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Metro-Goldwyn-Mayer Studios, et al. v. Grokster, Ltd., et al.

Court holds that both Sharman Network Ltd. ("Sharman") a company based in Australia which distributes software that enables individuals to utilize the Kazaa peer-to-peer file sharing network, and LEF Interactive PTY Ltd. ("LEF"), which manages Sharman's operations, are subject to personal jurisdiction in the California federal courts in a copyright infringement lawsuit arising out of Sharman's distribution of its file sharing software to California residents, and their subsequent use of such software.  The court reached this conclusion notwithstanding the fact that Sharman's activities all occur outside California, where it operates a web site from which California residents download the Kazaa software.  As a result, the court denied defendants' motion to dismiss this action for want of personal jurisdiction.

Sharman owns and operates the Kazaa domain name and website at which it makes available for free download software that enables individuals to connect to the Kazaa peer-to-peer file sharing network.  A significant number of California residents, perhaps as many as two million, have downloaded this software, which has been downloaded more than 143 million times.  Once installed on a user's computer, the Kazaa software enables users to search through, and download copies of files stored on other users' computers.  Many copyrighted materials are 'shared' in this fashion without the permission of the copyright owner, including MP3 music files and video files.  While Sharman does not charge for its software, it does derive revenue from its use via advertising.  Sharman "bundles" its software with programs that cause the user's computer to contact servers run by third parties, which in turn supply advertisements that are delivered within the Kazaa interface.  Sharman also enters into license agreements with each individual who uses its software. 

Sharman acquired Kazaa related assets from Kazaa Bv after a lawsuit had been commenced in the Netherlands against Kazaa BV arising out of Kazaa's distribution of this software.

Plaintiffs, consisting of various owners of copyrights, or representatives of such owners, commenced suit, charging Sharman with contributory and vicarious copyright infringement as a result of the use of the Kazaa software by third parties to download without authorization or payment copyrighted materials, including music and video files.  Sharman and LEF moved to dismiss, arguing that the Court lacked personal jurisdiction over them.  The California District Court denied these motions, holding that it possessed jurisdiction over the defendants.  While Sharman's contacts with California were insufficient to give the court general personal jurisdiction over it, they were sufficient to allow the Court to exercise specific personal jurisdiction in this copyright infringement matter.

California authorizes its courts to exercise personal jurisdiction over non-resident defendants to the full extent permitted by the United States Constitution.  As such, its courts can exercise jurisdiction over a defendant if he has "certain minimum contacts with the forum [state] such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'"

Under prevailing Ninth Circuit doctrine, specific jurisdiction is presumptively reasonable where: 1) a nonresident defendant purposefully avails itself of the privilege of conducting activities in the forum state, thereby invoking the protections of its laws; and 2) the plaintiff's claims arise out of the defendants' forum-related activities.

The Court found that Sharman had purposely availed itself of the privilege of doing business in California by permitting its software to be downloaded by a significant number of California residents for Sharman's financial benefit.  In reaching this conclusion, the Court rejected Sharman's argument that it could not be found to have purposefully availed itself of the privilege of doing business in California because it did not either know the location of the individuals downloading its software, or initiate those downloads.  Said the Court:

Here, there is little question that Sharman has knowingly and purposefully availed itself of the privilege of doing business in California.  First, Sharman essentially does not dispute that a significant number of its users - perhaps as many as two million - are California residents.  Indeed, given that Sharman's KMD software has been downloaded more than 143 million times, it would be mere cavil to deny that Sharman engages in a significant amount of contact with California residents.

Second, Sharman does not dispute that the distribution of its software is an essentially commercial act.  While the KMD software is freely available, it is distributed for the singular purpose of facilitating advertising and otherwise generating income for Sharman.  Moreover, Sharman enters into a licensing agreement with every user authorizing and limiting use of the software.  While Sharman may not ask each user where he or she is located, and may therefore mot know exactly how many agreements it has entered into with California residents, Sharman is at least constructively aware that many such agreements are executed daily.

In sum, Sharman engages in a significant quantum of commercial contact with California residents constituting a but for cause of plaintiffs' claims.  Jurisdiction is therefore presumptively reasonable.

Because the acts of downloading and licensing the software to California residents were 'but for' causes of the infringements giving rise to the instant litigation, the Court held that these were sufficient contacts to support the assertion of specific personal jurisdiction in a copyright infringement claim arising therefrom.

The Court held that its determination that Sharman had purposefully availed itself of the privilege of doing business in California was also supported by application of the Calder "effects test."

[P]urposeful availment may be demonstrated where the effects of a defendant's conduct are felt in the forum state.  Calder v. Jones. . . . Under the Calder line of cases, personal jurisdiction is appropriate where a non-residential defendant engages in "(1) intentional actions (2) expressly aimed at the forum state (3) causing harm, the brunt of which is suffered - and which the defendant knows is likely to be suffered - in the forum state.

Sharman knew or should have been known that users of its software were infringing copyrights in musical and video works, and that a significant number of both the users infringing such copyrights, and the holders of such copyrights, resided in California.  As such, Sharman was chargeable with sufficient knowledge that the effects of its acts of contributory infringement would be felt in California to permit the Court to conclude that Sharman purposefully availed itself of the privilege of doing business in California.

The Court also held that its exercises of jurisdiction over Sharman in this action was "reasonable."  The reasonableness inquiry focuses on:

whether the defendant's "conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there."

The Court held that exercise of personal jurisdiction over Sharman was clearly "reasonable."  Said the Court:

Plaintiffs clearly have carried their burden in this respect.  Sharman provides its KMD software to millions of users every week, and executes a licensing agreement with each user permitting use of the software.  Sharman has not denied and cannot deny that a substantial number of its users are California residents, and thus that it is, at a minimum, constructively aware of continuous and substantial commercial interaction with residents of this forum.  Further, Sharman is well aware that California is the heart of the Entertainment industry, and that the brunt of the injuries described in these cases is likely to be felt here.  It is hard to imagine on these bases alone that Sharman would not reasonably anticipate being haled into court in California.

However, jurisdiction is reasonable for an important added reason:  Sharman's effective predecessor, Kazaa BV, was engaged in this very litigation when Sharman was formed.  Sharman was apparently created for the sole purpose of acquiring Kazaa BV's key assets and taking over operation of Kazaa system.

Finally, the Court held that it could assert jurisdiction over Sharman in California based on the aggregate of Sharman's contacts with the United States as a whole.  Fed. R. Civ. P. Rule 4(k)(2):

permits nationwide aggregation for cases arising under federal law, unless 1) the defendant is subject to jurisdiction of the courts of general jurisdiction of any state, or 2) aggregation is expressly forbidden by the relevant law . . .

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The effect of the Rule in cases such as this is that jurisdiction may be exercised over copyright claims against a foreign defendant where sufficient contacts with, or injury to, U.S. residents is alleged, even though there are not sufficient contacts with any single state to justify jurisdiction in that state.

Under this rule, all of the downloading activity by all United States users could and did support the assertion of jurisdiction over Sharman in California.

The Court also denied LEF's motion to dismiss for want of personal jurisdiction.  LEF claimed it was an independent management company which, while owned by the same individual who owned Sharman, did not own the Kazaa software or web site.  Plaintiffs argued that LEF was Sharman's alter ego.  In support of this contention, plaintiffs pointed to the fact that LEF's only revenue source was Sharman, its employees were listed on Kazaa's website as members of the "Sharman team," the Kazaa logo was displayed on both LEF'S office door and letterhead, and LEF's employees received e-mail at Sharmannetworks.com.  Relying on a jurisdictional doctrine applicable to corporate parents who are sought to be held liable for acts of their subsidiary committed within the jurisdiction, the Court held it would assert jurisdiction over LEF.  Under this doctrine:

the controlling question remains whether the defendant has such minimum contacts with the forum state that it should reasonably anticipate being haled into court there.  In the parent-subsidiary context, several courts have articulated this as a requirement that plaintiff show either "(1) attribution, 'that the absent parent instigated the subsidiary's local activity;' or (2) merger, 'that the absent parent and the subsidiary are in fact a single legal entity.'

The Court held that, given the nature of the interaction between LEF and Sharman, sufficient elements of merger and attribution were present to support the assertion of jurisdiction over LEF based on the acts of Sharman in California.  Said the Court:

The relationship between Sharman and LEF includes the indicia of both attribution and merger.  First, attribution is satisfied by Plaintiffs' showing that Sharman's activities are predominantly instigated or maintained by employees of LEF.  Second, the extensive overlap of corporate operation and perception, described above, shows a tremendous degree of "merger" between the two companies.  As set forth above, Sharman has sufficient contacts with California to subject it to jurisdiction here.  LEF's actions through and with Sharman similarly subject it to jurisdiction in this Court.