E360 Insight v. The Spamhaus Project

• Decision Date: 30 August 2007
• Docket Number: No. 06-4169.,No. 06-3779.,06-3779.,06-4169.
• Citation: 500 F.3d 594
• Parties: e360 INSIGHT, an Illinois Limited Liability Co., and David Linhardt, Plaintiffs-Appellees, v. The SPAMHAUS PROJECT, a Company Limited by Guarantee and Organized Under the Laws of England also known as The Spamhaus Project, Limited, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

500 F.3d 594

e360 INSIGHT, an Illinois Limited Liability Co., and David Linhardt, Plaintiffs-Appellees, v. The SPAMHAUS PROJECT, a Company Limited by Guarantee and Organized Under the Laws of England also known as The Spamhaus Project, Limited, Defendant-Appellant.

No. 06-3779.

No. 06-4169.

United States Court of Appeals, Seventh Circuit.

Argued June 6, 2007.

Decided August 30, 2007.

Bartly J. Loethen (argued), Synergy Law Group, Chicago, IL, for Plaintiffs-Appellees.

Craig C. Martin (argued), Jenner & Block, Matthew M. Neumeier, Howrey, Simon Arnold & White, Chicago, IL, for Defendant-Appellant.

Before RIPPLE, KANNE and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

e360 Insight, LLC, and David Linhardt (collectively, "e360") brought this action in the Cook County Circuit Court, alleging various tort claims against The Spamhaus Project ("Spamhaus"). Spamhaus removed the case to the United States District Court for the Northern District of Illinois. Spamhaus answered the complaint and then, one month later, in open court, moved to withdraw its answer. The court granted that motion, as well as a motion by Spamhaus' counsel to withdraw. Because Spamhaus had elected not to defend the action, the court also entered a default, issued a preliminary injunction and requested evidence from e360 to support a default judgment against Spamhaus. Upon receiving e360's response, the court entered judgment, awarding to e360 $11,715,000 in damages, plus costs, and a permanent injunction. Spamhaus, then represented by new counsel, challenged the judgment in a Rule 60(b) motion to the district court. That motion was denied. Spamhaus timely appeals both the default judgment and the district court's denial of its Rule 60(b) motion. For the reasons stated in this opinion, we affirm the entry of a default judgment, but vacate the award of damages and injunctive relief and remand for further proceedings consistent with this opinion.

I BACKGROUND

A. Facts

Spamhaus is a non-profit company limited by guarantee and organized under the laws of the United Kingdom. It is an internet watchdog group in the business of identifying and blocking internet "spam," or unsolicited bulk e-mail. In that capacity, it maintains the "Register Of Known Spam Operations" ("ROKSO"), a "3 strikes list" for internet users it believes are responsible for creating and distributing spam messages. R.1, Ex. A at 4. Through the ROKSO, Spamhaus publishes a sort of blacklist of persons or businesses that have been thrown off a minimum of three internet service providers ("ISPs") for violating the terms of use of the ISP; Spamhaus classifies persons or entities who have had at least "three strikes" as "spammers." Although the process is not entirely clear from the record, it appears that ISPs can access Spamhaus' ROKSO list (either directly or through the use of other anti-spam databases into which the ROKSO is integrated); if an ISP then elects, it can employ the ROKSO as part of its own screening process for incoming messages directed to its customers—its "spam filter." That is, an ISP could see that a particular internet protocol ("IP") address had been marked as a spammer on Spamhaus' ROKSO and then, as a result, might refuse to allow a message sent from that IP address to reach the e-mail's intended recipient.

e360 is an internet marketing company operated by David Linhardt out of Wheeling, Illinois. e360 maintains that, at the time it was listed on the ROKSO, it never had been excluded by an ISP. It also claims that it operates in accordance with ISP terms of use and within all applicable laws. e360 uses e-mail to market products for other businesses. The value of its service to the businesses it represents lies in its ability to reach potential individual customers for those businesses via e-mail.

In December 2003, Spamhaus placed e360 Insight, LLC, and Mr. Linhardt on the ROKSO list. e360 claims that it contacted Spamhaus to inform it that a mistake had been made, but nevertheless it remains on the ROKSO list. e360 also claims that Spamhaus cross-lists businesses who partner with companies and individuals on the ROKSO list and refuses to remove these partners from the blacklist until they terminate their relationship with the primary spammer on the ROKSO list.

B. District Court Proceedings

e360 brought this action in state court, claiming that Spamhaus was liable in tort for losses e360 suffered as a result of its placement on the ROKSO. Specifically, the complaint alleged that Spamhaus' placing e360 on the ROKSO list amounted to tortious interference with contractual relations, tortious interference with prospective economic advantage, defamation per se and defamation quod. It sought compensatory and punitive damages, as well as an injunction requiring Spamhaus both to remove e360 from the list and to place a notice on the Spamhaus website that e360 had been included on the ROKSO list in error.

Spamhaus removed the case to the district court on the basis of diversity of citizenship. Spamhaus then answered the complaint on July 21, 2006. In that answer, it denied many of e360's allegations and asserted fourteen affirmative defenses. Among those defenses were lack of personal jurisdiction, insufficient process and insufficient service of process. R.6 at 8.

On August 23, 2006, counsel for both sides appeared before the district court at a status call. The court began addressing the issue of diversity of citizenship when then-counsel for Spamhaus interrupted the court and the following exchange ensued:

MR. BROWN [then-counsel for Spamhaus]: Your Honor, if I may, before we get too far down what we are talking about here today, I have been authorized by my client to do precisely two things here this morning; and, I do acknowledge that it is a bit of an unconventional maneuver. My client wants to—

THE COURT: You represent who?

MR. BROWN: The defendant—

THE COURT: Okay.

MR. BROWN: Spamhaus.

And my client wants to participate in the defense no further.

I am not authorized to do anything more today than to ask this Court that the answer be withdrawn; and, then, once we hear from this Court on that, to get a ruling on our motion to withdraw as counsel.

[the Court engages counsel for the plaintiffs.]

THE COURT: All right.

Do you know whether your client has another law firm in hand or what their position is?

MR. BROWN: My position—or my understanding—from them is that they want to do absolutely nothing.

So, I don't know for certain—

THE COURT: Do they want to lose?

I mean, that is what is on the horizon if they want to do nothing. You have to defend the case.

MR. BROWN: They have been fully informed of the fact that the default judgment is a real possibility. And they are aware of that and are prepared to take that risk.

[exchange regarding motion to withdraw as counsel] THE COURT: Okay.

Here is what we are going to do. I am going to give you leave to withdraw the answer; I am going to give you leave to withdraw; and, in light of the fact that your client is aware of that— and, apparently, has sent no one here to disagree with the request to withdraw; and, I assume you told them it was a dead—bang certainty that default is going to be entered without any resistance to the lawsuit—I am going to enter a default order today.

[court reinstates TRO entered in state court]

THE COURT: [granting the motion to withdraw as counsel]

And I will ask you, as your, if not your final act, at least approaching finality, to let you[r] client know what happened this morning. And tell them it is not just a risk that they will lose the case, but it is a dead-bang certainty. And the first step has been undertaken with the entry of a default.

But no judgment, just a default. Okay?

R.56-1 at 2-3, 6-7.

A week later, e360 filed a motion for a default judgment, supported by an affidavit from Mr. Linhardt that stated the amounts in which he believed his business had been harmed by being placed on the ROKSO. On September 13, 2006, the district court entered judgment and awarded the full amount of compensatory damages stated in Mr. Linhardt's affidavit, $11,715,000.00, as well as $1,917.50 in costs. It denied attorney's fees and punitive damages. The court also entered a permanent injunction, the details of which we shall examine shortly.

Spamhaus filed a timely Rule 60(b) motion to vacate the default and the default judgment. At the hearing on that motion, new counsel for Spamhaus articulated several bases for the motion. First, Spamhaus reasserted its challenge to "the fundamental power of the Court to exercise jurisdiction for default or other purposes over a UK-based Internet company." R.56-4 at 7. According to Spamhaus, that defense could be "independently raise[d], [and] ha[d] nothing to do with whether the attorney appeared . . . or not. Because when they did appear, they properly asserted these defenses." Id. at 7. Spamhaus also advised the district court that it had received conflicting legal advice and that its instruction that prior counsel withdraw was based on a misunderstanding of the applicable law. Finally, Spamhaus raised various objections to the propriety of the specific relief awarded. The district court gave the following response:

I do not think there was anything unknowing or unintentional about the decision made not to defend this case once it got over here at some point. . . .

. . . [T]he idea that Rule 60 accommodates at least what may have seemed at the time an intelligent decision—and an intentional one—should be used to reopen the consequence of the decision, knowingly made, I am not sure that is what Rule 60 is about.

Secondly, yes, we do have to have jurisdiction over subject matter, as well as the person or presence of a defendant in the first instance. There is no question about that.

That was apparently, you say, pressed by way of an affirmative defense—or, at least, it was suggested as an affirmative defense, but not...