Tuesday, November 19, 2013
Wrap Contracts Symposium, Part III: Woodrow Hartzog, Wrap Contracts as Mediators of Social Interaction
This is the third in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our third guest blogger is Woodrow Hartzog, an Assistant Professor at Samford University’s Cumberland School of Law and Affiliate Scholar at the Center for Internet and Society at Stanford Law School.
Professor Kim’s book is an extremely valuable addition to the literature. Kim adeptly distinguishes wrap contracts from traditional contracts. Perhaps more importantly, Kim distinguishes wraps from boilerplate paper contracts. In this review I will argue that Kim’s case for wrap exceptionalism could be taken even further for parties in highly interactive relationships, such as the relationship between social media and their users.
One of Kim’s most valuable contributions is her explication of how the form of wrap contracts accounts for their proliferation, content, and problematic legal treatment. The absence of any meaningful physical restraints on wrap contracts, like the available area on paper for text and the ceremony required to actually sign paper contracts, has resulted in a difference in kind from other contracts, not just a difference in magnitude.
Kim also focuses on the problematic content of wrap contracts. Kim’s thesis is that the form of wraps makes reading them so burdensome that problematic content is inevitable. Drafters can insert terms that are unfavorable to the adherent because they know that adherents will not read them. Kim develops a helpful taxonomy of shield, sword, and crook terms. These categories can be roughly described as limitations on liability for offered services (shield terms), terminations of rights held by the other party (sword terms), and appropriation of benefits unrelated to the consideration that is the subject of the transaction (crook terms).
I agree with Kim’s observations that both the form and content of wrap contracts make them substantially different than paper contracts, including paper boilerplate. But Kim may have left out an important variable in her case that wraps deserve exceptional legal treatment. Kim could better highlight the importance of the service being offered by the drafter of the wrap contract and the form that service takes. Many of the examples used by Kim involve standard commercial transactions such as Amazon or iTunes. But commercial websites are unlike other websites, notably the social web. Social media offer tools for social interaction and self-expression, which, until the Internet, have been largely boilerplate-free activities.
Social media wrap contracts differ from their commercial website counterparts in at least two important ways: 1) Social media are much more interactive than traditional websites. This interactivity is an opportunity for websites to obtain specific assent to terms; and 2) many social media wrap contracts include social behavior restrictions, such as community guidelines. These restrictions simultaneously cost and benefit adherents precisely because they are universally applied and non-negotiable.
Greater Interactivity Can Lead to Specific Assent
All websites are becoming more interactive, but few more so than social media. Users can utilize privacy settings, tag others, and click and drag in ways that communicate preferences to websites like never before. These user expressions and the design that enables them are ideal opportunities for meaningful assent. In many ways, website design can communicate messages to users more effectively than boilerplate ever could. For example, privacy settings often make it clear that “only friends” or authorized “followers” will have access to your information. If a website’s data access and use policy is also part of the wrap contract, should the settings or the wrap govern who can access user info?
Kim proposes that “drafting parties should receive specific assent to obtain rights belonging to the nondrafting party that are not directly created from the drafting party’s license or promise. In other words, sword and crook provisions…require specific assent but shield provisions do not.” (195) Assuming binding privacy policies generally operate to effectuate consent to a website’s collection and use of the adherent’s data, privacy settings would seem to be an effective way to obtain specific assent under Kim’s proposal.
Community Guidelines Benefit Contract Adherents Yet Also Leave Them in a Bind
Social media often require many commitments from their users. For example, Facebook requires its users to promise not to “provide any false personal information on Facebook,” “bully, intimidate, or harass any user” or “do anything unlawful, misleading, malicious, or discriminatory.” These kinds of terms make it virtually impossible to interact online without fear of breaching the required contract. Users can either hardly use the website or roll the dice and hope they don’t get caught.
Yet there is a dichotomy that makes these terms difficult to categorize. They are a cost to the user who must refrain from certain kind of otherwise permissible conduct, yet they are also a benefit to that same user because every other user also promised to refrain from the same antisocial or illegal behavior. Here, the uniform and non-negotiable nature of wraps is precisely what makes them attractive to users. These terms can be used to combat scourges like hate speech and revenge porn.
While Kim recognized that wrap contracts are beneficial because they facilitate mass transactions and minimize risk for drafters, she overlooked the benefits that wrap contracts can have when terms set rules for how Internet users interact with each other.
Given that social behavior restrictions simultaneously cost and benefit the adherent, it is unclear if Kim would subject these terms to additional scrutiny as “sword” or “crook” terms.
These observations are meant to support Kim’s proposals, not counter them. Kim rightly criticizes the current legal approach to wrap contracts. Her solutions wisely harness the elasticity of existing contract doctrine to right the ship. Social media vividly illustrate the problematic proliferation of wraps in unprecedented areas. Yet they also represent opportunities to effectuate Kim’s proposed solutions.
[Posted, on Woodrow Hartzog's behalf, by JT]
Monday, November 18, 2013
I'm enjoying the posts from Ryan Calo and Miriam Cherry about my book, Wrap Contracts: Foundations and Ramifications and plan to post a response later this week. A common question I get (after, Are these things really legal?) is What harm can these contracts cause anyway? Well, one woman claims that a company can use them to ruin your credit. The woman, Jen Palmer, ordered some trinkets from KlearGear.com but she claims that she never received them and canceled the payment. After she allegedly failed to reach someone at the company, she wrote a negative review of KlearGear.com on a consumer reporting website stating that they have "horrible" customer service. KlearGear allegedly emailed her, claiming that her negative review ran afoul of a non-disparagement clause in their online terms of sale. She says that they told her to remove the post or face a $3500 fine. Ms. Palmer was unable to get the post removed and alleges that KlearGear.com reported her to a credit bureau! She claims that she is now fighting the negative mark on her credit report which is preventing her from getting loans for a new car and house repairs.
I don't think the terms of sale are enforceable against Ms. Palmer but that's almost beside the point. Contracts are used in a variety of ways - one of those ways is to deter problems. Not many consumers are willing to fight to test the enforceabilty of a contract in court.
But I have a question: Why would a credit agency ding someone's record simply because they received a call from an online retailer about someone who wasn't even a customer breaching the terms of sale? I checked KlearGear's website and couldn't find the non-disparagement clause in their terms of sale- they might have removed it after the negative publicity or it might not be in another agreement that doesn't appear until a customer places an order. There's got to be more to this story...or else we've just entered a new era of abuse by wrap contracts.
A screwdriver can be used for turning screws and opening cans of paint. Or it can be used as a dagger in mortal prison combat. Likewise, a contract can “facilitate an efficient private ordering of society,” but it can also be “a means of social dominance and oppression.” Law professors should be quicker to tell new students about the shank-side of contracts.
That’s the gist of Teaching Contract Law: Introducing Students to a Critical Perspective Through Indentured Servitude and Sharecropper Contracts, 66 SMU L. Rev. 341 (2013), by Dr. Gregory Scott Crespi.
Crespi provides a sample lecture in which he tells of homeless English people becoming indentured servants and former slaves becoming sharecroppers. In both cases, contracts were used to bind people to functional slavery.
Crespi gives this lecture around the third class of the semester. He believes that informing students of such abusive contracts early in their legal educations allows them to bring a critical perspective to subsequent doctrinal studies and to consider the law’s context and unintended social consequences.
Dr. Crespi has done us several services by publishing this piece: (1) he has given us a brilliant lecture to use if we don’t feel like doing our own critical research; (2) he has kept it short, six printed pages, excluding footnotes; and (3) he has told us some important stories about abusive contracts.
But I wonder if Crespi’s approach is like teaching students to play tennis without a net? Does the first-semester 1L understand the intended consequences of the law well enough to opine on the unintended consequences? Students arrive at law school fluent in cynicism, but they have difficulty describing the relationship between well-established doctrines and the common good. So perhaps students should be encouraged to develop a critical perspective later, rather than sooner.
Using Crespi’s screwdriver analogy, imagine a master carpenter saying to his new apprentice, “The first thing about a screwdriver is that it turns screws. The second thing is that it can open a can of paint. The third thing is that it can be sharpened into a dagger and used to kill a man.” It’s a fascinating narrative, but is it apt for the apprentice? I’m inclined to think students need to know doctrine before they can criticize it and that giving new students the critical perspective too early might cause them to develop a distorted view of Contracts and the world.
Query the right view of Contracts and the world. If the professor think it’s more shanks than screwdrivers, perhaps the critical lesson should come early. I probably won’t be giving that lesson until at least class number four.
[Image by Xeni Jardin]
This is the second in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our second guest blogger, Miriam A. Cherry, is a visiting professor at the University of Missouri School of Law and a tneured professor law at Saint Louis University.
The Duty to Draft Reasonably
Professor Nancy Kim’s “Wrap Contracts” is a foundational book, one that delves deeply into recent cases surrounding online contracting. Based on existing strands of contract theory, Prof. Kim expresses concern about the ways in which wrap contracts reinforce, and in many instances, amplify, one-sided contracting that may harm consumers in adhesion contracts. Pointing to a recent study, Kim notes that it would cost the average American Internet user the equivalent of $3,534 a year to read the privacy policies of each website that he or she visits.” (213) Noting that wrap contracts bear little similarity to the model of free assent that undergirds traditional contract theory, Kim sensibly argues for a more balanced model of drafting and enforcement.
Prof. Kim is not alone in calling for a more level playing field between businesses and consumers. Indeed, Margaret Jane Radin’s recent book, Boilerplate, contains a similar approach, and earlier work by legal academics, Todd Rakoff and Fredrich Kessler, provided what is now a well-understood and well-articulated argument against contracts of adhesion. The approach finds support in decades of writing by legal academics, ethicists, journalists, and consumer advocates, who have all voiced similar problems with the one-sided nature of adhesion contracts.
Granted, wrap contracts are different – and perhaps even more disturbing – than the original adhesion contracts that engendered them. But the fact remains that wrap contracts spring from - and build on – the same set of problematic assumptions that underlie adhesion contracts. Given that this literature is well-known, Prof. Kim faces a high hurdle to say something interesting and new.
The piece of Prof. Kim’s solution that most resonated was her idea of imposing a “duty to draft reasonably,” (176). Her solution would seem to be the converse of the current idea that consumers have a “duty to read.” Right now this is a one-sided duty without a corresponding responsibility on businesses posting wrap contracts or adhesion contracts. Some of the devices she describes in the book – how some online businesses have used wrap contracts as sword, shield, and crook (in instances where consumers are subject to overreaching behavior) reinforce the impression that Prof. Kim’s recommended intervention is needed. As such, imposing such a reasonableness requirement to make a wrap contracts enforceable seems eminently sensible. Prof. Kim’s book is timely, well-researched, and will play an important role in the debates about adhesion and wrap contracts that are sure to happen in years to come.
[Posted, on Miriam Cherry's behalf, by JT]
This is the first in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Today's contributor, Ryan Calo, is an assistant professor at the University of Washington School of Law and the Faculty Director of the Tech Policy Lab at the University of Washington. He previously served as a director at the Stanford Law School Center for Internet and Society (CIS) where he remains an Affiliate Scholar.
I am delighted to contribute to this online symposium around Nancy Kim’s new book, Wrap Contracts: Foundations and Recommendations. Even if you are closely familiar, as I am, with Kim’s previous work, I recommend picking up a copy; the author both synthesizes and meaningfully extends her important thinking on the evolving role of contracts in a digital world. The sophisticated practitioner, too, has something to gain, particularly from later parts of the book where Kim explores the origins and strategic uses of wrap contracts and makes recommendations that attorneys may one day encounter in a court opinion or Federal Trade Commission complaint.
Indeed, Kim is one of only a handful of legal scholars (another is Woodrow Hartzog, whom Kim mentions) who engage in a sustained way with the growing importance of interface design (i.e., the very look and feel of a website or digital product) on contemporary contract formation and enforcement. You see this, for instance, in her wonderful discussion of responsible drafting in Chapter 11. And while I cannot show causation, as opposed to correlation, I would note that the Federal Trade Commission has in recent years brought enforcement proceedings based in part on interface design, in one case hiring a human-computer interaction specialist to act as an expert witness.
What has most amazed me in my own examination of this space is the range of possibilities the digital environment offers. If there were one critical note I would sound about Kim’s otherwise substantively and methodologically comprehensive book, it is that she does not always countenance the full boundaries of consumer experience. Kim cites to Oren Bar-Gill (at page 83) for the proposition that the growing complexity of contracts hides their true costs from the imperfectly rational consumer. Kim also develops various scenarios in Chapter 10 meant to underscore the powerlessness consumers feel to address conflicts with web companies. But the prospect for mischief is worse still: As the short title of Bar-Gill’s book, Seduction By Contract, suggests, companies may leverage what they know about consumer psychology to design purposefully disadvantageous terms. I would (and do) go further in forthcoming work, arguing that firms increasingly control every aspect of their interaction with consumers. We should expect this control, coupled with the firms’ meticulous knowledge of consumers and their economic incentive to maximize profit, to lead to a wider variety of digital abuses than Kim acknowledges. Contract becomes not a just a shield against liability here but, in a few instances, a species of license for ethically questionable business practices.
Similar criticisms could focus on Kim’s pessimistic assessment of the potential prospective advantages that a more mediated world might have for consumers. Kim explores how a better understanding of design can improve disclosure and contract in an online environment. I certainly agree, as Kim notes, that the digital nature of contemporary commerce could result in enhanced disclosure, and maybe even drag notice beyond inscrutable prose and into the twenty-first century. But what I expected and did not see—what I hope still to see from Kim—is a response to the work of Scott Peppet. Peppet argues that increased digitalization could, if anything, strengthen the traditional understanding of freedom of contract by conferring on consumers radical new tools of evaluation and comparison. I would want to understand why the dangerous ascendance of wrap contracts is not substantially offset by other digital developments that empower consumers. (Eric Goldman recently made this comment about my work, so it is top of mind).
To summarize: Kim’s is a rich and engaging book that I would recommend to anyone who is intellectually curious about consumer contracts or whose professional life in some way depends on them. I learned a lot and agree with many of Kim’s recommendations. By way of critique, I would say only that Kim’s book does not answer every single fascinating question about digital contract. Perhaps no book could, nor would I necessarily want hers to. Then I would not so eagerly anticipate Kim’s future work.
[Posted, on Ryan Calo's behalf, by JT]
Sunday, November 17, 2013
The symposium marks the publication of Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Next wek, this blog will publish posts by experts from around the country commenting on Nancy's work. Here is Oxford's bullet point summary of the book's virtues:
- Explains why wrap contracts were created, how they have developed, and what this means for society
- Uses hypotheticals, cases, and real world examples
- Discusses court decisions with summary critiques
- Provides doctrinal solutions grounded in law and policy
- Defines and distinguishes different types of contract terms
- Includes actual wrap contract terms, flow charts, checklists and other visual aids to explain legal concepts
The following people will be adding their own thoughts and comments on the blog next week:
Ryan Calo is an assistant professor at the University of Washington School of Law. He researches the intersection of law and emerging technology, with an emphasis on robotics and the Internet. His work on drones, driverless cars, privacy, and other topics has appeared in law reviews and major news outlets, including the New York Times, the Wall Street Journal, and National Public Radio. Professor Calo has also testified before the full Judiciary Committee of the United States Senate.
Professor Calo serves on numerous advisory boards, including the Electronic Privacy Information Center (EPIC), the Electronic Frontier Foundation (EFF), the Future of Privacy Forum, and National Robotics Week. Professor Calo co-chairs the Robotics and Artificial Intelligence committee of the American Bar Association and is a member of the Executive Committee of the American Association of Law Schools (AALS) Section on Internet and Computer Law.
Professor Calo previously served as a director at the Stanford Law School Center for Internet and Society (CIS) where he remains an Affiliate Scholar. He also worked as an associate in the Washington, D.C. office of Covington & Burling LLP and clerked for the Honorable R. Guy Cole on the U.S. Court of Appeals for the Sixth Circuit. Prior to law school at the University of Michigan, Professor Calo investigated allegations of police misconduct in New York City.
Miriam A. Cherry is a visiting professor at the University of Missouri School of Law and a tneured professor law at Saint Louis University. Her scholarship is interdisciplinary and focuses on the intersection of technology and globalization with business, contract and employment law topics. In her recent work, Professor Cherry analyzes crowdfunding, markets for corporate social responsibility, virtual work and social entrepreneurship. Her articles will appear or have appeared in the Northwestern Law Review, Minnesota Law Review, Washington Law Review, Illinois Law Review,Georgia Law Review, Alabama Law Review, Maryland Law Review, and the Tulane Law Review, and U.C. Davis Law Review, among others.
Professor Cherry attended Dartmouth College and Harvard Law School, where she was a research assistant to Professor Martha Minow, the present dean. After graduation from law school, she clerked for Justice Roderick Ireland of the Supreme Judicial Court of Massachusetts and then for Judge Gerald Heaney of the U. S. Court of Appeals for the Eighth Circuit. In 2001, a transition to the private sector took Professor Cherry to the Boston firm of Foley Hoag LLP, where she practiced corporate law with an emphasis on mergers and acquisitions, securities compliance filings, venture capital and private debt financing. She was also associated with the firm of Berman, DeValerio & Pease, where she was involved in litigating several accounting fraud cases including those against former telecom giant WorldCom and Symbol Technologies, which resulted in a $139 million settlement.
Professor Cherry has been on the faculty or visited at a number of law schools, including the University of Georgia, University of the Pacific-McGeorge School of Law and Cumberland School of Law. In 2008, she was elected a member of the American Law Institute.
You can read some of Professor Cherry's scholarship on SSRN.
Woodrow Hartzog is an Assistant Professor at Samford University's Cumberland School of Law, which he has taught since 2011. Professor Hartzog writes in the area of privacy law, online communication, human-computer interaction, robotics, and contracts. His work has been or is scheduled to be published in scholarly publications such as the Columbia Law Review, California Law Review, and Michigan Law Review and popular publications such as The Atlantic and The Nation.
Before joining the faculty at Cumberland, Professor Hartzog worked as a trademark attorney at the United States Patent and Trademark Office in Alexandria, Virginia and as an associate attorney at Burr & Forman LLP in Birmingham, Alabama. He has also served as a clerk for the Electronic Privacy Information Center in Washington D.C. and was a Roy H. Park Fellow at the School of Journalism and Mass Communication at the University of North Carolina at Chapel Hill.
Professor Hartzog holds a Ph.D. in mass communication from the University of North Carolina at Chapel Hill, an LL.M. in intellectual property from the George Washington University Law School, a J.D. from the Cumberland School of Law at Samford University, and a B.A. from Samford University. He is an Affiliate Scholar at the Center for Internet and Society at Stanford Law School.
Recent and Forthcoming publications include:
Juliet Moringiello is a Professor at Widener University School of Law, where she regularly teaches Property, Sales, Secured Transactions, and Bankruptcy, and has taught seminars on Cities in Crisis and Electronic Commerce. From 2004 – 2010, she was the co-author, with William L. Reynolds, of the annual survey of electronic contracting law published in The Business Lawyer. She has recently published articles in the Maryland Law Review, the Wisconsin Law Review, the Fordham Law Review, and the Tulane Law Review. Prof. Moringiello has held several leadership positions in the American Bar Association Business Law Section, most recently in its Cyberspace Law Committee, and she is co-chair of the Uniform Commercial Code Committee of the Pennsylvania Bar Association Business Law Section.
Recent Publications Include:
- From Lord Coke to Internet Privacy: The Past, Present and Future of the Law of Electronic Contracting, 72 Maryland Law Review 452 (2013) (co-authored w/ William L Reynolds).
- (Mis)use of State Law in Bankruptcy: The Hanging Paragraph Story, 2012 Wisconsin Law Review 963 (2012).
- Specific Authorization to File Under Chapter 9: Lessons from Harrisburg, 32 California Bankruptcy Journal 237 (2012).
- Mortgage Modification, Equitable Subordination, and the Honest But Unfortunate Creditor, 79 Fordham L. Rev. 1599 (2011)
Recent Publications Include:
- SOFTWARE LICENSES: PRINCIPLES & PRACTICAL STRATEGIES (Oxford University Press, 2d ed., forthcoming 2013 )
- GLOBAL INTERNET LAW (HORNBOOK SERIES) (forthcoming 2013 )
- GLOBAL INTERNET LAW IN A NUTSHELL (2d ed., 2013)
- The Myth of A Value-Free Injury Law: Constitutive Injury Law as a Cultural Battleground, 107 NW. U. L. REV. (forthcoming 2013) (Book Review Esay of Marshall Shapo's An Injury Constitution, Oxford University Press 2012)
- Twenty-First Century Tort Theories: The Internalist/Externalist Debate, 88 INDIANA L.J. 419 (2013) (Fall 2012, Special Symposium Issue on Civil Recourse & Twenty-First Century Tort Theories with Posner, Calabresi, Goldberg, Zipursky, Chamallas and Robinette)
- Restorative Justice to Supplement Deterrence-Based Punishment: An Empirical Study and Theoretical Reconceptualization of the EPA's Power Plant Enforcement Initiative, 2000-2011, 65 OKLA. L. REV. 427 (2013)
Eric Zacks is an assistant professor of law at Wayne State University Law School. His recent scholarship focuses on the relevance of behavioral sciences to contract formation, breach, and enforcement. His work has been published in the University of Cincinnati Law Review, the University of Pennsylvania Journal of Business Law, and the Penn State Law Review, and his forthcoming article, Shame, Regret, and Contract Design, will be published in the Marquette Law Review.
In 2012 and 2013, Professor Zacks was voted Professor of the Year by the second- and third-year law students at Wayne. He teaches a variety of business law courses, including Corporate Finance, Mergers and Acquisitions, Securities Regulation, and Corporations, as well as a first-year Contracts course.
Prior to joining Wayne State, Professor Zacks was a partner in the corporate and securities department of Honigman Miller Schwartz and Cohn LLP, a Detroit law firm, with a practice focus on complex acquisitions and divestitures, debt and equity financings, and other aspects of corporate transactions. He received his J.D., magna cum laude, from Harvard Law School and his B.A., with high distinction, from the University of Michigan.
Recent Publications Include:
- "Shame, Regret, and Contract Design," 97 Marq. L. Rev. __ (forthcoming, 2013)
- "Contracting Blame," 15 U. Pa. J. Bus. L.. 169 (2012)
- "Unstacking the Deck? Contract Manipulation and Credit Card Accountability,"78 U. Cin. L. Rev. 1471 (2011)
- "Dismissing the Class: A Practical Approach to the Class Action Restriction on the Legal Services Corporation," 110 Penn St. L. Rev. 1 (2005) (with Joshua D. Blank) reprinted in Class Action Litigation and Limitations (Icfai University Press, 2008).
Friday, November 15, 2013
On November 2, 2013, Judge Dearie of the U.S. District Court for the Eastern District of New York denied British Airways' motion to dismiss a putative class action suit in Dover v. British Airways, PLC. Plaintiffs, British Airways Executive Members, allege that British Airway was charging fuel charges on rewards flights that were not actually based on the cost of fuel. British Airways moved to dismiss based on federal preemption and based on the claim that plaintiffs could not show that the surcharge was not based on fuel costs.
The terms and conditions of the Executive Membership agreement provide as follows:
Members will be liable for all taxes and other charges associated with Reward travel on British Airways or a Service Partner airline, including without limitation, airport departure tax, customs fines, immigration fees, airport charges, customer user fees, fuel surcharges, agricultural inspection fees, security and insurance surcharge or other incidental fees or taxes charged by any person or relevant authority or body.
Despite British Airways' claim on its website that fuel surcharges "reflect the fluctuating price of worldwide oil," plaintiffs allege that the fuel surcharges are just an excuse for British Airways to increase revenue by charging passengers hundreds of dollars on free flights. For example, one plaintiff paid $854 for two "free" round-trip tickets between San Francisco and London. Another plaintiff paid nearly $3300 in fees, including fuel surcharges, for five tickets from Los Angeles to London. Plaintiffs put in evidence suggesting that the fuel surcharges are a hedging mechanism that bear little relationship to the actual cost of fuel. The District Court found these allegations sufficient to surive a motion to dismiss.
British Airways also argued that dismissal was warranted because plainiffs' claims are preempted by the Federal Airline Deregulation Act (ADA), which forbids states from "enact[ing] or enforc[ing] a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier[.]" 49 U.S.C. § 41713(b)(l). The District Court found this argument foreclosed by Am. Airlines, Inc. v. Wolens, 513 U.S. 219, 222 (1995), in which the U.S. Supreme Court ruled that "the ADA does not preempt contract claims, whether or not they relate to pricing or would otherwise be precluded if articulated under state consumer protection laws."
The District Court also rejected British Airways' argument that plaintiffs claims are preempted because enhanced or enlarged by state laws or policies external to the agreement. The District Court found that plaintiffs, like those in Wolens, were merely seeking to enforce the terms of their agreement with the airline. Finally, the District Court rejected an implied preemption based on the ADA's occuption of the field on the ground that the U.S. Supreme Court had declined to recognize any such preemption.
Thursday, November 14, 2013
As announced here on the TaxProf Blog, the Mother Ship of the Law Professor Blog Network, of which this blog is a proud member, the Securities Law Prof Blog, edited by Eic Chaffee (Toledo) has been re-launched. From the inaugural post:
The Securities Law Prof Blog has always been one of my favorite blogs because of its comprehensive coverage of an area of the law that I love. A few weeks ago, I spoke with Barbara Black at the Ohio Securities Conference, an event at which we were both presenting. She mentioned that she had decided to step away from the Blog to concentrate on her list of numerous other projects. After contacting Paul Caron, I now find myself in the editor's chair. Over the months to come, I look forward to building the Blog into a comprehensive resource for those interested in securities regulation.
We welcome a new member to the family and congratulate Paul Caron on the continued expansion of his Blog Empire.
Readers who followed our Boilerplate symposium or who are otherwise fans of Peggy Radin's work will be interested to know that she has not rested on her laurels since the publication of Boilerplate. She has some scholarship forthcoming, and you can get a sneak preview over at SSRN.
Here are some titles and abstracts:
This chapter develops an analytical framework that could help legal analysts – especially common law judges – make better decisions about boilerplate in the context of rights deletions deployed by firms against consumers. It is based on one aspect of the author’s recent work, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law (Princeton University Press, 2012). A great deal of mass-market boilerplate – such as hidden lists of terms that recipients have no idea exist – should not be treated as contractual, and should be regulated by other means. But when courts insist on treating boilerplate as contractual, I encourage them to consider an improved analysis. That analysis takes into account three factors: (1) the nature of the right of recipients deleted by the boilerplate; (2) the quality of consent to the boilerplate deletion; and (3) the extent of social dissemination of the deletion. Two particular features of current doctrine should be improved. The procedural/substantive requirement in unconscionability doctrine is misapplied when a judge ignores the nature of the right once she concludes that the quality of consent is adequate, because some rights are market-inalienable, or partially market-inalienable. Market-inalienable rights tend to be rights that are constitutive of civil society, that are not salient to individual decision-makers, and/or that are important for the progress or well-being of the collective as a whole. Also, the notion of reasonable expectation should be avoided because it engenders a truly mischievous positive/normative ambiguity, and seems to license a conclusion that the more something is imposed on people, no matter what it is, the more it is permissible. The approach taken here need not be interpreted as innovative, because it can be understood as a reinvigoration of principles of equity that have been corrupted.
In today’s US, transactions between firms and consumers (including businesses in the position of consumers) routinely contain fine-print terms deleting rights to legal remedies against the firm, such as exculpatory clauses, waivers of consequential damages, and mandatory pre-dispute arbitration clauses. This chapter argues that such remedial rights should not be treated as mere default rules routinely waivable by recipients of fine-print contracts (‘boilerplate’), because such rights deletions threaten the rule of law by undermining rights structures that are central to the state’s obligations toward the public. When remedial rights are subject to easy waiver by boilerplate, they place recipients into a situation that might be called quasi-anarchy; that is, a one-sided situation resembling the anarchy that the state is supposed to supplant. Moreover, they underwrite a scheme of privatization that amounts to exercise of arbitrary power over recipients; and they transgress the principle of equality before the law by separating people that retain legal rights from people that do not. Such rights should remain situated in the public realm, and subject to a species of market-inalienability. This chapter thus argues for a modified version of the public/private distinction, related to maintaining the rule of law.
Wednesday, November 13, 2013
Starbucks lost an arbitration fight with Kraft Foods and is being fined nearly $2.8 billion. Yes, you read that right - that's billion with a B. At the center of a dispute was a 1998 contract that required Kraft to distribute and market Starbucks brand coffee to U.S. retailers. The agreement was supposed to terminate in 2014 but Starbucks didn't want to wait that long. It complained that Kraft wasn't doing a good job promoting its coffee and offered Kraft $750 million to terminate the contract. Kraft rejected but Starbucks ended it in 2011 anyway (and entered into a deal with Green Mountain Coffee Roasters) which led Kraft to commence arbitration proceedings.
Another reminder to think carefully about those long durations in contracts - you can never predict how things will go and it's a good idea to really think about those termination provisions.
A New Haven rabbi purchased a desk on Craigslist for under $200. When the desk couldn't fit through the doorway, he and his wife took it apart. There was $98k in cash in a bag behind one of the drawers. As one article explains:
"Right away my wife and I sort of looked at each other and said we can't keep this money."
They picked up the phone and called the original owner. They recorded the call on cellphone video.
"I saw there was a bag back there and through the bag I saw one 100 dollar bill and I', like, Oh my gosh there's money in there'. And i picked it up and this is pretty heavy. And I brought it over to the table and sort of counted it up and was like 'oh my gosh'."
The original owner was speechless. "Oh my gosh, because I... oh my God," she said.
The former owner had stuffed her inheritance in the desk and forgot where she put the money.
My sense is that the good rabbi did the right thing. But was he legally obligated to return the cash? He certainly received more than he bargained for, but seller beware? Or, would the seller be able to claim mutual mistake to rescind the contract?
[Meredith R. Miller]
In a situation that underscores the importance of thinking twice about very long term contracts, the NBA wants to end a contract which requires it to pay two brothers a percentage of its broadcast revenues. Back in 1976, the Silna brothers owned an ABA franchise, the Spirits of St. Louis. When the ABA merged with the NBA, the Silnas agreed to this bargain - they would dissolve their team in exchange for 1/7 of the television revenues for the four ABA teams that were merged. The four teams were the Indiana Pacers, the San Antonio Spurs, the Brooklyn Nets and the Denver Nuggets.
Sure, back in 1976, the Silnas might have looked silly for giving up a huge buyout for something that seemed pretty worthless (the NBA wasn't even televised prime time) but now the deal is being called "the greatest sports deal of all time."
Not kidding about that "all time" either - the Silvas reportedly received $19 million under the contract last season and the contract term is "in perpetuity." Fat chance the NBA will be able to scream foul on the basis of lack of mutuality...
Jonathan L. Kang, The Effect of the Court of Federal Claims' Decision in Systems Application & Technologies, Inc. v. United States on Contracting Officer Discretion to Take Corrective Action in Response to Protests before the GAO. 42 Pub. Cont. L.J. 585 (2013)
Anthony Niblett, Tracking Inconsistent Judicial Behavior. 34 Int'l Rev. L. & Econ. 9 (2013)
Tuesday, November 12, 2013
When teaching contracts I deal with a delimma. I feel that any law student who graduates and could not carry on a cocktail party discussion about the Coase Theorem has been short changed. There are many places in a contracts class where one might address the theorem. (Of course maybe we all assume someone else will do it.) In fact, if one teaches Walgreen Co. v. Sara Creek Property, you almost have to go out of your way to avoid discussing it even if you do not name it. Specific performance generally invites discussion of the Theorem. It also comes up, if you want it to, any time you ask the class how the parties could avoid an issue. In effect, the could bargain around many problems.
The problem is that, once mentioned, how do you keep it from showing up repeatedly on final exam essay answers? It might legitimately come up in a policy discussion about specific performance but I am pretty sure I have never asked a question that would call for that analysis. It is less pesky than "good faith" and "unconscionability" which tend to worm their way into any answers the students find complicated.
In fact, when teaching anything (for me that means copyright, antitrust. law and economics, and contracts) there are many pieces of information that you may feel make for a better educated law student. Once you mention them they will find their way into exam answer because, well . . . . that's what students do. So how do you enlighten them in a way that rounds them out without also signaling that they need to cram the information into their exam answer?
Hello, I’m one of the new contributors. Thanks for letting me feed the beast.
I’ll be writing some mini-reviews of recent articles and essays. If you have something fresh that you’d like reviewed, e-mail me (email@example.com).
Today I’m reviewing Set in Stone? Changes and Innovation in Consumer Standard-Form Contracts, 88 N.Y.U. L. Rev. 240 (2013), by Florencia Marotta-Wurgler of New York University School of Law and Robert B. Taylor.
Set in Stone studies the evolution of End User License Agreements (EULAs) by comparing their 2003 content to their 2010 content. The article provides a wealth of data about EULA development based on company type, product type, term type, word count, “bias” toward seller or buyer, innovative terms, legal representation, and impact of litigation on terms.
The article focuses on changes in EULAs’ relative buyer-friendliness. For example, a EULA that has changed to inform buyers of their right to return a product has become relatively more buyer-friendly, but a EULA that has changed to allow a seller to remotely disable a buyer’s software is relatively less buyer-friendly.
The article concludes that EULAs are becoming relatively less buyer-friendly. Surprise!
Data provides the great joy of quibbling over its meaning. For example, is a EULA that informs buyers they can return a product really buyer-friendly? Such notice may render the EULA more enforceable, which actually may be more seller-friendly. But quibbling aside, Set in Stone makes a major contribution simply by giving us a treasure trove of data.
A few thoughts on this important article:
More data, please: Set in Stone measures EULAs’ relative buyer-friendliness, but it acknowledges that it lacks the price information we would need to determine whether EULAs are increasing welfare or merely redistributing wealth. This is the big question, isn’t it? Hopefully some enterprising, empirically-minded scholar will relate Set in Stone to the relevant pricing data and tell us whether we’re better off now than we were ten years ago.
Democratic degradation: Set in Stone does provide evidence of the democratic degradation described in Margaret Radin’s Boilerplate. Set in Stone notes that EULAs increasingly include terms that allow sellers to control buyers’ performance through technological means as opposed to litigation. For example, some EULAs allow sellers to remotely terminate a buyer’s ability to use software when the seller deems the software has been misused. Isn’t this like a liquidated damages clause that lets the seller unilaterally determine the buyer has breached and provides the buyer’s ATM pin number? Should buyers have their day in court before sellers enjoy their remedies? Even if buyers were receiving price discounts in exchange for their legal rights, we might think such seller self-help mechanisms are contrary to our basic political arrangements.
Lawyers as product engineers: Set in Stone suggests that EULAs are more susceptible to innovation than other contracts. So, if contracts are product components, perhaps lawyers can engineer better products. Entrepreneurial lawyers could identify EULAs containing inefficient terms and revise them to create economic surplus. Lawyers could be trained to identify and eliminate EULA inefficiencies. In-house lawyers could be transformed from cost centers to profit centers. And all without doing any math! Well, we might have to do some math.
[Image by James Provost]
The same panel that declined to compel arbitration in the Chavarria case, which we disussed yesterday, did compel arbitration against claims brought by a putative class of students against the parent company that owns the for-profits colleges they attended in Ferguson v. Corinthian Colleges, Inc. Plaintiffs brought claims alleging deceptive business practices. Defendant moved to compel arbitration, and the District Court granted that motion in part, allowing plaintiffs' claims for injunctive relief under California’s unfair competition law, false advertising law, and Consumer Legal Remedies Act to proceed. The District Court's decision to allow such claims to proceed relied on the California Supreme Court's Broughton-Cruz rule, which exempts claims for public injuntive relief from arbitration. But U.S. Supreme Court precedent has now established that the Federal Arbitration Act (FAA) preempts the Broughton-Cruz rule. Accordingly, the Ninth Circuit reversed the District Court in part and granted Corinthian Colleges motion to compel arbitration.
The Ninth Circuit summarized plaintiffs' claims as follows:
The thrust of Plaintiffs’ complaints was that Corinthian systematically misled prospective students in order to entice enrollment. Corinthian allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.
Plaintiffs brought various claims seeking damages and injunctive relief under California law.
The Ninth Circuit summarized the recent history of U.S. Supreme Court cases in which it held that the FAA preempts various state rules. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). it held that the FAA preempted a California rule—known as the Discover Bank rule—which invalidated most class action waivers in adhesion contracts, including arbitration agreements, as unconscionable. In Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam), the Supreme Court reiterated its position that "[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA."
The Ninth Circuit found that rule articulated in Concepcion and Marmet invalidated the Brouthton/Cruz rule. After reviewing Supreme Court rulings on the scope of the FAA, the Ninth Circuit concludes that "even where a specific remedy has implications for the public at large, it must be arbitrated under the FAA if the parties have agreed to arbitrate it."
The Ninth Circuit also rejected plaintiffs' argument that their claims were not within the scope of the arbitration agreement.
Monday, November 11, 2013
The ContractsProf Blog is delighted to welcome the following new contributors!
Professor Kenneth Ching (left) joined the faculty of the Regent University School of Law in 2011 and teaches Contracts and UCC 1. He was selected as the 2011-2012 1L Professor of the Year and the 2013 Law Faculty Scholar of the Year. Professor Ching’s scholarship focuses on legal theory. He has also published creative essays, poetry, and fiction.
Prior to teaching, Professor Ching practiced law in the areas of commercial litigation, trusts and estates litigation, and employment law. He has also litigated constitutional law issues.
His publications include:
Jeffrey L. Harrison (right) holds the Stephen C. O'Connell Chair at the University of Florida's Levin School of Law, where he has taught since 1983. He previously taught law at the University of Houston and economics at the University of North Carolina-Greensboro. He has held visiting position of the Universite du Pantheon-Sorbonne, the University of Texas, Leiden University and the University of North Carolina. Professor Harrison is the author of about a dozen books on monopsony, antitrust law, commercial regulation and deregulation and law and economics, as well as dozens of articles on everything from socioeconomic theory to French New Wave cinema.
Some of Professor Harrison's work is available on SSRN.
We welcome you both to the blog, and we look forward to seeing your posts!
Stay tuned, readers, we expect to introduce a few more new contributors in the coming weeks.
In Chavarria v. Ralphs Grocery Company, the Ninth Circuit found an arbitration agreement unconscionable and therefore affirmed the District Court's order denying Ralphs' motion to compel arbitration and remanded the class action case back to the District Court for further proceedings. In so doing, it rejected Ralphs' contentions that its arbitration clause was not unconscionable and that California's law on unconscionability is preempted by the Federal Arbitration Act (FAA).
Plaintiff worked at Ralphs for six months as a deli clerk. Plaintiff's employment application included an agreement to be bound by Ralphs' aribtration policy. The policy provided for arbitration by a retired state or federal judge to be agreed upon by the parties or selected through a process of elimination -- that is, each party would get to strike one of the other party's three proposed aribtrators until only one name was left, and that person would be the arbitrator. The process guarantees that the arbitrator chosen would be one of the three proposed by the party that did not seek arbitration. The Ninth Circuit described the arbitration agreement's promvision for allocation of costs of as arbitration "a little convoluted," but the basic default is that the parties split the costs of arbitration.
The District Court identified several aspects of Ralphs' arbitration policy that, taken cumulatively, rendered it procedurally unconscionable. The policy was offered to Chavarria on a "take it or leave it" basis, and the specifics of the policy were not shared with Chavarria until three weeks after she agreed to be bound by it. Quoting an earlier decision, the Ninth Circuit noted that “a contract is procedurally unconscionable under California law if it is ‘a standardized contract, drafted by the party of superior bargaining strength, that relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’” That standard was clearly met in this case (and in almost all other cases involving form contracts), and the problem was exacerbated here because, while Chavarria recieved a one-paragraph notice of the arbitration policy, it actual terms, which were in a complex, four-page document, were provided later.
As to substantive unconscionability, the Ninth Circuit agreed with the District Court's finding that substantive unconscionability is satisfied here because the arbitration policy shocks the conscience. It does so because the arbitrator selection process is designed so that Ralphs will always choose the arbitrator in a claim brought by an employee. Moreover, the allocation of arbitrator's fees is unfair, imposing costs on employees and precluding them from recovering those costs so as to render many claims "impracticable." The fees for a "qualified arbitrator" as defined in the policy would range form $7000 to $14,000 per day, so an employee seeking to arbitrate would likely have to pay at least $3500, a cost that would likely exceed any claim that people like Chavarria might bring.
[An aside: Ralphs argued that in a case such as this one, plaintiff would get to choose the arbitrator. Since Chavarria tried to sue in court and Ralphs moved to compel arbitration, Ralphs was the party seeking arbitration. The Ninth Circuit found this unpersuasive because inconsistent with the wording of the arbitration policy and because it requires employees to bring a frivolous lawsuit in order to force Ralphs to compel arbitration. Even if the Court is right about the language of the arbitration policy, wouldn't Ralphs be estopped from insisting on its right to choose an aribtrator by having argued against such a right in this case? And given that there is no bar to plaintiff proceeding in arbitration as part of a class, won't the cost of arbitration be allocated to the class? So, the arbitrator's fee is only excessive in relation to the claim if the claims of the class in the aggregate do not exceed the arbitrator's fee.]
The Ninth Circuit begins its analysis of the preemption issue with a summary of Concepcion, 131 S. Ct. 1740 (2011):
Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability. Id. at 1746. A defense such as unconscionability, however, cannot justify invalidating an arbitration agreement if the defense applies “only to arbitration or [derives its] meaning from the fact that an agreement to arbitrate is at issue.” Id. The U.S. Supreme Court has held that state rules disproportionately impacting arbitration, though generally applicable to contracts of all types, are nonetheless preempted by the FAA when the rule stands as an obstacle to the accomplishment of Congress’s objectives in enacting the FAA. Id. at 1748.
Returning to the preemption argument, the Ninth Circuit noted that Concepcion had held that "the FAA preempts state laws that in theory apply to contracts generally but in practice impact arbitration agreements disproportionately." But since California's procedural unconscionability doctrine applies to all contracts, it does not disproportionately affect arbitration agreements.
As to substantive unconscionability, the Ninth Circuit noted a potential difficulty arising from the Supreme Court's recent decision in American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). That case involved an argument that a class-action waiver in an arbitration agreement precluded plaintiffs from pursing their antitrust claims because the costs of proving such claims would exceed the value of any particular claim. This Ninth Circuit found this case distinguishable:
The class waiver provision did not foreclose effective vindication of that right, the Court reasoned, because “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute an elimination of the right to pursue that remedy.” Id. at 2311. The Court explicitly noted that the result might be different if an arbitration provision required a plaintiff to pay “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at 2310–11.
The Ninth Circuit found that this case presents the exact situation excluded from the scope of the Italian Colors precedent. The costs of arbitration alone, the Court found, "effectively foreclose pursuit of the claim." The Court then explained more fully its concerns about Ralphs' arbitration policy:
In addition to the problematic cost provision, Ralphs’ arbitration policy contains a provision that unilaterally assigns one party (almost always Ralphs, in our view, as explained above) the power to select the arbitrator whenever an employee brings a claim. Of course, any state law that invalidated this provision would have a disproportionate impact on arbitration because the term is arbitration specific. But viewed another way, invalidation of this term is agnostic towards arbitration. It does not disfavor arbitration; it provides that the arbitration process must be fair.
If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees. Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power. California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power. The FAA does not preempt its invalidation of Ralphs’ arbitration policy.
[Another aside: At first, reading through this opinion, I thought this might be an attempt by liberal judges on the Ninth Circuit to find ways to undermine the Supreme Court's 5-4 majorities' clear indications of support for the enforcement of arbitration agreements. But the three-judge panel consisted of two George W. Bush appointees and a Republican appointed late in the Clinton Presidency. Either this is not a case on which liberal and conservative judges would differ or the Supreme Court is out of step with the views of the judges on lower courts.
I have my doubts about the Court's procedural unconscionability analysis, and that analysis colors the substantive unconscaionability analysis. It would of course be unconscionable if Ralphs could appoint its own president as the arbitrator. But this arbitration agreement is facially neutral and would never result in Ralphs getting its preferred arbitrator. At best, it gets its third choice (assuming plaintiffs can accurately identify Ralphs' preferences). In any case, that choice will be a retired judge, so the Ninth Circuit's assumption that such a person would be incapable of impartiality is a bit insulting to retired judges. This case seems like a long-shot for Supreme Court review, but it would be nice if the Court could clarify whether this case does indeed present facts that evade the Italian Colors precedent.]
Thursday, November 7, 2013
In Tillman v. Macy's, Inc., the Sixth Circuit reversed a District Court's denial of Macy's motion to compel arbitration. The issue in the case was whether Tillman had consented to Macy's four-step dispute resolution program by continuing to work at Macy's and not availing herself of two opportunities to opt out of the program.
Tillman had been employed since 2001 by May Department Stores, which merged into what is now Macy's, Inc. in 2005. The new dispute resolution program was rolled out in 2006, and at that time, employees were notified of their ability to opt out of the program and that if they did not choose to opt out they would not be permitted to bring claims against Macy's in court. There followed another opportunity to opt out in 2007. Macy's claims that Tillman received notice of her right to opt out of the dispute resolution program on at least two occassions. The District Court found that Tillman had no duty to read the materials sent to her, and it found it unsurprising that she did not read the information about the dispute resolution program carefully, since the company was sending employees a lot of information at the time of the merger. Tillman never signed any agreement or knowingly waived her right to a trial, and so the District Court refused to compel arbitration.
The Sixth Circuit disagreed. It found that Macy's various information sessions and mailings constituted an offer to Tillman that she accepted by continuing to work for Macy's and not opting out of the dispute resolution program.
In finding a waiver of prospective civil rights claims, courts consider five factors:
(1) plaintiff’s experience, background, and education; (2) the amount oftime the plaintiff had to consider whether to sign the waiver, including whether the employee had the opportunity to consult with a lawyer; (3) the clarity of the waiver; (4) consideration for the waiver; as well as (5) the totality of the circumstances.
The Sixth Circuit concluded that, applying these five factors, Ms. Tillman waived her right to bring a claim in court. A fine test that one! If you are considering the totality of the circumstances, why even mention the other four?