“I’m Being Sued Where?!”: The Uncertainties Of Riding On The Information Superhighway

If a website operator in New York establishes a site and permits anyone, including people from Arizona, to use that site, will that operator be subject to personal jurisdiction in the courts of Arizona, even if it has never opened an office there?

Anyone who expected a yes or no answer to that question is going to be very disappointed. The answer, of course, is a most unhelpful, “It depends. . . .”

Personal jurisdiction is the legal authority of a court over the parties to a lawsuit to make and enforce a judgment, and there are now a number of cases across the U.S. that deal with what business activities conducted on the internet will subject a company to jurisdiction in foreign states.

These cases are not consistent, and consequently, there is no clear rule of law. Nevertheless, broadly speaking, the cases divide websites and website businesses into three general categories:¹

• Non-Passive Websites – at one end, where a defendant clearly does business over the internet, entering into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the internet – in this case, jurisdiction is proper; and
• Passive Websites – at the other end, the defendant simply posts information on a website and makes that information available to anyone who is interested, including people in foreign jurisdictions – here the exercise of jurisdiction would be improper. Of course, there are very few websites that permit no interaction whatsoever.
• “Essentially Passive” Websites – most websites fall into this third category – a sort of middle ground – where the defendant operates and interactive website that involves some exchange of information – here, the exercise of jurisdiction will depend on the level of interactivity and the commercial nature of the exchange of information that takes place. The analysis becomes whether the cases in this middle ground are more passive than non-passive.

Passive and “Essentially Passive” Websites

One 9th Circuit case, Cybersell, Inc. v. Cybersell, Inc.,² helps define what many courts see as a truly passive website. Cybersell was a trademark infringement case brought by the plaintiff in Arizona. The defendant was a Florida web marketing consulting company that operated a website that displayed the plaintiff’s registered mark and a domain name allegedly similar to that mark. The plaintiff sued in Arizona for trademark infringement. The 9th Circuit held that an internet ad alone was not sufficient to confer jurisdiction over the defendant and dismissed the case. The Court reasoned that the defendant conducted no commercial activity over the internet, but simply posted a passive home page. It entered into no contracts and made no sales in Arizona, nor did it receive any phone calls or receive any income from it. Interestingly, the Court made light of the site’s interactivity, noting that it was limited to receiving the browser’s name and address and an indication of interest. A browser could not sign up for the services and no money changed hands on the internet from Arizona.

There are other cases with indistinguishable facts that have produced the opposite result,³ but generally speaking, the cases have held that there must be “something more” to supplement the contact of an essentially passive website to subject the defendant to jurisdiction in a foreign state. One case that illustrates this point is Panavision Int’l, L.P. v. Toeppen.⁴ In Panavision was a cybersquatter, a person who registers many domain names, often with another company’s trademark, and then offers to sell those domain names to the trademark owners owner. The court in this case found jurisdiction. It took pains to state that jurisdiction was not merely based on the posting of a website with the domain name. Rather the court pointed to “something more” – in this case, the making of an “extortionate” demand for money sent to the California plaintiff by regular mail and the deliberate registration of the name with knowledge that it would harm the plaintiff’s business and that this business was located in California.

Non-Passive Websites

A good example of what constitutes a non-passive website is in Zippo Mfg. Co. v. Zippo Dot Com, Inc.,⁵ the case that first set out the three categories of websites mentioned above. In Zippo, a Pennsylvania case, the plaintiff was the famous maker of cigarette lighters and the California defendant ran a internet news website that used the famous plaintiff’s trademark. The site contained information about the defendant, ads and an application for the news service. The service had three levels of service, two of which required the user to fill out the application and pay a fee online by credit card. Those subscribers would then receive a password enabling them to download news from a server located outside Pennsylvania. Two percent of defendant’s subscribers were Pennsylvania residents and subscribed by filling out the online application.

The Pennsylvania federal court held that it had jurisdiction over the defendant in Pennsylvania. Applying the 3-category test, it held that the defendant went beyond a mere passive website that exchanged information and, solely by its website activities, engaged in commerce with Pennsylvania residents, specifically by contracting with approximately 3000 such residents over the website.

A more recent case from last year seeks to reconcile the conflicting caselaw. In Millennium Enterprises, Inc. v. Millennium Music, LP,⁶ the plaintiff, who operated a retail music store in Oregon, alleged that defendant, a large music store chain in South Carolina, had infringed its trademark rights in the name “Music Millennium.” Plaintiff had cited the sale of one compact disc to an Oregon resident over its website engineered by the plaintiff,⁷ the purchase of some inventory from an Oregon distributor and maintenance of defendant’s substantially interactive internet website as evidence.

Calling the existing caselaw a “current hodgepodge” that is “inconsistent, irrational and irreconcilable”, the court concluded that the middle category of website types (set forth in Zippo) needed further refinement. The court concluded that, to find jurisdiction in the middle category, there had to be “deliberate action within the forum state in the form of transactions between the defendant and residents of the forum or conduct of the defendant purposefully directed at residents of the forum state.” – i.e., the “something more” required by Cybersell. The mere publishing and maintenance of an interactive website available to residents of Oregon was not activity purposefully directed at Oregon residents, absent actual and substantial sales or actions specifically targeting Oregon customers. The court rejected the single compact disc sale as “an attempt by plaintiff to manufacture a contact with the forum” and not conduct by the defendant purposefully directed at Oregon.

The court, in particular, noted that the application of personal jurisdiction to use of the internet opens the web user up to inconsistent regulations throughout all 50 states and the world, and that businesses, particularly small businesses, might be reluctant to use this new technology “if faced with the litigious nightmare of being subject to suit in every jurisdiction in this country.”⁸

The holdings in these four cases are by no means well-settled law. A businessperson cannot presume that, for example, if she simply avoids taking orders from Washington residents over the internet, that she will not be able to be hailed into court in Seattle. Personal jurisdiction law in the U.S., while well-developed, has always been fact-intensive. The application of these highly fact-driven legal principles to the developing area of e-commerce requires the courts to struggle with new practices and concerns, and how to fairly apply the law to these new circumstances, thus contributing to the law’s current state of flux. The businessperson should bear in mind that this area of the law, much like the underlying nascent industry, is still evolving, and therefore, is likely to remain unpredictable for some time.

Yet, while recognizing that the law is as uncertain as the industry itself, a businessperson can and should see that the courts are focusing on certain facts, and refining their analysis of the same. For example, it should be apparent to the reader that the courts will look at the level or degree of interactivity of the website, and that a heavily interactive site, that takes credit card information and processes orders, is more likely to subject the owner of the site to jurisdictions where residents have used that site. The greater the interactivity, the more important this risk factor.

Similarly, the businessperson should see clearly that the courts are reluctant to subject all operators of “essentially passive” websites to jurisdiction based solely on the their availability to residents of the forum, and without any regard to whether, in fact, there is actual interaction with that forum’s residents. The Millennium Enterprises case, in particular, expresses the concern over the sweeping impact of subjecting the entire category of “essentially passive” websites to nationwide, and perhaps worldwide, jurisdiction, warning of the possible chilling effect that such a holding could have on the growing e-commerce field. The court held that an interactive website is not enough, that the operator has to capitalize on that website with forum state residents and that the interaction with the forum state has to be more than a few stray sales.

Millennium Enterprises is not the law anywhere but in Oregon, but its holding is the logical next step in the developing a predictable body of caselaw that e-commerce businesses can rely on. The requirement it imposed – that there be some conduct purposefully directed at the forum state – is nothing new to the law; the court simply and logically held that the mere availability of an interactive website to residents of a forum state cannot form the basis of jurisdiction in that forum.