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.
No. 96-3294
UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
105 F.3d 1147;
1997 U.S. App. LEXIS 176
December 10, 1996, ARGUED
January 6, 1997, DECIDED
SUBSEQUENT HISTORY:
[**1] Rehearing Denied February 3, 1997, Reported at:
1997 U.S. App. LEXIS 1877. Certiorari Denied October 6, 1997, Reported at:
1997 U.S. LEXIS 4594.
PRIOR HISTORY: Appeal from the United States District Court for the Northern District of
Illinois, Eastern Division. No. 96 C 4086. Suzanne B. Conlon, Judge.
DISPOSITION: Vacated and remanded.
COUNSEL: For RICH HILL, ENZA HILL, Plaintiffs - Appellees: Daniel A. Edelman, Cathleen
M. Combs, James O. Latturner, Charles E. Petit, EDELMAN
& COMBS, Chicago, IL USA.
For GATEWAY 2000, INCORPORATED, DAVID PRAIS, Defendants - Appellants: Terry M.
Grimm, Thomas J. Wiegand, WINSTON
& STRAWN, Chicago, IL USA. Robert M. Rader, WINSTON
& STRAWN, Washington, DC USA.
JUDGES: Before CUMMINGS, HARLINGTON WOOD, JR., and EASTERBROOK, Circuit Judges.
OPINIONBY: EASTERBROOK
OPINION:
[*1148] 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 because 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
customers, kept the computer
[**2] more than 30 days before complaining 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
"the present record is insufficient to support 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 immediate appeal, as is its right.
9 U.S.C. § 16(a)(1)(A).
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 therefore 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, 134 L. Ed. 2d 902, 116 S. Ct. 1652 (1996), holds that this provision
[**3] of the Federal
Arbitration Act is inconsistent with any requirement that an
arbitration clause be prominent. A contract need not be read to be effective; people who accept
take the risk that the unread 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' contract 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. Likewise,
Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 113 L. Ed. 2d 622, 111 S. Ct. 1522 (1991), enforces a forum-selection clause that was included among three pages of terms
attached to a cruise ship ticket.
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
[**4] 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
[*1149] could be formed, it is not the only way:
"A
vendor, as master of the offer, may invite acceptance by conduct, and may propose
limitations on the kind of conduct that constitutes acceptance. A
buyer may accept 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
Wisconsin 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
[**5] preceding the
revelation of full terms is common for air
transportation, insurance, 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 potential
buyers. Others would hang up in a rage over the waste of their time. And oral
recitation would not avoid
customers' assertions (whether true or feigned) that the clerk did not read term X to
them, or that they did not remember or understand it. Writing provides benefits
for both sides of commercial transactions.
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. Competent adults are bound by such
documents, read or unread. For what little it is worth, we add that the
box from Gateway was crammed with
software. The computer came
[**6] with an operating system, without which it was useful only as a boat anchor.
See
Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756, 761 (7th Cir. 1996). Gateway also included many application programs. 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 parties' 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 performed.
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 purposes a
"license"
characterization might be preferable.
86 F.3d at 1450. All debates about
characterization to one side, the transaction in
ProCD
[**7] 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
Gateway's
warranty and are not
satisfied with its response, so they are not well positioned to say that
Gateway's 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 service and information obligations are
common in the computer business, on both
hardware and
software sides. Gateway offers
"lifetime service" and has a round-the-clock telephone hotline to fulfil this promise. Some
vendors spend more money helping
customers use their products than on developing and manufacturing them. The document in
Gateway's
box includes promises of
[*1150] future performance that some
consumers
[**8] value highly; these promises
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 section, 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
"merchant" and the terms
inside ProCD's
box were not excluded 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 payment 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
[**9]
"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 occupation
holds himself out as having knowledge or skill peculiar to the practices or
goods involved in the transaction",
§ 2-104(1). Zeidenberg bought the product at a retail 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 litigation but did not make Zeidenberg a
software
merchant.
At oral argument the Hills propounded still another distinction: the
box containing ProCD'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
[**10] 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 legal-ware after opening the
box and wanted to return the computer in order to avoid disagreeable terms, but
were dissuaded by the expense of
shipping. What the remedy 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 important 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 free onsite service? What sort of
support was offered?
Shoppers have three principal ways to
discover these things. First, they can ask the
vendor to send a copy before deciding whether to buy. The Magnuson-Moss
Warranty Act requires firms
[**11] to distribute their
warranty terms on request,
15 U.S.C. § 2302(b)(1)(A); the Hills do not contend that Gateway would have refused to
enclose the remaining terms too. Concealment would be bad for business, scaring 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 documents after
the product's
delivery. Like Zeidenberg, the Hills took the third option. By keeping the computer
beyond 30 days, the Hills accepted Gateway's offer, including the
arbitration clause.
The Hills' remaining arguments, including a contention that the
arbitration
[*1151] 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, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967). Whatever may be said pro and con about the cost and efficacy of
arbitration (which the Hills disparage) is for Congress and the contracting parties to
consider. 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,
[**12] 238-42, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (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.
