February 25, 2011
Equitable Estoppel in the Federal Circuit
On February 4th, the Federal Circuit Court of Appeals filed its opinion in Mabus v. General Dynamics C4 Systems, Inc. The case involved a dispute that arose after General Dynamics took over from Motorola a losing contract to provide digital modular radios to the U.S. Navy. The contract called for the Navy to order a minimum number of radios annually. After it reached the minimum, the Navy could order additional radios at a discount price. In short, the more radios General Dynamics provided, the more money it lost on the contract. It sought a way out. General Dynamics believed that it found the way out in the original contract's ordering clause, which provided that: "Orders may be issued orally, by facsimile, or by electronic commerce methods only if authorized in the schedule.” The relevant schedule did not allow for electronic orders. On that basis, General Dynamics challenged the propriety of eleven orders that the Navy had issued by e-mail. The Armed Services Board of Contract Appeals (the Board) sided with General Dynamics, finding that the orders were invalid.
The Navy appealed. The divided Federal Circuit found that General Dynamics was equitably estopped from refusing to fill the orders. The reversal hinged on two different tests for estoppel. The Federal Circuit's Majority opinion relied on the following test:
(1) misleading conduct, which may include not only statements and actions but silence and inac-tion, leading another to reasonably infer that rights will not be asserted against it; (2) reliance upon this conduct; and (3) due to this reliance, material prejudice if the delayed assertion of such rights is permitted.
The Board had elied on this one:
“(1) [General Dynamics] knew the facts; (2) it intended that its conduct be acted upon or acted such that the Navy had a right to believe it was so intended; (3) the Navy was ignorant of the true facts; and (4) the Navy relied upon appellant’s conduct to its injury,”
The Board ruled for General Dynamics because it found that the Navy could not satisfy the first and third parts of this test. General Dynamics did not know that e-mail delivery was prohibited and the Navy knew or should have known the content of its own contracts.
General Dynamics conceded that the Board had applied an improper standard but insisted that the error was harmless. Unfortunately for General Dynamics, its previous conduct was crucial, as it had filled prior e-mail orders, thus inducing reliance, and effectively putting all questions of knowledge out of bounds. General Dynamics was thus estopped from refusing to fill the orders, and the doctrine of equitable estoppel trumped General Dynamics' alternative argument that a party must exercise an option in exact accordance with its terms.
Judge Newman filed a vigorous dissent in support of the Board's disposition of the case.
[Katherine Freeman & JT]
February 24, 2011
Florida Appellate Court Invalidates Class Action Waiver in Payday Loan Agreement
Earlier this month, in McKenzie v. Betts, the District Court of Appeal of Florida (4th District) invalidated a class action waiver in a payday loan agreement on public policy grounds. In summary, the court reasoned:
the record below supports the trial court‟s conclusion that consumers would not be able to obtain competent counsel in their actions against [the Defendant] for allegedly usurious rates on its payday loans if the claims could not be brought in a class action. Also, the waiver in this case would ban the borrower from being a member of a class action suit, even one initiated by an “enforcing authority” contemplated by statute. This result would prevent a consumer from vindicating the rights that consumer protection statutes are designed to create and nurture.
The decision had to address and reconcile the result with Fonte v AT&T Wireless, 903 So. 2d 1019 (Fla. 4th DCA 2005), which upheld a class action waiver in a cell phone contract. The court stated:
[The defendant] invites us to read Fonte as creating a categorical rule that class action waivers do not violate public policy. We reject this invitation. Instead, we agree with the trial court that Fonte is distinguishable on its facts. In Fonte, the plaintiffs did not present the trial court with evidence that competent counsel would not represent individual plaintiffs on these small claims. Without such evidence, we could not say in Fonte that the class action waiver there violated public policy.
Here, however, the plaintiffs presented expert testimony from three Florida attorneys. The attorneys testified that Florida customers who wanted to challenge the practice of payday loan businesses would not be able to obtain competent representation absent the class action mechanism. This was because the issues were complex and time-consuming—and there was a substantial risk that a circuit court would award inadequate compensation at the end of a successful case. In our view, this evidence established that individuals could not secure competent representation to pursue small claims actions against [the defendant]. Indeed, one attorney testified that she had never been able to successfully refer a payday loan case to a private attorney.
Convincing distinction? The law is just a mess on this issue. That said, the decision does a nice job of collecting the cases on class action waivers and setting out a typology of class action waiver challenges.
McKenzie v. Betts, Nos. 4D08-493 and 4D08-494 (Fla. 4th DCA 2005 Feb. 2, 2011).
[Meredith R. Miller]
Group Alleges Former President Jimmy Carter Breached Contract by “Deceiving the Public”
As reported by Washington Post Political Bookworm blogger Steven Levingston, five purchasers of Jimmy Carter's book, Palestine: Peace Not Apartheid, filed a $5 million class-action lawsuit in the U.S. District Court for the Southern District of New York against the former President and his publisher, Simon & Schuster. They allege that Carter’s 2006 book “is filled with demonstrable falsehoods, omissions, and knowing misrepresentations intended to promote Carter’s agenda of anti-Israel propaganda.” As a result, they claim, Carter committed breach of contract, unjust enrichment, negligent and intentional misrepresentation, and violation of the New York Consumer Protection act
In the complaint, the plaintiffs claim that Carter promoted his book as an accurate and truthful historical account, citing statements he made on Larry King Live and elsewhere to that effect. The plaintiffs claim that they purchased Carter’s book “in reliance on Defendants’ representations that the events and agreements which are the subject of the book were described accurately, fully, and fairly…” These allegations are at odds with plaintiffs additional allegation that Carter’s “virulently anti-Israel bias” both “comes as no surprise” and is “well known” to the public." Even if they had suspended their disbelief long enough to make their purchase, one would think Carter's title would have tipped off plaintiffs that the book expressed some views critical of Israeli policies.
Plaintiffs attempt to document what they call a “pattern of factual inaccuracies” by going page by page through Carter’s book. For example, Carter writes on page 207 “Palestinian leaders unequivocally accepted this proposal [the Roadmap for Peace], but Israel has officially rejected its key provisions with unacceptable caveats and prerequisites.” However, Plaintiffs contend that although Prime Minister Mahmoud Abbas did “verbally express his support” for the Roadmap for Peace, “there is no evidence that the Palestinian Authority cabinet ever approved the Roadmap or ratified it, as required for an international agreement between two governmental entities.” The Plaintiffs dedicate almost 15 pages of the complaint to detailing similar alleged inaccuracies, with topics ranging from compliance with United Nations resolutions to characterizations of negotiations between the Israeli and Palestinian leaders..
A spokesperson for Simon & Schuster called the lawsuit “frivolous”, “without merit”, and a “chilling attack on free speech.” Plaintiffs, in their complaint, claim that this lawsuit is “not in any way an attempt to challenge Defendant Jimmy Carter’s right to write a book” but instead about Carter “deceiving the public.”
Carter’s book cost $27 when it was first published, but a careful reading of the complaint suggests that some of the plaintiffs listened to an audiobook version rather than buying the hardcover. Those audiobooks can be pricey, but it's still a bit hard to see how plaintiffs got to the $5 million mark.
Plaintiffs' breach of contract claim is quite straightforward. They claim to have bought the book based on the defendants' representations of the book as factual and accurate. As Lionel Hutz put it, "Mr. Simpson, this is the most blatant case of fraudulent advertising since my suit against the film, 'The Never-Ending Story.'”
[Jon Kohlscheen & JT]
February 23, 2011
Circuit Split on Burdens in Contracts Clause Claims
In United Automobile, Aerospace, Agricultural Implement Workers of America International Union v. Fortuño, Puerto Rico's labor unions sued its governor in order to challenge Act No. 7, enacted to address a budget crisis through, among other things, layoffs and salary freezes. Plaintiffs challenged this act as an unreasonable and unnecessary -- and thus unconstitutional -- infringement of the unions' collective bargaining agreements. See U.S. Const. art. I, § 10, cl. 1 ("No State shall. . . pass any . . .Law impairing the Obligation of Contracts").
In order to determine whether the Contracts Clause has been violated, courts employ a two-part test, first determining whether the challenged state action causes a substantial impairment of contractual obligations and, if so, determining whether the impairment is reasonable and necessary to serve some government purpose. The court assumed an affirmative answer to the first issue but nonetheless upheld the District Court's dismissal of the claim on the ground that plaintiffs had not adequately pled that the Act was not reasonable or necessary.
The First Circuit's finding turned in large part on its determination that plaintiffs bear the burden of establishing that the challenged legislation is not reasonable or necessary, despite clear law that courts need not defer to legislative findings on the subject when the government is the beneficiary of the challenged contract modification. The issue appears to be one of first impression for the First Circuit, although the court acknowledged that both it and the Supreme Court had previously used language that might be construed as placing the burden on the state. The Sixth and Ninth Circuits place the burden on the state; the Second Circuit places the burden on plaintiffs.
Having determined that plaintiffs have the burden, the court set out a multi-factor test for determining when state action that impairs contractual relations is reasonable and necessary. The court's application of this multi-factor test is complicated, but the upshot of it seems to be a severely heightened pleading standard, suggesting that one would have to hire economic experts and crunch some numbers in order to meet the burden and survive a motion to dismiss.
NB: In describing Act No. 7, the opinion indulges in a classic misuse of the word "plethora," viz:
Finally, Phase III temporarily suspended, for a period of two years, a plethora of statutory, contractual, and other provisions governing the conditions of employment for the remaining affected public employees.
Please don't make us tell you again. "Plethora" means "an unhealthy excess." It does not mean "a whole bunch."
February 22, 2011
An Update on the No Doubt v. Activision Suit: The End of Guitar Hero?
We previously blogged about No Doubt's lawsuit against Activision. In a nutshell, the band admits that it granted Activision a license to use the names and likenesses of its members in one of the Guitar Hero games ("Band Hero"); however, the band claims that it never agreed that Activision could use avatars of the band members to perform songs by other artists and sing in voices of other artists (an example was Gwen Stefani, the lead singer of No Doubt, singing "Honky Tonk Woman"). (You may recall that Courtney Love was also peeved that the game allowed Kurt Cobain's avatar to sing the songs of other artists).
A California trial court had denied Activision's motion to dismiss the suit; last week, an appeals court affirmed. Here's an update on the lawsuit from the LA Times "Company Town" blog:
A three-judge panel on Tuesday rejected Activision Blizzard Inc.'s motion to throw out a lawsuit filed in 2009 by the rock band No Doubt, dealing a minor blow to the Santa Monica video game giant.
The ruling by the federal district court of appeals paves the way for No Doubt to proceed with its suit, which alleged Activision breached its contract with the group when it allowed players of Activision's video game Band Hero to use band members' avatars to perform songs they did not write.
The band, in its lawsuit, said the game's feature "transformed No Doubt band members into a virtual karaoke circus act."
Activision Blizzard filed a motion to have the lawsuit dismissed, saying it had the right of creative expression. The motion was rejected in April by Los Angeles County Superior Court Judge Kenji Machida. The appellate court Tuesday agreed with Machida, saying No Doubt can pursue its case against Activision.
While the decision is probably a mere prelude to further legal maneuvers by both sides, the Guitar Hero video game series itself, which had once generated more than $1 billion in revenue for Activision, was recently declared dead. Activision last week said it would shut down its Guitar Hero business, lay off 500 workers and cease development of a Guitar Hero title that was slated for release this year.
Here's a copy of the appellate court decision that allows No Doubt's lawsuit to continue.
[Meredith R. Miller]
How To eBay Your Children's Offending Toys (Moms: Do Not Try This At Home).
As the mother of two preteen children this story hit a little too close to home. In short, kids insist on playing with Beyblades in the bathtub, said tub is chipped and soap holder is broken by the rough play, frustrated Mom seizes toys, and presumably, after reducing the kids to tears by threatening to get rid of the toys, takes a snapshot of the tearful kids holding the offending toys in a ziplock bag; frustrated Mom makes good on her threat by actually auctioning toys of traumatized kids on eBay.
Now here's the thing: there was keen bidding for the toys (estimated retail price $69) - the bids skyrocketed to $999,999! So, what's wrong with this picture? I'll tell you what's wrong - like a virtual Hydra, an online community known for rapidly rallying behind the causes of its members became indignant at the 'heartless' Mom. Members waded in, sparing no expense, to bid the auction to ridiculous heights.
The last auction bid was for $999,999. As we know, an auction sets up a contractual sale - in ordinary circumstances notice of the sale is an invitation to make offers, bids are offers, and the bang of the auctioneer's gavel (or in these circumstances, expiry of the fixed time predetermined for auction of the particular item) signifies acceptance of the highest bid. Are you serious??? Surely not $999,999 for a Ziploc bag of silly used toys (plus the guilt of being an accomplice to the trauma of two kids). Is there a law against this? There may be.
The first rule is READ THE CONTRACT. eBay's terms provide:
As an auction-style listing proceeds, we’ll automatically increase your bid on your behalf, up to your maximum bid, to maintain your position as the high bidder or to meet the item’s reserve price. The bid increment is the minimum amount by which your bid will be raised.
So, there may be automatic bidding. Okay. But you may pay less than your bid if you win:
When you win an auction you always actually pay only a small amount more than the next highest bid-even if your bid was thousands of dollars more. If your bid wins, you must buy. Your bid on an auction is a legally binding contract. If when time runs out your bid is the highest, you have purchased the item and must pay the seller for it.
So what happened here? Was the last bid $999,999, or was it in reality say (I'm picking a number out of thin air here) $73.01? Clearly this would be less cause for excitement/incredulity (take your pick). And that brings me to my next point: what was said frustrated Mom supposed to make of the bids? Was she expected to take it all seriously? Was she one of those rare creatures that actually read the fine print, and knew that $999,999 meant squat?
These are not merely rhetorical questions. If she had reason to believe the bids were in jest, would that negate the intention of the vengeful Hydra to enter into a legally binding agreement? Do eBay's terms permit this - can any random group decide to use eBay as a means of punishing (whom in its opinion is) a bad mom by frustrating her lesson-in-financial-responsibility punishment? Maybe not - eBay's terms state further:
Bidding is meant to be fun, but remember that each bid you place enters you into a binding contract. The only bids that are non-binding are those placed in the Real Estate category and for vehicles on eBay Motors. All bids are active until the listing ends. If you win an item, you’re obligated to purchase it.
But was this auction binding? Let's think this through:
if you bid in malice believing that your bid is patently ridiculous and obviously not to be taken seriously = no intention [read: not binding],
but the terms say a bid is binding, period, and you are presumed to read the terms = intention [read: binding],
but the size of the bid may not be what it seems [read: binding. Caveat: for a lesser price unknown to all except eBay during bidding],
but bids may be withdrawn in some circumstances = possibly not binding [read: not binding],
So, what's a mom to do: exasperated, ask eBay to cancel the auction? Can this be done without a reserve price? Can eBay do whatever its adhesion contracts say it can? Apparently, yes, and in this case, that is what happened. eBay cancelled the auction (presumably at the request of the humiliated Mom) and that was that.
Well I say there ought to be a law. Not necessarily against on-again-off-again auctions (if there can be such a thing - you either bid or you don't, you either accept the bid or you don't?), but against the unsympathetic hounding of frustrated mommies. You see, I know all too well how hard it is to balance lessons in obedience, responsibility and (dollars &) 'sence' with warm hugginess, patience and forgiveness. As the mother of two children, I know that sometimes, you need to just let it lie. But there are those moments when you've simply had it - when you've heard 'let 'er rip"a hundred million times, and that irritating rattle and roll in the beyblade arena (yes, one of my kids looooooves beyblades too) is ringing in your ears, for example.
Imagine another scenario: You've had a long day teaching, you are starving because all you had to eat all day was that granola bar snatched between classes. You're finally home juggling cooking dinner, supervising homework and checking voicemail messages. The fact that someone has contributed to the daunting mess in the family room by leaving beyblade paraphernalia scattered all over the place is ticking like a timebomb, at the back of your brain, setting up a 'Mommy moment'. Must you not only patiently endure your hunger, your exhaustion and your frustration, but fight the temptation of eBaying the offending toys too?
I've tried the maligned discipline tactic before, you see. Someone who will remain nameless once shattered my car windscreen during a tantrum. Exactly $173.16 of the $1000+ it cost to replace the windscreen emptied the culprit's piggy bank. Admittedly I didn't take a picture of the culprit, post it on eBay, round up all the beyblades I could find, and attempt to raise the $826.84 balance by auctioning them on eBay. I'm not even sure the lesson had the desired effect because from time to time, I'm reproachfully reminded by a certain someone (who's saving up for the latest computer-game-thingy), that s/he would have $173.16 more by now if I hadn't raided his/her piggybank. But what's a mom to do?
Its a sometimes thankless job, being a Mom, but really, what has this world come to when a random Hydra can rear up to (caution: link contains coarse language) frustrate your non-spanking discipline attempts , and you earn yourself a place in the Mommies Hall Of Shame for even trying the discipline attempt? With a chipped bathtub and broken soap dish on top, to add insult to injury?
So now I have a hilarious intended-in-jest-or-serious-contractual-offer teaching hypo for my contracts students. And, the urge to check that I have not been outed in the Mommy's Hall of Shame as a bad mom everytime I cringe at hearing 'let er rip!"
[Eniola O Akindemowo]
Miami Herald on Strategic Default in South Florida
Fortuitously, while I was in St. Petersburg blabbing about presenting on strategic default and the tension between morality and efficiency, the Miami Herald ran a long article "The Curse of Negative Home Equity." The article focuses on South Florida's housing "tailspin" and the temptation of strategic default. Here's a taste:
As more than $113 billion worth of home equity has vanished from South Florida’s housing market in the past five years, the number of homeowners with mortgages that are larger than the values of their properties has become enormous. More than 300,000 South Florida mortgages—or 43 percent of them—are currently underwater, the highest level in decades, if not ever. That’s about four times the number of homes in foreclosure.
The underwater problem has been a thorn in the side of a housing market plagued with tight credit, record-high foreclosures and high unemployment. It has contributed to a deluge of loan modification requests, pushed up the foreclosure rate and helped revive a once-taboo exit strategy—the strategic default.
You can read the rest of the article here.
[Meredith R. Miller]
International Conference on Globalization and Development in Dar es Salaam
The University of Dar es Salaam Business School in Tanzania has issued a call for papers for:
International Conference on Globalization and Development:
Developing Countries’ Perspectives
The conference will provide a forum for academicians and practitioners from all corners of the globe to critically address these issues with the aim of coming up with suggestions that will lead to solutions that can help to improve the lot of developing countries.The main theme of the conference is: Promoting Trade Competitiveness in Developing Countries.
Papers to be submitted can therefore focus on any of the following sub-themes:
- Domestic Market Integration
- Market access Conditions in Emerging Markets
- Export promotion in Developing Countries
- Export Supply and Competitiveness
- Natural Resources and Competitive Advantage
- Trade in Services and its Implications in Developing Countries
- Industrial and Trade Policies Complementarities in Developing Countries
- Foreign Direct Investments in Africa
- Chinese Investments in Africa
- Regional Economic Integrations
- SMEs Development and Foreign Trade Performance
- Aid for Trade and Development
- Agricultural Trade and Poverty Alleviation
- Other contemporary Issues on International Trade and Agreements
- Abstract Submission Deadline: May 15th, 2011
- Full Paper Submission Deadline: July 30th, 2011
- Deadline for registration: August 30th, 2011
- Conference dates: 22nd – 23rd September, 2011
University of Dar-es-Salaam Business School
P.O. Box 35046
Fax: +255 22 241 0510
More information is available here.
Weekly Top Tens from the Social Science Research Network
February 21, 2011
Teaching Contracts via Seinfeld...Again
I find that some students tend to struggle with the concept of implied terms, especially when it comes to the non-occurrence of an implied condition serving as an excuse for non-performance. When that happens, I offer some additional explanation and then point them to this clip from Seinfeld. In the contract between George Costanza and Newman, George C. promises to pay Newman in exchange for Newman's promise to deliver a calzone to George C.'s employer, George Steinbrenner, whose office is located along Newman's mail route. When George C. discovers Newman at home instead of out delivering mail and Italian delicacies, he accuses him of breach. Newman, however, has an excuse. And it's a particularly funny one given his profession. More importantly than the humor, however, is that this presentation of an implied condition leads to many of those "Oh, *now* I get it" moments that make teaching so worthwhile. Enjoy!