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Internet Usage Creates Jurisdiction Issues

Second District widens province of Internet jurisdiction, Calder test to include breach-of-contract casesIntroduction

Some notice has been taken of the Second District’s recent Innovative Garage Door Co. v. High Ranking Domains, LLC ruling that imposed Illinois personal jurisdiction on a Colorado Internet business for referring Illinois consumers to a local Illinois garage-door installation and repair company which then sued when the Colorado entity switched its referrals to a competitor. Most rulings governing Internet jurisdiction enjoy complete diversity and are the province of the federal courts, so this one was a bit unusual as an Illinois appellate district ruling. However, the Court’s use of the Calder v. Jones landmark decision’s “effects” test as a basis for imposing jurisdiction on the foreign entity is in line with the Seventh Circuit’s analysis over the past several years. What is extraordinary about this ruling has been overlooked by commentators and, indeed, mentioned only casually by the Court itself in its opinion: this case did not involve intentional torts, but a breach-of-contract action. The authors are unaware of any such rulings in Illinois, either in the circuit or federal courts. By doing so, the Second District has widened the scope of Internet jurisdiction law in Illinois as well as the Calder test to embrace not only claims sounding in intentional tort but in contract as well. Interestingly, this ruling lacks the sort of rigor one might expect in a watershed case of this nature. The Innovative Court cited the U.S. Supreme Court’s use of Calder in its landmark Burger King decision, a contracts case, as a rather attenuated basis for its use here. It will be interesting to see if the Seventh Circuit follows the Second District’s lead.

A Brief History of Illinois Trends in Internet Jurisdiction Cases

After the birth of e-commerce, disputes arising out of Internet-based transactions became more common, and a 1997 Pennsylvania federal case centering on a domain name dispute (sounding, as nearly all such disputes have, in tort), Zippo Mfg. Co. v. Zippo Dot Com, Inc., quickly found widespread acceptance by providing a “sliding scale” test for determining personal jurisdiction based on a finding that the website was passive, interactive, or integral to the business. It is important to note that the Seventh Circuit was in the national minority as having never adopted the Zippo test or any other test crafted especially for Internet-based cases. See State of Illinois v. Hemi Group, LLC, 622 F.3d 754, 758 (7th Cir. 2010). In recent years, however, as interactivity became the norm and more precise instruments for measuring minimum contacts were needed, Zippo has fallen out of favor nationwide as an accurate or just barometer for imposing personal jurisdiction on out-of-state entities based on Internet commerce.

Courts began to revert to the more traditional “effects” test first set forth in the U.S. Supreme Court’s landmark Calder v. Jones ruling involving a Florida-based publisher, the National Enquirer, which targeted a California resident, the actress Shirley Jones, for libelous comments that she was an alcoholic. Decided years before the Internet was established commercially, Calder elegantly emphasized the effects of the defendants’ intentional conduct in Florida on a plaintiff in California. The effects test simply requires the plaintiff to demonstrate that 1) the conduct at issue was intentional; 2) it was expressly aimed at the forum state; and 3) the defendant was aware that the brunt of its injurious effects would be felt in the forum state. As with Calder, Internet-based cases invariably involve individuals or foreign corporations that are not incorporated in Illinois, have no principal offices there, and have not consented to jurisdiction there or been put on notice of it. In such cases “specific jurisdiction” under the bedrock U.S. Supreme Court International Shoe ruling may be imposed. International Shoe requires a two-part showing that the defendant established “minimum contacts” in the forum state out of which the plaintiff’s action arose or is related in order to pass constitutional muster such that imposing personal jurisdiction would not offend “traditional notions of fair play and substantial justice.”

After International Shoe, state courts were able to use their so-called “long-arm statutes” to bring in non-resident defendants, so long as constitutional scrutiny under the Due Process clause of the Fourteenth Amendment established that doing so was equitable and fair. A state’s long-arm statute allows the long reach of the law to impose personal jurisdiction on a defendant for certain specified acts even though that person or entity has not incorporated under that state’s laws, maintained a principal office there, or consented to personal jurisdiction. A list of provisions under the Illinois long-arm statute permits Illinois personal jurisdiction over a foreign defendant under various circumstances, including: 1) the transacting of any business or committing a tort in Illinois; 2) a corporation doing business in Illinois; and 3) under the statute’s “catch-all” provision permitting the courts’ exercise of jurisdiction on any basis permitted by the Illinois Constitution and the Constitution of the United States.

In Illinois recent cases have produced mixed and interesting results. In the most important recent ruling, the Seventh Circuit held that out-of-state defendants from Colorado, Michigan, Ohio, and Canada with “sporadic” Illinois contacts were subject to Illinois specific jurisdiction for their concerted efforts to defame an Illinois resident and interfere with his dog-breeding software company’s business via website posts and blast emails in retaliation for the Illinois resident’s use of data off the defendants’ websites which he alleged was in the public domain. Tamburo v. Dworkin, 601 F.3d 693, 697 (7th Cir. 2010).

The Court found the “express aiming” element of the Calder test was met by the defendants’ online urgings to the plaintiff’s customers and Internet readers to boycott the plaintiff. Tamburo, 601 F.3d at 697. In an influential 2010 case, the Seventh Circuit’s finding that the defendant site’s disclaimer that it specifically disavowed doing business in New York—where it was already involved in litigation—operated to subject it to jurisdiction in Illinois (and implicitly the other 49 states). State of Illinois v. Hemi Group LLC, 622 F.3d 754, 758 (7th Cir. 2010). In another 2010 case, the Seventh Circuit ruled that the famous domain registration site GoDaddy.com, against which Chicago-based plaintiff uBid, Inc. brought suit, violated the Anti-Cybersquatting Consumer Protection Act by deliberately registering dozens of domain names confusingly similar to plaintiff’s, and in light of GoDaddy’s vast commercial success and intentional mass targeting was subject to Illinois specific jurisdiction. uBid, Inc. v. The GoDaddy Group, Inc., 623 F.3d 421, 423 (7th Cir. 2010). This case more closely resembled Keeton v. Hustler Magazine, Calder’s companion case issued the same day by the High Court, in that the continuing and deliberate presence in the forum state, including billboard signs in Chicago ballparks and Super Bowl commercials which ran in Illinois for six years, tipped the scales toward the plaintiff.

All these cases involved intentional torts or tort-like injury. The authors could not find a single federal district, Seventh Circuit, or circuit/appellate court decision in Illinois involving Internet jurisdiction which was not tort-based. Both Zippo and Calder were grounded in tort or tort-like injuries: the former was trademark infringement, a tort-like injury under the rubric of unfair competition, and the latter defamation. This doesn’t mean that courts have consistently ruled against or refused to use either test to decide the issue of personal jurisdiction in an Internet-based, non-tort-based dispute. It simply means that no such cases have been previously brought before the courts.

The Innovative Garage Door Ruling: Internet Jurisdiction Beyond Torts
  • Facts and the trial court’s ruling.

The plaintiff, Innovative Garage Door Company (“Innovative), is an Illinois corporation that repairs and installs garage doors. Innovative Garage Door Co. v. High Ranking Domains, LLC, 2012 IL App (2d) 120117, ¶ 3 (Ill. App. 2012). The defendant, High Ranking Domains, LLC (“HRD”), an Arizona limited liability company with its principal offices in Colorado, is an Internet business that owns and operates at least three websites designed to solicit inquiries from people seeking handyman or garage-door services. HRD sells these leads to companies across the nation. A form on the website permits users to check specific services, states, and cities and Illinois is listed as a supported state. A particular type of service can be selected from another drop-down menu and the user can request an estimate. The website then provides contact information for a local company servicing the area in order to receive a free estimate, along with coupon codes. HRD has no offices in Illinois, its employees do not regularly travel there, and no business is physically conducted there. Innovative, 2012 IL App (2d) 120117, ¶¶ 3-4.

In 2007, Innovative’s president saw an HRD advertisement in an international trade magazine inviting garage-door installers across the country to enter into a contract with HRD to obtain installation and repair leads and downloaded a written service agreement from HRD’s website highrankingdomains.com, which he submitted to HRD. HRD accepted the contract in Arizona. HRD sold some 150 leads per year to Innovative under the agreement for $15 each. In November, 2010, HRD suddenly terminated the agreement in order to sell the leads to another company, after which Innovative filed a complaint seeking damages for breach of contract, asserting a clause in the contract required HRD to supply the leads indefinitely, with cancellation being solely at Innovative’s discretion. HRD moved to dismiss, contending the trial court lacked personal jurisdiction over it. The trial court found HRD’s Internet activity to be nothing more than an advertisement and concluded HRD was merely a conduit for connecting consumers with service providers. The court concluded that HRD’s activities were insufficient for subjecting it to personal jurisdiction in every state where it brought together two in-state parties. Innovative, 2012 IL App (2d) 120117, ¶¶ 5-8.

  • The Second District’s Analysis and Application of Calder to Contracts in Cyberspace: Was it Sufficient?

The Second District, reviewing everything new as if for the first time, cites the minimum contacts analysis required under both state and federal due process: the “fair, just, and reasonable” standard under state due process, and the minimum contacts International Shoe standard under federal due process such that the defendant’s contacts with the forum state gave fair warning that it was reasonable for the defendant to be haled there. Acknowledging the lack of continuous and systematic presence in the forum needed for general jurisdiction in this case, the Court correctly restricts its analysis to one of specific jurisdiction. Innovative, 2012 IL App (2d) 120117, ¶ 14. For some time now it has been the standard in Illinois that because the long-arm statute’s “catch-all” provision, 735 ILCS § 5/2-209(c), allows Illinois courts to assert jurisdiction on any basis permissible under the State and Federal Constitutions, the long-arm statute is coextensive with the due process requirements of the Illinois and United States Constitutions, thus restricting the minimum contacts analysis concerns of fairness to due-process requirements only.

The Court cites an earlier case for the contention that “in almost all cases, when federal due process concerns regarding personal jurisdiction are satisfied, so are Illinois due process concerns,” after which the Court states that it will therefore only address the federal due process standard.Innovative at ¶ 13 and n. 2, quoting Keller v. Henderson, 359 Ill.App.3d 605, 616 (2d Dist. 2005). However, it is worth noting that in Keller, the Second District backstopped itself by stating that even an independent application of the Illinois due process standard would be satisfied, because the Court had already concluded the defendant had purposefully availed himself of the benefits of Illinois jurisdiction and that a lawsuit in Illinois arising out of injuries from the plane crashing was foreseeable. Keller, 359 Ill.App.3d at 616. In stark contrast, the Court here confines itself solely to the federal due process standard at the beginning of its analysis, before it has determined anything, and doing so behind a circuit court which found that there was no intentional conduct by the defendant to avail itself of the benefits of Illinois jurisdiction. While these arguments over federal vs. Illinois due process analysis appear regularly in opinions, including an Illinois Supreme Court decision from this year, the fact remains that both the Seventh Circuit and the Illinois appellate courts have consistently ruled that federal due process analysis is the only one that need be undertaken.

Nevertheless, the arguments are frequently crunched through, probably because of an important Illinois Supreme Court ruling from 1990 which is still good law, Rollins v. Ellwood, involving claims brought against a Baltimore police officer, among others, sounding in intentional tort for his role in the apprehension of a misidentified criminal defendant and Illinois resident in Illinois, for which the Court found the officer was not subject to Illinois jurisdiction. See Rollins v. Ellwood, 141 Ill.2d 244, 273, 279-280 (Ill. 1990). In this single case, and never since, the Illinois Supreme Court ruled that the protections offered by the Illinois long-arm statute and Illinois due process exceeded those of the federal due process clause under the Fourteenth Amendment, and that for the Illinois courts to assert personal jurisdiction over the officer on these facts was “not fair, just, and reasonable.” Rollins, at 279-80. The key to this ruling was that the officer was acting solely in the capacity of his employment as a Baltimore police officer, and not for his own personal interest. As the scope of Internet-based disputes widens, it is conceivable that the defenses brought to avoid jurisdiction will also expand to include arguments such as those in Rollins.

The Innovative Court, after establishing that federal due process analysis is the only one which need be applied, sums up the law governing Internet specific personal jurisdiction in Illinois based in the two major lines of holdings, the first based in the Zippo “sliding scale” test and the second grounded in principles of “targeting” a forum state as was found in Calder. After concluding that both tests are merely tools to aid in the analysis of certain fact patterns and citing the Seventh Circuit’s express refusal to fashion a special jurisdictional test for Internet cases, the Court asserts that in the “sliding scale” continuum of Zippo, the quality and nature of the defendant’s contacts typically involve “additional considerations independent of the Internet (such as a contract and the parties’ obligations under it)[.]” Innovative, at ¶ 20. The Court then makes the decision to apply the Calder test—a test which to that point had been used exclusively for tort-based disputes in Illinois to determine jurisdiction over the Internet—without hesitation and almost casually. While the Court rejects the use of any single test for Internet cases and expressly states it would employ both Zippo and Calder as factors to assist in its analysis, its appropriation of Calder in a contracts case of first impression is clearly a bold step with potentially huge implications.

The Court’s entire analysis in deciding to apply Calder on these facts to impose specific personal jurisdiction on an out-of-state defendant in an Internet contracts case consists of one paragraph, citing one Arizona case based on wholly different facts and law, one Arizona law review article written by an Arizona law school student, and a bald, insupportable assertion that the Burger King Court “relied” on Calder in its ruling on both tort and contract claims. Innovative, at ¶ 23. In the Arizona case the Court of Appeals had dismissed all the plaintiff’s claims under tort and contract for failing to meet a jurisdictional test of “purposeful availment” for contracts, even though Arizona requires a separate jurisdictional test for torts which the plaintiff had already met. Understandably, the Arizona Supreme Court overturned the Court of Appeals’ ruling. This is light years removed from the issue before the Innovative Court regarding a single contract claim over the Internet.

This leaves us with Burger King. This United States Supreme Court case was a breach-of-contract action brought by Florida-based Burger King Corporation against a Michigan resident and Burger King franchisee, John Rudzewicz, for failure to pay and trademark infringement. In no way was the Calder “effects” test used by the Burger King Court to determine whether Rudzewicz was subject to personal jurisdiction in Florida. Indeed, the High Court proclaimed that it rejected the use of “any talismanic judicial formulas” to impose personal jurisdiction. Burger King v. Rudzewicz, 471 U.S. 462, 485 (1985). And of the two references to Calder in the Burger King opinion cited by the Innovative Court, the first is solely within the context of “tortious out-of-state conduct,” (emph. added) and the second among several other Supreme Court rulings from the 1980s back to the early 1940s for the bedrock premise that an out-of-state actor’s physical contacts with the forum state may not defeat personal jurisdiction so long as his efforts are “purposefully directed” there. Burger King at 469, n. 11, 476.

Thus, in essence, the Second District expanded the judicial scope of a test used exclusively for tort-based actions in Illinois to contracts without a scintilla of Illinois court-based authority for doing so. Not only did the Court take this unilateral action, it did so in what appears to be the State’s first cyberspace contracts case. Perhaps the only thing more shocking is that in spite of all the Court’s corner-cutting, there is nothing on these facts to suggest the ruling is not fair, just, and reasonable. Indeed, the principles applied in rendering its decision are sound, and the question will be whether: 1) there is an increase in Internet contract cases filed with the Illinois courts; and 2) whether the Seventh Circuit will follow the Second Circuit’s lead.

  • The Innovative Court’s Findings and Ruling.

Early on, the Court states that the ultimate analysis is whether the “quality and nature of the defendant’s contacts with the forum are such that it is fair and reasonable to assert personal jurisdiction.” Innovative, at ¶ 20. This language is taken right out of the Illinois due process language, and concerns exactly what must be assessed in determining whether personal jurisdiction lies, whether it be in cyberspace or in traditional brick-and-mortar channels of commerce. Its liberties with due process analysis and thorough lack of rigor in expanding the scope of Calder to contracts cases notwithstanding, the Court employs a sound analysis in making its determinations on the quality and nature of those contacts.

In its analysis of the facts and the relationship established between the defendant HRD and the Illinois plaintiff Innovative for establishing specific personal jurisdiction, the Court observes and makes its conclusions based on multiple compelling facts weighing heavily in the plaintiff’s favor. First, the most significant contact the defendant had with the forum state was the nature of its business relationship with the plaintiff: a long-term contract in which the substantial and enduring relationship between the parties constituted some 150 leads a year for over three-and-a-half years. Second, the HRD website specifically identified Illinois and a number of cities in Illinois as territories with which it was reaching out to do business. Innovative, at ¶¶ 25-27.

The Court also dismisses HRD’s characterization of the nature of its business as “an online telephone book.” Aside from the obvious counterargument that one cannot enter into a contractual relationship with a telephone book, the Court points out that HRD was not merely communicating information to consumers; rather, it was directing them to a specific Illinois commercial interest, based on the company’s willingness to pay a referral fee to HRD, and thus fostered business transactions within the state that might well not have occurred. Here, the Court relied on the Seventh Circuit’s ruling in Hemi, where jurisdiction was imposed on a defendant who made sales to Illinois through an interactive, commercial website that allowed customers to create accounts and calculate their shipping charges based on their location. Innovative at ¶ 30.

Based on the Burger King minimum contact factors, especially terms of the contract and the parties’ actual course of dealing, which included hundreds of leads per year for 3-1/2 years and which netted HRD $15 per lead, it is difficult to see how the Innovative Court could have ruled otherwise. Moreover, the interactivity of the website was directed specifically at Illinois and cities within the state for the express purpose of connecting Illinois residents in need of garage door work with Illinois companies in that trade, including access to coupon codes. All these facts strongly support a finding that under federal due process the quality and nature of HRD’s minimum contacts with Illinois put it on fair warning that it might be haled into court there; that the action arose out of those minimum contacts; and that requiring HRD to litigate in Illinois is reasonable.

Conclusion

The Second District’s ruling in Innovative Garage Door Co. v. High Ranking Domains, LLC is fair, just, and reasonable based on the facts of this case and the relevant Burger King factors. That said, the expansion of Internet jurisdiction cases in Illinois—which has been exclusively torts-based to this point—to include contracts gives serious pause as to the level of judicial reflection and rigor exercised by the Court in obtaining this result. Much like the atom, the full potential, nature, and consequence of the exchange that is the Internet has yet to be realized, and if this is true as well for the laws governing it then a more reasoned, comprehensive assessment by the Court at this critical juncture might have proved more useful. At the same time the abstract quality of the Internet as an unpeopled domain without consequences no longer works—nor should it—in the contractual realm.Rollins, at the very least, should perhaps be kept in view as courts enter into these new waters, and a more rigorous examination of Calder in the Internet contract context would seem to be called for. Unless someone makes a case for the application of the Rollins due-process analysis, the shrinking of state due-process concerns in jurisdictional analysis is likely to continue.