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IN RE BAAN CO. SECURITIES LITIGATION

January 14, 2000

IN RE BAAN COMPANY SECURITIES LITIGATION. THIS DOCUMENT RELATES TO ALL ACTIONS.


The opinion of the court was delivered by: Facciola, United States Magistrate Judge.

MEMORANDUM OPINION

BACKGROUND

In this class action,*fn1 plaintiffs, purchasers of Baan Corp. ("Baan") common stock, American Depository Receipts ("ADRs"),*fn2 warrants, and options, are suing defendants*fn3 for alleged violations of the Securities Exchange Act of 1934,15 U.S.C.A. § 78a (1997). Plaintiffs claim "that defendants made materially false and misleading statements about Baan's business, finances and future prospects."*fn4 Compl. at 1.

Defendants Vanenburg Ventures, B.V. ("Vanenburg") and J.G. Paul Baan ("Paul Baan") have moved to dismiss and plaintiffs have filed Plaintiffs' Motion for Leave to Take Expedited Discovery Concerning Jurisdictional Issues. Upon consideration of plaintiffs' motion and the replies and responses thereto, I will deny plaintiffs' motion without prejudice to their being permitted to take the restricted discovery I will describe in this opinion.

ANALYSIS

When a motion to dismiss for lack of jurisdiction over the person is filed, this Circuit permits limited discovery if the opponent of the motion has made allegations specific enough to permit the conclusion that discovery may enable him to establish that assertion of jurisdiction over the movant's person meets the requirements of the Due Process Clause. GTE New Media Services Inc. v. BellSouth Corporation, 199 F.3d 1343, 1351-52 (D.C.Cir. 2000). Compare Caribbean Broadcasting System, Ltd. v. Cable & Wireless P.L.C., 148 F.3d 1080, 1088-1090 (D.C.Cir. 1998) and Naartex Consulting Corporation v. Watt, 722 F.2d 779, 787 (D.C.Cir. 1983) with El-Fadl v. Central Bank of Jordan, 75 F.3d 668, 675 (D.C.Cir. 1996) and Crane v. Carr, 814 F.2d 758 (D.C.Cir. 1987) and Edmond v. United States Postal Service, 949 F.2d 415, 424 (D.C.Cir. 1991) See also Goodman Holdings v. Rafidain Bank, 26 F.3d 1143, 1147 (D.C.Cir. 1994), cert. denied, 513 U.S. 1079, 115 S.Ct. 728, 130 L.Ed.2d 632 (1995); Foremost-McKesson v. Islamic Republic of Iran, 759 F. Supp. 855 (D.C. 1991).

The scope of discovery is defined by law pertaining to the limits imposed by the Due Process Clause upon the court's assertion of jurisdiction over the defendants. The defendants who have moved to dismiss for lack of jurisdiction over their persons are a foreign national, J.G. Paul Baan, and a Netherlands corporation, Vanenburg Ventures, B.V. which has no place of business in the United States. The court's jurisdiction over these defendants is based on 15 U.S.C. § 78aa (1997) which, in conjunction with Fed.R.Civ.P. 4(k)(D)(2), authorizes service of process upon them anywhere in the world. It does not follow, however, that merely because service has been effected in accordance with American rules of procedure, that alien defendants can be thereby made subject ipso facto to the jurisdiction of any American court. Instead, aliens may claim the Fifth Amendment protection from being haled into an American court in a manner which contradicts traditional (and American) notions of fair play and justice. See, e.g., Asahi Metal Industry Co. v. Superior Court, 480 U.S. 102, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987) (hereafter "Asahi"); Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984).

That broad standard of "fair play and justice" requires a showing of such minimum contacts between the alien and the forum that the assertion of jurisdiction over his person does not offend due process. Asahi, 480 U.S. at 109, 107 S.Ct. 1026. When, as is true in this case, a federal statute authorizes service of process anywhere the defendant can be found, i.e., anywhere on the face of the earth, the minimum contacts are those between the defendant and the United States, as opposed to those between the defendant and the District of Columbia under the District's long arm statute. Associated Transport Line, Inc. v. Productos Fitosanitarios Proficol El Carmen, 197 F.3d 1070, 1073-74 (11th Cir. 1999); Chew v. Dietrich, 143 F.3d 24, 28 n. 4 (2nd Cir. 1998); Republic of Panama v. BCCI Holdings, 119 F.3d 935, 946 (11th Cir. 1997); United States Securities and Exchange Commission v. Carrillo, 115 F.3d 1540, 1543 (11th Cir. 1997) (securities case); Nazareth National Bank & Trust Co. v. E.A. International Trust, 1999 WL 549036 (W.D.Pa. July 26, 1999) (securities case).

Unfortunately, analysis of the vague phrase "such minimum contacts as will not offend due process" is not aided by a case law as clear as the one I have just summarized. A central problem in defining the legal standard was the inability of a majority of the Supreme Court to agree on a crucial question: whether the defendant's placing an object in the stream of commerce for a profit was sufficient in itself to impose jurisdiction over his person in any forum in which the object caused harm. Asahi, 480 U.S. at 102, 107 S.Ct. 1026. While Justice O'Connor's plurality opinion firmly rejected that principle, the concurring justices, Brennan and Stevens, refused to accept that rejection and premised their concurrence on other grounds. Despite their differences, there is common ground in the three opinions of O'Connor, Brennan, and Stevens. All the justices would agree that while merely placing the object in the stream of commerce might or might not be in itself sufficient, the defendant's knowledge that the object will be sold in a particular forum combined with his exploitation of the market in that forum would suffice. Asahi at 112, 107 S.Ct. 1026 (O'Connor, J.), 121 (Brennan, J.) ("I cannot join in the determination . . . that Asahi's regular and extensive sales of component parts to a manufacturer it knew making regular sales of the final product in California is insufficient to establish minimum contacts with California") Id., (Stevens, J.) (Asahi arguably engaged in a "higher quantum of conduct" than placing his product into the stream of commerce; regular course of dealing (deliveries over 100,000 units over a period of several years) constitutes purposeful availment even though the item delivered was marketed throughout the world). See Omeluk v. Langsten Slip & Batbyggeri, 52 F.3d 267, 271 (9th Cir. 1995) (all agree after Asahi that mere presence of product in forum insufficient where product has not been marketed there and its presence in forum is not part of regular and anticipated flow of products from the manufacturer).

Given these statements, the circuit courts of appeals and district courts have followed this admittedly uncertain guidance by rejecting talismanic reliance on abstract concepts.*fn5 and focusing on specific facts such as the defendant's knowledge that his product is being marketed in the forum and its efforts to create, nurture, and exploit that market. While such fact specific cases yield no lapidary conclusion, it can be said that the more evidence that the defendant knew that his product would be sold in the forum and made conscious efforts to increase the market for its product in that forum by, for example, customer service and advertising, the easier it is to conclude that the contacts between the defendant and the forum are sufficient to assert jurisdiction over his person. Kernan v. Kurz-Hastings, Inc., 175 F.3d 236, 242-244 (2d Cir. 1999) (exclusive sale rights agreement to sell products in North America evidenced effort to exploit America market, including New York); Pennzoil Products Co. v. Colelli & Associates, Inc., 149 F.3d 197, 203-208 (3d Cir. 1998) (awareness that customers were selling product to third parties and expressed desire to maintain relationship with one such third party sufficient); Mid-America Tablewares, Inc. v. Mogi Trading Co., Ltd., 100 F.3d 1353, 1358-1362 (7th Cir. 1996) (sample sent to forum, knowledge of shipment to forum, storage in warehouse in forum, shipment of replacement part to form sufficient contacts); Metropolitan Life Insurance Co. v. Robertson-Ceco Corp., 84 F.3d 560, 561-573 (2d Cir. 1996) (sales of $4 million, relationship with dealers in forum, advertising in forum, visits to forum by personnel, targeting of firms in forum sufficient), cert. denied, 513 U.S. 948, 115 S.Ct. 359, 130 L.Ed.2d 313 (1994); Lesnick v. Hollingsworth & Vose Co., 35 F.3d 939 (4th Cir. 1994) (knowledge that object would be sold in forum insufficient without showing that the defendant directed activity towards the forum), cert. denied, 513 U.S. 1151, 115 S.Ct. 1103, 130 L.Ed.2d 1070 (1995); Renner v. Lanard Toys Limited, 33 F.3d 277 (3d Cir. 1994) (awareness of sale of product without regularity of shipments into forum insufficient); Barone v. Rich Bros. Interstate Display Fireworks Co., 25 F.3d 610, 612-615 (8th Cir. 1994) (use of regional distributors belies claim that defendant did not know that product was being sold in forum when it knew of sales in bordering states), cert. denied, 513 U.S. 948, 115 S.Ct. 359, 130 L.Ed.2d 313 (1994); Vermeulen v. Renault, U.S.A., Inc., 985 F.2d at 1545-1550 (nationwide distribution system of car designed for American market and national advertising sufficient); Falkirk Mining Co. v. Japan Steel Works. Ltd., 906 F.2d 369, 374-375 (8th Cir. 1990) (that purchaser brought product into forum when manufacturer did not control distribution system and did not advertise or solicit business insufficient); Mason v. F. LLI Luigi, Franco Dal Maschio Fu G.B., 832 F.2d 383 (7th Cir. 1987) (minimum contacts when defendant custom made machine for company in forum state); Lodgistix, Inc. v. Carnival's Crystal Palace Hotel Corp., Ltd., 1990 WL 7511 (Kan. Feb. 1, 1990) (sufficient when defendant entered into contract with forum resident and agreed that forum's laws would apply and when defendant knew that if it did not pay it would be haled into forum's court). See also GTE New Media Services Inc. v. BellSouth, at 1349 ("[P]ersonal jurisdiction surely cannot be based solely on the ability of District residents to access the defendants' websites, for this does not show any persistent course of conduct by the defendants in the District.").

This conclusion is hardly surprising. Prior to Asahi, the Supreme Court held that a showing that the defendant purposefully availed himself of the benefits available to him in a forum was essential to the assertion of jurisdiction over him by that forum. Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). It therefore follows that the theoretical foreseeability that a product would injure someone in the forum could not justify the assertion of the forum's jurisdiction over the manufacturer of that product. Aside from sounding too much like the poem which explains why a kingdom was lost for want of a nail, imposing jurisdiction solely because the presence of the defendant's product in the forum was foreseeable is inconsistent with the obligation to establish a purposeful availment of the forum's benefits. It is, after all, foreseeable that a person who buys a car in New Jersey may drive it to Oklahoma but it hardly follows that it is reasonable to require the seller of the car to submit to jurisdiction in Oklahoma when a defect in the car causes an accident in Oklahoma and the only connection between the seller and Oklahoma is the presence of the car in the state when the accident occurred. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). The true question is not whether an accident's occurring in Oklahoma was theoretically foreseeable but whether it was reasonable for the seller of the car to anticipate that he would be haled into court in that state because by his own acts he purposefully availed himself of the benefits of that state's laws and the potential market for his products. Id.

This analysis requires the rejection of the central theory upon which plaintiffs would premise this Court's jurisdiction over the defendants. The statute upon which plaintiffs rely, the Securities Exchange Act of 1934, 15 U.S.C.A. § 78t (1997), imposes liability upon any person who controls a corporation or other entity which violates the various provisions of that statute. Plaintiffs then reasons that if it can show that the defendants controlled the corporation which engaged in the acts claimed to violate the statute, that showing will sustain the court's jurisdiction over their persons. But, that theory goes too far. Under it, jurisdiction could be predicated on an act done anywhere in the world by a person who did not and could not have known that his act would affect the value of a security owned by some one in the United States. In a world that is shrinking as a result of the communications revolution, and with the rapid emergence of a global, economic culture, acceptance of plaintiffs theory would mean that an individual in Guam who used the Internet to purchase 10 shares of stock of a company in the Netherlands could cause a person who has never been in the United States to appear and defend itself in the United States District Court for the District of Guam merely by alleging that he controlled the Netherlands corporation which issued the stock. The staggering implications of the acceptance of that theory makes it understandable that the cases, including the ones upon which plaintiffs try to rely, have never gone that far. To the contrary, each (with one exception) has required more than the allegation that defendant controlled the entity which performed the act claimed to have violated the pertinent securities law before asserting jurisdiction over its person.

In McNamara v. Bre-X Minerals Ltd., 46 F. Supp.2d 628 (E.D.Tex. 1999), the court permitted the assertion of personal jurisdiction only after the plaintiff made out what the court called a prima face case of "control person liability." Id. at 635. It first found that a prima facie case had been made against a defendant corporation because the plaintiff established that the defendants made a "clear showing" that the defendant corporation's representatives were an extensive presence on the board of the corporation which plaintiff claimed violated the law. It then asserted personal jurisdiction over the individual defendants because it found that individual defendants either (1) disseminated financial statements knowing that those statements would affect the price of stock when he also knew by signing an SEC filing that the stock would be traded in America, or (2) prepared the fraudulent press releases claimed to violate the pertinent statute, or (3) authorized the corporation claimed to have violated ...


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