Penguin Group (USA) Inc. v. American Buddha: New York’s Long Arm Statute Grows Longer for Internet Piracy

DWT Media Law December 7, 2011 Comments Off
Penguin Group (USA) Inc. v. American Buddha:  New York’s Long Arm Statute Grows Longer for Internet Piracy

By Elizabeth McNamara and Chris Robinson

Earlier this year, the New York Court of Appeals issued an important decision which should help New York publishers combat online piracy of their copyrighted works and will have implications for other online content providers as well. In Penguin Group (USA) Inc. v. American Buddha[1] the Court held that “[i]n copyright infringement cases involving the uploading of a copyrighted printed literary work onto the Internet,” the situs of the injury for purposes of determining personal jurisdiction under C.P.L.R. § 302(a)(3)(ii) is the “location of the principal place of business of the copyright holder,” not, as some courts had held in other circumstances, the location of the infringing act or the specific location where sales or customers are lost.[2] The ruling is significant because it should make it easier for publishers based in New York State – which includes the majority of large book publishers and many smaller U.S. publishers – to bring actions in New York for online piracy of their published works, whether or not they can allege an infringing download or use within the state.

Factual Background

Penguin Group (USA) is one of New York’s leading trade books publishers. In late 2008, it became aware of an Oregon not-for-profit entity called American Buddha with its principal place of business in Arizona. Through its website at www.naderlibrary.com,[3] American Buddha offers to its estimated 50,000 members and to the general public free downloads of many books, articles, speeches, and movies, including books published by Penguin such as Oil by Upton Sinclair. The website assures its users that by downloading any works from the American Buddha library, no copyright infringement is taking place because the site merely “makes available selected artistic and literary works under a system of voluntary, free online lending, under the fair use exclusion from copyright liability accorded to libraries and archives pursuant to 17 U.S.C. Section 108.”[4] For Penguin, however, American Buddha’s “library” amounted to blatant copyright infringement.

Penguin wrote to American Buddha’s counsel to demand that it remove its works from the site. American Buddha responded by invoking the safe harbor provision of the Digital Millennium Copyright Act (DMCA). Penguin served notice on the site’s designated agent for service under the statute, and the work was removed, but days later American Buddha restored the work, submitting a counter-notification pursuant to section 512(g)(3) of the DMCA, citing 17 U.S.C. § 108, the First Amendment, and fair use.

The Lawsuit

Penguin responded by bringing a copyright infringement action in the Southern District of New York, in which it identified four Penguin books that had been copied and made available for download on American Buddha’s websites. American Buddha moved to dismiss for lack of personal jurisdiction. Penguin argued that jurisdiction was proper under C.P.L.R. § 302(a)(3)(ii) because American Buddha, as a non-domiciliary, had infringed Penguin’s copyright by copying and digitally uploading its books outside the state, causing injury to Penguin in New York.[5] Judge Gerard Lynch (since appointed to the Second Circuit) granted American Buddha’s motion on the ground that an indirect financial loss or derivative commercial injury in New York based solely on the plaintiff’s presence in the state was insufficient to confer jurisdiction under section 302(a)(3)(ii).[6] The court relied on a line of cases represented by Fantis Foods, Inc. v. Standard Importing Co., Inc.,[7] in which the New York Court of Appeals held that the court lacked jurisdiction over a Greek defendant for conversion of a shipment of cheese outside the United States when the only connection to New York was that the plaintiff was incorporated in New York and maintained an office there. Although Judge Lynch acknowledged that there was some competing authority for the proposition that in intellectual property cases, injury may occur where the property owner is domiciled, he found more compelling those tort cases that barred jurisdiction when based solely on indirect economic loss. Judge Lynch recognized that the online nature of the defendant’s activities and the potential for widespread piracy of Penguin’s copyrighted works were factors in the infringement analysis, but he ultimately rejected the relevance of the Internet to the legal question of determining the situs of the injury. [8]

On appeal to the Second Circuit, Penguin stressed that the purpose of section 302(a)(3) was to plug a perceived gap in the reach of the long-arm statute and that courts in cases such as Fantis had undermined that purpose by requiring that the injury to plaintiff be directly felt in New York. Penguin stressed that the Second Circuit’s decision in DiStefano v. Carozzi, Inc..[9] was more relevant. In that case, the court held that a man whose employment was unlawfully terminated at a meeting in New Jersey felt the first effect of the tortious act not in New Jersey, where the firing occurred, but in New York, where he lived and worked. His New York injury – the loss of his job – was sufficient to confer jurisdiction. Further, district courts in the Second Circuit had extended the concept to find that the situs of injury in an intellectual property case was where that property was held.

Similarly, Penguin relied on the 1978 New York Court of Appeals case Sybron Corp. v. Wetzel[10] that had rejected a narrow interpretation of section 302(a)(3) and found personal jurisdiction over a non-domiciliary company when the company hired a former employee of the plaintiff to misappropriate plaintiff’s trade secrets. Because the plaintiff manufactured equipment in New York, it was foreseeable that theft of its trade secrets would eventually cause injury in New York from lost sales.[11] Nor was it necessary for plaintiff to point to actual lost sales because to impose such a requirement would foreclose that section of the long-arm statute to plaintiffs seeking anticipatory injunctive relief, which the Court considered an “unacceptable” result.[12] In 2006, Sybron was endorsed in Sung Hwan Co. v. Rite Aid Corp, where the Court of Appeals stated: “In Sybron, this Court held that a tortious act committed out of state that was likely to cause injury through loss of business in state was sufficient to satisfy personal jurisdiction regardless of whether damages were ascertainable or likely recoverable.”[13]

The Second Circuit laid out the competing arguments in depth, including the legislative history behind the enactment of the statute and the competing lines of case law.[14] It then certified to the New York Court of Appeals the following question:

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?

In so doing, the Second Circuit sent an unmistakable signal to the Court of Appeals by highlighting that “the presence of online libraries and the Internet may have an impact on the Court of Appeals’ evaluation of the situs of the injury and may figure in the Court’s analysis.”[15]

American Buddha raised a wide variety of arguments in its papers to the Court of Appeals. It argued that the Court had no place setting forth broad jurisdictional principles specific to copyright infringement when Congress had pre-empted the field. To decide on the situs of the injury, American Buddha stated, the Court would have to determine the situs of the copyright, which Congress had declined to do in the statute and which the fragmented complexities of copyright ownership would make impossible. It also again raised its library exemption defense under 17 U.S.C. § 108, arguing that the court should not make distinctions between bricks and mortar libraries and online libraries when neither the statutory language nor the Copyright Office has made any such distinction.

American Buddha further argued that the case had been correctly decided by the district court and that the Court of Appeals should continue to rely on its decision in Fantis for the proposition that derivative economic injury is insufficient to confer jurisdiction. To find that the location of the rights holder is the situs of injury, American Buddha argued, raised the specter of opening a “Pandora’s box” that would flood the New York courts with litigation.

The New York Court of Appeals Decision

The Court of Appeals rejected American Buddha’s arguments. Responding to the Second Circuit’s focus on the transforming role of the Internet, the Court of Appeals reformulated the certified question to read:

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?[16]

The Court acknowledged that “both parties raise compelling arguments” and that Fantis Foods and Sybron represented two instances where the Court came to different conclusions about how “direct” an injury in New York had to be for jurisdiction under section 302(a)(3)(ii). The injury here was harder to “identify and quantify because the alleged infringement involves the Internet, which by its nature is intangible and ubiquitous.” [17]

Ultimately, though, the Court determined that New York was the situs of injury based on the confluence of two factors. First, it acknowledged that the Internet and digital technology enable pirates “to reproduce and distribute perfect copies of works” at virtually no cost, making them instantaneously available anywhere.[18] Electronic piracy of books is growing along with the proliferation of devices to read them. These realities transform the jurisdictional analysis. Because the speed and wide geographic scope of the true injury caused by the infringement bear little relationship to the location of the initial copying and uploading of the work to the Internet, it makes little sense to focus on the traditional analysis of where business was actually lost or where the original injury or copying occurred. “In short,” the Court stated, “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.”[19]

Second, the nature of copyright as a bundle of distinct rights necessarily causes the jurisdictional analysis to move beyond the situs of the infringing activity. The harm from online piracy impacts more than the reproduction and display rights implicated by an infringing download; also lost may be the incentive to write or publish, an injury surely felt in New York, where the publishers are predominantly located.[20] The Court of Appeals recognized that publishers need economic incentives to publish works. Further, quoting the Second Circuit’s decision in Salinger v. Colting, the Court of Appeals noted the injury in copyright cases is often irreparable.[21] Because that harm is so frequently irreparable, the Court concluded, it did not matter that Penguin could not point to a direct injury in the form of specific damages from unauthorized downloads in New York. Indeed, the Court noted, in Sybron it had held that jurisdiction was proper “regardless of whether damages were likely recoverable or even ascertainable.”[22]

Finally, the Court addressed American Buddha’s Pandora’s box argument. It observed that section 302(a)(3)(ii) contains additional hurdles to obtaining jurisdiction over an out-of-state defendant that will deter suits that should not be in New York. Thus, a plaintiff must show that the defendant had a reasonable expectation that its acts would have consequences in New York and that it might be drawn into New York litigation. While that should not be a heavy burden for the publishing industry, which is widely recognized as being located in New York, it may be a more difficult burden for other less evidently New York-focused industries. A plaintiff also must satisfy Federal due process and show that the defendant “derives substantial revenue from interstate or international commerce.”

It is worth noting two additional points. First, in answering the certified question, the Court of Appeal ignored American Buddha’s preemption argument and gave short shrift to its lengthy briefing on the threshold question of where a copyright physically resides. Rather, in a footnote the Court simply accepted the characterization of the Second Circuit for purposes of the appeal that “copyrights have a location and that their location in this case is in New York State.”[23] Second, the Court expressly reserved the question of whether the same jurisdictional result would apply in a copyright infringement case that does not allege Internet piracy, simply noting that cases in New York had come to different conclusions when considering non-Internet distribution.[24]

Conclusion

Courts have struggled with the challenge of applying personal jurisdiction rules developed under traditional geographic analysis to the Internet. The Internet is both everywhere and nowhere. The widespread electronic dissemination of copyright works can inflict damage on a rights holder faster and on a vastly greater scale than anything possible in the bricks-and-mortar world. On the other hand, legitimate users or disseminators of copyrighted material online risk exposure to legal action in a far greater number of jurisdictions. The publishing industry, overwhelmingly concentrated in New York, has faced significant obstacles to remaining viable in the face of the increasing threat of online piracy and other threats to its traditional business model. In American Buddha the Second Circuit and the New York Court of Appeals have shown a willingness to use New York’s long-arm jurisdiction to protect that valuable asset.

The ruling will have important ramifications for online content providers based in New York. Despite American Buddha’s focus on “printed literary works,” its reasoning applies with equal force to the digital piracy of movies, television shows, music, and other online content. As the Association of American Publishers, the Association of American University Presses, and the Association of Magazine Media pointed out in their amicus brief on behalf of Penguin, permitting content providers to sue out-of-state alleged infringers in New York will make it easier and quicker to obtain preliminary injunctive relief without having to do what is sometimes impossible without discovery – determining where the infringing uploads take place. It will also allow New York litigants to benefit from the New York judiciary’s considerable expertise in applying copyright law to digital piracy of all content, leading to greater consistency in this area.



Endnotes

[1] 16 N.Y.3d 295 (2011).

[2] Id. at 301.

[3] Although the website professes admiration for Ralph Nader’s libertarian philosophy, it disclaims any direct affiliation with him.

[4] See http://www.naderlibrary.com/naderlibrarymemberinfo.htm.

[5] Penguin was reluctant to seek out and sue users of the website and therefore did not assert jurisdiction under C.P.L.R. § 302(a)(2) for tortious acts committed within the state.

[6] 2009 U.S. Dist. LEXIS 34032, at * 9, 90 U.S.P.Q. 2d (BNA) 1954 (S.D.N.Y. Apr. 21, 2009).

[7] 49 N.Y.2d 317, 326 (1980).

[8] 2009 U.S. Dist. LEXIS 34032, at *8-13 (citing Andy Stroud, Inc. v. Brown, No. 08 Civ. 8246, 2009 WL 539863, at *3 (S.D.N.Y. Mar. 4, 2009)).

[9] 286 F.3d 81 (2d Cir. 2001).

[10] 46 N.Y.2d 197, 413 N.Y.S.2d 127 (1978).

[11] Id. at 204, 206.

[12] Id. at 204.

[13] 7 N.Y.3d 78, 85 (2006).

[14] 609 F.3d 30 (2d Cir. 2010).

[15] Id. at 42-43.

[16] 16 N.Y.3d at 301.

[17] Id. at 303-05.

[18] Id. at 304.

[19] Id. at 305.

[20] Id. at 305-06.

[21] Id.

[22] Id. at 306.

[23] Id. at 302 n.2.

[24] Id. at 307 n.5.

Elizabeth McNamara, Linda Steinman, and Christopher Robinson of Davis Wright Tremaine, LLP represented the publishing associations as amici before the New York Court of Appeals.

Comments are closed.