Technology Law Column

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Published in the Chicago Daily Law Bulletin, January 9, 1997 at page 6.

'Data Havens' May Protect Online Enterprises

Copyright 1997 by David Loundy

Local control over Internet activities is once again a hot legal topic.

In a move unsurprising to some tax authorities, the Commissioner of the Alabama Department of Revenue has ruled that flat-fee or hourly access charges (but not charges for "world wide web services") collected by on-line service providers in Alabama are essentially a "computer exchange service" and should be subject to the state's tax on utility gross receipts (Revenue Ruling 96-003). Some other states already tax some aspects of the provision of Internet services.

In California, Business & Professions Code Section 17538 which took effect on the first of the year requires on-line merchants doing business with buyers located in California to disclose their legal name and address (in most cases), and also provide notice of the merchant's return and refund policy. As an illustration of some of the inherent difficulties in such a requirement, the statute does not require that a buyer in California receiving delivery of an electronically-distributed product identify him or herself as being located in California, and thus someone who must be shown the required notice.

In the arena of jurisdiction, the courts have also been busy. In Naxos Resources (U.S.A.) Ltd. v. Southam, Inc., No. CV 96-2314 WJR (MCx) (S.D. Cal. Aug. 16, 1996), the court was the next in a continuing series to address jurisdiction resulting from an on-line publication. At issue was an allegedly defamatory publication in the Vancouver Sun. One of the plaintiff's arguments was that, because the article was available on the defendant's web page and via Westlaw and Lexis-- all from the State of California-- jurisdiction in California was proper.

The court followed its earlier holding, which stated that the "mere act of transmitting information through the use of interstate communication facilities is not . . . sufficient to establish [general] jurisdiction over the sender" (citing California Software, Inc. v. Reliability Research, 631 F.Supp. 1356, 1360 (C.D. Cal. 1986)). The court held, however, that jurisdiction might be appropriate if the sender intentionally engaged in conduct calculated to cause injury in the forum state, and the sender knew and intended that the effects of the conduct would be felt in the forum state.

Also examining the question of general jurisdiction, the court in McDonough v. Fallon McElligott, Inc., No. 95-4037, 1996 U.S. Dist. LEXIS 15139; 40 U.S.P.Q.2D (BNA) 1826 (S.D. Cal. Aug. 5 1996), held that merely having a world wide web page accessible in a state was not sufficient to give a court personal jurisdiction in that state when the claims involved in the suit were unrelated to the web page.

When the on-line communication does produce harm in a forum state, specific jurisdiction may be proper-- according to the court in EDIAS Software International, L.L.C. v. BASIS International Ltd., No. CIV. 96-0932 PHX-PGR, 1996 WL 700063 (D. Ariz., Nov. 21, 1996). This case involved a software company which sent e-mail messages to some of its customers, and posted a notice on its web page and in its CompuServe forum explaining that it had canceled its distribution agreement with the plaintiff. EDIAS sued, claiming that the e-mail, web page, and CompuServe notices constituted defamation and tortious interference with contract (among other things).

The court, citing many of the same cases as the McDonough court, held that when the defendant published messages on CompuServe and the Internet which could have the effect of dissuading customers from dealing with an Arizona-based company, and the defendant knew that these actions would damage the Arizona company, the defendant was subject to jurisdiction in the state where its messages resulted in damage. The court stated that it "agrees with EDIAS' assertion that BASIS should not be permitted to take advantage of modern technology through an Internet web page and forum [sic] and simultaneously escape traditional notions of jurisdiction" (Opinion at b).

The last case meriting mention in this article is one that will prove to be the tip of the iceberg. Last year the Minnesota Attorney General posted a warning to Internet Service Providers and Internet users concerning the Minnesota Attorney General's stance on jurisdiction, particularly as it pertains to Internet gambling (available on the Internet at Minnesota has finally put its claim of jurisdiction to the test.

In State of Minnesota v. Granite Gate Resorts, Inc., No. C6-95-7227, available on the Internet at Judge Connolley found the defendant's Internet activities were sufficient to provide jurisdiction to Minnesota courts. The defendant is a Nevada corporation and Internet service provider. It maintained a web page advertising for WagerNet, a service of Global Gaming Services, Ltd. of Belize, which hopes to offer international sports wagering services in the near future via its own server located in Belize. The advertisement invites interested parties to contact the defendant for more information. The ad also contains a warning that users should consult local authorities about the legality of placing bets by telephone with off-shore betting facilities before registering with WagerNet. Other information on the web site states that WagerNet will soon be operational, providing for legal electronic betting. Potential customers may also sign up for an e-mail mailing list by providing their name, postal address and e-mail address.

Another service affiliated with the defendant, and advertised at the same web site, is All Star Sports, which, for a fee collected by either a 900 number or by sending credit card information over the Internet, will deliver sports picks to help customers bet on sporting events.

The complaints made in the Minnesota case are that federal law prohibits the interstate or foreign transmission of both betting information and bets by one engaged in the business of betting or wagering through wire communication facilities, including telephone wires (18 U.S.C. Section 1084) and that Minnesota law forbids commercial sports betting. Furthermore, the Attorney General contends that WagerNet and All Star are advertising in Minnesota and are representing that such betting is lawful-- which therefore violates the Minnesota Consumer Protection statutes forbidding false advertising, deceptive trade practices and consumer fraud.

The Granite Gate court held that because the web page ad "would be on continuously on the Internet and that it had to reach national markets that included Minnesota," as would the e-mail distribution list, that the defendant had made sufficient contacts to make Minnesota jurisdiction proper. In making this determination, the court found particularly persuasive the recent case Inset Systems, Inc., v. Instruction Set, Inc., 937 F.Supp. 161 (D.Conn. 1996) (available at which held that advertising via a web page could produce jurisdiction. The court did not, however, mention Bensusan Restaurant Corp. v. King, No. 96 Civ. 3992 (SHS) (S.D.N.Y. Sept. 9, 1996) (available at which held that merely advertising via web page was not sufficient to allow for jurisdiction.

Regardless of whether the Granite Gate court reached the right decision, the decision does point out difficulties with the International nature of modern communications. Such holdings will inevitably give rise to the concept of "data havens." Certain jurisdictions may permit activities on line that other jurisdictions find objectionable.

For example, New York's Off-Track Betting Corp. is sponsoring an experimental Web site that offers gamblers the option of placing their wagers directly via their home computers, making it the first state-sponsored race-wagering business on-line. There is no information indicating whether access and use will be limited to New York residents. Internationally, Internet Casinos Inc. (, a Delaware company, intends to became the world's largest casino by operating largely over the Internet. The company figures that it can take advantage of the international gambling marketplace, and, while excluding U.S. residents, still become highly profitable by taking a part of the trillions of dollars per year spent internationally on gambling. The company apparently will consider its legal position with regard to U.S. customers once its network of off-shore banking is fully established.

Local control over Internet activities will result in efforts to avoid unfriendly localities for hosting of on line services. Whether it is an unfriendly tax climate or an unfriendly legal environment, companies will operate their on-line businesses in the most favorable jurisdiction. This, in turn, will produce an international enforcement problem--to quote the President of Granite Gate, who reportedly is appealing Minnesota's adverse ruling before implementing a plan to move his business south of the U.S. border, "What are they going to do, send down the Minnesota State Militia?"

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