Wednesday, February 5, 2014
This is the fourth in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.
In teaching contracts, we often feel a bit guilty about presenting the world of contracts as if contracts involved two people meeting, dickering over terms and then knowingly consenting to an agreement. Most contracts don't happen that way nowadays. Most contracts that consumers enter into are standard form contracts with terms to which they agree without knowing what they are. And contracts among business entities tend to be relational contracts in which it is difficult to extract from the parties' complex interactions the moment when an offer was made and acceptance occurred.
So it's nice to have a straightforward case involving two homeowners dissatisfied with the quality of work performed by a man hired to lay tile in their home. Interesting contractual issues arise in such cases as well.
In 2008, Ramon and Stacey Halum entered into a written contract (how quaint!) with Michael Thalheimer for Thalheimer to remove carpeting and tiles from their home and to install new tiles. When Thalheimer completed the work, the Halums paid him in full and also gave him two $100 gift cards, which he regarded as a bonus. But the parties also agreed that Thalheimer would return to fix six unsatisfactory tiles.
Thalheimer never came, and the Halums hired someone else to do the work. They then sued Thalheimer for breach of contract, negligence and breach of the implied warranty of habitability. After a bench trial, they won a judgment of over $14,000 against Thalheimer, covering labor and materials paid to the man who re-did their floors.
On appeal in Thalheimer v. Halum, Thalheimer invoked the economic loss doctrine, seeking to limit recovery to damages for breach of contract where the Halums' loss was purely economic in nature. In response to this, the Halums noted that their son was injured by the improperly installed tiles. The trial court found Thalheimer liable both for breach of contract and for negligence in connection with the Halums' son's injury. The Court of Appeals found that the economic loss doctrine does not preclude recovery in a case such as this one in which an independent tort has been alleged. The Court of Appeals construed Thalheimer's remaining objections as a claim that the son was not really injured, but the Court of Appeals refused to be drawn into a factual dispute already resolved at trial.
The warranty issue is a bit more interesting. The parties' agreement included the following warranty:
“All workmanship guaranteed for two (2) years from date of completion.”
On my reading of the case, it seems that Thalheimer argued that he should have beeen permitted to repair the tiles himself rather than having to pay for the full replacement costs. But the Court of Appeals agreed with the trial court that by being dilatory in responding to the Halums' requests that he repair the faulty tile, Thalheimer had voided the warranty, freeing the Halums to hire another installer. There was a potentially relevant ambiguity in the warranty, which might have guaranteed only quality workmanship and not quality tile, but the Court of Appeals found that the trial court did not err in construing the ambiguity against Thalheimer, the drafter. Contra proferentem lives!
Monday, February 3, 2014
We learn more about public policy limits on enforcement of arbitration clauses in a January 2014 ruling of the SDNY in National Credit Union Admin. Bd. v. Goldman, Sachs & Co. The case is a $40 million suit filed in September 2013 by the National Credit Union Adminsitration as Liquidating Agent of failed credit unions Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union. A spinoff from the capital markets collapse of 2008, the complaint alleges that Goldman, Sachs – through GS Mortgage Securities Corp. – misrepresented the quality of securities sold in 2006 and 2007 to the two credit unions, in violation of sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), and the Texas Securities Act, Tex.Rev.Civ. Stat. Ann. art. 581, § 33 (2013).
Goldman’s immediate response was to move for an order to compel arbitration, based on arbitration provisions in a 1992 cash account contract between Goldman and Southwest that appeared to govern “any controversy” between the parties. Citing 12 U.S.C. § 1787(c), the NCUA had repudiated the Cash Account Agreement between Southwest and Goldman Sachs. The court found that the NCUA had met the requirements of the statutory provision, and therefore the agency had broad authority to repudiate contracts that might burden its administration of a troubled credit union. Accordingly, the court denied Goldman’s motion.
While this ruling is certainly consistent with growing policy skepticism about arbitration clauses discussed in an earlier Global K post, we need to keep in mind what the ruling does and does not represent. First, it is by no means the final word in this litigation. As the court noted in passing, Goldman had expressly reserved the right to file a motion to dismiss in the event that the court rejected the motion to compel arbitration. There is no reason to doubt that such a motion will be forthcoming.
Second, we should not over-read the ruling as a repudiation of arbitration clauses. In the course of its discussion, the court was careful to note the strong policy of the Federal Arbitration Act (FAA) “to counteract ‘widespread judicial hostility to arbitration agreements’ and [to] reflect ‘a liberal federal policy favoring arbitration,’ ” quoting AT&T Mobility LLC v. Concepcion.
Nevertheless, the ruling does accord considerable credibility to the position that, despite the strong and longstanding FAA policy in favor of arbitration, a broad arbitration clause frustrates supervisory efforts to resolve institutional failures and should not be enforced in a financial institutions receivership. This observation leads to the third point to be noted – that in a regulated industry, contract law expectations skew in favor of overarching supervisory policy. Like the corresponding policy that applies to failed banks in FDIC receivership under 12 U.S.C. § 1821(d) and § 1823(e), § 1787(c) allows the NCUA as conservator or liquidating agent to “disaffirm or repudiate” any contract or lease of which the failed credit union is a party, if the conservator or liquidating agent determines in its discretion that the performance would be “burdensome” to it, and the disaffirmance or repudiation would “promote the orderly administration of the credit union's affairs.” Significantly, the Second Circuit has long taken the same position as National Credit Union Administration in cases dealing with bank receiverships. See, e.g., Resolution Trust Corp. (“RTC”) v. Diamond, 45 F.3d 665, 670 (2d Cir.1995); Westport Bank & Trust Co. v. Geraghty, 90 F.3d 661, 668 (2d Cir.1996). While the credit union statute allows for claims for damages for the contract repudiation, such claims are “limited to actual direct compensatory damages,” and expressly exclude claims for “lost profits or opportunity.” We must await further developments in this litigation to assess how far contracts principles skew in favor of supervisory intervention.
This is the third in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.
Shannon Garrett was an employee of a sub-contractor working on the construction of Lucas Oil Stadium in Indianapolis (pictured). She was injured on the job and sought to recover from the construction manager on the project, Hunt Construction Group (Hunt). She was not employed by the construction manager but claimed that it had a legal duty of care for jobsite safety and was vicariously liable for the negligence of her employer, Baker Concrete Construction, Inc. (Baker). Her claims against Baker were governed by Indiana's Worker's Compensation Act, but the Act does not prevent her from suing any other entity in tort.
While the trial court ruled in Garrett's favor on the issue of various liability, the Court of Appeals reversed on that issue. The Court of Appeals majority found that Hunt did owe Garrett a contractual duty for workplace safety. In Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court summarily affirmed the Court of Appeals' ruling on vicarious liability, but it also found that Hunt owed Garrett no contractual duty and had assumed none for which it could be liable to her.
Under Indiana case law, a construction manager can assume a duty to a sub-contractor's employee in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager “assumes such a duty, either gratuitously or voluntarily." The Indiana Supreme Court concluded that, while the contracts at issue did impose some duties upon Hunt for jobsite safety, those duties ran to the Stadium Authority and not to "Contractors, the Architect, or other parties performing Work or services with respect to the Project." On the contrary, the contracts provided that Baker was “the controlling employer responsible for [its own] safety programs and precautions.”
The tougher question was whether Hunt had gratuitously or voluntarily assumed a duty for jobsite safety. As to that, the Court held that, in order for a construction manager to assume a legal duty of care for jobsite safety, it "must undertake specific supervisory responsibilities beyond those set forth in the original construction documents." After reviewing the facts of the case, the Court found that Hunt had not done so "for any part of the project on which Garrett was working."
Justice (now Chief Justice) Dickson dissented. He found that there remained material facts in dispute and would not have decided the case on a motion for summary judgment.
Wednesday, January 29, 2014
This is the second in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana. This post will discuss State of Indiana Military Department v. Continental Electric Company, which was decided by the Indiana Court of Appeals in 2012.
In 2006, Continental Electric Company (Continental) submitted a bid as a subocontractor on the construction of an avaiation facility at the Gary/Chicago Internaional Airport (see the image at left). Continental's submitted a bid of about $1.8 million to do the electrical work on the project, noting in its bid that $335,000 should be added to its bid under "Alternative 2," which was designated "Diesel Generator." The State of Indiana Military (the State) which had issued the bid hosted a pre-bid meeting at which it sought to clarify that costs relating to Alternative 2 should be included in the base bid, but Continental did not do so, relying on its understanding of the written bid documents. The State provided a written version of its clarification of Alernative 2, but Continental claims that the written version did not reflect what was said at the pre-bid meeting.
The Larson-Danielson Construction Company (Larson) was awarded the project and chose Continental to do its electrical work. Continental began work in October 2006. It dealt only with Larson and there was no contractual relationship between it and the State. Continental billed Larson for an extra $207,000 worth of work associated with Alternative 2.
Continental complained throughout the process that it was entitled to payment for the work done under Alternative 2, but both Larson and the State believed that no extra payment was required, since both interpreted the bid documents as requiring that work associated with Alternative 2 be part of the base bid. Getting no satisfaction from Larson, Continental brought suit against the State, claiming $207,000 in damages for breach of contract or quantum meruit. The trial court found for Continental and the State appealed.
The Court of Appeals reversed. It found that Continental could not bring a breach contract claim against the State because it was not in a contractual relationship with the State. Nor had the State agreed to hear appeals arising out of controversies between Larson and its subcontrators.
The Court then moved on to Continental's unjust enrichment claim. Under Indiana law, four criteria must be met to establish such a claim:
1)Whether the owner impliedly requested the subcontractor to do the work; 2) whether the owner reasonably expected to pay the subcontractor, or the subcontractor reasonably expected to be paid by the owner; 3) whether there was an actual wrong perpetrated by the owner; and 4) whether the owner’s conduct was so active and instrumental that the owner “stepped into the shoes” of the contractor.
The Court concluded that because Larson was paid in full, the trial court erred in finding that the State had retained a benefit for which it did not pay. Basically, the Court agreed with Larson and the State the the bid documents and the clarification established that the costs associated with Alternative 2 were to be included in the base bid. The Court concluded as follows:
In sum, we conclude that Continental Electric had no right to recover against Indiana Military. Continental Electric failed to establish that a measurable benefit was conferred on Indiana Military and that its retention of a benefit without payment would be unjust. Indeed, Indiana Military did not receive a measurable benefit from Continental Electric that it had not already paid for.
All concerned, including Continental Electric, knew long before Continental Electric ever entered into a subcontract with Larson that the wiring in question was part of the base contract with Larson and that Indiana Military would expect Larson to install the wiring between the facility building and the concrete generator pad. Larson 28completed the work, and was fully paid for that work. In short, Indiana Military has not unjustly retained a benefit without payment.
The Court of Appeals set aside the trial court's ruling on quantum meruit and reversed its judgment.
Monday, January 27, 2014
Offshore friends and colleagues are often confused or frustrated by the U.S. approach to resolving financial exploitation or manipulation of consumers. Why is it assumed that private remedies are the appropriate response to such pervasive problems, they ask. How is it that U.S. consumer protection law is so often merely a matter of perfunctory disclosures that noone reads, they complain. Certainly, much of the run-up to the capital markets collapse of 2008 involved rather blatant abuse of consumers, but when the Great Reccession emerged, only the high end of the economy received massive government support, while affected mortgagors were left largely to whatever remedies or defenses they could fashion from applicable transactional law. One might legitimately wonder at these official responses.
A recent decision, In re Late Fee and Over–Limit Fee Litigation, issued by the Ninth Circuit on January 21, 2014, offers an interesting variation on this problem. The case also highlights the limits of ordinary principles of contract law in addressing contemporary issues of consumer protection.
A group of credit cardholders, who had allegedly paid excessive late fees and over-limit fees to issuing banks, brought a class action against the issuers, claiming on a flurry of legal grounds that the fees should not be enforceable. Some of these grounds were regulatory. Others sought to align the judicial treatment of torts remedies with that of contracts remedies. Among other things, the plaintiffs argued that the fees violated usury limits under the National Bank Act, 12 U.S.C. §§ 85–86, or were otherwise excessive under the corresponding provisions of the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA”), 12 U.S.C. § 1831d(a), which applied to state-chartered, FDIC-insured banks. Even if seemingly in compliance with these regulatory statutes, plaintiffs asserted, the fees were so excessive as to be unconstitutionally punitive. They also made a try at arguing that the issuing banks had conspired to fix prices and maintain a price floor for late fees in violation of the Sherman Act, 15 U.S.C. § 1 et seq. Furthermore, the plaintiffs alleged, the fees violated the California Unfair Competition Law, Cal. Bus. & Prof.Code § 17200 et seq.
The district court found it hard to accept these challenges given the routine practices of the issuers. In accordance with federal law, the fees had been disclosed in the contracts between the issuers and the cardholders, and were fairly uniform and typically between $15 and $39 – amounts that the plaintiffs argued still vastly exceeded the harm the issuers actually suffered when their customers charged beyond their credit limits or made late payments. The Northern District of California dismissed the action for failure to state a claim.
On appeal, the cardholders argued that the fees should be treated like the punitive damages that were subjected to substantive due process limits in the Supreme Court’s 1996 decision in BMW of North America, Inc. v. Gore and its 2003 decision in State Farm Mut. Auto. Ins. Co. v. Campbell. Hence, even if permitted by federal regulatory law, the fees should be refused enforcement on constitutional grounds. Nevertheless, the Ninth Circuit affirmed, holding that substantive due process principles – developed in the context of jury-awarded punitive damages in tort cases – did not apply to liquidated damages clauses in contracts cases. As the court explained, “[t]he jurisprudence developed to limit punitive damages in the tort context does not apply to contractual penalties, such as the credit card fees at issue in this case.” It also held that the banks could not be liable for excessive charges under the state unfair competition law, since the late fees and over-limit fees were charged by banks in conformity with federal law. As Judge Nelson observed in her opinion for the court, “[b]ecause we conclude that the issuers' conduct did not violate the National Bank Act or the DIDMCA, there is no derivative liability under the Unfair Competition Law.”
Judge Nelson recognized that the case turned on the relative similarities and differences between liquidated damages and punitive damages. It is a commonplace of contracts remedies that “liquidated damages” are enforceable if the damages are likely to be difficult to determine at the time of agreement and the liquidated sum represents a good faith effort by the parties to quantify. See, e.g., UCC § 2–718(1). However, if the liquidated damages provision were “unreasonably large,” it would be treated as an unenforceable penalty.
Judge Nelson also acknowledged that “[l]ike the common-law rule against contractual penalty clauses, punitive damages have an ancient provenance.” The key to the case was the plaintffs’ attempt to meld these two historical traditions to invalidate otherwise enforceable contractual fees, on a constitutional basis. This the court refused to do. “[C]onsidering that the penalty clauses at issue originate from the parties' private – albeit adhesive – contracts, they are distinct from the jury-determined punitive damages awards,” Judge Nelson concluded. “Adhesive” though the contracts may be, the court was not prepared to invalidate fees ostensibly permitted by federal law.
Ironically, the problem seems to be that contracts law had already long assimilated excessiveness as a ground for unenforceability of a penalty clause without the invocation of due process notions. Hence, if a regulatory statute interevened – as the National Bank Act and DIDAMCA provisions arguably had – to permit a standardized fee that might otherwise be argued to be excessive, the question was whether a litigant could resuscitate the excessiveness argument with a jolt of due process. The basic reason for not exploring this possibility is that this had only been done in tort remedies theory, not contracts.
I am not sure that that is a very compelling reason. Apparently, neither did the Ninth Circuit. Judge Reinhardt concurred in the judgment “reluctantly.” In his view, the Supreme Court would be “well advised” to apply the prinicples of BMW of North America, Inc. and State Farm Mut. Auto. Ins. Co. “to prevent disproportionate penalties from being imposed on consumers when they breach contracts of adhesion.” He reluctantly admitted that the opinion of the court was correct in recognizing that due process constraints in the Constitution had not yet been interpreted so widely, but he gave a stirring and persuasive analysis of why it should be.
Judge Reinhardt’s separate opinion deserves the serious attention of contracts scholars and practitioners, as a possible map of future developments. Apparently, Judge Nelson, the author of the court’s opinion, agrees with me, because – in an extraordinary gesture – Judge Nelson also wrote separately to join Judge Reinhardt's concurrence, “although [she] agree[s] that the district court reached the correct result under currently applicable law and should be affirmed.” Are they suggesting the need for further judicial review?
Last week, we noted Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana. This week, we will be summarizing some of the important cases discussed in that article.
East Porter County School Corporation v. Gough, Inc. is a pretty typical bid case. Gough, Inc. (Gough) submitted a bid of around $3 million to the East Porter County School Coporation (the County) on some additions, presumably to school buildings. Just after the deadline for the submission of bids, but likely before the bids were unsealed, Gough tried to withdraw its bid, claiming that its bid was the result of an inadvertent clerical error. One month later, the County awarded the contract to Gough. Gough's president notified the County that the bid was incorrect and stated that Gough would not accept the contract. Gough returned the contract to the County unsigned.
When the County tried to enforce the contract, Gough brought suit, seeking a declaration that its bid be rescinded and its bid bond released. The County counterclaimed, alleging breach of contract by both Gough and its bid bonding agency, Travelers Casualty and Surety Company of America (Travelers). The trial court granted the Gough and Travelers summary judgment, citing a 1904 case that permitted excuse of a contractor's bid based on mistake.
The law in Indiana excuses bids based on mistakes in calculation or clerical errors but not based on errors in judgment. Gough's presidnet submitted an affidavit in which he stated that on the day that Gough submitted its bid, its total of the bids of its subcontractors and its own cost estimates came to just over $3.3 million. "For psychological reasons," Gough wanted to get the bid below $3.3 million, but they spoke of trying to get to 299 or 2998. They thus mistakenly wrote down a bid of $2.998 million, which they then arbitrarily cut down to $2,997,900, when they apparently intended $3,299,700. Gough then quickly realized that the error would result in a $200,000 loss on the project, so Gough attempted to pull the bid.
The Court of Appeals found that, as a result of the error, the minds of the parties never met and the County "would obtain an unconscionable advantage" as a result of Gough's mistake. Because Gough timely notified the County of the mistake, the County was not in any way harmed by its withdrawal of its bid. As a result, the Court ruled that the County had no right to enforce Gough's erroneous bid, nor did Traveler's have any obligation to pay its bid bond.
I have no problem with this result, but the "meeting of the minds" language strikes me as misplaced in this context. Many contracts professors dislike the phrase "meeting of the minds" because it suggests that subjective agreement on terms is what is required when the test for whether or not a contract formation is objective. Twenty bishops could attest to Gough's president's veracity and still he would be bound if a contract had actually been formed. But here no contract was formed because the bid was withdrawn before it was accepted. In this circumstance, courts should really only ask two questions. First, was the bid irrevocable? If so, Gough should bear the burden of its own mistake -- and the existence of the bond suggests that the parties have allocated the burden. If not, the second question is whether the bid was relied upon, and it was not. So really the case should turn on whether or not the bid was irrevocable and not on whether the parties "minds" met or on how the court categorizes Gough's mistake.
This is not to find fault with the Court in this case, which simply followed Indiana precedent. But the case nicely illustrates the difficulties in distinguishing between clerical or calculation errors and errors of judgment. Sure, Gough's principals made a clerical mistake reducing their bid by $330,000 when they meant to reduce it by only $30,000, but one could also argue that the decision to reduce the bid is a judgment, especially when one does so for "psychological reasons." Once they made the decision to reduce their bid, the fact that they committed a clerical error in carrying out that judgment is epiphenomenal.
Sunday, January 5, 2014
The recent discussion of the December 2013 decision by the Ninth Circuit in In re Wal-Mart Wage & calls to mind the contrast in attitudes between international and domestic practice. Mention “arbitration” among international practitioners and profs, and you are likely to get a bit of a swoon from most – arbitration, properly structured, rescues us from the risks and uncertainties of unfamiliar legal systems and provides a comfort level in terms of predictability of process if not outcome. Mention "arbitration" in domestic circles, particularly with respect to consumer protection issues, and you encounter a growing skepticism if not outright hostility about the imposition of arbitration as an exclusive contract remedy.
There are delicate ironies in these contrasting attitudes. Many would say that the contrast – to the extent it actually exists – simply reflects the difference between complex disputes at the “wholesale” level, between commercial actors with more or less equal bargaining power, and consumer disputes in which arbitration is imposed by the dominant party on the “retail” party. However, In re Wal-Mart itself undermines that neat dichotomy, since it involves parties with, presumably, more or less equal bargaining power. In any event, there is certainly nothing in principle or in text that suggests a wholesale-retail split in the approach to deciding arbitration challenges. (Consider, for example, the Supremes’ 2011 AT & T Mobility LLC v. Concepcion, upholding an arbitration provision in a class-action consumer suit, and the Ninth Circuit’s own 2003 en banc decision in Kyocera Corp. v. Prudential–Bache Trade Servs., Inc., upholding arbitration in what was ostensibly a “wholesale” transaction between commercial parties.) It is nevertheless clear that there is a growing conception – or preconception – that arbitration clauses may be hostile to, or at least incompatible with, consumer interests.
This conception does have textual support in the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1414(a) of the Act added a provision to the Truth in Lending Act, 15 U.S.C. § 1639c(e)(1), that prohibits the inclusion in any home mortgage or home equity loan of “terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.” However, as with so many of the provisions of the Dodd-Frank Act, § 1639c contained a special delayed effective date, namely, the date on which final regulations implementing the prohibition took effect, or a date 18 months after the transfer of authority to the new Consumer Financial Protection Bureau, whichever is earlier. Nevertheless, in the November 2013 case State ex rel. Ocwen Loan Servicing, LLC v. Webster, the Supreme Court of Appeal of West Virginia found that the delayed effective date “only applies to those portions of Title XIV that require administrative regulations to be implemented.” Accordingly, the effective date of this prohibition was the general effective date of the act, July 22, 2010. Good for us, not so good for the consumer plaintiffs suing the mortgage servicer, since their mortgage agreement containing an arbitration clause was entered into several years prior to the enactment of the Dodd-Frank Act. The West Virginia court refused to apply the Dodd-Frank Act retroactively, and proceeded to decide that it was compelled to enforce the arbitration clause in light of the mandate of the Federal Arbitration Act, which generally favors the application and enforcement of such clauses, despite the plaintiffs’ claims that the arbitration clause was procedurally and substantively unconscionable. Ocwen Loan Servicing is worth a careful read, particularly in light of its consideration of the interplay among emerging statutory policy with respect to consumer protection, general federal policy in favor of arbitration, and the contract doctrine of unconscionability.
Tuesday, December 31, 2013
This case is fodder for Nancy Kim's work on wrap contracts.
In 2008, Donovan Lee purchased an Internet background check and report from a company called Intelius. Lee confirmed this purchase when he clicked "yes" on Itelius's webpage, where its name was the only company name to appear. In fine print on that page, he was informed that by clicking yes and looking at the report he was seeking he was also agreeing to a seven-day free trial of a "Family Safety Report" for which he would be billed $19.95/month after the seven-day trial lapsed. Lee noticed the monthly charges, from a company called Adaptive Marketing, after the company had been charging his credit card $19.95 for about a year. Lee and other named plaintiffs brought a state-law class action against Intelius, which impleaded Adaptive Marketing as a third-party defendant.
Claiming that Lee had agreed to arbitrate any claims he would have against Adaptive Marketing when he clicked "agree" on Intelius's website, Adaptive Marketing moved to compel arbitration. The District Court denied that motion, and on December 1th, the Ninth Circuit affirmed in Lee v. Intelius, Inc.
The Court's description of the Intelius webpage's architecture is quite elaborate. It seems that Lee was lured into his trial membership with Adaptive Marketing when he took a two-question survey in return for $10 cash back (which he claims he never received) should he try "Family Safety Report." After taking the survey, it appears that Lee had the option of just seeing the background check that he was interested in or also getting the Family Safety Report on terms provided through another link. The "yes" button was large and orange. The "no" button was smaller and featured a smaller font. Lee testified that he did not read the text of the smaller button, as his eye was drawn to the large orange button. He also did not read Intelius's terms and conditions, which included an arbitration clause.
The District Court found that Lee had entered into a contract with Adaptive Marketing to purchase the Family Safety Report but had not entered into a arbitration agreement with that company. The Ninth Circuit, applying Washington state law, found that Lee had entered into no contract with Adaptive Marketing, and therefore had no arbitration agreement with the company.
The Ninth Circuit found no contract because it concluded that Intelius's webpage was "designed to deceive" Lee and others like him. While a careful consumer would have read the entire webpage, the District Court had noted, Lee's conduct was not careful but also not unreasonable:
A less careful, but not unreasonable, consumer could conclude that providing Intelius with his email address and clicking the big [orange] “YES” button would reveal the report he had been trying to get for an undisclosed number of screens. Because the consumer never selects an additional product or service and is not asked for his account information, he could reasonably believe, based on his past experiences with internet transactions, that there would be no unpleasant surprises on his credit/debit account.
On this basis, the Ninth Circuit expressed skepticism regarding whether Lee had made an objective manifestation of consent to a contract with Adaptive Marketing. But because that issue was uncertain, the Ninth Circuit ruled on other grounds. Washington law requires that the "essential elements" of a contract be set forth in writing. Identification of the parties to an agreement is one such essential element, and it was lacking in this instance, since Adaptive Marketing's name did not appear. Even a cautious consumer would have thought she was contracting with Intelius.
In addition, the Ninth Circuit agreed with the District Court that even if there were a contract between Lee and Adaptive Marketing, there was no agreement to arbitrate. As the District Court put it:
The Ninth Circuit agreed.
The Court noted as an aside that the federal government prohibited the so-called "data pass" method employed on Intelius's website in the 2010 Restore Online Shoppers' Confidence Act (ROSCA).
Monday, December 30, 2013
I have been thinking a lot about Peggy Radin's book Boilerplate and her arguments about how boilerplate contacts threaten a democratic degradation (discussed elsewhere on the blog by Brian Bix, with Peggy Radin responding here, and by David Horton) because they permit private parties, powerful companies, to negate statutory or common law rights. The Ninth Circuit has put its foot down and refused to permit a potential innovation in the direction of democratic degradation, but the odd thing about the case is that the arbitration agreement at issue here seems to have been among parties with fairly even bargaining power.
On December 17, 2013, the Ninth Circuit issued its opinion in In re Wal-Mart Wage & Hour Employment Practices Litigation, affirming the District Court's confirmation of an arbitration award and rejecting appellee's argument that the Court was without jurisdiction because the parties agreed to binding, non-appealable arbitration.
The dispute at issue arose in the aftermath of an $85 million settlement agreement between Wal-Mart and a class of employee-plaintiffs. As part of that settlement, the parties agreed to have all disputes as to fees decided by an arbitrator. The District Court awarded $28 million in attorneys' fees, but plaintiffs' counsel quarreled over the proper allocation of that fee award. That dispute was submitted to "binding, non-appealable arbitration."
The arbitrator divided the fee among three law firms, and one of them brought suit in District Court challenging the allocation. The District Court found no grounds to vacate the arbitrator's award, and the law firm that challenged the award appealed. The firm that got the lion's share of the fee award argued that there could be no appeal due to the "non-appealable" language in the arbitration agreement.
The Ninth Circuit found the language of the agreement ambiguous. "Non-appealable" could just preclude courts from reviewing the merits of the arbitrator's decision, or it could mean that no federal court could exercise jurisdiction in the case. The Ninth Circuit concluded that the second meaning would be unenforceable in any case, as inconsistent with the provision for judicial review of arbitration awards under Section 10 of the Federal Arbitration Act (FAA). Citing Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), in which the Supreme Court rejected an arbitration agreement that expanded the grounds for judicial review of an arbitration award, the Ninth Circuit reasoned that "[j]ust as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract." As if the Court had the concept of democratic degradation in mind, the opinion continues:
Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration. . . . If parties could contract around this section of the FAA, the balance Congress intended would be disrupted, and parties would be left without any safeguards against arbitral abuse.
In a separate memorandum disposition, the panel affirmed the District Court's confirmation of the aribral award.
Tuesday, December 24, 2013
Since I am getting ready to teach Business Associations for the first time in three years, it is nice to have a case that reviews basic agency principles:
On November 25, 2013, a panel of the Seventh Circuit issued a per curiam decision in NECA-IBEW Rockford Local Union 364 Health and Welfare Fund v. A & A Drug Co. and upheld a district court's grant of defendant's motion to compel arbitration. Plaintiff (the Fund) provides health benefits to a Rockford union of electrical workers (Local 364). In 2002, it negotiated an agreement (the Local Agreement) with Sav-Rx, a provider of prescription drug benefits. In 2003, Sav-Rx also negotiated a different agreement (the National Agreement) with the International Brotherhood of Electrical Workers, with which Local 364 is affiliated. The National Agreement offers locals reduced charges, but it, unlike the Local Agreement, contains an arbitration clause.
While the Fund's trustees never voted on the matter, the Fund accepted Sav-Rx services provided under the National Agreement between 2003 and 2011. The process by which this occurred is unclear. The Fund never actually signed the Local Agreement, but Sav-Rx began providing services under the agreement as of January 1, 2003. After the National Agreement was announced at at a meeting attended by the Chair of the Fund's Board of Trustees, the Chair requested that Sav-Rx reduce its rates to comport with those of the National Agreement. Sav-Rx did so effective April 1, 2003. Sav-Rx included Local 364 in its annual audits under the National Agreement, and the Fund's administrative manager communicated with Sav-Rx about these annual audits.
The Fund is now suing Sav-Rx for charges not authorized under either the Local or the National Agreements. Sav-Rx moved to compel arbitration pursuant to the National Agreement. The Fund claimed that it had never signed the National Agreement and should not be bound to its terms. The district court found that the Fund had knowingly accepted benefits under that Agreement and had thereby ratified it, thus acceeding to its arbitration clause. The Seventh Circuit affirmed.
The Seventh Circuit noted that the Fund is bound to the National Agreement if the Fund or an agent with actual, implied, or apparent authority, assented to it, or if the Fund ratified it. As the Fund's Trustees had never voted on the National Agreement, the Fund was not bound under actual authority. Nor did the Chair of the Board of Trustees possess implied authority to bind the Fund to the National Agreement, which did not relate to ordinary day-to-day affairs but was an "extraordinary," "once-in-a-decade transaction" that also caused the Fund to forego an important right -- access to the courts. Sav-Rx could not establish that the Chair of the Board of Trustees had apparent authority to bind the Fund to the National Agreement. The Board had never held out the Chair as having such authority and Sav-Rx in fact knew that only the Board itself could bind the Fund.
Nevertheless, the Fund is bound by the National Agreement because it ratified that agreement through its conduct. By imputation or direct knowledge, the Trustees knew of both the National and the Local Agreements and of their differences. They also knew that the Fund was receiving discounted prices. The Seventh Circuit concluded that "knowing that the Fund received the benefits of the National Agreement and never repudiating those benefits, the trustees ratified the National Agreement."
Monday, December 23, 2013
One of the unexpected benefits of global acquisitions and diversification of multinational enterprises is that the companies occasionally pop up in interesting contracts cases. Such is the situation in Hoffman v. Daimler Trucks North America, LLC, a case from the Western District of Virginia involving the purchase of an RV that was such a lemon only the mice could love it. Daimler Trucks, a wholly owned subsidiary of Daimler AG, got itself entangled in this case through Freightliner Trucks, its U.S. truck division, and earned itself a quick education in U.S. warranty law.
The case offers some interesting reflections on the interrelationship and interactions between state and federal law with respect to the creation and disclaimer of warranties in the consumer purchase context, as well as the role played by specialized statutes like vehicle lemon laws. Too often, the basic Contracts course barely has time to deal with UCC warranty law and lore, and so the compact treatment of these issues can be a useful hand-off for students interested in exploring some of the implications of warranty law and policy.
On the federal side, we have the Magnuson–Moss Warranty Act — affectionately known as the Federal Trade Commission Improvement Act of 1975, 15 U.S.C. § 2301 et seq. Magnuson-Moss establishes federal minimum standards for warranties if and when a written warranty is offered. If a seller does offer a written warranty to a consumer, seller may not disclaim or modify any implied warranties. 15 U.S.C. § 2308(a). Any written warranties must be made available to the consumer prior to the sale. 15 U.S.C. § 2302(b)(1)(A).
On the state side, of course, we have substantive warranty law represented by the UCC. The UCC will be relevant even when Magnuson-Moss is not (i.e., when an oral, but not a written warranty is offered to the consumer). In contrast with federal law, the UCC permits disclaimer of express and implied warranties, but imposes requirements when a seller attempts to disclaim. UCC § 2-316. Hence, the applicability of Magnuson-Moss could make a substantial difference in a case where disclaimer of warranty is an important issue.
The story so far . . .
In the fall of 2010, Donald Kent Hoffman of Fishersville, Virginia, bought a Tuscany recreational vehicle from RV dealer Camping World. The RV had been manufactured by Thor Motor Coach and included a chassis built by Daimler Trucks North America and various component parts supplied by Drew Industries. To Mr. Hoffman’s deep disappointment, there were very few things about his RV that weren’t problematic, and so Hoffman and the RV spent nine out of their first ten months together off the road and in the shop. Indeed, the situation was so dire that, during one of the repair episodes at Camping World, the RV developed a mouse infestation because it was left outside for an extended period of time.
The mice were apparently untroubled by the flaws in the RV. Among other things, the automatic leveler and indicator lights did not work, nor did the water and waste water indicator lights. The aisle lights in the coach did not work. The deadbolt in the cabin did not work, but then the door didn’t lock from the inside anyway. The door did manage to leak water into the cabin when it rained, however, and the sprayer on the kitchen sink leaked. There was no heat in the vehicle. The front seat did not properly swivel or recline. The map light did not work. The airbags deflated. The driver's side mirror would not stay in place. The control panel did not function properly, nor did the window shades. The steps were installed improperly. The batteries died quickly. In addition, various features that Hoffman said he had been promised were absent from the RV – there was no GPS as promised, and no satellite television.
Daimler, trading as Freightliner, entered the story during the course of Hoffman’s tortuous attempts to coordinate warranty coverage. Camping World told Hoffman that the problem with the air bags would have to be addressed by Freightliner, but Hoffman reported back that Freightliner said it was “ok as per truck stand[a]rds.” Meanwhile, the general twelve-month warranty on the RV was set to expire on or about October 29, 2011. Before this happened, Hoffman attempted to revoke his acceptance of the RV by dropping it off at Camping World and seeking a refund of the purchase price. (The RV apparently remains at Camping World pending the outcome of the litigation, although there is no indication in the court’s opinion where the mice are at this point.)
In April 2012, the long-suffering, travel-deprived Mr. Hoffman brought suit in state court against Camping World, Daimler Trucks, Drew, and Thor for breach of express and implied warranties under Magnuson-Moss and the Virginia Uniform Commercial Code (VUCC), and against Thor under Virginia’s Motor Vehicle Warranty Enforcement Act, popularly known as the Virginia Lemon Law, Va. Code Ann. § 59.1–207.11 et seq. Thor and Camping World, the only defendants served at that point, managed to have the action removed to federal district court, since neither apparently was a Virginia resident.
At this juncture, the scope of the Virginia Lemon Law became an issue. There is some authority that the Virginia Lemon Law does not apply to a completed motor home, but only to the “self-propelled motorized chassis,” Va. Code Ann. § 59.1–207.11. Since Daimler Trucks manufactured the chassis, Hoffman amended his complaint to name Daimler Trucks as the correct defendant on the Lemon Law claim. At that point, the defendants filed motions to dismiss.
The retailer’s disclaimers
The interaction of the three relevant bodies of law – Magnuson-Moss, UCC § 2-316, and the Lemon Law – is critical to the motions to dismiss. The express warranties that Hoffman relied on in his claims against Camping World were not written, hence not covered by Magnuson-Moss, and Camping World argued that it had validly disclaimed any express warranties via a merger clause in the written contract of sale, and that it had disclaimed any implied warranties in a conspicuous manner as required by VUCC § 2-316(2).
Boldly going where most Contracts students have not gone before, Judge James C. Turk found that a merger clause in the contract of sale, coupled with the parole evidence rule embodied in UCC § 2-202, overcame Hoffman’s express warranty claim. As to the implied warranty, however, in a clear and succinct discussion Judge Turk found that the relevant disclaimer clause was not conspicuous for purposes of disclaiming the implied warranties, and he denied Camping World’s motion to dismiss as to the implied warranty claims.
The manufacturer’s disclaimers
Thor’s argument was that its written warranty reduced the limitation period to “90 days after the expiration of the [designated] warranty coverage period,” or in other words three months after the one-year warranty. However, Thor’s warranty language was ambiguous; the same page also referred to a two-year warranty on the vehicle frame, which might make the limitation period in question 27 months instead of 15 months. Rejecting the approach taken in the now-classic RV warranty case, Merricks v. Monaco Coach Corp., and relying on the limitation rules of UCC § 2-725, Judge Turk decided that “Hoffman could not accept the limitation period by passive acceptance of the RV without objection to the pertinent warranty provision.”
As to the two claims against Daimler Trucks – one for breach of express and implied warranties and the other for violation of the Lemon Law – Daimler Trucks argued that Hoffman had simply failed to state a claim for breach of warranty and that the Lemon Law claim was untimely. On the latter argument, which is somewhat beyond our scope, the court allowed relation back to the original filing date of the complaint in determining that the Lemon Law claim against Daimler Trucks in the amended complaint was not time-barred.
On the breach of warranty claim, Judge Turk agreed that Hoffman had failed to plead specific breaches attributable to Daimler Trucks, and hence dismissed the claim against the manufacturer with leave to amend. More importantly from a teaching perspective, the Daimler situation illustrates the impact of Magnuson-Moss clearly and succinctly. Daimler Trucks purported to disclaim all implied warranties in its written warranty, but that contravened Magnuson-Moss. Once the supplier gives a written warranty, it cannot wholly disclaim implied warranties. 15 U.S.C. § 2308. Hence, Hoffman’s implied warranty claims against Daimler Trucks would survive a disclaimer argument.
The supplier’s arguments
Drew, the components supplier, argued that Hoffman’s claims were untimely and that, in any event, its express and implied warranties applied only to Thor, not to the consumer. The timeliness argument neatly illustrates the difference between warranty periods and limitation periods, which, in the court’s view, Drew had confused. Drew had argued that the claims were untimely because they weren’t brought within the one-year warranty period. Judge Turk was quick to point out that “[t]he warranty and limitation periods, however, are not identical concepts. The warranty period covers the component parts for a specified period of time; in other words, it defines the time in which the warrantor has a responsibility to repair or replace the covered parts. The limitation period, however, places constraints on the time in which the buyer must sue.” Simply put, the parties had not agreed to reduce the limitations period “by the original agreement,” per UCC § 2-725(1), and so the UCC default four-year statute of limitations applied.
On the warranty issues, Drew was on stronger ground. Drew claimed that its limited express warranty extended coverage only to Thor, the initial purchaser, and not to the consumer. The Court agreed. Based on a Fourth Circuit warranty case, Buettner v. R.W. Martin & Sons, Inc., which involved a remote supplier who had not even given an express warranty to its immediate purchaser, Judge Turk argued that “an original seller is still free to disclaim warranties as to foreseeable users. . . . The Drew limited warranty plainly extended only to the initial purchaser and Hoffman is not entitled to enforce its protections.”
Drew also argued that it had effectively disclaimed all implied warranties in the text of its written express warranty, but Hoffman countered that this attempt was ineffective because Magnuson-Moss prohibits such disclaimers when the supplier provides a written warranty to a consumer. Here the court found that Magnuson-Moss was not applicable, because Drew did not offer Hoffman a “written warranty” as the term is understood by Magnuson-Moss, because the warranty was intended for the product manufacturer, not the ultimate consumer, per 16 C.F.R. § 700.3(c). Hence, the Magnuson-Moss limitation on disclaimers of implied warranties was inapplicable, and UCC disclaimer rules governed. The court found the disclaimer sufficiently conspicuous to pass muster under UCC 2-316, and it dismissed the claim against Drew.
I would recommend this case to anyone seeking an exemplary discussion of the interplay of federal, UCC, and consumer law with respect to warranties. Judge Turk is undeterred by the complexities of the overlapping issues and multiple defendants, and his analysis is clear, concise, and informative. Students looking for further guidance on these issues would benefit from a careful review of Hoffman.
Motion to Compel Arbitration Granted in Part, Denied in Part in Antitrust Case v. Cable Providers and Sports Organizations
On November 25, 2013, Judge Scheindlin of the Southern District of New York issued an opinion in Laumann v. National Hockey League, granting in part and denying in part a motion to compel arbitration brought by defendant Comcast and denying in full a similar motion brought by defendant DIRECTV. Plaintiffs claim that defendants, including the National Hockey League and Major League Baseball, along with the major cable and satellite television service providers entered into "agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts," and by "collud[ing] to sell the `out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices." These agreements allegedly violate the Sherman Antiturst Act.
At the heart of plaintiffs' beef, it seems, is that if one wants to view "out-of-market" games -- that is, games that do not feature the team from one's home city or the city where one is located -- one must purchase television packages which inculde all out-of-market games, even if one is only interested in the games of one out-of-market team.
Both Comcast and DIRECTV have customer service agreements that feature arbitration clauses and so both defedants moved to compel arbitration. Judge Scheindlin granted Comcast's motion with respect to one plaintiff who purchased an out-of-market package directly from Comcast and thus was clearly bound by the arbitration provision. The remaining plaintiffs had a more complicated relationship to Comcast and claimed that their claims did not arise directly under their customer service agreements with Comcast.
Judge Scheindlin first ruled that any colorable dispute about the scope or validity of the arbitration clause must be referred to the arbitrator. Plaintiffs colorfully objected that where the relationship between the agreements and the claims are too attenuated, granting Comcast's motion would be like compelling arbitration of a claim by a plaintiff who had been hit by a Comcast bus. Judge Scheindlin agreed with respect to one plaintiff, where "the sole nexus between his claims and his Comcast service is the allegation that his DIRECTV package contained material produced by the Comcast" Regional Sports Networks.
Comcast also sought to compel arbitration of claims brought against it pursuant to arbitration clauses in plaintiffs' agreements with DIRECTV. With respect to these claims, Judge Scheindlin noted that there was no clear intent to have questions of arbitrability between a signatory and a non-signatory decided by the arbitrator. She then ruled that the arbitration clause in the DIRECTV agreements did not encompass plaintiffs' claims against Comcast. She also rejected Comcast's claim that plaintiffs should be estopped from bringing a claim under the DIRECTV agreements through any mechanism other than arbitration.
DIRECTV's motion to compel arbitration against another plaintiff failed because the plaintiff is not a DIRECTV customer bound by its arbitration agreement. The DIRECTV subscription is in the name of plaintiff's wife, and the court rejected any claim that he could be bound by admission or estoppel.
Tuesday, December 17, 2013
Broad Arbitration Clause in Employment Agreement Also Captures Dispute over Asset Purchase Agreement
In 2010, plaintiff James Palese (Palese) sold two companies to defendant Tanner Bolt & Nut, Inc. (Tanner), and Tanner hired Palese as the General Manager of its new Herman's Hardware Division, which included Palese's companies. Palese entered into a five-year Employment Agreement with a broad arbitration clause calling for arbitration of "all claims . . .in any way relating" to the Employment Agreement. At the same time, he entered into two Asset Purchase Agreements, which provided that disputes should be settled in "any court of competent jurisdiction" in Kings County, New York. The Employment Agreement and the Asset Purchase Agreement made refernence to one another and were part of what the court deemd "an integrated deal."
In March, 2012, Tanner terminated Palese and then stopped payment on promissory notes relating to the Asset Purchase Agreement. Palese filed charges of discrimination and retaliation with the EEOC and then brought suit in the Eastern District of New York. Tanner moved to compel arbitration and dismiss the suit. On December 5, 2013, the District Court granted Tanner's motion in Palese v. Tanner Bolt & Nut, Inc.
There is no question that if Palese's only claim were breach of his employment agreement, the claim would be subject to the arbitration clause. But what of his claim that Tanner also breached the Purchase Agreements. As the District Court noted
[T]he essence of Palese's allegation is that Tanner retaliated against him in two ways—first by firing him, and second, in "further retaliation," by stopping payment on the promissory notes—in response to a single cause: Palese's objections to his employer's "constant racist, illegal and discriminatory" workplace conduct.
So put, it seems clear that his claims relating to the Purchase Agreement relate to the Employment Agreement.
The District Court also rejected Palese's further contention that the forum selection clause in the Asset Purchase Agreements vitiates the arbitration clause. That argument was foreclosed by the Second Court's decision in Bank Julius Baer & Co., Ltd. v. Waxfield, Ltd., 424 F.3d 278, (2d Cir. 2005). As in that case, the forum selection clause in the Asset Purchase Agreements could be read as complementary rather than contraditory to the arbitration clause in Palese's Employment Agreement.
The court thus granted Tanner's motion to compel arbitration of all of plaintiff's claims.
Monday, December 9, 2013
Every once in a while, a student will send me a story about contracts, but when multiple students send me the same story, you know they must be desparate for a study break -- and that there is some rather comical contracts story in the news.
And so it is with this story about a woman who won a $50,000 judgment on her claim that her fiance had breached his promise to marry her. A Georgia appellate court upheld the judgment, which included an award of attorney's fees, on appeal. The court more or less treated the couple as married and upheld an award of roughly half the property acquired during the relationship, which was a house valued at $86,000. The couple had co-habited for ten years and had a child together. The woman had looked after the child, as well as one she had from a previous relationship.
The man had had sexual relationships with other women both before and after he led his live-in partner to believe that he would marry her and gave her a ring worth $10,000. For what it's worth, the woman also had other sexual relationships.
According to media reports, the defendant's argument on appeal was that his alleged promise arose in the context of a meretricious relationship and was therefore unenforceable. Moreover, he denied any intention to marry. He claims he never said "will you marry me" or words to that effect. He just gave her a ring.
The meretriciousness argument is rather confusing, as a defense to the claim that he broke a promise, since the promise was to cleanse the relationship of its meretriciousness. As the appellate court noted, according to FoxNews, “the object of the contract is not illegal or against public policy.” If we still live in a world in which courts think they can pass judgment on people's long-term relationships (and we seem to), then a court is likely to uphold an agreement that will "make an honest woman" of the plaintiff.
The award of damages is also confusing. the effect of the ruling seems to be to treat the couple as married even though they weren't. In effect, the court is recognizing a common law marriage where such marriages do not seem to be recognized. I suppose the court could do so as a mechanism of giving the woman her expectation for the broken promise. The California Supreme Court endorsed such an approach in Marvin v. Marvin, but other courts have rejected marriage by judicial decree where the legislature has expressed its disapproval of recognition of common law marriages.
Thursday, December 5, 2013
As we noted last week, on Monday, the U.S. Supreme Court heard arguments in the first investment arbitration case ever to be placed on the Court's docket. That transcript from oral argument can be found here.
Other links related to the case, BG Group PLC v. Republic of Argentina, can be found on SCOTUSblog.
Wednesday, December 4, 2013
For those who don't want to click on the links, here is our earlier summary of the facts of the case:
Plaintiff, Rabbi, S. Binyomin Ginsberg had been a member of Northwest's frequent flyer program, WorldPerks, since 1999. By 2005, he was such a macher, Northwest granted him Platinum Elite Status (oy, what nachas!). In 2008, Northwest revoked his membership. Ginsberg claims that Northwest took this action because he was a kvetch. . . .
The official reason provided for the termination was that Northwest had discretion "in its sole judgment," to cancel a member's account due to abuse of the program. Apparently, such judgment includes the ability terminate a membership if complaints persist after the "Enough with the complaining already!" warning. Ginsberg sued, asserting four causes of action, but Northwest moved for dismissal, arguing that the Airline Deregulation Act (ADA) preempted all of Ginsberg's claims.
According to the The New York Times' synopsis of oral argument, Justices Ginsburg and Sotomayor expressed concern that the airline's frequent flyer program was either an illusory contract or subject to the airline's "whim and caprice." Justice Breyer, however, seemed inclined to think that claims sounding in breach of contract are preempted by the federal Airline Deregulation Act of 1978, which was supposed to allow airlines to compete based on, among other things, price. Since frequent flyer programs are price discounts, Breyer suggested that such programs are governed by the Deregulation Act and cannot be subject to claims based on state laws aimed at regulating the airlines. However, in 1995, the Court exempted contracts claims from federal preemption in American Airlines v. Wolens.
The distinction between regulating airlines through state law and regulating airlines through breach of contract claims is a subtle one. It seems to turn on whether Rabbi Ginsberg's claim is construed as a breach of contract claim or a claim that the airline breached a duty of good faith and fair dealing. Paul Clement, arguing for the airline (on page 13 of the transcript) claimed that to permit a claim based on the duty of good faith and fear dealing would "enlarge the bargain." Since the contract gave the airline discretion to terminate Rabbi Ginsberg's membership, Clement argued, invoking the implied duty of good faith and fair dealing takes his claim outside of the contract. The claim implicates state policies because in some states the implied duty is not merely a rule of construction but a means of imposing public policy standards of "fairness and decency" on private agreements.
The Solicitor General joined the case as amicus curiae on behalf of the airline and attempted to clarify the federal uniformity concerns implicated in the case. Counsel for the Solicitor General contended that state contracts law is fine to help adjudicate the intent of the parties, but where states impose public policy concerns in areas such as implied covenants and the unconscionability defense, there preemption is necessary.
This is very strange territory, and it was clear that Justices and counsel alike struggled to work out how to put such fine distinctions into place. It is odd for the Court to say in Wolens that contracts claims are not preempted by the Deregulation Act but for the Court to now say that certain types of contracts claims, like breach of the implied covenant of good faith and fair dealing or unconscionability defenses are still preempted.
And what about Federal Arbitration Act (FAA) preemption? One of the few ways that parties can get out of arbitration clauses is by arguing that such clauses are unconscionable, because the FAA does not preempt defenses sounding in common law contracts doctrine. But since unconscionability doctrine varies from state to state, parties seeking to enforce arbitration clauses could argue that the same uniformity concerns that govern preemption in the Deregulation Act context should also apply in the FAA context. If so, good-bye unconscionability challenges to arbitration clauses.
The Times provides this link to the transcript of oral argument.
Friday, November 29, 2013
Craig Crockett's law firm had a billing dispute with LexisNexis (Lexis). but his firm's agreement with Lexis had an arbitration clause. Crockett realized that arbitration of his claim against Lexis as individual claim would be economically unfeasible, so he sougth to create a nationwide class of similarly situated Lexis customers. The arbitration clause itself was silent about the availability of class claims. In 5 Reed Elsevier, Inc. v. Crockett, the Sixth Circuit affirmed the District Court's finding that arbitration clause does not permit class claims.
Crockett's basic claims is that, although his firm was to be charged a monthly fee for unlimited use of certain Lexis databases, and an additional fee for the use of other databases, Lexis charged him for the use of databases that were not identified as extras. He seeks to bring claims for fraud, negligent misrepresentation, breach of contract, negligence, gross negligence, unjust enrichment, and violation of New York's consumer protection laws on behalf of classes consisting of law firms using Lexis services and their clients. On behalf of the two classes, Crockett sought damages in excess of $500 million.
Lexis responded to the claim with a suit in federal District Court seeking a declaration that the arbitration agreement did not allow for class arbitration. The District Court granted the declaratory judgment sought. Crockett objected that the issue of whether or not classwide arbitration was available should have been put to the arbiter. As the Sixth Circuit explained, that issue turns on whether it is a "gateway" or a "subsidiary" question. There is a presumption in favor of courts answering gateway questions, while subsidiary questions should presumptively be reserved to the arbiter.
Alas, the Supreme Court has yet to decisively address whether classwide arbitrability is a gateway or subsidiary question. While a plurality of the Justices found the issue to be susbidiary in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003), the Court more recently acknowledged that it had not yet determined whether or not classwide arbitrability is a gateway question. Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2 (2013). But in other recent cases, Stolt-Nielsen and Concepcion, the Supreme Court has characterized the difference between bilateral and class arbitration as "fundamental" and thus has indicated fairly strongly that the issue is a gateway question.
The Sixth Circuit cited various reasons for assigning "gateway" status to the question of classwide arbitration and concluded that "whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved 'for judicial determination unless the parties clearly and unmistakably provide otherwise'" (citing Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 (2002)). The Court then reasons that "the principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it." Because the consequences of class arbitration are "momentous," the Sixth Circuit reasoned, an arbitration agreement must include class arbitration in order for a court to find that the parties have agreed to it.
To which I say, where is the contra proferentem canon when a consumer needs it? The agreement is silent on the issue and thus unquestionably ambiguous. The consequences are equally momentous on both sides, since the Sixth Circuit acknowledges that Crockett's claims are not worth bringing as an individual arbitration. It also characterizes the contract as one of adhesion. So it was entirely within Lexis's powers to avoid the ambiguity and completely beyond Crockett's power to remedy it. In such cases, courts should invoke contra proferentem and interpret the agreement in favor of the non-drafting party.
Crockett also argued that the arbitration clause is unconscionable, and the Sixth Circuit seemed to agree that, substantively, it's a lousy agreement. However, elements of procedural unconscionability are lacking, and Crockett had the option of using Westlaw (which apparently has no arbitration clause -- for now). This is likely a correct application of the law but it also illuminates a central tension in unconscionability doctrine. In order to show that substantive unconscionability exists, one has to show that the terms are outrageously lopsided in favor of the drafting party "by the business standards and mores of the time and place." But if one can make such a showing, then one loses on the procedural unconscionability prong because one then could have chosen to go with a competing business. And if all of the businesses in the market have equally one-sided terms, then one cannot meet the standard for substantive unconscionability.
Tuesday, November 26, 2013
Monday, November 25, 2013
The U.S. Supreme Court is scheduled to hear oral arguments on December 2, 2013 in BG Group PLC v. Republic of Argentina. Links related to the case can be found on the SCOTUSblog, including this fabulous introduction to the case from Professor Diane Marie Amann (pictured), the Emily and Ernest Woodruff Chair in International Law at the University of Georgia School of Law. The issue in the case is whether, in disputes involving a multi-staged dispute resolution process, a court or the arbitrator determines whether a precondition to arbitration has been satisﬁed.
The International Dispute Resolution Committee of the DC Bar's International Law Section, in cosponsorship with the American Society of Internatioanl Law's Howard M. Holtzmann Research Center for the Study of International Arbitration and Conciliation and the Washington Foreign Law Society, and in cooperation with the International Arbitration Committee of the American Bar Association's Section of International Law and the International Committee of the American Bar Association's Section of Dispute Resolution, will host a luncheon program to discuss the case immediately following the oral argument.
- George Bermann, Professor, Columbia Law School, and Chief Reporter for the forthcoming Restatement on International Commercial Arbitration
- Janis Brennan, Partner, Foley Hoag LLP, and Vice-Chair, DC Bar International Dispute Resolution Committee
- Jean Kalicki, Partner, Arnold & Porter LLP (Moderator)
Wednesday, November 20, 2013
Laura Dee (plaintiff) and Dena Rakower (defendant) lived together in a committed, same-sex relationship for nearly 18 years and are the parents of two children. In her complaint, Dee alleges that they had an oral “joint venture/partnership agreement” whereby Dee would share in Rakower's assets, including Rakower’s retirement contributions and earnings, in exchange for Dee leaving her full-time job to care for their children. The couple’s entire relationship pre-dated the passage of New York’s Marriage Equality Act. Upon termination of the couple’s relationship, Dee sued Rakower for, among other claims, breach of contract. The trial court dismissed the cause of action for breach of contract; in a divided opinion, the Appellate Division (Second Department) reinstated that claim.
The majority of the appellate court reasoned that the allegations in the complaint sufficiently plead a cause of action for breach of contract:
The alleged contractual agreement between the parties was supported by consideration. "Consideration consists of either a benefit to the promisor or a detriment to the promisee. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him [or her]" * * * The consideration here for the alleged contract is the forbearance of the [Dee’s] career, the inability to continue to save toward her retirement during that forbearance, and her maintenance of the household in return for a share in [Rakower’s] retirement benefits and other assets earned during the period of forbearance. * * * Since [Dee] also alleged that [Rakower] breached the alleged agreement and that she has sustained damages as a result of that breach, at this pleading stage, the eighth cause of action [to recover damages for breach of contract] must survive dismissal * * *.
The fact that the alleged agreement was made by an unmarried couple living together does not render it unenforceable. "New York courts have long accepted the concept that an express agreement between unmarried persons living together is as enforceable as though they were not living together, provided only that illicit sexual relations were not part of the consideration of the contract'" (Morone v Morone, 50 NY2d 481, 486, quoting Rhodes v Stone, 63 Hun 624, 624 [citations omitted]). "[W]hile cohabitation without marriage does not give rise to the property and financial rights which normally attend the marital relation, neither does cohabitation disable the parties from making an agreement within the normal rules of contract law" (Morone v Morone, 50 NY2d at 486; see Matter of Gorden, 8 NY2d 71, 75).
The case at bar is similar to Morone v Morone (50 NY2d 481). In Morone, the parties cohabited as husband and wife although they were not married. The plaintiff claimed that the parties had entered into an oral partnership agreement whereby, among other things, they agreed that the net profits of their partnership would be used and applied for their equal benefit **. The plaintiff devoted herself exclusively to their relationship and this endeavor. The Court of Appeals concluded that the plaintiff sufficiently stated a breach of contract cause of action.
There is no reason, on this record, at this early stage of the litigation to conclude, as the Supreme Court did, that the oral agreement between the parties cannot serve as the basis for a breach of contract cause of action. ***
Contrary to the Supreme Court's determination and the opinion of our dissenting colleague, [Dee’s] failure to specifically allege that there was a "meeting of the minds" as to how the assets would be distributed upon the termination of the parties' relationship does not compel the conclusion that the complaint fails to state a cause of action to recover damages for breach of contract. * * * The complaint specifically alleges that the parties agreed to share equally the defendant's retirement account accrued during that period of time that the plaintiff did not work at a job that provided a retirement plan without consideration of the direct and indirect contributions of the parties or when such contributions were made. Thus, as alleged, there is sufficient definiteness to the material terms of the alleged agreement between the parties to establish an enforceable contract (see Joseph Martin, Jr., Delicatessen v Schumacher, 52 NY2d 105, 109). The failure to include the mechanism for the implementation of the parties' alleged agreement does not negate the allegations in the complaint that they entered into an agreement with regard to the rights to their assets.
The dissent, however, took the view of the oral agreement, stating that “the complaint is devoid of any allegation as to whether and how their assets and pension benefits would be divided in the event the parties were to no longer be together.” The dissent opined that “read[ing] such a provision into the parties’ agreement, where none is expressed in the complaint, would result in the invention of an implied contractual provisions which, as noted, is prohibited by our law for agreements between unmarried persons living together.” Then the dissent expressed concern that Dee seeks “equitable distribution” without alleging that the parties had expressly agreed to such a distribution:
Distilled to its essence, the plaintiff in this action seeks "equitable distribution" of the defendant's assets and future pension benefits without alleging in the complaint that the defendant had promised to share them if the parties did not stay together. Indeed, there is no allegation that the parties had any meeting of the minds as to the distribution of property or assets upon a termination of their relationship. Absent such an allegation, and absent an affidavit from the plaintiff clarifying or expanding her description of the parties' agreement to cover such an eventuality, the complaint fails to state a cause of action. The plaintiff's theory of recovery is dependent upon implying terms for the distribution of retirement benefits to circumstances involving the dissolution of the parties' familial relationship. The Supreme Court properly refrained from implying such provisions into the oral contract in determining that, under the circumstances alleged, the "complaint lacks a contract for the court to enforce."
No aspect of this partial dissent speaks to the merits of the New York's more recent enactment of the Marriage Equality Act. This Court is sensitive to the complications occasioned by various forms of familial relationships that necessarily result in financial agreements or entanglements. The judiciary, however, is limited in addressing and determining the ownership and/or distribution of familial assets, absent either the existence of a lawfully recognized marriage or an enforceable expressed contract between persons in a cohabitational relationship.
According to an article in the NYLJ about the case:
The court agreed to resolve the appeal though the parties settled, apparently accepting the position of Dee's pro bono attorney, Michele Kahn of Kahn & Goldberg, that the case involved important issues for both gay and heterosexual couples.
Kahn noted in a letter to the court that there were "tens of thousands of unmarried, mostly gay, couples in the State." Although those couples can now marry, she said "questions will remain" about the application of equitable distribution laws to "specific and identifiable promises and agreements" prior to their marriages.
Kahn also argued that, according to the Census Bureau,"an increasing number of couples are rejecting the institution of marriage."
"The manner in which this couple conducted their lives—relying and acting upon each others' specific promises, without formal writings, is the way that most unmarried couples live their lives," she wrote. "Inevitably, many of these couples will break up, and inevitably many of these couples will be involved in litigation over property and assets that were acquired during the relationship," Kahn wrote.
Dee v. Rakower, 2013 NY Slip Op 07443 (2d Dep't Nov. 13, 2013).
[Meredith R. Miller]