Wednesday, January 16, 2013
This is the second in a series of posts on issues that arise in a Sales course.
As Holly K. Towle lays it out in, Enough Already: It Is Time to Acknowledge that UCC Article 2 Does not Apply to Software and Other Information, 52 S. Tex. L. Rev. 531 (2011), many courts simply apply Article 2 to software licenses without much consideration of the law of licenses Others apply the law of licenses, which she thinks is appropriate. Her approach makes sense when we're talking about mass-marketed software provided to consumers through licenses. In fact, courts ought to take notice of the fact that all U.S. jursdictions have now clarified the status of software as a "general intangible" and not a good through the revisions to UCC Article 9 adopted in all fifty states.
But what of custom-made software that may not be licensed but sold to the client who will be its exclusive user? My impression from the limited caselaw I have reviewed on the subject suggests that courts recognized early on that software consists of both tangible and intangible elements. They seem to have assumed that the intangible elements (the services provided in developing software, for example) could be easily separated from the tangible elements (the disks, drives or hardware associated with the delivery of the software). On this line of reasoning, only the latter are goods. That distinction strikes me as artificial. Unless the deal involves a lot of hardware, the cost of the "goods" is trivial compared to the costs of software development, and in fact, with digital downloads and cloud computing, there may not be a good at issue at all. That is, my office used to be cluttered with the boxes that held the disks on which my software came to me. I may have naively thought of software as a good then because those boxes made software look like a good. Now, my software either comes pre-loaded or I download it without the aid of a disk or external drive. Now it looks much less good-like, but of course, how it looks should not matter.
Towle draws on IP law to argue that software is really "information" and information ought to be treated differently from tangible goods. I'm not sure I understand why that distinction matters if we are dealing with a sale rather than a license. A lot of things that we consider goods are really just information, in the sense that Towle uses it. Books are just information, but a sale of books is a sale of goods (although she is correct that you cannot return a lousy novel based on a breach of the implied warranty of merchantability). There are lots of other items that we buy about which is could be said that the costs of development constitute a large part of the costs of the good, but the UCC does not ask about cost breakdowns; it just asks if the subject of the transaction is moveable at the time that it is identified to the contract. Electricity has been held to be a good because it moves. So does information. More particularly, custom-made software, White & Summers point out, does not really seem much different from any other specially-manufactured good, which the UCC treats as a good for the purposes of Article 2.
I recommend Towle's article. She has persuaded me that courts err in trying to apply Article 2 to software licensing transactions, but when it comes to custom-designed software that is actually sold, rather than licensed, to the end user, I think a strong case can be made for applying Article 2.
I do not know if the software design companies agree to flat out sell the software they develop. It might be safer for them to license it so that they can re-use the code for other businesses that might need similar software designed for their specific needs. If that's the way these deals are done, it follows from Towle's reasoning that licensing law, rather than Article 2 should apply to those transactions as well.
H. Martin Gibson, Modifying Oil & Gas Documents for Horizontal Drilling, 19 Tex. Wesleyan L. Rev. 77 (2012)
Chunlin Leonhard, The Unbearable Lightness of Consent in Contract Law. 63 Case W. Res. L. Rev. 57 (2012)
Patricia Proctor, J. Kevin West and Gregory P. Neil, Moving Through the Rocky Legal Terrain to Find a "Safe" Royalty Clause or a "New" Market at the Well, 19 Tex. Wesleyan L. Rev. 145 (2012)
James C. Wright, Brian J. Pulito and Cheryl L. Davis, Implied Covenants in Oil and Gas Leases in the Appalachian Basin, 19 Tex. Wesleyan L. Rev. 121 (2012).
Tuesday, January 15, 2013
The N.Y. Times reports that Conde Nast has issued new contracts to its writers with changes that diminish their right to profits from articles. Conde Nast is the publisher for magazines like Wired, Vanity Fair and The New Yorker. (You remember magazines, right? They’re printed on paper and you can usually find them at airports. Unlike newspapers, they don’t leave inky residue on your fingers). Conde Nast writers typically lack job security and benefits, signing one-year contracts – but they are (or were) allowed to keep the rights to their work. These rights could be valuable if an article becomes a movie, like “Argo” or “Brokeback Mountain.” Under the new contracts, however, Conde Nast has exclusive rights to articles for periods of time ranging from thirty days to one year and option rights where payments to the writer top out at $5K. If the article is turned into a movie, there is also a cap on what writers can receive.
It would be easy for me to demonize Conde Nast given my association with writers. Yet, it’s no secret that the demand for glossies is diminishing and that publishers need to figure out a way to monetize their content better – otherwise, there won’t be any magazine writers at all. Perhaps Conde Nast could bargain employee benefits for these rights, the way newspapers do. Maybe they could increase the cap based on different variables. Maybe they could lift the exclusivity for certain writers after a period of time (or a designated number of successes). Maybe they could commission articles that they conceived in-house, so that the work is a traditional work for hire, and the cap isn’t tied to an idea that originated with the writer. In any event, it’s clear that Conde Nast needs to evolve with the marketplace; what’s not so clear is that this is the way to do it.
As indicated in Monday's post, I am teaching Sales for the first time this semester, and this is the first in what I hope will be a series of posts in which I highlight but do not resolve tricky issues addressed in the course.
The situation is quite common. A contract involves the provision of both services and goods: a construction contract covers both building supplies and labor costs; a medical contract covers both the costs of the surgery and the prosthetic device to be inserted in toto the body; a software company will both design and maintain the software, while also providing computer hardware to run it. Are these transactions covered under Article 2?
Most courts seem to favor a version of the "predominant purpose" test, although it goes by various names. In such cases, the court's analysis aims to determine whether the contract is predominantly one for goods or one for services. But what does it mean to have services of goods predominate? It could mean that the parties thought of the contract as one for good or as one for services, in which case the inquiry will largely turn on the parties' testimony, although if the contract is named "Sercies Agreement" or "Purchase Agreement" that might help. Or the court might have to look to which component counted for a larger portion of the contract price.
Contracts scholar and FOB (Friend of the Blog) Steven Feldman (pictured) has provided a more detailed account of the predominant purpose test including a list of factors that courts (in his example in Tennessee) weigh in appyling that test:
Where a contract has a mix of goods and services, relevant criteria for determining whether the UCC will control a contract will include the contract language, the nature of the seller's business, the reason for entering the contract, and the amounts charged under the contract for the goods and services.
Fleet Business Credit, LLC v. Grindstaff, Inc., 2008 WL 2579231 (Tenn. Ct. App. 2008). But the fact that the test is multi-factor and nuanced only renders it more problemmatic in my view, on which more below.
Other courts use the gravamen of the action test. They look not to what the contract as a whole was about but to whether the issues in the case relate to faulty service or faulty goods. So, for example, I am using the Whaley & McJohn casebook on sales, which includes a Maryland case about a faulty diving board installed as part of the installation of an in-ground pool. The case related not to the installation of the pool but to the design of the board, which was slippery on the end. The court applied the gravamen of the action test and found that the UCC applied.
The gravamen of the action test seems right to me, and I'm surprised that more states have not adopted it. Predominant purpose is vague and hard to apply, and it seems artibtrary that whether or not a contractor's work should be covered on a warranty should turn on whether 45% of 55% of the cost was related to the provision of goods. Moreover, the fact that a party sold a good as part of a services contract should not affect the warranties that run with the sale of a good. And on the other side, if there was a failure in the services provided in connection with a provision of goods, then the warranties that relate to the goods should not be relevant in an assessment of whether or not the service provider was at fault.
The gravamen rule also seems better to me in terms of putting the parties on notice of potential liabilities in store. Faced with a multi-factor test like the predominant purpose test, parties to mixed contracts cannot know in advance whether their contract will be governed by the UCC or not. If the gravamen rule applies, parties should always know that the UCC will apply to the goods portion of the contract. And if a service provider wants to protect itself from liability relating to the goods it installs, that legal certainty can be very valuable.
Monday, January 14, 2013
Coverall North American (Coverall) contracts to provide janitorial clearning services to building owners or oeprators. The people who do the clearning, a/k/a janitors, are falled "franchisees." These franchisees sued Coverall alleging state law claims, including breach of contract. The case was before the First Circuit on the issue of which franchisees were subject to arbitration provisions in the Franchise Agreements. The District Court certified a class consisting of plaintiffs not subject to the arbitration provisions and then later expanded the class to include the plaintiffs in Awuah v. Corvall North America, Inc., (Awuah Plaintiffs) who were not party to the original Franchise Agreements containing the arbitration provisions but signed other agreements that incorporated those provisions by reference. The District Court found that the incorporation by reference did not give the Awuah Plaintiffs sufficient notice of their obligation to arbitrate to those plaintiffs who never were given a copy of the documents incorporated by reference.
The District Court's expansion of the class was predicated on its reading of First Circuit precedent providing that a party cannot be bound by an arbitration clause of which she has no notice, and the First Circuit reversed of the District Court's ruling because it disagreed with that reading of the case law. The District Court was correct in finding that, while the unconscionability of an arbitration clauses can be decided by an arbitrator, the question of whether there was an arbitration agreement at all must be decided by a court. However, the First Circuit concluded, while the District Court asked the right question, it provided the wrong answer.
Massachusetts law requires no magic language to effect an incorporation by reference so long as the intent to do so is clear, and the First Circuit found that the various agreements to which the Awuah Plaintiffs are parties all clearly incorporated the Franchise Agreements and their aribtration provisions. The District Court also erred in its reading of federal law, importing from the realm of employment law a general heightened notice requirement that it applied to all arbitration provisions. No such general requirement exists and even if some state law provision imposed a heightened notice rule, that rule would be pre-empted by the Federal Arbitration Act, according to both AT&T Mobility v. Concepcion and Nitro-Lift Tech. v. Howard.
The First Circuit reversed the District Court's expansion of the class to include teh Awuah Plaintiffs and ordered their claims stayed pending arbitration.
I am teaching Sales this semester for the first time. It's pretty exciting actually. I expect to be posting a lot of issues that are new to me since I've never covered the material before. I have not read widely in the area, so there are probably answers out there to my questions, but I don't have time to research them all. Or sometimes I suspect there will not be clear answers. In either case, I invite contracts scholars and practitioners to weigh in with references to relevant cases or scholarship or with opinions.
- When should mixed contracts be treated as contracts for the sale of goods: predominant purpose v. gravamen of the action test?
- When is a contract relating to software a contract for the sale of goods and does the emergence of the cloud change our perspective on the issue?
- Why should a distribution agreement be treated as a contract for the sale of goods?
Thursday, January 10, 2013
With more people acting like citizen journalists these days, celebrities often are exposed for engaging in various activities they'd rather their fans not know about (insert shameless plug for my privacy-related article, The Mythical Right to Obscurity, here). For example, pictures of Justin Bieber recently surfaced that allegedly show him holding a "blunt," a.k.a. marijuana rolled like a cigarette. How is this related to contracts? Well, in order to avoid future publication of pictures like the blunt pics, Justin Bieber reportedly is posting signs wherever he socializes which state that any pictures taken of him during the socializing belong to Justin Bieber only. In other words, if you are hanging out with Justin Bieber, Baby, you are promising not to distribute (take?) any pictures without his express permission. The questions for our blog are:
(i) Is there a contract? Is my staying in the room, thereby giving him Somebody to Love, acceptance of Justin's proposed terms (like my keeping of the computer in Gateway)?
(ii) Is there consideration? Is Justin's staying in the room valid consideration to support my promise not to share pictures of him? Or is everything ok As Long as [He] Love[s] Me?, and
(iii) Has my use of song-related puns in this and other posts grown tiresome?
In a related post, our own Nancy Kim discussed Chris Brown's practice of requiring fellow partiers to sign a confidentiality agreement.
[Heidi R. Anderson]
Wednesday, January 9, 2013
Fans of last year's contest to choose the best contracts law article of the year, heralded as the First Annual ContractsProf Prize may now wonder what became of that contest, which should now be in the midst of its second, annual iteration.
Well, it's a long story, but the short version is, the contest took a lot of time, and we all got too busy. All four current contributors to the blog, Heidi Anderson, Nancy Kim, Meredith Miller and I read all the finalists and voted on a winner. This year, we were too busy grading, writing, etc. to be able to organize another contest. Who knows what the future will hold. In the meantime, here are some of the top contracts articles that appeared in 2012.
George M. Cohen, The Financial Crisis and the Forgotten Law of Contracts, 87 Tul. L. Rev. 1 (2012)
Melissa T. Lonegrass, Finding Room for Fairness in Formalism--The Sliding Scale Approach to Unconscionability, 44 Loy. U. Chi. L.J. 1 (2012)
Anat Rosenberg, Separate Spheres Revisited: On the Frameworks of Interdisciplinarity and Constructions of the Market, 24 Law & Lit. 393 (2012)
By the way, in addition to the great panel that the AALS Section on Contracts put on, some of us found other things to do with our time in New Orleans. I, for example, ate an alligator:
Tuesday, January 8, 2013
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal
November 8, 2012 to January 7, 2013
|1||396||The Cross-Border Freedom of Form Principle Under Reservation: The Role of Articles 12 and 96 CISG in Theory and Practice
Ulrich G. Schroeter,
University of Mannheim - Faculty of Law
|2||315||Libertarianism, Law and Economics, and the Common Law
Todd J. Zywicki,
George Mason University - School of Law, Faculty
|3||145||Monism and Dualism in International Commercial Arbitration: Overcoming Barriers to Consistent Application of Principles of Public International Law
University of Missouri School of Law
|4||144||Sovereign Immunity and Sovereign Debt
Mark C. Weidemaier,
University of North Carolina (UNC) at Chapel Hill - School of Law
|5||125||Contracting About Private Benefits of Control
Ronald J. Gilson, Alan Schwartz,
Stanford Law School, Yale Law School
|6||112||The Historical Origins of America's Mortgage Laws
Andra C. Ghent,
Arizona State University (ASU) - Finance Department
|7||109||A People's History of Collective Action Clauses
Mark C. Weidemaier, G. Mitu Gulati,
University of North Carolina (UNC) at Chapel Hill - School of Law, Duke University - School of Law
|8||86||The Transnationalisation of Commercial Law
Gralf-Peter Calliess, Hermann Hoffmann, Jens Mertens,
University of Bremen - Faculty of Law, University of Bremen - Faculty of Law, University of Bremen - Faculty of Law
|9||75||Class, Mass and Collective Arbitration in National and International Law
University of Missouri School of Law
|10||71||The Inalienable Right of Publicity
Jennifer E. Rothman,
Loyola Marymount University - Loyola Law School Los Angeles
|1||111||A People's History of Collective Action Clauses
Mark C. Weidemaier, G. Mitu Gulati,
University of North Carolina (UNC) at Chapel Hill - School of Law, Duke University - School of Law
|2||53||Transnational Private Regulatory Governance: Ambiguities of Public Authority and Private Power
York University - Osgoode Hall Law School
|3||52||Custom, Contract, and Kidney Exchange
Kieran Healy, Kimberly D. Krawiec,
Duke University, Duke University - School of Law
|4||49||Contracting with Sovereignty: State Contracts and International Arbitration (Book Review)
A. F. M. Maniruzzaman,
University of Portsmouth - School of Law
|5||43||Would Enactment of the Uniform Premarital and Marital Agreement Act in All Fifty States Change U.S. Law Regarding Premarital Agreements?
J. Thomas Oldham,
University of Houston - Law Center
|6||30||The Role of Public Policy and Mandatory Rules within the Proposed Hague Principles on the Law Applicable to International Commercial Contracts - Updating Note
University of Sydney - Faculty of Law,
|7||24||Interpretations of Standard Clauses: A Comparative Study of China and UK Contract Law
Xi'an Jiaotong University -- School of Law
|8||20||Die Bestimmung durch einen Dritten im Europäischen Vertragsrecht – Textstufen transnationaler Modellregelungen (Determination by a Third Party in European Contract Law – A Genetic Comparison of Transnational Model Rules)
Max Planck Institute for Comparative and International Private Law
|9||20||Norms and Law: Putting the Horse Before the Cart
Barak D. Richman,
Duke University - School of Law
|10||19||The Duty to Draft Reasonably and Online Contracts
Nancy S. Kim,
California Western School of Law
Monday, January 7, 2013
Below is a parking ticket I got from a parking lot outside of a hotel I stayed at over the holidays. The fact that the ticket announced itself as a contract caught my attention. It was as if the busboy in a restaurant, after clearing the table and placing a towel in his waistband, pulled out a pad of paper and announced, "My name's Devon, and I'll be your server tonight."
Nothing against busboys or servers. They each have their designated role, and for some reason restaurants keep them separate. If you ask a busboy to bring you some ketchup, the best he can do is pass word on to the server that you need something, who will then send over the ketchup sommelier who will intimidate you with questions about what you have in mind for what he calls "catsup," what kind of tomato you prefer and if there was a particular vintage you had in mind. Similarly, it seems a bit ambitious for a simple parking ticket to announce itself as a contract. That's all I'm saying.
At this point, it should not shock us that our knowing assent to terms is not required for the the formation of a consumer contract, but still I found this little parking ticket a bit jarring. The reason for that is as follows. At the hotel at which I stayed, you actually don't use the ticket to get in and out of the parking lot; you use your room key, which has no contractual langauge written on it. Nor were there signs elsewhere in the parking area that I noticed about limitations of liability. I got the ticket because I parked my car before getting my room key.
Moreover, the information provided does not seem adequate to establish a contract. How long can I park my car? What do I pay for the license to do so. That information was not provided to me until I checked in to the hotel. If I had just wandered into that parking lot without checking into the hotel, I would have no information about parking rates, and I'm not sure how a court would go about implying a price term in this case. Social conventions suggest that I ought to know that by taking a ticket, proceeding through a raised gate and entering a parking lot, I am agreeing to pay for the privilege, but that should not mean they can charge me whatever they please.
If I had parked outside the front entrance of the hotel, unpacked my stuff, registered and then parked my car, I would have used my room key to get into the parking lot and never have received the notice printed on the ticket. I suspect that the hotel somehow would still have found a way to limit its liabilty for any damage to my (rental) car while it was parked in its lot, but I really have no idea how or if it matters. It's all for the best, because this way I started my little holiday thinking about contracts.
Friday, January 4, 2013
But tomorrow morning is Saturday, and that means . . .
It's time for the AALS Section on Contracts Session:
8:30-10:15 AM: Oak Alley, Third Floor, Hilton new Orleans Riverside
"Good Faith Notice and the Bilateral Employment Contract," Rachel Arnow-Richman, University of Denver Sturm College of Law
"Instructing Juries on Noneconomic Contract Damages," David A. Hoffman, Temple University, James F. Beasley School of Law
"The Dog that Didn’t Bark: Private Investment Funds and Relational Contracts in the Wake of the Great Recession,” Robert C.Illig, University of Oregon School of Law
"Formality in Patent Licensing," Karen E. Sandrik, Willamette University College of Law
To be followed by the ever-exciting business meeting.
We hope to see you there.