Wednesday, April 23, 2014
I just stumbled upon an interesting damages decision from the Australian High Court in December. In a thouroughly modern context (sale of frozen sperm), it raises the age-old question of how to measure expectation damages when the buyer is able to recoup the costs of replacement in a forward contract.
Plaintiff and Defendant are doctors specializing in “assisted reproductive technology services.” For just over $380,000 (AUD), Plaintiff agreed to buy the assets of a company operating a fertility clinic, a company controlled by Defendant. The asset sale included a stock of frozen sperm. The company warranted that the identification of the donors of that sperm complied with specified regulatory guidelines. (Defendant guaranteed the company’s obligations under the contract).
The stock of sperm delivered contained 1,996 straws that were in breach of warranty. Specifically, it did not comply with regulatory requirements concerning consents, screening tests and identification of donors. For this reason, the sperm was unusable by Plaintiff. Plaintiff was unable to find suitable replacement sperm in Australia and eventually found only one alternative source of sperm from a U.S. supplier for over $1.2million (AUD). Plaintiff “accepted that ethically she could not charge, and in fact had not charged, any patient a fee for using donated sperm greater than the amount [she] had outlaid to acquire it.”
The question before the High Court: how should Plaintiff’s damages for breach of warranty be calculated? The primary judge assessed the damages as the amount that the Plaintiff would have had to pay the U.S. company (at the time the contract was breached) to buy 1,996 straws of sperm. On appeal, the Court of Appeal held that the Plaintiff should have no damages because the Plaintiff was able to pass on the increased costs to her patients. The Court of Appeal held that the Plaintiff had thus avoided any loss she would otherwise have sustained.
The parties did not dispute damages should be "that sum of money which will put the party who has been injured ... in the same position as he [or she] would have been in if he [or she] had not sustained the wrong for which he [or she] is now getting his [or her] compensation or reparation.” Nor did they dispute that the Plaintiff was entitled to be put in the position she would have been in had the contract been performed. The parties disputed how these principles should be applied to this particular case.
First, there might be a loss constituted by the amount by which the promisee is worse off because the promisor did not perform the contract. That amount would include the value of whatever the promisee outlaid in reliance on the promise being fulfilled. Second, the loss might be assessed by looking not at the promisee's position but at what the defaulting promisor gained by making the promise but not performing it. Third, there is the loss of the value of what the promisee would have received if the promise had been performed. Subject to some limitations, none of which was said to be engaged in this case, damages for breach of contract must be measured by reference to the third kind of loss: the loss of the value of what the promisee would have received if the promise had been performed.
After a nod to Fuller and Purdue, Justice Hayne explained how to value what Plaintiff should have received:
Under the contract which the [Plaintiff] made, she should have received 1,996 more straws of sperm having the warranted qualities than she did receive. The relevant question in the litigation was: what was the value of what the [Plaintiff] did not receive? The answer she proffered in this Court was that it was the amount it would have cost (at the date of the breach of warranty) to acquire 1,996 straws of sperm from [the U.S. company]. That answer should be accepted.
The answer depends upon determining the content of the unperformed promise. The answer does not depend upon whether the contract can be described as one for the sale of goods or for the sale of a business. How much the [Plaintiff] paid for the benefit of the promise is not relevant. It does not matter whether the value of what she did not receive was more than the price she had agreed to pay under the contract or (if it could have been determined) the price she had agreed to pay for the stock of sperm. The extent to which the [Plaintiff] could have turned the performance of the promise to profit would be relevant only if the [Plaintiff] had claimed for loss of profit. She did not. She sought, and was rightly allowed by the primary judge, the value of what should have been, but was not, delivered under the contract.
As for mitigation, the Justice wrote:
As already noted, however, the Court of Appeal concluded that the [Plaintiff] had mitigated her loss by buying replacement sperm from [the US. Company]. In respect of "the loss of each straw of replacement sperm actually sourced from [the U.S. company]" before the date of assessment of damages, Tobias AJA concluded that the chief component of the [Plaintiff’s] "loss" would be "the sum (if any) representing that part of the overall cost of acquisition of that straw not recouped from a patient". And in respect of "the residue of the 'lost' 1996 straws over and above those in fact replaced by [U.S.] sperm up to the date of trial", Tobias AJA concluded that "the appropriate course would have been to assume that [the Plaintiff] would continue to source straws of donor sperm from [the U.S. company] at a cost consistent with that which had prevailed since August 2005, and that she would continue to recoup from patients the same proportion of that cost as she had done in the past". On this footing, Tobias AJA concluded that the [Plaintiff’s] damages in respect of straws not "replaced" would be "the aggregate of the discounted present value of the un recouped balances (if any) of that cost as at the date of their assessment" (emphasis added).
Two points must be made about this analysis. First, the calculations described would reveal whether, and to what extent, the [Plaintiff] was, or would be, worse off as a result of the breach of warranty. That is, the calculations of the net amount which the [Plaintiff] had outlaid, and would thereafter have to outlay, would reveal the amount needed to put the [Plaintiff] in the position she would have been in if the contract had not been made. The calculations would not, and did not, identify the value of what the [Plaintiff] would have received if the contract had been performed. Second, the reference to mitigation of damage was apt to mislead. In order to explain why, it is necessary to say something about what is meant by "mitigation" of damage.
For present purposes, "mitigation" can be seen as embracing two separate ideas. First, a plaintiff cannot recover damages for a loss which he or she ought to have avoided, and second, a plaintiff cannot recover damages for a loss which he or she did avoid. * * *
The [Plaintiff’s] subsequent purchases and use of replacement sperm left her neither better nor worse off than she was before she undertook those transactions. In particular, * * * the [Plaintiff] obtained no relevant benefit from her subsequent purchases of sperm. The purchases replaced what the vendor had agreed to supply.
The purchase price paid for the replacement sperm revealed the value of what was lost when the vendor did not perform the contract. But the commercial consequences flowing from the [Plaintiff’s] subsequent use of those replacements would have been relevant to assessing the value of what should have been supplied under the contract only if she had obtained some advantage from their use, or if she had alleged that the replacement transactions had left her even worse off than she already was as a result of the vendor's breach. If she had obtained some advantage, the value of the advantage would have mitigated the loss she otherwise suffered. If she had been left even worse off (for example by losing profit that otherwise would have been made), that additional loss may have aggravated her primary loss. But the [Plaintiff] was not shown to have obtained any advantage from the later transactions and she did not claim that they had left her any worse off. Those transactions neither mitigated nor aggravated the loss she suffered from the vendor not supplying what it had agreed to supply. The value of that loss was revealed by what the [Plaintiff] paid to buy replacement sperm from [the U.S. company].
Showing that the [Plaintiff] had charged, or could charge, third parties (her patients) the amount she had paid to acquire replacement sperm from [the U.S. company] was irrelevant to deciding what was the value of what the vendor should have, but had not, supplied. If the contract had been performed according to its terms, the [Plaintiff] would have had a stock of sperm having the warranted qualities which she could use as she chose. She could have stored it, given it away or used it in her practice. In particular, she could have used it in her practice and charged her patients nothing for its supply. But because the vendor breached the contract, the [Plaintiff] could put herself in the position she should have been in (if the contract had been performed) only by buying replacement sperm from [the U.S. company]. Whatever transactions she then chose to make with her patients are irrelevant to determining the value of what should have been, but was not, provided under the contract.
Thus, Justice Hayne, joined by Justices Crennan and Bell, allowed Plaintiff’s appeal and ordered the she receive damages on the terms she sought. Justice Keane agreed with the result. Justice Gageler did not.
The appropriate measure of [the Plaintiff’s] loss is so much of the cost to [the Plaintiff] of sourcing 1,996 straws of replacement sperm for the treatment of her patients as she had been, and would be, unable to recoup from those patients. That measure, adopted by the Court of Appeal, is appropriate because it yields an amount which places [the Plaintiff] in the same position as if the contract had been performed so as to provide her with the expected use in the normal course of her practice of 1,996 straws of the frozen sperm delivered to her by the company.
To [the Plaintiff’s] protest that adoption of that measure leaves her without an award of damages in circumstances where the company has been found to have breached its warranty, the answer lies in the way she has chosen to put her case. She has made a forensic choice to eschew the measure which, together with the Court of Appeal, I would hold to be the appropriate measure.
Clark v. Macourt,  HCA 56 (Dec. 18, 2013).
Monday, April 21, 2014
On Thursday, we posted about General Mills' new arbitration policy.
Still, on Saturday, the New York Times reported that General Mills has retracted its new arbitration policy. In short, we win. A company spokesman was quoted in the Times saying, “Because our terms and intentions were widely misunderstood, causing concerns among our consumers, we’ve decided to change them back to what they were . . . .”
In a blog post, General Mills strikes a slightly different tone The company still claims that its terms were "misread." The company's lawyers state:
At no time was anyone ever precluded from suing us by purchasing one of our products at a store or liking one of our Facebook pages. That was either a mischaracterization – or just very misunderstood.
I have to admit that I am one of the parties who "misunderstood" their terms as having been broadly drafted so as to be reasonably construable to cover just about any interaction with General Mills, its websites and its products. So I (and everyone else who looked at the policy) may have been mistaken in its meaning. Still, in short, we win.
In any case, the company acknowledges that its new policies went over like a lead balloon. General Mills claims to have listened to the firestorm of criticism and therefore apologizes. It's a real apology too -- none of this "I'm sorry if you were upset by your misunderstanding of our intent" or "I'm sorry if I unintentionally hurt anyone in any way." The company states that it is sorry that it "even went down this path."
However, having issued the apology, the company can't quite let it go. The blog post points out that arbitration clauses are widespread and simply provide a cost-effective means of resolving legal claims.
As Bob Sullivan points out," if arbitration is so great, why not make it voluntary instead of mandatory?" I suspect that the answer has a lot to do with the class action waivers that now routinely accompany binding arbitration clauses.
Thursday, April 17, 2014
According to this article in today's New York Times, General Mills has added language to its website designed to force anyone who interacts with the company to disclaim any right to bring a legal action against it in a court of law. If a consumer derives any benefit from General Mills' products, including using a coupon provided by the company, "liking" it on social media or buying any General Mills' product, the consumer must agree to resolve all disputes through e-mail or through arbitration.
The website now features a bar at the top which reads:
The Legal Terms include the following provisions:
- The Agreement applies to all General Mills products, including Yoplait, Green Giant, Pillsbury, various cereals and even Box Tops for Education;
- The Agreement automatically comes into effect "in exchange for benefits, discounts," etc., and benefits are broadly defined to include using a coupon, subscribing to an e-mail newsletter, or becoming a member of any General Mills website;
- The only way to terminate the agreement is by sending written notice and discontinuing all use of General Mills products;
- All disputes or claims brought by the consumer are subject to e-mail negotiation or arbitration and may not be brought in court; and
- A class action waiver.
The Times notes that General Mills' action comes after a judge in California refused to dismiss a claim against General Mills for false advertising. Its packaging suggests that its "Nature Valley" products are 100% natural, when in fact they contain ingredients like high-fructose corn syrup and maltodextrin. The Times also points out that courts may be reluctant to enforce the terms of the online Agreement. General Mills will have to demonstrate that consumers were aware of the terms when they used General Mills products. And what if, when they did so, they were wearing an Ian Ayres designed Liabili-T?
Thursday, April 3, 2014
Running out of examples of offers to enter into a unilateral contract? This story from California comes just in time and, like all good ideas, it was inspired by television:
A pizza parlor specializing in take-out business is offering a special challenge to any two people who choose to eat in the dining room: A check for $2,500 if they can finish a giant pizza in less than an hour.
"I call it Da Big Kahuna," said Glenn Takeda, owner of 8 Buck Pizza, whose $60 extra, extra, extra large pizza is 30 inches in diameter and weighs 15 pounds.
The 8.5 lbs of dough is covered with 3.5 lbs of cheese and a choice of any three toppings, one of which must be meat.
Takeda got the idea for Da Big Kahuna challenge in January from watching other food-eating contests on TV.
He initially offered $100 cash per person plus a year's worth of free pizza, but got no takers.
Contestants started lining up when Takeda boosted the prize to $2,500. So far, 15 teams have taken -- and failed -- the challenge.
Among those who have left the table without finishing Da Big Kahuna is well-known competitive eater Naader Reda, who drove more than 400 miles from his home in Joshua Tree Wednesday to tackle the monster pizza with eating partner John Rivera.
"John and I make a great team, but that day, the 15-pound Big Kahuna was too much," Reda tweeted to News10. "It is a very tough opponent."
Reda was equally gracious in his review of the pizza's quality.
"It was the thickest, doughiest pizza I've ever encountered. It was also one of the two or three most delicious pies I've sampled," he wrote.
Takeda said Reda and Rivera came as close as anyone to finishing Da Big Kahuna, and admits he was preparing to part with $2,500.
"I swear I thought they were going to do it," he said.
At the end of the hour, the pair left with enough pizza to fill a 14-inch takeout box.
Based on Wednesday's close call, Takeda knows it's only a matter of time before he's forced to write the check.
"I'm sure somebody will surface," he said.
Not a bad marketing strategy. So long as Takeda sells about 42 of these $60 pizzas, he's got the $2500 prize covered.... and he's already half way there. Though, that assumes a 100% profit margin. We can call his cost per pizza "advertising" - and at a really good price given that his business is already all over the Internets.
[Update: I thought more about this and perhaps it isn't a unilateral contract but, rather, a bilateral contract with a condition. Customer pays $60 in exchange for a large pizza and the opportunity to win the $2500. The condition precedent to winning the $2500 is eating the whole pizza in an hour. If the customer did not have to pay for the pizza, then it looks more like a unilateral contract.]
Friday, March 21, 2014
Nan Aron, President of the Alliance for Justice, has an op-ed in SFGate supporting the Arbitration Fairness Act. It begins with the attention-grabbing question:
What do a Bay Area restaurant, customers of Instagram and the Oakland Raiders cheerleaders have in common? All of them have been - or could become - victims of a perversion of the American system of justice that could deny them their chance to stand up for their rights in court.
The practice is known as forced arbitration. Thanks to a series of bad decisions by the U.S. Supreme Court and unfair corporate practices, more and more Americans are required to use it. Forced arbitration turns dispute resolution into a privatized system of dispute suppression that is supplanting our justice system and letting corporations ignore laws that protect consumers and workers.
Aron explains that the Raiderette cheerleaders have attempted to sue the Raiders for wage violations but the cheerleader contract has an arbitration clause requiring them to take their dispute to the Commissioner of the NFL. The op-ed concludes:
The Consumer Financial Protection Bureau is considering barring forced arbitration in consumer services contracts - and it should. But forced arbitration is also spreading to employment contracts, like the one between the cheerleaders and the Raiders, threatening workers' ability to sue over race, sex or age discrimination and other workplace injustices.
There is a solution: The Arbitration Fairness Act, now pending in Congress, would bar forced arbitration in employment, antitrust and civil rights cases as well as consumer disputes. It would reopen the courthouse doors to millions of Americans and level the legal playing field for the cheerleaders, who, like every American, deserve a fair shot at justice.
I agree with Aron's conclusion and I support the Arbitration Fairness Act, but I am struck by the shift in the political framing of pre-dispute arbitration -- from "mandatory" to "forced." That seems a bit hyperbolic to me.
Anyway, here's a link to the full op-ed.
Tuesday, March 11, 2014
According to Russian media, China has sued Ukraine for $3 billion, claiming Ukraine breached a loan-for-grain contract.
Under the loan-for-grain contract signed in 2012, the Export-Import Bank of China provided the loan to Kiev in exchange for supplies of grain.
Ukraine's State Food and Grain Corporation used part of the $3 billion Chinese loan to instead provide crops for other countries and parties, including Ethiopia, Iran, Kenya and the Syrian opposition groups, the ITAR-TASS news agency reported, citing a Ukrainian parliament official.
The contract stipulated annual supply of a maximum 6 million tonnes of Ukrainian grain for a 15-year period.China also delivered half of the agreed loan to Ukraine last year and Ukraine had planned to export four million tonnes of grain to China.
However, Chinese importers have so far received only 180,000 tonnes of grain, worth $153 million, from Ukraine, the report said.
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!
Tuesday, February 18, 2014
During a basketball game at West Chester University in Pennslyvania, freshman Jack Lavery was randomly picked for the $10,000 halftime challenge. Lavery had 25 seconds to make a lay-up, shot from the free throw line, shot behind the three-point line and a half-court shot. Lavery successfully made a lay-up, a shot from the behind the free throw line, and then a shot behind the three-point line. As the clock was winding down, Lavery attempted the half-court shot, but missed. With one hand, he made the half-court shot on his second attempt just as the buzzer went off. As Lavery explains it:
"I stopped and did that one handed shot and it happened to go in. I ran to the other side of the court just high fiving everyone and then I went and bear hugged my dad," said Lavery.
See for yourself:
As you see, the crowd cheered, but the University refused to award the prize money. Why? The contract.
Intrepid reporting by Action News obtained a copy of a contract signed by Lavery. The rules of the contest provide:
I shall have as many opportunities as necessary at each of the first three (3) locations to make a shot; however, no more than ONE (1) attempt may be made at the HALF COURT shot, provided that there is still time left on the shot clock.
Lavery took more than one attempt at the half court shot and, therefore, the University claims that he is inelgible for the prize. Nevertheless, apparently his father intends to "challenge the wording of the contract."
Additionally, the contract reportedly states that anyone who played basketball in high school would be ineligible to collect the prize money. Lavery played high school ball, another reason for his ineligibility.
Reminds me of this:
Tuesday, February 11, 2014
... at least, Florida's non-compete law is "truly obnoxious" to New York public policy. The intermediate appellate court in New York (Fourth Department) recently refused to enforce a Florida choice of law provision in a non-compete agreement. Here's the analysis:
We nevertheless conclude that the Florida choice-of-law provision in the Agreement is unenforceable because it is “ ‘truly obnoxious’" to New York public policy (Welsbach, 7 NY3d at 629). In New York, agreements that restrict an employee from competing with his or her employer upon termination of employment are judicially disfavored because “ ‘powerful considerations of public policy . . . militate against sanctioning the loss of a [person’s] livelihood’ ” (Reed, Roberts Assoc. v Strauman, 40 NY2d 303, 307, rearg denied 40 NY2d 918, quoting Purchasing Assoc. v Weitz, 13 NY2d 267, 272, rearg denied 14 NY2d 584; see Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 499; D&W Diesel v McIntosh, 307 AD2d 750, 750). “So potent is this policy that covenants tending to restrain anyone from engaging in any lawful vocation are almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post v Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 86-87, rearg denied 48 NY2d 975 [emphasis added]). The determination whether a restrictive covenant is reasonable involves the application of a three-pronged test: “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 [emphasis omitted]). “A violation of any prong renders the covenant invalid” (id. at 389). Thus, under New York law, a restrictive covenant that imposes an undue hardship on the restrained employee is invalid and unenforceable (see id.). Employee non-compete agreements “will be carefully scrutinized by the courts” to ensure that they comply with the “prevailing standard of reasonableness” (id. at 388-389).
By contrast, Florida law expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant. Florida Statutes § 542.335(1) (g) (1) provides that, “[i]n determining the enforceability of a restrictive covenant, a court . . . [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought” (emphasis added). The statute, effective July 1, 1996, also provides that a court considering the enforceability of a restrictive covenant must construe the covenant “in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement” and “shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract” (§ 542.335  [h]; see Environmental Servs., Inc. v Carter, 9 So3d 1258, 1262 [Fla Dist Ct App]). Thus, although the statute requires courts to consider whether the restrictions are reasonably necessary to protect the legitimate business interests of the party seeking enforcement (see § 542.335  [c]; Environmental Servs., Inc., 9 So3d at 1262), the statute prohibits courts from considering the hardship on the employee against whom enforcement is sought when conducting its analysis (see Atomic Tattoos, LLC v Morgan, 45 So3d 63, 66 [Fla Dist Ct App]).
Based on the foregoing, we conclude that Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is “ ‘truly obnoxious’ ” to New York public policy (Welsbach, 7 NY3d at 629), inasmuch as under New York law, a restrictive covenant that imposes an undue hardship on the employee is invalid and unenforceable for that reason (see BDO Seidman, 93 NY2d at 388-389). Furthermore, while New York judicially disfavors such restrictive covenants, and New York courts will carefully scrutinize such agreements and enforce them “only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post, 48 NY2d at 87; see BDO Seidman, 93 NY2d at 388-389; Columbia Ribbon & Carbon Mfg. Co., 42 NY2d at 499; Reed, 40 NY2d at 307; Purchasing Assoc., 13 NY2d at 272), Florida law requires courts to construe such restrictive covenants in favor of the party seeking to protect its legitimate business interests (see Florida Statutes § 542.335  [h]).
According to the NYLJ, courts in Alabama, Georgia and Illinois have also rejected the Florida law.
You know what else is truly obnoxious? All of the Floridians who complain about how cold it is when it hits 55 degrees...
Brown & Brown v. Johnson (N.Y. App. Div. 4th Dep't Feb. 7, 2014)
Sunday, February 9, 2014
This article in the WSJ coincides perfectly with my syllabus as we are now finishing up our segment on offer and acceptance. Apparently, in the early to mid-nineties, the band Rocket from the Crypt agreed to let in free to their concerts anyone with a tattoo of the band’s logo.
As with many messy offer and acceptance scenarios, it started informally. The band members got tattoos of the logo – of a rocket blasting out of grave – and a few of their friends decided to do the same. Eventually, the band decided to let anyone with the tattoo get in free to see them play. They were a small band then and so whoever had the tattoo was probably a friend (or a friend of a friend) of a band member. But the band grew in popularity – and so did the number of tattooed fans. At their 2005 farewell concert, 500 rocket-tattooed fans got in free.
Now the band is preparing for their reunion tour. Tickets are selling out. There’s just one small problem. Many of the venues where they are scheduled to play don’t want to honor the free-admission-with-tattoo policy.
In my humble opinion, it doesn’t sound like the band actually made an offer to anyone, much less the public at large. The terms weren't definite - how big did the tattoo have to be? Could it be anywhere? For how long would fans get in free? Were there any limits?
But the band did honor the “tattoo-as-ticket” in the past. Does that then give rise to an implied contract? Or is there an equitable estoppel argument that could be raised given the fans’ reliance?
As interesting as this may be to ponder for contracts profs, in the end, I think there should be no enforceable contract and no estoppel claim for the simple reason that the band never intended to make an offer to the public at large. Furthermore, it doesn’t seem reasonable for someone to get a tattoo based upon what they understand to be the band’s informal policy of letting tattooed fans in free. The practice was a custom that grew organically, rather than a promise that must be kept as long as the band plays or the tattoo lasts. Not everything is a contract. If there was some sort of actual promise made, the band's promise was likely one to make a gift (free admission) to show their appreciation to anyone who had a tattoo. In other words, the band members weren't bargaining for fans to get a tattoo, and they weren't bargaining for them to show up to the venue with a tattoo - rather, motivated by affective reasons, they made a donative promise to let in their most loyal fans, the ones with tattoos, for free.
Wednesday, February 5, 2014
Tuesday, February 4, 2014
According to this article from The New York Times, Detroit filed suit on Friday, seeking to invalidate complex transactions that it used to finance its debts. Detroit claims that the contracts at issue were illegal and are thus unenforceable.
The transactions brought in $1.4 billion for the city, but it now claims that they were an unlawful scheme to get around a ceiling on the amount of debt the city could take on and that it thus has no obligation to make payments on the "certificates of participation" issued in connection with the transactions. Detroit is also seeking to cancel some related "interest-rate swaps" with two banks that obligate the city to pay tens of millions of dollars annually to the banks. Just a few weeks ago, Detroit had offered to pay $165 million to get out of the contracts, but the bankruptcy judge rejected that as "too much money." Paying nothing seems like a better deal for the city, if they can find a legal basis to get out of the obligation.
Saturday, February 1, 2014
Running out of examples of unilateral contracts? Well, here's one: Hong Kong tycoon Cecil Chao offered $65 million to any man that could get his lesbian daughter's hand in marriage. That is, if a person could reasonably believe that Chao intended to enter into this bargain (it seems that he was in fact serious, especially in light of his wealth and his rejection of his daughter's sexuality):
Chao's daughter Gigi handled the situation with incredbile grace, writing an open letter to her father:
In her letter, Gigi Chao tells her father that she "will always forgive you for thinking the way you do, because I know you think you are acting in my best interests."
And she says she takes responsibility for some of her father's misplaced expectations.
When he first announced the colossal dowry in 2012, she said at the time she found it "quite entertaining."
But this week she appeared to set the record straight.
"I'm sorry to mislead you to think I was only in a lesbian relationship because there was a shortage of good, suitable men in Hong Kong," she writes. "There are plenty of good men, they are just not for me."
Here's Gigi in her own words:
It sounds like quite a few men responded to the offer with attempts to win Gigi's heart. But it is now too late. Even though Chao will not recognize his daughter's relationship with her long-time partner (really, wife - given that they wed in France even though the marriage is not recognized in Hong Kong), Chao has now revoked the offer.
Friday, January 31, 2014
I like to remind my 1Ls Contracts students that a contract is private law between two parties, but it doesn't override public law. This story is last week's news, but I thought I'd blog about it anyway because it provides a pretty good example of this point. In 2009, William Marotta responded to a Craigslist ad posted by two women for a sperm donor. All three parties agreed - and signed an agreement to the effect - that Marotta waived his parental rights and responsibilities. The Kansas Department for Children and Families sought to have Marotta declared the father and responsible for payments of $6,000 that the state had already paid and for future child support.
Unfortunately for Marotta, a Kansas state statute requires a physician to perform the artificial insemination procedure. The Shawnee County District Court Judge Mary Mattivi ruled that because the parties "failed to conform to the statutory requirements of the Kansas Parentage Act in not enlisting a licensed physician...the parties' self-designation of (Marotta) as a sperm donor is insufficient to relieve (Marotta) of parental rights and responsibilities."
Note that the couple was not seeking to invalidate the contract - it was the Kansas state agency.
It's unclear whether the parties will appeal.
Wednesday, January 29, 2014
All four members of Motley Crue signed an agreement Tuesday that will permanently dissolve the legendary rock group after a final tour.
Vince Neil, Mick Mars, Nikki Sixx and Tommy Lee appeared in a Hollywood hotel Tuesday for a signing ceremony for a "cessation of touring agreement," which their lawyer said would bring a peaceful end to the group.
"Other bands have split up over rancor or the inability of people to get along, but this is mutual among all four original members and a peaceful decision to move on to other endeavors and to confirm it with a binding agreement," attorney Doug Mark said.
Motley Crue has sold more than 80 million albums since hitting the road in 1981, but drummer Tommy Lee said, "Everything must come to an end."
"We always had a vision of going out with a big f**king bang and not playing county fairs and clubs with one or two original band members," said Lee, who is the youngest member at 51. "Our job here is done."
Guitarist Mick Mars, the oldest band member at 62, said the group's 33 years have had "more drama than 'General Hospital.'"
Vocalist Vince Neil, 52, said he'll miss the group, but it's not an end to his rock career. "I feel there are a lot of great opportunities and exciting projects after Motley."
The first leg of "The Final Tour" starts in Grand Rapids, Michigan, on July 2.
The termination agreement becomes effective at the end of 2015, after a global tour that will include Alice Cooper.
"Motley Crue and Alice Cooper -- A match made in Armageddon?" said Cooper.
I'd love to see a copy of the contract (...wherefore Motley Crue hereby f***g agrees fortwith to cease any and all rock band activities of any kind...). In the main, it sounds like a hard one to breach: I promise not to show up for band stuff anymore!
Tuesday, January 28, 2014
Last week, Myanna Dellinger posted about tipping and Uber. One piece of information she provided in that post that was new to me was that servers were tipped only about 10% on the West Coast until about ten years ago. It seemed odd to me that there should be a more stingy tipping culture in the West. After all, one does not imagine Hollywood players threatening one another with "You'll never tip 10% in this town again."
Yesterday's New York Times provides a timely explanation of this anomaly. It turns out, tips may be lower on the West Coast because wages are higher. While the federal minimum wage for waiters who earn tips is only $2.13, states are free to mandate higher miniumum wages, and states in the West are most likely to do so. In Washington State, a waiter's base pay is $9.32/hour.
Myanna has lived in Europe so she knows that the real solution to the problem is to pay servers a living wage. If restaurant patrons want to reward them for especially fine service, they are welcome to do so, but with many servers living below the poverty line, they should be protected against economic surges and depressions that are beyond their control.
The restaurant industry protests against any rise in the minimum wage and is fighting legislation supported by the Obama administration that would incrementally increase the minimum wage for tip-earners to $7.25/hour. But restaurants can learn from cabbies. Pass increased costs onto customers by increasing menu prices, but then recommend that patrons tip only 10%. Across the nation, people with math phobia will delight in the ease of calculation.
Monday, January 27, 2014
Severe Economic Disruptions from Climate Change
For many, climate change remains a far off notion that will affect their grandchildren and other “future generations.” Think again. Expect your food prices to increase now, if they have not already. Amidst the worst drought in California history, the United Nations is releasing a report that, according to a copy obtained by the New York Times, finds that the risk of severe economic disruptions is increasing because nations have so dragged their feet in combating climate change that the problem may be virtually impossible to solve with current technologies.
The report also says that nations around the world are still spending far more money to subsidize fossil fuels than to accelerate the urgently needed shift to cleaner energy. The United States is one of these. Even if the internationally agreed-upon goal of limiting temperature increases to 2° C, vast ecological and economic damage will still occur. One of the sectors most at risk: the food industry. In California, a leading agricultural state, the prices of certain food items are already rising caused by the current drought. In times of shrinking relative incomes for middle- and lower class households, this means a higher percentage of incomes going to basic necessities such as food, water and possible medical expenses caused by volatile weather and extreme heat waves. In turn, this may mean less disposable income that could otherwise spur the economy.
Disregarding climate change is technologically risky too: to meet the target of keeping concentrations of CO2 below the most recently agreed-upon threshold of 500 ppm, future generations would have to literally pull CO2 out of the air with machinery that does not yet exist and may never become technically or economically feasible or with other yet unknown methods.
Of course, it doesn’t help that a secretive network of conservative billionaires is pouring billions of dollars into a vast political effort attempting to deny climate change and that – perhaps as a consequence – the coverage of climate change by American media is down significantly from 2009, when media was happy to report a climate change “scandal” that eventually proved to be unfounded.
The good news is that for the first time ever, the United States now has an official Climate Change Action Plan. This will force some industries to adopt modern technologies to help combat the problem nationally. Internationally, a new climate change treaty is slated for 2015 to take effect from 2020. Let us hope for broad participation and that 2020 is not too late to avoid the catastrophic and unforeseen economic and environmental effects that experts are predicting.
Assistant Professor of Law
Western State College of Law
Today's New York Times has a long story about college coaches in non-money sports, like soccer and lacrosse, recruiting middle schoolers. Like most intersections between amatuer athletics and money, this phenomenon is bad for everyone. According to the Times, the new trend is an unintended consequence of Title IX. There is lots of scholarship money chasing relatively few talented athletes, especially female athletes, in the non-money sports. As a result, players of promise get snatched up very early, so now schools offer scholarship money to eighth graders in the hope that they will commit to play for them when they go to college.
The result is bad for everyone for obvious reasons. Coaches cannot really predict which 13-14 year olds will be All-American athletes. Even if athletic potential is there, injuries, loss of interest or other factors (e.g., life outside of sports) can intervene. The dynamic hurts young athletes because it forces them to focus on one sport very early, playing that sport year round and increasing the likelihood of injury. Then, many athletes recruited in middle school are not top players in college, so they spend their college years as frustrated bench warmers, has-beens at the age of 18. The coaches hate it as well. They've got better things to do with their time than endless telephone converstions with middle schoolers, and they hate the dynamic of having to commit to student athletes before they are confident of the students' potential.
But it's actually hard to have that much sympathy for the coaches, since this is a world they have created by exploiting loopholes in NCAA rules. They could voluntarily self-regulate or simply work at getting a reputation for being a school that only accepts students who arrive at a particular sports program as a result of more mature deliberation. Perhaps it won't work and then a school might have to suffer the ignominy of not having, for example, a top ten women's soccer team. The horrors. University administrators should focus more an graduation rates, employment rates and student well-being and less on rankings.
But the reason I am posting about this is of course the relevant contacts issues. The Times is silent on how the minors bind themselves to particular universities. Since these middle schoolers cannot bind themselves contractually, there must be parents involved. Still, I wonder what the remedy is if a student athlete decides not to attend the university to which she has pre-committed. Of course, the student will sacrifice her scholarship, but if a recruited soccer player decides that she wants to play at a different school, will it really be impossible for her to find a school that will offer her a scholarship when she is a senior? Given that the coaches know that they will make mistakes in recruiting 14-year-olds, they ought to hold a few scholarships in reserve so that they can make offers to late bloomers.
But students may be unwilling to renege on their commitments. As the closing line of the Times article suggests, students may be happy to simply be done with the process, even though they know that they are pretty poor predictors of what they will want for themselves in four years' time. The disservice we do to student athletes is obvious. But the process also disserves colleges and universities. There are lots of reasons to go to college, but the chief reason for almost all students ought to be educational. By forcing to middle schoolers to pick a school based on a sport which will almost certainly never be anything more than a hobby for them, we present a distorted picture of the purposes of higher education -- or perhaps we simply contribute to a realistic picture of higher education which is in fact a disfigurement of education.
Wednesday, January 22, 2014
Warren Buffett and Quicken Loans have teamed up to help make teaching about unilateral contracts and interpretation so much more interesting. The offer? One billion dollars to anyone who fills out a perfect 2014 NCAA tournament bracket.
Say what? Is this serious? Or is it like that Pepsi commercial - you know the one.
Although at first, this might sound like a joke, once you learn the odds are, by one estimate, one in 9.2 quintillion, you --a reasonable person -- would realize this offer was serious.
All you have to do is fill out a perfect bracket. (Now might be the time for me to mention that I once won my law firm's pool one year. Strange but true).
But wait - there's more. The Business Insider reports that Quicken, which is actually running the contest, will award $100,000 to 20 of the most accurate but not perfect brackets "submitted by qualified entrants in the contest to use toward buying, refinancing or remodeling a home." The company will also donate $1million to Detroit and Cleveland non-profit organizations.
Get ready for March Madness....
Monday, January 20, 2014
In the mid-1990s, the Walt Disney Company hired Michael Ovitz to be its #2 executive. After slightly over a year in the position, Disney's Board of Directors fired Ovitz, having determined that he was an ineffective executive for the company. He received over $100 million in severance pay. After years of litigation, the Delaware courts found that Disney's Board of Directors did not breach its duty of care in approving an excecutive compensation scheme that made Ovitz better off for having been terminated than he would have been had he stayed on the job. The Delaware Supreme Court noted that Disney's corporate governanace was far from optimal and should not pass muster in a post-Enron/WorldCom etc., world. I have written about the case here.
According to this article in The New York Times, Yahoo! was not paying attention. In 2012, Yahoo! hired Henrique de Castro to be its #2 executive. He lasted a little over a year and is now walking away with at least $88 million. The Times quotes Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, who says that such hiring decisions are usually made by the corporation's CEO and that the Board can't tell the CEO whom to hire. However, Professor Elson also notes that Boards have an obligation to "ask hard questions," especially when executive compensation seems "out of whack." Mr. de Castro was the eighth highest paid executive in the region, earning more than Yahoo!'s CEO.
I suppose it is usually true that a Board cannot tell a CEO whom to hire, but the Board and its Compensation Committee do set executive pay. And nobody at that level can be hired without Board approval. In order to lure an executive of de Castro's experience, a corporation must offer "downside protection." That is, a business person of de Castro's experience is not going to leave a secure, well-compensated position without a guarantee that he will be well-compensated at the new position, even if the relationship sours. However, as the Times points out, de Castro's record at Google was mixed. He had been demoted and then promoted again, which suggests his position was not that secure. In any case, his compensation seems to have been well in excess of what was necessary to protect his potential downside.
Board capture apparently is still a major problem in U.S. public companies, and the Times suggests that the problem is especially bad in Silicon Valley. The real problem is that executive pay remains absurdly, stratospherically high in this country. No pay package should be structured to guarantee millions in dollars of severance even in cases of abject failure.