because it obliges him to take measures which may represent a significant cost for him, have a considerable impact on the organisation of his activities or require difficult and complex technical solutions.

51 However, such an injunction does not seem to infringe the very substance of the freedom of an internet service provider such as that at issue in the main proceedings to conduct a business.

52 First, an injunction such as that at issue in the main proceedings leaves its addressee to determine the specific measures to be taken in order to achieve the result sought, with the result that he can choose to put in place measures which are best adapted to the resources and abilities available to him and which are compatible with the other obligations and challenges which he will encounter in the exercise of his activity.

53 Secondly, such an injunction allows its addressee to avoid liability by proving that he has taken all reasonable measures. That possibility of exoneration clearly has the effect that the addressee of the injunction will not be required to make unbearable sacrifices, which seems justified in particular in the light of the fact that he is not the author of the infringement of the fundamental right of intellectual property which has led to the adoption of the injunction.

54 In that regard, in accordance with the principle of legal certainty, it must be possible for the addressee of an injunction such as that at issue in the main proceedings to maintain before the court, once the implementing measures which he has taken are known and before any decision imposing a penalty on him is adopted, that the measures taken were indeed those which could be expected of him in order to prevent the proscribed result.

55 None the less, when the addressee of an injunction such as that at issue in the main proceedings chooses the measures to be adopted in order to comply with that injunction, he must ensure compliance with the fundamental right of internet users to freedom of information.

56 In this respect, the measures adopted by the internet service provider must be strictly targeted, in the sense that they must serve to bring an end to a third party’s infringement of copyright or of a related right but without thereby affecting internet users who are using the provider’s services in order to lawfully access information. Failing that, the provider’s interference in the freedom of information of those users would be unjustified in the light of the objective pursued.

57 It must be possible for national courts to check that that is the case. In the case of an injunction such as that at issue in the main proceedings, the Court notes that, if the internet service provider adopts measures which enable it to achieve the required prohibition, the national courts will not be able to carry out such a review at the stage of the enforcement proceedings if there is no challenge in that regard. Accordingly, in order to prevent the fundamental rights recognised by EU law from precluding the adoption of an injunction such as that at issue in the main proceedings, the national procedural rules must provide a possibility for internet users to assert their rights before the court once the implementing measures taken by the internet service provider are known.

58 As regards intellectual property, it should be pointed out at the outset that it is possible that the enforcement of an injunction such as that in the main proceedings will not lead to a complete cessation of the infringements of the intellectual property right of the persons concerned.

59 First, as has been stated, the addressee of such an injunction has the possibility of avoiding liability, and thus of not adopting some measures that may be achievable, if those measures are not capable of being considered reasonable.

60 Secondly, it is possible that a means of putting a complete end to the infringements of the intellectual property right does not exist or is not in practice achievable, as a result of which some measures taken might be capable of being circumvented in one way or another.

61 The Court notes that there is nothing whatsoever in the wording of Article 17(2) of the Charter to suggest that the right to intellectual property is inviolable and must for that reason be absolutely protected (see, to that effect, Scarlet Extended, paragraph 43).

62 None the less, the measures which are taken by the addressee of an injunction, such as that at issue in the main proceedings, when implementing that injunction must be sufficiently effective to ensure genuine protection of the fundamental right at issue, that is to say that they must have the effect of preventing unauthorised access to the protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter made available to them in breach of that fundamental right.

63 Consequently, even though the measures taken when implementing an injunction such as that at issue in the main proceedings are not capable of leading, in some circumstances, to a complete cessation of the infringements of the intellectual property right, they cannot however be considered to be incompatible with the requirement that a fair balance be found, in accordance with Article 52(1), in fine, of the Charter, between all applicable fundamental rights, provided that (i) they do not unnecessarily deprive internet users of the possibility of lawfully accessing the information available and (ii) that they have the effect of preventing unauthorised access to protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter that has been made available to them in breach of the intellectual property right.

64 In the light of the foregoing considerations, the answer to the third question is that the fundamental rights recognised by EU law must be interpreted as not precluding a court injunction prohibiting an internet service provider from allowing its customers access to a website placing protected subject-matter online without the agreement of the rightholders when that injunction does not specify the measures which that access provider must take and when that access provider can avoid incurring coercive penalties for breach of that injunction by showing that it has taken all reasonable measures, provided that (i) the measures taken do not unnecessarily deprive internet users of the possibility of lawfully accessing the information available and (ii) that those measures have the effect of preventing unauthorised access to the protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter that has been made available to them in breach of the intellectual property right, that being a matter for the national authorities and courts to establish. […]

65 In the light of the reply to the third question, it is not necessary to reply to the fourth question.”

In sum, the ECJ finds that fundamental rights do no preclude such an injunction as long as: (1) the measures taken by the ISP do not unnecessarily deprive users the opportunity to lawfully access information available on the internet (freedom of information of internet users), and (2) the measures have the effect of preventing unauthorized access to the protected subject-matter, or at least discourage users from accessing infringing material (intellectual property rights of the rightholders).

In the words of the ECJ, the conclusion is:

“1. Article 8(3) of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society must be interpreted as meaning that a person who makes protected subject-matter available to the public on a website without the agreement of the rightholder, for the purpose of Article 3(2) of that directive, is using the services of the internet service provider of the persons accessing that subject-matter, which must be regarded as an intermediary within the meaning of Article 8(3) of Directive 2001/29.

2. The fundamental rights recognised by EU law must be interpreted as not precluding a court injunction prohibiting an internet service provider from allowing its customers access to a website placing protected subject-matter online without the agreement of the rightholders when that injunction does not specify the measures which that access provider must take and when that access provider can avoid incurring coercive penalties for breach of that injunction by showing that it has taken all reasonable measures, provided that (i) the measures taken do not unnecessarily deprive internet users of the possibility of lawfully accessing the information available and (ii) that those measures have the effect of preventing unauthorised access to the protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter that has been made available to them in breach of the intellectual property right, that being a matter for the national authorities and courts to establish.”

Citation: European Court of Justice (ECJ), Judgment in Case C-314-12, UPC Telekabel Wien GmbH v Constantin Film Verleih GmbH and Wega Filmproduktionsgesellschaft mbH, ECJ Press Release No 38/14, available on the ECJ’s website http://curia.europa.eu.

FORUM NON CONVENIENS

Fifth Circuit applies forum non conveniens to dispute over software pending in both in the U.S. and Brazil

InduSoft, Inc. (“Indusoft”) is a software company based in Texas. Together with its affiliated companies (jointly “Plaintiffs”), it sued Marcos Taccolini for infringing upon its core software product “Web Studio.”

The present case has its root in Plaintiffs hiring Unisoft Systems, Ltda. (“Unisoft”), a Brazilian company owned by Taccolini, to write software in 1997. Indusoft subsequently purchased Unisoft, and Taccolini became InduSoft’s Chief Technology Officer and 50 percent owner. After a dispute among the owners, Taccolini surrendered his rights to InduSoft’s proprietary information, including Web Studio’s source codes, in 2009.

Taccolini went on to form Tatsoft, LLC, with its principal place of business in Texas. A related company, Tatsoft Informatica, Ltda. (“Informatica”), began operating in Brazil. Informatica is majority owned by Roberto Vigiani, a former Indusoft software designer. Taccolini also hired Roberto Vigiani’s brother, Eric Vigiani, also a long-time InduSoft software engineer.

In 2010, Tatsoft launched its “Factory Studio” software, which resembles Web Studio.

InduSoft claims that it received a tip from an Informatica employee that Eric Vigiani had stolen the Web Studio’s source codes at the direction of Taccolini and Roberto Vigiani. Brazilian law enforcement searched the home of one of Informatica’s employees and found some evidence of InduSoft’s allegations. InduSoft then filed a civil action in Brazil against Taccolini and the Vigiani brothers. This case is ongoing.

InduSoft proceeded to file the present case in the U.S. District Court for the Western District of Texas against Taccolini, Eric Vigiani, Tatsoft and Informatica. Taccolini and Tatsoft answered the first amended complaint and filed counterclaims, while Eric Vigiani and Informatica moved to dismiss based on forum non conveniens. The District Court granted the motion to dismiss, and sua sponte dismissed the counterclaims of Taccolini and Tatsoft.

InduSoft now appeals the dismissal on forum non conveniens, and Taccolini and Tatsoft cross-appeal the dismissal of their counterclaims.

The U.S. Court of Appeals for the Fifth Circuit affirms the dismissal of the Plaintiffs’ claims, but remands for further proceedings on the counterclaims.

The Court first outlines the applicable law of forum non conveniens.

“To dismiss a case on forum non conveniens grounds, a court must first find that an adequate and available alternative forum exists for the parties to litigate their claims. Saqui v. Pride Cent. America, LLC, 595 F.3d 206, 211 (5th Cir. 2010). If such a forum exists, the court weighs a number of public and private interest factors to determine whether the case should be dismissed in favor of that forum. Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947). A court, however, does not engage in a straight balancing test; depriving the plaintiff of his chosen forum is an exceptional outcome, only appropriate when the balance is ‘strongly in favor of the defendant.’ Id. The Supreme Court has made clear that a plaintiff ‘should not be deprived of the presumed advantages of his home jurisdiction except upon a clear showing of facts which . . . establish such oppressiveness and vexation to a defendant as to be out of all proportion to plaintiff’s convenience. . . .’ Koster v. (Am.) Lumbermens Mut. Cas. Co., 330 U.S. 518, 524 (1947).” [Slip op. 2]

The first question is whether Brazil is an available and adequate forum. The District Court found that it was.

“Alternative-forum analysis requires a court to determine whether ‘all parties can come within the jurisdiction’ of the alternative forum and whether parties will be ‘deprived of all remedies or treated unfairly, even though they might not enjoy the same benefits as they might receive in an American court.’ Saqui, 595 F.3d at 211-12 (quotation marks and citation omitted). The district court assumed that all parties could come within the jurisdiction of Brazil and relied on the presumption that the substantive law of the foreign forum was adequate.”

“InduSoft contends that the district court erred by presuming that Brazil was an adequate forum. It argues the district court’s application of a presumption violated this principle: ‘A defendant of course bears the burden of invoking the doctrine and moving to dismiss in favor of a foreign forum. This burden of persuasion runs to all the elements of the forum non conveniens analysis.’ In re Air Crash Disaster Near New Orleans, La. on July 9, 1982, 821 F.2d 1147, 1164 (5th Cir.1987) (en banc) (citations omitted), vacated on other grounds sub nom. Pan Am. World Airways, Inc. v. Lopez, 490 U.S. 1032 (1989). Though defendants must carry the burden of proving an adequate forum, they may rely on a presumption that the foreign forum is adequate. See DTEX, LLC v. BBVA Bancomer, S.A., 508 F.3d 785, 796 (5th Cir. 2007); … A plaintiff may overcome that presumption by making a contrary showing. DTEX, 508 F.3d at 796. InduSoft did not show that the law of Brazil was inadequate. Moreover, the fact that the parties, with the exception of Tatsoft, currently are engaged in litigation in Brazil indicates that Brazil is an available forum. The district court did not err in concluding that Brazil was a suitable alternative forum.” [Slip op. 2-3]

The next question is whether the District Court properly weighed the private interest factors.

“Private interest factors include: ‘(1) the ease of access to evidence; (2) the availability of compulsory process for the attendance of unwilling witnesses; (3) the cost of obtaining attendance of willing witnesses; (4) the possibility of a view of the premises, if appropriate; and (5) any other practical factors that make trial expeditious and inexpensive.’ …. Focusing primarily on the ease of access to the evidence and the availability of compulsory process, the district court found that ‘viewed as a whole,’ the private-interest factors favored having the suit in Brazil.”

“As for accessibility of the evidence, some evidence related to this dispute is in the United States, while other evidence is in Brazil. The district court found that the practical difficulties associated with ensuring the evidence in Brazil was available in the United States weighed in favor of the foreign forum. InduSoft disputes this finding, claiming that the ‘defendant-appellants still have possession of the original hard drives and can produce duplicate copies if anyone needs access to the raw data retrieved.’ The defendants deny this assertion, claiming that Brazilian authorities currently possess the servers containing the relevant data and that they will be unable to recover them ‘in all likelihood.’ Given the deferential standard of review on this issue of fact, we cannot conclude that the district court abused its discretion in weighing the ease of access factor slightly in favor of the foreign forum.”

“The district court also weighed the availability of compulsory process in favor of Brazil. That was error. Vasconcelos, the one witness mentioned by the district court as potentially subject to compulsory process, cannot be a reason to favor the foreign forum because she, as InduSoft’s primary informant, is a willing witness. …”

“Regardless of this narrow disagreement on compulsory process, the more important consideration is that the district court found that the private interest factors weighed only slightly in favor of the foreign forum. This court typically affirms dismissals only when the balance strongly favors the dismissal. See DTEX, 508 F.3d at 794-95 … The insubstantial weight of these factors, even with the factor of the availability of compulsory process counted in favor of the foreign forum, alone does not justify a finding that the plaintiffs’ claims should be dismissed on forum non conveniens grounds.” [Slip Op. 3]

The Court notes that the public interest factors did not play a significant role in the District Court. The Court turns to the heightened burdens applicable to a forum non conveniens dismissal.

“[T]he district court focused on InduSoft’s decision to initiate litigation in Brazil. It reasoned that ‘[t]o allow InduSoft to litigate related issues in two different forums against the same Defendants gives rise to a host of practical inconveniences to the parties and their witnesses and would require all parties to incur inordinate legal expenses.’ It further expressed its concern over ‘the substantial risk of inconsistent and conflicting outcomes in each forum.’ Because of these two considerations, it concluded ‘that InduSoft’s choice of this forum is not entitled to substantial deference.’”

“Whether the district court’s decision not to give substantial deference to InduSoft’s choosing Texas for this suit was warranted by InduSoft’s voluntary litigation in Brazil is a key issue in this appeal. Convenience, as Piper indicates, is the linchpin in the analysis. Filing suit first in Brazil does indicate convenience in Brazil at least on the claims brought there. On the other hand, practical difficulties created by parallel or duplicative litigation, and the costs and expenses associated with having to litigate in two forums, comfortably fit within the traditional private interest inquiry. We agree with the Fourth Circuit that ‘the mere presence of parallel litigation bears only marginally on the touchstone of the forum non conveniens analysis; namely, convenience.’ SAS Inst., Inc. v. World Programming Ltd., 468 F. App’x 264, 266 (4th Cir. 2012) …” […]

“… InduSoft’s primary business operations are in Texas, and the software at issue in this litigation was developed there. Both Taccolini and Eric Vigiani lived in Texas for some time, worked for InduSoft at its Texas headquarters, and signed contracts with the domestic company. In addition, the business relationship between Taccolini, the purported instigator of the alleged theft, and InduSoft has a long and turbulent history, which has been the subject of litigation in Ohio state court. There is a settlement agreement related to that litigation which both InduSoft and the counterclaimants wish to have interpreted and enforced. Moreover, the complaint includes allegations that certain wrongs, including the actual theft of the source code, occurred in Texas. Consequently, a substantial connection has been alleged between InduSoft and its chosen forum in Texas.”

“Nevertheless, there does appear to be some overlap between the claims InduSoft has asserted in Brazil and the claims asserted here. The parties dispute the exact nature of the litigation in Brazil, and it is difficult to determine from the record the extent of the overlap between the two cases. But we do know that InduSoft is pursuing its copyright infringement claims in Brazil and also seeking damages for that action, which are necessarily related to the defendants’ alleged theft and use of the software. Further, those claims appear to be closely tied to the settlement agreement, which provides that both Sao Paulo and Austin are appropriate jurisdictions to resolve any disputes arising out of the agreement.”

“The district court, with a few exceptions we noted, made proper determinations of the public and private interest factors. The district court properly gave less weight to the plaintiff’s choice of forum inasmuch as a foreign forum was chosen first, indicating convenience was not the central motive. Our review reveals there are considerations under forum non conveniens analysis that could have justified allowing this litigation to proceed in Texas. Still, we are mindful of the Supreme Court’s directive:”

“‘The forum non conveniens determination is committed to the sound discretion of the trial court. It may be reversed only when there has been a clear abuse of discretion; where the court has considered all relevant public and private interest factors, and where its balancing of these factors is reasonable, its decision deserves substantial deference.’”

“Piper, 454 U.S. at 257. We conclude that there was no clear abuse of discretion when the district court dismissed Indusoft’s claims.”

“As for the counterclaims, Taccolini and Tatsoft are correct that the district court should have given them notice that their counterclaims were in jeopardy of dismissal. We conclude that the court’s sua sponte dismissal of their counterclaims was error. …” […]

“Because the district court did not allow Taccolini and Tatsoft to address the possible dismissal of their counterclaims, we reverse and remand for further proceedings consistent with this opinion.” [Slip Op. 4-5]

Citation: Indusoft, Inc. v. Taccolini, No. 13-50042 (5th Cir. March 20, 2014).

JURISDICTION

In dispute where foreign plaintiffs (from Argentina) filed lawsuit against foreign defendant (German company Daimler AG) and all relevant events occurred outside the U.S. (namely in Argentina), U.S. Supreme Court holds that the foreign defendant was not “at home” in California and hence not subject to suit there on claims by foreign plaintiffs having nothing to do with California

The following U.S. Supreme Court opinion concerns parties and events that are unrelated to the U.S., except that the Defendant maintains an affiliated company in California.

In 2004, 22 residents of Argentina (“Plaintiffs”) filed a lawsuit in the U.S. District Court for the Northern District of California against Daimler AG (the company reorganized and is now called Daimler AG, hereinafter referred to as “Daimler” or “Defendant”). Daimler AG is headquartered in Stuttgart, Germany, and manufactures Mercedes-Benz automobiles. Plaintiffs alleged that Daimler’s subsidiary in Argentina collaborated with Government agents during Argentina’s “Dirty War” (1976-1983). As a result, several employees of the Argentine subsidiary were kidnapped, tortured and killed. Plaintiffs referred to the Alien Tort Statute, 28 U.S.C. Section 1350, and the Torture Victim Protection Act of 1991 (106 Stat. 73, note following 28 U.S.C. Section 1350), as well as other claims under California and Argentina law.

Jurisdiction was based on the presence of the Daimler-affiliated company Mercedes-Benz USA, LLC (MBUSA) in California. MBUSA distributes Mercedes-Benz automobiles throughout the U.S. The Plaintiffs thus argued that the California District Court had general or all-purpose jurisdiction. MBUSA’s sales in California account for approximately 2.4% of Daimler’s worldwide sales. According to the General Distributorship Agreement, MBUSA is an “independent contractor” that buys and sells vehicles on its own account.

Daimler moved to dismiss for lack of personal jurisdiction. Plaintiffs responded with declarations and exhibits purporting to prove the presence of Daimler in California and, alternatively, argued that the presence of a related entity in California, MBUSA, is sufficient for jurisdiction. The District Court granted Daimler’s Motion to Dismiss as Daimler’s connections with California were insufficient for all-purpose jurisdiction, and MBUSA was not Daimler’s agent.

The U.S. Court of Appeals for the Ninth Circuit initially affirmed the District Court. Upon Plaintiffs’ petition for rehearing, the panel withdrew its initial opinion and found jurisdiction over Daimler based on the presence of MBUSA.

The question is whether the Due Process Clause of the Fourteenth Amendment prevents a finding of jurisdiction over Daimler under circumstances where all plaintiffs are foreign and the conduct occurred entirely abroad.

The U.S. Supreme Court reverses the Ninth Circuit. Such exorbitant exercises of personal jurisdiction are barred by due process constraints.

“In Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. ___, 131 S.Ct. 2846, 180 L.Ed.2d 796 (2011), we addressed the distinction between general or all-purpose jurisdiction, and specific or conduct-linked jurisdiction. As to the former, we held that a court may assert jurisdiction over a foreign corporation ‘to hear any and all claims against [it]’ only when the corporation’s affiliations with the State in which suit is brought are so constant and pervasive ‘as to render [it] essentially at home in the forum State.’ Id., at ___, 131 S.Ct., at 2851. Instructed by Goodyear, we conclude Daimler is not ‘at home’ in California, and cannot be sued there for injuries plaintiffs attribute to MB Argentina’s conduct in Argentina.” [134 S.Ct. at 751]

Before going any further, the Court first outlines the general rules applicable to this case:

“Federal courts ordinarily follow state law in determining the bounds of their jurisdiction over persons. See Fed. Rule Civ. Proc. 4(k)(1)(A) (service of process is effective to establish personal jurisdiction over a defendant ‘who is subject to the jurisdiction of a court of general jurisdiction in the state where the district court is located’). Under California’s long-arm statute, California state courts may exercise personal jurisdiction ‘on any basis not inconsistent with the Constitution of this state or of the United States.’ Cal. Civ. Proc. Code Ann. § 410.10 (West 2004). California’s long-arm statute allows the exercise of personal jurisdiction to the full extent permissible under the U.S. Constitution. We therefore inquire whether the Ninth Circuit’s holding comports with the limits imposed by federal due process. See, e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462, 464, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985).” [134 S.Ct. at 753]

The Court then turns to the crucial question—are Daimler’s contacts with California sufficient to subject it to general (all-purpose) personal jurisdiction in California courts?

“In sustaining the exercise of general jurisdiction over Daimler, the Ninth Circuit relied on an agency theory, determining that MBUSA acted as Daimler’s agent for jurisdictional purposes and then [759] attributing MBUSA’s California contacts to Daimler. The Ninth Circuit’s agency analysis derived from Circuit precedent considering principally whether the subsidiary ‘performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.’ ….”

“This Court has not yet addressed whether a foreign corporation may be subjected to a court’s general jurisdiction based on the contacts of its in-state subsidiary. Daimler argues, and several Courts of Appeals have held, that a subsidiary’s jurisdictional contacts can be imputed to its parent only when the former is so dominated by the latter as to be its alter ego. The Ninth Circuit adopted a less rigorous test based on what it described as an ‘agency’ relationship. Agencies, we note, come in many sizes and shapes: ‘One may be an agent for some business purposes and not others so that the fact that one may be an agent for one purpose does not make him or her an agent for every purpose.’ 2A C. J. S., Agency § 43, p. 367 (2013) … A subsidiary, for example, might be its parent’s agent for claims arising in the place where the subsidiary operates, yet not its agent regarding claims arising elsewhere. The Court of Appeals did not advert to that prospect. But we need not pass judgment on invocation of an agency theory in the context of general jurisdiction, for in no event can the appeals court’s analysis be sustained.”

“The Ninth Circuit’s agency finding rested primarily on its observation that MBUSA’s services were ‘important’ to Daimler, as gauged by Daimler’s hypothetical readiness to perform those services itself if MBUSA did not exist. Formulated this way, the inquiry into importance stacks the deck, for it will always yield a pro-jurisdiction answer: ‘Anything a corporation does through an independent contractor, subsidiary, or distributor is presumably something that the corporation would do ‘by other means’ if the independent contractor, subsidiary, or distributor did not exist.’ …. The Ninth Circuit’s agency theory [760] thus appears to subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the ‘sprawling view of general jurisdiction’ we rejected in Goodyear. 564 U.S., at ___, 131 S.Ct., at 2856.”

“Even if we were to assume that MBUSA is at home in California, and further to assume MBUSA’s contacts are imputable to Daimler, there would still be no basis to subject Daimler to general jurisdiction in California, for Daimler’s slim contacts with the State hardly render it at home there.”

“Goodyear made clear that only a limited set of affiliations with a forum will render a defendant amenable to all-purpose jurisdiction there. ‘For an individual, the paradigm forum for the exercise of general jurisdiction is the individual’s domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home.’ 564 U.S., at ___, 131 S.Ct., at 2853-2854 … With respect to a corporation, the place of incorporation and principal place of business are ‘paradig[m] ... bases for general jurisdiction.’ Id., at 735. … Those affiliations have the virtue of being unique — that is, each ordinarily indicates only one place — as well as easily ascertainable. … These bases afford plaintiffs recourse to at least one clear and certain forum in which a corporate defendant may be sued on any and all claims.”

“Goodyear did not hold that a corporation may be subject to general jurisdiction only in a forum where it is incorporated or has its principal place of business; it simply typed those places paradigm all-purpose forums. Plaintiffs would have us look beyond the exemplar bases Goodyear identified, [761] and approve the exercise of general jurisdiction in every State in which a corporation ‘engages in a substantial, continuous, and systematic course of business.’ Brief for Respondents 16-17, and nn. 7-8. That formulation, we hold, is unacceptably grasping.”

“As noted, see supra, at 753-754, the words ‘continuous and systematic’ were used in [International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945)] to describe instances in which the exercise of specific jurisdiction would be appropriate. See 326 U.S., at 317, 66 S.Ct. 154 (jurisdiction can be asserted where a corporation’s in-state activities are not only ‘continuous and systematic, but also give rise to the liabilities sued on’). Turning to all-purpose jurisdiction, in contrast, International Shoe speaks of ‘instances in which the continuous corporate operations within a state [are] so substantial and of such a nature as to justify suit ... on causes of action arising from dealings entirely distinct from those activities.’ Id., at 318, 66 S.Ct. 154 … Accordingly, the inquiry under Goodyear is not whether a foreign corporation’s in-forum contacts can be said to be in some sense ‘continuous and systematic,’ it is whether that corporation’s ‘affiliations with the State are so `continuous and systematic’ as to render [it] essentially at home in the forum State.’ 564 U.S., at ___, 131 S.Ct., at 2851.”

“Here, neither Daimler nor MBUSA is incorporated in California, nor does either entity have its principal place of business there. If Daimler’s California activities sufficed to allow adjudication of this Argentina-rooted case in California, the same global reach would presumably be available in every other State in which MBUSA’s sales are sizable. Such exorbitant exercises of all-purpose jurisdiction would [762] scarcely permit out-of-state defendants ‘to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.’ Burger King Corp., 471 U.S., at 472, 105 S.Ct. 2174 …..”

“It was therefore error for the Ninth Circuit to conclude that Daimler, even with MBUSA’s contacts attributed to it, was at home in California, and hence subject to suit there on claims by foreign plaintiffs having nothing to do with anything that occurred or had its principal impact in California.” [134 S.Ct. at 758-762] (footnotes omitted)

After this legal analysis and its application to the facts of this case, the Court notes that the Ninth Circuit failed to consider the impact of its expansive view of general jurisdiction upon international comity. The Court looks across the Atlantic to compare how the European Union would decide the issue of jurisdiction in such a case.

“In the European Union … a corporation may generally be sued in the nation in which it is ‘domiciled,’ a term defined to refer only to the location of the corporation’s ‘statutory seat,’ ‘central administration,’ or ‘principal place of business.’ European Parliament and Council Reg. 1215/2012, Arts. 4(1), and 63(1), 2012 O.J. (L. 351) 7, 18. See also id., Art. 7(5), 2012 O.J. 7 (as to ‘a dispute arising out of the operations of a branch, agency or other establishment,’ a corporation may be sued ‘in the courts for the place where the branch, agency or other establishment is situated’ ... The Solicitor General informs us, in this regard, that ‘foreign governments’ objections to some domestic courts’ expansive views of general jurisdiction have in the past impeded negotiations of international agreements on the reciprocal recognition and enforcement of judgments.’ … Considerations of international rapport thus reinforce our determination that subjecting Daimler to the general jurisdiction of courts in California would not accord with the ‘fair play and substantial justice’ due process demands. International Shoe, 326 U.S., at 316, 66 S.Ct. 154 …” [134 S.Ct. at 763]

Justice Sotomayor concurs the in the judgment, but notes her disagreement with the Court’s argument. This opinion may lead to injustice in four respects: (1) it unduly curtails the States’ sovereign authority to adjudicate disputes against corporate defendants who have engaged in continuous and substantial business operations within their boundaries; (2) the proportionality approach will treat small businesses unfairly in comparison to national and multinational conglomerates. While a larger company will often be immunized from general jurisdiction in a State by virtue of extensive contacts outside the forum, a small company will not be; (3) the incongruous result is that an individual defendant whose only contact with a forum State is a one-time visit can be subject to general jurisdiction if served with process during that visit, but a large corporation with property and employees may not be; and (4) it shifts the risk of loss from multinational corporations to the individuals harmed by their actions, for example where there is no adequate court for a foreign incident yet the corporation is present in the U.S. [see 134 S.Ct. at 773]

Therefore, Justice Sotomayor would reverse the Ninth Circuit on the narrower ground that the exercise of jurisdiction over Daimler is unreasonable in any event.

Citation: Daimler AG v. Bauman, No. 11-965, 134 S.Ct. 746 (2014).

MARITIME LAW/CRIMINAL LAW

Eleventh Circuit finds that a certification of the Secretary of State to establish jurisdiction to prosecute drug traffickers arrested on the high seas does not violate the Confrontation Clause because such certification does not prove an element of a defendant’s culpability

In 2011, Christopher Patrick Campbell was one of the individuals on a boat in international waters off the coast of Jamaica that was observed by the U.S. Coast Guard. Three individuals were throwing bales overboard, which later turned out to be 997 kilograms of marijuana. The boat had no flag or registration number, but the master of the vessel claimed that it was registered in Haiti. Haiti did not confirm whether the boat was in fact registered there.

The Secretary of State issued a certification to establish extraterritorial jurisdiction for a prosecution of drug trafficking on the high seas. The certification included a statement from a U.S. Coast Guard Commander that he had contacted Haiti to find out whether the boat was registered there. Haiti responded that it could neither confirm nor deny the boat’s registry.

Campbell and his fellow mates were charged pursuant to the Maritime Drug Law Enforcement Act (MDLEA), 46 U.S.C. Section 70501 et seq., for conspiracy and possession with intent to distribute more than 100 kilograms of marijuana.

Campbell filed a motion to dismiss arguing that (1) the admission of the certification of the Secretary of State to prove a response to a claim of registry violates Campbell’s rights under the Confrontation Clause, and there is insufficient evidence to prove that Campbell was aboard a vessel subject to the jurisdiction of the U.S.; (2) the MDLEA violated Campbell’s due process rights under the Fifth Amendment because he had no contacts with the U.S.; and (3) Congress exceeded its constitutional power to punish felonies committed on the high seas when it enacted the MDLEA. Campbell, however, conceded that the latter two arguments were foreclosed by precedent in the Eleventh Circuit.

A magistrate judge found, and the district court adopted the report, that the certification established extraterritorial jurisdiction over the boat, and that the MDLEA was constitutional both on its face and as applied to Campbell. Campbell was convicted and now appeals.

The question here is whether the admission of the certification of the Secretary of State to establish extraterritorial jurisdiction violates the defendant’s right to confront the witnesses against him at trial. See U.S. Const. Amendment VI.

Recent changes in the law complicated the legal analysis of this case. In United States v. Rojas, 53 F.3d 1212, 1216 (11th Cir. 1995), the Eleventh Circuit held that the admission at trial of a certification to establish jurisdiction over a Panamanian vessel on the high seas with cocaine on board did not violate the Confrontation Clause.

After Rojas, Congress amended the MDLEA to require a judge to decide jurisdictional issues. The amendment also added that jurisdiction of the United States with respect to a vessel is not element of an offense. Pub.L. 104-324, Section 1138, 110 Stat. 3901, 3988-89 (1996), codified at 46 U.S.C. Section 70504(a).

Subsequently, the U.S. Supreme Court held that the Confrontation Clause bars the admission of a testimonial statement by “a witness who did not appear at trial unless he was unavailable to testify, and the defendant had had a prior opportunity for cross-examination.” Crawford v. Washington, 541 U.S. 36, 53-54, 124 S.Ct. 1354, 1365 (2004).

The U.S. Court of Appeals for the Eleventh Circuit affirms Campbell’s judgment and convictions.

The U.S. Constitution empowers Congress to “define and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations.” U.S. Const. Art. 1, Section 8, cl. 10.

Congress enacted the MDLEA to prohibit any person from “knowingly or intentionally … possess[ing] with intent to manufacture or distribute, a controlled substance on board … a vessel subject to the jurisdiction of the United States.” 46 U.S.C. Section 70503(a)(1). The 1996 amendment to the MDLEA provides that “[j]urisdiction of the United States with respect to a vessel subject to this chapter is not an element of an offense.” 46 U.S.C. Section 70504(a). Any “[j]urisdictional issues arising under this chapter are preliminary questions of law to be determined solely by the trial judge.” Id.

As for a vessel’s nationality, the MDLEA subjects “a vessel without nationality” to the jurisdiction of the U.S. Vessels without nationality include “a vessel aboard which the master or individual in charge makes a claim of registry and for which the claimed nation of registry does not affirmatively and unequivocally assert that the vessel is of its nationality.” Id. Section 70502(c)(1)(A), (d)(1)(C). A certification from the Secretary of State is conclusive proof of a response to a claim of registry by a foreign nation. Id. Section 70502(d)(2).

Interpreting the law, the Court reaches the same decision as previously in Rojas, but for a different reason. The certification proves jurisdiction, as a diplomatic courtesy to a foreign nation. It does not prove an element of a defendant’s culpability. Thus, the pretrial admission of the certification does not violate the Confrontation Clause.

In particular, the Court finds that the Confrontation Clause does not bar the admission of the certification to establish extraterritorial jurisdiction. The Confrontation Clause does not bar the admission of hearsay to make a pretrial determination of jurisdiction when that hearsay does not pertain to an element of the offense. The stateless nature of Campbell’s vessel was not an element of his offense to be proved at trial.

“… Rojas no longer controls this issue, the admission of the certification of the Secretary of State did not violate Campbell’s right under the Confrontation Clause. In [United States v. Tinoco, 304 F.3d 1088 (11th Cir. 2002)], we held that Congress was entitled to remove the jurisdictional requirement from consideration by the jury because that requirement ‘does not raise factual questions that traditionally would have been treated as elements of an offense under the common law,’ such as the actus reus, causation, and the mens rea elements. 304 F.3d at 1108. Instead, the jurisdictional requirement serves as a ‘diplomatic courtesy to foreign nations and as a matter of international comity.’ Id. Proof of jurisdiction ‘does not affect the defendant’s blameworthiness or culpability, which is based on the defendant’s participation in drug trafficking activities, not on the smoothness of international relations between countries.’ Id. at 1109 … And, unlike some federal crimes in which the jurisdictional element provides Congress with the authority to proscribe the offense under Article I, the Act makes the determination of jurisdiction a discretionary ‘statutory hurdle[] to a court’s subject matter jurisdiction.’ Tinoco, 304 F.3d at 1104 n.18; see also id. at 1110 n.21 (explaining that many federal criminal statutes, such as the Hobbs Act, 18 U.S.C. § 1951(a), and the Travel Act, id. § 1952(a), ‘require[] a particularized, case-by-case factual finding that some product or activity of the defendant relate in some way to interstate commerce’). This jurisdictional requirement ‘is unique because it is not meant to have any bearing on the individual defendant, but instead is meant to bear only on the diplomatic relations between the United States and foreign governments.’ Id. at 1109. The Confrontation Clause protects a defendant’s trial right to confront testimony offered against him to establish his guilt, and the Supreme Court has never extended the reach of the Confrontation Clause beyond the confines of a trial. And, because a pretrial determination of extraterritorial jurisdiction does not implicate the Confrontation Clause, we need not decide whether the certification of the Secretary of State is testimonial in nature. ….”

“Our analysis aligns with other authorities too. For example, faced with the same issue raised by Campbell, the First Circuit held that, ‘in this non-trial context, where evidence does not go to guilt or innocence, the Confrontation Clause does not apply.’ United States v. Nueci-Peña, 711 F.3d 191, 199 (1st Cir. 2013) (internal quotation marks omitted) … We need not decide whether the Confrontation Clause could ever apply to a pretrial determination and conclude only that it does not apply to this pretrial determination of jurisdiction where the certification does not implicate either the guilt or innocence of a defendant charged with an offense under the Act.” [Slip op. 5-6]

Citation: United States v. Campbell, No. 12-13647 (11th Cir. February 20, 2014).