February 19, 2011
Forty-Five Left on a Boat, But Only Thirty-Six Came Back…
It’s been an eventful twenty-four hours at the Sixth International Contracts Conference at Stetson University Law School filled with contracts theory, insightful presentations, and a triumph of the human will. The Professors embarked on a one hour boat tour, but ended up waylaid on the sandbar, rather like Prof. Bruno Zeller’s pants. In Telman-style, Profs. Nancy Ota (Albany) and Emily Houh (Cincinnati) came up with some limericks in order to celebrate the adventure:
Jamie Fox had planned for most folly.
But we boarded a boat
That could not stay afloat
How we wished we had taken a trolley.
Until the sand caused too much traction.
Nine jumped the boat.
Others hoped it would float
After which they would sue the captain.
Jamie Fox has good reason to gloat
A great conference plus a night on a boat.
Our gratitude unspoken
A reminder to find a deep moat.
[Meredith Miller / Miriam Cherry]
February 18, 2011
Members of Congress Advocate Avoidance of Indemnification Clauses for Fannie Mae Executives
Behind the placid exterior, shown at left, not all is well at Fannie Mae Headquarters. Legal fees have mounted for the mortgage giant's former executives. The executives have been defending themselves against accusations of accounting improprieties alleged in a shareholder suit brought in 2004. The New York Times reports that their legal fees have climbed to over $100 million since the suit began, with the best estimate being in the $160 million range. It is not difficult to rack up such fees when, as Ohio Attorney General Mike DeWine claims in the Washington Post, they are “lawyering this case to death.” Evidence of such over-lawyering included bringing upwards of 13 seemingly mute lawyers to some 123 depositions and another 35-40 lawyers to monthly conference meetings. All of this, and the former executives are reportedly still years from trial.
Who could be paying for all of this you ask?
Well, you are, in a way. As of 2008, the government took over Fannie Mae. The executives were part of the deal, along with contracts including standard provisions calling upon Fannie Mae to indemnify them for “reasonable” legal fees associated with their employment at Fannie Mae. These contracts remain in place, even though the Housing and Economic Recovery Act of 2008, the act that created the Federal Housing Finance Agency, empowered to oversee of Fannie Mae and Freddie Mack, allowed for these contracts to be voided. Officials at the Federal Housing Finance Agency have claimed that overturning these contracts would have been "inappropriate and possibly unconstitutional."
In any case, if the executives are found liable, the Times reports, the executives will have to reimburse the corporation for the legal fees. The executives, who have already paid $31 million to settle with the Office of Federal Housing Enterprise Oversight, a predecessor regulator, may not have the means to repay the legal fees already advanced to them.
Members of Congress know a moral hazard when they see one. At a Congressional Hearing earlier this week, lawmakers questioned whether these fees are actually “reasonable.” Randy Neugebauer, chairman of the Oversight and Investigations Subcommittee of the House Financial Services Committee, claims that keeping these contracts intact gives the former execs incentive to keep running up enormous legal bills- all at the expense of the taxpayers. U.S. District Judge Richard J. Leon said it best at a hearing in 2009, "I am not so sure the taxpayers are doing pretty well, but the lawyers are doing pretty well in this deal."
[JT & Katherine Freeman]
Greetings from Stetson!
The first panel of the 6th International Conference on Contracts is off and running with Jean Braucher (Arizona), Carol Chomsky (Minnesota), Victor Goldberg (Columbia), and Bill Woodward (Temple) discussing some of conference honoree Stewart Macaulay's contracts and pedagogical scholarship, the insights and impact of Stewart's "law in action" casebook and related scholarship, including but not limited to the importance of contextualizing contracts, contract disputes, and contract law, and Stewart's personal impact on the contracts professoriate over the past 50 years.
More to come ...
[Keith A. Rowley]
February 17, 2011
The Huffington Post/AOL Merger: Choice and Value in Contracts
What is “a good bargain”? Is it all in the price? The price may or may not reflect the value of the subject of the bargain. It may be underpriced (to the glee of the buyer), or overpriced (to the satisfaction of the seller). An underlying belief about what the basic value of the subject is must also exist. Without that underlying belief, judgments about how underpriced or overpriced - and thus, how good or bad - the proposed contractual bargain (price) is, cannot be made. So, what is the true value of the Huffington Post? Some see the HuffPo as a barely five year old celebrity upstart that defied expectations to become a remarkably popular blog. Was it a steal or a bust at 315 million?
Celebrity, even notoriety, seems admired and highly valued these days. And, if admiration is not quite the word, the fact of celebrity - even where the person concerned is famous for simply being famous – certainly draws our attention. It is because of this that the 'art' of being a celebrity is a hardnosed business pursuit rather than a frivolous lark. There is no shortage of promoters willing to pay someone - anyone - who can attract, however fleetingly, the public’s attention. In this era of the ever shrinking attention span therefore, the proverbial fifteen minutes of fame is a lifetime in dog celebrity years. How to explain otherwise the high dollar book deals, and the endorsements that are the badge of even the most tenuous celebutante?
So, how to quantify the objects of our admiration? We may not even be dealing with objects but with abstract values if you will – celebrity, popularity, notoriety to name a few. Might a sampling of celebrity book deal dollar values yield a value index of sorts? Perhaps - if accurate figures were not so fiercely guarded and exaggerated accounts were not so eagerly circulated. Perhaps a listing of celebrity books on the New York Times Bestseller List might provide a surrogate of sorts? One can only hope it was no mean feat for the reflections of a celebutante to make the New York Times Best Seller list at the same time that the memoirs of a former U.S. president did.
Contract law permits a wide exercise of choice here. As one person’s trash may be another’s treasure, it is the buyer’s (or seller’s) choice to make a deal that might seem a bad idea to someone else. Choice is the operative word – if the party was misled, unduly influenced or improperly threatened for example, the deal will of course be voidable.
Twenty years ago, America On Line (AOL) was a profitable media giant. A decade later, a less vibrant AOL consented to become a part of the Time Warner group. Seen as a bad idea at the time by some and now viewed as possibly the worst merger deal in history, there was no suggestion when it all ended badly, that it was anything other than an ill-advised gamble. Now a very publicly ailing member of a reputably dying breed of media and print enterprises, AOL has by this merger bought itself a chance to turn around it’s all but inevitable demise.
Presuming that this can only be a good deal for AOL which had to do something, anything, or die, what about the Huffington Post? Did the HuffPo get ‘good value’ for the trade? The jury is out on whether the deal will be a vindicated or regretted. Contractually speaking, however, a contractual party is entitled to exactly what he or she bargained for – nothing more, nothing less. Full performance of a party’s side of the bargain discharges that party’s duty to perform, while the unexcused non performance of even part of a due duty is a breach per the Restatement of Contracts (2nd) §235.
The bargain, ideally, was shaped by the parties preferences. A party may thus receive as the exchange, if she chooses, a little something now whose value at the time of contracting is greater to her than its face value. She may promise to pay, if she wishes, double, threefold or more of that face value in exchange, sometime in the future. She may choose, conversely, to pay big money for a subject of seemingly slight value in the hope that the potential she sees will soon be realized. If that potential is unrealized, she will wear the risk. Unfair tactics and public policy aside, the law is content to permit her to assign whatever value she chooses to the subject of her desire be it increased popularity, an entry pass into a stronger corporate group, or a chance to play with the big boys.
Should we conclude therefore that value is in the eye of the beholder, and that the measure of a subject’s value is how much people are willing to pay for it? This is a logical deduction, but only one side of the value-is-determined-subjectively v objectively jurisprudential debate. It must be harder in any event, to quantify the value of celebrity musings without reference to sponsored endorsements, celebrity impact rankings and such. It evidently is just as difficult, if not more so, higher up the food chain. Take our example of a very popular upstart website/blog. Analyses of monitored acquisition deals indicate that online media sites are typically acquired for 1½ times the amount of their generated revenues. Launched barely five years ago, the Huffington Post was acquired for 315 million - reportedly five times its generated revenue. It is hard to know whether this figure is a hardnosed assessment of the HuffPo’s worth, or a reflection of the fact that the negotiations were between an ailing giant and an ambitious upstart fledgling.
If all goes well, the ultimate verdict may one day be that the HuffPo was a steal at 315 M. It is possible that Adrianna Huffington may come to rue the bargain that looked oh so good at the time. If AOL’s profitability hemorrhage is not stemmed by this deal, on the other hand, its 315 M payout will be just one more milestone in its march to oblivion. There is no contractual rule against a deal that was, with hindsight, ruefully underpriced or fatally expensive. Contract law will be content where the regretted deal, truly bargained for and not compromised by vitiating factors, was based upon a freely quantified exchange.
The parties considered the bargain. They assessed its value. Once you have done that, “you pays your money and you takes your choice.”
[Eniola O Akindemowo]
6th Annual Contracts Conference Program
I'm hoping there's time between sessions for a dip in the law school swimming pool.
[Meredith R. Miller]
Arianna Huffington: New Media Diva or Feudal Pirate Plantation-Owner?
The blogosphere has erupted with chatter regarding the recent acquisition of the Huffington Post by America Online (Sidebar: was anyone else surprised to learn that AOL still exists?) for a reported $315 million. While estimates of how much Arianna Huffington (shown at left prior to having herself gilded) personally profited from the sale greatly vary, it is safe to say that she made somewhere in the ballpark of $20 million to $30 million. In light of this, commentators have come out of the woodwork to both praise and question the Huffington Post model. From the journalists, the message is basically this: Arianna, you've got hate mail!
The Huffington Post employs paid journalists to create original content and editors to sift through the massive content aggregated from AP, Reuters, and major newspapers and magazines, all to draw in readers to their website. Nothing controversial so far. Beyond that, the Huffington Post also features the work of unpaid bloggers who can post their content on the Huffington Post site to benefit from the increased traffic. Up until now, most were content with this arrangement. However, the idea that a relatively small number of people made millions of dollars, at least in part due to the work of “little-guy” bloggers who won’t see a dime, does have many up in arms.
Some decry the transaction as unjust enrichment of the elite at the expense of citizen journalists. For example, David Carr at the New York Times compares the plight of unpaid bloggers at Huffington Post to serfs under feudalism.
Not to be outdone, Tim Rutten of the Los Angeles Times likened Huffington Post’s business model to “a galley rowed by slaves and commanded by pirates” with “overhead that would shame an antebellum plantation.” But there is more to this line of argument than farfetched historical analogies. While Huffington Post now draws most of its traffic from “big name” content, it only got to this point by the work of unpaid bloggers who contributed their time, efforts, and ideas. Without them, HuffPo may have been DOA.
Others praise and defend the Huffington Post model. TJ Walker at Forbes points out that no promise of payment was ever extended to these bloggers. In other words, they knew what they were getting into. And if they feel they are being exploited, Walker argues that you can always “own your own means of production” by starting your own blog on your own terms. Hillary Rosen of HuffPo notes that Huffington Post gives bloggers a platform to let their ideas be known to a larger audience than they might otherwise get themselves.
Will this joint-venture succeed? Will the “blogger serfs” ever receive compensation for their intellectual labors? Who knows? What no one can deny is that the Huffington Post model has changed the way journalism works, and the AOL/HuffPo deal validates that proposition.
Asked for comment about how this development reflects on their own business model, the managers of the Law Professors Blog Network stated, "We pay our bloggers exactly what they are worth. And if they don't like being galley slaves rowing for watered grog, they can row without the watered grog."
Okay team, pass the grog and row!
[JT and Jon Kohlscheen]
February 16, 2011
What's the Harm in a Missed Super Bowl?
As reported here earlier, there was "a bit of a kerfuffle" at the Super Bowl this year. Now, the National Football League is trying to figure out what it can do to address the harm to the fans who were sold tickets to effectively non-existent seats. Of the 1260 fans effected, about 2/3 were sent to alternative seating in the stadium, The remaining 400 had to view the game on video monitors or from standing-room only spots. As reported here on Slate.com, the 400 have the following options.
First, the NFL offered the 400 $2400/ticket, three times the face value of the tickets, plus a ticket to next year’s Super Bowl which they could keep or resell. In the alternative, the NFL offered the 400 a nontransferable ticket to the future Super Bowl of their choice plus accommodations and airfare but they would not receive the $2400. The third option would be to join a class action lawsuit in the Dallas District Court filed against the NFL, the Dallas Cowboys, and Cowboys owner Jerry Jones. A fourth option is that the 400 could make an epic movie based on the graphic novel that tells the story of how 400 outraged football fans held their position at the narrow passageway through which a throng of enemies tried to invade their homeland. The screenplay is still in the works, but you can get a sense of what it will look like from this prequel:
Those not willing to become action heroes may be inclined to join the class action lawsuit. Attorney Tom Goldstein explains that fans electing this route will likely not get anything more than the NFL is already offering. According to Goldstein, this is due to the fact that in order to succeed the class action would need to demonstrate that the NFL knew that the portable seats were not going to be ready for patrons by game time and therefore failed to inform them of this. Goldstein predicts that the class action would likely settle out of court for something very similar to the offers that the NFL has already made. On the other hand, the attorney representing the class action, Michael Avenatti, says that the compensation offered by the NFL would not cover the full expenses of the patrons and therefore at this time there is not enough information to settle. He claims that based on pricing of the tickets the day of the game, and other expenses of the displaced patrons the average displaced patron lost almost $4,000, meaning that the NFL offer would not fully compensate them. Regarding the second option, Avenatti explains that there has been no information provided to the fans as to where their seats for the future Super Bowl will be located, what the airfare will include, and what other accommodations they will receive.
The class action may enhance the negotiating power of the aggrieved 400, but it also may make it more difficult and more expensive for the NFL to settle the claims. Are lawyers a good thing or a bad thing?
The NFL has also acknowledged that in addition to the 400, and the 860 fans who were assigned "nosebleed" seats when their assigned seats turned out to be unusable, 1,140 fans were delayed entry to stadium because of the problem. The NFL has apparently now offered fans in the latter two categories either face value for their tickets or a ticket to any upcoming Super Bowl.
As Slate's Jeremy Stahl explains, the best option for the fans depends on the nature of their harm and the nature of their animus. One reasonable Chicago Bears fan might be happy to have watched the Bears' 46-10 trouncing of the New England Patriots in Super Bowl XX from the comforts of home, thus saving something like $4000. Another Chicago Bears fan might place the value of being there to see Walter Payton winning his Super Bowl ring at $10,000. And what would have been the value to hypothetical fans of the New England Patriots if they were displaced and thus forced to miss the humiliation they would have experienced had they witnessed the Bears' 46-10 demolition of their Patiots in Super Bowl XX?
[JT and Jared Vasiliauskas]
New in Print
Sébastien Grammond, The Interpretation of Contracts in Civil Law, 52 Supreme Ct. L. Rev. (Canada) 411 (2010).
Kathryn A. Lohmeyer Pounders, Of Cabbages and King: The Time Has Come to Talk about the Ninth Circuit's View of the Effect Refinancing Has on TILA Rescission Rights, 19 S. Cal. Rev. L & Soc'l Justice 189 (2010)
February 15, 2011
Charlie Sheen Has No Morals...Clause (allegedly)
After we discuss ambiguity, contractual interpretation, interpretive maxims and other related topics, I have my first-year Contracts students draft a morals clause for a faux contract between a television network and a performer. The exercise is an attempt to put the issues "in context" and demonstrate how and why ambiguity actually arises. We also discuss the general benefits of brevity versus the costs of leaving something out of the contract. It seems that Warner Brothers may be facing the latter scenario in its contract with actor Charlie Sheen. The clause allegedly left out is a morals clause.
Most contracts between producers and performers routinely contain a "morals clause," the breach of which entitles the show's producer to fire the performer. Conduct swept within a morals clause can range from more serious offenses, such as criminal convictions, to any behavior that merely would make the producer or network look bad. For example, as we've previously reported, Tiger Woods's reported marital infidelities may have triggered the morals clauses in some of his endorsement contracts. Because Sheen's recent off-camera behavior has made him appear to be, ahem, less than 100% moral, some industry insiders have suggested that Sheen would be fired from the highly-successful CBS show, Two and a Half Men, produced by Warner Brothers. Not so fast, says Sheen. Sheen reportedly is telling friends and advisors not to fear because his contract, unlike most others, has no morals clause. Thus, in Sheen's world, he cannot be fired from the show without his firing being a breach of the contract by Warner Brothers.
So, if you are tired of hearing about Charlie Sheen's off-camera exploits on this blog or elsewhere, blame Warner Brothers' lawyers. If they had included a morals clause in his contract, I am confident that Sheen would not be doing these allegedly immoral things (this sentence brought to you by our sponsor, Sarcasm).
AT&T, “Phantom Data”, and Office Space: A Legal Brouhaha
As reported by CNET News here, consumers have recently filed a class-action lawsuit in the Northern District of California against AT&T for breach of contract, unjust enrichment, and unfair business practices stemming from the “systemically overbilling” of its iPhone and iPad customers for data transactions. For most consumers, independently verifying the data used on their smartphones can be anywhere from extremely difficult to downright impossible. That’s why Plaintiff Patrick Hendricks hired an independent consulting firm to conduct a 2-month study of AT&T’s billing practices of data usage.
The findings should give AT&T customers pause. According to the class action complaint filed on January 27, 2011 in Hendricks v. AT&T Mobility, LLC, AT&T regularly overcharges consumers between 7% and 14%, but in some cases by over 300% for data transfers. Beyond inflated charges, the complaint also alleges charges for what it calls “phantom data traffic”, or data charges when there is no actual data usage by the customer. The consulting firm purchased an iPhone, disabled all web-based data functions, and let the phone sit idle for 10 days. During that period, AT&T billed the account for 2,922 KB of usage, or roughly 35 transactions. In response to the class-action lawsuit, AT&T issued a brief statement, saying, “We intend to defend ourselves vigorously. Transparent and accurate billing is a top priority for AT&T.”
The complaint compares AT&T’s billing practices to “a rigged gas pump that charges for a full gallon when it pumps only nine-tenths of a gallon into your car’s tank.” Count II of the complaint alleges that AT&T breached its contract with members of the class consisting of all U.S.-based iPhone or iPad users with a usage-based AT&T plan. AT&T allegedly breached its agreement by rigging its billing system to overstate data usage. Plaintiffs seek restitution and cessation of the practice.
Fans of the movie Office Space can clearly see the similarities between AT&T's plan, as alleged, and the penny tray at your local 7-11:
Peter Gibbons: [Explaining the plan] Alright so when the sub routine compounds the interest is uses all these extra decimal places that just get rounded off. So we simplified the whole thing, we rounded them all down, drop the remainder into an account we opened.
Joanna: [Confused] So you're stealing?
Peter Gibbons: Ah no, you don't understand. It's very complicated. It's uh it's aggregate, so I'm talking about fractions of a penny here. And over time they add up to a lot.
Joanna: Oh okay. So you're gonna be making a lot of money, right?
Peter Gibbons: Yeah.
Joanna: Right. It's not yours?
Peter Gibbons: Well it becomes ours.
Joanna: How is that not stealing?
Peter Gibbons: [pauses] I don't think I'm explaining this very well.
Peter Gibbons: Um... the 7-11. You take a penny from the tray, right?
Joanna: From the cripple children?
Peter Gibbons: No that's the jar. I'm talking about the tray. You know the pennies that are for everybody?
Joanna: Oh for everybody. Okay.
Peter Gibbons: Well those are whole pennies, right? I'm just talking about fractions of a penny here. But we do it from a much bigger tray and we do it a couple a million times.
Hopefully, the legal defense team at AT&T can come up with a more convincing argument than Peter Gibbons.
[JT & Jon Kohlscheen]
Michael Moore Sues for Profits of “Fahrenheit 9/11”
Film Director Michael Moore filed suit last week against brothers Bob and Harvey Weinstein for the 2004 documentary “Fahrenheit 9/11” alleging breach of contract, constructive fraud, and breach of fiduciary duty. According to the Los Angeles Times, Moore is now seeking $2.7 in compensatory damages, legal fees and other costs. The complaint asserts that deceptive accounting practices enabled the Weinsteins to siphon off millions owed to Moore and his company, Westside Productions. The Weinstein brothers allegedly deducted payments that were never made, deducted expenses that were never authorized, and diverted to their own entity at least $2.5 million from the revenue pool, which Moore alleges they were to split 50/50 with Moore.
The documentary, a look at President George W. Bush’s foreign policy, grossed a whopping $222 million worldwide, for which Moore received $19.8 million. The Weinstein brothers and their company, Fellowship Adventure Group, also collaborated with Moore on his 2007 documentary “Sicko,” which attempted to do for the U.S. healthcare industry what Moore's earlier film, "Pets or Meat" did for rabbits. There subsequently seems to have been a falling out, as the Weinsteins were not involved in Moore's most recent film.
The Weinsteins' attorney claims Moore is just playing on the timing of the Oscar’s, a claim that Moore’s attorney denies- pointing out that Moore does not even have a movie out this year. But the Weinsteins are more likely pointing to the timing of the suit as seeking to capitalize on the publicity surrounding the Oscar season and more particularly the Weinstein's film, "The King's Speech," which is a front-runner for best picture. Or perhaps the Weinsteins' attorney is simply under order to mention "The King's Speech" as often as possible in the run-up to the Oscars. The only thing worse than being talked about is not being talked about.
While Moore’s films have been shrouded in controversy before, Moore’s attorney reports that this is his first suit in his 20 year career. Look for a new Moore documentary that takes aim at the legal system.
[JT & Katherine Freeman]
February 14, 2011
Weekly Top Tens from the Social Science Research Network
Restitution Rollout and Washington & Lee
Washington and Lee University School of Law and the American Law Institute are pleased to sponsor a conference, Restitution Rollout: Restatement (Third) of Restitution and Unjust Enrichment, on February 25, 2011 in Lexington, Virginia.
The American Law Institute (ALI), the leading legal-reform organization in the United States, restates basic legal subjects to inform the legal profession what "the law" is in a particular subject. In 2010, the ALI approved the Restatement (Third) Restitution and Unjust Enrichment (2011), the subject of our Restitution Rollout.
Restatement Third restores the full title, Restitution and Unjust Enrichment, that appeared on the Tentative Drafts of the original Restatement but was dropped when the official text was published, thus emphasizing that the subject matter encompasses the independent body of law of unjust enrichment, and not simply the remedy of restitution.
At the conference, ALI Reporter Andrew Kull and ALI Director Lance Liebman will introduce the Restatement Third of Restitution. They will be joined by leading Restitution and Contracts scholars including Joe Perillo, Lionel Smith, Peter Linzer, and Caprice Roberts, among others.
Sponsored by the W&L Frances Lewis Law Center, the American Law Institute, and the W&L Law Review. CLE credit available.
For the full seminar agenda and biographies of the participants, you can click on the conference link above.
Introducing the ContractsProf Blog Interns!
We are pleased to announce that, through the good offices of the Valparaiso University School of Law, the blog now has three student research assistants who will toil mightily to bring the world the latest in contracts law developments.
They are, from left to right, Jon Kohlscheen, Katherine Freeman and Jared Vasiliauskas. All three are first year students at the Valparaiso University School of Law, fresh with enthusiasm for contracts law, having just completed our one-semester, four credit course in the subject.
Our readers can expect to see the products of their work on the blog beginning this week.
Conference Announcement: Contract as Promise at 30
In honor of the 30th anniversary of the publication of Charles Fried's Contract as Promise, the Suffolk University Law School will be hosting a conference on March 25, 2011. Conference details, including a full agenda/schedule, are available here, From their website, here is the introduction:
ABOUT THE PROGRAM
In 1981, Professor Charles Fried published a book on contract theory entitled Contract as Promise. For almost thirty years, the book has been the seminal work on the moral or deontological justification for the state's enforcement of private promises. No scholarly discussion of the field can be complete without addressing its claims, whether one agrees or not with its original and provocative stand. Suffolk University Law School will mark the thirtieth anniversary of the book's publication with a day-long symposium. Distinguished contract theorists will offer papers and commentary, followed by reflections from Professor Fried. Participants presently scheduled include the Honorable Richard Posner, Randy Barnett, Barbara Fried, T.M. Scanlon, Jean Braucher, Richard Craswell, Jody Kraus, Carol Chomsky, Avery Katz, Henry Smith, Lisa Bernstein, Seana Shiffrin, Daniel Markovits, Juliet Kostritsky, John C.P. Goldberg, Rachel Arnow-Richman, Curtis Bridgeman, Nathan Oman, Roy Kreitner, Gregory Klass, and Robert Scott. This is an opportune moment to step back, review the alternative approaches to contract theory that have developed since 1981, and to offer views about future doctrinal or inter-disciplinary developments, whether based in moral philosophy, welfare economics, sociology, or other disciplines. The papers and proceedings will be published in a forthcoming issue of the Suffolk Law Review.