Petition for Writ of Certiorari — Hill v. Gateway 2000, Inc.

{ 961760 MAY 5 1997

FFICE OF THE CLERK

No. °

IN THE

Supreme Court of the United States

OCTOBER TERM, 1996

RICH HILL and ENZA HILL,

Petitioners,

GATEWAY 2000, INC. and DAVID PRAIS,

Respondents.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Seventh Circuit

PETITION FOR WRIT OF CERTIORARI

OF RICH HILL AND ENZA HILL

DANIEL A. EDELMAN

Counsel of Record

CATHLEEN M. CoMBS

JAMES O. LATTURNER

135 South LaSalle Street

Suite 2040

Chicago, Illinois 60603

(312) 739-4200

Attorneys for Petitioners

EDELMAN & COMBS

Of Counsel

Midwest Law Printing Co., Chicago 60610, (312) 321-0220

i

QUESTIONS PRESENTED FOR REVIEW

Did the Court of Appeals improperly ignore state law

of contract formation when it determined that an

arbitration clause unilaterally imposed by the vendor

and buried within hundreds of pages of important

documents shipped along with goods purchased by a

consumer, without any other notice to the consumer,

was part of the written agreement for purchase of

those goods absent explicit agreement to arbitrate by

the consumer?

Must a court enforce an arbitration clause that acts

to prevent any effective redress for misrepresenta-

tions made by the party proposing arbitration and

that is therefore both an integral part of the scheme

to defraud via the misrepresentations and itself

fraudulently induced?

il

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW .... i

TABLE OF AUTHORITIES ................. iii

PREVIOUS OPINIONS ............00.e00ee0- 1

STATEMENT OF JURISDICTION ........... ]

STATUTES AND REGULATIONS

SEED cbs scones oso baw canes sea aeeea ]

STATEMENT OF THE CASE ............... 2

PE bo a3 k4-0 oa 55 dhe de kuaeeuee eee 2

Proceedings in the Lower Courts ......... 5

REET, Ko Ss. dks vadkwstnae ele 7

A

PROBLEMS IN IMPOSING ARBITRATION ON

CRUUEEED. 6 aadenscgdkbeakaesaeu cee 7

Il.

THE RELEVANT STATE LAW OF CON-

TRACT FORMATION INDICATES THAT

THERE WAS NO AGREEMENT TO ARBI-

BOAED 044644064 0sckusaweeneneee ee eee 9

ITI.

THE ARBITRATION CLAUSE WAS BOTH AN

INTEGRAL PART OF THE SCHEME TO DE-

FRAUD AND ITSELF FRAUDULENTLY IN-

SPE S00 + 000k escnepunacne wee 19

Meet i a ee

lil

TABLE OF AUTHORITIES

CASES PAGE

Album Graphics, Inc. v. Beatrice Foods Co., 408

N.E.2d 1041 (lll. App. 1980)............... 13

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.

Te heroes sce eissesses,..... 7

Barliant v. Follett Corp., 483 N.E.2d 1312 (Ill.

ise saicsss ssc... 13

C. Itoh & Co. (America), Ltd. v. Jordan Int’l Co.,

552 F.2d 1228 (7th Cir. ae 10, 11, 13

C.B.S. Employees Fed. Credit Union v. Donaldson,

Lufkin & Jenrette Securities Corp., 912 F.2d

1068 (6th Cir. 1990)....................... 21

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585

senses es siesescs........ 18

Champ v. Siegel Trading Co., Inc., 55 F.3d 269

Rosso cc os kcesens.c......, 23

Coastal Indus., Inc. v. Automatic Steam Products

Corp., 654 F.2d 375 (Sth Cir. 1981)........ 10, 13

Cole v. Burns Int'l Security Servs., 105 F.3d 1465

(D.C. Cir. 1997) ........ ec, 9, 23

Diskin v. J.P. Stevens & Co., 836 F.2d 47 (1st Cir.

PREY igre odnsccyssccoecce..,.. 10, 13

First Options of Chicago, Inc. v. Kaplan, 115 S. Ct.

cites ris 9

Ford Motor Credit Co. v. Russell, 519 N.W.2d 460

(Minn. App. 1994)........................ 16

Frances Hosiery Mills, Inc. v. Burlington Indus.,

Inc., 204 S.E.2d 834 (N.C. WONT ENS y akxce’s 11

iV

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

os en ee ee 7,9

Hill v. Gateway, Inc., 105 F.3d 1147 (7th Cir.

PE SC ackR OR ORG RSD TEE CU ee Oe 1, 16

Hill’s Pet Nutrition, Inc. v. Fru-Con Constr.

Corp., 101 F.3d 63 (7th Cir. 1996)......... 14, 17

Hullum v. Sherbondy, 1991 U.S. App. LEXIS 7826

ee CAP. COU. Fey TPG occ case vevesticvens 21,22

Marlene Indus. Corp. v. Carnac Textiles, Inc., 380

ss 8 8: 8 ee ee 10, 11

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Fie. Gime Ui GR Ce ek ba deededeedivss 7

Moseley v. Electronic & Missile Facilities, Inc.,

Se, Ae Se I Wo Kea cece enedeh eine. 19

N&D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d

= Bs Fre ee 10

Osage Homestead, Inc. v. Sutphin, 657 S.W.2d 346

FE IG ook eCRN Seen behibeweneds 16

Perry v. Thomas, 482 U.S. 483 (1987) ......... 10

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

ee ee errr 19-22

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.

SOE G4 66 8 ESSER ENO ae 16-18

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) . 21, 22

Schubtex, Inc. v. Allen Snyder, Inc., 399 N.E.2d

Ce te I os bk os veh cece ee eeeees 10

Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831

F.2d 709 (7th Cir. 1987) ............. 10, 11, 18, 14

Shearson/American Express, Inc. v. McMahon, 482

oS 8 RTI CCe re te rer ees 21, 22

V

Steinberg v. Chicago Medical School, 371 N.E.2d

OPW SO MIP oi hss hne 04s babeadeuckccn...

Supak & Sons Mfg. Co. v. Pervel Industries, Inc.,

593 F.2d 135 (4th Cir. 1979)...............

Touraine Partners v. Kelly, 482 A.2d 240 (Pa.

i. cas ce scsan MCC ta

Trans-Aire Int’l Inc. v. Northern Adhesive Co., 882

F.2d 1254 (7th Cir. SN os vse Burke,

United Steelworkers v. Warrior & Gulf Navigation

Co., 363 U.S. 574 (1960) ...................

Volt Info. Sciences, Inc. v. Board of Trustees, 489

a We COD ss huey caciecge cee...

Wheat, First Securities, Inc. v. Green, 993 F.2d 814

(11th Cir, 1008) ..........ccccccecccecce.,.

STATUTES AND RULES

Federal Arbitration Act, 9 U.S.C. § 2-4 (“FAA”) .

Uniform Commercial Code § 2-207, codified at 810

]

ILCS 5/2-207, S.D. Code § 57A-2-207 ... 1, 2, 10-15, 17

OTHER AUTHORITIES

77A CJS Sales § 31 SEE Wik cosie ecu euG cons

Jean R. Sternlight, Panacea or Corporate Tool?:

Debunking the Supreme Court’s Preference for

Binding Arbitration, 74 Wash. U. L.Q. 637

PP Fs 0 eg Seaweed aweiw scree...

Restatement (2d) of Contracts | one

Robert A. Gorman, The Gilmer Decision and the

Private Arbitration of Public-Law Disputes,

1995 U. Ill. L. Rev. 639..................

]

PREVIOUS OPINIONS

The decision of the United States Court of Appeals for

the Seventh Circuit in Hill v. Gateway, Inc. is officially

reported at 105 F.3d 1147 (7th Cir. 1997) (Easterbrook,

J.). The Court of Appeals’ denial of the Hills’ petition for

rehearing and for rehearing en banc has not been offi-

cially reported. Neither the Trial Court’s opinion on arbi-

trability (the subject of the opinion in the Court of

Appeals) nor its opinion on class certification have been

officially reported.

STATEMENT OF JURISDICTION

The Court of Appeals filed its decision in this case on

January 6, 1997. Plaintiffs timely filed a petition for

rehearing on January 21, 1997.' The Court of Appeals

denied the petition for rehearing on February 3, 1997.

This Court has jurisdiction to review this case pur-

suant to 28 U.S.C. § 1254(1).

STATUTES AND REGULATIONS INVOLVED

Federal Arbitration Act, 9 U.S.C. § 2-4 (reprinted in

Appendix).

Uniform Commercial Code § 2-207, codified at 810

ILCS 5/2-207, S.D. Code § 57A-2-207 (“§ 2-207”):

Additional terms in acceptance or confirmation.

(1) A definite and seasonable expression of accep-

tance or a written confirmation which is sent within

' January 20, 1997 was a federal holiday (Martin Luther

King, Jr. Day).

2

a reasonable time operates as an acceptance even

though it states terms additional to or different from

those offered or agreed upon, unless acceptance is ex-

pressly made conditional on assent to the additional

or different terms.

(2) The additional terms are to be construed as pro-

posals for addition to the contract. Between mer-

chants such terms become part of the contract un-

less:

(a) the offer expressly limits acceptance to the

terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already

been given or is given within a reasonable time

after notice of them is received.

(3) Conduct by both parties which recognizes the

existence of a contract is sufficient to establish a con-

tract for sale although the writings of the parties do

not otherwise establish a contract. In such case the

terms of the particular contract consist of those

terms on which the writings of the parties agree, to-

gether with any supplementary terms incorporated

under any other provisions of this Act.

STATEMENT OF THE CASE

Facts

After purchasing an advertised computer system

through mail-order from defendant Gateway 2000, Inc.

(“Gateway”), plaintiffs Rich and Enza Hill discovered

that the system they received was substantially inferior

to the system advertised. Gateway has attempted to en-

force an arbitration clause buried in the midst of hun-

dreds of pages of documents shipped with the computer

3

system, although the Hills never signed an agreement to

arbitrate disputes.

On or about September 28 1995, Mr. and Mrs. Hill

purchased Gateway’s Tenth Anniv ersary System through

a telephone order and paid by credit card at that time.

This computer system was a limited-time “special” ad-

vertised at approximately $4,000 in magazines and other

media directed to computer buyers (Gateway sells by

mail-order). Plaintiffs learned of the special through the

advertising. The computer arrived at plaintiffs’ residence

in early November of 1995.

Gateway’s advertisement specified system components

including a 6X EIDE CD-ROM Drive, Altec Lansing Sur-

round Sound Speakers with Subwoofer, and a Matrox

MGA “Millennium” 2MB Graphics Accelerator. Gateway

claimed it would furnish a “new blazing 6X CD-ROM

Drive ... the fastest EIDE CD-ROM anywhere” (empha-

sis in original) and “the first speaker system designed to

create theater-type surround sound” (emphasis in orig-

inal). The advertised graphics accelerator is an upgrad-

able video card.

Gateway did not supply what it advertised. Plaintiffs’

CD-ROM performed like a 4X drive (which is significant-

ly slower than a 6X drive) and would jam while running

a number of programs (requiring a complete reset of the

computer system, losing any unsaved work in process).

A faster CD-ROM drive was available when Gateway

made its claim. The Altec Lansing speakers plaintiffs

received did not have “surround sound,” although they

came in the “surround sound” packaging. The speakers

produce static and hiss. After inquiring about this, plain-

tiffs were informed by Gateway that the “surround

nail iiaiaia ia iiiia

4

sound” speakers were not available through Gateway,

and that it was a “misprint” in the advertisement. Gate-

way did not supply a Matrox MGA Millennium 2MB

Graphics Accelerator, but substituted another less-ex-

pensive component from the same manufacturer that

was not upgradable, without informing its customers.

It would cost the plaintiffs approximately $1,000 more

than they paid (and than Gateway advertised) in order

to obtain the actual system advertised by Gateway, in-

cluding parts and installation. However, opening the

computer system’s case voids the warranty for the entire

system under the terms of the advertised limited war-

ranty. Thus, if an unrelated component (such as, say, the

modem) failed after replacement of the substandard com-

ponents, the purchaser would have no recourse.

Inside the shipping containers, Gateway included a

myriad of documents, including hundreds of pages of

technical manuals for the computer system itself and

software included with it, setup instructions, the limited

warranty noted in the advertisement, an invoice, and

various shipping documents. Buried in this mass of

paper was a four-page document entitled “Standard

Terms and Conditions.” There was no prior notice of such

a document in the advertisement, on the outside of the

box, or on the order confirmation that Gateway faxed to

plaintiffs.

Paragraph 10 of the “Standard Terms & Conditions,”

on page 3, reads:

Any dispute or controversy arising out of or relating

to the Agreement or its interpretation shall be set-

tled exclusively and finally by arbitration. The arbi-

tration shall be conducted in accordance with the

Rules of Conciliation and Arbitration of the Interna-

5

tional Chamber of Commerce. The arbitration shal]

be conducted in Chicago, Illinois, U.S.A. before a sole

arbitrator. Any award rendered in any such arbitra-

tion proceeding shall be final and binding on each of

the parties, and judgment may be entered thereon in

a court of competent jurisdiction.

The “Standard Terms and Conditions” purport to become

effective thirty days after receipt of the computer system

without any further action by purchasers; rejection

would require that the consumer, at the consumer’s ex-

pense, repackage the computer system and return it to

Gateway. The “Standard Terms and Conditions” do not

contemplate a signed agreement to be so bound by the

purchaser. The Hills did not acknowledge or sign an

agreement to the “Standard Terms and Conditions.”

The rules of the International Chamber of Commerce

also require each side to pay an arbitration fee in ad-

vance of approximately $2,000—half the list price of the

Tenth Anniversary System.

Gateway began including the “Standard Terms and

Conditions” in shipping containers for the first time in

July of 1995. Gateway began taking orders for the Tenth

Anniversary System on the last business day of June,

1995, and did not begin shipping the Tenth Anniversary

System until August of 1995.

Proceedings in the Lower Courts

On July 8, 1996, the Hills filed a multi-count RICO

class action complaint against defendants Gateway and

David Prais in the United States District Court for the

Northern District of Illinois (Conlon, J.). Jurisdiction was

proper pursuant to 28 U.S.C. § 1331 (federal question).

6

The Hills filed a motion for class certification on August

2, 1996, which was granted on November 4, 1996.”

Meanwhile, Gateway filed a motion to compel arbitra-

tion on August 12, 1996. After briefs by both sides, the

District Court denied defendants’ motion to compel arbi-

tration on August 22, 1996. Defendants then moved to

supplement the record and for reconsideration of their

motion to compel arbitration. On September 4, 1996, the

District Court denied defendants’ motion for reconsidera-

tion.

Defendants appealed to the Court of Appeals for the

Seventh Circuit on September 12, 1996, and moved to

stay proceedings in the District Court pending the ap-

peal. Jurisdiction in the Court of Appeals was proper

pursuant to 9 U.S.C. § 16 (providing for interlocutory ap-

peal upon denial of a motion to compel arbitration). After

the District Court denied defendants’ motion to stay

proceedings pending the appeal, defendants presented an

emergency motion to stay proceedings in the District

Court to this Court. The Court of Appeals denied defen-

dants’ emergency motion to stay on October 9, 1996, and

designated the matter for expedited consideration.

In its opinion, the Court of Appeals reversed the Dis-

trict Court, holding that the arbitration clause bound the

Hills despite the absence of any signed agreement to

arbitrate. The Hills timely filed a petition for rehearing,

which was denied on February 3, 1997.

* Class certification was not considered by the Court of Ap-

peals and is outside the scope of this Petition.

7

ARGUMENT

Arbitration between parties who have agreed to arbi-

trate can be an efficient means of resolving disputes

without requiring allocation of judicial resources. How-

ever, in this case, the Hills did not sign an agreement to

arbitrate disputes with Gateway over the computer sys-

tem. The Court of Appeals incorrectly held that Gateway

could materially alter the agreement to purchase a com-

puter system to prevent effective relief from its practice

of shipping computer systems substantially inferior to

those advertised.

I.

PROBLEMS IN IMPOSING ARBITRATION ON CON.

SUMERS.

One preliminary issue that should be considered in this

matter—which received short shrift in the Court of

Appeals—is the context of the arbitration clause. This

case does not involve an employment contract. See, e.g.,

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20

(1991) (individual employment contract); United Steel-

workers v. Warrior & Gulf Navigation Co., 363 U.S. 574

(1960) (collective bargaining). Neither does it involve a

signed arbitration agreement. See, e.g., Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614 (1985) (agreement between commercial parties). In-

stead, it concerns an arbitration clause secreted in docu-

ments accompanying a one-time consumer purchase. It

is unlike this Court’s recent opinion in Allied-Bruce

Terminix Cos. v. Dobson, 513 U.S. 265 (1995), because

the consumers in Dobson actually signed an arbitration

agreement. ‘

8

Whether “agreements” to arbitrate consumer disputes

are appropriate at all is open to question. As one com-

mentator remarked,

Large companies such as banks, hospitals, brokerage

houses and even pest exterminators are increasingly

including mandatory binding arbitration clauses in

the fine print contracts they require all customers,

employees, franchisees and other little guys to sign.

While legal commentators are beginning to take note

of such clauses, the general public remains quite

unaware of the importance of such agreements. Yet,

from a practical standpoint, the arbitration clauses

are crucial in that they not only bar judicial relief

but also may allow companies to select the arbitra-

tors, set the arbitration in a location convenient for

the company but not for the little guy, exclude cer-

tain recoveries such as punitive damages, shorten

the statute of limitations, deny discovery and other

procedural protections, and eliminate virtually any

right to appeal.

Jean R. Sternlight, Panacea or Corporate Tool?: Debunk-

ing the Supreme Court’s Preference for Binding Arbi-

tration, 74 Wash. U. L.Q. 637, 637-38 (1996); see also

Robert A. Gorman, The Gilmer Decision and the Private

Arbitration of Public-Law Disputes, 1995 U. Ill. L. Rev.

639, 645 (“[Dlespite the strong FAA policy of ordering

arbitration hearings and implementing arbitration

awards, minimal standards of procedural fairness must

be satisfied before a civil action may be stayed and

arbitration ordered .. .”).

The disparity in knowledge and bargaining power be-

tween a multinational manufacturer of computer systems

and a consumer indicates that a court should scrupulous-

ly inquire into both (1) whether the consumer did, in

9

fact, agree to arbitrate disputes, and (2) whether the pro-

cedures imposed by any such agreement allow the con-

sumer to “effectively . . . vindicate [his or her] statutory

cause of action in the arbitral forum.” Gilmer, 500 U.S.

at 28 (bracketed text in original, internal quotation omit-

ted); see also Cole v. Burns Int’l Security Servs., 105

F.3d 1465, 1481-83 (D.C. Cir. 1997).

II.

THE RELEVANT STATE LAW OF CONTRACT FOR-

MATION INDICATES THAT THERE WAS NO AGREE.

MENT TO ARBITRATE.

The first question properly before this Court is quite

simple: Did the Hills agree to arbitrate disputes arising

from their purchase of a Tenth Anniversary System from

Gateway? Absent an agreement to arbitrate, the Hills

are not required to do so. First Options of Chicago, Inc.

v. Kaplan, 115 S. Ct. 1920, 1924 (1995) (“arbitration is

simply a matter of contract between the parties; it is a

way to resolve those disputes—but only those disputes—

that the parties have agreed to submit to arbitration”);

Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S.

468, 478 (1989) (the FAA “does not require parties to

arbitrate when they have not agreed to do so”). Prior to

committing a matter to arbitration, therefore, a court

must first find that the parties agreed to arbitrate the

dispute in question:

It is, therefore, rudimentary that “the first task of a

court asked to compel arbitration of a dispute is to

determine whether the parties agreed to arbitrate

that dispute.” [citation omitted] Section 4 of the FAA

supports this conclusion. This section, which provides

10

a federal remedy to a party seeking to compel compli-

ance with an arbitration agreement, specifies that:

The court shall hear the parties, and upon being

satisfied that the making of the agreement for

arbitration or the failure to comply therewith is

not in issue, the court shall make an order di-

recting the parties to proceed to arbitration in

accordance with the terms of the agreement. .. .

If the making of the arbitration agreement or the

failure, neglect or refusal to perform the same be

in issue, the court shall proceed summarily to the

trial thereof.

Wheat, First Securities, Inc. v. Green, 993 F.2d 814, 817

(11th Cir. 1993) (emphasis and ellipses in original).

The existence of a valid agreement to arbitrate is gov-

erned by state law, as long as state law does not single

out arbitration agreements for special burdens. Perry v.

Thomas, 482 U.S. 483, 492 n.9 (1987) (“Thus state law,

whether of legislative or judicial origin, is applicable if

that law arose to govern issues concerning the validity,

revocability, and enforceability of contracts generally”).

Before the Court of Appeals issued its opinion below,

UCC § 2-207 governed whether an arbitration clause in

a printed form document became part of the contract.

Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d

709 (7th Cir. 1987); Supak & Sons Mfg. Co. v. Pervel

Industries, Inc., 593 F.2d 135 (4th Cir. 1979); Diskin v.

J.P. Stevens & Co., 836 F.2d 47 (1st Cir. 1987); Coastal

Indus., Inc. v. Automatic Steam Products Corp., 654 F.2d

375 (5th Cir. 1981); C. Itoh & Co. (America), Ltd. v.

Jordan Int’l Co., 552 F.2d 1228 (7th Cir. 1977); N&D

Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722 (8th Cir.

1976); see also Schubtex, Inc. v. Allen Snyder, Inc., 399

N.E.2d 1154 (N.Y. 1979); Marlene Indus. Corp. v. Carnac

ee

11

Textiles, Inc., 380 N.E.2d 239, 242 (N.Y. 1978); Frances

Hosiery Mills, Inc. v. Burlington Indus., Inc., 204 S.E.2d

834, 842-43 (N.C. 1974). All of these decisions held that

UCC § 2-207 determines whether an arbitration clause

in a printed form is part of the contract. For example, in

C. Itoh, supra, 552 F.2d at 1236-38, the Court of Appeals

held that a seller’s arbitration clause did not become part

of the contract without the express assent of the buyer,

even though the seller’s acknowledgment form stated

that failure to object was assent. See also Trans-Aire

Intl Inc. v. Northern Adhesive Co., 882 F.2d 1254 (7th

Cir. 1989) (discussing C. Itoh and Schulze & Burch with

approval).

The Court of Appeals—without citing any of these de-

cistons—asserts that § 2-207 does not apply to this trans-

action because there was no “exchange” of “forms.” How-

ever, nothing in UCC § 2-207 requires an exchange of

forms. UCC § 2-207 reads:

Additional terms in acceptance or confirmation.

(1) A definite and seasonable expression of accept-

ance or a written confirmation which is sent within

a reasonable time operates as an acceptance even

though it states terms additional to or different from

those offered or agreed upon, unless acceptance is ex-

pressly made conditional on assent to the additional

or different terms.

(2) The additional terms are to be construed as pro-

posals for addition to the contract. Between mer-

chants such terms become part of the contract un-

less:

(a) the offer expressly limits acceptance to the

terms of the offer;

(b) they materially alter it; or

12

(c) notification of objection to them has already

been given or is given within a reasonable time

after notice of them is received.

(3) Conduct by both parties which recognizes the

existence of a contract is sufficient to establish a

contract for sale although the writings of the parties

do not otherwise establish a contract. In such case

the terms of the particular contract consist of those

terms on which the writings of the parties agree, to-

gether with any supplementary terms incorporated

under any other provisions of this Act.

While this section does provide a solution to the com-

mon-law “battle of the forms” by rejecting the mirror-

image rule, its plain language does not limit it to ex-

changes of forms. In fact, no writings need be exchanged

at all. The “agreement” referred to in subdivision (1) may

be oral, as when the Hills phoned Gateway and ordered

a Tenth Anniversary System. All that is required is

“(c]onduct by both parties which recognizes the existence

of a contract,” which is deemed “sufficient to establish a

contract for sale although the writings of the parties do

not otherwise establish a contract.” UCC § 2-207(3). The

“conduct” may be an oral agreement or an order for

goods followed by their shipment.

The conduct of the parties in this case is “sufficient to

establish a contract for sale.” Gateway solicited offers to

purchase with its advertisements. The Hills made an

offer to purchase and tendered payment by credit card.

Gateway accepted the Hills’ offer by stating it would ship

a computer, faxing an immediate confirmation and then

shipping the computer system several weeks later. This

conduct clearly establishes a contract for sale.

13

Illinois decisions* apply UCC § 2-207 even when there

is no exchange of writings. Barliant v. Follett Corp., 483

N.E.2d 1312 (Ill. App. 1985) (§ 2-207 applied even

though the only documents were seller's invoices and

packing slips); Album Graphics, Inc. v. Beatrice Foods

Co., 408 N.E.2d 1041 (Il. App. 1980) (similar). The Court

of Appeals had previously applied § 2-207 to determine

if an arbitration clause became part of a contract when,

as in this case, there was an oral agreement followed by

a unilateral writing from one party. Schulze & Burch,

supra. So have other courts. In Coastal Industries, supra,

the court stated “Section 2-207 covers situations in which

either the parties have reached a prior oral contract and

any writings serve only as a memorialization or confir-

mation of that contract or the prior negotiations did not

establish a contract and the writings themselves consti-

tute the offer and/or acceptance.” 654 F.2d at 378 (em-

phasis added). Accord, Album Graphics, supra; Diskin,

supra.

The Illinois courts have also held that a document

accompanying the goods and purporting to add material

terms is ineffective, and cannot be made effective by a

demand that the recipient return the goods if it doesn’t

like the additional terms. Album Graphics, supra (war-

ranty disclaimer). So has the Seventh Circuit. C. Itoh,

supra.

The only question is whether the arbitration clause not

mentioned in the ads or the confirmation, but hidden

inside the packaging, became part of the contract. Under

* Research has not disclosed any reported South Dakota

opinions on point. The text of the South Dakota enactment of

§ 2-207 is identical to that in Illinois.

14

UCC § 2-207, the answer to this question is plainly “no.”

An arbitration clause is a material term. Schulze &

Burch, supra. The Hills (and virtually all other Tenth

Anniversary System purchasers) are consumers, not mer-

chants (the system was intended for family rather than

business use). There is no claim that they or anyone else

expressly agreed to the arbitration clause.

An additional term in an invoice or similar document

in an accepted contract is only a proposal for addition to

the contract. If sent to an ordinary (non-merchant) con-

sumer, the proposal does not become part of the contract

absent affirmative assent by the consumer. If sent to a

merchant and not objected to, it becomes part of the

contract if, and only if, it is not material. § 2-207(2); cf.

Hill’s Pet Nutrition, Inc. v. Fru-Con Constr. Corp., 101

F.3d 63, 64 (7th Cir. 1996) (Easterbrook, J.) (“the con-

tract contains only the agreed-on terms; one side cannot

use partial agreement to enforce proposals to which the

other side did not assent”).

Gateway does not contend that plaintiffs (or anyone

else) expressly assented to the arbitration provision, but

simply asserts that retention of the computer system

made the clause binding. Gateway relies on the preamble

of its Standard Terms and Conditions, one of the many

documents included in the packaging. This statement

reads:

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.

This assumes the conclusion desired by Gateway. Section

2-207 makes additional terms only proposals for addition

15

to the contract. In addition to proposing an arbitration

clause, Gateway also attempts to alter the method of

accepting the proposed additional term with another

additional term: a waiver of the consumer’s right to be

bound by material alterations only upon explicit accept-

ance. A proposed waiver of the right to be bound by ma-

terial alterations only upon explicit acceptance is itself

material and thus binding only under § 2-207(2). Other-

wise, one could evade the explicit acceptance require-

ment of § 2-207(2) by first proposing a waiver of explicit

acceptance as a “nonmaterial” change, which would be

accepted unless objected to, and then proceeding with

other material changes arguing that the parties had

agreed that no explicit acceptance was now required.

Therefore, the preamble to the Standard Terms and Con-

ditions fails for the same reason as the arbitration clause

itself.

The Official Commentary to § 2-207 states that a

clause will “materially alter” a contract if it would “result

in surprise or hardship if incorporated without express

awareness by the other party.” UCC § 2-207 Official

Comment 4. Arbitration clauses are material terms, and

are not binding modifications absent affirmative assent,

even against a merchant.

The Court of Appeals’ contrary holding—without citing

any of the conflicting prior decisions—brings disorder

and confusion to the law of contract formation. Nor is the

ruling confined to arbitration clauses. There is no reason

under contract law, for example, why a seller could not

include a statement disclaiming all warranties with the

goods and demand that the buyer return them if it

doesn’t like the disclaimer.

16

These are not the only ways in which the opinion

below is contrary to settled Illinois law. The opinion

below depends upon finding that Gateway is the master

of the offer. Hill, 105 F.3d at 1150 (citing ProCD, Inc. v.

Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)). This assumes

that Gateway was in fact the offeror. On the other hand,

the Illinois Supreme Court has held that an advertise-

ment such as Gateway’s advertisement for the Tenth

Anniversary System is not an offer to sell, but a solicita-

tion of offers to purchase.

[Assume a] merchant advertises goods for sale at a

fixed price. While the advertisement itself is not an

offer to contract, it constitutes an invitation to deal

on the terms described in the advertisement... .

Only when the merchant takes the money is there an

acceptance of the offer to purchase.

Steinberg v. Chicago Medical School, 371 N.E.2d 634,

639 (Ill. 1977) (citations omitted, emphasis added). This

is consistent with the majority view that an advertise-

ment is only a solicitation of offers to purchase. See, e.g.,

Ford Motor Credit Co. v. Russell, 519 N.W.2d 460, 462

(Minn. App. 1994) (advertisement or price quotation is

not an offer); Touraine Partners v. Kelly, 482 A.2d 240

(Pa. Super. 1984) (holding that an advertisement is an

“invitation to come and purchase,” not an offer); Osage

Homestead, Inc. v. Sutphin, 657 S.W.2d 346, 351-52 (Mo.

App. 1983) (holding, under Missouri and UCC law, that

a magazine ad for goods was not an offer); see generally

Restatement (2d) of Contracts (“Rest.2d Contr.”) § 26

Com. b II. 1 (“A, a clothing merchant, advertises over-

coats of a certain kind for sale at $50. This is not an

offer, but an invitation to the public to come and pur-

chase.”); Rest.2d Contr. § 33 Com. c (“advertisements and

Seen

17

price quotes are ordinarily not interpreted as offers”);

77A CJS Sales § 31 (1994),

In this case, the Hills offered to purchase a Tenth

Anniversary System with specified components adver-

tised by defendants in national media. Gateway accepted

the Hills’ offer by accepting credit card payment and

sending an order confirmation by facsimile transmission.

Since the Hills are “masters of the offer,” it is quite clear

that Gateway’s attempt to impose an arbitration clause

with the delivery of the computer system is a material

alteration of the agreement to purchase and thus falls

within UCC § 2-207.

The Court of Appeals depended almost exclusively

upon ProCD for its analysis of contract law, claiming as

follows:

Plaintiffs ask us to limit ProCD to software, but

where’s the sense in that? ProCD is about the law of

contract, not the law of software. Payment preceding

the revelation of full terms is common for air trans-

portation, insurance, and many other endeavors.

105 F.3d at 1149. This both misstates plaintiffs’ argu-

ment concerning applicability of ProCD to this case and

assumes its conclusion.

Plaintiffs did not argue that ProCD is limited to soft-

ware. Plaintiffs argued that ProCD is limited to transac-

tions involving substantial future performance on speci-

fied terms by the parties.‘ Transportation and insurance

* Indeed, although ProCD is probably correct on its facts, the

statement in the opinion that UCC § 2-207 applies only to

cases where there is an exchange of forms is certainly not a

correct statement, at least insofar as I]linois law is concerned.

See supra.

18

are also examples of this kind of transaction. See, e.g.,

Carnival Cruise, Lines, Inc. v. Shute, 499 U.S. 585

(1991) (concerning a luxury cruise). In each of these ex-

amples, the item “sold” is a right to future use without

transfer of ownership. For example, the Shutes did not

own their cabin on the cruise ship in question; their

ticket represented the right to use that cabin in a speci-

fied manner at a specified time. Similarly, Mr. Zeiden-

berg did not own ProCD’s software; he owned a license

to use that software. On the other hand, there is no time

or use restriction—no license—involved in the sale of the

computer itself to the Hills.°

This points out the main difficulty with applying

ProCD to this case. The dispute in ProCD concerned

misuse of the software and violation of the license. This

is inherently a question of executory action. The Court of

Appeals asserts, however, that the purchase agreement

between the Hills and Gateway is equally executory,

pointing to the Standard Terms and Conditions as creat-

ing additional responsibilities of the parties. This, of

course, is circular: the Standard Terms and Conditions

create additional responsibilities of the parties if, and

> The Court of Appeals’ discussion of the software shipped

with computer systems only obfuscates the issue. Each piece

of that software comes with a separate license granted by the

manufacturer of that software (not Gateway). These license

agreements may (or may not) be similar or identical to that at

issue in ProCD, but they are separate license agreements. The

purchaser of the computer system need not use the software

that came with the machine y a substantial portion of

Microsoft’s software sales are t®those dissatisfied with the

operating systems supplied with their computers). In any

event, the capability of software supplied with the Tenth An-

niversary System is not relevant to this lawsuit.

19

only if, they are assumed to be part of the contract for

sale!®

III.

THE ARBITRATION CLAUSE WAS BOTH AN INTE-

GRAL PART OF THE SCHEME TO DEFRAUD AND

ITSELF FRAUDULENTLY INDUCED.

The second question before this Court is equally

simple: If the Hills did agree to arbitrate disputes with

Gateway, was that agreement procured by fraud? Mose-

ley v. Electronic & Missile Facilities, Inc., 374 U.S. 167,

171 (1963), held that an arbitration clause that is used

to effect a fraudulent scheme is invalid if induced inde-

pendently from the fraud. This is the precise situation

here. The Court of Appeals averred that avoiding Mose-

ley “doles] not require more than a citation to Prima

Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395

(1967).” 105 F.3d at 1150 (parallel citations omitted). But

examination of Prima Paint discloses that merely citing

it as dispositive on the issue of fraud is insufficient. Such

a conclusion implies that Prima Paint overruled Moseley.

In fact, this Court explicitly harmonized Prima Paint

with Moseley. Prima Paint, 388 U.S. at 404 n.12 (“This

position is consistent both with the decision in Moseley

. and with the statutory scheme”). As this Court

noted, the critical factual issue in Prima Paint was that:

® Any warranty responsibilities are a matter not only of con-

tract law, but the Magnuson-Moss Act. In any event, Gateway

fully disclosed the existence of a warranty prior to purchase

(the ads mention the warranty). Further, certain warranties

are presumed under the UCC without explicit reference.

20

no claim has been advanced by Prima Paint that

F&C fraudulently induced it to enter into the agree-

ment to arbitrate “[a]Jny controversy or claim arising

out of or relating to this agreement, or the breach

thereof.”

Prima Paint, 388 U.S. at 406. On :»e other hand, the

Hills’ complaint explicitly sets forts: such allegations.

The Prima Paint doctrine holds that a court may in-

quire only into fraudulent inducement of the arbitration

clause, but the arbitrator decides upon fraudulent in-

ducement of the entire contract. This case is outside the

doctrine for a very simple reason: This case does not

concern fraudulent inducement of the entire contract.

The contract for sale was based upon Gateway’s offer of

a Tenth Anniversary System containing specified compo-

nents and plaintiffs’ (and the class members’) acceptance

of that offer. The contract was completely performed at

the time the arbitration clause arrived at plaintiffs’

home. Had Gateway’s performance complied with the

contract, there would be no dispute. Gateway intention-

ally failed to perform and attempted to insulate itself

from the consequences of its nonperformance by secret-

ing an arbitration clause inside the shipping container

without notice.

The Court of Appeals ignored the fact that two sepa-

rate fraudulent schemes are at issue in this case. The

subject matter of the lawsuit is the misrepresentation of

the performance of specific components comprising the

Tenth Anniversary System. If the Hills had explicitly

agreed to the arbitration agreement at issue, there is no

question that Prima Paint would control and that the

misrepresentation would be a matter for arbitration. The

Hills, however, specifically allege that Gateway fraudu-

rn

21

lently attempted to materially alter the purchase agrece-

ment by sneaking in an arbitration clause that was not

agreed to (and that abrogates substantial rights). This is

fraud in the inducement of the arbitration clause, a

matter which is for the courts to decide. Prima Paint,

388 U.S. at 406; see also Scherk v. Alberto-Culver Co.,

417 U.S. 506, 519 n.14 (1974) (“an arbitration or forum-

selection clause in a contract is not enforceable if the

inclusion of that clause in the contract was the product

of fraud or coercion,” distinguishing Prima Paint);

Hullum v. Sherbondy, 1991 U.S. App. LEXIS 7826 (9th

Cir. Apr. 23, 1991) (denying validity of arbitration clause

inserted in a series of contracts for investment manage-

ment when the facts demonstrated that the defendants

did not in fact invest the plaintiffs money, and that the

arbitration clause was designed to prevent investors from

inquiring into the fraudulent scheme); C.B.S. Employees

Fed. Credit Union v. Donaldson, Lufkin & Jenrette

Securities Corp., 912 F.2d 1563, 1568 (6th Cir. 1990)

(holding that arbitration clause in margin agreement

was part of fraudulent scheme to induce plaintiff’s

assent to margin agreement and, by including arbitration

clause, to coerce plaintiff into ratifying the unauthorized

trading occurring in its accounts).

The Court of Appeals’ citation of Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 238-42 (1987),

is no more persuasive. In McMahon, the arbitration

clause was part of an industry-standard account agree-

ment between a securities brokerage and the customers.

The customers filed a RICO suit alleging that their

broker, an employee of the brokerage, had defrauded

them through a pattern of unauthorized trading after

they had entered into the account agreement. McMahon,

22

482 U.S. at 223-25. This Court held that, when there

was no question that the parties had agreed to an arbi-

tration clause and no allegation that the arbitration

clause was itself fraudulently induced, a RICO claim

falling within the language of the arbitration clause

could be sent to arbitration. Jd. at 238-42.

Those predicate facts are absent from this case. As dis-

cussed above, the Hills did not agree to an industry-

standard arbitration agreement. They have also pleaded

that the arbitration clause itself was induced by fraud,

as part of a scheme to prevent redress for Gateway’s

completed prior misconduct (misrepresentation of the

Tenth Anniversary System’s components and capabili-

ties). They do not complain that a RICO claim is not

arbitrable per se, but that their particular RICO claim is

not the subject of a valid and binding arbitration agree-

ment. This is completely distinct from the issue in

McMahon (whether a RICO claim can ever be arbi-

trated).

Prima Paint did not concern an arbitration clause im-

posed as an addition to an already-consummated con-

tract. Gateway’s attempt to add an arbitration clause to

a consummated contract for sale emphasizes that the

fraud induced the arbitration clause, not just the entire

contract. See Scherk, siipra, 417 U.S. at 519 n.14 (“an

arbitration or forum-selection clause in a contract is not

enforceable if the inclusion of that clause in the contract

was the product of fraud or coercion,” distinguishing

Prima Paint); Prima Paint, 388 U.S. at 403-04; Hullum,

supra (denying validity of arbitration clause intended to

cover up completed fraud).

” ae Anite AA Vet Be 8 eae

23

Detailed examination of the arbitration clause and the

underlying rules supports the conclusion that the arbi-

tration clause is itself fraudulent. The arbitration clause

requires all arbitrations to occur in Chicago, which is an

unconscionable barrier to relief. Given the list price of

approximately $4,000, and damages of approximately

$1,000, a consumer who purchased the Tenth Anniver-

sary System in, for example, Phoenix cannot travel to

Chicago or pay for representation in Chicago.

The rules of the International Chamber of Commerce—

the organization specified in the arbitration clause—also

require each side to pay an arbitration fee in advance of

over $2,000, which is approximately half the list price of

the Tenth Anniversary System. Requiring the consumer

to pay such a fee is unfair. Cf. Cole, supra, 105 F.3d at

1483-86 (holding that an employee need not agree to

arbitrate pursuant to an employment contract requiring

the employee to pay the arbitration fees). A $2,000 fee,

while high, is not that unusual in a private arbitration.

See Cole, 105 F.3d at 1480 n.8 (remarking on fees of

$500-$600 per hour). And, by its failure to allow for class

arbitration concerning standard practices or defects, such

as those at issue in this case, the arbitration clause pre-

vents consumers from joining together to efficiently seek

redress through a single proceeding. See Champ v. Siegel

Trading Co., Inc., 55 F.3d 269, 271 (7th Cir. 1995) (“ab-

sent a provision in the parties’ arbitration agreement

providing for class treatment of disputes, a district court

has no authority to certify class arbitration”).

The arbitration clause is not a legitimate attempt to

resolve potential future disputes; it is an outrageous

attempt by defendants to avoid liability for a completed

fraud.

24

CONCLUSION

For the reasons stated, petitioners Rich Hill and Enza

Hill respectfully request that this Court issue a writ of

certiorari to the United States Court of Appeals for the

Seventh Circuit.

Respectfully submitted,

DANIEL A. EDELMAN

Counsel of Record

CATHLEEN M. CoMBS

JAMES O. LATTURNER

135 South LaSalle Street

Suite 2040

Chicago, Illinois 60603

(312) 739-4200

Attorneys for Petitioners

EDELMAN & COMBS

Of Counsel

abide .

PWR A A A bile TURN

Sp aiiatintidline biel iit nls

tah eis aise ahem

APPENDIX

App. 1

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 96-3294

RicH HILL and ENZA HILL, on behalf

of a class of persons similarly situated,

Plaintiffs-Appellees,

v.

GATEWAY 2000, INC., and DAVID PRaIs,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 96 C 4086—Suzanne B. Conlon, Judge.

ARGUED DECEMBER 10, 1996—DECIDED JANUARY 6, 1997

Before CUMMINGS, HARLINGTON WOOD, JR., and

EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge. A customer picks up the

phone, orders a computer, and gives a credit card number.

Presently a box arrives, containing the computer and a

list of terms, said to govern unless the customer returns

the computer within 30 days. Are these terms effective

as the parties’ contract, or is the contract term-free be-

cause the order-taker did not read any terms over the

phone and elicit the customer’s assent?

One of the terms in the box containing a Gateway 2000

system was an arbitration clause. Rich and Enza Hill, the

App. 2

customers, kept the computer more than 30 days before

com laining about its components and performance. They

filed suit in federal court arguing, among other things,

that the product’s shortcomings make Gateway a racketeer

(mail and wire fraud are said to be the predicate offenses),

leading to treble damages under RICO for the Hills and

a class of all other purchasers. Gateway asked the district

court to enforce the arbitration clause; the judge refused,

writing that “{tJhe present record is insufficient to sup-

port a finding of a valid arbitration agreement between

the parties or that the plaintiffs were given adequate

notice of the arbitration clause.”’ Gateway took an im-

mediate appeal, as is its right. 9 U.S.C. *§16(aX1XA).

The Hills say that the arbitration clause did not stand

out: they concede noticing the statement of terms but

deny reading it closely enough to discover the agreement

to arbitrate, and they ask us to conclude that they there-

fore may go to court. Yet an agreement to arbitrate must

be enforced “save upon such grounds as exist at law or

in equity for the revocation of any contract.” 9 U.S.C.

§2. Doctor’s Associates, Inc. v. Casarotto, 116 S. Ct. 1652

(1996), holds that this provision of the Federal Arbitration

Act is inconsistent with any requirement that an arbitra-

tion clause be prominent. A contract need not be read to

be effective; people who accept take the risk that the un-

read terms may in retrospect prove unwelcome. Carr v.

CIGNA Securities, Inc., 95 F.3d 544, 547 (7th Cir. 1996);

Chicago Pacific Corp. v. Canada Life Assurance Co., 850

F.2d 334 (7th Cir. 1988). Terms inside Gateway’s box

stand or fall together. If they constitute the parties’ con-

tract because the Hills had an opportunity to return the

computer after reading them, then all must be enforced.

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996),

holds that terms inside a box of software bind consumers

who use the software after an opportunity to read the

terms and to reject them by returning the product. Like-

wise, Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585

(1991), enforces a forum-selection clause that was included

among three pages of terms attached to a cruise ship ticket.

App. 3

ProCD and Carnival Cruise Lines exemplify the many

commercial transactions in which people pay for products

with terms to follow; ProCD discusses others. 86 F.3d

at 1451-52. The district court concluded in ProCD that

the contract is formed when the consumer pays for the

software; as a result, the court held, only terms known

to the consumer at that moment are part of the contract,

and provisos inside the box do not count. Although this

is one way a contract could be formed, it is not the only

way: “A vendor, as master of the offer, may invite accept-

ance by conduct, and may propose limitations on the kind

of conduct that constitutes acceptance. A buyer may ac-

cept by performing the acts the vendor proposes to treat

as acceptance.” Id. at 1452. Gateway shipped computers

with the same sort of accept-or-return offer ProCD made

to users of its software. ProCD relied on the Uniform

Commercial Code rather than any peculiarities of Wiscon-

sin law; both Illinois and South Dakota, the two states

whose law might govern relations between Gateway and

the Hills, have adopted the UCC; neither side has pointed

us to any atypical doctrines in those states that might

be pertinent; ProCD therefore applies to this dispute.

Plaintiffs ask us to limit ProCD to software, but where’s

the sense in that? ProCD is about the law of contract,

not the law of software. Payment preceding the revela-

tion of full terms is common for air transportation, insur-

ance, and many other endeavors. Practical considerations

support allowing vendors to enclose the full legal terms

with their products. Cashiers cannot be expected to read

legal documents to customers before ringing up sales. If

the staff at the other end of the phone for direct-sales

operations such as Gateway’s had to read the four-page

statement of terms before taking the buyer’s credit card

number, the droning voice would anesthetize rather than

enlighten many — buyers. Others would hang up

in a rage over the waste of their time. And oral recita-

tion would not avoid customers’ assertions (whether true

or feigned) that the clerk did not read term X to them, or

that pe did not remember or understand it. Writing pro-

vides benefits for both sides of commercial transactions.

App. 4

Customers as a group are better off when vendors skip

costly and ineffectual steps such as telephonic recitation,

and use instead a simple approve-or-return device. Com-

petent adults are bound by such documents, read or un-

read. For what little it is worth, we add that the box

from Gateway was crammed with software. The computer

came with an operating system, without which it was

useful only as a boat anchor. See Digital Equipment Corp.

v. Unig Digital Technologies, Inc., 73 F.3d 756, 761 (7th

Cir. 1996). Gateway also included many application pro-

grams. So the Hills’ effort to limit ProCD to software

would not avail them factually, even if it were sound

legally—which it is not.

For their second sally, the Hills contend that ProCD

should be limited to executory contracts (to licenses in

particular), and therefore does not apply because both par-

ties’ performance of this contract was complete when the

box arrived at their home. This is legally and factually

wrong: legally because the question at hand concerns the

formation of the contract rather than its performance, and

factually because both contracts were incompletely per-

formed. ProCD did not depend on the fact that the seller

characterized the transaction as a license rather than as

a contract; we treated it as a contract for the sale of

goods and reserved the question whether for other pur-

poses a “license” characterization might be preferable. 86

F.3d at 1450. All debates about characterization to one

side, the transaction in ProCD was no more executory

than the one here: Zeidenberg paid for the software and

walked out of the store with a box under his arm, so if

arrival of the box with the product ends the time for

revelation of contractual terms, then the time ended in

ProCD before Zeidenberg opened the box. But of course

ProCD had not completed performance with delivery of

the box, and neither had Gateway. One element of the

transaction was the warranty, which obliges sellers to fix

defects in their products. The Hills have invoked Gate-

way’s warranty and are not satisfied with its response,

so they are not well positioned to say that Gateway’s

eh ta

are eee

App. 5

obligations were fulfilled when the motor carrier unloaded

the box. What is more, both ProCD and Gateway promised

to help customers to use their products. Long-term ser-

vice and information obligations are common in the com-

puter business, on both hardware and software sides.

Gateway offers “lifetime service” and has a round-the-

clock telephone hotline to fulfil this promise. Some ven-

dors spend more money helping customers use their prod-

ucts than on developing and manufacturing them. The

document in Gateway’s box includes promises of future

performance that some consumers value highly; these

eae bind Gateway just as the arbitration clause binds

the Hills.

Next the Hills insist that ProCD is irrelevant because

Zeidenberg was a ‘‘merchant’”’ and they are not. Section

2-207(2) of the UCC, the infamous battle-of-the-forms sec-

tion, states that “‘additional terms [following acceptance

of an offer] are to be construed as proposals for addition

to a contract. Between merchants such terms become part

of the contract unless. . .”. Plaintiffs tell us that ProCD

came out as it did only because Zeidenberg was a “‘mer-

chant” and the terms inside ProCD’s box were not ex-

cluded by the “unless” clause. This argument pays scant

attention to the opinion in ProCD, which concluded that,

when there is only one form, “§2-207 is irrelevant.” 86

F.3d at 1452. The question in ProCD was not whether

terms were added to a contract after its formation, but

how and when the contract was formed—in particular,

whether a vendor may propose that a contract of sale be

formed, not in the store (or over the phone) with the pay-

ment of money or a general “send me the product,” but

after the customer has had a chance to inspect both the

item and the terms. ProCD answers “yes,” for merchants

and consumers alike. Yet again, for what little it is worth

we observe that the Hills misunderstand the setting of

ProCD. A “merchant” under the UCC “means a person

who deals in goods of the kind or otherwise by his oc-

cupation holds himself out as having knowledge or skill

peculiar to the practices or goods involved in the trans-

action”, §2-104(1). Zeidenberg bought the product at a re-

App. 6

tail store, an uncommon place for merchants to acquire |

inventory. His corporation put ProCD’s database on the

Internet for anyone to browse, which led to the litiga-

tion but did not make Zeidenberg a software merchant.

At oral argument the Hills propounded still another dis-

tinction: the box containing CD’s software displayed |

a notice that additional terms were within, while the box

containing Gateway’s computer did not. The difference is

functional, not legal. Consumers browsing the aisles of a

store can look at the box, and if they are unwilling to

deal with the prospect of additional terms can leave the

box alone, avoiding the transactions costs of returning the

package after reviewing its contents. Gateway’s box, by

contrast, is just a shipping carton; it is not on display

anywhere. Its function is to protect the product during

transit, and the information on its sides is for the use of

handlers (“Fragile!” “This Side Up!” &'¥#*) rather than

would-be purchasers.

Perhaps the Hills would have had a better argument

if they were first alerted to the bundling of hardware and

gal-ware after opening the box and wanted to return

computer in order to avoid disagreeable terms, but

dissuaded by the expense of shipping. What the rem-

edy Would be in such a case—could it exceed the shipping

charges?—is an interesting question, but one that need

not detain us because the Hills knew before they ordered

the computer that the carton would include some impor-

tant terms, and they did not seek to discover these in

advance. Gateway’s ads state that their products come

with limited warranties and lifetime support. How limited

was the warranty—30 days, with service contingent on

shipping the computer back, or five years, with on-

site service? What sort of —— was offered? om ly

have three principal ways to discover these things. First,

they can ask the vendor to send a copy before deciding

whether to buy. The ay phew Warranty Act re-

quires firms to distribute their warranty terms on request,

15 U.S.C. §2302(bX1XA); the Hills do not contend that

Gateway would have refused to enclose the remaining

App. 7

terms too. Concealment would be bad for business, scar-

ing some customers away and leading to excess returns

from others. Second, shoppers can consult public sources

(computer magazines, the Web sites of vendors) that may

contain this information. Third, they may inspect the docu-

ments after the product’s delivery. Like Zeidenberg, the

Hills took the third option. By keeping the computer be-

yond 30 days, the Hills accepted Gateway’s offer, including

the arbitration clause.

The Hills’ remaining arguments, including a contention

that the arbitration clause is unenforceable as part of a

scheme to defraud, do not require more than a citation

to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

U.S. 395 (1967). Whatever may be said pro and con about

the cost and efficacy of arbitration (which the Hills dis-

parage) is for Congress and the contracting parties to con-

sider. Claims based on RICO are no less arbitrable than

those founded on the contract or the law of torts. Shearson/

American Express, Inc. v. McMahon, 482 U.S. 220, 238-42

(1987). The decision of the district court is vacated, and

this case is remanded with instructions to compel the Hills

to submit their dispute to arbitration.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

App. 8

UNITED STATES COURT OF APPEALS

For The Seventh Circuit

Chicago, Illinois 60604

JUDGMENT — WITH ORAL ARGUMENT

Date: January 6, 1997

BEFORE:

Hon. WALTER J. CUMMINGS, Circuit Judge

Hon. HARLINGTON Woop, JR., Circuit Judge

Hon. FRANK H. EASTERBROOK, Circuit Judge .

as ie Ne

No. 96-3294

RicH HILL and ENZA HILL,

Plaintiffs-Appellees

v.

GATEWAY 2000, INCORPORATED and DAVID PRAIS,

Defendants-Appellants

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division

No. 96 C 4086—Suzanne Conlon, Judge

The judgment of the District Court is VACATED and

the case is REMANDED, in accordance with the decision _

of this court entered on this date. The appellants shall

recover costs.

App. 9

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

Case Number: 96 C 4086 Date: August 22, 1996

Name of Assigned Judge: SUSANNE B. CONLON

Case Title: Rich Hill, et al. v. Gateway 2000, Inc., et al.

* xe * * *

DOCKET ENTRY:

* ** * *

(10) & [Other docket entry]

Defendants’ motion to compel arbitration [16-1] is

denied. (See reverse for details.)

/s/ Susanne B. Conlon

x*x* kK *

ORDER

Defendants Gateway 2000, Inc. and David Prais move

to compel plaintiffs Rich Hill and Enza Hill to submit

their claims arising from the purchase of defendants’ com-

puter system to arbitration. Filed as a class action on

behalf of other purchasers, plaintiffs allege defendants

breached the sales contract by the undisclosed “swapping”

of advertised computer components, that defendants breach-

ed implied and express warranties, and that defendants

engaged in racketeering and consumer fraud. In addition,

plaintiffs seek a declaratory judgment that the arbitra-

tion clause in defendants’ standard terms and conditions

agreement is invalid because when the provision was “‘in-

cluded in the contract,”’ defendants intended to substitute

advertised components. Complt. ¢¢ 90, 91. Plaintiffs fur-

ther claim that the arbitration clause, which was enclos-

App. 10

ed in the computer system’s packaging, was not part of

the contract. Id. | 92.

It is apparently undisputed that the arbitration clause

was neither negotiated by the parties nor included in any

pre-delivery agreement. Rather, the arbitration clause was

contained in a four-page form placed inside the packag-

ing, which was not received by plaintiffs until the com-

puter system was shipped to them. See Complt. Ex. C,

¢{ 10. Defendants insist that plaintiffs are bound by the

arbitration clause because an introductory notice on the

form states in bold type that by keeping the computer

system 30 days after delivery, the purchaser accepts all

terms in the notice. Jd. Ex. C at 1. Plaintiffs respond that

there was no disclosure of an arbitration provision dur-

ing the purchasing process, nor was there any indication

on the outside of the packaging that the box contained

an arbitration agreement. Plaintiffs assert they were un-

aware of the arbitration clause until some unspecified date

when they discovered the computer system did not func-

tion as advertised. Rich Hill Decl. ¢ 1. Plaintiffs argue that

the unfair manner in which purchasers are purportedly

notified of the arbitration clause is part of a scheme to

defraud.

The present record is insufficient to support a finding

of a valid arbitration agreement between the parties or

that plaintiffs were given adequate notice of the arbitra-

tion clause. Compare Carnival Cruise Lines, Inc. v. Shute,

499 U.S. 585 (1991) (actual notice of forum-selection pro-

vision on passenger ticket conceded); ProCD, Inc. v. Zei-

denberg, 86 F.3d 1447 (7th Cir. 1996) (notice on outside

of computer software packaging that warranties and

license restriction were inside).

ee Pe ey ee ee ee ee ee

/s/ Susanne B. Conlon

heieeeneanimaiaaamaalaiammeasiiel

App. 11

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

February 3, 1997.

Before

Hon. WALTER J. CUMMINGS, Circuit Judge

Hon. HARLINGTON Woop, JR., Circuit Judge

Hon. FRANK H. EASTERBROOK, Circuit Judge

RicH HILL and ENZA HILL, on behalf

of a class of persons similarly situated,

Plaintiffs-Appellees,

No. 96-3294 v.

GATEWAY 2000, INC., and DAVID PRAIS,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 96 C 4086—Suzanne B. Conlon, Judge.

Order

Plaintiffs-appellees filed a petition for rehearing and sug-

gestion of rehearing en banc on January 21, 1997. No

judge in regular active service has requested a vote on

the suggestion of rehearing en banc, and all of the judges

on the panel have voted to deny rehearing. The petition

for rehearing is therefore DENIED.

App. 12

9 U.S.C. §2

Validity, irrevocability, and enforcement of agreements to

arbitrate

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out

of such contract or transaction, or the refusal to perform

the whole or any part thereof, or an agreement in writing

to submit to arbitration an existing controversy arising

out of such a contract, transaction, or refusal, shall be

valid, irrevocable, and enforceable, save upon such grounds

as exist at law or in equity for the revocation of any con-

tract.

9 U.S.C. §3

Stay of proceedings where issue therein referable to

arbitration

If any suit or proceeding be brought in any of the courts

of the United States upon any issue referable to arbitra-

tion under an agreement in writing for such arbitration,

the court in which such suit is pending, upon being satis-

fied that the issue involved in such suit or proceeding is

referable to arbitration under such an agreement, shall

on application of one of the parties stay the trial of the

action until such arbitration has been had in accordance

with the terms of the agreement, providing the applicant

for the stay is not in default in proceeding with such ar-

bitration.

9 U.S.C. $4

Failure to arbitrate under agreement; petition to United

States court having jurisdiction for order to compel arbi-

tration; notice and service thereof; hearing and determina-

tion

A party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agreement

for arbitration may petition any United States district

App. 13

court which, save for such agreement, would have jurisdic-

tion under Title 28, in a civil action or an admiralty of

the subject matter of a suit arising out of the controversy

between the parties, for an order directing that such arbi-

tration proceed in the manner provided for in such agree-

ment. Five days’ notice in writing of such application shall

be served upon the party in default. Service thereof shall

be made in the manner provided by the Federal Rules

of Civil Procedure. The court shall hear the parties. and

upon being satisfied that the making of the agreement

for arbitration or the failure to comply therewith is not

an issue, the court shall make an order directing the par-

ties to proceed to arbitration in accordance with the terms

of the agreement. The hearing and proceedings, under

such agreement, shall be within the district in which the

petition for an order directing such arbitration is filed.

If the making of the arbitration agreement or the failure,

neglect, or refusal to perform the same be in issue, the

court shall proceed summarily to the trial thereof. If no

jury trial be demanded by the party alleged to be in de-

fault, or if the manner in dispute is within admiralty

jurisdiction, the court shall hear and determine such issue.

Where such an issue is raised, the party alleged to be

in default may, except in cases of admiralty, on or before

the return day of the notice of application, demand a jury

trial of such issue, and upon such demand the court shall

make an order referring the issue or issues to a jury in

the manner provided by the Federal Rules of Civil Pro-

cedure, or may specially call a jury for that purpose. If

the jury find that no agreement in writing for arbitra-

tion was made or that there is no default in proceeding

thereunder, the proceeding shall be dismissed. If the jury

find that an agreement for arbitration was made in writ-

ing and that there is a default in proceeding thereunder,

the court shall make an order summarily directing the

parties to proceed with the arbitration in accordance with

the terms thereof.