Wednesday, November 30, 2005
Where an employer requires an employee sign a noncompete agreement, what happens when the employee’s job changes, as by promotion or reassignment? According to Wilfred J. Benoit, Jr., James W. Nagle, Robert M. Hale and Bradford J. Smith of Boston’s Goodwin Procter LLP, a number of lower court Massachusetts cases have suggested that changes in the job or employment status will nullify the clauses, and that employers must get new agreements signed when the employee’s job responsibilities change. Other courts, they say, have rejected a per se rule.
The Seventh Circuit recently decided an insurance coverage dispute involving spoiled peanut butter. The court held that a peanut butter company’s insurer was not obligated to indemnify the company for amounts paid to a cookie mix manufacturer after the peanut butter company supplied spoiled peanut butter. (Image Source: Wikipedia). Under the terms of the Insurance Coverage Agreement between the peanut butter company and the insurer, the spoiled peanut butter did not cause “property damage” subject to indemnification. Moreover, certain “business risk” exclusions to coverage applied.
Here is the story as Judge Sykes tells it:
The peanut butter in question was contained in sealed packets supplied by plaintiff Sokol and Company ("Sokol") to its customer Continental Mills ("Continental") for inclusion in boxes of Continental's cookie mix. When Continental discovered that the peanut butter had gone bad, it retrieved the cookie mix, substituted fresh peanut butter packets, and sought reimbursement from Sokol for the costs associated with the replacement. Sokol filed notice of Continental's claim with Atlantic Mutual Insurance Company ("Atlantic"), its Comprehensive General Liability ("CGL") insurer. Atlantic denied coverage, citing a number of the policy's “business risk” exclusions. Sokol then paid Continental's claim itself and sought indemnification from Atlantic under the policy. Atlantic again denied coverage and this litigation ensued.
After parsing out the difference between a duty to defend and a duty to indemnify, the court turned to the language of the policy, noting that “property damage” was defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
Applying this definition, the court held that “Sokol's peanut butter paste . . . did not cause 'physical injury to tangible property.'" The court reasoned:
The paste was sealed in individual packets, and those packets were simply removed from the boxes of cookie mix. There has been no allegation that the spoilage of the peanut butter affected the other food products contained within the boxes. Sokol suggests weakly that when Continental opened the boxes to remove and replace the spoiled paste, the opening itself constituted "property damage" within the meaning of the policy. The act of opening and resealing cookie mix boxes can scarcely be characterized as an "injury" to the boxes.
Even assuming the spoiled peanut butter caused “property damage,” the court held that certain “business risk” exclusions from coverage applied, namely: the exclusion of damage to impaired property and the exclusion of recalled products.
Sokol & Co. v. Atlantic Mut. Ins. Co. (7th Cir.
[Meredith R. Miller]
University of Oregon law professor Merle Weiner (left) has been threatened with a lawsuit for her references to a particular lawsuit in an article she wrote that appeared in the University of San Francisco Law Review. And she's discovered that she's all alone. Neither her employer nor the law review will defend her, even though she has a legal opinion that her report was accurate. Rather than face litigation, the law review reportedly has pulled the disputed reference from its online version of the article.
The article, for those interested, is Strengthening Article 20, 38 U.S.F. L. Rev. 701 (2004).
Those of you who use the Farnsworth-Young-Sanger casebook are familiar with the case of Oglebay Norton Co. v. Armco, Inc., 52 Ohio St. 3d 232, 556 N.E.2d 515 (1990). The case involves a series of long-term contracts entered into by ONC and Armco beginning in 1957, for carriage of iron ore across the Great Lakes.
What you may not know is that one of those ships operated by Oglebay Norton was the SS Edmund Fitzgerald, whose 1975 sinking off Whitefish Bay in Lake Superior became the subject of Gordon Lightfoot’s subsequent hit record, The Wreck of the Edmund Fitzgerald.
The ship was the pride of the American side,
Coming back from some mill in Wisconsin.
As the big freighters go it was bigger than most
With a crew and the Captain well seasoned.
Concluding some terms with a couple of steel firms,
When they left fully loaded for Cleveland.
And later that night when the ships bell rang,
Could it be the North Wind they'd been feeling?
The ship was built for the Northwestern Mutual Life Insurance Co. (and named after its chairman), and was chartered to Oglebay Norton for its entire career. As Lightfoot's lyric notes, it was at the time it was built the largest freighter on the Great Lakes. A good deal of information about the Fitzgerald can be found at S.S. Edmund Fitzgerald Online. An Edmund Fitzgerald desktop is here.
Oglebay Norton itself is a venerable company, founded as an iron-ore partnership in 1851. One of its early employees was 16-year-old John D. Rockefeller, who made $3.50 a week as a bookkeeper before quitting in 1859 for greener pastures in the oil business. After filing for bankruptcy protection in 2003, the company exited the shipping business (though it still carries its own products in its own ships) and now remains a supplier of industrial aggregates.
Tuesday, November 29, 2005
Contractual pre-dispute waivers of jury trials are not effective in California, according to a recent ruling by the state supreme court in Grafton Partners, L.P. v PriceWaterHouseCoopers L.L.P. (August 5, 2005).
Parties can agree in advance to arbitration, said the court, but they cannot agree in advance to have their case tried by a judge instead of a jury. What is striking is that this is not a consumer case, but one between sophisticated business entities. Christopher R. Ball and John M. Grenfell of New York’s Pillsbury Winthrop offer a brief report on the case.
A plaintiff home builder’s complaint against buyers who backed out of a deal was properly dismissed on the pleadings, because the complaint on its face showed that the alleged contract was not in writing, according to a recent decision by the Indiana Court of Appeals.
In the case, a home builder e-mailed a purchase agreement to prospective buyers. The buyers never actually executed it. When the buyers backed out of the deal, the builder sued. Its complaint
adequately alleged the existence of an oral contract for the sale of real property. It alleged that the parties agreed on the identity and location of the property to be sold, the purchase price, the date of closing, and the down payment. And in their answer, the [buyers] admitted to all allegations in the complaint for purposes of the Rule 12(C) motion. Thus, in this appeal, we conclude that the parties entered into an oral contract for the sale of real estate.
But the [buyers] also pleaded the statute of frauds as an affirmative defense with their answer. The statute requires that contracts for the sale of real property be in writing. . . . The statute is intended to preclude fraudulent claims that would probably arise when one person's word is pitted against another's and that would open wide the flood-gates of litigation. . . . Nevertheless, oral contracts for the sale of real property are voidable, not void. . . . Oral contracts for the sale of real property are excepted from the statute of frauds where there is part performance, . . . or promissory estoppel . . . .
The builder argued that it did in fact rely on the oral contract, and thus that it could not be said as a matter of law that the contract would be unenforceable. Trouble was, it did not raise any exceptions to the statute in its complaint. Since on its face the contract set forth in the complaint was unenforceable, it had to be dismissed.
Fox Development, Inc. v. England, 2005 Ind. App. LEXIS 2131 (2d Dist. Nov. 14, 2005).
The ABA Cyberspace Law Committee's Winter Working Meeting will take place at the offices of Potter Anderson & Corroon LLP in Wilmington, Delaware, on Friday and Saturday, January 27-28, 2006. The group historically has been involved in some interesting and important project, and they're always interested in getting more academics involved. According to the organizers:
The Winter Working Meeting attracts Internet and technology lawyers from around North America. If you have not attended the Committee's "WWM" in the past, it is not to be missed -- this is where we roll up our sleeves and get some real work done with our colleagues without a heavy schedule of Section and Association gatherings. We especially encourage everyone who has joined the Cyberspace Law Committee this year to attend the Winter Working Meeting.
A block of rooms at the Hotel DuPont will be available at a discounted rate. Hotel reservations must be made by January 5, 2006 to take advantage of the ABA group rate. The Committee will also hold its traditional Friday evening dinner, which is always great fun and a good opportunity to connect with Committee members and guests. The deadline to register for the meeting and dinner is January 13, 2006.
To find out about membership, and to sign up for the meeting, you can visit the Committee Web Site.
The case describes Rupert as a “German prince, . . . an alien born, enemy to the King and his kingdom.” Though he was, in fact, a German prince and an alien, he was also nephew to King Charles I, being the son of his sister Elizabeth of Bohemia. His uncle created him Earl of Holderness and Duke of Cumberland, in addition to his German titles. Far from being an enemy of the King, he was one of his staunchest supporters in the Civil War.
Trouble had been brewing for years between Charles and Parliament. On January 4, 1642, royal troops entered Parliament to arrest its leaders, but they had fled. Because of hostility in London, Charles moved north to raise an army. Rupert, though only 23, already had nine years’ military experience campaigning on the Continent, and he was appointed commander of all Royalist cavalry. Oxford, intensely loyal to the Crown, became the Royal capital during the war.
On July 19, 1642, Royalist troops took possession of some property owned by one Paradine and leased to Jane. Charles subsequently raised the royal banner at Nottingham on August 22, triggering the Civil War. The tide of war ebbed and flowed, but by December 1645, the king was bottled up in Oxford and the Royalist resistance is broken. When Oxford fell, shortly after the Feast of the Annunciation, in April 1646, the remaining resistance collapsed. Jane got his land back.
Paradine sued for three years of back rent. By the time the case reached the judges, Rupert was banished to the Continent and the King was a prisoner of Parliament -- hence the "enemy" label. In his defense against Paradine’s claim for rent, Jane raised the fact that he had been deprived of use of the land for three years. The court’s opinion, finding for the landlord, can be read by clicking on “continue reading.”
Rupert, meanwhile, joined a group of English exiles fighting for the King of France, turned buccaneer for a while, preying on English shipping in the West Indies, and with the Restoration came back to England with Charles II. He commanded the English fleet successfully during the Second Anglo-Dutch War and unsuccessfully during the Third, helped invent the mezzotint, and served as the first Governor of the Hudson’s Bay Company. He died peacefully at home with his mistress, a Drury Lane actress, and his daughter Ruperta.
Monday, November 28, 2005
Academy Chicago Publishers v. Cheever, 144 Ill. 2d 24 (1991), is a fun case to teach. John Cheever was a Pulitzer Prize-winner author. After his death, a small publisher entered into a licensing agreement with John Cheever's widow for the right to republish a collection of John Cheever's stories. Things went horribly wrong, however. Neither party had the help of counsel, and the contract was poorly-drafted and ambiguous--leaving open basic questions like which stories were being licensed or even how many. Even though the contract did not initially appear to be financially significant (the widow received a $1,500 advance against royalties), the resulting lawsuit ultimately generated over $1 million in legal fees. Unfortunately for the publisher, the contract ultimately failed for indefiniteness.
I like teaching the case for several reasons:
- it shows the limits of gap-filling in common law contracts (and offers an opportunity to discuss if this case comes out differently under the UCC's more liberal gap-filling approach)
- it shows what happens when clients draft complex intellectual property agreements without legal help--the client may end up spending far more money trying to clean up a crummy contract than the client would have spent getting competent counsel involved at the drafting/negotiation stage
- it shows how relatively small contracts can become significant assets, reinforcing that lawyers need to treat even seemingly-inconsequential contracts with respect
- it gives students an opportunity to consider the negotiation dynamics. Why didn't the parties resolve basic details? Why didn't the parties use lawyers? Was one party preying on the other?
This litigation is surprisingly well-documented. The publishers wrote a book called Uncollecting Cheever: the Family of John Cheever vs. Academy Chicago Publishers (1998; ISBN 0-8476-9076-8). You can typically buy this book used for less than $5 at Amazon or Half.com. This book was extensively reviewed (including at the New York Times and Salon), and the book reviews provide a nice summary of the story to supplement the case facts. This page aggregates the various opinions and contains a variety of contemporaneous news articles.
Meanwhile, Academy Chicago Publishers did end up publishing a book, composed entirely of public domain works for which no license agreement was needed, called Thirteen Uncollected Stories by John Cheever (1994, ISBN 0-89733-405-1). You can also buy this book used at Amazon or Half.com for less than $5. I circulated both books in class as props, which I thought made the case far more tangible for students.
There’s a slew of new papers breaking into this week’s Top Ten. Following are the ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending November 27, 2005. (Last week's ranking in parentheses.)
1 (2) Katrina's Continuing Impact on Procurement - Emergency Procurement Powers in H.R. 3766, Christopher R. Yukins & Joshua I. Schwartz (Geo. Washington).
2 (4) In Memoriam, John Cibinic, Jr., Ralph C. Nash (Geo. Washington), et al.
3 (5) Rethinking Spyware: Questioning the Propriety of Contractual Consent to Online Surveillance, Wayne Barnes (Texas Wesleyan).
4 (9) Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere, Richard Craswell (Stanford).
5 (8) Contracting in the Shadow of the Law, Nicola Gennaioli (IIES-Stockholm).
6 (10) Effective vs. Nominal Valuations in Venture Capital Investing, Michael Woronoff (Proskauer Rose) & Jonathan Rosen (Shelter Capital).
7 (-) From St. Ives to Cyberspace: The Modern Distortion of the Medieval 'Law Merchant,' Stephen E. Sachs (Yale).
8 (-) An Embedded Options Theory of Indefinite Contracts, George S. Geis (Alabama).
9 (-) Hurricane Katrina's Tangled Impact on U.S. Procurement, Christopher R. Yukins (Geo. Washington).
10 (-) One-Sided Contracts in Competitive Consumer Markets, Lucian Arye Bebchuk (Harvard) & Richard A. Posner (Chicago).
A judge in the Eastern District of Pennsylvania recently refused an employer’s request to enforce a non-competition clause against a former employee. The court held that the agreement lacked consideration and the restrictions were unreasonably overbroad.
Robert Bodell worked as a sales representative for Fres-co, a manufacturer and distributor of “flexible packaging materials.” In 1998, three weeks before he began employment with Fres-co, Bodell signed a confidentiality and non-competition agreement. All of Fres-co’s 350 employees signed the same agreement. In 1999, Fres-co had the employees sign a slightly revised agreement based on concerns that the 1998 agreement was overbroad. So, in 1999, during his employment with Fres-co, Bodell signed a new non-compete, promising, among other things, not to work for any of Fres-co’s competitors for one year after termination of his employment.
Inevitably, Bodell left Fres-co and went to work for Ultra
Flex, a Fres-co competitor. Fres-co sought
injunctive and declaratory relief against Bodell, alleging
breach of the 1999 confidentiality and non-solicitation agreement. The court denied the request, holding that the
1999 agreement was not supported by “new consideration” – under
According to the language of the 1999 Agreement, Bodell signed it "in consideration of the nullification of a prior confidentiality and non-competition agreement." The 1999 Agreement differed from the 1998 Agreement in that it (1) reduced the restricted period from two years to one year; (2) introduced and defined the phrase "line of business;" and (3) eliminated a liquidated damages provision. Fres-co characterizes these lessened restrictions as consideration.
* * *
However, as Fres-co has conceded, the company had employees sign the 1999 Agreement because it was concerned that the 1998 Agreement might be unenforceably overbroad. If the 1998 Agreement is unenforceable, there were no prior restrictions on Bodell's post-Fres-co activity. In that case the 1999 Agreement's non-compete language would not decrease the period of a restriction (as Fres-co contends), but rather it would increase restrictions on Bodell's post-Fres-co activity by creating a new a one-year restriction where none existed before. This hardly constitutes consideration.
Moreover, Fres-co admits that every employee, however lowly, had to sign the same 1999 Agreement and was not permitted to negotiate any terms. Fres-co argues this was done for consistency across the organization. No doubt this method was administratively convenient and achieved consistency, but whether such an agreement was permissible under Pennsylvania law is quite a different matter. Lacking consideration since gratuitously sought, the 1999 Agreement fails to satisfy Pennsylvania's requirements and is thus unenforceable on this basis alone.
The court further held that, even if Bodell had received consideration for the 1999 agreement, it was unenforceable because (1) the restrictions were not reasonably necessary for Fres-co’s protection and (2) the restrictions were not reasonably limited in duration and geographic extent.
Finally, the court refused to exercise its equitable powers to rewrite the contract terms:
Having recognized an overbreadth problem with its 1998 Agreement, Fres-co failed properly to address it. Now it asks this Court to take on a wholesale rewriting that properly belongs to corporate decision-makers working with their counsel. We decline this expansive invitation to exercise our equitable powers to help this employer stifle legitimate competition by a salesman merely seeking to ply his trade.
Fres-co Sys. USA, Inc. v. Bodell (E.D.
[Meredith R. Miller]
Saturday, November 26, 2005
Outsourcing of business operations is a growing trend in the U.S. In-house employees are replaced by a firm which handles the business using its own staff. Such agreements, writes Dennis F. Penepacker of Chicago’s Meyer Brown Rowe & Maw LLP, require the closest kind of relationships between the parties. He argues that neither the command-and-control mechanisms of in-house operations nor the arms’-length contacts typical of ordinary supplier contracts are appropriate.
Friday, November 25, 2005
A surety who believed he had a prior oral agreement that his liability would be limited but who nevertheless signed an unlimited surety agreement, was entitled to claim the benefit of the earlier oral agreement, according to a recent decision by the Cape High Court in South Africa, Davids and Another v. ABSA Bank Ltd. According to a report by Dawie Malan of Johannesburg’s Cliffe Dekker Inc., the court held that the bankers who presented the agreement to the surety failed to explain the unlimited nature of the liability, despite a recitation in the agreement that it had been explained.
On this date, November 25, 1795, young Levi Wyman is born in Shrewsbury, Massachusetts, the fourth son and seventh child of 38-year-old farmer and militia officer Seth Wyman and his wife, Mary Brown Wyman.
Unlike most of the Wymans, who will not settle far from home, Levi will develop a roving streak and go away to sea. And, unlike his sober siblings, he’ll become a drunkard and a spendthrift. When he lands ashore in Hartford, Connecticut, aged 25 and destitute, he’ll fall dangerously ill and into delirium -- no one knows why -- and will be tended by innkeeper Daniel Mills. Mills’s suit to claim recompense from Seth will enter the world of contracts casebooks as Mills v. Wyman in C.C. Langdell’s first edition in 1881.
The classic treatment of the case is the Tulane Law Review piece by Geoffrey R. Watson (Catholic), In the Tribunal of Conscience: Mills v. Wyman Reconsidered. The case is also the one that in law school inspired Lisa Bernstein (Chicago) with the desire to become a contracts professor.
Thursday, November 24, 2005
On this date, November 24, 1981, the U.S. Senate confirmed 42-year-old Richard Allen Posner, a law professor at the University of Chicago, to the U.S. Court of Appeals for the Seventh Circuit. Given the fact that he had written the book The Economics of Contract Law with Anthony Kronman in 1978, it’s not surprising he would go on to be probably the most influential judge in contract law issues at least since Roger Traynor, and perhaps since Benjamin Cardozo. For a mano-a-mano slugfest between Posner and Cardozo, see Larry Cunningham’s Cardozo and Posner: A Study in Contracts.
Wednesday, November 23, 2005
A previous post summarized Srour v. Dwelling Quest Corp., a New York case concerning when a real estate broker’s job is fully performed, entitling her to a fee. There, the parties’ contract defined the broker’s job as “assisting in the location and renting of a suitable apartment.”
The New York Court of Appeals decided the case yesterday, unanimously reversing the appellate decision in a summary memorandum. The lesson: you have to satisfy the conditions of your agreement to earn a brokerage fee. The court held:
Here, the rental agreement obligated the defendant-broker to assist plaintiff in renting a "suitable apartment" and provided that the broker's commission was to be paid "at the time of lease signing"; however, the apartment had become uninhabitable by the time the landlord signed the lease. Accordingly, the defendant-broker did not satisfy the brokerage agreement's condition, and is not entitled to any commission.
[Meredith R. Miller]
It's a truism that all contracting occurs in the context of the legal regime that governs contract enforcement. But what are the implications of that statement? In Contracting in the Shadow of the Law, Nicola Gennaioli of the Institute for International Economic Studies at Stockholm University offers a model of how different judicial approaches lead to different contracting practices. Here's the abstract:
I study how law shapes the form and efficiency of contracts. I build a model where judges subject to personal biases try to subvert contracts by distorting fact-finding and interpretation. I consider two adjudication regimes, one where judges wield discretion and another where they must follow a code. I find that, by affecting judicial behavior, the law shapes the form of optimal contracts: discretion fosters the use of contingent contracts, codification the use of non-contingent contracts. Beyond contract form, I find that adjudication regimes fundamentally differ in their ability to enforce complex transactions, where performance is hard-to verify. The code's bias is the cost of codification, the arbitrariness of judges and juries and their incompetence are the costs of discretion. I illustrate the costs and benefits of discretion across areas of law by discussing findings from law and finance and product liability.
On this date, November 23, 1730, twenty-five year-old William Murray of Lincoln's Inn is called to the Bar. The fourth son of the Scottish noble Viscount Stormont, his political connections will keep him in business during his early years. His marriage to the daughter of the Earl of Winchelsea, a former secretary of state and Lord President of the Council, won't hurt his advancement, either. (Image: Private collection.)
Murray will be Solicitor General at 37, Attorney General and Leader of the House of Commons at 49, and Chief Justice of the King's Bench at 51, where, as 1st Earl of Mansfield, he’ll go on to become the most famous (if not actually the most influential) commercial law judge in British history.
By the way, the Murrays, a canny Scots clan, will play both sides of the fence in true Master of Ballantrae style in the decades that follow the “Glorious Revolution” of 1688. While William is working his way up the ladder in King George’s government, his brother James Murray will go with the Jacobites and be made Earl of Dunbar by the exiled king, an honor he'll never enjoy.
Tuesday, November 22, 2005
As noted in this post, today is the 78th anniversary of Judge Cardozo's decision in Allegheny College v. National Chautauqua County Bank, 246 N.Y. 369 (1927). Coincidentally, today, the New York Court of Appeals issued a decision in Matter of the Estate of Wirth. Matter of the Estate of Wirth was described in a previous post because it calls to mind Allegheny College -- it addresses whether a promise to pledge money to a Pennsylvania college is enforceable. (Image source: Historical Society of the Courts of the State of New York portrait gallery ).
Today, the New York Court of Appeals held that the pledge was enforceable. The result was consistent with Allegheny College, but a statute enacted that same year drove the court's reasoning. The New York court recognized that Pennsylvania's Uniform Written Obligations Act, enacted in 1927, provided that a written promise is not unenforceable for lack of consideration if the writing contains an additional, express statement by the signer that he intends to be bound. In a unanimous memorandum, the court held:
By the plain terms of the statute, Wirth's pledge was not "invalid or unenforceable for lack of consideration," and Wirth's estate has no other defense to Drexel's claim. The estate argues that there was a "failure" rather than a "lack" of consideration, but this argument rests only on confusion. A "failure of consideration" means a failure to render the performance the parties agreed on (citation to Corbin omitted). In this case, there is no basis for asserting that Drexel failed to render any required performance.
Most interesting is not the reasoning or the result, but the rich history: Allegheny College is listed in the New York court's memorandum as amicus curiae.
[Meredith R. Miller]