March 11, 2010
From Hog to Film Futures, Coming Soon to a Market Near You
Earlier this week, there was a story on NPR's Marketplace about commodity futures trading, and the transition of most of the trading from the floor to computer screens. The story noted one holdout, however: livestock futures. Floor trader James "Bugsy" Brooks explained why the livestock markets, cattle and hogs, have been slower to go electronic:
The cash livestock trade has always been a verbal, handshake, word-of-mouth agreement. And so they were very comfortable still having that personal relationship.
Nevertheless, the story noted that even livestock futures trading has largely transitioned to computer -- with more than 50% of cattle futures traded electronically, and around 70% of hog futures following suit.
Before you get nostalgic for the old days of traders in coats, shouting and waving around their arms on a trading floor, realize that this same technology has paved the way a new type of futures trading: movie futures. The New York Times DealBook reports today:
Cantor Futures Exchange, a subsidiary of Cantor Fitzgerald, expects to open an online futures market next month that will allow studios, institutions and moviegoers to place bets on the box-office revenue of Hollywood’s biggest releases. Last week, the company learned from regulators that customers could start putting money into their accounts on March 15.
“I’ve worked in the futures industry for a long time,” said Richard Jaycobs, the president of Cantor Exchange, who has worked with derivative markets and the cotton exchange. “And none of the products has the overall appeal that this does. This just has a tremendous potential audience.”
Betting on the success of Hollywood releases has long been a parlor game for moviegoers. In 2001, Cantor Fitzgerald bought the Web site HSX.com (for “Hollywood Stock Exchange”), where users can place bets with play money on a film’s box-office success; smart traders win little more than satisfaction. Mr. Jaycobs said that he hoped to lure a sizable portion of that site’s 200,000 active users to the real futures exchange.
But buyers beware: if “Avatar” is any indication, the public isn’t always so wise about Hollywood fortunes. Most users of HSX.com predicted a flop, and if those users had placed real money on the Cantor exchange, they would have taken a serious hit.
In the real market, contracts on the Cantor exchange will trade at $1 for every $1 million a movie is expected to bring in — a figure determined by traders — at the domestic box office during its first few weeks in theaters. So if “Robin Hood” is expected to bring in $100 million in its opening weeks, a single contract could be bought for $100 by a trader who thinks Russell Crowe’s role in the movie will drive sales far above expectations. If that trader guesses right, and the movie sells $150 million in tickets, the trader makes $50.
Mr. Jaycobs said the metric used — domestic box-office receipts — “is as simple as it can possibly be.” He hopes the business will also attract professional and institutional investors. If a movie distributor, for example, screens a movie it has backed and thinks sales will beat expectations, the company can take an even bigger financial stake in the movie by buying contracts for it. The possible mix of investors — Hollywood insiders and moviegoers at large — creates an interesting laboratory, said P. Clark Hallren, a managing partner at Clear Scope Partners, a financial adviser to entertainment businesses who advises Veriana Networks, a company that is planning its own futures trading operation.
Whether its movie or hog futures, it is a gamble. Iowan hog farmer Todd Wiley never knows if he will make enough money selling his hogs to cover the cost of their feed, so he hedges by selling futures contracts on the Chicago Mercantile Exchange. The contracts guarantee a price for his hogs, and Wiley told Marketplace:
I'm not a big gambler. I mean, we drive by casinos and my buddies say you want to stop and play a little bit, and I say "I play every day." Everything's a gamble, and you manage your risk to the best that you can.
It does bring that Oscars pool to a whole new level.
[Meredith R. Miller]
Pink Floyd v. EMI -- Dark Side of the Recording Industry
The band Pink Floyd has taken its record label, EMI, to court, as reported here in the Financial Times. There are two aspects to the dispute. First, the band is challenging the way EMI calculates royalties from online sales. At the time the parties entered into their current agreement, online sales were not a major factor, but they now account for over 1/4 of all record company revenues, according to the Financial Times. In addition, the band objects to having its songs "unbundled"; that is, sold as single tracks rather than together in an album.
The latter is an interesting issue. Pink Floyd was one of my favorite bands when I was in high school, but I could not have told you the names of many of the songs on "Dark Side of the Moon," "Wish You Were Here," or "Animals." One always listened to their records -- there were records in those days -- track by track, and it would not have made sense to do anything else. Theirs were concept albums, and the songs flow into one another -- so much that one could not always say where one ended and the other began. Moreover, in the state most people were in when listening to Pink Floyd albums in the 70s, nobody would have wanted to take the initiative to get up from the couch, nor did they possess the fine motor skills it would have taken to move the needle to the desired track. But since all music is now digitized, listeners usually have the option of a "shuffle" feature that enables them to play the tracks in random order. In short, regardless of what Pink Floyd wants, listeners can conveniently opt to listen to the band's songs in any order or in random order. I'm not sure there is much a court can do to affect that.
UPDATE in the comments. Pink Floyd won its case, at least with respect to the bundling issue.
March 10, 2010
Ninth Circuit Rules Government Contracting No Bar to Exercise of Free Speech Rights
Judge Louis H. Pollak, sitting by designation on the Ninth Circuit, authored the unanimous opinion in Marez v. Bassett, a case brought by a vendor who claimed that he was retaliated against for speaking out against the Las Angeles Department of Water and Power procurement process. Mr. Marez sold products to the Department for years and so was selected to join a Small and Local Business Advisory Committee established by the LA City Council. He then became the co-chair of a sub-committee on "Mega-Contracts." In that latter capacity, Mr. Marez received numerous complaints about a recent contract, and he spoke out against that contract and about the Department's procurement procedures more generally. According to the complaint, adverse actions followed almost immediately, ranging from harassment and threats to reforms in the procurement process that were intended to and did prevent Mr. Marez from winning bids which he claimed he should have won. Mr. Marez brought suit against various city employees in their individual capacities and against the Department, alleging First Amendment violations and relying on 28 U.S.C. § 1983
The District Court granted defendants' motion for summary judgment, finding that Mr. Marez had offered "no evidence" of any adverse action. The Ninth Circuit vacated the grant of summary judgment and remanded. The issue before the Ninth Circuit was whether Mr. Marez was barred by Garcetti v. Ceballos, which held that government employees speaking publicly in an official capacity do not enjoy First Amendment protections against employer discipline. The Ninth Circuit found that Garcetti was inapplicable because Mr. Marez was not an "employee" of the city simply by virtue of his service on an advisory committee. He was not paid for his service, and the court noted that he did not work for the city; he worked with it. The court further found that Mr. Marez's evidence of adverse retaliatory actions was sufficient to give rise to questions of material fact that could not be resolved on summary judgment.
Weekly Top Ten from the Social Science Research Network
March 9, 2010
New Episode in the Prolonged Aerial Refueling Contract Drama
We have had occasion previously to note the competition between Boeing and Northrop Grumman for a contract to design and build a new fleet of aerial refueling aircraft for the Air Force. We noted in passing that, as illustrated to the right, aerial refueling is cool. When we first reported on this issue, the contract had been awarded to Northrop Grumman in partnership with the parent company of Boeing's Professor Moriarty, Airbus. Later, we reported that Boeing had successfully protested the award and a new round of bidding was to commence.
Today, the New York Times reports that Northrop will not participate in the bid process, leaving Boeing as the only bidder. Northrop also states that it will not challenge the award to Boeing, although it claims that it would have grounds to do so. Northrop claims that the bid process was rigged to Boeing's advantage. The Times suggests that this is a blow to the Obama administration, which was attempting to eliminate single-bidder government contracting. As the Wall Street Journal reports, Members of Congress from Alabama, where the planes were to be built had Northrop won the bid, expressed "disappointment" and "outrage" at the news and suggested that the bid was rigged to favor Boeing to the detriment of American servicemen and women. A Member of Congress from Washington State, where the planes are now to be built, suggested that Northrop and its European partner had been cheating all along and that challenges under international trade agreements would have followed an award to Northrop.
Contracting Around the Duty of Good Faith & Fair Dealing in California
The New York Times reported over the weekend on the case of Cussler v. Crusader Entertainment, LLC, an unreported California Court of Appeal, Second District, Third Division decided on March 3rd. The case involves a option agreement between Clive Cussler, whom the court describes as a "widely read novelist" and Crusader Entertainment LLC [Crusader], which exercised its contractual option in producing the movie "Sahara" based on one of Mr. Cussler's novels. Before the film was produced, both parties sued each other alleging breach of the option agreement. At trial, the jury rejected all of Cussler's claims and most of Crusader's but awarded the latter $5 million based on a finding that Cussler had breached the covenant of good faith and fair dealing. On Mr. Cussler's appeal, the Court of Appeal reversed, finding that the breach of covenant claim was barred as a matter of law.
Crusader exercised its option to make "Sahara" in November, 2001. Under the terms of the agreement, Crusader was contractually obligated to start filming within 24 months. But wrangling over the screenplay, which Cussler allegedly declared to be "crap," made it difficult for Crusader to do so. The parties eventually arrived at an impasse, allegedly due to Cussler's insistence that he should write the screenplay and Crusader would not let him do so, both because actors did not like Cussler's screenplays and because of concerns related to the fact that Cussler was not a member of the Writers' Guild. When Crusader proceeded to produce and release the film, Cussler publicly criticized it, stressing that he had not approved the screenplay.
On the key issue in the appeal, the court found that Cussler had a contractual right to review and reject proposed changes to the original Approved Screenplay "for unreasonable reasons. . . or for no reason at all." The court rejected Crusader's argument that granting Cussler such broad discretion rendered the agreement illusory, since Crusader retained the right to produce the film using the Approved Screenplay. In short, because the contract did not require Cussler to act either reasonably or in good faith, he could not be held liable for having failed to do so.
Because the Court of Appeal reversed the trial court's ruling on damages, it remanded the case back to the trial court for a determination of which party had "prevailed" for the purposes of determining which party should bear the costs.
March 8, 2010
The Ethicist and the Lawyer
As I have previously confessed, I read Randy Cohen's "The Ethicist" column in the New York Times Sunday Magazine. Mr. Cohen occasionally uses the law as a point of reference in explaining his grounds for thinking behavior is ethical or unethical. I object, citing my conviction that the law sometimes reflects something like a collective ethic and sometimes reflects complex political processes that operate beyond good and evil. On occasion, as indicated in this previous post, Mr. Cohen assumes positions consistent with mine, for which I heartily applaud him. So, I've chided him for giving too much credence to the law as evidence of ethics and applauded him for recognizing that law and ethics can diverge. Today, I return to congratulate him for recognizing some of the the subtleties of the dance between contracts law and ethics.
In last week's column, Mr. Cohen responded to a reader seeking advice respecting a school-year length agreement with a baby sitter to look after his two children two days a week. The reader learned that he would be laid off in April and would no longer need the baby sitter's services, but his wife felt bound by the agreement to employ the baby sitter through June. Mr. Cohen sides with the wife, arguing that the reader is bound, both in ethics and in law by his commitment to the baby sitter. However, a contract is not a suicide pact. Mr. Cohen recognizes that there are legal as well as ethical solutions short of pretending to putter about the house two days a week while your two children pester the under-utilized baby sitter with questions about why Daddy is still in his bathrobe and hasn't shaved in a week. Mr. Cohen does not consider the defense of frustration of purpose, which might have some applicability in this context. That is too bad, as it would be interesting to consider the extent to which our ethical intuitions overlap with legal doctrine with respect to that affirmative defense.
Mr. Cohen correctly notes that, while one can assist the baby sitter in finding alternative employment or can offer her a compromise of one month's severance, she has no legal obligation to accept such an offer. In the real world, she might see the advantages of being accommodating. But here again, in my view, ethics and law diverge. As a matter of ethics, I agree with Mr. Cohen that it is the breaching party's obligation to seek to mitigate the harm to the non-breaching party. In law, however, the baby-sitter has a duty to seek alternative employment or she would forfeit her entitlement to damages that would make her whole. This divergence of law and ethics is one about which I have strong views, since I regard myself as a victim of past baby sitters who have cancelled without notice and considered it my problem to find a replacement or change my plans for the evening.
Mr. Cohen also offers a brief paean to written contracts and their advantages over oral agreements. Mr. Cohen notes that written agreements lend clarity to the terms of an agreement -- although there seems to be no ambiguity as to the terms of the baby-sitter contract at issue -- and provide an opportunity to make those terms explicit. If the parties had wanted to stipulate that the agreement was contingent on the employer's continued employment at his own job, they could have made such an assumption explicit.
This seems a bit off to me. Very few people would want their informal contracts solemnized in writings, and it is highly unlikely that such a writing would address unforeseen -- though not unforeseeable -- events such as those that befell Mr. Cohen's reader. A good baby-sitter contract -- one that addressed all contingencies and rendered its terms explicit -- would have to be drafted by an attorney. But the costs of the contract would be excessive in relation to the value of the contract to the employer, who could not reasonably expect that the baby sitter would share the costs of drafting the agreement. Moreover, because it would contain terms that likely would be opaque to the baby-sitter, a written contract could exacerbate the already uncomfortable inequality in bargaining power between the parties.
Protecting Your Passwords From Beyond the Grave
Fellow conferee Sid DeLong has called our attention to a possible, but perhaps problematic solution. There is a service called Legacy Locker. Among other things, Legacy Locker gathers and tests your online passwords for you and then passes them on to your personal representative or named beneficiary when you die. More information on the service can be found here. Please note: although the name of the principal behind Legacy Locker is similar to that of the undersigned, we at the blog intend neither to endorse nor to criticize the product. We just think it is an interesting example of private ordering that could at least potentially save the bereaved from the kinds of adversarial wrangling described by Professor Preston.
In the specific case described by Professor Preston, the parents of a beloved child wanted to recover some of her e-mail communications, and Professor Preston believes that they had a legal right to such communications. However, in many cases, though not the case Professor Preston discusses, minors have passwords on their internet accounts precisely because they want to keep those communications private from their parents. That reasonable assumption could be easily overcome if children specified, through Legacy Locker or some other service what was to become of their accounts in case of their demise.