CompuServe v. Patterson: The Limits of Personal Jurisdiction over Computer Networks

By Mark Borghese

{1} The world of Cyberspace¹, unlike the borders of States and the jurisdiction of courts, is not defined by physical boundaries; Cyberspace is simultaneously everywhere and nowhere.² The Internet³ continues to be the vehicle for new forms of communication and contact between people--people who may be separated by state or even national boundaries. Because the interactions between individuals on the Internet may be separated by great distances, exactly where these interactions are taking place is creating problems for traditional notions of jurisdiction which are typically based on the location of individuals.⁴ As the Internet becomes more interactive, the threat that an individual's legal rights will be electronically trampled on increases.⁵ When a cause of action does arise in the intangible world of Cyberspace, establishing the proper forum for that action has become increasingly problematic.⁶

{2} Personal jurisdiction is based on the geographical location of a particular court, the location of the parties involved, and where the actions took place that gave rise to the litigation.⁷ In Cyberspace, however, it is often difficult to know where an individual is located or exactly where actions are taking place.⁸

{3} This Comment examines the case of CompuServe v. Patterson, a case of first impression for the U.S. Court of Appeals for the Sixth Circuit.⁹ The Patterson court wrestled with the issues of where personal jurisdiction can be obtained and what constitutes "minimum contacts" when all "contacts" took place over a computer network.¹⁰ The court established the limits of personal jurisdiction for anyone conducting business on the Internet.¹¹ Part II of this Comment examines the traditional notions of personal jurisdiction with particular attention paid to the limitations placed on it by the Due Process Clause of the Fourteenth Amendment.¹² Part III of this Comment addresses the particular facts of the Patterson case.¹³ Part IV of this Comment analyzes the court's opinion and what implications this opinion has on Internet commerce.¹⁴ This Comment argues that Patterson incorrectly broadened personal jurisdiction. Under the Patterson analysis, parties can be hauled into a foreign court for de minimis contacts with the forum state. Part V of this Comment offers a brief summary and concludes that under the facts of the Patterson case and as a general principal, minimum contacts should not be expanded to situations where the defendant can not reasonably anticipate being hauled into court in a foreign jurisdiction.15

{4} Before a court can hear a case it must have jurisdiction over the parties.¹⁶ To determine if a court has personal jurisdiction over a defendant, federal courts apply the law of the forum state, subject to the limits of the Due Process Clause¹⁷ of the Fourteenth Amendment.¹⁸ For example, in Ohio where the court heard Patterson, the long-arm statute allowed the court to exercise personal jurisdiction over nonresidents of Ohio in claims arising from, inter alia, the nonresident transacting any business in Ohio.¹⁹ It is settled Ohio law that the "transacting business" clause was meant to extend the statute to the federal constitutional limits of due process.²⁰ A court may constitutionally exercise jurisdiction over a defendant if the defendant is either served in the forum state,²¹ or if the defendant established minimum contacts with the forum state giving rise to the long-arm statute of the state.²² When a defendant 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 justice²³," a defendant can be subject to a judgment in personam²⁴--a judgment against the person concerning his or her rights or actions.

{5} In general, for a defendant to have "minimum contacts" with a state, the defendant must have taken actions that were purposefully directed toward the forum state.²⁵ Court decisions have expanded what minimum contacts are by holding that there need only be a substantial connection between a defendant and the forum state for the test to be satisfied.²⁶ What can be called minimum contacts is not limitless, however.²⁷

{6} [Restrictions on jurisdiction] are more than a guarantee of immunity from inconvenient or distant litigation. They are a consequence of territorial limitations on the power of the respective states. However minimal the burden of defending in a foreign tribunal, a defendant may not be called upon to do so unless he had the minimum contacts with that state that are a prerequisite to its exercise of power over him.²⁸

{7} If a cause of action does not arise because of a defendant's in-state activities, courts have required greater contacts between the defendant and the forum state.²⁹ Courts must find continuous and systematic general business contacts before requiring a party to defend a suit in a state when the subject of the litigation did not result from the defendant's activities within that state.³⁰ The mere fact that a product might find its way into the forum state is not enough to subject a corporation who manufactures the product to a suit there.³¹ Minimum contacts only arise when a defendant purposefully directs action toward the forum state.³² Even a contractual relationship between an out-of-state defendant and an in-state plaintiff does not by itself mean that a defendant has met the minimum contacts requirement.³³ Other factors to be considered by courts include prior negotiations and contemplated future consequences, along with the terms of the contract and the parties' actual course of dealing.³⁴

{8} Even if a defendant has met the minimum contacts requirement, it must still be reasonable for the forum state to exercise jurisdiction over the particular defendant.³⁵

{9} [T]he determination of the reasonableness of the exercise of jurisdiction in each case will depend on an evaluation of several factors. A court must consider the burden on the defendant, the interest of the forum state, and the plaintiff's interest in obtaining relief. It must also weigh in its determination "the interstate judicial system's interest in obtaining the most efficient resolution of controversies; and the shared interest of the several States in furthering fundamental substantive social policies."³⁶

{10} The issue in Patterson arose because of common law trademark and trade name disputes³⁷. Under common law, trademark and trade name rights are appropriated only through actual prior use in commerce.³⁸ The first to use a mark on a product or service in a particular geographic market, the senior user, acquires rights in the mark in that market.³⁹ A senior user's rights are geographically limited to only those territories in which it actually uses its mark or into which it might naturally expand (the "zone of natural expansion").40

{11} CompuServe information service (CompuServe) is located in Columbus, Ohio, but CompuServe and its parent company H&R Block both have divisions in Texas⁴¹. CompuServe consists of a computer information network which is navigated using special software.⁴² A user of CompuServe accesses the Columbus, Ohio computers via ordinary telephone lines by dialing a local access number and connecting into a local system which is linked to the Ohio system over a closed network.⁴³ Users of CompuServe pay both a monthly subscription fee and an hourly usage fee in return for accessing the system.⁴⁴ CompuServe enters into boiler-plate agreements with users which provide, in part, that the agreements are made and performed in Ohio and that the agreement is to be governed by Ohio law.⁴⁵

{12} CompuServe users are also able to distribute "shareware" over the network.⁴⁶ Shareware is software which is distributed with the "try before you buy" philosophy.⁴⁷ Under the shareware system, a user is granted a limited license which allows him or her to use the software for a limited period of time for free.⁴⁸ Under a shareware license, copying and distribution of the software by a user is unrestricted provided that the program remains in its original format.⁴⁹ After this trial period expires, the license requires that that user pay for the software to be able to continue to use it.⁵⁰

{13} Users of CompuServe can simply place their own shareware programs on the network for distribution or they can enter into a "Shareware Registration Agreement" ("SRA").⁵¹ Under CompuServe's SRA, users pay the license fees directly to CompuServe, which keeps 15% of the fee and remits the rest to the creator of the software.⁵² Like the user agreement, the SRA provides that it is governed by the laws of Ohio.⁵³

{14} Prior to 1991, Richard Patterson began distributing his WinNav software, a product which allowed P.C. users to execute, view and manage files and directories on their computers.⁵⁴ Between 1991 and 1994 Patterson electronically sent ("uploaded") various versions of his shareware programs from his home in Houston, Texas to CompuServe.⁵⁵ The programs were stored by CompuServe's computers in Ohio and advertised on CompuServe's system.⁵⁶ In late 1993 or early 1994, Patterson entered into the SRA with CompuServe.⁵⁷ According to the Sixth Circuit, Patterson's software was sold through the CompuServe's SRA, $650 of which was sold to twelve residents of Ohio.⁵⁸ The suit arose in late 1993 or early 1994 because Patterson alleged that the name of the software developed by CompuServe ("Windows Navigator") infringed on Patterson's common-law trademark names of his software: "WinNav," "Windows Navigator," and "FlashPoint Windows Navigator."⁵⁹

{15} After Patterson informed CompuServe of the possible infringements, CompuServe brought a diversity action for specific performance in Ohio's Southern District Court.⁶⁰ Patterson responded pro se with a consolidated motion to dismiss the complaint for lack of personal jurisdiction.⁶¹ The district court granted Patterson's motion,⁶² denied CompuServe's motion for a rehearing, and CompuServe appealed.⁶³ The United States Court of Appeals for the Sixth Circuit held in this case of first impression that (1) Patterson purposefully availed himself of benefits of doing business in CompuServe's home state of Ohio; (2) that the action arose from Patterson's contacts with Ohio; and (3) that the exercise of jurisdiction was reasonable.64

{16} In reaching its conclusion, the Court of Appeals for the Sixth Circuit applied Ohio's long-arm statute⁶⁵ and carefully analyzed the Due Process Clause of the Fourteenth Amendment.⁶⁶ The court stated that: "[T]he crucial federal constitutional inquiry is whether, given the facts of the case, the nonresident defendant has sufficient contacts with the forum state that the district court's exercise of jurisdiction would comport with traditional notions of fair play and substantial justice."⁶⁷

{17} The court applied a three-prong test and determined that Ohio was a proper forum to hear this case.⁶⁸ First, the defendant must purposefully avail himself of the privilege of acting within the forum state or causing a consequence in the forum state.⁶⁹ Second, the cause of action must arise from the defendant's activities there.⁷⁰ Finally, the acts of the defendant must have a substantial enough connection with the forum to make the exercise of jurisdiction over the defendant reasonable.⁷¹

{18} A defendant has purposefully availed himself to process in the forum state when the defendant's contacts with that state "proximately result from actions by the defendant himself that create a 'substantial connection' with the forum state."⁷² The court asserted that Patterson took actions which created a substantial connection with Ohio.⁷³ Patterson subscribed to CompuServe by entering into the user agreement, and later entered into CompuServe's SRA.⁷⁴ Furthermore, the court stated that Patterson repeatedly uploaded his software on to CompuServe's system.⁷⁵ Finally, the court pointed out that Patterson initiated the events that led to CompuServe's filing of this suit when he demanded that CompuServe change the name of its program and threatened to bring an action against CompuServe to enforce his rights.⁷⁶

{19} The court concluded that these connections are substantial and that Patterson could have reasonably anticipated being hauled into an Ohio court.⁷⁷ The court stated that Patterson entered into a written contract with CompuServe which provided for the application of Ohio law.⁷⁸ Furthermore, the court pointed out that Patterson chose to use CompuServe as a distribution point for his software, allowing others to gain access to his software via the system. In addition, Patterson advertised and sold his product through that system, and the parties intended the relationship to be ongoing in nature.⁷⁹ Therefore the court concluded that Patterson purposefully transacted business in Ohio.⁸⁰

{20} Although Patterson did have some contacts with the Ohio based company, his contacts were not substantial.⁸¹ In Burger King v. Rundzewicz⁸², the Court concluded that it was not unreasonable for a Burger King franchisee in Michigan to defend a lawsuit brought under the franchise agreement in Florida. Although the Michigan franchisee had little physical contact with Florida, the Court noted that the franchisee entered into a 20-year agreement with the Florida-based Burger King corporation which required substantial interaction between the Michigan franchisee and the Florida franchiser. The Court stated that merely entering into a contract without more, does not establish that a defendant had minimum contacts with a state. However, the length of the relationship, the on-going dealings, and the parties interdependent relationship made the exercise of jurisdiction in Burger King reasonable.⁸³

{21} A similar result was reached in Unix Systems Laboratories, Inc. v. Berkley Software Design⁸⁴. The defendant, a California corporation, was subject to a lawsuit in New Jersey brought by a New Jersey corporation that claimed the defendant violated its property rights.⁸⁵ The court held that the defendant was subject to personal jurisdiction under the New Jersey long-arm statute for the following reasons: the defendant had entered into a long-term licensing agreement with the plaintiff; the defendant had regularly communicated with the plaintiff's New Jersey office; the defendant had contemplated an on-going business relationship with the plaintiff in the development of software; and the defendant had knowledge that its actions would cause injury to the plaintiff.⁸⁶ Therefore, because the parties did more than merely enter into a contract, the defendant established minimum contacts with the forum state.⁸⁷ In both of these cases the dispositive factors were the existence of a long-term relationship, the continuous communication between the parties, and the parties' interdependent relationship.⁸⁸

{22} By contrast, Patterson had not contemplated a long-term contract with CompuServe--in fact Patterson did not even enter the SRA until after his software had been on CompuServe's system for several years⁸⁹. Furthermore, Patterson had little if any communication with CompuServe after the initial agreement⁹⁰; and did not depend on CompuServe to distribute his software because he was free to distribute his software anywhere he pleased.⁹¹ In addition, Patterson's sales to Ohio residents were de minimis: he sold less than twelve copies of his software to Ohio residents, while CompuServe admits that more than 1,800 total copies of Patterson's software were downloaded off their system.⁹²

{23} The Patterson court cites the Ohio Supreme Court case of U.S. Sprint Communications Co. Limited Partnership v. Mr. K's Foods, Inc.,⁹³ in support of its contention that Patterson conducted business in Ohio and was subject to personal jurisdiction there.⁹⁴ In Mr. K's Foods, the court held that a foreign corporation "transacted business" in Ohio when it maintained distribution centers in Ohio and shipped goods to Ohio for ultimate sale.⁹⁵ However, Mr. K's Foods can be distinguished from Patterson on an important ground:⁹⁶ the dispute in Mr. K's Foods specifically arose from the contract between the plaintiff and defendant.⁹⁷ The plaintiff provided telephone service to the defendant and the defendant failed to pay for the service.⁹⁸ In Patterson the conflict arose not from a breach of contract, but because of a dispute about common law trademark and trade name protection.⁹⁹ Furthermore, unlike Mr. K's distribution center in Ohio, Patterson's "distribution center" did not solely distribute products to Ohio customers.¹⁰⁰ As stated above, Patterson's sales to Ohio residents were de minimis¹⁰¹.

{24} The court also finds Patterson similar to the cases of Southern Machine Co. v. Mahasco Industries,¹⁰² and McGee v. International Life Insurance Co.¹⁰³ In Mahasco, a non-resident defendant entered into a licensing contract with the plaintiff for the manufacture and sale of goods in the forum state and contemplated the ongoing marketing of that equipment in the forum state.¹⁰⁴ The Court held that the forum state did have personal jurisdiction over the defendant¹⁰⁵. Patterson, however, is distinguishable from Mahasco because Patterson did not contract with CompuServe for anything more than a place to store his goods.¹⁰⁶ Patterson signed a boiler-plate agreement and manufactured his own goods.¹⁰⁷

{25} In McGee, a Texas insurance company was forced to defend against a lawsuit in California based upon the issuance of a single insurance contract to a California resident.¹⁰⁸ The decision in that case was based largely on policy considerations; it would not be fair to require a California resident to go to Texas to settle a claim against his own insurance company.¹⁰⁹ In Patterson's case, the policy considerations tip the other way.¹¹⁰ Because Patterson did not have a substantial connection with Ohio¹¹¹, and because Patterson was allegedly harmed when CompuServe violated his common law trademarks and trade names,¹¹² policy should dictate that Patterson defend any attacks by CompuServe in Texas.113

{26} The second prong of the court's analysis is whether Patterson's action arises out of his contacts with the forum state. According to the court, Patterson's contacts with Ohio directly relate to the suit at hand.¹¹⁴ The court states that because Patterson used CompuServe to both advertise and sell his shareware, any common law trademark or trade name which Patterson might have in his product would have been created in Ohio.¹¹⁵ Therefore, the court concluded that Ohio was the appropriate forum.

{27} The court's reasoning is flawed on a number of grounds. First, the court misconstrues the nature of common law trademarks and trade names.¹¹⁶ Even if Patterson only distributed his software from Ohio, a majority of Patterson's registered shareware users were from states other than Ohio--establishing common law trademark and trade name protection in those states as well. Furthermore, had Patterson's programs only been distributed in Ohio, it is likely that Patterson would have expanded the distribution of his program outside of Ohio, considering that his program runs on computers world-wide. This "natural expansion" of distribution evokes the doctrine of the zone of natural expansion and would establish common law trademark and trade name protection at least in the United States and possibly internationally.

{28} Although the court stipulates that Patterson's programs are shareware, it completely ignores this fact in its analysis. The very nature of shareware is that it is free for anyone to distribute.¹¹⁷ Shareware is designed to be copied by users and distributed by users.¹¹⁸ As more people distribute the program, more people have the program which increases the pool of potential shareware buyers.¹¹⁹ Patterson could not and did not market his software exclusively through CompuServe and thus exclusively in Ohio, because a shareware license grants all individual users the right to copy and distribute the program.¹²⁰ Therefore Patterson had countless distribution points, not a single distribution point in Ohio.¹²¹ Common law trademark and trade-name protection arises wherever the trademark or trade name is used and may be naturally used in the future. Therefore, Patterson's infringement claim arises under the law of the many jurisdictions in which his shareware was used or may naturally be used, not simply Ohio.¹²²

{29} More importantly, Patterson did not involve a dispute over the contracts between Patterson and CompuServe.¹²³ Neither party complained that the other had breached the contracts, or in any other way failed to fulfill a duty of the contract.¹²⁴ Patterson entered into the contracts with CompuServe.¹²⁵ However, those contracts did not give rise to this dispute.¹²⁶ The court incorrectly concluded that Patterson's case arose from contacts with Ohio, when in fact the case arose from common law trademarks in multiple jurisdictions.

{30} The third prong of the court's analysis is a reasonableness requirement. The plaintiff must show that the exercise of jurisdiction over the defendant would be reasonable, would comport with traditional notions of justice and fair play, and would be in line with the defendant's reasonable expectations about where he might have to defend his activities. In considering the reasonableness requirements, the court stated that Patterson purposefully employed CompuServe to market his software.¹²⁷ The court also noted that Ohio had a substantial interest in litigating a claim arising under Ohio's common law involving an Ohio company.¹²⁸

{31} Under common law trademark and trade name protection, Patterson's trademark and trade name claims would arise in many jurisdictions not just Ohio because trademarks and trade name protection extends to where ever the marks and names have been used in commerce.¹²⁹ Furthermore, Patterson's home state of Texas has more of an interest in settling this dispute than Ohio. First, it is likely that Texas common law trademark and trade names is implicated in this case.¹³⁰ Second, Texas has an interest in settling a dispute involving one of its citizens.¹³¹ And third, CompuServe and its parent company H&R Block both have divisions located in Texas.¹³² Therefore Texas, and not Ohio is the more reasonable forum for settling this dispute.

{32} The court ignores another aspect of reasonableness here--the burden on the defendant.¹³³ Notions of fairness suggest that Patterson should not be forced to journey to Ohio.¹³⁴

{33} If this were a suit brought by CompuServe to collect a small amount of user fees from a Texas resident who, while seated at his computer terminal, became a member of the CompuServe network, the Court would have a very difficult time concluding that the exercise of jurisdiction over that customer in the State of Ohio was proper. Although the nature of the controversy between the parties in this case is different, the Court concludes that it is no more connected with purposeful activities within the State of Ohio than the standard customer dispute and that it would be manifestly unreasonable for this or any Ohio court to exercise jurisdiction over this case.¹³⁵

{34} The district court was correct in concluding that the exercise of personal jurisdiction over Patterson was improper. The district court as well as the Sixth circuit, however, applied a test of personal jurisdiction not well suited to cases arising from computer networks.

{35} CompuServe's cause of action does not arise from Patterson's Ohio activities. Despite the mystery some commentators¹³⁶ have chosen to mask over the Internet--those far-out claims of traveling around the world without leaving home--the contacts made over a computer network can only take place where there are users¹³⁷. If a CompuServe user in California is browsing shareware program descriptions, the reading of the descriptions is taking place in California. If the California user decides to copy the program, the copying is taking place in California. Action takes place where the human beings are. Similarly, when Patterson uploaded software to CompuServe, the uploading took place in Texas. And more importantly, when users download Patterson's software, the downloading takes place where the users are.

{36} The services CompuServe provides in its shareware area are mostly passive¹³⁸. Once CompuServe puts a file in its shareware area it is the users who decide whether to download the file or to simply ignore it.¹³⁹ The services CompuServe provides in its shareware area are thus more analogous to a telephone company than to a distribution center. If a person in New York calls someone in California, the conversation is taking place both in New York and in California--not in the miles of fiber-optic wires that carry the signal; not at the many phone switching sites where the signal travels through.

{37} Without users downloading and using Patterson's shareware file, the shareware file does nothing. Patterson's program stored on CompuServe's network is like a tree falling in the forest without anyone around to hear it. The Patterson Court says this tree makes a sound loud enough to warrant personal jurisdiction of Patterson in Ohio--it does not. The fact that Patterson's program was stored in Ohio does not amount to an activity within the state of Ohio.

{38} When a cause of action does not arise from the defendant's in-state activities, the correct standard to be applied is one of "systematic and continuous" contacts with the forum state.¹⁴⁰ Although it is unfair to allow a person conducting business over a computer network to hide behind state boundaries, it is equally unfair--and unconstitutional--to haul a person into court in a state with which he has not had minimum contacts¹⁴¹. A company which conducts business on a world-wide computer network such as CompuServe, or the Internet, should not automatically be subject to jurisdiction in every court in the world. The court should have applied the more rigorous test of "systematic and continuous" contacts to determine whether Patterson's activities met the requisite minimum contacts to subject him to personal jurisdiction in Ohio.¹⁴²

{39} However, Patterson's activities were far from being systematic and continuous. Patterson simply entered into two boiler-plate agreements with CompuServe and used the CompuServe system to passively store his software for users to download.¹⁴³ Patterson did not actively sell his products in Ohio, nor did Patterson seek to have CompuServe help him with marketing or development of his programs.¹⁴⁴ Few, if any, of Patterson's actions were specifically targeted to Ohio.¹⁴⁵ Although Patterson conducted some advertising on CompuServe, a national advertising campaign does not involve systematic and continuous contact.¹⁴⁶ Even if the court had applied the correct standard of systematic and continuous contacts to this case, the court should have dismissed the action for lack of personal jurisdiction.

{40} The court in CompuServe v. Patterson incorrectly applied personal jurisdiction when all of the contacts with the forum state took place over a computer network.¹⁴⁷ The court's holding expanded the notion of minimum contacts to include storing and displaying programs written by entrepreneurs on a computer system.¹⁴⁸ This expansion was both unreasonable and a violation of Patterson's rights under the Due Process Clause of the Fourteenth amendment.¹⁴⁹ The use of "systematic and continuous" contacts logically encompasses the ongoing nature of Cyberspace.¹⁵⁰ Because interaction in Cyberspace may take place in several locations at once, a person should only be subject to the jurisdiction of a court if the person's contacts with the forum state have been so systematic and continuous that the person should have anticipated being hauled into court there.¹⁵¹