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Alternate Case Problem answers

Chapter 2

Courts and Alternative
Dispute Resolution

2-1A. Jurisdiction (Chapter 2—Pages 29–30)
A court can exercise personal jurisdiction over nonresidents under the authority of a long arm statute. Under a long arm statute, it must be shown that the nonresident had sufficient contacts with the state to justify the jurisdiction. In regard to business firms, this requirement is usually met if the firm does business within the state. In this case, the parties to the sponsorship agreement contemplated that substantial activities to further their joint venture would take place in Florida. Sutton lived in Florida, and he was expected to and did play in tour events in Florida. Sutton was to be provided health care insurance in Florida. All earnings from Sutton’s golf-related activities in Florida and elsewhere were to be paid by the Professional Golfing Association from its headquarters and bank account in Florida to the ARS & Associates account in Michigan; the partnership was to disburse funds from the account to Sutton’s account in Florida to enable him to perform golf-related activities and participate in tour events for the benefit of the joint venture. After ARS failed to fund health insurance for Sutton, it instructed Sutton to obtain medical care in return for providing golf lessons to a physician in Florida. These facts—the provision of health care insurance in Florida, the exchange of funds to and from Florida, the instruction to Sutton to perform certain work in Florida—showed that the members of the joint venture were operating, conducting, engaging in, or carrying on their business venture in Florida. When an agreement for a joint venture made outside a state contemplates and results in performance in substantial part within the state, the nonresident members of the venture exercise sufficient minimum contacts within the state to support the state’s exercise of personal jurisdiction over them. Thus, ARS could be subjected to the Florida court’s exercise of jurisdiction and could be required to appear to defend itself in that state.

2-2A. Arbitration (Chapter 2—Pages 42–45)
The public policy that the court weighed in making its decision included the policy of “not tolerating the knowing misappropriation of state funds by state officials or employees,” as well as “[t]he public policy of discouraging fraud,” which is “firmly rooted in our common law.” The defendant asserted the public policy of discouraging discrimination against the mentally ill. The court considered this policy, but “did not find that Beaudry’s discharge was motivated by an intent to discriminate against the mentally ill.” In this case, “the policy of minimizing discrimination against the mentally ill did not outweigh the damaging consequences to the concomitant policy goal of refusing to countenance the knowing misappropriation of state moneys.” The court vacated the award, the union appealed, and a state appellate court affirmed the trial court’s decision.

2-3A. Arbitration (Chapter 2—Pages 42–45)
The U.S. Court of Appeals for the Third Circuit held that the arbitration award, requiring Exxon to reinstate Fris, should be vacated as contrary to public policy. The court reasoned that the award “violates a public policy that is both well defined and dominant,” that is “that owners and operators of oil tankers should be permitted to discharge crew members who are found to be intoxicated while on duty.” The court explained, “An intoxicated crew member on such a vessel can cause loss of life and catastrophic environmental and economic injury. Some of this injury may not be reparable by money damages.” The court offered, as an example, harm caused by oil spills. “Moreover,” added the court, “it is entirely possible that much of the cost resulting from a major oil spill may fall on taxpayers and those who are injured by the accident.”

2-4A. Jurisdiction (Chapter 2—Pages 29–30)
The North Carolina state court held that it had personal jurisdiction over the Florida defendants. On appeal, the North Carolina Court of Appeals agreed. The appellate court initially pointed out that a court can assert “personal jurisdiction over a corporation that delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum State. When a corporation purposefully avails itself of the privilege of conducting activities in this State, it is not unreasonable to subject it to suit here.” The court pointed out that Health Care advertised Cal-Ban in North Carolina. “Health Care sold the Cal-Ban 3000 capsules to its distributor, defendant CKI Industries, who in turn advertised and sold the drug to defendant Prescott’s Pharmacies.” The court concluded, “[a]ccordingly,” that the defendants “injected Cal-Ban 3000 into the stream of commerce of this State with the expectation that the drug would be purchased by consumers here. The trial court properly exercised personal jurisdiction over defendants.” 25A. Standing to sue (Chapter 2—Pages 36–37)
The court held that the Blues had standing and denied the tobacco companies’ motion to dismiss the case. The defendants argued in part that any injury to the plaintiffs was indirect and too remote to permit them to recover, and that it would be too difficult to determine whether the plaintiffs’ injuries were due to the defendants’ conduct or to intervening third causes. The court reasoned that the damages claimed in this case were separate from the damages suffered by smokers. The plaintiffs “seek recovery only for the economic burden of those medical claims and procedures which they directly paid as a result of tobacco use.” The Blues had paid for the smokers’ health care, and thus only the Blues could recover those amounts. As to whether the injuries were too remote, the court said that if “as alleged, the defendants conducted a decades long scheme to deceive the American public and its health providers concerning the addictive characteristics and health hazards of their tobacco products, and if they conspired to deprive smokers of safer or less addictive tobacco products, then their actions can properly be characterized as illegal and deliberate criminal fraud.” If so, the plaintiffs’ injuries would have been foreseeable and direct. The court also noted that the plaintiffs might have reliable statistical and expert evidence to show the percentage of damage caused by the defendants’ actions. Note: The Blues filed suits in three federal district courts. Two of the courts refused to dismiss the suits, applying the reasoning set out above. The third court agreed with the defendants, however. See Regence Blueshield v. Philip Morris, Inc., 40 F.Supp.2d 1179 (W.D.Wash.1999). In that case, the court concluded that the Blues’ injuries were “derivative” of personal injuries to smokers because it would be impossible to separate the smokers’ injuries from those of the insurers and there would thus be a possibility of “duplicative recovery.” 2-6A. E-Jurisdiction (Chapter 2—Pages 33–34)
The court denied Boyer’s motion to dismiss the complaint for lack of personal jurisdiction. “[T]he likelihood that personal jurisdiction can be constitutionally exercised [in the context of Internet activities] is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet.” Boyer “posted Internet messages on the Yahoo bulletin board, which included negative information regarding ABFI.” He “also sent an e-mail to ABFI’s independent auditors, accusing ABFI of ‘fraudulent accounting practices’ and ‘borderline criminal conduct’ . . . with the understanding that the independent auditors were situated in Pennsylvania.” Also, the court held that the e-mail fell under the state’s long-arm statute, which, like other states’ long-arm statutes, permits the exercise of jurisdiction “where an act or omission outside the Commonwealth [Pennsylvania] causes harm or tortious injury inside the Commonwealth.” Finally, the court reasoned that “its exercise of jurisdiction over Defendant Boyer would not necessarily violate traditional notions of fair play and substantial justice. It is true that as a non-resident individual, Boyer will be burdened in being forced to defend himself in Pennsylvania. However, his conduct appears to be directed towards Pennsylvania where Plaintiff is located and where Plaintiff’s auditors are located. Plaintiff’s interest in adjudicating its dispute and vindicating its reputation in Pennsylvania appears to be self-evident. . . . In addition, it does seem reasonable and fair to require Boyer to conduct his defense in Pennsylvania since that is where he sent the negative e-mail.” 2-7A. Arbitration (Chapter 2— Pages 42–45)
The court denied Auto Stiegler’s motion. A state intermediate appellate court reversed this ruling, and Little appealed to the California Supreme Court, which held that the appeal provision was unenforceable but which also held that the provision could be cut from the agreement and the agreement could then be enforced. Auto Stiegler argued in part that the “provision applied evenhandedly to both parties.” The court stated, “[I]f that is the case, [the defendant fails] to explain adequately the reasons for the $50,000 award threshold. From a plaintiff’s perspective, the decision to resort to arbitral appeal would be made not according to the amount of the arbitration award but the potential value of the arbitration claim compared to the costs of the appeal. If the plaintiff and his or her attorney estimate that the potential value of the claim is substantial, and the arbitrator rules that the plaintiff takes nothing because of its erroneous understanding of a point of law, then it is rational for the plaintiff to appeal. Thus, the $50,000 threshold inordinately benefits defendants. Given the fact that Auto Stiegler was the party imposing the arbitration agreement and the $50,000 threshold, it is reasonable to conclude it imposed the threshold with the knowledge or belief that it would generally be the defendant.” The court acknowledged that “parties may justify an asymmetrical arbitration agreement when there is a legitimate commercial need,” but added that the “need must be other than the employer’s desire to maximize its advantage in the arbitration process. There is no such justification for the $50,000 threshold. The explanation for the threshold . . . that an award in which there is less than that amount in controversy would not be worth going through the extra step of appellate arbitral review . . . makes sense only from a defendant’s standpoint and cannot withstand scrutiny.” 2-8A. Jurisdiction (Chapter 2— Pages 29–30)
The court denied Sharman’s motion to dismiss. The court explained that “fairness consists principally of ensuring that jurisdiction over a person is not exercised absent fair warning that a particular activity may subject that person to the jurisdiction of a foreign sovereign.” Thus, “the touchstone constitutional inquiry is whether the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.” In this case, “Sharman provides its KMD software to millions of users every week . . . . 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 . . . 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. . . . Because Sharman has succeeded Kazaa BV in virtually every aspect of its business, Sharman reasonably should have anticipated being required to succeed Kazaa BV in this litigation as well. If Sharman wished to structure its primary conduct with some minimum assurance that it would not be haled into court in this forum, it simply could have avoided taking over the business of a company already enmeshed in litigation here.” 2-9A. Standing to sue (Chapter 2— Pages 36–37)
This problem concerns standing to sue. As you read in the chapter, to have standing to sue, a party must have a legally protected, tangible interest at stake. The party must show that he or she has been injured, or is likely to be injured, by the actions of the party that he or she seeks to sue. In this case, the issue is whether the Covingtons had been injured, or were likely to be injured, by the county’s landfill operations. Clearly, one could argue that the injuries that the Covingtons complained of directly resulted from the county’s violations of environmental laws while operating the landfill. The Covingtons lived directly across from the landfill, and they were experiencing the specific types of harms (fires, scavenger problems, groundwater contamination) that those laws were enacted to address. Indeed, this was the conclusion reached by the appellate court in this case. While the trial court found that the Covingtons lacked standing to sue, when the plaintiffs appealed to U.S. Court of Appeals for the Ninth Circuit, that court found that the Covingtons did have standing to assert their claims. The appellate court remanded (sent back) the case to the lower court for a trial.

2–10A. A Question of Ethics
1. A court can generally exercise personal jurisdiction over a defendant that has had minimum contacts with the forum “necessary to have reasonably anticipated being haled into court there.” After minimum contacts have been established, a court can consider whether the exercise of personal jurisdiction comports with “traditional conceptions of fair play.”
In this case, the court held that “Rosedale's representations—which were made as part of a national campaign to induce persons, including Bragg, to visit Second Life and purchase virtual property—constitute sufficient contacts” to support the exercise of personal jurisdiction. The court compared these efforts to an advertising campaign that, for example, urges viewers to call a toll-free phone number to place orders. “This inducement destroys any semblance of . . . passive advertising,” which might consist of generalized product promotion that would not support an assertion of jurisdiction.
It was the interactive nature of the marketing scheme, not the Web site, on which the court based its holding. “Rosedale's personal role was to bait the hook for potential customers to make more interactive contact with Linden by visiting Second Life's website. Rosedale's activity was designed to generate additional traffic inside Second Life. He was the hawker sitting outside Second Life's circus tent, singing the marvels of what was contained inside to entice customers to enter. Once inside Second Life, participants could view virtual property, read additional materials about purchasing virtual property, interact with other avatars who owned virtual property, and, ultimately, purchase virtual property themselves. Significantly, participants could even interact with Rosedale's avatar on Second Life during town hall meetings that he held on the topic of virtual property.”
As for fairness, the court focused chiefly on the burden that would be imposed on Rosedale to make an appearance. Rosedale did not claim that he could not afford to appear “or that he would otherwise be irreparably prejudiced by litigating” in Pennsylvania. Rosedale had lawyers “on both coasts.” Weighed against Rosedale’s burden was Pennsylvania’s interest in protecting its residents from “allegedly misleading representations that induce them to purchase virtual property” and in vindicating their rights.
2. Under the Federal Arbitration Act (FAA), a court must compel the arbitration of a dispute if there is a valid agreement to arbitrate that covers the dispute. In this case, the court focused primarily on the validity of the agreement. A critical factor was the manner in which Linden presented the “Terms of Service” (TOS). A participant was effectively told to “take it or leave it”—one who declined could not gain access to Second Life. There was no opportunity for negotiation so that even a participant like Bragg, who was an experienced attorney, could not use his or her skills to negotiate different terms. And there was no reasonable market alternative—Second Life was the only virtual world to recognize its participants’ rights in virtual property. As for the specific TOS, including the arbitration provision, the court emphasized that Linden allowed itself a range of remedies to resolve disputes while limiting Bragg and other participants to the sole remedy of arbitration. In the circumstances of this case, Linden froze Bragg's account, kept the funds that Linden determined were subject to dispute, and told Bragg that he could resolve the dispute only by arbitration, subject to whatever “asymmetrical” amendment Linden might choose to impose. Also, limiting venue to “Linden's backyard appears to be yet one more means by which the arbitration clause serves to shield Linden from liability instead of providing a neutral forum in which to [resolve] disputes.” Altogether, these terms were one-sided and thus unfair.