Borowiec v. Gateway 2000, Inc.

Case Date: 05/31/2002
Court: 1st District Appellate
Docket No: 1-01-0480, 1-01-4187, 1-02-0001 cons.

Nos. 1-01-0480, 1-01-4187 & 1-02-0001 (cons.)

 

MICHAEL BOROWIEC, ) Appeal from the
) Circuit Court of
          Plaintiff-Appellee, ) Cook County.
)
     v. ) No. 00 M1 125578
)
GATEWAY 2000, INC., ) Honorable
) John Laurie
          Defendant-Appellant. ) Judge Presiding.

 


 

TADEUSZ KOBIK and DOROTA KOBIK, ) Appeal from the
) Circuit Court of
          Plaintiff-Appellee, ) Cook County.
)
     v. ) No. 00 M1 145067
)
GATEWAY, INC., ) Honorable
) James P. McCarthy
          Defendant-Appellant. ) Judge Presiding.



LESLIE WALDRON ) Appeal from the
) Circuit Court of
          Plaintiff-Appellee, ) Cook County.
)
     v. ) No. 00 M1 151803
)
GATEWAY, INC., ) Honorable
) James P. McCarthy
          Defendant-Appellant. ) Judge Presiding.


JUSTICE REID delivered the opinion of the court:

The defendant, Gateway, Inc., appeals the trial courts'orders which denied its motions to dismiss. The plaintiffs,Michael Borowiec, Tadeusz and Dorota Kobik, and Leslie Waldronpurchased personal computers from Gateway and subsequently suedin their individual capacities to recover damages alleging: (1)breach of express and implied warranty pursuant to the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act (WarrantyAct) (15 U.S.C. '2301 et seq. (1994)), (2) violations of theIllinois Consumer Fraud and Deceptive Business Practices Act (815ILCS 505/2, (West 1998)) and (3) common law fraud. Gateway movedto have the complaints dismissed pursuant to sections 2-615 and2-619 of the Illinois Code of Civil Procedure. 735 ILCS 5/2-615.2-619 (West 1998). The trial courts denied Gateway's motions todismiss. The cases were subsequently consolidated, and thisappeal ensued. The main issue before this court, which is one offirst impression, is whether a written warranty governed by theWarranty Act can require a consumer to submit to bindingarbitration, or simply, does the Warranty Act preclude bindingarbitration? For the reasons that follow, we affirm thedecisions of the trial courts.

I

THE FACTS

A. Michael Borowiec

On or about November 18, 1999, Borowiec purchased a GatewayPerformance 600 PC computer from Gateway, Inc. (Gateway), whichwas formerly doing business as Gateway 2000, Inc. The sale andpurchase of the computer were subject to Gateway's "LimitedWarranty and Terms and Conditions Agreement." Upon receiving thecomputer in the mail, Borowiec discovered that it was defective. On three different occasions, Borowiec attempted to have Gatewayrepair the computer. After Gateway failed to repair thecomputer, Borowiec subsequently revoked acceptance of it and suedto recover damages.

On May 26, 2000, Borowiec filed a four-count complaintagainst Gateway alleging: (1) violations of the Warranty Act, (2)violation of the Consumer Fraud and Deceptive Business PracticesAct, and (3) common law fraud. Gateway filed a motion to dismissBorowiec's complaint pursuant to section 2-615 for lack ofsubject matter jurisdiction and to compel arbitration. OnSeptember 20, 2000, the trial court denied Gateway's motion todismiss. Following an unsuccessful attempt to have the causeremoved to federal court, Gateway timely filed a notice ofappeal.

B. Tadeusz and Dorota Kobik

On or about January 31, 2001, the Kobiks purchased a GatewayPerformance 1000 PC computer and services from Gateway CountryStores LLP (Gateway). The sale and purchase of the computer weresubject to Gateway's "Limited Warranty and Terms and ConditionsAgreement." Upon receiving the computer, the Kobiks realizedthat it was defective. After unsuccessfully attempting to haveGateway cure the defects, the Kobiks revoked acceptance of thecomputer and brought suit against Gateway to recover damages.

On September 13, 2001, the Kobiks filed a three-count complaintwherein they alleged: (1) violations of the Warranty Act, and (2)violations of the Consumer Fraud and Deceptive Business PracticesAct. Gateway subsequently filed a motion to dismiss oralternatively to compel arbitration and stay proceedings pendingcompletion of arbitration pursuant to section 2-619. The trialcourt denied Gateway's motion on November 27, 2001, and Gatewaytimely filed a notice of appeal.

C. Leslie Waldron

On or about November 14, 2000, Waldron purchased a GatewayEssential 866 computer and services from Gateway Direct LP(Gateway). The sale and purchase of the computer were subject toGateway's "Limited Warranty and Terms and Conditions Agreement." After receiving the computer in the mail, Waldron discovered thatit was defective. After several failed attempts to have Gatewaycure the defects, Waldron revoked acceptance of the computer.

On October 19, 2001, Waldron filed a four-count complaintwherein she alleged: (1) violations of the Warranty Act, and (2)violations of the Consumer Fraud and Deceptive Business PracticesAct. On November 21, 2001, Gateway filed a motion to dismiss oralternatively to compel arbitration and stay proceedings pendingcompletion of arbitration pursuant to section 2-619. The trialcourt denied Gateway's motion to dismiss on December 20, 2001,and Gateway timely filed its notice of appeal the same day.



D. Gateway's Warranty Agreement

It is undisputed that Gateway's "Limited Warranty and Termsand Conditions Agreement" governed the purchase of the computersin all three matters. In each of the plaintiffs' "LimitedWarranty and Terms and Conditions Agreement" there appears adispute resolution clause. The dispute resolution clause isidentical in all the plaintiffs' warranties and is as follows:

"You agree that any Dispute between Youand Gateway will be resolved exclusively andfinally by arbitration administered by theNational Arbitration Forum (NAF) ***. *** Anydecision rendered in such arbitrationproceedings will be final and binding on eachof the parties ***. *** You understand thatYou would have had a right to litigatedisputes through a court, and that You haveexpressly and knowingly waived that right andagreed to resolve any Disputes throughbinding arbitration. This arbitrationagreement is made pursuant to a transactioninvolving interstate commerce, and shall begoverned by the Federal Arbitration Act, 9U.S.C. Section 1, et seq."

E. Consolidation of the Cases

In each of Gateway's motions to dismiss, Gateway argued thatdismissal was proper because the "Limited Warranty and Terms andConditions Agreement" requires all disputes between Gateway andits customers to be resolved through binding arbitration pursuantto the Federal Arbitration Act (FAA) (9 U.S.C '1 et seq. (1994)). In response, the plaintiffs argued that the Warranty Actprecludes binding arbitration, and as such, the arbitrationagreement in Gateway's warranty is unenforceable. On February11, 2002, the three cases were consolidated.

II

ANALYSIS

The issue before this court is whether the trial courtserred when they denied Gateway's motions to dismiss pursuant tosections 2-615 and 2-619. "A section 2-615 motion poses thequestion of whether the complaint states a cause of action uponwhich relief can be granted. [Citation.] A section 2-619motion, on the other hand, raises certain defects or defenses andquestions whether defendant is entitled to judgment as a matterof law. [Citation.] Since the resolution of either motion onlyinvolves a question of law, the standard of review is de novo. [Citation.] On a motion to dismiss, this court must accept allwell-pleaded facts as true. [Citation.]" In re Parentage ofM.J., 325 Ill. App. 3d 826, 829 (2001).

On appeal, Gateway argues that the trial courts erred whenthey denied its motions to dismiss pursuant to sections 2-615 and2-619. Specifically, Gateway maintains that when the plaintiffsaccepted the terms in the warranty agreement, they agreed toresolve any dispute with Gateway through binding arbitration, andsubsequently, the trial courts erred when they did not dismissthe plaintiffs' complaints and enforce the binding arbitrationclause in the warranty.

In reply, the plaintiffs assert that the binding arbitrationclause in Gateway's warranty violates the Warranty Act, and assuch is unenforceable. In particular, the plaintiffs contendthat the Warranty Act preserves for consumers the right toultimately have their disputes with warrantors settled in ajudicial forum and consequently precludes binding arbitration. We agree.

A. The Warranty Act and the FAA

In 1975, Congress enacted the Warranty Act in order "toimprove the adequacy of information available to consumers [and]prevent deception" in connection with written warranties issuedwith consumer products. 15 U.S.C. '2302(a) (1994). The WarrantyAct sets out clear and comprehensive requirements regardingdisclosures, duties, and remedies associated with warranties onconsumer products. Products covered by the Warranty Act includeany "tangible personal property which is distributed in commerceand which is normally used for personal, family, or householdpurposes." 15 U.S.C. '2301(1) (1994).

In 1925, Congress passed the FAA to reverse the long-standing judicial hostility to arbitration agreements and toplace arbitration agreements upon the same footing as othercontracts. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20,24, 114 L. Ed. 2d 26, 36, 111 S. Ct. 1647, 1651 (1991); CircuitCity Stores, Inc. v. Adams, 532 U.S. 105, 111, 149 L. Ed. 2d 234,244, 121 S. Ct. 1302, 1307 (2001). The FAA provides:

"A written provision in any *** contractevidencing a transaction involving commerceto settle by arbitration a controversythereafter arising out of such contract ortransaction, or the refusal to perform thewhole or any part thereof, or an agreement inwriting to submit to arbitration an existingcontroversy arising out of such contract,transaction, or refusal, shall be valid,irrevocable, and enforceable, save upon suchgrounds as exist at law or in equity for therevocation of any contract." 9 U.S.C. '2(1994).

The United States Supreme Court has recognized an "emphaticfederal policy in favor of arbitral dispute resolution."Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473U.S. 614, 631, 87 L. Ed. 2d 444, 458, 105 S. Ct. 3346, 3356(1985). To further this purpose, the FAA compels judicialenforcement of a wide range of written arbitration agreements. Circuit City Stores, Inc., 532 U.S. at 111, 149 L. Ed. 2d at 244,121 S. Ct. at 1307. Only a contrary congressional command canoverride the FAA's mandate to enforce arbitration agreements. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 96L. Ed. 2d 185, 194, 107 S. Ct. 2332, 2337 (1987). Thus, toovercome the presumption favoring arbitration agreements, theparty opposing arbitration must show that Congress intended topreclude a party's waiving a statute's judicial remedies. McMahon, 482 U.S. at 227, 96 L. Ed. 2d at 194, 107 S. Ct. at2337.

The Supreme Court has articulated a test for determiningwhether a federal statute may override the FAA's directive toenforce arbitration agreements. In essence, this test requiresthe party opposing arbitration to show a clear congressionalintent to override the FAA's mandate to enforce bindingarbitration agreements. According to the Supreme Court, thiscongressional intent must be evidenced in the statute's text,history or through an inherent conflict between arbitration andthe statute's purposes. McMahon, 482 U.S. at 226-27, 96 L. Ed.2d at 194, 107 S. Ct. at 2337. "[A]ny doubts concerning thescope of arbitrable issues should be resolved in favor ofarbitration ***." Moses H. Cone Memorial Hospital v. MercuryConstruction Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 785 ,103 S. Ct. 927, 941 (1983).

B. Other Jurisdictions

We note that there is a split among the courts that havevisited this issue. The cases which support the position thatthe Warranty Act precludes binding arbitration are as follows: Wilson v. Waverlee Homes, Inc., 954 F. Supp. 1530 (M.D. Ala.1997); Boyd v. Homes of Legend, Inc., 981 F. Supp. 1423 (M.D.Ala. 1997); Rhode v. E&T Investments, Inc., 6 F. Supp. 2d 1322(M.D. Ala. 1998); Pitchford v. Oakwood Mobile Homes, Inc., 124 F.Supp. 2d 958 (W.D. Va. 2000); Raesly v. Grand Housing, Inc., 105F. Supp. 2d 562 (S.D. Miss. 2000); and Philyaw v. PlatinumEnterprise, Inc., No. CL00-236 (Va. Cir. Ct. 2001).

We agree with the rationale of these cases and for thereasons that follow, we reject the reasoning of the followingcases, which were relied on by Gateway: Southern Energy Homes,Inc. v. Ard, 772 So. 2d 1131, 1135 (Ala. 2000)(followed thedissent in Southern Energy Homes, Inc. v. Lee, 732 So. 2d 994(Ala. 1999)); Results Oriented, Inc. v. Crawford, 245 Ga. App.432, 538 S.E.2d 73 (2000); In re Homestar of Lancaster, 50 S.W.3d480 (Tex. 2001); and Palm Harbor Home, Inc. v. Turner, 796 So. 2d295 (Ala. 2001).



C. Text of the Warranty Act

An examination of the Warranty Act's text shows that it wasCongress' intent to ultimately preserve a judicial forum forconsumers.

The Warranty Act provides that "a consumer who is damaged bythe failure of a supplier, warrantor, or service contractor tocomply with any obligation under this chapter, or under a writtenwarranty, implied warranty, or service contract, may bring suitfor damages and other legal and equitable relief." 15 U.S.C.'2310(d)(1) (1994). The Warranty Act recognizes only oneexception to this entitlement and, hence, provides for theestablishment of "informal dispute settlement mechanisms" (15U.S.C. '2310(a)(1) (1994)) or "informal dispute settlementprocedures" (15 U.S.C. '2310(a)(3) (1994)).

Warrantors may establish "informal dispute settlementmechanisms" to further the congressional goal of encouragingconsumers and warrantors to settle their disputes. Section2310(a)(1) of the Warranty Act states that "Congress herebydeclares it to be its policy to encourage warrantors to establishprocedures whereby consumer disputes are fairly and expeditiouslysettled through informal dispute settlement mechanisms." 15U.S.C. '2310(a)(1) (1994).

These informal dispute settlement mechanisms are proper solong as they comply with the Federal Trade Commission's (FTC)minimum standards. 15 U.S.C. ''2310(a)(2), (a)(3) (1994). TheWarranty Act authorizes the FTC to prescribe rules about thepresale disclosure of a written warranty's terms and conditionsand the minimum federal requirements for any informal disputesettlement mechanism incorporated in a written warranty. 15U.S.C. ''2302(b)(1)(A), 2310(a)(2) (1994).

If the informal dispute settlement mechanisms comply withFTC regulations and if the written warranty states that theconsumer must resort to this procedure before pursuing any legalremedy, then "the consumer may not commence a civil action ***unless he initially resorts to such procedure." 15 U.S.C.'2310(a)(3) (1994). The Warranty Act states that "in any civilaction arising out of a warranty obligation and relating to amatter considered in such a procedure, any decision in suchprocedure shall be admissible in evidence." 15 U.S.C.'2310(a)(3)(C) (1994).

In other words, the informal dispute settlement proceduresare a prerequisite, not a bar, to relief in court. "[T]heconsumer may not commence a civil action *** unless he initiallyresorts to such procedure." 15 U.S.C. '2310(a) (1994). Theconsumer must first try to settle his or her dispute with thewarrantor by resorting to an informal dispute settlementprocedure. If the consumer is dissatisfied with the resultreached in the informal dispute settlement, the consumer may thencommence a civil action and the results of the informal disputesettlement procedure shall be admissible as evidence.

D. Legislative History of the Warranty Act

A review of the legislative history of the Warranty Actprovides further evidence that Congress intended for consumers toretain the right to have their disputes with warrantors decidedin the courts. Specifically, remarks made by one of the sponsorsof the bill, Congressman Moss, show that the informal disputesettlement mechanism was intended to act as a prerequisite toconsumers seeking relief in the court.

Congressman Moss' remarks follow:

"First, the bill provides the consumer with aneconomically, feasible private right of action so thatwhen a warrantor breaches his warranty or servicecontract obligations, the consumer can have effectiveredress. Reasonable attorneys fees and expenses areprovided for the successful consumer litigant, and thebill is further refined so as to place a minimum extraburden on the courts by requiring as a prerequisite tosuit that the purchaser give the [warrantor] reasonableopportunity to settle the dispute out of court,including the use of a fair and formal disputesettlement mechanism which the bill encourages[warrantors] to set up under the general supervision ofthe Federal Trade Commission." (Emphasis added.) 119Cong. Rec. 972 (1973)

Congressman Moss' remarks show that the informal disputesettlement mechanisms or procedures are simply a "prerequisite"and not a bar to suit. The mechanisms were created to act as afilter as opposed to a stopper.

The report on the bill makes this point even clearer. Thereport states that "[a]n adverse decision in any informal disputesettlement proceeding would not be a bar to a civil action on thewarranty involved in the proceeding, but the decision reached inany informal dispute settlement procedure relating to any matterconsidered in such procedure would be admissible in any civilaction arising out of a warranty on a consumer product." H.R.Rep. No. 93-1107 (1974), reprinted in 1974 U.S.C.C.A.N. 7702,7723.

E. FTC Regulations

The regulations adopted by the FTC pursuant to the WarrantyAct provide more evidence of an intent that consumers have finalaccess to the courts. In particular, the regulations show thatthe informal dispute settlement procedure was meant to act onlyas a prerequisite and not as a bar to a consumer ultimately goingto court.

The first evidence appears in 16 C.F.R. 700.8 (2001). Thesection is entitled "Warrantor's decision as final" and states:

"A warrantor shall not indicate in anywritten warranty *** either directly orindirectly that the decision of the warrantor*** or any designated third party is final orbinding in any dispute concerning thewarranty ***. Nor shall a warrantor ***state that it alone shall determine what is adefect under the agreement. Such statementsare deceptive since section 110(d) of the Actgives state and federal courts jurisdictionover suits for breach of warranty ***." 16C.F.R. '700.8 (2001).

Stronger evidence is found further in the regulations. Under the regulations, a "mechanism" is defined as an informaldispute settlement procedure which is incorporated into the termsof a written warranty. 16 C.F.R. '703.1(e) (2001). Theregulations require that a "mechanism" comply with therequirements prescribed by the FTC and contained in 16 C.F.R.''703.3 through 703.8. 16 C.F.R. '703.2(a) (2001). Theregulations then state that the "[d]ecisions of the Mechanismshall not be legally binding on any person. *** In any civilaction arising out of a warranty obligation and relating to amatter considered by the Mechanism, any decision of the Mechanismshall be admissible in evidence ***." (Emphasis added.) 16C.F.R. '703.5(j) (2001).

Moreover, and to bring this point further home, theregulations add that "The mechanism shall inform the consumer ***that *** [i]f he or she is dissatisfied with its decision orwarrantor's intended actions, or eventual performance, legalremedies, including use of small claims court, may be pursued." 16 C.F.R. '703.5(g) (2001).

Finally, if any doubt remains about whether the Warranty Actprecludes binding arbitration agreements, our examination of theremarks made by the FTC upon adopting 16 C.F.R. ' 703.5(j) showthat binding arbitration is precluded under the Warranty Act. The FTC's comments are as follows:

"Several industry representativescontended that warrantors should be allowedto require consumers to resort to mechanismswhose decisions would be legally binding(e.g., binding arbitration). The Rule doesnot allow for this for two reasons. First,*** Congressional intent was that Section 110Mechanisms not be legally binding. Second,even if binding Mechanisms were contemplatedby Section 110 of the Act, the Commission isnot prepared, at this point in time, todevelop guidelines for a system in whichconsumers would commit themselves, at thetime of product purchase, to resolve anydifficulties in a binding, but nonjudicial,proceeding. The Commission is not nowconvinced that any guidelines which it setout could ensure sufficient protection forconsumers." 40 Fed. Reg. 60168, 60210(1975).

The Commission goes on to state:

"The warrantor, the Mechanism, or anyother group can offer a binding arbitrationoption to consumers who are dissatisfied withMechanism decisions or warrantor intentions. However, reference within the writtenwarranty to any binding, nonjudicial remedyis prohibited by the Rule and the Act." 40Fed. Reg. at 60211.

Here, Gateway's "Limited Warranty and Terms and ConditionsAgreement" contains a binding arbitration clause. This clause isin violation of the Warranty Act and is therefore unenforceable. As such, the trial courts' decisions are affirmed.

III

CONCLUSION

For the foregoing reasons, the decisions of the trial courtsare affirmed.

Affirmed.