Internet Entrepreneurs Beware: You Are Swimming In Murky Waters

You and a friend decide to start a new Internet company selling little bean-bag bears out of your home in Hawaii. You gather some inventory, set up a website from which customers can purchase online, and open for business. The orders start trickling in, mostly local, but a few nationwide.

Happily, you ship the bears, without thinking that completing such sales might have unforeseen consequences. Nevertheless, a short time later, you discover that you are being sued for trademark infringement by Ty, Inc., the maker of the Beanie Baby. Worse yet, you are being sued in Illinois, a state that you have never come within a thousand miles of, because of one sale of 3 bears that you made to a customer there.

Farfetched? This exact scenario was recently litigated in the United States District Court for the Northern District of Illinois. 2001 U.S. Dist. LEXIS 5761.

The Hawaiian company, Baby Me, claimed that its contacts in Illinois were so minimal that it could not reasonably expect to be hauled into court there, and that Illinois' exercise of jurisdiction over it would be a violation of its constitutional due process rights.

The court noted, however, that although Baby Me's contacts with Illinois were few, the website offered itself up for business anywhere in the U.S. The contacts in question involved the sale of the allegedly infringing goods, and thus were directly related to the suit. The court held that Baby Me was subject to jurisdiction in Illinois for this particular suit. The seven-month-old, two-person company had to defend an expensive lawsuit thousands of miles from its home.

The law of personal jurisdiction based on Internet activity is still very murky. But, this much is clear: If your website allows purchase of goods and services online, you are most likely subjecting yourself to jurisdiction anywhere that you make sales, especially if the suit is directly related to those sales.

But what if the website merely provides information to users, or provides free services such as news or email? The case cited most often on the subject of Internet jurisdiction, Zippo Manufacturing Co. v. Zippo Dot Com, examined web activity on a sliding scale, placing sites at which business is conducted on one end of a spectrum, and sites that are passive and merely display information at the other, jurisdiction proper and not proper, respectively.

In the middle ground were interactive websites at which information is exchanged between the user and the...