Validity of Arbitration Agreement

The high courts of two states have allowed non-signatories to compel arbitration in recent weeks.  The cases show courts are addressing non-signatory issues using different standards and raise important drafting issues for joint ventures and business affiliates.

In Locklear Automotive Group, Inc. v. Hubbard, 2017 WL 4324852 (Alabama Sept. 29, 2017), the Supreme Court of Alabama found most of the claims against the non-signatory must be arbitrated.  [But before we get into the merits, I have to ask: what the heck is going on in Alabama?  Is some plaintiffs’ lawyer trolling for cases against dealerships? This is the third arbitration case   involving claims against dealerships coming out of that state’s high court in the last two months!]  Seven plaintiffs brought separate actions alleging that personal financial information they provided the dealership was not safeguarded.  All seven plaintiffs were the victims of identity theft.  They sued the dealership’s LLC, as well as the corporate entity which is the sole member of that LLC (the non-signatory).

Each plaintiff had at some point signed an arbitration agreement with the dealership, but not with the non-signatory.  The court separated plaintiffs into three groups.  The first group, made up of five plaintiffs, established that defendants had waived any argument to enforce the delegation clause at the trial court.  However, the non-signatory was able to compel arbitration with this group using an estoppel theory because: a) the language of the arbitration agreement was not limited to disputes between the signing parties; and b) the claims against the non-signatory were intertwined with the claims against the dealership.  The second group involved a single plaintiff, against whom the non-signatory had preserved its delegation argument.  Therefore the court enforced the delegation clause, sending the issue of arbitrability to an arbitrator.  Finally, in the third group, the court refused to compel arbitration of a plaintiff’s claims because the signed arbitration agreement related to a previous purchase, not the credit application that resulted in identity theft.

West Virginia reached a similar result, albeit through a different analysis, in Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. October 6, 2017).  In that case, Bluestem (aka Fingerhut) had teamed up with banks to offer credit to its customers for Fingerhut purchases.  The credit agreements between the banks and consumers called for arbitration of any disputes.  In response to a credit collection case, Ms. Shade (such a great name for a plaintiff alleging bad deeds) claimed that Bluestem violated West Virginia law with its credit program.  Ms. Shade did not assert claims against the banks.  When Bluestem moved to compel arbitration under the “alternative estoppel” theory, the court held that it could compel arbitration if “the signatory’s claims make reference to, presume the existence of, or otherwise rely on the written agreement.”  (Note that W. Va. did not require the language of the arbitration agreement to encompass more than the signing parties, like Alabama above.)  The court found that Ms. Shade’s claims all were “predicated upon the existence of the credit” agreement, so it was appropriate to compel arbitration of the claims.

So, we have two high courts applying different standards for estoppel.  And we have the Bluestem case reaching the oppose result of a recent federal court in a very similar factual circumstance (the Sunoco case, involving jointly marketed credit cards).  This leaves less than clear guidance for lawyers who are trying to craft arbitration agreements that can stick, no matter the type of case, or who the plaintiff is that is attacking the product.

In January of 2016, SCOTUS granted review of an arbitration case from Hawaii, but summarily vacated and remanded it without analysis.  (Unless you consider “Please read DIRECTV” substantive analysis.)  Here’s the risk of that course of action: Hawaii can refuse to change its mind.

Last month, in Narayan v. The Ritz-Carlton Development Co., 2017 WL 3013022 (Haw. July 14, 2017), Hawaii affirmed its decision after considering DIRECTV.  The case related to whether purchasers of new condominiums could sue the developers over their abandonment of the project.  The developers moved to compel arbitration based on an arbitration clause within the Declaration for the condo project, because the Declaration was incorporated into the plaintiffs’ purchase agreement.  In 2015, Hawaii’s highest court found the parties had not clearly agreed to arbitrate and portions of the arbitration clause were unconscionable.

Two years later, after a forced reconsideration, the court dropped its analysis of whether the arbitration agreement was validly formed (smart decision, given that it was on the shakiest ground, and given Kindred’s statement that FAA preempts formation decisions that disfavor arbitration).  Instead, it focused exclusively on unconscionability.  It found the arbitration clause both procedurally and substantively unconscionable (noting “severe” discovery limitations), and added more state case law to support those findings.  Amusingly, it also cited to two other state supreme courts which have affirmed their arbitration decisions on unconscionability after receiving a “GVR” from SCOTUS GVR: West Virginia and Missouri. (As if to say: You let those other kids off the hook!)

Speaking of SCOTUS and arbitration, two updates of note:

  • Mark your calendars; SCOTUS will hear argument in the cases regarding whether the NLRB can preclude class waivers on October 2.  Even so, the federal appellate courts keep issuing decisions on both sides of this issue.  E.g. NLRB v. Alternative Entertainment, 2017 WL 2297620 (6th Cir. May 26, 2017) (enforcing NLRB order); Convergys Corp. v. NLRB, 2017 WL 3381432 (5th Cir. Aug. 7, 2017) (rejecting NLRB position); Logisticare Solutions Inc. v. NLRB, 2017 WL 3404648 (5th Cir. Aug. 9, 2017) (rejecting NLRB position).
  • Physicians from Florida are asking SCOTUS to grant certiorari in a case about the regulation of doctor-patient arbitration clauses.  If you know of other arbitration cases in the pipeline, let me know.
  • An employer from California is asking SCOTUS to grant certiorari in this case regarding when courts should review interim arbitration awards. [Ed note: this final bullet was not in the original post, but was added after a thoughtful reader alerted me to it.]

The Federal Arbitration Act has been in effect for nearly 100 years (92, to be precise).  Nevertheless, the First Circuit found two issues of first impression to address this month.  In Oliveira v. New Prime, Inc., 2017 WL 1963461 (1st Cir. May 12, 2017), the court refused to compel arbitration of a class action complaint, because it interpreted Section One of the FAA to exempt contracts for independent transportation contractors.

Mr. Oliveira brought a putative class action suit against the interstate trucking company for which he worked–Prime–for violating the Fair Labor Standards Act, Missouri minimum wage statute, and other labor laws.  Prime moved to compel arbitration under the FAA.  In response, Plaintiffs argued that the FAA had no application to their contracts because they are transportation workers. Prime argued that that issue–the applicability of the FAA–should be decided by an arbitrator.  Furthermore, it argued that the FAA does not exempt independent contractors and these workers had been classified as independent contractors.  The district court agreed it must decide the threshold question, but then ordered discovery on the question of whether the named plaintiff was an independent contractor.

On appeal, the First Circuit decided to tackle both the tough legal issues head on, and not wait to see if discovery mooted either of them.

First, it analyzed whether an arbitrator or a court should decide whether the FAA applies to a plaintiff’s contract.  It noted that the 8th Circuit had concluded an arbitrator should decide, while the 9th Circuit had concluded a court should decide.  Finding the 9th Circuit’s analysis more persuasive, it held that “the question of whether the [Section] 1 exemption applies is an antecedent determination that must be made by the district court before arbitration can be compelled under the FAA.”

Second, it interpreted the language in Section 1 in order to answer the question of whether the exemption “extends to transportation-worker agreements that establish or purport to establish independent-contractor relationships.”  (Recall that the truckers were arguing they were exempt from the FAA, whether they were independent contractors or not.)  The FAA says it does not apply to “contracts of …any other class of workers engaged in foreign or interstate commerce,” and the Supreme Court interpreted that language in 2001 to mean that “contracts of employment of transportation workers” are exempted from the FAA.  After noting that multiple courts have found the exemption does not extend to independent contractor relationships, the First Circuit brushed that aside with this gem: “Interpreting a federal statute is not simply a numbers game.”

Instead of playing a numbers game, the First Circuit played a “pull out the antique dictionary” game.  It looked at definitions of contracts of employment from 1925, when the FAA was enacted, and concluded the phrase means any agreement to perform work, and is broad enough to include independent contracting.  Therefore, because Prime had conceded Mr. Oliveira was a transportation worker, “the contract in this case is excluded from the FAA’s reach.”

However, the court inserted a footnote allowing that a state arbitration act may provide a basis to compel arbitration in a future scenario like this one. . . which raises interesting preemption issues.

Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning.  The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.

The Kentucky decision can be summarized easily.  The case  involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents.  In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home.  However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.  (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude.  If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)

Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act.  “[T]he court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.”  In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”

That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied.  (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)

The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts.  New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.)  Those NJ decisions are now shaky precedent, IMHO.

The decision then went beyond the basic preemption analysis.  Respondents had argued the FAA had no application to contract formation, that only state law controlled that question.  SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements.  (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA.  (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity  distinction used to separate which issues are decided in court and which by arbitrators.)

[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]

It is not uncommon for lenders to exempt small claims actions from their arbitration provisions. The question confronted by the Court of Appeals of Maryland in a recent case was: when a lender opts for small claims court, does that waive any later right to enforce the arbitration clause?  The court’s answer was yes, if the claims are related.

In Cain v. Midland Funding, LLC, __ A.3d__, 2017 WL 1101804 (Md. Mar. 24, 2017), the lender pursued its collection action against the credit card holder in small claims court in 2009.  It obtained a default judgment for $4,520.  In 2013, that same credit card holder filed a class action complaint against the lender, arguing the lender had been an unlicensed collection agency. The lender moved to compel arbitration.  The trial court compelled arbitration, finding the lender had not waived its right to arbitrate by bringing the 2009 case, and the intermediate appellate court agreed.

A five-member majority of Maryland’s highest court applied a de novo standard of review and reversed on the issue of waiver (two judges dissented).  It applied Maryland case law that holds participating in a judicial proceeding only constitutes a waiver of the right to arbitrate issues raised in that proceeding, but not “unrelated issues.”  Therefore, the court looked at whether the lender could have arbitrated its collection action, and if so, whether that was related to the licensing issue raised in 2013.

The arbitration agreement at issue states that “claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual. . . Claim.” The court found that language, along with the broad language that “all Claims . . . are subject to arbitration,” gave the lender the choice to litigate or arbitrate the collection issue.

The court also found the 2009 and 2013 claims were sufficiently related to apply the waiver doctrine. “Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist.”  The majority noted that 2016 cases from both Nevada and Utah had reached similar conclusions.  Finally, the court refused to require a showing of prejudice: “Cain does not have to demonstrate that he will suffer prejudice if the arbitration clause is enforced.”

This issue is an important one for lending institutions. If the small claims court option is generally efficient, it may be worthwhile adding a clause to those arbitration provisions that pursuit of a claim in small claims court does not waive the right to raise arbitration as a defense in any later action.


Maryland did not make my list of 5 states most hostile to arbitration last summer (and still wouldn’t). BUT, some of the states on that list have recently issued surprisingly pro arbitration decisions.  Check these out:

  • WEST VIRGINIA recently reversed a lower court’s refusal to enforce arbitration. It found the employee had failed to show the arbitration provision was unconscionable. It wasn’t all sunshine and arbitration butterflies, though.  One justice wrote a concurring opinion asking Congress to take action. “We can only hope that…Congress will implement better safeguards to the FAA to ensure that the legal rights of unsophisticated employees are protected.” Employee Resource Group, LLC v. Harless, 2017 WL 1371287 (W.Va. April 13, 2017).
  • WEST VIRGINIA also enforced an arbitration clause waiving class actions in Citizens Telecommunications Co. v. Sheridan, 2017 WL 1457006 (W.Va April 20, 2017). In that case, the class action waiver had been added via notice to all consumers pursuant to a modification clause in the original terms of the agreement. Because the new terms and conditions were distributed with a paper billing statement and “accepted” via continued use of the internet service, the court found they were a valid unilateral contract, just like an employee handbook. Therefore, the court enforced individual arbitration of the claims.
  • HAWAII confirmed an arbitration award in RT Import v. Torres, 2017 WL 1366999 (Ha. April 13, 2017), although reversed the trial court’s award of additional costs above the award. The court did get a jab in at arbitration in a footnote, though. It noted that the arbitrator awarded damages for emotional distress to a corporation. After commenting that there is no legal authority allowing such damages, the opinion states: “parties who submit their claims to binding arbitration assume all the hazards of the arbitration process, including the risk that the arbitrator may make mistakes in the application of law and in their findings of fact.”
  • ALABAMA found the arbitration agreement between a family and a funeral home was not unconscionable in Newell v. SCI Alabama Funeral Services, LLC, 2017 WL 1034469 (March 17, 2017).

I really should have titled this post “State Court Smorgasbord”…

Demonstrating just how difficult it can be to separate questions about the “formation” of an arbitration agreement from the “validity” of that agreement, the Fifth Circuit found this month that when an argument was applied to two of the parties’ three agreements, it related to their formation, but when the same argument was applied to the third agreement, it related to its validity.

In Lefoldt v. Horne, 2017 WL 1326241 (5th Cir. April 11, 2017), the plaintiff, a community hospital, had engaged the defendant to provide auditing services.  The parties signed contracts in 2009, 2010, and 2012.  However, only the 2009 agreement was reflected in the minutes of the hospital’s board.  In 2014, the hospital filed for bankruptcy, and its trustee sued the auditor for professional malpractice.  In response, the auditor moved to compel arbitration, based on arbitration provisions in all three contracts.

In order to determine whether the dispute was arbitrable, the Fifth Circuit had to confront two confounding rules. First was Mississippi’s “minutes rule,” which the hospital raised as a defense to arbitrability.  The “minutes rule” appears to require  that a public board reflect actions taken in the minutes of its meetings, and, if an agreement to contract is not reflected in those minutes, the contract is not enforceable.  The second issue the Fifth Circuit had to address was the first footnote in SCOTUS’s Buckeye Check Cashing decision, which distinguished disputes over a contract’s validity from those over “whether any agreement between the alleged obligor and oblige was ever concluded.”  That matters because issues of validity can be sent to an arbitrator, which those over formation generally cannot.

The court found the issue of whether Mississippi’s “minutes rule” was one about formation or validity “a close question.” However, it concluded that the minutes rule raised an issue of the very formation of the 2010 and 2012 service contracts.  That decision allowed the court to decide whether those contracts were formed, and it found they were not validly formed, so the trustee did not have to arbitrate issues under those two contracts.

However, the court found that because the hospital board recorded the auditing contract in its 2009 minutes, the application of the “minutes rule” in that instance involved the validity of the 2009 contract. The court found an arbitrator should decide “whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause,” unless the district court finds a delegation clause on remand.

This case is a great example of how the current arbitration jurisprudence may have gotten off course.  Should it be this difficult for a court to decide whether a particular argument should be heard by a court or an arbitrator?  See my post from five years ago (has it really been that long?!) on the thin line between formation and validity.

One of the few “get out of arbitration free” cards that SCOTUS offers litigants is this: find another federal statute that clearly entitles plaintiff(s) to a court trial. In a recent 8th Circuit case, that court carefully considered, and then rejected, the argument that the Age Discrimination in Employment Act (ADEA) constituted that type of “get out of arbitration free” statute.

The claims in McLeod v. General Mills, Inc., 2017 WL 1363797 (8th Cir. Apr. 14, 2017), stem from a 2012 reduction in force at General Mills.  In exchange for severance packages, terminated employees released the company from claims relating to their termination, and agreed to individual arbitration of future disputes.  In McLeod, 33 of those employees sued the company alleging violations of the ADEA.  In response, the company moved to compel arbitration on an individual basis.

The Chief Judge of the District of Minnesota denied General Mills’ motion. He found that the plain language of the statute at issue “requires General Mills to defend the validity of the plaintiffs’ release agreements in court, not in an arbitral forum.” The statute reads: “any dispute that may arise over whether any of the requirements, conditions, and circumstances set forth in [Section 626(f)(1) ] have been met, the party asserting the validity of a waiver shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.” 29 U.S.C. § 626(f)(3) (emphasis added).

On appeal, the Eighth Circuit reversed. It found that the statute relied upon by the district court was not applicable, because General Mills was not asserting the validity of a waiver within the meaning of that statute.  Furthermore, the Eighth Circuit concluded that the ADEA does not grant employees the substantive right to a jury trial or to a class action, but only provides procedural rights that can be waived.

**Yikes – three weeks since my last post. Where was I?  In arbitration of course!

Now that Justice Gorsuch is confirmed and can take the open seat on the Supreme Court, maybe SCOTUS can move forward on the cases about whether employers can make employees waive their right to class actions in an arbitration agreement.  (Btw, here’s a nice SCOTUSblog piece on Gorsuch’s arbitration decisions.)  In the meantime, California’s high court has decided a similar arbitration issue that seems likely to be the subject of a future cert petition.  In McGill v. Citibank, issued April 6, a unanimous California Supreme Court held that consumers cannot validly waive their statutory right to injunctive relief under California law, and found that the FAA did not preempt that result.

The case involves a woman who purchased a “credit protector” plan from the credit card issuer.  She felt the credit card did not keep its end of the bargain when she lost her job.  Although she had agreed to arbitrate claims and had waived representative or class actions, she started a putative class action in California state court alleging violations of multiple California consumer statutes.  Part of the relief she sought was an injunction preventing the credit card from continuing to violate California statutes.  (The parties agreed that the arbitration waiver prohibited the consumer from obtaining injunctive relief in any forum, not just arbitration.)

Each of the statutes at issue in her lawsuit was intended to protect consumers and each authorized injunctive relief.  One of the statutes also explicitly prohibited waiver of the statutory protections.  The Consumers Legal Remedies Act (CLRA), for example, declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.”

California has codified the following contractual defense: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Civil Code Section 3513.)  Applying that doctrine in this case, California’s high court found the waiver of public injunctive relief in the arbitration agreement invalid, as it “would seriously compromise the public purposes the statutes were intended to serve.”

Now comes the tricky part of every state court opinion in this area.  Having found the arbitration agreement invalid under state law, how will the court clear the hurdles of the FAA and Concepcion/DirecTV?  The McGill opinion took the standard path: it reasoned that because the contractual defense at issue applies to every contract, this decision withstands FAA scrutiny.  (It did not, however, cite any cases in which this defense has been applied outside the arbitration context, which I believe is the unstated requirement of DirecTV.)

Furthermore, the court found reasons to distinguish the banning of class action waivers (prohibited in Concepcion) from the banning of public injunction waivers (at issue here).  For example, it noted class actions are a procedural device, while injunctions are substantive remedies.  It also found that its ruling would not interfere with the fundamental arbitration-ness of arbitration, because the injunctive relief cases will stay in court and can be heard once individual arbitrations are concluded.

Finally, the California high court remanded to the lower court to decide whether the rest of the arbitration clause should be thrown out with the bath water.  (There was conflicting language in the agreement.)

Ah, just when I worried California arbitration decisions were becoming too staid and dull…


In the past week, the Third Circuit has issued two important decisions on the formation of arbitration agreements.  (Sing it Beyoncé! “Okay ladies, now let’s get in formation.”)  In one, a class action was allowed to proceed in court because the defendant did not obtain explicit enough agreement to the arbitration, and in another an arbitration award was initially vacated due to questions about whether there had been an arbitration agreement at all.

In James v. Global Tellink Corp., __ F.3d __, 2017 WL 1160893 (3d Cir. Mar. 29, 2017), a putative class of New Jersey inmates sued the sole provider of inmate telecommunication services, and the Defendant moved to compel individual arbitration.  The class representative who created her account through the website and actively clicked a button accepting the terms and services was dismissed.  But, the class representatives who had created accounts by telephone were a different story.  They received an audio notice that “your account…[is] governed by the terms of use at [defendant’s website].”  The system did not require those telephone users to take any affirmative step to indicate consent to the terms.

As a result, the district court refused to compel those telephone members of the class to arbitration and the Third Circuit affirmed.  Applying New Jersey law, the court distinguished this situation from those involving on-line services, where a link is easily accessible to terms, and from shrinkwrap cases, where consumer received physical copies of the terms when they open the product. It suggested the telephone situation may be closer to “browsewrap” agreements that do not require a manifestation of express consent, and which courts have refused to enforce if the terms are obscured.  In sum, the court said the telephone users “neither received GTL’s terms of use, nor were they informed that merely using GTL’s telephone service would constitute assent to those terms” and therefore there was no arbitration agreement to enforce.

In Aliments Krispy Kernels, Inc. v. Nichols Farms, __ F.3d __, 2017 WL 1055569 (3d Cir. Mar. 21, 2017), Aliments was attempting to confirm an arbitration award it received, and Nichols Farms was trying to vacate that award.  Aliments and Nichols had exchanged some sales confirmations to purchase pistachios, none of which were signed.  However, Nichols ended up refusing to deliver the pistachios without advance payment, based on Aliments’ credit application.  Aliments bought elsewhere, and then sought to recoup the extra cost from Nichols at arbitration (in which Nichols refused to participate).  In the action to confirm or vacate the award, the district court allowed months of discovery and then vacated the award, finding no genuine issue of fact on that issue.  On appeal, the Third Circuit vacated and remanded for further proceedings.  In the course of its decision, the Third Circuit noted that its previous expressed standard — that there must be express and unequivocal agreement to an arbitration contract — is outdated and that nothing more than relevant state law on contract formation is required.

Two federal circuit courts of appeals have recently found that documents Samsung included in boxes with consumer products did not effectively create an arbitration agreement.   In both cases, the documents had titles indicating they related to safety and warranty information, and therefore were ruled insufficient to put consumers on notice of any obligation to arbitrate.

In Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017), the putative class action complained that the battery life of the Samsung Galaxy Gear S Smartwatch was significantly less than advertised.  In response, Samsung moved to compel individual arbitration with the class representative and to dismiss the class action.  Samsung relied on an arbitration clause, including a class waiver, contained on pages 97-102 of a “Health and Safety and Warranty Guide” that was packaged in the box with the watch.  The district court denied the motion to compel and the Third Circuit affirmed.  Critically, the appellate court found that under New Jersey state law, there had been no meeting of the minds with respect to arbitration, because the Warranty Guide “did not appear to be a bilateral contract, and the terms were buried in a manner that gave no hint to a consumer that an arbitration provision was within.”  The court distinguished this case from enforceable shrink-wrap or click-wrap agreements by saying those agreements clearly inform consumers that they contain contractual terms.

Just a few weeks earlier, the Ninth Circuit had reached a similar result with regard to Samsung’s ability to compel arbitration of class claims about its phones.  In Norcia v. Samsung Telecommunications America, LLC, 2017 WL 218027 (9th Cir. Jan. 19, 2017), the putative class complained of misrepresentations regarding the Galaxy S4 phone.  Samsung moved to compel arbitration.  The district court denied the motion, and the Ninth Circuit affirmed.  Mr. Norcia’s receipt from the Verizon Wireless store stated “I am agreeing to …settlement of disputes by arbitration and other means instead of jury trials and other important terms in the Customer Agreement.”  But the Customer Agreement only mentioned Verizon Wireless, so Samsung could not avail itself of that language.  Inside the phone’s box was a 101-page brochure called “Product Safety & Warranty Information,” which included a statement that “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.”

Applying California contract law, the court found that the consumer did not express any consent to the terms in the Warranty brochure.  And, while silence can in some instances be treated as consent to a contract, the court noted that is not true when the silent person did not reasonably know there was an offer on the table.  The Ninth Circuit also distinguished shrink-wrap and click-wrap cases, by saying the outside of the Galaxy S4 box “did not notify the consumer that opening the box would be considered agreement to the terms” in the brochure and finding that in this instance the customers did not have “inquiry notice of the arbitration provision”.

The issue of whether arbitration clauses within warranty documents packaged with consumer products are enforceable is an issue in a petition for certiorari at SCOTUS right now.  In that case, the manufacturer of roofing shingles printed its warranty on the wrapper of every bundle of shingles, and the warranty included an arbitration clause.  The Missouri Court of Appeals found insufficient evidence that the consumers consented to the arbitration clause and therefore refused to enforce it.  SCOTUS appears to be holding that case in abeyance while it decides the Kindred case.

What are manufacturers of consumer products to do with these cases?  If the goods are sold by third parties, such that the manufacturer cannot get its arbitration terms on the receipt itself, the next best thing may be to put clear language on the outside of the box, informing consumers that if they open and keep the goods, they will be agreeing to the terms of X document.  If nothing else, it sounds like these brochures and guides need to be renamed.