July 27, 2012
Rocket Science: Boeing Sues Pentagon
Your tax dollars at work. Here's the story from the Wall Street Journal:
Six years after the Pentagon fostered consolidation of its largest rocket makers, Boeing Co. now claims Air Force officials reneged on promises to reimburse the company for hundreds of millions of dollars in development expenses.
Accusing Defense Department officials of violating basic principles of "good faith, fair dealing and cooperation," Boeing is pursuing a federal lawsuit seeking reimbursement of more than $380 million the company spent on rocket development years before it formed a joint venture with Lockheed Martin Corp.
The Pentagon encouraged its two largest rocket contractors, each struggling to recoup major investments in next generation boosters, to create a joint venture, promising to reimburse certain Boeing expenditures that predated the venture. Then, the lawsuit alleges, amid eroding commercial orders and rising launch costs, the Pentagon retroactively decided those commitments weren't binding.
The scuffle highlights the challenges of trying to control escalating costs of launching U.S. defense and spy satellites amid anticipated leaner budgets. Some military satellite launches cost around $200 million, substantially more than the joint venture initially was projected to charge.
The suit, filed last month in the U.S. Court of Federal Claims in Washington, D.C., alleges that Pentagon brass and high-ranking Air Force program managers reneged on assurances that Boeing would be able to recoup investments made prior to 2006 on the Delta IV rocket, the U.S. military's most powerful launcher. Military contractors rarely suggest Pentagon officials tricked them.
The courtroom fight comes after years of quiet disputes and sometimes public clashes over the issue, including a 2008 Senate committee hearing that raised questions about Boeing's earlier financial practices.
By squaring off against its biggest military customer, Chicago-based Boeing is spotlighting arcane legal issues that entail significant financial and public-perception risks for both sides. The suit comes amid heightened Pentagon worries that current satellite and rocket budgets won't fit into slimmed-down Pentagon spending plans.
According to Boeing, Pentagon officials have contended those earlier agreements aren't legally binding. Boeing has said that if its arguments fail, it could result in a loss attributed to the venture and a payment of "up to $317 million" to the joint venture.
Spokesmen for the Air Force and the Justice Department declined comment on the litigation. A Boeing spokesman said "we negotiated in good faith," adding that the original reimbursement terms "are valid and we hope this gets resolved." But he declined to elaborate on specific points raised in the suit.
* * *
The suit alleges that Boeing initially agreed to modify its Air Force contracts and then opted to create the joint venture, which was championed by the Pentagon, based on commitments that it would be able to gradually recover expenditures it made between 1998 and 2006.
The joint venture is in the running to launch manned capsules for the National Aeronautics and Space Administration later in this decade.
The consolidation was considered essential because it allowed both financially struggling rocket systems to stay in production in order to provide the Pentagon assured access to space. The companies haven't disclosed their total losses on the two programs.
Boeing and Lockheed Martin together spent several billion dollars to develop the rockets starting in the mid-1990s, with the Pentagon contributing about $500 million in seed money to each program. But as costs soared and the outlook for commercial launches eroded by 2006, it became clear that they couldn't recoup all of those investments. A 50-50 joint venture was created to reduce overhead while keeping both rockets in production.
Boeing's earlier expenditures became a major topic of negotiation as early as 2005. In the suit, Boeing stresses that it "clearly and repeatedly conditioned its willingness" to follow the Pentagon's lead based on the government's pledges to reimburse the company's investments in hardware, personnel, program management and certain fixed costs.
In the court filing, Boeing said its "ability to recover its inventoried costs was a precondition" to continued participation in the rocket program.
But Boeing argues that after starting the reimbursement process, the Defense Department in 2008 reversed course and turned down all subsequent reimbursement requests.
The lawsuit, which also lists the joint venture as a plaintiff, suggests the change of heart was prompted by a Pentagon inspector general's review. An Air Force contracting officer ordered payments suspended in the fall of 2008, the day after the inspector general formally recommended such action.
If I am able to obtain a copy of the complaint, I will post it. I am interested to see the "arcane legal issues" that Boeing "spotlights." In the interim, some of the article comments over at the WSJ are actually worth reading.
UPDATE: Here's the complaint: Download BoeingPentagonComplaint.
[Meredith R. Miller]
July 26, 2012
Julianna Margulies Plays "The Good Wife," But Is She a Good Client?
Talent management company D/F Management, (D/F) has filed this complaint in the Superior Court of California against actress Julianna Margulies, alleging breach of an oral contract. D/F alleges that in early February, 2009, Margulies agreed that in consideration for D/F’s services to her, she would turn over 10% of all gross revenue earned through Margulies' employment in the entertainment industry.
According to the Complaint and attached lovey-dovey e-mails, the parties got along swimmingly, with D/F assisting Margulies in landing the lead role in The Good Wife and a contract to promote L’Oreal cosmetics. However, in April 2011, Margulies terminated her relationship with D/F and stopped paying the 10% commission. D/F contends that, under industry custom, Margulies remains responsible for ongoing payment of 10% of her gross from industry work that D/F helped her get. D/F seeks damages of no less than $420,000 and declaratory relief entitling D/F to 10% of Margulies earnings on from The Good Wife and L’Oreal going forward.
An interesting aside. The Complaint quotes an e-mail that Margulies allegedly sent to D/F in happier times. As quoted, the e-mail reads as follows:
I'm tryng [sic] to figure out the situation [with my entertainment attorney] who I love, but I've been paying him a lot of money my whole career, he gets 5% of everything I do, but really only works once every blue moon for me, and I am finding that actors don't do that with lawyers anymore, they all do flat rates. With the 3rd year coming up, (i'm [sic] talking about the syndication deal etc....) it feels like too much money going out for such minimal work and I just want to see what other clients are doing . . . .
As to this, we have two comments. First, it looks like Margulies might soon be getting her money's worth out of her attorney. Second, who puts "sic" in a quoted e-mail?!? And why put a "sic" after "tryng" and "i'm" while ignoring, e.g., all of the comma splices, not to mention the questionable choice of "who" over "whom" in "who I love"? If you "sic" some things but not others, aren't you endorsing all mistakes that escaped your pedantry?
The really surprising thing about all this is that there is no written contract. D/F refers to an “oral management agreement” that incorporated the “industry custom” of a 10% fee to D/F. So, while we do not claim any expertise in California law, general contracts principles suggest that if this case proceeds, there will need to be factual determinations as to whether there is indeed such a custom that continues after the termination of the relationship and whether Margulies knew or should have known of it.
In addition, there would seem to be a Statute of Frauds issue here, since on D/F's view, the contract may not be performable within a year if, for example, Margulies entered into multi-year agreements with either CBS or L'Oreal.
Stay tuned to see how Margulies answers.
[Christina Phillips & JT]
July 25, 2012
Bratz v. Gaga in Breach of Contract Suit
Bratz dolls are no stranger to the blog - we've previously blogged about the Bratz' travails with Barbie. For those uninitiated, in a previous post, our editor D. A. Jeremy Telman described Bratz as barbies that "dress like prostitutes" (or, his sister did). Anyway, Bloomberg now reports that Bratz his initiated a contract suit against Lady Gaga (really, her management company). From Bloomberg:
Pop star Lady Gaga and her management company were sued by MGA Entertainment Inc., the maker of Bratz toys, for failing to approve a line of dolls in her image.
The Van Nuys, California-based company, alleging breach of contract in New York state court, is seeking more than $10 million in damages from the pop star, her management company, Culver City, California-based Atom Factory, and Los Angeles- based Bravado International Group, a merchandising company that works with musicians and music groups.
MGA Entertainment says in the complaint that it agreed to produce dolls in Lady Gaga’s image in December 2011 at Bravado’s “request and insistence” and paid the company a $1 million fee in anticipation of shipping the products to retailers this summer in time for the holiday selling season.
In April, Bravado’s Chief Executive Officer, Tom Bennett, told MGA’s chief executive officer, Issac Larian, that Lady Gaga wanted to delay production and shipping of the dolls until her new album is released in 2013, according to the complaint. MGA says the defendants have continued to withhold final approval in order to delay marketing the dolls until next year and instead sell a licensed Lady Gaga perfume called “Fame.”
“Defendants’ conduct is egregious, in bad faith and is pretextual, especially in light of the fact that MGA has, among other things, paid Bravado a $1,000,000 advance, agreed to an excessively generous royalty rate, invested millions in the preproduction of the Lady Gaga dolls and put its reputation and goodwill on the line in order to secure distributors and retail shelf space,” MGA Entertainment said in the complaint.
Amanda Silverman, a spokeswoman for Lady Gaga, said the singer hasn’t seen the complaint and has no comment.
“This is a dispute between Universal Music Group’s merchandising company and MGA,” Silverman said in an e-mail. “There was no legitimate reason for dragging Lady Gaga into that dispute. Lady Gaga will vigorously defend MGA’s ill- conceived lawsuit and is confident that she will prevail.”
Peter Lofrumento, a spokesman for Vivendi SA’s Universal Music Group, the parent company of Bravado, said in an e-mail that the claims in the suit are meritless and the company will vigorously defend itself in court.
A telephone message left at the headquarters of Atom Factory wasn’t immediately returned.
[Meredith R. Miller]
Cast Members of ABC's Modern Family Claim that Their Contracts Are Invalid under "7 Year Rule."
Yesterday, the cast of ABC's hit sitcom, Modern Family, filed a Complaint for Declaratory Relief against the show's production company, Twentieth Century Fox. (Ed O'Neill, previously of Married...with Children fame, who is compensated differently than his co-stars, has not joined the lawsuit but plans to do so, according to The Hollywood Reporter). The stars apparently were negotiating pay increases for future seasons 4 through 9 but were not satisfied with the offers they were receiving. Twentieth Century Fox (and ABC, the network on which the show airs) reportedly offered to increase each cast member's per-episode compensation from around $65,000 to $200,000 for the next few years. As negotiations broke down, the stars filed suit.
The named plaintiffs (including Sofia Vergara, Jesse Tyler Ferguson, Eric Stonestreet, Julie Bowen and Ty Burrell) are relying on an interesting legal strategy. They claim that their employement agreements are "personal service contracts" that are "illegal and void under California law" because they violate the "Seven-Year Rule." The Seven-Year Rule is codified in California's Labor Code section 2855(a), copied below:
"Except as otherwise provided in subdivision (b), a contract to render personal service, other than a contract of apprenticeship as provided in Chapter 4 (commencing with Section 3070), may not be enforced against the employee beyond seven years from the commencement of service under it. Any contract, otherwise valid, to perform or render service of a special, unique, unusual, extraordinary, or intellectual character, which gives it peculiar value and the loss of which cannot be reasonably or adequately compensated in damages in an action at law, may nevertheless be enforced against the person contracting to render the service, for a term not to exceed seven years from the commencement of service under it. If the employee voluntarily continues to serve under it beyond that time, the contract may be referred to as affording a presumptive measure of the compensation."
The complaint itself does not quote from the code section. It merely cites the code section and adds this parenthetical: "(personal service contracts are barred from having terms beyond seven years)." The complaint also does not explain how the law applies to a contract of a shorter duration that provides the employer (Twentieth Century Fox) with the option to extend it beyond seven years. Without citing any cases, it's hard to tell how this law would be interpreted to apply to the cast employment agreements. However, I am not a California lawyer so I should not go further without doing more research. Anyone know anything about this law?
If I never look into it more deeply, I at least hope to use this case as an example of the importance of researching individual state law rather than thinking, "All I really need to know I learned in Contracts class."
[Heidi R. Anderson]
First Circuit on Promissory Estoppel: Rockwood, You're No Joseph Hoffman
We hoped this case might be a more up-to-date version of Hoffman v. Red Owl Stores. No dice. Another commercial promissory estoppel claim bites the dust.
After defaulting on a commercial loan, co-founders and sole shareholders of Environamics, Inc. (“Environmanics”), Robert Rockwood (“Rockwood”) and Roxanna Marchosky (“Marchosky”) were thrilled when SKF USA, Inc. (“SKF”) expressed interest in acquiring Environamics. However, when negotiations fell through leaving Environamics in a bigger hole, Rockwood and Marchosky brought suit in the District Court of New Hampshire claiming that they had relied on SKF’s promise to purchase the company in personally guaranteeing a $3 million loan needed to keep up the day-to-day operations of Envrionamics. The District Court granted SKF’s motion for summary judgment, so Rockwood and Marchosky appealed to the United States Court of Appeals for the First Circuit, which affirmed.
On January 14, 2004, Rockwood and Marchosky (collectively “Appellants”) entered into a $9 million plus royalties “Option Agreement” with SKF that gave SKF “an irrevocable option to purchase all, but not less than all, of the outstanding shares of stock” in Environamics. The parties also implemented a “Buy-Sell Agreement” that made SKF the “exclusive marketer and reseller” of Environamic’s pumps and related products. The Option Agreement was to last fifteen months and allowed the parties to negotiate a nine month extension. After the parties signed the Option and Buy-Sell Agreements, SKF paid Environamics $2 million. Environamics needed more money to sustain its day-to-day operations. At SKF's urging, Wells Fargo agreed to extend a $3 million line of credit to Environamics providing Rockwood and Marchosky personally guaranteed the loan. Rockwood and Marchosky were reluctant to agree to those terms but claim that they did so after receiving assurances that SKF would buy Environamics under the terms of the Option Agreement.
In October 2004, SKF, disappointed in its sales of Environamics products, announced that it would not exercise its option to purchase Environamics. Rockwood and Marchosky filed suit alleging promissory estoppel in that they took out the Wells Fargo loan in reliance on SKF’s alleged promise to exercise its option. They survived a first motion for summary judgment based on affidavits alleging that specific promises had induced them to agree to the personal guarantee. After Rockwood and Marchosky amended their complaint to omit any specific references to such promises, the District Court granted SKF’s second motion for summary judgment.
The First Circuit ruled (oh the irony!) that the doctrine of judicial estoppel now precluded Rockwood and Marchosky’s promissory estoppel claim. The First Circuit found that the two conditions for judicial estoppel had been met: (1) Rockwood and Marchosky's two summary judgment affidavits contradicted each other, and (2) Rockwood and Marchosky had convinced the District Court to accept their earlier position. Having determined that no specific competent evidence suggested that Rockwood and Marchosky had reasonably relied on any SKF promise to buy Environamics on terms other than those of the Option Agreement, the First Circuit affirmed the District Court’s ruling.
[Christina Phillips & JT]
New in Print
Michael E. Kenneally, Commandeering Copyright, 87 Notre Dame L. Rev. 1179 (2012)
Jay J. Madrid, David F. Johnson and Joseph P. Regan, The Merger Clause: A Potential Defense to the Mann Frankfort Implied Promise? 18 Tex. Wesleyan L. Rev. 729 (2012)
Mohsen Manesh, Contractual Freedom under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs, 37 J. Corp. L. 555 (2012)
Daniel Warner, Establishing Norms for Private Military and Security Companies. 40 Denv. J. Intl'l L. & Pol'y 106 (2011-2012)
July 24, 2012
Call for Blog Entries Renewed: Journal of Energy Law and Resources
The newly formed LSU Journal of Energy Law and Resources (JELR) at the Louisiana Sate University Paul M. Hebert Law Center invites submissions of articles for the Journal’s companion blog, The LSU Law Energy Blog. The blog will launch in August 2012 and will continue to publish pieces on a rolling basis. JELR is a student-edited journal devoted to the promotion of legal scholarship in energy law. The Journal is committed to publishing a variety of topics within the purview of energy law, including interdisciplinary pieces. The LSU Law Energy Blog will supplement the Journal by providing shorter articles on recent developments in energy law and the surrounding fields published by students, practitioners, and professionals in these fields.
Submissions: To be considered for publication on The LSU Law Energy Blog, please submit an entry on a current, relevant energy law topic or a case note on a major energy law case. Topical entries should be around 500 words and case notes may be longer. The deadline for submissions is quickly approaching—July 31. Please email these entries or requests for deadline extensions to firstname.lastname@example.org.
Contract Dispute over Easyriders Trademarks
On June 22, 2012, Paisano Publications (“Paisano”), publisher of Easyriders Magazine, filed a complaint against KSLB&D, owners of the popular Sturgis, South Dakota bar and restaurant, Easyriders Saloon (the “Saloon”) in the Superior Court of Los Angeles. The Complaint alleges breach of a licensing and vendor agreement. Paisano alleges that KSLB&D was granted the right to operate the Saloon under the name “Easyriders Saloon” via a License Agreement under which Paisano was entitled to royalties from sales of food, beverages, and merchandiseat the Saloon.
In addition to the License Agreement, the parties also had a Vendor Agreement wherein KSLB&D engaged Paisano to act as its “exclusive agent of the sale of vendor space” adjacent to the Saloon surrounding the annual motorcyclist rally held in Sturgis (the "Sturgis Event"). The Vendor Agreement permitted either party to terminate upon ten days notice.
Paisano alleges that KSLB&D sent Paisano a Notice of Termination claiming that Paisano had materially breached the Vendor Agreement in failing to sell sufficient vendor space in advance of the approaching 2012 Sturgis Event and that KSLB&D had begun selling the remaining available vendor space on its own. Although the Saloon has now rebranded itself “The Saloon & Steakhouse,” Paisano contends that KSLB&D continued to sell merchandise featuring the Easyriders mark without approval.
Paisano contends that it did not breach the agreement and accuses KSLB&D of attempting to avoid royalty and commission obligations under the Vendor and License Agreements prior to the 2012 Sturgis Event. Paisano further accuses KSLB&D of breaching the implied covenant of good faith and fair dealing in connection with both the License and the Vendor Agreement.
Paisano seeks damages in excess of $2,000,000, along with attorney fees and costs of the suit, It also seeks declaratory and Injunctive relief barring KSLB&D from covering and otherwise obscuring the signs in and around the Saloon, and from identifying or advertising itself as “The Saloon & Steakhouse.”
[Christina Phillips & JT]
Weekly Top Tens from the Social Science Research Network
July 23, 2012
DirecTV and Viacom Settle After Jon Stewart Makes Fun of Them
As reported in the New York Times, DirecTV and Viacom ended their nine-day blackout of cable channels after Jon Stewart, whose Daily Show is broadcast on Comedy Central, one of the channels at issue, asked rhetorically, "Viacom, what are you China?" The remark related to Viacom's attempt to prevent viewers from watching its programming commercial free on the Internet. As Stewart noted, young people know all sorts of ways to watch pirated programming commercial free on the Internet. Stewart informed his corporate overlords, "[Y]ou're only blocking the old people from watching the show."
The dispute between the DirectTV and Viacom started out as the usual squabbling between service providers and programming providers over how much consumers should be charged for a bundle of two channels that they watch and seven that they don't. And as often happens in such cases, in order to increase pressure on DirecTV, Viacom blocked DirecTV from airing its programming, leaving viewers unable to quench their insatiable desire to know, inter alia, who had hooked up with whom in Jersey Shore and why anybody would watch any show on Comedy Central other than The Daily Show and The Colbert Report.
But DirecTV upped the ante by encouraging viewers who could not watch Viacom programing via satellite to just watch episodes on Internet sites such as Hulu. Now order has been restored, as the two parties have worked out a deal that will provie free Internet access to Viacom-owned shows but only for DirecTV subscribers. Ultimately though, it seems that time is running out for the conventional models on which companies like Viacom and DirecTV rely. Viewers increasingly find their content on the Internet, and the companies can only keep their fingers in the dam for so long.
California Superior Court Refuses to Compel Arbitration in Sexual Harassment Claim
On May 10th, Ellen Pao, a junior partner at Kleiner Perkins Caufield & Byers (Kleiner) filed a complaint in California state court. In her complaint, Pao alleges that Kleiner discriminates against female employees in their advancement and compansation based on gernder. She also alleges that Kleiner retaliated against her after she reported sexual harassment by Kleiner management.
At this point, the issue in the case is whether or not the case will go to arbitration. Kudge Kahn of the San Francisco Superior Court found that it should not. As the New York Times reported over the weekend, Judge Kahn commented on Kleiner's papers submitted in connection with its motion to compel arbitration as follows, "[A]ll of your papers were terrific and I disagreed with all of them.' Apparently, Pao had an arbitration agreement with Kleiner funds but not with the firm itself.
The Times interviewed Melinda Riechert, an attorney who represents employers. She explained the value of arbitration clauses in employment contracts: "People who want to keep cases out of hte press and the blogosphere should seriously consider arbitration agreements."
Yes, fear the blogosphere!
July 22, 2012
Kevin Costner, Usual Suspect of ContractsProf Blog, Beats Actual Usual Suspect, Stephen Baldwin, in Contract Suit
Earlier this month, a federal district court rejected Stephen Baldwin's request for a new trial in his dispute with Kevin Costner. In the suit (amended complaint here), Baldwin and another party claimed that agreements they entered into with Costner and others were invalid due to fraud, misrepresentation, and/or mistake. It appears that Baldwin, Costner, et al. once held varying levels of interest in a closely-held company, Ocean Therapy Solutions, that had developed a special oil cleanup technology. As part of some internal restructuring, cash infusions, and other maneuvering, Baldwin sold his interest in the company to Costner's group for a mere half million in a Transfer Agreement. Shortly thereafter, Ocean Therapy Solutions announced a $52 million dollar deal with BP. Baldwin sought to have the Transfer Agreement-as well as the associated release--declared uneforceable due to fraud.
In an order rejecting an earlier motion for summary judgment by Costner, the district court stated as follows:
"The plaintiffs assert that the defendants' alleged misrepresentations in the days leading up to the sale of their shares in OTS constitute the kind of fraud that, if proved, is sufficient to vitiate the release agreements. The Court agrees. The plaintiffs have maintained since the beginning of this lawsuit, that had they known about the completed deal with BP...they would not have sold their interests. This is not to say, of course, that plaintiffs have met their burden on these questions, but, rather, to suggest that summary relief is not appropriate on this record."
That opinion also contains a nice discussion of how a release agreement may be innvalidated due to fraud under Louisiana law, the civil law system oft-neglected by law professors outside of Louisiana (see pages 11-15). Athough Baldwin survived summary judgment, his side later lost at trial, and, as noted above, also lost a bid for a new trial.
[Heidi R. Anderson]