Drafting Enforceable Arbitration Clauses for Online Businesses by EricGoldman and Chris Smith

Drafting Enforceable Arbitration Clauses for Online Businesses

By Eric Goldman and Chris Smith


Due to the worldwide availability of websites, online businesses potentially may have to defend against user lawsuits in courts throughout the nation.  Not only is this logistically daunting, but it can be expensive as well.  User agreements can help reduce the potential exposure from such lawsuits.  In particular, including arbitration clauses in user agreements is one of the strongest risk management tools available to online businesses.  Arbitration offers several benefits to online businesses with a large number of geographically diverse users, such as:


Arbitration clauses can prevent class action lawsuits.  Because individual online consumers rarely experience problems significant enough to litigate, most online businesses rarely encounter lawsuits brought by individual plaintiffs.  Instead, class action lawsuits sponsored and brought by plaintiffs’ attorneys are a far greater risk.  Arbitration clauses may prevent consolidated class action claims from forming, keeping plaintiff attorneys at bay.


Arbitration dictates where the case is heard.  An arbitration clause can determine where claims can be brought.  As a result, selecting arbitration can avoid the hassle and expense of litigating user cases throughout the country.


Arbitration avoids juries.  Jury trials are risky for 2 reasons.  First, in a consumer-vs.-business case, juries may be more sympathetic to consumers.  Second, juries can sometimes produce emotionally-inflated damage awards.  Arbitration ensures that cases do not end up in front of unpredictable juries.


Arbitrations can favor business defendants.  Arbitrators can consistently favor businesses over consumers.  For example, the Washington Post reported that First USA won over 95% of their arbitrated cases. 


With these benefits, it should be clear why so many major Internet companies, including eBay, Amazon, PayPal, Lycos and others, include arbitration clauses in their user agreements.  However, while the Federal Arbitration Act strongly favors enforcement of arbitration clauses, some courts have not enforced the clauses in online user agreements.  Therefore, it’s crucial to properly structure and implement arbitration clauses to maximize their potential enforceability:


Step 1: Form a Binding Agreement Using Mandatory Clickthroughs.  While many online businesses include “terms and conditions” as a link that users can review if they choose, such terms and conditions are often not enforceable.  For example, in Specht v. Netscape (2d Cir. Oct. 2002), the court rejected Netscape/AOL’s attempt to divert a class action lawsuit to arbitration because the arbitration clause was included merely as an optional link.  For increased chances of enforcement, online agreements should be presented to users in a way that requires their affirmative assent, such as by clicking on an “I accept” button.


Step 2: Choose the Right Arbitration Service Provider and Rules.  Courts may reject unreasonably expensive arbitration service providers.  For example, in Brower v. Gateway (N.Y. App. Div. Aug. 1998), the court rejected Gateway’s attempt to force consumers to arbitrate through the International Chamber of Commerce (ICC).  Not only were the ICC rules hard to locate, the ICC fees were too high because consumers’ arbitration costs exceeded the purchase price of the computer giving rise to the claim.


Further, in Comb v. PayPal (N.D. Cal. Aug. 2002), PayPal’s user agreement forced all claims to arbitration through the American Arbitration Association (AAA).  The court rejected this clause because, among other reasons, PayPal selected AAA’s commercial rules, which were significantly more costly to consumers than AAA’s consumer rules.


Step 3: Include Other Fair and Reasonable Terms.  In addition to courts’ concerns over arbitration mechanics, arbitration clauses are susceptible to standard contract enforcement defenses such as unconscionability.  To minimize these defenses, the arbitration clause should be fair and reasonable and prominently displayed in the user agreement.


The decision to include an arbitration clause in an online user agreement is a complex one, and properly deploying an arbitration clause requires some thought and care.  However, online businesses willing to take the appropriate steps may significantly improve their risk profile.


About the Authors: Eric Goldman (eric.goldman@marquette.edu) is an Assistant Professor at Marquette University Law School teaching in the Internet and IP areas.  Chris Smith is a second year student at Marquette University Law School, currently focusing on business law.