BUSI 2001 Week 10 Gateway Case Comparison Example

Same Computer Maker, Same Arbitration Clause, Opposite Results: Comparing the Seventh Circuit in Hill v. Gateway 2000 With a New York Appellate Court in Brower v. Gateway 2000 to Find the Fact That Decided Whether a Consumer Had to Arbitrate

Student Name

Walden University

BUSI 2001: Business Law

Instructor Name

Month Day, Year

Same Computer Maker, Same Arbitration Clause, Opposite Results: Comparing the Seventh Circuit in Hill v. Gateway 2000 With a New York Appellate Court in Brower v. Gateway 2000 to Find the Fact That Decided Whether a Consumer Had to Arbitrate

Why These Two Cases

Consumer contracts often include arbitration clauses that the buyer never negotiated. Two questions decide whether such a clause binds the buyer. First, did the buyer agree to it at all? Second, if so, is the clause so one-sided that a court will refuse to enforce it as unconscionable? Two cases decided a year apart involved the same company, Gateway 2000, and the same kind of terms shipped inside the computer box, yet one required the consumers to arbitrate and the other refused to enforce the clause as written. Comparing them shows where the line sits.

The Doctrine

A court may refuse to enforce a contract term that is unconscionable. Most courts require two elements: procedural unconscionability, meaning unfairness in how the term was presented, such as hidden terms or no real choice, and substantive unconscionability, meaning terms so one-sided that they shock the conscience or are unreasonably favorable to one party (American Law Institute, 1981). Arbitration clauses are also governed by the Federal Arbitration Act, which requires courts to enforce them on the same footing as other contracts.

Hill v. Gateway 2000

Rich and Enza Hill ordered a Gateway computer by phone. The box arrived with a list of terms, including an arbitration clause, which stated that the terms governed unless the computer was returned within thirty days. The Hills kept the computer longer, then sued Gateway in federal court over alleged defects. The Seventh Circuit held that the terms in the box were part of the contract: Gateway had invited acceptance by keeping the computer beyond thirty days, and the Hills had done so. The arbitration clause was enforceable, and the case was sent to arbitration (Hill v. Gateway, 1997). The Hills argued that they had not agreed to terms they saw only after paying; they did not build a record that the arbitration forum itself was unfair.

Brower v. Gateway 2000

Consumers in New York brought a class action against Gateway, which moved to compel arbitration under a similar clause requiring arbitration before the International Chamber of Commerce. The Appellate Division accepted the reasoning that the terms in the box formed part of the contract, and it found no procedural unconscionability, since buyers had thirty days to read the terms and return the computer. But the court held that the clause's choice of forum was substantively unconscionable because of its cost. The fees required to bring a claim before that body exceeded the price of many of the products at issue, and part of them could not be recovered even by a consumer who won. A consumer with a small claim would be deterred from pursuing it at all. The court did not void arbitration altogether; it sent the matter back so that an appropriate arbitrator could be appointed (Brower v. Gateway, 1998).

The Factual Difference

The cases did not disagree about formation; both accepted that terms in the box can bind a buyer who keeps the product. The difference lay in what was proven about the arbitration forum itself. In Hill, the consumers attacked whether they had agreed and offered nothing showing the forum was prohibitively expensive, so the court had no basis for finding the clause substantively one-sided. In Brower, the record showed the cost of using the chosen forum, and that cost was large relative to the consumers' claims. That evidence carried the substantive element of unconscionability.

So the line does not run between arbitration clauses that are disclosed after purchase and those disclosed before. It runs between clauses whose practical effect is to let consumers pursue their claims, even in a less convenient forum, and clauses whose costs effectively prevent them from pursuing claims at all.

Limits of the Comparison

Two cases cannot settle a national rule. Hill is a decision of one federal court of appeals, and Brower is a decision of an intermediate New York court; neither binds courts in other states. Some courts have rejected the reasoning that terms shipped in a box form part of a contract at all, holding instead that the contract was complete at the phone order and the later terms were only proposals the buyer never accepted. A business selling in many states therefore cannot rely on either case alone. What the pair does show is a useful method: separate the formation question from the fairness question, and test each against the facts a court would actually have in front of it.

Later Developments

The law has moved since these decisions. In 2011 the Supreme Court held that the Federal Arbitration Act prevents states from applying a rule that treats class-action waivers in consumer arbitration agreements as unconscionable (AT&T Mobility LLC v. Concepcion, 2011). That decision narrowed the room for unconscionability challenges based on the arbitration process itself, though cost-based challenges of the Brower kind can still matter where a forum would make a claim impossible to bring. Mallor et al. (2022) note that businesses drafting consumer arbitration clauses now commonly offer to pay most arbitration fees, which removes the problem the Brower court found.

What the Comparison Teaches a Business

A business that wants its arbitration clause enforced should make the terms available before or at the time of sale, give customers a real chance to reject them and, above all, choose a forum whose cost does not swallow the customer's claim. The Gateway cases show that the second question, what the clause does in practice, can matter more than the first.

References

American Law Institute. (1981). Restatement (second) of contracts.

AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (1998).

Hill v. Gateway 2000, Inc., 105 F.3d 1147 (1997).

Mallor, J. P., Barnes, A. J., Bowers, L. T., & Langvardt, A. W. (2022). Business law: The ethical, global, and e-commerce environment (18th ed.). McGraw Hill.