☀️🏖️ Better weather is ahead, join us for Legal Summit in Ocean City this summer! Early Bird registration ends March 31, 2024, so lock in your registration today.
 

By: Brett Philpotts

Holding:  The United States Court of Appeals for the Fourth Circuit affirmed in part, as to personal jurisdiction, forum, and preliminary injunction, and vacated and remanded in part, for further proceedings as to appropriate injunctive relief.

Opinion by:  Judge J. Harvie Wilkinson III

Facts:  

Plaintiff-Appellee (“Developer”) was a software company domiciled in the United States whose computer programs helped businesses guard against malicious and spurious email. Defendant-Appellant (“Promoter”) was a company domiciled in Europe that eventually came to market and sell Developer’s software in Europe and Africa. 

In 2014, Developer self-marketed its software via a “.com” domain. Promoter offered help to make Developer’s software available more broadly, and informal discussions between the two continued for more than twelve months. Developer and Promoter eventually met in person in 2016 and brokered an oral agreement; Developer would receive a 50.01% stake in Promoter’s business, while Promoter would rebrand itself under a trade name similar to Developer and receive a license to sell and market Developer’s software in Europe and Africa, via “.eu”, “.es”, and “.nl” domains. 

The partnership initially bore fruit. Developer forwarded sales leads to Promoter and shared source code with Promoter while Promoter’s engineers made improvements and local language translations to Developer’s software. The two companies’ employees corresponded regularly and attended virtual meetings and trainings. The two companies’ employees travelled occasionally to visit each other’s respective countries of operations for business meetings.

In 2019, the relationship soured. Promoter alleged ownership of portions of Developer’s source code. After talks failed to resolve the disagreement, Developer briefly closed Promoter’s access to Developer’s North Carolina servers. In June 2020, Developer (as majority stakeholder of Promoter) called a shareholder meeting. In response, Promoter’s minority shareholder filed suit in the Enterprise Court of the Appellate Court of Amsterdam in the Netherlands (“Enterprise Chamber”), a Dutch court specialized in Dutch corporate governance disputes. In September 2020, the Enterprise Chamber seized control of Promoter, ordered an investigation into its affairs, and named a Dutch attorney as its interim managing director pending the results of the investigation.

Developer again suspended Promoter’s access to Developer’s servers. With Promoter and Developer at loggerheads,  Promoter announced in January 2021 that it intended to terminate Promoter’s license. Promoter filed for injunctive relief in Rotterdam Court. Developer failed to appear at the hearing, at which the Rotterdam Court ordered Developer to restore server access and maintain Promoter’s license pending the Enterprise Chamber’s investigation. 

After the injunction, Promoter modified its website to be substantially similar to Developer’s website, changed its website links to redirect “Americas” users back to its own platform rather than to Developer’s website, and reported a “data breach” to authorities and customers as a ruse to bring Developer’s existing business to its own website and encroach on Developer’s sales territory.

On March 12, 2021, Developer sued in the Western District of North Carolina, moving for a temporary restraining order and preliminary injunction. The district court denied the former but reserved ruling on the preliminary injunction until it could be briefed by the parties. Developer later amended its complaint to add breach of contract, copyright infringement, trademark infringement, defamation, trade secret misappropriation, computer trespass, tortious interference, unjust enrichment, and unfair or deceptive business practice claims. The district court denied Promoter’s motions to dismiss for lack of personal jurisdiction and forum non conveniens, granting the motion for preliminary injunction as to the copyright, trademark, trade secret, and tortious interference claims on the basis that Developer was likely to succeed on the merits of its claims. The preliminary inunction prohibited Promoter from activity beyond Europe and Africa, from making alterations to Developer’s software, from using Developer’s trademark without including a 65-word disclaimer, and further requiring Promoter to include a 27-word disclaimer on each page of Promoter’s website.

One month later, Developer moved to hold Promoter in contempt for violating the preliminary injunction. Promoter moved to stay or modify the injunction. The district court found Promoter partly in contempt and partly amended, denying the motion to stay, ordering Promoter to pay $5,000 per day for each day that Promoter’s website had omitted the requisite disclaimer. The sanction totaled $335,000 for 67 days of violative conduct. 

Promoter appealed the orders granting and amending the preliminary injunction, and holding it in contempt, asserting that the case should be dismissed for lack of personal jurisdiction and improper forum, the preliminary injunction be reversed because Developer was unlikely to succeed on the merits of the underlying claims, and that the contempt order be vacated. The circuit court consolidated the appeals.

Analysis:

The circuit court began with de novo review as to whether the lower court’s exercise of personal jurisdiction over Promoter was proper, beginning first by inquiring whether the local long-arm statute authorized an exercise of jurisdiction before turning to whether such an application would be consistent with the Fourteenth Amendment’s guarantee of due process. Looking to North Carolina’s long-arm statute, N.C. Gen. Stat. § 1-75.4(4)(a), the court found its three elements to have been satisfied: an action claiming injury to a North Carolina person arising from defendant’s activities outside of North Carolina; where defendant engaged in solicitation or services within North Carolina at or about the time of the injury. While it was minimally sufficient that Promoter’s acts abroad misused Developer’s proprietary information that simultaneously harmed Developer and sowed confusion among domestic customers, the court was strongly persuaded that the pattern of services rendered by Developer to Promoter – routine attendance of virtual meetings and calls, fielding of sales leads, and rendering of operational and technical assistance – a pattern of services which was ratified by Promoter, was evidence of substantive domestic personal contacts. The court accordingly found jurisdiction to be authorized pursuant to the North Carolina long-arm statute. 

Turning next to whether application of the long-arm statute was consistent with a constitutional guarantee of due process rights, a second three-prong test applied: the extent to which Promoter purposefully availed itself of the privilege of conducting activities in the State; whether Developer’s claims arose out of those same activities; and whether the exercise of personal jurisdiction would be constitutionally reasonable. The circuit court found plentiful examples of coordinated, systemic, and purposeful behavior evident of purposeful availment: Promoter having initiated contact in forming the partnership with Developer; significant and long-term business activities in the State; regular attendance of weekly and monthly virtual meetings; years of paying compensation into the State; years of acting on client referrals directed through the State; and a years-long pattern of sharing data and information between North Carolina and Netherlands-based servers. Finding Developer’s intellectual property claims to have clearly arisen from Promoter’s collaborative activities in the State, the second prong was satisfied. Finally, the third prong required the circuit court to evaluate whether the exercise of jurisdiction would be so unduly burdensome on Promoter as to outweigh the State’s interest in adjudication of the dispute and Developer’s interest in receiving relief for its injury. The circuit court found Promoter’s significant and long-term business activities in the State to mean that it was reasonably foreseeable for Promoter to be subject to a federal court’s jurisdiction; and also for the State to have strong interests in both protecting its corporate citizens’ rights against foreign infringements and preserving a home forum for vindication of those rights. The circuit court affirmed the lower court’s finding on personal jurisdiction.

Absent a finding that the lower court had abused its discretion by declining to dismiss on forum non conveniens grounds, the circuit court would exercise deference to the district court. That the district court found the Dutch court to be an inadequate forum due to its inability to adjudicate trademark claims arising under United States law was sufficient for the circuit court to find no abuse of discretion. 

Turning next to Promoter’s challenge of the preliminary injunction, the circuit court applied an “abuse of discretion” standard to the district court’s determination that Developer was likely to succeed on the merits of the underlying copyright, trademark, trade secret, and tortious interference claims:

Copyright: The circuit court agreed with the lower court’s determination that Developer would likely prevail on its copyright claim, which required demonstration of Developer’s ownership of a valid copyright, Promoter’s copying of the original work, and a domestic violation by Promoter. Nowhere in the record was there sufficient evidence to overturn the district court’s finding of a valid copyright. Because Promoter admitted that the 2016 oral agreement permitted it only to sell Developer’s software in Europe and Africa, the court found Promoter to have copied original works when it exceeded the scope of its license by marketing its services beyond its territory. The circuit court also agreed with the lower court’s determination that Promoter had committed domestic violations by directing infringing materials into the United States from abroad. Whether Developer or the courts could identify a particular natural citizen who had received infringing materials was of no importance; Promoter’s decision to circulate copyrighted material to international employees of an American company was enough to constitute a domestic violation. 

Trademark: The circuit court agreed with the lower court’s determination that Developer would likely prevail on its trademark claim, which required a demonstration that Developer possessed a valid mark and a likelihood of confusion with another mark. Promoter stipulated to the validity of Developer’s mark, and the lower court had found the two parties to share similar website domain names, to use virtually identical website designs, and to provide substantially similar services. The circuit court agreed that similarly named companies selling similar software on similar websites would sow confusion, and Developer was therefore likely to succeed on its trademark claim. The circuit court again found Promoter’s protestation against extraterritorial application of the statute unpersuasive, agreeing with the lower court’s determination that Promoter’s conduct had significant effects on domestic commerce and that confusion among domestic customers was likely.

Trade Secrets: The circuit court agreed with the lower court’s determination that Developer would likely prevail on its misappropriation claim under the Defend Trade Secrets Act (“DTSA”), which required a demonstration of the existence of a trade secret, the trade secret’s misappropriation, and the trade secret being implicated in interstate or foreign commerce. The lower court had found Developer’s source code and client list to be likely trade secrets, that Developer had taken steps to protect the same by restricting access and requiring nondisclosure and confidentiality agreements, and that Promoter had misappropriated them by exceeding the scope of the 2016 oral agreement. Again evaluating the question of whether a domestic act in furtherance of the offense had taken place, the circuit court found sufficiency in the Promoter’s access of data stored on domestic computer servers and subsequent disclosure of the trade secrets within the United States.

Tortious Interference: The circuit court agreed with the lower court’s determination that Developer would likely prevail on its two tortious interference claims. Under North Carolina law, tortious interference with contract would require demonstrating Promoter’s knowledge of a valid contract between Developer and a third party where Promoter unjustifiably and intentionally induced the third party not to perform the contract whereby Developer suffered actual injury. The circuit court found the lower court to have fairly concluded that Promoter was aware of Developer’s valid contract with a particular client that Promoter subsequently poached under false pretenses. As to the second claim, under North Carolina law, tortious interference with prospective economic advantage would require demonstrating that Promoter maliciously and illegitimately induced a third party not to enter into a contract with Developer which the third party would have entered into but for the interference, whereby Developer suffered actual injury. There, the circuit court found the lower court to have fairly concluded that Promoter’s misleadingly similar websites had lured potential clients away from Developer. The circuit court dispensed with Promoter’s contention that North Carolina law did not extend to it, finding Promoter to have targeted American companies and caused harm to a particular North Carolina corporate citizen.

The circuit court next evaluated Promoter’s contention that the district court had erred by issuing the preliminary injunction before the Rotterdam Court had completed its investigation and issued a determination regarding the parties’ 2016 agreement. The circuit court found the lower court not to have abused its discretion, because the presence or absence of the 2016 agreement was immaterial to whether Promoter’s conduct reflected a violation of copyright, trademark, or trade secret statutes, or reflected tortious interference. Further, the circuit court found the lower court to have acted reasonably in issuing a sensible decree tailored to the necessities of the particular case; one that barred Promoter from using Developer’s intellectual property outside the reasonably conceivable limits of the 2016 oral agreement, pending the conclusion of the instant litigation. Promoter was thereby free to continue doing business, so long as it regionally confined its activities, avoided directly competing with Developer, and communicated the nature of its relationship to Developer to prospective clients that visited its website. The circuit court held the district court not to have abused its discretion.

Finally, the circuit court reviewed the lower court’s contempt order for abuse of discretion. The circuit court was persuaded that the district court had correctly analyzed the requisite elements in establishing Promoter to be in contempt of the preliminary injunction; Promoter was aware of and knowingly violated an injunction that benefited Developer whereby Developer suffered the harm of consumer confusion. The circuit court was further persuaded that Promoter had made no good faith attempt to comply with the injunction based on the fact that Promoter chose forbearance over any number of possible reasonable steps toward compliance and had not availed itself of an opportunity to move the district court to clarify the order in the case of honest misunderstanding. However, the circuit court paused to indicate that the amount of the resulting sanction – $5,000 per day – appeared not to serve to coerce obedience for Promoter’s failure to comply, but to compensate Developer for losses sustained as a result of Promoter’s past conduct. Finding the sanction to pertain only to Promoter’s previous conduct, the circuit court found the record wanting. The lower court had only vaguely described how its sanctions figure was intended to approximate Developer’s losses; the figure represented roughly half of Developer’s daily income but no explanation tied the amount to the Developer’s injury.

 The court affirmed the lower court’s judgment as to personal jurisdiction, forum non conveniens, and the preliminary injunction, but vacated and remanded for further proceedings as to the appropriate degree of monetary sanctions.

Opinion HERE | MSBA Business Law Section Blog HERE


Brett Philpotts is in-house counsel at Three Rivers Management, Inc., with practice focused in environmental law.

https://www.linkedin.com/in/brett-philpotts-9303235/