Selling across state lines

Think selling merchandise over the Internet is a virtual goldmine? It may be the most comprehensive and least expensive means of marketing a product, but it comes at a price some business owners may not appreciate.

Consider this hypothetical example: X Corp. is a small, Indiana-based company that sells sunglasses throughout Indiana and Ohio. To increase public exposure to its product, X Corp. designs a Web site that allows consumers to purchase sunglasses online.

A competitor in California notices X Corp.’s logo and, believing it is confusingly similar to its own, files suit in California for trademark infringement. Outside of selling sunglasses to a few California residents over the Internet, X Corp. has never conducted business in California, never advertised there and never had a physical presence there.

Based on its lack of contact with California, X Corp. seeks dismissal from the lawsuit on the theory that the California court cannot constitutionally exercise personal jurisdiction over X Corp. The result? Motion denied. X Corp. is forced to hire counsel and defend itself in a court thousands of miles from Indiana.

This example is not merely theoretical. Businesses whose only contact with a particular state is selling products over the Internet to residents of another state can expect to be subject to suit in that state.

While the legal analysis can be involved, the narrow legal question is whether operating a Web site is sufficient “contact” with a state to subject the operator to personal jurisdiction (i.e., capable of being sued) in a court within that state. The answer from the courts is that it depends on the type of Web site used.

1) Active Web sites — An active Web site is defined by the courts as one that permits a consumer to purchase a company’s products online. Companies that operate active Web sites are held to be transacting business with consumers of the state and will be subject to personal jurisdiction in that state.

2) Passive Web sites — A passive Web site is one that is essentially informational only. The site may offer product information, pricing, etc., but the consumer cannot order products online or interact with the Web site by requesting more information. Companies that operate passive Web sites are not subject to personal jurisdiction because they are merely providing information, not transacting business with consumers of a state.

3) Interactive Web sites — An interactive Web site is a hybrid of an active and passive Web site. Consumers cannot order products online, but they can interact with the Web site and request additional information (for example, by inputting their e-mail or mailing address). Courts decide on a case-by-case basis whether an interactive Web site is “active” enough to warrant personal jurisdiction. The more interactive, the more likely personal jurisdiction will be found.

Companies that wish to utilize the Internet to boost sales but avoid being exposed to the risk of suit in distant states have a couple of options. The simplest is to create an interactive or a passive Web site rather than an active Web site. However, this solution may make little business sense for companies that derive a large portion of their revenue from online sales.

A second option is to insert a forum selection clause into the Web site that advises purchasers they can only bring suit in a particular state. The drawbacks to a forum selection clause are that it is largely untested in the courts and may not apply to a plaintiff that did not purchase the company’s products (such as in a trademark suit).

While the benefits of selling products online may outweigh the risk of suit in distant states, business owners would be wise to consider the legal implications of online sales.

Paul Vink is an attorney in the Litigation Group of Bose McKinney & Evans. He assists clients with a wide variety of complex business and commercial litigation. Reach him at (317) 684-5422 or [email protected]