The British Columbia Court of Appeal’s decision in Petty v. Niantic Inc.¹ demonstrates how a tailored arbitration agreement in a standard form contract can operate to stay a class proceeding in the context of a consumer relationship. The Court of Appeal upheld the application judge’s contextual analysis, which found that an arbitration agreement in a standard form contract was neither unconscionable nor contrary to public policy.

You can also read our blog post on the companion case, Williams v. Amazon Inc.²

Factual background

The plaintiffs commenced a proposed class action on behalf of residents of British Columbia and Alberta who had purchased or otherwise paid directly or indirectly for “loot boxes” in video games from the defendants. The plaintiffs alleged that the loot boxes (a game of chance inside a video game where users could win virtual awards) were an unlicensed, illegal gaming system under Canadian law.

To access the video games, the plaintiffs agreed to standard form Terms of Service that contained an arbitration agreement, a U.S. choice of law clause and a class action waiver.

The plaintiffs sought damages against the defendants for unjust enrichment, alleged statutory breaches, illegal gaming and other alleged wrongs.

The Supreme Court’s decision

The defendants brought an application for a stay of proceedings pursuant to section 8 of the International Commercial Arbitration Act, except for the relief sought by the appellant under the Business Practices and Consumer Protection Act.

The application judge found that the defendants met their onus under subsection 8(1) to demonstrate that the dispute arguably fell within the terms of the arbitration agreement, and that the plaintiffs failed to meet their onus under subsection 8(2) to show that the arbitration agreement was void, inoperative or incapable of being performed.

The application judge found that the arbitration agreement was not void on grounds of unconscionability or public policy because (a) the relationship between the parties did not exhibit a special relationship of trust; (b) the use of the video games or ability to purchase loot boxes were not sufficiently important elements of everyday life to make the plaintiffs particularly vulnerable in terms of their need to access the game platforms; and (c) the arbitration agreement itself was fair and understandable because

• the costs and procedures were sufficiently described
• the up-front filing fee of $200 for starting the arbitration was relatively modest
• the various reimbursements for filing, arbitrator fees and legal costs mitigated any cost disadvantages for the customers
• the agreement provided that the arbitrator must make decisions in a timely manner
• the arbitration could be conducted in writing and the arbitrator had jurisdiction to order further discovery for claims under $10,000
• the arbitration agreement identified the website containing the procedural rules
• the customer had certain opt-outs and alternatives, such as a small claims court action

The Court of Appeal’s decision

On appeal, the plaintiffs argued that the application judge erred in failing to find (1) that the arbitration agreement is unconscionable; and (2) that it is contrary to public policy.

The Court of Appeal applied a deferential standard of review because unconscionability and public policy analyses are inherently contextual and informed by the factual matrix surrounding entry into the arbitration agreement and the nature of the parties’ contractual relationship.

No unconscionability

The Court of Appeal found that the application judge properly considered the plaintiffs’ concerns regarding unconscionability. The fact that an arbitration agreement is found within a standard form contract does not alone establish an inequality of bargaining power, nor does it render the agreement unconscionable. In this instance, there was no evidence that the plaintiffs were unable to understand the arbitration agreement when they entered into it.

No improvident bargain

The Court of Appeal found no error in the application judge’s conclusion that the plaintiffs did not establish a resultant improvident bargain. It was open to the application judge to conclude that the arbitration agreement was not improvident owing to the lack of the plaintiffs’ dependency on the services provided by the defendants, the nature of the transactions in issue and the specific features of the arbitration agreement that included reimbursement, the ability to opt-out and the continued availability of a small claims court action.

No violation of public policy

The Court of Appeal found that the motion judge was correct in concluding that the arbitration agreement did not create insurmountable economic or procedural barriers to dispute resolution. The fact that the plaintiffs could not access a class proceeding under the Terms of Service did not make the arbitration agreement unfair or unduly burdensome.

Key takeaway

To withstand arguments concerning unconscionability and public policy, an arbitration clause should be drafted with the principles of fairness and transparency in mind and with a view to the underlying contractual context. Specifically, where an arbitration agreement is embedded in a contract of adhesion involving a potentially unsophisticated consumer, the drafter should consider how an arbitration agreement may minimize potential barriers faced by the consumer.

Footnotes