Friday, January 18, 2013
Apparently the Supreme Court of Texas will decide this issue in Strickland v. Medlen. According to the Wall Street Journal:
In 2009, Avery, a spotted mixed-breed dog, escaped from his Fort Worth home and was taken to a city animal shelter where workers promised to hold him until his owners picked him up. Instead, he was put to death.
Avery's owners sued the shelter employee who mistakenly ordered the killing, raising an emotionally charged issue argued Thursday at the Texas Supreme Court: Can people be compensated for the sentimental value of a lost pet?
Texas law awards damages for the "market value" of a lost pet, which is defined as the price the animal would fetch at sale. But it is an open question in Texas whether pet owners can also be compensated for their emotional losses. The issue has split courts in other states.
The case sounds in tort (negligence) but it does in essence allege a breached promise (to hold the dog until the owners picked him up).
This video interview provides a nice overview of the case:
Should damages be assessed based on the dog's market value (tricky to assess - and maybe zero - for a mutt) or intrinsic/sentimental value to his owners?
Here's a link to the oral argument before the Texas Supreme Court on January 10th.
[Meredith R. Miller]
In yesterday's post, Heidi Anderson introduced us to a football analogy for the parol evidence rule (PER). The parol evidence rule prevents certain extrinsic evidence from getting to the trier of fact just like an offensive lineman prevents defensive players from getting at the quarterback. She analogizes the PER to a very good offensive lineman, but in some jurisdictions the PER is pretty porous, and that may well be a good thing, as Heidi aknowledges. On Heidi's analogy a football safety is like fraud, and these days, letting evidence of fraud tackle the quarterback is widely viewed as a good thing. Or maybe the the safety is supposed to get through to the trier of fact.
On Monday, in Riverisland Cold Storage v. Fresno-Madea Production Credit Association, a case alleging a fraudulent misrepresentation in connection with a debt restructuing agreement, the California Supreme Court revisited a rule derived from a 1935 case, Bank of America etc. Assn. v. Pendergrass. In Pendergrass, the California Supreme Court held that the PER excludes evidence of fraud if that evidence indicates "a promise directly at variance with the promise of the writing." In Riverisland, the lower courts read Pendergrass narrowly and decided that it did not apply to exclude plaintiffs' evidence. On appeal, the Court noted that Pendergrass has been broadly criticized and is inconsistent with both the Restatement and contracts treatises, which suggest that evidence of fraud should not be excluded under the PER. A 1977 California Law Revision Commission also indicated its disappoval of the Pendergrass rule.
The Court then noted that Pendergrass has had its defenders both in the courts and in the scholarly literature. The Court also acknolwedged the principle of stare decisis but nonetheless recognized that the principle must be limited in cases of poorly-reasoned decisions out of step with existing law.
The Court concluded that Pendergrass was "plainly out of step with established California law" at the time it was decided. The Court accordingly overruled Pendergrass and embraced the rule that the PER does not bar evidence of fraud.
Quarterbacks had better watch their blind sides.
Thursday, January 17, 2013
I start the second semester of Contracts with the Parol Evidence Rule. I think it's a complex but manageable topic that engages my no-longer-terrified "seasoned" students at the beginning of the semester. Some students, however, struggle to understand exactly what the effect of the rule is, especially after I tell them that it's not really a rule of evidence. Then, after we cover the exceptions, they're even more confused. So, for the visual thinkers in the class, I show this clip:
For the students not familiar with football, I explain that the player featured in the video, Michael Oher, is an offensive lineman at the heart of the book and movie, The Blind Side. His primary job is to protect the quarterback. More specifically, Oher's job is to protect the quarterback's "blind side"--the side the QB can't see when looking downfield to pass (for right-handed quarterbacks, the left tackle protects the blind side; for lefty QBs, it's the right tackle's job).
Then, I say, "Michael Oher is the Parol Evidence Rule. The defenders rushing in are parol (or extrinsic) evidence. Defensive linemen are prior written agreements. Linebackers are contemporaneous statements. The safety is fraud in the inducement. The quarterback is the judge. Most of the time, Michael Oher (a.k.a., the Parol Evidence Rule) is keeping the extrinsic evidence away from the quarterback/judge. The QB/Judge knows the evidence is there but it does not reach him or affect his decision. That said, Michael Oher is not perfect. Neither is the parol evidence rule. Sometimes, a safety gets through, and for good reason."
And so on. The analogy breaks down in various places but still seems to work for some students. Thus, I thought I'd share it on the blog. I hope some of you find it useful.
[Heidi R. Anderson]
Whether or not distributorship agreements should be covered under UCC Article 2 as contracts for the sale of goods seems to be a case very similar to that of software contracts. That is, some courts assume that such contracts are covered under Article 2 without looking very carefully to see whether the contract is predominantly one for the sale of goods. In the case of software contracts, as discussed yesterday, if the transactions are really about licenses, the assumption that Article 2 applies is not warranted unless the parties have stipulated that they want their agreement to be governed by Article 2, and according to this very helpful comment, they usually stipulate that they do not want the agreement to be governed by Article 2.
A distribution agreement is more likely to involve the sale of goods, and so it is more like the mixed contracts that we talked about on Tuesday. That is, a distributorship agreement will often entail both a service agreement and an agreement for the sale of goods. If so, then the court should analyze the contract under either the predominant purpose test or the gravamen of the action test as discussed in Tuesday's post, depending on the jurisdiction. But it seems that some courts do not do that, either mistaking precedents in which distributorship agreements are treated as governed by Article 2 as establishing a blanket rule or preferring a bright line rule in which all distributorships are governed by Article 2.
Wednesday, January 16, 2013
This is the second in a series of posts on issues that arise in a Sales course.
As Holly K. Towle lays it out in, Enough Already: It Is Time to Acknowledge that UCC Article 2 Does not Apply to Software and Other Information, 52 S. Tex. L. Rev. 531 (2011), many courts simply apply Article 2 to software licenses without much consideration of the law of licenses Others apply the law of licenses, which she thinks is appropriate. Her approach makes sense when we're talking about mass-marketed software provided to consumers through licenses. In fact, courts ought to take notice of the fact that all U.S. jursdictions have now clarified the status of software as a "general intangible" and not a good through the revisions to UCC Article 9 adopted in all fifty states.
But what of custom-made software that may not be licensed but sold to the client who will be its exclusive user? My impression from the limited caselaw I have reviewed on the subject suggests that courts recognized early on that software consists of both tangible and intangible elements. They seem to have assumed that the intangible elements (the services provided in developing software, for example) could be easily separated from the tangible elements (the disks, drives or hardware associated with the delivery of the software). On this line of reasoning, only the latter are goods. That distinction strikes me as artificial. Unless the deal involves a lot of hardware, the cost of the "goods" is trivial compared to the costs of software development, and in fact, with digital downloads and cloud computing, there may not be a good at issue at all. That is, my office used to be cluttered with the boxes that held the disks on which my software came to me. I may have naively thought of software as a good then because those boxes made software look like a good. Now, my software either comes pre-loaded or I download it without the aid of a disk or external drive. Now it looks much less good-like, but of course, how it looks should not matter.
Towle draws on IP law to argue that software is really "information" and information ought to be treated differently from tangible goods. I'm not sure I understand why that distinction matters if we are dealing with a sale rather than a license. A lot of things that we consider goods are really just information, in the sense that Towle uses it. Books are just information, but a sale of books is a sale of goods (although she is correct that you cannot return a lousy novel based on a breach of the implied warranty of merchantability). There are lots of other items that we buy about which is could be said that the costs of development constitute a large part of the costs of the good, but the UCC does not ask about cost breakdowns; it just asks if the subject of the transaction is moveable at the time that it is identified to the contract. Electricity has been held to be a good because it moves. So does information. More particularly, custom-made software, White & Summers point out, does not really seem much different from any other specially-manufactured good, which the UCC treats as a good for the purposes of Article 2.
I recommend Towle's article. She has persuaded me that courts err in trying to apply Article 2 to software licensing transactions, but when it comes to custom-designed software that is actually sold, rather than licensed, to the end user, I think a strong case can be made for applying Article 2.
I do not know if the software design companies agree to flat out sell the software they develop. It might be safer for them to license it so that they can re-use the code for other businesses that might need similar software designed for their specific needs. If that's the way these deals are done, it follows from Towle's reasoning that licensing law, rather than Article 2 should apply to those transactions as well.
Tuesday, January 15, 2013
The N.Y. Times reports that Conde Nast has issued new contracts to its writers with changes that diminish their right to profits from articles. Conde Nast is the publisher for magazines like Wired, Vanity Fair and The New Yorker. (You remember magazines, right? They’re printed on paper and you can usually find them at airports. Unlike newspapers, they don’t leave inky residue on your fingers). Conde Nast writers typically lack job security and benefits, signing one-year contracts – but they are (or were) allowed to keep the rights to their work. These rights could be valuable if an article becomes a movie, like “Argo” or “Brokeback Mountain.” Under the new contracts, however, Conde Nast has exclusive rights to articles for periods of time ranging from thirty days to one year and option rights where payments to the writer top out at $5K. If the article is turned into a movie, there is also a cap on what writers can receive.
It would be easy for me to demonize Conde Nast given my association with writers. Yet, it’s no secret that the demand for glossies is diminishing and that publishers need to figure out a way to monetize their content better – otherwise, there won’t be any magazine writers at all. Perhaps Conde Nast could bargain employee benefits for these rights, the way newspapers do. Maybe they could increase the cap based on different variables. Maybe they could lift the exclusivity for certain writers after a period of time (or a designated number of successes). Maybe they could commission articles that they conceived in-house, so that the work is a traditional work for hire, and the cap isn’t tied to an idea that originated with the writer. In any event, it’s clear that Conde Nast needs to evolve with the marketplace; what’s not so clear is that this is the way to do it.
As indicated in Monday's post, I am teaching Sales for the first time this semester, and this is the first in what I hope will be a series of posts in which I highlight but do not resolve tricky issues addressed in the course.
The situation is quite common. A contract involves the provision of both services and goods: a construction contract covers both building supplies and labor costs; a medical contract covers both the costs of the surgery and the prosthetic device to be inserted in toto the body; a software company will both design and maintain the software, while also providing computer hardware to run it. Are these transactions covered under Article 2?
Most courts seem to favor a version of the "predominant purpose" test, although it goes by various names. In such cases, the court's analysis aims to determine whether the contract is predominantly one for goods or one for services. But what does it mean to have services of goods predominate? It could mean that the parties thought of the contract as one for good or as one for services, in which case the inquiry will largely turn on the parties' testimony, although if the contract is named "Sercies Agreement" or "Purchase Agreement" that might help. Or the court might have to look to which component counted for a larger portion of the contract price.
Contracts scholar and FOB (Friend of the Blog) Steven Feldman (pictured) has provided a more detailed account of the predominant purpose test including a list of factors that courts (in his example in Tennessee) weigh in appyling that test:
Where a contract has a mix of goods and services, relevant criteria for determining whether the UCC will control a contract will include the contract language, the nature of the seller's business, the reason for entering the contract, and the amounts charged under the contract for the goods and services.
Fleet Business Credit, LLC v. Grindstaff, Inc., 2008 WL 2579231 (Tenn. Ct. App. 2008). But the fact that the test is multi-factor and nuanced only renders it more problemmatic in my view, on which more below.
Other courts use the gravamen of the action test. They look not to what the contract as a whole was about but to whether the issues in the case relate to faulty service or faulty goods. So, for example, I am using the Whaley & McJohn casebook on sales, which includes a Maryland case about a faulty diving board installed as part of the installation of an in-ground pool. The case related not to the installation of the pool but to the design of the board, which was slippery on the end. The court applied the gravamen of the action test and found that the UCC applied.
The gravamen of the action test seems right to me, and I'm surprised that more states have not adopted it. Predominant purpose is vague and hard to apply, and it seems artibtrary that whether or not a contractor's work should be covered on a warranty should turn on whether 45% of 55% of the cost was related to the provision of goods. Moreover, the fact that a party sold a good as part of a services contract should not affect the warranties that run with the sale of a good. And on the other side, if there was a failure in the services provided in connection with a provision of goods, then the warranties that relate to the goods should not be relevant in an assessment of whether or not the service provider was at fault.
The gravamen rule also seems better to me in terms of putting the parties on notice of potential liabilities in store. Faced with a multi-factor test like the predominant purpose test, parties to mixed contracts cannot know in advance whether their contract will be governed by the UCC or not. If the gravamen rule applies, parties should always know that the UCC will apply to the goods portion of the contract. And if a service provider wants to protect itself from liability relating to the goods it installs, that legal certainty can be very valuable.
Monday, January 14, 2013
Coverall North American (Coverall) contracts to provide janitorial clearning services to building owners or oeprators. The people who do the clearning, a/k/a janitors, are falled "franchisees." These franchisees sued Coverall alleging state law claims, including breach of contract. The case was before the First Circuit on the issue of which franchisees were subject to arbitration provisions in the Franchise Agreements. The District Court certified a class consisting of plaintiffs not subject to the arbitration provisions and then later expanded the class to include the plaintiffs in Awuah v. Corvall North America, Inc., (Awuah Plaintiffs) who were not party to the original Franchise Agreements containing the arbitration provisions but signed other agreements that incorporated those provisions by reference. The District Court found that the incorporation by reference did not give the Awuah Plaintiffs sufficient notice of their obligation to arbitrate to those plaintiffs who never were given a copy of the documents incorporated by reference.
The District Court's expansion of the class was predicated on its reading of First Circuit precedent providing that a party cannot be bound by an arbitration clause of which she has no notice, and the First Circuit reversed of the District Court's ruling because it disagreed with that reading of the case law. The District Court was correct in finding that, while the unconscionability of an arbitration clauses can be decided by an arbitrator, the question of whether there was an arbitration agreement at all must be decided by a court. However, the First Circuit concluded, while the District Court asked the right question, it provided the wrong answer.
Massachusetts law requires no magic language to effect an incorporation by reference so long as the intent to do so is clear, and the First Circuit found that the various agreements to which the Awuah Plaintiffs are parties all clearly incorporated the Franchise Agreements and their aribtration provisions. The District Court also erred in its reading of federal law, importing from the realm of employment law a general heightened notice requirement that it applied to all arbitration provisions. No such general requirement exists and even if some state law provision imposed a heightened notice rule, that rule would be pre-empted by the Federal Arbitration Act, according to both AT&T Mobility v. Concepcion and Nitro-Lift Tech. v. Howard.
The First Circuit reversed the District Court's expansion of the class to include teh Awuah Plaintiffs and ordered their claims stayed pending arbitration.
I am teaching Sales this semester for the first time. It's pretty exciting actually. I expect to be posting a lot of issues that are new to me since I've never covered the material before. I have not read widely in the area, so there are probably answers out there to my questions, but I don't have time to research them all. Or sometimes I suspect there will not be clear answers. In either case, I invite contracts scholars and practitioners to weigh in with references to relevant cases or scholarship or with opinions.
- When should mixed contracts be treated as contracts for the sale of goods: predominant purpose v. gravamen of the action test?
- When is a contract relating to software a contract for the sale of goods and does the emergence of the cloud change our perspective on the issue?
- Why should a distribution agreement be treated as a contract for the sale of goods?