Takeaway
In short, this case confirms that a seller may make retention of a delivered product the method of accepting enclosed terms, including an arbitration clause, so long as the buyer has a meaningful opportunity to reject the deal by returning the product.
Rich and Enza Hill ordered a Gateway computer by telephone and supplied a credit-card number. Gateway later shipped the computer in a box containing its standard terms and conditions. The terms stated that the buyer accepted them by keeping the computer for more than 30 days, and they included an arbitration clause. The Hills retained the computer beyond that period, then complained about its components and performance.
The Hills filed a proposed federal class action, alleging, among other claims, that Gateway’s product practices constituted mail and wire fraud and thus supported civil RICO liability. Gateway moved to compel arbitration under the clause in the box. The district court denied the motion, finding the record inadequate to establish a valid arbitration agreement or adequate notice of the clause. Gateway took an immediate interlocutory appeal under the Federal Arbitration Act.
Issue #1
Whether Gateway’s terms, delivered inside the computer box after the telephone order, became part of the parties’ contract when the Hills kept the computer beyond the stated 30-day return period.
Holding
Yes. Gateway validly proposed a contract under which keeping the computer for more than 30 days constituted acceptance of the enclosed terms, and the Hills accepted that offer by retaining the computer.
Reasoning
The court followed ProCD, Inc. v. Zeidenberg, which held that a seller may structure its offer so that the buyer accepts by using or retaining a product after an opportunity to read the accompanying terms and reject the transaction by returning the product. Contract law does not require a contract to form at the instant the buyer places an order or makes payment; as master of the offer, the seller may specify the conduct that will count as acceptance.
The Hills’ failure actually to read the arbitration clause did not prevent its enforcement. Competent adults ordinarily are bound by contractual terms they had an opportunity to read but chose not to read. Under the Federal Arbitration Act, moreover, an arbitration clause cannot be subjected to a special prominence requirement that would not apply to contract terms generally.
ProCD was not confined to software transactions. Its rule concerns ordinary contract formation, and transactions in which payment precedes disclosure of complete written terms are common in commerce. Requiring telephone sales representatives to recite lengthy legal terms before taking an order would be costly, ineffective, and often less informative than providing written terms with a practical opportunity to return the product.
The transaction was not outside ProCD merely because Gateway had delivered the physical computer. The dispute concerns when the contract formed, not whether all performance had been completed. In any event, Gateway retained ongoing obligations under its warranty and its lifetime service and support commitments, while the Hills invoked the warranty and were dissatisfied with Gateway’s response.
The absence of a notice about additional terms on Gateway’s shipping carton did not alter the result. Unlike a retail box displayed to prospective purchasers, a shipping carton is not ordinarily available for inspection before purchase. The Hills knew that Gateway offered a limited warranty and lifetime support, could have requested the terms beforehand or consulted public sources, and instead chose to inspect the documents after delivery. Having kept the computer more than 30 days, they accepted all of Gateway’s enclosed terms together.
Issue #2
Whether UCC § 2-207 prevented Gateway’s enclosed terms from binding the Hills because the Hills were consumers rather than merchants.
Holding
No. Section 2-207 was inapplicable because this case involved the terms of Gateway’s original offer and the manner of acceptance, not additional terms proposed after an already-formed contract.
Reasoning
The Hills characterized the box terms as additions to a contract made during the telephone call and relied on § 2-207’s treatment of additional terms, especially its rule for transactions between merchants. The court rejected that premise. Gateway’s offer was that the Hills could accept the complete transaction, including the enclosed terms, by keeping the computer beyond 30 days.
Because there was only one set of contractual terms rather than conflicting forms exchanged by buyer and seller, § 2-207 did not govern. ProCD therefore applies to consumers and merchants alike. The court also noted that Zeidenberg, the purchaser in ProCD, was not shown to be a merchant simply because his corporation later used the purchased software commercially.
Issue #3
Whether the arbitration clause could be enforced against the Hills’ RICO and fraud-related claims.
Holding
Yes. The arbitration clause was enforceable, and the Hills’ claims, including their civil RICO claims, had to be submitted to arbitration.
Reasoning
Once the enclosed terms became the parties’ contract, the arbitration clause stood on the same footing as every other term. The Federal Arbitration Act requires enforcement of an arbitration agreement except on generally applicable grounds for revoking a contract; the Hills could not invalidate arbitration through a rule demanding special notice or conspicuousness for arbitration provisions.
The Hills’ assertion that the arbitration provision was part of a broader fraudulent scheme did not defeat arbitration. Under Prima Paint, an attack on the contract as a whole is for the arbitrator, rather than the court, when the arbitration clause itself is not independently challenged on a valid contract-defense ground.
Civil RICO claims are arbitrable. The court relied on Shearson/American Express, Inc. v. McMahon, which held that RICO does not create an exception to the Federal Arbitration Act. Objections to arbitration’s cost or effectiveness are matters for Congress and contracting parties, not a basis for disregarding an otherwise valid agreement.