On January 19, 2017, the Ninth Circuit Court of Appeals affirmed a district court’s denial of Samsung’s motion to compel arbitration by the named plaintiff in a class action alleging that Samsung made misrepresentations as to the performance of the Galaxy S4 phone. Norcia v. Samsung Telecommunications America, LLC, No. 14-16994 (Opinion by Judge Sandra S. Ikuta).[1] The Court rejected Samsung’s argument that the Plaintiff agreed to arbitrate his claims based on a warranty brochure included in the Galaxy S4 box.

Background of the Case. In February 2014, Plaintiff Daniel Norcia filed a class action against Samsung alleging that the company misrepresented the storage and speed of the Galaxy S4. The complaint alleged claims under common law fraud as well as California’s UCL, FAL, and CLRA. The putative class included all purchasers of the Galaxy 4S phone in California. Plaintiff did not bring any claims for breach of warranty. Samsung moved to compel arbitration on the grounds that there was an arbitration provision in the Product Safety & Warranty Information brochure in the Galaxy 4S box.[2] The district court denied the motion, finding that receipt of the brochure did not form an agreement to arbitrate non-warranty claims. Samsung appealed.

No Agreement to Arbitrate Based on In-Box Warranty Brochure. Samsung raised two theories in support of its argument that Plaintiff agreed to arbitrate his claims. First, it argued that the inclusion of the arbitration provision in the Product Safety & Warranty Information brochure created a contract between Samsung and Plaintiff to arbitrate all claims. The Ninth Circuit disagreed. As an initial matter, it found that although the brochure was in the form of an express warranty from Samsung to Plaintiff, the arbitration provision not only covered claims arising from the warranty, but also all disputes arising from the “sale, condition or performance of the products.” As such, the Court’s analysis was governed by California contract law, not warranty law.

Applying those contract principles, the Court found that Plaintiff did not engage in conduct sufficient to show that he agreed to be bound by the arbitration agreement in the brochure. He did not sign the brochure or 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.” Under California law, silence does not constitute assent unless an exception to the general rule applies.

Samsung made several unsuccessful arguments in response. It tried to analogize the brochure to a shrink-wrap license, which the Ninth Circuit held enforceable in Wall Data Inc. v. L.A. Cty. Sheriff’s Dep’t, 447 F.3d 769, 782 (9th Cir. 2006). The Court disagreed, finding Wall Data at most stands for the proposition that a shrink-wrap license of intellectual property is enforceable in California. The decision did not address whether the license created a contract.

Samsung also argued that the brochure was enforceable under California law as an in-the-box contract between the manufacturer and consumer. Again, the Court disagreed, stating that Samsung’s argument was based on a misunderstanding between California warranty and contract law. The Court explained that California courts have concluded that even if a customer may be bound by an in-the-box contract under certain circumstances, such a contract is ineffective where the customer does not receive adequate notice of its existence. Here, Samsung entitled the brochure “Product Safety & Warranty Information.” The title would not put a reasonable person on notice that the brochure contained “a freestanding obligation outside the scope of the warranty.” (Emphasis added.)

No Agreement to Arbitrate Based on Verizon Customer Agreement. Second, Samsung argued that Plaintiff agreed to arbitrate his claims by signing the Customer Agreement with Verizon Wireless. The Ninth Circuit found this argument meritless. Samsung was not a signatory to the agreement. Nor was there any evidence that Plaintiff and Verizon Wireless intended Samsung to be a third-party beneficiary.

Takeaway. Companies and manufacturers should carefully consider the placement of any arbitration provisions. Arbitration provisions included in documents presented to a consumer after purchase may be subject to challenge, particularly where they do not require the consumer to take any affirmative action to demonstrate his or her assent to the terms and conditions therein.