California Business Divorce Blog: Your LLC Can Run, But It Probably Cannot Hide From California Jurisdiction
In some cases, owners of an LLC provide in their Operating Agreements that any disputes involving the LLC or arising out of the Operating Agreement, including a business divorce, must be litigated in a private arbitration without a jury. However, where there is no arbitration agreement between the parties to a lawsuit, those disputes must be decided in courts which have personal jurisdiction over the LLC and/or its managers and members.
In a recent case, the U.S. Court of Appeals for the Ninth Circuit held that an LLC, which moved its business operations from San Diego, California to Austin, Texas in 2016 and had not conducted any business in California since then, could still be sued in California where the subject matter of the lawsuit concerned the LLC’s business activities in California nearly a decade earlier.
In Impossible Foods, Inc. v. Impossible X, LLC, 2023 DJDAR 9367 (9thCir., Sept. 13, 2023), the owner of the Impossible X, LLC registered various “IMPOSSIBLE” trademarks, which the owner first used in connection with his personal blog promoting personal fitness and adventure activities. From 2014-2016, the LLC owner used these marks on national platforms, including Amazon e-commerce platform and a YouTube channel.
Although the owner never registered Impossible X, LLC to do business in California, and had no employees, outside investors, or manufacturing or production facilities, he referred to his personal office in San Diego as the “Impossible headquarters” and, while living in San Diego from 2014-2016, endeavored to build brand recognition for Impossible X, including various marketing efforts and social media posts.
In 2020, the U.S. Patent and Trademark Office published for opposition three trademark applications by another company called Impossible Foods in connection with “recipes, ingredients and cooking information.” Impossible X filed an opposition claiming the application infringed upon its already registered marks. Impossible Foods then sued Impossible X in California and sought a declaratory judgment that Impossible Foods' use of “IMPOSSIBLE” in connection with its business would not infringe the already existing Impossible X marks and that Impossible X was applying its marks too broadly.
Impossible X, which had long since moved to Austin, Texas and had no physical footprint in California, moved to dismiss the case on the ground that California did not have personal jurisdiction over Impossible X. The lower court agreed and dismissed the lawsuit, finding that Impossible X’s activities in California in 2014-2016 did not have any direct relation to Impossible Foods’ 2020 trademark application. However, that decision was overturned on appeal. In a detailed opinion, the 9thCircuit found that the LLC had purposefully availed itself of the benefits of doing business in California and that those activities had a sufficient connection to Impossible Food’s trademark application that it could be compelled to defend itself in California from Austin, Texas.
Because the question whether an LLC’s connection to California is sufficient for jurisdiction purposes is fairly subjective, simply moving an LLC from California to another state, even for an extended period of time, may not prevent an LLC from having to return to California to litigate legal disputes.
Although an arbitration clause applies only to the parties to an Operating Agreement, and would not have prevented this particular lawsuit by Impossible Foods (which is not a party to the Operating Agreement), this case is a still good reminder to implement such clauses due to the subjective nature of personal jurisdiction analysis. This is particularly true where members of the LLC are in different states or may intend to move in the future.
