Personal Jurisdiction in Arizona Securities Cases
Personal Jurisdiction in Arizona Securities Cases
When can an Arizona court exercise specific personal jurisdiction over a non-resident defendant in a securities case?
Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
I. Arizona Courts May Exercise Personal Jurisdiction Over A Non-Resident Defendant to the Maximum Extent Permitted by the U.S. Constitution.
Under Ariz. R. Civ. P. 4.2(a), an Arizona court may exercise personal jurisdiction over a non-resident defendant to the maximum extent permitted by the U.S. Constitution. Arizona’s long-arm statute has a broad remedial purpose and is liberally construed to confer upon Arizona residents the maximum privileges permitted by the federal constitution. Meyers v. Hamilton Corp., 143 Ariz. 249, 252, 693 P.2d 904, 907 (1984).
For an Arizona court to exercise personal jurisdiction over a non-resident defendant, the plaintiff must show that the defendant had minimum contacts with Arizona such that maintaining the suit in Arizona does not offend traditional notions of fair play and substantial justice. Id.
at 252, 693 P.2d at 907. “The notion of ‘fair play and substantial justice’ is a flexible one, requiring courts to look at the fact situation of each case to determine whether there are sufficient, purposeful ‘minimum contacts’ with the forum.” O’Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P.A. v. Bonus Utah, Inc., 156 Ariz. 171, 173, 750 P.2d 1374, 1376 (Ct. App. 1988) (emphasis added). See also Williams v. Lakeview Co.,
199 Ariz. 1, 3-4, 13 P.3d 280, 282-83 (2000) (“We cannot decide the issue of personal jurisdiction by applying any mechanical test or ‘talismanic jurisdictional formulas’; the facts of each case must always be weighed in determining whether personal jurisdiction would comport with ‘fair play and substantial justice.’”) (quoting Burger King Corp. v. Rudzewicz,
471 U.S. 462, 485-86 (1985)
In deciding if minimum contacts exist, “it is not the number of contacts involved but the importance of the particular contacts. Quality, not the quantity of defendant’s activities, is what is persuasive.” Meyers, 143 Ariz. at 253, 693 P.2d at 908. Therefore, a single act is sufficient to establish a basis for personal jurisdiction. O'Connor, 156 Ariz. at 173, 750 P.2d at 1376. See, e.g., Id.
,
156 Ariz. at 173, 750 P.2d at 1376 (defendant’s hiring of Arizona law firm to file answer on its behalf in pending lawsuit created minimum contact necessary to establish personal jurisdiction over him); Holmes Tuttle Broadway Ford, Inc. v. Concrete Pumping, Inc., 131 Ariz. 232, 235, 639 P.2d 1057, 1060 (Ct. App. 1981) (defendant’s single act of ordering a new engine from plaintiff without intending to pay for it was sufficient to satisfy minimum contacts test).
“[T]he plaintiff has the burden of establishing the existence of personal jurisdiction and cannot ‘simply rest on the bare allegations of the complaint, but rather [is obliged] to come forward with facts, by affidavit or otherwise, supporting personal jurisdiction. ... Once the plaintiff makes a prima facie showing of jurisdiction, ‘the burden is on the defendant to rebut that argument.’” MacPherson v. Taglione, 158 Ariz. 309, 311-12, 762 P.2d 596, 598-99 (Ct. App. 1988). A prima facie showing means evidence sufficient to avoid a directed verdict. Planning Group of Scottsdale, L.L.C. v. Lake Mathews Mineral Props., Ltd., 224 Ariz. 306, 311, 230 P.3d 365, 370 (Ct. App. 2010).
If the jurisdictional facts are in conflict, then the court must view and resolve those facts in the light most favorable to the plaintiff. MacPherson, 158 Ariz. at 312, 762 P.2d at 599. Where the determination of the jurisdictional issue involves disputed factual questions that are intertwined with the merits of the case, and would therefore necessarily determine the merits of the case, the jurisdictional issue must be left for trial rather than determined on a motion to dismiss. Bonner v. Minico, Inc.,
159 Ariz. 246, 253-54, 766 P.2d 598, 605-06 (1988).
In Arizona, there are two types of personal jurisdiction: specific jurisdiction and general jurisdiction.[1] Williams, 199 Ariz. at 3, 13 P.3d at 282. “Under either specific or general jurisdiction, ‘the constitutional touchstone remains whether the defendant purposefully established ‘minimum contacts’ in the forum State.” Id.
at 3, 13 P.2d at 282. This article specifically analyzes specific personal jurisdiction in the context of securities cases.
II. When an Arizona Court May Exercise Specific Personal Jurisdiction Over a Non-Resident Defendant.
An Arizona court may exercise specific personal jurisdiction over a non-resident defendant if: (1) the defendant purposefully avails himself of the privilege of conducting business in Arizona or purposefully directs his activities toward Arizona; (2) the claim arises out of or relates to the defendant’s contact with Arizona; and (3) the exercise of jurisdiction is reasonable. Id.
at 3, 13 P.3d at 282. “Although specific jurisdiction may arise without the defendant ever setting foot in the forum state, and may arise incident to a single act directed to the forum, it does not arise from the plaintiff’s or a third party’s unilateral activity or from the non-resident defendant’s mere foreseeability that a claim may arise.” Id.
at 3, 13 P.3d at 282 (citing World-Wide Volkswagen v. Woodson,
444 U.S. 286, 295-97 (1980)).
1. When a Non-Resident Defendant’s Contacts Constitute Purposeful Conduct.
Historically, courts have analyzed the first element of specific jurisdiction under a purposeful direction test for tort claims and purposeful availment test for contract claims. Planning Group of Scottsdale, LLC v. Lake Mathews Mineral Props., Ltd.,
226 Ariz. 262, 266-67, ¶ 18, 246 P.3d 343, 347-48 (2011). For tort claims, the court asked whether the defendant purposefully directed his activities or consummated some transaction with the forum or resident thereof. Id.
at 267, ¶ 18, 246 P.3d at 348. For contract claims, the court asked whether the defendant performed some act by which he purposefully availed himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws. Id.
at 267, ¶ 18, 246 P.3d at 348.
Finding that analysis “problematic,” particularly when both tort claims and contract claims exist in one case, courts now “embody a holistic approach” and ask: “Considering all of the contacts between the defendants and the forum state, did those defendants engage in purposeful conduct for which they would reasonably expect to be haled into that state’s courts with respect to that conduct?” Id.
at 267-68, ¶¶ 22 & 25, 246 P.3d at 348-49. “[P]ersonal jurisdiction is not a zero sum game; a defendant may have the requisite minimum contacts allowing the exercise of personal jurisdiction by the courts of more than one state with respect to a particular claim. The anlaysis not concluded simply because contacts with one state predominate over those with another. Id.
¶ 27.
Also, jurisdictional contacts must be analyzed in totality, not isolation. Id.
¶ 29. For example, telephone calls, e-mails, letters or faxes, particularly those initiated by the plaintiff, may alone be insufficient. See,
e.g.,
Taylor v. Fireman’s Fund Ins. Co. of Can., 161 Ariz. 432, 436, 778 P.2d 1328, 1332 (Ct. App. 1989);
G.T. Helicopters, Inc. v. Helicopters, Ltd.,
135 Ariz. 380, 383-84, 661 P.2d 230, 233-34 (Ct. App. 1983);
Coast to Coast Mktg. Co., Inc. v. G & S Metal Prods. Co., Inc.,
130 Ariz. 506, 508, 637 P.2d 308, 310 (Ct. App. 1981). However, they must be analyzed in connection with any other contacts with the forum state. See, e.g., Brainerd v. Governors of Univ of Alta.,
873 F.2d 1257, 1259 (9th Cir. 1989) (non-resident defendant’s two telephone calls and responsive letter directed to Arizona about alleged defamatory statements constituted purposeful availment ); EDIAS Software Int’l, LLC v. BASIS Int’l Ltd.,
947 F. Supp. 413, 421 (D. Ariz. 1996) (non-resident defendant’s many phone, fax and e-mail communications to Arizona, among other contacts, constituted purposeful availment).
In determining whether a non-resident defendant in a securities case engaged in purposeful conduct in the forum state, relevant contacts to consider are the solicitations, negotiations, course of dealings, contracts (discussions, drafting, execution and performance thereof), communications and payments among the parties.
For example, the Arizona Supreme Court found purposeful direction in a case for securities fraud where the subject representations, which played an important role in the investment decisions, were made during communications by the defendants to the plaintiff and its representative in Arizona, the defendants directed the delivery of a due diligence report to the plaintiff in Arizona and the defendants repeatedly contacted plaintiff’s representative in Arizona. See Planning Group,
226 Ariz. at 268, ¶¶ 30-31, 246 P.3d at 350-51. Accord Rollin v. William V. Frankel & Co., Inc.,
196 Ariz. 350, 355 n.3, 996 P.2d 1254, 1259 n.3 (Ct. App. 2000) (recognizing case in which “nonresident’s transmission of fraudulent misrepresentations to a Connecticut resident by telephone and electronic mail for the purpose of inducing him to buy and hold securities renders him subject to suit in Connecticut”) (citing Cody v. Ward,
954 F. Supp. 43, 44 (D. Conn. 1997)). However, the court noted “it is not enough that a defendant know that he is dealing with an Arizona resident then located in another state; the requisite activity must instead be purposefully directed at the forum.” See Planning Group, 226 Ariz. at 271, ¶ 41, 246 P.3d at 352
The Supeme Court also found purposeful availment on the contract claims because the defendants actively sought out to make a deal with the Arizona plaintiffs, who ultimately loaned money to the defendants with the expectation of repayment to be made in Arizona. See Id.
at 269-70, ¶¶ 33-34, 246 P.3d at 351. See also MacPherson,
158 Ariz. at 312, 762 P.2d at 599 (non-resident defendant solicited plaintiff in Arizona to purchase rare coins and delivered coins to plaintiff in Arizona); Rollins v. Vidmar,
147 Ariz. 494, 496-97, 711 P.2d 633, 635-36 (Ct. App. 1985) (non-resident defendant solicited money from plaintiff in Arizona, plaintiff withdrew money from Arizona bank account, and plaintiff received several loan repayments in Arizona).
In short, in a securities case, a non-resident defendant may engage in purposeful conduct toward Arizona based on the following: (1) plaintiff is solicited and induced to enter into a contract in Arizona based upon representations and/or documents received in Arizona; (2) the contract is negotiated, drafted, executed and/or performed in Arizona; and (3) plaintiff’s payment is made from Arizona and/or repayment or return is expected in Arizona. See, e.g., Davis v. Metro Prod., Inc., 885 F.2d 515 (9th Cir. 1989); Sullivan v. Metro Prod., Inc., 150 Ariz. 573, 724 P.2d 1242 (Ct. App. 1986).
2. Claims Arise Out of and Relate to Non-Resident Defendants’ Contacts.
The second requirement for establishing specific personal jurisdiction is that a causal nexus must exist between a plaintiff’s causes of action and a defendant’s activities in the forum state. Williams, 199 Ariz. at 4, 13 P.3d at 283. In determining whether a plaintiff’s claim arises out of or relates to a defendant’s contacts with the forum state, the focus is on the relationship between the defendant, the forum and the litigation. Id.
at 4, 13 P.3d at 283. This causal nexus test “ensures that forums will not exercise jurisdiction over nonresident defendants based solely upon random, fortuitous, or attenuated contacts, or upon the unilateral activity of another person.” Id.
at 4, 13 P.3d at 283. “Foreseeability, relevant as it may be to the defendant’s liability, cannot substitute for the require causal nexus between the defendant’s contact with the forum state and an eventual injury.” Id.
at 6, 13 P.3d at 285.
Where the defendant’s solicitations, negotiations or communications to the plaintiff, or the defendant’s formation, execution or performance of a contract, related to and ultimately facilitated the underlying securities investment, which is the crux of the plaintiff’s claims, then arguably they arise out of and relate to the defendants’ contacts.
3. Reasonableness of Exercise of Specific Personal Jurisdiction.
“Once the plaintiff establishes that minimum contacts occurred with the forum state and that the events causing the injury arose out of that contact, a rebuttable presumption arises that the forum reasonably can exercise jurisdiction.” Williams, 199 Ariz. at 3, 13 P.3d at 282. In deciding whether the exercise of specific personal jurisdiction over a non-resident defendant is reasonable, the third requirement, the court can consider several factors, including the following: (1) the burden on the defendant; (2) the existence of an alternative forum; (3) the convenience and effectiveness of relief for the plaintiff; (4) the interest of the forum state; (5) the efficiency of adjudication; (6) the extent of the defendant’s purposeful interjection into the forum; and (7) the possibility of conflict with over sovereignty. Brainerd, 873 F.2d at 1260.
In Arizona, courts place little weight on the first factor, a non-resident defendant’s burden in litigating out-of-state, particularly where the defendants has retained counsel:
Telephones, facsimile machines, and photocopiers answer the logistical problems as easily for lawsuits pending in Arizona as those anywhere in a world reached by telecommunications satellites. As Defendant has already demonstrated, competent Arizona counsel is available to represent it. Defendant’s burden may be greater defending in [Arizona] than in [a foreign tribunal], but it is certainly manageable.
Uberti, 181 Ariz. at 575-76, 892 P.2d at 1364-65.
In securities cases, the fairness factors would also likely favor the exercise of personal jurisdiction over non-resident defendants in Arizona, as Arizona has a strong interest in protecting its residents from fraudulent investments. Arizona’s strong interest is evident from the Arizona Securities Act, which is “‘liberally construed as a remedial measure in order not to defeat the purpose thereof.’” Siporin v. Carrington, 200 Ariz. 97, 103, 23 P.3d 92, 99 (Ct. App. 2001). “The intent and purpose of this Act is for the protection of the public, the preservation of fair and equitable business practices, the suppression of fraudulent or deceptive practices in the sale or purchase of securities, and the prosecution of persons engaged in fraudulent or deceptive practices in the sale or purchase of securities.” 1951 Ariz. Sess. Laws ch. 18, § 20. To that effect, A.R.S. § 44-2003(A) provides that a statutory securities action “may be brought against any person, including any dealer, salesman or agent, who made, participated in or induced
the unlawful sale or purchase . . . .” (emphasis added).
Further, exercising jurisdiction over non-resident defendants provides a forum for the Arizona residents harmed by such fraudulent investments, and acts a deterrent to others perpetrating such frauds in Arizona. Finally, a plaintiff has a strong interest in obtaining relief in Arizona based on any solicitations, negotiations or communications related to the investment made to the plaintiff in Arizona, the formation, execution or performance of the underlying investment contract in Arizona, and the transmittal of investment funds from Arizona and potential profit or repayment sent to Arizona. Under these circumstances, it is likely that there is no jurisdiction more reasonable than Arizona. To otherwise require a plaintiff to sue each defendant in its home state would be inequitable, inefficient, and contrary to the interest of judicial economy and efficiency.
III. Conclusion
An Arizona court may exercise specific personal jurisdiction over a non-resident defendant when: (1) the non-resident defendant engages in purposeful conduct toward Arizona; (2) the plaintiff’s claim arises out of or relates to the non-resident defendant’s contact with Arizona; and (3) the exercise of jurisdiction is reasonable. Specific jurisdiction in a securities case may exist in Arizona depending on the solicitations, negotiations, course of dealings, contracts (drafting, execution and performance thereof), communications and payments among the parties.
[1] “A non-resident defendant is subject to general jurisdiction when the defendant’s contacts with the forum state are substantial or continuous and systematic enough that the defendant may be haled into court in the forum, even for claims unrelated to the defendant’s contacts with the forum.” Williams, 199 Ariz. at 3, 13 P.3d at 282. General jurisdiction exists when a non-resident defendant has property, offices, agents or some type of physical presence in the forum state, or is licensed to do business in the forum state. A. Uberti & C. v. Leonardo,
181 Ariz. 565, 569, 892 P.2d 1354, 1358 (1995); Batton v. Tennessee Farmers Mut. Ins. Co.,
153 Ariz. 268, 270, 736 P.2d 2, 4 (1987).