Chicago Federal District Court Strikes Down Mandatory Arbitration Clause

A consumer fraud case here in Chicago met an interesting end in late September. In Trujillo v. Apple Computer, No. 07 C 4946, 2008 WL 4368937 (N.D.Ill., Sept. 22, 2008) lead plaintiff Jose Trujillo filed a proposed class action against Apple and AT&T Mobility, the iPhone’s service provider. Trujillo contended that Apple and AT&T did not disclose a de facto service fee of $79 plus shipping for the iPhone’s battery, which must be replaced after 300 charges. That claim failed when the U.S. District Court for the Northern District of Illinois granted summary judgment to Apple and AT&T on Sept. 23 on the merits of Trujillo’s claims. However, as Chicago, Naperville and Oak Brook consumer rights and consumer fraud attorneys, we are very interested in a decision from the same court on the day before handing a victory to consumers. The court decided to not compel the mandatory binding arbitration required in Trujillo’s contract with AT&T, finding that contract procedurally unconscionable under Illinois state law.

According to court documents, AT&T was the only wireless phone carrier for the iPhone when Trujillo purchased the phone in 2007. (Without a service provider, the iPhone’s telephone function will not work.) Trujillo activated a service plan with AT&T online, through Apple’s iTunes software, which directs the user to AT&T’s Web site. In order to sign up, the user must click a box indicating that he or she has read and agrees to AT&T’s service agreement. The service agreement is many pages, and in fact, displays as multiple separate pages on AT&T’s Web site. If the user does not check the box indicating that he or she has read this agreement, that user cannot sign up and will not have access to all of the iPhone’s functions.

In court papers filed earlier in the case, AT&T argued that Trujillo had the opportunity to read the service agreement when he signed up for service through iTunes. It also said he had access to the service agreement before this, in two separate ways: in paper booklets at the Apple store and online, on the AT&T Wireless Web site. But in later supplementary papers, it admitted that neither of those statements was true. The paper booklets, it turned out, were not available in the Apple store, though they may have been available in an AT&T store that Trujillo later visited to have a credit check done. The court’s opinion also noted that a footnote in the new papers said the applicable terms of service were not available online after all, though an obsolete version was available through the Web site’s search function. The true terms of service were available when Trujillo signed up through iTunes, it said, but in a small window, with the language relevant to arbitration about two-thirds of the way through.

For those reasons, the court dismissed AT&T’s arguments that Trujillo had access through the paper booklets or through the obsolete terms of service on its Web site, noting that he had no way of knowing to search for the terms of service online or how to find them. Thus, the terms of service were not available to Trujillo until after he had bought the iPhone, and he could not have returned it for a full refund. Under Illinois law governing unconscionability and its interpretation in Razor v. Hyundai Motor Am., 222 Ill.2d 75, 99, 854 N.E.2d 607, 622 (2006), this made the service agreement, including its mandatory binding arbitration clause, procedurally unconscionable under Illinois law. The court found this sufficient under Razor to make the entire agreement unenforceable, regardless of the parties’ claims on substantive unconscionability.

As we said, we believe this decision is significant for consumers. By refusing to uphold an arbitration clause that the plaintiff never saw before making his purchase and did not have a significant chance to renegotiate or turn down, the court removed a substantial barrier to many Illinois consumer rights lawsuits. If this type of arbitration agreement is unenforceable, many more Illinois consumers will be allowed full access to the justice system.

It should be noted that the court seemed extremely upset with the conduct of AT&T and a particular in-house lawyer for the company, who swore in the original papers to personal knowledge of their truth. When it later turned out that those papers had two major misrepresentations, and the lawyer had no personal knowledge of some of the facts at issue, Judge Matthew F. Kennelly pointed out that sanctions would be appropriate. However, he declined to impose them.

To learn abour our Chicago, Naperville and Oak Brook consumer rights and business litigation practice and the cases we have handled, including cases where we have defeated unfair arbitration provisions click here.

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