Citation. 246 A.D.2d 246 (Supreme Court, Appellate Division, First Department 1998)
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Brief Fact Summary.
The validity of an arbitration clause in a contract to sell a computer between a computer company and various consumers was at issue.
Synopsis of Rule of Law.
It is generally necessary to prove both procedural and substantive unconscionability when arguing a provision of an agreement is unconscionable. However, substantive unconscionability alone is enough in a case where the consumer is "[b]arred from resorting to the courts by the arbitration clause in the first instance, the designation of a financially prohibitive forum effectively bars consumers from this forum as well; [and] consumers are thus left with no forum at all in which to resolve a dispute."
The Appellants/Plaintiffs, Brower and others (the "Plaintiffs"), were individuals that purchased computers and software products from the Defendant, Gateway 2000 (the "Defendant"), through a direct-sales system, by mail or telephone order. A copy of the Defendant's "Standard Terms and Conditions Agreement" (the "Agreement") and any relevant warranties were included with the shipment. The first part of the agreement included a "Note to the Customer". This note states, "in slightly larger print than the remainder of the document, in a box that spans the width of the page: 'This document contains Gateway 2000's Standard Terms and Conditions. By keeping your Gateway 2000 computer system beyond thirty (30) days after the date of delivery, you accept these Terms and Conditions.' " The agreement spanned sixteen paragraphs. Paragraph ten entitled "dispute resolution" is relevant here. It reads as follows: "Any dispute or controversy arising out of or relating to this Agreement or its interpretation shall be settled exclusively and finally by arbitration. The arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted in Chicago, Illinois, U.S.A. before a sole arbitrator. Any award rendered in any such arbitration proceeding shall be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction."
• The Plaintiffs brought an action "alleging deceptive sales practices in seven causes of action, including breach of warranty, breach of contract, fraud and unfair trade practices." The Defendant moved to dismiss the Plaintiffs' complaint based on the existence of the Arbitration Clause in Paragraph ten. In response, the Plaintiffs argued that the arbitration clause was "invalid under UCC 2-207, unconscionable under UCC 2-302 and an unenforceable contract of adhesion." The Plaintiffs' major contentions were first that the forum for the arbitration was in Chicago and the headquarters of the arbitral body, the "International Chamber of Commerce" ("ICC") was located in France. Second, the arbitral body's rules were difficult to locate. Third, its costs were prohibitive (for claims less then $50,000, litigants had to advance fees of $4000, $2000 of which was non-refundable). Fourth, travel expenses would be incongruent to the amount sought. Fifth, if the Plaintiffs were to lose, they would have to pay the Defendant's legal fees. Thos amount of money was more than the cost of most of the Defendant's products.
Is the arbitration clause violative of § 2-207 of the Uniform Commercial Code ("UCC")?
• Is the arbitration clause unenforceable as a contract of adhesion?
• Does the arbitration clause violate § 2-302 of the UCC "due to the unduly burdensome procedure and cost for the individual consumer?"
No. Pursuant to [Hill v. Gateway 2000] and [ProCD, Inc. v. Zeidenberg], the arbitration clause does not violate UCC § 2-207. Based on [Hill], which construed the identical arbitration clause, the court here observed "the contract was not formed with the placement of a telephone order or with the delivery of the goods. Instead, an enforceable contract was formed only with the consumer's decision to retain the merchandise beyond the 30-day period specified in the agreement." During this time, the purchaser "has presumably examined and used the product(s) and read the agreement." Additionally, the court recognized how the [Hill] court recognized the realities of conducting business and observed "the concept of '[p]ayment preceding the revelation of full terms' is particularly common in certain industries, such as air transportation and insurance." The court also recognized that the [ProCD] court observed "UCC 2-207 did not apply and indeed was 'irrelevant' to such transactions, noting that the section is generally invoked where multiple agreements have been exchanged between the parties in a classic 'battle of the forms,' whereas ProCD (as well as Hill and this case) involves but a single form."
• No, irrespective of the fact that the parties do not possess equal bargaining power. Since the consumer had "the ability to make the purchase elsewhere and the express option to return the goods, the consumer is not in a 'take it or leave it' position at all; if any term of the agreement is unacceptable to the consumer, he or she can easily buy a competitor's product instead–either from a retailer or directly from the manufacturer–and reject Gateway's agreement by returning the merchandise." The consumer had 30 days to make their decision. The fact that the consumer does not read or understand certain portions of the contract is irrelevant.
• Yes. Under New York law, unconscionablity requires that a contract was "both procedurally and substantively unconscionable when made." In other words "some showing of 'an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.' " The procedural element is assessed by examining the contract formation process to determine if "in fact one party lacked any meaningful choice in entering into the contract, taking into consideration such factors as the setting of the transaction, the experience and education of the party claiming unconscionability, whether the contract contained 'fine print,' whether the seller used 'high-pressured tactics' and any disparity in the parties' bargaining power." The court concluded the transaction here was not procedurally unconscionable. The substantive portion of the analysis requires "an examination of the substance of the Agreement in order to determine whether the terms unreasonably favor one party." Alone, the site of the arbitration (Chicago) being inconvenient is not enough to rise to the level of unconscionability. However, the "excessive cost factor that is necessarily entailed in arbitrating before the ICC is unreasonable and surely serves to deter the individual consumer from invoking the process." Since the consumer is "[b]arred from resorting to the courts by the arbitration clause in the first instance, the designation of a financially prohibitive forum effectively bars consumers from this forum as well; consumers are thus left with no forum at all in which to resolve a dispute." The court then recognized that in this case, unlike most other cases, both procedural and substantive unconscionability did not need to exist for unconscionability to be found.
This case offers an interesting discussion of §2-207 and §2-302 of the UCC and the common law principle of adhesion.