Get ready, because in this post, we’re going to tackle a topic that bedevils even eager law students, many of whom face it first on the bar exam and then not until a small business client served with a lawsuit walks into their office years later. But don’t worry too much – this is a pretty vital issue for business owners to know about, and we’re going to break it down into small, easily digestible pieces that non-lawyers can understand. I promise.
So with all that introduction, what am I even talking about? It’s called “long-arm jurisdiction,” and basically, it refers to when a business located in one state can be sued in another state, or alternately, is subject to the laws of that other state. (Here is the New York law laying this out.) You can see why this is an important topic. If you’re a small business owner with an internet presence, there’s a good chance you’re doing business with people in other states, probably by shipping them goods that they order off your website. You’re probably also thinking, well, I comply with New York’s laws, I have a solid small business lawyer, I’m safe. And frankly, there’s a good chance that you are! Until, of course, something goes wrong, or until your business becomes prominent enough to attract the attention of other state authorities.
The latter is what has happened recently to Amazon, about as big and powerful a company as it gets. Let’s say citizens of State 1 purchase, in one year, a few million dollars worth of product from Amazon. Under federal law, a state is not allowed to directly tax those purchases, because Amazon is not technically “doing business” in State 1. Instead, states must pass laws that attempt to force Amazon to collect those sales taxes themselves. And of course, these laws wind up effecting all businesses engaged in online sales, not just the big, evil ones like Amazon. This confusing patchwork of state tax laws has resulted in an explosion of litigation which has already reached the Supreme Court once, in a fairly non-consequential and heavily technical decision that nonetheless is being treated as a small victory for Amazon and its ilk, as it allowed trade groups to challenge the state tax laws.
“Long arm jurisdiction,” then, refers to the practice of a state (like State 1, above) reaching across state lines to impose its own laws, regulations, and court system on businesses and persons not within that state. It’s a feature that pops up in every sort of lawsuit, from divorce and custody to contracts and personal injury. For business owners, though, it’s relevant in not only the Amazon/tax context, but also in terms of private, civil lawsuit liability. In simple terms: when can an out-of-state customer sue me in their home state, instead of the state where I do business?
There are obvious reasons why a business owner would not be happy with such a lawsuit. After all, you’ve chosen to do business in your home state for a reason. You know the laws of that state, you probably have a lawyer barred and based in that state, and the entire legal structure of your business is built around that state’s mandates. So if you’re a New York business suddenly facing a lawsuit in say, Alaska (dramatic example, sure), because you shipped a defective necklace to Juneau, you’re probably going to be thrown for a loop. Not to mention that in practical terms, this might mean a few flights on Alaska Air. And while Alaska is a beautiful state, repeated visits there to fight a lawsuit aren’t in every business’s budget.
Here’s the key difference between the long-arm tax issue, and the long-arm lawsuit issue. While small businesses are mostly at the mercy of legislatures and courts when it comes to taxes (although knowledge is power), it is actually fairly easy to protect yourself from foreign lawsuits. Any internet business has terms and conditions that a customer must agree to before they go through with a purchase (and if your business doesn’t, please stop reading and call my office). It’s vital, absolutely vital, that these terms and conditions contain what’s called in lawyer-speak a “forum selection clause.” In essence, such a clause mandates that in the event of a disagreement leading to a suit, the laws and courts of X state will control the resolving of that dispute. If you’re reading this right now, that probably means your terms and conditions will mandate that disputes be settled in New York courts and by New York laws.
Where creative minds come together
Admittedly, these clauses aren’t foolproof – no contract clauses are, really – and litigation can still arise over their adequacy. (Although you run a much higher risk of getting buried in litigation without any clause at all, as this recent high-profile New York case shows.) Not to get too self-promotional, but this does speak to the need to find an experienced and knowledgeable attorney to draft your site’s terms and conditions, as well as to advise you on potential out-of-state tax and civil liabilities. You can contact The Fried Firm to discuss these issues in depth.
