Illinois Supreme Court Strikes Down Arbitration Clause; Carr v. Gateway, Inc.

William Carr filed a lawsuit against Gateway, Inc. accusing the computer company of consumer fraud after it misrepresented the speed of its computer processors to Carr and other consumers. Gateway, Inc. sought to have the case heard before an arbitrator rather than a judge and jury, citing an arbitration clause was found in the sales agreement that was mailed with the computer Mr. Carr purchased from Gateway in 2001. However, the Illinois Supreme Court struck down an arbitration clause found in a contract between William Carr and Gateway, Inc. in Carr v. Gateway, Inc., Illinois Supreme Court, Docket No. 109485.

Carr’s complaint alleged that Gateway had mislead consumers when it marketed its computers outfitted with Pentium 4 processors as being faster than the older Pentium III processors. Furthermore, Carr alleged that the Pentium 4 processor was actually slower than the Pentium III and Athlon processors from Advanced Micro Devices, Inc. (AMD).

The Illinois Supreme Court lawsuit did not consider the claims of consumer fraud against Gateway, Inc., but rather dealt with the issue of arbitration proceedings. In Illinois, some contracts between parties include arbitration agreements, which essentially stipulate that if the party signing the contract has a legal claim against the party providing the services that the claim will be decided by an arbitrator rather than a jury.

In arbitration, both sides present their evidence to the arbitrator, an unbiased third party who then decides the case. Arbitration is typically less expensive and time consuming that a jury trial because the arbitrator typically reviews the evidence beforehand and makes recommendations to both sides in order to come to a final agreement.

In Illinois, there is a trend among nursing homes to include mandatory arbitration agreements in nursing home resident contracts, which if allowed, denies nursing home residents from filing Illinois nursing home malpractice lawsuits against nursing homes. This trend has been contested in Illinois, with residents claiming that the arbitration agreements deny their right to have their lawsuits heard and decided by a jury of their peers.

The Illinois Supreme Court ruled on this mandatory arbitration issue in Carter v. SSC Odin Operating Co., LLC, No. 106511 (4/15/10). The Court held that an arbitration clause is not preempted under the Illinois Nursing Home Care Act because the Federal Arbitration Act (FAA) (9 U.S.C. §2 (2000)) overrules the Illinois act and actually allows companies to include arbitration clauses. However, the Illinois Supreme Court did not rule on whether or not the nursing home in Carter satisfied the requirements needed in order to apply the FAA rules; that legal issue was remanded to the lower courts to decide.

In the present consumer fraud lawsuit, Gateway filed a motion to dismiss the Illinois civil case and have the case referred to an arbitrator. The computer company cited an arbitration clause in its “Limited Warranty Terms and Conditions
Agreement” as the basis for the mandatory arbitration. The agreement was included in materials Gateway had included with the computer it mailed to Carr’s residence and argued that Carr’s acceptance of these materials constituted his agreement to the terms of the sales contract. The Circuit Court of Madison County, Illinois denied Gateway’s motion, stating as its reason that the arbitration clause between the two parties was invalid because it was not technically part of the sales agreement.

Furthermore, the circuit court found that even if the arbitration clause were a part of the sales contract, that it would still be unenforcable for the following reasons:

(1) the clause was nonnegotiable;
(2) it was part of a preprinted form and was not read by Carr until several days after the computer was purchased;
(3) the terms of the arbitration clause were one-sided;
(4) Carr could be saddled with large costs in pursuing his claim through the designated arbitral forum;
(5) Carr would be prohibited from pursuing his claim as a class action; and
(6) Carr would be prohibited from pursuing a claim for punitive damages.

Gateway appealed the circuit court’s decision under Rule 307(a)(1) (Ill.S.Ct.R. 307(a)(1)(eff. Mar. 20, 2009)), which states that a party may appeal an interlocutory order of a court dealing with injunction issues. In Carr, the defendant was seeking an appeal of the circuit court’s denial of its motion to dismiss the case or remove it for arbitration proceedings.

However, while Carr was being appealed, the National Arbitration Forum (NAF), stopped accepting consumer arbitrations. NAF apparently stopped conducting consumer arbitrations because it was the subject of a civil fraud lawsuit brought by the Minnesota Attorney General alleging consumer fraud, deceptive trade practices, and false advertising.

This development was significant because the NAF was the entity that Gateway had designated in its arbitration agreement; the NAF’s denial of future arbitrations meant that Gateway no longer had an forum where it could bring its arbitrations. Therefore, the Illinois Appellate Court ruled that Gateway’s arbitration agreement was void because it failed to provide for an alternative arbitral forum.

In its reasoning for its decision, the Illinois Appellate Court stated that the designation of the NAF as the exclusive arbitrator was a key component of Gateway’s arbitration clause because the NAF had a “very specific set of rules and procedures that has implications for every aspect of the arbitration process.” 395 Ill. App. 3d at 1085. Furthermore, the appellate court noted that Gateway’s agreement included a clause imposing monetary penalties if a party brought a dispute in any forum other than the NAF. Therefore, the court held that Gateway had intended that any disputes be decided by the NAF alone, so that the unavailability of the NAF left Gateway’s arbitration clause with no options for arbitration. <a href="https://www.chicago-personal-injury-lawyer-blog.com/Carr%20v%20Gateway%20App%20Decision.pdf"Carr v. Gateway, Inc., Illinois Appellate Court, Docket No. 5-07-0711.

Gateway brought its appeal to the Illinois Supreme Court, where it argued that §5 of the Arbitration Act (710 ILCS 5/5) allows the substitution of arbitrators. However, the Illinois Supreme Court agreed with the lower court that Gateway’s designation of the NAF as its arbitral forum was integral to its arbitration agreement. Therefore, the court held that §5 of the Arbitration Act is not applicable and that Gateway cannot appoint a substitute arbitrator.

In its decision, the Illinois Supreme Court cited the evidence that Gateway itself had drafted the arbitration agreement which included non-negotiable terms regarding arbitrator substitution. The court held that Gateway should be held to the same standards that the Carrs would have been held to under the sales contract, i.e. no substitutions. Therefore, given the lack of availability of an arbitrator under Gateway’s terms, the arbitration agreement is void and the civil lawsuit may proceed.

The Carr decision is significant because it allows Illinois consumers the option of filing a civil lawsuit when a mandatory arbitration contract becomes void. Furthermore, the court’s decision sets a precedent of striking arbitration clauses when the contract terms are heavily in favor of the company and not the consumer, which then would allow the consumer to litigate his or her disputes in a civil court. The Carr decision is similar to that of the Washington Supreme Court in Carideo v. Dell, Inc. , another consumer fraud lawsuit where the mandatory arbitration clause was denied after Dell lost the ability to bring its disputes before NAF.

Kreisman Law Offices has been practicing Illinois personal injury law in and around Chicago and Cook County for over 35 years, including Elmhurst, Harvey, Tinley Park and Glenview.