Canada: Douez V. Facebook, Inc.: Supreme Court Of Canada Decision Creates New Uncertainty About Enforceability Of Forum Selection Clauses In Consumer Contracts

In a recent decision that could affect consumer class actions in Canada, the Supreme Court of Canada ruled in Douez v. Facebook, Inc. ("Facebook") that a forum selection clause contained in Facebook's Terms of Service was unenforceable when applied to a claim for breach of British Columbia's privacy legislation. The precedent set by this case creates more uncertainty around how forum selection clauses will be applied by Canadian courts and could give plaintiffs new ammunition to avoid forum selection clauses in pursuing their claims. In allowing the appeal, the Supreme Court of Canada significantly modified the test for validity of forum selection clauses from Z.I. Pompey Industrie v. ECU-Line N.V. (the "Pompey test").

We have also reported on the implications of this decision on privacy and cyberspace law.

Background

Ms. Douez brought a proposed class action in British Columbia on behalf of more than 1.8 million Facebook users. She alleges that an advertising product called "Sponsored Stories" that was briefly used in 2011 violated section 3(2) of the British Columbia Privacy Act. The advertising used a user's profile picture and Facebook posts in advertisements on their friends' "newsfeeds" on the site. Ms. Douez alleges that was done without the user's consent.

The BC Supreme Court rejected Facebook's application seeking to enforce the forum selection clause mandating that Facebook users pursue lawsuits exclusively in Northern Californian courts and certified the class action. The BC Court of Appeal reversed that decision and ruled that the forum selection clause was enforceable, effectively ending the class action.

Supreme Court of Canada Decision- introducing public policy considerations into the "strong cause" test

In a narrow 4-3 decision, the Supreme Court of Canada overturned the BC Court of Appeal's decision and modified the application of the Pompey test for enforceability of forum selection clauses. The Pompey test consists of a two-step analysis:

  1. Can the applicant prove that the clause is "valid, clear and enforceable" under contract law? At this point, the respondent may also raise defences of unconscionability, undue influence or fraud.
  2. If the clause passes step 1, can the respondent show "strong cause" for the court not to enforce the clause?

Although the Court unanimously agreed that the Pompey test remains the correct framework for determining the enforceability of forum selection clauses, the majority modified the traditionally jurisdictional factors to be considered under the second step of the test.

The majority ruled that beyond jurisdictional questions, the court should take into account public policy considerations related to "gross inequality of bargaining power between the parties and the nature of the rights at stake." The Court sought to balance uncertainty for companies with the ability of consumers to access justice following an infringement of their rights.

  • The majority held there was gross inequality in bargaining power because the Terms of Service were a "consumer contract of adhesion," where a user must accept all the terms as written, without a right to negotiate, in order to use Facebook. The implication is that all consumer contracts of adhesion will have this weigh against them when determining enforceability of these clauses, regardless of whether the contract was actually unfair or not.
  • Although forum selection clauses in consumer contracts have already been legislated as having limited enforceability in Québec, this increases the risk that they will be found unenforceable across all Canadian jurisdictions.
  • The majority held that due to the "quasi-constitutional" nature of the rights granted by the Privacy Act, Canadian courts are better suited to situate the case within the relevant "social and cultural context" than foreign courts.

Taking these factors into account with jurisdictional issues, the majority ruled that there was strong cause to not enforce the forum selection clause when applied to an action under the Privacy Act. As a result, the BC Supreme Court decision certifying the class action was restored.

Implications

The Facebook decision clearly signals that consumer protection and the protection of privacy rights are at the forefront of judicial concerns in Canada. While forum selection clauses remain a good way to ensure certainty in constraining potential legal action, their enforceability is now uncertain and likely be challenged by plaintiffs in consumer claims, especially in cases involving consumer contracts of adhesion or privacy related claims.

With an increasing trend of privacy related class action lawsuits in Canada as consumer data continues to be commodified in untested ways and targeted by hackers, due diligence in assessing privacy risks is even more important for companies offering services in Canada.

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