Business and Technology Law

When faced with a foreign lawsuit, it is rarely good advice to suggest that a company simply ignore the proceedings and allow the plaintiff to receive an award by default in the hope that any resulting judgment might not be enforceable. A recent decision in the Seventh Circuit highlights the dangers that might arise if a business presumes that a judgment in a foreign jurisdiction might not be enforceable.

The Spamhaus Project, a British non-profit company that maintains a spammer blacklist, was sued in Illinois state court by e360 Insight. e360 Insight claimed that after it was listed as a spammer by Spamhaus, it lost several customers and suppliers. Spamhaus removed the case to federal district court and filed an answer. Spamhaus believed that the Illinois court did not have jurisdiction over it, claiming that it could only be sued in a British court. A month after filing its answer, Spamhaus, in open court, moved to withdraw its answer, and the court granted the motion. The district court entered a default judgment in favor of e360 Insight, awarded $11.7 million in damages, and ordered Spamhaus to cease its operations in the United States if it did not pay the award. The court also instructed the Internet Corporation for Assigned Names and Numbers (ICANN), an international organization that oversees the distribution of IP addresses and domain names, to suspend the spamhaus.org domain. While ICANN claimed it did not have the power to suspend the domain, it did advise Spamhaus’ hosting company to do so.

Although Spamhaus admitted that it normally ignored foreign lawsuits, the attack on its Internet domain definitely got the company’s attention. After its domain was threatened, Spamhaus filed an appeal.

In e360 Insight v. The Spamhaus Project, 2007 WL 2445016 (7th Cir. 2007), the United States Court of Appeals for the Seventh Circuit affirmed the validity of the default judgment. The court rejected Spamhaus’ contention that the district court did not have the authority to enter a default judgment without inquiring into the factual basis for personal jurisdiction and effective service. The Seventh Circuit had previously refused to impose any such requirement on district courts, and it rejected Spamhaus’ argument that a special rule should be applied in cases involving a foreign defendant, internet-based defendant. While recognizing that such a rule might be justified where a defendant had not made an appearance, the court noted that Spamhaus had appeared but chose to withdraw its answer and allow a default to be taken. The court saw no reason “to require the district to raise sua sponte affirmative defenses, which may, of course, be waived or forfeited, on behalf of an appearing part who elects not to pursue those defenses for itself.” In upholding the default, the court was not persuaded that Spamhaus should be allowed to “escape the consequences of” its decision not to participate in the litigation.

Nevertheless, the court did give Spamhaus a second chance with respect to the damages and the injunction. The court concluded that the evidence relied on by the district court was conclusory and insufficient to support the damages awarded. The award was vacated and remanded “for a more extensive inquiry into the damages to which e360 is entitled.” With respect to the injunction, the court found that the entry of default was not a sufficient basis, by itself, for entering a permanent injunction against Spamhaus. Instead, the court remanded the case and directed the district court to assess the well-established elements necessary to support an award of injunctive relief. The court also concluded that the injunctive relief as crafted by the district court was overly broad.

While Spamhaus will have another opportunity to persuade the district court regarding damages and injunctive relief, it still faces potential liability based on the default judgment. The Spamhaus situation serves as a reminder that when faced with a foreign lawsuit, instead of ignoring the suit as a matter of course, a better strategy would be to consult with legal counsel in both jurisdictions and formulate an approach that minimizes risks without jeopardizing a party’s legal position.