Opinion
CIVIL ACTION No. 02-2435-CM
October 21, 2003
MEMORANDUM AND ORDER
Pending before the court is Defendants Rare Medium Group, Glenn S. Meyers and Jeffrey J. Kaplan's Motion to Dismiss Plaintiffs' Petition (Doc. 46). Defendants argue that plaintiffs' suit should be dismissed, pursuant to Fed.R.Civ.P. 12(b)(2), because the court lacks personal jurisdiction over them. Further, defendants assert that plaintiffs' claims for fraud, negligence, and breach of fiduciary duty should be dismissed for failing to state a claim upon which relief may be granted.
Defendant Joe Zapulla has not yet been properly served in this action. Further, Mr. Zapulla is not one of the defendants bringing this motion.
I. Background
Beginning in March 2000, plaintiff James D. Loeffelbein, who resides in Bucyrus, Kansas, began buying and selling stock in Rare Medium Group, Inc. ("Rare Medium"), a website design and consulting corporation organized in Delaware, and located in New York, New York. Loeffelbein purchased Rare Medium stock for himself and for a hedge fund that he managed, and in which he and plaintiff Terrie L. Pham owned a 20% share. At the time, Rare Medium stock sold for almost $90 per share, and Loeffelbein's investment strategy was to rapidly buy and sell the stock to take advantage of short-term jumps in the stock's value.
In April 2000, Rare Medium's stock value began to steadily decline, and in the first week of October the stock traded for $5.25. Loeffelbein increased his investment in Rare Medium over this same period. In April he owned 4700 shares, and by October he had purchased 150,000 shares and another 100,000 shares for the hedge fund.
Loeffelbein, in October 2000, obtained Zapulla's phone number from the Rare Medium website. Rare Medium's website stated that Zapulla should be contacted "[f]or stockholder information and inquiries." Under Zapulla's name was the line: "Wall Street Investor Relations." Rare Medium had hired Wall Street Investor Relations ("WSIR"), located in New York, New York, to provide information to the public regarding its stock, and Zapulla was a principal in the firm.
Zapulla and Loeffelbein spoke by phone approximately forty times from October 2000 through May 2001. Zapulla allegedly initiated at least twenty of those phone calls. Loeffelbein had decided to make substantial, long-term investments in Rare Medium, and he spoke with Zapulla in order to obtain investment information and guidance about his investments in Rare Medium. During the phone calls, Zapulla allegedly told Loeffelbein that he was obtaining information about Rare Medium directly from defendant Glenn S. Myers, CEO of Rare Medium. Loeffelbein details numerous instances in which Zapulla allegedly provided him with false information about Rare Medium's long-term financial outlook.
Loeffelbein also alleges that Myers provided misleading information about Rare Medium during a telephone conference call and in press releases. Myers allegedly stated, during the conference call, that Rare Medium's stock price would rise to $10 by the end of the year. Myers allegedly reported, in a press release, that Rare Medium had achieved positive earnings (before interest, taxes, depreciation, and amortization) in the first quarter. Loeffelbein also asserts that Myers supplied misleading information to him through Zapulla.
Loeffelbein contends that Myers and Zapulla knew, at the time they were making these statements, that Rare Medium's reported revenues were nonexistent, and that it was unlikely that the company would continue providing internet services. In reliance on the statements made to him, Loeffelbein asserts, he increased his investment in Rare Medium to approximately one million shares.
Rare Medium announced, in April 2001, that it would loan $50 million to Motient Corp. ("Motient") in exchange for shares in a corporation that Motient owned. Loeffelbein called Zapulla to express his concern about the loan, and Zapulla allegedly assured him that it was a wise financial decision. On May 14, 2001, Rare Medium announced a proposed merger with Motient. On August 15, 2001, Rare Medium announced a proposed reverse stock split in conjunction with its merger with Motient.
Rare Medium's stock continued to decline from its $5.25 per share value in October 2000. Following Rare Medium's August 15, 2001, announcement, its stock was trading at approximately $0.25 a share.
II. Personal Jurisdiction
A. Legal Standard
A plaintiff opposing a motion to dismiss for lack of personal jurisdiction bears the burden of showing that the court's exercise of personal jurisdiction over the defendant is proper. Kuenzle v. HTM Sport-Und Freizeitgerate AG, 102 F.3d 453, 456 (10th Cir. 1996). If the motion to dismiss is submitted prior to trial on the basis of affidavits and other written materials, the plaintiff need only make a prima facie showing to avoid dismissal for lack of personal jurisdiction. Id. Although the plaintiff will be required to prove the factual basis for jurisdiction by a preponderance of the evidence at trial, on a pretrial motion to dismiss, all factual disputes are resolved in favor of the plaintiff. Id. If the plaintiff makes the required prima facie showing that personal jurisdiction exists, "a defendant must present a compelling case demonstrating `that the presence of some other considerations would render jurisdiction unreasonable.'" OMI Holdings, Inc. v. Royal Ins., 149 F.3d 1086, 1091 (10th Cir. 1998) (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985)).
In the instant case, the court must determine that the exercise of jurisdiction comports with due process and that an applicable statute potentially confers jurisdiction by authorizing service of process. Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th Cir. 2000). The Kansas long-arm statute is construed liberally to allow jurisdiction to the full extent permitted by due process; therefore, the court proceeds directly to the constitutional analysis. Federated Rural Elec. Ins. Corp. v. Kootenai Elec. Co-op., 17 F.3d 1302, 1305 (10th Cir. 1994).
Under the due process analysis, the "constitutional touchstone" is "whether the defendant purposely established `minimum contacts' in the forum state." Burger King, 471 U.S. at 474 (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). A nonresident party creates minimum contacts by some act or actions in which it purposefully avails itself of the privilege of conducting activities in the forum state. Hanson v. Denckla, 357 U.S. 235, 253 (1958). The purposeful availment requirement ensures that a defendant will not be sued in a foreign jurisdiction solely as a result of the unilateral activity of another party. Burger King, 471 U.S. at 475.
Consistent with due process, specific jurisdiction may be conferred over a nonresident defendant where the court's exercise of jurisdiction directly arises from a defendant's forum-related activities. To determine whether specific jurisdiction is appropriate, the court must first decide whether the defendant has such minimum contacts within the forum state "that he should reasonably anticipate being haled into court there." World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1979). Second, the court must then consider whether the exercise of personal jurisdiction offends "traditional notions of fair play and substantial justice." Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 113(1987).
B. Rare Medium
Plaintiffs assert that the court may properly exercise specific jurisdiction over Rare Medium because the present cause of action arises from Rare Medium's contacts with Kansas. Specifically, plaintiffs allege that Zappulla served as Rare Medium's agent, and that Zapulla's phone calls to Loeffelbein's residence in Kansas creates personal jurisdiction over defendants. Defendants contend that Zappulla's actions should not be attributed to them because he was an independent contractor rather than an employee. Alternatively, defendants argue that even if Zappulla were considered Rare Medium's employee, his actions do not establish sufficient minimum contacts to justify the court's exercise of personal jurisdiction.
1. Relationship Between Zapulla and Rare Medium
Kansas law dictates that an entity is generally not vicariously liable for the tortious conduct of an independent contractor. Burlington N. v. Cosco N. Am., Inc., 2003 WL 21685908 (D. Kan. July 15, 2003) ( citing Mitzner v. State, 257 Kan. 258, 891 P.2d 435, 438 (1995)). An independent contractor "contracts to do certain work according to his own methods, without being subject to the control of his employer, except as to the results or products of his work." Falls v. Scott, 249 Kan. 54, 815 P.2d 1104, 1112 (1991). Conversely, when an employer "has the right of control and supervision over the work" of an individual, then that individual is an agent or employee of the employer. Id.
The court properly exercises subject matter jurisdiction as a court of diversity jurisdiction. The court therefore applies Kansas law.
Defendants contend that they hired WSIR to develop Rare Medium's investor relations program, and that Zapulla, a principal in WSIR, handled Rare Medium's account in the role of an independent contractor. Defendants argue that they never employed Zapulla, and that Zapulla had almost complete control over how he developed Rare Medium's investor relations program.
Plaintiffs argue that Rare Medium exercised more control over Zapulla than would be typical if he were merely an independent contractor. In essence, plaintiffs contend that an implied actual or apparent agency existed between Rare Medium and Zapulla. See, e.g., Saxon Mortgage, Inc. v. Mortgage Plus, Inc., 130 F. Supp.2d 1236, 1248 (D. Kan. 2001) (explaining Kansas law regarding implied actual and apparent agency). In particular, Loeffelbein stated in his affidavit that Zapulla told him that Myers was "feeding . . . [Zapulla] the information he was providing to me and was telling Zapulla the information to provide to me." Loeffelbein Aff. ¶ 23. Plaintiffs also have alleged that Zapulla made false representations at the request of Myers. Pls. Pet. ¶ 62.
The court questions whether plaintiffs have made a prima facie showing that Zapulla was Rare Medium's actual or apparent agent. The court's finding in this area, however, is not necessary. Even if the court determined that plaintiffs sufficiently pled their allegation of an agency relationship, the court still could not exercise personal jurisdiction over Rare Medium because Zapulla did not engage in the necessary minimum contacts with Kansas.
2. Zapulla's Contacts with Kansas
Plaintiffs first assert that Rare Medium engaged in sufficient minimum contacts due to Zapulla's tortious acts committed while on the phone to Loeffelbein at his Kansas residence. These purported actions, however, are insufficient, by themselves, to justify the court's personal jurisdiction over Rare Medium. An out-of-state defendant who commits an intentional tort is not automatically subject to personal jurisdiction in the state. Caldwell-Baker Co. v. S. Ill. Railcar Co., 225 F. Supp.2d 1243, 1262 (D. Kan. 2002). Rather, the court's proper inquiry into personal jurisdiction requires it to examine the particular facts of the defendent's actions to determine if the defendant purposely availed itself of the benefits of the state's laws. Id. Consequently, the court turns to plaintiffs' specific allegations of Zapulla's contacts with Kansas. Plaintiffs argue that Zapulla established minimum contacts with Kansas by making at least twenty phone calls to Loeffelbein at his home in Bucyrus, Kansas. Phone calls, however, "are not necessarily sufficient in themselves to establish minimum contacts." Far West Capital, Inc. v. Towne, 46 F.3d 1071, 1077 (10th Cir. 1995). The Tenth Circuit has not stated a bright-line rule specifying the number of phone calls that are sufficient to create minimum contacts, but the circuit's case law provides factual analogies to this case. In Soma Medical International, Inc. v. Standard Chartered Bank, 196 F.3d 1292, 1299 (10th Cir. 1999), the court cited a district court's conclusion, in Harnischfeger Eng'rs, Inc. v. Uniflo Conveyor, Inc., 883 F. Supp. 608, 615 (D. Kan. 1995), that "numerous," or "hundreds" of phone calls and letters established minimum contacts. Conversely, in Far West Capital, 46 F.3d at 1076-77, the Tenth Circuit determined that "defendants' phone calls, and ten-to-twenty faxes and letters" during the course of contract negotiations were insufficient to establish minimum contacts.
In this case, Zapulla's approximately twenty phone calls equal, or even fall short of, the quantity and quality of the defendants' contacts in Far West Capital, in which the Tenth Circuit determined that personal jurisdiction did not exist. Consequently, the court concludes that it cannot properly exercise personal jurisdiction over Rare Medium.
C. Myers and Kaplan
Defendants object to the court's exercise of personal jurisdiction over Myers and Kaplan, arguing that their actions as corporate officers do not establish minimum contacts with Kansas because of the fiduciary shield doctrine.
Plaintiffs have not asserted any basis for the court's personal jurisdiction over Kaplan; the court therefore concludes that it lacks personal jurisdiction over him. See Kuenzle, 102 F.3d at 456. Moreover, from the court's review of the facts in this case, any basis upon which it could exercise personal jurisdiction over Kaplan would be the same as for Myers. But as explained below, the court lacks personal jurisdiction over Myers as well.
The fiduciary shield doctrine precludes the court from exercising personal jurisdiction over corporate officers merely because the court established jurisdiction over the corporation. Thies v. LifeMinders, Inc., 2002 WL 31571258, at *6 (K. Kan. Nov. 6, 2002). In this case, however, the court concluded that personal jurisdiction over Rare Medium is not proper. The fiduciary shield doctrine, therefore, is inapplicable. Further, plaintiffs have not alleged any facts showing that Kaplan or Meyers made any contacts with Kansas (other than indirect contacts made for the benefit of Rare Medium). The court therefore concludes that it cannot exercise personal jurisdiction over these defendants.
III. Plaintiffs' Claims of Fraud, Negligence, and Breach of Fiduciary Duty
Because the court declines to exercise personal jurisdiction over Rare Medium, Myers, or Kaplan, the court will not rule on defendants' motion to dismiss plaintiffs' claims of fraud, negligence, and breach of fiduciary duty.
IV. Order
IT IS THEREFORE ORDERED that Defendants Rare Medium Group, Glenn S. Meyers and Jeffrey J. Kaplan's Motion to Dismiss Plaintiffs' Petition (Doc. 46) is granted. These defendants are hereby dismissed from this action.