Business Law Today: Trapped on the Web

ABA Section of Business Law
Business Law Today
July/August 1998

Trapped on the Web
Your office and Web site are in Honolulu, but they're hauling you into court in Fairbanks

By MARK A. WILLARD

Willard is a partner with Eckert Seamans Cherin & Mellott, LLC in Pittsburgh.

If your clients, like most, are considering establishing sites on the World Wide Web, they should consider a number of things ahead of time, not the least of which is whether the site will expose them to the risk of being sued anywhere the user can tap into its Web site.

No geographic boundaries prevent or limit access to a Web site once it is placed on the Internet. This total access enables the Web site owner to provide products and information about its products and services to customers across the country
even across the world. That's the good news. The bad news is that the same unlimited access that enables your client to distribute information, goods and services anywhere, also can expose your client to being sued in any number of distant forums, outside the business' home state.

Internet technology is different from that of advertising media. Companies with sites on the Web cannot "target" a market in the same way they can using television, radio or print advertising. As a result, lawyers of business owners who are considering establishing sites should recommend to their clients measures that minimize the risk of being hauled into court in another state.

To establish personal jurisdiction, a plaintiff must satisfy both constitutional due process requirements and any applicable state long-arm statutes. A finding of personal jurisdiction gives the court the power to issue a judgment against the defendant. Virtually all states have long-arm statutes that authorize the courts to exercise jurisdiction over a nonresident defendant.

The Constitution requires that a defendant living in one state may be subjected only to litigation in another state if it has "minimum contacts" with another state, such that the maintenance of jurisdiction does not offend "traditional notions of fair play and substantial justice."

There are three prongs to the well-established minimum-contacts test:

The nonresident defendant must have benefited from an interactive relationship with residents of the other state.
The reason for the lawsuit must arise from the defendant's activities in the state where the lawsuit was filed.
The exercise of personal jurisdiction must comply with "traditional notions of fair play and justice."

Until the last few years, courts never faced the task of determining jurisdictional issues based on interaction in cyberspace. The few courts that have considered the issue have adopted the traditional analysis outlined above in determining whether personal jurisdiction attaches to a nonresident defendant conducting business on the World Wide Web. As a result, we lawyers are able to provide guidance to the business community in this regard.

A nonresident defendant may be subject to "general" jurisdiction or "specific" jurisdiction. General jurisdiction arises if the nonresident defendant conducts "continuous and systematic" activities in the state. Specific jurisdiction arises if the defendant had one or more contacts with the state and those contacts gave rise to the cause of action on which it is sued. Specific jurisdiction exists if the defendant actually committed a tort within the state, or if the defendant's out-of-state activities were purposefully directed toward state residents and caused harm.

A Web site is more likely to give rise to specific jurisdiction, where statements made on or products sold from the Web site are the basis for the plaintiff's cause of action. For example, the Web site itself may give rise to claims for defamation, false advertising, breach of contract, trademark infringement or claims of personal injuries caused by allegedly defective goods sold through the Web site.

The jurisdictional issue is often whether the defendant, through its Web site, "purposefully availed" itself of the benefits of the forum state. Two components determine whether a business has done so:

the nature of activity with residents
the extent of business conducted there.

In deciding this issue, courts have focused on whether the particular Web site in question is in fact "interactive" or "passive."

While the courts have followed traditional due process analysis, the results have not been wholly predictable. An Arizona federal court has refused to find jurisdiction over a Florida defendant that allegedly infringed on the Arizona defendant's federally registered trademark, reasoning that the Florida defendant only posted an "essentially passive" home page on the Web. As a passive page, Arizona residents could not conduct business with the Florida company.

A New jersey federal court found that advertising on the Internet by a hotel in Italy was insufficient to support jurisdiction in a personal injury suit by a New Jersey resident who fell at the hotel. A New York federal court refused to find jurisdiction over a Missouri defendant in a trademark infringement case, stating that the mere fact that a person can gain information on an allegedly infringing product from a Web site is not the equivalent of a business making an effort to target its product in New York.

On the other hand, personal jurisdiction has been upheld in cases where its assertion is based in large part on Internet contacts within the state where the lawsuit was filed. Judicial authorities have been ruling that companies must adapt to doing business within the constraints of the Internet and within the rules that apply to traditional business dealings.

A California court held that conducting business over the Internet was sufficient to establish personal jurisdiction, stating that there is no reason why the requisite "minimum contacts" cannot be electronic. Similarly, a New York court upheld jurisdiction over an out-of-state business, finding that electronic contacts with New York residents through a computer network constituted "transacting business" within New York. The court questioned "whether, in an age of e-mail and teleconferencing, the absence of actual personal visits to the forum is any longer of critical consequence."

In each case, the decision on finding jurisdiction was based on the courts' perceptions of the degree of interactivity with the Web site. In all cases where jurisdiction was asserted over the nonresident defendant, the Web site in question was not protected by terms and conditions that restricted access or otherwise sought to avoid a finding of jurisdiction.

Web site owners can do a number of things to reduce the possibility that they will be subjected to jurisdiction in out-of-state lawsuits. Some of these steps may reduce the usefulness of a site, so Web site owners must balance their legitimate business needs with jurisdictional concerns. The following suggestions may be useful in an attempt to avoid lawsuits:

Maintain a passive site. The less interactive the site, the less likely there will be a finding of jurisdiction. Inviting consumers to sign on for services or to order products from Web sites increases the chances that a court somewhere will find jurisdiction.
Limit access. A Web site is far less likely to give rise to jurisdiction in a particular state if the site is not fully accessible to that state's residents. By requiring users to identify their state or zip code, it may be possible to impede certain people's access to the site. Short of this, a simple disclaimer that the Web site is not intended for customers from a particular state may be persuasive in demonstrating that the site owner is not "purposefully availing" itself of the benefits and privileges of doing business in that state.
Disclaim purposeful availment. Even if residents of other states are not denied access to the site, the site may purport to be only for the benefit of residents in the company's home state.
Include a forum-selection clause. Often, parties in a written contract name the jurisdiction in which a lawsuit may be filed. Similarly, Web pages may dictate that any litigation arising out of transactions involving the site must be brought in a particular court, thus avoiding out-of-state litigation. This can be done by requiring the customer to agree to online terms and conditions before an order for goods or services can be placed.
Include a choice-of-law clause. Although not affecting the location of litigation directly, provisions in a contract that dictate which state's laws will apply to the business transaction
such as taxes
may indirectly block litigation from being supported out of state. This too can be made part of the online terms and conditions.

Internet law has not developed sufficiently to predict with absolute accuracy whether a court will find personal jurisdiction in a particular set of facts. However, by following the above guidelines, your client will minimize the risk of being forced to defend itself in a distant and perhaps unfamiliar forum.