United States: Ninth Circuit Expands Court Jurisdiction To Internet Companies

On September 2, 2003, the United States Court of Appeals for the Ninth Circuit issued a decision which dramatically expands the scope of federal jurisdiction over companies doing business through the internet. In Gator.com v. L.L. Bean, Inc., the Court ruled that L.L. Bean can be sued in California because a considerable volume of its revenues come from catalog and internet sales to California residents, although the company does not operate any retail stores or warehouses in California, and pays no taxes to the state.

The United States Supreme Court has established the basis for exercising jurisdiction on a defendant’s "contacts" with the state. Historically, the Supreme Court has determined that where a corporation purposefully chooses to locate offices, sell product, or otherwise conduct activities within a state, it implicitly accepts a reciprocal duty to answer for its in-state actions in a court within that state. The Ninth Circuit determined that the California court could exercise jurisdiction over L.L. Bean stating: "It is increasingly clear that modern businesses no longer require an actual physical presence in a state in order to engage in commercial activity there."

This case may have a significant impact on internet-based businesses. Prior to the wide acceptance of internet commerce in the 1990’s, most businesses capable of maintaining significant interstate operations were large, well-funded corporations capable of defending a lawsuit anywhere in the United States as a "cost of doing business." Internet commerce now has spawned many smaller businesses which have used the internet to expand their once localized customer base into national and even global markets. For these businesses, the ability to defend against litigation in a location far from home may prove difficult or even impossible.

In light of Gator.com, businesses that conduct significant sales or marketing over the internet may wish to consider implementing user agreements on their web sites that include "choice of forum" and "choice of law" provisions. Such provisions in an agreement with internet users, although not a perfect solution, will give internet business operators a better opportunity to control the location of any potential litigation.