The global marketplace afforded by e-commerce poses risks that may be addressed by including arbitration clauses in online contracts. Placing millions of consumers one click away from completing a transaction creates the risk of millions of consumers filing lawsuits in their hometowns or, worse yet, joining in a class action lawsuit. Consider the following true story.
A California corporation, Handa-Lopez, Inc., maintains an Internet site that allows users to purchase tokens and play casino games on the site. The server for the Web site is in California, and Handa-Lopez's principal place of business is in California, but the Web site is continually accessible to every Internet consumer in the world. A Texas consumer, Tom Thompson, enters an online contract to play games on Handa-Lopez's Web site. Included in the contract is an arbitration provision, which provides that all disputes shall be resolved by binding arbitration in California. Thompson plays games on the Internet site and attempts to redeem online tokens for $193,728.40, but Handa-Lopez refuses to pay.
Thompson files a lawsuit in Texas, alleging breach of contract, fraud, and violations of the Texas Deceptive Trade Practices Act. Relying on the arbitration clause in the online contract, Handa-Lopez files a motion asking the court to dismiss the action or transfer it to California. The Texas court finds that it has jurisdiction over Handa-Lopez, based on Handa-Lopez's contacts with the State of Texas through its Internet transactions with Thompson. The court also finds the arbitration clause does not require that the dispute be resolved in California because the clause was inconspicuously buried within a multi-page contract and did not give Thompson sufficient notice that California was a possible forum. Ultimately, Handa-Lopez must defend the lawsuit in Texas, where it may be subject to treble damages under the Texas Deceptive Trade Practices Act, punitive damages, and a jury of Thompson's peers. Thompson v. Handa-Lopez, Inc., 998 F. Supp. 738 (W.D. Tex. 1998).
The Handa-Lopez litigation highlights the risk of doing business on the Internet without a binding arbitration clause. Although the chief benefits of arbitration are the same for brick and mortar and click and mortar businesses (i.e., arbitration is generally quicker and cheaper than litigation), e-commerce magnifies the risk that click and mortar businesses will be subject to jurisdiction in the user's home state and adds importance to arbitration clauses' added benefits of ensuring a nearby forum for resolution of the dispute and removing the specter of class action litigation.
In the few reported decisions on this topic, courts generally have divided Internet sites into three categories for jurisdictional purposes: (1) sites that allow the parties to transact business and enter contracts online, which subject the site host to jurisdiction where the user is found; (2) passive sites that merely make information available to the user, which do not provide a basis for jurisdiction where the user is found; and (3) interactive sites where a user may exchange information with the host computer, which may provide a basis for jurisdiction where the user is found, depending upon the nature and quality of the information exchanged. Significantly, however, a passive site has provided a basis for jurisdiction in at least one decision. Therefore, in assessing risks, Internet businesses should assume their Web site could subject them to jurisdiction in their users' home states. If given the option, users will choose to litigate in their hometown and take advantage of punitive damages provisions of local laws, which will be interpreted and applied by a local judge and jury. Internet businesses will not only be forced to face a local judge and jury but also will incur the expense of travelling to the consumer's hometown and hiring local counsel in that jurisdiction.
E-commerce also enhances the risk of a class action lawsuit by allowing businesses to reach millions of consumers instantly, rather than wait for the slow, deliberate growth of a customer base through physical expansion into adjoining states. Unlike the court system, arbitration does not have a class action mechanism. Instead, disputes are arbitrated on an individual basis.
Thus, in the world of e-commerce, arbitration's additional benefits of ensuring a nearby forum for resolution of the dispute and removing the specter of class action litigation take on added importance. Online agreements may include an arbitration provision with a forum selection clause (e.g., the arbitration shall be conducted in Atlanta, Georgia) and a choice of law clause (e.g., any disputes concerning this agreement shall be resolved in accordance with the law of the State of Georgia).
Having discussed the advantages of using arbitration clauses in online agreements, it is important to note that the enforceability of online arbitration clauses is an open question. The Federal Arbitration Act, 9 U.S.C. § 2, presently requires an agreement to arbitrate to be in writing. Whether an online contract with an electronic signature will qualify as a written agreement under the Federal Arbitration Act remains to be seen. Moreover, electronic signatures are not yet widely accepted. Thus, caution counsels backing up electronically signed contracts with a requirement that the user print, sign, and return the contract.
Assuming an online contract may qualify as a writing under the Federal Arbitration Act, it is also important to make sure the arbitration clause meets the other requirements for enforceability. In traditional written agreements, the enforceability of an arbitration clause generally depends upon whether the clause is sufficiently clear and conspicuous to put the contracting party on notice that he or she is waiving the right to litigate, i.e., the arbitration clause may not be inconspicuously buried within a multi-page contract as in the Handa-Lopez case. The Handa-Lopez court found that a reasonable person would not have noticed the arbitration clause. Online contracts could be used to prevent this finding. For example, the user may be forced to move through the contract page by page before electronically signing the agreement and transacting business on the site. If the arbitration provision is prominently displayed on one screen in this process, it will be difficult for the user to argue that the provision was not sufficiently conspicuous to put a reasonable person on notice.
In short, Internet businesses may use online arbitration agreements, in connection with choice of law and forum selection clauses, to manage the risks of litigation in remote forums and class action litigation. Without online arbitration agreements, click and mortar businesses may be forced to stand before a jury in the user's hometown, facing punitive and statutory damages under the law of the user's home state.
C. Celeste Creswell (email@example.com) is an attorney in the technology practice group at Altman, Kritzer & Levick, P.C. (www.akl.com), an Atlanta-based law firm with offices in Chicago and New York City. Creswell practices in the areas of technology litigation and general commercial litigation.