5th Circuit Rules No Personal Jurisdiction Over Out of State Regulator of Online Commerce
January 14, 2008. The U.S. Court of Appeals (5thCir) issued its opinion [19 pages in PDF] in Stroman Realty v. Wercinski, a case regarding state regulation of internet based commerce in timeshares, such as vacation condos.
The Court of Appeals did not reach the merits of the commerce clause claim. Rather, it held that the state of Arizona's regulators cannot be sued in federal court in Texas, the location of the targeted company. This case may be of concern to internet based businesses that find themselves regulated or taxed by numerous distant state regulators. This case stands as authority for the proposition that if internet based business's constitutional or federal statutory rights are violated by distant state regulators or tax collectors, then these businesses cannot obtain personal jurisdiction over the distant regulators in their home states. On the other hand, state regulators and taxers of interstate and internet commerce may celebrate this opinion.
Introduction. The state of Arizona seeks to regulate the commercial activities of a real estate timeshare sales business (Strohman Realty) located in the state of Texas, which does business in part over the internet. Stroman advertises through an internet website, and matches buyers and sellers via an internet access electronic database. Stroman's prospective buyers and sellers are located everywhere, including in the state of Arizona.
Arizona ordered Stroman to cease "all contact with Arizona resident and non-resident owners of real estate located in Arizona ... by mail, telephone, telefax, computer modem or any other means". It later forbade Stroman from advertising properties located in Arizona in its website.
Stroman asserts that Arizona's efforts to regulate its business violates the commerce clause of the U.S. Constitution. It brought suit in federal court in Texas seeking injunctive relief under 42 U.S.C. § 1983. However, this opinion does not address the commerce clause issue, or the Section 1983 claim. Rather, the Court of Appeals held that the District Court lacks personal jurisdiction over the state of Arizona.
The Court of Appeals held that regulating a business in another state, issuing a cease and desist order to that out of state business, and censoring the content of its web site, are not sufficient contacts with that other state to confer jurisdiction upon a federal court in that state.
The holding in this case leads to an anomalous outcome. A state regulator was able to reach across state lines to regulate a business located in another state based upon its interstate and online activities. But, when that out of state business sought protection of its rights in a federal court in its state, that District Court held that it could not reach back across state lines by asserting personal jurisdiction over the other state's regulator.
Background. Stroman Realty, Inc., the plaintiff below and the appellant before the Court of Appeals, is a business located in Conroe, Texas. It is an advertiser and resale broker of timeshare intervals in the secondary resale market.
Timeshare refers to ownership of property that is divided by time. That is, property has multiple owners, each of which is entitled to use and possession for limited periods of time. This case involves timeshares in real property, such as vacation condos and homes. Although, timesharing can be applied to other forms of property, such as aircraft and boats.
While Stroman is located in Texas, the location of the property that is divided into timeshares and brokered by Stroman is located in many states and countries. Moreover, both buyers and sellers are spread around. However, its real estate brokers are licensed by the state of Texas.
Stroman advertises in national newspapers, trade magazines, through direct mail publications, and over the internet. The Court of Appeals wrote that "Prospective purchasers can search Stroman’s website for availabilities at condominiums, resorts, or spas, and read about the occupancy conditions of the various timeshare intervals being offered. Interested parties then submit bids through the website or call a Stroman broker. Stroman uses its computer database to match prospective buyers with such variables as location, price range, amenities, and use interval."
Sam Wercinski, the defendant below and appellee before the Court of Appeals, is the current Commissioner of the Arizona Department of Real Estate. His predecessor was Elaine Richardson. They are residents of Arizona.
Arizona regulates real estate brokers. In 2000 Richardson sent a cease and desist letter to Stroman stating that Stroman's agents were not licensed as real estate brokers or salespeople in Arizona, and were therefore violating Arizona law. This letter ordered Stroman to cease "all contact with Arizona resident and non-resident owners of real estate located in Arizona ... by mail, telephone, telefax, computer modem or any other means".
Stroman continued to broker timeshares over the internet. In 2005 Arizona ordered Stroman to stop advertising Arizona properties on its web site.
District Court. Stroman then filed a complaint in U.S. District Court (SDTex) against Richardson pleading violation of 18 U.S.C. § 1983 in connection with the state of Arizona's alleged attempts to exercise regulatory jurisdiction to license timeshare resales in violation of the commerce clause of the U.S. Constitution by discriminatorily and unduly burdening nonresident participation in the interstate secondary timeshare market.
The state of Arizona moved to dismiss the complaint under various theories, including lack of personal jurisdiction over Richardson, and claim preclusion.
The District Court dismissed the complaint under the theories of claim preclusion and abstention (which Arizona did not plead). The District Court did not rule on personal jurisdiction over Richardson (now Wercinski).
Constitution and Statutes. Article I, Section 8, of the Constitution provides that "The Congress shall have Power ... to regulate Commerce with foreign Nations, and among the several States ..."
The doctrine of the dormant commerce clause is that the Constitution, by delegating certain authority to the Congress to regulate commerce, thereby bars the states from legislating on certain matters that affect interstate commerce, even in the absence of Congressional legislation. It is applied to block states from regulating in a way that materially burdens or discriminates against interstate commerce.
Section 1983 provides that "Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress ..."
The Texas long arm jurisdiction statute is codified at TEX. CIV. PRAC. & REM. CODE ANN. § 17.042.
Court of Appeals. Stroman brought the present appeal. The Court of Appeals affirmed the dismissal on other grounds. It held that the District Court lacked personal jurisdiction over Richardson, and did not address the other issues.
Neither the District Court nor the Court of Appeals addressed the underlying merits of Stroman's commerce clause based Section 1983 claim.
The Court of Appeals began by examining the state of Texas' long arm jurisdiction statute, which sets the maximum limits for the exercise of personal jurisdiction by state and federal trial courts in the state of Texas.
Neither the legal precedents on personal jurisdiction in internet related cases, nor the language of state long arm statutes, are easily applied to the facts of this case. State long arm statutes tend to focus on personal jurisdiction in cases in which non-governmental parties are involved in commercial activities. Judicial precedents tend to involve disputes between commercial litigants, and in particular, cases in which a plaintiff in one state asserts that its state has jurisdiction over a distant defendant based upon its internet activities. In the present case, Arizona is not engaged in online commerce that reaches into other states -- it is regulating online commerce in other states.
Hence, when the Court of Appeals examined the Texas statute, it found that Texas asserts jurisdiction over various forms of commercial activity. It noted that Arizona's regulatory activities do not fit the statute's references to "does business in this state", "contracts ... with a Texas resident", or "commits a tort ... in this state". However, the Court of Appeals did not base its ruling on this language of the statute. Yet, it subsequent analysis is affected by its distinction between commercial activities and regulatory activities.
Rather, it applied due process limitations to Texas' exercise of personal jurisdiction. It began with the Supreme Court's ruling in International Shoe v. Washington, 326 U.S. 310 (1945), that the defendant must have such minimum contacts with the forum state as not to violate traditional notions of fair play and substantial justice.
The Court of Appeals continued with a discussion of general and specific jurisdiction. The Court of Appeals also noted that the progeny of International Shoe provide that minimum contacts requires a three part analysis. First, did the defendant purposely direct its activities toward the forum state or purposely avail itself of the privileges of conducting activities there? Second, does the plaintiff’s cause of action arise out of or result from the defendant’s forum related contacts? Third, is the exercise of personal jurisdiction fair and reasonable?
It held that under this test the Arizona regulators do not have the minimum contacts with Texas that would confer personal jurisdiction upon the courts in Texas because the regulators did not purposely avail themselves of the privileges of conducting activities there.
It wrote too that "Courts generally exercise specific jurisdiction over nonresident defendants that are engaged in commercial, profit-oriented enterprise."
The Court of Appeals also rejected the argument that Texas courts have personal jurisdiction based upon the Supreme Court's effects test announced in Calder v. Jones, 456 U.S. 783 (1984). That opinion applies in tort cases. It provides that there is personal jurisdiction where the defendant's conduct is aimed at the forum state, and it causes harm, the brunt of which is suffered in the forum state. (The parties characterized this Section 1983 action as a tort action. This is common characterization of Section 1983. However, the Court of Appeals wrote about its concern with this characterization.)
The Arizona regulators action specifically targeted a business located in Texas. Nevertheless, the Court of Appeals concluded that the Calder effects test does not confer personal jurisdiction because "Although it may be true that the Commissioner's action against Stroman is based upon conduct which occurred entirely in Texas, we cannot find, as Stroman urges, that the Commissioner has purposefully directed her conduct at Texas."
This is a curious conclusion because Stroman is in Texas, and the cease and desist order is directed to, and applies only to, Stroman.
The Court wrote that the Arizona regulator's "intent is to uphold and enforce the laws of Arizona." It added that if it were to find personal jurisdiction under the effects test in this case, then "any state official seeking to enforce her state’s laws -- could potentially be subjected to suit in any state where the validity of her state’s laws were in question. We are unwilling to establish such a broad principle."
This is a tortured interpretation of Calder, but a fine defense state authority and state immunity.
It should also be noted that this is an opinion written by Judge Edith Jones. It is possible that this opinion reflects her animosity to Section 1983 actions, and her advocacy of state authority and immunity, more than her reasoned opinions regarding the commerce clause and internet based commerce. The federal courts are flooded with Section 1983 claims, many of which have little or no merit. Judge Jones is a states rights conservative.
On the other hand, aside from the present opinion, Judge Jones has not demonstrated a bias against internet commerce, or in favor of state regulation of internet commerce. For example, she wrote a concurring opinion, that resembles a dissenting opinion, in Ford v. Texas, 264 F.3d 493 (2001). In that case the Court of Appeals upheld the constitutionality of a protectionist Texas statute backed by car dealerships that prevented the car makers from selling cars over the internet. The Court of Appeals rejected a commerce clause challenge to the statute. However, Judge Jones condemned the existing precedent, argued that the statute harms consumers, and invited the Supreme Court to review the case. See also, story titled "5th Circuit Upholds Protectionist Car Dealership Law" in TLJ Daily E-Mail Alert No. 258, August 28, 2001.
This case is Stroman Realty, Inc. v. Sam Wercinski, U.S. Court of Appeals for the 5th Circuit, App. Ct. No. 06-20095, an appeal from the U.S. District Court for the Southern District of Texas. Judge Jones wrote the opinion of the Court of Appeals, in which Judges Weiner and Barksdale joined.