ContractsProf Blog

Spring Contracts Conference: Day One

The 2010 Spring Contracts Conference begins today at UNLV's William S. Boyd School of Law.  Here's Friday's line-up:

The Contract Law System and Power – Past, Present, and Future

Chair: Jay M. Feinman (Rutgers-Camden)

Hila Keren (Hebrew U. of Jerusalem), Considering Affective Consideration

Nancy S. Kim (Cal Western), ‘Wrap Contracts as Sword, Shield, Crook, and Drawbridge

Amy J. Schmitz (Colorado), Pizza-Box Contracting: An Empirical Exploration of Consent

Danielle Kie Hart (Southwestern), Smoke, Mirrors & Contract Law

Incomplete Information and Contract Law

Chair: Keith A. Rowley (UNLV)

Robert Anderson (Pepperdine), Information, Incentives, and Disclosure in the Law of Contracts

H. Allen Blair (Hamline), No-Reliance Clauses

Yair Listokin (Yale), Bayesian Interpretation

Shawn J. Bayern (Florida State), Rational Ignorance, Rational Closed-Mindedness, and Modern Economic Formalism in Contract Law

Contract Law’s Intersection with Business Law

Chair: Nancy B. Rapoport (UNLV)

Daniel S. Kleinberger (William Mitchell), Battle Report from the Undiscovered Territory – The Law of “Contractual Organizations” Continues its Silent War on the Common Law of Contract

Andrew A. Schwartz (Colorado), A “Standard Clause Analysis” of the Frustration Doctrine and the Material Adverse Change Clause

Lydie N. Pierre-Louis (St. Thomas (FL)), Mini-Tender Offers: The Lack of Federal Jurisdiction and the Failure of Fundamental Contract Law Principles to Protect Investors

Keynote: Omri Ben-Shahar (U. of Chicago), The Failure of Mandated Disclosure

Arbitration and Unconscionability in Rent-a-Center West v. Jackson and Elsewhere

Chair: Jean R. Sternlight (UNLV)

Charles L. Knapp (UC-Hastings), Blowing the Whistle on Mandatory Arbitration: Unconscionability as a Signaling Device

Karen Halverson Cross (John Marshall (IL)), Letting the Arbitrator Decide?  Unconscionability and the Allocation of Authority Between Courts and Arbitrators

Christopher R. Drahozal (Kansas), Rent-A-Center and Institutional Arbitration Rules

Thomas J. Stipanowich (Pepperdine), Contracts and Conflict Management: Another Look

Forming Contracts and Similar Relationships

Chair: James W. Fox, Jr. (Stetson)

Michael Pratt (Queen's U. (Ontario)), What is a Promise?

Val D. Ricks (South Texas), The Continued Relevance of Consideration

Janet Ainsworth (Seattle), Beyond Status and Contract: Relational Estoppel as a Source of Rights and Obligations in Intimate Relationships

Andrea B. Carroll (LSU), Reviving Proxy Marriage

Vive la Différence!: Comparative Contract Theory

Chair: Daniel D. Barnhizer (Michigan State)

Robin J. Effron (Brooklyn), Revisiting The Death of Contract: Gilmore’s Thesis in Comparative Perspective

Wayne R. Barnes (Texas Wesleyan), French Subjective Theory of Contract: Separating Rhetoric from Reality

Tadas Klimas (Kaunas, Lithuania), Lessons American and Continental Contract Theory Can Teach One Another

Franklin G. Snyder (Texas Wesleyan), Cross-Cultural Adoption of Legal Rules: The Case ofHadley v. Baxendale

[Keith A. Rowley]

Hurley v. Eddingfield: It's the Law and It's Ethical

 I always start my contracts course with Hurley v. Eddingfield, in which the court held that a doctor has no contractual obligation to treat his own patient and need give no reason or excuse for his refusal to do so.  The case illustrates the strength of our notions of freedom of contract and also permits us to discuss the interaction of common law doctrines with other legal or regulatory regimes.  

Now I have in the past crossed swords with The New York Times Magazine's ethicist, Randy Cohen.  I have chided him for too readily conflating the lawful with the ethical.  Mr. Cohen has always responded to my criticisms, which is all one can ask for, but he gives no ground.  Still, I was cheered by a recent column addressing the etiquette of car phones.  The writer boasted of her hands-free car phone and of her habit of informing people when other people are in the car.  Cohen responded, in part, as follows:

This should be handled by never using the phone while driving. To do so increases your chance of an accident fourfold, akin to driving drunk. And there is no significant difference between speaking on a hand-held or hands-free device. (As your local legislators knew or should have known when they legalized the latter. Ignorant or cynical? Let’s not rush to judgment. They might merely have been possessed by demons.)

My point exactly.  But the comment applies to much of what emerges from our legislature.  

In any case, having criticized Mr. Cohen in the past. I must now give him his props for his nuanced response to a Hurley-like question that arose in yesterday's column. The writer is a doctor who did not want to take on a notorious med-mal attorney who had in the past sued the doctor's wife.  Cohen answered as follows:

As to this particular would-be patient, you acted reasonably. Because you and your wife have a history that causes you to resent him and his cohort, your ability to view him dispassionately and thus act in his best medical interest may be compromised. Therefore, not only may you decline to take him on; you should decline. I might feel different if you practiced medicine in a provincial town on the Russian steppes, like some brooding doctor out of Chekhov, with no other physician within a thousand miles. But in your actual situation, go forth guiltlessly.

And the good doctor can do so all the more easily, as the attorney found some other sucker -- oops, typo -- doctor to treat him.

[Jeremy Telman]

Michelle Triola Marvin, Mother of Palimony, Dead at 76

Michelle Triola Marvin, who lived with Lee Marvin for six years and then sued for her share of the income he had earned during the relationship, has died at the age of 76.  Ms. Marvin was the plaintiff in the landmark Marvin v. Marvin case, which we have had occasion to mention on the blog before, here and here.  The New York Times obituary can be found here.

[Jeremy Telman]

Contracts Limerick of the Week: Market Street Associates v. Frey

There has been a lot of interest on the blog lately in the topic of contracts law and morality, e.g. here and here.  Our comments section has been unusually active, which is terrific.  A recent comment got me to thinking about Market Street Associates v. Frey.  

That case involved a lease agreement between GE Pension Trust (GE) and Market Street Associates (MSA) as the assignee of JC Penny.   The lease had a provision that allowed MSA to seek a loan from GE for the purpose of improving the property.  If GE refused, MSA had an option to buy the property for the original purchase price plus 6% annual interest. 

MSA offered to repurchase the property from GE, but GE demanded $3 million, which MSA thought was too much.  MSA then requested financing, and when GE refused on the ground that it was not offering loans in amounts less than $7 million, MSA demanded the sale of the property pursuant to the lease provision.  Under the terms of the lease, MSA would have been entitled to buy the property for about $1 million.  GE claimed that because MSA had failed to remind it of the option in the lease, MSA had acted in bad faith. 

The district court granted summary judgment to GE, finding that under the doctrine of good faith or simply as a matter of contract interpretation, MSA had a duty to remind GE of the option provision.  This led Judge Posner to a lengthy rumination on the nature of terms such as “good faith” in contract law.  Not surprisingly, Judge Posner does not find these terms very useful.  However, he was able to explain the value of the doctrine of good faith in economic terms, and that permitted him to find that in fact MSA's conduct might well have violated the duty to act in good faith.

For Posner, what we call the duty of good faith is really just about reducing transactions costs by creating a disincentive to sharp practices in the course of performance.  Sharp practices, says Judge Posner, are perfectly fine when negotiating a deal, but once the parties enter into an agreement, they are now in a “cooperative relationship” in which each lowers her guard.  The doctrine of good faith thus protects against opportunistic behavior that can arise in the context of the sort of bilateral monopoly that can develop after the parties have committed themselves to a contractual relationship.

As many commentators on the blog have pointed out, there are many reasons to doubt that the moralizing tone underlying terms such as “good faith” could or should be eliminated from contracts law.   But even assuming we were to attempt to understand contracts law entirely in terms of transactions costs, Posner’s position remains highly dubious. 

First, at least since the Restatement (2d) and the UCC, contracts law has been sensitive to the difficulty of attempting to pinpoint the moment at which a threshold from a pre-contractual to a post-contractual relationship has been crossed.  Parties continue to negotiate and change deals as they go.  There is thus little reason to suspect that parties immediately let down their guards once they have entered into a cooperative relationship.

Second, if sharp practices increase transactions costs, then they do so regardless of when they occur.  A party that engages in sharp practices will get a reputation for doing so.  Other parties dealing with that party will be cautious and will engage in extra diligence that will complicate negotiations and may ultimately prevent many deals from occurring because a fundamental mistrust cannot be overcome satisfactorily.  

Finally, if one is really interested in reducing transactions costs, then hold sophisticated, well-resourced parties to the terms of the agreements they sign.  If GE wants a provision requiring notice before its contractual partner triggers its option to purchase, it can very easily write that duty to notify into the contract.  A party like GE should have no recourse to a doctrine like good faith when it had the means and the ability to protect its own interests in both the pre- and the post-contractual moments.

Still, Posner opinions are always stimulating and thus Limerickworthy:

Market Street Associates v. Frey

“Don’t get moralistic with me,”
 Said Judge Posner to trustee, GE.
 “Though when I hear ‘good faith,’
 I reach for my . . . Wraith.
 Opportunists ain’t my cup o’ tea.”

[Jeremy Telman]

Alan White on Public Policy and Pedagogy:

The Fourth in a Series of Posts by

Guest Blogger, Alan White

One of the things I took away from Elizabeth Mertz’s

interesting book The Language of Law School was that Contracts professors have a tendency to squelch their students’ moral intuitions in the process of teaching critical thinking and legal rules.  After reading this I resolved to hear students out when they react with “it’s not right” or “it’s not fair”, while at the same time engaging with their moral sense and challenging them to consider the dialectical tensions that are ever-present in seemingly simple questions of right and wrong.

Yesterday a session on illegal contracts provided my students with an opportunity to wander in this territory.  The case at issue, Carroll v. Beardon, involves a contract for one madam to sell her house of ill repute to another.  The court enforces the note and mortgage obliging the buyer topay the remainder of the sale price (we don’t know if the buyer madam was eventually foreclosed on) based on the notion that the seller was not an active participant in the business, at least not after she sold it.

The first question students raised was why the parties did not end up in criminal court as a result of airing their dirty laundry (so to speak) in the civil case, as happened to the two partners in the Highwaymen’s case.  One can only assume that the judge and other citizens of the county all found the business at issue distasteful but tolerable, and the parties and their lawyers regarded the risk as minimal.  This thought raises a number of interesting questions about malumprohibitum and whether the legal system can occasionally look the other way when legal rules are perceived either as illegitimate or at least not worthy of strict enforcement.

This thread then led to several equally interesting questions, such as whether merely selling an illegal business would constitute a crime, and whether it made a difference that the seller received payments over time on her Note, and thus continued profiting in some sense from the trade.  These questions provided a useful opportunity to point out the seamless nature of law practice, and the need to be on the lookout for issues that clients may not have considered, most especially the prospect of jail time. 

Also interesting was the question of the lawyer’s duty when her client seeks legal advice about the sale of an illegal business.  This provided me with yet another opportunity to venture into a subject ordinarily taught by one of my colleagues.  Many students approach this question with the intuition that if a client is guilty of a crime, assisting them in any way is wrong, and perhaps we should even report them to the authorities.  Here is a nice example that might be viewed simplistically and incorrectly as differentiating between what is moral and what is legal.  The presumption of innocence, the unequal burden of proof placed on the awesome power of the state, and the freedom from self-incrimination are all moral as well as legal principles, that obviously come into tension with the basic moral notion of wanting to see wrongdoers punished.  A lawyer’s role in advising an admitted criminal to my mind is profoundly moral, as well as instrumentally legal.  Nevertheless, the idea of counseling a client who confesses past sins is troubling to students, for reasons we should not too hastily dismiss.

[Posted, on Alan's behalf, by Jeremy Telman]

Bonus Limerick: Totten v. United States

I decided to bolster the section of my Contracts course devoted to public policy issues by introducing students to the Totten doctrine and the states secrets privilege, which we will discuss without reading any cases.  In Totten, a the administrator for the estate of William A. Lloyd brings a claim against the government seeking to recover for the breach of an espionage contract.   It is alleged that Lloyd entered into an agreement with President Abraham Lincoln in which Lloyd infiltrated enemy territory during the Civil War in order to provide the U.S. Government with vital information relating to the military forces and fortifications of the Confederacy.   For these services, Lloyd was to be paid $200/month plus expenses.  Honest Abe allegedly paid Lloyd only expenses.  

Justice Field, writing in 1875, found that the subject matter of the contract was a secret and that both parties must have known at the time of their agreement that their lips would be “for ever sealed respecting the relation of either to the matter.”  In order to protect the public interest in having an effective arm of the government that could engage in secret services, the Court ruled that there could be no claim for breach of a secret contract because the existence of the contract was itself a secret that could not be disclosed.

I am happy to report that Totten is a hit!  We only got to it in the last ten minutes of class, which I thought would suffice for a one-page opinion.  But when I suggested that we could continue the discussion in the next session, in addition to their now habitual groans of disapproval, a couple of students murmured: “Yes!”  And several students stuck around after class to explore the consequences of the Totten doctrine.  Giddy about this overlap of my teaching and research interests, I composed a celebratory Limerick:

Totten v. United States

 The President gamely employed
 But then stiffed an agent named Lloyd.
 Abe knew Lee’s plan
 Because of this man,
 But the court found his legal claims void. 

[Jeremy Telman]

Macaulay & Whitford on Hoffman v. Red Owl Stores

When I first learned that Steward Macaulay and William Whitford had written a new “Law Stories” article about Hoffman v. Red Owl Stores, all I could do was groan.  I had already read Robert Scott’s piece on the case.  How much background material can I possibly incorporate into a discussion of one case?!?  But Professors Macaulay and Whitford have made use of their access to the plaintiff in the case, Joseph Hoffman, and do indeed have new information to share.  Based on new factual findings the two reach different conclusions from those of Professor Scott.  And they do so, I must say, with class, praising him as a giant of contracts scholarship.   As I have only read a draft of the Macaulay and Whitford article, I will not quote them, but you can find their draft here and their very respectful expression of disagreement with Professor Scott can be found in footnote 15 of the draft.

It is a piece that pays great dividends, not only for what it says about Hoffman, but also for all the pearls of wisdom the authors let fall along the way, which relate not only to contracts doctrine, but also to pedagogy and the advantages of the Law Stories approach to scholarship.  Here is the abstract from SSRN:

Hoffman v. Red Owl Stores is one of the most famous 20th century cases in American contract law, usually credited both with expanding the reach of the promissory estoppel doctrine and with opening up the issue of liability for precontractual reliance. It is a staple in contracts casebooks. By fortunate circumstance we have located the plaintiff, who retains a vivid memory about many of the circumstances in his famous case. We have interviewed him and we have examined the full trial record as well as the briefs on appeal. In this article we tell the story of what we have learned about this famous case, including what happened after the appellate decision. We conclude that a fuller understanding of the facts provides information about a promise that was made, yet was not described in the Court’s opinion. This promise supports the outcome of the litigation. Justice was done! The plaintiff substantially relied to his detriment after receiving specific assurances from an authorized agent of the defendant that he would receive a franchise if he relied by selling his bakery building and business. Reimbursing precontractual reliance in this circumstance can be done without creating a rule that would justify reimbursement of precontractual reliance in all circumstances.

I see that the article is now forthcoming in the Hastings Law Journal, so congratulations to the authors on that fine placement!

[Jeremy Telman]

Limerick of the Week: Leonard v. Pepsico, Inc.

As most readers of this blog likely know, John Leonard saw a Pepsi commercial and then attempted to accept what he took to be Pepsi's offer of a Harrier Jet.  The commercial seemed to indicate that one could get a Harrier in exchange for 7,000,000 Pepsi Points.  Relying on the Pepsi Stuff catalogue, Leonard learned that he could turn in 15 Pepsi Points and provide the remaining consideration in cash, so he attempted to accept Pepsi's purported offer with 15 Pepsi Points and just over $700,000 in cash.

Judge Kimba Wood found that the ad was not an offer, distinguishing it from the advertisments discussed in the last two Limericks cases, Lefkowitz and Izadi.  The ad, said Judge Wood, was not an offer, largely because the Harrier Jet was not included in the Pepsi Stuff Catalogue that provides further information about the Pepsi Points program. Moreover, Judge Wood added, the ad was a joke, and anybody who didn't recognize it as such was simply past help.  Explaining why a joke is funny defeats the purpose of jokes, Judge Wood opined. 

At least some of my students agreed.  They felt that, while both Lefkowitz and Izadi were taken in by intentionally misleading advertisements, Leonard must have known that the Harrier commercial was just supposed to be absurd.  Among other things, my students pointed out that Pepsico was unlikely to have access to a piece of military hardware like the Harrier.  They also deemed it unlikely that the high school kid featured in the commercial would have been able to get a license to fly a Harrier in any case.  

They are probably right, and yet, as far as we can tell, Lefkowitz was the only person to come forward to complain about having been mislead by the Great Minneapolis Surplus Store's ad.  Izadi seems to have been the only one who tried to trade in a matchbox car in order to get $3000 off a new Ford truck.  But Leonard was not alone.  He did not just happen to have $700,000 lying around; he raised the money necessary to accept Pepsi's "offer" by finding interested investors who thought his interpretation of the commercial as an offer had merit.

Interestingly enough, Pepsi released a second version of the commercial.  It contains only one change.  Now the "offer" requires 700,000,000 Pepsi points for a Harrier jet.  There is also a third version, which ads the additional verbiage: "Just kidding."  Apparently Pepsi's non-offer was not as clearly not an offer as it could have been.

Leonard v. Pepsico

Intent to be bound was a barrier
To Leonard's acquiring a Harrier.
Now he only drinks Coke,
And he gets every joke
But I would not say he's much merrier.

[Jeremy Telman]

Contracts Limerick of the Week: Izadi v. Machado (Gus) Ford, Inc.

As I mentioned in introducing last week’s Limerick, although Lefkowitz and Izadi cover much the same ground, I think they go well together.  In fact, I also have the students read Leonard v. Pepsico., Inc., which is always good for a laugh.

My students raised some interesting issues with respect to Lefkowitz.  As you may or may not recall, Lefkowitz is about a guy who responds to an ad advertising various fur coats and stoles for sale on a first-come-first-served basis for $1.  When Lefkowitz shows up and tries to buy a fur, the store owners say that they have a policy against selling to men.  Lefkowitz tries the trick again two weeks later and gets the same response.  He sues, claiming breach of a contract for sale. The court sides with Lefkowitz, construing the ad as an unambiguous offer.

We had a really interesting discussion of damages this time around.  The court gave Lefkowitz his expectation damages for the second failed attempt at purchase, which was for a stole valued at $139.  The court refused to grant him damages for his first failed attempt because the ad was ambiguous as to the value of the coats: “worth to $100.”   We explored whether Lefkowitz’s attorneys could not have elicited deposition testimony or gotten some appraisal of the coats.  Perhaps if they failed to do so, that’s their fault and Lefkowitz was properly precluded.

But some of my students wondered whether Lefkowitz should be entitled to collect for his second attempt at purchase.  After all, it seems likely that he was unaware of the store policy against selling women’s coats to men when he first showed up in the Great Minneapolis Surplus Store.  But the second time he came, he knew that the ad in question was not an offer directed at him.  Why grant him recovery?   It seems like the court split the baby, but they gave Lefkowitz the wrong half.  Eww; that’s a hideous metaphor, but you get the point.

I am somewhat sympathetic to Lefkowitz.  I don’t know about Izadi.  Izadi claims to have construed Machado Ford’s ad as meaning that he could get $3000 off a new Ford car or truck if he traded in “any vehicle.”  He showed up with a vehicle which the court acknowledged was likely worth far less than $3000.  Was it a tricycle?   That’s a vehicle.  I feel for Machado Ford, because they were arguing before a highly unsympathetic Judge Alan R. Schwartz.  I’ve had that experience and it was not pleasant.

Judge Schwartz got himself in a lather about what he took to be an intentionally misleading advertisement.   In order to establish that the advertisement was misleading, one might try to learn how many people were actually mislead.  As far as I can tell, only Izadi claimed to have been taken in by the ad -- after all, the case is not a class action -- and I suspect that Izadi was not mislead at all but in fact was opportunistic in his reading of the ad.  

But here’s the rub: Judge Schwartz offers two justifications for ruling against Machado Ford.  First, he reads the ad as an unambiguous offer.  That’s a bit hard to swallow.  The ad is confusing, but that argues for rather than against ambiguity.  The second justification is that people ought not to be allowed to take advantage of consumers with intentionally misleading ads.  I certainly agree with that, but Judge Schwartz is able to find no Florida authority establishing that rule as a matter of contract law.  

I thus use this case to introduce my students to the problems of institutional competence and judge-made law.  In order to do so, I edit out the case which indicates that defendant could also be liable under relevant Florida consumer protection statutes. 

As Judge Schwartz notes, other states have adopted the rule of contracts law that “a binding offer may be implied from the very fact that deliberately misleading advertising intentionally leads the reader to the conclusion that one exists,” but Florida courts had not recognized that rule.  Why not leave it to the legislature to do so, I ask my students.  This can lead to an interesting discussion of why judges often feel that they have to make or adopt legal rules on the fly rather than wait for the slugs in the legislature to act.

Well, this post is already too long.  I’ll have to compose a Limerick for Leonard so that I can explain where that case fits in next week.

Izadi v. Machado (Gus) Ford, Inc.. 

Want to make a used-car dealer weep?
Try to trade in your rusting junk-heap,
Then pretend that your mad
On account of his ad
And seek justice not blind but asleep.

[Jeremy Telman]

Contracts Limerick of the Week: Lefkowitz

I am teaching Lefkowitz v. Great Minneapolis Surplus Store for the first time this year.  I don't know why this case has fallen out of the casebooks; I really like it.  I also teach Izadi v. Machado Ford, Inc. (about which more in next week's Limerick), and I like that case too, but I think they will teach well together because I think Lefkowitz is pretty clearly rightly decided, while I have my doubts about Izadi.

The reason I like Lefkowitz is that it provides lots of opportunities to talk about what constitutes an offer, as well as the sub-topic of when an ad can qualify as an offer.  It also provides an opportunity to talk about the need for damages to be calculable with reasonable certainty.  As I mentioned in an earlier post, I do not start with damages, but I try to bring them into the conversation wherever possible, since as my colleague Alan White stresses, ultimately, contracts cases are about getting some recovery for your clients.  The casebook that we both use, Law in Action, appropriately stresses that the storybook contract with an easily identifiable offer followed by a clear acceptance does not capture the much more tohu vavohu world of actual commercial interactions.  I do not quarrel with that principle, but I still think you've got to be able to swim before you can synchronized swim.  So I start with the basics, even if they may be Platonic forms.

In any case, to celebrate the return of Lefkowitz to my syllabus, I have composed a new Limerick, which I acknowledge does not do the case justice.  By the way, after I introduced my new students to the Limerick approach to contracts pedagogy, one of them asked how much time I spend composing them -- as if he could think of better uses for my time!  Well, in this case, the answer is about 20 minutes.  Next week's Limerick was more of an epiphany; it only took me ten minutes.

Lefkowitz v. Great Minneapolis Surplus Store

Mo Lefkowitz made his career
Finding ads explicit and clear.
He's the first to the store;
Now he's got furs galore,
And the price that he pays isn't dear.

[Jeremy Telman]

Alan White: Teaching Peevyhouse First

The first in a series of posts by

guest blogger, 

Alan White

      I was fortunate during my transition from practice to teaching to have had the wise counsel of several experienced contracts teachers, and as it happened they were all advocates of the Wisconsin group text, Contracts:  Law in Action.  Being an empiricist, legal realist, and having decidedly leftist political tendencies, I was attracted to the Law and Society project, and so I dove in last fall, and dragged my good friend Jeremy Telman, an unrepentant Kelsenian, along with me.  Horrified by the absence of vital doctrine, Jeremy plugged the gaps with a few old chestnuts, while I did the best I could to stick to the authors’ logic and lesson plan, aided by extensive notes they generously shared.  Promising my students that this would not be their father’s Contracts class, I supplemented the materials with pleadings and exercises grabbed from the (mostly financial crisis-related) headlines, to drive home the point that we would be learning the real world version of Contracts law.  Reviews were mixed.

          This year, with one semester’s experience under my belt, I hope to enrich my teaching of Contracts with a variety of assessments, collaboration with our Legal Writing teachers (more on this later) and other improvisations.  I’ll try to recount the successes and failures each week as the semester progresses. 

          Law in Action begins at the end (of a lawsuit), with remedies.  This makes complete sense to me, as a former plaintiff’s lawyer, who was never interested in any statute or common law doctrine until I could see what it might do for my client.  Regrettably (and I offer this as the friendliest of critiques) the casebook begins the term with the Shirley Maclaine case, Parker v. Twentieth Century Fox.  I find this regrettable because the case illustrates nothing so much as an exception to an exception to a remedies principle.  If one wants to begin by getting across the idea of what the so-called expectation interest is, why bring in the issue of mitigation of damages?  If on the other hand, one wants to get across the simple idea that contract remedies are rarely adequate to make parties whole, why not use a mitigation case in which the aggrieved employee is not fully compensated, on the grounds of failure to mitigate?  And if the point is to liven up the proceedings with a bit of pop culture, perhaps a case involving a more contemporary entertainer would do. 

          So I decided to deviate only slightly from the casebook’s path this year and to lead with the contract-remedies-are-never-fully-compensatory theme.  To do that, we will begin not with the Parker case, but with Peevyhouse v. Garland Coal Company, a case that aroused ire and passion and the best classroom discussion last year, and therefore the case I will rely on to start this year with a bang.  The injustice of the Oklahoma Supreme Court’s decision seems obvious, and yet when pressed to view the question of compensation from the Coal Company’s point of view, students come quickly to understand the murkiness and ambiguity of the seemingly limpid principle that the victim of a breach should receive what they expected.  The wonderful video history of the case, produced by Professor Judith Maute, will once again be featured, I think to introduce the second day of discussion, after we first have at the opinion in splendid isolation from the entire context and the facts not selected for narration by the Oklahoma Supreme Court.  To my students who might read this, be patient, all will be revealed in the end (of the first week.)

The Coen Brothers on Studio Contracts

I recently watched Barton Fink for the first time in more than a decade and the following scene reminded me of casebook staple Locke v. Warner Brothers, Inc., 66 Cal. Rptr. 2d 921 (Cal. Ct. App. 1997), in which the plaintiff alleged that the studio resolved not to develop any movie idea she pitched and not to hire her to direct any movie during the term of their three-year "non-exclusive first look" development and "play or pay" directorial agreement.

Lipnik: ... I had Lou read your script for me. I gotta tell you, Fink. It won't wash.

Fink: With all due respect, sir, I think it's the best work I've done.

Lipnik: Don't gas me, Fink. If you're opinion mattered, then I guess I'd resign and let you run the studio. It doesn't and you won't, and the lunatics are not going to run this particular asylum....

Fink: Yes, sir.

....

Lipnik: Hell, I could take you through it step by step, explain why your story stinks, but I won't insult your intelligence.  Well, all right.  First of all, this is a wrestling picture; the audience wants to see action, drama, wrestling, and plenty of it.  They don't wanna see a guy wrestling with his soul -- well, all right, a little bit, for the critics -- but you make it the carrot that wags the dog.  Too much of it and they head for exits and I don't blame 'em.  There's plenty of poetry right inside that ring, Fink.  Look at Hell Ten Feet Square....  Look at Blood, Sweat, and Canvas.  These are big movies, Fink, about big men, in tights -- both physically and mentally -- but especially physically....

Fink: I'm sorry if I let you down.

Lipnik: You didn't let me down....  You let Ben Geisler down.  He liked you.  Trusted you.  And that's why he's gone.  Fired.  That guy had a heart as big as the outdoors, and you f*cked him.  He tried to convince me to fire you too, but that would be too easy.  No, you're under contract and you're gonna stay that way.  Anything you write will be the property of Capitol Pictures; and Capitol Pictures will not produce anything you write....

[Keith A. Rowley]

Business Associations Limerick of the Week: Paramount Communications v. QVC Network, Inc.

Paramount v. QVC is a lot like Paramount v. Time, and the decisions are entirely consistent: Paramount always loses.  Beyond that, it is hard to say what principles are operative here.  In this case, Paramount was trying to protect a friendly merger with Viacom and fend off a hostile offer from QVC.  Viacom and Paramount agreed to the usual array of defensive measures and treated QVC disdainfully.  Sounds a lot of like the way Time treated Paramount.  

This time, however, the Delaware Supreme Court enjoined the key defensive measures.  Because Viacom's chief, Sumner Redstone, was a controlling shareholder and would be so in the newly combined entity, this transaction contemplated a change in control, an element missing from the proposed Time/Warner merger.  This difference necessitated the imposition of Revlon duties, so Paramount could not engage in defensive measures that shut down an active bidding process.

Paramount v. QVC

The Court invokes the old adage;

We expect that managers manage.

But Boards must patrol:

Where there's loss of control,

Shareholders must win some advantage.

[Jeremy Telman]

Business Associations Limerick of the Week: Paramount Communications v. Time, Inc.

This case is again very complicated and involves a full panoply of defensive measures.  You might think that just a few years after its Revlon decision, the Delaware Supreme Court would be eager to apply that decision to another case in which management arguably shut down an auction of a firm that was clearly not going to continue to exist in its prior form.  But the court believed that Time's management acted within its powers in fending off Paramount's tender offer and locking up with Warner Brothers in order to preserve Time's corproate culture and preserve the entity for future long-term payoffs. 

Paramount Communications v. Time, Inc.

Time's lock-up and no-shop don't trigger
Revlon's protections -- go figger!
A Paramount vulture
Threatened Time's culture
And justified defensive vigor. 

[Jeremy Telman]

More on Webb v. McGowin

When lumberman James Greeley McGowin died in 1934, his heirs stopped payments that the old man had been making to Joe Webb.  The resulting case, as everyone who reads this blog knows, is Webb. v. McGowin.

Two of the heirs who cut off the pension were Norman Floyd McGowin (left) and Earl Mason McGowin (right).  Floyd succeeded his father as the president of the W.T. Smith Lumber Co., while Earl (a Rhodes Scholar) was a long-time company vice president.  Both were Oxford graduates, Alabama state legislators, and prominent conservationists.  As it happens, the Forest History Foundation has some oral history interviews of Floyd and Earl.  They don't mention Webb, but they do give some sense of what things were like at the mill in the 1920s.  Turns out that walking around the plant to interact with the employees was one of old man McGowin's regular activities:

He was a man who would get up early every morning. He loved to walk all over the property. He would walk into each of the mills each morning and then come back home for breakfast. He made a habit of that. He could call the name of any employee there. Even to this day [1976] people all speak of him.

And in some respects Chapman, though completely owned by the lumber company (including the churches and schools) had some progressive ideas, including mandatory health insurance for the workers.

The [physician's] office and the equipment facilities were, of course, donated by the company. But there was a medical fee, as I remember, of about seventy-five cents a month for a single man and a dollar and a quarter a month for a married man and his family. That gave them full medical attention. There were no further costs except for medicine. The doctor was also available for house calls.

Incidentally, the McGowin family still seems to be flourishing in Chapman.  Maybe some of you folks in Alabama might want to investigate to see if there are any oral history memories of Webb around, hmm?

[Frank]

Business Associations Limerick of the Week: Revlon v. MacAndrews & Forbes

Ron Perelman, cigar-chomping CEO of Pantry Pride, wanted to acquire Revlon.  Revlon's CEO, Michel Bergerac, did everything in his power to prevent the acquisition.  The case is a great vehicle for teaching defensive measures, because Revlon's efforts to escape Perelmans' grasp were extensive: we've got a poison pill, a stock buy-back, a white knight, and a lock-up involving a no-shop provision, a cancellation fee and a crown jewel transaction. After several rounds of bidding, Revlon locked up with Forstmann Little.  The latter would acquire the company. The security of the deal was enhanced through the no-shop provision, a hefty cancellation fee and an option to purchase Revlon's key divisions (the "crown jewels") at a discount.  

Pantry Pride sought to enjoin the transaction.  The Delaware Supreme Court found that, when management has determined that the corporation is going to be sold, its duty is to maximize the sales price.  Fiduciary duties to other stakeholders must now be subordinated the duty of getting shareholders the greatest possible bang for their buck.  The court thus adds a heightened level of scrutiny in the context of defensive measures.  Just months before Revlon, the court had decided Unocal, in which it permitted an exclusive self-tender to fend off a (two-tiered, front-loaded and potentially coercive) tender offer from T. Boone Pickens.  There, the court determined that Pickens' offer was a threat to the corporation and that management had taken reasonable and proportional measures to counteract the threat.

Here, however, because Revlon was now up for sale and the lock-up with Forstmann precluded further bids that could have benefitted shareholders, there was a fiduciary breach and the transaction was enjoined.

Revlon v. MacAndrews & Forbes

If you put your firm up for sale

And entice a White Knight with a grail,

Lock-ups are out.

In this heavyweight bout,

Shareholder rights must prevail.

[Jeremy Telman]

Speaking of McQuade v. Stoneham . . .

 

Some of us who teach Contracts also teach Business Associations, so we like to run occasional things of interest to B.A. teachers beyond, of course, Jeremy’s regular limericks.

One of the great casebook staples is McQuade v. Stoneham (1934), a battle over control of the New York Giants baseball team. The case set down the rule that any agreement among shareholders and directors that would bind directors in the exercise of their discretion would be void. Above we see the dramatis personae of the case, Francis X. McQuade, Charles Stoneham, and John J. McGraw in happier days, meeting with other baseball luminaries in November, 1920.

Front row, left to right: McQuade, Harry Frazee (Red Sox), Col. Jacob Ruppert (Yankees), George Grant ;McGraw, and Barney Dreyfuss (Pirates).

Back row: Sam Breadon (Cardinals), Stoneham, L.C. Ruch (Phillies), Bill Veeck (Cubs); Charles Ebbets (Dodgers); Charles Comiskey (White Sox).  Contracts folks will recognize that last name, Comiskey, as the guy whose literal approach to contracts conditions has been explored on this site by Keith Rowley.

[Frank Snyder]

Business Associations Limerick of the Week: Cheff v. Mathes

Cheff has great facts, although the facts do not really affect the opinion.  Holland Furnace, it turns out, was a thoroughly corrupt business that was also losing money.  Its means of selling furnaces was to send a crew over to people's houses to "inspect" the furnaces.  The inspectors would often find (or perhaps create) problems and then sell the unsuspecting homeowner a new furnace.  Arnold Maremont, who owned a muffler business (and a lot of modernist art), took an interest in taking over Holland furnace and started buying up shares.

Maremont had a reputation for buying corporations and then liquidating them.  The principals of Holland feared he would do the same to them or at least streamline their business model by selling furnaces the way he sold mufflers -- through retailers -- thus eliminating much of Holland's workforce.  Incumbent Holland management decided to use corporate funds to buy back Holland's stock from Maremont, a defensive measure known as greenmail.  Dissatisfied shareholders filed a derivative action, claiming the payments were improper because motivated by a desire to maintain control of the corporation rather than by the best interests of its shareholders.  

The trial court bought this argument, but its finding was reversed on appeal.  Although the trial court applied the right standard, management's conduct in this case was justified, in the court's view, by the real threat to the corporation's well-being posed by the prospect of Maremont's takeover.  The court deferred to Holland's management's business judgment as to the long-term best interests of the firm.  The deference was misplaced in this instance, because the fraudulent scheme described was discovered, leading to the demise of Holland Furnace.  

Cheff v. Mathes

Cheff, who controlled Holland Furnace,

Said, "Pay Maremont greenmail to spurn us."

The court was not peeved

Because Cheff believed

"That Maremont will buy us and churn us."

[Jeremy Telman]

Business Associations Limerick of the Week: Stuparich v. Harbor Furniture

This is a case about a family-owned close corporation.   The father, Malcolm, Sr. gave a controlling share to his son, Malcolm, Jr., leaving two sisters, Candi and Ann, as minority shareholders.  The siblings disagreed about the direction of the business.  The main business, which involved furniture was stagnating, so the sisters wanted to expand the family's side business in trailer parks. 

But Malcolm had a controlling interest, and while the sisters had the ability to voice their opinions, Malcolm never paid them any heed, and he ran the business according to his own lights.  One of the disputes allegedly involved Malcolm hitting one of the sisters, but the court did not give any weight to that fact. 

The sisters claimed that they were being improperly frozen out and deprived of the benefits of ownership, so they sought a court-ordered dissolution of the company.  The court sided with Malcolm.  The sisters still got their dividends, so their ownership interest in the company was not frustrated.

Stuparich v. Harbor Furniture

Two sisters, Candi and Ann,
Preferred trailers to chairs of rattan.
Dividends they receive
And so they must leave
It to Malcolm the business to plan.

[Jeremy Telman]

Business Associations Limerick of the Week: Pedro v. Pedro

Pedros was a family business run by three brothers.  Alfred discovered that his brothers, Carl and Eugene were embezzling from the business, and he wouldn't shut up about it.  After two investigations, some funds could not be accounted for.  Carl and Eugene repeatedly warned Alfred to move on, but he refused.  Eventually, they were forced to tell employees that poor Alfred had suffered a nervous breakdown and would no longer be able to work.  I mean really -- what choice did they have?  He was also frozen out of the decision-making process and otherwise deprived of the benefits of his ownership share in the corporation. 

They court found that Carl and Eugene had violated their fiduciary duties to Alfred and ordered damages, including his reasonable expectation of lifetime employment, without any requriement that Alfred show that his brothers' misconduct caused actual harm to the corporation,

Pedro v. Pedro

Alred loved Carl and Eugene,
Though they thought him off his bean.
Their breaches frenetic
Made judges splenetic
So they paid for their freeze-out routine.

[Jeremy Telman]