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March 23, 2017Download PDF

Shrink Wrap Agreements: The Third Circuit Thinks Outside the Box

My last post dealt with the four “wraps”: arbitration clauses presented on the internet in connection with consumer transactions. There is yet another arbitration “wrap” worthy of discussion, but it’s not an internet-based “wrap.” Rather, as the name implies, “shrink wrap” agreements are printed agreements packaged in boxes containing various consumer products. These agreements are ubiquitous and they raise unique issues in the arbitration context because of the way in which they are presented.

As practitioners know, the law of arbitration is grounded in the law of contract. If that is the case, however, how could a consumer purchasing a product but never even having opened the box be bound by a shrink wrapped contract’s terms? Certainly, the contract was not “negotiated” or even entered into prior to the purchase transaction. How could a valid agreement to arbitrate possibly be found under these circumstances where there was no meeting of the minds?

Although consumers do not see arbitration shrink wrap agreements prior to their purchases, the theory is that people are put on notice once they unpackage their products, assuming that the agreements are conspicuous. Thus, if the consumer knows about the agreement and has the opportunity to reject it by returning the product, then the consumers’ continued use of the product means that they’ve accepted the agreement.

Of course, all of this hinges on proof that consumers either actually saw the arbitration clause in their shrink wrap agreement or that the law imputes consumers with constructive knowledge of it. On this issue, courts have reached diametrically opposed conclusions- even when considering virtually the same shrink wrap agreement used by the same company!

In 2014, our firm was involved in McNamara et al. v. Samsung Telecommunications America, LLC et al., a putative class action case in the Northern District of Illinois involving Samsung’s Galaxy S4 smartphones and advertised battery life. Shortly after we filed the case, Samsung moved to compel individual arbitration, invoking a clause buried in Samsung’s user manual (in fairness to Samsung, there was some opt-out language in the clause that allowed the consumer to reject the agreement to arbitrate if they did so within thirty days of purchase). In opposing the motion to compel arbitration, we made various arguments on behalf of consumers, the primary thrust being that consumers could not have known that they were agreeing to arbitrate because the relevant language was buried in a user guide and not even listed in the table of contents. The court disagreed, holding that the arbitration language appeared in a reasonable location in the lengthy guide. The court further found that, because smartphones are complex machines by nature, purchasers were expected to review the guide that accompanied their purchases. Samsung’s motion to compel arbitration was granted, effectively eliminating consumers’ rights to pursue the case on behalf of a class of smartphone purchasers.

Now, fast forward three years. Our firm is currently involved in a new case against Samsung. Like in McNamara, Noble v. Samsung Electronics America, Inc. involves alleged battery life misrepresentations, but this case is about smartwatches instead of cell phones. In considering almost identical circumstances concerning an arbitration provision buried in Samsung’s lengthy product guide, the District of New Jersey and a unanimous panel of the Third Circuit held that arbitration would not be enforced. Contrary to the Court’s reasoning in McNamara, the Third Circuit found that the consumer had not received adequate notice of the arbitration agreement because it was buried in the document and not referenced in the Table of Contents—the exact same facts as in McNamara!

Obviously, we consumer lawyers see Noble as a step in the right direction, but it remains to be seen how courts will interpret shrink wrap agreements in the future. As always, we encourage consumers to read documents accompanying the products that they buy very carefully and to be on the lookout for sneaky arbitration clauses!