Knutson v. Sirius XM Radio: Buying a Truck With Free Satellite Radio Doesn't Mean You Agreed to Arbitrate

Judge Pregerson wrote the opinion for the panel.

The Setup

In November 2011, the buyer purchased a Toyota Tacoma with a 90-day Sirius XM trial. His account was activated on November 7. Sirius XM mailed a Welcome Kit on November 29, which arrived around December 12, more than a month after activation.

The customer agreement inside said that failing to cancel "WITHIN 3 BUSINESS DAYS OF ACTIVATION" meant you agreed. It also contained an arbitration clause and class action waiver. The buyer didn't read it, because he didn't think anything in the kit was a contract.

During the trial, he got three telemarketing calls from Sirius XM on his cell phone and filed a putative Telephone Consumer Protection Act (TCPA) class action. The district court compelled arbitration and dismissed the case.

No Mutual Assent

Under California law, mutual assent is required, and the company seeking arbitration must prove an agreement by a preponderance of the evidence. The Ninth Circuit asked two questions:

1. Did buying the truck bind him to Sirius XM? No. He received nothing from Sirius XM at purchase and believed the trial was a complimentary marketing perk. "A reasonable person in Knutson's position could not be expected to understand that purchasing a vehicle from Toyota would simultaneously bind him or her to any contract with Sirius XM, let alone one that contained an arbitration provision."
2. Did continuing to listen count as acceptance? Also no. Silence or inaction can be acceptance when there's a duty to act, but nothing showed the offer was clearly and effectively communicated by mailing the kit. The customer had no reason to open the welcome kit and read its terms. "He could not be obligated to act where there was no effective notice that action was required."

Not a Shrinkwrap Case

Sirius XM pointed to cases enforcing terms that arrive after a purchase. The court distinguished them: in those cases, the customer dealt directly with the service provider, such as by calling to subscribe or signing a service contract. Here, the only transaction was with Toyota. The court added that the notice problem could easily be fixed if the purchase agreement or dealer literature explained the arrangement and asked for assent.

The court also found persuasive a Second Circuit decision refusing to enforce arbitration against customers who didn't know they had a contract with a second company, even though those customers had more notice than this buyer. He never enrolled, gave personal information to Sirius XM, acknowledged any terms, or paid anything.

Because there was no agreement, the court didn't reach unconscionability.

Why It Matters

• Trial subscriptions aren't automatic contracts. Bundled freebies may not carry the provider's fine print.
• Mailing terms isn't enough. If the recipient doesn't know a contract exists, failing to opt out won't show assent.
• Arbitration defenses start with formation. In TCPA cases, the threshold question is whether anyone agreed at all.

Reversed and remanded.

Read the full Ninth Circuit opinion.