Intellectual Property Law

Choice of Law and Arbitration Clauses in E-commerce Agreements

By Martha L. Arias

Laws applicable to e-commerce transactions may be spread among several areas of law, e.i., criminal, contract, evidence, advertisement law, etc.  A very interesting case applying the U.S. Federal Arbitration Act (FAA) to a franchise agreement and e-commerce dealer agreement exemplifies this statement.  This case shows how contracts, choice of law, and arbitration law amalgam in an e-commerce setting.  

The U.S. Federal Arbitration Act (FAA), 9 U.S.C.S § 1. et sq., entered into force in 1925 and aimed to place arbitration agreements under the same footing as other contract.  FAA also made arbitration agreements enforceable by U.S. courts in maritime and commerce cases.  Indeed, even contracts regarding statutory rights may be subject to arbitration, absent a show of fraud or excess of power. See Shearson/American Express v. McMahon (1987) 482 US 220, 107 S Ct 2332, 96 L Ed 2d 185, CCH Fed Secur L Rep P 93265. Arbitration has been commonly used in franchise agreements.  In these cases, the parties are entitled to stay litigation pending arbitration proceedings, even in lawsuits in which damages are claimed.  See   Garber v. Sir Speedy, Inc. (1995, ND Tex) 930 F Supp 267, affd (1996, CA5 Tex) 91 F3d 137.   

In the case of Suburban Leisure Ctr., Inc. v. Amf Bowling Prods., 468 F.3d 523 (8th Cir. Ct. Appeals 2006), the franchisor, through a verbal agreement, conferred the franchisee the right to use the franchisor's trade name, trademarks, and service marks to sell some goods in franchisee's stores.  Later, the same parties executed a written e-commerce dealer agreement that included a merger clause in which franchisee agreed to provide delivery and installation services to franchisor's clients in its area, for those products the franchisor sold in its website.  Some months later after the parties had entered into this e-commerce dealer agreement, franchisor sent a termination letter to franchisee requesting to cease promotion of franchisor's marks under the verbal agreement.  The termination letter did not mention the e-commerce dealer agreement.  Franchisee filed a lawsuit for damages for violation of the oral franchise agreement. 

The e-commerce dealer agreement (e-dealer agreement) included an arbitration clause under 9 U.S.C.S. §1, stating that any claim under the e-dealer agreement would be settled by binding arbitration under the law of Virginia.  The e-dealer agreement also included a clause stating that it superseded any prior agreement and it was the entire agreement between the parties.  Lastly, the e-dealer agreement selected Virginia as the choice of law jurisdiction. 

The franchisor filed a motion to dismiss, and, in the alternative, a motion to compel arbitration and stay proceedings.  The district court denied this motion; franchisor appealed.  Regarding the applicable law for the e-dealer agreement, the court of appeals applied Virginia law as the choice of law for the e-dealer agreement and also determined that the FAA applied to the present case because the e-dealer agreement involved interstate commerce.  Franchisor argued that the e-dealer agreement incorporated a merger clause that superseded the verbal franchise agreement.  Additionally, the franchisor argued that any dispute should be subject to arbitration, as the dispute mechanism binding on the parties.  The court of appealed affirmed the district court holding.

The court of appealed applied the "collateral contract doctrine" under Virginia state law.  This doctrine constitutes an exception to the parole evidence rule.  The court of appeals found that the oral agreement involved franchisee's right to promote franchisor's products by using its trademark, trade name, and service mark; while the e-dealer agreement involved franchisor's online sales and a new contract for installation and services with franchisee.  The court found that the e-dealer agreement did not complement or contradict the previous oral agreement.  Thus, "the parol evidence rule does not exclude parol proof of a prior or contemporaneous oral agreement that is independent of, collateral to and not inconsistent with the written contract, and which would not ordinarily be expected to be embodied in the writing" (this is the collateral contract doctrine). Therefore, the oral agreement between the parties addressed the franchise relationship that was not covered by the e-dealer agreement which involved another type of relationship.  Consequently, the arbitration clause included in the e-dealer agreement is not applicable to the oral agreement between the parties.  

We can infer from this case that the choice of law clause in any e-commerce agreement has tremendous incidence in any future contractual dispute; including the validity of arbitration and merger clauses in subsequent agreements.  The outcome of this case would have been different if an unlike choice of law forum had been selected where not similar exception to the parole evidence rule exist. 

Full post as published by IBLS Internet Law Blog on November 19, 2008 (boomark / email).