September 12, 2008
Caveat Employer: Recruiters Beware!
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NMHC's failure to exercise due diligence in the hiring of Fallarino, the first cause of action to have the Agreement rescinded ab initio must be dismissed.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]
September 11, 2008
NY Times Reports Tragedy: 21-Year-Old May Have to Work for Only $6 Million
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.
Battle of the Titans over Huntsman Corp. Deal
Jon Huntsman, Sr. the Chairman of Huntsman Corp., a Texas-based chemical company (not to be confused with his son, Jon Huntsman, Jr., the Governor of Utah), is fighting mad. In July 2007, Leon Black's private-equity firm, Apollo Management L.P. agreed to buy Huntsman for $6.5 billion. Now, Black wants to back out of the deal, claiming Huntsman's operations have deteriorated, according to this report in the Wall Street Journal.
Before Apollo came along, Huntsman Corp. was to be sold to Access Industries at a price of $25.25/share. Apollo's bid came in at $28/share, which Jon Huntsman says would mean $1.3 billion for him, his nine children and 56 grandchildren. Apollo determined in June 2008 that the deal would be a disaster and sued in Delaware seeking a declaration that the deal need not be consumated. Determined to force Apollo to stick to its agreement, Huntsman has sued Apollo in Texas.
We've heard the story before. As credit has tightened, a number of private equity firms have sought to back out of buyouts. We reported on one such instance here. Barron's provides a nice overview of the problems the private equity industry is facing here. In such transactions, the WSJ points out, the buyer will often invoke a standard clause permitting the buyer to back out if there are "material adverse effects" (MAE) prior to closing. If the court finds that Huntsman Corp. has suffered such effects, Apollo can walk away from the deal. Otherwise, Apollo would be liable for a $325 million cancellation fee. According to Huntsman's attorneys, Delaware courts have never excused a buyer based on such an MAE clause.
Florida Condo Buyers Seeking Escape from Contracts
The Wall Street Journal reports that Florida is "awash" in empty or unfinished condominiums and that investors, trying to escape their contracts, are going to court seeking to recover their deposits. Thus far, the courts have been unsympathetic. The WSJ suggests that some of these buyers were speculating in the housing market and are now desperate to be relieved of the real estate because prices in the Florida condo market have declined 22% since 2005.
In one case, plaintiffs claimed they were misled by advertisements promising an "Olympic style" swimming pool at one Miami condo. The developer successfully maintained that "Olympic style" meant only that the pool would have lanes. Judge Patricia Seitz noted that the parties were put on notice that the pool was L-shaped and smaller than an olympic-sized pool. They also might have figured out that it is not housed in a futuristic cube or located in Beijing. In another case, plaintiffs D&T Properties tried to rely on a state law provision that permits buyers to back out if there are "material changes" in the project. Florida's Fourth District Court of Appeal ruled that rising insurance and utility costs were not covered by the statute. The court ruled that even an 18% increase "in costs controlled by a developer" is not "material" within the meaning of the statute.
The article ends on a pessimistic note, suggesting that all the litigation, whether or not it is successful, just makes a bad situation worse and that the Florida condo market is going to get worse still before it gets better.
September 10, 2008
In Memoriam: Richard E. Speidel (1933-2008)
The fields of contracts and commercial law (as well as ADR) lost an important scholar and a wonderful gentleman Saturday. At the time of his death, Dick Speidel was the Beatrice Kuhn Professor Emeritus at Northwestern University School of Law and a half-time professor at the University of San Diego School of Law. A longtime collaborator of James J. White and Robert Summers, with whose UCC hornbook and treatise I assume all our readers are familiar, Dick served from 1991-1999 as reporter for Revised UCC Article 2 -- an experience he recounted in Revising UCC Article 2: A View from the Trenches, 52 Hastings L.J. 607 (2001). Among his many other books and articles are Studies in Contract Law (7th ed. 2008), which he co-authored with Ian Ayres (and previously with the late Edward J. Murphy), Commercial Transactions: Sales, Leases, and Licenses (2d ed. 2004), which he co-authored with Linda J. Rusch (who served from 1996-1999 as associate reporter for Revised Article 2).
USD Law Dean Kevin Cole posted this brief tribute.
UPDATE: Northwestern posted this obituary that appeared in The Chicago-Sun Times on Sept. 14.
[Keith A. Rowley]
September 9, 2008
Business Associations Limerick of the Week: Shlensky v. Wrigley
Last week's Limerick addressed the famous dictum of Dodge v. Ford Motor Corp., in which the court reminded Henry Ford that his primary goal ought to be shareholder wealth maximization. In discussing that case, we cautioned that there is more to business associations than shareholders. Rather, as Lynn Stout properly emphasizes, boards of directors owe duties to multiple stakeholders. One case that illustrates this principle is the Barlow case, discussed on this blog here. An even better illustration is Shlensky v. Wrigley.
Shlensky tried to get Wrigley, the owner of the Cubs, to install lights at Wrigley field (pictured) so that the Cubs could play before larger crowds at night games. Shlensky faced a problem. How could he possibly prove that the Cubs could attract more spectators to night games than they could to day games? After all, that would require some comparable sports team that plays in a similar city, and how was he supposed to find another major league baseball team that played in a city like Chicago?
What? White Sox? Oh, yeah. Turns out, Shlensky proferred evidence that people were more inclined to go to Sox games at night than they were to go to Cubs games during the day when the two teams played on the same day. Wrigley responded not with a challenge to Shlensky's economic analysis but with concerns about the effect of night baseball on the Wrigleyville neighborhood and with a lovely little bit of arcane ideology: "Baseball is a daytime sport." As Neo (Keanu Reeves) might say, "Woh!"
That's pretty far from an exercise of reasonable business judgment. By the way, on the clip shown above, Neo's "Woh!" is presented as if it were a response to Trinity's (Carrie-Ann Moss) fleetness (which in our context represents how quickly your head would spin if you tried to construe Wrigley's argument as an exercise of reasoned business judgment). In fact, of course, it was a response to Morpheus's (Laurence Fishburne) leaping abilities (which in our context would represent the leap of faith it would take to get from Wrigley's non-exercise of business judgment to a dismissal of the suit based on the business judgment rule).
The court accommodated Wrigley by hypothesizing what a decent basis for refusing to install lights at Wrigley Field might look like, and on that basis, Shlensky's complaint was dismissed.
Shlensky v. Wrigley
As Wrigley explained to the court,
Pro ball is a daytime sport.
Night ball you can see
Down at Comiskey
Where the teams out for profit cavort.
September 8, 2008
New Contracts Law Scholarship on SSRN
Government contracting fans can find something new to read here. It is Steven L Schooner (pictured) and Daniel S. Greenspahn's article, "Too Dependent on Contractors? Minimum Standards for Responsible Governance." Here's the abstract:
While acknowledging that there are many benefits, challenges, and risks involved in outsourcing, this article asserts that failed implementation, rather than outsourcing policy, explains the government's current (mis)management of its contractors. This article explores the minimum standards for responsible governance following more than 15 years of ill-conceived and inadequate investment in the federal government's acquisition workforce, followed by a governmentwide failure to respond to a dramatic increase in procurement activity. These trends have led to a buying and contract management regime animated by triage, with insufficient resources available for contract administration, management, and oversight. The old adage "an ounce of prevention is worth a pound of cure" rings true. Accordingly, a prospective investment in upgrading the number, skills, incentives, and morale of government purchasing officials would reap huge long-term dividends for the taxpayers
George Mason Law School's David E. Bernstein also has an article residing at the intersection of contracts law and government, more specifically at the intersection of contracts and constitutional law. Professor Bernstein's article is called "Freedom of Contract." You can find a downloadable version here. Here's the abstract:
This essay provides a concise overview of the history of the constitutional status of freedom of contract in the United States, with particular attention to the rise and fall of the "liberty of contract" doctrine in the early 20th century.
California Court Puts the Brakes on Warranty Claim
The Plaintiff in Shtofman v. Mercedes-Benz of North America, Inc., No. B195677, 2008 WL 3984219 (Cal. Ct. App, Aug. 29, 2008) bought a new 1997 Mercedes S420 in 1997. It came with a 4-year, 50,000 mile warranty. During the warranty period, Shtofman returned the dealer 12 times for repairs of "a recurrent brake light problem." But it was not until September 2003 that defendants fessed up tnat they would were unable to fix the problem. Shtofman brought suit in August 2004 claiming, among other things, breach of warranty. On cross-motions for summary judgment or summary adjudication of issues, the trial court ruled in Shtofman's favor. He was awarded the purchase price of the vehicle, plus costs incurred in having defendants make attendant repairs plus attorneys fees. The total award topped $200,000.
On appeal, the California Court of Appeal, Second District, Division 8, reversed and awarded summary judgment to defendants on the warranty issue. Defendants pointed out that the warranty had expired in 1999, by which time Shtofman had driven the car 50,000 miles. Under the four-year statute of limitations provided for in UCC s. 2-725, the claim was barred back in 2003 and was not brought until 2004. The court sided with defendants.
In so doing, the court had to distinguish Shtofman's case from Krieger v. Nick Alexander Imports, Inc., 234 Cal.App.2d 205 (1991). Krieger is clearly distinguishable. That case involved a BMW, not a Mercedes, and the problem with the BMW was that its drive train fell out one day after purchase. That's gotta hurt! There was some dispute about exactly when Krieger's cause of action for breach of warranty was triggered, but there was no dispute that he had discovered the breach of warranty "at some point during the warranty period." The court denied summary judgment to both sides and remanded for a determination of when Krieger had learned that the damage to his car was irreparable. Once it made that determination, the trial court could then count to four and determine whether the claim was time-barred. Here, there was no dispute that Shtofman did not discover the breach until after the warranty period had expired.
The court found that, given Shtofman's repeated visits to the dealer for the same repairs, it required no "specialized mechanic's acumen" to discover the breach of warranty. Accordingly, Shtofman had four years from December 1999 to file his cause of action for breach of warranty. His failure to do so until 2004 was fatal to that claim. But the court reinstated Shtofman's other claims, which had been dismissed by the trial court, because he had already recovered on breach of warranty.
I have no problem with the rule announced in this case, but how does the Court of Appeals know that Shtofman "should have discovered" that the dealer would be unable to fix his car? He brought the car back to them repeatedly after the warranty had lapsed, and I don't expect that they worked for free. Indeed, I suspect that each time he brought them the car, they had some new theory for how they were going to fix it. Why shouldn't he be entitled to rely on such representations? And wouldn't defendants' expert opinion render Shtofman's ignorance of his car's irreparable state reasonable? Seems like a remand for further fact-finding would have been appropriate.
I would like to see the case remanded to the Car Talk Guys. I've never heard them say, "Oh, that can't be fixed."
Contracts Limerick of the Week: Neri
If the Americas Cup, were a competition among boats to see which could be the subject of the most celebrated lost volume seller case, the 1970 31-foot Broadwater "Bay Breeze" at issue in Neri v. Retail Marine Corp. would surely bring home the prize. Mr. Neri had to back out of his purchase of the boat because of an unexpected hospitalization and surgery (could this whole mess have been avoided through national health insurance?). He sued to recover his $4250 deposit, and Retail Marine counterclaimed seeking, among other things, lost profits. Neri contested lost profits on the ground that Retail Marine had resold the boat four months later, but Retail Marine contended that, but for the breach, it would have sold two boats, not just one.
The trial court sided with Neri, applying the traditional measure of damages provided in UCC 2-708(1):
(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710) but less expenses saved in consequence of the buyer's breach.
New York's Court of Appeals reversed, finding that the damages permitted by the trial court did not grant Retail Marine the full benefit of the bargain and that UCC 2-708(2) permitted recovery of lost volume sales:
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), less due allowance for costs reasonably incurred and due credit for payments or proceeds of resale
Many commentators have pointed out that, although the Court of Appeals' ruling seems to accord with the legislative intent of 2-708(2), in order to give effect to that intent, the court had to ignore the last phrase of the provision: "due credit for payments or proceeds of resale." Still, most courts have followed Neri and judicially "fixed" what appears to be a clear drafting error. And that is the point of this Limerick:
Neri v. Retail Marine Corp.
In Neri, New York's highest court
Offered lost volume sellers a port.
They'd still be at sea
If New York's UCC
Weren't lopped off a half-sentence short.
September 7, 2008
UCC Legislative Update
Nearly three months after both houses of the Illinois legislature passed SB 2080, Governor Rod Blagojevich signed it into law on August 22, making Illinois the 34th state to enact Revised UCC Article 1 and the 31st state to enact Revised UCC Article 7.
As have all thirty-three prior state enactments, and consistent with the ALI's and NCCUSL's promulgation earlier this year of a substitute for the original version of uniform R1-301, Illinois Public Act 95-0895 (neé SB 2080) rejects the 2001 uniform version of R1-301 in favor of language generally tracking its version of pre-revised 1-105. Act 95-0895 also rejects the uniform good faith definition in R1-201(b)(20), joining Alabama, Arizona, Hawaii, Idaho, Indiana, Nebraska, Rhode Island, Tennessee, Utah, and Virginia in opting to retain the bifurcated good faith standard of pre-revised 1-201(19) and 2-103(1)(b).
Act 95-0895 will take effect January 1, 2009.
[Keith A. Rowley]