In the
United States Court of Appeals
For the Seventh Circuit


No. 96-3294

RICH HILL and ENZA HILL, on behalf
of a class of persons similarly situated,

Plaintiffs-Appellees,

v.

GATEWAY 2000, INC., and DAVID PRAIS,

Defendants-Appellants.


Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 96 C 4086--Suzanne B. Conlon, Judge.


ARGUED DECEMBER 10, 1996--DECIDED JANUARY 6, 1997


   Before CUMMINGS, HARLINGTON WOOD, JR., and
EASTERBROOK, Circuit Judges.

   EASTERBROOK, Circuit Judge. A customer picks up the
phone, orders a computer, and gives a credit card number.
Presently a box arrives, containing the computer and a
list of terms, said to govern unless the customer returns
the computer within 30 days. Are these terms effective
as the parties' contract, or is the contract term-free be-
cause the order-taker did not read any terms over the
phone and elicit the customer's assent?

   One of the terms in the box containing a Gateway 2000
system was an arbitration clause. Rich and Enza Hill, the
customers, kept the computer more than 30 days before
complaining about its components and performance. They
filed suit in federal court arguing, among other things,
that the product's shortcomings make Gateway a racketeer
(mail and wire fraud are said to be the predicate offenses),
leading to treble damages under RICO for the Hills and
a class of all other purchasers. Gateway asked the district
court to enforce the arbitration clause; the judge refused,
writing that "[t]he present record is insufficient to sup-
port a finding of a valid arbitration agreement between
the parties or that the plaintiffs were given adequate
notice of the arbitration clause." Gateway took an im-
mediate appeal, as is its right. 9 U.S.C. sec. 16(a)(1)(A).

   The Hills say that the arbitration clause did not stand
out: they concede noticing the statement of terms but
deny reading it closely enough to discover the agreement
to arbitrate, and they ask us to conclude that they there-
fore may go to court. Yet an agreement to arbitrate must
be enforced "save upon such grounds as exist at law or
in equity for the revocation of any contract." 9 U.S.C.
sec. 2. Doctor's Associates, Inc. v. Casarotto, 116 S. Ct. 1652
(1996), holds that this provision of the Federal Arbitration
Act is inconsistent with any requirement that an arbitra-
tion clause be prominent. A contract need not be read to
be effective; people who accept take the risk that the un-
read terms may in retrospect prove unwelcome. Carr v.
CIGNA Securities, Inc., 95 F.3d 544, 547 (7th Cir. 1996);
Chicago Pacific Corp. v. Canada Life Assurance Co., 850
F.2d 334 (7th Cir. 1988). Terms inside Gateway's box
stand or fall together. If they constitute the parties' con-
tract because the Hills had an opportunity to return the
computer after reading them, then all must be enforced.

   ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996),
holds that terms inside a box of software bind consumers
who use the software after an opportunity to read the
terms and to reject them by returning the product. Like-
wise, Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585
(1991), enforces a forum-selection clause that was included
among three pages of terms attached to a cruise ship ticket.
ProCD and Carnival Cruise Lines exemplify the many
commercial transactions in which people pay for products
with terms to follow; ProCD discusses others. 86 F.3d
at 1451-52. The district court concluded in ProCD that
the contract is formed when the consumer pays for the
software; as a result, the court held, only terms known
to the consumer at that moment are part of the contract,
and provisos inside the box do not count. Although this
is one way a contract could be formed, it is not the only
way: "A vendor, as master of the offer, may invite accept-
ance by conduct, and may propose limitations on the kind
of conduct that constitutes acceptance. A buyer may ac-
cept by performing the acts the vendor proposes to treat
as acceptance." Id. at 1452. Gateway shipped computers
with the same sort of accept-or-return offer ProCD made
to users of its software. ProCD relied on the Uniform
Commercial Code rather than any peculiarities of Wiscon-
sin law; both Illinois and South Dakota, the two states
whose law might govern relations between Gateway and
the Hills, have adopted the UCC; neither side has pointed
us to any atypical doctrines in those states that might
be pertinent; ProCD therefore applies to this dispute.

   Plaintiffs ask us to limit ProCD to software, but where's
the sense in that? ProCD is about the law of contract,
not the law of software. Payment preceding the revela-
tion of full terms is common for air transportation, insur-
ance, and many other endeavors. Practical considerations
support allowing vendors to enclose the full legal terms
with their products. Cashiers cannot be expected to read
legal documents to customers before ringing up sales. If
the staff at the other end of the phone for direct-sales
operations such as Gateway's had to read the four-page
statement of terms before taking the buyer's credit card
number, the droning voice would anesthetize rather than
enlighten many potential buyers. Others would hang up
in a rage over the waste of their time. And oral recita-
tion would not avoid customers' assertions (whether true
or feigned) that the clerk did not read term X to them, or
that they did not remember or understand it. Writing pro-
vides benefits for both sides of commercial transactions.
Customers as a group are better off when vendors skip
costly and ineffectual steps such as telephonic recitation,
and use instead a simple approve-or-return device. Com-
petent adults are bound by such documents, read or un-
read. For what little it is worth, we add that the box
from Gateway was crammed with software. The computer
came with an operating system, without which it was
useful only as a boat anchor. See Digital Equipment Corp.
v. Uniq Digital Technologies, Inc., 73 F.3d 756, 761 (7th
Cir. 1996). Gateway also included many application pro-
grams. So the Hills' effort to limit ProCD to software
would not avail them factually, even if it were sound
legally--which it is not.

   For their second sally, the Hills contend that ProCD
should be limited to executory contracts (to licenses in
particular), and therefore does not apply because both par-
ties' performance of this contract was complete when the
box arrived at their home. This is legally and factually
wrong: legally because the question at hand concerns the
formation of the contract rather than its performance, and
factually because both contracts were incompletely per-
formed. ProCD did not depend on the fact that the seller
characterized the transaction as a license rather than as
a contract; we treated it as a contract for the sale of
goods and reserved the question whether for other pur-
poses a "license" characterization might be preferable. 86
F.3d at 1450. All debates about characterization to one
side, the transaction in ProCD was no more executory
than the one here: Zeidenberg paid for the software and
walked out of the store with a box under his arm, so if
arrival of the box with the product ends the time for
revelation of contractual terms, then the time ended in
ProCD before Zeidenberg opened the box. But of course
ProCD had not completed performance with delivery of
the box, and neither had Gateway. One element of the
transaction was the warranty, which obliges sellers to fix
defects in their products. The Hills have invoked Gate-
way's warranty and are not satisfied with its response,
so they are not well positioned to say that Gateway's
obligations were fulfilled when the motor carrier unloaded
the box. What is more, both ProCD and Gateway promised
to help customers to use their products. Long-term ser-
vice and information obligations are common in the com-
puter business, on both hardware and software sides.
Gateway offers "lifetime service" and has a round-the-
clock telephone hotline to fulfil this promise. Some ven-
dors spend more money helping customers use their prod-
ucts than on developing and manufacturing them. The
document in Gateway's box includes promises of future
performance that some consumers value highly; these
promises bind Gateway just as the arbitration clause binds
the Hills.

   Next the Hills insist that ProCD is irrelevant because
Zeidenberg was a "merchant" and they are not. Section
2-207(2) of the UCC, the infamous battle-of-the-forms sec-
tion, states that "additional terms [following acceptance
of an offer] are to be construed as proposals for addition
to a contract. Between merchants such terms become part
of the contract unless. . .". Plaintiffs tell us that ProCD
came out as it did only because Zeidenberg was a "mer-
chant" and the terms inside ProCD's box were not ex-
cluded by the "unless" clause. This argument pays scant
attention to the opinion in ProCD, which concluded that,
when there is only one form, "sec. 2-207 is irrelevant." 86
F.3d at 1452. The question in ProCD was not whether
terms were added to a contract after its formation, but
how and when the contract was formed--in particular,
whether a vendor may propose that a contract of sale be
formed, not in the store (or over the phone) with the pay-
ment of money or a general "send me the product," but
after the customer has had a chance to inspect both the
item and the terms. ProCD answers "yes," for merchants
and consumers alike. Yet again, for what little it is worth
we observe that the Hills misunderstand the setting of
ProCD. A "merchant" under the UCC "means a person
who deals in goods of the kind or otherwise by his oc-
cupation holds himself out as having knowledge or skill
peculiar to the practices or goods involved in the trans-
action", sec. 2-104(1). Zeidenberg bought the product at a re-
tail store, an uncommon place for merchants to acquire
inventory. His corporation put ProCD's database on the
Internet for anyone to browse, which led to the litiga-
tion but did not make Zeidenberg a software merchant.

   At oral argument the Hills propounded still another dis-
tinction: the box containing ProCD's software displayed
a notice that additional terms were within, while the box
containing Gateway's computer did not. The difference is
functional, not legal. Consumers browsing the aisles of a
store can look at the box, and if they are unwilling to
deal with the prospect of additional terms can leave the
box alone, avoiding the transactions costs of returning the
package after reviewing its contents. Gateway's box, by
contrast, is just a shipping carton; it is not on display
anywhere. Its function is to protect the product during
transit, and the information on its sides is for the use of
handlers ("Fragile!" "This Side Up!"          ) rather than
would-be purchasers.

   Perhaps the Hills would have had a better argument
if they were first alerted to the bundling of hardware and
legal-ware after opening the box and wanted to return
the computer in order to avoid disagreeable terms, but
were dissuaded by the expense of shipping. What the rem-
edy would be in such a case--could it exceed the shipping
charges?--is an interesting question, but one that need
not detain us because the Hills knew before they ordered
the computer that the carton would include some impor-
tant terms, and they did not seek to discover these in
advance. Gateway's ads state that their products come
with limited warranties and lifetime support. How limited
was the warranty--30 days, with service contingent on
shipping the computer back, or five years, with free on-
site service? What sort of support was offered? Shoppers
have three principal ways to discover these things. First,
they can ask the vendor to send a copy before deciding
whether to buy. The Magnuson-Moss Warranty Act re-
quires firms to distribute their warranty terms on request,
15 U.S.C. sec. 2302(b)(1)(A); the Hills do not contend that
Gateway would have refused to enclose the remaining
terms too. Concealment would be bad for business, scar-
ing some customers away and leading to excess returns
from others. Second, shoppers can consult public sources
(computer magazines, the Web sites of vendors) that may
contain this information. Third, they may inspect the docu-
ments after the product's delivery. Like Zeidenberg, the
Hills took the third option. By keeping the computer be-
yond 30 days, the Hills accepted Gateway's offer, including
the arbitration clause.

   The Hills' remaining arguments, including a contention
that the arbitration clause is unenforceable as part of a
scheme to defraud, do not require more than a citation
to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395 (1967). Whatever may be said pro and con about
the cost and efficacy of arbitration (which the Hills dis-
parage) is for Congress and the contracting parties to con-
sider. Claims based on RICO are no less arbitrable than
those founded on the contract or the law of torts. Shearson/
American Express, Inc. v. McMahon, 482 U.S. 220, 238-42
(1987). The decision of the district court is vacated, and
this case is remanded with instructions to compel the Hills
to submit their dispute to arbitration.

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