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What to do When a New York Based Client Gets Sued Out of State

In E3 Innovation Inc., et al. v. DCL Techs. Inc., et al., No. CV-21-01141-PHX-DWL, 2021 WL 5741442 (D. Ariz. Dec. 2, 2021), the United States District Court for the District of Arizona recently dismissed an action for lack of personal jurisdiction against three non-resident independent contractors – two New York Defendants and one additional defendant – who were accused of downloading confidential information when exiting the business relationship between the parties.  This case not only sets precedent on the nuances of cloud-based servers relating to personal jurisdiction, but also continues the line of cases in the Ninth Circuit that hold that the required showing of jurisdictional facts “is not toothless.”  E3 Innovation, 2021 WL 5741442, at *10, quoting In re Boon Glob. Ltd., 923 F.3d 643, 650 (9th Cir. 2019).

The Plaintiff in E3 Innovation is based in Phoenix, Arizona.  Through an acquisition of a non-party company, Defendants became independent contractors of the Plaintiff.  One defendant left Plaintiff in 2018 and the New York Defendants exited in late 2020, and they all signed certain agreements upon departure.  Plaintiff then alleged that after Defendants departed, Plaintiff discovered Defendants had engaged in a series of acts that breached their exit agreements and/or were tortious, including taking and misappropriating Plaintiff’s confidential information.  Plaintiff originally brought an action in Arizona State Court, which the New York Defendants removed to Federal Court.  Then, the New York Defendants and the additional defendant each brought motions to dismiss or in the alternative to transfer venue to New York.

As set forth by the Court, while a plaintiff need only make a prima facie showing of jurisdictional facts to withstand the motion to dismiss, an Arizona plaintiff’s right to bring in citizens of another state into Arizona courts is still subject to constitutional due process.  E3 Innovation at *2.  The Defendants were not residents of Arizona, nor did Plaintiff argue that they were subject to general jurisdiction in Arizona.  Therefore, the Court applied the Ninth Circuit’s three-pronged test to determine whether Defendants had sufficient contacts with Arizona to be subject to specific personal jurisdiction.  The test first required that Defendant must have purposefully directed their activities or consummated some transaction with the forum or resident thereof [used for tort claims]; or performed some act by which they purposefully availed themselves of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws [used for contract claims]. Id. at *2, 6 (citations omitted).  Additionally, “the claim must be one which arises out of or relates to the defendant’s forum-related activities.”  Id. at *3.  Finally, “the exercise of jurisdiction must comport with fair play and substantial justice, i.e., it must be reasonable.”  Id.

In addressing the first prong, the Court acknowledged that Plaintiff had abandoned its contract-based jurisdictional arguments, and therefore were only left with the tort-based “purposeful direction” theory of jurisdiction based upon the alleged misappropriation of Plaintiff’s confidential business information.  Establishing “purposeful direction” has its own requirements, namely that Defendants must have “(1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be suffered in the forum state.” Id. at *7 (citations omitted).  There was no real dispute that Plaintiff alleged intentional acts were committed or that the harm was likely to be suffered in Arizona, so the question came down to whether Defendants’ acts were “expressly aimed” at Arizona.

The New York Defendants, on whom the Court’s analysis was primarily focused, argued that the Complaint does not set forth any allegations that any of the alleged acts were expressly aimed at Arizona.  Indeed, the only connection with Arizona was Plaintiff’s headquarters, which is insufficient to confer jurisdiction.  Id. at *7.  Plaintiff argued that the confidential information at issue was developed in Arizona, access to the information originated in Phoenix, and Defendants used their independent contractor relationship with an Arizona business to access the confidential information.  Id.  Plaintiffs identified DBSI, Inc. v. Oates, 2020 WL 5517305 (D. Ariz. 2020 as a case supporting the exercise of personal jurisdiction in Arizona under these circumstances.

The Court agreed with Defendants’ position that Plaintiff’s arguments were fatally flawed in that they focused on Defendant’s contacts with a resident of the forum—i.e., Plaintiff—and the harm Plaintiffs experienced in the forum, rather than on Defendants’ contacts with the forum.  Id. at *8.  The Court noted that the Supreme Court had rejected Plaintiff’s approach in Walden v. Fiore, 571 U.S. 277 (2014).  Id.  The Court explained that while the alleged misappropriation may have harmed an Arizona resident, it would be error to impute Plaintiff’s forum connections to Defendants.  Id.  The Court found it “irrelevant” that the contractor relationship was negotiated in Arizona, that the confidential information was developed in Arizona and used to fulfill customer orders through Arizona channels, or that Defendants received access to the information via permissions granted by Plaintiff’s Arizona office because those facts are inextricably bound up with Plaintiff’s location in Arizona.  Id. at *9.  Further, the Court also rejected Plaintiff’s use of DBSI, Inc. v. Oates because, in an important distinction, there are no allegations that Defendants accessed any servers located in Arizona, but “that the alleged acts of misappropriation involved email accounts and cloud-based servers not located in Arizona.”  Id. (emphasis in original).  Citing precedent, the Court reasoned that when the tortious conduct in question alleges targeting of servers, the location of those servers is “central” to the question of an “express aiming” analysis.  The Court therefore concluded that Plaintiff did not meet its burden of establishing the “express aiming” prong of the purposeful-direction test as it relates to their misappropriation of confidential information tort claim, and as Plaintiff had no other theory as to why one of its other claims might support the exercise of personal jurisdiction, Plaintiff’s action against the Defendants was dismissed.  Id. at *10.

E3 Innovation Inc., et al. v. DCL Techs. Inc., et al. is an excellent roadmap of Federal Court analysis of jurisdiction after Walden, as it is defendants – not plaintiffs – who must have a tether to the state in question.  Further, E3 Innovation serves as a warning that even as technology becomes more remote and cloud-based, the location of the actual hardware containing the data is still an important aspect of just where an alleged wrong is taking place. 




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