Wednesday, December 9, 2015
I am always fascinated by covenants not to compete. The facts surrounding them and their analysis are always so interesting.
A recent decision out of the Western District of Kentucky, Fruit of the Loom, Inc. v. Zumwalt, Civil Action No. 1:15CV-131-JHM, found Fruit of the Loom's non-competition clause valid and enforceable and prohibited the employee, Zumwalt, from competing against Fruit of the Loom or soliciting any customers for a period of twelve months.
After a bit of a dispute over which state's law should apply, the court concluded that Zumwalt was violating the terms of his contract with Fruit of the Loom in having gone to work for a competitor (specifically identified in the employment contract) in a capacity that uses knowledge and experience Zumwalt gained at Fruit of the Loom. The court noted that Zumwalt was the only salesperson Fruit of the Loom had had in the Oklahoma and eastern Kansas region and had access to a considerable amount of confidential information, including pricing, sales strategies, and customer lists. The court also found that, under Kentucky law, twelve months was a reasonable period of time for competition to be restricted. The non-compete provision doesn't appear to have had a specific limitation on geographic area, but it did limit its application, the court said, to nine specific competitors, so that that set out what the geographic scope would be.
The court also found that there was a likelihood of irreparable harm to Fruit of the Loom. There was evidence that confidential customer lists had already been provided by Zumwalt to the competitor, in violation of the agreement, and the court seems to endorse an inevitable disclosure theory: "[i]t is entirely unreasonable to expect [Zumwalt] to work for a direct competitor in a position similar to that which he held with [Fruit of the Loom], and forego the use of the intimate knowledge of [Fruit of the Loom's] business operations."
Zumwalt tried to argue that enforcement of the noncompetition agreement would result in substantial harm to him because he would be deprived of income, but the court stated that Zumwalt signed the agreement knowing that this would be the result, so that his damage "was foreseeable and avoidable."
In conclusion, the court issued an injunction prohibiting Zumwalt from working for any of the named competitors or soliciting any of Fruit of the Loom's customers for a period of twelve months.
I understand the enormity of the harm from Fruit of the Loom's perspective, especially given that Zumwalt was its only salesperson in the area, but I also admit to feeling a little bad for Zumwalt here, as this probably leaves him with not very many options for employment for the next year. Cases like this really feel like no-win situations.
Monday, December 7, 2015
(That was a terrible pun. Please let's forget that I wrote it.)
A recent opinion out of the Fourth Circuit, Severn Peanut Co., Inc. v. Industrial Fumigant Co., No. 15-1063, upheld a clause in the parties' contract limiting Industrial Fumigant's ("IFC") liability for consequential damages against arguments from Severn that the clause was unconscionable.
The parties entered into a contract whereby IFC promised to fumigate Severn's peanut dome. (I didn't know what this was, so I looked it up. Here are my Google Image search results, but more importantly, it turns out the Severn Volunteer Fire Department has actually uploaded to Facebook video from the Severn peanut dome fire in this case. The Internet is a wondrous place. Oh -- spoiler alert -- as our story continues, there's going to be a fire in the peanut dome.) IFC agreed that it would use the pesticide in question "in a manner consistent with instructions . . . and precautions . . . ." Severn alleged that IFC threw around 49,000 tablets of the pesticide in one big pile, in a way contrary to the instructions of use and, indeed, heedless of warnings not to do this, and that, as a result (as you know if you watched the video), the tablets caught fire, smoldered despite all efforts to put them out, and eventually resulted in an explosion. Severn had an insurance policy under which it collected $19 million to cover the loss of the peanut dome, the peanuts inside it, and other various costs and lost income.
Severn, together with its insurer, then sued IFC for breach of contract and negligence. But IFC pointed out that the contract it had with Severn expressly limited its liability for consequential damages. The contract was price was $8,604, and the contract contained a clause stating that that sum was not "sufficient to warrant IFC assuming any risk of incidental or consequential damages." The Fourth Circuit noted that such clauses are considered useful and efficient and parties are free to enter into agreements containing such clauses if they so desire. Severn tried to argue that the clause was unconscionable but the Fourth Circuit remarked that Severn and IFC were both sophisticated parties and that Severn had been free to try to negotiate that clause out of the bargain, if it so desired. The Fourth Circuit also noted that Severn had another option in the face of the limitation clause: procure insurance to cover itself in case something went awry, which Severn in fact did. The Fourth Circuit concluded: "We are not presently considering the plight of a vulnerable member of the public adrift among the variegated hazards of a complex commercial world. Instead, we are considering a rather typical agreement among two commercial entities, and we may hold them to the contract's terms."
The Fourth Circuit also did away with Severn's negligence claim, viewing it as an end run around the contract's limitation clause. Severn, the court said, could not obtain through a tort cause of action what it bargained away under contract.
Friday, December 4, 2015
This is the latest chapter in a long saga that started with lawsuits in 1983 and has resulted in several disputes between clients and various attorneys. This particular opinion, Richardson v. Casher, 14-P-503 (requires a sign-in to Bloomberg Law), out of the Appeals Court of Massachusetts, deals with a $9 million settlement agreement that was negotiated by attorney Casher with Travelers Indemnity Company. After the settlement agreement was reached, Casher and his clients, the Picciotto parties, entered into an allocation agreement deciding how the settlement should be disbursed. The allocation agreement included disbursements from Casher's share to the Picciotto parties' former attorney, George Richardson, and UP, a charitable organization that donates legal services in insurance cases and helped the Picciotto parties out at one point in the 30-year court battle. The court found that both of these parties were third-party beneficiaries of the allocation agreement.
Unfortunately for Richardson and UP, when presented with the allocation agreement, Travelers rejected it. The settlement agreement was therefore amended to permit Travelers to file an interpleader action and pay the vast majority of the settlement account into the court instead of disbursing it in the way the allocation agreement had contemplated. The interpleader action then dragged on for several years. Eventually, Casher received a bit more under the interpleader action than he had expected to receive under the allocation agreement. Richardson filed a complaint in the interpleader action and the judge found that Casher was required to pay Richardson and UP under the allocation agreement, with a slight increase to reflect the fact that Casher had actually received more than the allocation agreement would have given him. Casher and the Picciotto parties appealed.
On appeal, the court concluded that the condition precedent to Casher's obligation to pay Richardson and UP under the allocation was never met, and so no duty had been triggered for Richardson and UP to seek to enforce. Casher and the Picciotto parties argued that the condition precedent to the disbursements under the allocation agreement was the immediate receipt of the sizable first installment of the settlement money (set at $5 million in the allocation agreement), which never happened because instead Traveler paid the money into the court. The appeals court agreed with this argument. To find otherwise, the court say, would make the allocation agreement nonsensical, as it was premised on the straightforward receipt of the majority of the settlement money. The fact that Casher and the Picciotto parties eventually received the money through the interpleader action didn't matter when it was clear from the face of the allocation agreement that none of the parties contemplated that the first distribution of the settlement money would be anything other than immediate. The court therefore concluded that the immediate distribution of at least the first part of the settlement funds was a condition precedent to Casher's duties to pay Richardson and UP. When that initial $5 million distribution never happened, the condition precedent was never fulfilled, and Casher never became obligated to pay Richardson and UP.
The lesson here is, of course, to always play the what-if game as thoroughly as you can: "What if Travelers refuses to distribute the funds the way we've contemplated?" Asking that question may have caused the allocation agreement to be re-written in such a way as to protect Richardson and UP's interests. The bigger complicating wrinkle for both Richardson and UP, however, is that they were only third-party beneficiaries who actually had no part in the drafting of the allocation agreement (they didn't even know about it until much later), so they had no ability to protect their interests in the language.
Thursday, December 3, 2015
I feel like one of the lessons of my Contracts class (aside from, you know, all the contract law stuff) is that disability insurance is the type of insurance policy most likely to end up in a published opinion in a casebook someday. Proving my point is a new opinion out of the 8th Circuit, The Northwestern Mutual Life Insurance Company v. Weiher, No. 14-3098.
In this case, Weiher, a dentist, applied for a disability policy from Northwestern in which he "specifically agreed" that he would cancel his previously existing disability policy from Great-West. As you could probably predict from the fact that this ended up in litigation, Weiher never canceled the Great-West policy. When he became disabled to the point that he could no longer practice dentistry, he submitted claims to both Northwestern and Great-West. When Northwestern found out that Weiher had never terminated his Great-West policy, it rescinded its policy, claiming that it would never have issued the policy had it known that Weiher wasn't going to cancel the Great-West policy. So Northwestern sued claiming that Weiher's promise to cancel the Great-West policy was a misrepresentation on Weiher's part that entitled Northwestern to rescind the policy. Weiher counter-claimed. The District of Minnesota granted Northwestern summary judgment because Weiher's failure to fulfill his promise to cancel the Great-West policy exposed Northwestern to greater risk and allowed Northwestern to rescind the contract. Weiher appealed.
Weiher wins his appeal, not because his vow to cancel the Great-West policy wasn't a promise (the 8th Circuit finds that it was) and not because he didn't fail to fulfill that promise (the 8th Circuit agrees that he didn't), but because Northwestern failed to show that Weiher's failure to fulfill his promise increased Northwestern's risk. Under the relevant Wisconsin statute, the court found, Northwestern's ability to rescind the policy had to turn on specific increased risk in connection with Weiher's particular policy, not just generalized increased risk. All of Northwestern's evidence stated that Northwestern's custom was not to provide disability insurance to people who already had existing disability insurance policies because the risk of over-insurance would encourage fraudulent claims. However, Northwestern had no evidence that insuring Weiher here resulted in over-insurance to Weiher. There was simply no indication that the level of insurance Weiher was carrying between the two policies was too much. Northwestern's testimony on the subject admitted that it didn't know the specifics of Weiher's situation and could only talk in generalities. Therefore, the 8th Circuit concluded that Northwestern couldn't be entitled to summary judgment because it hadn't met its burden with regard to Weiher's specific policy. The 8th Circuit further noted that there was a factual dispute over whether Weiher's representation to cancel the Great-West policy was made with the intent to deceive Northwestern or if, as Weiher contended, he had intended to cancel the Great-West policy and had just forgotten.
If you feel bad for Northwestern here, there's a dissent on your side: According to Judge Loken, Weiher's promise to cancel the Great-West policy was a condition precedent to Northwestern's policy kicking in, based upon widely accepted underwriting standards that warned against over-insurance. Wisconsin precedent, Judge Loken said, indicated that conditions precedent to insurance coverage should be respected if clearly stated. Based on that, the dissent would have found that Northwestern's policy was not effective until the condition precedent of cancellation of the Great-West policy had occurred (which it never did).
Wednesday, October 28, 2015
F & M Equipment, Ltd. (F&M) entered in to a ten-year insurance policy with Indian Harbor Insurance Company (Indian Harbor). The policy included a promise from Indian Harbor that it would offer F&M the option to renew. After ten years, Indian Harbor sent its "renewal policy" with substantially new terms. F&M rejected these terms. Indian Harbor sought a declaratory judgment that its new policy was a "renewal," and F&M counterclaimed for breach of contract.
The District Court ruled for Indian Harbor, but in Indian Harbor Insurance Co., v. F&M Equipment Ltd., the Third Circuit reversed, holding that "for a contract to be considered a renewal, it must contain the same, or nearly the same, terms as the original contract." Sitting in diversity and applying Pennsylvania law, the Third Circuit noted that, because insurance contracts are construed against the drafter, the contract would "be interpreted in light of the insured’s reasonable expectations." With respect to unresolved ambiguities, the Court stated that "inferences should be drawn against the insurance company."
Indian Harbor pointed to case law that it claimed required only that it give notice of its intention to renew on new terms. This reading of the contract, the Court held, would render Indian Harbor's promised renewal illusory. Indian Harbor argued that the duty of good faith and fair dealing would prevent it from offering terms that radically differed from the original contract and calling the offer a "renewal." That well may be, but it does not resolve the question of what constitutes a "renewal." The Court determined that a renewal must contain the same or nearly the same terms, and the new contract that Indian Harbor proffered contained four significant changes. The Court ordered Indian Harbor to offer F&M a genuine renewal of its policy.
Interestingly, Indian Harbor objected that doing so would mean including another promise of renewal, at which point the contract would become perpetual. The Court was unmoved. While not deciding the issue (because it did not have to), the Court essentially told Indian Harbor that it had made its bed and would have to sleep in it.
Wednesday, October 21, 2015
In Swoger v. Rare Coin Wholesalers, plaintiff William Swogen (Swogen) sued for recovery of a consulting fee in connection with a rare coin. The Brasher Doubloons were minted in the 18th century in New York and were among the first coins minted in the United States. The Brasher Doubloons, a $15 gold piece, feature an image of an eagle. Ephraim Brasher punched his initials on the wing of the bird (see image). However, Defendants owned a Brasher Doubloon in which Brasher had punched his initials on the breast of the eagle. The coin they owned (and subsequently sold) was exceedingly rare and thus exceedingly valuable. Swoger offered to sell defendants information that he thought would prove his claim the "Punch the Breast" Brasher Doubloon was the first legal tender coin minted in the U.S.
Defendants offered $250,000 for the information, but Swoger wanted $500,000. The parties met at a numismatic trade show, and Swoger shared his information with defendants, which purported to show that their coin must have been minted pursuant to a federal act that specified the weight of gold coins. Defendants refused to pay Swoger for the information he provided, and he sued, alleging breach of contract, quantum meruit and other non-contractual claims.
The district court dismissed Swoger's claims because he provided no evidence in support of them. The federal act in question applied only to foreign coins, and so the Brasher Doubloon would not have been minted pursuant to it. Swoger did not in fact provide defendants with any information in support of his theory that the Brasher Doubloon was the first legal tender coin minted in the United States. Moreover, all of the information that Swoger provided was publicly available.
On appeal, Swoger claimed that even if the Brasher Doubloon was not minted pursuant to the Act; it was minted in accordance with the Act, as it was the same weight as Spanish Doubloons and thus could circulate as having a certain value. The Ninth Circuit rejected this argument, because only Congress can recognize a coin as legal tender of the United States, and Swoger, even taking all of his factual allegations as true, did nothing to show that Congress did so with respect to the Brasher Doubloon.
Too bad, but certainly a very interesting fact pattern. And the coin has an undeniable rough beauty.
Friday, October 16, 2015
Class action plaintiffs began working with Cellular Sales (Cellular), which sells Verizon wireless services, in 2010. Cellular required that they form a business entity like an LLC and that they sign a sales agreement that identified them as independent contractors. The sales agreements did not contain arbitration clauses. In 2011, the plaintiffs became employees of Cellular and signed new compensation agreements that did contain arbitration clauses. When plaintiffs brought claims that, before the compensation agreements entered into force, they were misclassified as independent contractors when they were really employees, Cellular sought to compel arbitration. The District Court denied that motion.
In Holick v. Cellular Sales of New York, the Seventh Circuit affirmed. Although the Court acknowledged that an arbitration clause can apply retroactively, it cannot do so when the cause of action arises under a contract that does not contain an arbitration clause. In construing arbitration clauses, courts must give effect to the parties' intentions, and the Seventh Circuit saw no evidence that the parties intended to arbitrate disputes arising pursuant to their sales agreements.
Not so small aside: in its opinion the Seventh Circuit notes that plaintiffs relied heavily on an unpublished Fourth Circuit opinion. I found this curious and so I dug a bit. According to the Illinois Bar Journal the Seventh Circuit changed its rules relating to unpublished opinions in 2006. It is now permissible to cite to unpublished opinions issued on or after January 1, 2007. Citation to unpublished opinions issued prior to 2007 is still prohibited. Well, this is progress. As my colleague, David Cleveland has argued in numerous articles, unpublished opinions are a bad idea, and allowing parties to cite to them goes a long way towards eliminating the dangers of the designation.
But why draw the line at 2007? When I was in college, I saw a play called Sister Mary Ignatius Explains It All to You. I have no idea what compelled me to see that play and even less idea why I remember this one joke, but here it is: Sister Mary Ignatius explains that before Vatican II, unbaptized babies were consigned to limbo. After Vatican II, they are allowed to enter heaven. Sister Mary Ignatius is asked what becomes of the pre-Vatican II babies that were in Limbo. She pauses. "They are still in limbo." Maybe it was the delivery, but I still love that line, and remember it 30 years later. Yup, the rest of my college years are a blur.
Interestingly enough, I read on Slate that in 2007, the Vatican investigated the concept of limbo and either eliminated it entirely or at least determined that unbaptized babies do not end up there. The articles I read suggest that limbo was just for unbaptized babies, but I thought the virtuous pagans (like Virgil pictured right) were there as well (discussing prosody I am told). In any case, 2007. The very same year that unpublished opinions emerged from limbo! Coincidence?
Friday, October 9, 2015
In DIRECTV, Inc. v. Inburgia, SCOTUS is addressing the enforceability of an arbitration clause with a class-action waiver. The clause provides that the entire arbitration clause is invalid if state law prohibits class action waivers. At the time the agreement was written, California law clearly prohibited class action waivers. SCOTUS subsequently ruled that California's law must yield to the Federal Arbitration Act. According to the SCOTUSblog entry on the case, the issue in the case is "Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act."
The California court refused to enforce the arbitration agreement, and it was widely predicted that the Court would reverse that decision, in accordance with its Concepcion decision. At oral argument, the Justices seemed agreed that the California courts had gotten the case wrong, but as Justice Kagan put it, "Wrongness is just not what we do here." In other words, the Court cannot step in every time a state court makes a mistake, and here the contract was so poorly drafted that the blame lies as much with the parties as with the court.
Justice Scalia seemed to think that the Court had to choose between two "horribles." One horrible would be second-guessing state courts on every case of contract interpretation; the other would be permitting state courts to get away with ignoring the Federal Arbitration Act in favor of state laws that SCOTUS held must yield before that federal law.
Friday, September 18, 2015
Nancy Kim is, as you probably know, one of the nation’s, if not the world’s, leading experts on internet contracting. She is a contributor to this blog as well. Among other issues, Professor Kim rightfully questions whether consumers are put on sufficient notice of various contractual terms and conditions when they purchase goods or services via the Internet.
The Second Circuit has just held that emails sufficiently direct a purchaser’s attention to a service provider’s terms and conditions including a forum selection clause when a hyperlink is provided along with language “advising” the purchaser to click on the hyperlink. (The case is Starkey v. G Adventures, Inc., 796 F.3d 193 (Second Cir. 2015). Said the court, “This method serves the same function as the method of cross-referencing language in a printed copy promotional brochure and sufficed to direct [the purchaser’s] attention to the Booking Terms and Conditions. Both methods may be used to reasonably communicate a forum selection clause.”
The background is this: A customer purchased a ticket for a vacation tour of the Galápagos Islands operated by a tour operator. Shortly thereafter, the tour operator sent the customer three emails: a booking information email, a confirmation invoice, and a service voucher. The booking information email contained the statement, “TERMS AND CONDITIONS: ... All Gap Adventures passengers must read, understand and agree to the following terms and conditions.” This statement was followed by a hyperlink with an underlined URL. The confirmation invoice and service voucher each also contained hyperlinks, which were preceded immediately by the following text: “Confirmation of your reservation means that you have already read, agreed to and understood the terms and conditions, however, you can access them through the below link if you need to refer to them for any reason.” The hyperlinks in all three emails linked to a document entitled “…. Booking Terms and Conditions.” The second paragraph of that document stated that “[b]y booking a trip, you agree to be bound by these Terms and Conditions.... These Terms and Conditions affect your rights and designate the ... forum for the resolution of any and all disputes.” The customer did not dispute that she received the relevant emails. Instead, she alleged, as often happens, that she never read the Booking Terms and Conditions because she never clicked on the hyperlinks.
The customer alleged that she was sexually assaulted on the tour by one of the tour operator’s employees. Instead of being able to pursue her negligence claim in a New York court, she must now pursue her claim in Ontario, Canada. The court also held that it was not unreasonable and unjust to enforce the forum selection clause, stating that such clauses will only be set aside if (1) its incorporation was the result of fraud or overreaching; (2) the law to be applied in the selected forum is fundamentally unfair; (3) enforcement contravenes a strong public policy of the forum in which suit is brought; or (4) trial in the selected forum will be so difficult and inconvenient that the plaintiff effectively will be deprived of his day in court. The plaintiff failed to meet any of those requirements.
This case shows how some courts still ignore the fact that, as Professor Kim has pointed out and as the case obviously shows, even though the attention of purchasers (online or otherwise) is directed towards certain crucial contractual clauses, they in fact do not read these. Such is reality in a society such as ours with numerous and often lengthy and complicated legal notices and disclaimers. Are purchasers then truly given sufficient notice in such modern cases? But from a contrary viewpoint, what else can sellers and service providers possibly do to make purchasers aware of key terms? For more on this, read Professor Kim’s scholarship or book.
Friday, September 11, 2015
A woman visits a Nordstrom Rack store and sees a cardigan that she really likes. It costs $49.97, but features a “Compare At” price tag of $218.00 representing “77% worth of savings.” The woman buys the sweater, allegedly believing that the sweater really had been sold by Nordstrom itself or other department stores at the higher price. The receipt states, “You SAVED: $168.03 Congratulations! You saved more than you spent. You're a shopping genius!” If neither Nordstrom, Nordstrom Rack nor other retailers ever sold the cardigan at the higher price, is that common-law fraud, breach of contract, or unjust enrichment?
Posting any kind of “before” prices that have never truly been in effect does, at first blush, seem fraudulent. But it is not fraud, at least according to Shaulis v. Nordstrom, Inc., d/b/a/ Nordstrom Rack. “It is well-settled that a common-law action for fraud requires a pecuniary loss.” Here, the court found none as “plaintiff did not allege that she did not receive the sweater or that she paid more than the sweater is worth. Maybe so, but what about fraud in the inducement? This was not at issue in the case, but arguably should have been. “Fraud in the inducement occurs when a party contends it would not have entered into the agreement ‘but for’ the fraudulent statements made by the other." That is precisely what the plaintiff here seems to claim. Could the pecuniary loss then not simply be the price paid for an item believing it was a better deal than it actually was? If I buy a painting I like, but it is not the Rembrandt I was told it was, can I not sue for fraud simply because I actually got a painting that can hang on a wall and has the value it was sold for? Alas, that goes to show that plaintiffs must “win their own cases,” as the saying goes.
Plaintiff also claimed that Nordstrom was unjustly enriched by obtaining revenues and profits that it would not otherwise have obtained absent its conduct. The court found this to be a conclusory statement that did not allege that Nordstrom retained a benefit that would be inequitable without payment for its value.
Bad faith, at least? Not even that. Plaintiff complained that Nordstrom “either explicitly violated” the contract or violated the implied covenant of good faith and fair dealing by including a “Compare At” price that “does not exist in the marketplace within the meaning of the requirements of the Code of Massachusetts Regulations.” Having found that the common law allegations are not coextensive with or suffice under a regulatory claim, the court found no breach of the good faith covenant since the “complaint does not allege that the sweater was worth less than what plaintiff paid, or that plaintiff did not receive the benefit of the bargain. By charging this agreed price in exchange for ownership of the clothing, [Nordstrom] gave the plaintiff[ ] the benefit of [her] bargain.”
This case shows what we probably all know: you cannot really trust retailers’ “sales” prices, “before and after” statements and the like. They simply rank alongside puffery. Whether this is acceptable under the common law or state regulations is another story. The practice seems widespread, however, so buyer beware. “The more you shop, the more you save”? I don’t think so. As one of my students recently commented in class when I asked the somewhat philosophical question of why businesses exist: “to rip you off.” Well, maybe not quite, but some business behavior does seem questionable and at least unnecessary.
Monday, August 24, 2015
A recent case out of the Eastern District of California, Handy v. LogMeIn, found that there was notice good enough to defeat a consumer's claims under California's Unfair Competition and False Advertising Laws -- even if that notice might not be sufficient for contract formation.
Darren Hardy obtained LogMeInFree which was provided free of charge and allowed users to remotely access a desktop computer from another computer. Some time later, he purchased Ignition for $29.99 which allowed him to access a computer using a tablet or smart phone. Four years later, the defendant, LogMeIn, discontinued the free LogMeIn product although it offered LogMeInPro for $49/year for two computers. Handy claimed that LogMeIn, when marketing Ignition, should have informed consumers that LogMeInFree could be discontinued in the future.
LogMeIn's "Terms and Conditions of Use" stated that users accepted
"BY COMPLETING THE ELECTRONIC ACCEPTANCE PROCESS, CLICKING THE "SUBMIT" OR "ACCEPT" BUTTONS, SIGNING, USING ANY OF THE PRODUCTS OR OTHERWISE INDICATING YOUR ACCEPTANCE OF THESE TERMS . ."
The Terms allowed the company to "to modify or discontinue any Product for any reason or no reason with or without notice to You or the Contracting Party. LMI shall not be liable to You or the Contracting Party or any third party should LMI exercise its right to revise these Terms or modify or discontinue a Product." It also allowed the company to "in its sole discretion immediately terminate these Terms and this subscription, license and right to use any Product if . . . LMI decides, in its sole discretion, to discontinue offering the Product. LMI shall not be liable to You, the Contracting Party or any third party for termination of the Service or use of the Products . . ."
The plaintiff argued that he didn't remember being prompted to review the Terms and Conditions prior to buying Ignition or during his use of it. He also stated that if he had known that LogMeInFree would be discontinued, he would not have purchased Ignition.
California's False Advertising Law (Cal. Bus. & Prof. Code section 17500) states that it is unlawful for any company to make any untrue or misleading statement in advertising. California Unfair Competition Law (Cal. Bus. & Prof. Code section 17200) prohibits "unlawful, unfair, or fraudulent" business practices. Because the plaintiff's claims under both Laws relied upon claims that the defendant engaged in knowing deception, the plaintiff was subject to the heightened pleading standards of Rule 9(b) of the FRCP.
The Court granted the defendant's motion to dismiss because the plaintiff failed to meet the heightened pleading standard for fraud. It found that the plaintiff failed to provide sufficient factual detail to state his claims for several reasons although I'll only discuss the contract-related one. The court found that LogMeIn provided notice that LogMeInFree could be terminated in its Terms and Conditions of Use. While Handy argued that the Terms were not binding as they were a "browsewrap," the court stated that missed the point:
"Whether the Terms and Conditions constituted an enforceable contract is irrelevant to whether the Terms and Conditions related to LogMeInFree provided notice to prospective purchasers of the Ignition app that LogMeInFree could be discontinued....the fact that Defendant posted on its website information that told users that LogMeInFree could be terminated undermines Plaintiff's claims. Though this information was not forced on Plaintiff through a clickwrap, the evidence makes clear that Defendant did publish the fact that it reserved the right to terminate the free app, LogMeInFree."
In other words, the court found that terms on a website could provide sufficient notice to defeat a claim based upon deception even if the notice wasn't sufficient to meet the standards for contractual assent.
Tuesday, August 11, 2015
One of our readers asked for a follow-up on our post on the suit by Charleston Law School professors seeking to enjoin the Law School from eliminating their tenured positions. We have good news to report, at least provisionally:
Charleston's Post & Courier reports that a judge last week blocked the termination of two tenured law professors until their suit against the law school is either settled or adjudicated.
Monday, August 10, 2015
We shared with our readers Professor Robin Kar's views on the case a while back.
You can find Professor Kar's latest here.
Friday, August 7, 2015
In a case we have been following for a year (here, here, and here, for example), Stephen Salaita is suing the University of Illinois for withdrawing its offer to hire him to teach in its American Indian Studies Program after discovering some intemperate anti-Zionist tweets Mr. Salaita had posted. This week, a Federal District Court ruled on the University's motion to dismiss the claim. While the Court dismissed some of Salaita's claims, his breach of contract and first amendment claims were allowed to proceed. The case is Salaita v. Kennedy, and the opinion is here.
The claim that we care about is, of course, the breach of contract claim. Mr. Salaita signed an employment letter and so claimed that he had a contract with the University. The University claimed that there was no contract because the offer of employment was subject to approval of the University's Board, which never occurred. The Court carefully parsed the language of the offer letter and found that the offer was not conditional on board approval. Rather, board approval was a condition of performance of the contract; it was not a condition of the offer.
Although the Court conceded that the language of the offer letter might be ambiguous, the University's conduct resolved such ambiguities in favor of a finding of a contract. The University paid Mr. Salaita's moving expenses, gave him office space and an e-mail address, and referred to him as "our employee."
If the Court accepted the University’s argument, the entire American academic hiring process as it now operates would cease to exist, because no professor would resign a tenure position, move states, and start teaching at a new college based on an “offer” that was absolutely meaningless until after the semester already started. In sum, the most reasonable interpretation of the “subject to” term in the University’s offer letter is that the condition was on the University’s performance, not contract formation.
The Court then quickly rejected the University's argument that the Dean had no authority to make the offer to Mr. Salaita.
Monday, August 3, 2015
In the continuing fallout from Donald Trump's Presidential candidacy (photo right by Michael Vadon via Wikimedia Commons), Trump is now suing celebrity chef Jose Andres. According to the Washington Times, Andres was to open a restaurant in Washington, DC's old post office building, which will soon be the Trump International Hotel. He now claims that Trump's anti-immigrant comments make it impossible for him to do so. It seems that Trump's attorneys' response is to claim that his views on immigration were well known and consistent and should not have come as a surprise to Mr. Andres. The lawsuit seeks $10 million in damages.
In other Presidential candidate news, three unions representing New Jersey public employees are suing the state for breach of contract. The suit arises out of Governor Chris Christie's efforts to address a budget shortfall by cutting contributions to the state pension fund. Excellent coverage of this suit and its background can be found in the Winnipeg Free Press here.
The Fay Observer reports that Intersal, a company that discovered the wreck of Blackbeard's ship of the coast of North Carolina, is suing North Carolina. The suit alleges that the state has breached a contract pertaining to the use photos and video relating to the wreck and seeks $8.2 million in damages.
Thursday, July 16, 2015
Contracts Prof Kermit Mawakana (pictured) has sued the University of District Columbia (UDC) for breach of contract and employment discrimination in connection with his termination from UDC's David A. Clarke School of Law. Last week, the District Court for the District of Columbia issued an opinion in the case. On UDC's motion to dismiss the contract claim, the court found that UDC had breached no express contract but may have breached an implied contract, and it denied the motion.
According to the court, Professor Mawakana was hired in 2006 as an Assistant Professor and promoted to Associate Professor three years later. However when he came up for tenure, his application was denied because he had not met UDC's criteria for scholarship. Professor Mawakana alleged defects in his review process that amounted to a breach of contract. The court found that the review policies did not amount to a contract and thus found no breach of an express contract, but it did find that the complaint alleged sufficient facts "if just barely" for the claim for breach of an implied contract to proceed. The court similarly found that plaintiff had alleged sufficient facts to allow his claim for breach of the implied covenant of good faith and fair dealing to proceed.
The court did not rule on Professor Mawakana's non-contractual claims.
Wednesday, July 8, 2015
There but for fortune . . . . I spent three happy years teaching in the history department at the College of Charleston. Having studied in New York for nearly ten years, I never imagined myself living in the South, but Charleston is a charming city, and the College of Charleston was a gem when I was there, with a dedicated faculty of scholars and teachers and an unbelievably beautiful campus. When I learned that Charleston was opening a law school, I was very tempted to apply for a position.
Charleston's Post & Courier reported on Monday that Charleston Law School (CLS) has terminated seven faculty members, including two tenured faculty members. The two filed lawsuits in late June alleging breach of contract. They are seeking an injunction that would allow them to retain their status as tenured professors while also enjoining the CLS's owners from making expenditures that might otherwise be used to pay them their salary. The two fired professors were signatories of a letter published by 17 CLS faculty members in the Post & Courier in mid May. I assume that they are alleging retaliatory firing in violation of the very thing tenure is designed to protect. Certainly, the optics are bad. A preliminary injunction hearing is scheduled for the end of the month.
I have no doubt that, if I had decided to apply for a faculty position at Charleston and been hired there, I would have signed that letter. And then I too might be experiencing the joy of having to file a lawsuit in order to keep my tenured position. I do not know enough of the details to speak to the merits of the professors' claims, but my inclination it to root for them.
Monday, June 29, 2015
Given the major U.S. Supreme Court opinions that were released last week, it's no surprise that the one involving contracts, Kimble v. Marvel Entertainment, LLC, didn't make the headlines. The case involved an agreement for the sale of a patent to a toy glove which allowed Spidey-wannabes to role play by shooting webs (pressurized foam) from the palm of their hands. Kimble had a patent on the invention and met with an affiliate of Marvel Entertainment to discuss his idea --in Justice Elena Kagan's words--for "web-slinging fun." Marvel rebuffed him but then later, started to sell its own toy called the "Web Blaster" which, as the name suggests, was similar to Kimble's. Kimble sued and the parties settled. As part of the settlement, the parties entered into an agreement that required Marvel to pay Mr. Kimble a lump sum and a 3% royalty from sales of the toy. As Justice Kagan notes:
"The parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can)*."
It wasn't until after the agreement was signed that Marvel discovered another Supreme Court case, Brulotte v. Thys Co. 379 U.S. 29 (1964) which held that a patent license agreement that charges royalties for the use of a patented invention after the expiration of its patent term is "unlawful per se." Neither party was aware of the case when it entered into the settlement agreement. Marvel, presumably gleeful with its discovery, sought a declaratory judgment to stop paying royalties when Kimble's patent term expired in 2010.
In a 6-to-3 opinion written by Justice Kagan (which Ronald Mann dubs the "funnest opinion" of the year), the Court declined to overrule Brulotte v. Thys, even though it acknowledged that there are several reasons to disagree with the case. Of interest to readers of this blog, the Court stated:
"The Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire."
In other words, the intent of the parties doesn't matter when it runs afoul of federal law. Yes, we already knew that, but in cases like this - where the little guy gets the short end - it might hurt just the same to hear it. In the end, the Court viewed the case as more about stare decisis than contract law and it was it's unwillingness to overrule precedent that resulted in the ruling.
Yet, I wonder whether this might not be a little more about contract law after all. The Court observed in a footnote that the patent holder in Brulotte retained ownership while Kimble sold his whole patent. In other words, Brulotte was a licensing agreement, while Kimble was a sale with part of the consideration made in royalties. This made me wonder whether another argument could have been made by Kimble. If Kimble sold his patent rights in exchange for royalty payments, and those royalty payments are unenforceable, could he rescind the agreement? If the consideration for the sale turns out to be void ("invalid per se"), was the agreement even valid? The question is probably moot now given the patent has expired....or is it? Although Kimble did receive royalty payments during the patent term, he presumably agreed to a smaller upfront payment and smaller royalty payments in exchange for the sale of the patent because he thought he would receive the royalty payment in perpetuity. So could a restitution argument be made given that he won't be receiving those royalty payments and the consideration for the sale of the patent has turned out to be invalid?
*Yes, I made an unnecessary reference to the Spiderman theme song so that it would run through your head as you read this - and maybe even throughout the day.
Thursday, June 18, 2015
We used to count on Britney Spears as the leading source for blog fodder. Move aside Britney. Uber just passed you by. We have two new Uber stories just in California alone.
First, last week the District Court for the Northern District of California issued its opinion in Mohamed v. Uber Technologies. Paul Mollica of the Employment Law Blog called that decision a "blockbuster," because it ruled Uber's arbitration agreement with its drivers unconscionable and therefore unenforceable. The opinion is very long, so we will simply bullet point the highlights. With respect to contracts entered into in 2013, the court found:
- Valid contracts were formed between plaintiffs and Uber, notwithstanding plaintiffs' claims that they never read the agreements and that doing so was "somewhat onerous";
- While Uber sought to delegate questions of enforceability to the arbiter, the court found that its attempt to do so was not "clear and unmistakable" as the contract included a provision that "any disputes, actions, claims or causes of action arising out of or in connection with this Agreement or the Uber Service or Software shall be subject to the exclusive jurisdiction of the state and federal courts located in the City and County of San Francisco, California";
- In the alternative, the agreement was unconscionable and therefore unenforceable;
- The procedural unconscionability standard of "oppression," generally assumed in form contracting, was not overcome in this instance by an opt-out clause; the opt-out was inconspicuous and perhaps illusory;
- The procedural unconscionability standard of "surprise" was also met because the arbitration provision was "hidden in [Uber's] prolix form" contract; and
- Uber's arbitration provisions are substantively unconscionable because the arbitration fees create for some plaintiffs an insuperable bar to the prosecution of their claims.
The court acknowledged that the unconscionability question was a closer question with respect of the 2014 contracts but still found them both procedurally and substantively unconscionable.
There is much more to the opinion, but that is the basic gist.
In other news, as reported in The New York Times here, the California Labor Commissioner's Office issued a ruling earlier this month in which it found that Uber drivers are employees, not independent contractors as the company claims. The (mercifully short!) ruling can be found here through the good offices of Santa Clara Law Prof, Eric Goldman (pictured).
The issue arose in the context of a driver seeking reimbursement for unpaid wages and expenses. The facts of the case are bizarre and don't seem all that crucial to the key finding of the hearing officer. Although plaintiff''s claim was dismissed on the merits, Uber has appealed, as it cannot let the finding that its drivers are employees stand.
But the finding is a real blockbuster, especially as Uber claims that similar proceedings in other states have resulted in a finding that Uber drivers are independent contractors. Here's the key language from the ruling:
Defendants hold themselves out to as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation. The reality, however, is that Defendants are involved in every aspect of the operation. Defendants vet prospective drivers . . . Drivers cannot use Defendants' application unless they pass Defendants' background and DMV checks
Defendants control the tools the drivers use . . . Defendants monitor the Transportation Drivers' approval ratings and terminate their access to the application if the rating falls below a specific level (4.6 stars).
As the Times points out, few people would choose to be independent contractors if they had the option to be employees. Our former co-blogger Meredith Miller has written about similar issues involving freelancers, and we blogged about it here. So far, it appears that five states have declared that Uber drivers are independent contractors, while Florida has joined California in finding them to be employees. For more on the implications of this ruling, you can check out this story in Forbes, featuring insights from friend of the blog, Miriam Cherry.
Monday, June 8, 2015
I wanted to follow up on Jeremy Telman's posts about two cases, Andermann v. Sprint Spectrum and Berkson v. Gogo. Both cases involved consumers and standard form contracts. Both Sprint and Gogo sought to enforce an arbitration clause in their contracts and both companies presumably wanted to do so to avoid a class action. In Andermann v. Sprint Spectrum, there was no question regarding contract formation. The contract issue in that case involved the validity of the assignment of the contract from US Cellular to Sprint. The court found that the assignment was valid and consequently, so was the arbitration clause.
In Berkson v. Gogo, on the other hand, the issue was whether there was a contract formed between the plaintiffs and Gogo. As Jeremy notes in his post, this is an important case because it so thoroughly analyzes the existing wrap contract law. It also has important implications for consumers and the future of class actions.
Many arbitration clauses preclude class actions (of any kind). Judge Posner notes in his opinion in Andermann v. Sprint Spectrun:
"It may seem odd that (Sprint) wants arbitration....But doubtless it wants arbitration because the arbitration clause disallows class arbitration. If the Andermann's claims have to be arbitrated all by themselves, they probably won't be brought at all, because the Andermanns if they prevail will be entitled only to modest statutory damages."
Judge Posner may have been troubled by this if the facts were different. The Andermanns are claiming that Sprint's calls to them are unsolicited advertisements that violate the Telephone Consumer Protection Act, but Sprint needed to inform them that their service would be terminated because U.S. Cellular's phones were incompatible with Sprint's network. How else would they be able to contact their customers whose service would soon be terminated, Posner rhetorically asks, "Post on highway billboards or subway advertisements?....Post the messages in the ad sections of newspapers? In television commercials?" Sprint's conduct here "likely falls" within an exception to the law and hence, Posner notes "the claims are unlikely to prevail."
It's a different situation in Berkson v. Gogo. In that case, Gogo is allegedly charging consumers' credit cards on a monthly recurring basis without their knowledge. The plaintiffs were consumers who signed up to use Gogo's Wi-Fi service on an airplane, thinking it was only for one month. When Welsh, one of the plaintiffs, noticed the recurring charges, he was given a "partial refund." Welsh then hired a lawyer. Welsh's lawyer sent Gogo a letter notifying the company of the intent to file a class action lawsuit if it did not correct its practices and notify everyone who might have been charged in this manner. Gogo then allegedly sent a refund check directly to Welsh, not his lawyer (which would violate the rule not to directly contact someone represented by counsel). When Berkson, another plaintiff, noticed the charges and complained, the charges stopped; however, when he requested a refund for the period he was charged for the service but did not use it, the company allegedly refused.
I think that most people would agree that, if the facts alleged are true, Gogo likely violated consumer protection statutes. It also acted poorly by making it so hard to get a refund. Companies should not be permitted to act like this and consumers shouldn't have to threaten class action lawsuits to get their money back. (Gogo doesn't seem to dispute that they were charged during months they did not use the service).
This is where contract formation becomes so important. The class action in Berkson v. Gogo was allowed to proceed because the court found that there was no valid contract formation.
If there was a contract formed between Gogo and the plaintiffs, the arbitration clause would likely have been effective. (I say "would likely have been" because it wasn't even included until after Berkson signed up for the service. But let's put that aside for now and continue....). The arbitration clause - you guessed it - contained the following clause:
"To the fullest extent permitted by applicable law, NO ARBITRATION OR OTHER CLAIM UNDER THIS AGREEMENT SHALL BE JOINED TO ANY OTHER ARBITRATION OR CLAIM, INCLUDING ANY ARBITRATION OR CLAIM INVOLVING ANY OTHER CURRENT OR FORMER USER OF THE SITE OR THE SERVICES, AND NO CLASS ARBITRATION PROCEEDINGS SHALL BE PERMITTED. In the event that this CLASS ACTION WAIVER is deemed unenforceable, then any putative class action may only proceed in a court of competent jurisdiction and not in arbitration.
WE BOTH AGREE THAT, WHETHER ANY CLAIM IS IN ARBITRATION OR IN COURT, YOU AND GOGO BOTH WAIVE ANY RIGHT TO A JURY TRIAL INVOLVING ANY CLAIMS OR DISPUTES BETWEEN US."
Now, under the recent line of federal cases (AT&T Mobility v. Concepcion, American Express v. Italian Colors, etc) interpreting the FAA, if a contract contains a mandatory arbitration clause, an arbitrator pretty much decides everything unless (1) the arbitration agreement is unconscionable; or (2) the agreement to arbitrate was never formed
Regarding (1), this doesn't mean that a court may determine whether any other contract provision was unconscionable - only the arbitration clause. So, if there's another clause that you want to argue is unconscionable -- let's say a recurring billing provision that is not conspicuous just as a random example -- you have to take that to the arbitrator. Furthermore, it's much harder now (after the line of US Supreme cases noted above) to argue that an arbitration clause is unconscionable. While many state courts had previously found mandatory arbitration clauses and class action waivers unconscionable, they may no longer find them unconscionable just because they impose arbitration. In other words, in order to be found unconscionable, the arbitration clauses have to be one-sided (i.e. only the consumer has to arbitrate) or impose hefty filing fees, etc. This, as I mentioned in a prior post, is why so many of these clauses contain opt-out provisions. Gogo's arbitration clause also contained an opt-out provision. But, as readers of this blog know, NOBODY reads wrap contract terms and I would be surprised if anyone opted out. The clause was also in capitalized letters and so would be conspicuous -- if only anyone clicked on the link and scrolled down to see it.
This is why Judge Weinstein's opinion is so important -he recognizes the burden that wrap contracts place on consumers:
"It is not unreasonable to assume that there is a difference between paper and electronic contracting....In the absence of contrary proof, it can be assumed that the burden should be on the offeror to impress upon the offeree -- i.e., the average internet user - the importance of the details of the binding contract being entered into...The burden should include the duty to explain the relevance of the critical terms governing the offeree's substantive rights contained in the contract."
If a contract contains a mandatory arbitration clause, a consumer who has been wronged and wants to argue that a standard form contract is unconscionable, would probably have to take it to an arbitrator unless there was no agreement to arbitrate in the first place. If there was no agreement formed at all, that would mean no agreement to arbitrate.
This is why it is so important not to find contract formation so easily and expect unconscionability to do all the heavy lifting of consumer protection. An arbitrator very well might do a good job - but we don't know that because an arbitration is a closed hearing. Arbitrators also don't go through the rigorous screening process that judges go through (both elected and appointed judges are thoroughly scrutinized). Furthermore, arbitral decsions are not generally made public, and so arbitration doesn't help with providing guidelines for acceptable business behavior. Judge Posner notes in his opinion, "It's not clear that arbitration, which can be expensive...and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation." Furthermore, if the arbitration clause contains a "no class" provision, it also forces a consumer to face a company's intimidating attorneys all alone ((because no lawyer is taking this type of case on a contingency basis and no consumer is going to pay a lawyer to attend this type of arbitration).
Berkson v. Gogo is notable for recognizing that website design and contract presentation matter in determining contract formation. Not every click is perceived the same way by consumers -- scrollwraps (where scrolling is required to read through all the terms) provides more notice than a "sign-in-wrap" which is merely a hyperlink next to a SIGN UP button. The reality is that nobody clicks on the Terms hyperlink with a sign-in wrap. As Judge Weinstein notes:
"The starting point of analysis must be the method through which an electronic contract of adhesion is formed. The inquiry does not begin, as defendants argue, with the content of the provisions themselves."
There are some who think that there's no harm in finding contract formation so easily because courts and the doctrine of unconscionability will protect consumers from really bad contract terms. They should think again. Mandatory arbitration clauses affect consumers' ability to seek redress which is why we should start taking contract formation seriously.