Businesses need to be intentional about how interactive they allow their websites to be, since they can be forced to defend themselves in lawsuits filed in another state if they actually make sales in other states through their websites. In a decision issued August 28, 2009, federal Judge Aleta Trauger held that the U.S. District Court for the Middle District of Tennessee had no personal jurisdiction over the Denver-based defendant that had been sued for trademark infringement and unfair competition in Nashville, despite the defendant having a fully interactive web page from which Tennessee residents could order services. Capital Confirmation, Inc. v. Auditconfirmations, LLC, No. 3:09-0412 (M.D. Tenn.). My law partner and I served as local counsel for the defendant, along with Bobbee Musgrave of Denver.
For many reasons, it is almost always preferable to defend a lawsuit in your hometown or home state. In today's environment, where almost every business has a website, many businesses would be surprised to learn they can be forced to defend themselves in a lawsuit in another state, depending in part on how interactive their website is. Fully interactive websites are those that allow customers to order goods and services from the site.
In general, the law requires plaintiffs to sue defendants where they reside or have their principal place of business, or where the acts giving rise to the lawsuit occurred. But where defendants "purposefully avail" themselves of the benefits of another state, they can be forced to defend in that other state. Before the Internet, defendants who sold their goods and services in person typically did so locally, and could not be sued in other states. The Internet, however, has allowed businesses of all sizes to expand their reach without ever physically leaving their home state. Businesses with a robust Internet presence may unwittingly be at risk for defending against out-of-state lawsuits.
In the Sixth Circuit (the appeals court that covers Tennessee, Kentucky, Ohio and Michigan), a website's interactivity is measured on a sliding scale. At one end are "passive sites that only offer information for the user to access." At the other end are "active sites that clearly transact business and/or form contracts." In the middle are "hybrid or interactive sites that allow users to exchange information with the host computer," and these middle cases must be evaluated on an individual basis. See Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883, 890 (6th Cir. 2002).
Following well-established Sixth Circuit precedence, Judge Trauger's decision makes clear that an interactive website by itself is insufficient to be haled into federal court in Tennessee. As she explained, suing an out-of-state defendant in Tennessee requires "something more" than merely an interactive web page.
In Capital Confirmations, the defendant's web page was fully interactive, but it had no legitimate sales into Tennessee. The plaintiff had posed as a non-existent individual named "Frank Jepson," purporting to enter into a transaction on the defendant's web page from within Tennessee. The court considered these transactions to be illegitimate. The only other interaction with Tennessee was from a request that was aborted before any payment was made by the customer, so the court considered that interaction to be incomplete and of no impact. The mere fact that a Tennessee resident could theoretically purchase goods or services over the defendant's web page is insufficient to hale the defendant into Tennessee.
The lesson to be learned from this decision is that businesses need to be intentional about the level of their web pages' interactivity. One upside of the Internet is the ability to sell and market all across the country, not to mention all over the world. The downside is that sales in other states can create jurisdiction in courts far from home. One step businesses can take to minimize the chance of being sued by their customers out of state is to include a provision in all contracts that sets the exclusive jurisdiction in the place where the business is headquartered. But such a provision will not work in suits by non-customers. Instead, businesses need to gauge their appetite for defending lawsuits in other states before selling goods and services there, whether through the Internet, over the telephone, through distributors or in person.