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CompuServe, Inc. v. Patterson, 89 F.3d 1257, 39 U.S.P.Q.2d (BNA) 1502 (6th Cir. 1996).

PERSONAL JURISDICTION - DECLARATORY JUDGMENT - INTERNET - TRADEMARK - UNFAIR COMPETITION - COMPUTER INFORMATION AND NETWORK SERVICE - LONG-ARM STATUTE

Continued supply and sales of shareware via a computer information and network Internet access provider based in the forum state satisfies the due process requirements of the federal Constitution concerning the exercise of personal jurisdiction over an out-of-state defendant.

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

Plaintiff-Appellant CompuServe, Inc. ("CompuServe"), a nationwide provider of both electronic network and information services, has its headquarters in Ohio. Among the services provided by CompuServe is the opportunity for subscribers to post and sell software in the form of "shareware." Shareware, provided to the end user initially free of charge, allows the user to test the software for a specified length of time, after which he or she must decide whether to pay the software's author for continued use, or terminate the use of the software. CompuServe accepted payment for the shareware from purchasers and remitted that payment, less a commission, to the authors of the software.

Richard S. Patterson ("Patterson"), a resident of Texas, subscribed to CompuServe. Patterson took advantage of CompuServe's shareware service by posting Internet navigation software that he developed but marketed via his own corporation, Flashpoint Development. Before use of the shareware service, Patterson entered into a "Shareware Registration Agreement" ("SRA") that provided that Ohio law governed the parties' relationship.

Subsequent to the posting of Patterson's navigation software, CompuServe itself began to market its own navigation software. Patterson believed that CompuServe's software was confusingly similar to his own trademarked software and notified CompuServe.

CompuServe filed a declaratory judgment action in the District Court for the Southern District of Ohio, seeking a declaration that it had not infringed Patterson's trademarks. Patterson filed a motion to dismiss for lack of personal jurisdiction. The district court granted Patterson's motion.

CompuServe filed an appeal arguing that Patterson's repeated availment of the shareware sales procedures constituted minimum contacts with the forum state. CompuServe further argued that the existence of the Shareware Registration Agreement clearly stipulating that Ohio law governed disputes regarding the agreement meant that the exercise of personal jurisdiction comported with traditional notions of fair play and substantial justice.

ISSUE & DISPOSITION

Issue(s)

Whether an Internet service provider's home state can exercise jurisdiction over an out-of-state author of software who subscribes to the Internet service provider and receives commissions for software sold via the Internet service provider.

Disposition

Yes. A forum state can exercise jurisdiction over an author of software who sells his software via a Internet service provider based in the forum state because 1) the author purposefully avails himself of the forum's laws by acting in the forum, 2) the cause of action arises from that availment, and 3) the burden on the defendant author is less than that on the forum state's interests in determining its laws concerning trademarks and trade names.

AUTHORITIES CITED

Cases Cited by the Court
Other Sources Cited by the Court

COMMENTARY

State of the Law Before CompuServe

A federal court's personal jurisdiction is determined by the law of the forum state, subject to the limits of the Due Process Clause of the Fourteenth Amendment. See Reynolds v. International Amateur Athletic Association, 23 F.3d 1110, 1115 (6th Cir. 1994). Ohio's long-arm statute, Ohio R.C. 2307.382(A), extends to the limits of due process. Id.

In light of Supreme Court decisions, the Sixth Circuit has interpreted the Fourteenth Amendment to require that 1) the defendant purposefully avail himself of the privilege of acting within the forum, 2) the cause of action must arise from the defendant's activities within the forum, and 3) the activities by or contacts of the defendant must be substantial enough to make the exercise of personal jurisdiction reasonable. See Reynolds, 23 F.3d at 1116.

A defendant commercial actor meets the purposeful availment standard when he or she purposefully directs his or her activity at the residents of the forum. See Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985). A physical presence within the forum is not necessary; actions such as transmitting a radio broadcast or sending newspapers or magazines into the forum are sufficient. See Southern Mach. Co. v. Mohasco Industries, Inc., 401 F.2d 374, 382 (6th Cir. 1968). However, the defendant's activities must be ongoing, rather than singular, in nature. Id., at 385. Further, the activities of the defendant must constitute more than merely placing a product into the stream of commerce. See Asahi Metals Industry Co., Ltd. v. Superior Court of California, Solano County, 480 U.S. 102 (1987) (O'Connor J., plurality op.).

The cause of action will arise from the defendant's activities in the forum state when the operative facts of controversy relate to those contacts. See Reynolds, 23 F.3d at 1119. Under the common law, commercial actors can only gain trademarks and trade name rights through actual prior commercial use. See In re Trade-Mark Cases, 100 U.S. 82, 94 (1879). Therefore, in common law trademark and trade name disputes, the marks and names must be used in prior commerce by the defendant to give rise to operative facts relating to that controversy. See generally Dakota Indus. v. Dakota Sportswear, Inc., 946 F.2d 1384, 1388 (8th Cir. 1991).

In determining if the exercise of personal jurisdiction is reasonable a court should consider 1) the burden on the defendant, 2) the interest of the forum state, 3) the plaintiff's interest in obtaining relief, and 4) the interests of other forums in an efficient resolution of the controversy. See American Greetings Corp. v. Cohn, 839 F.2d 1164, 1169-1170 (6th Cir. 1988).

The application of the above standards to the realm of Internet-related activities was a case of first impression for the Sixth Circuit.

Effect of CompuServe on Current Law

In many ways the Sixth Circuit's analysis treated the case as if Patterson had been a traditional manufacturer and CompuServe as a distributor of the manufactured goods.

The circuit court applied the traditional analysis concerning the limits of due process to the Internet-related facts of the case. The court confined its analysis to three prongs: availment of the forum, controversy arising from activities in the forum, and reasonableness of applying personal jurisdiction. Patterson availed himself of the privileges of Ohio because he 1) subscribed to CompuServe (an Ohio corporation), 2) loaded his software onto the CompuServe network (located in Ohio), 3) entered into the Shareware Registration Agreement (which contained an Ohio choice of law clause), and 4) repeatedly sent software to CompuServe via electronic means (ongoing activity). See CompuServe Inc. v. Patterson, 89 F.3d 1257, 1264 (6th Cir. 1996).

The court found the facts above analogous to those in Mohasco Industries where the court held that jurisdiction was proper when a defendant had entered into a licensing contract (analogous to the SRA) and contemplated ongoing marketing within the forum (analogous to the continue use of the shareware service combined with the continued acceptance of payment via CompuServe for the shareware purchased). See Southern Mach. Co. v. Mohasco Industries, Inc., 401 F.2d 374, 159 U.S.P.Q. 72 (6th Cir. 1968). The court's noted that "Patterson deliberately set in motion an ongoing marketing relationship with CompuServe, and he should have reasonably foreseen that doing so would have consequences in Ohio." CompuServe, 89 F.3d at 1265.

The action by CompuServe concerned trademarks and trade names, which require prior commercial use for appropriation. Patterson's sole distribution of his software was via the Ohio based CompuServe. The court reasoned, therefore, that Patterson's supposedly infringed marks and names had been used in commerce in Ohio. Therefore his commercial activity in Ohio gave rise to the operative facts of the controversy concerning any infringement of trademarks and names associated with that activity. See CompuServe, 89 F.3d at 1267.

The court found that the application of personal jurisdiction in Ohio was reasonable because 1) Patterson entered into the SRA in hopes of selling software, 2) Ohio had a strong interest in determining the application of its common law regarding trademarks and trade names, and 3) CompuServe (valued at 10 million dollars) had important business interests at stake.

The Sixth Circuit's decision relied on two essential facts. First, that a contract was involved that contained a choice of law provision (the SRA), and second, that Patterson's arrangement with CompuServe closely resembled that of a traditional manufacturer and distributor. While the facts of the case were unique to the court, the court used analogous licensing and manufacturing precedent to find the exercise of personal jurisdiction constitutional in light of the due process clause. The effects of the holding may therefore be limited. The case clearly stands for the proposition that when individuals and corporations, in Internet-related cases, act in traditional manners and with traditional instruments, yet conduct their business over the Internet, the application of personal jurisdiction is appropriate. Thus the effect of the Sixth Circuit's opinion is to put Internet commerce squarely within the framework of the traditional due process analysis concerning personal jurisdiction.

Unanswered Questions

The Court itself recognized that its decision by no means answered all the personal jurisdiction questions concerning software sales, Internet Service providers, and subscribers. The Court noted three areas of concern: first, whether or not merely selling a piece of shareware in a forum state (not that of the Internet service provider) meets the minimum contacts standard, second, whether or not a party from a third state may bring suit against the producer of software that causes damage (i.e. a computer virus) in the state of the Internet service provider; and third, whether an Internet service provider may bring suit in its state against an individual subscriber, who has never left his or her state?

In addition to those questions explicitly noted by the court, several others are suggested by the opinion:

1) To what extent does the presence of a software and/or service provider contract containing both a choice of law clause and forum selection clause tip the balance in favor of the reasonableness of the exercise of personal jurisdiction?

2) What are the minimum number of software or other electronic transactions that would constitute minimum contacts?

3) To what extent does a software author purposefully avail him or herself of a forum state's laws when he or she offers his or her software via several Internet service providers located in several forums?

Survey of the Law in Other Jurisdictions

The Sixth Circuit was the first federal circuit court to examine personal jurisdiction and computer network transactions. Since that decision, four other Federal Circuit Courts (D.C., Fifth, Ninth (twice), and the Second) have considered, in one form or another, the problem of the Internet and personal jurisdiction. Several district courts have also encountered the issue. Below is a list of the Circuit Court decisions, and plus one district court decision that substantially surveyed the decisions among the federal district courts.

The District of Columbia Circuit Court of Appeals:

In GTE New Media Services Inc. v. Bellsouth Corp., 199 F.3d 1343, 2000-1 Trade Cases P 72, 749 (D.C. Cir. 2000), GTE filed a complaint against Bellsouth for violation of the Sherman Act. Bellsouth had a website that anyone in the forum state could access. The district court found that such accessibility constituted sufficient contact so as to allow personal jurisdiction. Pursuant to 28 U.S.C. 1292(b) Bellsouth brought an interlocutory appeal on the jurisdiction issue. The D.C. Circuit reversed the lower court. The court surveyed the several circuit court decisions concerning the Internet and found that "personal jurisdiction surely cannot be based solely on the ability of District residents to access the defendant's website."

The Fifth Circuit Court of Appeals:

In Mink v. AAAA Development LLC, 190 F.3d 333, 52 U.S.P.Q.2d (BNA) 1218 (5th Cir. 1999), Mink, a developer of software, brought suit against his competitors asserting violations of his copyright and patent rights through the illegal copying of his software. The district court dismissed for lack of personal jurisdiction. The Fifth Circuit affirmed. The court found significant that AAAA's only contact with the forum (Texas) was a website that merely allowed individuals to contact the company via electronic mail. The court ruled that the website was "passive" in nature, and such a passive advertisement was not grounds for the assertion of personal jurisdiction.

The Ninth Circuit Court of Appeals:

In Panavision Int. L.P. v. Toeppen, 141 F.3d 1316, 46 U.S.P.2d (BNA) 1511 (9th Cir. 1998), Panavision brought suit against Toeppen for trademark related issues concerning the use by Toeppen of the marks Panavision and Panaflex as domain names. The district court found the exercise of personal jurisdiction appropriate, and the Ninth Circuit affirmed. Toeppen had no contacts with the forum (California) other than the noncommercial websites and a letter sent to Panavision requesting $13,000.00 for the domain names. The court focused on the fact that Toeppen had registered the domain names knowing that the trademarks belonged to a California corporation, and further offered to sell the domain names in a letter sent to California. In essence, the court found personal jurisdiction existed because the defendant had directed economic activity via the Internet into the forum and directed it at a resident of the forum.

In Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 44 U.S.P.Q.2d (BNA) 1928 (9th Cir. 1997), the Arizona Cybersell brought an action against the Florida Cybersell for infringement of the service mark Cybersell. Florida Cybersell's only contact with the forum of Arizona was a website advertising the services (website creation) of the Florida Cybersell. The district court dismissed for lack of personal jurisdiction, and the Ninth Circuit affirmed. The court cited the proposition that the constitutionality of the exercise of personal jurisdiction is proportionally linked to the nature and quality of the commercial activity done by the defendant over the Internet. See Cybersell, 130 F.3d at 419 (citing Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119, 1124 (W.D.Pa. 1997)). The court found that because the only contact that the Florida Cybersell's website had with Arizona was the Arizona Cybersell visiting the Florida Cybersell's website, no commercial activity had occurred and therefore an exercise of personal jurisdiction was inappropriate.

The Second Circuit Court of Appeals:

The case Bensusan Restaurant Corp. v. King, 126 F.3d 25, 44 U.S.P.Q.2d (BNA) 1051 (2nd Cir. 1997), (also know as the "Blue Note Case") the operator of a New York Jazz club called "The Blue Note" brought an action for trademark violation against a Missouri club of the same name. The district court dismissed for lack of personal jurisdiction, and the Second Circuit affirmed. The only contact with the forum (New York) was a website advertising the Missouri club. The court found that because the defendant had not committed any tort in New York via the website, the exercise of personal jurisdiction was inappropriate. See the LII commentary on this case.

The District Court of Oregon:

The case of Millennium Enterprises, Inc. v. Millennium Music, LP, 33 F.Supp.2d 907, 49 U.S.P.Q.2d (BNA) 1878 (D.Or. 1999), provides an overview of the decisions on personal jurisdiction and the Internet by district courts.

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