Saturday, September 22, 2018
There comes a time in every teaching semester (usually very early on...) where you have to coax your students to be comfortable with courts contradicting each other. You have to teach them to distinguish the cases, to make sense of it, but sometimes I feel like the answer to the contradictions is "the parties didn't argue that point and it just got missed and now we just have to deal."
I was thinking about this as I read a recent case out of the Third Circuit, Cook v. General Nutrition Corp., No. 17-3216 (behind paywall), which affirmed a failed lawsuit against GNC for, among other things, breach of contract. The appellants made several arguments for why their claims should not have been dismissed, one of them that GNC's termination of the contract was a breach. But the Third Circuit noted that termination was permitted by the contract: "[The contract] expressly permit[ted] GNC to unilaterally modify or cancel the agreement at any time, with or without notice."
That was the line that gave me pause, because I only recently taught Harris v. Blockbuster, which holds a contractual provision illusory precisely because it permitted Blockbuster to unilaterally change the contract at any time without even having to provide any notice. Other courts have definitely agreed with Harris, and while it's been distinguished I didn't really see any courts disagreeing with the conclusion. Third Circuit courts do seem to apply the illusory promise doctrine, so it doesn't seem like they've just decided to do without this doctrine in the Third Circuit.
It does seem like Harris can be read as only applying in the context of agreements to arbitrate and not all agreements (although there was apparently an arbitration clause in the GNC contract). Unfortunately, this is just me guessing as to how you can distinguish Harris, because there is zero discussion of illusory promises in the Third Circuit's very brief opinion. The court asserts that the contract gave GNC this right, and that while it might be "unfortunate," it was permissible and therefore not a breach.
Thursday, September 20, 2018
Above the Law has a write-up of a case involving charges of copyright infringement against the NFL for using photographs without permission, but the case has a very strong contract angle, as the allegations involve the scope and validity of the license that the AP granted to the NFL for the photos. The Second Circuit has a contract-interpretation-focused analysis that permits the photographers' lawsuit to go forward (the district court had dismissed the complaint). You can read the full decision here.
Wednesday, September 12, 2018
A recent case out of the Third Circuit, Lee v. Sixth Mount Zion Baptist Church of Pittsburgh, No. 17-3086, applies the ministerial exception of the First Amendment and refuses to entangle the court in a breach of contract dispute between a pastor and his former church. The parties had entered into a contract providing that Lee would serve as the Church's pastor for a twenty-year term. The contract provided for termination if its terms were breached. The Church terminated Lee's employment and alleged that he had failed to provide adequate spiritual leadership, as he was required to do by the terms of the contract. Lee disputed this, but the court refused to get involved, citing the ministerial exception. Courts aren't supposed to get entangled in "religious governance and doctrine," and asking the court to judge the quality of Lee's spiritual leadership under the contract would be just such an entanglement.
Monday, September 10, 2018
If you're turning to teaching damages in your semester, here's a recent case out of Florida for you, Forbes v. Prime General Contractors, Inc., Case No. 2D17-353. This is one of those cases where the homeowners and the contractor had a contract where the homeowners would pay periodically, as milestones for the work were reached. After completion of the scheduled demolition, though, the contractor told the homeowners that the cost to complete the project had almost doubled. The homeowners refused to pay the extra money, insisting on enforcement of the cost in the contract. The contractor walked off the job at that point. The home, having been in the demolition stage of the project, was uninhabitable. The homeowners rented another house and looked in vain for another contractor to finish the job. Finally, they bought a new house and let the old house go into foreclosure. They also sued the contractor for breach of contract.
The homeowners won their beach of contract case, but the lower court only awarded them their cost of renting the alternative house as damages, stating that the homeowners had failed to prove any other damages and also had failed to mitigate damages. The appellate court disagreed. The appellate court permitted the homeowners to treat the breach of contract as total and found that they should be awarded damages to place them in the position they would have been in had they never signed the contract. This could include reimbursement of the amount they had paid the contractor and the equity they lost in their home when they had to let it lapse into foreclosure, as well as the rent they had paid.
The appellate court also found that the homeowners had taken reasonable steps to mitigate damages. They rented while they searched for someone to finish the renovations. When that search failed, they bought a new house rather than continuing to make rent payments. Even if they hadn't bought the new house, they would not have been able to afford continuing to pay rent and the mortgage on the uninhabitable house, so whether they were renting or owning that house would have lapsed into foreclosure either way. The appellate court found that there was nothing else the homeowners could have done to avoid further damages.
Thursday, September 6, 2018
Here at the beginning of the semester, I've just been going over determining whether the UCC or common law applies to contract claims, and here's a recent case out of the Seventh Circuit, Heiman v. Bimbo Foods Bakeries Distribution Co., No. 17-3366, that illustrates why that question can be important.
The case involves some pretty eyebrow-raising allegations, as, according to the complaint, the defendant began "fabricating" breaches of the contract between the parties, so that it could terminate the contract based on these allegedly faked breaches. Pretty dramatic stuff, but the case falls apart on a statute of limitations issue. The UCC statute of limitations is four years; the relevant common law statute of limitations was ten years. All parties agreed that the cause of action accrued in 2011, so the statute of limitations would have already run if the UCC applied; not so if the common law statute of limitations was applied.
The court looked at the primary purpose of the agreement. The agreement at issue was a distribution agreement, and the court noted that jurisdictions overwhelmingly interpret distributorship agreements to be about the sale of goods. While the agreement certainly also covered "a significant amount of services," those serves were all "incidental to the larger purpose of the contract, which [was] to sell goods to consumers." Therefore, the contract was governed by the UCC and barred as untimely.
There was also a tortious interference claim that likewise failed because the complaint admitted that the plaintiff was aware of the possibility of its tortious interference claim in 2011, and so therefore this claim was also untimely under the relevant statute of limitations. The court also added that a party cannot tortiously interfere with its own contract, so the claim failed on the merits as well.
Tuesday, September 4, 2018
I don't blog a lot about contracts damages, but a recent opinion out of New York, St. Stephen Community A.M.E. Church v. 2131 8th Avenue LLC, 650558/11, had a discussion of the damages which it would allow the plaintiff to try to prove at trial. Specifically, the defendant was complaining about the plaintiff's seeking of lost income and punitive damages. The court found that the lost income damages would be permitted to survive to give the plaintiff an opportunity to prove them at trial with sufficient certainty. The plaintiff claimed that its board members would be able to testify at trial about the loss of revenue it suffered, and so the court did not think these were too speculative not to allow such testimony.
The plaintiff's punitive damages claim was a different story, however. The plaintiff argued that punitive damages were appropriate because a breach of fiduciary duty was at stake, but the court found that that was so only when the breach was "an outrageous public wrong," and there was nothing in this case that involved the "moral culpability" the court needed to award punitive damages. Likewise, punitive damages are normally recoverable from a breach of contract action only when there is a public right at issue or when an independent tort justifies such an award. Neither was relevant here, and so the court precluded the plaintiff from recovering punitive damages in connection with its breach of contract claims.
Wednesday, August 29, 2018
A recent case out of the Western District of Texas, May v. Expedia, Inc., No. A-16-CV-1211-RP (behind paywall), examines the enforceability of HomeAway.com's online contract. HomeAway is a website that offers vacation rental properties. Property owners can buy one-year subscriptions to HomeAway to list their properties for rent on the website. May was a property owner who had purchased successive annual subscriptions to HomeAway, and who now sues based on several breach of contract and fraud allegations, together with related state claims. HomeAway moved to compel arbitration, pointing to its terms and conditions. Specifically, in July 2016 HomeAway amended its Terms and Conditions to include a mandatory arbitration clause. May allegedly agreed to this clause when he renewed his HomeAway subscription in September 2016, and again when he booked his property through the website in October 2016.
May argued that he did not agree to the terms and conditions when he renewed his annual subscription because he changed the name on the account to his wife's name in an effort to avoid being bound by the new terms, but the court found that had no effect on the effectiveness of the terms and conditions and that May bound himself when he renewed his subscription, regardless of changing the name on the account. May was trying to take advantage of the benefits of the subscription without binding himself to the terms, and the court found that to be inequitable.
The court already found May to be bound but for the sake of completeness also analyzed May's argument that he was not bound when the property was booked because he did not receive sufficient notice of the terms and conditions, which gives us further precedent on how to make an enforceable online contract. The HomeAway site required the clicking of a "continue" button, and wrote above the button that the user was agreeing to the terms and conditions if they clicked the button, with a hyperlink to the terms and conditions. The court found this to be sufficient notice of the terms and conditions.
Monday, August 27, 2018
Revitch received an automated advertising call from DirecTV to his cell phone, and sued alleging violations of the Telephone Consumer Protection Act. Revitch was a wireless customer of AT&T, so DirecTV moved to compel arbitration under its sibling corporation's wireless service contract with Revitch. This recent case out of the Northern District of California, Revitch v. DirecTV, LLC, No. 18-cv-01127-JCS, denied the motion, finding that the arbitration clause did not cover claims with DirecTV completely unrelated to the wireless services provided under the AT&T contract.
It was true that the arbitration provision covered affiliates, and it was also true that DirecTV was an affiliate of AT&T, having become sibling companies a few years after Revitch entered into the contract with AT&T. But the court characterized the establishment of this relationship as a "completely fortuitous fact." The court noted that the intention for wording the clause broadly and including affiliates was typically to cover situations regarding assignments or successors. Nothing of the sort had happened here. No benefits under the contract had been assigned to DirecTV, nor had DirecTV undertaken any obligations under the contract. The calls Revitch was complaining about had nothing at all to do with the wireless service covered by the contract. So the precedent DirecTV tried to rely on was all distinguishable in the view of the court: "The Court concludes that Adams and Andermann, at most, support the conclusion that an entity may become an affiliate subject to the arbitration contract after the time of contracting where that relationship arises from an assignment of the underlying agreement or a related entity becomes a successor to the original contracting entity. That is not the case here."
The court interpreted the arbitration clause of the contract according to ordinary rules of contract interpretation that required the avoidance of absurd results and also that contracts be construed against the drafter. DirecTV argued that the presumption in favor of arbitration established by the Federal Arbitration Act meant that arbitration clauses should trump such rules of contractual interpretation, but the court disagreed. The court stated that, according to Ninth Circuit precedent, the FAA requires arbitration agreements to be placed on equal footing with other contracts. Allowing the suspension of ordinary contract rules of interpretation when arbitration agreements were involved would be placing arbitration agreements on favored footing; on equal footing, the same rules ought to apply to arbitration agreements as apply to all other contracts. Arbitration, the court emphasized, "is a matter of consent."
This is an interesting case. Due to the consolidation of most of our forms of communication under massive umbrella corporations, a relationship with one subsidiary can be used to assert a relationship with all companies under the same corporate umbrella, as DirecTV tried to do here. This court's view feels rooted in a common-sense understanding that the arbitration agreement Revitch entered into when he decided to sign up for AT&T wireless service shouldn't also cover completely unrelated television services provided by a company that hadn't been affiliated with AT&T when Revitch entered into the contract. Only a few months ago, though, the Supreme Court reversed the Ninth Circuit for refusing to enforce an arbitration clause, re-affirming the trump-card nature of the Federal Arbitration Act over many other public policies. This case seems like another display of Ninth Circuit courts' skeptical views toward arbitration clauses -- which the Supreme Court has just reminded the Ninth Circuit it doesn't share.
Wednesday, August 22, 2018
We have blogged several times before about the confusing and often tragic state of health care and health insurance in this country. Now we have another case out of the Eighth Circuit to add to the tally, Ferrell v. Air EVAC EMS, Inc., No. 17-2554.
Ferrell went to an emergency room with chest pain. Emergency room staff arranged for an air ambulance operated by AIR EVAC to transport him to another hospital. Ferrell's health insurance only covered a thousand dollars of this helicopter flight, so Ferrell was billed over $29,000. Ferrell then sued on behalf of a class of those similarly situated, alleging that there was no enforceable contract with the air-ambulance provider because he was not informed of the price of the helicopter flight before taking it. The problem, though, is that the federal Airline Deregulation Act (the "ADA") comes into play here, as this is about air travel. The ADA, among other things, prohibits states from regulating the cost of air transportation.
Ferrell argued that the ADA should not apply to air-ambulance services, which are unique from other forms of air transportation. But the plain language of the ADA is broad enough to include air-ambulance services, so the court refused to exclude them from the preemption. Because Ferrell was bringing a class action, this doomed all of his claims.
The court did find that Air EVAC could potentially bring a breach of contract claim if Ferrell refuses to pay, and that Ferrell could then assert there was no enforceable contract in defense. In that case, Air EVAC could then possibly rely on equity to recover the value of the services provided, and then the court would be able to determine that value without ADA preemption.
Which is a pretty complicated analysis and decision. Surely this is not the most efficient way we can think of to handle health care in this country. But I suppose there is something poetic about having to lump in health care with the air transportation industry: They often are both perplexing in their treatment of their customers.
Monday, August 20, 2018
California warranty case against Google illustrates the work the covenant of good faith and fair dealing does for consumers
A recent case out of the Northern District of California, Weeks v. Google LLC, Case No. 18-cv-00801 NC (behind paywall), involves Google's Pixel phones, which the plaintiffs allege are defective. The phones were covered by a warranty that permitted Google to either repair, refund, or replace the phones, at its discretion. When the plaintiffs complained about the defective phones, Google offered to replace the phones, but the plaintiffs weren't happy with that result: Their allegations are that their defective phones would just be getting replaced with more defective phones, until the point when the warranty expired.
The court agreed with Google that, under the terms of the warranty, Google had every right to do exactly that: "The Court understands plaintiffs' outrage at Google's being able to replace a defective Pixel with another defective Pixel for 365 days straight. . . . It beggars reason and would appear to make hash of the spirit of the warranty. But the warranty provided a remedy, and as far as the Court can tell, Google abided by its remedy. . . . The question of whether it was valid under the express warranty to replace a defective Pixel with another defective Pixel must be answered in the affirmative based on a plain reading of the Limited Warranty."
However, all was not lost for the plaintiffs, because the court then turned to allegations that Google had breached the covenant of good faith and fair dealing, a claim which the court allowed to survive Google's motion to dismiss. The court found that, while Google's conduct might not have been in violation of the terms of the contract, its conduct was not "expressly permitted" under the contract, nor did it meet "reasonable expectations" as to what its behavior would be. Therefore, the covenant of good faith and fair dealing acted as a backstop here against the dismissal of the breach of warranty claims.
(The court also allowed fraudulent concealment and California consumer protection law claims to survive.)
Friday, August 3, 2018
Watch out for relevant statutes when entering into contracts (but also, read your own contract language)
A recent case out of the Eastern District of Virginia, K12 Insight LLC v. Johnston County Board of Education, Civil Action No. 1:17-cv-1397, is a cautionary tale for being aware of how statutes can affect contracts. But, also, it could have been decided just on the contractual language alone.
In the case, the Board of Education signed an Order Form with K12 Insight that provided for an annual fee for three one-year terms. After signature, the school district realized that it could not afford the final two years of the subscription to K12's software and so attempted to terminate the subscription. K12 sued for breach of contract, alleging that the school district was obligated to maintain its subscription for the full three years.
The court declared the Order Form contract to be void. First, there was a statute that required a pre-audit certification to be affixed to the Order Form in order to ensure that there would be funding for the school district's contract. This contract lacked the pre-audit certification (which maybe explains why there wasn't funding). The court found that the contract was also outside the scope of the superintendent's authority.
But, finally, even if the contract had been properly made, the Board was permitted under the contract's own terms to terminate it if it didn't have sufficient funds. That was exactly what happened here, so the termination was proper.
Wednesday, August 1, 2018
Yet another contract aspect has emerged to the Harvey Weinstein situation, beyond the NDAs with the accusers, the contracts between lawyers and private investigators, and the complicated situation with the National Enquirer. Now insurance policies have stepped into the fray. According to this article, Weinstein's insurance companies are denying coverage based on alleged exclusions of "blatantly egregious and intentionally harmful acts." Weinstein, as his defense has stated, denies the accusations against him and counters that the insurance companies are siding with the accusers in order to get out of paying their obligations.
According to the insurers, Weinstein is facing eighteen lawsuits and other claims that have been filed in the past year. Naturally, Weinstein's defense is costing a great deal of money. Whether the insurance companies need to pay out under the policies (and which insurance companies need to pay out) probably depends on the exact wording of the policies, which seem to all be slightly different. For instance, one carrier was providing "crisis assistance" in the event of "significant adverse regional or national media coverage." Another was apparently a policy for legal defense that according to Weinstein explicitly included criminal investigations.
Friday, July 27, 2018
23andMe, one of the services that takes your saliva and analyzes your DNA for you, has announced a partnership with GlaxoSmithKline to use its DNA database to develop targeted drugs. I've written before about the fairly broad consent Ancestry.com's similar home DNA service elicited under its terms and conditions, which 23andMe also enjoyed. According to the article, 23andMe considers itself to have gained consent from its users, and is allowing users to opt out if you wish.
I think most of us have little problem with our DNA being used to find cures for terrible diseases and afflictions. If my DNA could be used to cure cancer, I am happy to line right up. (And, in fact, when my father had cancer, we did provide express consent to his doctors for us to assist in their DNA research.) But I think most of us, if asked, would have said something like, "I want my DNA to be used to cure cancer so people with cancer can be cured."
However, the way the pharmaceutical industry works in this country, that's not exactly what happens. The cure, as we know because we talk about health insurance A LOT, is then available to those who can afford it. Many of Wikipedia's drug entries keep track of the cost of pharmaceuticals in the U.S. against the cost of producing the drug, as can be seen here. So I don't want to sound like a terrible person trying to stall progress, but, well, the users in the database paid to use 23andMe, and now their DNA is being sold to a pharmaceutical company, so 23andMe has now made money off of the DNA twice, and then it's going to get used to develop into medications that will then be sold again, back to the people who need the medications, who may be the same people whose DNA was used to develop the drug. At that point your DNA has been profited off of three times, and never by you, and possibly twice at your own personal expense. And, if history is anything to go by, that pharmaceutical is your DNA coming back to you at a tremendous mark-up. So you could find yourself in a position where you paid to have a pharmaceutical company take your DNA, turn it into the drug that could save your life, and then ask you to pay, again, much more money than you have, to gain access to the drug. You paid to donate your DNA so they could charge you for the benefits it provides. And, according to the terms and conditions, you consented to that.
Thursday, July 26, 2018
It's the time of year when I start thinking about the fact that I should be thinking about my fall classes, and right on cue, here's a case out of the Seventh Circuit, Knopick v. Jayco, Inc., No. 17-2285, that's thoughtful about how waiver works and the policy underlying it. (You can listen to the oral argument here.)
The waiver portion of the case (there was also a jurisdictional issue) involved a warranty that stated it did not apply to RVs purchased by LLCs. The RV in question was purchased by an LLC. Therefore, under the unambiguous language of the warranty, the RV was not covered. However, Knopick argued that Jayco waived this exclusionary language of the warranty when it voluntarily performed some repairs to the RV as if the warranty applied. The warranty, though, had an additional clause stating that such "good will" repairs would not alter the exclusionary language of the warranty.
Even without that language, the court was skeptical that waiver could be used to achieve what Knopick wanted here. The court noted that waiver is ordinarily used as a "shield" to excuse non-performance. It's used so that a party cannot be "lulled" into a belief that its compliance is sufficient to fulfill a contractual obligation only to be surprised by a lawsuit for inadequate compliance later. Knopick, the court said, was trying to use waiver as a "sword." Rather than protecting himself, he wished to use it to compel performance by Jayco. The court, wary of expanding waiver because of how greatly it would damage the predictability of contracts, stated that it was unwilling to use the doctrine of waiver to compel Jayco, as such an action would have the effect of discouraging parties from "good faith" actions such as that undertaken by Jayco for fear of opening themselves up to expanded liability.
h/t to Timothy Murray of Murray, Hogue & Lannis for passing this one along!
Friday, July 20, 2018
A recent case out of the Southern District of New York, Garcia v. Good for Life by 81, Inc., 17-CV-07228 (BCM) (behind paywall), is an examination of a settlement agreement implicating the Fair Labor Standards Act ("FLSA"). It's interesting for the language it's willing to approve vs. the language it says should not be contained in the agreement.
First, the court expresses concern about the contract's releases being overly broad and rewrites them, concerned that the language as written would have attempted to bar claims by a "second cousin once removed." Upon revision, the court is comfortable with the releases, but the court declares unenforceable the no-assistance and no-media provisions. The court finds it a violation of the FLSA to bar the plaintiff from assisting other individuals who might have a claim against the employer. The court also states that the effective "partial confidentiality clause" preventing the plaintiff from contacting the media is "contrary to well-established public policy." I found this last ruling especially interesting in our age of widepsread NDAs, which I've blogged about a bunch. I agree that such a clause would "prevent the spread of information" in a way that would be harmful to other wronged victims trying to vindicate their rights; we should keep talking about that when it comes to NDAs.
Wednesday, July 18, 2018
I blogged about the issue of emergency room and hospital “surprise charges” before, but this important issue is well worth re-addressing in the context of a new case. Many court decisions and articles are still generated about the topic, but with no good solution yet from a patient/consumer point of view.
Here is the classic scenario: A person receives urgent medical care in an emergency room. Upon admission, he or she is presented with a contract stating, for example, that he or she will pay for the services “in accordance with the regular rates and terms” of the hospital or emergency room. But how does one ever know what those charges will be? Does that make them an open price term? If so, is the medical provider under an obligation to pay only the reasonable value of the services provided or can they charge pre-posted list rates? Who decides what is “reasonable” and not in a market marked by, for most of us, very high prices? If the provider charges what appears to be a very high amount, is the entire contract void for unconscionability?
A current case I came across addresses these issues (class certification was granted). The uninsured “self-pay” patient, Mr. Cesar Solorio, signed a three-page admissions contract stating the above. Once released, he got an un-itemized bill for $7,812. He filed suit for breach of contract asking the court to, among other things, clarify how the contractual language “in accordance with the regular rates and terms of [medical center] should be interpreted and applied. Mr. Solorio alleges that the language constitutes an open price term that, under applicable law, is an agreement to pay only the reasonable value of the items received and not the posted rates by the medical center. Solorio also alleges that the medical charges were artificially inflated and more than four times higher than the actual fees and charges collected by the medical center.
I still find these types of contracts highly problematic seen from a consumer/patient point of view. I have myself been subjected to a similar treatment (so to speak) by an emergency room that also, after the fact, sent me a much higher bill than what I was initially “promised” (orally and probably non-binding, but still). Several items were double if not triple billed. Patients can complain and complain, but what can we really do? Not much, it seems, as these types of cases keep re-appearing.
Yes, of course we want urgent medical treatment if we need it. Yes, that is expensive. But clearly, we also have a contractual (and moral) right notto be ripped off. And maybe some services that might initially seem urgent could actually wait… In my own case and, I know, that of many others, medical providers are very eager to promote their treatment as highly necessary and urgent/”a good idea.” That may, I hate to say, simply be a way for the medical providers to make more money.
As it is now, the burden seems to be on the patient seeking services to bargain for and document having received a promise that is limited in scope to … what? Is this just an impossible issue to solve from a contractual point of view? It seems to be. That’s where health insurance comes into play, but reality remains that not everyone has that. The “free market” takes over, but, in my opinion, that is far from optimum in this particular context.
The case is Cesar Solorio v. Fresno Community Hospital and Medical Center, Ca. Super. Ct. NO. 15CECG03165, 2018 WL 3373411.
A recent decision out of Ohio, Whitt v. The Vindicator Printing Company, Case No. 15 MA 0168, discusses the limits of the implied covenant of good faith and fair dealing. In the case, the contract contained a provision permitting termination of the contract for "malfeasance . . . , or at the will of either party for any reason or no reason" upon thirty days written notice. Vindicator terminated the contract with Whitt after an altercation between Whitt and a temp employee working for Vindicator. Whitt sued for, among other things, breach of contract, complaining that Vindictor had wrongfully terminated the contract only seven months into its three-year term. Whitt alleged that Vindictor violated the implied covenant of good faith and fair dealing because it terminated the contract after Whitt was a victim of criminal assault at the hands of Vindicator's employee.
The court noted, though, that the requirement of good faith should not give a court the ability to second-guess decisions made within the context of the contract. The termination provision of the contract did not require just cause, which was what Whitt was trying to read in. Rather, the contract permitted Vindicator to terminate it for no reason whatsoever, so the exact circumstances of the termination did not matter.
I think many people assume that contracts provide a level of reliability and predictability that doesn't exist if those contracts permit termination for any reason, or for no reason. I think Whitt assumed that this contract would stay in effect unless he did something terrible, but that's not how the termination clause was worded.
(h/t to D. C. Toedt for the free link!)
Saturday, July 14, 2018
We went to Lake George on vacation a couple of times when I was a kid, so I am blogging this recent case out of New York, Edscott Realty Corp. v. LaPlante Enterprises, Inc., 61356, out of a sense of nostalgia. Also it's another ambiguity case, and I always find those interesting and instructive for thinking about things to watch out for.
The parties operate two adjacent hotels on the shores of Lake George. In 1999, the parties had a dispute over water access that was eventually resolved in 2002 by dividing up the water according to a fence line "continued out into the waters of Lake George in an easterly direction along said course." The waters north of the fence line were reserved for the plaintiff and the waters south for the defendant.
The parties are now disputing, among other things, the meaning of this division. The plaintiff alleged that it limits both the actual berthing of boats on the wrong side of this line plus ingress and egress to navigate into those berths. The defendant alleged that it pertains only to the berthing of boats and does not limit the navigation of boats on Lake George. The court found that there was an ambiguity as to how far out into Lake George the parties had stipulated their rights to extend, and so refused to award summary judgment on the issue.
Friday, July 13, 2018
A recent case out of New York, Niznick v. Sybron Canada Holdings, Inc., 650726/2018, illustrates how ambiguity can crop up anywhere, sometimes no matter how careful you are; it's difficult to plan for every eventuality.
The parties had a contract that included a non-competition clause that prohibited competition for five years after Niznick ceased to own any units in the company. Sybron tried to exercise an option to purchase Niznick's units in the company in 2014, but Niznick disputed the validity of Sybron's actions, and the parties engaged in litigation. Eventually, a court concluded that Sybron was permitted to exercise the option and that Niznick's ownership interest terminated as of the 2014 date when Sybron had attempted to exercise its option. After this decision, in 2017, the parties entered into a purchase and sale agreement "deemed to be effective as if the transfer" had occurred in 2014. Niznick also asserted that, therefore, the non-competition clause would expire in 2019--five years after the 2014 date. Sybron contested that reading.
The parties' previous contracts had referred to the non-compete as "a material part of the consideration" of the agreement. The court, therefore, did not allow Niznick's attempt to minimize its importance. The purchase and sale agreement executed in 2017 stated that Niznick "is the owner" of the units in question (emphasis added). The "deemed to be effective" date was not considered to alter the language of the non-compete, which stated that it would commence when Niznick ceased to own units, which did not happen until the 2017 purchase and sale agreement, regardless of the "deemed effective" date.
At the time of drafting the non-compete, it was probably thought that it would be pretty clear when Niznick ceased to own the units. Sybron probably did not anticipate that they would have a dispute about the operative date this way.
Thursday, July 5, 2018
A recent Indiana case demonstrates the continued necessity of distinguishing between the common law and the UCC. Nothing too new in the case legally as I see it, but it lends itself well to classroom use.
A medical center entered into two contracts with a medical billing services company for records-management software and related services. In Indiana and elsewhere, “where a contract involves the purchase of preexisting, standardized software, courts treat it as a contract for the sale of goods governed by the UCC. However, to determine whether the UCC applies to a mixed contract for both goods and services, Indiana uses the “predominant thrust test.” Courts ask whether the predominant thrust of the transaction is the performance of services with goods incidentally involved or the sale of goods with services incidentally involved. Id. To determine whether services or goods predominate, the test considers (1) the language of the contract; (2) the circumstances of the parties and the primary reason they entered into the contract; and (3) the relative costs of the goods and services.
In the case, the contractual language was neutral. Next, the primary reason for executing the agreements was to obtain billing services. The software was merely a conduit to transfer claims data to the billing services company in order to allow it to perform those services. The goods – the software – were incidental. The third and final factor—the relative cost of the goods and services—also pointed toward that conclusion. As the Indiana Supreme Court has explained, “[i]f the cost of the goods is but a small portion of the overall contract price, such fact would increase the likelihood that the services portion predominates.” Under the agreement, the medical center paid a one-time licensing fee of $8,000 for software; a one-time training fee of $2,000; and $224.95 each month for services and support for about nine years. Thus, for the life of the Practice Manager agreement, the services totaled approximately $26,294—more than three times the $8,000 licensing fee for the software. Under the agreement, the medical center also paid a one-time licensing fee of $23,275 for the software; a one-time training fee of $4,000; and $284 per month for services and support for about six years. Thus, the services totaled about $24,448—slightly more than the $23,275 software licensing fee. The relative-cost factor reinforces the conclusion that services predominated. Thus, the ten-year common-law statute of limitations and not the four years under the UCC applied.
Interestingly, the case also shows that because the UCC did not apply, plaintiff’s claim for good faith performance under the UCC dropped out too. In Indiana, a common-law duty of good faith and fair dealing arises “only in limited circumstances, such as when a fiduciary relationship exists,” which was not the case here. The parties were thus not under a duty to conduct their business in good faith. Yikes! This should allow for some good classroom discussions.