The Court Of Appeals For The Federal Circuit Does Not Dive Into The Turbulent Waters Of The Supreme Court’s Stream Of Commerce Debate

Tuesday, October 2, 2012 - 09:25

For more than two decades, there has been a split in Supreme Court jurisprudence over the proper standard for assessing when a non-resident is subject to specific jurisdiction under the stream of commerce theory of personal jurisdiction. Recently, the Court of Appeals for the Federal Circuit highlighted the absence of any Supreme Court consensus on this issue and applied its own precedent to hold that, based upon the facts alleged, personal jurisdiction could not be exercised over a non-resident accused of patent infringement simply because allegedly infringing products were placed into the stream of commerce. Until the Supreme Court resolves the conflict governing jurisdiction premised upon products entering the stream of commerce, the Federal Circuit has stated that it will not take a position on which of the two competing standards should control. Instead, the Federal Circuit will decide if the facts alleged support exercising or declining to exercise personal jurisdiction under either standard.

The Supreme Court’s Competing Theories Of Personal Jurisdiction

Personal jurisdiction is analyzed using the familiar two-part test: (1) whether the long-arm statute of the forum State is satisfied; and (2) whether the exercise of personal jurisdiction comports with the Due Process Clause. See, e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462 471-476 (1985). Additionally, the exercise of personal jurisdiction over an entity placing products into the stream of commerce with an expectation that those products will be purchased by consumers in a remote jurisdiction can be consonant with the Due Process Clause. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297-98 (1980). The Supreme Court, however, has not arrived at a majority view on the proper standard for evaluating when the exercise of personal jurisdiction over a non-resident whose products enter the stream of commerce survives constitutional scrutiny.

For the last 25 years, specific personal jurisdiction under the stream of commerce theory has been evaluated under two competing standards – one based on foreseeability and the other requiring something more than simply placing a product into the stream of commerce. The fragmented state of the law can be traced to the Supreme Court’s decision in Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987). In Asahi, Justice Brennan, writing for four Justices, opined that the touchstone of personal jurisdiction is foreseeability. Specifically, Justice Brennan stated that the “placement of a product into the stream of commerce [without more] is consistent with the Due Process Clause” because, “[a]s long as participant in this process is aware that the final product is being marketed in the forum State, the possibility of a lawsuit there cannot come as a surprise.” Id. at 117. Justice O’Connor and three other Justices rejected Justice Brennan’s standard, and maintained that personal jurisdiction requires something more than foreseeability since “[t]he placement of a product into the stream of commerce, without more, is not an act of the defendant purposefully directed toward the forum State.” Id. at 112. Justice Brennan’s “foreseeability” standard and the “foreseeability-plus” standard advocated by Justice O’Connor each failed to obtain the support of the majority of the Court. Accordingly, neither standard is controlling precedent.

It was hoped that the questions raised by the plurality opinions in Asahi would be resolved when the issue of personal jurisdiction and the stream of commerce was revisited by the Supreme Court in McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011). Instead of settling the disagreement over which standard should govern personal jurisdiction, the Supreme Court issued another divided opinion in which a majority of the Court failed to adopt either standard.

The District Court Rules No Jurisdiction Under The Stream Of Commerce Theory

AFTG-TG (incorporated in Wyoming) and Phillip M. Adams & Associates (registered to do business in Wyoming) (collectively “AFTG”) filed two complaints in the U.S. District Court for the District of Wyoming alleging that computer chips, motherboards and other products infringed a number of AFTG’s patents. The first complaint was filed against Pegatron (a Taiwanese corporation with facilities in California), Pegatron Technology Service (a subsidiary of Pegatron, incorporated in Indiana) and Urihan (a wholly owned subsidiary of Pegatron, incorporated in Taiwan) (collectively “Pegatron”). AFTG-TG LLC, et al. v. Nuvoton Tech. Corp., et al., No. 10-CV-227-F (D. Wyo. 2010). The second action was filed against ASUSTeK Computer (a Taiwanese corporation) and ASUS Computer (a wholly owned subsidiary of ASUSTeK, incorporated in California) (collectively “ASUS”). AFTG-TG LLC, et al. v. Winbond Elecs. Corp. et al., No. 10-CV-229-F (D. Wyo. 2010).

The complaints in both actions did not allege that any defendant sold or offered to sell products in Wyoming. Rather, each complaint simply implied, parenthetically, that others, “such as [defendants’] customers or end-users,” may have committed acts of infringement in Wyoming.

The Pegatron and ASUS defendants filed virtually identical motions seeking dismissal of the complaints for lack of personal jurisdiction. In support of their respective motions, each group of defendants submitted declarations averring, inter alia, that no steps were taken to directly market or sell products in Wyoming and that any contact with Wyoming was de minimus. The ASUS defendants conceded, however, that “on a few occasions” some products were “drop-shipped” to Wyoming addresses.

With no opportunity for jurisdictional discovery, AFTG was unable to refute the evidence proffered by defendants. Instead, AFTG was left with the complaints’ bare formulaic allegation of jurisdiction and relegated to attorney argument that personal jurisdiction was proper based upon isolated “drop-shipments” and upon the fact that allegedly infringing products were purportedly sold to companies that in turn sold the products to consumers in Wyoming.

The district court faulted AFTG for failing to allege sufficient facts in both complaints to show minimum contacts with Wyoming and for not introducing evidence to demonstrate the existence of those contacts. The district court also rejected AFTG’s argument that “drop-shipments” were sufficient to confer jurisdiction, noting that those shipments were limited and made at the request of third-party resellers. In dismissing both actions for lack of personal jurisdiction, the district court characterized AFTG’s argument that defendants placed allegedly infringing products into the stream of commerce knowing that those products would reach consumers in Wyoming as “mere speculation.”

The Federal Circuit Does Not Enter The Supreme Court’s Stream Of Commerce Debate

In a per curiam opinion, the Federal Circuit stated that AFTG’s jurisdictional allegations would be evaluated under the court’s own precedent – Beverly Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558 (Fed. Cir. 1994). AFTG-TG, LLC, et al. v. Pegatron Corp., et al., 2012 U.S. App. LEXIS 18030, at *12-16 (Fed. Cir. Aug. 24, 2012). Accordingly, the court would refrain from taking a position on the conflicting stream of commerce standards if the facts alleged by AFTG compelled either exercising or declining to exercise personal jurisdiction “under any articulation” of the steam of commerce theory. Id. at *13-14.

In contrast to the undisputed evidence supporting jurisdiction in Beverly Hills (e.g., one sale of the allegedly infringing product in Virginia, 52 allegedly infringing products available for purchase and ongoing and continuous shipments into Virginia through established distribution channels, and substantial revenue derived from Virginia), there was no factual support for AFTG’s personal jurisdiction allegation. In fact, the Federal Circuit criticized AFTG for (1) failing to submit any evidence of sales in Wyoming, (2) not refuting defendants’ assertions that their Wyoming contacts were “sporadic at best,” and (3) not establishing that Wyoming was part of defendants’ continuous and established distribution channels. Id. at *15-16. As a result, the Federal Circuit concluded that, based upon the facts alleged by AFTG, personal jurisdiction was not “a close call” under either of the Supreme Court’s conflicting stream of commerce standards and affirmed the dismissal of both complaints. Id. at *16.

Signaling a potential future clash with the Supreme Court, the Federal Circuit urged that its own body of case law regarding the stream of commerce should govern patent litigations because personal jurisdiction is a “critical determinant of whether and in what forum a patentee can seek redress for infringement.” Id. at *20-21, n.1. However, the court conceded that the “[p]ersonal jurisdiction principles addressed by the Supreme Court in non-patent cases … may well be applicable in patent cases.” Id.

Key Takeaways

Until the Supreme Court resolves its longstanding split regarding the standard for evaluating personal jurisdiction when an accused infringer’s products enter the stream of commerce and find their way into a remote forum, patent litigants are left with Beverly Hills and its progeny for assessing if jurisdiction is proper.

While the timely request for jurisdictional discovery is often granted, some judges are reluctant to afford plaintiff the opportunity to take discovery to supplement an allegation that should have been fully pled in the complaint. Consequently, a diligent effort should be undertaken to marshal all facts demonstrating the forum activities of a non-resident accused of infringement prior to filing the complaint. This should include evidence of actual sales in the forum, marketing and advertising activities directed toward residents of the forum, shipments of the accused product into the forum, and retailers and distribution channels within the forum.

Incorporating detailed facts of the forum activities of a non-resident into the complaint will help make a prima facie showing that the alleged infringer is subject to personal jurisdiction in the chosen forum. If the court is then forced to contend with an accused infringer’s motion to dismiss, all uncontroverted facts in the complaint must be accepted as true and any factual disputes resolved in plaintiff’s favor. Further, by including the specific factual underpinnings of personal jurisdiction in the complaint, a non-resident-accused infringer will hopefully recognize that any attempt to transfer the action to a purportedly more convenient forum stands little chance of success. However, if there is insufficient evidence to credibly support personal jurisdiction over a non-resident, plaintiff’s initial forum choice should be reevaluated. The perceived benefits of forcing an accused infringer to defend a claim of patent infringement in a remote forum must be balanced against the initial delay and cost associated with obtaining jurisdictional discovery and responding to an anticipated motion to dismiss and/or transfer.

Locating detailed evidence of the forum activities of a non-resident accused of infringement should be a part of the early case assessment for any contemplated patent infringement action. The time and expense spent gathering this evidence, including the factual predicate to support a claim of personal jurisdiction based upon allegedly infringing products entering the stream of commerce in the complaint, will be relatively minor when compared with the distraction and cost associated with taking jurisdictional discovery and responding to an accused infringer’s motion to dismiss for lack of personal jurisdiction and/or motion to transfer.

John T. Gallagher, a Member of Sills Cummis & Gross P.C.’s Intellectual Property Practice Group, has over 20 years of litigation and counseling experience. Mr. Gallagher specializes in all aspects of intellectual property litigation, including patent infringement, antitrust, trade secret and unfair competition disputes. His litigation and counseling experience spans a wide range of technologies, including medical devices, consumer products, prescription and over-the-counter drugs, polymer chemistry, chemical processes, semiconductors and software systems. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

Please email the author at jgallagher@sillscummis.com with questions about this article.