Appellate Court denies arbitration for Gateway in Madison County Pentium 4 case

By Kelly Holleran | Dec 1, 2009



An Illinois Appellate Court upheld Madison County Associate Judge Ralph Mendelsohn's order denying Gateway computer's motion to compel arbitration in a class action case.

According to the Fifth District order published Nov. 24, lead plaintiff William Carr's case against Gateway will proceed in Madison County Circuit Court.

William Carr originally joined a class action lawsuit filed June 3, 2002, against Gateway in which consumers claimed they purchased a Pentium 4 over a Pentium III because they believed the Pentium 4 to be faster and more powerful than its predecessor. However, the plaintiffs contended the Pentium 4 is instead less powerful and slower than the Pentium III.

On Sept. 3, 2003, William Carr removed his counts from the class action complaint to form his own class action complaint, alleging causes of action under the California Consumers Legal Remedies Act and the California Remedies Act, according to the order.

"Mr. Zigler [the plaintiffs' attorney in both complaints] explained that in each of the cases, the plaintiffs are alleging that the defendants violated consumer protection laws throughout the country by failing to disclose the material fact that the Pentium 4 is slower than the Pentium III, or not any faster, and by promoting the products knowing that they are no faster," the order says.

After receiving Carr's complaint, on Sept. 17, 2003, Gateway filed a motion to dismiss the complaint or to stay the proceedings and compel arbitration.

The matter belonged in arbitration, Gateway argued, because when Lynn Carr, William Carr's wife, purchased their computer from Gateway Country Stores, a "Limited Warranty Terms and Conditions Agreement" existed. In the agreement, a clause provided that any complaints, such as the Carrs', should be heard before an arbitration board, specifically the National Arbitration Forum.

"You agree that any Dispute between You and Gateway will be resolved exclusively and finally by arbitration administered by the National Arbitration Forum and conducted under its rules, except as otherwise provided below," the order states. "The arbitration will be conducted before a single arbitrator and will be limited solely to the Dispute between you and Gateway.

"You understand that You would have had a right to litigate disputes through a court and that You have expressly and knowingly waived that right and agreed to resolve any Disputes through binding arbitration."

However, Judge Mendelsohn ruled that the Gateway sales contract into which the Carrs entered did not include the agreement. And even if it did, the arbitration clause "is unconscionable," in part because the plaintiffs would not have read the agreement until days after their purchase, Mendelsohn said.

Gateway appealed Madison County Circuit Court's denial, but after the Appellate Court of Illinois heard oral arguments in the case, the NAF announced its intentions to cease administering all consumer arbitrations, according to the order.

Although Gateway conceded that the NAF could no longer hear the Carrs' case, it contended that section 5 of the Federal Arbitration Act allows for the appointment of an alternative arbitrator.

But the Illinois Appellate Court disagreed, saying Gateway's specification of the NAF as an arbitrator excludes any other arbitrators from hearing disputes against it.

"The courts are split regarding whether section 5 applies in cases such as this, where the parties have specified an exclusive arbitral forum but that forum is no longer available," Illinois Appellate Justice Stephen Spomer wrote in the court's order. "We find that the selection of the NAF is neither logistical nor ancillary and is thus an integral part of the agreement to arbitrate in this case. Accordingly, section 5 of the Federal Arbitration Act cannot be used to reform the arbitration provision, and we must affirm the circuit court's denial of Gateway's motion to compel arbitration on the basis of the unavailability of the NAF."

Illinois Appellate Justices James Donovan and Bruce Stewart concurred with the order.

John T. Walsh and Peter Maginot of Lathrop and Gage in St. Louis represented Gateway.

Stephen M. Tillery, Aaron M. Zigler and Korein Tillery of St. Louis; Stephen A. Swedlow, Maximilian C. Gibbons and Korein Tillery of Chicago; and Robert L. King of St. Louis represented the Carrs.

Appellate Court case number: 5-07-711.

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