Intellectual Property Law

Arbitration Clause and Internet Contracts of Adhesion

By Martha L. Arias

According to the Appellate Court of Illinois, an arbitration clause in Internet contracts is not necessarily unconscionable and is binding on the parties to the agreement. Yet, some requirements must be met. Arbitration is a common alternative dispute resolution mechanism for Internet contracts involving parties located in diverse jurisdictions and contracts to which several laws may apply, and this decision is extremely important for online retailers and their customers.  This article presents the Illinois Appellate Court decision in the case of Hubbert v. Dell Corp.

In Hubbert v. Dell Corp., 359 Ill. App. 3d 976 (2005) (hereafter Hubbert), plaintiffs were several Dell Corp.?s customers who bought computers through Dell Corp.?s Web site.  Plaintiffs bought Dell computers online by completing online forms that included the ?Terms and Conditions of Sale? within a blue hyperlink, which plaintiffs and online customers could easily access. Dell informed its online clients that all purchases were subject to Dell?s ?Terms and Conditions of Sale.? Dell?s ?Terms and Conditions of Sale? for these online sales, were also printed on the back of plaintiffs? invoices sent along with the purchased computers. Also, Dell informed plaintiffs that an additional copy of the ?Terms and Conditions of Sale? could be requested by calling Dell?s toll-free number.  As part of Dell?s total satisfaction policy, computers purchased online could be returned within 30 days and customers could receive full refund or credit.   After purchasing Dell computers online and receiving them, plaintiffs were not satisfied. They claimed Dell?s advertisement regarding Pentium 4 computers was false, misleading and deceptive because the computers were not ?the fastest? as Dell claimed they were.  Yet, none of the plaintiffs returned the purchased computers within 30 days.

Plaintiffs filed a lawsuit against Dell and Dell moved to dismissed and, in the alternative, demanded arbitration. Dell alleged there was an arbitration clause required by the Terms and Conditions of Sale.  The arbitration clause read as follows:

?Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY (WHETHER IN CONTRACT, TORT, OR OTHERWISE, WHETHER PREEXISTING, PRESENT[,] OR FUTURE, AND INCLUDING STATUTORY, COMMON LAW, INTENTIONAL TORT[,] AND EQUITABLE CLAIMS) AGAINST DELL, its agents, employees, successors, assigns[,] or affiliates (collectively for purposes of this paragraph, 'Dell'[),] arising from or relating to this Agreement, its interpretation, or the breach, termination[,] or validity thereof, the relationships which result from this Agreement (including, to the full extent permitted by applicable law, relationships with third parties who are not signatories to this Agreement), Dell's advertising, or any related purchase SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION  FORUM (NAF) under its Code of Procedure then in effect (available via the Internet at http://www.arb-forum.com [], or via telephone at 1-800-474-2371). The arbitration will be conducted before a single arbitrator and will be limited solely to the dispute or controversy between Customer and Dell. The arbitration shall be held in a mutually agreed upon location in person, by telephone, or online. Any award of the arbitrator(s) shall be final and binding on each of the parties[] and may be entered as a judgment in any court of competent jurisdiction. Information may be obtained and claims may be filed at any office of the NAF or at P.O. Box 50191, Minneapolis, MN 55405." (Emphasis in original.)?  

Plaintiffs denied arbitration was compelling. The trial court denied Dell?s motion to dismiss and demand for arbitration.  Dell filed an interlocutory appeal.    

The appellate court first determined what law applied.  Texas law applied; although parties had different views as to why Texas law applied.  Plaintiffs claimed Texas law applied under a ?conflict-of-law analysis? (some of the plaintiffs where located in Texas) while defendants claimed Texas law applied under a ?choice-of-law analysis? (the Terms and Conditions of Sale chose Texas law as the applicable law).  The court held that, according to well-established law, ?a choice-of-law provision will be upheld if public policy is not violated and there is some relationship between the chosen forum and the parties or the transaction.? Thus, the choice-of-law analysis triumphed.

Then, the court determined the validity of the arbitration clause.  The court held that federal and state law strongly favor arbitration and that courts are to resolve doubts concerning an arbitration agreement in favor of arbitration. Also, if the parties have agreed to submit disputes to arbitration and the arbitration agreement is clear, arbitration must be sustained. Therefore, if the parties disputes are within the scope of the issues subject to arbitration, trial courts have no discretion but to compel arbitration, the Illinois Appellate Court held citing to Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830, 835 (Tex. App. 2002).  Consequently, parties seeking to compel arbitration have the burden of proving that an arbitration agreement exists and that the disputed issues are covered within the scope of the arbitration agreement. Parties defeating arbitration must show proof that the issues are not covered by the arbitration agreement. The Court held that the Dell?s Terms and Conditions of Sale included a valid arbitration clause and that they were properly displayed and informed to Dell?s online customers.

Regarding plaintiffs? argument that the arbitration clause was unconscionable, the court held that the trial court erred in finding that the arbitration clause in this case was unconscionable.  The appellate court held that unconscionability is a question of law and must be determined in a case-by-case basis.  A contract of adhesion is not automatically unconscionable.  Also, unconscionability has two aspects: procedural (refers to circumstances surrounding the adoption of the arbitration clause) and substantive (refers to the fairness of the arbitration clause).  A party arguing unconscionability must proof both.  In this case, the appellate court held, the clause was within a blue color hyperlink and the arbitration clause within the Terms and Conditions of Sale was displayed in partial capital letters.  The court held that these letters and the hyperlink color provided conspicuous notice to online customers.  Also arguing that a contract of adhesion containing an arbitration clause is unconscionable fails to consider the procedural aspect of that analysis.

To conclude, under Texas and Illinois law, contract of adhesion containing an arbitration law is not per-se unconscionable.  We must determine the applicable law, then establish the validity of the arbitration clause under state law, and then apply the unconscionability test to reach a final conclusion of whether an Internet agreement containing an arbitration law is valid.

Full post as published by IBLS Internet Law Blog on August 09, 2009 (boomark / email).