TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO.03-01-00589-CV
Charlie Smith, Appellant
v.
Gateway, Inc. and Over the Moon Productions, Inc., Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT NO. 99-11483, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING
Appellant Charlie Smith sued appellees Gateway, Inc. and Over the Moon Productions,
Inc. (together AGateway@) for violations of the Deceptive Trade Practices-Consumer Protection Act, Tex.
Bus. & Com. Code Ann. '' 17.41-.63 (West 2002) (ADTPA@),1 breach of contract, and breach of
settlement agreement, arising from Smith=s purchase of a Gateway computer. The district court ordered the
dispute to arbitration and rendered final judgment, based on the arbitrator=s award, that Smith recover from
Gateway $3477, interest, and arbitration costs. The judgment also required Smith to return the computer to
Gateway. Smith appeals. We will affirm the judgment.
1 Smith alleged violations of the DTPA Alaundry list,@ breach of an express or implied warranty, and unconscionability. See Tex. Bus. & Com. Code Ann. '' 17.46, .50(a)(1)-(3) (West 2002). FACTUAL BACKGROUND
In December 1998 Smith purchased a computer from Gateway as a Christmas present for
his wife. Although the computer arrived before Christmas, the Smiths waited until March or April 1999 to
open and assemble the computer, so their son could connect the components and show Mrs. Smith how to
operate the computer. Once assembled, the computer did not operate properly and Acrashed@ repeatedly.
Smith contacted Gateway regarding the malfunction. Gateway requested to be allowed to fix the computer.
An on-site service technician came to Smith=s home in June and determined the computer
was not working because the power-supply was inadequate. The technician further determined that
replacing the power-supply with an identical one would not solve the problem. At about the same time,
Smith=s son spoke with Gateway technical support, who agreed to send Smith a Areturn kit,@ so Smith could
return the computer. Gateway agreed to refund the computer=s purchase price. Smith alleges that while
placing the computer in its original packaging, he noticed for the first time the ALimited Warranty and Terms
& Conditions Agreement@ Gateway includes with each product it sells. Smith says he did not read the
agreement because Gateway had agreed to refund the computer=s purchase price upon its return.
When Smith did not receive the return kit, he contacted Gateway who then refused to
accept the computer or refund Smith=s money. In July Smith=s attorney sent a demand letter to Gateway to
comply with the DTPA=s notice requirement. See Tex. Bus. & Com. Code Ann. ' 17.505 (consumer must
give notice to potential defendant advising of complaint and damages claimed at least sixty days before filing
suit). Gateway made no written response.
2 In October Smith filed suit against Gateway. Gateway moved to dismiss the suit based on
an arbitration clause in the agreement, which stated, inter alia:
DISPUTE RESOLUTION:
Any dispute, controversy, or claim arising out of or relating to this Agreement, its interpretation, or the breach, termination or validity thereof, or any related purchase shall be resolved exclusively and finally by arbitration administered by the American Arbitration Association (AAA) under its rules . . . . Any decision rendered in such arbitration proceedings will be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction. The arbitrator shall not award either party special, exemplary, consequential, punitive, incidental or indirect damages, or attorneys= fees and each party irrevocably waives any such right to recover such damages.
(Emphasis added.) In December the district court denied Gateway=s motion to dismiss, but stayed
the proceedings and ordered Smith and Gateway to arbitration.
In August 2000 the parties arbitrated the suit via telephone conference. The
arbitrator issued an award in September, concluding that although
Gateway, Inc.=s . . . attempts to limit the applicability of the Texas Deceptive Trade Practices Act by seeking to contractually limit the arbitrator=s authority to award damages, costs, attorneys= fees as allowed by the Deceptive Trade Practices Act, is contrary to public policy, unenforceable, and not binding upon the parties of the arbitration,
Gateway had not violated the DTPA. The arbitrator awarded Smith $3477, interest, and $100 for his
contribution to the arbitration fee. The arbitrator found that each party should pay its own attorney=s fees
and expenses.
3 In September the district court rendered a final judgment, confirming the arbitrator=s award.
Smith appeals by two issues, contending (1) that the district court erred in enforcing an illegal arbitration
agreement, and (2) that the district court erred by referring the matters to arbitration when they were outside
the scope of arbitration.
DISCUSSION
By his first issue, Smith contends that the district court erred in ordering him to arbitrate his
dispute because the arbitration agreement was illegal. Smith argues that the arbitration agreement violated
the DTPA because it dictated how the arbitrator must rule before the case was arbitrated, thus violating the
DTPA=s nonwaiver provision:
(a) Any waiver by a consumer of the provisions of [the DTPA] is contrary to public policy and is unenforceable and void; provided, however, that a waiver is valid and enforceable if:
(1) the waiver is in writing and is signed by the consumer;
(2) the consumer is not in a significantly disparate bargaining position; and
(3) the consumer is represented by legal counsel in seeking or acquiring the goods or services.
Tex. Bus. & Com. Code Ann. ' 17.42(a).
A party seeking to compel arbitration must establish the existence of an arbitration
agreement and show that the claims raised fall within the scope of that agreement. See Cantella & Co. v.
Goodwin, 924 S.W.2d 943, 944 (Tex. 1996). Once the party establishes a claim within the arbitration
4 agreement, the trial court must compel arbitration and stay its own proceedings. Id. Gateway established
that an arbitration agreement existed between the parties. The burden then shifted to Smith to present
evidence that the agreement with Gateway was procured in an unconscionable manner, induced or procured
by fraud or duress, or that Gateway had waived arbitration. See Weekley Homes, Inc. v. Jennings, 936
S.W.2d 16, 18 (Tex. App.CSan Antonio 1996, writ denied).
In resisting arbitration, Smith argued in the district court that the agreement was
Aunconscionable and unenforceable,@ as well as illegal. On appeal Smith limits his contention to the illegality
of the agreement. Smith argues that illegality and unconscionability are different defenses and that illegality
of the agreement should be determined by a trial court and not an arbitrator. The Federal Arbitration Act, 9
U.S.C. '' 1-307 (2000), applies to all suits in state and federal court when the dispute concerns a
Acontract evidencing a transaction involving commerce.@ Perry v. Thomas, 482 U.S. 483, 489 (1987). In
the district court, Gateway asserted that this cause involves interstate commerce. Smith does not dispute
this assertion.
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TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO.03-01-00589-CV
Charlie Smith, Appellant
v.
Gateway, Inc. and Over the Moon Productions, Inc., Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT NO. 99-11483, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING
Appellant Charlie Smith sued appellees Gateway, Inc. and Over the Moon Productions,
Inc. (together AGateway@) for violations of the Deceptive Trade Practices-Consumer Protection Act, Tex.
Bus. & Com. Code Ann. '' 17.41-.63 (West 2002) (ADTPA@),1 breach of contract, and breach of
settlement agreement, arising from Smith=s purchase of a Gateway computer. The district court ordered the
dispute to arbitration and rendered final judgment, based on the arbitrator=s award, that Smith recover from
Gateway $3477, interest, and arbitration costs. The judgment also required Smith to return the computer to
Gateway. Smith appeals. We will affirm the judgment.
1 Smith alleged violations of the DTPA Alaundry list,@ breach of an express or implied warranty, and unconscionability. See Tex. Bus. & Com. Code Ann. '' 17.46, .50(a)(1)-(3) (West 2002). FACTUAL BACKGROUND
In December 1998 Smith purchased a computer from Gateway as a Christmas present for
his wife. Although the computer arrived before Christmas, the Smiths waited until March or April 1999 to
open and assemble the computer, so their son could connect the components and show Mrs. Smith how to
operate the computer. Once assembled, the computer did not operate properly and Acrashed@ repeatedly.
Smith contacted Gateway regarding the malfunction. Gateway requested to be allowed to fix the computer.
An on-site service technician came to Smith=s home in June and determined the computer
was not working because the power-supply was inadequate. The technician further determined that
replacing the power-supply with an identical one would not solve the problem. At about the same time,
Smith=s son spoke with Gateway technical support, who agreed to send Smith a Areturn kit,@ so Smith could
return the computer. Gateway agreed to refund the computer=s purchase price. Smith alleges that while
placing the computer in its original packaging, he noticed for the first time the ALimited Warranty and Terms
& Conditions Agreement@ Gateway includes with each product it sells. Smith says he did not read the
agreement because Gateway had agreed to refund the computer=s purchase price upon its return.
When Smith did not receive the return kit, he contacted Gateway who then refused to
accept the computer or refund Smith=s money. In July Smith=s attorney sent a demand letter to Gateway to
comply with the DTPA=s notice requirement. See Tex. Bus. & Com. Code Ann. ' 17.505 (consumer must
give notice to potential defendant advising of complaint and damages claimed at least sixty days before filing
suit). Gateway made no written response.
2 In October Smith filed suit against Gateway. Gateway moved to dismiss the suit based on
an arbitration clause in the agreement, which stated, inter alia:
DISPUTE RESOLUTION:
Any dispute, controversy, or claim arising out of or relating to this Agreement, its interpretation, or the breach, termination or validity thereof, or any related purchase shall be resolved exclusively and finally by arbitration administered by the American Arbitration Association (AAA) under its rules . . . . Any decision rendered in such arbitration proceedings will be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction. The arbitrator shall not award either party special, exemplary, consequential, punitive, incidental or indirect damages, or attorneys= fees and each party irrevocably waives any such right to recover such damages.
(Emphasis added.) In December the district court denied Gateway=s motion to dismiss, but stayed
the proceedings and ordered Smith and Gateway to arbitration.
In August 2000 the parties arbitrated the suit via telephone conference. The
arbitrator issued an award in September, concluding that although
Gateway, Inc.=s . . . attempts to limit the applicability of the Texas Deceptive Trade Practices Act by seeking to contractually limit the arbitrator=s authority to award damages, costs, attorneys= fees as allowed by the Deceptive Trade Practices Act, is contrary to public policy, unenforceable, and not binding upon the parties of the arbitration,
Gateway had not violated the DTPA. The arbitrator awarded Smith $3477, interest, and $100 for his
contribution to the arbitration fee. The arbitrator found that each party should pay its own attorney=s fees
and expenses.
3 In September the district court rendered a final judgment, confirming the arbitrator=s award.
Smith appeals by two issues, contending (1) that the district court erred in enforcing an illegal arbitration
agreement, and (2) that the district court erred by referring the matters to arbitration when they were outside
the scope of arbitration.
DISCUSSION
By his first issue, Smith contends that the district court erred in ordering him to arbitrate his
dispute because the arbitration agreement was illegal. Smith argues that the arbitration agreement violated
the DTPA because it dictated how the arbitrator must rule before the case was arbitrated, thus violating the
DTPA=s nonwaiver provision:
(a) Any waiver by a consumer of the provisions of [the DTPA] is contrary to public policy and is unenforceable and void; provided, however, that a waiver is valid and enforceable if:
(1) the waiver is in writing and is signed by the consumer;
(2) the consumer is not in a significantly disparate bargaining position; and
(3) the consumer is represented by legal counsel in seeking or acquiring the goods or services.
Tex. Bus. & Com. Code Ann. ' 17.42(a).
A party seeking to compel arbitration must establish the existence of an arbitration
agreement and show that the claims raised fall within the scope of that agreement. See Cantella & Co. v.
Goodwin, 924 S.W.2d 943, 944 (Tex. 1996). Once the party establishes a claim within the arbitration
4 agreement, the trial court must compel arbitration and stay its own proceedings. Id. Gateway established
that an arbitration agreement existed between the parties. The burden then shifted to Smith to present
evidence that the agreement with Gateway was procured in an unconscionable manner, induced or procured
by fraud or duress, or that Gateway had waived arbitration. See Weekley Homes, Inc. v. Jennings, 936
S.W.2d 16, 18 (Tex. App.CSan Antonio 1996, writ denied).
In resisting arbitration, Smith argued in the district court that the agreement was
Aunconscionable and unenforceable,@ as well as illegal. On appeal Smith limits his contention to the illegality
of the agreement. Smith argues that illegality and unconscionability are different defenses and that illegality
of the agreement should be determined by a trial court and not an arbitrator. The Federal Arbitration Act, 9
U.S.C. '' 1-307 (2000), applies to all suits in state and federal court when the dispute concerns a
Acontract evidencing a transaction involving commerce.@ Perry v. Thomas, 482 U.S. 483, 489 (1987). In
the district court, Gateway asserted that this cause involves interstate commerce. Smith does not dispute
this assertion. Therefore, the federal act governs arbitration of this dispute. Jack B. Anglin Co. v. Tipps,
842 S.W.2d 266, 270 n.6 (Tex. 1992).
Section 2 of the federal act provides:
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. ' 2 (2000).
5 The federal act preempts Aapplication of the nonwaiver provisions of the DTPA to prevent
or restrict enforcement of [an] arbitration agreement.@ Jack B. Anglin, 842 S.W.2d at 271 (citing
Commerce Park v. Mardian Constr. Co., 729 F.2d 334, 338 (5th Cir. 1984)). Therefore, the fact that
the arbitrator found that the arbitration clause was in violation of the DTPA did not make the agreement
illegal under federal law or unenforceable under Texas law. We hold that the district court did not err in
compelling arbitration.
Additionally, for present purposes, we see no material difference between illegality and
unconscionability. Although Smith switches terminology from Aunconscionable@ in his petition to Aillegal@ in
his brief, he has not altered the substance of his argument. Smith=s complaints are based on the substantive
terms of the arbitration agreement that limit the DTPA-damages remedies available to him. He does not
complain that the entire contract is illegal.
Unconscionability has two prongsCprocedural and substantive. In re Rangel, 45 S.W.3d
783, 786 (Tex. App.CWaco 2001, orig. proceeding). Procedural unconscionability relates to the actual
making or inducement of the contract. Id. Claims of procedural unconscionability are reserved for judicial
review. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) (citing
Federal Arbitration Act, ch. 1263, ' 19, 68 Stat.1233 (1954) (current version at 9 U.S.C. ' 4 (2000))); In
re Foster Mold, Inc., 979 S.W.2d 665, 667-78 (Tex. App.CEl Paso 1998, orig. proceeding).
Substantive unconscionability relates to the Alegitimate commercial reasons justifying the terms of the
contract.@ In re Turner Bros. Trucking Co., 8 S.W.3d 370, 376 (Tex. App.CTexarkana 1999, orig.
proceeding). AWhether the terms and conditions of an arbitration agreement are themselves unconscionable
6 is a matter which must be submitted to the designated arbitrator.@ In re Oakwood Mobile Homes, Inc.,
987 S.W.2d 571, 573 n.3 (Tex. 1999). Smith is arguing that the terms of the agreement are substantively
unconscionable; therefore, we hold it was appropriate for the district court to compel arbitration because
the claims of unconscionability were for the arbitrator to decide.
Significantly, the arbitrator found that the terms of the arbitration agreement that limited the
remedies available to Smith were indeed unconscionable. Furthermore, the arbitrator found that he was not
limited in what he could award Smith. But the arbitrator also found that Gateway had not violated the
DTPA. Had Smith prevailed on his DTPA claim, the arbitrator might have awarded him the damages
allowed by the DTPA. We overrule issue one.
By his second issue, Smith argues, alternatively, as to whether the provision in the arbitration
clause prohibiting the arbitrator from ruling on Aspecial, exemplary, consequential, punitive, incidental, or
indirect damages, or attorneys= fees@ deprived the arbitrator of jurisdiction over those issues. If so, Smith
contends that the district court erred by referring these matters to arbitration when they were outside the
scope of the arbitration agreement. Claims made under the DTPA are arbitrable. Jack B. Anglin, 842
S.W.2d at 271. The district court did not err in referring all of Smith=s claims to arbitration. We overrule
Smith=s second issue.
CONCLUSION
We overrule Smith=s issues and affirm the judgment of the district court.
7 Lee Yeakel, Justice
Before Chief Justice Aboussie, Justices B. A. Smith and Yeakel
Affirmed
Filed: July 26, 2002
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