Appeals Court Says Samsung Can’t Use In-Box Warranty Booklet To Strip Customers Of Legal Rights

Image courtesy of Kārlis Dambrāns

Last week, we used the example of a Stormtrooper Snuggie to show how easy it is for companies to take away customers’ constitutional rights with just a slip of paper placed inside the box. Now a federal appeals court has ruled that Samsung can’t use an in-the-box warranty booklet to derail a class-action lawsuit.

We actually mentioned this case — Norcia v. Samsung — in that Snuggie piece. It involves allegations from customers that Samsung falsely advertised about the speed, performance, and memory capacity of the Galaxy S4.

Samsung tried to force this lawsuit out of the court system by compelling it into private arbitration. The company argued that Mr. Norcia was bound by a forced arbitration clause included in the warranty booklet of his S4.

If successful, not only would Mr. Norcia’s case be taken out of the court system, but he would be forbidden from representing any other S4 owner with a similar complaint. Thus, every individual S4 owner with a gripe would have to enter into the arbitration process.

Norcia countered that he purchased his phone at a Verizon store, where an employee unboxed the device and set it up for him, and that he didn’t take the packaging — including the warranty booklet — with him when he left.

In 2014, a U.S. District Court in California disagreed with Samsung, ruling that the case could move forward because Samsung’s warranty booklet was not sufficient notice that the customer was passively agreeing to this arbitration clause.

Samsung appealed that ruling to the Ninth Circuit, which heard oral arguments from both sides last October:

Samsung’s Failed Appeal

In trying to make its case for why this lawsuit should be broken up, Samsung argued that the presence of the warranty booklet created the binding contract between Norcia and the company. After all, the company explained, Samsung is bound by the warranty whether or not the customer is aware of it.

Yet, as members of the three-judge appellate panel pointed out during oral arguments, a manufacturer’s warranty is effectively a one-way street; the customer need not actively agree to the warranty because the customer isn’t the one replacing or repairing a defective product.

“Language in a written warranty agreement is ‘contractual’ in the sense that it creates binding, legal obligations on the seller, but a warranty does not impose binding obligations on the buyer,” the Ninth Circuit explains in its unanimous ruling [PDF].

Additionally, says the panel, warranty laws don’t apply to the Samsung arbitration agreement because the clause explicitly applies not just to warranty issues but to all disputes arising from “the sale, condition or performance” of the device.

That makes it an issue of contract law, says the Ninth Circuit, and in California — where Mr. Norcia purchased his phone — courts have generally held that “silence or inaction does not constitute acceptance of an offer.”

One of the few exceptions to this rule is when the consumer continues to receive a benefit from that contract despite their inaction.

“Samsung has not pointed to any principle of California law that imposed a duty on Norcia to act in response to receiving the Product Safety & Warranty Information brochure,” explains the court. “Moreover, Samsung has not alleged that Norcia retained any benefit by failing to act. Indeed, the brochure states that Norcia was entitled to ‘the benefits of the Limited Warranty’ regardless whether Norcia opted out of the arbitration agreement.”

Samsung also tried to claim that there was no difference between its in-the-box warranty booklet and so-called “shrink wrap” agreements that the Ninth Circuit had previously upheld as binding. The company pointed to a case involving a software company that had placed a notice on the outside of the box, under the shrink wrap, alerting customers that opening the package meant they were agreeing to the license.

However, the Ninth Circuit concluded that the two situations were not really analogous.

“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,” explains the ruling.

Samsung’s final argument involves the fact that Mr. Norcia signed a “Customer Agreement” with Verizon Wireless that includes an arbitration agreement.

The Ninth Circuit judges pointed out the obvious problem with this contention: “Samsung is not a signatory. While the agreement itself includes a number of terms governing the relationship between Norcia and Verizon Wireless, including an arbitration provision, nothing in the agreement references Samsung or any other party.”

Samsung still maintained that it should be able to compel arbitration as a third-party beneficiary to this agreement, but the court said the company provided no evidence showing that “Verizon Wireless intended the Customer Agreement to benefit Samsung.”

And so the case is allowed to move forward, though Samsung could appeal the matter even higher up the ladder to the U.S. Supreme Court.

When reached for comment by Consumerist, Samsung declined to issue a statement on the ruling or answer our question about whether the company plans to appeal the arbitration issue.