As companies doing business on the Internet continue to look for ways to distinguish themselves and become more valuable to their users, a number of them are deciding to add to their existing Web site(s) the use of auction services. Often referred to as "B2B marketplaces" or "trading hubs," these services are a practical way to build a site's sticky applications. They keep users coming back to find out what new goods or services are being offered, or help users to sell their own goods or services. There is an obvious synergy to adding auction functionality to the Web site of businesses engaged in the export-import sector, and it would not be surprising to see more of those sites add electronic marketplaces in the coming year.

Once an electronic marketplace is added to a site, it is important to re-evaluate whether the site's existing agreement(s) with its users sufficiently cover liabilities which may arise in the course of the marketplace's use. For example, what happens if a seller fails to ship goods purchased through the marketplace, or ships to an incorrect address? What if a buyer fails to pay a seller for goods shipped? What impact, if any, should the marketplace have on the site's privacy policy? These are only some of the issues which should be addressed for an Internet business offering auction services. This article is a primer for business executives and their legal counsel, discussing basic issues to be addressed in an agreement between an Internet-based auction site and the site's users (the "Agreement").

I. Core Issues

A. The Electronic Marketplace Is Merely And Solely A Venue For Buyers And Sellers To Identify Each Other And Agree Upon Terms Of Trade

One of the first concepts the Agreement should address is that the auction site is nothing more than a venue bringing together buyers and sellers of goods and services. Responsibility for creditworthiness of the buyers or reliability of the sellers should be explicitly disclaimed. This disclaimer should include standard language about the auction services being provided on an "as is" basis. As discussed below, the electronic marketplace should further disclaim any responsibility for the accuracy of the postings made by its users.

B. Limitation Of Liability And Indemnification

In addition to the disclaimers referenced above, the Agreement should have strong limitation of liability and indemnification clauses. As a condition of joining the auction site, registrants should agree that neither the auction site (or its affiliates) nor its management are liable for damages or expenses arising from use of the electronic marketplace, termination of membership, failure of performance on the part of other electronic marketplace participants, unanticipated government actions, or other events. The Agreement should further require each registrant to defend and hold the electronic marketplace and its management harmless against claims arising from the registrant's use of the electronic marketplace.

In short, the Agreement should seek to explicitly remove the Web site from liability for the transactions occurring through the electronic marketplace. If the Web site does not involve itself in the actual transactions occurring through the electronic marketplace (such as arranging shipment, guaranteeing payment, confirming addresses, etc.), the auction participants should release the Web site and its management from liability connected with transactions occurring on the electronic marketplace.1 While this may sound extreme, it is neither unprecedented nor unreasonable. Broadly stated, suing an electronic marketplace for a dispute arising from a transaction that occurred on the site is similar to suing the New York Stock Exchange for a dispute arising from the purchase of a stock listed on the exchange.

C. Availability Of The Electronic Marketplace Should Not Be Guaranteed

A prudently drafted Agreement will disclaim any obligation to be available for a regular or predictable period. That is, the participants in the marketplace should bear the risk of any disruptions caused by the site going down for unanticipated reasons. The Agreement may state that (reasonable) efforts will be made to maintain the electronic marketplace's availability on a continuing and ongoing basis (with allowances for regular maintenance), but that the results of such efforts are not guaranteed.

D. Responsibility For Reliability Of The Notices And Other Information Posted To The Electronic Marketplace Should Be Disclaimed

The Agreement should, at a minimum, disclaim any responsibility for the reliability of the postings to the electronic marketplace. The Agreement can further protect the auction site by prohibiting improper or illegal activity, such as the sale of stolen goods, or goods which infringe on any intellectual property rights (e.g., trademarks, copyrights or patents). Will explicitly stating such prohibitions prevent someone from offering to sell stolen goods on the site? Perhaps. But such terms in the Agreement will undoubtedly be used to the Web site's advantage if the site unexpectedly finds itself in court as a party to a suit involving the sale of stolen goods or goods infringing upon third party intellectual property rights.

Discussion of permissible and impermissible postings may also address practical business issues. For example, must postings to the electronic marketplace be exclusive to the site? That is, should the client permit a seller to simultaneously offer a product for sale on its site and a third party electronic marketplace? What if a posting to sell a product refers interested buyers to another Web site? Such activity may be considered objectionable by management. The policies contemplated after asking such questions should be balanced against the nature of the Web site and the specific industries involved, to determine whether additional legal issues, particularly antitrust issues, are raised.

E. Applicable Laws, Regulations And Policies Should Be Addressed

There are intellectual property and privacy issues on a variety of dimensions to consider in operating an electronic marketplace. What if management decides to advertise or highlight items listed in the electronic marketplace on other areas of its Web site, to help increase traffic of the auction site and the Web site? A business specializing in wireless technology, for example, may want to advertise the fact that a large quantity of a particular model of cell phones are available for purchase on its auction site. Similarly, management may wish to increase use of its auction site by highlighting well known members/users (e.g., Fortune 500 companies) of the auction site. More generally, the electronic marketplace may want to collect and advertise aggregate data about itself (e.g., advertising that "over 10,000 widgets are auctioned every day!"). The Agreement and/or the Web site's privacy policy should anticipate such plans and notify registrants that data collected in connection with the electronic marketplace's operation, the names of registrants, or particular items being offered on the site may be advertised or otherwise provided to third parties. Depending upon how publicity is to be handled, it may be useful to have the registrant consent in the Agreement to grant the electronic marketplace a non-exclusive license of the registrant's trademark or other intellectual property for advertising purposes. This language should be drafted with care, to re-enforce the point that intellectual property rights shall be honored by all users of the auction site, including management.

Furthermore, management should be mindful of basic demographics about the anticipated users of the auction site. Are users restricted to persons or businesses within a particular state or country? If not, are the goods and services likely to be sold through the site subject to regulation (including European privacy regulation) or export control laws? The answer will depend on what is being sold (chemicals, technology) and where the sales are occurring. The United States imposes trade sanctions in many parts of the world (e.g., Asia, Europe and the Middle East). If the client or its registrants do business in Europe, awareness of the European Commission Directive on Data Protection and the related U.S. Safe Harbor Privacy Principles are recommended. Additionally, will some sales but not others be subject to an Internet or sales tax? The Agreement should make a good faith effort to alert users to the existence of these taxes and regulations, and should obtain from the user a commitment to comply with them.

F. Dispute Resolution

The Agreement should, at the least, address a dispute resolution mechanism between users of the electronic market place and management. A more sophisticated agreement may also address a dispute resolution mechanism between the buyers and sellers using the electronic marketplace. Sometimes the mechanism chosen is arbitration in a certain city convenient to management (e.g., through the local offices of the American Arbitration Association), or in a court of law in a particular jurisdiction.2 If the Web site has well drafted terms and conditions, it is likely that those terms and conditions address dispute resolution; the Agreement may simply incorporate by reference from those terms and conditions.

G. Termination

The Agreement should address how electronic marketplace members may terminate their membership or the conditions under which a user's membership may be terminated by the hosting Web site. Details may vary, for example, depending upon whether there is a fee for registering with and using the electronic marketplace. Every Agreement should address the orderly termination of membership when transactions remain outstanding or offers to buy or sell remain outstanding. The electronic marketplace should have a mechanism to ensure that the offers to buy and sell which are posted on it are from members in good standing, with valid registrations. It is advisable to provide users the option of withdrawing offers to sell provided that no offers to buy have yet been posted.

II. Consider Memorializing The Trading Rules

Even if the electronic marketplace created is easy to use,3 it may be helpful to memorialize the basic auction or trading rules. Such rules may state, for example, that a transaction is legally binding on the buyer and the seller once an offer is accepted and my not be unilaterally modified thereafter. Furthermore, particularly where there is a fee to join the electronic marketplace, the rules should state that only registrants may offer to buy and sell goods on the auction site. Explicit prohibitions against bad faith manipulations of price for any of the goods or services offered are also recommended. A final rule which should be included is the reservation of the management's right to revoke the usage privileges of any registrant(s) violating the trading rules.

If and as the electronic marketplace is upgraded, the trading rules may become more complicated. By memorializing the trading rules and posting them on the site, users of the electronic marketplace will know where to turn to for clear directions on how to use any new features and functions. Attaching or integrating those trading rules the with Agreement may enhance them by providing them with authority and legitimacy.

III. Modify Existing User Agreements Or Create A New One?

Management will likely wish to keep the need for contracts and legal agreements between itself and its users to a minimum. Legal counsel may be asked whether the existing site agreements are sufficient to address liability issues raised by the electronic marketplace, or whether those agreements could be modified. The answer to this question of course depends upon how the existing agreements are drafted. Often, a site will have a General Terms and Conditions page setting forth the terms and conditions with which the public may use the site, along with a Privacy Policy page. In deciding whether to use the existing agreements, modify existing agreements to address the points raised in Parts I and II above, or draft a new agreement to accommodate the new electronic marketplace, legal counsel should bear in mind who will have access to the auction site. The three broad possibilities are the general public, all registered users of the Web site, or only those specifically registering with the electronic marketplace.

One of the easiest ways to limit liability for interaction with non-registered users (meaning, not registered with either the Web site or its electronic marketplace, if there is separate registration) is restricting access to the electronic marketplace to registered users.4 Non-registered users may be permitted to review some or all of the auctions offered, but denied the rights to participate (i.e., offer to buy or sell) in the electronic marketplace. Registration is a time consuming process; someone willing to devote the time to register is more likely to be a responsible user of the service. As a practical matter, not all the registered users of the Web site may want to use the auction services. If all registered users of the Web site shall have access to the electronic marketplace, it makes sense to modify the Web site's existing Terms & Conditions to incorporate the electronic marketplace elements. If separate registration is necessary anyway (for example, if an additional access or membership fee must be paid to use the electronic marketplace), it may be more suitable to draft a new set of terms and conditions specifically for the electronic marketplace members.


The author is a partner in the Washington, D.C. office of Williams, Mullen, Clark & Dobbins, counseling clients on a variety of international technology-related legal matters. The views expressed in this article are those of the author alone and do not necessarily reflect the views of Williams, Mullen, Clark & Dobbins or its clients.

1 A sophisticated electronic marketplace may provide additional services related to the underlying transactions, such as coordinating with shipping vendors or undertaking some advanced level of credit worthiness review of registrants prior to granting them membership in the electronic marketplace. Such services may be provided with the hope that it will increase use of the electronic marketplace. In such instances, while it may not be possible to disclaim total liability, it is important that the risks and liabilities are clearly defined and, with respect to the client, limited to the extent possible.

2 In deciding between arbitration or a court, it is important to be mindful of the client's likely litigation posture. For a client more likely to be an infrequent defendant, it may be wise to require exclusive jurisdiction for assertion of a claim to be in nearby federal or state courts of law. Such courts will have diversity of jurisdiction, amount in controversy, and other requirements requiring a plaintiff to retain a lawyer and undergo some effort (and hopefully reflection) before asserting a claim. If the client is likely to be a frequent plaintiff (or perhaps a frequent defendant), it may be preferable to resolve disputes as informally and quickly as possible; this may suggest the use of arbitration.

3 Ease of use issues merit being the subject of a separate article and will be a material factor in the success of an electronic marketplace. Complexity of legal issues should not be permitted to overshadow the objective of creating an electronic marketplace which is easy to use, popular and consequently profitable.

4 This analysis presumes that users of the Web site must register with the site. Most business Web sites, whether they cater to other businesses or to consumers, encourage or require registration with the site to fully utilize all the features of the site. Aside from the commercial/business reasons why requiring registration is advisable, there are legal reasons to require registration. Part of the registration process should include the display of the site's terms of use (and depending upon the nature of the site, perhaps its privacy policy as well), and require some affirmative indication that the user reviewed and agrees to those terms.

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