Tuesday, July 11, 2017
Will an associate who makes a $1.5 billion (yes, with a “b”) clerical error still make partner?... Do law firms owe a duty of care to clients of opposing party’s law firm? The answers, as you can guess: very likely not and no! The case goes like this:
General Motors (“GM”), represented by law firm Mayer Brown, takes out a 2001 loan for $300 million and a 2006 loan for $1.5 billion secured by different real estate properties. JP Morgan acts as agent for the two different groups of lenders. GM pays off the first loan, but encounters severe financial troubles and enters into bankruptcy proceedings before paying off the big 2006 loan. GM continues to follow the terms on that loan, and the bankruptcy court also treats the lenders as if they were still secured.
What’s the problem with this, you ask? When Mayer Brown prepared and filed the UCC-3 termination statement for the 2001 loan, the firm also released the 2006 loan by mistake. The lenders of that were thus not secured under the law any longer even though both GM itself and the bankruptcy court treated them as such. The big loan was simply been converted from a secured transaction into a lending contract. Yikes.
How did this happen? The following is too good to be true, if you are in an irritable or easily amused summer mode, so I cite from the case:
“The plaintiffs' complaint offers the following autopsy of the error: a senior Mayer Brown partner was responsible for supervising the work on the closing. He instructed an associate to prepare the closing checklist. The associate, in turn, relied on a paralegal to identify the relevant UCC-1 financing statements. As a cost-saving measure, the paralegal used an old UCC search on General Motors and included the 2006 Term Loan. Another paralegal tasked with preparing the termination statements recognized that the 2006 Term Loan had been included by mistake and informed the associate of the problem, but he ignored the discrepancy. The erroneous checklist and documents were then sent to [JP Morgan’s law firm] Simpson Thacher for review. The supervising partner at Mayer Brown never caught the error, nor did anyone else. With JP Morgan's authorization, the 2001 Synthetic Lease payoff closed on October 30, 2008 … We must also note that, when provided an opportunity to review the Mayer Brown drafts, a Simpson Thacher attorney replied, ‘Nice job on the documents.’”
The lenders represented by JP Morgan sued not Simpson Thacher or JP Morgan, but… Mayer Brown; counsel for the opposing party, arguing that the law firm owed a duty to them not because Mayer Brown represented them or their agent, JP Morgan, in connection with these loans, but rather because, plaintiffs argued, Mayer Brown owed JP Morgan – not the plaintiffs directly – a duty of care as a client in other unrelated matters! As the court said, an astonishing claim.
A law firm or a party directly must always prepare a first draft of any document. “By preparing a first draft, an attorney does not undertake a professional duty to all other parties in the deal.” In sum, said the court, “there is no exception to the Pelham primary purpose rule, and there is no plausible allegation that Mayer Brown voluntarily assumed a duty to plaintiffs by providing drafts to Simpson Thacher for review.”
The case is Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, States District Court for the Northern District of Illinois, Eastern Division, Case No. 15 C 6742
Friday, June 30, 2017
Denise Daniels of Minnesota, who says that she has worked with children’s social and emotional development for more than four decades, claims that she pitched her idea for what became the 2015 animated box office success "The Moodsters" to Disney-owned Pixar a number of times between 2005 and 2009 with the understanding that she and her team would be compensated if Disney used her idea.
Ms. Daniels just filed a complaint in federal court in the Central District of Los Angeles stating that she had an implied-in-fact contract that obligated Disney to compensate and credit her if the studio used her idea. Ms Daniels also argues that "The Moodsters" would have featured five color-coded, anthropomorphic characters, each representing a single emotion: happiness, sadness, anger, love and fear. The characters would reside in an abstract world within a child. The movie "Inside Out" features five characters based on the emotions joy, sadness, anger, fear and disgust. The characters reside in the mind of a young girl named Riley, who must learn to adjust to a new life when her family moves to San Francisco.
In March, Disney was also sued over 2016's "Zootopia." In that lawsuit, a screenwriter claimed that the studio stole his original idea and copied his designs for the movie's animal characters.
So, how would you advise your students to best take care of the interests of clients seeking advise in pitching ideas to major entertainment companies? “Get a contract in writing ahead of time” is easier said than done. If you really have a good idea for a movie or the like, how do you even get to talk to a studio about it without at least revealing something about your idea? - And if you do, might it then not already be too late? For example, it seems odd to seek to discuss potential ideas with an entertainment company simply saying “I have a good idea, but first, let’s talk legal details.” Wouldn’t the company just tell you to get lost, if you even got a response at all? On the other hand, so many of these suits seem to take place that at least some sort of preliminary writing seems to be a good idea for both parties.
In 2004, Disney lost a case over profits for ABC’s “Who Wants to be a Millionaire,” which resulted in a $320-million verdict against Disney in favor of a British licensing company.
Is Disney just too risk-willing in these types of cases, or are private individuals people egged on by the chance of winning some “big money”? It’s hard to tell. Asked why Daniels waited two years before filing her lawsuit against Disney, Daniels’ attorney says “you don’t file these cases lightly” and that such time gaps are not unusual in these types of cases.
Thus, the moral of this story might simply be: get something in writing and if anything goes wrong, take legal action as soon as possible to be on the safest side possible.
Friday, May 26, 2017
Earlier this week, Stacey Lantagne wrote a post about Ancestry.com’s Terms and Conditions. Among other things, it gives Ancestry.com a perpetual license to use its customers' DNA for…well, pretty much anything. Attorney Joel Winston wrote about the terms here and his post quickly went viral. The social media backlash was fast and furious – and Ancestry.com now claims that it didn’t really mean what it said in its terms. They also say that they will take out that provision (although as of this writing, it is still there). It seems that nobody reads wrap contracts – even the companies that draft them.
This is another example of how consumers often do care what’s in the TOS, even if they don’t read them. Not reading (and so not knowing what’s in the terms) is not the same as not caring that the terms apply. It’s also another encouraging example of a company responding to market demand for different contract terms. Shades of General Mills….
Sunday, May 21, 2017
We all know the importance of “getting it in writing.” At the same time, we also all know how hard it can be to actually implement that, especially when it comes to a party you trust. An appellate case out of California shows how even simple emails could probably have saved the parties a lot of agony, especially in a non-commercial context where tempers may flare.
In 2010, Richard Grace bought a classic 1967 VW bus from Drew Colome, who also specialized in restoring older vehicles to show standards. Indeed, Grace stated to Colome that he wanted the bus to be restored to become an “excellent to outstanding” bus that he could show or, no less, “the best bus in the world” (yes, alarm bells should be going off by now by anyone dealing with such a purchaser). Grace also sent an email to Colome asking for the “BEST original and correct bus in the world,” stating that he would like to enter the bus in “two or three of the BEST [car] shows.” Colome understood that to mean a car show in Irvine, California, where show cars are allowed to feature non-original car parts. Discussions had also included the Pebble Beach car show in which only original car parts can be used. Restoring a car to Pebble Beach standards can take three years or more. Colome testified that since Grace already knew a great deal about classic cars and car shows, he (Grace) would also understand the timelines involved in the restoration project.
A year and half into the project, Grace again stated in an email to Colome that Grace wanted “THE BEST” and did not want to rush the job. At that point in time, Grace apparently thought that the final restoration would take no more than two further months. Colome testified that it would take at least seven months longer. Half a year later, Grace told Colome that he wanted “to terminate the project” and would take the bus “regardless of where we [are] or what condition the bus was in.” At some point in time, Grace also mentioned the fact that he had hoped to have the restored bus in time for his birthday.
Colome then delivered the bus to Grace in a winery parking lot (yes, really), believing that Grace would not try to drive the bus and later testifying that the bus was in fact “ not safe to drive.” Grace did, however, drive the bus, but found it difficult to steer and the bakes to not function properly. Grace subsequently paid another mechanic $12,500 to put the bus in working condition and sold it for $98,000.
Grace then filed suit against Colome for breach of oral contract. Grace alleged that Colome breached the parties' contract by "[f]ailing to restore [Grace's] 1967 21-Window VW Bus to show condition." After a bench trial, the court entered judgment in favor of Colome on all issues. Among other things, the court found that Grace failed to establish that he contracted with Colome in June 2010 for the restoration of the bus to the standards of Pebble Beach, that Colome did not breach the agreement because Grace prevented his performance when he retrieved the bus in August 2012, that Grace did not reasonably communicate his intention to drive the bus upon retrieval, and that Grace failed to establish that Colome's failure to complete the restoration of the bus was a breach of reasonable expectations under the contract because no time for completion was specified in the contract and a reasonable time would have been approximately three years.
With this case, you have to ask yourself why Colome did not, especially with a buyer like this, make sure to at least send an email stating the details of the deal as he understood them. A simple “reply” with some details and questions as to the expectations of the buyer would have worked wonders, it seems. Of course, Colome won the case anyway, but is it really reasonable, as here, to expect that a private buyer has all the knowledge about timelines, etc., involved in a specialty project such as this when you consider the fact that Colome was the expert who had restored between 90 and 120 VW buses? Why in the world would the parties not have gotten this in some sort of writing? Why would Colome, with a seemingly hot-tempered buyer like this, not have communicated more details in a deal such as this in at least an email? This seems unusual, especially given the fact that car mechanics always seem to issue “estimates” or “contracts” when I take my cars in for repair.
It seems that there were several miscommunications of intent and misunderstandings in this case. Of course, the case is more unique than a regular car repair job because of the special purposes of the car. On balance, the outcome of the case does seem fair both legally and factually. But it does, I think, raise some questions about the reasonable expectations of parties and why the parol evidence rule was not raised given the long time horizon of this job (three years). At a minimum, it again shows the importance of “getting it in writing,” even if that “just” takes the form of emailed communications.
Sunday, March 19, 2017
In case you have not yet heard about the recent First Circuit Court of Appeals case discussing the legal importance of a comma, here goes: A Maine statute lists the following activities as not counting for overtime pay:
The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.
Does that mean that drivers can get overtime because driving does count for overtime since “packing” covers both “shipment or distribution”? Or should the sentence be read as “packing for storage” as one thing and “distribution” another, thus precluding the drivers from earning overtime pay?
Circuit judge David J. Barron concluded that “the exemption’s scope is actually not so clear in this regard. And because, under Maine law, ambiguities in the state’s wage and hour laws must be construed liberally in order to accomplish their remedial purpose, we adopt the drivers’ narrower reading of the exemption.”
So, commas still matter. Consider too how “I love my parents, Lady Gaga and Humpty Dumpty” and “I love my parents, Lady Gaga, and Humpty Dumpty” are a little different. Language aficionados take note! Precise drafting still matters. Was this an outcome-oriented holding? Perhaps. But if so, a holding in favor of workers over a company in a case of interpretive doubt may, in today’s increasingly tough economy for middle and low-income earners, not be such a bad idea from a public policy point of view.
The case is O’Connor v. Oakhurst Dairy, No. 16-1901 (1st Cir. 2017).
Friday, March 17, 2017
A group of plaintiffs suffering from glaucoma bought eye drops manufactured by six pharmaceutical companies. They claimed that the eye drops were unnecessarily large (no, let’s not go there this time): all drops sold by these manufacturers were larger than 16 microliters (equal to 10% of a tablespoon). The plaintiffs claim that unnecessarily large eye drops are wasteful because the human eye can only contain so much fluid. Anything in excess of that will simply overflow and be wasted, which is a waste of money.
The amount of fluid that the human eye can contain without overflowing varies from person to person. The defendants asserted that the amount often exceeds 16 microliters. Further, the active ingredient in each drop is only about 1% of the drop. The smaller the drop, the less therapeutic effect, they claimed (without explaining why, for example, two drops could not simply be applied by those with larger eyes…). Defendants also claimed that larger drops helps those with unsteady hands, such as the elderly, because “the smaller the drop, the likelier they are to miss.” Now, at least that makes sense… (not!).
As was said on the listserv, this is arguably not even a contract law case at all, especially because no allegation of misrepresentation, breach of contract, or the like was asserted. In the words of opinion author Judge Posner, this is merely a case of “you can do better by us” asserted by plaintiff consumers. “That is all they are arguing.” However, said Posner, “[o]ne cannot bring a suit in federal court without pleading that one has been injured in some way (physically, financially—whatever) by the defendant. That's what's required for standing. The fact that a seller does not sell the product that you want, or at the price you'd like to pay, is not an actionable injury; it is just a regret or disappointment—which is all we have here, the class having failed to allege ‘an invasion of a legally protected interest.’”
So, what do we have here? No contracts violation, perhaps. Consumer fraud under the respective state acts? Apparently not. What we seem to have, however, is another instance of Corporate America taking advantage of consumers with the consent of even the federal judicial appellate system. Of course any product that is larger than what is needed per “portion” is wasteful and thus arguably taking unnecessary advantage of consumers. Whether or not that can be framed as an actionable legal issue in our system is another story altogether, sadly. Even worse: companies do apparently not want to do right by their own customers, in this case often elderly folks going blind!
This is, of course, not the only instance of needless and blatant consumer fraud (for that is what these instances are, at least in the common, if not the legal, sense of the word). More examples:
- When you buy lotion, it is next to impossible to get the last, oh, 20% out of those pump-type containers unless you unscrew the pump and pour out the lotion.
- Almost all perishable food items are sold in much larger portions than what is needed for most of us – think cottage cheese, yoghurt, lunch meats (OK, apart from those itty bitty bags, those are great), milk, you name it. People needing more could just buy two items! (That’s how it’s done with great success in many European countries, but heaven forbid that we ever learn anything from other countries.) The rest of us often have to throw out much of the food as it doesn’t last that long.
- How about packaging? Huge bags of chips that are only 1/2 full? Same for cereal boxes? Sun screen spray bottles that are also only 1/3 full?
- OK, I’m in a crappy mood about companies and organizations today, I admit. Of course the capitalist model is the best one, etc. etc. But it would be nice if more companies would focus more on decency, less waste in packaging and eventual product usage, and consumer needs. This eye drop story really is one of forcing consumers to waste product and thus money. Let’s just call a spade a spade.
On an unrelated note: I apologize for being so inactive on this blog for so long. I have had a disappointing contractual work experience that has drained me and continues to do so, frankly. I am trying the hardest I can to find interesting cases to blog about. Should you hear of any, I’d be delighted to be notified. I also invite guest bloggers to blog here with us. As always: thanks to my co-bloggers for their hard and excellent work!
The case described above is Eike, et al. v. Allergan, et al., No. 16-3334 (Seventh Cir. 2017).
Hat tip to my colleagues on the Contracts listserv for discussing this case.
Friday, February 3, 2017
In Holtz v. JPMorgan Chase Bank (the “Bank”), Judge Easterbook recently held that litigants may pursue state law contracts or fiduciary duty claims in an individualized manner, but not in the form of class action law suits under the Securities Litigation Uniform Standards Act of 1998 (“the Litigation Act,” 15 U.S.C. § 78bb (F)).
In the case, the plaintiffs alleged that the Bank gave its employees incentives to place clients’ money on the Bank’s own mutual funds, even when those funds have higher fees or lower returns than competing funds sponsored by third parties. The Bank allegedly failed to inform the clients of this conflict of interest or lied about it. Plaintiffs also argued that banks have fiduciary duty that they simply cannot contract out of under state contract law. J. Easterbrook recognizes that contract claims survive federal statutory pre-emption standards. Here, the Litigation Act is on point. However, to plead misrepresentations or omissions under the Act, the contract claims must not be “material.” (An omission is “material” when a reasonable investor would deem it significant to an investment decision.) In other words, the gravamen of litigation under the Act must, it seems, be statutory, and not purely contractual, issues. If the contractual issues are material, they must be litigated in the form of state law claims.
Per Easterbrook, “there are plenty of ways to bring wrongdoers to account – but a class action that springs from lies or material omissions in connection with federally regulated securities is not among them … If [the plaintiff] wants to pursue a contract or fiduciary-duty claim under state law, she has only to proceed in the usual way: one litigant against another.”
Another win in the “war” against class actions, it seems.
In a recent case, the video game publisher 2K recently won the right to collect and store gamers biometric data (in this case, face scans) indefinitely. The face scanning technology is used in at least two of its NBA series games to allow gamers to create "personalized virtual basketball players".
Plaintiffs agreed to allow them to do so when they agreed to the company’s terms and conditions. The plaintiffs didn’t dispute that they had agreed to the terms or that they had consented to having their faces scanned; their objection was that they did not know that the scans would be stored “indefinitely” and that 2K could share the biometric data. The court ruled that there was no harm under the Illinois Biometric Information Privacy Act. The focus was not on contractual assent to the terms and conditions. But this made me wonder, given how unobtrusive most terms and conditions are, and how easy it is to "manifest assent," shouldn't there be more stringent assent requirements when it comes to consent with respect to certain terms (such as the permanent storage and sharing of biometric data)? Isn't it time we moved past the notion of blanket assent?
As more companies move toward biometric data for a wide range of reasons, we’re likely to see more problems with too-easy consent and wrap contracts.
Sunday, January 22, 2017
In times with enough serious and often depressing news, I thought I would bring you this little neat story (with profuse apologies to everyone, including my co-bloggers, for my virtual absence for a few months):
An Apollo 11 bag used to protect moon rocks samples was stolen by Max Ary, a former curator convicted in 2006 of stealing and selling space artifacts that belonged to the Cosmosphere space museum in Hutchinson, Kansas. Mr. Ary subsequently served two years in prison and was sentenced to pay more than $132,000 in restitution. Space artifacts found in his home, including the Apollo 11 bag, were forfeited to meet that debt. However, the Apollo 11 bag was incorrectly identified as Ary's and subsequently sold to Nancy Carlson for $995 in February 2015 at a Texas auction held on behalf of the U.S. Marshals Service.
The government petitioned the court to reverse the sale and return the lunar sample bag to NASA, alleging that due to a mix up in inventory lists and item numbers, the lunar sample bag that was the subject of the April 2014 forfeiture order was mistakenly thought to be a different bag and that no one, including the United States, realized at the time of forfeiture that this bag was used on Apollo 11. The government cited cases where federal courts vacated or amended forfeiture orders, including where inadequate notice was provided to a property owner, as a justification for the bag's return to NASA.
Judge J. Thomas Marten ruled in the U.S. District Court for Kansas that Ms. Carlsen obtained the title to the historic artifact as "a good faith purchaser, in a sale conducted according to law." With her title to the bag now ordered by the Kansas court, Carlson needs to file a motion in the U.S. District Court for Texas for its return from NASA's Johnson Space Center in Houston. However, “[t]he importance and desirability of the [lunar sample] bag stems solely and directly from the efforts of the men and women of NASA, whose amazing technical achievements, skill and courage in landing astronauts on the moon and returning them safely [to Earth] have not been replicated in the almost half a century since the Apollo 11 landing," the judge wrote … Perhaps that fact, when reconsidered by the parties, will allow them to amicably resolve the dispute in a way that recognizes both of their legitimate interests," J. Marten wrote.
H/t to Professor Miriam Cherry for bringing this story to my attention.
Monday, December 5, 2016
A California Court of Appeals recently answered yes to this question, although finding that in the case at issue, the facts didn’t warrant a finding of actual elder abuse.
At bottom, the facts were as follows: an elderly couple – the wife was in her 80s – suffered rain damage to their house and claimed repair benefits under an insurance policy. The insurance company initiated investigations as to whether the damage was covered. The investigations were, among other things, hampered by the couple having discarded debris from the damaged room although the insurance company had requested an immediate investigation and announced its arrival two days later.
The couple first claimed bad faith in the insurance company subsequently denying part of the insurance claim. The court granted the insurance company’s motion for summary judgment in this respect, finding that a mere incorrect denial of insurance policy benefits does not constitute bad faith. Said the court: “[A]n insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract.”
The bad faith issue also came up in another case where a husband died from a lethal dose of a prescription drug, the insurer assigned an investigator, who unsuccessfully attempted to obtain information from the plaintiff wife regarding the husband's state of mind before his death and the source of the fatal drugs. Where the insurer simply tried to “do all it reasonably could” to determine the cause of death, no bad faith was at issue in simply denying benefits.
California law broadly defines financial abuse of an elder as “occurring when a person or entity takes, secretes, appropriates, obtains, or retains real or personal property of an elder for a wrongful use or with intent to defraud, or both,” as well as “by undue influence.” See Elder Abuse and Dependent Adult Civil Protection Act (Welf. & Inst.Code, § 15610.30, subds. (a)(1), (a)(3).)). Additionally, the wrongdoer must have known or should have known that the conduct was likely to be harmful to the elder. In this case, however, the improper conduct was missing: there was no evidence that the insurance company acted in subjective bad faith or unreasonably denied policy benefits. This stands in contrast to cases where, for example, insurance companies have employed deceptive practices in executing contract such as annuity agreements with senior citizens.
Sunday, November 13, 2016
Allow me to highlight my most recent article, An “Act of God”? Rethinking Contractual Force Majeure in an Era of Anthropogenic Climate Change.
Given anthropogenic climate change, what were previously considered to be inexplicable and unpredictable “acts of God” cannot reasonably be said to be so anymore. They are acts of man. “Extreme” weather events have become the new normal. Accordingly, the contractual force majeure defense, which largely rests on the notion that contractual parties may be exculpated from liability for failed or delayed performances if supervening unforeseen events that the party could not reasonably control or foresee have made a performance impracticable, is becoming outdated in the weather context. It makes little sense to allow contractual parties to escape contractual performance liability for events that are highly foreseeable given today’s knowledge about climate change. Parties can and should take reasonable steps to contractually assess and allocate the risks of severe weather events much more accurately than ever before. Further, they should be better prepared to take reasonable steps to alleviate the effects of severe weather on their contractual performances instead of seeking to avoid liability at the litigation stage.
Time has come for the judiciary to rethink the availability of the impracticability defense based on “extreme” weather for public policy purposes. Perhaps most importantly, by taking a hard look at the doctrine and modernizing it to reflect current on-the-ground reality, the judiciary may help instigate a broader awareness of the underlying pollution problem and need for action at many scales. Meanwhile, a more equitable risk-sharing framework that might become known as “comparative risk sharing” and which would resemble the notion of comparative negligence in torts could be introduced where parties have failed to reach a sufficiently detailed antecedent agreement on the issue. This is surprisingly often the case. Parties often use mere boilerplate phrases that do not reflect today’s highly volatile weather and appurtenant risks.
The law is never static. It must reflect real world phenomena. Climate change is a super-wicked problem that requires attention and legal solutions at many fronts to many problems, including contractual ones. The general public is often said to have lost faith in the judiciary. Given this perception, courts could regain some of that faith in the context of contracts law and force majeure caused by events for which no “God,” other supernatural power, or even nature can be blamed.
The article can be downloaded here.
I apologize that I have not been able to post very many blogs recently and that I will, for family and work reasons, also not be able to do so until January. I trust it that my lovely assistant Ashley and my co-bloggers will keep you intrigues until then!
Friday, October 21, 2016
If a patent license agreement contains a non-assignment clause, does that also prohibit assignment of the patent? A recent case said not necessarily. It depends on the precise wording.
In Au New Haven v. YKK Corp. (1:15-cv-3411-GHW), (thanks to Finnegan's law firm) YKK entered into an exclusive license agreement with the patent owner, Au New Haven (actually the inventors, but I'm simplifying things here). The agreement contained the following clause:
“Neither party hereto shall assign, subcontract, sublicense or otherwise transfer this Agreement or any interest hereunder, or assign or delegate any of its rights or obligations hereunder, without the prior written consent of the other party. Any such attempted assignment, subcontract, sublicense or transfer thereof shall be void and have no force or effect. This Agreement shall be binding upon, and shall inure to the benefit of the parties hereto and their respective successors and heirs. “
Subsequently, Au New Haven assigned the patent to Trelleborg without requesting YKK’s consent. Au New Haven and Trelleborg later sued YKK for patent infringement and breach of the patent licensing agreement. YKK filed a motion to dismiss against Trelleborg, arguing that Trelleborg lacked standing to sue for patent infringement because Au New Haven failed to obtain YKK’s consent to the patent assignment which meant that it was void as stated in the agreement.
The federal district court (SDNY) stated that the anti-assignment language did not expressly limit transfer of the underlying patent or render it void. The question then was whether the patent constituted an “interest hereunder,” meaning an interest under the licensing agreement. The court stated:
“Here, the anti-assignment provision does not expressly bar transfers of the ‘214 Patent itself, or render transfers fo the ‘214 Patent void…the 2014 Assignment would be void ab initio only if the ‘214 Patent is an “interest” under the licensing agreement (i.e., an “interest hereunder”). The Court finds that it is not.”
The Court’s rationale was that although the ‘214 Patent was the subject of the agreement, it did not “originate” from the licensing agreement, it did not “arise under” the agreement and it was not “created” in accordance with the agreement. Consequently, the anti-assignment provisions did not render the underlying patent assignment void and Trelleberg had standing to sue for patent infringement.
The decision doesn’t seem right to me. If the plaintiffs couldn’t assign their rights under the agreement, but they could assign their patent rights to a third party, then wouldn't they be in breach of contract at the very least? Notably, the Court’s conclusion was limited to whether the patent assignment was void, not whether it breached the licensing agreement. It was thus following New York law by narrowly construing the effect of an anti-assignment clause. Still, I don't think it makes sense to construe a clause so that it permits a party to do something that would be a breach of the agreement (which is different from construing a clause as a personal covenant where a violation of the clause would be a breach of contract but the assignment would still be enforceable). The case could lead to some pretty puzzling results and not necessarily in favor of Au New Haven....
Tuesday, October 18, 2016
I'm happy to report that my new book, The Fundamentals of Contract Law and Clauses, is now available. The book is intended to give students a working knowledge of contract law, meaning that they learn the meaning of contract clauses and how they are shaped and affected by doctrine. It's a textbook but it's not a casebook - it's intended to be used as a supplement in a first year contracts course or a primary text in a business school or undergraduate contracts law course. (There's a Teacher's Manual which is available to instructors adopting the book which contains discussion points and exercises).
It always seemed a bit strange to me to teach contracts law solely by using cases - this emphasizes how to win disputes rather than how to avoid them. This makes sense for litigators, but transactional attorneys (which I was for a decade) have a different role. As Mark Burge has pointed out on this blog, contracts is a good gateway to transactional skills but it's not easy to figure out how to do that seamlessly. Hopefully, this book will be an easy way to incorporate some "transactional skills" into a first year contracts course.
Monday, October 10, 2016
Exciting news! JOTWELL (the Journal of Things We Like - Lots!) has a new Contracts section - and it has just gone live! David Hoffman (Temple) and I are the Section editors. Aditi Bagchi (Fordham), Dan Barnhizer (Michigan State), Shawn Bayern (Florida State), Omri Ben-Shahar (Chicago), Martha Ertman (Maryland), Robert Hillman (Cornell), Hila Keren (Southwestern), Florencia Marotta-Wurgler (NYU), Eboni Nelson (South Carolina), Robert Scott (Columbia), Tess Wilkinson-Ryan (Pennsylvania) and Eyal Zamir (Hebrew University) are contributing editors so expect to see articles from them over the next few months.
The inaugural article is by Prof. Robert Hillman of Cornell and reviews Aaron Perzanowski & Chris Jay Hoofnagle's article, What We Buy When We Buy Now, (forthcoming U. Pa. L. Rev.). The article raises interesting issues about ownership of digital "goods" and has already sparked interest in the popular press.
Welcome to the world of contracts JOTWELL!
Tuesday, September 20, 2016
New York Attorney General Eric Schneiderman has launched an investigation into whether now-notorious EpiPen manufacturer Mylan inserted potentially anticompetitive terms into its EpiPen sales contracts with numerous local school systems.
EpiPens are carried by those of us who have severe allergies to, for example, bee stings. The active ingredient will help prevent anaphylactic shocks that can quickly result in death. In 2007, a two-pack of EpiPens sold for $57. Today, the price is $600. The company touts various coupons, school purchase programs and the like, but in my experience, at least the coupons are mere puffery unless you are very lucky to fit into a tiny category of users that I have not been able to take the time to identify.
However, there is finally hope for some real competition in this field: Minneapolis doctor Douglas McMahon has created an EpiPen alternative that he is trying to market. This doctor claims that Mylan and companies like it have lost sigh of patient needs and are catering to investors. In his opinion, that is the true reason for the skyrocketing prices. Well said.
The doctor is even resorting to something as unusual as a fundraising website to raise money for the required FDA testing and other steps.
Another contractual issue seems to be why customers have to buy at least two Epipens at a time. The active ingredient only lasts for one year. Those of use who carry EpiPens hope never to have to use them, but if we will, it is extremely unlikely that we will have to do so twice in a year! But alas, in the United States at least, you have to buy this product in a two-pack (EpiPens are sold individually in countries such as Canada and the UK). It may be a regulatory and not a pure contractual issue, but if the company truly sticks to its current story that it is on the up-and-up in all respects in this context, they should at least enable people to offer to buy only what they need, which in many cases would be only one EpiPen at a time.
Hat tip to Professor Carol Chomsky of the University of Minnesota School of Law for the information on the Minnesota doctor.
Saturday, September 10, 2016
In an 8/27 article, the New York Times (paid access only) reports how Payless Car Rental, owned by Avis Budget, basically forces at least some of its customers to buy personal liability insurance whether or not they want it. Here’s how the story reports it done – well worth repeating on this website to show the blatant disregard for contract law displayed by Payless Car Rental:
A client states repeatedly to the car rental company that he or she does not want insurance. When returning the car after the rental period is over, guess what shows up on the receipt: of course, the declined insurance – in one case $222. When the renter complains, the car rental agency representative snatches the contract that had been initialed by the renter, who apparently thought he or she indicate that they did not want the insurance. Instead, although orally and repeatedly stating that, the initials indicated that he or she did want the insurance (fine print probably not read by renter at airport counter).
After not getting the reimbursement requested, he or she disputed the charge with credit card provider American Express. The amount was refunded, the renter thought… until Payless sent a letter titled “Debit notice” which indicated that the amount would now be sent to collection by a company located on, I kid you not, “32960 Collection Center Drive, Chicago, Ill.” The problem with that is that no such address exists! Try in Google Maps. At least I and the New York Times reporter could not bring it up.
Payless also told the renter that if he or she did not react, his/her “rental privileges” would be suspended(!). Not sure why they would think that their renter would ever want to rent from that company again…
A Payless PR representative did not, when contacted about this incident, offer any explanation or apologies. She simply stated that the issue had been resolved and that “we will reinforce with our associates … the importance of ensuring that our customers clearly understand which services and options they are selecting.” It seems like they should also train their associates to accept the contractual choices then made by the customers.
Tuesday, September 6, 2016
Vast Majority of Consumers Prefer Court Procedure over Arbitration
We have discussed arbitration clauses in this blog several times. Now, a Pew Charitable Trust survey of more than 1,000 individuals shows that 95% of consumers prefer judge or jury trials regarding questionable bank fees and similar practices over arbitration clauses. 89% want to be able to join a class action lawsuit. At the same time, no less than 93% of banks include jury (but not bench) trial waivers in their checking account agreements.
What about the argument that the only thing that consumers get out of this is higher fees and fewer services to cover increased litigation costs? First, consumers are not prohibited from choosing arbitration, it’s the option to have class action suits that is at issue here. And as the Los Angeles Times reported, “if banks keep their noses clean, they won’t end up in court” in the first place. Besides, it’s not so much consumers that choose to litigate, businesses file four times as many lawsuits as individuals. Maybe this is for good reason: arbitrators ruled in favor of banks and credit card companies 94% of the time in disputes with California consumers. Maybe it is not: since banks are the ones who pay for the arbitration process, a recurring concern is that arbitrators may be reluctant to find against the banks.
Of course, class action lawsuits is the only feasible way for consumers to have their legal rights vindicated because of the small individual amounts involved. For the banks, however, this is big business – literally: In April, the Supreme Court let stand a decision that Wells Fargo had deliberately arranged checking-account payments in order to “maximize the number of overdrafts” resulting in fees of $25-35. http://www.scotusblog.com/wp-content/uploads/2016/03/13-16195.pdf
Monday, September 5, 2016
A few days ago, I posted a blog here on Amtrak raising the rent on backyard lots neighboring Amtrak's railroad lines in New York. The rent in some cases went up by 100,000% (!) according to the website of Congressman Joseph Crowley.
Professor Bruckner posed the relevant question of whether the now hotly contested leases are truly new leases or the renegotiation of existing ones. I've been trying to find out, but not having seen the actual letter from Amtrak (yet), I've dug through news reports and website of legislators. This is the upshot as best as I can find out right now: It looks like Amtrak is upping the price on _existing_ leases after having had very low prices for years. See, e.g., these statements: "For decades, Amtrak has leased the property underneath the trusses to homeowners for a nominal fee which releases the agency from the burden of maintaining the premises. Residents were given a 30-day notice to accept an unconscionable annual rent increase – in some cases as much as 100,000 percent or tens of thousands of dollars" and "[i]n a letter addressed to homeowners, Amtrak argues that a review of the lease and the premises it covers, indicates the lease is substantially undervalued. For some, the rent will go up from $25 annually to over $26,000 annually. Failure to approve the new rental amount would result in the termination of the lease 30 days from the notice."
To me, that does indeed seem if not outright unconscionable, then certainly in violation of reasonable contractual expectations and the contractual terms what appears to be an already existing contract.
As mentioned, Amtrak does have a good argument in its prices having been exceptionally low for decades, but perhaps market prices should be introduced over time as the lessees get replaced over time with the existing leases somehow being grandfathered in? Granted, the turnover in the NYC real estate market may not be high in the case of lucrative deals, but on the other hand, nobody lives in any home forever. Underlying this story does seem to be the fact that Amtrak got upset not so much about the low rents per se, but the fact that some renters were making profits off them.
Saturday, September 3, 2016
You heard about Epipen, the “price of which has climbed sixfold over the last several years. At drug price-comparison website GoodRx, the cheapest price today is $614 for a package containing two, or more than $300 per EpiPen, up from about $100 for two.”
Now there’s Amtrak. The company just raised the prices for renting backyard spaces underneath the Hell Gate Bridge in New York from, in one case, $25 to $25,560 a year (that’s not a typo) and, in another, from $50 to $45,000 a year.
The homeowners that rent these “additional” spaces have been given 30 days to accept the new leases or else give up the land. Some use it for recreational purposes but others rent it out as parking lots, which has allegedly caused Amtrak to reconsider these contracts. The company has confirmed the rent hikes, stating that “some lease holders have not seen an increase in more than 70 years” and that renters can still expect to pay only “a fraction (less than 1 percent) of the fair market rental rates.” Amtrak will be “working with each person individually to determine the exact terms of their lease.”
Is this fair? Many of the renters have decks, pools, and established plants on the land. They also clear snow, remove falling bricks and other debris from the land. They’ve been able to enjoy the land for years, perhaps creating a reasonable “course of performance” expectation that the rents would not be increased to such a high extent.
On the other hand, the rent is exceptionally low for New York and has not been increased for many decades. Then again, if the intent of these contracts was for them to serve mainly recreational purposes, what about people that now convert the land into commercial use (parking lots, of all things)? Does that matter?
This case raises interesting issues of contract interpretation, unilateral contract modification, good faith obligations by both parties, etc. It seems to me that Amtrak might, depending on the wording of these contracts, be able to now increase the rent somewhat, but to the extent done here, the intent seems to be an arguably contractually impermissible penalty rather than, perhaps, a good-faith renegotiation of contract terms.
Hat tip to Shubha Ghosh for alerting my attention to this issue.
Thursday, August 25, 2016
The New York Times reports here (paid access) on the increasing use of so-called “rent-to-own” housing contracts. Under these contracts, companies from big Wall Street giants to a slew of small landlords hoping to strike it rich lend or, should I say, purport to sell homes to tenants who contractually commit to make all repairs on the homes no matter how major or minor (yes, you read that right: all repairs… and it gets more extreme than that, read on!). Typically, tenants under such contracts are not told what repairs are needed, yet face a contractual deadline for making sure that the houses in question are brought up to local code. Unlike most typical home purchases, rent-to-own contracts do not require the tenant/buyer to obtain an independent home inspection.
We probably all know how many things can go wrong with older homes, even newer ones. Examples of how bad things can go in this context thus abound. One tenant moved into a home not having been told that it had several unresolved building code violations and had to remain vacant by city order. Another moved into a home that had no heat, no water, and major problems with its sewage system that led to nearly $10,000 in repairs (many of these homes have been purchased by the lender for less than $10,000 and are not worth very much more than that, if any). A third example describes a woman moving into a home with her three children and partner in Michigan, living in the house during cold winter with the only heat sources being one electric heater and a wood-burning stove in the kitchen, only to be evicted and charged $3,100 in overdue rent after she stopped paying rent because of the heat issue.
People who accept these kinds of contracts often do not qualify for mortgages. Banks have virtually stopped making mortgages on homes worth less than $100,000, which leaves millions of people with few options for - now or one day - owning their own homes.
One company that rents homes on a rent-to-own basis does so “as is,” calling the contracts “hybrid leases” that allow people to build up “implied equity.” If tenants are evicted during the contract (typically of a seven-year-duration), they get no credit for money spent on repairs or renovations. Neither do they receive any equity unless they actually end up buying the home at the end of the contract term. At that point, they still need financing for the home which, as mentioned, many people just cannot obtain.
A number of legal questions arise in this context, among them several contractual ones such as the role of caveat emptor vs. the violation of a possible duty to disclose. If the landlords know of the problems from which many of these houses suffer, should they disclose this knowledge? On the other than, shouldn’t these potential (long-term) buyers be presumed to have at least enough savvyness to not promise to bring a home that they do not own outright up to Code by a certain deadline? Then again, are landlords fraudulent in their dealings with these folks when the landlords require such potentially extensive repairs when, as the owners of the homes, they presumably if not actually have actual knowledge of the problems from which these houses suffer? What about the statement that renters get “implied equity?” What in the world does that mean, if anything? Do low-income folks that may never have been homeowners truly understand what it means to bring a home “up to Code” and buying “as is?” Does it matter? And what about the doctrine of unconscionability, which is alive and well in some states such as California? If nothing else, this case seems to smack of both procedural and substantive issues.
In some states, landlords are required to keep homes and apartments in habitable condition. But rent-to-own contracts have, for good reason, been said to reside in a gray area of the law: are they rental contracts? - Or purchase contracts? Or something else?
Further, rent-to-own contracts may, to some extent, resemble contracts for deeds. However, the latter are subject to basic consumer-lending regulations such as the Federal Truth in Lending Act.
The housing market again seems to host highly questionable practices. This story almost reads as a contract or property law issue-spotting exam. Meanwhile, housing sharks seem to be swimming relatively freely in some areas of the nation.
For further information, see Alexandra Stevenson and Matthew Goldstein, Rent-to-own Homes: A Win-Win for Landlords, a Risk for Struggling Tenants, the New York Times, Aug. 21, 2016.