Canada: Internet Jurisdiction: An Overview

The Internet is a powerful place to do business around the world without leaving your doorstep. Herein lies the problem: When conducting business across national or provincial boundaries, which jurisdiction’s laws apply to your online transactions, or even merely to you or your employee’s online actions? In what jurisdiction would you enforce your rights stemming from online activity? Understanding these issues is central to successfully implementing a key (legal) component of an e-commerce strategy.

In the online world, the issue of jurisdiction is complex and relatively new. Although the law tends to have difficulty keeping pace with technological change, there are some principles with which any Canadian business with a website should try to become familiar. The leading American case on Internet jurisdiction, decided three years ago, is Zippo Manufacturing Company v. Zippo Dot Com, Inc. ("Zippo"). Zippo is often referred to for its articulation of an analytical framework for Internet jurisdiction; and because it is fast becoming the reference point for American courts exercising jurisdiction over "foreign" Internet ventures (including Canadian ones), it is worth reviewing first.

In Zippo, the Court establishes a three-pronged test for determining when an American court is to exercise jurisdiction over a non-resident (including a Canadian business). The judge in Zippo (McLaughlin J.) set out the test as follows:

A three-pronged test has emerged for determining whether the exercise of special jurisdiction over a non-resident defendant is appropriate:

1. the defendant must have sufficient "minimum contacts" with the forum state,

2. the claim asserted against the defendant must arise out of those contacts, and

3. the exercise of jurisdiction must be reasonable.

What is most interesting about Zippo is the analysis that the Court makes about websites. The Court focusses on the nature and quality of commercial activity of company websites and created a "sliding scale" to determine if any website in the world could be the subject of a lawsuit in an American jurisdiction. The "sliding scale" has two extremes. At one end, websites which allow for commercial transactions are considered to be "active". At the other end, websites which merely provide information to be accessed by others are considered to be "passive". In between, are "interactive" websites.

A Canadian business which publishes brochureware (brochures converted into HTML code to be placed on the company website), and does not conduct business with anyone outside of Canada, should not have to worry about American courts exercising jurisdiction over the company website. There are a number of American cases where courts did not find personal jurisdiction for passive websites. One example is Cybersell, Inc. v. Cybersell, Inc., a case in which the Court found that advertising over the Internet and inviting people to leave their name and address or e-mail address was not enough to exercise personal jurisdiction. In Bensusan Restaurant Corp. v. King, the Court found that a Missouri website offering nothing more than advertising was not within the jurisdiction of New York. In Desktop Technologies, Inc. v. Colorworks Reproduction & Design, Inc., a website which was equipped to receive e-mails from visitors, but did not allow visitors to place orders or execute a sale, was considered to be passive. In Resnick v. Manfredy, the Court dealt with a scenario where website visitors could download and print an order form which would then have to be sent by regular mail. The Court held that the website was nothing more than general information and advertising, thus passive, and not within its jurisdiction.

A Canadian business engaging in e-commerce will likely find that American courts will consider its "active" website to be conducting business in the American jurisdiction. Furthermore, the American courts will then apply their local laws to any transaction which occurred "in their jurisdiction". For example, in Zippo, the Pennsylvania Court found that a California company actually contracted with Pennsylvania residents through its website, and thus, was subject to Pennsylvania law. Actual sales in the foreign jurisdiction will clearly fall within this end of the "sliding scale" spectrum.

When a Canadian business provides more that mere brochureware on the Internet, yet does not participate in full blown e-commerce, it falls within the "interactive" website category. The first case that dealt with this type of website was International Star Registry of Illinois v. Bowman-Haight Ventures, Inc., where a Virginia website invited visitors to make e-mail inquiries. The website owner actually corresponded with Illinois residents. The website also contained an "Electronic Secure Order Form", used by many Illinois residents. The Court found that the website was within its jurisdiction.

However, in Molnylcke Health Care AB v. Dumex Medical Surgical Products, Ltd., the District Court for the Eastern District of Pennsylvania held that the mere presence of an online ordering facility does not automatically make a website active or interactive. The Court states that "While the websites are available in every state, they are not necessarily targeted towards every state." This is interesting given the recent experience of Toronto’s iCraveTV.com before the Pennsylvania Courts. The Canadian company had been using a three-part security measure:

1. viewers must enter a Canadian area code;

2. viewers must state that they are in Canada; and

3. viewers must then agree to terms of contract that affirm the above previous steps.

Effectively, any non-Canadian resident could only access the website television services fraudulently. The final outcome of iCraveTV.com was never judicially determined (because this matter was settled) but it is interesting that iCraveTV’s measures were not sufficient to protect it from an interlocutory injunction.

There is no Canadian equivalent to the decision in Zippo. However, there are Canadian cases which are relevant to the issue of jurisdiction. It should also be noted that even if an American Court finds a Canadian company’s website to be operating within its state’s jurisdiction, enforcement in Canada of any order granted by that American Court is not guaranteed.

The general test for the standard of review of a foreign judgment by a Canadian Court is found in Morguard Investments Ltd. v. De Savoye ("Morguard"). In Morguard, an appellant owned land in Alberta subject to two mortgages. The appellant left Alberta for British Columbia after the mortgages fell into arrears. The mortgagees served the appellant ex juris pursuant to the Alberta Court rules. The appellant took no steps to appear or defend the actions in Alberta.

Once the mortgagees obtained their judgments in Alberta, they commenced an action in British Columbia to enforce the Alberta judgments. The Supreme Court of Canada balanced the rights of the parties with respect to the jurisdiction in which a dispute should be decided. The Court established the "real and substantial connection" test:

In another Supreme Court of Canada decision, Amchem Products Incorporated v. British Columbia (Workers’ Compensation Board), jurisdiction was examined from a pro-active perspective: an anti-suit injunction whereby the Supreme Court of British Columbia restrained B.C. residents from pursuing a tort remedy in Texas for injuries related to asbestos which occurred in B.C. Such anti-suit injunctions are only appropriate when serious injustice can occur due to the failure of a foreign court to decline jurisdiction. Thus, even if a foreign court agrees to hear a case involving a Canadian business without jurisdiction, the local Canadian Court can be called upon to prevent the plaintiffs from pursuing that action in the foreign jurisdiction.

The most recent and highest level case in Canada regarding Internet jurisdiction is Braintech v. Kostiuk ("Braintech") where a publicly-traded computer, software company headquartered in British Columbia obtained default judgment in Texas in the amount of $406,690 (US$300,000) for liability for defamation and business disparagement, and then tried to enforce this judgment in British Columbia. The Braintech decision is highlighted in this month’s Litigation Update column.

Although not developing as rapidly as the technology itself, American and Canadian case law is quickly adapting to the reality of Internet commerce. Keeping an eye on this developing case-law can be as important as upgrading systems and software. In the meantime, crafting innovative legal solutions is the key to making any e-commerce venture less risky and more profitable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.