United States: Ninth Circuit to Re-Examine Personal Jurisdiction Over Internet Sellers

On September 2, 2003, in a controversial decision, a three-judge panel of the Ninth Circuit Court of Appeals in California held that L.L. Bean's sales via the Internet were sufficient to establish general personal jurisdiction in California over the famous catalog clothing retailer. Gator.com Corp. v. L.L. Bean, Inc., 341 F.3d 1072 (9th Cir. 2003). The court reached this conclusion despite the fact that L.L. Bean is incorporated in Maine and has all of its facilities and employees in that state, and despite the fact that the allegations in the lawsuit were unrelated to L.L. Bean's sales via the Internet to customers in California. The Ninth Circuit panel held that L.L. Bean's Internet sales in California were sufficient to allow Gator.com to sue L.L. Bean in California seeking a judicial declaration that Gator.com's computer pop-up software did not infringe any L.L. Bean trademark or constitute an unfair trade practice.

On April 29, 2004, the Ninth Circuit decided to rehear the case en banc, meaning that all of the Ninth Circuit judges will participate in reevaluating the case. The decision to rehear the case results in immediate (although potentially temporary) decertification of the previously published opinion. The Ninth Circuit's action has thus raised the hopes of those companies that do business over the Internet that this act alone will not subject the companies to personal jurisdiction in the California courts.

L.L. Bean's Web site allows individuals to make direct purchases or engage in transactions via the Web site (as opposed to simply reviewing materials posted on the Web site). The operation of such "interactive" Web sites has grown rapidly in the past few years as the Internet has allowed sellers to reach a global marketplace for their goods. As a result, sales routinely take place over the Internet without the seller ever having set foot in the buyer's state or country.

Courts have traditionally relied on actual physical presence in, or contacts with, the forum in order to determine whether personal jurisdiction exists in that jurisdiction. With Internet sellers, the fundamental element of actual physical presence is usually lacking unless the seller happens to be located in that state or has other physical connections with the state to which the court can point, such as a warehouse, bank account, or sales representative in the jurisdiction. Similarly, incorporating in a state or designating an agent for service of process may provide the court with a sufficient basis to find personal jurisdiction. These are the easy cases.

The difficult cases are those in which the Internet seller markets its product or service to no particular geographic location but attempts to capture as much electronic market share as possible. The only contact between the parties is an electronic agreement and perhaps a product mailed to the buyer's jurisdiction. When actual physical presence is lacking, courts have traditionally looked to concepts such as "purposeful availment" as a proxy, meaning, Did the individual purposively engage in conduct that might result in litigation in the state?

There are two kinds of personal jurisdiction — general and specific. General jurisdiction exists when a defendant has engaged in activities that are sufficiently "substantial, continuous, and systematic" to allow a court to exercise jurisdiction over any cause of action, even unrelated to the defendant's specific activities in the state. Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437, 445 (1952). As a result, a finding of general jurisdiction requires a high level of contact by the defendant with the forum state. By contrast, specific jurisdiction can arise based only on the defendant's specific conduct in the state.

While some federal courts have weighed in on the subject, no other court has found that Internet sales could subject a seller to general jurisdiction. Some federal courts have found more limited specific jurisdiction based on use of the Web site itself.

The three-judge panel in L.L. Bean characterized its analysis of general jurisdiction as whether L.L. Bean's conduct was "substantial," or "continuous and systematic." L.L. Bean, Inc., supra, 341 F.3d at 1077. The panel focused on both the volume of sales made by the company in California and the "virtual store" nature of the L.L. Bean Web site, complete with live operators ready to respond to instant messages sent by potential buyers on the site. The panel seemed impressed with the apparently large number of sales made in the state and concluded without citation to any evidence that L.L. Bean's "millions of dollars in sales, driven by an extensive, ongoing, and sophisticated sales effort involving very large numbers of direct email solicitations and millions of catalog sales, qualifies as 'substantial' or 'continuous and systematic' commercial activity." Id. at 1080.

There are some problems with the panel's logic. In the past, the Ninth Circuit has held that advertising alone directed at the forum state was insufficient to establish general jurisdiction. Cubbage v. Merchent, 744 F. 2d 665, 668-69 (9th Cir. 1984); Forsyth v. Overmyer, 576 F. 2d 779, 783 (9th Cir. 1978). As a result, L.L. Bean's "sophisticated sales effort" alone would not appear to serve as a basis for general jurisdiction.

Similarly, the Ninth Circuit has previously held that sales of products in the forum state through independent sales representatives were insufficient to establish general jurisdiction over an out-of-state company. Congoleum Corp. v. DLW Aktiegesellschaft, 729 F. 2d 1240 (9th Cir. 1984). It is unclear how Internet sales that probably involve even less contact with the forum state would, therefore, subject the seller to general jurisdiction.

In all events, by voting to rehear the case en banc, the Ninth Circuit will now issue a more definitive opinion on the subject, perhaps as soon as later this year.

The United States Supreme Court has yet to rule in a case involving general personal jurisdiction over an Internet seller. Therefore, irrespective of how the Ninth Circuit ultimately rules in the L.L. Bean litigation, there will in the near term be no simple answer to the question: Where can I be sued because of my Internet operations?