The choice-of-law provision is an important tool of modern contracts. Such provisions are not just pervasive; they are well-accepted as binding even in consumer contracts.1 But, with the rise of the "global" class action – in which the claimants attempt to aggregate the claims of both US and non-US residents in a single jurisdiction – specifying the uniform application of a specific US state law to non-residents may not have the intended result.
The common rationale for choosing a governing law by contract is to avoid the uncertainty of a post hoc choice-of-law analysis, which has been likened to a "quiet game of Russian roulette." 2 However, for the growing number of global businesses that remain subject to the jurisdiction of the federal court system in the US – and its relatively liberal class action procedures – the one-time promise of choice-of-law certainty may increasingly be a mirage. A broadly-drafted choice-of-law provision selecting the law of a single jurisdiction may actually increase the chances that global businesses will have to defeat overlapping claims brought by the same plaintiffs in more than one jurisdiction.
Although the choice-of-law clause sometimes is viewed as being antithetical to consumer protection,3 plaintiffs successfully have exploited one of its features to bring larger and broader class actions based on a theory that a single state's laws apply to all class members regardless of where they reside. In the absence of such provisions, nationwide (much less worldwide) class actions have been difficult to maintain because no "class action is proper unless all litigants are governed by the same legal rules." 4 This is especially true under some of the more onerous consumer protection statutes – like the California Consumer Legal Remedies Act, California Right to Privacy Act, and Illinois Biometric Information Privacy Act – which do not as a general matter apply beyond the borders of the enacting state.5 But when a company includes a California or Illinois choice-of-law provision in its standard terms and conditions, it may be eliminating this one hurdle to the maintenance of a class action. The key feature of the choice-of-law provision – bringing certainty and uniformity to contract enforcement – ostensibly eliminates the need to apply multiple states' laws to consumers in multiple jurisdictions.6
If a nationwide US class is certified on the basis of a contractual choice-of-law provision, then a single judicial determination (or court-approved settlement) should bind all class members. Comity, res judicata, and the full-faith-and-credit afforded court judgments in the United States largely prevent the re-litigation of previously decided issues.7 These well-developed doctrines effectively preserve the traditional wisdom of choice-of-law provisions for standardized terms and conditions in the United States.
But when claimants attempt to aggregate the claims of both US and non-US residents in a single jurisdiction based on a choice-of-law provision, the intended benefit of that provision may be lost. The preclusive effect of a class action judgment by a US court cannot be presumed in foreign jurisdictions. This creates at least two significant potential downsides for defendants facing litigation which includes foreign plaintiff class members: as one court has noted, “first, a foreign plaintiff may get a second bite at the apple through subsequent litigation in her home forum, and second, a foreign court may not honor a domestic class judgment in a defendant’s favor.”8 On the one hand, a defendant's inability to assert claim or issue preclusion in a foreign jurisdiction may mean that residents of that jurisdiction will be excluded from a class,9 potentially depriving the defendant of the certainty it attempted to bargain for with consumers in that jurisdiction. On the other hand, if residents from that jurisdiction are included within the approved class, the inability to assert claim or issue preclusion equally deprives the defendant of certainty.
This issue continues to develop in US federal courts and no clear answer has yet emerged as to whether "global" classes may be maintained. Additionally, the application of a choice-of-law provision to non-residents still requires a fact-intensive analysis that balances the interests of other jurisdictions in protecting the rights of their citizens against the application of a single state's laws to non-residents nationally or globally.
Obviously, there are still benefits to the contractual choice-of-law provision. But in an increasingly global economy, businesses should ask whether they are getting those benefits by specifying the application of US laws to disputes with non-US residents. This remains an area to watch, and as experience with global class actions grows, the answer to this question may well become no. In the meantime, some US businesses may have side-stepped this issue by including arbitration provisions with class action waivers in their contracts.