Thursday, April 17, 2014
According to this article in today's New York Times, General Mills has added language to its website designed to force anyone who interacts with the company to disclaim any right to bring a legal action against it in a court of law. If a consumer derives any benefit from General Mills' products, including using a coupon provided by the company, "liking" it on social media or buying any General Mills' product, the consumer must agree to resolve all disputes through e-mail or through arbitration.
The website now features a bar at the top which reads:
The Legal Terms include the following provisions:
- The Agreement applies to all General Mills products, including Yoplait, Green Giant, Pillsbury, various cereals and even Box Tops for Education;
- The Agreement automatically comes into effect "in exchange for benefits, discounts," etc., and benefits are broadly defined to include using a coupon, subscribing to an e-mail newsletter, or becoming a member of any General Mills website;
- The only way to terminate the agreement is by sending written notice and discontinuing all use of General Mills products;
- All disputes or claims brought by the consumer are subject to e-mail negotiation or arbitration and may not be brought in court; and
- A class action waiver.
The Times notes that General Mills' action comes after a judge in California refused to dismiss a claim against General Mills for false advertising. Its packaging suggests that its "Nature Valley" products are 100% natural, when in fact they contain ingredients like high-fructose corn syrup and maltodextrin. The Times also points out that courts may be reluctant to enforce the terms of the online Agreement. General Mills will have to demonstrate that consumers were aware of the terms when they used General Mills products. And what if, when they did so, they were wearing an Ian Ayres designed Liabili-T?
Wednesday, April 16, 2014
Kenneth A. Adams, Dysfunction in Contract Drafting: The Causes and the Cure (Reviewing Mitu Gulati & Robert E. Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design (2013)), 15 Transactions: The Tenn. J. of Bus.L. 317 (2014)
Andrea J. Boyack, Sovereign Debt and The Three and A Half Minute Transaction: What Sticky Boilerplate Reveals about Contract Law and Practice (Reviewing Mitu Gulati and Robert E. Scott, The Three and A Half Minute Transaction: Boilerplate and the Limits of Contract Design), 35 Whittier L. Rev. 1 (2013)
Richard R.W. Brooks, On the Empirical and the Lyrical: Review of Revisiting the Contracts Scholarship of Stewart Macaulay (Edited by Jean Braucher, John Kidwell & William C. Whitford) 2013 Wis. L. Rev. 1295-1354.
THE 2013 RANDOLPH W. THROWER SYMPOSIUM
Privatization: Managing Liability and Reassessing Practices in Local and International Contexts
Alex Kozinski & Andrew Bentz, Privatization and Its Discontents
Preston C. Green III, Bruce D. Baker, Joseph O. Oluwole, Having It Both Ways: How Charter Schools Try to Obtain Funding of Public Schools and the Autonomy of Private Schools
Alexander Volokh, Prison Accountability and Performance Measures
Tuesday, April 15, 2014
RECENT TOP PAPERS
SSRN Top Downloads For LSN: Contracts (Topic)
RECENT TOP PAPERS
Bringing Numbers into Basic and Advanced Business Associations Courses:
How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014). The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair.
Emerging Scholars in Commercial and Consumer Law
The AALS Section on Commercial and Related Consumer Law is pleased to announce a Call for Papers for its program during the AALS 2015 Annual Meeting. The Annual Meeting is currently scheduled to take place in Washington, DC from January 2-6, 2015.
As we all know, no area of the law is ever static. New cases and issues arise that inform and challenge our thinking about existing laws and policies. Such is the case for commercial and consumer law. Whether concerning issues related to financial products, secured lending, arbitration, and the like, commercial and consumer law continue to evolve. Central to this evolution is the emergence of new scholars who contribute their voices and perspectives to these areas of the law. This panel will provide the valuable opportunity for pre-tenured professors to present and discuss their work with others in the field. Panelists are welcome to discuss any topic related to commercial and/or consumer law. Program and eligibility details are below.
Professor Tracie R. Porter, Western State College of Law
Professor Andrea Freeman, University of Hawaiʻi at Mānoa William S. Richardson School of Law
Professor Dalié Jiménez, University of Connecticut School of Law
Professor David Min, University of California, Irvine School of Law
Two speakers to be selected from a call for papers
Format: There is no formal requirement as to the form or length of proposals. Preference will be given to proposals that are substantially complete and to papers that offer novel scholarly insights. A paper may have already been accepted for publication as long as it will not be published prior to the Annual Meeting. The Section does not have plans to publish the papers, so individual presenters are free to seek their own publishing opportunities.
Eligibility: Since the goal of the program is to provide opportunities for pre-tenured professors, panelists selected from the Call for Papers must not have received tenure at their institution by January 15, 2015. Per AALS rules, only full-time faculty members of AALS member law schools are eligible to submit a paper to a Section’s call for papers. Fellows from AALS member law schools are also eligible to submit a paper but must include a CV with their proposal. Faculty at fee-paid law schools, visiting faculty with no full time appointment at a member school, international and adjunct faculty members, graduate students, and non-law school faculty are not eligible to submit. All panelists, including speakers selected from this Call for Papers, are responsible for paying their own annual meeting registration fee and travel expenses.
Deadline: AUGUST 15, 2014. Please email submissions, in Word or PDF format, to the Program Committee c/o Eboni Nelson at firstname.lastname@example.org with “CFP Submission” in the subject line.
Monday, April 14, 2014
Last month, the First Circuit decided Grand Wireless, Inc. v. Verizon Wireless, Inc. In 2002, Grand Wireless (Grand) entered into an Agreement to serve as an exclusive agent for Verizon Wireless (Verizon) within a defined geographic area. The Agreement had a five-year term, after which it became month-to-month, terminable on thirty days' written notice. The Agrement also provided for arbitration of all disputes by the American Arbitration Association (AAA).
Verizon gave notice of its intention to terminate the relationship on July 19, 2011. At Grand's request, the relationship was extended until October 31, 2011 so that Grand could sell its stores to another Verizon agent. Grand alleged that, during the month of October 2011, Verizon employee Erin McCahill sent out a postcard to Grand's customers notifying them that Grand's stores had closed and directing them to the nearest Verizon dealers. Grand alleged that McCahill knew that this information was false when she sent it out. Grand further alleged that this mailing caused its business to collapse as the mailing caused its negotiations with T-Mobile to fail. Grand filed an action in state court against McCahill and Verizon alleging fraud and federal RICO violations.
Verizon removed the case to federal court and then moved to compel arbitration. The District Court denied the motion without opinion, simply adopting the arguments in Grand's memorandum of law. So the District Court agreed with Grand that its claims were not covered by the arbitration clause and that McCahill, a non-party, could not rely on the arbitration clause.
The First Circuit reversed. As to the first issue, the First Circuit found it "clear that Grand’s claims 'arise out of or relate to' the Agreement and therefore fall within the scope of the arbitration clause." Even if it were a close call, the Court noted, the presumption in favor of arbitration would apply.
As to the second issue, Verizon argued that because "Ms. McCahill was acting as an agent of Verizon and the claims against her 'relate solely to her performance as an employee,' she is entitled to invoke the arbitration clause." The First Circuit agreed: "Verizon and Grand certainly wished to have their disputes settled by arbitration. Since Verizon could operate only through the actions of its employees, it would have made little sense to have agreed to arbitrate if the employees could be sued separately without regard to the arbitration clause."
This ruling is consistent with those of other Circuit Courts that have addressed the issue. However, in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), the U.S. Supreme Court held that state law controls whether a non-party to an arbitration agreement seek protection under that agreement. But Carlisle did not address whether employees could avail themselves of the arbitration agreements entered into by their employers, and the case indicated no intention to overrule the Circuit Court rulings indicating that employees could avail themselves of such agreements. In any case, the Court found that Grand had identified no principle of New York state law indicating that McCahill should be prohibited form enjoying the protections of her employer's arbitration agreement.
Six months ago, we reported that our blog is ranked #41 in the top 50 law blogs (or blawgs) and that we had experienced a healthy 9% growth in our readership over the previous 12-month period.
Today, Paul Caron announced on the TaxProf Blog that we have climbed to #35, with a 79.9% increase in our readership.
Thanks to all of our contributors and to our readers. We hope the upward trend continues.
Sunday, April 13, 2014
The AALS Contracts Section has issued its call for papers for the 2015 AALS Annual Meeting in Washington, D.C. - please see below:
CALL FOR PROPOSALS
ASSOCIATION OF AMERICAN LAW SCHOOLS (AALS)
SECTION ON CONTRACTS
2015 ANNUAL MEETING
JANUARY 2-5, 2015
MIND THE GAP! -- CONTRACTS, TECHNOLOGY AND LEGAL GAPS
The AALS Contracts Section solicits proposals for presentations at the Section’s Annual Meeting program, Mind the Gap! - Contracts, Technology and Legal Gaps, to be held in Washington, D.C. on January 2-January 5, 2015.
Technological innovation has created new challenges for the law. New technologies often create legal and ethical questions in areas such as privacy, employment, reproduction and intellectual property. Who owns the data collected by embedded medical devices? Can employers wipe departing employees’ phone data? To what extent are companies liable for harms created by their inventions, such as driverless cars? Who owns crowd sourced content?
Courts and legislatures are often slow to respond to these issues. To fill this legal gap created by rapid advancements in technology, businesses and individuals attempt to reduce their risk and uncertainty through private ordering. They limit their liability and allocate rights through contractual provisions. Technology affects the way contracts are used as well. Employers may have employees agree to remote phone wiping policies in their employment agreement or through click wrap agreements that pop up when they connect to the network server. Through contracts, businesses establish norms that can be hard to undo. The norm of licensing instead of selling software, for example, was established through contract and has become entrenched as a business practice. The collection of online personal information through online contracts is another example.
The Section seeks two or three speakers to join our panel of invited experts to discuss how technology has affected the use of contracts. How have parties used contracts to address the risks created by technologies? In what ways have contracts been used to privately legislate in the gap created by technological advancements? What concerns are raised when private ordering is used to fill the legal gap created by technology? What are, or should be, the limits of consent and contracting where emerging technologies are involved?
Drafts and completed papers are welcome though not required, and must be accompanied by an abstract. Preference will be given to proposals that are substantially complete. Please indicate whether the paper has been published or accepted for publication (and if so, provide the anticipated or actual date of publication). There is no publication requirement, but preference will be given to papers that will not have been published by the date of the Annual Meeting.
We particularly encourage submissions from contracts scholars who have been active in the field for ten years or less, especially those who are pre-tenured, as well as more senior scholars whose work may not be widely known to members of the Contracts Section. We will give some preference to those who have not recently participated in the Section’s annual meeting program.
DEADLINE: August 15, 2014. Please e-mail an abstract or proposal to section chair, Nancy Kim (email@example.com) with “AALS Submission” in the title line by 5:00pm (Pacific Time) August 15, 2014. Submissions must be in Word or PDF format.
Friday, April 11, 2014
I opened the box of wine for this case out of N.Y. Civil Court (where else?!):
In January 2013, defendants sent plaintiff, via email, an advertisement advising plaintiff of the availability for purchase of up to 240 bottles of 2009 Cune Vina Rioja Crianza wines. The advertisement stated:
Yesterday, we sampled the 2009 Cune Vina Real Crianza and we were very impressed. The old world style of Rioja is on a roll. Much to the chagrin of Jorge Ordonez and Eric Solomon. Even Robert Parker [ed note: wikipedia bio] could not hide his approval of this wine, blasting out a 91 point score on this one. I am not sure what 91 points means these days, but you probably do…
The rest of the advertisement contained a WA score of 91 and a quotation from Robert Parker describing the wine and the $12.99 per bottle price of the wine. Based upon this advertisement and believing that the 2009 Cune Vina Rioja Crianza was the equivalent of a Marquis Riscal, plaintiff purchased six bottles of the offered wine. After receiving the wine, plaintiff did not like the wine, found it mediocre and to be of poor quality and determined based upon his own opinions that the wine was worth no more than seven dollars per bottle. Plaintiff then demanded a refund for the six bottles he purchased. Citing store policy, defendants refused to refund plaintiff but offered to allow plaintiff to return the five unopened bottles for store credit.
After an email exchange of name calling, plaintiff then commenced a lawsuit alleging, among other things, that defendants fraudulently induced plaintiff into purchasing the wine. The court dismissed plaintiff's claim as flabby and austere, with hints of barnyard:
In order to plead a prima facie case of fraud, a plaintiff must allege each of the elements of fraud with particularity and must support each element with an allegation of fact (Fink v. Citizens Mortg. Banking Ltd., 148 AD2d 578 [2nd Dept 1989]). To plead a prima facie case of fraud the plaintiff must allege representation of a material existing fact, falsity, scienter, deception and injury (Lanzi v. Brooks, 54 AD2d 1057 [3rd Dept 1976]). Plaintiff has not made out a prima facie case on several of the elements. Plaintiff has focused his fraud claim on the fact that defendant represented the wine as a 91 point wine. The advertisement states that even Robert Parker rated this as a 91 point wine and continued that defendants were not sure what a 91 point wine wasanymore. Plaintiff alleges that this advertisement fraudulently induced him into buying the wine. However, plaintiff does not provide even a scintilla of evidence that the advertisement contained any fraud at all. Plaintiff does not allege that Robert Parker did not rate this wine 91 points and plaintiff has acknowledged that defendants did not themselves give the wine a rating. Rather, plaintiff assumed on his own that the wine was "even better than a Marquis de Riscal" and decided to purchase the wine based upon this. When the wine did not measure up to his subjective tastes, he decided that the wine was not as advertised. However, plaintiff has not demonstrated at even the minimum prima facie level that any deception took place, that there was any falsity or anything other than plaintiff's assumptions were incorrect. Thus, the second cause of action is dismissed.
This makes a fun fact pattern if you change the claims to breach of express or implied warranties. In particular, is a 91 wine score (whatever that means) a statement of opinion or fact?
Seldon v. Grapes, CV-20953/13-NY, NYLJ 1202650165299, at *1 (Civ., NY, Decided March 20, 2014).
Wednesday, April 9, 2014
Learning Contracts relies on more than appellate opinions to teach students the law. Structured presentations, detailed explanations, illustrative examples, and helpful summaries provide for more efficient learning and understanding of basic doctrine in advance of class, thus facilitating a “flipped-classroom" approach. With this approach, much more of your valuable class time can be spent on problems—both those included at the end of each lesson for preparation by students before class and others provided in teaching materials for “real time” problem solving during class. This new book provides substantial coverage of common law, UCC Article 2, and the CISG (using a “comparative” approach) and can reasonably be completed in a 4 credit hour course, or liberally supplemented with skills-building exercises for a 5 or 6 credit hour course.
Making and Doing Deals is a book that your students will learn from long after they graduate. It is also a book that should be fun for you to teach from. It’s a book that students will enjoy, and, therefore, a book that they will read. Since the First Edition, students have been reading Making and Doing Deals because the cases, problems, and text not only help them learn what they need to know as first-year law students, but also address the real-world problems and situations they will encounter after their final exam.
Tuesday, April 8, 2014
Monday, April 7, 2014
My student, Cecelia Harper (pictured), recently ordered television service. The representative for the service provider offered a 2-year agreement, which he said was “absolutely, positively not a contract.” Learned in the law as she is, Cecelia asked the representative what he thought the difference was between a contract and an agreement. He wasn't sure, but he did read her what he called "literature," which surprisingly enough was not a Graham Greene novel but the terms and conditions of the agreement, which included a $20/month "deactivation" fee should Cecelia terminate service before the end of the contract -- oops, I mean agreement -- term.
I have seen said agreement, and it includes the following charming terms:
- Service provider reserves the right to make programming and pricing changes;
- Customer is entitled to notice of changes and is free to cancel her service if she does not like the changes, but then she will incur the deactivation fee;
- Customer must agree in advance to 12 categories of administrative fees that may be imposed on her;
- Service provider reserves right to change the terms of the agreement at any time, and continued use of the service after notice constitutes acceptance of new terms;
- An arbitration clause that excludes certain actions that the service provider might bring; and
- A class action waiver
If the agreement had a $20/month deactivation fee in it, I could not find it. All I see is a deactivation fee of "up to $15." Rather, the "customer agreement" references a separate "programming agreement," and suggests that there are cancellation fees associated with termination prior to the term of the programming agreement.
So in what sense is this not a contract? My guess is that this is service providers trying to emulate what cell phone service providers have done with their "no contract phone" campaigns. For example, there's this one:
I'm guessing that the television service providers have learned that these ad campaigns have made "contract" into a dirty word. They are now seeking to seduce new customers by insisting that they do not offer contracts. Oren Bar-Gill will have to write a sequel to his last book and call it Seduction by Agreement.
If anyone has any other theories for why representatives for service providers are insisting that their contracts are really agreements, please share!
Sunday, April 6, 2014
I have been wandering and wondering about the notion of copyright as contract. The last time up, I discussed the consideration requirement. The availability of the work for limited use for life plus 70 and then free use in exchange for exclusivity. It's hardly a perfect fit if one goes by the bargain theory of contract formation. There are many works created without a second thought to copyright. We could call them gratuitous works.
In any case, if the analogy fits, what would constitute a breach? This gets harder. It cannot really be an infringement unless one views the infringing party as one of the principals who, acting through the government, promised exclusivity. I suppose that is possible. It is pretty clear that it is a breach when an author promises (by virtue of claiming copyright protection) to deliver on something with a modicum of creativity but fails to do so. Thus, there would be a breach when someone casually attaches copyright notice to something that is not copyrightable or when, in an infringement action, the author fails because he or she did not produce a work that is copyrightable or not protected by copyright for other reasons.
I am not sure where any of this is taking me but I'm having fun.
All comments are welcome.
Thursday, April 3, 2014
Running out of examples of offers to enter into a unilateral contract? This story from California comes just in time and, like all good ideas, it was inspired by television:
A pizza parlor specializing in take-out business is offering a special challenge to any two people who choose to eat in the dining room: A check for $2,500 if they can finish a giant pizza in less than an hour.
"I call it Da Big Kahuna," said Glenn Takeda, owner of 8 Buck Pizza, whose $60 extra, extra, extra large pizza is 30 inches in diameter and weighs 15 pounds.
The 8.5 lbs of dough is covered with 3.5 lbs of cheese and a choice of any three toppings, one of which must be meat.
Takeda got the idea for Da Big Kahuna challenge in January from watching other food-eating contests on TV.
He initially offered $100 cash per person plus a year's worth of free pizza, but got no takers.
Contestants started lining up when Takeda boosted the prize to $2,500. So far, 15 teams have taken -- and failed -- the challenge.
Among those who have left the table without finishing Da Big Kahuna is well-known competitive eater Naader Reda, who drove more than 400 miles from his home in Joshua Tree Wednesday to tackle the monster pizza with eating partner John Rivera.
"John and I make a great team, but that day, the 15-pound Big Kahuna was too much," Reda tweeted to News10. "It is a very tough opponent."
Reda was equally gracious in his review of the pizza's quality.
"It was the thickest, doughiest pizza I've ever encountered. It was also one of the two or three most delicious pies I've sampled," he wrote.
Takeda said Reda and Rivera came as close as anyone to finishing Da Big Kahuna, and admits he was preparing to part with $2,500.
"I swear I thought they were going to do it," he said.
At the end of the hour, the pair left with enough pizza to fill a 14-inch takeout box.
Based on Wednesday's close call, Takeda knows it's only a matter of time before he's forced to write the check.
"I'm sure somebody will surface," he said.
Not a bad marketing strategy. So long as Takeda sells about 42 of these $60 pizzas, he's got the $2500 prize covered.... and he's already half way there. Though, that assumes a 100% profit margin. We can call his cost per pizza "advertising" - and at a really good price given that his business is already all over the Internets.
[Update: I thought more about this and perhaps it isn't a unilateral contract but, rather, a bilateral contract with a condition. Customer pays $60 in exchange for a large pizza and the opportunity to win the $2500. The condition precedent to winning the $2500 is eating the whole pizza in an hour. If the customer did not have to pay for the pizza, then it looks more like a unilateral contract.]
Supreme Court Finds Breach of the Implied Duty of Good Faith and Fair Dealing Claim Barred by the Airline Deregulation Act
We have been following this case, Northwest, Inc. v. Ginsberg, which departed from the Ninth Circuit and arrived in the Supreme Court, which heard oral argument in the case in December. The facts are amusing and all-too-familiar.
Mr. Ginsberg joined Northwest's frequent flyer program in 1999 and in 2005 he achieved "Platinum Elite" status. In June 2008, Northwest Airlines (Northwest) sent Mr. Ginsberg a letter revoking his Platinum Elite membership with Northwest for "abuse." This was done, Northwest alleged, in accordance with its contractual right to terminate membership for abuse, as determined in its sole discretion. The letter noted that Mr. Ginsberg has contacted Northwest 24 times over a roughly six-month period to report, among other things, "9 incidents of your bag arriving late at the luggage carousel. . . ."
At this point, we interrupt this blog post for a bit of a rant. . . .
Wait a minute! Northwest compensated Mr. Ginsberg with travel vouchers, points and $491 in cash reimbursements, so one might think that Mr. Ginsberg's complaints were, at least in part, justified. So, over the course of six months, his bags were delayed or lost nine times, and Northwest accuses him of abuse. That, I think Mr. Ginsberg would agree, takes chutzpah!
We now return to our more sober summary of the case . . . .
The issue before the Supreme Court was whether Mr. Ginsberg's claim that Northwest had vioalted the implied covenant of good faith and fair dealing was preempted under the Airline Deregulation Act (the Act). The Act includes a preemption provisions which provides that . . .
a State, political subdivision of a State, or political authority of at least 2 States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation under this subpart.
The Act thus should preclude claims related to a price, route, or service. The Court had twice previously struck down state statutory schemes that regulated practices in the arline industry, including practices related to frequent flyer programs. The central issue before the Supreme Court was whether Northwest had voluntarily taken on additional contratual duties pursuant to its frequent flyer program. The Supreme Court, unanimously reversing the Ninth Circuit, held that it had not. Because the implied duty of good faith and fair dealing is implied, the Court held, it was imposed upon Northwest by the state and thus constituted a form of state regulation preempted by the Act.
The Court suggested that Ginsberg, or at least other, similarly situated plaintiffs, are not without alternative remedies. If Northwest really is abusing its discretion in administering its frequent flyer program, the Court suggests, airline passengers can choose to join some other airline's frequent flyer program (assuming there are significant differences and Mr. Ginsberg lives near an airport serviced by multiple airlines), and the Department of Transportation has authority to investigate and sanction the airline. Finally, the Court noted that while Mr. Ginsberg's good faith and fair dealing claim was pre-empted, his abandoned breach of contract claim might not have been.
Wednesday, April 2, 2014
James D. Rendleman, Brave New World of Hosted Payloads, 39 J. Space L. 129 (2013)
Maj. Travis P. Sommer, Getting the Job Done: Meaningfully Investigating Organizational Conflicts of Interest, Army Law. 16 (2013)
The Perspective of Law on Contract
88 Wash. L. Rev. 1227
Contract Texts, Contract Teaching, Contract Law: Comment on Lawrence Cunningham, Contracts in the Real World
Brian H. Bix
88 Wash. L. Rev. 1251
Lawrence A. Cunningham
88 Wash. L. Rev. 1265
Contract Stories: Importance of the Contextual Approach to Law
Larry A. DiMatteo
88 Wash. L. Rev. 1287
Contract as Pattern Language
Erik F. Gerding
88 Wash. L. Rev. 1323
Cases and Controversies: Some Things to Do With Contracts Cases
Charles L. Knapp
88 Wash. L. Rev. 1357
Unilateral Reordering in the Reel World
88 Wash. L. Rev. 1395
Unpopular Contracts and Why They Matter: Burying Langdell and Enlivening Students
Jennifer S. Taub
88 Wash. L. Rev. 1427
Tuesday, April 1, 2014
Last week, New York's Court of Appeals decided Biotronik A.G. v. Conor Medsystems Ireland, Ltd. The case involved a distribution agreement that went wrong when Conor Medsystems (Conor) decided to cease worldwide distribution of a specialized stent for which Biotronik was to be its exclusive distributor in specified geographic areas. Conor paid Biotronik 8,320,000 Euros plus a 20% handling fee to satisfy its obligations under the agreement. Bitronik believed itself entitled to further damages for lost profits, despite the agreement's provision excluding "indirect, special, consequential, incidental, or punitive" damages.
Both the New York Supreme Court and the Appellate Division ruled for Conor, finding that Biotronik's claims for lost profits were barred under the contractual limitation on damages. The Court of Appeals reversed, holding that the lost profits at issue here "were the direct and probable result of a breach of the parties' agreement and thus constitute general damages."
Whether lost profits are direct or consequential damages turns on whether they "flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty." However, the Court of Appeals noted, damages are not automatically consequential just because they involve a transaction with a third party. Here, the very essence of the contract was that Biotronik would resell Conor's stents. As a result, its lost profits arose directly from the breach and its lost profits damages arose as a "natural and probable consequence" of the breach.
Judge Read filed a lengthy dissent. She argued that the parties had agreed to exclude consequential damages. Since Biotronik's lost profits would have arisen from sales to third parties, they were consequential and not direct. But the majority rejected this view as elevating form over substance.
Monday, March 31, 2014
More on the Fairness of Contractual Penalties
By Myanna Dellinger
In my March 3 blog post, I described how the Ninth Circuit Court of Appeals just held that contractual liquidated damages clauses in the form of late and overlimit fees on credit cards do not violate due process law. A new California appellate case addresses a related issue, namely whether the breach of a loan settlement agreement calling for the repayment of the entire underlying loan and not just the settled-upon amount in the case of breach is a contractually prohibited penalty. It is.
In the case, Purcell v. Schweitzer (Cal. App. 4th Dist., Mar. 17, 2014), an individual borrowed $85,000 from a private lender and defaulted. The parties agreed to settle the dispute for $38,000. A provision in the settlement provided that if the borrower also defaulted on that amount, the entire amount would become due as “punitive damages.” When the borrower only owed $67 or $1,776 (depending on who you ask), he again defaulted, and the lender applied for and obtained a default judgment for $85,000.
Liquidated damages clauses in contracts are “enforceable if the damages flowing from the breach are likely to be difficult to ascertain or prove at the time of the agreement, and the liquidated damages sum represents a good faith effort by the parties to appraise the benefit of the bargain.” Piñon v. Bank of Am., 741 F.3d 1022, 1026 (Ninth Cir. 2014). The relevant “breach” to be analyzed is the breach of the stipulation, not the breach of the underlying contract. Purcell. On the other hand, contractual provisions are unenforceable as penalties if they are designed “not to estimate probable actual damages, but to punish the breaching party or coerce his or her performance.” Piñon, 741 F.3d at 1026.
At first blush, these two cases seem to reach the same legally and logically correct conclusion on similar backgrounds. But do they? The Ninth Circuit case in effect condones large national banks and credit card companies charging relatively small individual, but in sum very significant, fees that arguably bear little relationship to the actual damages suffered by banks when their customers pay late or exceed their credit limits. (See, in general, concurrence in Piñon). In 2002, for example, credit card companies collected $7.3 billion in late fees. Seana Shiffrin, Are Credit Card Law Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006). Thus, although the initial cost to each customer may be small (late fees typically range from $15 to $40), the ultimate result is still that very large sums of money are shifted from millions of private individuals to a few large financial entities for, as was stated by the Ninth Circuit, contractual violations that do not really cost the companies much. These fees may “reflect a compensatory to penalty damages ratio of more than 1:100, which far exceeds the ratio” condoned by the United States Supreme Court in tort cases. Piñon, 741 F.3d at 1028. In contrast, the California case shows that much smaller lenders of course also have no right to punitive damages that bear no relationship to the actual damages suffered, although in that case, the ratio was “only” about 1:2.
The United States Supreme Court should indeed resolve the issue of whether due process jurisprudence is applicable to contractual penalty clauses even though they originate from the parties’ private contracts and are thus distinct from the jury-determined punitive damages awards at issue in the cases that limited punitive damages in torts cases to a certain ratio. Government action is arguably involved by courts condoning, for example, the imposition of late fees if it is true that they do not reflect the true costs to the companies of contractual breaches by their clients. In my opinion, the California case represents the better outcome simply because it barred provisions that were clearly punitive in nature. But “fees” imposed by various corporations not only for late payments that may have little consequence for companies that typically get much money back via large interest rates, but also for a range of other items appear to be a way for companies to simply earn more money without rendering much in return.
At the end of the day, it is arguably economically wasteful from society’s point of view to siphon large amounts of money in “late fees” from private individuals to large national financial institutions many of which have not in recent history demonstrated sound economic savvy themselves, especially in the current economic environment. Courts should remember that whether or not liquidated damages clauses are actually a disguise for penalties depends on “the actual facts, not the words which may have been used in the contract.” Cook v. King Manor and Convalescent Hospital, 40 Cal. App. 3d 782, 792 (1974).
Eleventh Circuit Joins Others in Holding that Bank Agreement without Arbitration Clause Supersedes Prior Customer Agreement
Last month, the Eleventh Circuit Court of Appeals decided Dasher v. RBC Bank, in which Mr. Dasher alleges excessive overdraft fees and which is part of a larger multidistrict litigation pending in the Southern District of Florida. RBC Bank (RBC) moved to compel arbitration, and the District Court denied the motion.
The procedural history of the case is complicated. The parties' relationship was originally governed by a 2008 agreement (the RBC Agreement) which included an arbitration clause. Before the Supreme Court decided Concepcion, the District Court refused to enforce the arbitration clause because it made it impossible for Mr. Dasher and others to vindicate their rights. While the case was awaiting reconsideration after Concepcion, PNC Financial Services Group (PNC) aquired RBC and a 2012 PNC Agreement replaced the 2008 RBC Agreement which had previously governed the parties' relationship. The PNC agreement did not mention arbitration. The District Court ruled that the PNC Agreement applied to this litigation and that it superseded the RBC Agreement. The District Court thus again denied RBC's motion to compel arbitration, and the Eleventh Circuit affirmed on the same grounds.
While the Court acknowledged the general public policy in favor of arbitration, courts cannot compel arbitration where the parties have not agreed to arbitration. Here, the Court found that the parties expressed a "clear and definite intent" that the PNC Agreement superseded the RBC Agreement, and the former had no arbitration clause. The Court was unmoved by RBC's arguments that it had not waived its right to demand arbitration. There was no question of waiver where the right to demand arbitration did not exist in the relevant agreement. Similarly, the Court rejected RBC's argument that mere silence was not enough to overturn an arbitration clause. While RBC cited cases that seemed to support its position, those cases all involved new agreements that did not entirely supersede prior agreements. Two other Circuit Courts have addressed the issue in the context of superseding agreements, and both have held that an arbitration clause from a prior agreement is unenforceable, and the Sixth Circuit was especially clear that prior arbitration agreements are unenforceable even where the superseding agreement is silent on the subject.