In a recent decision expanding jurisdiction over Internet activity, the New York Court of Appeals in response to a question certified by the U.S. Court of Appeals for the Second Circuit held that, for purposes of determining jurisdiction under New York’s long-arm statute in a copyright infringement action, the location of the copyright holder is the situs of injury under N.Y. C.P.L.R. § 302(a)(3)(ii) where the claims involved the uploading of copyrighted literary works onto the Internet. Penguin Group (USA), Inc. v. American Buddha, 2011 N.Y. Slip Op. 02079, 2011 WL 1044581 (N.Y. March 24, 2011).

As a result of this decision, copyright owners based in New York should now be able to obtain jurisdiction in New York courts against entities which infringe their content through Internet distribution that bears no other connection to the state. Conversely, entities that provide Internet content should be aware of the heightened possibility of being brought into court in New York by parties challenging their right to use allegedly infringing content.

Background

American Buddha, an Oregon company, operated an “online library.” The “online library” was a website on which subscribers could access and download literary and other works free of charge. Penguin Group, a New York-based publishing company, owns an extensive copyright portfolio for a range of literary works. Penguin sued American Buddha in the Southern District of New York, alleging infringement of its copyrights in four literary works, which American Buddha was offering for download to its subscribers without Penguin’s consent.

American Buddha moved to dismiss the complaint for lack of personal jurisdiction, arguing that as an Oregon-based company its ties to New York were too limited, the decision to upload the works was made outside of New York; the works were stored on servers outside New York; and Penguin had alleged no infringing activity within New York. Penguin asserted jurisdiction in New York under a provision of the state’s long-arm statute, N.Y. C.P.L.R. § 302(a)(3)(ii), which permits a New York court to assert jurisdiction over any party 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.” The district court agreed, finding that any loss suffered by Penguin in New York was “purely derivative” and granted American Buddha’s motion to dismiss.

Penguin appealed the decision to the U.S. Court of Appeals for the Second Circuit. Penguin Group (USA) Inc. v. American Buddha, No. 09 Civ. 528(GEL), 2009 WL 1069158, *4 (S.D.N.Y. 2009). The Second Circuit focused on the question of whether New York was the “situs of injury” in this case. Reviewing the New York case law, the Second Circuit identified three approaches to determining the situs of injury: that the injury occurs where the plaintiff experiences the loss; that it occurs where the intellectual property is held (usually the owner’s residence or principle place of business); or that it occurs wherever the infringing conduct took place. Penguin Group (USA) Inc. v. American Buddha, 609 F.3d 30, 36 (2nd Cir. 2010). While the district court focused on the location of the infringing conduct, the Second Circuit found that New York law did not provide a clear answer to the situs of injury question in cases involving copyright infringement by distribution over the Internet or similar circumstances. It, therefore, 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. 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?” [1] Id. at 42. Noting that the Internet context of the case could impact analysis of the question, the Second Circuit invited the New York Court of Appeals to alter the question as it might deem appropriate.

The Decision

Accepting the Second Circuit’s invitation to modify the certified question, the New York Court of Appeals rephrased it to focus more narrowly on the context of the copyright case before it[2], especially its basis in Internet activity:

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?

N.Y. Slip Op. 02079 at 4-5. Parting from the analysis of the district court, the Court of Appeals determined that the situs of injury is the location of the copyright holder.

The court reviewed the applicable New York cases, comparing Fantis Foods, Inc. v. Standard Importing Co., Inc., 402 N.E. 2d 122 (N.Y. 1980), in which the “derivative” injury in New York resulting from a competitor’s diversion of a shipment outside the state was insufficient to establish jurisdiction, and Sybron Corp. v. Wetzel, 385 N.E. 2d 1055 (N.Y. 1978), where the alleged theft of trade secrets outside the state threatened the plaintiff’s business in New York and thus created a sufficiently direct injury in New York to support jurisdiction. The court also considered American Eutectic Welding Alloys Sales Co. v Dytron Alloys Corp., 439 F.2d 428 (2d Cir. 1971), in which the Second Circuit determined that the plaintiff’s economic injury in New York based solely on its loss of business outside the state was insufficient to establish jurisdiction. While the district court in Penguin Group had relied in part on American Eutectic to deny jurisdiction over American Buddha, the court here distinguished the type of analysis needed in Internet cases from that required in more traditional commercial tort cases, since the Internet is “intangible and ubiquitous,” and thus any injury is “more difficult to identify and quantify.” N.Y. Slip Op. 02079 at 8.

The New York Court of Appeals identified two factors establishing the plaintiff’s location as the situs of injury under the facts of Penguin Group. First, the Internet-based nature of the alleged infringement means that the infringed works were made available instantaneously to people everywhere, including in New York, in contrast to cases like American Eutectic, where the locus of injury is clearly circumscribed to locations outside New York. It is thus illogical, the court determined, to rely on the location of lost business in Internet cases where “the place of uploading is inconsequential and it is difficult, if not impossible, to correlate lost sales to a particular geographic area.” As a result, “the out-of-state location of the infringing conduct carries less weight in the jurisdictional inquiry in circumstances alleging digital piracy and is therefore not dispositive.” N.Y. Slip Op. 02079 at 10.

Second, the court relied on the unusual nature of copyright to distinguish this case. Copyright owners whose rights are infringed suffer something more than indirect financial loss. The court explained that they face unique, possibly irreparable harms such as loss of the incentive to publish or write. Moreover, the lack of evidence of infringing activity within the state was not dispositive, since the accessibility within New York of any website featuring infringing content establishes a sufficient likelihood of harm, and since any actual loss of sales due to copyright infringement is almost always very difficult to establish. Ultimately, the court concluded that “[t]he location of the infringement in online cases is of little import inasmuch as the primary aim of the infringer is to make the works available to anyone with access to an Internet connection, including computer users in New York.” N.Y. Slip Op. 02079 at 12-13. Despite being difficult to quantify, the court deemed this sort of injury less remote than a purely indirect financial loss, and thus sufficient to establish the situs of injury for purposes of jurisdiction under New York’s long-arm statute.

Conclusion

Both content owners and companies offering content via the Internet should take note of this decision and the resulting expansion of jurisdiction in New York courts over Internet-based distribution of copyrighted materials. While the additional jurisdictional requirements of N.Y. C.P.L.R. § 302(a)(3)(ii) and due process will still constrain jurisdiction to entities possessing some contacts with the state that should make jurisdiction foreseeable, if you have infringed a New York copyright owners' rights, there is now an increased likelihood that jurisdiction will reside in a New York court even if your alleged infringing activities took place outside the state. Moreover, although this decision is ostensibly limited to Internet-based copyright infringement, there nonetheless remains a possibility that it could contribute to an expansion of jurisdiction for other types of intellectual property cases.