The US Court of Appeal for the Ninth Circuit has found that the Nevada District Court was wrong to throw out a defamation lawsuit brought by a Bermudian aircraft sales and charter company against a US boutique aviation law firm for lack of jurisdiction.

The 18 September opinion held that Freestream Aircraft (Bermuda) was entitled to sue Washington State-based Aero Law Group in Nevada over comments allegedly made by one of its lawyers, John Schmidt, claiming the company was involved in illegal financing transactions.

In 2014, Schmidt allegedly interfered with Freestream’s sale of a Boeing Business Jet to China’s Blue City Holdings by contacting its representatives and claiming the Bermudian company had built its business on “illegal and unethical” back-to-back transactions, whereby a broker acts as both the interim buyer and the interim seller of an aircraft and recoups the difference between the purchase and sale prices.

The deal subsequently fell through, leading Freestream to write to Aero demanding Schmidt stop “defaming” its business practices. The law firm responded that it wasn’t aware of any statements made by its team connecting Freestream to back-to-back deals.

Freestream alleges, however, that Schmidt went on to make similar statements to another potential buyer at an aviation conference on the Isle of Man in June 2015. Later that year he met again with the same contact and a representative of UK aviation services company Gama at the National Business Aviation Association annual meeting in Nevada, where he “reiterated that back-to-back transactions are illegal under federal law” and said that potential buyers would be “significantly disadvantaged” by Freestream’s use of such a deal structure.

The Bermudian company sued Aero in the Nevada court in 2016, seeking compensation for defamation and injunctive relief against further statements that could harm its reputation. It challenged Schmidt’s claims that back-to-back transactions were the core of its business and that such deals were illegal, adding that the resulting reputational damage from such claims would be keenly felt in the “tight-knit” private aviation market.

The court, however, found in favour of Aero, which claimed the suit should be thrown out for lack of personal jurisdiction. In reaching its decision, the court applied the so-called effects test based on the US Supreme Court’s 1984 opinion in Calder v Jones, which establishes when courts can exercise personal jurisdiction based on harmful conduct by parties outside a forum state that nevertheless affects individuals in the state. The test thus focuses on the forum in which the effects of a defendant’s actions are felt, rather than where they occurred.

On appeal, the Ninth Circuit found that the district court had been wrong to apply the effects test, which focuses on out-of-state-conduct, and should instead have used the US Constitution’s “minimum contacts” test in the first instance. Under the latter tests, local courts are shown to have jurisdiction over defendants if they conduct or direct their activities towards the forum and are subsequently sued on the basis of those activities, as long as the court’s exercise of jurisdiction comports with fair play and substantial justice.

“Schmidt’s allegedly defamatory statement was made in Nevada, and the cause of action arises from that statement,” the Ninth Circuit said, which satisfied the first two “prongs” of the minimum contacts test.

The test for establishing fair play, meanwhile, was established by the earlier Ninth Circuit decision in Paccar International v Commercial Bank of Kuwait, which requires courts to look at: the extent of defendants’ “interjection” in the forum state; the burden placed on defendants to defend themselves in the forum; potential conflicts with the sovereignty of the defendant’s home state; the forum state’s interest in the dispute; judicial efficiency; the importance of the forum state to the plaintiff’s interest in convenient relief; and the existence of alternative forums. The court ultimately held that the balance of these factors weighed in Freestream’s favour or was “at best, ‘a wash’,” and that the defendants had “failed to make a compelling case that the district court’s exercise of personal jurisdiction over them would be unreasonable”.

On this basis, the Ninth Circuit concluded that Aero could be sued in Nevada without any affront to constitutional due process and reversed and remanded the district court’s dismissal.

In the United States Court of Appeal for the Ninth Circuit

Freestream Aircraft v Aero Law Group

  • Judge Kim Wardlaw
  • Judge Jacqueline Nguyen
  • Judge Solomon Oliver

Counsel to Freestream

  • Boies Schiller Flexner

Marc Ayala and Douglas Mitchell

Counsel to Aero

  • Lipson Neilson Cole Seltzer & Garin

Angela Nakamura and Joseph Garin