Reference no: EM131674664

Question: FACTS: Hemi Group LLC is a New Mexico-based cigarette company that was selling discounted cigarettes over the Internet to customers. The defendant company pays federal taxes on the cigarettes that it sells over the Internet, but in the state of Illinois, the law holds buyers accountable for paying the applicable state tax on cigarettes purchased over the Internet. The plaintiff, the state of Illinois, fi led suit against Hemi Group LLC, asserting that the company was failing to submit monthly reports of sales to Illinois residents as required by the Jenkins Act. The plaintiff also filed suit against the defendant company for shipping cigarettes to Illinois residents who were not licensed distributors or export warehouse operators and, last, for violating the Enforcement Act and the Consumer Fraud Act by selling brands of cigarettes to Illinois residents who were not in the Illinois Directory. Both parties agreed that the defendant company is not a resident of Illinois and that it is not incorporated under Illinois law. Hemi Group LLC filed to dismiss the motion due to lack of personal jurisdiction. The district court denied the defendant's motion. The defendant company appealed.

ISSUE: Should a company be subject to personal jurisdiction in a state if that company's business is conducted over the Internet, and the company is not a resident of that same state?

REASONING: If a company is involved in commercial activities over the Internet and is involved in these activities with a great number of consumers, then the company is thought to have "purposefully availed itself" of the state's jurisdiction. In this case, the Illinois court decided to apply a test to determine whether the company had enough interactions with Illinois residents to make the company liable in that state. The court must note the legitimate concern that "premising personal jurisdiction on the maintenance of a website, without requiring some level of ‘interactivity' between the defendant and consumers in the forum state, would create almost universal personal jurisdiction because of the virtually unlimited accessibility of websites across the country." Courts should be careful in resolving questions about personal jurisdiction involving online contacts to ensure that a defendant is not brought into court simply because the defendant owns or operates a website that is accessible in the forum state, even if that site is interactive. In this case, the court decided to reference but not to apply the sliding scale test, also called the Zippo test. The Zippo test was created in Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997) and is now most often used as the test that determines whether a company conducting business over the Internet is subject to personal jurisdiction in a certain state.

In the Zippo case, the court stated that "the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet." In other words, if a company is involved in commercial activities over the Internet and is involved in these activities with a great number of consumers, then the company is thought to have "purposefully avail[ed] itself" of the state's jurisdiction. If the purpose of the website is to conduct business transactions, this means the company that runs the website is interacting in online commercial activities. Yet if a website is passive in that its purpose is simply to display information for online users, the company running the website will likely not be subject to personal jurisdiction. The plaintiff provided evidence that the defendant company's contacts with Illinois were suffi cient to satisfy due process. The defendant maintained commercial websites through which customers could purchase cigarettes, calculate their shipping charges by using their zip codes, and create accounts. The defendant stated that it would ship to any state in the country except New York. The defendant stood ready and willing to do business with Illinois residents. And the defendant company, in fact, knowingly did do business with Illinois residents.

DECISION AND REMEDY: The court affirmed the district court's denial of the defendant's motion to dismiss for lack of personal jurisdiction and remanded for further proceedings.

SIGNIFICANCE OF THE CASE: This case provides an illustration of the standard courts' use to determine whether a company's business over the Internet will be subject to personal jurisdiction in a given state.

CRITICAL THINKING: Why is the court reluctant to extend in personam jurisdiction whenever a firm with online presence offers to make a sale of products in the state in question? Why is there a reluctance to extend in personam jurisdiction broadly?

ETHICAL DECISION MAKING: What Illinois stakeholders are especially happy that the court extended in personam jurisdiction in this case?