Businesses and individuals located in the State of New York who are defrauded by those located entirely outside New York may not have the right to sue those wrongdoers in any of the state or federal courts sitting in New York. Counsel for the putative plaintiff seeking to sue in New York must carefully analyze the critical facts and strategically structure the legal arguments in order to support personal jurisdiction over the fraudsters. Conversely, defendants who have no presence in New York have available arguments to avoid being haled into New York to defend against the claims.
A recent decision of the New York Appellate Division, First Department, has ruled definitively that allegedly fraudulent electronic communications transmitted outside New York to a New York company are insufficient to trigger jurisdiction in New York of a fraud action against the accused wrongdoers (albeit under one claimed section of the procedural law (CPLR 302(a)(2))): SOS Capital v Recycling Paper Partners of PA, LLC, 2023 NY Slip Op 04480 (1st Dep’t Decided Aug. 31, 2023). While the decision applied one subsection of CPLR 302 narrowly, the Court did not address another potentially-available subsection because it found that the plaintiff’s attorney did not pursue that basis of jurisdiction.
Long-Arm Jurisdiction
Many have undoubtedly heard the expression “long arm of the law.” While the expression dates back at least to the 18th Century UK references to the notion that the law will extend broadly to catch and bring to justice scoundrels who have violated the law, in modern civil procedural contexts, the doctrine known as “long-arm jurisdiction” refers to the authority of a court to adjudicate claims against companies or individuals that are located outside the particular jurisdictional boundaries based upon some acts or occurrences that may trigger that jurisdiction. Because it is a fundamental principle of Constitutional Due Process that a court have a fair and reasonable basis to force a defendant to litigate in a foreign jurisdiction, courts apply a two-step analysis: First, the particular statute must apply and authorize jurisdiction over the defendant. Second, if the statute does confer jurisdiction, the court must determine that the manner in which jurisdiction has been compelled is consistent with Constitutional Due Process.
New York’s long-arm statute is embodied in CPLR 302, which explains that “[a]s to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent” is involved in any of a number of listed acts or circumstances.
Two of those subsections could have been relevant to the facts in the SOS case: CPLR 302(a)(2)(defendant “commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act”) and CPLR 302(a)(3)(defendant “commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act” and provided certain other criteria is met)(emphasis added).
SOS Case
The SOS case involves a fact-pattern unfortunately arising all too often stemming from the COVID-19 pandemic. In the early days of the crisis, people were clamoring to get their hands on personal protective equipment (PPE) including medically-effective masks. Various individuals took the opportunity to play fast and loose with the supply chain (whether intentionally or perhaps inadvertently) resulting in the promised PPE turning out to be not what was anticipated or promised.
In SOS, the plaintiff purchasing company alleged that the defendant selling company and its principals failed to provide the represented KN95 masks with FDA logo evidencing approval for medical use. While defendants showed plaintiff packaging depicting the required FDA approval prior to the sale upon which plaintiff relied to purchase the masks, when the product shipment arrived, no such logo or evidence of medical use was on the actual masks sold. The defendant company and the individual principal defendants were each outside the State of New York at all relevant times. The plaintiff was a New York-based company.
Plaintiff brought suit against the defendants alleging five causes of action: (1) breach of contract; (2) sale of nonconforming goods; (3) constructive fraud; (4) deceit; and (5) fraud.
The plaintiff and defendant companies entered into a contract in which the defendant seller agreed to jurisdiction in New York, so personal jurisdiction over the company was not at issue. Personal jurisdiction over the individuals was at the heart of the decision below and on appeal.
In the court below, all defendants defaulted in responding to the complaint, so plaintiff moved for a default judgment and an inquest on damages. After the default judgment was entered, the court determined damages during an inquest at which defendants did not appear. Thereafter, however, the defendants moved to vacate the default. As relevant here, if the court below never had personal jurisdiction over the individual defendants, then the entire action can be dismissed because nothing the court below did could have any legal effect. So the first issue was whether there was any personal jurisdiction over the defendants so as to satisfy dismissal under CPLR 3211(a)(8)(lack of personal jurisdiction).
The court below denied defendants’ motion to vacate the default and to dismiss the action. The lower court did not indicate the specific subsection of CPLR 302(a) that conferred jurisdiction, simply finding that plaintiff sufficiently alleged that “‘defendants agreed to send masks to New York and that defendants, including the individual defendants, made fraudulent misrepresentations about the nature of those masks,” and that it was “‘of no moment’ that ‘the sales order was signed by the corporate defendant in Pennsylvania or that neither [individual] defendant was physically present in New York’.” The First Department reversed the decision below to extent it determined that there was personal jurisdiction over the individual defendants.
The First Department indicated that plaintiff sought to support jurisdiction by arguing “that the individual defendants made misrepresentations to plaintiff, a resident of New York, and those statements induced plaintiff to enter into the instant agreement to its detriment. Specifically, plaintiff alleges that the individual defendants sent emails to plaintiff in New York, containing images that falsely represented that the masks being sold were both FDA-approved and approved for medical use. Notably, however, plaintiff does not contend that [the company defendant] or the individual defendants were ever physically present in New York when they made the alleged fraudulent representations.”
Defendants argued “that all of their communications with plaintiff, including the alleged fraudulent statements, occurred via calls, texts and emails that took place while they were located outside of New York and solely in their capacity as representatives of [the company defendant]. They further allege[d] that they reside outside of the state and that they did not enter New York jurisdiction for the purposes of the agreement. Specifically, they contend[ed] that the contract was not only signed outside of New York, but also that the masks were to be picked up by plaintiff in Pennsylvania.”
First Department Rules Alleged Fraudulent Communications Must Have Been in NY
Significantly on appeal, the First Department noted that plaintiff only sought to rely on CPLR 302(a)(2)(defendant “commits a tortious act within the state …”) and not CPLR 302(a)(3)(defendant “commits a tortious act without the state causing injury to person or property within the state, …”)(emphasis added), so it confined its analysis to only 302(a)(2).
The First Department then ruled that the “calls, texts and emails” that were sent from outside New York were insufficient to trigger personal jurisdiction under CPLR 302(a)(2). The First Department specifically declined the plaintiff’s invitation to acknowledge and apply “technological advances” to CPLR 302(a)(2)’s requirement of acts within the state:
[P]laintiff’s contention that technology mandates that a tortfeasor and its agents must no longer physically enter New York to perform a tortious transaction within this state misses the mark. While we are cognizant of the role technology plays in the adaptation and application of our laws, technological advances do not give this Court the authority to supplant the legislature. Thus, our application of CPLR 302(a)(2) must be in accord with the legislative intent, structure of the statute, and its prior application.
CPLR 302(a)(3)
While the First Department did not address CPLR 302(a)(3)(tortious act without the state causing injury to person or property within the state), there may have been more to argue under that subsection. There are a long line of cases observing that in the context of a commercial tort such as fraud, “where the damage is solely economic, the situs of commercial injury is where the original critical events associated with the action or dispute took place, not where any financial loss or damages occurred.” See,e.g., CRT Invs., Ltd. v BDO Seidman, LLP, 85 AD3d 470 (1st 2011). However, the underlying reasoning of those cases is not entirely applicable or even appropriate in all instances and circumstances where a New York domiciliary is injured by the fraudulent conduct of non-domiciliaries.
The reasoning dates back principally to a Second Circuit decision applying what it predicted would be New York State courts’ handling of the issue, American Eutec. Weld. Alloys S. Co. v. Dytron Alloys Corp., 439 F. 2d 428 (2d Cir. 1971). Dyton also relied upon a federal district court’s decision.
The Second Circuit did correctly note that CPLR 302(a)(3) was added to specifically address and overrule a decision where an actual explosion occurred in New York and no jurisdiction was found despite the injuries sustained in New York, but the subsection does not exclude purely commercial cases.
In Dyton, plaintiff alleged that the corporate defendant misused confidential information improperly obtained from plaintiff’s former employees, causing lost profits. While the Second Circuit found that such commercial injury could not be deemed to have been sustained in New York simply because plaintiff was located there, the facts and circumstances of each case could have particular characteristics that may better support an argument that the commercial injury did in fact occur in New York. Otherwise, simply concluding, as many cases superficially rule, that in commercial cases the injury is always deemed to have occurred where the wrong is committed would render CPLR 302(a)(3) meaningless in such cases because CPLR 302(a)(2) already provides a basis for jurisdiction for acts committed in New York and CPLR 302(a)(3) was obviously intended to expand that ground. CPLR 302(a)(3) does not exclude commercial cases such as fraud or other business torts.
Commentary
When New York residents are defrauded by fraudsters outside New York, plaintiffs’ counsel must carefully analyze the facts and circumstances to solidify jurisdiction over the defendants. New York has a powerful long-arm statute that is potentially available to confer jurisdiction over the alleged wrongdoers. Each subsection must be carefully considered and applied. On the other hand, for out-of-state defendants, arguments can be made to dismiss such cases and prevent the defendants from being haled into court in New York.