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Global Defense

One Net side effect: worldwide legal worries

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.

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This article was originally published in the December 1999 print edition of Entrepreneur with the headline: Global Defense.

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