Case:Grokster METRO-GOLDWYN-MAYER STUDIOS INC., et al., Plaintiffs, v. GROKSTER, LTD., et al., Defendants. JERRY LEIBER, et al., Plaintiffs, v. CONSUMER EMPOWERMENT BV a/k/a FASTTRACK, et al., Defendants. CV 01-08541-SVW (PJWx), CV 01-09923-SVW (PJWx) UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA ---F.Supp.2d--- January 9, 2003, Decided JUDGES: STEPHEN V. WILSON, UNITED STATES DISTRICT JUDGE. OPINIONBY: STEPHEN V. WILSON OPINION: ORDER DENYING DEFENDANT SHARMAN NETWORKS LTD.'S AND DEFENDANT LEF INTERACTIVE'S MOTIONS TO DISMISS II. FACTUAL/PROCEDURAL BACKGROUND A. The Parties These two related cases arise from the free exchange of copyrighted music, movies and other digital media over the Internet. When the actions were originally filed, Defendants Grokster, Ltd. ("Grokster"), Streamcast Networks, Inc. (formerly known as MusicCity.com, Inc.) ("Streamcast" or "MusicCity"), and Kazaa BV (formerly known as Consumer Empowerment BV) ("Kazaa BV"), distributed software that enabled users to exchange digital media via the same peer-to-peer transfer network. In the Metro-Goldwyn-Mayer. v. Grokster case, CV-01-8541, Plaintiffs are organizations in the motion picture and music recording industries, and bring an action against Defendants for copyright infringement, pursuant to 17 U.S.C. 501, et seq. In the Lieber v. Consumer Empowerment case, CV-01-9923, Plaintiffs are professional songwriters and [*14] music publishers bringing a class action for essentially the same claims against the same Defendants. The cases have been consolidated for discovery and pretrial purposes. When the actions were originally filed, Grokster, MusicCity and Kazaa BV each independently branded, marketed and distributed file-sharing software. All three platforms were powered, however, by the same "FastTrack" networking technology. This technology was developed by Defendants Niklas Zennstrom and Janus Friis (who also launched Kazaa BV), and licensed to each company. As a result, users of all three software platforms were connected to the same peerto-peer "FastTrack network," and were able to exchange files seamlessly. Kazaa BV, which is a Netherlands corporation, did not contest jurisdiction in either case. Rather, it answered and counterclaimed for declaratory relief. In January 2002, while related legal action was pending against it in the Netherlands, Kazaa BV transferred ownership of key assets to the newly-formed Sharman Networks, Ltd. ("Sharman"). n2 Sharman is a company organized under the laws of the island-nation of Vanuatu and doing business principally in Australia. The assets transferred to Sharman include the Kazaa.com website and domain, and the Kazaa Media Desktop ("KMD") software. In its agreement to acquire these assets, Sharman explicitly disclaimed assumption of any of Kazaa BV's liabilities, including any liability arising from these lawsuits. (Memo of P&A in Support of Sharman's Motion to Dismiss for Lack of Subject Matter Jurisdiction and Other Grounds ("Sharman Mot."), Declaration of Nicola Hemming, P6.) The FastTrack software is owned by a company known as Joltid, Ltd. ("Joltid" (formerly "Blastoise")), which is owned by Zennstrom. Shortly after Sharman's acquisition of the Kazaa assets, Joltid granted an "irrevocable, perpetual, worldwide license" to Sharman for the use and sub-licensing of FastTrack. (Sharman's Reply Memorandum in Support of Motion to Dismiss ("Reply"), Declaration of Nicola Hemming Concerning Blastoise Agreement, Exh. A, at 1.) In return, Joltid receives twenty percent of Sharman's revenue. (Id.; Decl. of Ana C. Reyes in Support of Opposition to Defendants' Motion, Hemming Dep. at 152.) In essence, Sharman has acquired Kazaa BV's primary assets - the Kazaa brand, domain and website, the KMD software, and a long-term license to the FastTrack software - without having formally acquired the company. Meanwhile, Kazaa BV has apparently ceased defending this action. B. The Kazaa System Although novel in important respects, the "Kazaa system" operates in a manner conceptually analogous to the Napster system described at length by the district court in A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000) III. SHARMAN'S MOTION TO DISMISS A. Personal Jurisdiction [*19] For this Court to have personal jurisdiction over the Defendants, the exercise of jurisdiction must be authorized under California's "long-arm" jurisdictional statute and comport with constitutional due process limitations. Aanestad v. Beech Aircraft Corp., 521 F.2d 1298, 1300 (9th Cir. 1974); see Fed. R. Civ. P. 4(k)(1)(A). Because California authorizes jurisdiction to the full extent of the Constitution, the only question before the Court is whether the exercise of in personam jurisdiction in this case is consistent with due process. See Cal. Code Civ. Proc. 410.10 (2002); Peterson v. Highland Music, Inc., 140 F.3d 1313, 1317 n.2 (9th Cir. 1998). In the absence of a traditional basis for asserting jurisdiction (i.e., physical presence, domicile or consent), due process requires that a non-resident defendant have "certain minimum contacts with the forum [state] such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'" International Shoe Co. v. State of Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 85 L. Ed. 278, 61 S. Ct. 339 (1940)). The defendant is subject to "specific jurisdiction" where the cause of action arises out of or relates to the defendant's contacts with the forum. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 & n.15, 105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985). If the defendant's contacts are of a sufficient magnitude, it is subject to "general jurisdiction" - that is, subject to suit on any matter, including those not arising out of the in-forum activity. See Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 447-48, 72 S. Ct. 413, 96 L. Ed. 485, 63 Ohio Law Abs. 146 (1952). 1. In-Forum Activities Plaintiffs assert that Sharman engages [*22] in a wide range of contacts with this forum, which can be summarized roughly as follows: 1) Provision of the KMD software to approximately two million California residents and execution of end-user license agreements between Sharman and these users; 2) Use of California and U.S. agents, including a Los Angeles-based public relations firm, a California company engaged in selling and serving advertising to users of the KMD software, and a San Francisco-based law firm; 3) Contracts Sharman assumed from Kazaa BV, including use of California-based CNET.com for recording the number of copies of Defendant's software downloaded, and advertising-related agreements with California and U.S. companies; and, 4) Inclusion in certain contracts assumed from Kazaa BV of California and other U.S. state choice of law and forum selection clauses, including in the FastTrack licensing agreement. (Plaintiffs' Memorandum in Opposition to Defendants Sharman's and LEF's Motions to Dismiss ("Opp.") at 4-10.) 2) General Jurisdiction Plaintiffs do not make a serious case for general jurisdiction, instead consigning their argument on this point to a two-sentence footnote. ( [*23] See Opp. at 12 n.8.) Indeed, it appears that while Sharman has engaged in a continuous stream of contacts with the forum, they are not the types of contacts that generally approximate physical presence. They are therefore insufficient to establish general jurisdiction. General jurisdiction over a non-resident defendant exists where the defendant's contacts are "continuous and systematic," and the exercise of jurisdiction satisfies "traditional notions of fair play and substantial justice." Ziegler, 64 F.3d at 473. The standard for establishing general jurisdiction is "fairly high," Brand v. Menlove Dodge, 796 F.2d 1070, 1073 (9th Cir. 1986), and requires that defendant's contacts be of the sort that "approximate physical presence." Bancroft & Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir. 2000) (citing Gates Lear Jet Corp v. Jensen, 743 F.2d 1325, 1331 (9th Cir. 1984)). The Supreme Court has upheld general jurisdiction only once, in a case involving wide-ranging contacts, n4 and the Ninth Circuit regularly has declined to find jurisdiction even in the presence of extensive contacts. Amoco Egypt Oil Co. v. Leonis Navigation Co., 1 F.3d 848, 851 n.3 (9th Cir. 1993), [*24] citing Perkins, 342 U.S. 437, 96 L. Ed. 485, 72 S. Ct. 413. Factors to be taken into consideration in this analysis include whether the defendant is incorporated or licensed to do business in the forum state, has offices, property, employees or bank accounts there, pays taxes, advertises or solicits business, or makes sales in the state. See Hirsch v. Blue Cross, Blue Shield of Kansas City, 800 F.2d 1474, 1478 (9th Cir. 1986); Bancroft & Masters, 223 F.3d at 1086; Amoco Egypt Oil Co., 1 F.3d at 851 n.3. As discussed infra, Sharman certainly engages in a continuous stream of commercial contact with the forum state, including provision of its software and execution of [*25] licensing agreements with a large number of California residents. It also engages in more limited commercial contact with advertising vendors, a website for counting downloads of its software, and in-state legal and public relations representatives. However, Sharman is not registered or licensed to do business in California, nor does it appear to have any substantial presence here (e.g., offices, employees or assets). Commercial contact absent other indicia of corporate presence is typically not sufficient to establish general jurisdiction. See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 104 S. Ct. 1868, 80 L. Ed. 2d 404 (1984) (no general jurisdiction where Colombian corporation repeatedly purchased helicopter parts in Texas and sent employees there for training, but did not have offices, agents, employees or a license to do business there). In short, it is impossible based upon the contacts alleged in this case to conclude that Sharman "may in fact be said already to be 'present'" in California. Wells Fargo & Co. v. Wells Fargo Express Co., 556 F.2d 406, 413 (9th Cir. 1977). Thus, general jurisdiction is not available in this [*26] case, and the Court must look to whether specific jurisdiction is appropriate. 3) Specific Jurisdiction Under prevailing Ninth Circuit doctrine, specific jurisdiction [*27] is presumptively reasonable where: 1) a nonresident defendant purposefully avails itself of the privilege of conducting activities in the forum state, thereby invoking the protections of its laws; and 2) the plaintiff's claims arise out of the defendants' forum-related activities. See Ochoa v J.B. Martin & Sons Farms, 287 F.3d at 1189 & n.2; Ziegler, 64 F.3d at 473. a) Purposeful Availment and Relatedness The purposeful availment prong requires that defendant purposefully direct its activities toward the forum, or purposefully avail itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of local law. See, e.g., Data Disc, 557 F.2d at 1287-88 (commercial act or transaction with forum); Bancroft & Masters, 223 F.3d at 1087 (effect of tortious act felt in forum). 2) Related Contacts In contrast, Sharman's distribution of the KMD software, and licensing of its use, are "but for" causes of the alleged infringement. But for Sharman's acts in these regards, Plaintiffs' claims of direct infringement never would have arisen against Sharman. n5 Defendant's chief argument against purposeful availment is that its "internet activities" are "passive in nature," and that, while the KMD software can be downloaded by anyone in the world, Sharman "does not purposefully direct anything toward California." (Mot. at 18.) Rather, Sharman asserts that it "does not know the identity" of persons downloading its software nor does it know where they reside. (Reply at 12.) In short, Sharman contends, the KMD software is made freely available worldwide, and the only distribution contacts with California are those initiated by California residents. Indeed, the Supreme Court has held that personal jurisdiction cannot be exercised constitutionally where the only contact with the forum state is the result of an isolated or fortuitous act not directed by the defendant. See World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S. Ct. 559, 62 L. Ed. 2d 490 (1980) (no Oklahoma jurisdiction over New York automobile dealer in products liability action where the only contact with the forum was the sale of the car to New York residents who subsequently drove the vehicle to Oklahoma and suffered injuries there); Kulko v. Superior Court, 436 U.S. 84, 98 S. Ct. 1690, 56 L. Ed. 2d 132 (1978) (consent [*34] by father, who is a New York resident, to allow children to live with mother who had relocated to California not sufficient to establish jurisdiction over father in California for enforcement of child support obligations); Hanson v. Denckla, 357 U.S. 235, 78 S. Ct. 1228, 2 L. Ed. 2d 1283 (1958) (no jurisdiction in Florida over Delaware corporate trustee where trust was executed in Delaware and plaintiff then relocated to Florida). Consequently, this Court previously has recognized that the operation of a "strictly 'passive' website, in which the only contacts with the forum state consist[] of mere viewings of the website's content by those surfing the internet," typically will not give rise to specific jurisdiction. Batzel v. Smith, 2001 U.S. Dist. LEXIS 8929, at *7 (C.D. Cal. June 6, 2001). On the other hand, jurisdiction may be appropriate where the Internet conduct includes "something more" to show the plaintiff directed substantial activity toward the forum. Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 418 (9th Cir. 1997). These poles reflect a familiar spectrum, wherein jurisdiction is more likely the greater the "'level [*35] of interactivity and commercial nature of the exchange of information that occurs'" with the forum state. Id. at 418 (quoting Zippo Mfg. Co. v. Zippo Dot Com, 952 F. Supp. 1119, 1124 (W.D. Pa. 1997)). In this analysis, the Court considers the scope and nature of the related contacts. Factors include whether the defendant encouraged residents of the forum state to engage in relevant contacts with the defendant, whether there is evidence that the contacts constitute a continuous and substantial part of the defendant's business, whether the defendant exchanged messages with forum residents or gained subscribers through its contacts, or whether the defendant otherwise purposefully availed itself of the privilege of doing business in the forum. Cybersell, Inc., 130 F. 3d at 419; see CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996) (finding jurisdiction where defendant entered into contract to distribute shareware via server located in forum state). Here, there is little question that Sharman has knowingly and purposefully availed itself of the privilege of doing business in California. First, Sharman essentially [*36] does not dispute that a significant number of its users - perhaps as many as two million - are California residents. n6 Indeed, given that Sharman's KMD software has been downloaded more than 143 million times, n7 it would be mere cavil to deny that Sharman engages in a significant amount of contact with California residents. Second, Sharman does not dispute that the distribution of its software is an essentially commercial act. While the KMD software is freely available, it is distributed for the singular purpose of facilitating advertising and otherwise generating income for Sharman. Moreover, Sharman enters into a licensing agreement with every user authorizing and limiting use of the software. While Sharman may not ask each user where he or she is located, and may therefore not know exactly how many agreements it has entered into with California residents, Sharman is at least constructively aware that many such agreements are executed daily. n8 In sum, Sharman engages in a significant quantum of commercial contact with California residents constituting a but for cause of Plaintiffs' claims. Jurisdiction is therefore presumptively reasonable. 3) Alternative Basis for Purposeful Availment: Effects Test Even if purposeful availment were not manifested by Sharman's commercial contacts, it nonetheless may be demonstrated through the "effects test." Because the Court has already concluded that Plaintiffs have established a prima facie case of purposeful availment, however, the following merely articulates a partial alternative basis for its conclusion. 1. Legal Standards Even where a defendant does not directly contact the forum state, purposeful availment may be demonstrated where the effects of a defendant's conduct are felt in the forum state. Calder v. Jones, 465 U.S. 783, 104 S. Ct. 1482, 79 L. Ed. 2d 804 (1984) (establishing the "effects test" for personal jurisdiction); Panavision Int'l L.P. v. Toeppen, 141 F.3d 1316, 1321-22 (9th Cir. 1998) (sustaining jurisdiction over a non-resident defendant who registered Internet domain names that infringed plaintiff's trademarks). Under [*39] the Calder line of cases, personal jurisdiction is appropriate where a non-resident defendant engages in "(1) intentional actions (2) expressly aimed at the forum state (3) causing harm, the brunt of which is suffered - and which the defendant knows is likely to be suffered - in the forum state." Panavision, 141 F.3d at 1321 (quoting Core-Vent Corp. v. Nobel Industries AB, 11 F.3d 1482, 1486 (9th Cir. 1993)). Sharman does not dispute that jurisdiction typically is appropriate where a foreign defendant engages in significant infringement of a resident's intellectual property, and knows where the harm from that infringement is likely to be suffered. (See Sharman Reply at 6-7.) See Panavision, supra; Indianapolis Colts, Inc. v. Metropolitan Baltimore Football Club, 34 F.3d 410 (7th Cir. 1994) (upholding Indiana jurisdiction in trademark infringement action by National Football League's Indianapolis Colts against Canadian Football League's Baltimore CFL Colts). Rather, Defendant argues that the effects test, as applied by Calder and its progeny, has not been used to establish jurisdiction against someone " [*40] other than the actual wrongdoer directly causing the harm. . . ." (Sharman Reply at 7.) According to Sharman, the effects test requires an intent to cause a "tortious effect" within the forum state. (Sharman Reply at 8.) Sharman concludes that because the primary claims in this case arise from direct infringement by its users, and not by Sharman itself, the effects test does not apply. (Id. at 9.) Although there is some merit to these contentions, Sharman does not adequately distinguish between Plaintiffs' theories of liability. The effects test is likely sufficient to show purposeful availment for purposes of the contributory infringement claims, while it might not be able to support an exercise of jurisdiction over the vicarious infringement claims. 2. Contributory Infringement Contributory infringement originated in tort and "stems from the notion that one who directly contributes to another's infringement should be held accountable." Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir. 1996) (emphasis added). Thus, the traditional statement of the doctrine, adopted in this circuit, is that "one who, with knowledge of the infringing [*41] activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a 'contributory' infringer." Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971), cited in Fonovisa, Inc., 76 F.3d at 264. In other words, "liability exists if the defendant engages in personal conduct that encourages or assists the infringement." A&M Records v. Napster, Inc., 239 F.3d 1004, 1019 (9th Cir. 2001) ("Napster") (internal quotations omitted). At the risk of turning the test into a tautology, contributory infringement will lie only where the defendant contributed to the infringement, i.e., knowingly and intentionally assisted, induced or caused the infringement. Therefore, to prevail on their contributory infringement claim, Plaintiffs will have to show that Sharman intended to contribute to the infringing conduct of another. Under Napster, 239 F.3d at 1020-21, it would be insufficient for Plaintiffs in this case to allege simply that Defendants' peerto-peer file sharing software may be used to infringe Plaintiffs' copyrights. Indeed, [*42] Plaintiffs allege that Defendants have infringed Plaintiffs copyrights through "willful, intentional and purposeful" conduct. (See MGM v. Grokster FAC P64). To this effect, Plaintiffs complain that Defendants: 1) actively participated in the unauthorized distribution and reproduction of copyrighted works, and 2) provided the means and facilities for, and encouraged users to engage in, unauthorized reproduction and distribution of copyrighted works. (See MGM v. Grokster FAC PP58-59, 62.) However, the effects test is not satisfied simply by showing that the tortious act was intentional. Rather, the intentional conduct "must be targeted at a plaintiff whom the defendant knows to be a resident of the forum state." Bancroft & Masters, 223 F.3d at 1087. Plaintiffs allege, and Sharman does not dispute, that Sharman was and is aware that much of the alleged copyright infringement affects Defendants. (Opp. at 5, 13-14) (Sharman was aware of this litigation when it acquired Kazaa BV's assets, and Plaintiffs have sent notices of millions of separate infringements committed by Kazaa users to both Kazaa BV and Sharman). Moreover, Sharman is and has been well aware of the [*43] charge that its users are infringing copyrights, and reasonably should be aware that many, if not most, music and video copyrights are owned by California-based companies. n9 (See Reyes Decl., Exh. 5, Deposition of Jeffrey Rose, at 135-136, 138-139.) See Panavision, 141 F.3d at 1321 (effects test satisfied because defendant likely knew that plaintiff would suffer harm in California, since "its principal place of business was in California, and the heart of the theatrical motion picture and television industry is located there."). Thus, Plaintiffs have alleged that Sharman intentionally and materially contributed to the infringement of Plaintiffs' works, and that it did so with full knowledge that much of the harm from this infringement would be suffered in California. n10 This is sufficient to establish a prima facie case of purposeful availment under the effects test of Panavision. 3. Vicarious Liability Sharman's argument appears to have more merit as applied to the vicarious liability claims. As the Napster court noted, vicarious liability "is an 'outgrowth' of respondeat superior." 239 F.3d at 1022 (citing Fonovisa, 76 F.3d at 262). Though claims for vicarious copyright infringement extend beyond the employer/employee context, they are limited to those cases where the defendant "has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities." Id. (quoting Gershwin, 443 F.2d at 1162). Notably, however, neither an intent to infringe nor knowledge of direct infringement is an element of this tort. See Napster, 239 F.3d at 1022-24 (failure to police system combined with financial interest in ongoing infringement sufficient to justify preliminary injunction); Shapiro Bernstein and Co. v. H. L. Green Co., 316 F.2d 304 (2d Cir. 1963) (imposing vicarious liability on owner of department store chain for infringing sales by independent concessionaire, despite fact that owner was unaware of the infringement). Thus, [*46] it is somewhat doubtful that the alleged acts comprising vicarious liability are sufficient to satisfy the intentional act and express aiming requirements of the effects test under Panavision. See also Bancroft & Masters, 223 F.3d at 1087. Nonetheless, because the Court has concluded that purposeful availment is otherwise demonstrated in these cases, it is unnecessary to conclude that the effects test alone demonstrates purposeful availment for all claims. b) Reasonableness Accordingly, the touchstone constitutional inquiry is whether the defendant's "conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there." Id., quoted in Calder v. Jones, 465 U.S. at 790, and Kulko v. Superior Court, 436 U.S. at 97-98; see also Gordy v. Daily News, L.P., 95 F.3d 829, 832 (9th Cir. 1996) (this inquiry is the "touchstone" of due process); Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987) ("fundamental determination"); Sher v. Johnson, 911 F.2d 1357, 1361 (9th Cir. 1990). Plaintiffs clearly have carried their burden in this respect. Sharman provides its KMD software to millions of users every week, and executes a licensing agreement with each user permitting use of the software. Sharman has not denied and cannot deny that a substantial number of its users are California residents, and thus that it is, at a minimum, constructively aware of continuous and substantial commercial interaction with residents of this forum. Further, Sharman is well aware that California is the heart of the entertainment industry, and that the brunt [*49] of the injuries described in these cases is likely to be felt here. It is hard to imagine on these bases alone that Sharman would not reasonably anticipate being haled into court in California.

After readingMetro-Goldwyn-Mayer Studios, Inc. v. Grokster, ----F.Supp.2d--- (U.S.Dist.Ct., Cent.Dist.Cal 2003)

[1] What arguments are advanced by each of the parties in support of their positions?

[2] What is the distinction between general and specific jurisdiction?

[3] What is the "effects" test?

[4] Is the court's ultimate decision correct or incorrect?Why or why not?