Legal Alert

Reasonable Notice to Consumer Required for Enforcement of Arbitration Clause

May 30, 2018

Addressing an important contract-formation issue that has divided federal courts, the U.S. District Court for the Western District of Pennsylvania recently denied a company's motion to compel arbitration because the consumer was not given "reasonable notice" of the arbitration clause.

The court in Jones v. Samsung Electronics America, Inc. declined to enforce the arbitration clause because it was located in the "Manufacturer's Warranty" section of a 64-page "Important Information Booklet" contained in the phone's sales box. None of the Booklet's section headings referred to arbitration.

In Jones, the plaintiff, Brittany Jones, filed a class action against Samsung after her cell phone allegedly exploded and caught fire. Samsung moved to compel arbitration, relying in part on the U.S. Court of Appeals for the Seventh Circuit's 1997 decision in Hill v. Gateway 2000, Inc., which enforced an arbitration clause contained in the shipping box that stated purchasers had 30 days to return the computer if they did not want to arbitrate.

According to the Seventh Circuit, "[a] contract need not be read to be effective." Ms. Jones said she was unaware of the arbitration clause and its 30-day opt-out period at the time she bought the phone because the arbitration clause was inconspicuous and contained in a section of the Booklet dealing with warranties. She relied on the U.S. Court of Appeals for the Ninth Circuit's 2017 decision in Norcia v. Samsung Telecommunications America, Inc., which held that Samsung's arbitration clause was ineffective because the plaintiff did not receive adequate notice of its existence.

After reviewing these decisions and precedent of the U.S. Court of Appeals for the Third Circuit, the Jones court concluded that "[p]urchasers may be bound by what they have not read, but they may not be bound by what they cannot find, or what has been (negligently or by connivance) buried in the verbal underbrush."

The court emphasized that the arbitration agreement was never cited in the Booklet's section headings and was "tucked away in the section misleadingly titled 'Manufacturer's Warranty.'" According to the court, "[i]f Samsung had actually desired to make its customers aware of the Arbitration Agreement, it would have been simple to bring the point home more clearly."

The Jones court found the Seventh Circuit's Gateway decision was no longer the leading authority in this area, having been eclipsed by more recent decisions that "focus not on whether consumers had read waiver language, but on whether they received reasonable notice of the existence of the language."

Jones illustrates that even the best-drafted arbitration clause will not be enforced if the court perceives it to have been presented in a manner that would make it unlikely consumers would actually notice it.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). We routinely counsel companies on the procedures for implementing arbitration programs contractually, both in original agreements and through change-of-terms procedures.

Copyright © 2018 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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