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November 14, 2010

Jurisdictional Nuance

Nuance sued competitor Abbyy over its OCR scanning software patents. Finding out who the US subsidiary of Abbyy was owned by, Nuance amended its complaint to target the parent company in Cyprus, and the Russian subsidiary of Abbyy. Nuance served them both. Abbyy motioned to dismiss for lack of personal jurisdiction, and improper service of the foreign companies. The district court judge pitched the case over personal jurisdiction, as well as the service spat, including sua sponte determining that Nuance hadn't even properly served the US Abbyy. The judge also stopped further discovery. There was no nuance to reversal on appeal: it was loud and clear.

Nuance Communications  v. Abbyy (CAFC 2010-1100) precedential

Both Nuance and the Abbyy family of companies develop and sell software products including optical character recognition ("OCR") software. According to Abbyy Software's website, "ABBYY is an international company with 9 offices in different countries, including Russia, Germany, the United States, Ukraine, the UK, Cyprus, Japan and Taiwan." J.A. 252.

The law of the Federal Circuit, rather than that of the regional circuit in which the case arose, applies to determine whether the district court properly declined to exercise personal jurisdiction over an out-of-state accused infringer. Akro Corp. v. Luker, 45 F.3d 1541, 1543 (Fed. Cir. 1995). A district court's conclusion on personal jurisdiction is a question of law subject to review without deference. LSI Indus. Inc. v. Hubbell Lighting, Inc., 232 F.3d 1369, 1371 (Fed. Cir. 2000). This court reviews district court findings regarding underlying disputed facts for clear error. Dainippon Screen Mfg. Co. v. CFMT, Inc., 142 F.3d 1266, 1269 (Fed. Cir. 1998).

"Personal jurisdiction over an out-of-state defendant is appropriate if the relevant state's long-arm statute permits the assertion of jurisdiction without violating federal due process." 3D Sys., Inc. v. Aarotech Labs., Inc., 160 F.3d 1373, 1376-77 (Fed. Cir. 1998). Because California's long-arm statute is co-extensive with federal due process requirements, the jurisdictional analyses under California law and federal law are the same. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 801 (9th Cir. 2004). The constitutional touchstone for determining whether an exercise of personal jurisdiction comports with due process "remains whether the defendant purposefully established 'minimum contacts' in the forum State." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).

Akro laid out a three-prong test to resolve general jurisdiction.

General jurisdiction is not at issue in this case. The Federal Circuit applies a three prong test to determine if specific jurisdiction exists: (1) whether the defendant purposefully directed activities at residents of the forum; (2) whether the claim arises out of or relates to those activities; and (3) whether assertion of personal jurisdiction is reasonable and fair. Akro, 45 F.3d at 1545-46; see also Schwarzenegger, 374 F.3d at 802.

The Supreme Court advises that the third factor applies only sparingly. When a defendant seeks to rely on the "fair play and substantial justice" factor to avoid the exercise of jurisdiction by a court that otherwise would have personal jurisdiction over the defendant, "he must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable." Burger King, 471 U.S. at 477. This court has echoed that restrictive characterization of the third factor, stating that "defeats of otherwise constitutional personal jurisdiction 'are limited to the rare situation in which the plaintiff's interest and the state's interest in adjudicating the dispute in the forum are so attenuated that they are clearly outweighed by the burden of subjecting the defendant to litigation within the forum.'" Akro, 45 F.3d at 1549 (quoting Beverly Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558, 1568 (Fed. Cir. 1994)).

Without discovery and a record on jurisdiction, this court must resolve all factual disputes in the plaintiff's favor. Deprenyl Animal Health, Inc. v. Univ. of Toronto Innovations Found., 297 F.3d 1343, 1347 (Fed. Cir. 2002). "[W]here the plaintiff's factual allegations 'are not directly controverted, [they] are taken as true for purposes of determining jurisdiction . . . .'" Akro, 45 F.3d at 1543 (quoting Beverly Hills Fan, 21 F.3d at 1563). To survive a motion to dismiss in the absence of jurisdictional discovery, plaintiffs need only make a prima facie showing of jurisdiction. Trintec Indus., Inc. v. Pedre Promotional Prods., Inc., 395 F.3d 1275, 1282 (Fed. Cir. 2005).

On appeal, Nuance seeks a reversal of the dismissal of the Abbyy defendants, arguing that the evidence presented was more than sufficient to establish personal jurisdiction. As an alternative to reversal, Nuance urges this court to vacate the judgment below and remand to allow Nuance to take jurisdictional discovery.

Nuance contends that Abbyy Production purposefully directed activities at residents of California, thereby satisfying the first prong of the Akro test for specific personal jurisdiction. Nuance focuses on the CEO's stated goal of "conquering" the U.S. market; the importation of allegedly infringing products into California; the extraction of royalty payments for the sale of those products; and Abbyy Production's agreement to provide assistance to Abbyy USA in selling, reproducing, and modifying the accused products in California. As of the February 11, 2008 date of the Trade Secret Magazine article, Abbyy's FineReader software program allegedly controlled about thirty-percent of the U.S. market.

The court noted that over 95% of Abbyy's US profits flowed to the foreign parent.

"[W]here the defendant 'deliberately' has engaged in significant activities within a State . . . he manifestly has availed himself of the privilege of conducting business there, and because his activities are shielded by 'the benefits and protections' of the forum's laws it is presumptively not unreasonable to require him to submit to the burdens of litigation in that forum as well." Burger King, 471 U.S. at 475-76 (internal citations omitted). Abbyy Production purposefully directed its activities at residents of California and therefore satisfies the first prong of the Akro test.

Abbyy Production's actions also satisfy the second prong of the Akro test, that the claims arise out of or relate to the purposefully directed activities, because Nuance's infringement claims relate to Abbyy Production's importation of goods into California.

Abbyy Production also runs afoul of the Supreme Court's and this court's stream of commerce jurisprudence. In World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 298 (1980), the Supreme Court stated that a defendant could purposefully avail itself of a forum by "deliver[ing] its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum [s]tate." In Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987), a plurality of four justices concluded that something more was required--"an action of the defendant purposefully directed toward the forum state." Id. at 112. The cited examples of purposeful direction included "marketing through a distributor . . . in the forum [s]tate" and "providing regular advice to customers." Id. Four other justices considered the showing of additional conduct unnecessary. Id. at 117.

Although Appellees argue that Abbyy Production is merely licensing the rights to software in exchange for royalty payments, this distinction is irrelevant for jurisdictional purposes. Abbyy Production has purposefully imported the accused products into California, made those products available for sale through an established distribution chain, and the cause of action for patent infringement is alleged to arise out of these activities. No more is required for specific jurisdiction. See Burger King Corp., 471 U.S. at 472-73; Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774-75 (1984); Beverly Hills Fan, 21 F.3d at 1565.

With respect to the third prong of the Akro test,... Abbyy Production established a distribution system with Abbyy USA that was intended to deliver products to the U.S. market via a commonly owned California entity. Abbyy Production knew the destination of its products, and its conduct and connections with the forum state were such that it should have reasonably have anticipated being brought into court there. See World-Wide Volkswagen, 444 U.S. at 292. Additionally, Abbyy Production and Abbyy USA share the same counsel and operate under a consolidated Global Management Team. These relationships should ameliorate any possible burden of litigating in California. See Patent Rights Prot. Grp., LLC v. Video Gaming Techs., Inc., 603 F.3d 1364, 1370 (Fed. Cir. 2010). Because the exercise of jurisdiction over Abbyy Production would not violate due process, and because California's long-arm statute is coextensive with federal due process, this court concludes that the district court erred when it declined to exercise personal jurisdiction over Abbyy Production.

Nuance also successfully challenged dismissal on personal jurisdiction grounds, though the record was undeveloped, and Abbyy Software's involvement in domestic sales "uncertain."

Nuance contends that Abbyy Software purposefully directs its activities at residents of California through the importation and sale of infringing products via distribution channels it controls; while Appellees maintain that Abbyy Software is simply a holding company that neither imports nor sells goods in California or elsewhere.

The limited evidence of record supports Nuance's contention that Abbyy Software functions as more than a holding company. Abbyy Software's website portrays Abbyy as a single company with offices in many countries, including the United States.

Similar facts have been held to establish a prima facie case of jurisdiction. For example, in Cardsoft, Inc. v. Verifone Holdings, Inc., No. 08-098, 2009 WL 361069, at *1-2 (E.D. Tex. Feb. 10, 2009), the district court held that a prima facie showing for the exercise of personal jurisdiction had been made over a foreign entity that alleged it was merely a holding company.

The district court's denial of discovery to more clearly establish jurisdiction was also reversed.

The district court de facto denied Nuance's request for jurisdictional discovery by not addressing it in its dismissal order. See Nuance Commc'ns, 2009 WL 2707390. Yet Nuance's request for jurisdictional discovery is not "based on a mere hunch." See Patent Rights Prot. Grp., 603 F.3d at 1372. Rather, the request is supported by, inter alia, Abbyy Software's website and the Trade Secret Magazine article, which suggest that Abbyy Software controls the actions of its subsidiaries. Although the proffered documents may be insufficient in themselves to establish a prima face case, this incomplete record nevertheless supports the need for additional discovery to determine the merits of personal jurisdiction over Abbyy Software.

"[D]iscovery should ordinarily be granted where pertinent facts bearing on the question of jurisdiction are controverted . . . ." Laub, 342 F.3d at 1093 (citation omitted). Accordingly, this court holds that the district court abused its discretion by dismissing Abbyy Software without jurisdictional discovery.

Nuance could not have served the Russian company under the normal channel: Hague Convention rules.

[T]he Russian Federation "unilaterally suspended all judicial cooperation with the United States in civil and commercial matters in 2003." J.A. 316.

Under Rule 4(f)(3), federal courts have discretionary authority to direct service "by other means not prohibited by international agreements." Fed. R. Civ. P. 4(f)(3); Brockmeyer, 383 F.3d at 805 (emphasis omitted). "Rule 4(f)(3) is not subsumed within or in any way dominated by Rule 4(f)'s other subsections; it stands independently, on equal footing." Rio Props., Inc. v. Rio Int'l Interlink, 284 F.3d 1007, 1015 (9th Cir. 2002). The Advisory Committee Note to Rule 4 explains that Rule 4(f)(3) is particularly appropriate where a signatory to the Hague Service Convention has "refused to cooperate for substantive reasons." Fed. R. Civ. P. 4, Advisory Committee Note to Subdivision (f) (1993). The Advisory Committee Note further explains that service under 4(f)(3) might be justified when the foreign country's central authority "refuses to serve a complaint seeking punitive damages or to enforce the antitrust laws of the United States." Id.

Substituted service under Rule 4(f)(3) has also been specifically used to serve litigants from the Russian Federation in multiple U.S. courts.

Nuance served Abbyy Production in Moscow by personal delivery.

[N]umerous courts have found alternate service methods appropriate without a prior attempt to serve through the Hague Convention. See, e.g., In re LDK Solar Sec. Litig., No. 07-05182, 2008 WL 2415186, at *2 (N.D. Cal. June 12, 2008); In re Potash Antitrust Litig., 667 F. Supp. 2d 907, 931 (N.D. Ill. 2009); Arista Records, 2008 WL 563470, at *1-2. This court holds that the district court erred in requiring service of Abbyy Production under the Hague Service Convention.

The court-ordered method of service must still be reasonable and comport with constitutional notions of due process. To meet this requirement, the method of service crafted by the court must be "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). This court finds that substitute service on Abbyy USA would satisfy this standard, as it is reasonably calculated to apprise Abbyy Production of the pendency of the action and afford it an opportunity to respond. Indeed, the Trade Secret Magazine article reveals that Abbyy USA was effectively passing information about this lawsuit to Abbyy Production even before Nuance attempted to serve Abbyy Production. "Dismissal is not appropriate when there is a reasonable prospect that service may yet be obtained." Chapman v. Teamsters Local 853, No. 07-1527, 2007 WL 3231736, at *3 (N.D. Cal. Oct. 30, 2007). On remand, the district court should therefore allow alternate service as it deems appropriate, including at least substitute service, pursuant to Rule 4(f)(3), of Abbyy Production by substitute service on Abbyy USA.

The district court erred by dismissing Abbyy Software for improper service on its own initiative.

On review of the record, this court concludes that the district court erred when it declined to exercise jurisdiction over Abbyy Production and abused its discretion when it denied Nuance's request for jurisdictional discovery. This court further concludes that the district court erred when it dismissed the Abbyy defendants for improper service of process. This court vacates the district court's judgment and remands for further proceedings consistent with this opinion.

Posted by Patent Hawk at November 14, 2010 10:09 PM | Case Law

Comments

Judges shall hold their offices during good behavior; i.e. tenure for life -- just the latest USDC example of why the Fondling Fathers weren't really all that smart after all.

"The district court dismissed both Abbyy Production and Abbyy Software. With respect to personal jurisdiction, the court provided a single paragraph of analysis, concluding that the record did not show that Abbyy Production and Abbyy Software purposefully directed any specific activity at residents of California or within the forum state, or that Nuanceā€™s claims arise out of or relate to those activities."

The record did not show purposeful direction because the judge refused to allow jurisdictional discovery.

Judge Jeffery S. White, federal prosecutor appointed to the bench by Bush. This is the same judge that tried to shut down the Wikileaks website in Sweden on a motion from the Swiss banking group Julius Bear until he relented in the face of international out-cry against prior restraint.

Jurisdiction, particularly involving international players, is never easy, which is why a single paragraph analysis is a prima facie badge of . . .whatever. You fill in the blanks.

Posted by: Babel Boy at November 16, 2010 9:28 AM