Appellants were consumers who purchased mail order computers and software products from Gateway 2000, Inc. (Defendant). Appellants alleged deceptive sales practices in seven causes of action, and Defendant moved to dismiss based on the arbitration clause in the “Standard Terms and Conditions Agreement” (Agreement) it enclosed in every shipment.
Under New York Law, unconscionability requires a showing that a contract is “both procedurally and substantively unconscionable when made,” and there must be a 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.”
Appellants sought compensatory and punitive damages for breach of warranty and contract, fraud, unfair trade practices, and Defendant’s false advertising that service was available around the clock.
Defendant enclosed an Agreement in every box that stated that the consumer accepted its terms by keeping the computer 30 days. Section 10, entitled “DISPUTE RESOLUTION,” stated that any claim would be settled in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC). Further, the location of the arbitration would be Chicago, Illinois.
The IAS court dismissed the complaint based on the arbitration clause.
· Was the arbitration clause invalid under Uniform Commercial Code (UCC) 2-202?
· Was the arbitration clause an unenforceable contract of adhesion?
· Was the arbitration clause unconscionable under UCC 2-302 because it required an unduly burdensome procedure and cost for the consumer?
. Modified the order on appeal to the extent of finding that portion of the arbitration provision requiring arbitration to be before the ICC to be unconscionable, and remanded to the Supreme Court so that the parties had the opportunity to seek substitution of an arbitrator pursuant to the Federal Arbitration Act.
· The court properly rejected Appellants’ argument that the arbitration clause was invalid under UCC 2-207. The clause was not a “material alteration” of an oral agreement, but, rather, simply one provision of a sole contract that existed between the parties.
· The claim that the arbitration clause was unenforceable as a contract of adhesion was also properly rejected. Although the parties did not possess equal bargaining power, the consumer had 30 days in which to return the goods for any reason at all. The consumer was not in a “take it or leave it” situation at all.
· Excessive fees, such as those incurred under ICC procedure, have been grounds for finding an arbitration clause unenforceable or commercially unreasonable. However, the lower court found the point to be moot because Gateway had agreed to arbitrate before the American Arbitration Association (AAA) instead.
Appellants claimed that the AAA fees were also excessive and unconscionable, and the court could not determine that on the record
A large portion of the court’s rationale rested upon the consumers’ acceptance of the terms contained in the Agreement by keeping the items for over 30 days. They could have returned the goods and avoided the contract.