Saturday, August 30, 2008
Two days ago, the Supreme Court of Washington upheld a decision that AT&T's class action waiver in the arbitration clause of its Consumer Services Agreement is unconscionable. Despite a clause choosing New York law, the court applied Washington law based on public policy. The substantive unconscionability analysis began:
This issue was largely, but not entirely, decided by Scott. Scott, 160 Wn.2d at 847. In Scott, we held that a class action waiver in an arbitration agreement was substantively unconscionable. Id. In so holding, we relied on several crucial facts. First, the individual claims at issue were very small (between $1 and around $45 per month), but the plaintiffs alleged that in the aggregate, Cingular had overcharged the public very large sums of money. Id. at 847-48. We found that without class action suits, the public’s ability to act as “private attorneys general,”as intended in the ConsumerProtection Act, was eviscerated. Id. at 854. We therefore concluded the class action waiver was unconscionably in violation of public policy. Id.
We also found the agreement substantively unconscionable because it effectively, if not explicitly, exculpated Cingular for potentially widespread misconduct. Id. at 855. We found that when wrongs are small but widespread, class actions are often the only effective way to address them. Id. We rejected Cingular’s argument that relief was practically available because it promised to pay the costs of individual arbitration and because attorney fees could be awarded to the prevailing party. Id. at 856. We cited the evidence that no attorney would be willing to undertake individual arbitration to recover the trivial amounts of moneyat stake in an individual claim. Id. We also noted that small claims court was not an effective remedy because the amounts at issue were too small to be worth the time and energy, let alone the nominal filing fee. Id. We were concerned that without class actions, many consumers might not even know they had a claim. Id. at 855.
As in Scott, the contractnow before usis a contract for consumer services, and the individual claims here are extremely small, under $2 per month. Without access to class-wide relief, competent counsel would not be
available to redress many meritorious claims. SeeCP at 566-69. The agreement allows for small claims court actions, but even the availability of small claims court or low-cost arbitration does not make it practicable for an individual to pursue such small amounts. See Scott, 160 Wn.2d at 855-56. Indeed, this agreement is less favorable to consumers than the one we struck down in Scott. Cingular’s agreement at issue in Scottprovided that Cingular would pay the attorney fees for aprevailing consumer. Id. at 856. Here, not only does AT&T not pay the consumer’s attorney fees, the agreement prohibits the arbitrator from awarding them unless specifically provided for in a statute. Because the class action waiver in this case is not meaningfully
different from the one we held substantively unconscionable in Scott, we hold that the class action waiver in the AT&T agreement before us is unconscionable.
McKee v. AT&T Corp. (Wash. Aug. 28, 2008).
[Meredith R. Miller]
Our compatriot Legal Profession blogger Jeffrey Lipshaw (Suffolk University Law School) has a new piece in the Canadian Journal of Law and Jurisprudence titled Objectivity and Subjectivity in Contract Law: A Copernican Response to Professor Shiffrin. It is available on SSRN; here's the abstract:
This is a response to Seana Shiffrin's recent and important contribution to the continuing debate whether there is a universal moral or economic truth at the heart of contract law. Her most significant advance toward a general theory of promise and contract is not, however, her analysis of the divergence of morality and contract, but instead her identification of the critical moment at which the interposition of the public in a private matter occurs or is contemplated. This essay carries that theme forward, suggesting that a universal justification for contract law is not possible because the law, by its very nature, objectifies (publicly or with that implicit threat) what was heretofore a private relationship.
Give it a read!
[Meredith R. Miller]
Friday, August 29, 2008
The Thomas M. Cooley Law School's emeritus professor Norman Otto Stockmeyer (pictured) has recently published a charming short article about Sherwood v. Walker. The article, To Err is Human, To Moo Bovine: The Rose of Aberlone Story, can be downloaded here. Here is the abstract:
In 1887 the Michigan Supreme Court decided the case of Sherwood v. Walker, involving a contract for a cow. It is still studied by law students today as the seminal case on the law of mutual mistake. But some popular beliefs about the case turn out themselves to be mistaken. This law review commentary explores the classic "case of the barren cow," including the parties to the lawsuit, its surprising aftermath, and its continuing importance in the law of contracts
But the abstract does not really reveal the delights of Professor Stockmeyer's article, which includes the most complete collection of Sherwood v. Walker-related poetry I have ever seen, as well as no fewer that two citations to the Contracts Prof Blog. The undersigned's verse is quoted in a section devoted to the villainous forces seeking to upset the doctrinal primacy of Rose 2d of Aberlone. The tireless efforts of our guiding spirit, Frank Snyder, in researching cattle registry records relating to Rose and her offspring, are also duly recognized.
Thursday, August 28, 2008
N.Y. Trial Court Holds that Dental Students' Claims against NYU Not Properly Fashioned as Breach of Contract Action
We all know the type of personality that chooses a career in dentistry (which happens to claim both my father and brother in its ranks):
Well, today's New York Law Journal reports (subscription required) that a New York County Trial Court (Stallman, J.) recently granted NYU Dental School summary judgment in an action commenced by a disgruntled former student, Leonard Eidlisz. The facts seem to indicate that the student failed out of school in mid 1990's but may have re-enrolled in 2002 and, ultimately, sought to have the court order NYU Dental School to issue him a diploma. The court held, however, that the student's action was not timely because it should have been fashioned as an Article 78 proceeding (in NY, in short, that is a proceeding for review of academic and administrative decisions). The student unsucessfully argued that the action sounded in breach of contract and, therefore, the shorter statute of limitations under Article 78 did not apply. The trial court held in favor of NYU:
Eidlisz argues that this case, like Ansari v. New York University (1997 WL 257473; 1997 US Dist LEXIS 6863 [SD NY 1997]), is a contract action and that, therefore, it is timely. In Ansari, plaintiff sued NYU, arguing that NYU had failed to provide the facilities and staffing that it had promised in its promotional materials and that those failures constituted a breach of contract and negligent misrepresentation, and violated section 349 of the General Business Law. Although the Court in Ansari sustained the plaintiff's breach of contract and General Business Law claims, it also noted that "judicial review of academic and administrative decisions must be brought in an Article 78 proceding." Ansari v. New York University, 1997 WL 257473 at *2, 1997 US Dist LEXIS 6863 at *6-7, citing Gertler v. Goodgold, 107 AD2d 481, 486 (1st Dept), affd 66 NY2d 496 (1985); see also Maas v. Cornell Univ., 94 NY2d 87, 92 (1999)(Article 78 proceedings rather than plenary actions are the appropriate vehicle for judicial review of "university" cases).
The very nature of the relief sought here underscores the conclusion that this case relates to the sort of academic and administrative decisions that the court in Ansari indicated are properly the subject of an Article 78 proceeding, rather than an action on a breach of contract. An Article 78 proceeding, by its nature, is brought to obtain relief in the nature of a writ of certiorari, mandamus, or prohibition. CPLR 7801. Here, plaintiff seeks an order directing defendants to award him his degree. Such an order relates to "the exercise of subjective professional judgment" (Gertler v. Goodgold, 107 AD2d at 485), in contrast with, for example, an action for damages for breach of contract, or a return of academic fees. See e.g. Matter of Golomb v. Board of Educ. of City School District of City of New York, 92 AD2d 256 (2d Dept 1983)(a petition seeking recovery of back salary is akin to damages for breach of contract and cannot be made in an Article 78 petition).
I should mention that this is a nice win for NYU's fearless litigator, Nancy Kilson, for whom I worked while we were both at a big New York firm.
Eidlisz v. New York University, 600105/05 (Sup. Ct., NY County, Aug. 28, 2008).[Meredith R. Miller]
Wednesday, August 27, 2008
The 8th Circuit recently addressed this question in Henning v. Mainstreet Bank. Here are the facts, as told by the 8th Circuit:
Henning was a principal and officer in several businesses that borrowed money from Mainstreet. In July 2003, Henning, those businesses, and Mainstreet consolidated and restructured the debt into a single amended and restated promissory note for $600,000 pursuant to the terms of an assumption agreement and consent of guarantors (“assumption agreement”). Dick Henning Landscape, LLC, was the primary debtor, and Henning personally guaranteed the debt. Henning presented no evidence that disputes Mainstreet's assertion that the promissory note was secured by personal and real property valued at $700,000. The real property consisted of Henning's home, which secured $250,000 of the note. The assumption agreement provided that Mainstreet would release its mortgage on the home once $200,000 of the promissory note had been paid off. The relevant portion of the assumption agreement provides:7. Guarantors Not Released. The Guarantor hereby consents to and understands and acknowledges that the transfer of the Assets and the assumption by the Purchaser of the obligations under the Financing documents shall not release the Guarantor from any personal liability under the Guaranty Documents and that such Guaranty Documents shall remain in full force and effect.
Notwithstanding the foregoing, the Lender hereby agrees that when $200,000 of the outstanding principal balance of the Amended and Restated Note has been paid, Lender upon written request from the Guarantor, will agree to release the Mortgage. Furthermore, the Lender hereby agrees that when an additional $200,000 of the outstanding principal balance of the Amended and Restated Note has been paid, Lender upon written request from the Guarantor, will agree to release the Guarantor from his Guaranty.
(emphasis added). In July 2004, Mainstreet filed proceedings against Henning and Dick Henning Landscaping, alleging default under the terms of the promissory note. Mainstreet was able to obtain more than $200,000 in funds by foreclosing on some of the personalty that secured the loans, but Henning had not voluntarily provided Mainstreet with payments totaling $200,000 of outstanding principal on the loan. The amount of outstanding principal remaining on the promissory note was about $280,000, with Henning's home being the only collateral remaining to secure the loan. Henning and Mainstreet filed cross-motions for summary judgment on whether Mainstreet was required to release its mortgage on Henning's home. This question, in turn, depended on the interpretation of the word "paid" in paragraph 7 of the assumption agreement.
The 8th Circuit affirmed the grant of summary judgment to Mainstreet, holding that the word "paid" was unambiguous:
Henning argues that the word “paid,” as it is used in paragraph 7 of the assumption agreement, should be interpreted as meaning that the mortgage must be released if Mainstreet receives $200,000 towards the debt from any source. He bases this interpretation primarily on the language, “Notwithstanding the foregoing,” in paragraph 7, which he asserts requires us to ignore all of the rights and obligations of the parties and all provisions in the assumption agreement that precede that language.
The term “paid” is not reasonably susceptible to Henning's definition, and thus the contract is not ambiguous. Article 3 of the Uniform Commercial Code provides that “an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.” Minn.Stat. § 336.3-602(a). This is a natural and ordinary meaning of “paid,” especially in the present context, where the payments contemplated in the assumption agreement are owed on a promissory note. The bankruptcy court adopted a dictionary definition of “pay,” meaning “to satisfy (someone) for services rendered or property delivered: discharge an obligation to.” Henning v. Mainstreet Bank (In re Henning), ADV 06-4108 (BKY 05-49574), at 5 (Bankr.D.Minn. Nov. 22, 2006) (citing Webster's Third International Dictionary (Unabridged), 1659 (1976)). Although less explicit, this definition also implies that a payment must be made voluntarily in connection with the receipt of a benefit to the source of that benefit. Dick Henning Landscaping, an obligor on the promissory note, made principal payments of $124,061.10 to Mainstreet, which is entitled to enforce the instrument. No one disputes that this amount was “paid” within the meaning of paragraph 7. The purchasers who paid $140,000 for equipment at the lien foreclosure sale were not obligors on the promissory note and such purchase cannot be considered a payment made on the obligor's behalf. Thus, the $140,000 cannot be considered as having been “paid” within the meaning of paragraph 7. Nor was the $56,000 “paid” when Mainstreet exercised its lien rights in certain of Dick Henning Landscaping's accounts. Although the money came from the debtor's accounts, Mainstreet recovered the money through legal action; the transfer was not “made by or on behalf of” Dick Henning Landscaping.
Henning's definition of “paid” is contrary to the parties' clear intention that Mainstreet be made a secured creditor. The assumption agreement covers multiple facets of Mainstreet's becoming and remaining a secured creditor. The first part of paragraph 7 titled “Guarantors Not Released” makes it clear that the assumption agreement does not release Henning from his liability. The second part provides that despite Henning's continued liability, Mainstreet will release the mortgage when the principal has been reduced by $200,000, i.e., when the other collateral can fully secure the remaining debt. If the principal is reduced only because other collateral is liquidated, the continued existence of the mortgage is necessary to fully secure the remainder of the loan. Requiring the release of the mortgage upon Mainstreet's liquidation of other collateral worth more than $200,000 would render Mainstreet's security interest in the home and its status as a fully secured creditor dependent upon the order in which Mainstreet exercised its rights as a secured creditor and would thwart the parties' clear intention that Mainstreet remain fully secured for the duration of the loan.
Henning v. Mainstreet Bank, --- F.3d ----, 2008 WL 3876294 (8th Cir. Aug. 22, 2008).
[Meredith R. Miller]
What do you get when you cross the number 2 wireless communications provider with the number 1 internet search engine? According to the Wall Street Journal, Verizon is hoping to get "a wide-ranging partnership" and "a much-needed jolt for the anemic mobile search business."
The deal would make Google the default search provider on Verizon devices in return for a share of ad revenue. The advantage is that Verizon users could find all the information they are looking for -- from contracts-related ring tones to contracts outlines -- in one spot.
Rumor has it that Verizon phones would eventually come with Google bars on the home screen. Frankly, I'd rather have a phone that came with a mini bar, but perhaps I'm a bit old school.
Tuesday, August 26, 2008
Newsday reports that a class action has been filed against American Express, alleging breach of contract and unjust enrichment based on its gift card policy. Namely, Amex apparently charges $10 for a cardholder to obtain anything below a $5 balance on a gift card and, after a year, charges a $2 monthly service charge, which wipes out any balance on the gift card. (At least, that is my understanding of the allegations based on the newspaper's account of the lawsuit). The terms come with the gift card, sealed in the envelope given to the recipient. Newsday reports:
The suit accuses American Express of breach of contract over the face value of the card and "unjust enrichment" by charging fees that eventually zero out balances -- unspent money that would have gone to state coffers under state laws governing unclaimed money, such as those in nonactive bank accounts.
The suit is just the latest complaint in a multibillion-dollar and growing gift card industry that's been feeling the heat from consumers because of fees. Last year, American Express sold about $1 billion in gift cards in the United States.
American Express spokesman Robert Sherman said vendors are supposed to accept the cards but there's been confusion over how to do split transactions, which led to an educational campaign for retailers and consumers last year.
The company's gift card does mention the $2 monthly service charge on the envelope, and Sherman said it's been that way for years.
"We try to put the information that is most important on the outside of the packaging," Sherman said. "We really want our consumers to understand the product that they're buying and are looking for new ways to improve that process all the time."
In the past few years, as consumers complained about the fine print and undisclosed fees, many states have imposed limits on fees.
Surveys show the cards are very popular, making up a $100 billion-a-year industry, according to Consumers Union, publisher of Consumer Reports. Gift cards from retail stores tend to have fewer fees and problems because that may reflect badly on the businesses, consumer experts said.
"It's growing in leaps and bounds every year," said Tod Marks, an editor at Consumer Reports. "A lot of people don't use them because they forget about them or they run out of money by the time they realize they have them. It is quite annoying."
The suit has been filed right here in the EDNY in Central Islip, so we'll keep you apprised.
[Meredith R. Miller]
Monday, August 25, 2008
1. I ran out of Contracts Limericks
2. I couldn't find any other place to post my Business Associations Limericks
3. Some Business Associations cases involve contracts
If none of these explanations satisfy you, there is good news, because I switched casebooks and so I am teaching new cases and new Contracts Limericks are thus on their way. The first is posted here. But I warn you, today's Business Associations Limerick doesn't really relate to contracts law much, unless you are one of those nexus of contracts types who think that contracts are really at the heart of all business associations. If so, you are my kind of reader.
In A.P. Smith Mfg. v. Barlow, a shareholder objected to A.P. Smith's decision to donate money to Princeton University. After all, corporations exist for the benefit of their shareholders; they are not eleemosynary institutions. They are not even semi-eleemosynary institutions. The court's rejection of Barlow's claim is not surprising. Corporations may engage in charitable donations, so long as the donations are not excessive or suggestive of some sort of conflict of interest (like if the money goes to a relative's charity). Beyond that, the business judgment rule governs.
But a more interesting aspect of the case was the court's treatment of the question of why Princeton in particular was a worthy recipient. As the picture of Princeton's Chapel (above, left) suggests, it would have been hard to argue that Princeton desperately needed the money. The court pointed out many advantages the corporation might derive from a good relationship with Princeton University and its alumni. The court also suggested that it was important to support private universities because if we only had public universities, well, that way lies communism.
A.P. Smith Mfg. v. Barlow
If your business supports democracy,
Don't give in to hypocrisy!
Send your donations
To the private locations
That train the future plutocracy!!
We here at the Contracts Blog object to accusations that we are obsessed with "Borat." True, we did report on controversies relating to the release signed by participants in the film here, here, here and here. But hey, we were just doing our job.
You might feel that we are overdoing things a bit when we bring the "Borat" release (above left) into the classroom. But is it my fault that the authors of the statutory supplement I use chose to include the release in their collection of form contracts at the back of the book? For those of you without the time to read all the other posts, here is a summary of the case in Limerick form:
Doe v. One America Productions
Some guys who got drunk during "Borat"
Signed releases with terms they're now sore at.
Though they waived every right,
They sued claiming false light,
Giving students a claim they can roar at.
Jim Morrison is dead. That's his grave at left. So, you would think that if a band plays a tour in the 21st Century under the banner "The Doors of the 21st Century," nobody would be fooled and think they are going to hear the legendary Mr. Morrison. Nonetheless, according to the Associated Press, the California Supreme Court has upheld a trial court finding that two members of the original band, "The Doors" are liable for $3.2 million in damages plus $2 million in legal fees for having used the band's name during a recent tour.
Back in 1970, the original "Doors" had a violent disagreement over the use of their song "Light My Fire" in a Buick commercial. Guys, roll the video:
Well, okay, that's not the Buick commercial, but there's a good reason for that. The band members, perhaps unaware of the fiduciary implications of such an arrangement, agreed to make all future business decisions by a unanimous vote. Morrison put the kaibash on the Buick commercial. After his death, decisions are taken by the three remaining members, with proceeds shared with Morrison's parents and the parents of his deceased wife. Drummer John Densmore has recently objected to the use of "Light My Fire" to sell Cadillacs and also to an endorsement of iPods. Too bad, that's a commercial I would have liked to see.
It was also Densmore who objected to the use of the name, "The Doors," the band's old logo or any other Morrison era imagery when he gave fellow band members Ray Manzarek and Robby Krieger permission to tour and perform the band's old songs. Their tour as "The Doors of the 21st Century" grossed $3.2 million. That money must now be paid over to Densmore and the parents of Morrison and his wife. The trial court's ruling that Manzarek and Krieger also had to pay the other parties' legal fees (amounting to $2 million) is still on appeal.
Manzarek and Krieger now tour as "Riders on the Storm."