Is Your Business Website Putting You at Risk For Out-of-State Litigation?

The INside Edge
January 18, 2005
Brian Paul

Annual revenues from global e-commerce now surpass a trillion dollars. This is motivating U.S. businesses (small and large alike) to invest significant capital in interactive, dynamic websites that convert Web surfers into Web consumers.

While these websites may make your storefront more accessible, they also have the potential for exposing your business to lawsuits filed in far flung places.

Generally speaking, a business may not be sued in a state in which it has not established significant, purposeful contact. When there is no such contact, a plaintiff has to bring suit where the business is located. Although the business doesn’t avoid litigation altogether, it at least can defend itself on its home turf. This can translate into an important strategic advantage. It usually reduces the cost of defense, as well.

Interactive websites exponentially raise the risk of out-of-state litigation. In contrast to “passive” websites — ones that simply provide a means to view information for those interested in accessing it — interactive sites make it possible for a user to exchange information with a host computer. Within this “interactive” category is a broad range of sites. At one end of the spectrum are sites that require users to key in a password so they can view and interact with the website’s contents (for example, an online catalogue). At the other end of the spectrum are sites where individuals can actually purchase products or enter into other commercial transactions.

The knowing and repeated transmission of computer files over the Internet with residents of a foreign jurisdiction may well subject your business to the long arm of that jurisdiction’s courts. Although the U.S. Supreme Court has yet to address when a website will make a defendant vulnerable to out-of-state litigation, most lower courts agree that when an entity intentionally reaches beyond its boundaries to conduct business it is impliedly consenting to being sued there. This traditionally has been the rule in cases involving transactions conducted over the telephone or by mail. The majority of courts have found no reason to deviate from this rule when a case involves a transaction conducted over the Internet.

Whether your business’s website is putting you at risk for out-of-state litigation depends on a number of factors. Does your business derive revenue from its website? If so, what percentage of your revenue? Does your business execute contracts through its website? Does your business’s website solicit the input of personal information? Can users download files from your website? If your business has already been sued, is the plaintiff’s interaction with the website the basis of her suit (for example, the plaintiff claims a product she bought through your website is defective)?

Knowing the answers to these questions can assist you in determining your business’s exposure to out-of-state litigation, and allow you to weigh that exposure against the benefits of maintaining an interactive website.