United States: Ninth Circuit Questions Validity Under California Law Of Contract Terms Enclosed With Products

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.

Originally published 27 January 2017

Learn more about our Supreme Court & Appellate and Consumer Litigation & Class Actions practices.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2017. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions