On January 19, 2017, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Norcia v. Samsung Telecommunications America, LLC in which it provided guidance on the enforceability of arbitration agreements in consumer terms. The decision addresses a threshold level of notice that companies must provide and the requisite assent that they must receive in order to enforce these agreements.

Subsequently, Samsung filed a motion for a panel or en banc rehearing with the Ninth Circuit, suggesting that the decision has created an unworkable rule that will result in tremendous uncertainty. On February 27, 2017, the panel unanimously voted to deny Samsung’s petition for rehearing.

Background

In 2011, the U.S. Supreme Court held in AT&T Mobility v. Concepcion that the Federal Arbitration Act preempted any state law rules prohibiting class action waivers obtained as part of an arbitration agreement.¹ Since this decision, many companies have used class action waivers in conjunction with arbitration agreements to reduce the risk of lengthy and expensive litigation, having grown more confident that they will be upheld in the event of a legal challenge. However, courts will still invalidate arbitration agreements on procedural grounds if the consumer did not receive adequate notice or manifest assent to the agreement. This was the case in Norcia v. Samsung Telecommunications America, LLC.

Norcia v. Samsung Telecommunications America, LLC²

In Samsung Telecommunications, Daniel Norcia purchased a Samsung Galaxy S4 phone at a Verizon Wireless store. During the payment process, Norcia signed a receipt entitled “Customer Agreement,” followed by the name and address of the Verizon Wireless store. This receipt included the product identification number; a statement that read (in all capital letters) “I AGREE TO THE CURRENT VERIZON WIRELESS CUSTOMER AGREEMENT...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”; and a reference to “WAR6002 1 YR. MFG. WARRANTY.”³ The receipt also contained an agreement to arbitrate that read (in all capital letters) “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.”⁴ The receipt did not reference Samsung.

Following the purchase, Norcia and a Verizon employee took the phone, still in its sealed Samsung box, to a table where they opened the box and unpacked the materials. The front of the product box stated “Samsung Galaxy S4” and the back stated “Package contains...product safety and warranty brochure.”⁵ As he left the store, Norcia took his new phone, phone charger, and headphones with him, but declined to take the box and the rest of its contents, including the 101-page “Product Safety & Warranty Information” brochure. The warranty section of this brochure contained a provision to settle disputes through binding arbitration.⁶

Norcia later filed a class action suit against Samsung, alleging that Samsung misrepresented aspects of the phone.⁷ In response, Samsung moved to compel arbitration. The district court denied this motion, stating that the consumer’s receipt of the brochure did not form an agreement to arbitrate. Samsung appealed the court’s order, but the Ninth Circuit upheld the decision.⁸

The Ninth Circuit’s Analysis

Basing its decision on California contract law, the Ninth Circuit stated that “Because Norcia did not give any ‘outward manifestations of consent [that] would lead a reasonable person to believe the offeree has assented to the agreement,’ no contract was formed between Norcia and Samsung, and Norcia is not bound by the arbitration provision contained in the brochure.”⁹ The court pointed to the premise that “silence or inaction does not constitute acceptance of an offer.”¹⁰ While few exceptions to this concept exist, including that 1) silence may be deemed consent when the offeree has a duty to respond to an offer and fails to act in the face of this duty, and 2) silence may be treated as consent to a contract when the party retains the benefit offered,”¹¹ these exceptions did not apply here. Norcia was under no duty to respond, nor did he retain any benefit by remaining silent, as the brochure stated that he would be entitled to the benefits of the warranty regardless of whether he opted out of arbitration.¹²

While Samsung attempted to counter the court’s conclusion by arguing that the arbitration provision should be enforced either as analogous to a shrink-wrap license or as an “in-the-box contract,” it did not succeed. With regard to the shrink-wrap license analogy, the Ninth Circuit stated that “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.”¹³ With regard to the in-the-box contract analogy, the Ninth Circuit stated that “A reasonable person in Norcia’s position would not be on notice that the brochure contained a freestanding obligation outside the scope of the warranty.”¹⁴

Finally, the court rejected Samsung’s contention that Norcia agreed to arbitrate his claims by signing the Customer Agreement with Verizon Wireless, which incorporated the terms of the warranty agreement.¹⁵ Although the Customer Agreement included a number of terms governing the relationship between Norcia and Verizon Wireless, including an arbitration provision, the court concluded that the Customer Agreement was an agreement between Verizon Wireless and Norcia, not Samsung and Norcia. Further, Samsung failed to meet the burden of proving that it was a third-party beneficiary to the agreement, and Samsung did not proffer any other theory for enforcing the Verizon Customer Agreement, such as estoppel.¹⁶Accordingly, the Ninth Circuit declined to permit Samsung to enforce the arbitration agreement against Norcia.

Implications of the Samsung Telecommunications Decision

The Ninth Circuit’s decision demonstrates the necessity of providing conspicuous notice and obtaining unambiguous consent to arbitration agreements. Now more than ever, companies should evaluate their consumer consent mechanisms to maximize the chances for enforceability in a given situation for a particular product.

For more information about the Samsung Telecommunications decision, arbitration, or class action litigation, please contact a member of Wilson Sonsini Goodrich & Rosati's litigation department.