E-Business Counsel, PLC

A recent case out of the Seventh Circuit Court of Appeals provides an important example of why certain precautions and issues should be proactively addressed by companies conducting business over the Internet.

The case, Poulsen Roser A/S v. Jackson & Perkins Wholesale, Inc. (N.D. Ill. Nov. 15, 2010) involved trademark infringement claims under the Lanham Act arising out of the defendant’s website. The central issue before the court was whether merely having a website accessible within the forum state was enough for a court to properly exercise personal jurisdiction over a non-resident litigant.

For background purposes, jurisdiction refers to whether a court may properly exercise authority over a party involved in litigation. There are two types of jurisdiction: The first is general jurisdiction and common examples supporting general jurisdiction include forming your business under the laws of the forum state or having a physical presence such as an office or facility in the forum state. A finding of general jurisdiction enables a court to exercise jurisdiction over a party regardless of whether the claim at issue is related to its activities in the state or has an in-state effect.

In contrast, the second type of jurisdiction is referred to as limited or specific jurisdiction. This type of jurisdiction extends only to claims arising from a party’s activities that were either within the forum state or had an in-state effect. But personal jurisdiction cannot be exercised if it would violate a party’s constitutional right to due process. Generally (or at least under the law of the Sixth Circuit, which is where I routinely practice) courts focus on three requirements in deciding jurisdictional due process issues: First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant’s activities there. Third, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.

Back to the issue of Internet jurisdiction and the Poulsen Roser case, the Court upheld the prior analysis regarding the corporate defendants’ Internet contacts. Those internet contacts were insufficient for establishing jurisdiction. In reaching this conclusion, the Court expressed concern about creating universal jurisdiction based upon merely having a website and cautioned:

We note the legitimate concern that “[p]remising personal jurisdiction on the maintenance of a website, without requiring some level of ‘interactivity’ between the defendant and consumers in the forum state, would create almost universal personal jurisdiction because of the virtually unlimited accessibility of websites across the country.” Jennings, 383 F.3d at 550. Courts should be careful in resolving questions about personal jurisdiction involving on-line contacts to ensure that a defendant is not haled into court simply because the defendant owns or operates a website that is accessible in the forum state, even if that site is “interactive.”

Poulsen Roser, quoting Illinois v. Hemi Group LLC, ___ F.3d ___, 2010 U.S. App. LEXIS 19126, 2010 WL 3547647, at *4 (7th Cir. 2010). In upholding the dismissal on jurisdictional grounds, the Court rejected what is commonly referred to as the Zippo sliding scale for determining Internet-based jurisdiction. Under the Zippo test (so named because it arose out of Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997)), whether a business’ website subjects the business to personal jurisdiction in a given forum depends on a “sliding scale” of the website’s level of interactivity: a website that is “passive” (i.e., merely offers information to the user) would not support jurisdiction while a website that is “interactive” (i.e., allows the user to exchange information with the host computer) would support jurisdiction.

In reaching its decision, however, the Court critically noted that the plaintiff only presented evidence that “merely establishes that some of the Corporate Defendants advertise their products on the Internet and have the ability to sell products in Illinois through dealers …There is no indication, however, of whether or how a customer can order products to be shipped to Illinois via the Internet.” This language suggest that had there been a showing – no matter how slight – of an actual sale or other interaction accomplished through the defendant’s website by an Illinois resident that jurisdiction would be proper.

The Take Away:

Essentially what the Poulsen Court said is that courts should be careful in resolving questions about personal jurisdiction involving Internet contacts to ensure that a party is not brought into court simply because that party owns or operates a website that is accessible in the forum state regardless of whether the site is “interactive.” But the Court’s reasoning seems to suggest that only slight interaction may be required in order to properly exercise jurisdiction over a defendant’s whose only contact with the forum state is through a website. For companies, especially smaller companies and entrepreneurs conducting business through a website, it is important to carefully evaluate your website presence and whether it poses an unreasonable risk of establishing a basis for jurisdiction and thereby force your company to litigate in some distant, inconvenient jurisdiction. Assuming it does, the next step is to limit this potential result by specifying where jurisdiction for any claims or disputes may be brought. Choosing the jurisdiction in advance is commonly accomplished through a carefully drafted terms of use for your website.