The Arbitration Clauses That Used To Protect Retailers Now Do The Opposite

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

Arbitration clauses have always been seen as favoring the retailers and, therefore, as a clause you always want to fight for—if you can. But as the world of retail has changed, with Web and mobile enabling customers to have much greater access to critical operations, things have subtly flipped. Those retailer-protecting arbitration clauses of yesteryear have now morphed into the customer-protecting clauses of today.

Consumers are now empowered to do genuine harm to retailers—harm that would otherwise be addressed through some legal recourse. Consumers can commit commercial defamation (think Oprah and the beef industry). They can manipulate stock prices through online campaigns. They can shoplift or otherwise steal goods, products or services. They can release sensitive personal information about the company, its products or plans, its personnel or processes. They can hack into computer systems and steal information. They can infringe or disparage trademarks. They can infringe copyrights. They can modify hardware or software. They can start a grass-roots online campaign to literally destroy a business. They can organize online protest movements, flash mobs or other demonstrations. They can launch denial of service attacks. They can even use your goods and services to harm others.

Because the Internet, mobile and social media also empower your customers (for good and for bad), there may be substantial claims against customers you may want to pursue that you are forgoing by contract. Before you insert a mandatory arbitration provision into your contracts, however, think about your relationship with your customers and ask yourself whether it is really in your best interest to arbitrate all claims.

In April, the United States Supreme Court in AT&T Mobility v. Concepcion found that a click-wrap agreement between a mobile provider and its customers required the customer to not only submit all disputes arising out of the relationship with the carrier to arbitration but also agree to never file or participate in a class-action lawsuit. What this means is that, no matter what the retailer did to the consumer, the consumer could not sue. Overlooked in this case was the plausible argument that, no matter what the consumer did to the retailer, the retailer could not sue either.

Take the example of Sony. After Sony's PlayStation Network was hacked (and a bunch of other Sony entities were hacked), Sony found itself on the receiving end of multiple lawsuits, including class-action lawsuits filed by consumers for possible breach of personal information including PSN IDs and passwords.Sony's lawyers responded in part by adding a new "Terms of Service" whereby the parties agree to arbitrate (and not litigate) any "dispute" between them. The agreement defines "dispute" as:

...any dispute, claim or controversy between you and any Sony Entity regarding any Sony Online Services or the use of any devices sold by a Sony Entity to access Sony Online Services, whether based in contract, statute, regulation, ordinance, tort (including, but not limited to, fraud, misrepresentation, fraudulent inducement or negligence), or any other legal or equitable theory, and includes the validity, enforceability or scope of this Section 15 (with the exception of the enforceability of the Class Action Waiver clause below). "Dispute" is to be given the broadest possible meaning that will be enforced.

What this means is that, if you use the PlayStation Network and someone has sold you a defective Sony Vaio (or committed fraud or misrepresentation), you can't sue. It means if your Bravia television with integrated Internet access goes kaput, you are out of luck. If the Cyber Shot camera used to upload pictures is defective, you may not get your day in court. Remember, "dispute" is to be given the broadest possible meaning, and it applies to all Sony entities. Sony is a huge company that makes not only consumer devices but is also a full-service entertainment company.

The language above also defines a dispute as any disagreement "between you and any Sony entity," thereby creating at least the possibility that the arbitration agreement is mutual. This could mean that Sony would be required to arbitrate any "dispute." And that might not be a good thing for Sony.

The relationship between a consumer and a large, integrated, multinational multimedia company is a complex one. Ordinarily, we can think of dozens of things a consumer might want to sue a retailer for (defective products, rude salespeople, fraud, failure to protect data, slip and fall in a store) but few things consumers can do to raise the ire of the retailer (and the retailer's lawyers) except failing to pay their bills.

The online environment changes this. Indeed, the Sony Terms of Service give a list of things that consumers are prohibited from doing. Consumers can't engage in deceptive or misleading practices; harass or stalk others; upload offensive content; organize hate groups; transfer viruses, worms or malware; infringe copyrights; hack or reverse engineer code or content; or tell anyone—that’s right, not even your mother—your name or personal information through any means, among dozens of other things. You also agree not to violate the law.

So what if a consumer does any or all of these things? What if he or she pirates a Sony movie? Hacks a Sony network? Steals and sells Sony code? Uploads pirated Sony software? Assuming that the arbitration agreement is mutual, then Sony's language may prohibit it from suing for copyright infringement, filing a complaint for hacking or pursuing any other legal remedy other than arbitration. Sony could, of course, agree by contract not to prosecute or refer for prosecution a shoplifter and instead to handle the shoplifting "dispute" through arbitration.Sony could, of course, agree by contract not to prosecute or refer for prosecution a shoplifter and instead to handle the shoplifting "dispute" through arbitration. Is that what Sony's lawyers meant to do here? Did Sony really mean to say to computer hackers, "Hey, don't worry about us calling the cops, we will agree by contract to arbitrate." I doubt it. But the language may be so broadly written as to mandate arbitration.

This problem is made worse when a merchant who has both an online and a brick-and-mortar presence wants to use terms of an online contract to bind activity in the retail store. A few years ago, a consumer who called the 1-800-FLOWERS number to order flowers for his girlfriend and which were mistakenly delivered to his wife—OOPS!—was prevented from suing the company because of an arbitration provision in the online Web site that he never saw or used. If you write a mutual arbitration agreement too broadly (e.g., every dispute arising out of our relationship must be submitted to arbitration), then you may be legally forgoing your right to prosecute people who damage store property, steal items from the store or even fail to pay for goods and services (so long as there is a "dispute").

OK. So you just make the arbitration provisions unilateral, right? The consumer must arbitrate all claims with you, but you reserve the right to call the cops, prosecute the consumer for hacking or go after him or her for copyright infringement, no? Not so fast. Although unilateral arbitration agreements may be enforceable in some jurisdictions for some purposes, courts generally do not look favorably upon obligations that are imposed on consumers (particularly in online contracts nobody reads). Sauce for the goose?

So the best advice when it comes to arbitration agreements is to keep it reasonable. Don't overreach by binding the consumer to arbitrate disputes that have no real relationship to what they are doing—particularly if you are a multifaceted organization. Keep it limited to the conduct. And explicitly give the parties the right to pursue criminal penalties, because it is more likely the consumer will commit a crime than you will (I hope). And remember, too, that sometimes it is better for you to settle one class-action lawsuit than to have tens of thousands of individual arbitrations—especially if you have to pay for each arbitration. That's another thing the Internet and social media is good at—organizing potential plaintiffs.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.