SCOTUS Decisions May Provide A Roadmap to Enforcing Arbitration Clauses Included In Product Packaging

It is open opinion season at the U.S. Supreme Court, and two recent decisions pertaining to the enforceability of arbitration clauses provide guidance to manufacturers looking to bind consumers through the use of product packaging.

In Kindred Nursing Centers Limited Partnership v. Clark, No. 16-32, 2017 WL 2039160 (U.S.S.C. May 15, 2017), the U.S. Supreme Court upheld application of a nursing home’s arbitration agreement to tort claims for alleged personal injuries suffered by patients under the home’s care.  Those holding the patients’ medical powers of attorney “signed an arbitration agreement with [defendant] on behalf of [the] relative.” Id. at *3.  Later, they brought state-court tort actions for wrongful death.  Id.  The defendant unsuccessfully moved to enforce the arbitration agreement.  The state supreme court held both agreements invalid, invoking specificity rules involving powers of attorney and singling out arbitration agreements for special scrutiny.  As described by the Court:

The Kentucky Constitution, the court explained, protects the rights of access to the courts and trial by jury; indeed, the jury guarantee is the sole right the Constitution declares “sacred” and “inviolate”. . . . And that clear-statement rule − so said the court − complied with the FAA’s demands.  True enough that the [Federal Arbitration] Act precludes singling out arbitration agreements.  But that was no problem, the court asserted, because its rule would apply not just to those agreements, but also to some other contracts implicating “fundamental constitutional rights” . . . [such as] a contract “bind[ing] the principal to personal servitude.”

Kindred, at *4.

The Federal Arbitration Act “preempts any state rule discriminating on its face against arbitration,” including “any rule that covertly accomplished the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” Id.  The Court then found the examples of non-arbitration “constitutional rights”− other than jury trial − pretextual.  “[T]he court hypothesized a slim set of both patently objectionable and utterly fanciful contracts that would be subject to its rule,” but only the jury trial was realistically implicated:

In ringing terms, the court affirmed the jury right’s unsurpassed standing in the State Constitution: The framers, the court explained, recognized “that right and that right alone as a divine God-given right” when they made it “the only thing” that must be “ ‘held sacred’ ” and “ ‘inviolate’”. . . .  And so it was that the court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement − namely, a waiver of the right to go to court and receive a jury trial.  Such a rule is too tailor-made to arbitration agreements − subjecting them, by virtue of their defining trait, to uncommon barriers.

Id. at *5 (citations omitted).

Thus, even in personal injury cases, the FAA “requires a State to enforce all arbitration agreements (save on generally applicable grounds) once they have come into being.” Id. at *6.  “The Act’s key provision, once again, states that an arbitration agreement must ordinarily be treated as “valid, irrevocable, and enforceable.” Id. (citing 9 U.S.C. § 2).  “Adopting the [plaintiffs’] view would make it trivially easy for States to undermine the Act − indeed, to wholly defeat it.” Id.  Thus, the Court in Kindred “reach[ed] a conclusion that falls well within the confines of (and goes no further than) present well-established law.” Id. at *7 (quoting DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 471 (2015)).  States cannot “flout[ ] the FAA’s command to place those agreements on an equal footing with all other contracts.” Id.  Prior holdings made clear that FAA enforces arbitration clauses in traditional contracts.  Kindred eliminates any argument that the FAA exempts state-law personal injury actions.

Meanwhile, of interest to product manufacturers monitoring this issue, SCOTUS denied cert in TAMKO Building Prods. Inc. v. Hobbs, U.S. No. 15-1318, review denied 5/22/17).  TAMKO attempted to invoke an arbitration provision printed on single product packaging after a homeowner and a church filed class actions alleging the shingles caused their roofs to leak.  The Missouri Court of Appeals agreed with the consumers that they weren’t bound by the arbitration clause because it only appeared on the packaging.  Because there was no evidence the consumers received that packaging, there was no “reasonable notice” or evidence of assent.   The distinguishing feature between TAMKO and Kindred being the existence of a valid contract – in Kindred, the clause was in an executed agreement while TAMKO’s was only on the product packaging.

Product manufacturers could certainly benefit from a ruling permitting them to incorporate arbitration clauses enforceable under the FAA into product packaging – and although cert. was denied, this case may provide a roadmap to achieving that result.

The FAA certainly does not exempt product liability claims. The relevant provision – the aforementioned 9 U.S.C. §2 – states:

A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

For a product manufacturer to effectively utilize arbitration clauses, SCOTUS appears to be signaling that such an agreement must be incorporated into the sales agreement or other enforceable contract with the consumer.  TAMKO correctly argued that under Missouri law, the act of “keeping and using a product” is sufficient to manifest assent to contractual terms printed on packaging.  The problem TAMKO had below is that there was no evidence in the record that the consumer received the packaging and thus had reasonable notice before manifesting assent.  Hence, Hobbs argued, there was no evidence a valid contract was formed.

If the facts were different – if there was evidence that the consumer received, read and understood the packaging, kept the product, and then filed a class action – the decision below would likely have been different.  As Hobbs pointed out in its opposition brief to the Supreme Court, Missouri does not discriminate against arbitration clauses, however evidence must be submitted “to establish an enforceable agreement to arbitrate”.

What can manufacturers take away from this pair of decisions?  The lesson appears to be that (under certain states’ law) arbitration agreements contained on product packaging may be enforceable, so long as reasonable notice of the clause is provided along with notice that failure to return the product constitutes assent.  Contact informed counsel to the extent your company wishes to explore including arbitration provisions into its product packaging.

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Products Liability Prevention & Defense
Our attorneys represent foreign and domestic designers, manufacturers, and distributors of a diverse array of products, from food and drugs to industrial equipment and building materials. We help clients respond to major personal injury and property damage claims in the form of single-product cases, class actions, mass torts, and multidistrict litigation, as well as all types of congressional, regulatory, or criminal investigations. Our team works closely with corporate counsel to minimize a company’s overall liability and establish efficient protocols for fielding claims and advise on labeling, marketing, manuals and instructions, supply and distribution contracts, and insurance and indemnification issues.
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