The Seventh Circuit Court of Appeals has dealt head-on with an issue of importance to online retailers, holding that an e-commerce cigarette outlet from New Mexico could be sued in Illinois over online sales. The case is State of Illinois v. Hemi Group LLC, No. 09-1407, 2010 U.S. App. LEXIS 19126 (7th Cir. Sept. 14, 2010). Hemi is a Native-American-owned cigarette sales business that operates several e-commerce Web sites from a reservation in New Mexico. Illinois claimed that Hemi evaded Illinois tax regulations and restrictions on sales to minors by selling cigarettes to Illinois residents over the Internet. Hemi moved to dismiss for lack of personal jurisdiction, arguing that it could not be haled into court in Illinois if its business activities took place solely in New Mexico, where it received and fulfilled orders. The decision turned on whether Hemi, through its Internet activities, had purposely availed itself of opportunities in Illinois by shipping orders to Illinois residents. The Seventh Circuit was hesitant “to fashion a special jurisdictional test for Internet-based cases” and declined to adopt a sliding-scale approach used by other courts to determine whether Internet activity could lead to court jurisdiction. The Seventh Circuit also conceded that Hemi did not have continuous and systematic business activities in Illinois. Nonetheless, the Court found jurisdiction, relying on three facts:

  1. Hemi maintained a substantial commercial venture online.
  2. Hemi stated on its Web site that it would ship to any state except New York, which the Court interpreted as an express election to do business with Illinois residents. Focusing on this fact, the Court highlighted that Hemi knew how to protect itself from being haled into court in New York and thereby must have known that by conducting business with residents of another state, it could be forced into court in that state.
  3. Hemi shipped cigarettes to Illinois purchasers. This was a sufficient basis for establishing jurisdiction, even though under commercial law the sales technically occurred in New Mexico.

Of particular significance for on-line retailers, the Court concluded that it was “fair” to require Hemi to appear in Illinois to answer claims based on sales through its nationwide interactive Web site. This was true even though Hemi had no physical operations in Illinois, did no advertising in the state, and accepted and filled orders in New Mexico. The Court accepted the notion that a retailer selling to Illinois residents deserves to be subject to suit in Illinois, at least with respect to issues related to those sales.

Likewise, in deciding not to ship to New York, Hemi “should have foreseen” that by making sales to Illinois, it would be subject to jurisdiction there, the Court held. It is unclear whether the Seventh Circuit would have found jurisdiction in the absence of this fact, but it was interpreted as a deliberate decision to do business with the state.

Significantly, while the case deals with taxes, the decision is limited to the question of whether Hemi could be sued in Illinois. The court did not consider whether Hemi's Internet activities created sufficient nexus in Illinois to require Hemi to collect and remit state sales/use taxes on sales to Illinois residents. Finally, the Seventh Circuit made clear that this case dealt with sales into the state through a Web site and cautioned that courts must be careful “to ensure that a defendant is not haled into court simply because the defendant owns or operates a website that is ‘interactive.'”

The full ruling is available online at http://tinyurl.com/2c4gxo4.