Monday, October 7, 2013
I’ve been meaning to blog about a Fourth Circuit opinion that went under noticed, although it should have raised alarm bells. That opinion, rendered in Metropolitan Regional Information Systems, Inc. v. American Home Realty Network, Inc.,722 F.3d 591 (July 17, 2013) held that copyright could be transferred via a clickwrap.
The TOU states:
“All images submitted to the MRIS Service become the exclusive property of (MRIS). By submitting an image, you hereby irrevocably assign (and agree to assign) to MRIS, free and clear of any restrictions or encumbrances, all of your rights, title and interest in and to the image submitted. This assignment includes, without limitation all worldwide copyrights in and to the image, and the right to sue for past and future infringements.”
The defendant, AHR, operates a website, NeighborCity.com which displays real estate listings using a variety of sources, including photographs taken from the MRIS website.
MRIS sued AHR for copyright infringement. Photographs are protected under the Copyright Act. Section 204 of the Copyright Act requires that transfers of copyright ownership require a writing that is signed by the owner. AHR argued that MRIS did not own the copyright to the photographs because its TOU failed to transfer those rights. The issue then was whether a subscriber who clicks agreement to a TOU has “signed” a “written transfer” of the copyright in a way that meets the requirement of Section 204. The Fourth Circuit found that “(t)o invalidate copyright transfer agreements solely because they were made electronically would thwart the clear congressional intent embodied in the E-Sign Act. We therefore hold that an electronic agreement may effect a valid transfer of copyright interests under Section 204 of the Copyright Act.”
Given the reality that few read wrap contracts, holding that an author/creator can give up copyright with a click is alarming. The opinion is a prime example of a court doing what is arguably the right thing for reasons of business competition but creating an alarming precedent in the process. Shades of ProCD! Online businesses will certainly benefit from this decision, but creators - not so much. They may realize too late that when they clicked to upload content, they also assigned their rights to their work. This is especially problematic since the primary reason creators use some of these sites is to get publicity for their work. The bargain, in other words, may be quite different from what the creator might have intended.
So - all you creators out there - BEWARE and check out those terms before you click. They may not be as harmless as you think.
H/T to my former student, Leslie Burns and her blog.
Tuesday, October 1, 2013
As we noted here, the Ninth Circuit's Judge Noonan (pictured) appended a stinging concurring opinion to the Ninth Circuit's judgment in Corvello v. Wells Fargo. Wells Fargo challenged the language we identified as "the money quote" from Judge Noonan's concurrence, claiming that it did not draft the allegedly fraudulent plan, as Judge Noonan suggested. The Department of the Treasury drafted the language, and Wells Fargo was required to use it under the federal program at issue.
This week the Ninth Circuit issued a brief order in which it withdrew Judge Noonan's concurrence.
Monday, September 30, 2013
Modelmayhem.com (“Modelmayhem”) is a nationwide modeling industry website. Shana Edme (“Edme”) joined the site to further her modeling career. After several photographs of Edme modeling lingerie were disseminated and viewed without her permission, Edme commenced an action in the Federal District Court for the Eastern District of New York (“EDNY”) against Modelmayhem (among others). Edme claimed that the site violated her right to privacy under New York State statutes.
The court began with a discussion of contracting and the Internets:
The conclusory statement by Modelmayhem that "New York law specifically recognizes 'Terms and Conditions' posted on a website as a binding contract" (Modelmayhem's Mem. at 6) completely ignores the developing discussion within this Circuit (and courts nationwide) regarding what actions by an internet user manifests one's asset to contractual terms found on a website. "While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract." Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004). "Mutual manifestation of assent, whether by written or spoken word or by conduct" is one such principle. Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 29 (2d Cir. 2002). As Judge Johnson of this District previously explained:
The Court then discussed Modelmayhem’s failure to explain how Edme became bound to the terms on the website. Modelmayhem could have presented Edme with the terms in a number of ways:
Edme v. Internet Brands, 12 CV 3306 (E.D.N.Y. Sept. 23, 2013)(Hurley, J.).
[Meredith R. Miller]
Yusuf Farran, Executive Director of Facilities and Transportation with the Canutillo Independent School District, claims that he observed employee theft and falsification of time cars. He also claimed that the School District overpaid a contractor, Henry's Cesspool Services (kudos to you Henry for an honest description fo your business!). Farran complained to his supervisors about the contractor's failures to properly dispose of grease-trap waste. He allegedly was told to stop making any more complaints relating to the grease trap.
In March 2009, the School District first suspended and then fired Farran for unrelated reasons. While suspsended and while his termination was pending, Farran contacted the FBI to complain about Henry's Cesspool Services. When his termination was finalized, Farran brought a claim for breach of contract and wrongful termination in violation of Texas's Whistleblower Act.
On August 3oth, the Supreme Court of Texas dismissed Farran's complaint in Canutillo Independent School District v. Farran. "To establish a Whistleblower Act claim, the plaintiff must show that his report to a law enforcement authority caused him to suffer the complained-of adverse personnel action." Unfortunately for Farran, he contacted the FBI after he had already been warned to stop complaining about the grease trap and after he had been suspended and was due to be terminated. Farran bore the burden of showing that, but for the FBI report, the School District would have reversed course and reinstated him, but he could not do so. There was no evidence that the FBI report played a role in his termination.
The Texas Supreme Court also affirmed dismissal of Farran's breach of contract claim for failure to exhaust administrative remedies. Farran thought he did not need to do so because his breach of contract claim related to his Whistleblower act claim.
Tuesday, September 17, 2013
In Corvello v. Wells Fargo Bank, the issue before the Ninth Circuit was whether Wells Fargo was contractually obligated under the Federal Home Affordable Modification Program (HAMP) to offer plaintiffs a permanent mortgage modification after they had complied with the requirements of the trial period plan (TPP).
The Treasury set out procedures that mortgage servicers were to follow under HAMP in order to qualify for payments of $1000 per mortgage modification. HAMP required that servicers provide permanent modifications to borrowers to made all their payements under the TPP and whose representations provided as part of the TPP process remained accurate. If the servicers were to deny modifications, they are obligated to inform borrowers in writing.
Plaintiffs alleged that they complied with all requirements of their TPPs but that Wells Fargo neither notified them of their ineligibility nor modified their mortgage loans. Plaintiffs sued seeking permanent modifications and other relief. The District Court granted Wells Fargo's motion to dismiss based on language in the TPP suggesting that Wells Fargo's obligation to grant a modification was conditioned on its provision of a "fully executed copy of a Modification Agreement." Since Wells Fargo provided no such Modification Agreement, the District Court reasoned, the condition was not met.
Subsequent to the District Court's decision, the Seventh Circuit decied Wigod v. Wells Fargo Bank, which held that bank are required to offer permanent modifications to borrowers who complete their obligations under the TPPs unless the banks timely notify those borrowers that they do not qualify for a HAMP modification. The Ninth Circuit followed Wigod and reversed the District Court. Both Circuit Courts rejected Wells Fargo's position "because it made teh existence of any obligation conditional solely on action of the bank and conflicted with other provisions of the TPP," including the bank's obligation to send a Modification Agreement if the borrower qualified for a modification. Although Wigod was decided under Illinois law and California law applied in Corvello, the Ninth Circuit found "no material difference" in the laws of the two jurisdictions.
Plaintiffs thereby survived a motion to dismiss, with the Ninth Circuit accepting as true all of the allegations of the complaints. The Court remanded the case for further proceedings.
Judge Noonan concurred. The money quote:
No purpose was served by the document Wells Fargo prepared except the fraudulent purpose of inducing Corvello to make the paymetns while the bank retained the option of modifying the loan or stiffing him.
Monday, September 16, 2013
The Ninth Circuit's opinion in Murphy v. DirecTV starts in the manner to which we have been accustomed in the past few years. Although Plaintiffs state claims under California consumer protection statutes, and although another California statute declares unenforceable arbitration clauses in consumer contracts that preclude collective or class action proceedings, the Ninth Circuit must uphold DirecTV's arbitration agreement with the plaintiff class and compel arbitration. The Supreme Court's 2011 decision in Concepcion compels this result.
The arbitration provision with its class action waiver also contained a "jettison clause," which reads: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [section on dispute resolution] is unenforceable.” Originally, the Distirct Court relied on the jettison clause in denyingDirecTV's motion to compel arbitration, and the Ninth Circuit affirmed. Post-Concepcion, however, the District Court reversed itself and granted the motion to compel and the Ninth Circuit affirmed that grant of the motion to compel.
This confuses me, and I must confess that I do not find the Ninth Circuit's explanation enlightening, despite several pages devoted to distinguishing cases that Plaintiffs thought supported their claim. The Ninth Circuit treats the issue of one of retroactivity. When the Supreme Court interpreted in Federal Arbitration Act (FAA) in Concepcion, it told us what the FAA meant, and it has always meant what it meant in Concepcion. If the FAA preempts state law, then it has always done so, and it can do so with respect to claims that arose before Concepcion was decided. As the Court explains.
A contract cannot be unenforceable under state law if federal law requires its enforcement, because federal law is “the supreme Law of the Land . . . , any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Section 9 of the Customer Agreement provides only that the arbitration agreement will be unenforceable if the “law of your state” disallows class waivers, which California law does not—and could not—under the FAA as interpreted in Concepcion.
But the Ninth Circuit also quotes the Supreme Court as saying that the FAA “places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.” Here, the parties have stipulated that their agreement to arbitrate is unenforceable if state law would prohibit it, and there seems to be no doubt that the law of California at the time of the contract prohibited class action waivers in arbitration provisions. If the courts are aiming at giving effect to the intent of the parties, it seems to me that the "jettison clause," rather than Concepcion governs. The FAA is about enforcing arbitration agreements, and here the parties have agreed that, to the extent California law governs, claims cannot be arbitrated. Concepcion should not be construed so broadly as to compel arbitrations to which the parties have not agreed.
But fortunately for Plaintiffs, they also have claims against Best Buy, where they acquired their DirecTV equipment and which is neither a party to the arbitration clause nor a third-party beneficiary of it, according to the Ninth Circuit. The nature of that acquisition is at the heart of Plaintiffs' claims. They allege that Best Buy misled them into thinking that they were purchasing DirecTV equipment when in fact the two companies consider the transaction a lease. Plaintiffs also allege that the lease terms are oppressive and unfair.
The District Court granted Best Buy's motion to compel arbitration based on equitable estoppel. Plaintiffs are suing alleging that the two parties colluded in imposing on them unfair and oppressive terms in a Customer Agreement and Lease Addendum. If it is suing based on that document, the arbitration provision should be in with respect to both defendants. The District Court held that Plaintiffs were estopped to deny Best Buy the benefits of the arbitration provision.
The Ninth Circuit reversed on estoppel. Plaintiffs are suing DirecTV because of unfair and oppressive terms in a lease agreement. They are suing Best Buy because its conduct in the transaction misled Plaintiffs into thinking they were buying equipment when they were in fact only leasing it. In short, the Ninth Circuit concludes that "Plaintiffs’ claims against Best Buy do not rely on, and are not intertwined with, the substance of the DirecTV Customer Agreement or Lease Addendum." In addition, while alleged collusion is another ground for equitable estoppel, and Pliantiffs have alleged collusion, the alleged collusion is unrelated to the contract on which Best Buy would rely in order to compel arbitration.
The Ninth Circuit also rejected Best Buy's claims that it was entitled to benefit from the arbitration provision either under an agency theory or as a third-party beneficiary.
Friday, September 6, 2013
I start my first year contracts course with consideration. For the first time, I’m also teaching a contracts drafting course. Based upon the contracts drafting texts that I reviewed, the general consensus seems to be that recitals of consideration are basically pointless. While I think that’s somewhat true in that they don’t contain performance obligations, it’s misleading, too. Courts not only consider recitals in construing clauses and the parties’ intent, a recital of consideration may create a rebuttable presumption or may estop a party from claiming lack of consideration. In other words, in some cases, it can save a party from a claim that consideration was insufficient.
A recent case involving a patent assignment, Network Protection Sciences v. Fortinet, 2013 WL 4479336 (N.D. Cal 2013), seemed to go even further when the court, applying Texas law, held that a recital was conclusive. The recital in question stated that the patent was assigned “for good and valuable consideration, the receipt of which is hereby acknowledged.” The party contesting the assignment argued that it was invalid because it was “beyond dispute” that no consideration was paid for it. The court, applying Texas law, rejected that argument finding the recital conclusive and that “(e)ven if no actual consideration were paid…NPS’s agreement to be bound by the choice-of-law provision would be deemed adequate consideration.” In other words, according to the court, the recital is conclusive with respect to the issue of whether there was consideration for the assignment but even if it weren’t, agreeing to the choice of law provision was sufficient consideration. Is this the law in Texas, is it unique to Texas, or did the judge make new law? Any contracts profs care to weigh in?
In any event, it seems that consideration wasn't the way to go anyway because (although the parties didn't raise the issue) the assignment seems to fall under Restatement section 332 regarding gratuitous assignments that are irrevocable if signed and delivered to the assignor. This makes sense to me because a written assignment can affect third parties who rely upon it.
The case is also noteworthy because it opens with a quote from a recent NYT oped, coauthored by Santa Clara law prof Colleen Chien, which discusses the problem of “patent trolls” (companies that buy up patents with the intent to sue for infringement, rather than to practice the patented invention). The court’s decision denying the defendant's motion to dismiss the patent infringement action was a bit disappointing given the way it began its opinion and the less-than-admirable behavior of the plaintiffs and their trollish behavior in pursuing the action. Where are the activist judges when you need them?
Thursday, August 29, 2013
Michelle Richards brought a class acction lawsuit in Federal District Court against her former employer Ernst & Young (E&Y). After her claim was consolidated with similar claims brought by other former E&Y employees, E&Y filed a motion to compel arbitration. The District Court ruled that E&Y had waived its right to compel by not asserting that right in the other cases.
On August 21st, the Ninth Circuit reversed. Courts disfavor a finding that a party has waived its contractual right to arbitrate. In order to establish a waiver, a party must show:
(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.
Although Richards claimed that she had been prejudiced, because the District Court had already ruled on some of her claims, the Ninth Circuit rejected that argument because the District Court had not decided any of her claims on the merits. One claim was dismissed without prejudice; another was dismissed for lack of standing.
Richards also claimed that she had been prejudiced by the expenses incurred during years of litigation prior to E&Y's motion to compel. The Ninth Circuit found that she had not been prejudiced because she had not alleged that E&Y sought discovery of information that could not have been obtained in arbitration. In addition, the Ninth Circuit will not find prejudice when expenses are "self-inflicted," and here the expenses were self-inflicted because Richards chose to bring her claim in "an improper forum, in contravention of" her agreement with E&Y to arbitrate her claims.
Finally, the Ninth Circuit rejected Richards' argument that her claim under the National Labor Relations Act should not be arbitrated on the ground that (oh, the irony!) she had not raised it in a timely manner. In any case, that claim was doomed under Italian Colors.
In a final footnote, the Ninth Circuit also reverses the Distirct Court's grant of class certification, since (you guessed it!) the arbitration agreement precludes class arbitrations.
[JT, with hat tip to former blog intern, Justin Berggren]
Thursday, August 22, 2013
This is the fourth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
One Contracts Professor’s Preference for State Court Decisions
In the essay that I contributed to Revisiting the Scholarship of Stewart Macaulay: On the Empirical and the Lyrical, I gave vent to the frustration I experienced over the years reading decisions written by the 7th Circuit Judges Richard Posner and Frank Easterbrook. Stewart wrote to me recently and in two sentences, appropriately lyrical, summed up the source of my frustration: “In theory, of course, the court applies state law in a diversity situation. About the one thing that you can expect is that Judges Posner and Easterbrook will be off on a frolic of their own.”
I have a healthy respect these days, and a strong preference for, the decisions of state courts. I try to use the best of these to teach contract law to my students. I admire the tenacity of state courts that insist, for example, that the commentary to the UCC matters in interpreting that statute. See e.g. Simcala Inc. v. American Coal Trade, Inc. 821 So.2d 197 (Ala. 2001) (the word “center” in comment 3 to UCC section 2-306 means something when used to describe the way a stated estimate limits the “intended elasticity” of an output or requirements contract).
I am particularly gratified by the persistence of courts that have used the unconscionability doctrine to invalidate boilerplate arbitration clauses. Implicit in these cases is a duality. Oppression exists on two levels. The terms of the transactions are oppressive and unconscionable, and the terms of the arbitration agreement are oppressive. Two cases I discussed previously at the 8th Annual International Contracts Conference at Texas A & M University Law School.
In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court describes the terms of a loan agreement. Ms. Brewer borrowed $2,215 and paid back $2000, at which point she had reduced the principal balance on the loan by $.06. The interest rate on that loan was 300%. Ms. Brewer brought suit under the Missouri consumer protection statute, the Missouri Merchandising Practices Statute.
In Tillman v. Commercial Credit Loans Inc., 655 S.E.2d 362 (N.C. 2008), Ms. Tillman and Ms. Richardson, the named plaintiffs in a class action, purchased single premium credit insurance from a lender. Within a year the North Carolina legislature made this species of loan illegal, but the statute was not retroactive. Ms. Tillman and Ms. Richardson sued under the North Carolina Unfair and Deceptive Trade Practices Act. The North Carolina Supreme Court found the arbitration clause in the contract, which barred class actions, unconscionable in a 3-2-2 decision.
When the United States Supreme
Court vacated the decision in the Brewer
case and remanded it to the Missouri court for reconsideration in light of A.T.& T. Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011), Chief Justice Richard Teitelman
, responded that
the unconscionability doctrine in Missouri law was not an “obstacle to the
accomplishment of the act’s objectives.”
The arbitration agreement was unconscionable because there was expert
testimony that no consumer would pursue a claim against the Title Company. The cost was too high. The Tillman
court made much the same point. Of the
68,000 loans that Citifinancial made in North Carolina, no borrower ever
pursued arbitration of a claim.
Citifinancial on the other hand, had reserved its right to go to court
and had exercised that privilege over 3,000 times in civil suits and
foreclosure actions. The Tillman court also provided information
about the actual cost of arbitration, a factual discussion that is missing in a
lot of these cases. It turns out that
arbitration is cost prohibitive for most low income consumers.
Exploitive or predatory contracts saturate the market for credit, housing, furniture for the least well off in our society. The Montana Supreme Court recently held a payday loan and its arbitration provision unconscionable. Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 ( Mont. 2013)(780% APR was violation of Montana Consumer Loan Act) If the U.S. Supreme Court grants certiorari in Kelker, the decision in that payday loan case will probably meet the fate of its progenitors, Casarotto v. Lombardi, 886 P.2d 931 (Mont. 1994)(Casarotto I) and Casarotto v. Lombardi, 901 P.2d 596 (Mont. 1995)(Casarotto II). Justice Trieweiler maintained in Casarotto I that the Federal Arbitration Act had not pre-empted state laws addressing arbitration because the federal statute had not addressed every aspect or possibility with respect to arbitration agreements. In Casarotto II he argued that the U.S. Supreme Court’s decision to strike down an Alabama statute that made pre-dispute arbitration agreements unenforceable was irrelevant to the decision in Casarotto I. He was reversed in an opinion written by none other than Justice Ginsberg.
Justice Terry N. Trieweiler, the twice rebuked but unrepentant Montana Supreme Court jurist, actually wrote three Casarotto opinions. He penned a special concurring opinion in Casarotto I to address “those federal judges who consider forced arbitration as the panacea for their “heavy caseloads” and to single out for criticism Judge Bruce M. Selya, First Circuit Court of Appeals, who called the prevalence in state courts of “traditional notions of fairness” an “anachronism.” 886 P.2d at 940. Justice Trieweiler’s rejoinder was that some federal judges are arrogant. I think of it as hubris.
The number of cases challenging arbitration agreements has not diminished over time. I can think of at least two reasons for this phenomenon. One is ever expanding disparity in wealth and power in the United States in this post-industrial society. There are very few ways individuals can challenge those who have power over them or expose what they feel to be an injustice that has been done to them. We are conditioned to believe that there is “equal justice under the law” and to believe that a citizen may seek redress in court. The second reason is the failure of federal courts to recognize that the FAA is indefensible when it is applied in consumer cases. That was the subject of the last series of blog posts discussing Margaret Radin’s book, Boilerplate. The FAA is a statute frozen in time, applied to transactions almost ninety years after Congress held those hearings on the resistance of state courts to arbitration and used to enforce arbitration “agreements” in contracts that were not even dreamed of when the FAA was passed -- online, clickwrap contracts such as the contract in Kelker. Contract defenses that police agreements where there is no real consent and no real bargaining are rendered impotent by the FAA. It does not matter if Certiorari is denied in Kelker, because the 9th Circuit has already used a pre-emption argument to defeat the Montana court’s use of “reasonable expectations” and unconscionability doctrines to invalidate arbitration provisions. Mortensen v. Bresnen Communications, LLC, 2013 U.S. App. Lexis 14211.
This past weekend I had the pleasure of meeting the judge who wrote the plurality opinion in the Tillman case, Justice Patricia Timmons-Goodson (pictured), who retired from the North Carolina Supreme Court in December 2012. I did not plan this meeting. It was completely serendipitous. I was looking for the meeting room where the Task Force on the Future of Legal Education was discussing the end of law school as we know it. I asked her for directions, and then I glanced at her name tag. It took me a moment to realize who she was. I was told by Judge James Wynn, who is now on the 4th Circuit U.S. Court of Appeals, but who once served with Judge Timmons-Goodson on the North Carolina Court of Appeals and the Supreme Court, that she was a recent recipient of the Legend in the Law award at Charlotte School of Law.
I knew that Justice Timmons-Goodson was a black woman. I looked for background information when I decided to write about the case. I knew, courtesy of North Carolina’s Lawyers Weekly, that two lawyers from Raleigh, John Alan Jones and G. Christopher Olson, obtained a judgment in Tillman and two companion cases in the amount of $81.25 million. Of the borrowers represented in the Tillman case, 759 received approximately $31,291 each. Another 9,670 received $544 each.
Taking the admonition of Stewart Macaulay seriously, striving to do something that looks like empirical research, I asked Justice Timmons-Goodson if she would consent to an interview. She hasn’t agreed yet, but I hope she will. I would like to know more about the process that she used to reach a decision in the Tillman case; how she persuaded enough of her colleagues to agree that the contract and the arbitration clause were unconscionable, even if two of them relied on a “totality of the circumstances” analysis that they thought sufficiently different from her opinion to merit a separate concurring opinion. Two justices signed her opinion relying on substantive unconscionability; two joined in finding the arbitration clause unconscionable but stressed the importance of deference to the fact-finding of the trial judge under a “totality of the circumstances” approach, and two justices dissented.
The Justice writing the dissenting opinion, appears to believe that the unconscionabiity doctrine is somehow illegitimate. He noted that it had never been used in North Carolina to invalidate a contract or a term in a contract. If I do interview Justice Timmons-Goodman, I will ask her about her reaction to the most recent U. S. Supreme Court decisions. She has herself written about the importance of state court judges at every level, particularly in the trial courts.
I am not sure that she would call her own acts as a justice on the Supreme Court “resistance.” She might simply say that logic and adherence to an ethic of principled decision-making impelled her to write the decision in Tillman as she did. I cannot be sure that she believes, as I do, that the drafters of the FAA never intended to completely pre-empt state law, especially those contract doctrines that are designed to control avarice and unscrupulous behavior. I do think, however, she will enjoy discussing the decisions of Justice Trieweiler.
[Posted, on Deborah Post's behalf, by JT]
Wednesday, August 14, 2013
Joyce Green alleges that two companies doing business as "The Cash Machine" violated the Truth in Lending Act (TILA) by misstating the interest rate on her pay-day loan. Her loan agreement provided for binding arbitration "under the Code of Procedure of the National Arbitration Forum." Although the agreement dates from 2012, the National Arbitration Forum (NAF) had ceased taking consumer cases in 2009, when a district court found it biased it in favor of merchants. When defendants moved to compel arbitration, the Distirct Court found the non-existence of the named arbitral body fatal to the arbitration provision, which it struck. The Distirct Court denied defendants' motion to compel arbitration.
In Green v. U.S. Cash Advance Illinois, LLC , decided July 30, 2013, the Seventh Circuit reversed the Distirct Court and compelled arbitration by a 2-1 vote. Chief Judge Easterbrook, writing for the majority, notes that the arbitration agreement provides only that the arbitration will be governed by the rules of the NAF (the Rules), not that arbitration be in that forum. Those Rules provide for severability -- that is, if any provisions of the Rules are found to be unenforceable, the remainder of the Rules remain in effect. The Rules also contain the following provision:
If Parties are denied the opportunity to arbitrate a dispute, controversy or Claim before the Forum, the Parties may seek legal and other remedies in accord with applicable law.
Judge Easterbrook reads that provision as permitting a judge to appoint an aribter pursuant to the Federal Arbitration Act, 9 U.S.C. § 5. In support of this reasoning, Judge Easterbook cites opinions from the 3rd and 11th Circuits, both of which held that the identity of the arbitral forum is not integral to an arbitration agreement. A court may thus reform an arbitration agreement by appointing an aribter under § 5, which permits a judge to appoint an arbiter if none is specified in the agreement. On Judge Easterbrook's reading of the agreement, that is the case here. Moreover, it would make no sense to conclude, based on the unavailability of the NAF, that the parties had agreed to litigate rather than arbitrate their disputes. It is far more reasonable to construe the agreement as continuing to evidence the parties' consent to arbitration.
Judge Hamilton wrote a long and passionate dissent, which begins:
Despite the surface simplicity of its logic, the majority has actually made an extraordinary effort to rescue the payday lender- defendant from its own folly, or perhaps its own fraud.
The majority’s reasoning departs from the contractual foundation of arbitration. It puts courts in the business of crafting new arbitration agreements for parties who failed to come to terms regarding the most basic elements of an enforceable arbitration agreement. Section 5 of the Federal Arbitration Act need not and should not be read to authorize such a wholesale re-write of the parties’ contract. It certainly should not be read to rescue an arbitration clause on behalf of the clause’s author when the author knew or should have known that its designated arbitrator was unavailable.
In dissenting, Judge Hamilton relies on the Second Circuit's reasoning in In re Salomon Inc. Shareholders’ Derivative Litigation, 68 F.3d 554 (2d Cir. 1995), which leaves the parties in the court system when their arbitration agreement "utterly fails." Here, for Judge Hamilton, the arbitration agreement fails because defendants were either being negligent or deliberately deceptive in invoking an arbitral forum that had been shut down three years earlier for consumer fraud. Judge Hamilton gives little weight to Joyce's alleged "agreement" to the arbitral forum because:
The payday loan agreement that Green signed was certainly a contract of adhesion. Green had no bargaining power over its terms, including the arbitration clause. The idea that she actually agreed, in a subjective sense, to any arbitration clause at all therefore requires some rather heroic assumptions.
Judge Hamilton is unimpressed with the Majority's reading of the arbitration provision. By invoking the Rules, the parties could only have intended to identify NAF as the forum for arbitration since Rule 1(A) states, “This Code shall be administered only by the National Arbitration Forum or by any entity or individual providing administrative services by agreement with the National Arbitration Forum.” [emphasis added] Judge Hamilton reads Rule 48(D) as similarly requiring arbitration either in the NAF or nowhere. The Majority ignores these provisions based on the Rules' severability provision, but severability arises only where specific provisions are found to be unenforceable, and there is no reason not to enforce either Rule 1(A) or Rule 48(D) as between these parties.
As for the Majority's reasoning on Section 5 of the FAA, Judge Hamilton notes that, while Circuit Courts have split on its scope, no court has gone so far as to find "a correctable lapse where a drafter has at least negligently named an arbitration forum that was never available." Judge Hamilton again invokes In re Salmon, in which the Second Circuit refused to name a substitute forum for arbitration when the forum to which the parties had agreed was unavailable. Judge Hamilton rejects the Third Circuit's ruling in Khan v. Dell, Inc., 669 F.3d 350 (3d Cir. 2012), on which the majority relies, as both poorly reasoned and distinguishable. Khan also involved a challenge to NAF arbitration. The case is poorly reasoned, according to Judge Hamilton, because the court ignored clear language in the arbitration agreement that provided that the (unavailable) NAF was to be the exclusive forum for arbitration. The case is distinguishable because there at least the NAF was available in 2004 when the parties entered into their arbitration agreement.
There is more to Judge Hamilton's dissent, and it is all very interesting, but this post is already very long and people interested in the case should read it for themselves. As there is a Circuit split, courts are likely to return to this issue in future cases.
Tuesday, August 13, 2013
After an ugly three-car accident, plaintiffs sued the other drivers, one driver’s employer (Xerox) and a corporation that owned one of the cars (Gelco). Gelco moved for summary judgment dismissing the complaint. That same day, the parties held a mediation that did not resolve the lawsuit. Thereafter, Brenda Greene, the adjuster for Gelco’s insurer called plaintiffs’ counsel to revive settlement negotiations. After a few days of negotiating, plaintiffs’ counsel orally agreed to settle the case. Greene sent a confirmation email message to plaintiffs’ counsel, it read:
Per our phone conversation today, May 3, 2011, you accepted my offer of $230,000 to settle this case. Please have your client executed [sic] the attached Medicare form as no settlement check can be issued without this form.
You also agreed to prepare the release, please included [sic] the following names: Xerox Corporation, Gelco Corporation, Mitchell G. Maller and Sedgwick CMS. Please forward the release and dismissal for my review. Thanks Brenda Greene.
Plaintiffs signed a release on May 4. On May 10, plaintiffs’ counsel sent that release and a stipulation of discontinuance to Gelco. That same day, Gelco’s attorney received an email alert that the court granted Gelco’s motion for summary judgment dismissing the complaint. Gelco’s counsel faxed and mailed a letter to plaintiffs’ counsel "rejecting" the release and stipulation. Gelco’s attorney stated: "there was no settlement consummated under New York CPLR 2104 between the parties, we considered this matter dismissed by the court's decision…dated May 10..."
The issue before the appellate court was whether the email message satisfied the criteria of CPLR 2104 so as to constitute a binding and enforceable stipulation of settlement. Where a settlement is not made in open court, CPLR 2104 provides: "An agreement between parties or their attorneys relating to any matter in an action…is not binding upon a party unless it is in a writing subscribed by him or his attorney."
The appellate court held that the email counted as a writing and a subscription by Gelco’s representative, binding the parties to the settlement. After holding that Greene had apparent authority to bind Gelco to the settlement, the court reasoned:
It is, of course, axiomatic that a letter can be considered "subscribed," since letters are usually signed at the end by the author thereof. However, email messages cannot be signed in the traditional sense. Nevertheless, this lack of "subscription" in the form of a handwritten signature has not prevented other courts from concluding that an email message, which is otherwise valid as a stipulation between parties, can be enforced pursuant to CPLR 2104. * * *
Morever, given the now widespread use of email as a form of written communication in both personal and business affairs, it would be unreasonable to conclude that email messages are incapable of conforming to the criteria of CPLR 2104 simply because they cannot be physically signed in a traditional fashion (see Newmark & Co. Real Estate Inc. v. 2615 E. 17th St. Realty LLC, 80 AD3d 476, 477-478 ["e-mail agreement set forth all relevant terms of the agreement…and thus, constituted a meeting of the minds"]). Indeed, such a conclusion is buttressed by reference to the New York State Technology Law, former article 1, "Electronic Signatures and Records Act," which was enacted by the Legislature in 2002. In the accompanying statement of legislative intent, the Legislature stated in part:
"[This act] is intended to support and encourage electronic commerce and electronic government by allowing people to use electronic signatures and electronic records in lieu of handwritten signatures and paper documents" (L 2002, ch 314, §1).
Section 302(3) of this statute states that an "'[e]lectronic signature' shall mean an electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the record." Section 304(2) of the statute states that "an electronic signature may be used by a person in lieu of a signature affixed by hand [and] [t]he use of an electronic signature shall have the same validity and effect as the use of a signature affixed by hand."
In the case at bar, Greene's email message contained her printed name at the end thereof, as opposed to an "electronic signature" as defined by the Electronic Signatures and Records Act. Nevertheless, the record supports the conclusion that Greene, in effect, signed the email message. In particular, we note that the subject email message ended with the simple expression, "Thanks Brenda Greene," which appears at the end of the email text. This indicates that the author purposefully added her name to this particular email message, rather than a situation where the sender's email software has been programmed to automatically generate the name of the email sender, along with other identifying information, every time an email message is sent (cf. DeVita v. Macy's E., Inc., 36 AD3d 751). In addition, the circumstances which preceded Greene's email message, and in particular, the face-to-face mediation at which settlement was attempted and the subsequent follow-up telephone calls between Greene and the plaintiff's counsel, support the conclusion that Greene intended to "subscribe" the email settlement for purposes of CPLR 2104 (see Newmark & Co. Real Estate Inc. v. 2615 E. 17th St. Realty LLC, 80 AD3d at 477 ["e-mail sent by a party, under which the sending party's name is typed, can constitute a writing for purposes of the statute of frauds"]; see also Naldi v. Grunberg, 80 AD3d 1, 6-13).
Accordingly, we hold that where, as here, an email message contains all material terms of a settlement and a manifestation of mutual accord, and the party to be charged, or his or her agent, types his or her name under circumstances manifesting an intent that the name be treated as a signature, such an email message may be deemed a subscribed writing within the meaning of CPLR 2104 so as to constitute an enforceable agreement.
Forcelli v. Gelco Corp., 27584/08, NYLJ 1202612381868, at *1 (App. Div., 2d, Decided July 24, 2013)
[Meredith R. Miller]
The ever-vigilant Miriam Cherry has turned up another news item for our amusement. We have had reason to comment previously on the Seinfeld episode in which the character "Jerry Seinfeld," played by Jerry Seinfeld (pictured), tries to return a jacket "for spite," explaining that he didn't care for the salesman who sold it to him. But our previous post was a stretch compared to this story from Slate, which is spot on.
According to the report, Patricia Walker sought to return $1.4 million worth of merchandise allegedly purchased at the store by Ms. Walker's now-ex-husband. She alleged that her ex was having an affair with the Neiman Marcus salesperson who sold him the mercandise and that this other woman earned significant commissions from the sales. In seeking to return the goods, Ms. Walker cited spite and Neiman Marcus's generous return policy. When the company balked, she sued and won a settlement, according to Slate.
A gloriously detailed account of the litigation can be found on the Dallas News website here.
Monday, August 12, 2013
Ninth Circuit Leaves Determination of Arbitrability to the Arbiter in Oracle America v. Myrida Group
The facts of this case are complex and require an understanding of computing that I Iack, but what it seems to come down to is that Myriad Group (Myriad) had some licenses to use Java trademarks and the Java programming language developed by Oracle America (Oracle). The parties dispute the terms of the licenses and as a result Oracle alleges that Myriad had been using the trademarks and the programming language without paying for them, thus infringing upon Oracle's intellectual property rights. Oracle sued in the Northern District of California alleging breach of contract and violation of intellectual property rights, while Myriad sued Oracle in Delaware alleging breach of contract.
Myriad moved to compel arbitration in the Northern District of California pursuant to an arbitration clause that provided for arbitration of any claim relating to intellectual property rights "in accordance with the rules of the United Nations Commission on International Trade Law (UNCITRAL) (the 'Rules') in effect at the time of the arbitration as modified herein . . . " The District Court granted Myriad's motion with respect to Oracle's breach of contract claim only, finding that the UNCITRAL Rules do not provide the arbitrator with exclusive jurisdiction to determine the scope of its own jurisdiction.
On July 26, 2013, the Ninth Circuit issued its opinion in Oracle America, Inc. v. Myriad Group A.G. and reversed the District Court’s partial grant of Myriad’s motion to compel arbitration.
The Ninth Circuit began by noting that, while public policy favors arbitration agreements, there is a presumption that courts should decide which issues are arbitrable. Nonetheless, a court should grant a motion to compel arbitration to decide issues of arbitrability if the parties’ arbitration provision “constitutes clear and unmistakable evidence that the parties intended to arbitrate arbitrability.” While the Ninth Circuit had never decided whether UNCITRAL’s Rules constitute such evidence, both the Second Circuit and the D.C. Circuit had concluded that the 1976 version of the UNCITRAL Rules constitutes clear and unmistakable evidence that the parties to an agreement governed by the Rules intended to arbitrate questions of arbitrability. Although the 2010 version of UNCITRAL’s Rules might have been at issue in this case, the Ninth Circuit ruled the differences betwee the 1976 and 2010 versions do not affect the outcome on this issue.
The Court remanded the case to the District Court for proceedings consistent with its opinon.
Monday, August 5, 2013
Ars Technica provides a nice summary of the state of affairs in the case of the New York City dentist who attempted to contract around the criticism of her patients. It even includes a shout out to law profs Eric Goldman (Santa Clara) and Jason Schultz (Berkeley). Open wide, here's a taste:
A lawsuit regarding a dentist and her ticked-off patient was meant to be a test of a controversial copyright contract created by a company called Medical Justice. Just a day after the lawsuit was filed, though, Medical Justice backed down, saying it was “retiring” that contract.
Now, more than a year after the lawsuit was filed, the case against Dr. Stacy Makhnevich seems to have turned into a case about a fugitive dentist. Makhnevich is nowhere to be found, won’t defend the lawsuit, and her lawyers have asked to withdraw from the case.
In 2010, Robert Lee was experiencing serious dental pain. He went to see Dr. Stacy Makhnevich, the “Classical Singer Dentist of New York,” in part because she was a preferred provider for his dental insurance company. Before Makhnevich treated him, she asked him to sign a contract titled “Mutual Agreement to Maintain Privacy.”
The contract worked like this: in return for closing “loopholes” in HIPAA privacy law, Lee promised to refrain from publishing any “commentary” of Makhnevich, online or elsewhere. The contract specified that Lee should “not denigrate, defame, disparage, or cast aspersions upon the Dentist.”
And the kicker: if he did write such reviews, the copyright would be assigned to the dentist. She’d own it.
This “I own your criticism” contract would soon be put to the test, because Lee was an extremely unhappy customer. “Avoid at all cost!” he wrote in a one-star Yelp review. “Scamming their customers! Overcharged me by about $4000 for what should have been only a couple-hundred dollar procedure.”
The forms Makhnevich was using, provided to her by a company called Medical Justice, were already the subject of considerable controversy. Two tech-savvy law professors, Eric Goldman of Santa Clara University and Jason Schultz of UC Berkeley, launched a website to fight the contracts, which garnered considerable press. Former Ars Technica writer Tim Lee chronicled his own experience with a Philadelphia dentist who was using the contract.
The “Mutual Agreement” was essentially a work-around to try to stifle patient reviews. Doctors, or any other business, who believe that an online review is, say, defamatory, can go ahead and sue a reviewer—but they don’t have an easy way to get the review down. Review sites like Yelp are protected by Section 230 of the Communications Decency Act, which immunizes the platforms hosting such user-generated content, as long as they don’t edit it heavily. Review sites in the US don’t typically remove posts when a business claims defamation.
Copyright, however, is a different story. Section 230 doesn’t cover intellectual property laws, and Yelp has to react quickly to claims that a user has violated copyright law.
Users of the Medical Justice form were counting on that, and it worked. In September 2011, staff members of Dr. Makhnevich sent DMCA takedown notices to Yelp and DoctorBase. That was followed up with invoices sent to Robert Lee, saying he owed $100 per day for copyright infringement. Accompanying letters threatened to pursue “all legal actions” against him.
Of course, the dentist's disappearance and considerable negative press leads Paul Levy of Public Citizen to remark:
“It’s quite possible that the consequence of her having this contract is that she had to give up her dental practice,” said Levy. “It’s the Streisand effect gone bonkers.”
Yes, indeed. More from Ars Technica here.
[Meredith R. Miller]
Thursday, July 25, 2013
In Pettigrew v. State of Oklahoma, the Tenth Circuit addressed the issue of whether "a settlement agreement between Thomas Trent Pettigrew (Pettigrew) and the Oklahoma Department of Public Safety (DPS) waived the state’s 'Eleventh Amendment' right not to be sued in federal court." The Court found that it did, for reasons to be explaned below, but first we note the scare quotes around "Eleventh Amendment" in the quotaiton from the Court.
We can only assume that the scare quotes denote the Court's awareness that the Eleventh Amendment protects states only against suits commenced of prosecuted in federal courts by "Citizens of another State" or by Citizens or Subjects of any Foreign State." Pettigrew, presumably, is neither. Still, courts have held that state sovereign immunity also protects states from suits by their own citizens. The scare quoates may indicate that, in the Court's view, that outcome is a product of a customary rule of state sovereignty and does not derive directly from the Eleventh Amendment itself. But if that were so, one would think that Congress could, pursuant to its Article I powers, override state sovereign immunity with respect to federal suits brought by a state's own citizens. Post Seminole Tribe, it cannot do so. So, if we read the scare quotes correctly, and we may not, what we have here is a very understated (and irrelevant to the case at hand) protest against incoherent Eleventh Amendment jurisprudence, to which we say, Amen. OVERRULE HANS!
Now back to the matter at hand. Pettigrew believed that he was improperly passed over for a promotion at DPS in 2009. He filed administrative grievances, and in October of that year, he was placed on administrative leave on suspicion of unauthorized leaks to the media in an unrelated claim against DPS. He filed suit in 2010 alleging that DPS had retaliated against him in violation of Title VII of the 1964 Civil Rights Act and had negligently trained and retained employees. The parties settled in December 2010. They entered into a settlement agreement that provided that any litigation relating to the settlement agreement "will be brought in the appropriate Oklahoma court having jurisdiction, either state or federal . . . "
By 2012, the partis were back in court. Pettigrew alleges that DPS has retaliated against him in various ways. He alleged new Title VII violations as well as breach of the agreement. DPS moved to dismiss Pettigrew's breach claim, as well as his claim for declaratory judgment, as barred by sovereign immunity doctrine. As Title VII was enacted pursuant to Congress powers under § 5 of the 14th Amendment, it is not subject to a sovereign immunity defense. The District Court denied the motion.
The Tenth Circuit noted that, but for the sovereign immunity defense, a court could exercsie supplementary jurisdiction over the claims subject to DPS's motion to dismiss. Although the language of the settlement agreement suggests that suit could be brought in a federal court, DPS stressed that suit must be brought in an "appropriate" court, and if sovereign immunity bars a suit from being brought in federal court, then such a court is not "appropriate." The Tenth Circuit rejected this reading of the settlement agreement on the ground that no rational drafter would have written the agreement that way if she meant to bar, on Eleventh Amendment grounds, suits in federal court to enforce the agreement. The Tenth Circuit's reasoning largely followed that of the Supreme Court in Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299 (1990).
Wednesday, July 24, 2013
That headline is not a typo! The Eleventh Circuit has actually issued a ruling favorable to plaintiffs in an arbitration case. Earlier this month, the Eleventh Circuit issued its opinion in Southern Communications Services, Inc. v. Thomas in which it upheld a District Court's order denying a motion by Southern Communications Servcies (Southern) to vacate two arbitration awards, one construing the arbitration clause so as to allow for class litigation, the other certifying a class.
Thomas contracted for three lines of service with Southern, covering cell phones for him, his wife, and his son. With respect to each line, he agreed to Southern's terms of service which included a $200 termination fee per line and an arbitration clause. Thomas eventually cancelled all three lines and was charged three termination fees. Southern excused the first fee; Thomas paid the second fee, and the third he challenged. He filed a demand for class arbitration, alleging that Southern's fees were unlawful penalties under Georgia law The arbitrator certified the class.
Southern challenged the certification, and then challenged it again after the Supreme Court decided Stolt-Nielsen. The arbitrator reconsidered but found that his original decision was consistent with Stolt-Nielsen becasue it was based "on a rule of law or rule of decision as Stolt-Nielsen requires.”
But perhaps the got that wrong. Once again, there is a SCOTUS decision on point. In Sutter, the Court held that a court must uphold an arbitrator's decision, even if clearly erroneous, so long as the arbitrator is even arguably construing the parties' agreement. Under that standard, the arbitral award could be vacated only if it lacks any contractual basis. The Eleventh Circuit found that the arbitrator engaged with the contract's language and the parties' intent and thus did not stray from his delegated task fo interpreting the parties' agreement.
Finding that the arbitrator had not exceeded his authority, the Eleventh Circuit affirmed the decision of the District Court.
For those interested in learning more about Stolt-Nielsen and Sutter, we recommend Jack Graves' post from June.
Friday, July 19, 2013
Apple had a MFN clause in its contracts with five major book publishers. Last week, Judge Denise Cote (SDNY) held that this clause was part of a conspiracy to fix e-book prices. The contracts required the publishers to give Apple’s iTunes store the best deal in the marketplace on e-books.
What does this decision mean for MFN clauses, which are used in a number of industry contracts? The WSJ took up this topic in a recent article:
Defendants in antitrust cases have liked to have the sound bite that no court has found an MFN to be anticompetitive," said Mark Botti, a former Justice Department antitrust lawyer now in private practice. "They can no longer say that."
Apple, meanwhile, has strongly denied that it conspired to fix prices, and has said it will appeal the decision.
Judge Cote avoided a broad denunciation of MFN clauses, but her decision could haunt contract negotiations in industries as diverse as entertainment and health care, legal experts said. In recent years, the Justice Department has sued a few companies over the use of MFN clauses and is investigating others.
"While most favored-nation clauses can be competitively benign, when they are used as a tool to engage in anticompetitive conduct that harms consumers, the Antitrust Division will take enforcement action," said Assistant Attorney General Bill Baer, who oversees the division at the Justice Department.
MFN clauses guarantee the recipient the lowest prices or rates charged to any buyer. While in theory that could encourage competition and lower prices for consumers, in practice such agreements sometimes end up establishing a minimum price, according to antitrust lawyers and government officials.
Apple said the provisions guaranteed its customers would get the lowest price for new and popular e-books. But Judge Cote offered a less-flattering interpretation.
"[The MFN] eliminated any risk that Apple would ever have to compete on price when selling e-books, while as a practical matter forcing the publishers to adopt the agency model across the board," she wrote in her 160-page ruling.
The article reports that the Justice Department is expected to request that the court “impose a variety of conditions on Apple's business, including barring the company from using MFN clauses,” sending the viability of MFN clauses into doubt.
More of the article here on the WSJ site (subscription required).
[Meredith R. Miller]
Wednesday, July 17, 2013
Twenty-five years after the Baby M case, some states (including one shaped liked a mitten), still have not passed legislation addressing the legality of surrogacy contracts. So it is that the Wisconsin Supreme Court just last week upheld a surrogacy contract much like the one at issue in Baby M in a case called In re Paternity of F.T.R.: Rosecky v. Schissel.
The contract at issue was called a parentage agreement (PA). The PA provided that the Rosecky's would become the parents of the child that resulted from Monica Schissel's pregnancy. The child was the product of Ms. Schissel's egg and Mr. Rosecky's sperm. The Court concluded that the PA was enforceable except for two things. Termination of Ms. Schissel's parental rights could not occur automatically by contract, and the contract would not be enforceable if such enforcement was deemed not to be in the best interests of the child. The Court reversed the lower court's decision, which set aside the PA, and remanded for proceedings in which the terms of the PA are to be enforced unless at odds with the best interests of the child.
Chief Justice Abrahamson, joined by Justice Bradley, filed a lengthy concurrance in which she made two points: First, while she would not hold surrogacy agreements to be per se invalid, Chief Justice Abrahamson stresseed the need for courts to scrutinize them closely, given that they are contracts for the use of human bodies for altruistic or commercial purposes, which also are designed to create a child and to establish custody of that child. Second, Chief Justice Abrahamson criticized the majority opinion for treating the case as a contract dispute when actually the posture of the case made such an analysis inappropriate. The case began as a petition for recognition of paternity rights, custody and placement brought by Mr. Rosecky. As a result, according to the Chief Justice policy considerations relevant to family law should prevail. She agreed with the main opinion that the lower court erred in setting aside the PA, but she was equally critical of the main opinion, which in her view did not give adequate wait to statutory provisions relevant to a determination of the best interests of the child.
It just happens that a new article on this subject by Yehezkel Margalit has just gone up. It is called In Defense of Surrogacy Agreements: A Modern Contract Law Perspective. Here is the abstract from SSRN.
The American public’s attention was first exposed to the practice of surrogacy in 1988 with the drama and verdict of the Baby M case. Over the last twenty-five years the practice of surrogacy has slowly but surely become increasingly socially accepted and even welcomed. This evolution serves to emphasize the bizarre judicial and legislative silence regarding surrogacy that exists today in the vast majority of U.S. jurisdictions. In this article I describe and trace the dramatic revolution that took place during the recent decades as the surrogacy practice has totally changed from one viewed as problematic and rejected to a socially widespread and accepted practice. As set forth below, this recent shift demands increasing legal recognition of the legality of surrogacy contracts and moderate regulation of their enforcement. In doing so, this article explores the various intrinsic contractual problems of surrogacy contracts - the problem of unequal power of the contracting parties, the problem of change of heart and the problem of changed circumstances. As presented the preliminary normative claim regarding those contractual problems was not properly addressed by classical contract law, however, with the development of modern contract law we are now supplied with a well-equipped framework and doctrines appropriate for dealing with such problems. In order to demonstrate my innovation I will represent one main solution that the modern contract law gives us for each given contractual problem. The article then concludes with an appeal to the legislature and judiciary for a legal framework and a suggested outline of the practical administrative-legal mechanisms for accomplishing the complete legal and social recognition of surrogacy contracts.
Friday, June 28, 2013
“Forum Selection Bylaws” Statutorily and Contractually Valid: Shareholders Assented to Not Have to Assent
While the nation was preoccupied with SCOTUS decision days, the Delaware Chancery Court upheld the “forum selection bylaws” of FedEx and Chevron. Those clauses in the corporations’ bylaws provided that litigation relating to the companies’ internal affairs should be conducted in Delaware, the state of incorporation of both companies.
First, the Chancery Court (Chancellor Strine) held that the bylaws were statutorily valid under the Delaware General Corporation Law (“DGCL”). Second, the Chancery Court held that the bylaws were contractually valid even though they were adopted unilaterally by the boards of FedEx and Chevron rather than the shareholders of those corporations. The court reasoned (citations and footnotes omitted):
Our corporate law has long rejected the so-called “vested rights” doctrine. That vested rights view, which the plaintiffs have adopted as their own, “asserts that boards cannot modify bylaws in a manner that arguably diminishes or divests pre-existing shareholder rights absent stockholder consent.” As then-Vice Chancellor, now Justice, Jacobs explained in the Kidsco case, under Delaware law, where a corporation’s articles or bylaws “put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment.”
In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders. Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects. Such a change by the board is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own. In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards. Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws. The plaintiffs’ argument that stockholders must approve a forum selection bylaw for it to be contractually binding is an interpretation that contradicts the plain terms of the contractual framework chosen by stockholders who buy stock in Chevron and FedEx. Therefore, when stockholders have authorized a board to unilaterally adopt bylaws, it follows that the bylaws are not contractually invalid simply because the board-adopted bylaw lacks the contemporaneous assent of the stockholders.
The court went on to hold that the forum selection clauses would be evaluated just as any other forum selection clauses under the standard enunciated by SCOTUS:
In Bremen, the [U.S. Supreme] Court held that forum selection clauses are valid provided that they are “unaffected by fraud, undue influence, or overweening bargaining power,” and that the provisions “should be enforced unless enforcement is shown by the resisting party to be “unreasonable.” In Ingres, our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used “unreasonabl[y] and unjust[ly].” The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.
Boilermakers Local 154 Retirement Fund v. Chevron Corp., Del. Ch., Civil Action No. 7220-CS, 6/25/13; ICLUB Investment Partnership v. FedEx Corp., Del. Ch., Civil Action No. 7238-CS, 6/25/13.
[Meredith R. Miller]
Wednesday, June 26, 2013
The New York Court of Appeals rarely requests amicus participation, but it has done so in a UCC artcle 4 case. Here is an excerpt from the request for participation:
On June 4, 2013, the Court of Appeals granted plaintiffs Clemente Bros. Contracting Corp. and Jeffrey A. Clemente leave to appeal in Clemente Bros. Contracting Corp.. et al.. v Hafner- Milazzo. et al. Plaintiff Clemente Bros. Contracting Corp. (Contracting) was a customer of defendant bank CapitalOne, N.A.(CapitalOne). Contracting had three deposit and/or checking accounts with Capital One and also took out two loans from Capital One. The plaintiffs commenced this action against Capital One, asserting inter alia, that Capital One had failed to use ordinary care in paying on allegedly forged checks and failed to comply with its own regulations in handling Contracting's accounts. In its answer, Capital One interposed several counterclaims to recover amounts due under the loans. Insofar as pertinent to this appeal, Supreme Court granted summary judgment to defendant Capital One, dismissing plaintiffs' complaint and awarding it judgment on its counterclaims. The Appellate Division affirmed (100 AD3d 677).
Under New York's Uniform Commercial Code, a bank may be liable to its customer when it pays a check on a forged signature. The bank may avoid such liability, however, when it makes statements of the account and the allegedly forged items available to the customer, and the customer fails to report the alleged forgery to the bank within one year. Here, the parties, by agreement, shortened the one-year period to 14 days. One of the issues on appeal is whether a bank and its customer may shorten the statutory time period provided for in UCC 4-406 within which the customer must make a claim to its bank for payment o f an altered or forged item.
More information is available here. I am no expert on UCC article 4, but if you are considering a motion for leave to appear amicus curiae, I am happy to advise on New York Court of Appeals procedure.
Here is the Appellate Division decision from which the the appeal is taken.
[Meredith R. Miller]