District Court Squeezes Sharman on Internet Based Personal Jurisdiction

January 9, 2003. The U.S. District Court (CDCal) issued an order and opinion in MGM v. Grokster in which it denied Sharman Network's motion to dismiss for lack of personal jurisdiction. Sharman, which now owns the key assets of Kazaa, is organized in the offshore jurisdiction of Vanuatu, apparently for the purpose of evading the reach of U.S. courts. Sharman provides free software, known as the Kazaa Media Desktop (KMD), that can be downloaded and used to search for and exchange digital music, movies, and other mostly copyrighted works, using FastTrack file sharing technology. The Court based its finding of personal jurisdiction largely on the fact that Sharman had made the KMD software available to about two million residents of the state of California.

Introduction. This order and opinion is issued in two related actions, both pending in the same court, both alleging copyright infringement, and both against the same entities involved in facilitating the copying of copyrighted works over the Internet.

In one action, Metro Goldwyn Mayer Studios Inc. and other movie and music recording companies, filed a complaint against Grokster, Ltd and others involved in the exchange of copyrighted music, movies and other digital works over the Internet. These plaintiffs alleged copyright infringement in violation of 17 U.S.C. § 501. In the second action, Jerry Leiber, and other professional songwriters and music publishers, filed a complaint against Consumer Empowerment BV a/k/a FastTrack and others. Both suits involve essentially the same claims against the same defendants.

Kazaa BV was formerly know as Consumer Empowerment BV. Kazaa BV is a Netherlands Corporation. The Court opinion notes that after these complaints were filed, Kazaa "transferred ownership of key assets to the newly-formed  Sharman Networks, Ltd. ... Sharman is a company organized under the laws of the island nation of Vanuatu and doing business principally in Australia. The assets transferred to Sharman include the Kazaa.com website and domain, and the Kazaa Media Desktop (``KMD´´) software." The Court concluded that "Sharman has acquired Kazaa BV's primary assets ... without having formally acquired the company. Meanwhile, Kazaa BV has apparently ceased defending this action."

The Court's opinion does not address Kazaa's and Sharman's reasons for structuring and locating in this manner. However, their actions are not inconsistent with the hypothesis that the purpose is to evade personal jurisdiction in U.S. courts, and seizure of assets in the event of an adverse judgment.

Sharman filed a motion to dismiss for lack of personal jurisdiction, and numerous other reasons. LEF Interactive Pty Ltd, another defendant, moved to dismiss solely for lack of personal jurisdiction. The Court denied both motions.

Facts. The Court first reviewed relevant facts. It wrote that "Although novel in important respects, the ``Kazaa system´´ operates in a manner conceptually analogous to the Napster system described at length by the district court in A&M Records, Inc. v. Napster, Inc., 114 F.Supp. 2d 896 (N.D.Cal. 2000)."

"In summary, Sharman provides free proprietary software, the Kazaa media Desktop, that enables Internet users to search for and exchange digital media with other users of file-sharing software powered by FastTrack technology. Sharman also operates the Kazaa.com website, which serves as a central distribution and customer support hub for the KMD software."

The Court added that "The KMD software can be transferred to the user's computer, or ``downloaded,´´ from servers operated by Sharman (for instance, by visiting Sharman's Kazza.com website, or third-party CNET's Download.com, and choosing to download the software). Once installed, each KMD user may elect to ``share´´ certain files located on the user's computer, including, for instance, music files, video files, software applications, e-books, and text files. When launched on a user's computer, KMD automatically connects to the FastTrack peer-to-peer network, and makes any shared files available for transfer to any other user's computer." (Parentheses in original.)

The Court wrote that Sharman has had several types of contacts with the state of California. These include making its KMD software available to California residents, and the use of California agents (including an advertising firm). However, Sharman is not licensed or incorporated in California, and its has no offices, employees or assets there.

The Court also pointed out that "Because the KMD software itself is free, most of Sharman's revenue comes through its advertising partnerships."

Legal Analysis. The Court first briefly concluded that there is not general jurisdiction, because of Sharman's lack of presence in the state. The Court then analyzed at length (pages 11-34) the issue of specific jurisdiction.

The Court first wrote that the analysis must begin with the Due Process Clause, but that the inquiry is of a "somewhat nebulous nature". Citing Quill v. North Dakota and International Shoe v. Washington, it wrote that "the central due process inquiry remains whether an exercise of jurisdiction is ``consistent with traditional notions of fair play and substantial justice.´´"

The Court then reviewed the 9th Circuits two prong test of purposeful availment and relatedness. "Under prevailing Ninth Circuit doctrine, specific jurisdiction is presumptively reasonable where: 1) a nonresident defendant purposefully avails itself of the privilege of conducting activities in the forum state, thereby invoking the protections of its laws; and 2) the plaintiff's claims arise out of the defendants' forum-related activities."

The Court elaborated on the relatedness prong: "Contacts with a forum state are relevant for purposes of specific jurisdiction only if they are sufficiently related to the cause of action. The Ninth Circuit adopts a broad, ``but for´´ test of relatedness. ... Thus, if Plaintiffs' claims would have arisen notwithstanding certain contacts, those contacts are not relevant to the jurisdictional analysis."

The Court concluded that "Contacts with U.S. agents such as public relations representatives and lawyers, contacts respecting advertising relationships, and the use of a California company for counting downloads of Sharman's software, are simply not but for causes of the alleged infringement." However, the Court found that "In contrast, Sharman's distribution of the KMD software, and licensing of its use, are ``but for´´ causes of the alleged infringement. But for Sharman's acts in these regards, Plaintiffs' claims of direct infringement never would have arisen against Sharman."

The Court went on to conclude that Sharman's software distribution contacts also satisfy the purposeful availment prong of the test. "Here, there is little question that Sharman has knowingly and purposefully availed itself of the privilege of doing business in California. First, Sharman essentially does not dispute that a significant number of its users -- perhaps as many as two million -- are California residents. ... Second, Sharman does not dispute that the distribution of its software is an essentially commercial act."

"In sum, Sharman engages in a significant quantum of commercial contact with California residents constituting a but for cause of Plaintiffs' claims. Jurisdiction is therefore presumptively reasonable", wrote the Court.

The Court went on to add that there is an alternative basis for finding purposeful availment -- the effects test. That is, "purposeful availment may be demonstrated where the effects of a defendant's conduct are felt in the forum state." The Court citing the Supreme Court opinion in Calder v. Jones and the 9th Circuit opinion in Panavision v. Toeppen. "Thus, Plaintiffs have alleged that Sharman intentionally and materially contributed to the infringement of Plaintiffs' works, and that it did so with full knowledge that much of the harm from this infringement would be suffered in California. This is sufficient to establish a prima facie case of purposeful availment under the effects test of Panavision."

Finally, the Court wrote that even if the two prong test for finding personal jurisdiction is met, the exercise of jurisdiction must also be "reasonable". The Court found that it is. One key factor in this finding was that Sharman acquired the assets of Kazaa after Kazaa had already been sued for copyright infringement.

Sharman also moved to dismiss on other grounds, including venue, forum non conveniens, the political question doctrine, and extraterritoriality. The Court rejected each of these.

Finally, the Court rejected LEF Interactive's motion to dismiss for lack of personal jurisdiction (at pages 39-45). LEF is a management company that the Plaintiffs argued is an alter ego of Sharman. Plaintiffs argued that personal jurisdiction over Sharman may be imputed to LEF. The Court did not rule that the LEF is an alter ego for liability purposes, but found enough merger between the two to find personal jurisdiction over LEF based upon its finding of personal jurisdiction over Sharman.

Comments. Motion Picture Association of America (MPAA) and Recording Industry Association of America (RIAA) issued a joint statement in which they said that "We are pleased that the court denied the efforts of Sharman Networks and LEF to avoid being subject to the suit. Sharman Networks and LEF should be held accountable by U.S. laws, which clearly indicate that what they are doing is illegal, and that they should not profit from it. Their attempts to play an intricate and shameless shell game designed to evade a U.S. court's jurisdiction and avoid liability have rightly failed."

Related Cases. This case follows two other recent cases that address personal jurisdiction in the context of Internet activities. On December 10, 2002, the High Court of Australia issued its opinion in Dow Jones v. Gutnick, a case involving three procedural issues (jurisdiction, choice of law, and convenient forum) in 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", TLJ Daily E-Mail Alert No. 564, December 10, 2002.

On December 13, 2002, the 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 held that the web publication did not establish minimum contacts because the newspapers are not directed at a Virginia audience. See, TLJ story titled 4th Circuit Rules in Internet Jurisdiction Case.