RETAIL & E-COMMERCE: Jurisdiction of e-commerce

Can an Internet business, with its Web site located on a server in the state of Michigan, be hauled into court in New York for sending e-mail to residents of New York in an attempt to sell its goods and services?

The answer to the question depends upon whether personal jurisdiction can be established over the Michigan Internet business. Traditionally, a company must have some physical ties to a state before it’s subject to another state’s jurisdiction. An e-commerce business is conceivably conducting business throughout the world from a desk top. At the same time, it’s suspect to finding itself in a lawsuit over claims encompassing such issues as its conduct in selling products and services, or the content posted on its Web pages.

In order for a court to exercise jurisdiction over a defendant, it must determine whether certain constitutional limits of due process are satisfied. To comply with due process, generally there must be some constant presence in the forum state.

The U.S. Supreme Court has long established that a defendant must have certain “minimum contacts” with a state before it can be sued in that state. If Web sales by a Michigan company can be construed as a “constant presence” in another state, then an Internet business could be subject to the jurisdiction of a court in any state that has access to the Web. That is, every state.

Confronted with this issue for the first time, the Michigan Court of Appeals recently held in Clapper vs. Freeman Marine Equipment, Inc. that maintaining a Web site alone does not constitute minimum contact to establish jurisdiction absent some evidence that it actually generated sufficient business in the state. The court did imply that ordering products from the Web site may be sufficient to invoke the court’s jurisdiction.

The most often cited case in this area is Zippo Manufacturing Co. vs. Zippo Dot Com, Inc., which involved a Pennsylvania court’s jurisdiction over a California Internet news service.

Zippo Manufacturing sued Zippo Dot Com alleging that the defendant’s use of the domain name “Zippo” violated the plaintiff’s trademark rights.

The Court held that the defendant’s Web site created sufficient contacts with Pennsylvania because it sold passwords to 3,000 subscribers in Pennsylvania and entered into seven contracts with Internet access providers to furnish its services to their customers in Pennsylvania.

In reaching its decision, the court in Zippo identified three levels of Internet contact to determine if the type of activity is sufficient to establish personal jurisdiction. At one end of the spectrum are “passive” Web sites that are largely informational in nature. These sites feature little interactivity with the viewer and function much like an electronic brochure. Generally, courts agree to take a hands-off approach to these sites. These decisions recognize that Web site owners cannot reasonably foresee facing legal action in a far-off jurisdiction based simply on providing information.

At the other end of the spectrum are those interactive Web sites that fully function as an on-line store. These are characterized as “active” sites because the customers can order and pay for products or enter into on-line contracts exclusively through the Web site.

Courts have repeatedly asserted their authority over these sites, arguing that the site owners are aware of the risk of facing legal actions in multiple jurisdictions since they are doing business globally via the Internet.

Falling between the clearly passive sites and the obviously active sites are sites that provide more than simple information, but less than full blown e-commerce. These sites present courts with a difficult balancing act. Judges carefully consider all the features and circumstances to determine at which end of the spectrum the site falls. Given the national and international scope of e-commerce, jurisdictional questions will remain a significant Internet law issue.

Whether your e-business may find itself defending a lawsuit in some distant state or foreign country depends on the level of contacts with that jurisdiction. For example, a New York Court is more likely to exercise jurisdiction over a Michigan business if the business specifically targets customers in New York or has sold its products or services to a significant number of New York residents.

Hopefully, as the law develops in this area there will be more certainty as to the risk to e-businesses of being hauled into court in distant places.

Michael Conlon is a partner at the Traverse City law firm of Running, Wise, Ford & Phillips, PLC, where he practices in the areas of commercial transactions, litigation, e-commerce, bankruptcy and municipal law; BN