Nov 30, 1999
Internet Activity and Jurisdiction over Foreign Defendants
by Simon Johnson, Partner, Bennett Jones LLP, Edmonton, Alberta, (johnsons@bennettjones.ca )

When Bill Gates posed the question "Where do you want to go today" in Microsoft's advertising campaign for the Windows95 operating system, few people would have answered "to court in a distant state". Recently,
that is what is happening. Courts are asserting personal jurisdiction over individuals based upon Internet contacts within their state.

A. Introduction

The Internet creates business risks as well as business opportunities. One significant risk is that a potential plaintiff may claim that a business's activities on the Internet render it liable to legal actions in the home forum of a plaintiff, rather than the home forum of the business. Many businesses would be surprised to find that an act as simple as creating a website could result in exposure to litigation in a forum thousands of miles from its home forum.

This paper looks at reasons why the forum where an action is brought is significant, discusses how an Internet presence can give rise to jurisdiction over a defendant in a foreign forum, and considers the United States approach to this problem. It then reviews Braintech v. Kostiuk , the leading Canadian case on the enforcement in Canada of judgments obtained in other forums based upon Internet activities and the use of the Internet as a basis for the exercise of jurisdiction, and considers the implications of that decision.

B. Why Jurisdiction Matters

The forum where an action is commenced has significant consequences for a foreign defendant who is being sued outside its home forum.

Perhaps the most serious legal issue that arises is the risk that a dispute may be decided in accordance with the law of the forum where the action is commenced, even if the law of some other forum should properly apply. The forum in which an action is commenced does not necessarily determine the substantive law which will be applied to the action . However, as a general principle, a court will assume that foreign law is the same as the law of the forum in the absence of evidence to the contrary . If there is a difference between the substantive law which should govern the dispute and the law of the forum in which the action is commenced, a foreign defendant faces a difficult choice. The defendant may be forced to choose between defending on the merits in order to raise the proper law, and thereby submitting to the jurisdiction of the foreign court , or having the matter determined on the basis of the law of the forum where the action has been brought. Typically, a plaintiff will have no incentive to draw the difference to the court's attention.

Even if a court applies the substantive law of the foreign defendant's forum to the action, it will apply its own procedural laws . This has a series of consequences. First, there is a risk of exposure to exemplary or punitive damages assessed in accordance with the practice of the forum where the action is commenced. As a general principle, the availability of a given head of damages is a matter of substantive law; however, the quantum of damages is governed by the law of the forum where the action is commenced . Given the broad discretion to award such damages in Canadian law, and the size of punitive damages awards made in the United States, this can create a very significant exposure.

There are other potentially significant procedural disadvantages to having the action heard in a foreign forum. For example, it may be easier, as a matter of law or practice, for a plaintiff to obtain a jury trial. It may be possible for a plaintiff to take advantage of class action legislation. Security for costs will not be available on the basis that the plaintiff is resident outside of the forum where the action is brought . The foreign forum may not permit a successful defendant to recover its legal costs from an unsuccessful plaintiff.

Apart from the legal problems that arise when an action is brought outside a defendant's home forum, there will often be significant practical disadvantages. Typically the defendant will need to locate and retain local counsel in the foreign forum. It will have to educate that counsel about its operations and procedure, and may need to be educated in return about the legal system of the forum in which the action is brought. There will be significantly increased transactions costs, notably in travel costs for discoveries, depositions, and the trial itself, but also in the costs of communication and copying of documents. Finally, the additional time commitment required from executives of the defendant, and the employees involved in the activities giving rise to the litigation, is likely to be considerable. This will pose a particular hardship for smaller businesses. Defending litigation is rarely an activity in which a business wants to engage; the additional disadvantages of litigation in a foreign forum add inconvenience to unpleasantness.

C. Cyberspace and jurisdictional problems

It is a general principle of private international law that a defendant may not be sued in a foreign forum unless there is some factor to connect the litigation to the forum . In a number of cases Internet activity has been advanced as a sufficient connection.

Historically, as new business activities have emerged they have raised the issue as to whether they give a sufficient level of contact with a particular jurisdiction to permit actions to be brought in that jurisdiction. National magazine advertising, radio advertising, and television advertising have all been alleged to provide sufficient contacts to permit the assertion of jurisdiction over a defendant. The Internet is simply the latest in a series of activities, which have been argued to justify the assertion of jurisdiction over foreign defendants making use of them.

The Internet has a number of characteristics that create difficulties in applying a traditional jurisdictional analysis. Traditional concepts of jurisdiction are territorial: they are based on concepts of the place in which activity occurs or persons are located. This concept of a "place" where activities occur does not apply easily to contacts made through the borderless world of "cyberspace" . Material on the Internet is, at least in theory, not only accessible worldwide but equally accessible worldwide. Unlike traditional modes of communication such as magazine or television advertising, a party placing material on the Internet has no control over the location of the persons who access that material. Parties interacting through the Internet may not even know each other's geographical location.

At the same time, activity and interactivity on the Internet occurs between persons (real or corporate) who are located in particular jurisdictions. Jurisdictional inquiry has always involved a consideration of the locations and activities of persons to determine whether those locations or activities permit an action to be brought in a particular forum. While the medium where activity and interactivity occurs is novel, the fundamental nature of the jurisdictional inquiry is not.

The central problem that the Internet raises for the resolution of jurisdictional problems is the need to strike a fair balance between the needs of potential plaintiffs and potential defendants. On one hand, jurisdiction based upon Internet activity should not be so broad that the fear of being subject to the jurisdiction of courts around the world cripples either freedom of expression or legitimate commercial activity. On the other hand, jurisdiction should not be so restrictive as to remove all accountability, or recourse, for activity in cyberspace that potentially harms other persons.

D. The United States Approach To Jurisdiction over Internet activity

There is now a significant body of law in the United States on the principles, and limits, governing the assertion of jurisdiction based in whole or in part upon Internet activity. An understanding of that law is important for two reasons. First, given the commercial contacts between the United States and Canada and the litigation culture in the United States, it will become increasingly common for United States plaintiffs to sue Canadians before United States courts on the basis that the defendants' Internet activities give jurisdiction to those courts. A number of Canadian businesses have already faced this situation . Accordingly, an understanding of the basis upon which United States courts assert jurisdiction based upon Internet activity is important for website design for Canadian businesses. Second, Canadian courts are likely to draw upon the principles developed in the U.S. cases as they work out their own rules for asserting jurisdiction based upon Internet activity.

1. The general U.S. approach to jurisdiction

To understand the United States approach to jurisdiction over foreign defendants based upon Internet activity, it is necessary to review the general principles governing the United States rules for the exercise of jurisdiction over foreign defendants.

There are two elements that must be satisfied before a court in a particular forum can exercise jurisdiction over a foreign defendant:

(a) the laws of the forum must authorize the assertion of jurisdiction over the foreign defendant; and

(b) those laws must comply with the limitations of the due process clause of the Fourteenth Amendment of the Constitution of the United States.

Generally, the first requirement involves a consideration of the so-called "long arm" statutes that permit courts to assert jurisdiction over defendants who are not physically located within the forum . The "long arm" jurisdiction statutes are state-specific. Long-arm statutes may be narrower than the limits of jurisdiction authorized by the principles of constitutional due process or co-extensive with those limits. However, the test is conjunctive and there will be no jurisdiction in a given case if the requirements of constitutional due process have not been met. Whether a particular forum's "long arm" legislation authorizes service in a particular situation can only be determined by a review of that legislation.

The purpose of the second requirement, constitutional due process, is to protect a person's liberty interest in not being subject to the binding judgments of a forum with which the person has established no meaningful contacts, ties or relationships . The requirement seeks to balance two important values: the ability of a person to know and control when their activity in another forum may render them liable to litigation in that forum, and the need for each jurisdiction to allow its own citizens have a means of bringing actions against for wrongs done to those citizens.

Constitutional due process in this context has two elements. First, in order for an assertion of jurisdiction over a foreign defendant (known as "personal jurisdiction") to accord with constitutional due process, there must be sufficient "minimal contacts" between the defendant and the forum seeking to assert jurisdiction (the level of "minimum contact required to assert jurisdiction varies depending upon whether what is sought is "general" or "specific" jurisdiction – this is discussed below). Second, the exercise of jurisdiction must be "reasonable" and accord with "fair play and substantial justice".

Personal jurisdiction itself is divided into two types: general jurisdiction and specific jurisdiction. A finding of general jurisdiction renders a defendant liable to any actions that are properly brought within a particular forum: the action does not have to arise out of the defendant's forum-related activities. Constitutional due process requires that, for general jurisdiction to be found, the Defendant must carry on "systematic and continuous" activities within the forum. . This requires a high degree of activity within the jurisdiction . Specific jurisdiction, on the other hand, only permits a claim based upon the forum-related activity of the defendant . For specific jurisdiction to be found, the defendant must engage in activity in which it "purposely avails itself of the privilege of conducting activities within the forum state" so that it can reasonably expect to be haled into court in that forum . The test of "purposeful availment" is met if the defendant has purposely directed activity toward the forum state, such as establishing contacts with that state for a commercial purpose , or has purposely engaging in conduct knowing that it will result in harm being caused in that forum.

Once sufficient "minimal contacts" have been found for either general or specific jurisdiction, the court must then consider whether the exercise of jurisdiction is reasonable. While different courts have set out different lists of factors to consider in determining whether the exercise of jurisdiction is "reasonable", the factors considered typically include:

(a) the extent of the defendant's intentional activity in the forum;
(b) the burden on the defendant in defending in the forum;
(c) the extent of conflict with the sovereignty of the defendant's state;
(d) the forum's interest in adjudicating the dispute;
(e) the most efficient means of judicial resolution of the controversy;
(f) the importance of the forum to the plaintiff's interest in convenient and effective relief; and
(g) the existence of a more appropriate alternative forum.

It appears from the decided cases that United States courts generally do not conduct a close analysis of the issue of reasonableness . When the cases are examined, reasonableness rarely seems to be a significant consideration for the constitutional due process analysis once the "minimal contacts" test has been satisfied.

2. Jurisdiction and cyberspace activity

There are now a number of United States cases that apply these general principles of personal jurisdiction specifically to cyberspace activity. Generally, these cases recognize that there are serious consequences if the test for assuming jurisdiction based upon Internet presence is too wide:

…the imposition of broad territorial concepts of personal jurisdiction on the commercial uses of the Internet has dramatic implications….the possibility of such overreaching jurisdiction raises the specter of "dramatically chilling what may well be the most participatory marketplace of mass speech that this country – and indeed the world – has ever yet seen"….Businesses offering products through the Internet, particularly small businesses, might forego this efficient and accessible avenue of commerce if faced with the "litigious nightmare of being subject to suit" in every jurisdiction in this country…

At the same time, there is a need to balance this overbreadth concern against the need for meaningful redress for potential plaintiffs.

The view that a presence on the Internet is per se sufficient for the exercise of jurisdiction by any forum from which the website can be accessed has generally been rejected . As one court has stated, "…as far as we are aware, no court has ever held that an Internet advertisement alone is sufficient to subject the advertiser to jurisdiction in the plaintiff's home state" . Rather, courts have looked at the nature of the activity in cyberspace, often coupled with other presence or activities in the jurisdiction, to determine if the constitutional standard for the exercise of jurisdiction has been met.

(a) general jurisdiction

There have been relatively few cases in which a plaintiff has successfully asserted general jurisdiction over a defendant based in whole or in part upon Internet activity. A website that amounts to "passive advertising" will not suffice to establish specific jurisdiction: a fortiori, it will not suffice for general jurisdiction . At the same time, there is no clear line demarcating those cases where general jurisdiction will be recognized from those where it will not.

Two somewhat similar cases illustrate the difficulty in determining where general jurisdiction will be recognized. In Bancroft & Masters Inc. v. Augusta National, Inc , the existence of a website that advertised the Masters golf tournament but did not permit the purchase of tickets or products, the sale of tickets and merchandise in California amounting to less than 1% of the defendant's revenues, and the national broadcast of the tournament were held insufficient to confer general jurisdiction. On the other hand, in Mieczkowski v. Masco Corporation , a plaintiff resident in Texas who had purchased an allegedly defective product second-hand sought to sue the manufacturer in Texas. The manufacturer had no offices or employees in Texas and no business premises there, but had sales to Texas residents amounting to approximately 3% of its net income. In addition, it maintained an Internet site at which potential customers could browse catalogues, print off order forms, and communicate with on-line sales representatives by e-mail. The court held that the combination of the traditional business contacts and the Internet presence justified the assertion of general jurisdiction, declining to decide whether either would be individually sufficient.

When these two cases are compared, it is difficult not to conclude that the Internet activity in Mieczkowski, while not necessarily sufficient in itself for general jurisdiction, was sufficient to tip the balance in favour of a finding of general jurisdiction. The case illustrates the potentially significant impacts of a highly interactive website.

While the cases that consider assertions of general jurisdiction typically look at a combination of traditional business activity and activity in cyberspace, the decided cases do not rule out the possibility of a finding of general jurisdiction based solely upon activity in cyberspace. The absence of decisions on this issue is probably results from two factors. First, in many cases the issue of general jurisdiction is not reached because of a finding of specific jurisdiction. Second, in most cases a potential defendant will have traditional business activities within a jurisdiction as well as an Internet presence, and so a plaintiff will encourage the court to consider both factors. There is no reason in principle, and no authority, that holds that general personal jurisdiction cannot be based solely upon activity on the Internet.

(b) specific jurisdiction

In determining whether an Internet presence amounts to sufficient "minimum contact" to assert specific jurisdiction over a defendant, U.S. courts have developed what is often referred to as a "sliding scale" analysis, although in some respects the "sliding scale" is closer to a threefold categorization:

…the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet. This sliding scale is consistent with well-developed personal jurisdiction principles. At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise [of] personal jurisdiction. The middle ground is occupied by interactive Web sites where a user can exchange information with a host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site.

This framework for analysis has been approved by at least two Circuits.

The case most often cited as an example of the first category is Bensusan . The defendant owned a small jazz club called "The Blue Note" in Columbia, Missouri. He maintained a website that contained information about the club and a calendar of events. The site was not interactive, although it provided information about where tickets could be obtained. The owners of the famous "Blue Note" jazz club in New York City sued him for trademark infringement. The court held that a website that did nothing more than advertise did not amount to an act "purposefully directed" toward New York which would amount to purposeful availment.

The two cases most often cited as examples of the second category are Compuserve, Inc. v. Patterson and Zippo . In Compuserve, the defendant Patterson, a resident of Texas, transmitted software he developed to Compuserve, a computer information service headquartered in Ohio, over the Internet in return for payment when those files were disseminated to other subscribers. The court held Patterson's conduct amounted to doing business over the Internet: he had purposefully availed himself of the privilege of doing business in Ohio, and the assertion of jurisdiction was proper. In Zippo, the plaintiff "Manufacturing", a Pennsylvania corporation, brought an action in Pennsylvania against the defendant "Dot Com", a California corporation, for trademark infringement. Dot Com operated an Internet news service. It had approximately 3,000 paying subscribers in Pennsylvania, representing some 3% of its customers, and also entered into contracts with seven Pennsylvania Internet service providers to give the subscribers of those services access to its service. The court characterized the conduct as "doing business over the Internet".

The most difficult category of cases is the intermediate category, where the conduct goes beyond mere advertising but falls short of effecting sales of goods or services. In these cases, courts have considered the nature and quality of the interactivity, the extent to which the contents are commercial, and other activities of the defendant within the jurisdiction. The results in cases falling into this category tend to depend on a balance of a number of factors, rather than one particular circumstance. Factors that have been found to be relevant to the "sliding scale" analysis include the following:

(a) whether the defendant makes sales in the jurisdiction ;
(b) whether the defendant maintains a toll-free telephone number that is advertised on the web site and is accessible from the jurisdiction ;
(c) whether the website includes a disclaimer as to the areas in which the defendant will sell merchandise ;
(d) the level of interactivity permitted by the website ;
(e) whether the website permits a visitor to the site to sign up for an interactive "mailing list" with information about the defendant's products or services ;
(f) whether the website provides information about the defendant's specific commercial activities in the forum in which it is sought to be sued ;
(g) whether there have been interactions or sales through the website with residents of the forum in which the action is brought
(h) the likely market for the products or services being sold ;
(i) the market which the website itself explicitly or implicitly indicates it is targeting ;
(j) whether the website permits orders to be placed on-line ; and
(k) whether the defendant has otherwise marketed its services in the jurisdiction.

Unfortunately, given the range of factors that courts have considered and applied, it is difficult to predict with any certainty what result will be reached in any particular case falling into this "middle category". The practical difficulty is increased, of course, by the fact that the business creating the website will have no way of knowing at the time the site is designed which forum's set of factors it may end up being tested against. Generally, the risk of a finding of jurisdiction increases with the commercial nature of the website, the level of interactivity of the website, and the extent to which the forum in which jurisdiction is sought to be asserted can reasonably be seen as a focus for the defendant's business activities.

There is an additional basis upon which U.S. courts have recognized specific personal jurisdiction over defendants. Where a defendant purposefully engages in wrongful conduct that will, to the knowledge of a defendant, have its effects felt in a particular forum, then the exercise of jurisdiction over that defendant will accord with the principles of constitutional due process. This is known as the "effects" doctrine . This principle will apply to intentional torts such as defamation. Several cases have applied the effects doctrine to authorize the assertion of jurisdiction over defendants where defamatory statements were made in cyberspace against individuals who would suffer harm and who brought suit in their home jurisdiction . Courts have been more reluctant to apply the test to non-purposeful intentional torts such as trademark infringement where there is no reason to believe the infringement was directed at the plaintiff . In contrast, courts have applied the "effects test" to permit plaintiffs to bring actions in their home jurisdictions with respect to the activities of "cyber-squatters" or "cyber-pirates".

E. Braintech: Internet Jurisdiction comes to Canada

The decision of the British Columbia Court of Appeal in Braintech, Inc. v. Kostiuk appears to be the first Canadian decision to consider the enforcement in Canada of a judgment where jurisdiction over the defendant was based upon Internet activity.

Braintech involved a claim in defamation. The defendant, Kostiuk, was a resident of British Columbia who was alleged to have made defamatory statements about the plaintiff Braintech, Inc. in a posting on an Internet bulletin board. Braintech was a Nevada corporation, domiciled in British Columbia at the time of the action, which at one point had had its technical development activities centred in Austin, Texas.

Braintech commenced an action against Kostiuk in the District Court of Harris County, Texas. Kostiuk did not defend, and Braintech obtained a default judgement. The effect of the default judgment was that the Texas court did not have to address the issue of whether Texas had jurisdiction over Kostiuk. Braintech then commenced an action in the Supreme Court of British Columbia to enforce the Texas judgement. Kostiuk defended this action. One defence raised was that the judgment should not be enforced because the Texas court did not have jurisdiction over him. Ultimately, Braintech obtained summary judgment in its favour and Kostiuk appealed.

The British Columbia Court of Appeal considered whether it should recognize the judgment of the Texas court. The Court applied three significant principles in coming to its conclusion:

(a) it noted that the fundamental test for whether an assertion of jurisdiction by a foreign forum should be recognized is the test set out in Morguard v. De Savoye of whether there was a "real and substantial connection" between the forum and the action;
(b) it noted that the Supreme Court of Canada in Amchem had held that satisfaction of the principles of constitutional due process as set out in the Fourteenth Amendment to the Constitution of the United States would amount to a finding of "real and substantial connection"; and
(c) because the Texas court had not addressed itself to the issue of whether there had been compliance with the requisites of constitutional due process, it analysed those requisites. Quoting at length from Zippo , it applied the "three category" or "sliding scale" framework and concluded that the U.S. constitutional standard for the assertion of personal jurisdiction had not been met.

Accordingly, the court overturned the lower court decision, preventing the enforcement of the Texas judgment in British Columbia.

Braintech sought leave to appeal to the Supreme Court of Canada, but leave was refused, without reasons, on March 9, 2000.


F. The significance of Braintech

The decision in Braintech is particularly significant because it introduces into Canadian law the U.S. analysis as to when an Internet presence can be used as a basis for asserting jurisdiction over a foreign defendant. There are problems with the U.S. approach, most notably in predicting the results in the middle category where there is some interaction falling short of full commercial activity. Nevertheless, its flexibility has the potential for real fairness to both potential plaintiffs and potential defendants. As well, the open-ended list of factors to be taken into account will allow the test to evolve with technology and new forms of Internet interaction as these develop.

The analysis of jurisdiction based in whole or in part upon Internet activity imported in Braintech will be significant in at least three contexts in Canada:

(a) where foreign judgments based upon Internet activity are sought to be enforced in Canada (the situation in Braintech);
(b) where a plaintiff seeks to serve a defendant outside the forum and uses Internet activity as a basis for service (for example, by arguing that it amounts to "carrying on business" within a province , or by seeking to have a court exercise its residual discretion to permit service ex juris ) and
(c) where there is a dispute between the plaintiff and the defendant as to the most appropriate forum for a trial when there is more than one forum that would be proper (i.e., the issue of forum non conveniens).

In each of these situations, one of the most valuable aspects of Braintech is the manner in which it explicitly recognizes the need to restrict the excessive exercise of jurisdiction based on Internet activity. After citing Zippo, the court stated:

It would create a crippling effect on freedom of expression if, in every jurisdiction in the world over in which access to Internet could be achieved, a person who posts fair comment on a bulletin board could be haled before the courts of each of those countries where access to this bulletin could be obtained.

While Braintech did not deal with commercial activity, there is no reason for the danger of the chilling effect commercial activity to be given any less protection than the chilling effect on free speech when a court is assessing whether it should take jurisdiction . The special characteristics of the Internet as a means of communication and dissemination of information make the threat of "jurisdiction chill" a real one. This passage is a strong endorsement of the need to avoid such a chill.

G. Conclusion

The deceptive ease with which a website can be created potentially gives rise to a trap for the unwary. For a business, creating a website requires a careful balancing between business needs and legal risks, as there is a close connection between maximizing the commercial potential of a website and maximising the risk of litigation in foreign forums. Careful attention must be paid to the form and content of the website. Failure to exercise such caution significantly increases the risks of lawsuits being brought against the business in foreign jurisdictions. In a world where enforcement in Canada of such foreign judgments is becoming significantly easier, this exposure is becoming an increasingly significant business risk.