Tuesday, February 12, 2013
We had previously blogged about the demand letter that Donald Trump sent to Bill Maher. Maher dedicated a segment on his show to the dispute, taking aim at Trump's lawyer. Maher begins: “Donald Trump must learn two things: what a joke is and what a contract is.”
The segment is reminiscent of the Leonard v. Pepsico decision when Judge Wood takes on the task of explaining why the harrier jet commercial was "evidently done in jest." Here, Maher continues the humor in explaining why it was parody when challenged Trump to prove that he (Trump) was not born of an orangutan.
Here's the clip:
[Meredith R. Miller]
Monday, February 11, 2013
The LA Times reports that the state of California has terminated its contract with SAP Public Services, a contractor that was supposed to fix the state's outdated computer network system that handles paychecks and medical benefits for 240,000 state employees.
While both SAP and California are unhappy about the state of events, I have just covered breach, substantial performance, conditions and damages in my Contracts course and was delighted to find a real life scenario to illustrate the relevance of the material we just covered.
So what triggered CA's termination? SAP was hired three years ago but when its program was tested, it made errors at "more than 100 times" the rate of the old system.
Was failing this test a breach? If so, was it a minor or material breach? It seems it would depend on what was in the contract. As contracts profs know, the first place to look in a contract dispute is the contract itself. The are terms in the contract that will be relevant in evaluating whether there was a breach or the applicable measure of damages. For example, there may be performance targets (i.e. conditions) that SAP had to meet which weren't met. Those conditions would be relevant in determining each party's obligations (would the contract terminate upon failure to meet the condition, for example?) There's also likely to be a provision dealing with whether SAP gets paid per deliverable or target met or per person/hour or time spent on a project. If this was a scheduled deliverable, then the facts tend toward finding a breach (or, if the contract language indicates, it could be a condition that was just never met). If it was a test done in the course of moving the project toward completion, CA may have jumped the gun. A material breach would allow CA to then terminate its obligation. If not a material breach, CA should have sought adequate assurance of performance and could itself be in breach by terminating the contract.
Facts matter, as I repeat like a broken record to my students (I guess I should update my reference for the iPod generation) - so it matters what it means to say that SAP failed the test. The LA Times reports that:
"During a trial run involving 1,300 employees....some paychecks went to the wrong person for the wrong amoung. The system canceled some medical coverage and sent child-support payments to the wrong beneficiaries."
Furthermore, because the system sent money to retirement accounts "incorrectly,"' the state had to pay $50,000 in penalties.
Given the late stage of the project, if not a material breach itself, the failed trial seems to at least give rise to a reasonable belief that SAP would breach. What did CA do then? Did it immediately terminate or seek explanations/reassurance?
Another issue is what damages measure is applicable? CA paid SAP $50million dollars but it had incurred much more trying to get the system up and running. It wasn't clear to me whether the $50million dollar amount was the amount paid up to that point, or the total due to SAP. In class, the cases we study regarding breach of contract to provide services typically involve some type of construction contract. The standard measure then would be the difference between the cost of completion and the contract price. But in a situation like this, the cost of completion is a bit funny given the various factors involved - and the period of time it would take to implement a new project (SAP took the project over from a prior contractor). Furthermore, the purpose of the new system wasn't so CA could make money (no loss profit measure applicable here). Given that, the standard expectation measure likely would not be appropriate and a reliance (or restitution) measure makes more sense. Not surprisingly, CA is seeking recovery of the $50million dollars paid.
What about SAP? Will it claim that it substantially performed? I don't think it can with a straight face, but again, I am only basing my conclusion upon the facts contained in the newspaper article. Will SAP seek restitution for the reasonable value of its services to CA? It very well may, (and any students reading this, should raise it on an exam...) since it has spent three years on this project. Based upon the information in the article, it doesn't sound as though CA received any benefit from the services rendered. If SAP is determined to be the breaching party, it may not get awarded anything. The real world problem for SAP is that trying to hang on to money for delivering a system that doesn't work might hurt its reputation even more. And it doesn't help that the other party is a state entity - meaning lots of future potential business at stake. (The LA times noted that SAP projects with other CA entities are not going so well, either).
As is true for other contracts profs, I spend a lot time trying to situate doctrine into a problem solving (or minimizing) scenario since this is how most lawyers deal with contract law. For example, prior to cancelling the contract, the attorneys for the state of CA most likely sat down and discussed its available options under both the contract and contract law. SAP, too, likely reviewed (or is reviewing) its options under the contract and contract law. My guess is that the contract terms probably permit CA to cancel under these circumstances, although a spokesperson for SAP stated that it believed it had "satisfied all contractual obligations in this project."
I'm sure I missed a few things in my quick analysis of ths situation, so feel free to note any other issues in the comments.
Thursday, February 7, 2013
Shades of Hamer v. Sidway! A man offered his daughter $200 if she quits Facebook for five months. It seems that the daughter was well aware of the irresistible time-wasting hazards of the popular social networking site, but needed an incentive to quit. The father even had her sign a contract. But, as contractsprofs know, it's not the written form that makes the contract but the bargain. Even though quitting Facebook may be better for productivity (as I keep telling my students....), it is still a legal "detriment" so if she's successful, dad should pay up.
Monday, February 4, 2013
File this under "objective theory" example that even a law professor could not invent.
On national tv Bill Maher challenged Donald Trump to come forward with Trump's birth certificate to prove that Trump was in fact born from a human father (not an orangutan). Apparently Trump provided his birth certificate and then requested that Maher remit the $5 million. The discussion on Fox News: what did Donald Trump reasonably believe? Was this an offer to enter into a unilateral contract? Watch it here:
Who wins: Trump or Maher?
[Meredith R. Miller h/t Steven Crosley]
Wednesday, January 30, 2013
[Edited: Apologies to my co-blogger, Nancy Kim, for posting this before reading our own blog to see that she already covered it. I'll keep this up for the links to the cases but please read Nancy's post for a more in-depth analysis of the materiality issue.]
For professors who teach nondisclosure as a "reason not to enforce a contract," (that's what the book I use calls "defenses"), Stambovsky v. Ackley often is a favorite case due its entertaining facts. In the case, the buyers of a Nyack, NY house (pictured) seek to have the contract rescinded due to the home being haunted by poltergeists. The haunted condition was known by the sellers but was not disclosed to the buyers.
I am particularly fond of the case in part because the opinion is filled with puns such as, "[I]n his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, [however,] I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.". Puns aside, the case is instructive because it helps students understand the difference between nondisclosure versus misrepresentation and gets some students to question their faith in caveat emptor. The fact that I teach the case right around Halloween is a nice bonus.
The only potential problem with the case is that it's somewhat dated (yes, something from the 1990s can feel dated to current first-year students). Thankfully, a student of mine from last semester just sent me a link to this newer version of Stambovsky out of Pennsylvania (what do ghosts love about the mid-atlantic states?). In this new dispute, the buyer, a recent widow, is seeking to rescind the contract for sale of a home based on the nondisclosure of a murder-suicide in the home in the same year she agreed to purchase it. The trial court granted summary judgment to the sellers and the appellate court affirmed, finding that, "psychological damage to a property cannot be considered a material defect in the property which must be revealed by the seller to the buyer." The buyer now has appealed the case to the Supreme Court of Pennsylvania. No one knows how that court will exorcise its discretion (ba-dum-bum).
[Heidi R. Anderson]
Tuesday, January 29, 2013
A Pennsylvania homeowner is suing the seller of the house and a real estate agent, claiming fraud and misrepresentation, for failing to tell her that the home she recently purchased had been the scene of a murder-suicide the previous year. The homeowner had moved to Pennsylvania from California with her two children after her husband's death. She learned of the murder-suicide from a neighbor, several weeks after moving in. You can read about it here.
I don't know about you, but I think a murder suicide is pretty material, although there aren't enough facts here to indicate whether the seller and agent deliberately concealed the fact or whether the buyer inquired as to any unusual events happening in the house.... With respect to the seller, it might be one of those "tough luck" situations where the law just doesn't help the buyer even if the court feels sympathetic toward the buyer's situation. It's not clear whether the agent is the buyer's agent - if so, the agent should have disclosed this as a fiduciary. But it's more likely that the agent was actually the seller's agent, and not the agent of the buyer or a dual agent. (Got that? Just because someone has the word "agent" in their job title doesn't make that person your agent. Who is paying the commission? When in doubt about where the agent's loyalties lie - ASK the agent).
The lesson here - especially relevant given the recent rise in home sales - is BUYER BEWARE. I wonder if a quick online search of the address would have uncovered the grisly events that took place in it. It would probably be prudent for all potential home buyers to expressly ask, "Did anything unusual ever happen in this house that we should know about such as any crimes?" A buyer should also ask how long the current sellers have lived in the house and why they are moving. [In this case, such a question probably wouldn't have helped the homeowner. The immediate sellers were not the owners of the house when the murder-suicide took place, but subsequent owners who bought it, presumably at a low price given what had just happened in it, and then turned around and sold it to the out-of-state buyer]. The seller's failure to disclose in a situation where the buyer has specifically asked is entirely different from a failure to affirmatively disclose unasked for (albeit material) information.
N.B. Under California real estate law (which imposes a duty to disclose facts materially affecting the value of real property where the facts would be hard to uncover), the result would probably have been different. See Reed v. King, 145 Cal. App. 3d 261 (1983) involving a failure to disclose a multiple murder by a home seller. Interesting, given that the PA home buyer was from California and might have expected a bit more from the seller based upon her real estate experiences there...
Tuesday, January 15, 2013
The N.Y. Times reports that Conde Nast has issued new contracts to its writers with changes that diminish their right to profits from articles. Conde Nast is the publisher for magazines like Wired, Vanity Fair and The New Yorker. (You remember magazines, right? They’re printed on paper and you can usually find them at airports. Unlike newspapers, they don’t leave inky residue on your fingers). Conde Nast writers typically lack job security and benefits, signing one-year contracts – but they are (or were) allowed to keep the rights to their work. These rights could be valuable if an article becomes a movie, like “Argo” or “Brokeback Mountain.” Under the new contracts, however, Conde Nast has exclusive rights to articles for periods of time ranging from thirty days to one year and option rights where payments to the writer top out at $5K. If the article is turned into a movie, there is also a cap on what writers can receive.
It would be easy for me to demonize Conde Nast given my association with writers. Yet, it’s no secret that the demand for glossies is diminishing and that publishers need to figure out a way to monetize their content better – otherwise, there won’t be any magazine writers at all. Perhaps Conde Nast could bargain employee benefits for these rights, the way newspapers do. Maybe they could increase the cap based on different variables. Maybe they could lift the exclusivity for certain writers after a period of time (or a designated number of successes). Maybe they could commission articles that they conceived in-house, so that the work is a traditional work for hire, and the cap isn’t tied to an idea that originated with the writer. In any event, it’s clear that Conde Nast needs to evolve with the marketplace; what’s not so clear is that this is the way to do it.
Wednesday, December 19, 2012
Stop me if you've heard this one before - Facebook changes its Terms in a way that its users find offensive and invasive of their privacy. Uproar ensues and Facebook promises that the changes are harmless and everyone is just overreacting. Facebook backs off, a little, and then pushes the boundaries a little further next time, regaining even more ground against its users. Sound familiar?
I think the public backlash is a very good thing since it reminds companies that there are at least some people who are reading their online agreements. Unfortunately, they are usually only reading the terms of companies that already have a monopoly in the marketplace. It's not easy for unhappy Facebookers, Googlers or Instagramers to pick up their content and go elsewhere - where would they go?
What makes my skin crawl, however, is the misleading reassurances doled out by companies when they are called on their online agreements. Instagram, for example, states on its blog that users shouldn't fear, because it respects them, really it does:"Instagram users own their content and Instagram does not claim any ownership rights over your photos. Nothing about this has changed. We respect that there are creative artists and hobbyists alike that pour their heart into creating beautiful photos, and we respect that your photos are your photos. Period.
I always want you to feel comfortable sharing your photos on Instagram and we will always work hard to foster and respect our community and go out of our way to support its rights."
While it may be true that Instagram users own their content, Instagram does take a pretty broad license from its users:
As Instagram knows, it doesn't need to own your content in order to use it as if it owned it. All it needs is a broad license, like the one it has. Note that it has the right to "use" the content - and doesn't define what that means or restrict that use very much.
- "provide personalized content and information to you and others, which could include online ads or other forms of marketing
- provide, improve, test, and monitor the effectiveness of our Service
- develop and test new products and features
- monitor metrics such as total number of visitors, traffic, and demographic patterns"
I found this sentence particularly sneaky:
"We will not rent or sell your information to third parties outside Instagram (or the group of companies of which Instagram is a part) without your consent, except as noted in this Policy"
Did you like the "except as noted in this Policy" ? And, as Contracts profs know, "consent" means something other than what a layperson might think - it can mean just using a website in many cases. There is similar broad language here:
"We may also share certain information such as cookie data with third-party advertising partners. This information would allow third-party ad networks to, among other things, deliver targeted advertisements that they believe will be of most interest to you."
I'm not as concerned about the targeted advertisements (which doesn't mean I'm not concerned at all) as I am about the "such as" and "among other things."
And remember, the Terms do expressly state:
"Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you."
The company reassures its users, on its blog that it is not their "intention" to "sell" user photos. The company says it is working on language to make that clear. Let's hope so, but my guess is that they are probably going to use more mealy language like "at the moment" or "sell as a good defined under the UCC," or something that leaves wide open the possibility that it can make money off user photos by selling them to third party advertisers.
I'd suggest you save Granny some embarrassment and delete that photo now.
Thursday, October 25, 2012
Although I am loathe to increase publicity for someone as publicity-hungry as "The Donald," I am confident that our loyal readers will permit me this one post. A few first semester Contracts students sent me a link to the above video and suggested that this was a great example of an offer to enter into a reward-style unilateral contract. I told them I'd oblige them and post it here. It clearly identifies the one person who can accept, the manner and mode of acceptance, and the performance sought in return for Trump's promise. In case you've been living under a rock ignoring anything political lately, the performance he seeks is President Obama's submission of passport and college application records (which Trump reportedly believes indicate a place of birth of Kenya). The offered reward is Trump's promise to donate $5 million to a charity of the president's choice.
The president's fantastic response from The Tonight Show is posted below.
Not to be outdone, Stephen Colbert has offered up his own reward, the nature of which was, well...see for yourself (viewer discretion strongly advised).
[Heidi R. Anderson]
Thursday, October 11, 2012
On the way in to work this morning, I heard on the radio that Pizza Hut is making an offer for a unilateral contract (okay, that’s not exactly the way the d.j. put it, but anyway…). The offer is free pizza for life to anyone who manages to ask either one of the presidential candidates during the town hall debate, “Do you prefer sausage or pepperoni on your pizza?” The debate will take place October 16 at Hofstra University. (It turns out that the offer is not actually “free pizza for life” it’s actually a $520/year gift card for up to 30 years). A silly contest, of course -- but a good example to illustrate the difference between a unilateral and bilateral contract and related issues having to do with effective offers and acceptances. Often, it doesn’t really matter if an offeree accepts by performing by by promising to perform– but in some cases (i.e. bets, dares), it really does. I used to refer to the bet in the book, HOW TO EAT FRIED WORMS to explain the difference between a unilateral and bilateral contract (15 worms in 15 days for $50). This year I might use the more election -season- friendly example of the Pizza Hut offer.
Tuesday, October 9, 2012
As reported in The Guardian here, a challenge to a series of UK rulings permitting parties to specify the religion of their arbitrator is being referred to the European Court of Justice. The UK Supreme Court case at issue, Jivraj v. Hashwani, was decided in July 2011. The two parties to the dispute are members of the Ismaili Muslim community, and they agreed that any disputes involving their joint venture would be decided by an arbitrator who belonged to that same community.
The parties fell out and, after some complicated litigation, their chosen arbitrator resigned. Hashwani wanted to replace the Ismaili arbitrator with a retired judge, but Jivraj objected that the nomineed was not Ismaili. Hashwani contended that the part of the paties agreement specifying the ethnicity of the arbitrator is s unenforceable under European legislation and the Equality Act 2010 because it unfairly discriminates against non-Ismaili arbitrators. The Supreme Court ruled in Jivraj's favor, finding that the Equality Act does not apply to arbitrators and, even if it did, the requirement that the arbiter be Ismaili was a "genuine occupational requirement" and thus permissible.
A new, Ismaili arbiter was appointed, but he too resigned, and Hashwani then asked the European Commission to refer the issue to the European Court of Justice. Given that the dispute is clearly commercial, rather than religious in nature, Hashwani believes that there is no need for the arbitrator to be from the Isamili Islamic community. The Guardian suggests that an ECJ ruling could have far-reaching consequences for religious arbitration, but it would seem that there is room for a narrow holding that religious arbitration is perfectly appropriate when there are issues of religious law to be adjudicated.
[JT, with hat tip to my student, Alex Seciuch]
Tuesday, October 2, 2012
While teaching the concept of "offeror is king" this semester, I said something like, "I wish I had a crown. One of you should bring me a crown! There might be some participation points in it for you if you do." (It sounded less entitled than that quote but you get the point.) Shortly thereafter, two students brought me a crown--one from Burger King (of course!) and one from a party supply store. The first one was just slipped under my door but the second one had "terms of acceptance" attached. The terms stated that I had to use the crown in class and not disclose the student's name in order to accept. I did both, and my acceptance was deemed substantively valid and timely by the entire class.
Another student recently alerted me to a New York Times story about a lawyer victimized by the "offeror is king" concept. The lawyer, Theodore Scott, reportedly produced a winning video and essay in response to a contest offer from Gold Peak Tea. The contest winner would receive $100,000 to take a year off and enjoy life (presumably over some tea). However, after Mr. Scott's video received the highest number of votes and was declared the grand prize winner, Gold Peak Tea had a change of heart. Apparently, Mr. Scott had requested votes for his contest entry via a crowdsourcing website on which people, well, request votes for things like this. Gold Peak Tea took the position that Mr. Scott's online plea for votes violated the contest rules. Because Mr. Scott accepted in a way other than that specified by the offeror, there was no deal, and a different winner was selected.
As an interesting side note, many folks appear to be bombarding Gold Peak Tea's Facebook page with comments supporting Mr. Scott, the original winner. The Facebook response from Gold Peak Tea reads as follows:
"Gold Peak appreciates input from the community on our Facebook page. The Take the Year Off program was created to reward a Gold Peak Tea fan with the opportunity to refresh, renew and refocus. By devoting more time to his three special needs children and bettering his community with the development of a local equine therapy program, Michael Simpson will take the year off in a deserving fashion. We’d like to address some of the feedback shared about the Take the Year Off promotion and how the winner was determined:
Unfortunately, Theodore Scott was disqualified when it was determined during the verification process that he had attempted to inappropriately induce members of the public to vote for his submission, a violation of Official Contest Rules (http://CokeURL.com/TTYORules).
The House Rules for the Gold Peak Tea Facebook page state that users will not “publish, post, distribute or disseminate any defamatory, infringing, obscene, indecent, misleading or unlawful material or information.” Certain posts addressing the Take the Year Off promotion do not abide by these Rules and have been removed (http://CokeURL.com/HouseRules)."
Gold Peak hopes the members of this community will join us in wishing Michael Simpson well in his year off."
Perhaps the ultimate message, then, is not "offeror is king" but, rather, "read the fine print."
[Heidi R. Anderson, hat tip to Ly Tran]
Friday, September 28, 2012
A student in my Contracts class shared this story with me regarding a recent offer to enter into a unilateral contract. Cecil Chao Sze-tsung, a wealthy Hong Kong-based property developer, has offered a $65 million "reward" to the man who first woos his daughter into a heterosexual marriage and away from her current lesbian partner.
Mr. Chao described his plan to the BBC as follows (he even uses the word "inducement!"): "It is an inducement to attract someone who has the talent but not the capital to start his own business. I don't mind whether he is rich or poor. The important thing is that he is generous and kind-hearted." He further described his daughter, Gigi, as "a very good woman with both talents and looks" who "is devoted to her parents, is generous and does volunteer work."
In an interview with the BBC (scroll down and click play--the file would not embed), Ms. Chao confirmed that her father is indeed "serious" (there goes the Lucy v. Zehmer argument) and that she views his reward offer as an "expression of fatherly love" from the man she talks to "on a daily basis." Ms. Chao admits that potential suitors face an uphill battle given that she already has committed herself to her longtime partner, Sean Eav. However, because she is not legally "married," she would not rule out someone successfully accepting her father's offer. Specifically, when asked by the BBC reporter, "Are you saying it's a waste of time?," she said, "No" and that it would be "inappropriate for me to outright contradict [my father]."
So, from a ContractsProf perspective, it appears that there is a definite offer that can be accepted by only a single person and only via performance. What is unclear to me, however, is whether the mere act of marriage from any male is actually what Mr. Chao seeks. In her BBC interview, Ms. Chao says that she does not know whether her father has received any offers but confirms that she has received many offers made directly to her. So, if a man were to convince Ms. Chao to marry him, and they were to get married, it's not clear (at least not to Gigi Chao) that he would get his $65 million without first convincing Mr. Chao that he's worthy. Absent clear, unequivocal commitment from Mr. Chao, there may not be a definite offer after all.
[Heidi R. Anderson, hat tip to student Ly Tran]
Tuesday, September 4, 2012
The Wired article reports on research by Lisa Shu, a psychologist and Visiting Professor of Management and Organizations at Northwestern University's Kellogg School of Management. While earlier research showed that signing (as opposed to printing) our names generally promotes more honesty, Professor Shu's research showed that signing at the top of a document, before one started making factual statements, significantly enhances honesty. In some studies, signing at the bottom has the same effect on honesty as not signing at all.
Professor Shu thinks that most people want to be honest and that signing in advance gives them a reminder or a nudge. Some people will never lie and some people will lie in a cavalier way. The placement of the signature block affects the people in between. The challenge is how to operationalize Professor Shu's insights. If one wants people to sign documents before they fill them out, placing the signature block at the top is not necessarily effective.
It is dangerous to generalize based on one's own idiosyncratic habits. That caveat aside, I don't think I would sign a blank document before I had filled anything in. And I don't think that is because I went to law school. It's just an extension of the reasoning that leads me to sign personal checks only after I have filled in all the relevant information. So, even if the signature block were at the top of a document, I still would sign last.
Friday, August 31, 2012
The U.S. government reportedly is considering filing a breach of contract suit against the Navy Seal (pseudonym "Mark Owen") who wrote a book about the raid and killing of Osama bin Laden. According to a letter obtained by Reuters, the Pentagon has told Owen that his publication of the book would further violate certain confidentiality provisions in agreements between him and the U.S. government. The Huffington Post reports the contents of the letter as follows:
"In the judgment of the Department of Defense, you are in material breach and violation of the non-disclosure agreements you signed....Further public dissemination of your book will aggravate your breach and violation of your agreements."
I recently thought about how I could use this case in class without crossing any lines of impropriety (read: without crossing over into an uncomfortably political discussion). One angle I envisioned was using it when we get to specific performance. A topic closer to the (mythical?) impropriety line would be whether Owen would have any arguments regarding why the agreements should not be enforced, perhaps including public policy or duress. Both are a stretch without more facts. Regardless of specifics, I think it could be a great case to use when discussing the general topics of the limits of contract law and the limits of contract law remedies.
[Heidi R. Anderson]
Thursday, August 23, 2012
In March, we briefly mentioned a contract-based royalty payment dispute between one member of the disco group Earth, Wind and Fire, and the children of a deceased member of the group. According to this story, the defendant, Maurice White, now has responded in court. (It is unclear whether White's response was an answer to the complaint, a motion for summary judgment, or something else). White alleges that there was no oral agreement pursuant to which he was to pay royalties and that, if there was an oral agreement, it is not enforceable. This could end up being a good case to discuss when presenting the statute of frauds. Expect another post if/when I am able to find the court filings.
[Heidi R. Anderson]
Thursday, August 2, 2012
Social Impact Bonds: “The most interesting government contract written anywhere in the world this year”….
…. And the award goes to… Goldman Sachs and New York City. According to the ABA Journal, Goldman Sachs has loaned $9.6M to New York City to fund a new social services program with the aim of “reducing recidivism among young men at Rikers Island.” Details are to be provided later today (Thursday). The loans are being described as “social impact bonds” and they carry a nice return ($2.1 million) if there is a “significant reduction” in recidivism. If not, Goldman could lose up to $2.4 million (though, we know, Goldman won’t lose the money because, as a “market maker,” it will just turn around and sell the “shitty” bonds to an unwary client).
About the contracts that lie at the heart of the deal, the ABA Journal provides:
“This will get attention as perhaps the most interesting government contract written anywhere in the world this year,” said Jeffrey B. Liebman, a public policy professor at Harvard University. “People will study the contract terms, and the New York City deal will become a model for other jurisdictions.”
Similar programs have been tried in Great Britain and Australia and currently are being considered in Massachusetts.
But the New York Times reports that this program is different because Mayor Bloomberg’s foundation is a guarantor on the loan:
In a twist that differentiates New York’s plan from other governments’ experiments with social impact bonds, Mr. Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC. If the jail program does not succeed, MDRC can use the Bloomberg money to repay Goldman a portion of its loan; if the program does succeed, Goldman will be paid by the city’s Department of Correction, and MDRC may use the Bloomberg money for other social impact bonds, said James Anderson, director of the foundation’s government innovation program.
The social impact bonds are not without critics:
But social impact bonds have also worried some people in the nonprofit and philanthropy field, who say monetary incentives could distort the programs or their evaluations. “I’m not saying that the market is evil,” said Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati, “but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”
The proponents argue that this financing model is a transformative way to fund social programs, with benefits to both taxpayers and private investors. They argue that it is a way for government to pay to achieve outcomes.
[Meredith R. Miller]
Wednesday, July 25, 2012
Yesterday, the cast of ABC's hit sitcom, Modern Family, filed a Complaint for Declaratory Relief against the show's production company, Twentieth Century Fox. (Ed O'Neill, previously of Married...with Children fame, who is compensated differently than his co-stars, has not joined the lawsuit but plans to do so, according to The Hollywood Reporter). The stars apparently were negotiating pay increases for future seasons 4 through 9 but were not satisfied with the offers they were receiving. Twentieth Century Fox (and ABC, the network on which the show airs) reportedly offered to increase each cast member's per-episode compensation from around $65,000 to $200,000 for the next few years. As negotiations broke down, the stars filed suit.
The named plaintiffs (including Sofia Vergara, Jesse Tyler Ferguson, Eric Stonestreet, Julie Bowen and Ty Burrell) are relying on an interesting legal strategy. They claim that their employement agreements are "personal service contracts" that are "illegal and void under California law" because they violate the "Seven-Year Rule." The Seven-Year Rule is codified in California's Labor Code section 2855(a), copied below:
"Except as otherwise provided in subdivision (b), a contract to render personal service, other than a contract of apprenticeship as provided in Chapter 4 (commencing with Section 3070), may not be enforced against the employee beyond seven years from the commencement of service under it. Any contract, otherwise valid, to perform or render service of a special, unique, unusual, extraordinary, or intellectual character, which gives it peculiar value and the loss of which cannot be reasonably or adequately compensated in damages in an action at law, may nevertheless be enforced against the person contracting to render the service, for a term not to exceed seven years from the commencement of service under it. If the employee voluntarily continues to serve under it beyond that time, the contract may be referred to as affording a presumptive measure of the compensation."
The complaint itself does not quote from the code section. It merely cites the code section and adds this parenthetical: "(personal service contracts are barred from having terms beyond seven years)." The complaint also does not explain how the law applies to a contract of a shorter duration that provides the employer (Twentieth Century Fox) with the option to extend it beyond seven years. Without citing any cases, it's hard to tell how this law would be interpreted to apply to the cast employment agreements. However, I am not a California lawyer so I should not go further without doing more research. Anyone know anything about this law?
If I never look into it more deeply, I at least hope to use this case as an example of the importance of researching individual state law rather than thinking, "All I really need to know I learned in Contracts class."
[Heidi R. Anderson]
Thursday, June 28, 2012
Other blogs will tell you that the Supreme Court's healthcare decision was all about the commerce clause, Congress's taxing authority, and John Roberts's identity. But we here at ContractsProf Blog look past all of that and dig deeper. We dig all the way to page 46. Yes, I'm talking about the Medicaid expansion, the part of the Affordable Care Act ("ACA") that says, "it's my turn now, people!" when everyone already has walked away. Buried there is a discussion of an oft-covered Contract law defense to formation known as undue influence.
In case you never heard of are not as familiar with the Medicaid expansion as you are with the individual mandate (or, as I like to call it, the "anti-freeloader provision"), allow me to refresh your memory. (Or, allow me to point you to a great podcast.) Before the ACA, one qualified for Medicaid in most states only if she was a "needy individual" (Roberts's words, not mine), such as a pregnant woman, a child, a member of a needy family, or a blind, elderly, or disabled person. In the ACA, Congress required states to expand Medicaid to cover many allegedly "less needy" people, i.e., childless, non-disabled adults with incomes below a certain level. Actually, Congress didn't require such an expansion. It just said (and I'm paraphrasing), "You, state, can choose not to expand coverage to these other people. But, if you don't cover them, we're taking away ALL of your Medicaid funding, even if that federal money is ten percent of your state's entire revenue stream." In his opinion (which may or may not be the "majority" on this issue, depending on whom you ask), Chief Justice Roberts analyzed whether this directive from the federal government was a proper exercise of its Spending Clause powers. And that's where Contract law takes center stage (or, at least center-left).
The excerpt begins as follows (citations omitted):
"At the same time, our cases have recognized limits on Congress's power under the Spending Clause to secure state compliance with federal objectives. 'We have repeatedly characterized...Spending Clause legislation as "much in the nature of a contract."' The legitimacy of Congress's exercise of the spending power 'thus rests on whether the State voluntarily and knowingly accepts the terms of the "contract."'
And how would one allege that the State did not voluntarily accept the terms of the contract? Undue influence, that's how! The next portion of the opinion continues:
"[This insight regarding contracts] has led us to scrutinize Spending Clause legislation to ensure that Congress is not using financial inducements to exert a 'power akin to undue influence.' Congress may use its spending power to create incentives for States to act in accordance with federal policies. But when 'pressure turns into compulsion,' the legislation runs contrary to our system of federalism.'"
Roberts ultimately agrees with the states that the federal government's "take it or leave it" offer rose to the level of coercion. I have not read the rest of the opinion or the other opinions to determine how many votes there were for this holding. It looks like only Breyer and Kagan agreed with Roberts on this point.* However, even if I can't give you certainty, I hope I've at least given you enough ammunition to use in your debates with Con Law professors who think today's decision is all about them.
[Heidi R. Anderson]
* Update: There were 7 votes to toss the Medicaid expansion--Roberts, Breyer and Kagan via the Roberts opinion and Scalia, Thomas, Kennedy and Alito via Scalia's dissent. Scalia's dissent discusses the Spending Clause issue using the same coercion-based Contracts rationale that Roberts used. The dissent's Contract-based discussion begins in earnest on page 33. The most direct excerpt states:
"When federal legislation gives the States a real choice whether to accept or decline a federal aid package, the federal-state relationship is in the nature of a contractual relationship. And just as a contract is voidable if coerced, 'the legitimacy of Congress' power to legislate under the spending power...rests on whether the state voluntarily and knowingly accepts the terms of the "contract."' If a federal spending program coerces participation the States have not 'exercised their choice'--let alone made an 'informed choice.'"
Based on this excerpt and the points that follow, it appears that the anti-expansion argument is better characterized as economic duress than as undue influence.
Wednesday, June 20, 2012
I'm a little late with this post but I'm going to open up a political can of worms here on the blog and talk about pension reform. In California, two cities (including my hometown, San Diego) have voted to approve changes to their city's pension plans. The San Jose measure seems to make changes to plans for retired workers. I can understand how changes to plans for new employees might be legal, but I'm not sure how changes to existing plans and vested benefits can be considered legal. The contract law issues boggle the mind. Not surprisingly, the proposed changes to the San Jose plan are being legally challenged. It's going to get messy....