A recent business deal - the names and places of which "have been changed to protect the innocent," as Joe Friday once would say - involved the sale of a domain name for several hundred thousand dollars. The seller was in Phoenix. The buyer was in England. The seller was enthusiastic about the deal, with visions of paying off the mortgage on his house and bankrolling his son's tuition, room and board at Stanford. The buyer was at least as charged up because acquiring this domain name would be the final cog in his world-wide, money-making machine. These deals, of course, have lawyers working on weekends.
This probably is not the kind of transaction you learned about in Business Law 101. But, like any sale transaction, the real issues are that the seller gets his money and the buyer gets his merchandise. So you do an escrow, just like selling a business or real estate.
How an escrow works, as many of you know, is as follows: In the sale of a home or building, for example, the seller and the buyer first enter into a contract, usually subject to some conditions. Examples of conditions include the ability of the buyer to obtain satisfactory financing, a termite inspection and a title insurance policy. The buyer puts in "earnest money" which, depending upon the agreement, the buyer might forfeit if financing cannot be secured. The contingencies are limitless; they all depend upon what the buyer and seller agree on.
Next, the buyer and seller go to an escrow company. Escrow companies are generally licensed, require bonding and other things to make sure they will not run off with your money. The earnest money is sent to the escrow company along with escrow instructions, signed by both parties. (The escrow company has a good deal to do with the content of the instructions, by the way.)
Generally, aside from all kinds of provisions in the escrow instructions protecting the escrow company, the escrow company accepts the money. After the escrow company has received the title policy, the termite-inspection report, financing, and whatever else is required, there is a "closing" where the escrow company pays the sale-price money to the seller, records the deed conveying the property to the buyer, all according to the escrow instructions. This way, the buyer is assured that he doesn't part with his money until he has his insured title to the property and satisfactory termite inspection and the seller is assured that he doesn't relinquish title to his property until he is assured that he will be paid for it. The sale agreement usually contains terms for dispute resolution. That is, if there is a dispute later, how and where is it resolved? What if the buyer later finds termites and claims that the termite inspection was forged? This is not usually too complex. The "where" part almost always is the locus of the property, which typically is where the buyer will be situated and for the most part where the seller can be found. But, for example, if the two are both from California but the property is in Miami, they might agree that any dispute will be settled in California courts, to avoid one of them making a nuisance of himself by filing suit in Florida. This is called a "choice of forum clause" which, if reasonable, usually will be honored by the courts.
The parties may wish to go further and agree that California law would be applied to any dispute, although Florida law ordinarily would be applied. They also may want an arbitration clause, so that they need not worry about shouldering the staggering expense of a jury trial if a dispute arises. This all is generally very straightforward since, usually, everyone is from the same town.
But what about our transatlantic domain-name sale? The basic transaction is much like the one described above. However, there are a few complexities because of the nature of the transaction. For example, finding an escrow company was not easy. In the real estate transaction, your broker will be right on the spot with a nearby escrow company. Escrow companies for business sales are many, at least in substantial metropolitan areas. But call one of those up and tell them you want to set up an escrow for the sale of a domain name - "A what?" So this brings in a third city because the escrow company that best fit the bill is in Seattle. The scorecard now is that the seller is in Phoenix, the buyer is in England and the escrow company is in Seattle. The parties checked out the escrow company, checking its license and getting a copy of its bond, as the bonding company will make good if the escrow company makes off with the money or the domain name.
The mechanics of the escrow were pretty straightforward, just like the sale of a building. The parties drew up a sale agreement; escrow instructions were approved; and, according to the instructions, the buyer put his mega-bucks into the escrow, which money was released to the seller (less the escrow fee) after NSI transferred the domain name to the buyer. Simple enough?
Compare the dispute-resolution issues which were so easily resolved in the building-sale deal with what is required here. For example, usually the escrow company and the parties are all in the same town.
The escrow company has concerns that something may go awry. Assume for the moment that the seller later claims that he had validly transferred the domain name and satisfied all of the other conditions of the agreement, but the buyer disagrees. The seller says, "I want my money" but the buyer says, "Don't give it to him; give it back to me, because he hasn't satisfied all of the conditions of the sale." If that dispute is not resolved, the escrow company has two folks claiming the same several-hundred-grand which is in the escrow company's account, and the escrow company is not about to pay it more than once.
What the escrow company does when faced with such a dilemma is to file what is called an "interpleader" or a "stake-holder's action." That is a lawsuit where the escrow company says to the court, "I have this money; it isn't mine; please enter an order telling me who is entitled to it so that I will not be subject to paying it twice." The action is served on both of the claimants, who slug out in court the issue of who gets it.
The Seattle escrow company is not about to allow that dispute to take place in Phoenix, much less England. That is non-negotiable insofar as the escrow company is concerned. So the parties are stuck with going to Seattle and applying the law of the State of Washington if they come to blows at closing.
The parties must then negotiate some dispute-resolution process. Should Arizona law apply to this transaction? British law? Where should any dispute be resolved. Meet half-way in New York? These are tricky questions because, as you know if you are a regular reader, the most likely disputes would arise from trademark issues, and the resolution may be very different in Jolly Ole England than in Arizona, the State of Washington or New York.
Then, how do you resolve a dispute? There is nowhere that is convenient to all that are involved. Everyone wants the dispute(s) resolved on home turf.
The worst thing you can do is ignore the issue. Probably you have noted in previous articles the emerging body of law concerning venue issues in Internet cases. Recall that if you have a website in Boston which someone in California claims is infringing a trademark, you might be packing your bags for Los Angeles. At least where you are involved in a transaction with someone at the start, you can deal with these issues in advance before there is a dispute. Arbitration in Chicago would be less costly for both parties than litigation at either end of the continent.
Importantly, a surprisingly large (to non-lawyers, that is) percentage of legal disputes arise because the parties tried to cut corners on legal expenses at the time of the transaction which gave rise to the dispute. Business people are always complaining that "Legalman" - as Robert Ringer called him in his wonderful 1970s books - is always there to screw up the deal. But, in fact, as Ringer readily admits, the place where a lawyer's talent is most useful is doing just that. Lawyers know what can go wrong. They ask all of these "what happens if?" questions that the parties often overlook. Saving a few thousand dollars on legal fees at the outset can result in absolutely dizzying legal fees and expenses if a dispute arises - often a dispute that could have been avoided in the first place. The solution to this "global dispute resolution" problem is a long way off. There are inventive people working on a way to resolve Internet disputes without "throwing out the baby with the bath water," so to speak.
The federal Electronic Signatures in Global and National Commerce Act, authorizing electronic signatures, is a good start to the process of trying to bring the law into the world of e-commerce. It preempts the inconsistent electronic-signature laws which have been enacted in about 40 states, creating uniformity in allowing (but not requiring) the use of electronic signatures, where the parties agree. This Act encourages the development of electronic-signature technology and will do much to facilitate e-commerce transactions, at least within the United States. Hopefully treaties will effect the same thing abroad.
However, that only helps efficiently cement agreements between parties that start off with an amicable transaction. The larger issue is the resolution of e-commerce disputes between strangers. If you have a growing e-commerce business and someone sues you in some far-flung jurisdiction, the cost of defense could bankrupt your growing business. Lawyers like that because they get the money, so you can count on lawyers to support the status quo. Most lawyers, that is; present company excepted.
These new electronic dispute-resolution companies operate the same way as brick-and-mortar dispute resolution services, but are geared to the Internet. Alternative Dispute Resolution, or ADR (you just knew there would be an acronym here, didn't you?), consists primarily of arbitration and mediation.
Arbitration is sort of a "rent-a-judge" system, whereby the parties agree, either in an original business contract or after a dispute arises, to try their case before an arbitrator, who normally is an attorney and often a retired judge. The arbitrator charges what seems to be a staggering fee - thousands of dollars per day - but that pales in comparison to the cost of court litigation. Normally, the parties split the arbitrator's fee, 50-50. Arbitration usually is binding, by agreement of the parties. In essence, it is a contract to abide by the arbitrator's decision.
Mediation is an effort to settle a dispute short of litigation. Courts are increasingly requiring mediation (sometimes called a "settlement conference") prior to trial in an effort the clear the docket. The process of mediation is simply one of hiring a mediator, usually through the same dispute-resolution companies that provide arbitration services. Mediators, who often are also arbitrators, are likewise usually lawyers and often retired judges. The parties submit their respective positions to the mediator, who attempts to persuade the parties to settle. This often is successful because a mediator, who is neutral, will punctuate the weaknesses in the parties' respective cases, pushing them toward a middle ground.
Internet disputes normally create the obvious distance problems. The parties cannot simply go downtown to the arbitrator or mediator's office and proceed, as with most mediation or arbitration. These new online mediation/arbitration services are harnessing technology to overcome the distances involved, such as by use of e-mail and Internet teleconferencing, which facilitates a practical resolution of disputes, for example, amongst folks in England, Phoenix and Seattle.
These electronic ADR services ("ODR" or Online Dispute Resolution), however, are only available where the parties agree. And the best time to agree upon how to resolve a dispute is before one has arisen.
The Internet is said to be "shrinking the world," but it really is not. It still takes all day to transport a person from London to Seattle. New technologies are learning to deal with that, but the legal system is unfortunately slow to catch up.
Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip, and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
