Jurisdictional Issues for Startups

Jurisdiction

The first major potential pitfall that startups face when operating through an Internet presence is the question of jurisdiction. The borderless nature of the Internet[1] may expose companies to lawsuits around the world and underscores the question of whether a business can be subject to personal jurisdiction at the point where a website is accessed, rather than the actual physical location of the server or the location where the company does business in. Startups which engage in online business may become involved in disputes involving the content of their website or over their products in services in jurisdictions with different procedural and substantive laws than their home venue. In the United States, what constitutes personal jurisdiction can vary from state to state because of differing long-arm statutes, which determine whether or not jurisdiction over an out of state resident is appropriate. Generally, personal jurisdiction is established in federal court if the party has purposely availed itself of the resources of protection of the state, and if the exercise of jurisdiction does not offend traditional notions of fair play and substantial justice.[2]

However, what constitutes purposeful availment Although neither the Supreme Court nor any of the Circuit courts have yet considered the issue, a few select district court cases generally provide a guide to the level of activity that will subject a startup to jurisdiction in another state. Below the line of selling goods/services, however, there are a variety of activities that can bring about jurisdictional consequences. For example, in Maritz v. Cybergold, Inc., 947 F.Supp. 1328 (E.D. Mo. 1996), internet solicitation of advertisers and prospective customers for targeted electronic advertising based on individual preferences was deemed sufficient conduct to subject the defendant California corporation to jurisdiction in Missouri. Likewise, in what is widely considered to be the leading case on the subject, Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa 1997), jurisdiction was established based on contracts with service providers and the selling of passwords to residents of Pennsylvania. In Zippo, he court adopted what is commonly referred to as the sliding scale test, a balancing approach that examines the level of interactivity and the nature of the activity that is being conducted on the site.[3] The Zippo case makes a distinction between active and passive websites; the later generally considered not establishing jurisdiction in a state without the presence of other contacts.[4] However, active conduct toward the residents of a state will almost always subject a business to personal jursction within that state. [5]

As a result, startups weary of subjecting themselves to jurisdiction in foreign venues should take active measures to minimize their contacts there. Measures to characterize a website’s nature as “passive” rather than “active” can help curtail the treat of costly litigation by limiting jurisdictional exposure. For example, disclaimers that state a sites content is “for informational purposes only” or other statements which indicate that web content is published for the informational benefit of consumers, or that a company only offers its products to a particular market or regional area can help prevent establishing the necessary contacts for personal jurisdiction. By taking these measures, companies can effectively pick and choose which states they will subject to jurisdiction in, unless their conduct rises to the level of tortuous activity or active conduct. Furthermore, the court’s analysis in Millennium Enterprises, Inc. v. Millennium Music, LP, 33 F.Supp.2d 907 (D.Or.,1999), suggests that general advertising will not be considered purposeful availment unless there is other evidence that a company has intentionally directed its activities toward the forum state. Therefore, if a company’s online presence is able to keep the level of interactivity low and does not engage in conduct or selective advertising that is targeted toward a particular state’s residents should not have to worry about personal jurisdiction in foreign venues due to their Internet presence.

There are also other means that companies may take to curtail their liability. Another preventative measure that startups can take is to subject users to a website’s terms of service, which can be drafted to minimize the venues a company may face potential legal action. Such a measure often requires an affirmative acceptance or some other substantial step by the user to be considered valid. However, some states such as California, have laws in place, which effectively make corporate efforts to contractually limit liability ineffective by allowing users to sue for damages in their local venue. Arbitration clauses, however, can also significantly reduce the costs involved for companies that are conducting business in multiple states. Because of previous court precedent that enforces the binding nature of electronic contracts and well as the established preference of the United States toward arbitration, courts will usually defer to arbitration agreements, even those entered into electronically, absent extreme circumstances such as fraud, misrepresentation, or mutual mistake. Therefore, arbitration provisions are generally recommended for companies doing business over the Internet and can save significant costs for startups by eliminating the discovery process entirely.