Two recent cases, one in Ontario and one in the Federal Court, provide guidance as to when a court will take jurisdiction over an Internet business. In the first case, Disney Enterprises Inc., et al. v. Click Enterprises Inc. and Philip G. Evans, a case decided in the Ontario Superior Court of Justice on April 5, 2006, the Ontario court had to consider whether a U.S. court had properly taken jurisdiction over an Internet business operating from Canada. In the second case, which was arguably the flip side of the same issue, Patrick Desjean v. Intermix Media, Inc., the Federal Court had to consider whether it should take jurisdiction in Canada over a U.S. business offering software programs over the Internet from the U.S.

McCarthy Tétrault Notes:

In both cases, the Court had to apply the real and substantial connection test of Morguard Investments Ltd. v. De Savoye and Beals v. Saldanha in light of the recent Canadian Supreme Court case of Socan v. Canadian Association of Internet Providers.

In the Disney case, the Ontario court found that the U.S. court had properly exercised jurisdiction over the Canadian defendant. The Canadian defendant was operating an Internet retail business for profit from Canada, and had a commercial purpose to use the Internet to enter the U.S. to carry out its activities. It was making its services available to residents of the U.S. who wished to illegally download American films and it contracted with payment service providers in the U.S. to process Internet payments from its websites. As a result of these factors, the court concluded that there was a real and substantial connection to the U.S.

This can be contrasted with the subsequent Federal Court case of Desjean v. Intermix Media, in relation to a class action taken in Québec against Intermix Media, a U.S. company that operated websites from a U.S. server. In that case, the court found that Intermix websites did not target Canada or Canadian consumers in any specific way, had no specific references to Canada and no specialized content for a Canadian audience and no French language content. There was no direct advertising to the Canadian market and no solicitation aimed at the Canadian market. No person affiliated with Intermix had either directly or indirectly ever attended trade shows or any other Internet industry promotional events in Canada. Although there was evidence that at least some Canadians had downloaded software from the Intermix website, this represented only 2.5 to 5.3 per cent of the downloads, depending on the application. The fact that a small portion of Canadians had downloaded software was not sufficient to establish jurisdiction. The Federal Court found that it would be manifestly unfair to subject Intermix to the Canadian court’s jurisdiction since it would in effect mean a U.S.-based operator of a website, with no business assets in Canada and no physical presence in the jurisdiction, could be sued in Canada, as well as in any other country from which a plaintiff might choose to download the defendant’s products. The courts held that this would put too great an onus on foreign website operators or foreign commercial undertakings with no real presence in Canada, which happen to deal with Canadian residents. The Intermix case is currently under appeal.

The two cases are instructive as to the factors which will influence the court in taking or accepting jurisdiction or in recognizing the jurisdiction of another court over an Internet business.

The court in Disney concluded that the defendant’s activities conducted on the Internet had the potential to cause harm anywhere and everywhere, that the defendant’s websites were available through normal distribution channels to the residents of New York, and that the defendant’s products caused harm there. It is clear in Disney that the defendant was entering the U.S. purposely to make a profit from Americans although it was also offering its software to other parts of the world.

In Intermix, however, the Moran case was of limited relevance since the issue in dispute in Intermix related to misleading advertising, rather than product liability. The court concluded that the nature of the website was such that its business and marketing were not directed towards Canada. Moreover, on the record before the court, the websites were not interactive in nature nor did the websites allow users to communicate and exchange information with the sponsors of the site or to order products online. The court found that the Intermix software was free, and that there was no targeting of Canada or of Canadian consumers in any specific way.

At the end of the day, the court concluded that "Intermix could not reasonably expect to be sued in Canada for allegedly breaching the criminal provisions of Canadian competition legislation because of alleged false advertising on its website - one which is solely supported by a server located in the U.S."

These cases represent either side of a fine line. An Internet business actively directed to soliciting sales in a jurisdiction would seem to justify a court exercising jurisdiction in that location. On the other hand, it seems that the free download of software from a non-interactive website, where only a small portion of the downloaders are in Canada, will not justify a Canadian court taking jurisdiction.

As the court in Disney recognized quoting from Sharpe J. A. in Muscott v. Courcelles, the test for assuming jurisdiction "is deliberately general to allow for flexibility in its application" and "it cannot be reduced to a fixed formula." However, those seeking actively to do business over the Internet in a jurisdiction can reasonably expect to be sued there.