The Internet enables businesses to overcome traditional barriers to the marketplace. Local businesses can instantaneously market their goods or services to anyone with access to a computer. However, staking out a presence on the Internet is not without risk. Companies that launch their own web site become vulnerable to being sued in other states, increasing the cost and burden of defending such business litigation.

Recent court cases confirm that companies conducting activities over the Internet are susceptible to jurisdiction in other states. Under this approach, courts typically look at the web site’s level of interactivity with out-of-state visitors. Where a company’s online contacts with visitors are “deliberate”, rather than merely “random” or “fortuitous”, courts are more likely to exercise jurisdiction. In practical terms, this means that a company which actively promotes online business transactions, such as accepting customer orders or payments, is more susceptible to foreign jurisdiction than if it merely provides information, such as an online catalog.

One court recently held that a Connecticut company was subject to jurisdiction in California, where the company permitted visitors to purchase products over its web site. The court observed that the web site looked like a “virtual store”, in which consumers “can view descriptions, prices and pictures of various products”, add items to their “virtual shopping cart”, and then “check out” by providing credit card and shipping information. By selling its products to California residents over the Internet, rather than selling them to a distributor who might then ship them to California, the Court concluded that the Connecticut company directly availed itself of the privilege of conducting business in California and should be held to answer for its online activities.

In another example, a court held that a North Carolina company was subject to jurisdiction in California, where the company entered into Internet advertising contracts with five California-based companies. The North Carolina company agreed to display advertising banners and links from the California companies on its web site in return for a commission each time a visitor clicked through to one of these companies’ web sites. Even though the North Carolina company claimed to be unaware that the five companies were located in California, the court concluded that the defendant purposefully directed its business activities toward California when it engaged in contractual relations with these companies.

There are certain precautions which should be taken in order to limit your Company’s exposure to out-of-state lawsuits:

  1. Use a disclaimer stating that only local regions will be served by your web site. You can display a notice on your web site advising visitors that the company will not sell its products outside a certain geographic region. Courts have found that such companies should not have to bear the burden of defending out-of-state lawsuits, because they intended to allow only local customers to buy their goods or services.
  2. If your web site contains any sort of online agreement or license, consider adding a provision requiring visitors to agree to have their legal disputes heard in the state where the company resides or to indicate that the agreement will be governed by the laws of that state. Such a “forum selection” or “choice-of-law” clause is commonly used by companies in written agreements to guide courts in deciding the proper venue for a lawsuit.
  3. A web site that contains only advertisements or information is typically not subject to jurisdiction in other states. A company must do something more than launch an informational web site about its business. Courts have repeatedly ruled that mere accessibility of a passive web site to residents of different states is insufficient, by itself, to establish foreign jurisdiction.

Although no business practice can fully safeguard a company from the reach of distant courts, those online activities that indicate an intent by the company to capitalize on out-of-state internet commerce will increase its risk of being dragged into a far-flung jurisdiction.