Overview

     Over the past three years, the explosion of electronic commerce has left many in the legal profession at a loss as to how
to react to the new economy Every form of industry, from the auto industry, to the clothing industry, to the legal profession is
being affected by this new medium for conducting business.

     To date, lawyers, legislators, policymakers and industry representatives have struggled with the issue of how existing laws
should (or should not) function in the amorphous world of cyberspace. Consumers and business alike have struggled to figure
out what law governs Internet transactions and whether existing rules concerning intellectual property, contracts and consumer
protection are valid in an e-commerce context. Another problem that arises in cyberspace is in which jurisdiction a consumer or
business would seek a remedy with respect to an Internet-based transaction. Online contracting and e-commerce creates a
global marketplace for consumers. However, consumers can ill afford to pursue their legal remedies in an overseas jurisdiction

     The use of nonjudicial means for dispute resolution may provide a solution to this problem. This report focuses on the
possibility of using the Alternative Dispute Resolution ("ADR") as a means for dealing with consumer complaints and disputes
connected to Internet transactions. Additionally, this report analyzes the use of the Internet itself as a medium for such dispute
resolution. For the sake of consistency, the term Online ADR will be used when referring to this concept. While Online ADR
may be a solution for consumers faced with the daunting task of seeking remedies for cross border Internet disputes, one must
also consider the validity of existing complaint resolution procedures. Existing mechanisms such as credit card charge backs or
informal complaint resolution conducted directly with merchants may be adequate for a large number of consumer Internet
complaints.

     An ancillary question is who should provide Online ADR? Some of the possible actors include:

     private for-profit companies,
     industry trade associations,
     existing arbitration or mediation service providers (who deal with disputes in the non-virtual world);
     international organizations or
     government agencies (state or federal).

     This report provides policymakers with background information they will summarize the current status of Online ADR
and the various models that exist. It is hoped that this information will aid decision makers in determining:

   1.Whether Online AFR is desirable for resolution of commerce disputes (business to consumer and business to business)?

        2.Which entities are best placed to provide Online ADR services?

        3.What type of model/structure is optimal for various types on online disputes?; and

        4.Who should allocate resources for these efforts (consumers, government, industry)?

     This report explores the costs, benefits and possible efficiencies of Online ADR, in particular with respect to the types of
consumer complaints currently being lodged with state attorneys general's Offices throughout the country. The report begins
with a discussion of the current treatment of Internet related complaints by States Attorneys Generals, and is followed by
explanation of Online ADR as a concept. The report then moves on to a discussion of some of the key reasons for adopting
and promoting Online ADR processes. Finally, we canvass some of the major Online ADR providers in order to provide an
overview of the various approaches currently in use or under development.

I. Attorneys General's treatment of Internet Related Complaints

     Note: This section is still in progress as we await responses from additional states and hope to create summaries
and a table of current approaches to resolution of Internet-related consumer complaints.

     The state attorneys general and corresponding state consumer protection bureaus are focal points where consumers
currently direct complaints and queries with respect to Internet transactions. Keeping this fact in mind, state attorneys general
need to consider whether it is desirable to:

     refer consumers to existing Online ADR providers;
     work with industry to propagate new models for consumer complaint resolution and/or Online ADR; or
     take on a role at the state level as a provider of Online ADR in addition to or as an alternative to the proprietary services
     that are available.

     The Center for Law, Commerce and Technology is currently in the process of corresponding with the 50 States
Attorneys General regarding their treatment use approaches to online consumer complaints, and specifically their use of Online
ADR. To date, far the Center has received responses from ten of the fifty states.1 It is expected that most offices will respond
during the summer months of 2000.

     It is clear that Attorneys General throughout the United States recognizes the growing consumer protection issues
associated with the Internet. The State of Virginia provides us with some interesting data. Their Attorney Generals Office
received 213 Internet-related complaints in 1997, 64 in 1998, 87 in 1999 and 45 as of May 23, 2000.2 Not surprisingly the
majority of Internet related complaints in Virginia have been against Internet Service Providers. (Virginia is home to many of the
Nation's biggest ISPs such as AOL.)3 Their Office of Consumer Affairs (OCA) received 16 Internet related complaints in
1997 (15 against ISPs, 1 concerning the sale of a product), 53 in 1998 (20 against ISPs, 26 concerning online auctions, 7
concerning the sale of products), 115 in 1999 (71 against ISPs, 43 concerning online auctions, 1 concerning sale of a product),
and 59 in 2000 (36 against ISPs, 23 against Internet Auctions).4

     At present, the various states are taking different approaches to consumer complaints and inquiries related to Internet
transactions. The majority of states fall into one of three categories. In category A, are states, which while aware of the unique
problems of Internet complaints, are not currently participating in specific efforts to address these problems. Category B, is
made up of states that are taking awareness of Internet related complaints and allow consumers to use their web sites to
provide information and file complaints online. Category C states are those states taking the most proactive stance. These states
have web sites dedicated to Internet related problems and complaints. In addition several of these states either have or are in
the process of establishing Online ADR processes. Of those states responding to our survey, two are in category A, eight fall
into category B, and 0 are in category C.

     Two leaders in online consumer protection are the States of Washington, and New York. The State of Washington
Attorney General's Office has created a new High Tech Unit of its Consumer Protection Office to address Internet crimes and
disputes. The Washington State Attorney General's web site currently allows consumers to file disputes online and will
ultimately allow consumers to have their complaints resolved online.5 The New York Attorney General's Office already has a
mediation process that allows a complaint to be filed online, and allows the complainant to communicate with the Office via
email.6 In 1999 the New York Attorney General, Eliot Spitzer, committed his office to protecting citizens from Internet fraud
and established a special unit dedicated to online enforcement; Attorney General Spitzer estimated his office would receive
nearly 2500 Internet related complaints in 1999 alone.7 Initiatives such as the two established by Washington and New York
may serve as models for other states.

II. What is Online ADR?

     Online ADR, like its parent traditional ADR, consists of a variety of methods such as arbitration, mediation, and
mini-trials, that seek to resolve disputes by means other than litigation. Unlike traditional ADR, Online ADR utilizes the Internet
as a means to more efficiently engage parties in non-litigious dispute resolution. Online ADR resolves disputes by harnessing
computer-networking technology to bring parties together in a dialogue that is hosted by a third party service provider.

     Typically the Online ADR process begins when a claimant registers with an Online ADR Provider, such as
clickNsettle.com or Squaretrade.com.(see Figure 1) The ADR Provider then uses the information provided by the claimant to
contact the defendant party and invite them to participate in Online ADR. If the defendant accepts the invitation, they will then
file a response to the claimant's complaint. From this point on the various ADR Providers take on different approaches. Some
have developed proprietary software that allows parties to engage in negotiation of monetary sums without the participation of a
negotiator or mediator.

     Other service providers have taken a more hands on approach that provides for more traditional mediation services
across email and interactive web sites. Still others employ variations of these two methods. Another area of difference is the
level of enforceability of a settlement. While most online settlements are not legally binding and enforceable (i.e., a party may
still seek resolution in a court of law after engaging in the Online ADR process), some ADR providers require or encourage
parties to enter into a binding settlement contract. Of course, such a settlement is only enforceable to the extent allowed by
state contract law.

                     Figure 1.: Typical Online Alternative Dispute Resolution Process
 
 

     In the future, the development of other forms of dispute resolution are likely, as dot.coms, governmental agencies and
individuals realize the power and relative ease of resolving disputes online. As we begin the shift to broadband technology, the
possibility for incorporating real-time audio and video into the existing framework may lead to more powerful dispute resolution
tools that could potentially increase the power of Online ADR.

Why Online ADR?

     Online ADR can play an important role in bridging the gap between the Internet and our existing laws. In particular,
Online ADR minimizes the jurisdictional problems inherent in Internet transactions. The relatively low costs of Online ADR may
provide a forum for claims of low monetary value that would otherwise not have a forum. As transactions involving micro
payments on the Internet increase (e.g., buying a news article or a horoscope on line for a nominal fee), the number of claims of
small value will similarly grow. ADR, in general, may create a more real level of accountability for private individuals transacting
on intermediary web sites, such as auction sites. Online ADR addresses the need for an appropriate forum for international
disputes that would otherwise not be adjudicated or would be extremely expensive or time consuming. While several of these
issues have increased in importance due to the growth of business to consumer (B2C) and business to business (B2B) Internet
transactions, Online ADR is may be equally attractive for settling traditional (non-Internet) disputes.

     Attorneys General and consumer protection agencies throughout the country have seen a tremendous influx in the number
of consumer complaints connected to the advent of e-commerce in 1997. Unfortunately, many of these complaints may never
be resolved. One reason some of those disputes have not been addressed has to do with the fact that one of the parties to the
dispute is often outside of a state's jurisdiction. Traditionally a company or individual being sued outside of its state's jurisdiction
might take significant steps to avoid such a lawsuit. The costs associated with establishing representation in a foreign state are
often significant enough to warrant such a response. The Internet is increasing the number of products being sold and bartered
across state lines, with the result that cross-border disputes are becoming increasingly more commonplace.

     Elimination of Jurisdictional barriers

     The Online ADR process provides a dispute resolution medium that does not depend on the exercise of jurisdiction in a
forum state. Companies and individuals are given incentives to resolve their disputes. Certainly such an interest is most
commonly present where an ongoing relationship is at a premium.8 The process is dependent on extending an invitation to a
defendant party to engage in communication. While this process requires the acceptance of such an invitation, it is most often in
both parties' best interest resolve the dispute in the >least expensive and time-consuming manner. The Internet serves this
process very well because it does not require the physical presence of both parties and the arbitrator or mediator. The
discussion can be carried on at speeds close to real time and the costs associated with legal representation, travel and lodging
can be minimized. Furthermore, the physical separation may actually benefit the parties. Physically separated parties are more
likely to keep their cool and negotiate effectively because a large part of the emotional element involved with face to face
negotiation is removed. Thus it is possible to bring parties to a conflict to a resolution without the exercise of jurisdiction on a
foreign corporation or resident.

     More attractive for disputes with small monetary value

     A second problem associated with many Internet transactions is that disputes are often over items of relatively little
monetary value. Disputes over goods of such little value do not lend themselves to being litigated in court because of the high
costs of litigation. As a result, consumers have relatively little recourse when challenging disputes of low monetary value. This
type of dispute most commonly arises, but is not limited to, smaller, less developed e-businesses, as well as Internet
transactions between private parties. At large e-businesses, such disputes are often handled internally by a company's customer
service center.

     Online ADR mechanisms may provide an effective medium for resolving disputes of low monetary value. Generally,
Online ADR providers are inviting resolution of claims regardless of the size of the claim. In fact, some Online ADR providers
do not even charge for their service, thus the value of the claim is effectively of no importance9. While most ADR Providers do
charge a fee, the prices are most often very reasonable and start for as little as $36.50 for an item up to $2000
(Onlinemediators.com). The presence of Online ADR mechanisms accredited by States Attorneys General might provide an
avenue to contest smaller disputes and remove those disputes from Attorneys General's consumer protection caseload.
Alternatively, the states might consider creating and investing in their own Online ADR mechanisms, at least for informal
complaint resolution, as a way of speeding up the complaint resolution process, and allowing for the ease and convenience for
consumers and merchants alike, of participating in the dispute resolution process from their home or business office.

     Auction sites - Dispute resolution when Internet business as the intermediary

     Consumer fraud at intermediary sites, such as auction sites, is one of the areas prone to a greater number of disputes and
consumer fraud. Intermediary web sites are companies that provide a forum for interaction and transaction between members
of a community such as eBay.com. The majority of these disputes are not between companies and individuals, but rather
between private individuals.

     Consumers that participate in this type of commerce expose themselves to a heightened level of risk due to the relative
anonymity of the individual making a sale. The occurrence of disputes arising out of misrepresentation, or non-delivery of a
product is extremely high in this type of transaction. Many of the Internet related complaints received by Attorneys General
take this form. Unfortunately the majority of buyers and sellers at auction/intermediary sites do not have the wherewithal to
contest such a claim in court, but an online mediation might serve as a much better alternative. With their low costs, simple
processes and human interaction even when hundreds of miles apart, Online ADR providers present a possible alternative to
the court system which would generally be inaccessible for this type of dispute.10

     Lack of clear contract and consumer protection rules

     The lack of clear legal rules in the international e-commerce arena is another reason why Internet companies are
embracing Online ADR. As electronic commerce grows, borders between nations are blurred. Thus the application of one
country's law as compared. that of another, or the application of private international law can lead to very complex jurisdictional
and conflict of law issues. E-businesses will continue to expand their markets into the international arena, and will face
consumer disputes from a multiplicity of jurisdictions.

     In sum, issues of jurisdiction, disputes with low monetary value and the frequency of complaints involving Internet
intermediaries are likely to be exacerbated in the international arena. Online ADR Providers allow individuals from across the
world to settle disputes in one meeting place even while being in opposite ends of the globe and have the ability to address
these issues in a manner not possible by traditional litigation. The flexibility of the process means that participants do not have to
rely strictly on the rule of law. Rather they may rely on understanding each other as people, and work more effectively toward
an amicable solution that bridges legal, cultural and contractual divides.

     Recent example of intervention guidelines that include Online ADR

     Although still in its early stages, Online ADR is proving to be a viable dispute resolution proposal not only for the public,
but also for the industry. As noted above, a group of major multinational companies with significant Internet presence, recently
unveiled its own proposed consumer protection guidelines that include the adoption of an international system of Online
ADR.11 The guidelines were presented at a recent FTC workshop, and were proposed by industry leaders such as America
Online, AT&T, Dell, IBM and Microsoft. These companies recognize the value that online consumer safety brings to their
companies, and recognize that establishing an international system of Online ADR addresses some consumer fears about
accountability. The proposal calls for any company signing on to it to abide by a set of guidelines, including: full disclosure of the
terms of sale, opportunity to review a transaction, and disclosure of all costs involved in the transaction including shipping.12

     The proposal has not received widespread approval. For instance, the plan does not fail to address what if any laws will
apply internationally, nor does it provide for a review of non-B2C transactions.13 Thus transactions arising out of auction sites,
which currently make up the majority of consumer complaints, are not addressed by this proposal. While some consumer
advocates have criticized the plan, it is important nonetheless, that industry has recognized the need for effective consumer
complaint resolution in the global marketplace.

Alternatives to Online ADR

     Certainly there are alternative methods to dispute resolution other than Online ADR. These include credit card charge
back mechanisms, complaint resolution mechanisms established by merchants, consumer complaints to state attorneys general
offices, consumer protection agencies, small claims court, and litigation. Consumers are free to utilize any one of these methods
of dispute resolution, but as with all options certain drawbacks do exist.

     For example credit card mechanisms generally take a long period of time and do not typically utilized cooperation
between the consumer and the merchant to reach a resolution. Rather the process requires an expensive investigation on the
part of the credit card company. Complaint resolution mechanisms offered by merchants may be an intelligent alternative.
SquareTrade.com began as such a service. A problem with this approach may be the vastly different approaches taken by one
merchant as compared with another, as well as the lack of accountability of an in-house service.

     Complaints to Attorneys Generals offices and consumer protection agencies have traditionally been a preferred method
of resolving disputes. This method may not be the most effective online. In the current ongoing survey of the 50 states Attorneys
General's Offices by the authors of this report at the University of Washington's Center for Law, Commerce and Technology,
the majority of AGs have yet to seriously address Internet related complaints. While most have some experience with consumer
complaints of this nature, states have been slow to allocate funds specifically to Internet complaints. Yet the experience
Attorneys General do have with existing channels of Online ADR may prove to be a means to create fairness and effective
consumer protection in the Online ADR context.

     Small claims procedures and litigation has been traditional method of resolving most transactional disputes. Unfortunately,
as previously discussed traditional litigation does not lend itself to Internet transaction due to its high costs and the existing
congestion of the court system. Furthermore, while small claims courts often provide a venue for disputes of smaller amounts,
the ubiquitous nature of the Internet does not lend itself well to this venue. A merchant in London is not likely to show up in a
Seattle municipal small claims court. Online ADR may be a proxy for small claims courts - creating, in essence, virtual small
claims courts for citizens from multiple jurisdictions.

     Thus while existing complaint resolution mechanisms, present viable options for many types of transactions, they may be
less well equipped to handle Internet complaints for which Online ADR may be a viable alternative. Even if traditional
mechanisms continue to provide an avenue for some consumer complaints, the main issue is whether online ADR
can provide a needed supplement to the existing menu of options.

Survey of Online Alternative Dispute Resolution Providers

     The following is a representative sample of the various ADR Providers of Online ADR. The sample is meant to present
the range of services and methods utilized by Online ADR providers. While some ADR Providers have developed well thought
out and organized Online ADR processes, others have only rather loosely organized processes that are still in the development
stages.

     The various ADR Providers have different origins, which may affect their methods of dispute resolution. For instance,
those initiatives from the public sector, and academia tend to lack proprietary technology that contributes to the dispute
resolution process. On the other hand, privately funded initiatives have taken to utilizing and developing technology that
contributes to the process. Furthermore, some ADR Providers are focussed on one or two specific types of transactions,
whereas others tend to address a broader range of disputes. Some ADR Providers have developed processes that are geared
especially toward one type of claim, for instance insurance, or domain name dispute resolution. Others have less focussed
approaches that address a variety of disputes.

     Generally, all Online ADR providers fall into one of four categories or a combination thereof. The categories are
Arbitration, Mediation, Negotiation, and so-called "Peer Pressure" services. (see Data Chart 1) Arbitration services
actually decide cases brought before them. Generally, the parties have agreed by contract to be bound by the decision.
Mediation services are generally designed to facilitate communication and cooperation between parties. The services utilize
email or some other form of proprietary communication software to allow communication between the parties and the mediator.
Online Negotiation services are currently the most automated Online ADR services and are most often applied in the insurance
claims settlement arena. These services rely on proprietary software that accepts offers and demands; once the parties offer
and demand are within a certain range the case settles. Parties to a negotiation have generally agreed to be bound by the
negotiated sum and thus are generally precluded from seeking relief in the courts.

     Peer Pressure services are a child of the Internet. Traditionally when individuals have been upset with the quality of
product or services, they have turned to mass media to tell their story and create negative press about a particular company.
The Internet is the ultimate way for private individuals to make their complaints public thus encouraging companies to reach a
resolution with them before such a disclosure. Companies using this approach generally use it as an incentive in conjunction with
an online mediation service.14

Cost

     Currently Online ADR providers use a wide range of fee structures, although generally the fees are less expensive than
traditional litigation. There is no one fee structure that appears to be dominant, although it is common for companies to employ
a filing fee, a service fee, as well as a settlement fee. Some companies skip one of these, but most do not employ a single sum
fee. Several companies, such as Webdispute.com and Onlinemediators, have developed scaled fees that are dependent on the
amount in controversy.

Response Time and Caseloads

     While the courts face heavy caseload, which often means that a particular case may not be heard for months, many
Online ADR providers are able to settle disputes within a matter of days. For example Squaretrade.com settles most disputes
within 10 to 14 days.15 Certainly, Online ADR is heavily dependent upon the response time of the parties involved, and thus
the time required to resolve a dispute is often more dependent on the parties' response times than a back log of the system.
Although there is currently no independent literature on the caseload of Online ADR providers, no provider appears to be at
their maximum capacity. Currently almost every ADR Provider points to the efficiency of their system as a reason for using
Online ADR rather than the court system.

Personnel

     The credentials of arbitrators and mediators are essential to establishing a trustworthy online arbitration or mediation
service. Although standards for traditional mediators and arbitrators do exist16, no industry standard for online mediators is
currently being used. As previously mentioned a coalition of industry partners recently unveiled a proposal for an international
dispute resolution process.17 Although details of this plan have yet to be ironed out, it is likely to include standards for
mediators.

     Presently arbitrator and mediator standards are established the individual ADR Providers. While some ADR Providers
do not explicitly disclose how their mediators are chosen, nor what standards they must meet, Disputes.org and
Onlinemediators have been with respect to their selection methodology. Disputes.org publishes a list of law professors, and
lawyers that they use as arbitrators and allows the parties weigh in on which arbitrators work on a particular case.18
Onlinemediators not only set up standards for its mediators, but also requires that they operate according to the Model
Standards of Practice for Mediators of the American Bar Association. Certainly this is one area where disclosure and
regulation will be key to the success of the Online ADR industry. Without the adoption of a uniform set of standards for online
mediators or arbitrators, Online ADR is less likely to become a legitimate alternative to the courts. As the ADR Providers
become more established, this will certainly become an issue they will all have to address.

     The survey below addresses the characteristics of each ADR Provider and catalogues the variety of approaches
currently available.

Endnotes

   1.Letter from Denis M. Wright, Assistant Attorney General - Chief, Consumer Affairs, State of Alabama Office of the
     Attorney General, to Anita Ramasastry, Assistant Professor of Law, Center for Law, Commerce and Technology
     (hereinafter "CLCT"); (May 16, 2000); Letter from Don Stenberg, Attorney General, and Marti Crawford, Consumer
     Specialist, Consumer Protection Division, State of Nebraska, Office of the Attorney General, to CLCT, (May 2, 2000);
     Electronic letter from Jay I. Ashman, Assistant Attorney General, Consumer Assistance Program, Vermont Attorney
     General's Office, to CLCT, (May 22, 2000); Letter from Jill L. Miles, Deputy Attorney General, State of West Virginia
     Office of the Attorney General, to CLCT, (May 31, 2000) ; Electronic letter from Judy Austad, Attorney General,
     Consumer Protection and Antitrust division, North Dakota Attorney General's Office, to CLCT , (May 22, 2000);
     Letter from Jill L. Miles, Deputy Attorney General, State of West Virginia Office of the Attorney General, to CLCT,
     (May 31, 2000); Letter from David B. Irvin, Senior Assistant Attorney General, Commonwealth of Virginia, Office of
     the Attorney General, to, (May 23, 2000); Letter from Todd Letterman, Director of Consumer Protection,
     Commonwealth of Kentucky, Office of the Attorney General, to CLCT , (May 12, 2000); Letter from Bruce Meeks,
     Executive Deputy, State of Florida, Office of the Attorney General, to CLCT , (July 11, 2000); Letter from Scott J.
     Davis, Assistant Attorney General, St. Thomas, US Virgin Islands, Department of Justice, Office of the Attorney
     General, to CLCT , (May 12, 2000) (Letters on file with the CLCT).

   2.See Letter from David B. Irvin, Senior Assistant Attorney General, Commonwealth of Virginia, Office of the Attorney
     General.

   3.See Id.

   4.See Id.

   5.Attorney General of Washington, Consumer and Criminal Justice Cyber Clearinghouse,
     http://www.wa.gov/ago/clearinghouse/, last visited June 16, 2000.

   6.New York State Internet complaint forms http://www.oag.state.ny.us/internet_complaint/, last visited June 16, 2000.

   7.Attorney General Eliot Spitzer, Ensuring the Integrity of Electronic Commerce, Address at Annual Meeting of the New
     York State Business Council, September 23, 1999, http://www.oag.state.ny.us/press/statements/e_commerce.html.

   8.Ethan Katsh, Summary of presentation to Ohio State University Law School Journal of Dispute Resolution, Symposium
     on ADR in Cyberspace (November 11, 1999), http://www.osu.edu/units/law/JDR/katshpaper.htm.

   9.For example the Chicago-Kent College of Law, Illinois Institute of Technology's Virtual Magistrate
     http://www.vmag.org/, last visited June 8, 2000.

  10.SquareTrade.com, http://www.squaretrade.com, has been a leader in this area. Though it currently handles complaints
     related to all aspects of e-business, it began as a pilot program within the eBay auction site. Last visited June 8, 2000.

  11.John Swartz, Online Firms Plan Retail Guidelines (visited June 10, 2000)
     http://www.washingtonpost.com/wp-dyn/articles/A2939-2000Jun5.html.

  12.See id.

  13.See id.

  14.For example see http://www.ilevel.com.

  15.http://www.squaretrade.com, last visited June 8, 2000.

  16.For example Model Standards of Practice for Mediators of the American Bar Association.

  17.Swarts, http://www.washingtonpost.com/wp-dyn/articles/A2939-2000Jun5.html.

  18.eResolution (Disputes.org) Supplemental Rules, http://www.eresolution.ca/services/dnd/p_r/supprules.htm.