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Media Alerts - Norcia, et al. v. Samsung Telecommunications America, LLC - Ninth Circuit
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March 3, 2017
  Norcia, et al. v. Samsung Telecommunications America, LLC - Ninth Circuit
Headline: Ninth Circuit panel, applying California contract law, declined to enforce the arbitration provision in a brochure contained in a Samsung phone box's Product & Safety Warranty Information brochure, holding that California courts have not adopted the Seventh Circuit's view that arbitration clauses contained in in-the-box contracts are enforceable.

Areas of Law: Contract Law, Arbitration Clause, Warranty Law

Issues Presented: Whether an arbitration clause in a Product & Safety Warranty Information brochure included in the box of a phone created a binding contract between the phone purchaser and the phone manufacturer to arbitrate the purchaser's claim; and (2) whether a Customer Agreement signed by the product seller created a binding contract between the phone purchaser and the phone manufacturer to arbitrate the purchaser's claim.

Brief Summary: The Ninth Circuit panel affirmed the district court's order denying Samsung's motion to compel arbitration of a class action complaint alleging that Samsung made misrepresentations as to the performance of the Galaxy S4 phone. Samsung moved to compel arbitration of the dispute on the ground that an arbitration provision, contained in a warranty brochure in the Galaxy 4S box, was binding on plaintiff.

The panel applied California contract law and held that Samsung failed to demonstrate the applicability of any exception to the general California rule that an offeree's silence does not constitute consent. The panel further held that the brochure was not enforceable as an "in-the-box" contract ruling that, even if a customer may be bound by an in-the-box contract under certain circumstances, such a contract is ineffective where the brochure entitled "Product & Safety Warranty Information" did not give the purchaser notice that the brochure contained a freestanding obligation outside the scope of the warranty.

The panel also rejected Samsung's argument that the plaintiff agreed to arbitrate his claims by signing a Customer Agreement with Verizon Wireless. The panel concluded that Samsung failed to bear its burden of establishing that it was a third party beneficiary of the Customer Agreement, and therefore Samsung could not enforce the arbitration provision in the agreement.

Significance: Finding that California contract law has not adopted the Seventh Circuit's view that a brochure containing an arbitration clause is enforceable as an in-the-box contract, the Ninth Circuit panel concluded that an arbitration provision in a Product Safety & Warranty Information brochure was not enforceable because (1) the box it was contained in did not notify the consumer that opening the box would be considered agreement to the terms set forth in the brochure; and (2) the brochure would not have put a reasonable person on notice that the brochure contained a freestanding obligation outside the scope of the warranty.

Extended Summary: Plaintiff-Appellee Daniel Norcia ("Norcia") purchased a Samsung Galaxy S4 phone at a Verizon Wireless store. Upon purchasing the phone, a Verizon Wireless employee provided a receipt entitled "Customer Agreement." The receipt stated (in all capital letters), in pertinent part: "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 Customer Agreement did not reference Samsung or any other party. Norcia signed the Customer Agreement. Norcia left the store with the phone, the phone charger, and the headphones, but he declined the offer by the Verizon Wireless employee to take the box and the rest of its contents. The back of the Galaxy S4 box stated: "Package Contains . . . Product Safety & Warranty Brochure."

Section 2 of the "Product Safety & Warranty Information" brochure contained Samsung's "Standard Limited Warranty" and "End User License Agreement for Software." The warranty section included the following (in all capital letters): "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 court or jury." Further down Section 2 a paragraph explained the procedures for arbitration and stated that purchasers could opt out of the arbitration agreement by providing notice to Samsung within 30 calendar days of purchase, either through email or by calling a toll-free telephone number. Norcia did not take any steps to opt out.

Norcia filed a class action complaint against Samsung Telecommunications America, LLC, and Samsung Electronics America, Inc., (collectively, "Samsung"), alleging that Samsung misrepresented the Galaxy S4's storage capacity and rigged the phone to operate at a higher speed when it was being tested. The complaint sought certification of the case as a class action for all purchasers of the Galaxy S4 phone in California. Norcia did not bring any claims for breach of warranty.

Samsung moved to compel arbitration by invoking the arbitration provision in the Product Safety & Warranty Information brochure. The district court denied Samsung's motion, holding that even though Norcia should be deemed to have received the Galaxy S4 box, including the Product Safety & Warranty Information brochure, the receipt of the brochure did not form an agreement to arbitrate non-warranty claims. Samsung timely appealed the district court's order.

"[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986). Therefore, in order to evaluate the district court's denial of Samsung's motion to compel arbitration, the panel first determined "whether a valid agreement to arbitrate exists." Chiron Corp. v Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

Samsung raises two theories of contract formation to support its argument that Norcia entered into a binding contract with Samsung to arbitrate his claims. First, Samsung claims that the inclusion of the arbitration provision in the Product Safety & Warranty Information brochure created a valid contract between Samsung and Norcia to arbitrate all claims related to the Galaxy S4 phone. Second, Samsung contends that the Customer Agreement signed by Norcia incorporated the terms of its Product Safety & Warranty Information brochure by reference and created a binding contract between Norcia and Samsung.

Samsung's first argument that the arbitration provision in the Product Safety & Warranty Information brochure created a binding contract between Samsung and Norcia.

Here, contract law governed the panel's analysis, as Norcia's complaint involves a non-warranty dispute. "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." Cal. Com. Code § 2204(1). California courts have long held that "[a]n offer made to another, either orally or in writing, cannot be turned into an agreement because the person to whom it is made or sent makes no reply, even though the offer states that silence will be taken as consent, for the offerer cannot prescribe conditions of rejection so as to turn silence on the part of the offeree into acceptance." Leslie v. Brown Bros. Inc., 208 Cal. 606, 621 (1929).

There are exceptions to this rule, however. An offeree's silence may be deemed to be consent to a contract when the offeree has a duty to respond to an offer and fails to act in the face of this duty. Golden Eagle, 20 Cal. App. 4th at 1386 (1993). Additionally, an offeree's silence may also be treated as consent to a contract when the party retains the benefit offered. See Id.; see also Cal. Civ. Code § 1589. Even if there is an applicable exception to the general rule that silence does not constitute acceptance, courts have rejected the argument that an offeree's silence constitutes consent to a contract when the offeree reasonably did not know that an offer had been made. The court in Windsor Mills, Inc. v. Collins & Aikman Corp. held that "an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he was unaware, contained in a document whose contractual nature is not obvious." 25 Cal. App. 3d 993, 993 (1972).

Samsung failed to demonstrate the applicability of any exception to the general California rule that an offeree's silence does not constitute consent. 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," Knutson, 771 F.3d at 565, the panel concluded that no contract was formed between Norcia and Samsung, and Norcia is not bound by the arbitration provision contained in the brochure.

Samsung argued that Norcia was bound by the terms set forth in the brochure because the brochure is analogous to a shrink-wrap license, which was held enforceable in California, see Wall Data Inc. v. L.A. Cty. Sheriff's Dep't, 447 F.3d 769 (9th Cir. 2006). The court previously defined a "shrink-wrap license" as "a form on the packing or on the outside of the CD-ROM containing the software which states that by opening the packaging or CD-ROM wrapper, the user agrees to the terms of the license." Id. at 775. The panel held 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. Accordingly, Wall Data does not support Samsung's argument that Norcia was bound by the brochure contained in the Galaxy S4 box.

Samsung also argued that the terms set forth in the brochure are analogous to terms included in a box sent to the consumer (an "in-the-box" contract), which the Seventh Circuit has also held to be enforceable in Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997). Samsung claimed that California courts have adopted the reasoning expressed in Hill, citing Weinstat v. Dentsply International Inc., 180 Cal. App. 4th 1213 (2010). However, Samsung misapplied Weinstat, as the case focused on warranty formation under section 2313 of the California Commercial Code, not on contract formation. Accordingly, Weinstat did not adopt the rule stated in Hill, that statements in a brochure enclosed in a product box create a contract between the seller and the consumer that can limit the consumer's rights to bring legal actions against the manufacturer for claims involving an express warranty.

Samsung also relied on a Second Circuit case, Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012), to support its argument that California courts have adopted the reasoning in Hill for enforcing in-the-box contracts. Schnabel noted that holding licenses in a product box as enforceable contracts "do[es] not nullify the requirement that a consumer be on notice of the existence of a term before he or she can be legally held to have assented to it." Id. at 24. The panel held that the information provided in Samsung's brochure would not have put a reasonable person in Norcia's position on notice that the brochure contained a freestanding obligation outside the scope of the warranty. Nor would a reasonable person understand that receiving the seller's warranty and failing to opt out of an arbitration provision contained within the warranty constituted assent to a provision requiring arbitration of all claims against the seller, including claims not involving the warranty. Samsung's inclusion of a brochure in the Galaxy S4 box, and Norcia's failure to opt out, does not make the arbitration provision enforceable against Norcia.

Samsung's second argument that the Customer Agreement signed by Norcia created a binding contract between Norcia and Samsung.

The Customer Agreement was an agreement between Verizon Wireless and its customer. Samsung was not a signatory. Samsung argued that it may enforce the arbitration agreement because it is a third-party beneficiary of the agreement, however, the parties to the contact must have intended the third party to benefit and Samsung did not point to any evidence in the record indicating that Norcia and Verizon Wireless intended the Customer Agreement to benefit Samsung. Samsung failed to meet its burden of establishing that it was a third-party beneficiary.

The district court's order denying Samsung's motion to compel arbitration of a class action was affirmed.

To read the full opinion, please visit:

http://cdn.ca9.uscourts.gov/da...017/01/19/14-16994.pdf

Panel: Sidney R. Thomas, Chief Judge, and Carlos T. Bea and Sandra S. Ikuta, Circuit Judges.

Argument Date: October 17, 2016

Date of Issued Opinion: January 19, 2016

Docket Number: 3:14-cv-00582-JD

Decided: Affirmed

Case Alert Author: Brandon Homan

Counsel: John R. Hurley (argued), Eduardo G. Roy, Daniel C. Quintero, and Jill Dessalines, Prometheus Partners L.L.P., San Francisco, California, for Plaintiff-Appellee. Sean D. Unger (argued), John P. Phillips, and Ryan C. Nier, Paul Hastings LLP, San Francisco, California, for Defendants-Appellants.

Author of Opinion: Circuit Judge Sandra S. Ikuta

Circuit: Ninth

Case Alert Supervisor: Professor Glenn Koppel

    Posted By: Glenn Koppel @ 03/03/2017 06:42 PM     9th Circuit  

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