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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)

Tuesday, June 10, 2014

Your Kids as a Free Facebook Marketing Tool Against Your Will

By Myanna Dellinger

What would you say if you found out that Facebook used your kids’ names and profile pictures to promote various third-party products and services to other kids?  Appalling and legally impossible as minors cannot contract?  That’s just what a group of plaintiffs (all minors) attempting to bring a class action lawsuit against Facebook argued recently, but to no avail. Here’s what happened:

Kids sign up on Facebook, “friend” their friends and add other information as well as their profile pictures.  Facebook takes that information and display it to your kids’ friends, but alongside advertisements.  The company  insists that they do “nothing more than take information its users have voluntarily shared with their Facebook friends, and republish it to those same friends, sometimes alongside a related advertisement.” How does this happen?  A program called “Social Ads” allows third parties to add their own content to the user material that is displayed when kids click on each other’s information. 

The court dismissed the complaint, finding no viable theory on which it could find the user agreements between the kids and Facebook viable.  In California, where the case was heard, Family Code § 6700 sets out the general rule for minors’ ability to contract: “… a minor may make a contract in the same manner as an adult, subject to the power of disaffirmance.”  The plaintiffs had argued that as a general rule, minors cannot contract.  That, said the court, is turning the rule on its head: minors can, as a starting point, contract, but they can affirmatively disaffirm the contracts if they wish to do so.  In this case, they had not sought to do so before bringing suit. 

Plaintiffs also argued that under § 6701, minors cannot delegate their power to, in effect, appoint Facebook as their agent who could then use their images and information.  Wrong, said the court.  Kids signing up on Facebook is “no different from the garden-variety rights a contracting party may obtain in a wide variety of contractual settings.  Facebook users have, in effect, simply granted Facebook the right to use their names in pictures in certain specified situations in exchange for whatever benefits they may realize from using the Facebook site.” 

In its never-ending quest to increase profits, Corporate America once again prevailed.  Even children are not free from being used for this purpose.  The only option they seemed to have had in this situation would have been to disaffirm the “contract;” in other words, to stop using Facebook.  To me, that does not seem like a difficult choice, but I imagine the vehement protests instantly launched against parents asking their kids to stop using the popular website.  Of course, kids are a highly attractive target audience.  Some already have quite a bit of disposable income.  They are all potential long-time customers for products/services not directed only at kids.  Corporate name recognition is important in connection with this relatively impressionable audience.  But is this acceptable?  After all, there is an obvious reason why minors can disaffirm contracts.  This option, however, would often require intense and perhaps undesirable parent supervision.  In 2014, it is probably unreasonable to ask one’s kids not to be on social media (although the actual benefits of it are also highly debatable). 

Although the legal outcome of this case is arguably correct, its impacts and the taste it leaves in one’s mouth are bad for unwary minors and their parents.

June 10, 2014 in Commentary, Current Affairs, E-commerce, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, June 9, 2014

Teaching Third Party Beneficiaries, Assignment & Delegation & a New Third Party Beneficiaries Case out of the First Circuit

Last year, my big teaching innovation was to get rid of casebooks and rely instead on cases and ancillary materials that my fellow contracts prof, Mark Adams, and I edited and compiled on a LibGuide.  This coming year, my big innovation will be to add a unit on Third Party Beneficiaries, Assignment and Delegation.  I can do so because we now have a two-credit course on Damages and Equity at the end of our first-year curriculum, and so I do not need to cover remedies in my contracts course.  I will continue to emphasize remedies throughout the course, but we will not end the semester with a unit consisting of cases that focus primarily on remedies issues.  Fare thee well, Peevyhouse, Jacob & Youngs, Hadley, et al.!  I really will miss you.  

I can do so without regrets, as my students will study these cases (or at least the subject matter for which they are the vehicle of presentation) in their Damages and Equity course.  The reason I feel I need to jettison this material in favor of third parties, etc. is that I have recently learned that those subject matters are heavily tested on the multi-state bar exam.  They also are important in practice, and I don't know where they would be covered if not in first-year contracts.

1st CirSo, with that in mind, the recent First Circuit case, Feingold v. John Hancock Life Ins. Co. caught my eye.  The case related to Feingold's mother's insurance policy, which she took out in 1945.  The policy named Mrs. Feingold's late husband as the sole beneficiary.  He apparently pre-decesased her, and she died in 2006.  Feingold had no knowledge of his mother's policy and did not inform John Hancock of her death until 2012.  At that point, he sought information about her policy.  John Hancock issued Feingold a death benefit check of $1,349.71 but provided no further information about his mother's policy.  That policy, it seems, required a named beneficiary to notify the insurer of the policy-holder's death.  Because such a provision was permissible under state law, the trial court found that John Hancock had no duty to notify Feingold of the policy or to independently seek out potential beneficiaries.  

But Feingold also relied on a 2011 Global Resolution Agreement (GRA) entered into by John Hancock and several states.  Under the GRA, John Hancock agreed to alter some of its practices relating to unclaimed property.   Feingold filed a putative class action claiming that he and other members of the class were harmed as third-party beneficiaries of the GRA when John Hancock breached its obligations under the GRA.  

The First Circuit affirmed the District Court's grant of John Hancock's motion to dismiss Feingold's claims.  The First Circuit found that Feingold and the putative class members are not third-party beneficiaries to the GRA.  The GRA contains no language sufficient to overcome the "strong presumption" against third party beneficiaries.   While Feingold alleged that both John Hancock and the states entered into the GRA in order to protect insurance policy beneficiaries, the First Circuit reasoned that Feingold and others like him are at most incidental rather than direct beneficiaries of the GRA.  Under applicable state law, the fact that states were parties to the agreement strengthens the assumption in favor of the third parties' incidental status.

June 9, 2014 in Recent Cases, Teaching | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 3, 2014

Texas Supreme Court Finds Settlement Agreement Was Formed Although Mirror Image Rule Not Satisfied

Texas SealAfter two employees of Amedisys, Inc. (Amedisys) went to work for its competitor, Kingwood Home Health Care, LLC (Kingwood), Amedisys sued Kingwood for tortious interference.  The two parties then engaged in a game of legal chicken.  Amedisys threatened that it would not settle below six figures.  Kingwood responded with a settlement offer of $90,000, expecting that Amedisys would reject the offer and trigger Rule 167 of the Texas Civil Practice and Remedies Code, which would allow Kingwood to recover litigation costs if the case went to trial and resulted in a judgment considerably less favorable to Amedisys than the settlement offer.

Amedisys accepted the settlement offer.  This apparently was not what Kingwood wanted or expected, and Kingwood refused to treat Amedisys's response as an acceptance.  Kingwood proceeded with some pre-trial motions, and Amedisys filed an emergency motion for the enforcement of the settlement agreement.  Kingwood claimed that the settlement agreement lacked consideration and that it was fraudulently induced by Amedisys's statement that it would not settle for less than six figures.  Note that Kingwood is thus effectively admitting that it made its settlement offer only in order to avail itself of Rule 167.  After a few more procedural complexities, the trial court granted Amedysis's motion to have the settlement agreement enforced.

On appeal, in addition to its allegations that the settlement agreement lacked consideration and was fraudulently induced, Kingwood claimed that Amedisys's purported acceptance was a counteroffer because it did not match the terms of Kingwood's offer.  While Kingwood offered $90,000 "to settle all claims asserted or which could have been asserted by Amedisys,” Amedisys agreed to accept $90,000 "to settle all monetary claims asserted."  Despite the fact that this argument was first raised on appeal, the Texas Court of Appeals agreed with Kingwood and reversed the trial court's judgment in favor of Amedisys.

Texas FlagThe Supreme Court found that the Court of Appeals acted correctly in considering Kingwood's argument, raised for the first time on appeal, that no contract existed.  Amedisys, as the moving party, bore the burden of proving each element of its claim that Kingwood had breached a contract, including proof of the existence of a contract.  

[Editorializing here: This seems more than a bit off to me.  Amedisys likely thought it had proved the existence of a contract when it presented evidence of offer and acceptance.  At the trial court, Kingwood did not raise any claims that the acceptance was invalid based on the difference in wording between offer and acceptance.  Why should Kingwood be permitted to sit on its legal arguments and save them for appeal?  By not raising them in opposition to Amedisys's motion, Kingwood should have been treated as having waived those arguments.  Otherwise, Amedisys would have to attempt to guess every possible legal challenge that Kingwood might raise to its claims and put them in its motion papers.  In the process, Amedisys would be required to aniticipate every conceivable counterargument to its position, raise and refute each argument.  This places an intolerable burden on the movant.]

While the common law does provide that an acceptance may not qualify or change the material terms of an offer, the Texas Supreme Court found that the differences between offer and acceptance in this case were not material given the full context of the exchanges between the parties.  Amedisys made clear its intention to accept Kingwood's offer on the terms Kingwood presented.  Moreover, there were no additional claims that Amedisys might potentially bring, as the doctrine of res judicata would bar Amedisys for bringing additional, related claims once the suit had been settled.  

Because the Court of Appeals declined to rule on Kingwood's additional defenses, the Supreme Court remanded the case back to the Court of Appeals for resolution of those issues.

For those who would like to explore the Mirror Image Rule with students, this is a pretty interesting case, and the Texas Supreme Court provides a video recording of the oral arguments, so that would be pretty cool to share with students as well.

June 3, 2014 in Commentary, Recent Cases, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, June 2, 2014

Divided Mississippi Supreme Court Strikes One-Sided Arbitration Clause as Unconscionable

Mississippi SealPlaintiffs in Caplan Enterprises, Inc. v. Ainsworth signed two versions of a delayed-deposit agreement with a business called Zippy Check.  The agreements included two versions of arbitration clauses that applied to all of plaintiffs' potential claims, but Zippy Check remained free to pursue all judicial remedies.  In addition, plaintiffs' potential damages were limited to the price paid by plaintiffs for services rendered.

In 2010, plaintiffs brought actions against Zippy Check, alleging fraudulent misrepresentation and predatory lending.  Zippy Check moved to compel arbitration.  The trial court found the aribtration clauses in both versions of the agreement to be unconscionable and unenforceable.  The appellate court found only one version to be unenforceable.  The Mississippi Supreme Court agreed with the trial court.  Its analysis focused on the substantive unconconscionability of the arbitration clauses.  Apparently, a showing of substantive unconscionability alone is enough in Mississippi, at least in connection with adhesion contracts.  The Supreme Court concluded that while arbitration agreements need not impose identifical obligations on each side, "under the particular facts of this case, the arbitration agreements were unreasonably favorable to Zippy Check, oppressive, unconscionable, and unenforceable."

Two dissenting Justices found that plaintiffs had not demonstrated procedural unconscionability because "plaintiffs presented no evidence that they were 'prevented by market factors, timing[,] or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all.'"  The dissenting Justices also noted that Mississippi does not require mutuality of obligation in arbitration clauses and thus found no substantive unconscionability in the arbitration agreements at issue in the case.

June 2, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, May 30, 2014

SDNY Enforces Hyperlinked Arbitration Clause and Class Action Waiver

BambooLast month, the District Court for the Southern District of New York granted a motion to dismiss brought by defendant Gilt Groupe, Inc. (Gilt) in Starke v. Gilt Groupe, Inc.  Adam Starke (Starke) sought to bring a class action claim against Gilt for allegedly misrepresenting on its website that its textiles were made from bamboo fibers when they are in fact made from bamboo derivatives (rayon).  

Gilt is an online shopping website that specializes in "flash sales" of short duration.  In order to purchase items on the website, one must become a Gilt member.  One does so by clicking on a "sign-up" box that states that the consumer agrees to be bound by Gilt's Terms of Membership.  Once click on the mouse brings the consumer to Gilt's "Terms and Conditions," which are governed by Gilt's Terms of Use.  A second click brings one to those terms which include, in paragraph 16, an arbitration agreement and a class action waiver.  

Starke claimed both that he never effectively agreed to the arbitration agreement and class action waiver and that they are unconscionable.  Relying on a 2012 case invovling similar challenges to Facebooks click-through terms and conditions, the District Court quickly concluded: 

Regardless of whether he actually read the contract's terms, Starke was directed exactly where to click in order to review those terms, and his decision to click the "Shop Now" button represents his assent to  them.

Yes, this is indeed how mass-market boilerplate rights-deletion scheme works.  Clicking twice, and carefully reading  both documents would have increased the time involved in Starke's transaction substantially.  Neither Starke nor Gilt, which specializes in "flash sales," wants that.   The terms are not intended to be read.  Nor do we know that Starke could have understood the significance of the arbitration clause and class action waiver had he read them.  In addition, what is Starke's alternative?  The District Court blithely directs Starke to  What do you know?  Amazon also has an arbitration clause and a class-action waiver!  [In fairness, I've always found Amazon's customer service to be excellent -- they take returns and cover shipping on returns, so Starke probably would have been better off with them -- Amazon also accurately described the product at issue in Starke's case.]  SDNY, you're part of the problem.

Starke did not seem to raise any serious grounds for finding the arbitration agreement unconscionable.  

[This post has been edited to fix errors that a reader called to the author's attention.]

May 30, 2014 in Commentary, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Tuesday, May 27, 2014

Third Circuit Rejects Insurer's Motion to Compel Arbitration of Medical Device Suppliers' Claims

3rd cirPlaintiffs in Cardionet, Inc. v. CIGNA Health Corp supply medical devices that permit patients to monitor heart function while away form a hospital.  CIGNA insured these businesses beginning in 2007, but in 2012, CIGNA announced that it would no longer do so because the services the plaintiffs  provide are "considered experimental, investigational or unproven."  CIGNA sent out a "Physician Update" informing them that it would no longer insure the plaintiffs' businesses.  The plaintiffs allege that CIGNA was in possession of no information relating to their services in 2012 that CIGNA did not already possess in 2007.  Tehy were miffed that services that were insureable in 2007 had become uninsureable in 2012.  They sued on their own behalf and on behalf of their patients, seeking damages and injunctive relief and alleging causes of action sounding in breach of contract, tortious interference and trade libel.  

CIGNA moved to compel arbitration pursuant to the original 2007 agreement which included a clause requiring arbitration of all disputes "regarding the performance or interpretation of the Agreement."  The District Court found that the arbitration provision applied and granted CIGNA's motion to compel  arbitration.  The Third Circuit reversed.

As to the plaintiffs' claims brought on their own behalf, the court noted that they all arose out of the following common set of factual allegations: 

CIGNA made false and misleading statements in the Physician Update about the nature and quality of OCT; CIGNA conveyed the false impression that OCT would never be covered under any health plans CIGNA administers; and the Physician Update injured them by decreasing the number of physicians willing to use OCT services.

The Third Circuit determined that the plaintiffs' claims related to the Physician Update and not to the plaintiffs' agreements with CIGNA.  If the Physician Update indeed contained material misstatements as plaintiffs allege, it would harm them whether or not they were insured by CIGNA because it informs doctors that, in CIGNA's view, the services plaintiffs provide are unproven.

The Third Circuit also determined that the claims brought on behalf of patients were not subject to arbitration, even if they would have been arbitrable if brought by the plaintiffs on their own behalf.  First, the patients were not signatories to the arbitration agreement and thus could not be brought within its ambit.  Second, the fact that plaintiffs took on their patients' claims as assignees did not bring the assigned claims within the scope of the arbitration provision, because that provision does not require arbitration of assigned claims.  

May 27, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, May 23, 2014

A Small Fish in a Big Game

By Myanna Dellinger

In California, the Bureau of Reclamation is in charge of divvying up water contracts in the California River Delta between the general public and senior local water rights owners.  Years ago, it signed off on long-term contracts that determined “the quantities of water and the allocation thereof” between the parties.  About a decade ago, it renewed these contracts without undertaking a consultation with the Fish and Wildlife Service (“FWS”) to find out whether the contract renewals negatively affected the delta smelt, a small, but threatened, fish species.  The thinking behind not doing so was that since the water contracts “substantially constrained” the Bureau’s discretion to negotiate new terms, no consultation was required.

Not correct, concluded an en banc Ninth Circuit Court of Appeals panel Ninth Circuit Court of Appeals panel recently.  By way of brief background, Section 7 of the Endangered Species Act (“ESA”) requires federal agencies to ensure that none of their actions jeopardizes threatened or endangered species or their habitat.  16 U.S.C. § 1536(a).  Among other things, federal agencies must consult with the FWS if they have “some discretion”"some discretion" to take action on behalf of a protected species.  In this case, since the contractual provision did not strip the Bureau of all discretion to benefit the species, consultation should have taken place.  For example, the Bureau could have renegotiated the pricing or timing terms and thus benefitted the species, said the court.

In 1993, the delta smelt had declined by 90% over the previous 20 years and was thus listed as a threatened species under the ESA.  Of course, fish is not the only species vying for increasingly scarce California water.  Man is another.  The current and ongoing drought in California – one of the worst in history – raises questions about future allocations of water.  Who should be prioritized?  Private water right holders?  People in Southern California continually thirsty and eager to water their often overly water-demanding garden plants?  Industry?  Farmers?  Not to mention the wild animals and plants depending on sufficient levels of water?  There are no easy answers here.

The California drought is estimated to cost Central Valley farmers $1.7 billion and 14,500 jobs.  While that seems drastic, the drought is still not expected to have any significant effect on the state economy as California is no longer an agricultural state.  In fact, agriculture only accounts for 5% of jobs in California.  Still, that is no consolation to people losing their jobs in California agriculture or consumers having to pay higher prices for produce in an increasingly warming and drying California climate. 

The 1974 movie Chinatown focused on the Los Angeles water supply system.  40 years later, the problem is just as bad, if not worse.  The game as to who gets water contracts and for how much water is still on.

May 23, 2014 in Commentary, Current Affairs, Food and Drink, Government Contracting, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)