ContractsProf Blog

News Flash: SCOTUS Takes a Contracts Case

 

Coach Seat, Actual Size

We blogged about this case before.  Since that time, a panel of the Ninth Circuit issued a new opinion that is available here.  

 

You can read more about the case on SCOTUSblog, which provides this summary of the case here in a roundup of all the cases on which the Court granted Cert on the same day:

The Court agreed to decide whether airline passengers who are removed from a “frequent flyer” entitlement list have a right under state law to sue the airline for alleged violation of a promise that they could continue to enjoy the benefits.   The case of Northwest, Inc., v. Ginsberg (12-462) tests whether such legal claims are preempted by federal law governing regulation of commercial air service.

SCOTUSblog also provides this statement of the issue in the case:

Issue: Whether the court of appeals erred in holding, in contrast with the decisions of other circuits, that respondent’s implied covenant of good faith and fair dealing was not preempted under the Airline Deregulation Act because such claims are categorically unrelated to a price, route, or service, notwithstanding that respondent’s claim arises out of a frequent-flyer program (the precise context of American Airlines, Inc. v. Wolens ) and manifestly enlarged the terms of the parties’ undertakings, which allowed termination in Northwest’s sole discretion.

We are looking forward to the Supreme Court's ruling (although the tea leaves seem pretty clear), and we hope that they cite to our earlier post as (some kind of) authoirty.

[JT]

Plain Meaning Leads to Mood Indigo for Ellington Heir

Duke Ellington’s grandson brought a breach of contract action against a group of music publishers; he sought to recover royalties allegedly due under a 1961 contract. Under that contract, Ellington and his heirs are described as the “First Party” and several music publishers, including EMI Mills, are referred to as the “Second Party.” On appeal from the dismissal of the case, Ellington’s grandson pointed to paragraph 3(a) of the contract which required the Second Party to pay Ellington "a sum equal to fifty (50 percent) percent of the net revenue actually received by the Second Party from…foreign publication" of Ellington's compositions. Ellington’s grandson argued that the music publishers had since acquired ownership of the foreign subpublishers, thereby skimming net revenue actually received in the form of fees and, in turn, payment due to Ellington’s heirs.

The appellate court explained the contract and the grandson’s argument:

This is known in the music publishing industry as a "net receipts" arrangement by which a composer, such as Ellington, would collect royalties based on income received by a publisher after the deduction of fees charged by foreign subpublishers. As stated in plaintiff's brief, "net receipts" arrangements were standard when the agreement was executed in 1961. Plaintiff also notes that at that time foreign subpublishers were typically unaffiliated with domestic publishers such as Mills Music. Over time, however, EMI Mills, like other publishers, acquired ownership of the foreign subpublishers through which revenues derived from foreign subpublications were generated. Accordingly, in this case, fees that previously had been charged by independent foreign subpublishers under the instant net receipts agreement are now being charged by subpublishers owned by EMI Mills. Plaintiff asserts that EMI Mills has enabled itself to skim his claimed share of royalties from the Duke Ellington compositions by paying commissions to its affiliated foreign subpublishers before remitting the bargained-for royalty payments to Duke Ellington's heirs.

Ellington’s grandson asserted on appeal that the agreement is ambiguous as to whether "net revenue actually received by the Second Party" entails revenue received from EMI Mills's foreign subpublisher affiliates. The appellate court found no ambiguity in the agreement; the court stated that the agreement “by its terms, requires EMI Mills to pay Ellington’s heirs 50 percent of the net revenue actually received from foreign publication of Ellington’s compositions.” It reasoned:

"Foreign publication" has one unmistakable meaning regardless of whether it is performed by independent or affiliated subpublishers. Given the plain meaning of the agreement's language, plaintiff's argument that foreign subpublishers were generally unaffiliated in 1961, when the agreement was executed, is immaterial.

The court continued by stating that “the complaint sets forth no basis for plaintiff's apparent premise that subpublishers owned by EMI Mills should render their services for free although independent subpublishers were presumably compensated for rendering identical services.” Thus, dismissal of the suit was affirmed.

Ellington v. EMI Music, 651558/10, NYLJ 1202598616249, at *1 (App. Div., 1st, Decided May 2, 2013). 

[Meredith R. Miller]

Harper Lee Sues to Recover Her Rights to To Kill a Mockingbird

For many lawyers, To Kill a Mockingbird (TKAM) is at the top of their list of "favorite books/movies about a lawyer." TKAM is about more than lawyering, of course.  It's about racism, family, class and much more.  This week, TKAM also is about "fraudulent inducement," "consideration" (a lack thereof) and "fiduciary duty." All of those subjects are in the complaint filed by TKAM author, (Nelle) Harper Lee, against her purported literary agent.

In the suit, Lee alleges that Samuel L. Pinkus (and a few other defendants) fraudulently induced her to sign her TKAM rights over to one of Pinkus's companies in 2007 and again in 2011. According to Lee, Pinkus, the son-in-law of Lee's longtime agent, Eugene Winick, transferred many of Winick's clients to himself when Winick fell ill in 2006. Pinkus then allegedly misappropriated royalties and failed to promote Lee's copyright in the U.S. and abroad.

For Contracts professors, the Lee v. Pinkus suit provides some interesting hypos to discuss when teaching fraud, consideration, and assignments of rights. Regarding fraud, Lee alleges that Pinkus lied to her about what she was signing at a time when she was particularly vulnerable due to a recent stroke and declining eyesight.  Consideration is in play because there allegedly was no consideration from Pinkus to Lee in exchange for Lee's transfer of rights to Pinkus.  Assignment issues arose because the many companies who owed Lee royalties reportedly struggled to figure out which company or companies they should pay given Pinkus's many shell companies.  Overall, it's a sad story for Ms. Lee but one that students may find particularly engaging.

[Heidi R. Anderson]

p.s. Although there are many quote-worthy passages in TKAM, a favorite of mine (useful when advising students about their writing) is: “Atticus told me to delete the adjectives and I'd have the facts.” Please feel free to share your favorites in the comments.

Yogurt Deal Goes Sour

Interesting story here on the Wall Street Journal's Market Watch blog.  Interesting because it seems like the case will be very difficult for plaintiff to prove and its damages will be a challenge to calculate with requisite specificity.

The facts, as also reported here on Food Navigator-USA are as follows:

In 2012, Tula Foods introduced its Better Whey of Life premium Greek yogurt line, which is now sold in over 400 stores.  Tula contracted with the Kroger Co., which in addition to its retail stores owns and operate 37 manufacturing plants at which it produced, among other things, Tula's Better Whey of Life yogurts.  According to the complaint, as summarized on the Market Watch blog, becasue Kroger did not produce the yogurt according to Tula's specification (and it allegedly did so knowlingly).  Tula also brings claims against Weber Flavors, which Tula claims failed to properly "treat and process the vanilla bean base" in Tula's yogurt.   As a result, Kroger released "poor-quality unappetizing yogurt on the market."  If that isn't not specific enough for you, the complaint specifies that, as a result of the improperly processed vanilla bean base, Tula found mold growing in its finished yogurt, resulting in a recall.

Just an aside here, for fans of Slings and Arrows, doesn't that slogan (something like, "Tula provides only poor-quality unappetizing yogurt laced with mold") strike you as precisely the sort of ad campaign that Froghammer would have come up with if they were hired to market Better Whey of Life yogurts?

 

 There is also a misappropriation claim, since Kroger allegedly used Tula's trade secrets to make a competing store brank of Greek yogurt -- but was it of equally poor quality and equally unappetizing?  Surely a jury question there. 

The theory of contract damages will be a challenge, because Tula will have to show that its product would have taken off were it not for the devastating effects on its reputation caused by the alleged breaches and resulting product recalls.  Demonstrating defendants' failure (perhaps intentional failure) to adhere to Tula's specifications will also be a lot of work.  But those allegations will also be very difficult to dismiss without a lot of discovery and perhaps a trial, so the settlement price should be high if the complaint adequately states a cause of action.  Moreover, as Tula is also bringing claims for breach of express and implied warranties, a record of moldy yogurt ought to do the trick.

[JT]

Movie Producers Sue Michael Keaton for Breach of Contract

We are grateful to the website Lexology.com and to Ellen D. Marcus of Zuckerman Spaeder LLP for this informative and interesting post about this complaint filed in the Northern District of Illinois by Merry Gentlemen, LLC against actor and director, Michael Keaton.  According to the complaint, Keaton breached his contract to act in and direct a film called Merry Gentlemen by failing to deliver it on time and by marketing his own version of the film to the Sundance Film Festival.  The film cratered, grossing only $350,000 at the box office.  Moreover, the producers allege that Keaton's various breaches caused "substantial delays and increased expenses in the completion and release of the movie," thus causing the producers to suffer "substantial financial loss."

Ms. Marcus's post picks it up there, citing Restatement 2d's Section 347 on the elements of expectation damages and illustrating what sort of sums the producers might be looking to recover.  Ms. Marcus has to speculate, as the producers cite no figures beyond those required to meet the amount-in-controversy requirement to get their diversity claim into a federal court.

Whether or not the allegations of the complaint are true, they paint a nice picture of the behind-the-scenes machinanations invovled in getting a film out to the viewing public.  According to the complaint, Keaton produced a "first cut" that all agreed was unsatisfactory.  There then followed both a "Chicago cut," edited by the producers and by Ron Lazzeretti, the screenwriter and the producers' original choice for director, as well as Keaton's second director's cut.  

The producers then shopped the Chicago cut to the Sundance Film Festival, where they were awarded a prime venue.  Keaton then allegedly threatened not to appear at Sundance unless his cut was screened.  That was a dealbreaker for Sundance, so despite already having sunk $4 million in to the film, the producers claim they had no choice but to agree to screen Keaton's second cut at the festival.   They did so through a Settlement and Release (attached to the complaint, but not to the online version) entered into with Keaton, which they now claim was without consideration, despite the recital of consideration in the agreement, and entered into under duress.

Despite all of this, the complaint alleges that the Sundance screening was a success, since the USA Today identified "Merry Gentlemen" as one of ten stand-out films screened that year.  But the producers were unable to capitalize on this success, since Keaton's alleged continuing dereliction of his directorial duties resulted in dealys of the release of the film from October of November 2008 to May 2009.  The producers allege that the film was a Christmas movie (or at least was set around Christmas time), so Keaton's delays caused the movie to premiere during the wrong season.  

The producers allege that Keaton continued to refuse to cooperate with them after Sundance.  Somehow, the movie nonetheless was released to some positive reviews:  

The movie, as released (based upon Keaton’s second cut and numerous changes made by plaintiff), received substantial critical praise. Roger Ebert called the film “original, absorbing and curiously moving in ways that are far from expected.” The New York Times’ Manohla Dargis called it “[a]n austere, nearly perfect character study of two mismatched yet ideally matched souls.” David Letterman said on his Late Night  talk show, “What a tremendous film . . . . I loved it.”

Note to the producers' attorneys: if you've got Roger Ebert and Manohla Dargis in your corner, you don't need Letterman (or The USA Today for that matter).

Nonetheless, the film did not succeed, grossing only $350,000, allegedly because of Keaton's failure to promote it.  Indeed, some of the complaints allegations relating to Keaton's promotion efforts suggest some real issues.  Upon being asked by an interviewer if she had accurately summarized the film's plot, Keaton allegedly responded that he had not seen it for a while.  

We note also that Ms. Marcus's post is cross-posted on Suits by Suits, a legal blog about disputes between companies and their executives, a site to which we may occasionally return for more blog fodder.

[JT]

En Banc Ninth Circuit Upholds Panel in Kilgore but Broughton-Cruz Survives

A little over a year ago, we reported on a Ninth Circuit case, Kilgore v. Key Bank.  Here is a summary of the panel's opinion:

The issue in Kilgore was whether California’s public policy favoring the litigation (rather than arbitration)  of claims seeking public injunctions could trump the [Federal Arbitration Act (FAA)] post-Concepcion  as it did pre-Concepcion in two California Supreme Court cases, Broughton and Cruz.  The Ninth Circuit reluctantly concluded that the Broughton-Cruz line of cases is no longer viable post-Concepcion.  As the Supreme Court made clear in Marmet, about which we blogged last month, Concepcion’s reach is broad enough to preempt state public policies other than the specific one addressed in Concepcion.  The fact that a state legislature specifically intended to avoid federal preemption under the FAA is irrelevant.

The Court then addressed the unconscionability of the arbitration clause. The Court noted that the arbitration clause at issue here was not buried in the contract and specified the rights that plaintiffs waived under arbitration.  In addition, the contract contained clear instructions on how to opt-out.  Finding no procedural unconscionability, the Court saw no need to address potential substantive unconscionability in the arbitration clause.  The case was remanded to the District Court with instructions to compel arbitration.

On rehearing en banc, the Ninth Circuit held that the case does not fall within the "public injunction" exception to the FAA, recognized in Broughton, Cruz, and Davis v. O'Melveny & Myers, and thus the Ninth Circuit vacated the District Court's denial of the defendant's motion to compel arbitration and remanded with instructions to compel aribration.  That exception only applies where the "benefits of granting injunctive relief by and large do not accrue to that party, but to the general public in danger of being victimized by the same deceptive practices as the plaintiff suffered.”  The Ninth Circuit found that not to be the case in Kilgore and thus it was able to compel arbitration while leaving the Broughton-Cruz exception to the FAA intact for now.

Judge Pregerson dissented, finding the challenged arbitration clause unconscionable.  

[JT] 

Fourth Circuit Vacates District Court's Finding that an Arbitration Clause is Unconscionable

Samuel Muriithi was a driver for Shuttle Express, a shuttle service that transported passengers to and from the Baltimore-Washington International Thurgood Marshall Airport (BWI).  Muriithi signed a Unit Franchise Agreement with Shuttle Express in 2007 (the Agreement).  He claims that he was misled when he signed the agreement and objects to Shuttle Express having classified him as an independent contractor and franchisee rather than as an employee.  He claims entitlement to payment of at least federal minimum wage plus overtime pay.  

Based on this claims, Mr. Muriithi brought a Fair Labor Standards Act (FLSA) claim, as well as state law claims, on his own behalf and behalf of a purported class of other similarly situated drivers.  in reliance on the Agreement's arbitration provision, which included a fee-splitting provision, a one-year statute of limitation and a class action waiver, Shuttle Express moved to compel arbitration.

The District Court found the arbitration provision unenforceable based on all three features mentioned above.  The District Court found that the fee-splitting provision made arbitration so expensive as to deter an arbitration that Mr. Muriithi might consider.  In addition, hat provision coupled with the class action waiver would prevent Mr. Muriithi from vindicating his statutory rights.  Finally, the District Court found that the one year statute of limitations was unenforceable because inconsistent with the FLSA's two year statute of limitations.  Concluding that the arbitration provision was "permeated by substantively unconscionable parts," the District Court found no way to severe the objectionable elements and denied Shuttle Express's motion to compel arbitration.  Shuttle Express appealed.

In Muriithi v. Shuttle Expres Inc., decided April 1st, the Fourth Circuit vacated and remanded.  The Fourth Circuit quickly established that Mr. Muriithi's dispute with Shuttle Express was subject to the arbitration provision, so the only questions was whether that provision was for some reason unenfroceable.  In appealing the District Court's ruling that the class action waiver rendered the provision unconscionable, Shuttle Express contended that AT&T Mobility v. Concepcion foreclosed any such finding.  Whilte Muriithi and the District Court attempted to limit Concepcion to cases involving federal pre-emption of state law claims and thus render it inapplicable to Muriithi's FLSA claim, the Fourth Circuit read Concepcion more broadly.  It read Concepcion as foreclosing any unconscionability defenses to an otherwise valid arbitration agreement based on a class action waiver.  

As to the fee-splitting provision, such a provision can render an arbitration agreement unenforceable, if plaintiff can establish that the "arbitral costs are so high that they effectively preclude a litigant from vindicating his federal statutory rights in an arbitral forum."  The Fourth Circuit concluded that Mr. Muriithi failed to make such a showing.  Finally, since the statute of limitations was not part of the arbitration clause, the Fourth Circuit found that the District Court had erred in addressing it on a motion to compel arbitration.  

The case was remanded to the District Court for an order compelling arbitration, with Suttle Express paying the costs of such arbitration, pursuant to its in-court agreement to do so.

[JT]

7th Circuit to Johnson Controls: No Second Bite at the Apple for You!

According to Judge Wood, Johnson Conrols, Inc. v. Edman Controls, Inc., was a simple case of a party agreeing to arbitration and then seeking to avoid arbitration once the decision went against it.  The parties had an agreement according to which Edman Controls (Edman) was supposed to have the exclusive right to distribute the products of Johnson Controls (Johnson) in Panama.  The agreement provided for arbitration of all disputes under Wisconsin law and for the losing party to pay the prevailing party's attorneys' fees.  At the time of the agreement, both parties were aware that Edman would rely on its Panamanian subsidiaries (Pinnacle) to carry out the distribution agreement.  

In 2009, Johnson breached the agreement by seeking to sell its products directly in Panama.  The Seventh Circuit noted that there was nothing subtle about the breach.  Johnson approached Edman's clients directly and refused to communicate with Edman about attempts to market its products in Panama,  In 2010, Edman brought its claims, sounding in tortious interference, unjust enrichment and breach of the duties of good faith and fair dealing to an arbitrator.

The arbitrator ruled in Edman's favor and awarded about $750,000 in damages.  However, the arbitrator dismissed Edman's claims relating to tortious interference with Pinnacle, finding that he had no authority over the relations between Johnson and Pinnacle.  "Aha!" said Johnson (we paraphrase).  Challenging the arbitral award, Johnson argued that all of Edman's harm actually derived from Pinnacle's harm, and the arbitrator had no jurisdiction over Pinnacle's harms.  

The District Court was unimpressed.  The parties knew that Edman would be operating through Pinnacle, and given the narrow scope of the court's review on a challenge to an arbitral award, Johnson's claim that the arbitrator had been mistaken in his understanding of Wisconsin law was unavailing.  But thanks for playing, Johnson.  For your troubles, the District Court awarded Edman attorneys' fees of about $250,000, bringing the total in damages to a tidy $1 million.

On appeal, the Seventh Circuit noted that although both parties relied on Chapter 1 of the Federal Arbitration Act (FAA), the case was actually governed by either the FAA's Chapter 2, which incorporates the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the FAA's Chapter 3, which incorporates the (Panama) Inter-American Convention on International Commercial Arbitration.  The Seventh Circuit noted that it was not clear whether a court could rely on FAA Chapter 1 to vacate a decision taken by a U.S. arbitrator relating to an agreement that is governed by either the New York or the Panama Convention.

In a close case, the Seventh Circuit opined, a court would have to address that issue, as the grounds for vacatur in FAA Chapters 2 and 3 are different from those in Chapter 1.  But this was not a close case.  Arbitral decisions are not overturned lightly and will be upheld so long as “an arbitrator is even arguably construing or applying the contract and acting within the scope of this authority.”  Johnson claimed that the arbitrator exceeded its power by letting Edman bring claims on behalf of its subsidiary.  But that would only be a mistaken application of Wisconsin law if Johnson were correct.  Such a mistake would not be enough to overturn the award, and Johnson is not correct as to Wisconsin law.  And in any case, it seems, not of that matters anyway, because Edman was directly harmed by Johnson's breach and the arbitrator allowed recovery only for Edman's direct losses.  

The Seventh Circuit also affirmed the award of attorneys' fees, finding that the District Court had not abused its discretion in finding that Johnson had to pay a 33% contingency fee to Edman's attorneys.  The Court denied Edman's request that the Court impose Rule 38 sanctions on Johnson for a frivolous appeal largely, it said, because the attorneys' fee award was already sanction enough.

[JT]

The Measure of a Seller’s Damages for Breach of a Real Estate Sale Contract

Remarkably, until just last month, the New York Court of Appeals was not presented with the occasion to decide the measure of a seller’s damages for a buyer’s breach of contract to purchase real property.  Should the damages be based on the difference between the contract price and the market value of the property at the time of breach?  Or, should the damages be based upon the difference between the contract price and the lower price obtained by the seller in a later resale of the property?

Relying heavily on Williston, the Court held that the measure of damages is “the difference, if any, between the contract price and the fair market value of the property at the time of the breach.”  The Court stated that the resale price is not irrelevant to the determination of damages because,

in a particular case, it may be very strong evidence of fair market value at the time of breach.   This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable.

Judge Piggott concurred in the result (issues of fact required a trial), but he would have adopted a resale measure based upon the Uniform Land Transfers Act.  Piggott reasoned:

The non-breaching sellers are entitled to the benefit of their bargain, and that benefit should not be denied by the application of a rule that fails to take that basic tenet into account.  The cases cited by the majority in support of the "time-of-the-breach" rule appear to apply the rule by rote. . ., detached from the reality of realty by failing to consider the legal consequence of an axiom that is harmful to the non-breaching party.

The majority ultimately supports its adoption of the "time-of-the-breach" rule – which is common in contract law and in the Uniform Commercial Code where the parties are dealing in common activities or fungible goods – by relying primarily on a case involving a school district's cause of action seeking the cost of replacing or repairing defective window panels that had been installed in its building (see Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256 [1998]). There, the Court, applying general, black letter law, stated that "damages for breach of contract are ordinarily ascertained as of the date of the breach" (id. at 261 [citations omitted]).

But real property, unlike window panels, is not fungible. While there are usually extensive and active markets for fungible goods, thereby making it relatively less difficult for the seller to mitigate or cover in the event of a breach, the sale of real estate is clearly different because each parcel is unique. . . As a result, the pool of buyers is plainly smaller for real estate than goods, and when a buyer breaches a real estate purchase agreement, the seller must then commence the sale process anew, which may require a reassessment of the list price and more showings of the property to new buyers, who may or may not find the property's location, amenities or architectural style desirable.  This may take a substantial amount of time and effort on the seller's part, and the seller's efforts may not readily succeed, because once the house has been on the market for a significant period of time, the market may have declined or prospective purchasers may be wary of the amount of time the house has been on the market, leading them to conclude that the property is tainted in some fashion.  Meanwhile, under our holding today, the breaching buyer will walk away indifferent to the hardship caused to the seller by his conduct. 

* * *

There is no dispute that the general rule is that damages are measured by the fair market value at the time of the breach; the issue here is whether that measure, in cases where the property is later sold with reasonable diligence and in good faith, is adequate or even realistic.  In such a circumstance, why should the non-breaching seller suffer the consequences of the buyer's breach?  If market conditions decline, shouldn't the loss be laid squarely at the feet of the breaching buyer, particularly where the seller is able to make a colorable claim at trial in that regard?

The majority also holds that the trial court in this case will need to consider, among other things, whether the sellers "made sufficient efforts to mitigate" . . ., but mitigation is irrelevant under the majority's rule since the only calculation that matters is the difference between the fair market value at the time of the breach and the contract price.

Here's a link to a webcast of the oral argument.

White v. Farrell, No. 43 (N.Y. Ct. of Appeals Mar. 21, 2013).

[Meredith R. Miller]

Life Imitates Art; Martha Stewart Imitates Lady Duff

My co-blogger, Meredith Miller has already commented on the ways in which Martha Stewart is the modern Lady Duff.  It really is extraordinary.  Martha Stewart is, of course, far more diverse and perhaps more ambitious in terms of the range of products that her company produces, but Lady Duff was quite the force in her day.  Remember that Mr. Wood sued her because her agreement to endorse merchandise sold in Sears Roebuck stores allegedly violated their agreement that he was to be her exclusive marketing agent.  

As reported in the New York Times, Martha Stewart was in court last week testifying in a showdown between Macy's and J.C. Penney over which company gets to carry Martha Stewart products in its stores.  Alas, the facts in this case are much more complicated than the straightforward Wood v. Lady Duff-Gordon.  However, the kernel of the dispute is very much reminiscent of the older case.  

Martha Stewart's company, now called Martha Stewart Living Omnimedia (MSLO), entered into an agreement with Kmart in 1997 permitting Kmart to sell the company's products in its stores.  Ten years later, MSLO entered into a similar agreement with Macy's, and when the agreement with Kmart expired in 2009, Macy's became "the only retailer to sell [MSLO] products in categories like home décor, bedding and bath," according to the Times.  In 2011, J.C. Penney started attempting to woo Ms. Stewart into a deal to sell MSLO products in its stores as a mechanism for bolstering its shaky financial performance.  James B. Stewart's column in last week's New York Times indicates that, since its new CEO has come on board, J.C. Penney has reported a $4.28 billion loss in sales and laid off 2200 workers, while its share price has dropped 60%.  

Upon learning that Ms. Stewart was in bedding with J.C. Penney, Macy's was not well-pleased.  In her testimony, Ms. Stewart did not seem to see the problem.  When asked if a consumer was likely to buy the same product, say a knife, at two different stores, Ms. Stewart gamely answered that the consumer might have two houses and need one knife for each kitchen.  This might explain why she no longer sells her goods at Kmart.  What's the point of selling to a demographic that includes renters?  She might have added, "I like to keep an extra knife handy for back-stabbing," but her talents for self-mockery (in response to a question about how she spends her time, she responded "I did my time," to the delight of the courtroom audience), do not extend quite that far.  

In today's New York Times, David Carr presents an apt anaology: the conflict is like a schoolyard fight between two boys over the most popular girl on the playground.  And Carr succinctly explains why Martha Stewart is so popular.  Ms. Stewart, he reminds us, "altered the way that people live by decoupling class and taste. . . .  When you go into Target or Walmart and see a sage green towel that is soft to the touch, it may not carry her brand, but it reflects her hand. Her tasteful touch — in colors, in cooking, in bedding — is now ubiquitous. . . ."  Here too, there are echoes of Lady Duff.

Ms. Stewart expressed surprise that a simple contract dispute would end up in court.  It should be possible for the parties to come to an understanding of words written on a page.  New York Supreme Court Justice Jeffrey K. Oing may agree, since he sent the case to mediation, but according to James Stewart, he might have arrived at that result through a reasoning process that Ms. Stewart would not endorse.  According to James Stewart, the meaning of the contract is clear:

[T]he contract itself seems straightforward, with numerous clauses giving Macy’s exclusive rights to Martha Stewart products in various categories, including “soft home,” like sheets and towels, as well as housewares, home décor and cookware, and specifically limits her rights to distribute her products through any other “department store.”

He adds that there is no question that J.C. Penney is a department store.  Justice Oing appeared to agree, since he repeatedly said that the contract is clear, and he granted an earlier injunction.  J.C. Penney may have hoped to get around the exclusive contract by setting up a MSLO boutique within its own stores, but James Stewart gives a number of reasons, both legal and factual, and citing to the authoritative Charles Fried on the law, for why that argument is unlikely to fly.

What might fly would be a giant Martha Stewart balloon at the next Macy's Thanksgiving Day Parade.  According to James Stewart, Ms. Stewart still asks for and receives free tickets for herself and her grandchildren to that event.  Last year, James Stewart reports, she complained that she did not get to sit with the other celebrities who are seated with Macy's CEO, Terry Lundgren.  Time for Macy's to show Martha Stewart the love.  After all, Macy's does need her products in its stores.

[JT]

Eighth Circuit Describes and Permits a Scheme to Get Around Arbitration

In In re: Wholesale Grocery Products Antitrust Litigation, five retail grocers sought to bring anti-trust class action suits against two wholesale grocers.  Each retail grocer did business with and had an arbitration agreement with only one of the two wholesalers.  

According to the Eighth Circuit's opinion, "[i]n an effort to avoid arbitration, each Retailer brought claims only against the Wholesaler with whom they did not have a supply and arbitration agreement."  At the District Court level, the wholesalers argued that the doctrine of equitable estoppel permitted the non-signatory wholesalers to invoke the arbitration agreements and moved to have the retailers' claims dismissed and arbitration compelled.  The District Court granted the wholesalers' motion.

On appeal, the Eighth Circuit reversed holding that parties cannot invoke the doctrine of equitable estoppel in order to enforce arbitration agreements to which they are not signatories.  The Court noted that

[E]quitable estoppel applies when a complaint involves "allegations of prearranged, collusive behavior demonstrating that the claims are intimately founded in and intertwined with the agreement at issue.”  In contrast, merely alleging that a non-signatory conspired with a signatory is insufficient to invoke equitable estoppel, absent some “intimate[] . . . and intertwined” relationship between the claims and the agreement containing the arbitration clause. [citations omitted]

Here, the Eighth Circuit found that the retailers' claims were not intertwined with the agreement containing the arbitration clause.

The Eighth Circuit remanded the case to address the wholesalers' claim, left unresolved by the District Court, that some of the arbitration agreements are enforceable by non-signatories as successors-in-interest.  It did not address the retailers' arguments that the arbitration agreements are unenforceable as against public policy, as that argument will only be relevant should the District Court resolve the successor-in-interest argument in the wholesalers' favor.

Judge Benton dissented.

[JT]

Surrogate Offered Money to Have Abortion

After a surrogate refused to abort a fetus with abnormalities, a tangled legal battle ensued.  The surrogacy contract provided that the surrogate would have an abortion "in case of severe fetus abnormality" but the surrogate refused the biological parents' pleas (and offer of $10,000) to have an abortion.  Here's some of the story from CNN.com:

On February 22, 2012, six days after the fateful ultrasound, Kelley received a letter. The parents had hired a lawyer.

"You are obligated to terminate this pregnancy immediately," wrote Douglas Fishman, an attorney in West Hartford, Connecticut. "You have squandered precious time."

On March 5, Kelley would be 24 weeks pregnant, and after that, she couldn't legally abort the pregnancy, he said.

"TIME IS OF THE ESSENCE," he wrote.

Fishman reminded Kelley that she'd signed a contract, agreeing to "abortion in case of severe fetus abnormality." The contract did not define what constituted such an abnormality.

Kelley was in breach of contract, he wrote, and if she did not abort, the parents would sue her to get back the fees they'd already paid her -- around $8,000 -- plus all of the medical expenses and legal fees.

Fishman did not return phone calls and e-mails from CNN.

Kelley decided it was time to get her own attorney.

Michael DePrimo, an attorney in Hamden, Connecticut, took the case for free. He explained that no matter what the contract said, she couldn't be forced to have an abortion.

DePrimo sent an e-mail to Fishman, the parents' lawyer, stating that Kelley was not going to have an abortion.

"Ms. Kelley was more than willing to abort this fetus if the dollars were right," Fishman shot back.

"The not-so-subtle insinuation that Ms. Kelley attempted to extort money from your clients is unfounded and reprehensible," DePrimo responded. "If you wish to propose a solution to this unspeakable tragedy, I will listen and apprize (sic)my client accordingly."

"However, as I mentioned in my previous correspondence, abortion is off the table and will not be considered under any circumstance," he said.

The entire story is here.

[Meredith R. Miller]

Walker-Thomas Brooklyn Redux?

Judge Noach Dear of Civil Court in Brooklyn, N.Y., began a recent decision:

This case is part of a very unfortunate trend in this Court's docket. Generally speaking, the fact pattern tends to be as follows: A person goes into a store and contemplates making a purchase for an amount of money that is beyond his or her means. The store offers to set him or her up with financing and induces the purchaser to enter into the deal. Any attempt to back out of the deal either before the goods are delivered or immediately thereafter is rebuffed by the store as the store now claims that all sales are final. The financing company pays the store and, when inevitably the poor quality, shoddily constructed furniture, appliances, or whatnot, begin to break, the buyer calls the store — unhelpful since they were already paid — and the financing company which argues that it is merely a lender and has no obligations as to the merchandise. These conversations, unfortunately, seem to happen long before the credit payments are complete and the purchaser often defaults. The financing company sues the buyer and the Court is faced with a quandary. On one hand, the financing company did pay the store for the goods and the buyer got some use of the same. On the other hand, the purchaser is getting charged interest at a high rate for goods that were never worth the purchase price and, often, has no recourse against the store which, even if it is still in business, rarely is impleaded in the case.

Capitol Discount does business with furniture stores in the NYC metro area, financing the customers’ purchases. Anna Rivera went to Universal Furniture to purchase a couch and the financing was from Capital Discount.  Capital Discount sued Rivera for $3292.01 plus interest.  Rivera answered pro se and the court dismissed the complaint, holding that no contract was formed and, in any event, is was unconscionable.

The uncontradicted story (record citations omitted):

In August of 2007, Anna Rivera, then working for New York City Housing, went to Universal Furniture looking to purchase furniture for her living room. According to her version of events, she expressed potential interest in certain couches and was told that they would do a credit check and, if approved, they would call her. Under the impression that she was applying for a credit check, she signed a document entitled "Security Agreement — Retail Installment Contract". At that point the various blanks on the form — the store's information, her information, the articles purchased, the prices, and payment terms — were not yet filled in and she did not read the document before signing it. Plaintiff's Vice President (and part-owner), Adam Greenberg, suggested that the rest was filled out by the store since Plaintiff received a completed contract from the store. That is a logical supposition, but speculation nonetheless in the absence of any representative from the store. Contemporaneously, Defendant also signed a Credit Application, according to her, filling out only the section seeking her references. The top portion of that document clearly was filled out in a different handwriting, Plaintiff's counsel admitting that portion could easily have been filled out by the store.

Thereafter, Defendant got a call that the furniture was going to be delivered. Even following delivery, no one told Defendant how much the furniture cost nor the payment terms. It was one week afterward that she received a filled-in copy of Plaintiff's Exhibit 1 in the mail reflecting a base cost of $3500, $3300 of which were financed at 24.9 percent, and a total outstanding balance of $4463.10 to be paid in 30 monthly installments of $148.77. Once she saw the amount that they intended to charge her, Defendant called the store and told them to take back the furniture since, now that they provided a price, she thought that the furniture was too expensive. The store refused to comply with her request telling her that all sales are final. Having made only one payment to Plaintiff and a $200 down payment to the store, Defendant defaulted.

The court held that there was no contract:

In this case, Defendant's uncontradicted testimony makes it clear that, when she was in the store, there was no offer to sell the furniture or at a minimum no price was given, she did not accept an offer to sell the furniture, she did not assent to the terms of the contract, and she did not intend to be bound. It is undisputed that she received consideration — the furniture. Nonetheless, no contract was formed in the absence of most of the elements for forming a contract. By accepting the furniture, Defendant still did not enter into a contract to pay. Material terms, most notably the price, were still not agreed upon and, when she learned what they were thereafter, Defendant called the store and expressed her unwillingness to enter into the agreement.

Even so, the court also held that it was both procedurally and substantively unconscionable:

With respect to the first prong, examples of procedural unconscionability include "high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties" (Emigrant Mortg. Co., Inc. v. Fitzpatrick, 95 A.D.3d 1169, 1170 [2d Dept 2012][citations omitted]). Crediting Defendant's testimony in the absence of a witness from the store to rebut her account, such elements appear to be present here. Steps were taken by the store to force her into the deal — she left the store without any intention of getting the furniture, they called her and delivered the furniture without her agreeing to acquire it, they failed to give her a price repeatedly until a week after delivery, and then they refused to take back the furniture when she promptly complained. The store and financing company certainly had greater bargaining power, understanding, and acumen than someone of limited means who could not easily get credit elsewhere and who is a stranger to this sort of transaction. Further, the agreement itself is difficult to read and understand. The front contains various provisions in different areas of the paper and in different size fonts. The terms on the rear are printed in light ink and are virtually unreadable. Thus, the procedural unconscionability prong is certainly met here.

The substantive unconscionability requirement, that is unconscionable terms within the contract, is also met. "Examples of unreasonably favorable contractual provisions are virtually limitless but include inflated prices, unfair termination clauses, unfair limitations on consequential damages and improper disclaimers of warranty" (Emigrant Mortg. Co., 95 A.D.3 at 1170 [citations omitted]). As Defendant herself noted, to pay $3500 for a couch and loveseat, especially for furniture of a quality that lasted barely two years, is ridiculous. Further, there is a clause limiting liability on behalf of the seller to the amount paid by the buyer. This too is unreasonably favorable to one party. Thus, the substantive prong is also met and the alleged agreement is unconscionable.

Capitol Discount Corp v. Rivera, CV-6114-12, NYLJ 1202590031804, at *1 (Civ., KI, Decided February 25, 2013).

[Meredith R. Miller]

What Is the "Ordinary" Purpose of an "Extraordinary" Product?

I recently reviewed a new decision out of West Virginia involving the implied warranty of merchantability ("IWM"), Teamsters v. Bristol Myers Squibb.  Many Contracts Profs teach IWM as part of their UCC coverage but some do not.  For those unfamiliar...any sale of good by a merchant comes with the IWM assuming that the state has adopted its own version of UCC 2-314. Under West Virginia law (and under the UCC), goods are "merchantable" if they "are fit for the ordinary purposes for which such goods are used." Although IWM cases are common, this case is particularly interesting (at least to me) because it involved the following issue: What is the "ordinary" purpose of a supposedly "extraordinary" product?

In Teamsters, the product was Plavix, a prescription anti-coagulant. According to the FDA, Plavix's blood-thinning properties could help treat "patients who experienced a recent heart attack [or] stroke." The drug reportedly was marketed as a superior alternative to Aspirin, a much cheaper, over-the-counter anti-coagulant taken by similar patient groups. Plaintiffs alleged that Plavix's "ordinary and intended pharmacological purpose" was "being a superior alternative to asprin for certain indicated usages."  Because Plavix allegedly worked no better than Aspirin, Plaintiffs alleged breach of IWM. Defendants countered that the "ordinary purpose" of Plavix was "to act as an anticoagulant" and nothing more.  

The West Virginia court agreed with Defendants.  The court gave the following fact-based reasons:

"The FDA approved Plavix for its blood-thinning properties in treating patients who experienced a recent heart attack, stroke, PAD, or ACS. There is no indication that the FDA approval was related to Plavix's efficacy compared to aspirin and other alternatives. Also, this Court has reviewed the Plavix labeling information, and has found nothing on that label suggesting that Plavix's ordinary purpose was to act as a superior alternative to aspirin or Aggrenox."

These reasons were supported by citations to Williston on Contracts and other sources indicating that IWM "requires only that the goods be fit for their ordinary purpose, not that they be...outstanding or superior....or function as well as the buyer would like." Thus, because "Plaintiffs [did] not allege that Plavix was not fit for its ordinary purpose of being an anticoagulant," the IWM was not breached.  

When I read the case, I wasn't entirely convinced by the cited sources because they dealt with claims involving products marketed as ordinary (as far as I could tell). I also couldn't help but think back to the (in)famous claim of Papa John's regarding its pizza--"Better Ingredients, Better Pizza--Papa John's." I recalled that being an express warranty case but it turns out that it was a Lanham Act case brought by Pizza Hut. I suppose that if a product is marketed as extraordinary, the warranty claims will be based on those assertions (whether under express warranty, false advertising, etc.) and not on IWM.  So, the "ordinary" purpose of an "extraordinary" product becomes irrelevant.  Regardless, I'm still a bit puzzled by the question.

[Heidi R. Anderson, h/t to student, Shawn Matter]

U.S. Supreme Court Seems Poised to Compel Arbitration -- Again

SCOTUSblog has linked to the transcript from yesterday's oral arguments in American Express Co. v. Italian Colors Restaurants.  SCOTUSblog, as always, has full materials on the case here.  The issue in the case is:

Whether the Federal Arbitration Act permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim. 

The plaintiffs in the case are merchants who claim that American Express violates antitrust laws by requring it to accept American Express credit cards if they also accept American Express charge cards.  The plaintiffs claim that, since the expense associated with individual arbitrations outweighs the individual recovery that any one merchant can expect, their claims are effectively denied if they cannot bring them as part of a class action lawsuit.  

According to the New York Times' coverage, there are at least six votes on the Court for enforcing the arbitration agreements.   Justice Scalia set the tone for the presumptive majority, stating on page 24 of the transcript, "I dont' see how a Federal statute is frustrated or is unable to be vindicated if it's too expensive to bring a Federal suit.  That happened for years before there was such a thing as class action[s] in Federal courts.  Nobody thought the Sherman Act was a dead letter, that it couldn't be vindicated."  On the Times reading of the tea leaves, that position will be attractive to the five Justices who formed the majority in Concepcion, but this time Justice Breyer (pictured) also seemed inclined to reject the argument that there was no cost-effective way for plaintiffs to bring their claims through arbitration.

[JT]

NY Ct of Appeals: Conflicts Analysis Obviated by Choice of Law Clause

I have been meaning to blog about IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., a New York Court of Appeals case holding that a conflict of laws analysis was obviated by the parties’ choice of law clause. 

IIC (a Brazilian company) owns a 60% stake in Inepar (a Uruguayan company). Inepar issued $30 million in notes to raise capital and refinance previous debt incurred by both companies.  IIC agreed to guarantee the notes.  The guarantee contained a clause choosing New York law to govern the agreement.  New York was also designated as the venue.

Another Brazilian company (IRB/Plaintiff) purchased $14 million of the notes.  When Inepar defaulted, IRB sued Inepar and IIC in New York.  IIC argued that New York’s choice of law principles should apply, resulting in the application of Brazilian law.  Under Brazilian law the guarantee was void because it was never authorized by IIC’s board. 

Invoking New York General Obligations Law § 5-1401, the New York Court of Appeals held that New York law applied and no choice of law analysis was necessary.  Section 5-1401(1) provides in part:

The parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars . . . may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.

The Court explained:

The Legislature passed the statute in 1984 in order to allow parties without New York contacts to choose New York law to govern their contracts.  Prior to the enactment of § 5-1401, the Legislature feared that New York courts would not recognize "a choice of New York law [in certain contracts] on the ground that the particular contract had insufficient 'contact' or 'relationship' with New York" (Sponsor's Mem, Bill Jacket, L 1984, ch 421).  Instead of applying New York law, the courts would conduct a conflicts analysis and apply the law of the jurisdiction with "'the most significant relationship to the transaction and the parties'" (Zurich Ins. Co. v Shearson Lehman Hutton, 84 NY2d 309, 317 [1994] [quoting Restatement (Second) of Conflict of Laws § 188 (1)]).  As a result, parties would be deterred from choosing the law of New York in their contracts, and the Legislature was concerned about how that would affect the standing of New York as a commercial and financial center (see Sponsor's Mem, Bill Jacket, L 1984, ch 421).  The Sponsor's Memorandum states, "In order to encourage the parties of significant commercial, mercantile or financial contracts to choose New York law, it is important . . . that the parties be certain that their choice of law will not be rejected by a New York Court . . ." (id.).  The Legislature desired for parties with multi-jurisdictional contacts to avail themselves of New York law if they so designate in their choice-of-law provisions, in order to eliminate uncertainty and to permit the parties to choose New York's "well-developed system of commercial jurisprudence" (id.).

General Obligations Law § 5-1402 (1) further provides:

any person may maintain an action or proceeding against a foreign corporation,           non-resident, or foreign state where the action or proceeding arises out of or relates           to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.

The Court wrote that:

Section 5-1402 (1) opened New York courts up to parties who lacked New York contacts but who had (1) engaged in a transaction involving $1 million or more, (2) agreed in their contract to submit to the jurisdiction of New York courts, and (3) chosen to apply New York law pursuant to General Obligations Law § 5-1401. The statutes read together permit parties to select New York law to govern their contractual relationship and to avail themselves of New York courts despite lacking New York contacts.

Thus:

Applying General Obligations Law §§ 5-1401 and 5-1402 to the facts of the present case, we conclude that New York substantive law must govern, since the parties designated New York in their choice-of-law provision in the Guarantee and the transaction exceeded $250,000.  IIC argues that the "whole" of New York law should apply, including New York's common law conflict-of-laws principles.  IIC maintains that the Guarantee's choice-of-law provision would have had to expressly exclude New York's conflict-of-laws principles in order for New York substantive law to apply; otherwise, IIC claims that the court must engage in a conflicts analysis that results in the application of Brazilian substantive law.  IIC's argument is unpersuasive.  Express contract language excluding New York's conflict-of-laws principles is not necessary.  The plain language of General Obligations Law § 5-1401 dictates that New York substantive law applies when parties include an ordinary New York choice-of-law provision, such as appears in the Guarantee, in their contracts.  The goal of General Obligations Law § 5-1401 was to promote and preserve New York's status as a commercial center and to maintain predictability for the parties.  To find here that courts must engage in a conflict-of-law analysis despite the parties' plainly expressed desire to apply New York law would frustrate the Legislature's purpose of encouraging a predictable contractual choice of New York commercial law and, crucially, of eliminating uncertainty regarding the governing law. 

IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., (NY Ct of Appeals Dec. 12, 2012).

[Meredith R. Miller]

Cruise Ship Room Attendant Scores Victory v. John Travolta and then Voluntarily Dismisses Suit

Plaintiff Fabian Zanzi alleged that John Travolta sexually assualted and battered him while Zanzi was attending to him aboard a Royal Carribean Cruise ship.  In the District Court for the Central District of California, Travolta moved to compel arbitration based on his cruise ticket and Zanzi's employment agreement.  On February 1, 2013, as posted on The Hollywood Reporter, the District Court denied Travolta's motion to compel arbitration. 

The District Court rejected Travolta's arguments that Zanzi was bound by the arbitration clause in Travolta's ticket because Zanzi, as a non-signatory to the agreement contained in that ticket could not be bound to arbitrate under it.  While the court recognized certain exceptions to the rule against binding non-signatories, it found none of them applicable on these facts.  

The court similarly rejected Travolta's argument that Zanzi could be bound by the arbitration clause in Travolta's ticket because Zanzi was an agent of Royal Carribean, a signatory.  The court noted that "a non-signatory employee is bound to arbitrate under 'agency principles' only to the extent that its principal signed an arbitration agreement with the authority to bind the employee in his individual capacity."  Zanzi never authorized his employer to divest him of his right to bring personal claims.  

Travolta next argued that Zanzi should be bound by Travolta's ticket's arbitration clause because Zanzi was a third-party beneficiary to the agreement contained in the ticket.  The court rejected Travolta's third-party beneficiary theory, finding that the agreement benefits Royal Caribbean and shields it from liability.  Any benefits flowing to Zanzi from the ticket are indirect and incidental.

In the alternative, Travolta argued that Zanzi should be estopped from litigating his claims against Travolta in court while also litigating related claims against Royal Caribbean through arbitration as required under Zanzi's employment agreement.  Here, Zanzi is a signatory to the agreement; Travolta is not.  Travolta contended that estoppel applied because Zanzi had "alleged substantially interdependent and concerted misconduct by the nonsignatory Defendant and signatory Royal Caribbean."  The court found that characterization inaccurate.  Zanzi alleged sexual assault and battery against Travolta; his allegations against Royal Caribbean relate to how his employers treated him after he reported Travolta's alleged misconduct.  Zanzi claimed that he had been confined for five days until Travolta disembarked.  In his dispute with Royal Caribbean, Zanzi is claiming false imprisonment and intentional and negligent infliction of emotional distress.  The two sets of claims relate to separate acts that occurred at different times and there are no allegations that the parties acted in concert.  

Days after this decision was issued, as reported in the Daily Mail online, Zanzi announced that he was dropping his suit, citing litigation costs.  Travolta's lawyers dismsses Zanzi's allegations as an attempt to gain fame and money by selling the story to the media.

[JT]

Ninth Circuit Affirms Denial of Toyota's Motion to Compel Arbitration of Class Action

Owners of the model year 2010 Prius and Lexus HS 250h brought suit against Toyota alleging that defects in the cars' anti-lock brake systems (ABS) caused increased stopping distances.  They also allege that Toyota knew of the problem but failed to disclose that knowledge.

Members of the class entered into purchase agreements with Toyota dealerships that included arbitration provisions and also provided that owners of the cars would give up any right to participate in class action lawsuits if their disputes went to arbitration.  Toyota sought to compel arbitration, but the District Court denied the motion on multiple grounds. First, becasue Toyota had vigorously litigated the case in federal court for two years, the District Court found that it had waived its right to move for arbitration.  Second, the District Court found that, since Toyota was not a signatory to purchase agreements that contained the arbitration clauses, it could not move to compel arbitration.  Nor would the District Court hold that plaintiffs are equitably estopped from avoiding arbitration

On appeal in Kramer v. Toyota Motor Corp., Toyota argued that, since arbitrators may decide issues of interpretation, scope, and applicability of arbitration agreements, it was for the arbitrator to decide whether a non-signatory to the arbitration agreement could invoke it.  The Ninth Circuit distinguished cases that had permitted the arbiter to decide such issues on the ground that in those cases, the parties had agreed to have the arbiter decide them.  Here, plaintiffs had never agreed to submit any of their disputes with Toyota to arbitration.

The Ninth Circuit was equally unmoved by Toyota's argument that plaintiffs should be equitably estopped from resisting arbitration.  This doctrine applies where: 1) a signatory relies on the terms of a written agreement in asserting claims against the non-signatory or the claims are intertwined with the agreement and 2) a signatory alleges concerted action bewteen the non-signatory and a signatory and that action is intimately connected to the agreement.  

The Ninth Circuit found that none of plaintiffs claims inimately relied on the purchase ageements; they merely referenced the purchase agreements.   With respect to the second prong of the test, the Ninth Circuit noted that "California state contract law does not allow a nonsignatory to enforce an arbitration agreement based upon a mere allegation of collusion or interdependent misconduct bewteen a signatory and nonsignatory."  The Ninth Circuit found that the complaint did not allege systematic collusion between the dealerships and Toyota and that any collusion that was alleged was not inextricably related to the purchase agreement.  

Since the Ninth Circuit found that Toyota had no right to compel arbitration, it did not address the District Court's finding that it had waived that right.  

[JT]

NY Appellate Court Enforces No Oral Modification Clause

Buyer and seller enter into a contract of sale for property in Manhattan for a purchase price of over $56 million.  The contract sets a closing date and contains a no oral modification clause.  The parties had extended the closing date numerous times by written agreement.  The buyer, however, did not appear at the scheduled closing. Later that day, the parties began negotiating an amendment to the contract of sale.  While the parties communicated by email, their negotiations did not result in a written modification agreement.  The seller declared the buyer in breach of contract for failure to close and notified the buyer that the seller would retain the down payment (upwards of $9 million).  The buyer sued for its return.

After the trial court granted the seller’s motion for summary judgment, the buyer appealed.  Judge Saxe writing for a unanimous appellate court (App Div 1st Dep’t) began the decision:

A standard provision included in many commercial contracts is one requiring any modification of the agreement to be in writing. Nevertheless, courts are presented over and over again with litigation arising out of circumstances where one party to a contract wrongly presumes, based on past practice, that an oral modification will be sufficient. This appeal illustrates the problem.

The Appellate Division affirmed:

The question then becomes whether [the buyer’s] evidence suffices to create an issue of fact as to whether the parties’ written agreement was modified by an agreement extending the closing date. Since the contract of sale provided that any amendments or modifications must be in a signed writing, under General Obligations Law §15-301, the contract cannot be changed by an executory agreement that is not in a signed writing.

The court rejected the buyer’s argument that the existence of a modification was proved by the parties' full (or at least partial) performance of the alleged oral modification:

We reject [the buyer’s] contention that the parties fully performed the oral modification of the contract providing for the adjournment of the closing, since they met at 3:00 p.m. on [the date of the scheduled closing]. At best, that 3:00 p.m. meeting could qualify as partial performance of the alleged oral modification. But, while partial performance of an alleged oral modification may permit avoidance of the requirement of a writing, any such partial performance must be unequivocally referable to the modification (see Rose v. Spa Realty Assoc., 42 NY2d 338, 341 [1977]). The "unequivocally referable" standard requires that the conduct must be "explainable only with reference to the oral agreement." Where the conduct is "reasonably explained" by other possible reasons, it does not satisfy this standard (Anostario v. Vicinanzo, 59 NY2d 662, 664 [1983]). If "the performance undertaken by plaintiff is also explainable as preparatory steps taken with a view toward consummation of an agreement in the future," then that performance is not "unequivocally referable" to the new contract (id.).

* * *

[The buyer’s] submissions fail to satisfy this standard. None of the documents and events that [the buyer] relies on are unequivocally referable to the alleged oral extension. The unexecuted proposed fifth amendment to the contract, the emails exchanged between the parties after noon on [the scheduled closing date], and the 3:00 p.m. meeting attended by the parties that day are insufficient. Not only do the emails fail to even indicate that the closing was adjourned by agreement, but all these items were clearly explainable as preparatory steps taken with a view of attempting to arrive at a possible agreement in the future (see Sutphin Mgt. Corp. v. REP 755 Real Estate, LLC, 73 AD3d 738 [2d Dept 2010]; RAJ Acquisition Corp. v. Atamanuk, 272 AD2d 164 [1st Dept 2000]). In the absence of a resulting written modification, the mere fact that the parties met at 3:00 p.m. does not negate [the buyer’s] default at the 12:00 p.m. closing, or reflect an adjournment of that scheduled closing; it may be understood to merely reflect that [the seller] was willing to attempt to negotiate a new modification, as the parties had done once before, and which, if accomplished, would have nullified the default. Since [the buyer] had already invested $9 million into the project, it had many reasons to continue meeting and negotiating in order to attempt to salvage the deal despite the expiration of the closing deadline, so meetings held after the time set for the closing do not establish that an extension was orally agreed to.

The court also held that estoppel was inapplicable.

Get those modifications in writing! As Beyonce says, "if you liked it then you should've put a pen to it."

Nassau Beekman, LLC v. Ann/Nassau Realty, LLC, 116402/08 (NY App. Div. 1st Dep’t Jan. 31, 2013).

[Meredith R. Miller]

Second Circuit Holds that Scope of "Arbitration" Is a Question of Federal Common Law

M.D. Imad John Bakoss (Bakoss) entered into an insurance contract with Lloyds of London (Lloyds), which provided for the paymetn of a benefit to Bakoss should be become "permanently totally disabled."   Each party was permitted to have Bakoss examined by a physician of its choice to determine whether or not he was qualified to receive such a payment.  In the case of a disagreement between the two party physicians, the two physicians were to name a third physician who would then determine whether or not Bakoss was in fact permanently totally disabled.  That decision was, according to the insurance contract, "final and binding."

Bakoss brought a suit on the insurance contract in New York state court.  Lloyd's removed the case to a federal district court, characterizing the third-physician clause as an arbitration agreemnt, which gave rise to federal question jurisdiction under the Federal Arbitration Agreement (FAA).  

In agreeing with Lloyd's characterization of the agreement as an abritration agreement, the district court relied on other decisions from federal district courts.  On appeal in Bakoss v. Certain Underwriters at Llods of London Issuing Certificate No. 0510135, Bakoss argued that the district court erred in using federal common law rather than New York state law in determining whether or not the agreement was one for arbitration.  While the Second Circuit acknolwedged a Circuit split on the issue, it sided with those that reasoned that a congressional interest in favor of a uniform national arbitration policy counciled in favor of the application of federal common law.  It thus upheld the exercise of subject-matter jurisdiction over the suit.

The Second Circuit also affirmed the district court's grant of summary judgment to Lloyd's on the ground that Bakoss did not provide timely notice of his potential permanent disability.

[JT]