Antitrust Law Daily Wrap Up, ADVERTISING—9th Cir.: Samsung failed to enforce mandatory arbitration provision in cell phone brochure, (Jan 20, 2017)

By Robert B. Barnett Jr., J.D.

Samsung Telecommunications America, LLC, had no right to compel a lawsuit involving the Galaxy S4 phone into arbitration by relying on a mandatory arbitration provision in a warranty information brochure located in the Galaxy S4 box, the U.S. Court of Appeals in San Francisco has ruled. The arbitration provision, which was on page 76 of a 101-page brochure that the phone purchaser never saw, was not a valid contract under California law and was instead, at best, an offer that the purchaser never accepted (Norcia v. Samsung Telecommunications America, LLC, January 19, 2017, Ikuta, S.).

Background. An individual purchased a Galaxy S4 phone at a Verizon Wireless store in San Francisco. He paid for the phone at the register, receiving a receipt that stated, among other things, that disputes would be resolved through arbitration. A Verizon Wireless employee took the phone, still sealed in its box, to a table and sat with the individual. The back of the box stated that the box contained a Product Safety & Warranty Information Brochure. After the employee opened the box and helped the individual transfer his contacts to his new phone, the individual left the store, refusing an offer to take the box and its contents with him.

Had the individual looked in the box, he would have seen a 101-page Product Safety & Warranty Information containing two sections, one related to health and safety and the other to Samsung’s warranties and an end user license agreement. The second section, amid the warranty information, included a statement on page 76 that all disputes were to be resolved through arbitration. The section also gave the purchaser the right to opt out of the arbitration agreement by giving Samsung notice within 30 days of purchase.

The individual later filed a class action suit against Samsung, alleging that Samsung’s misrepresentations about the phone’s storage capacity and speed violated the California Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law. Samsung moved to compel arbitration, based on the Product Safety & Warranty Information brochure. When the trial court denied the motion, Samsung appealed to the Ninth Circuit.

The brochure. Samsung argued that the arbitration provision in the brochure created a binding contract. Because the lawsuit was based on contract rather than on warranty, the appellate court looked to California contract law for answers. Under California contract law, silence is not an acceptance of an offer. In this case, the individual clearly never assented to any agreement in the brochure. He never signed the brochure or otherwise acted in a way to show acceptance. Furthermore, none of the exceptions to the rule that silence is not acceptance were present—no duty to respond existed and the individual did not retain the benefit offered. In any event, silence is never acceptance when the offeree does not even know that an offer has been made. As a result, no contract existed.

In-the-box contract. Samsung attempted to analogize this situation with shrink-wrap licenses, which have been held enforceable in California. In a shrink-wrap or in-the-box license, the purchaser agrees to the terms when he or she opens the packaging or the CD-ROM wrapper. The Ninth Circuit noted, however, that it had previously only agreed that such licenses were enforceable; it never ruled that the license created a contract. Furthermore, the California courts that have held that a customer is bound by an in-the-box license have also held that a customer who lacks adequate notice of its existence is not bound by it. In this case, a reasonable person in the phone purchaser’s shoes would not have understood that failing to opt out of an arbitration provision buried in a warranty would require arbitration of all claims, including those not involving the warranty. Thus, even if this constituted an in-the-box contract, and even if it were enforceable under California law, the individual would not have been bound by it because he was unaware of it or its implications.

Customer agreement. Samsung next argued that the customer agreement receipt that the individual signed when he purchased the phone obligated him to arbitrate. The appellate court rejected that argument as well, noting that Samsung was not a party to the agreement between the individual and the Verizon Wireless store. Moreover, Samsung was not a third-party beneficiary to the agreement because the requirement that the parties to the agreement intend for the contract to benefit Samsung was absent. No evidence existed that the individual and Verizon Wireless intended that the agreement benefit Samsung.

FAA. Finally, Samsung argued that the Federal Arbitration Act created a national policy favoring arbitration. Yes, the court said, but the FAA does not require arbitration for those individuals who have not agreed to it.

As a result, the Ninth Circuit affirmed the lower court ruling denying Samsung’s motion to compel arbitration.

The case is No. 14-16994.

Attorneys: John R. Hurley (DLA Piper LLP) for Daniel Norcia. John P. Phillips (Paul Hastings LLP) for Samsung Telecommunications America, LLC and Samsung Electronics America, Inc.

Companies: Samsung Telecommunications America, LLC; Samsung Electronics America, Inc.

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