Ordering online: good for customer… and for plaintiffs

Is your company online? Does your website target customers in certain states? Does your website allow customers to order products and pay online? Or does your website serve simply as a platform for company information or advertising?

These are important questions to ask when reevaluating your online presence this year – and questions a court will ask when determining whether you are subject to personal jurisdiction in a court you never thought you would be in. If your company has a website, you may find yourself defending a lawsuit in an inconvenient and potentially unfriendly forum. How can you be subject to a lawsuit in a city you have never heard of, or in a state where you and your employees have never set foot? The answer is your company’s website and a short phrase packing a powerful punch: “minimum contacts.”

Generally speaking, a company can be sued in a jurisdiction if it has sufficient minimum contacts with that jurisdiction. For example, a company has sufficient minimum contacts with a jurisdiction if it regularly does business within, sells products to or seeks out business opportunities in that jurisdiction.

The explosion of e-commerce has created an entirely new set of “contacts,” and plaintiffs have used them to their advantage. Increasingly, patent plaintiffs have brought suit in plaintiff-friendly venues (such as the Eastern District of Texas) and attempted to satisfy the personal jurisdiction requirement based on the defendant’s website. Companies should be aware of the impact that online activities can have on the ability of a plaintiff to successfully initiate a lawsuit in a remote location.

The Zippo sliding scale

In Zippo Manufacturing v. Zippo Dot Com, Inc., the Western District of Pennsylvania applied a sliding scale to address when it is or is not appropriate to find personal jurisdiction based on a defendant’s web presence. 952 F. Supp. 1119 (W.D. Pa. 1997). The Zippo sliding scale analysis has been at least implicitly adopted and recognized in many federal courts throughout the country.

At one end of the Zippo sliding scale are “interactive” websites. An interactive website is one where customers are able to buy products, submit payment and transact business with the company through its website. On the opposite side of the scale are “passive websites” that primarily post company and product information but do not allow a customer to purchase or communicate with the company directly through the website. An interactive website subjects a company to jurisdiction across the entire nation, whereas a passive website does not.

But is it really appropriate for a company to be sued in a place where it only made a few sales over the Internet? Under the Zippo sliding scale, the answer would be yes.

Some courts rethink Zippo approach

However, a growing minority of courts are rethinking the Zippo approach and instead are focusing on the defendant’s relative volume of online sales in the particular jurisdiction and on its activities specifically targeting the jurisdiction. For example, in a case where a company operated an interactive website but sales in the jurisdiction were less than 1 percent of the company’s total revenue and the company neither advertised nor attended trade shows in the jurisdiction, the court found personal jurisdiction lacking. Laseraim Tools, Inc. v. SDA Mfg., LLC, 624 F. Supp. 2d 1027 (E.D. Ark. 2008).

Thus, under the minority approach, a company operating an interactive website may not necessarily be sued in a remote jurisdiction if its online sales to consumers in that jurisdiction have been relatively insubstantial and if its website and other activities have not specifically targeted that geographic location. This is a promising development for companies who are beginning to engage in e-commerce but do not yet have nationwide market penetration.

Although most of the cases to date have focused on website activities, the same legal principles likely will apply to other online activities, such as the sale of mobile phone applications. All companies, particularly startups, should consider whether their website and other online activities are inadvertently creating nationwide personal jurisdiction before the company is ready to engage in litigation outside of its home state.

For more information about this issue, please contact Kathryn Riley Grasso and Megan McCarthy.