Tuesday, December 9, 2014
In what seemed an inevitable turn of events, the Los Angeles and San Francisco district attorneys filed a consumer protection lawsuit on 12/9/2010 against Uber for making false and misleading statements about Uber’s background checks of its drivers. George Gascon, the district attorney for San Francisco, calls these checks “completely worthless” because Uber does not fingerprint its drivers. Uber successfully fought state legislation that would have subjected the company’s drivers to the same rules as those required of taxi drivers. Allegedly, Uber has also defrauded its customers for charging its passengers an “airport fee toll” even though no tolls were paid for rides to and from SFO, and charging a “$1 safe ride fee” for Uber’s background check process. California laws up to $2,500 per violation. There are “tens of thousands” of alleged violations by Uber. However, even that will likely put only a small dent in Uber’s economy as it is now valued at $40 billion (yes, with a “b”).
Lyft has settled in relation to similar charges and has agreed to submit information to the state to verify the accuracy of its fares (although not its background checks). It has also agreed to stop picking up passengers at airports until it has obtained necessary permits. Prosecutors are continuing talks with Sidecar.
Time will tell what prosecutors around the nation decide to do against these and similar start-ups such as airbnb and vrbo.com, which are also said to bend or outright ignore existing rules.
The Los Angeles Times comments that the so-called “sharing economy” companies face growing pains that “start-ups in the past didn’t – dealing with municipalities around the world, each with their own local, regional and countrywide laws.” It is hard to feel too sorry for the start-ups on this account. First, all companies obviously have to observe the law, whether a start-up or not. Today’s regulations may or may not be more complex than what start-ups have had to deal with before. However, these companies should not be unfamiliar with complex modern-day challenges as that is precisely what they benefit from themselves, albeit in a more technological way. Finally, there is something these companies can do about the legal complexity they face: hire savvy attorneys! There are enough of them out there who can help out. But perhaps these companies don’t care to “share” their profits all that much? One has to wonder. Sometimes, it seems that technological innovation and building up companies as fast as possible takes priority over observing the law.
Monday, October 20, 2014
Class action lawsuits can be a great way for consumers to obtain much necessary leverage against potentially overreaching corporations in ways that would have been impossible without this legal vehicle. But they can also resemble mere litigiousness based on claims that, to laypeople at least, might simply seem silly. Decide for yourself where on this spectrum the recent settlement between Red Bull and a class of consumers falls. The background is as follows:
The energy drink Red Bull contains so much sugar and caffeine that it can probably help keep many a sleepy law professor and law student alert enough to get an immediate and urgent job done. I admit that I have personally enjoyed the drink a few times in the past, but cannot even drink an entire can without my heart simply beating too fast (so I don’t).
Red Bull’s marketing efforts promised consumers a “boost, “wings,” and “improved concentration and reaction speeds.” One consumer alleges in the class action suit that he “had been drinking the product since 2002, but had seen no improvement in his athletic performance.”
It strikes me as being a bad idea to pin one’s hopes on a mere energy drink to improve one’s athletic performance. These types of energy drinks seem to be geared much more towards a temporary sugar high than anything else. At any rate, if the drink doesn’t help, why continue drinking it for another 12 years?
Nonetheless, a group of plaintiffs filed claim asserting breach of express warranty, unjust enrichment, and violations of various states’ consumer protection statutes. The consumers claim that Red Bull’s deceptive conduct and practices mean makes the company’s advertising and marketing more than just “puffery,” but instead deceptive and fraudulent and thus actionable. The company of course denies this, but has chosen to settle the lawsuit “to avoid the cost and distraction of litigation.”
To me, this case seems to be more along the lines of Leonard v. Pepsico than a more viable claim. Having said that, I am of course not in favor of any type of false and misleading corporate claims for mere profit reasons, but a healthy dose of skepticism by consumers is also warranted.
Friday, August 1, 2014
Readers of this blog should already be familiar with the famous Harrier jet case in which plaintiff John Leonard attempted to treat a Pepsi commercial as an offer for the sale of a Harrier jet in exchange for 7 million Pepsi points or the equivalent in cash, which came to about $700,000. In Leonard v. Pepsico. (edited version available here), Judge Kimba Wood ruled in Pepsico's favor, finding that the commercial that Leonard mistook for an offer was actually a joke.
We have learned via the Contracts Prof listserv that a Harrier Jet was recently sold at auction for £ 105,800 -- that is under $200,000. In this case, the auctioneer specified that the jet was being sold "for display purposes only and is not currently airworthy." It doesn't even come with any weapons systems. Bummer. Still, although the Pepsi commercial suggests an operational Harrier (there is no indication of weapons capabilities), Leonard's offer of $700,000 actually turns out to be way too high for a non-functional jet. So, if instead of showing a kid landing a jet outside of his school, the commercial had shown the same kid impressing his friends with the grounded jet in his backyard, Judge Wood would have had a harder time construing the ad as a joke.
Since the notice of the jet for auction claims that this is the first time a Harrier has been sold at auction, Pepsico would have had a hard time getting its hands on a jet. Tthat would not have bothered Mr. Leonard, who more likely was interested in the difference in value between a functioning Harrier and the $700,000 he offered. However, if the court were able to discover the actual value of a non-operational jet, it would have awarded Mr. Leonard no damages for the breach.
Friday, July 18, 2014
By Myanna Dellinger
A woman owes $20 to Kohl’s on a credit card. The debt collector allegedly started to “harass” the woman over the debt, calling her cell phone up to 22 times per week as early as 6 a.m. and occasionally after midnight. What would a reasonable customer do? Probably pay the debt, which the woman admits was only a “measly $20.” What did this woman do? Not to pay the small debt, telling the caller that they had “the wrong number,” and follow the great American tradition of filing suit, alleging violations of the 1991 Telephone Consumer Protection Act which, among other things, makes it illegal to call cell phones using auto dialers or prerecorded voices without the recipient’s consent.
Consumer protection rules also prohibit collection agencies from calling before 8 a.m. and after 9 p.m., calling multiple times during one day, leaving voicemail messages at a work number, or continuing to call a work phone number if told not to.
Last year, Bank of America agreed to pay $32 million to settle claims relating to allegations of illegally using robo-debt collectors. Discover also settled a claim alleging that they violated the rules by calling people’s cell phones without their consent. Just recently, a man’s recorded 20-minute call to Comcast pleading with their representative to cancel his cable and internet service went viral online.
The legal moral of these stories is that companies are not and should, of course, not be allowed to harass anyone to collect on debt owed to them or refuse to cancel services no longer wanted. However, what about companies such as Kohl’s who are presumably owed very large amounts of money although in the form of many small debts? Is it reasonable that customers such as the above can do what she admits doing, simply saying “screw it” to the company and in fact reverse the roles of debtor and creditor by hoping for a settlement via a lawsuit on a questionable background? Surely not.
I once owned a small company and can attest to the difficulty of collecting on debts even with extensive accurate documentation. The only way my debt collecting service or myself were able to collect many outstanding amounts was precisely to make repeat requests and reminders (although, of course, in a professional manner). As a matter of principle, customers should not be able to get away with simply choosing not to pay for services or products they have ordered, even if the outstanding amounts are small. If companies have followed the law, perhaps time has come for them to refuse settling to once again re-establish the roles of debtor and creditor. This, one could hope, would lead irresponsible consumers to live up to their financial obligations, as must the rest of society.
Wednesday, July 9, 2014
By Myanna Dellinger
Recently, I blogged here on Aereo’s attempt to provide inexpensive TV programming to consumers by capturing and rebroadcasting cable TV operators’ products without paying the large fees charged by those operators. The technology is complex, but at bottom, Aereo argued that they were not breaking copyright laws because they merely enabled consumers to capture TV that was available over airwaves and via cloud technology anyway.
In the recent narrow 6-3 Supreme Court ruling, the Courts said that Aereo was “substantially similar” to a cable TV company since it sold a service that enabled subscribers to watch copyrighted TV programs shortly after they were broadcast by the cable companies. The Court found that “Aereo performs petitioners’ works publicly,” which violates the Copyright Act. The fact that Aereo uses slightly different technology than the cable companies does not make a “critical difference,” said the Court. Since the ruling, Aereo has suspended its operations and posted a message on its website that calls the Court’s outcome "a massive setback to consumers."
Whether or not the Supreme Court is legally right in this case is debatable, but it at least seems to be behind the technological curve. Of course the cable TV companies resisted Aereo’s services just as IBM did not predict the need for very many personal computers, Kodak failed to adjust quickly enough to the digital camera craze, music companies initially resisted digital files and online streaming of songs. But if companies want to survive in these technologically advanced times, it clearly does not make sense to resist technological changes. They should embrace not only technology, but also, in a free market, competition so long as, of course, no laws are violated. We also do not use typewriters anymore simply to protect the status quo of the companies that made them.
It is remarkable how much cable companies attempt to resist the fact that many, if not most, of us simply do not have time to watch hundreds of TV stations and thus should not have to buy huge, expensive package solutions. Not one of the traditional cable TV companies seem to consider the business advantage of offering more individualized solutions, which is technologically possible today. Instead, they are willing to waste money and time on resisting change all the way to the Supreme Court, not realizing that the change is coming whether or not they want it.
Surely an innovative company will soon be able to work its way around traditional cable companies’ strong position on this market while at the same time observing the Supreme Court’s markedly narrow holding. Some have already started doing so. Aereo itself promises that it is only “paus[ing] our operations temporarily as we consult with the court and map out our next steps.”
Monday, July 7, 2014
H/T to Eric Goldman for sharing with the list a new case from Judge Lucy Koh of the federal district court of Northern California. Tompkins v. 23andMe provides a detailed analysis of 23andMe's wrap contracts. The case involves the same Terms of Service presented as a hyperlink at the bottom of the website's pages, and then later, post-purchase and at the time of account creation, as a hyperlink that requires a "click" in order to proceed (which I refer to as a "multi-wrap" as it's neither browsewrap nor clickwrap but a little of both). The court says the former presentation lacks notice, but the latter constitutes adequate formation. Eric Goldman provides a detailed analysis of the case here.
Not surprisingly, the Terms contained a unilateral modification clause which was briefly discussed in the context of substantive unconscionability. It was not, however, raised as a defense to formation, i.e. to argue that the promises made by 23andme were illusory.
Sunday, May 18, 2014
By Myanna Dellinger
Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few.
Luckily, change may finally be on its way. The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology. The price? About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves.
How does this work? Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations. In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease. In other words, Aereo records show for its subscribers so that they don’t have to.
That sounds great, right? Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows). They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.
Of course, the great American tradition of filing suit was followed. Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.
Stay tuned for the outcome in this case…
Monday, May 12, 2014
By Myanna Dellinger
The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg). Contracts ProfBlog first wrote about the case on April 3.
In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel. The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles. According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer. The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines. He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.
The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement. The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.
Really? Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!.. The opinion may at first blush read as such and have that somewhat chilling effect. However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.
The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.” These days, that may be hard to do. First, most airlines appear to have more or less similar frequent flyer programs. Second, what airline these days has a truly “good” reputation? Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.
One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable. I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes. A few times, I have had the good fortune to fly first or business class, but most times, I fly economy. Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.” - Guess what, the fares always had increased the times I asked for a change. Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta. I was told that it was impossible to change the ticket as it was “deeply discounted.” I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors. I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.” Remember that these days, airfare often has to be bought months ahead of time to get the best prices. In the meantime, life happens. Unexpected, yet important events come about. Changes to airline tickets should be realistically feasible, but are currently not on these conditions.
What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation. My mother is elderly and lives in Europe. I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services. Such is life in a globalized world for many of us. In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States. Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently. I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy. It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.
Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa. For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist. Two years ago, my father was passing and I was called to his deathbed. Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…). The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.
In the United States, “market forces” are said to dictate the pricing of airfare. In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours). Strange, since both markets are capitalist and offer freedom of contracting. Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States. A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms. Under heavy criticism, that plan was soon given up. In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies. Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.
Wednesday, April 30, 2014
By Myanna Dellinger
A class-action lawsuit filed recently against Amazon asserts that the giant online retailer did not honor its promise to offer “free shipping” to its Prime members in spite of these members having paid an annual membership fee of $79 mainly in order to obtain free two-day shipping.
Instead, the lawsuit alleges, Amazon would covertly encourage third-party vendors to increase the item prices displayed and charged to Prime members by the same amount charged to non-Prime members for shipping in order to make it appear as if the Prime members would get the shipping for free. Amazon would allegedly also benefit from such higher prices as it deducts a referral fee as a percentage of the item price from third-party vendors.
The suit alleges breach of contract and seeks recovery of Prime membership costs for the relevant years as well as treble damages under Washington’s Consumer Protection Act. Most states have laws such as consumer fraud statutes, deceptive trade practices laws, and/or unfair competition laws that can punish sellers for charging more than the actual costs of “shipping and handling." In some cases that settled, companies agreed to use the term “shipping and processing” instead of “shipping and handling” to be more clear towards consumers.
On the flip side of the situation is how Amazon outright prevents at least some private third-party vendors from charging the actual shipping costs (not even including “handling” or “processing” charges). For example, if a private, unaffiliated vendor sells a used book via Amazon, the site will only allow that person to charge a certain amount for shipping. As post office and UPS/FedEx costs of mailing items seem to be increasing (understandably so in at least the case of the USPS), the charges allowed for by Amazon often do not cover the actual costs of sending items. And if the private party attempts to increase the price of the book even just slightly to not incur a “loss” on shipping, the book may not be listed as the cheapest one available and thus not be sold.
This last issue may be a detail as the site still is a way of getting one’s used books sold at all whereas that may not have been possible without Amazon. Nonetheless, the totality of the above allegations, if proven to be true, and the facts just described till demonstrate the contractual powers that modern online giants have over competitors and consumers.
A decade or so ago, I attended a business conference for other purposes. I remember how one presenter, when discussing “shipping and handling” charges, got a gleeful look in his eyes and mentioned that when it came to those charges, it was “Christmas time.” When comparing what shipping actually costs (not that much for large mail-order companies that probably enjoy discounted rates with the shipping companies) with the charges listed by many companies, it seems that not much has changed in that area. On the other hand, promises of “free” shipping have, of course, been internalized in the prices charged somehow. One can hope that companies are on the up-and-up about the charges. Again: buyer beware.
Monday, March 17, 2014
An employee sues his employer for age discrimination and retaliation. The parties reach an $80,000 settlement agreement pursuant to which the existence and terms of the settlement are to be kept “strictly confidential.” The employee is only allowed to tell his wife, attorneys and other professional advisers about the settlement. A breach of the agreement will result in the “disgorgement of the Plaintiff’s portion of the settlement payments,” although the attorney would, in case of a breach, be allowed to keep the separately agreed-upon fee for his services. The employee tells his teenage daughter about the settlement and being “happy about it.” Four days later, she boasts to her 1,200 Facebook friends:
“Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”
The employer does not tender the otherwise agreed-upon settlement amount, citing to a breach of the confidentiality clause of the contract. The employee brings suits, wins at trial, but loses on appeal. The employee’s argument? He felt that it was necessary to tell his daughter “something” about the agreement because, some sources state, she had allegedly been the subject of at least some of the retaliation against her father.
The appellate court emphasized the fact that the agreement had called for the employee not to disclose “any information” about the settlement to anyone either directly or indirectly. Settlement agreements are interpreted like any other contract. Thus, the unambiguous contractual language “is to be given a realistic interpretation based on the plain, everyday meaning conveyed by the words,” according to the court. The employee did precisely what the confidentiality agreement was designed to prevent, namely advertise to the employer’s community that the case against them had been successful.
What could the employee have done here if he truly felt a need to tell his daughter about the deal? Pragmatically, he could have made it abundantly clear to his daughter that she was not to tell anyone, obviously including her thousands of Facebook “friends,” about it. Hopefully she would have abided by that rule... The court pointed out that the employee could also have told his attorney and/or the employer about the need to inform his daughter in an attempt to reach an agreement on this point as well. Having failed to do so, “strictly confidential” means just that. As we know, consequences of breaches of contract can be ever so regrettable, but that does not change any legal outcomes.
The case is Gulliver Sch., Inc. v. Snay, 2014 Fla. App. LEXIS 2595.
Wednesday, February 19, 2014
Do such words imply an enforceable promise to give an employee additional compensation both for work already performed and for work to be performed in the future if the speaker actually obtains a sizeable chunk of money? (Does it matter to your answer if the words were uttered by Heather Mills, famous or infamous ex-wife of Sir Paul McCartney?..)
Your answer to the former question would probably be a resounding “of course not.” In a recent decision, the United States Court of Appeals for the Ninth Circuit agrees (Parapluie v. Heather Mills, No. 12-55895). The case resembles such Contracts casebook classics old and new as Kirksey v. Kirksey (1945), Ricketts v. Scothorn (1898) and Conrad v. Fields (2007). One might have thought that promissory estoppel and, in this case, promissory fraud and intentional misrepresentation claims had generated enough case law to prevent an appeal. Apparently not, much to the amusement of law students and law professors alike.
At bottom, the facts behind the case against Ms. Mills are as follows: In 2005, Ms. Mills hired Michele Blanchard to conduct PR work for her. Ms. Blanchard was paid nothing for her work from 2005 to 2007. In 2007, however, Ms. Mills and Ms. Blanchard agreed that Ms. Blanchard would be paid $3,000 per month because Mills couldn’t pay Blanchard’s usual fee of $5,000 per month. The payments were made. In 2008, the relationship between the two women soured. Ms. Blanchard quit and sent Ms. Mills an additional invoice for $2,000 per month in arrears. Ms. Blanchard claimed to be entitled to the greater amount because Ms. Mills allegedly misrepresented her financial situation when telling Ms. Blanchard that she could only pay $3,000 a month when she could, allegedly, afford to pay more. In making this assertion, Ms. Blanchard relied on Ms. Mills having expressed an interest in renting a house for $80,000 per month, having bid $30,000 on a cruise at a charity auction, and having once stated about the fee to Ms. Blanchard, “I don’t know if I can pay the entire amount, but I’ll do something” and, after Ms. Blanchard askeed Ms. Mills if she might pay Ms. Blanchard “a little something,” allegedly agreeing that “I’ll take care of you when I get the big money.” Ms. Blanchard claims that the latter statement was a promise to pay her regular fee of $5,000 both in the future and for the work already performed. The court pointed out that Ms. Mills interest in renting expensive housing was just that; an interest. She had in fact only rented “modest” properties via Ms. Blanchard for $2,000-3,000 per week for one week. Perhaps most tellingly of Ms. Mills’ financial state of affairs at the time is the fact that when she attempted to pay for the cruise bid with a credit card, the payment was denied.
Ms. Mills is reported to have obtained a nearly $50 million divorce settlement with a sizeable interim payment around the times listed above. But as the court pointed out, when Ms. Mills did receive this interim payment, she also started paying Ms. Blanchard $3,000 a month, suggesting that her earlier statements about her inability to pay Blanchard were true, not false, when made. Ms. Blanchard’s monthly invoices further stated “the total amount due” as $3,000, negating any inference that the contractual parties intended a retroactive or future payment for more than that amount.
Ms. Blanchard’s attorney may have wanted to read Baer v. Chase (392 F.3d 609, U.S. Ct. of App. for the Third Cir. (2004)). In that case, Robert Baer, a former state prosecutor wishing to pursue a career as a Hollywood writer, similarly claimed that David Chase had promised to “take care of” Baer and “remunerate him in a manner commensurate to the true value of [his services]” should the project on which Baer worked for Chase become a success. It did: the project was the creation and development of what turned out to be the hit TV series The Sopranos. Baer received nothing for his services. The court found that the alleged contract was unenforceable for vagueness because nothing in the record allowed the court to figure out the meaning of “success,” “true value,” and, in general, what it meant to be “taken care of” in this context.
Potentially starstruck employees be ware: if you think that your employer promises you a chunk of money, make sure you find out exactly what you have to do to earn that. Now as well as hundreds of years ago: alleged promisors are unlikely to simply “take care of you” out of the goodness of their hearts. And as always: get the promise in writing!
Thursday, October 31, 2013
Upon reflection, Judge Traynor may have had it right when he wrote:
Words, however, do not have absolute and constant referents. "A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, ..." * * * The meaning of particular words or groups of words varies with the "... verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). ... A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning."
I say this because, today, I learned what "chicken" apparently means in one specific context in Suffolk County, New York. You don't suppose that this is was what Frigaliment and B.N.S. meant by "chicken"?
[Meredith R. Miller]
Monday, September 23, 2013
I get to teach Raffles v. Wichelhaus today, which is always a pleasure, as it is one of my favorite cases. I am not alone. One of my students, Justin Vining, was inspired by the case to make a representation of the case in the painting below:
I afraid my photo of the painting does not do it justice (because I have it under glass), but I hope you can see that Justin has captured the ship's voyage from India to Liverpool, and he has used as his model for the ship, the image of a ship called Peerless (right) that often accompanies the case, even though (I recently learned) that the Peerless in the picture is neither the October Peerless or the December Peerless featured in the case. But I actually love the fact that there were (at least) three ships called Peerless. That's what makes this case such a truth-is-stranger-than-fiction bonanza.
In Sunday's New York Times Magazine, a reader posed the Wood v. Boynton dilemma for the Times "The Ethicist." Chuck Klosterman, as an ethical rather than a legal question. The context is a bit different because we are dealing with a garage sale rather than a jeweler, but still we have a seller who is unaware of the value of the object being sold. The reader's question is simple and straightforward: does a buyer who is aware of the value of the the thing being sold (a first-edition comic book worth $2000) have an ethical duty to tell the seller.
For those of us who have been around the Wood v. Boynton, Laidlaw v. Organ block, this is familiar territory. As a typical survey of students' responses to the cases indicates, it is a territory in which ethcial and legal duties do not coincide. One might think that there is an obvious injustice when a person with superior knowledge takes advantage of a seller who unwittingly sells something of great value. Wood v. Boynton comes out as it did precisely because the buyer did not know and had no reason to know that the stone at issue was an uncut diamond, as he had never seen one before. If he knowingly took advantage of the seller, that would be grounds for rescision.
This result in Wood is not so surprising. Normally, a seller is in a better position to know the value of the thing she possesses than is the buyer, unless the buyer is an expert appraiser, and it makes sense to put the burden of discovery on the person better positioned to discover the item's worth. One might think that a professional jeweler would be an expert appraiser, but in this case he wasn't. I think it is reasonable for the law to place the burden on the seller at a garage sale to know the value of the things she sells. People come to these things in search of surprises and bargains, so it stands to reason that, from a legal perspective, all sales are final. Laidlaw v. Organ is similar and brings home the important point that sometimes we want to reward people for having taken the trouble to inform themselves of market conditions and spot a bargain.
But the ethical perspective on these matters is potentially quite different. It may be a common practice for people to pounce on garage sales in search of items significantly undervalued by the sellers, but that doesn't mean that it is an ethical practice. The reader poses the hypothetical as taking place at a garage sale or a flea market. I think the cases are different, because I do think a proprietor at a flea market (if, for example, she has a regular stall and or sells items regularly) can be charged with a duty to research the value of the items she sells. Still, fleecing even merchants is not what I would call an ethical practice.
I once unloaded about 200 books in advance of a move from Charleston, South Carolina to New York City. A bookdealer came by to look at the books and kindly informed me that one of the books I was offering for sale was a first edition, likely worth fifty times as much as I was asking for it. Perhaps he was not much of a businessman, but he did the right thing in telling me. I later donated the book for a silent auction, which seemed a good way out of my ethical dilemma since I had unwittingly bought the book at a huge discount from some equally unwitting (and long forgotten) seller.
I realize that the ethical standard I am proposing here is exacting, and Chuck Klosterman doesn't disagree in cases where an aggressive buyer initiates a sale from an unknowledgeble seller. But what is irksome about his column is that he pretends that the word "value" has no conventional meaning.
There is no “true value” for any object: it’s always a construct, provisionally defined by a capricious market and the locality of the transaction.
Well, thanks for the theoretical discourse, but that's all quite beside the point in this context. The value of a thing is easily determinable if there is any market for it. If two people are interested in buying it, then it is worth at least what the person who made the second highest bid for it is willing to pay. When a reader says that a comic book is worth thousands of dollars, that is because there is an existing, stable market in which the comic can be sold for thousands of dollars. Klosterman follows up with a silly hypothetical about a buyer who is willing to pay far in excess of a given price because an item has sentimental value to the buyer. There is no ethical obligation on the part of the buyer to disclose the extent to which she values the item, but even if there were, it would make no difference. The buyer could pull out $2000 to buy the item and remark to the seller, "I would have paid $5000 for this item, I want it so badly." The seller could refuse to sell at $2000, mark the item up to $5000 and risk going home with no money at all, because there is only one person willing to buy the item at that price and that person has just been alienated by grasping sales tactics.
But if the marked price of an item is 25 cents and the market values it at $2000, there will be plenty of buyers, and the seller really is wronged if someone who knows of the item's true worth does not disclose that fact. And such disclosure may not in the end preclude the transaction. You can approach a seller at a garage sale and say, "You know, this comic book is a first edition worth much, much more than you are selling it for." I think that, in most instances, the seller will say, "Well, that's a good find for you. I've marked it 25 cents, so you can have it for 25 cents. I wouldn't know where to sell it for more anyway."
Thus commerce proceeds without unnecessary soul-soiling.
Monday, August 26, 2013
Friday's New York Times included this story that might be of interest to Hurly v. Eddingfield fans. As readers of this blog should recall, Hurley is a case about a doctor who refused to see his deathly ill patient, giving no reason and despite a proffer of payment and having no excuse for his refusal. We have blogged about the case previously here and here. The point of the case is that the doctor is not contractually obligated to come to the aid of his patient, and the law will not impose on him an obligation to enter into such a contractual obligation unwillingly.
As many of my students find it a bad state of affairs if a doctor cannot be compelled to treat her patient, when she is the only doctor available and she has no reason for refusing to do so, I assure them that there are non-contractual mechanisms -- state or professional codes -- for that may address Hurley's facts. Friday's story in the Times illustrates how this can work.
Vanessa Willock (Willock) contacted Elane Photography, LLC (Elane), to determine whether Elane would be available to photograph her commitment ceremony/wedding to another woman. (New Mexico's Supreme Court explains that although Willock at first referred to the ceremony as a commitment ceremony, the parties also referred to the event as a wedding, and the court used the terms interchangeably.) Elane's lead photographer is opposed to same-sex marriage and will not photoraph events that violate her religious beliefs.
Represented by the Washington-based Alliance Defending Freedom, Willock sued, citing New Mexico's constitutional Human Rights Act, which was revised in 1972 to prohibit discrimination on the basis of sexual orientation. Elane claimed that forcing it to photograph Willock's commitment ceremony/wedding violated its First Amendment Rights. Eugene Volokh has blogged extensively on the case (e.g., here), and he filed an amicus brief in the case. Volokh characterized his position and that of his fellow amici as follows: "All the signers of the brief support same-sex marriage rights; our objection is not to same-sex marriages, but to compelling photographers and other speakers works that they don’t want to create."
New Mexico's Supreme Court (and all other courts that heard the case) ruled in favor of Willock. Willock sought only a declaratory judgment that Elane had violated New Mexico's Human Rights Act. Willock sought no other remedy. We leave the constitutional issues to Volokh and others with greater claims of expertise. We note, however, that the effect of the ruling is that New Mexico's constitutional interest in prohibiting discrimination trumps the common law contractual principle of freedom of contract. Unlike the doctor in Hurley, Elane's must contract with people with whom it does not want to contract, even though, also unlike doctor in Hurley, Elane's has grounds for its unwillingness to contract sounding in constitutional principles of freedom of speech and freedom of religion.
The Times provides the full text of the case, Elane Photograhpy, LLC v. Willock.
Thursday, August 22, 2013
This is the fourth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
One Contracts Professor’s Preference for State Court Decisions
In the essay that I contributed to Revisiting the Scholarship of Stewart Macaulay: On the Empirical and the Lyrical, I gave vent to the frustration I experienced over the years reading decisions written by the 7th Circuit Judges Richard Posner and Frank Easterbrook. Stewart wrote to me recently and in two sentences, appropriately lyrical, summed up the source of my frustration: “In theory, of course, the court applies state law in a diversity situation. About the one thing that you can expect is that Judges Posner and Easterbrook will be off on a frolic of their own.”
I have a healthy respect these days, and a strong preference for, the decisions of state courts. I try to use the best of these to teach contract law to my students. I admire the tenacity of state courts that insist, for example, that the commentary to the UCC matters in interpreting that statute. See e.g. Simcala Inc. v. American Coal Trade, Inc. 821 So.2d 197 (Ala. 2001) (the word “center” in comment 3 to UCC section 2-306 means something when used to describe the way a stated estimate limits the “intended elasticity” of an output or requirements contract).
I am particularly gratified by the persistence of courts that have used the unconscionability doctrine to invalidate boilerplate arbitration clauses. Implicit in these cases is a duality. Oppression exists on two levels. The terms of the transactions are oppressive and unconscionable, and the terms of the arbitration agreement are oppressive. Two cases I discussed previously at the 8th Annual International Contracts Conference at Texas A & M University Law School.
In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court describes the terms of a loan agreement. Ms. Brewer borrowed $2,215 and paid back $2000, at which point she had reduced the principal balance on the loan by $.06. The interest rate on that loan was 300%. Ms. Brewer brought suit under the Missouri consumer protection statute, the Missouri Merchandising Practices Statute.
In Tillman v. Commercial Credit Loans Inc., 655 S.E.2d 362 (N.C. 2008), Ms. Tillman and Ms. Richardson, the named plaintiffs in a class action, purchased single premium credit insurance from a lender. Within a year the North Carolina legislature made this species of loan illegal, but the statute was not retroactive. Ms. Tillman and Ms. Richardson sued under the North Carolina Unfair and Deceptive Trade Practices Act. The North Carolina Supreme Court found the arbitration clause in the contract, which barred class actions, unconscionable in a 3-2-2 decision.
When the United States Supreme
Court vacated the decision in the Brewer
case and remanded it to the Missouri court for reconsideration in light of A.T.& T. Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011), Chief Justice Richard Teitelman
, responded that
the unconscionability doctrine in Missouri law was not an “obstacle to the
accomplishment of the act’s objectives.”
The arbitration agreement was unconscionable because there was expert
testimony that no consumer would pursue a claim against the Title Company. The cost was too high. The Tillman
court made much the same point. Of the
68,000 loans that Citifinancial made in North Carolina, no borrower ever
pursued arbitration of a claim.
Citifinancial on the other hand, had reserved its right to go to court
and had exercised that privilege over 3,000 times in civil suits and
foreclosure actions. The Tillman court also provided information
about the actual cost of arbitration, a factual discussion that is missing in a
lot of these cases. It turns out that
arbitration is cost prohibitive for most low income consumers.
Exploitive or predatory contracts saturate the market for credit, housing, furniture for the least well off in our society. The Montana Supreme Court recently held a payday loan and its arbitration provision unconscionable. Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 ( Mont. 2013)(780% APR was violation of Montana Consumer Loan Act) If the U.S. Supreme Court grants certiorari in Kelker, the decision in that payday loan case will probably meet the fate of its progenitors, Casarotto v. Lombardi, 886 P.2d 931 (Mont. 1994)(Casarotto I) and Casarotto v. Lombardi, 901 P.2d 596 (Mont. 1995)(Casarotto II). Justice Trieweiler maintained in Casarotto I that the Federal Arbitration Act had not pre-empted state laws addressing arbitration because the federal statute had not addressed every aspect or possibility with respect to arbitration agreements. In Casarotto II he argued that the U.S. Supreme Court’s decision to strike down an Alabama statute that made pre-dispute arbitration agreements unenforceable was irrelevant to the decision in Casarotto I. He was reversed in an opinion written by none other than Justice Ginsberg.
Justice Terry N. Trieweiler, the twice rebuked but unrepentant Montana Supreme Court jurist, actually wrote three Casarotto opinions. He penned a special concurring opinion in Casarotto I to address “those federal judges who consider forced arbitration as the panacea for their “heavy caseloads” and to single out for criticism Judge Bruce M. Selya, First Circuit Court of Appeals, who called the prevalence in state courts of “traditional notions of fairness” an “anachronism.” 886 P.2d at 940. Justice Trieweiler’s rejoinder was that some federal judges are arrogant. I think of it as hubris.
The number of cases challenging arbitration agreements has not diminished over time. I can think of at least two reasons for this phenomenon. One is ever expanding disparity in wealth and power in the United States in this post-industrial society. There are very few ways individuals can challenge those who have power over them or expose what they feel to be an injustice that has been done to them. We are conditioned to believe that there is “equal justice under the law” and to believe that a citizen may seek redress in court. The second reason is the failure of federal courts to recognize that the FAA is indefensible when it is applied in consumer cases. That was the subject of the last series of blog posts discussing Margaret Radin’s book, Boilerplate. The FAA is a statute frozen in time, applied to transactions almost ninety years after Congress held those hearings on the resistance of state courts to arbitration and used to enforce arbitration “agreements” in contracts that were not even dreamed of when the FAA was passed -- online, clickwrap contracts such as the contract in Kelker. Contract defenses that police agreements where there is no real consent and no real bargaining are rendered impotent by the FAA. It does not matter if Certiorari is denied in Kelker, because the 9th Circuit has already used a pre-emption argument to defeat the Montana court’s use of “reasonable expectations” and unconscionability doctrines to invalidate arbitration provisions. Mortensen v. Bresnen Communications, LLC, 2013 U.S. App. Lexis 14211.
This past weekend I had the pleasure of meeting the judge who wrote the plurality opinion in the Tillman case, Justice Patricia Timmons-Goodson (pictured), who retired from the North Carolina Supreme Court in December 2012. I did not plan this meeting. It was completely serendipitous. I was looking for the meeting room where the Task Force on the Future of Legal Education was discussing the end of law school as we know it. I asked her for directions, and then I glanced at her name tag. It took me a moment to realize who she was. I was told by Judge James Wynn, who is now on the 4th Circuit U.S. Court of Appeals, but who once served with Judge Timmons-Goodson on the North Carolina Court of Appeals and the Supreme Court, that she was a recent recipient of the Legend in the Law award at Charlotte School of Law.
I knew that Justice Timmons-Goodson was a black woman. I looked for background information when I decided to write about the case. I knew, courtesy of North Carolina’s Lawyers Weekly, that two lawyers from Raleigh, John Alan Jones and G. Christopher Olson, obtained a judgment in Tillman and two companion cases in the amount of $81.25 million. Of the borrowers represented in the Tillman case, 759 received approximately $31,291 each. Another 9,670 received $544 each.
Taking the admonition of Stewart Macaulay seriously, striving to do something that looks like empirical research, I asked Justice Timmons-Goodson if she would consent to an interview. She hasn’t agreed yet, but I hope she will. I would like to know more about the process that she used to reach a decision in the Tillman case; how she persuaded enough of her colleagues to agree that the contract and the arbitration clause were unconscionable, even if two of them relied on a “totality of the circumstances” analysis that they thought sufficiently different from her opinion to merit a separate concurring opinion. Two justices signed her opinion relying on substantive unconscionability; two joined in finding the arbitration clause unconscionable but stressed the importance of deference to the fact-finding of the trial judge under a “totality of the circumstances” approach, and two justices dissented.
The Justice writing the dissenting opinion, appears to believe that the unconscionabiity doctrine is somehow illegitimate. He noted that it had never been used in North Carolina to invalidate a contract or a term in a contract. If I do interview Justice Timmons-Goodman, I will ask her about her reaction to the most recent U. S. Supreme Court decisions. She has herself written about the importance of state court judges at every level, particularly in the trial courts.
I am not sure that she would call her own acts as a justice on the Supreme Court “resistance.” She might simply say that logic and adherence to an ethic of principled decision-making impelled her to write the decision in Tillman as she did. I cannot be sure that she believes, as I do, that the drafters of the FAA never intended to completely pre-empt state law, especially those contract doctrines that are designed to control avarice and unscrupulous behavior. I do think, however, she will enjoy discussing the decisions of Justice Trieweiler.
[Posted, on Deborah Post's behalf, by JT]
Wednesday, May 29, 2013
This is the fifteenth in a series of posts reviewing Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.
Cheryl Preston is the Edwin M Thomas Professor of Law at Brigham Young University's J. Reuben Clark Law School.
Professor Radin’s book is a monumental effort to bring together in one place various facets of the seemly intractable problem of non-negotiated standard term contracts and to offer creative insights at each step. This legal problem is not new: Judge Cowen in Cole v. Goodwin, 19 Wend. 251, 273-74 (N.Y. Sup. Ct. 1838), was adamant that a common carrier could not post a notice of its intent not to be liable at the station and claim that each passenger entering the train gave contractual consent to waiving liability. To hold otherwise would change the deal from “give me a due reward [cost of passage], and I will be accountable as a common carrier” to “‘give me the same reward,’ (for the carrier fixes it; it may be less, but it may also be more,) ‘and yet, I claim to throw all risk upon you, or such a degree of it as I please.’” The judicial mindset later changed, and by the early 1900s courts lined up with businesses in generally enforcing such terms. Nonetheless, early courts ran interference with unconscionability and equivalent doctrines. The evolution to multitudes of daily online contracts hidden behind links, without size limitations, signatures, or someone to explain terms, as well as the increasing reluctance of judges to interfere, requires new analysis such as that offered by Radin.
Once the problem is exposed, the more difficult endeavor is framing a feasible solution. By characterizing such contracts as a form of “democratic denigration,” Radin suggests that the fundamental remedy is for legislatures, acting as democratic representatives of the people, to draw limits around powerful economic actors’ ability to override the default rules of enlightened contract doctrine. Radin argues that boilerplate schemes make a “sham” of democratic governance because they take away entitlements given through the democratic process “after extended debate and fierce political struggle.” Democratic ordering “at least give[s] us a voice” because politicians can be voted out if people are unhappy with what they enact.
Returning to the polity for a solution is dubious for three reasons. First, outside of copyright and perhaps employment, it is something of a stretch to say that the democratic process has created protections that such contracts “delete.” The regulatory rules that exist are at best default, subject expressly to the right to contract around them. What we seem to have lost, rather, is a judiciary willing to maintain reasonable boundaries of the kind envisioned by Karl Llewellyn and other Realist scholars.
Second, most consumers seem utterly content to be bound to terms they would not read even if such terms were brought forcefully to their attention, could not understand if read, and could not appropriately evaluate as risks. But the same problem applies to voters. Until consumers are educated or fall victim to such a contract, they will not understand the problem enough to vote out politicians who do not protect them. An unorganized few cannot change elections any more than they can convince firms to change undesirable contract terms.
Third, current legislative bodies seem effectively “influenced” by the same business interests that control consumers by contract. Money buys lobbyists, makes campaign contributions, and spins information, just as it hires the lawyers who draft and defend these contracts and the programmers and marketers who decide how to hide them. In the current political climate, consumers’ ability to influence change with election votes seems more of a stretch than consumers’ ability to unite to demand fairness with economic votes.
While Radin leans toward tort law as a solution, in Chapter 10 she offers a range of interesting possibilities for giving consumers the knowledge to make intelligent choices in contracting. Her suggestions include rating agencies, seals of approval programs, and contract term filter technology. Given the irrationality of reading all form contracts, workable initiatives depend on some surrogate to synthesize contract content and create a basis of comparison that a consumer can digest and act upon in seconds. Without a government mandate, how can consumer power be marshaled to organize and fund such programs? What existing organization has the resources to educate consumers or issue legal standards with sufficient credibility? A Statement of Principles issued by the American Law Institute might be influential, but the painful process of birthing a timid Principles of the Law of Software Contracts, and a failed revision to Article 2, show that the same powers and influences compete in that arena as well.
Until social change is possible, the courts remain the best defense of those unable to evoke sufficient power and money on their own behalf. As law professors, we need to train students to value principles of fairness and balance. As legal scholars, we need to encourage judges and contract drafters to stop exploitation.[Posted, on Cheryl Preston's behalf, by JT]
Tuesday, May 28, 2013
This is the fourteenth in a series of posts reviewing Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.
Peggy Radin’s book, Boilerplate has got lots of people talking – and blogging, particularly about her argument that boilerplate contracts aren’t contracts at all, and shouldn’t be overseen by contract law. Peggy was expanding on the theme of the apologists for adhesion who argue that the form contract is simply part of the product; you’d pay less, and we’d analyze the transaction very differently if you were buying a used or dented washer, so why shouldn’t we treat the washer with a disclaimer of merchantability the same way? Peggy does a good job in undermining the idea that the benevolent sellers (they would say “licensors”) will share their savings with you by reducing the price, but the bigger objection is from those who are offended by the removal of form contracts from the contracts kingdom. Yet that has been the process throughout the history of products liability, the very area Peggy is pointing to.
The usual starting point of products liability is Winterbottom v. Wright, an 1842 decision of the Court of Exchequer, in which a coachman who had been injured when a defective mail coach “broke down,” attempted to recover from Wright, who had contracted with the Postmaster-General (who had immunity) to supply the coach and keep it in good repair. Lord Abinger, the Chief Baron, took considerable care to support his conclusion that no duties were owed that were not “public duties” or violations of the law of nuisance, unless they were created by contract. Since Winterbottom was not in privity of contract with Wright, Winterbottom had no claim against him for his injuries, though caused by Wright’s failure properly to perform his contractual duties. For nearly seventy-five years, the courts chipped away at this notion that a manufacturer (or, as in Winterbottom’s case, a maintenance contractor) had no tort duty to the ultimate user, until Cardozo, in Macpherson v. Buick Motor Co. destroyed the doctrine, with careful delineation of the caselaw, but really in three sentences: “We have put aside the notion that the duty to safeguard life and limb, when the consequences of negligence may be foreseen, grows out of contract and nothing else. We have put the source of the obligation where it ought to be. We have put its source in the law.”
This worked well when negligence could be shown, but it didn’t help Bertha Chysky, a waitress who had been furnished as part of her lunch a piece of cake containing a nail that punctured her gum and cost her three teeth. She couldn’t prove negligence against the wholesale baker and sued for breach of warranty. The New York Court of Appeals, only seven years after Macpherson, and with Cardozo joining with the majority, reversed a verdict for her because “privity of contract does not exist between the seller and such third persons [like Bertha], and unless there be privity of contract there can be no implied warranty.” Yet in the same era, in other states, courts were focusing on the nature of food to expand liability, until it became the widespread law that implied warranties were not limited to a contractual privity, and until Roger Traynor, in 1944, could use the fact that a Coke bottle contained “foodstuffs” to buttress his seminal opinion in Escola v. Coca-Cola Bottling Co., the well-spring of strict products liability.
By focusing on the subject matter of the transaction rather than the formalities of contract or the assumption that tort is based on fault and wrong, Cardozo, Traynor and many other judges and writers were able to transform the issue to a question of who should bear the cost when a product injures a consumer, regardless of contract, regardless of fault. Similarly, the courts, Congress and state legislatures should look, not at the mechanics of contract, but at the many factors relied upon by Professor Radin, to restrain the power of sellers to deprive consumers of rights that the social system has granted them and that form contracts attempt to take away.
[Posted, on Peter Linzer's behalf, by JT]
Thursday, April 25, 2013
It's the end of the semester which means that I'm finally covering third parties. One of my favorite (and pretty simple) cases in this unit is Rumbin v. Utical Mutual Insurance, Co. Mr. Rumbin, who had settled a personal injury case, was due regular payments under an annuity purchased by Utica and issued by Safeco. When he faced foreclosure and other financial hardships, Rumbin sought a declaratory judgment approving his assignment of rights to J.G. Wentworth. After a student recites the facts, I often pause the class to ask, "How many of you have heard of Mr. Wentworth before?" Usually, about half of my class has heard of him while the other half is thinking, "J.G. who?" For those who haven't heard of him, I offer this clip, which sums up Mr. Rumbin's situation rather nicely and features Mr. Wentworth himself at the end as the conductor:
If you watch and later find a way to get the "877-CASH-NOW" earworm out of your head, please let me know. I've been stuck with it for nearly 24 hours now.
[Heidi R. Anderson]
Monday, April 22, 2013
A lot of very smart contracts scholars, including to name just a few, Omri Ben-Shahar and Lisa Bernstein (here), Victor Goldberg (here), and Peter Siegelman and Steve Thel (e.g., here), have thought long and hard about the seeming conflict between UCC § 2-713 and the general principles of damages set out in UCC § 1-305 (formerly § 1-106). Most of them support the ruling in Tongish v. Thomas, to which I have just been introduced in teaching Sales for the first time this semester. I am uncomfortable with the decision for two reasons, which I will set out below.
But first, a brief summary of the case: Tongish agreed to sell his sunflower seeds to the Decatur Coop Association (the Coop) for a fixed price. The Coop had a deal with Bambino Bean & Seed, Inc. (Bambino) to sell the seeds to them for whatever price the Coop paid plus $0.55 per 100 pounds. The price of seeds went up and Tongish breached. The trial court awarded the Coop its lost profits, which came out to $455.51. The Court of Appeals vacted that award and remanded the case for a calculation of damages based on UCC § 2-713 (and the Kansas Supreme Court upheld that ruling). UCC § 2-713 allows a buyer to recover the difference between makret price at the time buyer learned of the breach and the contract price. Under this section, the Coop would recieve not $455 but something like over $5500, despite the fact that it would not have been able to charge Bambino anything more than what it paid Tongish for his seeds. In short, under the damages awarded by the appellate courts, the Coop gets about $5000 more than expectation damages.
I do not like the result, at least not based on the court's reasoning. Subsequent law review articles (cited above) provide more sophisticated defenses of § 2-713 based on economic theory. I cannot address those arguments here. Instead, I focus on two issues: fault and contract and the court's characterization of UCC § 2-713 as a "statutory liquidated damages provision."
First, the case is grist for the mill of Friend of the Blog, Steve Feldman, who has been trying unsuccessfully for years to persuade me that courts not only do consider moral fault in assessing damages but should do so. In Tongish, the Kansas Court of Appeals distinguished the case from a California case, Allied Canners Packers, Inc. v. Victor Packing Co. In Allied, the California court limited the buyer's remedy to actual loss. That case was different, says the Kansas court, because in Allied, the seller's crop had been destroyed and so it had no goods that it could deliver to buyer. Here, Tonigish breached simply becasue the price went up, and so "the nature of Tongish's breach was much different" from that in Allied, because the Kansas court found, "there was no valid reason" for Tongish's breach. Whether or not the court is right that there was no valid reason for the breach depends on one's views on the doctrine of efficient breach. More to the point, I find no language in the UCC that indicates that the measure of damages turns on the state of mind of the breaching party. That is, where in the UCC does it say that whether or not one can recover damages in excess of actual loss depends on whether the breach was innocent or willful?
The Kansas court then proceeds to an actual statutory analysis and notes the principle that a specific clause (in this case § 2-713, which the court reads to provide damages in excess of actual loss) trumps a general clause (§ 1-305, which limits damages to expectations). Allowing the specific clause to trump the general clause generally makes sense, but I would invoke another canon of contruction and read § 1-305 as articulating the general remedial scheme in light of which the remainder of the Code is to be read. Section 1-305 puts parties on notice that, unless they set out their own remedial schemes, though allocation of risk, liquidated damages and the like, they should expect that traditional expectation damages will be the most they can hope for in case of breach.
Read in that light, § 2-713 does nothing more than describe the usual mechanism for calculating expectation damages. It does not contemplate a contract such as the one at issue in Tongish in which the Coop, very far from demanding liquidated damages in the case of breach, has protected itself against loss by linking its purchase price from Tongish to its sale price to Bambino. In so doing, it invited the very sort of efficient breach in which Tongish engaged, and it is absurd for it to now to claim entitlement to (effectively) a disgorgement remedy when it failed to negotiate such a remedy at the time of contracting.
The Kansas court cites to Robert Scott's argument that limiting recovery to lost profits in such cases creates market instability by encouraging breach if the market fluctuates to the seller's advantage. Applying § 2-713 to permit recovery of damages in excess of actual loss, on the other hand, "encourages a more efficient market and discourages the breach of contracts," says the court. Once again, that determination turns on one's understanding of efficiency. In any case, to the extent that the circumstances in Tongish encouraged breach, they were entirely a product of the way the parties drew up their contracts. They in effect, allocated the risk of breach to the Coop, which had protected itself by finding a buyer who would accept any price so long as it was the same price as what the Coop had paid, plus a $0.55/100 lb. handling fee. To allow the Coop to recover cover costs on top of lost profits actually creates an incentive for sellers with contractual protections such as the Coop had, to encourage breaches, since the court allowed them recovery ten times in excess of their actual harm.