ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, March 14, 2016

Using Contract Law to Protect Guestworkers

 

H-2B visas provide for foreign citizens to work temporarily for American businesses in non-agricultural roles. However, these visas can sometimes lead to abuse of the foreign citizens working under them, as was alleged in a recent case out of the Eighth Circuit, Cuellar-Aguilar v. Deggeller Attractions, No. 15-1219. Also blogged about here from a workplace law point of view, the case involved a group of nineteen workers who had been employed in a traveling carnival. The workers alleged, among other things, that their employer had breached their employment contracts by paying them below the minimum wage. 

The district court found that there had been no contract between the workers and their employer, basing its decision on the federal regulations governing the H-2B visa program. However, the appellate court said that was the incorrect place to look for guidance on whether a contract existed. Rather, the existence of a contract is governed by state common law, and in this case there was enough evidence of a contract to survive a motion to dismiss. The workers received offers of employment from Deggeller and then traveled to the United States in acceptance of those offers, which was enough to establish a contractual relationship. The court then used the federal regulations governing the H-2B visa program to fill in the particular terms of the contract, which included a requirement that the employer pay no less than the minimum wage. Therefore, the workers' allegations that the employer had breached this requirement established a valid contract cause of action. 

Allowing the workers to proceed on a contract theory may seem like a positive development for similarly situated workers who might find themselves taken advantage of. However, I had the pleasure recently of hearing Prof. Annie Smith from the University of Arkansas School of Law speak on the prospect of mandatory arbitration clauses being applied to guestworkers. As we all know, mandatory arbitration clauses are currently in major vogue, and Prof. Smith expressed concern that mandatory arbitration would be detrimental to already vulnerable guestworkers. The decision here might encourage employers like Deggeller to enter into more formal contracts that would include arbitration clauses. If they're going to be found to be in a contractual relationship anyway, presumably the employers would want to exercise control over the terms of that contractual relationship. 

March 14, 2016 in Commentary, Games, Recent Cases, True Contracts | Permalink | Comments (0)

Friday, March 11, 2016

Can We Just Get J.K. Rowling to Arbitrate Everything?

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I bet we'd have a lot fewer people fighting arbitration clauses if arbitration = tweeting J.K. Rowling. 

As reported around the Internet, a student and her high school science teacher entered into a contract concerning whether Rowling would write another Harry Potter book. The contract called for the loser to declare the victor "Mighty" (a much more charming form of consideration than payment of a sum of money). 

The article (from last month) reports that there were two possible Harry Potter pieces of creativity to be contended with. One is the prequel movie Fantastic Beasts and Where to Find Them. Rowling wrote the original textbook (which already existed at the time the contract was entered into and so isn't part of the dispute) and also wrote the screenplay for the movie, which could have been in dispute. However, the article points out that Rowling wrote the screenplay to the movie, and the contract concerns a Harry Potter "novel." Even if you wish to make an argument that screenplays should have been included in the definition of the contractual term "novel," it seems like Fantastic Beasts would fail because it does not "feature the character Harry Potter as part of the main plotline," as required by the contract. (At least, so I assume from what I know about the movie so far.)

The other piece of Harry Potter creativity being debated under the contract, and the one for which Rowling was called in to arbitrate, concerned Harry Potter and the Cursed Child, a play focusing on Harry as an adult and his relationship with his children, especially his son Albus. Cursed Child raised issues: It was a play but it is being billed as "the eighth story," the script will be published in text form, and the website claims it's "based on an original story by J.K. Rowling, Jack Thorne and John Tiffany." It does seem as if, considering this is a "play," even its published script would not be considered a "novel" under the contact. However, the student who was a party to the contract sought further clarification from Rowling. 

Using the convenient method of Twitter, the student explained her contract to Rowling and asked for a decision on whether Cursed Child would fulfill the terms of the contract. Rowling responded, confirming that Cursed Child is a play and also noting that, while she had contributed to the story, Jack Thorne was the "writer" of the play. 

The student was pleased that her clear contractual terms meant that she was still the victor, but also noted that the term of the contract had not yet run. Since the publication of the article and the arbitration of the Cursed Child dispute, J.K. Rowling has announced a new set of stories to be collected under the title History of Magic in North America. So far, these stories also seem not to fulfill the terms of the contract, as they seem more like "extra books" rather than "an entirely new book," and they do not seem to feature Harry Potter at all. However, Rowling seems to be dancing right around the edges of this contract's terms. 

March 11, 2016 in Commentary, Current Affairs, Film, In the News, True Contracts | Permalink | Comments (0)

Monday, March 7, 2016

Arbitration Provisions, Professional Organizations Edition

People keep challenging arbitration provisions, and they keep losing. In this instance, a case out of Washington called Marcus & Millichap Real Estate Investment Services of Seattle, Inc. v. Yates, Wood & MacDonald, Inc., No. 73199-8-I

This time, the parties were both voluntary members of the Commercial Broker's Association (the "CBA"), the bylaws of which contained a clause that CBA members agreed to arbitrate disputes with each other according to the CBA's arbitration procedure. Neither party ever signed any sort of membership agreement to belong to the CBA, which Marcus focused on in its argument that the arbitration provision therefore wasn't enforceable. Marcus argued that, without a signed agreement, there was no evidence that it had manifested assent to the arbitration provision. However, well-established Washington law held that membership in the voluntary organization was evidence enough that Marcus and Yates assented to abide by its bylaws. There was no requirement that there be a signed agreement.

Marcus didn't confine its arguments to just asserting that there should have been a signed agreement, however. Marcus then tried to argue that it wasn't even a member of the CBA, because of the fact that no one had been able to produce a membership agreement signed by Marcus. This was a bad move on its part and lost it a lot of credibility. The court pointed out that Marcus had paid all of the CBA's required fees and dues since 1993 and had in fact on two previous occasions taken advantage of the CBA's arbitration tribunal to resolve disputes, a procedure only available to CBA members. The court also pointed out that, despite testifying that he did not believe Marcus was a member of the CBA, Marcus's regional manager had routinely provided other brokers with Marcus's "CBA Office ID" number. 

Marcus was willing to fight hard to keep this dispute out of arbitration, to the point of having to be scolded by the court for "prevaricating." At the point when that is happening, I'm not sure winning the case and staying in front of that judge is what you want! 

March 7, 2016 in Commentary, Recent Cases, True Contracts | Permalink | Comments (0)

Friday, March 4, 2016

Did Trump University Peddle Degrees of Deception?

I am pleased to be able to post the following from guest blogger Creola Johnson of the Ohio State University Moritz College of Law:

“His promises are as worthless as a degree from Trump University,” said Mitt Romney during a speech denouncing Donald Trump’s candidacy for the presidency. This statement has prompted additional inquiries into lawsuits filed against Trump University by New York Attorney General Eric Schneiderman and others. (See Petition from New York v. The Trump Entrepreneur Initiative LLC.)

In a class-action lawsuit, many attendees of Trump University alleged that they paid as much as $35,000 to be personally mentored in learning how to earn millions investing in real estate. Despite numerous attempts by lawyers for the Trump defendants to get these lawsuits to dismiss, courts have given the green light for the lawsuits to continue against the Trump defendants. See, e.g., Makaeff v. Trump Univ., LLC, No. 10-CV-940-IEG (WVG), 2010 WL 3988684 (S.D. Cal. Oct. 12, 2010) (refusing to dismiss claims against the for-profit Trump program on educational malpractice grounds because the court was not convinced “Trump University” was “an educational institution to which this doctrine applies.”). For the most recent decision permitting Mr. Schneiderman’s case to proceed, go to: http://www.courts.state.ny.us/courts/AD1/calendar/appsmots/2016/March/2016_03_01_dec.pdf.

What can we say for sure at this juncture about the lawsuits? First, “Trump University” was not a university. There are numerous educational standards and laws that must be complied with for an institution to legitimately claim to be a university. The question then becomes: did the people running Trump’s real estate program (the Trump Program) make promises that arose to level of being a contract. For example, the consumer-plaintiffs alleged that the Trump Program promised that the instructors and mentors running the program would be “hand-picked by Donald Trump.” However, this promise was allegedly breached because most of the instructors and mentors were unknown to Mr. Trump and that they didn’t actually teach any real estate techniques.

We’ll have to wait for a court or jury’s finding regarding what promises were actually made by Donald Trump and the people running the Trump Program. The good news for the plaintiffs and Mr. Schneidermann is that they do not have to prove the existence of a contract. New York, along with every state, has laws that prohibit businesses from engaging in deceptive and unfair business practices.

Consumers should be leery of any language that appears to promise an educational outcome—e.g., “you will earn a six-figure salary after graduation.” While a state’s attorney general, such as Mr. Schneiderman, has the authority to make businesses stop deceptive practices, the attorney general may not be able to get back the money consumers have lost. If it sounds too good to be true, it probably is! For an in-depth discussion of deceptive degrees, see my article, Degrees of Deception: Are Consumers and Employers Being Duped by Online Universities and Diploma Mills?

Creola Johnson,

President’s Club Professor of Law,

The Ohio State University Moritz College of Law

Profile at http://moritzlaw.osu.edu/faculty/professor/creola-johnson/

(professor.cre.johnson@gmail.com)

March 4, 2016 in Commentary, Current Affairs, Famous Cases, In the News, Teaching | Permalink | Comments (0)

Monday, February 29, 2016

Arbitration Provisions and Exotic Dancers

Are arbitration provisions binding against exotic dancers? Well, if you're wondering, in this Connecticut case, Horrocks v. Keepers, Inc., CV156054684S (behind a paywall), the answer is yes. 

The plaintiffs here filed the lawsuit alleging that they were employees, not independent contractors as the gentleman's club maintained, and as such the club had violated plaintiffs' legal rights as employees, including failing to pay minimum wage. The club moved to stay the proceedings arguing that it had signed an entertainment lease agreement with all of the dancers that required binding arbitration to resolve disputes. 

The plaintiffs' main argument was that the entire entertainment lease agreement was void because it had an illegal purpose in seeking to implement the club's violation of labor laws as alleged in the plaintiffs' complaint. Because the entire agreement was void, the argument went, the arbitration clause wasn't enforceable. In the alternative, the plaintiffs argued that the arbitration provision was unconscionable. 

On the plaintiffs' first point, the court concluded that the legality of the overall entertainment lease agreement was a matter for the arbitrator to decide. According to Connecticut precedent, the courts' job is only to determine if the arbitration clause is valid; every other issue is left to the arbitrator. Therefore, all of the arguments about the illegality of the entertainment lease agreement were left to the arbitrator, and the court focused its analysis on the alleged unconscionability of the arbitration provision. 

We've seen this story before. And, in fact, courts have seemed pretty determined to find arbitration provisions enforceable, even when other parts of the contract were unconscionable (or, as here, where it was questionable whether the contract was enforceable at all). There was actually Connecticut precedent about another set of exotic dancers suing another gentlemen's club with similar allegations, and in that case, D'Antuono v. Service Road Corp, 789 F. Supp. 2d 308 (D. Conn. 2011), the court upheld the arbitration provision against attacks of unconscionability. The court in this case follows the precedent, finding this case indistinguishable from D'Antuono.  

The court here allows for the possibility that this arbitration clause was part of an unenforceable adhesion contract presented in bad faith with a knowing illegal purpose, but says that alone isn't enough to deny enforcement of the arbitration clause, because that would only be procedural unconscionability. As far as substantive unconscionability went, the cost and fee shifting provisions provided in the arbitration clause weren't unreasonable, and the class action waiver included in the arbitration provision was also not unconscionable according to precedent: "Requiring the plaintiffs to pursue their claims individually is not an ineffective vindication of their rights." 

I admit that I'd never really given a lot of thought to class action waivers, but it does seem odd to assert that class action waivers do not harm the plaintiffs' ability to vindicate their rights. After all, class actions are frequently understood to exist to correct the problem that, sometimes, individual pursuit of claims isn't effective. 

At any right, individual pursuit through arbitration is what these plaintiffs are left with. 

February 29, 2016 in Commentary, Recent Cases, True Contracts | Permalink

Tuesday, February 23, 2016

Contract Interpretation by Market Muscle: Gogo Caves and American Airlines Nonsuits

Well THAT was fast--apparently faster than Gogo's in-flight internet service. American_Airlines_Jets_630x420

American Airlines has nonsuited (i.e., dismissed without prejudice to refilling the lawsuit) its declaratory judgment claim against Gogo. American had recently asked a Texas state court to determine whether the provision of the availability of "better service" (or some similar term) in its 2012 contract had been triggered such that American could force Gogo to submit a competitive bid to retain its service.

As discussed in a previous post, American's negotiating leverage arose as much from the publicity surrounding it filing of a lawsuit as it did from the actual contract term.  The term was apparently vague enough that Gogo could (and did) take the position that its rights as American's exclusive in-flight service provider had not been called into question by American's request for a new proposal. Upon American's filing of a declaratory judgment lawsuit in Texas state court, however, Gogo's stock price dropped 27 percent.

Today, the word is out that Gogo has changed its position and accepted American's interpretation of the contract. The Fort Worth Star-Telegram reports:

[American Airlines had said] that its contract with Gogo allowed it to renegotiate or terminate its agreement if another company offered a better service. Gogo had disputed that clause in the contract, but Friday agreed to the contract provision and said it would provide a competitive bid within 45 days.

Gogo_logo“American is a valued customer of Gogo, and Gogo looks forward to presenting a proposal to install 2Ku, our latest satellite technology, on the aircraft that are the subject of the AA Letter,” Gogo said in a government filing Friday. “We acknowledge the adequacy of the AA Letter and that our receipt of the AA Letter triggered the 45 day deadline under the agreement for submission of our competitive proposal.”

*   *   *

Once American reviews Gogo’s proposal, if it does not beat out a competitor’s proposal, American can terminate Gogo’s contract with 60 days’ notice.

Shares of Gogo [ticker: GOGO] jumped on the news of the dropped lawsuit, up almost 10 percent....

The swift manner in which this episode had played out emphasizes the extent to which contract doctrine and interpretation it frequently not the principal driver of business relationships. Gogo could have marshalled a team of lawyers and stood on its interpretation of the contract up to final judgment--likely a summary judgment based on a question of law.  But what would be the reputational and business cost? Eventually, the marketplace won't allow contract rights to serve as a substitute for proof of the quality of a product.

A challenge I find in teaching future transactional lawyers is to ensure that they do not become enamored with legal rights as being the be-all and end-all of deal making. Law is important, but a business lawyer must employ practical wisdom, as well. That wisdom includes the fact that law itself is only one part of practicing law... and it sometimes isn't even the most important part.


Read more here: http://www.star-telegram.com/news/business/aviation/sky-talk-blog/article61775272.html#storylink=cpy

 

February 23, 2016 in Commentary, Current Affairs, E-commerce, In the News, True Contracts, Web/Tech | Permalink | Comments (0)

Friday, February 19, 2016

Regulation of Virtual Currency Businesses Act

ULCLogoAt any given time, the Uniform Law Commission/NCCUSL is engaged in many important and useful state-law drafting projects, but one of the more interesting ones for me is its current work in drafting a proposed Regulation of Virtual Currency Businesses Act. I have had the fantastic opportunity to act as an observer to the drafting committee and watch the stakeholders and commissioners navigate disparate policy perspectives and try find as-common-as-possible ground, while Chair Fred Miller keeps the group on task and Reporter Sarah Jane Hughes assimilates an incredible amount of debate into a rapidly evolving draft. The experience is a wonder that I would recommend to anyone with a serious interest in legislative policymaking. It also, for present purposes, helps illustrate both the benefits and limits of contract law in a nascent market-space.

Bitcoin_logo1The current drafting project arose out of the phenomenon of Bitcoin, the first technologically viable means of electronically transmitting value without the possibility of double spending or the need for a financial intermediary, like a bank. While the use cases for virtual currency technology are still in their relative infancy, states began to consider and enact disparate regulatory schemes, with New York's BitLicense regulatory framework being the most prominent example. While federal regulators and law enforcement have understandably focused on preventing the use of pseudonymous cryptocurrency to advance criminal enterprises and finance international terrorism, the state concerns have tended more toward protection of consumers and other users engaged in perfectly legal transactions. While Bitcoin does not require an intermediary any more than paper cash requires use of a bank, intermediaries--like digital wallet services--have arisen to fill the convenience role analogous to bank accounts. These virtual currency intermediaries are, for the most part, the principal target of state-law regulation and current work of the Uniform Law Commission.

Contract1What is the contract law angle here? It's this: In the absence of specially-crafted law of the sort now under consideration, the common law of contracts fills the void to enable some degree of enforceable private ordering. The flexibility of contract law is such that it can allow for the birth of business models no one contemplated as recently as the eve of Bitcoin's creation in 2008. The flexibility of such a legal regime is amazing. Contract law can, nonetheless, only facilitate business so far. Public-protective regulation is necessary to achieve widespread market acceptance beyond the universe of early-adopters and risk takers. Regulation carries its own risks, however, as a heavy-handed approach can stifle innovation and create anti-competitive barriers to market entry.

That--in many different flavors--is the policy question being grappled with in the Regulation of Virtual Currency Businesses Act, and the question is relevant in any other space where rapidly developing technology exceeds the capacity of existing law. Where do we apply protective public law, and what do we keep within the realm of private contracts?

 

February 19, 2016 in Commentary, Current Affairs, E-commerce, Legislation, Web/Tech | Permalink | Comments (0)

Sunday, February 14, 2016

Solar Contracts - Still Trouble on the Horizon

Change is coming to the energy field, finally. As the realization is broadening that fossil fuels have to be left in the ground, solar and wind energy are becoming more popular to investors and private households alike.

The problem is still the types of contracts and financing options available. An average solar system costs $14,700. If paying that in cash, homeowners would typically save around $50 a month on their electric bills. However, most people cannot afford to pay that in cash. Financing options will reduce the monthly savings to about $20-30 a month. “Net metering,” which allows homeowners to sell electricity back to the utilities, may result in bigger savings.

Problems still loom on the horizon with contracts in this area. A new financing program known as the “Property Assessed Clean Energy” financing program (“PACE”) allows solar panel buyers to finance the system and add the loan to the property as a tax assessment. Some are criticizing that for making it difficult or sell the homes or refinance mortgages.

More importantly, utility companies are complaining that the electric grids were designed to send electricity to consumers, but not receive it back. The utility industry is even referring to individually owned power systems as “disruptive technologies.” This new interaction will force changes in the market and infrastructure. But so what? Utilities have had a chance to make quite a lot of money for years on end, often in pure or monopoly-like situations. Now the market is changing. Utilities must adapt to necessary societal changes. This is clearly one of them. The resentment towards new technological change by parties in an industry that is per se technological is inexpedient and childish. Yes, utilities have invested much money in the existing electricity infrastructure, but they have surely never been promised that the market wouldn’t change and that users won’t demand other product sources than what has been the case for, now, more than a hundred years. Time has come to innovate. La-2451929-fi-0204-agenda-solar-panels-009-ik-jpg-20160207

The industry is also complaining that in the future, new rules are going to force the industry to provide more services, which will cost more money and thus result in fewer savings via alternative energy sources. Yeah, let’s see about that one. That still sounds like a contrarian, outmoded argument against inevitable progress.

What could be more troublesome is the expected erosion of benefits such as solar credits. For example, the existing 30% federal solar tax credit will end in 2019 unless, of course, Congress renews it. Hopefully under the new Paris Agreement on climate change and with the looming risks, financial and otherwise, on continually rising global temperatures (2015 was yet another hottest year on record), such and other benefits will be increased, not decreased.

For anyone wishing to buy a solar system, the best deal on the market still seems to be buying outright, even if via a property tax assessment. Many of the still-typical 20-year lease contracts are still too lengthy in nature. Too many things could change in this marketplace to make them seem like a viable option.

It is too bad that with as many hours of sunshine as many parts of this nation has, there still is not a really good, viable option for solar energy contracts for middle- or low-income private homeowners.

February 14, 2016 in Commentary, Current Affairs, Science, True Contracts, Web/Tech | Permalink | Comments (0)

Thursday, February 11, 2016

Emerging Payment Systems and the Primacy of Private (Contract) Law

CLS-logoIs the public commercial law of payment systems being displaced by private contract law? The short answer is "yes." Recently, I had the opportunity to write an invited post for the CLS Blue Sky Blog, Columbia Law School's Blog on Corporations and the Capital Markets, and I hope you'll indulge me a moment to share about it here.

Emerging Payment Systems and the Primacy of Private Law is a synopsis of a larger project on how the public law and Uniform Commercial Code aspects of the regulation of payments have become marginalized over the last few decades--and how the marginalization isn't necessarily a bad thing.  Contract law is presumptively a better organizing instrumentality, but there still remains a significant and robust role for public regulation. Or, as I state in part of the longer post:

Payment systems have now clearly exceeded the regulatory capacity of public legal institutions to govern them via a comprehensive code like the UCC. Public law protection of the end user, however, has proven so successful and facilitated such industry growth that complete privatization of payments law is not the best response either. Emerging payment systems should be subject to a division between private law and public law in which private law is predominant, but not exclusive.

Private contract law is best equipped to deal with both current and future developments as the primary governance mechanism for emerging systems of payment. This market-friendly primacy of private law is only assured, nonetheless, by ceding to public law specific protections for payment system end users against oppression, fraud, and mistake.

If this particular intersection of contract law and commercial law is of interest to you, read the complete post. Or, if you are a particular glutton for punishment, the draft article on which the CLS Blue Sky Blog piece is based is here

 

February 11, 2016 in Commentary, Current Affairs, E-commerce, Recent Scholarship | Permalink | Comments (0)

Monday, February 8, 2016

Arbitration Provisions and Unconscionability

This case is a lesson in: Do what the judge tells you to do. 

Ruiz v. Millennium Square Residential Association, Civil Action No. 15-1014 (JDB), out of the U.S. District Court for the District of Columbia, is a fairly staid dispute over whether a condominium owner complied with the condominium association bylaws when he made changes to his unit. The bylaws contained an arbitration provision for disputes like this, which the plaintiff argued was unconscionable. 

The court didn't seem to think much of the unconscionability argument. First of all, procedurally, it was unpersuaded by the plaintiff's allegation that, because he had to accept the bylaws as they were and couldn't negotiate them, they were unconscionable. The court pointed out that this would make all condominium bylaws everywhere unconscionable, which the court termed "at odds with common sense." The court pointed out that some very powerful buyers might in fact have the ability to negotiate condominium bylaws (which would seem to me to present a different case altogether, and so not very relevant to this case at all). The court also pointed out that the plaintiff could have chosen to buy real estate elsewhere if he didn't like the bylaws at Millennium Square. 

As for substantive unconscionability, the plaintiff raised three separate problems with the arbitration structure set forth in the agreement: (1) it didn't require a written decision; (2) it didn't provide for discovery; and (3) it didn't allow the plaintiff to participate in selecting the arbitrators. The court was dismissive of the first two arguments, saying that precedent doesn't require arbitration to have those characteristics, so there was no reason to find a clause not requiring them to be unconscionable. 

The third argument is where the defendant dropped the ball in this litigation, apparently. The defendant tried to argue that the plaintiff did have a role in selecting the arbitrators under the agreement. This argument hinged on reading together two separate provisions of the agreement. The court, however, was unconvinced by this reading. The court then specifically requested that the defendant address whether the arbitration procedure would be unconscionable if the defendant's reading was wrong and the plaintiff didn't have a role. The court actually invited supplemental briefing on that issue. The defendant, however, declined to make that argument. Maybe the precedent was really bad for the defendant, but it's generally a good idea to give the court supplemental briefing when it requests it, I think. The court concluded that the defendant's behavior was a concession that the clause was unconscionable. Faced with a failure to argue by the defendant, the court concluded that the defendant's reading of the contract was wrong; plaintiff had no role in selecting the arbitrators under the agreement; and that was unconscionable because the court had been given no ability to rule otherwise. 

The court therefore severed the unconscionable arbitration procedure in the arbitration clause but upheld the rest of the clause. It requested that the parties work together to arrive at new, detailed, acceptable arbitration procedures. 

February 8, 2016 in Commentary, Recent Cases, True Contracts | Permalink | Comments (0)

Thursday, February 4, 2016

The Pink Tax

Although some things bear little direct relation to Contracts Law, they are still worth mentioning here for their inherent news value and for potential classroom use by creative law professors. Here’s one such story:

Both British and American studies show that women pay an average of… 48% more for items targeted for women compared to those for men.  This “sexist pricing” pattern is reflected in, for example, razors costing 11% more for women than those for men, jeans allegedly 10% more (I would personally have thought more than that, but that’s another story), skin lotion around $15 for women, but similar lotion $10 for men.

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A report by the New York City Department of Consumer Affairs, released in December, found similar patterns. It compared nearly 800 products with clear male and female versions from more than 90 brands sold in New York, both online and in stores. It found that women pay more in 42% of cases.

Similarly, a bill in California calling for lawmakers to exempt tampons and sanitary pads from the state sales tax got a big endorsement in January from the board that administers the state's sales taxes. A few other states such as Utah, Virginia and New York have introduced similar bills. Even President Obama seems to subscribe to the notion that women should not have to pay tax on products they simply have to have because of Mother Nature’s demands. When asked in a recent interview if he felt it was right that tampons are taxed, he said, “I have no idea why states would tax these as luxury items. I suspect it's because men were making the laws when these were passed.” Well, not quite: states typically just tax all goods and exempt some. But states such as California don’t tax foods, for example. Time truly seems to have come to exempt some other goods.

British Labor Party MP Paula Sheriff sums up the issue well “[w]omen are paid less and are expected to spend more on products and services ... they are charged more simply for being women.” The only thing that should also be mentioned, in all fairness, is the price of clothing and shoes. I personally find those items much cheaper than men’s clothes, but I’m also not a brand-conscious person.   As long as it fits and looks good, I don’t care whether it’s called one thing or another, so my anecdote may not fit into the “pink tax” story and protests which are gaining momentum in several nations.

February 4, 2016 in Commentary, Current Affairs, In the News | Permalink | Comments (0)

Wednesday, February 3, 2016

Liability Releases for Negligence, New York Trampoline Park Edition

A recent case out of New York, Gosh v. RJMK Park LLC, No. 155024/2015 (thanks to reader Frank for the non-paywall link!), tackled the familiar issue of negligence liability release provisions, this time in the context of a trampoline park that the plaintiffs' child was injured at while playing "trampoline dodgeball." I had no idea what this was, so I looked it up. Here's a video: 

It mainly looks like something people who don't get motion-sick should play (i.e., people who are not me). 

The plaintiffs had signed an agreement with the trampoline park with a clause under which they waived all claims against the trampoline park arising out of negligence. Under New York law, such a clause is unenforceable when "a place of amusement or recreation" with an entry fee is involved as against public policy. 

However, that didn't mean the plaintiffs got everything they wanted in this case. The plaintiffs' argument was that the presence of the negligence liability release clause rendered the entire agreement with the trampoline park unenforceable, including the venue provision that required them to bring suit in Westchester County. The court disagreed: Just because that one provision was unenforceable didn't mean the entire agreement got thrown out. Rather, the court severed the negligence liability release provision as "unrelated" to the main goal of the agreement. It didn't actually clarify what the main objective of the agreement was, just dismissed the release provision as being related to "legal stuff," basically. At any rate, the agreement had contained the standard boilerplate provision stating that any illegal clause should be severed from the agreement and the rest of the agreement enforced, which also supported the court's conclusion. So venue was transferred to Westchester County. 

February 3, 2016 in Commentary, Games, Recent Cases, Sports, True Contracts | Permalink | Comments (2)

Monday, February 1, 2016

How Much Does It Cost to Have an IMAX Theater in Your Own Home?

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Okay, there's actual contract stuff to talk about in this case, but mostly I was fascinated to learn that IMAX theaters rent the movie-showing equipment from IMAX and, in 2004 at least, the cost was $41,400 in annual maintenance fees plus the greater of $75,000 or 7% of the box office receipts in annual rent. So, if you win the lottery and want an IMAX theater in your house, there's a rough idea of the kind of costs you're looking at. 

And now that we've learned that fascinating tidbit of information, what happens when you get into a fight with IMAX about whether the equipment it's leased you is capable of playing "Hollywood" movies? 

That's what happened in a recent case out of the Middle District of Pennsylvania, IMAX Corp. v. The Capital Center, Civ. No. 1:15-CV-0378. In that dispute, Capital Center alleged that it told IMAX it wanted to rent its equipment so it would be able to show "Hollywood" movies. In 2004, it entered into a fifteen-year lease of IMAX's movie-showing equipment/software/etc. Apparently around 2014, IMAX announced that it had developed new technology that rendered the equipment Capital Center had rented obsolete, interfering with Capital Center's ability to play "Hollywood" movies. (I keep putting "Hollywood" in quotation marks because it's in quotation marks in the opinion. Clearly Capital Center considered it a direct quote and an important characterization.)

In reaction to the new technology, Capital Center stopped paying rent on the old technology, apparently because it felt its equipment was now valueless. IMAX pointed out that Capital Center had therefore breached the contract and IMAX was entitled to the remainder due under the lease in liquidated damages (a clause in the contract). Capital Center gave the equipment back to IMAX, and IMAX sued to collect the money it claimed it was due under the contract. Capital Center raised in response defenses of mutual mistake and frustration of purpose. It also claimed IMAX had no right to demand the further rent amounts because Capital Center no longer had possession of the equipment. Finally, it claimed that IMAX had not properly disclaimed its warranty that the equipment was fit for a particular purpose, i.e., playing "Hollywood" movies. Unfortunately for Capital Center, none of these defenses succeeded. 

Capital Center's mutual mistake defense centered on the "mistake" that both parties made that the equipment that was the subject of the lease would still be capable of playing "Hollywood" movies fifteen years later. However, the mutual mistake defense exists to vindicate mistakes of fact, not errors in predicting the future; this situation was the latter. There was no "fact" that IMAX thought it knew that the equipment would still be valid in fifteen years. And, in fact, the agreement itself contemplated as much, because the agreement contained a clause noting that IMAX might upgrade its equipment and setting forth the terms by which Capital Center could receive the improved equipment. Difficult for Capital Center to argue that the parties were mistaken about the future viability of the equipment in question when the agreement itself noted that the equipment in question might not be viable in the future. 

The frustration of purpose defense failed for a similar reason. Here, the purpose of the contract might have been to play "Hollywood" movies but there was no unforeseen event that occurred after the signing of the contract that frustrated that purpose. The agreement itself predicted that the equipment might not continue to be viable for the showing of "Hollywood" movies. Therefore, the continued viability of the equipment could not be said to have been a basic assumption of the contract. 

As for the argument that IMAX shouldn't be entitled to future rent payments because IMAX was in possession of the equipment, under Pennsylvania law, IMAX was entitled to choose either future rent payments or repossession of the equipment. However, IMAX didn't seek to repossess the equipment; Capital Center gave the equipment back to IMAX of its own volition. Therefore, IMAX wasn't seeking repossession, only the future rent payments: a choice it was allowed to make. 

Finally, the contract between the parties had contained a clause in which IMAX disclaimed all of the usual warranties, including suitability to a particular use, i.e., showing "Hollywood" movies. Under Pennsylvania law, such a disclaimer is valid as long as it is "conspicuous." Capital Center tried to argue that the disclaimer in question wasn't conspicuous, but it was the only clause in the seven-page Schedule B of the agreement that was in bold font, which, according to the precedent, rendered it "sufficiently conspicuous." 

February 1, 2016 in Commentary, Film, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (2)

Sunday, January 31, 2016

On Artificial Intelligence and Contract Law

SmartcontractsIan Kerr of the University of Ottawa's Centre for Law, Technology and society has an interesting post from last September on a topic of that has been of occasional discussion on this blog, and which I came across only recently.  In "The Arrival of Artificial Intelligence and 'The Death of Contract,'" Kerr outlines some of the foreseeable challenges facing today's students of contract law due to disruptive technology:

On the market today are a number of AI products that carry out contract review and analysis. Kira, an AI system used to review and analyze more than US$100 billion worth of corporate transactions (millions of pages), is said to reduce contract review times by up to 60%. Likewise, a Canadian product called Beagle (“We sniff out the fine print so you don’t have to”) is faster than any human, reading at .05 seconds per page. It reads your contract in seconds and understands who the parties are, their responsibilities, their liabilities, how to get out of it and more. These are amazing products that improve accuracy and eliminate a lot of the “grunt work” in commercial transactions.

But hey—my Contracts students are no dummies. They can do the math. Crunch the numbers and you have a lot of articling students and legal associates otherwise paid to carry out due diligence who now have their hands in their pockets and are looking for stuff to do in order to meet their daily billables. What will they do instead?

In some ways, such concerns are just teardrops in an ocean full of so-called smart contracts that are barely visible in the murky depths of tomorrow. Their DRM-driven protocols are likely to facilitate, verify, and enforce the negotiation and performance of contracts. In some cases, smart contracts will obviate the need for legal drafting altogether—because you don’t actually need legal documents to enforce these kinds of contracts. They are self-executing; computer code ensures their enforcement.

Kerr's concludes that smart contracts and their technological relatives are no more the death of contract than what Grant Gilmore pronounced, but that the change is worrisome, including to our relational understanding of contract doctrine and its practice:

I suspect we will face some significant changes and I am not sure that it’s all good. Self-executing contracts, like the DRM-systems upon which they are built, are specifically designed to promote the wholesale replacement of relational aspects of contract such as trust, promise, consent and enforcement. As such, they do injury to traditional contract theory and practice. While I have no doubt that an AI-infused legal landscape can to some extent accommodate these losses by creating functional equivalents where historical concepts no longer make sense (just as e-commerce has been quite successful in finding functional equivalents for the hand-written signature, etc.), I do worry that some innovations in AI-contracting could well have a negative effect on human contracting behavior and relationships.

The entire post is worth a read for anyone interested in the impact of technology on contracts.

January 31, 2016 in Commentary, Contract Profs, E-commerce, Web/Tech | Permalink | Comments (0)

Monday, January 25, 2016

Is a Dollar Movie in This Day and Age Still Feasible?

Cinemaaustralia

The average price for a movie ticket in the United States is apparently $8.61. A recent case out of Ohio, Capital City Community Urban Development v. Columbus City, Case No. 13CVH-01-833 (behind a paywall), dealt with the question of whether a dollar movie is still feasible when most movies cost more than $8.00. 

The contractual provision at issue was: "The Buyer agrees to provide Saturday movies for children once the theater is operational, and for as long as feasible. The cost is to be $1.00 or less for a double feature." (So, in fact, it was fifty cents a movie.) The clause actually wasn't that old (from what I could discern from the facts, it seems to have only been written in 2002), so it wasn't as if the dollar price was intended to be profitable, which both parties acknowledged. However, the issue was that the defendant had sought donations to offset the cost of the features and been unsuccessful. That meant that the theater would suffer a loss of $100,000 a year to fulfill the contractual provision, which would have been a substantial hardship to the theater. Moreover, the double feature wasn't very popular in the community. In a theater with a capacity of 400, it usually only attracted a few dozen patrons. 

The parties fought over whether the definition of feasibility included a consideration of the economics of the issue. There was some precedent that feasibility required looking at the finances of the situation. Also, compellingly in the court's view, feasibility had to take into account the finances or else it had no meaning. The argument that "feasible" meant "capable of being done" without looking to the finances meant that it would be "feasible" basically as long as the theater was open, i.e., as long as the theater had a projection. That would mean that it would be "feasible" until the theater closed down entirely. If that was the meaning of the word "feasible," there was really no reason to have that specification in the contract: it would have just been a clause in effect until the theater closed. 

This all makes sense to me, especially considering that there didn't seem to be much public interest in having the double feature continue. However, what's really striking to me about this opinion is the statement that "Columbus never showed a Saturday children's movie." So apparently Columbus's argument was really that it was never feasible to have the double feature. This meant Columbus agreed to a provision in the contract that it apparently never intended to comply with? That's not a wrinkle that gets introduced in this case--in fact, the line that no double feature had ever been shown is basically a throwaway line--but I found it to be the most striking detail. 

January 25, 2016 in Commentary, Film, Recent Cases, True Contracts | Permalink | Comments (0)

Thursday, January 21, 2016

Fired for Posting Critical Comments about Employer on Facebook

On Thursday, the U.S. Circuit Court of Appeals for the D.C. Circuit heard arguments about whether a clothing company illegally fired three retail store employees for their Facebook posts criticizing the employer. The case involves the as-of-yet little developed area of how labor law applies to social media usage as well as other complex issues of contracts and employment law. The case is Design Technology Group v. NLRB, Case Number 20-CA-035511.  The case also demonstrates the issue of poor workplace conditions and how little employees can do under contracts law or other bodies of law against this, which I have blogged about before (most recently here). I am not an employment law expert.  I simply find this case very interesting from the point of view of how social media law is developing in relation to what is, after all, also an employment contract.

In the case, three employees repeatedly brought various safety concerns to the attention of the store manager. Among other things, the employees felt that the area of San Francisco where the store was located was relatively unsafe at certain times of the evening and that, perhaps, store hours could thus be changed to alleviate this problem. Homeless people would also gather in numbers outside the store to watch a burlesque video that the store played on a big TV screen right inside a window, thus potentially also attracting various (other) unsavory characters. Images

Allegedly, the store manager did not respond to these safety concerns and treated the employees in an immature and unprofessional way. The three employees discussed the events not at the water cooler, which is so yesteryear, but on Facebook. These posts included messages such as

  • “It’s pretty obvious that my manager is as immature as a person can be and she proved that this evening even more so. I’m am unbelieveably [sic] stressed out and I can’t believe NO ONE is doing anything about it! The way she treats us in NOT okay but no one cares because everytime [sic] we try to solve conflicts NOTHING GETS DONE!!... “
  • “800 miles away yet she’s still continues to make our lives miserable. phenomenal!”
  • “hey dudes it’s totally cool, tomorrow I’m bringing a California Worker’s Rights book to work. My mom works for a law firm that specializes in labor laws and BOY will you be surprised by all the crap that’s going on that’s in violation 8) see you tomorrow!” Unknown

One of the employees did bring the California worker’s rights book—which covered issues such as benefits, discrimination, the right to organize, safety, health, and sanitation—to work and put it in the break room where other employees looked through it, noticing that they were entitled to water and sufficient heat.

This same employee also (naïvely) sent resumes from the company computer in spite of company rules allowing only sporadic computer access (the store manager had allegedly set a bad example by using the store computer for personal purposes herself). The company discovered this as well as the Facebook posts, and fired the three employees.

The company argues that the workers commented on Facebook only in order to create a pretext for filing a claim with the NLRB. The smoking gun, according to the company, is the following exchange of (select, but most salient) Facebook postings:

  • “OMG the most AMAZING thing just happened!!!! J”
  • “What … did they fire that one mean bitch for you?”
  • “Nooooo they fired me and my assistant manager because “it just wasn’t working out” we both laughed and said see yaaah and hugged each other while giggling ….Muhahahahaha!!! “So they’ve fallen into my crutches [sic].”

The use of the expression “Muhahaha” is, according to the company, the smoking gun indicating the employee’s desire to get fired. It does indeed seem to indicate _some_ reveling in the turn of events, but arguably not a desire to be fired.  The “top definition” of the phrase on the user-created online “Urban Dictionary” is, today, “supost [sic] to be an evil laugh when being typed in a game.” Case briefs list it as “An evil laugh. A laugh one does when they are about to do something evil. Such as when a villain has a plot to take over the world, he does this laugh right before it goes into effect. Also a noise made by people who have just gotten away with an evil deed or crime….” The “evil laughter” entry on Wikipedia describes the phrase Muhahaha as being “commonly used on internet Blogs, Bulletin board systems, and games. There, [it is] generally used when some form of victory is attained, or to indicate superiority over someone else.”

The company appeals a ruling from the National Labor Relations Board (“NRLB”) finding the terminations unlawful because the employees’ discussions of working conditions were protected concerted activities under the National Labor Relations Act. The company claims that the comments were not legally protected because they were part of a scheme to manufacture an unfair labor practice claim.

It will be interesting to see how the Court of Appeals will address the social media aspect of this case. One the one hand, it does seem exceptionally naïve to expect to be able post anything in writing on the internet – Facebook, no less – without it potentially being seen by one’s current or future employer. I’m sorry, but in 2016, that should not come as a surprise to anyone (note that the company also used email monitoring software to discover whether its employees applied for jobs with competitors, which at least one of the employees here did). Note to employees who may not have a home computer or internet access: use a library computer.

On the other hand: does it really matter what employees post to their “friends” about their jobs, absent torts or other clear violations of the law (not alleged here)? Isn’t that to be expected today just as employees previously and still also talk in person about their jobs? Isn’t the only difference in this case that the posts are in writing and thus traceable whereas “old-fashioned” gossip was not? If employees merely state the truths, as seem to have been the case in this instance perhaps apart from the last “Muhahaha” comment, isn’t it overreaching by the employer to actually _fire_ the employees if they, of course, otherwise provided good services? Even if the employees are exaggerating, boasting, or outright lying, should employers be able to fire employees merely because of private comments on Facebook posted to one’s online “friends”?

An alternative idea might be to consider whether the employees were actually on to something that (gasp!) could help improve a poor work situation for the better.

The National Federation of Independent Business’ Small Business Legal enter has filed an amicus brief in support of the company, alleging that the NLRB decision “allow[s] employees regardless of their motive or actual misconduct to become termination-proof simply by making comments relating to their employment online.”

That’s hardly what the employees are arguing here. They do, however, argue a right to discuss their employment situation online without a snooping employer terminating them just for doing so. In this case, the employees had, noticeably, tried to improve highly important workplace issues in a fruitful way. The situation did, however, escalate. In and of itself, however, the “fallen into my clutches” comment, although of admittedly debatable intent, does not seem to indicate that the employees were attempting to manufacture an unfair labor practice claim. The employees seemed to have been primarily concerned with safety issues and working conditions, but were fired in retaliation for their critical online arguments. That, to me, seems like a fair argument.

Stay tuned for the outcome of this case!

January 21, 2016 in Commentary, E-commerce, Famous Cases, Labor Contracts, Science, Web/Tech | Permalink | Comments (0)

Wednesday, January 20, 2016

The Enforceability of Liability Releases for Negligence in Colorado

When I was in law school, I remember starting to be really struck by how often I had to sign liability releases: going to play paintball, renting skis, etc. A recent case out of the Tenth Circuit, Espinoza v. Arkansas Valley Adventures, had to deal with just such a release in the context of a tragic whitewater rafting accident. 

The plaintiff's mother drowned when her raft capsized during a rafting trip organized by the defendant. She had signed a contract that released the defendant from liability for negligence. The plaintiff agreed that his mother had signed the release but tried to argue that the release was unenforceable. As a matter of Colorado law, though, he lost. The court found the release enforceable both as a matter of public policy and under the particular circumstances of the mother's signing. 

The court explained that Colorado uses four facts to determine whether a release of liability for negligence is enforceable: 

(1) the existence [or nonexistence] of a duty to the public; (2) the nature of the service performed; (3) whether the contract was fairly entered into; and (4) whether the intention of the parties is expressed in clear and unambiguous language.

The court concluded that, while other states were free to disagree on this, Colorado had decided that corporations providing recreational activities are allowed to protect themselves from liability for negligence. The court stated that this is a valid policy choice for Colorado to make because it arguably encourages the active, outdoorsy lifestyle that the state of Colorado cherishes and wants to protect and promote. Without such ability to protect themselves, companies might be discouraged from offering recreational activities like horseback riding, snowboarding, or whitewater rafting. And in fact other courts in Colorado had explicitly found that companies offering whitewater rafting trips can protect themselves from liability for negligence using a contractual release. The court stated that the Colorado legislature was free to introduce a statute that would change this legal precedent, but, as it stood, the court was bound to follow the precedent. 

Having decided that the release was not against public policy according to the first two factors of the balancing test, the court then further decided that the plaintiff's mother had fairly entered into the contract with full knowledge of the risks at stake. The court dismissed the plaintiff's expert testimony that the rapids his mother was exposed to were too advanced for a beginner (in contrast to what the defendant had assured her) by pointing to the fact that the defendant had expert testimony that the rapids were suitable for beginners. Finally, the court noted that the release had the typical all-caps language that you see on these sorts of contracts. You know:  "HAZARDOUS AND INVOLVES THE RISK OF PHYSICAL INJURY AND/OR DEATH" and "THIS IS A RELEASE OF LIABILITY & WAIVER OF LEGAL RIGHTS." The truth is, seldom does any consumer seeing that stuff really take it a serious communication of a great risk of death, I think. Especially not when there was some evidence that the consumer has been assured the trip in question was suitable for families with children. Nonetheless, the court found that the language of the release unambiguously informed the plaintiff's mother of the risks of the activity and the fact that she was releasing the defendant from liability should those risks come to pass. 

There was a dissent in this case, however, who agreed that the release wasn't against public policy but disagreed on the conclusion that the contract had been fairly entered into. In the dissent's view, the contradictory testimony about the level of difficulty of the rapids meant that the question should have gone to the jury. 

I don't spend a lot of time in my Contracts class talking in detail about liability releases for negligence, but this case made me think that I should talk about them more, because they really do seem to arise in the context of so many activities. 

January 20, 2016 in Commentary, Recent Cases, Sports, Teaching, Travel, True Contracts | Permalink | Comments (4)

Tuesday, January 19, 2016

Contracts Professors: Prepare to Meet Robolawyer

Do law students intending to practice in the areas of contracts and commercial law particularly need to consider the risk of being replaced by artificial intelligence?  It wouldn't hurt.

At this month's AALS annual meeting, Harvard Law School Dean Martha Minnow made some headlines with her comments that the threat to the jobs of human lawyers from artificial intelligence is overhyped:

Minow said she didn’t see computers having a role in matters that require subjective legal judgment. “Assessment and critique of justice and justice mechanisms, I don’t see AI taking that on. Nor do I see AI taking on ethics,” she said. “I don’t mean to suggest there is no relation between AI and ethical suggestions, but I don’t think you’ll ever get rid of the human being. There will always be a need for human beings.”

Robot-lawyer-at-deskDean Minnow's points of optimism--that matters of justice and ethics will require a human component--seem substantially correct, but they highlight a particular problem in the contract and commercial law fields. Matters of human justice, like the administration of criminal penalties and the protection of civil rights, are a natural bulwark against the replacement of lawyers by computers in those fields. The values at stake are ones that we, as a society, would be (fortunately) fundamentally queasy about taking out of human hands. But what if the stakes are "mere" money, as is frequently the case with contracts?  That is the kind of area where increased efficiencies and removal of the human element give less pause.

This sort of automation of transactional work is certainly underway, ranging from the drafting of basic transactional documents through websites like Legal Zoom to the intriguing use of smart contracts that can govern and enforce themselves, such as through application of Bitcoin-style blockchain technology. In short, teachers of Contracts are training students in a field with a high degree of risk of being automated out of existence.

Robolawyer is coming, so how do we prepare our Contracts students to become lawyers whose value-adding proposition is not susceptible to automation?  This question has many answers, I suspect, but we won't reach any of them unless we start by recognizing the problem.

January 19, 2016 in Commentary, Current Affairs, Law Schools, Teaching, Web/Tech | Permalink | Comments (2)

Monday, January 18, 2016

What Happens If Your YouTube Channel Suddenly Disappears?

 Logo YouTube

A recent case out of California, Lewis v. YouTube, continues on my terms and conditions theme from earlier

The plaintiff in this case had a bunch of videos on YouTube. One day, she found that YouTube had deleted them. The videos had had close to 500,000 views at the time YouTube deleted them. The plaintiff claimed that she spent a lot of time and money promoting them but there was no commercial aspect to the videos; she didn't make any money off of them. 

Upon realizing YouTube had deleted her videos, she sent YouTube an e-mail asking what had happened and if her videos could be restored. She received in response what appeared to be a form e-mail informing her that she'd violated YouTube's terms and conditions but not giving any truly specific information. The best that I can discern is that YouTube thought she was a spammer. 

The plaintiff replied to the e-mail from YouTube saying that she had not engaged in any behavior violating the terms and conditions. She received another response from YouTube identical to the first. She filed a formal appeal with YouTube, and received another identical response. 

So that brings us to the lawsuit in question, in which the plaintiff was alleging that YouTube violated the covenant of good faith and fair dealing implicit in its terms and conditions when it deleted her videos unjustifiably and without any notice. 

To be honest, I see the plaintiff's point and I'm kind of on her side. It's frustrating when you have no idea what you've done wrong and you can't get a website to explain anything to you and you just feel kind of powerless. The good news is that at some point she did get YouTube's attention enough that it did restore her videos. I don't know if that happened before or after the lawsuit was filed.

It seems, therefore, like the plaintiff got what she wanted, which was restoration of her videos. The lawsuit appears to have really been about trying to get damages, but the court pointed out that YouTube's terms and conditions (which, let's face it, none of us reads) contained a limitation of liability clause that is valid in California, so the plaintiff couldn't seek any damages. 

I think this is a situation where the court just thought that plaintiff had what she wanted and was just being greedy. I would be curious to see another case challenging the limitation of liability clause where the plaintiff could prove actual damages that might sway a sympathetic judge. But, for now, YouTube's terms and conditions do act to protect YouTube from having to pay out damages. If you find yourself a victim of YouTube's apparently aggressive anti-spamming patrol, you might just have to settle in for a bit of a fight in getting YouTube's attention, without much hope of compensation for any of that time and effort. 

January 18, 2016 in Commentary, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0)

Wednesday, January 13, 2016

The Tricky Question of Whether Minds Met

Ourasi

A recent case out of Ohio, Oryann, Ltd. v. SL & MB, LLC, highlights how complicated it can be to determine whether a contract ever existed in the first place. 

This case involved the sale and purchase of a horse farm that was being operated as a horse-boarding business. The parties agreed on a price of $640,000, and in all of their communications back and forth, that price was always stated as being the price for the real estate of the farm. There was no written reference to purchase of the business and its assets until the parties were through with their negotiations and signing the final papers. Those final papers indicated that the buyer was buying real estate for $350,000 and the business for $290,000. The business sale contract referenced "Exhibit A" as listing the assets that were being transferred, but Exhibit A was never completed.  

A disagreement arose between the parties, and the trial court found that there was never any meeting of the minds with respect to the sale of the business and it was illusory because it didn't have enough specificity to show that anyone was bound to do anything due to the fact that there was never any enumeration of the assets to be transferred (given the blank Exhibit A). While the trial court enforced the real estate contract in the amount of $350,000, it threw the business sale contract out as unenforceable. 

The appellate court, however, disagreed with the trial court's conclusion. To the appellate court, it was obvious from the language of the contracts and the behavior of the parties that there was a meeting of the minds with respect to the sale of the business and that the parties were bound by the contract. The appellate court noted that the two contracts were intended to be read as one entire deal, not two separate deals the way the trial court was reading it. The appellate court thought that if the parties intended to be bound by the real estate contract (as the trial court had found), then it had to follow that they intended to be bound by the business sale contract as well, as the contracts' language expressly referenced each other and the fact that they were one deal. And, as the appellate court noted, the trial court's ruling on the contracts meant that the trial court was ignoring was ignoring the fact that, at all times, the amount of money the parties were discussing was $640,000. It didn't make sense to then pretend that the parties had only intended to pay half of that. 

The appellate court was untroubled by the blank Exhibit A. The business sale contract's language explicitly stated that "all" of the business would be transferred; the purchasing party took possession and ran the business for over a year without complaining about a lack of specificity in the contract because of the missing Exhibit A; and the evidence showed that the parties did indeed transfer over their business assets. The appellate court thought it was therefore clear from the parties' behavior that they understood what the business sale contract achieved, even without the Exhibit A. 

So, where the trial court had seen questionable conduct, the appellate court found an enforceable contract. 

The key to the trial court's ruling might actually be in the parties' testimony as to why they ended up executing two separate contracts: They wished to lessen the amount of real estate tax paid in the transaction. I think the trial court thought that the parties clearly thought the real estate was worth $640,000, didn't want to pay the taxes owed on that, and so pretended the real estate was only worth $350,000 in order to avoid those taxes. In fact, it appears from the parties' testimony that that's exactly what they did. I think the trial court disapproved of that and that its ruling probably reflects its unwillingness to endorse the parties' behavior. 

January 13, 2016 in Commentary, Recent Cases, True Contracts | Permalink | Comments (0)