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CAPITOL RECORDS, INC. v. OPTICAL RECORDING CORP.

October 28, 1992

CAPITOL RECORDS, INC., Plaintiff,
v.
OPTICAL RECORDING CORPORATION, Defendant.


GOETTEL


The opinion of the court was delivered by: GERALD L. GOETTEL

On July 2, 1992, Plaintiff, Capitol Records, Inc. (Capitol), filed this suit seeking a declaratory judgment that U.S. Patents 3,795,902 and 3,891,794, which are owned by Defendant, Optical Recording Corporation (ORC), are invalid, unenforceable, and uninfringed upon.

 ORC is engaged in the research and development of optical data storage technology (compact disks and compact disk equipment) and the license of its related patents. ORC's revenues are substantially derived from licenses of U.S. and foreign patents relating to its compact disk technology, including the patents in this suit. ORC's principal place of business is in Toronto, Canada. ORC has no offices, employees, telephone listings, bank accounts, or assets of any kind in New York. ORC does not manufacture or distribute any products in New York.

 ORC's contacts with New York can be summarized as follows. In 1987, ORC held a meeting with Sony Corporation in New York, and attended a trade show at the New York Hilton to demonstrate prototypes of equipment made pursuant to its patents. In June 1990, ORC held a meeting in New York with Laser Magnetic Storage International Company (LMSI) to negotiate a license of the patents in suit. On September 25, 1991, G. John Adamson, president of ORC, held a meeting with Guy Marriott, Senior Vice President and General Counsel of Capitol-EMI Music, Inc., the parent company of Capitol, at Capitol's offices in New York. In June and July of 1992, ORC held three negotiation meetings with Time Warner, Inc. (Time Warner) in New York. The purpose of each of these meetings was to reach a settlement for past infringement and a license for future sales of compact disks and/or compact disk players in the United States.

 ORC has also brought two patent infringement actions in New York. In December 1990, ORC filed a patent infringement suit against Denon Digital Industries, Inc. (Denon), a subsidiary of Nippon Columbia Co. Ltd. (Nippon), in the Eastern District of New York. At some other point, ORC also instituted a patent infringement suit against Nippon in the Eastern District of New York.

 ORC's efforts to legally enforce its patents have not been confined to New York. ORC recently brought a patent infringement suit against Time Warner and WEA Manufacturing Inc. in the District of Delaware. On June 23, 1992, judgment was entered declaring ORC's patents valid and willfully infringed by Time Warner. On July 2, 1992, Mr. Adamson informed the Managing Director of Thorn EMI Patents Ltd., parent company of Capitol in the United Kingdom, of the outcome of the Time Warner suit by facsimile. That same day, Capitol filed this declaratory judgment action against ORC. Twenty days later, ORC brought an action against Capitol and Capitol-EMI for infringement of the patents in suit in the United States District Court for the District of Delaware. This Delaware action was assigned to United States District Judge Joseph J. Farnan who previously presided over the Time-Warner trial. On October 16, 1992, Judge Farnan denied a motion by Capitol to dismiss in deference to the New York action, to stay pending a determination of the New York action, or to transfer the Delaware action for consolidation with the New York action.

 Before the court is ORC's motion to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure or, in the alternative, to stay Capitol's declaratory judgment action. Under Rule 4(e), Fed. R. Civ. P., a non-resident corporation is subject to personal jurisdiction pursuant to state law. Fed. R. Civ. P. 4. Here, Capitol asserts personal jurisdiction under sections 301 and 302 of the N.Y. Civ. Prac. Law. Capitol need only make a prima facie showing of personal jurisdiction since ORC has challenged jurisdiction by a Rule 12(b)(2) motion. Ball v. Metallurgie Hoboken-Overpelt S.A., 902 F.2d 194, 197 (2d Cir. 1990), cert. denied, 498 U.S. 854, 111 S. Ct. 150, 112 L. Ed. 2d 116 (1990).

 Under section 301, a non-domiciliary is subject to personal jurisdiction in New York over any cause of action if it is engaged in a "continuous and systematic course of 'doing business' [in New York] as to warrant a finding of its 'presence'" in the jurisdiction. N.Y. Civ. Prac. L. & R. 301 (McKinney 1990); Beacon Enterprises v. Menzies, 715 F.2d 757, 762 (2d Cir. 1983). A non-domiciliary must be doing business in New York more than occasionally or casually; it must be doing business with a "fair measure of permanence and continuity." Laufer v. Ostrow, 55 N.Y.2d 305, 449 N.Y.S.2d 456, 458, 434 N.E.2d 692 (1982). This determination involves a case-specific assessment, requiring a careful consideration of all the facts and circumstances without relying too heavily on any one factor. Katz Agency, Inc. v. Evening News Ass'n, 514 F. Supp. 423, 427 (S.D.N.Y. 1981), aff'd 705 F.2d 20 (2d Cir. 1983).

 Capitol contends that ORC is engaged in a continuous and systematic course of doing business in New York under section 301. Capitol concedes that ORC does not maintain the traditional indicia of doing business, but argues that the cumulative effect of: ORC's attendance at a trade show in New York in 1987; the presence of ORC's primary patent counsel, Davis Hoxie Faithfull & Hapgood, in New York; six negotiation meetings to discuss settlement offers and future licenses in New York from 1987 through 1992; a letter to Capitol in New York relating to the settlement offer; a phone call to New York relating to future licenses; and the two patent infringement suits brought by ORC in the Eastern District of New York, are sufficient to establish that ORC is doing business in New York.

 To establish personal jurisdiction, the business conducted in New York must not be peripheral to the main business of the corporation, but must be a substantial part of that corporation's business. Potter's Photographic Applications Co. v. Ealing, 292 F. Supp. 92, 99 (E.D.N.Y. 1968). ORC does not maintain the traditional indicia of doing business because it does not manufacture or sell tangible goods. However, a substantial part of its business is the protection and licensing of its patents. ORC is engaged in the research and development of compact disks and compact disk equipment; thus, protecting the fruits of its research and development of its patents, is essential to the operation of ORC. Negotiation of future patent licenses is of significant importance to ORC because of the considerable economic benefit ORC stands to derive from such licenses.

 In this unusual situation, where a substantial part of ORC's business is protecting its patents, ORC's contacts with New York to protect such patents are sufficient to constitute "doing business" in the state under section 301. Because we have found personal jurisdiction under section 301, we do not need to review jurisdiction under section 302, the "transacting of business" standard. Although this case presents a novel determination of jurisdiction, the facts persuade the court that ORC is present in New York with such permanence and continuity as to justify the assertion of personal jurisdiction over it. Thus, Capitol's motion to dismiss for lack of personal jurisdiction is denied.

 ORC argues that if we find personal jurisdiction, this cause of action should be stayed or dismissed pending disposition of the Delaware action. The general rule in the Second Circuit is that "as a principle of sound judicial administration, the first suit should have priority, 'absent the showing of balance of convenience in favor of the second action.'" Remington Products Corp. v. American Aerovap, Inc., 192 F.2d 872, 873 (2d Cir. 1951). The balance of convenience between competing jurisdictions should be left to the sound discretion of the district court. Joseph Bancroft & Sons Co. v. Spunize Co. of America, 268 F.2d 522 (2d Cir. 1959). When an action in two federal district courts embrace the same issue, "the first court has jurisdiction to enjoin the prosecution of the second action." Meeropol v. Nizer, 505 F.2d 232, 235 (2d Cir. 1974). Here, both the New York action and the Delaware action "embrace" the same issues. Therefore, it appears that the "first-filed rule" could be applied in Capitol's favor.

 However, an exception to the first-filed rule applies when "special circumstances" warrant giving priority to the second suit. William S. Gluckin & Co., Inc., v. International Playtex Corp., 407 F.2d 177, 178 (2d Cir. 1969). Special circumstances include when the plaintiff in the first action is solely motivated by forum shopping in the choice of forum for the first suit. Id.; Rayco Mfg. Co. v. Chicopee Mfg. Co., 148 F. Supp. 588 (S.D.N.Y. 1957). Forum shopping occurs when a litigant selects a forum with only a slight ...


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