Friday, April 23, 2010
This story from Fox News:
A computer game retailer revealed that it legally owns the souls of thousands of online shoppers, thanks to a clause in the terms and conditions agreed to by online shoppers.
The retailer, British firm GameStation, added the "immortal soul clause" to the contract signed before making any online purchases earlier this month. It states that customers grant the company the right to claim their soul.
"By placing an order via this Web site on the first day of the fourth month of the year 2010 Anno Domini, you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamesation.co.uk or one of its duly authorised minions."
GameStation's form also points out that "we reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act. If you a) do not believe you have an immortal soul, b) have already given it to another party, or c) do not wish to grant Us such a license, please click the link below to nullify this sub-clause and proceed with your transaction."
The terms of service were updated on April Fool's Day as a gag, but the retailer did so to make a very real point: No one reads the online terms and conditions of shopping, and companies are free to insert whatever language they want into the documents.
While all shoppers during the test were given a simple tick box option to opt out, very few did this, which would have also rewarded them with a £5 voucher, according to news:lite. Due to the number of people who ticked the box, GameStation claims believes as many as 88 percent of people do not read the terms and conditions of a Web site before they make a purchase. The company noted that it would not be enforcing the ownership rights, and planned to e-mail customers nullifying any claim on their soul.
This reminds me of the episode of the Simpsons when Bart sells his soul to Millhouse. Though Bart had agreed to sell his soul to Millhouse in a negotiated deal - and, of course, Millhouse went and resold it for Alf pogs:
[Meredith R. Miller – h/t Cynthea Motschmann]
Thursday, April 22, 2010
Gawker has it here. Apparently Hunter Thompson wasn't a fan of signing anything, deciding instead to scrawl Dick Cheney's name on the signature block, along with expletives and swastikas. Ironically, even if there is an argument that the scrawling evidences an intent to be bound, at least it also serves as strong evidence of incapacity.
[Meredith R. Miller]
As reported in the Setonian here, Bobby Gonzalez, former head coach of the Seton Hall University men's basketball team, the Pirates, filed suit last week, alleging that he was terminated in violation of the covenant of good faith and fair dealing. Gonzalez was fired following a Seton Hall loss in the post-season NIT. During that loss, a Seton Hall player was ejected after having twice punched an opposing player in the groin. Usually such behavior just leads to the Pirate in question being told to swab the decks. But that was not the only incident during the game. Gonzalez was assessed his seventh technical foul of the season, which is kind of a lot for a college basketball coach, and so they made him walk the plank.
Announcing the decision to fire Coach Gonzalez, University President Msgr. Robert Sheeran remarked that the NIT loss was "the crystallization of all that was really wrong with the coaching and leadership." According to the Setonian, two former members of the team were arrested after the game and charged with kidnapping, aggravated assault, robbery, burglary and weapons violations. These events may have been the last straw. However, as reported on Wikipedia, there may have been grounds for Seton Hall administrators' discomfort with Gonzalez already. There was concern that he was filling his roster with transfer students who, while gifted on the court, struggled academically and may have appeared too many times in courts without hoops or hardwood.
Apparently, Gonzalez's suit turns on the suspicious timing of his for-cause termination, which deprived him of entitlement to two years of base salary.
Wednesday, April 21, 2010
Thanks to Jeremy for the invitation to participate in this discussion. (Full disclosure: I’m currently trapped in London after a conference, with limited access to things like the internet, and sleep. So I may have missed some of the discussion. If so, my apologies.)
The core question in Rent-A-Center is whether courts should respect contract terms that clearly allocate unconscionability questions to the arbitrator. I want to use this post to explain why this strikes me as a relatively easy question in a case like Rent-A-Center, but a more difficult question generally. In Rent-A-Center, Jackson objects that the arbitration clause allows RAC to go to court in some cases, requires him to pay half the arbitrator’s fee (unless the law requires otherwise), and limits discovery. Importantly, none of these objections implies that the arbitrator cannot reach a fair decision on the unconscionability question. For example, Jackson doesn’t identify any discovery related to that question that will be unavailable to him, and his complaint about fee-splitting seems to ignore the fact that both AAA and JAMS, the providers designated in the contract, cap employee fees at relatively low amounts.
Once we accept that Jackson’s unconscionability challenge can be resolved as fairly as any other issue in arbitration, I have trouble understanding why it shouldn’t be resolved there. Let’s assume that you and I form a contract that includes an arbitration clause with various bells and whistles, like discovery restrictions, that we know can be challenged as unconscionable. We’d prefer to arbitrate these challenges, too, so we draft an arbitration clause that encompasses all issues related “to the … enforceability” of our contract or any part of it. Why shouldn’t our agreement be enforced? There’s nothing illogical about concluding that we have “made” an agreement to arbitrate that permits the arbitrator to decide whether the “bells and whistles” are unconscionable. After all, an arbitrator who is unbiased and competent enough to resolve complex federal statutory claims surely can manage to decide whether to enforce a limit on discovery. Nor is this like the example of a forged signature on a contract containing an arbitration clause. A party whose signature was forged hasn’t manifested assent to anything, including arbitration. The forgery claim calls into question the very existence of the arbitration agreement and is plainly for the court to decide, whatever the arbitration clause might have to say on the subject. That is why RAC correctly concedes that such issues relate to the “making” of the arbitration agreement. But a party who has agreed to arbitrate unconscionability challenges has, well, agreed to arbitrate unconscionability challenges. (As an aside, I mean “agree” in the objective sense important to contract law. In many cases, of course, consumers and employees do not actually agree to each contract term. But under current law, if objectively manifested assent is good enough to enforce other contract terms, it’s good enough to enforce the arbitration clause.)
The difficulty arises when the unconscionability challenge cannot be resolved fairly (or at all) in arbitration. Examples might include challenges to clauses that impose very high initial filing fees, or clauses that require arbitration in remote locations or before a biased arbitrator. Given the length of this post already, I won’t elaborate on this difficulty here. Suffice it to say that it seems like courts should resolve these kinds of challenges, even if the contract purports to send them to arbitration. And there is a further difficulty: how should courts identify whether an unconscionability challenge is one that cannot be resolved fairly in arbitration? These questions strike me as the difficult ones, and also the ones on which the Court’s decision in Rent-A-Center is likely to provide the least guidance.
[Posted on behalf of Mark Weidemaier by Jeremy Telman]
Many thanks to Jeremy for letting me chime in. I’ve also really enjoyed both Karen and Christopher’s posts and work on this subject.
A bit of shameless self-promotion: I’ve got a (very) short essay in the Virginia Law Review In Brief on Rent-A-Center. You can find it here. In the piece, I argue that section 4 of the Federal Arbitration Act (“FAA”) bars parties from delegating the issue of whether an arbitration clause is valid to an arbitrator. Section 4 instructs courts on what to do when a party moves to compel arbitration. Here’s its key language:
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration . . . is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement . . . . If the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof.
In addition, the statute empowers a party to request a jury trial on the issue of whether “no agreement in writing for arbitration was made.”
In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”
In the brief, which Karen deftly summarized, Rent-A-Center (much to my surprise!) seems to concede the first point: that courts enjoy a monopoly on resolving any claim that revolves around “the making of the agreement for arbitration.” However, Rent-A-Center makes three related arguments about why the phrase “making of the agreement for arbitration” doesn’t include unconscionability challenges.
First, Rent-A-Center notes that section 4 allows the parties to demand a jury trial, and limits the jury to resolving the discrete issue of whether “no agreement in writing for arbitration was made.” Thus, Rent-A-Center suggests that section 4 governs only the bald claim that no arbitration clause actually exists. One difficulty with this argument, though, is that the phrase “no agreement in writing for arbitration was made” appears only toward the end of section 4. Toward the beginning of the statute, Congress described the judiciary’s role in broader terms: to hear all claims that place “the making of the agreement to arbitrate . . . in issue.” If Congress intended to limit section 4 to bare assertions that there is no arbitration clause, presumably it would’ve used the narrower phrase “no agreement in writing for arbitration was made” throughout. Moreover, the Supreme Court has construed the phrase “the making of the agreement to arbitrate” to include a claim of fraud in the inducement—a claim that goes beyond a mere assertion that no arbitration clause exists. See, e.g., Prima Paint v. Conklin, 388 U.S. 395, 403-04 (1967).
Second, Rent-A-Center contends that because section 4 entitles a party to a jury trial, it can’t encompass unconscionability, which juries don’t decide. Yet the statute also cross-references the Federal Rules of Civil Procedure, which limits the availability of jury trials. Arguably, then, section 4 merely preserves the right to a jury trial when it would otherwise exist, but stops short of conferring the right to a jury trial on any litigant who challenges “the making of the arbitration agreement.” This means that even if section 4’s jury trial guarantee doesn’t apply to unconscionability, section 4 still governs unconscionability claims.
Third, Rent-A-Center claims that the phrase “making of the agreement for arbitration” refers not to unconscionability, but to particular contract defenses, such as fraud in the inducement or duress, “which question[ ] the very existence of mutual assent.” (Brief at 12). Yet it seems bizarre that Congress would make such arbitrary distinctions in section 4. Section 2 of the FAA requires courts to consider whether an arbitration clause is invalid under any contract defense. Unless section 4 is equally broad—unless it instructs courts how to resolve any challenge to the enforceability of an arbitration clause—then the FAA contains a gaping hole. The statute would say absolutely nothing about how courts must go about entertaining a vast class of possible challenges to arbitration clauses. (For example, in addition to unconscionability, claims of incapacity and minority also don’t challenge “the very existence of mutual assent.”). Thus, section 4 must be keyed to section 2, and a claim that all or part of an arbitration clause is unconscionable places “the making of the agreement for arbitration . . . in issue.” In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”
[Posted, on behalf of David Horton, by Jeremy Telman]
Tuesday, April 20, 2010
Yep. We're imperialistic, so what are you gonna do about? Throw some fulminated mercury at us?!?
We've already pretty much taken over the realms of business associations, alternative dispute resolution, national security law, international law, and law and literature. Well, now we're taking over intellectual property. And why? Because other blawgers are dropping the ball, in this case by not reporting on the relevant intellectual property issues in AMC's Breaking Bad. If you don't have cable or have cable but think (incorrectly in this case) that you have better ways to use your time than watching television on a Sunday night, you can get a re-cap of most of the relevant issues from the first two seasons of the show here.
In Season 3, our hero, Walter White, is taking a sabbatical from his Heisenberg identity and has given up his career as a producer (cook) of crystal meth. His partner in the business, Jesse Pinkman, decides to continue the business on his own, cooking up a batch of crystal meth by using Walt's formula. He sells this product through Walt's distributor, Gus. Gus pays Jesse half of his producer's fee and gives the other half to Walt. Jesse is quite understandably furious and Walt is equally furious but less understandably so. As he explained to Gus on Sunday night, for Walt, it's really all about the chemistry, and he cannot stand to have his formula reproduced by someone like Jesse, who whatever other endearing qualities he may have, is not a master chef.
I don't want to give away too much more of the plot, in case some of our readers are waiting to watch the entire season through Netflix, which BTW is a method I highly recommend, since watching television series about addictive drugs is, ironically enough, highly addictive. It's hard to wait a week between episodes and to endure commercials.
In any case, the plot gives rise to certain intellectual property concerns in the context of a now-defunct -- or at least non-functioning partnership. In this case, the partnership never operated according to a written partnership agreement. Still, Walt and Jesse were operating according to a contract of sorts, and we might look to their conduct to establish who has the right to the intellectual property developed in their joint venture. Walt clearly has the stronger claim, since he was the inventor of the recipe, while Jesse was just in charge of distribution. However, Walt had made clear that he was not interested in continuing the business and the business, which was illegal and thus never properly formed, was also never officially dissolved or terminated.
Walt seems to think he has a right to exclusive use of the recipe, even if he elects not to use it. Jesse seems to think he has a non-exclusive right. Since their claims are unlikely to be adjudicated in any court, we had better hash things out here.
While we are discussing the arguments pending before the U.S. Supreme Court in Rent-A-Center West v. Jackson, Loyola Law School Los Angeles's David Horton have moved on to the next issue in the world of arbitration agreements. Professor Horton's article, The Shadow Terms: Contract Procedure and Unilateral Amendments has appeared in the current issue of the UCLA Law Review. The full text is here. The abstract is reproduced below:
For decades, courts and commentators have debated the normative implications of contract procedure. Conservatives argue that mandatory arbitration clauses reduce the burden on the judicial system and that class arbitration waivers, choice-of-law clauses, and jury trial waivers allow businesses to pass litigation savings to their consumers in the form of lower prices. In response, liberals object that contract procedure dilutes substantive rights and runs roughshod over important jurisdictional and constitutional values.
This Article argues that neither view has accounted for a defining trait of contract procedure: the regularity with which drafters unilaterally amend procedural terms. Indeed, many standard form consumer agreements and a growing number of state statutes authorize drafters to revise procedural terms unilaterally. The frequency with which drafters exercise this power undermines the foundational conservative theory that sophisticated adherents can exert market pressure on drafters to offer efficient procedural terms. However, the liberal model of contract procedure—which urges courts to nullify procedural terms that erode substantive, jurisdictional, or constitutional interests—creates perverse incentives. Drafters respond to judicial decisions voiding procedural terms by amending their terms again. The target audience for these revisions is not the adherents who will be subject to them, but the courts who will adjudicate their validity. This “private conversation” between corporations and courts not only widens the informational gulf between drafters and adherents, but increases the burden on the judicial system. To end this pernicious feedback loop, the Article encourages policymakers to eliminate drafters’ ability to amend procedural terms unilaterally.
Monday, April 19, 2010
Comments to RAC reply brief
I write to raise a few brief points with respect to Rent-A-Center’s reply brief, which Jeremy described in today’s post:
- The reply brief (more so than RAC’s first brief) does an impressive job of framing the argument for claimant in a manner that is consistent with the reasoning of the Court’s prior arbitration decisions. In particular, the brief effectively responds to Jackson’s FAA arguments by drawing a distinction between issues surrounding the “making” of an arbitration agreement and issues surrounding the validity or enforceability of such agreement. In other words, RAC seems to argue that all that the FAA requires is that the court establish the “making” (i.e., the prima facie existence) of an agreement to arbitrate, and if such evidence can be shown, the court should enforce contractual language in the clause delegating any other arbitrability determinations to the arbitrator. So, for example, if Jackson had demonstrated that his signature on the contract was forged (as opposed to arguing that the agreement is unconscionable), then according to RAC’s reasoning, in such a case the outcome of the case would be different.
- The reply brief also invokes prior decisions of the Court (Vimar Seguros, PacifiCare and Mitsubishi) to suggest that the arbitrator should be allowed to determine arbitrability as an initial matter, subject to judicial review at the award enforcement stage (see reply brief at 18-20). As I suggested in my previous post, taking this position would allow the Court to sidestep the implications of the First Options dictum with respect to judicial review. The First Options dictum suggests not only that parties may contract to let the arbitrator decide arbitrability, but that the arbitrator’s determination of arbitrability in such a case should be accorded substantial deference.
- The reply brief does also briefly refer to the dictum in First Options for the idea that an arbitrator’s findings of arbitrability should be subject to deference (see reply brief at 21), but it does not discuss the implications of such a result under the FAA. FAA Section 10(a)(4) provides that one of the grounds on which an arbitral award may be vacated is where the arbitrator exceeds his or her powers – in other words, if the award is not based upon an enforceable agreement to arbitrate. The statutory language would suggest, therefore, that at the award enforcement stage, a court should be able to make a de novo finding with respect to the enforceability of the agreement to arbitrate. But the First Options dictum cited in RAC’s brief suggests otherwise – i.e., that any arbitral findings with respect to unconscionability should be accorded deference. Thus there is tension between the FAA’s provisions on judicial review and RAC’s position.
- Finally, the reply brief refers to “countless” private parties that have contracted in reliance on “the First Options/AT&T rule,” citing the institutional rules of the AAA and JAMS, which like most arbitration rules, provide that the arbitrator has the power to rule on his or her jurisdiction, including challenges to the existence of the agreement to arbitrate (see reply brief at 7, 17). However, there is an important difference between authorizing the arbitrator to decide jurisdictional challenges as a matter of arbitration procedure (this is referred to in international practice as competence-competence and is widely, if not universally, recognized), versus suggesting that contractually agreed-upon provisions can displace the court’s power under local law to make initial determinations as to the existence, validity or scope of the arbitration agreement. This latter proposition is more controversial; indeed, under the law of jurisdictions such as Germany, rules on the allocation of authority between courts and arbitrators to make jurisdictional findings appear to be mandatory.
[Posted, on Karen Halverson Cross's behalf, by Jeremy Telman]
On Friday, Rent-A-Center West filed its reply brief with the U.S. Supreme Court in Rent-A-Center West v. Jackson, a case we have been following on the Blog. Here is a summary of Petitioner's arguments on Reply:
Rent-A-Center (RAC) begins by noting that Respondent Jackson signed an arbitration agreement according to which all questions of enforceability were said to be within the exclusive authority of the arbitrator. That agreement, says RAC, is presumptively enforceable.
In order to overcome that presumption, Jackson first argues that Section 2 of the Federal Arbitration Act bars parties from delegating enforceability issues to the arbitrator. RAC argues that the statutory language does not support Jackson's interpretation of Section 2 and urges the Court not to read elements into the statute that do not appear on its face. Indeed, RAC contends, the full language of Section 2, together with the prior precedents, First Options and AT&T, make clear that issues regarding the scope of an arbitration agreement may be delegated to the arbitrator by clear and unmistakable language. If the Court rules as Jackson wishes, RAC contends, these precedents "wither to nothing." Jackson's unconscionability claim is not extinguished under RAC's understanding of current precedent. Rather, his claim will be addressed by the arbitrator.
Jackson similarly argues that Section 4 of the FAA requires that courts decide enforceability challenges. No, RAC says, Section 4 only permits a judge or jury to decide issues having to do with formation -- with the "making" of an agreement to arbitrate -- and this case is not about formation. Jackson's unconscionability claim is not about formation. It is a claim that, although an agreement has been made, it should not be enforced because it is substantively unfair. According to RAC, Jackson treats language in Section 4 relating to the "making" of an agreement as equivalent to language in Section 2 about when an agreement is valid and enforceable. RAC argues that Congress used different language intentionally in the two sections and the meanings of the various terms should not be confused or conflated.
Finally, RAC seeks to rebut Jackson's policy arguments in favor of court review by returning to the FAA's textual presumption in favor of the enforceability of arbitration agreements. RAC contends that arbitrators will in fact refuse to enforce unconscionable arbitration provisions. Moreover, RAC contends that Jackson has failed to produce any empirical evidence suggesting that the inequities he fears would result from continued reliance on arbitrators to determine enforceability and validity issues. Finally, RAC argues that Jackson overstates in various ways the potential harm that would result from a ruling in RAC's favor.