Monday, October 10, 2011
Steve Jobs made quite an impact on the world, rethinking the way people use technology and introducing beautifully designed, innovative products. Because this is a contracts blog, I want to discuss the interesting way his company, Apple, uses contracts in its business. Before iTunes, most music was sold to consumers on CDs. Apple is not the first or only company to license rather than sell digital music, but it is the most popular. Because of the enormous popularity of the iPod and iTunes, Apple made it acceptable to license rather than sell music - a concept that at one time seemed strange and somewhat outrageous. The way Apple uses contracts is closely tied to the nature of its innovative products and services (which meld the tangible and the digital), the way they are delivered to the customer, and Apple’s business model. Apple markets itself as more than a purveyor of technology products. Its customers don’t buy a product, they enter into a relationship. Apple reminds customers that they have a relationship, not a one time transaction, and they remind them via contracts. Apple has its customers click each time they purchase a song and each time they download an updated version of iTunes. It's mass consumer relational contracting. (Other companies may do this, too, but I can't think of one offhand that does it the way Apple does). Apple also closes the gap between offline and online contracting. When I bought my iPad not long ago, after I had paid for it, the salesperson (aka the “Genius”) had me click “I agree” to the terms of an agreement on my new iPad before he would hand it over. It made me wonder, will we see more rolling clickwraps? Will clickwraps replace paper contracts in the mass consumer setting? As products become more digital than tangible, will we see more licenses and fewer sales? (I think the answer is yes). As products incorporate more software than hardware, will they no longer be considered “goods”? What types of innovative contracting forms might we expect to confront in the future?
On September 28, 2011, District Judge Paul Gardephe issued his opinion and order denying defendants' motion for partial summary judgment in Spaulding v. Monsanto Company. Plaintiffs alleged that Monsanto engaged in negligent waste disposal practices at its plant in Nitro, West Virginia between 1949 and 1970. The waste at issue were biproducts from the manufacture of a key component in Agent Orange.
In its motion, Monsanto attempted to rely on the govenrment contrator defense, since for part of the time that it was manufacturing the product in question, it was doing so, at least in part, for government use. The standard for determining the applicability of the defense comes form Boyle v. United Techs. Corp. 487 U.S. 500, 512 (1988), in which the court explained as follows:
Liability for design defects in military equipment cannot be imposed, pursuant to state law, when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.
In this case, the Court concluded that Monsanto had not satisfied the requirements for the defense because the record did "not demonstrate . . . that U.S. Government representatives made an 'express determination' regarding Monsanto's alleged waste disposal practices." Nor was there any evidence that the Government had "exercised consistent oversight over Monstanto's waste disposal practices." The Court came to the same conclusion with respect to air pollution. Because the defendants had not demonstrated that the complained-of activity was conducted "pursuant to reasonably precise government specifications," the District Court denied their motion based on the government contractor defense.
Friday, October 7, 2011
Don't get me wrong. I'm a big fan of The Simpsons. I own the first seven seasons on DVD. Okay, I'm a big fan of the first five seasons of The Simpsons, and the sixth and seventh seasons have their moments. But at some point in the mid-90s, we turned to one another and acknowledged the truths that we dared not admit -- even to ourselves -- for many years. Our favorite show no longer amused us. The gags were all familiar, the meta-fictional, self-referential games had all been played. It was time to move on with our lives. So long, Matt Groening, hello, Jerry Seinfeld. And so, we survived the 90s.
Over the years I've had my share of fruitful debates.
JT: The Simpsons just isn't funny anymore.
Person who discovered The Simpsons in 2000: Yes they are!
JT: No, really, if you watch the first five seasons and compare them to what's on now, you will notice a huge difference
PWDTSi2000: I still think they're funny.
Bowled over by this reasoning, or having nothing else to do, I re-mounted the couch and turned on Fox at the appointed hour. A few good gags and hope springs eternal, but after five minutes, it's just a bunch of recycled schtick and the sort of incoherence and forced plot lines that clearly indicate a sit-com that has irretrievably jumped the shark.
So, now there is news that the voices behind The Simpsons (heroes all!) are being asked to accept a mere $4 million/year instead of the $8 million/year they were making under their previous contract. In fact, HuffPo reports that even if the actors agree to the pay cut, next season will the show's last. If the actors don't agree to a pay cut, this season will be the finale. I hope the actors insist on an early exit. After all, if actors are willing to lend their voices to animated television programs for a mere $4 million/year, where will it end? Will Bruce Willis and Harrison Ford have to accept a mere $10 million per film? Will television news anchors have to take pay cuts too. It's stuff like this that drove the irreplacable Glenn Beck from the airwaves!
Thursday, October 6, 2011
On September 28, 2011, Judge Blackburn of the Northern District of Alabama upheld against federal challenge most of Alabama's new immigration law, proclaimed to be the "toughest in the nation" when it comes to undocumented aliens. The case is United States v. State of Alabama and the opinion is here (Thank you, thank you, New York Times! Why do so few organizations provide links to public legal documents?!?).
Among the challenged provisions of the law was Section 27, which bars courts from enforcing contracts with undocumented aliens, assuming the other party to the contract knows of that immigration status. The federal government challenged this section as preempted by federal immigration laws. Judge Blackburn spent less than a page on the topic, finding that no federal law specifically addresses the enforceability of contracts with undocumented aliens. She therefore refused to preliminarily enjoin the enforcement of Section 27.
Why no Contracts Clause challenge? Even given that such claims are very difficult to win, it seems like the sort of situation where at least some consideration ought to be given to the Clause. After all, the language of the Constitution seems to clearly prohibit states from interfering with contractual obligations. But the Constitution does not mean what is seems to mean (anymore). In Energy Reserves Group, Inc. v. Kansas Power & Light, the Supreme Court ruled that even if state action amounts to "substantial impairment" of private contracts, such laws can be justified if designed to address a significant and legitimate public purpose, such as remedying a broad or general social or economic problem. Since the states are not involved in the contracts at issue, courts are generally to defer to the legislature's judgment as to the appropriateness of the chosen remedy.
Freakonomics blogger and Yale ContractsProf, Ian Ayres, has teamed up with his 14-year-old Gleek daughter to write a song, and now he's offering an iTunes gift card worth up to $500 to the winner of a contest to guess which lyrics are his.
It's really two contests in one. The first contest is to guess which of three songs peformed by his daughter Professor Ayres co-wrote and also to specify a line that he authored. That contest ends October 31st. The second contest is to predict the total number of views for the three songs. The deadline for that contest is October 10th. Winner of the first contest will get a gift card; winner of the second contest will get signed copies of two of Professor Ayres' books.
The details of the contest are here.
And as an additional incentive, Professor Ayres offers a special bonus: If the winning entry happens to come from a student or ContractsProf who use the Ayres & Speidel casebook, he and/or his daughter will perform a song of the winner's choosing in a "personal Skype concert." He did not specify that the song has to be one of the three relevant to the contest, so I recommend demanding a performance of Queen's "Bohemian Rhapsody."
Wednesday, October 5, 2011
This observation is law school related, so I will take the liberties of posting it to our humble blog about contract law. And, since I have used the word "porn" in my post, we'll probably generate some traffic and maybe even get a few unexpected people interested in contract law....
So, is it me, or has "law porn" finally found my email inbox? This year, it appears that there is a particularly high volume of junk email from law schools about how great they are... more than ever before and certainly a higher volume in proportion to the ordinary print brochures (though, I've received plenty of those too, they just don't interrupt me the same way as an email when it pops up).
[Meredith R. Miller]
The case is Wilder Corporation of Delaware v. Thompson Drainage and Levee District. Wilder owned 6600 acres of farmland in Illinois on which it grazed cattle. At a certain point, it sold the land to The Nature Conservancy for $16.35 million, which then restored the land to its pre-20th-century condition as a flood plain wetland. In so doing, it warranted that the land was not contaminated with petroleum. That turned out not to be the case. The Nature Conservancy sued and was awarded $800,000 in damages, although some of those damages related to a separate, but no doubt noisome breach involving "sewage lagoons."
Wilder could not deny the smoking methane gun when it came to the sewage. But while its cows produced waste products, petroleum was not one of them. The blame for that product lay with defendant drainage district, which had stored petroleum on the land in question to run some water pumps for which the Nature Conservancy had no use.
Wilder sued seeking common law indemnification. It's problem, as Judge Posner explained, was that the Nature Conservancy's claim sounded in contract and not in tort, and there could be no recovery based on common law indemnification on a breach of contract claim.
This is the kind of decision that Judge Posner was born to write. He loves these cases, and it shows in the energy and the pure joy of the writing. He arrives at his holding on page 6. The rule common law indemnification for tort claims does not extend to contract claims. He then spends an additional six pages explaining why this is a good rule.
- To impose such damages on a third party would be inconsistent with the general rule that contracts damages must be foreseeable;
- Suit is barred by the economic loss rule;
- It would make the drainage district an insurer of Wilder, and one can't insure against a breach of contract as that would create a moral hazard; and
- Wilder assumed the risk by including the warranty and by not insisting on a subrogation clause
It's a fun read.
Tuesday, October 4, 2011
Having blogged about Charlie Sheen's contractual dispute on what seems like nineteen previous occasions, I felt compelled to share the likely end of the story--a settlement reportedly worth $25 million--and to mention Sheen's post-settlement humility in recent interviews. As our seven many loyal readers will recall, Sheen's contractual dispute with his Two-and-a-Half Men employer, Warner Brothers, involved multiple Contract law issues, including the lack of a morals clause, the unconscionability of a mandatory arbitration clause and the parties' gap in bargaining power. Prior to the recent settlement, Sheen left the show and was replaced by fellow actor, Ashton Kutcher (pictured here). Although there are many possible lessons to be learned from this whole saga, I think one of my current students, Huma Noorani, summed it up best when she said that the case "illustrates how costly imprecise language can be."
[Heidi R. Anderson]
Frankly, I've never seen this housewives show. And I don't say that to be a snob of any sort, there is plenty of bad television that I do watch. So, I don't really have any knowledge about the characters involved in this story from the Daily News, but I suspect it may be of interest in the classroom:
Contrary to reports that the brunette babe has quit the Bravo reality series, a network insider tells us Laurita may be departing because she violated the confidentiality agreement in her contract.
Laurita blamed Giudice for what she called the "setup" of another cast member, Melissa Gorga.
In her tweets, Laurita claimed Giudice put Gorga in an embarrassing situation by arranging for a former employee of Lookers Gentlemen's Club in Elizabeth, N.J., to "confront" Gorga at a Porsche Fashion show that was being shot for a future fourth-season episode of the series. The show just finished filming its third season, and Bravo will run a "reunion" episode Oct. 16.
Media reports suggest the encounter had something to do with rumors Gorga worked there as a stripper, although her former boss at the club recently told Us Weekly she worked as a bartender.
The source says Laurita's tweets backfired because she's contractually prohibited from divulging future story lines for the series.
"She revealed a significant amount of a plot line" for an episode that "has not yet been aired," says the insider.
That's not the only issue. Our source also says Laurita broke one of Bravo executive Andy Cohen's cardinal rules by refusing to attend a taping session for next week's season-three reunion show.
The source adds that Bravo is "not happy" with Laurita's behavior, "even if she was upset.
"There are rules. She knows that," says the insider."
After initially declining to comment, a Bravo spokeswoman issued a carefully worded statement to us: "Bravo is not firing anyone from 'The Real Housewives of New Jersey.' All five cast members will be featured on season four," read the statement. "No decisions have been made about season five at this time."
Laurita did not respond to us by deadline, but her castmate and sister-in-law, Caroline Manzo, downplayed Laurita's threats to quit. She told the Wet Paint website, "Maybe [Jackie's] in a funk now," but "in two hours, she'll be like, 'Hey, when are we filming next week?'"
If you want to participate in the comments section to this intrepid news story, here's a link to the Daily News.
[Meredith R. Miller]
Monday, October 3, 2011
Maybe it’s because my Contracts class is discussing unconscionability and I’ve got bargaining on my mind, but it seems that bargaining was everywhere in the news this week. Jesse Jackson, for example, seems to be calling out Capital’s One’s bargaining naughtiness when he criticizes its marketing practices aimed at vulnerable borrowers. In a different context altogether, Ohio’s governor John Kasich has waded into the collective bargaining fray. Finally, there’s this article about the increase in debit fee charges to consumers. Consumers, of course, don’t like these increases but are in a take ‘em- or- leave ‘em position given the difficulties of mobilizing disparate individuals to bargain collectively. [This article advocates the leaving 'em -- and joining a credit union-- alternative, whereas this article touches upon the problems of mobilizing disparate individuals to bargain collectively]. Super star executives are in a much different bargaining position. As this article and Jeremy's recent post points out, they can negotiate highly lucrative compensation packages , where they receive millions in severance pay even when they are essentially fired for poor performance.
It has been nearly 15 years since the Walt Disney Company offered Michael Ovitz a non-fault termination and the estimated $140 million severance package which came as a reward for 14 1/2 months of turbulent and ineffective leadership at the company. We summarized the basic facts here and commented briefly on one of the many rulings in the case here.
James Stewart, author of a great account of the Walt Disney Company during the Eisner years, knows a thing or two about executive compensation and he shares his thoughts in this article from Saturday's New York Times. Basically, very little has changed. Last week, the Times' Eric Dash reported on seven executives who had received lavish severance pay after "failed tenures." Stewart's account focuses on one of the seven, Leo Apotheker (pictured), who received $13 million in severance benefits after less than a year as CEO at Hewlett-Packard (HP). One might say that this is progress. After all Apotheker's severance is an order of magnitude less than was Ovitz's. But Stewart points out that the perverse incentives that were at the heart of the Disney litigation remain. According to Stewart, CEOs like Apotheker make more if they can get a quicky non-fault termination than they make if they stay on the job. And since "non-fault" is a term of art, encompassing everything other than committing a felony or not showing up to work at all, CEOs can rely on non-fault terminations.
Stewart refutes the usual defense of such severance payments. Executive compensation experts often argue that such "downside protection" is necessary to lure talent away from their old jobs at which they have an assured income. That argument might have made some sense with respect to Michael Ovitz, who left his partnership at which he was earning $20-25 million/year to join Disney. But Stewart points out that there is no empirical support for this claim. Moreover, the notion that executives are entitled to downside proection is at odds with the capitalist ideal that one should always have a motivation to strive for success and that failure should never be rewarded. In the case of Mr. Apotheker, the theory clearly could not have applied, since he had been fired from his last position and so was not giving up anything in order to come to HP.
Stewart suggests that the solution is to stop treating "non-fault" as a term of art. If a CEO is fired because he is incompetent, ineffective or simply fails to provide the leadership that a company needs, the company should be able to fire him for cause and without lucrative benefits. The solution seems simple, but I don't see how it would make any difference. Boards don't want to fire CEOs for cause, because that would suggest that they made an incompetent decision in hiring the CEO in the first place. Regardless of the definition, I think boards would continue to call terminations "non-fault," and courts would defer to that determination under the business judgment rule. And even if the courts refused to uphold the business judgment of the board, there would likely be no remedy, since board members cannot be personally liable for breaches of the duty of care. A suit to recover the money from the departing CEO would be difficult, I would think, as she would certainly be entitled to argue that she relied on the authority of the board in entering into the employment agreement in the first place.
We offer an equally implausible alternative solution: courts should adopt the structural bias thesis in reviewing challenges to executive compensation decisions. There is ample evidence that corporate boards provide generous compensation packages to executives because board members are themselves corporate executives and value their own contributions at levels that are not determined by any sort of market test. The breach of fiduciary duty at issue then is no longer the duty of care but the duty of loyalty, as all board members may be presumed to have a personal interest in setting executive compensation absurdly high. Once we switch from care to loyalty, we no longer have to worry about the business judgment rule or those pesky statutes that immunize board members from liability for anything short of fraud or illegality.
More implausibly still, I argued a few years ago in an article that appeared in the Tulane Law Review that the business judgment rule should not apply to executive compensation agreements. Tulane has not (yet) adopted the increasingly popular practice of putting back issues up online. Therefore, the easist place to find the article, in its pre-edited format, is on SSRN.
My reasoning is as follows:
1. None of the justifications for the business judgment rule make sense -- it's not true that judges are not business experts; it's no longer true that board members need the business judgment rule to protect them from liability for risky decisions; and corporate democracy is not sufficiently robust to effect the sort of delegation of decision-making authority from shareholders to directors that the business judgment rule assumes to have occurred.
2. But the business judgment rule is justified in situations where the costs of disclosure of prospective business plans or strategies associated with litigation outweigh any potential benefit to the corporation from litigating the alleged breach of the board's duty of care.
3. Executive compensation is not determined with reference to any prospective business plans.
4. Therefore, there is no need to accord board business judgment rule protections with respect to executive compensation plans.