The concept of Internet jurisdiction can be complicated and unclear. What happens when a dispute arises over an item or service purchased from your business through the internet? If that dispute turns into a lawsuit, it could be with an individual residing across the country from your business. What happens then? If you live in California, could your business actually be dragged into a state court in Maine?
Any business with an Internet presence should understand how courts gain authority to hear claims made against out-of-state businesses. The bottom line is that establishing Internet jurisdiction over your business can potentially end up being very costly!
Establishing Internet Jurisdiction Over Your Business
No matter what the subject of the dispute is about, a court must have what is known as “personal jurisdiction” over all the parties involved. This applies to all courts, including state and federal district courts. Establishing personal jurisdiction means that the court has the legal power to make a binding decision over the plaintiff and the defendant in a given dispute. State and federal courts always have personal jurisdiction over state residents. But, when the defendant’s principal residence or place of business is not in the state where the lawsuit is filed (often called the “forum state”), matters are much more complex. This is often the case with suits involving e-commerce.
(Note: A corporation is treated as a citizen of the state in which it is incorporated and the state in which its principal place of business is located. A partnership or limited liability company is considered to assume the citizenship of each jurisdiction of its partners/members. If you understand the nature of how a court can gain jurisdiction to hear a claim filed against your business, you can avoid certain practices that may expose you to out-of-state claims.)
The Concept of Minimum Contacts
One way a foreign court can claim personal jurisdiction over your business is by establishing that some sort of meaningful connection exists with the state in question and your business. States can exercise jurisdiction over your business through their “long-arm statutes” (which I discuss separately). However, the Due Process Clause of the U.S. Constitution mandates that certain “minimum contacts” must exist between the forum state and the defendant in order for a state to assert jurisdiction over the defendant. This basically means that activities which are deemed to establish substantially sufficient contacts with the residents or businesses of a particular state can be used by its courts to establish jurisdiction over your business. For example, you are not subject to the personal jurisdiction of an out-of-state court simply because you are involved in an automobile accident with a resident of that state where you live. All the events necessary to give rise to the claim occur outside the state of the other resident.
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Activities establishing minimum contacts with another state are not always clear, but usually any substantial presence in the state will justify personal jurisdiction. Regularly soliciting business in that state, deriving substantial revenue from goods or services sold in that state, or engaging in some other persistent and continuous course of business conduct in the state are all examples of activities that would establish minimum contacts with that state.
Minimum Contacts Define Internet Jurisdiction
As stated, the concept of minimum contacts becomes more complicated when it involves the Internet. The courts have recognized that exposing the owners of a website to personal jurisdiction simply because the website can be viewed nationally is not enough to establish minimum contacts in a given state. Personal jurisdiction is “directly proportionate to the nature and quality of commercial activity that a business conducts over the Internet.” Businesses that enter into contracts or subscriptions with residents of another state that involve the “knowing and repeated transmission of computer files over the Internet will be subject to the jurisdiction of out-of-state courts. But, websites that only post information without making active sales are unlikely to establish personal jurisdiction in a foreign state (except in the state where the owner(s) resides or conducts other business).
The ‘Zippo’ Sliding Scale Guide
Generally speaking, minimum contacts for Internet retailers and marketers are directly related to the nature and quality of electronic contacts they establish with residents of another state. In other words, mere advertising alone is not enough to establish jurisdiction. Most courts across the nation have adopted the “sliding scale” approach used in Zippo Manufacturing Co. v. Zippo Dot Com, Inc. (1997). The court in Zippo determined that the act of processing the applications from Pennsylvania residents and assigning passwords was sufficient to demonstrate sufficient minimum contacts with the state. But, the Court held that jurisdiction is not proper when a website passively posts information on the Internet which may or may not be viewed by residents of that particular jurisdiction.
In the Zippo case, the district court described a spectrum consisting of three categories websites fall under. This spectrum ranges from: 1) businesses clearly conducting commercial activities over the Internet by entering into contracts with residents of the forum state; 2) interactive web sites with which a user in the forum state can exchange information and jurisdiction is proper if the level of interactivity is sufficient and there is a commercial component to the web site and 3) web sites which are “passive” by merely allowing users to post information accessible nationwide or globally that do not target a particular plaintiff in a particular forum (i.e. by intentional trademark or copyright infringement or in cases of defamation). Basically, under the Zippo sliding scale jurisdiction is more likely to be established when your Internet business engages in commercial activities directed at residents of a given state.
Of course, many cases fall in the middle of the Zippo sliding scale. In these instances, the courts generally have determined that “the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the website.” Making multiple sales to state residents is likely to expose an Internet-based business to personal jurisdiction in that state. A single sale may also be enough, provided it is accompanied by numerous intentional communications with a resident customers so that the transaction can be said to be purposefully aimed at the residents (or businesses) of that state.
Typically, the courts require “something more” than passive Internet advertising or more than just a single sale for jurisdiction to exist over a non-resident Internet business. Jurisdiction is often triggered by repeated or commercially significant sales to out-of-state residents, deliberate target marketing to out-of-state residents or significant non-Internet based contacts with the state Planet Amend.
State Long Arm Statutes
All states have enacted “long-arm statutes” setting forth what will be considered sufficient contacts with that state. In a nutshell, the long-arm statute allows that state’s courts to gain personal jurisdiction over Internet businesses. These statutes form the legal basis allowing the courts to exercise personal jurisdiction over your business. Under these statutes, service of process outside the state on nonresident individuals and businesses is allowed for claims generally arising out of: (1) the transaction of any business in the state; (2) the commission of a tortious act within the state; (3) the ownership, use, or possession of real estate in the state; or (4) contracting to supply goods or services to any person or business in the state; or 5) causing injury or damage in this state to any person by breach of warranty expressly or impliedly made in the sale of goods; 6) contracting to insure any person, property, or risk located within this state at the time of contracting; 7) an act or omission outside the state causing injury in the state.
State courts typically exercise personal jurisdiction over Internet businesses under the “transacting business” provision of the long-arm statute. Like the Zippo court, state courts will look at jurisdiction in an Internet setting by looking at the “nature and quality” of the contacts with the state. Some Long-arm statutes set forth factual situations likely to satisfy the minimum-contacts test. Others contain much broader provisions not inconsistent with constitutional restrictions.
Helpful Case Summaries
Here is a summary of some decisions that have helped shape the law regarding internet jurisdiction. Hopefully, these summaries can provide some guidance.
Thompson v. Handa-Lopez, Inc. (1998): A Texas court gained personal jurisdiction over an out-of-state online gambling enterprise because the gambling operation entered into contracts with Texas residents to play online gambling games, sent emails to the Texas residents, and sent winnings to Texas residents;
Chloé NA v Queen Bee of Beverly Hills LLC (2010): The US Second Circuit Court of Appeals held that specific personal jurisdiction over an out-of-state website operator located in California may exist based on a single act of shipping a handbag into New York, along with other substantial business activity in the state. The single act of shipping an infringing handbag to New York combined with other substantial contacts, such as the shipment of several other items in-state and operating a commercial interactive website available to New York residents was sufficient to obtain specific personal jurisdiction;
Verizon Online Services, Inc. v. Ralksky (2002): The court held that nonresident defendants’ transmission of spam emails through plaintiff’s servers, located in Virginia, to nonresident Internet subscribers created a substantial connection to forum sufficient for exercise of personal jurisdiction on a claim of trespass to chattel;
Gates v. Royal Palace Hotel (1998): The court decided that the combination of a concentrated advertising effort within the state of Connecticut, active booking of reservations for Connecticut citizens through state travel agents, and an invitation to Connecticut citizens to make reservations through the Internet, constituted the transaction of business within the state such that exercise of personal jurisdiction was proper.
Causing an Injury within a State
Your Internet business can also be subject to jurisdiction in another state for purposefully causing a physical or economic injury (i.e. a “tort”) to a business or resident of that state. This is a separate avenue of liability outside of a breach of contract claim where your business is dragged into court by one of your unhappy customers. If you use the Internet to cause an injury in one state, you or your business may be brought into court in the state where the injury occurred. For example, under state long arm statutes, committing a tortious act within the state is a basis of jurisdiction.
Of course, in cases where the connection between the activity and the injury is not clear, courts have looked for evidence that the activity was “purposefully directed” at the resident(s) of the forum state, or that the person causing the injury had substantial contacts with the state. Most courts are less inclined to exercise personal jurisdiction over non-residents in cases involving tort claims arising from Internet use. Generally speaking, an Internet business must direct its activities at an in-state resident, or have a continuing obligation with that resident, in order reasonably to anticipate being hauled into court in the state.
But, not all torts or injuries will expose your business to the personal jurisdiction of another state. Even if a plaintiff claims to feel the effects of the harm caused by an act causing injury in his or her forum state, there must still be “something more” than mere Internet use to satisfy due process under the Constitution. Purposeful conduct may still be insufficient in jurisdictions where the activity must be directed at the plaintiff in his or her capacity as a resident of that particular state.
More case examples:
EDIAS Software International v. BASIS International Ltd. (1996): A New Mexico company was sued for sending defamatory email and making defamatory postings about an Arizona business. The court claimed personal jurisdiction because the defamatory statements intentionally targeted the Arizona business and actually caused an injury (defamation) within the state.
Pavlovich v. Superior Court (Cal. 2002): Under the “effects test”, the trial court did not have jurisdiction over a foreign resident in a corporation’s suit alleging the resident misappropriated its trade secrets by posting the corporation’s program’s source code on his website. The website was accessible to any person with Internet access and the resident merely posted information and had no interactive features. The court determined that the resident could not have known that his tortious conduct would hurt the corporation in California when the misappropriated code was first posted and this did not establish express targeting of California residents.
Blumenthal v. Drudge (1998): In another early decision, Matt Drudge of The Drudge Report made alleged defamatory statements about a Washington, D.C. resident on his website and the resident filed suit in the District of Columbia. Although Matt Drudge lived and worked in California at the time of the suit, a court ruled that he was subject to personal jurisdiction in the District because the injury occurred in the District. The court also determined that the Drudge Report had substantial contacts in D. C. since Drudge personally emailed his column to a list of emails belonging to D.C. residents, solicited contributions and collected money from D. C. residents and he traveled to D. C. on two occasions to promote his column. All of this was enough for the court in that case to determine that Matt Drudge had substantial contacts with the District;
Cybersell, Inc. v. Cybersell, Inc. (1997): An Arizona plaintiff suing for trademark infringement argued that a Florida defendant’s mere use of the same trademark in its home page was sufficient for personal jurisdiction. The Florida defendant had “no contacts with Arizona other than maintaining a home page that was accessible to anyone over the Internet.” The court declined to exercise jurisdiction, noting the Florida defendant “did nothing to encourage residents of Arizona to access its site, and there [was] no evidence that any part of its business (let alone a continuous part of its business) was sought or achieved in Arizona.” The circumstances lacked the “something more” necessary “to indicate that the defendant purposefully… directed his activity in a substantial way to the forum state.”
Consenting to Jurisdiction over Your Business
A court can obtain personal jurisdiction if both parties consent to such jurisdiction. The most common type of consent is where a company is required to consent, in advance, to personal jurisdiction in a state for incorporating or organizing a business under the laws of that state. State business organization statutes require that a business provide the secretary of state with an agent to accept service of process. An Internet business can also consent to the court’s jurisdiction by filing a response to a lawsuit filed with that court.
Similarly, you may grant consent by signing a contract that has a provision requiring you agree in advance to be subject to the personal jurisdiction of a state. For example, a California website developer may sign an agreement with an Illinois service provider containing a clause stating: “The parties consent to the exclusive jurisdiction of the federal and state courts located in Cook County, Illinois, in any action arising out of or relating to this agreement. The parties waive any other venue to which either party might be entitled by domicile or otherwise.” (However, the States of Montana and Idaho do refuse to recognize such clauses).
You have now been introduced to the catch 22 of e-commerce! The Internet provides a great way for small businesses to operate and achieve massive growth. Unfortunately, such growth will inevitably expose your business to foreign jurisdiction and the ability to be hauled into court in some distant State. If you want to guarantee that you will avoid this risk and you plan on operating a commercial website, you will surely sacrifice sales and growth.
This article was written by Philip A. Nicolosi, J.D. Mr. Nicolosi provides legal services through his law firm, Phil Nicolosi Law, P.C., focusing on startup and small business law, Internet & technology law and commercial transactions.
Mr. Nicolosi serves as a trusted advisor to numerous startups and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet and mobile marketing and technology-related legal matters to many of his business clients. He also assists startups with seed funding and venture capital law.