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California Federal District Court Examines Personal Jurisdiction Issue in International Trade Secret Misappropriation and Breach of Contract Dispute and Maintains Suit Brought Against Irish Company and Owner

Posted in Practice & Procedure, Trade Secrets

By Robert Milligan and Jeffrey Oh

In a recent federal case out of California, Judge Morrison C. England, Jr. of the U.S. District Court for the Eastern District of California examined the issue of personal jurisdiction in an international trade secret misappropriation and breach of contract dispute. The case, Vance’s Foods, Inc. v. Special Diets Europe Limited, et al., No. 2:11-cv-02943-MCE-GGH, centers around contracts governing the business relationship between an American company and a European distributor based out of Ireland. Using a three-prong test promulgated by the Ninth Circuit to determine the court’s right to exercise specific jurisdiction over a defendant, Judge England granted in part and denied in part Defendants’ Motion to Dismiss.

The Plaintiff, Vance’s Foods, Inc. (“VF”), is an Alaskan corporation with its principal place of business in Sacramento, CA. VF produces and distributes a non-dairy milk substitute called DariFree™. According to the court’s order, in October 2007, VF entered into two written agreements with the Defendants, Special Diets Europe Limited (“SDE”). The first contract, referred to as the “Distribution Agreement,” made SDE the exclusive distributor for DariFree™ in a specified area of Europe. The second contract, known as the “Product Development Agreement” gave SDE permission to use VF’s product formula, manufacturing process, and list of ingredient suppliers to develop and distribute a liquid stable version of DariFree™ in Europe. VF gave SDE this information with the caveat that they keep it confidential, use it only for the stated purpose of the contract (successful development of the liquid stable version within 8 months), and return the information upon VF’s request or the termination of the agreement. In its initial complaint, VF claims that SDE, along with its owners and directors Eamon and Mariel Cotter, entered into this agreement with the sole intention of misappropriating and using VF’s confidential information. In response, SDE and the Cotters filed a Motion to Dismiss for Lack of Personal Jurisdiction pursuant to Federal Rule of Procedure 12(b)(2). SDE is an Irish corporation with its offices located in Ireland. Individual defendants Eamon Cotter and Mariel Cotter are citizens and residents of Ireland. The Cotters are the sole owners and directors of SDE.

The Defendants did not challenge general jurisdiction over them, so the Court employed the “three prong test to determine whether a court can exercise specific jurisdiction over a defendant” first used by the Ninth Circuit in Brayton Purcell LLP v. Recordon & Recordon, 606 F.3d 1124, 1128 (9th Cir.2010). The first prong of this test requires that the non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws.

This first prong is primarily concerned with establishing a link between a defendant and the forum in which the case is being heard. This link is best established by either showing proof of direct activity related to the complaint within the forum, or by showing that the defendant has deliberately created an ongoing business relationship with forum residents and is therefore subject to “the burden of litigating in that state as well.”

Defendants argued that SDE lacks the requisite “minimum contacts” with California because: 1) SDE does not have any offices, employees or agents, bank accounts, or real property in California; 2) SDE does not conduct any business in California, is not licensed to do business in California, and does not directly advertize or solicit business in California; 3) SDE’s only purpose was to import and distribute Plaintiff’s products in Europe; 4) both the Distribution Agreement and Product Development Agreement were negotiated and entered into in Ireland; and 5) any products that SDE received from Plaintiff were shipped from Plaintiff’s plant in Utah, not from California.

Created with the primary purpose of developing a distributorship relationship with VF, SDE – through its owner and director Mr. Cotter – allegedly solicited VF’s founder in 2003 at his home in Sacramento, California. This initial meeting allegedly led to the development of a relationship between the two companies that culminated four years later in the signing of two business agreements in 2007. These agreements entered SDE into a long-term contractual obligation with an entity principally operating out of Sacramento, as specifically noted in the agreements. The court noted that both agreements provide that any dispute arising between the parties would be governed by California law and the parties would attempt to mediate such a dispute in California. The court found that while the choice-of-law clause is not sufficient by itself to determine that Defendants availed themselves of the benefits and protections of the laws of the forum state, it is a relevant factor. 

The court found that SDE – in addition to Mr. Cotter, the corporate officer who served as the “’guiding spirit’ behind the wrongful act” – both satisfy the standard of purposeful availment within the first prong. In Davis, 885 F.2d at 520-21, the Ninth Circuit allowed that “courts can exercise jurisdiction over an individual acting in an official capacity…where ‘the corporation is the agent or alter ego of the individual defendant.’” According to the Court, Mr. Cotter’s many trips to California and communications with VF executives in which he refers to SDE in the first person made his role as an alter ego of the company hard to deny. In contrast, Ms. Cotter’s lack of consistent communication with VF employees in either the negotiation process or the subsequent business relationship, as well as her never having visited California, led Judge England to rule that VF has failed to establish purposeful availment in her case.

The second prong of the Ninth Circuit’s test holds that the claim must be one which arises out of or relates to the defendant’s forum-related activities.

The standard laid out in this prong of the test requires that the conduct and contacts used to prove purposeful availment in the first prong gave rise to the current dispute. To evaluate this prong judges use the “’but for’ test,” where “’but for’ the contacts between the defendant and the forum state, the cause of action would not have arisen.” Terracom, 49 F.3d at 561.

Applied to SDE, the court found that but for SDE’s solicitation of the contractual relationship with a California-based Plaintiff and entering into two long-term agreements with Plaintiff, Defendants would not have obtained Plaintiff’s confidential information, and thus Plaintiff’s causes of action for breach of contract would not have arisen.

Given Mr. Cotter’s status within the court’s eyes as the “alter ego” of SDE, Judge England extended his rationale for SDE meeting the standard for the second prong to Mr. Cotter. However, since Ms. Cotter’s lack of purposeful availment in the matter precluded the possibility of her being brought into court under specific jurisdiction, the Court did not analyze her under the second prong.

In the first two prongs, the burden rests on the Plaintiff to prove that the Defendant meets all necessary requirements for specific jurisdiction. Once standing under the first two prongs has been established, the burden shifts to the Defendant to argue the third and final prong of the test, the exercise of jurisdiction must comport with fair play and substantial justice, i.e. it must be reasonable.

For a defendant to defeat jurisdictional claims under this test, they must prove that litigating in the current forum would be too difficult as to put them at a significant disadvantage. In deciding this prong, courts use the seven “reasonableness” factors laid out in Bancroft, 223 F.3d at 1088. They are: purposeful interjection; burden on Defendant; sovereignty concerns; the forum state’s interest in adjudicating the matter; the efficiency of resolution in the forum; the importance of Plaintiff receiving a convenient and effective resolution; and the availability of an alternative forum. Given the high level of interaction with residents of the forum, the nature of the contractual language linking SDE and Mr. Cotter to California, including a California choice of law provision, California’s strong interest in protecting its residents, the parties’ inclusion of an arbitration provision providing for arbitration in Illinois for disputes, and the benefits of technology and modern travel which have lowered the costs and burden of litigating in the current forum, the Court found that the majority of the “reasonableness” factors weighed in favor of the Plaintiff. Evaluating SDE and Mr. Cotter simultaneously, the court found that neither had presented compelling evidence why the specific personal jurisdiction in the current forum would be unreasonable.

After evaluating each defendant against the Ninth Circuit’s three prong test, the Court denied the motion to dismiss in the case of both SDE and Mr. Cotter, and granted the motion to dismiss with leave to amend in the case of Ms. Cotter.

Because both of Plaintiff’s claims, including the claim for misappropriation of trade secrets, arise out of the parties’ contractual relationship, the court reasoned that it was not necessary for the court to conduct the “purposeful direction” analysis which is typically analyzed in tort suits. However, the court found that were it to consider the “purposeful direction” prong, it would conclude that Plaintiff has sufficiently demonstrated that SDE purposefully directed its alleged tortious actions at California under the “effects” test. The court reasoned that the Plaintiff has alleged that SDE engaged in intentional tortious acts of trade secret misappropriation, thus satisfying the first prong of the “effects” test. The court further found that the second prong is also satisfied because SDE allegedly “engaged in wrongful conduct targeted at a plaintiff whom [SDE] knows to be a resident of the forum state.” Finally, if SDE misappropriated Plaintiff’s trade secrets, it should have known that Plaintiff would likely suffer harm in California, which is where Plaintiff’s principal place of business is located.

In the end, the court refused to grant the motion to dismiss because the court was convinced that SDE initiated a long-term business arrangement with a company it knew to be principally located in Sacramento, CA. In addition, according to the court, Mr. Cotter’s intertwined existence with SDE as its founder, owner, director and alter ego made him equally suspectible to personal jurisdiction in California federal court. Ms. Cotter’s lack of identifiable involvement in the business relationship between VF and SDE led the Court to rule that Plaintiff “failed to allege sufficient personal conduct directed at California that would justify hailing [her] into this Court.” A subsequent filing in the case reveals that SDE’s and Mr. Cotter’s attorneys are now seeking to withdraw from the case based in part on the Defendants’ continued contention that the court does not have proper jurisdiction over them.  

This decision highlights the importance of including enforceable choice of law, forum selection, and consent to jurisdiction provisions in your company’s business agreements involving international transactions and parties, as well as suing in your home forum first should there later be a dispute to attempt to secure jurisdiction. Critical contract components such as these are essential because the chosen substantive law governing the dispute is typically more favorable in the selected forum for the resident party and there may be increased costs of suit and lack of familiarity and/or level of comfort in the selected forum by the foreign party that may prove dispositive.