Wednesday, June 26, 2013
The New York Court of Appeals rarely requests amicus participation, but it has done so in a UCC artcle 4 case. Here is an excerpt from the request for participation:
On June 4, 2013, the Court of Appeals granted plaintiffs Clemente Bros. Contracting Corp. and Jeffrey A. Clemente leave to appeal in Clemente Bros. Contracting Corp.. et al.. v Hafner- Milazzo. et al. Plaintiff Clemente Bros. Contracting Corp. (Contracting) was a customer of defendant bank CapitalOne, N.A.(CapitalOne). Contracting had three deposit and/or checking accounts with Capital One and also took out two loans from Capital One. The plaintiffs commenced this action against Capital One, asserting inter alia, that Capital One had failed to use ordinary care in paying on allegedly forged checks and failed to comply with its own regulations in handling Contracting's accounts. In its answer, Capital One interposed several counterclaims to recover amounts due under the loans. Insofar as pertinent to this appeal, Supreme Court granted summary judgment to defendant Capital One, dismissing plaintiffs' complaint and awarding it judgment on its counterclaims. The Appellate Division affirmed (100 AD3d 677).
Under New York's Uniform Commercial Code, a bank may be liable to its customer when it pays a check on a forged signature. The bank may avoid such liability, however, when it makes statements of the account and the allegedly forged items available to the customer, and the customer fails to report the alleged forgery to the bank within one year. Here, the parties, by agreement, shortened the one-year period to 14 days. One of the issues on appeal is whether a bank and its customer may shorten the statutory time period provided for in UCC 4-406 within which the customer must make a claim to its bank for payment o f an altered or forged item.
More information is available here. I am no expert on UCC article 4, but if you are considering a motion for leave to appear amicus curiae, I am happy to advise on New York Court of Appeals procedure.
Here is the Appellate Division decision from which the the appeal is taken.
[Meredith R. Miller]
Monday, June 24, 2013
Jeremy was nice enough to ask me to write quick post reacting to American Express Co. v. Italian Colors Restaurants. Because he’s already provided a good summary of the decision, I’m just going to launch in.
1. The road not taken. After oral argument, I expected Amex to be a 6-2 reversal, with Justice Breyer joining the majority. I thought the rough gist of the decision was going to be something like this: “The plaintiffs argue that they can’t vindicate their antitrust rights without the class action device because the cost of an expert report dwarfs any individual plaintiff’s potential recovery. But arbitration isn’t subject to the same evidentiary demands as litigation. Indeed, it’s flexible and casual. Perhaps each plaintiff can prove up its case without a full-fledged expert report. Let’s compel bilateral arbitration and see what happens!” For instance, Justice Breyer repeatedly referred to the prospect of the parties “getting it done cheap” in the extrajudicial forum. Justice Kennedy also emphasized that arbitration doesn’t “involve the costs and formalities of litigation.” (This actually prompted Paul Clement to respond, “God bless it, Justice Kennedy”—check out page 35 of the hearing transcript—which I can only imagine the savvy litigator said with his hand o’er his heart). But perhaps the anything-goes-in-arbitration approach seemed too dangerous to the majority. After all, it raised the specter of anything going in arbitration—including antitrust plaintiffs vindicating their rights.
2. Does the vindication of rights doctrine survive exist? Like AT&T Mobility LLC v. Concepcion, Amex’s long-term impact is hard to discern through the fog of results-oriented reasoning. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. and Green Tree Financial Corp.-Ala. v. Randolph, the Court suggested—but did not squarely hold—that judges can invalidate arbitration clauses when plaintiffs prove that they can’t effectively vindicate their federal statutory rights in arbitration. The primary way plaintiffs met this burden was by offering evidence of prohibitive costs: for instance, hefty filing or arbitrator’s fees. However, in Amex, Justice Scalia calls the rule “dicta” and opines that “Mitsubishi Motors did not hold that federal statutory claims are subject to arbitration so long as the claimant may effectively vindicate his rights in the arbitral forum.” According to Justice Scalia, if there is such a thing as the vindication of rights doctrine, it’s not about vindication of rights; instead, it hinges on the narrower inquiry of whether an arbitration clause is the functional equivalent of “a prospective waiver of a party’s right to pursue statutory remedies.” That is, this mythical but perhaps not mythical rule only applies when a contract literally bars plaintiffs from even asserting a federal statutory claim and “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” But it doesn’t include the mere “expense involved in proving a statutory remedy.” That’s a lot of attention lavished upon a doctrine that might not even be real!
3. Distinguishing Amex. I don’t know how much good this does, but I read Amex not to govern all arbitration clauses. Although there seems to be some confusion about the specific provision in Amex, my understanding was that it didn’t just preclude class actions—it also barred plaintiffs from sharing information, consolidating claims, or recovering costs if they won. In perhaps the most bizarre part of the majority opinion, footnote 4 (1) insists that the Amex clause doesn’t contain these features and then (2) limits its holding to identical provisions. Arguably, this leaves a window open for future plaintiffs subject to strict arbitration clauses to show that they can’t engage in “other forms of cost sharing” and thus need the class action device to vindicate their federal statutory rights.
4. My new favorite Justice. Something that has always bugged me about Concepcion is the blandness of Justice Breyer’s dissent. So I was heartened by Justice Kagan’s sarcastic, point-by-point smackdown of the majority. I know I’m biased, but I found it to be pretty devastating, and I’d be psyched if she became the go-to Justice on the left for arbitration issues.[Posted, on David Horton's behalf, by JT]
Thursday, June 20, 2013
In a 5-3 decision (Sotomayor, J., not participating), the U.S. Supreme Court today compelled arbitration in American Express Co. v. Italian Colors Restaurants.
We reported on the oral arguments in this case here, and UC Davis's David Horton provided an introduction for us to the case after cert. was granted here. Things unfolded much as Professor Horton predicted.
Justice Scalia, writing for the majority, accepts plaintiffs' premise that, given the costs of experts' fees necessary to prove plaintiffs' antitrust allegations, the costs to any American Express customer to bring an antitrust claim against American Express far exceeds any possible recovery, even assuming the availability of triple damages. Plaintiffs argue that the class action waiver that they signed as part of their arbitration agreement with Amerrican Express is thus invalid because the waiver denies them of any meaningful opportunity to prosecute their antitrust claim.
According to the majority, that argument is foreclosed by the Federal Arbitration Act, which directs courts to enforce arbitration agreements, absent something like fraud or duress, which is not present in this case. Justice Thomas specially concurred to say that in his view, such a finding followed inevitably from the Court's prior decision in AT&T Mobility LLC v. Concepcion. Justice Scalia pretty much agrees (at the bottom of page 8), but he first does a two part analysis, finding: 1) no clear congressional command that might trump the Federal Arbitration Act's command that courts enforce arbitration agreement and 2) that the judicially created "effective vindication" doctrine does not apply here. That doctrine would set aside arbitration provisions that prevent a party from vindicating important statutory rights. Here, however, parties can pursue their legal rights; they simply do not have a procedural mechanism (the class action suit) available to them, but that is what they agreed to when they signed the arbitration agreement.
Justice Kagan, writing for the three dissenting Justices summarizes the case as folllows:
The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.
And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.
Wednesday, June 19, 2013
On Monday, the U.S. Supreme Court issued a ruling in Federal Trade Commission v. Actavis that permitted the Federal Trade Commission to sue pharmaceutical companies for potential antitrust violations when they enter into “pay-to-delay” agreements. (Lyle Denniston of SCOTUSblog has a good analysis here ). These agreements are a type of settlement agreement where a pharmaceutical company pays a generic drug company to keep the drug off the market for a certain period of time. Lower court rulings had held that these agreements were valid as long as they did not exceed the term of the patent held by the pharmaceutical company. This should be an interesting case for contractsprofs because it is a high profile "limits of contract" case. In an era where judges have been notoriously reluctant to interfere with freedom of contract even when it hurts consumers, this case is a refreshing change.
I’m curious though what will happen to the payments that were made to the generic drug companies – are the agreements rescinded and the payments returned? (I haven’t read the decision thoroughly yet to see whether it’s indicated). That might be a problem for the generic drug companies. It seems like some sort of restitution should be made - I wonder if the parties thought of putting a provision addressing what would happen in the event of illegality in their agreement?
Monday, June 17, 2013
I don't know if this recent case will help Hall's Mentho-Lyptus with the Triple-Colling Action Presents Jay the Intern, but it might help some of our law students.
As The Atlantic reports here, Federal District Judge William H. Pauley III ruled on June 11th in favor of two interns who sued Fox Searchlight studios for breaching New York and federal minumum wage laws in failing to pay them for their work on the studio's academy award winning film, "Black Swan." The Atlantic helpfully links to this page from the U.S. Department of Labor that establishes a six-part test for when interns can go unpaid. Here are the six criteria:The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Considering the totality of the circumstances, Judge Pauley concluded that the plaintiffs were employees and that Fox Searchlight had violated the Fair Labor Standards Act as well as New York law by not paying them minimum wage. The court also allowed certification of a class of unpaid interns who worked for various Fox affiliates between 2005 and 2010.
Fox Searchlight plans to appeal to the Second Circuit.
Judge Pauley's 36-page opinion can be found here.
Thursday, June 13, 2013
The United States Supreme Court rarely has occasion to opine on contract law, the contours of which are largely left to state courts. However, a couple of recent arbitration cases provided the court with a unique opportunity to point out the difference between contract terms implied-in-fact and contract terms implied-in-law. As any diligent first-year Contracts student should know, the former must rest upon the actual consent of the parties (even though not clearly expressed), while the latter are given effect through default legal rules, applied, as necessary, where the parties’ agreement is silent. This distinction between the two (and between contract “interpretation” and “construction”) is, of course, not always made clear in contract cases addressing one or both. However, these two recent opinions, Stolt-Nielsen v. Animal Feeds Int’l Corp., 130 S.Ct. 1758 (2010), and Oxford Health Plans, LLC v. Sutter, 2013 WL 2459522 (U.S.) (June 10, 2013) illustrate the difference quite nicely—whatever one may think about the content of the Court’s arbitration jurisprudence animating these decisions.
In Stolt-Nielsen, a panel of arbitrators had reasoned that an agreement permitted class arbitration, because it did not preclude it. Stolt-Nielsen at 1766. In effect, the parties’ silence required the arbitrators to supply an omitted essential term—a default rule—and they did so, thereby construing the agreement as allowing for class arbitration. Id. at 1768-69 and 1781. While acknowledging the power of arbitrators to craft procedural rules, generally, the Court explained that a “default rule,” allowing for class arbitration was sufficiently inconsistent with the fundamental nature of arbitration as to be beyond the power of arbitrators. Id. at 1668-69, 1775-76 (referencing the Restatement (Second) of Contracts § 204 on default rules and relying on FAA § 10(a)(4) to hold that the arbitrators had exceeded their powers). After Stolt-Nielsen, some might have expected that class arbitration would require some sort of “clear and unmistakable” expression of party intent (as the Court purports to require for a “delegation” clause, assigning jurisdictional decisions to the arbitrator). This is not necessarily so, however, as we learned this week in Oxford Health Plans.
In Oxford Health Plans, a claimant sought to bring class arbitration claims, and respondent asserted they were not allowed under the arbitration agreement. Both parties agreed to submit the question to a sole arbitrator, who “interpreted” the parties’ agreement and determined that it impliedly allowed class arbitration. Id. In affirming the arbitrator’s decision, Justice Kagan explained that the arbitrator was merely interpreting the actual intent-in-fact of the parties—a task clearly assigned to the arbitrator by those same parties. Id. Therefore, the arbitrator’s decision was fully within his power, even if erroneous—in fact, even if “grievously erroneous.” Id.
Thus, the Court neatly distinguished between the power of an arbitrator to determine actual, factual party intent, when assigned that task by the parties, and the power of the arbitrator to craft legal default rules (at least beyond the scope of general arbitration procedures). This distinction is of course analogous to the distinction between contract interpretation—generally an issue for the jury, if in question—and contract construction—generally an issue for the court.
Perhaps of greater interest to those who follow the Court’s arbitration jurisprudence, Oxford Health Plans appears to continue the inexorable march towards a seemingly unreviewable form of contractual Kompetenz-Kompetenz, see Jack Graves & Yelena Davydan, Competence-Competence and Separability: American Style in, International Arbitration And International Commercial Law: Synergy, Convergence and Evolution (Kluwer 2011) (Part 2) and Jack Graves, Arbitration as Contract: The Need for a Fully Developed and Comprehensive Set of Statutory Default Legal Rules, 2 William & Mary Bus. L. Rev. 225, 276-85 (2011), initially announced in First Options, Inc. v. Kaplan, 115 S.Ct. 1920 (1995), further expounded upon in Rent-A-Center, West, Inc. v. Jackson, 130 S.C t. 2772 (2010), and made even more seemingly absolute in Oxford Health Care. The Court had already made abundantly clear that a decision as to whether the parties had in fact agreed to arbitrate a dispute—when the decision was “delegated” to an arbitrator—was beyond court review, except as provided under FAA § 10(a). In Oxford Health Care, the Court further clarified the extraordinarily narrow scope of FAA § 10(a)(4).
[posted by Meredith R. Miller on behalf of Jack Graves]
Wednesday, May 22, 2013
blogged about this case before. Since that time, a panel of the Ninth Circuit issued a new opinion that is available here.
The Court agreed to decide whether airline passengers who are removed from a “frequent flyer” entitlement list have a right under state law to sue the airline for alleged violation of a promise that they could continue to enjoy the benefits. The case of Northwest, Inc., v. Ginsberg (12-462) tests whether such legal claims are preempted by federal law governing regulation of commercial air service.
SCOTUSblog also provides this statement of the issue in the case:
Issue: Whether the court of appeals erred in holding, in contrast with the decisions of other circuits, that respondent’s implied covenant of good faith and fair dealing was not preempted under the Airline Deregulation Act because such claims are categorically unrelated to a price, route, or service, notwithstanding that respondent’s claim arises out of a frequent-flyer program (the precise context of American Airlines, Inc. v. Wolens ) and manifestly enlarged the terms of the parties’ undertakings, which allowed termination in Northwest’s sole discretion.
We are looking forward to the Supreme Court's ruling (although the tea leaves seem pretty clear), and we hope that they cite to our earlier post as (some kind of) authoirty.
Thursday, May 9, 2013
Duke Ellington’s grandson brought a breach of contract action against a group of music publishers; he sought to recover royalties allegedly due under a 1961 contract. Under that contract, Ellington and his heirs are described as the “First Party” and several music publishers, including EMI Mills, are referred to as the “Second Party.” On appeal from the dismissal of the case, Ellington’s grandson pointed to paragraph 3(a) of the contract which required the Second Party to pay Ellington "a sum equal to fifty (50 percent) percent of the net revenue actually received by the Second Party from…foreign publication" of Ellington's compositions. Ellington’s grandson argued that the music publishers had since acquired ownership of the foreign subpublishers, thereby skimming net revenue actually received in the form of fees and, in turn, payment due to Ellington’s heirs.
The appellate court explained the contract and the grandson’s argument:
This is known in the music publishing industry as a "net receipts" arrangement by which a composer, such as Ellington, would collect royalties based on income received by a publisher after the deduction of fees charged by foreign subpublishers. As stated in plaintiff's brief, "net receipts" arrangements were standard when the agreement was executed in 1961. Plaintiff also notes that at that time foreign subpublishers were typically unaffiliated with domestic publishers such as Mills Music. Over time, however, EMI Mills, like other publishers, acquired ownership of the foreign subpublishers through which revenues derived from foreign subpublications were generated. Accordingly, in this case, fees that previously had been charged by independent foreign subpublishers under the instant net receipts agreement are now being charged by subpublishers owned by EMI Mills. Plaintiff asserts that EMI Mills has enabled itself to skim his claimed share of royalties from the Duke Ellington compositions by paying commissions to its affiliated foreign subpublishers before remitting the bargained-for royalty payments to Duke Ellington's heirs.
Ellington’s grandson asserted on appeal that the agreement is ambiguous as to whether "net revenue actually received by the Second Party" entails revenue received from EMI Mills's foreign subpublisher affiliates. The appellate court found no ambiguity in the agreement; the court stated that the agreement “by its terms, requires EMI Mills to pay Ellington’s heirs 50 percent of the net revenue actually received from foreign publication of Ellington’s compositions.” It reasoned:
"Foreign publication" has one unmistakable meaning regardless of whether it is performed by independent or affiliated subpublishers. Given the plain meaning of the agreement's language, plaintiff's argument that foreign subpublishers were generally unaffiliated in 1961, when the agreement was executed, is immaterial.
The court continued by stating that “the complaint sets forth no basis for plaintiff's apparent premise that subpublishers owned by EMI Mills should render their services for free although independent subpublishers were presumably compensated for rendering identical services.” Thus, dismissal of the suit was affirmed.
Ellington v. EMI Music, 651558/10, NYLJ 1202598616249, at *1 (App. Div., 1st, Decided May 2, 2013).
[Meredith R. Miller]
For many lawyers, To Kill a Mockingbird (TKAM) is at the top of their list of "favorite books/movies about a lawyer." TKAM is about more than lawyering, of course. It's about racism, family, class and much more. This week, TKAM also is about "fraudulent inducement," "consideration" (a lack thereof) and "fiduciary duty." All of those subjects are in the complaint filed by TKAM author, (Nelle) Harper Lee, against her purported literary agent.
In the suit, Lee alleges that Samuel L. Pinkus (and a few other defendants) fraudulently induced her to sign her TKAM rights over to one of Pinkus's companies in 2007 and again in 2011. According to Lee, Pinkus, the son-in-law of Lee's longtime agent, Eugene Winick, transferred many of Winick's clients to himself when Winick fell ill in 2006. Pinkus then allegedly misappropriated royalties and failed to promote Lee's copyright in the U.S. and abroad.
For Contracts professors, the Lee v. Pinkus suit provides some interesting hypos to discuss when teaching fraud, consideration, and assignments of rights. Regarding fraud, Lee alleges that Pinkus lied to her about what she was signing at a time when she was particularly vulnerable due to a recent stroke and declining eyesight. Consideration is in play because there allegedly was no consideration from Pinkus to Lee in exchange for Lee's transfer of rights to Pinkus. Assignment issues arose because the many companies who owed Lee royalties reportedly struggled to figure out which company or companies they should pay given Pinkus's many shell companies. Overall, it's a sad story for Ms. Lee but one that students may find particularly engaging.
[Heidi R. Anderson]
p.s. Although there are many quote-worthy passages in TKAM, a favorite of mine (useful when advising students about their writing) is: “Atticus told me to delete the adjectives and I'd have the facts.” Please feel free to share your favorites in the comments.
Monday, May 6, 2013
Interesting story here on the Wall Street Journal's Market Watch blog. Interesting because it seems like the case will be very difficult for plaintiff to prove and its damages will be a challenge to calculate with requisite specificity.
The facts, as also reported here on Food Navigator-USA are as follows:
In 2012, Tula Foods introduced its Better Whey of Life premium Greek yogurt line, which is now sold in over 400 stores. Tula contracted with the Kroger Co., which in addition to its retail stores owns and operate 37 manufacturing plants at which it produced, among other things, Tula's Better Whey of Life yogurts. According to the complaint, as summarized on the Market Watch blog, becasue Kroger did not produce the yogurt according to Tula's specification (and it allegedly did so knowlingly). Tula also brings claims against Weber Flavors, which Tula claims failed to properly "treat and process the vanilla bean base" in Tula's yogurt. As a result, Kroger released "poor-quality unappetizing yogurt on the market." If that isn't not specific enough for you, the complaint specifies that, as a result of the improperly processed vanilla bean base, Tula found mold growing in its finished yogurt, resulting in a recall.
Just an aside here, for fans of Slings and Arrows, doesn't that slogan (something like, "Tula provides only poor-quality unappetizing yogurt laced with mold") strike you as precisely the sort of ad campaign that Froghammer would have come up with if they were hired to market Better Whey of Life yogurts?
There is also a misappropriation claim, since Kroger allegedly used Tula's trade secrets to make a competing store brank of Greek yogurt -- but was it of equally poor quality and equally unappetizing? Surely a jury question there.
The theory of contract damages will be a challenge, because Tula will have to show that its product would have taken off were it not for the devastating effects on its reputation caused by the alleged breaches and resulting product recalls. Demonstrating defendants' failure (perhaps intentional failure) to adhere to Tula's specifications will also be a lot of work. But those allegations will also be very difficult to dismiss without a lot of discovery and perhaps a trial, so the settlement price should be high if the complaint adequately states a cause of action. Moreover, as Tula is also bringing claims for breach of express and implied warranties, a record of moldy yogurt ought to do the trick.
Tuesday, April 30, 2013
We are grateful to the website Lexology.com and to Ellen D. Marcus of Zuckerman Spaeder LLP for this informative and interesting post about this complaint filed in the Northern District of Illinois by Merry Gentlemen, LLC against actor and director, Michael Keaton. According to the complaint, Keaton breached his contract to act in and direct a film called Merry Gentlemen by failing to deliver it on time and by marketing his own version of the film to the Sundance Film Festival. The film cratered, grossing only $350,000 at the box office. Moreover, the producers allege that Keaton's various breaches caused "substantial delays and increased expenses in the completion and release of the movie," thus causing the producers to suffer "substantial financial loss."
Ms. Marcus's post picks it up there, citing Restatement 2d's Section 347 on the elements of expectation damages and illustrating what sort of sums the producers might be looking to recover. Ms. Marcus has to speculate, as the producers cite no figures beyond those required to meet the amount-in-controversy requirement to get their diversity claim into a federal court.
Whether or not the allegations of the complaint are true, they paint a nice picture of the behind-the-scenes machinanations invovled in getting a film out to the viewing public. According to the complaint, Keaton produced a "first cut" that all agreed was unsatisfactory. There then followed both a "Chicago cut," edited by the producers and by Ron Lazzeretti, the screenwriter and the producers' original choice for director, as well as Keaton's second director's cut.
The producers then shopped the Chicago cut to the Sundance Film Festival, where they were awarded a prime venue. Keaton then allegedly threatened not to appear at Sundance unless his cut was screened. That was a dealbreaker for Sundance, so despite already having sunk $4 million in to the film, the producers claim they had no choice but to agree to screen Keaton's second cut at the festival. They did so through a Settlement and Release (attached to the complaint, but not to the online version) entered into with Keaton, which they now claim was without consideration, despite the recital of consideration in the agreement, and entered into under duress.
Despite all of this, the complaint alleges that the Sundance screening was a success, since the USA Today identified "Merry Gentlemen" as one of ten stand-out films screened that year. But the producers were unable to capitalize on this success, since Keaton's alleged continuing dereliction of his directorial duties resulted in dealys of the release of the film from October of November 2008 to May 2009. The producers allege that the film was a Christmas movie (or at least was set around Christmas time), so Keaton's delays caused the movie to premiere during the wrong season.
The producers allege that Keaton continued to refuse to cooperate with them after Sundance. Somehow, the movie nonetheless was released to some positive reviews:
The movie, as released (based upon Keaton’s second cut and numerous changes made by plaintiff), received substantial critical praise. Roger Ebert called the film “original, absorbing and curiously moving in ways that are far from expected.” The New York Times’ Manohla Dargis called it “[a]n austere, nearly perfect character study of two mismatched yet ideally matched souls.” David Letterman said on his Late Night talk show, “What a tremendous film . . . . I loved it.”
Note to the producers' attorneys: if you've got Roger Ebert and Manohla Dargis in your corner, you don't need Letterman (or The USA Today for that matter).
Nonetheless, the film did not succeed, grossing only $350,000, allegedly because of Keaton's failure to promote it. Indeed, some of the complaints allegations relating to Keaton's promotion efforts suggest some real issues. Upon being asked by an interviewer if she had accurately summarized the film's plot, Keaton allegedly responded that he had not seen it for a while.
We note also that Ms. Marcus's post is cross-posted on Suits by Suits, a legal blog about disputes between companies and their executives, a site to which we may occasionally return for more blog fodder.
Monday, April 29, 2013
A little over a year ago, we reported on a Ninth Circuit case, Kilgore v. Key Bank. Here is a summary of the panel's opinion:
The issue in Kilgore was whether California’s public policy favoring the litigation (rather than arbitration) of claims seeking public injunctions could trump the [Federal Arbitration Act (FAA)] post-Concepcion as it did pre-Concepcion in two California Supreme Court cases, Broughton and Cruz. The Ninth Circuit reluctantly concluded that the Broughton-Cruz line of cases is no longer viable post-Concepcion. As the Supreme Court made clear in Marmet, about which we blogged last month, Concepcion’s reach is broad enough to preempt state public policies other than the specific one addressed in Concepcion. The fact that a state legislature specifically intended to avoid federal preemption under the FAA is irrelevant.
The Court then addressed the unconscionability of the arbitration clause. The Court noted that the arbitration clause at issue here was not buried in the contract and specified the rights that plaintiffs waived under arbitration. In addition, the contract contained clear instructions on how to opt-out. Finding no procedural unconscionability, the Court saw no need to address potential substantive unconscionability in the arbitration clause. The case was remanded to the District Court with instructions to compel arbitration.
On rehearing en banc, the Ninth Circuit held that the case does not fall within the "public injunction" exception to the FAA, recognized in Broughton, Cruz, and Davis v. O'Melveny & Myers, and thus the Ninth Circuit vacated the District Court's denial of the defendant's motion to compel arbitration and remanded with instructions to compel aribration. That exception only applies where the "benefits of granting injunctive relief by and large do not accrue to that party, but to the general public in danger of being victimized by the same deceptive practices as the plaintiff suffered.” The Ninth Circuit found that not to be the case in Kilgore and thus it was able to compel arbitration while leaving the Broughton-Cruz exception to the FAA intact for now.
Judge Pregerson dissented, finding the challenged arbitration clause unconscionable.
Monday, April 15, 2013
Samuel Muriithi was a driver for Shuttle Express, a shuttle service that transported passengers to and from the Baltimore-Washington International Thurgood Marshall Airport (BWI). Muriithi signed a Unit Franchise Agreement with Shuttle Express in 2007 (the Agreement). He claims that he was misled when he signed the agreement and objects to Shuttle Express having classified him as an independent contractor and franchisee rather than as an employee. He claims entitlement to payment of at least federal minimum wage plus overtime pay.
Based on this claims, Mr. Muriithi brought a Fair Labor Standards Act (FLSA) claim, as well as state law claims, on his own behalf and behalf of a purported class of other similarly situated drivers. in reliance on the Agreement's arbitration provision, which included a fee-splitting provision, a one-year statute of limitation and a class action waiver, Shuttle Express moved to compel arbitration.
The District Court found the arbitration provision unenforceable based on all three features mentioned above. The District Court found that the fee-splitting provision made arbitration so expensive as to deter an arbitration that Mr. Muriithi might consider. In addition, hat provision coupled with the class action waiver would prevent Mr. Muriithi from vindicating his statutory rights. Finally, the District Court found that the one year statute of limitations was unenforceable because inconsistent with the FLSA's two year statute of limitations. Concluding that the arbitration provision was "permeated by substantively unconscionable parts," the District Court found no way to severe the objectionable elements and denied Shuttle Express's motion to compel arbitration. Shuttle Express appealed.
In Muriithi v. Shuttle Expres Inc., decided April 1st, the Fourth Circuit vacated and remanded. The Fourth Circuit quickly established that Mr. Muriithi's dispute with Shuttle Express was subject to the arbitration provision, so the only questions was whether that provision was for some reason unenfroceable. In appealing the District Court's ruling that the class action waiver rendered the provision unconscionable, Shuttle Express contended that AT&T Mobility v. Concepcion foreclosed any such finding. Whilte Muriithi and the District Court attempted to limit Concepcion to cases involving federal pre-emption of state law claims and thus render it inapplicable to Muriithi's FLSA claim, the Fourth Circuit read Concepcion more broadly. It read Concepcion as foreclosing any unconscionability defenses to an otherwise valid arbitration agreement based on a class action waiver.
As to the fee-splitting provision, such a provision can render an arbitration agreement unenforceable, if plaintiff can establish that the "arbitral costs are so high that they effectively preclude a litigant from vindicating his federal statutory rights in an arbitral forum." The Fourth Circuit concluded that Mr. Muriithi failed to make such a showing. Finally, since the statute of limitations was not part of the arbitration clause, the Fourth Circuit found that the District Court had erred in addressing it on a motion to compel arbitration.
The case was remanded to the District Court for an order compelling arbitration, with Suttle Express paying the costs of such arbitration, pursuant to its in-court agreement to do so.
Thursday, April 11, 2013
According to Judge Wood, Johnson Conrols, Inc. v. Edman Controls, Inc., was a simple case of a party agreeing to arbitration and then seeking to avoid arbitration once the decision went against it. The parties had an agreement according to which Edman Controls (Edman) was supposed to have the exclusive right to distribute the products of Johnson Controls (Johnson) in Panama. The agreement provided for arbitration of all disputes under Wisconsin law and for the losing party to pay the prevailing party's attorneys' fees. At the time of the agreement, both parties were aware that Edman would rely on its Panamanian subsidiaries (Pinnacle) to carry out the distribution agreement.
In 2009, Johnson breached the agreement by seeking to sell its products directly in Panama. The Seventh Circuit noted that there was nothing subtle about the breach. Johnson approached Edman's clients directly and refused to communicate with Edman about attempts to market its products in Panama, In 2010, Edman brought its claims, sounding in tortious interference, unjust enrichment and breach of the duties of good faith and fair dealing to an arbitrator.
The arbitrator ruled in Edman's favor and awarded about $750,000 in damages. However, the arbitrator dismissed Edman's claims relating to tortious interference with Pinnacle, finding that he had no authority over the relations between Johnson and Pinnacle. "Aha!" said Johnson (we paraphrase). Challenging the arbitral award, Johnson argued that all of Edman's harm actually derived from Pinnacle's harm, and the arbitrator had no jurisdiction over Pinnacle's harms.
The District Court was unimpressed. The parties knew that Edman would be operating through Pinnacle, and given the narrow scope of the court's review on a challenge to an arbitral award, Johnson's claim that the arbitrator had been mistaken in his understanding of Wisconsin law was unavailing. But thanks for playing, Johnson. For your troubles, the District Court awarded Edman attorneys' fees of about $250,000, bringing the total in damages to a tidy $1 million.
On appeal, the Seventh Circuit noted that although both parties relied on Chapter 1 of the Federal Arbitration Act (FAA), the case was actually governed by either the FAA's Chapter 2, which incorporates the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the FAA's Chapter 3, which incorporates the (Panama) Inter-American Convention on International Commercial Arbitration. The Seventh Circuit noted that it was not clear whether a court could rely on FAA Chapter 1 to vacate a decision taken by a U.S. arbitrator relating to an agreement that is governed by either the New York or the Panama Convention.
In a close case, the Seventh Circuit opined, a court would have to address that issue, as the grounds for vacatur in FAA Chapters 2 and 3 are different from those in Chapter 1. But this was not a close case. Arbitral decisions are not overturned lightly and will be upheld so long as “an arbitrator is even arguably construing or applying the contract and acting within the scope of this authority.” Johnson claimed that the arbitrator exceeded its power by letting Edman bring claims on behalf of its subsidiary. But that would only be a mistaken application of Wisconsin law if Johnson were correct. Such a mistake would not be enough to overturn the award, and Johnson is not correct as to Wisconsin law. And in any case, it seems, not of that matters anyway, because Edman was directly harmed by Johnson's breach and the arbitrator allowed recovery only for Edman's direct losses.
The Seventh Circuit also affirmed the award of attorneys' fees, finding that the District Court had not abused its discretion in finding that Johnson had to pay a 33% contingency fee to Edman's attorneys. The Court denied Edman's request that the Court impose Rule 38 sanctions on Johnson for a frivolous appeal largely, it said, because the attorneys' fee award was already sanction enough.
Friday, April 5, 2013
Remarkably, until just last month, the New York Court of Appeals was not presented with the occasion to decide the measure of a seller’s damages for a buyer’s breach of contract to purchase real property. Should the damages be based on the difference between the contract price and the market value of the property at the time of breach? Or, should the damages be based upon the difference between the contract price and the lower price obtained by the seller in a later resale of the property?
Relying heavily on Williston, the Court held that the measure of damages is “the difference, if any, between the contract price and the fair market value of the property at the time of the breach.” The Court stated that the resale price is not irrelevant to the determination of damages because,
in a particular case, it may be very strong evidence of fair market value at the time of breach. This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable.
The non-breaching sellers are entitled to the benefit of their bargain, and that benefit should not be denied by the application of a rule that fails to take that basic tenet into account. The cases cited by the majority in support of the "time-of-the-breach" rule appear to apply the rule by rote. . ., detached from the reality of realty by failing to consider the legal consequence of an axiom that is harmful to the non-breaching party.
The majority ultimately supports its adoption of the "time-of-the-breach" rule – which is common in contract law and in the Uniform Commercial Code where the parties are dealing in common activities or fungible goods – by relying primarily on a case involving a school district's cause of action seeking the cost of replacing or repairing defective window panels that had been installed in its building (see Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256 ). There, the Court, applying general, black letter law, stated that "damages for breach of contract are ordinarily ascertained as of the date of the breach" (id. at 261 [citations omitted]).
But real property, unlike window panels, is not fungible. While there are usually extensive and active markets for fungible goods, thereby making it relatively less difficult for the seller to mitigate or cover in the event of a breach, the sale of real estate is clearly different because each parcel is unique. . . As a result, the pool of buyers is plainly smaller for real estate than goods, and when a buyer breaches a real estate purchase agreement, the seller must then commence the sale process anew, which may require a reassessment of the list price and more showings of the property to new buyers, who may or may not find the property's location, amenities or architectural style desirable. This may take a substantial amount of time and effort on the seller's part, and the seller's efforts may not readily succeed, because once the house has been on the market for a significant period of time, the market may have declined or prospective purchasers may be wary of the amount of time the house has been on the market, leading them to conclude that the property is tainted in some fashion. Meanwhile, under our holding today, the breaching buyer will walk away indifferent to the hardship caused to the seller by his conduct.
* * *
There is no dispute that the general rule is that damages are measured by the fair market value at the time of the breach; the issue here is whether that measure, in cases where the property is later sold with reasonable diligence and in good faith, is adequate or even realistic. In such a circumstance, why should the non-breaching seller suffer the consequences of the buyer's breach? If market conditions decline, shouldn't the loss be laid squarely at the feet of the breaching buyer, particularly where the seller is able to make a colorable claim at trial in that regard?
The majority also holds that the trial court in this case will need to consider, among other things, whether the sellers "made sufficient efforts to mitigate" . . ., but mitigation is irrelevant under the majority's rule since the only calculation that matters is the difference between the fair market value at the time of the breach and the contract price.
Here's a link to a webcast of the oral argument.
White v. Farrell, No. 43 (N.Y. Ct. of Appeals Mar. 21, 2013).
[Meredith R. Miller]
Monday, March 11, 2013
My co-blogger, Meredith Miller has already commented on the ways in which Martha Stewart is the modern Lady Duff. It really is extraordinary. Martha Stewart is, of course, far more diverse and perhaps more ambitious in terms of the range of products that her company produces, but Lady Duff was quite the force in her day. Remember that Mr. Wood sued her because her agreement to endorse merchandise sold in Sears Roebuck stores allegedly violated their agreement that he was to be her exclusive marketing agent.
As reported in the New York Times, Martha Stewart was in court last week testifying in a showdown between Macy's and J.C. Penney over which company gets to carry Martha Stewart products in its stores. Alas, the facts in this case are much more complicated than the straightforward Wood v. Lady Duff-Gordon. However, the kernel of the dispute is very much reminiscent of the older case.
Martha Stewart's company, now called Martha Stewart Living Omnimedia (MSLO), entered into an agreement with Kmart in 1997 permitting Kmart to sell the company's products in its stores. Ten years later, MSLO entered into a similar agreement with Macy's, and when the agreement with Kmart expired in 2009, Macy's became "the only retailer to sell [MSLO] products in categories like home décor, bedding and bath," according to the Times. In 2011, J.C. Penney started attempting to woo Ms. Stewart into a deal to sell MSLO products in its stores as a mechanism for bolstering its shaky financial performance. James B. Stewart's column in last week's New York Times indicates that, since its new CEO has come on board, J.C. Penney has reported a $4.28 billion loss in sales and laid off 2200 workers, while its share price has dropped 60%.
Upon learning that Ms. Stewart was in bedding with J.C. Penney, Macy's was not well-pleased. In her testimony, Ms. Stewart did not seem to see the problem. When asked if a consumer was likely to buy the same product, say a knife, at two different stores, Ms. Stewart gamely answered that the consumer might have two houses and need one knife for each kitchen. This might explain why she no longer sells her goods at Kmart. What's the point of selling to a demographic that includes renters? She might have added, "I like to keep an extra knife handy for back-stabbing," but her talents for self-mockery (in response to a question about how she spends her time, she responded "I did my time," to the delight of the courtroom audience), do not extend quite that far.
In today's New York Times, David Carr presents an apt anaology: the conflict is like a schoolyard fight between two boys over the most popular girl on the playground. And Carr succinctly explains why Martha Stewart is so popular. Ms. Stewart, he reminds us, "altered the way that people live by decoupling class and taste. . . . When you go into Target or Walmart and see a sage green towel that is soft to the touch, it may not carry her brand, but it reflects her hand. Her tasteful touch — in colors, in cooking, in bedding — is now ubiquitous. . . ." Here too, there are echoes of Lady Duff.
Ms. Stewart expressed surprise that a simple contract dispute would end up in court. It should be possible for the parties to come to an understanding of words written on a page. New York Supreme Court Justice Jeffrey K. Oing may agree, since he sent the case to mediation, but according to James Stewart, he might have arrived at that result through a reasoning process that Ms. Stewart would not endorse. According to James Stewart, the meaning of the contract is clear:
[T]he contract itself seems straightforward, with numerous clauses giving Macy’s exclusive rights to Martha Stewart products in various categories, including “soft home,” like sheets and towels, as well as housewares, home décor and cookware, and specifically limits her rights to distribute her products through any other “department store.”
He adds that there is no question that J.C. Penney is a department store. Justice Oing appeared to agree, since he repeatedly said that the contract is clear, and he granted an earlier injunction. J.C. Penney may have hoped to get around the exclusive contract by setting up a MSLO boutique within its own stores, but James Stewart gives a number of reasons, both legal and factual, and citing to the authoritative Charles Fried on the law, for why that argument is unlikely to fly.
What might fly would be a giant Martha Stewart balloon at the next Macy's Thanksgiving Day Parade. According to James Stewart, Ms. Stewart still asks for and receives free tickets for herself and her grandchildren to that event. Last year, James Stewart reports, she complained that she did not get to sit with the other celebrities who are seated with Macy's CEO, Terry Lundgren. Time for Macy's to show Martha Stewart the love. After all, Macy's does need her products in its stores.
In In re: Wholesale Grocery Products Antitrust Litigation, five retail grocers sought to bring anti-trust class action suits against two wholesale grocers. Each retail grocer did business with and had an arbitration agreement with only one of the two wholesalers.
According to the Eighth Circuit's opinion, "[i]n an effort to avoid arbitration, each Retailer brought claims only against the Wholesaler with whom they did not have a supply and arbitration agreement." At the District Court level, the wholesalers argued that the doctrine of equitable estoppel permitted the non-signatory wholesalers to invoke the arbitration agreements and moved to have the retailers' claims dismissed and arbitration compelled. The District Court granted the wholesalers' motion.
On appeal, the Eighth Circuit reversed holding that parties cannot invoke the doctrine of equitable estoppel in order to enforce arbitration agreements to which they are not signatories. The Court noted that
[E]quitable estoppel applies when a complaint involves "allegations of prearranged, collusive behavior demonstrating that the claims are intimately founded in and intertwined with the agreement at issue.” In contrast, merely alleging that a non-signatory conspired with a signatory is insufficient to invoke equitable estoppel, absent some “intimate . . . and intertwined” relationship between the claims and the agreement containing the arbitration clause. [citations omitted]
Here, the Eighth Circuit found that the retailers' claims were not intertwined with the agreement containing the arbitration clause.
The Eighth Circuit remanded the case to address the wholesalers' claim, left unresolved by the District Court, that some of the arbitration agreements are enforceable by non-signatories as successors-in-interest. It did not address the retailers' arguments that the arbitration agreements are unenforceable as against public policy, as that argument will only be relevant should the District Court resolve the successor-in-interest argument in the wholesalers' favor.
Judge Benton dissented.
Tuesday, March 5, 2013
After a surrogate refused to abort a fetus with abnormalities, a tangled legal battle ensued. The surrogacy contract provided that the surrogate would have an abortion "in case of severe fetus abnormality" but the surrogate refused the biological parents' pleas (and offer of $10,000) to have an abortion. Here's some of the story from CNN.com:
On February 22, 2012, six days after the fateful ultrasound, Kelley received a letter. The parents had hired a lawyer.
"You are obligated to terminate this pregnancy immediately," wrote Douglas Fishman, an attorney in West Hartford, Connecticut. "You have squandered precious time."
On March 5, Kelley would be 24 weeks pregnant, and after that, she couldn't legally abort the pregnancy, he said.
"TIME IS OF THE ESSENCE," he wrote.
Fishman reminded Kelley that she'd signed a contract, agreeing to "abortion in case of severe fetus abnormality." The contract did not define what constituted such an abnormality.
Kelley was in breach of contract, he wrote, and if she did not abort, the parents would sue her to get back the fees they'd already paid her -- around $8,000 -- plus all of the medical expenses and legal fees.
Fishman did not return phone calls and e-mails from CNN.
Kelley decided it was time to get her own attorney.
Michael DePrimo, an attorney in Hamden, Connecticut, took the case for free. He explained that no matter what the contract said, she couldn't be forced to have an abortion.
DePrimo sent an e-mail to Fishman, the parents' lawyer, stating that Kelley was not going to have an abortion.
"Ms. Kelley was more than willing to abort this fetus if the dollars were right," Fishman shot back.
"The not-so-subtle insinuation that Ms. Kelley attempted to extort money from your clients is unfounded and reprehensible," DePrimo responded. "If you wish to propose a solution to this unspeakable tragedy, I will listen and apprize (sic)my client accordingly."
"However, as I mentioned in my previous correspondence, abortion is off the table and will not be considered under any circumstance," he said.
The entire story is here.
[Meredith R. Miller]
Monday, March 4, 2013
This case is part of a very unfortunate trend in this Court's docket. Generally speaking, the fact pattern tends to be as follows: A person goes into a store and contemplates making a purchase for an amount of money that is beyond his or her means. The store offers to set him or her up with financing and induces the purchaser to enter into the deal. Any attempt to back out of the deal either before the goods are delivered or immediately thereafter is rebuffed by the store as the store now claims that all sales are final. The financing company pays the store and, when inevitably the poor quality, shoddily constructed furniture, appliances, or whatnot, begin to break, the buyer calls the store — unhelpful since they were already paid — and the financing company which argues that it is merely a lender and has no obligations as to the merchandise. These conversations, unfortunately, seem to happen long before the credit payments are complete and the purchaser often defaults. The financing company sues the buyer and the Court is faced with a quandary. On one hand, the financing company did pay the store for the goods and the buyer got some use of the same. On the other hand, the purchaser is getting charged interest at a high rate for goods that were never worth the purchase price and, often, has no recourse against the store which, even if it is still in business, rarely is impleaded in the case.
Capitol Discount does business with furniture stores in the NYC metro area, financing the customers’ purchases. Anna Rivera went to Universal Furniture to purchase a couch and the financing was from Capital Discount. Capital Discount sued Rivera for $3292.01 plus interest. Rivera answered pro se and the court dismissed the complaint, holding that no contract was formed and, in any event, is was unconscionable.
The uncontradicted story (record citations omitted):
In August of 2007, Anna Rivera, then working for New York City Housing, went to Universal Furniture looking to purchase furniture for her living room. According to her version of events, she expressed potential interest in certain couches and was told that they would do a credit check and, if approved, they would call her. Under the impression that she was applying for a credit check, she signed a document entitled "Security Agreement — Retail Installment Contract". At that point the various blanks on the form — the store's information, her information, the articles purchased, the prices, and payment terms — were not yet filled in and she did not read the document before signing it. Plaintiff's Vice President (and part-owner), Adam Greenberg, suggested that the rest was filled out by the store since Plaintiff received a completed contract from the store. That is a logical supposition, but speculation nonetheless in the absence of any representative from the store. Contemporaneously, Defendant also signed a Credit Application, according to her, filling out only the section seeking her references. The top portion of that document clearly was filled out in a different handwriting, Plaintiff's counsel admitting that portion could easily have been filled out by the store.
Thereafter, Defendant got a call that the furniture was going to be delivered. Even following delivery, no one told Defendant how much the furniture cost nor the payment terms. It was one week afterward that she received a filled-in copy of Plaintiff's Exhibit 1 in the mail reflecting a base cost of $3500, $3300 of which were financed at 24.9 percent, and a total outstanding balance of $4463.10 to be paid in 30 monthly installments of $148.77. Once she saw the amount that they intended to charge her, Defendant called the store and told them to take back the furniture since, now that they provided a price, she thought that the furniture was too expensive. The store refused to comply with her request telling her that all sales are final. Having made only one payment to Plaintiff and a $200 down payment to the store, Defendant defaulted.
The court held that there was no contract:
In this case, Defendant's uncontradicted testimony makes it clear that, when she was in the store, there was no offer to sell the furniture or at a minimum no price was given, she did not accept an offer to sell the furniture, she did not assent to the terms of the contract, and she did not intend to be bound. It is undisputed that she received consideration — the furniture. Nonetheless, no contract was formed in the absence of most of the elements for forming a contract. By accepting the furniture, Defendant still did not enter into a contract to pay. Material terms, most notably the price, were still not agreed upon and, when she learned what they were thereafter, Defendant called the store and expressed her unwillingness to enter into the agreement.
Even so, the court also held that it was both procedurally and substantively unconscionable:
With respect to the first prong, examples of procedural unconscionability include "high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties" (Emigrant Mortg. Co., Inc. v. Fitzpatrick, 95 A.D.3d 1169, 1170 [2d Dept 2012][citations omitted]). Crediting Defendant's testimony in the absence of a witness from the store to rebut her account, such elements appear to be present here. Steps were taken by the store to force her into the deal — she left the store without any intention of getting the furniture, they called her and delivered the furniture without her agreeing to acquire it, they failed to give her a price repeatedly until a week after delivery, and then they refused to take back the furniture when she promptly complained. The store and financing company certainly had greater bargaining power, understanding, and acumen than someone of limited means who could not easily get credit elsewhere and who is a stranger to this sort of transaction. Further, the agreement itself is difficult to read and understand. The front contains various provisions in different areas of the paper and in different size fonts. The terms on the rear are printed in light ink and are virtually unreadable. Thus, the procedural unconscionability prong is certainly met here.
The substantive unconscionability requirement, that is unconscionable terms within the contract, is also met. "Examples of unreasonably favorable contractual provisions are virtually limitless but include inflated prices, unfair termination clauses, unfair limitations on consequential damages and improper disclaimers of warranty" (Emigrant Mortg. Co., 95 A.D.3 at 1170 [citations omitted]). As Defendant herself noted, to pay $3500 for a couch and loveseat, especially for furniture of a quality that lasted barely two years, is ridiculous. Further, there is a clause limiting liability on behalf of the seller to the amount paid by the buyer. This too is unreasonably favorable to one party. Thus, the substantive prong is also met and the alleged agreement is unconscionable.
Capitol Discount Corp v. Rivera, CV-6114-12, NYLJ 1202590031804, at *1 (Civ., KI, Decided February 25, 2013).
[Meredith R. Miller]
Thursday, February 28, 2013
I recently reviewed a new decision out of West Virginia involving the implied warranty of merchantability ("IWM"), Teamsters v. Bristol Myers Squibb. Many Contracts Profs teach IWM as part of their UCC coverage but some do not. For those unfamiliar...any sale of good by a merchant comes with the IWM assuming that the state has adopted its own version of UCC 2-314. Under West Virginia law (and under the UCC), goods are "merchantable" if they "are fit for the ordinary purposes for which such goods are used." Although IWM cases are common, this case is particularly interesting (at least to me) because it involved the following issue: What is the "ordinary" purpose of a supposedly "extraordinary" product?
In Teamsters, the product was Plavix, a prescription anti-coagulant. According to the FDA, Plavix's blood-thinning properties could help treat "patients who experienced a recent heart attack [or] stroke." The drug reportedly was marketed as a superior alternative to Aspirin, a much cheaper, over-the-counter anti-coagulant taken by similar patient groups. Plaintiffs alleged that Plavix's "ordinary and intended pharmacological purpose" was "being a superior alternative to asprin for certain indicated usages." Because Plavix allegedly worked no better than Aspirin, Plaintiffs alleged breach of IWM. Defendants countered that the "ordinary purpose" of Plavix was "to act as an anticoagulant" and nothing more.
The West Virginia court agreed with Defendants. The court gave the following fact-based reasons:
"The FDA approved Plavix for its blood-thinning properties in treating patients who experienced a recent heart attack, stroke, PAD, or ACS. There is no indication that the FDA approval was related to Plavix's efficacy compared to aspirin and other alternatives. Also, this Court has reviewed the Plavix labeling information, and has found nothing on that label suggesting that Plavix's ordinary purpose was to act as a superior alternative to aspirin or Aggrenox."
These reasons were supported by citations to Williston on Contracts and other sources indicating that IWM "requires only that the goods be fit for their ordinary purpose, not that they be...outstanding or superior....or function as well as the buyer would like." Thus, because "Plaintiffs [did] not allege that Plavix was not fit for its ordinary purpose of being an anticoagulant," the IWM was not breached.
When I read the case, I wasn't entirely convinced by the cited sources because they dealt with claims involving products marketed as ordinary (as far as I could tell). I also couldn't help but think back to the (in)famous claim of Papa John's regarding its pizza--"Better Ingredients, Better Pizza--Papa John's." I recalled that being an express warranty case but it turns out that it was a Lanham Act case brought by Pizza Hut. I suppose that if a product is marketed as extraordinary, the warranty claims will be based on those assertions (whether under express warranty, false advertising, etc.) and not on IWM. So, the "ordinary" purpose of an "extraordinary" product becomes irrelevant. Regardless, I'm still a bit puzzled by the question.
[Heidi R. Anderson, h/t to student, Shawn Matter]