In a recent decision, the New York Court of Appeals concluded that an online library's alleged acts outside of New York, involving infringing copying and distribution over the Internet of copyrighted works, constituted a direct injury to a New York copyright holder for purposes of satisfying jurisdiction over the out-of-state library under New York's long-arm statute. Penguin Group (USA) Inc. v. American Buddha, 2011 BL 75585 (N.Y. March 24, 2011). The court determined the injury occurred at the location of the principal place of business of the copyright holder rather than the place of the alleged infringing act. Central to its finding was the court's emphasis on the ubiquitous nature of the Internet and "unique bundle of rights" held by a copyright owner.

Penguin Group, based in New York, commenced an action against American Buddha, an Oregon not-for-profit with its principal place of business in Arizona, under the Copyright Act in the U.S. District Court for the Southern District of New York. Penguin claimed that American Buddha infringed its copyrights by publishing on its website, for free downloading and use, unauthorized copies of four works: "Oil!" by Upton Sinclair, "It Can't Happen Here" by Sinclair Lewis, E.J.'s translation of Apuleius' "The Golden Ass" and R.E. Latham's translation of Lucretius' "On the Nature of the Universe." American Buddha assured its members that their downloading of the works would not constitute copyright infringement because of fair use provisions of the Copyright Act applicable to libraries and archives. According to Penguin, American Buddha's online activity encouraged illegal downloading of such texts in New York and elsewhere, which would result in significant financial injury to Penguin.

American Buddha moved to dismiss, contending that its ties to New York were insubstantial and that Penguin did not suffer an injury in New York. Penguin countered that N.Y. C.P.L.R. § 302(a)(3)(ii), which provides long-arm jurisdiction over a defendant who "commits a tortious act without the state causing injury to person or property within the state, if he ... expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce," applied to American Buddha's activities. Penguin submitted that because it was based in New York and had been exposed to economic damage stemming from such activity, long-arm jurisdictional requirements were satisfied. American Buddha maintained that the alleged injury took place at the site of the activity – computer servers in Arizona and Oregon – and thus no injury was caused in New York. The district court opined that the fact that the publishing had taken place online was "inconsequential" because "[a]lthough the advent of the internet... has no doubt added additional layers of depth to personal jurisdiction jurisprudence... it plays no role in determining the situs of plaintiff's alleged injury." The district court recognized a division of authority on the issue of the location of injury in intellectual property cases, one viewing the location of injury as the place of the infringing act and the other the location of the rights owner. The court ultimately determined that no direct injury occurred in New York and that Penguin suffered only a "purely derivative economic injury" in New York, which was insignificant to satisfy § 302(a)(3)(ii).

On appeal, the Second Circuit, noting two competing lines of cases within the circuit and a lack of guidance from legislative history or state court decisions, certified the question of the location of injury in a copyright infringement case to be answered by the New York Court of Appeals. The circuit court also noted the use of the Internet as relevant because it may allow out-of-state conduct to cause injury to copyright holders in New York. The New York Court of Appeals found that use of the Internet was salient and revised the certified question to include the following italicized phrase: "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. C.P.L.R. § 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 New York Court of Appeals highlighted the convergence of two factors in this case: the unique threat posed by the digital environment to copyright owners and the "unique bundle of rights" flowing from such copyright. The court held that "the alleged injury in this case involves online infringement that is dispersed throughout the country and perhaps the world." It noted the ease with which digital technology can be reproduced, the instantaneous availability of works posted to the Internet, and the lack of a single location of injury. The court also emphasized the fact that the Copyright Act grants five "exclusive rights" to an owner (rights of reproduction, preparation of derivative works, distribution, public performance and display). Given the multifaceted nature of these rights, it concluded that Penguin could reasonably be characterized as having suffered more than indirect financial loss in New York and, thus, concluded that an injury did in fact occur in New York for the purposes of satisfying § 302(a)(3)(ii).

While the New York Court of Appeals concluded that the element of injury in New York was satisfied, this case will return to the federal court and likely be remanded to the district court for further findings on whether the other elements of the long-arm statute and U.S. constitutional jurisdictional standards are satisfied.

Given the increasing popularity of e-books, the distribution of e-books by libraries and evolving digital rights management protocols, as well as the rising piracy of digital works, this opinion is extremely timely. It permits authors, publishers and other copyright holders in New York to demonstrate injury at the location of their residence or place of business when faced with out-of-state acts of infringement over the Internet.