The University of Kansas
School of Law
June 29, 2000
I submit these comments for the public workshop on ADR for online consumer transactions. I am a law professor at the University of Kansas School of Law. I have taught and lectured on commercial arbitration to students, lawyers, and judges, in the United States and abroad. I have written both on consumer arbitration in the United States and on international commercial arbitration. I very much appreciate the opportunity to submit these post-workshop comments.
The subject I address in these comments is whether businesses should be permitted to include pre-dispute arbitration clauses in the standard form contracts they use for online consumer transactions. Pre-dispute arbitration clauses commit the parties to arbitrate any disputes that thereafter arise out of the contract, in lieu of proceeding in court. Such clauses are increasingly common in consumer contracts, including contracts governing online consumer transactions. They are fully enforceable under the Federal Arbitration Act, unless some general state law contract defense such as unconscionability applies. 9 U.S.C. § 2. The European Commission in its post-workshop comments and other commentators in their pre-workshop comments, however, contend that pre-dispute arbitration agreements should not preclude consumers from going to court once a dispute arises. While such an approach would benefit the small group of consumers who have disputes, it would harm consumers as a whole by increasing the prices they pay in online transactions.
Benefits of Pre-Dispute Arbitration Clauses. Arbitration offers important advantages for consumers and businesses in resolving disputes in the borderless online marketplace. Arbitration procedures are more flexible than court procedures, and arbitration may be cheaper than court litigation - particularly given the online dispute resolution procedures possible through the Internet. Arbitrators can be chosen for their expertise in the subject matter in dispute. Importantly for transactions in the "borderless" online world, arbitration provides a neutral forum that enables each party to avoid the other's home courts. In such cases, arbitration may reduce or avoid altogether uncertainties about jurisdiction and available fora for resolving disputes. Because of such benefits, arbitration commonly is used to resolve disputes between businesses engaged in international commerce. Estimates are that over 90 percent of such contracts contain pre-dispute arbitration clauses. Consumers, too, should be allowed to continue sharing in these benefits.
It is not enough that parties be able to agree to arbitrate after a dispute arises. Instead, pre-dispute arbitration agreements are necessary for businesses and consumers to obtain the most benefit from arbitration: pre-dispute arbitration clauses enable the parties to share between themselves the benefits of arbitration in ways that are not possible when they have a dispute. For example, one party may benefit from arbitration while the other party does not. At least some consumer transactions likely are of this type, with the business made better off by arbitration but the consumer made no better off or worse off. Arbitration still may be desirable for both parties, however, if the benefits outweigh the costs and the business compensates the consumer - through price adjustments or modifications in other terms - for agreeing to arbitrate. Competition among online sellers is such that much of the cost savings from arbitration almost certainly gets passed on to customers, with the result that all consumers benefit from arbitration. As a practical matter, however, such arrangements are much less likely to happen once a dispute arises between the parties, depriving consumers of the ability to share in the benefits of arbitration.
"Mandatory" Arbitration and Consumers. A common objection to pre-dispute arbitration clauses is that they make arbitration "mandatory." See, e.g., Comments of John Vail (ATLA); Comments of F. Paul Bland, Jr. (Trial Lawyers for Public Justice). The use of the label "mandatory" here is misnomer. "Mandatory" arbitration is arbitration mandated by law. Pre-dispute arbitration clauses in consumer contracts are not mandated by law. As the authors of the leading work on American arbitration law have written:
1 Ian R. Macneil et al., Federal Arbitration Law § 220.127.116.11, at 17:8 to 17:9 (Supp. 1999).
In substance, the objection to arbitration as "mandatory" is an objection to the use of pre-dispute arbitration clauses in standard form contracts, presented to consumers on a take-it-or-leave-it basis. But such standard form contracts are an essential part of a modern economy. Without them, commerce would grind to a halt. Moreover, consumers do have a choice, and here I echo the comments of Professor Stephen Ware: consumers can buy the product from another seller, or not buy the product at all. Particularly in online transactions - in which online sellers can make their contract terms available to consumers before any binding contract is formed and consumers can consider that information in their own homes in deciding whether to buy - consumers are not mandated to arbitrate but voluntarily agree to do so when they choose to buy the product.
Costs of Regulating Consumer Arbitration. Increased regulation of pre-dispute arbitration clauses - such as returning to the common law rule that such agreements can be revoked once a dispute arises - certainly would benefit some consumers: those consumers with disputes who want a jury. Consumers are compensated for agreeing to arbitrate by the reduced price they pay for the goods. That price reduction is based on the probability that a dispute will occur. Not surprisingly, once a dispute arises - when that probability has become a certainly - consumers who have agreed to a pre-dispute arbitration clause may have second thoughts and now find the compensation they received inadequate. But if consumers who have disputes can at that point revoke their agreement to arbitrate, businesses no longer have much incentive to use pre-dispute arbitration agreements in the first place.
The result would be higher prices for all consumers, not just the ones who have disputes. The amount of the resulting price increase is an empirical question that no one has yet answered. But the point remains: whatever the benefits might be of increased government regulation of consumer arbitration for certain consumers, increased regulation also will have costs, costs that will be borne by all consumers who are involved in online transactions.
Private Efforts to Promote Arbitral Fairness. Finally, the online marketplace itself (as supervised by the courts) gives rise to incentives to promote fairness in consumer arbitration. Businesses, who must consider their reputation for fair dealing, are demanding fair, low-cost arbitration services for resolving disputes with consumers. Arbitration institutions that want to attract those businesses, and that want to ensure that their awards will be enforced by courts, are providing such services. Illustrative of these private efforts are the American Arbitration Association's Consumer Due Process Protocol and Arbitration Rules for the Resolution of Consumer-Related Disputes, the National Arbitration Forum's Arbitration Bill of Rights and low-cost consumer arbitration services, as well the online dispute resolution services provided by various of the participants in this workshop. Governments that wish to promote online commerce should foster such private efforts, which will make arbitration an even more attractive means of resolving disputes in online consumer transactions.
Again, I appreciate the opportunity to comment, and hope my comments are useful in your consideration of this important issue.
Christopher R. Drahozal