Publishers, check those T&C’s: BC Court of Appeal upholds arbitration and class action waivers ‎in video game contracts

The British Columbia Court of Appeal (the “Court”) has recently affirmed a lower court decision that a mandatory arbitration agreement and class action waiver in a standard form contract for the popular video games “Pokémon Go” and “Harry Potter: Wizards Unite” is valid and enforceable. This decision confirms that the enforceability of these common terms depends on the context of the transaction, and there is no “blanket ban”.

In 2021, Sharise Petty and David Stasch (the “Appellants”) claimed that loot boxes (a catch-all phrase for randomized, consumable, in-game purchases) amounted to unlicensed, illegal gambling under various Canadian laws, including the Criminal Code, the Competition Act, the Alberta Consumer Protection Act and the British Columbia Business Practices and Consumer Protection Act.

Warner Bros. and Niantic (the “Respondents”) asked for a stay of legal proceedings to halt further legal process on the basis that the Appellants agreed, in the games’ Terms of Service (the “Terms”), to a clause requiring disputes about the games to be resolved by either binding arbitration under California law or local small claims procedures. The judge in the first instance allowed a stay of proceedings finding that the arbitration agreement and class action waiver within the Terms were not unconscionable nor void for public policy reasons. Our full article with further discussion about the lower court decision can be found here.

Before the Court in this appeal began its review of the original court’s decision, they first determined what standard of review was warranted. In this case, the Court held that a deferential standard of review was appropriate over a stricter correctness standard. The reasoning of the Court was taken from a companion case, in which the same Court determined that in order to conduct an unconscionability or public policy assessment, a court must first interpret the agreement between two contracting parties and then determine whether the agreement, as interpreted, is unconscionable or contrary to public policy. Since contractual interpretation is generally a matter of mixed fact and law, the Court determined that the decision was reviewable for palpable and overriding error, thus giving high deference to the original decision-maker – i.e. the judge.

Position of the parties

The Appellants challenged that judgement in Petty v. Niantic Inc., 2023 BCCA 315, saying the judge erred in reaching his conclusion by failing to find that the arbitration agreement was unconscionable and that it was contrary to public policy.

Unconscionability is an equitable doctrine for setting aside unfair agreements, having two ‎requirements: an ‎inequality of bargaining power; and, the bargain itself must be improvident.‎ Public policy is a similar doctrine to unconscionability; however, while unconscionability focusses ‎on ‎vulnerability of a party and the inherent unfairness that results, public policy focusses on the ‎harm to society at ‎large as a result of enforcing a particular contract’s terms.‎

‎On the unconscionability front, the Appellants argued in particular with the lower court’s assessment of inequality of bargaining power and in finding that the arbitration agreement did not confer an undue advantage (i.e. an improvident bargain). They submitted, among other things, that the judge should have paid greater attention to the fact that this was a contract of adhesion between a sophisticated corporate party and an unsophisticated consumer with no room to negotiate terms, and that there was an undue advantage in favour of the Respondents as there were significant economic impediments to the Appellants, such as costs of legal representation. They also argued that the agreement frustrated access to justice due to the inclusion of a class action waiver, which “deny[ies] consumers access to effective means of advancing their claims” while preserving access to the courts for the Respondents.

On the other side, the Respondents contended that the arbitration agreement provided for a fair, accessible and low cost process of dispute resolution since the Appellants would be entitled to have their arbitration costs reimbursed if they prevailed. They also noted that the Terms allowed consumers to opt out of the arbitration agreement altogether, with notice, and that the arbitration process was easy to discern from the face of the agreement and fair: there was no substantial upfront fee nor a requirement that the consumer travel to another jurisdiction for a hearing (which is distinguishable from previously adjudicated circumstances). Lastly, the Respondents argued that the Appellants were not vulnerable nor dependent on the Games in the same way as other cases. For instance, in a recent decision of the Supreme Court of Canada, the ‎plaintiffs relied on a multinational corporation for ‎employment ‎and were thus ‎vulnerable, which were found in that case to functionally bar claimants from pursuing arbitration with no other ‎means by which to address their disputes. Additionally, in Pearce v. 4 Pillars Consulting Group Inc., 2021 BCCA 198,‎ ‎ a ‎case involving a debt restructuring business, ‎the ‎plaintiffs included people who were facing bankruptcy ‎and were thus vulnerable.

Unconscionability

The Court agreed with the Respondents that the arbitration agreement in the Terms was “profoundly different” than the ones previously adjudicated as the parties’ contract does not arise in the context of a dependent employment or remunerative relationship. Although the Court acknowledged that there was an inequality of bargaining power between the parties, they found that the Appellants had not proved that it was to so inequitable that it would justify a finding that the arbitration agreement was unconscionable. The Court noted that the fact that the arbitration agreement was contained in a contract of adhesion or housed within a standard form contract is not determinative, emphasizing that the issue of unconscionability and its requirement of “inequality of bargaining power” should be assessed contextually.

The Court confirmed that the judge had properly considered all necessary facts in deciding whether there was a sufficient degree of inequality in bargaining power. Specifically, the Court noted among other things that:

• the Appellants were not particularly dependent on or vulnerable in their need to access the Games;
• a “special relationship of trust” did not exist between the parties;
• there was no evidence that the Appellants were unable to understand the arbitration agreement when they entered into it;
• the Appellants had the ability to choose between proceedings in small claims court and arbitration;
• the costs of arbitration and arbitration procedure were sufficiently described in the agreement; and
• the arbitration agreement identifies a website from which a consumer can obtain the procedural rules.

Emphasizing again that the inequality of bargaining power is contextually assessed, the Court held that the judge’s analysis of bargaining power did not contain “an error in principle that affected the analysis in a material way” nor was there a “palpably wrong determination.”

Furthermore, the Court also noted that a finding of unconscionability requires not only an inequality of bargaining power but a resultant improvident bargain as well, a factor that the Court again affirmed had been analyzed correctly by the lower court. Although the costs of advancing a claim through arbitration or small claims court would exceed the amount of the Appellants’ claims, the Court held that because of the specific features of the arbitration agreement (e.g., the reimbursement of filing and legal costs if the consumer prevails, the ability to opt-out of the arbitration agreement, and continued availability of a small claims action), the arbitration clause was not so disproportionately one-sided that it would result in an improvident bargain, even with the existence of a class action waiver.

The Court applied the same principle as it did in the companion case in concluding that, even with the inclusion of a class action waiver within the arbitration agreement, the facts of the case and Terms were not enough to warrant a finding of unconscionability, and stated that the mere inclusion of a class action waiver would not render an otherwise valid arbitration agreement unconscionable or contrary to public policy. Parties are free to agree to waive class action proceedings under an arbitration agreement and it is up to the legislature, not the courts, to create exceptions, thus impliedly rejecting the argument that a class waiver action offends public policy.

The Court pointed to the law of other provinces, notably Ontario, Quebec and Saskatchewan, each of which have expressly prohibited mandatory arbitration agreements and class action waivers. By contrasting with BC’s law, the Court held that the inclusion of class waivers in the case at hand were neither unconscionable nor contrary to public policy.

Public policy

The Court again confirmed the judge’s analysis in favour of the Respondents that the arbitration agreement did not create undue hardship and was therefore not unenforceable for public policy reasons.  Agreeing with the judge, the Court noted that just because a consumer does not have the ability to access a class proceeding under an arbitration clause, does not necessarily make an arbitration clause unfair or unduly burdensome. For reasons similar to the unconscionability analysis discussed above, the Court gave deference to the judge’s public policy analysis and found them reasonable. Particularly, the Court held that the ability to opt out of the arbitration agreement offered flexibility for consumers, and supported the judge’s decision that the arbitration agreement did “not present an insurmountable economic or procedural barrier” to dispute resolution and accessible arbitration remained a viable method, even if the consumers chose not to opt-out of the arbitration agreement.

Conclusion

The end result was that the Court affirmed that the Terms’ arbitration agreement was not void, inoperative or incapable of being performed for unconscionability or public policy reasons, and so the Court dismissed the appeal.

From this, we see continued support for the proposition that if a publisher properly considers the fairness of the bargain struck with players in its posted terms and conditions, and that process is easily accessible to the players, a court may uphold its mandatory arbitration and class waiver provisions (at least, in jurisdictions where this has not been prohibited by statute). Publishers should therefore consider revisiting their terms of service with counsel to ensure their dispute resolution provisions remain up-to-date and effective.