March 16, 2006
High School Pays Students Cash for Attendance
According to CNN.com, Chelsea High School in Chelsea, MA, is paying students for their classroom attendance. Perfect attendance in a quarter leads to a $25 reward, with a $25 bonus for perfect attendance all year long. All told, perfect attendance for the full four years nets a student $500.
The news report also featured other schools, which were raffling off cars, scholarships, and even cash prizes for students with perfect attendance.
I questioned where public schools – already strapped for money – would come up with these extra funds. Perhaps foundations or local businesses are throwing some money that way to encourage student attendance. My own experiences as an educator provide at least anecdotal evidence that the students that come to class generally tend to do much better than the chronic absentees.
But would the occasional grant really provide all this largesse? I think there’s a missing piece of the incentive story that the CNN clip doesn’t discuss. At the large Miami public high school I attended, I know that they received a set amount of funds from the state for each student that was there every day. A large number of absentees reduced the funds received. Now, back in the day, teachers and administrators relied on moral suasion and exhortation. I suppose today we have incentives and attendance contracts.
I’m not sure what I think of it. One the one hand, it would encourage high school students to come to class, and therefore to learn. It might also reduce drop out rates. And it might encourage students to think of school kind of like a job – important from a financial perspective. On the other hand, it’s rather demeaning of the education provided, which is valuable in and of itself; and perhaps it stresses attendance over all else (who wants someone in school who has a contagious flu?)
[Miriam A. Cherry]
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On Paradoxes at the Intersection of Contracts, Employment and Corporate Reorganization
One of the important purposes of commemorating an agreement in writing is to avoid potential lawsuits by clearly defining the rights and obligations of the parties. Thus, a delicately crafted contract is priceless in the sense that it has the ability to prevent costly litigation. This recognition, however, has created somewhat of a paradox. In an attempt to account for every conceivable possibility and to encompass and include every contingency, contracts often become increasingly complex and convoluted. The paradox then, is that contracts, originally designed to prevent lawsuits, are increasingly becoming the source of litigation. This paradox is aptly demonstrated by this controversy arising out of an alleged violation of a covenant not to compete contained in an employment agreement executed between the parties. As this court once again attempts to describe and interpret the intricate and complex nuances of this lawsuit . . . the pricelessness of a precisely drafted, yet simplistic, contract becomes rapidly apparent.
Here is the factual context for the "paradox": an employee works as a veterinarian for a company that provides embryo transfer services for cattle producers. The employee (who also happens to be a shareholder in the company) has an employment agreement with the company containing, among other things, a non-compete clause. The agreement also has a clause requiring prior written consent before the agreement may be assigned by either party.
[Click on "continue reading" for the rest of the story . . . .]
The employer goes through a series of two corporate restructuring and spin-off transactions, and the employer thereby transfers its assets to a newly created entity. The detailed documents governing the employer’s asset transfer transaction excludes mention of the employment agreement. The employee eventually leaves employment. The employer (now re-branded as a new corporate entity) seeks to enforce the terms of the non-compete agreement and enjoin the employee from providing embryo transfer services for its customers for a 12-month period.
This scenario raised many interesting questions for the Northern District of Iowa to address on summary judgment.
First, was the employment agreement transferred with the assets of the employer in the corporate reorganization? The court held: yes. It reasoned that, "according to the plain and clear terms of the . . . Employment Agreement, it appears that no degree of formality is required with respect to the assignment itself." Therefore, the agreement could have been transferred informally, without being mentioned in the asset transfer documents.
Second, did the transfer of assets constitute an "assignment" of the employment agreement? The court held: yes. This was an open question under Iowa law. The court noted that there were "two distinct lines of thought" concerning whether a merger or other change in corporate form constitutes an "assignment." There is one line of thought that holds that a surviving corporation of a merger succeeds to certain rights previously owned by the merged corporation, irrespective of the fact that the original agreements contained anti-assignment clauses. This line of thought rests on the belief that the merger occurs by "operation of law" and, therefore, no assignment or transfer within the meaning of an anti-assignment clause has occurred. The second line of thought recognizes that a transfer has occurred when a business entity has changed form, but holds that such a "mere change" in the form should not necessarily mean that an anti-assignment clause should work to prohibit the transfer of the employment agreement. The court recognized that "both lines of thought exude certain appeal," but, on the facts of this case, adopted the first approach. The court reasoned:
[The first line of thought] emphasizes the importance of drafting accurate contracts and places the burden on the drafters to provide an exception in the case of a merger or change of business structure. However, [the other line of thought] recognizes the fluidity of business entities and appear to temper the harsh consequences that potentially can ensue as a result of the formality of shifting the legal form of a business endeavor. For the reasons discussed below, however, this court finds that, on the facts of this case, the [first] approach controls. First, it must be noted that [the employer] drafted the . . . Employment Agreement. [The employer] is an extremely experienced business entity and should have been savvy to the importance of drafting an explicit and accurate contract. [The employee], although highly educated in the field of veterinary medicine, cannot be held to such a high standard as an individual employee. As the . . . Employment Agreement clearly contemplated and provided for its assignment and provided the conditions which must be met prior to such an assignment, [the employer] could have easily gone one step further and defined "assignment" or provided for an exception in the event of a change in corporate structure. [The employer] failed to do so and should not be allowed to seek refuge by asserting the transactions that followed were a simple "transfer" and insufficient to constitute an "assignment" within the meaning of the parties' agreement. While it is true the basic rule in interpreting written contracts is that the intent of the parties controls, this intent is determined by the language of the contract unless it is ambiguous. * * * An ambiguity does not exist simply because the parties disagree on the meaning of a phrase. * * * Rather, in construing a contract, it is a court's duty to give effect to the language of the contract in accordance with its plain and ordinary meaning. * * * In this case, the word "assignment" is not defined by the parties. Accordingly, it should be given its plain and ordinary meaning, which includes any transfer of all or part of one's property, interest or rights to another. See Black's Law Dictionary 119 (6th ed.1990). Accordingly, the transfer of [the employer’s] assets to [the new entity] constitutes an "assignment," within the word's plain and ordinary meaning. Finally, this court notes that when [the employer] essentially became [the new corporate entity], much more than a mere name change was involved, as excruciatingly detailed in the factual background of this opinion. [The employer] went through a fundamental change in its form of ownership. . . . [A] complex series of legal transactions was involved and essentially resulted in the complete transformation of what used to be known as [the new entity]. For these reasons, the court concludes that under the particular facts of this case, an assignment within the meaning of the . . .Employment Agreement did occur when [the employer] revamped its corporate structure.
The court, therefore, had to address whether the employer obtained the prerequisite written consent from the employee to assign the employment agreement. The employee was also a shareholder in the employer and, therefore, as required under Iowa law, had (as a shareholder) signed the Stock Purchase Agreement and Statement of Unanimous Consent. The court held that "no reasonable factfinder could conclude that [the employee’s] consent as a selling shareholder to an extraordinary transaction as required under the Iowa Business Corporation Act can somehow perform ‘double duty’ and also act as his consent to the assignment of his personal employment agreement."
Finally, the question remained whether the employee ratified the assignment because he was aware of the asset transfer and continued his employment with the newly branded entity. The court held: no, for two main reasons. First, the agreement here was not silent concerning the requirements for a valid assignment, and most of the cases providing for ratification do so in the context of a contract that is silent in this respect. Second, the employer cannot use the employee’s shareholder knowledge of the asset transfer to argue that the employee ratified the assignment.
Pro-Edge, L.P. v. Gue (N.D. Iowa Mar. 7 2006).
[Meredith R. Miller]
If You Also Teach Agency . . . .
. . . you probably teach the famous inherent-authority case of Watteau v. Fenwick, the Case of the Disloyal Pub Manager. I've unearthed some information about that case -- including photos of the site of the old pub (left) a map, and links to pictures of how the area looked at the time -- which I've posted here over at Unincorporated Business Law Prof Blog.
Relational Contract Theory and Job Design
Employees who have broad task assignments are more likely to feel part of a relationship with their employer than those who perform a single task. That's important when job performance is hard to verify, according to a new paper, Relational Contracts and Job Design, by Anja Schöttner (Humboldt University of Berlin, School of Business and Economics). She suggests that where it's hard to verify performance, broad task assignments may increase employees' incentives to perform well. Here's the abstract:
This paper analyzes optimal job design in a repeated principal-agent relationship when there is only one contractible and imperfect performance measure for three tasks whose contribution to firm value is non-verifiable. The tasks can be assigned to either one or two agents. Assigning an additional task to an agent strengthens his relational contract. Therefore, broad task assignments are optimal when the performance measure strongly distorts incentives for the two-task job. This is more likely to be the case if these two tasks are substitutes.
Israel: Can't Shed Employees by Shedding Division
Employees of an Israeli parent company whose division has been spun off by the parent do not automatically become employees of the new company, according to a recent decision by the Israeli Supreme Court.
Rather, the workers can choose to remain employees of the former enterprise. In a fractured decision that resulted in three separate opinions -- none a majority -- the Court appears to have held that the employees' contract is with the parent and cannot be transferred without employee consent. If the parent no longer needs the employees, it can terminate them pursuant to whatever limitations and agreements it had with them previously.
Shoshana Gavish and Avi Ordo of Tel Aviv's S. Horowitz & Co., recount the decision in Do Employees Have The Right to Refuse to be Employed by Another Employer, in The Event of an Enterprise "Changing Hands"?
. . . Elizabeth Winston is headed east, leaving Whittier for Catholic . . . . Jeff Lipshaw, who visited last year at Wake Forest, will spend next year visiting at Tulane . . . .
March 15, 2006
Connery Part III
Just yesterday, I wrote a post asking why the golf club would have signed a contract with Sean Connery that allowed him to collect money after he quit. I couldn’t find a copy of the contract on line, so I was really just guessing about it. After reading my post, Professor Jeff Lipshaw had this excellent comment to offer:
“I wonder what the precise wording of the contract was. This is pure speculation because I haven't seen the contract. But it seems to me this is either going to be an easy case of the kind of opportunism that simple and unambiguous contracts are supposed to avoid, or a very difficult case of ambiguous language leaving it unclear what the parties intended.
If the words "going rate" clearly and unambiguously apply to the going rate at the time the member resigns, then the following are possible: (a) Connery is right, and he had an incentive to create value to the club proprietors - if he attracted members at that rate, he clearly earned the money, or (b) Connery got lucky because nobody thought about a huge inflation in the price, or (c) or somebody really blew it, and created a "four corners" document that allocated the risk of future inflation in a way the parties did not intend, invoking the application of mistake doctrine.
This is pure speculation, but I would bet something less than the whole farm that the lawsuit is based on an ambiguity around the words "going rate." It is not uncommon for clubs to be obliged to pay as much as 80% of the equity or initiation fee back. I wonder if the contract failed to specify the precise time (upon entry or exit) at which the "going rate" was to be calculated. In which case, we don't even have the contract language as an indicator of what the parties really intended. Which I have contended in the past is the way most contract disputes in the real world arise: both parties argue ambiguous language in their favor as applied to present opportunity, and there really never was a mutual intention!”
That makes a lot of sense. Thanks for your input, Jeff!
March 14, 2006
A Counterfeit Just for Bill Gates
A counterfeiter was caught in California with 250 fake bills. But these were not your average counterfeit bills, given that each bill was supposedly worth a whopping one billion dollars. They bore a picture of Grover Cleveland and were ostensibly printed in 1934.
According to the story, “’You would think the $1 billion denomination would be a giveaway that these notes are fake, but some people are still taken in," said James Todak, a secret services agent involved in the probe.”
Er… yeah, most people should know there is no such thing as a billion dollar bill. But I’m just wondering what the counterfeiter intended to do with them. It’s not like he could just go into a normal store and purchase something. Or ask for change.
[Miriam A. Cherry]
More on James Bond and Golf
Being a celebrity certainly has its advantages, not the least of which is getting lots of free “stuff.” Manufacturers send celebrities products – all gratis – hoping that it will get their product additional publicity or name-recognition.
But Sean Connery seems to have taken this sense of entitlement to a new level in suing for breach of contract over a golf club membership. Apparently, he terminated his membership – which was given to him at a reduced price – and is now seeking damages for breach of contract. From what I see in the news reports, I’m having a hard time discerning why the club would agree to put such a damage provision into any contract it had with a celebrity. It is one thing to give a free or reduced price membership, and quite another to pay the celebrity if they quit the club! From the reports, Connery claims that his belonging to the club induced other members to join (and therefore, I suppose, the unjust enrichment).
“Connery is seeking more than $500,000 for breach of contract and more than $500,000 for "unjust enrichment" from the Sherwood Country Club in Thousand Oaks
The suit claims the golf club was aware of the actor's lucrative status as an "internationally renowned celebrity and famously avid golfer" when it invited him to join in 1990 at a special initiation fee of $35,000.
His celebrity boosted the club's value and attracted new members, the suit states.
In 2004, Connery terminated his membership. But according to the lawsuit, Connery's contract allowed him to collect 80 percent of the "going rate" of membership — more than $500,000 — which the club has refused to pay.”
The Killers rock band has asked a judge to toss out a $16 million lawsuit brought by their former manager. He says they dumped him when they hit the big time -- they say he's incompetent and dishonest.
Actor Sean Connery is suing a California country club, saying it used his fame to attract members but then stiffed him when he quit the club. He wants somewhere around $1 million.
Howard Stern, caught in the headlights of a breach-of-contract suit by CBS Radio that could cost him as much as $200 million, appeared on the network's David Letterman program to blast the company's CEO. CBS says Stern is "desperate."
Relational Contracting and Privatization
Privatization of social services is a big topic these days. Much of the literature, according to Colorado's Nestor Davidson (left), seems to rely on a vision of arms'-length discrete contracting, under which the solution to assuring accountability is detailed specifications and constant monitoring. In a new paper, Relational Contracts in the Privatization of Social Welfare: The Case of Housing, forthcoming in the Yale Law & Policy Review, Davidson argues that this is misguided. Here's the abstract:
Privatization has become a permanent and increasingly significant part of contemporary public policy, especially in the social welfare arena. Commentators are increasingly debating how to maximize privatization's potential to enhance the efficiency of service delivery while grappling
with the threat that privatization holds for accountability. A recurring prescription in this debate calls for additional government control of private providers, through agreements that contain ever-more-careful terms, monitored with ever-greater care. This view reflects a model of discrete contracting that places great faith in the capacity of government entities to state requirements in complete terms and to enforce these terms through the threat of termination. This conceptual framework, however, misses the fundamentally relational nature of many of the agreements that define privatization. These agreements reflect the inherent difficulty of capturing requirements over the course of a long-term, closely entwined public-private partnership. Examining a collection of subsidized housing programs, this Article identifies the relational aspects of core agreements between the government and private providers. It then argues that embracing and enhancing the relational features of public-private partnerships holds promise to capture privatization's benefits while providing a different approach to accountability.
New Rules for Retail Leases in Queensland
Retail leases in Queensland will likely be subject to a new set of terms and rules next month, when the new Retail Shop Leases Amendment Act 2006 is expected to come into effect. The Act has new disclosure requirements for both lessors and lessees, and a variety of non-waivable terms regulating rent, options, and other aspects of the deal. A client letter from Sydney's Phillips Fox outlines the changes.
Contract Suit Potentially Brewing Against Hasidic Reggae Star
Matisyahu (“Matis”) is surely the only Hasidic reggae singer to regularly sell out 2,000-to-3,000-seat concert halls -- his music has been described as "dancehall without the accent." Last week he released "Youth,” which is expected to climb the Top 10 charts. However, a lawsuit seems to be brewing after Matis recently terminated his managers.
Aaron Bisman, an NYU student, and Matthew Miller, a New School student, founded JDub, a nonprofit record label with the goal to make “innovative music that was proudly Jewish.” Early in the venture, Matthew Miller embraced hasidism and was rebranded as "Matisyahu," which is yiddish for Matthew. Matis grew more devotely religious and, meanwhile, honed his reggae skills.
Bisman and Jacob Harris helped Matis set up gigs and promoted his concerts. Bisman and Harris entered into a 4-year management contract with Matis. The NY Times reports:
And while JDub has not been Matisyahu's record label for two years, Mr. Bisman and Mr. Harris had remained his managers, and Matisyahu's engagements bring in a substantial part of the company's revenue.
However, just before the release of “Youth,” Matis called Bisman and Harris and terminated their management services.
The two men said they still have nearly three years left on a four-year management contract, and are consulting with their lawyers on how to proceed. "There has to be some sort of legal action," Mr. Bisman said in an interview at the JDub offices at the
Edgar M. Bronfman Center for Jewish Student Life at New York University.
Bisman told the NY Times: “That is the music business, I guess.”
[Meredith R. Miller]
March 13, 2006
Quite a few Contracts profs are changing jobs this year. Perhaps the biggest news is former Virginia dean Bob Scott -- the guy synonymous with contract law in the Old Dominion -- heading north for Columbia. Randy Barnett joins Georgetown from Boston University, where Mitu Gulati has departed for Duke. Peggy Radin must be tired of nice weather -- she's leaving Stanford for Michigan. Two transplanted Northerners are headed back above the Mason-Dixon line: Marie Reilly is leaving South Carolina to join the faculty at Penn State, while Rafael Pardo exits Tulane to head up to Seattle.
Two of our ContractsProf colleagues are also moving. Miriam Cherry of Cumberland, who visited last year at Hoftstra, will join the faculty at Pacific, and Meredith Miller leaves Temple for Touro.
Weekly Top 10
Two new papers have landed on this week's Top Ten countdown. Another popular federal procurement piece by chart regulars Steven Schooner and Christopher Yukins debuts in the third spot, while David Hoffman's take on the little-understood phenomenon of "puffing" makes its entrance at number ten. Following are the top ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending March 12, 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 (-) Emerging Policy and Practice Issues (2005) , Steven L. Schooner & Christopher R. Yukins (Geo. Washington).
4 (3) Contract as Statute, Stephen J. Choi (NYU) & G. Mitu Gulati (Georgetown).
5 (4) Penalties and Optimality in Financial Contracts: Taking Stock, Michel A. Robe (American-Business), Eva-Maria Steiger (Humboldt-Berlin-Business) & Pierre-Armand Michel (Liege-Management).
6 (5) Directors' Duties in Failing Firms, Larry E. Ribstein (Illinois) & Kelli A. Alces (Gardner Carton & Douglas LLC).
7 (6) Legal Infrastructure, Judicial Independence, and Economic Development, Daniel Klerman (Southern Cal).
8 (7) Bundling and Consumer Misperception, Oren Bar-Gill (NYU).
9 (8) Choice, Consent, and Cycling: The Hidden Limitations of Consent, Leo Katz (Penn).
10-tie (-) The Best Puffery Article Ever, David A. Hoffman (Temple).
10-tie (9) Reading Wood v. Lucy, Lady Duff-Gordon with Help from the Kewpie Dolls, Victor P. Goldberg (Columbia).
They're Getting Younger
A recent discussion on the Contracts Listserv focused on technology in the classroom and the need for preparing students for practice. The comments raised again the fundamental question that keeps plaguing law schools: are we trade schools, preparing practitioners to serve clients ("Hessian Trainers"), or are we academic departments whose primary focus is scholarly inquiry ("Scholars")?
"Scholar" seems to be beating "Hessian Trainer" again this year in the annual faculty hiring numbers. A look at the new hires cataloged by Lawrence Solum shows that the median new faculty hire graduated from law school in 1999, which means that half of the new faculty hired at American law schools have no experience of law practice at a level higher than mid-level associate. Many have considerably less. When you factor in the clerkships, the advanced degrees earned following the initial J.D., and (in many cases) a year or two as Fellows or visiting professors, you get even less experience at the actual practice of law. Here's a breakdown by law-firm classes of the 85 new hires at this point:
2003-2005 Junior Associate 17%
2000-2002 Mid-Level Associate 29
1997-1999 Senior Associate 31
1990-1996 Junior Partner 14
Before 1990 Senior Partner 6
March 12, 2006
So Do We Feel Sorrier for Them Now?
Employees often lose their jobs when their company hits an industry downturn. Turns out, so do CEOs. Traditional wisdom is that corporate boards don't hold a CEO responsible for things beyond his or her control, like market downturns. But a new study from the National Bureau of Economic Research suggests that while this may have been true in the 1970s and 1980s, it's no longer the case today.
The paper is CEO Turnover and Relative Performance Evaluation, by Dirk Jenter and Fadi Kanaan (MIT-Business). Here's the abstract:
This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention.
Using a new hand-collected sample of 1,590 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This finding is robust to controls for firm-specific performance. The result is at odds with the prior empirical literature which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.