The Internet enables Israeli companies to carry on world-wide business. From computers in Israel they can offer their services to customers anywhere in the world. However, whilst entrepreneurs are captivated by the unlimited opportunities that the Internet is opening up to them, they tend to forget that world-wide business also has a legal price. An Israeli company's site that operates on a server in Israel and offers services without limitation is likely to subject its operators to the jurisdiction of many indefinite countries. In other words, a global site embodies the risk of global liability. In the last year at least two Israeli companies have burned their fingers in this way: VocalTec, the Internet telephony pioneer, whose offices are in Herzlia; and GoSMS of Tel Aviv, which provides text message content (SMS) to cellular phone owners. This was reported in the news journal of the law firm Sidley, Austin, Brown & Wood (edited by Adv. Joel Singer, former legal adviser to the Israeli Ministry of Foreign Affairs and one of the architects of the peace arrangements with the Palestinians, who is now working as a partner in the firm's Washington branch).
Since 1877 the American constitution has protected defendants against excess of jurisdiction by means of its due process provisions, in the interpretation of which the Courts have held that jurisdiction over a non-resident defendant is only possible if he has some minimal connections with the state where he is being sued. In this way they have sought to ensure that an action will not be contrary to the basic principles of fair play and substantive law. In the absence of a physical representation in the USA, foreign companies will generally not be sued there, unless they have submitted to the jurisdiction of the US courts. Such submission need not be express and can be inferred from the facts. In the various states that make up the USA there are jurisdiction provisions that are known collectively as "long arm statutes". These statutes, in certain circumstances, extend jurisdiction over defendants who are physically outside the state. These are the statutes that trapped the two Israeli companies.
Offer for Sale
VocalTec, an Israeli registered company, was sued in Minnesota, USA, it being alleged that its telephony software infringed a patent owned by the plaintiff, an American company called Multi-Tech Systems. VocalTec has no offices, representatives or physical presence in Minnesota. It therefore petitioned for the claim to be summarily dismissed, pleading that the American Court had no jurisdiction over it. Its plea was dismissed. The Court ascribed decisive importance to the fact that VocalTec had offered the software for sale from an Internet site which, despite being kept on computers in Israel, was clearly also aimed at residents of Minnesota. Anyone wishing to download the software from the site was asked to provide his personal particulars. Amongst other things, it was possible for him to choose the state where he lived from a list. One of the states mentioned in the list was Minnesota. The visitor to the site was also asked to confirm his agreement to a licence before downloading the software.
The Court applied earlier precedents and divided Internet sites into three types: at one end of the spectrum is a site where the defendant clearly carries on business through the Internet by entering into contracts with the residents of other states. In that way it submits to the jurisdiction of the plaintiff's state. The other end of the spectrum is where the defendant maintains a passive Internet site to promote its image. Such a site will generally not support an attempt to impose jurisdiction over the defendant. Between the two poles are sites that permit a certain degree of interactivity, in respect of which there is a real problem. This problem did not exist in the VocalTec case. It was held that in the circumstances of the particular case VocalTec's activity fell between the mid-point and the first situation and as such it was subject to the jurisdiction of the Court in Minnesota. This part of the decision stands alone but it is also reinforced by the fact that the software was also being sold on two American Internet sites and even in a physical store in Minnesota. The Israeli company, VocalTec, therefore found itself subject to the jurisdiction of the Federal Court of Minnesota, USA (Multi-Tech Systems, Inc. v. VocalTec Communications, Inc. and VocalTec Communications Ltd, 122 F, Supp. 2d 1046 - decision of Judge Ann Montgomery of 4th December 2000).
The fate of GoSMS was no better. This company offers a service that converts content from Internet sites into text data, which it transmits to cellular phone subscribers. GoSMS was sued by the American media giants, including CNN, the New York Times and the Washington Post. The plaintiffs alleged that it was copying content from their Internet sites, transmitting it to its subscribers and thereby infringing their copyright. However, GoSMS is an Israeli company and the server computers through which it was offering its services were located in Tel Aviv and California, far from the State of New York where it was sued. The Court held that in a claim involving the presentation of infringing content, the infringing activity should be treated as occurring where the Internet site was created or where it is situated. On the face of it this should have led to the dismissal of the claim. Nevertheless, the plaintiffs asserted that the defendant had deceived New York residents, who were amongst its customers, by using their trade marks and news, in which they held copyright. This plea sufficed to give the foreign Court jurisdiction. It was further held that although GoSMS' services were only offered to residents of California, Israel and parts of Europe, the service was accessible in the USA and the defendants were indirectly seeking to serve the New York market. In the circumstances they should have reasonably foreseen that their infringing acts (as alleged by the plaintiffs) would have consequences in the State of New York. The company's application for the claim against it to be summarily dismissed for want of jurisdiction was therefore dismissed (CNN et al v. GoSMS.Com Ltd et al, S.D.N.Y. No. 00 CIV 4812).
The lesson to be learned is that if you want global income you had better beware of global risks.
published in Hapraklit, the journal of the Tel Aviv District Committee of the Israel Bar.
Translated by Word Power