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Legal Update

Ninth Circuit Questions Validity Under California Law of Contract Terms Enclosed With Products

27 January 2017
Mayer Brown Legal Update

A panel of the US Court of Appeals for the Ninth Circuit has held that, under California law, the inclusion of an arbitration provision in the warranty brochure enclosed with a product does not create a binding arbitration agreement between the purchaser and the manufacturer when the existence of contract terms is not adequately disclosed to the purchaser. (Norcia v. Samsung Telecommunications America, Inc., No. 14-16994 (9th Cir. Jan. 19, 2017).) The panel’s opinion also called into question the prevailing view that California law follows the majority rule that “terms in the box” are enforceable—i.e., that a customer accepts terms enclosed with a product by keeping and continuing to use the product rather than returning it. That said, the panel did not resolve that question, instead concluding that even if an “in-the-box contract were otherwise enforceable under California law,” the defendant in this case failed to disclose the contractual nature of the terms in the warranty brochure sufficiently.

Background

The plaintiff in Norcia, a California purchaser of the Samsung Galaxy S4 smartphone, filed a class action alleging that Samsung’s marketing of the phone violated California consumer-protection law. Samsung moved to compel arbitration, invoking the arbitration provision in the Product Safety and Warranty Information brochure enclosed in the box containing the plaintiff’s phone. Samsung asserted that, although that booklet specified that consumers could contact Samsung within 30 days to opt out of the arbitration provision, the plaintiff had not opted out and thus was bound to arbitrate.

The plaintiff resisted arbitration on two grounds. First, he contended that he could not be bound by the arbitration provision in the warranty booklet because he never received a copy; a store employee opened the box for him and kept the box and brochure. The district court rejected this argument, however, concluding that the plaintiff should be charged with having received the booklet because it was undisputed that the plaintiff had declined the store employee’s offer to let him keep the booklet.

But the district court agreed with the plaintiff’s second argument—that even if the plaintiff had received the brochure, the brochure did not adequately disclose that it contained contract terms (apart from the warranty) and, thus, did not create a valid contract under California law with respect to the non-warranty terms in the booklet, such as the arbitration provision.

On appeal, Samsung relied on two lines of authority in arguing that the plaintiff’s failure to follow the booklet’s instructions to opt out of the arbitration provision after receiving the booklet constituted acceptance of the arbitration provision under California law. First, Samsung relied on cases enforcing “shrinkwrap” licenses, in which a customer accepts a software license by opening the plastic shrinkwrap on the outside of the package. See, e.g., Wall Data Inc. v. L.A. Cty. Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006).Second, Samsung relied on cases enforcing terms included in a product box provided to the customer. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997). Prior to the Ninth Circuit panel’s ruling in this case, several district judges (including, most prominently, Judge Koh) had held that Samsung’s terms—including the arbitration provision—were enforceable under these precedents. The district court in this case took a different path.

The Ninth Circuit panel affirmed. It held that Samsung’s theories of contract formation ran afoul of California’s general contract rule that “an offeree’s silence does not constitute consent.” The panel’s holding was ultimately bound up with the facts of the case; the court concluded that Samsung failed to provide adequate notice of the terms for two reasons. First, “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.” Second, the brochure itself was labeled “Product Safety & Warranty Information,” which did not give consumers “adequate notice of [the] existence” of “freestanding [contractual] obligations outside the scope of the warranty.”

Although the panel did not decide whether shrinkwrap and terms-in-the-box contracts can ever be enforceable under California law, it stated that past decisions should not be read as adopting that view. The panel asserted that the Ninth Circuit’s prior statement that shrinkwrap licenses “are enforceable in California” was merely dicta and “not free from doubt.” And the panel purported to distinguish a series of decisions from other courts—in California and elsewhere—that addressed terms-in-the-box contracts under California law as not in fact deciding whether California law recognizes this type of contract formation. In the panel’s view, the validity of terms-in-the-box contracts is, at best, an open question under California law and one that should be addressed to the “California Legislature.”

Finally, the panel rejected Samsung’s argument that it could avail itself of the plaintiff’s arbitration agreement with his wireless carrier (Verizon), because Samsung was neither a party to that agreement nor a third-party beneficiary of the agreement.

(In a companion unpublished memorandum, the same Ninth Circuit panel reversed Judge Koh’s decision enforcing Samsung’s arbitration provision.)

Analysis

To the extent that the opinion in Norcia suggests (albeit in dictum) that the commonplace practice of enclosing terms with product packaging is not effective under California law, that suggestion is disconcerting. It is a widely accepted reality of modern contracting that purchasers are bound by terms enclosed with products. Indeed, it would be impractical or impossible to require separate signed documents for the terms and conditions for each and every product sale, especially when products are sold by third-party retailers. And the panel’s attempt to recharacterize prior holdings recognizing the validity of this method of contract formation under California law as mere dicta is mistaken.

That said, the best reading of the panel’s opinion is that it does not purport to invalidate terms-in-the-box contracts across the board as a matter of California law. To begin with, the panel emphasized that the plaintiff had not been provided adequate notice of Samsung’s arbitration provision. The panel noted that neither the box containing the Samsung phone nor the front cover of the Product Safety and Warranty Information booklet indicated that the booklet contained additional contract terms. Businesses that provide better disclosures to customers of the existence of additional terms and conditions enclosed with a product will be better positioned to argue that those terms are enforceable.

Moreover, the panel recognized that there are several valid exceptions to what it termed California’s rule that silence does not constitute acceptance of an offer.

First, the panel noted that a purchaser’s “silence may be deemed to be consent to a contract” when he or she “has a duty to respond to an offer and fails to act in the face of that duty.” The panel gave the example of an employee who signs an acknowledgment that “his silence, or failure to opt out” constitutes acceptance of an arbitration agreement. In addition, the panel also cited approvingly California decisions observing more generally that the “circumstances or the previous course of dealing between the parties” may allow “silence or inactivity [to] constitute * * * assent.” Beatty Safway Scaffold v. Skrable, 180 Cal. App. 2d 650, 655 (1960).

Second, the panel acknowledged that “[a]cceptance of an offer may be inferred” from the buyer’s “retention of the benefit offered.” The panel held that Samsung could not qualify for this exception because purchasers were free to keep the phone even if they opted out of the arbitration provision. By contrast, many businesses will be able to argue that the purchaser’s failure to return the product constitutes “retention of the benefit offered.”

Third, the panel conceded that California permits enforcement of language in warranty agreements enclosed with products. The panel reasoned that only sellers are bound by written warranties. Nonetheless, the panel acknowledged that if the plaintiff had instead raised warranty claims, “Samsung may be able to require [the plaintiff] to arbitrate” those warranty claims because purchasers seeking to enforce warranties can be required to fulfill conditions to obtain the benefit of a warranty.

Despite these limitations in the panel’s holding, plaintiffs are likely to argue that the decision calls many terms-in-the-box contracts into doubt under California law. Because of the risk that plaintiffs will succeed in pressing those arguments, businesses might choose to reconsider the manner in which they form contracts with customers to increase the likelihood that their terms will be enforceable nationwide. One tried and true (albeit more burdensome) alternative to terms-in-the-box is to obtain customers’ affirmative consent to contract terms, such as in product-registration processes or other interactions with purchasers. And businesses that continue to use terms-in-the-box (for example, when it is not practical to use an alternative) would be better served by including more prominent disclosures of the availability of contract terms on product packaging.

Authors

  • Evan M. Tager
    T +1 202 263 3240
  • Archis A. Parasharami
    T +1 202 263 3328
  • Kevin S. Ranlett
    T +1 202 263 3217
  • Daniel E. Jones
    T +1 202 263 3860
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