Foreign Web seller can be sued

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State courts have jurisdiction over out-of-state Internet vendors.

On Sept. 14, the Seventh Circuit held that the State of Illinois could sue, in Illinois court, a New Mexico-based seller of discounted cigarettes.

Hemi Group, LLC, sells cigarettes over the Internet. It pays federal taxes on the cigarettes that it sells, but under Illinois law, buyers pay the applicable state tax on cigarettes purchased over the Internet or by mail. Hemi’s websites direct customers to check with their states to determine their responsibility for paying state taxes.

Illinois sued Hemi in Illinois state court, alleging that Hemi failed to submit monthly reports of its sales to Illinois, as required by the Jenkins Act, and other claims.

Hemi removed the case to federal court and moved to dismiss for lack of personal jurisdiction, but the district court denied Hemi’s motion. The Seventh Circuit granted interlocutory review, but affirmed, in an opinion by Judge Michael S. Kanne.

The court held that Hemi’s motion to dismiss was properly denied.

It was not contested that Hemi does not have the continuous and systematic business contracts with Illinois to permit the exercise of general jurisdiction over it. But the court found that the district court could exercise specific jurisdiction over claims related to its cigarette sales.

Minimum Contacts

Because Hemi knowingly did business with Illinois residents, the court found that Hemi had sufficient minimum contacts with Illinois to satisfy due process.

Hemi argued that the transactions were merely unilateral actions by its customers, but the court called this characterization “misleading.”

Because Hemi created the websites and shipped the cigarettes, the court concluded, “It is Hemi reaching out to residents of Illinois, and not the residents reaching back, that creates the sufficient minimum contacts with Illinois that justify exercising personal jurisdiction over Hemi in Illinois.”

Before concluding, the court emphasized that it was not applying the methodology unique to Internet cases adopted by the court in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa.1997), and followed in other jurisdictions. The court stressed that, as in Tamburo v. Dworking, 601 F.3d 693 (7th Cir. 2010), it was employing a traditional minimum contacts inquiry.

Fairness

After summarily finding that Illinois’ claims arose out of Hemi’s sales to Illinois, the court held that it was not unfair to exercise jurisdiction over Hemi in Illinois.

Finding that Hemi “set up an expansive, sophisticated commercial venture online,” and “held itself out to conduct business nationwide and was apparently successful in reaching customers across the country,” the court held that the exercise of jurisdiction would not offend due process: “Hemi wants to have its cake and eat it, too: it wants the benefit of a nationwide business model with none of the exposure.”

Case analysis

The procedural posture of the case is noteworthy – an interlocutory appeal of a motion to dismiss, rather than summary judgment.

At that stage, the plaintiff need only establish a prima facie case for personal jurisdiction. After discovery has been completed, on summary judgment, a defendant could have a better argument for lack of personal jurisdiction.

The question is, what facts might come out during discovery that could change the result?

Arguably, the district court might find that there were so few actual sales to the forum state that it would violate due process to exercise jurisdiction.

That was the result in a recent unpublished case from the Western District of Wisconsin, Trek Bicycle Corp. v. Trek Winery, LLC, No. 09-CV-603 (Mar. 2, 2010, W.D.Wis.).

In Trek Bicycle, the out-of-state defendant shipped wine from California to Wisconsin. But, because it only did so on three occasions, Judge Crabb concluded, “Plaintiff cannot seriously argue that three isolated sales show that defendants have made such purposeful availment of the benefits of Wisconsin’s laws that they could reasonably anticipate being haled into court in this state.”

But nothing in the Seventh Circuit’s opinion in Hemi suggests that the result hinges on how many shipments to Illinois it actually made. The key facts to finding personal jurisdiction were that they were open for interstate business, and shipped to the forum state. If the number of actual shipments is relevant, it is not apparent from the Seventh Circuit’s opinion.

The court stressed that Hemi is not subject to suit in Illinois merely because its website was “interactive,” rather than “passive,” but because it had voluntary contacts with Illinois.

However, those voluntary contacts consist of creating the interactive websites and shipping the cigarettes to Illinois residents.

If that is all the “voluntary contacts” required for personal jurisdiction, the opinion may effectively subject anyone who maintains an interactive website, and makes any sales to any state, subject to personal jurisdiction in that state.

What the court held

Case: State of Illinois v. Hemi Group, LLC, No. 09-1407

Issues: Can a state sue an out-of-state Internet vendor, in its own courts, for claims arising from sales to the state?

Holdings: Yes. Due process permits the vendor to be sued in states to which it sells products.