Sort Out the Jurisdictional Issues of E-Commerce

E-commerce jurisdiction can be a sticky business, particularly if you sell goods and services outside the state where your Web site and server are located.

Traditionally, a company must have some physical ties to a state before it is subject to that state's laws. But that theory doesn't hold with commercial Web sites.

Companies can easily sell to consumers anywhere in the world with no physical presence in any of the locations. And so far, regulations and law are a bit murky. Fundamentally, legal experts say, for a court to exercise jurisdiction over a Web site, it must determine if certain constitutional limits of due process are satisfied. In order to do this, a site has to have some presence in the state.

The U.S. Supreme Court ruled that a site must have certain "minimum contacts" with a state before the state can file a suit. If Web sales by a California company, for example, can be construed as having a "constant presence" in New York, then the Internet business could be subject to New York State jurisdiction or to the laws of any state where the company has customers.

However, courts don't always rule this way. For instance, in one case, the Michigan Appeals Court held that maintaining a Web site doesn't constitute minimum contact unless the site generates a substantial amount of business in the state. But the court implied that ordering products online might be sufficient to invoke jurisdiction (Clapper vs. Freeman Marine Equipment Inc.).

One of the most frequently cited cases is Zippo Mfg. Co. vs. Zippo Dot Com Inc. Zippo Mfg., a Pennsylvania-based firm, sued California-based Zippo Dot Com, alleging that the defendant's use of the domain name Zippo violated the plaintiff's trademark rights.

The court agreed, saying the Internet site had sufficient contacts with Pennsylvania to warrant state jurisdiction because the company sold passwords to 3,000 subscribers in the state and signed seven contracts with Internet access providers to furnish services to their Pennsylvania customers.

In reaching its decision, the court identified three levels of Internet contact to determine if activity is sufficient to establish jurisdiction:

• Passive sites that are largely informational in nature, feature little interactivity with viewers and function like an electronic brochure. Courts generally take a hands-off approach to these sites, recognizing that the owners can't reasonably foresee facing legal action in a distant jurisdiction just because they provide information.
• Active sites that function as online stores where customers order and pay for goods or enter into online contracts exclusively through the site. Courts have repeatedly asserted their authority over these sites, arguing that the owners are aware of the risk of facing legal actions in multiple jurisdictions because they are doing business globally.
• In between sites that offer more than information but less than full-blown e-commerce. In these cases, courts must carefully consider all the features and circumstances to determine jurisdiction.

Given the international scope of e-commerce, Internet jurisdiction will remain a significant legal issue for some time. As the law develops, it will become clear which businesses run the risk of being hauled into a distant court.

In the meantime, to protect your business as far as possible from an out-of-state lawsuit, get good legal advice about your particular situation.

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