Microsoft and Contractual Ambiguity
April 24, 2023
Microsoft Corporation (Microsoft) has a market capitalization of $2.14 trillion. It reported $204 billion in revenue in 2022. Its legal team is reportedly comprised of 1,500 people worldwide. Microsoft is the proverbial 800-pound gorilla in contract negotiations. A recent case suggests, however, that Microsoft has yet to master the art of drafting a forum selection clause that applies broadly to non-contractual claims. The company’s refusal to follow state-of-the-art drafting techniques limits its ability to dictate where claims against it must be brought. This is good for Microsoft’s counterparties. It is not so good for Microsoft.
Culinary Ventures, Ltd. v. Microsoft Corporation
In Culinary Ventures, Ltd. v. Microsoft Corporation, the plaintiff was an Israeli company known as Culinary Ventures, Ltd. (CV). CV operated a smartphone app called Bitemojo that was used by travelers looking to sample dishes offered by small, local restaurants around the world. CV entered an online services agreement with Microsoft Ireland Operations Limited (Microsoft-Ireland) to host its data, products, and content. That contract contained the following language:
This agreement is governed by the laws of Ireland. If we bring an action to enforce this agreement, we will bring it in the jurisdiction where you have your headquarters. If you bring an action to enforce this agreement, you will bring it in Ireland.
In March 2020, CV decided to shutter its business temporarily due to disruptions stemming from the COVID-19 pandemic. It asked Microsoft-Ireland if it could temporarily cease making payments. Microsoft-Ireland said yes and stated that CV’s data would be preserved. In June 2020, CV sought another extension. Microsoft-Ireland again stated that this wouldn’t be a problem but urged CV to be in touch again within 90 days to avoid having its data deleted. In September 2020, CV reached out to Microsoft-Ireland a third time to discuss payment and data storage. At this time, CV was informed that its data had been deleted and could not be recovered.
In August 2021, CV sued Microsoft in Washington state court, asserting claims for (1) breach of contract, (2) promissory estoppel, (3) conversion, and (4) violations of the Washington Consumer Protection Act (WCPA). Microsoft moved to dismiss the lawsuit based on the Ireland forum selection clause in the online services agreement. The trial court granted the motion. This decision was subsequently affirmed in an opinion by the Washington Court of Appeals (Judge Janet Chung). The discussion below surveys the issues presented by the case, only some of which were addressed in the opinion by the appeals court.
Standing to Invoke the Clause
A threshold issue that was not addressed anywhere in the opinion was why Microsoft had standing to invoke a forum selection clause in a contract to which it was not a party. There was no contractual relationship between CV and Microsoft; the contract containing the Ireland forum selection clause was between CV and Microsoft-Ireland. Although there are a number of doctrines under U.S. law that might allow Microsoft to take advantage of this forum selection clause – including agency law, alter ego doctrine, assumption, incorporation by reference, successor liability, equitable estoppel, the law of third-party beneficiaries, and the closely-related-and-foreseeable test – the Washington Court of Appeals mentioned none of them. The result is a curious opinion in which the court dismissed a case against Microsoft based on a forum selection clause in a contract to which Microsoft was not a party without explaining why this was doctrinally permissible.
The online services agreement stated that it was to be governed by Irish law. It logically follows that any ambiguity in the agreement – including any ambiguity relating to the scope of the forum selection clause – should have been resolved by reference to Irish law. This choice-of-law issue is not discussed in the court’s opinion. The reader is left to wonder how the interpretive issue at the heart of the case would have been resolved under the law of the jurisdiction selected by the parties. One is also left to wonder whether Microsoft would have standing to invoke the clause in its subsidiary’s contract if the issue had been resolved under Irish law.
The issue at the core of the appeal – and the one to which the court devotes most of its attention – is whether the language of the forum selection clause is broad enough to encompass all the claims asserted by the plaintiff. The clause by its terms applied only to an “action to enforce this agreement.” The plaintiffs, not unreasonably, argued that their claims for promissory estoppel, conversion, and violation of the WCPA were not covered by this clause because none of these claims sought to “enforce” the agreement. Microsoft argued in response that the language in the clause was broad enough to encompass all the plaintiff’s claims.
There are several methods by which Microsoft, as the drafter of the agreement, could have made clear that the clause was intended to cover claims other than breach of contract. It could have stated, for example, that any claims “relating to” or “arising in connection with” the agreement had to be litigated in Ireland. Microsoft’s clause did not contain such language. In light of this absence, it seems fair to say that the clause is ambiguous with respect to its scope. This reading is confirmed by the court’s opinion. In footnote 5, the court cites to four cases where courts have construed similar language not to cover non-contractual claims; in Footnote 6, the court cites to five cases where courts have construed similar language to cover non-contractual claims.
In a number of cases, courts presented with ambiguous forum selection clauses have invoked the doctrine of contra proferentem to hold that the language in the clause should be construed against the drafter. If the Washington Court of Appeals had gone down this route, the clause would have been deemed too narrow to encompass CV’s non-contractual claims. This would have resulted in a win for CV and a loss for Microsoft on this issue. This is not, however, what the court did.
Instead, it chose to adopt an exceedingly generous doctrinal test for determining the scope of a forum selection clause laid down by U.S. Court of Appeals for the Eighth Circuit in 1997 in Terra International, Inc. v. Mississippi Chemical Corporation. In Terra, the Eighth Circuit held that a non-contractual claim was covered by a forum selection clause if (1) that claim arose out of the same operative facts as a parallel contract claim, or (2) the resolution of the claim required the court to analyze the contract, or (3) the claim ultimately depended on the existence of a contractual relationship. When a court invokes this disjunctive test to determine the scope of a clause, it almost always concludes that the non-contractual claim is covered by it.
And that is precisely what happened here. The Washington Court of Appeals held that because resolution of the non-contractual claims required the court to interpret the contract, and because these claims grew out of the parties’ preexisting contractual relationship, they were covered by the Ireland forum selection clause. The result was a win for Microsoft. But it could easily have been a loss had the court applied the doctrine of contra proferentem. And the court’s opinion never explains how this test interacts with the “action to enforce this agreement” language in this particular contract.
The court also addressed the question of whether dismissing the plaintiff’s claims under the WCPA based on the forum selection clause would be contrary to Washington public policy. It concluded that it would not. It reasoned that the facts of this case were distinguishable from a trio prior cases – Dix, West Consultants, and Acharya – where the Washington Court of Appeals had grappled with similar issues. The court distinguished Dix on the ground that it involved a class action. It distinguished West Consultants on the ground that CV had failed to show that a lawsuit in the chosen forum was infeasible. And it distinguished Acharya on the ground that it presented different public policy interests.
The court did not consider – apparently because the plaintiffs did not ask it to consider – whether the remedies available to consumers under Irish law were equivalent to those available under the WCPA. Some courts have declined to enforce forum selection clauses when enforcement would make it impossible to vindicate rights conferred by a particular statute in the chosen forum. In the absence of any evidence relating to content of Irish consumer law, however, there was no basis for the Washington Court of Appeals to rule on this issue.
Although Microsoft ultimately prevailed, one is left to wonder who, exactly, is drafting its forum selection clauses. If the Washington Court of Appeals had decided to apply the doctrine of contra proferentem to interpret this ambiguous clause, Microsoft’s motion to dismiss would probably have been denied. Going forward, Microsoft’s legal team would be well advised to rewrite its forum selection clauses to include phrases like “related to” to give them a broader scope, as discussed on TLB’s Primer on Forum Selection Clauses. One is also left to wonder about what-might-have-been for the plaintiff. If CV had presented evidence showing that Irish courts interpret the phrase “action to enforce this agreement” to apply only to claims for breach of contract, or if it had managed to show that Ireland lacks any equivalent to the WCPA, this may have been enough to defeat Microsoft’s motion to dismiss.