DISPUTE RESOLUTION IN CYBERSPACE: DEMAND FOR NEW FORMS OF ADR
15 OHIO ST. J. ON DISP. RESOL. 675
Henry H. Perritt, Jr.
The Internet has heightened interest in alternative dispute resolution (ADR). Three characteristics of the Internet make traditional dispute resolution through administrative agency and judicial procedures unsatisfactory for many controversies that arise in Internet-based commerce and political interaction. The Internet's low economic barriers to entry invite participation in commerce and politics by small entities and individuals who cannot afford direct participation in many traditional markets and political arenas. These low barriers to entry, and greater participation by individuals and small entities, also mean a greater incidence of small transactions. When dispute resolution costs are high, as they are for traditional administrative and judicial procedures, the transaction costs of dispute resolution threaten to swamp the value of the underlying transaction, 1 meaning on the one hand that victims are less likely to seek vindication of their rights and, on the other hand, that actors and alleged wrongdoers may face litigation costs that outweigh the advantages of their offering goods and services in the new electronic markets. To realize the potential of participation by small entities and individuals and of small transactions, it is necessary to reduce the costs of dispute resolution.
Second, the geographic openness of electronic commerce makes stranger-to-stranger transactions more likely. The absence of informal means of developing trust, as when one shops regularly at the local bookstore, means that both merchants and consumers will be inhibited in engaging in commerce unless they have some recourse if the deal goes sour.
Third, the Internet is inherently global. Offering to sell goods on a web page published on a server physically located in Kansas is as visible to consumers in Kosovo as in Kansas. In other words, it is difficult to localize injury-producing conduct or the injury itself in Internet-based markets or political arenas. Traditional dispute resolution machinery depends upon localization to determine jurisdiction. 2 Impediments to localization create uncertainty and controversy over assertions of jurisdiction. That uncertainty has two results. It may frustrate communities that resent being unable to reach through their legal machinery to protect local victims against conduct occurring in a far-off country. It also subjects anyone using the Internet to jurisdiction by any of nearly 200 countries in the world and, in many cases, to their subordinate political units.
Alternative dispute resolution, including not only arbitration and mediation but also a wider range of alternatives such as credit card chargebacks, escrow arrangements, complaint bulletin boards, and complaint aggregation services culminating in official enforcement activity, helps respond to these challenges in two ways. First, ADR can be designed to be much cheaper than traditional procedures. It also is inherently transnational when those agreeing to participate in the ADR process are in different countries.
Appropriately designed ADR mechanisms offer lower costs, reassure participants, and solve the jurisdictional problem because use of them manifests consent. As important, many forms of ADR involve a readily available fund (usually the payment for the disputed transaction) as a way of satisfying a decision for either disputant. The availability of a fund often is underestimated as a consideration. This consideration may explain why intermediary-provided dispute resolution, such as credit card chargebacks and escrow arrangements, prove more attractive in practice than independent third-party mechanisms such as arbitration or mediation. The successful party to an arbitration still must be concerned about the enforceability of an arbitration award against a reluctant loser.
This Article offers criteria for further development of Internet-based ADR, relating the criteria to elements of procedural due process. It provides an overview of developments in cyberspace that crystallize ideas for effective ADR in this new commercial and political space, including the Virtual Magistrate (VMAG), judicial and administrative agency public access techniques, the Better Business Bureau online (BBBOnline), World Intellectual Property Organization (WIPO) dispute resolution for trademarks/domain name disputes, and consumer techniques such as credit card chargebacks and eBay's escrow arrangements.
The Article explains why disputes between merchants and consumers present greater challenges than business-to-business disputes, necessitating public law frameworks for private dispute resolution systems. It then concludes by explaining how systems can be constructed that meet these criteria while being linked to other new techniques for hybrid international regulation of Internet activities.
The criteria for Internet-based dispute resolution depend on the type of dispute resolution contemplated. Criteria appropriate for arbitration are not necessarily appropriate in every respect for mediation or credit card chargeback systems. Because arbitration is the most formal and comprehensive form of dispute resolution resulting in a binding decision, however, it is useful to begin with criteria for arbitration and then to consider how those criteria should be relaxed or otherwise modified for "softer" forms of dispute resolution.
Arbitration is a form of adjudication. Basic concepts of adjudicative due process 3 provide an appropriate starting point for developing online arbitration criteria. Shortly after the U.S. Supreme Court's decision in Goldberg v. Kelly, 4 holding that the due process clause of the U.S. Constitution prohibits termination of social benefits without a hearing meeting the criteria of procedural fairness, Judge Henry J. Friendly wrote an article in the University of Pennsylvania Law Review entitled Some Kind of Hearing. 5 In this article, Friendly defined eleven requirements of procedural due process that can be applied to adjudicative procedures. 6 He did not suggest that all eleven must be present in order for due process to be satisfied; rather, his list of procedural elements represents a kind of menu. 7 [*678] As one moves down the list, more formality and more fairness are present, albeit at increased cost.
Judge Friendly's first criterion, an unbiased decisionmaker, is the most rudimentary element of due process. 8 In the online arbitration context, this means that the decisionmaker for dispute resolution must be someone other than the person who made the decision leading to the dispute. Widely accepted arbitration systems, such as those defined by the American Arbitration Association (AAA) 9 and by the International Chamber of Commerce (ICC), 10 maintain rosters of qualified arbitrators who have been screened to ensure the absence of bias. Online dispute resolution systems similarly should begin with rosters of qualified and unbiased decisionmakers, with appropriate background information available online, to facilitate review and selection of arbitrators by disputants.
Judge Friendly's second element, notice and a statement of reasons for the initial action giving rise to the dispute, 11 is linked conceptually with his third element, the opportunity to present reasons why the disputed action should not be taken. 12 Both these elements represent pleading requirements. 13 They contemplate that both claimant and respondent set forth their positions, thus defining the controversy to be resolved. In some controversies, such as ones involving claims of fraud, the burden of proof, and therefore the burden of pleading, is placed on the claimant. As Federal [*679] Rule of Civil Procedure 9 requires, "fraud must be pleaded with particularity." 14
After the claimant sets forth the particulars of the alleged fraud, the respondent should be able to deny the allegations or offer "new matter"--additional factual allegations that would exonerate the respondent from legal liability. In other types of controversies, such as a complaint over removal of material from a web server, the burden of proof and therefore of pleading most appropriately rests with the respondent. Pleading obligations should be organized so that someone whose web page is taken down can protest the action through an online arbitration mechanism, thereby triggering an obligation on the part of the respondent to explain why the page was taken down. Then the complainant can challenge the reasons offered by the respondent.
The first three Friendly elements are essential for any online arbitration system. They also may be sufficient for simple claims. Indeed, in many instances, an exchange of formal positions in the virtual presence of an unbiased decisionmaker will be enough to permit a settlement because these first three elements permit the parties to understand each others' positions more concretely than they may have before exchanging their position statements or pleadings.
In other cases, however, the first three Friendly elements will not be enough, and the online arbitration process must include other elements from Judge Friendly's list. The fourth element, an opportunity to present evidence, including witnesses, in support of one's position, is only appropriate to help resolve factual disputes. 15 In order to make this element meaningful, some procedural device should be available to define the factual issues in dispute, lest the fourth element deteriorates into an unfocused group debate. One possibility is for the arbitrator, after reviewing the pleadings, to issue a statement defining disputed facts and the law to be applied to the facts once determined. This procedural device is akin to a partial summary judgment 16 or a final pretrial order, 17 although in the online arbitration context it can be much simpler and briefer than a typical partial summary judgment or pretrial order in federal court practice.
As with the judicial process for developing pretrial orders, parties wishing to call witnesses should be required to relate the expected witness testimony with particular facts in dispute. The arbitrator should have the power to limit the number of witnesses in the interest of efficiency. How witnesses should be heard presents a technological challenge. The simplest technologies, e-mail exchanges and web-based discussion spaces, can be used when written statements by witnesses are sufficient. They also are sufficient for textual documentary evidence such as subscriber agreements. The process is equivalent to that in common law and civil law judicial procedure for deciding cases based on affidavits and exhibits thereto.
In some but not all cases, witness credibility will be important. When that is so, some mechanism must be available to allow the arbitrator to observe witness demeanor and thereby to judge credibility. The simplest but most expensive possibility is to take these cases "offline" and schedule a live face-to-face hearing at which witnesses can testify. But this is not the only possibility. Increasingly, judicial and formal administrative agency proceedings allow witnesses to testify via video conference or video recording. 18 As the bandwidth of Internet connectivity improves, it is feasible to use inexpensive video and audio technology to allow witnesses to testify over the Internet with their voices and images available to the disputants and to the decisionmaker. Video cameras, microphones, speakers, and capture (digitization) cards for desktop and portable computers are available now for about $ 150. Online arbitration systems should be designed to accommodate this kind of evidence when the parties have the necessary hardware and bandwidth.
Judge Friendly's fifth element, the right to know opposing evidence, 19 and sixth element, right to cross-examine opposing witnesses, 20 elaborate on the notice and witness presentation elements. Both discovery and cross-examination may be conducted by electronic means, such as e-mail exchanges with attachments and Internet-based telephone or video conferencing.
Judge Friendly's seventh element, limiting the decision to that which can be justified by the record, 21 helps to ensure that the hearing process is not a sham, but it also increases the burden on the parties' counsel to get everything in the record necessary to support their positions. The existence of a record is also necessary to permit complete appellate review, in those cases for which some form of appeal is provided. Imposing a record
requirement for online arbitration may be less onerous than
imposing the same requirement for live dispute resolution. When parties
argue their positions and present witnesses orally in the physical presence
of a dispute resolver, it is cheaper if no verbatim record must be made.
In contrast, online dispute resolution automatically generates a record
because textual submissions and oral submissions transmitted electronically
are fixed (recorded) by the technology. Accordingly, it is appropriate to
have a basic record requirement in online arbitration.
The eighth element, the right to be represented by counsel, 22 has few implications for the technical design of online arbitration systems; instead, the availability of this right depends on a policy judgment. Allowing counsel increases the cost of dispute resolution procedures. A party wishing to minimize costs nevertheless may be unwilling to suffer the disadvantage associated with being unrepresented while the opponent is represented. Moreover, use of counsel interposes delay. Parties must be allowed time to find and retain counsel, and counsel must be allowed time to become familiar with the case. When disputants act without counsel, they may proceed directly to define their dispute before the decisionmaker.
But in all but the simplest cases, counsel is invaluable in helping a naive disputant understand the procedure, the relevant rules for decision, and the most effective way to present a case. Online arbitration systems should allow for counsel, perhaps subject to control by the arbitrator, who may determine in simple cases that no counsel is permitted.
Judge Friendly's ninth and tenth requirements, that the decisionmaker prepare a record of evidence presented 23 and give reasons supporting the decision, 24 are appropriate for online arbitration. In very simple administrative conference-type proceedings, and in some labor arbitrations, the reasoned decision requirement imposes additional burdens and costs on the decisionmaker and is unnecessary to the perceived fairness and legitimacy of the process. A decisionmaker can meet with the parties, hear their stories, and say, "I have listened carefully and it is my overall judgment that Party A should win."
But the benefits of reasoned decisionmaking outweigh the costs for online arbitration. Online arbitration is a new process and therefore likely to be mistrusted to some extent by early users. Reasoned decisionmaking will alleviate some of the mistrust. Moreover, if the public has access to online [*682] arbitral decisions, decisions without accompanying reasons are only of modest utility; those wishing to understand the developing decisional law must infer the reasons for decisions from the parties' pleadings and from the testimony. Moreover, appellate review with any degree of deference to the original decisionmaker is almost impossible without reasoned decisionmaking.
Another element not explicitly enumerated by Judge Friendly, public access to the proceedings, 25 implicates conflicting interests. Many disputants prefer commercial arbitration over judicial conflict resolution precisely because arbitration proceedings need not be open to the public. Closed proceedings allow presentation of proprietary material and avoid the risk that public knowledge of one dispute may trigger the presentation of other disputes. On the other hand, the democratic tradition mistrusts secret proceedings, and the legitimacy and acceptability of online arbitration may be diminished if its proceedings are not opened to public scrutiny at some point. Moreover, most advocates of online dispute resolution for Internet governance contemplate the development of a body of decisional law to help people understand the ground rules for conduct. Only if decisions are available to the public can this aspiration be realized.
But transparency need not occur at the outset of an online arbitration. As was the case with the Virtual Magistrate system, parties may present their positions and evidence to the arbitrator in closed electronic spaces with the decision in the record being opened up to the public only after a decision is made in the case. 26
Judge Friendly's eleventh element, the availability of appellate review, 27 contemplates a range of possibilities. One polar position is to allow no appellate review at all when the parties have so stipulated. A slightly more intrusive possibility is represented by the extremely narrow grounds for judicial review of arbitration awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, in which an arbitration decision may not be reviewed on the merits, but can be overturned only for fraud, gross irregularity in procedure, or the absence of jurisdiction based on the arbitrator's having exceeded the scope of the [*683] agreement to arbitrate. 28 The most intrusive possibility, but also the least controversial in terms of getting online arbitration started, is represented by the WIPO guidelines, in which an online arbitration decision is without prejudice to a subsequent decision by a traditional judicial or administrative agency tribunal. 29
Opening up online arbitration to a subsequent de novo decision by another tribunal does not necessarily vitiate entirely the effect of online arbitration. The experience of court-annexed arbitration when state constitutions mandate an opportunity for subsequent de novo jury trial demonstrates that many disputes stop at the arbitration stage. The parties perceive the initial decision as representing a reasonably accurate prediction of what a jury will do, and the substantial additional transaction costs of proceeding to a jury trial outweigh the expected value of the result. It may be that the most prudent course for proponents of online arbitration is to allow de novo trials in other tribunals--at least for a period of time, until online arbitration has proven its acceptability.
The transcript of the first online ombuds case 30 provides a good example of online mediation. Analysis of the interaction disclosed by that transcript offers a concrete context for evaluating mediation under Judge Friendly's elements of due process. The first element--an unbiased decisionmaker 31 --is appropriate and essential for effective mediation, although mediation does not vest the neutral party with actual decisionmaking power. Neutrality is essential for the kind of trust that allows mediation to work.
The second and third elements 32 also are appropriate for mediation; indeed, the mediation process is focused on facilitating party communication about the reasons favoring and opposing proposed action. The difference between mediation and arbitration is that arbitration structures the second [*684] and third elements while mediation allows a more fluid process. Mediation seeks a kind of conversation.
For the remaining elements in Judge Friendly's system, 33 arbitration and mediation diverge completely. Rarely would mediation involve the presentation of evidence through documents or third-party testimony. Counsel is less appropriate for mediation because mediation seeks to engage the parties directly in assessing how their interests can be reconciled. Privacy rather than public scrutiny helps the parties communicate candidly with the mediator and with each other. Usually there is no record, and there is no third-party decision to be bound by a record or to be subjected to appellate review.
The Virtual Magistrate 34 is an online arbitration system initially implemented in the fall of 1996. VMAG resulted from discussions organized in October 1996 by David R. Johnson, a partner at Wilmer, Cutler & Pickering, former president of Counsel Connect, and former president of the Electronic Frontier Foundation. 35 Mr. Johnson, Robert M. Gellman, former chief counsel of the Government Operations Committee in the House of Representatives, representatives of the American Arbitration Association (AAA), counsel for America Online and CompuServe, as well as this author, were concerned about the dilemma confronting online service providers such as America Online when they were accused of allowing access to illegal material, such as postings or e-mail messages that infringed copyright, invaded privacy, represented consumer fraud, or were defamatory. In such circumstances, the service provider could choose to remove the accused material, potentially exposing the service provider to liability in favor of the author or sponsor, 36 or the provider could allow it to remain, resulting in potential liability to the accuser. Now, the Online Copyright Infringement Liability Limitation Act 37 provides a safe harbor for service providers that implement detailed procedures for removing material. 38 In 1996, however, [*685] no such statutory safe harbor existed. The designers of VMAG sought to provide a mechanism for a quick and inexpensive interlocutory 39 dispute resolution mechanism to decide whether accused material should be removed immediately or should be allowed to remain.
While the design of VMAG may not have met all the requirements of the New York Convention 40 or the Federal Arbitration Act, 41 and thus VMAG decisions may not have the same preclusive effect as arbitration awards, VMAG designers nevertheless thought that the existence of an interlocutory decision by a third party would show that the service provider acted in good faith in dealing with accused material and that the decision would be given some weight by a court ultimately deciding the dispute on the merits, or that, at the least, it would avoid damages linked to bad faith or indifference. 42
From the beginning, VMAG was implemented entirely through the World Wide Web, with e-mail communication as a backup. No aspect of the procedure involved paper submissions or reports or face-to-face contact. Disputes were handled pursuant to procedural rules posted on the VMAG website. 43 A complainant could initiate a VMAG case by clicking on an e-mail button on the website to post a complaint. 44 Complaints thus posted initially were screened by an AAA staff member who determined whether the complaint facially was within the jurisdiction of VMAG. 45 An affirmative determination resulted in the AAA staff member selecting a virtual magistrate from a roster maintained by the AAA. 46 One could be [*686] listed on the roster by qualifying under general AAA rules to be an arbitrator and also demonstrating familiarity with Internet technology. 47
Once a virtual magistrate was selected, the magistrate would forward the complaint to the respondent and any affected third parties, such as an online service provider or the originator of the accused material. 48 Respondents were given several hours to respond through the website. The virtual magistrate then was obligated to make a decision within seventy-two hours. 49 Until a decision was made, the record of the proceedings was not open to the public, but a decision triggered an automatic routine that moved the complaint, the response, the decision, and other pertinent materials to a part of the website open to the public. 50 In the first two years of VMAG's existence, only one case was decided. 51 Several dozen other complaints were submitted, however, and a few of these resulted in settlements. Most of the others were determined to be outside the scope of VMAG jurisdiction.
In late 1996 and early 1997, Peter E. Sand, now with the Pennsylvania Attorney General's Office, sought to induce participants in Internet electronic commerce in eastern Pennsylvania to participate in VMAG. Though interest was expressed, no actual use resulted. VMAG received extensive print publicity, but no service providers provided actual links on their own sites to VMAG. In 1999, responsibility for VMAG was transferred from Villanova University School of Law to Chicago-Kent College of Law at the Illinois Institute of Technology. 52 AAA interest in the project had waned in connection with personnel changes at AAA, and Professor Pam Kentra at Chicago-Kent took over responsibility for the project, revising the rules to make VMAG available for a wider range of disputes.
The features of VMAG represent a logical use of the Internet and the Web for alternative dispute resolution involving relatively simple disputes. The initial rules confine the dispute resolution system to a very narrow set of cases, resulting in the rejection of a number of complaints in the early years of the system's operation. Even after the rules were modified to expand the [*687] scope of VMAG jurisdiction, however, few complaints were filed and no additional disputes were decided.
IV. WHY DID VMAG NOT PROVE MORE POPULAR?
Over three years of existence, VMAG has not attracted many disputes. Understanding why can help designers of ADR for electronic commerce design more effective systems.
One reason for VMAG's limited popularity is that initial predictions that online service providers would refer large numbers of cases to VMAG proved to be wrong. America Online in particular, which was a strong original proponent of developing the VMAG system, found that its own internal terms-of-service complaint mechanisms resolved most controversies successfully and that the feared exposure to conflicting liability before outside fora did not materialize. Keeping complaints within the internal system gave AOL and other service providers complete control over the outcome of the complaint process. Referring the complaints to VMAG would result in loss of control. Also, the failure of significant numbers of complainants to submit disputes to VMAG is likely due to the fact they did not know about VMAG--at least they had no easy way to file a complaint with VMAG, as contrasted with filing complaints with service providers directly or in other fora.
Two conclusions can be drawn from the VMAG experience, both applicable to online dispute resolution systems in general. First, proponents of online ADR must recognize that whoever has superior economic power in a dispute is unlikely to be eager to surrender that power to a third party decisionmaker. Nonunion employers have not embraced arbitration of employment disputes even though arbitration might protect them from lawsuits in regular judicial fora. 53 The fact is, most complaints about online services are resolved through complaint mechanisms such as AOL's term-of-service procedure or credit card chargeback mechanisms. One may be skeptical of the fairness of such mechanisms, either because decisionmakers have an economic interest in particular outcomes or because the process does not result in a binding resolution of the dispute. Nevertheless, complainants stop with these procedures in the vast majority of cases rather than going on [*688] to file lawsuits or complaints with administrative agencies. Thus, the purported benefit of online arbitration is modest.
Second, online dispute resolution procedures must be easy to find and easy to access, preferably by a link directly on the site where the controversy arises. For example, one wishing to submit a complaint about noncompliance with voluntarily adopted privacy policies is far less likely to submit that complaint to an unfamiliar online dispute resolution process that is not linked directly to the offending site. The complainant must look for and find the dispute resolution procedure and then cannot have any confidence that the dispute resolution forum will have jurisdiction over the complaint, in the sense that any meaningful relief can be obtained. On the other hand, if the site at which the controversy arises has a link to the dispute resolution site, and if the site in controversy represents that it will accept and be bound by a decision of the dispute resolution forum, complainants are more likely to make use of that dispute resolution machinery.
A. Virtual Mediation
Shortly after VMAG was launched, Ethan Katsh, Professor of Legal Studies at the University of Massachusetts, launched a virtual mediation system. 54 In conjunction with the University, as a mechanism for resolving student complaints under University rules, the University of Massachusetts Center for Information Technology and Dispute Resolution initiated an "Online Ombuds Office." 55 The Online Ombuds Office was established in June of 1996 with a grant from the National Center for Automated Information Research (the "Center") and also was supported in part by a grant from the Hewlett Foundation. 56 The Center works with eBay and Up4Sale to mediate disputes arising out of auctions on the Internet. 57
The best way to get a feel for the process is to view the transcript of the first dispute, which is available from the website. 58 That dispute involved a claim by a local newspaper that an Internet user was committing copyright infringement by posting excerpts from his stories on the Internet--apparently [*689] in e-mail messages rather than on a web page. 59 The Internet user sought the assistance of the Online Ombuds Office, and Director Ethan Katsh mediated the dispute himself. Although both of the parties were located in Kansas, Katsh was in Massachusetts and all of the communication occurred either by e-mail, fax, or phone. 60 The dispute was resolved successfully with little difficulty or acrimony. 61
The University of Massachusetts's virtual mediation project was much more active than VMAG. Some of this is attributable to its association with an institution that referred large numbers of complaints. Some of it is attributable to more effective marketing. Some of it may be attributable to the superiority of mediation to arbitration as an online dispute resolution process, although this conclusion is hard to justify given the absence of any real experience with disputants who made it as far as arbitration and somehow found that procedure unsatisfactory.
B. Credit Card Chargebacks
The most common form of alternative dispute resolution for consumer disputes is a credit card chargeback. 62 Under the Fair Credit Billing Act, 63 credit card issuers must investigate 64 cardholder claims of billing errors. 65 "Billing errors" are defined to include "[a] reflection on a statement of goods or services not accepted by the obligor or his designee or not delivered to the obligor or his designee in accordance with the agreement made at the time of a transaction." 66 When cardholders allege such nonacceptance or nondelivery, the card issuer may not insist on the charge without determining "that such goods were actually delivered, mailed, or otherwise sent to the [*690] obligor and providing the obligor with a statement of such determination." 67
Under Regulation Z and the Fair Credit Billing Act, chargebacks extend only to consumers and not to business transactions. 68
Card issuers typically retain only limited authority--defined by the merchant and cardholder agreements--actually to adjudicate the dispute, although repeated claims involving the same merchant may jeopardize the merchant's membership in the credit card network. 69 In most cases, the cardholder protests the charge, a chargeback results, the merchant substantiates the charge, informal negotiation directly between merchant and cardholder may ensue, and the charge is reinstated.
Major credit card networks extend chargeback protection internationally 70 and have adopted special consumer protection chargeback rules for electronic commerce. 71
[*691] Although good empirical data is lacking, it appears that the system satisfies both consumers and merchants. Almost no reported cases in the regular courts exist, suggesting that consumers rarely are motivated to go beyond the chargeback process to more formal forms of dispute resolution.
It is important for designers of online dispute resolution systems to understand the apparent attractiveness of the chargeback mechanism. On its face, it would seem to be an incomplete dispute resolution mechanism quite different from the arbitration model. Several hypotheses can be offered as to why it works so well. Chargebacks give customers leverage with merchants against whom they have claims, thus equalizing to some extent otherwise disparate bargaining power. Psychological satisfaction results from triggering a chargeback even if the customer eventually has to pay the full price. In at least some cases, triggering a chargeback gets the merchant's attention, allowing the merchant and the consumer to work out a compromise. And, in extreme cases, there is the possibility that the consumer will not have to pay or that the merchant will be excluded from the credit card network, ending a pattern of consumer abuse. Moreover, the system is [*692] cheap, easily accessible, and quick. A consumer need not search for and find a lawyer or a third-party dispute resolution forum. All that is necessary upon receiving a monthly credit card statement is to call or write the card issuer and protest the charge. The card issuer and the merchant handle the rest. No dispute resolution fees are involved.
Merchants like the system compared to other possibilities such as accepting personal checks for a larger percentage of transactions because the merchant is in a better position with credit card chargebacks than with stop payment orders on checks. If a consumer buys merchandise or services with a personal check and then stops payment on the check to protest failure of the merchant to perform, the merchant has no attractive remedy. It only can sue the consumer or cut the consumer off from further check-payment privileges. Cutting the consumer off may be an effective remedy for the merchant when there is a continuing relationship between the merchant and consumer, but not in stranger transactions, which are increasingly important to electronic commerce. Lawsuits over small consumer transactions are no more attractive to merchants than to consumers. They are expensive, require lawyer involvement, and engender long delays.
Credit card chargebacks are a more common form of dispute resolution in the United States than in other prosperous nations. 72 One of the reasons is the existence of Regulation E in the United States, which requires card issuers to make chargebacks available. 73 Canadian banks strongly oppose the institution of chargebacks in Canada because of concern about processing costs for card issuers. 74 This reluctance is reinforced by the perception of [*693] Canadian card issuers that the incidence of disputes is much higher in electronic commerce than in conventional face-to-face commerce. 75
In Europe, chargebacks are not required, but they are nevertheless fairly common in credit card and debit card agreements. 76 The availability of chargebacks in debit card agreements is much more important in Europe than in credit card agreements because the proportion of consumer transactions accomplished through debit cards relative to credit cards in Europe is much higher than in the United States, although the total of credit and debit card transactions is a much smaller proportion of the total universe in Europe than in the United States. 77 The relatively wide availability of chargebacks in Europe despite the absence of any government compulsion to offer them is strong testimony to their attractiveness as an alternative dispute resolution mechanism.
As with newer and relatively untested mechanisms such as eBay's escrow, insurance, and complaint-posting procedures, credit card chargebacks put a private sector intermediary in the position of being the dispute resolver. Intermediaries are willing to do this because the availability of mutually acceptable dispute resolution facilitates consumer and merchant use of the intermediaries' services. Intermediary-provided dispute resolution greatly reduces search costs and other costs because the intermediary already has a relationship with both disputants. 78
As the preliminary report on the subject by the Organization for Economic Co-operation and Development (OECD) said:
Financial intermediaries appear best suited to resolve individual transaction problems in the global marketplace through chargeback mechanisms. This involves reversing a transaction (charging it back to the seller) to settle various types of problems (for example, nondelivery of goods, nonconformance of goods, billing errors, etc.). Chargeback mechanisms encourage merchants to provide high levels of customer satisfaction, as card associations withdraw card privileges from merchants with excessive chargeback rates. Such mechanisms have long been available in the United States and are credited with helping to create consumer confidence in, and widespread use of, catalog shopping in that country. [*694] During the several years of discussions on this project with card associates, the spread of such mechanisms internationally and to debit cards has been seen as an encouraging sign. 79
a. Normally, the determinations on Complaints under these Rules are to be made with reference to the file alone. However, as an exceptional matter a Panel may, at the request of a Party or on its own motion, determine in relation to a particular complaint that a hearing shall be held with the participation of the Parties.
b. For the purposes of this Article, "hearing" shall include a physical meeting, a telephone or video conference and the simultaneous exchange of electronic communications in a manner that allows the Panel and the Parties to receive any communication sent by one of them and to send communications to the others. 88
If a consumer submits a billing error notice alleging either the nondelivery of property or services under paragraph (a)(3) of this section or that information appearing on a periodic statement is incorrect because a person honoring the consumer's credit card has made an incorrect report to the card issuer, the creditor shall not deny the assertion unless it conducts a reasonable investigation and determines that the property or services were actually delivered, mailed, or sent as agreed or that the information was correct.
Visa's chargeback rules do not attempt to track all of the possible consumer protection laws around the world, although some chargeback rights do correspond with statutory rights granted to consumers in particular countries, such as the rights granted under Federal Reserve Board Regulation Z to dispute certain credit card transactions. The chargeback reasons permitted under Visa's rules for international transactions have been adopted to enable issuers of Visa cards to address the fundamental consumer concerns of their cardholders, and incidentally to reinforce the reputation of Visa Cards as the best way to pay.
We will immediately chargeback a merchant selling goods or services delivered electronically (e.g., software, images) if a cardmember disputes the charge (for example, claiming it was unauthorized). There are several sound business and policy reasons underlying this rule: processing an inquiry is costly and not justified by the usually small dollar amount of these transactions. In addition, an immediate chargeback for these types of purchases provides an incentive for the merchant to exercise greater care in authorizing such transactions.
Notwithstanding the provisions of Article 3 [providing that "a contract shall be governed by the law chosen by the parties"], a choice of law made by the parties shall not have the result of depriving the consumer of the protection afforded to him by the mandatory rules of the law of the country in which he has his habitual residence:
--if in that country the conclusion of the contract was preceded by a specific invitation addressed to him or by advertising, and he had taken in that country all the steps necessary on his part for the conclusion of the contract, or
--if the other party or his agent received the consumer's order in that country, or
--if the contract is for the sale of goods and the consumer traveled from that country to another country and there gave his order, provided that the consumer's journey was arranged by the seller for the purpose of inducing the consumer to buy.