Tuesday, December 23, 2014
Really? This is a thing now? The District Court held that a company can bind a consumer to an arbitration provision and class action waiver in a rolling contract of adhesion. Fortunately, the Ninth Circuit didn't buy it, but why is it even a close call?
In November 2011, Erik Knutson bought a Toyota which came with a 90-day subscription to Siriux XM Radio (Sirius). About a month into his trial subscription, Sirius sent Knutson a "welcome kit." That welcome kit included a customer agreement with an arbitration clause and class action waiver. According to the customer agreement, its terms became binding if Knutson did not contract Sirius to cancel his 90-day trial within three business days. Knutson also received unsolicited phone calls from Sirius on his cell phone. He filed a putative class action suit against Sirius for violations of the federal Telephone Consumer Protection Act.
Sirius cited to the arbitration clause and moved to compel arbitration. The District Court granted Sirius's motion to compel. In Knutson v. Sirius XM Radio, Inc. The Ninth Circuit reversed. The opinion is unanimous and careful. The Court explains why Mr. Knutson never assented to any terms and was not bound in any way to Sirius. Knutson never bought anything from Sirius and never knew that he was entering into a contact.
Thursday, December 18, 2014
This case arises out of a fact pattern with which many contracts profs may already be familiar. It's a new twist on Leonard v. PepsiCo., alas with the same result.
James Cheney Mason (Mason) represented defendant Nelson Serrano in a capital murder trial. Mason gave an interview on NBC news in which he pointed out that his client could not have committed murders in Bartow, Florida on the same day that he was on a business trip in Atlanta Georgia. Surveillance cameras from the La Quinta Inn in Atlanta established Serrano's presence at the hotel both before and after the murders. The prosecution claimed that Serrano flew to Orlando, drove to Bartow, committed the murders, drove to Tampa, and flew back to Atlanta in time to show up on the surveillance tapes once again. Serrano was convicted and sentenced to death.
Law student Dustin Kolodziej (Kolodziej) watched Mason's interview with NBC after it was edited for broadcast. In the edited version that Kolodziej saw, Mason seemed to be offering a million dollars to anyone who could get off a plane in Atlanta and make it back to the La Quinta Inn in 28 minutes. Kolodziej took this as a challenge and as a unilateral offer that he could accept by making the trip in 28 minutes or less. Kolodziej recorded himself making the trip and sent the recording to Mason with a demand for payment. Mason refused.
In Kolodziej v. Mason, the Eleventh Circuit upheld the grant of summary judgment to Mason. In the unedited version of Mason's interview, it is clear that his challenge was directed at the prosecution and not erga omnes. Moreover, the Eleventh Circuit found, no reasonable person could construe any statement that Mason made in either the edited or the unedited version of the interview as a serious offer to pay a million dollars to anybody who could travel from the airport to the hotel in 28 minutes. According to the Court, the context in which the words were uttered (an attempt to poke holes in the prosecution's theory) and the hyperbolic nature of the alleged offer, with its familiar overtones of schoolyard braggadocio, were insufficient to establish Mason's willingness to enter into a contract.
The Court distinguished this case from the classics, Lucy v. Zehmer and Carbolic Smoke Ball and other, equally entertaining cases. The Court was no more inclined to entertain Kolodziej's claim than it would be to declare Mason a monkey's uncle, if he had chosen that turn of phrase when attempting to illustrate the implausibility of the prosecution's timeline.
The Court suggested that the entire suit was a result of Kolodziej's inadequate understanding of contracts doctrine (hence the duncecap image above, which by the way, does not represent Kolodziej). The Court paraphrased Pope and suggested that a little legal knowledge is a very dangerous thing indeed. As the Court explained,
Kolodziej may have learned in his contracts class that acceptance by performance results in an immediate, binding contract and that notice may not be necessary, but he apparently did not consider the absolute necessity of first having a specific, definite offer and the basic requirement of mutual assent.
This seems more than a bit unfair. Kolodziej was wrong, but he may have thought it worth the gamble. He lost his case, but he had quite an experience. In any case, Judge Cardozo's remark in Allegheny College about how half-truths are sometimes mistaken for the whole truth seems more apposite.
A classic form of statement identifies consideration with detriment to the promisee sustained by virtue of the promise. Hamer v. Sidway, 124 N. Y. 538, 27 N. E. 256, . . . . So compendious a formula is little more than a half truth. There is need of many a supplementary gloss before the outline can be so filled in as to depict the classic doctrine.
Mistakes of law such as Kolodziej's are common, and learned judges (and even law professors) as well as law students can make them.
Wednesday, December 10, 2014
I read an interesting article the other day about parties to a contract agreeing to a broad arbitration provision and then carving out some issues that would be litigated should a problem arise. As with many others, I am involved in the International Commerical Arbitration Moot and, when I read the article, the issue seemed familiar. That is because this year's problem includes a contract with the following two provisions:
"Art. 20 All disputes arising out of or in connection with the present contract shall be finally settled
under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators
appointed in accordance with the said Rules. The seat of arbitration shall be Vindobona,
Danubia, and the language of the arbitration will be English. The contract, including this clause,
shall be governed by the law of Danubia.
Art 21: Provisional measures
The courts at the place of business of the party against which provisional measures are sought
shall have exclusive jurisdiction to grant such measures."
As you would expect, one of the parties in the problem asks for interim relief from the ICC while the other says interim measures are for courts only. Very often, if not most of the time, the Moot problem is inspired by an actually case. Some years the students are able to find the case and, while it is never quite exactly on point, it can be helpful.
I could not help but wonder if this issue within this year's problem was inspired by a botched effort to carve interim relief out from the general provision. It would be pretty sloppy to draft something like the above but my hunch is that it has happened.
I am curious to know how other ICAM team coaches have dealt with the issue. In particular, does the word "finally" in Article 20 have any particular signficance?
Wednesday, December 3, 2014
Plaintiffs in Nashimua v. Gentry Homes, Ltd., are a class of persons who believe that the defendant corporation built their homes without adequate high wind protection. Gentry Homes, Ltd. (Gentry) moved to compel arbitration. The arbitration provision at issue provided in relevant part:
The arbitration shall be conducted by Construction Arbitration Services, Inc., or such other reputable arbitration service that PWC shall select, at its sole discretion, at the time the request for arbitration is submitted.
By the time the case was filed, Construction Arbitration Services was no longer available, which left the choice of arbiter in Gentry's sole discreation. The issue before Hawaii's Supreme Court was whether plaintiffs could claim that the provision was fundamentally unfair and therefore unenforceable or if they had to await the selection of an arbiter and then show actual bias.
Following the Sixth Circuit's approach, he Court held that plaintiffs need not wait: "'Actual bias' need not be proven in a pre-arbitration challenge to an arbitrator-selection provision, where . . . the mere fact of one party’s 'exclusive control over the pool of potential arbitrators from which the arbitrator is selected' renders the arbitrator-selection process fundamentally unfair." Applying the fundamental unfairness standard to the provision at issue, the Court found it fundamentally unfair.
The Circuit Court had orderd the parties to confer and agree upon an arbitral forum. If they could not do so, the Circuit Court would select an appropriate arbitral forum. The Supreme Court deemded this solution appropriate.
Tuesday, December 2, 2014
Ilya Shapiro at the Cato Institute posted last week about Century Exploration v. United States, decided by the Federal Circuit on March 14, 2014. Century Exploration (Century) acquired a lease for an oil field in the Gulf of Mexico. It paid $23 million up front, plus $50,000 per year of the lease. Century sought to protect itself against possible changes in applicable laws governing such leases through a contractual provision that no changes in law, other than reulgations created pursuant to the Outer Continental Shelf Lands Act (OCSLA), would affect Century's rights under the lease.
In the wake of the Deepwater Horizon fire, Congress passed the Oil Pollution Act (OPA), which required oil exploration companies to develop worst case scenarios and certify that they have reserves adequate to address such worst cases. Using a methodology required by the Interior Department, Century would have to have $1.8 billion on hand to deal with such a worst case. When Century could not prove that it had such funds, the government sought to cancel the lease. Century brought suit, relying on the contractual provision that protected it against regulatory changes, such as those promulgated pursuant to the OPA. Ilya Shapiro questions whether the directives from the Interior Department even qualify as government regulations, as they were sent via e-mail by "a civil servant in the Interior Department." The government filed for summary judgment, and both the Court of Federal Claims and the Federal Circuit sided with the government.
The Federal Circuit acknowledged that this case involves a lease provision nearly identical to that at issue in Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000). However, in this case, the Federal Circuit found that the new regulations were actually promulgated pursuant to the OCSLA rather than the OPA. As such, they were within the carve-out to the contractual provision protecting Century against regulatory changes. In short, the Federal Circuit found this case distinguishable from Mobil Oil because of the nature of the regulations at issue.
To see in detail why the Cato Institute disgrees with that holding, you can have a look at its amicus brief. Ilya Shapiro provides the following summary:
First, it is vital to the smooth operation of the government and the health of the economy that private entities are confident that the government will honor its contractual promises. Federal spending on contracts has totaled roughly $500 billion annually since 2008—or 15% of the federal budget. If businesses and individuals have no reason to believe that the government will live up to its business obligations, they’ll have no reason to work with it. The Federal Circuit’s decision, which condoned the government’s flagrant breach of its contract with Century, sets a bad example and must be reversed.
Second, and quite simply, words have meaning—in the Constitution, in statutes, and yes, in contracts. A “regulation” is a formal rule adopted and issued by an authorized agency, in accordance with strict procedural protocols. It’s not a casual email. Giving informal government policy documents created by civil servants the full weight of the law is unconstitutional, undemocratic, and unsustainable.
Monday, December 1, 2014
Cyanotech Corporation and Valensa International are competitors. They nonetheless entered into two agreements under which Cyanotech was to sell algae to Valensa so that it could extract from said algae an antioxidant compound. Both agreements were governed by arbitration provisions, except for carve-outs for litigation relating to breaches of confidentiality. Valensa sued Cyanotech for tortious interference and breach of a confidentiality agreement. The suit relates to the two parties' dealings with a third company, Mercola. In short, Valensa was selling antioxidant to Mercola, and when Cyanotech found out, it offered to provide its antioxidant at a lower price. Finding that the dispute fell within the carve-out, the District Court denied Cyantotech's motion to compel arbitration.
In U.S. Neutraceuticals, LLC v. Cyanotech Corp., the Eleventh Circuit reversed. Citing its decision in Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship, 432 F.3d 1332 (11th Cir. 2005), the Eleventh Circuit held that the question of arbitrability must be determined by the arbiter. The District Court determined that the case was not arbitrable under the second of the two contracts between the parties. In so doing, said the Eleventh Circuit, the District Court decided an issue (which contract governs or do both govern) that only the arbiter could decide.
Judge Wilson dissented, agreeing with the District Court that the later agreement clearly governed because the later agreement is the one cited to in the complaint. Although there is a general presumption in favor of arbitration, that presumption does not apply to the qeustion of which agreement governs. Judge Wilson then carefully reviewed the terms of the later agreement and found that the District Court had correctly denied the motion to compel arbitration.
Monday, November 24, 2014
File this under "Nice!" According to this report in the Durham Herald Sun, the parents of a child who has been prohibited from attending his private school, the Mount Zion Christian Academy, are suing the school for breach of contract. The allegations of breach are based on the fact that the child's parents are paying tuition, but their son is forbidden to attend his school.
And what has the child done to earn this suspension? Nothing! His parents were informed that the child would not be permitted to attend school becasue his father had traveled to Nigeria, and the school did not want to risk the spread of ebola. The school took these precautions despite the fact that:
- there is no ebola in Nigeria;
- the father had no contact with anyone with ebola;
- the father was screened at the airport and cleared.
The superintendent of schools failed to appear at a hearing and a judge ordered the school to allow the child to return
According to this story from the Spokane Spokesman Review, an Idaho judge has thrown out as invalid a $60 million contract that the state entered into with Education Networks of America (ENA) and Qwest to provide a broadband network that would link every Idaho high school. The plaintiff in the case, Syringa, had partnered with ENA on one of the two bids on the contract, but when the state awarded the contract to ENA, it cut Syringa out of the allocation of work in the contract. The court found this a violation of state procurement law.
Sandra Troian a physicist at CalTech, has filed a complaint against the school, alleging violations of the California whistleblower protection statute and breach of contract, among other things. Troian alleges that she had reported that the school had been infiltrated by a spy who was sending classified information to the Israeli government. Troian alleges that the school ignored her because it did not want to endanger a large contract with Jet Propulsion Laboratories. She further alleges that the school has retaliated against her for blowing the whistle.
Monday, November 10, 2014
According to this report on the International Business Times website, two children, through their mother, are suing Malaysia Airlines for breach of contract and negligence in connection with their father's death on Flight MH370. Plaintiffs allege that the airline breached a safety agreement that it entered into with their father and the other passengers on the flight.
As reported here in the Bellingham Herald, the Indiana Supreme Court heard arguments on October 30th about the state's contract with IBM to privatize its welfare services. The state was so disappointed with IBM's performance that it cancelled the contract three years into a $1.3 billion, ten-year deal. Friend of the blog, Wendy Netter Epstein (pictured), has written about this case in the Cardozo Law Review.
Sunday's New York Times Magazine has a cover story pondering whether lawyers are going to do to football what they did to tobacco. As an example of what this might look like we have this case filed on October 27, 2014 on behalf of Julius Whittier and a class of plaintiffs who played NCAA football from 1960-2014, never played in the NFL, and have been diagnosed with latent brain injury or disease. Mr. Whittier suffers from early-onset Alzheimer's. The complaint alleges, among other things, breach of contract, based on NCAA documents requiring each member instittuion to look after the physical well-being of student athletes.
Monday, November 3, 2014
As reported on JDSupra here, the Florida District Court of Appeal for the Fourth District, sitting en banc, held that while an insurer’s liability for coverage and the extent of damages must be determined before a bad faith claim becomes ripe, the insured need not also show that the insurer is liable for breach of contract before proceeding on the bad faith claim.
We have also learned from JD Supra of Piedmont Office Realty Trust v. XL Specialty Ins. Co., 2014 U.S. App. LEXIS 20141 (11th Cir. Oct. 21, 2014), in which the United States Court of Appeals for the Eleventh Circuit, elected to certify to the Supreme Court of Georgia the question of whether an insured’s payment obligations under a judicially approved settlement agreement qualify as amounts that the insured is “legally obligated to pay,” and if so, whether the insured’s failure to have obtained the insurer’s consent to settle resulted in a forfeiture of coverage.
According this this report on Yahoo! Sports, Oklahoma State is suing the former Offensive Coordinator of its football team, Joe Wickline (who now is a coach for the University of Texas), and Wickline has countersued. According to the report, Wickline's contract with Oklahoma State require that he pay the balance of his contract ($593,478) if he left for another position and was not his new team's play-caller. Wickline claims that he is calling plays at Texas. What a bizarre thing to put in a contract. It's a reserve non-compete! In effect, Oklahoma State is saying that it would pay Wickline to call plays for a rival.
According to this report from the Courthouse New Service, Ted Marchibroda Jr., the son of NFL Football coach Ted Marchibroda, filed a $1 million malpractice lawsuit against Sullivan, Workman & Dee and trial lawyer Charles Cummings , alleging breach of contract, professional negligence and breach of fiduciary duty. In a 2011 lawsuit, Marchibroda accused sports agent Marvin Demoff of breaching an agreement to share the proceeds of NFL contracts for linebacker Chad Greenway. He claims that he is also owed money for recruiting center Alex Mack.
And continuing our sports report, Golf.com notes that golfer Rory McIlroy is taking a break from the "sport" to pursue his legal claims against his former management company, Horizon Sports Management. McIlroy claims that Horizon took advantage of his youth to extract an unconscionable 20% fee for McIlroy's off-the-course income. Horizon is claiming $3 million in breach-of-contract damages.
In a simpler companion case to the Sharpe v. AmeriPlan Corp. case about which we blogged earlier today, the Eighth Circuit affirmed the District Court's denial of a motion to compel arbitration in Quam Construction Co., Inc. v. City of Redfield. As reported here on Law.com, the case was relatively easy, since the contract at issue contained permissive language: "the parties may submit the controversy or claim to arbtiration." Given such language, the Eighth Circuit agreed with the Distrcit Court that arbitration could not be compelled.
Fifth Circuit Finds Arbitration Clause Trumped By Dispute Resolution Mechanisms in Parties' Prior Agreements
The Fifth Circuit's opinion in Sharpe v. AmeriPlan Corp. begins with a wise observation on the state of the law of arbitration. "As the use of arbitration clauses grows, so too do the legal arguments surrounding their validity and enforceability." The plaintiffs in the case raised all of the traditional objections to arbitration clause, labeling it: not supported by consideration, illusory, unconscionable, not broad enough to cover the dispute in the case, and waived. The Fifth Circuit rejected all of these arguments and nonetheless found for plaintiffs on the ground that the arbitration agreement could not be harmonized with dispute resolutions found in earlier agreements among the parties still in effect.
The plaintiffs were "independent business owners" (IBOs) who earned their income from AmeriPlan by selling health plans and recruiting additional IBOs. Upon recruiting the requisite number of IBOs, they earned the statue of Sales Directors, who can earn an income stream (down lines) from the commissions of the IBOs they had recruited. All named plaintiffs were Sales Directors when AmeriPlan terminated them without cause in 2011. In doing so, it also deprived plaintiffs of their down lines. Plaintiffs sued, alleging that they had been promised lifetime vested residual income.
The parties relationships were governed by three agreements. Three of the four named plaintiffs entered into Sales Director agreements with AmeriPlan that provided for mediation followed by litigation in the case of a dispute. After a jury returned a $5.5 million verdict against AmeriPlan in favor of a Sales Director, AmeriPlan added an arbitration clause to its Policy Manual. Plainitffs accepted this revision either by clicking an "I agree" icon on AmeriPlan's website or because AmeriPlan sent them notice of the change in the form of a revised Policy Manual that contained the new arbitration clause on page 22.
Plaintiffs sued in California. AmeriPlan had the case tranferred to federal court and then changed the venue to Texas. It then moved to compel arbitration. The District Court granted the motion while deleting two provisions that it found unconscionable. Plaintiffs appealed to the Fifth Circuit. The Fifth Circuit reversed as to three of the four plaintiffs.
The Court noted that an amendment to an agreement would ordinarily effectively supersede a prior, related agreement. Here, however, the Plaintiffs' Sales Director agreements provided they could only be amended through a written agreement executed by all parties. As that did not occur, here, the three plaintiffs whose agreements reserved a right to litigation retained that right. The survival of the original agreements was especially clear in that AmeriPlan had relied on language in those agreements in order to transfer the case from California to Texas. AmeriPlan conceded as much but claimed that the agreements could be harmonized. But the Fifth Circuit found that the detailed two-tiered plan in three of the plaintiffs' Sales Director agreements clearly required mediation followed by litigation in Texas. That structure could not be reconciled with the revised Policy Manual's arbitration clause. The Court was especially secure in its reading of three of the plaintiffs' Sales Director agreements because the fourth plaintiff had entered into an earlier version fo the agreement which lacked such details. The Court held that the addition of the detailed language manifested AmeriPlan's clear commitment to its two-tiered approach of mediation followed by litigation of disputes governed by the Sales Director agreements.
The Fifth Circuit reversed and remanded with respect to three of the plaintiffs. The fourth will have to arbitrate her claims. The Court acknoweldged that the result might seem arbitrary, but it was in fact simply a product of the Court's effort to give effect to the differing terms of the parties' agreements.
Tuesday, October 28, 2014
In The Otoe-Missouria Tribe of Indians v. N.Y. State, Dep't of Financial Services, the Second Circuit upheld the District Court's denial for a preliminary injunction sought by two Native American tribes and related entities (collectively the Tribes) engaged in high-interest, short-term loans offered over the Internet. The interest rates on the loans exceeded state caps, and so the Department of Financial Services (the Department) sought to bar them. The Tribes sought a preliminary injunction, claiming that the bar violated the Indian Commerce Clause of the U.S. Constitution.
The Tribes' claims turned on whether the loans took place on their sovereign territory or in New York State. The Second Circuit observed that, although the loans were initiated on the Tribes' territories, they flowed across New York State. When the Department shut down the Tribes' loan operations, it had devastating effects on the tribal economies, and so the Tribes sued to enjoin the bar on their loans.
On review of the denial of the motion for preliminary injunction, the Second Circuit found no clear error. It concluded that, while the Tribes may ultimately prevail, the record is at this point too murky, and thus the Tribes could not establish their likely success on the merits.
Monday, October 27, 2014
According to his complaint, Abraham Inetianbor borrowed $2600 from Western Sky Financial, LLC in January 2011. Over the next twelve months, he paid $3252 to the servicer of the loan, CashCall, Inc. (CashCall). Believing that he had paid off the loan, Mr. Inetianbor then refused further payments. According to the complaint, CashCall responded by reporting a default to credit agencies, harming Mr. Inetianbor's credit rating. He sued, alleging defamation and usury, as well as a violation of the federal Fair Credit Reporting Act.
CashCall moved to compel arbitration pursuant to a clause in the loan agreement that called for "Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative . . . .” The District Court initially granted the motion, but it proved impossible for the parties to arbitrate since the Sioux Tribe "does not authorize arbitration." Eventually, the District Court denied the motion to compel CashCall appealed.
Before the 11th Circuit, Inetianbor v. CashCall, Inc., CashCall argued that; 1) the failure of the arbitral forum should not void the arbitration agreement even if the forum selection is integral to the agreement; 2) even if that were the rule, it only applies when the forum clause is "integral" to the agreement, and this forum clause was not "integral"; and 3) the District Court erred in finding the aribral forum unavailable. The Court rejected all three arguments.
First, under Circuit rules, the panel could not reverse a rule adopted by a previous panel. Such a reversal could only occur by the entire Court sitting en banc. Thus the panel was bound to hold to the Circuit's rule that arbitral agreements cannot be enforced where the forum fails and the forum clause is integral to the agreement. Second, after a lengthy discussion, the Court concluded that the forum clause at issue in this case was integral. Finally, the Court agreed with the District Court that the Tribe's involvement was essential and that arbitration involving the Tribe was unavailable.
Judge Restani, United States Court of International Trade Judge, sitting by designation, concurred. She agreed with the majority's conclusion that the arbitration agreement was unenforceable, but she would have struck it as unconscionable.
Tuesday, October 7, 2014
DC Circuit Allows Class Action against American Psychological Association to Proceed on Unjust Enrichment Claims
Very interesting case! The American Psychological Association (APA) listed as "mandatory" an optional assessment that members paid annually with their dues. The additional fees went to support the lobbying efforts of an affiliated organization, jthe American Psychological Association Practice Organization (APAPO).
Upon discovery that the fee was optional, members of the APA experienced a range of emotions consistent with symptoms of outrage and moral indignation and filed a class action lawsuit to recover the fees. The complaint stated three causes of action, but we are here concerned only with the first, unjust enrichment and constructive trust. The District Court opined that the plaintiffs were unreasonable, if not delusional, if they thought the fees lobbying fees were mandatory, and it dismissed the suit. Diagnosed as crazy, Plaintiffs asked for a second option, to which the District Court replied, "Okay, you're ugly too!"
But seriously folks, Plaintiffs sought their second opinion in the D.C. Circuit.
In In re: APA Assessment Litigation, the D.C. Circuit disagreed with District Court and reversed in part. The District Court had dismissed the quasi-contract claim on the ground that such a claim cannot exist where there is an actual contract on the same subject matter. The D.C. Circuit agreed with the District Court's statement of the law but disagreed with its application to these facts. The special assessment to support APAPO formed no part of the plaintiffs' contractual agreement with the APA. As the Court noted, citing the Restatement (Third) of Restitution & Unjust Enrichment, mistaken payment of money not due is one of the core cases of restitution. It typically applies in a contractual context in which one party negligently or fraudulently charges the other excessive fees for services that exceed the sope of the contract.
The Court was unmoved by the APA's arguments that it was not unjustly enriched because the plaintiffs benefited from APAPO's lobbying efforts. The plaintiffs had no interest in APAPO's functions. They were induced to make the payments because they wanted to retain their APA membership, not because they wanted to support APAPO. Finally, the Court found that it was not unreasonable for Plaintiffs to believe that the payments were mandatory.
Nor were they ugly.
Monday, October 6, 2014
The New Jersey Supreme Court rendered a decision on September 23 that found an arbitration provsion unenforceable because the language was insufficient to alert a reasonable consumer that she was surrendering a constitutional or statutory right. The plaintiff, Patricia Atalese, entered into a contract with U.S. Legal Service Group, L.P. (USLSG) for debt adjustment services. Atalese paid USLSG approximately $5,000 for its services. She alleged that USLSG did very little for her and further, that it failed to mention that it was not a licensed debt adjuster in New Jersey. She sued, alleging that USLSG violated the Consumer Fraud Act and other consumer law.
The contract contained the following provision:
Arbitration: In the event of any claim or dispute between Client and the USLSG related to this Agreement or related to any performance of any services related to this Agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request on the other party. The parties shall agree on a single arbitrator to resolve the dispute. The matter may be arbitrated either by the Judicial Arbitration Mediation Service or American Arbitration Association, as mutually agreed upon by the parties or selected by the party filing the claim. The arbitration shall be conducted in either the county in which Client resides, or the closest metropolitan county. Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction. The conduct of the arbitration shall be subject to the then current rules of the arbitration service. The costs of arbitration, excluding legal fees, will be split equally or be born by the losing party, as determined by the arbitrator. The parties shall bear their own legal fees.
The NJ Supreme Court found that despite arbitration's "favored status," not every arbitration clause, "however phrased," will be enforceable. NJ consumer law required that consumer contracts be written in a "simple, clear, understandable and easily readable way." Arbitration clauses, like other contractual clauses, must also be phrased in "plain language that is understandable to the reasonable consumer."
Here, the arbitration clause was on page 9 of a 23 page contract. It provided no explanation that the plaintiff was waiving her right to sue in court for breach of her statutory rights. The provision also did not explain the meaning of arbitration or indicate how it differed from a court proceeding. Finally, the court found that it was not written in plain language that would be "clear and understandable to the average consumer that she is waiving statutory rights." The court concluded:
"In the matter before us, the wording of the service agreement did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court. That deficiency renders the arbitration agreement unenforceable."
Very nice work, Supreme Court of New Jersey, for recognizing that "reasonable consumers" should not be expected to sift through fine print and make sense of legal mumbo jumbo.
While we were busy with the virtual symposium, we got a bit behind on reporting on cases. This one is from late August.
Three Steak n Shake (SNS) franchisees brought suit against SNS seeking a declaratory judgment that, under the terms of their franchise agreements, they may set their own prices and are not required to participate in corporate promotions. The case resulted from a corporate takeover in 2010, after which SnS initiated new pricing policies that plaintiff franchisees claim adversely affected their businesses.
The franchisees' agreements with SNS provided that the latter “reserve[d] the right to institute at any time a system of nonbinding arbitration or mediation.” One month after plaintiffs filed suit, SNS introduced an arbitration policy requiring franchisees to engage in nonbinding arbitration at SNS's request. Pursuant to that policy, SNS filed a motion in the District Court to stay proceedings and compel arbitration. The District Court denied the motion, finding the arbitration agreement "illusory" because one-sided and unenforceable. In addition, the District Court found that the new arbitration policy could not apply retroactively to claims that had already been filed and that the Federal Arbitration Act (FAA) did not apply to non-binding arbitration.
In Druco Restaurants, Inc. v. Steak N Shake Enterprises, Inc., the Seventh Circuit agreed with the District Court's first ground for decision and did not reach its alternative grounds. Applying Indiana law, the Seventh Circuit found the arbitration agreement illusory. The Court noted that SNS was free to exercise or not exercise its right to arbitration at whim. The company also retained complete discretion to determine venues where and procedures under which arbitration would take place. Where so much is uncertain, the Seventh Circuit noted, the agreement is vague, indefinite and unenforceable.
Wednesday, October 1, 2014
In a recently unsealed ruling, the U.S. Court of Claims has awarded $1.1 million in damages for breach of contract to a former undercover Drug Enforcement Administration ("DEA") informant who was kidnapped in Colombia and held captive for more than three months.
Here's a flavor from the opening paragraphs of the 52-page decision:
This breach-of-contract action comes before the Court after a trial on damages. In its decision addressing liability, the Court determined that the Drug Enforcement Administration (“DEA”) breached an implied-in-fact contract and its duty of good faith and fair dealing by failing to protect Plaintiff, an undercover informant. During an undercover operation in Colombia, Plaintiff, known as “the Princess,” was kidnapped and held captive for more than three months. Plaintiff claims that her kidnapping and prolonged captivity caused the onset of her multiple sclerosis and seeks compensatory damages in the amount of $10,000,000 for financial losses, inconvenience, future medical expenses, physical pain and suffering, and mental anguish arising from Defendant’s breach.
Because Plaintiff demonstrated that Defendant’s breach of contract was a substantial factor in causing the Princess’ kidnapping and captivity, and triggering her multiple sclerosis, the Court awards the Princess the value of her life care plan, $1,145,161.47. Plaintiff failed to prove any other damages.
The decision covers a number of issues related to damages. For example, the court holds that it was reasonably foreseeable at the time of contracing that a DEA informant would be kidnapped in Colombia and suffer resulting health issues:
The inquiry under foreseeability in this case is whether Plaintiff's damages, namely her multiple sclerosis and the ensuing costs of her medical care, were reasonably foreseeable at the time of contract formation. Anchor Sav. Bank, FSB, 597 F.3d at 1361; Pratt v. United States, 50 Fed. Cl. 469, 482 (2001) (“Whether damages are foreseeable is a factual determination made at the time of contract formation.”) (citing Bohac v. Dep't of Agriculture, 239 F.3d 1334, 1340 (Fed.Cir.2001)). Hence, Plaintiff must show that both the kidnapping, her ensuing health problems, and consequential financial costs of medical care constituted the type of loss that was reasonably foreseeable when the parties formed their implied-in-fact contract.
Plaintiff has established that her kidnapping was reasonably foreseeable at the time the contract was entered into. From the outset ASAC Salvemini voiced concerns for the Princess' safety, and DEA moved her family because of the dangers of her operation as part of her agreement to work with DEA. Evidence revealed that kidnappings were not uncommon in Colombia at the time. 2007 Tr. 270 (Princess); 2007 Tr. 1523 (Warren) (“[W]e got the report [the Princess] had been abducted. That was not an unusual report in Colombia then or now unfortunately.”). Plaintiff established that harm to undercover informants, including injury and death, were reasonably foreseeable consequences of a breach at the time of contract formation.
Knowing, as DEA did, of the dangers inherent in undercover operations aimed at highechelon Colombian traffickers, especially kidnapping in Col ombi a–a “hot spot”–the Princess' kidnapping and resultant harm to her health was a reasonably foreseeable type of injury at contract formation. The Court recognizes that DEA likely did not specifically foresee that the injury would be multiple sclerosis, but this is not a requirement for a showing of foreseeability. Anchor Savings Bank, FSB, 597 F.3d at 1362–63 (noting that “the particular details of a loss need not be foreseeable,” as long as the mechanism of loss was foreseeable) (quoting Fifth Third Bank v. United States, 518 F.3d 1368, 1376 (Fed.Cir.2008)).
Not the ordinary intrigue of the average contracts case.
SGS-92-X003 v. U.S., No. 97-579C (Ct. of Fed. Claims, filed Aug. 30, 2014)(republished Sept. 26, 2014).
Thursday, September 25, 2014
This is a edited version of a longer post from the Legally Speaking Ohio blog, written by Marianna Brown Bettman (pictured), a law professor at the University of Cincinnati College of Law, where she teaches torts, legal ethics, and a seminar on the Supreme Court of Ohio. She is also a former Ohio state court of appeals judge.
Professor Bettman's full blog post can be found here.
Cedar Fair, L.P. v. Falfas
Jacob Falfas worked continuously for Cedar Fair for nearly thirty five years. In 2005 he was promoted to Chief Operating Officer, pursuant to a written employment agreement. Falfas reported directly to Richard Kinzel, Cedar Fair’s Board Chair, President, and CEO.
In June of 2010 Falfas became aware of Kinzel’s dissatisfaction with certain aspects of his work. The two men had a 94 second telephone call on June 10, 2010. It is undisputed that after this phone call, Falfas’ employment with the company ended, but Kinzel believed that Falfas had quit, and Falfas believed he had been fired.
The employment agreement between the parties contained a binding arbitration provision. The parties arbitrated their dispute, resulting in a finding that Falfas had not resigned, but was terminated for reasons other than cause. The arbitrators found that equitable relief was needed to restore the parties to the positions they held prior to the breach of the employment agreement, and ordered Cedar Fair to reinstate Falfas to his former position.
Judicial Review of Arbitration Award
On appeal to the Erie County Common Pleas Court, the trial judge found that the arbitration panel’s order of reinstatement exceeded its authority under the employment agreement. The Sixth District Court of Appeals reversed, finding that the trial court erred in refusing to order reinstatement.
Specific performance is not a remedy in this breach of an employment agreement case.
An arbitrator’s authority to interpret a contract is drawn from the contract itself. The statutory authority of courts to vacate an arbitrator’s award is very limited. Arbitrators act within their authority to craft a remedy as long as the award “draws its essence” from the contract, but an award departs from the essence of a contract when the award conflicts with the express terms of the agreement or cannot rationally be supported by the terms of the agreement.
In this case the court found that the arbitration panel exceeded its powers in ordering Cedar Fair to reinstate Falfas.
Specific performance is not an available remedy for breach of an employment contract unless it is explicitly provided for in the contract or by an applicable statute. (Masetta v. Natl. Bronze & Aluminum Foundry Co., 159 Ohio St. 306, 112 N.E.2d 15 (1953), applied.)
Tuesday, September 9, 2014
We previously blogged about Ellington v. EMI, in which Duke Ellington's grandson essentially claims that EMI is double dipping into foreign royalties because it now owns the foreign subpublishers that are charging fees. The New York Appellate Division held that Ellington's 1961 royalties agreement is unambiguous and allows EMI to do this. Ellington has appealed to the New York Court of Appeals and oral argument is scheduled for Thursday. Oral argument will be streamed live on the Court's website.
Here's the summary of the case from the Court's Public Information Office:
In 1961, big-band jazz composer and pianist Duke Ellington entered into a then-standard songwriter royalty agreement with a group of music publishers including Mills Music, Inc., a predecessor of EMI Mills Music, Inc. (EMI). The agreement designates Ellington and members of his family as the "First Parties," and it defines the "Second Party" as including the named music publishers and "any other affiliate of Mills Music, Inc."
Regarding royalties for international sales, the agreement requires the Second Party to pay Ellington's family "a sum equal to fifty (50%) percent of the net revenue actually received by the Second Party from ... foreign publication" of his songs. Under such a "net receipts" arrangement, the foreign subpublisher retained 50 percent of the revenue from foreign sales and remitted the remaining 50 percent to EMI. EMI would then pay Ellington's family 50 percent of its net receipts, amounting to 25 percent of all revenue from foreign sales. At the time the agreement was executed, foreign subpublishers were typically not affiliated with American music publishers; but EMI subsequently acquired ownership of foreign subpublishers and, thus, fees that had been charged by independent foreign subpublishers are now charged by subpublishers owned by EMI.
In 2010, Ellington's grandson and heir, Paul Ellington, brought this breach of contract action against EMI, claiming EMI engaged in "double-dipping" by having its foreign subsidiaries retain 50 percent of revenue before splitting the remaining 50 percent with the Ellington family. He alleges this enabled EMI to inflate its share of foreign revenue to 75 percent, and reduce the family's share to 25 percent, in violation of its contractual agreement to pay the family 50 percent "of the net revenue actually received by the Second Party from ... foreign publication."
Supreme Court dismissed the suit, saying the parties "made no distinction in the royalty payment terms based on whether the foreign subpublishers are affiliated or unaffiliated with the United States publisher." The term 'Second Party' does not include EMI's new foreign affiliates, it said, because the definition "includes only those affiliates in existence at the time that the contract was executed."
The Appellate Division, Second Department affirmed, saying there is "no ambiguity in the agreement which, by its terms, requires [EMI] to pay Ellington's heirs 50% of the net revenue actually received from foreign publication of Ellington's compositions. 'Foreign publication' has one unmistakable meaning regardless of whether it is performed by independent or affiliated subpublishers." It said the definition of 'Second Party' includes only affiliates "that were in existence at the time the agreement was executed," not "foreign subpublishers that had no existence or affiliation with Mills Music at the time of contract."
Paul Ellington argues the agreement was intended to split foreign royalties 50/50 between EMI and his family, while allowing EMI to deduct a reasonable amount for foreign royalty collection costs, and EMI breached the contract by "diverting" half of the revenue to its own foreign subsidiaries. "Per the plain terms of the Agreement..., EMI is 'actually receiv[ing]' all the revenue, and it must, therefore, split it all equally with plaintiff." He argues the definition of Second Party includes affiliates EMI might acquire in the future, since there is no language limiting the term to affiliates then in existence. In any case, he says the language is ambiguous and cannot be resolved on a motion to dismiss.
Here's the Appellate Division decision in Ellington v. EMI.
Wednesday, September 3, 2014
Cooper Union for the Advancement of Science and Art, founded in Manhattan in 1859, was one of the last institutions of free higher education in the United States until last year. Facing declining enrollment, the school announced that it would start charging tuition of more than $19,000 per year. Students, faculty members and alumni have filed a lawsuit challenging that decision and seeking to block the tuition as violating the school's charter. (Great timeline of Cooper Union tuition related events here at NYTimes).
Complicating matters is that Peter Cooper, who died in 1883, wrote the charter in lofty, less-than-precise language.
In the charter document, he said he was leaving his considerable funds and property to "regular courses of instructions, at night, free to all who shall attend the same, under the general regulations of the trustees, on the application of science to the useful occupations of life."
School officials say the intent is clear, even if the language is flowery: Mr. Cooper wanted night courses to be free, not necessarily all courses.
But the school has used the language in other ways, too. In 2006, during litigation seeking to maintain a tax exemption on a school-owned building, the administration in court documents quoted the line this way: "Cooper Union must provide 'regular courses of instruction…free to all who shall attend.' " The right was granted.
And a plaque deeming Cooper Union's Manhattan campus as a city landmark reads: "Peter Cooper…founded this institution, offering free education to all."
(emphasis added). Hmmm.... free to all or free to all at night?
Estate attorneys believe that the court is likely to be "sympathetic to the instutition's needs." Attorney Howard Krooks told the WSJ: "If you're dealing with a trust that's 100 years old, it's generally understood [by judges] that whatever it took to run a school back then is drastically different than today[.]"
Monday, September 1, 2014
Sunday's New York Times has a story by Gretchen Morgenson on the front page of its Business Section that illustrates an additional problem with binding arbitration. Arbitral panels can make arbitrary decisions to exclude evidence that could be outcome determinative. Courts do that as well, but while a court's rulings on evidentiary matters are reviewed for reversible error, it is not clear that courts have jurisdiction to review an arbitral body's evidentiary decisions.
Although Morgenson, a Pulitzer Prize winner, did her best to report all sides of the case, only the plaintiff and his attorney would speak with her. So we can't pretend we have all the facts. But here is what Morgenson reports:
Sean Martin, who works at Deutsche Bank, noticed five years ago that the firm was letting hedge fund clients listen in as analysts shared information about the markets before that information was shared with other investors. Martin reported the conduct at the time and was rewarded with his first ever negative performance review. He was moved out his work group and suffered a pay cut. In August 2012, he decided to pursue an arbitration, claiming retaliation and seeking recovery of lost wages. Under his employment agreement, disputes must be heard by arbitrators associated with the Financial Industry Regulatory Authority (Finra).
Streamlined discovery is supposed to be one of the advantages of arbitration. The purposes of the streamlining is supposed to be efficient resolution of claims. That is not happening in this case. The first hearings took place in March of this year, and at those hearings, the arbitral panel decided to exclude a number of crucial pieces of evidence that Martin sought to introduce. In addition, the Bank has asked that hearings for the case go on into 2105, six years after the alleged conduct took place and well over two years after Martin sought arbitration.
Martin was so dissatisfied with the panel's discovery decisions that he asked all three aribtrators to withdraw. They refused to do so. Martin then brought an action in the New York State Supreme Court (pictured above), seeking a stay of the arbitration proceedings and the removal of the panel. Mr. Martin's lawyer has done arbitrations before Finra before. It's not as if he is hostile to arbitration in principle. But this panel has gone "off the rails," he claims.
We'll see if the legal system can provide a remedy.