Klocek v. Gateway

 

104 F.Supp.2d 1332 (D. Kansas, 2000)

 

Vratil, District Judge.

 

William S. Klocek brings suit against Gateway, Inc. and Hewlett-Packard, Inc. on claims arising from purchases of a Gateway computer and a Hewlett-Packard scanner.   This matter comes before the Court on the Motion to Dismiss filed by Gateway. . .  For reasons stated below, the Court overrules Gateway's motion to dismiss . . .

 

A. Gateway's Motion to Dismiss

 

Plaintiff . . . claims breach of contract and breach of warranty, in that Gateway breached certain warranties that its computer would be compatible with standard peripherals and standard internet services.

Gateway asserts that plaintiff must arbitrate his claims under Gateway's Standard Terms and Conditions Agreement ("Standard Terms").   Whenever it sells a computer, Gateway includes a copy of the Standard Terms in the box which contains the computer battery power cables and instruction manuals.   At the top of the first page, the Standard Terms include the following notice:

 

NOTE TO THE CUSTOMER:

This document contains Gateway 2000's Standard Terms and Conditions.   By keeping your Gateway 2000 computer system beyond five (5) days after the date of delivery, you accept these Terms and Conditions.

 

The notice is in emphasized type and is located inside a printed box which sets it apart from other provisions of the document.   The Standard Terms are four pages long and contain 16 numbered paragraphs.   Paragraph 10 provides the following arbitration clause:

 

DISPUTE RESOLUTION.   Any dispute or controversy arising out of or relating to this Agreement or its interpretation shall be settled exclusively and finally by arbitration.   The arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce.   The arbitration shall be conducted in Chicago, Illinois, U.S.A. before a sole arbitrator.   Any award rendered in any such arbitration proceeding shall be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction.

 

Gateway urges the Court to dismiss plaintiff's claims under the Federal Arbitration Act ("FAA"), 9 U.S.C.   1 et seq.   The FAA ensures that written arbitration agreements in maritime transactions and transactions involving interstate commerce are "valid, irrevocable, and enforceable."  9 U.S.C.   2. . .

 

[The court holds that the FAA applies only if there is an enforceable agreement to arbitrate; hence,] . . .  [b]efore granting a stay or dismissing a case pending arbitration, the Court must determine that the parties have a written agreement to arbitrate. . . . When deciding whether the parties have agreed to arbitrate, the Court applies ordinary state law principles that govern the formation of contracts. . . .

 

Before evaluating whether the parties agreed to arbitrate, the Court must determine what state law controls the formation of the contract in this case. . . . 

 

[The plaintiff resides in Missouri, and the computer was purchased in Kansas and shipped to Missouri; the court] . . . discerns no material difference between the applicable substantive law in Kansas and Missouri and--as to those two states--it perhaps would not need to resolve the choice of law issue at this time. . .

 

The Uniform Commercial Code ("UCC") governs the parties' transaction under both Kansas and Missouri law.   See K.S.A.   84-2-102;  V.A.M.S.   400.2- 102 (UCC applies to "transactions in goods.");  Kansas Comment 1 (main thrust of Article 2 is limited to sales);  K.S.A.   84-2-105(1) V.A.M.S.   400.2-105(1) (" 'Goods' means all things ... which are movable at the time of identification to the contract for sale ....").  Regardless whether plaintiff purchased the computer in person or placed an order and received shipment of the computer, the parties agree that plaintiff paid for and received a computer from Gateway.   This conduct clearly demonstrates a contract for the sale of a computer.   See, e.g., Step-Saver Data Sys., Inc. v. Wyse Techn., 939 F.2d 91, 98 (3d Cir.1991).   Thus the issue is whether the contract of sale includes the Standard Terms as part of the agreement.

 

State courts in Kansas and Missouri apparently have not decided whether terms received with a product become part of the parties' agreement.  Authority from other courts is split.   Compare Step-Saver, 939 F.2d 91 (printed terms on computer software package not part of agreement);  Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F.Supp. 759 (D.Ariz.1993) (license agreement shipped with computer software not part of agreement);  and U.S. Surgical Corp. v. Orris, Inc., 5 F.Supp.2d 1201 (D.Kan.1998) (single use restriction on product package not binding agreement); with Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert. denied, 522 U.S. 808, 118 S.Ct. 47, 139 L.Ed.2d 13 (1997) (arbitration provision shipped with computer binding on buyer);  ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996) (shrinkwrap license binding on buyer);  and M.A. Mortenson Co., Inc. v. Timberline Software Corp., 140 Wash.2d 568, 998 P.2d 305 (2000) (following Hill and ProCD on license agreement supplied with software).  It appears that at least in part, the cases turn on whether the court finds that the parties formed their contract before or after the vendor communicated its terms to the purchaser.  Compare Step-Saver, 939 F.2d at 98 (parties' conduct in shipping, receiving and paying for product demonstrates existence of contract; box top license constitutes proposal for additional terms under   2- 207 which requires express agreement by purchaser);  Arizona Retail, 831 F.Supp. at 765 (vendor entered into contract by agreeing to ship goods, or at latest by shipping goods to buyer;  license agreement constitutes proposal to modify agreement under   2-209 which requires express assent by buyer);  and Orris, 5 F.Supp.2d at 1206 (sales contract concluded when vendor received consumer orders;  single-use language on product's label was proposed modification under   2-209 which requires express assent by purchaser); with ProCD, 86 F.3d at 1452 (under   2-204 vendor, as master of offer, may propose limitations on kind of conduct that constitutes acceptance;    2-207 does not apply in case with only one form); Hill, 105 F.3d at 1148-49 (same);  and Mortenson, 998 P.2d at 311-314 (where vendor and purchaser utilized license agreement in prior course of dealing, shrinkwrap license agreement constituted issue of contract formation under   2-204, not contract alteration under   2-207).

 

Gateway urges the Court to follow the Seventh Circuit decision in Hill. That case involved the shipment of a Gateway computer with terms similar to the Standard Terms in this case, except that Gateway gave the customer 30 days-- instead of 5 days--to return the computer.  In enforcing the arbitration clause, the Seventh Circuit relied on its decision in ProCD, where it enforced a software license which was contained inside a product box.  See Hill, 105 F.3d at 1148-50.   In ProCD, the Seventh Circuit noted that the exchange of money frequently precedes the communication of detailed terms in a commercial transaction.   See ProCD, 86 F.3d at 1451.  Citing UCC   2- 204, the court reasoned that by including the license with the software, the vendor proposed a contract that the buyer could accept by using the software after having an opportunity to read the license.  ProCD, 86 F.3d at 1452.   Specifically, the court stated: A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance.   A buyer may accept by performing the acts the vendor proposes to treat as acceptance.  ProCD, 86 F.3d at 1452.  The Hill court followed the ProCD analysis, noting that "[p]ractical considerations support allowing vendors to enclose the full legal terms with their products." Hill, 105 F.3d at 1149.

 

The Court is not persuaded that Kansas or Missouri courts would follow the Seventh Circuit reasoning in Hill and ProCD.   In each case the Seventh Circuit concluded without support that UCC 2-207 was irrelevant because the cases involved only one written form.   See ProCD, 86 F.3d at 1452 (citing no authority);  Hill, 105 F.3d at 1150 (citing ProCD ).  This conclusion is not supported by the statute or by Kansas or Missouri law. Disputes under   2-207 often arise in the context of a "battle of forms," see, e.g., Diatom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574 (10th Cir.1984), but nothing in its language precludes application in a case which involves only one form.   The statute provides:

 

Additional terms in acceptance or confirmation.

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract [if the contract is not between merchants]....

 

K.S.A.   84-2-207;  V.A.M.S.   400.2-207. By its terms, 2-207 applies to an acceptance or written confirmation.   It states nothing which requires another form before the provision becomes effective.   In fact, the official comment to the section specifically provides that   2-207(1) and (2) apply "where an agreement has been reached orally ... and is followed by one or both of the parties sending formal memoranda embodying the terms so far agreed and adding terms not discussed."   Official Comment 1 of UCC   2- 207.   Kansas and Missouri courts have followed this analysis.   See Southwest Engineering Co. v. Martin Tractor Co., 205 Kan. 684, 695, 473 P.2d 18, 26 (1970) (stating in dicta that   2-207 applies where open offer is accepted by expression of acceptance in writing or where oral agreement is later confirmed in writing);  Central Bag Co. v. W. Scott and Co., 647 S.W.2d 828, 830 (Mo.App.1983) (   2-207(1) and (2) govern cases where one or both parties send written confirmation after oral contract).   Thus, the Court concludes that Kansas and Missouri courts would apply   2-207 to the facts in this case.  Accord Avedon, 126 F.3d at 1283 (parties agree that   2-207 controls whether arbitration clause in sales confirmation is part of contract).

 

In addition, the Seventh Circuit provided no explanation for its conclusion that "the vendor is the master of the offer."   See ProCD, 86 F.3d at 1452 (citing nothing in support of proposition);  Hill, 105 F.3d at 1149 (citing ProCD ).   In typical consumer transactions, the purchaser is the offeror, and the vendor is the offeree.   See Brown Mach., Div. of John Brown, Inc. v. Hercules, Inc., 770 S.W.2d 416, 419 (Mo.App.1989) (as general rule orders are considered offers to purchase);  Rich Prods. Corp. v. Kemutec Inc., 66 F.Supp.2d 937, 956 (E.D.Wis.1999) (generally price quotation is invitation to make offer and purchase order is offer). . . . The Court therefore assumes for purposes of the motion to dismiss that plaintiff offered to purchase the computer (either in person or through catalog order) and that Gateway accepted plaintiff's offer (either by completing the sales transaction in person or by agreeing to ship and/or shipping the computer to plaintiff). . . .

 


The cases the court cites show that the display of an item in a retail store is not an offer from the retailer to sell the item.  However, when a consumer purchases a product in a retail store, the customer typically enters two contracts:  one with the store, and one with the manufacturer of the item purchased.  The warranties asserted in the contract that comes with the item are asserted by the manufacturer (unless the consumer purchases and additional warranty from the store).  In light of these considerations, do the cases cited by the court show that Gateway is the manufacturer?

 

(a) Yes

 

(b) No


 

Under 2-207, the Standard Terms constitute either an expression of acceptance or written confirmation.  

 


The court assumes that Gateway is the offeree.  Does the above conclusion follow if Gateway is the offeror?

 

(a) Yes

 

(b) No


As an expression of acceptance, the Standard Terms would constitute a counter-offer only if Gateway expressly made its acceptance conditional on plaintiff's assent to the additional or different terms.  K.S.A.   84-2-207(1);  V.A.M.S.   400.2- 207(1).  "[T]he conditional nature of the acceptance must be clearly expressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed with the transaction unless the additional or different terms are included in the contract."  Brown Machine, 770 S.W.2d at 420.  Gateway provides no evidence that at the time of the sales transaction, it informed plaintiff that the transaction was conditioned on plaintiff's acceptance of the Standard Terms.   Moreover, the mere fact that Gateway shipped the goods with the terms attached did not communicate to plaintiff any unwillingness to proceed without plaintiff's agreement to the Standard Terms.   See, e.g., Arizona Retail, 831 F.Supp. at 765 (conditional acceptance analysis rarely appropriate where contract formed by performance but goods arrive with conditions attached);  Leighton Indus., Inc. v. Callier Steel Pipe & Tube, Inc., 1991 WL 18413, *6, Case No. 89-C-8235 (N.D.Ill. Feb. 6, 1991) (applying Missouri law) (preprinted forms insufficient to notify offeror of conditional nature of acceptance, particularly where form arrives after delivery of goods).

 

    Because plaintiff is not a merchant, additional or different terms contained in the Standard Terms did not become part of the parties' agreement unless plaintiff expressly agreed to them.   See K.S.A.   84-2- 207, Kansas Comment 2 (if either party is not a merchant, additional terms are proposals for addition to the contract that do not become part of the contract unless the original offeror expressly agrees).  Gateway argues that plaintiff demonstrated acceptance of the arbitration provision by keeping the computer more than five days after the date of delivery.   Although the Standard Terms purport to work that result, Gateway has not presented evidence that plaintiff expressly agreed to those Standard Terms.   Gateway states only that it enclosed the Standard Terms inside the computer box for plaintiff to read afterwards.   It provides no evidence that it informed plaintiff of the five-day review-and-return period as a condition of the sales transaction, or that the parties contemplated additional terms to the agreement.  See Step-Saver, 939 F.2d at 99 (during negotiations leading to purchase, vendor never mentioned box-top license or obtained buyer's express assent thereto).   The Court finds that the act of keeping the computer past five days was not sufficient to demonstrate that plaintiff expressly agreed to the Standard Terms.  Accord Brown Machine, 770 S.W.2d at 421 (express assent cannot be presumed by silence or mere failure to object).   Thus, because Gateway has not provided evidence sufficient to support a finding under Kansas or Missouri law that plaintiff agreed to the arbitration provision contained in Gateway's Standard Terms, the Court overrules Gateway's motion to dismiss.. .