Monday, October 6, 2014
While we were busy with the virtual symposium, we got a bit behind on reporting on cases. This one is from late August.
Three Steak n Shake (SNS) franchisees brought suit against SNS seeking a declaratory judgment that, under the terms of their franchise agreements, they may set their own prices and are not required to participate in corporate promotions. The case resulted from a corporate takeover in 2010, after which SnS initiated new pricing policies that plaintiff franchisees claim adversely affected their businesses.
The franchisees' agreements with SNS provided that the latter “reserve[d] the right to institute at any time a system of nonbinding arbitration or mediation.” One month after plaintiffs filed suit, SNS introduced an arbitration policy requiring franchisees to engage in nonbinding arbitration at SNS's request. Pursuant to that policy, SNS filed a motion in the District Court to stay proceedings and compel arbitration. The District Court denied the motion, finding the arbitration agreement "illusory" because one-sided and unenforceable. In addition, the District Court found that the new arbitration policy could not apply retroactively to claims that had already been filed and that the Federal Arbitration Act (FAA) did not apply to non-binding arbitration.
In Druco Restaurants, Inc. v. Steak N Shake Enterprises, Inc., the Seventh Circuit agreed with the District Court's first ground for decision and did not reach its alternative grounds. Applying Indiana law, the Seventh Circuit found the arbitration agreement illusory. The Court noted that SNS was free to exercise or not exercise its right to arbitration at whim. The company also retained complete discretion to determine venues where and procedures under which arbitration would take place. Where so much is uncertain, the Seventh Circuit noted, the agreement is vague, indefinite and unenforceable.
Wednesday, October 1, 2014
In a recently unsealed ruling, the U.S. Court of Claims has awarded $1.1 million in damages for breach of contract to a former undercover Drug Enforcement Administration ("DEA") informant who was kidnapped in Colombia and held captive for more than three months.
Here's a flavor from the opening paragraphs of the 52-page decision:
This breach-of-contract action comes before the Court after a trial on damages. In its decision addressing liability, the Court determined that the Drug Enforcement Administration (“DEA”) breached an implied-in-fact contract and its duty of good faith and fair dealing by failing to protect Plaintiff, an undercover informant. During an undercover operation in Colombia, Plaintiff, known as “the Princess,” was kidnapped and held captive for more than three months. Plaintiff claims that her kidnapping and prolonged captivity caused the onset of her multiple sclerosis and seeks compensatory damages in the amount of $10,000,000 for financial losses, inconvenience, future medical expenses, physical pain and suffering, and mental anguish arising from Defendant’s breach.
Because Plaintiff demonstrated that Defendant’s breach of contract was a substantial factor in causing the Princess’ kidnapping and captivity, and triggering her multiple sclerosis, the Court awards the Princess the value of her life care plan, $1,145,161.47. Plaintiff failed to prove any other damages.
The decision covers a number of issues related to damages. For example, the court holds that it was reasonably foreseeable at the time of contracing that a DEA informant would be kidnapped in Colombia and suffer resulting health issues:
The inquiry under foreseeability in this case is whether Plaintiff's damages, namely her multiple sclerosis and the ensuing costs of her medical care, were reasonably foreseeable at the time of contract formation. Anchor Sav. Bank, FSB, 597 F.3d at 1361; Pratt v. United States, 50 Fed. Cl. 469, 482 (2001) (“Whether damages are foreseeable is a factual determination made at the time of contract formation.”) (citing Bohac v. Dep't of Agriculture, 239 F.3d 1334, 1340 (Fed.Cir.2001)). Hence, Plaintiff must show that both the kidnapping, her ensuing health problems, and consequential financial costs of medical care constituted the type of loss that was reasonably foreseeable when the parties formed their implied-in-fact contract.
Plaintiff has established that her kidnapping was reasonably foreseeable at the time the contract was entered into. From the outset ASAC Salvemini voiced concerns for the Princess' safety, and DEA moved her family because of the dangers of her operation as part of her agreement to work with DEA. Evidence revealed that kidnappings were not uncommon in Colombia at the time. 2007 Tr. 270 (Princess); 2007 Tr. 1523 (Warren) (“[W]e got the report [the Princess] had been abducted. That was not an unusual report in Colombia then or now unfortunately.”). Plaintiff established that harm to undercover informants, including injury and death, were reasonably foreseeable consequences of a breach at the time of contract formation.
Knowing, as DEA did, of the dangers inherent in undercover operations aimed at highechelon Colombian traffickers, especially kidnapping in Col ombi a–a “hot spot”–the Princess' kidnapping and resultant harm to her health was a reasonably foreseeable type of injury at contract formation. The Court recognizes that DEA likely did not specifically foresee that the injury would be multiple sclerosis, but this is not a requirement for a showing of foreseeability. Anchor Savings Bank, FSB, 597 F.3d at 1362–63 (noting that “the particular details of a loss need not be foreseeable,” as long as the mechanism of loss was foreseeable) (quoting Fifth Third Bank v. United States, 518 F.3d 1368, 1376 (Fed.Cir.2008)).
Not the ordinary intrigue of the average contracts case.
SGS-92-X003 v. U.S., No. 97-579C (Ct. of Fed. Claims, filed Aug. 30, 2014)(republished Sept. 26, 2014).
Thursday, September 25, 2014
This 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.
Cedar Fair, L.P. v. Falfas
Jacob Falfas worked continuously for Cedar Fair for nearly thirty five years. In 2005 he was promoted to Chief Operating Officer, pursuant to a written employment agreement. Falfas reported directly to Richard Kinzel, Cedar Fair’s Board Chair, President, and CEO.
In June of 2010 Falfas became aware of Kinzel’s dissatisfaction with certain aspects of his work. The two men had a 94 second telephone call on June 10, 2010. It is undisputed that after this phone call, Falfas’ employment with the company ended, but Kinzel believed that Falfas had quit, and Falfas believed he had been fired.
The employment agreement between the parties contained a binding arbitration provision. The parties arbitrated their dispute, resulting in a finding that Falfas had not resigned, but was terminated for reasons other than cause. The arbitrators found that equitable relief was needed to restore the parties to the positions they held prior to the breach of the employment agreement, and ordered Cedar Fair to reinstate Falfas to his former position.
Judicial Review of Arbitration Award
On appeal to the Erie County Common Pleas Court, the trial judge found that the arbitration panel’s order of reinstatement exceeded its authority under the employment agreement. The Sixth District Court of Appeals reversed, finding that the trial court erred in refusing to order reinstatement.
Specific performance is not a remedy in this breach of an employment agreement case.
An arbitrator’s authority to interpret a contract is drawn from the contract itself. The statutory authority of courts to vacate an arbitrator’s award is very limited. Arbitrators act within their authority to craft a remedy as long as the award “draws its essence” from the contract, but an award departs from the essence of a contract when the award conflicts with the express terms of the agreement or cannot rationally be supported by the terms of the agreement.
In this case the court found that the arbitration panel exceeded its powers in ordering Cedar Fair to reinstate Falfas.
Specific performance is not an available remedy for breach of an employment contract unless it is explicitly provided for in the contract or by an applicable statute. (Masetta v. Natl. Bronze & Aluminum Foundry Co., 159 Ohio St. 306, 112 N.E.2d 15 (1953), applied.)
Tuesday, September 9, 2014
We previously blogged about Ellington v. EMI, in which Duke Ellington's grandson essentially claims that EMI is double dipping into foreign royalties because it now owns the foreign subpublishers that are charging fees. The New York Appellate Division held that Ellington's 1961 royalties agreement is unambiguous and allows EMI to do this. Ellington has appealed to the New York Court of Appeals and oral argument is scheduled for Thursday. Oral argument will be streamed live on the Court's website.
Here's the summary of the case from the Court's Public Information Office:
In 1961, big-band jazz composer and pianist Duke Ellington entered into a then-standard songwriter royalty agreement with a group of music publishers including Mills Music, Inc., a predecessor of EMI Mills Music, Inc. (EMI). The agreement designates Ellington and members of his family as the "First Parties," and it defines the "Second Party" as including the named music publishers and "any other affiliate of Mills Music, Inc."
Regarding royalties for international sales, the agreement requires the Second Party to pay Ellington's family "a sum equal to fifty (50%) percent of the net revenue actually received by the Second Party from ... foreign publication" of his songs. Under such a "net receipts" arrangement, the foreign subpublisher retained 50 percent of the revenue from foreign sales and remitted the remaining 50 percent to EMI. EMI would then pay Ellington's family 50 percent of its net receipts, amounting to 25 percent of all revenue from foreign sales. At the time the agreement was executed, foreign subpublishers were typically not affiliated with American music publishers; but EMI subsequently acquired ownership of foreign subpublishers and, thus, fees that had been charged by independent foreign subpublishers are now charged by subpublishers owned by EMI.
In 2010, Ellington's grandson and heir, Paul Ellington, brought this breach of contract action against EMI, claiming EMI engaged in "double-dipping" by having its foreign subsidiaries retain 50 percent of revenue before splitting the remaining 50 percent with the Ellington family. He alleges this enabled EMI to inflate its share of foreign revenue to 75 percent, and reduce the family's share to 25 percent, in violation of its contractual agreement to pay the family 50 percent "of the net revenue actually received by the Second Party from ... foreign publication."
Supreme Court dismissed the suit, saying the parties "made no distinction in the royalty payment terms based on whether the foreign subpublishers are affiliated or unaffiliated with the United States publisher." The term 'Second Party' does not include EMI's new foreign affiliates, it said, because the definition "includes only those affiliates in existence at the time that the contract was executed."
The Appellate Division, Second Department affirmed, saying there is "no ambiguity in the agreement which, by its terms, requires [EMI] to pay Ellington's heirs 50% of the net revenue actually received from foreign publication of Ellington's compositions. 'Foreign publication' has one unmistakable meaning regardless of whether it is performed by independent or affiliated subpublishers." It said the definition of 'Second Party' includes only affiliates "that were in existence at the time the agreement was executed," not "foreign subpublishers that had no existence or affiliation with Mills Music at the time of contract."
Paul Ellington argues the agreement was intended to split foreign royalties 50/50 between EMI and his family, while allowing EMI to deduct a reasonable amount for foreign royalty collection costs, and EMI breached the contract by "diverting" half of the revenue to its own foreign subsidiaries. "Per the plain terms of the Agreement..., EMI is 'actually receiv[ing]' all the revenue, and it must, therefore, split it all equally with plaintiff." He argues the definition of Second Party includes affiliates EMI might acquire in the future, since there is no language limiting the term to affiliates then in existence. In any case, he says the language is ambiguous and cannot be resolved on a motion to dismiss.
Here's the Appellate Division decision in Ellington v. EMI.
Wednesday, September 3, 2014
Cooper Union for the Advancement of Science and Art, founded in Manhattan in 1859, was one of the last institutions of free higher education in the United States until last year. Facing declining enrollment, the school announced that it would start charging tuition of more than $19,000 per year. Students, faculty members and alumni have filed a lawsuit challenging that decision and seeking to block the tuition as violating the school's charter. (Great timeline of Cooper Union tuition related events here at NYTimes).
Complicating matters is that Peter Cooper, who died in 1883, wrote the charter in lofty, less-than-precise language.
In the charter document, he said he was leaving his considerable funds and property to "regular courses of instructions, at night, free to all who shall attend the same, under the general regulations of the trustees, on the application of science to the useful occupations of life."
School officials say the intent is clear, even if the language is flowery: Mr. Cooper wanted night courses to be free, not necessarily all courses.
But the school has used the language in other ways, too. In 2006, during litigation seeking to maintain a tax exemption on a school-owned building, the administration in court documents quoted the line this way: "Cooper Union must provide 'regular courses of instruction…free to all who shall attend.' " The right was granted.
And a plaque deeming Cooper Union's Manhattan campus as a city landmark reads: "Peter Cooper…founded this institution, offering free education to all."
(emphasis added). Hmmm.... free to all or free to all at night?
Estate attorneys believe that the court is likely to be "sympathetic to the instutition's needs." Attorney Howard Krooks told the WSJ: "If you're dealing with a trust that's 100 years old, it's generally understood [by judges] that whatever it took to run a school back then is drastically different than today[.]"
Monday, September 1, 2014
Sunday's New York Times has a story by Gretchen Morgenson on the front page of its Business Section that illustrates an additional problem with binding arbitration. Arbitral panels can make arbitrary decisions to exclude evidence that could be outcome determinative. Courts do that as well, but while a court's rulings on evidentiary matters are reviewed for reversible error, it is not clear that courts have jurisdiction to review an arbitral body's evidentiary decisions.
Although Morgenson, a Pulitzer Prize winner, did her best to report all sides of the case, only the plaintiff and his attorney would speak with her. So we can't pretend we have all the facts. But here is what Morgenson reports:
Sean Martin, who works at Deutsche Bank, noticed five years ago that the firm was letting hedge fund clients listen in as analysts shared information about the markets before that information was shared with other investors. Martin reported the conduct at the time and was rewarded with his first ever negative performance review. He was moved out his work group and suffered a pay cut. In August 2012, he decided to pursue an arbitration, claiming retaliation and seeking recovery of lost wages. Under his employment agreement, disputes must be heard by arbitrators associated with the Financial Industry Regulatory Authority (Finra).
Streamlined discovery is supposed to be one of the advantages of arbitration. The purposes of the streamlining is supposed to be efficient resolution of claims. That is not happening in this case. The first hearings took place in March of this year, and at those hearings, the arbitral panel decided to exclude a number of crucial pieces of evidence that Martin sought to introduce. In addition, the Bank has asked that hearings for the case go on into 2105, six years after the alleged conduct took place and well over two years after Martin sought arbitration.
Martin was so dissatisfied with the panel's discovery decisions that he asked all three aribtrators to withdraw. They refused to do so. Martin then brought an action in the New York State Supreme Court (pictured above), seeking a stay of the arbitration proceedings and the removal of the panel. Mr. Martin's lawyer has done arbitrations before Finra before. It's not as if he is hostile to arbitration in principle. But this panel has gone "off the rails," he claims.
We'll see if the legal system can provide a remedy.
Thursday, August 28, 2014
According to FedEx, the people who drive up to your house in FedEx trucks, wearing FedEx uniforms and delivering FedEx packages are not FedEx employees. They are independent contractors. In Alexander v. FedEx Ground Package System, Inc. , a Ninth Circuit panel applying California law unanimously held otherwise, reversing an earlier multi-district court decision and remanding for an entry of summary judgment in favor of plaintiffs on the question of their employment status.
A class of 2300 drivers brought claims against FedEx claiming entitlement to expenses and overtime under California law. They also brought claims under the federal Family and Medical Leave Act. Their entitlment to relief turns on their status as employees.
The opinion is long and detailed, but it basically comes down to this. The drivers sign an Operating Agreement (OA) which has language suggsting that the drivers enjoy the sort of independence ordinarily associated with independent contractors. The Ninth Circuit found that, notwithstanding the OA, FedEx controls the terms and conditions of its drivers' work the way it would for an employee.
Under California law, a person is an employee if the alleged employer has a right to control the purported employee's on-the-job conduct: “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means ofaccomplishing the result desired.” In addition, the right to terminate at will and without cause is a strong indicator of an employment relationship. The court lists a number of additional factors as well. The court carefully examined the nature of the relationship and found that FedEx clearly exercised a right to control the conduct of its drivers.
Tuesday, August 26, 2014
Intervening Illegality of Underlying Promises Does Not Cause Contract to Fail for Lack of Consideration; Does Not Breach Warranty
What happens when a party to an agreement terminates and begins to make quarterly termination (liquidated damage) payments as promised and then, while payments are being made, a law is past that makes the underlying promised performance illegal? The parties are sorting this out in a case against Orbitz.
In 2005, Orbitz and Trilegiant entered into an agreement (“Master Service Agreement,” or “MSA”) for Orbitz to provide “DataPass” marketing services. Pursuant to the MSA, Orbitz marketed Trilegiant’s services to Orbitz customers. If a customer enrolled in Trilegiant’s services, Orbitz would transfer the customer’s billing and credit card info to Trilegiant and, thereafter, Trilegiant would charge the customer and pay Orbitz a commission. As a result, customers were charged for Trilegiant’s services without ever affirmatively providing their credit card information to Trilegiant (though, they had arguably agreed to be charged when purchasing travel arrangements on the Orbitz site – I leave that part to Nancy Kim).
Customers eventually complained about their credit cards being charged without their knowledge. In 2007, Orbitz notified Trilegiant that it would be terminating the MSA. The MSA allowed for early termination but required Orbitz to make a series of quarterly termination payments (totaling over $18 million) through 2016.
In 2010, Congress enacted the Restore Online Shopper Confidence Act (“ROSCA”), which made the DataPass marketing practice illegal. Orbitz stopped making the quarterly termination payments to Trilegiant. Trilegiant sued Orbitz in New York and a recent decision of the trial court (Supreme Court, New York County, Ramos, J.) granted Trilegiant summary judgment on 3 of Orbitz’s 17 affirmative defenses.
First, the court rejected Orbitz’s defense of lack of consideration. The court explained:
Orbitz contends that there had to be consideration for each quarterly termination payment and that Trilegiant's continued use of DataPass is necessary to its claim against Orbitz. Orbitz argues that the consideration for the termination payments was supposed to be Trilegiant's forfeit of potential earnings, earnings that Trilegiant cannot forfeit if it is not in the business of DataPass (see Orbitz's Memorandum of Law at 8-9).
The law does not support Orbitz's argument. It is well settled that an agreement "should be interpreted as of the date of its making and not as of the date of its breach" (X.L.O. Concrete Corp. v John T. Brady and Co., 104 AD2d 181, 184 [1st Dept 2009]). Additionally, "[i]f there is consideration for the entire agreement that is sufficient; the consideration supports every other obligation in the agreement" (Sablosky v Edward S. Gordon Co., 73 NY2d 133, 137 ). A single promise "may be bargained for and given as the agreed equivalent of one promise or of two promises or of many promises. The consideration is not rendered invalid by the fact that it is exchanged for more than one promise" (2-5 Corbin on Contracts § 5.12).
Considerations of public policy also support this conclusion, because a promisor should not be permitted to renege on a promise either because that specific promise lacks textually designated consideration or because the promisor wants to avoid performance of multiple obligations when the promisee has already performed and has no further obligations concurrent with the promisor's performance (see 15 Williston on Contracts §45:7 [4th ed.]).
While Orbitz contends that Trilegiant has been unable to forfeit earnings from new DataPass customers since it ceased the practice in January 2010, that fact has no bearing on whether there was consideration for the termination payment provision in the MSA. The termination payments were part of the original MSA (see MSA at Ex. B), and Trilegiant is correct when it asserts that the existence of consideration for the MSA itself, whether "consist[ing] of either a benefit to the promisor or a detriment to the promisee" (Weiner v McGraw-Hill, 57 NY2d 458, 464 ), is not a disputed material fact in this case.
Additionally, courts do not look to the adequacy of consideration provided that there was consideration, "absent fraud or unconscionability" (Apfel v Prudential-Bache Sec. Inc., 81 NY2d 470, 476 ). There are no allegations that the MSA was fraudulently agreed upon or that it is unconscionable. Further, this Court has already held that the termination payments in the MSA do not constitute a penalty or unenforceable liquidated damages (see NYSCEF Doc. No. 97 at ¶5, Order entered 12/24/2013).
As this Court has previously stated, if these sophisticated parties to the original MSA wanted Orbitz's promise to pay each quarterly termination payment to be contingent on Trilegiant's continued use of DataPass and subsequent forfeiture of revenues, they could have so stipulated in the MSA (see NYSCEF Doc. No. 89 at p 6, Entered 10/7/2013). This Court finds that Orbitz's promise to pay all quarterly termination payments is supported by the same bargained-for consideration given by Trilegiant in exchange for Orbitz's various promises in the MSA as a whole.
Second, the court rejected Orbitz’s argument that Trilegiant lacked standing because it could not show that it was “ready, willing and able” to perform its obligations. The court reasoned:
Orbitz argues that its early termination in 2007 triggered the MSA liquidated damages remedy and that even though Trilegiant was relieved of its obligation to perform it still had to show it was able. Orbitz further argues that Trilegiant has adduced "no evidence whatsoever to prove that it was ready, willing, and able to perform its obligations under the MSA as of the time Defendants stopped making payments in 2010" (Orbitz's Memorandum of Law at p 10).
Whether the remedy constitutes liquidated damages or a separate provision of the MSA that establishes new obligations for Trilegiant and Orbitz whereby Orbitz is obligated to make quarterly payments and Trilegiant essentially is obligated only to collect them, is irrelevant in light of the fact that Trilegiant claims only general damages, which "include money that the breaching party agreed to pay under the contract" (See Biotronik A.G. v Conor Medsystems Ireland, LTD 22 NY3d 799, 805,  citing Tractebel Energy Marketing, Inc. v AEP Power Marketing, Inc., 487 F3d 89, 109 [2d Cir 2007]).
Trilegiant is not required to show its ability to perform through September 30, 2016, the date of the final quarterly termination payment. Even if, arguendo, Trilegiant was required to show it could have performed its obligations under the MSA, Orbitz's argument that those obligations would have included an ability to perform DataPass is unpersuasive. Whether Exhibit B of the MSA constitutes liquidated damages or a separate provision of the contract, Trilegiant is not textually obligated to do anything except not market to Orbitz's customers.
Furthermore, liquidated damage clauses benefit both potential plaintiffs "who [are] relieved of the difficult, if not impossible, calculation of damage, item by item" and potential defendants "who [are] insulated against a potentially devastating monetary claim in the event" of a breach and "[t]hus, public policy is served by the implementation of such clauses" (X.L.O. Concrete Corp. at 186).
Finally, the court rejected Orbitz’s argument that Trilegiant violated a warranty provision in the MSA in which the parties promised that performance of the agreement did not violate any law. The court reasoned:
While Orbitz contends that Trilegiant and similar DataPass practitioners "violated the rights of millions of Americans" (Orbitz's Response at 13), ROSCA does not refer to the violation of consumers' "rights" when it describes the actions of third party sellers, such as Trilegiant, who purchased consumers' credit card information (15 U.S.C. §8401 at Sec. 2). ROSCA's findings instead refer to DataPass as something that undermined consumer confidence and "defied consumers' expectations" (id. at Sec. 2(7)).
This Court has already held that ROSCA does not make any violating contracts unenforceable and the MSA is enforceable despite DataPass being presently illegal (see NYSCEF Doc. No. 89 at p 5, Entered 10/7/2013). Moreover, as this Court has already explained, "the primary purpose of ROSCA was to protect consumers (15 U.S.C. §8401), not marketers that were using DataPass as a tool" (NYSCEF Doc. No. 89 at p 4, Order entered 10/7/2013, citing Lloyd Capital Corp. v Pat Henchar, Inc., 80 NY2d 124, 127 ).
Orbitz claims that Trilegiant has failed to show that it was not in violation of Section 6.1 of the MSA, based on the concept that an "express warranty is as much a part of the contract as any other term" (CBS, Inc. v. Ziff-Davis Pub. Co., 75 NY2d 496, 503 ).
A breach of warranty claim is established "once the express warranty is shown to have been relied on as part of the contract," and the claiming party then has "the right to be indemnified in damages for its breach [and] the right to indemnification depends only on establishing that the warranty was breached" (id. at 504).
Orbitz argues that there are disputed issues of fact as to Trilegiant's alleged breach of warranty, but Orbitz has not alleged damages for which it could be indemnified nor has it alleged any evidence of Trilegiant's breach of warranty that is not rooted in ROSCA's condemnation of DataPass. This Court has already held that ROSCA's enactment and findings do not relieve Orbitz from its obligations under the MSA, holding that "as a general rule also, forfeitures by operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as a sword for personal gain rather than a shield for the public good" (NYSCEF Doc. No. 89 at p 4, Entered 10/7/2013, quoting Lloyd Capital Corp. at 128 [internal quotations omitted]).
Orbitz tries to use ROSCA's findings that DataPass was bad for consumers and the economy and Trilegiant's cessation of DataPass activity as evidence of conduct that would violate the MSA Section 6.1. These allegations do not create a question of fact. This Court has already held that "ROSCA does not provide that any violating contracts are rendered unenforceable or that its provisions were intended to apply retroactively" (see NYSCEF Doc. No. 89 at p 5, Entered 10/7/2013), and Trilegiant ceased DataPass almost a year before ROSCA made the practice illegal.
A case worth watching.
Trilegiant Corp. v. Orbitz, LLC, 2014 NY Slip Op 24230 (Sup. Ct. N.Y. Cty. Aug. 20, 2014)(Ramos, J.).
Third Circuit Says that Courts Decide the "Gateway Question" of the Availability of Class Arbitration
The question before the Third Circuit in Opalinski v. Robert Half Int'l Inc. was whether a court or the arbitrator should decide on the availability of class arbitration. The Court held that the issue was akin to the question of arbitrability itself and so, absent agreement to the contrary, the issue is one for the court.
The posture of the case is interesting. Robert Half International (RHI) had filed a motion to compel individual arbitration of David Opalinski's Fair Labor Standard Act claims. The District Court granted the motion to compel but did not rule on RHI's demand for individual arbitration. The arbiter issued a partial award in Mr. Opalinski's favor and permitted class arbitration. At that point, RHI went back to the District Court and moved to vacate the partial award. The District Court denied that motion, and RHI appealed. The key issue on appeal was whether the District Court or the arbiter should decide the availability of class arbitration.
The Third Circuit resolves the issue as follows:
We read the Supreme Court as characterizing the permissibility of classwide arbitration not solely as a question of procedure or contract interpretation but
as a substantive gateway dispute qualitatively separate from deciding an individual quarrel. Traditional individual arbitration and class arbitration are so distinct that a choice between the two goes, we believe, to the very type of controversy to be resolved.
The court then went on to note that the Sixth Circuit, the only other Circuit to have ruled on the manner, resolved the issue in the same way.
Monday, August 25, 2014
Towards the end of 2011, Barnes & Nobles (B & N) decided to liquidate its inventory of HP Touchpads (left), by offering them for sale at deep discounts at a "fire sale." Kevin Khoa Nguyen (Nguyen) acted quickly to take advantage of this opportunity and purchased two units through the B & N website. He first received an e-mail confirmation of the transaction and then an e-mail cancellation of the transaction due to unexpectedly high demand.
Nguyen argued that he did not read or otherwise have notice of B & N's terms and did not assent to them. The District Court agreed and denied B & N's motion to compel arbitration. In Nguyen v. Barnes & Noble Inc., the Ninth Circuit affirmed. In so doing, the Ninth Circuit began by explaining the difference between clickwrap and browsewrap contracts:
Contracts formed on the Internet come primarily in two flavors: “clickwrap” (or “click-through”) agreements, in which website users are required to click on an “I agree” box after being presented with a list of terms and conditions of use; and “browsewrap” agreements, where a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen.
Over on the Technology and Marketing Law Blog, Venkat Balasubramani has a great post on this case called "What's a Browsewrap? The Ninth Circuit Sure Doesn't Know -- Nguyen v. Barnes & Noble. The post is less snarky than it might appear (or much more so), for as Eric Goldman's contribution to the post makes clear, nobody is able to draw sufficiently clear distinctions between clickwrap and browsewrap. Goldman suggests that the time has come to retire the clickwrap/browsewrap language entirely. Fortunately, our readers are far better informed than most courts about wrap contracts!
Tuesday, August 19, 2014
Plaintiff sued the YMCA for injuries sustained when he slipped and fell on stairs that he alleged were negligently maintained. First, let’s get this out of the way:
The YMCA argued that plaintiff was contractually barred from seeking damages against the YMCA because plaintiff had voluntarily signed an exculpatory clause in his membership agreement. That clause provided:
I AGREE THAT THE YMWCA WILL NOT BE RESPONSIBLE FOR ANY PERSONAL INJURIES OR LOSSES SUSTAINED BY ME WHILE ON ANY YMWCA PREMISES OR AS A RESULT OF A YMWCA SPONSORED ACTIVITIES [SIC]. I FURTHER AGREE TO INDEMNIFY AND SAVE HARMLESS THE YMWCA FROM ANY CLAIMS OR DEMANDS ARISING OUT OF ANY SUCH INJURIES OR LOSSES.
A New Jersey trial court granted summary judgment dismissing the complaint. An appellate court reversed. The appellate court framed the issue as “whether a fitness center or health club can insulate itself through an exculpatory clause from the ordinary common law duty of care owed by all businesses to … invitees[.]” The court held that it could not.
While the New Jersey Supreme Court upheld an exculpatory clause in Stelluti v. Casapenn Enters., Inc., 203 N.J. 286 (2010), that case was characterized as involving allegations of injury based upon risks inherent in the activity (bike riding in a spin class). In Stelluti, the New Jersey Supreme Court did not specifically address or decide whether an exculpatory clause may waive ordinary negligence.
Given the expansive scope of the exculpatory clause here, we hold that if applied literally, it would eviscerate the common law duty of care owed by defendant to its invitees, regardless of the nature of the business activity involved. Such a prospect would be inimical to the public interest because it would transfer the redress of civil wrongs from the responsible tortfeasor to either the innocent injured party or to society at large, in the form of taxpayer-supported institutions.
The appellate court also noted that the agreement was presumably a contract of adhesion.
This is a case worth following if appealed to the New Jersey Supreme Court. And a good teaching case because it lays bare the tension between freedom to contract and overriding concerns about general public welfare.
Walters v. YMCA, DOCKET NO. A-1062-12T3 (Superior Ct. of N.J. App. Div. Aug. 18, 2014).
Now there's a headline that will make Fox News chortle with glee. The Al Jazeera news network purchased Al Gore's Current TV channel for $500 million. Gore's suit alleges that Al Jazeera still owed $65 million on the purchase price.
According to this report on the Guardian Liberty Voice, Al Jazeera may be withholding the final payment in an attempt to negotiate a discount on the sale price. According to the report, Al Jazeera has not garnered as many viewers as it hoped -- an anemic average of 17,000 during prime time, as compared with 1.7 million for Fox News and nearly 500,000 for CNN.
But with new crises erupting daily in the Middle East, things are looking up for all three.
Monday, August 18, 2014
The named plaintiffs in Stevenson v. The Great American Dream, Inc. are former employees of Pin Ups Nightclub. They brought suit claiming entitlement to minimum wage and overtime compensation under the Fair Labor Standards Act (FLSA). They sought class certification in December 2012, which was granted in August 2013. Kwanza Edwards attempted to join the class on October 2013. Unfortunately for her, she had signed an arbitration agreement in February 2013. On July 15, 2014, the District Court for the Northern District of Georgia granted defendants' motion to compel Edwards to arbitrate her claim.
On motion for reconsideration, Edwards argued that the arbitration agreement was unconscionable, given that a FLSA action had already been filed, with class certification pending. The Court found that the timing of the agreement did not affect its substantive terms.
The Court was unimpressed with Edwards' citations to cases from other Circuits. Plaintiff does not seem to have cited to Russell v. Citigroup, Inc., about which we previously posted here. The case is probably distinguishable, but that was a case where the court refused to compel arbitration where a plaintiff signed an arbitration agreement after the class action litigation had already commenced. The difference is that Russell was himself already a party to a class action when he signed the new arbitration agreement. Edwards was not yet a party to the FLSA class when she signed her arbitration agreement.
Tuesday, August 5, 2014
Ah, “good faith” – the jello mold of contract law. What is “good faith”? What does it mean to negotiate in “good faith”? If a statute does not provide a definition, do common law notions of good faith apply? In New York, a panel of the Appellate Division (Second Department) had occasion to define the parameters of “good faith” for purposes of the statutory requirements in mortgage foreclosure actions.
In 2009, in response to the foreclosure crisis, New York’s Civil Practice Law and Rules (“CPLR”) § 3408 was amended to require mandatory settlement conferences in mortgage foreclosure actions involving any home loan in which the defendant was residing in the property. The statute further requires that both plaintiff and defendant negotiate in "good faith" to resolve the action, including, if possible, a loan modification. The statute does not define “good faith.”
Plaintiff (bank) argued on appeal that “a party to a mortgage foreclosure action can only be found to have violated the good-faith requirement of CPLR 3408(f) when that party has engaged in egregious conduct such as would be necessary to support a finding of ‘bad faith’ under the common law.” Of course, plaintiff maintained that it did not engage in any egregious conduct such as gross negligence or intentional misconduct and, therefore, it satisfied the good faith requirement of CPLR 3408(f).
The court rejected plaintiff's contention that a lack of good faith pursuant to CPLR 3408(f) requires a showing of gross disregard of, or conscious or knowing indifference to, another's rights. Instead, the court held that a failure to negotiate in “good faith” under CPLR 3408(f) is determined “by considering whether the totality of the circumstances demonstrates that the party's conduct did not constitute a meaningful effort at reaching a resolution.”
The court reasoned that this definition aligned with the purpose of the good faith requirement, which is “to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution."
The court elaborated on what constitutes a failure to act in good faith:
Where a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds, or, conversely, where a defendant fails to provide requested financial information or provides incomplete or misleading financial information, such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.
Applying the standard to this case, the court held that:
Any one of the plaintiff's various delays and miscommunications, considered in isolation, does not rise to the level of a lack of good faith. Viewing the plaintiff's conduct in totality, however, we conclude that its conduct evinces a disregard for the settlement negotiation process that delayed and prevented any possible resolution of the action and, among other consequences, substantially increased the balance owed by [defendant] on the subject loan. Although the plaintiff may ultimately be correct that [defendant] is not entitled to a . . . modification, the plaintiff's conduct during the settlement negotiation process makes it impossible to discern such a fact, as the plaintiff created an atmosphere of disorder and confusion that rendered it impossible for [defendant] or the Supreme Court to rely upon the veracity of the grounds for the plaintiff's repeated denials of [defendant’s] application.
Can you nail that to the wall: what's a meaningful effort?
U.S. Bank National Assoc v. Sarmiento, 11124/09 (N.Y. App. Div. 2d Dep't Aug 5. 2014).
Monday, August 4, 2014
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):
Tuesday, July 29, 2014
The 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).
Monday, July 28, 2014
In 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.
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.
Monday, July 21, 2014
In 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.
This 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.
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.
. . .
Monday, July 14, 2014
Fatemeh 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.