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Where are we when we use the Internet?
This isn’t Kansas anymore. But is it New Jersey?
October 2000

Bill Wood is an Assistant City Attorney, in the San Antonio City Attorney's Office. He practices real estate and technology law for the city .

The Internet has profoundly affected legal principals of jurisdiction. The Internet’s worldwide coverage and explosive growth of e-commerce have both contributed to reexamination of basic legal principals.

When does a person have to worry about the laws and courts of another state? That question is really bothering people trying to establish a rational policy that integrates the Internet and e-commerce into daily life. And if you face the question, it may be time to visit with your lawyer. 

Two recent legal issues, both connected to New Jersey, highlight the issue. How much net presence will be enough to force you to abide by a state’s laws, taxes and court system?

A bit of background is in order. Under our Constitution a person is entitled to certain elements of due process before a Court can enter an order that affects the defendant’s person or property. Unless you have done something to subject yourself to a state’s jurisdiction, it would be a violation of that due process concept if court in another state simply entered a judgment against you. The International Shoe case from 1945 is one of the cases that define the law. The US Supreme Court held, 

    “Due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it, such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”
It usually does not take very much to satisfy the Court. That case also notes, 
    “[g]eneral personal jurisdiction, which enables a court to hear cases unrelated to the defendant's forum activities, exists if the defendant has “substantial” or “continuous and systematic” contacts with the forum state”

That case means there are two elements to be considered. First, did you have a physical presence in the state? Second, if you did not have a physical presence, did you do something else that amounts to the “minimum contacts?” One of the New Jersey cases involved the physical presence of a company’s computer. The other merely involved the posting of information on a host company’s computer.     

The Internet has introduced the virtual presence into modern life. We can do amazing things in another state without ever setting foot in that state. We can maintain an entire store, post a library or control a robot. Little electrons traveling through the network are the only physical presence. 

The key ingredient in the recent controversies has been the use of a web server located at a remote location. The parties used a computer located in New Jersey. Neither company actually ran the computer. One company employed a remote hosting service to maintain its web site. The other incident merely involved a passive web server that was located in New Jersey. Two key elements led to different results. In the first case the company actually owned the computer and the web host maintained it. In the second, the company neither owned the computer itself nor conducted business through its web page.

Ed Foster a columnist for Infoworld magazine tells the story of the first New Jersey case. It involves a tax bill for uncollected sales tax. A New York company, which he does not name, contracted with a New Jersey company to host its web server. It had made the choice based on sound business and technology reasons. The host provided security and back-up power. 

New Jersey sent the company a statement for taxes based on the physical presence of the server in New Jersey. The state alleges that the company is conducting business from New Jersey, not New York. The mere choice to own the computer as opposed to merely contracting with the host company for service on a computer owned by the host company subjected the New York company and its customers to New Jersey tax law. 
See Ed Foster’s article

Longtime readers may remember the case of Richard Patterson, a Texas lawyer. In 1996 I wrote about his dispute in the October 1996 issue of PC Alamode. He was subjected to Ohio law just because he posted a shareware program on a CompuServe computer through a cooperative marketing program. The federal appeals court ruled that two facts indicated he subjected himself to Ohio law. First, CompuServe marketed Mr. Patterson’s software from its computer that was based in Ohio and Mr. Patterson signed an agreement that the transaction was subject to Ohio law. Mr. Patterson claimed he had never been to Ohio and all of his actions took place in Texas.

It would have been interesting to see if he might have fared better in California federal Court. Recently District Court Judge Nicholas Politan ruled that merely posting information on the remote server did not constitute sufficient contacts with the state. The case, Amberson Holdings LLC v. Westside Story Newspaper, C.A. No. 00-1108, indicates that a company might be subject to suit in another state if it has fully interactive sites where the company conducts business. Since the newspaper did not sell anything through its web site, it could not be sued in New Jersey.

Although specific legal advice is not possible in a general column like this, an observation is in order. A visit with your lawyer to discuss the pros and cons of entering any significant agreement that relates to the Internet can be very beneficial. Something as simple as changing the “choice of laws” and venue terms of the contract can make a big difference. That contract provision will become even more important as various states adopt the proposed uniform laws on computer contracts. Parties to agreements subject to the new laws may be astounded at the provisions of the Uniform Computer Information Transaction Act. Infoworld has provided significant coverage to the proposed law

Finally, if you are involved in e-commerce you must consider the jurisdictional question when selecting a web host, when deciding whether or not to purchase your own server equipment and even the terms of your sales transactions. The laws on taxes, warranties and limitations on damages all change from state to state. 

I’d recommend the American Bar Association’s web site as a roadmap through these jurisdictional issues. It has reports on jurisdiction and conflicts of laws from various ABA committees. It also has a very good background article.

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