Advantage, Little Guy

In 2004, Ian Andrews purchased a Dell laptop computer for $1,700. About two-and-a-half years later, the computer began to malfunction, periodically shutting down unexpectedly. Stuck with a problem computer that was past the standard warranty period, Andrews complained to Dell. The computer giant responded that the online contract governing the initial purchase required him to resolve the dispute by arbitration.

Andrews recognized this was not a realistic approach, later stating that as a university student he was not in a financial position to retain counsel to support an arbitration claim. Instead, he chose a different course of action, suing the company as part of a class action lawsuit that brought together thousands of consumers experiencing similar problems.

Dell challenged the class action suit, but last month the Ontario Court of Appeal sided with Andrews, ruling that it could proceed.

The case raised a wide range of legal issues from the impartiality of the proposed arbitration provider (a U.S. firm that had ceased accepting new consumer arbitrations after allegations of "serious impropriety") to the applicability of an Ontario consumer protection statute. But the heart of the case was whether consumers can click away their class action rights when they agree to online contracts mandating that disputes be resolved by arbitration.

The use of such clauses has been commonplace among many businesses that are willing to trade the higher expenses associated with a handful of individual arbitrations for the threat of a big payout in a class action lawsuit. From businesses' perspective, the math makes sense: class actions hold the prospect of bringing together thousands of aggrieved consumers who may individually receive less, but collectively could cost the company far more.

Imbalance of power

Although quite common, contracting out of class action rights has long been a source of frustration for consumers and consumer advocates. Conventional contract analysis posits that businesses and consumers have an equal opportunity to negotiate a satisfactory contract. Yet the practical reality is that online contracts are rarely, if ever, the product of actual negotiation. Rather, businesses present the lengthy terms and conditions -- often buried behind a link or unreadable fine print -- and consumers have little choice but to accept if they want the product or service.

The Ontario government recognized the inequity of the business-consumer relationship in 2002, when it enacted the Consumer Protection Act, which outlawed mandatory arbitration clauses in consumer contracts. The reasoning was simple: individual consumer disputes are rarely financially viable as independent legal actions and only make sense if aggregated as a class action.

Applying the law to Andrews' situation and those similarly facing the Dell arbitration clause, the unanimous court was clearly persuaded that arbitration was not an option, concluding "the choice is not between arbitration and class proceeding; the real choice is between clothing Dell with immunity from liability for defective goods sold to non-consumers and giving those purchasers the same day in court afforded to consumers by way of the class proceeding."

Consumer groups, high-five!

This latest case represents a major win for Canadian consumer groups, who have tangled with Dell before in a case that ultimately went to the Supreme Court of Canada.

Businesses operating online may understandably prefer to limit their likely liability through arbitration, but the resounding response from the Ontario legislature and courts indicates that it should not be possible to force consumers to click away their class action rights.