We're Not in Kansas Anymore - Personal Jurisdiction and Getting Sued Far From Home Base
Now that pretty much anyone can set up a web-based business, even the smallest business can, and probably will, have customers in states other than that company's home base. In addition to having to worry about when there's enough interaction with customers in a state to mean your business really needs to register with the Secretary of State as a "foreign" entity, there's always the possibility of being sued in some distant state by an unhappy customer/client.
Maybe you thought they'd have to come to Ohio to file a lawsuit against you. Wrong. Courts routinely can and do "exercise jurisdiction" over nonresident defendants they deem to have had sufficient connection with the states and its residents that it is not unfair to require them to defend an action in that State. Thus, If a court decides your company has "minimum contacts" with the particular state your unhappy customer chose to file a lawsuit in, that state is where you have to go to defend the legal action, even if it's a long way from home for you. See World-Wide Volkswagen v. Woodson, 444 U.S. 286 (1980); Int'l Shoe Co. v. Washington, 326 U.S. 310 (1945)
It all starts with the state's "long arm" (yes, that IS what it's really called) jurisdiction statute. Ohio's long arm statute is found in Ohio Rev. Code 2307.382. Among other circumstances justifying the exercise of jurisdiction over a defendant in a state far from its home base is "transacting any business in the state." Ohio courts, as do courts in many other states, interpret "transacting business" rather broadly. The Ohio Supreme Court has explained that it includes "to prosecute negotiations, to carry on business, to have dealings... carrying on of prosecution of business negotiations which have been either wholly or partly brought to a conclusion." Kentucky Oaks Mail Co. v. Mitchell's Formal Wear, Inc., 52 Ohio St.3d 73 (1990).
Essentially, the test is whether the defendant has "purposefully availed” itself of a forum state when he has “deliberately engaged in significant activities within [the] state or created continuing obligations between himself and residents of the forum state,” Richer v. Fraza/Forklifts of Detroit, 828 N.E.2D 205, 168 Ohio App.3d. 634, 2005-Ohio-1945 (10th App. Dist – Franklin Cty), or has otherwise “reach[ed] out beyond one state and create[d] continuing relationships and obligations with citizens of another state.” Calphalon Corp. v. Rowlette, 228 F.3d 718, 722 (6th Cir. 2000)..
Courts are still wrestling with the sorts of websites and internet activity which can subject a business to jurisdiction and the possibility of a lawsuit in any given forum outside the state of the company’s formation. Courts remain divided about what the appropriate analytical framework should be and how the internet/web fits within the traditional “minimum contacts” paradigm of analysis. Although the United States Supreme Court has recognized the Internet as “a unique and wholly new medium of worldwide human communication,” Reno v. ACLU, 521 U.S. 844, 850 (1997), it has yet to provide any specific guidance on how the concept of jurisdiction should be applied to web-based businesses. In addition, other courts have shown a reluctance to endorse any new theories of jurisdiction applicable only to the internet. See, e.g., GTE Media Servs., Inc. v. BellSouth Corp., 199 F.3d 1343, 1350 (D.C. Cir. 2000) (“[w] e do not believe that the advent of advanced technology, say, as with the Internet, should vitiate long-held and inviolate principles of federal court jurisdiction.”).
Generally two main standards are used by courts to determine whether jurisdiction over a particular defendant is appropriate in cases involving the web. Most courts seem to increasingly prefer the “sliding scale” test enunciated in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp.1119 (E.D. Pa. 1997). The major alternative is the “effects” test set forth in Calder v. Jones, 465 U.S. 783 (1984). Courts sometimes use both to reach a decision. See Bailey v. Turbine Design, Inc., 86 F. Supp.2d 790 (W.D. Tenn. 2000). The Sixth Circuit has adopted the sliding scale test. Neogen Corp. v. Neo Gen Screening, Inc. 282 F.3 883 (6th Cir. 2002). In both cases, the less interactive the website, the less likely a court is to exercise jurisdiciton.
Sliding Scale. The sliding scale test for determining jurisdiction is largely based on the nature of the website involved. As set forth in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp.1119 (E.D. Pa. 1997), jurisdiction depends on extent of internet use and depends upon “level of interactivity and commercial nature of the exchange of information that occurs on the Web site.” The Court explained:
At one end of the spectrum are situations where a defendant clearly does business over the internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the internet, then personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an internet website which is accessible to users in foreign jurisdictions. A passive website that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive websites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the website.
Effects Test The other major test for determining whether the court can exercise personal jurisdiction over a nonresident defendant is known as the “effects” test”. See Calder v. Jones, 465 U.S. 783 (1984). Under this analysis the question is whether the nonresident defendant has purposefully caused “negative effects” to happen in the forum state. It is especially popular in defamation, trademark infringement, and other intentional tort cases.
Recently,in Kauffman Racing Equipment, LLC v. Roberts, 2010-Ohio-2251, the Ohio Supreme Court addressed the jurisdiction issue in the context of alleged defamatory statements made in various internet postings. The Court held that it did indeed have personal jurisdiction over the alleged internet defamer, saying "We decline to allow a nonresident defendant to take advantage of the conveniences that modern technology affords and simultaneously be shielded from the consequences of his intentionally tortious conduct." The opinion contains an excellent discussion of the jurisdiction concept.
The Court's Office of Public Information's summary is useful for those not wanting to read the relatively lengthy opinion. At least one commentator - whose concise analysis of the case is very helpful - believes that the case expands the jurisdiction of Ohio courts when it comes to stuff posted on the internet. See this analysis as well
I will be speaking on this and other "Advanced Issues in Business Entity Selection" topics on August 16, 2010 at NBI's seminar entitled LLC or Inc.? Entity Selection for the Small to Medium Sized Business. For more information or to register and attend, click this link.
