ContractsProf Blog

Space Suit

Spacenews.com reports that satellite fleet operator MEASAT Satellite Systems of Malaysia (MEASAT) is suing fleet operator Intelsat Corporation (Intelsat) for at least $29 million in a U.S. District Court, alleging breach of contract and collusion in Intelsat’s handling of the launch of a Measat satellite in 2009. 

The lawsuit, filed on April 27, 2012, in the United States District Court, Central District of California, is really two lawsuits in one.  MEASAT is after Intelsat for breach of contract in connection with two different planned launches of the same MEASAT sattelite. MEASAT contends that the parties entered in to an agreement on March 9, 2006, in which MEASAT agreed to pay over $40 million, and Intelsat agreed to launch MEASAT's satellite between November 1, 2007 and Janury 29, 2008.  For reasons that are unclear from the complaint, the parties agreed to delay the launch until August 2008.

The scheduled launch on August 21, 2008, was allegedly delayed due to Intelsat's repeated mishandling of the satellite -- first by hitting it with a crane and then by dropping it while it was being loaded onto a cargo plane.  In order to secure a second launch date, MEASAT alleges that it had to pay additional fees and also agree to waive any claims associated with the aforementioned breaches and/or negligence on Intelsat's part.  MEASAT alleges that the delays caused by Intelsat's mishandling of its satellite it "was fast losing millions of dollars and valuable good will" and was "teetering on financial disaster." 

The parties agreed to a June 2009 launch date, but Intelsat contniued to seek additional compensation, now reducing its demand to $7.5 million.  Intelsat also allegedly demanded that MEASAT sign a release, abandoning all claims associated with the earlier launch date and also threatened to use the launch to send up one of its own satellites instead of MEASAT's satellite, if its demands were not met.  At that point, it would have cost MEASAT between $80 and $90 million to negotiate an alternative launch.  As MEASAT would not have survived had it chosen to do so, it capitulated to Intelsat's demands.  The MEASAT Satellite was launched on June 21, 2009, over ten months from the previously scheduled launch date and eighteen to twenty months from the first promised launch period.          

MEASAT now alleges that Intelsat conspired with other entities to "facilitate the coercive and wrongful conduct" alleged in the complaint.  MEASAT is claiming that Intelsat breached its contract w/ MEASAT by demanding payments for launch in addition to the agreed-upon $40 million fee and through failures to exercise care that resulted in dealys in the launch. 

In addition, MEASAT has alleged claims for economic duress, unjust enrichment, breach of the convent of good faith and fair dealing, and a violation of California Business and Professions Code §17200.  MEASAT seeks damages in the amount of $29,000,000 as well as punitive damages and attorneys fees.

[Christina Phillips and JT]

 

 

New in Print

Mark A. Lemley, Contracting around Liability Rules. 100 Cal. L. Rev. 463 (2012).

Barak Richman and Dennis Schmeltzer. When Money Grew on Rrees: Lucy v. Zehmer and Contracting in a Boom Market. 61 Duke L.J. 1511(2012)

Dean B. Thomson, and James R. Thomson, The Business Risk Doctrine in Minnesota: the Emperor Has No Clothes. 35 Hamline L. Rev. 43 (2012)

[JT]

Arbitration Award Upheld in Atlanta District Court

As reported in prnewswire.com, an arbitrator awarded Fox Insurance Company (“Fox”) over $3.3 million, in an arbitration Fox and ProCare, its former pharmacy benefit manager.   On May 21, 2012, the U.S. District Court for the Northern District of Georgia, Atlanta Division, issued its decision confirming the arbitration award.

ProCare is a pharmacy benefit manager (“PBM”) that provides such services to over 290 insurance companies, including Fox.  Pursuant to a client services agreement (“the Agreement”), ProCare acts as Fox’s attorney-in-fact by making payments to pharmacies.  The Agreement provides:   Fox “shall have the right to request that ProCare conduct an audit of a specific participating Pharmacy Provider if it believes such pharmacy is not accurately administering Client’s benefit plans or the terms of this Agreement”.  “Any identified overpayments to a participating Pharmacy Provider relating to Fox’s Covered Persons, shall be returned to Fox by ProCare minus any administrative fees associated with this service”.  Such a refund “may be accomplished ... through application of a credit against future claim invoices” Also included in the Agreement was a provision stipulating that any controversy related to the Agreement or breach thereof was to be settled by binding arbitration governed by the commercial rules of the American Arbitration Association.

In May 2010 ProCare initiated an arbitration proceeding seeking to recover money allegedly owed by Fox.  Fox filed an answer and counterclaim, and requested an audit, as premitted under the Agreement.  The audit authorized by the arbitration panel identified $1,949,063.68 associated with approximately 165 pharmacies that was subject to reclaim based on waste or abuse, and awarded Fox $1,658,739.17 in additional damages.  The panel ordered ProCare to collect the $1,949,063.68 identified in the audit and return that sum to Fox. 

While ProCare did not contest the damage award, it filed a motion to vacate the arbitration award, contending the $1.9 million sum constituted an award against the non-party pharmacies and that the arbitration panel thereby overstepping its authority.  The District Court rejected this challenge.  To the extent that the non-party pharmacies believe they are entitled to any portion of the $1.9 million, they may seek those funds from Fox, ProCare, or both.  The Agreement allowed for the collection of overpayments through application of a credit against future invoices, and this is exactly what the arbitration panel ordered.  Although ProCare’s obligations under the Agreement may conflict with its obligations under contracts with certain pharmacies, that conflict does not mean that the arbitration panel exceeded its authority.  Indeed, the Agreement states that ProCare must return overpayments without mention of ProCare’s contracts with participating pharmacies. 

The District Court also rejected ProCare's argument that the arbitration panel improperly ordered a setoff against funds that ProCare held in trust, in violation of Georgia law.The District Court noted taht Fox’s claim to funds held by ProCare arises from the Agreement, not from a Georgia statute.  In any case, even if the arbitrator incorrectly interpreted Georgia law with respect to setoff, a “panel’s incorrect legal conclusion is not grounds for vacating or modifying the award.” 

Thus, ProCare’s Motion to Vacate the Arbitration Award was denied.

[Chistina Phillips & JT]

 

Weekly Top Tens from the Social Science Research Network

In an uprecedented development our second Top Ten list is only a Top Eight.  Apparently, there is a shortage of fresh contracts scholarship showing up on SSRN this summer.  Those of you out there eager to break into the big time with a top-ten hit, this is the time to post.

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal 
April 5, 2012 to June 4, 2012

Rank	Downloads	Paper Title
1	561	The Perils of Social Reading  Neil M. Richards,  Washington University in Saint Louis - School of Law
2	162	The Common European Sales Law (CESL) Beyond Party Choice  Jan M. Smits,  Maastricht University Faculty of Law - Maastricht European Private Law Institute (M-EPLI)
3	143	A Minor Problem with Arbitration: A Proposal for Arbitration Agreements Contained in Employment Contracts of Minors  Matthew Miller-Novak, Richard A. Bales,  Unaffiliated Authors - affiliation not provided to SSRN, Northern Kentucky University - Salmon P. Chase College of Law
4	130	Transaction Simplicity  Stephen J. Lubben,  Seton Hall University - School of Law
5	128	The Private Equity Contract  Steven M. Davidoff,  Ohio State University (OSU) - Michael E. Moritz College of Law
6	101	The Draft Common Frame of Reference (DCFR) - The Most Interesting Development in Contract Law Since the Code Civil and the BGB  Frank Emmert,  Indiana University Robert H. McKinney School of Law
7	101	'Offer to Sell' as a Policy Tool  Lucas Osborn,  Campbell University Law School
8	80	Conceptualizing Contractual Interpretation  Alan Schwartz, Joel Watson,  Yale Law School, University of California, San Diego (UCSD) - Department of Economics
9	74	Legal Epistemology in the Restatement (3d) of Restitution and Unjust Enrichment  Lionel Smith,  McGill University - Faculty of Law - Quebec Research Centre of Private and Comparative Law
10	67	A Framework for Analyzing Financial Market Transformation  Steven L. Schwarcz,  Duke University - School of Law

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  
April 5, 2012 to June 4, 2012

Rank	Downloads	Paper Title
1	561	The Perils of Social Reading  Neil M. Richards,  Washington University in Saint Louis - School of Law
2	150	Modern Chinese Real Estate Law: Property Development in an Evolving Legal System (Chapter 1)  Gregory M. Stein,  University of Tennessee College of Law
3	78	A Tea Party at the Hague?  Stephen B. Burbank,  University of Pennsylvania Law School
4	65	Europe-Building Through Private Law: Lessons from Constitutional Theory  Chantal Mak,  University of Amsterdam - Centre for the Study of European Contract Law (CSECL)
5	65	Remedial Consilience  Marco Jimenez,  Stetson University College of Law
6	64	An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements  Michael L. Rustad, Richard Buckingham, Diane D'Angelo, Katherine Durlacher,  Suffolk University Law School, Suffolk University - Law School, Suffolk University - Law School, Suffolk University - Law School
7	62	Instructing Juries on Noneconomic Contract Damages  David A. Hoffman, Alexander Radus,  Temple University - James E. Beasley School of Law, Temple University James E. Beasley School of Law
8	36	Against Liability for Private Risk-Exposure  Sheila B. Scheuerman,  Charleston School of Law

[JT]

Today's topics: those pesky fees

This article in the Huffington Post provides  some tips on how to get out of a contract without paying fees. Tip #1? Read the fine print. Speaking of fees, it looks like it'll take less digging to uncover the fees that are chipping away at your hard earned savings in your 401K plan.

 

[Nancy Kim]

Seventh Circuit Affirms Dismissal of Labor Union's Contracts Clause Claims

Council 31 of the American Federation of State, County and Municipal Employees, AFL-CIO (the Union) represents 40,000 employees in the state of Illinois.  It agreed to certain cost-saving measures, including deferred wage increases, in order to help Illinois address significant budget pressures.  When Illinois did not emerge from its financial woes, it instituted a wage freeze, repudiating the earlier deal.

The Union brought suit, citing inter alia the Contracts Clause, and seeking an injunction forcing the state to pay the wage increases as they came due. Illinois brought a motion to dismiss, which the District Court granted.  In Council 31 v. Quinn, the Seventh Circuit affirmed.  

The case is procedurally complex, especially since the parties proceeded with arbitration, in which the Union prevailed in part, and that ruling is subject to an on-going appeal in the state courts.  Meanwhile, the 7th Circuit addressed only constitutional claims brought pursuant to the Contracts Cluase and the Equal Protection Clause against Illinois Governor Quinn and from the State's Department of Central Management Services Director Malcolm Weems, both in their offiical capacities.

Although the Union characterized its claims as seeking only injunctive and declaratory relief, the true aim was to get the state to make expenditures from its treasury.  As such, not withstanding Ex parte Young, the Eleventh Amendment barred the Union's Contracts Clause claims against the defendants.  

Even if there were no Eleventh Amendment bar to the suit, the Court also found that the Union could not state a claim under the Contracts Clause because it alleged only an ordinary breach of contract, which is insufficient to constitute an "impairment" of contractual relations for the purposes of the Contracts Clause.  The reasons why this is so have to do with the state's defenses to the Union's claims in the arbitration proceedings and the state court appeals thereof.  The basic argument is that appropriate legislative appropriations were a condition precedent to its duties to pay the wage increases.  If that argument succeeds, there was no contractual impairment.  If it fails, there is no need for a federal court injunction because the Union will have prevailed.

The Court dismissed the Union's Equal Protection claim because the challenged state rules withstand rational basis scrutiny.

[JT]