Ninth Circuit Rules “No, You Can’t Just Stash the Binding Arbitration Agreement in the Box”

We know that under the “shrink-wrap doctrine,” the manufacturer of software can place language on the outside of its package stating that by opening the shrink-wrap around the DVD or CD-ROM that contains the software, the user agrees to the terms of a license, which may be inside the packaging, on the wide world web or elsewhere. That’s Wall Data Inc. v. L.A. Cty. Sheriff’s Dep’t, 447 F.3d 769, 782 (9th Cir. 2006). And we also know that when a manufacturer puts provides a warranty in a use and care guide, which the buyer doesn’t see until she has bought the product, taken it home opened the package and put the product to use, if those things happen at all, the warranty is enforceable against the manufacturer. Weinstat v. Dentsply International Inc., 180 Cal. App. 4th 1213 (2010).

So how about when the manufacturer, or distributor, or seller puts a provision that reduces consumer rights in the box, in a manual, such as, say, a binding arbitration provision? That was the issue in Norcia v. Samsung Telecomm ___ F.4^th___ (9^th Cir. 2017) decided just a few days ago.

Norcia bought a cell phone and a plan at a Samsung Galaxy GS4 phone at a Verizon store (Fortunately, it wasn’t a Note 7). He sued Verizon, and Verizon moved to compel contractual arbitration.

At the store, Norcia had signed a “Customer Agreement” with the following provisions:.

I agree to the current Verizon Wireless Customer Agreement, including the calling plan, (with extended limited warranty/service contract, if applicable), and other terms and conditions for services and selected features I have agreed to purchase as reflected on the receipt, and which have been presented to me by the sales representative and  which I had the opportunity to review.

That was followed by:

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.

The biggest problem with that for Samsung was that none of this said anything about Samsung. So  the Court ruled the quoted language did not constitute a binding agreement for arbitration between Norica and Samsung.

But Samsung had a second basis for claiming a right to arbitration – an “in the box” provision. Norcia and a salesperson took the phone, still in its sealed Samsung box, to a table. The back of the box stated: “Package Contains . . . Product Safety & Warranty Brochure.” The Verizon Wireless employee opened the box, unpacked the phone and materials, and helped Norcia transfer his contacts. Norcia took the phone,  charger and the headphones with him leaving behind the box and the rest of its contents.

Included in those contents was the 101 page “Product Safety & Warranty Brochure,” which included among many, many other provisions, the following language:

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.

Samsung sought to compel arbitration based on this language, arguing that under the Wall Data and Weinstat decisions, as well as a 7^th Circuit “contract in the box” decision, Hill v.Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997) it was enforceable against the consumer.

Said the Ninth Circuit:  Wrong!  California contract law applied, and the California courts have not applied Hill. 

And the shrink-wrap rule does not apply:

Where a notice on a package states that the user agrees to certain terms by opening the package, a court could reasonably conclude, consistent with California contract law, that the user has a duty to act in order to negate the conclusion that the consumer had accepted the terms in the notice. This principle does not help Samsung, however. Even 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.  . . . Under these circumstances, California’s general rule that silence or inaction does not  constitute acceptance is binding .

Finally, Weinstat allows additional warranty rights to be given to the consumer by placing the terms inside the box. It does not allow the consumer’s rights to be restricted that way.

Bottom line:  no contract terms hidden inside the box are binding against the consumer.