Nuance Communications, Inc. v Abbyy Software House, No. 2010-1100, US Court of Appeals for the Federal Circuit, 2010 US App. LEXIS 23419, 12 November 2010 (Nuance II)
Under California’s Long-Arm Statute, a US District Court erroneously dismissed patent infringement claim against a Cyprus parent corporation and its Russian affiliate for lack of personal jurisdiction and improper service of process.
As emerging markets play a bigger role in the global economy, and corporate entities located in them continue to avail themselves of US markets, when and how such entities become subject to personal jurisdiction in US Courts for alleged patent infringement is a matter of increasing concern. In Nuance Communications, Inc. v Abbyy Software House, et al., the US Court of Appeals for the Federal Circuit laid out in great detail how two of the defendants (Abbyy Software, a Republic of Cyprus corporation, and Russian Federation Abbyy Production) were improperly dismissed for lack of personal jurisdiction and improper service of process outside the Hague Convention by the US District Court for the Northern District of California.
Nuance Communications was the owner by assignment of six US patents related to methods and systems for performing optical character recognition.
In 2008 Nuance brought a patent infringement action in the Central District of California against Abbyy USA Software House (‘Abbyy USA’) and Lexmark. The case was transferred to the US District Court for the Northern District of California. Later that year Abbyy USA identified in discovery responses a Cyprus company, Abbyy Software, and a wholly-owned Russian subsidiary, Abbyy Production. Nuance filed an amended complaint, adding Abbyy Production and Abbyy Software as additional defendants and served documents requests on both entities.
In May 2009 a local process server in Moscow personally served a manager of Abbyy Production with the amended complaint, amended summons and standing orders of the court, as well as Russian translations of these documents, effecting personal service on Abbyy Production. In June 2009 the Abbyy defendants filed a motion to dismiss Abbyy Production and Abbyy Software for lack of personal jurisdiction, and to dismiss Abbyy Production for improper service of process. Abbyy Software did not object to service of process. The motion was supported with written declarations and previously unproduced documents. The Abbyy defendants also sought a protective order to preclude pending written discovery until the motion to dismiss was resolved.
In August 2009 the District Court issued an order in which it found:
In particular, with respect to the jurisdictional issue, the District Court explained its rationale as follows:
“Here, because there is no showing that the Moving Defendants purposefully directed any specific activity at residents of California or within the forum state or that the plaintiffs’ claim arises out of or relates to those activities, the Court need not reach the issue whether the assertion of personal jurisdiction is reasonable and fair. Again, there is no controlling precedent or evidence sustaining the position that this Court should pierce the corporate veil between the United States defendant, Abbyy USA, and the foreign defendants. Based on the record, the Court finds that it cannot exercise personal jurisdiction over the Moving Defendants. Defendants Abbyy Software, Ltd. or Abbyy Production, LLC are dismissed as defendants.”
Nuance Commc’ns Inc. v Abbyy Software House, No. 08-02912, 2009 WL 2707390, at *3 (ND Cal. 25 Aug, 2009) (‘Nuance I’) (citation omitted).
Significantly, as the Federal Circuit observed, no evidentiary hearing was conducted by the District Court before it reached its decision, and Abbyy Production and Abbyy Software never responded to Nuance’s discovery requests.
Nuance filed a notice of appeal challenging the District Court’s determination that it cannot exercise personal jurisdiction over Abbyy Production and Abbyy Software, and that these companies were served in a legally insufficient manner.
On appeal, the Federal Circuit found:
First, the Federal Circuit analysed the personal jurisdiction issues over Abbyy Production and Abbyy Software. In this regard, the Federal Circuit applied its own law (rather than the regional Ninth Circuit law) to determine if the District Court properly declined to exercise personal jurisdiction over an out-of-state accused patent infringer. This is a question of law that the Federal Circuit reviews without deference, with the underlying factual determinations reviewed under a clear error standard.
In particular, the Federal Circuit applied the California Long-Arm statute, which is coextensive with the due process requirements under US federal law, to determine whether the California District Court had personal jurisdiction over the Abbyy Defendants. The touchstone of this analysis was whether the defendant was consistent with due process ‘purposefully established “minimum contacts” in the forum State’ (Nuance II at *10).
In this case, the issue was whether there was specific jurisdiction (rather than general jurisdiction) over the two defendants. In particular, under Federal Circuit law, specific jurisdiction exists under the following three-prong test:
Significantly, the Federal Circuit found troubling the failure of the District Court to allow for jurisdictional discovery and to hold a factual hearing on the subject. In such a situation, the Court noted that ‘[w]ithout discovery and a record on jurisdiction, this court must resolve all factual disputes in the plaintiff’s favor’ (Id. at *11–12).
Personal jurisdiction over Abbyy Production
First, the Federal Circuit analysed whether Abbyy Production, the Russian Federation affiliate of Abbyy USA, was subject to personal jurisdiction, and found that it was.
Under the first prong, the Federal Circuit found, ‘Abbyy Production purposefully directed its activities at residents of California and therefore satisfies the first prong of the Akro test’ (Id. at *16).
In particular, the Federal Circuit cited Nuance’s arguments regarding:
The Federal Circuit also distinguished two cases cited by defendants, HollyAnne Corp. v TFT, Inc., 199 F.3d 1304 (Fed. Cir. 1999) and Pieczenik v Dyax, 265 F.3d 1329 (Fed. Cir. 2001), both of which affirmed dismissals for lack of jurisdiction.
HollyAnne involved a single ‘offer to donate’ as being insufficient to confer personal jurisdiction. The Federal Circuit found it to be inapposite, ‘because Abbyy Production seeks to “conquer” the US market, not to donate its services, and its contacts with California are much more significant than the single interaction in HollyAnne’ (Nuance II at *14).
Pieczenik found an arrangement which ‘superficially resemble[d]’ the arrangement between the Abbyy defendants as insufficient to establish personal jurisdiction. In particular, Pieczenik found ‘that [an] agreement [between the defendant there and a New York company] did not confer personal jurisdiction because
The Federal Circuit distinguished Pieczenik, as applying a different standard under New York’s narrower long-arm statute, after an extensive factual hearing, which more importantly involved unrelated entities. The Federal Circuit found it significant that Abbyy Production and Abby USA not only had an agreement like in Pieczenik, but also had:
Under the second prong, the Federal Circuit found ‘that the claims arise out of or relate to the purposefully directed activities, because Nuance’s infringement claims relate to Abbyy Production’s importation of goods into California.’ (Id.) The Federal Circuit rejected Abbyy Production’s argument that it ‘has no physical presence in California’:
“To the contrary, the record shows that Abbyy Production provided copies of the accused software products to Abbyy USA, a California entity. By operation of the Agreement, Abbyy Production retains ownership in the accused software even after that software enters California. Greater than ninety-five percent of the profits in California flow to Abbyy Production. Under these facts, Abbyy Production has sufficient presence in the forum for importation under 35 U.S.C. § 271(a). (Id. at *17).”
The Federal Circuit also found that ‘Abbyy Production also runs afoul of the Supreme Court’s and this court’s stream of commerce jurisprudence’ (Id. at *18). In particular, the Federal Circuit distinguished its Beverly Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558 (Fed. Cir. 1994), precedent, as follows:
“Abbyy Production purposefully ships the accused software products into California through an established distribution channel, with the expectation that copies of those products will be sold in California. Unlike Beverly Hills Fan, which involved the more attenuated connection of an out-of-state distributor, Nuance brought suit in the same forum in which Abbyy Production’s distributor, Abbyy USA, is located. Moreover, under the Agreement, Abbyy Production has agreed to furnish Abbyy USA with new versions and updates of the Software, technical support, and oral and written consultations. The Supreme Court has endorsed precisely this sort of purposeful activity as reinforcing the proper exercise of jurisdiction. See Asahi (Metal Indus. Co. v. Superior Ct. of Cal.), 480 US (102), 112 (1987). [Nuance II at *19–20 (citation omitted).]”
Significantly, the Federal Circuit emphasized that no more is required to establish specific jurisdiction than the non-US defendant making the accused products available for sale through an established distribution chain, and the cause of action for patent infringement is alleged to arise out of these activities.
With respect to the third prong, the Federal Circuit rejected the argument that assertion of jurisdiction over Abbyy Production would be unfair. The Federal Circuit distinguished Asahi, on the following grounds:
In sum, the Federal Circuit found ‘[t]hese relationships should ameliorate any possible burden of litigating in California.’ (Id. at *21).
Personal jurisdiction over Abbyy Software
The Federal Circuit separately analysed whether the California District Court had personal jurisdiction over Abbyy Software. While the Federal Circuit found evidence to establish a prima facie case of personal jurisdiction, it also recognized that the factual record was insufficient to make a proper determination. Thus the Federal Circuit found that the district court abused its discretion by dismissing Abbyy Software without jurisdictional discovery.
In particular, the Federal Circuit identified the following facts to support a conclusion that Abbyy Software was more than merely a holding company:
“Abbyy Software’s website portrays Abbyy as a single company with offices in many countries, including the United States. The CEO of Abbyy Software, who expressed a desire to return to the U.S. market, is both the founder of the Abbyy companies and the Chairman of Abbyy’s Global Management Team, which includes among its members the CEOs of Abbyy USA and Abbyy Production. Abbyy Software’s website lists multiple California entities as customers of the accused products, including Hewlett-Packard, Alameda County, and Los Angeles County. Abbyy Software’s website also promotes the sale of these products in California by providing the names and contact information for retail stores located in California as well as online stores that sell the FineReader product. (Id. at *22–23).”
However, the record also included evidence making ‘uncertain’ the extent of Abbyy Software’s involvement:
“Abbyy Software does not directly sell products through its website or otherwise. The record does not show at this point that Abbyy Software receives revenue from the sale of the accused software. Abbyy Production, not Abbyy Software, appears to develop the accused software and import master copies of that software into California. While the Global Management Team and the statements in the Trade Secret Magazine article suggest that Abbyy Software exerts some control over its subsidiaries, the record is unclear about the degree to which Abbyy Software intentionally established distribution channels that it knew, or could have foreseen, terminated in California. (Id. at *23–24).”
Because the Federal Circuit could not ‘determine that Abbyy Software purposefully availed itself of the privilege of conducting activities in California by some affirmative act or conduct, and that Nuance’s claims arise out of those activities,’ the Court remanded the case for further discovery. (Id. at *24).
Service of process over Abbyy Production and Abbyy Software
The Federal Circuit found the District Court improperly found Nuance’s service of process over Abbyy Production and Abbyy Software to be insufficient under the Hague Convention.
With respect to Abbyy Production, Nuance served Abbyy Production personally in Moscow, but did not attempt to serve Abbyy Production under the Hague Convention. The record in the case indicates that Nuance could not serve Abbyy Production through the Russian Federated Authority under the Hague Convention. While the Federal Circuit expressly did not decide whether personal service is allowed under Russian law, it nonetheless found that on remand ‘the district court should therefore allow alternate service as it deems appropriate, including at least substitute service, pursuant to Rule 4(f)(3), of Abbyy Production by substitute service on Abbyy USA.’ (Id. at *39).
With respect to Abbyy Software, the Federal Circuit found the District Court’s dismissal of Abbyy Software for lack of personal jurisdiction on its own motion to be clear error. First, the District Court erred in failing to provide Nuance with any opportunity to show its service of process was sufficient on Abbyy Software. Moreover, since Abbyy Software failed to raise this defence in their first motion under Rule 12(b), the defence was waived, and thus it was improper for the District Court to dismiss on this ground in any event.
Nuance II provides helpful guidelines to non-US entities whose products are sold in the US to determine whether they may be subject to jurisdiction in the US. It confirms the expansive reach of US courts in patent infringement actions over non-US entities that purposely seek to avail themselves of US markets. When establishing worldwide networks of related entities to manufacture and distribute products, entities that seek to avoid jurisdiction in the US should pay careful attention to the considerations outlined in Nuance II.
By Charles R. Macedo
Amster Rothstein & Ebenstein LLP
* Mr. Macedo is a Partner at Amster, Rothstein & Ebenstein LLP and author of The Corporate Insider’s Guide to U.S. Patent Practice, published by Oxford University Press. Mr. Macedo’s practice specializes on intellectual property issues including litigating patent, trademark and other intellectual property disputes, prosecuting patents before the U.S. Patent and Trademark Office and other patent offices throughout the world, registering trademarks and service marks with the U.S. Patent and Trademark Office and other trademark offices throughout the world, and drafting and negotiating intellectual property agreements. He may be reached at [email protected].
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