Tuesday, December 1, 2009

More Arbitration Related Case Law - Arbitration Clause Not Enforceable

Another recent case, Henry v. Gateway, Inc., et. al., (No. 0537, September Term 2008, Issued August 31, 2009), shows that binding arbitration clauses are not always binding in Maryland. The case arose from plaintiff-appellant’s purchase of a Gateway computer at a local Best Buy retail store, and the subsequent malfunctioning of said computer. The computer came with a standard One Year Limited Warranty, the terms of which the consumer was required to agree to in order to render the computer operational. One of those terms was submission of all disputes to binding arbitration, which would be governed by the Federal Arbitration Act, 9 U.S.C. § 1, et. seq. Disregarding the binding arbitration clause, plaintiff-appellant elected to file a complaint in The Circuit Court for St. Mary’s County, alleging three state law claims: 1) breach of express warranty; 2) breach of implied warranty; and 3) violation of the Maryland Consumer Protection law, Md. Code (1975, 2005 Repl. Vol.), Commercial Law Article §§13-101 et seq. In addition, there was one federal claim: violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et. seq. The Circuit Court for St. Mary’s County ruled in favor of defendant-appellee, dismissing plaintiff-appellant’s state law claims (with prejudice) and ordering the arbitration of said claims.

On appeal, the Court of Special Appeals of Maryland ruled that the binding arbitration clause in the consumer contract was unenforceable given a 2007 ruling by the Court of Appeals of Maryland, Koons Ford of Baltimore, Inc. v. Lobach, 398 Md. 38 (2007). In Koons Ford, the Court of Appeals held that the Magnuson-Moss Warranty Act supersedes the Federal Arbitration Act, so that a litigant advancing a federal warranty claim cannot be forced to resolve his or her claim through binding arbitration.

Further, the contract in Henry had a South Dakota choice-of-law designation. The choice-of-law question was whether, in the absence of a controlling decision by the U.S. Supreme Court, and given the divided nature of the relevant federal precedent, a Maryland Court is bound to apply a contractual choice-of-law rule that has the effect of interpreting federal law in a way inconsistent with a decision of the Court of Appeals of Maryland. The Court of Special Appeals answered with a resounding no, finding that it would be contrary to the fundamental policy of the state (as embodied in Article 2 of the Maryland Declaration of Rights, and a 1979 case, Pope v. State) for a Maryland court to apply a choice-of-law provision that conflicts with the state’s highest court’s interpretation of federal law.

The Circuit Court for St. Mary’s County ruling was reversed and the case was remanded to that court for further proceedings. The Court of Special Appeals ordered that all costs be covered by defendant-appellant.

It just goes to show that what is written in a contract is not always an accurate reflection of a consumer’s actual rights and/or potential recourse.

18 comments:

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