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Internet Sales Create Risk Of Out-of-State Lawsuits

By Michael W. Dunagan
TIADA General Counsel

The internet can be a wonderful thing.  New and exciting applications are being discovered every day that make our world seem smaller.  On the business side, the internet has expanded our selling opportunities and increased our buying choices.  Certainly, those who buy and sell motor vehicles have found a brave new world out there where markets are no longer limited by geographical or mileage restraints. 

There has also been a dark side to the internet that seems to follow all new innovations as technology shoots out ahead of the laws and regulations that were designed to protect citizens from theft and fraud.  Most of our laws were written well before the internet was even a gleam in some computer expert's (or Al Gore's) eye. 
 
And just as good and honest businesspeople look for opportunities and markets that something like the internet can bring, so do crooks and thieves see a wonderful universe of new potential victims that they could have never reached under the old ways.  Dealing with internet fraud and theft has been a challenge for law enforcement officials who have been forced to expand their activities to a worldwide stage and to incorporate new technologies into their bags of police tools.
           
And even beyond the scope of fraud and theft on the net, are new issues involving the relationship of buyer and seller when a civil dispute arises.

For instance, legal disputes arise over the condition of a motor vehicle even when the potential buyer puts his or her hands on the vehicle and possibly has a mechanic inspect it.  Imagine, then, what can happen when a buyer never actually lays eyes or hands on the vehicle, but relies solely on photographs and written descriptions.

One of the problems that rarely existed before the internet that the judicial system has had to contend with on an increasingly common basis, is:  When does a state's courts have jurisdiction over a resident of another state who sells to a resident of that state over the internet?  A number of Texas dealers have had to face up to this issue when an unhappy out-of-state buyer decided to sue over the transaction in the buyer's home state.  We have seen lawsuits brought against Texas dealers in New Jersey, California, Florida, West Virginia, and Hawaii, to name a few.

Obviously, a litigant in a multi-state transaction would prefer to have a lawsuit heard in his or her home state.  First, there is the issue of home-field advantage.  A judge or jury just might be more sympathetic to a neighbor than to a foreigner.  But far more important is the cost of litigation.  The defendant's regular attorney is likely not licensed to practice in the other state.  This means that counsel would have to be retained in the state the case was filed in, and in representing a non-resident, that attorney will probably demand a substantial retainer.  Even if the dealer's regular counsel could obtain temporary permission to appear to challenge the jurisdiction, he or she might not have a grasp of that state's procedural process.   Then there is the problem of the expense and down time an out-of-state litigant faces in having to travel to and from the location of the court.   
    
Consider, for example, the case in which a Texas dealer advertises a vehicle on the internet, and concludes a sale with a resident of Massachusetts.  The buyer in Massachusetts, upon the arrival of the vehicle, decides that it is not the shiny, perfect-condition vehicle that the buyer envisioned when reading the description and reviewing the pictures attached to the internet listing.  The dealer takes the position that the vehicle was accurately represented and refuses the buyer's demand to buy the vehicle back.  The buyer then files suit in a Massachusetts state court, seeking to dissolve the transaction and to recover transportation costs and attorneys fees.  The Texas dealer is soon served with the lawsuit papers and must now decide how to respond.

The threshold question that arises in this situation is whether courts of the Commonwealth of Massachusetts (or whichever state is involved) have jurisdiction over the Texas dealer.  This is a question that has been the subject of inquiry by legal scholars since the beginning of the republic.  The founders recognized that each of the states would be entitled to have its own court system that would operate in parallel with the federal courts, and that the federal courts would be restricted in the type of cases they could hear.

Over the years, the concept of “minimum contacts” was developed to determine when a state's court would have power over a non-resident.  That is, it was determined that it would be a violation of constitutional due process for one state's courts to exercise jurisdiction over a non-resident unless that person had certain minimum contacts with that state.  Those contacts include (among others) whether the defendant had a place of business or residence in the state; whether the defendant had transacted business with residents of the state before; to what extent the defendant completed the contract or transaction in the state; and whether the defendant targeted advertising to the state's residents (such as advertising in a newspaper or magazine that was distributed in that state). 

In most cases we've seen, the primary issue was whether targeted advertising was involved, since the dealer did not have any presence in the other state, and had not had prior sales there.  The new internet-related sub-issue became whether a listing placed on an internet trading site amounted to targeted advertising since the dealer knew (or at least, should have suspected) that the listing placed by our Texas dealer would be seen by residents of Massachusetts, for example.

Some courts have concluded that the placement of a listing on an internet trading site, alone, would not give rise to sufficient contacts to create jurisdiction.  Others have taken the opposite point of view.  We have seen a number of articles that analyze the cases that have addressed this issue. 

But when it gets down to decision time for the dealer, it really doesn't matter all that much which way the courts in the state where the lawsuit was filed have ruled on the issue.  More important than the legal issue is the practical problem of the cost of fighting the jurisdictional question in the foreign state. That cost could be as much or more than the cost of litigation over the actual consumer dispute.  The point here is that even if the Texas dealer is entitled to have the case heard by a Texas court, the cost of obtaining such a ruling could exceed the amount that is in dispute.

In the event that the Texas dealer loses on the jurisdictional question, he must then defend the actual consumer case in the Massachusetts court and the costs that go with foreign litigation, whether the main case is won or lost.  If the jurisdictional question is won, then the buyer would have to sue in Texas courts. 

An obvious consideration for those who sell on the internet should be a program to quickly identify and settle consumer disputes on out-of-state sales to avoid having to even face the issue.  Certainly having the buyer come to the dealer's location to examine and take delivery (and possibly have an independent appraisal by a mechanic) would increase the seller's argument that Texas courts should have control.  Also, a provision compelling that disputes would be litigated in the seller's location (although not always enforceable by other states) could enhance the seller's argument.

Using the internet to expand one's markets beyond the state borders can have a very positive impact on sales.  But a dealer's business plan should also factor in the cost of the risk of facing out-of-state litigation.  

This column originally appeared in the May 2015 issue of Texas Dealer. 

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