By Curt Graham
The Internet Age has opened up a world of possibilities for small business owners. “I can do business all over the country now!” The ambitious entrepreneur exclaims. “Heck, I’m worldwide!” However, this opportunity for higher sales does not come without unexpected risks. Imagine the entrepreneur’s surprise when she later receives a summons and complaint requiring her to appear in the court of a state she has never even visited. She feels certain she cannot be sued somewhere she has never been. Is she correct?
Answering this question requires analysis of a legal doctrine called “personal jurisdiction.” Simply put, personal jurisdiction is the power of a particular court over the parties in a lawsuit. Personal jurisdiction can be contrasted with “subject matter jurisdiction,” which is the power of a court to hear certain types of cases. In order for a court to exercise personal jurisdiction over any party, the general rule is that the party must have had at least some level of contact with the state where the court sits. This requirement arises out of state long-arm statutes and the United States Constitution (through the Due Process Clause).
As you might imagine, the existence of the Internet raises new and interesting questions about when personal jurisdiction over a defendant arises. For example, will you subject yourself to the courts of another state simply by conducting one simple business transaction online with a distant customer? Although the law continues to develop and is not completely settled, a few important cases are worthy of discussion.
One of the most well-known and important cases addressing these issues is Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). This case is a good starting point for anyone interested in this topic. In Zippo, a manufacturing company based in Pennsylvania filed suit in Pennsylvania against a California corporation. However, the California company’s only contacts with Pennsylvania occurred online. The issue facing the Court was whether the California entity could be “hailed into” a Pennsylvania court based solely on those online contacts. The Court ultimately held the exercise of jurisdiction in Pennsylvania was reasonable because the defendant had “purposefully availed” itself of doing business in Pennsylvania. Essentially, the rationale was that if a company gets the benefit of doing business out-of-state, it must also accept the risk.
Perhaps the most important rule found in Zippo – and a statement still cited by courts today – is this: “the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet.” Id. at 1124 (emphasis added). This rule produced what is known as the “sliding scale test,” which generally means that a website with a higher level of interactivity is more likely to provide the basis for jurisdiction over the site’s owner. In other words, a site merely providing information in the form of advertisements (considered “passive” in nature) is treated much differently than a site that actively engages with customers. The latter likely gives rise to personal jurisdiction.
More recent Kentucky cases suggest the Zippo test is still utilized. In QSR Automations, Inc. v. KRS Corp. LLC, Civil Action No. 3:09-CV-242, 2010 WL 1416700 (W.D. Ky. Mar. 31, 2010), a Kansas business argued it should not be required to appear in a Kentucky federal court because it did not sell any products in Kentucky and did not have any employees there. The plaintiff disagreed, noting the defendant offered its products to Kentucky purchasers through its interactive website. The court sided with the defendant and dismissed it from the case, finding that no sales had ever been made to Kentucky purchasers online. The court properly observed that “the maintenance of a website in and of itself does not constitute purposeful availment” to doing business in Kentucky. Id. at *3.
To see how the issue plays out under Ohio law, the cases of Malone v. Berry, 2007-Ohio-6501 and Parshall v. PAID, Inc., 2008-Ohio-3171 are instructive. In Malone, the court held there were insufficient contacts made with Ohio when a nonresident seller simply placed an advertisement on an Internet auction site in order to sell his vehicle. The court noted the site was not maintained by the seller and the seller never entered Ohio as part of the sales transaction. Similarly, the Parshall court found personal jurisdiction was lacking when there was no evidence of an actual purchase by an Ohio customer through the defendant’s website, despite the fact that there was promotional material on the site. Both opinions are from the 10th District Court of Appeals, which is generally a fairly good predictor of later Ohio Supreme Court decisions.
Despite its impact, the Zippo analysis offers little help when the Internet activity is “non-commercial” in nature. Kauffman Racing Equip., L.L.C. v. Roberts, 126 Ohio St.3d 81 (2010). For example, in Roberts the Court was analyzing the question of where allegedly defamatory Internet postings were “published,” and ultimately held the statements had been published in Ohio because several Ohio residents had seen the comments there. The Court did not have to resort to using the Zippo sliding scale.
With these considerations in mind, the answer to our entrepreneur’s question about whether she can be sued out-of-state is: “it depends.” Each case analyzing personal jurisdiction is decided on its own facts. In any event, it is safe to say that accepting orders or otherwise conducting business online brings with it the risk of having to defend against a lawsuit elsewhere. While this threat should not deter you from offering your products or services online, it pays to educate yourself in order to understand the risks involved.
For questions or additional information, please contact Curt Graham at email@example.com or 859.899.8516.