Regulatory Reform

Can State Courts Exercise Jurisdiction Over Online Marketplaces or Individual Sellers?

A recent Supreme Court case could have a significant impact for online marketplaces and the individual sellers who rely on them. The case, entitled Ford Motor Co. v. Montana Eighth Judicial District Court went into detail over the question of whether a state court could exercise jurisdiction over an automobile manufacturer. The ultimate result was not controversial—all eight justices participating in the decision believed the state courts could exercise jurisdiction.

The controversial aspect of the decision rested in “why” the courts could exercise jurisdiction. Within the back and forth between the majority opinion, authored by Justice Kagan, and the concurring opinions, one by Justice Alito and the other by Justice Gorsuch, raises serious questions for online platforms such as Ebay, Etsy, Amazon, and others that rely on independent sellers.

Jurisdiction is nothing more than a court’s ability to hear and decide cases that will bind both parties. State courts, traditionally, have authority to decide cases either when a defendant lives within the state or when the defendant is, somehow, connected to it. Jurisdiction gets a bit trickier when a company, rather than an individual, is the defendant. For a company to be “at home” within a state, it must either have its headquarters, its “principal place of business,” or be incorporated there.  Alternatively, the company must have some deliberate, and continuous, contacts with the state—in legalese, courts will ask if a company has “purposefully availed itself” of a particular state.

A typical example is that of a car manufacturer. In the Ford Motor Company case, the company is incorporated in Delaware, has its headquarters in Detroit, and manufacturers vehicles in states like Kentucky. Despite this, Ford authorizes dealerships across the country, in nearly every state. Because of this, the courts ruled that courts in states like Montana and Minnesota could exercise jurisdiction over the company.

The example breaks down, though, when considering ecommerce and online marketplaces. Online marketplaces are not like traditional malls or shopping centers. Instead, they provide an opportunity for individuals to sell products across the country and across the globe. Many online marketplaces do not set up storefronts across the country or in a specific state. Most, if not all, of the individual sellers do not intentionally sell products to consumers in Montana, Georgia, Tennessee, and so on. But by virtue of the marketplaces existing virtually, individual sellers can reach consumers in those states simply by listing a product for sale.

The majority in Ford would claim these types of contacts are “random, isolated, or fortuitous,” but the concurring opinions disagree. Justice Gorsuch recounted the judicial historical analysis of jurisdiction, pointing out that a company purposefully availed itself of a state market if it sent agents to the state, advertised in local media, or developed a network of on-the-ground dealers. He followed this up by wondering, in a digital age, what presence or purposeful availment looks like. In so doing, Justice Gorsuch claimed that “new technologies and new schemes to evade the process server [and thus jurisdiction] will always be with us.”

Because of the concurring opinions, in the majority decision Justice Kagan went out of her way to state that the Court did “not consider internet transactions, which may raise doctrinal questions of their own.” She then pointed out that the case “does not present the very different questions whether and how a defendant’s virtual ‘presence’ and conduct translate into ‘contacts’ with a particular State.” Between this statement in the majority opinion and the concurring opinions, the Court likely has an appetite to hear cases involving those questions—questions of what state jurisdiction looks like in a Digital Age.

Ultimately, this means that platforms and individual sellers will face legislation and litigation. States and lawyers may push several envelopes, asking for the Supreme Court’s clarification in several areas. At the heart will be questions of whether states can exercise jurisdiction over platforms or sellers because they advertise in the state, ship products to consumers in the state, or a combination of both.

Ebay, Etsy, Amazon, and other platforms may advertise heavily in a few states. The advertisements, though, generically promote the platforms rather than specific sellers. For platforms like Ebay and Etsy, though, they are nothing without their individual sellers.

The platforms may also realize, in the aggregate, that their sellers ship large quantities of goods to specific states. An individual merchant, though, may be unaware of the total number of products shipped to consumers in those states by other merchants on the platform. In fact, a particular sale may be the first time the merchant sells a product to a consumer in that state.

The questions courts may address in the future include:

  • Did the individual seller “avail” himself of a specific state’s market? If he did not intentionally sell a product to a consumer in a specific state, was he aware of the fact that the consumer could purchase it? That is, does a seller deliberately conduct business in a state if he simply lists a product for sale on a website that may have national reach?
  • Even if the seller does not have the necessary contacts for state courts to exercise jurisdiction over him, what about the platform? If Ebay or Etsy advertised heavily in a specific state or knew that its sellers in the aggregate shipped large numbers of products there, can a state exercise jurisdiction over the platform independent of the seller? If the answer becomes, “yes,” online marketplaces will essentially become a type of “insurer,” responsible for the quality of products sold by independent sellers.

The ALEC Task Force on Communications and Technology, along with the Task Force on Tax and Fiscal Policy, has long warned such issues will eventually percolate to courts. Most of the related task force model policies focus on taxation but include principles applicable for jurisdiction.

  • Six Principles for Communications and Technology – Online marketplaces and individual sellers have contributed greatly to economic growth within states. Marketplaces have opened the entire world for individual sellers. States should seek to preserve the dynamic growth, disruptive change, and vibrant competition that exists. Threats of litigation will diminish economic activity and innovation. Legislatures should lead the way with unambiguous language, protecting online marketplaces from overzealous plaintiffs’ lawyers and the risk of expansive court decisions.
  • Resolution to Oppose Imposing Intermediate Liability on the Internet under State Laws – Online marketplaces should not be concerned about whether consumer in a random state is going to sue in that state based on an isolate transaction between him and an individual seller. Online marketplaces need to focus, instead, on producing additional value for other individual sellers and complying with existing federal standards.
  • Sales and Use Tax Collection Practices Act – If an online marketplace has limited economic connections to a state seeking to impose sales tax obligations, the marketplace may seek declaratory relief in the courts of its home state against out-of-state tax collectors. The same type of principle could work for individual sellers and online marketplaces if they lack regular and sustained contacts with the state in which someone brings a suit.

In Ford Motor Company, the Supreme Court signaled a willingness to address jurisdictional questions, online marketplaces, and individual sellers. Because the Court signaled this willingness, online marketplaces and online sellers will likely find themselves at the center of lawsuits designed to test the limits of state court jurisdiction. State lawmakers, thus, have an incredible opportunity to protect individual sellers and online marketplaces in their states against overzealous plaintiff’s attorneys and judges in other states.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

+ Regulatory Reform In Depth