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When do on-line transactions originating from out-of-state afford courts long-arm jurisdiction over a non-domiciliary defendant?  A New York court answered this question in the recent opinion, Deer Consumer Products, Inc. v. Little and John Does 1-10 and Seeking Alpha Ltd., Index No.: 650823/11, 2012 N.Y. Slip Op. 22021 (1/27/12, N.Y. Sup. Ct., New York Co., Edmead, J.)

Background

The plaintiff, Deer Consumer Products brought a defamation action against a defendant known only by the pseudonym Alfred Little.  Little subsequently moved to: (1) dismiss the action for lack of personal jurisdiction; and (2) appear in the action under his pseudonym.

Deer is a Nevada corporation doing business in China.  According to the complaint Little made several defamatory statements which were published on a website operated by Seeking Alfa, Ltd. an Israeli-based company.  These statements were allegedly part of a scheme to lower the price of Deer’s shares so that Little could profit from short positions he was holding in the stock.

Little’s Motion

Little argued that the court lacked personal jurisdiction over him because he did not reside in New York nor did he maintain a domicile in New York.  Moreover, he had not been in the U.S. for the last twelve months nor did he reside in New York when Deer started the suit.

He next argued that the long arm statute, CPLR 302 (a) (2), is inapplicable because the statute exempts defamatory statements.  Further, he does not “transact business” in New York as that term is defined in the long-arm statute, CPLR § 302 (a)(1).  He posted the allegedly defamatory statements on a website that can be accessed not only in New York but all around the world for that matter.  He did not make the defamatory remarks in New York nor did he make the statements about a New York resident. Additionally, the statements were published by a non-New York company.  Furthermore, Little contended that he did not purposely transact business in New York which is “substantially connected” to the alleged defamation as provided by the long-arm statute.

In the second part of his motion, Little requested that he should be allowed to appear under his pseudonym because of the claimed danger that he will suffer physical harm if his identity is revealed. At the very least, Little argued, his identity should only be disclosed to the court. He also argued that under the First Amendment, he has the right to anonymous speech.  Regarding his claim that he will be exposed to physical harm if his identity is revealed, the only proof he submitted was his own unsubstantiated affidavit.

Deer’s Contentions

Deer argued that Little did “transact business” under the long-arm statute, CPLR §302 (a)(1).  First, he maintained an interactive website, i.e. a blog.  Second, he executed a short-sale in Deer shares on the NASDAQ whose headquarters are located in New York.  Further, there was a “substantial relationship” between Little’s short-sale and his defamatory statements regarding Deer because Little allegedly published those statements in an effort to manipulate the price of Deer’s shares and thereby execute his short sale at a profit.

Alternatively, Deer reasoned that if it had not yet presented adequate evidence of the court’s jurisdiction over Little, then Little’s motion should still be denied as premature, and discovery should be allowed to proceed so that jurisdictional facts could be established.

Deer also pooh-poohed Little’s claim of impending danger if his true identity was revealed, pointing out that there was nothing other than Little’s affidavit to that effect.  Moreover, disclosure of Little’s true identity was necessary for the prosecution of Deer’s claims, and it would be severely prejudiced if Little were allowed to proceed anonymously.

Legal Analysis

CPLR 302 (a)(1) allows a court to exercise personal jurisdiction over a non-domiciliary who either himself or through an agent “transacts business” within New York, provided the subject cause of action arises out of that “transaction of business”. To determine the existence of jurisdiction under section 302(a)(1), a court must decide: (1) whether the defendant “transacts any business” in New York; and, if so, (2) whether this cause of action arises from such business transaction.

Transacting Business

Regarding “transacting business”, courts look to “the totality of the defendant’s activities within” New York to determine whether a defendant has transacted business.  The transactions must constitute “purposeful activity”.  This is defined as “some act by which the defendant purposefully avails himself of the privilege of conducting activities within New York, thus invoking the benefits and protections of its laws”.  To determine whether the cause of action arises out of the subject business transaction, a suit arises out of a party’s activities in New York if there is a substantial relationship between the cause of action and the activity that occurred in New York.

The long-arm statute has limited applicability to defamation cases because of the need “to avoid unnecessary inhibitions on freedom of speech or the press”. Thus, for purposes of CPLR 302 (a)(1), defamatory statements sent into New York are insufficient to satisfy the “transacting business” requirement.  If the defamatory statement is the alleged “transaction of business”, then the claimant must show more than the distribution of the statement within New York to establish long-arm jurisdiction over the person distributing such statements.

Personal Jurisdiction in the Internet Context

As for allegedly defamatory statements sent out for distribution via the internet, the same principles apply. Posting allegedly defamatory statements outside New York about a New York resident on a website that is merely accessible in New York, without more, does not provide a basis for jurisdiction over a non-domiciliary for the purposes of CPLR § 302 (a)(1). Instead, a nonresident’s internet activity must be expressly targeted at or directed to the forum state to establish minimum contacts necessary to support the exercise of personal jurisdiction.  Cf. Intellect Art Multimedia, Inc. v Milewski, 24 Misc 3d 1248 (N.Y, Sup. Ct., New York Co. 2009) (defendant transacted business in New York through its website, because of, among other things, the high level of interactivity of the website; website users freely exchanged information; and defendant played an allegedly active role in manipulating user’s information and data).

In analyzing personal jurisdiction in the internet context, many New York courts use the sliding scale of interactivity first enunciated in Zippo Manuf. Co. v Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997).  In that case websites were classified in three categories: (1) interactive -a defendant provides goods and services over the internet or knowingly and repeatedly transmits computer files to customers in other states; (2) middle ground-permits the exchange of information between users in another state and the defendant, and (3) passive-makes information available to users. To exercise personal jurisdiction over the owner of an internet website accessible in New York, the site has to be “highly interactive”.   In other words, more has to be shown than mere presence on the internet. Websites occupying the middle ground, i.e., where a user can exchange information with the host computer, such as in Little’s case, require closer scrutiny. Whether there is personal jurisdiction depends on the level of interactivity and the commercial nature of the exchange of information that occurs on the website.  The level and quality of its contact with New York residents becomes key.

Interactive Website

The court concluded that Little’s internet activities did not constitute “transaction of business” in New York within the meaning of CPLR 302 (a)(1).  There was no indication that Little’s internet postings on the subject websites, which are accessible to anyone – both in New York and in the entire world – were expressly targeted at anyone in New York.  Deer did not present any facts that Little purposefully directed the website’s activity at New York. Deer’s assertion that Little interacted with his website’s users by answering e-mails, questions and comments and that he allowed users to post comments in response to his articles and to contribute their own articles to the blog was insufficient to find that Little purposefully and knowingly interacted with New York residents or otherwise targeted New York for business, “thereby invoking the benefits and protections of New York’s laws”.

Neither does the nature of Little’s or other users’ postings suggest that they were purposefully directed to New Yorkers rather than a worldwide audience. Indeed, the reports authored by Little provide information about Deer’s alleged fraudulent land transactions in another part of the world altogether, i.e. China.

Thus, even assuming that Little’s website was interactive or fell somewhere in the “middle ground” of interactivity, there were no alleged contacts with New York residents which would “require closer evaluation”. There is nothing in this record to support a finding that Little purposefully transacted business via his website with New York residents. In the context of a CPLR 302 (a)(1) inquiry, such failure is fatal.

Deer did not even make a preliminary showing which would warrant further jurisdictional discovery regarding Little’s internet activities.

Short Sale Transaction

Likewise, Deer’s argument that Little’s short sale of Deer stock, which is traded on the New York-based NASDAQ, did not support CPLR 302 (a)(1) jurisdiction.

A corporation is not ‘doing business’ in New York for jurisdictional purposes just because its shares are listed on a stock exchange.  Even taking Deer’s allegations as true– that Little drove down the value of Deer stock so he could profit from short sales by widely disseminating his allegedly defamatory statements– this relationship between the defamation claim and the short sale might satisfy the second part of the test, i.e., that the cause of action “arises from” the subject transaction. However, if Little did not “project” himself into New York, e.g., by trading stocks directly with a NASDAQ employee in New York or by dealing directly with a New York broker, this connection alone is not sufficient to establish jurisdiction over Little because the first part of the test remains unsatisfied.

If Little did not “purposefully avail himself of the privilege of conducting activities within New York,” neither his website, nor his short sale constitute “transacting business” in New York such as to subject him to jurisdiction pursuant to CPLR 302 (a)(1). There was no evidence, nor did Deer even make an allegation that Little directed his alleged defamatory statements to anyone in New York. Consequently, CPLR 302 (a)(1) did not provide a basis for jurisdiction over Little.

Request for Anonymity

Presumption of openness in the judicial process can be overridden in exceptional circumstances, where a court, in its discretion, will allow a party to proceed under a pseudonym, “if the party’s need for anonymity outweighs prejudice to the opposing party and the public’s interest in knowing the party’s identity”.

In evaluating anonymity requests, courts consider, among other things, whether disclosing the person’s identity will subject him to possible physical or mental harm or whether such harm will come to innocent non-parties.  This risk must be balanced against the unfairness to the opposing party arising from the concealment of the person’s identity.

Little’s allegations in his affidavit that disclosing his name will pose a risk of retaliatory physical harm to him and his associates were totally unsubstantiated. Because of the lack of any supporting evidence, the court could not determine whether Little’s claims of retaliatory physical harm are reasonable so as to warrant anonymity.  On the other hand, Deer demonstrated that it would be manifestly unfair if Little’s identity is not disclosed because without Little’s identity, Deer would not be able to satisfy its burden of proving jurisdiction since the essential jurisdictional facts are within Little’s exclusive control.

The court struck a compromise.  At this point in the litigation Little’s identity would be disclosed solely for the purposes of resolving the jurisdictional issue pursuant to a confidentiality agreement. Little was ordered to submit affidavits and other evidence, corroborating his allegations of potential risks of physical harm, which were to be reviewed in camera.

First Amendment

As for Little’s claim that disclosing his identity would violate his First Amendment rights, the First Amendment does not bar disclosure of Little’s identity.  The First Amendment includes a person’s right to speak anonymously. However, this right is not absolute and may be limited by defamation considerations. Indeed, courts have already found that releasing false information about a publicly traded company through the internet is as harmful as libelous statements, which are also not protected by the First Amendment.

In determining whether to disclose the identities of anonymous internet speakers, courts balance the interests of the plaintiff in seeking damages against the First Amendment interest of the speaker in maintaining his anonymity.  In the instant case, Deer stated a prima facie case for defamation against Little. It alleged that: Little published false statements of fact on websites regarding Deer’s allegedly fraudulent land transactions and Deer management’s misappropriation of millions in shareholder value; and that Deer suffered injury (resulting from a significant drop in the price of its common shares).

Deer also established that Little’s true identity is materially necessary for Deer to advance its defamation claim.  Absent his identifying information, Deer would not be able to properly carry its burden of proving the existence of personal jurisdiction over Little.  Thus, the First Amendment did not bar disclosure of Little’s identity.

However, because of Little’s asserted fear of physical harm, disclosure of Little’s identity would be limited at this juncture solely to the purposes of jurisdictional discovery pursuant to the aforementioned confidentiality agreement.

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