ContractsProf Blog

Warner Bros vs Charlie Sheen: The First Salvo After The Last Straw

Well, it happened - Warner Brothers fired Charlie Sheen.  Several questions raised in my previous post about Charlie Sheen have been answered by the termination letter (TL) dated March 7th 2011:

• I speculated that the gloves might 'come off' in response to Charlie's rant against Charles Lorre, creator of Two and a Half Men; The TL indicates that this, in conjunction with another bizarre interview (held on the same day), tried Warner Bros.' patience to the limit.  The last straw was Charlie's non response to the request for confirmatory notice of treatment that Warner Bros. requested after the show was put on hiatus. 
• The time for gritted teeth and walking on eggshells is over.  No longer willing to put a good face on things, Warner Brothers has replaced the (forced) smile with the menacing growl of its notice of intention to seek legal remedy.  Notice of this intention was served in the TL thus:
  • "Mr Sheen's conduct constitutes breach of contract, breach of the covenant of good faith and fair dealing and tortious interference with Warner Bros.'s contracts with third parties, among other causes of action.....In any ensuing arbitration, Warner Bros. will seek recovery of all of its damages including lost revenue from the show and all other damages the law allows."
• Time Warner was sensitive to the possibility that it might be accused of illegal or immoral motives for standing by the self destructing actor after all.  The letter states "in halting production of Two and a Half Men...Warner Brothers took the only responsible action open to it - morally and legally - in these painful circumstances.  Warner Bros. would not, could not, and should not attempt to continue 'business as usual' while Mr Sheen destroys himself as the world watches".
• There was in fact a morals clause in Charlie's contract, albeit an unusually narrow one.  If the producer in good faith was of the opinion that a felony offence involving moral turpitude had been committed, or if the actor was indicted or convicted of such an offence, the clause conferred on the Producer the right to treat the commission of those acts as an actionable breach.  Sheen's proud assertion that Warner Bros did not have the power to 'dominate and totally interfere with my personal life', was therefore not entirely true.  In fact Warner Bros.statements in the TL indicate further that regardless of whether Charlie was hired to play himself or not, he was not at liberty to cross the line of criminal conduct, or bring the network in disrepute by his self destructive behavior.  The letter further states that "his admitted extreme cocaine use violates his obligation under ....the Terms & Conditions not to engage in any extra-hazardous activity without Producer's prior written consent..."
• I suggested that the lack of a morals clause could cut both ways - freeing Charlie from the moralistic control of the network while absolving the network from responsibility for his poor choices.  In detailing the actions justifying their invocation of the morals clause, Warner Bros pointedly refers to Charlie's alleged supply of illegal drugs to a third party in the TL rather than Charlie's alleged personal use of such drugs. 
• Good faith and fair dealing have come into it - Warner Bros claims that it has discharged it's contractual duties of good faith and fair dealing to Charlie while asserting that Charlie has failed to do so.
• I mused on how reputational mud just didn't seem to stick to 'Teflon Charlie' and wondered if Warner Bros. would resort to some 'teflon abrasive', if the gloves were to come off.  Well they have, they did, and the mud slinging has not merely stained his reputation.  In the eyes of some, he's mired in the mud.
• Charlie's mental health is now squarely in issue.  The TL opens with a direct attack on his mental state:
  • "At the outset, let us state the obvious: Your client has been engaged in dangerously self-destructive conduct and appears to be very ill. For months before the suspension of production, Mr Sheen's erratic behavior escalated while his condition deteriorated.....Now the entire world knows Mr Sheen's condition from his alarming outbursts over just the last few weeks....". Later, the letter continues "In any event, Warner Bros is entitled to suspend Mr Sheen's employment...due to his "Incapacity"....defined....as including..."any physical or mental disabilities, which due to the unique nature of the Performer's Obligations, are not subject to reasonable accommodation". 
• Warner Bros utilises speculative comments about Charlie Sheen's mental condition by a number of talking head medical experts in alleging mental disorder/mental incapacity:
  • A number of health care experts observing Mr Sheen during these interviews have commented that he (1) appears to be 'manic' and/or 'bipolar,' (2) he suffers from a 'hypomanic' psychological state; (3) potentially poses a dangerous threat to himself and others; (4) requires immediate professional care."
• The suspension of the show was indeed a first discreet step towards distancing and ultimately disengaging from Charlie.
• Warner Bros relies on several grounds for termination.  I suggested earlier that consistently failing to be in a fit condition to work, bringing the network into disrepute, and being charged with a serious felony were possible grounds for termination.  The TL asserts that Warner Bros is entitled to terminate Charlie Sheen's contract because :
  • he is not in a fit state to work due to mental incapacity or a serious health condition
  • they have reason to believe that he has committed at least one felony involving moral turpitude, and thus breached his morals clause
  • he has engaged in (harmful) PR activities without authorization.. 

Other grounds relied upon are that:

• by failing to perform material obligations (the TL asserts that his condition prevents him from doing so) Charlie committed an immediate default, also that, 
• by refusing or failing to return to work, he also repudiated his obligation to perform,
• his incapacity, once persisting over a (fairly limited) period, constitutes a default justifying suspension, and,
• force majeur events have occurred as a result of his hampering production of the show, his being out of control (of Warner Bros.), his illness and loss of weight (disfigurement), and his breaches of contract.

The TL summarizes the case for termination by observing "based on the totality of Mr Sheen's statements, conduct and condition, including but not limited to his refusal to offer any cure in response to the notice of suspension, Warner Bros. is exercising its rights to terminate the Agreement under the provisions specified above."

Warner Bros. terminated Charlie's contract summarily, asserting the right to terminate, with written notice, for a serious health condition or uncured incapacity (lasting for more than 10 consecutive days, or 15 days over the course of the year), or anytime following suspension for a default.  Charlie Sheen's contract obviously contained an arbitration clause, as the TL states "...Warner Bros. has submitted this dispute to arbitration...as required by the Agreement....We look forward to your cooperation with the arbitration process."  The letter further insists in a heading that "This Dispute Must Be Arbitrated'.

 
  Though short of a cliff hanger, we are left with several questions.  Will Charlie Sheen respond with 'all barrels blazing', or will he back down - or at least adopt a less confrontational approach - to begin to attend to the repair of his disintegrating life?  Will he submit to arbitration, or fight for his day in court? Will there be a response, from health care officials, to the deepening allegations about his mental state?  To what extent will his alleged mental state/incapacity lessen the brunt of the legal storm he has unleashed?  Who will represent him - legally, publicly - now? (Reports of recent firings and resignations from his support team suggest that he will need to recruit new representatives.)

The first salvo, in what is likely to be a drawn out sensational (ist) legal battle, has been dispatched.  Brace yourselves for the next episode of this tragic drama, in which family, mental health officials, and law enforcement officials may have more than a walk on role.

 

Eniola O. Akindemowo.

The Sheen Has Worn Off.

Charlie Sheen’s antics, documented virtually everywhere, have kept the public agog for months.  As the seriousness of his scrapes escalates, questions swirl about how this will all end.  As parents caution a hyperactive child obviously heading for a fall that “it will all end in tears”, I am rooting for a happy ending, despite all indications.  I am hoping, as I watch this awful drama unfold, that it will not culminate in a tragic end. 

It was only a few weeks ago that Charlie Sheen reportedly announced that his contract for Two And A Half Men has no morality clause.  It was alleged that he proudly asserted that he could do as he pleased, because he had not given the powers that be the contractual power to ‘dominate and totally interfere with my personal life’. 

The unfolding drama raises contract questions galore.  Is it true, for instance, that there is no moral clause in his contract?  Really? It almost makes you want to incredulously ask who wrote the thing, until you realize that morality clauses are no longer de rigueur –  at least not in entertainment contracts.  He may even have such a clause in his contract - some accounts have him confirming the existence of such a clause but admitting that he hasn’t read it. 

Clause or not, good luck Charlie; in the past a mere whiff of scandal could be the kiss of death for a career  – yet this has not happened to Charlie - yet.   A conceptual pair of reins over his scandalous behavior would do him some good, I think.  A morality clause, and a carefully crafted artistic control clause, for example, could do some good.  Regarding contractual control over his artistry however, this may depend on where performing ends and true life starts for Charlie.  The two may have blurred into one.  It almost seems like he was hired to play himself.  (Does that make anything he does off set a spin-off?  One might be forgiven for thinking so by his behavior).

It seems, in any case, that artistic authenticity  is important to Charlie.  Charlie wants to be true to self .  The tragic thing about this is that he allegedly believes that authenticity precludes sobriety - at least for him. This brings to mind a pantheon of tormented stars that departed before their time.  It makes you want to shake the guy saying “Snap out of it man – you’re not doomed.  It doesn’t have to end this way".

Did he ever take the time to read the contract? We can safely presume that he signed it or that it was signed on his behalf, but he allegedly claims to not have read it.  Perhaps he is no different from the large number of people who routinely sign before reading. Or perhaps he has not read it because he feels that is what he pays his legal team for.  It’s hard, admittedly, to imagine Charlie Sheen taking the time to read a how-many-pages-long contractual document of carefully worded clauses at this point.  Perhaps he once did – during that awful five years of sobriety a long time ago. 

Maybe he enough patience for his legal team to give him only the nitty gritty of his contract i.e. what behavior will get him fired.  He certainly seems confident that he has a long string to play with.  Although he comes across as  cocky, I suppose he has some reason for this – he is not known as ‘Teflon Charlie’  for nothing. 

So here’s another question – what makes it so difficult for the reputational mud to stick to Teflon Charlie?  Does he have a super slick contract assisting his PR agent? If so, what might be the ingredients for the slickest contractual Teflon – a tepid moral clause and wide discretion?  The right to engage in ‘artistic expression’ so long as that bargain, and its expression, remain on the right side of public policy?  Maybe being liked in the industry pragmatically translates to Teflon?   Or is it just a good old double standard at work? 

It’s hard to believe a party the size and sophistication of the CBS TV/Warner Joint Venture would leave itself contractually vulnerable to the antics of a Teflon profligate.  CBS/Warner is surely working through its arsenal of options.  That would include termination – firing Charlie – although the CBS/Warner has stopped short, for now, of doing so. 

Another option, of course, would be to stand by Charlie - with gritted teeth.  The show’s ratings have not been harmed by his troubles.  It is likely, in fact, that his antics have helped the ratings. The show has performed so strongly, that if no more epsodes are made, the CBS/Warner will still profit handsomely from syndication which likely would go on for years.   That’s good news and bad news for Charlie.  It's good news if he gets a percentage cut of profits.  Onthe other hand, the fact that he is no longer indispensible may be a bad omen for his continued antics as a CBS-Warner star.

CBS-Warner has undoubtedly weighed its choices every step of its turbulent journey with Charlie.  So far the preference has been to put a good face on things.  After his latest antic however - savaging the hand that fed him – it will be understandable if the CBs/Warner decides it’s time for the gloves to come off.

Before things turn really nasty, before the last straw breaks the camel’s back, might a point be reached when it becomes immoral – contractually speaking - to stand by and watch an actor, no matter how profitable, implode?  It’s one thing to condone the omission of a morals clause – big boys are allowed to live out the bargains of their choice after all, but when does standing by and watching a train wreck become permissible?  When does  benefitting from the fast motion slide of a rakishly cute actor morphing into something less cute – though compelling viewing - become a breach of the duty of good faith and fair dealing?  “All publicity is good publicity” the show biz adage goes – but might there be a point where standing by an out of control star begins to seem a cynical enablement of that actor’s race to self destruction? 

He’s a big boy you may say – he knows when to say no – but does he, really?  The ability to say no to poor choices is playing a starring role in this whole drama.  His family is concerned and has asked the public to pray.  Allegedly plagued by all manner of addiction issues, it is becoming harder after his latest rant to argue that Charlie’s ordinary judgment, let alone his contractual ability is intact.  He may even think that HE is a contract. Concerned contemporaries and celebrity doctors are predicting that things will end badly if he does not get help now.

Let’s say hypothetically that the acceptance of an offer to make another season of a hugely popular show could be convincingly shown to be more likely harmful than beneficial to a random troubled star.  Addicted not only to substances, but to public attention, the hypothetical star accepts the offer in a snap.  Establishing that the hypothetical contract is voidable - because the hypothetical star, due to his substance induced intoxication was either unable to understand what he was getting into (unlikely) or act reasonably in relation to the bargain (more likely) , and hence a bad deal for him - could  be a step toward establishing a lack of good faith on the part of the Network.  Entering into a contract ,knowing the star has addiction issues, and then standing by while the star self-destructs amid skyrocketing ratings could arguably qualify if, for example, the contract obliges the Network not only to provide employment, but employment that is reasonably likely to enhance or benefit to the star's image.  Though unlikely in an ordinary employment contract, this makes sense in an agreement for the employment of an actor - as an independent contractor - to whom image building is of primary importance. The act of facilitating the self destruction of a known addict would be deemed detrimental to that actor, one would hope. The chances of success will be stronger where the argument that the Network callously failed to intervene to wring out maximum profits is credible on the facts.  The omission of a morality clause from the hypothetical star's contract could cut both ways.  While freeing the star from the moral control of the network, it could also release the network from the already minimal responsibility the network might have for the hypothetical star's poor choices. 

CBS/Warner Bros may be in the early process of disassociating itself from the imploding soap opera that has become Charlie’s life.  The discreet cancellation of the rest of the season first, and then what?  You can be sure of this – Charlie will not go quietly.  He is not happy about the cancellation of the remainder of the season, and he wants the world to know it.

 So, now what? Time to activate some Teflon abrasive – the moral clause (if there is indeed one in his contract) or a close equivalent?  Perhaps another clause might have the bite of a moral clause?  A moral clause is a glorified termination sub clause, in one sense, and as we all know, a termination clause is the emergency escape chute.  If there is no moral clause, check the wording of the termination clause next.  Actions such as consistently failing to be in a fit condition to work, bringing the network into disrepute (a.k.a making the boss look bad), or being charged with a serious felony, could easily fall within the terminations clause of an entertainment contract.

More details will definitely seep out in ensuing weeks.  We will discover whether termination is on the cards for Charlie Sheen - and whether Charlie is really going to sue.  Should CBS/Warner get to the point of pulling the plug – and it’s not a given that it will, it will certainly be interesting to see what finally is deemed grounds to terminate the contract rather than merely exercising the option to cancel a season.   

Eniola O. Akindemowo.

Members of Congress Advocate Avoidance of Indemnification Clauses for Fannie Mae Executives

Behind the placid exterior, shown at left, not all is well at Fannie Mae Headquarters. Legal fees have mounted for the mortgage giant's former executives.  The executives have been defending themselves against accusations of accounting improprieties alleged in a shareholder suit brought in 2004. The New York Times reports that their legal fees have climbed to over $100 million since the suit began, with the best estimate being in the $160 million range.  It is not difficult to rack up such fees when, as Ohio Attorney General Mike DeWine claims in the Washington Post, they are “lawyering this case to death.” Evidence of such over-lawyering included bringing upwards of 13 seemingly mute lawyers to some 123 depositions and another 35-40 lawyers to monthly conference meetings.  All of this, and the former executives are reportedly still years from trial.

Who could be paying for all of this you ask?

Well, you are, in a way.  As of 2008, the government took over Fannie Mae. The executives were part of the deal, along with contracts including standard provisions calling upon Fannie Mae to indemnify them for “reasonable” legal fees associated with their employment at Fannie Mae. These contracts remain in place, even though the Housing and Economic Recovery Act of 2008, the act that created the Federal Housing Finance Agency, empowered to oversee of Fannie Mae and Freddie Mack, allowed for these contracts to be voided. Officials at the Federal Housing Finance Agency have claimed that overturning these contracts would have been "inappropriate and possibly unconstitutional."  

In any case, if the executives are found liable, the Times reports, the executives will have to reimburse the corporation for the legal fees.  The executives, who have already paid $31 million to settle with the Office of Federal Housing Enterprise Oversight, a predecessor regulator, may not have the means to repay the legal fees already advanced to them.  

Members of Congress know a moral hazard when they see one.  At a Congressional Hearing earlier this week, lawmakers questioned whether these fees are actually “reasonable.”  Randy Neugebauer, chairman of the Oversight and Investigations Subcommittee of the House Financial Services Committee, claims that keeping these contracts intact gives the former execs incentive to keep running up enormous legal bills- all at the expense of the taxpayers. U.S. District Judge Richard J. Leon said it best at a hearing in 2009, "I am not so sure the taxpayers are doing pretty well, but the lawyers are doing pretty well in this deal." 

[JT & Katherine Freeman]

 

The Huffington Post/AOL Merger: Choice and Value in Contracts

 The Huffington Post/AOL Merger that is rousing indignation in certain quarters  got me thinking about value and choice in contractual bargains. 

What is “a good bargain”?  Is it all in the price?  The price may or may not reflect the value of the subject of the bargain.  It may be underpriced (to the glee of the buyer), or overpriced (to the satisfaction of the seller).   An underlying belief about what the basic value of the subject is must also exist.  Without that underlying belief, judgments about how underpriced or overpriced - and thus, how good or bad - the proposed contractual bargain (price) is, cannot be made.  So, what is the true value of the Huffington Post?  Some see the HuffPo as a barely five year old celebrity upstart that defied expectations to become a remarkably popular blog.   Was it a steal or a bust at 315 million?  

Celebrity, even notoriety, seems admired and  highly valued these days.  And, if admiration is not quite the word, the fact of celebrity -  even where the person concerned is famous for simply being famous – certainly draws our attention.  It is because of this that the 'art' of being a celebrity is a hardnosed business pursuit rather than a frivolous lark.  There is no shortage  of promoters willing to pay someone - anyone - who can attract, however fleetingly, the public’s attention.  In this era of the ever shrinking attention span therefore, the proverbial fifteen minutes of fame is a lifetime in dog celebrity years.  How to explain otherwise the high dollar book deals, and the endorsements that are the badge of even the most tenuous celebutante? 

So, how to quantify the objects of our admiration?  We may not even be dealing with objects but with abstract values if you will – celebrity, popularity, notoriety to name a few.  Might a sampling of celebrity book deal dollar values yield a value index of sorts?  Perhaps - if accurate figures were not so fiercely guarded and exaggerated accounts were not so eagerly circulated.  Perhaps a listing of celebrity books on the New York Times Bestseller List might provide a surrogate of sorts?  One can only hope it was no mean feat for the reflections of a celebutante to make the New York Times Best Seller list at the same time that the memoirs of a former U.S. president did. 

Contract law permits a wide exercise of choice here.  As one person’s trash may be another’s  treasure, it is the buyer’s (or seller’s) choice to make a deal that might seem a bad idea to someone else.  Choice is the operative word – if the party was misled, unduly influenced or improperly threatened for example, the deal will of course be voidable. 

Twenty years ago, America On Line (AOL) was a profitable media giant.  A decade later, a less vibrant AOL consented to become a part of the Time Warner group.   Seen as a bad idea at the time by some and now viewed as possibly the worst merger deal in history,  there was no suggestion when it all ended badly, that it was anything other than an ill-advised gamble.    Now a very publicly ailing member of a reputably dying breed of media and print enterprises, AOL has by this merger bought itself a chance to turn around it’s all but inevitable demise.

Presuming that this can only be a good deal for AOL which had to do something, anything, or die, what about the Huffington Post?  Did the HuffPo get ‘good value’ for the trade?  The jury is out on whether the deal  will be a vindicated or regretted.  Contractually speaking, however, a contractual party is entitled to exactly what he or she bargained for – nothing more, nothing less.  Full performance of a party’s side of the bargain discharges that party’s duty to perform, while the unexcused non performance of even part of a due duty is a breach per the Restatement of Contracts (2^nd) §235. 

The bargain, ideally, was shaped by the parties preferences.  A party may thus receive as the exchange, if she chooses, a little something now whose value at the time of contracting is greater to her than its face value. She may promise to pay, if she wishes, double, threefold or more of that face value in exchange, sometime in the future.  She may choose, conversely, to pay big money for a subject of seemingly slight value in the hope that the potential she sees will soon be realized.  If that potential is unrealized, she will wear the risk.  Unfair tactics and public policy aside, the law is content to permit her to assign whatever value she chooses to the subject of her desire be it increased popularity, an entry pass into a stronger corporate group, or a chance to play with the big boys. 

Should we conclude therefore that value is in the eye of the beholder, and that the measure of a subject’s value is how much people are willing to pay for it?  This is a logical deduction,  but only one side of the value-is-determined-subjectively v objectively jurisprudential debate.   It must be harder in any event, to quantify the value of celebrity musings without reference to sponsored endorsements, celebrity impact rankings and such.  It evidently is just as difficult, if not more so, higher up the food chain.  Take our example of  a very popular upstart website/blog.  Analyses of monitored acquisition deals indicate that online media sites are typically acquired for 1½ times the amount of their generated revenues.  Launched barely five years ago, the Huffington Post was acquired for 315 million - reportedly five times its generated revenue.  It is hard to know whether this figure is a hardnosed assessment of the HuffPo’s worth, or a reflection of the fact that the negotiations were between an ailing giant and an ambitious upstart fledgling.

If all goes well, the ultimate verdict may one day be that the HuffPo was a steal at 315 M.  It is possible that Adrianna Huffington may come to rue the bargain that looked oh so good at the time.  If AOL’s profitability hemorrhage is not stemmed by this deal, on the other hand, its 315 M payout will be just one more milestone in its march to oblivion. There is no contractual rule against a deal that was, with hindsight, ruefully underpriced or fatally expensive.   Contract law will be content where the regretted deal, truly bargained for and not compromised by vitiating factors, was based upon a freely quantified exchange. 

The parties considered the bargain.  They assessed its value.   Once you have done that, “you pays your money and you takes your choice.”

 

[Eniola O Akindemowo]

Charlie Sheen Has No Morals...Clause (allegedly)

After we discuss ambiguity, contractual interpretation, interpretive maxims and other related topics, I have my first-year Contracts students draft a morals clause for a faux contract between a television network and a performer.  The exercise is an attempt to put the issues "in context" and demonstrate how and why ambiguity actually arises.  We also discuss the general benefits of brevity versus the costs of leaving something out of the contract.  It seems that Warner Brothers may be facing the latter scenario in its contract with actor Charlie Sheen. The clause allegedly left out is a morals clause. 

Most contracts between producers and performers routinely contain a "morals clause," the breach of which entitles the show's producer to fire the performer.  Conduct swept within a morals clause can range from more serious offenses, such as criminal convictions, to any behavior that merely would make the producer or network look bad.  For example, as we've previously reported, Tiger Woods's reported marital infidelities may have triggered the morals clauses in some of his endorsement contracts.  Because Sheen's recent off-camera behavior has made him appear to be, ahem, less than 100% moral, some industry insiders have suggested that Sheen would be fired from the highly-successful CBS show, Two and a Half Men, produced by Warner Brothers.  Not so fast, says Sheen.  Sheen reportedly is telling friends and advisors not to fear because his contract, unlike most others, has no morals clause.  Thus, in Sheen's world, he cannot be fired from the show without his firing being a breach of the contract by Warner Brothers. 

So, if you are tired of hearing about Charlie Sheen's off-camera exploits on this blog or elsewhere, blame  Warner Brothers' lawyers.  If they had included a morals clause in his contract, I am confident that Sheen would not be doing these allegedly immoral things (this sentence brought to you by our sponsor, Sarcasm).

[HRA]

Are Baseball Players Suckers for Oddball Incentive Clauses?

With the Superbowl coming up this Sunday, many sports fans currently are focused on football (or at least on the commercials to air during the football telecast).  However, a recent story collecting oddball terms in professional baseball players' contracts recently grabbed my attention.  Most of the terms detailed are incentive clauses of the "do "this thing, get this much more money" variety.  What makes these incentive clauses particularly interesting, however, is that many of the triggering actions appear impossible or near impossible to achieve.  For example, some players that have World Series MVP incentives play for teams that stand little chance of winning games let alone the World Series (sorry, Pittsburgh).  In another perplexing example, a player who is a designated hitter (meaning that he does not play in the field--ever) has a clause promising to pay him extra money if he wins a Gold Glove, an award given to the best fielding player at a particular position.  Ultimately, the article raises an interesting question that some of our readers may be able to address...why?  Why are these clauses, many of which sound downright silly, in these contracts at all?  Is it because the agent copied and pasted the terms from another player contract?  Is it because the player is delusional?  Or, is it because these incentives somehow help the contracts satisfy rules that apply solely to professional sports contracts (such as terms insisted upon by the players' union)?  If anyone has an idea, please post in the comments.  And enjoy the Superbowl!

[H.R.A. w/ hat tip to student Ron Angerer]

Happy Groundhog Day!

It was Groundhog Day yesterday and Punxsuatawney Phil did not see his shadow.  Spring, in other words, is officially around the corner, definitely less than six weeks away.  Or is it?  Can we hold the Inner Circle - the group on whose behalf  Punxsuatawney Phil acts – to this happy prediction?  What should we make of the annual February 2^nd hoopla?  Does it provide a reliable forecast – it is promoted as a "reliable prediction of when spring will begin" after all. 

The pertinent question is whether there is even a hint of any intention to be legally obliged by the assurance of reliability that accompanies every such 'Philly' prediction?  An assurance, I might add, that draws thousands of avid devotees to the ceremony annually.  But then, do we even think of suing the weatherman when the weather forecast on the evening news is wrong?  Perhaps the analogy is not such a good one – we should compare apples with apples.  Your humble weatherman on the evening news is not to be compared with the likes of such a prophetic rodent as Phil, I suppose. 

A reasonable response to the spring prediction might be to treat it all as a publicity stunt.  Nothing but an elaborate performance.  One by Phil and the Inner Circle, on behalf of the Borough of Gobblers Knob in Punxsuatawney Pennsylvania that surely is most appreciative of the tourist traffic. 

So, perhaps it is all in jest?  This has, after all, been an annual event for the last 125 years.  Surely the groundhog Phil of yesterday’s prediction cannot be the same Phil of the first ever 'Philly' groundhog spring prediction.  Or, can he be?  There are those whispers about a certain elixir of life.   There is an alternative explanation of course – that the Inner Circle has had an inexhaustible supply of prophetic Phils over the years – but this strains credulity.

I suppose one could take an analytical approach and test Phil’s batting average over the years.  It is a matter of public record after all.  Apparently Phil has seen his shadow 99 times, and not seen his shadow 16 times .  It should not be too difficult to map Phil’s predictions against historical weather records.  But perhaps we need not bother to do even that.   

Considering the fierce snowstorms presently lashing a large swath of the US, a not unreasonable conclusion would be that Phil’s prediction yesterday morning was nothing but a bold faced statement to be taken with a pinch of salt.  How can spring be near when weathermen are panicking about 'thundersnow'?  Reasonably reliable?  I haven’t done the math, but I strongly suspect that Phil’s predictions are not very reliable at all.  Poor Phil.

This does mean of course, that Phil’s predictions are poor candidates for contractual liability.  No failure of consideration, no misrepresentation, no estoppel.  Poor disappointed litigious weather watchers.  Lucky Phil.  

[Eniola O Akindemowo]

 

“And the Golden Globe goes to…the Parol Evidence Rule!”

The telecast of the 68^th Annual Golden Globe Awards Ceremony is this Sunday, January 16^th.  Although True Grit was rumored to be the favorite for “Best Use of Contract Law in a Western or Documentary” here, it appears to have been omitted from the actual list of nominees.  Also not mentioned on the Golden Globe site is the Parol Evidence Rule issue at the heart of the ongoing contract dispute between the Hollywood Foreign Press Association (“HFPA”), which votes on and presents the Golden Globe awards, and Dick Clark Productions (“DCP”), which produces the award telecast. 

 The contract between HFPA and DCP, as amended: (i) gave DCP the right to license the telecast rights for the awards ceremony to a broadcast network (DCP chose NBC); and (ii) specified that HFPA and DCP would split the license payment 50/50.  However, when DCP recently awarded an extension of the telecast license to NBC without first consulting with HFPA, HFPA sued.  HFPA claims that DCP cannot grant an extension of a license without HFPA’s consent.  The primary problem with HFPA’s argument, however, is that the written contract says nothing about HFPA’s consent.  Instead, it states that DCP may grant “any extensions, renewals, substitutions or modifications of the NBC Agreement, and to exploit such productions in all media through the world in perpetuity."  The words “subject to HFPA’s consent” or “only with HFPA’s consent, not to be unreasonably withheld” simply are not there.  And that is where the Parol Evidence Rule enters Stage Left.  HFPA’s preferred term would appear to contradict the writing (if the agreement is partially integrated) or at least fall within its scope (if the agreement is fully integrated).  Thus, evidence of such a consent requirement likely would be barred by the Parol Evidence Rule   However, as reported in this recent Variety article, HFPA has a decent argument under California law, which allegedly is rather welcoming to extrinsic evidence.  Hopefully, some of you more familiar with California law will comment on the accuracy of that assessment.

Biased Author Note:  I am cheering for HFPA in this one.  DCP now is owned by the same conglomerate that owns the Washington Redskins.  And if you’re a Dallas Cowboys fan like I am, you don’t like to see the Redskins’ owner, Dan Snyder, win anything.  

[HRA]

Federal Contractors and Arbitration of Sexual Assault and Harassment Claims

As reported in the Bureau of National Affairs (BNA) Federal Contracts Report (subscription necessary, alas) -- and nowhere else that I can find on the web -- on December 8, 2010, the Department of Defense (DoD) issued its final rule implementing Section 8116 of the 2010 Defense Appropriations Act, known as the Franken Amendment.  The Amendment applies to DoD contracts of more than $1 million and provides that contractors awarded such contracts must not require employees to arbitrate their Title VII claims or "any tort relating to or arising out of sexual assault or harassment."

According to the BNA Report, the Franken Amendment was a response to the case of Jamie Leigh Jones, a former employee of government contractor and former Halliburton-subsidiary, KBR.  Ms. Jones alleged that her fellow KBR employees drugged and gang-raped raped her while she was working for the company in Baghdad.  She further alleged that KBR confiscated, hid and tampered with the rape kit compiled by an army doctor who treated Ms. Jones.  KBR then allegedly confined Jones to a shipping container under armed guard and denied her food, water and medical treatment. 

Jones's case inspired Senator Franken (pictured) because KBR argued that her claims were subject to arbitration and sought dismissal of her suit from the federal courts.  The Fifth Circuit denied KBR's motion to compel arbitration and remanded the case to the District Court.  KBR's petition for cert. was denied in March.  

[JT]

The Gates of Hell[ish Mandatory Arbitration]?

Thanks to Michigan State University's Daniel Barnhizer and his student Christpher Anderson, we have the picture at right, which Mr. Anderson found taped to a local burger franchise while he was home in Texas for the holidays.

If you can't read the text, here it is in full: 

"Arbitration Notice"

"By entering these premises, you hereby agree to resolve any and all disputes or claims of any kind whatsoever, which arise from the products, services or premises, by way of binding arbitration, not litigation. No suit or action may be filed in any state or federal court. Any arbitration shall be governed by the FEDERAL ARBITRATION ACT, and administered by the American Mediation Association.

"Arbitration Notice"

Further research by contracts profs provides further information regarding the aforementioned American Mediation Association on this website.  Even as we speak, contracts profs are debating the effectiveness of this notice and of the counter-notice suggested by Ian Ayres here.  

[JT]

AALS Meeting Affected By Labor Dispute

As many readers of this blog already know, many of us are currently in San Francisco attending the annual meeting of our bricks and mortar mother ship, the Association of American Law Schools.  That meeting has been the subject of some controversy this year, as its official home is San Francisco's Hilton Union Square Hotel, which has been the subject of a union-organized boycott for over a year now.  

Unfortunately, this is not the sort of situation that lends itself to neutrality.  The workers are encouraging consumers to boycott the affected hotels rather than striking.  Consumers thus choose whether to side with management or with the union by booking at the Hilton or booking elsewhere.  And the union faces a challenge because without a strike and picket lines, boycotted hotels look pretty much like other hotels.  You would not know when you walked by or entered the hotel that it is the subject of a labor dispute.  Information about the boycott can be found here.

The AALS is caught in the middle, as it made its contractual  commitment to the Hilton long before the boycott began and apparently could not back out without incurring very high costs.  The AALS's leadership set forth their reasoning for not cancelling or relocating here.  Subsequently, the vast majority of section organizers determined that their sessions will be held elsewhere, including two very exciting sessions organized by the Contracts section, as detailed in Keith's post below.  I believe that our other regular bloggers will be in attendance, and we would all welcome the opportunity to meet with our readers and discuss ways to improve the blog.

[JT]

 

SF kids should get burgers, nuggets & Cokes at school, not McDonald's

San Francisco's city elders love their kids.  You can tell this because the city school budget this year has slashed funding for summer school, after-school programs, and drug education.  Safety officers at schools are seeing their hours cut, resulting in the prospects of less safe environments.  Teacher vacancies aren't being filled.  The city has just raised bus fares for kids, and is reportedly even contemplating charging students for bus rides to school.  But San Francisco Supervisors there have taken a huge step to better their childrens' lives:

They've banned toys in Happy Meals.  Not just McDonald's Happy Meals, of course, but all fast-food kids meals.  They're tired of kids being lured into buying unhealthy meals

The idea, apparently, is not to shield kids from cheap Shrek action figures and Hannah Montana pocket mirrors.  No, it's to combat childhood obesity by discouraging kids from eating at fast-food restaurants.  It's bad for children to be eating unhealthy food like hamburgers, chicken nuggets, hot dogs, and pizza,

Unless, of course, they're fed them in public schools, as they are in the San Francisco Unified School District, where these items are on school menus on a daily basis.  It's interesting to note that the average meal sold at an SFUSD elementary school cafeteria is more fattening than the cheeseburger, fries, and Coke you get at McDonald's.

Under the ordinance, kids' meals can include toys only if the meal contains fewer than 600 calories.  As it happens, the average kids' meal at a San Francisco public school has (according to the printed menu) more than 680.

Good to know that government officials in the City by the Bay are taking such good care of our kids.  They are, after all, our future.

FGS

Strategic Default: The Popularization of a Debate Among Contract Scholars

I apologize for my general absence from the blog.  I’ve posted my excuse to SSRN; it is titled Strategic Default: The Popularization of a Debate Among Contract Scholars.  Here’s the abstract:

A June 2010 report estimates that roughly 20% of mortgage defaults in the first half of 2009 were “strategic.” “Strategic default” describes the situation where a home borrower has the financial ability to continue to pay her mortgage but chooses not to pay and walks away. The ubiquity of strategic default has lead to innumerable newspaper articles, blog posts, website comments and editorial musings on the morality of homeowners who can afford to pay but choose, instead, to walk away. This Article centers on the current public discourse concerning strategic default, which mirrors a continuing debate among scholars regarding whether the willful breach of a contract has a moral element.

For those scholars that maintain that it is possible to describe and prescribe contract law with a general, unifying theory, the debate is primarily one between promise-based theories and economic theory. This debate between promissory and economic theory reflects a perpetual volley concerning whether contract law should reflect the primacy of morality or efficiency.

The argument of those that support strategic default reads like a case for efficient breach. Many of these commentators argue that the mortgage contract simply presents home borrowers with a choice: pay or surrender the property in foreclosure. If a homeowner is deep underwater, she is better off defaulting and the lender is no worse off relative to the bargain (after all, the lender agreed to foreclosure as a remedy). However, those who argue in favor of strategic default are counteracting a prevailing social norm that it is fundamentally immoral to willfully breach a contract. Many of the blog comments and even newspaper editorials have reflected a general sense that the homeowners who strategically default are acting shamefully.

The public discussion further mirrors the academic debate about whether encouraging efficient breach enables the greatest public good or, instead, undermines the very convention of contracting. On the one hand, strategic default serves as an example of how encouragement of breach of contract may lead to a breakdown of confidence in the marketplace and, in turn, could inhibit market activity. On the other, it is difficult to muster sympathy for lenders, whose imprudent loans are a large piece of the systemic problems that precipitated the housing crisis.

In the end, to the extent that questions of morality are nuanced and contextual, the example of strategic default elucidates the futility of either morality or efficiency as a unifying descriptive or normative theory of contract law. Indeed, it suggests that instead of focusing on individual contracts between borrowers and lenders, a more fruitful public discourse should be reframed to focus on appropriate systemic reforms to prevent the practices that played a part in devastating outcomes for the housing industry, families and communities. Because the concerns about strategic default – neighborhood depreciation and market collapse – are systemic, the solutions should be driven by those concerns, rather than shaming individual borrowers who decide to walk away.

The article is forthcoming in the Cornell Real Estate Journal.  There is still time for your feedback, which I welcome.

[Meredith R. Miller]

 

One Happy Meal™, Hold the Cadmium

Friday, the Consumer Product Safety Commission(CPSC), in conjunction with fast-food giant McDonald’s®, voluntarily recalled about 12 million Shrek Forever After™ collectible drinking glasses (photo courtesy of the CPSC) sold or awaiting sale at McDonald’s® locations throughout the U.S. after someone in Representative Jackie Speier's(D-CA) office alerted the CPSC that the movie-character illustrations on the glasses contained cadmium, prolonged exposure to which may pose a serious long-term health risk.

Millville, NJ-based Durand Glass Manufacturing Co.(DGMC), a subsidiary of Arques, France-based Arc International, manufactured the movie-themed glasses, which another Arc International subsidiary, Millville-based Arc International North America, distributed exclusively to McDonald's. McDonald's locations nationwide sold the glasses in May and early June 2010.

McDonald's web site addresses the recall through a series of FAQs (and answers). (For the benefit of those with short attention spans, every answer to which the statement would be germane includes the statement "the CPSC has said the glassware is not toxic.") Arc International deployed a press release. Representative Speier posted a statement on her web site, which also includes a link to a Los Angeles Times article about the recall. Only DreamWorks™ appears to be mum on the subject -- so far, at least. (Perhaps the Shrek-iverse's creators didn't retain all of the product licensing-rights like George Lucas did, not so long ago and not so far away, with the original Star Wars™ trilogy or they made McDonald's pay a non-refundable lump sum to market the glassware.) Rumors of a replacement glass featuring an image of McDonald's CEO Jim Skinnerthat transmogrifies into a Shrek-alike when filled with any non-Coca-Cola® brand soft or sport drink appear to be completely unfounded.

So, what's the contract law angle on collectible glassware manufactured for and sold to McDonald's for resale to McDonald's retail customers?

It should go without saying that the most interesting legal issues arising out of this scenario involve (1) what express and implied UCC Article 2 warrantieseach seller in the chain from DGMC (or DGMC's ingredient supplier) to McDonald's made to anyone who purchased or used the glassware; (2) to what extent, if any, each seller in that chain may have disclaimed some or all of its warranty liability, limited the remedies available to the buyer, user, or other person affected by the glassware's use, or both; (3) whether one or more warranty-making sellers breached one or more warranties to one or more buyer, user, or other person affected by the glassware's use; and (4) what remedies Article 2 affords any person to whom any seller is liable for breach of warranty.

For those wanting to add some international flavor to the mix, the CBC reports here that the recall has spread to include all Canadian McDonald's restaurants. Information from the Associated Press and Reuters, reported here, indicates that recalling the glassware sent to Canadian McDonald's restaurants raises the total number of recalled glasses to 13.4 million. Both the U.S. and Canada are partiesto the U.N. Convention on Contracts for the International Sale of Goods (CISG). To the extent that the Canadian McDonald's restaurants purchased their Shrek Forever After™ collectible glassware from New Jersey-based DGMC or New Jersey-based Arc International North America, that transaction constituted a sale of specially-manufactured goods (CISG art. 3(1)), purchased for resale, rather than personal, family, or household use (CISG art. 2(a)), by a buyer located in one CISG "contracting state" from a seller located in a different "contracting state" (CISG art. 1(1)(a)). Therefore, unless the Canadian McDonald's buyers and New Jersey-based DGMC or New Jersey-based Arc International North America effectively opted out of the CISG (CISG art. 6), any breach of warranty claim the Canadian buyers might have (CISG art. 35), the extent to which any U.S. seller disclaimed any warranty or limited its liability for breaching any warranty (CISG arts. 6 & 35), and the available remedies (CISG arts. 45-52 & 74-78), will be matters for the CISG to resolve.

[Keith A. Rowley] (partially cross-posted on the Commercial Law blog)

Guest Post by Deborah Post: Contract and Structural Inequality

[Cross-posted to SALTLAW blog]

Last week we learned that Jim Perdue,  Chairman of Perdue Foods Inc., spoke to Maryland legislators on behalf of the small farmers he claimed would be forced out of business if the environmental law clinic at University of Maryland Law School is allowed to sue Perdue and one of its growers.  I was familiar with Perdue’s relationship with small farmers.  Some years ago — in 1998, to be precise — I wrote a contracts exam using the pleadings filed in Monk v. Perdue Farms, Inc., 12 F. Supp.2d 508 (D.Md. 1998),  by plaintiff’s attorney, Roger L. Gregory, then partner in the firm of Wilder and Gregory, now judge on the Fourth Circuit Court of Appeals.

Monk was a case about racial discrimination. Several black farmers alleged that they were not accorded the same treatment under the terms of Perdue’s standard form contract as white farmers.  In that respect, the Monk case bore some resemblance to Reid v. Key Bank of Southern Maine, Inc., 821 F.2d 9 (1st Cir. 1987), a case I cover in contracts when I teach students about the implied duty of good faith. Mr. Reid was the only borrower at the bank to have his line of credit cut off, his note accelerated, his collateral seized without the bank officers first calling him in to the bank for a meeting.  Reid is still mentioned in other casebooks in notes about lender liability or the subjective test for good faith, but these notes appear to sidestep the issues of race and motive altogether.  The relationship between motive, malice and racial prejudice is admittedly somewhat ambiguous in Reid  because the jury found there was no racial discrimination by the bank.  Nevertheless, Reid is still a case that calls attention on the disparate treatment one black businessman received and the inferences that could be drawn from that fact.

But I chose the Monk case for my final examination because it was not just a case about discrimination and bad faith.  The pleadings alleged behavior by Perdue that could be analyzed variously as misrepresentation, economic duress, bad faith unrelated to any allegation of racial prejudice, and failure to perform many of its obligations under the contract.

The genesis of all of these claims was the ironclad control Perdue had over the manner in which the farmer ran his business. The farmer was contractually obligated to take chicks supplied by Perdue, use the food or grain supplied by Perdue, build housing for the chickens or purchase equipment if Perdue decided it was necessary, administer antibiotics to the chickens as required by Perdue. The chickens were collected, weighed and delivered to the plants by Perdue employees (the status and plight of chicken collectors is a story for another day). According to the pleadings, a rider to the contract, not negotiated with the farmers but unilaterally imposed by Perdue, shifted all risk of disaster – flood or disease or excessive heat – to the farmers. If the chickens died, there would be no compensation forthcoming, although the practice in the past had been to pay a minimum amount per chicken received and raised.

The current conflict with Perdue reminded me of that old exam  because back then chicken manure was part of the problem. Perdue has known for some time that farmers were storing chicken manure on their property. In  Chapter 3 of  a 2001 report , Professor Neil D. Hamilton of the Drake University Agricultural Law Center  reviewed the terms in several contracts used by producers, noting that whether the contracts were silent on the issue of chicken manure or expressly placed responsibility for disposal on the farmer, the cost of the removing chicken manure fell on the farmer. By most reports, chicken growers don’t make much money, somewhere between  $16,000 -$18,000 a year. Perdue, in contrast, reports on its website that it has annual sales of $4.6 billion a year. Perdue had to have  known that the cost of removing manure would be significant  for  famers whose profit margin is so slim.

Apparently, Perdue did see and plan for a future when environmental regulation would prohibit the use of chicken manure as fertilizer and  require its removal from poultry farms.   Perdue Farms is now trumpeting its environmental stewardship and its farsightedness in constructing the Perdue AgriRecyle plant. The plant has been in operation for nine years and was built, says Perdue, to offer the growers the option of taking poultry litter ( chicken manure) somewhere at “no cost to them.”  In fact, Jim Perdue proudly claims that Perdue was willing to bear that cost “in order to help the growers satisfy the new rules around nutrient management in the Chesapeake Bay region.”   The ‘cost’ to Perdue of taking the growers’ manure without charging those growers a fee  is questionable. This manure is the raw material Perdue uses to manufacture MicroStart 90, a fertilizer that that it  sells to the Scotts Co., golf course management companies and organic farmers as “processed manure.”  Chicken manure may well become a new profit center for Perdue.

Perdue offered the plaintiffs in Monk a standard form contract on a take-it-or-leave-it basis that gave Perdue  control over production and placed much of the risk of loss associated with growing poultry on the farmer. The power differential, the structural inequality between farmer and producer, is explicit in the contractual terms that governed their relationship, in the asymmetry of duties and obligations, and in the disparity in wealth perpetuated by the method and terms of compensation.

Farmers fought for fairer terms in their contracts, but were thwarted by contractual terms that made the provisions of the Packers and Stockyards Act inapplicable to to producers like Perdue.  In the 1980s,  a grower in North Carolina filed suit against Perdue claiming that the company was violating a provision of the Act which prohibited “live poultry dealers from engaging in or using “ any unfair, unjustly discriminatory, or deceptive practice or device.”  Wiley B. Bunting Jr. v. Perdue Inc., 611 F. Supp. 682 (EDNC 1985). The plaintiff lost the case  because Perdue does not sell poultry to the growers. It retains title to the chickens and the growers are paid for the service they provide in raising the chickens.  The court found no legislative history to support an expansive interpretation of the term “live poultry dealer.” 

More recently, arbitration provisions in the standard form contracts drafted by producers thwarted the efforts of farmers, like the plaintiffs in Monk, to challenge the terms or the manner in which the contract was performed by Perdue.

Fortunately, agrarian sentiment worked to the benefit of poultry growers when Congress passed the last farm bill.  Under the amended version of the Packers and Stockyards Act, a poultry farmer cannot be coerced into assenting to an arbitration provision.  ”Any livestock or poultry contract that contains a provision requiring the use of arbitration to resolve any controversy that may arise under the contract shall contain a provision that allows a producer or grower, prior to entering the contract, to decline to be bound by the arbitration provision.” 7 U.S.C.S. Section 197(c).

The revised statute and new regulations effect a redistribution of power between grower and producer; they address structural inequality by regulating the process of contract formation in a situation where the terms otherwise would not have been negotiable. The statute restored to farmers the freedom of contract that contemporary contract jurisprudence has theorized out of existence. Maybe this is a development that judges need to think about. Why was legislation needed to remedy the abuses that stem, inexorably and inevitably, from structural inequality?

Which brings me back to contracts and to the final examination I gave in the Spring of 1998. A final examination matters to students. They probably read it more carefully than any case they read all year. If questions of social justice have been explored in class, students may reflect, as they construct their answer, on the meaning of power, the reason why a drafter would include terms that are extremely favorable, perhaps even ‘disproportionately favorable,’ to a client, the strength or weakness of doctrines which arguably restrain the use or abuse of power. A final examination is an instrument that assesses what students learn. If we truly want our students to learn something about social justice, a final examination should raise issues about the inequities and the inequality that law perpetuates and the potential the law might have to address or even remedy them.

[Deborah Waire Post (Touro)]

Artists' Rights 101

If you're interested in art law and are in the Dallas-Fort Worth area you may want to drop by a free seminar for artists, lawyers, and interested others put on by the Texas Wesleyan Center for Law and Intellectual Property and the Fort Worth Arts Council.  The seminar, third in a series, will deal with what artists need to know about the Visual Artists Rights Act of 1990.

The program is scheduled for 6:30 p.m. on Monday, February 8, in the Sanders Theater at the Fort Worth Community Arts Center.  Pre-registration is required for the free program.  (Left:  "Vortex" by Richard Serra, Fort Worth Museum of Modern Art.)

[FGS]

Supreme Court to Hear Unconscionability Challenge to Arbitration Clause

 As the ever-reliable SCOTUSblog reports, on Friday, the U.S. Supreme Court announced that it would review Rent-A-Center West, Inc. v. Jackson, a case decided by the Ninth Circuit last September.  The NInth Circuit opinion is available here.

In the case, Plaintiff Antonio Jackson brought a claim in the federal district court claiming race discrimination and retaliatory termination.  Rent-A-Center moved to dismiss and compel arbitration pursuant to a "Mutual Agreement to Arbitrate Claims" that the parties had signed and which specifically lists discrimination claims among those subject to arbitration.  Noting that the Arbitration Agreement gave the arbitrator exclusive powers to interpret it and to determine its enforceability, the District Court granted the motion to dismiss, unconvinced by Jackson's argument that the Agreement is unconscionable.  

The Ninth Circuit vacated that dismissal and remanded, finding that where a party asserts that there was no reasonable assent to an arbitration agreement because that agreement is both substantively and procedurally unconscionable, the question of unconscionability is for the court.  The Ninth Circuit further found that, although the District Court properly rejected one of Mr. Jackson's arguments for the substantive unconscionability of the Agreement, it did not address his other two arguments.  

There was a dissenting opinion on the Ninth Circuit, which may foretell what the Supreme Court will find.  Dissenting Judge Hall found that the Agreement was, in anything, more favorable to employee interests than are most such agreements.  The upshot of the Ninth Circuit opinion, said Judge Hall, will be mini-trials in the district court prior to the arbitration proceedings to which the parties agreed for any party who is clever enough to challenge the arbitration agreement on unconscionability grounds.  

I will find this case especially interesting to watch and may teach it if the Supreme Court has interesting things to say on the subject, as I find that the issue of the unconscionability of binding arbitration in employment agreements is one that frequently elicits passionate exchanges among my students.  The question of the substantive unconscionability of such agreements is a complex one, and perhaps it is one for which first-year law students usually have inadequate information.  

Many if not most of my students have worked before coming to law school and so they have had the experience of arriving for their first day of work and then being told that they must sign a stack of forms, including one that provides for binding arbitration.  Very few people have any bargaining power at that stage in their employment history.  The situation strikes my students as fundamentally unfair.  

However, many students defend the practice, pointing out that arbitration also has advantages for employees and that the deal is not substantively unconscionable.  Moreover, the savings to employers can translate into savings to consumers as a whole.  It will be interesting to see how the Supreme Court does the dance this time around, but I'm predicting a unanimous reversal.

[Jeremy Telman]

A Corollary to the Totten Doctrine: Wilson v. CIA

As previously discussed on the blog, the Totten doctrine requires dismissal of a case when "the very subject-matter" of the case is a state secret.  Today's New York Times reports that the Second Circuit has dismissed Valerie Wilson's suit against the Central Intelligence Agency, in which she claimed that the Agency violated her free-speech rights when it required redaction of her 2007 book, Fair Game.  

As reported in the Times, the Second Circuit's reasoning is based on a contractual override of Wilson's 1st Amendment rights: “When Ms. Wilson elected to serve with the C.I.A., she accepted a life-long restriction on her ability to disclose classified and classifiable information.”  The problem is that at least some of the information in question had already been leaked to the public by the government and in any case was made public and widely reported on.  No matter, says the court.  The information is still classified, and she is still bound, even if governmental breaches “may warrant investigation.”

Although the entire panel voted to dismiss, Judge Katzmann concurred:

I agree with the majority that Ms. Wilson’s pre-2002 dates of service, if any, were originally properly classified by the CIA, have never been officially declassified, and were never officially disclosed by the CIA.  Therefore, I also agree that this Court has no power to free Ms. Wilson from the secrecy agreement that she signed upon commencement of her employment with the CIA.  At the same time, I write to observe that the CIA’s position in this litigation blinks reality in light of the unique facts of this case and the policies behind the doctrines at issue here.  Indeed, the CIA’s litigation posture may very well be counterproductive to its purposes.

Judge Katzmann proceeds to explain that the CIA’s justification for the redaction was that the dates of Ms. Wilson’s service ought not to be revealed.  However, those dates had already been revealed in a CIA-authored document, submitted on CIA letterhead and entered in the public record as part the Congressional Record in 2006.  Judge Katzmann thus argued that while, as a legal matter, the court is without power to order the CIA to permit the release of classified information, whether or not it was already in the public domain, as a matter of policy, it is harmful to the reputation of the CIA for it to disseminate information and then also attempt to suppress it. 

The opinion can be found here.

[Jeremy Telman]

"Pay for Performance" sponsor explains legal reasoning . . . sort of

The sponsor of the "Pay for Performance Act of 2009" gives his reasoning in a Huffington Post piece today.  Freshman Rep. Alan Grayson (left), who introduced the bill, is a Harvard Law grad who was a staff clerk at the D.C. Circuit and used to do government contracts work at the Fried, Frank ifirm n D.C., but his explanation for why his bill is reasonable contains some dubious legal reasoning.  His basic argument is that "the taxpayers are owners [of these covered institutions], and owners of companies set salaries for their employees."

Setting aside whether the bill is a good idea -- lots of folks are lining up on either side -- Grayson's legal analysis is wrong.  The "taxpayers" (to pick nits, it's the 'government," not the "taxpayers" that owns the stake) certainly have an ownership interest in those entities where the government has taken a capital stake.

But it's not true that "owners" of public companies "set salaries for their employees."  It is the directors of a company who are responsible for making decisions on employment and compensation -- the owners' only remedy is to fire the directors.  That's not a nit-picky distinction.  There's a solid line of cases going back to McQuade v. Stoneham (1934) which hold that any attempt by shareholders to bind directors to whom they can employ and at what compensation is void.  Directors are free to ignore commands from their majority shareholders, and are, in fact, required to do so if they believe that the action isn't in the firm's best interest.

None of this is to say that the government can't do this -- that's one for the Con Law folks, probably -- but it is curious that a highly trainsed lawyer has offered a pretty dubious legal analysis in support of it.

[Frank Snyder]

[NOTE:  Edited to remove erroneous description of the scope of the act.  F.S.]

Not everyone likes "Pay for Performance"

While the House of Representatives debates whether financial institutions that received TARP money ought to be compelled to adopt "pay for performance" criteria for compensation, the American Federation of Government Employees is urging Congress to jettison the concept when it comes to federal workers.  The 600,000-member AFGE says the Department of Defense's pay-for-performance initiative is "misguided" and "wrought with unfairness."

[Frank Snyder]