Buyer Beware: A Hidden Legal Risk of Interstate Transactions
As the explosion of e-commerce shrinks the world, a business owner can often buy just as easily from a vendor in Pasadena, California as from one in Pasadena, Maryland. Interstate purchases, though, carry with them a particular legal risk that purely intrastate transactions do not – the possibility of having to chase the other party into its home state if things go badly.
The problem is what’s called jurisdiction. Jurisdiction is the legal authority that a court or other judicial body has to render decisions. Maryland courts certainly have jurisdiction –power and authority – to decide cases concerning, and render decisions affecting, defendants who live or regularly conduct business within our state. However, this power and authority are less certain when a potential defendant neither resides nor does business in the state. A Maryland court will not usually have, and probably should not have, authority to enter a judgment that binds a California resident or corporation that has never had any connection with Maryland.
If your business elects to buy from an out-of-state vendor, and the transaction does not go as planned, you may well be forced to chase the vendor in the courts of its home state. (Of course, jurisdiction is often addressed in any written contract that may govern the transaction). Whether or not you will be able to sue your vendor in Maryland depends on whether a Maryland court can exercise jurisdiction over the vendor. Maryland law extends Maryland’s jurisdiction over out-of-state defendants as far the limits of the U.S. Constitution will allow.
Jurisdiction over an out-of-state defendant will depend on whether the vendor has enough sufficient “minimum contacts” with Maryland that a Maryland court considers it fair to exercise jurisdiction over the vendor. Generally speaking, the vendor must have sufficient contacts with Maryland to make it reasonable for the vendor to expect to be dragged into court here.
There is no bright-line test, but greater connections and more frequent contact increase the likelihood that an out-of-state individual or company will be subject to jurisdiction here. Merely advertising in Maryland, or selling via direct mail or the internet to Maryland residents almost certainly will not suffice to allow jurisdiction. On the other hand, people or companies that have substantial contacts within Maryland, such as an office or offices, employees, real or personal property, and/or accounts in Maryland banks will likely be easy to sue here. Likewise, voluntarily becoming registered or qualified to do business in Maryland, or becoming licensed under a state statute, will almost always subject a defendant to suit in Maryland.
In some cases, even where the potential defendant is not licensed, registered, or qualified, and has no office, employees, property or accounts in Maryland, a single contract or commercial transaction might be enough. If the customer or vendor initiates contact with a Maryland resident or company, signs the contract here, and the goods are to be delivered, or the services are to be performed here, a Maryland court would likely allow the customer or vendor to be sued here.
The extra costs of litigating out-of-state can, of course, be significant. Out-of-state litigation will require new counsel, travel costs, and probably substantially more time away from your business than would be required to bring the same claim locally. Unfortunately, the question of Maryland’s jurisdiction over a particular out-of-state party is often unsettled, and may be difficult to predict in advance of a transaction. A contractual provision in which the parties agree to the jurisdiction of Maryland courts will eliminate the issue at the outset and potentially save significant money in the event of litigation later in the parties’ dealings.