Using Contracts to Avoid Problematic Jurisdictions and Unfavorable Law

For far too long, companies facing consumer and product liability litigation have relied solely on personal jurisdiction doctrine to try avoiding unfavorable forums applying unfavorable law. Personal jurisdiction doctrine, though useful, is ultimately a tool that produces inconsistent results.

Instead, companies facing consumer and product liability litigation should turn to another, well-developed body of law that may more consistently establish the procedural boundaries of any potential litigation: the law of contract. Courts have recognized that plaintiffs and defendants can pre-suit contract to terms governing any future tort litigation, including the place of suit, the law that applies, whether arbitration is necessary, and whether class actions are permitted.

These types of contracts can be used more frequently, and for more situations, than current practice suggests. Whether included in the contract for sale of goods or services; a terms of sale included in the packaging of a sold product; on a website that allows customers to view, rent, or buy goods or services; or as part of accessing store or product phone apps—these terms can be agreed to by companies and their customers, and can potentially attach to any future consumer or product liability litigation between those parties.

The upshot of these terms include direct benefits in ensuring appropriate forums applying the correct law. They also provide indirect benefits of better positioning companies for stronger settlement.

I. Favorable contract terms can define the manner and procedure of litigation.

Well-established law governs contractual terms that can define how any litigation can proceed. A contract can answer threshold procedural questions like where a lawsuit can take place, what law applies, and what the dispute resolution process should look like. In particular, four contract terms are relevant:

  • Forum Selection Clause. A forum selection clause dictates in what forum a plaintiff can sue a defendant for a particular matter. The “forum” specified in this clause is typically a particular state, but the clause can also specify whether it permits suing in either federal or state (or both) courts in that forum. Forum selection clauses are prima facie valid. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). The resisting party (the plaintiff) bears the burden to show that the clause is invalid. While defenses to forum selection clauses vary among states, they include unreasonableness, against public policy, being affected by fraud or other inequity, grave inconvenience, or a clause that fails to sufficiently identify the forum.

Forum selection clauses are beneficial because they determine where the suit can be filed. As a result, this clause controls the pool of judges and jurors who would decide the case. This allows a defendant to direct claims to a forum that is not a judicial hellhole and instead has a good pool of jurists and jurors.

  • Choice of Law Clause. A choice of law clause dictates what law will apply to all or some aspects of a plaintiff’s claims. This clause has two requirements to be effective. First, the chosen state law must have a substantial relationship to either the parties or the transaction, or there must be some other reasonable basis for its application. Second, the chosen state law cannot violate the forum state’s public policy.

Choice of law clauses are beneficial because they govern what state’s law applies to various aspects of a lawsuit, and some state’s laws are more favorable to defendants than others.

  • Arbitration Clause. An arbitration clause directs that a dispute shall be resolved through an arbitrator, subject to rules of arbitration, rather than through the typical judicial process of civil litigation. There is a common law presumption in favor of arbitration, which is bolstered by the Federal Arbitration Act that compels arbitration when the parties have agreed to it. 21 Williston on Contracts §§ 57:21, 57:22 (4th ed. 2019). A court will not enforce an arbitration clause only if the clause is both procedurally and substantively unconscionable.

Arbitration clauses are beneficial because arbitration contains some advantages for defendants. For example, parties to arbitration usually split the bill to pay the arbitrator. Arbitrators (typically retired judges or well-respected persons in the profession) are also less likely to award excessive judgments sometimes seen with runaway juries. Finally, even if a defendant suffers a loss, arbitration results are typically confidential.

  • Class Action Waiver Clause. Class action waiver clauses limit the contracting parties’ ability to initiate a class action lawsuit. Like other contractual provisions, a class action waiver clause is analyzed under applicable state law. In many situations, the determination of the validity of such clauses is multi-factorial. For example, many courts look to: (1) whether the clause was sufficiently conspicuous (i.e., physical characteristics); (2) its availability for review (i.e., extrinsic characteristics); (3) fundamental fairness in enforcing the provision; (4) unconscionability; and (5) public policy.  See generally Archer v. Carnival Corp. & PLC, No. 2:20-CV-04203-RGK-SK, 2020 WL 6260003 (C.D. Cal. Oct. 20, 2020).

Class action waivers are a valuable tool for defendants. They provide a company certainty in that any lawsuit initiated will concern an individual customers grievance rather than grievances of an entire class of customers. Moreover, to the extent that class action waivers can be divorced of arbitration clauses, a defendant can contractually eliminate a class action without the risk of mass arbitration filings that often require the defendant to pay a significant sum in filing fees. If mass individual lawsuits are filed in either state or federal courts, defendants can take advantage of various consolidation methods for streamlined discovery and will not be burdened with the filing fees of these cases at the outset.

II. Companies have opportunity to contract even with potential tort plaintiffs.

Contracting opportunities containing relevant terms are obviously available to companies that face the potential for contract litigation. The contract at the center of a contractual dispute can also include the favorable terms.

Similar contracting opportunities are available to companies who face potential consumer and product liability litigation. Even though tort litigation does not directly implicate those contracts, those contractual relationships often underlie why any given company is even a potential defendant.

Take, for example, a simple vehicle collision between two individuals. When Driver A sues Driver B for his personal injuries, there are no contracts between those parties. But when the litigation implicates consumer and product companies, contracts are there in the background.

If Driver A also sues their vehicle’s retailer over an alleged defect in the vehicle, that plaintiff-defendant relationship traces back to a contract: the sale of the vehicle. To the extent Driver A also sues others in the distribution chain—such as distributors, manufacturers, or designers—a contract often governs each link in that chain.

And suppose that an injured passenger in Driver B’s vehicle was using a rideshare service. That passenger might sue the rideshare company for its employee’s alleged negligence, which is a plaintiff-defendant relationship that also traces back to a contract: the agreement permitting the rideshare service. Each of these contracts are an opportunity for a company to include the relevant terms that would help define litigation arising from the collision.

This is just but one example. Companies have plenty opportunity to pre-suit contract with potential consumer and product liability plaintiffs. The particularities of how such an opportunity can manifest will change from one business model to the next. That said, four categories broadly establish when these opportunities arise.

  • Existing Written Contracts. The simplest scenario is when a company already executes a written contract with consumers about their product or service. These are usually big-ticket items that might be bought on credit, such as a new vehicle, or large home appliances (washer and dryer, dish washer, etc.). In these scenarios, presumably the existing contracts are otherwise enforceable, and so a company need only modify the terms of their written contracts.
  • Product Packaging. For products that are sold in boxes, either because of their size or value, a written contract can be included inside the packaging itself (alongside the product, any manuals, and other product literature). The courts that recognize these types of contracts as binding require the consumer’s clear assent by way of knowing that the only way to reject the terms is to return the product. As a result, these contracts need to be carefully formulated both in terms of content and how they are presented to the consumer.
  • Websites. Websites present two opportunities to contract. First, it is possible to impress terms on a user of a website who accesses that website. There are different methods to create a binding contract with website users, and a company will need to weigh the varying strategies that balance strength of legal argument against the business concern of intrusive legalese on mere website browsers. Second, to the extent users can purchase goods or services on the website, that purchasing act presents an opportunity for the consumer to agree to written contractual terms. Companies will need to assess the proper interface, scope, and substance of these contracts particularly relative to the type of good or service being sold.
  • Mobile Apps. Similar to websites, mobile apps allow two opportunities for a point of contract. When an app is first downloaded, on first accessing an app after an update, or even every time the app is opened—users can be asked to agree to terms of use. And if the app can be used to buy goods or services, a written contract can be imposed at that point of sale. Companies will need to consider the interface, scope, and substance of contracts presented at both opportunities relative to the purpose of the phone app.

The opportunity to contract will also differ depending on what relationship the company has with a consumer. For any given product, the designer, manufacturer, and retailer—assuming they are not the same entity—have different opportunities for contract.

  • Direct Contract. Through one of the opportunities identified above, a company has an opportunity to directly engage with the consumer by contract.
  • Upstream Participants. Companies whose business keep them upstream in the distribution process without direct contact with consumers, like designers or manufacturers, have opportunity to contract with downstream entities who do have contact with consumers. These business-to-business contracts can benefit the upstream companies with the relevant terms by requiring the downstream business to contract to those terms with the consumer. Alternatively, the business-to-business contract may be able to impose the relevant terms by making consumers an express, but limited, third-party beneficiary to that contract.
  • Subsequent Users. Typically, companies cannot contract with subsequent product users. It may be possible, however, for companies to contract with the purchasing consumer in a manner that extends those contract terms to subsequent users.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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