Can Your Web Site Cause Your Company to be Sued in States Other than the State in Which Your Business is Located?

This article will explain the basic rules under which our courts assess whether a business is subject to jurisdiction in another state and, specifically, explain the emerging law in this area as it relates to Web sites and other Internet activities.

The Basics of Personal Jurisdiction

In our legal system, the concept of personal jurisdiction is an important one. In order for someone to sue your business, the court must have personal jurisdiction over your business in the state in which the lawsuit is brought. This concept is known as personal jurisdiction and is grounded in the Constitution of the United States.

There are several ways in which a court can obtain personal jurisdiction over your business. Generally, a business is subject to the authority of the courts in the state in which the business entity is formed and a state in which the business maintains a presence. A business can also agree to be subject to the authority of the courts of a particular state by contract.

If a business does not meet one of these criteria, it must have certain minimum contacts with the state, such that allowing a lawsuit to proceed against it does not offend what are termed the "traditional notions of fair play and substantial justice." The acts of a business directed toward people or businesses in the state are considered to be consent to the jurisdiction of the courts of that state. If a business enters a particular jurisdiction physically or through business contacts, accepts its benefits, and subsequently harms a citizen of that jurisdiction, the theory is that the business should be required to answer in a court of that jurisdiction.

Thus, business owners should understand that companies that conduct business with citizens or businesses of another state may render themselves subject to the jurisdiction of the state of the other individual or business. By accepting the benefits of doing business in another state, your company may be called upon to answer for an alleged injury, which results from doing such business.

Personal Jurisdiction as it Relates to the Internet

With the emergence of the Internet as a significant medium for conducting business, the courts of this country have begun to address whether the traditional principles described above should be used to determine a state's authority to exercise personal jurisdiction over out-of-state companies in the Internet context. When creating a Web site and placing it on the Internet, you are allowing individuals all over the country, and in fact all over the world, to access that Web site and some part of your business. The extent of the business that someone can conduct with your company over the Internet will dictate whether the courts of the state in which the person conducting business with you resides can exercise jurisdiction over your company in the event of a dispute.

In a recent case in one of the federal courts of appeals, the court addressed whether passive on-line activity was sufficient to subject a Georgia company to jurisdiction in the State of Maryland. In the case, the court held that a company based in Georgia was not subject to jurisdiction in Maryland simply because it maintained a Web site on the World Wide Web from which people in Maryland could obtain information concerning the Georgia company. Unlike an active Web site, through which customers and others can conduct business with the owner of the site, the passive Web site (which is primarily informational) does not subject the business owner to jurisdiction in every jurisdiction from which the Web site can be accessed. The court ruled that jurisdiction related to an Internet transaction exists in another state only where a non-resident business 1) directs electronic activity into the state; 2) with the manifested intent of engaging in business or other interactions with the state; and 3) that activity creates in a person within the state a potential cause of action cognizable in the courts if that state.

This decision demonstrates that, while the courts have recognized that the standards used to determine the proper exercise of personal jurisdiction may evolve as technological progress occurs, it has remained clear that technology cannot eviscerate the constitutional limits on a state's power to exercise jurisdiction over a defendant. The Constitution and the United States Supreme Court have mandated the limits on the power of individual states to exercise personal jurisdiction over non-residents and these limits must be maintained, despite the growing ease with which business is conducted across state lines.

In this recent decision, the court stated that if it were to conclude as a general principle that the act of placing information on the Internet subjects a business to personal jurisdiction in each state in which the information is accessed, then the defense of personal jurisdiction, in the sense that a state has geographically limited judicial power, would no longer exist. Businesses placing information on the Internet would be subject to personal jurisdiction in every state.

The argument has been made that the Internet's electronic signals are surrogates for the business, and that Internet users conceptually enter a state to the extent they send their electronic signals into the state establishing those minimum contacts sufficient to subject the sending business to jurisdiction in the state where the signals are received. So far, the courts have found that if such a broad interpretation were adopted, state jurisdiction over businesses would be universal and notions of limited state sovereignty and jurisdiction would be destroyed.

In view of the traditional relationship among the states and the relationship to a national government with nationwide judicial authority, the federal court of appeals found that it would be difficult to accept an arrangement in which each state has unlimited judicial power over every business which uses the Internet. Given the tension between the traditional standards and modern technology, the court recognized a "sliding scale" for defining when electronic contacts with the state are sufficient. At one end of the spectrum are situations where a business clearly conducts business over the Internet. If the business enters into contracts with residents or businesses of another state that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction in that state is likely to be found to be proper. At the opposite end are situations where a business has simply posted information on the Web site, which is accessible to users in other states. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise of jurisdiction over that party in another state. The middle ground is occupied by interactive Web sites where a user can exchange information with the business owner. In such cases, the exercise of jurisdiction is determined by examining the level of inter-activity and the commercial nature of the exchange of information that occurs on the Web site.

Thus, if your company's Web site is one which allows customers or others to engage in business with your company or contract with it, you should be aware that if a dispute arises your business can be sued in the state in which the customer accessed the Web site. If your company's Web site is one on which you have simply posted information about your company and which allows little, if any, interaction between your business and the Internet user, it is unlikely that your business will be subject to jurisdiction in another state for any dispute which may arise between it and the Internet user. If your company's Web site falls in the middle ground, you should seek legal counsel to determine whether your Web site may be subjecting you to jurisdiction in other states.

For example, one method that is frequently used in contracts and which can be used to ensure that your business is not haled into court in a state in which it does not regularly conduct business is to include on your Web site a consent to jurisdiction in the state in which your business is located for anyone that conducts or attempts to conduct business with you over the Internet.

As with any potential problem, if you think through the issue and consult your legal counsel, you can save yourself the significant surprise of being sued in a state in which you do not regularly conduct business. Being aware of the law in this area and making sure you have evaluated the risks of doing business over the Internet can help you better prepare for this possibility.

Benjamin I. Fink is a shareholder in Berman Fink Van Horn PC, an Atlanta law firm representing businesses in the legal challenges they face every day. E-mail him at bfink@bfvlaw.com.