March 30, 2017 Practice Points

Third Circuit Emphasizes the Need to Provide Reasonable Notice of Arbitration Clauses

The case involves an unwieldy user's manual for a Samsung Galaxy smartphone.

By Jennifer L. Mesko and Michael J. Ruttinger

On March 3, 2017, the United States Court of Appeals for the Third Circuit held that the arbitration clause (and class action waiver) contained on page 93 of the Samsung Galaxy Gear S Smartwatch “Health and Safety and Warranty Guide” was not a valid term of the parties’ contract because the consumer did not have reasonable notice of it. Noble v. Samsung Electronics Am., Inc., No. 16-1903, --- F. App’x ----, 2017 WL 838269 (3rd Cir. Mar. 3, 2017). This holding is consistent with the Ninth Circuit’s holding in a nearly identical case, Norcia v. Samsung Telecommunications America, LLC, 845 F.3d 1279 (9th Cir. 2017).

Noble, like most cases construing contract terms, is fact-specific in its approach to determining whether the consumer had reasonable notice of the arbitration clause. Here, the clause was contained in “a 3.1- inch by 2.5-inch, 143 page document, titled ‘Health and Safety and Warranty Guide’ (the ‘Guide’),” the cover of which directed the watch user to “[p]lease read this manual before operating your device and keep it for future reference.” Nothing on the guide’s face suggested to the user that it contained contract terms. Indeed, the court emphasized the cover language referring to the document as a “manual” in reasoning that the user would not have realized he or she was agreeing to the terms of an arbitration clause. Moreover, neither the guide’s table of contents nor its index identified or referred to an arbitration clause. On these facts, the court reasoned that “the only manner in which a consumer could receive notice of the Clause at issue here would be to read ninety-seven pages into the Guide where the Clause appears, or to happen upon page ninety-seven by luck.” Thus, this case turned on the “‘threshold dispute’ over ‘whether the parties have a valid arbitration agreement at all.’”

As the court noted, the lack of reasonable notice distinguishes this case from click-wrap and shrink-wrap cases in which courts generally bind consumers to electronically available or hyperlinked terms and conditions, even if they have not read the terms. In those cases, the “reasonable notice” requirement is satisfied by the user’s acknowledgment, typically expressed by clicking a box or an “I accept” button, that he or she agrees to contract terms by using the product or service. See, e.g., Specht v. Netscape Commc’ns Corp., 306 F.3d 17 (2d Cir. 2002) and its progeny. But unlike those cases, the Guide did not include any conspicuous warning that its user agreed to contract terms by virtue of using the Samsung Galaxy Gear S Smartwatch.

Since AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Third Circuit has been active in adhering to Concepcion and preempting state laws that seek to impose class arbitration—or invalidate arbitration agreements with class action waivers—despite a contractual agreement to the contrary. It stands to reason, therefore, that Samsung’s provision would have been upheld if the court was convinced that Noble had a reasonable opportunity to review and assent to the arbitration clause.

Jennifer L. Mesko and Michael J. Ruttinger are with Tucker Ellis in Cleveland, Ohio.

Jennifer L. Mesko and Michael J. Ruttinger – March 30, 2017