Key Lessons for Businesses in 3 Arbitration Cases

By Robert E. Bartkus
rbartkus@marc.law
April 5, 2017

The U.S. Court of Appeals for the Third Circuit and the New Jersey Supreme Court have recently provided guidance in three cases on drafting and enforcing arbitration clauses. Although the rulings were in the context of consumer transactions, the lessons should be taken into account more broadly to include negotiated contracts and commercial terms and conditions between merchants.

Noble v. Samsung Electronics America, Inc.: Package Inserts

Companies often provide product warranties that attempt to limit exposure to product liability and other claims. The warranty may be included in the terms and conditions made part of the purchase-offer confirmation or invoice, or the warranty may be included with the product. The vendor may prefer to have any disputes regarding warranty claims resolved in arbitration rather than in court, but the question arises where to propose the arbitration agreement and how the contract should be presented.

Although they may be related, warranties and arbitration clauses are not governed by the same legal doctrines. Warranties are governed by provisions of the Uniform Commercial Code, including Article 2-313. Arbitration clauses can only be enforced if they meet standard contract-law principles of fair notice and mutual assent.

In Noble v. Samsung Electronics America, Inc., No. 16-1903, 2017 WL 838269 (3d Cir. Mar. 3, 2017) (not for publication), the Third Circuit affirmed the decision from the District of New Jersey refusing to compel arbitration of a consumer claim where the arbitration clause in a warranty booklet packed with the product was not clearly marked as such.

The U.S. Supreme Court long ago held that arbitration clauses will be enforced despite not meeting state-law requirements that such clauses be printed in bold, all caps or a certain size type, or not highlighted by a special notice on the front page of a contract. However, as noted by the Third Circuit and other courts, such a clause cannot go to the other extreme and be hidden, whether by intent or not.

The arbitration clause in Samsung’s case began on page 102 of a 143-page, 1-inch-by-2.5-inch “Health and Safety and Warranty Guide” inside the box for the Samsung Smartwatch bought by the plaintiff. The cover did not mention arbitration, nor did the table of contents or (even) the index at the end of the booklet. The page on which the clause began did not include a highlighted heading for “arbitration.” Nor, as the Third Circuit found, was there any other indicator that the booklet included a bilateral contract (such as an arbitration agreement), rather than a product warranty. The District Court concluded that the clause was hidden. The ability of a consumer to opt out of the arbitration program was meaningless without fair notice.

The lesson for consumers and merchants is not hard to understand: Arbitration agreements can be a reasonable choice for resolving disputes, but they are contracts and they will be enforced only if the normal criteria for contract formation have been met. That is not to say that a consumer can avoid arbitration if he or she fails to read a form contract, whether in a shrink-wrap format or online. Especially if there is an opt-out clause, though, it makes sense to read the product terms and conditions and exercise the right of opt out when available, if that is the consumer’s choice.

James v. Global Tel*Link Corp.: Insufficient Assent Sequence

And in a precedential opinion, James v. Global Tel*Link Corp., No. 16-1555, 2017 WL 1160893 (3d Cir. Mar 29, 2017), the court affirmed the denial of arbitration to a company that markets phone services for inmates.

Comparing alternative means of presenting arbitration terms, and methods of indicating assent, the circuit said the sequence used by the defendant was insufficient under ordinary principles of New Jersey contract law. Users were informed that the terms of use (which contained an arbitration clause) were available on the company’s website, but users were not required to indicate assent or, even, acknowledge having visited the site and read the terms. Critically, the automated phone service did not inform users that continued use would act as a consent to the terms.

Roach v. BM Motoring: Designation of the AAA or Its Rules

The New Jersey Supreme Court in Roach v. BM Motoring, LLC, 2017 WL 931430 (N.J. Mar. 9, 2017), provides guidance on drafting arbitration clauses of a different sort. The holding of the case is that a party to a contract with an arbitration clause can lose the right to require arbitration by refusing to pay the filing fees the arbitration provider requires to accept the case. The court found that the failure was a material breach of the contract, which released the other party from the contract.

Our lesson is different: a clause designating the rules under which the arbitration is to be conducted must carefully distinguish between designating the rules and designating the forum. In the Roach case, the dealer from which plaintiff purchased a used car stated in its contract documents that any disputes had to be resolved in arbitration following the rules of the American Arbitration Association by a retired judge or experienced attorney.

When the buyer filed for arbitration with the AAA, the car dealer took the position that the arbitration was to be conducted by a retired judge or experienced attorney — what is called an ad hoc arbitration. According to the car dealer, the reference to the AAA was meant solely to incorporate its rules, not its administration, which the car dealer considered too expensive. The problem with the car dealer’s position is that the AAA rules provide that designating the AAA rules also designates the AAA to administer the case. The Supreme Court therefore decided that the plaintiff’s choice was proper and that, under the contract and the applicable AAA consumer rules, the seller had to advance the fees.

Parties can differentiate in their arbitration clause between a provider and its rules, but the drafter must be aware of what the rules provide and craft language that clearly differentiates between the forum in which the arbitration is to take place and the rules to be applied.

Robert E. Bartkus, of counsel at MARC in Florham Park, NJ, has more than 40 years of experience in business and international arbitration and litigation. He is the author or editor of numerous legal treatises and is co-author of the New Jersey Arbitration Handbook, to be published by Law Journal Press in April. The firm’s ADR practice handles complex business, shareholder/partner, contractual, employment, insurance and franchise disputes as well as civil fraud and legal malpractice matters.

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