MACPA's Statement - October 2010 - 34

hIGh-TECh sOluTIOns

Can your website expose you to a lawsuit in a distant land?
By edward e. sharKey

ebsites – every business has one. A recent opinion from the U.S. District Court in Maryland highlights ways that a website might get a business sued in a far-off jurisdiction. It’s hard enough to be sued. Make sure you or your clients don’t needlessly land in court away from home if you don’t have to. Litigating in a distant state is costlier and riskier than litigating at home. Despite modern technology, it is more expensive to supervise and manage litigation away from home. In addition, bias favoring local companies can affect the ultimate outcome. In Music Makers Holdings v. Sarro, the U.S. District Court addressed a dispute between two parties over the trade name “Bach to Rock.” A Maryland company and a New York woman both wanted to use it and demanded the other desist. The Maryland company got to court first, suing the New York woman in Maryland. The woman protested. She argued she was not subject to jurisdiction in Maryland because she did no business in the state. The Maryland company pointed out that the defendant marketed her business to Maryland citizens on her website. In deciding the issue, the court looked at the defendant’s website and applied a “sliding scale” test applicable in Maryland, and, in one form or another, in many jurisdictions. By this test, the mere act of placing information on the Internet is not sufficient by itself to subject that person to jurisdiction in each state where the information is accessed. Instead, the defendant must have acted with the intent of targeting residents in that state. Under the sliding scale model, there are passive, interactive and semi-interactive websites. At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents that involve the knowing and repeated transmission of computer files over the Internet, the defendant can be sued in that state. At the opposite end are situations in which a defendant has simply posted information on a website. A passive website that does little more

than make information available is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive websites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information. Courts will look at the particular website and make a subjective assessment of the extent to which it “targets” home-state residents. Results can be hard to predict on this socalled middle ground, but the case law illustrates factors that are relevant to the analysis. In Music Makers, the defendant’s site provided information regarding her music camp, a toll-free number, and a registration form which visitors could print and mail to the defendant in New York. It also had a Google search box. The court expressly enumerated, however, the things the website did not have. It did not have an electronic application, a payment-by-credit card function, live chat or an interactive e-mail form. Under those circumstances, the court ruled that the defendant was not doing business in Maryland and could not be sued there. Accordingly, it dismissed the case against her. While the court noted multiple missing features that seemingly were relevant to its decision, it is the existence or lack of an electronic application (or contract) that usually plays the primary role in these cases. Having an interactive function by which transactions are consummated online will be very likely to subject a business to jurisdiction in the states where it has contracting customers. That may be acceptable to a company, but the risk should be accounted for in the decision to adopt such a business model. In addition, the risk of being subjected to foreign jurisdiction can be mitigated. Businesses should use forum-selection clauses in their contracts. Such clauses require counterparties to litigate disputes in the business’s home jurisdiction. Such terms are enforceable, even against consumers. Businesses should also adopt effective terms of use for their websites. Users of interactive websites

can be required to consent to terms of use, including terms that establish the forum where litigation will take place. Such terms also are enforceable, subject to determination of whether the user had reasonable notice. Reasonable notice is a subjective standard, but it normally depends on things like the prominence of the notice and the nature of consent to the terms – whether a user expresses consent by affirmative action (a “click” to agree) or by default arising from use of the site. These measures will not remove all risk of website-based jurisdiction. In Music Makers, the plaintiff was not a website user or customer of the defendant. It would not have been bound by a forum selection clause. The steps, however, are cost-free and deliver a substantial reduction in risk.
Edward E. Sharkey is founder of the Law Office of Edward E. Sharkey, LLC, a Bethesda-based firm focusing on business transactions, including the negotiation and documentation of business financing. He can be reached via www.sharkeylaw.com.

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MACPA's Statement - October 2010

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