June 29, 2012
Heidi Anderson, Neal Katyal and the Contracts Angle in the Obamacare Decision
Yesterday, our co-blogger, Heidi Anderson (pictured left), was ahead of the curve, writing about the Court's decision on the Medicaid provision of the Affordable Care Act (Obamacare) when everyone else was writing about the individual mandante. Heidi noted that Chief Justice Roberts, joined by Justices Breyer and Kagan, voted to strike the provision of Obamacare that would deprive states of all Medicaid funding if they rejected Obamacare's Medicaid expansion. The four dissenters rejected Medicaid expansion in its entirety. In so doing, both sides relied on contracts law concepts, which they understood in terms of undue influence but which Heidi described as more akin to an argument based in economic duress. Given Chief Justice Roberts' characterization of the financial inducement in the Medicaid Provision as "a gun to the head" (Slip Op. at 51), we do seem to be in the realm of duress.
Today's New York Times contains an op-ed by Neal Katyal (pictured right), that continues Heidi's line of reasoning and illustrates the uncomfortable fit of contracts concepts in the constitutional context. As Katyal puts it:
The health care decision also contains the seeds for a potential restructuring of federal-state relations. For example, until now, it had been understood that when the federal government gave money to a state in exchange for the state’s doing something, the federal government was free to do so as long as a reasonable relationship existed between the federal funds and the act the federal government wanted the state to perform.
In potentially ominous language, the decision says, for the first time, that such a threat is coercive and that the states cannot be penalized for not expanding their Medicaid coverage after receiving funds. And it does so in the context of Medicaid, which Congress created and can alter, amend or abolish at any time. The states knew the terms of the deal when they joined — and those terms continue to be enshrined in the federal code.
Katyal proceeds to identify other landmark federal legislation that could also be found unconstitutional based on the reasoning applied to the Medicaid expansion.
In any case, Katyal makes clear that traditional contracts law concepts do not apply here. If they did, it would constitute duress or undue influence every time Google or other such internet service providers included provisions in their Terms of Service that permit them to "add or remove functionalities or features," "suspend or stop a Service altogether" or "stop providing Services to you, or add or create new limits to our Services at any time."
Chief Justice Roberts' opinion is premised on the notion that the Federal Government knows that the states have grown dependent on Medicaid funding and that the threat to eliminate all such funding if the states do not accept Medicaid expansion is thus coercive. As a matter of constitutional law, that may be right, but since one could not positively enjoin Google from changing its services based on the (highly plausible) argument that one had come to depend on those services, contracts law is not particularly helpful here.
Markets on the Mekong
I have returned from an enriching 5 weeks in Southeast Asia, mostly in frenetic Ho Chi Minh City, where I taught a class titled "Workplace Law in Global Context." I blogged about my travels at Saigoner, which would be of interest only to those readers with curiosity about what I ate (e.g., spider).
I'll be back in the contracts blogging saddle next week. In the meantime, I wanted to share some thoughts and pictures that might be of interest to ContractsProf readers.
We stayed in a government owned hotel in Ho Chi Minh City. I was amazed by its efficiency - in the U.S., a hotel run by the government would operate like the post office.
I've shared a few pictures of a floating market in Can Tho on the Mekong Delta. The floating markets are the main tourist attraction in Can Tho and they start up early in the morning. A guide took us to see the boats; from the boats, people were all selling fruit wholesale. To the masts of their boats, the sellers tie the fruit they have for sale. Pineapples, watermellons and bananas were the main offering that day. There was a little boat that went around like a convenience store for the sellers, in it a lady offered the sellers coffee and hot bowls of pho.
Along the banks of the Mekong, people live in clapboard houses made of whatever they can find – mostly pieces of shipping containers and plastic tarps. The houses are on log stilts. One of the houses was partly constructed with a plastic advertisement for Kaplan University.
processing factory were wooden and dusty and it seemed improbable that they still functioned the way they did. We were told that Vietnam is second to Thailand as the world's largest rice producer.
The Vietnamese have a refreshing lack of anxiety about heavy machinery. In the U.S., we would not have been able to get that close to those rickety rice machines, and certainly not without a helmet and a waiver form. Same goes for firing automatic weapons (I fired an AK-47 and an M-16 at the Cu Chi tunnels) and renting or hitching a ride on a moto-bike.
Another eye-opening field trip was a garment factory
tour I arranged for my class. After a presentation on the company, we were toured around the factory. It had over 1000 workers in the Ho Chi Minh outpost. You really cannot picture a room of 600 people making jackets for Columbia and Izod in assembly lines until you see it. After the tour, we asked a million questions through an interpreter. Most of the factory's buyers are U.S. and European companies. I found it interesting that (at least thelast time I checked), Vietnam is not a signatory to the CISG. This is especially so given that their garment exports apparrently rose 14% in the first 4 months of 2012 (and their claim as the world's second largest rice producer).
Finally, I thought readers would appreciate this picture from outside the Ho Chi Minh Stock Exchange (oh, the irony). Their statue (as compared to this) is arguably a more honest depiction of markets.
June 28, 2012
How the Supreme Court's Decision on the Affordable Care Act Was All About Contracts After All
Other blogs will tell you that the Supreme Court's healthcare decision was all about the commerce clause, Congress's taxing authority, and John Roberts's identity. But we here at ContractsProf Blog look past all of that and dig deeper. We dig all the way to page 46. Yes, I'm talking about the Medicaid expansion, the part of the Affordable Care Act ("ACA") that says, "it's my turn now, people!" when everyone already has walked away. Buried there is a discussion of an oft-covered Contract law defense to formation known as undue influence.
In case you never heard of are not as familiar with the Medicaid expansion as you are with the individual mandate (or, as I like to call it, the "anti-freeloader provision"), allow me to refresh your memory. (Or, allow me to point you to a great podcast.) Before the ACA, one qualified for Medicaid in most states only if she was a "needy individual" (Roberts's words, not mine), such as a pregnant woman, a child, a member of a needy family, or a blind, elderly, or disabled person. In the ACA, Congress required states to expand Medicaid to cover many allegedly "less needy" people, i.e., childless, non-disabled adults with incomes below a certain level. Actually, Congress didn't require such an expansion. It just said (and I'm paraphrasing), "You, state, can choose not to expand coverage to these other people. But, if you don't cover them, we're taking away ALL of your Medicaid funding, even if that federal money is ten percent of your state's entire revenue stream." In his opinion (which may or may not be the "majority" on this issue, depending on whom you ask), Chief Justice Roberts analyzed whether this directive from the federal government was a proper exercise of its Spending Clause powers. And that's where Contract law takes center stage (or, at least center-left).
The excerpt begins as follows (citations omitted):
"At the same time, our cases have recognized limits on Congress's power under the Spending Clause to secure state compliance with federal objectives. 'We have repeatedly characterized...Spending Clause legislation as "much in the nature of a contract."' The legitimacy of Congress's exercise of the spending power 'thus rests on whether the State voluntarily and knowingly accepts the terms of the "contract."'
And how would one allege that the State did not voluntarily accept the terms of the contract? Undue influence, that's how! The next portion of the opinion continues:
"[This insight regarding contracts] has led us to scrutinize Spending Clause legislation to ensure that Congress is not using financial inducements to exert a 'power akin to undue influence.' Congress may use its spending power to create incentives for States to act in accordance with federal policies. But when 'pressure turns into compulsion,' the legislation runs contrary to our system of federalism.'"
Roberts ultimately agrees with the states that the federal government's "take it or leave it" offer rose to the level of coercion. I have not read the rest of the opinion or the other opinions to determine how many votes there were for this holding. It looks like only Breyer and Kagan agreed with Roberts on this point.* However, even if I can't give you certainty, I hope I've at least given you enough ammunition to use in your debates with Con Law professors who think today's decision is all about them.
[Heidi R. Anderson]
* Update: There were 7 votes to toss the Medicaid expansion--Roberts, Breyer and Kagan via the Roberts opinion and Scalia, Thomas, Kennedy and Alito via Scalia's dissent. Scalia's dissent discusses the Spending Clause issue using the same coercion-based Contracts rationale that Roberts used. The dissent's Contract-based discussion begins in earnest on page 33. The most direct excerpt states:
"When federal legislation gives the States a real choice whether to accept or decline a federal aid package, the federal-state relationship is in the nature of a contractual relationship. And just as a contract is voidable if coerced, 'the legitimacy of Congress' power to legislate under the spending power...rests on whether the state voluntarily and knowingly accepts the terms of the "contract."' If a federal spending program coerces participation the States have not 'exercised their choice'--let alone made an 'informed choice.'"
Based on this excerpt and the points that follow, it appears that the anti-expansion argument is better characterized as economic duress than as undue influence.
June 27, 2012
New in Print
Amy B. Monahan, Statutes as contracts? The "California Rule" and Its Impact on Public Pension Reform, 97 Iowa L. Rev. 1029 (2012)
Daniel P. O'Gorman, Contract Theory and Some Realism about Employee Covenant Not to Compete Cases. 65 SMU L. Rev. 145 (2012)
June 26, 2012
United States Found in Breach of Contracts with Indian Tribes; Ordered to Pay in Full
Pursuant to the Indian Self-Determination and Education Assistance Act (ISDA), the Secretary of the Interior enters into contracts with Indian tribes. The tribes the provide services that would otherwise be provided by the Federal Government. ISDA requires that the Secretary (pictured) pay "contract support costs" incurred by tribes in connection with the contracts, subject to the availability of appropriations. However, between 1994 and 2001, Congress appropriated funds sufficient to cover only between 77% and 92% of the aggregate contract support costs. It instead paid portions of the contracts on a pro rata basis. The tribes sued for breach of contract prusuant to the Contract Disputes Act.
The issue decided June 18th by the U.S. Supreme Court in Salazar v. Ramah Navajo Chapter was whether the U.S. government must pay those contracts in full when Congress fails to appropriate sufficient funds. The District Court had granted summary judgment to the Government, but the 10th Circuit Court of Appeals reversed, because Congress had made sufficient funds "legally available." Judge Sotomayor, writing for the 5-3 majority, uphled the 10th Circuit.
Just seven years ago, in Cherokee Nation of Oklahoma v. Leivitt, 543 U.S. 631, the Court faced a similar situation and ruled that the Government was not excused from its contractual obligations where Congress has appropriated sufficient funds to pay the tribes but the Indian Health Service, but the agency had decided to allocate the money elsewhere. Here, Congress appropriated sufficient money to Bureau of Indian Affairs (BIA) but that agency had not allocated sufficient funds to pay the contracts at issue here. The Majority also relied on Ferris v. United States, which provides that the Government is responsible to a contractor for the full amount due under a contract even if the agency exhausts is appropriation in the service of other permissible ends.
Chief Justice Roberts, joined by Justices Ginsburg, Breyer and Alito, dissented, noting that the Government's obligation to pay was made expressly contingent on the availability of appropriations and that payments under the contracts were not to exceed a set amount, which will be exceeded as a result of the Majority's ruling, nor can the Secretary be required to reduce funding for aother programs in order to make funds available under the contracts. For the dissenting Justices, ISDA creates a triply whammy that the Majority ignores. It provides that the Government's obligations are (1) subject to the availability of appropriations; (2) not to exceed a set amount; and (3) limited because the Secretary is relieved from any oblgiation to make funds available to one contractor by reducing payments to others.
The Majority responds by noting that this confuses appropriations by Congress, which were adequate to cover all the conracts at issue, and the allocation of those funds by the BIA.
Weekly Top Tens from the Social Science Research Network
June 25, 2012
Call for Submissions for the 2013 AALS Annual Meeting
CALL FOR SUBMISSIONS
AALS Section on Contracts, 2013 Annual Meeting Program
The Executive Committee of the AALS Contracts Section solicits proposals for presentations at the Section’s Annual Meeting program, The Law of Contracts or Laws of Contracts?, to be held in New Orleans, Louisiana on Saturday, January 5, 2013.
In The Path of the Law, Oliver Wendell Holmes wrote,
"There is a story of a Vermont justice of the peace before whom a suit was brought by one farmer against another for breaking a churn. The justice took time to consider, and then said that he had looked through the statutes and could find nothing about churns, and gave judgment for the defendant."
This story was meant to ridicule the Vermont justice, but he may have been ahead of his time. This year’s Section Meeting will revisit perennial and fundamental questions about “contract law” as a legal rubric. Is it preferable to analyze “contracts” as a category, or to disperse contracts into “churn–like” categories, such as sales, consumer protection, employment, family relations, intellectual property, securities, and so on? To what extent does the experience of one type of contract justify generalizations about “contract law”? Conversely, what kinds of contracts implicate context-specific practices, markets, or policy concerns justifying specialized analysis and/or doctrine?
The Section seeks three to five presentations that address these and related questions. We welcome papers that address these questions broadly as well as those that more narrowly discuss the doctrinal, transactional, or policy characteristics of a specific contractual context.
Full-time faculty members of AALS member law schools are eligible to submit proposals. Please e-mail an abstract or proposal (500 words or fewer) to section chair Thomas Joo (email@example.com) by 5:00 p.m. (Pacific Time) September 7, 2012. Drafts and completed papers are welcome (though not required), but must be accompanied by an abstract. Please indicate whether the paper has been published or accepted for publication (and if so, provide the anticipated or actual date of publication). There is no publication requirement, but preference will be given to papers that will not have been published by the date of the Annual Meeting.
We particularly encourage submissions from contracts scholars who have been active in the field for ten years or less, especially those who are pre-tenured, as well as more senior scholars whose work may not be widely known to members of the Contracts Section. We will give some preference to those who have not recently participated in the Section’s annual meeting program.
Thank you for your consideration. Please contact Thomas Joo or any other Executive Committee Member if you have any questions.
AALS Section on Contracts Executive Committee
Thomas Joo (Chair)
Larry Garvin (Chair-Elect)
Nancy Kim (Secretary)
Jury Awards $6.08 Million to Developers in Suit Against San Jose
As reported here by the San Jose Mercury News, a Santa Clara County jury has awarded Silicon Valley developer Carl Berg $6.08 million in a breach of contract dispute against the City of San Jose for its failure to enact a timely planning process that would allow up to 5,200 homes to be built in the Evergreen area.
Berg’s suit alleged that city officials let him and other Evergreen property owners to believe for four years that rezoning of their industrial property to residential property would be approved. As a result, the owners agreed to pay the city $8.8 million to conduct a community planning process as part of their development applications. However, in 2006, when Chuck Reed ran for mayor, Reed argued that the council should not approve the rezoning. Reed wanted to preserve the land for potential industrial uses that would generate jobs and taxes for the city. Ultimately, Reed won this argument, and in 2007 San Jose rejected the Evergreen zoning. As reported by mercurynews.com, Berg commented that “there are inherent risks in getting development agreements processed by municipal agencies.” According to Berg “the City of San Jose took the unique approach of creating a contract with us, asking for money up front, in exchange for expediting our applications.” However, according to Berg, the City never even created a process for review of Berg's application, and on that basis the jury found that the City breached its agreement with Berg and thus should refund money paid by him and the other Evergreen property owners
Mayor Reed likened the verdict to buying a car, driving it for a while, then asking to return it for a full refund. Here, the City says it is being asked to return money for many services it already rendered through the Planning Department and consultants. The City plans an appeal.
[JT and Christina Phillips]