ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

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Monday, June 29, 2015

SCOTUS decision on the Spiderman Contract

Given the major U.S. Supreme Court opinions that were released last week, it's no surprise that the one involving contracts, Kimble v. Marvel Entertainment, LLC, didn't make the headlines.  The case involved an agreement for the sale of a patent to a toy glove which allowed Spidey-wannabes to role play by shooting webs (pressurized foam) from the palm of their hands.  Kimble had a patent on the invention and met with an affiliate of Marvel Entertainment to discuss his idea --in Justice Elena Kagan's words--for "web-slinging fun."  Marvel rebuffed him but then later, started to sell its own toy called the "Web Blaster" which, as the name suggests, was similar to Kimble's.  Kimble sued and the parties settled.  As part of the settlement, the parties entered into an agreement that required Marvel to pay Mr. Kimble a lump sum and a 3% royalty from sales of the toy.  As Justice Kagan notes:

"The parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can)*."

It wasn't until after the agreement was signed that Marvel discovered another Supreme Court case, Brulotte v. Thys Co. 379 U.S. 29 (1964) which held that a patent license agreement that charges royalties for the use of a patented invention after the expiration of its patent term is "unlawful per se."  Neither party was aware of the case when it entered into the settlement agreement.  Marvel, presumably gleeful with its discovery, sought a declaratory judgment to stop paying royalties when Kimble's patent term expired in 2010.

In a 6-to-3 opinion written by Justice Kagan (which Ronald Mann dubs the "funnest opinion" of the year), the Court declined to overrule Brulotte v. Thys, even though it acknowledged that there are several reasons to disagree with the case.  Of interest to readers of this blog, the Court stated:

"The Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire."

In other words, the intent of the parties doesn't matter when it runs afoul of federal law.  Yes, we already knew that, but in cases like this - where the little guy gets the short end - it might hurt just the same to hear it.  In the end, the Court viewed the case as more about stare decisis than contract law and it was it's unwillingness to overrule precedent that resulted in the ruling.

Yet, I wonder whether this might not be a little more about contract law after all.  The Court observed in a footnote that the patent holder in Brulotte retained ownership while Kimble sold his whole patent.  In other words, Brulotte was a licensing agreement, while Kimble was a sale with part of the consideration made in royalties. This made me wonder whether another argument could have been made by Kimble. If Kimble sold his patent rights in exchange for royalty payments, and those royalty payments are unenforceable, could he rescind the agreement?  If the consideration for the sale turns out to be void ("invalid per se"), was the agreement even valid?  The question is probably moot now given the patent has expired....or is it?  Although Kimble did receive royalty payments during the patent term, he presumably agreed to a smaller upfront payment and smaller royalty payments in exchange for the sale of the patent because he thought he would receive the royalty payment in perpetuity.  So could a restitution argument be made given that he won't be receiving those royalty payments and the consideration for the sale of the patent has turned out to be invalid?

 

 *Yes, I made an unnecessary reference to the Spiderman theme song so that it would run through your head as you read this - and maybe even throughout the day.

 

 

June 29, 2015 in Current Affairs, Famous Cases, In the News, Recent Cases | Permalink | Comments (2)

Thursday, June 18, 2015

Uber Is the New Britney Spears

We used to count on Britney Spears as the leading source for blog fodder.  Move aside Britney.  Uber just passed you by.  We have two new Uber stories just in California alone.

First, last week the District Court for the Northern District of California issued its opinion in Mohamed v. Uber Technologies.  Paul Mollica of the Employment Law Blog called that decision a "blockbuster," because it ruled Uber's arbitration agreement with its drivers unconscionable and therefore unenforceable.  The opinion is very long, so we will simply bullet point the highlights.  With respect to contracts entered into in 2013, the court found:

  • Valid contracts were formed between plaintiffs and Uber, notwithstanding plaintiffs' claims that they never read the agreements and that doing so was "somewhat onerous";
  • While Uber sought to delegate questions of enforceability to the arbiter, the court found that its attempt to do so was not "clear and unmistakable" as the contract included a provision that "any disputes, actions, claims or causes of action arising out of or in connection with this Agreement or the Uber Service or Software shall be subject to the exclusive jurisdiction of the state and federal courts located in the City and County of San Francisco, California"; 
  • In the alternative, the agreement was unconscionable and therefore unenforceable;
  • The procedural unconscionability standard of "oppression," generally assumed in form contracting, was not overcome in this instance by an opt-out clause; the opt-out was inconspicuous and perhaps illusory;
  • The procedural unconscionability standard of "surprise" was also met because the arbitration provision was "hidden in [Uber's] prolix form" contract; and
  • Uber's arbitration provisions are substantively unconscionable because the arbitration fees create for some plaintiffs an insuperable bar to the prosecution of their claims.

The court acknowledged that the unconscionability question was a closer question with respect of the 2014 contracts but still found them both procedurally and substantively unconscionable.

There is much more to the opinion, but that is the basic gist.

Eric GoldmanIn other news, as reported in The New York Times here, the California Labor Commissioner's Office issued a ruling earlier this month in which it found that Uber drivers are employees, not independent contractors as the company claims.  The (mercifully short!) ruling can be found here through the good offices of Santa Clara Law Prof, Eric Goldman (pictured).

The issue arose in the context of a driver seeking reimbursement for unpaid wages and expenses.  The facts of the case are bizarre and don't seem all that crucial to the key finding of the hearing officer.  Although plaintiff''s claim was dismissed on the merits, Uber has appealed, as it cannot let the finding that its drivers are employees stand.

But the finding is a real blockbuster, especially as Uber claims that similar proceedings in other states have resulted in a  finding that Uber drivers are independent contractors.  Here's the key language from the ruling:

    Defendants hold themselves out to as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation.  The reality, however, is that Defendants are involved in every aspect of the operation.  Defendants vet prospective drivers . . . Drivers cannot use Defendants' application unless they pass Defendants' background and DMV checks

Meredith    Defendants control the tools the drivers use . . . Defendants monitor the Transportation Drivers' approval ratings and terminate their access to the application if the rating falls below a specific level (4.6 stars).

As the Times points out,  few people would choose to be independent contractors if they had the option to be employees.  Our former co-blogger Meredith Miller has written about similar issues involving freelancers, and we blogged about it here.  So far, it appears that five states have declared that Uber drivers are independent contractors, while Florida has joined California in finding them to be employees.  For more on the implications of this ruling, you can check out this story in Forbes, featuring insights from friend of the blog, Miriam Cherry.

June 18, 2015 in In the News, Recent Cases, Travel, Web/Tech | Permalink | Comments (0)

Monday, June 8, 2015

Class Actions, Arbitration and the Importance of Contract Formation

I wanted to follow up on Jeremy Telman's posts about two cases, Andermann v. Sprint Spectrum and Berkson v. Gogo.  Both cases involved consumers and standard form contracts.  Both Sprint and Gogo sought to enforce an arbitration clause in their contracts and both companies presumably wanted to do so to avoid a class action.  In Andermann v. Sprint Spectrum, there was no question regarding contract formation.  The contract issue in that case involved the validity of the assignment of the contract  from US Cellular to Sprint.  The court found that the assignment was valid and consequently, so was the arbitration clause.

In Berkson v. Gogo, on the other hand, the issue was whether there was a contract formed between the plaintiffs and Gogo.  As Jeremy notes in his post, this is an important case because it so thoroughly analyzes the existing wrap contract law.  It also has important implications for consumers and the future of class actions.

Many arbitration clauses preclude class actions (of any kind).  Judge Posner notes in his opinion in Andermann v. Sprint Spectrun:

"It may seem odd that (Sprint) wants arbitration....But doubtless it wants arbitration because  the arbitration clause disallows class arbitration.  If the Andermann's claims have to be  arbitrated all by themselves, they probably won't be brought at all, because the Andermanns if they prevail will be entitled only to modest statutory damages."

Judge Posner may have been troubled by this if the facts were different.  The Andermanns are claiming that Sprint's calls to them are unsolicited advertisements that violate the  Telephone Consumer Protection Act, but Sprint needed to inform them that their service would be terminated because U.S. Cellular's phones were incompatible with Sprint's network.  How else would they be able to contact their customers whose service would soon be terminated, Posner rhetorically asks, "Post on highway billboards or subway advertisements?....Post the messages in the ad sections of newspapers? In television commercials?"   Sprint's conduct here "likely falls" within an exception to the law and hence, Posner notes "the claims are unlikely to prevail."

It's a different situation in Berkson v. Gogo.  In that case, Gogo is allegedly charging consumers' credit cards on a monthly recurring basis without their knowledge.  The plaintiffs were consumers who signed up to use Gogo's Wi-Fi service on an airplane, thinking it was only for one month.   When Welsh, one of the plaintiffs, noticed the recurring charges, he was given a "partial refund."  Welsh then hired a lawyer.  Welsh's lawyer sent Gogo a letter notifying the company of the intent to file a class action lawsuit if it did not correct its practices and notify everyone who might have been charged in this manner.  Gogo then allegedly sent a refund check directly to Welsh, not his lawyer (which would violate the rule not to directly contact someone represented by counsel).  When Berkson, another plaintiff, noticed the charges and complained, the charges stopped; however, when he requested a refund for the period he was charged for the service but did not use it, the company allegedly refused. 

I think that most people would agree that, if the facts alleged are true, Gogo likely violated consumer protection statutes.  It also acted poorly by making it so hard to get a refund.  Companies should not be permitted to act like this and consumers shouldn't have to threaten class action lawsuits to get their money back.  (Gogo doesn't seem to dispute that they were charged during months they did not use the service).

This is where contract formation becomes so important.  The class action in Berkson v. Gogo was allowed to proceed because the court found that there was no valid contract formation. 

If there was a contract formed between Gogo and the plaintiffs, the arbitration clause would likely have been effective.  (I say "would likely have been" because it wasn't even included until after Berkson signed up for the service.  But let's put that aside for now and continue....).  The arbitration clause - you guessed it - contained the following clause:

"To the fullest extent permitted by applicable law, NO ARBITRATION OR OTHER CLAIM UNDER THIS AGREEMENT SHALL BE JOINED TO ANY OTHER ARBITRATION OR CLAIM, INCLUDING ANY ARBITRATION OR CLAIM INVOLVING ANY OTHER CURRENT OR FORMER USER OF THE SITE OR THE SERVICES, AND NO CLASS ARBITRATION PROCEEDINGS SHALL BE PERMITTED. In the event that this CLASS ACTION WAIVER is deemed unenforceable, then any putative class action may only proceed in a court of competent jurisdiction and not in arbitration.

WE BOTH AGREE THAT, WHETHER ANY CLAIM IS IN ARBITRATION OR IN COURT, YOU AND GOGO BOTH WAIVE ANY RIGHT TO A JURY TRIAL INVOLVING ANY CLAIMS OR DISPUTES BETWEEN US."

Now, under the recent line of federal cases (AT&T Mobility v. Concepcion, American Express v. Italian Colors, etc) interpreting the FAA, if a contract contains a mandatory arbitration clause, an arbitrator pretty much decides everything unless (1) the arbitration agreement is unconscionable; or (2) the agreement to arbitrate was never formed

Regarding (1), this doesn't mean that a court may determine whether any other contract provision was unconscionable - only the arbitration clause.  So, if there's another clause that you want to argue is unconscionable -- let's say a recurring billing provision that is not conspicuous just as a random example -- you have to take that to the arbitrator.  Furthermore, it's much harder now (after the line of US Supreme cases noted above)  to argue that an arbitration clause is unconscionable.  While many state courts had previously found mandatory arbitration clauses and class action waivers unconscionable, they may no longer find them unconscionable just because they impose arbitration.  In other words, in order to be found unconscionable, the arbitration clauses have to be one-sided (i.e. only the consumer has to arbitrate) or impose hefty filing fees, etc.  This, as I mentioned in a prior post, is why so many of these clauses contain opt-out provisions.   Gogo's arbitration clause also contained an opt-out provision.  But, as readers of this blog know, NOBODY reads wrap contract terms and I would be surprised if anyone opted out.  The clause was also in capitalized letters and so would be conspicuous -- if only anyone clicked on the link and scrolled down to see it.

This is why Judge Weinstein's opinion is so important -he recognizes the burden that wrap contracts place on consumers:

"It is not unreasonable to assume that there is a difference between paper and electronic contracting....In the absence of contrary proof, it can be assumed that the burden should be on the offeror to impress upon the offeree -- i.e., the average internet user - the importance of the details of the binding contract being entered into...The burden should include the duty to explain the relevance of the critical terms governing the offeree's substantive rights contained in the contract."

 

If a contract contains a mandatory arbitration clause, a consumer who has been wronged and wants to argue that a standard form contract is unconscionable, would probably have to take it to an arbitrator unless there was no agreement to arbitrate in the first place.  If there was no agreement formed at all, that would mean no agreement to arbitrate. 

This is why it is so important not to find contract formation so easily and expect unconscionability to do all the heavy lifting of consumer protection.  An arbitrator very well might do a good job - but we don't know that because an arbitration is a closed hearing.   Arbitrators also don't go through the rigorous screening process that judges go through (both elected and appointed judges are thoroughly scrutinized).  Furthermore, arbitral decsions are not generally made public, and so arbitration doesn't help with providing guidelines for acceptable business behavior.  Judge Posner notes in his opinion, "It's not clear that arbitration, which can be expensive...and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation." Furthermore, if the arbitration clause contains a "no class" provision, it also forces a consumer to face a company's intimidating attorneys all alone ((because no lawyer is taking this type of case on a contingency basis and no consumer is going to pay a lawyer to attend this type of arbitration).

Berkson v. Gogo is notable for recognizing that website design and contract presentation matter in determining contract formation.  Not every click is perceived the same way by consumers -- scrollwraps (where scrolling is required to read through all the terms) provides more notice than a "sign-in-wrap" which is merely a hyperlink next to a SIGN UP button.   The reality is that nobody clicks on the Terms hyperlink with a sign-in wrap.  As Judge Weinstein notes:

"The starting point of analysis must be the method through which an electronic contract of adhesion is formed.  The inquiry does not begin, as defendants argue, with the content of the provisions themselves."

There are some who think that there's no harm in finding contract formation so easily because courts and the doctrine of unconscionability will protect consumers from really bad contract terms.  They should think again.  Mandatory arbitration clauses affect consumers' ability to seek redress which is why we should start taking contract formation seriously.

 

 

June 8, 2015 in Current Affairs, E-commerce, Miscellaneous, Recent Cases, Web/Tech | Permalink | Comments (0)

Friday, June 5, 2015

Follow-up on Andermann v. Sprint Spectrum

We posted about this case last week.

It was an easy decision for Judge Posner; he granted Sprint's motion to compel arbitration without too much difficulty, leaving him time to ruminate more generally on the purposes of the Federal Arbitration Act.  We summarized his views as follows:

Having quickly dispensed with plaintiffs' opposition to the motion to compel arbitration, Judge Posner then focused his attention on Sprint's effusive celebration of arbitration provisions as "a darling of federal policy" (Judge Posner's wording).  Judge Posner emphasized that language encouraging judges to enforce arbitration clauses was a corrective to an era when judges disfavored arbitration.  The aim of federal policy is neither to favor nor disfavor arbitration but to compel arbitration when the parties have agreed to arbitrate claims.  Fortunately for Sprint, this case was, in Judge Posner's view, not a close call.

Judge Posner then when on to note Sprint's motives in challenging the denial for arbitration when, in Judge Posner's view, the Andermanns will lose on the merits wherever their claim is decided.  Judge Posner pointed out that Sprint wants to avoid class action litigation, which is prohibited under the applicable arbitration provision.  He also noted that without the class action option, the claim is unlikely to be brought at all.   Judge Posner then explained the absurd results that would follow from a finding that Sprint had violated the TCPA, thus effectively deciding a claim that the Seventh Circuit ruling will prevent from ever being brought, before catching himself and noting that the decision is really for the arbiter and limiting the Court's ruling to the instruction that the claim be sent to arbitration.

BagchiFordham Law Professor Aditi Bachi (pictured) now has a post up over at the New Private Law blog in which she uses Judge Posner's opinion as an occasion to ruminate on the need for a federal arbitration policy.  As she puts it:

Putting aside for the moment what stance federal courts should take (and which Congressional statutes might speak to the question), arbitration is too substantial a public policy issue for courts to approach these terms with ostensible neutrality.  In the absence of an articulated policy, we are likely to end up with courts that are in practice either friendly or hostile but march under the banner of neutrality.

We look forward to the ensuing policy debate, which is long past due.

June 5, 2015 in Commentary, Recent Cases, Weblogs | Permalink

Thursday, June 4, 2015

Important Wrap Contracts Decision from Judge Weinstein (EDNY)

JackbweinsteinPlaintiff Adam Berkson,  alleges that the defendant, Gogo, misled him and a putative class of similarly situated consumers, who signed up for in-flight wifi service through Gogo's website. Plaintiffs allege that the website led them to believe that they were signing up for a one-month subscription.  Gogo claims that its site clearly provides for automatic renewal, as well as mandatory arbitration and choice of venue.  Plaintiffs allege breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violations of consumer protection statutes.  Gogo responded with a motion to transfer venue, compel arbitration and dismiss for lack of standing.  As the first two parts of Gogo's motion related to its terms of use, Judge Weinstein had to address plaintiffs' claim that they were not bound by hidden terms.  

In an 83-page memorandum and order of the case, available hereJudge Weinstein denied all three parts of Gogo's motion.  Judge Weinstein identifies three policy questions raised by the suit.  We are most interested in the first: 

[H]ow should courts deal with hybrid versions of “browsewrap” and “clickwrap” electronic contracts of adhesion (referred to in this memorandum as “sign-in-wraps”) that do not provide internet users with a compelling reason to examine terms favoring defendants?

We note in passing that in defining his terms and throughout the opinion, Judge Weinstein relies on Nancy Kim's book, Wrap Contracts.  He also takes note of other excellent work by scholars whose work has been featured on this blog, such as Oren Bar-Gill, Woodrow Hartzog Juliet Moringiello and Tess Wilkinson-Ryan, among others.

Judge Weinstein concluded that, in the circumstances present in the case, "the average internet user would not have been informed. . . that he was binding himself to a sign-in-wrap" and that the wrap contract thus "does not support the venue and arbitration clauses relied upon by defendants."  The relevant facts are a bit different for the two named plaintiffs, but the basic gist is that they would have to click on the words "terms of use" in order to gain access to them, and they could agree to those terms of use without clicking on the words.  In addition, Gogo's arbitration and venue provisions were not added until after plaintiffs signed up for the service.

After a truly impressive survey of the caselaw and the scholarly literature, Judge Weinstein emerges with some general principles:

  • “terms of use” will not be enforced where there is no evidence that the website user had notice of the agreement;
  • “terms of use” will be enforced when a user is encouraged by the design and content of the website and the agreement’s webpage to examine the terms clearly available through hyperlinkage; and
  • “terms of use” will not be enforced where the link to a website’s terms is buried at the bottom of a webpage or tucked away in obscure corners of the website where users are unlikely to see it.

Applying these principles, Judge Weinstein concludes that Gogo could not establish that the named plaintiffs knowingly bound themselves to Gogo's terms of use.  Along the way, Judge Weinstein notes that some of the wrap contract cases are not correctly decided and do not accurately apply precedent.  He also makes clear that the design and presentation of the contract matter in determining whether a consumer has had an opportunity to give meaningful consent to terms in a wrap contract.

A hearing on class standing is scheduled for July.  Stay tuned.

June 4, 2015 in Recent Cases, Travel, Web/Tech | Permalink | Comments (0)

Monday, May 25, 2015

Seventh Circuit Grants Motion to Compel Arbitration Where Underlying Contract Has Been Assigned

7th Circuit SealRonald and Anna Andermann had had cell phone service through US Cellular since 2000.  Their service contract provided for arbitration of all claims.  The contract also provided that US Cellular could assign the contract without notice to the Andermanns.  The Andermanns renewed their contract every two years up until 2012.  In May 2013, they received notice that their contract had in fact been assigned to Sprint but that it could not be renewed because their phone was not compatible with Sprint's network.  Sprint called the Andermanns six times (three times each) to try to persuade them to purchase a new phone that would be compatible with Sprint's network, but the Andermanns decided to move to a different service provider instead.

They also decided to sue Sprint on behalf of a class of similarly situated consumers, alleging that the undesired calls violated the Telephone Consumer Protection Act (TCPA).  Sprint filed a motion to compel arbitration, which the District Court denied on the ground that the calls originated after the contract had terminated and thus the legality of the calls had no connection to the contract.  

PosnerIn Andermann v. Sprint Spectrum L.P., the Seventh Circuit reversed and remanded with instructions to order arbitration.   Judge Posner an found intimate relation between the contract and the calls.  The case was an easy one according to Posner because the claims here clearly arose out of or related to the agreement.  Sprint was attempting to offer consumers a way to continue their services.  This case was thus easily distinguishable from other cases, more favorable to plaintiffs, in which the plaintiffs had agreements with defendants that were governed by arbitration provisions but plaintiffs' claims related to contracts that did not contain arbitration provisions.

Having quickly dispensed with plaintiffs' opposition to the motion to compel arbitration, Judge Posner then focused his attention on Sprint's effusive celebration of arbitration provisions as "a darling of federal policy" (Judge Posner's wording).  Judge Posner emphasized that language encouraging judges to enforce arbitration clauses was a corrective to an era when judges disfavored arbitration.  The aim of federal policy is neither to favor nor disfavor arbitration but to compel arbitration when the parties have agreed to arbitrate claims.  Fortunately for Sprint, this case was, in Judge Posner's view, not a close call.

Judge Posner then when on to note Sprint's motives in challenging the denial for arbitration when, in Judge Posner's view, the Andermanns will lose on the merits wherever their claim is decided.  Judge Posner pointed out that Sprint wants to avoid class action litigation, which is prohibited under the applicable arbitration provision.  He also noted that without the class action option, the claim is unlikely to be brought at all.   Judge Posner then explained the absurd results that would follow from a finding that Sprint had violated the TCPA, thus effectively deciding a claim that the Seventh Circuit ruling will prevent from ever being brought, before catching himself and noting that the decision is really for the arbiter and limiting the Court's ruling to the instruction that the claim be sent to arbitration.

May 25, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, May 18, 2015

Seventh Circuit Parses "Generate" and "Receive" in an Attorney's Breach of Contract Suit

7th Circuit SealIn 2001, Kanosky & Associates (now Kanosky Bresney) hired Lawrence Hess to handle medical malpractice suits.  In 2007, the firm fired Mr. Hess.  Under Mr. Hess's employment agreement, Hess was entitled to bonus pay in the amount of fifteen percent of all fees “generated over the base salary."   The employment agreement also stated that the “[b]onus shall increase” to twenty-five percent “on all fees received annually in excess of $750,000.00.”   

Mr. Hess conceded that he was not entitled to any additional fees "received," but he claimed that his work had "generated" fees for which he had not been compensated.  The District Court found that "generated" and "received" had the same meaning within the employment agreement, and in oral argument before the Seventh Circuit in Hess v. Kanosky Bresney, Mr. Hess conceded as much.  

 However, Mr. Hess pointed to a 2002 modification of his employment agreement that entitled him to 40% of all revenue "generated."  Both parties also relied on additional language in Section 8 of the original employment agreement:

[W]here the Corporation retains clients upon Employees [sic] termination that Employee has no proprietary interest in fees to be earned since the Employee is to be fully compensated through his salary and/or bonus for all work done while an Employee of the Corporation” (emphasis added). 

Mr. Hess read this provision to entitle him to compensation for revenues "generated" while he was an employee; the firm read the provision to bar him from any post-employment compensation.

The Seventh Circuit rejected Mr. Hess's arguments.  While implying that the employment agreement could have been more clearly drafted, the Court found that reading "generate" and "receive" as synonyms results in a simple, straightforward compensation scheme.  Reading generate as Hess would have it read, leads to headaches, as the contract does not specify (and doing so would be very difficult) how one is to determine any individual attorney's role in "generating" fees.  Hess's interpretation of the contract was "less plausible" than the firm's, and he produced no extrinsic evidence suggesting that his interpretation should be favored despite its facial implausibility.  Given the Court's presumption that the firms documents use "generate" and "receive" interchangeably, Mr. Hess's 2002 Modification did not avail him.  

May 18, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, May 15, 2015

Kmart Cannot Enforce Arbitration Agreement with Class of Infant (Minor) Plaintiffs

InfantIn 2013, Kmart hired Adrian Lopez, then age 16, as a cashier.  Before beginning work, Lopez received online training, and in order to do so, he had to acknowledge receipt of various Kmart forms, including an arbitration agreement.  One month after turning 18, Lopez filed a putative class action lawsuit against his employer for breaches of California's wage and hours laws. Kmart sought to compel arbitration.

Under California Family Code § 6710, minors (under the age of 18) may enter into contracts, but they have a right of disaffirmation "before majority or within a reasonable time afterwards."  In Lopez v. Kmart Corp., Magistrate Corley, of the Northern District of California, held that Lopez disaffirmed his arbitration agreement with Kmart by filing the lawsuit within one month of turning 18 and that one month was a "reasonable" time under § 6710.  

While California Family Code § 6712 excepts certain categories of contracts from the right of disaffirmation, Kmart did not argue that its contract with Lopez fell within any of those categories.  Instead, Kmart sought to argue that the contract could not be disaffirmed because California Family Code § 6711 removes the right of disaffirmation of any contract entered into "under the express authority or direction of a statute."  Magistrate Corley disagreed with Kmart, finding that § 6711 did not apply and that the argument was waived because first raised at oral argument.

Kmart next argued that §6710 only applies to contracts for goods or services and not to employment contracts.  Magistrate Corley simply noted that the statutory language contains no such limitation.  In any case, the contract was for services, as Lopez was to serve as a cashier.  

Finally, Kmart urged the court to deny the disaffirmation in the exercise of its equitable powers.  Magistrate Corley noted that she could not exercise such powers where the authority for disaffirmation was statutory.  Kmart cited to cases from other jurisdictions in which courts had exercised such equitable powers in the employment context, but Magistrate Corley noted that they did so in the context of common law, not statutory infancy doctrines.

May 15, 2015 in Recent Cases | Permalink | Comments (3) | TrackBack (0)

Friday, May 8, 2015

Victory at the Smelliest Place on Earth

 

Disney Tree of Life
Disney Tree of Life by Clavet

The Orlando Sentinel reported that an arbitrator has reinstated Disney workers who had refused to perform in a Disney Animal Kingdom Show, the Festival of the Lion King.  The workers refused to perform because the unitards they were expected to wear for the show were not clean and dry as required in the Collective Bargaining Agreement between Disney and Teamsters Local 385 of the Services Trade Council Union (Attachment 6, Part C).  

Disney was forced to cancel a performance of the show and then terminated the objecting workers.  Disney will have to pay the workers back-pay for the time they were out of work (minus what they earned at other jobs), and reprimands will be removed from their files.

May 8, 2015 in Labor Contracts, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, May 7, 2015

West Virginia Supreme Court of Appeals Refuses to Enforce Unethical Fee-Splitting Agreement

WV SealGary Rich and Joseph Simioni met in connection with an asbestos case involving West Virginia University.  Rich is an attorney.  Simioni has a J.D. but was never admitted to the bar.  Starting in the 1990s, the two men collaborated on two additional asbestos cases and contracted with out-of-state law firms to help them class action litigation.  It appears that until 2002, the men agreed that they would split the proceeds of their work 50/50.  but then Rich announced there would be an 80/20 split in his favor. The parties then proceeded on this basis and committed their agreement to writing in 2005.  

Rich now contends that he was under the impression that Simioni was a licensed attorney, and he did not realize that Simioni was not licensed until 2000 or 2001.  He consulted with the former Chief Lawyer Disciplinary Counsel of the West Virginia State Bar, who told him that Sinioni “might not be able to get paid ethically."

Simioni eventually filed sued in District Court against the out-of-state law firms, seeking recovery based in quantum meruit, unjust enrichment and breach of an implied contract.  The District Court certified the following question to the Supreme Court of Appeals:

Are the West Virginia Rules of Professional Conduct statements of public policy with the force of law equal to that given to statutes enacted by the West Virginia State Legislature? 

The Supreme Court of Appeals answered in the affirmative, at least with respect to Rule 5.4 of the Rules of Professional Conduct. which prohibits fee-sharing between lawyers and non-lawyers..  The Court held for the first time (but based on numerous authorities) that fee-sharing agreements between lawyers and non-lawyers violate public policy.  The parties sought to persuade the court to find an alternative mechanism for compensating Simioni by setting aside the agreement to share fees and compensate Simioni in quantum meruit, but the Court rejected that as an attempt to circumvent the rule.

May 7, 2015 in Recent Cases, True Contracts | Permalink | Comments (1) | TrackBack (0)

Friday, May 1, 2015

Caveat Vendor in a Banksy Sale in Gaza?

Banksy in BethlehemIn March, while I was co-teaching  a course called International Humanitarian Law in Israel and Palestine with Professor Yaël Ronen, I visited Bethlehem with my students.  Among other things, we saw the image at left, attributed to Banksy, on a wall in Bethlehem.

So today's New York Times story about Banksy's other creations in Gaza caught my eye.  The heart of the story, for the purposes of this blog, is that Banksy apparently painted an image of a weeping Greek goddess an the iron door of a destroyed home in Gaza.  An enterprising Gazan artist bought the door for less than $200, saying he wanted to protect the goddess.  The owner of the door was unaware that the painting could be worth hundreds of thousands of dollars.

According to the Times, the local authorities, Hamas, have confiscated the door, and its ownership and value are to be determined by a court.  I'm not sure what law the courts in Gaza would apply to such a dispute.  Does anybody think the buyer of the door has a duty to disclose its possible worth to the vendor?  

May 1, 2015 in In the News, Recent Cases, True Contracts | Permalink | Comments (1) | TrackBack (0)

Wednesday, April 22, 2015

Tiered Water Pricing System Declared Unconstititional in California

On Monday, a California Appellate Court declared the tiered water payment system used by the city of San Juan Capistrano unconstitutional under Proposition 218 to the California Constitution.  The California Supreme Court had previously interpreted Prop. 218’s requirement that “no fees may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question” to mean that water rates must reflect the “cost of service attributable” to a particular parcel.

At least two-thirds of California water suppliers use some type of tiered structure depending on water usage.  For example, San Juan Capistrano had charged $2.47 per “unit” of water (748 gallons) for users in the first tier, but as much as $9.05 per unit in the fourth.  The Court did not declare tiered systems unconstitutional per se, but any tiering must be tied to the costs of providing the water.  Thus, water utilities do not have to discontinue all use of tiered systems, but they must at least do a better job of explaining just how such tiers correspond to the cost of providing the actual service at issue.  This could, for example, be done if heavy water users cause a water provider to incur additional costs, wrote the justices. 

The problem here is that at the same time, California Governor Jerry Brown has issued an executive order requiring urban communities to cut water use by 25% over the next year… that’s a lot, and soon!   Tiered systems are used as an incentive to save water much needed by, for example, farmers.  The California drought is getting increasingly severe, and with the above conflict between constitutional/contracting law and executive orders, it remains to be seen which other sticks and carrots such as education and tax benefits for lawn removals California cities can think of to meet the Governor’s order.  Happy Earth Day!

April 22, 2015 in Current Affairs, Famous Cases, Food and Drink, Government Contracting, In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, April 13, 2015

Three Arbitration Decisions from March

1st_Circuit_sealOn March 20, 2015, in First State Ins. v. National Casualty Co.the First Circuit affirmed a District Court's refusal to vacate an arbitral remedy that the party seeking vacation claimed was "plucked out of thin air" and not derived from any term in the contract at issue.    When reviewing an arbitral award, the only question is whether the arbiter was even arguably construing the agreements.  Here, the First Circuit found that the arbiter unquestionably was doing so.  Moreover, the contracts at issue directed the arbiter to consider each agreement as "an honorable engagement rather than merely a legal obligation" and relieved the arbiters "of all judicial formalities and may abstain from following the strict rules of law."  This provision permitted arbiters to grant equitable remedies, which is precisely what they did.  Justice Souter sat on the panel and joined in Judge Selya's opinion for the unanimous panel.

8th Circuit SealOn March 25, 2015, the Eight Circuit decided Torres v. Simpatico, Inc.  The issue in that case was that a number of franchisees claimed that an arbitration provision in a franchise agreement was unconscionable because the individual arbitration processes were prohibitively expensive.  The Eighth Circuit affirmed the District Court's finding that plaintiffs had not met their burden of establishing that the arbitration costs would be prohibitively high for any particular plaintiff.  The court also rejected plaintiffs claim that non-signatories to the arbitration agreement could not seek to compel arbitration.  In this case, the non-signatories were third-party beneficiaries entitled to invoke the arbitration provision.  

6th-Circuit-Court-SealOn March 27, 2015, the Sixth Circuit decided Shy v. Navistar Int'l, Corp.  That case involved claims that Navistar was improperly classifying aspects of its business activities and structuring its business so as to evade its profit-sharing obligations under an agreement relating to a consent decree in a litigation relating to Navistar employee retirement benefits.  The Sixth Circuit affirmed the District Court's finding that the claims were subject to an arbitration provision in the parties' agreement.  However, it reversed the District Court's finding that Navistar's conduct amounted to a waiver of its right to compel arbitration.  The case was remanded with instructions to compel arbitration.  Judge Clay dissented, finding both that the parties had not contemplated arbitrating claims of this scope that that Navistar had waived its right to arbitration "by engaging in an unmistakable campaign of avoidance and delay both before and after the SBC intervened to enforce the settlement agreement in the instant litigation." 

April 13, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, April 6, 2015

Law Professors Sue Law School for Breach of Contract

We saw this report over on the Faculty Lounge.  This is fallout from the proposed merger of Hamline University School of Law and the William Mitchell College of Law (William Mitchell).  Two William Mitchell faculty members are claiming that the merger, which will necessitate the elimination of two tenured faculty lines, is a a breach of contract.  

William Mitchell
The Complaint alleges that law schools must comply with ABA Standard 405(b) by maintaining policies for academic freedom and tenure.  William Mitchell has a faculty handbook that incorporates the AAUP's 1940 Statement on Academic Freedom, which regards tenure as indispensable to such freedom.  Under William Mitchell's Tenure Code, tenured professors may only be dismissed for adequate cause or in cases of "bona fide financial exigency."  

In February, when the merger of the two law schools was proposed, William Mitchell announced that is was considering amendments to its Tenure Code to permit termination of tenure based on a merger.  Plaintiffs allege that William Mitchell now intends to amend its Tenure Code to permit termination of tenure even if the merger does not go through, to permit termination of tenure without cause and without declaring the existence of a financial exigency.  

Plaintiffs seek a judgment declaring that the proposed amendment to William Mitchell's Tenure Code would constitute a breach of contract.

April 6, 2015 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, March 30, 2015

Eric Goldman on Consumer Review Bans

Eric GoldmanWriting for Forbes.com, Santa Clara Law Prof Eric Goldman (pictured) reports on a recent SDNY case, Galland v. Johnston The case is similar to others about which we have blogged recently.  Plaintiffs rent out their apartment in Paris through a website.  The rental agreement associated with the property provides that defendants would “not to use blogs or websites for complaints, anonymously or not."  Notwithstanding this clause, defendants posted reviews of the apartment that were not entirely positive.  In one case, plaintiffs offered a defendant $300 to remove a three-star review from a website.  The defendant refused and complained to the website.  Plaintiff then sued defendants for, among other things, breach of contract, extortion and defamation.

The magistrate judge dismissed all of the claims except the breach of contract claim.  Plaintiffs objected to this disposition.  Defendants did not, which may be a good reason why the District Court let the breach of contract claim stand while upholding the Magistrate's dismissal of the remaining claims.  Indeed, the District Court's opinion did not address the breach of contract claim.  

Professor Goldman expresses surprise that the Magistrate allowed the breach of contract claim to stand.  Other New York courts have found that contracts clauses that prohibit customer reviews are a deceptive business violate New York's consumer protection laws.  Professor Goldman also points out that they violate public policy regardless of New York law.

March 30, 2015 in In the News, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Thursday, March 26, 2015

Fifth Circuit Reverses District Court's Order Vacating Arbitral Award

5th CircuitBNSF Railway Company (BNSF) and Alstom Transportation, Inc. (Alstom) had a Maintenance Agreement that included an arbitration clause.  BNSF notified Alstom that it was eliminating locomotives from its active fleet, which triggered a clause in the Maintenance Agreement that required discussions so that an economic adjustment could be made in Alstom's favor.  BNSF then terminated the Agreement before any such discussions took place.  

BNSF sought declaratory relief in a District Court, but the District Court granted Alstom's motion to compel arbitration.  The Arbitration Panel (Panel) found that BNSF's termination of the contract violated the contractual duty of good faith and fair dealing and awarded Alstom damages.  When Alstom sought to enforce the award in the District Court, BNSF moved to vacate.  The District Court granted the motion to vacate,  finding that the Panel had not applied Illinois law correctly.

In BNSF Railway Co. v. Alstom Trans., Inc., the Fifth Circuit vacated the District Court's order and remanded with instruction to reinstate the arbitral award.  The Fifth Circuit noted that the Supreme Court has instructed that district courts’ review of arbitrators’ awards under § 10(a)(4) is limited to the “sole question . . . [of] whether the arbitrator (even arguably) interpreted the parties’ contract.” Oxford Health, 133 S. Ct. at 2068.  After a brief review of the interpretive options, the Fifth Circuit concluded that "BNSF fails to show that the Panel could not have been interpreting the Agreement when it concluded that Illinois law imposes a limitation on the right to terminate 'without cause' based on the covenant of good faith and fair dealing."   The Panel also interpreted the Agreement in determining damages.  For the purposes of judicial review, it does not matter whether the interpretation was right or wrong.

March 26, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 24, 2015

Guest Post - Tina Stark on Contract Drafting at the Intersection of Law and Business

The following guest post is from Tina Stark, a Professor in the Practice of Law (retired) and the Founding Executive Director of Emory's Center for Transactional Law and Practice.  Tina is one of the pioneers of teaching transactional skills and the founder and first Chair of the AALS Section on Transactional Law and Skills.  She is also the author of Drafting Contracts:  How and Why Lawyers Do What They Do  and the editor and co-author of Negotiating and Drafting Contract Boilerplate  Welcome, Tina!

 

When I speak about contract drafting, I often state that contract drafting sits at the intersection of law and business. Students can learn about style, organization, process, interpretation, ambiguity, and clarity, but if they don't know the law and understand the deal, the contract will be ripe for litigation. 

 In  Buckingham v. Buckingham, 14335 314297/11, NYLJ at *1 (App. Div., 1st, Decided March 19, 2015), a well-known matrimonial lawyer botched the drafting of a prenuptial agreement. As drafted, the relevant provision stated that if the husband sold "MS or any of its subsidiaries or related companies," he was obligated to pay the wife a share of the proceeds. But the provision did not address the consequences of the husband's sale of any shares he owned in those businesses. Stated differently, the agreement gave the wife the right to proceeds from asset sales, but was silent about the right to proceeds from stock sales. 

 The couple married; time passed; and the marriage failed. Along the way, the husband sold shares of his business and the ex-wife wanted her share of the proceeds: about $950,000. The husband and the courts said "no." The court reasoned that the relevant language created a condition to the husband's obligation to pay sale proceeds to his ex-wife, but that language encompassed only asset sales. Therefore, because the husband's sale of shares did not satisfy the condition, the wife had no right to any proceeds. (Technically, there was a condition to an obligation and an obligation. The condition to the obligation was an asset sale, and the obligation was the husband's obligation to pay the wife a share of the proceeds. The husband's obligation to pay created the wife's reciprocal right to receive the proceeds.)

 As the dissent points out, the business deal was almost undoubtedly that the wife was entitled to money if the husband received proceeds from a business disposition. But the court held the provision unambiguously applied only to business dispositions that were asset sales, and it refused to rewrite the provision. Bottom line: the wife’s lawyer didn’t know the law. She didn’t understand the difference between an asset sale or a stock sale and language embraced only the former. This is a classic case of a business issue driving the litigation, not unclear, ambiguous drafting. It was “bad” drafting, but not for reasons of style, lack of clarity, or ambiguity. It was “bad” because it didn’t memorialize the parties’ intent. 

 And that's why matrimonial lawyers need to understand business and business law and how drafting sits at the intersection of law and business.

March 24, 2015 in Contract Profs, Miscellaneous, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, March 23, 2015

SCOTUS Grants Cert. on an Arbitration Case

Scotus-2014The case is DIRECTV, Inc. v. Imburgia.  You can read all about it on SCOTUSblog.  

The issue is: 

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act. 

The case involved a consumer contract with a class action waiver in Section 9.  It also provided as follows: “if . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”  However, Section 10 states that "Section 9 shall be governed by the Federal Arbitration Act."

The California Court of Appeal for the Second District affirmed the superior court's denial of DirectTV's motion to compel arbitration.  Because the class action waiver violates California law, the entire arbitration clause is unenforceable.  We'll see what SCOTUS (or at least five of its members) has to say about that!

March 23, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Weekly News Roundup

Graham_SpanierAs reported here in Onward State, Former Penn State University President Graham Spanier (left) is now suing his former employer for breach of contract, while also naming the University and former FBI Director Louis Freeh in a defamation claim.  The allegations stem from the Freeh Report, which Mr. Freeh undertook as a private consultant hired to look into allegations of sexual misconduct within the Penn State athletics program.  The complaint alleges that the University breached its separation agreement with him by publicizing the Freeh Report and through other statements.  Mr. Spanier has set up a website purporting to refute the findings of the Freeh Report.

In a potentially very interesting, bizarre and short(!) opinion, the Delaware Supreme Court weighed in  on a hypothetical case not before it in Friedman v. Khosrowshahi, No. 442,2014 (March 6, 2015).  The Court said that if a stockholder brings suit alleging breach of a stockholder approved plan as a contract, and she seeks recovery under contract law, such a plaintiff would not have to make demand on the board before proceeding in a derivative action because "directors arguably have no discretion to violate the terms of a stockholder adopted compensation plan whose terms cannot be amended without the stockholders’ approval."

MarketWired.com reports that Canadian purchasers of Lenovo computers are seeking $10 million in breach of contract damages for Lenovo's violation of their privacy rights by installing Superfish on their personal computers.  Superfish allegedly makes it possible for third parties to use wireless networks to steal private information off of Lenovo computers.  The Statement of Claim (Canadian, we assume for Complaint) can be found here.

CubsAnd, as Spring training is underway and Opening Day is only a fortnight away, we should mention the ongoing contract dispute between the Chicago Cubs and the parties with whom the team entered into a revenue-sharing agreement relating to rooftop seating across the street from Wrigley Field.  The Cubs want to put up a video board that the Sheffield Avenue property owners claim will block views in violation of the terms of the revenue-sharing agreement.  The latest news on the subject matter can be found on Crain's Chicago Business here.  The Cubs' opposition to plaintiffs' motion for an injunction is here.  As a life-long Cubs fan, I stand by my view that not having to watch the Cubs play actually enhances the value of the seats, but hope springs eternal.

As reported here in the Cranston Patch, a teachers' union is suing a school district for breach of contract and violations of civil and religious rights.  The school district decided to hold classes on religious holidays, including Good Friday, but to permit teachers two days of religious leave each year.  The school district then denied leave to teachers who sought to use their leave on Good Friday.   The community is predominantly Catholic, and it is likely that the school district had not plan for replacing the 200 teachers who applied for leave on Good Friday.  Heavy snows and the large number of snow days this year might also have played a role.

March 23, 2015 in In the News, Recent Cases, Sports | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 18, 2015

Chapman University Faces Litigation over $12 Million Gift

According to this story in the LA Times, James and Catherine Emmi are seeking the return of $3 million that they have already donated as part of a $12 million charitable pledge to Chapman University.  They are also asking the University to renounce any claim to the remaining $9 million.  If the account is accurate, the Emmis seem to be claiming that:

  • they never made the $12 million pledge;
  • the University took advantage of James Emmi's "confusion in his old age" and preyed on him for the donation (are they alleging mental incapacity or undue influence?);
  • the University harassed the couple by inviting them to events, sending them cards and "referring to them as family";
  • the University breached its agreement with the Emmis by 
    • not publicly recognizing them in a 2013 ceremony, and
    • not making sufficient progress on "Emmi Hall."

It is not clear how the Emmis account for their having already made a $3 million payment towards the $12 million pledge that they claim they never made.  

[H/T Miriam Cherry]

February 18, 2015 in Recent Cases | Permalink | Comments (0) | TrackBack (0)