Six months ago, authorities in the United States and eight other countries moved against Megaupload following a grand jury indictment that charged the company and its officers with five federal charges stemming from a “mega-conspiracy” of criminal copyright infringement. Police in New Zealand arrested the site’s founder, Kim Dotcom, and three other Megaupload employees at Dotcom’s mansion (two other employees indicted were arrested a few days later in Europe while the last employee charged in the indictment remains at large). The indictment alleges the company and its employees made over $175 million in illegal profits, and the case is considered one of the largest criminal copyright cases in US history.

There are a lot of moving parts to this case already — no surprise, given its size and complexity — so a quick update may be helpful. The New Zealand Listener has put together a handy timeline of the Megaupload case. Specifically, I want to look at some of the issues that have made headlines recently, including the New Zealand extradition proceedings, a motion to dismiss filed in the US, a New Zealand ruling that certain search warrants were illegal, and a US proceeding seeking access to user data stored on Megaupload servers.

Extradition

The formal request for extradition of Dotcom and three other Megaupload defendants in New Zealand was filed on March 2nd. The hearing was originally scheduled for August, but the hearing has been postponed until at least March 2013, due to the growing legal complications surrounding the case.

Under New Zealand law, extradition is governed by the Extradition Act of 1999 and any bilateral treaty in place.1 The United States and New Zealand entered into an extradition treaty in 1970.2 That treaty lists thirty-two offenses for which subjects can be extradited; criminal copyright infringement is not one of them. However, under New Zealand’s Extradition Act, section 101B, someone may also be extradited for offenses that carry a penalty of not less than one year in the requesting country and involves conduct that would be criminal had it occurred in New Zealand and carries a similar penalty. Extradition of suspects indicted but not convicted require an arrest warrant and any accompanying depositions.

Here, the extradition hearing is likely to hinge on whether the offenses Dotcom has been charged with are offenses in New Zealand that would carry a similar penalty. Admittedly, the primary operation of Megaupload presents a novel set of facts for criminal liability of copyright infringement even in the US, but the indictment also alleges a number of the defendants personally uploaded infringing works to the service, which, by itself, could be sufficient to constitute an extraditable offense under New Zealand law.

And, in an odd twist, the New Zealand judge who had been presiding over the extradition proceeding stepped down last week after calling the US “the enemy” at a copyright conference earlier this month. Judge Nevin Dawson, who granted Dotcom bail in February, will be taking over the case.

Motion to Dismiss

On July 3, Megaupload filed a motion to dismiss for lack of personal jurisdiction. The motion to dismiss applies only to the Megaupload Limited corporation itself — it does not pertain to Kim Dotcom, or the other individual defendants, personally, nor does it pertain to Vestor Limited, the other corporate defendant indicted.3

Corporations, as separate entities, have long been held liable for criminal actions. Said the Supreme Court in 1909 (quoting an earlier criminal law treatise):

Since a corporation acts by its officers and agents their purposes, motives, and intent are just as much those of the corporation as are the things done. If, for example, the invisible, intangible essence of air, which we term a corporation, can level mountains, fill up valleys, lay down iron tracks, and run railroad cars on them, it can intend to do it, and can act therein as well viciously as virtuously.

But, like with individual defendants, before a case can proceed against a corporation, the court must have personal jurisdiction over it, and before a court can exercise personal jurisdiction, the corporation must be properly served.4 Megaupload’s attorneys argue that charges against the company should be dismissed because it wasn’t properly served under Federal Rules of Criminal Procedure 4(c)(3)(C). Under that rule:

A summons is served on an organization by delivering a copy to an officer, to a managing or general agent, or to another agent appointed or legally authorized to receive service of process. A copy must also be mailed to the organization’s last known address within the district or to its principal place of business elsewhere in the United States.

Megaupload basically argues that, under the second portion of that rule, a corporation can never be held liable for crimes committed in the United States so long as it doesn’t maintain an office or address within the country.5 The United States responded that Megaupload’s reading of the Rule can’t possibly be correct — “Neither the facts, the law, nor common sense and the interests of justice, which the Federal Rules of Criminal Procedure are designed to serve, support as extreme a remedy as the outright dismissal sought by defense counsel” — and offers a number of arguments against it, as well as alternative methods that could be used to properly serve Megaupload. The court will hear oral arguments on the motion on July 27.

Should the court grant the motion to dismiss Megaupload Limited, the effects are unclear. Vestor Limited and the other indicted defendants, including Dotcom, would still remain. Given the allegations of personal involvement by the defendants, and the fact that Megaupload Limited can be considered merely a corporate “alter ego” of these defendants, dismissal may turn out to be mostly a symbolic victory.

Search Warrant Illegal

On June 28, a New Zealand judge ruled that certain search warrants, used to gather evidence from Dotcom’s mansion during his arrest, were illegal. The search warrants were executed by New Zealand police, on behalf of the US pursuant to New Zealand’s Mutual Assistance in Criminal Matters Act (MACMA). The US had requested the warrants to search Dotcom’s residence for evidence that could be used to “demonstrate that the mega-conspiracy’s directors and employees were aware that Megaupload’s websites were regularly used to reproduce and distribute infringing copies of copyright works, to gain a better understanding of and document the mega-conspiracy’s activities, and to identify additional individuals who were working with the mega-conspiracy.”

The judge concluded that the search and seizure was overly broad and, thus, illegal. She also held that the New Zealand Central Authority breached MACMA when it shipped clones of hard drives seized to the FBI. The immediate impact of the ruling is unknown. New Zealand police and the FBI haven’t responded, and it is highly likely the ruling will be appealed up through the New Zealand court system. If the warrants were illegal, the New Zealand police may be able to cure the defect with new, narrower warrants. Or, some of the evidence may become excludable at trial as “fruit of the poisonous tree.”

I’m not familiar with New Zealand extradition proceedings, so take this with a grain of salt, but I doubt this ruling would affect Dotcom’s extradition hearing. The evidence seized here was for the US criminal trial; the extradition hearing is similar to a preliminary hearing or grand jury in that the judge is primarily concerned with whether there is sufficient evidence for a trial to proceed, evidence which the US had already submitted.6

User Data

The entry of third parties seeking access to their own data that had been uploaded to Megaupload adds a collateral issue to this case. On June 29, a hearing on the motion was held, and a decision is forthcoming.

MegaUpload leased over 500 servers from Virginia based Carpathia Hosting as part of its business. As part of its investigation, the United States served a search warrant on Carpathia. It copied select data from the servers and then released the servers back into the custody of Carpathia.

Carpathia later moved for a protective order regarding the servers. According to the order, it is costing Carpathia thousands of dollars a day to preserve the servers, and the company is losing money because it cannot repurpose the servers for other clients. As the company notes, “Carpathia does not have any legal obligation to preserve evidence on the Mega Servers” — it likely could delete the data on the servers and put them back into use without liability. However, it has so far refrained from doing so because several parties have expressed interest in the data. Those include MegaUpload itself, which wishes to examine the servers for evidence to prepare for its defense in the criminal trial, and the Electronic Frontier Foundation, which, according to Carpathia, “claims to represent the interests of end users who have non-infringing content stored on the Mega Servers and has requested that the data be preserved in order to facilitate its return to Mega users who have not engaged in copyright infringement.”

In May, an individual who had an account with MegaUpload before it was indicted filed with the court to have his property returned.  In response, the US has reiterated that it has no continuing interest in the servers or data. The MPAA, an interested non party, told the court that it has no position in the matter, but whatever the court decides to facilitate return of user data, “it is essential that the mechanism include a procedure that ensures that any materials the users access and copy or download are not files that have been illegally uploaded to their accounts.”

Demand Progress, a 527 group which specializes in writing strident headlines, added its own two cents with its own court filing. The PAC told the court, “Our sincere hope is for the immediate return of all property not related to Mr. Dotcom’s indictment and a clear pronouncement that the seizure of the private property of innocent third parties is not countenanced by our Constitution.” But Demand Progress has it entirely wrong: the US never seized Megaupload’s servers in the US and is not exercising any continuing custody over them.

As the Government notes in its brief:

The government does not possess any of Mr. Goodwin’s property, nor does it seek to forfeit it. The government also does not oppose access by Kyle Goodwin to the 1103 servers previously leased by Megaupload. But access is not the issue – if it was, Mr. Goodwin could simply hire a forensic expert to retrieve what he claims is his property and reimburse Carpathia for its associated costs. The issue is that the process of identifying, copying, and returning Mr. Goodwin’s data will be inordinately expensive, and Mr. Goodwin wants the government, or Megaupload, or Carpathia, or anyone other than himself, to bear the cost.

The US later points out, “Mr. Goodwin does not argue that the actual search violated his rights – he actually argues the opposite. Mr. Goodwin claims that the government’s failure to seize his information led to its abandonment ‘under circumstances in which it was both inaccessible and potentially subject to destruction.’”

From a legal standpoint, I don’t see how the court can exercise its jurisdiction over Megaupload’s servers as Goodwin and Demand Progress have asked. Courts can exercise jurisdiction where the federal government once had property but later gave it away, lost it, or destroyed it.7 But a court can’t force the government to return property it never possessed, as here.8

In the event the court denies any relief, Goodwin is unfortunately in the same situation as he would be had Megaupload stopped paying its bills to Carpathia — he could seek a remedy from Megaupload (highly unlikely, given that Megaupload’s terms of service waived all liability for loss of data) or arrange to recover his data himself from Carpathia.

Footnotes

  1. Extradition Officer, Legal Division, Ministry of Foreign Affairs and Trade, New Zealand: Extradition. []
  2. Treaty on Extradition Between the United States of America and New Zealand (entered into force Dec. 8, 1970). []
  3. According to the indictment, Megaupload Limited is the registered owner of Megaupload.com and Megaclick.com. Vestor Limited owns 68% of the shares in Megaupload Limited, as well as being the sole shareholder of Megamedia Limited, an unindicted corporation that controls Megavideo and other “Mega” companies and sites. Kim Dotcom is the sole director and shareholder of Vestor Limited. []
  4. Murphy Brothers v. Michetti Pipe Stringing, 526 US 344, 350 (1999): “In the absence of service of process (or waiver of service by the defendant), a court ordinarily may not exercise power over a party the complaint names as defendant.” []
  5. “In no event can the Government satisfy Rule 4’s second requirement that it mail the summons to Megaupload’s ‘last known address within the district or to its principal place of business elsewhere in the United States,’ for no such address exists. Megaupload does not have an office in the United States, nor has it had one previously. Service of a criminal summons on Megaupload is therefore impossible, which forecloses the Government from prosecuting Megaupload.” []
  6. See the May 29, 2012 opinion of the New Zealand court presiding over the extradition hearing for more discussion on the purpose and standards of extradition. []
  7. See cases cited in US v. Chambers, 192 F.3d 374, 376-77 (3rd Cir. 1999). []
  8. See US v. Solis, 108 F.3d 722 (7th Cir. 1997). []

15 Comments

  1. Great stuff as always, Terry. I’ve been researching the service of process issue. Mega’s argument that they can’t be served so therefore they can’t be prosecuted is just too cute by half. And, of course, the law doesn’t quite work that way for criminals.

    The Virginia Stock Corporation Act provides: “A foreign corporation may not transact business in the Commonwealth until it obtains a certificate of authority from the Commission..” Va. Code Ann. § 13.1-757(A). So any foreign corporation that transacts business in the state of Virginia must obtain a certificate of authority (COA).

    The next section of the Act provides what happens if a corporation does not obtain a COA: “Suits, actions and proceedings may be begun against a foreign corporation that transacts business in the Commonwealth without a certificate of authority by serving process on any director, officer or agent of the corporation doing such business, or, if none can be found, on the clerk of the Commission or on the corporation in any other manner permitted by law. If any foreign corporation transacts business in the Commonwealth without a certificate of authority, it shall by transacting such business be deemed to have thereby appointed the clerk of the Commission its attorney for service of process. Service upon the clerk shall be made in accordance with § 12.1-19.1.” Va. Code Ann. § 13.1-758(F).

    So, if a corporation transacts business in Virginia, that corporation is deemed to have appointed the Clerk of the Commission as its agent for service of process. This makes sense, or else corporations who failed to obtain a COA would be rewarded for their misdeeds.

    As the Supreme Court of Virginia explains, “it is quite clear that the purpose of . . . requiring that every foreign corporation shall, before it commences doing business in Virginia, appoint or constitute the Secretary of the Commonwealth as its agent upon whom process may be served, is to subject such corporations to the jurisdiction of the local court in controversies growing out of transactions within this State.” Eure v. Morgan Jones & Co., 195 Va. 678, 683-84 (1954).

    Furthermore, “[w]hen a foreign corporation engages in the privilege of doing business in Virginia, it enjoys the benefits and protection of the laws of this Commonwealth. It thereby subjects itself to the jurisdiction of the courts of this State for the purpose of litigating liabilities created during its stay here.” Id. at 688. So the privilege of doing business in Virginia comes with the responsibility of being amenable to suits there.

    Of course, the argument then becomes whether Mega has transacted business in Virginia. There is some case law, naturally, that lays out the contours of the analysis. I think the analysis of whether Mega is transacting business turns out to be the same as whether Mega has sufficient minimum contacts in Virginia so as to subject it to personal jurisdiction there. In other words, by conducting enough business in Virginia to make prosecution in Virginia not violative of due process, Mega has also conducted enough business to make them amendable to substituted service.

    Should be interesting! My prediction is that substituted service on the Secretary will be allowed, and the case against Mega Ltd. trudges on in Virginia.

    • Great stuff, DH. I had only skimmed this argument in the briefs; thanks for the excellent (as always) analysis!

    • That’s all fine and dandy, but how do you satisfy the second prong of Fed. R. Crim. Pro 4(c)(3)(C) requiring “A copy must also be mailed to the organization’s last known address within the district or to its principal place of business elsewhere in the United States” when Megaupload conceivably has neither?

      If I were the Judge, and absent any further developments, I’d have no choice but to quash the summons.

      I don’t think it would even make a difference. The Motion to Dismiss is only for Megaupload. Apparently nobody is challenging the service or jurisdiction issue for Vestar Limited, which owns 68% of the Megaupload shares. So even if Megaupload is dropped from the indictment, it’s assets can still remain forfeited because the entire company is fruits of the racketeering activity attributed to the individual co-conspirators and to the unchallenged entitites like Vestar.

      • When/if Megaupload Ltd. transacted business in the district, by operation of law it designated the Clerk of the Commission to be its agent for service of process, so the last known mailing address in the district is the mailing address of the Clerk of the Commission. The whole point of the sections I quoted from the Corporation Act is to establish a mailing address for service of process within the district for foreign corporations doing business there.

        • The whole point of the sections I quoted from the Corporation Act is to establish a mailing address for service of process within the district for foreign corporations doing business there.

          I respectfully disagree. All of the sections that you quoted only support the assertion that Megaupload designated the clerk of the Corporation Commission as its statutory agent, which goes to the first prong of the service analysis. From Fed. R. Crim. P. 4(c)(3)(C):

          “A summons is served on an organization by delivering a copy to an officer, to a managing or general agent, or to another agent appointed or legally authorized to receive service of process.

          VA. CODE ANN. § 12.1-19.1 describes how the clerk is to be served:

          ” … service on the clerk shall be made by leaving two copies of the process for each defendant ,,, in the office of the clerk of the Commission. The party seeking service … shall include the mailing address of the defendant in accordance with subsection D or subsection F of this section.

          Subsection D provides that:

          “The address for the mailing of process pursuant to this section shall be the address on record with the Commission.”

          And Subsection F provides that:

          “in the event the Commission does not have a record of the defendant’s address he shall, provide the latest known mailing address of the defendant.

          In light of these statutory sections, your claim that “last known mailing address in the district is the mailing address of the Clerk of the Commission” makes little sense.

          First, while the statute clearly appoints the clerk of the Corporation Commission as the statutory agent for a foreign corporation who fails to register in the state, it contains no language whatsoever appointing the Commission as the “last known address” or as the “principal place of business” of the foreign corporation for purposes of Fed. R. Crim. P. 4(c)(3)(C).

          Second, deeming the Corporation Commission as the “latest known address,” would render most of Subsections B, C, D and F as mere surplussage, which is not an acceptable canon of statutory construction. In that case, service would require handing to the Clerk two copies of the summons for each defendant, who would then be under a bizarre circular legal requirement to serve them unto himself or herself by mail.

          So while one may be able to present copies of the summons to the Clerk, service under the Virginia statute can never be perfected because Megaupload has no mailing address in the state of Virginia. The result has to be a quashed summons.

          • Great stuff. Thanks.

            I think though that what matters is Rule 4, not the state rule, for serving the summons. The federal rule only requires that the last known address be used. If the Clerk of the Commission is deemed to be the agent for service of process, then serving process on that agent’s address satisfies Rule 4 since that’s a known address for Megaupload Ltd.

            When Megaupload Ltd. transacted business in Virginia (and I believe that operating 570 servers for 6 years is transacting business for a cloud-computing company), the Clerk’s address became Megaupload’s address for the very purpose of serving a summons.

            Think of it this way: Had Megaupload actually filled out the paperwork and designated the Clerk as their agent for service of process, could they later claim that they had no address to which to mail process? I don’t see how.

            The very reason the Clerk is named as agent for service of process is so that foreign corporations can be haled into court in Virginia by serving process on the Clerk. Otherwise, the court would not be able to enter binding judgments on foreign corporations who conducted business in the state but failed to designate an agent.

            I guess we’ll find out soon enough. Oral arguments on the motion are tomorrow, IIRC.

          • I’ve been digging further into the statutes and discovered something very interesting. I’m honestly surprised the Department of Justice didn’t include this in its brief because I feel that it overcomes any objection in Megaupload’s Reply Brief.

            VA. CODE ANN. 13.1-763 requires foreign corporations transacting business in Virginia to not only have a registered agent, but also “[a] registered office that may be the same as any of its places of business.” It goes on to state that “[a] registered agent … shall be [one] … whose business office is identical with the registered office.”

            If the argument can be made that Megaupload was a foreign corporation transacting business in Virginia (an argument I think that is easily made), then by their lack of filing with the Corporation Commission, they deem the clerk of the Commission as the statutory agent. Then, according to 13.1-763, the registered office’s address must be where their statutory agent resides because Megaupload cannot claim that it has any other address. That satisfies Fed. R. Crim. P. 4(c)(3)(C) because service is made upon an “agent” and can subsequently be mailed to the “last known address” (in this case, the “registered office”), which are now one in the same.

            Furthermore, if I were making the argument for an expansive interpretation of jurisdiction and process, I’d be sure to include this prescient statement from the Supreme Court in McGee v. Int’l Life Ins. Co., even though it really focuses on civil litigation:

            “Looking back over this long history of litigation, a trend is clearly discernible toward expanding the permissible scope of state jurisdiction over foreign corporations and other nonresidents. In part, this is attributable to the fundamental transformation of our national economy over the years. Today, many commercial transactions … may involve parties separated by the full continent. With this increasing nationalization of commerce has come a great increase in the amount of business conducted by mail across state lines. At the same time, modern transportation and communication have made it much less burdensome for a party sued to defend himself in a State where he engages in economic activity.”

            Finally, I’d argue policy. If the Judge quashes the summons, he essentially tells the world that, regardless of your extensive minimum contacts with the forum, you are afforded some degree of immunity from criminal prosecution so long as you do not maintain so much as a PO Box anywhere in America (I’d like to think that Judges abhor technicalities). Additionally, I’d argue that service upon the clerk (even though notice will never reach the company itself) would be constitutionally permissible so long as service is also done on the co-defendants upon their extradition, who own 95% of the shares in Megaupload.

            If I were arguing Megaupload’s position, I’d first argue the Erie doctrine and that Virginia service of process rules are inapplicable in a federal case. I’d then focus on somehow exempting myself from the issue of transacting business, which would make all of the Virginia stuff go away. Even if it didn’t, I’d argue that criminal trials are not “suits, actions, and proceedings” for purposes of 13.1-758, and therefore are not subject to service. Finally, I’d argue the hell out of Mullane v. Central Hanover Bank Trust Co. and that service on the clerk of the commission is not constitutionally sound because it does not a “means … desirous of actually informing the absentee” of the charges against it because the summons will never leave the clerk’s office as there are no means for the clerk to forward it to Megaupload.

            I hope the Judge and his clerks have prepared because this is one of those cases where a persuasive argument can make the decision come out either way. But that can only be done with very precise and direct questioning.

            Presuming Erie doesn’t complicate things, I think the successful argument is the one I laid out for the government.

          • More great stuff, Jason. I don’t think Erie is an issue though since that only applies when the court is sitting in diversity jurisdiction. Here it’s federal question.

            Corporate law is by its nature substantively state law (corporations are all created and defined at the state level, not federal), so to determine things like who the agent for service of process is, you need to look at the controlling state law. There is no substantive federal corporate law that would say otherwise. But for the procedural law stuff, like whether there is a mailing requirement in order to effect service (which there is in Fed. R. Crim. P. 4(c)(3)(C)), the federal procedural law is used since it’s in the federal courts.

            So you use the state substantive law to determine who the agent for service of process is, but not because of Erie–it’s because substantive corporate law is solely a creature of state law. There is no federal law that would preempt. And as far as the procedural stuff goes, like Rule 4, it’s federal procedural law that controls because the case is being heard in the federal court. That’s my understanding of those issues.

          • It’s killing me not having access to the oral argument transcripts from today. There are some articles loosely recounting the hearing, and they reported at least one interesting comment from the Judge:

            “”It’s unlikely that Congress, when creating the rules for serving criminal ‘charges, intended that a company could “violate our laws indiscriminately from an island on the Pacific,’ [Judge] O’Grady said.”

            http://www.pcworld.com/article/259974/megaupload_lawyers_ask_for_judge_to_restore_business.html

          • Yeah, I checked on PACER last night to see if anything was indicated there about the case… and nothing yet!

  2. Pingback: Bruce Leddy Responds to Kim Dotcom's Letter To Hollywood | Creative America Blog

  3. I have a little time this morning, so I wanted to run my argument by you guys for why I think the transacting business test for whether Megaupload Ltd. made itself amenable to service of process in Virginia collapses into the due process analysis.

    The test for “transacting business” in Virginia changes depending on the context:

    We agree with defendant in its contention that the question presented is controlled by the principles adopted and enunciated by the Supreme Court of the United States, as it involves the ‘due process‘ clause of the Federal Constitution. The term ‘doing business‘ has a legal significance which differs with the type of case to which it is applied. It is quite possible that a foreign corporation may be held to be ‘doing business‘ in a given state for one purpose, and not ‘doing business‘ for another. Three general classes of cases involving ‘doing business‘ are found in the reports, viz., (1) Those involving service of process upon a foreign corporation; (2) those involving taxation; (3) those involving domestication or qualification under statutes regulatory of foreign corporations. Many of the cases of the second and third classes are primarily concerned with the nature and character of the business done, that is, whether the business is interstate, and hence beyond the power of the State to tax or regulate. In process cases that feature is not determinative. International Harvester Co. v. Kentucky, 234 U.S. 579, 34 S.Ct. 944, 58 L.Ed. 1479; Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 115 N.E. 915.

    The legal tests, for determining whether or not the foreign corporation is ‘doing business‘ in a State, differ as the case falls within one or the other of these classifications, and precedents dealing with one class are of little value in those instances where it is sought to apply them to another class.

    Tignor v. L. G. Balfour & Co., 167 Va. 58, 62, 187 S.E. 468, 470 (1936).

    A more recent case echoes the three different tests:

    As grounds for its motion to dismiss the defendant’s counterclaims, QuesTech contends that Liteco is transacting business in Virginia, but has not obtained a certificate of authority from the Commonwealth which would entitle Liteco to maintain the counterclaims. In Virginia, “[a] foreign corporation transacting business … without a certificate of authority may not maintain a proceeding in any court in this Commonwealth until it obtains a certificate of authority.” Va.Code § 13.1-758 (Repl.Vol.1989).

    This court must determine whether defendant Liteco is transacting business within Virginia such as would require the company to obtain a certificate of authority. Generally, the test for whether a corporation is transacting business differs depending on the purpose for which the term is to be used. Whether a corporation is transacting business will vary according to whether the court is making a determination for purposes of service of process, for purposes of taxation or for purposes of qualification under statutes regulating foreign corporations. Continental Properties, Inc. v. Ullman Co., 436 F.Supp. 538, 540 (E.D.Va.1977) (quoting Tignor v. L.G. Balfour & Co., 167 Va. 58, 62, 187 S.E. 468, 470 (1936)). The test for defining transacting business for one purpose is of little value as applied to transacting business for another purpose. Id.

    A much stronger showing of in-state activities is required to find that a corporation is transacting business within the meaning of Virginia’s corporate qualification statutes than is required to subject a foreign corporation to local taxation or service of process. Continental Properties, Inc., 436 F.Supp. at 541; Hitachi Sales Corp. v. Burl F. Long, 9 Va.Cir. 473 (City of Roanoke Cir.1982). Generally, transacting business by a foreign corporation in Virginia “imports the transaction of its ordinary and customary business.” Continental Properties, 436 F.Supp. at 542. Business transactions which are incidental to a company’s ordinary business do not constitute transacting business within the meaning of the statute. Id. There must be significant contacts with the forum state in order for the court to make a finding that a foreign corporation is transacting business. Hitachi Sales, 9 Va.Cir. at 487. See also, Oliver Promotions Ltd. v. Tams-Witmark Music Library, Inc., 535 F.Supp. 1224 (S.D.N.Y.1982) (contacts should be regular and continuous). A master-servant or a principal agent relationship should be established between the foreign corporation and the local dealer or distributor, or acts of the foreign corporation on their own must amount to transacting business. Hitachi Sales, 9 Va.Cir. at 487. See also Thaxton v. Commonwealth, 211 Va. 38, 175 S.E.2d 264 (1970).

    QuesTech, Inc. v. Liteco, AG, 735 F. Supp. 187, 188 (E.D. Va. 1990).

    The court there is looking at Va. Code Ann. § 13.1-758(A), which requires a foreign corporation doing business in Virginia to obtain a COA before maintaining a proceeding in court. Paragraph A asks whether the foreign corporation has done so much business in the state that it must obtain a COA before making use of the courts. This requires a “much stronger showing of in-state activities” than if it’s for the purpose of service of process. The test in Paragraph A is not the test that applies here.

    What applies here is Paragraph F, which provides in part: “If any foreign corporation transacts business in the Commonwealth without a certificate of authority, it shall by transacting such business be deemed to have thereby appointed the clerk of the Commission its attorney for service of process.”

    Paragraph F only asks whether the foreign corporation has transacted business in Virgina without a COA. It does not ask whether that corporation transacted so much business that it would have been necessary to obtain a COA. See the difference? The transacting business test in Paragraph F is a much lower showing. Whereas Paragraph A necessitates determination of whether the foreign corporation should have obtained a COA, Paragraph F merely asks whether the foreign corporation has transacted business in the state without a COA—it doesn’t say either way whether that foreign corporation should have actually needed the COA.

    That’s the way I’m reading the case law, though I admit I’m not 100% convinced of this argument. I am reading “transacting business” in Paragraph A to have a different meaning than “transacts business” in Paragraph F of the same statute. But, then again, the case law is clear that the same phrase has different meanings depending on the context.

    Thoughts?

    • Curious how this VA statute may effect your analysis:

      § 13.1-1059. Transactions not constituting doing business.

      • That would appear to only apply to foreign LLCs (it’s located in Chapter 12 Virginia Limited Liability Company Act, Article 10 Foreign Limited Liability Companies). My understanding is that Megaupload Ltd. is a corporation and not an LLC, so I don’t think that would apply.

        I think you need to look in Chapter 9 Virginia Stock Corporation Act, Article 17 Foreign Corporations. There is a similar list of activities that do not constitute conducting business in Paragraph B of 13.1-757 that I think would apply to foreign corporations such as Megaupload Ltd.: http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+13.1-757

        But I don’t think that list applies here. The list of activities is for determining whether a corporation has conducted so much business that it must obtain a COA under 13.1-757(A). The question for purposes of service of process, though, is whether the corporation has transacted at least the constitutional minimum amount of business so as to make substituted service constitutional.

        Those limitations in Paragraph B of 13.1-757 are not referenced in Paragraph F of the next section, 13.1-758(F), which in part states, “If any foreign corporation transacts business in the Commonwealth without a certificate of authority, it shall by transacting such business be deemed to have thereby appointed the clerk of the Commission its attorney for service of process.”

        By its own terms, the limitations Paragraph B of 13.1-757 only applies to the transacting business issue in Paragraph A of the same statute. It does not say that it applies to any other definitions of transacting business, like the one in 13.1-758(F) that I think controls here.

        • I referenced but one section because time did not permit reviewing the entirety of the Chapter re VA’s corporate laws. The one you cited appears to be virtually identical, and it seems a safe bet that other sections as well track these two. Para. 6 struck me as perhaps having some relevancy to the conduct of business in VA. I have not, as you have, worked my way through the intricacies of VA law, but it would strike me as quite surprising if a corporation whose business/customer base includes VA residents would be able to operate beyond the reaches of VA authorities. Here, of course, it seems even less likely given the circumstance that the source of most, if not all, of its “inventory” is physically located within the state.

          Perchance are you the individual who has been making these points over at TD, and challenged at every opportunity by those who hew to the position that business over the “internet” should virtually never be subject to the rules of law applicable to “brick and mortar”?

          • The language in Virginia’s 13.1-757 is borrowed from the Model Business Corporation Act Section 15.01:

            § 15.01. Authority to Transact Business Required.

            (a) A foreign corporation may not transact business in this state until it obtains a certificate of authority from the secretary of state.

            (b) The following activities, among others, do not constitute transacting business within the meaning of subsection (a):

            (1) maintaining, defending, or settling any proceeding;

            (2) holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs;

            (3) maintaining bank accounts;

            (4) maintaining offices or agencies for the transfer, exchange, and registration of the corporation’s own securities or maintaining trustees or depositaries with respect to those securities;

            (5) selling through independent contractors;

            (6) soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts;

            (7) creating or acquiring indebtedness, mortgages, and security interests in real or personal property;

            (8) securing or collecting debts or enforcing mortgages and security interests in property securing the debts;

            (9) owning, without more, real or personal property;

            (10) conducting an isolated transaction that is completed within 30 days and that is not one in the course of repeated transactions of a like nature;

            (11) transacting business in interstate commerce.

            (c) The list of activities in subsection (b) is not exhaustive.

            I don’t think it’s even necessary to limit the research to Virginia law since lots of states use the same statute. I read the case law in three other states and found they all use the same three different tests for “transacting business” (which changes depending on the context).

            Apparently the reason why the transacting business test is a higher showing for subjecting foreign corporations to state regulations (vs. the showing for subjecting foreign corporations to service of process) is because of interstate commerce concerns. Due process is not offended by subjecting foreign corporations to personal jurisdiction based on minimum contacts, but federalism concerns (and federal supremacy on matters of interstate commerce) raise the bar such that more contacts are needed before states can regulate foreign corporations doing business therein.

            TD is always a good source for breaking IP/tech law news. The commentary that comes with it, unfortunately, is internet exceptionalism and pirate apologism at its worst. That the usual suspects are hyper-critical of the government’s actions yet willfully blind to everything Dotcom et al. have done is as to be expected, I suppose. Not like they’d ever call an internet spade a spade.

            Personally, I’m enjoying researching this topic wherever it may take me. Just ran across these nuggets that I’m pursuing further:

            The Federal courts follow the local law designating the person upon whom service may be had in an action against a foreign corporation. Lung Chung v. Northern P. R. Co. (1884, D.C.) 10 Sawy. 17, 19 F. 254; Van Dresser v. Oregon R. & Nav. Co. (1891, C. C.) 48 F. 202; William Grace Co. v. Henry Martin Brick Mach. Mfg. Co. (1909, C. C. A. 7th) 174 F. 131; Globe & R. F. Ins. Co. v. Brown (1931, D.C.) 52 F. 2d 164; United States Merchants’ & S. Ins. Co. v. Elder Dempster & Co. (1932, C. C. A. 2d) 62 F. 2d 59; American Indem. Co. v. Detroit Fidelity & S. Co. (1933, C. C. A. 5th) 63 F. 2d 395; Harbich v. Hamilton-Brown Shoe Co. (1932, D.C.) 1 F. Supp. 63.

            Service on an agent designated for that purpose by a foreign corporation doing business in a state, pursuant to the requirements of a state statute, is sufficient in an action in a Federal court sitting in such state. Ex parte Schollenberger (1878) 96 U.S. 369, 24 L. ed. 853; Provident Sav. Life Assur. Soc. v. Ford (1885) 114 U.S. 635, 29 L. ed. 261, 5 S. Ct. 1104; Knott v. Southern L. Ins. Co. (1874, C. C.) 2 Woods, 479, Fed. Cas. No. 7,894; Gray v. Quicksilver Min. Co. (1884, C. C.) 10 Sawy. 261, 21 F. 288; Maxwell v. Atchison, T. & S. F. R. Co. (1888, C. C.) 34 F. 286 (arguendo); Boultbee v. International Paper Co. (1916, C. C. A. 1st) 229 F. 951 (arguendo). And see Eaton v. St. Louis Shakspear Min. & Smelting Co. (1881, C. C.) 2 McCrary, 362, 7 F. 139.

            113 A.L.R. 9 (1938).

            And I just found this nice passage from the Supreme Court from 1898:

            The manifest injustice which would ensue if a foreign corporation, permitted by a state to do business therein, and to bring suits in its courts, could not be sued in those courts, and thus, while allowed the benefits, be exempt from the burdens, of the laws of the state, has induced many states to provide by statute that a foreign corporation making contracts within the state shall appoint an agent residing therein, upon whom **529 process may be served in actions upon such contracts. This *108 court has often held that, wherever such a statute exists, service upon an agent so appointed is sufficient to support jurisdiction of an action against the foreign corporation, either in the courts of the state, or, when consistent with the acts of congress, in the courts of the United States held within the state; but it has never held the existence of such a statute to be essential to the jurisdiction of the circuit courts of the United States. Insurance Co. v. French, 18 How. 404; Ex parte Schollenberger, 96 U. S. 369; Insurance Co. v. Woodworth, 111 U. S. 138, 146, 4 Sup. Ct. 364; Shaw v. Mining Co., 145 U. S. 444, 452, 12 Sup. Ct. 935.

            Barrow S.S. Co. v. Kane, 170 U.S. 100, 107-08, 18 S. Ct. 526, 528-29, 42 L. Ed. 964 (1898).