Recently, the Ninth Circuit affirmed two court rulings denying Samsung’s motion to compel arbitration in Velasquez-Reyes v. Samsung Elecs. Am., and Samsung Elecs. Am. v. Ramirez. In the “shrink-wrap” context, the Ninth Circuit held that a consumer must be given adequate notice of an arbitration provision in order to expressly agree to be bound by its terms, and the consumer must conspicuously know how to express consent or opt-out. Hence, the details of how an arbitration agreement is presented in the shrink-wrap context are crucial, under the Ninth Circuit’s view.

In Velasquez-Reyes, Velasquez-Reyes purchased a water-resistant Samsung cell phone that stopped working after she dropped it into a toilet. When she purchased the phone, Velasquez-Reyes asked the salesman to transfer her contacts from her old phone to her new phone. The salesman unwrapped the cell phone packaging, opened the box, and transferred her contacts. Once complete, the salesman placed the cell phone packaging and receipt into Velasquez-Reyes’ shopping bag. The salesman did not tell Velasquez-Reyes that the cell phone came with additional documents, nor did he tell her to read the documents. The cell phone box stated, “device purchase subject to additional Samsung terms and conditions.” Included in the packaging was the Warranty Guide, which stated that it contains important terms and conditions, and that by using the device the consumer accepts those terms and conditions. Velasquez-Reyes did not see the notice that “by using this device [consumer] accepts those terms and conditions,” and she was unaware of the arbitration provision contained in the Warranty Guide.

In Ramirez, Ramirez’s Samsung cell phone battery overheated and exploded in his pocket. The cell phone’s packaging indicated that it was “subject to additional Samsung terms and conditions.” The Product Safety and Warranty Guide contained in the packaging was 23 pages and the first page directed users to read the manual before operating the device. It also stated that “by using [the cell phone], [the consumer] accepts those terms and conditions.” The arbitration provision was included in the Product Safety and Warranty Guide on pages 19-21.

Each consumer sued Samsung and Samsung motioned to compel arbitration. The issue in both cases was whether the consumer entered into agreement with Samsung to arbitrate their claims, focusing specifically on whether the plaintiff had sufficient notice of the arbitration provision and consented to arbitration.

Both of these cases emphasize the importance of labeling, placement, and prominence of important contract terms, and how to effectively obtain consent to contractual terms. In both cases, the disclaimer on the box did not expressly provide that opening the cell phone box or using the cell phone constitutes consent to the terms contained in the respective guidebooks. The statement on the boxes only indicated that the purchase was subject to additional terms and conditions, which the Ninth Circuit held was too vague and inconspicuous to provide the consumer notice of arbitration and that use of the cell phone would constitute consent. In addition, the labeling of each guidebook was misleading because one would not reasonably expect an arbitration agreement to be included in a warranty guide. The labeling of the guidebook does not put a reasonable person on notice that the guidebook contains an arbitration provision.

Cases teach that when entering into agreements with consumers that contain important contract terms, such as an arbitration provision or privacy policy, businesses should make sure to draw the consumer’s attention to the important contract terms in order to maximize the chance of enforcement. The contract terms and their existence should be explicit and made prominent. Cases say that businesses should appropriately label the important contract provisions and conspicuously place them in a location the consumer is most likely to notice. Important contract terms should not be mislabeled or hidden in a place where a consumer would not reasonably expect to see them. In addition, businesses should direct the consumer to the location of the important contract terms so they are easily accessible to the consumer. Lastly, businesses should make sure to obtain the consumer’s express consent. In a shrink-wrap contract context, it would be prudent to include a phrase such as “by using this product you agree to the terms and conditions (including the arbitration provision) located in the included Guidebook” on the outside of the box or in a location where a consumer is most likely to see it. Prominence, placement, and labeling of important contract provisions, and obtaining consumer consent could be what stands between an arbitration action and a multi-million dollar class action suit.