E-commerce: Is Your Company Vulnerable to Lawsuits? As more consumers shop online, all kinds of businesses find the Internet to be a valuable tool for direct sales. Although e-commerce represents a simple and economical way to reach potential customers worldwide, a recent appellate court ruling demonstrates one of its risks — being sued in far-flung jurisdictions. Here’s a case in point: Gator.com Corp. v. L.L. Bean Inc. Substantial contacts Maine-based L.L. Bean operates no stores in California. Instead, it conducts business with California customers via catalog, phone and its Web site. Another company’s software causes Eddie Bauer coupons to pop up when a user visits Bean’s site. Bean sent a cease-and-desist letter to the pop-up company. It sued Bean in California court, asking the court to declare that pop-ups don’t infringe or dilute the Bean trademark or constitute unfair competition. Bean moved to dismiss the suit, arguing that it wasn’t subject to California jurisdiction because it maintained no physical presence there, wasn’t authorized to do business there, had no agent for service-of-process there and wasn’t required to pay taxes there. The Ninth Circuit disagreed. First, it noted that a defendant generally must maintain “substantial” or “continuous and systematic” contacts with a state to be subject to lawsuits filed in its courts. But the court found that modern businesses increasingly no longer require an actual physical presence in a state “to engage in commercial activity there.” The court found that the company: o Realized about 6% of its total 2000 sales in California, o Mailed a substantial number of catalogs and packages to the state, o Targeted many California residents for direct e-mail solicitation, o Maintained a substantial number of online accounts for California customers, o Allowed California residents to communicate with service representatives “live” via the Internet, and o Contracted with several California vendors. Based on these findings, the Ninth Circuit held that the company’s contacts with the state were sufficiently continuous and systematic to justify subjecting it to jurisdiction — and lawsuits — in California. Continuous and systematic contact But the court went further, finding that the Web site was “highly interactive” and that the contacts made through the Web site — described as a “virtual store” — in and of themselves satisfied the jurisdiction criterion. The court applied the sliding-scale test for Internet-based companies. The test doesn’t require actual presence in a state. Rather, courts base jurisdiction on a finding that commercial activity occurs at sufficient levels to constitute “approximate physical presence.” So the court held that the company’s commercial activity in California qualified as “substantial” or “continuous and systematic.” A warning The Ninth Circuit stressed that jurisdiction interpretations must be flexible enough to respond to a modern marketplace where companies can sell products in a state without ever setting foot in it. The court warned that businesses that “structure their activities to take full advantage of the opportunities that virtual commerce offers can reasonably anticipate that these same activities will potentially subject them to suit in the locales they have targeted.” Other courts are split on this issue and the Supreme Court has yet to rule in a similar case. But online retailers who sell to customers in California should consider themselves forewarned. Contact | Legal Disclaimer