Gateway widens doorway to imposing unfair binding arbitration on consumers.

• Author: Sternlight, Jean R.

When Rich and Enza Hill opened the boxes to their new Gateway 10th Anniversary computer system, they had no idea they were trading their right to a jury trial for binding arbitration. Nonetheless, the Seventh Circuit Court of Appeals has held that because the boxes contained a "Standard Terms and Conditions Agreement" including an arbitration clause, the Hills waived their right to sue Gateway in court when they failed to return the computer within 30 days.[1] Instead, the Hills could only file a claim against Gateway in arbitration, and pay fees totaling at least $2,000 to get there.[2]

Hill v. Gateway,[3] is but the most extreme example of a series of court decisions that allow large companies to impose potentially unfair binding arbitration agreements on unwitting consumers. When a California bank sent its customers an envelope stuffer announcing that all future claims against the bank must be arbitrated rather than litigated, thereby precluding such consumers from having their claims heard by a jury, a California state court upheld the clause.[4] At least one Florida bank, First Union, has similarly sent their customers mailings announcing in small print that all future disputes with the bank must be arbitrated rather than litigated.[5] In a less extreme case Florida's Fifth District Court of Appeal held that consumers who purchased pest extermination services were required to arbitrate not only contractual disputes but also personal injury claims that allegedly resulted from the extermination, where they signed an arbitration clause as part of the contract.[6] In the health care context, the Utah Supreme Court, in Sosa v. Paulos,[7] found that a doctor could require a patient to arbitrate any future medical malpractice complaint before a panel of specialists in the doctor's own field because the patient signed an arbitration clause among a number of other documents just a few minutes before she went into surgery.[8]

The Gateway decision is more striking than these and many other pro-arbitration cases because the Hills literally had no chance to escape the arbitration clause other than by making the heroic effort of returning their new computer. Realistically, they had no chance to even learn of the existence of the arbitration clause before the computer was ordered, paid for, and delivered. While the Seventh Circuit implied potential buyers might learn about Gateway's arbitration program through advertisements[9] the Gateway web page, or conversations with Gateway personnel, these options are illusory. Neither the advertisements' nor the web page made any mention of arbitration.[10] Further, even had the Hills somehow had the prescience to ask a salesperson about arbitration,[11] it is not at all clear they could have obtained a copy of the clauses.[12] Even once the computer was delivered it is by no means clear that a typical consumer would have noticed or understood the arbitration clause contained on page 3, paragraph 10 of the statement of terms document, which was packed together with the computer, monitor, keyboard, lots of software, and multiple sets of instructions.

States' statutory attempts to protect their consumers from unfair arbitration clauses have been largely unsuccessful because courts have found that state laws that single out arbitration contracts for more hostile treatment than other contracts are preempted by the Federal Arbitration Act,[13] as long as the contract involves interstate commerce.[14] For example, the Supreme Court held preempted a Montana statute requiring adequate notice of an arbitration provision contained in a contract,[15] as well as an Alabama statute entirely prohibiting pre-dispute arbitration agreements.[16] In Securities Industry Ass'n v. Lewis,[17] the district court held preempted a Florida statute requiring that parties to securities arbitration agreements be provided the option of presenting their claims before a nonindustry arbitration panel.[18]

The outcome in Gateway, however, is questionable on federal statutory, common law, and constitutional grounds.[19] First, the Magnuson-MossAct,[20] passed in 1974 "to improve the adequacy of information available to consumers, [and] prevent deception,"[21] provides that consumers cannot, prior to their assertion of a claim, be deprived of their right to sue merchants in court. While the Act allows merchants to establish informal dispute settlement procedures,[22] the Act and the accompanying regulations and legislative history imply that these procedures must be nonbinding.[23] In comments issued together with the regulations the FTC explicitly rebutted claims of some industry representatives that warrantors ought, in advance of a dispute, be allowed to require consumers to resort to binding arbitration. It stated:

The Rule does not allow for this for two reasons. First.... Congressional intent was that Section 110 Mechanisms not be legally binding. Second, even if binding Mechanisms were contemplated by Section 110 of the Act, the Commission is not prepared, at this point in time, to develop guidelines for a system in which consumers would commit themselves, at the time of product purchase, to resolve any difficulties in a binding, but nonjudicial proceeding. The Commission is not now convinced that any guidelines which it set out could ensure sufficient protection for consumers against warrantors, even if the Congressional report had not made clear, as it did, that it wished for such mechanisms to not be binding.[24]

While the agency commentary accompanying the Magnuson-Moss Warranty Act regulations observes that a warrantor may offer consumers the option of binding arbitration, once a dispute has arisen,[25] the regulations prohibit warrantors from mandating binding arbitration prior to the occurrence of the dispute.[26]

Gateway is also questionable as a matter of contract law. While it is clear that buyers and seller entered a contract regarding purchase and sale of the computer, that contract did not necessarily include an arbitration provision. Judge Easterbrook, writing for the majority, essentially concluded that a contract for arbitration was formed because the buyers accepted delivery of the computer and then failed to return it within 30 days.[27] Yet, pursuant to the more traditional...