Israeli Consumers Can Sue Global Corporations Pursuant to Israeli Law Even if Agreement Determines Otherwise

The Israeli Supreme Court’s ruling in the recent case against Facebook case changes the criteria for determining when the choice of law clause in international companies’ uniform contracts constitutes a discriminatory stipulation in a uniform contract and can therefore be invalidated.

In its ruling, the Supreme Court stated the clause in Facebook’s usage agreement, which prescribes regulating relations between parties according to the laws of the State of California, is a discriminatory condition in a uniform contract in instances when the customer is a small business. It ruled it is possible to deliberate a consumer’s dispute (including a small business) against Facebook according to the laws of the State of Israel, notwithstanding that stated in the agreement’s choice of law clause.

Choice of Law Stipulation

The case began when purchasers of advertising on Facebook’s network filed a lawsuit in Israel against Facebook. They alleged Facebook’s negligence adversely affected their followers’ exposure to their advertisements on the social network. Facebook argued that, according to the agreement between the parties, the substantive law that applies to the relationship is the law of the State of California. Both the magistrate’s and the district court accepted this argument. However, the Supreme Court overturned their rulings and established a precedent. It ruled a global corporation like Facebook, which conducts business activities in Israel, may not categorically disregard the application of Israeli law to its relations with those who consume its services, using a choice of law stipulation in a uniform contract.

In order to ascertain what constitutes a discriminatory condition in a uniform contract, it is necessary to consider the balance of powers between the parties to the engagement. The Supreme Court differentiated between types of customers that engaged with the global company—strong and sophisticated commercial customers that can contend with any imbalance of powers between it and Facebook, or consumer customers, who are in an inherently inferior position relative to the supplier in terms of knowledge, experience, power, and financial means. With regard to a consumer customer, the court will more likely rule this is a discriminatory condition in a uniform contract.

Other considerations for determining that a choice of law clause is discriminatory are when the service provider’s activities involve monopolistic characteristics and when the subject of the agreement is an asset critical to the customer.

Who Is a Consumer Customer?

The Supreme Court classified small businesses that purchased advertising services from Facebook as consumer customers, considering the vast gaps in power and information between them and Facebook. On the other hand, it is less likely to deem advertisers on Facebook that are major sophisticated businesses as “consumer customers.”

The Supreme Court defined a series of criteria to ascertain if the advertiser is a commercial customer or a consumer customer, by showing the nature of the gaps in power and information between the advertiser and Facebook. These include the advertiser’s financial robustness, the number of employees it employs, if the advertiser has legal counsel and how extensive it is, if the advertiser has an advertising department and how large it is, to what extent advertising on Facebook is vital to the advertiser’s business and if it creates dependence on Facebook, if advertising is an integral part of the business’s activities or merely a tool to promote the business’s products and services, and the sum of the lawsuit and to what extent the complexities involved in litigating according to foreign law preclude the advertiser from suing.

A Discriminatory Clause?

In the case at hand, the Supreme Court ruled it is in the interest of Israeli consumers to regulate their relations with Facebook according to Israeli law. The court noted the choice of law stipulation prejudices their interest in that it widens the gaps of power and information between them and Facebook, thus contravening the purposes of consumer protection law. Therefore, the court ruled with regard to these types of customers that the choice of law clause may be discriminatory.

The deliberations did not discuss the question of jurisdiction (but only the question of choice of law), since Facebook agreed in this case to litigate in Israel, even though the agreement contained a stipulation of adjudication in the United States. Nevertheless, it is probable the same ruling will also apply to the question of jurisdiction. This too may be deemed a discriminatory condition in a uniform contract when the customer is a consumer customer.

***

The Litigation Department is at your service if you have any questions or require advice in the field of commercial Litigation. The Regulation department is at you service for questions relating to consumer protection.