By Kevin F. Reilly, J.D., CPA, Partner
As Published in The Boardroom
…the defendants’ Website and other promotional activities conducted in California established sufficient contacts with the State necessary to warrant the exercise of jurisdiction.
~ California Supreme Court, 2006
The club industry was not the quickest industry to adopt the use of web sites as a tool to use in its business. Clubs that were on the Internet frequently had very formal sites that were not dynamic. However, that is no longer the case. Not only do clubs have very interactive sites for members, but they use the sites to reach out to the general public. In addition, they are considering the use of social media for communication. Web 2.0 refers to the ever changing method of communicating, generating, and sharing user-generated content online. Whole industries, including newsletters and conferences, have arisen around Web 2.0. Computers are no longer used just for email any more. Just look at the number of vendors supplying this type of service at the last Golf Industry Show. Recently, I received an email from one of the vendors highlighting the ability of clubs to direct more traffic to their websites. This is not a problem if we are going after members.
For member owned private clubs, restrictions exist on how you can use the Internet. For tax-exempt clubs, these may be even stricter. If your club should be selected for audit, the agent will review your web site to make sure it reflects the exempt purpose for which the club was formed. As far back as 2003, BoardRoom magazine published an article with suggestions on what to include on a web page if you are a tax-exempt entity, and more important, what not to include. While many questions exist as to what can be on a web site, it is important to realize that there is no such thing as a 501(c)(7) approved web site. There are just ways to reduce your exposure should the IRS ever challenge your site. A more important question may be the public accommodation and privacy issues and how having a web site affects whether you truly are a private club. If the club aggressively advertises for non-member business on its web site, it may no longer be treated as tax exempt. In reviewing web sites of clubs, many seem to forget they are private.
Another issue that no one in the club area seems to be focusing on is the potential liability that arises from having a web site or using social media. One area to consider is the concept of jurisdiction. Why is jurisdiction important to your club if it is on the Internet? Simply because a club does not need to be present in a state to be sued within the state! If a guest hurts himself/herself at a club, the club may be sued. Generally, the suit will be in the locality of the club. However, suppose a city club allows reservations for its rooms over the Internet. If a member of a reciprocal club makes a reservation over the Internet and lives on the other side of the country, would he/she be able to sue you in that jurisdiction? Maybe!
Jurisdiction is the system in the United States which is used to determine if a case is brought in the proper court. It is an attempt to reduce “forum shopping” whereby a plaintiff brings a case where it thinks it has a better chance of winning. Without jurisdiction, a court cannot even hear a case and must drop it on the motion of a defendant. Although it does not always work out that way, its purpose is to prevent the defendant from defending a case in a locality with which it has no connection, and to make sure that the locality most interested in the outcome of the litigation gets to hear it. Generally, a court applies a three-prong test to determine if it can exercise specific jurisdiction over a non-resident defendant. These are:
- The defendant has purposefully availed himself or herself of forum state’s benefits;
- The controversy is related to or arises out of the defendant’s contacts with the forum; and
- The assertion of personal jurisdiction would comport with “fair play and substantial justice.”
Under its long arm statutes, a state may assert jurisdiction over a nonresident defendant if the defendant is found to have nexus with the state and the exercise of the jurisdiction is reasonable. To find nexus, most states require minimum contact with the state. This can sometimes be as little as whether the defendant has directed his activities to the state and whether there is a connection between the contacts and the suit. The law on jurisdiction as it relates to the Internet is still in a state of flux. Is the mere existence of a web site that can be accessed by an individual within a state sufficient to cause nexus and thereby allow jurisdiction? Probably not!
Generally, most courts look at a web site similar to advertising in a national publication. This alone does not provide jurisdiction. A sliding scale has been set up for finding jurisdiction in Internet related cases. The Supreme Court has stated that physical presence within a state is not needed to find jurisdiction. The more interactive a site is, the more likely jurisdiction can be found. If it is merely a passive site, a sufficient connection may not be found. However, even with a strictly passive site, some states have found sufficient minimum contacts for due process consideration. Among these states are Connecticut and California.
It is important to note that none of the cases have involved private clubs, and it is unclear how the courts would rule in that instance. As clubs become more aggressive in generating unrelated business and non traditional income, this may change. However, some cases have involved other businesses in the hospitality industry, including restaurants, travel sites, and hotels. Note the quote at the beginning of the article related to a hotel. In one case, jurisdiction was not found when the restaurant merely had a web page with no interactive connection. If someone wanted to make a reservation, they had to do it by telephone. However, in the California Supreme Court case, a hotel which conducted no business in California and had no bank accounts or employees in the state was subject to the specific jurisdiction of the state. The court based its decision on a number of factors including the interactive nature of the web site. It is difficult to see how that fact pattern is much different than a reciprocal club member making a reservation over the Internet with a club in another state.
Other legal issues that should be considered with the club’s or members’ use of social media is the potential for defamation, privacy concerns, and advertising. In addition, employee use of bulletin boards, etc. may impact the workplace environment. Offsite bulletin boards may not protect an employer from harassment claims if the employer is aware of the site.
The only way to ensure jurisdiction is never found because of a web page is to not have one and to avoid all use of social media. However, the purpose of this article is not to lead you to that conclusion. People communicate differently today and a presence is required. Rather, it is to make you aware of some of the potential issues, and encourage you to use care, and common sense, in setting up the page. Limit the interactive features of the site to members and limit your non-Internet activities in other states. Designing your web site to fulfill the privacy requirements will go a long way towards alleviating many of the potential problems with jurisdiction. Put most of the site behind firewalls, which are accessible only by members, and state right on the site that it is for the benefit of individuals (or members) in specific states. Review comments being made by your members so you can address any issues as they arise. If you do use the site as a marketing vehicle, or if you are not a member owned private club, make sure you put a forum selection clause on the site.
Remember, the law in this area is constantly changing, and this article is not intended to be considered the provision of legal advice. You should make sure that local counsel reviews any potential issue in this area.