Online Business Law: Jurisdictional Question

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Online Business Law: Jurisdictional Questions

Determining jurisdiction for business websites

By Larry Berglas

If your business is operating online, at least in theory, it is everywhere--even if you are only serving your local physical community. What does that mean from a legal standpoint? Can an out-of-state court hear a case against your business if you merely have a website, but do no business there?

While courts are still generally somewhat unsettled with respect to the treatment of online businesses where interstate business disputes arise, a couple of cases from several years ago offer a good idea of what can happen.

Does an Informational Website Subject Its Owner to Jurisdiction?

The defendant in a 1996 case heard in a federal district court in New York, Bensusan Restaurant Corp. v. King, was sued by an out-of-state plaintiff who alleged various trademark infringement claims. The plaintiff operated the Blue Note Jazz Club in New York City. The defendant was an individual who operated and owned a Missouri jazz club known as the Blue Note. The defendant maintained an informational website.

The claims in the plaintiff's lawsuit were based on the existence of the defendant's website which, like any website, could be viewed everywhere--including New York state, where the plaintiff's business was located. Obviously, both plaintiff and defendant operated under similar business names.

The Missouri defendant was sued in a federal district court in the plaintiff's home state of New York. Does that mean that the Missouri defendant is subject to the court's jurisdiction in New York? Does the Missouri defendant have to litigate the case and have the issues decided in New York?

New York Was Not Targeted By Website

After looking at the relevant issues, the court in Bensusan held that "...the exercise of personal jurisdiction [in the State of New York] over [defendant] ... would violate the protections of the Due Process Clause." This was an important statement because a lawsuit cannot move through the courts at all unless the courts can establish jurisdiction to hear and decide the issues.

The court in Bensusan concluded that it was not authorized to exercise jurisdiction over the defendant under the applicable statutes. The court looked carefully at what the website in Missouri was actually doing. The court reasoned that "[t]he mere fact that a person can gain information on the allegedly infringing product is not the equivalent of a person advertising, promoting selling or otherwise making an effort to target its product in New York."

So, whether a website is actively targeting a region, or, even more important, if it is a key vehicle for a business's commercial activity are key factors that the courts are likely to examine when considering the appropriateness of jurisdiction.

Sliding Scale Test

In the 1996 Zippo Manufacturing Co. v. Zippo Dot Com Inc. case, a federal district court in Pennsylvania crafted a "sliding scale" test to help it determine whether the existence of a website could subject its owner to jurisdiction outside its physical home.

The court said that purely passive sites, such as those that merely advertise a company or, better, only provide general information about it, fall at the end of the scale that would be the least likely to permit the exercise of jurisdiction. At the other end are highly interactive sites, such as those owned by retailers, over which transactions are made without regard for physical location. The rest of the sites fall somewhere in between. But the rule the court adopted appears to say: the more interactive your site, the more likely you could be subject to jurisdiction outside your home base.

Although the "Zippo test" has not been adopted universally, courts in nearly all the federal circuits have used this sliding scale to help them decide jurisdiction cases, and it seems to be viewed favorably.

Standards for Jurisdiction

What standards do the courts use in figuring out how to treat the plaintiff and defendant in an interstate website-related dispute? At least a couple of cases have expressed those standards as follows: "(1) whether the defendant 'purposefully availed' himself of the benefits of the [plaintiff's home] state; (2) whether the defendant's conduct and connection with the [plaintiff's home] state are such that he should reasonably anticipate being hauled into court there; (3) whether the defendant carries on a 'continuous and systematic' part of its general business within the [plaintiff's home] state."

Unfortunately for the sake of simplicity, it is quite possible that the federal courts in your home state may apply different reasoning under either a similar or different set of circumstances. Also you should note that your business may be subject to the laws of other states--including various state's consumer protection laws--if you are actually selling products in those states through your website.

If your business goes online it is probably wise to gain some familiarity with the legal implications of "doing business everywhere" in the online community. The surprise of a lawsuit is never welcome, especially when you need your most valuable resources focused on the development of your business.

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