SpamLaw: Fourth Circuit Affirms Dismissal of Foreign Banks from "Honey Pot" Internet Pharmacy Case

I have handled defense of alleged email “spamming” cases in both state and federal courts.  Recently, the United States Court of Appeals for the Fourth Circuit rendered an important opinion in regard to the reach of court’s jurisdiction in these cases: Unspam Technologies v. Chernuk.

In Unspam Technologies v. Chernuk, the Fourth Circuit upheld the U.S. District Court for the Eastern District of Virginia’s dismissal of foreign banks that were alleged to have profited from a spamming conspiracy. 

The plaintiffs in this case were a company formed for the purpose of pursuing enforcement of Internet laws, and an Arlington, Virginia resident who claimed that he himself was the victim of a spam conspiracy. The two plaintiffs specifically were seeking to redress a global cyber-crime conspiracy “to use popular credit card processing systems (particularly the Visa network) to collect funds from the sale of illegal counterfeit prescription drugs over the Internet to American consumers.” They alleged that consumers in the U.S., such as the individual plaintiff, responded to email advertisements for prescription drugs and paid for the drugs with credit cards. The Internet “pharmacists” then presented the credit card transactions to Internet Payment Service Providers, which in turn presented them to foreign banks participating in the international Visa network. The banks collected on the charges from the consumers’ accounts through the Visa network, but ultimately, the pharmacists never filled the orders for the prescription drugs or filled them with counterfeit drugs.

The plaintiffs argued that the frequency and nature of such transactions supported their claim as to the existence of a global conspiracy that violated U.S. and Virginia law. Plaintiffs agreed to the dismissal of one of the pharmacist defendants, and failed to properly serve the other. The only defendants remaining on appeal were foreign banks alleged to be integral to the conspiracy in that they were “responsible for the vast majority of this illegal business extending over a number of years” because they processed the largest number of transactions submitted to the Visa network by the fraudulent Internet pharmacists. The plaintiffs asserted that these banks, although headquartered outside the United States, could be sued in the United States for knowingly participating in a conspiracy that both depended on critical resources within the United States and caused widespread harm to American consumers. Plaintiffs further alleged that because the banks were part of a global conspiracy, any single defendant’s constitutionally sufficient contacts with Virginia would subject every coconspirator to personal jurisdiction in Virginia.

To justify personal jurisdiction over the foreign banks, the plaintiffs contended that the Internet “pharmacists” deliberately transmitted spam emails over the Internet, seeking to sell prescription drugs and aiming at email addresses that had been “harvested” from web pages, including addresses of persons in Virginia, such as the individual plaintiff. They argued that, based on this contact with Virginia, the district court had jurisdiction over the pharmacists under Virginia’s long arm statute and thus over the pharmacists’ coconspirators.

Plaintiffs asserted that the court should apply a “conspiracy theory of personal jurisdiction,” and thereby keep the foreign banks in the case. The court noted, however, that conspiracy requires a “common plan,” and there were no allegations that the banks’ processing of the transactions were designed to achieve the illegal ends of the fraudulent pharmacists.

In cases involving Internet activity, the Fourth Circuit previously adopted a three-part inquiry to determine whether a defendant is subject to jurisdiction in a state because of its electronic transmissions to that state. As set forth in a 2002 Fourth Circuit decision, ALS Scan v. Digital Serv. Consultants, 293 F.3d 707, the inquiry considers:

1) the extent to which the defendant purposely availed itself of the privilege of conducting activities in the state;

2) whether the plaintiffs’ claims arise out of those activities directed at the state; and

3) whether the exercise of personal jurisdiction would be constitutionally reasonable.

Plaintiffs failed to show any sufficient connection between the foreign banks and Virginia. Not one of the banks directed its business to Virginia or aimed its commercial efforts at customers in Virginia, and there was no indication that any of the banks acted in such a way as to subject itself to the sovereign power of a court in Virginia. Finally, there was no evidence that any drug transactions involving the plaintiffs were connected by intermediaries to these foreign banks. There was no legal basis for the court to exercise jurisdiction over the foreign banks and to do so would be unconstitutional.

Here’s a link to the case: http://www.ca4.uscourts.gov/Opinions/Published/112406.P.pdf