Originally published February 10, 2011

Keywords: Illinois, consumer arbitrations, National Arbitration Forum, NAF

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.)

Learn more about our Consumer Litigation & Class Actions practice.

Visit us at mayerbrown.com

Copyright 2011. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.