The risks of out-of-state liability when doing business over the Internet

You run an Illinois-based business that sells products to customers in your retail stores in the state and online through your website. Although your company has no physical presence outside of Illinois, one of your online customers recently filed a consumer fraud action in Alaska against your business. Do you need to expend the time and money to defend the company against this lawsuit?

“It depends,” says Amanda M.H. Wolfman, an associate at Novack and Macey LLP.

Whether the business’s Internet activities subject it to out-of-state lawsuits depends on numerous factors interpreted differently by courts across the country.

“If the company did nothing to direct its business to Alaska and merely had a ‘passive’ website that provided information to Internet users, the likelihood that you would have to defend the company in Alaska is relatively low,” she says. “On the other hand, if the business used the Internet to directly negotiate and form contracts with Alaskan residents, that likelihood is much higher.”

Smart Business spoke with Wolfman about the gray area where a business may find itself due to the business it conducts over the Internet.

 

Could the company in your example be subject to any lawsuit in Alaska based on its Internet activities?

Probably not. The company is incorporated in Illinois and maintains its principal place of business there. It only would have to defend itself against any and all claims asserted against it in Alaska if the company’s affiliations with that state were so ‘continuous and systematic’ that it could be considered ‘essentially at home’ in Alaska. It is very unlikely that a court would decide that the business’s Internet activities alone create this kind of connection with Alaska.

 

Could the company be subject to this lawsuit in Alaska?

The company may still need to defend itself against this lawsuit because of its connection to Alaska and this consumer. For that to be the case, a court would need to decide the following:

ν  The company ‘purposefully availed’ itself of, or ‘purposefully directed’ its activities at, Alaska.

ν  The lawsuit ‘arises out of’ the company’s contacts with Alaska.

ν  It would be fair and just to force the company to defend itself against the lawsuit in Alaska.

While all of the company’s contacts with Alaska are relevant to this analysis (not just its Internet-based contacts), courts are far from uniform in how they analyze businesses’ online activities.

Regardless, the company can analyze its risks by asking the following questions:

  • How ‘interactive’ is its website? Given that the website is not ‘passive,’ the business should consider where its website falls on a sliding scale. In the middle of that scale are websites that allow Internet users to exchange information with a host computer, but are not characterized by the knowing, back-and-forth transmission of documents often associated with contract negotiations.
  • Does its website specifically reference Alaska or expressly exclude other states from its scope?
  • Does the business advertise over the Internet? If so, are those advertisements part of an overall marketing campaign targeted at Alaska — even if also targeted at other states? These advertisements are especially noteworthy if coupled with physical advertisements in, or directed at, Alaska. 
  • How aware is the business of its customers in Alaska, including the overall size of its customer base there? This factor is relevant but not determinative.  

While each situation will dictate the appropriate response to a lawsuit, considering these questions will help businesses determine their risks and responsibilities when doing business over the Internet.