Jeremy Gottschalk, founder of Marketplace Risk and expert in risk management, trust & safety, and legal strategy for marketplace startups.
Limitation of Liability
You should think carefully about your limitations of liability and what you, as a marketplace, could potentially be liable for if something were to go wrong. In many cases, you will want to have a cap on your liability, but calculating this depends on a variety of factors, including whether your fees are paid via subscription or based on the amount that's transacted through the marketplace. You can also just pick a number out of thin air - there is really no magic to a cap on liability.
Most often, you’ll see caps that are equal to the amount transacted through your platform over a prior period of three, six or 12 months, for example, You may also calculate a multiple of the amount transacted through your platform over that time period to ensure that your customers may recover something, even if it is nominal. This is especially true in jurisdictions that do not permit businesses to completely limit their liability to zero.
Class Action Waivers
Let’s say for argument’s sake that there is some sort of a data breach of your marketplace, and some or all of your customer’s financial information or personal information is leaked. In this situation, naturally, it is likely that your customers will sue you.
In fact, in many cases, class action suits are driven by plaintiff's lawyers who often stand to win huge amounts as a result of the settlements. These lawyers usually take the lion’s share of any settlements or damages, leaving the plaintiffs as the injured parties with a cents-on-the-dollar fraction of what their actual damages are. In this scenario a marketplace can find their legal costs quickly spiraling, while plaintiffs are often left feeling short-changed
For this reason, it’s important to remove the incentive for lawyers to capitalize on potentially low-damage incidents that affect a lot of your customers by including a class action waiver. This specifies that each customer who believes that they've been injured shall pursue their claim against you individually.
In many jurisdictions, in order to include a class action waiver, you need to do so in the context of arbitration. That means that you will want to consider including mandatory arbitration in the event of any claim related to your marketplace.
In addition to going hand-in-hand with class action waivers, arbitration is seen to resolve disputes faster, more efficiently and significantly more cost-effectively than traditional litigation. While this is not always the case, generally speaking, arbitration is the more preferable route. Beyond the efficiency and cost-savings, arbitration is confidential. So, the result of the arbitration, as well as the arbitration, itself, is never made public.
When compelling arbitration, there are many things to consider, including what law applies to the disputes, what procedural rules will apply to the arbitration, where the arbitration will be conducted, and whether the arbitration can be done virtually, as is the case with digital arbitration platforms like New Era ADR and FairClaims.
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