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).[1] 

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. Bonus Utah, Inc., 156 Ariz. at 173, 750 P.2d at 1376. See, e.g., Bonus Utah, Inc., 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.[2]

In Arizona, there are two types of personal jurisdiction: specific jurisdiction and general jurisdiction.[3] 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 exists over a non-resident defendant if: (1) the defendant purposefully avails himself of the privilege of conducting business in 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 Direction or Purposeful Availment.

The first element of specific jurisdiction is met if the defendant has: (1) purposefully directed its activities toward the forum; or (2) purposefully availed itself of the privilege of conducting activities in the forum. Planning Group of Scottsdale, L.L.C., 224 Ariz. at 313, 230 P.3d at 372. Purposeful direction and purposeful availment are two distinct concepts, but either one satisfies the first prong of specific jurisdiction. Id. at 313, 230 P.3d at 372. In essence, the purposeful direction and purposeful availment tests prevent a court from exercising personal jurisdiction in situations where all of the contacts resulted from the plaintiff’s initiative. Mfrs.’ Lease Plans, Inc. v. Alverson Draughon College, 115 Ariz. 358, 360, 565 P.2d 864, 866 (1977).

a. Purposeful Direction Standard: Effects Test.

Cases that sound primarily in tort are generally analyzed under the purposeful direction standard. Planning Group of Scottsdale, L.L.C., 224 Ariz. at 313-14, 230 P.3d at 372-73. Purposeful direction involves actions taking place outside the forum state that are directed at the forum state, such as distributing goods in the forum state that originated elsewhere. Id. at 313-14, 230 P.3d at 372-73. In determining whether a non-resident defendant’s acts constitute purposefully directed activities toward the forum state, Arizona courts apply a three-part “effects test” to see if the defendant: (1) committed an intentional act; (2) expressly aimed at the forum state; and (3) causing harm that the defendant knows is likely to be suffered in the forum state. Id. at 314, 230 P.3d at 372.

“Mere foreseeability of an injury or event occurring in another state is not sufficient” to establish purposeful direction for purposes of specific personal jurisdiction. Id. at 314, 230 P.3d at 372. Further, purposeful direction does not exist when the only nexus with the forum state is the effect of the damage-causing event. Id. at 320, 230 P.3d at 379.

While Plaintiffs assert they felt the results of any alleged wrongdoing in Arizona, this is not sufficient to conclude that the Nonresident Defendants reasonably should have anticipated being haled into court in Arizona. Because Plaintiffs merely allege they suffered damage in Arizona, without something more, Nonresident Defendants’ due process rights would be violated if they were subject to personal jurisdiction in the State.

Id. at 320, 230 P.3d at 379. See, e.g., Cohen v. Barnard, Vogler & Co., 199 Ariz. 16, 18, 13 P.3d 758, 760 (Ct. App. 2000) (holding purposeful direction did not exist where non-resident defendant contracted to perform audit in non-forum state, performed work in non-forum state, and did not deliver work directly to plaintiff in forum state).[4]

b. Purposeful Availment Standard.

“Cases that sound ‘primarily in contract’ are generally analyzed under the purposeful availment standard, requiring courts to determine whether a defendant purposefully availed itself of the privilege of conducting business or consummating a transaction in the forum.” Id. at 313, 230 P.3d at 372. Evidence of purposeful availment include executing or performing a contract in the forum state. Id. at 313, 230 P.3d at 372.[5] See, e.g., Mfrs.’ Lease Plans, Inc., 115 Ariz. at 360, 565 P.2d at 866.

In determining whether a non-resident defendant’s acts constitute purposeful availment, courts look to see if the defendant has performed some type of affirmative conduct that allows or promotes the transaction of business within the forum state, and thus the defendant could have reasonably anticipated that its conduct and connection with forum may subject it to its jurisdiction. Planning Group of Scottsdale, L.L.C., 224 Ariz. at 313, 230 P.3d at 372. Courts “take a practical approach to this test, examining the qualitative evidence of the defendant’s conduct with the state, so that the mere formation of a contract with a resident of the forum is not, standing alone, sufficient to create jurisdiction.” Id. at 313, 230 P.3d at 372.

When a complaint contains both contract and tort claims, courts “look to see which claims predominate or the substance rather than the form of the complaint’s allegations.” Id. at 314, 230 P.3d at 372. If the substance of the claims predominates in contract, or the tort claim is co-extensive with the underlying contract, then courts must apply the purposeful availment analysis. Id. at 314, 230 P.3d at 372. Such is often the case in securities cases where there is a tort claim for securities fraud, but the plaintiff has filed suit to collect on interests outlined in the contract between the parties and the very basis of the securities fraud claim is the contract. Id. at 314, 230 P.3d at 373.[6]

In determining whether a non-resident defendant in a securities case had purposefully availed itself of doing business in the forum state, the Arizona Court of Appeals recently held that the mere existence of a contract was not by itself sufficient to confer specific personal jurisdiction, but that there must be other qualitative facts relating to the following: (1) the parties’ negotiations and communications; (2) the terms of the underlying contract and parties’ actual course of dealing; and (3) the parties’ ongoing relationship and contemplated future consequences. Id. at 315, 230 P.3d at 374.

i. Parties’ Negotiations & Communications.

Purposeful availment may exist where a non-resident defendant actively negotiated with a plaintiff in Arizona or unilaterally sent material to the plaintiff in Arizona. Id. at 316, 230 P.3d at 375. Where, however, the plaintiff initiates the contact or requests the information, or subsequent negotiations occur outside of Arizona, then purposeful availment does not necessarily exist. Id. at 316, 230 P.3d at 375.

Further, if the parties’ negotiations are exchanged in a series of telephone calls, e-mails, letters or facsimiles, these contacts alone are not sufficient to establish that the non-resident defendant purposefully availed itself of the privilege of conduct business in Arizona. Id. at 315-16, 230 P.3d at 374-75. Indeed, where interstate communications, such as telephone calls and e-mails, are the only contacts involved or are unilateral acts initiated by the plaintiff, courts have held that they are insufficient to establish specific jurisdiction. 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, the Arizona Court of Appeals did recognize a securities case in which a Connecticut court held that “a 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.” Rollin v. William V. Frankel & Co., Inc., 196 Ariz. 350, 355 n.3, 996 P.2d 1254, 1259 n.3 (Ct. App. 2000) (quoting Cody v. Ward, 954 F. Supp. 43, 44 (D. Conn. 1997)). In Cody, the U.S. District Court of Connecticut specifically held as follows:
[D]efendant’s contacts with the plaintiff in Connecticut were substantial enough that he should reasonably have anticipated being sued here. Crediting the allegations of the amended complaint, the defendant made fraudulent misrepresentations to the plaintiff in a series of [4] telephone calls and [at least 15] e-mail messages for the purpose of causing the plaintiff to purchase and hold ENP shares. Given the nature and number of the defendant’s telephone calls and e-mail messages to the plaintiff, he could reasonably expect to be sued in Connecticut if the plaintiff lost the nearly $200,000 he invested in ENP stock.
954 F. Supp. at 47. Thus, if a non-resident defendant’s communications regarding an investment are directed toward Arizona, are of a large number and are of a fraudulent nature, then they may on their own constitute purposeful acts sufficient to satisfy the first prong of specific jurisdiction. Id. Cf. 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).

ii. Terms of the Parties’ Contract & Course of Dealing.

A non-resident defendant may also purposefully avail itself of the privilege of conducting business in Arizona based upon the parties’ contract and course of dealing, including any further discussions in Arizona, the drafting of the parties’ agreement in Arizona, and the execution or performance of the parties’ agreement in Arizona. Planning Group of Scottsdale, L.L.C., 224 Ariz. at 316, 230 P.3d at 375. In other words, where the focus of the performance of the terms of the parties’ contract would be in Arizona, then purposeful availment may exist to confer specific personal jurisdiction. See, e.g., 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).

However, acceptance of money sent from Arizona in connection with the underlying contract is not itself sufficient to establish purposeful availment. Planning Group of Scottsdale, L.L.C., 224 Ariz. at 316, 230 P.3d at 375. This is particularly true when the plaintiff wired funds pursuant to the parties’ discussions that took place outside Arizona, a contract was drafted and executed outside of Arizona, and the parties’ performance of that contract was to take place outside of Arizona, including any profits or obligations to repay being dependent on activities performed outside of Arizona. Id. at 316, 230 P.3d at 375. “In analyzing interstate transactions in which there were only tangential contacts with the forum, such as payments to the forum state, we place special emphasis on where the underlying transactions was to be performed.” Id. at 316, 230 P.3d at 375.

iii. Parties’ Ongoing Relationships & Future Consequences.

In determining whether purposeful availment exists and confers specific personal jurisdiction, Arizona courts also “look to whether the transaction resulted in an ongoing and continuous relationship between the parties.” Id. at 317, 230 P.3d at 376. Such an ongoing and continuous relationship may exist where the parties negotiated in Arizona, the non-resident defendant solicited the contract or initiated the business relationship with the plaintiff in Arizona, the non-resident defendant sent materials to the plaintiff in Arizona, and payments were sent to and from Arizona. Id. at 318, 230 P.3d at 377.

However, the Arizona Court of Appeals made clear that the following events are alone insufficient to create an ongoing and continuing obligation sufficient to establish purposeful availment: (1) the negotiation and execution of a contract when the focus of the performance is not in Arizona; (2) the acceptance of funds from Arizona when they are to be used for activities performed outside of Arizona; and (3) payment of profits or repayment of funds when monies are produced as a result of the activities performed outside of Arizona. Id. at 317-18, 230 P.3d at 376-77.

In short, in a securities case, a non-resident defendant may purposefully avail itself of the privilege of conducting business in Arizona based on the following: (1) plaintiff is solicited and induced to enter into contract in Arizona that is negotiated in Arizona; (2) contract is drafted, executed and performed in Arizona; and (3) plaintiff’s payment is received in or from 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 & 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.
A. Uberti & C. v. Leonardo, 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 purposefully avails itself of the privilege of conducting business in 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. Purposeful availment, which is the test applied to securities cases that are based upon the underlying investment contract, exists when (1) the parties’ negotiations and communications occur in Arizona; (2) the terms of the underlying contract are performed in, and parties’ actual course of dealing occur in, Arizona; and (3) the parties’ ongoing relationship and contemplated future consequences occur in Arizona.

[1] 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)).

[2] 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).

[3] “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).

[4] But see A. Uberti & C., 181 Ariz. at 574, 892 P.2d at 1363 (holding non-resident defendant cannot “‘insulate itself from the reach of the forum State’s long-arm rule by using an intermediary or by professing ignorance of the ultimate destination of its products,’ [because that] would undermine principles of fundamental fairness and due process.”

[5] However, choice of law clauses or forum selection clauses in a contract do not apply to the specific jurisdiction analysis. See Williams, 199 Ariz. at 6, 13 P.3d at 285 (holding choice of law principles “determine which state’s law should apply, not whether a particular state can exercise specific jurisdiction over a particular defendant.”); Mfrs.’ Lease Plans, Inc., 115 Ariz. at 361, 565 P.2d at 867 (holding “whether another for[u]m is equally good or better does not bear on whether a prima facie case has been made that our long arm statute confers jurisdiction which does not violate due process.”).

[6] However, when the plaintiff’s securities fraud claim is not based on the parties’ underlying agreement, but on the defendant’s independent actions, then a purposeful direction analysis may be appropriate. Planning Group of Scottsdale L.L.C., 224 Ariz. at 315, 230 P.3d at 374.

If you have questions regarding a possible securities law matter, or to arrange for a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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