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SOTELO v. DIRECTREVENUE

August 29, 2005.

STEPHEN SOTELO, individually and on behalf of all persons similarly situated, Plaintiff,
v.
DIRECTREVENUE, LLC; DIRECTREVENUE HOLDINGS, LLC; BETTERINTERNET, LLC; BYRON UDELL & ASSOCIATES, INC., d/b/a ACCUQUOTE; AQUANTIVE, INC. and JOHN DOES 1-100, Defendants.



The opinion of the court was delivered by: ROBERT GETTLEMAN, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Stephen Sotelo filed a five-count putative class action complaint against defendants DirectRevenue, LLC ("DR"), DirectRevenue Holdings, LLC ("DR Holdings"), and BetterInternet LLC ("BI") (collectively, "Direct Revenue"), and Byron Udell & Associates, Inc., d/b/a AccuQuote ("AccuQuote) and aQuantive, Inc. ("aQuantive"), alleging that, without his consent, defendants caused software known as "spyware"*fn1 ("Spyware") to be downloaded onto his personal computer. Plaintiff alleges that Spyware tracked plaintiff's Internet use, invaded his privacy, and caused substantial damage to his computer. Plaintiff asserts various claims under Illinois law; trespass to personal property (Count I); consumer fraud (Count II); unjust enrichment (Count III); negligence (Count IV); and computer tampering (Count V). Plaintiff seeks injunctive relief and compensatory damages.

Defendants removed the class action to federal district court pursuant to 28 U.S.C. § 1332(d)(2) and the Class Action Fairness Act of 2005 ("CAFA"), 28 U.S.C. § 1453.*fn2 Defendants have filed five motions: (1) DR Holdings's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(2); (2) DR, BI, and AccuQuote's combined motion to stay litigation in favor of arbitration pursuant to § 3 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3; (3) AccuQuote's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6); (4) aQuantive's motion to dismiss pursuant to Rule 12(b)(6); and (5) DR and BI's combined motion to dismiss pursuant to Rule 12(b)(6).

  For the reasons discussed herein, defendants' motions are denied in part and granted in part.

  FACTS

  Defendant BI is a Delaware limited liability company with its principal place of business in New York, New York. Defendant DR is, upon information and belief, the sole member and manager of BI. Defendant DR Holdings is a Delaware limited liability with its principal place of business in New York, NY, and the holding company for BI and DR. Defendant AccuQuote, an Illinois corporation with its principal place of business in Wheeling, Illinois, sells life insurance on the Internet. Defendant aQuantive is a publicly traded Washington corporation headquartered in Seattle, Washington, that is a marketing company that acts as an advertising agent for companies that advertise their products on the Internet. At times relevant to this lawsuit, aQuantive maintained two offices in Chicago, Illinois.

  Plaintiff alleges that DirectRevenue deceptively downloaded Spyware, distributed by B1, on thousands of computers. Spyware allows DirectRevenue and companies that employ its services to track a computer user's web browsing behavior in order to deliver targeted advertisements to that computer. For example, if a computer with Spyware views music-related Internet sites, Spyware sends a signal of the computer user's activity back to DirectRevenue, which then targets the computer with advertisements from music-related companies that have paid for access to the computer via Spyware. DirectRevenue claims access to 12,000,000 computers in the United States, and has attracted national media attention and criticism for its alleged misconduct in gaining and maintaining such access.*fn3 According to plaintiff, aQuantive and AccuQuote, or someone on their behalf, used Spyware to send advertisements to the computers.

  DirectRevenue "secretly installs" Spyware by bundling it with other legitimate software that is available "free" on the Internet, such as games. When the computer user downloads and installs a game, he or she simultaneously, but unwittingly, downloads Spyware. "The computer users do not consent, let alone have knowledge," that Spyware is being installed on their computers because DirectRevenue has "deceptively caused" Spyware to download without the users' consent or knowledge. DirectRevenue has an agreement governing Spyware called the "BetterInternet End User License Agreement" ("EULA") that purports to inform a consumer that Spyware will be installed, computer use will be monitored, and the computer will receive targeted advertisements.

  According to plaintiff, DirectRevenue installs Spyware in at least three different ways to avoid showing the EULA to computer users. First, for computers with Microsoft settlings set to "low," Spyware automatically installs when a user downloads a free software program. These users are "never even shown the [EULA], told of its existence, or advised of the need for any sort of licensing." Second, computer users who have Microsoft Windows' Service Pack 2 (a security feature) installed on their computers receive a pop-up dialog box as the Spyware is being downloaded. The message in the dialogue box is an "unintelligible" incomplete sentence, refers only to "`the software,' rather than a bona fide program name," and asks the user to click "Install" or "Don't Install." There is no disclosure that the software being downloaded includes Spyware. There is a link to the EULA, but users are not asked to click on the link, advised of the availability of the EULA, or asked to agree to the EULA. Third, Internet users without Microsoft Windows Service Pack 2 are asked to agree to a "Consumer Policy Agreement," but not to the EULA, and there is no such policy available on DirectRevenue's website or elsewhere for computer users to review.

  According to plaintiff, Spyware is designed to be difficult to remove from a computer once it is installed. DirectRevenue engages "in a uniformly deceptive course of conduct" to prevent users from removing Spyware after it is installed, including changing its name to prevent disgruntled computer users from complaining and altering the Spyware file names so that anti-Spyware programs and computer technicians cannot locate and remove it. DirectRevenue uses misleading aliases in an effort to deceive consumers including: BestOffers, BetterInternet, Ceres, LocalNRD, MSView, MultiMPP, MXTarget, OfferOptimizer, and Twaintec. The EULA, if users ever see it, directs users who want to remove Spyware from their computers to a website address, http://mypctuneup.com/contacts.php. However, at the time of the complaint, the link did not connect to a web page, and no such site could be found. If a user attempts to use the "add or remove programs" feature to remove the legitimate software to which Spyware was bundled, Spyware "unbundles" and remains on the computer.

  Through Spyware, advertisers and advertising agents, including aQuantive and AccuQuote, have access to millions of computers for their targeted advertising. These advertisers, or companies they have hired to advertise on their behalf, bombard users' computers with ads that constantly "pop up" over whatever web page a user is viewing. The pop-up advertisements are sent in a manner that breaches the security of affected computers by bypassing commonly-used software designed to block pop-ups. Once an advertisement is sent, it generally remains on the computer screen until the computer user actually closes the advertisement. Even after closing the advertisement, however, it is sent over and over again, and users receive many advertisements repeatedly. According to plaintiff, "Newsweek reported that Direct Revenue may have as many as 1.5 billion advertising impressions (i.e., pop-ups) per month."

  Plaintiff alleges that Spyware wreaks havoc on a computer and its user. Spyware destroys other software programs, and Spyware and the unsolicited advertisements that clog the screen cause computers to slow down, deplete Internet bandwidth and the computer's memory, and use pixels and screen-space on monitors. Productivity is decreased because hours are wasted attempting to remove Spyware from computers, closing recurring and frequent advertisements, and waiting for slowed machines. Users are forced to keep their slowed computers running longer, which uses more electricity, decreases the useful life of an computer, and forces the user to incur increased Internet access charges. It costs approximately $30 per year to purchase software to effectively remove Spyware and unwanted advertisements, and to guard against future infections.

  DISCUSSION

  I. DR Holdings's motion to dismiss for lack of personal jurisdiction

  DR Holdings argues that the complaint against it should be dismissed pursuant to Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction because it is merely the parent of defendant DR, which is the parent of BI, and DR Holdings did not engage in any of the conduct at issue in plaintiff's complaint.

  Plaintiff bears the burden of establishing a prima facie case for personal jurisdiction. See, Central States, Southeast and Southwest Areas Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 939 (7th Cir. 2000); Steel Warehouse of Wisc. Inc. v. Leach, 154 F.3d 712, 714 (7th Cir. 1998). To demonstrate that a defendant has sufficient "minimum contacts" with the forum state to support the exercise of personal jurisdiction, a plaintiff may establish the existence of either general or specific jurisdiction. Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713-24 (7th Cir. 2002). When determining personal jurisdiction over a defendant, the court can consider affidavits submitted by the parties, see Kontos v. U.S. Dept. of Labor, 826 F.2d 573, 576 (7th Cir. 1987), and "must accept all undenied factual allegations and resolve all factual disputes in favor of the party seeking to establish jurisdiction." Saylor v. Dyniewski, 836 F.2d 341, 342 (7th Cir. 1988). The court has jurisdiction over a non-resident, non-consenting defendant in a diversity case if Illinois state courts would have jurisdiction. McIlwee v. ADM Industries, Inc., 17 F.3d 222, 223 (7th Cir. 1994); RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1275 (7th Cir. 1997). "The Illinois long-arm statute permits its courts to exercise jurisdiction on any basis permitted by the Illinois and United States Constitution." Central States, 230 F.3d at 940, citing 735 Ill. Comp. Stat. 5/2-209(c).

  According to the affidavit of Joshua Abram ("Abram"), chief executive officer of DR Holdings, it does not "engage in any of the Internet-related business activities that are alleged in the Complaint" or "distribute [Spyware] or `pop-up advertising' on the Internet." DR Holdings is not registered to do business in Illinois, and does not maintain any websites that are accessible to customers in Illinois, maintain any offices, facilities, bank accounts or personnel in Illinois, or conduct any business in Illinois. Thus, DR Holdings lacks the "minimum contacts" with the forum state that would justify the exercise of personal jurisdiction. FMC Corp. v. Varonos, 892 F.2d 1308, 1311 n. 5 (7th Cir. 1990), citing International Shoe Co. v. State of Washington, Office of Unemployment Compensation and Placement, 326 U.S. 310, 316 (U.S. 1945). DR Holdings has not "purposefully avail[ed] itself of the privilege of conducting activities in Illinois, Hanson v. Denekla, 357 U.S. 235, 253 (1958), and could not "reasonably anticipate being haled into court there." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985), quoting World-Wide Volkswagon Corp. v. Woodson, 444 U.S. 286 (U.S. 1980). Plaintiff's opposition to DR Holdings's motion to dismiss relies almost entirely on citations to DR Holdings's filings in a case before the District Court for the Western District of Washington, Avenue Media, N.V. v. Directrevenue, LLC, et al., No. 04-CV-02371C (W.D.Wa. Dec. 15, 2004), and the judge's order in that case denying the plaintiff's motion for a temporary restraining order ("TRO"). The defendants in Avenue Media — DR, DR Holdings, and BI — filed a joint brief in opposition to the plaintiff's motion for a TRO, which states, "Defendants [DR], [DR Holdings], and [BI] operate a leading internet business headquartered in New York. Defendants' operations include Offeroptimizer.com*fn4 . . ." Abram filed an affidavit in support of the brief.

  In the instant case, plaintiff argues that the defendants' argument, Abram's affidavit, and the court's finding in Avenue Media establish that DR, BI, and DR Holdings should be viewed collectively for jurisdictional purposes. Plaintiff's accusations that DR Holdings is "willing to tell directly contradictory stories, under oath, to different Federal courts," and that Abram is lying in his affidavit submitted to this court are hyperbolic. The arguments and affidavits in Avenue Media are not relevant here because DR Holdings has raised independent grounds for its dismissal from the instant case that it did not raise before the Washington court. In particular, the filings and the court's order in Avenue Media address the defendants collectively, whereas in the instant motion, DR Holdings seeks to distinguish itself from its subsidiaries, DR and BI. DR Holdings's arguments and affidavits regarding its distinct jurisdictional posture as a holding company are not foreclosed by the "judicial admissions" in Avenue Media, which did not differentiate between the defendants and do not contradict DR Holdings's more specific affidavit testimony in the instant case.

  Plaintiff, overly focused on the Avenue Media documents, fails to address DR Holdings's central argument that as a holding company it is not subject to personal jurisdiction here. Significantly, plaintiff does not deny DR Holdings's testimony that it did not have any contact with Illinois. See Turncock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987) (when determining whether plaintiff has met burden of establishing a prima facie showing of jurisdiction, allegations in plaintiff's complaint are taken to be true unless controverted by the defendant's affidavits or exhibits). As a general rule, "the jurisdictional contacts of a subsidiary corporation are not imputed to the parent." Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 787 n. 17 (7th Cir. 2003) (collecting cases); see also Central States, 230 F.3d at 943 ("[W]e hold that constitutional due process requires that personal jurisdiction cannot be premised on corporate affiliation or stock ownership alone when corporate formalities are substantially observed and the parent does not exercise an unusually high degree of control over the subsidiary."). A holding company that neither transacts business nor contracts to provide products or services in Illinois is not subject to personal jurisdiction in Illinois. Androphy v. Smith & Nephew, Inc., 31 F. Supp. 2d 620, 622 (N.D.Ill. 1998). A plaintiff's allegation that one defendant is the parent of another defendant is insufficient to support the exercise of specific jurisdiction absent "evidence that justifies piercing the corporate veil" or evidence that "the subsidiaries were acting as the parent's agent." Salon Group, Inc. v. Salberg, 156 F.Supp.2d 872, 876 (N.D.Ill. 2001). The only allegation in plaintiff's complaint specifically addressed to DR Holdings is that DR Holdings is a holding company for BI and DR. This lone allegation is insufficient to establish "continuous or ...


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