Brower v. Gateway 2000, Inc.
676 N.Y.S.2d 569 (1998)
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Rule of Law:
Terms included inside a product's packaging are enforceable parts of the contract if the consumer accepts them by retaining the product beyond a stated review period. However, a provision within those terms, such as an arbitration clause, is substantively unconscionable and unenforceable if it imposes excessive costs that effectively deny a consumer any forum to resolve a dispute.
Facts:
- Gateway 2000, Inc. sold computers directly to consumers via mail or telephone orders.
- Inside the shipping box, Gateway included its 'Standard Terms and Conditions Agreement.'
- A notice on the agreement stated that a customer accepted the terms by keeping the computer for more than 30 days.
- Paragraph 10 of the agreement mandated that all disputes be resolved exclusively through arbitration conducted by the International Chamber of Commerce (ICC) in Chicago.
- Plaintiffs purchased computers from Gateway and were dissatisfied with the advertised technical support, which they found was practically unreachable.
- The ICC's rules required a non-refundable $2,000 registration fee as part of a $4,000 advance fee for claims under $50,000.
- The cost of initiating ICC arbitration was significantly greater than the purchase price of most Gateway products and the potential damages for an individual consumer.
Procedural Posture:
- Plaintiffs filed a class action lawsuit against Gateway 2000, Inc. in the Supreme Court of New York, New York County, which is a trial-level court.
- Gateway filed a motion to dismiss the complaint against the appellants, arguing their claims were subject to a mandatory arbitration clause.
- The trial court granted Gateway's motion to dismiss, upholding the validity of the arbitration agreement.
- The plaintiffs (appellants) appealed the trial court's dismissal to the Supreme Court of New York, Appellate Division, First Department.
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Issue:
Is an arbitration clause included in the standard terms and conditions shipped with a product enforceable against a consumer who retains the product beyond a 30-day review period, and, if so, does the specific requirement to arbitrate before the International Chamber of Commerce render the clause unconscionable?
Opinions:
Majority - Milonas, J. P.
Yes, as to the formation of the contract, but No, as to the enforceability of the designated arbitral forum. The arbitration agreement is a valid part of a contract formed when the consumer retains the product for 30 days, but the specific provision requiring arbitration before the International Chamber of Commerce (ICC) is substantively unconscionable and unenforceable due to its excessive costs. The contract was not formed at the time of the telephone order but only after the consumer had an opportunity to review the terms and affirmatively accepted them by not returning the goods. This 'terms later' transaction is outside the scope of UCC § 2-207, which applies to a 'battle of the forms.' The agreement is not an unenforceable contract of adhesion because the consumer had a meaningful choice to reject the terms by returning the product. However, the arbitration clause is substantively unconscionable. While it is not procedurally unconscionable, the excessive costs required by the ICC—including a $4,000 advance fee for a small consumer claim—effectively deprive consumers of any forum to resolve their disputes. Under New York law, substantive unconscionability alone can be sufficient to render a contract term unenforceable. Therefore, the portion of the clause designating the ICC is severed, and the matter is remanded to allow the parties to select a different arbitrator.
Analysis:
This decision solidifies the enforceability of 'shrinkwrap' or 'terms-in-the-box' contracts in New York, aligning with influential federal precedents like Hill v. Gateway 2000 and ProCD v. Zeidenberg. It affirms that modern commercial practices allow for contract formation to occur after the initial purchase, with acceptance demonstrated by the consumer's retention of the product. However, the case establishes a crucial consumer protection limit: courts will scrutinize the substantive fairness of such terms. By finding the prohibitively expensive arbitration forum unconscionable, the court ensures that these agreements cannot be used to effectively strip consumers of all practical avenues for legal redress, creating a balance between facilitating modern commerce and preventing oppressive contractual terms.
