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June 28, 2007, Alert No. 1,603.
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2nd Circuit Addresses Personal Jurisdiction in Web Based Defamation Case

6/26. The U.S. Court of Appeals (2ndCir) issued its opinion [36 pages in PDF] in Best Van Lines v. Tim Walker, a case regarding personal jurisdiction over an out of district defendant in a defamation action where the defendant published the allegedly defamatory statements in a web site. The Court of Appeals affirmed the District Court's dismissal for lack of jurisdiction, based upon an interpretation of the New York jurisdiction statute.

Introduction. The Court of Appeals held that Tim Walker, who lives in the state of Iowa, cannot be sued in the distant forum of New York based solely upon his publication of comments on the internet. While this opinion is a victory for bloggers and some other internet speakers, its reach is limited, to the extent that it was decided under the state of New York's long arm jurisdiction statute, rather than the due process clause of the Constitution, and its minimum contacts limitation.

For a court to hear a case, it must have jurisdiction, both over the subject matter of the case (federal courts have jurisdiction over diversity actions and actions arising under federal law), and over the person of the defendant. States, including New York, enact statutes in which they assert the jurisdiction of their courts. (In diversity actions in federal courts, the relevant state's jurisdictional statute applies in determining whether there is personal jurisdiction.)

In addition, the Supreme Court of the U.S. (SCUS) has long held that the due process clause imposes limitations upon the exercise of jurisdiction over out of state defendants. The SCUS held in International Shoe v. Washington, 326 U.S. 310 (1945), that "For due process to be satisfied, a defendant, if not present in the forum, must have ``minimum contacts´´ with the forum state such that the assertion of jurisdiction ``does not offend traditional notions of fair play and substantial justice.´´"

States tend to write very broad jurisdictional statutes. Hence, they are called "long arm" statutes. In most leading cases on personal jurisdiction, the state jurisdictional statute reaches the distant defendant, or the statute asserts all jurisdiction consistent with the Constitution. Thus, in most of these cases the key issue is whether the due process rights of the defendant would be violated by the distant court's exercise of jurisdiction.

However, in this case, New York's statute imposes limitations on the exercise of jurisdiction over out of state defendants, and the District Court and Court of Appeals both held that the state statute does not provide for personal jurisdiction over Walker.

District Court. Tim Walker is a resident of the state of Iowa. He operates a a not-for-profit internet website that  provides information and opinions about household movers. He published information critical of Best Van Lines (BVL) in his web site. BVL asserts that this information is defamatory.

BVL filed a complaint in U.S. District Court (SDNY) against Walker alleging defamation. Walker moved to dismiss for lack of personal jurisdiction. The District Court dismissed the complaint. BVL brought the present appeal.

Statute. The New York statute, which is codified at N.Y. C.P.L.R. § 302(a), provides in relevant part as follows:

"As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent:
  1. transacts any business within the state or contracts anywhere to supply goods or services in the state; or
  2. commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act; or
  3. commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act, if he
    (i) regularly does or solicits  business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or
    (ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce; or
  4. owns, uses or possesses any real property situated within the state."

Court of Appeals. The Court of Appeals affirmed.

It wrote that "This appeal raises a single question: whether the United States District Court for the Southern District of New York had personal jurisdiction over Walker for purposes of entertaining this lawsuit. To answer that question, we look first to the law of the State of New York, in which the district court sits."

It continued that "If, but only if, our answer is in the affirmative, we must then determine whether asserting jurisdiction under that provision would be compatible with requirements of due process established under the Fourteenth Amendment to the United States Constitution."

It concluded that "under well-settled principles of New York law, the district court did not have such jurisdiction. We therefore need not address the second question: whether, if New York law conferred it, asserting such jurisdiction would be permissible under the Due Process Clause".

Nevertheless, the Court of Appeals did summarize and discuss the due process limitations.

The court found that Walker's online activities did not amount to transaction business within the state within the meaning of the statute.

Related Cases. This case turned upon an interpretation of the New York statute. However, other courts have held that even though a state long arm jurisdiction statute may allow an action to proceed, the due process clause does not.

In 2002, the U.S. Court of Appeals (4thCir) issued its opinion [12 pages in PDF] in Young v. New Haven Advocate, holding that a court in Virginia does not have jurisdiction over two small newspapers, and their editors and reporters, located in Connecticut, who wrote allegedly defamatory stories about a Virginia prison warden and published them on the internet. The Court of Appeals held that the web publication did not establish minimum contacts because the newspapers are not directed at a Virginia audience.

In Young v. New Haven Advocate the long arm statute analysis and due process analysis merged, because the state statute provided that personal jurisdiction of the Virginia courts extends to the maximum extend allowed by the due process clause.

See, story titled "4th Circuit Rules in Internet Jurisdiction Case" in TLJ Daily E-Mail Alert No. 568, December 16, 2002. See also, story titled "Supreme Court Denies Cert in Case Involving Personal Jurisdiction in Internet Defamation Suit" in TLJ Daily E-Mail Alert No. 665, May 20, 2003.

However, not all personal jurisdiction cases involving allegations of internet based defamation have been decided in favor of the internet speaker.

For example, in 2002, the U.S. Court of Appeals (9thCir) issued its "not for publication" opinion in Northwest Healthcare Alliance v. holding that the District Court has personal jurisdiction over an out of state defendant in defamation case, based solely upon its publication of the allegedly defamatory statements in its "passive" internet web site. See also, story titled "Supreme Court Denies Certiorari in Internet Jurisdiction Case" in TLJ Daily E-Mail Alert No. 652, April 30, 2003.

The SCUS has not yet decided a case involving personal jurisdiction based upon internet conduct. There is some lack of clarity as to the state of U.S. law, particularly in other types of actions, such as actions alleging violation of intellectual property laws.

Also, in 2002 the High Court of Australia issued its opinion in Dow Jones v. Gutnick, a tort action brought in Australia for an allegedly defamatory news story published on the internet by Dow Jones, a U.S. publisher. The Court held that because of publication on the internet, the Australian courts have jurisdiction, that Australian law applies, and that the case should proceed in the trial court in the Australian state of Victoria. See, story titled "High Court Rules Australia Has Jurisdiction Over Dow Jones Based on Web Publication" in TLJ Daily E-Mail Alert No. 564, December 10, 2002.

Cases such as Gutnick may pose little threat to individuals like Walker. He has no assets in Australia. Hence, if someone in Australia, or any other country, is offended by his internet speech, sues him there, and obtains a money judgment, that plaintiff will not be able to execute upon any of his assets. However, for companies with international operations, including news businesses, Gutnick remains a threat.

Jack Goldsmith, who was recently the Assistant Attorney General in charge of the Office of Legal Counsel wrote in his 2006 book, Who Controls the Internet: Illusions of a Borderless World [Amazon], that "the First Amendment does not reflect universal values; to the contrary, no other nation embraces these values, and they are certainly not written into the Internet's architecture."

He continued that "Australia can effectively coerce Dow Jones because Dow Jones is a multinational company with employees, facilities, contracts, and bank accounts in Australia. But the vast majority of Internet users -- students, e-consumers, porn purveyors, chat room participants, web-page operators, bloggers, and over 99 percent of other Net users -- have no connection to Australia or to any other country ..."

He concluded that Gutnick affects "content providers like CNN, Dow Jones, and The Economist; systems operations like Yahoo, Google, eBay, and AOL; and financial intermediaries like MasterCard, PayPal, and Citibank".

Tim Walker proceeded pro se. At the request of the Court of Appeals, Kate Bolger and Slade Metcalf of the New York City office of the law firm of Hogan & Hartson supported Walker as amicus curiae.

TLJ spoke with Bolger, who focuses on First Amendment and media law. She said that this opinion is "very good news" for internet speakers and free speech. While it primarily addressed New York law, "it builds up the case law", and providers speakers another case to cite.

She also commented that the Australian court's opinion in Gutnick was "such an unfortunate decision". She added that while that case caused concern, the U.S. courts are "building up a significant body of case law" that offers protection to internet speakers.

This case is Best Van Lines v. Tim Walker, U.S. Court of Appeals for the 2nd Circuit, App. Ct. No. 04-3924-cv, an appeal from the U.S. District Court for the Southern District of New York, Judge Gerard Lynch presiding.

SCUS Holds That All Vertical Price Restraints Are Subject to Rule of Reason

6/28. The Supreme Court of the U.S. (SCUS) issued its opinion [55 pages in PDF] in Leegin Creative Leather Products v. PSKS, an antitrust case regarding minimum resale price maintenance by manufacturers and intermediate distributors.

The SCUS reversed the judgment of the Court of Appeals, held that all vertical price restrains are to be judged by the rule of reason, and that the SCUS's 1911 opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co., which is reported at 220 U.S. 373, is overturned.

Resale price maintenance (RPM) exists when a manufacturer agrees with its distributor(s) to set the minimum price that the distributor(s) can charge for the manufacturer's goods. Prior to this opinion, RPM was subject to the antitrust per se rule, rather than the lighter rule of reason standard.

This opinion changes the law for vertical RPM. After this opinion, horizontal agreements among competitors to fix prices remain per se violations of the Sherman Act.

The case will impact the way some consumer information technology (IT) and other electronics products are marketed. It will also likely incent IT sector manufacturers to develop new products.

Manufacturers of consumer IT devices sometimes offer products that include numerous new and complicated features and services. But, many consumers do not know what the features are, or how to use the products. In order to promote adoption of new technologies, and sales of their products, manufacturers have an interest in distributors' disseminating information about the new devices through advertising, in store demonstrations, training of employees, and customer support. But, these services impose costs on the distributors who provide them. This can create a free riding situation, when some distributors go to the trouble to provide such information and support, but others do not. The presence of free riders, offering the products at lower prices, disincents other distributors from educating consumers. This, in turn, disincents manufacturers from offering complex devices that require consumer education. And this inhibits innovation in the IT sector.

The Office of the Solicitor General (OSG) submitted an amicus curiae brief in which it explained this free rider problem. The OSG wrote that "an individual retailer has an incentive to free ride on the provision of those services by rival retailers. A retailer offering no services but a lower price can sell to consumers who have been educated by retailers that do provide the services desired by the manufacturer and the consumer. The problem is exacerbated by catalog retailing and the advent of the Internet, as consumers may visit traditional, brick-and-mortar retailers to examine a product and select its features but then purchase the product at a discounted price from a catalog or on-line retailer, whose very lack of ``bricks and mortar´´ affords point-of-sale services impossible and whose lack of expenses for bricks and mortar gives them a competitive advantage over traditional retailers who provide the services that some manufacturers desire."

The use of RPM can incent distributors to engage in consumer education efforts. Thus, this opinion will make it easier for manufacturers to provide such incentives in the marketing of consumer communications, music and satellite radio devices, and other IT products.

The relevant statute, Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1, provides little guidance. It merely states that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." Section 1 also contains a criminal prohibition. The rest of the law exists in judicial interpretation and agency enforcement.

The SCUS held in 1911 in Dr. Miles that intrabrand vertical price fixing by manufacturers or intermediate distributors is a per se violation of the Sherman Act. That is, a manufacturer cannot fix the minimum price at which retailers sell its product.

More recently, the SCUS has issued opinions that have eroded the Dr. Miles rule. For example, it has held that vertical nonprice restraints and maximum resale price maintenance are not per se unlawful under the antitrust laws. Yet, until the just released opinion, the basic rule was that minimum resale price fixing was a per se violation.

PSKS, the plaintiff below, runs a women's clothing and accessories store. It filed a complaint in the U.S. District Court (EDTex) against Leegin Creative Leather Products (LCLP), which makes women's accessories, alleging violation of Section 1 of the Sherman Act, in connection with LCLP's suggested resale price policies. The District Court awarded $3.6 Million in treble damages to PSKS.

The U.S. Court of Appeals (5thCir) affirmed in a non-precedential opinion [PDF]. The District Court and Court of Appeals both applied the antitrust per se violation rule to LCLP's imposing of a minimum price fixing agreement on its retailer, PSKS.

The SCUS granted certiorari on December 7, 2006. See, story titled "Supreme Court Grants Certiorari in Antitrust Cases" in TLJ Daily E-Mail Alert No. 1,501, December 8, 2007.

The SCUS reversed and remanded, and expressly overturned Dr. Miles.

The SCUS wrote that under the rule of reason, "the factfinder weighs all of the circumstances of a case in decidingwhether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition."

Relevant factors include information about the relevant business, the restraint’s history, nature, and effect, and whether the businesses involved have market power. The Court wrote that the rule of reason is designed to distinguish between restraints "with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest".

In contrast, if a restraint is subject to the per se rule, it is necessarily illegal. The Court wrote that "the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue ... and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason ..."

The Court continued that the "economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance."

It also wrote that "A single manufacturer's use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between."

It continued that "Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate."

It added that "Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for new firms and brands."

The Court conceded that in some circumstances, RPM can have anticompetitive effects, such as a manufacturer cartel, and consequent monopoly profits.

Thus, it concluded that "Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed." Thus, a per se rule is inappropriate, because it would prohibit vertical agreement where there are procompetitive effects.

The Court held that the rule of reason applies, and proceeded to offer lower courts some guidance on its application to vertical agreements.

This is a 5-4 opinion. Justice Kennedy wrote the opinion of the Court, which was joined by Justices Thomas, Scalia, Alito and Roberts.

Justice Kennedy was confirmed as a Justice following the Senate's rejection of Robert Bork. Bork's fundamental area of expertise was antitrust law. He advocated the holding of the present opinion in his 1978 book, The Antitrust Paradox: A Policy at War With Itself [Amazon]. See especially, page 288, where Bork wrote that Dr. Miles is based on "mistaken economics". In 1987, his opponents blocked his confirmation as a Justice of the Supreme Court. In the present case, his disciples cited his book.

Justice Breyer, who was appointed by former President Clinton, wrote a long dissent that was joined by Justices Stevens, Souter and Ginsburg. He argued that the rule of law announced in Dr. Miles has been good enough for the Court for nearly one hundred years, and the Congress has not altered the law legislatively, so the Court should not now depart from the doctrine of stare decisis.

He also challenged the economic analysis of the majority. He wrote that "The only safe predictions to make about today's decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles."

Albert Foer, head of the American Antitrust Institute (AAI) criticized the ruled in a release [PDF]. The AAI represents the interests of the plaintiffs' antitrust bar.

He said that "While rule of reason cases are tough to win, ... manufacturers should not interpret this ruling as a green light to enforce minimum resale prices. Especially in concentrated markets, resale price maintenance agreements will remain risky. And resale price maintenance may still be unlawful per se under state antitrust laws."

This case is Leegin Creative Leather Products, Inc. v. PSKS, Inc., Sup. Ct. No. 06-480, a petition for writ of certiorari to the U.S. Court of Appeals for the 5th Circuit, App. Ct. No. 04-41243. The Court of Appeals heard an appeal from the U.S. District Court for the Eastern District of Texas, D.C. No. 2:03-CV-107-TJW. See also, Supreme Court docket.

Theodore Olson of the Washington DC office of the law firm of Gibson Dunn & Crutcher represents Leegin. Robert Coykendall of the law firm of Morris Laing Evans Brock & Kennedy represents PSKS.

Washington Tech Calendar
New items are highlighted in red.
Friday, June 29

The House will not meet. It will next meet on July 10.

The Senate will meet at 9:45 AM for morning business.

9:30 AM. Subcommittees of the House Foreign Affairs Committee and the House Education and Labor Committee will hold a hearing titled "International Students and Visiting Scholars: Trends, Barriers, and Implications for American Universities and U.S. Foreign Policy". See, notice. Location: Room 2172, Rayburn Building.

Saturday, June 30

Trade promotion authority expires.

Sunday, July 1

Opening date for sending a Notice of Internet Availability of Proxy Materials to shareholders. See, the Securities and Exchange Commission's (SEC) rule [119 pages in PDF] regarding voluntary internet availability of proxy materials. See also, notice in the Federal Register, January 29, 2007, Vol. 72, No. 18, at Pages 4147-4173. And see, story titled "SEC Adopts E-Proxy Rule Changes" in TLJ Daily E-Mail Alert No. 1,506, December 15, 2006.

Monday, July 2

The House will not meet on July 2-6 due to the Independence Day District Work Period. See, House 2007 calendar.

The Senate will not meet on July 2-6 due to the Independence Day District Work Period. See, Senate 2007 calendar.

11:00 AM. The Heritage Foundation will host an event titled "Irrational Politics: What's Happening to Free Trade?". See, notice. Location: Heritage, 214 Massachusetts Ave,  NE.

Deadline to submit initial comments to the Copyright Office (CO) in response to its Notice of Inquiry (NOI) regarding the operation of, and continued necessity for, the cable and satellite statutory licenses under the Copyright Act.. See, notice in the Federal Register, April 16, 2007, Vol. 72, No. 72, at Pages 19039-19055. See also, technical correction notice in the Federal Register, April 24, 2007, Vol. 72, No. 78, at Page 20374.

Deadline for those persons who are scheduled to testify at the Copyright Office's (CO) hearings on July 23 through July 26, 2007, regarding the operation of, and continued necessity for, the cable and satellite statutory licenses to submit to the CO copies of their prepared testimony. See, notice in the Federal Register, May 23, 2007, Vol. 72, No. 99, at Pages 28998-29000.

Deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its request for comments updating its record on the Center for the Study of Commercialism's (CSC) Petition for Reconsideration regarding stations that air home shopping programming and their status. See, notice in the Federal Register, May 17, 2007, Vol. 72, No. 95, at Pages 27811-27813.

Wednesday, July 4

Independence Day.

The Federal Communications Commission (FCC) and other federal offices will be closed. See, Office of Personnel Management's (OPM) list of federal holidays and 5 U.S.C. § 6103.

Friday, July 6

Deadline to submit comments to the National Institute of Standards and Technology's (NIST) Computer Security Division (CSD) regarding its Draft Special Publication 800-44 Version 2 [PDF] titled "Guidelines on Securing Public Web Servers".

Effective date of the rules changes contained in the Federal Communications Commission's (FCC) Memorandum Opinion and Order [PDF] in its proceeding titled "In the Matter of Facilitating Opportunities for Flexible, Efficient, and Reliable Spectrum Use Employing Cognitive Radio Technologies". This item responds to two petitions for reconsideration of the FCC's 2005 cognitive radio report and order submitted by Cisco Systems and Marcus Spectrum Solutions. This item is FCC 07-66 in ET Docket No. 03-108. See also, notice in the Federal Register, June 6, 2007, Vol. 72, No. 108, at Pages 31190-31192.

Monday, July 9

There will be no votes in the House.

8:30 AM - 12:00 NOON. The Electronic Transaction Association (ETA) will host an event titled "Second Annual ETA Payments Education and Discussion Forum". The ETA states that this event "is designed to provide Congressional staff, regulators, and law enforcement with a working knowledge of the acquiring side of the electronic payments business. Topics will include an overview of the roles/responsibilities of entities in the payments system; the components of an electronic transaction; and industry efforts to protect cardholder data." See, notice [PDF] and program agenda [PDF]. For more information, and to RSVP, contact Rob Drozdowski at 202-828-2635 x203 or rob dot drozdowski at electran dot org. A continental breakfast will be served. There is no charge. Location: Columbus Room, Union Station.

10:00 AM. The U.S. Court of Appeals (FedCir) will hear oral argument in SRI International v. Internet Security, App. Ct. No. 2007-1065, a patent infringement case. Location: Courtroom 201, 717 Madison Place, NW.

10:00 AM. The U.S. Court of Appeals (FedCir) will hear oral argument in Cybersettle v. National Arbitration Forum, App. Ct. No. 2007-1092, a patent infringement case. Location: Courtroom 203, 717 Madison Place, NW.

2:00 PM. The U.S. Court of Appeals (FedCir) will hear oral argument in Dolby Labs v. Lucent Technologies, App. Ct. No. 2006-1583, a patent infringement case. Location: Courtroom 201, 717 Madison Place, NW.

2:00 - 3:30 PM. The U.S. Chamber of Commerce's Coalition Against Counterfeiting and Piracy (CACP) will meet. For more information, contact counterfeiting at uschamber dot com or 202-463-5500. Location: U.S. Chamber, 1615 H St., NW.

Deadline to submit petitions to deny and initial comments to the Federal Communications Commission (FCC) regarding its review of the proposed merger of XM Satellite Radio Holdings and Sirius Satellite Radio. See, Public Notice [5 pages in PDF] (DA 07-2417).

Tuesday, July 10

10:00 AM. The U.S. Court of Appeals (FedCir) will hear oral argument in Nilssen v. Osram Sylvania, App. Ct. No. 2006-1550, a patent infringement case. The U.S. District Court (NDIll) held that the patents in suit are unenforceable for several reasons, including that Nilssen did not pay a large entity fee to the USPTO, but granted a non-exclusive license to a large corporation. Location: Courtroom 201, 717 Madison Place, NW.

Deadline to submit comments to the Rural Utilities Service (RUS) in response to its notice of proposed rulemaking regarding its Rural Broadband Access Loan and Loan Guarantee Program. The RUS proposes to change its rules regarding funding in competitive markets and new eligibility requirements, new equity and market survey requirements, and new legal notice requirements. See, notice in the Federal Register, May 11, 2007, Vol. 72, No. 91, at Pages 26742-26759

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