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Class Action Defense Cases–Carr v. Gateway: Illinois Appellate Court Affirms Denial Of Motion To Compel Arbitration Of Consumer Class Action Claims Because Required Forum Unavailable To Arbitrate Dispute

Illinois Appellate Court Holds Motion to Compel Arbitration of Individual Claims in Class Action Complaint Alleging Violations of Various Consumer Protection Laws, based on Arbitration Clause Containing Class Action Waiver, Properly Denied because Agreement Required Disputes be Heard by National Arbitration Forum which no Longer Conducted Consumer Arbitrations

Plaintiffs filed a putative class action in Illinois state court against Gateway, Intel, Hewlett-Packard and others alleging inter alia violations of various California and Illinois consumer protection statutes; specifically, the class action complaint challenged defendants’ marketing of computers equipped with Intel’s Pentium 4 processor. Carr v. Gateway, Inc., ___ Cal.App.4th ___ (Ill.App. November 24, 2009) [Slip Opn., at 1.] According to the allegations underlying the class action complaint, defendants “have engaged in conduct which is likely to mislead, and has misled, the public through the suppression and concealment from the public of the material fact that there is no benefit to consumers in choosing the Pentium 4 over the Pentium III and that the Pentium 4 is less powerful and slower than the Pentium III and/or the AMD Athlon processors.” Id., at 1-2. The class action also alleged that defendants “made or disseminated misleading statements regarding the power and speed of the Pentium 4.” Id., at 2. Counts IV, V and VI of the class action complaint alleged violations of California’s Consumers Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and of Illinois’ Consumer Fraud and Deceptive Business Practices Act (the Act); these claims were ultimately severed from the class action complaint and they are the claims at issue in this opinion. Id. Defense attorneys moved the circuit court to dismiss the class action complaint, or to stay the class action and compel plaintiff to arbitrate his individual claim based on an arbitration clause that contained a class action waiver. Id., at 1, 2-3. After holding an evidentiary hearing, id., at 3-4, the court denied the motion on the grounds that arbitration clause “was not a part of the sales contract that was entered into by the parties” and, in any event, would be unenforceable as unconscionable, id., at 4. The Illinois Supreme Court then issued its opinion in Barbara’s Sales, Inc. v. Intel Corp., 227 Ill.2d 45 (2007), see id., at 4-5. (This Blog’s article discussing that opinion may be found here.) The circuit court reaffirmed its order, and Gateway appealed. The appellate court affirmed.

The appellate court began its analysis by observing that the lower court denied Gateway’s motion to compel “primarily on its finding that the Agreement was not a part of the contract for the purchase of the Gateway computer.” Carr, at 6. If the arbitration clause was part of the contract, it called for any disputes to be “resolved exclusively and finally by arbitration administered by the National Arbitration Forum (NAF) and conducted under its rules,” id. However, during the pendency of the appeal, “the NAF has ceased administering consumer arbitrations.” Id. Noting that it could “affirm the circuit court’s order on any basis in the record,” the appellate court analyzed” the impact the unavailability of the NAF has upon the validity of the arbitration provision.” Id. Gateway argued that section 5 of the Federal Arbitration Act (FAA) provides a “method” exists for selecting “an alternative arbitration forum” under its contract with consumers, id., at 6-7. The appellate court rejected this claim, finding that “the specific designation of the NAF as the exclusive arbitration forum is an integral part of the arbitration clause in the Agreement.” Id., at 7. Because NAF was no longer available to resolve consumer disputes under the Agreement, and because the FAA “cannot be used to reform the arbitration provision,” the appellate court affirmed the circuit court’s order denying Gateway’s motion to compel arbitration. Id., at 8.

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