Friday, May 20, 2016
Implied Warranties of Habitability on Houses Do Not Apply to Second Buyers If the First Buyers Waived Them
A recent case out of Illinois, Fattah v. Bim, Docket No. 119365 (behind paywall), allowed the court to clarify whether an initial home buyer's waiver of the implied warranty of the house's habitability applied to subsequent buyers, or whether the second purchaser of the house could nevertheless assert a breach of warranty claim against the builder of the home. The Supreme Court of Illinois concluded that a waiver of the warranty on the part of the first buyer eliminated the second buyer's ability to exert such a claim, overturning an appellate court decision that had sent reactionary ripples through the home-building blogosphere.
In 2005, Masterklad built a house that contained a brick patio. In 2007, Masterklad sold the house to Beth Lubeck. The sale of the house included a "Waiver and Disclaimer of Implied Warranty of Habitability" in which Lubeck "knowingly, voluntarily, fully and forever" waived the implied warranty of habitability that the State of Illinois reads into all contracts involving newly constructed houses. In exchange for the waiver of the implied warranty, Masterklad provided Lubeck with an express warranty on the house. The express warranty was limited to a one-year term. There was no allegation in the case that Lubeck's waiver of the implied warranty wasn't effective and enforceable, and there were also no allegations that Masterklad hadn't complied fully with the terms of the express warranty.
In 2010, a couple of years after the expiration of Masterklad's express warranty on the house, Lubeck sold the house to John Fattah. The sale of the house stated that it was "as is." A few months later, the brick patio that Masterklad had installed collapsed. Fattah sued Masterklad, alleging that the patio had had latent defects that violated the implied warranty of habitability.
At the trial court level, Fattah lost, with the court concluding that the policy that permitted knowing waivers of the implied warranty would be frustrated if subsequent buyers could resurrect the claims. The appellate court, as has been mentioned, reversed, though, finding that Fattah could assert breach of the implied warranty.
Illinois' Supreme Court disagreed with the appellate court's decision. While Illinois has previously determined that the implied warranty extends to subsequent purchasers of a house where the first purchaser has not waived the warranty, this was a different situation: Fattah was seeking to recover damages that the first buyer would not have been entitled to. Allowing Fattah to do this alters Masterklad's risk exposure in an unfair way. Masterklad sought to manage its level of financial risk by providing an express warranty with a clear termination date, as it was permitted to do under Illinois precedent. It was unfair to switch everything up on Masterklad at this late date. In fact, allowing Fattah to bring this claim would effectively mean that the implied warranty of habitability could never be waived, as it could be resurrected by any subsequent buyer--which was the opposite of what Illinois had decided when it concluded that the implied warranty could be waived.
The disagreements within the Illinois court system about this come down very explicitly to a policy decision. The appellate court seemed uneasy with waivers of the implied warranty because of public policy concerns, and one can see its point: You like to assume the houses you buy can generally be lived in. But the supreme court's point here also makes sense: If you buy a house "as is," you've usually gotten some kind of discount. If your gamble doesn't pay off, the courts are reluctant to revive arguments you bargained away. This might boil down to, much of the time, the maxim that a deal that seems too good to be true might, indeed, be untrue, and wariness should be employed.
Thursday, May 19, 2016
Negotiating a settlement can be a tricky business, with drafts going back and forth and language tweaking continually occurring. All of that document tweaking means that there's plenty of opportunity for the whole thing to fall apart, as a recent case out of Connecticut, AREH Windsor Locks, LLC v. Tops Markets, LLC, Docket Number HDSP172841 (behind paywall), reminds us.
In the case, the parties had reached a settlement agreement "in principle," in the words used in an e-mail by one of the defendants' attorneys. The "in principle" language underlined the fact that, in fact, no true meeting of the minds had ever actually occurred. Defendants' attorneys' e-mails had warned of additional changes that would be made to the settlement agreement draft--even if those e-mails did characterize those changes as "a few" and "very minor." The last e-mail sent by defendants' attorneys before the agreement fell apart referred to the draft as "final" but explicitly noted that it was subject to the plaintiff's approval and that it needed the plaintiff's "green light."
The court concluded that the defendants never received the requested "green light." So, although the defendants' attorneys seemed to view the agreement as "final," there had in fact never been a final agreement between the party. The defendants, it turns out, may have been counting the settlement chickens before they hatched.
Tuesday, May 17, 2016
Jury instructions that cause a jury to answer questions indicating that a defendant has made a negligent misrepresentation, that the plaintiff reasonably relied on this statement, but that this did not cause harm to plaintiff are not so “hopelessly irreconcilable” as to be inconsistent under at least California law.
In a breach of contracts case with a cross-complaint, the jury answered “yes” to whether a cross-defendant had negligently misled cross-plaintiff, further found that the misrepresentation was indeed material and that the cross-plaintiff had reasonably relied on the statements pertaining to incentive agreements and construction permits inducing the cross-plaintiff to enter into a gas station purchase and related agreements. However, the jury also found that the misrepresentation did not “substantially” influence the buyer to buy the gas station in the first place. Cross-defendant seller appealed, seeing to have the jury verdict set aside for inconsistency.
The court did not agree that the jury verdict was inconsistent to the point of being hopelessly irreconcilable. “Reliance and causation are intertwined concepts … Reliance must be thought of as the mechanism of causation in an action for breach.” However, by answering “no” to the question of whether the representations were “substantial factors” in causing harm to the cross-defendant, the jury “clearly must not have believed this to be the case,” said the court. Thus, no causation was found in spite of reliance on a fraud. In other words, the jury must have thought that the buyers would enter into the agreement anyway despite the misrepresentations.
Of course, clearer jury instructions would resolve a matter such as this in a more satisfactory way for clients than having courts of appeals second-guess what the jury must have thought. This case again shows the importance of careful linguistic drafting in the contracts context. Easier said than done, apparently…
The case also shows that contracts for pre-specified amounts of gas still exist.
Thursday, May 12, 2016
If you and I worked in an industry with highly sensitive information (assuming that we do not), it might be one thing if we thought we could email confidential information to our private email accounts and copy such information to a memory stick without finding out. But if a C-level employee at a high-tech company does so, does such conduct not rise to an entirely different level of at least naivety, if not deliberate contractual and employment misconduct?
A court will soon have to answer that question. Louis Attanasio, former head of global sales for an IBM cloud computing unit has been sued by IBM for breach of a contractual confidentiality clause, misappropriation of trade secrets, and violation of a non-compete agreement when he left – information in hand – to work for direct competitor Informatica.
In 2016, Attanasio allegedly started sending confidential information to his private email account, including draft settlement agreements between other IBM employees who had left to work for competitors. Before leaving IBM, Attanasio was asked to return a laptop to the company, which claims that he cpied files to a USB storage device.
Once again, the extent of the traceability of our electronic actions at work has become apparent. I continually remind my students of this to help them avoid “traps” such as the above or, frankly, simply to remind them that they should not spend much, if any, time on their computers not working (most seem to use their own electronic devices anyway these days, but still… and doing so is also very visual in an office setting.). Employers frequently complain about the work ethics of new college graduates, so it might be worthwhile to remind our students of what seems obvious to us.
Wednesday, May 11, 2016
Contracts preventing consumers from filing class-action lawsuits against banks may soon be illegal if a proposed ruling by the Consumer Financial Protection Bureau takes effect. A hearing on the ruling will be held on Thursday, May 12, 2016.
For quite some time, clauses requiring consumers to arbitrate disputes with banks and banning class action lawsuits against banks in cases of disputes have been common. According to a prominent attorney to testify at Thursday’s hearing, one of the effects of required arbitration has been to make class action lawsuit highly unlikely. Of course, a contractual clause outright prohibiting class action suits means that if a consumer wants to litigate the dispute and arbitration, he or she would have to do so in an individualized suit. Because of the low amounts typical at issue in bank-v-consumer disputes, such clauses have had the effect of preventing litigation. Even if it comes to litigation between banks and consumers, “consumers can easily be outgunned” by savvy banks who additionally are said to “like to drag things out,” a problem when consumers at the same time have to take time off from work to litigate.
The proposed rule would not ban arbitration clauses. Rather, it would prevent contract clauses from including language that bans consumers from joining class-action cases. Such bans are common, and they have become more widely enforced since the United States Supreme Court in 2011 held that the FAA requires state courts to honor bans even if state law prohibits them.
According to Consumer Bureau Director Richard Cordray, "signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong." Cordray also calls the current practice a "contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing." The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness calls the proposed rules a “backdoor ban” on arbitration clauses, said to provide individual consumers the chance for “more financial relief than a class-action suit.” The Pew Charitable Trusts’ Consumer Banking Project states that it is probably true that banks will ditch arbitration clauses if the CFPB’s rules take effect, but “consumers will probably be just fine.”
Tuesday, May 10, 2016
A recent case out of New Jersey, Zelnick v. Morristown-Beard School, Docket No. L-1947-13, had some interesting things to say about the contractual relationship between a private high school and the students enrolled (and parents of those students).
The case arose out of an alleged inappropriate sexual relationship between the plaintiffs' daughter, then a student at the school, and her teacher. The plaintiffs' daughter was a minor throughout the alleged sexual relationship; at present, however, the plaintiffs' daughter is an adult who is estranged from her parents and took no part in the case brought here.
The court refused to get into the details of the relationship between the plaintiffs' daughter and the teacher, finding that the details were mostly irrelevant. It was sufficient to state that there seemed to be some knowledge on the part of the school of inappropriate behavior with other female students on the part of the teacher for a few months before a fateful school trip to Greece, which many of the accusations surrounded. At the time of the school trip, although the teacher violated the school's policy during the trip, the plaintiffs actually spoke up on his behalf, praising his assistance when their daughter fell ill on the trip. Apparently, it later was learned, at least part of the illness was faked, orchestrating "alone time" for the plaintiffs' daughter and the teacher apparently, and the plaintiffs did not know of the inappropriate relationship between their daughter and the teacher at the time that they spoke up on his behalf.
Shortly after the Greece trip, the school was informed by multiple sources that the plaintiffs' daughter and the teacher had engaged in inappropriate conduct during the trip. The school delayed for months contacting the Division of Child Protection and Permanency (the "DCPP") regarding the persistent rumors surrounding the teacher. It's unclear how the DCPP got involved, although once they did, the teacher fled the country during the investigation into his behavior. At the time, the plaintiffs' daughter was in her senior year at the school, although she was not attending school physically due to assessment by a psychologist that the persistent rumors about her relationship with the teacher were causing her to suffer too much stress.
Among other claims, the plaintiffs raised a breach of contract claim based on their daughter's enrollment contract with the school. The school argued that the terms of the contract were that they would provide the plaintiffs' daughter with an education in exchange for tuition. The plaintiffs argued that the contract implied that the learning environment provided to their daughter would be safe; the school rebutted that. The court agreed with the school: There was no "safe learning environment" requirement implied in the contract with the school. The plaintiffs' attempt to create one, the court said, was an attempt to convert tort claims into contract claims.
This is an interesting ruling to me because, on the one hand, I think all of us would hope that the schools we send our children to are striving to provide a safe learning environment. Very few of us would agree to enter into bargains with schools without a belief that the students' best interests must be at the school's heart. On the other hand, while this isn't a school shooting case, I can see this being a complicated promise in an age where this country has grown to expect that our schools are basically under attack.
It does seem to me that, in the court's recitation of the facts, the school behaved poorly here. The school had notice of persistent reports from multiple sources, including other students, other parents, and other school employees, that the teacher's behavior had been personally witnessed to be inappropriate, and for months the school seems to have taken no action and, indeed, to have allowed the teacher in question to act as one of a few chaperones on an international trip. It reminded me of the case Myanna wrote up a few days ago about the contractual duty of good faith in Texas and the lack of fiduciary relationship between universities and students. Maybe we (or just me) place more trust in other people and entities' obligations toward us/me than we/I should.
The plaintiffs, of course, did have tort claims here--gross negligence and negligent infliction of emotional distress--but the court ruled they did not have standing to pursue them. Those claims seem to have belonged to the plaintiffs' daughter, who, unfortunately, was no longer speaking to her parents, allegedly because of the parents' disapproval of her relationship with her teacher.
Monday, May 9, 2016
The situation in this recent case out of the District of Nebraska, Kermeen v. State Farm Fire & Cas. Co., No. 8:14-CV-416 (behind paywall), was possibly the result of lack of communication between departments at a large insurance company. But, even if the error was entirely innocent, it had very real consequences. Maybe a court might save you from clerical errors, but this alleged administrative mistake on the part of State Farm didn't win the court's sympathy at all.
The Kermeens had a homeowner's insurance policy from State Farm. In March 2014, during the term of the policy, a fire damaged the Kermeens' house and they made a claim for their losses. State Farm claimed to have sent the Kermeens a letter the following month asserting that it appeared that the fire had been set on purpose and that such activity on the part of the Kermeens would void the policy as of the date of the fire.
In June 2014, a couple of months later, a hail storm damaged some of the Kermeens' property. The Kermeens filed another claim with State Farm. State Farm never paid for the hail claim and instead continued investigating the circumstances of the fire. Finally, in November 2014, the Kermeens filed suit alleging that State Farm breached the homeowners policy by failing to pay the hail claim. State Farm responded in an answer in January 2015 that the Kermeens had intentionally set the March fire and that therefore the policy was void as of March 2014 and so didn't cover the hail damage in June. State Farm didn't formally reject either the fire or the hail claim until July 2015.
The problematic thing for State Farm, however, was that it had been accepting premiums from the Kermeens on the homeowners policy this entire time. Even when State Farm finally formally declared the policy void as of March 2014, it failed to refund any of the premiums that the Kermeens had paid between March 2014 and July 2015. State Farm stated that it fully intended to refund those premiums in July when it denied the Kermeens' claims, and that its failure to do was "an administrative mistake." State Farm also continued to accept premiums on the homeowners' policy from the Kermeens after July, another thing that State Farm claimed was "an administrative mistake." So, altogether, State Farm accepted nearly two years' worth of premiums from the Kermeens before it finally refunded them in February 2016--after the summary judgment motion in question in this case had been filed, arguing that State Farm had waived its ability to rely on voidness due to its failure to refund the premiums.
State Farm tried to argue that, by refunding the premiums eventually, it indicated that it was not waiving the voidness defense. State Farm also asserted that its other statements to the Kermeens, including telling the Kermeens in communications several times that the policy would be void as of the date of the fire and its answer filed in this case, further indicated that it had not waived the voidness defense.
The court disagreed with State Farm. In contrast to the clerical error that was forgiven in the CitiMortgage case, the court wasn't inclined to overlook State Farm's "administrative mistake" here. The court stated that State Farm knew that it was going to declare the policy void as early as January 2015 when it answered the complaint and still failed to refund any premiums to the Kermeens for over a year. This failure to return any of the premiums was inconsistent with a stance that the policy was void and thus constituted a waiver of State Farm's ability to raise voidness as a defense. It didn't matter that State Farm may have repeatedly declared the policy void to the Kermeens if State Farm continued to retain the premiums under that policy--and, indeed, continued to accept further premiums. Therefore, the Kermeens were entitled summary judgment for the damages caused by the hail storm.
Friday, May 6, 2016
Nevertheless, the court refused to enforce the provision. The court noted that part of the test in evaluating whether to enforce a choice-of-law provision is to consider whether California's law would be contrary to the "fundamental policy" of Illinois's law and, if so, whether Illinois would therefore have a "materially greater interest" than California in the case at issue. Here, Illinois is one of only a few states with a statute concerning biometrics; California has no such statute. The court found that Illinois's BIPA represented a fundamental policy of Illinois to protect its residents from unauthorized use of their biometrics, and that applying California law here instead of Illinois law would interfere with Illinois's policy. In fact, the court noted, enforcing the choice-of-law provision would effectively eliminate any effectiveness of BIPA whatsoever, because there would be no ability for Illinois residents to protect themselves against national corporations like Facebook. Therefore, the court found, Facebook has to deal with Illinois's BIPA, regardless of Facebook's attempts to limit the relevant laws of its service to only California's laws.
This all leaves for another day whether the Tag Suggestions program actually does violate BIPA.
Thursday, May 5, 2016
An Eighth Circuit Court of Appeals case demonstrates the importance - even to health care services providers – of carefully scrutinizing contractual provisions in contracts with health insurance companies. In spite of some contractual interpretation difficulties, the Eighth Circuit has found that the contractual language binds. It favored the insurance companies, even on a motion for summary judgment. The case is 32nd Street Surgery Center (“32nd Street”) v. Right Choice Managed Care (“insurer”), No. 15-1727. https://www.courtlistener.com/opinion/3197844/32nd-street-surgery-center-v-right-choice-managed-care/
In this case, the health care provider 32nd Street contracted with the insurer to become a network provider, which ensures increased patient volume as well as marketing and promotion by the insurer. In exchange for these benefits, a network provider generally agrees to receive discounted reimbursement rates. The disputed contract stipulated that a network provider is one “designated to participate in one or more [of insurer’s] Networks.” Another contractual stipulation stated, in much legalese, that if 32nd Street’s participation was limited to a certain plan, which it was, it would only receive the discounted in-network reimbursement rates for services in relation to other plans of which it was not a member. In other words, even though 32nd Street had contracted for only one certain “stick” in the insurance provider’s overall bundle, the entire lower insurance bundle pricing applied to 32nd Street.
This is boiled down from many gobbledygook contractual stipulations that, to me, seemed to indicate at least some reasonable factual doubt and thus at a minimum not to be suitable for summary judgment. But the court found the contract provisions sufficiently clear for that standard. Claims of unjust enrichment and quantum meruit were also rejected because they sound in quasi-contract whereas Missouri law does not allow such remedies when an express contract exists.
In today’s health insurance company apparent strong-arming tactics and power grabs, this case again demonstrates the importance of making sure that one has read and truly understands all the contractual provisions in the health care context. However, that is, as this case and others demonstrate, difficult enough to do for corporations with, presumably, sufficient assistance of counsel. But where does such law and precedent leave private individuals encountering similar problems? Not in a good place. This area is ripe for abuse by the stronger contractual party, which in this context always seems to be the health care insurance company. Arguments of good faith and fair dealing are, as this case demonstrates, largely or entirely ignored. The court did in this case. Good luck to future patients encountering problems of this nature. Further regulations truly seem to be in order in the health care field.
Wednesday, May 4, 2016
According to a recent Eleventh Circuit case, Patterson v. CitiMortgage, Inc., No. 14-14636, the answer is no.
Toby Breedlove (an additional plaintiff in the suit) had bought a house with a CitiMortgage loan. After falling behind in his payments and hoping to avoid a foreclosure, Breedlove sought to sell the house to Patterson in a short sale. Patterson and CitiMortgage negotiated over a price. Patterson offered $371,000, which was rejected; then $412,000, which was rejected; then $444,000. It is the response to the offer of $444,000 that is at issue here.
CitiMortgage sent Patterson a letter that stated that it wished to receive a payoff of $113,968.45. This was not what CitiMortgage meant to communicate. That amount is clearly much lower than the amounts which the parties had been discussing. Nevertheless, Patterson received the letter and immediately agreed to go forward with the deal. Patterson did not confirm the amount of the deal; neither did CitiMortgage. On the date of closing, CitiMortgage received the payment of $113,968.45 and at that point realized its mistake. It contacted the closing attorney's assistant and stated that it was rejecting the funds and would be returning them. CitiMortgage then contacted Patterson and informed him that it had meant to accept the $444,000 offer, with a few tweaks. Patterson, however, demanded that CitiMortgage accept the $113,968.45 for the house, since that had been the amount stated in CitiMortgage's letter.
For reasons that are never made clear, two years went by before CitiMortgage took any further action, moving to foreclose on Breedlove's house. That resulted in this lawsuit seeking to enforce the sale of the house for $113,968.45.
The question in this case was whether CitiMortgage's unilateral clerical error in the letter to Patterson prevented the parties from forming a valid contract. Georgia courts (the law that applied) often do not save contracting parties from their own mistakes if due diligence would have prevented the error. However, Georgia courts also refuse to allow parties to take advantage of obvious mistakes made by the other side. When the other party should have known that there was a mistake involved, then that can be grounds for rescinding the contract. And here, CitiMortgage's mistake should have been obvious to Patterson. They had been discussing numbers in the $400,000s; he should have realized that a number in the $100,000s had to be a typo. Therefore, there was no contract between the parties.
Tuesday, May 3, 2016
We all know about arbitration clauses but a recent case out of California, East Coast Foods v. Kelly, Lowry & Kelley, LLP, No. B262679, had something to say about arbitration specifically in the case of legal fee disputes. Is the arbitration clause in an engagement agreement between lawyer and client enforceable? In this case, yes.
East Coast Foods is perhaps best known through one of its businesses, Roscoe's House of Chicken 'N Waffles. There was a copyright dispute raised by ASCAP over allegedly unlicensed public performance of music. After being sued by ASCAP, East Coast Foods sought to retain counsel. After discussions, Kelly sent East Coast's general counsel a fee agreement. The fee agreement was three pages long and had eleven paragraphs. Paragraph 7 was an arbitration clause. Although there was disagreement over exactly when East Coast's president Herbert Hudson signed the fee agreement, it was undisputed that he did sign and return it to Kelly.
Kelly represented East Coast throughout the course of the copyright litigation, which lasted three years and included an appeal to the Ninth Circuit. At the end of the litigation, which ended in a judgment for ASCAP, East Coast stopped paying Kelly for the legal fees incurred, even though Kelly alleged that East Coast still owed over $81,000.
A few months after the end of the litigation, East Coast sued Kelly for malpractice. Kelly answered the complaint by asserting that the fee dispute was subject to mandatory binding arbitration pursuant to the terms of the fee agreement. East Coast, however, argued that the arbitration clause was unenforceable because it had not been adequately disclosed or explained to East Coast.
While it's true that an attorney-client relationship is full of fiduciary obligations and ethical responsibilities, the court here found that that relationship does not relieve a party of its responsibility to read a contract before signing it. The fee agreement represents a negotiation of employment, basically, which a lawyer is allowed to treat as an arm's-length negotiation. Here, the arbitration provision was clear and conspicuous. The agreement was not a long one, and the provision was not buried in legalese. Indeed, the fee agreement was initially sent to East Coast's general counsel to review, so it wasn't as if East Coast didn't have an opportunity to have the agreement reviewed by an attorney. There was no indication that East Coast couldn't have asked questions or even attempted to negotiate the fee agreement's terms. The circumstances here raised no red flags of fraud or unconscionability.
Therefore, this appellate court found, the trial court was correct in compelling arbitration and in confirming the arbitrator's award, which found in favor of Kelly to the tune of over $400,000.
Monday, May 2, 2016
You Might Think City Buses Don't Have a System, But They Totally Do! (it just might be copyright infringing)
Entities and people come together, do business, have disagreements, go their separate ways. It happens all the time. But nowadays, since so many things have embedded software, these break-ups of business relationships have copyright implications. If you don't have a license to continue using the embedded software, when you break up with another business, that means you have to stop using whatever contains the software, too. Theoretically.
A recent case out of the Middle District of Tennessee, ACS Transport Solutions, Inc. v. Nashville Metropolitan Transit Authority, 3:13-CV-01137, dealt with this issue. The Nashville Metropolitan Transit Authority ("MTA") had contracted with ACS to develop a system for MTA to manage its buses. The system ACS created contained copyrighted software that ACS expressly licensed to MTA. A few years after the development of the system, MTA discontinued its relationship with ACS, but it continued to use the system that contained the embedded software. ACS contacted MTA and told it that it was using the software without a license and infringing ACS's copyright. Nevertheless, MTA continued to use the system with the embedded software, and so ACS eventually brought this lawsuit.
MTA argued that, when it terminated its relationship with ACS, it did not terminate the license to use the software, and so it was still properly licensed. However, MTA's relationship with ACS was governed by a contract, within which was the software license. Terminating the relationship set forth by that contract, the court found, necessarily terminated the software license also found in that contract.
MTA additionally argued that it had paid for the system and that therefore it should be entitled to use the software within the system indefinitely. ACS did agree that MTA had paid for the system and would not have owed ACS any further payments...if ACS and MTA had fulfilled the rest of their contractual obligations. Instead, ACS argued, MTA breached its obligations. Therefore, ACS rescinded MTA's license to use the software.
There was some slim hope for MTA. MTA argued that it had an implied license to use the software for a "reasonable" period of time while it transitioned to the new software of the company it hired to replace ACS. The court seemed skeptical that the length of time MTA had used ACS's software after terminating ACS (it ended up using the software for more than two years after terminating ACS) was reasonable; the court implied that, even if MTA had had an implied license to use the software while it transitioned, MTA's use had exceeded that implied license's scope. However, the court found this to be a material fact in dispute and so inappropriate to resolve at the summary judgment stage.
Under the terms of its contract with ACS, MTA received only a non-exclusive, revocable license for the software. If MTA had wanted more protection, MTA should have negotiated better license terms. ACS, of course, might never have been amenable to granting better license terms. But let this case be a lesson: Many things are going to come with embedded software these days, and that software is copyrighted. You're going to need to dot your copyright i's and cross your copyright t's regarding this software; don't lose sight of that by focusing instead on the larger product you're buying. MTA may have thought of itself as buying a system, but it really needed to think of itself as buying the software within the system.
A class action lawsuit has been filed against Starbucks for negligent misrepresentation, fraud and unjust enrichment in the company’s sale of cold drinks.
The company offers three sizes of drinks — Tall, Grande, Venti and Trenta — which correspond to 12, 16, 24 and 30 fluid ounces, respectively. These fluid ounce measurements are advertised in the store. However, because of the large amounts of ice added to the drinks, customers actually receive much less (at a high price, as is well known).
The complaint claims that "[a] Starbucks customer who orders a Venti cold drink receives only 14 fluid ounces of that drink — just over half the advertised amount, and just over half the amount for which they are paying … In the iced coffee example, a Starbucks customer who orders and pays for a Venti iced coffee, expecting to receive 24 fluid ounces of iced coffee based on Starbucks' advertisement and marketing, will instead receive only about 14 fluid ounces of iced coffee."
A Starbucks spokesperson states that “[o]ur customers understand and expect that ice is an essential component of any ‘iced’ beverage,” adding that the company would remake any beverage if a customer is unsatisfied.
Maybe it would be a better idea to get a beer or a wine. They can’t water those down (I think...). Five Starbucks locations in the D.C. area have started serving booze and tapas as part of a nationwide effort to keep some of its stores open after typical coffee shop hours.
Going to a coffee shop for… tapas and alcohol in order to … what, stay loyal to an already huge brand? Avoid trying a local bar? If you think “only in America,” think again: Starbucks is also enjoying huge success in Europe, home of exquisite coffee shops with excellent pastries and snack. Talk about selling sand to Sahara…
Thursday, April 28, 2016
In spite of most jurisdictions reading a duty of good faith and fair dealing into all contracts, a Fifth Circuit Court of Appeals has held that it is unlikely that the Texas Supreme Court would find such a duty to exist in Texas. Wow. Additionally, the court found that no fiduciary relationship between a university student and his/her university faculty and other representatives.
Section 205 of the Restatement (Second) of Contracts states that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” See also Farnsworth, “Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code,” 30 U.Chi.L.Rev. 666, 670 (1963).
The seminal case in this area is Market Street Associates v. Frey, 941 F.2d 599 (7th Cir. 1991). In that case, Judge Posner held that in spite of the somewhat “moralistic overtones of good faith,” not every contract signatory is expected to be his “brother’s keeper.” Nonetheless, “the essentials of the modern doctrine [are] well established in nineteenth-century cases.” “This duty is … halfway between a fiduciary duty (the duty of utmost good faith) and the duty merely to refrain from active fraud. Despite its moralistic overtones it is no more the injection of moral principles into contract law than the fiduciary concept itself is.” “The office of the doctrine of good faith is to forbid the kinds of opportunistic behavior that a mutually dependent, cooperative relationship might enable in the absence of rule. “
In the new Texas case involving a student at SMU who got fired from his part-time job as a Community Adviser for misconduct toward students and faculty, the circuit court held that “Texas law does not impose a generalized duty of good faith and fair dealing and, in fact, rejects it” in all circumstances apart from when 1) a formal fiduciary relationships exists or 2) a “special or confidential relationship” exists. Examples of the former are attorney-clients, trustee-beneficiary, and principal-agents. In Texas, the latter apparently only includes the relationship between an insurer and an insured. That’s it! Texas courts have, found this panel, refused to impose the duty on, for example, employer-employees (not too surprising), lender-borrowers, medical provider-patients (double wow!), mortgagor-mortgagees, and franchisor-franchisees. The court in the described case also said that an “ordinary student-professor relationship is no different;” in other words, there is no fiduciary or even “confidential” or “special” relationship between students and faculty in Texas.
The case does not show how the student’s allegation that a duty of good faith existed between SMU and the student would really have helped the student on the merits. SMU seemed to have a very good case for firing the student from his job. Nonetheless, it is surprising that the court would so categorically reject that such a duty even exists apart from in traditional fiduciary relationships. While it may make sense that “a purely unilateral, subjective” sense of trust in one’s contractual counterpart and that the other party will have one’s interests at heart is not enough to create a fiduciary relationship, there is a vast difference between that and reading out the duty of good faith and fair dealings from most contracts law in general in Texas. Of course, as contracts law is state law, it is true that it is the Texas courts who must change this line of thinking, but doing so seems to be highly warranted given how courts in other parts of the nation rule on the issue.
The case discussed is Hux v. Southern Methodist University, 2016 WL 1621720 (no free online copy available yet).
Tuesday, April 26, 2016
A recent case out of California, Clever Hospitality, Inc. v. Patel, B264921, sheds light on the limits of due diligence to serve as consideration when it comes to making an offered option irrevocable. In that case, the Patels, the owner of a hotel, gave Clever, a prospective buyer, a 60-day option to buy the hotel. During that time, Clever indicated it was going to conduct due diligence. If, at the conclusion of its due diligence, Clever was interested in buying the hotel, it was supposed to exercise the option by depositing $150,000 into escrow. Clever used the 60-day period to perform significant amounts of due diligence, so much that Clever asked for an extension of the 60-day period. The Patels eventually refused the request and indicated to Clever once the 60-day period was over that, because Clever never deposited $150,000, the option had lapsed. However, the Patels and Clever continued to have contact regarding the hotel, although the Patels also told Clever that they were speaking to other potential buyers as well. Eventually, a few months later, the Patels sold the hotel to another buyer. Clever then sued the Patels for breach of contract.
Clever's main argument was that its time, effort, and money invested in its due diligence acted as consideration to render the Patels' option irrevocable. The court, however, noted that the necessary consideration here had to be money or services that the Patels had bargained for. In this case, Clever's due diligence only benefited Clever, not the Patels. After all, the Patels would have been quite content if Clever had performed no due diligence at all and instead just bought the hotel.
Clever then argued that promissory estoppel should save it and render the option irrevocable. However, the court could find no evidence that the Patels ever made any promise to Clever that it would keep the option open. In fact, the evidence seemed to show that the Patels had indicated the opposite to Clever: that the option had expired and that they were talking to other buyers. Therefore, there was no promise for Clever to reasonably rely upon and promissory estoppel was inappropriate.
Clever never at any time placed any money in escrow the way it was supposed to under the terms of the option. It seems as if Clever assumed that the Patels had no other serious buyers and that maybe there would be plenty of time for Clever and the Patels to work out a deal, and so the lapsing of the option didn't seem to concern Clever all that much...until a sale to someone else had been consummated. This case serves as a warning: Due diligence alone might not be enough to save you from losing out on the object of that due diligence.
Monday, April 25, 2016
My love for HGTV is real and enduring. It started as a House Hunters addiction when I was a practicing lawyer looking for something mindless to watch when I got home at night and it has seriously spiraled out of control. I find something soothing about the formulaic nature of the shows; their familiarity is like a security blanket to me. And I've also realized that I've actually learned a lot about my taste. For what it's worth, I do feel like HGTV has made me think more about how I decorate my house, even if I can't afford a professional decorator.
So I gobbled up with interest every single article I could find on the recent "Love It or List It" lawsuit. If you don't know the show, it's one of my favorites for the snark between the competing real estate agent and designer. One half of a home-owning couple wants to renovate their existing home; the other half wants to give up and move away. Enter the "Love It or List It" team, showing the couple houses they could buy while simultaneously renovating their home. The theory is that the couple can then decide to love it, or list it.
I entertain no illusions about the "realness" of reality television (really, mostly I've learned from reality television that apparently an enormous number of people are tremendously good actors - while others are decidedly not), but this recent lawsuit attacks not just the "realness" of reality television but practically the *definition* of it: "Love It or List It," the homeowners accuse, were much more interested in making a television show than they were in renovating this couple's home. On at least some level, this lawsuit seems to be a challenge to what "Love It or List It" is: a television show or a general contractor.
As a general contractor, the homeowners weren't too happy with the show's performance. They allege shoddy work on their house, including low-quality product, windows that were painted shut, and holes big enough for vermin to fit through. (They also allege their floor was "irreparably damaged," although I think they can't possibly mean that in the true legal sense of "irreparably," because surely the floor can be repaired?)
It seems to me this is going to come down to the contract between the parties. What did "Love It or List It"'s production company promise? I would love to see what the contract said about the work that was to be performed, how that work was to be performed, and what the financial arrangements were (since part of the couples' allegations is that a large portion of their money was diverted away from the renovations). However, for some reason, I have had an incredibly difficult time locating a copy of the complaint (never mind the contract). None of the stories I've found linked to it, and I have had zero luck finding it through Bloomberg Law's docket search.
Friday, April 22, 2016
To determine when the statute of limitations has run in relation to benefits contracts, the classification of the contract as “entire” or “divisible” may turn out to be crucial. If the contract is entire, the statute may start running on, for example, a certain date when the employer made a single contractually binding promise to provide health care for its employees, typically once a year. If the contracts is divisible, the contract may extend further into the future and run from, for example, ongoing times when the employee makes monthly premium payments under the plan.
The Eleventh Circuit Court of Appeals notes that in Georgia, a contract is entire if “the whole quantity, service, or thing, all as a whole, is of the essence of the contract,  if it appears that the contract was to take the whole or none,” and if the contract “involves a single sum certain.” In contrast, a divisible contract is one that involves “successive performances” and is “for an indefinite total amount which is payable in installments over an uncertain period.” (See Wood v. Unified Government of Athens – Clarke County, Ga. 2016 WL 1376443. ).
In the dispute before the court, the panel found that although the employer had made a single contractual promise for retirement healthcare benefits, the contract was divisible because the employer could only perform its promise by successive performances throughout the uncertain span of each retiree’s life. This was furthermore the case because of the unpredictable fluctuations in each retiree’s healthcare costs, the contract requiring the payment of many successive payments, and because the employees had no immediate claim for the entirety of the contract if the contract were entire. Thus, the statute of limitations ran separately as to each premium payment when it became due.
Friday, April 15, 2016
(image from IMDB)
Gilmore Girls fandom rejoiced when it was announced that the show would receive a revival on Netflix (and, even better, that it will include Sookie!). But, as often seems to be the case, developments that bring a fandom joy can come with legal entanglements. In this case, producer Gavin Polone's production company Hofflund/Polone has filed a lawsuit against Warner Bros., alleging breach of contract. The lawsuit, Hofflund/Polone v. Warner Bros. Television, Case No. BC616555 (behind paywall), was filed in the Los Angeles County, Central District, Superior Court of California.
The case revolves around the agreement between the parties concerning the original production of Gilmore Girls. The parties agreed, according to Hofflund/Polone, to provide Hofflund/Polone with "$32,500 for each original episode of Gilmore Girls produced in any year subsequent to 2003," along with some percentage of the gross and with "executive producer" credit. With the news of the recent Netflix revival, Hofflund/Polone allegedly reached out to Warner Bros. seeking compensation under the agreement. According to the complaint, Warner Bros. took the position that the Netflix version of Gilmore Girls is a derivative work based on the original series, and so therefore does not trigger compensation to Hofflund/Polone.
It's an interesting question that highlights one of the debates copyright scholars have: What, exactly, is a "derivative" work? Copyright owners have the exclusive right to reproduce their own works or works substantially similar to those works. They also have the right to produce derivative works based on those works, which, in the jurisprudence, has ended up using the same substantially similar standard to elucidate the "based on" language. Which means: what is the point of the derivative work right, if its standard seems the same as the reproduction right? This case has the potential to force confrontation with that problem: Where do we draw the line between infringement of the reproduction right and infringement of the derivative work right? When does a substantially similar work cross the line between reproduction and derivative work?
One thing that's been noted about the derivative work right is it tends to be talked about when there's some kind of change in medium or other kind of adaptation different from the original form (book to film, or translation from one language to another). The definition in the statute points us to that focus. Which raises the question: Is a Netflix revival more like a translation or adaptation of Gilmore Girls than it is like an exact copy of Gilmore Girls? Does this depend on how true it is to the original show?
The "television" landscape has shifted dramatically since Gilmore Girls premiered. It'll be interesting to see how contracts formed pre-Netflix-and-Amazon-production-era function going forward.
Tuesday, April 12, 2016
That's not usually a tagline you associate with insurance policies, but it nevertheless appears to be true.
I feel like I've been doing a lot of blogging about insurance policies lately. So it almost seemed inevitable to me when I received my latest Rec Center e-mail (if you're not signed up, you totally should be!) that there would be a link to an article about insurance policies. However, this article is about how the growing willingness of insurance companies to insure fantasy live action role playing (LARP) events may be helping those events to become more common. As it becomes easier for the average person to get insurance for a LARP event, those events become simpler and less risky to host. So, if you've been wanting to set up your own quest and re-enact some fantasy combat, you can now make sure that people are covered by insurance if they fall during the battle and break an arm. The article notes, by the way, that injuries at LARP events are rare. One of the insurance companies hasn't received a single claim in five years. So this seems like a win-win for everyone.
You should go read the article, it's really interesting, and a reminder that marijuana facilities aren't the only industry new-ish to the insurance area where policies need to be interpreted. Anything humans can dream up for fun can carry insurance policies with it. I guess they're kinda-sorta the equivalent of a healing spell or potion? (With a lot less magic.)
Saturday, April 9, 2016
How far does a franchisor have to go to help out a franchisee? That was the question asked in a recent case out of the Southern District of New York, The UPS Store, Inc. v. Hagan, 14cv1210 (behind paywall). This particular dispute between UPS and its franchisees the Hagans attracted a fair amount of online attention when it first erupted back in 2014. Now, UPS has been granted partial summary judgment on the contractual disagreements.
UPS and the Hagans entered into a variety of contract carrier agreements, franchise agreements, and promissory notes in connection with the Hagans' operation of eleven UPS franchises in the New York City area. The relationships between the parties eventually broke down, and accusations were flung back and forth between them. This federal lawsuit included trademark and trade secret allegations, in addition to breach of contract claims, and the Hagans counterclaimed alleging violations of New York's deceptive trade practices act.
With regard to the breach of contract claims, the Hagans conceded that they failed to perform under the contracts, but alleged that their breach was excused by impossibility, impracticability, or UPS's own breach of the implied covenant of good faith and fair dealing. The court, however, granted summary judgment to UPS, finding that the Hagans had impermissibly breached the contracts.
The Hagans' main allegations revolved around UPS's failure to police other franchisees, to allow the Hagans to bundle customer invoices, to provide the Hagans with better computer technology, and to negotiate with private investors who were funding the Hagans' businesses in order to soothe them about the businesses' profitability. But UPS was not required to do any of those things under the terms of the contract. Because they were not "basic assumptions" of the contract, the impractiability and impossibility defenses failed, and the alleged breach of the covenant of good faith and fair dealing was likewise doomed. The Hagans' arguments essentially boiled down to a desire for UPS to take "affirmative action" to save the Hagans' businesses as they began to fail. The Hagans termed this a "duty to cooperate" that was included in the covenant of good faith and fair dealing. But the court, applying California law, rejected this idea. Again, there was nothing in the contracts that required UPS to take the affirmative steps the Hagans desired, and the court declined to impose obligations on UPS beyond those agreed to under the contract.
The franchise agreement between the parties contained a liquidated damages clause dictating that damages should be the amount of royalties paid to UPS the previous year multiplied by the number of years (not to exceed two) left in the contract term. The Hagans argued that this was an unreasonable estimate of UPS's damages because UPS would recoup the lost royalties from the Hagans' franchises through either issuing new franchises or increased business to the remaining UPS franchises in the area (which the Hagans showed were all less than half a mile from the Hagans' locations, this being New York City). The court, however, found that, although maybe the Hagans might be right, that didn't mean that the clause had been unreasonable at the time of execution of the contract, which was the relevant test. Therefore, the liquidated damages clause was enforceable.