Thursday, April 28, 2016
In spite of most jurisdictions reading a duty of good faith and fair dealing into all contracts, a Fifth Circuit Court of Appeals has held that it is unlikely that the Texas Supreme Court would find such a duty to exist in Texas. Wow. Additionally, the court found that no fiduciary relationship between a university student and his/her university faculty and other representatives.
Section 205 of the Restatement (Second) of Contracts states that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” See also Farnsworth, “Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code,” 30 U.Chi.L.Rev. 666, 670 (1963).
The seminal case in this area is Market Street Associates v. Frey, 941 F.2d 599 (7th Cir. 1991). In that case, Judge Posner held that in spite of the somewhat “moralistic overtones of good faith,” not every contract signatory is expected to be his “brother’s keeper.” Nonetheless, “the essentials of the modern doctrine [are] well established in nineteenth-century cases.” “This duty is … halfway between a fiduciary duty (the duty of utmost good faith) and the duty merely to refrain from active fraud. Despite its moralistic overtones it is no more the injection of moral principles into contract law than the fiduciary concept itself is.” “The office of the doctrine of good faith is to forbid the kinds of opportunistic behavior that a mutually dependent, cooperative relationship might enable in the absence of rule. “
In the new Texas case involving a student at SMU who got fired from his part-time job as a Community Adviser for misconduct toward students and faculty, the circuit court held that “Texas law does not impose a generalized duty of good faith and fair dealing and, in fact, rejects it” in all circumstances apart from when 1) a formal fiduciary relationships exists or 2) a “special or confidential relationship” exists. Examples of the former are attorney-clients, trustee-beneficiary, and principal-agents. In Texas, the latter apparently only includes the relationship between an insurer and an insured. That’s it! Texas courts have, found this panel, refused to impose the duty on, for example, employer-employees (not too surprising), lender-borrowers, medical provider-patients (double wow!), mortgagor-mortgagees, and franchisor-franchisees. The court in the described case also said that an “ordinary student-professor relationship is no different;” in other words, there is no fiduciary or even “confidential” or “special” relationship between students and faculty in Texas.
The case does not show how the student’s allegation that a duty of good faith existed between SMU and the student would really have helped the student on the merits. SMU seemed to have a very good case for firing the student from his job. Nonetheless, it is surprising that the court would so categorically reject that such a duty even exists apart from in traditional fiduciary relationships. While it may make sense that “a purely unilateral, subjective” sense of trust in one’s contractual counterpart and that the other party will have one’s interests at heart is not enough to create a fiduciary relationship, there is a vast difference between that and reading out the duty of good faith and fair dealings from most contracts law in general in Texas. Of course, as contracts law is state law, it is true that it is the Texas courts who must change this line of thinking, but doing so seems to be highly warranted given how courts in other parts of the nation rule on the issue.
The case discussed is Hux v. Southern Methodist University, 2016 WL 1621720 (no free online copy available yet).
Tuesday, April 26, 2016
A recent case out of California, Clever Hospitality, Inc. v. Patel, B264921, sheds light on the limits of due diligence to serve as consideration when it comes to making an offered option irrevocable. In that case, the Patels, the owner of a hotel, gave Clever, a prospective buyer, a 60-day option to buy the hotel. During that time, Clever indicated it was going to conduct due diligence. If, at the conclusion of its due diligence, Clever was interested in buying the hotel, it was supposed to exercise the option by depositing $150,000 into escrow. Clever used the 60-day period to perform significant amounts of due diligence, so much that Clever asked for an extension of the 60-day period. The Patels eventually refused the request and indicated to Clever once the 60-day period was over that, because Clever never deposited $150,000, the option had lapsed. However, the Patels and Clever continued to have contact regarding the hotel, although the Patels also told Clever that they were speaking to other potential buyers as well. Eventually, a few months later, the Patels sold the hotel to another buyer. Clever then sued the Patels for breach of contract.
Clever's main argument was that its time, effort, and money invested in its due diligence acted as consideration to render the Patels' option irrevocable. The court, however, noted that the necessary consideration here had to be money or services that the Patels had bargained for. In this case, Clever's due diligence only benefited Clever, not the Patels. After all, the Patels would have been quite content if Clever had performed no due diligence at all and instead just bought the hotel.
Clever then argued that promissory estoppel should save it and render the option irrevocable. However, the court could find no evidence that the Patels ever made any promise to Clever that it would keep the option open. In fact, the evidence seemed to show that the Patels had indicated the opposite to Clever: that the option had expired and that they were talking to other buyers. Therefore, there was no promise for Clever to reasonably rely upon and promissory estoppel was inappropriate.
Clever never at any time placed any money in escrow the way it was supposed to under the terms of the option. It seems as if Clever assumed that the Patels had no other serious buyers and that maybe there would be plenty of time for Clever and the Patels to work out a deal, and so the lapsing of the option didn't seem to concern Clever all that much...until a sale to someone else had been consummated. This case serves as a warning: Due diligence alone might not be enough to save you from losing out on the object of that due diligence.
Monday, April 25, 2016
My love for HGTV is real and enduring. It started as a House Hunters addiction when I was a practicing lawyer looking for something mindless to watch when I got home at night and it has seriously spiraled out of control. I find something soothing about the formulaic nature of the shows; their familiarity is like a security blanket to me. And I've also realized that I've actually learned a lot about my taste. For what it's worth, I do feel like HGTV has made me think more about how I decorate my house, even if I can't afford a professional decorator.
So I gobbled up with interest every single article I could find on the recent "Love It or List It" lawsuit. If you don't know the show, it's one of my favorites for the snark between the competing real estate agent and designer. One half of a home-owning couple wants to renovate their existing home; the other half wants to give up and move away. Enter the "Love It or List It" team, showing the couple houses they could buy while simultaneously renovating their home. The theory is that the couple can then decide to love it, or list it.
I entertain no illusions about the "realness" of reality television (really, mostly I've learned from reality television that apparently an enormous number of people are tremendously good actors - while others are decidedly not), but this recent lawsuit attacks not just the "realness" of reality television but practically the *definition* of it: "Love It or List It," the homeowners accuse, were much more interested in making a television show than they were in renovating this couple's home. On at least some level, this lawsuit seems to be a challenge to what "Love It or List It" is: a television show or a general contractor.
As a general contractor, the homeowners weren't too happy with the show's performance. They allege shoddy work on their house, including low-quality product, windows that were painted shut, and holes big enough for vermin to fit through. (They also allege their floor was "irreparably damaged," although I think they can't possibly mean that in the true legal sense of "irreparably," because surely the floor can be repaired?)
It seems to me this is going to come down to the contract between the parties. What did "Love It or List It"'s production company promise? I would love to see what the contract said about the work that was to be performed, how that work was to be performed, and what the financial arrangements were (since part of the couples' allegations is that a large portion of their money was diverted away from the renovations). However, for some reason, I have had an incredibly difficult time locating a copy of the complaint (never mind the contract). None of the stories I've found linked to it, and I have had zero luck finding it through Bloomberg Law's docket search.
Monday, April 18, 2016
I’ve recently finished writing a textbook on contract clauses which takes a different approach to teaching contracts. The book, to be published in September, uses contract clauses and case excerpts to introduce doctrinal concepts and to teach students how to problem solve. (I always thought it unfortunate that a typical 1L learns contract law without knowing what common contract clauses mean or how they relate to what they’ve been learning). One of the cases mentioned in my book is SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A. 3d 330 (Del. 2013). I’ve been meaning to blog about this case for some time now because it’s an important one for readers of this blog and corporate lawyers everywhere and illustrates the importance of using the right words in a contract.
SIGA and PharmAthene signed a term sheet for an eventual license agreement and partnership to further develop and commercialize an anti-viral drug for the treatment of small pox. The term sheet was not signed and contained a footer on each page that stated “Non Binding Terms.” Subsequently, the parties drafted a merger term sheet that contained the following provision:
“SIGA and PharmAthene will negotiate the terms of a definitive License Agreement in accordance with the terms set forth in the Term Sheet…attached on Schedule 1 hereto. The License Agreement will be executed simultaneously with the Definitive [Merger] Agreement and will become effective only upon the termination of the Definitive Merger Agreement.”
The license agreement term sheet was attached as an exhibit to the merger term sheet. On March 10, 2006, the parties signed a merger letter of intent and attached the merger term sheet and the license agreement term sheet.
On March 20, 2006, the parties entered into a Bridge Loan Agreement where PharmAthene loaned SIGA $3million for expenses relating to the merger and for costs related to developing ST-246. It stated the following in Section 2.3:
“Upon any termination of the Merger Term Sheet….termination of the Definitive Agreement relating to the Merger, or if a Definitive Agreement is not executed…., SIGA and PharmAthene will negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in the License Agreement Term Sheet …and [SIGA] agrees for a period of 90 days during which the definitive license agreement is under negotiation, it shall not, directly or indirectly, initiate discussions or engage in negotiations with any corporations, partnership, person or other entity or group concerning any Competing Transaction without the prior written consent of the other party or notice from the other party that it desires to terminate discussions hereunder.”
On June 8, 2006, the parties signed the Merger Agreement which contained a provision nearly identical to section 2.3 of the Bridge Loan Agreement and provided that if the merger was terminated, the parties agreed to negotiate in good faith to enter into a license agreement with the terms of the License Agreement term sheet. The Merger Agreement also stated that the parties must use their “best efforts to take such actions as may be necessary or reasonably requested by the other parties hereto to carry out and consummate the transactions contemplated by this Agreement.”
Shortly thereafter, SIGA terminated the Merger Agreement and announced that it had received a $16.5million NIH grant. SIGA also proposed different licensing terms from those contained in the term sheet and argued that the license agreement term sheet was not binding because of the “Non-Binding” footer. PharmAthene sued -- and won. SIGA appealed and the Supreme Court of Delaware found that the “express contractual language” obligated the parties to “negotiate in good faith with the intention of executing a definitive License Agreement” with terms “substantially similar” to the terms in the license agreement term sheet.
The damages to PharmAthene ended up being around $200million– in other words, expectation damages. In order to stop PharmAthene from enforcing the judgment while undergoing the appeals process, Siga filed for Chapter 11 bankruptcy. Siga subsequently lost its second appeal to the Delaware Supreme Court, which upheld the award of expectation damages.
Last week, the U.S. Bankruptcy Court for the Southern District of New York approved a reorganization plan that sets the stage for SIGA to exit from bankruptcy. The judgment is expected to be satisfied by October 20, 2016.
A long and expensive road for SIGA which could have been avoided by paying more attention to the language used in the contract.
Friday, April 15, 2016
(image from IMDB)
Gilmore Girls fandom rejoiced when it was announced that the show would receive a revival on Netflix (and, even better, that it will include Sookie!). But, as often seems to be the case, developments that bring a fandom joy can come with legal entanglements. In this case, producer Gavin Polone's production company Hofflund/Polone has filed a lawsuit against Warner Bros., alleging breach of contract. The lawsuit, Hofflund/Polone v. Warner Bros. Television, Case No. BC616555 (behind paywall), was filed in the Los Angeles County, Central District, Superior Court of California.
The case revolves around the agreement between the parties concerning the original production of Gilmore Girls. The parties agreed, according to Hofflund/Polone, to provide Hofflund/Polone with "$32,500 for each original episode of Gilmore Girls produced in any year subsequent to 2003," along with some percentage of the gross and with "executive producer" credit. With the news of the recent Netflix revival, Hofflund/Polone allegedly reached out to Warner Bros. seeking compensation under the agreement. According to the complaint, Warner Bros. took the position that the Netflix version of Gilmore Girls is a derivative work based on the original series, and so therefore does not trigger compensation to Hofflund/Polone.
It's an interesting question that highlights one of the debates copyright scholars have: What, exactly, is a "derivative" work? Copyright owners have the exclusive right to reproduce their own works or works substantially similar to those works. They also have the right to produce derivative works based on those works, which, in the jurisprudence, has ended up using the same substantially similar standard to elucidate the "based on" language. Which means: what is the point of the derivative work right, if its standard seems the same as the reproduction right? This case has the potential to force confrontation with that problem: Where do we draw the line between infringement of the reproduction right and infringement of the derivative work right? When does a substantially similar work cross the line between reproduction and derivative work?
One thing that's been noted about the derivative work right is it tends to be talked about when there's some kind of change in medium or other kind of adaptation different from the original form (book to film, or translation from one language to another). The definition in the statute points us to that focus. Which raises the question: Is a Netflix revival more like a translation or adaptation of Gilmore Girls than it is like an exact copy of Gilmore Girls? Does this depend on how true it is to the original show?
The "television" landscape has shifted dramatically since Gilmore Girls premiered. It'll be interesting to see how contracts formed pre-Netflix-and-Amazon-production-era function going forward.
Saturday, April 9, 2016
How far does a franchisor have to go to help out a franchisee? That was the question asked in a recent case out of the Southern District of New York, The UPS Store, Inc. v. Hagan, 14cv1210 (behind paywall). This particular dispute between UPS and its franchisees the Hagans attracted a fair amount of online attention when it first erupted back in 2014. Now, UPS has been granted partial summary judgment on the contractual disagreements.
UPS and the Hagans entered into a variety of contract carrier agreements, franchise agreements, and promissory notes in connection with the Hagans' operation of eleven UPS franchises in the New York City area. The relationships between the parties eventually broke down, and accusations were flung back and forth between them. This federal lawsuit included trademark and trade secret allegations, in addition to breach of contract claims, and the Hagans counterclaimed alleging violations of New York's deceptive trade practices act.
With regard to the breach of contract claims, the Hagans conceded that they failed to perform under the contracts, but alleged that their breach was excused by impossibility, impracticability, or UPS's own breach of the implied covenant of good faith and fair dealing. The court, however, granted summary judgment to UPS, finding that the Hagans had impermissibly breached the contracts.
The Hagans' main allegations revolved around UPS's failure to police other franchisees, to allow the Hagans to bundle customer invoices, to provide the Hagans with better computer technology, and to negotiate with private investors who were funding the Hagans' businesses in order to soothe them about the businesses' profitability. But UPS was not required to do any of those things under the terms of the contract. Because they were not "basic assumptions" of the contract, the impractiability and impossibility defenses failed, and the alleged breach of the covenant of good faith and fair dealing was likewise doomed. The Hagans' arguments essentially boiled down to a desire for UPS to take "affirmative action" to save the Hagans' businesses as they began to fail. The Hagans termed this a "duty to cooperate" that was included in the covenant of good faith and fair dealing. But the court, applying California law, rejected this idea. Again, there was nothing in the contracts that required UPS to take the affirmative steps the Hagans desired, and the court declined to impose obligations on UPS beyond those agreed to under the contract.
The franchise agreement between the parties contained a liquidated damages clause dictating that damages should be the amount of royalties paid to UPS the previous year multiplied by the number of years (not to exceed two) left in the contract term. The Hagans argued that this was an unreasonable estimate of UPS's damages because UPS would recoup the lost royalties from the Hagans' franchises through either issuing new franchises or increased business to the remaining UPS franchises in the area (which the Hagans showed were all less than half a mile from the Hagans' locations, this being New York City). The court, however, found that, although maybe the Hagans might be right, that didn't mean that the clause had been unreasonable at the time of execution of the contract, which was the relevant test. Therefore, the liquidated damages clause was enforceable.
Wednesday, April 6, 2016
By Rotational - Own work, Public Domain, https://commons.wikimedia.org/w/index.php?curid=3455706
Here's an area of law where we're going to need a lot more guidance over the coming years, I suspect: how exactly does the wording of specific insurance policies apply to (now legal in some places under some circumstances) marijuana growing facilities?
A recent case out of the District of Colorado, The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, Civil Action No. 13-cv-03452-MSK-NYW, deals with that question. In that case, Green Earth, a marijuana growing facility, alleged that a wildfire sent so much smoke and ash into Green Earth's ventilation system that it ended up damaging the marijuana plants inside. Green Earth therefore made a claim under its insurance policy with Atain for this damage.
This case contains an interesting discussion of how exactly marijuana plants are grown. The important takeaway is that Green Earth was making claims both for Green Earth's growing marijuana plants and for buds and flowers that had been harvested and were being prepared for sale. Green Earth argued that both the growing plants and the harvested buds and flowers were covered under the insurance policy's definition of "Stock." Atain maintained, however, that "Stock" did not apply to the growing plants, only to the buds and flowers that had already been harvested.
The insurance policy defined "stock" as "merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping." Everyone agreed that the harvested buds and flowers qualified as "stock" so the debate centered entirely around whether the growing plants also qualified as "stock." There was no prior discussion between the parties as to this issue, so the court ended up relying heavily on dictionary definitions, especially of the term "raw materials." The court ended up concluding that this wasn't appropriate for summary judgment, because the court could see the definition as including growing plants or not.
However, the court then turned its attention to another part of the insurance policy that specifically excluded "growing crops." Green Earth argued that its growing marijuana plants weren't "growing crops" because crops are grown outside, not in indoor facilities. But, once again looking at dictionaries, the court concluded that the exact location was not important to the definition of "crop." "Crops" referred to things growing out of soil and did not differentiate between outdoor soil and indoor soil. Therefore, even if the growing marijuana plants could be "raw material" under the definition of "stock," they were specifically excluded from coverage as a "growing crop." And, indeed, in correspondence proposing the policy, Atain wrote that it would not cover "growing...plants," supporting the court's more expansive reading of "crops" as just being a type of plant, whether inside or outside.
Interestingly, Atain then tried to argue that, even though the harvested buds and flowers were technically "stock," they weren't covered because they were "contraband" and public policy was against insuring such forbidden goods. The court noted that the attitude of the federal government toward the legality of marijuana is "nuanced (and perhaps even erratic)" and focused on the fact that it was undisputed that Atain knew Green Earth was growing marijuana and agreed to insure it, so it wasn't fair to allow Atain to back out of that now.
Tuesday, April 5, 2016
Hurricane Sandy's flooding of the Red Hook section of Brooklyn damaged are in the Christie's warehouse located there, and provoked a rash of subrogation cases against Christie's, including AXA Art Insurance Corp. v. Christie's Fine Art Storage Services, Inc., 652862/13.
All of the cases revolved around the same core set of facts: As Hurricane Sandy was approaching, the Mayor of New York warned that Red Hook was likely to be flooded, and eventually ordered its evacuation. Christie's sent an e-mail to its clients stating it would "take extra precautions" in the face of "significant inclement weather," and that "may include" making sure the generators were working, providing extra security, and raising all of the artwork up off the floor. Allegedly Christie's did none of these things. Shortly after Sandy went through, Christie's sent another e-mail assuring its clients that the artwork was safe, but a few days later Christie's corrected itself, contacting some of its client to inform them that flooding had damaged some of the artwork.
Some insurance companies had to pay out millions of dollars in the wake of this news, and this insurance companies sought to collect the money from Christie's. AXA brought a typical case, that resulted in a typical failure, based on the fact that Christie's storage agreement contained a waiver of subrogation: Christie's clients were "responsible for arranging insurance cover" for the artwork stored at Christie's and "agree[d] to notify [the] insurance carrier/company of this agreement and arrange for them to waive any rights of subrogation against [Christie's] . . . with respect to any loss of or damage to the [artwork] while it remains in [Christie's] care, custody and control."
The court held that this subrogation waiver acted to bar AXA's claims for gross negligence, negligent misrepresentation, breach of bailment, and breach of contract. AXA tried to argue that this was in violation of U.C.C. Section 7-204, but the court disagreed: The U.C.C. prevented Christie's from exempting itself from all liability, but this subrogation waiver, according to the court, merely allocated the risk of liability to the insurance companies. AXA also argued that Christie's breached the storage agreement in its actions (apparently no artwork was supposed to be stored on the ground floor, which had been represented to the clients as being used for "intake" before the artwork was move to more secure storage), but the court said those breaches didn't affect the enforceability of the subrogation waiver.
Well, the appellate court has spoken, and claims like AXA's now live to be litigated another day. In the similar case XL Specialty Insurance Company v. Christie's Fine Art Storage Services, Inc., the appellate court held that the subrogation waiver did violate Article 7 of the U.C.C. and attempt to exempt Christie's from all liability, the lower court's characterization otherwise notwithstanding. Therefore, the fight will now shift to whether Christie's actions were reasonable.
Monday, April 4, 2016
CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=39855 (Harvard Science Center)
It's a very common thing, to be provided with a "policy" as opposed to a "contract." A recent case out of the District of Massachusetts, Charest v. President and Fellows of Harvard College, Civil Action No. 13-11556-DPW, addresses that exact issue, and concludes, as you might expect, that what you call something isn't as important as how you behave.
Dr. Mark Charest was a chemistry graduate student at Harvard University. While he was there, he and his supervisor (also a defendant in this lawsuit) and other scientists developed a "novel and valuable method for creating synthetic tetracyclines," important for commercial antibiotics. Universities have lots of valuable things being created by their employees and students, so it's not surprising that Harvard had a policy in place for this sort of situation. Harvard had Dr. Charest, as a student, sign the Harvard University Participation Agreement, which contained a clause that Dr. Charest "ha[d] read and  under[stood] and agree[d] to be bound by the terms of the 'Statement of Policy in Regard to Inventions, Patents, and Copyrights,'" referred to in this case as the IP Policy. A lot of things happen from that point on, but the important thing to know for purposes of this blog entry is that Dr. Charest maintained that Harvard had breached the IP Policy. Harvard, in response, maintained (among other things) that the IP Policy was not a contract.
Other than being called a "policy," you might think this an odd argument for Harvard to try to make, considering that having Dr. Charest sign an agreement to be bound by the IP Policy sounds pretty contract-y. A 1988 Massachusetts Supreme Judicial Court decision, Jackson v. Action for Boston Community Development, had held that an employer's personnel manual was not a contract, and so Harvard relied heavily on that precedent, trying to cast its IP Policy as similar to the personnel manual in that case.
Jackson established a number of factors for its decision, and, while some of those factors did weigh in favor of Harvard, others weighed in favor of Dr. Charest. For instance, Harvard maintained the ability to unilaterally modify the IP Policy and there were no negotiations between Harvard and Dr. Charest over the IP Policy, two factors Jackson said support a conclusion that the IP Policy does not impose contractual obligations. However, Harvard called special attention to the IP Policy and Dr. Charest's agreement to it, required Dr. Charest's signature acknowledging the IP Policy, and the IP Policy spoke in mandatory terms rather than suggestive terms, all of which made it seem more like a binding contract.
In the end, the court found that, as the Jackson precedent has developed, the really important thing is whether Dr. Charest understood himself to have to agree to the terms of the IP Policy in order to continue as a student researcher at Harvard, and that Harvard was likewise agreeing to be bound. The court concludes that yes, this was true. The IP Policy sounded as if it was being very clear about Harvard's obligations, because of its unambiguous language. Harvard itself consistently referenced the IP Policy as governing its actions when questioned by Dr. Charest and when communicating with its students. Therefore, Harvard could not pretend now that it had not been behaving as if it was bound by the terms of the IP Policy.
(Nevertheless, the court went on to dismiss most--but not all--of Dr. Charest's claims. The facts are too complicated to get into in the scope of this blog entry, but if you're interested in the relationship between research universities and their graduate students, it's an interesting read.)
Wednesday, March 30, 2016
Have you ever been frustrated with seeming endless and practically unreadable scroll-down window that accompany many internet contracts? Or maybe you don't even think about them enough to be frustrated. The dozens of pages of scroll text typically end with a checkbox stating, "I have read and understood the foregoing agreement." All but the most unusually focused among users will check the box without having read the verbose digital boilerplate, and both sides surely recognize the untruth of the "read and understood" certification.
A court has recently refused to enforce an arbitration provision because it was buried at the bottom of the lengthy scroll able window. And the decision came from not just any court, but from the United States Court of Appeals for the Seventh Circuit--known for present purposes as the founder of the ProCD and Hill v. Gateway 2000 line of shrinkwrap arbitration-clause cases.
Over at the National Law Review, attorney Eric G. Pearson describes the facts of in Sgouros v. TransUnion Corp., No. 15-1371 (7th Cir. March 25, 2016), an opinion by Chief Judge Diane Wood applying Illinois law:
Sgouros purchased a “credit score” package from TransUnion, and he later brought suit, alleging that TransUnion had provided him with a number that was erroneously high and thus useless to him in his negotiations with a car dealer. TransUnion filed a motion to compel arbitration, which the district court denied.
The crux of the dispute concerned the webpage for “Step 2” in Sgouros’s purchase, which asked him for an account username and password and for his credit-card information. See slip op. at 4. Below these fields were two bubbles to answer whether a user’s home address was the same as the user’s billing address (“yes” or “no”), and below that was a scrollable window in which only the first two-and-a-half lines of a “Service Agreement” were visible. Had he read to page 8 of the 10-page agreement, Sgouros would have found the arbitration clause. Below the scrollable window was a hyperlink to a printable version of the agreement and a bold-faced paragraph memorializing an “authorization” to obtain credit information. Rounding out the bottom of the page was a button labeled “I Accept & Continue to Step 3.”
Judge Wood's opinion itself begins, for those of us who admire persuasive storytelling, with an excellent example of framing the story around the ultimate result:
Hoping to learn about his creditworthiness, Gary Sgouros purchased a "credit score" package from the defendant, TransUnion. Armed with the number TransUnion gave him, he went to a car dealership and tried to use it to negotiate a favorable loan. It turned out, however, that the score he had bought was useless: it was 100 points higher than the score pulled by the dealership.Believing that he had been duped into paying money for a worthless number, Sgouros filed this lawsuit against TransUnion. In it, he asserts that the defendant violated various state and federal consumer protection laws. Rather than responding on the merits, however, TransUnion countered with a motion to compel arbitration. It asserted that the website through which Sgouros purchased his product included (if one searched long enough) an agreement to arbitrate all disputes relating to the deal.
- The arbitration clause was not visible in the window.
- The site did not call the user’s attention to the arbitration provision in any other way.
- The site did not require the user to scroll to the bottom of the window or to first click on the scroll box.
- It was not clear that the purchase “was subject to any terms and conditions of sale.”
- The term “Service Agreement” said nothing “about what the agreement regulated.”
- The bold-faced paragraph was merely an authorization, and the button labeled “I Accept” actually misled the consumer to thinking that this was an acceptance of only the authorization’s terms. “No reasonable person would think that hidden within that disclosure was also the message that the same click constituted acceptance of the Service Agreement.”
All in all, an interesting turn of events from an important court on issues of clickwrap terms and arbitration.
Sunday, March 27, 2016
One of the areas of contract law where the mere language alone frequently trips my students up is the area of assignment and delegation, largely because neither courts nor contracts are always exactly precise in what they mean in this area. It remains one of the areas that, say, a large insurance company can find it got the wording wrong, as happened in a recent case out of Florida, Bioscience West v. Gulfstream Property and Casualty Insurance, Case No. 2D14-3946.
A homeowner had bought a insurance policy from Gulfstream. The policy prohibited assignment "of this policy" without Gulfstream's written consent. The homeowner's house suffered water damage and she hired Bioscience to fix the damage. She assigned "any and all insurance rights, benefits, and proceeds pertaining to services provided by BIOSCIENCE WEST INC. under the above referenced policy to BIOSCIENCE WEST, INC." When Gulfstream subsequently denied the homeowner's insurance claim, Bioscience sued as the assignee of the homeowner's right to recover the insurance policy's benefit. Gulfstream responded by stating that the policy could not be assigned with Gulfstream's consent, which had never been given. The distract court agreed, found the homeowner's assignment to be improper, and entered summary judgment in Gulfstream's favor.
The appellate court disagreed. The appellate court said that the phrase "assignment of this policy" plainly referred to the entire policy. What the homeowner assigned, however, was something less than the entire policy, i.e., just a portion of the benefits. Therefore, under the "unambiguous" wording of the policy, the homeowner's actions were permissible without Gulfstream's consent; Gulfstream's consent was only required if she tried to assign the entire policy.
And, in fact, the court found this was consistent with the loss-payment portion of the policy, which provided that Gulfstream would pay the homeowner "unless some other person . . . is legally entitled to receive payment." The court said that proved that Gulfstream understood that the homeowner would be able to assign benefits under the policy. (Although arguably all this proved was that Gulfstream understood that the homeowner would be able to assign benefits under the policy with Gulfstream's consent.) At any rate, there was ample precedent in Florida's case law supporting the proposition that policyholders can assign post-loss claims without the consent of the insurer.
Saturday, March 26, 2016
I just find this case so tragic and frustrating that I had to share with others, because that's just how I am, I like to spread those emotions around. But I think it's important, as we continue to debate how we do health care and health insurance in this country, to really think about the outcomes of these questions. And I have a nephew who was born premature and had to spend a little time in the NICU. My nephew is now a happy, energetic, clever five-year-old who we are very grateful for (even though we don't understand how five years have managed to pass, surely that's incorrect and he was just born yesterday, no?), but this case made me think of him and remember those first few scary days when you have a baby who you can't bring home with you. And how unforgiving bureaucracy can be in the face of your mere human emotions.
Kurma v. Starmark, Inc., No. 12-11810-DPW, a recent case out of the District of Massachusetts, introduces us to the Kurmas. Their son was born about two months premature and was immediately hospitalized after birth and remained in the intensive care unit for over two months. His hospital bills totaled more than $667,000. It seems as if it was a happy ending for the baby boy and that he eventually went home with his parents, because the case doesn't tell us otherwise, so that at least seems like good news for the Kurmas.
The bad news was that they failed to comply perfectly with all of the formalities of their health insurance policy, and for this reason the court found it had no choice but to find that the baby boy was not covered by his father's health insurance plan and therefore the Kurmas are responsible for the $667,000 hospital bill.
Mr. Kurma had been employed by First Tek since 2006. First Tek enrolled in the Bluesoft Group Health Benefit Plan on July 1, 2010. Mr. Kurma and his family joined in the plan as soon as it became available. His wife at the time was already pregnant, and her pregnancy care was covered under the plan. Their son was born on October 7, 2010, three months after they joined the Bluesoft plan.
What makes this case so tragic to me is that it wasn't as if Mr. Kurma did nothing to inform his health insurance that his baby son had been born. He did, in fact. He called his health insurance's claims processor on October 14, 2010, to inform him that his son had been born the previous week. Everybody agreed that this was timely notice to the health insurance company of the baby's birth. A week later, on October 21, Mr. Kurma received a letter from an affiliate of his health insurance company referring to "Baby Boy" and requesting medical information to determine the necessity of the baby's ongoing treatment.
Mr. Kurma had several more conversations with his health insurance company during the month of October. The parties disputed what was said in those conversations, although they agreed that Mr. Kurma wished to add his newborn son to the health insurance plan. There was disagreement as to whether or not Mr. Kurma was told that he needed to provide his HR department at work with written notice of his son's birth in order to add him to the policy. At any rate, on November 8, 2010 (more than 30 days after the baby's birth, which was the time limit Mr. Kurma had under the policy), the health insurance company sent Mr. Kurma a "Certificate of Group Coverage" that "is evidence of your coverage under this plan." The new baby was listed as the individual to whom the coverage applied and the "Date coverage began" was given as October 7, 2010, the date of the baby's birth. To be honest, I would at that point, if I were Mr. Kurma, probably have considered the baby to have been covered, as that piece of paper would have seemed self-evident to me as "evidence of...coverage." However, this piece of paper contained a trick: It claimed the "Date coverage ended" as October 6, 2010, the date before the baby's birth. According to the health insurance company, this should have been a red flag to Mr. Kurma, as that was the health insurance company's way of indicating that it had refused coverage on the baby. I'm not entirely sure why the way to do this wouldn't have been to send a letter saying "We are not covering the baby," rather than sending some weird time-travel-y message like this. It would be a good policy for all of us to just say what we mean in communications like this, don't you think? This paper, far from raising any red flag that Mr. Kurma needed to do anything further, seemed to reassure Mr. Kurma that he had done everything he needed to do.
And, even more confusingly, not even the insurance company itself, internally, seemed to know whether or not it thought the baby was covered. On November 4, an employee noted that the baby was automatically covered for the first month of his life and then needed to be formally added to the policy. A second note on November 5 corrected that to explain that the baby needed to be immediately enrolled in order to be covered. But it seems to me that if not even the health insurance company's own employees can figure out whether or not the baby was covered, it seems ridiculous to assume that a harried new father, with a baby in intensive care and a five-year-old at home to worry about, was supposed to be able to figure it out.
On November 29, 2010, Mr. Kurma had a conversation with his health insurance company in which he stated that he had added his new son to the plan. That night he e-mailed HR at First Tek to ask them to add the baby to the plan. That e-mail was the first written contact Mr. Kurma had had with HR. It came, as you can see, more than 30 days after the baby's birth. Which was a violation of the policy, which provided, "You notify Us and the Claims Processor of the birth . . . within 30 days," with "Us" defined as Mr. Kurma's employer, First Tek. Mr. Kurma had only informed the claims processor within 30 days.
In December 2010, Mr. Kurma was told for the first time that the health insurance company was denying coverage for his new baby. Confused, Mr. Kurma inquired as to why and was told it was his failure to return the written enrollment forms to his HR department within 30 days of the baby's birth. Mr. Kurma called his health insurance company to complain; they were unmoved.
Mr. Kurma's employer, however, was moved by Mr. Kurma's situation. To be honest, it seems as if First Tek knew all along that Mr. Kurma's son had been born and was in intensive care, which makes sense to me, as it is the kind of thing that employers tend to know, if you're taking time off and such. First Tek's CEO actually contacted the health insurance company on behalf of Mr. Kurma, asking for leniency: "[Mr. Kurma] has a prematurely born child who is still in hospital and in deep sorrow and was not in a right frame of mind. Is there anything you can do to make the carrier make an exception?" The carrier--who nobody disputed was well aware of the baby's existence and Mr. Kurma's desire to add him to the plan--refused to make such an exception, insisting that it could not because First Tek (the company requesting leniency) had not been properly notified. Note that that was the only basis for the health insurance company's denial, as stated in the letter it sent Mr. Kurma: "The plan required that Mr. Kurma notify [the insurance company] AND his employer, within 30 days after the infant's date of birth. [The insurance company] received notification within the required time frame, but First Tek did not." No matter, apparently, that First Tek itself requested that its notice requirement be waived and at any right apparently believed itself to have been properly notified.
Now the insurance plan in this case contained language that added further confusion to what was going on here: It gave First Tek "full, exclusive and discretionary authority to determine all questions arising in connection with this Contract including its interpretation." Under this clause, one might think that, if First Tek considered itself to have been validly notified, then it was. Not so fast, though. The insurance plan also contained language that the insurance company "has full, discretionary and final authority for construing the terms of the plan and for making final determinations as to appeals of benefit claim determinations . . . ." So whose interpretation, First Tek's or the insurance company's, should win here, when they both have some sort of "full" and "discretionary authority"?
The court concluded that this language meant that First Tek had authority over contract interpretation, but the insurance company had authority over claim determinations under the contract. Therefore, First Tek was correct in its assertion that the baby was enrolled, because that lay within First Tek's discretion. However, First Tek could not contradict the insurance company's determination, even accepting that the baby was enrolled, that the benefits were denied. I admit I'm so confused by this determination, I read this paragraph of the decision over several times, and I'm fighting a cold myself at the moment (and worrying about what health insurance coverage I'm going to mess up should I need to see a doctor over this illness!), so if I'm reading this wrong, please let me know, but this seems contradictory. What's the point of giving First Tek "ultimate" authority over who's enrolled under the policy if the health insurance company has "ultimate" authority to ignore First Tek's "ultimate" authority and deny benefits because it doesn't think people are enrolled? The court seems to think that this is a system that makes sense, but it mostly seems to me that it's just a fancy way of obscuring the fact that First Tek really had no authority here. Which might be fine as just a straightforward matter, but this is anything but straightforward: The contract manages to strip First Tek of authority by saying the opposite, much like the weird denial of coverage the insurance company sent that actually read that it was "evidence . . . of coverage." This is like being Alice in Looking-Glass Land, frankly.
At any rate, as you could probably tell was coming, Mr. Kurma loses this case. What's interesting is that he presents no claim that he ever informed First Tek in any way of the birth of his son within the relevant 30-day period. I find this difficult to believe, personally, and I don't know how there couldn't have been something he could have used to argue that he gave First Tek some notice, especially given the evidence that even First Tek's CEO tried to get coverage for the baby. But the court says there was no dispute that there had been no notice "of any kind," not even oral, and so Mr. Kurma failed under the terms of the policy.
Mr. Kurma argued that First Tek clearly wished the baby to be enrolled and tried to intercede with the insurance company on Mr. Kurma's behalf. The court's reaction to this is unimpressed: the plan says what the plan says, and First Tek's desire not to follow the plan doesn't mean anything. (Of course, presumably First Tek didn't have a whole lot of opportunity to negotiate the terms of the plan in the first place.) Mr. Kurma also tries to argue estoppel, which fails because, again, the words of the plan were clear, and Mr. Kurma failed to follow them, so he can't argue estoppel. Likewise, there was no duty on the insurance company's part to explain to Mr. Kurma what steps he had to take to insure his son, and there was no bad faith on the insurance company's part in failing to do so.
So, the end result is that the Kurma family is now over $667,000 in debt, as a result of having sought to save their son's life. This case just kills me. I know what the plan said, but I am a trained lawyer who found the words being said to Mr. Kurma confusing; I am bewildered by how it could be reasonable to expect Mr. Kurma to wade through all of this during what was doubtless the most stressful and emotionally exhausting time of his life. Think of how challenging you find it to deal with bureaucracy under ideal circumstances; imagine having to do it while your tiny infant son is fighting for his life in intensive care. And having to do it under circumstances where you're given dense pages of legalese, no assistance to walk through that legalese, and documents that say one thing while meaning the opposite.
I know that insurance companies have a lot to deal with, too. And I know this insurance company didn't want to pay $667,000 in medical bills. I know this insurance company wanted to make sure it makes people jump through a few hoops first to make sure they really deserve the health care. But I just find this outcome in this case tragically absurd in a way that makes me despair for how we're dealing with health care in this country: Nobody disputed that the health insurance company was well aware Mr. Kurma's wife was pregnant and would presumably soon be having a child; nobody disputed that the health insurance company was well aware Mr. Kurma's son had been born and was hospitalized; nobody disputed that the health insurance company indicated to Mr. Kurma that it was evaluating the necessity of his son's medical treatment; nobody disputed that the health insurance company even sent "evidence of . . . coverage" to Mr. Kurma. And still the health insurance company didn't have to cover the baby, because of one missed hoop that the company it pertained to sought to waive entirely.
Maybe your view is that Mr. Kurma should have been more on top of things. But I just think this seems like an incredibly harsh case.
Peter Gulia, an adjunct professor at Temple University Beasley School of Law, sent me this as a follow-up and I add it to the text here with his permission because I think it's a valuable contribution.
Your great essay on Kurma v. Starmark, Inc. paints a striking story. But let me give you a way to reconsider what happened.
The health plan is a “self-funded” health plan that is not health insurance. The employer pays the claims from the employer’s assets. (The employer likely has a stop-loss insurance contract that pays the employer, not the plan or any participant, if claims exceed specified measures.)
Starmark is not an insurer; it provides services to the employer, which also is the health plan’s sponsor, administrator, and named fiduciary.
In any moment during Mr. Kurma’s difficulties, the employer, acting as the plan’s administrator, could have instructed the processor to treat Kurma’s newborn as regularly enrolled. Doing so would make the employer responsible to pay the mother’s and newborn’s medical expenses.
(Even if the employer asked: “Is there anything [the processor] can do to make the carrier make an exception?”, this likely referred to trying to persuade the stop-loss insurer to provide more coverage than its contract promised.)
If one analyzes this case under the common law of contracts, one might classify it as a duty-to-read case. The reported facts suggest the participant did not read the plan, and also did not read, at least not carefully, its summary plan description.
That Mr. Kurma suffered a loss because he didn’t sufficiently understand his employee-benefit plan’s conditions is harsh. But it’s not because Starmark failed to perform its service agreement. And it’s not because Starmark sought to avoid an expense it never would bear.
Sunday, March 20, 2016
A recent California appellate court case, Long v. Provide Commerce, Inc., found that a browsewrap agreement containing an arbitration clause failed to provide notice sufficient for assent. The case is likely to be significant in shaping wrap contract doctrine because it is the first California appellate court decision which addresses “what sort of website design elements would be necessary or sufficient to deem a browsewrap agreement valid in the absence of actual notice.”
This case is another in a line of cases coming out of California and the Ninth Circuit which is making a long overdue correction to contract law doctrine -- doctrine which veered dangerously off course with ProCD and its ilk. As I’ve previously noted, the law in this area is still working itself out, and my guess is that other jurisdictions will start reevaluating the meaning of “assent” when it comes to wrap contracts (and start following the Ninth Circuit’s more reasonable understanding of reasonableness).
(Disclosure and fun fact: I am the recipient of a chair funded from a class action settlement involving ProFlowers).
Saturday, March 19, 2016
Every time I teach the mailbox rule, I'm amazed by how different the world was not so long ago. Imagine having to wait days to receive documents, instead of seconds via e-mail. When I was practicing, if documents didn't come through to me instantaneously, I found myself going through my spam, annoyed at the delay and the time I was losing in not having the documents in hand immediately. I think all the time that the practice of law must have been very different.
A recent case out of the District of Maryland, CMFG Life Insurance Co. v. Schell, Case No. GJH-13-3032, made me think again about how important timing can be. In that case, a delay in sending a document that amounted to only a couple of hours contributed to a sizable financial loss.
Sandra Lee had an annuity with CMFG that listed as its beneficiaries her husband William Schell and her three children. On December 14, 2012, between 11 and 11:30 am, Schell delivered a Change of Beneficiary form to the office of Lee's financial advisor, Nelson Turner. The form, signed by Schell as attorney-in-fact for Lee pursuant to a power of attorney that had been executed by Lee on December 6, named Schell as the sole beneficiary of the annuity, removing Lee's three children. Turner faxed the form to CMFG; the fax transmission stated CMFG received it at 2:01 pm.
At 1:10 pm, in between the time of Schell leaving the form with Turner and the time of CMFG receiving the faxed form, Lee died. Therefore, CMFG rejected the beneficiary change because it had not received the form prior to Lee's death, as required by the contract. Schell objected to CMFG's payment of the benefits to Lee's children, arguing that he was the only beneficiary of the annuity, and this lawsuit resulted.
Section 4.2 of the annuity stated that the beneficiary could be changed "by written request any time while the annuitant is alive." Both parties agreed that this language was clear that any beneficiary change had to take place while Lee was alive. But Schell said that the contract said the beneficiary change would be effective on the date signed, and he signed it while Lee was alive. The court, however, noted that this reading of the contract ignored the "by written request" language. The annuity actually contained a definition of "written request" that said it was a "written notice . . . received in our home office." The court noted that, although Schell might have signed the beneficiary form while Lee was still alive, it was not received by CMFG, as required by the contract, until after Lee had died. Therefore, it was not effective under the terms of the contract requiring it to be received while Lee was alive.
You might be thinking that, if not for Turner's delay in faxing the form, Schell would have been tens of thousands of dollars richer at this moment. However, the court went on to rule that the change of beneficiary form would not have been effective in any event because Schell could not breach his fiduciary duty to Lee and use his power of attorney to achieve his own personal gain.
At any rate, though, if you do have a properly executed change of beneficiary form for an annuity, it is in your best interest not to delay sending it in and making it effective.
Monday, March 14, 2016
H-2B visas provide for foreign citizens to work temporarily for American businesses in non-agricultural roles. However, these visas can sometimes lead to abuse of the foreign citizens working under them, as was alleged in a recent case out of the Eighth Circuit, Cuellar-Aguilar v. Deggeller Attractions, No. 15-1219. Also blogged about here from a workplace law point of view, the case involved a group of nineteen workers who had been employed in a traveling carnival. The workers alleged, among other things, that their employer had breached their employment contracts by paying them below the minimum wage.
The district court found that there had been no contract between the workers and their employer, basing its decision on the federal regulations governing the H-2B visa program. However, the appellate court said that was the incorrect place to look for guidance on whether a contract existed. Rather, the existence of a contract is governed by state common law, and in this case there was enough evidence of a contract to survive a motion to dismiss. The workers received offers of employment from Deggeller and then traveled to the United States in acceptance of those offers, which was enough to establish a contractual relationship. The court then used the federal regulations governing the H-2B visa program to fill in the particular terms of the contract, which included a requirement that the employer pay no less than the minimum wage. Therefore, the workers' allegations that the employer had breached this requirement established a valid contract cause of action.
Allowing the workers to proceed on a contract theory may seem like a positive development for similarly situated workers who might find themselves taken advantage of. However, I had the pleasure recently of hearing Prof. Annie Smith from the University of Arkansas School of Law speak on the prospect of mandatory arbitration clauses being applied to guestworkers. As we all know, mandatory arbitration clauses are currently in major vogue, and Prof. Smith expressed concern that mandatory arbitration would be detrimental to already vulnerable guestworkers. The decision here might encourage employers like Deggeller to enter into more formal contracts that would include arbitration clauses. If they're going to be found to be in a contractual relationship anyway, presumably the employers would want to exercise control over the terms of that contractual relationship.
Monday, March 7, 2016
As Stacey writes just below this post, much is happening in the arbitration arena currently.
In December, the United States Supreme Court ruled that the 1925 Federal Arbitration Act pre-empts state law. Thus, when parties have executed agreements calling for arbitration rather than court resolutions, the arbiration clause will be upheld. The case was DirectTV, Inc. v. Imburgia, No. 14-462.
In the case, Imburgia’s contract stated that “[i]f ... the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 [the arbitration section] is unenforceable.” http://www.supremecourt.gov/opinions/15pdf/14-462_2co3.pdf
The Supreme Court noted that when DIRECTV drafted the contract, the parties likely believed that the words “law of your state” included California law that then made class-arbitration waivers unenforceable. But the Court’s subsequent holding in AT&T Mobility LLC v. Conception found that the Federal Arbitration Act pre-empts state law on the issue. Thus, parties cannot contractually bind themselves to invalid state law. When they refer to “state law,” this means only valid state law.
These rulings favor businesses, not consumers. This is so particularly so in cases between consumers and banks or credit card companies. A 2007 report found that over four years, arbitrators ruled in favor of the financial institutions in no less than 94% of the cases. Of course, in the typical take-it-or-leave it style contract, consumers have the choice only of agreeing to arbitrate or not getting the desired service.
As for the belief that arbitration saves scarce judicial resources, it is noteworthy that businesses file four times as many lawsuits as individuals. “It is hard to imagine any company giving up its own right to sue another company in a business dispute.” Double standards abound here.
Meanwhile, in early February, Senators Leahy and Franken introduced the Restoring Statutory Rights Act. This would create an exception in the Arbitration Act for disputes involving individuals and small businesses. The only way individuals would enter into arbitration is if they agreed to do so after the dispute has been filed. That’s very different from the current process, which automatically shunts all customer disputes into binding arbitration.
The Consumer Financial Protection Bureau is also considering a ban in mandatory-arbitration provisions in contracts for credit cards and other financial services. The Centers for Medicare and Medicaid Services is looking to do the same in relation to nursing home contracts.
Acts and regulations are highly warranted in this context. We know where the Supreme Court currently stands on the issue. We do not know where it will go with a new justice soon to be appointed, but judicial branch action in this area may not be forthcoming any time soon.
People keep challenging arbitration provisions, and they keep losing. In this instance, a case out of Washington called Marcus & Millichap Real Estate Investment Services of Seattle, Inc. v. Yates, Wood & MacDonald, Inc., No. 73199-8-I.
This time, the parties were both voluntary members of the Commercial Broker's Association (the "CBA"), the bylaws of which contained a clause that CBA members agreed to arbitrate disputes with each other according to the CBA's arbitration procedure. Neither party ever signed any sort of membership agreement to belong to the CBA, which Marcus focused on in its argument that the arbitration provision therefore wasn't enforceable. Marcus argued that, without a signed agreement, there was no evidence that it had manifested assent to the arbitration provision. However, well-established Washington law held that membership in the voluntary organization was evidence enough that Marcus and Yates assented to abide by its bylaws. There was no requirement that there be a signed agreement.
Marcus didn't confine its arguments to just asserting that there should have been a signed agreement, however. Marcus then tried to argue that it wasn't even a member of the CBA, because of the fact that no one had been able to produce a membership agreement signed by Marcus. This was a bad move on its part and lost it a lot of credibility. The court pointed out that Marcus had paid all of the CBA's required fees and dues since 1993 and had in fact on two previous occasions taken advantage of the CBA's arbitration tribunal to resolve disputes, a procedure only available to CBA members. The court also pointed out that, despite testifying that he did not believe Marcus was a member of the CBA, Marcus's regional manager had routinely provided other brokers with Marcus's "CBA Office ID" number.
Marcus was willing to fight hard to keep this dispute out of arbitration, to the point of having to be scolded by the court for "prevaricating." At the point when that is happening, I'm not sure winning the case and staying in front of that judge is what you want!
Wednesday, March 2, 2016
This case out of California, Gilkyson v. Disney Enterprises, Inc., B260103, involves the song "The Bare Necessities," which, as you can see from the above, is readily available on YouTube. The song was written by Terry Gilkyson (this might come up in a trivia competition someday, you never know). His adult children are the plaintiffs in this case.
In the 1960s, Gilkyson wrote several songs for Disney pursuant to a work-for-hire contract under which Disney was deemed the author and owner of the songs and Gilkyson was paid $1,000 per song together with ongoing royalties for certain licensing. The contract specifically excluded royalties for use of the songs in "motion pictures, photoplays, books, merchandising, television, radio and endeavors of the same or similar nature." Disney has paid royalties on the song to Gilkyson and his heirs but Disney has never paid royalties for use of the songs in any audiovisual medium, including DVDs. The Gilkyson heirs disagree with Disney's interpretation of the contract and believe that they are entitled to royalties for use of the songs on VHS tapes and DVDs. Disney argues that the four-year statute of limitations on breach of contract actions bars all of the Gilkysons' claims, because all of the VHS tapes and DVDs complained about were first issued sometime prior to 2007. Therefore, according to Disney, Gilkyson should have brought this claim by 2011, not, as it did, in 2013.
Disney loses this argument, however, based on the continuous accrual doctrine: "[E]ach breach of a recurring obligation is independently actionable." Basically, California law interprets the contract with Disney as being divisible, with each breach of that contract actionable and subject to its own statute of limitation period. Therefore, the court concluded that the Gilkysons could seek recovery of the royalties that were due for a period beginning four years from the filing of their complaint (so, from 2009 onward). According to this court, the California state court jurisprudence on this appears to be clear (although note that, at the trial court level, this case was dismissed without applying the continuous accrual doctrine). Disney pointed to a Central District of California case from 2001 that rejected the plaintiff's continuous accrual doctrine argument, but this California state court noted that it did so without any citation to any California case and that this court disagreed with that case's conclusion.
So it's on to the next step for these parties: fighting over the interpretation of the contract. Or settlement.
Monday, February 29, 2016
Are arbitration provisions binding against exotic dancers? Well, if you're wondering, in this Connecticut case, Horrocks v. Keepers, Inc., CV156054684S (behind a paywall), the answer is yes.
The plaintiffs here filed the lawsuit alleging that they were employees, not independent contractors as the gentleman's club maintained, and as such the club had violated plaintiffs' legal rights as employees, including failing to pay minimum wage. The club moved to stay the proceedings arguing that it had signed an entertainment lease agreement with all of the dancers that required binding arbitration to resolve disputes.
The plaintiffs' main argument was that the entire entertainment lease agreement was void because it had an illegal purpose in seeking to implement the club's violation of labor laws as alleged in the plaintiffs' complaint. Because the entire agreement was void, the argument went, the arbitration clause wasn't enforceable. In the alternative, the plaintiffs argued that the arbitration provision was unconscionable.
On the plaintiffs' first point, the court concluded that the legality of the overall entertainment lease agreement was a matter for the arbitrator to decide. According to Connecticut precedent, the courts' job is only to determine if the arbitration clause is valid; every other issue is left to the arbitrator. Therefore, all of the arguments about the illegality of the entertainment lease agreement were left to the arbitrator, and the court focused its analysis on the alleged unconscionability of the arbitration provision.
We've seen this story before. And, in fact, courts have seemed pretty determined to find arbitration provisions enforceable, even when other parts of the contract were unconscionable (or, as here, where it was questionable whether the contract was enforceable at all). There was actually Connecticut precedent about another set of exotic dancers suing another gentlemen's club with similar allegations, and in that case, D'Antuono v. Service Road Corp, 789 F. Supp. 2d 308 (D. Conn. 2011), the court upheld the arbitration provision against attacks of unconscionability. The court in this case follows the precedent, finding this case indistinguishable from D'Antuono.
The court here allows for the possibility that this arbitration clause was part of an unenforceable adhesion contract presented in bad faith with a knowing illegal purpose, but says that alone isn't enough to deny enforcement of the arbitration clause, because that would only be procedural unconscionability. As far as substantive unconscionability went, the cost and fee shifting provisions provided in the arbitration clause weren't unreasonable, and the class action waiver included in the arbitration provision was also not unconscionable according to precedent: "Requiring the plaintiffs to pursue their claims individually is not an ineffective vindication of their rights."
I admit that I'd never really given a lot of thought to class action waivers, but it does seem odd to assert that class action waivers do not harm the plaintiffs' ability to vindicate their rights. After all, class actions are frequently understood to exist to correct the problem that, sometimes, individual pursuit of claims isn't effective.
At any right, individual pursuit through arbitration is what these plaintiffs are left with.
Wednesday, February 24, 2016
We've looked at arbitration provisions and unconscionability before. In this recent case out of California, Yeotis v. Warner Pacific Insurance Services Inc., No. B245770, the agreement in question was found to be unconscionable in places, but that didn't doom the arbitration provision contained within it.
There was an element of procedural unconscionability to the contract. The court concluded that the contract was an adhesion contract, because the plaintiff was required to sign it in order to keep her job. There was, therefore, some procedural unconscionability attached to the formation of the contract. Additionally, there was some substantive unconscionability in the contract's provisions that gave the court pause. The wording of the contract required the plaintiff to pay fees in arbitration that she wouldn't have had to pay in a court of law. The defendant tried to argue that that was only the impression given and that the plaintiff would never have had to pay those fees in reality, but the court was concerned that the plaintiff would assume, under the contract's language, that she would be responsible for the fees and therefore might hesitate to pursue her remedy against the employer.
So the court directed the costs provision to be severed from the contract, but it found that the rest of the contract was enforceable. The procedural unconscionability was slight, it thought, and did not permeate the whole contract. The plaintiff's allegation that she had never been provided with the relevant arbitration rules prior to signing the contract was unpersuasive to the court as a more serious procedural unconscionability problem because the court thought she could have found the rules herself very easily and there was no contention otherwise. As for the rest of the arbitration procedures as explained in the contract, the court found that they were not substantively unconscionable and so could be enforced.