Clinton Willett, Associate Attorney at Sul Lee Law Firm, PLLC
Let’s face it, when you run a business, things happen. You work hard to create your business, develop your product or service, and create and maintain a customer base. But no one, and no business, is immune from the opinions and grievances of others. Whether it’s an angered employee, customer, business partner, or another contact, someone will likely threaten to sue or will actually sue your business. The harsh reality is that 36-53% of small businesses are involved in at least one lawsuit in any given year,[1] and 90% of all businesses are engaged in lawsuits at any given time.[2] An unfortunate reality of these statistics is that the question for business owners is not if their business will be sued, but when. When your business is sued, the place where the suit is to take place (or, as lawyers call it, the “forum”) is critical not only to the legal strategy of the particular case, but also to your business strategy decisions about operations, footprint, and expansion.
In your backyard
Although each state is different, as a general proposition, businesses can be sued in any state court where they are incorporated (this includes the state of formation for LLCs). In Texas and most other states, the actual event that gave rise to the lawsuit determines where within that state your business may be sued.[3]
For example, let’s you say form a Texas LLC with a physical storefront in Dallas, Texas. Both common sense and the actual law tell you that if someone says something goes wrong in that store – from a slip-n-fall, to a misrepresentation, to a breach of contract – the suit will be filed in the Dallas courthouse. In most cases, unless there are federal questions involved such as patents, trademarks, or other specialized federal statutes with civil liability clauses, it will not be in federal court – i.e., not the United States District Court for the Northern District of Texas. Rather it would be in a Texas state court, either (a) in one of Dallas’s five civil County Courts at Law or (b) in one of its thirteen Civil District Courts.[4]
When your backyard is as big as Texas
Let’s suppose further, because of the Covid-19 pandemic, your business has now started to sell some things online. Does this change where you can be sued? The short answer is yes.
As before, you can still be sued in Dallas, Texas, but what happens if one of your El Paso customers tries to sue you in her backyard? Under Texas law, as long as a “substantial part of the events or omissions that give rise to the claim occurred” in El Paso, you can be sued there.[5] As with the Dallas case, it would probably be in state court. This applies to cities and towns, small and large, all over Texas.
The virtual backyard
Suppose you, as a business owner, don’t want to be restrained to the great state of Texas for your customer base, and you want to use your online presence to sell all over the country. What if the person that sues your business ordered something online from Possumneck, Mississippi?[6]
The short answer is you could be sued in the Mississippi state court in Attala County, or in United States District Court for the Northern District of Mississippi. For our discussion, let’s assume Mr. Possumneck is alleging the product you sold him from Dallas has caused him great harm, and that he is seeking more than $100,000. Let’s assume further that Mr. Possumneck decides he thinks he has a better chance to win if he files his lawsuit in Attala County court. Are you and your business stuck with Mr. Possumneck’s decision? Luckily, the answer is no.
Because Mr. Possumneck sued your business for more than $75,000 and both of you don’t live (lawyers same “domiciled”) in Mississippi, your business can decide to “remove” the case to the federal court in the Northern District of Mississippi. Conventional wisdom is that federal courts, with lifetime appointed judges and a fresh supply of eager law clerks, are more favorable to interstate businesses and are more receptive to technical legal arguments. This same conventional wisdom suggests that state courts, whose judges are often elected on party tickets, are viewed as more beholden to their citizens and more wedded to local notions of fairness.
While there are important nuances and exceptions to these very broad-brush concepts of which court system a business should favor, there is another practical issue: state courts generally require lead counsel to have gone through the lengthy process to be admitted to that state’s bar, while federal courts generally make it a little easier for out-of-state lawyers to get admitted and take lead. This means that in our little scenario, instead of being required to find a lawyer in Mississippi that you’ve never met, you can contact your trusted law firm here in Dallas, Texas to seek admission and represent you in a court using familiar federal procedural rules.
It is worth noting that in state or federal court, the forum state’s substantive law would likely apply in our scenario. Also, even federal courts often require out of state counsel, even after having been admitted on a temporary or long term basis, to work with local counsel. But in any case, your Texas counsel plays a greater role in an out-of-state federal court than in an another state’s court.
The visitor from out of state
To round out the list of possibilities, let’s say Mr. Possumneck visits your store in Dallas, Texas, and drives all the way back to Mississippi with his purchase. The same injury occurs as before, and Mr. Possumneck decides to sue your business in federal court in the Northern District of Mississippi. What are your options then? Short answer: it’s complicated; so much so that the US Supreme Court recently revisited this sort of a scenario.
With no online presence
Suppose your business is not selling anything online. You have one store in Dallas, Texas. You have sometimes been through or to Mississippi but don’t really have any connections (or contacts) there. Can your business be sued in Mississippi when Mr. Possumneck buys from your Dallas store and returns home with your goods? The short answer is probably not. Some exceptions would require a technical analysis given the exact facts involved, but generally, your business could probably not be sued in Mississippi state or federal court.
With an online presence
Let’s say your business has two locations, one in Dallas, Texas, and one in Jackson, Mississippi. Mr. Possumneck purchases a good sold in your Dallas, Texas store and returns to his hometown of Possumneck, Mississippi, and suffers the same injury. Let’s consider the following two scenarios:
- Your business sells things online, but its locations are only in Texas;
- Your business sells things online AND has locations in multiple states (including Mississippi) .
Remembering that Mr. Possumneck purchased the product in your single store in Dallas, Texas in either case, where can you be sued now?
The United States Supreme Court recently (somewhat) clarified where companies with a multi-state presence (online or physically) may be sued in federal courts in a case called Ford Motor Co. v. Montana Eighth Judicial District (consolidated with Ford Motor Co. v. Bandemer). The critical factor in the Ford analysis was determining how frequently and in what quantity your business deals with businesses or individuals in a given state. If your physical presence is just in Texas and only you do occasional business outside Texas, then the occasional sale from the online presence has little bearing on our traveling Mr. Possumneck question; you probably cannot be sued in Mississippi.
With locations in multiple states
What happens when you expand into other states, have an online presence, and the plaintiff travels from a state where you do business only to get injured in a state where you do not do business?
Consider two extreme examples: one being a major auto manufacturer who does a substantial amount of business in most every state; the other is smaller specialty company that does some business across state borders, but happens to do no business in the particular state where it is sued.[7] While the United States Supreme Court decision in Ford provides the relevant method of analysis, it has not specifically identified where the tipping point is between these two extreme examples.
So, where can your business be sued? If you’re as big as Ford, your business can be sued just about anywhere, regardless of where the product originated. Suppose your business isn’t involved in any way (online sales or physical location) in a given state other than a customer taking your business’s product to that state themselves. In that case, your business likely can’t be sued there. The middle ground is harder to predict, other than to say that once you go from a single store to having a website, to having multiple locations across state lines, at some point you have enough contact with each state where someone bringing your product there exposes you to having to defend a lawsuit in that forum.
Conclusion
When someone crosses state lines with your products, and then gets injured, the Ford case at least lets you get into the specifics to argue that your business is not nearly as large and established in the target forum state as Ford is, and so a plaintiff should bring his lawsuit in a Texas forum. This gives little peace of mind to small and mid-market business owners with movable products and locations in multiple states. Moreover, having locations, service affiliates, and other arrangements to service products in multiple states is something that your customers may want, and which may give you some competitive advantage. These are not merely theoretical issues.
As a business owner, you simply need to weigh whether, in the aggregate, you are establishing enough of a contact with another state that you risk getting sued not just by people who buy your goods there, but also by people who take your goods there as well. If you are a seller of, say, specialty outdoor gear, you may need to think about what relationship you want to have with those states popular with outdoor recreational tourists. If you make musical and recording gear, you need to think about forums where your customers take your goods to engage in performances. Everyone from candy makers to tire manufactures faces similar questions.
If you are aware of a pending risk of suit, if you’ve been sued, or if you are just looking for insight and counsel as you decide whether the next phase of expansion is worth it, we at the Sul Lee Law Firm are ready to help. Let us know if we can be of service.
[1] https://www.sba.gov/sites/default/files/files/rs265tot.pdf
[2] http://www.fulbright.com/mediaroom/files/FJ0536-US-V13.pdf
[3] See Tex. Civ. Prac. & Rem. Code §15.002(a)(1)
[4] See Tex. Civ. Prac. & Rem. Code §§ 25.003; 25.592
[5] Tex. Civ. Prac. & Rem. Code §15.002(a)(1)
[6] And the second most difficult question is, where exactly is Possumneck, Mississippi?
[7] Walden v. Fiore, 571 U.S. 277, 134 S. Ct. 1115 (2014).