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Substitute Service of Process Ordered for Defendant from Russian Federation

10-1100
November 12, 2010

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Last Month at the Federal Circuit - December 2010

Judges: Rader (author), Newman, Prost

[Appealed from: N.D. Cal., Judge White]

In Nuance Communications, Inc. v. Abbyy Software House, No. 10-1100 (Fed. Cir. Nov. 12, 2010), the Federal Circuit reversed the district court’s dismissal of Abbyy Production LLC (“Abbyy Production”) for lack of personal jurisdiction.  To allow for additional discovery, the Court also vacated the district court’s dismissal of Abbyy Software, Ltd. (“Abbyy Software”).  The Court also reversed the dismissal of the case for improper service of process.  

Nuance Communications, Inc. (“Nuance”) originally sued Abbyy USA Software House (“Abbyy USA”) and Lexmark International, Inc. for infringement of its method and system patents directed to optical character recognition, and document recognition and management.  Based on responses to interrogatories, Nuance filed an Amended Complaint, adding as defendants Abbyy Software, Abbyy USA’s parent, and Abbyy Production, a wholly owned subsidiary of Abbyy Software and the provider of Abbyy USA’s software products and support.  Abbyy Software and Abbyy Production are corporations organized under the laws of Cyprus and Russia, respectively.  A local process server served Abbyy Production in Moscow with the Amended Complaint, Amended Summons, and Standing Orders of the Court.  The Abbyy defendants then filed a motion to dismiss Abbyy Production and Abbyy Software for lack of personal jurisdiction, and to dismiss Abbyy Production for improper service of process.  The district court concluded that the record did not show that Abbyy Production or Abbyy Software purposefully directed any specific activity at residents of California or within the forum state, or that Nuance’s claims arise out of those activities.  The district court further concluded that Nuance did not properly serve Abbyy Production in accordance with the Hague Convention.  The district court also dismissed the suit against Abbyy Software sua sponte for improper service of process.  In its decisions, the district court did not address Nuance’s request for jurisdictional discovery.

On appeal, Nuance challenged the district court’s determination that it cannot exercise personal jurisdiction over Abbyy Production and Abbyy Software, and that these companies were served in a legally insufficient manner.  Nuance first argued that Abbyy Production purposefully directed activities at residents of California, satisfying the first prong of the California test for personal jurisdiction.  Nuance focused on the CEO’s stated goal of “conquering” the U.S. market, the importation of allegedly infringing products into California, the extraction of royalty payments for the sale of these products, and Abbyy Production’s agreement to provide assistance to Abbyy USA in selling, reproducing, and modifying the accused products in California.

The Federal Circuit applied a three-prong test to determine whether specific jurisdiction exists over Abbyy Production and Abbyy Software:  “(1) whether the defendant purposefully directed activities at residents of the forum; (2) whether the claim arises out of or relates to those activities; and (3) whether assertion of personal jurisdiction is reasonable and fair.”  Slip op. at 8 (citing Akro Corp. v. Luker, 45 F.3d 1541, 1545-46 (Fed. Cir. 1995)). 

The Federal Circuit found that Abbyy Production had purposefully directed activities at the residents of California, availing itself of the privilege of conducting activities there.  Specifically, the Court noted that it provided master copies of its software products to its sister company, Abbyy USA, a resident of California, in exchange for royalty payments, and sought to conquer the U.S. market.  

The Court also found Nuance’s claim arose out of Abbyy Production’s importation of its allegedly infringing software into California for sale by Abbyy USA throughout the United States.  Abbyy Production’s physical absence from California was immaterial to the Court, because Abbyy Production retained ownership over the software, even after importation, under its license agreement with Abbyy USA.  Moreover, the Court found that the stream of commerce was not so attenuated as to undermine jurisdiction, because Abbyy Production purposefully shipped its accused software into California directly through an established distribution channel with no intervening links.  The Court found the fact that it merely licensed its product, as opposed to physically importing it, was irrelevant for jurisdictional purposes.

The Court further found exercising jurisdiction over Abbyy Production fair and reasonable, because of its established delivery system through a commonly owned subsidiary and intent to deliver its products to the United States.  Its litigation burden would be slight due to common management and legal representation with Abbyy USA.  For these reasons, the Court found the exercise of personal jurisdiction over Abbyy Production proper.

As to Abbyy Software, the Federal Circuit vacated the district court’s dismissal for lack of personal jurisdiction.  The Court noted that a global management team directed both Abbyy Software and Abbyy USA, that Abbyy Software’s CEO made assertive statements about U.S. entry in a trade magazine, and that Abbyy Software’s website, although not offering products for sale in the United States, listed American retailers.  The Court, however, could not conclude that Abbyy Software had purposefully availed itself of the privilege of conducting activities in California by intentionally establishing distribution channels terminating there.  Rather, the Court found the extent of Abbyy Software’s involvement in the sales of allegedly infringing products uncertain, prompting the Court to vacate the district court’s dismissal for lack of personal jurisdiction.

Applying Ninth Circuit law, the Federal Circuit also held that the district court abused its discretion by ignoring Nuance’s request for jurisdictional discovery.  Finding the district court’s failure to address the request in its dismissals a de facto denial, and Nuance’s request for jurisdictional discovery based on more than “a mere hunch,” the Court granted additional discovery to determine the merits of personal jurisdiction over Abbyy Software.  Slip op. at 18 (quoting Patent Rights Prot. Grp. LLC v. Video Gaming Techs., Inc., 603 F.3d 1364, 1372 (Fed. Cir. 2010)).

The Federal Circuit then turned to the service of process.  After reviewing the requirements of Federal Rule of Civil Procedure 4 and the Hague Convention, the Court concluded that the record indicates that Nuance could not have attempted to serve Abbyy Production through the Hague Convention.  Specifically, the Court found evidence that the Russian Federation does not consider the Hague Service Convention in effect between Russia and the United States. 

With regard to Nuance’s attempts to effect personal service by serving Abbyy Production’s manager in Moscow, the Federal Circuit concluded that, on remand, the district court should allow alternate service, including at least substitute service, pursuant to Rule 4(f)(3), of Abbyy Production by substitute service on Abbyy USA. 

Finally, the Court reversed the district court’s sua sponte dismissal of Abbyy Software for improper service of process, finding that Abbyy Software failed to raise the defense of improper service of process, thereby waiving it.

 

Summary authored by John "Jack" A. Kelly, Esq.