December 21, 2010

In this day and age, a large percentage of consumers take full advantage of online shopping. After all, it's easy and convenient. Businesses of every shape and size have tapped into this vast market by establishing websites that allow customers from around the country (and around the world) to easily purchase products to be shipped to their respective states. So what happens if one of your customers from, let's say, California sues you in state court for a claim arising out of an online transaction on your website? Will you be forced to defend the case in a jurisdiction where you have never even physically done business? Maybe.

Before, courts used a sliding scale approach where the likelihood that a website operator could be brought into court in a foreign state depended on the commercial nature of the site and the level of interaction with its out-of-state users. In other words, a website that merely posts information would be viewed differently than one that actually enters into contracts with users. However, thanks to a September 2010 decision by the Seventh Circuit Court of Appeals, it looks like federal courts in the Seventh Circuit (which includes Illinois, Indiana and Wisconsin) will be using a more clearly defined standard. In Illinois v. Hemi Group, LLC, the appeals court held that the defendant, a New Mexico firm that sold cigarettes to Illinois residents via a website, could be sued in Chicago. Central to the court's opinion was the idea that for a party to be forced to defend itself in the state in which a lawsuit was brought, "the defendant must have purposefully established minimum contacts with [that] State before personal jurisdiction will be found to be reasonable and fair." In other words, the Internet business must have reached out specifically to a resident or party in the state in which the lawsuit was filed in order for the continuation of that lawsuit to be fair to that party (e.g., by shipping products to someone in that state).

Following are some of the specific circumstances that persuaded the court to allow the lawsuit to be maintained against the New Mexico party in Chicago:

  1. Hemi maintained several sophisticated commercial websites that allowed customers to purchase cigarettes, calculate their shipping charges using their zip codes and create accounts. Hemi also stated that it would ship anywhere in the United States (except New York) and shipped products after customers completed their online purchases.

  2. Hemi expressly stated that it would not do business with customers in New York, which the court reasoned was because the defendant knew that it was protecting itself from violating certain state laws and being sued in New York. Hemi was savvy enough to attempt to limit its exposure to legal action in New York where it felt the risk of a lawsuit was not worth the business.

  3. The underlying claims brought against Hemi related to Hemi's failure to submit required monthly sales reports to the State of Illinois and for various other issues arising from Hemi's sales to Illinois residents.

The court acknowledged that defending a lawsuit in Illinois placed a burden on Hemi, whose physical business operations were located solely in New Mexico. However, it ultimately found that the defendant could not "have its cake and eat it too" by maintaining a nationwide business model with none of the risk.

What does Illinois v. Hemi Group, LLC mean for your Internet business? First, it is critical to note that this decision does not mean that every business that owns or operates an interactive website that is accessible in various states can be forced to defend itself in any of those states. However, you should be aware of the consequences of conducting business over the Internet in multiple states, as you could be forced to defend yourself in one or more of those jurisdictions when a lawsuit arises. As a result, you may want to consider including a forum selection clause in the terms and conditions of the website's user agreement, stating that any litigation brought by a user must be brought in the website's home state, to which the user must click "I agree" or "I don't agree." Doing so may not defeat jurisdiction, but at the very least it could give you an opportunity to transfer a case back to your home state. Ultimately, your safest bet is to consult with legal counsel who can guide you through the process of setting up a website that affords you the utmost protection against the risks of doing business without borders.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.