Sunday, December 15, 2013
London, UK: Current events smiled on GLOBAL K last week and offered an example of how contemporary economic sanctions programs interact with transnational contract activity. (See last week’s Global K.) While I was lecturing at the Centre for Commercial Law Studies in London, the news broke about possible sanctions violations by a British bank in its payment transfer practices.
On December 11, 2013, the British press was full of the news that Royal Bank of Scotland plc (RBS) had agreed to pay £62 million ($100 million) to settle charges by U.S. state and federal banking authorities that it had violated U.S. sanctions against Iran, Burma, Libya and Sudan, and possibly Cuba according to some news accounts. The three agencies involved – the Office of Foreign Assets Control (OFAC) in the Treasury, the Federal Reserve Board, and the New York State Department of Financial Services – coordinated their investigation with the UK Financial Conduct Authority. According to OFAC, from 2005 to 2009 (the Daily Mail asserted it was 2002-2011), RBS payment practices impeded U.S. economic sanctions. References to critical information about certain payment transfers that would have triggered a blocking of funds and payments – such as the fact that an Iranian party might be interested in one end or the other of the transfer – were excluded from documentation covering payments sent to or through U.S. financial institutions. By some accounts, these payment transfer practices involved more than 3,500 US dollar transactions worth £320 million ($523 million) routed through US banks. Two aspects of this situation are worthy of specific comment.
First, the nature of the claimed violations varies somewhat as you look from one sanctions program to the next, even if the payment activities were essentially the same. For example, under the Iran sanctions, foreign financial institutions such as RBS are quite specifically targeted by prohibitions in the sanctions program. A foreign financial institution would be prohibited from knowingly “[f]acilitat[ing] the activities of ... a person subject to financial sanctions” under U.N. sanctions against Iran,” engaging in “money laundering to carry out” such an activity, or facilitating “efforts by the Central Bank of Iran or any other Iranian financial institution to carry out” such an activity. 31 C.F.R. 561.201 (2013). Under the Burmese Sanctions Regulations, the focus would be on transactions and transfers involving “property and interests in property” of the direct targets of the sanctions, which would be prohibited where the property or interest was “in the United States, ... hereafter [came] within the United States, or … [came] within the possession or control of U.S. persons.” 31 C.F.R. 537.201 (2013). The Sudanese Sanctions Regulations contain a similar prohibition on transactions and transfers (31 C.F.R. 538.201 (2013)), but its facilitation prohibition applies on its face only to “U.S. persons.” 31 C.F.R. 538.206 (2013). Likewise, the Cuban Assets Control Regulations would prohibit transactions and transfers involving “property and interests in property” of any Cuban national. (31 C.F.R. 515.201 (2013).) However, beyond this basic sanction, if RBS were considered to be acting on behalf of a blocked Cuban national in these transfers, then it might be deemed to be a “specially designated national” of Cuba and as such it would itself be a direct target of the Cuban sanctions, See 31 C.F.R. 515.302,515.306 (2013) (defining “national,” “specially designated national”). Hence, given the incidence of significant variation as one moves from one sanctions program to the next, it becomes more difficult in managing risk in transnational contract activity to generalize as to the risks and appropriate risk management strategies.
Second, the likely implications of transnational contract activity on domestic contract activity may also vary significantly as our attention shifts from program to program. Take, for example, the situation of a U.S. citizen who is a holder of a credit card issued by RBS NA, a national bank subsidiary of RBS. In many of the sanctions situations identified above, the impact of the RBS violations on her contractual relationship would be adventitious. The substantial fine might marginally raise the cost of doing business with the card issuer, assuming that the bank chose to pass some portion of this indirect cost of doing business throughout the enterprise. Even at $100 million, it is unlikely that the credit card holder would even feel the effects of the event. However, if aggressive action were taken against RBS under the Cuban sanctions – a contingency that is essentially eliminated by the bank’s settlement, one would imagine – the effect on the credit card holder would be quite dramatic. As an ongoing contract party of a specially designated national, she herself would be potentially committing a direct violation of the Cuban Assets Control Regulations, because U.S. persons are prohibited from entering into contracts with Cuban nationals – even with specially designated nationals – in the absence of a license. So unless you are a great humanitarian like Beyoncé and hence above the law, avoid entering into contracts and other transactions with specially designated nationals of Cuba.
Tuesday, December 10, 2013
In late November 2013, negotiators reached agreement on a temporary accord under which Iran would halt much of its nuclear program and roll back some existing elements of it, and the United States agreed to $6 billion to $7 billion in sanctions relief, including releasing approximately $4.2 billion in oil revenue “frozen” in banks outside the United States. (The United States would continue to enforce other substantial sanctions that remain in place.) Recent coverage and commentary about the six-month U.S.-Iran deal calls to mind the fact that economic sanctions have become a pervasive feature of the transnational contract environment. (See this Table)
Source: M. P. Malloy (ed.), Economic Sanctions (Cheltenham, UK: Edward Elgar Publishing, forthcoming).
Two things are noteworthy about this situation. First, there is such a considerable array of sanctions in place – unilateral and multilateral, trade and financial, direct and indirect – that a state negotiating with Iran has an extensive menu from which to choose when it starts horse-trading. Second, it is probably not safe, as many casual observers still do, to view economic sanctions as unusual or “exigent,” rather than a commonplace feature of contracting in the transnational market.
It could be a year or more before we know the outcome of the ongoing maneuvering between Iran and the “P5-plus-1 countries” – the permanent members of the U.N. Security Council plus Germany – but contracts practitioners and commentators should learn one thing right now. The immediate lesson to be drawn is that the potential impact of sanctions is an increasingly pervasive risk factor in transnational contracting. The risk factor arises from three distinct circumstances in contemporary transnational practice.
First, the resurgence of U.N. mandatory sanctions practice under Chapter VII of the U.N. Charter. Prior to 1990, U.N. sanctions practice was limited and ineffective – the classic example being the curiously stunted trade sanctions against the break-away Southern Rhodesian regime in the1960s. In response to the Iraq invasion of Kuwait in 1990, however, and largely under the leadership of the George H.W. Bush Administration, U.N. mandatory sanctions broadly and effectively isolated the occupied Kuwait and stymied the Iraqi Government, as a prelude to the first Gulf War. The success of this program led to frequent and pervasive application of mandatory sanctions as the primary U.N. Security Council response to many crises over the decades that followed. This development means that there is now a formidable array of sanctions programs in which implementation is mandatory for all U.N. member states, actively monitored by the Security Council through sanctions committees. As a result, moving contract activities off-shore – a typical maneuver in many pre-1990 sanctions situations (including the Southern Rhodesian sanctions) – is no longer an easy and viable option. In addition, many states – and principally the United States – have continued to promulgate unilateral sanctions programs, often paralleling multilateral sanctions, and these have benefited from the newly pervasive incidence of sanctions as a risk factor in transnational contract practices.
Second, the emergence of “smart sanctions” strategies in the design of sanctions programs. Contemporary sanctions are often more carefully targeted, and include specific and distinct sanctions against intermediaries – e.g., business brokers, freight forwarders, purchasing agents, banks and other financial intermediares – which means that the direct and indirect costs of sanctions avoidance and evasion have grown significantly for indirect and secondary contract actors who would not have otherwise viewed themselves as “targets” of sanctions programs.
Third, the existence of licensing authority within sanctions programs. Ironically, the existence of authority within participating member states to license activities and transactions otherwise affected by a sanctions program, subject to oversight by U.N. sanctions committees, has increased the ongoing compliance and enforcement impact of sanctions programs. This feature has resulted in greater accountability for transnational contract parties.
The casual observer might respond that generally applicable contract doctrines of impracticability (or impossibility) and frustration would ameliorate the impact of these developments in sanctions practice. To the contrary, I believe that the interaction of these doctrines with current practice in transnational business may be more complicated than one might expect at first glance.
It is true that, under Restatement of the Law - Contracts (Second) § 261, a party to a contract affected by sanctions might claim that performance has been rendered “impracticable,” thus discharging its duty to perform. However, § 261 is grounded on the occurrence of an event “after a contract is made” that occurs “without his fault.” The pervasiveness and persistence of an array of sanctions programs challenges both of these premises. There is no end of sanctions already in place, and in the typical sanctions program the party bears the burden of demonstrating that it did not know, nor had no reason to suspect, that the subject transaction was prohibited or restricted. As comment d to § 261 observes, “If the event that prevents the obligor's performance is caused by the obligee, it will ordinarily amount to a breach by the latter. ... If the event is due to the fault of the obligor himself, this [§ 261] does not apply. As used here ‘fault’ may include not only ‘willful’ wrongs, but such other types of conduct as that amounting to breach of contract or to negligence.” Of course, this dilemma exists quite aside from any administrative or criminal consequences that might be visited on the parties by a sanctions-enforcing state. Goods or services that are the subject of the contract may be susceptible to being “blocked” or “frozen” by the enforcing state.
The same problem would exist for a contracting party who attempted to invoke the doctrine of discharge by a supervening frustration under Restatement (2d) § 265. This may be a particular concern for indirect or intermediary parties, a point that is neatly demonstrated by Illustration 5 under § 265:
A contracts to sell and B to buy a machine, to be delivered to B in the United States. B, as A knows, intends to export the machine to a particular country for resale. Before delivery to B, a government regulation prohibits export of the machine to that country. B refuses to take or pay for the machine. If B can reasonably make other disposition of the machine, even though at some loss, his principal purpose of putting the machine to commercial use is not substantially frustrated. B's duty to take and pay for the machine is not discharged, and B is liable to A for breach of contract.
Furthermore, given the typical licensing regime that is included in sanctions programs, “impracticability” may be even less apparent in a particular contracting situation. As comment d to § 261 goes on to note, “ ‘impracticability’ means more than ‘impracticality.’ A mere change in the degree of difficulty or expense . . . unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.”
One might respond, however, that if performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, then the regulation or order is “an event the non-occurrence of which was a basic assumption on which the contract was made,” according to Restatement (2d) § 264. Comment a to § 264 undercuts this argument, however, because “[w]ith the trend toward greater governmental regulation, however, parties are increasingly aware of such risks, and a party may undertake a duty that is not discharged by such supervening governmental actions, as where governmental approval is required for his performance and he assumes the risk that approval will be denied. ... Such an agreement is usually interpreted as one to pay damages if performance is prevented rather than one to render a performance in violation of law.” This problem is underscored by Restatement (2d) § 266, dealing with existing impracticability or frustration. In a situation in which, at the time a contract is made, the party's performance is impracticable without his fault “no duty to render that performance arises,” but only if this fact is one which it had “no reason to know,” a difficult position to maintain in an environment of persistent and pervasive sanctions programs.
All of this suggests a need for caution and proactive monitoring of contract activity in the transnational market. It is extremely naïve – if not outright disingenuous – to assume that one can casually rely on traditional doctrines of impracticability (or impossibility) and frustration in transnational commerce. Over-reading these doctrines can result in bitter lessons, and embarrassment, in the modern environment of transnational contract practice.
Monday, December 2, 2013
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) continues to collect state parties. The CISG will enter into force for Brazil on 1 April 2014, and for Bahrain on 1 October 2014. With that, Brazil and Bahrain will become the 79th and 80th States Party to the CISG, respectively.
The delay in entry into force is built into CISG art. 99, and does not suggest any particular caution on the part of either state. What may require some explanation, however, is why it took almost 25 years after Brazil approved the final text of the CISG and signed the Final Act of the Conference, before it finally acceded to the convention on 5 March 2013. According to local commentators, a large part of the delay is due to extraneous political considerations. Legislative inaction on this front was common under a previous authoritarian political system, as the regime was skeptical of – if not outright hostile to – multilateral initiatives to advance private international law. Efforts by Brazilian academics, the Bar Association of Brazil, and business interests progressively pressed for Brazil to engage in such initiatives, and the end result was that Brazil rejoined the Hague Conference on Private International Law in 2001 and began the internal process for accession to the CISG in 2011.
Brazil’s accession is a particularly significant development. Brazil’s economy is the largest among Latin American states, and the second largest in the Western Hemisphere. The existence of a common set of default rules governing trade in goods, irrespective of the significant differences in U.S. and Brazilian legal traditions, creates potential efficiencies for the future of economic relations between the two states. Furthermore, from the perspective of economic development policy, the existence of modern, uniform framework for contracts for the sale of goods involving one of the fastest-growing major economies in the world is a positive feature.
The increasing likelihood that regional contract activity in the Americas may implicate the CISG underscores the need for U.S. academics to ensure that our students at least understand that the convention exists as part of U.S. contract law. This generally applicable source of federal contract law constitutes the default rules that apply to an expanding range of regional contract situations. It has been a commonplace that parties can always make a contractual choice of law that would remove the CISG from the mix. However, what you don’t know can’t be planned against, and who is to say that local law – as opposed to the CISG default rules – is necessarily optimal for a given contracting situation?
Over at the Huffington Post, Sam Fiorella takes note of the egregious terms in Facebook Messenger's Mobile App Terms of Service. These terms include allowing the app to record audio, take pictures and video and make phone calls without your confirmation or intervention. It also allows the app to read your phone call log and your personal profile information. Of course, an app that can do all that is also vulnerable to malicious viruses which can share that information without your knowledge. But, of course, this is allowed only with your "consent."
Monday, November 18, 2013
I'm enjoying the posts from Ryan Calo and Miriam Cherry about my book, Wrap Contracts: Foundations and Ramifications and plan to post a response later this week. A common question I get (after, Are these things really legal?) is What harm can these contracts cause anyway? Well, one woman claims that a company can use them to ruin your credit. The woman, Jen Palmer, ordered some trinkets from KlearGear.com but she claims that she never received them and canceled the payment. After she allegedly failed to reach someone at the company, she wrote a negative review of KlearGear.com on a consumer reporting website stating that they have "horrible" customer service. KlearGear allegedly emailed her, claiming that her negative review ran afoul of a non-disparagement clause in their online terms of sale. She says that they told her to remove the post or face a $3500 fine. Ms. Palmer was unable to get the post removed and alleges that KlearGear.com reported her to a credit bureau! She claims that she is now fighting the negative mark on her credit report which is preventing her from getting loans for a new car and house repairs.
I don't think the terms of sale are enforceable against Ms. Palmer but that's almost beside the point. Contracts are used in a variety of ways - one of those ways is to deter problems. Not many consumers are willing to fight to test the enforceabilty of a contract in court.
But I have a question: Why would a credit agency ding someone's record simply because they received a call from an online retailer about someone who wasn't even a customer breaching the terms of sale? I checked KlearGear's website and couldn't find the non-disparagement clause in their terms of sale- they might have removed it after the negative publicity or it might not be in another agreement that doesn't appear until a customer places an order. There's got to be more to this story...or else we've just entered a new era of abuse by wrap contracts.
Wednesday, November 13, 2013
Starbucks lost an arbitration fight with Kraft Foods and is being fined nearly $2.8 billion. Yes, you read that right - that's billion with a B. At the center of a dispute was a 1998 contract that required Kraft to distribute and market Starbucks brand coffee to U.S. retailers. The agreement was supposed to terminate in 2014 but Starbucks didn't want to wait that long. It complained that Kraft wasn't doing a good job promoting its coffee and offered Kraft $750 million to terminate the contract. Kraft rejected but Starbucks ended it in 2011 anyway (and entered into a deal with Green Mountain Coffee Roasters) which led Kraft to commence arbitration proceedings.
Another reminder to think carefully about those long durations in contracts - you can never predict how things will go and it's a good idea to really think about those termination provisions.
In a situation that underscores the importance of thinking twice about very long term contracts, the NBA wants to end a contract which requires it to pay two brothers a percentage of its broadcast revenues. Back in 1976, the Silna brothers owned an ABA franchise, the Spirits of St. Louis. When the ABA merged with the NBA, the Silnas agreed to this bargain - they would dissolve their team in exchange for 1/7 of the television revenues for the four ABA teams that were merged. The four teams were the Indiana Pacers, the San Antonio Spurs, the Brooklyn Nets and the Denver Nuggets.
Sure, back in 1976, the Silnas might have looked silly for giving up a huge buyout for something that seemed pretty worthless (the NBA wasn't even televised prime time) but now the deal is being called "the greatest sports deal of all time."
Not kidding about that "all time" either - the Silvas reportedly received $19 million under the contract last season and the contract term is "in perpetuity." Fat chance the NBA will be able to scream foul on the basis of lack of mutuality...
Friday, October 11, 2013
One of the dangers of constructive contractual consent (a foundational principle of wrap contract doctrine) is that it might be used to prove statutory consent and thereby strip unknowing consumers of rights provided by law. Scholars such as Wayne Barnes and Woody Hartzog have argued that constructive contractual consent can undermine privacy protections provided by federal law. While there aren’t too many federal laws protecting consumer privacy, the ones that do exist generally provide that a practice is permissible if consumers consent. Google raised that very argument recently in its defense to a lawsuit that claimed that Google’s practice of scanning users' emails violated federal and state wiretapping laws.
The Wiretap Act, as amended by the Electronic Communications Privacy Act, prohibits the interception of “wire, oral, or electronic communications,” but it is not unlawful “where one of the parties to the communication has given prior consent to such interception.” Plaintiffs argued that Google violated the Wiretap Act when it intentionally intercepted the content of emails to create profiles of Gmail users and to provide targeted advertising. One of Google’s contentions was that Plaintiffs consented to any interception by agreeing to its Terms of Service and Privacy Policies. The court states:
“Specifically, Google contends that by agreeing to its Terms of Service and Privacy Policies, all Gmail users have consented to Google reading their emails.”
Yes, that’s right-- Google is arguing that by agreeing to its Terms of Service and Privacy Policies, you – yes YOU Gmail user – have agreed to allow Google to read your email!
Even more alarming, Google claims that non-Gmail users who have not agreed to its Terms of Services or Privacy Policies have impliedly consented to Google’s interception when they send email to or receive email from Gmail users.
Thankfully, Judge Lucy Koh is nobody’s fool. Without stepping into the muck and goo of wrap contract doctrine, she notes that the “critical question with respect to implied consent is whether the parties whose communications were intercepted had adequate notice of the interception.” Then she does something astounding , admirable and all-too-rare - - she interprets adequate notice in a way that actually makes sense to real people:
“That the person communicating knows that the interception has the capacity to monitor the communication is insufficient to establish implied consent. Moreover, consent is not an all-or-nothing proposition.”
Even with respect to Gmail users, she notes that “those policies did not explicitly notify Plaintiffs that Google would intercept users’ emails for the purposes of creating user profiles or providing targeted advertising.”
Judge Koh’s nuanced opinion reveals an understanding of online consent that’s based on reality. She notes that that “to the extent” that the user has consented to the Terms of Service, it is “only for the purposes of interceptions to eliminate objectionable content,” not for targeted advertisements or the creation of user profiles. She analyzes the contract from the standpoint of a reasonable user, rather than blindly following the all-or-nothing-constructive consent model mindlessly adopted by ProCD-lemming courts.
The opinion states that “it cannot conclude that any party – Gmail users or non-Gmail users- has consented to Google’s reading of email for the purposes of creating user profiles or providing targeted advertising.” I think most reasonable people - Gmail users and non-Gmail users alike – would agree.
Since I favor national health insurance, I have a hard time understanding the passionate opposition to the Affordable Care Act (ACA). But as a contracts professor, I also have a hard time understanding the Congressional Republicans' negotiating position. What consideration are they offering in return for passing a funding measure? As I understand it, their positions have been variously:
- We won't pass a funding measure unless the President agrees to defund the ACA;
- We won't pass a funding measure unless the President agrees to postpone the launch of the ACA for one year; and
- We will give the President an additional six weeks to postpone the launch of the ACA or we will refuse to raise the debt ceiling.
These positions take the rhetorical form of concessions. The Congressional Republicans seem to be offering compromise positions to the administration. But they are not in fact concessions because (by analogy to contracts doctrine), they are seeking a modification of an agreement without offering any new consideration. Funding the government is one of Congress's constitutional duties. Shutting down the governement and throwing (or threatening to throw) the economy over a cliff because one party opposes one piece of legislation is a reckless and irresponsible derogation of that duty. Moreover, all of these concessions are merely delays. Many Congressional Republicans have made clear that they intend to continue their strategy of threats to harm the country unless the administration concedes seriatim to an agenda driven by the GOP's most conservative members.
It is not as if there are not issues on which Congressional Republicans could give some ground -- and some of these issues would not even be costly. Are they offering real concessions on assault weapons? On environmental protection? On increasing taxaction on the wealthy or doing something to address the growing gap between rich and poor in this country? Is there any significant legislative realm in which the congressaional republicans are willing to make real concessions in return for an agreement that the ACA will be changed in some way or postponed?
Until the Republicans come forward with some serious consideration offered in return for a compromise on the ACA, I would be disappointed if the Senate or the administration gave any ground, just as I generally would not counsel a client to make concessions in a business context without negotiating some meaningful new consideration (absent unforeseen material changes in circumstances that have not occurred here). Modifications without consideration make sense in a relational context in which the parties value their on-going ability to continue engaging in mutually beneficial transactions more than the anticipated profits from any single contract. But that is not how I would characterize the relationship between Republicans and Democrats. These two entities have adopted mutual enmity as their raisons d'être, and they've been thrown together because members of each group are purportedly committed to the common good.
Well, it's time to show some evidence of allegiance to that purpose.
Friday, September 20, 2013
"By now, you’ve heard the stories of passengers urinating in bags, slipping on sewage, and eating stale cereal aboard the Carnival Cruise ship that was stranded in the Gulf of Mexico — not exactly the fun-filled cruise for which the passengers had signed up and paid." My post on "Carnival Cruise and the Contracting of Everything" is available here.
Wednesday, August 7, 2013
This post responds to the thoughtful comments offered by my co-blogger Jeremy Telman in his post about my op-ed. As he hinted, an op-ed provides a great forum for raising issues to a larger, non-academic audience but it is hardly the place to be thorough. Jeremy’s post gives me an opportunity to briefly touch upon the issues that I address in my forthcoming book. (Note: If you use the promotion code 31998 and click here you get a 20% discount).
Jeremy raised the issue of the inadequacy of doctrinal solutions. In fact, all of my proposed solutions are doctrinal. There are undoubtedly more effective way to achieve societal changes, but doctrine obviously matters and right now, the law of wrap contracts is a mess. It’s in a mess in a lot of different ways, yet the courts seem to be in denial, repeating the refrain that wrap contracts are “just like” other contracts. This is simply not so. Much of my scholarship looks at how technology shapes behavior and argues that courts should consider the role of technology when they interpret and apply the law. With respect to wrap contracts, courts ignore the ways that digital form affects both user perception and drafter behavior (i.e. overuse). My proposed solutions seek to make the effects of the digital form part of the court’s analysis.
One of these solutions, briefly mentioned in the op-ed and discussed in the book and elsewhere, is a “duty to draft reasonably” which acts to counter the burden of the “duty to read.” The duty to draft reasonably has very little to do with getting consumers to read contracts – it’s about getting companies to ask for less by making it less palatable for them to ask for more. As I explain in great length in my book, there are plenty of reasons why I am not a big fan of the duty to read –and why I think trying to get consumers to read is an inadequate solution. Consumers shouldn’t be expected to read online contracts, at least, not as they are now drafted. Reading wordy online contracts is not efficient and would hurt productivity. It’s also useless, since consumers can’t negotiate most terms. Instead, we should try to get companies to present their contracts more reasonably/effectively. We should require them to signal the information in an effective manner, the way that road signs signal dangerous conditions. For example, I propose using icons, such as the danger icon that accompanies this post, to draw consumers’ attention to certain information. Currently, courts construe “reasonable notice” to mean something other than “effective notice” – and this places too heavy a burden on consumers to ferret out information. A “duty to draft reasonably” shifts the focus from the consumer's behavior to the drafting company’s behavior. Could the company have presented the information in a better way? And if so, why didn’t it? This is a question that courts used to ask with paper contracts of adhesion – but for some reason, they have moved away from this with wrap contracts.
A related doctrinal adjustment that I propose in my book is specific assent. For terms that take away user rights (which I refer to as “sword” and “crook” provisions), the user should be forced to actively assent by, for example, clicking on an icon. The idea here is also not to get users to read, but to hassle them! Imagine having to click to give away each use of your data. What a pain – and that’s the point. The incorporation of a transactional hurdle or burden damages the relationship between the website and the user – and the more hurdles, the more annoying it becomes to complete the transaction.
Both proposals try to signal the type of company to the consumer. A website full of danger icons sends a very different message than one with only one or two danger icons. A website which requires a user to click forty times to complete a transaction won’t be around too long.
As for better solutions, there are ways to address specific problems by using third party tools and I am all in favor of technical solutions. For example, you can use duckduckgo or Tor to try to cover your tracks. But technical solutions have their shortcomings or limitations because they only address one part of the larger problem and it gets to be a bit like whack-a-mole as technology shifts and improves.
Ultimately, any comprehensive solution has to be implemented by the government – either the legislature or the judiciary. But it’s up to us, the consumers, to raise the issue as one needing a solution and we can do this through the democratic process and by marching with our feet. I agree with Jeremy that there are problems with collective action – there are coordination and resource issues as well as cognition limits, but that doesn't mean we shouldn't do anything. I don’t want to get into the thicket of that in this already too-long post, but I address this issue at great length in my book and propose that one way to deal with this is by reconceptualizing unconscionability.
Consumer advocacy groups and the websites referred to by Jeremy in his post certainly help with the collective action problem. They inspire us to get off the couch. Not easy when companies make it so comfortable for us to do nothing but that’s the nature of the beast here – it’s the same in other areas where consumers face the corporate marketing machinery and its expertise in manipulation. As Kate O'Neill notes in the comments to Jeremy's post, we contracts profs have a role which is to point out the inconsistencies and contradictions in judicial application of doctrine and propose better ways to evaluate legal issues. Some may scoff that judges don’t read law review articles --or books written by academics-- but it’s our job to keep trying.
Sunday, August 4, 2013
Wednesday, July 24, 2013
The Ninth Circuit recently decided an interesting case involving video on demand – or is the Hopper a DVR? That was one of the questions at the heart of Fox Broadcasting Company v. Dish Network. (Jeremy Telman had previously blogged about the case when the complaint was first filed a year ago). At issue was the Dish Network’s PrimeTime Anytime service which only works with the Hopper, a set top box with digital video recorder and video on demand functionalities. PrimeTime Anytime records Fox (and other) network shows and stores the recordings for a certain number of days (typically eight) on the Dish customer’s Hopper. Dish does not offer video on demand from Fox (but see discussion below). Dish started to offer a new feature called “AutoHop” that allows users to skip commercials on shows recorded on PrimeTime Anytime (although it doesn’t delete the commercials, the user can press a button to skip them). Fox sued Dish for copyright infringement and breach of contract and sought a preliminary injunction. The Ninth Circuit upheld the district court’s denial of the motion. The copyright issues are interesting, but I’m going to skip over them using this blog’s virtual AutoHop feature and get right to the contract issues, which are much more interesting to readers of this blog.
There were two agreements at issue here. There was a 2002 license agreement and a subsequent 2010 letter agreement (there were others but these were the two relevant ones). Pursuant to the 2002
agreement, Fox granted Dish a limited right to retransmit Fox’s broadcast signal to Dish’s subscribers. It also contained several restrictions and conditions and prohibited video on demand. A 2010 letter agreement, however, agreed to video on demand provided that Dish agreed to certain conditions, the primary one being that it couldn’t show the content without commercials.
So the basic questions (overly simplified for blog purposes) were – did Dish distribute Fox video on demand content? If so, did it comply with the terms of the 2010 letter? (Okay, that’s not exactly how the court or the parties put it, but those were the issues stripped down to their essence).
Fox argued that Dish breached this provision of the 2002 contract:
“EchoStar acknowledges andagrees that it shall have no right to distribute all or any portion of the
programming contained in any Analog Signal on an interactive, time-delayed, video-on-demand
or similar basis; provided that Fox acknowledges that the foregoing shall not restrict EchoStar’s practice of connecting its Subscribers’ video replay equipment.”
The district court construed the word “distribute” as requiring a copyright work to “change hands” (analogous to under the Copyright Act). Because the copies remained in users’ homes,they did not change hands and there was no distribution. Fox challenged this construction and argued that the prohibition against distribution meant that Dish would not make Fox programming available to its subscribers on the aforementioned basis. The Ninth Circuit found both Fox’s and the district court’s constructions plausible (yes I realize there’s a distinction between interpretation and construction but I don’t want to go there right now, although you may).
The Ninth Circuit withheld judgment on which construction was better but stated that “in the proceedings below, the parties did not argue about the meaning of ‘distribute.’ We express no view on whether, after a fully developed record and arguments, the district court’s construction of ‘distribute’ will prove to be the correct one.”
The court did, however, express skepticism that PrimeTime Anytime was not “similar” to video-on- demand (remember, the 2002 contract prohibited “video-on-demand or similar basis”)(emphasis added by yours truly). The “distribution” of that, therefore, would violate the 2002 contract. Dish argued that its service was not “identical” to VOD but, as the Ninth Circuit noted, did not explain why it was not “similar.” (Note: I hope all you contracts profs are feeling ever more relevant! And our students thought we were just making mountains out of molehills when we focused on the importance of contract language). The addition of that word “similar” might just save Fox when the case goes to trial. Especially since, as even the district court held, if PrimeTime Anytime is VOD, then Dish clearly breached the contract which prohibited skipping commercials. The district court, however, wasn’t convinced that it was VOD. Rather, the district court concluded that it was a hybrid of DVR and VOD and “more akin” to DVR than VOD.
In other words, the district court’s analysis went along these lines – the 2002 contract was not breached because there was no distribution of VOD (or similar) content. The 2010 contract was not breached because this was not VOD but DVR. In short, this was not VOD and there was no distribution of a VOD-like service.
Query if the 2010 amendment had adopted the “VOD or similar” language instead of just “VOD”; in other words, what if it permitted Dish to offer Fox’s programming as VOD or “similar” service? My guess is that they specifically drafted it narrowly to include just “VOD” to limit the scope of the license – but that it ended up backfiring to exclude the conditions on “similar” services. Funny how drafting rules of thumb can sometimes come back to bite you. Note the problem was created because the definitions were not consistent in the 2002 and 2010 agreements – it created a gap regarding a service (a “VOD similar service”) which required judicial construction. Distribution of VOD or similar services was prohibited under the 2002 contract but VOD was permitted under the 2010 provided commercials were not skipped. And what happens to showing (not distributing) "similar services to VOD"? Mind the gap!
There was a final issue regarding a “good faith” in performance type clause. The Ninth Circuit concluded that there was no evidence that Dish launched PrimeTime Anytime “because it was unwilling to comply with the requirements to offer Fox’s licensed video on demand service, rather than because Dish lacked the technological capability to do so.” Frankly, I’m not sure why this was not a bigger issue since it seems, at least to me, that Dish is trying to get around the “no commercial skipping” restriction in the 2010 agreement by using the Hopper.
The Ninth Circuit noted a few times that it was applying a “deferential standard of review” given the request for a preliminary injunction so I don’t think Dish can rest easy just yet. I think Fox’s case will eventually hinge upon how the contract issues are resolved. What is the meaning of “distribute”? (I don’t know enough about how Dish technology works to determine whether distribution occurred. Even under the district court’s definition, could it have occurred? Does rebeaming signals constitute distribution? Is the service analogous to a lease? I think there’s room here). Is the PrimeTime Anytime service VOD or not? And isn’t that 2002 agreement relevant in determining what the meaning of VOD is under the 2010 amendment? Finally, why did the court give the “good faith in performance of contract” such short shrift?
I didn't get to review the actual agreements, but I would look at what exactly is being licensed under the 2002 agreement. Does it exclude the VOD-like service or include it? The gap seems odd to me - it must be addressed in one of the agreements. What exactly does Dish have the right to do? That seems to me one of the keys to unlocking the "correct" interpretation of the contract - and help determine whether the obligation of good faith is being fulfilled.
The real hammer here is going to be contract renewal - if Dish pisses off Fox and the other networks then it may kiss its business goodbye if they don't renew their contracts. (As I mentioned, I haven't seen the contracts so don't know what the terms are).
As the court notes, the parties probably didn’t contemplate a hybrid DVR and VOD (this is the old “anticipating the future and new technologies” problem that contract drafters have to which I’ve previously referred) I think the copyright issues weigh more heavily in favor of Dish whereas Fox has the better argument re the contract issues. Of course, the much larger policy issue is how to strike the balance between contract and copyright – a recurring issue since the late eighties…Generally, it's been advantage contracts.
Wednesday, July 3, 2013
The NYT's (new) ethicist, Chuck Klosterman tackled the issue of non-disparagement clauses in last Sunday's magazine (you have to scroll down past the first question about the ethics of skipping commercials). Klosterman stated that, "(n)ondisclosure provisions that stretch beyond a straightforward embargo on business-oriented “trade secrets” represent the worst kind of corporate limitations on individual freedom — no one should be contractually stopped from talking about their personal experiences with any company." He adds, "You did, however, sign this contract (possibly under mild duress, but not against your will)." A non-disparagement clause, however, is quite different from a blanket nondisclosure provision - the ex-employee may presumably talk about her personal experiences, as long as she leaves out the disparaging remarks. "Mild duress" is an oxymoron since duress, by its definition, is not mild and if you sign something under duress, you are signing it against your will. Despite getting the nuances wrong, the advice -- which is basically to say nothing bad but say nothing good either -- is sound. Sometimes silence speaks volumes.
Non-disparagement clauses in settlement agreements are fairly common and I don't think they are necessarily outrageous (it is a settlement agreement afterall). That's not the case with this agreement, posted courtesy of radaronline and discussed at Consumerist. The agreement doesn't contain a non-disparagement clause but still manages to be overreaching. The agreement, purportedly from Amy's Baking Company , requires that its employees work holidays and weekends, and extracts a $250 penalty for no-shows. It also forbids employees from using cell phones, bringing purses and bags to work, and having friends and family visit during working hours. The contract also contains a non-compete clause, prohibiting employees from working for competitors within a 50 mile radius for one year after termination. What the agreement doesn't contain is a non-disparagement clause - and a clause prohibiting employees from sharing the terms of the agreement with others. My guess is that those clauses will probably show up in the next iteration of the contract....
Wednesday, June 19, 2013
On Monday, the U.S. Supreme Court issued a ruling in Federal Trade Commission v. Actavis that permitted the Federal Trade Commission to sue pharmaceutical companies for potential antitrust violations when they enter into “pay-to-delay” agreements. (Lyle Denniston of SCOTUSblog has a good analysis here ). These agreements are a type of settlement agreement where a pharmaceutical company pays a generic drug company to keep the drug off the market for a certain period of time. Lower court rulings had held that these agreements were valid as long as they did not exceed the term of the patent held by the pharmaceutical company. This should be an interesting case for contractsprofs because it is a high profile "limits of contract" case. In an era where judges have been notoriously reluctant to interfere with freedom of contract even when it hurts consumers, this case is a refreshing change.
I’m curious though what will happen to the payments that were made to the generic drug companies – are the agreements rescinded and the payments returned? (I haven’t read the decision thoroughly yet to see whether it’s indicated). That might be a problem for the generic drug companies. It seems like some sort of restitution should be made - I wonder if the parties thought of putting a provision addressing what would happen in the event of illegality in their agreement?
Friday, May 24, 2013
Given all the excitement over boilerplate on this blog, I thought it would be a good time to remind readers of problems that might arise that don't exactly involve (just) boilerplate, It's not just the words in the contract -- the way the contract is presented can create problems, too. I've been meaning for a while to discuss this NYT article about a lawsuit against Dollar Rent a Car. According to the article and the complaint, the plaintiffs were customers who specifically declined the insurance coverage that car rental companies are always pushing (and which is often covered by customers’ personal auto insurance policy and/or credit card). They were then handed a tablet and asked to sign electronically. When they returned the car, they were surprised with a much larger-than-expected bill that included a “loss damage waiver” which, like insurance, “waives” the customer’s liability for loss or damage to the car.
I planned to blog about this last month, but just as I was about to, I received a reprint of Russell Korobkin’s article, recently published in the California Law Review. The title, The Borat Problem in Negotiation: Fraud, Assent and the Behavioral Law and Economics of Standard Form Contracts, sounded intriguing and as I started to read it, I realized that the article addressed a lot of the issues raised by the car rental form contract/electronic signature situation. I thought it might be fun (er, contracts prof style-fun) to view the Dollar Rent a Car problem through the lens of Korobkin’s proposed Borat solution.
According to the article, the Dollar-Rent-A-Car plaintiffs explicitly told the car rental agent that they were declining insurance coverage yet unknowingly signed for it on an electronic tablet. This illustrates one way that contracting form matters –I suspect it was easier for customers to be misled by the “loss damage waiver” language because they didn’t have an easy way to read the surrounding language. While paper consumer contracts are generally adhesive, customers do have the option of declining insurance coverage. While many customers may still have overlooked the meaning of the language, others may have scanned the few sentences immediately before the signature line (this seems particularly true of the plaintiffs, who one of whom is an insurance lawyer).
Sales agents are typically paid a commission to upsell the insurance coverage and each of the plaintiffs paid a hundred to several hundred dollars more than they expected to pay.
I tried to get a copy of Dollar’s rental agreement off their website. While their general policies are posted, which references their rental agreement, the agreement itself is not available. That’s already a strike against them in my book – why not post the rental agreement on your website since you’re going to have your customer sign it anyway? I think it’s because the company doesn’t really expect anyone to read the agreement. Most people don’t read, but that doesn’t mean they wouldn’t if the company made more of an effort to make the agreement accessible and readable.
Without a copy of Dollar’s actual rental agreement, I can only make assumptions about what it contains but my guess is that it contains an integration clause and a no-oral modification or “NOM” clause. The latter may not be enforced but the former brings the contract into the grip of the parol evidence rule. The PER rule won’t effectively block a fraud claim, but fraud claims may be difficult to prove in this context. The other avenue for redress is under a consumer protection statute claiming unfair or deceptive trade practices. But what about contract law – can it do anything here to help the consumers?
Korobkin’s article doesn’t specifically address consumer actions, but he tackles the “Borat Problem” which often occurs in consumer contracting situations. According to Korobkin, the Borat Problem occurs when two parties “reach an oral agreement. The first then presents a standard form contract, which the second signs without reading or without reading carefully. When the second party later objects that the first did not perform according to the oral representations, the first party points out that the signed document includes different terms or disclaims prior representations and promises.”
As readers of this blog are well aware, contractsprofs went through a slight obsessive period with the Borat contract when it first arose. To quickly summarize, several people who were in the 2006 movie, Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan sued the producer, Twentieth Century Fox, claiming that they were misled into appearing in it. Korobkin states that these plaintiffs claimed that the studio obtained their consent using a two part strategy, “false representations followed by standard form contracts that included language designed to contradict or disclaim those representations.”
Sound similar to the Dollar situation? Although the Dollar agent didn’t expressly make false representations, they allegedly acted in a way that misled the plaintiffs into believing they were acting consistent with their wishes, and that the contract they were signing reflected their understanding. Korobkin discusses existing legal remedies to the Borat problem and concludes they are not so satisfying for various reasons. He then discusses the risk of “bilateral opportunism,” meaning that a “pure duty to read” rule leaves nondrafting parties vulnerable to exploitation by drafters and a “no-exploitation rule” leaves drafters vulnerable to opportunistic behavior (i.e. bad faith claims) by nondrafters. He discusses the different ways that each party might take advantage of the other under either rule and throws in a good amount of behavioral economics to back up his arguments – for example, “confirmation bias” makes it difficult for even sophisticated nondrafters to notice when a contract term contradicts a prior representation made by the drafter. Korobkin also discusses the role of trust, specifically that reading a contract may signal that the nondrafter doesn’t trust the drafter. I think trust plays a role (even if small) in the Dollar scenario – afterall, nobody wants to be that jerk in line who challenges the smiling service rep. There's also social pressure in that nobody want to be that jerk holding up the line of foot tapping customers by asking questions about fine print (believe me, I know).
Korobkin’s “Borat Solution” would require specific assent to written terms that are inconsistent with prior representations. This effectively puts the burden on drafters to include a “clear statement” that the particular provision takes precedence over prior representations and “realistic notice” which would generally mean that the parties actively negotiated the term. I like this proposal (and have proposed something very similar to it in the context of online agreements) because it recognizes that drafters have the power to make terms more salient. The notion of blanket assent puts too much of a burden on the nondrafting party instead of the party that has the power to actually communicate the terms more effectively.
So would the Borat solution have changed anything in the Dollar scenario? I think so, but for a different reason than the actual Borat scenario. A clear statement and realistic notice would preclude having customers sign on an electronic tablet without also making immediately visible the relevant provision. In other words, the customer wouldn't be asked to sign without being able to read the waiver provision. Although it's not expressly stated, it seems implied from the NYT article that the contract provision was not viewable on the tablet. If that's the case, that provision would not be enforceable.
So, for those of you planning to research the consumer contracts conundrum this summer, in addition to Margaret Jane Radin’s book, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law and Oren Bar-Gill’s book, Seduction by Contract, I recommend that you add Korobkin’s article to your summer reading list.
Thursday, May 9, 2013
For many lawyers, To Kill a Mockingbird (TKAM) is at the top of their list of "favorite books/movies about a lawyer." TKAM is about more than lawyering, of course. It's about racism, family, class and much more. This week, TKAM also is about "fraudulent inducement," "consideration" (a lack thereof) and "fiduciary duty." All of those subjects are in the complaint filed by TKAM author, (Nelle) Harper Lee, against her purported literary agent.
In the suit, Lee alleges that Samuel L. Pinkus (and a few other defendants) fraudulently induced her to sign her TKAM rights over to one of Pinkus's companies in 2007 and again in 2011. According to Lee, Pinkus, the son-in-law of Lee's longtime agent, Eugene Winick, transferred many of Winick's clients to himself when Winick fell ill in 2006. Pinkus then allegedly misappropriated royalties and failed to promote Lee's copyright in the U.S. and abroad.
For Contracts professors, the Lee v. Pinkus suit provides some interesting hypos to discuss when teaching fraud, consideration, and assignments of rights. Regarding fraud, Lee alleges that Pinkus lied to her about what she was signing at a time when she was particularly vulnerable due to a recent stroke and declining eyesight. Consideration is in play because there allegedly was no consideration from Pinkus to Lee in exchange for Lee's transfer of rights to Pinkus. Assignment issues arose because the many companies who owed Lee royalties reportedly struggled to figure out which company or companies they should pay given Pinkus's many shell companies. Overall, it's a sad story for Ms. Lee but one that students may find particularly engaging.
[Heidi R. Anderson]
p.s. Although there are many quote-worthy passages in TKAM, a favorite of mine (useful when advising students about their writing) is: “Atticus told me to delete the adjectives and I'd have the facts.” Please feel free to share your favorites in the comments.
Thursday, May 2, 2013
Wednesday, May 1, 2013
We previously blogged about high-profile reward offers by Donald Trump, Bill Maher, a laptop-seeking music producer, and a Hong Kong businessman. Only one of those (the producer) led to an actual lawsuit. The latest reward offer in the news involves murder.
In February of this year, the City of Los Angeles and other entities collectively offered a $1 million reward for information regarding Chris Dorner. Dorner was the former policeman and Navy officer who (allegedly) killed four people, including two policemen. The manhunt for Dorner, labeled the "Cop Killer," reportedly was one of the largest in LA County's history.
One of the people claiming the reward, Rick Heltebrake, has filed a breach of contract suit in LA Superior Court (the complaint can be obtained here but only for a fee). Heltebrake is suing the City of Los Angeles, and supporting entities for $1 million and is suing three cities that offered separate $100,000 rewards related to Dorner. Heltebrake was a carjacking victim of Dorner's. After he escaped, Heltebrake called the police and told them where they could find Dorner. Because Dorner was found at the location Heltebrake identified, he is seeking the rewards.
The contract controversy is one of interpretation. The rewards reportedly were available for "information leading to the apprehension and capture of" Dorner, for the "identification and apprehension" of Dorner, for the "capture and conviction" of Dorner, and for "information leading to the arrest and conviction of" Dorner (I do not have the complaint so these excerpts are cobbled together from TMZ, Courthouse News Service, ABC and other sources). Police charged Dorner on February 11, 2013. Heltebrake called police on February 12. On February 25, after a shootout with police and structure fire, Dorner was found dead from an apparently self-inflicted gunshot wound.
Given the above facts, some of the intepretations questions are: (i) whether the authorities' shootout and recovery of Dorner's body qualifies as "apprehension" or "arrest," (ii) whether the "and" between "identification and arrest" or between "capture and conviction" means that both are required in order to collect, and many, many more. A complicating factor is that the $1 million reward was merely announced on TV; no written record was made. At least one reward offeror, the City of Riverside, has stated that the lack of a "conviction" means that it won't pay. Although this is a tragic story, I may mention it the next time I teach the Carbolic Smoke Ball case.
If anyone is able to find the complaint for free, please post a link in the comments.
[Heidi R. Anderson]
Wednesday, April 24, 2013
The Sacramento Bee reports that a California legislative committee (if you really want to know, it’s called the Assembly Arts, Entertainment, Sports, Tourism and Internet Media committee) “gutted” a bill that would have illegalized “paperless” tickets. Paperless tickets are more (or is it less?) than what they sound like – they are a way for companies like Ticketmaster to sell seats without permitting purchasers to resell those seats. Purchasers must show their ID and a credit card to attend the show. The bill pitted two companies, Live Nation (owner of Ticketmaster) and StubHub, against each other.
This bill and the related issues should be of interest to contracts profs because it highlights the same license v. sale issues that have cropped up in other market sectors where digital technologies have transformed the business landscape. Like software vendors and book publishers, Ticketmaster is concerned about the effect of technology and the secondary marketplace on its business. Vendors, using automated software (“bots”), can quickly purchase large numbers of tickets and then turn around and sell these tickets in the secondary marketplace (i.e. at StubHub) at much higher prices. Both companies argue that the other is hurting consumers. Ticketmaster argues that scalpers hurt fans, who are unable to buy tickets at the original price and must buy them at inflated prices. Stub Hub, on the other hand, argues that paperless tickets hurt consumers because they are unable to resell or transfer their tickets.
The underlying question seems to be whether a ticket is a license to enter a venue or is it more akin to a property right that can be transferred. Or rather, should a ticket be permitted to be only a license or only a property right that can be transferred? The proposed pre-gutted legislation would have taken that decision out of the hands of the parties (the seller and the purchaser) and mandated that it be a property right that could be transferred. In other words, it would have made a ticket something that could not be a contract. Of course, given the adhesive nature of these types of sales, a ticket as contract would end up being like any other mass consumer contract – meaning the terms would be unilaterally imposed by the seller. In this case, that would mean the ticket would be a license and not a sale of a property right.
It’s not just the media giants who are feeling the disruptive effect of technology - we contracts profs feel it, too.
[NB: My original post confused StubHub with the vendors who use the site. StubHub is the secondary marketplace where tickets can be resold. Thanks to Eric Goldman for pointing that out].