Monday, April 20, 2015
The Texas Lawyer reports that Texas has amended a statute that allows plaintiffs to recover attorneys' fees in breach of contract claims. The statute originally allowed for recovery from an individual or a corporation. The amendment permits recovery from any non-government entity. As law Prof. Doug Moll (pictured) explains, the purpose of the policy is to encourage settlement and permit parties that could not pay their own attorneys' fees to sue for breach. "There is not a policy justification I can see for distinguishing between business forms in an attorney fee-shifting statute," Moll noted in defending the amendment. The bill faced some opposition from groups that would not want to exempt state entities and from others who wanted the law to allow either side, not just plaintiffs, to collect attorneys' fees. But lawmakers did not want to mess with Texas law.
From the Philadelphia Business Journal, we get yet another classic municipal contracting case. City meets company, city hires company to do some fancy, technical thing it can't do itself, city and company exchange allegations of breach of contract, and the parties settled for $4.8 million. In this case, the city is Baltimore and the company is Unisys.
As reported here in USA Today, one bi-product of the new nuclear deal with Iran is that Russia now feels free to send Iran S-300 missiles for use in its air-defense system. The missile deal has been suspended since 2010, and Iran had sued Russia in Geneva, alleging breach of contract and seeking $4 billion in damages. Iran now says that it will drop the case if Russia delivers the missiles.
Friday, April 3, 2015
In New Zealand, a ban on unfair terms in consumer contracts has taken effect and will, according to the Commerce Commission, will be enforced starting immediately. The regulation forms part of the 2013 Fair Trading Act. Australia introduced a similar ban in 2010.
The Consumer Organization “Consumer NZ” has launched its “Play Fair” campaign to increase awareness of the new law and related consumer issues. According to Consumer NZ, companies had been given plenty of notice of the upcoming ban and thus to review their contracts in order to remove unfair terms, but had to a large extent failed to do so.
The Act will apply to standard-form consumer contracts often used by electricity retailers, gyms, TV service providers and many others.
But what makes a term “unfair”? The Act defines a term as unfair if it would “would cause a significant imbalance between the rights of the company and the consumer, is not reasonably necessary to protect the legitimate interests of the company, [or] would cause detriment, whether financial or otherwise, to the consumer if it were to be applied or relied on.” The Act contains a list of terms that courts are likely to regard as unfair. This covers terms that would allow a company to unilaterally vary the terms of the contract, renew or terminate it, penalize consumers for breaching or terminating the contract, vary the price without giving consumers the right to terminate the contract, or vary the characteristics of the goods or services to be supplied.
After intense lobbying by the insurance industry, that industry was exempted from the ban.
Even though this Act is a consumer protection device, only the New Zealand Commerce Commission can, for now, enforce it. The contemplated fine for violations is $600,000.
In the USA, there are, of course, various statutory and common law protections against unfair terms such as those contained in the UCC as well as fraud protections. However, the deterrence effect of these does not seem effective in relation to at least some industries. Alternatively, perhaps the protections are not broad enough, sufficiently well-known, or sufficiently easy to enforce. Or perhaps people just give up and deal with other companies, or pay what they are asked to do by the companies.
I personally just spent no less than two hours chatting online with a major health care provider over their sudden allegation that a certain doctor I had used was “not in network” (with me thus allegedly owing a few thousand dollars to the insurance company) despite that particular provider being listed on the provider’s own website as “in network” and the doctor having confirmed this. Eventually and after numerous contractual and factual arguments, I was able to persuade provider that I was right. But how many others in my situation would simply give up and cave in to, as was the case, the provider’s repeated bootstrapping arguments that “their ultimate price was fair”?
Only two days later, I heard from a moving company that had agreed to move a car for me for $500 (and confirmed this twice) that the “price is actually $600.” When I told them no, it is not, they repeated their allegation that “we did not have a contract.” After telling them a few things about contract formation and modification principles and after declining listening to their attempted, time-consuming warnings about using other companies that were “scam artists,” I am now looking for a new contract another vendor.
Despite whatever legal protections we may officially have in this country against consumer fraud, it is still rampant. New Zealand’s government enforcement system is interesting, but time will tell if they have more success preventing consumer fraud than we do here.
Thursday, March 19, 2015
The problem with constructive consent, or substituting "manifestations of assent" for actual assent, in consumer contracts is that consumers often aren't aware what rights they've relinquished or what they have agreed to have done to them. Too bad for consumers, right? Well, it's also too bad for companies. Companies that rely on contracts to obtain consumer consent may find that what suffices for consent in contract law just won't cut it under other law that seeks actual consumer consent. Michaels, the arts and crafts store chain, found that out the hard way. They were recently hit with two class action lawsuits alleging that their hiring process violates the Fair Credit Reporting Act (FCRA). Job applications clicked an "I Agree" box which indicated "consent" to the terms and conditions which authorized a background check on the applicant. As this article in the National Law Review explains, the FCRA requires that job applicants receive "clear and conspicuous" standalone notice if they are seeking consent from applicants to obtaining a background report. A click box likely won't (and shouldn't) cut it. Contracts that everybody knows nobody reads shouldn't be considered sufficient notice. It would, of course, be much simpler if contractual consent were more aligned with actual human behavior....
Monday, February 23, 2015
2012 American Idol winner Phillip Phillips has lodged a “bombshell petition” with the California Labor Commissioner seeking to void contracts that Phillips now finds manipulative, oppressive, and “fatally conflicted.”
Before winning season 11 of “American Idol,” Phillips signed a series of contracts with show producer “19 Entertainment” governing such issues as his management, recording and merchandising activities. These contracts are allegedly very favorable to 19 Entertainment, for example allowing the company as much as a 40% share of any moneys made from endorsements, withholding information from Phillips about aspects of his contractual performance such as the name of his album before it was announced publicly, and requiring Phillips to (once) perform a live show once without compensation. 19 Entertainment has also lined up such gigs for Phillips as performing at a World Series Game, appearing on “Ellen,” the “Today Show,” and “The View.”
It is apparently not unusual for those on successful TV reality shows to renegotiate deals at some point once their career gets underway. Phillips claims that he too frequently requested this, but that 19 Entertainment turned his requests down. Can he really expect them to agree to post-hoc contract modifications?
Very arguably not. Under the notion of a pre-existing legal duty, a party simply cannot expect that the other party to a contract should have to or, much less, should be willing to change the contractually expected exchange of performances. This seems to be especially so in relation to TV reality shows where the entire risk/benefit analysis to the producer is that the “stars” may or may not hit it big. For hopeful stars, the same considerations apply: their contracts may lead them to fame and fortune… or not. That’s the whole idea behind these types of contracts. Of course, if industry practice is to change the contracts along the way and if both parties are willing to do so, they are free to do so. Otherwise, the standards for contractual modifications are probably the same for entertainment stars as for “regular” contractual parties.
Another issue in this case is whether an “agent” is a company or a physical person. Under the California Talent Agencies Act (“TAA”), only licensed “talent agents” can procure employment for clients. Phillips is attempting to apply the TAA to entertainment companies like 19 Entertainment. If Phillips is successful, the ramifications may be significant for the entertainment industry in which companies very often negotiate deals with performers without taking the TAA into account. In Citizens United v. Federal Election Commission, the United States Supreme Court famously gave personal rights to corporations, albeit only in the election context. Time will tell how California looks at the issue of corporate personhood and responsibilities in the entertainment context.
Adjudications under the controversial TAA are notoriously slow and could leave contractual parites in “limbo” for a very long time. Time and patience is not what Hollywood parties are known to have a lot of, so stay tuned for the outcome of this dispute.
Thursday, January 22, 2015
Texas A & M School of Law Contracts Prof Mark Burge (pictured) has posted a new article on SSRN:
Too Clever by Half: Reflections on Perception, Legitimacy, and Choice of Law Under Revised Article 1 of the Uniform Commercial Code
The Abstract is provided below, and the article is available for download here.
The overwhelmingly successful 2001 rewrite of Article 1 of the Uniform Commercial Code was accompanied by an overwhelming failure: proposed section 1 301 on contractual choice of law. As originally sent to the states, section 1-301 would have allowed non-consumer parties to a contract to select a governing law that bore no relation to their transaction. Proponents justifiably contended that such autonomy was consistent with emerging international norms and with the nature of contracts creating voluntary private obligations. Despite such arguments, the original version of section 1-301 was resoundingly rejected, gaining zero adoptions by the states before its withdrawal in 2008. This article contends that this political failure within the simultaneous success of Revised Article 1 was due in significant part to proposed section 1-301 invoking a negative visceral reaction from its American audience. This reaction occurred, not because of state or national parochialism, but because the concept of unbounded choice of law violated cultural symbols and myths about the nature of law. The American social and legal culture aspires to the ideal that “no one is above the law” and the related ideal of maintaining “a government of laws, and not of men.” Proposed section 1-301 transgressed those ideals by taking something labeled as “law” and turning on its head the expected norm of general applicability. Future proponents of law reform arising from internationalization would do well to consider the role of symbolic ideals in their targeted jurisdictions. While proposed section 1-301 made much practical sense, it failed in part because it did not—to an American audience—make sense in theory.
Tuesday, January 6, 2015
The U.S. Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. plans to create hurdles for lenders of payday and direct deposit advance loans. Both types of loans are short-term loans intended to help consumers through a rough patch. Payday loans are available at various storefront locations whereas direct deposit advance loans are for banks’ existing customers.
The problem with these types of loans is that they often trap people into cycles of mounting debt with annual interest rates of more than 500% and the need by some to take out an average of 10 loans a year amounting to a total of more than $3,000.
This is a crackdown on organizations that may be seen to pry on the already weak. But is it also a setback for financially underprivileged consumers? After all, if you need money now, you need money now. I think the new proposed regulations are a step in the right direction as consumer protection, but at the same time, more is needed. That “more” is a decent living wage so that so many people do not have to live not only paycheck to paycheck, but in fact pre-paycheck to pre-paycheck.
In his 2015 State of the Union address, President Obama is expected to highlight the nation’s economic growth and falling unemployment rate. However, as I have written here before, most people in the U.S. still do not see or feel the economic recovery. Perception is reality. Let’s hope that the economy soon improves so much that most people feel it.
Hat tip to Professor Miriam Cherry for alerting me to this story.
Monday, December 29, 2014
CNN reports that more and more restaurants are implementing no-tipping policies as, perhaps, a way of differentiating themselves from competitors. For example, one restaurant builds both tax and gratuity into menu prices, allegedly resulting in its servers averaging about $16.50 an hour. I have argued here before that it seems fair to me that the burden of compensating one’s employees should fall on the employer and not on, as here, restaurant patrons feverishly having to do math calculations at the end of a meal.
The law does not yet support employment contracts ensuring fair compensation of restaurant and hotel employees. For example, federal law requires employers to pay tipped workers only $2.13 an hour as long as the workers earn at least the federal minimum wage of $7.25 an hour. Talk about burden shifting…
But change seems to be on the way with private initiatives such as the restaurant no-tipping policy. In Los Angeles, the City Council has approved an ordinance that raises the minimum wage for workers in hotels of more than 300 rooms to $15.37 an hour. Of course, this will mainly affect large hotel chains, which predictably resisted the ordinance citing to issues such as the need to stay competitive price-wise and threatened circumventing the effect of the new law by laying off or not hiring workers to save money. Funny since many of these hotels have been making vast amounts of money for a long time on, arguably, overpriced hotel rooms attracting a clientele that does not seem overly concerned about paying extra for things that are free in most lower-priced hotels (think wifi) and thus probably could somehow internalize the cost of fairly compensating its blue-collar workers.
Much has been said about the “1%” problem and a fair living wage. No reason to repeat that here. However, it is thought-provoking that whereas the U.S. recession officially ended in June 2009 – five years ago - 57% of the U.S. population still believed that the nation was in a recession in March 2014.
Contracting and the economy is, of course, to a large extent a matter of seeking the best bargain one can obtain for oneself. But even in industrialized nations such as ours, there is something to be said for also ensuring that not only the strongest, most sophisticated and wealthiest reap the benefits of the improved economy. So here’s to hoping that more initiatives such as the ones mentioned above are taken in 2015. At the end of 2014, it’s still “the economy, s$%^*&.”
Saturday, December 13, 2014
In the UK, two sections of the Statute of Marlborough are facing repeal after being in force for 747 years. That’s right: the Statute was passed in 1267 and is thus older than the Magna Carta, which – although having been drafted in 1215 – was not copied into the statute rolls to officially become law until 1297. Two sections, however, still remain good law.
Why the suggested repeal? The two potentially obsolete sections address the ancient British power of “distress,” which allowed landlords to enter a debtor’s property and seize his/her goods. However, distress was abolished by new legislation this past March.
But don’t worry, our British colleagues are not about to do anything rash or unpopular. Although the Law Commission has proposed the repeal, a public consultation has been initiated to make sure that no one actually uses the two sections anymore.
Other newer, but nonetheless obsolete, laws are also being earmarked for removal. One is from the 1990s and was drafted to regulate the “increasing popularity of acid house parties.” Apparently, acid house parties are not in anymore and thus, the law is no longer needed.
In spite of the above, two sections of the Statute of Marlborough still remain in effect. One forbids individuals from seeking revenge for debt non-payment without being sanctioned to do so by the court (you gotta love the fact that in the UK, one can apparently get courts to approve one seeking revenge against one’s debtors). Another prevents tenants from ruining or selling off the landlord’s land. Fair enough…
Friday, October 17, 2014
The Alliance for Justice has released a documentary on forced arbitration called Lost in the Fine Print. It's very well-done, highly watchable (meaning your students will stay awake and off Facebook during a viewing), and educational. I recently screened the film during a special session for my Contracts and Advanced Contracts students. It's only about 20 or so minutes and afterward, we had a lively discussion about the pros and cons of arbitration. We discussed the different purposes of arbitration and the pros and cons of arbitration where the parties are both businesses and where one party is a business and the other a consumer. Many of the students had not heard about arbitration and didn't know what it was. Many of those who did know about arbitration didn't know about mandatory arbitration or how the process worked. Several were concerned about the due process aspects. They understood the benefits of arbitration for businesses, but also the problems created by lack of transparency in the process. I thought it was a very nice way to kick start a lively discussion about unconscionability, public policy concerns, economics and the effect of legislation on contract law/case law.
I think it's important for law students to know what arbitration is and it doesn't fit in easily into a typical contracts or civil procedure class so I'm afraid it often goes untaught. The website also has pointers and ideas on how to organize a screening and discussion questions.
Thursday, September 11, 2014
This is big - Governor Jerry Brown just signed a bill into law that would prohibit non-disparagement clauses in consumer contracts. The law states that contracts between a consumer and business for the "sale or lease of consumer goods or services" may not include a provision waiving a consumer's right to make statements about the business. The section is unwaivable. Furthermore, it is "unlawful" to threaten to enforce a non-disparagement clause. Civil penalties for violation of the law range from up to $2500 for a first violation to $5000 for each subsequent violations. (Violations seem to be based upon actions brought by a consumer or governmental authority, like a city attorney. They are not defined as each formation of a contract!) Furthermore, intentional or willful violations of the law subject the violator to a civil penalty of up to $10,000.
We've written about the dangers of non-disparagement clauses on this blog in the past. It's nice that one state (my home state, no less!) is taking some action. Will we see a California effect as other states follow the Golden State's lead? As I've said before, those non-disparagement clauses aren't such a good idea- now would be a good time for businesses to clean up their contracts.
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.
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.
Thursday, May 8, 2014
By Myanna Dellinger
On May 8, 2014, Vermont became the first state in the nation to require foods containing GMOs (genetically modified organisms) to be labeled accordingly. The law will undoubtedly face several legal challenges on both First Amendment and federal pre-emption grounds, especially since giant corporate interests are at stake.
Scientists and companies backing the use of GMOs claim that GMOs are safe for both humans and the environment. Skeptics assert that while that may be true in the short term, not enough data yet supports a finding that GMOs are also safe in the long term.
In the EU, all food products that make direct use of GMOs at any point in their production are subjected to labeling requirements, regardless of whether or not GM content is detectable in the end product. This has been the law for ten years.
GMO stakeholders in the United States apparently do not think that we as consumers have at least a right to know whether or not our foods contain GMOs. Why not, if the GMOs are as safe as is said? A host of other food ingredients have been listed on labels here over the years, although mainly on a voluntary basis. Think MSGs, sodium, wheat, peanuts, halal meat, and now gluten. This, of course, makes perfect sense. But why should GMOs be any different? If, for whatever reason, consumers prefer not to eat GMOs, shouldn’t we as paying, adult customers have as much a say as consumers preferring certain other products?
Of course, the difference here is (surprise!) one of profit-making: by labeling products “gluten free,” for example, manufacturers hope to make more money. If they had to announce that their products contain GMOs, companies fear losing money. So why don’t companies whose products don’t contain GMOs just volunteer to offer that information on the packaging? The explanation may lie in the pervasiveness of GMOs in the USA: the vast majority (60-80%, depending on the many sources trying to establish certainty in this area) of prepared foods contain GMOs just as more than 80% of major crops are grown from genetically modified seeds. Maybe GMOs are entirely safe in the long run as well, maybe not, but we should at least have a right to know what we eat, it seems.
Thursday, April 3, 2014
Supreme Court Finds Breach of the Implied Duty of Good Faith and Fair Dealing Claim Barred by the Airline Deregulation Act
We have been following this case, Northwest, Inc. v. Ginsberg, which departed from the Ninth Circuit and arrived in the Supreme Court, which heard oral argument in the case in December. The facts are amusing and all-too-familiar.
Mr. Ginsberg joined Northwest's frequent flyer program in 1999 and in 2005 he achieved "Platinum Elite" status. In June 2008, Northwest Airlines (Northwest) sent Mr. Ginsberg a letter revoking his Platinum Elite membership with Northwest for "abuse." This was done, Northwest alleged, in accordance with its contractual right to terminate membership for abuse, as determined in its sole discretion. The letter noted that Mr. Ginsberg has contacted Northwest 24 times over a roughly six-month period to report, among other things, "9 incidents of your bag arriving late at the luggage carousel. . . ."
At this point, we interrupt this blog post for a bit of a rant. . . .
Wait a minute! Northwest compensated Mr. Ginsberg with travel vouchers, points and $491 in cash reimbursements, so one might think that Mr. Ginsberg's complaints were, at least in part, justified. So, over the course of six months, his bags were delayed or lost nine times, and Northwest accuses him of abuse. That, I think Mr. Ginsberg would agree, takes chutzpah!
We now return to our more sober summary of the case . . . .
The issue before the Supreme Court was whether Mr. Ginsberg's claim that Northwest had vioalted the implied covenant of good faith and fair dealing was preempted under the Airline Deregulation Act (the Act). The Act includes a preemption provisions which provides that . . .
a State, political subdivision of a State, or political authority of at least 2 States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation under this subpart.
The Act thus should preclude claims related to a price, route, or service. The Court had twice previously struck down state statutory schemes that regulated practices in the arline industry, including practices related to frequent flyer programs. The central issue before the Supreme Court was whether Northwest had voluntarily taken on additional contratual duties pursuant to its frequent flyer program. The Supreme Court, unanimously reversing the Ninth Circuit, held that it had not. Because the implied duty of good faith and fair dealing is implied, the Court held, it was imposed upon Northwest by the state and thus constituted a form of state regulation preempted by the Act.
The Court suggested that Ginsberg, or at least other, similarly situated plaintiffs, are not without alternative remedies. If Northwest really is abusing its discretion in administering its frequent flyer program, the Court suggests, airline passengers can choose to join some other airline's frequent flyer program (assuming there are significant differences and Mr. Ginsberg lives near an airport serviced by multiple airlines), and the Department of Transportation has authority to investigate and sanction the airline. Finally, the Court noted that while Mr. Ginsberg's good faith and fair dealing claim was pre-empted, his abandoned breach of contract claim might not have been.
Monday, March 3, 2014
Contracts between credit card holders and card issuers typically provide for late fees and “overlimit fees” (for making purchases in excess of the card limits) ranging from $15 to $40. Since these fees are said to greatly exceed the harm that the issuers suffer when their customers make late payments or exceed their credit limits, do they violate the Due Process Clause of the Constitution?
They do not, according to the United States Court of Appeals for the Ninth Circuit (In re Late Fee & Over-Limit Fee Litig, No. 08-1521 (9th Cir. 2014)). Although such fees may even be purely punitive, the court pointed out that the due process analyses of BMW of North America v. Gore and State Farm Mut. Auto Ins. Co. v. Campbell are not applicable in contractual contexts, but only to jury-awarded fees. In Gore, the Court held that the proper analysis for whether punitive damages are excessive is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” and finding the award of punitive damages 500 times greater than the damage caused to “raise a suspicious judicial eyebrow”. 517 U.S. 559, 581, 583 (1996). The State Farm Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages … will satisfy due process. 538 U.S. 408, 425 (2003).
Contractual penalty clauses are also not a violation of statutory law. Both the National Bank Act of 1864 and the Depository Institutions Deregulation and Monetary Control Act provide that banks may charge their customers “interest at the rate allowed by the laws of the State … where the bank is located.” 12 U.S.C. s 85, 12 U.S.C. S. 1831(d). “Interest” covers more than the annual percentage rates charged to any carried balances, it also covers late fees and overlimit fees. 12 C.F.R. 7.4001(a). Thus, as long as the fees are legal in the banks’ home states, the banks are permitted to charge them.
Freedom of contracting prevailed in this case. But should it? Because the types and sizes of fees charged by credit card issuers are mostly uniform from institution to institution, consumers do not really have a true, free choice in contracting. As J. Reinhardt said in his concurrence, consumers frequently _ have to_ enter into adhesion contracts such as the ones at issue to obtain many of the practical necessities of modern life as, for example, credit cards, cell phones, utilities and regular consumer goods. Because most providers of such goods and services also use very similar, if not identical, contract clauses, there really isn’t much real “freedom of contracting” in these cases. So, should the Due Process clause apply to contractual penalty clauses as well? These clauses often reflect a compensatory to penalty damages ratio higher than 1:100, much higher than the limit set forth by the Supreme Court in the torts context. According to J. Reinhardt, it should: The constitutional principles limiting punishments in civil cases when that punishment vastly exceeds the harm done by the party being punished may well occur even when the penalties imposed are foreseeable, as with contracts. Said Reinhardt: “A grossly disproportionate punishment is a grossly disproportionate punishment, regardless of whether the breaching party has previously ‘acquiesced’ to such punishment.”
Time may soon come for the Supreme Court to address this issue, especially given the ease with which companies can and do find out about each other’s practices and match each other’s terms. Many companies even actively encourage their customers to look for better prices elsewhere via “price guarantees” and promise various incentives or at least matched, lower prices if customers notify the companies. Such competition is arguably good for consumers and allow them at least some bargaining powers. But as shown, in other respects, consumers have very little real choice and no bargaining power. In the credit card context, it may be said that the best course of action would be for consumers to make sure that they do not exceed their credit limits and make their payments on time. However, in a tough economy with high unemployment, there are people for whom that is simply not feasible. As the law currently stands in the Ninth Circuit, that leaves companies free to virtually punish their own customers, a slightly odd result given the fact that contracts law is not meant to be punitive in nature, but rather to be a resource allocation vehicle in cases where financial harm is actually suffered.
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
Tuesday, January 21, 2014
After a night on the town, you decide to hire not a traditional taxi company, but rather a new and similar service provider that uses third-party private drivers operating their individually owned, unmarked cars and smart application payment technology. The app says, “Gratuity is included.” Would you expect the tips you give to go in full to the drivers or for the tips to be shared with the taxi-like company? Probably the former, although tipping tactics and expectations seem to be changing.
The question of whether the drivers in the above situation have a viable claim to the full amount of the tips will soon be resolved in California in O’Connor v. Uber Techs, 2013 BL 338258 (N.D. Cal. Dec. 5, 2013). After determining that no implied-in-fact contract can be said to exist between the drivers and the taxi-like company “Uber,” the court so far determined that Uber and its passengers may have entered into an implied agreement regarding the tips from which the drivers were ultimately intended to benefit as third parties to the contract between Uber and passengers.
In the USA, tipping is widely considered a fair way for service personnel to earn a more decent living than if they had to rely on base salaries. This intersects with the current debate about whether the federal minimum wage should be increased. According to recent CNN TV news, if salaries reflected the productivity levels of United States workers, the minimum salary should be $28/hr. It is currently $7.25.
But what about consumers? Tipping seems to rising more rapidly than both salaries and inflation rates in general. Not long ago (ten years or so), tipping 10% in restaurants was considered the norm, at least in California and parts of the Western USA. Now, food servers, the drivers in the above case and undoubtedly others expect 20%; a 100% increase in ten years or so. Many Los Angeles restaurants have begun to automatically add this 20% gratuity to their guest checks (some still leaving an additional line open for tips…). In comparison, the average inflation rage was 2.5% per year over the past ten years. During the 12-month period ending November 2013, inflation was 1.2%. Of course, salaries may be a more accurate yardstick. According to the Social Security Administration’s Average Wage Index, salaries increased by approximately 33% over the past ten years (approx. 3% from 2011 to 2012).
To be sure, service personnel and other workers deserve a decent income for their efforts in a wealthy, industrialized nation such as the USA. The question is whether the burden of this should be placed on consumers in the form of more or less “hidden” costs such as tax and tips in somewhat uncertain amounts or whether the employers should be expected to more openly list the true bottom-line costs of their services as is the case in other nations. A better route may be to increase the federal minimum salary to the much-discussed (e.g., here) “living wage.” At a minimum, it would seem that all tips given should go to the workers and not be a mere way for companies to award themselves more money.
Assistant Professor of Law
Western State College of Law
Monday, December 16, 2013
Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructs the Consumer Financial Protection Bureau (the “Bureau”) to study the use of pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic. This document, dated December 12, 2013, presents preliminary results reached in the Bureau’s study to date.
Below are excerpts, with emphasis added, from the Executive Summary of the Bureau's preliminary findings:
- In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to such clauses. (In 2009 and 2010 several issuers entered into private settlements in which they agreed to remove the arbitration clauses from their credit card consumer contracts for a defined period. If those issuers still included such clauses, some 94% of credit card loans outstanding would now be subject to arbitration.)
- In the checking account market, larger banks tend to include arbitration clauses in their consumer checking contracts, while mid-sized and smaller banks and credit unions do not. We estimate that in the checking account market, which is less concentrated than the credit card market, around 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- In our [General Purpose Reloadable] GPR prepaid card sample, for which data are more limited than for our credit and checking account samples, arbitration clauses are included across the market. Some 81% of the cards studied, and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts.
- Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis. Around 90% of the contracts with arbitration clauses— covering close to 100% of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration—include such no-class arbitration provisions. . . .
- The AAA is the predominant administrator for consumer arbitration about credit cards, checking accounts, and GPR prepaid cards.
- From 2010 through 2012, there was an annual average of 415 individual AAA cases filed for four product markets combined: credit card, checking account, payday loans, and prepaid cards.23 The annual average was 344 credit card arbitration filings, 24 checking account arbitration filings, 46 payday loan arbitration filings, and one prepaid arbitration filing. These numbers do not indicate the number of cases in which the filing was “perfected” and the matter proceeded to arbitration. . . .
- Not all these arbitration filings were made by consumers. For the three product markets combined, the standard AAA “claim form” records consumers filing an average of under 300 cases each year. The remaining filings are recorded as mutually submitted or made by companies.
- From 2010 through 2012, around half the credit card AAA arbitration filings were debt collection disputes—proceedings initiated by companies to collect debt, initiated by consumers to challenge the company’s claims in court for debt collection, or mutual submissions to the same effect. More than a quarter of these debt collection arbitrations also included non-debt consumer claims. . . .
- In contrast, very few of the checking account and payday loan AAA arbitration filings from 2010 through 2012 were debt collection arbitrations.
- From 2010 through 2012, a slight majority (53%) of consumers were represented by counsel in the AAA arbitrations that we reviewed for these three product markets. For non-debt collection disputes, 61% of consumers had a lawyer at some point in the arbitration proceeding. For debt collection arbitrations, 42% of consumers had legal representation at some point in the proceeding. Companies were almost always represented by outside or in-house counsel in both debt collection and non-collection arbitrations.
- From 2010 through 2012, almost no AAA arbitration filings for these three product markets had under $1,000 at issue. . . . There were an annual average of seven arbitrations per year filed with the AAA that concerned disputed debt amounts that were at or below $1,000.
- From 2010 through 2012, for arbitration filings before the AAA involving these three products, the average alleged debt amount in dispute was $13,418. The median alleged debt amount in dispute was $8,641. Looking only at filings that did not identify a disputed debt amount, and excluding one high-dollar outlier, the average amount at issue was $38,726, and the median $11,805.
- Most arbitration clauses that we reviewed contain small claims court carve-outs. In 2012, consumers in jurisdictions with a combined total population of around 85 million filed fewer than 870 small claims court credit card claims—and most likely far fewer than that—against issuers representing around 80% of credit card loans outstanding.
- Credit card issuers are significantly more likely to sue consumers in small claims court than the other way around. In the two top-30 counties by population in which small claims court complaints can be directly reviewed by electronic means, there were more than 2,200 suits by issuers against consumers in small claims court and seven suits by consumers against those issuers. . . .
Monday, October 14, 2013
Nancy Kim (pictured) , author of the recent book Wrap Contracts: Foundations and Ramifications and contributing editor to the ContractsProf Blog (the official blog of the AALS Section on Contracts), has published an op-ed in the San Diego Union Tribune California's new "eraser" law.
Nancy's post clarifies what the bill accomplishes and what it doesn't and makes a succinct argument for the law's importnace.
You can read it here.
Wednesday, April 24, 2013
The Sacramento Bee reports that a California legislative committee (if you really want to know, it’s called the Assembly Arts, Entertainment, Sports, Tourism and Internet Media committee) “gutted” a bill that would have illegalized “paperless” tickets. Paperless tickets are more (or is it less?) than what they sound like – they are a way for companies like Ticketmaster to sell seats without permitting purchasers to resell those seats. Purchasers must show their ID and a credit card to attend the show. The bill pitted two companies, Live Nation (owner of Ticketmaster) and StubHub, against each other.
This bill and the related issues should be of interest to contracts profs because it highlights the same license v. sale issues that have cropped up in other market sectors where digital technologies have transformed the business landscape. Like software vendors and book publishers, Ticketmaster is concerned about the effect of technology and the secondary marketplace on its business. Vendors, using automated software (“bots”), can quickly purchase large numbers of tickets and then turn around and sell these tickets in the secondary marketplace (i.e. at StubHub) at much higher prices. Both companies argue that the other is hurting consumers. Ticketmaster argues that scalpers hurt fans, who are unable to buy tickets at the original price and must buy them at inflated prices. Stub Hub, on the other hand, argues that paperless tickets hurt consumers because they are unable to resell or transfer their tickets.
The underlying question seems to be whether a ticket is a license to enter a venue or is it more akin to a property right that can be transferred. Or rather, should a ticket be permitted to be only a license or only a property right that can be transferred? The proposed pre-gutted legislation would have taken that decision out of the hands of the parties (the seller and the purchaser) and mandated that it be a property right that could be transferred. In other words, it would have made a ticket something that could not be a contract. Of course, given the adhesive nature of these types of sales, a ticket as contract would end up being like any other mass consumer contract – meaning the terms would be unilaterally imposed by the seller. In this case, that would mean the ticket would be a license and not a sale of a property right.
It’s not just the media giants who are feeling the disruptive effect of technology - we contracts profs feel it, too.
[NB: My original post confused StubHub with the vendors who use the site. StubHub is the secondary marketplace where tickets can be resold. Thanks to Eric Goldman for pointing that out].