|April 29, 1999
Dear Mr. Secretary:
Thank you for providing me with the opportunity to comment on what will be the next step in the evolution of consumer protection, the establishment of institutions to protect consumers in a global marketplace; of necessity, these institutions must include some form of dispute resolution.
I would like to strongly endorse the use of alternative dispute resolution to resolve consumer disputes in the global e-marketplace. I note without commenting that arbitration suffers from many of the problems that the "commercial law" of e-commerce experiences. For example, if the Federal Arbitration Act requires that an agreement to arbitrate be in writing, does the exchange of bytes constitute a writing or signature under relevant law? Or similar to the jurisdiction issues in the commercial context, to the degree that the "place of the arbitration" is relevant, where is the arbitral situs and which curial law (lex arbitri) will apply. I assume that these broader commercial law and jurisdictional issues will be addressed in other comments. So my comments will focus on the possible abuse of arbitration thereby rendering it an ineffective means of resolving consumer grievances.
As an institution of private law making, arbitral institutions are readily adaptable to the changing needs of e-commerce and must be encouraged to develop processes and procedures that protect the interests of both e-merchants and consumers. Since the "checks and balances" in the existing model of arbitration may not serve the same purposes for e-arbitration. Moreover, the position of the current administration supports this view. See Framework for Global Electronic Commerce, July 1, 1997, at 8 (suggesting the government should promote "the development of adequate, efficient, and effective alternative dispute resolution mechanisms for global commercial transactions."). Today, the use of arbitrators to resolve domestic and international conflicts among private parties is a well-established and accepted practice. Accordingly, there are well-developed institutions supporting arbitration and a substantial body of domestic and international law than facilitates the enforcement of arbitral awards.
Yet, arbitration agreements, particularly in the mass market shrinkwrapped contract context, can be and are drafted so as to remove state court jurisdiction over the dispute and require submission to an expensive, distant arbitral forum. This effectively diminishes the consumer's prospect for prompt, effective relief. In light of recent cases in which a famous e-merchant's mass market form contract required submission to the International Court of Commerce, and the recent line of United States Supreme Court cases that frustrated state attempts to protect consumers through adequate notice of the arbitration clause or by exempting certain types of disputes from arbitration, federal action is needed to prevent e-merchants from including arbitration terms that effectively render any dispute resolution nugatory. Because under the Federal Arbitration Act, individual states are prohibited from "regulating" arbitration and e-commerce requires at a minimum a national solution, and optimally an international solution, the Federal Trade Commission should regulate arbitration terms as unfair and deceptive trade practices if those terms effectively preclude the consumer from seeking a remedy. As e-commerce grows there will be an increasing need for arbitration and dispute resolution; the FTC should act to ensure that consumers have effective access to arbitration or to other forms of dispute resolution.
Clearly, the FTC's decades of experience with consumer protection legislation (and litigation) demonstrate the need to correct the inherent imbalance between consumers and merchants. The FTC must act because the current commercial law model of arbitration is designed to resolve disputes between members of an industry and not between consumers and merchants. Some parties in commercial arbitration share common values and seek to use arbitration to preserve and enhance their relationship, the ordering of commercial arbitration may be left to private law making. But, in e-commerce the intra-industry merchant v. merchant model is not be representative of most disputes nor will the current international commercial arbitration paradigm of a separately negotiated agreement tailored to each specific deal. The commercial arbitration paradigm in the consumer context must change and provide substantive and procedural protections to consumers if it is to serve the needs of consumers (and small businesses) in the e-marketplace.
The FTC should support laws and policies that will encourage the self-development of arbitral institutions that will administer their mandate to do justice fairly and to establish customs that future generations of e-commerce consumers will follow because these customs meets the need of cyberians in a technologically and socially evolving environment. Failure to encourage the establishment of institutions which create a fair process for adjudication in cyberspace will unfortunately result in numerous nations attempting to regulation consumer transactions in cyberspace which will create a host of inconsistent laws and will either increase the costs of e-consumer transactions or deny consumers the intended benefits of global e-commerce.
Encouraging enhanced standards of substantive and procedural rights before arbitral bodies should have little effect on existing commercial arbitration practices. These changes may require abandoning the elegant simplicity of traditional commercial arbitration and encouraging it to institutionalize norms akin to "due process and fair play" when arbitration disputes involve unsophisticated e-consumers. Establishing due process and fair play will not require active judicial, legislative, or agency intervention into the arbitration processes, but rather require policies that facilitate enforcement of arbitral awards which are reached through a fair and just process. Courts while not reviewing any more extensively than they currently review arbitral awards as to law or fact should be free to examine the process by which the award was rendered for fundamental fairness. Sliding standards of judicial review of the process that lead to the arbitral award would provide an economic and judicial incentive for arbitral institutions to develop processes that promote a level playing field. Procedural processes that are inherently unfair would result in arbitral awards that would receive more Arguendo in the end even merchants will prefer a level playing field replete with sufficient due process to ensure fair adjudication and adopt similar substantive and procedural rules to govern their disputes.
As the e-consumer community grows, and the value of e-commerce increases, e-commerce disputes will become more common and the need for formal dispute resolution mechanisms for consumer-commercial transactions will become more pressing. The heterogeneous culture and evolving technology of the global marketplace will require a flexible method of law making and adjudication. There is no sovereign governing e-commerce in a global marketplace, and no one nation state exercises sovereignty over the entirety of it. Nation-states have already surrendered their sovereign prerogative to resolve many different types of disputes to arbitral forums so the lack of a sovereign- in-cyberspace does not affect the legitimacy of the award. Further, the communicative nature of global e-commerce makes it uniquely suited to a legal regime based on contract law. So whether the legitimacy of the arbitration process depends on a surrender of sovereign power or on the consent of the parties to the dispute, there is ample basis for legitimate arbitral awards to be rendered in cyberspace. Regardless of the theoretical jurisprudential basis for accepting the legitimacy of the arbitration award, such awards are readily enforceable in the domestic courts of the United States and readily transformed into foreign judgments in the courts of other countries.
Hence, binding dispute resolution in an e-commerce global marketplace must rely on dispute resolution paradigms such as arbitration, which are well established and already recognized under multilateral and bilateral treaties. Arbitration may be the best hope for formal adjudication in of global e-commerce -- in fact, the more sophisticated disputants may find it the most efficient method of dispute resolution. The use of arbitrators to resolve domestic and international conflicts among private parties is a well-established and accepted practice. Accordingly, there are well-developed institutions supporting arbitration and a substantial body of domestic and international law that facilitates the enforcement of arbitral awards.
The essential characteristics of arbitration make it particularly attractive for e-commerce. The three essential characteristics of arbitration are that it is consensual, involves non-governmental decision-makers, and the decision is definitive and binding. Through contract, the disputants create private law and private courts to adjudicate their dispute. So long as their own private laws are applied, they have contract for and achieve private justice when the dispute is adjudicated by a neutral decision-maker of their choice. Another important characteristic of an arbitration agreement is that it is severable from the underlying contract. This is so because arbitration clause is an independent and a separate agreement supported by independent and separate consideration; therefore, challenges to the existence, validity, and enforceability of the underlying contract have no affect on the validity of the arbitration clause.
Decades of consumer legislation (and litigation) demonstrate the need to correct the inherent imbalance between consumers and merchants. But the current commercial law model of arbitration is designed to resolve disputes between members of an industry and not between consumers and merchants. Because the parties in commercial arbitration share common values and seek to use arbitration to preserve and enhance their relationship, the ordering of commercial arbitration may be left to private lawmaking. But, in cyberspace the intra-industry merchant v. merchant model will not be representative of most disputes nor will the current international commercial arbitration paradigm of a separately negotiated agreement tailored to each specific deal apply to most e-consumer v. e-merchant disputes.
There are negative and positive reasons supporting the development of Internet commercial arbitration. "On the negative side, parties may be distrustful of foreign legal practices, political systems and economic structures. On the positive side, commercial arbitration offers privacy, procedural flexibility, and freedom to choose expertised arbitrators." William Grantham, Comment The Arbitrability of International Intellectual Property Disputes, 14 Berkeley J. Int'l L. 173, 175 (1996)(citations & footnotes omitted). Ultimately the best reason for arbitration is that public law making is too rigid, too slow to respond to the need for immediate adjudication, and too slow to adapt to changes in the social, technological, and commercial customs of cyberspace. Where private law making is flexible and readily adapts to the diverse evolving technological and social nature of cyberspace and its evolving commercial practices.
The model of arbitration that gained acceptance in the 1920s [and today] involved primarily resolution of disputes between members of an industry. In such cases, all parties are members of the community that established the arbitration process and all are likely to know and accept the norms and customs that govern the industry. There is no pressing need for legal accountability when the parties share a strong set of legally acceptable values and seek to use arbitration as a means of preserving and enhancing their relationship.
Mark E. Budnitz, Arbitration of Disputes Between Consumers and Financial Institutions: A Serious Threat to Consumer Protection, 10 Ohio St. J. Disp. Res. 267, 319 (1995)(quoting J. Auerbach, Justice Without Law 101-102 (1983)).
This model is readily transferred into and is readily adaptable to cyberspace except for the last sentence. In cyberspace, there may not be a sharing of legally acceptable (common) values nor may there be a relationship to preserve. The flexible nature of the arbitral process readily adapt to the unique environment of cyberspace, and arbitration would permit the global e-marketplace to develop sui generis traditions that befit a computer mediated agora, while using arbitration to maintain and enhance commercial and personal relationships. Yet, the relative anonymity of e-commerce attenuates the "relationship" and the accompanying reputational or social sanctions necessary to serve as a check on the potential abuse of binding arbitration. The constraints on existing arbitration are the on-going commercial relationship that effectively reinforces the reputational and relationship constraints and prevents either party from engaging in arbitral overreaching or arbitration. But the paradigmatic dispute in consumer global e-commerce will be between a series of one time players, so that there will not be reputational or social constraints to prevent the possible abuse of arbitration in cyberspace. This model of arbitration is further complicated by informational asymmetry between the "regular players" (e-merchants) and the one-time players (consumers).
The lack of shared commercial understanding leads to the question of whether the existing arbitration paradigm of the laissez faire creation of obligations to arbitrate and deferential judicial review of arbitral awards will adequately protect the commercial and consumer reality of cyberspace. I contend that it does not. The United States Court of Appeals for the Seventh Circuit in Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert. denied, 118 S. Ct. 47 (1997), extended its holding regarding merchants in ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), to the consumer arbitration context and ordered a "box-wrapped" contract to arbitrate enforced under facts that appear designed to frustrate the consumer's interests in efficient inexpensive dispute resolution rather than further them.
The Hills ordered a $4,000 computer from Gateway 2000, and when the computer did not live up to the Hills' expectations or the representations made by Gateway 2000, they attempted to sue Gateway 2000 in federal court. The Hills filed a class action suit against Gateway 2000, Inc. claiming that Gateway sold its 10th Anniversary computer systems with inferior components. The Hills sued for breach of contract, violations of the Uniform Commercial Code ("UCC"), the Magnuson-Moss Consumer Warranty Act, the Racketeer Influenced and Corrupt Organization Act ("RICO"), the Illinois Consumer Fraud Act (Count VI), and the South Dakota Consumer Fraud Act. The Hills also sought a declaratory judgment that the arbitration, disclaimer, and liability clauses of the contract between the Hills and Gateway were not enforceable.
The Hills purchased a computer from Gateway 2000, Inc. via the telephone. During the phone conversation, there was no mention of the arbitration clause or additional terms of the contract that were not known or arguably knowable until the computer arrived. Outside of the shipping container bore a cautionary legend, and enclosed with the computer, was a "license" with the following arbitration clause:
Any dispute or controversy arising out of or relating to the [sic-- this] Agreement or its interpretation shall be settled exclusively and finally by arbitration. The arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted in Chicago, Illinois,U.S.A. before a sole arbitrator. Any award rendered in any such arbitration proceeding shall be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction.
The district court judge considering this background, found that "'[t]he present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause."' And, Gateway 2000, Inc. immediately appealed.
This dispute involved more than just a mere difference in consumer v. merchant expectations regarding the forum to resolve their dispute. The costs imposed by Gateway 2000, Inc.'s choice of arbitration rendered the cost of seeking a remedy prohibitive. Although not mentioned in the Seventh Circuit's opinion, it would apparently cost the Hills $2000 in arbitration costs to commence to arbitrate their dispute with Gateway 2000, Inc. over a computer valued at approximately $4000. Moreover, these costs do not include arbitrator or attorney fees.
A New York court subsequently considered the same arbitration agreement in Brower v. Gateway 2000, Inc. 246 A.2d 246 (N.Y. App. 1998), and expressly considered the unconscionability provision. In Brower, the plaintiff's claimed that [arbitration] provision was obscure; that a customer could not reasonably be expected to appreciate or investigate its meaning and effect; that the International Chamber of Commerce ("ICC") was not a forum commonly used for consumer matters; and that because ICC headquarters were in France, it was particularly difficult to locate the organization and its rules. To illustrate just how inaccessible the forum was, appellants advised the court that the ICC was not registered with the Secretary of State, that efforts to locate and contact the ICC had been unsuccessful and that apparently the only way to attempt to contact the ICC was through the United States Council for International Business, with which the ICC maintained some sort of relationship. Id. at 249.
Further, the cost of ICC arbitration was prohibitive, particularly given the amount of the typical consumer claim involved. For example, a claim of less than $50,000 required advance fees of $4,000 (more than the cost of most Gateway products), of which the $2000 registration fee was nonrefundable even if the consumer prevailed at the arbitration. Consumers would also incur travel expenses disproportionate to the damages sought, which appellants' counsel estimated would not exceed $1,000 per customer in this action, as well as bear the cost of Gateway's legal fees if the consumer did not prevail at the arbitration; in this respect, the ICC rules follow the "loser pays" rule used in England. Also, although Chicago was designated as the site of the actual arbitration, all correspondence must be sent to ICC headquarters in France.
Id. at 250. My research indicates that the International Court of Arbitration charges a minimum administrative fee of $2,000 for cases involving up to $50,000 to a maximum of $50,000 in cases involving over $50,000,000. The arbitrator's fees vary from a minimum of $1,000 to a maximum of $50,000 if the dispute is over $100,000,000. Accordingly, the minimum fee, excluding the costs of using an arbitral institution located in Paris, France to administer an arbitration in the United States is $3,000. Considering the costs involved with using the ICC, the Brower court held:
With respect to the substantive element, which entails an examination of the substance of the agreement in order to determine whether the terms unreasonably favor one party we do not find that the possible inconvenience of the chosen site (Chicago) alone rises to the level of unconscionability. We do find, however, that the excessive cost factor that is necessarily entailed in arbitrating before the ICC is unreasonable and surely serves to deter the individual consumer from invoking the process. Barred from resorting to the courts by the arbitration clause in the first instance, the designation of a financially prohibitive forum effectively bars consumers from this forum as well; consumers are thus left with no forum at all in which to resolve a dispute. In this regard, we note that this particular claim is not mentioned in the Hill decision, which upheld the clause as part of an enforceable contract.
Id. at 255. The New York Court then ordered the parties to arbitration before the American Arbitration Association. While the AAA rules and costs were not part of the record before the New York Court, the parties agreed that there is a minimum, nonrefundable filing fee of $500, and Brower claimed each consumer could spend in excess of $1,000 to arbitrate in this manner. For example, the American Arbitration Association charges $150-$200 per hearing day plus processing fees of $150-$200 for each 90 days in addition to the arbitrator's fees. While this decision does provide a less costly and more reasonable alternative to arbitrating before the ICC, it still requires a substantial outlay to pursue the arbitral remedy, and to pay administrative and procedural costs that are borne by the state, if the matter proceeded to trial in a state court.
After Hill, Gateway 2000, Inc. changed its arbitration provisions to allow for arbitration before the American Arbitration Association. This change is a good first step and has reduced some of the costs. Still there are even cheaper more flexible arbitral institutions that could be used.
Relatively unsophisticated consumers will increasingly enter the global e-market place to engage in commerce. Eventually, this will lead to disputes. The FTC should consider whether it desires to enshrine existing commercial arbitration practices in the consumer context as a matter of national policy or should it level the merchant v. consumer playing field. As was discussed, supra, merchants will draft mass-market licenses to maximize their legal protection. These same merchants who set the rules of commerce through contract; also through contract are able to specify the arbitrator. Court have long recognized this as a danger "[b]y first making the contract then by declaring who should construe it, the strong could oppress the weak, and in effect so nullify the law as to secure the enforcement of contracts usurious, illegal, immoral, or contrary to public policy." Parsons v. Ambos, 48 SE 696, 698 (Ga. 1904).
So, the regulation of arbitration in cyberspace requires a weighing of the societal interest in "fairness," and its interest in resolving the dispute through state court adjudication versus the interest of particular parties in having their contractual dispute resolution procedure followed. In striking this balance, governments should allow maximum freedom to structure private dispute resolution. Thus, government should avoid adopting new pro-consumer regulations. Rather, government should adopt regulations that encourage arbitral institutions that establish procedures that approximate due process and fair play. The best method for so doing this to alter the standard of review when a party seeks to reduce the arbitral award to a state court judgment. Instead of imposing procedures on consumer disputes in global consumer e-commerce, governments should specify minimum default procedural rules. An award made under these rules would receive the same judicial deference that currently all arbitration awards enjoy. But, arbitration institutions without such rules or procedures would find awards made under their rules subject to heightened judicial review with the ultimate sanction de novo review as to both law and facts.
The commercial arbitration paradigm must change in the consumer global e-commerce context and provide substantive and procedural protections if it is to serve the need to adjudicate disputes. The commercial arbitration paradigm must change in the cyberspace context and provide substantive and procedural protections if it is to serve the need to create law and adjudicate disputes in cyberspace. Already, we are seeing the future dangers of unchecked arbitration. Arbitration clauses that through choice of arbitral forum, arbitral institution, or other substantive or procedural rules render the arbitration option nugatory. The changes necessary to prevent cyberspace from becoming another Wonderland with the arbitrator and arbitration process functioning like the King and Queen of Hearts require abandoning the elegant simplicity of traditional commercial arbitration and requiring it to develop something akin to "due process" and "fair play." So, arbitration in consumer e-commerce must be responsive to some institution or policy outside the will of the contracting parties. Especially when this "will" is embodied in the form of an unnegotiated mass-market shrink-wrapped "contract" .
The options for regulating dispute resolution in cyberspace range from "do nothing" to encouraging the development of arbitral institutions that provide both the appearance and reality of unbiased dispute resolution to banning or creating a special statutory regime for these disputes.
The potential policies of "do no harm" and "a special statutory regime" should yield to the adoption of laws and policies that will encourage the development of Self-Regulatory Organizations (SROs) or arbitral institutions that will administer their mandate to do justice. This should be done by shifting standards of judicial review depending on the amount of "process" provided by the SRO.
Again, thank you for the opportunity to comment on consumer issues in the global marketplace. If I can be of assistance, please contact me. The opinions expressed in this letter are my own and do not necessarily reflect those of the University of Toledo College of Law.
Yours very truly,
Llewellyn Joseph Gibbons