Ruling Clarifies Situs of Injury For Online Infringement Claims

The decision in Penguin Group (USA) Inc. v. American Buddha[1] is likely to significantly affect the publishing and entertainment industries in New York in their efforts to retain copyright control over online materials, from books to movies, music and other products.

Moreover, the ruling may influence courts across the country dealing with litigation involving claims of online infringement. Indeed, although narrowly focused on copyright law, Penguin Group may herald changes to long arm jurisdictional analysis reflecting technological changes taking place in the 21^st century.

The case arose when a large trade book publisher with its principal place of business in New York City, Penguin Group (USA) Inc., filed a copyright infringement action in the Southern District Court against American Buddha. The defendant, an Oregon not-for-profit corporation whose principal place of business was in Arizona, operated two websites – the American Buddha Online Library and the Ralph Nader Library – that were hosted on servers located in Oregon and Arizona.

Penguin Group alleged that American Buddha infringed on Penguin’s copyrights to four books (“Oil,” by Upton Sinclair; “It Can’t Happen Here,” by Sinclair Lewis; “The Golden Ass,” by Apuleius, as translated by E.J. Kenney; and “On the Nature of the Universe,” by Lucretius, as translated by R.E. Latham).

The complaint alleged that American Buddha published complete copies of these works on its two sites, making them available free of charge to its 50,000 members and to anyone with an Internet connection. The electronic copying and uploading of the works apparently was undertaken in Oregon or Arizona.

American Buddha moved to dismiss the complaint for lack of personal jurisdiction, arguing that its ties to New York were too insubstantial.

In response, Penguin Group asserted that it had secured long arm jurisdiction over American Buddha by virtue of CPLR § 302(a)(3)(ii), which provides jurisdiction over nondomiciliaries who committed tortious acts outside the state that resulted in injuries within New York.

American Buddha countered that CPLR § 302(a)(3)(ii) was inapplicable because Penguin Group had not suffered an injury in New York.

The district court granted American Buddha’s motion and dismissed the complaint, holding that Penguin Group was injured in Oregon or Arizona, where the copying and uploading of the books took place. Although the district court acknowledged that the Internet could be a complicating factor in analyzing personal jurisdiction, it concluded that the Internet played “no role in determining the situs of [Penguin Group’s] alleged injury” because the claimed infringement had occurred in Oregon or Arizona.

Penguin Group appealed, and the U.S. Court of Appeals for the Second Circuit, recognizing a split of authority in New York district courts regarding the application of CPLR § 302(a)(3)(ii) to copyright infringement cases against out-of-state defendants, certified the following question to the New York Court of Appeals:

In copyright infringement cases, is the situs of injury for purposes of determining long-arm jurisdiction under N.Y. CPLR § 302(a)(3)(ii) the location of the infringing action or the residence or location of the principal place of business of the copyright holder?

The Court of Appeals accepted the certified question but declared that, because the Internet “plays a significant role in this case,” it would narrow and reformulate the certified question to read:

In copyright infringement cases involving the uploading of a copyrighted printed literary work onto the Internet, is the situs of injury for purposes of determining long-arm jurisdiction under N.Y. CPLR § 302(a)(3)(ii) the location of the infringing action or the residence or location of the principal place of business of the copyright holder?  

The Court’s answer:  it was the location of the copyright holder.

Analysis

In its decision, the Court explained that under CPLR § 302(a)(3)(ii), a plaintiff must show that (1) the defendant committed a tortious act outside New York; (2) the cause of action arose from that act; (3) the tortious act caused an injury to a person or property in New York; (4) the defendant expected or should reasonably have expected the act to have consequences in New York; and (5) the defendant derived substantial revenue from interstate or international commerce.

The issue before the court was the third requirement: whether an out-of-state act of copyright infringement had caused injury in New York.

In analyzing that issue, the Court first examined its decision in Fantis Foods v Standard Importing Co.,[2] where it found personal jurisdiction to be lacking in the absence of a “direct injury” within New York.

In that case, a New York wholesaler of feta cheese asserted a claim for conversion against a Greek entity that had diverted a cheese shipment, meant to be shipped to the wholesaler in Chicago, to a competitor while the shipment was in Greece or on the high seas.

The Court concluded that personal jurisdiction over the Greek defendant did not lie under CPLR § 302(a)(3)(ii) because the only possible connection between the claimed conversion and any injury or foreseeable consequence in New York was the fact that the wholesaler was incorporated and maintained offices in New York. The Court explained that the residence or domicile of the injured party within a state was not a sufficient predicate for jurisdiction.

In Penguin Group, the Court next referenced its decision in Sybron Corp. v Wetzel,[3] where the defendant, a nondomiciliary corporation, hired a former employee of Sybron (a competitor engaged in manufacturing in New York) allegedly to obtain Sybron’s protected trade secrets.

Recognizing that the locus of injury in commercial cases was not as readily identifiable as it was in torts causing physical harm, the Court determined that Sybron had sustained a sufficiently direct injury in New York to support jurisdiction under CPLR § 302(a)(3)(ii) because its claim was based on more than just its in-state domicile.

Rather, Sybron had alleged that it had acquired the trade secrets at issue in New York and, further, that the defendant’s allegedly unfair competition threatened to pilfer Sybron’s significant New York customers.

In Penguin Group, the Court explained that Penguin Group’s alleged injury was more difficult to identify and quantify because the alleged infringement involved the Internet, which by its nature was “intangible and ubiquitous.”

It added that the crux of Penguin Group’s copyright infringement claim was not merely the unlawful electronic copying or uploading of the four copyrighted books but was “the intended consequence of those activities – the instantaneous availability of those copyrighted works on American Buddha’s websites for anyone, in New York or elsewhere, with an Internet connection to read and download the books free of charge.” Identifying the situs of injury in this case was not as simple as turning to “the place where plaintiff lost business” because there is no singular location that fits that description, the Court added.

As a result, the Court decided, although it might make sense in traditional commercial tort cases to equate a plaintiff’s injury with the place where its business was lost or threatened, it was illogical to extend that concept to online copyright infringement cases where the place of uploading was inconsequential and it was difficult, if not impossible, to correlate lost sales to a particular geographic area.

In short, the Court found, the out-of-state location of the infringing conduct carried less weight in the jurisdictional inquiry in circumstances alleging digital piracy and therefore was “not dispositive.”

The Court said that another factor tipped the balance in favor of identifying New York as the situs of injury: the unique bundle of rights granted to copyright owners.[4] In the Court’s view, based on the multifaceted nature of these rights, a New York copyright holder whose copyright was infringed suffered more than the indirect financial loss deemed inadequate in Fantis Foods.

Interestingly, the Court was not disturbed by the absence of any evidence of the actual downloading of Penguin Group’s four works by users in New York, noting that American Buddha’s sites were accessible by any New Yorker with an Internet connection and, in any event, an injury allegedly inflicted by digital piracy was felt throughout the United States.

The Court, therefore, concluded that (i) the role of the Internet in cases alleging the uploading of copyrighted books distinguished them from traditional commercial tort cases where courts have generally linked the injury to the place where sales or customers are lost; (ii) the location of the infringement in online cases was of little import inasmuch as the primary aim of the infringer was to make the works available to anyone with access to an Internet connection, including computer users in New York; and (iii) the injury to a New York copyright holder, while difficult to quantify, was not as remote as a purely indirect financial loss due to the broad spectrum of rights accorded by copyright law.

Given what the Court characterized as the concurrence of “the function and nature of the Internet and the diverse ownership rights enjoyed by copyright holders situated in New York,” it held that the alleged injury in this case had occurred in New York for purposes of CPLR § 302(a)(3)(ii).

Conclusion

It should be noted that the Court did not find that Penguin Group could necessarily bring its action against American Buddha in a federal district court in New York. As the Court pointed out, CPLR § 302(a)(3)(ii) requires that Penguin Group show that American Buddha both
expected or should reasonably have expected its act to have consequences in New York and that it derived substantial revenue from interstate or international commerce.

There also must be proof that American Buddha had the requisite “minimum contacts” with New York and that the prospect of defending a suit here comported with traditional notions of fair play and substantial justice, as required by the Federal Due Process Clause. Those issues will have to be resolved by the district court.

Still, the decision is likely to have significant practical ramifications in New York and elsewhere. Plaintiffs alleging online infringement, and perhaps plaintiffs in other kinds of cases involving the Internet, now will find their tasks a great deal easier as a result of the Court’s decision.

[1] 2011 N.Y. Slip Op. 2079 (March 24, 2011).

[2] 49 N.Y.2d 317 (1980).

[3] 46 N.Y.2d 197 (1978)

[4] The federal Copyright Act gives owners of copyrighted literary works five “exclusive rights,” namely, the right of reproduction; the right to prepare derivative works; the right to distribute copies by sale, rental, lease or lending; the right to perform the work publicly; and the right to display the work publicly. See 17 U.S.C. § 106.

This article is reprinted with permission from the April 19, 2011 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.