In July 2009, the National Arbitration Forum (NAF)—then one of the largest arbitration providers in the United States—stopped accepting new arbitrations involving consumers. (For more information, see our Legal Update on that development.) One of the affected businesses was Gateway, Inc., because its standard agreements with consumers who purchase computers included a provision selecting the NAF as the forum for arbitrating disputes. Last week, the Illinois Supreme Court held that Gateway’s consumer arbitration provision is unenforceable because the NAF is no longer available to administer the arbitration. Carr v. Gateway, Inc., __ N.E. 2d __, 2011 WL 329115 (Ill. Feb. 3, 2011).

Section 5 of the Federal Arbitration Act authorizes courts to appoint a new arbitrator if the arbitrator selected by the parties’ agreement is unavailable. But in Carr, the Illinois Supreme Court declined to exercise that authority, concluding that the choice of the NAF was so “integral to the agreement to arbitrate” that “the unavailability of NAF brought the agreement to an end.”

In the court’s view, the NAF was indispensable to Gateway’s arbitration provision for two reasons. First, the provision selected the NAF’s procedures and specified that only the NAF and its affiliates could administer them. Second, the provision required any party who brought a covered dispute in a forum other than the NAF to pay liquidated damages to the other party. The court explained that this “penalty” clause made the NAF part and parcel of the arbitration agreement.

The Illinois Supreme Court’s decision in Carr is of importance to any business that enters into arbitration agreements with its customers or employees. In particular, Carr underscores that companies whose arbitration provisions select the NAF as the sole forum for arbitration should consider revising their agreements to designate another arbitration provider. More generally, companies may wish to reexamine the enforceability of their arbitration agreements, assessing such issues as the designation of arbitration providers, the use of penalty clauses, or other potentially problematic features. (Please see our tips for drafting consumer and employee arbitration agreements.)

For more information on any matter raised in this Legal Update, please contact Evan Tager at +1 202 263 3240, Archis A. Parasharami at +1 202 263 3328, or Kevin Ranlett at +1 202 263 3217.

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