Saturday, October 29, 2005
The University of Pittsburgh is hosting a conference next week marking the 25th anniversary of the United Nations Convention on Contracts for the International Sale of Goods. They've lined up a great program, featuring six of their own faculty, Ronald Brand, Vivian Curran, Harry Flechtner, Kenneth Lehn, John E. Murray, Jr., and Mark Walter, along with a raft of international experts, including Volker Behr (Augsburg), Michael Bridge (University College, London), Harold Burman (U.S. State Department), Filip De Ly (Erasmus-Rotterdam), Johan Erauw (Ghent), Franco Ferrari (Verona), Henry Gabriel (Loyola-New Orleans), Alejandro Garro (Columbia), Albert Kritzer (Pace), Joseph Lookofsky (Copenhagen), Ulrich Magnus (Hamburg), Alejandro Osuna (Iberoamericana-Tijuana), Pilar Perales Viscasillas (Carlos III-Madrid), Sandra Saiegh (U.N. Procurement Service), Peter Schlechtriem (Albert Ludwigs-Freiburg), Jernej Sekolec (UNCITRAL), Marco Torsello (Bologna), Michael Van Alstine (Maryland), and Peter Winship (Southern Methodist).
The conference, The CISG and the Business Lawyer: The UNCITRAL Digest as a Contract Drafting Tool, is slated for next Friday and Saturday, November 4-6, at Pitt Law School.
When entrepreneurs and venture capitalists sit down to discuss financing, they often set ownership percentages based on "pre-money" (the amount the firm is worth before the VC investment) and "post-money" valuations. The VC's share will often depend upon the ratio of its investment to the pre-money value of the business.
This is the wrong way to go about things, argue the authors of a new paper, Effective vs. Nominal Valuations in Venture Capital Investing, forthcoming in the New York University Journal of Law and Business. Michael Woronoff, a partner at Proskauer Rose and lecturer at UCLA, and Jonathan Rosen of Shelter Capital argue that negotiators should focus not on how much the business is worth now, but on how much each will get upon exit. Here's the abstract:
Any serious conversation between venture capitalist and entrepreneur ultimately leads to the issue of valuation of the enterprise. The discussions typically focus on some combination of pre-money value, the amount of capital being raised, and post-money value.
In turn, these values may be used to calculate a percentage of the company being sold. The entrepreneur will typically use these amounts to compare offers from different investors, or in the absence of multiple offers, as one of the primary items of negotiation.
The focus on the nominal pre-money and post-money value and ownership percentage, though common, is misguided. All parties would be better served by focusing on the actual value that will flow to each party upon a monetization event (or exit), which will be only partially dependent upon the percentage ownership implied by the pre- and post-money valuation contained in the term sheet. As obvious as this advice may seem, it typically goes unmentioned in even sophisticated discussions of the valuation of venture capital deals. Indeed, some actually counsel against this advice, arguing that cash flows are not significantly affected by factors other than price, so these other factors should not be overemphasized.
This Article explores how the structure of the typical venture capital transaction can significantly affect the distribution of value among various interested parties upon exit.
1616: Sir Walter Raleigh, who left the Middle Temple and a potential law career for one of adventure and fame, is beheaded on Tower Hill. There’s a lesson there.
1815: Daniel Decatur Emmett is born at Mount Vernon, Ohio. He'll go on to invent the first truly American art form, the minstrel show.
1877: Nathan Bedford Forrest, who had become one of the richest men in the South as a slave trader before the Civil War wipes out his business, dies at Memphis, Tennessee.
1910: Logical positivist philosopher Alfred Jules Ayer is born at London. “No proposition, other than a tautology,” he will argue, “can possibly be anything more than a probable hypothesis.”
1929: Black Tuesday on the New York Stock Exchange - a final collapse of prices that will send the nation spiraling down into the Depression. The Dow Jones index will lose 89 percent of its value of 1932 and will take 25 years to recover to pre-crash heights.
1945: At $12.95 a pop, Gimbels Department Store in New York City sells $100,000 worth of the newfangled "ballpoint" pens the first day they go on sale in the U.S.
1954: Louis B. Mayer, the first U.S. executive to earn $1 million a year in salary (in 1936) dies at age 75.
1969: The first message is sent over the ARPANET, the forerunner of the Internet.
1983: Pink Floyd’s Dark Side of the Moon passes Johnny Mathis’s Greatest Hits to become the longest-charting album in music history.
Friday, October 28, 2005
The drafters of the UCC might have thought that over time case law would develop to give the concept of “unconscionability” some objective meaning. But it's clear that the concept has a lot of subjective elements in it.
A proposal for squeezing subjectivity from the doctrine of unconscionability comes from lawyer Paul Bennett Marrow in a new article, called (not coincidentally) Squeezing Subjectivity from the Doctrine of Unconscionability, forthcoming in the Cleveland State Law Review. Here’s the abstract:
Michigan State University's College of Law has a new Chair in Business Law, funded by a $4 million grant from the school’s president and his wife. The Clifton E. Haley Chair in Business Law is one of two new positions funded by the gift. The Chair, says the school, “will provide a stipend and additional program funds for the professors chosen for the distinction.” The gift will, in addition, “establish two endowed scholarships for entering students with exceptional academic credentials.”
Haley is a 1961 graduate of MSU (when it was Detroit College of Law), and is the former chairman of the board of Budget Rent-a-Car. He’s served as the law school’s president since 2001.
When you measure contract damages, you usually do so as of the time of the breach. But what if something happens after the breach that would have caused the plaintiff to suffer some of the loss even if the contract had been performed? That was the question before the English Court of Appeal in Golden Strait Corporation v. Nippon Yusen Kubishiki Kaisha, decided last week.
In July 1998, NYKK chartered the tanker Golden Victory from Golden Strait. The charter period was for seven years, through July 2005. The charter had a specific provision governing wars:
33. If war or hostilities break out between any two or more of the following countries: U.S.A., former U.S.S.R., P.R.C., U.K., Netherlands, Liberia, Japan, Iran, Kuwait, Saudi Arabia, Qatar, Iraq, both Owners and Charterers have the right to cancel this charter.
In December 2001, NYKK returned the ship to Golden Strait and repudiated the charter, apparently without any excuse. In March 2003, the Second Gulf War broke out, involving the U.S., the U.K., and Iraq. It was undisputed that the war would have justified NYKK in terminating the charter. So the question was whether damages should be measured until July 2005, the original charter period, or should end as of March 2003.
The general rule, said the court, is that damages are measured as of the time of the breach. But this rule isn’t invariable, nor is it the most basic rule of damages. The most basic rule is that damages should put the party into the position it would have been in but for the breach. If measuring damages at the time of the breach would create an injustice, a court may use another method. Here, even if the contract had not been breached, NYKK would have had the right to terminate the charter in March 2003. Golden Strait therefore could claim damages only to that point.
[Frank Snyder - thanks to Andrew Tettenborn for the tip]
1704: The father of the “Social Contract,” English political economist John Locke, dies at age 72.
1919: Over President Wilson’s veto, the U.S. Congress passes the Volstead Act, outlawing the sale of alcoholic beverages in the United States.
1927: Pan-American Airways makes the first commercial international flight, from Key West, Florida, to Havana, Cuba.
1943: The U.S. Navy turns the destroyer USS Eldridge invisible and accidentally teleports it from Philadelphia harbor to Newport News, Virginia, and back again, accompanied by blue flashes of light. All records of the “Philadelphia Experiment” are destroyed in a massive cover-up.
1948: Paul Hermann Müller of Swiss chemical firm J. R. Geigy wins the Nobel Prize in Medicine for his development of DDT as an insecticide.
1950: Lucky Strike Cigarettes presents the first episode of television's The Jack Benny Show, which will run for 15 years.
1955: William Henry Gates III is born at Seattle, Washington.
1986: The Neiman-Marcus catalogue offers a 100-year subscription to the Wall Street Journal for just $6,000, or $5,400 off the regular rate.
In a case of first impression, the Tenth Circuit recently held that an agreement which forecloses judicial review of an arbitration award beyond the district court level is enforceable, so long as it is clear and unequivocal.
In a contract dispute concerning the payment of royalties for a patented invention, an arbitrator awarded the defendant $4.5 million. The plaintiff filed an application in the District Court for the District of Colorado to vacate the arbitration award pursuant to the Federal Arbitration Act (FAA). The District Court denied the application, and the plaintiff sought to appeal the District Court decision. The Tenth Circuit dismissed the appeal, holding that it lacked jurisdiction over the appeal because of a non-appealability clause in the parties’ arbitration agreement.
In a previous case, Bowen, the court refused to enforce an arbitration agreement that permitted judicial review of the arbitrator’s award based on sufficiency of the evidence. Bowen held that the clause impermissibly expanded the right to judicial review under the FAA. The court reasoned that “[b]y agreeing to arbitrate, a party trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration."
With Bowen holding that private expansion of judicial review is unenforceable, the court had to reconcile its acceptance of private restrictions on judicial review. It held that the two views were both consistent with the underlying purpose of the FAA to reduce litigation costs by providing a more efficient forum.
Mactec v. Gorelick, (10th Cir. Oct. 25, 2005).
[Meredith R. Miller]
Thursday, October 27, 2005
Today in contracts class we discussed that classic promissory estoppel case, Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965). In connection with teaching the case, I did some research on the internet. Although I had hoped to learn about the history of the Red Owl grocery chain, that information mostly eluded me. But, on the bright side, I did find a number of collectible toys bearing the Red Owl logo. Apparently the Red Owl store is a popular component of midwestern Christmas displays.
An employee whose written employment application provided for at-will employment lost a claim that his employer’s policy bulletin promised dismissal only for just cause, in a recent decision by the Oregon Court of Appeals. In the case, plaintiff Robert Ewalt signed an employment application with the Coos-Curry Electric Co-Op. The application included these clauses:
3. I understand and agree that if I am offered and accept a position, I may resign or be terminated, with or without cause or notice, at any time;
4. I agree to conform to all existing and future Coos-Curry Electric Cooperative policies and rules, and I understand that such policies and rules may be changed, interpreted, withdrawn or added to as the company deems appropriate.
After he was hired, Ewalt was given a company handbook that stated:
These work rules are to be enforced fairly and uniformly, and not in an arbitrary manner by supervisors. Employees are entitled to adequate notice and warning of the consequences of their behavior and a fair and objective investigation of the facts must be made before discipline is administered. Where immediate action is required, an employee may be suspended, pending an investigation. Discipline short of discharge shall be used whenever possible for violation of these rules.
It also contained a list of things for which an employee could be terminated, and provided suggested punishments for first, second, and third violations. After Ewalt was fired for “deficient job performance,” he sued, claiming that he had a contractual right to be afforded the protections of the policy manual.
The question, said the court, was whether the bulletin was an agreement to alter the original at-will employment created by the application and the hiring. Here, the terms themselves were plainly "guidelines" for application of management discretion. There was nothing to suggest any intent that employment at will be abrogated. The original application had stated that the employer would be free to change or alter such procedures at any time. Under the circumstances, there was no triable issue of fact and the contract claim was dismissed.
Ewalt v. Coos-Curry Elec. Coop., Inc., 2005 Ore. App. LEXIS 1353 (Oct. 19. 2005).
It's a little late, but the University of Georgia has announced that Robert P. Bartlett, III, has been brought on board this fall as a new assistant professor who will teach contracts and payment systems.
Bartlett got his B.A. and J.D. from Harvard, where he was a Notes Editor for the Harvard Law Review. He practiced for several years doing complex business transactions, and has written a number of things that show he actually knows their practical aspects, including things like Understanding Price-Based Antidilution Protection: Five Principles to Apply When Negotiating a Down-Round Financing in The Business Lawyer. Before joining the faculty at the Athens (Ga.) school, Bartlett was a visiting assistant professor at Fordham Law School.
1430: Grand Prince Vytautas of Lithuania, known as “the Great,” dies just weeks before the arrival of the crown that would have given him the title of king. Vytautas Magnus University and its Law School (left) are named for him.
1811: Isaac Merritt Singer is born at Pittstown, New York. He’ll develop a knack for inventing things as a way of paying for his career as an actor, but will later discover that the sewing machine is more profitable than show business.
1838: Missouri Governor Lilburn Boggs orders all Mormons to be driven from the state.
1904: The New York City Subway opens. Because private investors didn't believe that the costs of digging the tunnels would ever be profitable, the city used public funds to build them and contracts with the Interborough Rapid Transit Co. to maintain and operate the trains, splitting the 5-cent fare.
1940: Crime boss John Joseph Gotti, Jr., is born at the Bronx, New York. His career will prove that if you leave it on the stove long enough on high enough heat, stuff will stick to Teflon.
1986: In what comes to be known as the Big Bang, the Thatcher government deregulates the London Stock Exchange, removing fixed commissions and allowing securities firms to act as broker-dealers.
1997: Newly implemented New York Stock Exchange “circuit breakers” are tripped as an economic scare in Asia causes major drops in all the world’s major exchanges. The U.S. market will mostly recover the next day.
This week, the Source, a hip-hop magazine, has sued Black Entertainment Television (BET) and two of its executives for $100 million for breach of contract. The complaint apparently alleges that BET, a Viacom-owned network, backed out of an agreement to televise The Source Awards on October 25. "Stay tuned" for more details.
[Meredith R. Miller]
Wednesday, October 26, 2005
Is a claim of fraudulent inducement based on pre-contractual representations defeated by a merger clause? A recent case holds that "it depends."
In an insurance case, Magistrate Judge Pepe of the Eastern District of Michigan held that “representations of fact made by one party to another to induce that party to enter into a contract” are not “wiped away” by a merger clause. Otherwise, a savvy but shady character could commit fraud in the inducement and protect herself with a merger clause. However, in the situation where “collateral agreements or understandings between two parties . . . are not expressed in a written contract,” those oral agreements are eviscerated by a merger clause, even if they were the product of fraud.
Judge Pepe noted that, then, the question is “when does fraud invalidate an entire contract, and when is it such that it provides no remedy or recourse if there is a written contract with a merger clause?” His answer:
fraud will invalidate a contract when a party’s assent to said contract is induced through justified reliance upon a fraudulent misrepresentation. A merger clause can render reliance unjustified as to agreements, promises or understandings related to performances that are not included in the written agreement.
The court held that the "key element" in cases involving merger clauses is:
whether one justifiably relied on the representations of another when the parties’ written agreement clearly stated that by signing the document they were agreeing that the document made up the parties’ entire agreement regarding the terms of the contract and its performance standards.
Star Ins. Co. v. United Commercial Ins. (E.D. Mich. Sept. 30, 2005).
[Meredith R. Miller]
Contracts and commercial law prof Philip T. Lacy has been named Interim Dean of the University of South Carolina School of Law.
Lacy, who got his B.A. at Duke and his LL.B. at Virginia, has taught at South Carolina for 30 years, the last fourteen as associate dean for academic affairs. A noted Article 9 expert, he's best known to the world outside academia as co-author of Clark Boardman Callaghan's four-volume Uniform Commercial Code Transaction Guide.
Fordham Law School has announced creation of the new T. J. Maloney Chair in Business Law. The new position -- one of four recently created at the school -- is funded by a $2 million grant from the eponymous alum, who is president of Lincolnshire Management, a private equity firm. Fordham has plans to add three more chairs in the relatively near future.
1825: With cannons firing in celebration, the $7.6 million Erie Canal opens. It will ensure that New York City becomes the principal port for the growing Great Lakes region.
1854: Cereal entrepreneur Charles William “C.W.” Post is born at Springfield, Illinois. His big secret will not be his products (Grape Nuts, Post Toasties), which he largely copies from Kellogg's, but his realization that sophisticated print advertising could be used to sell mass-market brands.
1863: At the Freemasons Tavern on Great Queen Street in London, the Football Association is formed.
1881: Sheriff Virgil Earp’s efforts to enforce a local gun control ordinance leads to three corpses and several men seriously wounded at the O.K. Corral in Tombstone, Arizona Territory.
1931: Chicago White Sox owner (and former baseball player) Charles Comiskey dies at Eagle River, Wisconsin. In 1919 he ordered star pitcher Eddie Cicotte, who had 29 wins to be benched at the end of the season to prevent him from collecting a contractual bonus he’d receive for 30 wins.
1948: An atmospheric inversion in the Monongahela Valley traps emissions from local zinc works and steel mills in the fog at Donora, Pennsylvania. At least 20 people will die and 7,000 people will be hospitalized.
1985: All of the “present” events in the film Back to the Future occur on this date.
1991: A 33-year-old art aficionado is crushed to death when a 485-pound umbrella, part of an installation called "Umbrellas" by artist Christo, comes loose in the wind and pins her against a boulder.
Tuesday, October 25, 2005
Few more contractual documents are more ambitious than the things that have come to be known as End User License Agreements. (Remember, "By opening this package you agree to spend the rest of your life as Bill Gates's towel boy"?) Tom Joo (UC-Davis) forwards this nice discussion that "translates" some of the various clauses into English.
The relatives of a deceased Hmong woman are suing a California cemetery for breach of contract. They allege that they were sold a burial plot that “already contained rusty casket handles” and human remains. Although the allegations, if true, would be disturbing no matter what the context, in the Hmong cultural tradition, improper burial could also stall deceased’s journey to the spirit world. [Hat-tip: Gariel Nehoum]