Monday, June 30, 2014
After BP's oil drilling rig, the Deepwater Horizon (below, right) located off the Gulf Coast of Louisiana, caught fire and sank in April 2010, BP sought to purchases millions of feet of oil containment boom (pictured). Plaintiff Packgen sought to capitalize on this demand by manufacturing boom, although it had never done so before. Assuming the facts as alleged by Packgen, already by May 2010, Pathgen had secured an oral agreement from BP to purchase boom at $21.75/sq. ft., subject to inspection of Packgen's facilities and testing of Packgen's products to confirm that they met standards established by the American Society of Testing and Matierals (ASTM). Such inspection occurred, and Packgen's products satisfied ASTM's standards.
Although the parties seemed committed to working together and Packgen geared up to produce 40,000 square feet of boom per day, the parties continued to exchange communications throughout May. BP began to express concern about the connectors on Packgen's boom and demanded various modifications to Packgen's boom design. A field test of Packgen's boom did not go well. BP's needs changed. It demanded further changes and Packgen scrambled to comply. By the time Packgen was producing boom that met BP's needs, BP had capped the Deepwatern Horizon and its need for boom quickly dimishinished. It never purchased any boom from Pathgen, and Pathgen was left with 60,000 feet of boom, which it eventually sold for $2/sq. ft.
Packgen sued, alleging misrepresentation, breach of contract, and equitable claims. The District Court dismissed all of Packgen's claims, and it appealed, drawing a panel that included retired Supreme Court Justice David Souter.
The First Circuit affirmed the District Court's dismissal of all claims in Packgen v. BP Exploration and Production, Inc. The Court found that there was no misrpresentation because the BP personnel who indicated an intention to purchase Packgen's boom sincerely intended to do so at the time they made those representations.
As this alleged contract was for the sale of goods with a value in excess of $500, it was within the Statute of Frauds (SoF) and thus had to be evidenced by a writing. Packgen did not claim that the sale was evidenced by a writing but claimed that the transaction fell within two UCC exceptions to the SoF: the specially manufactured goods exception and the judicial admission exception.
On the specially-manufactured-goods exception, the facts were interesting. In short, Packgen could not avail itself of the exception because it re-sold the goods. Packgen pointed out that it had repeatedly modified the product to meet BP's specifications and that BP was buying 90% of the boom produced in the U.S. markets at the time. The Court pointed out that those circumstances are not relevant. The only question is whether the goods could be re-sold to another purchaser, and they could. The fact that the market for boom collapsed once BP stopped buying and that Packgen consequently could get only 10% of its original selling price does not change the fact that the product could be sold to another purchaser.
On the judicial admission exception, Packgen cited to an e-mail from a BP employee who, in reference to Packgen, wrote: "I do not understand why we keep placing orders with suppliers like this[.]" Seen in its context, the Court found that the e-mail was insufficient to overcome other evidence indicating that, at the time that e-mail was sent, both parties believed themselves to be negotiating a contract rather than as having a contract.
Packgen's equitable claims failed as well. It could not show evidence that BP had benefitted from the information it had provided regarding boom speicifications nor that it had provided any services in connection with the parties' on-going negotiations for which it expected payment. Packgen's promissory estoppel claim, like its breach of contract claim, fell because of the SoF. While the SoF is not a complete bar of promissory estoppel claims relating to promises to sell goods in excess of $500, in order to overcome the SoF, plaintiff must allege conduct such that refusal to enforce the alleged promise would be tantamount to allowing the SoF itself to become an instrument of fraud. But as Packgen's misrepresentation claims failed, it could show no actual intent to deceive.
Friday, June 27, 2014
Several months back, I blogged about KlearGear's efforts to enforce a $3500 nondisparagement clause in their Terms of Sale against the Palmers, a Utah couple that had written a negative review about the company. It was a case so bizarre that I had a hard time believing that it was true and not some internet rumor. Even though the terms of sale most likely didn't apply to the Palmers --or to anyone given the improper presentation on the website-- KlearGear reported the couple's failure to pay the ridiculous $3500 fee to a collections agency which, in turn, hurt the couple's credit score. The couple, represented by Public Citizen, sued KlearGear and a court recently issued a default judgment against the company and awarded the couple $306,750 in compensatory and punitive damages. Consumerist has the full story here.
Congratulations to the Palmers and Scott Michelman from Public Citizen who has been representing the couple. And let this be a warning to other companies who might try to sneak a similar type of clause in their consumer contracts....
Thursday, June 26, 2014
Thanks to Miriam Cherry (left) for sharing this one:
I love this fact pattern: as reported in the National Law Journal, a student who received a D in contracts is suing the law school he attended, as well as his contracts professor, claiming that the professor deviated from the syllabus by counting quizzes towards the final grade. He claims $100,000 in harm because the D in contracts resulted in his suspension from the law school. He could not transfer to a different law school because he was ineligible for a certificate of good standing.
The case is a cautionary tale. It appears that the syllabus indicated that the quizzes would be optional. The professor then announced in class that the quizzes would actually count. The plaintiff claims to have been uanaware of the change or at least adversely affected by it. I say it is a cautionary tale because I sometimes make changes to my syllabus, usually in response to student feedback. I make sure to e-mail all students to make certain that everyone is aware of the changes and I obsessively remind students of the changes because I worry about precisely what happened here. It may well be that the defendant contracts prof did the same, although the National Law Journal article states that the change was evidenced by the handwritten notes of another student.
There is an interesting exchange on the merits of the case in the comments to the ABA Journal article on this subject. Apparently, there is some case law stating that a syllabus is a contract. For the most part, I think such a rule would benefit instructors. No student could complain about my attendance or no-technology policies because I could tell them (doing my best Comcast imitation) that by continuing to attend my course, they had agreed to my terms. But many of the commentators think that written contracts can never be orally modified. I don't think a syllabus is a contract because I don't think there are parties to a syllabus and I don't think there is intent to enter into legal relations. Things might be different if the syllabus identified itself as a contract and informed students of the manner of acceptance of its terms.
Friend of the blog, Peter Linzer (right), chimes in (comment #13) and succinctly dismisses this notion that a contract not within the Statute of Frauds cannot be orally modified. In any case, he thinks the claim is best understood as sounding in promissory estoppel, and plaintiff's claim fails because, in short, he cannot claim to have reasonably relied on a promise just because he missed class or did not pay attention when that promise was retracted.
1:00 PM - 2:30 PM ET
1.5 CLE credits requested
Section of Public Contract Law
This program will provide an introductory review on the federal procurement bid protest process, with a focus both on the procedural complexities of bid protest litigation, as well as a high-level review of the types of substantive legal issues that frequently arise in bid protests.
Too busy to attend?
Pre-purchase the recorded program now.
Wednesday, June 25, 2014
In 2006, Jacqueline Goldberg signed an agreement* to purchase two hotel condominium units in Trump Tower Chicago, a 92-story building in downtown Chicago that comprises residential condo units, hotel condo units and all of the amenities one expects to find in a hotel (pictured at left). Some of these amenities are called "common elements" in which each individual purchaser of the condo units has rights. But the agreement into which Ms. Goldberg entered included a "change clause" that permitted the Trump Organizations to modify those rights with either the notice to or approval by the purchasers. Ms. Goldberg attempted to negotiate for a return of her deposit if she disapproved of the changes, but the Trump Organizations refused. Three such changes took place before Ms. Goldberg signed the agreement.
But then came the fourth change, to which Ms. Goldberg strenuously objected. She refused to close on the deal and demanded a return of her $516,000 deposit. The Trump Organizations placed her deposit in escrow, and she sued, alleging breach of contract and other causes of action. Some of her claims were dismissed, some were tried before a jury, and some were tried before a judge. Both the jury and the judge found for the Defendants. Ms. Goldberg appealed to the Seventh Circuit, resulting in Judge Posner's opinion upholding the District Court in Goldberg v. 401 North Wabash Venture LLC.
Ms. Goldberg's common law allegations basically came down to a claim that the Trump Organizations had engaged in a bait and switch -- she had bought the condos as an investment and had been led to believe that they would have a certain value. After the changes, that value was diminished. Judge Posner rejected this characterization of the agreement, since Ms. Goldberg, "a wealthy and financially sophisticated Chicago businesswoman," was aware of the change clause and had even attempted to have it removed. On the facts, there was no deception. She took a risk when she entered into the agreement with the change clause included.
Of more interest to us, Judge Posner concluded that Ms. Goldberg's breach of contract claim collapsed once her "bait-and-switch" theory was eliminated. While there is a duty of good faith, Judge Posner reminded Ms. Goldberg that it applies only in the performance of a contract, not in its formation. There follows an interesting discussion of law and equity. Ms. Goldberg challenged the trial judge's decision to decide on her breach of contract claim rather than submit the question to the jury. Judge Posner noted that rescission is an equitable, not a legal, remedy, and under both Illinois and Federal law, there is no right to a jury trial on an equitable claim.
One could imagine that Ms. Goldberg might have argued that the Trump Organizations breached the duty of good faith and fair dealing in the performance of the contract. After all, the bait might have occurred in the formation of the contract, but the switch occurred during performance. Ms. Goldberg would then have to show that while some changes were to be expected under the change clause, the actual changes that the Trump Organizations engaged in were not in the contemplation of the parties at the time they entered into the contract and undermined the original agreement (or something like that). It's not clear that Ms. Goldberg could have made such a showing. It seems that the Trump Organizations had good reasons for the changes that were made. In any case, if she were making that sort of argument, I think Ms. Goldberg would not have sought rescission of the agreement but enforcement of the original agreement without the changes.
Finally, one might see this as another example of corporations getting to impose unreasonable terms on a consumer. Here, Judge Posner has very little sympathy for the plaintiff, despite her advanced age, because of her sophistication. But the facts make clear that even she, who bought two condos as an investment, had no bargaining power as to the terms at issue. Posner undoubtedly applied the law correctly, but just think, if a person with Ms. Goldberg's means has no bargaining power as to one-sided and potentially unreasonable terms, what chance do the rest of us have?
For a different take on the same case, check out my law school's student law blog, the VALPOLAWBLOG, where you can find this post by student Faith Alvarez.
*Following Judge Posner's example, we simplify things by making it one agreement and ignore the complexities of the various Trump entities by referring to those entities collectively as the Trump Organizations.
Call for Papers
A Conference on
The ALI’s Principles of the Law of Liability Insurance
Rutgers Center for Risk and Responsibility
Rutgers School of Law-Camden
February 27, 2015
The Rutgers Center for Risk and Responsibility is planning a conference on The American Law Institute’s Principles of the Law of Liability Insurance. The conference will be held Friday, February 27, 2015, at Rutgers Law School‒Camden.
The Principles project aims, as Director Lance Liebman wrote, to draft “coherent doctrinal statements based largely on current state law, but also grounded in economic efficiency and in fairness to both insureds and insurers.” The ALI has approved Chapter 1, Basic Liability Insurance Contract Principles, and Chapter 2, Management of Potentially Insured Liability Claims. The project has sparked spirited debate, and this is an appropriate time to assess the work yet still early enough to influence the project. The conference will focus on issues raised in Chapters 1 and 2.
The Principles potentially have significance far beyond the law of liability insurance. Their distinctive approach to interpretation charts a middle ground between formalist and contextualist approaches which may provide a model for the interpretation of other insurance contracts and of other types of contracts, from standard form contracts to commercial contracts. The rules on the duty to defend and the duty to make reasonable settlement decisions will impact tort law and litigation and raise ethical issues. Therefore, the Principles should be of interest of scholars in contracts, torts, litigation, and professional responsibility as well as insurance and insurance law scholars.
The conference will engage academics and practicing lawyers in discussion of the Principles.
The structure of the day is evolving, but likely topics include panels on the Principles’ interpretation rules, the duty to defend, and the duty to settle. Confirmed speakers include George Cohen (Virginia); Mark Geistfeld (NYU); Bruce Hay (Harvard); Leo Martinez (UC Hastings); and Jennifer Wriggins (Maine). Reporters Tom Baker (Penn) and Kyle Logue (Michigan) will attend and respond. The Rutgers Law Journal may publish the papers from the conference.
Participation is invited from a broad range of scholars with interests relevant to in these topics. Submit abstracts by August 15, 2014, to Jay Feinman at email@example.com. Papers will be due January 5, 2015.
Tuesday, June 24, 2014
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Thursday, June 19, 2014
This week, I received notice that I am a member of the plaintiff class in Schlesinger, et. al. v. Ticketmaster. After ten years of litigation, the parties' proposed settlement is pending before the Superior Court in Los Angeles. If you purchased tickets through Ticketmaster between 1999 and 2013, you most likely are also a part of the class. The case alleges (in short) that Ticketmaster overcharged customers for fees. Ticketmaster claims that its processing fees were necessary for it to recover its costs, while plaintiffs allege that those fees were actually a means of generating profits for Ticketmaster. Shocking, no?
The terms of the settlement are actually pretty sweet. Class members will get a discount code that they can use on the Ticketmaster website entitling them to $2.25 off future Ticketmaster transactions. Class members get to use the code up to 17 times in the next four years. The value of the discount codes is about $386 million, and if the money is not used up, class members will be eligible for free ticket to Live Nation events. Ticketmaster's website will also now include disclosures about how it profits from its fees.
But then there's THIS:
Ticketmaster will pay $3 million to the University of California, Irvine School of Law to be used for the benefit of consumers like yourself. In addition to the benefits set forth above, Ticketmaster will also make a $3 million cy pres cash payment to the University of California, Irvine School of Law’s Consumer Law Clinic. The money will establish the Consumer Law Clinic as a permanent clinic, and it will be used to: (i) provide direct legal representations for clients with consumer law claims, (ii) advocate for consumers through policy work, and (iii) provide free educational tools (including online tutorials) to help consumers understand their rights, responsibilities, and remedies for online purchases.
The settlement strikes me as masterly. It gets a beneift to people who, if the allegations are true, were actually harmed by the alleged conduct, but it does so in a way that will generate more business for Ticketmaster going forward, and Ticketmaster may value that new business stream at around $386 million in any case. Ticketmaster has had to make changes to its website to eliminate the risk of deception going forward. And the world gets a consumer protection clinic funded the sort of business against whom consumers need to be protected.
Congratulations to the attorneys who came up with this settlement and to the UC Irvine Conumser Protection Clinic on its new endowment.
Wednesday, June 18, 2014
Please do look too closely at my part in this. It is my first lecture in a MOOC. What I think is neat is the contract law rap by rapper. Brandon Rosin. Take a look but please stop when you get to my droning. https://class.coursera.org/globalintrouslaw-001/lecture/67
Sorry, after posting this I realized you have to sign in to view the tapes. If you go to the trouble -- very little trouble actually -- the rap is in the second contracts tape entitled, why have contract law. The artist is Brandon Rosin. https://www.youtube.com/user/ITSBlastfoME. The contracts rap is not on the youtube site but it will give you some idea of his "style." When you see the youtube bit you can understand why all of contract law might be taught in 2 minutes.
Tuesday, June 17, 2014
Over the past few years, more than a dozen 7-Eleven franchisees have sued the company claiming that it operated in bad faith by untruthfully accusing the franchisees of fraud and by strong-arming them to “voluntarily” surrender their franchise contracts based on such false accusations. The franchisees claim that the tactic, which is known in the franchise community as “churning,” is aimed at retaking stores in up-and-coming areas where the franchise can now be sold at a higher contractual value or from franchisees who are too outspoken against the company.
Franchisees split their gross profits evenly with 7-Eleven. The chain claims that it has hours of in-store covert footage showing franchisees voiding legitimate sales and not registering others to keep gross sales lower than the true numbers in order to pay smaller profits to 7-Eleven. Similarly, the chain uses undercover shoppers to spot-check the recording of transactions. This level of surveillance is uncommon among similar companies, says franchise attorney Barry Kurtz. A former corporate investigations supervisor for 7-Eleven calls the practice “predatory.”
Japanese-owned 7-Eleven asserts that a few of their franchisees are stealing and falsifying the sales records, thus depriving the company of its full share of the store profits. It maintains in court records that its investigations are thorough and lawful. It also complains that groups of franchisees often group together to create a “domino of lawsuits, pressuring the company to settle.”
It seems that a company installing hidden cameras to monitor not customers for safety reasons, but one’s own franchisees raises questions of whether or not these people had a reasonable expectation of privacy in their work-related efforts under these circumstances. If not, the issue certainly raises an ethical issue: once one has paid not insignificant franchise fees and continue to share profits with the franchisor at no less than 50-50%, should one really also expect to be monitored in hidden ways by one’s business partner, as the case is here? That has an inappropriate Big-Brother-is-Watching-You feel to it.
In the 1982 hit Dire Straits song Industrial Disease, Mark Knopfler sings that “Two men say they're, Jesus one of them must be wrong.” When it comes to this case, the accusations of “bogus” reasons asserted by the franchisees and returned fire in the form of theft accusations by 7-Eleven, somebody must not follow the contractual duty of good faith and fair dealings.
This case seems thus to be one that could appropriately be settled… oh, wait, the company apparently perceives that to be inappropriate pressure. Perhaps a fact finder will, then, have to resolve this case of mutual mud-slinging. In the meantime, 7-Eleven prides its “good, hardworking, independent franchisees” of being the “backbone of the 7-Eleven brand.” That is, until the company itself deems that not to be the case anymore, at which point in time it imposes a $100,000 “penalty” on those of its franchisees who do not volunteer to sign away their stores. The company does not reveal how it imagines that its hardworking, but probably not highly profitable, franchisees will be able to hand over $100,000 to a company to avoid further trouble.
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Sunday, June 15, 2014
Plaintiffs in SN4, LLC v. Anchor Bank wanted to buy two multi-unit apartment buildings for which Anchor Bank (the Bank) held title. Through an exchange of e-mails, the parties seemed to have agreed to a purchase price of $1.7 million, but they continued to exchange drafts of a final agreement. The opinion catalogues and summarizes 19 e-mails relevant to the transaction, but there was no e-mail and no hard copy in which the Bank signed any purchase agreement relating to the properties. When the Bank refused to sell the properties, plaintiffs sued alleging breach of an agreement that they had signed.
The trial court granted summary judgment in favor of the Bank on the ground that that the statute of frauds was not satisfied. On appeal before the Minnesota Court of Appeals, the plaintiffs argued that the Bank had electronically subscribed to the agreement. The matter of first impression for the court was plaintiffs' claim that the Bank had subscribed to the agreement that plaintiffs later signed because the Bank electronically signed the e-mail to which the agreement was attached. This claim required the court to address the Minnesota's version of the Uniform Electronic Transactions Act (UETA).
The court noted that, although the parties conducted their negotiations electronically, UETA does not require them to also subscribe to their transaction electronically unless the parties so intended to limit the means by which they would enter into agreement. Here, the parties repeatedly made it clear that they expected to sign hard copies of their final agreement. The court also rejected plaintiffs' contention that the Bank had signed the agreement in two e-mails which included the typed-in name of one of the Bank's principals and a signature block. The court found that a reasonable factfinder could conclude that the Bank had provided electronic signatures, but under UETA, such signatures must be attached to or associated with the electronic record at issue. An electronic signature in an e-mail does not automatically apply to a document attached to that e-mail. In this case, the Bank did not electronically sign the attached document, nor does it seem that the parties considered the attached document the final version of their agreement, as they referred to it as a draft.
Based on these findings, the Court of Appeals upheld the trial court's conclusion that UETA did not apply to the alleged agreement and that no reasonable finder of fact could conclude that the Bank had electronically signed the agreement. The Court of Appeals therefore upheld the grant of summary judgment to the Bank. The Court of Appeals also upheld the trial court's rejection of the plaintiffs' equitable estoppel claim.
Thursday, June 12, 2014
(The next John Grisham?)
Another way to provoke interest in the subject might be to write an imaginative futuristic tale of a world controlled by EULAs, like Miriam Cherry has done here. Her fast-paced story is a mashup of Girl with a Dragon Tattoo, Boilerplate and Ender's Game - beach reading for contracts profs!
Wednesday, June 11, 2014
- they limit workers' opportunities to seek better jobs within their profession;
- workers subject to non-competes change jobs less frequently and earn less money over time;
- states like California that refuse to enforce non-competes create a better environment for entrepreneurship; and
- low-level employees who are now being subjected to non-compete agreements have no bargaining power with which to challenge them and do not willingly consent to them.
There may be economic studies that dispute the first three bullet points. On the blog, we have tended to emphasize the fourth bullet point. The argument against that point is not empirical. Rather, those who support the enforcement of one-sided boilerplate terms contend that it is generally more efficient to enforce such terms than to expect that each agreement will be negotiated on an individual basis.
As Nancy Kim has argued, that might be okay, so long as the creators of boilerplate contracts are subject to a duty to draft those agreements reasonably. One interesting approach along similar lines is the solution proposed in Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014).
Tuesday, June 10, 2014
By Myanna Dellinger
What would you say if you found out that Facebook used your kids’ names and profile pictures to promote various third-party products and services to other kids? Appalling and legally impossible as minors cannot contract? That’s just what a group of plaintiffs (all minors) attempting to bring a class action lawsuit against Facebook argued recently, but to no avail. Here’s what happened:
Kids sign up on Facebook, “friend” their friends and add other information as well as their profile pictures. Facebook takes that information and display it to your kids’ friends, but alongside advertisements. The company insists that they do “nothing more than take information its users have voluntarily shared with their Facebook friends, and republish it to those same friends, sometimes alongside a related advertisement.” How does this happen? A program called “Social Ads” allows third parties to add their own content to the user material that is displayed when kids click on each other’s information.
The court dismissed the complaint, finding no viable theory on which it could find the user agreements between the kids and Facebook viable. In California, where the case was heard, Family Code § 6700 sets out the general rule for minors’ ability to contract: “… a minor may make a contract in the same manner as an adult, subject to the power of disaffirmance.” The plaintiffs had argued that as a general rule, minors cannot contract. That, said the court, is turning the rule on its head: minors can, as a starting point, contract, but they can affirmatively disaffirm the contracts if they wish to do so. In this case, they had not sought to do so before bringing suit.
Plaintiffs also argued that under § 6701, minors cannot delegate their power to, in effect, appoint Facebook as their agent who could then use their images and information. Wrong, said the court. Kids signing up on Facebook is “no different from the garden-variety rights a contracting party may obtain in a wide variety of contractual settings. Facebook users have, in effect, simply granted Facebook the right to use their names in pictures in certain specified situations in exchange for whatever benefits they may realize from using the Facebook site.”
In its never-ending quest to increase profits, Corporate America once again prevailed. Even children are not free from being used for this purpose. The only option they seemed to have had in this situation would have been to disaffirm the “contract;” in other words, to stop using Facebook. To me, that does not seem like a difficult choice, but I imagine the vehement protests instantly launched against parents asking their kids to stop using the popular website. Of course, kids are a highly attractive target audience. Some already have quite a bit of disposable income. They are all potential long-time customers for products/services not directed only at kids. Corporate name recognition is important in connection with this relatively impressionable audience. But is this acceptable? After all, there is an obvious reason why minors can disaffirm contracts. This option, however, would often require intense and perhaps undesirable parent supervision. In 2014, it is probably unreasonable to ask one’s kids not to be on social media (although the actual benefits of it are also highly debatable).
Although the legal outcome of this case is arguably correct, its impacts and the taste it leaves in one’s mouth are bad for unwary minors and their parents.
In August of last year, the WSJ reported that companies were easing up on executive noncompetes. Two days later, the WSJ reported that litigation over noncompetes was on the rise. As Jeremey Telman wrote here on the blog yesterday, the NY Times reported that noncompetes are everywhere. So which is it?
My guess is that noncompetes are increasingly widespread in non-executive contracts - the examples in the NY Times piece involved a 19-year old summer camp counselor, a pesticide sprayer and a hair stylist. At the same time, the popularity of the non-compete may be waning in executive contracts where they are less likely to have an in terrorem effect.
Here's a taste of the NY Times article:
Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals.
There are plenty of other examples of these restrictions popping up in new job categories: One Massachusetts man whose job largely involved spraying pesticides on lawns had to sign a two-year noncompete agreement. A textbook editor was required to sign a six-month pact.
A Boston University graduate was asked to sign a one-year noncompete pledge for an entry-level social media job at a marketing firm, while a college junior who took a summer internship at an electronics firm agreed to a yearlong ban.
“There has been a definite, significant rise in the use of noncompetes, and not only for high tech, not only for high-skilled knowledge positions,” said Orly Lobel, a professor at the University of San Diego School of Law, who wrote a recent book on noncompetes. “Talent Wants to be Free.” “They’ve become pervasive and standard in many service industries,” Ms. Lobel added.
Because of workers’ complaints and concerns that noncompete clauses may be holding back the Massachusetts economy, Gov. Deval Patrick has proposed legislation that would ban noncompetes in all but a few circumstances, and a committee in the Massachusetts House has passed a bill incorporating the governor’s proposals. To help assure that workers don’t walk off with trade secrets, the proposed legislation would adopt tough new rules in that area.
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I've been thinking a lot about contract design, disclosure and consent recently, and had a chance to read Tess Wilkinson-Ryan, A Psychological Account of Consent to Fine Print, 99 IOWA L. REV. 1745 (2014) which (from the abstract):
"aims to unpack the beliefs, preferences, assumptions and biases that constitute our assessments of assent to boilerplate. Research suggests that misgivings about procedural defects in consumer contracting weigh heavily on judgments of contract formation, but play almost no role in judgments of blame for transactional harms. Using experimental methods from the psychology of judgment and decision-making, I test the psychological explanations for this disjunction, including motivated reasoning and reliance on availability heuristics."
Wilkinson-Ryan concludes that, while disclosures may not have noticeable effects on the assent process (i.e. whether consumers read or understand terms), they have "enormous effects on how we understand transactional harms." In other words, we are more likely to understand that the consumer has consented and that the consumer is to blame for having consented if the particular disputed issue has been disclosed.
Wilkinson-Ryan covers the same territory that Eric Zacks covered in a couple of earlier articles having to do with contracting behavior by firms and the effect of contract design on how consumers perceive their moral obligations. In the first article, Contracting Blame, 15 Univ. of Penn. J. of Bus. L. 169 (2012) Zacks (I’m quoting from the abstract again):
“explores the impact of the cognitive biases of judges and juries in the context of contract preparation and execution....This Article makes a novel link between behavioral literature and contract preparation and suggests that contract preparers may be able to manipulate adjudicators’ cognitive biases systematically. Exclusive of the economic bargain, contract provisions can provide attributional 'clues' about the contracting context that inform and reassure judicial interpreters that a particular contracting party is more blameworthy than another....In light of the significant implications of the existence and prospective use of such attributional clues for contract law theory and judgment, this Article proposes a broader contextual and adjudicative focus when contemplating contract law reforms.”
In the second, Shame, Regret and Contract Design, 97 Marquette L. Rev. (forthcoming), Zacks argues (again from the abstract):
“(c)ontracts can encourage individuals to feel shame, to blame themselves, to believe that contracts are sacred promises that should be specifically performed, to utilize faulty judgment heuristics when determining contract costs, and to rely on misperceived social norms with respect to challenging or breaching contracts. This may influence them not to breach or challenge an otherwise uneconomical, unconscionable, or illegal contract.”
The takeaway from these three articles? Firms are manipulating consumers through disclosure and contract design into performing contracts without real consent. The question then is what to do about it.
Wilkinson-Ryan’s article raises interesting questions about whether disclosure requirements have unintended consequences. I think her article provides additional support for Omri Ben Shahar and Carl Schneider's book, More Than You Wanted to Know: The Failure of Mandated Disclosure (Princeton, 2014).* But rather than concluding that disclosure is a lousy way to address the problem of consent (which it often is), I came to a slightly different conclusion based upon one of her studies. That study found that "making the firm's behavior more salient changed how subjects ranked the blameworthiness of the parties." Wilkinson-Ryan notes that, "(u)nless participants are prompted to think about the firm's drafting process as a set of choices, the drafter's role is not a salient factor in judgments of blame." In my book, Wrap Contracts, and elsewhere, I argue that courts should stop focusing on consumer's "duty to read" and focus instead on the company's "duty to draft reasonably." In other words, courts should consider whether the drafting firm could have presented and drafted the contract terms in a better, more understandable fashion rather than on whether the adherent "should" have noticed the terms. This shifts the burden of form contracting - and Wilkinson-Ryan's studies suggest, the moral blame -- from the non-reading consumer to the bad-drafting, morally culpable, company. Of course, requiring companies to draft reasonably (as distinguished from providing “reasonable notice”) doesn’t get us all the way there – but it may help shift the focus away from blaming the adherent-victim to thinking about the immorality of the drafting firm.
*This blog plans to host a symposium on their book sometime in the fall so stay tuned.
**Boycott Amazon and buy this book from the publisher's website.
Monday, June 9, 2014
Today's New York Times reports on the extension of non-compete agreements to categories of employment not previously subject to them. This isn't really news, but it is nice to see the Times giving serious space to the issue, which I view as just another one-sided boilerplate term that employers are imposing on their employees. The difference here is that courts don't enforce non-competes if they overreach. However, the reality is that courts rarely get the opportunity to review non-competes, either because employees don't have the resources to fight them or because, as illustrated in the Times article, competitors are sometimes reluctant to risk a suit and so they do not hire people subject to non-competes, even if those non-competes might be unreasonable.
The over-the-top example with which the Times starts its story is about a woman whose job offer as a summer camp counselor was withdrawn because of a non-compete. She had worked three previous summers at a Linx-operated summer camp, and her terms of employment there included a non-compete of which she was (of course) unaware. Here is what Linx's founder had to say in defense of the non-compete:
“Our intellectual property is the training and fostering of our counselors, which makes for our unique environment,” he said. “It’s much like a tech firm with designers who developed chips: You don’t want those people walking out the door. It’s the same for us.” He called the restriction — no competing camps within 10 miles — very reasonable.
A few points. First, if your training and fostering of counselors creates a unique environment, then that training and fostering will not transfer when counselors switch to other camps that will presumably train and foster their counselors in other ways. If that's not the case, then there is nothing special or unique about the way you train and foster your counselors and thus no reason (except throwing up barriers to competition) not to allow counselors to work elsewhere.
Second, I just put my daughter on a bus for summer camp. I was a counselor at a summer camp for two years. Most camps now belong to a trade organization that sets down strict rules about safety and counselor training. It is unlikely that what Linx does is unique, and again, to the extent that it is unique, it is not transferable.
Third, a ten mile non-compete would be reasonable except that it is ten miles from any Linx camp, and Linx operates 30 camps in the area. So seen, the rule means that counselors who work at Linx camps cannot then work at any other camp in the region. There is no justification for this. If Linx has intellectual property to protect, it can do so, but Linx's founder's comparison of his camps to a tech firm strikes me as farfetched. I doubt that Linx has any intellectual property relating to its training of counselors. It is not as if a 19-year-old camp counselor comes to her new camp and impresses the people there with her knowledge from her past counseling experience. Each camp has its own traditions. If she says it is better to discard the leeches one pulls off the campers after a lake swim, they are not going to listen to her if the camp tradition is to move the leeches to the infirmary so that they can be "repurposed." What Linx is trying to do with this non-compete likely has less to do with protecting intellectual property than it does to establishing a stranglehold on the market of qualified camp counselors.
The Times story contrasts the employment situation in California, which does not enforce non-competes with that of Massachusetts, which does. But freedom of contract nad free enterprise still seem to have the upper hand in Massachusetts, as the following quote form the Times illustrates:
Michael Rodrigues, a Democratic state senator from Fall River, Mass., said the government should not be interfering in contractual matters like noncompetes. “It should be up to the individual employer and the individual potential employee among themselves,” he said. “They’re both adults.”
This is the typical nonsense underlying the enforcement of boilerplate. The camp counselor in the story was 19 years old, which means she was actually an infant when she signed the non-compete. But even if she could match the sophistication of the business that hired her, how does Mr. Rodrigues expect the negotiation to take place? In his mind it would go something like this:
Business: Here's the contract.
Employee: Okay, let me read it over and strike out all the terms that I don't like.
Business: Sure, take as long as you like and then we can negotiate over each term to which you object.
And here's the reality:
Business: Here's the contract.
Employee: Okay, let me read it over and strike out all the terms that I don't like.
Business: Well, actually, this is a form contract, and it's take it or leave it. Even if you wanted to object, I don't have any authority to change any of the terms. Either you sign this or you don't work here.
But even that is an exaggeration of the amount of consideration that goes in to the signing of employment contracts. They are not read at all and they are not expected to be read at all. And not reading them is the rational thing to do as potential employees have no bargaining power that they could deploy to challenge objectionable terms.
Teaching Third Party Beneficiaries, Assignment & Delegation & a New Third Party Beneficiaries Case out of the First Circuit
Last year, my big teaching innovation was to get rid of casebooks and rely instead on cases and ancillary materials that my fellow contracts prof, Mark Adams, and I edited and compiled on a LibGuide. This coming year, my big innovation will be to add a unit on Third Party Beneficiaries, Assignment and Delegation. I can do so because we now have a two-credit course on Damages and Equity at the end of our first-year curriculum, and so I do not need to cover remedies in my contracts course. I will continue to emphasize remedies throughout the course, but we will not end the semester with a unit consisting of cases that focus primarily on remedies issues. Fare thee well, Peevyhouse, Jacob & Youngs, Hadley, et al.! I really will miss you.
I can do so without regrets, as my students will study these cases (or at least the subject matter for which they are the vehicle of presentation) in their Damages and Equity course. The reason I feel I need to jettison this material in favor of third parties, etc. is that I have recently learned that those subject matters are heavily tested on the multi-state bar exam. They also are important in practice, and I don't know where they would be covered if not in first-year contracts.
So, with that in mind, the recent First Circuit case, Feingold v. John Hancock Life Ins. Co. caught my eye. The case related to Feingold's mother's insurance policy, which she took out in 1945. The policy named Mrs. Feingold's late husband as the sole beneficiary. He apparently pre-decesased her, and she died in 2006. Feingold had no knowledge of his mother's policy and did not inform John Hancock of her death until 2012. At that point, he sought information about her policy. John Hancock issued Feingold a death benefit check of $1,349.71 but provided no further information about his mother's policy. That policy, it seems, required a named beneficiary to notify the insurer of the policy-holder's death. Because such a provision was permissible under state law, the trial court found that John Hancock had no duty to notify Feingold of the policy or to independently seek out potential beneficiaries.
But Feingold also relied on a 2011 Global Resolution Agreement (GRA) entered into by John Hancock and several states. Under the GRA, John Hancock agreed to alter some of its practices relating to unclaimed property. Feingold filed a putative class action claiming that he and other members of the class were harmed as third-party beneficiaries of the GRA when John Hancock breached its obligations under the GRA.
The First Circuit affirmed the District Court's grant of John Hancock's motion to dismiss Feingold's claims. The First Circuit found that Feingold and the putative class members are not third-party beneficiaries to the GRA. The GRA contains no language sufficient to overcome the "strong presumption" against third party beneficiaries. While Feingold alleged that both John Hancock and the states entered into the GRA in order to protect insurance policy beneficiaries, the First Circuit reasoned that Feingold and others like him are at most incidental rather than direct beneficiaries of the GRA. Under applicable state law, the fact that states were parties to the agreement strengthens the assumption in favor of the third parties' incidental status.