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

by Orrick, Herrington & Sutcliffe LLP
Contact

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.

**     **     **

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.
____________________

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/).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick, Herrington & Sutcliffe LLP | Attorney Advertising

Written by:

Orrick, Herrington & Sutcliffe LLP
Contact
more
less

Orrick, Herrington & Sutcliffe LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.