With rosy predictions of rapid growth in Internet commerce over the next decade, an increasing number of companies are scrambling to launch Web sites for their businesses. Today, about one-quarter of U.S. companies have their own Web sites compared to just 5 percent in 1997. Because the Internet enables businesses to overcome traditional barriers to the marketplace, local businesses can instantaneously market their goods or services to anyone with access to a computer. However, staking out a presence on the Internet is not without risk. Companies that launch their own Web sites make themselves vulnerable to being sued in other states, and distance increases the cost and burden of defending a lawsuit.
For example, a small family-owned pizza parlor in California launchs a Web site to expand its business because it cannot afford to open new restaurants. Even though the owners intend to serve California residents only, their Web site enables visitors to order pizzas online, which then can be shipped anywhere in the United States. By offering to sell pizzas without regard for state borders, the owners could subject themselves to the jurisdiction of other states. However, if the owners appreciated the consequences of their online activities, they could take steps to reduce their risk.
Recent court cases confirm that companies conducting activities over the Internet that can be described as “doing business” are most susceptible to jurisdiction in different states. Under this approach, courts typically look at the Web site’s level of interactivity with out-of-state visitors. Where a company’s online contacts with visitors are “deliberate,” rather than merely “random” or “fortuitous,” court are more likely to exercise jurisdiction. In practical terms, this means that a company which actively promotes online business transactions, such as accepting customer orders or payments, is more susceptible to jurisdiction than if it merely provides information, such as an online catalog.
For example, a court recently held that a Connecticut company was subject to jurisdiction in California, where the company permitted visitors to purchase products over its Web site. The court observed that the Web site looked like a “virtual store,” in which consumers “can view descriptions, prices, and pictures of various products,” add items to their “virtual shopping cart,” and then “check out” by providing credit card and shipping information. By selling its products to California residents over the Internet rather than selling them to a distributor who might then ship them to California, the court concluded that the Connecticut company directly availed itself of the privilege of conducting business in California and should be held to answer here for its online activities.
In another example, a court held that a North Carolina company was subject to jurisdiction in California, where the company entered into Internet advertising contracts with five California-based companies. The North Carolina company agreed to display advertising banners and links from the California companies on its Web site in return for a commission each time a visitor clicked through to one of these companies’ Web sites. Even though the North Carolina company claimed to be unaware that the five companies were located in California, the court concluded that the defendant purposefully directed its business activities toward California when it engaged in contractual relations with these companies.
While certain business practices make companies more susceptible to jurisdiction in different states, there are other practices that can be adopted to minimize that risk.
One practice is the use of a disclaimer stating that only local regions will be served. For example, a company can display a notice on its Web site advising visitors that the company will not sell its products outside a certain geographic region. In prior cases, courts have found that such companies should not have to bear the burden of defending out-of-state lawsuits because they intended to allow only local customers to buy their goods or services.
Further, if a company’s Web site contains any sort of online agreement or license, the company should consider adding a provision requiring visitors to agree to have their legal disputes heard in the state where the company resides or to indicate that the agreement will be governed by the laws of that state. These “forum selection” and “choice-of-law” clauses are a common tool already used by companies in written agreements to guide the court in deciding the proper venue for a lawsuit.
Finally, a Web site that contains only advertisements or information is typically not subject to jurisdiction in different states. In other words, a company must do something more than launch an informational Web site about its business. Courts have ruled time and again that mere accessibility of a passive Web site to residents of different states is insufficient by itself to establish jurisdiction.
In short, the following factors increase the risk that a company will be subject to personal jurisdiction in a different state:
F The Web site is not restricted to providing information or advertising. For example, visitors actually communicate with the Web site by exchanging computer files or trading information, such as signing up for mailing lists or filling out registration forms.
F The Web site solicits business from visitors. To limit the likelihood of being sued in different states, the company should consider displaying a disclaimer stating that only certain geographic regions are served.
F The Web site offers products or services for sale. For example, visitors can order or pay for items over the Internet using a credit card or another form of payment. In these cases, courts are inclined to exercise jurisdiction.
F The Web site requires visitors to sign an online agreement or license. In these cases, the company should consider adding a forum selection or choice-of-law clause in its online agreement.
Although no business practice can fully safeguard a company from the reach of distant courts, those online activities that indicate an intent by the company to capitalize on out-of-state Internet commerce will increase its risk of being dragged into a far-flung jurisdiction.
Michael J. Lawrence is a litigation attorney in the Los Angeles office of Latham & Watkins.
