Monday, March 31, 2014
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).
Friday, March 21, 2014
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.
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.
Monday, March 17, 2014
An employee sues his employer for age discrimination and retaliation. The parties reach an $80,000 settlement agreement pursuant to which the existence and terms of the settlement are to be kept “strictly confidential.” The employee is only allowed to tell his wife, attorneys and other professional advisers about the settlement. A breach of the agreement will result in the “disgorgement of the Plaintiff’s portion of the settlement payments,” although the attorney would, in case of a breach, be allowed to keep the separately agreed-upon fee for his services. The employee tells his teenage daughter about the settlement and being “happy about it.” Four days later, she boasts to her 1,200 Facebook friends:
“Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”
The employer does not tender the otherwise agreed-upon settlement amount, citing to a breach of the confidentiality clause of the contract. The employee brings suits, wins at trial, but loses on appeal. The employee’s argument? He felt that it was necessary to tell his daughter “something” about the agreement because, some sources state, she had allegedly been the subject of at least some of the retaliation against her father.
The appellate court emphasized the fact that the agreement had called for the employee not to disclose “any information” about the settlement to anyone either directly or indirectly. Settlement agreements are interpreted like any other contract. Thus, the unambiguous contractual language “is to be given a realistic interpretation based on the plain, everyday meaning conveyed by the words,” according to the court. The employee did precisely what the confidentiality agreement was designed to prevent, namely advertise to the employer’s community that the case against them had been successful.
What could the employee have done here if he truly felt a need to tell his daughter about the deal? Pragmatically, he could have made it abundantly clear to his daughter that she was not to tell anyone, obviously including her thousands of Facebook “friends,” about it. Hopefully she would have abided by that rule... The court pointed out that the employee could also have told his attorney and/or the employer about the need to inform his daughter in an attempt to reach an agreement on this point as well. Having failed to do so, “strictly confidential” means just that. As we know, consequences of breaches of contract can be ever so regrettable, but that does not change any legal outcomes.
The case is Gulliver Sch., Inc. v. Snay, 2014 Fla. App. LEXIS 2595.
Monday, March 3, 2014
As reported here on Out-Law.com, the EU Parliament approved the proposed Common European Sales Law designed to apply to transnational sales conducted by telephone or through the Internet. Despite opposition from the German and UK governments, the new law found overwhelming support in the EU Parliament, passing by a vote of 416-159, with 65 abstentions.
The law is now placed before the EU's Council of Ministers, which can adopt the proposal into law. The EU's Justice Commissioner, Viviane Reding, spoke out in favor of the law, saying that he would cut down on transactions costs by creating a uniform sales law throughout Europe. The savings would be especially helpful to medium and small business, which account for 99% of all businesses in the EU.
We summarized the characteristics of the proposed sales law (in its then-current version) here.
You can find the version approved by the EU Parliament here (click on "texts part 3" and go to page 83 of the document that should open up).
Hat tip to Peter Fitzgerald.
Tuesday, February 11, 2014
If you applied for credit, but got turned down with the reason “Your worst bankcard or revolving account status is delinquent or derogatory,” would you understand what that means?
Probably not, at least not for sure. Under the Dodd-Frank Act, lenders are required to send applicants written explanations of why they are denied credit outright or given less favorable terms than those for which they applied. This requirement is aimed at helping consumers understand what they need to do to improve their credit scores. But many of the explanations provided to consumers are drafted by the credit score developers themselves and use confusing terminology or are too short to be useful.
What’s worse: lenders are aware of this problem, but apparently choose to do nothing about it. According to one survey, 75% of lenders “worry” that consumers don’t understand the disclosure notices. Only 10% of lenders said that their customers understand reason codes “well.” This problem is, of course, not isolated to the credit industry, but also prevails in the health care industry and beyond.
Contracts law is not helpful for consumers in this respect either: there is a clear duty to read and understand contracts, even if they are written in a language (typically English) that one does not understand. Perhaps that’s why only 10% of lenders bother to translate documents into Spanish with the effect that many Spanish-speaking monolingual applicants are unable to read the explanations at all.
Some companies offer websites offering “translations” into easier-to-understand and longer explanations of the codes behind credit refusals and what one can do to improve credit. There’s a website for almost anything these days, but for that solution to be sufficiently helpful in the lending context, it must be presumed that these websites are relatively easy to find, free or inexpensive, and easy to use; all quite far from always the case.
As law professors, most of us probably require our students to write in clear, plain English. We don’t take it lightly if they write incomprehensible sentences. The desirability of writing well should be obvious in corporate as well as academic contexts.
Friday, January 31, 2014
I like to remind my 1Ls Contracts students that a contract is private law between two parties, but it doesn't override public law. This story is last week's news, but I thought I'd blog about it anyway because it provides a pretty good example of this point. In 2009, William Marotta responded to a Craigslist ad posted by two women for a sperm donor. All three parties agreed - and signed an agreement to the effect - that Marotta waived his parental rights and responsibilities. The Kansas Department for Children and Families sought to have Marotta declared the father and responsible for payments of $6,000 that the state had already paid and for future child support.
Unfortunately for Marotta, a Kansas state statute requires a physician to perform the artificial insemination procedure. The Shawnee County District Court Judge Mary Mattivi ruled that because the parties "failed to conform to the statutory requirements of the Kansas Parentage Act in not enlisting a licensed physician...the parties' self-designation of (Marotta) as a sperm donor is insufficient to relieve (Marotta) of parental rights and responsibilities."
Note that the couple was not seeking to invalidate the contract - it was the Kansas state agency.
It's unclear whether the parties will appeal.
Monday, January 27, 2014
Severe Economic Disruptions from Climate Change
For many, climate change remains a far off notion that will affect their grandchildren and other “future generations.” Think again. Expect your food prices to increase now, if they have not already. Amidst the worst drought in California history, the United Nations is releasing a report that, according to a copy obtained by the New York Times, finds that the risk of severe economic disruptions is increasing because nations have so dragged their feet in combating climate change that the problem may be virtually impossible to solve with current technologies.
The report also says that nations around the world are still spending far more money to subsidize fossil fuels than to accelerate the urgently needed shift to cleaner energy. The United States is one of these. Even if the internationally agreed-upon goal of limiting temperature increases to 2° C, vast ecological and economic damage will still occur. One of the sectors most at risk: the food industry. In California, a leading agricultural state, the prices of certain food items are already rising caused by the current drought. In times of shrinking relative incomes for middle- and lower class households, this means a higher percentage of incomes going to basic necessities such as food, water and possible medical expenses caused by volatile weather and extreme heat waves. In turn, this may mean less disposable income that could otherwise spur the economy.
Disregarding climate change is technologically risky too: to meet the target of keeping concentrations of CO2 below the most recently agreed-upon threshold of 500 ppm, future generations would have to literally pull CO2 out of the air with machinery that does not yet exist and may never become technically or economically feasible or with other yet unknown methods.
Of course, it doesn’t help that a secretive network of conservative billionaires is pouring billions of dollars into a vast political effort attempting to deny climate change and that – perhaps as a consequence – the coverage of climate change by American media is down significantly from 2009, when media was happy to report a climate change “scandal” that eventually proved to be unfounded.
The good news is that for the first time ever, the United States now has an official Climate Change Action Plan. This will force some industries to adopt modern technologies to help combat the problem nationally. Internationally, a new climate change treaty is slated for 2015 to take effect from 2020. Let us hope for broad participation and that 2020 is not too late to avoid the catastrophic and unforeseen economic and environmental effects that experts are predicting.
Assistant Professor of Law
Western State College of Law
Wednesday, January 22, 2014
Warren Buffett and Quicken Loans have teamed up to help make teaching about unilateral contracts and interpretation so much more interesting. The offer? One billion dollars to anyone who fills out a perfect 2014 NCAA tournament bracket.
Say what? Is this serious? Or is it like that Pepsi commercial - you know the one.
Although at first, this might sound like a joke, once you learn the odds are, by one estimate, one in 9.2 quintillion, you --a reasonable person -- would realize this offer was serious.
All you have to do is fill out a perfect bracket. (Now might be the time for me to mention that I once won my law firm's pool one year. Strange but true).
But wait - there's more. The Business Insider reports that Quicken, which is actually running the contest, will award $100,000 to 20 of the most accurate but not perfect brackets "submitted by qualified entrants in the contest to use toward buying, refinancing or remodeling a home." The company will also donate $1million to Detroit and Cleveland non-profit organizations.
Get ready for March Madness....
Wednesday, January 15, 2014
Bridge: It hasn't been a good week for New Jersey governor Chris Christie who is embroiled in a scandal ("bridgegate") after one of his aides arranged to close lanes to the George Washington bridge, causing traffic in Fort Lee, a town where a democratic mayor did not support Christie's re-election.
Tunnel: Over in Washington, Seattle may see traffic delays of its own. The State Department of Transportation has declared that the Highway 99 tunnel team in “material breach of contract” because of different barriers than lane closings -- barriers to participation by small, minority-owned contracting firms. The Seattle Times reports:
The DOT threatens sanctions unless Seattle Tunnel Partners (STP) makes rapid improvement and the team leaders participate in meetings with DOT. Disadvantaged Business Enterprises (DBEs) led by minorities and women are supposed to receive 8 percent of the work, but as of last fall, by some measurements the rate was less than 2 percent, according to a scathing federal civil-rights review. The tunnel contractors are led by the U.S. arm of Spanish-based Dragados, and by California-based Tutor-Perini.
Lynn Peterson, the DOT secretary, released a letter Monday that recognizes efforts by STP to improve, but demands more.
What sanctions will mean is not yet clear. The DOT could exert leverage by reducing or delaying progress payments that STP periodically receives for tunnel work. Peterson mentions that as one option in her letter, which follows a state review by attorney Richard Mitchell.
STP has the leverage of already having a tunnel machine in the ground, and already collecting more than $700 million to date. The most extreme outcome, to switch prime contractors, could easily run up tens or hundreds of millions of dollars, and cause delays. Peterson writes that she would prefer collaboration to litigation. An excerpt:
Among other ideas, the state now recommends breaking contracts into smaller pieces so minority and women-led firms have a better chance to compete.
The federal investigation was prompted by a complaint by Elton Mason, owner of Washington State Trucking in Kirkland, who tried unsuccessfully to bid on a contract to transport excavated dirt. STP awarded the prime trucking contract to a larger company, Grady Excavating of Mukilteo, which DOT later disqualified from its DBE status. The KING 5 Investigators have aired several stories aboutfailures in the minority contracting programs for Highway 99 and other projects. Although Initiative 200 forbids quotas in minority hiring, the tunnel job is one-third federally funded, and therefore subject to hiring goals under federal affirmative-action rules.
Mason vented his exasperation Monday at what looks to him like another round of process. Mason said he’s had two meetings recently with state DOT and STP, but not a job offer. All it should take is for Peterson to make a phone call and demand that Mason and other minority contractors be hired immediately, he said.
Christie could only hope for a Seattle tunnel scandal to eclipse his coverage in the news cycle. Not likely.
Monday, January 13, 2014
Over the past year, there has been an explosion of interest – and a frenzied up-swing in trading – in bitcoins. Writing in The New York Times in late December 2013, in an article called Into the Bitcoin Mines, Nathaniel Popper noted that “The scarcity — along with a speculative mania that has grown up around digital money — has made each new Bitcoin worth as much as $1,100 in recent weeks.” From a socio-economic perspective, this offers an unusual opportunity to observe the emergence and development of an entirely new, and so far unregulated, kind of market. Scholars like Wallace C. Turbeville interested in the law and policy of financial services regulation are now presented with an important opportunity to test assumptions we often blithely make about the ways in which regulation interacts with business and commercial activity.
Policymakers may confront a moment of truth – to regulate or not to regulate, and when, and how. Earlier this month, National Taxpayer Advocate Nina Olson argued that the IRS should give taxpayers clear rules on how it will handle transactions involving bitcoin and other digital currencies accepted as payment by vendors. The Senate Homeland Security and Governmental Affairs Committee held hearings on bitcoins and other “cryptocurrencies” several weeks ago, and may have a report on the situation early next year after further consideration, but Committee Chair Sen. Thomas Carper (D-Del.) seems to be taking a “wait and see” attitude. Meanwhile, the People’s Republic of China has already banned banks from using bitcoins as a currency, while U.S. regulators have not addressed the use of virtual currencies, even as an increasing number of vendors – including Overstock.com – have announced that they will accept them in payment for transactions.
One basic problem is the difficulty in determining what is involved in bitcoin creation and trading. Unfortunately, we are as yet at the mercy of metaphors. For example, within the first six paragraphs of his NYT piece, Popper refers to bitcoins as “virtual currency,” “invisible money,” “a speculative investment,” “online currency,” and “a largely speculative commodity.” In point of fact, bitcoins are book-entry tokens awarded for successfully solving highly complex algorithms generated by an open-source program, The program is disseminated by a mysterious, anonymous sponsor or group known only as Satoshi Nakamoto – the digital world’s version of Keyser Söze.
Determination of the proper legal characterization of bitcoins is essential if we are to choose appropriate transactional and regulatory approaches. For example, if bitcoins really are a “virtual currency” – a meaningless phrase, a glib metaphor – then fiscal supervision by the Federal Reserve might be the most appropriate approach to regulating bitcoin activity. Further, if they are in any significant sense “currency,” then treatment under the U.S. securities regulation framework would be problematic, since “currency” is excluded from the statutory definition of “security” in section 3(a)(10) of the Securities Exchange Act. Similarly, if bitcoins are viewed as some sort of currency, they would then likely be an “excluded commodity” under section 1a(19)(i) of the Commodity Exchange Act. On the other hand, if bitcoins are viewed as derivatives of currency or futures contracts in currency, then they may be subject to securities regulation, or possibly commodities regulation, depending upon the basic characteristics and rights of the financial product itself. The exact delimitation between treatment as a security and treatment as a commodity is currently the subject of study and proposed rulemakings by the SEC and the CFTC.
Recent news reports have noted that bitcoins are beginning to be accepted by more and more vendors as a form of payment. If in fact it becomes a commonplace that bitcoins operate as a payment mechanism, then we must deal with the possibility that they should be subject to transactional rules of the UCC and the procedures of payment clearance centers. It is at this point that the contractual aspects of bitcoins become critical features of our analysis.
Conceivably, we might go further and argue that bitcoins are functionally a type of note – relatively short-term promises to pay the holder – in which case, they would be subject to UCC article 3, exempt or excluded from securities registration requirements, but possibly still subject to securities antifraud rules. This is an attractive alternative, since it would give us some definite transactional rules to work with, plus antifraud protection against market manipulation – if we could figure out what “manipulation” should mean in the strange new world of cryptocurrencies.
The New York Times reported last week on what it called The Consumer Financial Protection Bureau's (CFPB) next "crusades." That would not be my preferred term, but yes, the regulatory agenda is ambitious.
As the story recounts, The CFPB has already fined major companies, including American Express, GE Captial Retail Bank and Ocwen Financial for misleading business practices. Last Friday, it issued new regulations for the mortgage industry.
The CFPB's agenda in the coming year includes the following areas:
- Arbitration (see our earlier blog post on the CFPB's preliminary report);
- Bank overdraft fees;
- Student loans;
- Debt collection;
- Credit report disputes; and
- Prepaid cards
It is an ambitious agenda. Let's see if it will have much of an impact on consumer financial protection.
Monday, December 16, 2013
Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructs the Consumer Financial Protection Bureau (the “Bureau”) to study the use of pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic. This document, dated December 12, 2013, presents preliminary results reached in the Bureau’s study to date.
Below are excerpts, with emphasis added, from the Executive Summary of the Bureau's preliminary findings:
- In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to such clauses. (In 2009 and 2010 several issuers entered into private settlements in which they agreed to remove the arbitration clauses from their credit card consumer contracts for a defined period. If those issuers still included such clauses, some 94% of credit card loans outstanding would now be subject to arbitration.)
- In the checking account market, larger banks tend to include arbitration clauses in their consumer checking contracts, while mid-sized and smaller banks and credit unions do not. We estimate that in the checking account market, which is less concentrated than the credit card market, around 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- In our [General Purpose Reloadable] GPR prepaid card sample, for which data are more limited than for our credit and checking account samples, arbitration clauses are included across the market. Some 81% of the cards studied, and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts.
- Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis. Around 90% of the contracts with arbitration clauses— covering close to 100% of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration—include such no-class arbitration provisions. . . .
- The AAA is the predominant administrator for consumer arbitration about credit cards, checking accounts, and GPR prepaid cards.
- From 2010 through 2012, there was an annual average of 415 individual AAA cases filed for four product markets combined: credit card, checking account, payday loans, and prepaid cards.23 The annual average was 344 credit card arbitration filings, 24 checking account arbitration filings, 46 payday loan arbitration filings, and one prepaid arbitration filing. These numbers do not indicate the number of cases in which the filing was “perfected” and the matter proceeded to arbitration. . . .
- Not all these arbitration filings were made by consumers. For the three product markets combined, the standard AAA “claim form” records consumers filing an average of under 300 cases each year. The remaining filings are recorded as mutually submitted or made by companies.
- From 2010 through 2012, around half the credit card AAA arbitration filings were debt collection disputes—proceedings initiated by companies to collect debt, initiated by consumers to challenge the company’s claims in court for debt collection, or mutual submissions to the same effect. More than a quarter of these debt collection arbitrations also included non-debt consumer claims. . . .
- In contrast, very few of the checking account and payday loan AAA arbitration filings from 2010 through 2012 were debt collection arbitrations.
- From 2010 through 2012, a slight majority (53%) of consumers were represented by counsel in the AAA arbitrations that we reviewed for these three product markets. For non-debt collection disputes, 61% of consumers had a lawyer at some point in the arbitration proceeding. For debt collection arbitrations, 42% of consumers had legal representation at some point in the proceeding. Companies were almost always represented by outside or in-house counsel in both debt collection and non-collection arbitrations.
- From 2010 through 2012, almost no AAA arbitration filings for these three product markets had under $1,000 at issue. . . . There were an annual average of seven arbitrations per year filed with the AAA that concerned disputed debt amounts that were at or below $1,000.
- From 2010 through 2012, for arbitration filings before the AAA involving these three products, the average alleged debt amount in dispute was $13,418. The median alleged debt amount in dispute was $8,641. Looking only at filings that did not identify a disputed debt amount, and excluding one high-dollar outlier, the average amount at issue was $38,726, and the median $11,805.
- Most arbitration clauses that we reviewed contain small claims court carve-outs. In 2012, consumers in jurisdictions with a combined total population of around 85 million filed fewer than 870 small claims court credit card claims—and most likely far fewer than that—against issuers representing around 80% of credit card loans outstanding.
- Credit card issuers are significantly more likely to sue consumers in small claims court than the other way around. In the two top-30 counties by population in which small claims court complaints can be directly reviewed by electronic means, there were more than 2,200 suits by issuers against consumers in small claims court and seven suits by consumers against those issuers. . . .
Sunday, December 15, 2013
London, UK: Current events smiled on GLOBAL K last week and offered an example of how contemporary economic sanctions programs interact with transnational contract activity. (See last week’s Global K.) While I was lecturing at the Centre for Commercial Law Studies in London, the news broke about possible sanctions violations by a British bank in its payment transfer practices.
On December 11, 2013, the British press was full of the news that Royal Bank of Scotland plc (RBS) had agreed to pay £62 million ($100 million) to settle charges by U.S. state and federal banking authorities that it had violated U.S. sanctions against Iran, Burma, Libya and Sudan, and possibly Cuba according to some news accounts. The three agencies involved – the Office of Foreign Assets Control (OFAC) in the Treasury, the Federal Reserve Board, and the New York State Department of Financial Services – coordinated their investigation with the UK Financial Conduct Authority. According to OFAC, from 2005 to 2009 (the Daily Mail asserted it was 2002-2011), RBS payment practices impeded U.S. economic sanctions. References to critical information about certain payment transfers that would have triggered a blocking of funds and payments – such as the fact that an Iranian party might be interested in one end or the other of the transfer – were excluded from documentation covering payments sent to or through U.S. financial institutions. By some accounts, these payment transfer practices involved more than 3,500 US dollar transactions worth £320 million ($523 million) routed through US banks. Two aspects of this situation are worthy of specific comment.
First, the nature of the claimed violations varies somewhat as you look from one sanctions program to the next, even if the payment activities were essentially the same. For example, under the Iran sanctions, foreign financial institutions such as RBS are quite specifically targeted by prohibitions in the sanctions program. A foreign financial institution would be prohibited from knowingly “[f]acilitat[ing] the activities of ... a person subject to financial sanctions” under U.N. sanctions against Iran,” engaging in “money laundering to carry out” such an activity, or facilitating “efforts by the Central Bank of Iran or any other Iranian financial institution to carry out” such an activity. 31 C.F.R. 561.201 (2013). Under the Burmese Sanctions Regulations, the focus would be on transactions and transfers involving “property and interests in property” of the direct targets of the sanctions, which would be prohibited where the property or interest was “in the United States, ... hereafter [came] within the United States, or … [came] within the possession or control of U.S. persons.” 31 C.F.R. 537.201 (2013). The Sudanese Sanctions Regulations contain a similar prohibition on transactions and transfers (31 C.F.R. 538.201 (2013)), but its facilitation prohibition applies on its face only to “U.S. persons.” 31 C.F.R. 538.206 (2013). Likewise, the Cuban Assets Control Regulations would prohibit transactions and transfers involving “property and interests in property” of any Cuban national. (31 C.F.R. 515.201 (2013).) However, beyond this basic sanction, if RBS were considered to be acting on behalf of a blocked Cuban national in these transfers, then it might be deemed to be a “specially designated national” of Cuba and as such it would itself be a direct target of the Cuban sanctions, See 31 C.F.R. 515.302,515.306 (2013) (defining “national,” “specially designated national”). Hence, given the incidence of significant variation as one moves from one sanctions program to the next, it becomes more difficult in managing risk in transnational contract activity to generalize as to the risks and appropriate risk management strategies.
Second, the likely implications of transnational contract activity on domestic contract activity may also vary significantly as our attention shifts from program to program. Take, for example, the situation of a U.S. citizen who is a holder of a credit card issued by RBS NA, a national bank subsidiary of RBS. In many of the sanctions situations identified above, the impact of the RBS violations on her contractual relationship would be adventitious. The substantial fine might marginally raise the cost of doing business with the card issuer, assuming that the bank chose to pass some portion of this indirect cost of doing business throughout the enterprise. Even at $100 million, it is unlikely that the credit card holder would even feel the effects of the event. However, if aggressive action were taken against RBS under the Cuban sanctions – a contingency that is essentially eliminated by the bank’s settlement, one would imagine – the effect on the credit card holder would be quite dramatic. As an ongoing contract party of a specially designated national, she herself would be potentially committing a direct violation of the Cuban Assets Control Regulations, because U.S. persons are prohibited from entering into contracts with Cuban nationals – even with specially designated nationals – in the absence of a license. So unless you are a great humanitarian like Beyoncé and hence above the law, avoid entering into contracts and other transactions with specially designated nationals of Cuba.
Tuesday, December 10, 2013
In late November 2013, negotiators reached agreement on a temporary accord under which Iran would halt much of its nuclear program and roll back some existing elements of it, and the United States agreed to $6 billion to $7 billion in sanctions relief, including releasing approximately $4.2 billion in oil revenue “frozen” in banks outside the United States. (The United States would continue to enforce other substantial sanctions that remain in place.) Recent coverage and commentary about the six-month U.S.-Iran deal calls to mind the fact that economic sanctions have become a pervasive feature of the transnational contract environment. (See this Table)
Source: M. P. Malloy (ed.), Economic Sanctions (Cheltenham, UK: Edward Elgar Publishing, forthcoming).
Two things are noteworthy about this situation. First, there is such a considerable array of sanctions in place – unilateral and multilateral, trade and financial, direct and indirect – that a state negotiating with Iran has an extensive menu from which to choose when it starts horse-trading. Second, it is probably not safe, as many casual observers still do, to view economic sanctions as unusual or “exigent,” rather than a commonplace feature of contracting in the transnational market.
It could be a year or more before we know the outcome of the ongoing maneuvering between Iran and the “P5-plus-1 countries” – the permanent members of the U.N. Security Council plus Germany – but contracts practitioners and commentators should learn one thing right now. The immediate lesson to be drawn is that the potential impact of sanctions is an increasingly pervasive risk factor in transnational contracting. The risk factor arises from three distinct circumstances in contemporary transnational practice.
First, the resurgence of U.N. mandatory sanctions practice under Chapter VII of the U.N. Charter. Prior to 1990, U.N. sanctions practice was limited and ineffective – the classic example being the curiously stunted trade sanctions against the break-away Southern Rhodesian regime in the1960s. In response to the Iraq invasion of Kuwait in 1990, however, and largely under the leadership of the George H.W. Bush Administration, U.N. mandatory sanctions broadly and effectively isolated the occupied Kuwait and stymied the Iraqi Government, as a prelude to the first Gulf War. The success of this program led to frequent and pervasive application of mandatory sanctions as the primary U.N. Security Council response to many crises over the decades that followed. This development means that there is now a formidable array of sanctions programs in which implementation is mandatory for all U.N. member states, actively monitored by the Security Council through sanctions committees. As a result, moving contract activities off-shore – a typical maneuver in many pre-1990 sanctions situations (including the Southern Rhodesian sanctions) – is no longer an easy and viable option. In addition, many states – and principally the United States – have continued to promulgate unilateral sanctions programs, often paralleling multilateral sanctions, and these have benefited from the newly pervasive incidence of sanctions as a risk factor in transnational contract practices.
Second, the emergence of “smart sanctions” strategies in the design of sanctions programs. Contemporary sanctions are often more carefully targeted, and include specific and distinct sanctions against intermediaries – e.g., business brokers, freight forwarders, purchasing agents, banks and other financial intermediares – which means that the direct and indirect costs of sanctions avoidance and evasion have grown significantly for indirect and secondary contract actors who would not have otherwise viewed themselves as “targets” of sanctions programs.
Third, the existence of licensing authority within sanctions programs. Ironically, the existence of authority within participating member states to license activities and transactions otherwise affected by a sanctions program, subject to oversight by U.N. sanctions committees, has increased the ongoing compliance and enforcement impact of sanctions programs. This feature has resulted in greater accountability for transnational contract parties.
The casual observer might respond that generally applicable contract doctrines of impracticability (or impossibility) and frustration would ameliorate the impact of these developments in sanctions practice. To the contrary, I believe that the interaction of these doctrines with current practice in transnational business may be more complicated than one might expect at first glance.
It is true that, under Restatement of the Law - Contracts (Second) § 261, a party to a contract affected by sanctions might claim that performance has been rendered “impracticable,” thus discharging its duty to perform. However, § 261 is grounded on the occurrence of an event “after a contract is made” that occurs “without his fault.” The pervasiveness and persistence of an array of sanctions programs challenges both of these premises. There is no end of sanctions already in place, and in the typical sanctions program the party bears the burden of demonstrating that it did not know, nor had no reason to suspect, that the subject transaction was prohibited or restricted. As comment d to § 261 observes, “If the event that prevents the obligor's performance is caused by the obligee, it will ordinarily amount to a breach by the latter. ... If the event is due to the fault of the obligor himself, this [§ 261] does not apply. As used here ‘fault’ may include not only ‘willful’ wrongs, but such other types of conduct as that amounting to breach of contract or to negligence.” Of course, this dilemma exists quite aside from any administrative or criminal consequences that might be visited on the parties by a sanctions-enforcing state. Goods or services that are the subject of the contract may be susceptible to being “blocked” or “frozen” by the enforcing state.
The same problem would exist for a contracting party who attempted to invoke the doctrine of discharge by a supervening frustration under Restatement (2d) § 265. This may be a particular concern for indirect or intermediary parties, a point that is neatly demonstrated by Illustration 5 under § 265:
A contracts to sell and B to buy a machine, to be delivered to B in the United States. B, as A knows, intends to export the machine to a particular country for resale. Before delivery to B, a government regulation prohibits export of the machine to that country. B refuses to take or pay for the machine. If B can reasonably make other disposition of the machine, even though at some loss, his principal purpose of putting the machine to commercial use is not substantially frustrated. B's duty to take and pay for the machine is not discharged, and B is liable to A for breach of contract.
Furthermore, given the typical licensing regime that is included in sanctions programs, “impracticability” may be even less apparent in a particular contracting situation. As comment d to § 261 goes on to note, “ ‘impracticability’ means more than ‘impracticality.’ A mere change in the degree of difficulty or expense . . . unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.”
One might respond, however, that if performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, then the regulation or order is “an event the non-occurrence of which was a basic assumption on which the contract was made,” according to Restatement (2d) § 264. Comment a to § 264 undercuts this argument, however, because “[w]ith the trend toward greater governmental regulation, however, parties are increasingly aware of such risks, and a party may undertake a duty that is not discharged by such supervening governmental actions, as where governmental approval is required for his performance and he assumes the risk that approval will be denied. ... Such an agreement is usually interpreted as one to pay damages if performance is prevented rather than one to render a performance in violation of law.” This problem is underscored by Restatement (2d) § 266, dealing with existing impracticability or frustration. In a situation in which, at the time a contract is made, the party's performance is impracticable without his fault “no duty to render that performance arises,” but only if this fact is one which it had “no reason to know,” a difficult position to maintain in an environment of persistent and pervasive sanctions programs.
All of this suggests a need for caution and proactive monitoring of contract activity in the transnational market. It is extremely naïve – if not outright disingenuous – to assume that one can casually rely on traditional doctrines of impracticability (or impossibility) and frustration in transnational commerce. Over-reading these doctrines can result in bitter lessons, and embarrassment, in the modern environment of transnational contract practice.
Monday, December 2, 2013
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) continues to collect state parties. The CISG will enter into force for Brazil on 1 April 2014, and for Bahrain on 1 October 2014. With that, Brazil and Bahrain will become the 79th and 80th States Party to the CISG, respectively.
The delay in entry into force is built into CISG art. 99, and does not suggest any particular caution on the part of either state. What may require some explanation, however, is why it took almost 25 years after Brazil approved the final text of the CISG and signed the Final Act of the Conference, before it finally acceded to the convention on 5 March 2013. According to local commentators, a large part of the delay is due to extraneous political considerations. Legislative inaction on this front was common under a previous authoritarian political system, as the regime was skeptical of – if not outright hostile to – multilateral initiatives to advance private international law. Efforts by Brazilian academics, the Bar Association of Brazil, and business interests progressively pressed for Brazil to engage in such initiatives, and the end result was that Brazil rejoined the Hague Conference on Private International Law in 2001 and began the internal process for accession to the CISG in 2011.
Brazil’s accession is a particularly significant development. Brazil’s economy is the largest among Latin American states, and the second largest in the Western Hemisphere. The existence of a common set of default rules governing trade in goods, irrespective of the significant differences in U.S. and Brazilian legal traditions, creates potential efficiencies for the future of economic relations between the two states. Furthermore, from the perspective of economic development policy, the existence of modern, uniform framework for contracts for the sale of goods involving one of the fastest-growing major economies in the world is a positive feature.
The increasing likelihood that regional contract activity in the Americas may implicate the CISG underscores the need for U.S. academics to ensure that our students at least understand that the convention exists as part of U.S. contract law. This generally applicable source of federal contract law constitutes the default rules that apply to an expanding range of regional contract situations. It has been a commonplace that parties can always make a contractual choice of law that would remove the CISG from the mix. However, what you don’t know can’t be planned against, and who is to say that local law – as opposed to the CISG default rules – is necessarily optimal for a given contracting situation?
Over at the Huffington Post, Sam Fiorella takes note of the egregious terms in Facebook Messenger's Mobile App Terms of Service. These terms include allowing the app to record audio, take pictures and video and make phone calls without your confirmation or intervention. It also allows the app to read your phone call log and your personal profile information. Of course, an app that can do all that is also vulnerable to malicious viruses which can share that information without your knowledge. But, of course, this is allowed only with your "consent."
Monday, November 18, 2013
I'm enjoying the posts from Ryan Calo and Miriam Cherry about my book, Wrap Contracts: Foundations and Ramifications and plan to post a response later this week. A common question I get (after, Are these things really legal?) is What harm can these contracts cause anyway? Well, one woman claims that a company can use them to ruin your credit. The woman, Jen Palmer, ordered some trinkets from KlearGear.com but she claims that she never received them and canceled the payment. After she allegedly failed to reach someone at the company, she wrote a negative review of KlearGear.com on a consumer reporting website stating that they have "horrible" customer service. KlearGear allegedly emailed her, claiming that her negative review ran afoul of a non-disparagement clause in their online terms of sale. She says that they told her to remove the post or face a $3500 fine. Ms. Palmer was unable to get the post removed and alleges that KlearGear.com reported her to a credit bureau! She claims that she is now fighting the negative mark on her credit report which is preventing her from getting loans for a new car and house repairs.
I don't think the terms of sale are enforceable against Ms. Palmer but that's almost beside the point. Contracts are used in a variety of ways - one of those ways is to deter problems. Not many consumers are willing to fight to test the enforceabilty of a contract in court.
But I have a question: Why would a credit agency ding someone's record simply because they received a call from an online retailer about someone who wasn't even a customer breaching the terms of sale? I checked KlearGear's website and couldn't find the non-disparagement clause in their terms of sale- they might have removed it after the negative publicity or it might not be in another agreement that doesn't appear until a customer places an order. There's got to be more to this story...or else we've just entered a new era of abuse by wrap contracts.
Wednesday, November 13, 2013
Starbucks lost an arbitration fight with Kraft Foods and is being fined nearly $2.8 billion. Yes, you read that right - that's billion with a B. At the center of a dispute was a 1998 contract that required Kraft to distribute and market Starbucks brand coffee to U.S. retailers. The agreement was supposed to terminate in 2014 but Starbucks didn't want to wait that long. It complained that Kraft wasn't doing a good job promoting its coffee and offered Kraft $750 million to terminate the contract. Kraft rejected but Starbucks ended it in 2011 anyway (and entered into a deal with Green Mountain Coffee Roasters) which led Kraft to commence arbitration proceedings.
Another reminder to think carefully about those long durations in contracts - you can never predict how things will go and it's a good idea to really think about those termination provisions.
In a situation that underscores the importance of thinking twice about very long term contracts, the NBA wants to end a contract which requires it to pay two brothers a percentage of its broadcast revenues. Back in 1976, the Silna brothers owned an ABA franchise, the Spirits of St. Louis. When the ABA merged with the NBA, the Silnas agreed to this bargain - they would dissolve their team in exchange for 1/7 of the television revenues for the four ABA teams that were merged. The four teams were the Indiana Pacers, the San Antonio Spurs, the Brooklyn Nets and the Denver Nuggets.
Sure, back in 1976, the Silnas might have looked silly for giving up a huge buyout for something that seemed pretty worthless (the NBA wasn't even televised prime time) but now the deal is being called "the greatest sports deal of all time."
Not kidding about that "all time" either - the Silvas reportedly received $19 million under the contract last season and the contract term is "in perpetuity." Fat chance the NBA will be able to scream foul on the basis of lack of mutuality...
Friday, October 11, 2013
One of the dangers of constructive contractual consent (a foundational principle of wrap contract doctrine) is that it might be used to prove statutory consent and thereby strip unknowing consumers of rights provided by law. Scholars such as Wayne Barnes and Woody Hartzog have argued that constructive contractual consent can undermine privacy protections provided by federal law. While there aren’t too many federal laws protecting consumer privacy, the ones that do exist generally provide that a practice is permissible if consumers consent. Google raised that very argument recently in its defense to a lawsuit that claimed that Google’s practice of scanning users' emails violated federal and state wiretapping laws.
The Wiretap Act, as amended by the Electronic Communications Privacy Act, prohibits the interception of “wire, oral, or electronic communications,” but it is not unlawful “where one of the parties to the communication has given prior consent to such interception.” Plaintiffs argued that Google violated the Wiretap Act when it intentionally intercepted the content of emails to create profiles of Gmail users and to provide targeted advertising. One of Google’s contentions was that Plaintiffs consented to any interception by agreeing to its Terms of Service and Privacy Policies. The court states:
“Specifically, Google contends that by agreeing to its Terms of Service and Privacy Policies, all Gmail users have consented to Google reading their emails.”
Yes, that’s right-- Google is arguing that by agreeing to its Terms of Service and Privacy Policies, you – yes YOU Gmail user – have agreed to allow Google to read your email!
Even more alarming, Google claims that non-Gmail users who have not agreed to its Terms of Services or Privacy Policies have impliedly consented to Google’s interception when they send email to or receive email from Gmail users.
Thankfully, Judge Lucy Koh is nobody’s fool. Without stepping into the muck and goo of wrap contract doctrine, she notes that the “critical question with respect to implied consent is whether the parties whose communications were intercepted had adequate notice of the interception.” Then she does something astounding , admirable and all-too-rare - - she interprets adequate notice in a way that actually makes sense to real people:
“That the person communicating knows that the interception has the capacity to monitor the communication is insufficient to establish implied consent. Moreover, consent is not an all-or-nothing proposition.”
Even with respect to Gmail users, she notes that “those policies did not explicitly notify Plaintiffs that Google would intercept users’ emails for the purposes of creating user profiles or providing targeted advertising.”
Judge Koh’s nuanced opinion reveals an understanding of online consent that’s based on reality. She notes that that “to the extent” that the user has consented to the Terms of Service, it is “only for the purposes of interceptions to eliminate objectionable content,” not for targeted advertisements or the creation of user profiles. She analyzes the contract from the standpoint of a reasonable user, rather than blindly following the all-or-nothing-constructive consent model mindlessly adopted by ProCD-lemming courts.
The opinion states that “it cannot conclude that any party – Gmail users or non-Gmail users- has consented to Google’s reading of email for the purposes of creating user profiles or providing targeted advertising.” I think most reasonable people - Gmail users and non-Gmail users alike – would agree.