Wednesday, August 13, 2014
Today's New York Times features an article aptly titled (in the print version) "Under the Microscope." The article describes researchers' attempts to grapple with the ethical issues relating to projects such as Facebook's experiment on its users, about which we have written previously here and here. According to the article, researchers both at universities and at in-house corporate research departments are collaborating on processes to formulate ethical guidelines that will inform future research that makes use of users' information.
The article states that Facebook has apologized for its emotion experiment, in which it manipulated users' feeds to see if those users' own posts reflected the emotional tone of the posts they were seeing. It's not really clear that Facebook apologized for experimenting on its users. As quoted on NPR, here is what Facebook's Sheryl Sandberg said on behalf of the company:
This was part of ongoing research companies do to test different products, and that was what it was; it was poorly communicated . . . . And for that communication we apologize. We never meant to upset you.
As the Washington Post noted, Sandberg did not apologize for the experiement itself. Seen in its full context, Sandberg's statement is more akin to OKCupid's in-your-face admission that it experiements on its users, about which Nancy Kim posted here.
But the Times article focuses on Cornell University's Jeffrey Hancock, who collaborated with Facebook on the experiment. He seems to have no regrets. For Hancock, researchers' ability to data mine is to his field what the microscope was to chemists. Or, one might think, what the crowbar was to people doing research in the field of breaking and entering. Hancock is now working with people at Microsoft Research and others to lead discussions to help develop ethical guidelines applicable to such research.
The Times quotes Edith Ramirez, Chair of the Federal Trade Commission on the subject. She says:
Consumers should be in the driver’s seat when it comes to their data. . . . They don’t want to be left in the dark and they don’t want to be surprised at how it’s used.
By contrast, here is the Times's synopsis of Professor Hancock's views on how the ethical guidelines ought to be developed:
Companies will not willingly participate in anything that limits their ability to innovate quickly, he said, so any process has to be “effective, lightweight, quick and accountable.”
If the companies are subject to regulation before they can experiment on their users, it does not really matter whether or not they willngly participate. And the applicable standards have already been established under Institutional Review Board (IRB) rules. Significantly, as reported here in the Washington Post, although Professor Hancock works at Cornell, his participation in the Facebook study was not subject to Cornell's IRB review. In our previous posts, we have expressed our doubt that the Facebook study could survive IRB review (or that it yielded the information that it was supposedly testing for).
The Times article does not indicate that any of the people involved in devising rules for their own regulation have any expertise in the field of ethics. Why is letting them come up with their own set of rules in which they will "willingly participate" any better than expecting the wielders of crowbars to design rules for their safe deployment?
Monday, August 11, 2014
Presidential Executive Order Refuses Government Contracts to Companies that Mandate Employee Arbitration
President Obama today signed a new Fair Pay and Safe Workplaces Executive Order refusing to grant government contracts of over a million dollars to companies who mandate their employees arbitrate disputes involving discrimination, accusations of sexual assault, or harassment. This new order mirrors protections Congress already provided to employees of Defense Department contractors in 2011 in the so-called “Franken amendment.” The order also requires prospective federal contractors to disclose prior labor law violations and will instruct agencies not to do business with egregious violators.
While the executive order is limited in its scope (only protects employees who work for companies with large government contracts and only applies to arbitration of certain kid of claims), it is a step toward the Arbitration Fairness Act, which would prohibit mandatory arbitration more braodly. More here.
Thursday, August 7, 2014
It is not often that the Supreme Court of the United States entertains a contract issue (which is, coincidentally, one of the main reasons it is such a delight to teach contract law). The Supreme Court did, however, recently settle a contract dispute of its own.
The curious case of the trapezoidal windows at the U.S. Supreme Court is closed.
Documents filed recently in lower courts indicate that a contentious seven-year dispute over mistakes and delays in the renovation project at the high court has been settled.
“Everybody was worn out by the litigation,” Herman Braude of the Braude Law Group said this week. Braude represented Grunley Construction Company, the main contractor for the modernization project on the nearly 80-year-old building. “All good things have to come to an end,” he said.
The most contested feature of the litigation was the belated discovery by contractors that more than 150 large windows, many of which look out from justices’ chambers, were trapezoidal—not strictly rectangular. The building's persnickety architect, Cass Gilbert, designed them that way so they would appear rectangular from below, both inside and outside the building.
But Grunley and its window subcontractor failed to measure all four sides of the windows before starting to manufacture blast-proof replacements, so some of them had to be scrapped.
Grunley claimed it was not obliged to make the measurements, asserting that the government had “superior knowledge” of the odd shape of the windows that it should have shared with contractors. The company asked for an extra $757,657 to compensate for the extra costs of fabricating the unconventional windows.
But the federal Contract Appeals Board in 2012 rejected Grunley’s claim, stating: “We find inexcusable the firms’ failure to measure a necessary component of the windows prior to installation.”
Grunley appealed to the U.S. Court of Appeals for the Federal Circuit and placed other contract disputes before that court and the U.S. Court of Federal Claims. Both sides eventually agreed to settlement negotiations.
In February, both parties reported to the federal circuit that “the parties are now in the final process of closing out the underlying construction contract and settling various requests for equitable adjustment.” They also told the federal circuit that “the settlement discussion are at a very high level between the parties … and are being primarily led by the principals of each party, not the litigation counsel.”
Subsequent orders by both courts have dismissed the litigation, but no details of the settlement are available on the docket of either court.
Attempts to obtain details of the settlement have been unsuccessful so far. The Architect of the Capitol—the congressional agency that has jurisdiction over the Supreme Court building and was the defendant in the litigation—did not respond to a request for comment. The U.S. Department of Justice’s civil division, which handled the litigation for the architect's office, did not respond as of press time, and neither did anyone from the Supreme Court.
Braude, Grunley's attorney, was reluctant to give details. “The dollar figure doesn’t matter,” he said. But when pressed, Braude said his client “got some” of the $15 million in extra compensation it was seeking from the government, beyond its original $75 million contract for the work.
“Everybody agreed to an adjusted contract price that recognizes the budget limitations of the government,” Braude said, adding that the settlement was “satisfactory to all parties. Nobody was jumping for joy, but everybody was a little happy.” Braude also said the Supreme Court signed off on the settlement.
John Horan of McKenna Long & Aldridge, an expert on government contract disputes, said there is no general rule about the confidentiality of settlements, and sometimes “the government doesn’t go out of its way to make settlements public.” But a document spelling out terms of the agreement is sometimes made part of the public record or can be obtained through the Freedom of Information Act, he said. The Supreme Court and the Architect of the Capitol, an arm of Congress, are exempt from the FOIA.
The modernization project at the Supreme Court broke ground in 2003 and the target completion date was 2008, though some follow-up work is still underway. The court's aging infrastructure—including one of the oldest Carrier air-conditioners in existence—was the trigger for the project, which has cost an estimated $122 million overall.
More here. Great basis for an exam hypo. And, wow! -- to be the attorney that sues the Supreme Court!
Wednesday, August 6, 2014
Friday, August 1, 2014
Readers of this blog should already be familiar with the famous Harrier jet case in which plaintiff John Leonard attempted to treat a Pepsi commercial as an offer for the sale of a Harrier jet in exchange for 7 million Pepsi points or the equivalent in cash, which came to about $700,000. In Leonard v. Pepsico. (edited version available here), Judge Kimba Wood ruled in Pepsico's favor, finding that the commercial that Leonard mistook for an offer was actually a joke.
We have learned via the Contracts Prof listserv that a Harrier Jet was recently sold at auction for £ 105,800 -- that is under $200,000. In this case, the auctioneer specified that the jet was being sold "for display purposes only and is not currently airworthy." It doesn't even come with any weapons systems. Bummer. Still, although the Pepsi commercial suggests an operational Harrier (there is no indication of weapons capabilities), Leonard's offer of $700,000 actually turns out to be way too high for a non-functional jet. So, if instead of showing a kid landing a jet outside of his school, the commercial had shown the same kid impressing his friends with the grounded jet in his backyard, Judge Wood would have had a harder time construing the ad as a joke.
Since the notice of the jet for auction claims that this is the first time a Harrier has been sold at auction, Pepsico would have had a hard time getting its hands on a jet. Tthat would not have bothered Mr. Leonard, who more likely was interested in the difference in value between a functioning Harrier and the $700,000 he offered. However, if the court were able to discover the actual value of a non-operational jet, it would have awarded Mr. Leonard no damages for the breach.
Thursday, July 31, 2014
Imagine a world where specific performance of contracts is no longer a cause of action because the contracts themselves automatically execute the agreement of the parties. Or where escrow agents are replaced by rule- and software-driven technology. Imagine instantaneous recording of property records, easements and deeds. Imagine a world where an auto owner who is late on his payment will be locked out of his car. While these scenarios may seem to come from a futuristic fantasy world, innovations offered by the Bitcoin 2.0 generation of technology may create a world where these seeming marvels are an every-day occurrence, and technology renders some contract causes of action obsolete.
How could that be? Hinkes explains:
Bitcoin and other virtual currencies are powered by blockchain technology, which maintains and verifies all transactions in that virtual currency through a massive, publically available ledger. The transparency created by the blockchain eliminates the need for trusted third parties, like credit card processors or banks, to take part in these transactions. Because anyone can see the transactions, virtual currency cannot be transferred to more than one party, or “double spent,” which is a key feature that preserves the integrity of the blockchain system. This same blockchain technology can be purposed to facilitate, verify and enforce the terms of agreements automatically without the need for human interaction using what are termed “smart contracts.”
The blockchain, of course, cannot physically enforce a contract, or actually compel a person or entity to do anything. Instead, the blockchain can be used to enforce certain pre-determined rules that can move an asset from person to person by agreement. Ownership of goods could be associated with a specialized coin, which can be transferred between parties along with payment in a virtual currency system, or in a specialized implementation of blockchain technology.
Hinkes provides an example of how the technology can ensure performance:
Examining a simple real estate transaction can demonstrate how smart contracts could drastically alter the way business is conducted. Presently, Party A and Party B would enter into a contract that requires Party A to pay $200,000.00 to Party B in exchange for Party B agreeing to convey title to Party B’s condominium unit to Party A upon receipt of payment. If Party A pays the money, but Party B later refuses to convey title, Party A is required to hire an attorney to seek specific performance of that contract, or to obtain damages. The determination of the outcome will be made by a third party- a judge, jury, or arbitrator.
Using a smart contract, however, avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, Party A and Party B can agree to the same transaction, but structure it differently. In this scenario, Party A will agree to pay $200,000.00 worth of virtual currency to Party B, and Party B will agree to transmit the title to the condominium in a specialized type of coin on the blockchain. When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialized coin which signifies the title to the condominium at issue to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publically available record on the blockchain.
Friday, July 18, 2014
By Myanna Dellinger
A woman owes $20 to Kohl’s on a credit card. The debt collector allegedly started to “harass” the woman over the debt, calling her cell phone up to 22 times per week as early as 6 a.m. and occasionally after midnight. What would a reasonable customer do? Probably pay the debt, which the woman admits was only a “measly $20.” What did this woman do? Not to pay the small debt, telling the caller that they had “the wrong number,” and follow the great American tradition of filing suit, alleging violations of the 1991 Telephone Consumer Protection Act which, among other things, makes it illegal to call cell phones using auto dialers or prerecorded voices without the recipient’s consent.
Consumer protection rules also prohibit collection agencies from calling before 8 a.m. and after 9 p.m., calling multiple times during one day, leaving voicemail messages at a work number, or continuing to call a work phone number if told not to.
Last year, Bank of America agreed to pay $32 million to settle claims relating to allegations of illegally using robo-debt collectors. Discover also settled a claim alleging that they violated the rules by calling people’s cell phones without their consent. Just recently, a man’s recorded 20-minute call to Comcast pleading with their representative to cancel his cable and internet service went viral online.
The legal moral of these stories is that companies are not and should, of course, not be allowed to harass anyone to collect on debt owed to them or refuse to cancel services no longer wanted. However, what about companies such as Kohl’s who are presumably owed very large amounts of money although in the form of many small debts? Is it reasonable that customers such as the above can do what she admits doing, simply saying “screw it” to the company and in fact reverse the roles of debtor and creditor by hoping for a settlement via a lawsuit on a questionable background? Surely not.
I once owned a small company and can attest to the difficulty of collecting on debts even with extensive accurate documentation. The only way my debt collecting service or myself were able to collect many outstanding amounts was precisely to make repeat requests and reminders (although, of course, in a professional manner). As a matter of principle, customers should not be able to get away with simply choosing not to pay for services or products they have ordered, even if the outstanding amounts are small. If companies have followed the law, perhaps time has come for them to refuse settling to once again re-establish the roles of debtor and creditor. This, one could hope, would lead irresponsible consumers to live up to their financial obligations, as must the rest of society.
Tuesday, July 15, 2014
By Myanna Dellinger
The city of Berkeley, California, may become the first in the nation to require that gas stations affix warning stickers to gas pump handles warning consumers of the many recognized dangers of climate change. The stickers would read:
Global Warming Alert! Burning Gasoline Emits CO2
The City of Berkeley Cares About Global Warming
The state of California has determined that global warming caused by CO2 emissions poses a serious threat to the economic well-being, public health, natural resources, and the environment of California. To be part of the solution, go to www.sustainableberkeley.com
Consumers not only in California, but worldwide are familiar with similar warnings about the dangers of tobacco. The idea with the gas pump stickers is to “gently raise awareness” of the greenhouse gas impacts and the fact that consumers have alternatives. In their book “Nudge,” Richard Thaler and Cass Sunstein addressed the potential effectiveness of fairly subtly encouraging individual persons to act in societally or personally improved ways instead of using more negative enforcement methods such as telling people what not to do. Gas pump stickers would be an example of such a “nudge.”
But is that enough? World scientists have agreed that we must limit temperature increases to approximately 2° C to avoid dangerous climate change. The problem is that we are already headed towards a no less than 5° C increase. To stop this tend, we must reduce greenhouse gas emissions by 80% or more (targets vary somewhat) by 2050. Stickers with nudges are great, but in all likelihood, the world will need a whole lot more than that to reach the goal of curbing potentially catastrophic weather-related calamities.
Of course, the oil and gas industry opposes the Berkeley idea. The Western States Petroleum Association claimsthat the labels would “compel speech in violation of the 1st Amendment” and that “far less restrictive means exist to disseminate this information to the public without imposing onerous restrictions on businesses.” Why this type of sticker would, in contrast to, for example, labels on cigarette packaging, be so “onerous” and “restrictive” is not clear. Given the extent of available knowledge of climate change and its potential catastrophic effects on people and our natural environment, the industry is very much behind the curve in hoping for “less restrictive means.” More restrictive means than labels on dangerous products are arguably needed. Even more behind the curve is the Association’s claim that the information on the stickers is merely “opinion” that should not be “accorded the status of ‘fact’”. The Berkeley city attorney has vetted the potential ordinance and found the proposed language to be not only sufficiently narrow, but also to have been adopted by California citizens as the official policy of the state.
It seems that instead of facing reality, the oil and gas industry would rather keep consumers in the dark and force them to adopt or continue self-destructive habits. That didn’t work in the case of cigarettes and likely will not in this case either. We are a free country and can, within limits, buy and sell what we want to. But there are and should be restrictions. In this case, the “restriction” is actually not one at all; it is simply a matter of publishing facts. Surely, in America in 2014, no one can seriously dispute the desirability of doing that.
The Berkeley City Council is expected to address the issue in September.
Wednesday, July 9, 2014
By Myanna Dellinger
Recently, I blogged here on Aereo’s attempt to provide inexpensive TV programming to consumers by capturing and rebroadcasting cable TV operators’ products without paying the large fees charged by those operators. The technology is complex, but at bottom, Aereo argued that they were not breaking copyright laws because they merely enabled consumers to capture TV that was available over airwaves and via cloud technology anyway.
In the recent narrow 6-3 Supreme Court ruling, the Courts said that Aereo was “substantially similar” to a cable TV company since it sold a service that enabled subscribers to watch copyrighted TV programs shortly after they were broadcast by the cable companies. The Court found that “Aereo performs petitioners’ works publicly,” which violates the Copyright Act. The fact that Aereo uses slightly different technology than the cable companies does not make a “critical difference,” said the Court. Since the ruling, Aereo has suspended its operations and posted a message on its website that calls the Court’s outcome "a massive setback to consumers."
Whether or not the Supreme Court is legally right in this case is debatable, but it at least seems to be behind the technological curve. Of course the cable TV companies resisted Aereo’s services just as IBM did not predict the need for very many personal computers, Kodak failed to adjust quickly enough to the digital camera craze, music companies initially resisted digital files and online streaming of songs. But if companies want to survive in these technologically advanced times, it clearly does not make sense to resist technological changes. They should embrace not only technology, but also, in a free market, competition so long as, of course, no laws are violated. We also do not use typewriters anymore simply to protect the status quo of the companies that made them.
It is remarkable how much cable companies attempt to resist the fact that many, if not most, of us simply do not have time to watch hundreds of TV stations and thus should not have to buy huge, expensive package solutions. Not one of the traditional cable TV companies seem to consider the business advantage of offering more individualized solutions, which is technologically possible today. Instead, they are willing to waste money and time on resisting change all the way to the Supreme Court, not realizing that the change is coming whether or not they want it.
Surely an innovative company will soon be able to work its way around traditional cable companies’ strong position on this market while at the same time observing the Supreme Court’s markedly narrow holding. Some have already started doing so. Aereo itself promises that it is only “paus[ing] our operations temporarily as we consult with the court and map out our next steps.”
Friday, June 27, 2014
Several months back, I blogged about KlearGear's efforts to enforce a $3500 nondisparagement clause in their Terms of Sale against the Palmers, a Utah couple that had written a negative review about the company. It was a case so bizarre that I had a hard time believing that it was true and not some internet rumor. Even though the terms of sale most likely didn't apply to the Palmers --or to anyone given the improper presentation on the website-- KlearGear reported the couple's failure to pay the ridiculous $3500 fee to a collections agency which, in turn, hurt the couple's credit score. The couple, represented by Public Citizen, sued KlearGear and a court recently issued a default judgment against the company and awarded the couple $306,750 in compensatory and punitive damages. Consumerist has the full story here.
Congratulations to the Palmers and Scott Michelman from Public Citizen who has been representing the couple. And let this be a warning to other companies who might try to sneak a similar type of clause in their consumer contracts....
Thursday, June 26, 2014
Thanks to Miriam Cherry (left) for sharing this one:
I love this fact pattern: as reported in the National Law Journal, a student who received a D in contracts is suing the law school he attended, as well as his contracts professor, claiming that the professor deviated from the syllabus by counting quizzes towards the final grade. He claims $100,000 in harm because the D in contracts resulted in his suspension from the law school. He could not transfer to a different law school because he was ineligible for a certificate of good standing.
The case is a cautionary tale. It appears that the syllabus indicated that the quizzes would be optional. The professor then announced in class that the quizzes would actually count. The plaintiff claims to have been uanaware of the change or at least adversely affected by it. I say it is a cautionary tale because I sometimes make changes to my syllabus, usually in response to student feedback. I make sure to e-mail all students to make certain that everyone is aware of the changes and I obsessively remind students of the changes because I worry about precisely what happened here. It may well be that the defendant contracts prof did the same, although the National Law Journal article states that the change was evidenced by the handwritten notes of another student.
There is an interesting exchange on the merits of the case in the comments to the ABA Journal article on this subject. Apparently, there is some case law stating that a syllabus is a contract. For the most part, I think such a rule would benefit instructors. No student could complain about my attendance or no-technology policies because I could tell them (doing my best Comcast imitation) that by continuing to attend my course, they had agreed to my terms. But many of the commentators think that written contracts can never be orally modified. I don't think a syllabus is a contract because I don't think there are parties to a syllabus and I don't think there is intent to enter into legal relations. Things might be different if the syllabus identified itself as a contract and informed students of the manner of acceptance of its terms.
Friend of the blog, Peter Linzer (right), chimes in (comment #13) and succinctly dismisses this notion that a contract not within the Statute of Frauds cannot be orally modified. In any case, he thinks the claim is best understood as sounding in promissory estoppel, and plaintiff's claim fails because, in short, he cannot claim to have reasonably relied on a promise just because he missed class or did not pay attention when that promise was retracted.
Thursday, June 19, 2014
This week, I received notice that I am a member of the plaintiff class in Schlesinger, et. al. v. Ticketmaster. After ten years of litigation, the parties' proposed settlement is pending before the Superior Court in Los Angeles. If you purchased tickets through Ticketmaster between 1999 and 2013, you most likely are also a part of the class. The case alleges (in short) that Ticketmaster overcharged customers for fees. Ticketmaster claims that its processing fees were necessary for it to recover its costs, while plaintiffs allege that those fees were actually a means of generating profits for Ticketmaster. Shocking, no?
The terms of the settlement are actually pretty sweet. Class members will get a discount code that they can use on the Ticketmaster website entitling them to $2.25 off future Ticketmaster transactions. Class members get to use the code up to 17 times in the next four years. The value of the discount codes is about $386 million, and if the money is not used up, class members will be eligible for free ticket to Live Nation events. Ticketmaster's website will also now include disclosures about how it profits from its fees.
But then there's THIS:
Ticketmaster will pay $3 million to the University of California, Irvine School of Law to be used for the benefit of consumers like yourself. In addition to the benefits set forth above, Ticketmaster will also make a $3 million cy pres cash payment to the University of California, Irvine School of Law’s Consumer Law Clinic. The money will establish the Consumer Law Clinic as a permanent clinic, and it will be used to: (i) provide direct legal representations for clients with consumer law claims, (ii) advocate for consumers through policy work, and (iii) provide free educational tools (including online tutorials) to help consumers understand their rights, responsibilities, and remedies for online purchases.
The settlement strikes me as masterly. It gets a beneift to people who, if the allegations are true, were actually harmed by the alleged conduct, but it does so in a way that will generate more business for Ticketmaster going forward, and Ticketmaster may value that new business stream at around $386 million in any case. Ticketmaster has had to make changes to its website to eliminate the risk of deception going forward. And the world gets a consumer protection clinic funded the sort of business against whom consumers need to be protected.
Congratulations to the attorneys who came up with this settlement and to the UC Irvine Conumser Protection Clinic on its new endowment.
Tuesday, June 17, 2014
Over the past few years, more than a dozen 7-Eleven franchisees have sued the company claiming that it operated in bad faith by untruthfully accusing the franchisees of fraud and by strong-arming them to “voluntarily” surrender their franchise contracts based on such false accusations. The franchisees claim that the tactic, which is known in the franchise community as “churning,” is aimed at retaking stores in up-and-coming areas where the franchise can now be sold at a higher contractual value or from franchisees who are too outspoken against the company.
Franchisees split their gross profits evenly with 7-Eleven. The chain claims that it has hours of in-store covert footage showing franchisees voiding legitimate sales and not registering others to keep gross sales lower than the true numbers in order to pay smaller profits to 7-Eleven. Similarly, the chain uses undercover shoppers to spot-check the recording of transactions. This level of surveillance is uncommon among similar companies, says franchise attorney Barry Kurtz. A former corporate investigations supervisor for 7-Eleven calls the practice “predatory.”
Japanese-owned 7-Eleven asserts that a few of their franchisees are stealing and falsifying the sales records, thus depriving the company of its full share of the store profits. It maintains in court records that its investigations are thorough and lawful. It also complains that groups of franchisees often group together to create a “domino of lawsuits, pressuring the company to settle.”
It seems that a company installing hidden cameras to monitor not customers for safety reasons, but one’s own franchisees raises questions of whether or not these people had a reasonable expectation of privacy in their work-related efforts under these circumstances. If not, the issue certainly raises an ethical issue: once one has paid not insignificant franchise fees and continue to share profits with the franchisor at no less than 50-50%, should one really also expect to be monitored in hidden ways by one’s business partner, as the case is here? That has an inappropriate Big-Brother-is-Watching-You feel to it.
In the 1982 hit Dire Straits song Industrial Disease, Mark Knopfler sings that “Two men say they're, Jesus one of them must be wrong.” When it comes to this case, the accusations of “bogus” reasons asserted by the franchisees and returned fire in the form of theft accusations by 7-Eleven, somebody must not follow the contractual duty of good faith and fair dealings.
This case seems thus to be one that could appropriately be settled… oh, wait, the company apparently perceives that to be inappropriate pressure. Perhaps a fact finder will, then, have to resolve this case of mutual mud-slinging. In the meantime, 7-Eleven prides its “good, hardworking, independent franchisees” of being the “backbone of the 7-Eleven brand.” That is, until the company itself deems that not to be the case anymore, at which point in time it imposes a $100,000 “penalty” on those of its franchisees who do not volunteer to sign away their stores. The company does not reveal how it imagines that its hardworking, but probably not highly profitable, franchisees will be able to hand over $100,000 to a company to avoid further trouble.
Wednesday, June 11, 2014
- they limit workers' opportunities to seek better jobs within their profession;
- workers subject to non-competes change jobs less frequently and earn less money over time;
- states like California that refuse to enforce non-competes create a better environment for entrepreneurship; and
- low-level employees who are now being subjected to non-compete agreements have no bargaining power with which to challenge them and do not willingly consent to them.
There may be economic studies that dispute the first three bullet points. On the blog, we have tended to emphasize the fourth bullet point. The argument against that point is not empirical. Rather, those who support the enforcement of one-sided boilerplate terms contend that it is generally more efficient to enforce such terms than to expect that each agreement will be negotiated on an individual basis.
As Nancy Kim has argued, that might be okay, so long as the creators of boilerplate contracts are subject to a duty to draft those agreements reasonably. One interesting approach along similar lines is the solution proposed in Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014).
Tuesday, June 10, 2014
In August of last year, the WSJ reported that companies were easing up on executive noncompetes. Two days later, the WSJ reported that litigation over noncompetes was on the rise. As Jeremey Telman wrote here on the blog yesterday, the NY Times reported that noncompetes are everywhere. So which is it?
My guess is that noncompetes are increasingly widespread in non-executive contracts - the examples in the NY Times piece involved a 19-year old summer camp counselor, a pesticide sprayer and a hair stylist. At the same time, the popularity of the non-compete may be waning in executive contracts where they are less likely to have an in terrorem effect.
Here's a taste of the NY Times article:
Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals.
There are plenty of other examples of these restrictions popping up in new job categories: One Massachusetts man whose job largely involved spraying pesticides on lawns had to sign a two-year noncompete agreement. A textbook editor was required to sign a six-month pact.
A Boston University graduate was asked to sign a one-year noncompete pledge for an entry-level social media job at a marketing firm, while a college junior who took a summer internship at an electronics firm agreed to a yearlong ban.
“There has been a definite, significant rise in the use of noncompetes, and not only for high tech, not only for high-skilled knowledge positions,” said Orly Lobel, a professor at the University of San Diego School of Law, who wrote a recent book on noncompetes. “Talent Wants to be Free.” “They’ve become pervasive and standard in many service industries,” Ms. Lobel added.
Because of workers’ complaints and concerns that noncompete clauses may be holding back the Massachusetts economy, Gov. Deval Patrick has proposed legislation that would ban noncompetes in all but a few circumstances, and a committee in the Massachusetts House has passed a bill incorporating the governor’s proposals. To help assure that workers don’t walk off with trade secrets, the proposed legislation would adopt tough new rules in that area.
Monday, June 9, 2014
Today's New York Times reports on the extension of non-compete agreements to categories of employment not previously subject to them. This isn't really news, but it is nice to see the Times giving serious space to the issue, which I view as just another one-sided boilerplate term that employers are imposing on their employees. The difference here is that courts don't enforce non-competes if they overreach. However, the reality is that courts rarely get the opportunity to review non-competes, either because employees don't have the resources to fight them or because, as illustrated in the Times article, competitors are sometimes reluctant to risk a suit and so they do not hire people subject to non-competes, even if those non-competes might be unreasonable.
The over-the-top example with which the Times starts its story is about a woman whose job offer as a summer camp counselor was withdrawn because of a non-compete. She had worked three previous summers at a Linx-operated summer camp, and her terms of employment there included a non-compete of which she was (of course) unaware. Here is what Linx's founder had to say in defense of the non-compete:
“Our intellectual property is the training and fostering of our counselors, which makes for our unique environment,” he said. “It’s much like a tech firm with designers who developed chips: You don’t want those people walking out the door. It’s the same for us.” He called the restriction — no competing camps within 10 miles — very reasonable.
A few points. First, if your training and fostering of counselors creates a unique environment, then that training and fostering will not transfer when counselors switch to other camps that will presumably train and foster their counselors in other ways. If that's not the case, then there is nothing special or unique about the way you train and foster your counselors and thus no reason (except throwing up barriers to competition) not to allow counselors to work elsewhere.
Second, I just put my daughter on a bus for summer camp. I was a counselor at a summer camp for two years. Most camps now belong to a trade organization that sets down strict rules about safety and counselor training. It is unlikely that what Linx does is unique, and again, to the extent that it is unique, it is not transferable.
Third, a ten mile non-compete would be reasonable except that it is ten miles from any Linx camp, and Linx operates 30 camps in the area. So seen, the rule means that counselors who work at Linx camps cannot then work at any other camp in the region. There is no justification for this. If Linx has intellectual property to protect, it can do so, but Linx's founder's comparison of his camps to a tech firm strikes me as farfetched. I doubt that Linx has any intellectual property relating to its training of counselors. It is not as if a 19-year-old camp counselor comes to her new camp and impresses the people there with her knowledge from her past counseling experience. Each camp has its own traditions. If she says it is better to discard the leeches one pulls off the campers after a lake swim, they are not going to listen to her if the camp tradition is to move the leeches to the infirmary so that they can be "repurposed." What Linx is trying to do with this non-compete likely has less to do with protecting intellectual property than it does to establishing a stranglehold on the market of qualified camp counselors.
The Times story contrasts the employment situation in California, which does not enforce non-competes with that of Massachusetts, which does. But freedom of contract nad free enterprise still seem to have the upper hand in Massachusetts, as the following quote form the Times illustrates:
Michael Rodrigues, a Democratic state senator from Fall River, Mass., said the government should not be interfering in contractual matters like noncompetes. “It should be up to the individual employer and the individual potential employee among themselves,” he said. “They’re both adults.”
This is the typical nonsense underlying the enforcement of boilerplate. The camp counselor in the story was 19 years old, which means she was actually an infant when she signed the non-compete. But even if she could match the sophistication of the business that hired her, how does Mr. Rodrigues expect the negotiation to take place? In his mind it would go something like this:
Business: Here's the contract.
Employee: Okay, let me read it over and strike out all the terms that I don't like.
Business: Sure, take as long as you like and then we can negotiate over each term to which you object.
And here's the reality:
Business: Here's the contract.
Employee: Okay, let me read it over and strike out all the terms that I don't like.
Business: Well, actually, this is a form contract, and it's take it or leave it. Even if you wanted to object, I don't have any authority to change any of the terms. Either you sign this or you don't work here.
But even that is an exaggeration of the amount of consideration that goes in to the signing of employment contracts. They are not read at all and they are not expected to be read at all. And not reading them is the rational thing to do as potential employees have no bargaining power that they could deploy to challenge objectionable terms.
Sunday, May 18, 2014
By Myanna Dellinger
Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few.
Luckily, change may finally be on its way. The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology. The price? About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves.
How does this work? Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations. In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease. In other words, Aereo records show for its subscribers so that they don’t have to.
That sounds great, right? Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows). They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.
Of course, the great American tradition of filing suit was followed. Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.
Stay tuned for the outcome in this case…
Thursday, May 15, 2014
Today's New York Times features an article reporting on a 2012 study that indicates that consumers are better off being forced to buy bundled packages than they would be if they could choose to purchase only the cable channels they actually view. The argument seems to boil down to the fact that it costs the cable companies about the same to bring you four channels as it does for them to bring you 179 channels, so they are going to find a way to charge you the same regardless, and now you will miss out on watching channels that you only watch occasionally. Moreoever, the channels that are most in demand on a per-channel basis will now demand higher fees to make up for lost revenues from their sister stations that fewer people watch and which consequently cannot generate as much advertising revenue as they could under the bundled system.
Given that this story is based on one two-year old study and comes from Times correspondent Josh Barro, who also gives the thumbs up to Frontier Airlines for charging people extra to use overhead storage bins, I'm going to file this story provisionally under, "Wait, that can't be right," and see if any counterarguments turn up. The comments on the story indicate that some of the assumptions underlying the study and Barro's column could be questioned.
Wednesday, May 14, 2014
Yesterday's New York Times features a story about the costs associated with hotel boycotts when an organization has booked a hotel to host a conference or meeting long in advance. This issue ought to be a familiar to anyone who attended the 2011 annual AALS meeting in San Francisco, for which the conference hotel was a Hilton whose workers were on strike.
The article details the costs involved in cancellations. Often the organization is contractually obligated to pay hundreds of thousands of dollars to the hotel even if the conference ulimately takes place at a different venue. According to the Times, if the cancellation is on short notice, the organization is typically obligated to pay 90% of expected room costs and 90% of expected banqueting services. And then there are, of course, the costs of finding an alternative venue in proxity to the original choice on relatively short notice. Major conferences can be booked years in advance.
Sometimes it is possible to mitigate the harm -- by booking at a related hotel or by promising to return to the original hotel if the policy that causes offenese is revoked. The former is unlikely in cases where the problem is with the entity that owns the hotel. But it is more likely in cases like those that arose in connection with anti-immigrant legislation passed in Arizona. Organizations could punish the state by moving to related hotels in states that did not have similar legislation.
Monday, May 12, 2014
By Myanna Dellinger
The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg). Contracts ProfBlog first wrote about the case on April 3.
In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel. The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles. According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer. The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines. He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.
The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement. The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.
Really? Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!.. The opinion may at first blush read as such and have that somewhat chilling effect. However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.
The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.” These days, that may be hard to do. First, most airlines appear to have more or less similar frequent flyer programs. Second, what airline these days has a truly “good” reputation? Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.
One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable. I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes. A few times, I have had the good fortune to fly first or business class, but most times, I fly economy. Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.” - Guess what, the fares always had increased the times I asked for a change. Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta. I was told that it was impossible to change the ticket as it was “deeply discounted.” I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors. I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.” Remember that these days, airfare often has to be bought months ahead of time to get the best prices. In the meantime, life happens. Unexpected, yet important events come about. Changes to airline tickets should be realistically feasible, but are currently not on these conditions.
What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation. My mother is elderly and lives in Europe. I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services. Such is life in a globalized world for many of us. In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States. Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently. I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy. It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.
Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa. For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist. Two years ago, my father was passing and I was called to his deathbed. Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…). The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.
In the United States, “market forces” are said to dictate the pricing of airfare. In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours). Strange, since both markets are capitalist and offer freedom of contracting. Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States. A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms. Under heavy criticism, that plan was soon given up. In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies. Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.