E-Commerce ADR Growth in the USA and the Lessons for the UK

April 30, 2005

Statistics show that consumers in both the UK and USA are rapidly discovering the intricacies of e-commerce. E-commerce is the virtual wave of the future, “possibly the fastest growing business segment that has ever existed. . . . It is estimated that 63% of the online population will be purchasing goods and services over the Internet by 2006. Furthermore, it is perceived that the total value of e-commerce transactions around the world should reach US $1 trillion in 2003, and over $6 trillion in 2005.”[1] “” In the wake of this immediate history, Bill Gates’ prophetic words ring more loudly than ever: “The Internet changes everything. The newest innovations which we label information technologies, have begun to alter the manner in which we do business and create value, often in ways not readily foreseeable even five years ago.”

Change does not, however, come without cost. With the convenience and market diversity of e-commerce comes a subtle but definitive societal change. The most significant attribute of virtual commerce lies in its transcendence of spatial and geographic limitations. This very advantage carries with it a significant disadvantage in the event of a dispute. Consumers, often geographically distant from sellers, require an effective and reliable means of dispute resolution. Absent such systems, e-commerce loses its immediate appeal as consumers find themselves at a loss, both literally and figuratively, with little recourse when dissatisfied with an online transaction.[2] The operative question becomes, how can disputes involving only modest amounts of money be reconciled when the parties have never met, and reside hundreds of miles distant or across international borders?

The answer, like the transaction, is ideally found “online.”

The American solution to the problem of e-commerce generated disputes is generally found in a proliferation of online companion ADR agreements whose provisions provide “alternatives” to the courthouse. The high rate of propagation of such agreements creates a subtle yet defined shift in society’s approach to dispute resolution. Thus, American users of popular online enterprises are discovering that they are likely to be party to binding legal agreements requiring that they engage in one or more forms of alternative dispute resolution either in lieu of or as a condition precedent to going to court.

Consumerism has thus become a vehicle for societal change. By agreeing to buy online, consumers are agreeing to forego traditional forms of dispute resolution in favor of alternatives. The sheer numbers of such transactions command attention, heralding the rise of non-traditional dispute resolution mechanisms whose full import is not yet understood.[3]

E-Commerce and Alternative Dispute Resolution

As in America, expanded Internet commerce in the UK and EU creates a need for cross-border ODR, or online dispute resolution. Such dispute resolution mechanisms must, by definition be alternative to traditional methods in use before the widespread integration of e-commerce and the Internet. In the UK, alternative dispute resolution “has been seen to be a consumer friendly means of redress that has the benefits of being relatively quick, non-legalistic and cheap when compared to pursuing a complaint through the court process.”[4]

The EU has underwritten a consumer-focused ADR plan — the “European Extra-Judicial Network” — “a European Union project designed to be an important tool in the consumer adviser’s kitbag when trying to resolve a client’s cross border consumer complaint relating to goods and services.” The Web site – http://www.eej‑net.org.uk – offers EU consumers, and specifically UK consumers, an opportunity to engage in ODR in the case of an online dispute. The “European Extra-Judicial Network” declares:

“We can give you advice and information on your rights as a consumer in the European Union and help you to solve problems with goods and services you have purchased in the EU.”

Among the services offered by the “European Extra-Judicial Network” is information regarding “Alternative Dispute Resolution.” Specifically, the EEJ Network says that they “help people send cross border consumer complaints to a relevant ADR scheme in the trader’s country” helping “UK residents find ADR schemes in the rest of the European Union and non-UK residents find ADR schemes in the UK.” “The main thrust of the proposal is the setting up of a ‘one-stop clearing house’ in each Member State. It is anticipated that disputes over deliveries, defective products and services, other consumer interests should be dealt with by a single, one-stop national contact point or ‘clearing house’. This clearing house will be entrusted with the task of providing the consumer with information and support in making a claim to the out-of-court dispute resolution system in the country where the business from which the products or services were acquired is located.”[v]. One EEJ Network link provides information to various “ADR schemes” for various consumer activities, including complaints involving lawyers.[vi]

How does this translate at the individual level? Ruth Bamford notes that the initial or first step for any consumer lies with the seller. When “resolving a UK query, a consumer should be encouraged to first approach the trader or supplier to seek a resolution to their query.” The user-consumer is frequently faced with terms and conditions of sale or use which, as a result of a consummated online transaction, commonly requires agreement to some form of alternative dispute resolution as a condition of purchase or access. These terms and conditions are often bewildering to the user-consumer, who, in a rush to access information, continue in a Web site or consummate a purchase, “clicks” through the “fine print” to get to the “good stuff,” little knowing that he has now agreed to forego a formal remedy in the event of a dispute.

Consider certain sites and their attendant terms and conditions. An example of the passive “browser wrap” agreement is found at the American site Overstock.com. That site contains the language:

“Entering the Site will constitute your acceptance of these Terms and Conditions. If you do not agree to abide by these terms, please do not enter the site.”

The user entering the Web site thus agrees, absent any other affirmative “click” (otherwise required if one were to become a registered member/user of Overstock.com), to abide by the terms and conditions of use, simply by virtue of the user’s presence on the site.[vii]

Overstock.com is an online seller of goods as well as an online auction, similar to the more well-known site, eBay.com. Once entering the site, the user agrees to “Terms and Conditions” which contain the following additional language regarding dispute resolution:

Any dispute relating in any way to your visit to the Site or to products you purchase through the Site shall be submitted to confidential arbitration in Salt Lake City, Utah, except that, to the extent you have in any manner violated or threatened to violate Overstock.com’s intellectual property rights, Overstock.com may seek injunctive or other appropriate relief in any state or federal court in the State of Utah, and you consent to exclusive jurisdiction and venue in such courts. Arbitration under this agreement shall be conducted under the rules then prevailing of the American Arbitration Association. The Arbitrator’s award shall be binding and may be entered as a judgment in any court of competent jurisdiction . . . (emphasis added)

Overstock.com has created a broad arbitration clause as regards entry onto the site and any subsequent purchase of products from the site, except that it has carved out a violation of its intellectual property rights, preserving the remedies available to it through the courts. Any other dispute is placed before an arbitrator.

Looking further, one finds similar terms in place on other, popular internet sites. At Amazon.com the Conditions of Use kick in upon a “visit” to the site:

By visiting Amazon.com, you agree that the laws of the state of Washington, without regard to principles of conflicts of laws, will govern these Conditions of Use and any dispute of any sort that might arise between you and Amazon.com or its affiliates.

Reciting language precisely like that found at Overstock.com, Amazon.com provides for arbitration in Seattle, Washington.

Both clauses arguably suffer from the potential infirmity of denial of access to a forum; with corresponding potentials for unenforceability. In part, these concerns arise because of the very nature of the online enterprise. With a “presence” virtually anywhere in the nation, dispute resolution is nonetheless limited to a single geographic location requiring the disputant appear personally, notwithstanding the fact that he or she may reside literally thousands of miles distant.

By contrast, consider the American site, eBay.com. At the bottom of each page of the site appears the following language:

Use of this Web site constitutes acceptance of the eBay User Agreement and Privacy Policy.”

Within the User Agreement appears the additional language:

You must read, agree with and accept all of the terms and conditions contained in this User Agreement and the Privacy Policy, which include those terms and conditions expressly set out below and those incorporated by reference, before you may become a member of eBay . . .

eBay.com adopts both a “browser wrap” agreement for all those who “use” the web site; and a “click wrap” agreement for those who actually become “eBay members.” That is, to become an eBay member you must “click” that you agree to the User Agreement. This then binds you to a comprehensive alternative dispute resolution agreement which includes both the option to arbitrate or seek judicial resolution. eBay.com asserts that in the event of a dispute, its goal “is to provide you with a neutral and cost effective means of resolving the dispute quickly.” The result is a tiered dispute resolution system to resolve “any claim or controversy at law or equity that arises out of this Agreement or our services.” The would-be disputant is first asked to “contact us directly” “before resorting to these alternatives.” eBay.com says it will then consider “reasonable requests to resolve the dispute through alternative dispute resolution procedures, such as mediation, as an alternative to litigation.”

Thereafter, disputes are divided according to the total amount of the claim. For disputes “less than $10,000″ either party may elect to “resolve the dispute through binding arbitration.” Interestingly, eBay.com solves the denial-of-access problem by creatively proposing alternatives suited to its status as a net-based enterprise. Specifically, the agreement provides that binding arbitration may be conducted “by telephone, online and/or based solely on written submissions where no in-person appearance is required.” Litigation, in the face of an otherwise valid agreement to arbitrate, is no longer an option, so long as the dispute falls within the parameters carved out by the agreement.

Where the amount in dispute equals or exceeds $10,000, the eBay.com user agreement specifies court “in Santa Clara County, California or where the defendant is located,”[viii] or “alternatively . . . use of other alternative forms of dispute resolution…to be held in Santa Clara County, California or another location mutually agreed upon by the parties.”

Now consider the UK site, ebay.co.uk. Like its American counterpart, its homepage contains the advisory: Use of this Web site constitutes acceptance of the eBay User Agreement and Privacy Policy. Review of the accompanying hyperlinked “User Agreement and Privacy Policy” reveals a broad disclaimer in the event of a dispute with another e-bay.co.uk member such that the user releases the site “from all claims . . . arising from or in any way connected with such right, claim or action Additional provisions within the Agreement reinforce this, including limitations on liability for economic loss, loss of goodwill, revenues or profits, as well as disclaimers for loss of service, and an indemnity from the user/member to ebay.co.uk for any loss occasioned by the members breach of the Agreement or violation of law.

Most notable, however, is the dramatic difference in provisions relating to Dispute Resolution. Instead of the broad-reaching alternative dispute resolution mechanism employed by its sister-American site, the UK site simply provides:

Disputes between you and eBay regarding our services may be reported to eBay Customer Support. We encourage you to report all disputes between users to your local law enforcement body.

The dramatic difference between the two sites is indicative of the difference in the law between the UK and the USA. Whereas the US site contains extensive online ADR mechanisms which bind the user/member in the event of a dispute with eBay.com, the UK site contains only the polite advisory that the user/member report to “Customer Support.”

Still, online alternative methodologies are gathering momentum in the UK “A number of service providers are now up and running. Intersettle.co.uk, for example, has been taking case referrals and offering a blind/open bidding service since March 2001 and has the backing of a number of firms drawn from key industries such as the legal field and insurance sector. Other sites such as esettle.co.uk and wecansettle.co.uk offer similar bidding services and are reporting a steady stream of cases. . . and onlineresolution.com offers mediation in addition to a whole range of other dispute resolution techniques.”[ix]

The American Lesson and E-Commerce

American courts have, as a result of the differences in law, already experienced extensive exposure to the give and take of online ADR agreements. While it is not likely that dramatic changes in UK law will result in a replication of American-style ADR online contracts, the lessons are nevertheless informative.

For example, online arbitration clauses have not gone unchallenged in the US In Comb v Paypal, Inc., 218 F.Supp. 2d 1165 (N.D. Cal. 2002), the US District Court for the Northern District of California found that Paypal’s online arbitration agreement was “substantively unconscionable.” First, the agreement was found unconscionable because it refused to allow its members to consolidate claims, yet requires “arbitration in accordance with the commercial arbitration rules of the American Arbitration Association” with likely “prohibitive arbitration fees” notwithstanding amounts in dispute far less than the fees required for individual commercial arbitration before the AAA.[x] Second, the court found Paypal’s forum selection clause difficult to justify, commenting:

The record in this case shows that Paypal serves millions of customers across the United States and that the amount of the average transaction through Paypal is less than $55.00… Paypal cites no California authority holding that it is reasonable for individual consumers from throughout the country to travel to one locale to arbitrate claims involving such minimal sums. Limiting venue to Paypal’s backyard appears to be yet one more means by which the arbitration clause serves to shield Paypal from liability instead of providing a neutral forum in which to arbitrate disputes.?”

Compare, however, the case, Manning v Paypal, Inc., decided by the US District Court for the Middle District of Pennsylvania. Citing the same arbitration agreement, the court never reached the question of substantive unconscionability, concerned only with “whether the dispute between the parties falls within the language of the arbitration agreement.” The court noted that the parties do not dispute the existence of the agreement, analysing the case in terms of the scope of the arbitration clause, and ultimately finding that:

“ [T]the language at issue in the instant case is very broad. By its own terms it states that arbitration is to be applied to any controversy or claim arising out of or relating to the Agreement or the provision of services” and that “the dispute certainly falls within the provisions of the arbitration agreement.”

Two courts construing the same agreement thus arrive at two distinctly different results; the Pennsylvania court seemingly not at all troubled by the fact that its resident would have to travel literally 2,000 miles to Palo Alto, California to resolve what appears to be an $87.00 claim.

In Defontes et al. v Dell Computers Corporation, 2004 R.I. Super. LEXIS 32, 52 U.C.C. Rep. Serv. 2d (Callaghan) 823, the Rhode Island state court construed an arbitration agreement on Dell’s Internet site in the form of a “browser wrap” agreement. The court found, inter alia, as in Specht v Netscape Communications Corp, that Dell’s “hyperlink, inconspicuously located at the bottom of the webpage . . . was not sufficient to put Plaintiffs on notice of the terms and conditions of the sale of the computer.” The browser wrap could not, therefore, “bind the parties to the arbitration agreement.”

The court went on to analyse the actual arbitration agreement, finding, apart from its earlier determination, that even if the parties were to be found to have entered the agreement, that it was substantively unconscionable. Citing Comb v Paypal, the court observed that Dell’s retention, like Paypal’s contract, of the unilateral right to “amend the User Agreement without notice or negotiation” while nevertheless binding the customer to all such future amendments, produced an “illusory and therefore unenforceable” agreement.

In spite of the high-tech environment and paperless “virtual” world of the Internet, courts have continued to apply traditional contract rules to questions of contract formation and enforcement. Two cases are illustrative. In Raley v Michael,[xi] the court was faced with an action between two eBay.com members.[xii] The defendant asserted that the online arbitration agreement contained in the eBay.com membership agreement subsumed the plaintiff’s legal action, and argued that the case must be dismissed in favor of arbitration. Examining the question carefully, the court concluded that the eBay.com User Agreement did not govern the relationship between individual members, but only between the member and eBay.com, the court finding that “arbitration is only required as to disputes between subscriber and eBay.” The court looked to eBay.com’s own interpretation of the User Agreement as set out in the site’s FAQs:

“Q. Why is there a User Agreement?

A. The User Agreement is a legal document that spells out the relationship between you and eBay. It outlines the services, pricing, Privacy Policy, and the buyer and seller relationship for listing and bidding on items in eBay’s auction format.”

In a similar case, Evans v Matlock,[xiii] plaintiff was the winning bidder in an eBay.com online auction for an antique Dr. Pepper dispenser. The defendant, however, sold the machine to another, and in response to the resulting legal action, contended that the suit must yield to arbitration. Once again, the eBay.com User Agreement, and specifically paragraph 17 (“Arbitration”) was subject to the court’s scrutiny. The court examined the language of the User Agreement, noting that it provides that “eBay is only a venue, and that ‘we are not involved in the actual transaction between buyers and sellers.’” The court found that the User Agreement was unambiguous and that the defendant’s attempt to create an ambiguity where there was none, renders the agreement “enforceable according to its terms.” “The Agreement,” said the court, “cannot be construed, as insisted by appellant, to require that disputes between users must be arbitrated in San Jose, California.”

Thus, traditional rules of contract appear to hold sway despite the decidedly non-traditional environment within which such contracts are found. Still, the virtual environment creates potential for variations in legal insight, and continued demand for creative undertaking.

The American lesson is evidenced in the staggering numbers of users engaged in internet activity. eBay, for example, is thought by some to be among the ten most successful Web sites. It reportedly had 34.1 million registered users in the US in 2001 and nearly 50 million people around the world” in 2002.

In the wake of a continuing shift to e-commerce, a greater number of persons in the US will find themselves party to “User Agreements” or “Terms and Conditions” as a result of a virtual “click” — agreements which include, minimally, limitations of contractual liability, as well as a growing number of mandatory arbitration clauses. The proliferation of e-commerce will necessarily drive others, in jurisdictions such as the UK, to online alternatives, commonly referred to as online dispute resolution.

Will e-commerce eventually remove the courthouse or other forms of traditional dispute resolution from the mainstream equation? Not likely, but it marks a distinctive cultural shift, which, while often unseen, is tangibly reaching into everyday lives to bind an ever-increasing number of persons to cyber-agreements about which many remain unaware.

Jeffrey S Wolfe is a federal administrative law judge with the U.S. Social Security Administration, Office of Hearings and Appeals. He is also a member of the adjunct faculty of the University of Tulsa, College of Law.

This article is solely the work of the author and does not reflect the opinion of the Social Security Administration, the United States or any component thereof.

[1] Mohamed Wahab, “Globalisation And ODR: Dynamics Of Change In E-Commerce Dispute Settlement,” 12 International Journal of Law and IT 123 (March 2004).

[2] “The development of electronic commerce and new distance selling methods are likely to lead to a higher risk of disputes across frontiers. If things go wrong, resorting to traditional litigation is neither practical nor cost effective for consumers and business alike.” “EC Developments — Developments In Alternative Dispute Resolution In The EC,” Finance & Credit Law (May 5, 2000).

[3] See, Mohamed Wahab, “Globalisation And ODR: Dynamics Of Change In E-Commerce Dispute Settlement,” International Journal of Law and IT, (IJL&IT 2004.12(123)) (March 2004):

“Globalisation is a fact of life. But I believe we have underestimated its fragility. The problem is this. The spread of markets outpaces the ability of societies and their political systems to adjust to them, let alone to guide the course they take. History teaches us that such an imbalance between the economic, social and political realms can never be sustained for very long.”

[4] Ruth Bamford, “E-Commerce: Introducing the European Extra-Judicial Network,” IT Law Today (ITLT 10.6(16)), (August 2002).

[v] “EC Developments — Developments In Alternative Dispute Resolution In The EC,” Finance & Credit Law (F&CL 2.5(6)) (5 May 2000).

[vi] http://www.eej‑net.org.uk/index/using_your_rights‑2/adr/approved_uk_adr_bodies/legal_services.htm

[vii] It is generally acknowledged that “access to a web site, with knowledge or presumptive knowledge of [terms of use], constitutes an enforceable contract between the site owner and the visitor, with acceptance of the site owner’s terms.” David M. Fritch, “Click Here for Lawsuit – Trespass to Chattels in Cyberspace,” 9 J. Tech. L & Pol’y 31, 37 (June 2004).

[viii] eBay.com User Agreement, ¶ 17 Source: (http://pages.ebay.com/help/policies/user-agreement.html) at ¶ 17.2.

[ix] Bryan Clark, “ODR: The New Kid in Town,” New Law Journal (NLJ 152.7056(1710)) (15 November 2002).

[x] Comb, et al v Paypal, Inc., 218 F.Supp. 2d 1165 (N.D. Cal. 2002).

[xi] 56 Va. Cir. 87; 2001 Va. Cir. LEXIS 444 (2001).

[xii] The plaintiff was a resident of Virginia and the defendant was a resident of Utah. The plaintiff purchased a car through eBay, and it is this transaction which gave rise to the suit. eBay was not a named party.

[xiii] Interlocutory Appeal, Court of Appeals of Tennessee at Nashville (No. M2001-02631-COA-R9-CV, filed December 23, 2002).