The ease with which an online business can deal with customers in other states has a downside. Setting up a website and reaching out to anyone online could expose a business to lawsuits in any state where a disgruntled customer claims injury. This threat applies even to the smallest of businesses who may think of themselves only in local or regional terms.
The traditional rule, established long before the arrival of the Internet, required that a business have "minimum contacts" in a particular state in order for the business to be sued in the courts of that state. Opening a branch office in a state or sending a sales representative there is easier to categorize as "contacts" than are activities that take place only in cyberspace. Adaptation of the concept to business conducted on the Internet is a work in progress, but some patterns are starting to emerge.
Passive vs. Active Websites
Some courts distinguish between "passive" and "active" websites. A website that is clearly passive is limited to describing the company or providing its address or telephone number. It is unlikely that a passive website, by itself, will subject the business to lawsuits wherever it can be seen. On an active website, customers can make online transactions by signing up for services or buying products. Among courts adopting this approach, the consensus is that an active website constitutes doing business in the users' home states, subjecting the business to the jurisdiction of courts in those states.
The passive/active website distinction is flawed because there are large gray areas between the two ends of the spectrum. Courts have struggled with how to characterize "interactive" websites that do not permit online transactions but allow customers to get on mailing lists, communicate with company representatives, or check on orders.
Internet Server Location
Other courts find jurisdiction in the state where the Internet service provider is located. The problem with this approach is that businesses may use one or more servers not as part of a plan to do business where the server is located but simply for technical reasons. In fact, many businesses and individuals do not even know the location of their server. One state appellate court has concluded that a New York organization could not be sued for defamation in a California court on the ground that it had contracted with an Internet service provider in California. The court accepted the argument that choosing a server with a few keystrokes at the computer was for the purpose of giving access to people all over the world but not to target California in particular.
Non-Internet Factors
If no clear answer to the jurisdiction question emerges from the nature of a business's website activities, the scales may be tipped by non-Internet factors. For example, a manufacturer of beds in one state maintained a passive website in that no sales were conducted through it. The site was accessible to over two million residents in another state halfway across the country, and sales by conventional means in the second state represented over 3% of the manufacturer's gross sales. A federal district court in the second state allowed two of its residents to sue the manufacturer in their home state when their three-year-old was asphyxiated in a bunk bed.
Preventive Measures
Short of retreating from the age of the Internet, there are measures that can be taken to reduce the likelihood of being hauled into court up to three time zones away from your home state. Give thought to the kind of website you use and to its purpose. Some courts have held that the likelihood that jurisdiction can be asserted over an out-of-state business is directly proportionate to the nature and quality of the commercial activity that an entity conducts over the Internet.
While courts may not always enforce the practice against individual consumers, businesses can try to protect themselves by posting choice-of-jurisdiction and choice-of-law provisions on their sites. This is the online version of including in written contracts clauses in which parties agree that any dispute will be resolved in the courts, and according to the laws, of a specified state.
While such agreements can be in written form in the product's packaging, it is more effective to use "click wrap" agreements where a potential customer first must click on a button that says "I accept these terms." A federal court has upheld such an agreement, ruling that a couple who sustained personal injuries at a Las Vegas hotel could not sue the hotel in their home state. Although any customer in any state could reserve a room through the hotel's website, the customer first had to agree to have legal disputes settled in a court in Nevada as part of making the online reservation.