Foreign Cloud-Based Service Providers May Be Subject to Personal Jurisdiction in the United States

by Morrison & Foerster LLP - Social Media

Following a recent U.S. district court’s ruling, foreign companies operating cloud-based services may find themselves subject to federal long-arm jurisdiction under the Federal Rules of Civil Procedure 4(k)(2), even if they have no physical presence in the United States. In reaching its decision, the court noted that the question was ripe for consideration by the court of appeals; thus, it remains to be seen whether the decision will stand if appealed.

In Plixer International, Inc. v. Scrutinizer GMHB, the District Court of Maine ruled that, while jurisdiction would not exist under Maine’s long-arm statute, the court had specific personal jurisdiction over a German company under federal long-arm statute. Rule 4(k)(2), the federal long-arm statute, provides that serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if the defendant is not subject to jurisdiction in any state’s courts of general jurisdiction as long as exercising jurisdiction is consistent with the U.S. Constitution and laws.

This litigation started when Plixer International, Inc., a Maine firm, filed a case against the German defendant for a variety of trademark-related claims, including trademark infringement. The German company moved to dismiss the case. The parties agreed that the German company was not subject to general personal jurisdiction. Thus, the court was left to decide whether the German company was subject to specific personal jurisdiction under federal long-arm statute and Maine’s long-arm statute.

To answer the question of whether jurisdiction was consistent with the U.S. Constitution as required under Rule 4(k)(2), the court applied the “minimum contacts” test set forth in the U.S. Supreme Court’s decision in International Shoe v. Washington. The test asks whether the defendant has sufficient contacts with the forum such that maintaining the suit in that forum does not offend “traditional notions of fair play and substantial justice.”

Under its analysis of federal long-arm statute, the Plixer court focused on whether the German company purposefully availed itself of the privilege of conducting business in the forum State (here, the United States as a whole). Notably, the German company had no physical presence in the United States, but offered cloud-based services from an interactive website and had some U.S.-based revenue. Notwithstanding these limited contacts, the court was satisfied that the German company had minimum contacts with the United States to be subject to personal jurisdiction.

As the First Circuit (the applicable appellate court) has yet to determine whether a foreign company can be subject to specific jurisdiction on the basis of an interactive website or sales from such an interactive website, the district court considered some of the factors weighed in other circuits to determine if a website owner would be subject to personal jurisdiction. Such factors included, for example, whether a defendant uses a website to physically send items into the forum state or whether a defendant can be said to be directly targeting forum state residents.

The district court found no evidence that the German company “targeted” the United States in particular. Nonetheless, the court went on to find that there were sufficient factors that the German company “purposefully availed” itself of the United States.

In particular, the Plixer court noted, German company operated a “highly interactive website that sold its cloud-based services directly through the website, that it was open to business throughout the world, that it accepted recurrent business from the United States in a substantial amount, and that it did so knowingly.” The court also cited the German company’s trademark application in the United States as another factor showing the company’s “desire to deal with the American market.”

While recognizing the concern, the court did not agree that its decision might open up all types of foreign website operators to lawsuits in the United States. The court held that the German company engaged in “sizeable and continuing commerce with United States customers” through its website and should not be surprised by the U.S. litigation. The court reached this conclusion notwithstanding that the German company made only about $196,000 in U.S. sales over the prior three and a half years.

While being forced to litigate in the United States imposed a significant burden, the court ultimately concluded that exercising specific jurisdiction over the German company was reasonable after considering all the facts and circumstances.

With respect to Maine long-arm statute, the court found that personal jurisdiction did not arise, noting that the German company only had “attenuated contacts” with Maine, that the amount of business from that State was “miniscule.” The company had only two Maine customers.

Foreign cloud-based service providers should take note of the Plixer decision. Just because they do not have a physical presence in the United States, or ship any products for sale into the United States, does not necessarily mean they are safe from being hauled into a U.S. court, including being forced to defend themselves in states where they may have few if any customers and that they might not even be able to locate on a map.

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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.

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