By Takao Ohashi
Zachary Lutz, a former professional baseball player, played for the Tohoku Rakuten Golden Eagles (the “Team”) in 2014. In that season, Lutz fractured his thumb while playing for the Team. Because of the injury to his thumb, Lutz returned to his permanent residence in Pennsylvania in mid-September 2014. While Lutz was recovering from his thumb injury, he and his agents began discussions and negotiations with the Team representatives regarding a new contract for Lutz to play for the Team during the 2015 season. The 2015 contract was finalized, and Lutz received a copy of the finalized contract from the Team on Dec. 6, 2014. This contract guaranteed Lutz a base salary of $700,000, incentive bonuses based on Lutz’s performance on the field, and reimbursement for expenses.
Later, however, the director of the Team emailed his agent to inform him that the Team had decided to cease negotiations with Lutz regarding a contract for the 2015 season. Lutz was then released from the Team’s “Reserve List” on Jan. 5, 2015. Due to the timing of his release from the “Reserve List” Lutz was forced to sign a contract with the Doosan Bears of the Korean Baseball Organization for a salary of $550,000.
Lutz, as the Plaintiff, brought an action before the U.S. District Court for the Eastern District of Pennsylvania (the “Court”) against Rakuten Inc. (“Rakuten”), a Japanese corporation and holding company, and its direct and wholly-owned subsidiary, the Team as Defendants because of unilaterally rescinding the contract negotiations for the 2015 season, causing Lutz to lose opportunities to negotiate with other professional baseball teams in Japan due to not releasing him during the negotiations.
In this Order, the Court handed its opinion down regarding (i) personal jurisdiction over Rakuten and the Team and (ii) whether Plaintiff has stated plausible claim for relief under Fer. R. Civ. P. 12(b)(6).
This case is significant in that the Court determined whether a federal court has personal jurisdiction over foreign professional sports teams that recruit and employ U.S.-based professional athletes.
In this respect, the Fer. R. Civ. P. 4 (k) (1) (A) prescribes “who is subject to the jurisdiction of a court of general jurisdiction in the state where the district court is located.” Thus, the Court applied the Pennsylvania long-arm statute. The statute provides for jurisdiction “based on the most minimum contact with this Commonwealth allowed under the Constitution of the United States.”
Then, the Court applied the three-pronged test when determining specific jurisdiction over Defendants. First, “the defendant must have ‘purposefully directed its activities’ at the forum.” Second, “the litigation must ‘arise out of or relate to’ at least one of those activities.” Third, courts “may also consider whether the exercise of jurisdiction otherwise ‘comport[s] with fair play and substantial justice.’”
Regarding specific jurisdiction against the Team, the Court found that Lutz and the Team were in direct communication with each other by email, text message, and telephone in Pennsylvania, and the Team paid the salary for the 2014 season to his bank in Pennsylvania. The Court ruled that the Team took action that was purposely directed at Pennsylvania. Second, the Court ruled that this case was also a dispute that arose from these contacts. Third, the Court ruled that “[t]his matter being heard in Pennsylvania creates a substantially smaller burden on [the Team] compared to the burden Plaintiff [Lutz] would face if this Court would not hear this matter,” and that the Team has the resources to defend this matter in Pennsylvania, etc. As a result, the Court ruled it can exercise personal jurisdiction over the Team in this case.
On the other hand, with regard to Rakuten, the Court ruled it cannot exercise traditional specific jurisdiction over Rakuten because there was no evidence to indicate that the dispute arose from Rakuten’s contact in Pennsylvania. Lutz claimed general jurisdiction over Rakuten besides specific jurisdiction because Rakuten is a global company that has built the “ecosystem” under the Rakuten umbrella, handles e-commerce globally, has an office and is doing business in the United States. In this regard, the Court suggested that “Plaintiff has not exhibited that Rakuten has continuous and systematic affiliations with Pennsylvania that would essentially render it at home in Pennsylvania,” etc. Therefore, the Court denied the Plaintiff’s claims regarding personal jurisdiction.
This case will progress between Lutz and the Team, but there is a problem.
The Team filed the declaratory judgment of absence of any obligations for damages pertaining to the negotiations of the 2015 season contract between Lutz and the Team against Lutz at Sendai District Court in Japan. This is the countermeasure by the Team against this lawsuit in the United States. In the case in Japan, Lutz was summoned properly but did not submit an answer, etc. nor attend oral arguments. Thus, the Japanese court ruled the judgement by default in favor of the Team . In this case, the Japanese court found the dispute between Lutz and the Team arose from the tort by the Team and ruled the Japanese court had jurisdiction over Lutz under the Act on General Rules for Application of Laws in Japan because the place where the result of the wrongful act by the Team occurred was Japan, etc.
If Lutz won this case in Pennsylvania, the judgement of the Court would be inconsistent with the judgement of the Japanese court. I think the Team probably has no assets in the United States. Thus, it is necessary for Lutz to enforce the judgement of the Court in Japan in order to recover the damage.
Article 118 of the Code of Civil Procedure in Japan stipulates that “a final and binding judgment rendered by a foreign court is valid only if it meets all of the following requirements:
the jurisdiction of the foreign court is recognized pursuant to laws and regulations, conventions, or treaties;
the defeated defendant has been served (excluding service by publication or any other service similar thereto) with the requisite summons or order for the commencement of litigation, or has appeared without being so served;
the content of the judgment and the litigation proceedings are not contrary to public policy in Japan;
a guarantee of reciprocity is in place.”
A foreign judgement is possible to enforce in Japan if a Japanese court approves that it meets the requirement of the above article.
However, the Japanese law doesn’t show the solution of which of a foreign judgement or a Japanese judgement would be enforced if they were inconsistent. There are some precedents for lower courts in Japan, but some give priority to Japanese judgement and others give priority to foreign judgement. Thus, the conclusion depends on a case-by-case basis.
Also, Lutz seeks punitive damages in the case in Pennsylvania. There is no punitive damages system under Japanese law. Therefore, the Japanese Supreme Court ruled a ruling concerning punitive damages violated public policy in Japan. If the Court granted punitive damages in this case, Lutz wouldn’t enforce it in Japan.
This Order will be an opportunity for Japanese professional sports teams seeking to recruit and employ U.S.-based professional athletes to review the way of negotiation with players’ contracts.
Tokao Ohashi is a partner in Toranomon Kyodo Law office in Tokyo, Japan. He is also a professor at the graduate school of Kanazawa Institute of Technology in Tokyo, Japan. His areas of expertise are sports law, entertainment law, intellectual property law, and labor law.