ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

A Member of the Law Professor Blogs Network

Wednesday, November 6, 2013

Eric Goldman on Getting from "Dope" to "Nope"

GoldmanOn Monday, the Distrct Court for the  Southern of New York issued its opinion in  Beastie Boys v. Monster Energy Company, 12 Civ. 6065 (PAE) (S.D.N.Y. November 4, 2013).  The issue in the case was whether DJ Z-Trip had authorized Monster Energy to use a remix and video Z-Trip (Mr. Z-Trip?) had made of Beastie Boys songs.   Z-Trip wrote to Monster Energy saying, "Dope!" in the context of series of exchanges with Monster Energy over use of of the remix, and Monster Energy construed that word as consent.

Santa Clara Law Professor Eric Goldman (pictured) has a thorough anlysis here.

[JT]

November 6, 2013 in Celebrity Contracts, Contract Profs, In the News, Music, Recent Cases, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 5, 2013

What's the Cost of Entrance to the Met?

Free?  Suggested donation of $25?  Free on some days?  There are two lawsuits currently seeking to clarify.  According to the NYT:

MetUnder a clause in its original 1876 lease for the space, and according to an 1893 state law, the suits contend, the museum is required to allow visitors to be admitted free on most days of the week.       

“This is a case about democracy in New York,” said Andrew G. Celli Jr., a lawyer for the plaintiffs. “We had a partnership between the government and the arts communities, and it is clear that the bargain has broken down.”       

Many visitors make a different sort of bargain when they visit the museum, an internal one involving rapid and conflicting questions of guilt, moral obligation, personal financial prudence and not wanting to look cheap.       

Meanwhile, the Met said that free admission went the way of free love back in 1970, when a new deal struck between the city and the museum effectively superseded all the old arrangements. Though controversy raged around the introduction of the new “Pay What You Wish” policy back then, those were simpler times, with simpler sums: many visitors paid less than 25 cents to receive the famous Met buttons (which were briefly tickets and are now stickers).       

“The agreement with the city specifies that there has to be some minimal contribution,” said Harold Holzer, the Met’s senior vice president for public affairs. “There are people who express their own interpretation of the policy by paying very little. But something is required.”       

There is no question that except for the most alert visitor, a murkiness surrounds the matter of how to gain entry to the museum correctly. First, there are the signs that set out admissions prices in bold type — $25 for adults; $17 for those over 65 — and also contain the smaller, unbolded word “recommended.” Then there are the printed materials noting that a perk of annual membership (cost: $60 and up) is free admission, the implication being that members get huge savings — which, in fact, they do not, since technically they are not required to pay very much to begin with.       

There are Internet deals, including a recent offer from Groupon, that offer discounted tickets but fail to point out that visitors already have the right to unilaterally discount their own tickets.       

“I know lifetime New Yorkers who don’t quite know what it all means,” Mr. Celli said. “And it’s much harder if you’re not a New Yorker.”       

In its defense, the Met points out that it charges nothing for special exhibitions and that even $25 does not cover the cost of a museum visit.       

If the Met loses in court, it stands to forfeit some $40 million in annual revenue, or about 16 percent of its $250 million operating budget. An adverse decision could also affect other museums in the city, like the American Museum of Natural History, which has a similar suggested admissions policy.       

To understand the plaintiffs’ arguments, it is necessary to go back to the 1870s, when the state authorized the Parks Department to set aside land for a grand new art museum of which the city could be proud. Whether the museum should charge admission was one of the most hotly contested issues surrounding its inception. In the end, its lease with the city specified that on four days a week it “be kept open and accessible to the public free of charge.” In 1893, the state legislature enacted a law changing that to five days and two nights a week. That left the museum able to charge for admission on non-free days.       

And that was where the matter stood, more or less, until the early 1970s, when the museum was running at a deficit, and its director, Thomas Hoving, asked the city for permission to charge general admission daily. The City Council balked. “A penny today may be a dollar tomorrow,” warned Councilman Carter Burden, according to court papers.       

But a deal was hatched between Hoving and August Heckscher, the redoubtable New York City Parks Commissioner and Administrator of Recreation and Cultural Affairs. Heckscher said he would allow the museum to charge a fee as long as its amount was “left entirely to the individual’s discretion.”

Heckscher promised to direct the city’s Corporation Counsel office to amend the museum’s lease, but it never did. (The museum says no amendment was needed because, as the museum’s landlord, the city can set whatever rules it wants.)       

According to the two lawsuits — one that says the museum deceives its visitors and is guilty of fraud, and the other a class-action suit seeking recompense for people who claim that they were duped by the policy — the Heckscher-Hoving agreement violates the lease and the law. The plaintiffs in the suits comprise five museumgoers, including a persistent critic of, and past litigant against, the museum on other matters, and two Czech citizens who responded to an Internet appeal for people who said they had been misled into paying the full suggested admissions price.

More here.

[Meredith R. Miller]

November 5, 2013 in In the News, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Monday, November 4, 2013

Student's Breach of Contract Claim against His College Succeeds!

 

Eye Surgery
Medieval Eye Surgery
According to this story on NBC Affiliate WECT, a jury awarded over $50,000  to a student who sued his college for breach of contract.  The damages reflect not only tuition and fees but also the student's opportunity costs.  The student's argument was that the school was contractually obligated to screen applicants for criminal backgrounds that could prevent them from completing their coursework in medical fields which require that some coursework be done at hospitals.  

 

The school did not screen the student until he had been enrolled in the program for 18 months.  At that point, the student was dismissed from the school.  He sought readmission but was denied.  The school offered $25,000 in settlement but withdrew the offer during trial.

This is a rather surprising result.  We wonder whence comes the contractual duty for the school to screen applicants for criminal backgrounds. One would think that the obligation would run the other way.  That is, students ought to have a duty to disclose criminal backgrounds, because it is far cheaper and more effective to require such disclosure than it is for colleges to independently investigate each student.  One would expect that the application form would have a section requesting such disclosure, but even if it does not, all it would take would be some sort of statement somewhere on a website or in a student bulletin describing the college's policies.  If the college does have a duty to investigate, we wonder why the duty would run to the student rather than to some accrediting or professional body.  

Finally, there is a the question of damages.  Apparently, the student was awarded both a full tuition rebate and compensation for the income he forewent by pursuing his education.  If it is indeed the case that the college had a contractual obligation to screen the student's criminal background and that contractual duty ran to the student, the jury award assumes that the college gave the student nothing of value because he could not enter his chosen field of study.  There are two problems with this: 1) even in a professional school, the value of a degree exceeds its value as a means of entry into an occupation; and 2) even if the student had completed his education, he would not be guaranteed a position.  There ought to be some sort of set-off from the jury award to account for the benefit that the college conveyed to the student.  Otherwise, the case is a bit of a stick in the eye to educators.

[JT]

November 4, 2013 in Commentary, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Split California Supreme Court Allows Waiver of Hearing but Remands Case for Determination of Unconscionability

CA sc_sealIn 2011, the California Supreme Court decided Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I).  In that case, the California Supreme Court ruled that it is contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a Berman hearing, a dispute resolution forum established by the Legislature to assist employees in recovering wages owed.  In the California Supreme Court's view in 2011, that ruling was not preempted by the Federal Arbitration Act.  The result was not to invalidate the arbitration agreement at issue in the case but to permit arbitration to proceed only after the Berman hearing.

The U.S. Supreme Court vacated the 2011 opinion and remanded the case for reconsideration in light of AT&T Mobility LLC v. Concepcion (2011).  Upon reconsideration, the California Supreme Court issued this opinion on October 17th, in which it reversed Sonic I.  The Court now held that the FAA preempts California's state-law rule categorically prohibiting waiver of a Berman hearing in a predispute arbitration agreement imposed on an employee as a condition of employment.  However, the Court remanded the case back to the California Superior Court to determine whether the arbitration agreement was unconscionable because it is unreasonably favorable to the employer.

Four Justices joined in Justice Liu's opinion for the majority.  Justice Corrigan joined in the majority but offered a concurring opinion in which she remarked upon California's failure to articulate a clear standard for determining what makes an arbitration agreement unconscionable.  Justice Chin dissented, arguing that there was no reason for remand, since Moreno: 1) had forfeited the unconscionability claim by not raising it below and 2) could not meet the standard for unconscionability, which according to Justice Chin (and Justice Corrigan in her concurrence), applies only where the terms "shock the conscience."  

[JT]

November 4, 2013 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 29, 2013

Texas Taco Fight over Trade Secrets

Frank snyderOur Founding Editor Frank Snyder (pictured) sent us this story from the Fort Worth Business Press about a dispute over the "chef-inspired" offeerings at the three-store Texas Taco chain.  Another chain, Torchy's Taco, is alleging that Texas Taco's menu is based on Torchy's "Taco Bible."  

The alleged Edward Snowden of this taco thriller is an ex-Torchy's grill cook who is now working for Texas Taco.  The employee allegedly attempted to steal Torchy's Taco Bible by slipping it under his shirt.  Torchy's caught this on video camera and ordered the employee to return to Bible.  He surrendered the Bible and was fired.  Apparently, Torchy's neglected to confiscate the microfilm (or flash drive or whatever device the employee allegedly used to copy the recipes).  Some months later, some of Torchy's descriptions of its tacos appeared on Texas Taco menus that gave the creations new names.  

It is not entirely clear whether the employee is now being sued for beach of a covenant not to compete, for theft of trade secrets or both.  Both the cook and Texas Taco deny any wrongdoing. 

[JT]

October 29, 2013 in Food and Drink, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, October 28, 2013

Quincy Jones Sues Michael Jackson Estate and Sony for Breach of Contract

Quincy JonesAs reported here by Reuters, 27-time Grammy-winning producer Quincy Jones (pictured) is suing the estate of Micahel Jackson and Sony Music Entertainment (Sony) for $20 million for breach of two contracts relating to music that Mr. Jones produced on some of Michael Jackson's most successful albums.  Mr. Jones alleges that the music was re-mixed for used in a Michael Jackson concert movie, "This Is It," and in to Cirque du Soleil shows that use Mr. Jackson's music.  Mr. Jones claims that he is being denied proceeds in violation of his agreements with Sony and Mr. Jackson based on secret agreements between Sony and the administrators of Mr. Jackson's estate.

[JT]

October 28, 2013 in Celebrity Contracts, In the News, Recent Cases | Permalink | TrackBack (0)

Wednesday, October 23, 2013

Disco Star Sues Contractor for Allegedly Faulty Work

"I Will Survive" singer Gloria Gaynor has filed breach of contract and warranty claims against a contractor.  According to MyCentralJersey.com:

Gaynor has filed suit in state Superior Court in Somerville against a Piscataway contractor who replaced a second-floor concrete deck at her home that she says later caused leaks into the house and has to be replaced at a cost of $120,000.

According to the lawsuit filed earlier this month, Gaynor contracted with Diaz Landscape Design and Tree Service of Piscataway in November 2007 to remove an existing second-floor concrete deck and replace it with a new deck at a cost of $38,060.

After the new deck was installed, the lawsuit alleges, water began to leak into Gaynor’s home because of “faulty construction.”

There was also water ponding on the deck, water damage to wood sills and supports and the formation of mold, according to the suit.

Gaynor told the contractor about the problems and asked that the conditions be corrected. The contractor attempted to fix the problems, but the attempts failed and the problems persisted, causing more damage to the property, according to the lawsuit.

Gaynor then had another contractor examine the work performed by Diaz.

The new contractor determined that the work done by Diaz was “so faulty and defective” that the only appropriate remedy is removing the deck and constructing a new one at a cost of $120,000, the suit says.

Besides breach of contract and breach of warranty, Gaynor’s suit also charges Diaz with consumer fraud by not being registered in New Jersey as a home improvement contract and failing to obtain the required building permits, resulting in the work not being inspected.

Is Gaynor entitled to the cost of replacement of the deck?  Time for a music break:

 

[Meredith R. Miller]

October 23, 2013 in Celebrity Contracts, In the News, Music, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 16, 2013

Arbitration Agreement Found Unconscionable

Just when you start to lose faith in the judiciary, a couple of cases come along that suggest that some judges are willing to exercise common sense.  I blogged about Judge Koh’s opinion regarding consent in a case involving Google and email scanning in a previous post.  Today, I want to talk about a case that was even more delightful because it bucked the wave of arbitration clause cases ruling against consumers.  In Clark v. Renaissance West, LLC, the Superior Court of Maricopa County found an arbitration clause substantively unconscionable and therefore unenforceable -- and the Court of Appeals affirmed!

The plaintiff was John H. Clark, an eighty-eight year old man who was admitted into a nursing facility owned by Renaissance West.  After checking in, he signed an arbitration agreement which required him to arbitrate all disputes with Renaissance West.  After he was discharged, he filed a complained alleging that while he was at the nursing facility, he had been neglected and consequently, suffered a severe pressure ulcer that required medical treatment and long term case.  Renaissance West moved to dismiss and compel arbitration.  The trial court held an evidentiary hearing at which Clark’s expert witness testified that it would cost Clark approximately $22,800 in arbitrator’s fees to arbitrate the case.  The trial court ruled that based upon Clark’s limited income (he was retired and living on a fixed income), the arbitration agreement was substantively unconscionable.  The Court of Appeals agreed.

There were several noteworthy aspects to this case.  First, the trial court found that the arbitration agreement was not procedurally unconscionable.  The Agreement was a separate document from other paperwork signed at the time of admission, it was conspicuous and in bold font and large print.  It was also not offered on a take-it-or-leave-it basis and it could have been rescinded within thirty days of signature.  But, as Maxwell v. Fidelity held, you don’t need both procedural and substantive unconscionability in Arizona.  Substantive unconscionability will do.

The Court of Appeals noted that an arbitration agreement “may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to ‘deny a potential litigant the opportunity to vindicate his or her rights.’”  The question of whether arbitration is prohibitively expensive depends “on the unique circumstances of each case” and courts consider the following factors.

The first is “the party seeking to invalidate the arbitration agreement must present evidence concerning the cost to arbitrate.”  This evidence “cannot be speculative,” and must be based upon “specific facts showing with reasonable certainty the likely costs of arbitration.”  The court found that the expert testimony was adequate to establish the estimate cost of $22,800 in arbitrators’ fees alone.

The second factor is that a party must make  a “specific individualized showing as to why he or she would be financially unable to bear the costs of arbitration” based upon his or her specific income/assets.  Here, the plaintiff testified that he was retired, living on a fixed income, and did not have any financial resources such as savings or stocks.  His total monthly income of $4,630, consisted of social security benefits, a pension and veteran’s assistance payments.  The court deferred to the trial court’s finding that in light of these facts, arbitration would be cost-prohibitive. 

The third factor is “whether the arbitration agreement or the applicable arbitration rules references in the arbitration agreement permit a party to waive or reduce the costs of arbitration based on financial hardship.”  In this case, the arbitration agreement did not provide for a reduction or waiver of fees based upon financial hardship.  Strike three.

Based upon an analysis of the three above factors, the court concluded that there was reasonable evidence to support the trial court’s finding that plaintiff would be unable to afford to arbitrate his claims. Consequently, the arbitration agreement “effectively precludes Plaintiff from obtaining redress for any of his claims, and is therefore substantively unconscionable and unenforceable.”

[Nancy Kim]

October 16, 2013 in Miscellaneous, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, October 14, 2013

Some Side Notes on Nancy Kim's Post

Judge KohNancy posted last week on this lawsuit that claimed that Google’s practice of scanning users' emails violated federal and state wiretapping laws. Nancy discusses the excellent opinion of Judge Lucy Koh (pictured) in the case.  

I have a few observations, some of which take me beyond my areas of expertise.  My university switched over to Gmail a couple years ago, so our work e-mail is now Gmail.  I do not recall there being an option to opt-out of the switch over, so if Google eventually gets its way and is permitted to read its users e-mails:

  • Can employees really be said to have consented to Gmail's terms of service?
  • What is the status of confidential communications that are sent on our university accounts?
  • Is it a breach of confidentiality if employee A uses a university Gmail account to discuss a confidential personnel decision with employee B?  
  • Is it a breach of confidentiality if a faculty member or staff member responds via a universityGmail account to a student complaint relating to sexual or race-based harrassment?
  • Is attorney-client privilege defeated if a university staff member communicates with university counsel via a university Gmail account, since the parties have allegedly agreed that Google can read their communications?
  • Can anyone claim a reasonable expectation of privacy in their electronic communications if they are held to have consented to sharing those communications with a third party?
  • If Google's terms of service include a statement that Google may, if asked, share both data and the contents of your e-mails with federal or state law enforcement agencies, would that elminate any possible claims of constitutional violations in connection with NSA datamining?

NSAAs the last bullet point suggests, I am curious about the relationship between data-mining by internet service providers and data-mining by the U.S. government.  It is hard to generalize about people's feelings about such matters, but my impression is that there is a large sector of the population that considers Edward Snowden a hero for having revealed massive invastions of privacy by the U.S. government.  At least some of these same people respond with a shrug to revelations of Google's interpretation of its terms of service based on some version of the idea that "everyone knows" that Google's profit model is based on exploiting the personal information of its users.

I think it is equally true that, at least since the Bush Administration, "everyone knows" or should have known that the federal government has established a massive datamining operation whose purpose is to screen communications for evidence of terrorism or terrorism-related activities.  Nonetheless, my impression is that there is more anti-NSA outrage than there is anti-Google outrage.  This is (to me) counter-intuitive, since most people believe that combatting terrorism is an important national interest and that permitting Google to identify our habits of consumption is not.  So, why aren't the levels of outrage reversed?  

Some theories:

  1. People buy Google's argument that when we use Google we consent to all of its terms of service (but what of the people who send or receive e-mails to people with Gmail accounts?);
  2. NSA datamining is arguably a constitutional violation, while Google's reading our e-mails is arguably only a violation of a statute;
  3. The NSA doesn't market any useful products, but Google is awesome;
  4. Google, while powerful, cannot use personal information to mess with individual liberties in the ways that the NSA can

[JT]

October 14, 2013 in Commentary, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Monday, October 7, 2013

Click to Assign Copyright

I’ve been meaning to blog about a Fourth Circuit opinion that went under noticed, although it should have raised alarm bells.  That opinion, rendered in Metropolitan Regional Information Systems, Inc.  v. American Home Realty Network, Inc.,722 F.3d 591 (July 17, 2013) held that copyright could be transferred via a clickwrap. 

MRIS operates a website that offers a “multiple listing service” for a fee to real estate brokers and agents.  Subscribers to the site can upload their real estate listings, including photographs.  In order to submit their photographs they must click to indicate assent to the terms of use.  The court doesn’t specify exactly how this is done (and states in a footote that the “record is not clear as to the precise manner in which the TOU appears to subscribers). 

The TOU states:

“All images submitted to the MRIS Service become the exclusive property of (MRIS).  By submitting an image, you hereby irrevocably assign (and agree to assign) to MRIS, free and clear of any restrictions or encumbrances, all of your rights, title and interest in and to the image submitted.  This assignment includes, without limitation all worldwide copyrights in and to the image, and the right to sue for past and future infringements.”

The defendant, AHR, operates a website, NeighborCity.com which displays real estate listings using a variety of sources, including photographs taken from the MRIS website.

MRIS sued AHR for copyright infringement.  Photographs are protected under the Copyright Act.  Section 204 of the Copyright Act requires that transfers of copyright ownership require a writing that is signed by the owner.  AHR argued that  MRIS did not own the copyright to the photographs because its TOU failed to transfer those rights.   The issue then was whether a subscriber who clicks agreement to a TOU has “signed” a “written transfer” of the copyright in a way that meets the requirement of Section 204.  The Fourth Circuit found that “(t)o invalidate copyright transfer agreements solely because they were made electronically would thwart the clear congressional intent embodied in the E-Sign Act.  We therefore hold that an electronic agreement may effect a valid transfer of copyright interests under Section 204 of the Copyright Act.”

Given the reality that few read wrap contracts, holding that an author/creator can give up copyright with a click is alarming.  The opinion is a prime example of a court doing what is arguably the right thing for reasons of business competition but creating an alarming precedent in the process.  Shades of ProCD!  Online businesses will certainly benefit from this decision, but creators - not so much.  They may realize too late that when they clicked to upload content, they also assigned their rights to their work.  This is especially problematic since the primary reason creators use some of these sites is to get publicity for their work. The bargain, in other words, may be quite different from what the creator might have intended.

So - all you creators out there - BEWARE and check out those terms before you click.  They may not be as harmless as you think.

H/T to  my former student, Leslie Burns and her blog.

 

[Nancy Kim]

October 7, 2013 in E-commerce, Miscellaneous, Recent Cases, Web/Tech | Permalink | Comments (2) | TrackBack (0)

Tuesday, October 1, 2013

Judge Noonan's Concurrence Withdrawn in Corvello v. Wells Fargo

As we noted here, the Ninth Circuit's Judge Noonan (pictured) John_T_Noonan_Jr appended a stinging concurring opinion to the Ninth Circuit's judgment in Corvello v. Wells Fargo.  Wells Fargo challenged the language we identified as "the money quote" from Judge Noonan's concurrence, claiming that it did not draft the allegedly fraudulent plan, as Judge Noonan suggested.  The Department of the Treasury drafted the language, and Wells Fargo was required to use it under the federal program at issue.  

This week the Ninth Circuit issued a brief order in which it withdrew Judge Noonan's concurrence.

[JT]

October 1, 2013 in Recent Cases | Permalink | TrackBack (0)

Monday, September 30, 2013

Internet Contracting Mayhem

Modelmayhem.com (“Modelmayhem”) is a nationwide modeling industry website.  Shana Edme (“Edme”) joined the site to further her modeling career.  After several photographs of Edme modeling lingerie were disseminated and viewed without her permission, Edme commenced an action in the Federal District Court for the Eastern District of New York (“EDNY”) against Modelmayhem (among others).  Edme claimed that the site violated her right to privacy under New York State statutes.

Modelmayhem moved to dismiss, arguing that Edme agreed to resolve any and all disputes in California. Specifically, Modelmayhem claimed that the "Terms of Use" found on its website contains a forum selection clause.  The EDNY (Judge Hurley) denied Modelmayhem’s motion because it failed to explain how Edme bound herself to the Terms of Use, including how users of its website were advised of the terms.

The court began with a discussion of contracting and the Internets:

The conclusory statement by Modelmayhem that "New York law specifically recognizes 'Terms and Conditions' posted on a website as a binding contract" (Modelmayhem's Mem. at 6) completely ignores the developing discussion within this Circuit (and courts nationwide) regarding what actions by an internet user manifests one's asset to contractual terms found on a website. "While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract." Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004). "Mutual manifestation of assent, whether by written or spoken word or by conduct" is one such principle. Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 29 (2d Cir. 2002). As Judge Johnson of this District previously explained:

On the internet, the primary means of forming a contract are the so-called "clickwrap" (or "click-through") agreements, in which website users typically click an "I agree" box after being presented with a list of terms and conditions of use, and the "browsewrap" agreements, where website terms and conditions of use are posted on the website typically as a hyperlink at the bottom of the screen.  Hines v. Overstock.com, Inc., 668 F. Supp. 2d 362, 366 (E.D.N.Y. 2009). A browsewrap agreement "usually involves a disclaimer that by visiting the website — something that the user has already done — the user agrees to the Terms of Use not listed on the site itself but available only be clicking a hyperlink." Fteja v. Facebook, Inc., 841 F. Supp. 2d 829, 837 (S.D.N.Y. 2012). Thus, in deciding the validity of browsewrap agreements, "courts consider primarily whether a website user has actual or constructive knowledge of a site's terms and conditions prior to using the site." Hines, 668 F. Supp. 2d at 367 (internal quotation marks and citation omitted).

The Court then discussed Modelmayhem’s failure to explain how Edme became bound to the terms on the website.  Modelmayhem could have presented Edme with the terms in a number of ways:

For example, (1) a user could have agreed to the Terms of Use by clicking an "I agree" box before creating an account and gaining access to the website's services; (2) the Terms of Use could have
appeared on the website's homepage; (3) the Terms of Use could have been accessible from a hyperlink located on the homepage; (4) the Terms of Use could have been buried somewhere else on the website; or (5) some other combination or scenario not otherwise contemplated by the Court.

Modelmayhem did not, however, provide any evidence of how the Terms of Use were made available to users of the site:

The only evidence presented on this issue is a screenshot of the Terms of Use. The Court, however, cannot glean solely from this screenshot how the Terms of Use were presented to users of the Modelmayhem website.

The circumstances surrounding how Modelmayhem's Terms of Use were exhibited to its users is determinative on the issue of whether Edme had actual or constructive notice of the terms and condition, including whether the forum selection clause was reasonably communicated to her. Compare Specht, 306 F.3d at 32 (concluding that a provision that a website user would not encounter until he scrolled down multiple screens was not enforceable because "a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms") and Hines, 668 F. Supp. 2d at 368 (holding that forum selection clause was not reasonably communicated where "Defendant failed to explain how Plaintiff and its other customers were 'advised' of the Terms and Conditions, or to cite a single case that suggests that merely posting such terms on a different part of a website constitutes reasonable communication of a forum selection clause") with Zaltz v. JDate, --- F. Supp. 2d ----, 2013 WL 3369073, at *7-8 (E.D.N.Y. 2013) (finding that "plaintiff assented to Jdate.com's Terms and Conditions of Service, meaning that the forum selection clause contained therein was, in fact, reasonably communicated to her since plaintiff "did not need to scroll or change screens in order to be advised of the Terms and Conditions; the existence of, and need to accept and consent to, the Terms and Conditions of Service was readily visible") and Fteja, 841 F. Supp. 2d at 840-41 (concluding that because plaintiff was "informed of the consequences of his assenting click and he was shown, immediately below, where to click to understand those consequences," defendant's Terms of Use were "reasonably communicated"). Without such information and evidence, the Court is unable to conclude that the Terms of Use were binding on plaintiff and that the forum selection clause — contained within the Terms of Use — were reasonably communicated to plaintiff. Accordingly, the Court denies Modelmayhem's motion to dismiss on the basis that the forum selection clause contained in its Terms of Use is enforceable.

Internet companies, it is not enough to go into court and point to a forum selection clause in your terms of use.  To enforce that clause, you also have to establish where that clause is on your site and how you pointed users to that clause… and better yet, how you obtained the user's assent to the terms.

Edme v. Internet Brands, 12 CV 3306 (E.D.N.Y. Sept. 23, 2013)(Hurley, J.).

[Meredith R. Miller]

September 30, 2013 in E-commerce, Recent Cases, Web/Tech | Permalink | TrackBack (0)

Whistleblower Complaint Dismissed in Texas

TX Supreme CourtYusuf Farran, Executive Director of Facilities and Transportation with the Canutillo Independent School District, claims that he observed employee theft and falsification of time cars.  He also claimed that the School District overpaid a contractor, Henry's Cesspool Services (kudos to you Henry for an honest description fo your business!).  Farran complained to his supervisors about the contractor's failures to properly dispose of grease-trap waste.  He allegedly was told to stop making any more complaints relating to the grease trap.

In March 2009, the School District first suspended and then fired Farran for unrelated reasons.   While suspsended and while his termination was pending, Farran contacted the FBI to complain about Henry's Cesspool Services.  When his termination was finalized, Farran brought a claim for breach of contract and wrongful termination in violation of Texas's Whistleblower Act.  

On August 3oth, the Supreme Court of Texas dismissed Farran's complaint in Canutillo Independent School District v. Farran. "To establish a Whistleblower Act claim, the plaintiff must show that his report to a law enforcement authority caused him to suffer the complained-of adverse personnel action."  Unfortunately for Farran, he contacted the FBI after he had already been warned to stop complaining about the grease trap and after he had been suspended and was due to be terminated.  Farran bore the burden of showing that, but for the FBI report, the School District would have reversed course and reinstated him, but he could not do so.  There was no evidence that the FBI report played a role in his termination.  

The Texas Supreme Court also affirmed dismissal of Farran's breach of contract claim for failure to exhaust administrative remedies. Farran thought he did not need to do so because his breach of contract claim related to his Whistleblower act claim.

[JT]

September 30, 2013 in Government Contracting, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 17, 2013

A Win for Homeowners in the Ninth Circuit

In Corvello v. Wells Fargo Bank, the issue before the Ninth Circuit was whether Wells Fargo was contractually obligated under the Federal Home Affordable Modification Program (HAMP) to offer plaintiffs a permanent mortgage modification after they had complied with the requirements of the trial period plan (TPP).  

Mortgage-Rates-Historical

The Treasury set out procedures that mortgage servicers were to follow under HAMP in order to qualify for payments of $1000 per mortgage modification.  HAMP required that servicers provide permanent modifications to borrowers to made all their payements under the TPP and whose representations provided as part of the TPP process remained accurate.  If the servicers were to deny modifications, they are obligated to inform borrowers in writing.  

Plaintiffs alleged that they complied with all requirements of their TPPs but that Wells Fargo neither notified them of their ineligibility nor modified their mortgage loans.  Plaintiffs sued seeking permanent modifications and other relief.  The District Court granted Wells Fargo's motion to dismiss  based on language in the TPP suggesting that Wells Fargo's obligation to grant a modification was conditioned on its provision of a "fully executed copy of a Modification Agreement." Since Wells Fargo provided no such Modification Agreement, the District Court reasoned, the condition was not met. 

Subsequent to the District Court's decision, the Seventh Circuit decied Wigod v. Wells Fargo Bank, which held that bank are required to offer permanent modifications to borrowers who complete their obligations under the TPPs unless the banks timely notify those borrowers that they do not qualify for a HAMP modification.  The Ninth Circuit followed Wigod and reversed the District Court.  Both Circuit Courts rejected Wells Fargo's position "because it made teh existence of any obligation conditional solely on action of the bank and conflicted with other provisions of the TPP," including the bank's obligation to send a Modification Agreement if the borrower qualified for a modification.  Although Wigod was decided under Illinois law and California law applied in Corvello, the Ninth Circuit found "no material difference" in the laws of the two jurisdictions.  

Plaintiffs thereby survived a motion to dismiss, with the Ninth Circuit accepting as true all of the allegations of the complaints.  The Court remanded the case for further proceedings. 

Judge Noonan concurred.  The money quote:

No purpose was served by the document Wells Fargo prepared except the fraudulent purpose of inducing Corvello to make the paymetns while the bank retained the option of modifying the loan or stiffing him.

[JT]

September 17, 2013 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, September 16, 2013

Plaintiffs Catch a Break in Murphy v. DirecTV

9th CircuitThe Ninth Circuit's opinion in Murphy v. DirecTV starts in the manner to which we have been accustomed in the past few years.  Although Plaintiffs state claims under California consumer protection statutes, and although another California statute declares unenforceable arbitration clauses in consumer contracts that preclude collective or class action proceedings, the Ninth Circuit must uphold DirecTV's arbitration agreement with the plaintiff class and compel arbitration.  The Supreme Court's 2011 decision in Concepcion compels this result.   

The arbitration provision with its class action waiver also contained a "jettison clause,"  which reads:  “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [section on dispute resolution] is unenforceable.”  Originally, the Distirct Court relied on the jettison clause in denyingDirecTV's motion to compel arbitration, and the Ninth Circuit affirmed.  Post-Concepcion, however, the District Court reversed itself and granted the motion to compel and the Ninth Circuit affirmed that grant of the motion to compel.  

This confuses me, and I must confess that I do not find the Ninth Circuit's explanation enlightening, despite several pages devoted to distinguishing cases that Plaintiffs thought supported their claim.  The Ninth Circuit treats the issue of one of retroactivity.  When the Supreme Court interpreted in Federal Arbitration Act (FAA) in Concepcion, it told us what the FAA meant, and it has always meant what it meant in Concepcion.  If the FAA preempts state law, then it has always done so, and it can do so with respect to claims that arose before Concepcion was decided.  As the Court explains.

A contract cannot be unenforceable under state law if federal law requires its enforcement, because federal law is “the supreme Law of the Land . . . , any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Section 9 of the Customer Agreement provides only that the arbitration agreement will be unenforceable if the “law of your state” disallows class waivers, which California law does not—and could not—under the FAA as interpreted in Concepcion.

Fair enough.

But the Ninth Circuit also quotes the Supreme Court as saying that the FAA “places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.”  Here, the parties have stipulated that their agreement to arbitrate is unenforceable if state law would prohibit it, and there seems to be no doubt that the law of California at the time of the contract prohibited class action waivers in arbitration provisions.  If the courts are aiming at giving effect to the intent of the parties, it seems to me that the "jettison clause," rather than Concepcion governs.  The FAA is about enforcing arbitration agreements, and here the parties have agreed that, to the extent California law governs, claims cannot be arbitrated.  Concepcion should not be construed so broadly as to compel arbitrations to which the parties have not agreed.

But fortunately for Plaintiffs, they also have claims against Best Buy, where they acquired their DirecTV equipment and which is neither a party to the arbitration clause nor a third-party beneficiary of it, according to the Ninth Circuit.  The nature of that acquisition is at the heart of Plaintiffs' claims.  They allege that Best Buy misled them into thinking that they were purchasing DirecTV equipment when in fact the two companies consider the transaction a lease.  Plaintiffs also allege that the lease terms are oppressive and unfair.  

The District Court granted Best Buy's motion to compel arbitration based on equitable estoppel.  Plaintiffs are suing alleging that the two parties colluded in imposing on them unfair and oppressive terms in a Customer Agreement and Lease Addendum.  If it is suing based on that document, the arbitration provision should be in with respect to both defendants.  The District Court held that Plaintiffs were estopped to deny Best Buy the benefits of the arbitration provision.  

The Ninth Circuit reversed on estoppel.  Plaintiffs are suing DirecTV because of unfair and oppressive terms in a lease agreement.  They are suing Best Buy because its conduct in the transaction misled Plaintiffs into thinking they were buying equipment when they were in fact only leasing it.  In short, the Ninth Circuit concludes that "Plaintiffs’ claims against Best Buy do not rely on, and are not intertwined with, the substance of the DirecTV Customer Agreement or Lease Addendum."  In addition, while alleged collusion is another ground for equitable estoppel, and Pliantiffs have alleged collusion, the alleged collusion is unrelated to the contract on which Best Buy would rely in order to compel arbitration.

The Ninth Circuit also rejected Best Buy's claims that it was entitled to benefit from the arbitration provision either under an agency theory or as a third-party beneficiary.

[JT]

September 16, 2013 in Commentary, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, September 6, 2013

A Recital of Consideration

I start my first year contracts course with consideration.  For the first time, I’m also teaching a contracts drafting course.  Based upon the contracts drafting texts that I reviewed, the general consensus seems to be that recitals of consideration are basically pointless.  While I think that’s somewhat true in that they don’t contain performance obligations, it’s misleading, too.  Courts not only consider recitals in construing clauses and the parties’ intent, a recital of consideration may create a rebuttable presumption or may estop a party from claiming lack of consideration.  In other words, in some cases, it can save a party from a claim that consideration was insufficient.

A recent case involving a patent assignment, Network Protection Sciences v. Fortinet, 2013 WL 4479336 (N.D. Cal 2013), seemed to go even further when the court, applying Texas law, held that a recital was conclusive.  The recital in question stated that the patent was assigned “for good and valuable consideration, the receipt of which is hereby acknowledged.”  The party contesting the assignment argued that it was invalid because it was “beyond dispute” that no consideration was paid for it.  The court, applying Texas law, rejected that argument finding the recital conclusive and that “(e)ven if no actual consideration were paid…NPS’s agreement to be bound by the choice-of-law provision would be deemed adequate consideration.”  In other words, according to the court, the recital is conclusive with respect to the issue of whether there was consideration for the assignment but even if it weren’t, agreeing to the choice of law provision was sufficient consideration.  Is this the law in Texas, is it unique to Texas, or did the judge make new law? Any contracts profs care to weigh in?

In any event, it seems that consideration wasn't the way to go anyway because (although the parties didn't raise the issue)  the assignment seems to fall under Restatement section 332 regarding gratuitous assignments that are irrevocable if signed and delivered to the assignor.  This makes sense to me because a written assignment can affect third parties who rely upon it. 

The case is also noteworthy because it opens with a quote from a recent NYT oped, coauthored by Santa Clara law prof Colleen Chien, which discusses the problem of “patent trolls” (companies that buy up patents with the intent to sue for infringement, rather than to practice the patented invention).  The court’s decision denying the defendant's motion to dismiss the patent infringement action was a bit disappointing given the way it began its opinion and the less-than-admirable behavior of the plaintiffs and their trollish behavior in pursuing the action.  Where are the activist judges when you need them?

 

[Nancy Kim]

September 6, 2013 in Miscellaneous, Recent Cases | Permalink | Comments (12) | TrackBack (0)

Thursday, August 29, 2013

Ninth Circuit Finds No Waiver in Delayed Assertion of Right to Compel Arbitration

9th CircuitMichelle Richards brought a class acction lawsuit in Federal District Court against her former employer Ernst & Young (E&Y).  After her claim was consolidated with similar claims brought by other former E&Y employees, E&Y filed a motion to compel arbitration.  The District Court ruled that E&Y had waived its right to compel by not asserting that right in the other cases.  

On August 21st, the Ninth Circuit reversed.  Courts disfavor a finding that a party has waived its contractual right to arbitrate.  In order to establish a waiver, a party must show:

(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.

Although Richards claimed that she had been prejudiced, because the District Court had already ruled on some of her claims, the Ninth Circuit rejected that argument because the District Court had not decided any of her claims on the merits.  One claim was dismissed without prejudice; another was dismissed for lack of standing.  

Richards also claimed that she had been prejudiced by the expenses incurred during years of litigation prior to E&Y's motion to compel.  The Ninth Circuit found that she had not been prejudiced because she had not alleged that E&Y sought discovery of information that could not have been obtained in arbitration.  In addition, the Ninth Circuit will not find prejudice when expenses are "self-inflicted," and here the expenses were self-inflicted because Richards chose to bring her claim in "an improper forum, in contravention of" her agreement with E&Y to arbitrate her claims.  

Finally, the Ninth Circuit rejected Richards' argument that her claim under the National Labor Relations Act should not be arbitrated on the ground that (oh, the irony!) she had not raised it in a timely manner.  In any case, that claim was doomed under Italian Colors.  

In a final footnote, the Ninth Circuit also reverses the Distirct Court's grant of class certification, since (you guessed it!) the arbitration agreement precludes class arbitrations.

[JT, with hat tip to former blog intern, Justin Berggren]

August 29, 2013 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, August 22, 2013

Revisiting the Contracts Scholarship of Stewart Macaulay, Post IV: Deborah Post

This is the fourth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay.  More about the online symposium can be found here.  More information about this week's guest bloggers can be found here

PostDeborah Post is Associate Dean for Academic Affairs and Faculty Development and Professor of Law at Touro College Jacob D. Fuchsberg Law Center. 

One Contracts Professor’s Preference for State Court Decisions

In the essay that I contributed to Revisiting the Scholarship of Stewart Macaulay: On the Empirical and the Lyrical, I gave vent to the frustration I experienced over the years reading decisions written by the 7th Circuit Judges Richard Posner and Frank Easterbrook. Stewart wrote to me recently and in two sentences, appropriately lyrical, summed up the source of my frustration:  “In theory, of course, the court applies state law in a diversity situation.  About the one thing that you can expect is that Judges Posner and Easterbrook will be off on a frolic of their own.”

I have a healthy respect these days, and a strong preference for, the decisions of state courts. I try to use the best of these to teach contract law to my students.  I admire the tenacity of state courts that insist, for example, that the commentary to the UCC matters in interpreting that statute.  See e.g. Simcala Inc. v. American Coal Trade, Inc. 821 So.2d 197 (Ala. 2001) (the word “center” in comment 3 to UCC section 2-306 means something when used to describe the way a stated estimate limits the “intended elasticity” of an output or requirements contract). 

Cropped Cover (1)I am particularly gratified by the persistence of courts that have used the unconscionability doctrine to invalidate boilerplate arbitration clauses.  Implicit in these cases is a duality. Oppression exists on two levels.  The terms of the transactions are oppressive and unconscionable, and the terms of the arbitration agreement are oppressive. Two cases I discussed previously at the 8th Annual International Contracts Conference at Texas A & M University Law School.

In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court describes the terms of a loan agreement. Ms. Brewer borrowed $2,215 and paid back $2000, at which point she had reduced the principal balance on the loan by $.06.  The interest rate on that loan was 300%.  Ms. Brewer brought suit under the Missouri consumer protection statute, the Missouri Merchandising Practices Statute.

In Tillman v. Commercial Credit Loans Inc., 655 S.E.2d 362 (N.C. 2008), Ms. Tillman and Ms. Richardson, the named plaintiffs in a class action, purchased single premium credit insurance from a lender.  Within a year the North Carolina legislature made this species of loan illegal, but the statute was not retroactive.  Ms. Tillman and Ms. Richardson sued under the North Carolina Unfair and Deceptive Trade Practices Act.  The North Carolina Supreme Court found the arbitration clause in the contract, which barred class actions, unconscionable in a 3-2-2 decision.

When the United States Supreme Court vacated the decision in the Brewer case and remanded it to the Missouri court for reconsideration in light of A.T.& T. Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), Chief Justice Richard Teitelman, responded that the unconscionability doctrine in Missouri law was not an “obstacle to the accomplishment of the act’s objectives.”  The arbitration agreement was unconscionable because there was expert testimony that no consumer would pursue a claim against the Title Company.  The cost was too high.  The Tillman court made much the same point.  Of the 68,000 loans that Citifinancial made in North Carolina, no borrower ever pursued arbitration of a claim.  Citifinancial on the other hand, had reserved its right to go to court and had exercised that privilege over 3,000 times in civil suits and foreclosure actions.  The Tillman court also provided information about the actual cost of arbitration, a factual discussion that is missing in a lot of these cases.  It turns out that arbitration is cost prohibitive for most low income consumers. 

Exploitive or predatory contracts saturate the market for credit, housing, furniture for the least well off in our society.  The Montana Supreme Court recently held a payday loan and its arbitration provision unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 ( Mont. 2013)(780% APR was violation of Montana Consumer Loan Act). If the U.S. Supreme Court grants certiorari in Kelker, the decision in that payday loan case will probably meet the fate of its progenitors, Casarotto v. Lombardi, 886 P.2d 931 (Mont. 1994)(Casarotto I) and Casarotto v. Lombardi, 901 P.2d 596 (Mont. 1995)(Casarotto II). Justice Trieweiler maintained in Casarotto I that the Federal Arbitration Act had not pre-empted state laws addressing arbitration because the federal statute had not addressed every aspect or possibility with respect to arbitration agreements. In Casarotto II he argued that the U.S. Supreme Court’s decision to strike down an Alabama statute that made pre-dispute arbitration agreements unenforceable was irrelevant to the decision in Casarotto I.  He was reversed in an opinion written by none other than Justice Ginsberg. 

Justice Terry N. Trieweiler, the twice rebuked but unrepentant Montana Supreme Court jurist, actually wrote three Casarotto opinions.  He penned a special concurring opinion in Casarotto I to address “those federal judges who consider forced arbitration as the panacea for their “heavy caseloads” and to single out for criticism Judge Bruce M. Selya, First Circuit Court of Appeals, who called the prevalence in state courts of “traditional notions of fairness” an “anachronism.”  886 P.2d at 940. Justice Trieweiler’s  rejoinder was that some federal judges are arrogant. I think of it as hubris.

The number of cases challenging arbitration agreements has not diminished over time.  I can think of at least two reasons for this phenomenon. One is ever expanding disparity in wealth and power in the United States in this post-industrial society.  There are very few ways individuals can challenge those who have power over them or expose what they feel to be an injustice that has been done to them.  We are conditioned to believe that there is “equal justice under the law” and to believe that a citizen may seek redress in court.  The second reason is the failure of federal courts to recognize that the FAA is indefensible when it is applied in consumer cases. That was the subject of the last series of blog posts discussing Margaret Radin’s book, Boilerplate.   The FAA is a statute frozen in time, applied to transactions almost ninety years after Congress held those hearings on the resistance of state courts to arbitration and used to enforce arbitration “agreements” in contracts that were not even dreamed of when the FAA was passed -- online, clickwrap contracts such as the contract in Kelker.  Contract defenses that police agreements where there is no real consent and no real bargaining are rendered impotent by the FAA.  It does not matter if Certiorari is denied in Kelker, because the 9th Circuit has already used a pre-emption argument to defeat the Montana court’s use of “reasonable expectations” and unconscionability doctrines to invalidate arbitration provisions. Mortensen v. Bresnen Communications, LLC,  2013 U.S. App. Lexis 14211.

Timmons-GoodsonThis past weekend I had the pleasure of meeting the judge who wrote the plurality opinion in the Tillman case, Justice Patricia Timmons-Goodson (pictured), who retired from the North Carolina Supreme Court in December 2012.   I did not plan this meeting.  It was completely serendipitous.  I was looking for the meeting room where the Task Force on the Future of Legal Education was discussing the end of law school as we know it.  I asked her for directions, and then I glanced at her name tag. It took me a moment to realize who she was.  I was told by Judge James Wynn, who is now on the 4th Circuit U.S. Court of Appeals, but who once served with Judge Timmons-Goodson on the North Carolina Court of Appeals and the Supreme Court, that she was a recent recipient of the Legend in the Law award at Charlotte School of Law.

I knew that Justice Timmons-Goodson was a black woman. I looked for background information when I decided to write about the case. I knew, courtesy of North Carolina’s Lawyers Weekly, that two lawyers from Raleigh, John Alan Jones and G. Christopher Olson, obtained a judgment in Tillman and two companion cases in the amount of $81.25 million.  Of the borrowers represented in the Tillman case, 759 received approximately $31,291 each.  Another 9,670 received $544 each.

Taking the admonition of Stewart Macaulay seriously, striving to do something that looks like empirical research, I asked Justice Timmons-Goodson if she would consent to an interview. She hasn’t agreed yet, but I hope she will. I would like to know more about the process that she used to reach a decision in the Tillman case; how she persuaded enough of her colleagues to agree that the contract and the arbitration clause were unconscionable, even if two of them relied on a “totality of the circumstances” analysis that they thought sufficiently different from her opinion to merit a separate concurring opinion. Two justices signed her opinion relying on substantive unconscionability; two joined in finding the arbitration clause unconscionable but stressed the importance of deference to the fact-finding of the trial judge under a “totality of the circumstances” approach, and two justices dissented.

The Justice writing the dissenting opinion, appears to believe that the unconscionabiity doctrine is somehow illegitimate.   He noted that it had never been used in North Carolina to invalidate a contract or a term in a contract. If I do interview Justice Timmons-Goodman, I will ask her about her reaction to the most recent U. S. Supreme Court decisions. She has herself written about the importance of state court judges at every level, particularly in the trial courts. 

I am not sure that she would call her own acts as a justice on the Supreme Court “resistance.”  She might simply say that logic and adherence to an ethic of principled decision-making impelled her to write the decision in Tillman as she did. I cannot be sure that she believes, as I do, that the drafters of the FAA never intended to completely pre-empt state law, especially those contract doctrines that are designed to control avarice and unscrupulous behavior.  I do think, however, she will enjoy discussing the decisions of Justice Trieweiler.  

[Posted, on Deborah Post's behalf, by JT]

August 22, 2013 in Books, Commentary, Contract Profs, Famous Cases, Recent Cases, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 14, 2013

Seventh Circuit Compels Arbitration Even Though the Named Arbitral Body No Longer Exists

7th CirJoyce Green alleges that two companies doing business as "The Cash Machine" violated the Truth in Lending Act (TILA) by misstating the interest rate on her pay-day loan.  Her loan agreement provided for binding arbitration "under the Code of Procedure of the National Arbitration Forum."  Although the agreement dates from 2012, the National Arbitration Forum (NAF) had ceased taking consumer cases in 2009, when a district court found it biased it in favor of merchants.  When defendants moved to compel arbitration, the Distirct Court found the non-existence of the named arbitral body fatal to the arbitration provision, which it struck.  The Distirct Court denied defendants' motion to compel arbitration.

In Green v. U.S. Cash Advance Illinois, LLC , decided July 30, 2013, the Seventh Circuit reversed the Distirct Court and compelled arbitration by a 2-1 vote.  Chief Judge Easterbrook, writing for the majority, notes that the arbitration agreement provides only that the arbitration will be governed by the rules of the NAF (the Rules), not that arbitration be in that forum.  Those Rules provide for severability -- that is, if any provisions of the Rules are found to be unenforceable, the remainder of the Rules remain in effect.  The Rules also contain the following provision:

If Parties are denied the opportunity to arbitrate a dispute, controversy or Claim before the Forum, the Parties may seek legal and other remedies in accord with applicable law.

Judge Easterbrook reads that provision as permitting a judge to appoint an aribter pursuant to the Federal Arbitration Act, 9 U.S.C. § 5.  In support of this reasoning, Judge Easterbook cites opinions from the 3rd and 11th Circuits, both of which held that the identity of the arbitral forum is not integral to an arbitration agreement.  A court may thus reform an arbitration agreement by appointing an aribter under § 5, which permits a judge to appoint an arbiter if none is specified in the agreement.  On Judge Easterbrook's reading of the agreement, that is the case here.  Moreover, it would make no sense to conclude, based on the unavailability of the NAF, that the parties had agreed to litigate rather than arbitrate their disputes.  It is far more reasonable to construe the agreement as continuing to evidence the parties' consent to arbitration.

Judge Hamilton wrote a long and passionate dissent, which begins:

Despite the surface simplicity of its logic, the majority has actually made an extraordinary effort to rescue the payday lender- defendant from its own folly, or perhaps its own fraud.

and continues

The majority’s reasoning departs from the contractual foundation of arbitration. It puts courts in the business of crafting new arbitration agreements for parties who failed to come to terms regarding the most basic elements of an enforceable arbitration agreement. Section 5 of the Federal Arbitration Act need not and should not be read to authorize such a wholesale re-write of the parties’ contract. It certainly should not be read to rescue an arbitration clause on behalf of the clause’s author when the author knew or should have known that its designated arbitrator was unavailable. 

In dissenting, Judge Hamilton relies on the Second Circuit's reasoning in In re Salomon Inc. Shareholders’ Derivative Litigation, 68 F.3d 554 (2d Cir. 1995), which leaves the parties in the court system when their arbitration agreement "utterly fails."  Here, for Judge Hamilton, the arbitration agreement fails because defendants were either being negligent or deliberately deceptive in invoking an arbitral forum that had been shut down three years earlier for consumer fraud.  Judge Hamilton gives little weight to Joyce's alleged "agreement" to the arbitral forum because:

The payday loan agreement that Green signed was certainly a contract of adhesion. Green had no bargaining power over its terms, including the arbitration clause. The idea that she actually agreed, in a subjective sense, to any arbitration clause at all therefore requires some rather heroic assumptions. 

Judge Hamilton is unimpressed with the Majority's reading of the arbitration provision.  By invoking the Rules, the parties could only have intended to identify NAF as the forum for arbitration since Rule 1(A) states, “This Code shall be administered only by the National Arbitration Forum or by any entity or individual providing administrative services by agreement with the National Arbitration Forum.” [emphasis added]  Judge Hamilton reads Rule 48(D) as similarly requiring arbitration either in the NAF or nowhere.  The Majority ignores these provisions based on the Rules' severability provision, but severability arises only where specific provisions are found to be unenforceable, and there is no reason not to enforce either Rule 1(A) or Rule 48(D) as between these parties.  

As for the Majority's reasoning on Section 5 of the FAA, Judge Hamilton notes that, while Circuit Courts have split on its scope, no court has gone so far as to find "a correctable lapse where a drafter has at least negligently named an arbitration forum that was never available."  Judge Hamilton again invokes In re Salmon, in which the Second Circuit refused to name a substitute forum for arbitration when the forum to which the parties had agreed was unavailable.  Judge Hamilton rejects the Third Circuit's ruling in Khan v. Dell, Inc., 669 F.3d 350 (3d Cir. 2012), on which the majority relies, as both poorly reasoned and distinguishable.  Khan also involved a challenge to NAF arbitration.  The case is poorly reasoned, according to Judge Hamilton, because the court ignored clear language in the arbitration agreement that provided that the (unavailable) NAF was to be the exclusive forum for arbitration.  The case is distinguishable because there at least the NAF was available in 2004 when the parties entered into their arbitration agreement.  

There is more to Judge Hamilton's dissent, and it is all very interesting, but this post is already very long and people interested in the case should read it for themselves.  As there is a Circuit split, courts are likely to return to this issue in future cases.

[JT]

August 14, 2013 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 13, 2013

Email “Signature” Satisfies Subscription Requirement of NY Settlement Agreement Statute

Unknown
After an ugly three-car accident, plaintiffs sued the other drivers, one driver’s employer (Xerox) and a corporation that owned one of the cars (Gelco).  Gelco moved for summary judgment dismissing the complaint.  That same day, the parties held a mediation that did not resolve the lawsuit.  Thereafter, Brenda Greene, the adjuster for Gelco’s insurer called plaintiffs’ counsel to revive settlement negotiations.  After a few days of negotiating, plaintiffs’ counsel orally agreed to settle the case.  Greene sent a confirmation email message to plaintiffs’ counsel, it read:

Per our phone conversation today, May 3, 2011, you accepted my offer of $230,000 to settle this case. Please have your client executed [sic] the attached Medicare form as no settlement check can be issued without this form.

You also agreed to prepare the release, please included [sic] the following names: Xerox Corporation, Gelco Corporation, Mitchell G. Maller and Sedgwick CMS. Please forward the release and dismissal for my review. Thanks Brenda Greene. 

Plaintiffs signed a release on May 4.  On May 10, plaintiffs’ counsel sent that release and a stipulation of discontinuance to Gelco.  That same day, Gelco’s attorney received an email alert that the court granted Gelco’s motion for summary judgment dismissing the complaint.  Gelco’s counsel faxed and mailed a letter to plaintiffs’ counsel "rejecting" the release and stipulation. Gelco’s attorney stated: "there was no settlement consummated under New York CPLR 2104 between the parties, we considered this matter dismissed by the court's decision…dated May 10..."

The issue before the appellate court was whether the email message satisfied the criteria of CPLR 2104 so as to constitute a binding and enforceable stipulation of settlement. Where a settlement is not made in open court, CPLR 2104 provides: "An agreement between parties or their attorneys relating to any matter in an action…is not binding upon a party unless it is in a writing subscribed by him or his attorney." 

The appellate court held that the email counted as a writing and a subscription by Gelco’s representative, binding the parties to the settlement.  After holding that Greene had apparent authority to bind Gelco to the settlement, the court reasoned:

It is, of course, axiomatic that a letter can be considered "subscribed," since letters are usually signed at the end by the author thereof. However, email messages cannot be signed in the traditional sense. Nevertheless, this lack of "subscription" in the form of a handwritten signature has not prevented other courts from concluding that an email message, which is otherwise valid as a stipulation between parties, can be enforced pursuant to CPLR 2104. * * *

Morever, given the now widespread use of email as a form of written communication in both personal and business affairs, it would be unreasonable to conclude that email messages are incapable of conforming to the criteria of CPLR 2104 simply because they cannot be physically signed in a traditional fashion (see Newmark & Co. Real Estate Inc. v. 2615 E. 17th St. Realty LLC, 80 AD3d 476, 477-478 ["e-mail agreement set forth all relevant terms of the agreement…and thus, constituted a meeting of the minds"]). Indeed, such a conclusion is buttressed by reference to the New York State Technology Law, former article 1, "Electronic Signatures and Records Act," which was enacted by the Legislature in 2002. In the accompanying statement of legislative intent, the Legislature stated in part:

"[This act] is intended to support and encourage electronic commerce and electronic government by allowing people to use electronic signatures and electronic records in lieu of handwritten signatures and paper documents" (L 2002, ch 314, §1).

Section 302(3) of this statute states that an "'[e]lectronic signature' shall mean an electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the record." Section 304(2) of the statute states that "an electronic signature may be used by a person in lieu of a signature affixed by hand [and] [t]he use of an electronic signature shall have the same validity and effect as the use of a signature affixed by hand."

In the case at bar, Greene's email message contained her printed name at the end thereof, as opposed to an "electronic signature" as defined by the Electronic Signatures and Records Act. Nevertheless, the record supports the conclusion that Greene, in effect, signed the email message. In particular, we note that the subject email message ended with the simple expression, "Thanks Brenda Greene," which appears at the end of the email text. This indicates that the author purposefully added her name to this particular email message, rather than a situation where the sender's email software has been programmed to automatically generate the name of the email sender, along with other identifying information, every time an email message is sent (cf. DeVita v. Macy's E., Inc., 36 AD3d 751). In addition, the circumstances which preceded Greene's email message, and in particular, the face-to-face mediation at which settlement was attempted and the subsequent follow-up telephone calls between Greene and the plaintiff's counsel, support the conclusion that Greene intended to "subscribe" the email settlement for purposes of CPLR 2104 (see Newmark & Co. Real Estate Inc. v. 2615 E. 17th St. Realty LLC, 80 AD3d at 477 ["e-mail sent by a party, under which the sending party's name is typed, can constitute a writing for purposes of the statute of frauds"]; see also Naldi v. Grunberg, 80 AD3d 1, 6-13).

Accordingly, we hold that where, as here, an email message contains all material terms of a settlement and a manifestation of mutual accord, and the party to be charged, or his or her agent, types his or her name under circumstances manifesting an intent that the name be treated as a signature, such an email message may be deemed a subscribed writing within the meaning of CPLR 2104 so as to constitute an enforceable agreement.

Forcelli v. Gelco Corp., 27584/08, NYLJ 1202612381868, at *1 (App. Div., 2d, Decided July 24, 2013)

[Meredith R. Miller]

August 13, 2013 in In the News, Recent Cases | Permalink | TrackBack (0)