Feeling the Effects of Out-of-State Conduct Won’t Guarantee Personal Jurisdiction Over Nonresident

When analyzing personal jurisdiction, the Fourth Circuit (which includes both Virginia and South Carolina) had held that it is proper to consider the location where the effects of the alleged wrongdoing are felt. The so-called “effects test” is applied narrowly, however, and cannot be used to supplant the minimum contacts analysis required by the United States Constitution. The United States District Court for the District of South Carolina recently had occasion to apply the test in Power Beverages v. Side Pocket Foods.

Power Beverages, a South Carolina company, contracted with Side Pocket, an Oregon distillery, to manufacture and sell Ying Yang vodka and ship the product where directed. Power Beverages wired money to Side Pocket in Oregon to pay for materials, and Side Pocket delivered the vodka to a South Carolina licensed distributor.

A dispute arose between the founders of Power Beverages, and one of the founders demanded that Power Beverages cease operations. Side Pocket informed Power Beverages that the contract between them would terminate in thirty days, and it sent Power Beverages a final invoice which Power Beverages contested. Upon direction from one of the founders, Side Pocket released the remaining inventory to a distributor in California. Power Beverages then sued Side Pocket in South Carolina for breach of contract, fraud, conversion, unfair trade practices and conspiracy. Side Pocket argued that the South Carolina court lacked personal jurisdiction over it.

A federal court may exercise personal jurisdiction over a non-resident corporation if the state’s long-arm statute authorizes jurisdiction and the exercise of jurisdiction complies with the due process clause of the Fourteenth Amendment. The South YingYang.jpgCarolina long arm statute authorizes jurisdiction to the same extent as does the due process clause which requires the party to have sufficient minimum contacts with the forum state such that the exercise of jurisdiction does not offend traditional notions of fair play and substantial justice. Consulting Engineers Corp. v. Geometric Ltd., 561 F.3d 273, 277 (4th Cir. 2009).

A court can exercise either general or specific jurisdiction over a non-resident corporation depending on the extent of the corporation’s contacts with the forum state. Where contacts are continuous and systematic, a court may exercise jurisdiction over the party in matters unrelated to the party’s contact with the state. Where contacts are not continuous and systematic, a court may still exercise jurisdiction over matters arising out of the party’s contact with the state. To decide whether specific jurisdiction is appropriate, the court considers (1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiff’s claims arise out of those activities; and (3) whether the exercise of jurisdiction is constitutionally reasonable.

Here, Power Beverages insisted that the court had jurisdiction over Side Pocket because the contract between the parties required Side Pocket to supply goods in South Carolina and the goods would be used or consumed in South Carolina. Power Beverages also alleged that Side Pocket maintained an inventory in South Carolina and appointed a South Carolina distributor as its agent in South Carolina in order to penetrate the South Carolina market. Power Beverages asserted that Side Pocket shipped its products to South Carolina where they were received and sold.

Side Pocket argued that it is not registered to do business in South Carolina, has never owned property in South Carolina nor maintained an office in South Carolina, has not paid taxes in South Carolina, appointed an agent for service of process in South Carolina nor entered into a contract to be performed in South Carolina. Side Pocket denied hiring a South Carolina distributor and instead contends that it agreed to send some of its own products along with the Ying Yang vodka to the South Carolina distributor who paid for the products and their shipping. Side Pocket did not register brands in South Carolina.

The court found that the factors normally associated with physical presence in the forum state were absent here: an official agent, employees, a business license, incorporation, and corporate facilities. Even if Side Pocket had registered its brand in South Carolina, the court found that would be insufficient to satisfy minimum contacts. The court held that the facts did not support a finding that Side Pocket had continuous and systematic contacts with South Carolina to support general jurisdiction. As to specific jurisdiction, a contract with a South Carolina party alone cannot establish sufficient minimum contacts. Rather, the court must consider who initiated the agreement, where negotiations occurred, the extent of communication, where the agreement was executed and where the agreement was to be performed.

Here, the contract was negotiated, executed and primarily performed in Oregon, and the alleged breach occurred in Oregon. All of the alleged omissions and wrongs occurred in Oregon. Although the contract contained a South Carolina choice of law provision, the court noted that a choice of law provision is not dispositive and is rather only one factor to consider in evaluating personal jurisdiction.

Power Beverages also argued that the court could exercise personal jurisdiction over Side Pocket under the effects test. The effects test is three pronged and applied where: (1) the defendant committed an intentional tort; (2) the plaintiff felt the brunt of the harm in a forum that can be said to be the focal point of the harm; and (3) the defendant expressly aimed tortious conduct at the forum in a manner that the forum can be said to be the focal point of it. The court held that because the vodka and funds were allegedly converted in Oregon, the conversion claim did not meet the second prong. Additionally, the court found that South Carolina was not the focal point of the alleged tortious activity as Side Pocket did not expressly aim its allegedly tortious actions at South Carolina.

Although the court found that it did not have personal jurisdiction over Side Pocket, rather than dismissing the case, it transferred the case to the District of Oregon.

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