A 50-person law firm with a national practice in asbestos litigation found that the text of its Elder Law website was copied verbatim as the basis for a new site for a firm in another part of the state.  The plaintiff firm, Brayton Purcell, filed suit claiming copyright infringement, false advertising, unfair competition and misappropriation.

The two-person defendant firm, San Diego-based Recordon & Recordon, argued that it hired a company to construct its website, and that it was unaware that the content was stolen from a competitor without its knowledge.

They further argued that the case had been filed in the wrong jurisdiction, as the firm doesn’t maintain offices or staff within the jurisdiction of the 9th Circuit Court. Without a business nexus in Southern California, they claimed, the case should have been originally filed in Northern California.

The court ruled that since very few competitors exist in Elder Law, the copied site had been “expressly aimed” to compete with the plaintiff firm.

As glad as I am to see plagiarizing law firms held accountable, I must admit that dissenting Judge Stephen Reinhardt has a valid point:

“… express aiming” in these circumstances leaves every website operator vulnerable to the possibility “he will be hailed into far-away courts based upon allegations of intellectual property infringement, if he happens to know where the alleged owner of the property rights resides,” Reinhardt noted “[d]ue process and basic principles of fairness prohibit such an expansive exercise of personal jurisdiction.”

What if the facts were the same, but the companies were within different national boundaries? Would mere knowledge of a competitor create a sufficient nexus for the website owner to be tried in a foreign court?

Though the original verdict may have been from the wrong court, it was the right decision. Recordon & Recordon was found “one-third responsible for the copyright violation” and ordered to pay $24,000 in statutory damages and nearly $37,000 in fees and costs.

As state real estate and income tax collections head downward, tax collectors have turned their gaze toward online commerce. At the same time, a few states are emerging as havens from taxation.

New York Goes After Affiliate Marketers with the Amazon Tax
New York implemented the so-called Amazon tax. It seeks to change the common interpretation of online tax law, which holds that states don’t have jurisdiction to force sites to collect taxes unless the site has a sufficient presence, or nexus, such as offices or employees, in the taxing jurisdiction.

The New York legislature voted that companies running affiliate marketing programs should be considered as doing business in the jurisdications affiliate websites are operated from. This idea of affiliate liability stretches though issues such as online tax and liablity for trademark infringement by affiliates. Amazon and others are in court fighting this, but New York’s actions have forced many e-commerce sites to start collecting taxes.

Taxing Music Downloads: The iTax
Five states have already levied iTaxes to tax downloads: Nebraska, Tennessee, Indiana, South Dakota, and Utah. Eight states in all have proposed such taxes this year, while others, such as my home state, Massachusetts, are considering this as one way to overcome revenue shortfalls. This failed in California, but expect a second attempt at taxing iTunes later this year.

Of course, like New York’s online taxes, the problem lies in compelling out-of-state websites to collect taxes for the state or municipality.

Chicago Goes After StubHub and eBay for Amusement Tax
The legality of reselling tickets online has been a favorite topic on this blog. In Chicago, that activity is taxed, and the city claims that any business anywhere reselling a ticket for an event in their jurisdiction needs to collect amusement tax for them. That’s not so far fetched; Boston claims that anyone reselling a ticket for a Boston event is guilty of scalping.

Georgia Wants Room Taxes from Online Travel Sites
Over the last several years, Georgian courts have tried to get municipalities to work out a system to collect room taxes from online booking sites. The sites generally contend they are immune from tax requirements, so this seems headed back to court.

Finding an Online Tax Haven
If you run an entirely online business without a nexus of employees or offices, then you can pretty much pick where you want to incorporate as your only nexus. Nevada and Wyoming are tax havens, which can provide a relatively tax-free home state for incorporations. There are various techniques to keep company proceeds within these states, allowing online business operators from having a taxable nexus in less tax-friendly jurisdictions.

As reported back in November, the State of New York is now requiring e-commerce sites “doing business in the state” to collect sales tax.

New Yorkers were previously required to pay sales tax, but previous court rulings had exempted out of state sites from being required to collect that tax, unless they had sufficient manpower or points of presence in New York to be considered to be conducting business there.

The new law classifies promotion of an online store through an affiliate web site based in New York as constituting a sufficient nexus for taxation. Although Amazon.com doesn’t have a store in New York, individuals and organizations in New York get revenue if they refer customers to Amazon. Legislators, in fact, referred to this as the “Amazon Tax”.

Not surprisingly, Amazon has filed suit, both claiming to have been unfairly singled out for taxation, and arguing the broader point that affiliate promotion isn’t a sufficient nexus to be subject to New York tax laws. Overstock.com has ended its relationship with 3,400 New York based affiliate sites, and filed a similar suit.

New York is now one of five states for which Amazon collects sales tax. Amazon has distribution centers in three of these: Kansas, Kentucky and North Dakota — and they are headquartered in the state of Washington. Amazon has no physical presence in New York state.

Floyd Abrams published an Op-Ed piece in the Wall Street Journal describing how plaintiffs seeking to suppress protected speech in the US are gaining libel judgements in England.

Rachel Ehrenfeld’s book Funding Evil: How Terrorism is Funded and How to Stop It, had sold only 23 copies in England. But that was enough for a UK court to exercise jurisdiction and find that she had injured the reputation of a Saudi banker who had brought his case in the English courts. Note the absence of a UK citizen as a party in the case.

Remarkably, US state courts were not equipped with adequate legislation to provide a declaratory judgment in the Ehrenfeld case to rule that the English judgment was not enforceable here. Fortunately, New York moved quickly to implement such a law early this month.

Now a parallel federal law has been introduced by Senators Specter and Lieberman.

While the illustration of this point happens to be a print case, jurisdiction for future cases could certainly be based on Internet distribution. And that could give UK courts, and plaintiffs from around the world, a far broader basis for future suits.

The Case:
Domain Magic LLC, a Florida-based company, registered the domain chicagoarchitecturefoundation.org. They developed a website about Chicago-area attractions, then passively generated revenue through Google AdWords. 

The Chicago Architecture Foundation sued for trademark infringement in Illinois. Domain Magic filed a motion to dismiss the case for lack of personal jurisdiction, noting they had not conducted business in the court’s jurisdiction.

The Inevitable Questions of Jurisdiction:
Internet law cases regularly contain challenging issues of personal jurisdiction; that is, the determination of whether a specific court is authorized to hear a case. Judicial jurisdiction falls into three main types: personal jurisdiction (whether the parties are subject to court authority); territorial jurisdiction (the geographical area over which the court has authority); and subject matter jurisdiction (different courts hear specific types of cases).

The distributed nature of the Internet, and the variety of participants and transactions that take place on it, can make jurisdiction a vexing question. So why not simply give any court jurisdiction if someone uses a site in its territorial jurisdiction?

Such “universal Internet jurisdiction” would hold online publishers of all sizes to an unknowable variety of laws, since jurisdiction would be determined by the unpredictable jurisdictions in which future visitors might reside. As much business is conducted remotely, the courts established the idea of a sliding scale, based on how actively and purposefully companies have engaged in business within an area.

The Sliding Scale of “Purposeful Availment”:
The courts have drawn on the principle of “purposeful availment” to determine if a party can be sued in a specific jurisdiction. Courts consider where acts were perpetrated; if defendants actively engaged in business within the jurisdiction; and if it is reasonable to expect the defendant to answer charges there.

This sliding scale was established in Zippo Manufacturing v. Zippo.com, in which the defendant regularly sent online newsletters to 3,000 Pennsylvania residents. This level of interactivity satisfied the court that Zippo.com had purposefully availed itself of conducting business within the court’s jurisdiction.

Websites that publish information without inviting user interaction are traditionally immune from jurisdictional claims. However, when toll-free phone numbers and forms encourage users to engage in an active consumer relationship, the likelihood increases that remote courts will claim business has been conducted within their jurisdiction.

Using Ads to Support the Finding of Jurisdiction:
In the case of Chicago Architecture Foundation v. Domain Magic, Judge Charles R. Norgle denied the motion to dismiss, ruling that the defendant had “clearly transacted business within the state of Illinois, as it profited from individuals clicking on the hyperlinks that were posted on the offending website.”

Given the widespread use of Adwords on websites, the Court’s analysis could be a significant step toward giving courts universal jurisdiction over business on the Internet. Website operators can anticipate future cases calling site owners to answer in courts across the United States, based on the ads that appear on their sites.