July 13, 2011
A Contractual Protest: A Thread to A Can of Worms.
It is rare that a day passes without some headline or other about the affairs of the major players in the fields of information technology (IT), Internet Business (IB) or Social Networking (SN). The cast of players - a revolving door of usual suspects – includes Microsoft, Apple, Google, Facebook etc. The relative harmony that once derived from their clearly differentiated activities – e.g. personal computing, online searching or social networking – is now a thing of the past. Brittle harmony has given way to - shades of the 1990s - blow by blow accounts of smear tactics, strategic protests, general blogfare, and of course, court actions . Why? Because the players are slugging it out in the mush pit which the converging IT/IB/SN arena has become – all for a (bigger) piece of the pie.
The average observer might be daunted by the copious data and convoluted interrelationships typically involved. Close contemplation of contractual details, particularly those undergirding the relentless strategizing, negotiating, and (guarded) cooperation of such parties, is clearly something the average observer does not relish. Yet the nitty gritty of who is doing what to whom, and where, to get to the bottom of what is really going on in a dispute may not be that hard to find. Help is found in unexpected places – even in very contracts that are dauntingly associated with such transactions. Or more precisely, even from the angst created by such contracts.
There is a struggle, you see, between an industry giant, Microsoft, who is determined not to be past its prime, and an equally determined giant slayer, Google, a relative upstart that is notoriously hungry for power. Microsoft is determined to reinvent itself. It is trying to build on its dominant market position to expand beyond the dated server based computing approach. The aim is to become the leader of the emerging ‘cloud based enterprise solution revolution’. All very well. The thing is, however, that Google is eagerly developing competing products in the same field. And Google is striving, mightily, to market those products. So, here is the rub – Google has been having a hard time persuading potential customers, a significant percentage of whom are loyal customers of Microsoft’s email and other office offerings, to make the switch.
This is why Google cried foul, and loudly, when the U.S. govt., through the agency of the Department of the Interior (DoI), issued a request for quotations – an invitation for offers as we know – but allegedly indicated that it would not entertain offers from Google. The DoI subsequently awarded the contract to Microsoft.
Google objected to not being invited to the party by filing a bid protest in the U.S. Court of Federal Claims. In the filing, Google asserted infringements of the Competition in Contracting Act’s policy requirements which mandated that “technology vendor neutrality as far feasibly possible” must be maintained. Google has asked the court to enjoin the DoI from awarding the contract to Microsoft until competitive bidding has taken place.
This dispute between the parties has been anything but straightforward. The DoI has asserted that Google was ineligible for consideration because Google’s products were not certified under the Federal Information Security Management Act (FISMA) at the time. But here’s the thing - it now seems that Google had this certification – or at least for a related product, while Microsoft at the time of the award of the contract, allegedly did not. Microsoft reportedly received the certification after the award, but this disparity is a fierce point of contention.
Google clearly understands that it has a huge task to unseat the Microsoft behemoth. Its hopes of entering into what must be an accelerating volume of contracts required for market viability, if not market dominance, depends on a spreading domino effect. An increasing number of smaller users will need to take their cue (to contractually adopt Google products) from the bigger fish who adopt Google’s applications.
The bigger war for market dominance is not limited to Microsoft and Google, of course. When this slender threat of a bid protest is traced, it leads to a whole other can of worms: cut throat rivalry not only for cloud computing, but voice over IP, mobile tasking, and mobile payment also (to name a few). But that can of worms is for another day……
May 12, 2011
HuffPo on Schooner & Swan on Dead Contractors
Contracts Prof and friend of the blog, George Washington University Law School Professor Steven Schooner (pictured) has a new article up on SSRN that is making headlines in the nearly mainstream media. Over at the Huffington Post, David Isenberg reports on Professor Schooner's new scholarship, co-authored with GWU Law student Collin D. Swan, called "Dead Contractors: The Un-Examined Effect of Surrogates on the Public's Casualty Sensitivity." Here is the abstract from SSRN:
Once the nation commits to engage in heavy, sustained military action abroad, particularly including the deployment of ground forces, political support is scrupulously observed and dissected. One of the most graphic factors influencing that support is the number of military soldiers who have made the ultimate sacrifice on the nation’s behalf. In the modern era, most studies suggest that the public considers the potential and actual casualties in U.S. wars to be an important factor, and an inverse relationship exists between the number of military deaths and public support. Economists have dubbed this the "casualty sensitivity" effect.
This article asserts that this stark and monolithic metric requires re-examination in light of a little-known phenomenon: on the modern battlefield, contractor personnel are dying at rates similar to - and at times in excess of - soldiers. The increased risk to contractors’ health and well-being logically follows the expanded role of contractors in modern governance and defense. For the most part, this "substitution" has taken place outside of the cognizance of the public and, potentially, Congress. This article explains the phenomenon, identifies some of the challenges and complexities associated with quantifying and qualifying the real price of combat in a modern outsourced military, and encourages greater transparency so that the public can more meaningfully participate in "the great American experiment."
The article is forthcoming the Journal of National Security Law & Policy. As Isenberg notes, the article and its subject matter deserve our attention.
March 14, 2011
Killing Two Birds With One e-Bay: Boyfriends, Buyers Beware.
A relationship, in pseudo contractual terms, is the interaction of two persons who, because of mutually agreeable expectations, have chosen to spend time together and are willing to perform in certain ways. "I am willing to commit to this relationship", a prospective girlfriend might say, "because I want to have a companion for social events – a liberator from the dating jungle - and I’m attracted to you and want to get to know you better". Marriage, the ultimate relational commitment, is thus described as a marriage contract, while actions for breach of promise to marry - aka heart balm actions - are not unheard of. (Who on earth, you may wonder, even thinks of suing for breach of promise to marry these days? Evidently the few that live in a jurisdiction where the cause of action still exists, and are both extraordinarily peeved and brave enough to pursue a claim.)
Once upon a time, the idea of an eBaying paramour would have been unthinkable. Monogamous marital relationships were the default sixty years ago. Faithfulness was expected ‘till death do us part’, children out of wedlock were a disgrace, and adultery was a heinous wrong. To put it mildly, times have changed. Marriage is not the objective of a relationship for many nowadays . In fact, some statistics would have us believe that marriage is depressingly out of reach for some. So what might two people be committing to – or to rephrase for the commitment phobic - what might their expectations be when people decide to ‘become an item’? Monogamy as in a faithful, exclusive, romantic relationship with only one person at a time? An enjoyable companionship in which compatibility rather than passion is key? Expectations of trust and respect driving good faith efforts to abstain from all others, or an ‘open relationship’? Symbiotic cohabitation, or merely a friendship ‘with benefits'? The last two do not infer expectations of fidelity or exclusivity, so what was the girlfriend expecting? This incident clearly illustrates the hellish wrath of a woman scorned. Since the catalyst for her titillating revenge was discovering her boyfriend had been seen with other women, it is safe to infer that she expected fidelity from the guy.
So, she is furious. We don’t know if he expressly or implicitly promised to be faithful, but she clearly expected that he would be. Likely she would assert, if asked, that he induced her to believe that he would be faithful – that is, if she was not explicitly promised faithfulness (i.e. as an express term of their relational agreement) by the guy. However they arose, her expectations of faithfulness were disappointed. Should her ex be allowed to get away with his relational crime – or should he be estopped from denying his obligation to be true (if any) and be accordingly punished? Presumably she doesn’t want the guy back. Her actions indicate that she wants to make him pay for the betrayal and she wants it to hurt. How she goes about this is the crux of the story. The boyfriend preferred her to dress conservatively during their relationship so what does she do? She posts scantily clad pictures of herself draped with the items in question on eBay. Revenge and liberation in one fell swoop – so take that, ex boyfriend!
But wait a minute – who’s hurting whom? To a more conservative eye, she cut her nose off to spite her face by baring – on a global auction site no less – her assets in a demeaning display. Undignified perhaps, but understandable all the same? Relationships are more often emotional affairs than business arrangements so it is to be expected that the behavior of the parties will be illogical at times. A person braver than I might even suggest a correlation between the frequency of illogical responses and the sex (of the actor) involved - but I won’t venture into that particular minefield. The response of the scornee in this scenario is what should be our focus. She eBayed the scorner's clothes. She set up a website. She advertised the items for auction on eBay. She linked the risqué auctions to her new website. This drummed up traffic to her website. Immodest yes, but maybe not so illogical after all.
Were the items in question hers to sell? She claims to have bought most of the items. But even if she did, surely it was with the intention of giving them to him as a gift. If so, the clothes became his property at that point. She did not have title to the items and had no right to dispose of them if that was the case. She didn’t, that is, unless the relationship was based on the understanding – a sub provision of an implicit termination clause? – that in case of unfaithfulness or other just cause, all gifts given to an offending donee will revert to the affronted doner. Her disposal of the property would be justified alternatively, if it had been abandoned by its owner. As she reportedly locked him out by changing the locks and has been impervious – thus far - to his alleged pleas to return, the latter is unlikely on the facts. If in her rage, she has treated someone else’s property as her own, the legal ingredients for conversion –and perhaps theft – have been satisfied.
Will the scorner-donee-ex-boyfriend have the gumption to strike back – say by suing his scorned ex-girlfriend for the return of his property? Might he seek damages for whatever injuries he has sustained from this now very public exacting of revenge? In that case (if you will forgive the puns) , the shoe would be on the other foot – a suit for an intentional tort or negligence, rather than a case for breach of promise to marry (jilting). Assuming that he chooses not to press criminal charges, that is. But it seems the boyfriend has attempted at least one retaliatory blow – the auctions were taken down by eBay staff, allegedly at the instigation of her ex, for being too sexy. Undeterred, the enterprising Miss re-posted the listings in the ''art'' category. Although the ‘art’ advertised for sale is the collection of photographs showing her modelling different items (of her ex’s clothing), the ingenious gal still manages thus to accomplish her aim of profiting from, and getting rid of, her ex’s clothes. As an incentive to buy each photograph, she offers to ‘throw in’ (or should that be ‘throw out’?) the actual item photographed as a ‘gift’. Contractually, prospective buyers more interested in the ‘gift’ item than the photograph may be reassured in at least two ways. Either the promise of a ‘gift’, though made before the sale, induced the sale, and for that reason may be deemed a term of the contract (i.e. ‘gift’ is a misnomer as the item is jointly supported by the consideration provided by the price paid for ‘the photograph’). Alternatively, the promise of the gift, though unsupported by consideration - and to that extent not contractually mandated – may still be enforced by means of an estoppel. Bottom line, the girlfriend followed up her saucy baseline serve with a volley (that was ultimately met by eBay restricting the most risque pictures to the adult section).
But she may have moved on. It seems girlfriend has other fish to fry. Initially motivated by anger, she is now enjoying the attention of being a guest on TV networks here and overseas. More, she has a new business venture to think about. "I'm realising that maybe there's something there to explore with a website where I can invite women to also share their breakup stories and maybe also give them the opportunity to sell products and things like that as well," she has reportedly said. With careful execution, perhaps the conversion of her website into a portal for jilted lover-sellers will not create an exponentially greater liability minefield.
Of such a budding entrepreneurial empire however, one can only caution: buyers beware – the scorners may strike back! The Machiavellian tangles of sweet revenge reach far.
Eniola O. Akindemowo.
March 08, 2011
Today in the NYLJ: Applicability of the UCC to Software Transactions
[Meredith R. Miller]
February 22, 2011
How To eBay Your Children's Offending Toys (Moms: Do Not Try This At Home).
As the mother of two preteen children this story hit a little too close to home. In short, kids insist on playing with Beyblades in the bathtub, said tub is chipped and soap holder is broken by the rough play, frustrated Mom seizes toys, and presumably, after reducing the kids to tears by threatening to get rid of the toys, takes a snapshot of the tearful kids holding the offending toys in a ziplock bag; frustrated Mom makes good on her threat by actually auctioning toys of traumatized kids on eBay.
Now here's the thing: there was keen bidding for the toys (estimated retail price $69) - the bids skyrocketed to $999,999! So, what's wrong with this picture? I'll tell you what's wrong - like a virtual Hydra, an online community known for rapidly rallying behind the causes of its members became indignant at the 'heartless' Mom. Members waded in, sparing no expense, to bid the auction to ridiculous heights.
The last auction bid was for $999,999. As we know, an auction sets up a contractual sale - in ordinary circumstances notice of the sale is an invitation to make offers, bids are offers, and the bang of the auctioneer's gavel (or in these circumstances, expiry of the fixed time predetermined for auction of the particular item) signifies acceptance of the highest bid. Are you serious??? Surely not $999,999 for a Ziploc bag of silly used toys (plus the guilt of being an accomplice to the trauma of two kids). Is there a law against this? There may be.
The first rule is READ THE CONTRACT. eBay's terms provide:
As an auction-style listing proceeds, we’ll automatically increase your bid on your behalf, up to your maximum bid, to maintain your position as the high bidder or to meet the item’s reserve price. The bid increment is the minimum amount by which your bid will be raised.
So, there may be automatic bidding. Okay. But you may pay less than your bid if you win:
When you win an auction you always actually pay only a small amount more than the next highest bid-even if your bid was thousands of dollars more. If your bid wins, you must buy. Your bid on an auction is a legally binding contract. If when time runs out your bid is the highest, you have purchased the item and must pay the seller for it.
So what happened here? Was the last bid $999,999, or was it in reality say (I'm picking a number out of thin air here) $73.01? Clearly this would be less cause for excitement/incredulity (take your pick). And that brings me to my next point: what was said frustrated Mom supposed to make of the bids? Was she expected to take it all seriously? Was she one of those rare creatures that actually read the fine print, and knew that $999,999 meant squat?
These are not merely rhetorical questions. If she had reason to believe the bids were in jest, would that negate the intention of the vengeful Hydra to enter into a legally binding agreement? Do eBay's terms permit this - can any random group decide to use eBay as a means of punishing (whom in its opinion is) a bad mom by frustrating her lesson-in-financial-responsibility punishment? Maybe not - eBay's terms state further:
Bidding is meant to be fun, but remember that each bid you place enters you into a binding contract. The only bids that are non-binding are those placed in the Real Estate category and for vehicles on eBay Motors. All bids are active until the listing ends. If you win an item, you’re obligated to purchase it.
But was this auction binding? Let's think this through:
if you bid in malice believing that your bid is patently ridiculous and obviously not to be taken seriously = no intention [read: not binding],
but the terms say a bid is binding, period, and you are presumed to read the terms = intention [read: binding],
but the size of the bid may not be what it seems [read: binding. Caveat: for a lesser price unknown to all except eBay during bidding],
but bids may be withdrawn in some circumstances = possibly not binding [read: not binding],
So, what's a mom to do: exasperated, ask eBay to cancel the auction? Can this be done without a reserve price? Can eBay do whatever its adhesion contracts say it can? Apparently, yes, and in this case, that is what happened. eBay cancelled the auction (presumably at the request of the humiliated Mom) and that was that.
Well I say there ought to be a law. Not necessarily against on-again-off-again auctions (if there can be such a thing - you either bid or you don't, you either accept the bid or you don't?), but against the unsympathetic hounding of frustrated mommies. You see, I know all too well how hard it is to balance lessons in obedience, responsibility and (dollars &) 'sence' with warm hugginess, patience and forgiveness. As the mother of two children, I know that sometimes, you need to just let it lie. But there are those moments when you've simply had it - when you've heard 'let 'er rip"a hundred million times, and that irritating rattle and roll in the beyblade arena (yes, one of my kids looooooves beyblades too) is ringing in your ears, for example.
Imagine another scenario: You've had a long day teaching, you are starving because all you had to eat all day was that granola bar snatched between classes. You're finally home juggling cooking dinner, supervising homework and checking voicemail messages. The fact that someone has contributed to the daunting mess in the family room by leaving beyblade paraphernalia scattered all over the place is ticking like a timebomb, at the back of your brain, setting up a 'Mommy moment'. Must you not only patiently endure your hunger, your exhaustion and your frustration, but fight the temptation of eBaying the offending toys too?
I've tried the maligned discipline tactic before, you see. Someone who will remain nameless once shattered my car windscreen during a tantrum. Exactly $173.16 of the $1000+ it cost to replace the windscreen emptied the culprit's piggy bank. Admittedly I didn't take a picture of the culprit, post it on eBay, round up all the beyblades I could find, and attempt to raise the $826.84 balance by auctioning them on eBay. I'm not even sure the lesson had the desired effect because from time to time, I'm reproachfully reminded by a certain someone (who's saving up for the latest computer-game-thingy), that s/he would have $173.16 more by now if I hadn't raided his/her piggybank. But what's a mom to do?
Its a sometimes thankless job, being a Mom, but really, what has this world come to when a random Hydra can rear up to (caution: link contains coarse language) frustrate your non-spanking discipline attempts , and you earn yourself a place in the Mommies Hall Of Shame for even trying the discipline attempt? With a chipped bathtub and broken soap dish on top, to add insult to injury?
So now I have a hilarious intended-in-jest-or-serious-contractual-offer teaching hypo for my contracts students. And, the urge to check that I have not been outed in the Mommy's Hall of Shame as a bad mom everytime I cringe at hearing 'let er rip!"
[Eniola O Akindemowo]
February 17, 2011
The Huffington Post/AOL Merger: Choice and Value in Contracts
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 (2nd) §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]
Arianna Huffington: New Media Diva or Feudal Pirate Plantation-Owner?
The blogosphere has erupted with chatter regarding the recent acquisition of the Huffington Post by America Online (Sidebar: was anyone else surprised to learn that AOL still exists?) for a reported $315 million. While estimates of how much Arianna Huffington (shown at left prior to having herself gilded) personally profited from the sale greatly vary, it is safe to say that she made somewhere in the ballpark of $20 million to $30 million. In light of this, commentators have come out of the woodwork to both praise and question the Huffington Post model. From the journalists, the message is basically this: Arianna, you've got hate mail!
The Huffington Post employs paid journalists to create original content and editors to sift through the massive content aggregated from AP, Reuters, and major newspapers and magazines, all to draw in readers to their website. Nothing controversial so far. Beyond that, the Huffington Post also features the work of unpaid bloggers who can post their content on the Huffington Post site to benefit from the increased traffic. Up until now, most were content with this arrangement. However, the idea that a relatively small number of people made millions of dollars, at least in part due to the work of “little-guy” bloggers who won’t see a dime, does have many up in arms.
Some decry the transaction as unjust enrichment of the elite at the expense of citizen journalists. For example, David Carr at the New York Times compares the plight of unpaid bloggers at Huffington Post to serfs under feudalism.
Not to be outdone, Tim Rutten of the Los Angeles Times likened Huffington Post’s business model to “a galley rowed by slaves and commanded by pirates” with “overhead that would shame an antebellum plantation.” But there is more to this line of argument than farfetched historical analogies. While Huffington Post now draws most of its traffic from “big name” content, it only got to this point by the work of unpaid bloggers who contributed their time, efforts, and ideas. Without them, HuffPo may have been DOA.
Others praise and defend the Huffington Post model. TJ Walker at Forbes points out that no promise of payment was ever extended to these bloggers. In other words, they knew what they were getting into. And if they feel they are being exploited, Walker argues that you can always “own your own means of production” by starting your own blog on your own terms. Hillary Rosen of HuffPo notes that Huffington Post gives bloggers a platform to let their ideas be known to a larger audience than they might otherwise get themselves.
Will this joint-venture succeed? Will the “blogger serfs” ever receive compensation for their intellectual labors? Who knows? What no one can deny is that the Huffington Post model has changed the way journalism works, and the AOL/HuffPo deal validates that proposition.
Asked for comment about how this development reflects on their own business model, the managers of the Law Professors Blog Network stated, "We pay our bloggers exactly what they are worth. And if they don't like being galley slaves rowing for watered grog, they can row without the watered grog."
Okay team, pass the grog and row!
[JT and Jon Kohlscheen]
February 15, 2011
AT&T, “Phantom Data”, and Office Space: A Legal Brouhaha
As reported by CNET News here, consumers have recently filed a class-action lawsuit in the Northern District of California against AT&T for breach of contract, unjust enrichment, and unfair business practices stemming from the “systemically overbilling” of its iPhone and iPad customers for data transactions. For most consumers, independently verifying the data used on their smartphones can be anywhere from extremely difficult to downright impossible. That’s why Plaintiff Patrick Hendricks hired an independent consulting firm to conduct a 2-month study of AT&T’s billing practices of data usage.
The findings should give AT&T customers pause. According to the class action complaint filed on January 27, 2011 in Hendricks v. AT&T Mobility, LLC, AT&T regularly overcharges consumers between 7% and 14%, but in some cases by over 300% for data transfers. Beyond inflated charges, the complaint also alleges charges for what it calls “phantom data traffic”, or data charges when there is no actual data usage by the customer. The consulting firm purchased an iPhone, disabled all web-based data functions, and let the phone sit idle for 10 days. During that period, AT&T billed the account for 2,922 KB of usage, or roughly 35 transactions. In response to the class-action lawsuit, AT&T issued a brief statement, saying, “We intend to defend ourselves vigorously. Transparent and accurate billing is a top priority for AT&T.”
The complaint compares AT&T’s billing practices to “a rigged gas pump that charges for a full gallon when it pumps only nine-tenths of a gallon into your car’s tank.” Count II of the complaint alleges that AT&T breached its contract with members of the class consisting of all U.S.-based iPhone or iPad users with a usage-based AT&T plan. AT&T allegedly breached its agreement by rigging its billing system to overstate data usage. Plaintiffs seek restitution and cessation of the practice.
Fans of the movie Office Space can clearly see the similarities between AT&T's plan, as alleged, and the penny tray at your local 7-11:
Peter Gibbons: [Explaining the plan] Alright so when the sub routine compounds the interest is uses all these extra decimal places that just get rounded off. So we simplified the whole thing, we rounded them all down, drop the remainder into an account we opened.
Joanna: [Confused] So you're stealing?
Peter Gibbons: Ah no, you don't understand. It's very complicated. It's uh it's aggregate, so I'm talking about fractions of a penny here. And over time they add up to a lot.
Joanna: Oh okay. So you're gonna be making a lot of money, right?
Peter Gibbons: Yeah.
Joanna: Right. It's not yours?
Peter Gibbons: Well it becomes ours.
Joanna: How is that not stealing?
Peter Gibbons: [pauses] I don't think I'm explaining this very well.
Peter Gibbons: Um... the 7-11. You take a penny from the tray, right?
Joanna: From the cripple children?
Peter Gibbons: No that's the jar. I'm talking about the tray. You know the pennies that are for everybody?
Joanna: Oh for everybody. Okay.
Peter Gibbons: Well those are whole pennies, right? I'm just talking about fractions of a penny here. But we do it from a much bigger tray and we do it a couple a million times.
Hopefully, the legal defense team at AT&T can come up with a more convincing argument than Peter Gibbons.
[JT & Jon Kohlscheen]
January 04, 2011
American Airlines Wins Favorable Ruling in Fight with Orbitz
Last week, Judge Martin Agran of the Cook County Circuit Court issued a ruling in Travelport, LP v. American Airlines, Inc. Case No. 10 CH 48028. Unfortunately, I have been unable to find the opinion on the web, so I am relying on other reports that I have found on the web. As reported in The Mercury here, American threatened to pull its flights from Orbitz's site on December 1st as a result of a dispute over American's attempts to provide information about its flights directly to Orbitz and thus to cut out middlemen known as global distribution systems which track the airlines and provide the information to travel sites such as Orbitz. While Travelport, which owns 48% of Orbitz was initially granted an injunction forcing American to continue posting its flights on the travel site, Judge Agran now has ruled that no injunction is necessary, as American can simply pay damages if it is found to have breached its contract with Orbitz.
Apparently, under the current system, airlines such as American have to pay a fee to Orbitz when its customers book a flight with the airlines and also to the global distribution systems, which make flight information available. As anyone who has paid to check a bag, or to have legroom or to have a snack or a drink on an American Airlines flight known, American prefers to charge money rather than spend it. So it is now proposing to provide its own flight information and have Orbitz pay for access to that information. Travel industry experts claim that cutting out the middlemen will make it harder for consumers to comparison shop and will create confusion.
I checked on December 30th, and Orbitz does not seem to be offering flights on American Airlines right now. The short-term effect of Judge Agran's decision will thus make matters a bit more difficult for consumers. The website Travelpulse.com reports that the Business Travel Coalition is unhappy with the ruling for that reason. eTurboNews provides a quotation from BTC Chairman Kevin Mitchell here:
The stakes in this conflict are clear: either an improved airline industry and distribution marketplace centered around the consumer, or one that subordinates consumer interests to the self-serving motivations of individual airlines endeavoring to impose their wills on consumers and the other participants in the travel industry. Single-supplier direct connect proposals, like the one advanced by American Airlines, can cause massive fragmentation of airfares and ancillary fees depriving consumers of the ability to compare the total cost of air travel options across all airlines.
The same article provides survey results indicating business travel managers' hostility to American's new strategy. It appears that American is trying to learn from its more efficient rival, Southwest, which already has its own information distribution system.
For reasons unexplored in the articles I found, American's flights are listed on Expedia. In order to book with Southwest, you have to go to their website, And that may be the future for American as well.
Update: The New York Times, frustrated at having been scooped once again by this blog, has now published a full report with more information. Among other things, the report notes that American has taken down its flights from Expedia.com as well now. It looks as though Delta might follow American's lead. The Times report is also the clearest I have thus far found about what is motivating this move, beyond the general observation that the big airlines are looking for ways to cut costs and increase revenues.
July 07, 2010
Now in Print
Douglas G. Baird, The Holmesian Bad Man's First Critic, 44 Tulsa L. Rev. 739 (2009).
Matthew K. Bell, Forget What You Intended: Surprisingly Strict Liability and COGSA Versus Carmack, 37 Transp. L.J. 57 (2010).
Molly Brooks, The "Seller-Friendly" Approach to MAC Clause Analysis Should be Replaced by a "Reality-Friendly" Approach, 87 U. Det. Mercy L. Rev. 83 (2010).
Edwin Butterfoss & H. Allen Blair, Where is Emily Litella When You Need Her?: The Unsuccessful Effort to Craft a General Theory of Obligation of Promise for Benefit Received, 28 Quinnipiac L. Rev. 385 (2010).
David Cabrelli & Rebecca Zahn, Challenging Unfair Terms: Some Recent Developments,  Jurid. Rev. 115.
Ross Dillon, A Bale of Wool,  N.Z.L.J. 145.
Lisa A. Fortin, Note, Why There Should Be a Duty to Mitigate Liquidated Damages Clauses, 38 Hofstra L. Rev. 285 (2009).*
James Gordley, The Origins of Sale: Some Lessons from the Romans, 84 Tul. L. Rev. 1437 (2010).
Sam S. Han, Predicting the Enforceability of Browse-wrap Agreements in Ohio, 36 Ohio N.U. L. Rev. 31 (2010).
Robert A. Hillman & Maureen A. O'Rourke, Principles of the Law of Software Contracts: Some Highlights, 84 Tul. L. Rev. 1519 (2010).**
Kristin L. Hines, Note, Examining Contractual Models for Transferring Environmental Liability: How They Work and Where They are Headed, 11 Vt. J. Envtl. L. 395 (2009).
Martin A. Hogg, Promise: The Neglected Obligation in European Private Law, 59 Int'l & Comp. L.Q. 461 (2010).
Joshua Karton, Contract Law in International Commercial Arbitration: The Case of Suspension of Performance, 58 Int'l & Comp. L.Q. 863 (2009).
Nancy S. Kim, Expanding the Scope of the Principles of the Law of Software Contracts to Include Digital Content, 84 Tul. L. Rev. 1595 (2010).**
Juli Loden, Comment, The Earth is Not Flat, and "A Quasi Contract is Not a Contract at All" -- Tennessee Restitution and Unjust Enrichment Law, 11 Transactions: Tenn. J. Bus. L. 167 (2010).
Susana López-Bayón & Manuel González-Díaz, Indefinite Contract Duration: Evidence from Electronics Subcontracting, 30 Int'l Rev. L. & Econ. 145 (2010).
Andrew C. W. Lund, Opting Out of Good Faith, 37 Fla. St. L. Rev. 393 (2010).
Larry A. DiMatteo & Samuel Flaks, Beyond Rules, 47 Hous. L. Rev. 297 (2010).
Juliet M. Moringiello & William L. Reynolds, What's Software Got to Do with It? The ALIPrinciples of the Law of Software Contracts, 84 Tul. L. Rev. 1541 (2010).**
Otto Sandrock, The Choice Between Forum Selection, Mediation and Arbitration clauses: European Perspectives, 20 Am. Rev. Int'l Arb. 7 (2009).
Hannibal Travis, The Principles of the Law of Software Contracts: At Odds with Copyright, Consumer, and Employment Law?, 84 Tul L. Rev. 1557 (2010).**
Hal R. Varian, Computer Mediated Transactions, 100 Am. Econ. Rev. 1 (2010).
Daniel A. Verrett, Comment, Delay Damages Sufficient for a Maritime Lien?: The Economic Loss Doctrine Brings Certainty to the High Seas, 47 Hous. L. Rev. 463 (2010).
Kate Zdrojeski, Note, International Ice Hockey: Player Poaching and Contract Dispute, 42 Case W. J. Int'l L. 775 (2010).
* - Despite a somewhat awkward title -- the point is to mitigate damages, not mitigate clauses -- this Note is worth a read, arguing that, inter alia, preventing economic waste, a penalty on the breaching party, and windfall profits for the nonbreaching party, as well as promoting consistent remedial principles, should oblige a court (or arbitrator) to not mechanistically assess the damages to which the parties agreed in their contract.
** - These four essays comprise a mini-symposium on the ALI's Principles of the Law of Software Contracts, arising out of a program I organized and moderated at January's AALS Annual Meeting in New Orleans. (Yes, that's January 2010.) Bob Hillman, Maureen O'Rourke, and Juliet Moringiello spoke at the program, as did Amy Boss and Florencia Marotta-Wurgler. Nancy Kim and Hannibal Travis responded to a supplemental call for papers to accompany those the program speakers were contributing to the print symposium.
For those who complain about the sometimes sluggish processes of student-edited law journals (for example here, including the comments), the program was on January 9, final drafts were due February 15, and the print issue arrived in my campus mailbox on June 2. Unfortunately, this pace proved too brisk for several authors lined up to contribute to the print symposium (including yours truly). I hope to collect those authors' contributions, revised-as-appropriate versions of these four essays and other essays and articles first appearing elsewhere, and some original shorter response and reply pieces, in a book coming soon -- at least by astronomical or paleontological standards -- from an as-yet-undisclosed legal academic publisher.
[Keith A. Rowley]
April 06, 2010
Court Enforces Forum Selection Clause in Tradecomet.com v. Google
Back in 2008, we reported on how Curtis Bridgeman and Karen Sandrik think a lot of business-to-consumer form contracts are “bullshit,” which is a technical philosophical term referring to illusory promises. I often begin my contracts course by walking my students through Google’s Terms of Service agreement in order to alert them to the hazards of click-through agreements. Tradecomet.com LLC v. Google, Inc. reveals that things are not very different in the B2B context. In a March 5, 2010 opinion, Judge Stein of the Southern District of New York dismissed Tradecomet’s action, ruling that the parties were bound by a forum selection clause in their August 2006 agreement. Tradecomet will have to bring its antitrust claims in California.
The forum selection indicates Google’s vast advantages in terms of bargaining power. Not only does it specify that the agreement will be governed by California law and that all disputes must be litigated in Santa Clara County, California, it also specifies that “THE AGREEMENT MUST BE CONSTRUED AS IF BOTH PARTIES JOINTLY WROTE IT.” Obviously, both parties did not write it, and presumably Google insists on this whopper in order to avoid legal consequences such as claims of procedural unconscionability and contra proferentem construction.
That forum selection clause was added to the parties agreement in August 2006 and Tradecomet argued that it should not govern because the alleged antitrust violations occurred when the parties were operating under earlier versions of their agreement, dated April 19, 2005 and May 23, 2006. Both earlier versions contained language providing that “Google may modify the Program or these Terms at any time without liability and your use of the Program after notice that the Terms have changed indicates acceptance of the Terms.” The August 2006 Agreement also provides that it “supersedes and replaces any other agreement, terms and conditions applicable to the subject matter hereof.”
The court found that Tradecomet accepted the terms of August 2006 by clicking through text. Tradecoment contended that enforcement of the forum selection clause would be unconscionable, but the court found that doing so would be neither unreasonable nor unjust.
Wait a minute, shouldn't the case be renamed Tradecomet.com v. Topeka?
March 08, 2010
Protecting Your Passwords From Beyond the Grave
Fellow conferee Sid DeLong has called our attention to a possible, but perhaps problematic solution. There is a service called Legacy Locker. Among other things, Legacy Locker gathers and tests your online passwords for you and then passes them on to your personal representative or named beneficiary when you die. More information on the service can be found here. Please note: although the name of the principal behind Legacy Locker is similar to that of the undersigned, we at the blog intend neither to endorse nor to criticize the product. We just think it is an interesting example of private ordering that could at least potentially save the bereaved from the kinds of adversarial wrangling described by Professor Preston.
In the specific case described by Professor Preston, the parents of a beloved child wanted to recover some of her e-mail communications, and Professor Preston believes that they had a legal right to such communications. However, in many cases, though not the case Professor Preston discusses, minors have passwords on their internet accounts precisely because they want to keep those communications private from their parents. That reasonable assumption could be easily overcome if children specified, through Legacy Locker or some other service what was to become of their accounts in case of their demise.
March 01, 2010
UCC Legislative Update
It has been a fairly quiet eight months on the UCC legislative front since my last update.
Revised Article 1
As of March 1, 2010, Revised Article 1 was in effect in thirty-seven states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.
State legislatures continue to grapple with the definition of "good faith," although the uniform § R1-201(b)(20) definition has the upper hand. Of the 37 enacting states, 26 have adopted the uniform definition, while 11 have retained the pre-revised definition that, in conjunction with § 2-103(1)(b), imposes a different good faith standard on merchants and non-merchants. Effective July 1, 2010, one of those eleven minority states (Indiana) will join the majority as SB 501, enacted in 2009 primarily for the purpose of amending Articles 3 and 4, also included a new good faith definition for Indiana's Article 1.
With many state legislatures occupied with more pressing issues of the moment, 2009 yielded only three new adoptions -- Alaska, Maine, and Oregon -- down from five in 2008, and seven in 2007. While a downward trend in new enactments eventually becomes inevitable once two-thirds of the states have signed on, 2009's three enactments were the fewest in a year since 2003 (when Idaho became the third state overall to enact Revised Article 1).
As of March 1, only two states -- Mississippi and Wisconsin -- appear to be serious candidates to enact Revised Article 1 in 2010.
Mississippi SB 2419, introduced and amended (to replace a choice-of-law provision that appeared to have derived from the original § R1-301 that all 37 enacting states have declined to adopt and the ALI and NCCUSL have disavowed with one that reflected the substitute § R1-301 the ALI and NCCUSL promulgated in 2008) in January, unanimously passed the Mississippi Senate on February 10. It is presently before the House Judiciary Committee.
Wisconsin AB 687, introduced on January 25 and amended on February 16 to replace the uniform R1-201(b)(20) "good faith" definition with the pre-revised 1-201(19) version, received the Assembly Committee on Financial Institutions's unanimous approval on February 26. It is presently before the Assembly Rules Committee.
Two other bills, Massachusetts HB 89 and Washington SB 5155, seem less likely to produce results.
Massachusetts HB 89, a fifth attempt to enact Revised Article 1 in the Commonwealth, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action has been reported as of March 1, 2010.
Washington SB 5155, introduced on January 15, 2009, appeared to be drawn directly from the language of official Revised Article 1 circa 2001, including the original version of § R1-301. At an initial public hearing on January 23, 2009, all those testifying in support of and in opposition to the bill opposed the choice-of-law provision. The Washington Senate has taken no further action on the bill.
Article 2 and 2A Amendments
As of March 1, 2010, only three state legislatures (Kansas, Nevada, and Oklahoma) have considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West 2009), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted any of the 2003 amendments.
While the list of states enacting any of the 2003 amendments may not change in the near future, the number of amendments Oklahoma enacts may. Introduced on February 1, 2010, Oklahoma HB 3104 proposes amendments to forty-nine sections of Article 2 and four sections of Article 2A. The bill includes neither the reformulation of Sections 2-206 and 2-207 nor the addition of Sections 2-313A and 2-313B included in the 2003 Article 2 amendments. Many of the amendments appear designed to facilitate electronic signatures and transactions and to accommodate the terminology surrounding them that grows out of UETA, E-SIGN, and Revised UCC Articles 1 and 7, or to otherwise align Article 2 and 2A terminology with that used in Revised Articles 1 and 7. That is not to say that HB 3104 proposes only cosmetic changes to Oklahoma's versions of Articles 2 and 2A. Several of the proposed amendments alter existing substantive rights, obligations, or remedies. Some of those alterations (e.g., raising the statute of frauds floor from $500 to $5,000) do not seem to be inherently controversial; some (e.g., granting/recognizing a right to cure after a justifiable revocation) may or may not be controversial depending on how courts have interpreted the current Article 2; and some (e.g., giving sellers the right to recover consequential damages) do seem inherently controversial. This, however, is neither the place nor the time for a detailed assessment of HB 3104.
Article 3 and 4 Amendments
As of March 1, 2010, the 2002 amendments to Articles 3 and 4 were in effect in eight states: Arkansas, Kentucky, Minnesota, Nevada, New Mexico, Oklahoma (for a second time), South Carolina, and Texas.
In addition to enacting the 2002 amendments to Articles 3 and 4 and the usual conforming amendments, Indiana SB 501, which Governor Mitch Daniels signed into law on May 12, 2009, but does not take effect until July 1, 2010 also revises the definition of “good faith” in Ind. Code § 26-1-1-201(19) to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. At present, Ind. Code § 26-1-1-201(19) requires only “honesty in fact.” Like the rest of SB 501, this change will take effect July 1, 2010, and further tip the balance among enacting states in favor of the unitary good faith definition in uniform R1-201(b)(20).
As of March 1, 2010, the only pending Articles 3 and 4 bill is Massachusetts HB 90, which has been languishing for more than a year.
Revised Article 7
As of March 1, 2010, Revised UCC Article 7 was in effect in thirty-six states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia.
Additional bills are currently pending in Georgia, Massachusetts, Washington, and Wisconsin; but only the Wisconsin bill appears to be making any progress.
First introduced on February 18, 2009, Georgia HB 451 won unanimous approval in the Georgia House on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate. HB 451 was "recommitted" to the Georgia Senate on January 11, 2010. No further action has been reported.
Massachusetts HB 89, which also proposes adopting Revised Article 1, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action has been reported.
Washington SB 5154 was introduced on January 15, 2009, scheduled for a public hearing on January 23, 2009, and then stalled, like its Revised Article 1 counterpart, but without as compelling a reason. It was "reintroduced and retained in present status" on January 11, 2010. No further action has been reported.
Wisconsin AB 688 was introduced on January 25, 2010. On February 22, the Assembly Committee on Jobs, the Economy and Small Business unanimously recommended passage. The bill is now before the Assembly Rules Committee.
[Keith A. Rowley]
November 14, 2009
AALS Program and Print Symposium on the Principles of the Law of Software Contracts
The AALS Section on Commercial and Related Consumer Law invites you to attend our Annual Meeting program on The Principles of the Law of Software Contracts: A Phoenix Rising from the Ashes of Article 2B and UCITA? and solicits additional proposals for a companion symposium issue to be published in the Tulane Law Review.
The Topic: On May 19, 2009, the ALI approved the Principles of the Law of Software Contracts, which undertake to weave the currently divergent threads of law governing software contracts into a coherent whole that will guide parties in drafting, performing, and enforcing software contracts, assist courts and other arbiters in resolving disputes involving software contracts, and, perhaps, inform future legislation addressing software contracts. Do the Principles clarify the law of software contracts? Will they successfully unify the law of software contracts? Are they consistent with current best practices in software contracting? Will they encourage desirable future developments in the law and practice of software contracts? These are among the questions our program speakers will address.
The Program: The Commercial and Related Consumer Law Section's annual meeting program, scheduled for Saturday, January 9, 10:30 AM to 12:15 PM, in the Magnolia Room, Third Floor, Hilton New Orleans Riverside, will feature Principles Reporter Bob Hillman (Cornell) and Associate Reporter Maureen O’Rourke (Boston U.), who will offer their unique insights on the drafting process, key substantive provisions, and their legal and practical implications; Amy Boss (Drexel), who will add her insights about the failures of the UCC Article 2B project and UCITA and the prospects for the Principles’ success; Juliet Moringiello (Widener), who will discuss her and co-author Bill Reynolds's (Maryland) paper "What's Software Got to Do With It?," offering their perspectives on the Principles process, largely ignoring past efforts and debates, and addressing some of the assumptions underlying the Principles and how they address those assumptions; and Florencia Marotta-Wurgler (NYU), who will discuss her and co-author Yannis Bakos's (NYU Stern School of Business) paper "How Much Does Disclosure Matter?," which delves deeper into the value of disclosure -- an important assumption underlying the Principles and a subject the Principles tackle substantively -- and augments the conceptual discussion with empirical analysis.
The Symposium Issue: The Tulane Law Review will publish a print symposium issue including papers from most of our presenters, papers selected from among those who responded to our initial call for proposals as well as others from whom we solicited contributions, and some shorter responses and replies. We can accommodate a limited number of additional papers, responses, and replies in the symposium issue, which is scheduled to go to press in late summer 2010.
How to Submit a Paper or Proposal: If you would like to contribute to the print symposium, and want your proposal to receive full consideration, please e-mail an abstract, précis, or draft by Monday, December 14, 2009 to Professor Keith A. Rowley, Chair of the AALS Section on Commercial and Related Consumer Law. E-mail: firstname.lastname@example.org. We may consider submissions received after December 14 on a space-available basis. Executive Committee members and the Tulane Law Review's symposium editors will review all timely submissions and notify no later than Monday, January 11, 2010 those authors we would like to contribute to the print symposium.[Keith A. Rowley]
July 01, 2009
Mid-Year Legislative Update
With most state legislatures having concluded their business for the year, here is the 2009 mid-year legislative update.
Revised Article 1
As of January 1, 2009, Revised Article 1 was in effect in thirty-four states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.
Notwithstanding my suggestion elsewhere that the substitute § R1-301 NCCUSL and the ALI promulgated last year might “grease the skids” for additional enactments this year, 2009 has turned out to be a relatively quiet legislative year for Revised Article 1, with only three enactments -- down from five in 2008, and seven in 2007. While the most noteworthy nonuniformity among the thirty-seven enactments remains the definition of “good faith” -- with 26 states having adopted the uniform § R1-201(b)(20) definition and 11 having retained the pre-revised definition that imposes a different good faith standard on merchants and non-merchants -- all three 2009 enactments adopt the uniform definition and one of the eleven states (Indiana) that retained the pre-revised definition has amended its version of Revised Article 1 to adopt the uniform definition effective July 1, 2010.
As of June 30, Alaska (HB 102), Maine (LD 1403), and Oregon (SB 558) have enacted Revised Article 1 thus far this year. The Alaska and Oregon enactments take effect on January 1, 2010, with Maine’s following on February 15, 2010.
The Washington legislature failed to act on SB 5155 before adjourning sine die on April 26. (That’s probably just as well, because the introduced version of SB 5155 appeared to be drawn directly from the language of official Revised Article 1 circa 2001 and included the no-longer-official version of Revised 1-301 that all 37 enacting states have declined to adopt).
It is possible that the Massachusetts legislature will consider a Revised Article 1 bill sometime this year; however, having waited months for HD 89 to be assigned a bill number, and given the failure of four prior bills to garner a floor vote in either chamber, I would be surprised to see definitive action anytime soon.
Article 2 and 2A Amendments
As of June 30, 2009, only three state legislatures (Kansas, Nevada, and Oklahoma) had considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West Supp. 2008), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted the 2003 amendments.
Article 3 and 4 Amendments
As of January 1, 2009, the 2002 amendments to Articles 3 and 4 were in effect in six states: Arkansas, Kentucky, Minnesota, Nevada, South Carolina, and Texas. By July 1, 2010, that number will increase by at least 50%.
As of June 30, 2009, Indiana (SB 501), New Mexico (SB 74), and Oklahoma (SB 991) have enacted the 2002 amendments to Articles 3 and 4. Oklahoma SB 991 will take effect on November 1, 2009; New Mexico SB 74 will take effect on January 1, 2010; and Indiana SB 501 will take effect on July 1, 2010.
In addition to enacting the 2002 amendments to Articles 3 and 4 and the usual conforming amendments, Indiana SB 501 also revises the definition of “good faith” in Ind. Code § 26-1-1-201(19) to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. At present, Ind. Code § 26-1-1-201(19) requires only “honesty in fact.” Like the rest of SB 501, this change will take effect July 1, 2010, and further tip the balance among enacting states in favor of the unitary good faith definition in uniform § R1-201(b)(20).
Revised Article 7
As of January 1, 2009, Revised UCC Article 7 was in effect in thirty-one states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, and West Virginia. As of July 1, Revised Article 7 will be in effect in South Dakota, as well.
This has been a relatively active legislative year for Revised Article 7. In addition to South Dakota SB 89, which takes effect on July 1, Alaska (HB 102), Maine (LD 1405), and Oregon (SB 558) have already enacted Revised Article 7 in 2009, and Louisiana HB 403 lacks only Governor Bobby Jindal's signature (or pocket veto). Alaska HB 102 and Oregon SB 558 will take effect on January 1, 2010, as will Louisiana HB 403 (if enacted). Maine LD 1405 will take effect on February 15, 2010.
Georgia HB 451 made significant progress toward adoption. First introduced on February 18, the Georgia House unanimously passed the House Judiciary Committee’s substitute version on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate.
Washington SB 5154 stalled, like its Revised Article 1 counterpart, but without as compelling a reason.
Although the Georgia legislature did not pass HB 451 prior to adjourning, it did pass the Uniform Electronic Transactions Act (HB 126), to which Governor Sonny Perdue affixed his signature on May 5. As a result, effective July 1, 2009, Illinois, New York, and Washington will be the only states in which UETA is not in effect.
[Keith A. Rowley]
June 19, 2009
ALI Principles of the Law of Software Contracts
Speaking of the recently-approved Principles of the Law of Software Contracts (the subject of our sister section's call for proposals below), here's an overview and remarks from Reporter Bob Hillman for the benefit of those who have not already read them on Concurring Opinions:
Maureen O’Rourke, the Associate Reporter on the Principles of the Law of Software Contracts, and I are posting the following to acquaint readers with the Principles and also to respond to some criticism of one section of the Principles that creates, under certain circumstances, an implied warranty of no known material hidden defects in the software.
On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address issues including contract formation, the relationship between federal intellectual property law and private contracts governed by state law, the enforcement of contract terms governing quality and remedies, the meaning of breach, indemnification against infringement, automated disablement, and contract interpretation.
The Introduction to the Principles explains further that “[b]ecause of its burgeoning importance, perhaps no other commercial subject matter is in greater need of harmonization and clarification. . . . [T]he law governing the transfer of hard goods is inadequate to govern software transactions because, unlike hard goods, software is characterized by novel speed, copying, and storage capabilities, and new inspection, monitoring, and quality challenges.” Many of the rules of Article 2 of the UCC therefore apply poorly to software transactions or not at all, and the Principles are intended to fill the void.
The Principles are not “law,” of course, unless a court adopts a provision. Courts can also apply the Principles as a “gloss” on the common law, UCC Article 2, or other statutes. Nor do the Principles attempt to set forth the law for all aspects of a transaction, but instead rely on sources external to the Principles in many areas.
The Principles apply to agreements for the transfer of software or access to software for a consideration, i.e., software contracts. These include licenses, sales, leases, and access agreements. The project does not apply to the exchange of digital media or digital databases. It applies a predominant purpose test to determine applicability to transactions involving embedded software or software combined in one transfer with digital media, digital databases, and/or services.
We are the Reporter and Associate Reporter of the software principles. We have been greatly aided by our advisors, consultative group members, ALI Council members, liaisons from the National Commissioners on Uniform State Law, Business Software Alliance, and the American Bar Association, and many additional lawyers from industry and other groups who, over the last five and one-half years, have met with us, talked with us on the phone, and exchanged e-mails with us. We believe the project moved along smoothly largely because of the efforts of all of these groups and individuals.
Nevertheless, in the two weeks leading up to approval in May, we received communications from a few software providers evidencing concern largely with one section of the Principles. Section 3.05(b) creates a non-excludable implied warranty that the software “contains no material hidden defects of which the transferor was aware at the time of the transfer.” The section only applies if the transferor receives “money or a right to payment of a monetary obligation in exchange for the software.” Because the section may be the most controversial provision, we devote the rest of this post to the issue.
Despite concerns that section 3.05(b) creates “new law,” it simply memorializes contract law’s disclosure duties and tort’s fraudulent concealment law. The section makes clear that these rules apply to software transfers in order to allocate the risk to the party best able to accommodate or avoid the costs of materially defective software. Obviously this is the transferor in situations where only it knows of the material defect and the transferee cannot protect itself. The section requires that the transferor knows of the defect at the time of the transfer (negligence in not knowing is not enough to trigger liability), the defect is material, and it is hidden.
A few software providers have concerns that the concepts of “hidden,” and “material defect” are obtuse and will “increase litigation” or require a flood of “detailed notices” to prospective users. These concepts, however, are hardly unknown to the law. A comment to section 3.05(b) says that a “hidden” defect occurs if the “defect would not surface upon any testing that was or should have been performed by the transferee.” This is nothing new. See, e.g., UCC 2-316(3)(b) (”there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to [the buyer]“).
A few software providers also worry about the meaning of “material defect.” The comments to section 3.05(b) point out that the section simply captures the principle of material breach: Does the defect mean that the transferee will not get substantially what it bargained for and reasonably expected under the contract? The criticism that “materiality” is too vague, if accurate, would mean that contract law would have to abolish its material breach doctrine too.
Putting together the requirements of actual knowledge of the defect at the time of the transfer, that the transferee reasonably does not know of the defect, and that the defect constitutes a material breach means that a transferor would be insulated from liability in situations identified by the concerned software providers as problematic. These include where the transferor has received reports of problems but reasonably has not hadtime to investigate them, where the transferee’s problems are caused by uses of which the transferor is unaware, where the transferor learns of problems only after the transfer, and where the problems are benign or require reasonable workarounds to achieve functionality. The best example of when section 3.05(b) would apply is, as comment b to the section says, where the transferor already knows at the time of the transfer that the software will require “major workarounds . . . and cause long periods of downtime or never [will] achieve promised functionality,” the transferee cannot discover this for itself, and the transferor chooses not to disclose the defect.
As we have already said, the section simply memorializes existing law. Under the common law, a contracting party must disclose material facts if they are under the party’s control and the other party cannot reasonably be expected to learn of the facts. Failure to disclose in such circumstances may amount to a representation that the facts do not exist and may be fraudulent. See, e.g., Shapiro v. Sutherland, 76 Cal. Rptr. 2d 101, 107 (Cal. Ct. App. 1998) (”Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.”); Hill v. Jones, 725 P.2d 1115, 1118-19 (Ariz. Ct. App. 1986) (”[U]nder certain circumstances there may be a ‘duty to speak.’ . . . [N]ondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. . . . Thus, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation.”). The Restatement (Second) of Contracts section 161(b) states that “[a] person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist . . . where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Section 161, comment d of the Restatement (Second) adds “In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected to disclose the fact that would correct the mistake. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such character as would probably prevent the buyer from buying at the contract price.”
One concern of a commentator is that fraudulent concealment is a tort, implying that it has no place in the Principles. But the principle appears prominently in the Restatement (Second) of Contracts section 161. And why not memorialize a principle that discourages a party in a contract setting from hiding material facts that the other party reasonably does not know? The commentator notes that fraudulent concealment requires intent to deceive, but wouldn’t that be the usual inference if a transferor licenses software it knows is materially defective and knows the transferee cannot discover it?
A few organizations also are concerned that section 3.05(b) cannot be disclaimed. But there are plenty of cases that do not allow a party to contract away liability for concealment. One critic wonders why a statement such as “I am not giving any assurances about there being no defects in this software,” should not insulate a transferor from liability. A reasonable licensee, assuming the good faith of the licensor, would believe that this licensor does not intend to make any express warranties or implied warranties of merchantability or fitness, not that the licensor knows that the software is materially defective so that the software will be largely worthless to the licensee. A transferor playing this game is surely in bad faith and, frankly, engaging in reprehensible conduct. But there is a way to ensure no liability under this section, namely to disclose material hidden defects. In effect, disclosure is the disclaimer.
Bob Hillman and Maureen O’Rourke
June 2, 2009
The Concurring Opinions post -- which Bob asked me to re-post, with the blessings of the Concurring Opinions folks -- has provoked several comments and has been the subject of a follow-up post by David Hoffman, one of Concurring Opinions's thirteen regular contributors. Dave's post has generated its own comments. While we here at ContractsProf might have a vested interest in generating site traffic, it may be more efficient to funnel feedback through a single conduit. Because Concurring Opinions got the ball rolling, feel free to comment, or to respond to existing comments, there.
[Keith A. Rowley]
October 17, 2008
A Take on Clickwrap?
CHINO, CA—In an unprecedented and historic event Monday, the "I Am Under 18" button, an Internet security device which if selected restricts access to websites featuring adult content, was clicked for the first time ever. "I knew I could simply claim to be over 18 and continue onto my desired destination, but I also realized that I would have to live with that lie for the rest of my life," said local resident Garrett Kinley, 17. "I admit, I was curious to see what type of material I would find on www.juggworld.com, but that button was clearly placed there for a reason, and let's face it: 17 and three-quarters is not 18. I plan to return to the site three months from now, when I will be mature enough to handle its content." Moments later, Kinley's friend Dave Gerrard, 17, pushed Kinley aside and clicked the "I Am Over 18" button himself, at which point a tactical police unit broke down his bedroom door and arrested him.
[Meredith R. Miller]
October 01, 2008
Court Addresses Modification of Clickwrap Agreement
The U.S. District Court for the District of Maryland (Titus, J.) recently had occasion to address the modification of a clickwrap agreement. Plaintiffs, real estate appraisers, used defendant FNC’s internet-based service, “Appraisal Port.” Plaintiffs brought a class action against FNC, alleging that FNC falsely claimed that information entered in Appraisal Port would be kept private and would be transmitted securely. FNC moved to stay the proceedings pending arbitration of plaintiffs’ claims, pointing to an arbitration provision contained in the user agreements that plaintiffs acknowledged when joining the service.
Plaintiffs argued that they were not parties to a valid arbitration agreement because FNC amended their user agreements during their memberships, replacing them with a new agreement that did not include any arbitration clause. FNC recognized that it “attempted” to so amend the user agreements but argued that its attempt “failed” because plaintiffs did not acknowledge the changes. Based on the language of the original clickwrap agreement, which included a clause about modification, the court concluded that the modification was effective and, thus, plaintiffs were not bound to arbitrate. The court denied the motion to stay.
(Note the interesting posture here. Usually, the party seeking arbitration is arguing effective unilateral modification to include arbitration terms; here, it is the parties opposing arbitration that point to a unilateral modification as effective, because the modification did not include arbitration terms).
(The court's reasoning is after the jump).
The court reasoned:
FNC argues that any modification to the prior user agreements was ineffective because it neither (1) complied with specific provisions in the prior agreement governing such modifications nor (2) complied with general principles of law governing the formation of contracts, including notice to the existing users. In considering these arguments, the Court should first clarify that, while parties may agree in advance to a method for modifying an agreement, such method is not exclusive, and the parties are free to choose another method of modification, thereby waiving the originally agreed provisions for modification. See 17A C.J. S. Contracts § 409. As explained herein, the Court concludes that FNC's modification through issuance of the 2005 Agreement either complied with the explicit provisions of the 2000 and 2002 Agreements, or, alternatively, such provisions were otherwise waived by the Arbitration Plaintiffs. (a) Compliance with Modification Provisions
Both the 2000 and 2002 Agreements contain the following provision permitting FNC to modify the agreements unilaterally under certain conditions:This User Agreement may be modified at any time. Whenever changes are made, the revised agreement will be posted at this location. New terms will be effective 30 days after the changes are posted. You will be asked to acknowledge your acceptance of the changes the first time you log in after the changes have been made.
(Emphasis added.) Under the plain terms of the first sentence, therefore, the 2000 and 2002 Agreements purport to give FNC the unilateral right to modify them at any time. FNC argues that the second, third, and fourth sentences in the modification paragraph create mandatory conditions that must be satisfied before a modification is valid. As discussed above, it is undisputed that FNC did not ask previously registered users to acknowledge the 2005 Agreement the first time they logged in after it was introduced or, for that matter, at any time they logged in. For this reason, FNC contends, its attempted modification was ineffective.
The Court disagrees for two reasons. First, the modification provisions of the 2000 and 2002 Agreements are, at the very least, ambiguous as to whether asking the user to “acknowledge” acceptance of the changes is truly a necessary condition to effect a modification. In a case cited by FNC, the Supreme Court of Mississippi ruled that “[a]mbiguities in a contract are to be construed against the party who drafted the contract.” Union Planters Bank, Nat'l Ass'n v. Rogers, 912 So.2d 116, 120 (Miss.2005)(citing Miss. Transp. Comm'n v. Ronald Adams Contractor, Inc. ., 753 So.2d 1077, 1084)). FNC cites Rogers, of course, because the Supreme Court there found that a bank customer's continued use of an account by itself was insufficient to effect a modification, at least where a prior mailing had stated that the customer's agreement would be effected by “signing a signature card and using your account.” 912 So.2d at 118-19. Critical to the result in Rogers, however, was the fact that it was the drafter of the modification provisions who sought to validate its own attempted modification, not invalidate it, as FNC seeks to do here. In stating the above-quoted passage as one of the bases of its decision, therefore, Rogers stands less for the strict construction of modification provisions in general, than it does for the strict construction of them against the drafter. (More on Rogers, infra.)
Turning to the facts of this case, the Court recognizes that all three sentences in the modification provision in the 2000 and 2002 Agreements include the phrase “will be.” Only one of those sentences, however, includes the effectiveness of the modification as being linked to the “will be” language. Specifically, while the second sentence states that the new terms “will be posted,” and the fourth sentence states that the user “will be asked to acknowledge,” only the third sentence purports to state explicitly the condition(s) under which the new, unilaterally imposed terms “will be effective.” By using the phrase “will be effective” in this manner, the third sentence creates an ambiguity because it is at least capable of being understood as stating that posting of the new terms for thirty days is not merely one in a series of necessary conditions but is, in fact, sufficient by itself to effect a modification. The implication of such a reading, of course, is that asking the user for acknowledgment is not necessary to effect a modification, but is rather mere “icing on the cake.”
The Court recognizes that FNC stated in the fourth sentence that it would “ask” prior users to acknowledge their acceptance of the changes the first time they log in after the new terms are posted. The question is: what are the consequences if it fails to do so? Nothing in the fourth sentence or in any other term explicitly indicates that asking for customer acknowledgment is a condition precedent to the effectiveness of FNC's unilateral modifications. The fourth sentence simply does not state that the revisions “will be effective” after they have been posted for thirty days and after users are asked to acknowledge their acceptance. And while such a requirement, as drafted, is capable of being read as a condition precedent to the effectiveness of a modification, such a reading is not clear in light of the explicit provision just before it that effectiveness “will” occur after the new terms are posted for thirty days. In sum, where it is ambiguous whether such an acknowledgment inquiry is a condition precedent to the effectiveness of a modification, and where FNC's legal position would benefit from its admitted failure to do so, the Court construes the language against FNC and concludes that the 2000 and 2002 Agreements permit modification by FNC at any time and that such modifications will be effective after they are posted for thirty days.
(footnotes omitted). Other interesting arguments were addressed in the opinion, including plaintiffs' argument that FNC should be precluded by the doctrines of estoppel and waiver from arguing that the 2005 Agreement does not apply.
Harold H. Huggins Realty, Inc. v. FNC, Inc., --- F.Supp.2d ----, 2008 WL 4135997
( D.Md. Aug. 28, 2008).
[Meredith R. Miller]
August 22, 2008
Court Addresses Class Action Waiver in Commercial Contract
Plaintiff advertisers commenced a class action suit against Yahoo!, alleging that Yahoo! breached its advertising agreement in numerous ways. For example, plaintiffs alleged that Yahoo! promised to place plaintiffs' advertisements in a way that targeted plaintiffs' likely customers but, instead, Yahoo! placed ads in an untargeted way.
Yahoo! moved for summary judgment, pointing to a class action waiver in its standard form advertising agreement. The plaintiffs argued that this class action waiver was unenforceable. Yahoo! argued that the Discover Bank line of cases did not apply because the advertisement agreement was not a consumer contract but, rather, between two commercial entities. The District Court for the Central District of California held that "although Discover Bank's holding addresses only consumer contracts, nothing in that decision forecloses the possibility that a class action in a commercial contract may be deemed unconscionable under certain circumstances." The court then denied Yahoo!'s motion for summary judgment, holding that genuine issues of material fact existed concerning the enforceability of the class action waiver.
In re Yahoo! Litigation, __ FRD __, 2008 WL 1882786 (C.D. Cal. 2008)
[Meredith R. Miller]
August 14, 2008
Open Source Software: Why the Difference between Conditions and Covenants Matters
Imagine that you write some code, and offer it to the public under an open source license that requires that if someone distributes modified versions of the code, the modified versions also be open sourced. Now assume someone distributes modified versions of your code, but fails to open source the modified code. Do you have a claim for breach of contract? Or for copyright infringement? Or both? And why should anyone other than a law professor care?
After noting the significant differences between copyright and contract law, he explains why the situation he raises is not so hypothetical:
[I]t is very close to the facts in Jacobsen v. Katzer, a case concerning open sourced code from the Java Model Railroad Interface group. Today, the Federal Circuit vacated a district court decision [PDF] that had held that only contract law was implicated by the defendants' alleged breach of the open source license applicable to the JMRI code.
The court concluded that the key question was whether the parts of the agreement the defendants allegedly breached were mere covenants (things the defendants agreed not to do when they accepted the license), or also conditions of the license (things that must be satisfied in order for the defendants to be licensed at all). Because the license at issue went out of its way to state that licensees' obligations were "conditions," the court concluded that if the defendants were in breach, the plaintiff could sue for copyright infringement. There are a lot of things in this opinion that the open source community should cheer. The opinion notes that open source software "can often be written and debugged faster and at lower cost than if the copyright holder were required to do all of the work independently," and points out that "[t]here are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties." And the court emphatically concluded that "[c]opyright holders who engage in open source licensing have the right to control the modification and distribution of copyrighted material."
While we're pleased to see a panel of learned judges endorse the legal foundations of the open source software paradigm, the decision may also encourage proprietary software vendors who frequently fill their "end user license agreements" with restrictions that are denominated as "conditions" on the license. If violating a "condition" in a EULA results in copyright infringement liability, what's to stop a software vendor from imposing conditions that are unrelated to copyright law (e.g. an agreement not to disparage the copyright owner, or to wear pink bunny ears on Tuesdays), or even antithetical to copyright law (e.g. a waiver of fair use rights)?
For a view of the dark side of "conditions" imposed in proprietary software licenses, consider the "thou shalt not run software we don't like" terms that Blizzard imposes on those who purchase World of Warcraft software, terms that recently were upheld in court despite a very astute amicus brief by Public Knowledge.
He promises this issue is likely to arise again in the future, so we’ll have to stay tuned.
[Meredith R. Miller]