February 5, 2005
The Not-So-Uniform Parts of UCC Article 2
In Compaq Computer Corp. v. Lapray, 135 S.W.3d 657, 53 UCC Rep. Serv. 2d 483, 2004 WL 1048336 (decided May 7, 2004), the Supreme Court of Texas reversed a decision by the district court certifying a class action against Compaq Computer Corporation, alleging Compaq sold computers containing defective floppy disk controllers. The grounds for the reversal were that common questions may not predominate in the litigation, because the Uniform Commercial Code is not so uniform with respect to three provisions of Article 2 likely to be at issue in the claims. The variation among the jurisdictions is significant because the claims are likely to be governed by Article 2 as adopted in and interpreted by a number of different states. The particular provisions that troubled the Court are 2-607(3)(a), 2-313, and 2-714.
The Court pointed to 2-607(3)(a)), which requires the buyer to "notify the seller of breach" within a reasonable time after discovery of the breach. Some courts require notification only to the immediate seller, while others require notification to remote sellers in order to pursue them up the distributive chain. Whether Compaq will be liable on an individual claim may thus depend not only on who the buyer notified and whether Compaq sold the computer directly to the buyer, but on which notification scheme is in force in that buyer's state.
Similar problems develop under 2-313, which governs creation of express warranties. Some jurisdictions require that the buyer establish reliance on the seller's representations, some do not, and some haven't decided, the Court concluded. Common questions may therefore not predominate in determining whether an express warranty exists in individual claims.
Finally, the Court noted considerable uncertainty among the states over the question whether, in order to establish a breach of warranty under 2-714, a buyer need show only that the goods sold were not as promised or must also show that he/she has suffered some injury from the defect. For some buyers, the defective floppy disk controller may have already manifested itself and caused them damage. For others, the alleged problem remains a latent defect.
Questions surrounding notification to remote sellers, creation of express warranty, and existence of breach of warranty are likely to appear regularly in claims by remote buyers of goods against manufacturers, so the Texas Supreme Court decision appears to call into question the viability of any breach of warranty class action in such circumstances.
News in brief
A Cook County judge has ruled that cost and pricing details in a state contract aren't trade secrets, and thus that Illinois can release details of its contract with pharmaceutical firm Caremark.
The TNT Network and the Screen Actors Guild have renewed their broadcast agreement for the "prestigious" SAG Acting Awards.
Americans aren't baking as many cakes at home as they used to, so General Mills has approached labor unions about restructuring contracts to cut costs and keep its Betty Crocker brand afloat.
Illinois Governor Rudy Blagojevich has signed a new law requiring companies bidding on state contracts to disclose any outsourcing plans they have, so the state can take that into account in awarding the contract.
Good news for the struggling Basque shipyard at Sestao, which hasn't won a ship contract since 2000: it inks a deal to build a new natural gas tanker for Norway's Knutson line.
Today in history--February 5
1576: Noting that "Paris is worth a mass," Protestant leader King Henry III of Navarre converts to Catholicism so that he can succeed to the French throne.
1631: The story of Rhode Island's only law school begins when a young preacher name Roger Williams, who is also a protege of Sir Edward Coke, leaves Britain for the shores of New England.
1788: Sir Robert Peel, the British prime minister who will usher in both modern factory regulation and free trade, is born at Bury, Lancashire, to a wealthy merchant family.
1824: Sailor Levi Wyman takes ill while at the house of Daniel Mills. Mills begins nursing the boy.
1881: Phoenix, Arizona, The largest U.S. city without a law school (so far) is incorporated.
1881: Thomas Carlyle, the man who invented the modern genre of polemical history (or historical polemic) dies at London.
1885: King Leopold II of the Belgians becomes one of the world's biggest landowners when his own privately held company takes over the Congo.
1900: Adlai Ewing Stevenson II (Northwestern Law 1926), is born in Los Angeles. Did you know that he was a first cousin of actor McLean Stevenson (M.A.S.H.)?
1917: The Constitution of the United Mexiscan States is adopted.
1919: Director D.W. Griffith and film stars Charlie Chaplin, Mary Pickford, and Douglas Fairbanks form their own motion picture production company, which they call "United Artists."
1922: The inventor of the mechanical pencil, Slavoljub Eduard Penkala of Croatia, dies at age 51.
1937: President Franklin D. Roosevelt announces his plan to enlarge the U.S. Supreme Court so that he can appoint members more congenial to his political views.
1997: Morgan Stanley Group and Dean Witter, Discover & Co. announce that they will merge in a $10 billion deal.
2001: Tom Cruise and Nicole Kidman separate. Referring to her diminutive ex, Kidman says, "Now I can start wearing heels again."
February 4, 2005
Those who can, teach
Today’s entry in the "Isn’t It Ironic" category—if "ironic" is the word we mean—comes from Yale University, where the director of the school’s International Institute for Corporate Governance was forced to resign last month for "financial misconduct and irregularities."
Who says that Yale puts too much emphasis on theory rather than real-world practice?
News in brief
Princess Diana’s former lover, hired and fired by Fox News as a war correspondent, loses his breach of contract claim because he was hired by a rival and thus had no damages.
California Governor Arnold Schwarzenegger has canceled plans to award a no-bid $5.7 million to manage a state prison facility.
The Rhode Island Supreme Court says the state can go ahead and award a contract to UnitedHealthcare (sic); the bidding process was mucked up but the state did not act in bad faith.
Maryland firms are likely to be big winners as a result of Lockheed Martin’s winning bid on a $15 billion helicopter contract.
Lockheed, though, got some bad news when the Pentagon announced that its C130J transport aircraft program will be scrapped as of 2007.
True, it's not strictly a contract issue, but a woman in Germany may lose her unemployment benefits because she refused to take a job to which she was referred by the state job center—a brothel. No, it wasn’t an error, apparently. The state decided that brothels, which are legal in Germany, must be considered legitimate businesses.
Getting a handle on contract documents
When a major supermarket chain was being acquired in a big 1980s leveraged buyout, there was a nasty snag in the process: the fact that each of the company's thousands of stores had its own negotiated lease agreements, the clauses of which (including such things as non-assignment) varied greatly. Tracking down those leases and going over each one took a staggering amount of attorney time.
That's just one example of a wider problem: the fact that most big companies have warehouses full of contract documents and little knowledge of what they say. This, writes Louis Columbus of TechNewsWorld, leads them to miss deadlines, miss sales, and incur penalties and extra charges. But Columbus says that modern contract management software—"the emergency dentist of enterprise software"—can improve a firm’s contracting processes and save it a ton of money.
Two items from our colleages over at LaborProf Blog: A new book on how market mechanisms may shape employment relationships in the year ahead, and a new service that allows employers not only to see each and every web site heir employees visit, but how much bandwidth is used—and calculate the cash loss to the employer.
Today in history—February 4
869: St. Cyril, the Greek-Bulgarian monk who devised the first alphabet for Slavonic languages—which later evolved into what we now call the "Cyrillic" alphabet—dies at Rome.
1783: The United Kingdom announces that it will cease hostilities with its former colonies in North America who have been revolting since 1775.
1794: The French Republic formally abolishes slavery. Nothing happens, so it has to do it again in 1848.
1801: John Marshall is sworn in as Chief Justice of the United States.
1840: American inventor Hiram Stevens Maxim is born at Sangerville, Maine. His "Maxim gun" will be the first fully automatic portable machine gun, and a staple for British troops fighting the "natives":
Whatever happens, we have got
The Maxim gun, and they have not.
1861: Six U.S. states, meeting in Montgomery, Alabama, form the new "Confederate States of America." The number will eventually swell to eleven.
1862: In Santiago de Cuba, Catalonian immigrants Facundo Bacardi Masso and his brother José open a small distillery for making rum. It will grow into the world’s fourth largest distiller.
1913: Seamstress Rosa Parks, whose refusal to give up her seat on a bus to a white man in 1955 will lead to an economic boycott and ultimate desegregation of the Birmingham bus system, is born in Tuskegee, Alabama.
1921: Betty Naomi Goldstein Friedan, author if The Feminine Mystique (1963) and first president of the National Organization of Women (1966), is born at Peoria, Illinois.
1927: The first talking picture, The Jazz Singer, starring Al Jolson, opens. He says, prophetically, "You ain’t seen nothin’ yet."
1947: Vice President James Danforth Quayle III (Indiana-Indianapolis Law 1974) is born at Indianapolis.
1968: The most famous literary figure who never published a book, Neal Casady—"the catalyst of the Beat movement"—dies at San Miguel de Allende, Mexico.
February 3, 2005
Why Contracts is a great subject: Reason No. 218
You don't have to try to figure out what the President meant in his State of the Union speeches. In the the unlikely event he ever mentioned Article 2, for example, he'd almost certainly be talking about the one in the Constitution, not the real one.
"You don't buy beer, you rent it"
As Daniel Drew liked to say,
He who sells what isn't his'n
Must buy it back or go to prison.
Price as a trade secret
Illinois lawmakers are in a bind over a contract to fill the prescriptions of the state’s workers. They say want to investigate the $250 million contract with Caremark Rx Inc. to see if the state is getting a good deal. But Caremark refuses to turn over its cost and pricing data.
Caremark was awarded the contract, in which it provides mail-order prescriptions to employees, after competitive bidding. Caremark says its cost and pricing structure is a trade secret that it does not want to reveal publicly, and its contract says that the state will keep it confidential. When local pharmacies in competition with Caremark claimed that the state was paying too much, lawmakers wanted to wanted to investigate and asked for the data.
Caremark offered to provide it to lawmakers who pledged to keep it confidential, but the Solons demurred. Two of them will go to court Friday to argue that the pricing data must be revealed under the Illinois Freedom of Information Act.
Trade me and pay me
When an athlete for a team in a state without income tax gets traded to a state with a high tax, the athlete’s take-home pay can drop dramatically. This is one of the motivations for no-trade clauses in contracts.
When baseball slugger Carlos Delgado, who knows about high tax bills from his 12 seasons in Toronto, signed a four-year, $52 million contract with the Florida Marlins, taxes were on his mind. There’s no state income tax in Florida. But he didn’t insist on a no-trade clause. Instead, the Marlins agreed to a provision under which if he gets traded to a team in a state with an income tax, the Marlins will have to kick in enough extra money so that he’ll wind up with the same net pay.
One result is that it will be cheaper for the Marlins to trade him to, say, the Houston (no tax) Astros than the New York (high tax) Yankees.
No one paid much attention when an "incredibly respectable" British oil executive in Houston had the company issue a $2,500-a-month services contract to an entity called LB Evaluation, Inc.
But the stuff hit the fan when the executive, Philip Garrod, left Hydro Projects Group to go into competition with it. A subsequent audit showed that "LB Evaluation, Inc." was actually a 39-year-old American prostitute named Lina Burger, whose notarized contract required her to "love" Garrod and let him have visitation rights with her dog.
Hydro Projects says Garrod misappropriated almost $400,000, spending much of it on prostitutes, massage parlors, and strip clubs—about $212,000 is just "unaccounted for." Garrod agreed to plead guilty to "misappropriation of fiduciary property"—and was ordered to return $43,000 and do 160 hours of community service.
News in brief
It’s going to be an even colder winter in the Great White North, as National Hockey League players reject another offer from the owners.
Consulting firm Accenture, Ltd. nabs at $575 million outsourcing contract from BT Group PLC, which has 87,000 employees and 180,000 pension plan participants in the U.K.
A construction firm that claims it should have been awarded the contract for the Scottish Parliament building is suing, claiming £4.3 million in lost profits.
Some African-American religious leaders are announcing a "Black Contract with America."
United Auto Workers at Volvo’s plant in Pulaski County, Virginia, will vote on a new contract for the plant, which has 2,800 employees.
Clerical workers at the University of Illinois are picketing the administration building to gain support for a better mediated settlement in their ongoing contract dispute with the school.
"Environment-friendly" carbon monoxide
Celanese Corp. of Dallas has announced the award of a long-term supply contract to buy carbon monoxide from a Chinese company. Celanese needs the stuff for a 600,000 metric ton acetic acid plant that it is building in Nanjing. The contract, says the company, "gives Celanese a CO supply source that is based on readily-available coal processed by state-of-the-art environment-friendly technologies."
The odd thing is that if they’d built the plant in Los Angeles they could have had all the carbon monoxide they need for free.
Today in history—February 3
1468: The man who did more to disseminate knowledge than any teacher in history, printer Johannes Gensfleisch zur Laden zum Gutenberg, dies at Mainz.
1488: Bartolomeu Dias, a Portuguese sailor seeking a trade route around Africa to break the Turkish monopoly on Eastern trade, lands after rounding what he calls the Cape of Storms (later "Cape of Good Hope"), the first European navigator to do so.
1787: Shays’ Rebellion—a rising of farmers plagued by debt and taxes—is crushed at Petersham, Massachusetts. The uprising gives impetus to clamor for a new federal constitution.
1811: Horace Greeley—one of only two newspaper publishers to be nominated for President of the United States—is born at Amherst, New Hampshire.
1862: Future U.S. Supreme Court Justice James Clark McReynolds is born at Elkton, Kentucky.
1870: The Fifteenth Amendment to the U.S. Constitution is ratified. It guarantees the right to vote.
1909: French philosopher Simone Weil is born in Paris.
1913: The Sixteenth Amendment to the U.S. Constitution is ratified. This one allows the Federal government to collect income taxes.
1916: The Canadian Parliament building burns to the ground. This time it is not done by invading Americans.
1924: Thomas Woodrow Wilson, the man who proved that being President is harder than being a college professor, dies in Washington, D.C.
1959: The music dies for a generation as a plane carrying Buddy Holly, Richie Valens, and the Big Bopper crashes eight miles from Clear Lake, Iowa; the event is the subject of Don McLean’s American Pie.
February 2, 2005
Article 1 update
U.C.C. Article 1 watchdog Keith Rowley sends this update on the latest legislative news:
Versions of Revised Article 1 have been introduced and are currently pending before the legislatures of Arizona (SB 1234), Connecticut (HB 5975), Nebraska (LB 570), and North Dakota (SB 2143).
Connecticut's on-line bill tracking service did not produce the bill's text, so I can't comment on its content.
The Arizona, Nebraska, and North Dakota bills all include uniform R1-201(b)(20), which eliminates the bifurcated good faith standard in Articles 2 and 2A and holds merchants and non-merchants alike to "honesty in fact and the observance of reasonable commercial standards of fair dealing." To date, only three of the seven states (Delaware, Minnesota, and Texas) that have adopted a version of Revised Article 1 have adopted uniform R1-201(b)(20). The other four (Alabama, Hawaii, Idaho, and Virginia) have retained the bifurcated good faith standard by retaining the pre-R1 "honesty in fact in the conduct or transaction concerned" definition in Article 1 and leaving 2-103(1)(b) & 2A-103(3) unchanged.
Of greater import to most observers is that Arizona SB 1234 includes uniform R1-301, which allows the parties to a non-consumer transaction to choose to have their contract governed by the law of a jurisdiction bearing no relation to either the parties or the transaction. All seven states that have adopted Revised Article 1 to date have rejected uniform R1-301, choosing to retain some form of pre-Revised 1-105. The current versions of Nebraska LB 570 and North Dakota SB 2143, likewise, reject R1-301. (Last year, the Massachusetts legislature allowed a bill to die that included uniform R1-301, and Ed Smith reported that the plan was to reintroduce Revised Article 1 this year without uniform R1-301.)
NCCUSL Commissioner Jack Burton of Santa Fe adds that Revised Article 1 is also about to be introduced in New Mexico: "The draft of the bill contains the uniform version of R1-201 (b) (20) as our state supreme court has already adopted this test as a matter of common law in every contract. It does not contain the uniform version of 1-301; instead it reenacts the former choice of law provision, with minor stylistic updates."
Millions ride on interpretation of "member"
A knotty interpretation problem is bubbling up in Connecticut, where the meaning of the word "member" will determine who gets $100 million—the state or its employees—and whether an insurance company will be stuck with a double payment.
When mutual insurance companies "de-mutualize" (turn into stock companies), their "members," usually policy holders, are issued the stock. Anthem Blue Cross and Blue Shield de-mutualized in 2001. At the time, it had a deal to provide health insurance to services to the state of Connecticut for its employees, but did not issue individual policies to the employees. It therefore considered the state, not the individual employees, as the "member." When it de-mutualized it issued the state $93 million in shares. The state sold the shares and pocketed the money.
Now the individual state employees are suing Anthem, demanding that they were, in reality, the policy holders and that they were "members" entitled to get the issued shares. If they are successful, the recovery could be several thousand dollars per employee.
Illegality doctrine doesn't bar suit by criminal against lawyer
A plaintiff who claims bad legal advice caused him to violate U.S. criminal laws can go forward with a breach of contract claim against his lawyers, a Philadelphia judge has ruled.
In the case, the plaintiffs were principals of a company that got advice from Morgan Lewis & Bockius. They claim that bad legal advice caused them to violate U.S. trade restrictions with Cuba, and they subsequently pleaded guilty to criminal charges. In the pleas they apparently acknowledged that they knew they were breaking the law.
The firm argued that since the plaintiffs knew they were committing a criminal offense, they could not recover against their lawyer even if the lawyer were a confederate in the scheme. Common Pleas Judge Albert Sheppard, however, ruled that "the public interest is served where attorneys are held accountable for providing their clients with bad legal advice when those clients suffer harm as a result of that advice."
He dismissed claims of legal malpractice and breach of fiduciary duty as barred under the two-year statute of limitations.