Henry v. Gateway, Inc.

ZARNOCH, Judge. The central issue in this case is whether, in the absence of a controlling decision by the U.S. Supreme Court and in the face of divided federal precedent, a Maryland court is bound to apply a contractual choice-of-law clause that has the effect of interpreting federal law in a manner inconsistent with a decision of the Court of Appeals of Maryland. We conclude that it would be contrary to the fundamental policy of this State, as embodied in Article 2 of the Maryland Declaration of Rights 1 and in Pope v. State, 284 Md. 309 , 396 A.2d 1054 ⁶⁵¹ (1979), for a Maryland court to apply a choice-of-law provision that conflicts with an interpretation of federal law by the State’s highest court. For this reason and others set forth below, we must reverse the decision of the Circuit Court for St. Mary’s County in this case and remand for further proceedings.

This question arises in litigation of humble origin. Dissatisfied with the Gateway computer he purchased at Best Buy, appellant Barrington D. Henry, pro se, filed suit in December 2007 in the circuit court. Naming appellees Gateway, Inc. and Best Buy Co., Inc. as defendants, Henry’s four-count pro se complaint asserted three state law claims: 1) breach of express warranty; 2) breach of implied warranty; 3) violation of the Maryland Consumer Protection law, Md.Code (1975, 2005 Repl. Vol.), Commercial Law Article, §§ 13-101 et seq., and one federal claim, a violation on the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. § 2301 et seq.

Each count sought a judgment of $377.98, which was the computer’s purchase price, and $30,000 in consequential damages. Appellees filed a Motion to Dismiss with Prejudice and to Compel Arbitration, accompanied by exhibits and two affidavits. Among other things, they contended that the One Year Limited Warranty Agreement they said Henry received when he purchased the computer was governed by South Dakota law and required him to arbitrate his dispute. This included his federal MMWA claim, which, they said, was subject to arbitration under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq.

Henry opposed the motion and in a response, accompanied by documentary materials and his own affidavit, argued that the MMWA prevailed over the FAA and that he was not ⁶⁵² compelled to arbitrate his federal claim. He also contended that the arbitration provision in the Limited Warranty was a contract of adhesion, fraudulently induced, unconscionable, and the product of misrepresentation, and that the warranty accompanying the computer he purchased did not contain an arbitration provision. In his opposition, appellant also contended that it would be premature to grant appellee’s motion before he obtained discovery. 2 In a supplementary opposition filed on the eve of the motions hearing, Henry asked the court to order discovery. 3 In their April 2008 response to appellant’s opposition, appellees mentioned, for the first time, the Court of Appeals decision in Koons Ford of Baltimore, Inc. v. Lobach, 398 Md. 38 , 919 A.2d 722 (2007), which held that the MMWA supersedes the FAA, so that a litigant advancing a federal warranty claim could not be forced to resolve his or her claim through binding arbitration. However, appellees asserted that the Koons Ford case was distinguishable and not controlling.

On April 18, 2008, the circuit court held a hearing on the motion, and appellant appeared to argue his own case and to respond to questions from the court. He did not mention the discovery issue. After argument, the circuit court judge indi ⁶⁵³ cated that she was “going to grant the motion to dismiss in light of the arbitration clause.” With apparent reference to Henry’s claims of fraud, unconscionability, and other challenges to the arbitration agreement, the circuit court judge said: “I don’t find your allegations credible in light of the [Gateway] affidavits and the course of conduct that is ... the way of doing business that Gateway has.” A week later, the court granted the appellees’ motion to compel arbitration and dismissed Henry’s claims with prejudice. This appeal followed.

QUESTIONS PRESENTED In our view, the 11 questions appellant has raised in this appeal 4 can be reduced to two issues: ⁶⁵⁴ 1) Did the circuit court erred in rejecting appellant’s state law defenses to the motion to compel arbitration without affording him a reasonable opportunity to engage in discovery? and 2) Did the circuit court erred in finding that appellant’s federal MMWA claim was required to be submitted to arbitration? We answer “yes” to both questions. FACTS 5 In August of 2006, Henry purchased a Gateway computer from Best Buy. Gateway assembles and sells computers under both the Gateway and eMachines names through “resellers” like Best Buy.

These computers are sold subject to the terms of a Gateway One Year Limited Warranty Agreement (the “Agreement”), with the computers essentially nonfunctional without accepting the terms of the Agreement. A copy of this Agreement is placed in a conspicuous location inside of the ⁶⁵⁵ computer’s sealed box, so that the customer sees the Agreement when unpacking the box. 6 The Agreement between appellant and Gateway contained the following provision: THIS AGREEMENT APPLIES TO YOU UNLESS YOU NOTIFY GATEWAY IN WRITING THAT YOU DO NOT AGREE TO THIS AGREEMENT WITHIN 15 DAYS AFTER YOU RECEIVE THIS AGREEMENT AND YOU RETURN YOUR PRODUCT OR CANCEL SERVICES UNDER EITHER GATEWAY’S OR THE RESELLER’S RETURN POLICY, AS APPLICABLE. THIS AGREEMENT CONTAINS A DISPUTE RESOLUTION CLAUSE. PLEASE SEE SECTION 7 BELOW.

(Emphasis in original). The Agreement also contained the following “DISPUTE RESOLUTION CLAUSE:’’ 7. DISPUTE RESOLUTION. You and Gateway agree that any Dispute between You and Gateway will be resolved exclusively and finally by arbitration administered by the National Arbitration Forum (NAF) ...

The arbitration shall be held at any reasonable location near your residence by .. . whichever method of presentation you choose. If you prevail in the arbitration of any Dispute with Gateway, Gateway will reimburse you for the fees paid to the NAF in connection with the arbitration.... You understand that, in the absence of this provision, you would have had a right to litigate disputes through a court .. . and that you have expressly and knowingly waived those rights and agreed to resolve any Disputes through binding arbitration. This arbitration provision shall be governed ⁶⁵⁶ by the Federal Arbitration Act, 9 U.S.C. Section 1 , et seq.

(Emphasis in original.). Also set forth in bold type in the agreement was the following statement: THIS AGREEMENT AND ANY SALES THEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF SOUTH DAKOTA, WITHOUT REGARD TO CONFLICTS OF LAWS RULES. A user purchasing an eMachine computer, who turns on the computer, is confronted with a series of clickable set-up screens that give the user the option of either accepting or rejecting two agreements. One of the required clickable screens contains an End User License Agreement for the Microsoft Windows operating system software and the Gateway One Year Limited Warranty Agreement, both of which must be accepted before the customer can use the computer.

If a customer selects the “No, I don’t accept” option on the clickable screen, the computer will not operate, and the customer can return the computer for a refund. On July 26, 2007, appellant contacted Gateway Technical Support for assistance because the computer he purchased was freezing up. The technical support representative spent several hours on the phone with Henry, but was unable to fix the problem. Appellant contacted technical support again on July 29, 2007, but again, after several hours on the phone, the representative was unable to resolve the problem.

The representative told appellant that his computer had a defective piece of hardware, and advised appellant to take his computer to Best Buy for additional trouble-shooting and repair. On July 30, 2007, Henry took his computer to Best Buy, where an employee determined that the computer was defective and advised him to contact Gateway. Best Buy also told him that if it completed any repairs, then appellant would have to pay all costs of those repairs and that Best Buy would not replace the product or refund the purchase price. ⁶⁵⁷ On August 28, 2007, while at Best Buy, Henry contacted Gateway again. According to appellant, Gateway advised him that the computer was still under warranty.

He then requested that Gateway either replace the computer with a comparable product or refund the purchase price. Appellant claimed that Gateway refused to replace the computer or issue him a refund. This lawsuit followed. Additional facts will be discussed below.

DISCUSSION 1. Preliminary Matters Appellees asserted, and the circuit court obviously agreed, that the arbitration requirement was governed by federal law, viz. the FAA. Although the Agreement recited that it was governed by the FAA, it did not (as is commonly the case) state that the transaction involved interstate commerce. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 442-43 , 126 S.Ct. 1204 , 163 L.Ed.2d 1038 (2006); Koons Ford, supra, 398 Md. at 41 , 919 A.2d 722 .

Nevertheless, in light of the broad reach of the FAA, which covers arbitration agreements in contracts evidencing a transaction “involving interstate commerce,” 9 U.S.C. §§ 1-2 ; Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 , 123 S.Ct. 2037 , 156 L.Ed.2d 46 (2003), and the fact that appellee has not challenged the Agreement on this ground, we conclude that the FAA would apply to this transaction, unless otherwise precluded by federal law. In addition, appellant has not challenged the circuit court decision on the ground that it did not stay his claims under 9 U.S.C. § 3 . Although the issue of whether a court should stay rather than dismiss claims subject to arbitration under the FAA has divided federal courts, see Lloyd v. HOVENSA, LLC, 369 F.3d 263, 268-69 (3rd Cir.2004), there is authority that a dismissal with prejudice is permissible when all of the issues presented in the lawsuit are arbitrable. See Choice Hotels Int’l.

Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir.2001); Green v. Ameritech Corp., 200 F.3d ⁶⁵⁸ 967, 973 (6th Cir.2000). That appears to be what the circuit court found here. Because appellant does not raise the issue here, we express no view on the question. 2. Invalidity of Arbitration Agreement on State Law Grounds The FAA provides that written arbitration agreements “shall be validly irrevocable and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 .

Thus, generally available contract defenses, such as fraud, duress, or unconscionability, may be asserted in court to invalidate an arbitration agreement. Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 226 , 107 S.Ct. 2332 , 96 L.Ed.2d 185 (1987). A court may also consider “issues relating to the making and performance of the agreement to arbitrate,” Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U.S. 395, 404 , 87 S.Ct. 1801 , 18 L.Ed.2d 1270 (1967). 7 The burden of demonstrating these defenses is on the party opposing arbitration, and these issues are often fact-intensive. See, e.g., Green Tree Fin. Corporation-Alabama v. Randolph, 531 U.S. 79, 92 , 121 S.Ct. 513 , 148 L.Ed.2d 373 (2000); Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 483-84 , 109 S.Ct. 1917 , 104 L.Ed.2d 526 (1989). 8 ⁶⁵⁹ Here, there was no evidentiary hearing on Henry’s defenses and no discovery—merely a motion to dismiss and an opposition, both accompanied by affidavits and exhibits.

Because the circuit court obviously considered some of those evidentiary materials, see pp. 651-53, 979 A.2d 289 -90, Maryland Rule 2-322(c) was triggered. This rule provides: If, on a motion to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 2-501, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 2-501. The requirements of Maryland Rule 3-222(c) were the subject of a recent decision of the Court of Appeals, 120 W. Fayette St., LLLP v. Mayor of Baltimore, 407 Md. 253 , 964 A.2d 662 (2009). There, the Court emphasized that when a court considers matters outside of the pleadings, and thus converts a motion to dismiss into a motion for summary judgment, the court must give the plaintiff a reasonable opportunity to present “additional” pertinent material, id. at 263 , 964 A.2d 662 , and must consider the facts in the light most favorable to the plaintiff, not the moving party.

Id. at 264 , 964 A.2d 662 . Relying on federal authorities interpreting the similar requirement of Rule 12(b) of the Federal Rules of Civil Procedure, the Court said the circuit court judge erred as a matter of law when he considered matters outside the pleadings and failed to provide the plaintiff the opportunity to employ discovery in order to counter facts in the defendant’s affidavit or to establish a factual basis for his actions against the defendant. Id. 9 ⁶⁶⁰ This is exactly what happened here. Although not labeled a motion to dismiss “for failure to state a claim,” the appellees’ motion clearly contemplated dismissal on the legal ground that the claims were subject to arbitration.

The court expressly relied on appellees’ affidavit and exhibits. 10 Yet appellant had no notice that this would transform the appellees’ motion to dismiss into one for summary judgment. He may have submitted his own affidavits and exhibits in response to those initially filed by appellees. However, that does not make the requirements of Md. Rule 2-322(c) inapplicable. See Batson v. Powell, 912 F.Supp. 565, 571 (D.D.C.1996)(applying the mandatory conversion requirements of F.R. Civ.

Proc. 12(b) when both parties submitted material outside the pleadings.). He did not waive his requests for discovery. Even though he may not have mentioned the issue at the motions hearing, it was preserved in two pretrial filings, including a written motion. 11 Moreover, Rule 2-322(a) imposes a mandatory duty on the circuit court judge, not the parties, to give the litigants a reasonable opportunity to ⁶⁶¹ present all materials, including the right to discovery. We conclude that the dictates of Rule 2-322(c) were not followed. 12 Therefore, the dismissal of appellant’s state law claims must be reversed, along with the order mandating such claims to arbitration. 13 3.

Arbitrability of the Federal MMWA Claim The parties have devoted most of their attention on this appeal to appellant’s federal claim under the MMWA. Appellant argues that the MMWA supersedes the FAA and thus, he cannot be compelled to arbitrate his federal claim. He finds support in the decision of the Court of Appeals of Maryland in Koons Ford, supra, as well as decisions of two U.S. District courts. See Shannon Karla, Recent Development: Koons Ford of Baltimore, Inc. v. Lobach, 23 Ohio St. J. on Disp.

Resol. 421 n. 2 (2008) (collecting cases). Appellees point to decisions of two federal circuit courts, three U.S. district courts, and four state appellate courts holding that the FAA prevails over the MMWA. Id. In addition, they contend that because Henry’s agreement with Gateway contains a choice-of-law clause that makes the law of South Dakota ⁶⁶² controlling, that State would adopt the view taken by a majority of federal courts, rather than Maryland’s, and compel appellant to arbitrate his MMWA claim.

At the outset, we assume, without deciding, that when the agreement in question provided that it was to be governed by the “laws” of South Dakota, it intended to include interpretations of federal law by the courts of that state. See the Restatement (Second) of Conflict of Laws, § 187(1) and § 4. 14 The parties have not directed us to any South Dakota case on the issue of whether the MMWA does or does not supersede the FAA, nor to any decision of any federal court within the Eighth federal circuit (which includes South Dakota) that speaks to this question. Moreover, our search has turned up no such case. And obviously there is no Supreme Court decision on the issue.

Appellees, however, rely on a 1994 decision of the Supreme Court of South Dakota, St. Cloud v. Leapley, 521 N.W.2d 118 (S.D.1994), indicating that it is “bound” by decisions of the federal appellate or district courts interpreting federal statutes. Id. at 122-23 . In that case, the South Dakota appellate court adhered to a decision of the U.S. District Court for the District of South Dakota on the issue of who was an “Indian” for purposes of federal criminal jurisdiction. Id.

Appellees contend that on the basis of St. Cloud , South Dakota’s high court would simply do a headcount of the federal courts ⁶⁶³ considering the MMWA/FAA issue and side with the majority. 15 However, in a later decision, State v. Greger, 559 N.W.2d 854, 859, n. 5 (S.D.1997), another case involving jurisdiction over Indians in criminal cases, the South Dakota Supreme Court said: “[W]e do not consider ourselves bound by a decision of the U.S. Court of Appeals for the Eighth Circuit interpreting federal law on the question.” The Greger Court pointed to the Supreme Court’s decision in ASARCO Inc. v. Kadish, 490 U.S. 605, 620 , 109 S.Ct. 2037 , 104 L.Ed.2d 696 (1989), for the proposition that state courts can render binding-judgments over issues of federal law “that rest on their own interpretations of federal law.” 559 N.W.2d at 859, n. 5 . St. Cloud was relegated to a “but see” reference after ASARCO. 16 Id. Maryland caselaw reflects the views of the majority of state courts on this question and echoes Greger . In Pope v. State, 284 Md. 309, 320 , 396 A.2d 1054 (1979), the Court of Appeals citing Article 2 of the Maryland Declaration of Rights, said that “unlike decisions of the Supreme Court of the United States, decisions of federal circuit courts of appeals construing ⁶⁶⁴ the federal constitution and acts of the Congress pursuant thereto, are not binding upon us.” See also Degren v. State, 352 Md. 400, 414, n. 8 , 722 A.2d 887 (1999); Lone v. Montgomery County, 85 Md.App. 477, 494 , 584 A.2d 142 (1991).

Even if Greger and Pope did not appear to be consistent in their view of the impact of federal caselaw, 17 there is an overriding reason why the choice-of-law clause in the Gateway Agreement cannot have the effect of precluding a Maryland court from applying the decision of our State’s highest court in Koons Ford. It would be contrary to a “fundamental policy” of this State within the meaning of § 187(2)(b) of the Restatement (Second) of Conflict of Laws, viz., the requirements of Article 2 of the Maryland Declaration of Rights and of Pope v. State, supra, that “the Judges of this State ... shall be bound” by federal law as interpreted by the U.S. Supreme Court or the Maryland Court of Appeals, if there is no Supreme Court decision. 18 Section 187 of the Restatement (Second) states: (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either ⁶⁶⁵ (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other