Receipt of Royalty Payments In Rhode Island Not Sufficient For Personal Jurisdiction

| Oct 6, 2013 | Firm News

The federal district court has accepted a magistrate judge’s recommendation that a complaint alleging tortious interference with contract and advantageous business relations be dismissed for lack of personal jurisdiction where plaintiff could not establish either general or specific personal jurisdiction. The magistrate judge applied the prima facie method of review and concluded that the one direct contact related to the dispute, i.e., plaintiff’s receipt of royalty payments in Rhode Island, was not sufficient to confer jurisdiction.

Plaintiff is a company that develops fertilizer and plant food products for turf, horticultural and real estate markets. It licenses its technology to other companies that manufacture and sell the products in return for royalty payments to plaintiff. Plaintiff is the successor to other companies that were located in Texas. Defendant manufactures turf and horticultural products at a plant in Texas.

The parties have both an indirect and a direct contractual relationship. The indirect relationship involves a non-party company located in Georgia (“Progressive”) which plaintiff licenses to manufacture and sell turf fertilizer pursuant to a formula plaintiff developed. Progressive makes royalty payments to plaintiff. This contract was formed in Texas with plaintiff’s predecessors. It has Texas choice-of-law and forum selection provisions. It requires that notices to plaintiff be sent to a Texas address.

Progressive apparently outsourced manufacturing to defendant which shipped product to Progressive’s customers in the southeastern United States. Under this agreement, defendant never shipped product to Rhode Island and had no direct contractual relationship with plaintiff. Plaintiff’s allegation in the law suit is that defendant made improper and authorized changes to plaintiff’s turf fertilizer formula causing Progressive to stop purchasing products from defendant and eventually eliminating Progressive’s royalty payments to plaintiff. The only jurisdictional contact involving this contract is that Progressive mailed its royalty payments to plaintiff in Rhode Island and defendant was aware of this.

The direct contractual relationship between the parties is a license that authorizes defendant to manufacture and sell plant food products unrelated to the claims in the case. Defendant sold the products to independent distributors, two of which were located in Massachusetts. Those distributors made de minimis sales into Rhode Island, i.e., less than $1800 from 2010 to 2012. Pursuant to the same license agreement, defendant manufactured plant food products for an Alabama company that resold them to Home Depot and Lowe’s stores in Rhode Island. This agreement has Rhode Island notice, choice-of-law and forum selection clauses. Defendant sent its royalty payments to Rhode Island.

The Court first considered the appropriate method of review. It said there were three different kinds: prima facie, preponderance of the evidence or an intermediate standard. The prima facie method is “plaintiff-friendly,” the Court considers only whether plaintiff has submitted enough evidence, including documents, to support personal jurisdiction even if defendants disputes the evidence. Defendant’s evidence is considered only if plaintiff does not dispute it. The other methods of review apply if the evidence proffered by both sides is significantly conflicting or the plaintiff’s averments are “patently incredible.” The Court determined it could decide the jurisdictional issue using the prima facie method.

The Court then reviewed the law of personal jurisdiction noting that Rhode Island’s “long-arm” statute, R.I.G.L. 9-5-33(a), is coextensive with the permissible reach of the Due Process Clause. There are two kinds of personal jurisdiction, general and specific. General jurisdiction subjects the defendant to suit in the forum on all matters including those unrelated to the pending lawsuit. Specific jurisdiction depends on the connection between the pending lawsuit and the forum.

The Court said the First Circuit has set forth a three-prong test for general jurisdiction: (1) the defendant must have sufficient contacts with the forum state; (2) those contacts must be purposeful; and (3) the exercise of jurisdiction must be reasonable under the circumstances. The first prong requires a determination of whether the defendant is engaged in the continuous and systematic pursuit of “extensive and pervasive” general business activities in the forum. The second prong requires a determination that the defendant purposefully and voluntarily directs its activities toward the forum to avail itself of the privilege of conducting business in the forum. The court need only consider the “reasonableness” prong if the plaintiff has cleared the first and second ones.

The Court first determined that plaintiff had failed to establish general jurisdiction. Almost all the general jurisdiction facts arise from the contract that is unrelated to the pending controversy, i.e., defendant makes plant food products that it sells to others and those products are eventually sold in Rhode Island by Home Depot and Lowe’s stores. However, it is those stores that made the decision to purchase and sell the products here. While putting products into the “stream of commerce” may be sufficient to establish specific jurisdiction, it is not sufficient for general jurisdiction. Similarly, the fact that defendant had a website and currently has a Facebook page that tell the public how to purchase defendant’s products in Rhode Island might support specific jurisdiction but not general. Moreover, the sales of products in Rhode Island that are subject to the contract at issue ($1800) are not sufficient to establish general jurisdiction. The alleged presence of a sales force in Connecticut employed by defendant’s parent company is not relevant unless plaintiff shows facts that would pierce the corporate veil between defendant and its parent.

The Court also decided that plaintiff had not established specific jurisdiction which exists when: (1) the claims arise out of or are related to the defendant’s in-state activities; the defendant has purposefully availed itself of the benefits and protections of the forum state’s laws; and the exercise of jurisdiction is reasonable under the circumstances (what the Court called the “Gestalt factors”). The Court may have specific jurisdiction over some claims but not others.

Here, plaintiff points to one fact in the claims that relates to Rhode Island: defendant’s alleged conduct in Texas caused Progressive to send reduced royalty payments to plaintiff in Rhode Island. The Court acknowledged that it was somewhat unclear in the law to what extent could the effect in-state of out-of-state actions give rise to jurisdiction. It considered Supreme Court and First Circuit decisions and attempted to harmonize them. The Court concluded that those in-state effects are more significant when the tortious conduct alleged is intentional. Nonetheless, the in-state effects in this case are not proximately related to the contract which was performed in Texas or other states in the southeastern United States. The contract’s connection to Rhode Island arises because plaintiff moved its business to Rhode Island after the contract was formed. Mere knowledge that payments will go to Rhode Island is not sufficient.

Finally, the “Gestalt factors” are not sufficient to confer jurisdiction. Those factors are: (1) defendant’s burden of appearing in Rhode Island; (2) the forum’s interest in adjudicating the dispute; (3) plaintiff’s interest in obtaining convenient and effective relief; (4) the interstate judicial system’s interest in efficient resolution of the matter; and (5) the common interest of all states in promoting substantive social policies. The Court said only the third factor supported jurisdiction in Rhode Island.

Daniels Agroscience, LLC v. Ball DPF, LLC, C.A. 13-268ML, 2013 WL 5310208 (D.R.I. Sept. 20, 2013)

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