In a case arising from the sale of a personal computer, the Illinois Court of Appeals refused to honor a Texas choice-of-law provision on the ground that the application of Texas law would violate Illinois public policy by giving effect to an arbitration agreement that barred class-wide proceedings. However, instead of invalidating the entire arbitration agreement, the Court upheld the lower court’s decision to strike the offending provision and enforce the remainder of the agreement.

In Wigginton v. Dell, Inc., No. 5-07-0076, 2008 WL 2267173 (Ill. App. Ct. June 2, 2008), Wigginton, an attorney, bought two Dell computers for his law firm. He ordered the computers by phone. When Dell denied Wigginton’s request for a $500 rebate, Wigginton filed a class action lawsuit alleging breach of contract, unjust enrichment, and a violation of the Illinois Consumer Fraud Act.

In response to the lawsuit, Dell filed a motion to compel arbitration pursuant to the terms and conditions of sale. The terms and conditions included an agreement to arbitrate all disputes on an individual basis (i.e., an agreement that barred class-wide arbitration) as well as a Texas choice-of-law provision. The trial court granted the motion but also ruled that the bar on class-wide arbitration was unenforceable.

On appeal, Dell challenged the trial court’s ruling that the bar on class-wide arbitration was unenforceable. As support for its challenge, Dell relied largely on Hubbert v. Dell Corp., 835 N.E.2d 113 (Ill. App. Ct. 2005), in which the Court upheld an identical arbitration agreement.

The Court found that Hubbert was not controlling because subsequent decisions by the Illinois Supreme Court established that substantive unconscionability, standing alone, may render a contract unenforceable under Illinois law. See, e.g., Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 263 (Ill. 2006). Hubbert had been decided on the premise that Illinois law requires proof of both substantive and procedural unconscionability.

Having determined that Hubbert was not controlling, the Court turned to the choice-of-law question and held that the application of Texas law would violate the public policy of Illinois by giving effect to the bar on class-wide proceedings. In reaching this holding, the Court found that the arbitration agreement was tainted by some degree of both procedural and substantive unconscionability.

The Court found that procedural unconscionability was present because Wigginton, who ordered the computers by phone, did not have knowledge of the arbitration agreement before making the purchase, thus distinguishing the case from Hubbert where the Dell customer ordered his computer online and thus had pre-purchase access to the terms and conditions of sale.

On the issue of substantive unconscionability, the Court found that individual arbitration would be prohibitively expensive, thus rendering the bar on class-wide proceedings unenforceable under the case-by-case approach enunciated in Kinkel. In making this finding, the Court noted that the costs of arbitration along with attorney fees would exceed the prospective recovery.

Lastly, Dell argued that the trial court erred in severing the bar on class-wide arbitration from the arbitration agreement. In rejecting this argument, the Court cited the policy favoring the enforcement of arbitration agreement as a reason for severing the bar and enforcing the remainder of the arbitration agreement.

The Court’s choice-of-law analysis in this case is lacking in two important respects. First, the Court refused to honor the choice-of-law provision without making the requisite finding that Illinois had a materially greater interest in the issue than Texas. See Restatement (Second) of Conflicts of Law § 187(2)(b); Hall v. Sprint Spectrum L.P., 876 N.E.2d 1036, 1041 (Ill. App. Ct. 2007) ("Section 187 of the Restatement applies when the parties, as here, have made an express choice of law in their contract.").

Second, Kinkel rejected a blanket rule against class waivers and instead called for a case-by-case inquiry into the enforceability of class waivers. This case-by-case approach belies the notion that Illinois has a fundamental public policy against class waivers. See Halprin v. Verizon Wireless Services, LLC, No. 07-4015, 2008 WL 961239, at *5 (D.N.J. Apr. 8, 2008) ("Muhammad specifically called for a ‘fact-sensitive analysis’ when analyzing whether or not a class action waiver should be deemed unenforceable due to unconscionability. Further, the court explicitly pointed out that its holding did not declare class action waivers to be ‘per se unenforceable.’ Therefore, ‘Muhammad does not stand for the proposition that there is a fundamental public policy in New Jersey against the enforcement of class-arbitration waivers.’"); see also Homa v. American Exp. Co., 496 F.Supp.2d 440, 448 (D.N.J. 2007).

Setting aside the merits of the Court’s choice-of-law analysis, it should be pointed out that parties who prefer the simplicity and efficiency of one-on-one arbitration can guard against an unconscionability determination by giving the non-drafting party an opportunity to reject the arbitration agreement. See Kinkel, 857 N.E.2d at 274 (noting the general rule that "a class action waiver will not be found unconscionable if the plaintiff had a meaningful opportunity to reject the contract term").