Web Activity Enough for Discovery

Even if a Web site is both commercial and interactive, a court cannot exercise jurisdiction over its operator unless there is also proof that the company has 'purposefully availed' itself of doing business in that state, a federal appeals court has ruled.

But in a key victory for plaintiffs, the 3rd U.S. Circuit Court of Appeals also held that judges must be willing to consider the defendant's non-Internet activities 'as part of the 'purposeful availment' calculus' and that sometimes a plaintiff must be given a chance to build just such a case for jurisdiction.

In Toys 'R' Us v. Step Two SA, a unanimous three-judge panel found that U.S. District Judge Katharine S. Hayden erred when she denied the plaintiff's request for jurisdictional discovery.

'Toys' request for jurisdictional discovery was specific, non-frivolous, and a logical follow-up based on the information known to Toys. The District Court erred by denying this reasonable request,' visiting U.S. District Judge Louis F. Oberdorfer of the District of Columbia wrote in an opinion joined by 3rd Circuit Judge Samuel A. Alito and Julio M. Fuentes.

In the suit, New Jersey-based Toys 'R' Us claims that Step Two, a Spanish company, is using its Internet Web sites to engage in trademark infringement, unfair competition, misuse of the trademark notice symbol, and unlawful 'cybersquatting.'

According to the suit, in 1999 Toys acquired Imaginarium Toy Centers Inc., which owned and operated a network of 'Imaginarium' stores for the sale of educational toys and games as well as several Imaginarium trademarks.

Prior to the acquisition, the owners of the Imaginarium mark had been marketing a line of educational toys and games since 1985 and had first registered the Imaginarium mark with the U.S. Patent and Trademark Office in 1989.

Toys now owns 37 Imaginarium stores in the United States, seven of which are in New Jersey, and there are Imaginarium shops within 175 of the Toys 'R' Us stores, including five New Jersey stores.

Step Two is a Spanish corporation that owns or has franchised toy stores operating under the name 'Imaginarium' in Spain and nine other countries.

It first registered the Imaginarium mark in Spain in 1991, and it opened its first Imaginarium store in the Spanish city of Zaragoza in November 1992.

Step Two began expanding its chain of Imaginarium stores by means of a franchise system in 1994 and has registered the Imaginarium mark in several other countries where its stores are located. There are now 165 Step Two Imaginarium stores.

The Step Two stores have the same unique facade and logo as those owned by Toys and sell the same type of merchandise as Toys sells in its Imaginarium stores.

However, Step Two does not operate any stores, maintain any offices or bank accounts, or have any employees anywhere in the United States. It also pays no taxes to the United States or to any U.S. state and insists that it has not directed any advertising or marketing efforts at the United States.

In the mid-1990s, both Toys and Step Two parties turned to the Internet to boost their sales.

In 1995, Imaginarium Toy Centers Inc., which Toys later acquired, registered the domain name imaginarium.com and launched a Web site featuring merchandise sold at Imaginarium stores. In April 1999, Imaginarium Toy Centers registered the domain name imaginarium.net and launched another Web site where it offered Imaginarium merchandise for sale. In 1996, Step Two registered the domain name imaginarium.es and began advertising merchandise that was available at its Imaginarium stores. In June 1999, Step Two registered two additional domain names ' imaginariumworld.com and imaginarium-world.com. In May 2000 it added three more ' imaginariumnet.com, imaginariumnet.net and imaginariumnet.org.

The lawsuit began in February 2001 when Toys filed suit in U.S. District Court in New Jersey.

But Hayden dismissed the case for lack of jurisdiction, finding that since Step Two did not do any business in the United States, the court could not exercise personal jurisdiction over the company.

Now the 3rd Circuit has ruled that while most of Hayden's analysis was correct, she was too quick to deny Toys' request for discovery that could have uncovered additional facts relating to Step Two's non-Internet activity that would justify exercising jurisdiction.

'Given the allegations as to Step Two's mimicry of Toys' ventures on the Internet and its copy-cat marketing efforts, it would be reasonable to allow more detailed discovery into Step Two's business plans for purchases, sales, and marketing,' Oberdorfer wrote.

'Limited discovery relating to these matters would shed light on the extent, if any, Step Two's business activity ' including, but not limited to, its Web site ' were aimed towards the United States. This information, known only to Step Two, would speak to an essential element of the personal jurisdiction calculus.'

The decision is legally significant because it marks the first time that the 3rd Circuit has considered the standard for personal jurisdiction based upon a defendant's operation of a commercially interactive Web site.

Oberdorfer adopted the test first articulated in Zippo Manufacturing Co. v. Zippo Dot Com Inc., a 1997 decision from the Western District of Pennsylvania that stressed that the propriety of exercising jurisdiction depends on where on a sliding scale of commercial interactivity the Web site falls.

The Zippo court held that in cases where the defendant is clearly doing business through its Web site in the forum state, and where the claim relates to or arises out of use of the Web site, personal jurisdiction exists.

In Zippo, the court found that the defendant had purposefully availed itself of doing business in Pennsylvania when it 'repeatedly and consciously chose to process Pennsylvania residents' applications and to assign them passwords,' knowing that the contacts would result in business relationships with Pennsylvania customers.

Oberdorfer found that several other federal circuit courts have since adopted the 'purposeful availment' requirements articulated in Zippo.

'As Zippo and the Courts of Appeals decisions indicate, the mere operation of a commercially interactive Web site should not subject the operator to jurisdiction anywhere in the world,' Oberdorfer wrote.

'Rather, there must be evidence that the defendant 'purposefully availed' itself of conducting activity in the forum state, by directly targeting its Web site to the state, knowingly interacting with residents of the forum state via its Web site, or through sufficient other related contacts.'

With that test in mind, Oberdorfer found that Toys 'R' Us 'has failed to satisfy the purposeful availment requirement.'

Step Two's Web sites, Oberdorfer said, are both commercial and interactive but 'do not appear to have been designed or intended to reach customers in New Jersey.'

Instead, he said, Step Two's Web sites are written entirely in Spanish, and prices for its merchandise are in pesetas or euros. Merchandise can be shipped only to addresses within Spain, and none of the portions of Step Two's Web sites are designed to accommodate addresses within the United States.

But Oberdorfer found that Hayden erred when she denied the jurisdictional discovery request.

'The [lower] court's unwavering focus on the Web site precluded consideration of other Internet and non-Internet contacts ' indicated in various parts of the record ' which, if explored, might provide the 'something more' needed to bring Step Two within our jurisdiction,' Oberdorfer wrote.

'Although the plaintiff bears the burden of demonstrating facts that support personal jurisdiction, courts are to assist the plaintiff by allowing jurisdictional discovery unless the plaintiff's claim is 'clearly frivolous.”

Shannon P. Duffy is a reporter for The Legal Intelligencer.

Even if a Web site is both commercial and interactive, a court cannot exercise jurisdiction over its operator unless there is also proof that the company has 'purposefully availed' itself of doing business in that state, a federal appeals court has ruled.

But in a key victory for plaintiffs, the 3rd U.S. Circuit Court of Appeals also held that judges must be willing to consider the defendant's non-Internet activities 'as part of the 'purposeful availment' calculus' and that sometimes a plaintiff must be given a chance to build just such a case for jurisdiction.

In Toys 'R' Us v. Step Two SA, a unanimous three-judge panel found that U.S. District Judge Katharine S. Hayden erred when she denied the plaintiff's request for jurisdictional discovery.

'Toys' request for jurisdictional discovery was specific, non-frivolous, and a logical follow-up based on the information known to Toys. The District Court erred by denying this reasonable request,' visiting U.S. District Judge Louis F. Oberdorfer of the District of Columbia wrote in an opinion joined by 3rd Circuit Judge Samuel A. Alito and Julio M. Fuentes.

In the suit, New Jersey-based Toys 'R' Us claims that Step Two, a Spanish company, is using its Internet Web sites to engage in trademark infringement, unfair competition, misuse of the trademark notice symbol, and unlawful 'cybersquatting.'

According to the suit, in 1999 Toys acquired Imaginarium Toy Centers Inc., which owned and operated a network of 'Imaginarium' stores for the sale of educational toys and games as well as several Imaginarium trademarks.

Prior to the acquisition, the owners of the Imaginarium mark had been marketing a line of educational toys and games since 1985 and had first registered the Imaginarium mark with the U.S. Patent and Trademark Office in 1989.

Toys now owns 37 Imaginarium stores in the United States, seven of which are in New Jersey, and there are Imaginarium shops within 175 of the Toys 'R' Us stores, including five New Jersey stores.

Step Two is a Spanish corporation that owns or has franchised toy stores operating under the name 'Imaginarium' in Spain and nine other countries.

It first registered the Imaginarium mark in Spain in 1991, and it opened its first Imaginarium store in the Spanish city of Zaragoza in November 1992.

Step Two began expanding its chain of Imaginarium stores by means of a franchise system in 1994 and has registered the Imaginarium mark in several other countries where its stores are located. There are now 165 Step Two Imaginarium stores.

The Step Two stores have the same unique facade and logo as those owned by Toys and sell the same type of merchandise as Toys sells in its Imaginarium stores.

However, Step Two does not operate any stores, maintain any offices or bank accounts, or have any employees anywhere in the United States. It also pays no taxes to the United States or to any U.S. state and insists that it has not directed any advertising or marketing efforts at the United States.

In the mid-1990s, both Toys and Step Two parties turned to the Internet to boost their sales.

In 1995, Imaginarium Toy Centers Inc., which Toys later acquired, registered the domain name imaginarium.com and launched a Web site featuring merchandise sold at Imaginarium stores. In April 1999, Imaginarium Toy Centers registered the domain name imaginarium.net and launched another Web site where it offered Imaginarium merchandise for sale. In 1996, Step Two registered the domain name imaginarium.es and began advertising merchandise that was available at its Imaginarium stores. In June 1999, Step Two registered two additional domain names ' imaginariumworld.com and imaginarium-world.com. In May 2000 it added three more ' imaginariumnet.com, imaginariumnet.net and imaginariumnet.org.

The lawsuit began in February 2001 when Toys filed suit in U.S. District Court in New Jersey.

But Hayden dismissed the case for lack of jurisdiction, finding that since Step Two did not do any business in the United States, the court could not exercise personal jurisdiction over the company.

Now the 3rd Circuit has ruled that while most of Hayden's analysis was correct, she was too quick to deny Toys' request for discovery that could have uncovered additional facts relating to Step Two's non-Internet activity that would justify exercising jurisdiction.

'Given the allegations as to Step Two's mimicry of Toys' ventures on the Internet and its copy-cat marketing efforts, it would be reasonable to allow more detailed discovery into Step Two's business plans for purchases, sales, and marketing,' Oberdorfer wrote.

'Limited discovery relating to these matters would shed light on the extent, if any, Step Two's business activity ' including, but not limited to, its Web site ' were aimed towards the United States. This information, known only to Step Two, would speak to an essential element of the personal jurisdiction calculus.'

The decision is legally significant because it marks the first time that the 3rd Circuit has considered the standard for personal jurisdiction based upon a defendant's operation of a commercially interactive Web site.

Oberdorfer adopted the test first articulated in Zippo Manufacturing Co. v. Zippo Dot Com Inc., a 1997 decision from the Western District of Pennsylvania that stressed that the propriety of exercising jurisdiction depends on where on a sliding scale of commercial interactivity the Web site falls.

The Zippo court held that in cases where the defendant is clearly doing business through its Web site in the forum state, and where the claim relates to or arises out of use of the Web site, personal jurisdiction exists.

In Zippo, the court found that the defendant had purposefully availed itself of doing business in Pennsylvania when it 'repeatedly and consciously chose to process Pennsylvania residents' applications and to assign them passwords,' knowing that the contacts would result in business relationships with Pennsylvania customers.

Oberdorfer found that several other federal circuit courts have since adopted the 'purposeful availment' requirements articulated in Zippo.

'As Zippo and the Courts of Appeals decisions indicate, the mere operation of a commercially interactive Web site should not subject the operator to jurisdiction anywhere in the world,' Oberdorfer wrote.

'Rather, there must be evidence that the defendant 'purposefully availed' itself of conducting activity in the forum state, by directly targeting its Web site to the state, knowingly interacting with residents of the forum state via its Web site, or through sufficient other related contacts.'

With that test in mind, Oberdorfer found that Toys 'R' Us 'has failed to satisfy the purposeful availment requirement.'

Step Two's Web sites, Oberdorfer said, are both commercial and interactive but 'do not appear to have been designed or intended to reach customers in New Jersey.'

Instead, he said, Step Two's Web sites are written entirely in Spanish, and prices for its merchandise are in pesetas or euros. Merchandise can be shipped only to addresses within Spain, and none of the portions of Step Two's Web sites are designed to accommodate addresses within the United States.

But Oberdorfer found that Hayden erred when she denied the jurisdictional discovery request.

'The [lower] court's unwavering focus on the Web site precluded consideration of other Internet and non-Internet contacts ' indicated in various parts of the record ' which, if explored, might provide the 'something more' needed to bring Step Two within our jurisdiction,' Oberdorfer wrote.

'Although the plaintiff bears the burden of demonstrating facts that support personal jurisdiction, courts are to assist the plaintiff by allowing jurisdictional discovery unless the plaintiff's claim is 'clearly frivolous.”

Shannon P. Duffy is a reporter for The Legal Intelligencer.