Internet 2.0: Jurisdictional Risks in Today's Cyber World

Mavrix Photo, Inc. (“Mavrix”), a Florida company, sued Brand Technologies, Inc. (“Brand”), an Ohio company, in federal court in California for copyright infringement. Mavrix's primary business is licensing and selling “candid” celebrity photos to magazines such as People and Us Weekly. Brand operates a very popular celebrity gossip blog, celebrity-gossip.net. Its business model is largely based on third-party advertisements placed on its website. Shortly after Mavrix posted 35 copyrighted photos of celebrity Stacy Ferguson (a.k.a. “Fergie” from the Black Eyed Peas) and her husband Josh Duhamel on its website, Brand allegedly reposted the exact photos on its website. In the copyright infringement suit, Brand moved to dismiss the case for lack of personal jurisdiction. The district court denied Mavrix's motion for jurisdictional discovery and granted Brand's motion to dismiss. The Ninth Circuit reversed the motion to dismiss and found specific jurisdiction over Brand.

To determine whether the defendant purposefully directed his activities to the forum to be subject to specific jurisdiction, the court used the “effects test” articulated by the Supreme Court in Calder v. Jones, 465 U.S. 783 (1984). Under this test, the defendant allegedly must: 1) commit an intentional action, 2) expressly aimed at the forum, 3) that causes harm that the defendant knows, or should have known, is likely to be suffered in the forum state. With regard to the first prong of the effects test, the court held that Brand clearly committed an intentional act when it reposted the photos on its website. For the second prong, the court found that Brand expressly aimed its activities to the forum, California, because commercial gain from its California user base was a predictable consequence of its business model. Although Brand did not directly sell goods or services to California residents, third-party advertisers on Brand's website had advertisements specifically targeted to Californians. For example, third parties advertised jobs and hotels located in California. Interestingly, the court found it immaterial whether the third-party advertisers were California residents. According to the court, the fact that the advertisements targeted California residents indicated that Brand knew, or should have known, about the California user base, and that it exploited that user base for commercial gain by selling ad space on its website. In explaining the third prong of the effects test, the court held that Brand knew or should have known its actions were likely to cause harm in the forum state. Despite Mavrix posting the photos on its website first, the court held that Brand's posting “destroyed” the California-based value of the photos because a significant number of Californians would have bought publications such as People in order to see the photos.

What is different about this case is the court's focus on the actions of third parties to exercise jurisdiction. Brand implied that it knew about the third-party advertisers' forum-specific advertisements by not denying or repudiating Mavrix's allegation that Brand was aware of such advertisements. Although it may not have been the situation in Mavrix, it is foreseeable that because a website owner has a large number of third-party advertisers, the website owner is truly unaware of targeted advertisements to residents of specific geographic regions. Moreover, many advertisers display different advertisements depending on the IP address of the user. Nevertheless, it appears under Mavrix that such a case would result in subjecting the website owners to jurisdiction in the specific geographic regions targeted by the third-party advertisers if the cause of action arises out of or relates to the website at issue.

The court stated that when a “website with national viewership and scope appeals to, and profits from, an audience in a particular state, the site's operators can be said to have 'expressly aimed' at that state.” This is a far-reaching statement since most websites at least attempt to profit from their user base. The Ninth Circuit acknowledged the burden this may impose on popular websites, but stated that the alternative would allow corporations whose websites exploit a national market to defeat jurisdictions in the states where those websites generate substantial profits from local consumers. It is notable that there was no evidence that Brand “profited” from the California user base, and as illustrated in the CollegeSource and The Wine Group cases discussed below, the mere intent to commercially gain from users in a forum may be sufficient to subject a defendant to personal jurisdiction.

Personal Jurisdiction Based on Internet Contacts, Part II

On the same day, the same panel from the Ninth Circuit issued a similar opinion finding personal jurisdiction based on Internet contacts in CollegeSource. CollegeSource, Inc. (“CollegeSource”), a California-based company, sued one of its competitors AcademyOne, Inc., (“AcademyOne”), a Pennsylvania-based company, in federal court in California for allegedly misappropriating materials from CollegeSource's website. Both companies assist students and educational institutions with the college transfer process and provide college course catalogs. Shortly after its founding, AcademyOne attempted to acquire rights to CollegeSource's extensive collection of course catalogs. The parties briefly discussed a partnership, but negotiations quickly terminated because CollegeSource did not want to sell away its competitive advantage.

Not long after the negotiations failed, AcademyOne began building its own collection of catalogs by hiring a Chinese-based contractor to collect catalogs and course descriptions from various schools. AcademyOne copied 680 catalogs from CollegeSource's collection and placed them on its website. CollegeSource filed suit against AcademyOne for trademark infringement, computer fraud, and unfair competition, among other things.

The lower court granted AcademyOne's motion to dismiss for lack of personal jurisdiction. The Ninth Circuit reversed and held that the defendant, AcademyOne, was subject to specific jurisdiction under the effects test. The court found that AcademyOne expressly aimed its activities at the forum state because its wrongful conduct was targeted to CollegeSource, which AcademyOne knew was a California resident, and was made with the intent to compete in the California market. AcademyOne, for example, dialed CollegeSource's California telephone number during the brief negotiations. Moreover, CollegeSource's website, which AcademyOne visited several times, displayed a California physical address and telephone number on the “Contact Us” page.

Another factor considered by the court was AcademyOne's advertising keywords, several of which included the word “California,” such as “California college transfer.” The court pointed out that AcademyOne's efforts to target California residents have borne fruit, as 19% of all visitors of its webpage have California IP addresses. This was the highest number of visitors from any state.

The Defendant's Intent and Actions for Commercial Gain

Both the Mavrix and CollegeSource cases center on the defendant's actions in directing forum-specific traffic to their websites for commercial gain. It is notable that actual profit from forum users is not required; the intent to commercially gain from users of a forum may be sufficient. This will be increasingly important in the future, especially with more and more companies using social media and other web 2.0 outlets to increase web traffic. In fact, in a recent case citing both the Mavrix and CollegeSource cases, a California district court held that the totality of the circumstances, including the defendant's Facebook page, warranted exercising jurisdiction despite not having actual sales in the forum state. The Wine Group LLC v. Levitation Management, LLC, 2011 W.L. 4738335 (E.D. Cal. Oct. 6, 2011) (slip opinion).

In this case, the defendants' website indicated that the defendants' product was “Coming soon” to all 50 states. Defendants also used their Facebook page to advertise and communicate with users throughout the country, including California residents. The defendants engaged in an unsuccessful discussion with a forum-based distributor for the defendants' products. The court held that each of these facts alone was insufficient to exercise jurisdiction. When viewed in the aggregate, however, the court held that the defendants' strategy was to get people excited about their product on a national level, whether it was available in their state or not. This amounted to, according to the court, a purposeful availment in the forum state, which subjected them to jurisdiction in the forum.

Although this case was not published, The Wine Group case illustrates the potentially broad implications of Mavrix and CollegeSource. Under this analysis, popular websites may be subject to jurisdictional risks across the country. This is especially true since courts do not hesitate to combine Internet contacts with more traditional contacts with a forum to establish jurisdiction. Fortunately, there are a few steps website owners can take to mitigate or manage these risks.

Mitigating Jurisdictional Risk for Website Owners

One option is to consider choice-of-law or choice-of-forum clauses, which may be useful evidence in allowing a party engaging in Internet activities to avoid being subject to foreign jurisdictions. Nissan Motor Co., Ltd v. Nissan Computer Corp., 89 F. Supp. 2d. 1154 (N.D. Cal. 2000); but see Ottenheimer Publishers v. Playmore, 158 F. Supp. 2d 649, 653. (Mass. Dist. Ct. 2001). Although not every court has found that a choice-of-law or choice-of-forum clause is determinative of personal jurisdiction, it is a cost-effective method of reducing the risk associated with Internet activities by incorporating such clauses into the terms and conditions of use of the websites and in click-through agreements provided by a website. David Bender et al., Jurisdiction Based On Internet Activities: Managing Jurisdictional Exposure, 17th Annual Advanced Computer and Internet Law Institution, Mar. 4, 2004, available at 2004 WL 2797057.

If a website sells third-party ad space, it may be beneficial to at least find out to which region the third-party advertisers plan to provide forum-specific advertisements, and to determine if that region is a jurisdiction the website owner is willing to be subject to. Because of Mavrix, the contracts between website owners and the third-party advertisers are of an increased importance. If there are regions in which a company does not want to be subject to jurisdiction, it would be useful to have the third-party advertisers represent and warrant that they will not place forum-specific advertisements for these regions. It is notable, however, that such a screening or monitoring of third-party ads may pose a challenge to those advertisers that display different advertisements based on a web user's IP address.

Another potential method of managing jurisdictional risk includes adding a disclaimer on a website indicating that the advertised goods or services are limited to a particular geographic area or are intended for a specific, limited audience. See, e.g., Uncle Sam's Safari Outfitters, Inc. v. Uncle Sam's Army Navy Outfitters-Manhattan, Inc., 96 F. Supp. 2d 919 (E.D. MO 2000). For large companies, it may also be beneficial to have a top-level website that directs a user to select a country or region that automatically re-directs a user to the region-specific website. Bender, 2004 WL 2797057 *38.

Yet another method of mitigating jurisdictional risk includes requiring a self-authentication procedure such as a pop-up window that requires users to verify their residency by entering geographic information, such as ZIP code, and only allowing access to certain content of the website when the geographic region is one that is serviced by the website. This blocking method, however, may be undesirable because it essentially restricts the market and perhaps the growth of the website. Moreover, if the blocking method is routinely overcome by residents outside the targeted forum, a court may find that the website owner knew or should have known residents from outside the allegedly intended area were accessing the website. See, e.g., Twentieth Century Fox Film v. iCrave Tv, available at 2000 WL 255989 *3; see also Bender, 2004 WL 2797057 *38.

Conclusion

The Mavrix and CollegeSource cases illustrate the importance of being cognizant of the jurisdictional risk for website owners. Website owners should be aware that if they commercially gain, or even intend to commercially gain from their websites, they may be subject to personal jurisdiction in several states. Methods such as disclaimers, choice-of-law and choice-of-forum clauses are cost-effective means that mitigate jurisdictional risk. Other methods, such as monitoring third-party advertisements, top-level websites that automatically re-direct users to region-specific websites, and authentication procedures to verify the residence of web users, mitigate jurisdictional risk, but may not be cost-effective for some businesses. With the proliferation of the Internet, the use of websites and web 2.0 tools has become a crucial part of conducting business. Website owners should take appropriate steps to mitigate jurisdictional risk today, or face the far reaching consequences that will undoubtedly come with tomorrow's cyber world.

Erin Hennessy, a member of this newsletter's Board of Editors, is an intellectual property partner in Bracewell & Giuliani LLP's Seattle and Washington, DC offices. Her practice focuses on intellectual property law with a focus on worldwide trademark matters. She can be reached at [email protected]. Tasha Snipes is an intellectual property associate in Bracewell & Giuliani's Houston office. She counsels clients in all aspects of intellectual property law, including patents, trademarks and copyrights. She can be reached at [email protected].

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With the explosion of the Internet in the last several decades, courts have struggled with whether tortious conduct on a website is expressly aimed at any, or all, of the forums in which the website can be viewed. Two recent Ninth Circuit cases expanded the reach of Internet jurisdiction and may carry significant implications: Mavrix Photo, Inc. v. Brand Technologies, Inc. , 647 F.3d 1218 (9th Cir. 2001) and CollegeSource, Inc. v. Academy One, Inc. , 653 F.3d 1066 (9th Cir. 2011), cert. denied , __ S.Ct. __ (2012).

In prior cases analyzing personal jurisdiction based on Internet contacts, courts have focused on the level of interactivity of the website. Zippo Manufacturing Co. v. Zippo Dot Com, Inc. , 952 F. Supp. 1119 (W.D. Penn. 1997). The more interactive a defendant's website, the more likely the defendant is subject to personal jurisdiction in a foreign jurisdiction. In Mavrix, however, the court stated that many of the interactive features of the defendant's website such as commenting, voting in polls, receiving e-mail newsletters, and uploading user-generated content were “standard attributes of many websites.” Instead of focusing on these features, the court in Mavrix focused on commercial gain from forum residents.

Personal Jurisdiction Based on Internet Contacts, Part I

Mavrix Photo, Inc. (“Mavrix”), a Florida company, sued Brand Technologies, Inc. (“Brand”), an Ohio company, in federal court in California for copyright infringement. Mavrix's primary business is licensing and selling “candid” celebrity photos to magazines such as People and Us Weekly. Brand operates a very popular celebrity gossip blog, celebrity-gossip.net. Its business model is largely based on third-party advertisements placed on its website. Shortly after Mavrix posted 35 copyrighted photos of celebrity Stacy Ferguson (a.k.a. “Fergie” from the Black Eyed Peas) and her husband Josh Duhamel on its website, Brand allegedly reposted the exact photos on its website. In the copyright infringement suit, Brand moved to dismiss the case for lack of personal jurisdiction. The district court denied Mavrix's motion for jurisdictional discovery and granted Brand's motion to dismiss. The Ninth Circuit reversed the motion to dismiss and found specific jurisdiction over Brand.

To determine whether the defendant purposefully directed his activities to the forum to be subject to specific jurisdiction, the court used the “effects test” articulated by the Supreme Court in Calder v. Jones , 465 U.S. 783 (1984). Under this test, the defendant allegedly must: 1) commit an intentional action, 2) expressly aimed at the forum, 3) that causes harm that the defendant knows, or should have known, is likely to be suffered in the forum state. With regard to the first prong of the effects test, the court held that Brand clearly committed an intentional act when it reposted the photos on its website. For the second prong, the court found that Brand expressly aimed its activities to the forum, California, because commercial gain from its California user base was a predictable consequence of its business model. Although Brand did not directly sell goods or services to California residents, third-party advertisers on Brand's website had advertisements specifically targeted to Californians. For example, third parties advertised jobs and hotels located in California. Interestingly, the court found it immaterial whether the third-party advertisers were California residents. According to the court, the fact that the advertisements targeted California residents indicated that Brand knew, or should have known, about the California user base, and that it exploited that user base for commercial gain by selling ad space on its website. In explaining the third prong of the effects test, the court held that Brand knew or should have known its actions were likely to cause harm in the forum state. Despite Mavrix posting the photos on its website first, the court held that Brand's posting “destroyed” the California-based value of the photos because a significant number of Californians would have bought publications such as People in order to see the photos.

What is different about this case is the court's focus on the actions of third parties to exercise jurisdiction. Brand implied that it knew about the third-party advertisers' forum-specific advertisements by not denying or repudiating Mavrix's allegation that Brand was aware of such advertisements. Although it may not have been the situation in Mavrix, it is foreseeable that because a website owner has a large number of third-party advertisers, the website owner is truly unaware of targeted advertisements to residents of specific geographic regions. Moreover, many advertisers display different advertisements depending on the IP address of the user. Nevertheless, it appears under Mavrix that such a case would result in subjecting the website owners to jurisdiction in the specific geographic regions targeted by the third-party advertisers if the cause of action arises out of or relates to the website at issue.

The court stated that when a “website with national viewership and scope appeals to, and profits from, an audience in a particular state, the site's operators can be said to have 'expressly aimed' at that state.” This is a far-reaching statement since most websites at least attempt to profit from their user base. The Ninth Circuit acknowledged the burden this may impose on popular websites, but stated that the alternative would allow corporations whose websites exploit a national market to defeat jurisdictions in the states where those websites generate substantial profits from local consumers. It is notable that there was no evidence that Brand “profited” from the California user base, and as illustrated in the CollegeSource and The Wine Group cases discussed below, the mere intent to commercially gain from users in a forum may be sufficient to subject a defendant to personal jurisdiction.

Personal Jurisdiction Based on Internet Contacts, Part II

On the same day, the same panel from the Ninth Circuit issued a similar opinion finding personal jurisdiction based on Internet contacts in CollegeSource. CollegeSource, Inc. (“CollegeSource”), a California-based company, sued one of its competitors AcademyOne, Inc., (“AcademyOne”), a Pennsylvania-based company, in federal court in California for allegedly misappropriating materials from CollegeSource's website. Both companies assist students and educational institutions with the college transfer process and provide college course catalogs. Shortly after its founding, AcademyOne attempted to acquire rights to CollegeSource's extensive collection of course catalogs. The parties briefly discussed a partnership, but negotiations quickly terminated because CollegeSource did not want to sell away its competitive advantage.

Not long after the negotiations failed, AcademyOne began building its own collection of catalogs by hiring a Chinese-based contractor to collect catalogs and course descriptions from various schools. AcademyOne copied 680 catalogs from CollegeSource's collection and placed them on its website. CollegeSource filed suit against AcademyOne for trademark infringement, computer fraud, and unfair competition, among other things.

The lower court granted AcademyOne's motion to dismiss for lack of personal jurisdiction. The Ninth Circuit reversed and held that the defendant, AcademyOne, was subject to specific jurisdiction under the effects test. The court found that AcademyOne expressly aimed its activities at the forum state because its wrongful conduct was targeted to CollegeSource, which AcademyOne knew was a California resident, and was made with the intent to compete in the California market. AcademyOne, for example, dialed CollegeSource's California telephone number during the brief negotiations. Moreover, CollegeSource's website, which AcademyOne visited several times, displayed a California physical address and telephone number on the “Contact Us” page.

Another factor considered by the court was AcademyOne's advertising keywords, several of which included the word “California,” such as “California college transfer.” The court pointed out that AcademyOne's efforts to target California residents have borne fruit, as 19% of all visitors of its webpage have California IP addresses. This was the highest number of visitors from any state.

The Defendant's Intent and Actions for Commercial Gain

Both the Mavrix and CollegeSource cases center on the defendant's actions in directing forum-specific traffic to their websites for commercial gain. It is notable that actual profit from forum users is not required; the intent to commercially gain from users of a forum may be sufficient. This will be increasingly important in the future, especially with more and more companies using social media and other web 2.0 outlets to increase web traffic. In fact, in a recent case citing both the Mavrix and CollegeSource cases, a California district court held that the totality of the circumstances, including the defendant's Facebook page, warranted exercising jurisdiction despite not having actual sales in the forum state. The Wine Group LLC v. Levitation Management, LLC , 2011 W.L. 4738335 (E.D. Cal. Oct. 6, 2011) (slip opinion).

In this case, the defendants' website indicated that the defendants' product was “Coming soon” to all 50 states. Defendants also used their Facebook page to advertise and communicate with users throughout the country, including California residents. The defendants engaged in an unsuccessful discussion with a forum-based distributor for the defendants' products. The court held that each of these facts alone was insufficient to exercise jurisdiction. When viewed in the aggregate, however, the court held that the defendants' strategy was to get people excited about their product on a national level, whether it was available in their state or not. This amounted to, according to the court, a purposeful availment in the forum state, which subjected them to jurisdiction in the forum.

Although this case was not published, The Wine Group case illustrates the potentially broad implications of Mavrix and CollegeSource. Under this analysis, popular websites may be subject to jurisdictional risks across the country. This is especially true since courts do not hesitate to combine Internet contacts with more traditional contacts with a forum to establish jurisdiction. Fortunately, there are a few steps website owners can take to mitigate or manage these risks.

Mitigating Jurisdictional Risk for Website Owners

One option is to consider choice-of-law or choice-of-forum clauses, which may be useful evidence in allowing a party engaging in Internet activities to avoid being subject to foreign jurisdictions. Nissan Motor Co., Ltd v. Nissan Computer Corp. , 89 F. Supp. 2d. 1154 (N.D. Cal. 2000); but see Ottenheimer Publishers v. Playmore , 158 F. Supp. 2d 649, 653. (Mass. Dist. Ct. 2001). Although not every court has found that a choice-of-law or choice-of-forum clause is determinative of personal jurisdiction, it is a cost-effective method of reducing the risk associated with Internet activities by incorporating such clauses into the terms and conditions of use of the websites and in click-through agreements provided by a website. David Bender et al., Jurisdiction Based On Internet Activities: Managing Jurisdictional Exposure, 17th Annual Advanced Computer and Internet Law Institution, Mar. 4, 2004, available at 2004 WL 2797057.

If a website sells third-party ad space, it may be beneficial to at least find out to which region the third-party advertisers plan to provide forum-specific advertisements, and to determine if that region is a jurisdiction the website owner is willing to be subject to. Because of Mavrix, the contracts between website owners and the third-party advertisers are of an increased importance. If there are regions in which a company does not want to be subject to jurisdiction, it would be useful to have the third-party advertisers represent and warrant that they will not place forum-specific advertisements for these regions. It is notable, however, that such a screening or monitoring of third-party ads may pose a challenge to those advertisers that display different advertisements based on a web user's IP address.

Another potential method of managing jurisdictional risk includes adding a disclaimer on a website indicating that the advertised goods or services are limited to a particular geographic area or are intended for a specific, limited audience. See, e.g., Uncle Sam's Safari Outfitters, Inc. v. Uncle Sam's Army Navy Outfitters-Manhattan, Inc. , 96 F. Supp. 2d 919 (E.D. MO 2000). For large companies, it may also be beneficial to have a top-level website that directs a user to select a country or region that automatically re-directs a user to the region-specific website. Bender, 2004 WL 2797057 *38.

Yet another method of mitigating jurisdictional risk includes requiring a self-authentication procedure such as a pop-up window that requires users to verify their residency by entering geographic information, such as ZIP code, and only allowing access to certain content of the website when the geographic region is one that is serviced by the website. This blocking method, however, may be undesirable because it essentially restricts the market and perhaps the growth of the website. Moreover, if the blocking method is routinely overcome by residents outside the targeted forum, a court may find that the website owner knew or should have known residents from outside the allegedly intended area were accessing the website. See, e.g., Twentieth Century Fox Film v. iCrave Tv, available at 2000 WL 255989 *3; see also Bender, 2004 WL 2797057 *38.

Conclusion

The Mavrix and CollegeSource cases illustrate the importance of being cognizant of the jurisdictional risk for website owners. Website owners should be aware that if they commercially gain, or even intend to commercially gain from their websites, they may be subject to personal jurisdiction in several states. Methods such as disclaimers, choice-of-law and choice-of-forum clauses are cost-effective means that mitigate jurisdictional risk. Other methods, such as monitoring third-party advertisements, top-level websites that automatically re-direct users to region-specific websites, and authentication procedures to verify the residence of web users, mitigate jurisdictional risk, but may not be cost-effective for some businesses. With the proliferation of the Internet, the use of websites and web 2.0 tools has become a crucial part of conducting business. Website owners should take appropriate steps to mitigate jurisdictional risk today, or face the far reaching consequences that will undoubtedly come with tomorrow's cyber world.

Erin Hennessy, a member of this newsletter's Board of Editors, is an intellectual property partner in Bracewell & Giuliani LLP's Seattle and Washington, DC offices. Her practice focuses on intellectual property law with a focus on worldwide trademark matters. She can be reached at [email protected]. Tasha Snipes is an intellectual property associate in Bracewell & Giuliani's Houston office. She counsels clients in all aspects of intellectual property law, including patents, trademarks and copyrights. She can be reached at [email protected].

For Twitter, LinkedIn, Facebook and Google+ followers, click here to subscribe to Internet Law & Strategy at a special introductory rate of $329. This offer is valid for new subscribers only.