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Friday, May 30, 2014

SDNY Enforces Hyperlinked Arbitration Clause and Class Action Waiver

BambooLast 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).  

Gilt is an online shopping website that specializes in "flash sales" of short duration.  In order to purchase items on the website, one must become a Gilt member.  One does so by clicking on a "sign-up" box that states that the consumer agrees to be bound by Gilt's Terms of Membership.  Once click on the mouse brings the consumer to Gilt's "Terms and Conditions," which are governed by Gilt's Terms of Use.  A second click brings one to those terms which include, in paragraph 16, an arbitration agreement and a class action waiver.  

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.]

May 30, 2014 in Commentary, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Saturday, May 24, 2014

Mutuality and Wrap Contracts

As I've noted in a prior post, there is a lawsuit pending against Google for email scanning which was recently denied class status.  Something that's puzzled me about wrap contracts generally, including Google's, is that many of them don't seem to be contracts at all - and not simply because of the (lack of) consent issue.  They typically contain modification at will clauses and termination at will clauses.  In contracts class, I teach students that generally (with the exception of employment contracts) these clauses lack mutuality unless constrained in other ways, such as a notice period.  While there may be consideration (use of service in exchange for...data?  eyeballs?  not clear), there is no consideration if the promises are illusory and don't actually bind a party.   Google's terms of use, for example, state:

"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."

Google then isn't bound to actually provide anything according to its Terms of Use. 

In the email scanning case, Google is making the argument that consent to email scanning was obtained in the context of "consenting" to the Terms of Use.  But if these "contracts" are not really contracts because they lack mutuality, then can Google really claim that their users "consented" to the email scanning?  Is there blanket assent to terms outside of the context of a contract? 

 

 

 

May 24, 2014 in Commentary, E-commerce, Miscellaneous, Web/Tech | Permalink | Comments (2) | TrackBack (0)

Friday, May 23, 2014

A Small Fish in a Big Game

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.

May 23, 2014 in Commentary, Current Affairs, Food and Drink, Government Contracting, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Fargo: A TV Series About an Implied Contract

Martin_FreemanThe event that fuels the first-season plot of the new F/X television series Fargo is a conversation in an emergency room waiting room.  Lester Nygaard (Martin Freeman, left) has just been assaulted by Sam Hess, who used to bully him mercilessly in high school.  Hess intimidates and humiliates Lester in front of Hess's comically neanderthal sons.  Although Hess never actually hits Lester, the result is still a broken nose.  

While waiting for someone to attend to his injury, Lester has a conversation with Lorne Malvo (Billy Bob Thornton, Right), who was injured when his car hit a deer and careened off the highway.  Once the car came to rest in a snow-covered field, a man wearing only boxer shorts, who for some reason had been in the trunk of Malvo's car, jumped out and ran for the cover of the nearby woods.  That's pretty much all we know about Malvo when he and Lester have their conversation.

BillyBobThorntonMalvo manages to learn from Lester what had happened to him and that the man responsible for his injuries is named Hess.  Malvo suggests that Lester ought to kill Hess, but Lester is not that kind of person (or at least not yet), so he dismisses the idea.  Malvo offers to kill Hess for Lester.  Lester just gives him that look of incredulity that has been a staple of Martin Freeman's wonderful career.  Malvo insists that Lester say either yes or no, but  a nurse interrupts the conversation to take Lester in for treatment, and Lester says nothing.

Spoiler alert: you may not want to read below the jump if you have not watched the show (and intend to do so) as a few plot details are revealed:

Continue reading

May 23, 2014 in Commentary, Television | Permalink | Comments (0) | TrackBack (0)

Sunday, May 18, 2014

More on the Structure of Cable Contracts

By Myanna Dellinger

Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few. 

Luckily, change may finally be on its way.  The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology.  The price?  About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves. 

How does this work?  Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations.  In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease.  In other words, Aereo records show for its subscribers so that they don’t have to. 

That sounds great, right?  Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows).  They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.

Of course, the great American tradition of filing suit was followed.  Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.

Stay tuned for the outcome in this case…

May 18, 2014 in About this Blog, Commentary, Current Affairs, E-commerce, Famous Cases, In the News, Recent Cases, Television, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, May 12, 2014

No Frequent Complaining Allowed about Frequent Flyer Programs

By Myanna Dellinger

The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg).  Contracts ProfBlog first wrote about the case on April 3.

In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel.  The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles.  According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer.  The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines.  He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.

The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement.  The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.

Really?  Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!..  The opinion may at first blush read as such and have that somewhat chilling effect.  However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.

The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.”  These days, that may be hard to do.  First, most airlines appear to have more or less similar frequent flyer programs.  Second, what airline these days has a  truly “good” reputation?  Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.   

One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable.  I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes.  A few times, I have had the good fortune to fly first or business class, but most times, I fly economy.  Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.”  - Guess what, the fares always had increased the times I asked for a change.  Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta.  I was told that it was impossible to change the ticket as it was “deeply discounted.”   I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors.  I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.”  Remember that these days, airfare often has to be bought months ahead of time to get the best prices.  In the meantime, life happens.  Unexpected, yet important events come about.  Changes to airline tickets should be realistically feasible, but are currently not on these conditions.

What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation.  My mother is elderly and lives in Europe.  I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services.  Such is life in a globalized world for many of us.  In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States.  Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently.  I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy.  It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.   

Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa.  For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist.  Two years ago, my father was passing and I was called to his deathbed.  Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…).  The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.

In the United States, “market forces” are said to dictate the pricing of airfare.  In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours).  Strange, since both markets are capitalist and offer freedom of contracting.  Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States.  A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms.  Under heavy criticism, that plan was soon given up.  In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies.  Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.

 

May 12, 2014 in Commentary, Current Affairs, Famous Cases, In the News, Recent Cases, Travel, True Contracts | Permalink | Comments (0) | TrackBack (0)

Dropbox Updates Its Terms of Service

A few months ago, I received an e-mail from Dropbox, on which I rely to back up all of my work.  The e-mail notified me that Dropbox was updating its privacy policy and Terms of Service.  "Uh oh," I thought.  Since I rely on Dropbox, I figured this was something I ought to look at carefully, but since the e-mail came during a hectic time in the semester, I just saved it to look at later. 

Today is later, and cleaning out my inbox is one way I take a break from term-end grading.  Here is part of the e-mail:

  • We’re adding an arbitration section to our updated Terms of Service. Arbitration is a quick and efficient way to resolve disputes, and it provides an alternative to things like state or federal courts where the process could take months or even years. If you don’t want to agree to arbitration, you can easily opt out via an online form, within 30-days of these Terms becoming effective. This form, and other details, are available on our blog.

D'oh.  If I had read this when I got it, I could have opted out of the arbitration policy!  Today, when I tried to click on the opt-out link, I got a screen that said, in effect, "Sorry sucker, you missed the boat!"  I had already accepted the new terms of service, including the arbitration clause, by using Dropbox for 30 days without reading the e-mail.  If anybody has attempted to opt out, please share your experience.  I really wonder how easy it is to opt out or if Dropbox is just counting on people not to bother.

Fortunately, most of Dropbox's terms are pretty reasonable as such things go.  Dropbox will pay all fees on claims under $75,000 and will pay a $1000 bonus to anybody who wins an arbitral award in excess of Dropbox's settlement offer.  Dropbox promises not to seek its own fees and costs unless the arbitrator determines that the claim is frivolous.   There are also exceptions to the arbitration provision for small claims and for injunctive relief, but the latter would have to be brought in San Francisco.  There is also the now-unavoidable ban on class actions, as well as consolidated or representative actions.  

Boo!

May 12, 2014 in Commentary, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Thursday, May 8, 2014

Vermont First State to Require Labeling of GMOs

By Myanna Dellinger

On May 8, 2014, Vermont became the first state in the nation to require foods containing GMOs (genetically modified organisms) to be labeled accordingly.  The law will undoubtedly face several legal challenges on both First Amendment and federal pre-emption grounds, especially since giant corporate interests are at stake.

Scientists and companies backing the use of GMOs claim that GMOs are safe for both humans and the environment.  Skeptics assert that while that may be true in the short term, not enough data yet supports a finding that GMOs are also safe in the long term.

In the EU, all food products that make direct use of GMOs at any point in their production are subjected to labeling requirements, regardless of whether or not GM content is detectable in the end product.  This has been the law for ten years. 

GMO stakeholders in the United States apparently do not think that we as consumers have at least a right to know whether or not our foods contain GMOs.  Why not, if the GMOs are as safe as is said?  A host of other food ingredients have been listed on labels here over the years, although mainly on a voluntary basis.  Think MSGs, sodium, wheat, peanuts, halal meat, and now gluten.  This, of course, makes perfect sense.  But why should GMOs be any different?  If, for whatever reason, consumers prefer not to eat GMOs, shouldn’t we as paying, adult customers have as much a say as consumers preferring certain other products? 

Of course, the difference here is (surprise!) one of profit-making: by labeling products “gluten free,” for example, manufacturers hope to make more money.  If they had to announce that their products contain GMOs, companies fear losing money.  So why don’t companies whose products don’t contain GMOs just volunteer to offer that information on the packaging?  The explanation may lie in the pervasiveness of GMOs in the USA: the vast majority (60-80%, depending on the many sources trying to establish certainty in this area) of prepared foods contain GMOs just as more than 80% of major crops are grown from genetically modified seeds.  Maybe GMOs are entirely safe in the long run as well, maybe not, but we should at least have a right to know what we eat, it seems.

Bon appétit!

 

May 8, 2014 in Commentary, Current Affairs, Food and Drink, In the News, Legislation, Science, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, May 5, 2014

Ninth Circuit Rejects Contract-Based Challenge to eBay's Automatic Bidding System

9th CircuitIn Block v. eBay, Inc., Marshall Block contended that eBay's automatic bidding system violates two provisions of its User Agreement as well as California's Unfair Competition Law.  The District Court dismissed the case and the Ninth Circuit affirmed.

eBay conducts online auctions through its automatic bidding system.  A bidder enters into the system the maximum amount she is willing to bid.  This amount is kept confidential, but the system automatically and at pre-determined increments enters the bidder's bids until the bid price exceeds the maximum that the bidder is willing to pay.  Block, an eBay seller, claimed that the system violates provisions of the User Agreement in which eBay represents that: 1) it is not  involved in the actual transaction between buyers and sellers; and 2) the Agreement creates no agency, partnership, joint-venture, employer/employee or franchisor/franchisee relationship.

The District Court found that neither of these provisions constituted enforceable promises, and the Ninth Circuit agreed.  The Court discerned no promissory language in the relevant provisions.  Rather, the Court opined that the language in the User Agreement served as a general introductin to eBay's marketplace.  While some of the language of the User Agreement are explicitly promissory; the language at issue here is informal and conversational in style.

While I agree with the Court's analysis here, I am a bit wary of its emphasis on the informal language used in the User Agreement.  I noticed recently that Google changed the tone (but not the substance) of its Terms of Service by adding contractions and generally making the corporation sound more like an unthreatening hipster.  Notwithstanding the verbal skinny jeans, companies engaged in e-commerce use these agreements to limit consumer rights and  their own exposure to legal action, often to the verge of rendering these documents illusory agreements.  I wish the Ninth Circuit had limited its opinion to a finding that there was no promise and had not equated informal language with a lack of intent to be bound.

May 5, 2014 in Commentary, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 30, 2014

Handling Shipping and “Handling” Charges

By Myanna Dellinger

A class-action lawsuit filed recently against Amazon asserts that the giant online retailer did not honor its promise to offer “free shipping” to its Prime members in spite of these members having paid an annual membership fee of $79 mainly in order to obtain free two-day shipping.

Instead, the lawsuit alleges, Amazon would covertly encourage third-party vendors to increase the item prices displayed and charged to Prime members by the same amount charged to non-Prime members for shipping in order to make it appear as if the Prime members would get the shipping for free.  Amazon would allegedly also benefit from such higher prices as it deducts a referral fee as a percentage of the item price from third-party vendors. 

The suit alleges breach of contract and seeks recovery of Prime membership costs for the relevant years as well as treble damages under Washington’s Consumer Protection Act.  Most states have laws such as consumer fraud statutes, deceptive trade practices laws, and/or unfair competition laws that can punish sellers for charging more than the actual costs of “shipping and handling."  In some cases that settled, companies agreed to use the term “shipping and processing” instead of “shipping and handling” to be more clear towards consumers. 

On the flip side of the situation is how Amazon outright prevents at least some private third-party vendors from charging the actual shipping costs (not even including “handling” or “processing” charges).  For example, if a private, unaffiliated vendor sells a used book via Amazon, the site will only allow that person to charge a certain amount for shipping.  As post office and UPS/FedEx costs of mailing items seem to be increasing (understandably so in at least the case of the USPS), the charges allowed for by Amazon often do not cover the actual costs of sending items.  And if the private party attempts to increase the price of the book even just slightly to not incur a “loss” on shipping, the book may not be listed as the cheapest one available and thus not be sold. 

This last issue may be a detail as the site still is a way of getting one’s used books sold at all whereas that may not have been possible without Amazon.  Nonetheless, the totality of the above allegations, if proven to be true, and the facts just described till demonstrate the contractual powers that modern online giants have over competitors and consumers. 

A decade or so ago, I attended a business conference for other purposes.  I remember how one presenter, when discussing “shipping and handling” charges, got a gleeful look in his eyes and mentioned that when it came to those charges, it was “Christmas time.”  When comparing what shipping actually costs (not that much for large mail-order companies that probably enjoy discounted rates with the shipping companies) with the charges listed by many companies, it seems that not much has changed in that area.  On the other hand, promises of “free” shipping have, of course, been internalized in the prices charged somehow.  One can hope that companies are on the up-and-up about the charges.  Again: buyer beware.

April 30, 2014 in Commentary, Current Affairs, E-commerce, Famous Cases, In the News, True Contracts | Permalink | Comments (0) | TrackBack (0)

Thursday, April 17, 2014

General Mills Leads the Way (Into Compelled Arbitration)

According to this article in today's New York Times, General Mills has added language to its website designed to force anyone who interacts with the company to disclaim any right to bring a legal action against it in a court of law.  If a consumer derives any benefit from General Mills' products, including using a coupon provided by the company, "liking" it on social media or buying any General Mills' product, the consumer must agree to resolve all disputes through e-mail or through arbitration.

Old Mill

The website now features a bar at the top which reads:

We’ve updated our Privacy Policy. Please note we also have new Legal Terms which require all disputes related to the purchase or use of any General Mills product or service to be resolved through binding arbitration. For more information on these changes, please click here

The Legal Terms include the following provisions:

  • The Agreement applies to all General Mills products, including Yoplait, Green Giant, Pillsbury, various cereals and even Box Tops for Education;   
  • The Agreement automatically comes into effect "in exchange for benefits, discounts," etc., and benefits are broadly defined to include using a coupon, subscribing to an e-mail newsletter, or becoming a member of any General Mills website;
  • The only way to terminate the agreement is by sending written notice and discontinuing all use of General Mills products;
  • All disputes or claims brought by the consumer are subject to e-mail negotiation or arbitration and may not be brought in court; and
  • A class action waiver.

The Times notes that General Mills' action comes after a judge in California refused to dismiss a claim against General Mills for false advertising.  Its packaging suggests that its "Nature Valley" products are 100% natural, when in fact they contain ingredients like high-fructose corn syrup and maltodextrin.  The Times also points out that courts may be reluctant to enforce the terms of the online Agreement.  General Mills will have to demonstrate that consumers were aware of the terms when they used General Mills products.  And what if, when they did so, they were wearing an Ian Ayres designed Liabili-T?

April 17, 2014 in Commentary, E-commerce, Food and Drink, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, April 7, 2014

No Contract! But There Is This Agreement

Cecelia HarperMy student, Cecelia Harper (pictured), recently ordered television service.  The representative for the service provider offered a 2-year agreement, which he said was “absolutely, positively not a contract.”  Learned in the law as she is, Cecelia asked the representative what he thought the difference was between a contract and an agreement.  He wasn't sure, but he did read her what he called "literature," which surprisingly enough was not a Graham Greene novel but the terms and conditions of the agreement, which included a $20/month "deactivation" fee should Cecelia terminate service before the end of the contract -- oops, I mean agreement -- term.  

I have seen said agreement, and it includes the following charming terms:

  • Service provider reserves the right to make programming and pricing changes;
  • Customer is entitled to notice of changes and is free to cancel her service if she does not like the changes, but then she will incur the deactivation fee;
  • Customer must agree in advance to 12 categories of administrative fees that may be imposed on her;
  • Service provider reserves right to change the terms of the agreement at any time, and continued use of the service after notice constitutes acceptance of new terms;
  • An arbitration clause that excludes certain actions that the service provider might bring; and 
  • A class action waiver

If the agreement had a $20/month deactivation fee in it, I could not find it.  All I see is a deactivation fee of "up to $15."  Rather, the "customer agreement" references a separate "programming agreement," and suggests that there are cancellation fees associated with termination prior to the term of the programming agreement.

So in what sense is this not a contract?  My guess is that this is service providers trying to emulate what cell phone service providers have done with their "no contract phone" campaigns.  For example, there's this one:

 

I'm guessing that the television service providers have learned that these ad campaigns have made "contract" into a dirty word.  They are now seeking to seduce new customers by insisting that they do not offer contracts.  Oren Bar-Gill will have to write a sequel to his last book and call it Seduction by Agreement.

If anyone has any other theories for why representatives for service providers are insisting that their contracts are really agreements, please share!

April 7, 2014 in Commentary, Television, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, March 31, 2014

More on the Fairness of Contractual Penalties

More on the Fairness of Contractual Penalties

By Myanna Dellinger

In my March 3 blog post, I described how the Ninth Circuit Court of Appeals just held that contractual liquidated damages clauses in the form of late and overlimit fees on credit cards do not violate due process law.  A new California appellate case addresses a related issue, namely whether the breach of a loan settlement agreement calling for the repayment of the entire underlying loan and not just the settled-upon amount in the case of breach is a contractually prohibited penalty.  It is.

In the case, Purcell v. Schweitzer (Cal. App. 4th Dist., Mar. 17, 2014), an individual borrowed $85,000 from a private lender and defaulted.  The parties agreed to settle the dispute for $38,000.  A provision in the settlement provided that if the borrower also defaulted on that amount, the entire amount would become due as “punitive damages.”  When the borrower only owed $67 or $1,776  (depending on who you ask), he again defaulted, and the lender applied for and obtained a default judgment for $85,000. 

Liquidated damages clauses in contracts are “enforceable if the damages flowing from the breach are likely to be difficult to ascertain or prove at the time of the agreement, and the liquidated damages sum represents a good faith effort by the parties to appraise the benefit of the bargain.”  Piñon v. Bank of Am., 741 F.3d 1022, 1026 (Ninth Cir. 2014).   The relevant “breach” to be analyzed is the breach of the stipulation, not the breach of the underlying contract.  Purcell.  On the other hand, contractual provisions are unenforceable as penalties if they are designed “not to estimate probable actual damages, but to punish the breaching party or coerce his or her performance.” Piñon, 741 F.3d at 1026. 

At first blush, these two cases seem to reach the same legally and logically correct conclusion on similar backgrounds.  But do they?  The Ninth Circuit case in effect condones large national banks and credit card companies charging relatively small individual, but in sum very significant, fees that arguably bear little relationship to the actual damages suffered by banks when their customers pay late or exceed their credit limits.  (See, in general, concurrence in Piñon).  In 2002, for example, credit card companies collected $7.3 billion in late fees.  Seana Shiffrin,  Are Credit Card Law Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).  Thus, although the initial cost to each customer may be small (late fees typically range from $15 to $40), the ultimate result is still that very large sums of money are shifted from millions of private individuals to a few large financial entities for, as was stated by the Ninth Circuit, contractual violations that do not really cost the companies much.  These fees may “reflect a compensatory to penalty damages ratio of more than 1:100, which far exceeds the ratio” condoned by the United States Supreme Court in tort cases. Piñon, 741 F.3d at 1028.  In contrast, the California case shows that much smaller lenders of course also have no right to punitive damages that bear no relationship to the actual damages suffered, although in that case, the ratio was “only” about 1:2. 

The United States Supreme Court should indeed resolve the issue of whether due process jurisprudence is applicable to contractual penalty clauses even though they originate from the parties’ private contracts and are thus distinct from the jury-determined punitive damages awards at issue in the cases that limited punitive damages in torts cases to a certain ratio.  Government action is arguably involved by courts condoning, for example, the imposition of late fees if it is true that they do not reflect the true costs to the companies of contractual breaches by their clients.  In my opinion, the California case represents the better outcome simply because it barred provisions that were clearly punitive in nature.  But “fees” imposed by various corporations not only for late payments that may have little consequence for companies that typically get much money back via large interest rates, but also for a range of other items appear to be a way for companies to simply earn more money without rendering much in return.

At the end of the day, it is arguably economically wasteful from society’s point of view to siphon large amounts of money in “late fees” from private individuals to large national financial institutions many of which have not in recent history demonstrated sound economic savvy themselves, especially in the current economic environment.  Courts should remember that whether or not liquidated damages clauses are actually a disguise for penalties depends on “the actual facts, not the words which may have been used in the contract.”  Cook v. King Manor and Convalescent Hospital, 40 Cal. App. 3d 782, 792 (1974).

March 31, 2014 in Commentary, Contract Profs, Current Affairs, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, March 21, 2014

Microsoft's Terms of Service and Privacy

Microsoft has been in the news recently for accessing a user's Hotmail account without a court order. Microsoft revealed this information as part of a lawsuit it filed against a former employee who it accussed of stealing trade secrets.  The company received information that a French blogger had access to Windows operating system software code and wanted to find out who was the blogger's source.  Conveniently for Microsoft, the blogger had a Microsoft-operated Hotmail account.  The company's accessing of the emails and instant messages of the blogger was lawful because - you guessed it - it was permitted under the company's terms of service which state:

 

We also may share or disclose personal information, including the content of your communications:

  • To comply with the law or respond to legal process or lawful requests, including from law enforcement and government agencies.
  • To protect the rights or property of Microsoft or our customers, including enforcing the terms governing your use of the services.
  • To act on a good faith belief that access or disclosure is necessary to protect the personal safety of Microsoft employees, customers or the public.

Lest you think you can escape the intrusions of corporate peeking into personal communications by moving to another email provider, a quick check of the terms of service of Yahoo and Google showed nearly identical language in their privacy policies. 

 

Google’s terms of service state:

We will share personal information with companies, organizations or individuals outside of Google if we have a good-faith belief that access, use, preservation or disclosure of the information is reasonably necessary to:

  • meet any applicable law, regulation, legal process or enforceable governmental request.
  • enforce applicable Terms of Service, including investigation of potential violations.
  • detect, prevent, or otherwise address fraud, security or technical issues.
  • protect against harm to the rights, property or safety of Google, our users or the public as required or permitted by law.

Yahoo’s is similar:

You acknowledge, consent and agree that Yahoo may access, preserve and disclose your account information and Content if required to do so by law or in a good faith belief that such access preservation or disclosure is reasonably necessary to: (i) comply with legal process; (ii) enforce the TOS; (iii) respond to claims that any Content violates the rights of third parties; (iv) respond to your requests for customer service; or (v) protect the rights, property or personal safety of Yahoo, its users and the public.

Interestingly, Microsoft's terms of service give the company less discretion to snoop through our emails than Google or Yahoo -- it can only do so to protect the company and its users.  Google or Yahoo can access communications to protect third party property interests.  But they wouldn't really do that without a court order, would they?  Oh, right.

March 21, 2014 in Commentary, Current Affairs, Miscellaneous | Permalink | Comments (0) | TrackBack (0)

Monday, March 10, 2014

NewYork City Ballet Dancers Agree to New Contract

As the New York Times reports here, dancers with the New York City Ballet (NYCB)  have been operating without a contract since the summer of 2012.  No details of the agreement are available, beyond the fact that the dancers are guaranteed pay for 38 weeks of work now, up from 37.  

A bit of quick internet research suggests that a member of the NYCB corps de ballet makes $1500 a week.  Let's assume the new contract is more generous and round up to $2000/week.  If they get paid for 38 weeks of work, that comes out to $76,000/year, which is a good salary in New York City, so long as you can share a studio apartment in an outer borrough with two or more other members of of the corps (or you can marry and investment banker).  There was a bit of controversy about five years ago when tax returns for Peter Martins, the NYCB's Ballet Master-in-Chief, surfaced and revealed that he made about $700,000.  Some of that money comes from royalties he earns on his choreographies.  In any case, it seems that was considered a lot of money for a dancer.

To put that in some perspective, the median salary for an NBA player is $1.75 milion, if we include players on short-term contracts.  The top salary exceeds $30 million, and the lowest salary, as of the 2011-12 season according to nba.com, was just under $500,000 for a rookie.

And now, here is the New York City Ballet performing an excerpt from George Balanchine's Agon

 

 

March 10, 2014 in Celebrity Contracts, Commentary, Labor Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, March 7, 2014

Tenth Circuit Holds New Mexico Law Preempted by the Federal Arbitration Act

10th Cir.A New Mexico law permits a court to strike down as unconscionable arbitration agreements that apply only or primarily to claims that only one party would bring.  That is, if an arbitration agreement is drafted so that one party always has to go to arbitration while the other party can always go to court, such an agreement may well be unconscionable.   In THI of New Mexico at Hobbs Center, LLC v. Patton, a Tenth Circuit panel unanimously held that the Federal Arbitration Act (FAA) preempts the New Mexico law.  The Court reversed the District Court's ruling and remanded the case for the entry of an order compelling arbitration.

Lillie Mae Patton's husband was admitted to a nursing home in Hobbs, New Mexico operated by THI.  When he was admitted, he agreed to an arbitration clause that required "the parties to arbitrate any dispute arising out of his care at the home except claims relating to guardianship proceedings, collection or eviction actions by THI, or disputes of less than $2,500."  After he died, Ms. Patton sued THI on behalf of his estate, alleging negligence and misrepresentation.  THI brought a claim in the federal district court to compel arbitration.  At first, the District Court granted THI the relief it sought, but it reversed itself when the New Mexico Supreme Court found an identical arbitration clause unconscionable in Figueroa v. THI of New Mexico at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012).

The Tenth Circuit reviewed the legislative purposes underlying the FAA and the case law firmly establishing the view that arbitration agreements are to be enforced notwithstanding federal statutes that seemd to imply hostility to arbitration or state law invalidating arbitration agreements.  While a court may invalidate an arbitration agreement based on common law grounds such as unconscionability, it may not apply the common law in a way that discriminates against arbitral fora. Assuming that the agreement did indeed consign Ms. Patton to arbitration while allowing THI to bring its claims in court, and accepting the Figueroa Court's holding that the agreement is unsconscionable, the Tenth Circuit found that "the only way the arrangement can be deemed unfair or unconscionable is by assuming the inferiority of arbitration to litigation."  However, "[a] court may not invalidate an arbitration agreement on the ground that arbitration is an inferior means of dispute resolution.  As a result, the Court found that the FAA precludes Ms. Patton's unconscionability challenge to the enforceability of the arbitration agreement.

The Court distinguished this case from a Fifth Circuit case, Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, 168–71 (2004), in whichthe Fifth Circuit found an arbitration agreement to be unenforceable where one party's claims had to be arbitrated while the other's could be either litigated or arbitrated.  On the Court's reading of the arbitration agreement, THI did not have the option of arbitrating its claims; it would have to go to court.  Rather ominously, the Tenth Circuit expressed its doubt about the Fifth Circuit's reasoning in Iberia Credit that having the option to choose between arbitration and litigation was superior to having arbitration as the only option.  

There is a remarkable formalism to the Tenth Circuit's opinion.  Absolutely nothing that smells of denigration of arbitration is permissible.  The Court does not inquire into what might have motivated THI to provide that it gets to go to court with its claims, while its patients have to go to arbitration.  Given that THI drew up the contract, that seems a relevant line of inquiry.  If THI exploited its superior bargaining power and knowledge to create an unreasonably lopsided agreement that would not be detectable by the average consumer, the arbitration agreement is unconscionable and should not be enforced.  Refusing to do so is not a global rejection of arbitration but a recognition that both litigation and arbitraiton have their advantages and disadvantages. The Tenth Circuit's approach permits the party with superior bargaining power exploit its superior knowledge to extract benefits from form contracts to which the other party cannot give meaningful assent.

March 7, 2014 in Commentary, Recent Cases | Permalink | TrackBack (0)

Monday, March 3, 2014

Do Contractual Penalty Clauses Violate Notions of Due Process?

Contracts between credit card holders and card issuers typically provide for late fees and “overlimit fees” (for making purchases in excess of the card limits) ranging from $15 to $40.  Since these fees are said to greatly exceed the harm that the issuers suffer when their customers make late payments or exceed their credit limits, do they violate the Due Process Clause of the Constitution? 

They do not, according to the United States Court of Appeals for the Ninth Circuit (In re Late Fee & Over-Limit Fee Litig, No. 08-1521 (9th Cir. 2014)).  Although such fees may even be purely punitive, the court pointed out that the due process analyses of BMW of North America v. Gore and State Farm Mut. Auto Ins. Co. v. Campbell are not applicable in contractual contexts, but only to jury-awarded fees.  In Gore, the Court held that the proper analysis for whether punitive damages are excessive is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” and finding the award of punitive damages 500 times greater than the damage caused to “raise a suspicious judicial eyebrow”.  517 U.S. 559, 581, 583 (1996). The State Farm Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages … will satisfy due process. 538 U.S. 408, 425 (2003).

Contractual penalty clauses are also not a violation of statutory law.  Both the National Bank Act of 1864 and the Depository Institutions Deregulation and Monetary Control Act provide that banks may charge their customers “interest at the rate allowed by the laws of the State … where the bank is located.”  12 U.S.C. s 85, 12 U.S.C. S. 1831(d).  “Interest” covers more than the annual percentage rates charged to any carried balances, it also covers late fees and overlimit fees.  12 C.F.R.  7.4001(a).  Thus, as long as the fees are legal in the banks’ home states, the banks are permitted to charge them.

Freedom of contracting prevailed in this case. But should it?  Because the types and sizes of fees charged by credit card issuers are mostly uniform from institution to institution, consumers do not really  have a true, free choice in contracting.  As J. Reinhardt said in his concurrence, consumers frequently _ have to_ enter into adhesion contracts such as the ones at issue to obtain many of the practical necessities of modern life as, for example, credit cards, cell phones, utilities and regular consumer goods.  Because most providers of such goods and services also use very similar, if not identical, contract clauses, there really isn’t much real “freedom of contracting” in these cases.  So, should the Due Process clause apply to contractual penalty clauses as well?  These clauses often reflect a compensatory to penalty damages ratio higher than 1:100, much higher than the limit set forth by the Supreme Court in the torts context. According to J. Reinhardt, it should: The constitutional principles limiting punishments in civil cases when that punishment vastly exceeds the harm done by the party being punished may well occur even when the penalties imposed are foreseeable, as with contracts. Said Reinhardt: “A grossly disproportionate punishment is a grossly disproportionate punishment, regardless of whether the breaching party has previously ‘acquiesced’ to such punishment.”

Time may soon come for the Supreme Court to address this issue, especially given the ease with which companies can and do find out about each other’s practices and match each other’s terms.  Many companies even actively encourage their customers to look for better prices elsewhere via “price guarantees” and promise various incentives or at least matched, lower prices if customers notify the companies.  Such competition is arguably good for consumers and allow them at least some bargaining powers.  But as shown, in other respects, consumers have very little real choice and no bargaining power.  In the credit card context, it may be said that the best course of action would be for consumers to make sure that they do not exceed their credit limits and make their payments on time.  However, in a tough economy with high unemployment, there are people for whom that is simply not feasible.  As the law currently stands in the Ninth Circuit, that leaves companies free to virtually punish their own customers, a slightly odd result given the fact that contracts law is not meant to be punitive in nature, but rather to be a resource allocation vehicle in cases where financial harm is actually suffered.

March 3, 2014 in Commentary, Contract Profs, Legislation, Recent Cases, True Contracts | Permalink | Comments (1) | TrackBack (0)

Blockchain Contracting


WireMy student, Sam Henderson (who blogs here), directed my attention to this report on the Legal Informatics Blog about blockchain contracting and conveyancing systems.  Blockchain technology is apparently one of the many things that makes Bitcoin transactions foolproof, genius-proof, and completely impervious to rampant speculation, financial catastrophe and the bankruptcy of major dealers in the virtual currency.  So, like Bitcoin itself, applying blockchain technology could only democratize and decentralize commercial law, or so maintains this blog post on Thought Infection.

What a strange idea.  

Contracts are private legislation.  They are already about as democratic and decentralized as they could possibly be.  Sure, they are governed by the relevant laws of the relevant jurisdictions, but blockchain technology would not change that.  In any case, the law of contracts already permits the parties to choose the law that will govern them (within reason), so that's pretty decentralized and democratic.  

What is not democratic and decentralized about commercial law is the fact that contracts tend to be drafted by the powerful and imposed upon people as take-it-or-leave it deals through form contracting.  Given the complexity of the technologies associated with Bitcoin, it seems unlikely that adding layers of technology to commercial law would render it more democratic and less centralized.  

Unfortunately, Thought Infection's post is misinformed about contracts.  He writes

Whereas today contracts are restricted to deals with enough value to justify a lawyers time (mortgages, business deals, land transfer etc…), in the future there is no limit to what could be codified into simple contracts. You could imagine forming a self-enforcing contract around something as simple as sharing a lawnmower with your neighbor, hiring a babysitter, or forming a gourmet coffee club at work. Where this could really revolutionize things is in developing nations, where the ability to exchange small-scale microloans with self-enforcing contractual agreements that come at little or no cost would be a quantum leap forward.

Here are the problems with this as I see it:

  • Contracts are not restricted; they are ubiquitous;
  • Contracts do not require lawyers; they are formed all the time through informal dealings that are nonetheless legally binding so long as the requisite elements of contract formation are present;
  • To some extent, Thought Infection's imagined contracts already are contracts, and to the extent that they are not contracts it is because people often choose to form relationships that are not governed by law (e.g., do you really want to think about the legal implications of hiring a baby sitter -- taxes, child-labor laws, workman's comp . . . yuck!); and 
  • Microloans are already in existence, and the transactions costs associated with contracts do not seem to be a major impediment.

Look, I'm not a Luddite (I blog too), but I also don't think that technology improves our lives with each touch.  Technology usually makes our lives more efficient, but it can also make our lives suckier in a more efficient way.  Technology does not only promote democracy and decentralization; it also promotes invasions of privacy by the panopticon state and panopticon corporations or other private actors, reification of human interactions, commidication and alienation.  It has not helped address income disparity on the national or the global scale, ushered in an era of egalitarian harmony overseen by benevolent governments or pastoral anarchy.  

As to contracts specifically, however, there are lots of ways to use technology that are available now and are generally useful.  Last week, we discussed Kingsley Martin's presentation at KCON 9. Kingsley has lots of ideas about how to deploy technology to improve sophisticated contracting processes.  But for  the more mundane agreements, there is a nifty little app that a couple of people mentioned at KCON 9 called Shake.  For those of you looking for a neat way to introduce simple contracts to your students, or for those of you who want to make the sorts of deals that  Thought Infection thinks we need blockchain to achieve, Shake is highly interactive, fun and practical.

March 3, 2014 in Commentary, E-commerce, Web/Tech | Permalink | Comments (2) | TrackBack (0)

Friday, February 28, 2014

Nutrition Labels and Wrap Contracts

The Food and Drug Administration proposed big changes to nutrition labels on food packages.  These changes would include putting calorie counts in large type.  The serving sizes would also reflect typical serving sizes (meaning they will be bigger).  The purpose of the redesign is to make certain information salient and to increase comprehension.  Will it do so?  There's evidence that lots of people already read nutrition labels (although apparently a lot of commenters at the NYT blog here don't). The redesign is intended to make it easier for those who already read labels to find the information they want (such as calorie count).  What's interesting is that the goal here wasn't to improve reading of the labels - it was to make finding the information and understanding it easier for those who were already interested.

What does the revised nutrition label  have to do with wrap contracts? Wrap contracts (browsewraps, clickwraps) are basically notices.  Like nutrition labels, you take them or leave them.  Will making information more salient increase reading?  It has to - in other words, certain information (such as calorie count) can't be missed.  But the goal isn't to increase reading.  It's to increase awareness of certain information.  By increasing awareness, the labels may encourage consumers who may not otherwise have cared, to pay attention to what's on the labels.  But more importantly, it makes it harder for companies to get away with selling foods with excessive calories to unsuspecting consumers.  For those suspecting consumers (those who know and don't care about calorie count), it does nothing and it's not intended to affect them.  Furthermore, it may provide some marketplace incentives for companies to adjust their ingredients.  As the NYT article notes, when the category for trans fats was added in 2006, it both raised consumer awareness and resulted in companies reducing or eliminating the ingredient from their food. 

Wrap contracts, like nutrition labels, contain information that people care about but often can't find.  It's clear, for example, that most people are starting to care about their online privacy.  Privacy is the "calories" information.  But it' s not easy to find out how companies are using personal information.  Online privacy policies are densely written and typically hard to find, requiring several "clicks" to access.  Why not have some "labeling" requirements for wrap contracts?  It's high time that they had some sort of a redesign since consumers aren't reading them.  I know many think disclosure requirements are a lost cause, but I'm not one of them.  Naysayers always protest that consumers don't read terms, but that's because they're unreadable.  Would requiring that terms be both salient and concise increase reading of terms?  I think increasing reading as a goal is desirable but shouldn't be framed as the objective.  The objective should be to increase the salience (prominence) of certain information.  Increasing the prominence makes the information more relevant.  This may ultimately increase reading, but that's not the goal (at least in my view).  The goal is to heighten awareness of terms - that's different from encouraging consumers to read (which, given the state of contracts, is not efficient...)  But in order for disclosure to work it has to be accompanied by redesign.  The visual has to draw attention to the textul.   Like nutrition labels, a redesign of wrap contracts is long overdue.

Some may say the new labeling won't work.  The reason I think it will have a positive effect?  Some food companies are already protesting.  As my favorite nutritionist Marion Nestle (who likes the new labeling) said, the new labeling will be "wildly controversial."  Nobody likes to draw attention to their flaws.  Food companies are no exception.

 

 

February 28, 2014 in Commentary | Permalink | Comments (0) | TrackBack (0)

Monday, February 17, 2014

GLOBAL K: Empirically Speaking

Genuine, rigorous empirical analysis is always welcome in Contracts scholarship. It not only gives context to abstract principles, but also reminds us what is at stake. One of my favorite examples of empirical analysis in Contracts is Peter L. Fitzgerald’s 2008 article The International Contracting Practices Survey Project: An Empirical Study of the Value and Utility of the United Nations Convention on the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the United States. This is where many of us learned – or had our suspicions confirmed – that many practitioners and most judges were ignorant of the UN Convention on Contracts for the International Sale of Goods. In a broad 2006-2007 survey sampling practitioners, law professors, and state and federal judges in California, Florida, Hawaii, Montana, and New York, Professor Fitzgerald noted that U.S. practitioners reported relatively low levels of familiarity with the CISG (30 percent of reporting practitioners).  Even more alarming was his finding that 82 percent of reporting judges indicated that they were “not at all familiar” with the CISG.

 

A fresh and thought-provoking example of empirical analysis has recently appeared, and every Contracts scholar and practitioner should be aware of it. Dysfunctional Contracts and the Laws and Practices That Enable Them: An Empirical Analysis features two empirical studies and an experiment that seem to have significant policy implications for contract law and consumer protection policy as applied to real estate transactions. These were designed and conducted by Professor Debra Pogrund Stark of John Marshall Law School, Dr. Jessica M. Choplin, a psychology professor at DePaul University, and Eileen Linnabery, a graduate student in industrial/organizational psychology at DePaul University.

 

The authors reviewed form purchase agreements used by condominium developers in Chicago, Illinois from 2003-2008, and found that 79 percent of the agreements contained what the authors considered “highly unfair, one-sided remedies clauses.” The form agreements provided that in the event of seller's breach, buyer's sole remedy was the return of the earnest money deposit., which did not cover any of the losses that would normally be the basis for relief in a breach of contract action, whether expectation damages, consequential damages, or reliance damages, or specific performance where that might have otherwise been warranted. In contrast, the contracts provided that in the event of buyer's breach, seller could retain buyer's deposit, typically between 5 and 10 percent of the purchase price. A survey of over one hundred attorneys in Illinois conducted by Professor Stark appears to corroborate the view that there were “serious problems with remedies clauses” in agreements like those in the Condo Contracts Study. The authors argue that these “dysfunctional contracts,” where the relatively more sophisticated party could deliberately default and terminate the contract with virtually no harm to itself, rendered the contracts “no true binding agreement from that party,” in effect unconscionable or illusory. It appears, however, that only a few Florida cases like Blue Lakes Apts., Ltd. v. George Gowing, Inc. and Port Largo Club, Inc. v. Warren have ruled such contracts to be illusory, whereas most state courts looking at the issue have so far rejected that argument.

 

One might wonder about the extent to which courts are influenced by the assumption that these were bargained-for terms, and to that extent should escape such attacks. The authors have something to say about this. They ran a “Remedies Experiment” to gauge non-lawyer awareness of the imbalance of such remedy clauses. They found what they considered “a widespread failure of the participants to understand the impact of this type of clause on their rights after a breach.” This empirical insight might put into question the assumption in many unconscionability cases that buyer understands the clear wording of such clauses and in fact bargained for the result. If this is simply not true – and if the contrary assumption is being relied upon strategically by professional sellers – then perhaps the traditional unconscionability test needs to be rebooted in the real estate development context.

 

The authors conclude that buyers need greater protection, and they advocate four legal reforms in this regard. First, they recommend revision of unauthorized practice of law rules to require attorney review and approval of home purchase contracts, specifically by attorneys specially trained and licensed for this type of representation. Second, they recommend legislation to prohibit remedies clauses that limit buyer remedies to return of deposit and that create safe harbor rules based on mutuality of remedy and true bargaining in the home purchase contract. Third, they argue for the replacement of the substantive unconscionability test for limitation-of-remedies clauses with a “reasonable limitation of remedy” test in the home purchase context. Finally, they recommend legislation mandating award of attorneys’ fees to the prevailing party in litigation involving enforcement of rights in the context of home purchase agreements.

 

Regardless of one’s assessment of the desirability of these suggested reforms – or of their practical and political possibility – the analysis in Dysfunctional Contracts is rigorous, provocative, and compelling. This is a “must read” piece of Contracts scholarship.

 

 

Michael P. Malloy

February 17, 2014 in Commentary, Recent Scholarship | Permalink | TrackBack (0)