Chloé v. Queen Bee: Second Circuit Expands Reach of New York Long-Arm Statute in Online Counterfeiting Case
(Article first published in Bright Ideas Newsletter of the IP Section to the New York State Bar Association in Winter 2010 issue)
By Itai Maytal
As e-commerce continues to grow, so have counterfeit markets. The Internet provides counterfeiters the marketing and distribution tools needed to expand their illicit and profitable trade anywhere in the world, without requiring a physical presence to sell their knock-off goods. Because of this virtual, borderless reality, frustrated trademark owners seeking to enforce their rights in court are often faced with jurisdictional challenges from online counterfeiters.
Sometimes these challenges succeed, forcing trademark owners to chase infringers to their home jurisdictions – however remote and costly that might be – in pursuit of uncertain relief. It has often been unclear under what circumstances trademark owners could bring trademark infringement actions against out-of-state online merchants without having those actions dismissed on jurisdictional grounds.
Recently, the Second Circuit, in Chloé v. Queen Bee of Beverly Hills, LLC, provided local trademark owners some clarity on this issue by interpreting expansively the reach of New York courts over out-of-state trademark infringers and their employees. The court held that a single sale and shipment of a plaintiff’s branded good into New York by a defendant, whether the good is infringing or not, combined with the defendant’s use of an interactive website that sold goods carrying the marks of others in the forum, satisfied New York’s long-arm statute, C.P.L.R §302(a)(1) and the Due Process Clause of the U.S. Constitution. In arriving at this conclusion, the court noted the need to “update [the Court’s] jurisprudence on personal jurisdiction in the age of internet commerce.”
This article examines the Second Circuit’s “update” and offers insights into its potential impact on trademark owners.
II. Factual and Procedural Background
Chloé SA (“Chloé”) is a French fashion house that sells and markets, among other things, luxury women’s handbags and purses bearing the CHLOÈ word mark (Registration #3,291,996). The company’s exclusive licensee in the United States is Chloé NA, a division of a Delaware corporation operating out of New York.
In November 2005, Chloé NA became aware of an online retail discount designer named Queen Bee of Beverly Hills LLC (“Queen Bee”) during a lawsuit it had brought against a counterfeit handbag vendor that named Queen Bee as its supplier. Queen Bee is an Alabama corporation that had show rooms in Beverly Hills, California and Huntsville, Alabama. It did not maintain any offices or employees in New York. On its two identical websites, Queen Bee described itself as a “leading wholesale and retail designer boutique, offering the latest trends in authentic European designer accessories.” It advertised “trunk shows” across the country and offered to sell and ship handbags purportedly manufactured by various name brand designers – including Chloé – anywhere in the continental United States and to select locations worldwide.
Chloé investigated Queen Bee and learned that the company was selling unauthorized copies of Chloé handbags for $1,200, plus shipping, which was approximately $400 less than what the handbags sold for in authorized Chloé boutiques. In response, Chloé’s attorneys in New York orchestrated what is commonly described in the trademark community as a “trap sale.” A paralegal with Chloé’s firm named Rosa Santana was directed to place an online order for a Chloé “Paddington” bag from the Queen Bee site and have it delivered to her Bronx, New York address. The bag, which a Chloé investigator concluded was counterfeit, arrived with a FedEx shipping label bearing the Beverly Hills, California address of Simone Ubaldelli, a principal of Queen Bee. During the ensuing lawsuit, Ubaldelli did not dispute that the bag purchased by Chloé’s agent was counterfeit and was not manufactured, produced, or in any manner authorized by Chloé.
In April 2006, Chloé sued Queen Bee and five other defendants, including Ubaldelli, a California resident, in the Southern District of New York for trademark infringement under sections 32(1) and 43(a) of the Lanham Act and the New York General Business Law §349 as well as for common-law trademark infringement and unfair competition. The case proceeded only against Ubaldelli after the other defendants defaulted, settled, or went into bankruptcy. The suit was stayed against Queen Bee, which filed for bankruptcy.
In the course of jurisdictional discovery, questions arose as to whether New York courts could properly exercise personal jurisdiction over Ubaldelli and Queen Bee. While Chloé learned that Queen Bee had shipped more than seventy Chloé handbags in the United States, the only one shipped to New York appeared to be the one purchased by Chloé’s agent, Ms. Santana, the paralegal with Chloé’s firm. At the same time, Chloé discovered that Queen Bee had shipped at least fifty-two non-Chloé branded items to New York customers. It also was revealed that Queen Bee’s principal, Ubaldelli, had supervised and directed those sales.
At the close of discovery, Ubaldelli moved to dismiss for lack of personal jurisdiction, while Chloé cross-moved for partial summary judgment on liability. Ubalelli argued that the sale and delivery of a single admittedly counterfeit bag to the plaintiff’s investigator could not support jurisdiction in New York because it was a “manufactured contact” or a purchase not made by an actual customer but rather by an agent of the plaintiff. Ubaldelli also asserted that the sale was only a one-time Internet based sale from a company with no physical presence in the state. In response, Chloé argued that personal jurisdiction was proper based on the single purchase by its counsel’s paralegal and because the “offers of sale” of counterfeit Chloé bags on the Queen Bee website were accessible to New York residents.
On August 1, 2008, the District Court granted Ubadelli’s motion to dismiss, concluding that the court did not have personal jurisdiction over him based on a “single internet-based sale of a counterfeit retail product.”  The District Court dismissed as moot Chloé’s motion for partial summary judgment.
The district court found that the trademark infringement claim did not arise from an infringing sale where there could be a likelihood of confusion at the “point of sale” or “postsale.” The sale of a counterfeit Chloé bag to an agent of the plaintiff in New York was “manufactured” and thus could not by definition generate any confusion for the purchaser, since Ms. Santana knew she was buying a knock-off bag. Accordingly, the court held that it would violate due process to “permit a plaintiff to manufacture personal jurisdiction by purchasing an allegedly infringing product in a plaintiff’s forum of choice.” The court discounted the sale and shipment by Queen Bee of non-Chloé goods into New York because, while they indicated purposeful availment of the New York forum “for some business activity,” they did not sufficiently arise out of or relate to the sale of Chloé goods by Ubaldelli, which was the only infringing activity alleged by Chloé.
The district court also declined to exercise personal jurisdiction over Ubaldelli based on Queen Bee’s “commercial interactive website,” even though it permitted users to view allegedly infringing products and place orders for those products. The district court evaluated the website according to the “sliding scale of interactivity,” which generally holds that a wholly “passive” website is insufficient to support personal jurisdiction over its owner, but an “interactive website” in combination with other relevant forum contacts may be sufficient for jurisdiction. Under this approach, the District Court found that while the Queen Bee site did offer Chloé handbags, it could not support jurisdiction because it was not aimed or directed at New York users, and no New York residents had purchased counterfeit merchandise from Queen Bee, with the exception of the Plaintiff’s agent, Ms. Santana.
On June 29, 2009, the district court supplemented its rationale for granting Ubaldelli’s motion to dismiss in response to plaintiffs’ motion to certify the dismissal as final. Based on its review of various Supreme Court precedents, the court found that the single Internet purchase by Chloé’s agent from the Queen Bee site did not manifest the “a continuing relationship,, “prior negotiations,” or “contemplated future consequences” sufficient to support personal jurisdiction. The court also noted that it would offend traditional notions of fair play and substantial justice to subject Ubaldelli, a California resident, to jurisdiction in New York, when there was “no obvious reason why New York has a greater interest in hearing trademark actions than other federal and state courts.” Plaintiffs appealed.
III. Second Circuit Ruling
The Second Circuit reversed, holding that Ubaldelli’s single act of shipping a Chloé-branded bag into New York, combined with the sale of at least fifty non-Chloé items to New Yorkers through the Queen Bee interactive website, gave rise to personal jurisdiction under the state’s long arm statute, C.P.L.R § 302(a)(1), and the Due Process Clause. The court based its conclusion on Ubaldelli’s connections to the act in question and to the business activities of Queen Bee in New York. It then discussed the application of New York’s long-arm statute and the Due Process Clause.
A. Ubadelli’s Connections to Chloé’s Trademark Infringement Claim
Relying on Ubaldelli’s role at Queen Bee as the primary purchaser of infringing handbags and the fact that his Beverly Hills address was on the FedEx package containing the Chloé-branded bag shipped to New York, the Second Circuit first determined that “the evidence supported the conclusion that Ubaldelli either physically shipped or was responsible for the shipment of the counterfeit handbag from California to New York.” The court also imputed to Ubaldelli Queen Bee’s other business activities in New York – namely the shipment of fifty-two non-infringing goods into New York and an interactive website that permitted the sale of Chloé-branded goods to New York consumers – based on the fact that Ubaldelli shared profits from Queen Bee sales, had joint access to its bank account, used its revenue to pay his rent, and shared in the decision-making and execution of Queen Bee sales.
Having established the defendant’s connection to the allegedly infringing activity, the court proceeded to the two-step inquiry for finding personal jurisdiction over a non-domiciliary in a case involving a federal question. In its first step, a court must determine whether the laws of the forum state, here New York’s long arm statute, CPLR § 302, confers jurisdiction to reach the defendant. If so, the court then considers whether the exercise of jurisdiction is consistent with the Due Process Clause of the Fourteenth Amendment. This requires determining whether the defendant had “minimum contacts” in the forum state to justify the court’s exercise of personal jurisdiction, whether specific or general. It also requires asking whether the exercise of jurisdiction is reasonable in that it does not “offend traditional notions of fair play and substantial justice.” 
The court concluded that Ubaldelli had transacted business within the state under section 302(a)(1) of New York’s long arm statute. The section states that “a court may exercise personal jurisdiction over any non-domiciliary…who in person or through an agent…transacts any business within the state or contracts anywhere to supply goods or services in the state.” The court noted that the New York law is a “single act statute” and thus proof of one transaction in New York is sufficient to invoke jurisdiction even when the defendant never enters New York. However, because Chloé operated a “highly interactive website” offering counterfeit Chloé bags and sold and shipped a non-trivial number of branded goods into the state, the court declined to resolve whether a single act of shipping a counterfeit Chloé bag was by itself sufficient to support personal jurisdiction. The Second Circuit wrote that “[v]iewed in their totality, these contacts sufficiently demonstrate [defendant’s] availment of the benefits of transacting business in New York” under the New York long-arm statute.”
In addition to finding jurisdiction was authorized under New York’s long arm statute, the Second Circuit also found that personal jurisdiction over Ubaldelli comported with the due process requirements. In its “minimum contacts” analysis, the court found that Ubaldelli had “purposefully availed himself of the privileges of conducting activities within the forum state . . . by [Queen Bee’s] develop[ing] and serv[ing] a market for its products in [New York].”
Unlike the district court, the Second Circuit refused to limit the relevant minimum contacts between Queen Bee and New York to the “narrow subset of one sale that involved a Chloé handbag shipped to Plaintiffs’ law firm.” Instead, it included in its analysis the more than fifty additional sales of non-Chloé designer handbags in New York. The court held that the district court’s characterization of these sales as constituting only “some business activity” “too narrowly construe[d] the nexus requirement which merely requires the cause of action to relate to defendant’s minimum contacts with the forum.” Further, that Ubaldelli did not maintain a “continuous relationship” with any particular New York consumer – a deficit of significance to the district court – was irrelevant. While such a relationship may be a sufficient condition for asserting jurisdiction, the court found, it is not a necessary one.
Finally, the court of appealst rejected the district court’s reasonableness analysis after applying the five-factor test set forth in Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County. The Asahi Metal test requires courts to consider (i1) the burden on the defendant, (2) the interests of the forum state, and (3) the plaintiff’s interest in obtaining relief. It also must consider (4) the interstate judicial system’s interest in obtaining the most efficient resolution of controversies and (5) the shared interest of the several states in furthering fundamental substantive social policies.
The court concluded that any burden on Ubaldelli in litigating cross-country from California to New York would be equally burdensome for the plaintiffs and was, in any event, reduced by “modern communication and transportation.” It also found that New York had a particular interest in providing redress for its residents, notwithstanding the fact that trademark claims can be brought in any forum. Further, Chloé had a particular interest in obtaining relief in New York given that its headquarters and some of its witnesses were there. Thus, the court concluded that “Ubadelli’s generalized complaints of inconvenience arising from having to defend himself from suit in New York do not add up to a compelling case that the presence of some other considerations would render jurisdiction unreasonable.”
IV. Impact of the Decision
Having won the right to proceed in its action against Ubaldelli, it remains to be seen whether Chloé ultimately will prevail on the merits of its counterfeiting claim. What is clear though, is that the Second Circuit has significantly expanded long-arm jurisdiction, at least in New York, over Internet counterfeiters in such cases. Now, when faced with e-commerce sites hawking counterfeits goods, trademark owners can reliably use investigators to determine the extent of the illicit activity and confirm online sales of knock-offs without necessarily jeopardizing the jurisdictional basis of actions they may bring in New York. They may now be able to obtain specific personal jurisdiction over an out-of-state online defendant if they can show, in addition to a single act of shipping a counterfeit good, that the counterfeiter site engaged in non-trivial online business sales in the state, infringing or otherwise, of branded goods.
Exercising jurisdiction over such Internet merchants may not necessarily be unfair, given the control they generally have in limiting their online presence. As the International Trademark Association argued in an amicus curiae brief it filed in support of Chloé’s appeal, if an Internet merchant chooses to avoid a jurisdiction, it can do so by providing a passive, informational site or by blocking sales to that jurisdiction. Conversely, the merchant can elect to service a national market, to advertise, sell, and ship its goods throughout the country. In that scenario,the merchant should pay a jurisdictional price; otherwise, its conduct would go legally unchecked in the markets in which it operates.
Still, the Second Circuit’s interpretation of the “nexus requirement” for jurisdiction may have exposed more online merchants to claims in the New York forum than is necessary to combat counterfeiting. Without addressing how so-called “manufactured contacts” should be treated for purposes of trademark infringement claims, the court stated that “an employee’s single act of shipping a bag – any bag, not necessarily a counterfeit one – into the State of New York, combined with the employer’s other business activity involving the State of New York, gives rise to an inference that the defendant ‘purposefully avail[ed] himself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its law.” The strange implication of this statement seems to be that a trademark infringement claim can arise from the online purchase in the forum of a good later found to be non-infringing from a site that otherwise sells legitimate goods with different marks. Supporters of the Chloé decision may argue that this concern confuses the jurisdictional question with the merits of the claim. On the other hand, detractors may argue the decision will needlessly increase the cost of doing business for legitimate businesses as they are haled into forums they are only obliquely connected to. Ultimately, future decisions will determine the seriousness of these concerns and whether the law should change in response to them.
Notwithstanding its new expansive reading of the New York long-arm statute, the Second Circuit did not revamp the law to the extent INTA and the plaintiffs would have preferred. The court declined to decide whether an out-of-state defendant’s single act of selling and shipping one infringing good into New York is sufficient to support personal jurisdiction. However, in keeping with a number of district court decisions, the Second Circuit acknowledged in dicta the possibility that such facts could satisfy the New York long-arm statute. In so doing, the Second Circuit seems to have invited brand owners to test jurisdiction under these facts in future trademark actions. Two New York district courts already have applied the Second Circuit’s dicta – perhaps too loosely – in their personal jurisdiction analyses. In one case, the court allowed the plaintiff to proceed on the basis of only a few online sales made in the forum. Presumably, more New York courts will make similar rulings when pressed by trademark plaintiffs, given the limited sympathy the Second Circuit seems to have with counterfeiters.
The Internet has largely obviated the need for a brick-and-mortar presence in most markets. More entities now do business online and, to the dismay of trademark owners, so do counterfeiters. They sell their illicit wares through auction sites, stand-alone e-commerce sites and email solicitations from virtually anywhere in the world. Recognizing the enforcement problems this creates for trademark owners, the Second Circuit has now secured, at least in New York, greater access for them to the forum’s courts in trademark infringement actions. Future cases may expose the excesses of the Chloé decision as it relates to out-of-state non-infringers haled into New York courts on thin trademark infringement claims and oblique connections to the forum. Until then, trademark owners should take note of the Chloé decision and be further emboldened to pursue their claims against out-of-state counterfeiters and other types of infringers who attempt to avoid liability by operating solely in the virtual marketplace.
 Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010). (“Chloé III”)
 U.S. Patent and Trademark Office, Electronic Word Mark Search = Chloé, at http://www.uspto.gov (last visited October 10, 2010)
 Chloé III, 616 F.3d at 162.
 Chloé v. Queen Bee of Beverly Hills, LLC, 571 F.Supp.2d 518, 521 (S.D.N.Y. 2008)(“Chloé I”)
 Chloé III, 616 F.3d at 162.
 Chloé I, 571 F.Supp.2d at 522.
 Chloé III, 616 F.3d at 162.
 Chloé I, 571 F.Supp.2d at 522.
 Chloé III, 616 F.3d at 163.
 Chloé I, 571 F.Supp.2d at 521.
 Chloé v. Queen Bee of Beverly Hills, LLC, 630 F.Supp.2d 350, 351 (S.D.N.Y. 2009)(“Chloé II”)(Describing the holding of Chloé I).
 Chloé I, 571 F.Supp.2d at 526.
 Chloé I, 571 F.Supp.2d at 523 n.3. (district court noting that “Plaintiffs’ cause of action for infringement of the Chloé trademark does not arise out of or relate to Queen Bee’s sales of Gucci, Prada, Fendi, or other designers’ merchandise.”).
 Id. at 526 (citing Best van Lines, Inc. v. Walker, 490 F.3d 238, 252 (2d Cir. 2007). The “sliding scale” was originally proposed in Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1987).
 Id. at 528 (citing Energy Brands, Inc. v. Spiritual Brands Inc., 07 Civ. 10644(DC), 2008 WL 2747276, at *7-*8 (S.D.N.Y. July 16, 2008)).
 Chloé II, 630 F.Supp.2d at 351.
 Chloé II, 630 F.Supp.2d at 353 (citing Travelers Health Association v. Virginia, 339 U.S. 643 (1950), McGee v. International Life Insurance Co., 455 U.S. 220 (1957), and Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)).
 Chloé III, 616 F.3d at 162.
 Id. at 170. The Second Circuit declined to analyze the jurisdictional question under CPLR § 302(a)(3) even though Queen Bee did not dispute its products were counterfeit and that it advertised its goods on its website, as the court concluded it could find jurisdiction under section 302(a)(1) and because the court recently certified the question of its applicability to the New York Court of Appeals. See id. at 169 n.3 (referring to Penguin Group (USA) Inc. v. American Buddha, 609 F.3d 30 (2d Cir. 2010)). The question before the New York Court of Appeals focused on how the ease of infringement via the Internet should change long-arm jurisdiction analysis.
 Acknowledging the holdings of district court within the circuit, the court of appeals held in dicta that a “single act” of selling counterfeit goods into New York could satisfy the long-arm statute under section 302(a)(1). See, e.g., Baron Phillippe de Rothshild, S.A. v. Paramount Distillers, Inc., 923 F. Supp. 433 (S.D.N.Y. 1996); Mattel, Inc. v. Adventure Apparel, 00-cv-4085, 2001 WL 286827 (S.D.N.Y. Mar. 22, 2001). While it did not apply this rationale here, by making this observation the Second Circuit seems to have encouraged future brand-owner plaintiffs to bring trademark infringement claims under this jurisdictional theory.
 Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County, 480 U.S. 102 (1987).
 Brief of Amicus Curiae International Trademark Association in Support of Vacatur and Remand, 09-3361-cv (2d Cir. Aug. 5, 2010).
 Chloé III, 616 F.3d at 165 n.3.
 See Pearson Education v. Textbooks Discounters, No. 10-CV-324, 2010 WL 3528866, at *2 (S.D.N.Y. Aug. 20, 2010)(finds personal jurisdiction over trademark defendant in part under the Chloé dicta that stated “the sale of even a single item over the internet that is shipped into New York can give rise to personal jurisdiction.”); O’Brien & Gere Engineers, Inc. v. Innis Arden Golf Club, No. 5:10-CV-410, 2010 WL 3526207, at *5 (N.D.N.Y Sept. 3, 2010)(denying jurisdiction while misconstruing Second Circuit holding in Chloé to allow for personal jurisdiction through “an employee’s single act of shipping a handbag to New York”)
 Pearson Education, 2010 WL 3528866, at *2.
Itai Maytal is an IP and media law associate at Miller Korzenik Sommers LLP. He is also a member of the Section’s Trademark Law Committee.