Choice of Law Strikes Again
Updated: Nov 7, 2021
In a recent decision, an Israeli court missed the opportunity to take a position on an important choice-of-law issue, thereby increasing the uncertainty in this already murky and esoteric area of law.
Take the following choice-of-law provision from Facebook’s terms of service:
If you are a consumer, the laws of the country in which you reside will apply to any claim, cause of action or dispute that you have against us that arises out of or relates to these Terms or the Facebook Products […] In all other cases, you agree that the claim must be resolved exclusively in the US District Court for the Northern District of California or a state court located in San Mateo County. You also agree […] that the laws of the State of California will govern these Terms and any claim, without regard to conflict of law provisions.
This is not your generic/boilerplate choice-of-law provision. According to this clause, the choice-of-law governing a dispute between Facebook depends on whether the user is classified as a “consumer”: If the user is a “consumer”, the laws of the country of the user apply. If the user is not a “consumer”, the laws of California apply.
This begs the question: how do we define a “consumer”? This also begs the question, what state’s laws will govern the definition of the term “consumer”?
A recent Israeli court decision that dealt with this choice-of-law provision grappled with the former question but skipped the latter question: which jurisdiction’s laws should apply to determine the scope/interpretation of the provision. Eli Necht et al. v. Facebook Ireland, Ltd. et al. Class Act. 1393-01-17 (Dist. Ct. Tel-Aviv, Aug. 6. 2020).
The Israeli court used Israeli law to determine whether the plaintiffs were “consumers” or not. (To be fair, the court mentioned that counsel for both plaintiffs and Facebook did not assert that California law should apply to determine the definition of “consumer”.)
The question of what law to apply to determine the scope of a choice-of-law provision is an important one and can have far reaching effects. See John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 Wash. L. Rev. 631, 680 (2017). Take, for example, the question whether a choice-of-law provision includes tort and other statutory claims (non-contractual claims). As Prof. Coyle points out in his article, this question would depend on what law is applied to interpret the clause. Id.
In the U.S., different states have taken different approaches to this question. In New York, for example, the Second Circuit has held that the canons of the forum should always be applied to determine the scope of a choice-of-law clause. As that court has explained:
Determining which jurisdiction's law governs the scope of a valid choice-of-law clause is not a simple matter. On the one hand, once a court finds that a contractual choice-of-law clause is valid, the law selected in the clause dictates how the contract's provisions should be interpreted, and so arguably that law should also dictate how the choice-of-law clause--which is itself one of the contract's provisions--should be interpreted.
More commonly, however, courts consider the scope of a contractual choice-of-law clause to be a threshold question like the clause's validity. Courts therefore determine a choice-of-law clause's scope under the same law that governs the clause's validity--the law of the forum.
Fin. One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 332-33 (2d Cir. 2005) (citations omitted) (citing Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996)).
New York equates the question of scope/interpretation to the question of validity. Just like questions of validity are determined by the law of the forum, so to questions of scope/interpretation. Prof. Coyle criticized this approach in his article and called it “imperialistic”.
In contrast, the California Supreme Court has held that the canons of the state chosen by the parties should be used to determine the scope of the clause. As that Court explained in one case:
The choice-of-law clause states: “This agreement shall be governed by and construed in accordance with Hong Kong law. ...” The agreement, of course, includes the choice-of-law clause itself. Thus the question of whether that clause is ambiguous as to its scope ... is a question of contract interpretation that in the normal course should be determined pursuant to Hong Kong law.
Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1154 n.7 (Cal. 1992).
[Interestingly, in Nedlloyd, as in the Israeli case, the parties did not request judicial notice of Hong Kong law on the question of interpretation or supply the court with evidence of the relevant aspects of that law. The California court ruled, therefore, that the question becomes one of California law.]
Turing back to Necht v. Facebook: The Israeli court may have ultimately gotten the law right. It may have taken the New York “imperialistic” approach. Or perhaps the Israeli court adopted the Nedlloyd approach but because parties failed to brief the matter, the court simply applied Israeli law. Or perhaps the Israeli court merely flipped a coin. That is precisely the problem here: we honestly don’t know how the Israeli court arrived at its conclusion. Credit, however, must be given when credit is due: The Israeli court at least displayed a sensitivity to the matter by hinting that had counsel for the parties argued this point, the court may have considered it.
Nevertheless, the Necht v. Facebook decision was missing a proper analysis to help guide future litigation. The Israeli court should have taken this already confusing –yet important—matter and infused it with some sense and analytical organization.
Israeli courts must grapple with the fact that choice-of-law issues are here to stay and will continue to strike over and over again. Instead of brushing them away, Israeli courts need to analyze these issues with the aim of increasing certainty and confidence in the system. We, as litigators, have the duty to learn and understand this esoteric area of law, bring these matters to the courts’ attention and properly brief and argue them.