Feature

Minimizing Exposure

Personal jurisdiction in the Silicon Forest

A small business client comes to you to discuss a business plan to expand into e-commerce to keep up with competition. One question you will want to explore with your client is whether the intention is to market to customers outside of Oregon, or merely to provide the Oregon customers with another mode of communication. If it is the latter, you should advise your client of the perils of Internet jurisdiction and recommend steps to limit the possibility of being haled into out-of-state courts.

Traditional notions of due process and jurisdiction have undergone substantial reassessment with the advancement of telecommunications. In the middle of the past century, telephone and mail contact with a forum state were often examined to determine whether minimum contacts existed so as to allow the assertion of jurisdiction over the defendant. Now the courts are confronted with worldwide access to web pages, e-mail contracts and other electronic business relationships in deciding whether the assertion of personal jurisdiction satisfies constitutional muster. It is important to understand your client's desired business goals and advise about the jurisdictional ramifications accordingly.

THE INTERNET AGE
In one of the first cases to address personal jurisdiction in the Internet age, the U.S. 6th Circuit Court of Appeals ruled that a defendant had sufficient contacts with the forum state when he purposefully availed himself of the privilege of doing business in the state by marketing his product through a Internet service provider. Compuserve, Inc. v. Richard S. Patterson, 89 F.3d 1257 (6th Cir. 1996).

The defendant, a Texas resident, entered into a contract with Compuserve which was headquartered in Ohio. Defendant marketed software through Compuserve and agreed to certain terms and conditions posted on Compuserve's website stating that the 'service agreement' was entered in Ohio and was to be 'governed by and construed in accordance with Ohio law.' The defendant assented to these terms electronically by clicking on a box entitled 'Agree' when he transmitted his software to Compuserve over the Internet. The defendant and his company had no other contacts with Ohio, and as a result, argued there was no jurisdiction in Ohio.

The court found that although these were minimal contacts, the defendant had knowingly made an effort to market his product in other states through Ohio-based Compuserve and thus, it was foreseeable for defendant to anticipate being haled into Ohio courts.

Compuserve accurately predicted what courts would look at in future cases in assessing what amount of commerce over the Internet will be sufficient for jurisdiction. The court said that a standard consumer 'seated at his computer terminal' might not necessarily expose himself to jurisdiction in every state wherein a website he visits is operated. Thus, not only the amount of commerce but also the type of commerce or contact the defendant has is a pertinent question.

DOMAIN NAME CASES
Many new jurisdiction cases arise from disputes over domain names. A domain name is a website address that is registered with Network Solutions, Inc.1 The person registering the domain name may, or may not, have a license or trademark on the name. In Maritz, Inc. v. Cybergold, Inc., 947 F.Supp. 1328 (E.D. Mo. 1996), the plaintiff sued an Internet service provider under the Lanham Act, 15 U.S.C. § 1125(a). The defendant moved to dismiss based on a lack of personal jurisdiction. The defendant maintained an Internet site on the web using a server located in California. The suit was filed in Missouri. The court found that the website was accessible to every Internet-connected computer in Missouri and the world. The website had been accessed by people located in Missouri at least 311 times, although 180 of the 311 times were by the plaintiff and its employees. The defendant asserted that other than maintaining the website, it had no other contacts with Missouri.

The court recognized that maintaining a website accessible to residents of Missouri presented an issue of first impression with respect to personal jurisdiction analysis. The court recognized a distinction between the use of telephone and mail contact with a forum and simply posting an Internet site. Thus, the court dismissed the defendant's characterization of its activity as maintaining a 'passive website' and found that the defendant's intent was to reach all Internet users, regardless of geographic location.

The court's ruling in Cybergold boiled down to the proposition that an Internet provider can limit access to its website and its failure to do so may subject itself to jurisdiction in every state, particularly if the information gives rise to an injury within the forum state. A similar result was reached in Zippo Manufacturing Company v. Zippo.com, Inc., 952 F.Supp. 1119 (W.D. Pa. 1997).

In Zippo, the court was presented with a trademark infringement and dilution complaint. The defendant moved to dismiss for lack of personal jurisdiction. Zippo Manufacturing made the well-known Zippo lighter. The defendant 'dotcom' was a California corporation with its principal place of business in Sunnyvale, Calif., operated an Internet website and Internet news service and obtained the exclusive right to use the domain names 'Zippo.com,' 'Zippo.net' and 'Zipponews.com.' Zippo Manufacturing had its principal place of business in Pennsylvania where the suit was filed.

The defendant's contacts with Pennsylvania had occurred almost exclusively over the Internet. The defendant had no employees, offices or agents in Pennsylvania, and its Internet servers were located in California. Nonetheless, approximately 3,000 of its Internet webpage subscribers were Pennsylvania residents.

In analyzing the Internet and jurisdiction, the court reviewed extensive case law including the historical underpinnings of jurisdictional analysis. For example, in Hanson v. Denckla, the Supreme Court noted that 'as technological progress has increased the flow of commerce between the states, the need for jurisdiction has undergone a similar increase.' 357 U.S. 235, 250-51 (1958). Twenty-seven years after Hanson v. Denckla, the Court observed that jurisdiction could not be avoided 'merely because the defendant did not physically enter the forum state.' Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985). The Court observed that:

It is an inescapable fact of modern commercial life that a substantial amount of commercial business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted. Id.

The Zippo court went on to describe a sliding-scale approach so that the assertion of personal jurisdiction is 'directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet.' 952 F.Supp. at 1124.2

The court determined it had jurisdiction because the defendant had entered into contracts with residents of the forum state. The defendant was not a mere informational website but instead, purposely availed itself of the benefits and detriments of doing business in the forum state.

OREGON CASES
Judge Aiken decided the first significant virtual reality jurisdiction case in Oregon in 1999. Millennium Enterprises, Inc. v. Millennium Music, LP, 33 F.Supp.2d 907 (D. Or. 1999). The plaintiff was a business incorporated in Oregon with its principal place of business in Portland. Plaintiff operated two retail music stores and also sold products through the mail, over the telephone and through its Internet website.

The defendants were South Carolina corporations that operated retail music stores in South Carolina and sold products through their stores and their Internet website. The defendants did very little business via their website, however. The only Oregon contact was someone working for an acquaintance of plaintiff's counsel who purchased a compact disc from the defendants through their website. Defendants sold no other merchandise to any Oregon resident.

The court found that there was no basis for general jurisdiction because the sale of one compact disc was neither substantial nor continuous and systematic. The court then analyzed specific jurisdiction.

Plaintiff contended that the sale of one compact disc constituted purposeful availment because the sale occurred after defendants had 'solicited sales over the Internet in the State of Oregon.' The court disagreed because the sale to the Oregon resident was nothing more than an attempt by the plaintiff to manufacture contact with the forum sufficient to establish personal jurisdiction. Defendants did not purposefully avail themselves of the protections of the forum as it was the plaintiff that brought the defendants into the forum by requesting the business transaction. Because the sale of the one compact disc did not cause the plaintiff an ascertainable loss and did not form the basis of the plaintiff's Lanham Act claim, that transaction was insufficient to establish jurisdiction. See 900 Support Inc. v. Microportal.com, Inc., 2001 U.S. Dist. LEXIS 8603 (D. Or. 2001) (defendant arguing against personal jurisdiction submitted a declaration stating that its sales to Oregon constituted just over one-half of one percent of its business during the period in question - such contact was held insufficient to constitute 'continuous and systematic' contacts in Oregon).

While the defendant had acquired product from an Oregon-based supplier, the court found that sporadic purchases within a forum cannot support the assertion of personal jurisdiction unless the cause of action arose from or related to those purchases. Finally, the court found no support for the argument that the defendant had intentionally directed its activities at Oregon knowing that the plaintiff would be harmed. Thus, the court granted the defendant's motion to dismiss.

In Perry v. Righton.com, 90 F.Supp 2d 1138 (D. Or. 2000) Judge Redden granted a motion to dismiss finding that the plaintiff had not proven that the defendant had purposefully done business in Oregon by conducting business over the Internet on a nationwide basis. The case involved a fight over a domain name. Plaintiff was an Oregon resident who owned the trademark Righton. Defendant was a Delaware corporation headquartered in California and owned the Internet domain name righton.com.

The court granted defendant's motion to dismis finding that the plaintiff had not proven that the defendant 'intentionally directed its acquisition of the righton.com domain name at [plaintiff's] business in Oregon, with knowledge that [plaintiff] would be, or was likely to be, harmed.' Id. at 1141. In addition, the defendant had not engaged in any national advertising, had not directed any marketing activities toward Oregon, had not sold any product or service in Oregon and had not accepted any inquiries from Oregon residents for the sale of any product or service. Id. at 1139.

In July 2000, the Magistrate Judge Stewart denied a motion to dismiss for lack of personal jurisdiction in a Lanham Act claim brought by Tech Heads against a company that maintained a similarly worded website. Tech Heads, Inc. v. Desk Top Service Center, Inc., 105 F.Supp.2d 1142 (D. Or. 2000). Plaintiff asserted that the defendant had violated certain servicemarks when it set up and maintained a website in which it offered computer-related services. Plaintiff, an Oregon corporation with its principal place of business in Oregon, also provided computer-related services including consulting and training.

The defendant had no physical presence in Oregon, was not registered to conduct business in Oregon, had no registered agents, employees or sales representatives in Oregon, had never received a franchise inquiry from Oregon and a vast majority of its business was in Virginia, Maryland and North Carolina. The defendant also contended that it had conducted no business of any type at any time in the State of Oregon, or 'further west than the western border of the state of Virginia.' Id. at 1145.

Given these facts, the court concluded that it did not have general jurisdiction because the plaintiff was unable to show the continuous and systematic contacts necessary for personal jurisdiction. The court then analyzed specific jurisdiction.

Plaintiff asserted that Desk Top was subject to jurisdiction in Oregon because its allegedly infringing activities caused harm in Oregon because defendant's contact with Oregon included a 'highly interactive' website accessed by at least one Oregon resident. Defendant had also advertised in a national newspaper circulated in Oregon and there were threats of litigation in Oregon. Id. at 1147. The court rejected plaintiff's first assertion, finding that there was no evidence that Desk Top intentionally directed its activities at Oregon knowing that plaintiff would be harmed.

In addressing the website maintained by Desk Top, the court applied the 'sliding scale' test adopted in Zippo. It found that the site was not passive as described in Cybersell because it actively encouraged and sought an exchange of information and commerce. Conversely, the court found that the company did not direct most of its business through the website and there was no evidence of any contract between an Oregon resident and Desk Top. Thus, the website fell into the middle of the sliding scale.

The court acknowledged that in Millennium it had previously found that the sliding scale needed further refinement in the middle zone to include the fundamental requirement of personal jurisdiction:

'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. [105 F.Supp. 2d at 1150]

The Tech Heads court distinguished Millennium finding that defendant's website was highly interactive and that it actively encouraged and received resumes from job seekers. In doing so, Desk Top 'purposefully reached out across the United States, including Oregon, and around the world, not only through its Web site, but also through national advertising and a toll-free telephone number.' Id. As a result, the court found sufficient contact to exercise personal jurisdiction.

Nevertheless, the court recognized that exercising personal jurisdiction in this case does not strictly comply with 'traditional notions of jurisdiction.' Id. at 1152 citing Stomp, Inc. v. NeatO, LLC, 61 F.Supp.2d 1074, 1080 (C.D. Cal. 1999). However, the court recognized that 'traditional' notions of jurisdiction 'must remain flexible in the context of a constantly changing society where technological innovations have transformed the interactions that serve as the basis for personal jurisdiction.' 105 F.Supp. 2d at 1152.

ADVISING YOUR CLIENT
Some courts have found the idea that personal jurisdiction may be based on an entity's Internet activities to be disconcerting. See e.g., Millennium Enterprises, 33 F.Supp. 2d at 923. Those courts fear that the exercise of jurisdiction would open 'the Web user up to inconsistent regulations' and 'raises the specter of dramatically chilling what may well be the most participatory marketplace of mass speech that this country - and indeed the world - has yet seen.' Id. (internal citations omitted).

In Stomp Inc. v. NeatO, LLC, the court recognized that a
broad exercise of personal jurisdiction over defendants who engage in commerce over the Internet might have devastating effects on local merchants and small businesses that seek to expand through the Internet. 3 These small businesses make up the backbone of the American economy and should not have to bear the burden of defending suits in distant fora when they mean only to allow local consumers to buy their wares from the convenience of their own homes. This concern must be balanced against the ability of a distant consumer to press its cause against a defendant who uses the Internet to do business within the forum while remaining outside the boundaries of the jurisdiction. [61 F.Supp. 2d at 1080]

When advising your clients, it is important to understand what your clients' goals are for utilizing Internet technology. If they are interested in doing business on a regional or national level, then you should advise them accordingly that they increase the chance that other states could obtain personal jurisdiction over them. When a merchant seeks the benefit of engaging in unlimited interstate commerce over the Internet, it runs the risk of being subject to the process of the courts in those states. Stomp Inc. v. NeatO, LLC, 61 F.Supp. 2d at 1081. If one of your clients wants to remain local, there are certain steps it should take to help minimize any unintended jurisdictional exposure.

One strategy is to establish passive websites that are no more than advertisements on the Internet. See Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 417-419 (9th Cir. 1997). If the site is interactive, the owner of a website can include a disclaimer that it will not sell its products outside a certain geographic area, and an interactive 'clickwrap agreement' that includes a choice of venue clause which a consumer must agree to before being allowed to purchase any products. Stomp Inc. v. NeatO, LLC, 61 F.Supp. 2d at 1080-1081; American Eyewear, Inc. v. Peeper's Sunglasses and Accessories, Inc., 106 F.Supp.2d 895 (N.D. Tex. 2000) (an Internet company can limit the jurisdictions in which it could be subject to suit such as a disclaimer that it will not sell products or provide services outside a certain geographic area or an interactive agreement that includes a choice of venue clause).

A 'clickwrap agreement' allows the consumer to manifest her assent to the terms of a contract by 'clicking' on an acceptance button on the website. If the consumer does not agree to the contract terms, the website will not accept the consumer's order. Such agreements are common on websites that sell or distribute software programs that the consumer downloads from the website.

A forum selection clause is 'presumptively valid and should not be set aside unless the party challenging the clause clearly show[s] that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.' M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 32 L.Ed. 2d 513, 92 S.Ct. 1907 (1972). Where forum selection clauses are reasonable, fair, and clearly written, they are generally enforceable. Thrapp v. Erin Truckways, Ltd., 2001 U.S. Dist. LEXIS 7871 (D.Or. 2001). At least one court has held that such 'clickwrap agreements' are enforceable contracts. See Groff v. America Online, Inc., 1998 R.I. Super. LEXIS 46.

By keeping a website passive, or by utilizing disclaimers and 'clickwrap agreements,' local merchants may be able to limit the jurisdictions to which they may be haled into court. Although plaintiffs have many hurdles to overcome in the litigation process, including establishing personal jurisdiction, it is the merchants who seek to sell their products only to consumers in a particular geographic area that can control the location of resulting lawsuits.

Because these recommendations ought to be considered during the development and design phase of a website, you should discuss these issues with your client as early as possible. It will do little good when a client, who has just been sued in Vermont, comes to you and asks what the chances are to successfully move to dismiss for lack of personal jurisdiction, when the already-launched website is interactive with no disclaimers and no clickwrap agreements.

ENDNOTES
1. Network Solutions, Inc. has the authority to register and administer domain names.
2. 'This sliding scale is consistent with well developed personal jurisdiction principles. At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involved the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper.. . . At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. 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 personal jurisdiction. . . . The middle ground is occupied by interactive Web sites where a user can exchange information with a host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site.' Zippo Manufacturing Company v. Zippo.com, Inc., 952 F.Supp. at 1124. See also, Euromarket Designs, Inc. v. Crate & Barrel Limited, 96 F.Supp.2d 824; 2000 U.S. Dist. LEXIS 6746 (N.D.Ill. 2000).
The reach of Internet jurisdiction even stretches beyond this continent. In Euromarket, an Illinois court found jurisdiction over an Irish corporation that had opened stores in Ireland under the name Crate & Barrel name and used a similar website, which was accessible world-wide. The court remarked that such use infringed upon the plaintiff's trademark as the defendant's actions were expressly aimed at the forum state and caused harm to the plaintiff in Illinois.
3. See also, McDonough v. Fallon McElligott, Inc., 1996 U.S. Dist. LEXIS 15139 (S.D. Cal. 1996): 'because the web enables easy world-wide access, allowing computer interaction via the web to supply sufficient contacts to establish jurisdiction would eviscerate the personal jurisdiction requirement as it currently exists; the Court is not willing to take this step.'