February 10, 2012
Law Suit Over a "D" in Contracts
As the ABAJournal reports here, two students have elected not to go gently into that good night but to sue their law school for dismissing them after they failed to maintain a 2.0 GPA at the end of their first year in law school. The culprit, the students allege, was their contracts course, in which they were awarded grades of "D." The kicker -- the course was taught by an adjunct professor.
The offending course was Contracts II, a 3-credit course which accounted for precisely 10% of the students' aggregate GPA for the first year. It is very hard to imagine that this "D" was a significant departure from the students' performance in their other first-year courses.
This brings to mind once again Professors Amar and Ayres' proposal that Law Schools offer to rebate 50% of first-year students' tuition if they will quit after the first year. These two students would benefit from such a system, although one might doubt that bounded rationality would enable the students who, in the long term, would benefit most from such an offer would actually take it.
These are the top vote-getters for the first annual ContractsProf Blog prize for the best contracts law scholarship of the year:
Congratulations to our finalists!
The winner will be notified soon and then announced at the Spring Contracts Conference.
February 9, 2012
General Strike in Israel
We have not gotten much use out of our "Labor Contracts" category on this blog, but we've got a big story to report today, about a union really is flexing its muscles. Today's New York Times, reports that the Israeli labor union, the Histadrut, which represents hundreds of thousands of public sector workers, has called a general strike.that started yesterday and has shut down everything from government offices and the stock exchange to hospitals and even the Ben-Gurion national airport.
Ahh, general strikes! Those were the days. The very words are like a madeleine conjuring up images of Rosa Luxemburg and Karl Liebknecht rousing the forces of the Social Democratic and Independent Social Democratic Parties in post-WW I Berlin (see announcement at left). Meanwhile, closer to home, Mitch Daniels has signed legislation making Indiana a "right-to-work" state.
According to the Times, the central issue in the dispute is the government's increasing use of contract workers, whose pay is considerably less than that of Histadrut members. However, as reported here in Ha'aretz, talks are expected to conclude as early today to reach a deal that will end the general strike. The government has apparently agreed to re-classify some of the contract workers as government employees, thus entitling them to higher salaries and benefits. However, that change in status will effect only a few thousand out of approximately 300,000 contract workers.
New Developments in the Struggle over Spiderman: Turn Off the Dark
According to the New York Times, producers Michael Cohl and Jeremiah J. Harris now seek to remove Ms. Taymor from the $75 million Spiderman world going forward. In a 66-page filing, seeking unspecified damages, the producers assert that Ms. Taymor breached her contract after conflicts arose between Ms. Taymor and other creators and producers, causing producers to fire her. The complaint contends that “Taymor refused to develop a musical that followed the original, family-friendly ‘Spider-Man’ story, which was depicted in the Marvel comic books and the hugely successful motion picture trilogy based on them.” Rather, Ms. Taymor insisted on creating Arachne, a villain character, to portray what is referred to as a “dark, disjointed and hallucinogenic musical involving suicide, sex and death.” The filing alleges that Ms. Taymor declared she did not care whether audiences liked her version of Spiderman.
After Ms. Taymor was fired, producers hired Philip William McKinley, circus and theater director. Ms. Taymor, winner of a Tony Award for directing “The Lion King,” denies in her lawsuit that she was resistant to changes suggested by producers. Ms. Taymor’s associates contend that she was attempting to improve Spiderman up until the time producers fired her.
Ms. Taymor originally filed suit in November, asserting that Spiderman used 25% of her original script, yet the producers were not paying her royalties. This copyright claim sought $1 million in damages and future royalties based on the success of the production. In addition, Ms. Taymor sought to have future productions of Spiderman stopped until such claims were settled.
The producer’s counterclaim seeks damages to assist in covering the costs of hiring director McKinley, as well as costs from overrun production. Ms. Taymor’s lawyer, Charles T. Spada, believes the counterclaim to be baseless. He states, “Ms. Taymor will continue to vigorously seek enforcement of her creative rights and will respond to the defendants’ counterclaims as well as their outrageous mischaracterizations and attempts to besmirch her reputation.”
The producer’s filing included e-mail excerpts from several creators of the show, including Bono and the Edge of U2 (composers of the show -- pictured), and Glen Berger a playwright who Ms. Taymor hired to assist her in writing the Superman script. Bono’s e-mail criticizes Ms. Taymor “for shooting down ideas before taking time to understand them.” Glen Berger’s e-mail contains allegations of Ms. Taymor threatening him to stop agreeing with producers ideas, otherwise she would stop working with him.
Previews of the show were canceled for three weeks while McKinley redesigned the show that Ms. Taymor created. Since then, Spiderman has opened and received better reviews than Ms. Taymor’s version. Thus far, Spiderman has grossed $81 million since November 2010.
[JT & Janelle Thompson]
New in Print (Including some New Books)
David M. Driesen, Contract Law's Inefficiency, 6 Va. L. & Bus. Rev. 301 (2011).
Christopher C. French, Construction Defects: Are They "Occurrences"? 47 Gonz. L. Rev. 1 (2011/12)
February 8, 2012
Third Circuit Upholds Pennsylvania's Steel Act in the Face of a Contracts Clause Challenge
In 1978, the Commonwealth of Pennsylvania enacted the Pennsylvania Steel Products Procurement Act (the Steel Act), which requires that, with certain enumerated exceptions, steel products used or supplied in the performance of a public works contracts must be made in the U.S.
Mabey Bridge & Shore, Inc. (Mabey) has been involved in public work projects, including projects for the Pennsylvania Department of Transportation (PennDOT), for over twenty years. In 2009, Mabey subcontracted to provide a bridge for PennDOT. However, in April 2010, PennDOT informed the contractor that because the bridge was considered a “public work,” the Steel Act prohibited use of Mabey’s temporary bridge on the project owing to the fact that Mabey used foreign steel. As a result, Mabey was forced to cancel four contracts for temporary bridges on PennDOT projects, and has been barred from giving future quotes.
Mabey filed suit in the United States District Court for the Middle District of Pennsylvania against Pennsylvania’s Secretary of Transportation, seeking a declaratory and injunctive relief. The District Court granted the Secretary’s motion for summary judgment on all of Mabey’s claims. On its appeal before the Third Circuit Mabey argued that: the Steel Act is preempted by the Buy America Act, 23 U.S.C. § 313 and violates the Commerce Clause; and that PennDOT’s actions violated the Contract Clause and the Equal Protection Clause. In an opinion filed on January 24th in Mabey Bridge & Shore, Inc. v. Schoch, the Third Circuit affirmed the District Court’s grant of summary judgment.
Much of the Third Circuit’s opinion is taken up with issues other than the Contracts Clause. The Third Circuit found that the Buy America Act did not preclude stats from enacting mor restrictive requirements related to the use of domestic steel and thus did not preempt Pennsylvania’s Steel Act. Mabey’s Dormant Commerce Clause claim was more or less precluded by a prior Third Circuit decision, Trojan Techs., Inc. v. Pennsylvania. In any case, the Court found that, as Congress had plainly authorized restrictions of the kind contained in the Steel Act, the Act created no problems under the Commerce Clause. The Court also relied on Trojan Techs. in affirming summary judgment on Mabey’s Equal Protection claim. The Court held applied rational basis scrutiny in upholding the constitutionality of the Steel Act.
The Court noted that Mabey bore the burden to prove that PennDOT’s had violated the Contract Clause by establishing that a “change in state law has ‘operated as a substantial impairment of a contractual relationship.’” The Third Circuit found that Mabey failed to do so, as the Steel Act was enacted in 1978 and was in effect at the time Mabey entered into its contracts. Although Mabey conceded that the passage of the Act itself could not be the “change in law” that impaired its existing contracts, it argued that PennDOT’s change in interpretation met this requirement.
However, the Supreme Court established in Ross v. Oregon that the Contract Clause applies only to the exercise of legislative power. Based on Ross, the Third Circuit found that there is no violation of the Contract Clause when the act in question “investigates, declares, and enforces liabilities as they stand on present or past facts under laws supposed already to exist.” Although Mabey was justified in believing that its bridges were acceptable due to its long relationship with PennDOT, PennDOT’s actions are best characterized as interpretive, not as an exercise of legislative authority.
Moreover, in Fleming v. Fleming, the Supreme Court rejected the argument that the Contract Clause is violated when there is a new interpretation of an antecedent statute. Thus, because PennDOT’s actions interpreted and applied a law that had been in force for over 30 years, it did not exercise legislative authority subject to scrutiny under the Contract Clause, and the Third Circuit affirmed the District Court’s grant of summary judgment to PennDOT.
[JT and Christina Phillips]
February 7, 2012
Valentine's Oral Argument: Madoff Mutual Mistake Case (Simkin v. Blank)
We've blogged quite a bit about Simkin v. Blank, the Madoff account mutual mistake case now pending before the New York Court of Appeals. Oral argument is scheduled for (when else?) Valentine's Day. It is well-lawyered (Richard Emery for wife and Alan Arffa for husband) and should be a good show. I plan to watch the live webcast, which will also be archived on the New York Court of Appeals website.
Weekly Top Tens from the Social Science Research Network
February 6, 2012
Three Arbitration Decisions Part III: Third Circuit Enforces Arbitration Clause Even Though Arbitral Body Is Unavailable
Raheel Ahmad Khan bought a Dell 600m computer in 2004. He alleges that, due to design defects, the computer would overheat and fry its motherboard (non-fried motherboard is pictured above). This happened three times and Dell replaced the computer three times, but after that, Dell told Mr. Khan that he was on his own, as the warranty had expired. Nice. As it turns out, Mr. Khan may be a frequent filer in addition to being a frequent fryer. He filed a putative class action in July 2009, alleging consumer fraud, breach of warranty, common law fraud, negligent misrepresentation and unjust enrichment.
The terms and conditions that came with Mr. Khan’s computer provided for binding arbitration with the National Arbitration Forum (NAF). However, by the time Mr. Khan brought his suit, the NAF had been barred by a consent judgment from accepting consumer arbitrations because it had been found to have engaged in “various deceptive practices.” Dell nonetheless moved to compel arbitration in some other forum. The District Court denied Dell’s motion to compel arbitration and for the appointment of a special arbiter, finding that it could not compel parties to submit to an arbitral forum to which they had not agreed.
In Khan v. Dell, Inc., a split panel of the Third Circuit held that a class of consumers is bound by the arbitration agreement in their purchase agreement even though the arbitral body designated in the agreement is no longer available.
The case turned on Section 5 of the Federal Arbitration Act, which permits a court to appoint a substitute arbitral body unless the named body is “integral” to the arbitration provision. The key contract language provides that all disputes “SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM.” The Court found that language ambiguous, as the word “exclusively” could be read to relate to “binding arbitration” to the NAF or to both. Courts treating the language had split on the intended scope of “exclusively.” Because of the federal policy in favor of arbitration, the Court decided that a tie goes to the runner (from court), in this case Dell.
Judge Sloviter, dissenting, found no ambiguity in the arbitration agreement. To Judge Sloviter, the NAF was the designated exclusive arbitrator, and that should have meant that the court could not dictate to the parties whither to send them for arbitration. Judge Sloviter noted that the NAF is no longer allowed to accept new consumer arbitrations because it had chosen to enter into a consent judgment rather than dispute claims that it routinely appointed anti-consumer arbitrators and discontinued referrals to arbitrators who decided cases in favor of consumers. Having thrown in its lot with the NAF, Judge Sloviter agreed with the District Court that Dell should not get another shot at picking an arbitrator.
The Big Bang Theory's Fictional Physicists Take on Ambiguity and Interpretive Maxims
Some may find this clip from The Big Bang Theory useful in illustrating some contractual interpretation maxims, including "interpret against the drafter" and "read the contract in a way that gives meaning to the whole." It also addresses the general concept of ambiguity. In the clip, Sheldon accuses his roommate and fellow physicist, Leonard, of violating two terms of their "roommate agreement." The first involves Leonard's denial of access to the bathroom in the event of an "emergency" experienced by Sheldon. Leonard's girlfriend, Priya, rather convincingly argues that the term "emergency" is ambiguous and that it should be interpreted against Sheldon, the agreement's drafter. The second allegedly violated term involves unauthorized use of the shower by more than one person. Priya navigates around this term by arguing that another term of the agreement regarding hot water conservation trumps the "one person per shower" provision, perhaps illustrating the maxim of "specific beats general." (Note: The clip appears authorized by CBS, WB, et. al, as far as I can tell, but I make no warranties on that or, well, anything else I write).
[H.R. Anderson, h/t to student, Ellie Holub]
Three Arbitration Decisions Part II: DC Circuit Vacates $185 Million Arbitral Award
In BG Group v. Republic of Argentina, the D.C. Circuit vacated an arbitral award, reversing the District Court finding that the award was enforceable. The D.C. Circuit found that the arbitral panel had exceeded its authority by accepting the case when the relevant Bilateral Investment Treaty (the Treaty) between the United Kingdom and Argentina provided that the parties were to resort to arbitration only if the Argentine courts could not address the matter within 18 months of filing. Plaintiff never sought a ruling from the Argentine courts.
The BG Group had acquired a 54.67% stake in Gas Argentino, S.A., which owned 70% of a recently privatized gas distribution company, MetroGAS. BG Group also invested directly in MetroGAS, and by 1998, it held a 45.11% interest in MetroGAS. In 2001, the Argentine economy collapsed. Beginning in January 2002, Argentina implemented a set of emergency economic measures (the Emergency Law), and then in March it issued a new decree that “stayed for 180 days the compliance with injunctions and execution of final judgments in lawsuits brought on account of the Emergency Law’s effect on the financial system.”
In April 2003, BG Group filed its Notice of Arbitration, relying on a statement by the Argentine Minister of Justice that it would take at least six years to resolve BG Group’s claims in the Argentine courts, and also claiming that the requirement that domestic remedies be exhausted was obviated because Article 3 of the Treaty granted most favored nation treatment, and the bilateral treaty with the United States did not require exhaustion.
The Arbitral Panel found the Treaty no bar to arbitration, since the Emergency Law had restricted access to the courts. Because a strict reading of the Treaty would yield an “absurd and unreasonable result,” the panel found that the Emergency Law had rendered the relevant provisions inoperative. Proceeding to the merits, the panel awarded BG Group just over $185 million in damages, which represented the diminution in value of BG Group’s investment as a result of the Emergency Law. The District Court denied Argentina’s motion to vacate the award and granted BG Group’s cross-motion for enforcement.
The key issue before the D.C. Circuit was whether the arbitral body had the power to decide arbitrability. The Court found that the parties had agreed to leave that issue to the arbitrator only after domestic remedies had been exhausted. Prior to that, the Court found that the parties should have expected that a court would decide arbitrability. That intention is explicit, and therefore the public policy in favor of arbitration cannot override the intent of the parties.
Three Arbitration Decisions Part I: Gore v. Alltel, Seventh Circuit
In Gore v. Alltel Communications, the Seventh Circuit reversed the District Court and granted Alltel's motion to compel arbitration. In October 2005, Mr. Gore entered into a two-year agreement with First Cellular. He agreed to pay $40/month for four separate wireless lines. His agreement with First Cellular contained no arbitration clause. In May 2006, Alltel acquired First Cellular.
The details are complicated, but in the transition from First Cellular to Alltel, Mr. Gore lost service on some of his wireless lines. In addition, he was offered a choice between a $250 termination fee or a new contract that required him to purchase an Alltel-compatible phone and to pay $109/month for continued service. Mr. Gore chose the latter and then filed a class-action suit against Alltel, as successor in interest to First Cellular, alleging breach of contract, deceptive trade practices, civil conspiracy and unjust enrichment. However, back in November 2006, he had received an invoice that put him on notice that by using the services provided by Alltel, he was accepting new terms and conditions, including an arbitration clause.
Alltel had the case removed to federal court and then moved for dismissal and compelled arbitration. The District Court denied the motion to dismiss pending discovery on the issue of whether or not arbitration was appropriate. Alltel filed an interlocutory appeal. The Seventh Circuit stated the applicable rule as follows:
In cases like this, where the parties enter into two agreements—though only one contains an arbitration clause, and the plaintiff brings a cause of action based, at least in part, on conduct contrary to the agreement that does not have the arbitration clause, the parties can be compelled to arbitrate only if (1) the clause itself is broad enough to encompass their dispute, or (2) the agreement containing the clause incorporates the other by reference.
In this case, the Alltel contract did not incorporate the First Cellular contract by reference, so the case turned on the court's determination of the breadth of the arbitration clause. After a careful review of each of Gore’s claims, the Seventh Circuit found each subject to the arbitration clause. Gore also claimed that the arbitration agreement is unconscionable, but that issue is one for the arbitrator to decide.