Court Dismisses Foreign Banks from U.S. Lawsuit Alleging Complicity in Counterfeit and Illegal Online Drug Sales

The fight against sophisticated online schemes to sell counterfeit or otherwise illegal goods is being waged by increasingly focused efforts to identify responsible parties that may be sued in U.S. courts, and whose assets are at risk. But in the recent case of Unspam Technologies, Inc. v. Chernuk, No. 11-2406 (4th Cir., May 3, 2013), the U.S. Court of Appeals for the Fourth Circuit rejected an effort to hold foreign banks liable under a conspiracy theory, finding that the U.S. courts had no personal jurisdiction over them.

A decade ago, efforts to shut down websites selling counterfeit and illegal goods were largely dismissed as “Whack-A-Mole” efforts, doomed to fail as websites could be launched and taken down quickly. Trying a different tack, aggrieved IP owners and governmental entities concerned about illegal drug sales turned their focus to legitimate businesses that provided the infrastructure that enabled the illegal counterfeiters to thrive. These included express delivery services, search engines, domain name companies, and credit card networks. And over time, in part through voluntary cooperation and in part through governmental action, the environment has become much less friendly to Internet-based sales of counterfeit products.1 Unfortunately, while closing some of the most obvious means by which illegal products reach consumers, these efforts are still being undermined by the unregulated corners of the Internet ecosystem and the sheer complexity of the problem. With the growth of social media, the means by which criminals may get counterfeit products to market in ways that make detection difficult and law enforcement ineffective have only multiplied.2
 
There are a number of strategies that can be used to combat this type of alleged wrongdoing, but one effort to sue foreign-based deep-pocket defendants recently came to an unsuccessful end. A plaintiff group formed in part for the purpose of bringing litigation arising out of illegal spamming sued two Russian nationals and six foreign banks in connection with an alleged worldwide conspiracy to sell illegal drugs in the United States through an online entity called the “Canadian Pharmacy.” The four banks that were served with process were members of the Visa credit card network, and they were alleged to have processed for payment a majority of the claims presented by the payment intermediary that serviced Canadian Pharmacy. In May 2013, the Fourth Circuit in Unspam Technologies, Inc. v. Chernuk affirmed the dismissal of the banks on grounds that their contacts with the United States were too tenuous to support the exercise of personal jurisdiction.

The Unspam Technologies case was a putative class action alleging that six foreign defendants—two Russian citizen “pharmacists” and four banks based in Russia, Denmark and Azerbaijan—were involved in an international conspiracy to sell illegal prescription drugs over the Internet. Plaintiffs claimed that Canadian Pharmacy accepted Visa cards in payment for illegal drug sales into the United States and presented those charges to an Internet payment service provider in Russia, which in turn presented the charges to the defendant banks to obtain payment through the Visa system. The plaintiffs further claimed that the defendant banks were an essential part of the illegal operation, based on the frequency with which they processed transactions for the Russian Internet payment service provider and their failure to comply with Visa’s regulations for monitoring transactions and rejecting transactions from “merchants obviously engaged in criminal activity.” The plaintiffs alleged violations of the False Marking Act, 35 U.S.C. § 292, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 162 et seq., the Federal CAN-SPAM Act of 2003, 15 U.S.C. § 7701 et seq., and state-law claims including the Virginia Computer Crimes Act, Va. Code Ann. § 18.2-152.1 et seq. as well as common law claims for conspiracy, negligence and unjust enrichment.
 
The case ended before it got off the ground. The plaintiffs voluntarily dismissed one individual defendant found not to have been involved in the Canadian Pharmacy operation, and the trial court dismissed the other individual for lack of timely service. The trial court then dismissed the remaining defendants—the four foreign banks—for lack of personal jurisdiction. The Fourth Circuit reviewed that jurisdictional holding.

The Court of Appeals reviewed the basic law of personal jurisdiction over foreign defendants dating back to International Shoe Co. v. Washington, 326 U.S. 310 (1945). It then summarized the three-part standard for how that law was to be applied in the context of “electronic Internet activity”: (1) whether the defendant purposely availed itself of the privilege of conducting activities in a state, (2) whether the plaintiff’s claims arose out of those activities; and (3) whether the exercise of jurisdiction would be constitutionally “reasonable.” Slip op. at 10.

The court observed that none of the banks did business in Virginia or even in the United States, none sent any spam emails to recipients in Virginia, and none could specifically be linked to any fraudulent email solicitation for prescription drugs received in Virginia. Id. at 8, 10. All the Plaintiffs could allege was that the defendant banks processed a majority of the Russian Internet payment service provider’s claims. This, the court found, was not an adequate basis for jurisdiction. The court did not stop there, however, holding that jurisdiction would not be established even if the plaintiffs could connect the illegal purchase by a putative class representative to a defendant bank. The court concluded that such a transaction would still be too remote to confer jurisdiction because the actual transaction would have occurred in the foreign country where the request for processing to the bank was made, and “its only conduct ‘aimed’ from that location would be the transmittal of the transaction into the Visa network.” Id. at 11. Thus, the court found that the foreign banks did not purposefully avail themselves of the laws of Virginia simply because a “transaction ultimately rippled through other countries for the collection of monies.” Id. Notably in this regard, the court affirmed the trial court’s decision not to allow the plaintiffs to take jurisdictional discovery, stating that “the Court need not permit even limited discovery confined to issues of personal jurisdiction should it conclude that such discovery will be a fishing expedition.” Id. at 15 (citation and quotation marks omitted). The court was also unconvinced by Plaintiffs’ argument that personal jurisdiction was invoked by virtue of the acts of the banks’ coconspirators, holding that Plaintiffs failed to plead with sufficient particularity that the banks were involved in a conspiracy. Id. at 11-12.

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There may well be banks or other legitimate or semi-legitimate entities ultimately found to have conduct aimed at or traceable to the United States relating to illegal online sales. But as the very substantial efforts undertaken here by sophisticated and well-funded plaintiffs demonstrate, the necessary proof may be hard to come by. So long as the foreign bank refrains from directly marketing itself in the United States (arguably an achievable result for all but the most directly involved participants in online counterfeit and illegal sales), the Unspam decision seems to insulate it from U.S. anticounterfeiting laws and regulations. The rationale of creating liability for third parties that profit indirectly from Internet misconduct may have superficial appeal to those seeking to deny perpetrators needed resources, but absent a good reason to think those parties have violated the law it may be a waste of resources better spent pursuing other avenues.
 
This case, however, need not be taken to mean that the larger task of fighting the online sale of counterfeit and illegal goods through the courts is not worth pursuing. It may be true that suits like this one reflect a grasping at straws in the face of the failure of traditional law enforcement to address the problem of illegal Internet drug sales consistently and effectively. But perhaps as much as anything else the decision in Unspam Technologies reflects the fact that the interests of plaintiffs’ counsel (who mainly seek deep pockets) are not precisely aligned with those of the intellectual property owners or sellers of legitimate products (who mainly focus on deterring misconduct and packaging cases that can be referred to law enforcement). The case thus would counsel for the selection of better defendants. To be sure, enforcement of civil and even criminal remedies against spammers and others who use the Internet to commit their crimes is a difficult and complicated venture. Increasingly, however, parties are recognizing that successful litigation against such targets may be initiated if based on a sophisticated understanding of the technology and a willingness to use the tools of litigation against both counterfeiters and their enablers in creative ways.
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1 The U.S. Government has taken a number of significant actions against enablers, including negotiation of a USD $500 million forfeiture by Google arising from the search engine’s placement of ads for illegal drug sales targeting U.S. consumers (http://www.justice.gov/opa/pr/2011/August/11-dag-1078.html), and a USD $40 million forfeiture against UPS for shipping payments received from illegal online pharmacies (http://www.justice.gov/usao/can/news/2013/2013_03_29_UPS.forfeit.press.html).
2 The facilitation of illegal drug sales by social media has been the subject of pioneering research led by Dr. Bryan Liang of role played by social media. See Mackey TK, Liang BA, Global Reach of Direct-to-Consumer Advertising Using Social Media for Illicit Online Drug Sales, J. Med. Internet Res. 2013;15(5):e105 (available at http://www.jmir.org/2013/5/e105/).