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It's bad enough when your business gets sued in your owncounty and you have to waste days in depositions and hearings--andthousands of dollars in legal defense. But imagine how the time andexpense would multiply if a lawsuit were brought on the other sideof the country. Between unfamiliar laws, unfamiliar lawyers and thecost of traveling, one such lawsuit could put quite a strain onyour budget. And what if you had several going at once?
If you're advertising your products and services on your Website--and especially if people can order them directly through yourinteractive features--you're doing business in all 50 statesand all over the world. That means if something goes wrong, you maybe subject to lawsuits brought in any jurisdiction.
What could go wrong? Think of the possibilities. Supposeyou're selling software that can be downloaded directly fromyour Web site, and there's a glitch in it that erases harddrives all over the country. Or a small-business customer uses yoursoftware product to store company records, then it malfunctions andthe customer can't track inventory or bill clients, driving thecompany out of business. Or suppose there's a trademark disputewith a company 1,000 miles away that didn't even know aboutyour business until you put up your Web site. Or maybe you'reoffering a product that's regulated by state law, and yourCalifornia 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 youmove beyond your home territory through a distributorship, acatalog or a magazine advertisement. The difference, says attorneyAlan Sutin of Greenberg Traurig in New York City, is that with acatalog or advertisement, you can choose which states to mail toand which states to avoid until you're ready to comply with allthe local regulations. But because the Internet is global, itimmediately expands your market to worldwide--along with yourpotential liability.
For instance, Haelan Products Inc., a Louisiana corporation,started producing a health beverage under the registered trademarkHaelan 851 in 1991. A few years later, a company called BesoBiological Research Inc. introduced a competing health beverageunder 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 nojurisdiction over the case because Beso was a Kansas corporationdoing business primarily in California. It had no office and noemployees in Louisiana, did not own or lease property there, had nomailbox or telephone number there, and did not solicit customersthere beyond placing national ads that had garnered only four salesin Louisiana in two years.
The U.S. District Court for the Eastern District of Louisiana,however, ruled that the lawsuit could indeed be brought inLouisiana. The court noted that Beso had a nationwide toll-freenumber, had advertised in four nationally distributed publicationsand had solicited business through its Web site. While any one ofthose factors might not have been enough on its own, the courtnoted that the combination indicated an intent to do businessnationwide, subjecting the company to nationwide liability.
Steven C. Bahls, dean of Capital University Law School inColumbus, Ohio, teaches entrepreneurship law. Freelance writer JaneEaster Bahls specializes in business and legal topics.
How Interactive?
Miami attorney Jose I. Rojas, a specialist in technology law andintellectual property, of law firm Broad and Cassel, notes thatmost courts considering these cases have ruled that setting up amerely passive Web site does not subject a company to jurisdictionin a foreign court any more than taking out a national printadvertisement. However, the more interactive the site, the morelikely a court would rule that your company is actually doingbusiness in that state. For instance, if the customer can makepurchases by credit card directly from the Web site, that wouldmost likely count as commerce in the customer's state. The grayarea includes partially interactive sites, where, for instance, acustomer could click on a button and fill out an on-screen form torequest further information.
In one case involving a minimally interactive site, an Arizonacompany named Cybersell Inc. sued a Florida company named CyberSellInc. after the Florida company established a Web site. The U.S.Court of Appeals for the Ninth Circuit ruled that the Floridacompany was not liable for trademark infringement under Arizona lawjust because its Web site could be accessed by citizens in Arizona,as it could by anyone else in the world. The only interactivefeature was an invitation for browsers to introduce themselves bysending an e-mail message, which wasn't enough to indicate anintent to do business in Arizona. The case was dismissed.
Avoiding Problems
How can you stay out of trouble? There are no easy answers. Thesteps you should take depend on your goals for your Web site, howmuch risk you anticipate and how prepared you are to do businessnationwide (or worldwide).
- If you're aiming only for a local clientele and don'twant to risk being sued in other jurisdictions, keep interactivefeatures to a minimum and don't provide a toll-freenumber.
- If you want to expand into some states but not others, you canblock orders from all other states. When the would-be customer in astate you're not prepared to sell in tries to type in an order,a box would appear on the screen stating that the transaction isnot available in his or her state. That way, you can research thelaws and regulations of each state before making your product orservice available there.
- If you want to use e-commerce to do business worldwide but wantto 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 aseries of rules listed in the agreement. In the same way, you canset up your Web site to require that buyers have to scroll througha list of terms and conditions and click "I agree" beforecompleting their transactions. These might state that transactionsare governed by the laws of your home state, and any disputes mustbe pursued there.
How enforceable are click-wrap agreements? That has yet to bedecided by the courts, but a few cases have confirmed thatshrink-wrap agreements are enforceable. Sutin predicts thatclick-wrap cases will depend on how clear the terms are to thebuyer. "There's a higher likelihood it'll beenforceable if the buyer has to scroll down through the terms andclick `I agree' than if there's a hyperlink to the termsand 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 goodidea to do a nationwide trademark search before launching your Website. Trademark law is territorial, but by establishing a nationalpresence, you may be asking for trouble from another business withthe same name.
- Make sure you have enough insurance. Defending a lawsuit inanother jurisdiction costs more because of the travel expense,among other factors.
"Discuss the risk level with your attorney," Sutinsays. "You have to balance the interests of your marketingpeople and your attorney."
Contact Sources
Broad and Cassel, (305) 373-9421, jrojas@adelphia.net
Greenberg Traurig, http://www.gtlaw.com
