Earlier this month, a federal district court in the Northern District of California held that Facebook could rely on a choice-of-law clause in its terms of service to avoid enforcement of New Jersey’s Truth-in-Consumer Contract, Warranty, and Notice Act (“TCCWNA”), which we have previously discussed on the blog. See Palomino v. Facebook, Inc., no. 16-cv-04230-HSG, 2017 WL 76901 (N.D. Cal., Jan. 9, 2017). This New Jersey law has recently been popular among plaintiffs’ attorneys bringing putative class actions that target online businesses for minor technical violations in their terms of services. Nevertheless, the Palomino case provides hope that businesses can avoid the statute by means of a choice-of-law clause.
Enacted in 1981, the TCCWNA was made with the goal of preventing businesses from tricking consumers with misleading contracts, warranties, and notices. Most notably, the TCCWNA requires companies to explicitly state whether or not provisions in contracts and notices are void in New Jersey, providing as follows: “No consumer contract, notice or sign shall state that any of its provisions is or may be void, unenforceable or inapplicable in some jurisdictions without specifying which provisions are or are not void, unenforceable or inapplicable within the State of New Jersey; provided, however, that this shall not apply to warranties.” N.J.S.A. 56:12-16. Plaintiffs’ lawyers have latched on to this provision because online terms of services often just state that they are “void where prohibited” or words to that effect, and do not spell out exactly which provisions are or are not void in New Jersey.
The TCCWNA also provides a basis for enforcing certain “clearly established” state and federal law, stating that it bars any “seller, lessor, creditor, lender or bailee” from offering contracts or giving warranties, notices, or signs that include “any provision that violates any clearly established legal right of a consumer or responsibility of a seller, lessor, creditor, lender or bailee as established by State or Federal law.” N.J.S.A. 56:12-15. In addition, the TCCWNA prohibits a “contract, notice, or sign” from containing provisions “by which the consumer waives his rights under this act.” N.J.S.A. 56:12-16.
In Palomino, the plaintiffs filed a complaint alleging that Facebook committed violations of the TCCWNA, and they claimed to represent a class of “similarly situated New Jersey residents who created a Facebook account, and/or who agreed to [Facebook’s] Terms of Service within the applicable statute of limitation.” Palomino, 2017 WL 76901, at *1. According to the plaintiffs, Facebook’s terms of service contained provisions that violated the TCCWNA, as they required the consumer to “1) disclaim liability for claims brought by [Facebook]’s negligent, willful, malicious, and wanton misconduct; 2) bar claims for personal and economic injury and punitive damages; and 3) ban consumers from asserting claims against [Facebook] for deceptive and fraudulent conduct.” Id. Regarding these provisions, Facebook’s terms of service said they may not be applicable in certain jurisdictions, but did not specify whether they were void in New Jersey. Id.
In its choice-of-law clause, the Facebook terms of service stated that “[t]he laws of the State of California will govern [the terms of service], as well as any claim that might arise between [a user] and [Facebook].” Id. Applying California’s choice-of-law rules, the court stated that the clause could be enforced if (1) the chosen state bore a substantial relationship to the parties or their transaction; and (2) the relevant California law was not contrary to a “fundamental policy” of New Jersey law. Id. at *3. The court disposed of the first issue quickly, holding that Facebook had a substantial relationship to California, as both its headquarters and principal place of business were in the state. Id.
As for the second issue, the court held that New Jersey did not have a “fundamental policy” that would be violated if California law was applied in the case. Id. at *3–4. The court assumed for the sake of argument that “the TCCWNA’s goal of protecting consumers from deceptive practices and unequal bargaining power constitutes fundamental New Jersey policy,” but that even so, “Plaintiffs have failed to show that California’s consumer protection law is contrary to New Jersey policy.” Id. at *4. The court noted that California consumer protection is regarded as “among the strongest in the country,” and among other things barred businesses from misrepresenting the transaction they entered with consumers, so that the state’s law was functionally equivalent to the TCCWNA in that respect. Id. California law was less broad than New Jersey law in only key one way, which was that California law did not require businesses to explicitly identify which provisions were or were not applicable in New Jersey. Id. However, the court held that difference alone did not justify disregarding the choice-of-law clause, as California consumer protection laws still sought to “prevent confusion and deception among consumers and to incentivize businesses to draft clear and understandable business documents.” Id.