INTERNET BUSINESSES MAY SUBJECT THEMSELVES TO THE JURISDICTION OF DISTANT COURTS
By Jeffrey P. Miller
INTRODUCTION
Business conducted over the Internet has greatly expanded over the last decade. Businesses are no longer limited by the geographical restraints of having to locally advertise in many communities to broaden their customer base. The Internet provides the opportunity for even the smallest business to reach potential customers worldwide, not just in its local geographical area. Larger businesses almost by necessity must have a presence on the Internet to reach its existing and potential customer bases and to avoid being perceived as being “so 20th Century”.
Many small and medium businesses utilize the Internet for a wide variety of functions. The spectrum of uses range from passive websites that merely post information about a business and its products, services and contact information (sometimes referred to as an electronic billboard) to highly interactive websites that allow users to contact a business over the Internet by an email link or toll free number, purchase products through the website, create, store and manage customer account information, store information on the business’ servers, and/or interact with other customers (i.e., Fed Ex, ebay and myspace). A growing number of small businesses use their own websites, or third party websites such as ebay, to solicit and consummate sales nationwide.
The increased use, and types of uses, of the Internet by businesses may subject them to the jurisdiction of courts in distant states (and countries) from that of the businesses’ physical location. Many businesses probably do not appreciate that by conducting commercial activities over the Internet the business may be sued in a court in the states where the customers reside, not where the business is located. A business may have to retain counsel licensed in the distant state to defend itself, or at a minimum retain counsel to challenge the jurisdiction of the distant court over the business.
THE EXTENT AND LIMITS OF JURISDICTION CREATED BY INTERNET ACTIVITY
Whether a court has personal jurisdiction over and individual or entity as a defendant depends on whether the defendant has sufficient “minimum contacts” with the forum state for purposes of general or specific jurisdiction.[1]
General Jurisdiction Based On Internet Activity
When a suit neither arises from nor relates to a defendant's activities within the state where suit has been filed, the court is limited to exercising general jurisdiction over the out-of-state defendant. General jurisdiction exists when a defendant’s contacts with the state are “substantial” or “continuous and systematic” such that the defendant can be haled into court in that state in any action, even if the action is unrelated to those contacts.[2] The standard for establishing general jurisdiction is fairly high and requires that the defendant’s contact be the sort that approximates physical presence. The factors that courts take into consideration are whether the defendant makes sales, solicits or engages in business in the state, serves the state’s markets, designates and agent for service of process, holds a license with the state, or is incorporated there.[3]
Many courts use a "sliding scale" to determine whether Internet activity permits general jurisdiction. At one end of the sliding scale, a website may support a finding of personal jurisdiction when a defendant clearly does business over the Internet by entering into contracts and repeatedly transmitting computer files to and from the forum state. At the other end, personal jurisdiction can not be exercised over a defendant who merely "passively" posts information on the Internet. Courts evaluate contacts in the middle of this sliding scale based on the level of interactivity and the commercial nature of the exchange of information.[4] Thus, large retailers conducting business over the Internet such as Amazon.com or Apple’s itunes.com are likely to be subject to the general jurisdiction in many, if not all, states regardless of any “brick and mortar” presence in the state. These companies likely can be subject to the jurisdiction of a number of states even if the claim is unrelated to their activities over the Internet. Conversely, smaller businesses may not be subject to the general jurisdiction of a state when their Internet contacts and sales with the state are less frequent or substantial. A business that makes only a few sales, sales calls and/or advertising in a state may not be subject to general jurisdiction for claims unrelated to its activities in the state.
Specific Jurisdiction Based On Internet Activity
Even if general jurisdiction does not exist over a party based on the party’s unrelated Internet activity or other activities in the state, a court may still exercise personal jurisdiction if the case arises out of certain forum-related acts. In the Ninth Circuit, this “specific jurisdiction” exists if (1) the defendant has performed some act or consummated some transaction within the forum or otherwise purposefully availed himself of the privileges of conducting activities in the forum, (2) the claim arises out of or results from the defendant’s forum-related activities, and (3) the exercise of jurisdiction is reasonable.[5] A number of cases have interpreted this standard in the context of activities conducted over the Internet.
“Deliberate Transaction of Business” Test
The Ninth Circuit, as well as the majority of jurisdictions, has rejected the argument that merely posting information on an otherwise passive website is sufficient to assert jurisdiction over a defendant. Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 418 (9th Cir. 1997) (finding "something more" is required than merely posting information on a website); see also Vinten v. Jeantot Marine Alliances, S.A., 191 F. Supp.2d 642, 647 n.10 (D. S.C. 2002) (the majority of courts have rejected the conclusion of Telco Communications v. An Apple A Day, 977 F. Supp. 404 (E.D. Va. 1997) that the mere presence of a website is enough to subject the defendant to personal jurisdiction in the forum where the website could be accessed).
Instead, the Ninth Circuit in Cybersell adopted the analysis announced in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997), to judge whether a defendant can be held amenable to jurisdiction in a foreign state for contacts that occurred over the Internet. The Zippo court announced a sliding scale rule, which focuses on the level of interactivity a defendant employs through its website in doing business with a forum to determine whether the exercise of personal jurisdiction is appropriate. The Ninth Circuit in Cybersell stated the "likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and the quality of commercial activity that an entity conducts over the Internet."[6]
Therefore, when a defendant is charged with posting information on a passive website, that is, a website where information is simply made available to those interested in accessing it, the exercise of jurisdiction is not proper.[7] This same reasoning was applied in Cybersell, where the court found that a defendant who merely operates a website that can be accessed from anywhere cannot, without more, be said to be deliberately directing its merchandising towards one forum[8].
In Cybersell, the plaintiff and defendant used the same Internet web page name. Plaintiff sued the defendant, a Florida corporation, in Arizona for trademark infringement. The district court granted defendant’s motion to dismiss for lack of jurisdiction over defendant. The Ninth Circuit Court of Appeals affirmed, finding that the use of the Internet web page name was passive and defendant had conducted no commercial activity in Arizona such that the defendant’s contacts with Arizona were insufficient to constitute purposeful availment of Arizona. The court held that “something more” is required than merely posting information on a website to show purposeful availment.
Since Cybersell was decided in 1997, a number of courts also have held that merely posting information on a website does not qualify as purposeful activity invoking the benefits and protections of a foreign state. In Bailey v. Turbine Design, Inc., 86 F. Supp.2d 790 (W.D. Tenn. 2000), the court found a plaintiff failed to prove that an out of state defendant accused of posting defamatory information on a website purposefully availed itself of benefits of the forum state. Specifically, there was no evidence the defendant had any contacts with the forum besides the postings on the site, which could be accessed by anyone; and no evidence to suggest any outreach to the forum any more than to persons residing elsewhere. The court held "the mere fact that the website contained defamatory information concerning the plaintiff does not, absent some supporting evidence, mean that the defendant possessed the intent to target residents of the forum."[9]
In Medinah Mining, Inc. v. Amunategui, 237 F. Supp.2d 1132 (D. Nev. 2002), plaintiff alleged defendants were “Internet bashers” who posted defamatory statements about plaintiff on a website which allegedly led to the devaluation of the corporation’s stock. The District Court of Nevada found that, under the sliding scale analysis for personal jurisdiction, there was no evidence that the alleged basher did any business with anyone in Nevada or that he directed his allegedly defamatory comments at Nevada.
The “Effects” Test
A number of courts in the Ninth Circuit also have analyzed the application of specific jurisdiction by the “effects test” announced in Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984). The effects test is another means by which purposeful availment can be measured in the context of tortuous conduct over the Internet. To meet the effects test, the defendant must have (1) committed an intentional act, which was (2) expressly aimed at the forum, and (3) caused harm, the brunt of which is suffered and which the defendant knows is likely to be suffered in the forum state.[10]
The Cybersell court analyzed the effects test and found that a passive website with no commercial activity does not satisfy the effects tests. Significantly, the Cybersell court stated that the effects test applies with even less force when the plaintiff is a corporation “because a corporation ‘does not suffer harm in a particular geographic location in the same sense that an individual does.’” Id. at p. 420. (Citation omitted.)
In Pebble Beach Company v. Caddy, 453 F.3d 1151 (9th Cir. 2006), the Ninth Circuit cautioned that the term “effects test’ can be misleading and cause too much focus on the test’s third prong—the effects prong. The court recognized that “something more” is needed in addition to a mere foreseeable effect. In Pebble Beach, a British bed and breakfast operator advertised its services, which did not include a golf course, on a non-interactive website that described its accommodations and restaurant. The Pebble Beach golf course and resort in California sued the B & B operator for infringement and dilution of its trademark. The district court dismissed the complaint for lack of personal jurisdiction over the defendant, and the Ninth Circuit affirmed. Applying the effect test, the court stated that something more than a foreseeable effect is required, but instead the defendant’s website must constitute “express aiming” at the forum state. The court found that the only acts identified as being directed at California were the website and the use of the name “Pebble Beach” in the domain name. The court concluded that the B & B website was not targeting California any more than the U.S. in general so the acts were not expressly aimed at California.
In contrast, other courts have found specific jurisdiction applying the effects test. In Bancroft & Masters, Inc., 223 F.3d 1082 (9th Cir. 2000), a small California company that sold networking products brought an action against a Georgia entity, Augusta National, Inc. (“ANI”), after the latter claimed the plaintiff infringed on its trademarks relating to the Masters golf tournament. The plaintiff claimed that ASI was subject to the jurisdiction of a court in California because it sent a cease and desist letter to plaintiff in California that required the plaintiff to sue or else lose its rights to use its trademark in its domain name. The Ninth Circuit found that ANI purposefully availed itself to the jurisdiction in California under the effects test. The court held that the letter was expressly aimed at California because it individually targeted the plaintiff, a California corporation doing business almost exclusively in California, and the effect of the letter would be primarily felt in California because it would require the corporation to either relinquish its right to use the trademark in its domain name or sue ANI to assert its right to the mark.[11]
Likewise, in Metropolitan Life Ins. Co. v. Neaves, 912 F.2d 1062 (1990), the Ninth Circuit Court of Appeals held that an Alabama resident could be haled into a California court on the basis of one fraudulent letter she sent to an insurance company reporting that she was entitled to an insurance payment actually belonging to a California resident. The critical factor in Metropolitan Life was that in sending the letter, the defendant was purposefully defrauding the plaintiff in California rather than its New York headquarters.[12] See also Brainerd v. Governors of Univ. of Alberta, 873 F.2d 1257, 1259-60 (9th Cir. 1989) (holding that an Arizona Court could exercise jurisdiction over a Canadian resident--who made allegedly defamatory statements about a plaintiff he knew resided in Arizona--because the statements were not "untargeted negligence" but rather were performed for the very purpose of having the consequences felt in the forum state).
In Panavision v. Toeppen, 141 F.3d 1316 (9th Cir. 1998), the Ninth Circuit applied the effects doctrine and determined that purposeful availment existed. The defendant in Panavision, Toeppen, deliberately registered over one hundred domain names, including "panavision.com," intending to sell them. When plaintiff Panavision learned that its trademark was being used as a domain name for what appeared to be a purposeless Internet site, it notified Toeppen of the alleged trademark infringement. In response, Toeppen offered to sell the domain name to Panavision for $ 13,000. After Panavision ignored his demands, Toeppen put up a second site using another one of Panavision's trademarks. The Panavision court concluded Toeppen's acts were tortious in nature because he registered the domain names for the purpose of extorting money from Panavision, a California corporation.[13] Applying the effects test, the court determined that the purposeful availment requirement was satisfied because the brunt of the harm suffered by Panavision was in the state where it maintained its principal business, California.
Reasonableness
Even if the first two requirements for specific jurisdiction are met, the exercise of jurisdiction must still be reasonable. The courts require the party challenging jurisdiction to present a compelling case that the presence of some other considerations would render jurisdiction unreasonable.[14] This is a difficult burden to meet.
The Ninth Circuit applies seven factors when addressing reasonableness: (1) the extent of the defendant's purposeful interjection into the forum state, (2) the burden on the defendant in defending in the forum, (3) the extent of the conflict with the sovereignty of the defendant's state, (4) the forum state's interest in adjudicating the dispute, (5) the most efficient judicial resolution of the controversy, (6) the importance of the forum to the plaintiff's interest in convenient and effective relief, and (7) the existence of an alternative forum.[15] Since no one factor is dispositive, the court must balance the application of all seven.[16]
Nearly all of the courts that have found that the deliberate transaction of business test and/or effects test have been satisfied to support jurisdiction have likewise found that exercising jurisdiction over the non-resident is not unreasonable. This is largely due to the fact that the courts require a compelling case of unreasonableness. This is a high standard when a non-resident has already been found to have conducted commercial activity and/or an intentional acts causing harm in the jurisdiction.
CONCLUSION
Small and medium businesses may not appreciate that their marketing and business activities over the Internet may subject them to the jurisdiction of distant courts where their customers reside. The ease of the use of the Internet to conduct business over great distances can create a lack of appreciation of the businesses’ conduct in distant forums. Businesses may mistakenly believe that they can only be sued in the jurisdiction where their “brick and mortar” offices and facilities are located. To the contrary, a business may be subject to the jurisdiction of a distant court even when it conducts small or discreet business transactions in that jurisdiction.
[1]International Shoe Co. v. Washington, 326 U.S. 310, 316, 90 L.Ed. 95, 66 S.Ct. 154 (1945).
[2]Helicopteros Nacionales de Columbia, S.A. v. Hall, 466 U.S. 408, 415, 80 L.Ed. 2d 404, 104 S.Ct. 1868 (1984).
[3]See Hirsch v. Blue Cross, Blue Shield of Kansas City, 800 F.2d 1474, 1478 (9th Cir. 1986).
[4]See Carpenter v. Exelon Corp., 2007 Tex. App. LEXIS 8348.
[5]See Burger King v. Rudzewicz, 471 U.S. 462, 472-73, 105 S. Ct. 2174, 2182, 85 L.Ed. 2d 528; Ballard v. Savage, 65 F.3d 1495, 1498 (9thCir. 1995).
[6]Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 419 (9th Cir. 1997)
[7]Zippo, supra, 952 F. Supp. at 1124.
[8]Cybersell, supra, 130 F.3d at 419.
[9]Id. at 796 (citations omitted).
[10]Medinah Mining, Inc. v. Amunategui, 237 F. Supp.2d 1132 (D. Nev. 2002)
[14]Burger King v. Rudzewicz, 471 U.S. at 476-77.
[16]Core-Vent Corp. v. Nobel Industries AB, 11 F.3d 1482, 1488 (9th Cir. 1993)