Beware of the Long Arm Of the Law

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Do you know that your business may be sued in a distant state based on your Internet site?
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by Jean Warshaw
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Jean Warshaw, Beauty & The Law columnist

Your beauty business is probably headquartered in the state where you and most of your employees live. When can another state reach out and make you defend a lawsuit in that other state? Going to another state to defend yourself could be an expensive undertaking, requiring you to hire new lawyers you have never worked with before, travel long distances to attend depositions and court hearings, and put your witnesses up in hotels during the trial.

This was the question posed in a lawsuit against a company that sells cosmetics and beauty products over the Internet and by mail order. The beauty company and one of its managers were sued in New York for allegedly using trade secrets belonging to a beauty-product company that did business in New York. The defendant argued that it didn’t have a New York office, any New York employees or any New York bank accounts or property, although it said it did make one mass mailing to New York residents. Neither the beauty company nor the manager was in New York for any of the acts the plaintiff said they had done.

The court still required the beauty company to defend itself in New York. The court based its conclusion, in part, on the fact that it had a website that New Yorkers could use to order its products. The court was also persuaded by the plaintiff’s assertion that the company used the plaintiff’s trade secrets to make its one mass mailing into New York. The manager was also forced to defend himself in New York because he allegedly participated in using the plaintiff’s trade secrets, which the court said could have caused injury in New York to the plaintiff.

A federal court in Oregon reached the opposite conclusion when a defendant company did not aim its marketing efforts toward Oregon residents. Jell-e-Bath sued Crystal Mud Spa in the Oregon court claiming that Crystal Mud Spa infringed its rights to a patent for bath jelly. The product includes a powder that forms a jelly when added to bath water, and another powder to dissolve the jelly so the bath can be drained after use. Crystal Mud Spa was incorporated and headquartered in California, all of its sales were in California, and its only two out-of-state sales at the time were made at a trade show in San Francisco. Crystal Mud Spa had a website that out-of-state purchasers could use to buy its products, but it took down the order form before the court reached its decision, and it had not made a single Internet sale by then. It didn’t have a toll-free number for out-of-state customers to use. Crystal Mud Spa’s owner had never been to Oregon. The Oregon court found that Crystal Mud Spa did not have enough Oregon contacts to require it to defend itself in Oregon and dismissed the case against it.

[Photo courtesy of Barry Burns]

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A COURT’S LONG-ARM JURISDICTION

“Long-arm jurisdiction” is a vivid way to describe a court’s authority over a person or business—under some circumstances the law can reach its long arm into the state where you generally conduct your business, grab you and pull you into the state where the court sits. There are really two distinct things lawyers mean when they use the word “jurisdiction.” This column focuses on long-arm jurisdiction, which answers the question of when the court has the authority to exercise authority over you or your company. If a court does not have long-arm jurisdiction over a nonresident person or business, it is powerless to decide a case against that person or business. The court must then dismiss the action against any person or business that it does not have jurisdiction over. The other type of jurisdiction answers the question of what subjects a specific type of court can rule on, such as tort cases, murder cases or trademark cases, and will not be addressed here.

Each state is free to make its own laws about when it will use its long-arm jurisdiction to bring out-of-state residents into its courts. But, if you imagine a state that allows its citizens to sue anyone at all and make them travel to defend themselves, then you can imagine abuses. The U.S. Constitution serves as a brake on those abuses, and requires states to give due process to out-of-state defendants. The due process clause of the U.S. Constitution requires that a nonresident defendant must have at least minimum contacts with a state before the state courts or federal courts in that state can have authority to rule on a matter involving that defendant.

If your beauty business has a brick-and-mortar store in California and California employees, you probably would not be surprised to have a court in California exercise personal jurisdiction. Having a physical presence in a state satisfies the constitutional requirement for contact, and gives a state clear authority over any dispute relating to your business. Even without a physical presence, contacts that are substantial, continuous and systematic can approximate a physical presence and justify personal jurisdiction.

Analyzing for minimum contacts in a state where you don’t have a physical presence or enough contacts to approximate a physical presence poses harder questions under the Constitution. Minimum contacts under the Constitution usually require some act on the company’s part to do business in the state and a direct connection between those acts and the litigation. The Constitution also requires that the court’s assertion of authority over you must not violate “traditional notions of fair play and substantial justice.”

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HOW YOU MAY BE SUED FAR AWAY

If you have customers in a state—Iowa for example—who can order products through your interactive website, then courts will usually conclude that you are conducting business in Iowa. A plaintiff could sue you in Iowa and force you to come defend yourself on the theory that the interactive website is targeting commercial activity toward state residents. Many courts will require actual sales into the state where the court is located because without that you would not have any expectation that you could be sued there.

But merely having a website is not enough to require you to defend a case in another state. As in the Jell-e-Bath case, a passive website that has only advertising and product or company information will not be enough to confer jurisdiction over your business in a state where you are not otherwise actively conducting business. The court in the Jell-e-Bath case said that merely selling products in your home state does not mean that you intend that product to be used in every state. A website would have to be interactive before it supports personal jurisdiction.

There is a range of activities between the two extremes of a fully interactive website and a completely passive one, and courts will analyze the totality of the circumstances to determine if there are sufficient state contacts. Other factors can be viewed together with the nature of the website to support a conclusion that the company targeted business to a distant state. In one case, an Oregon court concluded that a Virginia headhunting company was subject to personal jurisdiction in Oregon because its website actively encouraged viewers throughout the country to submit résumés; one Oregon resident had done that, and the company advertised in national newspapers and had a toll-free telephone number. The combination of those factors showed that the Virginia company was targeting Oregon customers.

Courts throughout the country differ in how they analyze websites that are not fully interactive but do have some interactive features. Different states may reach different conclusions based on the same facts. Adding to the uncertainty, many websites have a combination of features and so each feature can’t be analyzed in a vacuum, but instead must be viewed as contributing to an overall sense of whether the defendant has minimum contacts with a particular state. Still, having a link to an email address to write to the company is not usually enough to meet minimum contact requirements; although having an email correspondence with someone in the state may supply those minimum contacts. Courts in different states have reached divergent conclusions when a website has a form for requesting a catalog. While a toll-free number is one factor that courts look at to support personal jurisdiction, it might not be enough if no other factors supporting jurisdiction are present.

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The law is still evolving, and just last December a Massachusetts court said that a French company had to defend itself in Massachusetts. The court relied on just two asserted facts for the conclusion that the French company was doing business in Massachusetts. First, a search feature on the French company’s website showed retailers who sold its products in Massachusetts, and second, the injured plaintiff had selected the product based, in part, on the French company’s website. The court’s conclusion that those were enough to be hauled into court in a foreign country has already been criticized in the blogosphere, and whether the decision will be reversed or followed by other courts remains to be seen.

The hardship and inconvenience of defending a case in a distant state does not usually make personal jurisdiction so unreasonable that it violates traditional notions of fair play. In one case, an Arizona resident who moonlighted from her full-time job by selling skincare products through an eBay virtual store and Google Checkout had to go to California to defend herself even though that would be burdensome. The plaintiff alleged that the defendant’s business infringed its trademark, among other things. The Arizona business had less than $50,000 in revenues and less than $7,000 in sales to California during the prior year. That revenue from sales to California was enough to show that the Arizona company intentionally engaged in business transactions with California residents. The California court said that the ease of communication and travel, and the fact that many lawyers practice in multiple states, reduce the inconvenience of defending a suit in a distant state compared to what those burdens used to be. Unless the inconvenience is so great that it deprives the defendant of due process, then it will not outweigh the other factors in favor of exercising personal jurisdiction.

JURISDICTION BASED ON IN-STATE HARM

Companies that set out to cause damage can be sued in the state where the damage occurs, even if they don’t do other business there. For example, a California court decided that an Illinois resident who registered Panavision’s name as a domain name as part of a scheme to sell the domain name to Panavision could be sued in California where Panavision had its offices. The court concluded that the defendant knew his actions would likely injure Panavision in California. The court was careful to note that the defendant’s deliberate targeting of a California company was an important factor in its decision.

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DON’T IGNORE A LAWSUIT

Although a court may ultimately determine that it does not have jurisdiction over you or your beauty business, you can’t afford to ignore a lawsuit. If you or your business fail to contest a lawsuit, the court may enter a default judgment, which means that the plaintiff wins simply because no one answered to contest the case. You should consult your lawyer about answering the complaint promptly for the purpose of challenging the court’s exercise of personal jurisdiction over you or your business.

There is no federal law that controls when a court has personal jurisdiction over an out-of-state company. Each state has established its own laws and rules about long-arm jurisdiction, and the courts apply the law of the state in which they are located. Just because you are an Iowa company doesn’t mean that a court in California will follow Iowa law on this issue. As a result, it is important to consult the laws in any state in which you may be sued to determine how that state’s laws will apply to the specific facts of your situation.

LIMIT WHERE YOU CAN BE SUED

In some cases, you can limit where you can be sued by having your customers enter into a contract that requires all lawsuits to be brought in your home state. Courts will generally enforce a contract that limits where suits can be brought so long as it is not unfair or unreasonable. Showing unfairness or unreasonableness can be very difficult. To show that your contract is unfair or unreasonable, the plaintiff would have to demonstrate that the state you selected is so inconvenient that he or she is deprived of the right to sue at all. If the agreement is made in good faith, the parties are usually entitled to select any state they agree on.

Conversely, if you sign someone else’s contract that says that suits must be brought in a state that is inconvenient for you, you should assume that a court will require you to go to that state to defend yourself or enforce your contractual rights if you think the other party has breached your agreement. If you are asked to sign a contract that specifies an inconvenient location for litigation, you should do your best to negotiate a different location. Many companies will agree to remove or modify those provisions. On the other hand, not every contract poses enough risk of litigation that it is worth negotiating every detail.

A provision limiting lawsuits to a convenient state can only help you if you are sued based on a contract that contains this provision. In the case of the Arizona moonlighter sued for trademark infringement discussed earlier, the parties had never done business with each other and so there wouldn’t have been any opportunity to implement a contractual limitation on the location of lawsuits.

This copyrighted article is intended to help make you aware of some of the issues that you may face, but it is not exhaustive and does not constitute legal advice. You should consult your lawyer for legal advice about the particular circumstances of your beauty business.

Jean Warshaw is a lawyer in private practice in New York City. She provides advice on business and environmental law. She can be reached at 212.722.2240.

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