Tuesday, September 23, 2008
A Russian hedge fund manager is suing the redeveloper of New York's Plaza Hotel, claiming that the $53.5 million penthouses he bought in reliance on computer modeling are unsatisfactory and "attic-like." Andrei Vavilov plunked down $10 million as a down payment to buy both penthouses in the renovated hotel, planning to make one giant condo overlooking Central Park.
The developer, however, is fighting back, claiming that Vavilov's claimed dissatisfaction is a sham and suing him for libel.
Michael Eisner, Disney's CEO for 20 years, hired his friend, the celebrated Hollywood agent, Michael Ovitz, to be Disney's President. The hire was a disaster from the start. I don't think it was really Ovitz's fault. I blame Eisner. Eisner's subordinates all took an immediate dislike to Ovitz and, according to James Stewart's Disney War, refused to answer to him. Eisner did nothing to protect his #2. He threw Ovitz to the dogs.
In addition, there were all sorts of irregularities in the hiring process. Ovitz had packed the board with loyal supporters. Nobody really looked very closely at Ovitz's employment agreement, including the compensation expert retained by the company. Indeed, by the time Disney's Board too a look at the agreement, Eisner had already told Ovitz he had the job. So many within Disney, as well as many shareholders, were shocked when Ovitz's severance package was valued at around $140 million, far more than he was likely to have made if he had not been fired within two years of taking the position.
In Brehm v. Eisner, the court stressed that when evaluating the decisions of a corporate board, the court reviews only the process, not the board's substantive business decisions. And since under Delaware law, a board is permitted to rely on an expert's opinion, Disney's Board could not be sued for a breach of the duty of care, even though the compensation expert had not done a very good job. That ruling was eventually reversed, since it turned out that there was no proper expert report supplied to and relied on by the Board. However, after a couple more years of litigation, the end result was the same. The main claim was that the Disney Board breached its duty of care, and that claim was dismissed.
I have often wondered if plaintiffs could have made some sort of breach of loyalty claim against the officers of the corporation who refused to answer to Ovitz. Weren't they putting their own interests ahead of those of the corporation? James Stewart's book suggests that Ovitz had some pretty good ideas about directions Disney might have taken in the late 1990s, but he couldn't implement any of them because nobody would work with him.
In any case, while the court found the process sound, I have my doubts . . . .
Brehm v. Eisner
That board meeting, it was a quickie,
And Ovitz left sporting a hickey.
Though questions abound,
The process was sound.
Did Ovitz slip Disney a mickey?
Monday, September 22, 2008
Regulars to this blog will notice the return of a number of familiar by-lines. You will be seeing a lot more of Keith and Miriam. And I am especially delighted to have Frank back posting regularly on this blog. Frank was the one who invited me to join the blog, and it's been a terrific experience, made much easier by all the work that Frank and my co-bloggers did to set up the blog before I came on board.
Words cannot describe my happiness. So if you see me walking around with a stupid grin on my face, this is the scene playing out endlessly in my head:
As you'll see from today's posts, its good to have our faithful blog editor Frank Snyder "back in the saddle." (His words, and not my own cheap reference to his ill-fated altercation with a quarter horse named Moses).
Among other things, Frank has been busy with his beloved Texarkana Gunslingers. As I imagine it, Hanks was channeling Frank in this clip:
Inspiring to base-ballers and bloggers alike!
[Meredith R. Miller]
After a lengthy hiatus and with a semester still fairly new, here are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending September 21, 2008.
1 Freedom of Contract, David E. Bernstein (Geo. Mason).
2 Contract Enforcement and Institutions Among the Maghribi Traders: Refuting Edwards and Ogilvie, Avner Greif (Stanford-Econ)
3 Consent in Contract Law, Brian Bix (Minnesota).
4 Law's Illusion: Scientific Jurisprudence and the Struggle with Judgment, Jeffrey M. Lipshaw (Suffolk).
5 The British Approach to Consumer Financial Disputes: A Model for Reform in Insurance Law and Beyond, Daniel Schwarcz (Minnesota).
6 Resolving the Foreclosure Crisis: Mortgage Modification in Bankruptcy, Adam Levitin (Georgetown) & Joshua Goodman (Columbia-Econ).
7 The Right Not to Be a Genetic Parent?, I. Glenn Cohen (Harvard).
8 Intellectual Property and Restrictive Covenants, Orly Lobel (San Diego).
9 Spanish and International Judicial Interpretation of CISG, Anselmo M. Martinez Canellas (Islas Baleares).
10 To Err is Human, to Moo Bovine: The Rose of Aberlone Story, Norman Otto Stockmeyer (Thos. Cooley).
Congrats to Western New England College's School of Law, which last week unveiled a new $5.5 million addition to the school's S. Prestley Blake Law Center. It marks a major expansion to the Springfield, Mass. campus. From the release:
The expanded Law Center includes a new 10,500-square-foot wing and entrance that provides a gateway to the rest of the campus. The entrance, with its soaring marble pillars, leads to a two-story lobby that serves as a primary gathering space for students and the hosting of Law Center events. "This Law School is a dynamic place; new ideas march through its halls with breathtaking pace," said Dean Arthur R. Gaudio. "We needed an equally dynamic venue where professors and visiting scholars could present those ideas to collected groups of students and faculty."
Besides the new addition, the biggest change students and visitors will notice is the restructured law library, which now extends to all three floors of the Law Center. Along with the new space comes a new user-friendly way of accessing library materials, with patrons able to take most books out of the library area and into any part of the Law Center. "You can go in and out of the library and into the Law School at any level," said Gaudio. "The Law Library is now as large as the entire Law School building." Western New England College School of Law is one of only a few schools in the country to try this cutting edge approach to access. Materials must still be checked out to leave the building, with sensors at the exits to the building monitoring the library's collection.
Friday, September 19, 2008
The Millers bought a Dodge station wagon from Colonial Dodge and then realized that it was missing a spare tire. Apparently a strike at the tire manufacturer made it impossible to provide a spare, but the dealer promised to supply a tire as soon as possible. Mr. Miller found this unacceptable and stopped payment on the car, which had already been delivered to him. Eventually the car was impounded, and it sat in the impound lot for nine years -- until the case was finally resolved.
The trial court found for Colonial Dodge.
Michigan's Court of Appeals reversed in a split decision.
On rehearing, the Court of Appeals took notice of additional facts. For example, both the salesman and Mr. Miller were stressed out at the time of the transaction, and the salesman offered to give Mr. Miller his own spare tire (illustrated at left), but Mr. Miller said, "No thanks, I've already got one." Or the spare tire didn't fit. Something like that. Having considered this additional evidence, the Court of Appeals reversed itself, as one of the judges switched sides. The Court of Appeals now found that the parties had stipulated that the Millers had accepted the car, and so the issue was whether acceptance could be revoked. Under UCC s. 2-608, such revocation is permissible only if the non-conformity of the good "substantially impairs" its value to the buyer. The Court of Appeals found no such substantial impairment. Judge Deming stuck by his guns, arguing that there was no acceptance and noting that under the UCC, "the right to reject nonconforming goods prior to acceptance is nearly absolute (citing 2-601). I wonder if Judge Deming would overturn the Seinfeld rule and permit rejection out of spite.
Michigan's Supreme Court reversed. It could not reverse the stipulation regarding acceptance, but it noted that that it was "not persuaded that, had the matter been contested in the trial court, a finding of acceptance would be warranted on this record." Instead, the court found that there was substantial impairment, since Mr. Miller's work required that he travel extensively, "sometimes in excess of 150 miles per day on Detroit freeways." The various opinions in the case make relatively little mention of the possibility of cure under UCC 2-508. This was not a case in which the Millers noticed the missing tire and the dealer chortled, "You snooze, you lose." The dealer offered to provide a spare tire as soon as the strike ended. Indeed, the Court of Appeals notes (the first time around) that a tire arrived shortly after the strike ended. Seems like an argument for cure is at least available.
Before you purchase a good,
It's best to look under the hood.
The good here is a dodge,
The case, a hodgepodge,
And the law not well understood.
Thursday, September 18, 2008
I promised Curtis Bridgeman (pictured) and Karen Sandrik that I would discuss their new essay "Bullshit Promises" on this blog, so long as I had the time and it wasn't too inconvenient. But now, I don't really feel like going into all that, so I'll just tell you that the paper focuses on the kinds of bullshit that can be found in the credit card and cell-phone industries. The statutory supplement that I use in my contracts course includes a reproduction of Google's Terms of Service. On the first day of class, in order to introduce students to concepts like forum selection clauses, choice of law provisions, arbitration clauses, merger clauses, limitations of liability and disclaimers of warranty, I walk the students through the Terms of Service agreement. At some point, they conclude that the Terms of Service agreement obligates Google to do absolutely nothing. As Bridgeman and Sandrik suggest, bullshit is ubiquitous. So watch your step.
The abstract page for "Bullshit Promises" (with download options) can be found here. And here is the abstract itself:
A few years ago, the philosopher Harry Frankfurt published an essay provocatively entitled, "On Bullshit." Convinced both that our society is laden with bullshit and that we nevertheless do not have a clear idea of what it is, Frankfurt set out to explain what bullshit is and to distinguish it from lying. While the liar seeks to lead his listener to a false belief, the bullshitter is unconcerned with truth altogether. Although the project sounds at first like the essence of philosophical navel-gazing, Frankfurt was trying to make an important point about how this indifference to truth has caused us to lose our way a bit in philosophical and political discourse.
In this project, we draw on Frankfurt's work to point out a disturbing trend in contract law: the use of bullshit promises. Bullshit promises are promises that are in a certain sense insincere even though they are not lying promises, at least not in a sense that would be actionable under the tort of promissory fraud. Promissory fraud is available in cases where a party makes a promise that it has no intention to keep, and it does so in order to deceive the promisee about its intentions. But it is quite common today for parties, especially companies dealing with consumers, to make promises that are not lying promises in that the promisor is not concealing an intention not to perform, but that are nevertheless insincere. In such cases a party uses promissory language but elsewhere reserves the right not to perform, or to change the terms of performance unilaterally as it sees fit. Such promises are not necessarily lying, especially if the promisor does not at the time have a specific plan to change the terms, but they are usually bullshit. By simply leaving its options open a party can help itself to the benefits of promissory language without being subject to the norms associated with promising, in particular some sort of commitment to a particular course of action. The tort of promissory fraud as now applied is not able to address this problem, but we will suggest minor modifications in both contract and tort that should help. At the very least, it is time courts and commentators recognized the phenomenon of bullshit promises and the potential challenges they create.
Wednesday, September 17, 2008
Here's a challenging fact pattern, but it is not from an exam. It's from Saturday's New York Times : Leo Friedman and Joseph Abeles formed a partnership, the Friedman-Abeles studio, that specialized in pictures of broadway musicals. Abeles was a portrait specialist, so he would take studio shots of the stars. Friedman, on the other hand, directed three-hour photo shoots, during which he would have the actors perform the relevant show in reverse, and he would shoot the scenes. Actress Carol Lawrence claims that it took about 300 tries before Friedman was satisfied with a picture of her running with Larry Kert that found its place on the cover of the LP recording of "West Side Story."
When Friedman and Abeles split acrimoniously in 1970 and the property of the partnership was allocated at an arbitral hearing. Friedman recalls the outcome of that hearing as giving him possession of the photos and negatives from the studio and giving Abeles possession of the studio itself and all of its equipment. This is Friedman's recollection of the ruling, but he has been unable to locate a copy of the decision, and Abeles died in 1991.
Friedman decided to send the collection (which now consists of about 4,580 prints and 2,655 contact sheets) to the New York Public Library's performing arts collection so that they could be catalogued and perhaps so that reproductions could be sold. The Library regarded the transaction as a gift. Mr. Friedman had always characterized it as a loan.
According to the Times, Mr. Abeles, perhaps under the impression that the photos were his, or perhaps out of spite, took the trouble to scratch out the original photo credit on the back of many of the pictures and replace it with a Joseph Abeles Studio label. The library has been charging fees for reproduction rights ever since (that's why you see no pictures here), but Mr. Friedman, now 89, objects. In 2001, the library offered Mr. Friedman $10,000 for the rights to the collection. Later, it doubled its offer to $20,000. Mr. Friedman thinks the collection is worth far more. Indeed, in 1978 Mr. Abeles sold 76 boxes of photos (some were marked "Friedman-Abeles Studio") to the University of Texas for $25,000.
Prior to the commencement of United States-led war in Iraq, Hilaturas Miel S.L. (“Hilaturas”) entered into a contract to supply the Republic of Iraq with yarn under the U.N. Oil For Food Program. The Southern District of New York (Sweet, J.) recently had occasion to opine on the effect of the hostilities in Iraq on the contractual rights and obligations of the parties.
Hilaturas filed a complaint alleging that Iraq breached the parties' contract, and alleged damages as a result of the failure of Iraq to provide means of inspection and acceptance of yarn shipped under the contract. On Iraq's motion for summary judgment, citing Article 79 of the CISG, the court dismissed the complaint, concluding that the war precluded the performance of the contract -- namely, inspection, which was a condition precedent under the contract, became impossible.
Hilaturas Miel S.L. v. Republic of Iraq, 06 Civ. 12 (S.D.N.Y. Aug. 20, 2008). [Decision available in NYLJ, subscription required].
[Meredith R. Miller]
Tuesday, September 16, 2008
Name changes are hard. I know from personal experience. True, the actual legal process of changing one's name, e.g. from David Aaron Telman to David Aaron Jeremy Telman, is actually quite easy. I paid an attorney a couple hundred bucks to do so back in the 1980s, and the attorney told me he was grateful to have a matter that he could actually close. No, the difficulties arise later, like when the Indiana Bureau of Motor Vehicles informs you that you are only permitted three names on your driver's license (initials are not permitted) and insists that you go by David AJ Telman, a person who does not exist.
So my heart goes out to NFL player Chad Ochocinco (formerly Johnson), who has faces much more significant problems associated with his name change. It turns out that Reebok controls the jerseys that NFL players wear, as CNBC reports here, and they need notice of changes (ordinarily of numbers) months before the season begins, so that Reebok doesn't end up manufacturing jerseys with the wrong numbers. I mean, who wants a Michael Jordan #45 jersey? So, if Chad wants to wear a jersey with his name on it this season, Reebok says he has to cover their costs for the 100,000 or so C Johnson jerseys already made and in circulation. Reebok puts that cost at $48/jersey (!), so the cost to Chad of wearing a jersey with his current name on it would be $4.8 million. The blogosphere has called down a pox upon all the relevant houses, for example here and here. But Chad is not without his defenders. Luckily for me, there is no market in contracts profs jerseys.
HT: Alan White and Valpo 1L George Catanzarite
As business judgment rule officianados already know, I am a proponent of Stephen Bainbridge's abstention theory of the business judgment rule (BJR). Well, sort of. Actually, I think the BJR is no longer necessary to protect directors, because they are statutorily protected (and how!), but it is necessary to protect corporations from forced disclosure of prospective business plans. And here is where I follow Bainbridge: when applied, it should be applied as a doctrine of abstention, not as an evidentiary presumption or a heightened standard of review.
There are many cases that illustrate Bainbridge's claim that courts already treat the BJR as a doctrine of abstention, and Kamin v. American Express Company, and Shlensky v. Wrigley are surely among the best examples. The idea is simple. In order to get around the BJR, plaintiffs must allege either that the Board made no decision whatsoever or that its decision was tainted by illegality or a conflict of interest. I don't mention waste because, as Chancellor Allen pointed out, a successful waste claim is sighted as often as the Loch Ness monster. If plaintiffs don't allege illegality or conflict of interest, the court simply defers to the business judgment of board, so long as there was an exercise of business judgment.
In Kamin, American Express made an investment that declined significantly in value. Rather than selling the de-valued stock and realizing an $8 million tax benefit, the board decided to distribute the stock to its shareholders as an in-kind dividend. The board attempted to justify this decision with the claim that reporting the loss would have a negative impact on American Express's stock price, but that's absurd. The market already knew of the loss and, under the efficient capital markets hypothesis, the loss was already incorporated into the stock price. The real motivation behind the in-kind dividend was probably earnings management, but plaintiffs didn't press that theory, or the court wouldn't hear it. Too bad. Evidence of earnings management would have suggested a conflict of interest and thus gotten around the BJR. Instead, the court said, in effect, you haven't alleged self-interest or illegality and so as long as the board has given a reason (even a ridiculous reason), the court must defer to that judgment and abstain from review.
As you will note below, I have made a decision about the pronunciation of the plaintiff's name. If you think I'm wrong about that, write your own stinkin' Limerick!!
Kamin v. American Express Co.
There once was a plaintiff named Kamin
Who showed errors of judgment most damnin'.
But without breach of duty,
Though the goof be a beauty,
The court must refuse to examine.
Monday, September 15, 2008
The Lone Star Supremes held that a waiver-of-reliance provision precluded a party from claiming fraud in the inducement with respect to an arbitration clause. Two commercial parties settled a protracted dispute over oil and gas royalties. The settlement agreement specifically disclaimed reliance "upon any statement or any representation of any agent of the parties" in executing the releases contained in the agreement. A dispute arose and the plaintiff sought to compel arbitration. In response, the defendant claimed that the arbitration clause was fraudulently induced. The court held:
Here, sophisticated parties represented by counsel in an arm's length transaction negotiated a settlement agreement that included a clear and broad waiver-of-reliance and release-of-claims language. Because that agreement conclusively negates reliance on representations made by either side, any fraudulent inducement claim, lodged here to avoid an arbitration provision, is contractually barred.
Chief Justice Wallace Jefferson filed a dissent:
Under the Court's analysis, a party may intentionally misrepresent facts essential to the bargain to induce the other to sign, as long as the agreement says reliance is waived. That is not sound policy[.]
Forest Oil Corp. v. McAllen, __ S.W.3d __, 2008 WL 3991058 (Tex. Aug. 29, 2008).
[Meredith R. Miller]
I used to think "Why would anybody want to fly on an air bus?" But then I learned then when you pronounce it the proper, French-inflected way, it's really not so bad. That must have been what the Pentagon was thinking when, as reported previously on this blog, it awarded a $40 billion contract for aerial refueling tankers to Northrop Gruman and EADS, the parent corporation of Airbus. But with a little prodding from Boeing, as reported in the Wall Street Journal and on National Public Radio, the Pentagon has gone back to thinking of Airbus planes as little more than Greyhound buses with wings.
Seven years ago, the Air Force determined that it needed to replace its aging fleet of tankers, but Boeing persuaded the Department of Defense that it had been too hasty in awarding the contract to do so to those nasty, nasty foreigners, who were going to build the new planes in faraway Mobile, Alabama. Defense Secretary Robert Gates prescribed a "cooling off" period to redress mistakes made in the bidding process by the Department of Defense. He did not elaborate on the nature of these mistakes, but I suspect that the problem was that the DoD permitted an American value (protect Boeing) to be trumped by other, less significant American values, such as freedom of contract, competition, and national security.
I am fortunate to live in a town that still has a drive-in movie theater, and I am pleased to be using a casebook that includes a case about a drive-in theater. Evergreen Amusement Corp. v. Milstead illustrates the difficulties of the "new business rule," that is, the rule that new businesses cannot get lost profits because they cannot establish a track-record of profits.
The new business rule is largely being abandoned, at least as a bright-line rule, as most states will allow a new business to introduce evidence of lost profits. However, as Evergreen illustrates, some states that have abandoned the new business rule are extremely skeptical that a new business will show profits and so new businesses still have a hard time. Evergreen's opening was delayed because Milstead did not level the property in time for the theater to open for summer shows. Evergreen proferred a witness who had built and operated most of the drive-ins in the area. That expert would have discussed a market survey that showed demand for a new drive-in in the area. He would testify as to reasonably anticipated profits based on the performance of Evergreen in its second summer of operation and he would show that other drive-ins in the area showed the same profits in their second summer as they did in the first. This proffer was refused and no error was found.
Just a warning, this Limerick is rated PG-13. Sensitive minors and people prone to become nauseated easily should not click on the link!
Evergreen Amusement Corp. v. Milstead
If drive-ins were all ever green,
Lost profits would be routine,
Though the business be new,
And the picture askew,
Showing Michael Moore naked on screen.
Sunday, September 14, 2008
Torts Prof Blog tags us with this meme: (1) identify five non-law blogs that you find interesting, and (2) tag five law-bloggers to do the same thing. I've never been a big fan of chain letters, and this internet meme thing is quite reminiscent of all the promised postcards that I never received. As superstition would have it, I'll participate.
I won't purport to speak for all of us here, and encourage my co-bloggers to chime in. Leaving off the regular rotation of political gossip blogs, here are my top five non-law blogs, which tend to be either technological or NY centric:
(1) the unflappable Prof. McGaugh at Millennial Law Prof
(2) the rocking Matt Lerner at NY Civil Law
(3) the inimitable Prof. Kotkin, blogista at clinicians with not enough to do
(4) the fearless solo, Carolyn Elefant, at My Shingle
(5) the best friend of man's best friend, Adam Karp, at Animal Law Blog
[Meredith R. Miller]
Friday, September 12, 2008
If a prospective employee intentionally lies on his resume and gets hired, are the misrepresentations grounds for the employer to rescind the employment contract? According to a recent New York trial court decision, the prospective employee’s misrepresentations are only grounds for rescission if the employer has done its due diligence in checking on that prospective employee’s references and work experiences. Otherwise, the employer will not be justified in relying on the prospective employee’s representations.
Plaintiff, National Medical Health Card, Inc. (“NMHC”), argued, among other things, that defendant Josepha Fallarino’s mispresentations on his resume provided grounds to rescind Fallarino’s employment contract. After a trial, the court held:
“Where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” * * *
The testimony well demonstrated that NMHC, its recruiter, its interviewers and all of those involved in the interview process failed to ascertain the truth about Fallarino's employment history though it appears to have been readily available via 10-k filings, background checks and calls to former employers. Savage testified that NMHC had not authorized him to check prior employers. He was only authorized to check references.
* * *
Proof that due diligence would have demonstrated the falsity of Fallarino's resume is found from the fact that after his firing, NMHC determined to look more closely at it in the apparent hope of establishing a justification for claiming that Fallarino was terminated for cause and bolstering its claim that he was not entitled to the benefits otherwise afforded him under ¶ 5.2 of the Agreement.
Based upon the credible evidence presented demonstrating NMHC's failure to exercise due diligence in the hiring of Fallarino, the first cause of action to have the Agreement rescinded ab initio must be dismissed.
National Medical Health Card Systems, Inc. v. Fallarino, --- N.Y.S.2d ----, 2008 WL 3982691 (N.Y. Sup. Ct, Nassau County, Aug. 25, 2008) (Austin, J.).
[Meredith R. Miller]
Thursday, September 11, 2008
The New York Times wants to be able to tell a feel-good story about a local kid, Pedro Alvarez, who grew up in poverty, worked hard and is going to get to live out his dream. Alas, contract law is getting in the way, according to his report. There is no dispute that Alvarez agreed to sign with the Pittsburgh Pirates in a deal that included a $6 million signing bonus. So, what is standing between this young man and his dream?
As near as I can tell from the report, the young man and his agent, Scott Boras, are. They are claiming that the agreement was consummated after a deadline had expired and therefore is unenforceable. Why? Apparently because Boras thinks Alvarez is entitled to more money! He is the #2 pick, and the #5 pick got a $6.2 million bonus. Alvarez refused to sign up with the Pirates, and the parties are now before an arbitrator. The Times quotes one of Alvarez's former coaches claiming that baseball is trying to take advantage of Alvarez because he is a "lower socioeconomic kid." However, the coach also maintains that Alvarez is "represented by the best agent in the history of baseball." In light of Alvarez's socioeconomic background, I am sure that Scott Boras is taking on this representation pro bono.
ESPN provides a fuller report here.
If you normally view this blog using Internet Explorer, you may have noticed that our pictures are sometimes inexplicably cropped. If you view our blog using a different web browser, such as Mozilla Firefox, which you can download for free here, of if, like me, you are a Mac user and browse using Safari, you have no idea what I'm talking about, because the pictures always look fine to you.
I usually post from home and the pictures always look fine on my Mac. It is only later when I get to work, where I am forced to use Internet Explorer, that I see that the pictures are incomplete. The simplest solution is that PC users should just switch to Mozilla. It's a superior browser in any case. You can read all about it here or here. I haven't tried the new Google browser yet, so I don't know how we look there.