Monday, July 28, 2014
In 2002, Shirley Douglas opened a checking account with Union Planters Bank. In connection with that account, which she closed in 2003, Ms. Douglas signed a signature card that provided for binding arbitration and delegated the issue of arbitrability to the arbiter.
That bank merged into Regions Bank (Regions) in 2005.
In 2007, Ms. Douglas was injured in a car accident. She alleges that her attorney embezzled her $500,000 settlement, and she sued Regions and another bank at which the attorney maintained accounts. Regions moved to compel arbitration based on Ms. Douglas's agreement with Union Planters Bank. The District Court found that there was no ground for arbitration.
On appeal, in Douglas v. Regions Bank, two judges affirmed, while noting that the District Court had applied the wrong law. While the District Court apparently believed that Regions had never become a party to the arbitration provision at issue, the Circuit Court found that it had, but that the arbitration provision is irrelevant because Ms. Douglas's claims do not relate to her account with Union Planters Bank. As the Court noted:
The mere existence of a delegation provision in the checking account’s arbitration agreement, however, cannot possibly bind Douglas to arbitrate gateway questions of arbitrability in all future disputes with the other party, no matter their origin.
In rejecting Regions' argument that the delegation clause in Ms. Douglas arbitration agreement with Union Planters Bank meant that the question of arbitrability had to be sent to an arbiter, the Fifth Circuit adopted the Federal Circuit's position, which is that the issue of arbitrability does not have to be sent to the arbiter when the assertion of arbitrability “wholly groundless.”
That seems like a reasonable rule, and dissenting Judge Dennis seemed to agree, except that Judge Dennis thought it impermissible for the Fifth Circuit to adopt the Federal Circuit's reasonable position when the Supreme Court adopted a less reasonable position in Rent-A-Center W. v. Jackson. Indeed, in AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643 (1986), the Supreme Court made clear that when an issue is reserved for the arbiter, courts may not pronounce on the merits of the issue. Thus a court must send the issue of arbitrability to an arbiter even when all are agreed that the arbitration agreement is inapplicable.
As Mr. Bumble might have put it, f the law supposes that the parties' interests are served by sending a claim to arbitration when there is no colorable claim that the parties have agreed to have the claim arbitrated, the law is a ass -- a idiot.
Friday, July 18, 2014
By Myanna Dellinger
A woman owes $20 to Kohl’s on a credit card. The debt collector allegedly started to “harass” the woman over the debt, calling her cell phone up to 22 times per week as early as 6 a.m. and occasionally after midnight. What would a reasonable customer do? Probably pay the debt, which the woman admits was only a “measly $20.” What did this woman do? Not to pay the small debt, telling the caller that they had “the wrong number,” and follow the great American tradition of filing suit, alleging violations of the 1991 Telephone Consumer Protection Act which, among other things, makes it illegal to call cell phones using auto dialers or prerecorded voices without the recipient’s consent.
Consumer protection rules also prohibit collection agencies from calling before 8 a.m. and after 9 p.m., calling multiple times during one day, leaving voicemail messages at a work number, or continuing to call a work phone number if told not to.
Last year, Bank of America agreed to pay $32 million to settle claims relating to allegations of illegally using robo-debt collectors. Discover also settled a claim alleging that they violated the rules by calling people’s cell phones without their consent. Just recently, a man’s recorded 20-minute call to Comcast pleading with their representative to cancel his cable and internet service went viral online.
The legal moral of these stories is that companies are not and should, of course, not be allowed to harass anyone to collect on debt owed to them or refuse to cancel services no longer wanted. However, what about companies such as Kohl’s who are presumably owed very large amounts of money although in the form of many small debts? Is it reasonable that customers such as the above can do what she admits doing, simply saying “screw it” to the company and in fact reverse the roles of debtor and creditor by hoping for a settlement via a lawsuit on a questionable background? Surely not.
I once owned a small company and can attest to the difficulty of collecting on debts even with extensive accurate documentation. The only way my debt collecting service or myself were able to collect many outstanding amounts was precisely to make repeat requests and reminders (although, of course, in a professional manner). As a matter of principle, customers should not be able to get away with simply choosing not to pay for services or products they have ordered, even if the outstanding amounts are small. If companies have followed the law, perhaps time has come for them to refuse settling to once again re-establish the roles of debtor and creditor. This, one could hope, would lead irresponsible consumers to live up to their financial obligations, as must the rest of society.
Tuesday, July 15, 2014
By Myanna Dellinger
The city of Berkeley, California, may become the first in the nation to require that gas stations affix warning stickers to gas pump handles warning consumers of the many recognized dangers of climate change. The stickers would read:
Global Warming Alert! Burning Gasoline Emits CO2
The City of Berkeley Cares About Global Warming
The state of California has determined that global warming caused by CO2 emissions poses a serious threat to the economic well-being, public health, natural resources, and the environment of California. To be part of the solution, go to www.sustainableberkeley.com
Consumers not only in California, but worldwide are familiar with similar warnings about the dangers of tobacco. The idea with the gas pump stickers is to “gently raise awareness” of the greenhouse gas impacts and the fact that consumers have alternatives. In their book “Nudge,” Richard Thaler and Cass Sunstein addressed the potential effectiveness of fairly subtly encouraging individual persons to act in societally or personally improved ways instead of using more negative enforcement methods such as telling people what not to do. Gas pump stickers would be an example of such a “nudge.”
But is that enough? World scientists have agreed that we must limit temperature increases to approximately 2° C to avoid dangerous climate change. The problem is that we are already headed towards a no less than 5° C increase. To stop this tend, we must reduce greenhouse gas emissions by 80% or more (targets vary somewhat) by 2050. Stickers with nudges are great, but in all likelihood, the world will need a whole lot more than that to reach the goal of curbing potentially catastrophic weather-related calamities.
Of course, the oil and gas industry opposes the Berkeley idea. The Western States Petroleum Association claimsthat the labels would “compel speech in violation of the 1st Amendment” and that “far less restrictive means exist to disseminate this information to the public without imposing onerous restrictions on businesses.” Why this type of sticker would, in contrast to, for example, labels on cigarette packaging, be so “onerous” and “restrictive” is not clear. Given the extent of available knowledge of climate change and its potential catastrophic effects on people and our natural environment, the industry is very much behind the curve in hoping for “less restrictive means.” More restrictive means than labels on dangerous products are arguably needed. Even more behind the curve is the Association’s claim that the information on the stickers is merely “opinion” that should not be “accorded the status of ‘fact’”. The Berkeley city attorney has vetted the potential ordinance and found the proposed language to be not only sufficiently narrow, but also to have been adopted by California citizens as the official policy of the state.
It seems that instead of facing reality, the oil and gas industry would rather keep consumers in the dark and force them to adopt or continue self-destructive habits. That didn’t work in the case of cigarettes and likely will not in this case either. We are a free country and can, within limits, buy and sell what we want to. But there are and should be restrictions. In this case, the “restriction” is actually not one at all; it is simply a matter of publishing facts. Surely, in America in 2014, no one can seriously dispute the desirability of doing that.
The Berkeley City Council is expected to address the issue in September.
Wednesday, July 9, 2014
By Myanna Dellinger
Recently, I blogged here on Aereo’s attempt to provide inexpensive TV programming to consumers by capturing and rebroadcasting cable TV operators’ products without paying the large fees charged by those operators. The technology is complex, but at bottom, Aereo argued that they were not breaking copyright laws because they merely enabled consumers to capture TV that was available over airwaves and via cloud technology anyway.
In the recent narrow 6-3 Supreme Court ruling, the Courts said that Aereo was “substantially similar” to a cable TV company since it sold a service that enabled subscribers to watch copyrighted TV programs shortly after they were broadcast by the cable companies. The Court found that “Aereo performs petitioners’ works publicly,” which violates the Copyright Act. The fact that Aereo uses slightly different technology than the cable companies does not make a “critical difference,” said the Court. Since the ruling, Aereo has suspended its operations and posted a message on its website that calls the Court’s outcome "a massive setback to consumers."
Whether or not the Supreme Court is legally right in this case is debatable, but it at least seems to be behind the technological curve. Of course the cable TV companies resisted Aereo’s services just as IBM did not predict the need for very many personal computers, Kodak failed to adjust quickly enough to the digital camera craze, music companies initially resisted digital files and online streaming of songs. But if companies want to survive in these technologically advanced times, it clearly does not make sense to resist technological changes. They should embrace not only technology, but also, in a free market, competition so long as, of course, no laws are violated. We also do not use typewriters anymore simply to protect the status quo of the companies that made them.
It is remarkable how much cable companies attempt to resist the fact that many, if not most, of us simply do not have time to watch hundreds of TV stations and thus should not have to buy huge, expensive package solutions. Not one of the traditional cable TV companies seem to consider the business advantage of offering more individualized solutions, which is technologically possible today. Instead, they are willing to waste money and time on resisting change all the way to the Supreme Court, not realizing that the change is coming whether or not they want it.
Surely an innovative company will soon be able to work its way around traditional cable companies’ strong position on this market while at the same time observing the Supreme Court’s markedly narrow holding. Some have already started doing so. Aereo itself promises that it is only “paus[ing] our operations temporarily as we consult with the court and map out our next steps.”
So I hadn't really thought about Crossfire since Jon Stewart shut them down. It was the pinnacle of Stewart's career thus far.
But I guess it's just hard to keep a terrible idea down when you have 24 hours of time to kill every day.
I don't know what CNN's little segment on sex contracts is supposed to accomplish. I guess it is intended to introduce its audience to one of its contributors, S. E. Cupp No doubt, Ms. Cupp has lots of interesting ideas and is telegenic and all that, but this segment reads like a Ms. America question gone wrong. "Ms. Louisiana, do you think colleges and universities ought to require written assent from both (or all) parties to any sexual act in which a student participates?"
Ms. Cupp starts, because her brand is "smart conservative," by lashing out at a culture that "disarms" students on college campuses. Her claim is that women can't protect themselves with pepper spray because of weapons bans on campuses. Of course, most of those bans do not include defensive weapons and anyway, if a woman used her pepper spary defensively in defiance of such a ban, she would 1) escape an assault and 2) perhaps face reprimand. It's not clear that the disarmament has occurred, nor does Ms. Cupp address the very real possibility that women are safer when men can't carry weapons on campus, but I digress.
Then she seems to complain about resources going to crisis centers and hotlines rather than to rape prevention but she is careful to say that crisis centers and hotlines are a good thing (way to give a balanced perspective, Ms. Louisiana!). Then comes the segue to the University of California's consideration of sex contracts. This is not news. Antioch College did it for years. Even we blogged about the subject two years ago.
What's Cupp's take? The idea is silly, but good for California for at least trying! Alright audience. Ms. Louisiana! Isn't she a great sport?
Cupp actually makes me feel nostalgic for the days when Camille Paglia would not just strike provocative intellectual poses but would actually take provocative intellectual positions on the right. I didn't agree with Paglia, but she expressed her original and outlandish ideas with verve and panache. She challenged her readers to consider their positions and think things anew. If anyone actually watches the new Crossfire, let me know if you see any signs of an ability to do so over there.
Monday, July 7, 2014
H/T to Eric Goldman for sharing with the list a new case from Judge Lucy Koh of the federal district court of Northern California. Tompkins v. 23andMe provides a detailed analysis of 23andMe's wrap contracts. The case involves the same Terms of Service presented as a hyperlink at the bottom of the website's pages, and then later, post-purchase and at the time of account creation, as a hyperlink that requires a "click" in order to proceed (which I refer to as a "multi-wrap" as it's neither browsewrap nor clickwrap but a little of both). The court says the former presentation lacks notice, but the latter constitutes adequate formation. Eric Goldman provides a detailed analysis of the case here.
Not surprisingly, the Terms contained a unilateral modification clause which was briefly discussed in the context of substantive unconscionability. It was not, however, raised as a defense to formation, i.e. to argue that the promises made by 23andme were illusory.
Christopher Keating was a tenure-track professor of physics at the University of South Dakota. He did not get along with the only other full-time physics professor at the university. Keating filed a grievance against her with their department head. She responded with an accusation of sexual harrassment against Keating. After two heated exchanges with Keating, the department head rejected Keating's claims. Some time later, having been reprimanded for not seeking approval from either his colleague or the department chair for something that required such approval, Keating explained in an e-mail that he would not seek approval from his colleague because "she is a lieing [sic], back-stabbing sneak."
After that academic year ended, Keating was informed that his employment contract would not be renewed, because his e-mail violated Appendix G to the university's employment policy, which reads:
Faculty members are responsible for discharging their instructional, scholarly and service duties civilly, constructively and in an informed manner. They must treat their colleagues, staff, students and visitors with respect, and they must comport themselves at all times, even when expressing disagreement or when engaging in pedagogical exercises, in ways that will preserve and strengthen the willingness to cooperate and to give or to accept instruction, guidance or assistance.
Keating challenged his termination, alleging that the "civility clause" was unconstitutionally vague in violation of the U.S. Constitution's Due Process Clause. The District Court granted Keating the declaratory relief he sought. In Keating v. University of South Dakota, the Eighth Circuit reversed.
In the public employment context, the Eighth Circuit noted, the standard for vagueness is not as stringent as in the criminal context. "Standards are not void for vagueness as long as ordinary persons using ordinary common sense would be notified that certain conduct will put them at risk of discharge.” The Eighth Circuit found that the civility clause was neither facially void for vagueness nor impermissibly vague as applied to Keating. The Court read the offending e-mail in the broader context of Keating's refusal to work with his colleagues or to even communicate with his immediate superiors. So seen, the Court had little difficulty finding that Keating had failed to comport himself in ways that "preserve and strengthen willingness to cooperate."
Professor Arthur Leonard, of New York Law School (pictured), posted a link to this case and queried whether the civility clause could pass contractual (as opposed to constitutional) tests for vagueness. One wonders what sort of evidence either party would have to put forward to persuade the court as to the meaning of "civil" in this context. Those of us in the academy can likely come up with plenty of examples of interactions with colleagues in which one or more university employees can be said to have acted in ways that were not civil. Still, it is rare to see someone put in writing his principled opposition to cooperation and communication with his one disciplinary colleague and his department chair. Could Keating show contractual vagueness by pointing to rampant and unpunished incivility on the part of other university employees, or does the university have discretion to terminate any given professor who, in its determination, crossed the line of incivility?
In short, if universities are free to point to a civility clause whenever they want to terminate a professor, tenure means nothing. Keating was not yet tenured, but as to the constitutional and contractual issues, I don't think tenure would change the outcome of the case. On the other hand, a civility clause might be a useful tool that university administrators can use in extreme cases when a faculty member -- even a tenured faculty member -- is so unprofessional as to degrade the working environment for his or her colleagues. In this case, the fact that Keating called his colleague a lying, back-stabbing sneak" may be less significant than his statement that he would not trust his department chair or communicate with the university's only other full-time physics professor.
Wednesday, July 2, 2014
Today's New York Times features a story about a new ride-sharing service called BlaBlaCar. The idea is simple -- it's just an internet ride board. Riders share with drivers the cost of travel between two cities. Drivers are forbidden from profiting from the ride share; BlaBlaCar takes a 12% cut. Cost savings over common carriers are significant, ranging according to the NY Times from 33% to 67%
The gimmick is the BlaBla part. Riders can indicate how much they want to talk en route. If you mark Bla, you want to ride in silence (or perhaps you want everyone to know that they can talk all they want but you will be hooked in to your iPod). If you mark BlaBlaBla, other riders (and the driver) are on notice that you will not shut up for six straight hours.
I don't think this would work for me. It's a question of etiquette and signaling. This might be useful if one could be more specific: e.g., BlaBla#WorldCup or BlaBlaBla#Kardashians or BlaBlaBla#MyElderlyMother'sHealthProblemsandMyRecentBreak-up would be useful to know in advance. If I were being honest, I would proclaim BlaBlaBla#HansKelsen, but that would guarantee me a train ticket. I might strategize and put Bla, because it seems more likely than not that I would not find all that much in common with my fellow passengers. But what if they turn out to be interesting? Can I BlaBlaBla, if I promised only Bla? Then, the next time I use BlaBlaCar, I might regret my misanthropy and commit to BlaBlaBla. Would I be a jerk if, after half an hour of conversations about pop stars or the best gear for rock climbing, I pulled out my iPod?
Of course, the odds are that most users of BlaBlaCar are young and interesting (to me), but I am old and boring (to them). So I should put BlaBlaBla because I am interested in hearing what 20- or 30-somethings are doing these days as they commute between European cities, but I would advise them to Bla me, because they likely do not want to hear about Hans Kelsen. This is based on my recent visit with my niece and three nephews whose BlaBlaBla fascinated me (when I could follow it) but who found my Bla, well, blah, or even bleh, but certainly nothing above meh.
But the question of legal liabilities does nag. BlaBlaCar seems rather blithe about the issues. The driver's insurance covers the possibility of injuries to passengers, and women who are wary of sharing cars with strange men can opt to ride only with other women. As for the rest, riders can rely on reviews of drivers and steer away from those who seem sketchy. This is all certainly an improvement over the level of risks assumed by, say, hitchhikers.
BlaBlaCar's terms of service put passengers on notice that the site cannot guarantee that they will be insured:
However BlaBlaCar gives no warranty or assurance in this regard and it is the Driver’s responsibility to verify that their insurance provides adequate cover.
As for other concerns, BlaBlaCar attempts to cover them under its Good Conduct Charter.
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.
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.
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.
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.
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.
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.
Tuesday, June 3, 2014
After two employees of Amedisys, Inc. (Amedisys) went to work for its competitor, Kingwood Home Health Care, LLC (Kingwood), Amedisys sued Kingwood for tortious interference. The two parties then engaged in a game of legal chicken. Amedisys threatened that it would not settle below six figures. Kingwood responded with a settlement offer of $90,000, expecting that Amedisys would reject the offer and trigger Rule 167 of the Texas Civil Practice and Remedies Code, which would allow Kingwood to recover litigation costs if the case went to trial and resulted in a judgment considerably less favorable to Amedisys than the settlement offer.
Amedisys accepted the settlement offer. This apparently was not what Kingwood wanted or expected, and Kingwood refused to treat Amedisys's response as an acceptance. Kingwood proceeded with some pre-trial motions, and Amedisys filed an emergency motion for the enforcement of the settlement agreement. Kingwood claimed that the settlement agreement lacked consideration and that it was fraudulently induced by Amedisys's statement that it would not settle for less than six figures. Note that Kingwood is thus effectively admitting that it made its settlement offer only in order to avail itself of Rule 167. After a few more procedural complexities, the trial court granted Amedysis's motion to have the settlement agreement enforced.
On appeal, in addition to its allegations that the settlement agreement lacked consideration and was fraudulently induced, Kingwood claimed that Amedisys's purported acceptance was a counteroffer because it did not match the terms of Kingwood's offer. While Kingwood offered $90,000 "to settle all claims asserted or which could have been asserted by Amedisys,” Amedisys agreed to accept $90,000 "to settle all monetary claims asserted." Despite the fact that this argument was first raised on appeal, the Texas Court of Appeals agreed with Kingwood and reversed the trial court's judgment in favor of Amedisys.
The Supreme Court found that the Court of Appeals acted correctly in considering Kingwood's argument, raised for the first time on appeal, that no contract existed. Amedisys, as the moving party, bore the burden of proving each element of its claim that Kingwood had breached a contract, including proof of the existence of a contract.
[Editorializing here: This seems more than a bit off to me. Amedisys likely thought it had proved the existence of a contract when it presented evidence of offer and acceptance. At the trial court, Kingwood did not raise any claims that the acceptance was invalid based on the difference in wording between offer and acceptance. Why should Kingwood be permitted to sit on its legal arguments and save them for appeal? By not raising them in opposition to Amedisys's motion, Kingwood should have been treated as having waived those arguments. Otherwise, Amedisys would have to attempt to guess every possible legal challenge that Kingwood might raise to its claims and put them in its motion papers. In the process, Amedisys would be required to aniticipate every conceivable counterargument to its position, raise and refute each argument. This places an intolerable burden on the movant.]
While the common law does provide that an acceptance may not qualify or change the material terms of an offer, the Texas Supreme Court found that the differences between offer and acceptance in this case were not material given the full context of the exchanges between the parties. Amedisys made clear its intention to accept Kingwood's offer on the terms Kingwood presented. Moreover, there were no additional claims that Amedisys might potentially bring, as the doctrine of res judicata would bar Amedisys for bringing additional, related claims once the suit had been settled.
Because the Court of Appeals declined to rule on Kingwood's additional defenses, the Supreme Court remanded the case back to the Court of Appeals for resolution of those issues.
For those who would like to explore the Mirror Image Rule with students, this is a pretty interesting case, and the Texas Supreme Court provides a video recording of the oral arguments, so that would be pretty cool to share with students as well.
Friday, May 30, 2014
Last month, the District Court for the Southern District of New York granted a motion to dismiss brought by defendant Gilt Groupe, Inc. (Gilt) in Starke v. Gilt Groupe, Inc. Adam Starke (Starke) sought to bring a class action claim against Gilt for allegedly misrepresenting on its website that its textiles were made from bamboo fibers when they are in fact made from bamboo derivatives (rayon).
Starke claimed both that he never effectively agreed to the arbitration agreement and class action waiver and that they are unconscionable. Relying on a 2012 case invovling similar challenges to Facebooks click-through terms and conditions, the District Court quickly concluded:
Regardless of whether he actually read the contract's terms, Starke was directed exactly where to click in order to review those terms, and his decision to click the "Shop Now" button represents his assent to them.
Yes, this is indeed how mass-market boilerplate rights-deletion scheme works. Clicking twice, and carefully reading both documents would have increased the time involved in Starke's transaction substantially. Neither Starke nor Gilt, which specializes in "flash sales," wants that. The terms are not intended to be read. Nor do we know that Starke could have understood the significance of the arbitration clause and class action waiver had he read them. In addition, what is Starke's alternative? The District Court blithely directs Starke to Amazon.com. What do you know? Amazon also has an arbitration clause and a class-action waiver! [In fairness, I've always found Amazon's customer service to be excellent -- they take returns and cover shipping on returns, so Starke probably would have been better off with them -- Amazon also accurately described the product at issue in Starke's case.] SDNY, you're part of the problem.
Starke did not seem to raise any serious grounds for finding the arbitration agreement unconscionable.
[This post has been edited to fix errors that a reader called to the author's attention.]
Saturday, May 24, 2014
"You can stop using our Services at any time, although we’ll be sorry to see you go. Google may also stop providing Services to you, or add or create new limits to our Services at any time."
and this unilateral modification clause:
"We may modify these terms or any additional terms that apply to a Service to, for example, reflect changes to the law or changes to our Services. You should look at the terms regularly. We’ll post notice of modifications to these terms on this page. We’ll post notice of modified additional terms in the applicable Service. Changes will not apply retroactively and will become effective no sooner than fourteen days after they are posted. However, changes addressing new functions for a Service or changes made for legal reasons will be effective immediately. If you do not agree to the modified terms for a Service, you should discontinue your use of that Service."
Friday, May 23, 2014
By Myanna Dellinger
In California, the Bureau of Reclamation is in charge of divvying up water contracts in the California River Delta between the general public and senior local water rights owners. Years ago, it signed off on long-term contracts that determined “the quantities of water and the allocation thereof” between the parties. About a decade ago, it renewed these contracts without undertaking a consultation with the Fish and Wildlife Service (“FWS”) to find out whether the contract renewals negatively affected the delta smelt, a small, but threatened, fish species. The thinking behind not doing so was that since the water contracts “substantially constrained” the Bureau’s discretion to negotiate new terms, no consultation was required.
Not correct, concluded an en banc Ninth Circuit Court of Appeals panel Ninth Circuit Court of Appeals panel recently. By way of brief background, Section 7 of the Endangered Species Act (“ESA”) requires federal agencies to ensure that none of their actions jeopardizes threatened or endangered species or their habitat. 16 U.S.C. § 1536(a). Among other things, federal agencies must consult with the FWS if they have “some discretion”"some discretion" to take action on behalf of a protected species. In this case, since the contractual provision did not strip the Bureau of all discretion to benefit the species, consultation should have taken place. For example, the Bureau could have renegotiated the pricing or timing terms and thus benefitted the species, said the court.
In 1993, the delta smelt had declined by 90% over the previous 20 years and was thus listed as a threatened species under the ESA. Of course, fish is not the only species vying for increasingly scarce California water. Man is another. The current and ongoing drought in California – one of the worst in history – raises questions about future allocations of water. Who should be prioritized? Private water right holders? People in Southern California continually thirsty and eager to water their often overly water-demanding garden plants? Industry? Farmers? Not to mention the wild animals and plants depending on sufficient levels of water? There are no easy answers here.
The California drought is estimated to cost Central Valley farmers $1.7 billion and 14,500 jobs. While that seems drastic, the drought is still not expected to have any significant effect on the state economy as California is no longer an agricultural state. In fact, agriculture only accounts for 5% of jobs in California. Still, that is no consolation to people losing their jobs in California agriculture or consumers having to pay higher prices for produce in an increasingly warming and drying California climate.
The 1974 movie Chinatown focused on the Los Angeles water supply system. 40 years later, the problem is just as bad, if not worse. The game as to who gets water contracts and for how much water is still on.