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New Media and Technology Law Blog

Arbitration Clause in Computer Purchase Contract Unenforceable Where Consumer’s Right to Reject Additional Contract Terms Was Not Clearly Explained

Posted in Contracts

Since the Seventh Circuit opinion in ProCD v. Zeidenberg (7th Cir. 1996), judicial analysis of standard form contracts has proceeded along lines that have, in general, been more favorable to the efforts of sellers and licensors seeking to enforce the provisions of "agreement now, terms later" contracts. The ProCD v. Zeidenberg analysis of the relevant UCC provisions endorsed the enforceability of additional terms included in shrinkwrap and mail order "in the box" contracts on the theory that a purchaser or licensee who disagreed with the later-presented terms could reject the terms and avoid contract formation by returning the goods.

Over time, the ProCD v. Zeidenberg approach to later-presented terms has become the majority view. But just because a court adopts the ProCD v. Zeidenberg analysis, it will not necessarily find that a "terms later" contract is enforceable. That was the case in Defontes v. Dell, decided on December 10 by the Rhode Island Supreme Court.

The case involves a dispute between Dell and consumers who claim they were wrongfully assessed a state tax on their purchase of service contracts in conjunction with a computer purchase. The purchasers filed a class action, and Dell sought to enforce an arbitration provision contained in the "Terms and Conditions Agreement" that accompanied the delivery of the computers. Dell argued that the plaintiffs had three separate opportunities to review the Terms and Conditions that included the arbitration provision. In addition to the inclusion of the Terms and Conditions with the delivery of the computer, the document was accessible via a hyperlink on the Dell Web site, and was included in an order acknowledgment document that preceded the delivery of the computers.

In endorsing the ProCD v. Zeidenberg analysis of later-presented terms, the Rhode Island Supreme Court commented:

After reviewing the case law pertaining to so-called "shrinkwrap" agreements, we are satisfied that the ProCD line of cases is better reasoned and more consistent with contemporary consumer transactions. It is simply unreasonable to expect a seller to apprise a consumer of every term and condition at the moment he or she makes a purchase. A modern consumer neither expects nor desires to wade through such minutia, particularly when making a purchase over the phone, where full disclosure of the terms would border on the sadistic. Nor do we believe that, after placing a telephone order for a computer, a reasonable consumer would believe that he or she has entered into a fully consummated agreement.

Contract formation occurs, the court concluded, "when the consumer accepts the full terms after receiving a reasonable opportunity to refuse them."

However, the court emphasized, the consumer must be "aware of the power to reject by returning the goods." And this is where the Dell agreement failed in the transactions before the court. Although the Terms and Conditions document contained an "express disclaimer" informing the purchasers of their right to return the goods, the disclaimer was located in a separate provision removed from the introductory contractual language in the agreement and it "confusingly informed" the purchasers of their rights, and the construction of the agreement required the purchasers to construe contractual language in order to infer from it the right to return the goods. Thus, the court concluded, the express disclaimer language "not only fails to establish a clear relationship between the consumer’s acceptance of the terms by retaining the goods and his or her right to reject the terms by returning the product, but it further obscures the matter by forcing the consumer to refer to a separate document if he or she wants to discover the full terms and conditions of the ‘Total Satisfaction Return Policy.’"

In sum, the court concluded that it was not "reasonably apparent" to the purchasers that they had the right to reject the additional terms by returning the computers:

We believe that too many inferential steps were required of the plaintiffs and too many of the relevant provisions were left ambiguous. We are not persuaded that a reasonably prudent offeree would understand that by keeping the Dell computer he or she was agreeing to be bound by the terms and conditions agreement and retained, for a specified time, the power to reject the terms by returning the product.

Because the court disposed of the appeal on this ground, it declined to reach two issues that the lower court had reached. "For the sake of completeness," the lower court ruled on the purchasers’ argument that the agreement was unconscionable because it prevented parties from asserting their rights as a class (rejected under Texas law, which the court found applicable), and that the contract was illusory. On this issue, the lower court agreed that the contract was illusory because it included the language "[t]hese terms and conditions are subject to change without prior  written notice, at any  time, in Dell’s sole discretion.” The lower court opinion is available here.

The ruling in Defontes v. Dell is a good example of the difficulties faced by sellers and licensors seeking to draft terms and conditions applicable to consumer transactions that can be relied upon to be enforceable, particularly with respect to arbitration provisions. Dell in particular has experienced mixed results in seeking to enforce the arbitration provision in its terms and conditions. In addition to the instant ruling, compare Stenzel v. Dell (Me. 2005) and Hubbert v. Dell (Ill. App. 2005) (finding the Dell arbitration provision enforceable) with Rogers v. Dell (Okla. 2005) (finding the notice of the right to return insufficiently clear, and the contract to be illusory).