January 02, 2019
by James K. Goldfarb

 

A federal court sitting in New York and applying that state’s long-arm statute lacked personal jurisdiction over a U.S. company not based in New York.  Accordingly, the court dismissed a breach of contract lawsuit brought against the company by an overseas consultant retained to assist with the company’s initial coin offering.  See ICO Servs., Ltd. v. Coinme, Inc., No. 18-cv-4276, 2018 WL 6605854 (S.D.N.Y. Dec. 17, 2018) (Schofield, J.).  The court held that the one-shot consulting agreement was not the type of on-going relationship courts consider in evaluating personal jurisdiction; and the alleged existence of New York-based customers, investors, and business activity had no alleged connection to the underlying dispute.  Coinme illustrates – in the context of an ICO – contract-related activity that will and will not support personal jurisdiction in federal court.

As alleged in the complaint, Coinme, a privately-held Delaware corporation with one office, in Washington state, contracted with ICO Services, a Hong Kong corporation with its principal U.S. office in New York.  Coinme negotiated the contract from Seattle, executed it in Hong Kong, and transmitted it to ICO Services’ office, which it believed to be in Singapore.  The contract contained a New York choice of law provision and required Coinme to provide notice to ICO Services’ in New York City.  Coinme performed the contract from Seattle; ICO Services from New York. 

When Coinme refused to pay ICO Services the balance of its fee, ICO Services sued to enforce the contract in federal court in New York.  Although Coinme was not domiciled in New York, ICO Services argued that personal jurisdiction existed over Coinme because Coinme customers or investors were New York residents and Coinme frequently used interstate communications to communicate with them and engage in business in New York.  The court turned aside these arguments and granted Coinme’s motion to dismiss.

The court first set forth well-established personal jurisdiction rules.  A federal court sitting in diversity applies the forum state’s personal jurisdiction rules.  Under New York’s long-arm statute, a court may exercise personal jurisdiction over a non-domiciliary that “transacts any business” in New York in person or through an agent.  “Transacting business” in the state means engaging in a “sustained and substantial transaction of business.”  The plaintiff’s claim also must have an “articulable nexus” or “substantial relationship” with the defendant’s transaction of business in New York.

The court then recounted four factors that courts may consider to determine if personal jurisdiction exists.

(i) whether the defendant has an on-going contractual relationship with a New York corporation; (ii) whether the contract was negotiated or executed in New York and whether, after executing a contract with a New York business, the defendant has visited New York for the purpose of meeting with parties to the contract regarding the relationship; (iii) what the choice-of-law clause is in any such contract; and (iv) whether the contract requires [parties to the contract] to send notices and payments into the forum state or subjects them to supervision by the corporation in the forum state.  Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 22 (2d Cir. 2004).

Applying the Sunward Electronics factors, the court held that only the third factor – the New York choice of law provision – supported personal jurisdiction.  The first factor weighed against it because Coinme was not a New York corporation and the consultancy was not “on-going.” “A single short-term contract is insufficient to constitute an ongoing contractual relationship,” the court held.  The second factor also weighed against personal jurisdiction.  Coinme did not negotiate the contract in New York, and ICO Services did not allege that it negotiated the contract there.  The fourth factor was neutral.  The contract provided for notice to ICO Services in New York, but was silent on where payments were to be made and did not provide for supervision in New York.  The New York choice-of-law provision was significant, but insufficient to support personal jurisdiction on its own, the court held. 

That ICO Services carried out its work under the contract in New York and Coinme communicated with it there by telephone and e-mail was irrelevant, the court held.  The focus of New York’s long-arm statute is the New York activity of the out-of-state defendant, not that of the plaintiff.  The court also rejected the argument that Coinme used interstate communications to connect with New York customers or investors and to otherwise conduct business in New York.  Even if those allegations were true, ICO Services failed to allege facts connecting those activities to the contract dispute.  Absent that nexus or substantial relationship, the New York-based activities were insufficient to support personal jurisdiction.

New York is an attractive forum for litigating international business disputes owing to its well-established commercial law and the transparency of the federal and New York state legal system.  But it takes more than a New York choice of law provision to walk into court there.  Coinme serves as a useful reminder to participants in the FinTech ecosystem of the personal jurisdiction rules that can impact where their disputes are heard.

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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.