March 10, 2006
"It's going to happen sometimes," says lawyer
Cruise ship ticket contracts routinely spell out that it is the passenger's obligation to get himself or herself aboard the ship in time to sail, and that if the passenger misses the ship it's his or her responsibility to get to the next port some other way.
Five Utah residents who got left behind on the island of St. Martin are suing Royal Caribbean for breach of contract anyway (along with negligence and infliction of emotional distress), claiming that the ship had a duty to have procedures in place for how to handle those left behind. The plaintiffs claim that Royal Caribbean was not helpful, and gave them incorrect information regarding how they could get to the next port.
Interestingly, they filed the suit in Utah. It's not clear whether Royal Caribbean has the same forum-selection clause as the defendant in Carnival Cruise Lines v. Shute, in which case the suit won't be in Utah long.
Lawyers Breached Contracts by Taking Too Much of Settlement
Plaintiffs' lawyers who, along with consultants, pocketed $106 million out of a $200 million settlement in a diet-drug case, and diverted another $20 million to a nonprofit of which they were paid directors, will have to give some of the money back. A Kentucky judge has ruled that the settlement breached the lawyers' contracts with their clients by paying them more than their contracts permitted.
Under the settlement, the 431 injured clients split $74 million, or about $171,000 each, while the lawyers took home $20 million each.
The Price is Right, But Expensive
Some years ago, in the wake of the development of cash register bar-code scanning, many states imposed "item pricing" laws on retailers. Laws required that, with some exceptions, each item on sale in a store be individually marked with a price. The goal was to protect consumers from a perception that stores might take advantage of them by ringing up higher prices at the register than were marked on the display signs, while the consumer wouldn't notice.
Turns out that consumers are paying a fair amount for this protection. A new paper, When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws, suggests that consumers pay higher average prices in stores subject to item pricing than in stores where it is not required. The paper is by Mark Bergen (Minnesota-Management), Daniel Levy (Bar Ilan-Economics), Sourav Ray (McMaster-Business), Paul Rubin (Emory-Law), and Benjamin Zeliger (Cornell-Law). Here's the abstract:
Item pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by examining and quantifying their costs and comparing them to their measurable benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the cost of pricing as well as the cost of price adjustment. We test this prediction using data collected from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments. We find that IPL store prices are higher by about 20¢-25¢ or 8.0%-9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempted from IPL
requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs. Specifically, we study the frequency and magnitude of pricing errors, which the IPLs are supposed to prevent. We find that the IPLs' costs are an order of magnitude higher than these benefits.
March 9, 2006
Bankruptcy and Financial Market Contracts
Much of the discussion amongst contracts professors before the 2005 bankruptcy bill dealt with consumer issues. But there are some significant implications for contracts that embody sophisticated financial transactions as well. Michael Krimminger of the Federal Deposit Insurance Corp. outlines the issues in a new paper, Adjusting the Rules: What Bankruptcy Reform Will Mean for Financial
Market Contracts. Here's the abstract:
Most of the commentary written on the recent Bankruptcy Reform Act (The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) has focused on provisions that will make bankruptcy less appealing for individuals. However, the Bankruptcy Act also contains important provisions that determine how financial market contracts are handled when a market participant goes into bankruptcy. These provisions, designed to update, clarify and strengthen the existing laws pertaining to financial contracts, will have far reaching implications for a wide variety of financial market participants, including banks and the Federal Deposit Insurance Corporation (FDIC) itself.
The 2005 Bankruptcy Act promises to significantly improve the efficiency of the business bankruptcy process by harmonizing the treatment of financial contracts across the spectrum of bank and non-bank market participants and instruments. It does so by revising and amending a number of previous statutes (including the Bankruptcy Code, FIRREA (1989) and FDICIA (1991)) that currently govern these matters. The most important result of these changes is an improved ability of creditors under certain financial contracts to quickly resolve claims against bankrupt debtors by employing what is known as close-out netting. This ability to terminate financial contracts, determine a net amount due, and liquidate any pledged collateral is a valuable tool in minimizing losses in receivership and reducing the disruptions that result from the bankruptcy process. An equally important feature of the changes is that it clarifies and strengthens the FDIC's ability to resolve a failing bank involved in the financial markets.
The past twenty-five years have been marked by a proliferation of new institutional players and ever-increasing complexity in financial instruments. These changes have led to a growing recognition that legal structures governing the disposition of financial market contracts in bankruptcy also needed to be updated. In the past, changes in how such contracts were handled were made in different statutes at different times creating inconsistencies, as well as persistent uncertainties as to how a given instrument might be handled in bankruptcy. By bringing more consistency and certainty to this process, the Bankruptcy Reform Act promises to reduce the risk that a bankruptcy will create systemic instability, which could affect individuals as well as financial institutions. To the extent that these changes allow financial market participants to more effectively manage market risks, they will also help to promote greater efficiency in the operation of U.S. financial markets.
Today in History: Ollie Jr. is Born
On this date, March 8, 1841, Oliver Wendell Holmes was born at Boston, Massachusetts. Holmes had a significant influence on contract law, through is writings in The Common Law and his theory that a contract was not a moral obligation, but merely an option to either perform the promised action or pay damages.
He is best remembered by Americans, however, as having the best mustache of any Supreme Court justice.
Yep, We're Incredibly Popular
True, our students may not want to listen to us in class -- preferring to surf the Internet, play solitaire, or even feign illness and not show up at all -- but on the Internet we're obviously very popular. Very popular indeed. A new list of the 25 Most Popular Law Blogs by Pepperdine's brilliant, charming, and charismatic Roger Alford shows ContractsProf Blog in the top 20 most-popular law-related blogs.
Okay, everyone knows that when you say you're in the "top 20" you obviously weren't in the "top 10." And to some extent being the most popular law-related blog is like being the tallest building in Tuna, Texas. And the list only includes those blogs that make visit figures available. So? We'll all put it in our annual reports to our deans anyway.
A 3L at Ohio State has put together a list of 500 law-related blogs which you can find here.
March 8, 2006
Unincorporated Business Prof Blog Launches
Contracts folks who also teach agency or business associations will be pleased to hear that our sister section, the AALS Section on Agency, Partnerships, LLCs, and Unincorporated Business Associations has launched Unincorporated Business Law Prof Blog. Contracts prof Greg Duhl (Southern Illinois) is the editor-in-chief of the blog. It already has a good deal of useful stuff. Even those who don't teach B.A. may find it interesting, since a lot of agency cases involve contractual issues. Be sure to check it out.
It Pays to Read the Boilerplate
One of the arguments over standard terms in consumer contracts is whether it makes any difference whether consumers get the terms before or after they get the goods, since they never read them anyway. Elizabeth Winston (Whittier) points us to this story in which consumer apathy about standard terms meets the Carbolic Smoke Ball case.
March 7, 2006
A new study shows that fifty percent of returns happen because products are difficult to use or the directions accompanying the product are difficult to understand:
"Half of all malfunctioning products returned to stores by consumers are in full working order, but customers can't figure out how to operate the devices, a scientist said on Monday. Product complaints and returns are often caused by poor design, but companies frequently dismiss them as "nuisance calls," Elke den Ouden found in her thesis at the Technical University of Eindhoven in the south of the Netherlands."
If products are being returned because they are difficult to use, but they are not technically “broken,” are there any implications for contract law? Personally, I’m still unable to program my VCR.
The full story can be found here.
Conference on Teaching: Bring Sweaters
Our beloved Mother Ship, the Association of American Law Schools, has reverted to form. After stunning everyone with a conference in Montreal last July -- July is the right time to be in Montreal -- the conference organizers have reverted to form, scheduling an interesting conference in a very nice place but at the wrong time.
The conference itself looks like a great one. It's called New Ideas for Law School Teachers: Teaching Intentionally. And it's designed not for newcomers but for experienced teachers who have found their teaching sliding more and more into habit. You can get a rundown of the impressive list of speakers at the link above. The event is scheduled for June 10-14 in Vancouver, British Columbia.
Vancouver is, of course, a very nice place, but the average high temperature in June is 66°F, and it tends to be awfully cloudy, though according to the Canadian weather site you can expect at least two days without rain during the four-day conference.
Deadline for early registration is May 8
Copy of the Howard Stern Complaint
Whether you're a fan of Howard Stern or you think he's offensive (or you're a fan because you think he's offensive), CBS v. Howard Stern provides an interesting fact pattern. (Mentioned in previous posts: here and here). Here's a purported copy of the "43-page complaint" mentioned in all the press accounts: Download cbs_v1._Sirius_complaint.pdf.
(Caveat: I obtained the complaint through someone who chooses to remain anonymous, who claims she obtained it simply by emailing the guys at thesmokinggun.com and asking if they had a copy. Based on a preliminary glance of its contents, this document appears to be a true copy of the complaint; however, it is not signed - and has not been stamped with an index number).
[Meredith R. Miller]
"Legal" v. "Other" Enforcement in Incomplete Contracts
Where parties have not specified important terms of their agreements, we get the problem of the "incomplete contract." If a dispute arises, the complaining party has a variety of tools at its disposal, only one of which is a breach of contract action asking the court to set the term for the parties. How efficient is such judicial imposition compared with such things as reputational sanctions?
That's the theme of a new paper, Reputations, Relationships and the Enforcement of Incomplete Contracts, by W. Bentley Macleod (Columbia/Southern Cal). Here's the abstract:
This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.
Computer Consulting Company Denied Lost Profit Damages for Breach of No-Hire Agreement
The Fifth Circuit recently held that Wilson Solutions, a computer consulting company, was not entitled to lost profit damages based on a client’s breach of a no-hire agreement.
Wilson Solutions entered into a contract with Anorad, a manufacturer, to provide consulting services. The contract contained a no-hire provision:
Both parties agree to not, directly or indirectly, during the period that Consultant [Wilson Solutions] provides services for Client [Anorad], and for a period of one year thereafter, solicit, employ or hire or induce to hire any person who is or has been an employee of either party unless otherwise consented to in writing.
Wilson Solutions then placed Schwartzman, one of its consultants, to advice Anorad. Schwartzman was not aware of the no-hire provision between Wilson Solutions and Anorad. Roughly a year later, Schwartzman resigned from Wilson Solutions. Thereafter, Anorad’s CFO attempted to obtain consent from Wilson Solutions to hire Schwartzman, and Wilson Solutions refused to consent.
Wilson Solutions sued Anorad for breach of the no-hire agreement, seeking lost profit damages for the first year Schwartzman worked for Anorad. Wilson Solutions sought $341,000 – based on an estimate of what Schwartzman would have earned in consulting fees ($450,000) minus his salary ($99,000) and overhead expenses (approximately 10%). In his final year at Wilson Solutions, Schwartzman earned approximately $441,000 in consulting fees for Wilson Solutions and received a salary of $99,000 for himself.
Reviewing the district court determination de novo, the Fifth Circuit held that Wilson Solutions could not establish lost profit damages with “reasonable certainty” because Schwartzman was an at-will employee. Applying Texas law, the court held:
Wilson Solutions cannot prove to a reasonable certainty the fact that it was damaged by Anorad's breach. The damages request relies on the assumption that Schwartzman would continue working for Wilson Solutions, earning consulting fees for the year in question. This type of contingency, created by his at-will status, is impermissible in Texas. Similarly, a jury would have difficulty estimating the losses suffered by Wilson Solutions. The purpose of lost profit damages it to put the nonbreaching party in the position it would have been in had the contract been performed. Here, because Schwartzman was an at-will employee, it is impossible to determine that position with the amount of certainty required by Texas law.
The court reasoned that:
Schwartzman could have left Wilson Solutions at any point during the year in question, and, in fact, did leave the company. Therefore, any consulting fees Schwartzman would have potentially received are too uncertain to serve as the basis for Wilson Solution's request for damages.
If you are a company concerned with the breach of a no-hire agreement, perhaps the lesson is to include a liquidated damages clause in the agreement. The court did note that no-hire agreements and covenants not to compete often have liquidated damages provisions – but the no-hire agreement between Wilson Solutions and Anorad did not contain such a provision.
Blase Industries Corp. v. Anorad Corp. (5th Cir. Mar. 1, 2006).
[Meredith R. Miller]
March 6, 2006
Sloppy Drafting Hits Anaheim
For a variety of reasons (chiefly involving putting on a conference) we didn't pay much attention here to the resolution of the City of Anaheim's breach of contract claim against the team formerly known as the Anaheim Angels. A local jury found by a 9-3 vote that the Angels didn't breach their contract with the city.
The city gave the Angels a ten-year lease on its stadium on condition that the team name "include" the word "Anaheim." After several years of using "Anaheim Angels," the owner decided he could make more money by calling the team "Los Angeles Angels of Anaheim." The city sued, claiming more than $300 million in damages. Jurors took four hours to conclude that "Los Angeles Angels of Anaheim" did, in fact, include the word "Anaheim," and that the team had not acted deceptively in changing it.
[Frank Snyder -- hat tip, Joe Perillo]
In the mail today are notices for two new books of interest to contracts profs. Thomson-West is announcing the new third edition of Steven Burton's Principles of Contract Law, which will delight your students by clocking in at a mere 700 pages. It also comes complete with a set of classroom PowerPoint slides for those who adopt it. It's due out this month.
Foundation Press, meanwhile, has a new third edition of Sales Transactions: Domestic and International Law, Cases and Materials, by Penn's John Honnold and Curtis Reitz. Like earlier editions, it focuses largely on sellers' obligations and on problems of performance. It came out in December.
Coke, Bottlers Spar over Wal-Mart
Wal-Mart is apparently in the middle of a dispute between Coca-Cola and some 60 Coke bottlers over who has the rights to sell the popular PowerAde drink to Wal-Mart. Bottlers normally deliver the soft drink direct to retail outlets, but Coke and its largest bottler are apparently trying to bypass the local bottlers by selling directly to Wal-Mart and delivery to its local warehouses.
Boilerplate in the Auto Industry
Contract lawyers know instinctively that "boilerplate" -- standard-form terms included regularly in transactions -- plays a major role in dealing with the risks of contract nonperformance. But it's a topic that's been studied very little by contracts scholars in the legal academy. Into the breach now come Michigan's Omri Ben-Shahar and James J. White, who have dug into the issue of when and how boilerplate is used in one specific industry. The piece is Boilerplate and Economic Power in Auto Manufacturing Contracts, and here's the abstract:
This article studies the standard form contracts used by automobile manufacturers to purchase auto parts. It explores how the contracts reflect divisions of bargaining power, asymmetric information, problems of hold-up and renegotiation, and market competition. Based on interviews with representatives of buyers and suppliers, the article also describes the process of drafting the forms, the negotiation over price and other terms in the shadow of these forms, and the opportunities for non-drafters to extract improved terms. Some of the main lessons are: (i) The terms of the contracts and the bidding process prevent ex-post hold-up by suppliers (in contrast to the claims made by Benjamin Klein and others based on the GM/Fisher Body contract); (ii) There is surprisingly little ad-hoc tailoring of terms, even when such tailoring can increase the surplus from the deal; (iii) Internal organization structures are harnessed effectively to secure favorable bargaining outcomes; (iv) There is a significant variation between the standard forms utilized by the big automakers, in some of the most important aspects of the deals. This variation suggests that some of the terms are inefficient.
Weekly Top 10
Strangely, there are absolutely no changes on this week’s list of the Weekly Top 10. This may mean either that everybody was reading exactly the same thing this week they were reading last week, or there’s a bug with SSRN’s data. In any event, following are the top-ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending March 5, 2006.
1 (1) A Model Regime of Privacy Protection (Version 3.0), Daniel J. Solove (Geo. Washington) & Chris Jay Hoofnagle (EPIC).
2 (2) Law and the Rise of the Firm, Henry Hansmann (Yale), Reinier Kraakman (Harvard) & Richard C. Squire (Yale).
3 (3) Contract as Statute, Stephen J. Choi (NYU) & G. Mitu Gulati (Georgetown).
4 (4) Penalties and Optimality in Financial Contracts: Taking Stock, Michel A. Robe (American-Business), Eva-Maria Steiger (Humboldt-Business) & Pierre-Armand Michel (Liege-Management).
5 (5) Directors' Duties in Failing Firms, Larry E. Ribstein (Illinois) & Kelli A. Alces (Gardner Carton & Douglas LLC).
6 (6) Legal Infrastructure, Judicial Independence, and Economic Development, Daniel Klerman (Southern Cal).
7 (7) Bundling and Consumer Misperception, Oren Bar-Gill (NYU).
8 (8) Choice, Consent, and Cycling: The Hidden Limitations of Consent, Leo Katz (Penn).
9 (9) Reading Wood v. Lucy, Lady Duff-Gordon with Help from the Kewpie Dolls, Victor P. Goldberg (Columbia).
10 (10) The Moral Impossibility of Contract, Peter A. Alces (Wm. & Mary).
March 5, 2006
Shrinks Rapt Over Cases
In a new book, Minds on Trial, a law professor and a clinical psychologist profile what they consider to be the “20 Most Psychologically Intriguing Legal Cases” of the past fifty years or so. We’re not sure whether to be pleased or offended that none of them is a contract case.
Smith on Boilerplate
A new and interesting paper from Yale's Henry Smith, Modularity in Contracts: Boilerplate and Information Flow. Here's the abstract:
Like property, contractual boilerplate is less tailored to its contractual and business environment than one might expect considering only the costs of producing it. Boilerplate, like all legal communication, requires actors to trade off the benefits of information-richness with the need for adaptability to a wide variety of contexts. One device for managing the complexity of contexts is modularity, under which a system is divided into information-hiding components which allow internal interaction but only limited interaction across component boundaries. Modularity helps boundedly rational agents to understand systems and to specialize in working on a subset of modules. Modularity also facilitates adaptability of systems in response to changes in the environment. Boilerplate utilizes modularity to allow for its addition, subtraction, and porting from one contract to another, without the need to worry about unforeseen interactions with other parts of the contract and the business context. Governing law and severability provisions provide particularly dramatic examples. Boilerplate is also intermediate between contract and property in terms of contexts not taken into account by the creators of boilerplate, and thus boilerplate requires less judicial intervention to maintain standardization than does property, but more so than in the case of contracts. The need for modularity also helps explain the role of "reading costs" in parties' choice of simpler contractual provisions over other more complex provisions that are not necessarily more costly to write. Modularity and formalism more generally are matters of degree, and underappreciated benefits of modularity help explain the incompleteness of the Realist revolution in contracts and the relationship of contracts to off-the-rack doctrines in civil and common law.