Related Practices

In-the-Box Agreements: Samsung Case Illustrates Pitfalls of Compelling Contractual Arbitration

On January 19, 2017, the Ninth Circuit Court of Appeals issued an opinion examining contract formation under California law in the context of enforcing an arbitration provision contained in an in-the-box agreement.  (Norcia v. Samsung Telecommunications America, LLC, No. 14-16994.)
The case arose out of the purchase of a Samsung Galaxy S4 phone from Verizon Wireless by the plaintiff, who signed a Customer Agreement with Verizon Wireless.   The Customer Agreement explicitly stated that the plaintiff agreed to the settlement of disputes by arbitration.   On the other hand, Samsung did not have a signed agreement with the plaintiff.  Rather, the box that the Samsung phone came in contained a "Product Safety & Warranty Information" brochure (the "Brochure").  The Brochure contained a limited warranty with language that disputes shall be resolved through arbitration.  The plaintiff filed a class action against Samsung, alleging violation of various California consumer laws.   Samsung in turn moved to compel arbitration by invoking the arbitration provision in the Brochure.  The lower court denied Samsung's motion, holding that the "receipt of the brochure did not form an agreement to arbitrate non-warranty claims."
The Ninth Circuit affirmed the lower court's ruling.  The Ninth Circuit's opinion examined if there was a valid agreement between Samsung and the plaintiff because arbitration is a matter of contract and a party cannot be required to arbitrate where there is no agreement to do so.  Under California law, the essential elements for a contract include:  (1) parties capable of contracting; (2) the parties' consent; (3) a "lawful object;" and (4) consideration.  In applying this law, the Ninth Circuit disagreed with Samsung's position that the Brochure created a binding contract to arbitrate all disputes related to the phone.  The Ninth Circuit found that the consumer did not expressly consent to any agreement in the Brochure or otherwise act in a manner that would show his silence meant he was accepting the arbitration agreement.  The Ninth Circuit also rejected Samsung's argument that Customer Agreement between the plaintiff and Verizon Wireless created a binding contract between the plaintiff and Samsung by incorporating the Brochure by reference.  The Ninth Circuit concluded that Samsung was neither a signatory nor a third party beneficiary to the Customer Agreement with Verizon.  
The Ninth Circuit's analysis provides a good overview of the essential elements for contract formation in California, and illustrates the pitfalls of in-the-box agreements. 
For more information about this case, or for more information about the intricacies of contract formation, please click here.