From the December 1999 issue of Entrepreneur

It's bad enough when your business gets sued in your own county and you have to waste days in depositions and hearings--and thousands of dollars in legal defense. But imagine how the time and expense would multiply if a lawsuit were brought on the other side of the country. Between unfamiliar laws, unfamiliar lawyers and the cost of traveling, one such lawsuit could put quite a strain on your budget. And what if you had several going at once?

If you're advertising your products and services on your Web site--and especially if people can order them directly through your interactive features--you're doing business in all 50 states and all over the world. That means if something goes wrong, you may be subject to lawsuits brought in any jurisdiction.

What could go wrong? Think of the possibilities. Suppose you're selling software that can be downloaded directly from your Web site, and there's a glitch in it that erases hard drives all over the country. Or a small-business customer uses your software product to store company records, then it malfunctions and the customer can't track inventory or bill clients, driving the company out of business. Or suppose there's a trademark dispute with a company 1,000 miles away that didn't even know about your business until you put up your Web site. Or maybe you're offering a product that's regulated by state law, and your California company gets in trouble for violating the laws of Maine, where you didn't even know you were doing business.

Of course, you can run into out-of-state lawsuits any time you move beyond your home territory through a distributorship, a catalog or a magazine advertisement. The difference, says attorney Alan Sutin of Greenberg Traurig in New York City, is that with a catalog or advertisement, you can choose which states to mail to and which states to avoid until you're ready to comply with all the local regulations. But because the Internet is global, it immediately expands your market to worldwide--along with your potential liability.

For instance, Haelan Products Inc., a Louisiana corporation, started producing a health beverage under the registered trademark Haelan 851 in 1991. A few years later, a company called Beso Biological Research Inc. introduced a competing health beverage under various trademarks, all of which included the number 851. When Haelan sued for trademark infringement under Louisiana law, Beso claimed that the state of Louisiana should have no jurisdiction over the case because Beso was a Kansas corporation doing business primarily in California. It had no office and no employees in Louisiana, did not own or lease property there, had no mailbox or telephone number there, and did not solicit customers there beyond placing national ads that had garnered only four sales in Louisiana in two years.

The U.S. District Court for the Eastern District of Louisiana, however, ruled that the lawsuit could indeed be brought in Louisiana. The court noted that Beso had a nationwide toll-free number, had advertised in four nationally distributed publications and had solicited business through its Web site. While any one of those factors might not have been enough on its own, the court noted that the combination indicated an intent to do business nationwide, subjecting the company to nationwide liability.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

How Interactive?

Miami attorney Jose I. Rojas, a specialist in technology law and intellectual property, of law firm Broad and Cassel, notes that most courts considering these cases have ruled that setting up a merely passive Web site does not subject a company to jurisdiction in a foreign court any more than taking out a national print advertisement. However, the more interactive the site, the more likely a court would rule that your company is actually doing business in that state. For instance, if the customer can make purchases by credit card directly from the Web site, that would most likely count as commerce in the customer's state. The gray area includes partially interactive sites, where, for instance, a customer could click on a button and fill out an on-screen form to request further information.

In one case involving a minimally interactive site, an Arizona company named Cybersell Inc. sued a Florida company named CyberSell Inc. after the Florida company established a Web site. The U.S. Court of Appeals for the Ninth Circuit ruled that the Florida company was not liable for trademark infringement under Arizona law just because its Web site could be accessed by citizens in Arizona, as it could by anyone else in the world. The only interactive feature was an invitation for browsers to introduce themselves by sending an e-mail message, which wasn't enough to indicate an intent to do business in Arizona. The case was dismissed.

Avoiding Problems

How can you stay out of trouble? There are no easy answers. The steps you should take depend on your goals for your Web site, how much risk you anticipate and how prepared you are to do business nationwide (or worldwide).

  • If you're aiming only for a local clientele and don't want to risk being sued in other jurisdictions, keep interactive features to a minimum and don't provide a toll-free number.
  • If you want to expand into some states but not others, you can block orders from all other states. When the would-be customer in a state you're not prepared to sell in tries to type in an order, a box would appear on the screen stating that the transaction is not available in his or her state. That way, you can research the laws and regulations of each state before making your product or service available there.
  • If you want to use e-commerce to do business worldwide but want to avoid defending lawsuits in other jurisdictions, consider a "click-wrap agreement." The name stems from the "shrink-wrap agreements" often used on software packages, stating that by opening the package, the buyer agrees to abide by a series of rules listed in the agreement. In the same way, you can set up your Web site to require that buyers have to scroll through a list of terms and conditions and click "I agree" before completing their transactions. These might state that transactions are governed by the laws of your home state, and any disputes must be pursued there.

How enforceable are click-wrap agreements? That has yet to be decided by the courts, but a few cases have confirmed that shrink-wrap agreements are enforceable. Sutin predicts that click-wrap cases will depend on how clear the terms are to the buyer. "There's a higher likelihood it'll be enforceable if the buyer has to scroll down through the terms and click `I agree' than if there's a hyperlink to the terms and conditions," he says. "But customers may not like it. There's a business judgment to be made."

  • Because most of these cases involve trademarks, it's a good idea to do a nationwide trademark search before launching your Web site. Trademark law is territorial, but by establishing a national presence, you may be asking for trouble from another business with the same name.
  • Make sure you have enough insurance. Defending a lawsuit in another jurisdiction costs more because of the travel expense, among other factors.

"Discuss the risk level with your attorney," Sutin says. "You have to balance the interests of your marketing people and your attorney."

Contact Sources

Broad and Cassel, (305) 373-9421, jrojas@adelphia.net

Greenberg Traurig, http://www.gtlaw.com