January 30, 2013
A New Stambovsky?
[Edited: Apologies to my co-blogger, Nancy Kim, for posting this before reading our own blog to see that she already covered it. I'll keep this up for the links to the cases but please read Nancy's post for a more in-depth analysis of the materiality issue.]
For professors who teach nondisclosure as a "reason not to enforce a contract," (that's what the book I use calls "defenses"), Stambovsky v. Ackley often is a favorite case due its entertaining facts. In the case, the buyers of a Nyack, NY house (pictured) seek to have the contract rescinded due to the home being haunted by poltergeists. The haunted condition was known by the sellers but was not disclosed to the buyers.
I am particularly fond of the case in part because the opinion is filled with puns such as, "[I]n his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, [however,] I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.". Puns aside, the case is instructive because it helps students understand the difference between nondisclosure versus misrepresentation and gets some students to question their faith in caveat emptor. The fact that I teach the case right around Halloween is a nice bonus.
The only potential problem with the case is that it's somewhat dated (yes, something from the 1990s can feel dated to current first-year students). Thankfully, a student of mine from last semester just sent me a link to this newer version of Stambovsky out of Pennsylvania (what do ghosts love about the mid-atlantic states?). In this new dispute, the buyer, a recent widow, is seeking to rescind the contract for sale of a home based on the nondisclosure of a murder-suicide in the home in the same year she agreed to purchase it. The trial court granted summary judgment to the sellers and the appellate court affirmed, finding that, "psychological damage to a property cannot be considered a material defect in the property which must be revealed by the seller to the buyer." The buyer now has appealed the case to the Supreme Court of Pennsylvania. No one knows how that court will exorcise its discretion (ba-dum-bum).
[Heidi R. Anderson]
January 28, 2013
Eighth Circuit Grants Motion to Compel Arbitration of FLSA Claims Despite Class Action Waiver
In 2009, Bristol Care, Inc. (Bristol), which operates residential care facilities for the elderly, hired Sharon Owen (Owen) as administrator of its Cameron, Missouri facility. Owens' agreement with Bristol contained a arbitration clause that specifically provided that claims arising under the Federal Labor Standards Act (FLSA) were also subject to arbitration. The provision also provided that the parties could not arbitrate class claims. Claims relating to "harassment, discrimination, other statutory violations, or similar claims" were excluded from the mandatory arbitration provision.
In 2011, Owen sued, alleging violations of FLSA, claiming that she and others similarly situated were required to work in excess of 40 hours a week without being compenstated for overtime. Bristol moved to compel arbitration, but the Distict Court denied the motion, reasoning that arbitration provisions containing class action waivers are invalid with respect to FSLA claims. The District Court, relying on one district court decisions and one decision from the National Labor Relations Board (NLRB), distinguished this case from AT&T Mobility, LLC v. Concepcion, reasoning that Concepcion's ruling that arbitration provisions containing class action waivers are enforceable in consumer contracts did not extend to employment contracts.
In Owen v. Bristol Care, Inc., the Eighth Circuit reversed. It noted that, under the Federal Arbitration Act (FAA), courts are required to enforce arbitration agreements according to their terms. Federal legislation can override an arbitration provision and a class action waiver only if there is evidence of "congressional command" contrary to the FAA's requirement that arbiration agreements be enforced. The Eighth Circuit found no such contrary congressional commend in the FLSA. The court did not feel itself bound under Chevron deference or any other doctrine to defer to the NLRB's narrow interpretation of Concepcion. Most district courts that had considered the issue have rejected the NLRB's approach.
The Eighth Circuit also cited to opinions from five other Federal Circuit Courts which ruled that class action waivers in arbitration agreements are enforceable in FLSA cases. The Eighth Circuit reversed the District Court's denial of Bristol's motion to compel arbitration and remanded the case for an order staying proceedings and compelling arbitration.
January 25, 2013
First Circuit Dismisses as Moot Contracts Case with Constitutional Implicatons
In 2006, the U.S. Department of Health and Human Services (HHS) recieved funds under the federal Trafficking Victims Protection Act (TVPA) and contracted with the United States Conference of Catholic Bishops (the Conference) to provide services to trafficking victims. It did so after issuing a request for proposals (RFP) and receiving submissions only from the Conference and the Salvation Army, both of which are religiously affiliated.
The Conference insisted that the contract provide that neither the Conference nor any of its sub-contracts would use the TVPA funds to counsel or provide abortions or contraceptive services and prescriptions to trafficking victims. The panel that reviewed the RFP's deducted points from the Conference's submission because of that condition, but it still rated the Conference's RFP far more favorably than that of the Salvation Army.
The Conference did not provide any direct services to trafficking victims. Rather, it subcontracted with hundreds of other organizations, which provided services to over 2200 victims over a four-year period. The Conference entered into agreements with its sub-contractors prohibiting them from using TVPA for any purposes relating to contraception or abortion, but the sub-contractors were not prohibited from using their own funds for those purposes.
In 2009, the American Civil Liberties Union of Massachusetts (ACLUM) brought suit alleging that the contract violated the First Amendment's Establishment Clause. The contract expired in 2011, and HHS replaced its program run through the Conferece with a grant program in which the Conference as not involved. The District Court nonetheless granted ACLUM's motion for summary judgment in March 2012, finding that the claim was not moot because the "voluntary cessation" exception to the mootness doctrine applied.
On January 15, 2013, the First Circuit issued its opinion in American Civil Liberites Union of Massachusetts v. United States Conference of Catholic Bishops, and it reversed. It remanded the case to the Distrcit Court for an entry of an order of dismissal because the case is rendered moot by the expiration of the contract at issue. In so doing, the First Circuit noted that the voluntary cessation doctrine has no application where the cessation is unrelated to the litigation. The exception exists to deter strategic behavior in which a party ceases the challenged behavior only to avoid further litigation and may reasonably be expected to resume the behavior once the threat of litigation has subsided. There is no likelihood that a contract will be awarded to the Conference in the foreseeable future, as HHS has locked itself into three-year agreements with other organizations under its new grant program.
As long as our first lady has ba-ba-ba-bangs [relevant "analysis" starts about a minute into the video], it seems unlikely that HHS will be contracting with the Conference and that, it seems, is enough to render ACLUM's challenge moot.
January 18, 2013
Can Pet Owners Recover Emotional Damages from Animal Shelter?
Apparently the Supreme Court of Texas will decide this issue in Strickland v. Medlen. According to the Wall Street Journal:
In 2009, Avery, a spotted mixed-breed dog, escaped from his Fort Worth home and was taken to a city animal shelter where workers promised to hold him until his owners picked him up. Instead, he was put to death.
Avery's owners sued the shelter employee who mistakenly ordered the killing, raising an emotionally charged issue argued Thursday at the Texas Supreme Court: Can people be compensated for the sentimental value of a lost pet?
Texas law awards damages for the "market value" of a lost pet, which is defined as the price the animal would fetch at sale. But it is an open question in Texas whether pet owners can also be compensated for their emotional losses. The issue has split courts in other states.
The case sounds in tort (negligence) but it does in essence allege a breached promise (to hold the dog until the owners picked him up).
This video interview provides a nice overview of the case:
Should damages be assessed based on the dog's market value (tricky to assess - and maybe zero - for a mutt) or intrinsic/sentimental value to his owners?
Here's a link to the oral argument before the Texas Supreme Court on January 10th.
[Meredith R. Miller]
Speaking of Parol Evidence: California Revisits Promissory Fraud
In yesterday's post, Heidi Anderson introduced us to a football analogy for the parol evidence rule (PER). The parol evidence rule prevents certain extrinsic evidence from getting to the trier of fact just like an offensive lineman prevents defensive players from getting at the quarterback. She analogizes the PER to a very good offensive lineman, but in some jurisdictions the PER is pretty porous, and that may well be a good thing, as Heidi aknowledges. On Heidi's analogy a football safety is like fraud, and these days, letting evidence of fraud tackle the quarterback is widely viewed as a good thing. Or maybe the the safety is supposed to get through to the trier of fact.
On Monday, in Riverisland Cold Storage v. Fresno-Madea Production Credit Association, a case alleging a fraudulent misrepresentation in connection with a debt restructuing agreement, the California Supreme Court revisited a rule derived from a 1935 case, Bank of America etc. Assn. v. Pendergrass. In Pendergrass, the California Supreme Court held that the PER excludes evidence of fraud if that evidence indicates "a promise directly at variance with the promise of the writing." In Riverisland, the lower courts read Pendergrass narrowly and decided that it did not apply to exclude plaintiffs' evidence. On appeal, the Court noted that Pendergrass has been broadly criticized and is inconsistent with both the Restatement and contracts treatises, which suggest that evidence of fraud should not be excluded under the PER. A 1977 California Law Revision Commission also indicated its disappoval of the Pendergrass rule.
The Court then noted that Pendergrass has had its defenders both in the courts and in the scholarly literature. The Court also acknolwedged the principle of stare decisis but nonetheless recognized that the principle must be limited in cases of poorly-reasoned decisions out of step with existing law.
The Court concluded that Pendergrass was "plainly out of step with established California law" at the time it was decided. The Court accordingly overruled Pendergrass and embraced the rule that the PER does not bar evidence of fraud.
Quarterbacks had better watch their blind sides.
January 14, 2013
First Circuit Rules that Janitor "Franchisees" Must Arbitrate Their Claims
Coverall North American (Coverall) contracts to provide janitorial clearning services to building owners or oeprators. The people who do the clearning, a/k/a janitors, are falled "franchisees." These franchisees sued Coverall alleging state law claims, including breach of contract. The case was before the First Circuit on the issue of which franchisees were subject to arbitration provisions in the Franchise Agreements. The District Court certified a class consisting of plaintiffs not subject to the arbitration provisions and then later expanded the class to include the plaintiffs in Awuah v. Corvall North America, Inc., (Awuah Plaintiffs) who were not party to the original Franchise Agreements containing the arbitration provisions but signed other agreements that incorporated those provisions by reference. The District Court found that the incorporation by reference did not give the Awuah Plaintiffs sufficient notice of their obligation to arbitrate to those plaintiffs who never were given a copy of the documents incorporated by reference.
The District Court's expansion of the class was predicated on its reading of First Circuit precedent providing that a party cannot be bound by an arbitration clause of which she has no notice, and the First Circuit reversed of the District Court's ruling because it disagreed with that reading of the case law. The District Court was correct in finding that, while the unconscionability of an arbitration clauses can be decided by an arbitrator, the question of whether there was an arbitration agreement at all must be decided by a court. However, the First Circuit concluded, while the District Court asked the right question, it provided the wrong answer.
Massachusetts law requires no magic language to effect an incorporation by reference so long as the intent to do so is clear, and the First Circuit found that the various agreements to which the Awuah Plaintiffs are parties all clearly incorporated the Franchise Agreements and their aribtration provisions. The District Court also erred in its reading of federal law, importing from the realm of employment law a general heightened notice requirement that it applied to all arbitration provisions. No such general requirement exists and even if some state law provision imposed a heightened notice rule, that rule would be pre-empted by the Federal Arbitration Act, according to both AT&T Mobility v. Concepcion and Nitro-Lift Tech. v. Howard.
The First Circuit reversed the District Court's expansion of the class to include teh Awuah Plaintiffs and ordered their claims stayed pending arbitration.
December 31, 2012
Judge Posner on Third-Party Invocation of Forum Selection Clauses
At issue in Adams v. Raintree Vacation Exchange, LLC was "the enforceability of a forum selection clause by entities not named as parties to the contract in which the clause appears."
Plaintiffs bought timeshare interests in villas at a resort called Club Regina in Baja California, in Mexico (pictured). Apparently, the villas in question were never built, and plaintiffs filed suit in Illinois against Raintree Vacation Exchange (Raintree) and its business partner in the venture, Starwood Vacation Ownership (Starwood). Plaintiffs alleged that Raintree owed Starwood $10 million and that Starwood used plaintiffs' money to pay off its debts instead of building the villas.
Each contract contained a choice of forum provision providing for jurisdiction in Mexico City federal district courts. Although that provision also implied that Mexican law should apply, neither party relied on Mexican law, so Judge Posner found that the provision had been waived. Defendants moved to dismiss the claim based on the choice of forum provision and the District Court granted the motion.
On appeal, plaintiffs alleged that defendants could not rely on the forum selection clause because they were not parties to the original contract, which had been with a Mexican entity that became a Raintree affiliate. Judge Posner noted that plaintiffs cited to no authority for their claim that litigants who are not parties to a contract cannot rely on such a contract's choice of forum provision, and that lack of authority would be grounds enough for affirming the District Court's decision. Nonetheless, Judge Posner decided to "trudge on."
There rule in such cases is that a nonparty to a contract containing a forum selection clause may rely on it if it is "closely related" to the suit. Judge Posner acknowledges that the standard is rather vague but he breaks it down into two elements, “affiliation” and “mutuality,” which apply in this case to Raintree and Starwood respectively. Forum slection clauses can sometimes be enforced by companies related to the original party to the agreement that contains the clause. Thus Raintree may invoke the clause in this case because of its relationship to the Mexican company that entered into the agreement with plaintiffs. As Judge Posner noted, if courts were not willing "in appropriate circumstances to enforce forum selection clauses against affiliates of signatories, such clauses often could easily be evaded."
Starwood can rely on the forum selection claues because plaintiffs allege that Starwood was an undisclosed principal (Posner calls it a "secret principal") of the Mexican entity with which plaintiffs contracted. Under agency law, plaintiffs could have invoked the forum selection against Starwood, and as a result of the principle of mutuality, that means that Starwood can also invoke the clause against plaintiffs.
Plaintiffs make the additional argument that since the entire agreement was fraudulent, defendants cannot rely on the forum selection clause. Seems sensible, but Posner says it is wrong. Even the contract is fraudulent, that does not make the forum selection clause fraudulent. There is nothing unclear or misleading about the clause. Nothing about it suggest an intent to mislead.
December 24, 2012
Ohio Supreme Court Finds Claim by Foreign Student Time Barred
In September 1993, Mohamed Bassem Rayess, having graduated from a Syrian medical school and completed a residency in France, applied to United States Educational Commission for Foreign Medical Graduates (the Commission) to take Part I of the United States Medical Licensing Examination (USMLE), which is split into four, three-hour exams administered over a two day period. Dr. Rayess took that exam and failed.
Fifteen years later, Dr. Rayess sued the Commission, alleging that it had failed to allow him the full time for his exam. For some reason, Ohio has a fifteen year statute of limitations for claims of breach of a written contract. Dr. Rayess attached to his complaint: 1) a copy of his application to take the USMLE and an acknowledgement of its receipt; 2) his letter enclosing payment for the exam and a copy of his cancelled check; 3) a transfer request (to take the exam at a different site) and evidence of payment for the transfer; 4) a copy of an informational pamphlet provided by the Comission and a confirmation regarding Dr. Rayess's test site; and 5) an account statement provided by the Commission, reflecting his payments.
The trial court found that these documents did not establish an express, written contract and dismissed the case base on the lapse of the six-year statute of limitations that applies to allegations of breach of an oral promise. An intermediate appellate court reinstated the claim. In Rayess v. Educational Commission for Foreign Medical Graduates, the Ohio Supreme Court reversed and reinstated the trial court's dismissal of Dr. Rayess's suit. In the suit, the Commission asked the Supreme Court to rule on the following proposition:
A written contract cannot exist when it is based on a general informational brochure coupled with supplemental evidence to establish the obligations of the parties.
The Supreme Court found that the documents that Dr. Rayess attached to his complaint did not suffice to establish a written contract. "Rather, the commission provided Rayess with an informational pamphlet describing the testing procedure, and Rayess submitted an application to take the examination. Neither the pamphlet nor the application imposed any express enforceable duty on the commission or Rayess." More specifically, the Commission made no express, written promises about test conditions or times. As a result the case was a dismissed, which is a shame, because it would have been very interesting to see how Dr. Rayess was going to prove that he was not allowed adequate time to complete his exam fifteen years ago.
December 18, 2012
Clickwrap Contract Containing Arbitration and Forum Selection Clauses Upheld in 10th Circuit
At this point, it should come as no surprise that consumers can be held to the terms of agreements they enter into by clicking on a box next the words "I agree" on a computer screen or simply by continuing to use services after being provided with notice of the terms. But what if the computer screen belongs to a technician who installs your television and voice communications services? And what if notice of the change in terms to your internet service comes in an e-mail notifying you that you are accepting new terms by continuing to use the service?
In Hancock v. American Telegraph and Telephone Co., Inc., the 10th Circuit held that contracts entered into through such mechanisms are enforceable. The 10th Circuit affirmed a District Court ruling dismissing all of plaintiffs claims based on forum selection and arbitration clauses.
On appeal, plaintiffs argued they did not knowingly accept AT&T's terms, claiming that the registration process to sign up for AT&T's services was complex and confusing and thus deprived them of an opportunity to give meaningful assent to governing terms. Plaintiffs also raised factual issues that they thought should have precluded dismissal. For example, one of the plaintiffs submitted an affidavit claiming that he was never informed of AT&T's terms of service and never agreed to them. When the "I agree" box is on a technician's computer rather than on the consumer's, how do we know who clicked the box? In a footnote, the court found immaterial the distinction between clicking a box on a technician's laptop and one on your own.
As to plaintiffs' arguments about the obscurity of the registration process, their best case was Specht v. Netscape Commc’ns Corp., 306 F.3d 17 (2d Cir. 2002), in which the court struck down terms that were hidden because the consumer would have had to scroll down a screen in order to find them. But the Tenth Circuit distinguished this case from Specht and found that AT&T's terms were not hidden. In order to register for AT&T's internet services, consumers must first acknowledge that they have read and agreed to AT&T's terms, and a technician may not install television and voice services until the consumer has acknowledged receipt of AT&T's terms.
Based on declarations providing information of AT&T's standard practices, the Tenth Circuit found that the District Court had not erred in resolving factual disputes in AT&T's favor.
December 11, 2012
SCOTUS Grants Cert. on Another Arbitration Case
Last week, the Supreme Court granted review of Oxford Health Plans LLC v. Sutter. The issue, according to SCOTUSblog is:
Whether an arbitrator acts within his powers under the Federal Arbitration Act (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that parties affirmatively “agreed to authorize class arbitration,” Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract
The agreement at issue, which was drafted by Oxford, in the case makes no reference to the availability of class arbitration. The arbitrator issued an award authorizing class arbitration. Oxford challenged that award, relying on Stolt-Nielsen, about which we have previously posted here and here. Both the District Court and the Third Circuit affirmed the arbitral award.
For comprehensive treatment and links to the relevant documents, check out the ever-reliable SCOTUSblog.
December 10, 2012
Larry Cunningham on Nitro-Lift
Over on Concurring Opinions, Larry Cunningham has a far stronger response to the decision, noting especially that there were no dissents from the Supreme Court's per curam decision. He calls for Congress to sort out the robes:
In numerous past SCOTUS cases, dissenting opinions were routinely filed exposing the flaws in the Court’s jurisprudence. The recent per curium opinion may signal capitulation, indicating that there are no longer any Justices prepared to object to these mistakes. That defeat means it is clearly time for Congress to rein the Court in. It should make it clear that state courts are responsible for developing and applying state contract law, not SCOTUS, federal courts or private arbitrators.
There is a lively comment section following Larry's post.
November 27, 2012
SCOTUS Smacks Down Oklahoma Supreme on Arbitration Law
In Nitro-Lift Technologies L.L.C. v. Howard, the U.S. Supreme Court granted certiorari, vacated and remanded a case that came to it from the Oklahoma Supreme Court. The first sentence of the Supreme Court's per curiam decision says it all:
State courts rather than federal courts are most frequently called upon to apply the Federal Arbitration Act(FAA), 9 U. S. C. §1 et seq., including the Act’s nationalpolicy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation. Here, the Oklahoma Supreme Court failed to do so. By declaring the noncompetition agreements in two employment contractsnull and void, rather than leaving that determination tothe arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law. The decision must be vacated.
Although the trial court had dismissed Respondents' challenges to the enforceability of their non-competition clauses and would have allowed the arbitrator to decide the merits, the Oklahoma Supreme Court struck the non-competition clauses as violative of public policy. In so doing, SCOTUS point out, the Oklahoma Supremes ignored clear case law providing that "attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved 'by the arbitrator in the first instance, not by a federal or state court.'" [citations omitted]
November 20, 2012
Eleventh Circuit Affirms District Court's Determination on Jurisdiction to Challenge to FCC Rule
Martha Self entered into a contract for cell phone service with AT&T in 1995. AT&T subsequently notified her that, beginning in January 1998 she would be subject to a Universal Service Support charge, which consisted of charges under a Federal Communications Commission (FCC) Universal Service Order that AT&T passed on to its customers. Displeased with the new charges, Self filed a putative class action, alleging breach of contract, unjust enrichment and (in the Fifth Amended Complaint) violations of federal statutory law, in Alabama state court,which AT&T removed to federal court.
At that point, the case went dormant for nearly a decade as the federal court system awaited resolution of disputes between the FCC and AT&T. Eventually, in Texas Office of Public Utility Council v. FCC, the Fifth Circuit determined that the FCC Universal Service Fund (USF) inappropriately included fees for intrastate revenues. However, the court's ruling did not call for refunds of payments that carriers had already paid into the USF. Between January 1, 1998 and November 1, 1999, the FCC collected $1.6 billion in USF fees. It ceased collecting such funds after the Texas Office opinion went into effect, but it did not refund any part of the money previously collected and found improper in Texas Office. AT&T petitioned the FCC seeking a refund of that money, and it 2008, the FCC issued a Final Order declining to refund the money, apparently because the carriers had been permitted to pass the costs on to consumers and recovery of those costs was no longer feasible.
The issue before the Eleventh Circuit in Self v. Bell South Mobility was whether the District Court had jursidiction over Self's various claims in light of Texas Office and the 2008 Final Order. The District Court held that it did not, to the extent that Self sought retroactive application of Texas Office -- that is, to the extent that Self sought to recover her portion of fees paid in to the USF in 1998 and 1999. The basis for that decision is 28 U.S.C. § 2342, which grants to the Federal Courts of Appeal exclusive jurisdiction over challenges to FCC final orders. The Eleventh Circuit affirmed the District Court's finding that it lacked urisdiction to review the 2008 Final Order.
Judge Carnes, who authored the opinion for the panel, begins with a Holmesian aphorism:
[W]hen you walk up to the lion and lay hold the hide comes off and the same old donkey of a question of law is underneath.
Throughout the opinion, Judge Carnes refers to his donkey metaphor. That aspect of the opinion is quite witty. Judge Carnes effectively uses Justice Holmes's remark as an organizational principle to separate the complex procedural background of the case from the rather straightforward legal question presented. Nicely done.
November 19, 2012
London Court Finds Breach of K in Terminating Man for Facebook Post Opposing Gay Marriage in Church
The Independent reports here that Adrian Smith, who was stripped of his managerial post with the Trafford Housing Trust (the Trust), won his breach of contract claim against his employer. London's High Court found that Mr. Smith had not engaged in "gross miconduct" by posting on this Facebook page his view that gay marriages in the church were "an equality too far." However, the High Court awarded Mr. Smith less than £100 on his breach of contract claim, despite the fact that his slaray had been reduced as a result of his demotion from more than £35,000 to £21,000.
The limited damages may have been the only remedy available to Mr. Smith in a court. He could have taken his case to an Employment Tribunal and gotten more substantial damages, but Mr. Smith claims that he did not bring the case for money. He did it for the principle involved. The Trust has apologized to Mr. Smith and claims that it attempted to settle with Mr. Smith for a much higher amount, but Mr. Smith rejected the offer and chose to proceed with his litigation.
The Trust's action against Mr. Smith is somewhat surprising, given that Mr. Smith does not oppose civil marriage for gay partners. He only spoke out against church marriages for gay couples The Independent even quotes a "gay rights campaigner Peter Tatchell" as supporting Mr. Smith:
This is not a particularly homophobic viewpoint, In a democratic society, Adrian has a right to express his point of view, even if it is misguided and wrong.
A spokesperson from Stonewall, an LGB rights charity described the Trust's treatment of Mr. Smith as "a little heavy-handed given that he had temperately expressed his point of view, however disagreeable that point of view might be to many.”
November 15, 2012
Court Grants Certiorari in American Express Co. v. Italian Colors Restaurant
[When we learned that SCOTUS had granted cert. in this case, since David Horton (pictured) has guest blogged for us before, repeatedly, we threatened to hold him hostage until we could complete our science fiction fanstasy movie called Argo unless he could supply a post on the case. Beacuse of the following post, it looks like the film will never be made. Can someone get John Goodman and Alan Arkin out of our blog offices?]
Jeremy has kindly asked me to say a few words about the U.S. Supreme Court’s cert grant in American Express Co. v. Italian Colors Restaurant, No. 12-133, 2012 WL 3096737 (U.S. Nov. 9, 2012) (“Amex”). For years, scholars like Jean Sternlight and Myriam E. Gilles have warned that the Court’s expansive interpretation of the Federal Arbitration Act (“FAA”) will kill off the consumer and employment class action. Amex may drive the final nail into this coffin. In fact, as I’ll explain, the case has the potential to sweep even further.
As many readers of this blog know, Amex comes hot on the heels of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Before Concepcion, courts routinely held that class arbitration waivers were unconscionable when applied to numerous, low value, state law claims. The idea was that these small-dollar grievances—which usually invoked state consumer protection statutes—would either be pursued as a class action or not at all. However, Concepcion (arguably) held that section 2 of the FAA preempts this line of authority. (I say “arguably” because Concepcion’s precise holding remains contested, and to plug my forthcoming article, which urges courts to read Concepcion narrowly). Justice Scalia’s majority opinion reasoned that using the unconscionability doctrine to mandate class arbitration—which is slower and more formal than two-party arbitration—violated the FAA’s purposes and objectives. Justice Scalia then dismissed concerns about deterring small claims by declaring that “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
Yet the unconscionability defense wasn’t the only tool that judges employed to invalidate class arbitration waivers. In Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 90 (2000), the Court suggested (but did not hold) that plaintiffs don’t have to arbitrate if they prove that they can’t effectively vindicate their federal statutory rights in the arbitral forum. Specifically, the Court cited high arbitral costs as a reason to strike down an arbitration clause for thwarting federal statutory rights. Since then, many lower courts have applied the vindication of rights doctrine to nullify class arbitration waivers in situations where individual lawsuits are cost-prohibitive. Because Concepcion dealt with state unconscionability principles and section 2 preemption, its effect on the vindication of rights doctrine—a matter of federal common law—is unclear.
Amex falls into this gap. The plaintiffs, a group of merchants and a trade association, claim that American Express violated the Sherman and Clayton Acts. Although the parties’ agreements contain a class arbitration waiver, the plaintiffs claim that the expense of proving their allegations (between several hundred thousand and a million dollars) dwarfs any individual’s potential recovery (a maximum of $38,000, even if trebled under the antitrust statutes). Thus, the Court (minus Justice Sotomayor, who sat on a Second Circuit panel that considered an earlier iteration of the case) will decide whether Concepcion’s rhetoric about the evils of class arbitration extends to negative-value federal statutory claims.
From reading the petition for certiorari—which was supported by amicus briefs from the usual defense-side suspects—it seems that the vindication of rights doctrine itself will come under fire. Of course, it’s unlikely to be the flagship argument. I think American Express et al. will first try to stretch Concepcion as far as possible and then distinguish the plaintiff’s costs (which are mostly expert fees) from other vindication of rights holdings (which tend to involve expenses that wouldn’t normally be incurred in litigation, such as arbitrator’s fees). But at least some of the briefs are already challenging Green Tree as dicta. If the Court takes the bait and throttles back on the vindication of rights doctrine, it would affect the entire sprawling institution of arbitration—not just class actions. Even plaintiffs with righteous, non-class claims under important federal statutes wouldn’t be able to challenge egregious arbitration clauses under federal law. (To be sure, the unconscionability defense might still prune away the worst provisions, but it (1) is notoriously unreliable and (2) also hangs by a thread in the arbitration arena). Thus, Amex could be another large step toward a proposition that the Court seems increasingly willing to embrace: claims must be sent to arbitration even if they can’t or won’t be arbitrated.
[Posted on David's behalf, by JT]
November 12, 2012
Second Circuit Upholds Summary Judgment in Favor of Holders of Argentina's Defaulted Bonds
In NML Capital v. The Republic of Argentina, the U.S. Court of Appeal for the Second Circuit has affirmed the District Court's grant of summary judgment in favor of bondholders of Argentina's defaulted bonds, but it remanded the case to allow the District Court to clarify the mechanics of its injunction requiring that Argentina pay plaintiffs concurrently or inadvance of payments made to other bondholders.
Argentina began issuing debt securities in 1994, and plaintiffs purchsed the Fiscal Agency Agreement ("FAA") bonds between 1998 and 2010. When Argentina defaulted on the FAA bonds in 2001, its President declared a "temporary moratorium" on principal and interest payments on more than $80 billion of its public external debt, including the FAA bonds. That moratorium has been extended, and Argentina has made no principal or interest payments on the FAA bonds. Instead, Argentina initiated exchange offers in both 2005 and 2010, allowing FAA bondholders to exchange their defaulted bonds for new unsecured and unsubordinated external debt in exchange for waivers of their rights and remedies under the FAA.
While Argentina successfully restructured 91% of its foreign debt under the two exchange offers (the Exchange Bonds), plaintiffs declined the exchange. The FAA included a pari passu provision which represented that "[t]he payment obligations of the Republic under the Securities shall at all times rank at lesat equally with all its other present and future unsecured and unsubordinated External Indebtedness debt." Despite the pari passu provision, Argentina made all payments due on the Exchange Bonds.
Alleging violation of the FAA's pari passu provision, plaintiffis sued Argentina, alleging breach of contract and seeking injunctive relief, including specific performance of the pari passu provision, which should prevent Argentina from discriminating against FAA bonds in favor of other unsubordinated, foreign bonds. The District Court first temporarily and then permanently enjoined Argentina from making payments on the Exchange Bonds without making comparable payments on the defaulted debt. Rejecting Argentina's six arguments that the Distrcit Court had erred, the Second Circuit affirmed the injunction, finding that Argentina had violated the pari passu provision by ranking its payment obligations on the defaulted debt below its obligations to the holders of the Exchange Bonds.
November 07, 2012
Former Attorney Sues Stephen King
As reported here by the BloombergBusinessweek, Jay Kramer, former attorney for master of horror, Stephen King, filed suit in New York’s Supreme Court against the author’s agents, Arthur B. Greene and Susan Greene of the Arthur B. Greene Literary Agency, alleging conversion of commissions for work performed, breach of contract, quantum merit/unjust enrichment, and tortious interference.
Kramer was fired on March 30th after having worked for Mr. King for thirty years. He alleges that the defendants have withheld his commission for several projects that he helped broker, including film and television production projects based on King's writings: Secret Window, The Stand, and 1408, among others. Kramer alleges that after he was fired, the Greenes “jointly and severally began diverting the sums owed to [him] to their own account.” Kramer is asking for $1 million in damages.
[Christina Phillips & JT]
November 06, 2012
Alleged Former Manager's Claims against Britney Spears Dismissed
Sam Lufti, former self-proclaimed manager to Britney Spears (left), filed suit against the “Baby One More Time” pop-star for breach of contract, against her father for assault and battery, and against her mother for defamation. Lutfi alleges he had a multi-year contract with the singer that entitled him to 15% of her income. However, as reported here by the New York Daily News, Lufti was unable to recall ever telling a single person that Spears promised to pay him 15% of her income, nor was he able to produce an adequate written contract. He could only provide a form contract that he downloaded from the internet, which he claimed he had used to make an oral agreement with Ms. Spears.
As reported on Fox News here, the suit was dismissed on Friday as Mr. Lufti was able to make out any of his claims against Ms. Spears or her parents.
[Christina Phillips & JT]
October 29, 2012
Profile Tech Falls Out with Facebook and Sues for Breach
Chris Claydon, the Managing Director of a New Zealand based company, Profile Technology, Ltd. (Profile Tech.), has brought suit against the social networking giant, Facebook, alleging breach of contract, interference with business relationships, defamation, and unlawful, unfair and fraudulent business practices. Claydon’s Complaint alleges that Profile Tech. and Facebook entered into an agreement in 2008 allowing Profile Tech. to acquire Facebook data by automated “crawling,” for the purpose of creating a service called Profile Engine. Profile Engine became the world’s first search engine dedicated to Facebook. However, according to the Complaint, without notice, Facebook cut off the access Profile Tech. needed to continue its venture shorty after October 13, and began a “malicious” defamation campaign, thereby damaging Profile Tech.’s business and reputation.
Claydon further alleges that Facebook interfered with access to its other applications, independent of Profile Engine (IQ Test, Survey, Polling, etc…) Facebook’s actions were allegedly purposeful and malicious and as such, require punitive damages in addition to compensation for lost profits and defamation. In addition, Claydon requested an injunction to prevent Facebook from any further defamation it is allegedly employing against Profile Tech.
Claydon states that Facebook breached the implied duties found in every contract: to deal fairly and in good faith, and refrain from doing anything that would have an ill effect on, or injure the rights of the other party’s receiving the fruits of the contract.
[Christina Phillips & JT]
October 23, 2012
Setback for Bank of American in the Fifth Circuit
Bank of America (BoA) recently experienced a setback when the Fifth Circuit reversed a ruling from the Northern District of Texas granting BoA's Motion to Dismiss a breach of contract claim brought by Highland Capital Management (“Highland”). The case, Highland Cap. Mgt., L.P v. Bank of Am., Nat. Ass’n., was decided on October 2, 2012.
According to Highland’s complaint, the parties entered into an agreement via telephone regarding BoA's interest in certain bank debt. Highland alleged that, during the phone conversation, the parties agreed to all material terms, including the price of the debt to be sold ($15,500,000 at the price of 93.5% of par), and that the agreement was binding pursuant to industry standards and the standard terms as published by the Loan Syndications and Trading Association, Inc (“LSTA”).
BoA claimed, and it was undisputed, that shortly after the phone conversation, on the very same day, it sent an e-mail to Highland confirming the agreement but including the language “subject to appropriate consents and documentation.” When BoA refused to settle the debt trade unless Highland incorporated additional terms relating to indemnification, legal fees, etc., Highland filed suit alleging promissory estoppel and breach of contract.
The Fifth Circuit had no trouble dispensing with Highland’s promissory estoppel claim, stating that Highland did nothing more than “recite the elements of a promissory estoppel claim and assert that the Bank’s actions met those requirements.” However, it did find a triable issue of fact with respect to the breach of contract claim.
When determining whether parties intend to be bound absent a writing, the court considers whether there has been an express reservation of the right not to be bound in the absence of a writing, whether there has been partial performance of the contract, whether all of the terms of the alleged contract have been agreed upon, and whether the agreement at issue is the type of contract that is usually committed to writing. While the District Court found that BoA's "subject to" language indicated an absence of intent to be bound, the Fifth Circuit found that conclusion at odds with other facts alleged in the complaint. Particularly, that the “consents and documentation” referenced by BoA’s email were controlled by the LSTA Standard Terms, and “any specific terms that deviated from the LSTA standard terms were required to be expressly reserved by the Bank.” There was no indication that BoA expressly reserved the right not to be bound and Highland alleged that the parties’ had agreed upon the material terms.
Standing alone, BoA’s email, which prompted the District Court to rule in favor of BoA, may suggest an absence of intent to be bound. Nevertheless, construing Highland’s claims in the light most favorable to Highland, it has alleged sufficient facts to render the Distroct Court's grant of BoA's motino to dismiss improper.
[Christina Phillips & JT]