Tuesday, January 24, 2017

What's in the box? Not a valid agreement to arbitrate!

Norcia v. Samsung Telecommunications America, LLC, --- F.3d ----, 2017 WL 218027, No. 14–16994 (9th Cir. Jan. 19, 2017)

Norcia brought a putative class action bringing the usual California claims against Samsung, alleging that Samsung made misrepresentations as to the performance of the Galaxy S4 phone. Samsung moved to compel arbitration on the ground that an arbitration provision contained in a warranty brochure included in the Galaxy S4 box was binding on Norcia. The court of appeals affirmed the denial of Samsung’s motion.

Norcia bought his phone at a Verizon Wireless store.  When he paid, he got a receipt labelled “Customer Agreement” which included a statement (in all capital letters) that: “I understand that I am agreeing to ... settlement of disputes by arbitration and other means instead of jury trials, and other important terms in the Customer Agreement.” Norcia signed the Customer Agreement, and Verizon Wireless emailed him a copy.

After that, Norcia took the phone, still in its sealed Samsung box, and a Verizon Wireless employee opened the box and helped Norcia transfer his contacts from his old phone to the new phone. Norcia declined the offer by the Verizon Wireless employee to take the box and the rest of its contents, which included Samsung’s “Standard Limited Warranty,” which included a statement that “All disputes with Samsung arising in any way from this limited warranty or the sale, condition or performance of the products shall be resolved exclusively through final and binding arbitration, and not by a court or jury.”  The statement continued that purchasers could opt out of the arbitration agreement by providing notice to Samsung within 30 calendar days of purchase, either through email or by calling a toll-free telephone number.

“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”  Samsung bore the burden of showing agreement by a preponderance of the evidence.

First, Samsung argued that including the arbitration provision in the Product Safety & Warranty Information brochure created a valid contract between Samsung and Norcia. California law governs contract formation.  “A party who is bound by a contract is bound by all its terms, whether or not the party was aware of them.”  Contracts can be made “in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” Silence or inaction isn’t acceptance, unless the offeree has a duty to respond to an offer and fails to act in the face of this duty (when she’s given the opportunity to opt out) or the offeree retains the benefit offered.  Nonetheless, silence won’t be consent when the offeree reasonably did not know that an offer had been made.

Norcia didn’t expressly assent to any agreement in the brochure, or sign the brochure or otherwise act in a manner that would show “his intent to use his silence, or failure to opt out, as a means of accepting the arbitration agreement.” No exception to the general rule applied; Samsung didn’t identify any duty imposed on Norcia by California law, nor any previous course of dealing between the parties. Nor did Norcia retain any benefit by failing to act, given that the brochure stated that Norcia was entitled to “the benefits of the Limited Warranty” regardless whether Norcia opted out of the arbitration agreement.  Without “outward manifestations of consent [that] would lead a reasonable person to believe the offeree has assented to the agreement,” no contract was formed between Norcia and Samsung.

Samsung argued that the brochure was analogous to a shrink-wrap license, or to terms included in a box sent to the consumer, which the Seventh Circuit has held to be enforceable.  The court of appeals first commented that a previous “unreasoned” Ninth Circuit statement about the enforceability of shrink-wrap licenses in California wasn’t focused on contract formation, and anyway wasn’t free from doubt; there were no identified California cases on the subject.

At most, previous precedent indicated that “a shrink-wrap license of intellectual property is enforceable in California” when it states on the packaging that opening the package constitutes consent to the license. But “[e]ven if a license to copy software could be analogized to a brochure that contains contractual terms, the outside of the Galaxy S4 box did not notify the consumer that opening the box would be considered agreement to the terms set forth in the brochure.”  

How about the in-the-box contract approved by the Seventh Circuit?  In the relevant case, consumers ordered a computer over the phone, but when the box arrived, it contained the computer and “a list of terms, said to govern unless the customer return[ed] the computer within 30 days.”  The Seventh Circuit stated that “[p]ractical considerations support allowing vendors to enclose the full legal terms with their products,” and concluded that “[b]y keeping the computer beyond 30 days, the [buyers] accepted [the seller’s] offer, including the arbitration clause.”  But California hasn’t adopted that rule (though it has held that statements in the box can constitute warranties; warranty and contract law differ).  Even if in-the-box contracts may be binding under certain circumstances, no contract is formed “when the writing does not appear to be a contract and the terms are not called to the attention of the recipient.” 

Samsung’s brochure was called “Product Safety & Warranty Information.” That title indicated that the brochure contained safety information and the seller’s warranty. “A reasonable person in Norcia’s position would not be on notice that the brochure contained a freestanding obligation outside the scope of the warranty.” Nor would a reasonable person understand that failing to opt out of an arbitration provision contained within the warranty constituted assent to a provision requiring arbitration of all claims against the seller, including claims not involving the warranty.

Samsung urged the Ninth Circuit to agree with the Seventh that “the practicalities of consumer transactions require the enforcement of in-the-box contracts and that consumers expect that products will come with additional terms.”  Nope.  Call your legislator if you want a different public policy.

Samsung’s next argument, that Norcia agreed to arbitrate his claims by signing the Customer Agreement with Verizon Wireless, was meritless.  Verizon isn’t Samsung; Samsung isn’t a third-party beneficiary of the contract. 

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