August 3, 2012
ABA Program on 'Wrap Contracts
For those of you attending the ABA conference in Chicago this week, there is a CLE program on Clickwraps, Browsewraps and Why ESIGN Deserves a Bum Rap. The speakers are Mark J. Furletti of Ballard Spahr, Christine Poulon of PayPal and yours truly. The panel is from (the unspeakable hour of) 8:00am-10:00am. If any of you early risers are at the meeting in Chicago, stop by for an earful about the state of electronic contracts.
Update on Golden Globes Parol Evidence Dispute
In an earlier post, we detailed the dispute between the Hollywood Foreign Press Association (“HFPA”), which votes on and presents the Golden Globe awards, and Dick Clark Productions (“DCP”), which produces the award telecast. One issue in the case involved the parol evidence rule. HFPA argued that DCP could not renew its contract with the NBC television network without first obtaining HFPA's consent. Because the writing did not specify this type of consent right, HFPA wanted to bring in extrinsic evidence regarding its existence. We then updated the story after HFPA lost at the district court level and after Dick Clark's passing. The latest development is related to the appeal. According to the Hollywood Reporter:
A federal judge has agreed to a motion by the HFPA which will allow the press group to file an appeal to their loss at trial with the appeals court prior to the second phase of the trial. As part of the decision by federal Judge Howard Matz, the second phase of the trial will now be put off at least until the appeals court rules on this motion.
Daniel Petrocelli, attorney for the HFPA, said that normally there would be no appeal until the entire trial was concluded, including the second phase which has to do with such issues as what expenses DCP takes out from the show’s production, who has the right to the pre-show and who holds digital rights.
Petrocelli estimates the appeal will take as much as 18 months to reach a judgment. He said that he will actually file the appeal, following a notice of appeal, around October or November.
So, final resolution of the issue will take some time. Expect more updates here when that finally occurs.
[Heidi R. Anderson]
Next week might be a bit slower than usual on the blog. As you read this, I am pedaling my way from Chicago to Michigan. It's not that long a ride for a serious bike rider, but I'm a law prof. . . . If I survive, my posts should start showing up again some time in the middle of the week.
Statute of Frauds? There's an app for that!
HelloFax, the company that lets you send and receive digital faxes, has spun off its digital signature service into a new stand-alone product: HelloSign.
“Everyone has to sign documents, and it’s done in a really poor way right now, which is what we’re trying to fix,” Joseph Walla, CEO of HelloSign (and HelloFax) told Mashable.
Documents can be signed and securely returned to their sender from both the web and the company’s new iPhone application. Unlike some similar services and apps that are already out there, digital signatures using the service are free and unlimited so you can send and receive just a few documents — or all the contracts for your business — with the service at no cost.
On the iPhone application, you sign a document with your finger on the screen. Once you’re done signing, the signature is brought back into your document, then you can place it where you want it to go. The same experience can be done on your home computer using a mouse.
When you send documents to be signed with HelloSign you can also track those documents with read receipts and audit trails, so you know exactly what’s going on with the document every step of the way.
Walla says that, while digital signatures have been legal in the U.S. for any document that can be signed with a pen for the past 12 years, many companies are still using pen and paper to get the job done. He sees the service as being invaluable to companies and businesses that are faced with delays waiting on paperwork to be signed.
“What we found out is that the only reason people fax things is that the vast majority of these documents are being signed,” Walla said when we spoke to him about HelloFax earlier this year. “What we’ve found is a lot of people joined us for faxing, and now they’ve converted to electronic signatures. We have a lot users who were fax users and now they don’t fax at all.”
With HelloSign, contracts and the like can be handled almost instantly, saving everyone involved in the process valuable time. The only type of document the service can’t handle is one that requires a notary.
HelloSign and its iPhone app are available now. For a limited time, those who sign up for HelloSign will also receive 25GB of free storage from Box.
[Meredith R. Miller]
August 2, 2012
Social Impact Bonds: “The most interesting government contract written anywhere in the world this year”….
…. And the award goes to… Goldman Sachs and New York City. According to the ABA Journal, Goldman Sachs has loaned $9.6M to New York City to fund a new social services program with the aim of “reducing recidivism among young men at Rikers Island.” Details are to be provided later today (Thursday). The loans are being described as “social impact bonds” and they carry a nice return ($2.1 million) if there is a “significant reduction” in recidivism. If not, Goldman could lose up to $2.4 million (though, we know, Goldman won’t lose the money because, as a “market maker,” it will just turn around and sell the “shitty” bonds to an unwary client).
About the contracts that lie at the heart of the deal, the ABA Journal provides:
“This will get attention as perhaps the most interesting government contract written anywhere in the world this year,” said Jeffrey B. Liebman, a public policy professor at Harvard University. “People will study the contract terms, and the New York City deal will become a model for other jurisdictions.”
Similar programs have been tried in Great Britain and Australia and currently are being considered in Massachusetts.
But the New York Times reports that this program is different because Mayor Bloomberg’s foundation is a guarantor on the loan:
In a twist that differentiates New York’s plan from other governments’ experiments with social impact bonds, Mr. Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC. If the jail program does not succeed, MDRC can use the Bloomberg money to repay Goldman a portion of its loan; if the program does succeed, Goldman will be paid by the city’s Department of Correction, and MDRC may use the Bloomberg money for other social impact bonds, said James Anderson, director of the foundation’s government innovation program.
The social impact bonds are not without critics:
But social impact bonds have also worried some people in the nonprofit and philanthropy field, who say monetary incentives could distort the programs or their evaluations. “I’m not saying that the market is evil,” said Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati, “but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”
The proponents argue that this financing model is a transformative way to fund social programs, with benefits to both taxpayers and private investors. They argue that it is a way for government to pay to achieve outcomes.
[Meredith R. Miller]
Discussion of Consideration over at Concurring Opinions
Over at Concurring Opinions, David Hoffman has called our attention to a "bizarre" consideration issue at the Olympics. Professor Hoffman liniks to this story in The USA Today, according to which the performers at the Olympics halftime show -- whoops, make that opening ceremonies -- including Paul McCartney, donated their time. According to The USA Today, the performers received a mere one pound for their performances, and that one pound was paid in order to make the performers' agreements with the Olympics binding.
Professor Hoffman comments as follows:
If true, I take it that British law takes the position that nominal consideration can bind obligees, but that “false” nominal consideration can’t. Thus, the organizers had to both promise to pay McCartney a pound and actually pay it before the ex-Beatle was bound to perform.
To my mind, this is the least good resolution of the consideration problem possible. Look: either consideration should mean something – bargained for exchange motivating actual counter-promising – or parties should be free to dispose of the requirement of consideration entirely. In the United States, only Pennsylvania has taken that sensible latter position. The rest generally tend to require actual bargained for exchange, excepting only charitable subscriptions, which the Olympics are not. The Brits, who handed us this mess in the first instance, have apparently now embraced the unfortunate, mumbo-jumbo, hybrid, which reduces the sensible formality of consideration to a bit of a magical contract theatre. Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?
Interesting comments follow, including those of Patrick O'Donnell, to whom we tip our virtual hats for having directed us to the Concurring Opinions post.
Unfortuantely, we have at present nothing substantive to add to the learned discussion of at Concurring Opinions. However, we would like to observe that perhaps Sir Paul is happy to work for nominal consideration given that just a few weeks ago, as reported by the BBC, concert organizers pulled the plug on him and Bruce Springsteen because they performed past a curfew in Hyde Park.
Band member and erstwhile proprieter of "Da Bing," Steven Van Zandt, tweeted rhetorically "When did England become a police state?"
August 1, 2012
10 Questions for @theContractsGuy
When did you realize you had a passion for contract law?
I fell in love with contracts while working in the legal department of a Fortune 500 company during a 15-month period early in my legal career (on loan from my law firm through a secondment). I’ve long been fascinated by business, and contracts are where the rubber meets the road and business deals are hammered out. Nothing is more satisfying than looking at a deal through lawyer goggles and identifying important business issues that your client hasn’t thought of.
Who is your typical client?
I do M&A and general corporate work in addition to commercial transactions, and the typical client profile varies depending on the type of work. Contracts clients tend to be larger companies in industries where a business’s relationship with its suppliers or customers is complex. The best clients are those who’ve found contract religion as the result of being involved in litigation over a contract and having an unfavorable result. Those clients tend to appreciate the danger of time bombs sitting in their file cabinets in the form of bad contracts.
What is something interesting you worked on recently?
One of the most interesting projects I’ve done involved a franchisor that wanted its franchisees in the US and Canada to refresh the look of their stores. I represented the contractor that won the bid to perform the work. The project involved drafting and negotiating an agreement between the contractor and the franchisor that balanced the interests of the franchisor and contractor, while properly inducing the franchisees to participate. It was interesting work for a wonderful client with exceptional opposing counsel.
What is the single most valuable lesson you learned in the first year (or so) of practice?
Always produce quality work product. In the rough and tumble of practice you often have to juggle deadlines and multiple projects and sometimes something has to give. Shoddy work product is always the wrong answer. Also, for those who plan to practice in large firms, the proper method of genuflection varies from partner to partner. Keep a list.
What do you wish someone told you when you were in law school?
What are your 3 favorite legal blogs or websites?
Who should ContractsProf readers be following on Twitter?
Has legal scholarship ever been valuable to you in your practice?
I often go to the journals when I’m doing in-depth research. One of the most useful articles I’ve read is “After the Battle of the Forms” by Francis J. Mootz III in I/S: A Journal of Law and Policy. The article has informed my thinking about the battle of the forms in today’s contracting world. Plus, it introduced me to the term “sign-wrap,” which I think is a good way to think of on-line contract terms that are incorporated into paper contracts by reference.
Best efforts or reasonable efforts?
Reasonable efforts. If anything beyond reasonable is expected, it should be spelled out in the contract.
What is your favorite restaurant in St. Louis?
[Meredith R. Miller]
New in Print
Norman D. Bishara, and David Orozco. Using the Resource-Based Theory to Determine Covenant Not to Compete Legitimacy, 87 Ind. L.J. 979 (2012)
Charles K.Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36 Del. J. Corp. L. 1081 (2011)
In addition, we just learned of this publication by a reader of the blog:
Eric Voigt, A Company's Voluntary Refund Program for Consumers Can Be a Fair and Efficient Alternative to a Class Action,"31 Rev. Litig. 617 (2012)
Here is Professor Voigt's description of his article:
My article concludes that Rule 23 requires courts to consider a company's voluntary refund program (and other non-judicial methods) in determining whether the proposed class action is the superior procedure. My conclusion is strongly supported by the Advisory Committee Notes to the 1966 amendment to Rule 23, as well as commentary by two former members of the Committee (including Professor Wright), the original purpose of the superiority requirement, and courts’ initial interpretations of the 1966 amendment. No federal court or scholar has analyzed the historical meaning of Rule 23(b)(3) as it applies to a voluntary refund program.
The last part of my article discusses what features a refund program should have for it to qualify as a fair and efficient alternative to a class action. The fairness prong requires companies to (1) replace the product at issue or reimburse consumers for out-of-pocket expenses, such as the product’s purchase price and any property damages caused by the product, and (2) notify most affected consumers about the refund program so that the program is a real, not illusory, remedy. The type of notice depends on the circumstances. For example, in some cases, postings at the point of sale would be sufficient; in other cases, notice should be published nationally on the internet and in print.
July 31, 2012
Weekly Top Tens from the Social Science Research Network
Political Question Doctrine Precludes Adjudication of Tort Claims against Government Contractor
On January 2, 2008, Staff Seargant Ryan D. Maseth stepped into a shower in his living quarters at the Radwaniyah Palace Complex (RPC) outside of Baghdad and was killed by electrocution caused by a malfunctioning water pump that was not grounded and faulty electical infrastructure. His estate sued Kellogg, Brown and Root Services, Inc. (KBR), the contractor responsible for maintaining the facilities at RPC. On July 13th, the District Court for the Western District of Pennsylvania dismissed the lawsuit, Harris v. Kellogg Brown & Root Services, Inc., finding that the political question doctrine and the combatant activities exception to the Federal Tort Claims Act (FTCA) barred the court from proceeding with the case any further.
The court had previously denied KBR's initial motion to dismiss on the same grounds, but after further discovery and two Circuit Court decisions that relied on the political question doctrine to dismiss torts claims against military contractors, the court reversed itself. While the court had initially assumed that KBR had discretion under its contracts with the military to make decisions about electrical repairs, it is now persuaded that any possible negligece by KBR cannot be divorced from military determinations.
On the political question doctrine, the court summarized its findings as follows:
[F]urther adjudication of this case will require evaluation of the military’s decision to continue to house soldiers in hardstand buildings with hazardous electrical systems even though the military was aware that the buildings lacked grounding and bonding and the military possessed specific knowledge that such electrical deficiencies had resulted in electrocutions to military personnel, causing injuries and even deaths, prior to the events of this case.
In addition, the court concluded that the combatant activities exception to the FTCA also applied and provided a separate grounds for dismissal. Although that exception does not directly address its applicability to government contractors, courts have extended its protections to such contractors. The tough issue was whether or not KBR's activities had a direct relation to combat activities. The court concluded that they did.
July 30, 2012
Nice Parol Evidence Case (with Facts Vaguely Reminiscent of Nanakuli)
In late 2005, James Brown (“Brown) and Stern Oil Co., Inc. (“Stern Oil”), a fuel distributor for Exxon Mobil Corp., executed an agreement regarding fuel supply. When Brown notified Stern Oil that he would no longer purchase its fuel, Stern Oil filed suit for breach of contract. Brown counterclaimed, alleging fraudulent inducement. The trial court granted summary judgment to Stern Oil moved, and after a trial on damages, it awarded Stern Oil eight years of lost profits in the amount of $925,317 plus attorneys’ fees. On appeal, the Supreme Court of South Dakota reversed, finding the award of summary judgment to have been improper.
Under two Motor Fuel Supply Agreements (“MFSAs”) the parties established a maximum annual amount of fuel that Stern Oil was obligated to sell to Brown each year. For each year thereafter, the maximum was adjusted according to sales. Brown was obligated to purchase at least seventy-five percent of the annual maximum, and if he failed to do so, Stern Oil had the option to terminate the agreement or to refuse to renew.
In addition, the MFSAs stating that “unless otherwise specified, all prices shall include applicable taxes, and are subject to change by Stern Oil at any time and without notice.” Further, under a brand incentive program (“BIP”), Brown and Stern executed a Repayment Agreement wherein Stern Oil would reimburse Brown for certain improvements such as equipping the stations with Exxon Mobil-approved fuel dispensers and payment systems, but provided Stern Oil with the option of reimbursement in the event Brown breached or defaulted.
In his Counterclaim, Brown alleged that Stern Oil fraudulently induced him to enter in the MFSAs and the BIPs by orally “guaranteeing a five-cent profit on every gallon of fuel he sold,” evidence that the circuit court found to be barred by the parol evidence rule. However, the Supreme Court noted that, as the MFSA’s deal primarily with goods, South Dakota’s version of the UCC governs. The UCC which allows for the introduction of parol evidence to establish fraud as a ground for rescinding a contract. Whether or not the parol evidence is ultimately credited will turn on questions of credibility, which are best left to a jury.
Brown challenged the MFSAs’ enforceability on the ground that they do specify the price of the fuel Brown was to purchase. Open price term contracts are permissible under South Dakota’s version of the UCC, but only where the parties possess the requisite intent to enter such an agreement. Here again, the Supreme Court found that the trial court’s erroneous exclusion of parol evidence rule regarding the alleged five percent profit guarantee, prevented it from recognizing a material issue of fact relating to the parties’ intent to enter into an open price term contract.
Moreover, the MFSAs state that “all prices shall include applicable taxes, and are subject to change by Stern Oil at any time and without notice.” Such language gives Stern Oil practically unlimited power to fix the fuel prices. Thus, whether Stern Oil set these prices in good faith also remains a question of fact.
[Christina Phillips & JT]
First Circuit: Sex Bias Claim Does Not Need to Go to Arbitration
Ann Gove filed suit against Career Systems Development Corporation (CSD) alleging that she was denied a position with CSD because of her gender and her pregnancy at the time she applied. CSD moved to compel arbitration, but the District Court found that the arbitration clause was ambiguous as to applicants whom CSD did not hire. In a split decision, the First Circuit affirmed that denial of CSD's motion to compel.
Gove filled out an online application to work at CSD. The last provision of that application read as follows:
CSD also believes that if there is any dispute between you and CSD with respect to any issue prior to your employment, which arises out of the employment process, that it should be resolved in accord with the standard Dispute Resolution Policy and Arbitration Agreement ("Arbitration Agreement") adopted by CSD for its employees. Therefore, your submission of this Employment Application constitutes your agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes. A copy of that procedure is on display in our employment office and a copy [of the] Arbitration Agreement setting forth that procedure will be provided to you.
If you have any questions regarding this statement and the Arbitration Agreement, please ask a CSD representative before acknowledging, because by acknowledging, you acknowledge that you have received a copy of the Arbitration Agreement and agree to its terms. Do not check the Accept box below until you have read this statement.
During her subsequent interview, Gove was asked about her pregnancy and whether she had other children. When she was not hired and the position remained open, she brought a claim through the Maine Human Rights Commission (MHRC). When the MHRC was unable to resolve her dispute with CSD, Gove brought suit. The District Court found that it was unclear whether the provision quoted above applied to applicants like Gove who were never hired.
On appeal, the First Circuit Majority limited its analysis to questions of state contracts law to determine the narrow question of whether or not CSD's arbitration clause was binding against an applicant who had not been hired. It did not address questions of federal policy favoring arbitration because CSD did not brief those issues on appeal. In its analysis of state contracts law, the Majority relied on Maine's bedrock principle that ambiguous contracts are construed against the drafter. While CSD made clear that the arbitration provision applied during "pre-employment," it makes no reference to the provisions applicability to applicants who are never employed. The Majority found persuasive Gove's argument that someone who is never employed never engages in a pre-employment process and that there is no period "prior to [the] employment" of someone who is never employed. The Majority observed that adherence to Maine's contra proferentem doctrine is especially appropriate in these circumstances given the inequality of bargaining power and the fact that Gove was presented with a "take it or leave it" proposition. She could not bargain her way out of the arbitration provision or demand clarification before her interview.
In a dissenting opinion, Judge Torruella argued that CSD had not in fact waived its right to argue for arbitration based on federal policy considerations. Applying the law relating to such considerations, Judger Torruella had no difficulty in concluding that the presumption in favor of arbitration trumped any considerations of state law.