Appeals Court Reverses Decision; Allows Class-Action Lawsuit Against Dell

The Ninth Circuit of the US Court of Appeals has filed its decision in the case of Olmstead v. Dell and reversed a decision by the lower court to dismiss the original case. The issue in question was whether or not Dell's Terms and Conditions of Sale (available here) could legally force the company's customers to settle disputes through arbitration rather than in a court of law. This is the second time in recent history that the ninth circuit has found such arbitration clauses unenforceable due to the unconscionable burden they place upon the purchaser.

The Dubious Nature of "Neutral" Arbitration

In Olmstead v. Dell, plaintiff's propose a class action lawsuit on the grounds that Dell "designed, manufactured, and sold defective notebook computers" between July 2004 and January 2005. Specifically, plaintiffs allege that individuals who purchased a Dell Inspiron 1100, 1150, 5100, or 5160 for a cost between $1200-$1500 were affected. The appeals' court decision today does not validate or speak to the accuracy of that claim; it only addresses the applicability of certain Dell terms and conditions (the full text of which is here.) Dell first attempts to mandate that the case be handled under Texas law, which conveniently allows consumers to waive their right to form a class action lawsuit. It then moves on to compel arbitration, as quoted below:

12. Dispute Resolution: ANY CLAIM, DISPUTE, OR CONTROVERSY... SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM ("NAF") under its Code of Procedure and any specific procedures for the resolution of small claims and/or consumer disputes then in effect."

Arbitration might bring to mind images of neutral mediation and fair consideration but the system can be abused by large companies seeking to avoid damages that might be individually small, but encompass large numbers of people. By forcing individuals to mediate each claim separately rather than combining them in a class action, companies can avoid much of the cost, particularly when contested sums ($1200-1500 in this case) are too small to be worth the cost of pursuing. Under the rules of the National Arbitration Forum, moreover, corporations can limit discovery to an amount "commensurate with the amount of the Claim." Since each claim is arbitrated individually, Dell (or any OEM) is only required to provide a relative scrap of information as opposed to a unified amount many times larger.

Dude, You're Getting A Lawsuit

The court based its ruling in Omstead v. Dell directly upon an earlier case, Oestreicher v. Alienware, in which Alienware (a Dell subsidiary) attempted to force Mr. Oestreicher into arbitration. In that decision, the court wrote that the Alienware contract was unconscionable because it was a "contract of adhesion." A contract of adhesion is a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party [the customer] only the opportunity to adhere to the contract or reject it."
Dell's contract is unquestionably a contract of adhesion and is unenforceable on that basis. In addition, the ninth circuit found that California law took precedence over Texas law, in part because Texas law 'allows' consumers to waive their right to a class action lawsuit. Courts across the nation at multiple levels of jurisdiction have generally found against clauses that compel the use of the corporation's choice of state law when the customer lived in another state, particularly when that choice would place the customer at a disadvantage. Based on its findings, the ninth circuit court reversed a lower court's order to compel arbitration and cleared the way for the class action suit to go forward. Again, this is not a judgment on the merits of the claims made against the Round Rock-based company, but it's a legal blow against companies that exploit their size and position of strength to force customers into unfair contracts. Arbitration may not be inherently biased as such, but it's a system a conflict resolution that works best when the two parties in question are on relatively equal footing.