From the Nolo eCommerce Center

If you have a dispute with a Web-based business and going to court is your only remaining option, you’ll need to know where to file the lawsuit.

If you have a serious legal dispute, you can always settle it at the county courthouse if negotiation or mediation fails. But what happens when you have a beef over an item or service purchased online? Your local state court – where traditional power usually stops at the state line – simply may not have the power to make a binding ruling over an online seller based in another state hundreds of miles away.

The location of a lawsuit can have an important impact on its outcome. A website operator that is based 3,000 miles away may want to settle the dispute simply to avoid traveling to your state and staying in a motel for a week while defending the suit. There’s also the immeasurable effect of the home-court advantage – that is, suing someone from far away in your hometown, where it’s easier to find a competent and reasonably-priced lawyer.

So where in the world is the proper place to file cyberspace lawsuits? That depends on negotiating a sometimes-complicated legal maze that lawyers call jurisdiction, which translates as a court’s authority to decide a particular dispute. Two overlapping issues always arise when determining jurisdiction over a particular dispute. First, is the case the type of subject (fact situation) that the court has the power to hear? And second, does the court have authority over the people or businesses (parties) that are suing one another?

Subject Matter Jurisdiction: Does the Court Have the Authority to Hear Your Case?

The first question – whether the case involves a subject that the court is permitted to hear – depends on whether the case concerns a divorce, contracts, bankruptcy or any one of dozens of other subjects. The point is that not every court can hear every type of dispute. For example, federal and state courts have power over different subjects, and even state courts are often divided into different divisions, such as civil, criminal, and family courts.

You must file your lawsuit in a federal court if your case arises under the U.S. Constitution or federal laws such as patent, bankruptcy, copyright, maritime, securities or aviation laws. But unless your dispute involves one of these relatively few issues where federal courts have exclusive subject matter jurisdiction, you can file it in a state court. That’s because state courts have “general” jurisdiction and can hear any type of case not exclusively delegated to the federal courts. There is one type of case where you can file in either state or federal court – that’s a lawsuit known as a “diversity” suit, between citizens of different states where the subject matter of the dispute (the contract or injury) is more than $75,000.

So why not just sue in federal court in your area for $75,000 or more to get around any state jurisdiction problems? The answer is because the federal courts follow state personal jurisdiction rules (discussed below) in diversity cases. The result is that even if you are in federal court you will still have to prove personal jurisdiction based upon the state law in which the federal court is located.

Personal Jurisdiction: Does the Court Have Authority Over the Parties Involved in the Dispute?

No matter what the subject, a court will not hear your case unless it has personal jurisdiction over all the parties involved. Having personal jurisdiction means that the court has the Constitutional right (legal power) to make a binding decision over the person doing the suing (the plaintiff) and the person being sued (the defendant). Obtaining personal jurisdiction over the plaintiff is never a problem because the plaintiff places himself under the court’s power (consents to jurisdiction) by filing the lawsuit. It’s the defendant – who in most instances hates the idea of being sued – that tries to claim that the court in question lacks personal jurisdiction over him.

Usually it’s no problem to assert jurisdiction in a local court over a defendant who resides or operates a business in your state. That’s because state and federal courts always have personal jurisdiction over state residents. But when the defendant’s principal residence or place of business is not in the state where the lawsuit is filed (often called “forum state”) you can only haul them into court there if there is a meaningful connection or contact between the defendant and the state where the suit is filed.

In the world of the Internet, what this amounts to is that if the cyber bad guy you want to sue doesn’t live in or operate a business in your state, owns no property there, and there are no other meaningful connections with that state (more on this below), it means that it’s unlikely that a local court will have personal jurisdiction or power over that person. If you want justice, you’ll probably have to file your lawsuit in a court in a state where the defendant lives or operates a business.

Okay, so much for the basics. As with everything in our legal system, there are a few additional complications. Specifically, laws known as long arm statutes describe a number of situations where a state’s personal jurisdiction can be extended beyond state lines. Let’s look at how and why these statutes can be so important to Web-based lawsuits.

“Gotcha” Jurisdiction

A court can obtain personal jurisdiction over an out of state defendant who visits the state provided that, during the visit, the defendant is properly served with a summons and complaint (the documents that provide notice of the lawsuit). Also known as “gotcha” jurisdiction, this method of acquiring personal jurisdiction is somewhat similar to playing tag.

EXAMPLE

Sam, a Nevada disc jockey who operates a rock memorabilia site, defrauded Alice, a resident of Buffalo, New York. She learns that Sam is visiting New York City for an Internet convention, so she sues Sam in New York’s state court. She hires a process server who hands Sam the summons and complaint while he is standing at his sales booth at the convention.

Causing an Injury within the State

An Internet business can also be subject to jurisdiction for purposefully causing an injury in the state. This principle is derived from a series of cases in the 1930s, when state courts began to claim jurisdiction over non-residents who entered the state, caused an accident and left – for example, a motorist who causes a car crash in Kansas before returning home to Oklahoma can be sued in Kansas. The same rules apply for “accidents” on the information highway. If someone uses the Internet to cause an injury in one state, the person causing the damage may be hauled into court in the state where the injury occurred. In cases where the connection between the activity and the injury is not completely clear, courts also look for evidence that the activity was “purposefully directed” at the resident of the forum state or that the person causing the injury had contacts with the state.

EXAMPLES

In one case, a New Mexico software company sent defamatory email and made defamatory web postings about an Arizona company. An Arizona court claimed personal jurisdiction because the defamatory statements were intentionally aimed at an Arizona business and caused an injury (defamation) within the state. EDIAS Software Intern. v. BASIS Intern., Ltd. 947 F. Supp. 412 (D. Ariz. 1996).In another incident, Matt Drudge of The Drudge Report, a gossip website, made alleged defamatory statements about a Washington D.C. resident on the Drudge Report website. Although Drudge lives and writes his column in California, a court ruled that he was subject to personal jurisdiction in the District of Columbia because the injury occurred in the District of Columbia and Drudge had the following contacts with the state: Drudge personally emailed his column to a list of District of Columbia email addresses; Drudge solicited contributions and collected money from District of Columbia residents; Drudge and traveled to the District of Columbia twice to promote his column; and D.C. residents systematically supplied Drudge with the fodder for his business – gossip. Blumenthal v. Drudge, 992 F. Supp. 44 (D.D.C. 1998).

Minimum Contacts

Another means by which a court can claim personal jurisdiction is known as “minimum contacts” and is originally derived from a Supreme Court case, International Shoe v. Washington, 326 U.S. 310 (1945). “Minimum contacts” refers to the fact that a business or person with sufficient contacts with a particular state can be dragged into court there even though they don’t live in that state or base their business there. Usually, any substantial presence in the state will justify personal jurisdiction – for example, if a business regularly solicits business in the state, derives substantial revenue from goods or services sold in the state or engages in some other persistent course of conduct there.

EXAMPLES

Here are two examples of how the minimum contacts standard has been applied to cases involving the Internet.In the first case, a Pennsylvania court was able to obtain personal jurisdiction over a California Internet service provider that had 3,000 Pennsylvania subscribers. The act of processing the Pennsylvania applications and assigning of passwords was sufficient to demonstrate the minimum contacts needed for personal jurisdiction. Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa 1997).In another state, a Texas court claimed personal jurisdiction over an out-of-state online gambling enterprise because the gambling operation entered into contracts with Texas residents to play online gambling games, sent emails to the Texas residents, and sent winnings to Texas residents. Thompson v. Handa-Lopez, Inc., 998 F. Supp. 738 (W.D. Tex. 1998).

The concept of “minimum contacts” can get tricky when it involves the Internet. Courts and legal scholars are of the opinion that it is unfair to make every website owner subject to personal jurisdiction in every state simply because the site is viewable there. Thus an Idaho-based consultant who has clients in three Western states could not be sued in Rhode Island just because Rhode Islanders can view his website.

State and federal courts have adopted a sliding scale for measuring how much contact with a state’s residents is sufficient to give that state’s courts personal jurisdiction to hear a lawsuit. At one end of the scale are sites that merely post information without making sales or otherwise doing active business, called “passive sites.” Passive sites are unlikely to incur personal jurisdiction – except in the state where their owner resides or does other business – because there is less contact with the state where the lawsuit is filed (the forum state). At the other end are sites over which credit card sales or other active business is conducted, called “interactive sites.” These sites are more likely to satisfy the minimum contacts requirement. Here are some examples of how the scale is applied:

No Personal Jurisdiction.

  1. A website designer posted a site describing his services but did not allow customers to purchase services online, and did not include a toll-free number to encourage business. A user of the site in a state other than the one where the designer lived filed a lawsuit in the user’s home state. The site was considered passive, with insufficient contacts to the user’s state.
  2. A Minnesota website did not sell its nutrition products directly over the Web; but instead directed consumers to email the company’s distributors. When a Texas company sued in Texas for patent infringement, the site was considered passive, with insufficient contacts to Texas to give the court personal jurisdiction over the defendant.

Personal Jurisdiction.

  1. A California man running a website called “nfltoday.com” earned revenue from his website through advertising, specifically through the sale of sports betting ads. The site was generating substantial income through interstate commerce and was disrupting marketing efforts by the National Football League in New York. When the NFL sued for trademark infringement (both parties were using the trademark “NFL” for football related services), a court determined that the site was not passive and had sufficient contacts to New York State.
  2. A New York charitable foundation used its website to seek contributions from users via email or a toll free number. The foundation also placed an ad in the Washington Post newspaper. When another charity sued for trademark infringement, a court determined that two factors demonstrated sufficient contacts for personal jurisdiction in the District of Columbia: the New York foundation’s site and the newspaper advertisement both directly solicited donations from District of Columbia residents.
  3. The Mayo Clinic website was used to solicit medical business from Texas residents. Specifically, Mayo provided directions for doctors to refer patients to the clinic, provided a toll-free number and had treated approximately 1000 Texas residents in the five years preceding the lawsuit. The site was considered to be interactive with sufficient contacts to Texas (the forum state) to justify personal jurisdiction in a Texas court.

Consent

A court can obtain personal jurisdiction if both parties consent to it. For example, a defendant may consent to the court’s jurisdiction by filing a response to the lawsuit with that court. As a condition of incorporating or doing business in the state, a company is often required to consent, in advance, to personal jurisdiction in the state and to provide the Secretary of State with an agent to accept service of process.

Along these same lines, you may grant consent by signing a contract that has a provision requiring you to agree in advance to the personal jurisdiction of a state. For example, a California website developer may sign an agreement with a New York company that contains a clause stating: The parties consent to the exclusive jurisdiction of the federal and state courts located in Nassau County, New York in any action arising out of or relating to this agreement. The parties waive any other venue to which either party might be entitled by domicile or otherwise. If either party wants to sue, the case will have to be brought in Nassau County, New York. Just three states – Montana, Idaho and Alabama – refuse to recognize such clauses.

What If a Cyberspace Merchant Sues You?

The rule that you can be sued in a remote state if you have certain minimum contacts with it applies to a shopper or Web user just as it does for businesses. But courts have ruled that if your only contact with an out-of-state online catalog company is an occasional purchase, that by itself is not enough to permit the catalog company to drag you to the distant state’s court. For example, a company based in Florida operated an airline reservation website. When a New York user defaulted on an airline ticket purchase, the company sued the user in Florida. A court ruled that the user’s only contact with Florida was this one electronic purchase, and that this contact was not enough to establish personal jurisdiction in Florida. In short, if the Florida company wanted to sue the New York resident, they would have to do it in New York. In Pres-Kap, Inc.v. Sys. One, Direct Access, 636 So.2d 1351 (Fla. App. 1994), review denied, 645 So.2d 455 (Fla. Sup. Ct. 1994).

International Rules

State and federal courts have personal jurisdiction over foreign citizens or corporations if those persons meet the minimum contacts rules. That is, a foreign business must have substantial economic ties to the forum state, such as operating an office or website, to fall within a court’s jurisdictional power. Even when personal jurisdiction is established, a bigger problem when it comes to foreigners may arise when attempting to collect your winnings from the lawsuit, known as “enforcing the judgment.” Enforcing judgment against out of state residents is difficult enough – you usually have to apply to a court within the defendant’s state to have the judgment honored. But it can be more difficult to enforce a judgment against a foreign citizen or company unless the citizen or business has some assets in your state that can be attached such as real or personal property.

Suggestions for E-Commerce

Because obtaining personal jurisdiction over out-of-state individuals and businesses can be difficult and collecting a winning judgment may be even tougher, here are some practical suggestions for dealing with e-businesses:

  • Use credit cards for purchases whenever possible. For purchases over $50 that you make within your home state, credit card companies have a dispute resolution procedure that bypasses litigation – and pesky personal jurisdiction problems. Since the law is unclear as to whether online purchases qualify, you may have to assert that, when making the purchase via your home computer, you were making the purchase within your home state. Regardless of the federal law, many credit card companies offer dispute resolution procedures without the in-state limitation. Check the back of your credit card statement for information about your card company’s policies.
  • Always investigate the other party before taking any legal action to see if facts justify suing in your state. For example, check with your state’s Secretary of State to determine if the company is licensed to do business in the state and check to see if the business has a physical presence in your state, as would be true if they operate a warehouse, store or office. If so, it will be easy to establish personal jurisdiction. If your investigating shows few contacts, it may not be worth pursuing the matter in your state.
  • If you enter into significant contracts with out-of-state companies, try to avoid contract provisions that require you to waive personal jurisdiction in your state or require that you submit yourself to jurisdiction in a distant state. Attempt to have this provision eliminated or, as a compromise, rewrite it so that the parties consent to personal jurisdiction in each party’s home state. That way, if the other party files the lawsuit, you’ll have to travel, but if you file the lawsuit, you can bring it in your local court.
  • If your dispute is substantial (more than $25,000) and personal jurisdiction is unclear, consider hiring a lawyer and filing a lawsuit in the cyber-defendant’s home state. It may prove more efficient than battling over jurisdiction and later attempting to collect an out of state judgment.

How to Find Court Cases Discussed in this Article

To read the full text of any of the following cases discussed in this article, click on its link below.

  • EDIAS Software Intern. v. BASIS Intern., Ltd., 947 F. Supp. 412 (D. Ariz. 1996)
  • International Shoe v. Washington, 326 U.S. 310 (1945)
  • Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa 1997)
    http://www.jmls.edu/cyber/cases/zippo-c1.html
  • Thompson v. Handa-Lopez, Inc., 998 F. Supp. 738 (W.D. Tex. 1998) http://www.loundy.com/CASES/Thompson_v_Handa-Lopez.html
  • In Pres-Kap, Inc.v. Sys. One, Direct Access, 636 So.2d 1351 (Fla. App. 1994), review denied, 645 So.2d 455 (Fla. Sup. Ct. 1994)

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