Tuesday, December 31, 2013
This case is fodder for Nancy Kim's work on wrap contracts.
In 2008, Donovan Lee purchased an Internet background check and report from a company called Intelius. Lee confirmed this purchase when he clicked "yes" on Itelius's webpage, where its name was the only company name to appear. In fine print on that page, he was informed that by clicking yes and looking at the report he was seeking he was also agreeing to a seven-day free trial of a "Family Safety Report" for which he would be billed $19.95/month after the seven-day trial lapsed. Lee noticed the monthly charges, from a company called Adaptive Marketing, after the company had been charging his credit card $19.95 for about a year. Lee and other named plaintiffs brought a state-law class action against Intelius, which impleaded Adaptive Marketing as a third-party defendant.
Claiming that Lee had agreed to arbitrate any claims he would have against Adaptive Marketing when he clicked "agree" on Intelius's website, Adaptive Marketing moved to compel arbitration. The District Court denied that motion, and on December 1th, the Ninth Circuit affirmed in Lee v. Intelius, Inc.
The Court's description of the Intelius webpage's architecture is quite elaborate. It seems that Lee was lured into his trial membership with Adaptive Marketing when he took a two-question survey in return for $10 cash back (which he claims he never received) should he try "Family Safety Report." After taking the survey, it appears that Lee had the option of just seeing the background check that he was interested in or also getting the Family Safety Report on terms provided through another link. The "yes" button was large and orange. The "no" button was smaller and featured a smaller font. Lee testified that he did not read the text of the smaller button, as his eye was drawn to the large orange button. He also did not read Intelius's terms and conditions, which included an arbitration clause.
The District Court found that Lee had entered into a contract with Adaptive Marketing to purchase the Family Safety Report but had not entered into a arbitration agreement with that company. The Ninth Circuit, applying Washington state law, found that Lee had entered into no contract with Adaptive Marketing, and therefore had no arbitration agreement with the company.
The Ninth Circuit found no contract because it concluded that Intelius's webpage was "designed to deceive" Lee and others like him. While a careful consumer would have read the entire webpage, the District Court had noted, Lee's conduct was not careful but also not unreasonable:
A less careful, but not unreasonable, consumer could conclude that providing Intelius with his email address and clicking the big [orange] “YES” button would reveal the report he had been trying to get for an undisclosed number of screens. Because the consumer never selects an additional product or service and is not asked for his account information, he could reasonably believe, based on his past experiences with internet transactions, that there would be no unpleasant surprises on his credit/debit account.
On this basis, the Ninth Circuit expressed skepticism regarding whether Lee had made an objective manifestation of consent to a contract with Adaptive Marketing. But because that issue was uncertain, the Ninth Circuit ruled on other grounds. Washington law requires that the "essential elements" of a contract be set forth in writing. Identification of the parties to an agreement is one such essential element, and it was lacking in this instance, since Adaptive Marketing's name did not appear. Even a cautious consumer would have thought she was contracting with Intelius.
In addition, the Ninth Circuit agreed with the District Court that even if there were a contract between Lee and Adaptive Marketing, there was no agreement to arbitrate. As the District Court put it:
The Ninth Circuit agreed.
The Court noted as an aside that the federal government prohibited the so-called "data pass" method employed on Intelius's website in the 2010 Restore Online Shoppers' Confidence Act (ROSCA).
Monday, December 30, 2013
As you may have read in Jeremy’s recent post, there are a number of programs at the AALS Annual Meeting in January 2014 that will be of interest to the Contracts-minded. I want to alert you to two unusual offerings that have a cross-over interest for Contracts scholars and teachers – (i) the day-long Annual Meeting of the Society of Socio-Economists (SOS) on the opening day of the AALS meeting on Thursday, 2 January 2014, from 9:00 a.m. to 5:30 p.m., at the New York Hilton Midtown; and, (ii) the extended program of the AALS Section on Socio-Economics on Sunday, 5 January 2014, from 9:00 a.m.to 5:00 p.m. One can drop in and out of sessions on either day.
I believe that the socio-economics approach to economic analysis enhances the understanding of the dynamics of contracts law and policy, and as a result I have become a member of SOS and expect to participate actively in these programs. The interdisciplinarity of the approach and its integration of economic analysis with other related methodologies make this approach particularly productive in the context of contracts. Socio-economics begins with the assumption that economic behavior and phenomena are not wholly governed or described by any one analytical discipline, but are embedded in society, polity, culture, and nature. Hence, drawing in an integrated fashion on economics, sociology, political science, psychology, anthropology, biology and other social and natural sciences, and other disciplines, socio-economics regards competitive behavior as a subset of human behavior within a societal and natural context that both enables and constrains competition and cooperation. Instead of assuming that individual pursuit of self-interest automatically or generally tends toward an optimal allocation of resources, socio-economics assumes that societal sources of order are necessary for people and markets to function efficiently. People are not only rational actors pursuing only self-interest, and socio-economics seeks a more encompassing interdisciplinary understanding of economic behavior open to the assumption that individual choices are shaped not only by notions of rational action but also by emotive and humane expectations.
The following link leads to the SOS Annual Meeting web page and describes the Thursday program and provides an additional link that leads to a registration form (separate from the AALS Annual Meeting registration): SOS Annual Meeting.
To cover the expenses of the SOS Annual Meeting, there is a $75 registration fee ($10 for students). Registration allows the registrant and one additional person to attend. However, I understand that there is a partial reduction or complete waiver of the registration fee available, by making a request to email@example.com (click or paste). The registration fee does not include the $15 cost of the box luncheon. However, participants may attend the luncheon address without purchasing a box lunch.
For the Thursday SOS Annual Meeting, I would particularly direct your attention to certain topics introduced during the morning plenary session and then picked up in concurrent sessions later in the day: (i) Socio-Economic Theory; (ii) Sustainable Economic Recovery and Growth; and, (iii) Ownership and Wealth Distribution.
During the extended Section Program on Sunday, I would especially commend your attention to the following concurrent session from 9:50 - 10:50 a.m.: Exposing the Myth of Consent: Strictures from Neuroscience, Economics, and Relational Contracting, featuring Jennifer Drobac (Indiana - Indianapolis), Oliver Goodenough (Vermont), Robin Kar (Law and Philosophy, Illinois), Amanda Pustilnik (Maryland), and Margaret Ryzner (Indiana - Indianapolis).
Section on Jurisprudence, January 3, 3:30 PM:
Section on Commercial and Related Consumer Law and Section on Contracts Joint Program: The Future of Consumer Law, January 5, 9 AM
In addition, there will also be a concurrent session during the joint program on the morning of January 5, at 9:50 AM
We look forward to meeting up in New York City!
I have been thinking a lot about Peggy Radin's book Boilerplate and her arguments about how boilerplate contacts threaten a democratic degradation (discussed elsewhere on the blog by Brian Bix, with Peggy Radin responding here, and by David Horton) because they permit private parties, powerful companies, to negate statutory or common law rights. The Ninth Circuit has put its foot down and refused to permit a potential innovation in the direction of democratic degradation, but the odd thing about the case is that the arbitration agreement at issue here seems to have been among parties with fairly even bargaining power.
On December 17, 2013, the Ninth Circuit issued its opinion in In re Wal-Mart Wage & Hour Employment Practices Litigation, affirming the District Court's confirmation of an arbitration award and rejecting appellee's argument that the Court was without jurisdiction because the parties agreed to binding, non-appealable arbitration.
The dispute at issue arose in the aftermath of an $85 million settlement agreement between Wal-Mart and a class of employee-plaintiffs. As part of that settlement, the parties agreed to have all disputes as to fees decided by an arbitrator. The District Court awarded $28 million in attorneys' fees, but plaintiffs' counsel quarreled over the proper allocation of that fee award. That dispute was submitted to "binding, non-appealable arbitration."
The arbitrator divided the fee among three law firms, and one of them brought suit in District Court challenging the allocation. The District Court found no grounds to vacate the arbitrator's award, and the law firm that challenged the award appealed. The firm that got the lion's share of the fee award argued that there could be no appeal due to the "non-appealable" language in the arbitration agreement.
The Ninth Circuit found the language of the agreement ambiguous. "Non-appealable" could just preclude courts from reviewing the merits of the arbitrator's decision, or it could mean that no federal court could exercise jurisdiction in the case. The Ninth Circuit concluded that the second meaning would be unenforceable in any case, as inconsistent with the provision for judicial review of arbitration awards under Section 10 of the Federal Arbitration Act (FAA). Citing Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), in which the Supreme Court rejected an arbitration agreement that expanded the grounds for judicial review of an arbitration award, the Ninth Circuit reasoned that "[j]ust as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract." As if the Court had the concept of democratic degradation in mind, the opinion continues:
Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration. . . . If parties could contract around this section of the FAA, the balance Congress intended would be disrupted, and parties would be left without any safeguards against arbitral abuse.
In a separate memorandum disposition, the panel affirmed the District Court's confirmation of the aribral award.
Thursday, December 26, 2013
Seller of Rothko Painting Wins Case Against Buyer and Dealers for Breach of Confidentiality Agreement
In 2007, Marguerite Hoffman decided to sell a major painting by Mark Rothko, and the buyer and delers agreed to keep the sale confidential. Mrs. Hoffman's husband, soft-drinks bottling magnate Robert K. Hoffman, had died the year before, and she wanted to quietly raise money from a discreet buyer. After a trial earlier this month, a jury in Dallas federal court found that two New York art dealers and a billionaire collector breached the confidentiality agreement, but also awarded plaintiff damages in an amount much less than she had sought. According to the WSJ:
The 2007 sale, to Studio Capital, a Belize-registered company advised by Mexican-born financier David Martinez, was arranged by prominent New York art dealer Robert Mnuchin and his then-partner, Dominique Lévy. The transaction, in which Mrs. Hoffman received $17.6 million, involved a letter agreement that "all parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely."
But according to Mrs. Hoffman's lawsuit, the private transaction came to light three years later when Studio Capital turned around and sold the painting in a highly publicized auction at Sotheby's, where it fetched $31.4 million and indirectly revealed the Hoffmans' prior ownership in marketing materials.
Mrs. Hoffman sued Mr. Mnuchin's and Ms. Levy's art gallery, L&M Arts, and Mr. Martinez and Studio Capital, claiming breach of contract. She claimed she could have sold the painting at auction herself and received far more, had she not wanted secrecy. In closing arguments, her attorney, Roger Netzer of Willkie Farr & Gallagher, argued that damages should be between $12.4 million and $22.4 million, based on disputed expert testimony about the art market before the 2008 financial crash.
Jurors in U.S. District Court found all three defendants did breach the agreement, and the panel assessed two types of damages, one of $500,000 and another totaling $1.2 million. The judge ruled that Mrs. Hoffman will have to choose between the two sums, although it is conceivable her counsel may try to claim both types of damages, for a total of $1.7 million.
"I am elated," said Mrs. Hoffman after the verdict. "This case was always about something other than money. It was about justice and integrity and honesty and trust and friendship."
Jonathan Blackman, an attorney at Cleary Gottlieb Steen & Hamilton, who represented Mr. Martinez and Studio Capital, said the limited damages amount to a defense victory. "We feel very good," he said. "After three years and enormous legal expenses on the part of the plaintiff, the elephant labored and came forth with a mouse." He said his clients plan to challenge the damages and breach-of-contract findings.
Major transactions in the art world often involve secrecy, and confidentiality clauses of differing stripes have become common in recent years. Before the trial, some lawyers said a victory by Mrs. Hoffman could have broad implications for the art world by threatening to turn such confidentiality agreements into restrictions or even prohibitions of resales.
Bill Carmody, an attorney at Susman Godfrey who represented defendant L&M Arts in the case, said "it was obviously a huge win for us," because the "jury awarded her a mere fraction of the $20-plus million she wanted."
[Meredith R. Miller]
Friend of the blog, Steven Feldman (pictured), has recently published his critique of Richard R.W. Brooks and Alexander Stremitzer's Remedies on and off Contract, which appeared in the Yale Law Journal in 2011. Feldman's piece, Rescission, Restitution, and the Principle of Fair Redress: A Response to Professors Brooks and Stremitzer, appeared in the Valparaiso Law Review earlier this year. Feldman characterizes Brooks and Stremitzer as arguing that current legal doctrine does not allow for rescission often enough and is too liberal in granting restitution. They believe that these approaches to damages are based on an exaggerated estimate of the threat to contract stabilitiy posed by rescission. They contend that parties would often bargain for broad rescission rights even if damages for breach were fully enforceable and costless to enforce. Greater rights of rescission, they contend, would result in more efficient outcomes because rational parties would negotiate price to avoid breach.
According to Feldman, Brooks and Stremitzer's argument is not based on a comprehensive survey of case law and relevant statutes. Rather, Feldman contends, "[t]heir legal analysis consists mainly of isolated references to the U.C.C.," the CISG the Restatement (Third) of Restitution and Unjust Enrichment and the Restatement (Second) of Contracts. By contrast, Feldman surveys case law and finds that courts follow a principle of "fair redress" that permits equitable remedies rather than rigid formulas for calculating damages. Moreover, Brooks and Stremitzer's economic model ignores situational and relational considerations that often influence buyers' decisions to seek rescission or to breach.
Feldman's article sets out to show that existing precedent supports a status quo that adequately protects both buyers and sellers. Based on his review of the case law and statutory authority, Feldman argues:
- Courts are far more liberal in granting rescission than Brooks and Stremitzer suggest;
- case law interpreting UCC Sections 2-601 and 2-608 is "decidedly "pro-buyer, allowing buyers to reject goods and to revoke acceptance, both of which are species of rescission that Brooks and Stremitzer overlook;
- Brooks and Stremitzer ignore both federal statutes and regulations and state consumer protection laws that promote a broad right of consumer rescission;
- the doctrine of material breach has always been a porous barrier against buyer's rescission rights;
- merchants often allow customers to rescind in order to maintain good customer relations;
- courts often allow buyers to rescind as an equitable remedy that accords with the principle of fair redress;
- while Brooks and Stremitzer contend that allowing buyers to recover in restitution overcompensates them, the election of remedies doctrine generally prevents duplicate recovery for the promisee;
- allowing both rescission and damages do not create a windfall but simply make the injured party whole; and
- allowing redress in excess of the contract price in cases such as Boomer v. Muir, 24 P.2d 570 (Cal. Dst. Ct. App. 1933), has a sound legal, normative and economic basis.
In the concluding sections of the article, Feldman contends that Brooks and Stremitzer's approach neglects what Feldman terms "the moral imperative " that would permit recovery in excess of losses on the contract in order to protect the innocent victims of legal wrongs. He then proceeds to attack their rational choice model by reminding readers of numerous criticisms of rational choice theory, especially of those sounding in relational contracts theory.
Feldman has undertaken a fundamental and multi-pronged critique of a very prominent article on contracts remedies that ought to be be considered by any scholar interested in Brooks and Stremitzer's model.
Wednesday, December 25, 2013
It seemed unthinkable that the Obama administration could have so badly botched the rollout of the website associated with Obama's signature legislation, the Affordable Care Act (aka Obamacare). However, as The New York Times reported here on Monday, and as we have already discussed here and here, the technological fumble may be a result of broader problems in the structures of government procurement systems which may finally get the attention they deserve because of the high-profile Obamacare rollout fiasco.
To reduce the Times' report to its essence, the process of winning a government contract is very complex and daunting. There are two problemmatic consequences of this structural element of government contracting. First, it is hard for small companies or companies without expertise in the government procurement process to jump through all the hoops associated with that process. Second, when the contracts are both long term and deal with technology, the government in some cases would be better served by working with smaller, more nimble contractors that can innovate and adapt as technology develops. With technology improving at the rate at which it improves, the government cannot afford to get locked into multi-year contracts with entities that are not in a position to adapt as quickly as technology advances. As the Times puts it:
Longstanding laws intended to prevent corruption and conflict of interest often saddle agencies with vendors selected by distant committees and contracts that stretch for years, even as technology changes rapidly. The rules frequently leave the government officials in charge of a project with little choice over their suppliers, little control over the project’s execution and almost no authority to terminate a contract that is failing.
“It may make sense if you are buying pencils or cleaning services,” said David Blumenthal, who during Mr. Obama’s first term led a federal office to promote the adoption of electronic health records. But it does not work “when you have these kinds of incredibly complex, data-driven, nationally important, performance-based procurements.”
Tuesday, December 24, 2013
Since I am getting ready to teach Business Associations for the first time in three years, it is nice to have a case that reviews basic agency principles:
On November 25, 2013, a panel of the Seventh Circuit issued a per curiam decision in NECA-IBEW Rockford Local Union 364 Health and Welfare Fund v. A & A Drug Co. and upheld a district court's grant of defendant's motion to compel arbitration. Plaintiff (the Fund) provides health benefits to a Rockford union of electrical workers (Local 364). In 2002, it negotiated an agreement (the Local Agreement) with Sav-Rx, a provider of prescription drug benefits. In 2003, Sav-Rx also negotiated a different agreement (the National Agreement) with the International Brotherhood of Electrical Workers, with which Local 364 is affiliated. The National Agreement offers locals reduced charges, but it, unlike the Local Agreement, contains an arbitration clause.
While the Fund's trustees never voted on the matter, the Fund accepted Sav-Rx services provided under the National Agreement between 2003 and 2011. The process by which this occurred is unclear. The Fund never actually signed the Local Agreement, but Sav-Rx began providing services under the agreement as of January 1, 2003. After the National Agreement was announced at at a meeting attended by the Chair of the Fund's Board of Trustees, the Chair requested that Sav-Rx reduce its rates to comport with those of the National Agreement. Sav-Rx did so effective April 1, 2003. Sav-Rx included Local 364 in its annual audits under the National Agreement, and the Fund's administrative manager communicated with Sav-Rx about these annual audits.
The Fund is now suing Sav-Rx for charges not authorized under either the Local or the National Agreements. Sav-Rx moved to compel arbitration pursuant to the National Agreement. The Fund claimed that it had never signed the National Agreement and should not be bound to its terms. The district court found that the Fund had knowingly accepted benefits under that Agreement and had thereby ratified it, thus acceeding to its arbitration clause. The Seventh Circuit affirmed.
The Seventh Circuit noted that the Fund is bound to the National Agreement if the Fund or an agent with actual, implied, or apparent authority, assented to it, or if the Fund ratified it. As the Fund's Trustees had never voted on the National Agreement, the Fund was not bound under actual authority. Nor did the Chair of the Board of Trustees possess implied authority to bind the Fund to the National Agreement, which did not relate to ordinary day-to-day affairs but was an "extraordinary," "once-in-a-decade transaction" that also caused the Fund to forego an important right -- access to the courts. Sav-Rx could not establish that the Chair of the Board of Trustees had apparent authority to bind the Fund to the National Agreement. The Board had never held out the Chair as having such authority and Sav-Rx in fact knew that only the Board itself could bind the Fund.
Nevertheless, the Fund is bound by the National Agreement because it ratified that agreement through its conduct. By imputation or direct knowledge, the Trustees knew of both the National and the Local Agreements and of their differences. They also knew that the Fund was receiving discounted prices. The Seventh Circuit concluded that "knowing that the Fund received the benefits of the National Agreement and never repudiating those benefits, the trustees ratified the National Agreement."
Monday, December 23, 2013
One of the unexpected benefits of global acquisitions and diversification of multinational enterprises is that the companies occasionally pop up in interesting contracts cases. Such is the situation in Hoffman v. Daimler Trucks North America, LLC, a case from the Western District of Virginia involving the purchase of an RV that was such a lemon only the mice could love it. Daimler Trucks, a wholly owned subsidiary of Daimler AG, got itself entangled in this case through Freightliner Trucks, its U.S. truck division, and earned itself a quick education in U.S. warranty law.
The case offers some interesting reflections on the interrelationship and interactions between state and federal law with respect to the creation and disclaimer of warranties in the consumer purchase context, as well as the role played by specialized statutes like vehicle lemon laws. Too often, the basic Contracts course barely has time to deal with UCC warranty law and lore, and so the compact treatment of these issues can be a useful hand-off for students interested in exploring some of the implications of warranty law and policy.
On the federal side, we have the Magnuson–Moss Warranty Act — affectionately known as the Federal Trade Commission Improvement Act of 1975, 15 U.S.C. § 2301 et seq. Magnuson-Moss establishes federal minimum standards for warranties if and when a written warranty is offered. If a seller does offer a written warranty to a consumer, seller may not disclaim or modify any implied warranties. 15 U.S.C. § 2308(a). Any written warranties must be made available to the consumer prior to the sale. 15 U.S.C. § 2302(b)(1)(A).
On the state side, of course, we have substantive warranty law represented by the UCC. The UCC will be relevant even when Magnuson-Moss is not (i.e., when an oral, but not a written warranty is offered to the consumer). In contrast with federal law, the UCC permits disclaimer of express and implied warranties, but imposes requirements when a seller attempts to disclaim. UCC § 2-316. Hence, the applicability of Magnuson-Moss could make a substantial difference in a case where disclaimer of warranty is an important issue.
The story so far . . .
In the fall of 2010, Donald Kent Hoffman of Fishersville, Virginia, bought a Tuscany recreational vehicle from RV dealer Camping World. The RV had been manufactured by Thor Motor Coach and included a chassis built by Daimler Trucks North America and various component parts supplied by Drew Industries. To Mr. Hoffman’s deep disappointment, there were very few things about his RV that weren’t problematic, and so Hoffman and the RV spent nine out of their first ten months together off the road and in the shop. Indeed, the situation was so dire that, during one of the repair episodes at Camping World, the RV developed a mouse infestation because it was left outside for an extended period of time.
The mice were apparently untroubled by the flaws in the RV. Among other things, the automatic leveler and indicator lights did not work, nor did the water and waste water indicator lights. The aisle lights in the coach did not work. The deadbolt in the cabin did not work, but then the door didn’t lock from the inside anyway. The door did manage to leak water into the cabin when it rained, however, and the sprayer on the kitchen sink leaked. There was no heat in the vehicle. The front seat did not properly swivel or recline. The map light did not work. The airbags deflated. The driver's side mirror would not stay in place. The control panel did not function properly, nor did the window shades. The steps were installed improperly. The batteries died quickly. In addition, various features that Hoffman said he had been promised were absent from the RV – there was no GPS as promised, and no satellite television.
Daimler, trading as Freightliner, entered the story during the course of Hoffman’s tortuous attempts to coordinate warranty coverage. Camping World told Hoffman that the problem with the air bags would have to be addressed by Freightliner, but Hoffman reported back that Freightliner said it was “ok as per truck stand[a]rds.” Meanwhile, the general twelve-month warranty on the RV was set to expire on or about October 29, 2011. Before this happened, Hoffman attempted to revoke his acceptance of the RV by dropping it off at Camping World and seeking a refund of the purchase price. (The RV apparently remains at Camping World pending the outcome of the litigation, although there is no indication in the court’s opinion where the mice are at this point.)
In April 2012, the long-suffering, travel-deprived Mr. Hoffman brought suit in state court against Camping World, Daimler Trucks, Drew, and Thor for breach of express and implied warranties under Magnuson-Moss and the Virginia Uniform Commercial Code (VUCC), and against Thor under Virginia’s Motor Vehicle Warranty Enforcement Act, popularly known as the Virginia Lemon Law, Va. Code Ann. § 59.1–207.11 et seq. Thor and Camping World, the only defendants served at that point, managed to have the action removed to federal district court, since neither apparently was a Virginia resident.
At this juncture, the scope of the Virginia Lemon Law became an issue. There is some authority that the Virginia Lemon Law does not apply to a completed motor home, but only to the “self-propelled motorized chassis,” Va. Code Ann. § 59.1–207.11. Since Daimler Trucks manufactured the chassis, Hoffman amended his complaint to name Daimler Trucks as the correct defendant on the Lemon Law claim. At that point, the defendants filed motions to dismiss.
The retailer’s disclaimers
The interaction of the three relevant bodies of law – Magnuson-Moss, UCC § 2-316, and the Lemon Law – is critical to the motions to dismiss. The express warranties that Hoffman relied on in his claims against Camping World were not written, hence not covered by Magnuson-Moss, and Camping World argued that it had validly disclaimed any express warranties via a merger clause in the written contract of sale, and that it had disclaimed any implied warranties in a conspicuous manner as required by VUCC § 2-316(2).
Boldly going where most Contracts students have not gone before, Judge James C. Turk found that a merger clause in the contract of sale, coupled with the parole evidence rule embodied in UCC § 2-202, overcame Hoffman’s express warranty claim. As to the implied warranty, however, in a clear and succinct discussion Judge Turk found that the relevant disclaimer clause was not conspicuous for purposes of disclaiming the implied warranties, and he denied Camping World’s motion to dismiss as to the implied warranty claims.
The manufacturer’s disclaimers
Thor’s argument was that its written warranty reduced the limitation period to “90 days after the expiration of the [designated] warranty coverage period,” or in other words three months after the one-year warranty. However, Thor’s warranty language was ambiguous; the same page also referred to a two-year warranty on the vehicle frame, which might make the limitation period in question 27 months instead of 15 months. Rejecting the approach taken in the now-classic RV warranty case, Merricks v. Monaco Coach Corp., and relying on the limitation rules of UCC § 2-725, Judge Turk decided that “Hoffman could not accept the limitation period by passive acceptance of the RV without objection to the pertinent warranty provision.”
As to the two claims against Daimler Trucks – one for breach of express and implied warranties and the other for violation of the Lemon Law – Daimler Trucks argued that Hoffman had simply failed to state a claim for breach of warranty and that the Lemon Law claim was untimely. On the latter argument, which is somewhat beyond our scope, the court allowed relation back to the original filing date of the complaint in determining that the Lemon Law claim against Daimler Trucks in the amended complaint was not time-barred.
On the breach of warranty claim, Judge Turk agreed that Hoffman had failed to plead specific breaches attributable to Daimler Trucks, and hence dismissed the claim against the manufacturer with leave to amend. More importantly from a teaching perspective, the Daimler situation illustrates the impact of Magnuson-Moss clearly and succinctly. Daimler Trucks purported to disclaim all implied warranties in its written warranty, but that contravened Magnuson-Moss. Once the supplier gives a written warranty, it cannot wholly disclaim implied warranties. 15 U.S.C. § 2308. Hence, Hoffman’s implied warranty claims against Daimler Trucks would survive a disclaimer argument.
The supplier’s arguments
Drew, the components supplier, argued that Hoffman’s claims were untimely and that, in any event, its express and implied warranties applied only to Thor, not to the consumer. The timeliness argument neatly illustrates the difference between warranty periods and limitation periods, which, in the court’s view, Drew had confused. Drew had argued that the claims were untimely because they weren’t brought within the one-year warranty period. Judge Turk was quick to point out that “[t]he warranty and limitation periods, however, are not identical concepts. The warranty period covers the component parts for a specified period of time; in other words, it defines the time in which the warrantor has a responsibility to repair or replace the covered parts. The limitation period, however, places constraints on the time in which the buyer must sue.” Simply put, the parties had not agreed to reduce the limitations period “by the original agreement,” per UCC § 2-725(1), and so the UCC default four-year statute of limitations applied.
On the warranty issues, Drew was on stronger ground. Drew claimed that its limited express warranty extended coverage only to Thor, the initial purchaser, and not to the consumer. The Court agreed. Based on a Fourth Circuit warranty case, Buettner v. R.W. Martin & Sons, Inc., which involved a remote supplier who had not even given an express warranty to its immediate purchaser, Judge Turk argued that “an original seller is still free to disclaim warranties as to foreseeable users. . . . The Drew limited warranty plainly extended only to the initial purchaser and Hoffman is not entitled to enforce its protections.”
Drew also argued that it had effectively disclaimed all implied warranties in the text of its written express warranty, but Hoffman countered that this attempt was ineffective because Magnuson-Moss prohibits such disclaimers when the supplier provides a written warranty to a consumer. Here the court found that Magnuson-Moss was not applicable, because Drew did not offer Hoffman a “written warranty” as the term is understood by Magnuson-Moss, because the warranty was intended for the product manufacturer, not the ultimate consumer, per 16 C.F.R. § 700.3(c). Hence, the Magnuson-Moss limitation on disclaimers of implied warranties was inapplicable, and UCC disclaimer rules governed. The court found the disclaimer sufficiently conspicuous to pass muster under UCC 2-316, and it dismissed the claim against Drew.
I would recommend this case to anyone seeking an exemplary discussion of the interplay of federal, UCC, and consumer law with respect to warranties. Judge Turk is undeterred by the complexities of the overlapping issues and multiple defendants, and his analysis is clear, concise, and informative. Students looking for further guidance on these issues would benefit from a careful review of Hoffman.
Motion to Compel Arbitration Granted in Part, Denied in Part in Antitrust Case v. Cable Providers and Sports Organizations
On November 25, 2013, Judge Scheindlin of the Southern District of New York issued an opinion in Laumann v. National Hockey League, granting in part and denying in part a motion to compel arbitration brought by defendant Comcast and denying in full a similar motion brought by defendant DIRECTV. Plaintiffs claim that defendants, including the National Hockey League and Major League Baseball, along with the major cable and satellite television service providers entered into "agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts," and by "collud[ing] to sell the `out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices." These agreements allegedly violate the Sherman Antiturst Act.
At the heart of plaintiffs' beef, it seems, is that if one wants to view "out-of-market" games -- that is, games that do not feature the team from one's home city or the city where one is located -- one must purchase television packages which inculde all out-of-market games, even if one is only interested in the games of one out-of-market team.
Both Comcast and DIRECTV have customer service agreements that feature arbitration clauses and so both defedants moved to compel arbitration. Judge Scheindlin granted Comcast's motion with respect to one plaintiff who purchased an out-of-market package directly from Comcast and thus was clearly bound by the arbitration provision. The remaining plaintiffs had a more complicated relationship to Comcast and claimed that their claims did not arise directly under their customer service agreements with Comcast.
Judge Scheindlin first ruled that any colorable dispute about the scope or validity of the arbitration clause must be referred to the arbitrator. Plaintiffs colorfully objected that where the relationship between the agreements and the claims are too attenuated, granting Comcast's motion would be like compelling arbitration of a claim by a plaintiff who had been hit by a Comcast bus. Judge Scheindlin agreed with respect to one plaintiff, where "the sole nexus between his claims and his Comcast service is the allegation that his DIRECTV package contained material produced by the Comcast" Regional Sports Networks.
Comcast also sought to compel arbitration of claims brought against it pursuant to arbitration clauses in plaintiffs' agreements with DIRECTV. With respect to these claims, Judge Scheindlin noted that there was no clear intent to have questions of arbitrability between a signatory and a non-signatory decided by the arbitrator. She then ruled that the arbitration clause in the DIRECTV agreements did not encompass plaintiffs' claims against Comcast. She also rejected Comcast's claim that plaintiffs should be estopped from bringing a claim under the DIRECTV agreements through any mechanism other than arbitration.
DIRECTV's motion to compel arbitration against another plaintiff failed because the plaintiff is not a DIRECTV customer bound by its arbitration agreement. The DIRECTV subscription is in the name of plaintiff's wife, and the court rejected any claim that he could be bound by admission or estoppel.
Friday, December 20, 2013
Chicago Cubs shortstop Starlin Castro (pictured) has reportedly had $3.6 million seized from his bank accounts in connection with an alleged breach of contract as reported here in the Chicago Tribune. The seizure relates (although how is unclear) to an alleged contract that Castro's father entered into when Castro was 15 years old with a baseball training school in the Dominican Republic. The alleged contract provided that the school was entitled to three percent of Castro's earnings as a professional ball player.
According to the Tribune, the money has already been seized from several banks, but the Tribune also reports that Castro's former coach at the school is "planning" to sue Castro. It is not clear why the school is able to seize funds based on a planned suit, but perhaps the coach is contemplating a separate law suit from that already initiated by the school. Still, since the Tribune suggests that Castro will counterclaim and claims that the suit is baseless, it is hard to understand how the seizure could have taken place prior to adjudication on the merits. Castro stole only nine bases last year (and was caught stealing six times). He is not a flight risk.
It is also not clear where the $3.6 million figure comes from. The Tribune reports that Castro signed a $60 million deal with the Cubs in 2012. So, he is due a bit under $7 million/year, which he has been paid for one year. Even if the school is due to be paid for the full $60 million, three percent of $60 million is $1.8 million, but why would the school be entitled to be paid before Castro has been paid?
And just for those of you who have any interest in my occasional gripes about absurd sports salaries. Castro was ranked 22nd among shortstops last year. I'm not certain but I suspect that those rankings are based exclusively on offensive numbers, which is ridiculous when it comes to shortstops, who are key defensive players. Castro's fielding percentage was 26th last year out of 28 shortstops who played more than 100 games. While Castro's offensive numbers were way off last year, his defensive numbers were a bit better than prior years. No shortstops near Castro in the rankings made even half of what he made. But he is guaranteed nearly $7 million a year even if his defense never picks up, he hits a punchless .250 and is as big a threat to get picked off as he is to steal a base. Baseball salaries are no more rational than CEO salaries and both are in need of reform.
Wednesday, December 18, 2013
Those who are considering proposals for presentation or who would like to serve as moderators at the 9th International Conference on Contracts to be held at St. Thomas University in Miami February 21-22, 2014 should send them to Jennifer Martin (firstname.lastname@example.org) right away as nearly all panels are full at this point.
The Call for Papers, as well as travel and registration information, is available at the Conference website. The St. Thomas Law Review is doing a Symposium around the Conference and still has a few spots for papers that it will consider for publication if received no later than January 15, 2012.
This is going to be a really wonderful conference this year all-conference honoree is Linda Rusch. Prof. Robin West (Georgetown) will be giving the plenary speech on Saturday and Kingsley Martin (KM standards) will be giving the talk at Friday's luncheon.
Confirmed Participants include:
Kristen Adams - Stetson University
Bader Almaskari - University of Leicester, England
Rachel Arnow-Richman- University of Denver
Reza Baheshti - University of Leicester, England
Wayne Barnes - Texas A&M University
Daniel Barnhizer - Michigan State University
Thomas Barton - California Western School of Law
Shawn Bayern - Florida State University
Christopher Bisping - University of Warwick
Amy Boss - Drexel University
Steve Callandryllo - University of Washington
Miriam Cherry - University of Missouri
Kenneth Ching - Regent University
Neil Cohen - Brooklyn Law
Nicolas Cornell - University of Pennsylvania - Wharton
Gerrit De Geest - Washington University School of Law
Sidney Delong - Seattle University
Scott Devito - Florida Coastal School of Law
Xingyan Ding - University of Sydney
Timothy Dodsworth - University of Warwick
Pamela Edwards - CUNY School of Law
Zev Eigen - Northwestern University School of Law
Seyed Reza Ektekhari - Islamic Azad University - Gonabad Branch
Jamie Fox - Stetson University
Caio Gabra - Federal University of Rio de Janeiro
Larry Garvin - Ohio State University
Peter Gerhart - Case Western
Katie Gianasi - Husch Blackwell L.L.P.
Jim Gibson - University of Richmond
Suren Gomtsyan - Tilburg Law School - Netherlands
Jack Graves - Touro Law Center
Ariela Gross - USC Gould
Danielle Hart -Southwestern Law School
Max Helveston - DePaul University
Catherine Imoedemhe - University of Leicester, England
Lyn K.L. Tjon Soel Len - University of Amsterdam
Hila Keren - Southwestern Law School
Nancy Kim - Cal Western University
Charles Knapp - UC Hastings College of Law
Christiina Kunz - William Mitchell College of Law
Lenora Ledwon - St. Thomas University
Peter Linzer - University of Houston
Joasia Luzak - University of Amsterdam
Colin Marks - St. Mary's University
Kingsley Martin - KM Standards
Jennifer Martin - St. Thomas University
John Mayer - CALI
Meredith Miller - Touro Law Center
Juliet Moringiello - Widener University Scool of Law
Murat Mungan - Florida State University
John Murray - Duquense University
Masaki Nakabayashi - University of Tokyo
Marcia Narine - St. Thomas University
Wendy Netter Epstein - DePaul University
Karl Okamoto - Drexel University
Joe Perillo - Fordham University
Amir Pichhadze - University of Michigan (SJD Student)
Michael Pinsof - Attorney
Lucille Ponte - Florida A&M University, College of Law,
Deborah Post - Touro Law Center
Michael Pratt - Queens University
Cheryl Preston - Brigham Young University
Val Ricks - South Texas College of Law
Roni Rosenberg - Carmel Academic Center, Law School, Israel
Linda Rusch - Gonzaga University
Amy Schmitz - University of Colorado
Mark Seidenfeld - Florida State University
Gregory Shill - University of Denver
Frank Snyder - Texas A&M University
Jeremy Telman - Valaparasio University
David Tollen - Adili & Tollen, L.L.P.
Manuel Usted - Florida State University
Robin West -Georgetown University
Alan White - CUNY School of Law
Robert Whitman - University of Connecticut
Pat Williams - Columbia Law School
Monica Woodard - St. Thomas University
Eric Zacks - Wayne State University
Dustin Zacks - King, Nieves & Zacks
Deborah Zalesne - CUNY School of Law
Candace Zierdt - Stetson University
Tuesday, December 17, 2013
Broad Arbitration Clause in Employment Agreement Also Captures Dispute over Asset Purchase Agreement
In 2010, plaintiff James Palese (Palese) sold two companies to defendant Tanner Bolt & Nut, Inc. (Tanner), and Tanner hired Palese as the General Manager of its new Herman's Hardware Division, which included Palese's companies. Palese entered into a five-year Employment Agreement with a broad arbitration clause calling for arbitration of "all claims . . .in any way relating" to the Employment Agreement. At the same time, he entered into two Asset Purchase Agreements, which provided that disputes should be settled in "any court of competent jurisdiction" in Kings County, New York. The Employment Agreement and the Asset Purchase Agreement made refernence to one another and were part of what the court deemd "an integrated deal."
In March, 2012, Tanner terminated Palese and then stopped payment on promissory notes relating to the Asset Purchase Agreement. Palese filed charges of discrimination and retaliation with the EEOC and then brought suit in the Eastern District of New York. Tanner moved to compel arbitration and dismiss the suit. On December 5, 2013, the District Court granted Tanner's motion in Palese v. Tanner Bolt & Nut, Inc.
There is no question that if Palese's only claim were breach of his employment agreement, the claim would be subject to the arbitration clause. But what of his claim that Tanner also breached the Purchase Agreements. As the District Court noted
[T]he essence of Palese's allegation is that Tanner retaliated against him in two ways—first by firing him, and second, in "further retaliation," by stopping payment on the promissory notes—in response to a single cause: Palese's objections to his employer's "constant racist, illegal and discriminatory" workplace conduct.
So put, it seems clear that his claims relating to the Purchase Agreement relate to the Employment Agreement.
The District Court also rejected Palese's further contention that the forum selection clause in the Asset Purchase Agreements vitiates the arbitration clause. That argument was foreclosed by the Second Court's decision in Bank Julius Baer & Co., Ltd. v. Waxfield, Ltd., 424 F.3d 278, (2d Cir. 2005). As in that case, the forum selection clause in the Asset Purchase Agreements could be read as complementary rather than contraditory to the arbitration clause in Palese's Employment Agreement.
The court thus granted Tanner's motion to compel arbitration of all of plaintiff's claims.
Monday, December 16, 2013
I took a break from grading exams this weekend to see the second installment of "The Hobbit." It was rather engaging and the special effects were amazing (although some of the scenes were, not surprisingly, rather gory and violent - which didn't seem to faze the little girl sitting behind me). I previously blogged about the contract issues in the first Hobbit movie and while there were some in this one ("a favor for a favor," additional duties Bilbo is required to take on that, as my daughter pointed out , were not expressly written out in his contract, and a few other issues), the bigger contract dispute takes place off screen between the Weinstein brothers and Miramax, on one side, and Warner Bros and New Line Cinema on the other.
The Weinstein brothers and Miramax signed an agreement giving up the rights to the Hobbit and LOTR movies to WB in exchange for 5% of gross revenues for "the first motion picture" of each book but "not remakes."
The problem? The Hobbit book has been split up into three movies - the first one grossed more than a $1billion worldwide, so we're not talking about chump change here. The Weinsteins and Miramax received $90 million dollars for the LOTR movies and $25 million for the first Hobbit movie. The Desolation of Smaug grossed over $73 million this past weekend.
The issue then boils down to one of contract interpretation - what does "the first motion picture" of each book but not "remakes" mean?
Based on the limited information I have, I think the Weinstein's got this one and here's why (although without reviewing the entire contract or being familiar with industry norms of interpretation - if there are any -- this is of course, just wild speculation). First, let's start with the plain meaning of "first motion picture." The second installment of "The Hobbit" is still the first motion picture made regarding the events in the book. WB advertises this as the second in a trilogy - not the second movie made of the Hobbit. "Trilogy" is a group of related works - not the same work. WB has turned the book into a trilogy - like the LOTR books (for which the Weinsteins got a cut from each movie). The colon here matters - the movie is not advertised as "The Hobbit" and "The Hobbit" it's "The Hobbit: The Desolation of Smaug." Supporting this interpretation is the language "not remakes" which clarifies what is meant by "first motion picture." Remakes are not subject to the revenue share provisions but a new installment of a trilogy, IMHO, is.
Another issue has to do with good faith. WB is quoted as saying that the Weinsteins basically just made "one of the great blunders in movie history."
I don't see it that way. I think both parties have an obligation to carry out their obligations in good faith and WB seems to be trying to pull a fast one here. The fact that they refer to this as a "great blunder" seems like they are trying to take advantage of the Weinsteins here, not that they seriously had a misunderstanding regarding the contract terms. If this issue had come up at negotiation, the parties would likely have agreed the Weinstein's should get a cut.
There is, of course, the pesky problem of whether the contract is subject to arbitration. Hopefully not, because I would really like to see how this plays out in court.
Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructs the Consumer Financial Protection Bureau (the “Bureau”) to study the use of pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic. This document, dated December 12, 2013, presents preliminary results reached in the Bureau’s study to date.
Below are excerpts, with emphasis added, from the Executive Summary of the Bureau's preliminary findings:
- In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to such clauses. (In 2009 and 2010 several issuers entered into private settlements in which they agreed to remove the arbitration clauses from their credit card consumer contracts for a defined period. If those issuers still included such clauses, some 94% of credit card loans outstanding would now be subject to arbitration.)
- In the checking account market, larger banks tend to include arbitration clauses in their consumer checking contracts, while mid-sized and smaller banks and credit unions do not. We estimate that in the checking account market, which is less concentrated than the credit card market, around 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- In our [General Purpose Reloadable] GPR prepaid card sample, for which data are more limited than for our credit and checking account samples, arbitration clauses are included across the market. Some 81% of the cards studied, and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts.
- Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis. Around 90% of the contracts with arbitration clauses— covering close to 100% of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration—include such no-class arbitration provisions. . . .
- The AAA is the predominant administrator for consumer arbitration about credit cards, checking accounts, and GPR prepaid cards.
- From 2010 through 2012, there was an annual average of 415 individual AAA cases filed for four product markets combined: credit card, checking account, payday loans, and prepaid cards.23 The annual average was 344 credit card arbitration filings, 24 checking account arbitration filings, 46 payday loan arbitration filings, and one prepaid arbitration filing. These numbers do not indicate the number of cases in which the filing was “perfected” and the matter proceeded to arbitration. . . .
- Not all these arbitration filings were made by consumers. For the three product markets combined, the standard AAA “claim form” records consumers filing an average of under 300 cases each year. The remaining filings are recorded as mutually submitted or made by companies.
- From 2010 through 2012, around half the credit card AAA arbitration filings were debt collection disputes—proceedings initiated by companies to collect debt, initiated by consumers to challenge the company’s claims in court for debt collection, or mutual submissions to the same effect. More than a quarter of these debt collection arbitrations also included non-debt consumer claims. . . .
- In contrast, very few of the checking account and payday loan AAA arbitration filings from 2010 through 2012 were debt collection arbitrations.
- From 2010 through 2012, a slight majority (53%) of consumers were represented by counsel in the AAA arbitrations that we reviewed for these three product markets. For non-debt collection disputes, 61% of consumers had a lawyer at some point in the arbitration proceeding. For debt collection arbitrations, 42% of consumers had legal representation at some point in the proceeding. Companies were almost always represented by outside or in-house counsel in both debt collection and non-collection arbitrations.
- From 2010 through 2012, almost no AAA arbitration filings for these three product markets had under $1,000 at issue. . . . There were an annual average of seven arbitrations per year filed with the AAA that concerned disputed debt amounts that were at or below $1,000.
- From 2010 through 2012, for arbitration filings before the AAA involving these three products, the average alleged debt amount in dispute was $13,418. The median alleged debt amount in dispute was $8,641. Looking only at filings that did not identify a disputed debt amount, and excluding one high-dollar outlier, the average amount at issue was $38,726, and the median $11,805.
- Most arbitration clauses that we reviewed contain small claims court carve-outs. In 2012, consumers in jurisdictions with a combined total population of around 85 million filed fewer than 870 small claims court credit card claims—and most likely far fewer than that—against issuers representing around 80% of credit card loans outstanding.
- Credit card issuers are significantly more likely to sue consumers in small claims court than the other way around. In the two top-30 counties by population in which small claims court complaints can be directly reviewed by electronic means, there were more than 2,200 suits by issuers against consumers in small claims court and seven suits by consumers against those issuers. . . .
To judge by the numerous cases that remind one of Wood v. Lucy, Lady Duff-Gordon, one might have the impression that parties never abide by their exclusive distribution agreements. This month, the District Court for the Southern District of New York issued its memorandum and order on defendant's partial motion to dismiss in Ciamara Corp. v. Widealab, Inc., in which Ciamara sued Widealab for breach of an exclusive distribution agreement relating to high-end audio equipment.
According to the complaint, the parties agreed in September 2011 that Ciamara would be the exclusive North American distributor of Widealab's products for two years. Ciamara alleges that it had significant expenses as a result of this agreement. In November 2011, Widealab removed all references to Ciamara from its website and instead listed a Ciamara competitor as its North American distributor. Ciamara sued on a number of theories, and Widealab moved to dismiss claims for fraudulent inducement, tortious interference, quantum meruit, and unjust enrichment. Widealab also moved to dismiss plaintiff's request for loss-of-future-profits, harm-to-business-reputation, and loss-of-goodwill damages related to its breach-of-contract claims.
After a nifty review of New York law relating to fraud, quantum meruit/unjust enrichment and damages (Ciamara abandoned its tortious interference claim), the District Court granted Widealab's motion in all respects, leaving Ciamara with a simple claim for breach of contract, which restores to the case its original dignity. No more slumming in torts and equity!