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Tuesday, August 26, 2014

Intervening Illegality of Underlying Promises Does Not Cause Contract to Fail for Lack of Consideration; Does Not Breach Warranty

ImgresWhat happens when a party to an agreement terminates and begins to make quarterly termination (liquidated damage) payments as promised and then, while payments are being made, a law is past that makes the underlying promised performance illegal?  The parties are sorting this out in a case against Orbitz.

In 2005, Orbitz and Trilegiant entered into an agreement (“Master Service Agreement,” or “MSA”) for Orbitz to provide “DataPass” marketing services.  Pursuant to the MSA, Orbitz marketed Trilegiant’s services to Orbitz customers.  If a customer enrolled in Trilegiant’s services, Orbitz would transfer the customer’s billing and credit card info to Trilegiant and, thereafter, Trilegiant would charge the customer and pay Orbitz a commission.  As a result, customers were charged for Trilegiant’s services without ever affirmatively providing their credit card information to Trilegiant (though, they had arguably agreed to be charged when purchasing travel arrangements on the Orbitz site – I leave that part to Nancy Kim). 

Customers eventually complained about their credit cards being charged without their knowledge.  In 2007, Orbitz notified Trilegiant that it would be terminating the MSA.  The MSA allowed for early termination but required Orbitz to make a series of quarterly termination payments (totaling over $18 million) through 2016.

In 2010, Congress enacted the Restore Online Shopper Confidence Act (“ROSCA”), which made the DataPass marketing practice illegal.  Orbitz stopped making the quarterly termination payments to Trilegiant.  Trilegiant sued Orbitz in New York and a recent decision of the trial court (Supreme Court, New York County, Ramos, J.) granted Trilegiant summary judgment on 3 of Orbitz’s 17 affirmative defenses. 

First, the court rejected Orbitz’s defense of lack of consideration.  The court explained:

Orbitz contends that there had to be consideration for each quarterly termination payment and that Trilegiant's continued use of DataPass is necessary to its claim against Orbitz.  Orbitz argues that the consideration for the termination payments was supposed to be Trilegiant's forfeit of potential earnings, earnings that Trilegiant cannot forfeit if it is not in the business of DataPass (see Orbitz's Memorandum of Law at 8-9).

The law does not support Orbitz's argument. It is well settled that an agreement "should be interpreted as of the date of its making and not as of the date of its breach" (X.L.O. Concrete Corp. v John T. Brady and Co., 104 AD2d 181, 184 [1st Dept 2009]). Additionally, "[i]f there is consideration for the entire agreement that is sufficient; the consideration supports every other obligation in the agreement" (Sablosky v Edward S. Gordon Co., 73 NY2d 133, 137 [1989]).  A single promise "may be bargained for and given as the agreed equivalent of one promise or of two promises or of many promises. The consideration is not rendered invalid by the fact that it is exchanged for more than one promise" (2-5 Corbin on Contracts § 5.12).

Considerations of public policy also support this conclusion, because a promisor should not be permitted to renege on a promise either because that specific promise lacks textually designated consideration or because the promisor wants to avoid performance of multiple obligations when the promisee has already performed and has no further obligations concurrent with the promisor's performance (see 15 Williston on Contracts §45:7 [4th ed.]).

While Orbitz contends that Trilegiant has been unable to forfeit earnings from new DataPass customers since it ceased the practice in January 2010, that fact has no bearing on whether there was consideration for the termination payment provision in the MSA.  The termination payments were part of the original MSA (see MSA at Ex. B), and Trilegiant is correct when it asserts that the existence of consideration for the MSA itself, whether "consist[ing] of either a benefit to the promisor or a detriment to the promisee" (Weiner v McGraw-Hill, 57 NY2d 458, 464 [1982]), is not a disputed material fact in this case.

Additionally, courts do not look to the adequacy of consideration provided that there was consideration, "absent fraud or unconscionability" (Apfel v Prudential-Bache Sec. Inc., 81 NY2d 470, 476 [1993]). There are no allegations that the MSA was fraudulently agreed upon or that it is unconscionable.  Further, this Court has already held that the termination payments in the MSA do not constitute a penalty or unenforceable liquidated damages (see NYSCEF Doc. No. 97 at ¶5, Order entered 12/24/2013).

As this Court has previously stated, if these sophisticated parties to the original MSA wanted Orbitz's promise to pay each quarterly termination payment to be contingent on Trilegiant's continued use of DataPass and subsequent forfeiture of revenues, they could have so stipulated in the MSA (see NYSCEF Doc. No. 89 at p 6, Entered 10/7/2013).  This Court finds that Orbitz's promise to pay all quarterly termination payments is supported by the same bargained-for consideration given by Trilegiant in exchange for Orbitz's various promises in the MSA as a whole.

Second, the court rejected Orbitz’s argument that Trilegiant lacked standing because it could not show that it was “ready, willing and able” to perform its obligations.  The court reasoned:

Orbitz argues that its early termination in 2007 triggered the MSA liquidated damages remedy and that even though Trilegiant was relieved of its obligation to perform it still had to show it was able.  Orbitz further argues that Trilegiant has adduced "no evidence whatsoever to prove that it was ready, willing, and able to perform its obligations under the MSA as of the time Defendants stopped making payments in 2010" (Orbitz's Memorandum of Law at p 10).

Whether the remedy constitutes liquidated damages or a separate provision of the MSA that establishes new obligations for Trilegiant and Orbitz whereby Orbitz is obligated to make quarterly payments and Trilegiant essentially is obligated only to collect them, is irrelevant in light of the fact that Trilegiant claims only general damages, which "include money that the breaching party agreed to pay under the contract" (See Biotronik A.G. v Conor Medsystems Ireland, LTD 22 NY3d 799, 805, [2014] citing Tractebel Energy Marketing, Inc. v AEP Power Marketing, Inc., 487 F3d 89, 109 [2d Cir 2007]). 

Trilegiant is not required to show its ability to perform through September 30, 2016, the date of the final quarterly termination payment.  Even if, arguendo, Trilegiant was required to show it could have performed its obligations under the MSA, Orbitz's argument that those obligations would have included an ability to perform DataPass is unpersuasive.  Whether Exhibit B of the MSA constitutes liquidated damages or a separate provision of the contract, Trilegiant is not textually obligated to do anything except not market to Orbitz's customers.

Furthermore, liquidated damage clauses benefit both potential plaintiffs "who [are] relieved of the difficult, if not impossible, calculation of damage, item by item" and potential defendants "who [are] insulated against a potentially devastating monetary claim in the event" of a breach and "[t]hus, public policy is served by the implementation of such clauses" (X.L.O. Concrete Corp. at 186).

Finally, the court rejected Orbitz’s argument that Trilegiant violated a warranty provision in the MSA in which the parties promised that performance of the agreement did not violate any law.  The court reasoned:

While Orbitz contends that Trilegiant and similar DataPass practitioners "violated the rights of millions of Americans" (Orbitz's Response at 13), ROSCA does not refer to the violation of consumers' "rights" when it describes the actions of third party sellers, such as Trilegiant, who purchased consumers' credit card information (15 U.S.C. §8401 at Sec. 2).  ROSCA's findings instead refer to DataPass as something that undermined consumer confidence and "defied consumers' expectations" (id. at Sec. 2(7)).

This Court has already held that ROSCA does not make any violating contracts unenforceable and the MSA is enforceable despite DataPass being presently illegal (see NYSCEF Doc. No. 89 at p 5, Entered 10/7/2013). Moreover, as this Court has already explained, "the primary purpose of ROSCA was to protect consumers (15 U.S.C. §8401), not marketers that were using DataPass as a tool" (NYSCEF Doc. No. 89 at p 4, Order entered 10/7/2013, citing Lloyd Capital Corp. v Pat Henchar, Inc., 80 NY2d 124, 127 [1992]).

Orbitz claims that Trilegiant has failed to show that it was not in violation of Section 6.1 of the MSA, based on the concept that an "express warranty is as much a part of the contract as any other term" (CBS, Inc. v. Ziff-Davis Pub. Co., 75 NY2d 496, 503 [1990]).

A breach of warranty claim is established "once the express warranty is shown to have been relied on as part of the contract," and the claiming party then has "the right to be indemnified in damages for its breach [and] the right to indemnification depends only on establishing that the warranty was breached" (id. at 504).

Orbitz argues that there are disputed issues of fact as to Trilegiant's alleged breach of warranty, but Orbitz has not alleged damages for which it could be indemnified nor has it alleged any evidence of Trilegiant's breach of warranty that is not rooted in ROSCA's condemnation of DataPass. This Court has already held that ROSCA's enactment and findings do not relieve Orbitz from its obligations under the MSA, holding that "as a general rule also, forfeitures by operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as a sword for personal gain rather than a shield for the public good" (NYSCEF Doc. No. 89 at p 4, Entered 10/7/2013, quoting Lloyd Capital Corp. at 128 [internal  quotations omitted]).

Orbitz tries to use ROSCA's findings that DataPass was bad for consumers and the economy and Trilegiant's cessation of DataPass activity as evidence of conduct that would violate the MSA Section 6.1. These allegations do not create a question of fact. This Court has already held that "ROSCA does not provide that any violating contracts are rendered unenforceable or that its provisions were intended to apply retroactively" (see NYSCEF Doc. No. 89 at p 5, Entered 10/7/2013), and Trilegiant ceased DataPass almost a year before ROSCA made the practice illegal.

A case worth watching.

Trilegiant Corp. v. Orbitz, LLC, 2014 NY Slip Op 24230 (Sup. Ct. N.Y. Cty. Aug. 20, 2014)(Ramos, J.).

August 26, 2014 in E-commerce, In the News, Recent Cases, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Third Circuit Says that Courts Decide the "Gateway Question" of the Availability of Class Arbitration

3d CirThe question before the Third Circuit in Opalinski v. Robert Half Int'l Inc. was whether a court or the arbitrator should decide on the availability of class arbitration.  The Court held that the issue was akin to the question of arbitrability itself and so, absent agreement to the contrary, the issue is one for the court.  

The posture of the case is interesting.  Robert Half International (RHI) had filed a motion to compel individual arbitration of David Opalinski's Fair Labor Standard Act claims.  The District Court granted the motion to compel but did not rule on RHI's demand for individual arbitration.  The arbiter issued a partial award in Mr. Opalinski's favor and permitted class arbitration.  At that point, RHI went back to the District Court and moved to vacate the partial award.  The District Court denied that motion, and RHI appealed.  The key issue on appeal was whether the District Court or the arbiter should decide the availability of class arbitration.

The Third Circuit resolves the issue as follows:

We read the Supreme Court as characterizing the permissibility of classwide arbitration not solely as a question of procedure or contract interpretation but
as a substantive gateway dispute qualitatively separate from deciding an individual quarrel. Traditional individual arbitration and class arbitration are so distinct that a choice between the two goes, we believe, to the very type of controversy to be resolved.

The court then went on to note that the Sixth Circuit, the only other Circuit to have ruled on the manner, resolved the issue in the same way.


August 26, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, August 25, 2014

Browsewrap Decision out of the Ninth Circuit


Towards the end of 2011, Barnes & Nobles (B & N) decided to liquidate its inventory of HP Touchpads (left), by offering them for sale at deep discounts at a "fire sale."  Kevin Khoa Nguyen (Nguyen) acted quickly to take advantage of this opportunity and purchased two units through the B & N website.  He first received an e-mail confirmation of the transaction and then an e-mail cancellation of the transaction due to unexpectedly high demand.

Nguyen sued and attempted to do so on behalf of a class of plaintiffs who had had their HP Touchpad purchases cancelled.  B & N responded in the now-expected it manner.  Pointing to the link to its Terms of Use, visible on multiple pages visited by Mr. Nguyen, B & N moved to compel arbitration, which in accordance with its Terms of Use (the familiar story continues), requires that claims be adjudicated on an individual basis with no possibility of class actions or class arbitration.

Nguyen argued that he did not read or otherwise have notice of B & N's terms and did not assent to them.  The District Court agreed and denied B & N's motion to compel arbitration.  In Nguyen v. Barnes & Noble Inc., the Ninth Circuit affirmed.  In so doing, the Ninth Circuit began by explaining the difference between clickwrap and browsewrap contracts:

Contracts formed on the Internet come primarily in two flavors: “clickwrap” (or “click-through”) agreements, in which website users are required to click on an “I agree” box after being presented with a list of terms and conditions of use; and “browsewrap” agreements, where a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen. 

Wrap ContractsHere, we are dealing with a browsewrap agreement, which the Ninth Circuit subjects to a more searching inquiry than clickwrap.  According to the Ninth Circuit, clickwrap requires consumers to affirmatively consent to an agreement, whereas with browsewrap, they are simply given notice that their transaction is subject to an agreement.  Whether or not that notice is effective, says the Court, depends on the facts of the case.  But in cases such as this one, where Nguyen never clicked on the links or otherwise had an opportunity to see B & N's terms of use, he had neither actual nor constructive notice of the terms and thus could not have agreed to them.  

Over on the Technology and Marketing Law Blog, Venkat Balasubramani has a great post on this case called "What's a Browsewrap? The Ninth Circuit Sure Doesn't Know -- Nguyen v. Barnes & Noble.  The post is less snarky than it might appear (or much more so), for as Eric Goldman's contribution to the post makes clear, nobody is able to draw sufficiently clear distinctions between clickwrap and browsewrap.  Goldman suggests that the time has come to retire the clickwrap/browsewrap language entirely.  Fortunately, our readers are far better informed than most courts about wrap contracts!

August 25, 2014 in Recent Cases, Web/Tech | Permalink | Comments (3) | TrackBack (0)

Tuesday, August 19, 2014

NJ Appellate Court Refuses to Enforce Exculpatory Clause that Waives Ordinary Negligence Claims

Plaintiff sued the YMCA for injuries sustained when he slipped and fell on stairs that he alleged were negligently maintained.  First, let’s get this out of the way: 

The YMCA argued that plaintiff was contractually barred from seeking damages against the YMCA because plaintiff had voluntarily signed an exculpatory clause in his membership agreement.   That clause provided:


A New Jersey trial court granted summary judgment dismissing the complaint.   An appellate court reversed.  The appellate court framed the issue as “whether a fitness center or health club can insulate itself through an exculpatory clause from the ordinary common law duty of care owed by all businesses to … invitees[.]”  The court held that it could not.

While the New Jersey Supreme Court upheld an exculpatory clause in Stelluti v. Casapenn Enters., Inc., 203 N.J. 286 (2010), that case was characterized as involving allegations of injury based upon risks inherent in the activity (bike riding in a spin class).  In Stelluti, the New Jersey Supreme Court did not specifically address or decide whether an exculpatory clause may waive ordinary negligence.

The appellate court declined to enforce the YMCA's exculpatory clause, reasoning that it was against the public interest:

Given the expansive scope of the exculpatory clause here, we hold that if applied literally, it would eviscerate the common law duty of care owed by defendant to its invitees, regardless of the nature of the business activity involved. Such a prospect would be inimical to the public interest because it would transfer the redress of civil wrongs from the responsible tortfeasor to either the innocent injured party or to society at large, in the form of taxpayer-supported institutions.

The appellate court also noted that the agreement was presumably a contract of adhesion.

This is a case worth following if appealed to the New Jersey Supreme Court.  And a good teaching case because it lays bare the tension between freedom to contract and overriding concerns about general public welfare.

 Walters v. YMCA, DOCKET NO. A-1062-12T3 (Superior Ct. of N.J. App. Div. Aug. 18, 2014).

August 19, 2014 in In the News, Recent Cases, Sports | Permalink | Comments (0) | TrackBack (0)

Al Gore Sues Al Jazeera

GoreNow there's a headline that will make Fox News chortle with glee.  The Al Jazeera news network purchased Al Gore's Current TV channel for $500 million.  Gore's suit alleges that Al Jazeera still owed $65 million on the purchase price.

According to this report on the Guardian Liberty Voice, Al Jazeera may be withholding the final payment in an attempt to negotiate a discount on the sale price.  According to the report, Al Jazeera has not garnered as many viewers as it hoped -- an anemic average of 17,000 during prime time, as compared with 1.7 million for Fox News and nearly 500,000 for CNN.  

But with new crises erupting daily in the Middle East, things are looking up for all three.


August 19, 2014 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, August 18, 2014

Arbitration Agreement Entered into during Pendency of FLSA Claim Ruled Enforceable

Mata_Hari_6The named plaintiffs in Stevenson v. The Great American Dream, Inc. are former employees of Pin Ups Nightclub.  They brought suit claiming entitlement to minimum wage and overtime compensation under the Fair Labor Standards Act (FLSA).  They sought class certification in December 2012, which was granted in August 2013.   Kwanza Edwards attempted to join the class on October 2013.  Unfortunately for her, she had signed an arbitration agreement in February 2013.  On July 15, 2014, the District Court for the Northern District of Georgia granted defendants' motion to compel Edwards to arbitrate her claim.  

On motion for reconsideration, Edwards argued that the arbitration agreement was unconscionable, given that a FLSA action had already been filed, with class certification pending.  The Court found that the timing of the agreement did not affect its substantive terms.  

The Court was unimpressed with Edwards' citations to cases from other Circuits.  Plaintiff does not seem to have cited to Russell v. Citigroup, Inc., about which we previously posted here.  The case is probably distinguishable, but that was a case where the court refused to compel arbitration where a plaintiff signed an arbitration agreement after the class action litigation had already commenced.  The difference is that Russell was himself already a party to a class action when he signed the new arbitration agreement.  Edwards was not yet a party to the FLSA class when she signed her arbitration agreement.

August 18, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 5, 2014

What Constitutes "Good Faith" Negotiation of a Foreclosure Action?

Ah, “good faith” – the jello mold of contract law.  What is “good faith”?  What does it mean to negotiate in “good faith”?   If a statute does not provide a definition, do common law notions of good faith apply?  In New York, a panel of the Appellate Division (Second Department) had occasion to define the parameters of “good faith” for purposes of the statutory requirements in mortgage foreclosure actions.

In 2009, in response to the foreclosure crisis, New York’s Civil Practice Law and Rules (“CPLR”) § 3408 was amended to require mandatory settlement conferences in mortgage foreclosure actions involving any home loan in which the defendant was residing in the property.  The statute further requires that both plaintiff and defendant negotiate in "good faith" to resolve the action, including, if possible, a loan modification.  The statute does not define “good faith.”

Plaintiff (bank) argued on appeal that “a party to a mortgage foreclosure action can only be found to have violated the good-faith requirement of CPLR 3408(f) when that party has engaged in egregious conduct such as would be necessary to support a finding of ‘bad faith’ under the common law.”  Of course, plaintiff maintained that it did not engage in any egregious conduct such as gross negligence or intentional misconduct and, therefore, it satisfied the good faith requirement of CPLR 3408(f).

The court rejected plaintiff's contention that a lack of good faith pursuant to CPLR 3408(f) requires a showing of gross disregard of, or conscious or knowing indifference to, another's rights.  Instead, the court held that a failure to negotiate in “good faith” under CPLR 3408(f) is determined “by considering whether the totality of the circumstances demonstrates that the party's conduct did not constitute a meaningful effort at reaching a resolution.”

The court reasoned that this definition aligned with the purpose of the good faith requirement, which is “to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution."

The court elaborated on what constitutes a failure to act in good faith:

Where a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds, or, conversely, where a defendant fails to provide requested financial information or provides incomplete or misleading financial information, such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.

Applying the standard to this case, the court held that:

Any one of the plaintiff's various delays and miscommunications, considered in isolation, does not rise to the level of a lack of good faith. Viewing the plaintiff's conduct in totality, however, we conclude that its conduct evinces a disregard for the settlement negotiation process that delayed and prevented any possible resolution of the action and, among other consequences, substantially increased the balance owed by [defendant] on the subject loan. Although the plaintiff may ultimately be correct that [defendant] is not entitled to a . . . modification, the plaintiff's conduct during the settlement negotiation process makes it impossible to discern such a fact, as the plaintiff created an atmosphere of disorder and confusion that rendered it impossible for [defendant] or the Supreme Court to rely upon the veracity of the grounds for the plaintiff's repeated denials of [defendant’s] application.

Can you nail that to the wall: what's a meaningful effort? 

U.S. Bank National Assoc v. Sarmiento, 11124/09 (N.Y. App. Div. 2d Dep't Aug 5. 2014). 

August 5, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, August 4, 2014

Eighth Circuit Shuts Down the Real Napster CEO

Christopher Gorog was the CEO of Roxio, Inc., which acquired Napster in 2002.  He thereby become the CEO of Napster, which was acquired by Best Buy in 2009.  Gorog entered into an Employment Agreement with Best Buy, which provided that he would stay on as a Napster employee, with Napster now a wholly-owned Best Buy subsidiary.  The Employment Agreement included a $3 milllion performance award to which Gorog would be entitled based on his and the company's performance on four target dates if he were still employed by Napster.  

At the end of 2009, Gorog resigned.  In 2011, Best Buy sold Napster to Rhapsody, an Internet Music Service.  Gorog signed a Separation Agreement which provided that Gorog’s employment would be terminated without cause and that Gorog would not release any claims to a performance award.  Gorog sued claiming that he was entitled to performance awards despite his resignation.  The District Court found that Gorog's best arguments rose under Section 2.4(b) of the relevant Award Agreement:

(b) If, prior to the end of the Performance Period, your
employment is terminated by Napster without Cause or you
terminate your employment with Napster for Good Reason,
the Performance Period will continue and you will be
entitled to receive a Performance Award equal to a pro-rata
portion, based on the number of Whole Months you served
during the Performance Period, of the Performance Award
that otherwise would have been earned in accordance with
the Performance Criteria Schedule . . . . 

The Distirct Court dismissed Gorog's claims finding that he did not meet the performance criteria under the section. 

In appealing to the Eighth Circuit in Gorog v. Best Buy, Inc.Gorog relied on Section 2.4(c) of the Award Agreement which he claimed was not mutually exclusive with Section 2.4(b).  Section 2.4(c) provides that 

If, prior to the Performance Target Date, majority
ownership of Napster (or any successor entity) is sold by
Best Buy or spun-off to its shareholders, or if the venture
ceases operations (the “Event”), you shall be entitled to
receive a Performance Award equal to 100% of the
Performance Award Target Value, regardless of whether
the Performance Criteria have been met. . . .

Gorog claimed that the fact that he was no longer employed at Napster was irrelevant to the question of his entitlement to a performance award, as that award was triggered by the sale of Napster.  

The Eighth Circuit sided with Best Buy, which argued that the two provisions are indeed mutually exclusive.  Read in context, the Court noted, each section of Section 2.4 relates to conditions of Gorog's termination that would entitle him to a performance award.  The Court also found no way to reconcile Gorog's claim that the provisions of Section 2.4 were not mutually exclusive with other terms in his agreement with Best Buy.

Once again, life fails to imitate art (if the amusing heist movie The Italian Job is art):

August 4, 2014 in Film Clips, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 29, 2014

Pa. S. Ct.: Contract that is Unenforceable by Statute Does Not Preclude Claim for Quantum Meruit

Screen Shot 2014-07-29 at 1.01.17 PMThe borderland between contract and quasi-contract can be murky.  For example: when failure to comply with a statutory requirement makes a contract unenforceable, can a party still recover under a theory of quantum meruit?  The Supreme Court of Pennsylvania recently addressed this question in the specific context of the state’s Home Improvement Consumer Protection Act (“HICPA”), holding that a contractor could pursue a cause of action sounding in quantum meruit.

Plaintiff construction corporation (“Shafer”) was hired by defendant homeowners (the “Mantias”) to build an addition on their home.  While the parties worked up an extremely detailed plan, the proposal did not comply with specific requirements of HICPA (for example, it did not contain approximate start and completion dates).  Notwithstanding, Shafer began construction but ran into problems because the excavation work for the foundation (completed by the Mantias) was not done properly.  The excavation was revised and, with that, the design for the construction was revised.  Shafer and the Mantias were unable to negotiate a modification of their agreement and agreed to discontinue the project.  Shafer sent a final invoice to the Mantias for almost $38,000 but the Mantias refused to pay it.

Shafer sued for breach of contract and quantum meruit.  The contract was not valid, however, because it failed to comply with some of the very specific requirements of HICPA.  The question remained whether Shafer could nevertheless seek recovery on a theory of quantum meruit.  The Supreme Court of Pennsylvania affirmed the intermediate appellate court and held that the restitution theory was not precluded.  The court reasoned:

It is well-settled at common law, however, that a party shall not be barred from bringing an action based in quantum meruit when one sounding in breach of express contract is not available. Zawada v. Pa. Sys. Bd. of Adjustment, 140 A.2d 335, 338 (Pa.1958). While the General Assembly, in its role as the policy-making branch of government, certainly may in “particular sets of circumstances” modify the structure of the common law, Program Admin. Servs., Inc. v. Dauphin County Gen. Auth., 928 A.2d 1013, 1018 (Pa.2007); see also Freezer Storage, Inc. v. Armstrong Cork Co., 382 A.2d 715, 720–21 (Pa.1978); Singer v. Sheppard, 346 A.2d 897, 902 (Pa.1975), there is no indication that the legislature has done so in the Act. Indeed, the Act “is silent as to actions in quasi-contract, such as unjust enrichment and quantum meruit—which, by definition, implicate the fact that, for whatever reason, no [valid] contract existed between the parties.” Durst, 52 A.3d at 361 (emphasis added)

With this understanding, it becomes self-evident and plain that Section 517.7(g) speaks only to the availability of remedies to a contractor who complies with Section 517.7(a).5 While traditional contract remedies may not be available due to the contractor's failure to adhere to Section 517.7(a) (thus, rendering the home improvement contract void and unenforceable), Section 517.7(g) does not contemplate the preclusion of common law equitable remedies such as quantum meruit when a party fails to comply with subsection (a). The Superior Court has already decided, and we now affirm, that this is the case when the contract at issue is oral (Durst), or noncompliant with the remaining sections of Section 517.7(a) (this case). If the General Assembly had seen it fit to modify the right of non-compliant contractors to recover in contract or quasi-contract, statutory or common law, or otherwise, it could have done so. Accord Freezer Storage, 382 A.2d at 720–21. Simply put, this Court cannot insert words into Section 517 .7(g) that are not there, especially words that would extinguish an otherwise cognizable common law action. Rieck Investment, 213 A .2d at 282.

Of course, this has the potential to undermine the purpose of the requirements of HICPA, but the message from the court to the legislature is: expressly negate other theories such as quantum meruit in the statute.

Shafer Electric & Construction v. Mantia, No. J-24-2014, (decided by Pa. S. Ct. on July 21, 2014).

July 29, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, July 28, 2014

Not Everything Is Arbitrable Says 2-1 Majority of the Fifth Circuit

5th CircuitIn 2002, Shirley Douglas opened a checking account with Union Planters Bank.  In connection with that account, which she closed in 2003, Ms. Douglas signed a signature card that provided for binding arbitration and delegated the issue of arbitrability to the arbiter.  

That bank merged into Regions Bank (Regions) in 2005.

In 2007, Ms. Douglas was injured in a car accident.  She alleges that her attorney embezzled her $500,000 settlement, and she sued Regions and another bank at which the attorney maintained accounts.  Regions moved to compel arbitration based on Ms. Douglas's agreement with Union Planters Bank.  The District Court found that there was no ground for arbitration.

On appeal, in Douglas v. Regions Bank, two judges affirmed, while noting that the District Court had applied the wrong law.  While the District Court apparently believed that Regions had never become a party to the arbitration provision at issue, the Circuit Court found that it had, but that the arbitration provision is irrelevant because Ms. Douglas's claims do not relate to her account with Union Planters Bank.  As the Court noted:

The mere existence of a delegation provision in the checking account’s arbitration agreement, however, cannot possibly bind Douglas to arbitrate gateway questions of arbitrability in all future disputes with the other party, no matter their origin.


Mr. Bumble

In rejecting Regions' argument that the delegation clause in Ms. Douglas arbitration agreement with Union Planters Bank meant that the question of arbitrability had to be sent to an arbiter, the Fifth Circuit adopted the Federal Circuit's position, which is that the issue of arbitrability does not have to be sent to the arbiter when  the assertion of arbitrability “wholly groundless.” 

That seems like a reasonable rule, and dissenting Judge Dennis seemed to agree, except that Judge Dennis thought it impermissible for the Fifth Circuit to adopt the Federal Circuit's reasonable position when the Supreme Court adopted a less reasonable position in Rent-A-Center W. v. Jackson.   Indeed, in AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643 (1986), the Supreme Court made clear that when an issue is reserved for the arbiter, courts may not pronounce on the merits of the issue.  Thus a court must send the issue of arbitrability to an arbiter even when all are agreed that the arbitration agreement is inapplicable.

As Mr. Bumble might have put it, f the law supposes that the parties' interests are served by sending a claim to arbitration when there is no colorable claim that the parties have agreed to have the claim arbitrated, the law is a ass -- a idiot.

July 28, 2014 in Commentary, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, July 21, 2014

Fifth Circuit Sends Case to Arbitration 2 1/2 Years After Litigation Begins

5th CircuitIn Al Rushaid v. Nat'l Oilwell Varco, Inc., plaintiffs sued eight entities for breach of contract.  The District Court found that the disputed contracts could result in damages in the hundreds of millions of dollars.  Discovery would have to take place on several continents.  Accordingly, although plaintiffs served all defendants except National Oilwell Varco Norway (NOV Norway) in August 2011, the District Court set a trial date in June 2013.

In August 2012, plaintiffs served NOV Norway, which invoked an arbitration clause in September 2012.  The District Court denied NOV Norway's motion to compel arbitration, finding that the dispute was not within the scope of the arbitration clause and that NOV Norway had waived its right to arbitrate.  

The Fifth Circuit rejected both the District Court's conclusion that there was no agreement to arbitrate and its conclusion that NOV Norway had waived its right to arbitrate.  On the first issue, the District Court's ruling was based on its finding that plaintiffs' claims against NOV Norway related to an NOV Norway price quotation that did not include an arbitration clause.  The Fifth Circuit concluded that the price quotation was merely a supplement to terms provided in a general agreement called the ORGALIME.  The Fifth Circuit concluded that the relationship between the two documents was sufficiently established so that the ORGALIME's arbitration clause should apply to disputes relating to the price quotation.

Under Fifth Circuit precedent, a party waives its right to arbitrate if it (1) “substantially invokes the judicial process” and (2) thereby causes “detriment or prejudice” to the other party.  The District Court found that this standard was met because NOV Norway's co-defendants engaged in extensive discovery and because all co-defendants are jointly owned and controlled and were represented by the same legal counsel.  The extent to which NOV Norway's codefendants' conduct could be imputable to it in a context such as this raised a question of first impression for the Fifth Circuit.  In this case, the Court found that, although NOV Norway might have benefitted from the discovery conducted by its co-defendants, it had not thereby invoked the judicial process, as this occurred before NOV Norway was served.  After it was served, discovery continued but NOV Norway did not participate.  

The District Court's denial of NOV Norway's motion to compel arbitration was vacated.  NOV Norway is the only defendant that may avail itself of arbitration.  The case was remanded for a determination of whether there should be a stay of proceedings in the District Court pending the outcome of arbitration between plaintiffs and NOV Norway.

July 21, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Supreme Court of Ohio Rules in Condition Precedent Case

BettmanThis is a edited version of a longer post from the Legally Speaking Ohio blog, written by Marianna Brown Bettman (pictured), a law professor at the University of Cincinnati College of Law, where she teaches torts, legal ethics, and a seminar on the Supreme Court of Ohio.  She is also a former Ohio state court of appeals judge.  

Professor Bettman's full blog post can be found here.

On July 17, 2014, the Supreme Court of Ohio handed down a merit decision in Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp.Slip Opinion No. 2014-Ohio-3095. In a 5-2 opinion authored by Justice Kennedy, the Court held that a contract for work performed by a subcontractor for a general contractor which contains a provision that payment by the project owner to the general contractor is a condition precedent to payment by the general contractor to the sub is a pay-if-paid provision. Such a provision clearly and unequivocally shows the intent of the parties to transfer the risk of the owner’s nonpayment from the general contractor to the subcontractor.  Justice O’Neill dissented, for himself and Justice Pfeifer.  The case was argued November 5, 2013.

Case Background

A.E.M was the general contractor on the construction of a swimming pool at a Holiday Inn. A.E.M. entered into a subcontract with Transtar to perform electrical work on the project. Transtar fully performed the work under the contract, and was paid $142,620. A.E.M. did not pay Transtar the remaining balance of $44,088 because A.E.M. contended the owner failed to pay it for Transtar’s work.

Section 4 of the subcontracting agreement included this provision, which was in bold and in capital letters: “Receipt of payment by contractor from the owner for work performed by subcontractor is a condition precedent to payment by contractor to subcontractor for that work.”

. . .

Analysis of Merit Decision

Definitions: Pay-when-Paid versus Pay-if-Paid

The Court explains there are two types of contract provisions between general and subcontractors.  A pay-when-paid provision is one in which a general contractor makes an unconditional promise to pay the subcontractor, within a reasonable period of time to allow the general contractor to be paid.  A pay-when-paid provision is not affected by the owner’s nonpayment.

By contrast, a pay-if-paid provision is a conditional promise to pay that is enforceable only if a condition precedent has occurred.  Under this type of contract, the general contractor is only required to pay the subcontractor if the owner pays the general contractor.  Under a pay-if-paid contract, the risk of the owner’s nonpayment is shifted to the subcontractor.

The issue in the case is which kind of contract provision was this one? Short answer: pay-if-paid.

. . .

Application of the Rule to the Contract in this Case

The Court held that Section 4 of the contract between A.E.M. and Transfer is a pay-if-paid provision, and clearly and unequivocally shows that the parties intended to transfer the risk of the owner’s nonpayment from A.E.M. to Transtar.


The court of appeals is reversed and the judgment of the trial court granting summary judgment to A.E.M. is reinstated.


Justice O’Neill, joined by Justice Pfeifer in dissent, would find the language in this particular contract inadequate as a matter of law to transfer the risk of nonpayment by the owner from A.E.M. to Transtar.  He would find the ambiguities in the wording create genuine issues of material fact that make summary judgment inappropriate.

 . . .

July 21, 2014 in Recent Cases, Weblogs | Permalink | Comments (0) | TrackBack (0)

Monday, July 14, 2014

Ninth Circuit Enforces Class-Action Waiver Despite Federal Statutes

9th CirFatemeh Johnmohammadi was an employee of Bloomingdale's, Inc. (Bloomingdale's).  She sought to bring a state class-action claim alleging that she and others, similarly situated, were owed overtime wages.  Bloomindale's removed the case to federal court and then filed a motion to compel arbitration of Johnmohammadi's claims.  The District Court granted the motion and dismissed the case without prejudice.  Johnmohammadi appealed to the Ninth Circuit.

In Johnmohammadi v. Bloomingdale's, Inc., the Ninth Circuit affirmed the District Court's decision.  The Court found that there is no question that Johnmohammadi voluntarily agreed to Bloomingdale's arbitration agreement, which also included a class action waiver.  The arbitration agreement included an opt-out option of which Johnmohammadi did not avail herself.

On appeal, Johnmohammadi argued that the class-action waiver is unenforceable because its enforcement would violate the Norris-LaGuardia Act and the National Labor Relations Act both of which protect the rights of employees to engage in "concerted activities."  While the Court noted that there is some support for Johnmohammadi's position, the cases she cited applied only where an employer forces employees to waiver their rights as a condition of employment.  Here, because of the opt-out option, Johnmohammadi was held to have voluntarily agreed to Bloomingdale's terms.  


July 14, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Court Finds that Party Who Signed "Flounder" Is Not Bound to New Employment Agreement

FlounderIn Random Ventures, Inc. v. Advanced Armament Corp., the District Court for the Southern District of New York found that a party that wrote the word "flounder" on a signature line was not bound by the document on which he scribbled that word.

For the full context, you would have to read the 117-page District Court opinion.  Our highly-consdensed summary is as follows:

Kevin Brittingham formed a company, Advanced Armament Corp. (AAC) that designed and manufactured silencers for firearms.  AAC thrived and in 2009, a large firearms manufacturer, Remington Arms Company (Remington) acquired it.  Remington paid $10 million up front, and Brittingham was to get another $8 million if he was still around as an AAC employee (now Remington's subsidiary) in 2015.  He was terminated at the end of 2011 and his partner from the original business, Lynsey Thompson, was terminated one month later.  Both Brittingham and Thompson sued for breach of contract and breach of the covenant of good faith.  

The Court noted that Brittingham socialized with his clients by riding dirt bikes, engaging in aerial pig hunts and attending strip clubs.  He ran a successful business but, as the Court observed, he is nobody's idea of a perfect fit for a corporate culture.  Tensions arose in the relationship over AAC's compliance with federal regulations relating to the handling of firearms.  The Court concluded unequivocally that Remington (not Brittingham) bore responsibility for the compliance failures.  Nontheless, Remington suspended Brittingham and Thompson over compliance issues.

Remington offered Brittingham a new employment agreement.  The agreement was really an ultimatum: either sign this acknowledgment that we have grounds to terminate you for cause and then you can return to work on a probationary basis or consider yourself terminated for cause right now.  Of course, termination for cause would cost Brittingham $8 million.  The court characterized this document as an $8 million hold-up (with or without a silencer?), which Brittingham "consistently refused to execute."  Eventually Brittingham (or someone) scribbled "Flounder" on the signature line and faxed the agreement to Remington.   The Court seems to have found that the scribble did not bind Brittingham, since a sophisticated party like "Remington could not reasonably have been duped into believing Brittingham had adequately executed the proposed amended EA based on the scribbling on the last page."  But it is not clear that such a finding is necessary to the Court conclusion, since Remington never executed the new agreement.

It seems that the Court's finding that the agreement was not enforceable did not actually turn on the issue of signature.  The Court refused to enforce an agreement that Brittingham could be terminated for cause when, in fact, no grounds for termination for cause existed.  

To the extent that Brittingham and Thompson did agree to amended employment terms, however, the Court finds as a factual matter that they did so under false pretenses – as determined above, defendants did not have Cause to terminate either plaintiff at the time of their suspensions.

The Court rejected Remington's argument that by writing "Flounder" and by returning to work, Brittingham had waived any objection to the amended employment agreement.  The Court construed Brittingham's act as one of defiance rather than as one of waiver.  

Thanks to Professor Royce de Rohan Baronedes who blogged about the case here and alerted us to its existence.

Interesting aside related to Nancy Kim's post from February about Rocket from the Crypt and acceptance by tattoo.  Before it was acquired, Brittingham's company ran a promotion promsing a free silencer to anyone bearing a tattoo with his company's logo.  The promo cost the company $250,000.

July 14, 2014 in Contract Profs, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 9, 2014

Aereo Loses in Supreme Court and so do Consumers – for Now

By Myanna Dellinger

Recently, I blogged here on Aereo’s attempt to provide inexpensive TV programming to consumers by capturing and rebroadcasting cable TV operators’ products without paying the large fees charged by those operators.  The technology is complex, but at bottom, Aereo argued that they were not breaking copyright laws because they merely enabled consumers to capture TV that was available over airwaves and via cloud technology anyway. 

In the recent narrow 6-3 Supreme Court ruling, the Courts said that Aereo was “substantially similar” to a cable TV company since it sold a service that enabled subscribers to watch copyrighted TV programs shortly after they were broadcast by the cable companies.  The Court found that “Aereo performs petitioners’ works publicly,” which violates the Copyright Act.  The fact that Aereo uses slightly different technology than the cable companies does not make a “critical difference,” said the Court.  Since the ruling, Aereo has suspended its operations and posted a message on its website that calls the Court’s outcome "a massive setback to consumers."

Whether or not the Supreme Court is legally right in this case is debatable, but it at least seems to be behind the technological curve.  Of course the cable TV companies resisted Aereo’s services just as IBM did not predict the need for very many personal computers, Kodak failed to adjust quickly enough to the digital camera craze, music companies initially resisted digital files and online streaming of songs.  But if companies want to survive in these technologically advanced times, it clearly does not make sense to resist technological changes.  They should embrace not only technology, but also, in a free market, competition so long as, of course, no laws are violated.  We also do not use typewriters anymore simply to protect the status quo of the companies that made them.

It is remarkable how much cable companies attempt to resist the fact that many, if not most, of us simply do not have time to watch hundreds of TV stations and thus should not have to buy huge, expensive package solutions.  Not one of the traditional cable TV companies seem to consider the business advantage of offering more individualized solutions, which is technologically possible today.  Instead, they are willing to waste money and time on resisting change all the way to the Supreme Court, not realizing that the change is coming whether or not they want it. 

Surely an innovative company will soon be able to work its way around traditional cable companies’ strong position on this market while at the same time observing the Supreme Court’s markedly narrow holding.  Some have already started doing so.  Aereo itself promises that it is only “paus[ing] our operations temporarily as we consult with the court and map out our next steps.”



July 9, 2014 in Commentary, Current Affairs, E-commerce, Famous Cases, Film, In the News, Music, Recent Cases, Television, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, July 7, 2014

Eighth Circuit Upholds Constitutionality of Civility Clause in Termination of Professor

University_of_South_DakotaChristopher Keating was a tenure-track professor of physics at the University of South Dakota.  He did not get along with the only other full-time physics professor at the university.  Keating filed a grievance against her with their department head.  She responded with an accusation of sexual harrassment against Keating.  After two heated exchanges with Keating, the department head rejected Keating's claims.   Some time later, having been reprimanded for not seeking approval from either his colleague or the department chair for something that required such approval, Keating explained in an e-mail that he would not seek approval from his colleague because "she is a lieing [sic], back-stabbing sneak."

After that academic year ended, Keating was informed that his employment contract would not be renewed, because his e-mail violated Appendix G to the university's employment policy, which reads:

Faculty members are responsible for discharging their instructional, scholarly and service duties civilly, constructively and in an informed manner. They must treat their colleagues, staff, students and visitors with respect, and they must comport themselves at all times, even when expressing disagreement or when engaging in pedagogical exercises, in ways that will preserve and strengthen the willingness to cooperate and to give or to accept instruction, guidance or assistance.

Keating challenged his termination, alleging that the "civility clause" was unconstitutionally vague in violation of the U.S. Constitution's Due Process Clause.  The District Court granted Keating the declaratory relief he sought.  In Keating v. University of South Dakota, the Eighth Circuit reversed.  

In the public employment context, the Eighth Circuit noted, the standard for vagueness is not as stringent as in the criminal context.  "Standards are not void for vagueness as long as ordinary persons using ordinary common sense would be notified that certain conduct will put them at risk of discharge.”   The Eighth Circuit found that the civility clause was neither facially void for vagueness nor impermissibly vague as applied to Keating.  The Court read the offending e-mail in the broader context of Keating's refusal to work with his colleagues or to even communicate with his immediate superiors.  So seen, the Court had little difficulty finding that Keating had failed to comport himself in ways that "preserve and strengthen willingness to cooperate."

Arthur_LeonardProfessor Arthur Leonard, of New York Law School (pictured),  posted a link to this case and queried whether the civility clause could pass contractual (as opposed to constitutional) tests for vagueness.   One wonders what sort of evidence either party would have to put forward to persuade the court as to the meaning of "civil" in this context.  Those of us in the academy can likely come up with plenty of examples of interactions with colleagues in which one or more university employees can be said to have acted in ways that were not civil.  Still, it is rare to see someone put in writing his principled opposition to cooperation and communication with his one disciplinary colleague and his department chair.  Could Keating show contractual vagueness by pointing to rampant and unpunished incivility on the part of other university employees, or does the university have discretion to terminate any given professor who, in its determination, crossed the line of incivility?

In short, if universities are free to point to a civility clause whenever they want to terminate a professor, tenure means nothing.  Keating was not yet tenured, but as to the constitutional and contractual issues, I don't think tenure would change the outcome of the case.  On the other hand, a civility clause might be a useful tool that university administrators can use in extreme cases when a faculty member -- even a tenured faculty member -- is so unprofessional as to degrade the working environment for his or her colleagues.  In this case, the fact that Keating called his colleague a lying, back-stabbing sneak" may be less significant than his statement that he would not trust his department chair or communicate with the university's only other full-time physics professor.

July 7, 2014 in Commentary, Contract Profs, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, June 30, 2014

Statute of Frauds to the Rescue in Deepwater Horizon Case

Oil_Spill_Containment_BoomAfter BP's oil drilling rig, the Deepwater Horizon (below, right) located off the Gulf Coast of Louisiana, caught fire and sank in April 2010, BP sought to purchases millions of feet of oil containment boom (pictured).  Plaintiff Packgen sought to capitalize on this demand by manufacturing boom, although it had never done so before.  Assuming the facts as alleged by Packgen, already by May 2010, Pathgen had secured an oral agreement from BP to purchase boom at $21.75/sq. ft., subject to inspection of Packgen's facilities and testing of Packgen's products to confirm that they met standards established by the American Society of Testing and Matierals (ASTM).  Such inspection occurred, and Packgen's products satisfied ASTM's standards.

Although the parties seemed committed to working together and Packgen geared up to produce 40,000 square feet of boom per day, the parties continued to exchange communications throughout May.  BP began to express concern about the connectors on Packgen's boom and demanded various modifications to Packgen's boom design.  A field test of Packgen's boom did not go well.  BP's needs changed.  It demanded further changes and Packgen scrambled to comply.  By the time Packgen was producing boom that met BP's needs, BP had capped the Deepwatern Horizon and its need for boom quickly dimishinished.  It never purchased any boom from Pathgen, and Pathgen was left with 60,000 feet of boom, which it eventually sold for $2/sq. ft. 

Packgen sued, alleging misrepresentation, breach of contract, and equitable claims.  The District Court dismissed all of Packgen's claims, and it appealed, drawing a panel that included retired Supreme Court Justice David Souter.

Deepwater HorizonThe First Circuit affirmed the District Court's dismissal of all claims in Packgen v. BP Exploration and Production, Inc.  The Court found that there was no misrpresentation because the BP personnel who indicated an intention to purchase Packgen's boom sincerely intended to do so at the time they made those representations.  

As this alleged contract was for the sale of goods with a value in excess of $500, it was within the Statute of Frauds (SoF) and thus had to be evidenced by a writing.  Packgen did not claim that the sale was evidenced by a writing but claimed that the transaction fell within two UCC exceptions to the SoF: the specially manufactured goods exception and the judicial admission exception.  

On the specially-manufactured-goods exception, the facts were interesting.  In short, Packgen could not avail itself of the exception because it re-sold the goods.  Packgen pointed out that it had repeatedly modified the product to meet BP's specifications and that BP was buying 90% of the boom produced in the U.S. markets at the time.  The Court pointed out that those circumstances are not relevant.  The only question is whether the goods could be re-sold to another purchaser, and they could.  The fact that the market for boom collapsed once BP stopped buying and that Packgen consequently could get only 10% of its original selling price does not change the fact that the product could be sold to another purchaser.  

On the judicial admission exception, Packgen cited to an e-mail from a BP employee who, in reference to Packgen, wrote: "I do not understand why we keep placing orders with suppliers like this[.]"  Seen in its context, the Court found that the e-mail was insufficient to overcome other evidence indicating that, at the time that e-mail was sent, both parties believed themselves to be negotiating a contract rather than as having a contract.

Packgen's equitable claims failed as well.  It could not show evidence that BP had benefitted from the information it had provided regarding boom speicifications nor that it had provided any services in connection with the parties' on-going negotiations for which it expected payment.  Packgen's promissory estoppel claim, like its breach of contract claim, fell because of the SoF.  While the SoF is not a complete bar of promissory estoppel claims relating to promises to sell goods in excess of $500, in order to overcome the SoF, plaintiff must allege conduct such that refusal to enforce the alleged promise would be tantamount to allowing the SoF itself to become an instrument of fraud.  But as Packgen's misrepresentation claims failed, it could show no actual intent to deceive. 

June 30, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, June 26, 2014

D-lightful Student Gets Litigious

Mcherry3Thanks to Miriam Cherry (left) for sharing this one:

I love this fact pattern: as reported in the National Law Journal, a student who received a D in contracts is suing the law school he attended, as well as his contracts professor, claiming that the professor deviated from the syllabus by counting quizzes towards the final grade.  He claims $100,000 in harm because the D in contracts resulted in his suspension from the law school.  He could not transfer to a different law school because he was ineligible for a certificate of good standing.  

The case is a cautionary tale.  It appears that the syllabus indicated that the quizzes would be optional.  The professor then announced in class that the quizzes would actually count.  The plaintiff claims to have been uanaware of the change or at least adversely affected by it.  I say it is a cautionary tale because I sometimes make changes to my syllabus, usually in response to student feedback.  I make sure to e-mail all students to make certain that everyone is aware of the changes and I obsessively remind students of the changes because I worry about precisely what happened here.  It may well be that the defendant contracts prof did the same, although the National Law Journal article states that the change was evidenced by the handwritten notes of another student.

There is an interesting exchange on the merits of the case in the comments to the ABA Journal article on this subject.  Apparently, there is some case law stating that a syllabus is a contract.  For the most part, I think such a rule would benefit instructors.  No student could complain about my attendance or no-technology policies because I could tell them (doing my best Comcast imitation) that by continuing to attend my course, they had agreed to my terms.  But many of the commentators think that written contracts can never be orally modified.  I don't think a syllabus is a contract because I don't think there are parties to a syllabus and I don't think there is intent to enter into legal relations.  Things might be different if the syllabus identified itself as a contract and informed students of the manner of acceptance of its terms.

PeterLinzerFriend of the blog, Peter Linzer (right), chimes in (comment #13) and succinctly dismisses this notion that a contract not within the Statute of Frauds cannot be orally modified.  In any case, he thinks the claim is best understood as sounding in promissory estoppel, and plaintiff's claim fails because, in short, he cannot claim to have reasonably relied on a promise just because he missed class or did not pay attention when that promise was retracted.  

June 26, 2014 in Commentary, Contract Profs, In the News, Recent Cases, Teaching | Permalink | Comments (1) | TrackBack (0)

Wednesday, June 25, 2014

Posner Sides with Donald Trump Upholding Dismissal of Suit by 87-Year-Old Woman

Trump Int'lIn 2006, Jacqueline Goldberg signed an agreement* to purchase two hotel condominium units in Trump Tower Chicago, a 92-story building in downtown Chicago that comprises residential condo units, hotel condo units and all of the amenities one expects to find in a hotel (pictured at left).  Some of these amenities are called "common elements" in which each individual purchaser of the condo units has rights.  But the agreement into which Ms. Goldberg entered included a "change clause" that permitted the Trump Organizations to modify those rights with either the notice to or approval by the purchasers.  Ms. Goldberg attempted to negotiate for a return of her deposit if she disapproved of the changes, but the Trump Organizations refused.  Three such changes took place before Ms. Goldberg signed the agreement.  

But then came the fourth change, to which Ms. Goldberg strenuously objected.  She refused to close on the deal and demanded a return of her $516,000 deposit.  The Trump Organizations placed her deposit in escrow, and she sued, alleging breach of contract and other causes of action.  Some of her claims were dismissed, some were tried before a jury, and some were tried before a judge.  Both the jury and the judge found for the Defendants.  Ms. Goldberg appealed to the Seventh Circuit, resulting in Judge Posner's opinion upholding the District Court in Goldberg v. 401 North Wabash Venture LLC.

Ms. Goldberg's common law allegations basically came down to a claim that the Trump Organizations had engaged in a bait and switch -- she had bought the condos as an investment and had been led to believe that they would have a certain value.  After the changes, that value was diminished.  Judge Posner rejected this characterization of the agreement, since Ms. Goldberg, "a wealthy and financially sophisticated Chicago businesswoman," was aware of the change clause and had even attempted to have it removed.  On the facts, there was no deception.  She took a risk when she entered into the agreement with the change clause included.

Of more interest to us, Judge Posner concluded that Ms. Goldberg's breach of contract claim collapsed once her "bait-and-switch" theory was eliminated.  While there is a duty of good faith, Judge Posner reminded Ms. Goldberg that it applies only in the performance of a contract, not in its formation.  There follows an interesting discussion of law and equity.  Ms. Goldberg challenged the trial judge's decision to decide on her breach of contract claim rather than submit the question to the jury.  Judge Posner noted that rescission is an equitable, not a legal, remedy, and under both Illinois and Federal law, there is no right to a jury trial on an equitable claim.

One could imagine that Ms. Goldberg might have argued that the Trump Organizations breached the duty of good faith and fair dealing in the performance of the contract.  After all, the bait might have occurred in the formation of the contract, but the switch occurred during performance.  Ms. Goldberg would then have to show that while some changes were to be expected under the change clause, the actual changes that the Trump Organizations engaged in were not in the contemplation of the parties at the time they entered into the contract and undermined the original agreement (or something like that).  It's not clear that Ms. Goldberg could have made such a showing.  It seems that the Trump Organizations had good reasons for the changes that were made.  In any case, if she were making that sort of argument, I think Ms. Goldberg would not have sought rescission of the agreement but enforcement of the original agreement without the changes.  

Finally, one might see this as another example of corporations getting to impose unreasonable terms on a consumer.  Here, Judge Posner has very little sympathy for the plaintiff, despite her advanced age, because of her sophistication.  But the facts make clear that even she, who bought two condos as an investment, had no bargaining power as to the terms at issue.  Posner undoubtedly applied the law correctly, but just think, if a person with Ms. Goldberg's means has no bargaining power as to one-sided and potentially unreasonable terms, what chance do the rest of us have?

For a different take on the same case, check out my law school's student law blog, the VALPOLAWBLOG, where you can find this post by student Faith Alvarez.

*Following Judge Posner's example, we simplify things by making it one agreement and ignore the complexities of the various Trump entities by referring to those entities collectively as the Trump Organizations.

June 25, 2014 in Commentary, Recent Cases, Weblogs | Permalink | Comments (0) | TrackBack (0)

Sunday, June 15, 2014

Minnesota Court of Appeals Finds E-Signature Did Not Apply to Attachment

TenementsPlaintiffs in SN4, LLC v. Anchor Bank wanted to buy two multi-unit apartment buildings for which Anchor Bank (the Bank) held title.  Through an exchange of e-mails, the parties seemed to have agreed to a purchase price of $1.7 million, but they continued to exchange drafts of a final agreement.  The opinion catalogues and summarizes 19 e-mails relevant to the transaction, but there was no e-mail and no hard copy in which the Bank signed any purchase agreement relating to the properties.  When the Bank refused to sell the properties, plaintiffs sued alleging breach of an agreement that they had signed.  

The trial court granted summary judgment in favor of the Bank on the ground that that the statute of frauds was not satisfied.  On appeal before the Minnesota Court of Appeals, the plaintiffs argued that the Bank had electronically subscribed to the agreement.  The matter of first impression for the court was plaintiffs' claim that the Bank had subscribed to the agreement that plaintiffs later signed because the Bank electronically signed the e-mail to which the agreement was attached.  This claim required the court to address the Minnesota's version of the Uniform Electronic Transactions Act (UETA).  

The court noted that, although the parties conducted their negotiations electronically, UETA does not require them to also subscribe to their transaction electronically unless the parties so intended to limit the means by which they would enter into agreement.  Here, the parties repeatedly made it clear that they expected to sign hard copies of their final agreement.  The court also rejected plaintiffs' contention that the Bank had signed the agreement in two e-mails which included the typed-in name of one of the Bank's principals and a signature block.  The court found that a reasonable factfinder could conclude that the Bank had provided electronic signatures, but under UETA, such signatures must be attached to or associated with the electronic record at issue.  An electronic signature in an e-mail does not automatically apply to a document attached to that e-mail.  In this case, the Bank did not electronically sign the attached document, nor does it seem that the parties considered the attached document the final version of their agreement, as they referred to it as a draft.

Based on these findings, the Court of Appeals upheld the trial court's conclusion that UETA did not apply to the alleged agreement and that no reasonable finder of fact could conclude that the Bank had electronically signed the agreement.  The Court of Appeals therefore upheld the grant of summary judgment to the Bank.  The Court of Appeals also upheld the trial court's rejection of the plaintiffs' equitable estoppel claim.

June 15, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)