California’s Second District Court of Appeal has held that where a private plaintiff which has not itself suffered injury files a representative action under California’s Unfair Competition Law (Bus. & Prof. Code section 17200 et seq., the “UCL”) alleging contractual provisions subject its customers to an unlawful, unfair or fraudulent business practice, and the contract contains a forum selection provision, the plaintiff is bound by that provision just as the customers would be bound had they filed the action themselves. Interestingly, in what may be a reflection of frustration with overzealous private representative UCL enforcement actions, the Court of Appeal noted sharply that while the plaintiff in the matter “stood to lose the opportunity to recover attorney’s fees should it prevail on a California UCL action, our paramount consideration is the protection of consumers, not the enrichment of attorneys.” The ruling has potentially sweeping application for businesses wary of widespread UCL litigation inside California.

In Net2Phone, Inc. v. Superior Court, __ Cal. App. 4th __ (2nd Dist., Docket No. B162210, June 9, 2003), Consumer Cause brought suit in Los Angeles County Superior Court against Net2Phone, Inc. (“Net2Phone”), a provider of Internet telecommunications services. Net2Phone’s service allows customers to place phone calls over the Internet. Customers who wish to utilize Net2Phone’s services have to download software from its website. The software had links to an “End User License Agreement” and “Terms of Use,” which must be accepted to use the software. In its action, Consumer Cause alleged that Net2Phone failed to disclose in its advertising and promotional materials its billing practices of rounding up to the nearest minute, thereby rendering its advertising and promotional materials false, misleading and fraudulent in violation the UCL. Consumer Cause further challenged Net2Phone’s practice of only disclosing its billing practices in its “End User License Agreement” and “Terms of Use” accessed through a highlighted hyperlink.

Citing forum selection provisions in the “Terms of Use” and “End User License Agreement” providing that disputes would be governed by New Jersey law and subject to the exclusive jurisdiction of the state and federal courts in New Jersey, Net2Phone filed a motion to stay or to dismiss the action. Ruling that Consumer Cause could pursue the action in California, but governed under New Jersey law, the Superior Court found that Consumer Cause was not bound by the forum selection clause. The Superior Court reasoned that “had the real Attorney General brought this action, I would doubt if this court would be sending him to New Jersey to try the matter.”

Although the Court of Appeal agreed with the Superior Court that a public prosecutor would not be subject to the forum selection clause, privately pursued representative actions or “private attorney general” actions are fundamentally different in nature. Rather, the relevant inquiry in determining whether a plaintiff, who is not a party to a contract, is bound by the contract’s forum selection clause is whether (1) the third party is “closely related to the contractual relationship,” and (2) the contractual forum state provides a “suitable alternative forum” for the lawsuit. The Court of Appeal held that Net2Phone’s contractual terms accessed via hyperlink, a common practice in Internet business, was not unfair and was enforceable had Net2Phone’s customers filed an action themselves. By suing in a representative capacity challenging certain contractual terms, Consumer Cause purported to assert the rights of those who are parties to the contract and thus was “closely related” to the contractual relationship since it stood in the shoes of those whom it purported to represent.

The Court of Appeal further found that New Jersey was a suitable alternate forum, despite the fact New Jersey’s Consumer Fraud Act (“CFA”), N.J.S.A. 56:8-1 to 20, differed in one crucial aspect from the UCL, in that an action can only be filed by either the Attorney General or a person who suffers an ascertainable loss of money or property. The Court of Appeal rejected Consumer Cause’s contention that since it had no standing to bring an action in New Jersey under the CFA, the forum selection clause would be unreasonable.

The Net2Phone decision incrementally narrows of the scope of representative actions under the UCL. While businesses must still ensure that forum-selection clauses are fair and enforceable with respect to the parties to the contract and that the selected state provides a suitable alternative forum, private attorney general suits under UCL will not be a means to avoid such clauses. Businesses considering forum selection clauses should carefully consider the effect of this case and its potential ability for curbing potential abuses in the name of the UCL by “private attorneys general.”

Attorney Contacts
 Peter R. Duchesneau, 310.312.4209
 Andrew H. Struve, 310.312.4355