ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, August 11, 2008

California Supremes' Sweeping Ruling Invalidates Non-competes

Images Robert J. Ambrogi of Legal Blog Watch beat us to it, and did it perfectly, so here's his summary:

In a ruling sure to send shudders through corporate legal departments up and down the west coast, the California Supreme Court has ruled that virtually all non-competition agreements are invalid in that state. The Recorder has a full report on the ruling, Edwards v. Arthur Andersen, and Ars Technica has more about it.

The ruling turns on an 1872 state law, Section 16600 of the Civil Code, that says, "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The law provides exceptions for noncompete agreements in the sale or dissolution of corporations, partnerships and LLCs. "Under the statute's plain meaning, therefore," writes Justice Ming Chin, "an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule."

The decision rejects a recent finding by the 9th U.S. Circuit Court of Appeals that the statute contained a "narrow restraint" exception that allowed non-compete agreements as long as they restricted only "a small or limited part" of an employee's future ability to work, The Recorder explains.

In Edwards, accounting firm Arthur Andersen argued that the 'narrow restraint' exception condoned the company's non-competition agreement, which tax manager Raymond Edwards II signed in 1997. Five years later, banking corporation HSBC offered Edwards a job on the condition that he and Arthur Andersen terminate his non-compete contract. Edwards refused to sign the termination agreement, citing a requirement that he give up all future claims against the accounting firm, which had recently been indicted in connection with its work at troubled Enron Corp. Arthur Andersen then fired Edwards, and HSBC rescinded its job offer. Edwards sued both companies for interfering with his career.

Even though the court rejected the narrow restraint exception, lawyers were not surprised by the ruling, The Recorder says. "I think this is what most practitioners in California expected," said Jennifer Redmond, a partner with Sheppard, Mullin, Richter & Hampton.

Edwards v. Arthur Andersen (Cal. Aug. 7, 2008).

[Meredith R. Miller]

August 11, 2008 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Limericks of the Week: Walkovsky v. Carlton

Yellow_cab Walkovsky v. Carlton is a great case.  It always generates a good discussion of the public policy issues surrounding the limited liability protections attendant to the corporate form.  The facts are simple; the law is complex.  Guy gets hit by a cab.  The cab is operated by a small cab company.  That company is owned by Carlton.  Carlton owns a lot of cab companies, each of which has only one or two cabs in it so that he can take full advantage of the benefits of limited liability. 

In a rather deflating finding, the court dismissed the claim based on a strict application of New York's heightened pleading standards for fraud or fraud-like allegations. The court found that Walkovksy had not made adequate allegations to go after Carlton either through enterprise liability (i.e., treating all of the small cab companies as one big cab company) or by piercing the corporate veil.

I like this case so much, I wrote two Limericks about it.

Walkovsky v. Carlton

Walkovsky had his eye on the grail
Of piercing the corporate veil.
But Carlton won't yield
His liability shield:
The complaint was lacking detail.

Walkovsky was hit by a cab.
Would Carlton pick up the tab?
No, limited liability
Has social utility;
Undercaptialization is fab!

[Jeremy Telman]

August 11, 2008 in Famous Cases, Limericks, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Moral Damages Awarded in International Arbitration

In a recent NYLJ article, Emmanuel Gaillard provides a nice overview of the arbitration award in Desert Line Projects LLC, which granted an Omani company US $1 million in moral damages in a breach of contract dispute against the Yemen government. The article explains:

Although it is not common practice for a party to international arbitration proceedings to bring a claim for moral damages, the possibility of awarding such damages has never been questioned in international arbitration. "Moral" damage is distinguished from "material" damage that refers to damage to property or loss that can be assessed in financial terms. The codification work of the International Law Commission (ILC) refers to moral damage as including "such things as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one's home or private life" (see ILC's Articles on the Responsibility of States for International Wrongful Acts ("ILC Articles"), Commentary of Article 31, at para. 5).

[Meredith R. Miller]

August 11, 2008 in Recent Cases | Permalink | TrackBack (0)

Shameless Self-Promotion: Medellin & Originalism

Months ago, I posted and posted and posted and posted about the Medellin v. Texas case and my concerns that if the U.N. Charter is non-self-executing and therefore without force as a matter of domestic law, the same might be said of the CISG.

Those concerns continue, and I have now written a piece about the case and the difficulties it raises in terms of U.S. participation in international treaty regimes. The article is available on SSRN here.

Here's the abstract:

In Medellin v. Texas, the Supreme Court permitted Texas to proceed with the execution of a Mexican national who had not been given timely notice of his right of consular notification and consultation in violation of the United States' obligations under the Vienna Convention on Consular Relations. It did so despite its finding that the United States had an obligation under treaty law to comply with an order of the International Court of Justice that Medellin's case be granted review and reconsideration. The international obligation, the Court found, was not domestically enforceable because the treaties at issue were not self-executing. The five Justices who signed the Chief Justice's Majority opinion, including the Court's self-proclaimed originalists, thus joined an opinion that construed the Constitution's Supremacy Clause without any serious consideration of its language or the history of its drafting, ignoring evidence of the Supremacy Clause's original meaning cited by the dissenting Justices.

This Article explores the meaning of originalism in the context of the Court's Medellin decision and contends that the Majority's opinion, while perhaps defensible on other grounds, cannot be reconciled with any identifiable version of originalism. Rather it is best understood as a decision reflecting the conservative Majority's political commitment to favor principles of U.S. sovereignty and federalism over compliance with international obligations, even when the consequences of such a commitment is to enable state governments to undermine the foreign policy decisions of the political branches of the federal government.

Ultimately, however, the Article concludes that Medellin's case never should have come before the Court. The President has a duty to "take Care that the Laws be faithfully executed." The Court determined that the Bush administration did not satisfy this duty by issuing an Executive Memorandum directing states to comply with the judgment of the International Court of Justice. That being the case, the President now must comply with his Take Care Clause duties by working with Congress to make certain that federal law compels compliance with the International Court of Justice's judgment. Indeed, this Article contends that the Medellin case is emblematic of the U.S. executive branch's broader failure to ensure that all treaties requiring domestic implementation are in fact implemented so as to avoid placing the United States in violation of its international obligations.

[Jeremy Telman]

August 11, 2008 in Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Saturday, August 9, 2008

Now in Print

Now available in print:

- Nicholas C. Dranias, Consideration as Contract: A Secular Natural Law of Contracts, 12 Tex. Rev. L. & Pol. 267-327 (2008).

From Symposium: Intellectual Property, Trade and Development: Accommodating and Reconciling Different National Levels of Protection, 82 Chi.-Kent. L. Rev. 1109-1626 (2007), The Role of Contracts and Private Initiatives:

- Severine Dusollier, Sharing Access to Intellectual Property through Private Ordering, 82 Chi.-Kent. L. Rev. 1391-1435 (2007).

- Arti K. Rai, "Open source" and Private Ordering: A Commentary on Dusollier, 82 Chi.-Kent. L. Rev. 1439-1442 (2007).

[Meredith R. Miller]

August 9, 2008 in Recent Scholarship | Permalink | TrackBack (0)

Thursday, August 7, 2008

Court Allows Associate's Claim to Proceed for Nominal Damages Only Because Damages (for Not Making Partner) are Too Speculative

Courts3cIn 1999, plaintiff Patrick Hoeffner ("Hoeffner") began working in Orrick's New York office as an associate in the IP group. In 2002, two of Orrick's New York IP partners left for Chadbourne & Park. Hoeffner was solicited by the departing partners to leave for Chadbourne, but based on alleged promises of partnership made by certain Orrick partners ("Partners"), Hoeffner stayed at Orrick. In early 2004, Hoeffner was not "put up" for partner and alleges that he did not, as promised, receive the full support of the Partners. Hoeffner sued for, among other things, breach of contract.

A New York trial court (Fried., J) recently denied defendants' motion for summary judgment and allowed the breach of contract cause of action to go forward for nominal damages only. The court reasoned that Hoeffner's alleged damages based on not making partner are "speculative and contingent rather than proximate and certain." Here's a taste:

The claim seeks to recover damages which Hoeffner allegedly suffered from: the loss of the salary, fringe benefits and other income that he would have received if Orrick made him a partner in January 2004; the "cost of seeking out partnership opportunities at a new firm"; the loss of "future earnings because of the delay in becoming a partner"; and/or the loss of the future income Hoeffner would have earned if he had become a partner at a firm with lower partnership compensation levels than Orrick. * * *

However, as the defendants correctly assert, Hoeffner's fourth cause of action fails to allege any damages that are recoverable on a breach of contract claim. "[B]reach of contract damages are intended to place a party in the same position as he or she would have been in if the contract had not been breached." * ** "'The damages for which a party may recover for a breach of contract are such as ordinarily and naturally would flow from the non-performance. They must be proximate and certain, or capable of certain ascertainment, and not remote, speculative or contingent.'"* * *

The damages which Hoeffner seeks in his breach of contract claim are speculative and contingent rather than proximate and certain. All of the purported damages are predicated upon losses that Hoeffner allegedly suffered because Orrick did not make him a partner in January 2004. However, even assuming that the Partners had performed their purported obligations under the Agreement -- i.e., that the Partners had given their full support and encouragement in helping Hoeffner to become a partner and that Anthony had put Hoeffner up to Orrick's executive committee for partnership in the end of 2003 and/or beginning of 2004 -- it is not reasonably certain that Hoeffner would, as a consequence, have been made a partner in January 2004. Rather, his becoming a partner would have been contingent upon the occurrence of an additional event over which the Partners did not exercise control, namely, the executive committee's approval and recommendation of Hoeffner to Orrick's full partnership for election to partnership in January 2004.

Hoeffner v. Orrick, Herrington & Sutcliffe, No. 602694/2005 (Aug. 1, 2008).

[Eds note: Update: Explanation Corrected.]

[Meredith R. Miller]

August 7, 2008 in Recent Cases | Permalink | Comments (1) | TrackBack (0)

Second Circuit Certifies Contract Modification Question to New York Court of Appeals

New_york_state_flagThe Second Circuit has certified a contract question to the New York Court of Appeals in Israel v. Chabra. In that case, Michael and Steven Israel sued to recover a bonus for services rendered to AMC Computer Corp. The Israels sued AMC's Chief Executive Officer Surinder "Sonny" Chabra, who had personally guaranteed the bonus payments. An article at explains:

Southern District Judge Denny Chin found Chabra liable for the debts and he ordered Chabra to pay the Israels $332,816 each and a total of $299,890 in attorney fees.

Chabra appealed to the 2nd Circuit, where the case was reviewed by Judges Guido Calabresi, Reena Raggi and Peter Hall.

Hall wrote that the issue was whether a post-guarantee agreement between AMC and the Israels to modify the bonus payment schedule discharged Chabra's obligations under the guarantee.

Complicating matters was the fact that Chabra signed the first amendment modifying the bonus payment schedule twice, in both his personal and corporate capacities, but only signed a second amendment once. Chabra argued that the sole signature was proof that he was acting solely in his corporate capacity.

"Unlike the district court, we find that this question cannot be answered by mere reference to the fact of the signature," Hall said. The circuit then found that Chabra did not agree to the second amendment by signing it.

But Hall said that "try though we have," the circuit could not reconcile two competing clauses.

The first, relied on by the Israels, is a consent clause which said Chabra's obligations under the guaranty "are absolute and unconditional irrespective of ... any change in the time manner or place of payment."

The second, relied on by Chabra, was a "writing requirement" stating that references to the "employment agreement shall mean the employment agreement immediately after the execution of Amendment No. 1 and shall not affect subsequent amendments to the Employer Agreement unless Guarantor has agreed in writing to such amendments."

Hall said the common law rule is that "where two clauses of the agreement are so totally repugnant to each other that they cannot stand together, the first of such clauses in the contract will be received and the subsequent one rejected."

The problem, he said, was that while the common law rule would lead to rejecting the writing requirement as secondary to the consent clause, "doing so would require us to disregard a private statute of frauds" created by New York General Obligation Law §15-301(1) to assure the authenticity of an amendment by requiring that a contractual modification be sealed with a "formal writing."

New York law, he said, "presumes that statutory law does not abrogate the common law unless it evinces a 'clear and specific legislative intent' to do so."

"We are unable to determine whether, in enacting §301(1), the New York State Legislature sought to abrogate the common law to the extent that the common law would give effect to a contractual provision at odds with the writing requirement," Hall said.

So the question sent to the Court of Appeals was: Does §301(1) "abrogate, in the case of a contract where the second of two irreconcilable provisions requires that any modifications to the agreement be made in writing, the common law rule that where two contractual provisions are irreconcilable, the one appearing first in the contract is to be given effect rather than the one appearing subsequent?"

[Meredith R. Miller]

August 7, 2008 in Recent Cases | Permalink | Comments (1) | TrackBack (0)

Wednesday, August 6, 2008

Grain Contracts: Floods and Price Fluctuations

GrainWhat is a grain farmer obligated to do when a flood causes loss of a crop? Is the farmer still obligated to deliver grain under forward contracts? If the flood causes the market price of grain to increase, can the farmer demand more than the contract price? What damages might be assessed against the farmer if he fails to deliver the grain? This, and many other questions are addressed in a report from the University of Illinois: "Grain Contracts, High Prices, Floods, and Failure to Deliver." The report is authored by Donald L. Uchtmann, a Professor Emeritus in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign, A. Bryan Endres, an Assistant Professor in the same department, and Stephanie B. Johnson, a law student at the University of Illinois.

The 4-page report, which may be of interest to contracts profs, begins by explaining:

The 2008 flood wreaked havoc on farmland throughout the Midwest. In addition to destroying thousands of acres of crops, the floods have contributed to an increase in grain prices compared to the fall of 2007. The flooding has some grain farmers wondering what to do if they cannot deliver on “forward contracts” to sell grain entered into before their crops were lost to the floodwaters.

Also, some elevators may be wondering what would happen if an unscrupulous farmer who contracted to sell gain to the elevator when prices were lower were to ignore these contracts for future delivery and, instead, sell the grain on a higher spot market. For example, what are the likely legal consequences if a farmer ignores a contract entered into in the fall of 2007 to deliver 2008 corn at harvest for a price under $4/bushel and, instead, sells the corn on the cash market after harvest at, say, $5/bushel?

Here's the abstract of the questions raised by the report:

This article addresses important issues arising when a farmer’s crop is lost to floodwaters or when market prices rise much higher than the contract prices negotiated when grain prices were lower. Is a grain contract binding if it was never signed by the farmer? Does the inability of a farmer to harvest a crop because of flood provide an excuse for the farmer not to deliver grain as required by contract? What if a farmer harvests a crop but prefers to sell it at a higher price than the contract price negotiated before a rise in grain prices? What damages might be assessed against a farmer who fails to deliver grain as required by contract? Is a farmer still liable for breach of contract damages if the farmer files bankruptcy? This article is part of a law-related educational program for Illinois family farmers made possible by a gift from the Illinois Bar Foundation. The assistance of the Agricultural Law Section Council of the Illinois State Bar Association in reviewing the article also is appreciated.

[Meredith R. Miller]

August 6, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 5, 2008

Limerick of the Week: Owen v. Cohen

71020split Owen v. Cohen is a highly Limerick-worthy case.  First off, since it is about a failed partnership to operate a bowling alley, it, along with Escott v. BarChris, is part of my business associations course's running bowling theme.  Second, the names of the parties rhyme (although it would be too cheap and easy to use them both as end-rhymes).  Finally, because there is a Cohen involved, this case provides the basis for the course's inaugural Borscht Belt Limerick. 

Why Owen wanted to be Cohen's partner is a mystery beyond my comprehension.  His reasons for fronting the business a loan are even more elusive.  According to the opinion, Cohen refused to do any work ("I haven't worked in 47 years, and I don't intend to start now"), offered to sell his interest in the business back to Owen at an extortionate rate ("It would cost you plenty to get rid of me"), attempted to set up a gambling room on the business's premises, and embezzled money from the business.  In any case, within months, Owen wanted out, and the court ordered a dissolution.

Owen v. Cohen

Owen furnished the loan,
And did all the work on his own.
The court could not knit
This 7-10 split:
Oy vey!  That meshuggene Cohen!*

*Because I teach at a Lutheran University, I provide my students the following translation of the last line:

Good grief, that Cohen fellow is irksome!

[Jeremy Telman]

August 5, 2008 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, August 4, 2008

Blame it on the Lawyers: NDA for iPhone Application Developers

iPhone enthusiasts may have noticed that many of the applications available in Apple's much-hyped "app store" fall short. Many of the applications are buggy and have stability and crashing issues. Blame it on the lawyers!

Many application developers would tell you the reason is a Non-Disclosure Agreement ("NDA") that Apple required developers to agree to before they could download and use the iPhone software development kit (SDK). SDK is the only sanctioned way to develop applications for the iPhone and iTouch. Apple is treating the contents of the development kit as "confidential information," and the NDA prohibits discussion of any "confidential information." To say the least, the NDA has application developers frustrated and angry.
While the NDA might have made sense when SDK was in its "beta period," most developers would now say that the utility of the NDA has run its course, and is actually doing more harm than good. Developers are accustomed to collaborating in various ways (online forums, blogs, mailing lists), all of which is prohibited by the NDA. It also prevents new developers from learning code from other, more seasoned developers. Likewise, the NDA silences authors and publishers of programming books about SDK. There is even talk that a conference for SDK developers is threatened by the NDA.

The NDA eliminates collaboration, which threatens the quality of the applications developed. It also threatens the reputation of Apple and the social norm of collaboration among developers:

Unfortunately for student Jeffrey Long, his experience learning to develop for the iPhone "has been like no other experience I've had with computers," he wrote. "It’s been a much, much lonelier one." Certainly, this is not the reputation Apple wants among developers for its hot new mobile platform

[Meredith R. Miller]

August 4, 2008 in E-commerce, In the News | Permalink | Comments (0) | TrackBack (0)

Saturday, August 2, 2008

Limerick of the Week: Lawlis

I didn't get to post a Limerick last week as we were driving cross country. visiting, inter alia, Devil's Tower. Img_0301_4

Cross-country trips, I have learned, leave little time for anything but sight-seeing, eating and recovering. So, I will post a Limerick today as we prepare to head back east.

Lawlis illustrates one of the limitations on Cardozo's punctilio, discussed in the previous Limerick. Lawlis was a partner in a law firm, but he hit the bottle. His partners kindly saw him through a full recovery, and then executed him via a "guillotine clause" in their partnership agreement, which permitted the termination of a partner. Under the Uniform Partnership Act, Lawlis should have been safe, but partners can trump at least parts of the punctilio through a partnership agreement. They did so in this case.

The case raises nice policy issues about what a partnership should do with a partner who becomes disabled for some reason. Students, it turns out, have very strong and divergent views about how best to treat an alcoholic partner.

Lawlis v. Knightlinger & Gray

"Where's Lawlis? I haven't seen him."
The UPA says, "Don't demean him."
"But that partners' agreement"
Is stronger than cement,
And the partners may guillotine him."

[Jeremy Telman]

August 2, 2008 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Friday, August 1, 2008

Now in Print

Papers_2Now available in print:

- George S. Geis, Automating Contract Law, 83 N.Y.U. L. Rev. 450 (2008).

- Mariana Pargendler, Modes of Gap Filling: Good Faith and Fiduciary Duties Reconsidered, 82 Tul. L. Rev. 1315 (2008).

- Lawrence Solan, Terri Rosenblatt and Daniel Osherson, False Consensus Bias in Contract Interpretation, 108 Colum. L. Rev. 1268 (2008).

- Bryce Yoder, Note, How Reasonable is "Reasonable"? The Search for a Satisfactory Approach to Employment Handbooks, 57 Duke L.J. 1517 (2008).

[Meredith R. Miller]

August 1, 2008 in Recent Scholarship | Permalink | TrackBack (0)

California Court First To Declare Cell Phone Early Termination Fee Illegal

Chp_cell_phoneThis just in from

Californians fed up with being charged for ending their cell phone service prematurely won a major victory in a Bay Area court decision that concluded such fees violate state law.

In a preliminary ruling Monday, Alameda County Superior Court Judge Bonnie Sabraw said Sprint Nextel must pay California mobile-phone consumers $18.2 million as part of a class-action lawsuit challenging early termination fees.

Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users.

The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee.

Whether Sabraw's ruling will stand isn't clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule - backed by the wireless industry - which might decree that only federal authorities can regulate early termination fees.

Sprint Nextel also argued in the lawsuit that such fees - which ranged from $150 to $200 - were outside the purview of California law. But Sabraw rejected that argument.

"This is a terrific ruling," said Chicago attorney Jay Edelson, who was not part of the case but has filed about 50 other suits nationwide against various cell phone charges. "The phone companies have a tremendous amount of power," he added. "They lock you into long-term contracts and then they allow all these charges to be put on your bill. We have to make sure that consumers are protected."

"We are disappointed," said Sprint Nextel spokesman Matthew Sullivan. But he added that Sabraw's ruling was tentative and that she has given Sprint Nextel's attorneys the opportunity to file a rebuttal before she considers making it permanent.

Sullivan noted that similar suits have been filed in other states, but that Sabraw's decision was the first he knows of declaring such fees illegal.

Several other industry experts agreed, including John Walls, a spokesman with the CTIA, a Washington-based organization that represents the wireless telecommunications industry.

"I don't know of any state that has gone to this extent," he said, adding that his group believes it makes more sense to have such fees solely policed by the federal government.

I haven't read the court's decision, but, from a contracts perspective, this is a thorny issue. On the one hand, consumers enter into these adhesion contracts with cell phone providers and the substantial early termination fees are arguably both procedurally and substantively unconscionable. Likewise, to the extent the fee constitutes liquidated damages for the consumer's breach, the consumer might have an argument that the fee amount is a penalty. On the other hand, cell phone companies keep the cost of the phones/devices down by building in this fee. Indeed, the reason the consumer gets the phone at below market cost is because they agree to be "locked in" to a service contract. If the consumer terminates early enough, the cell phone company might not recoup the cost of the phone. Though, this becomes less of a concern, for example, if the consumer cancels in month 22 of a two-year contract - presumably, by then, a $200 termination fee is mostly profit in the pocket of the company. Plus, all termination fees are the same under these contracts, but some phones are cheaper than others.

We've noted before that the FCC might begin to regulate these fees.

[Meredith R. Miller]

August 1, 2008 in In the News, Recent Cases | Permalink | Comments (1) | TrackBack (0)