WLF Legal Opinion Letter
Jurisdiction Over Online Disputes: Why ‘Active' vs. ‘Passive' Nature Of Business Website Matters
By Kasey J. Curtis
June 3, 2011 (Vol. 20 No. 11)
Nearly every business has a website. Businesses frequently believe that the more developed and interactive their websites are, the better. But is that really the case? Businesses are often unaware that merely operating an interactive website may provide a basis for courts to exercise jurisdiction over them, even in states where they otherwise do little or no business. Under U.S. Court of Appeals for the Ninth Circuit precedent, an "active" website is often sufficient to confer personal jurisdiction over a business while a "passive" website is not. As a practical matter, businesses may often find it difficult to be able to tell the difference between the two. Even more confusing is the fact that precedent does not always draw clear distinctions between the two.
In Cybersell v. Cybersell, 130 F.3d 414 (9th Cir. 1997), the Ninth Circuit adopted what has since been referred to as the "active/passive" test for determining whether or not a business' website provides a sufficient basis to justify exercising jurisdiction over that company in a particular state. The test is based upon the district court decision of Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). That court recognized the difficulty presented in applying the traditional minimum contacts analysis to business conducted over the internet, where any person, anywhere in the world, has the ability to access a business' webpage. It concluded that courts must consider the interactive nature of a business' website in determining whether the site provides sufficient contacts between the business and the forum state to justify the exercise of jurisdiction. This approach has since been widely adopted, including by the Second, Third, and Fifth Circuits.
Under the Ninth Circuit's formulation, courts examine the nature and quality of the business' commercial activity conducted via the internet in the forum state. The greater the business' activity in the state, the greater the likelihood the court will conclude that the business can be sued in that jurisdiction. Courts have identified three distinct categories: passive websites, active websites, and websites occupying the ground between the two. Active sites subject businesses to jurisdiction, passive sites do not. Websites in the middle ground may or may not subject a business to jurisdiction.
‘Active' vs. ‘Passive' Websites
Characteristics of a "Passive" Website:
- Posting Information about a Company: Courts have held that merely posting information about a company, i.e., using the website as an "advertising tool," does not subject that business to personal jurisdiction.
- Accepting Customers' Names and Addresses: The Ninth Circuit has recognized that a website that is limited to taking customers' names and addresses is not sufficiently interactive to confer jurisdiction over the business operating that site.
- Limited Use of an Intermediary Seller (Such as On-line Auctions): The Ninth Circuit has held that sellers of products via on-line auctions do not subject themselves to jurisdiction in the state where the goods were sold. It has concluded that the limited use of auction sites does not confer jurisdiction because sellers do not know where the winning bidder will be located, and thus are not directing their activity at a specific state.
Characteristics of an "Active" Website:
- Fully Interactive Sites that Take Frequent Orders from Within the Jurisdiction: The clearest example of an active site is one that fully incorporates on-line ordering and actively does business in the forum state. The Ninth Circuit has had no difficulty in determining that websites of major retailers subject those companies to jurisdiction.
- Advertising Website to Potential Customers in the Forum State: A business that advertises its website within a jurisdiction is considered to be actively marketing its site and thus subjecting itself to the laws of the jurisdiction where it advertises.
- Frequent Use of an Intermediary Seller (Such as On-line Auctions): Without deciding the issue, the Ninth Circuit noted that frequent use of an intermediary seller might confer jurisdiction because frequent use is similar to directed sales.
The "Middle Ground":
- Offering Products for Sale in a State: District courts have split on whether merely offering products for sale in a venue subjects a business to that jurisdiction. In one case a court determined that evidence of two internet sales in California, both made to plaintiffs, was sufficient to confer jurisdiction. In a different case, a court refused to exercise jurisdiction based upon a single internet sale to an Oregon resident.
Nearly a decade and a half has passed since the Ninth Circuit adopted the active/passive distinction in Cybersell. In the ever-evolving world of on-line business, it may appear strange that courts would adhere to a test developed back when Netscape Navigator was the web browser of choice; yet, for all Cybersell's imperfections, the Ninth Circuit appears poised to adhere to its use for the foreseeable future. This puts businesses in the unfortunate position of navigating this complex landscape. Businesses must remain aware of the far reaching implications that their on-line activities may have and make difficult decisions based upon how courts have continued to apply this distinction. While the law is less well defined than would be hoped, the Ninth Circuit has continued to refine the Cybersell approach and has offered clear guidance in a few scenarios. As always, the danger lies in the nebulous grey area where it is uncertain which way courts will rule.
Kasey J. Curtis is an associate in the Los Angeles office of the law firm Reed Smith LLP.