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Thursday, June 19, 2014

Congrats to UC Irvine on a Great Consumer Class Action Outcome

This week, I received notice that I am a member of the plaintiff class in Schlesinger, et. al. v. Ticketmaster.  After ten years of litigation, the parties' proposed settlement is pending before the Superior Court in Los Angeles.  If you purchased tickets through Ticketmaster between 1999 and 2013, you most likely are also a part of the class.  The case alleges (in short) that Ticketmaster overcharged customers for fees.  Ticketmaster claims that its processing fees were necessary for it to recover its costs, while plaintiffs allege that those fees were actually a means of generating profits for Ticketmaster.  Shocking, no?

U2_360_Zooropa_Oakland
Image of U2 Concert uploaded by Dream out loud (talk)


The terms of the settlement are actually pretty sweet.  Class members will get a discount code that they can use on the Ticketmaster website entitling them to $2.25 off future Ticketmaster transactions.  Class members get to use the code up to 17 times in the next four years.  The value of the discount codes is about $386 million, and if the money is not used up, class members will be eligible for free ticket to Live Nation events.  Ticketmaster's website will also now include disclosures about how it profits from its fees.

But then there's THIS:

Ticketmaster will pay $3 million to the University of California, Irvine School of Law to be used for the benefit of consumers like yourself. In addition to the benefits set forth above, Ticketmaster will also make a $3 million cy pres cash payment to the University of California, Irvine School of Law’s Consumer Law Clinic. The money will establish the Consumer Law Clinic as a permanent clinic, and it will be used to: (i) provide direct legal representations for clients with consumer law claims, (ii) advocate for consumers through policy work, and (iii) provide free educational tools (including online tutorials) to help consumers understand their rights, responsibilities, and remedies for online purchases.

The settlement strikes me as masterly.  It gets a beneift to people who, if the allegations are true, were actually harmed by the alleged conduct, but it does so in a way that will generate more business for Ticketmaster going forward, and Ticketmaster may value that new business stream at around $386 million in any case.  Ticketmaster has had to make changes to its website to eliminate the risk of deception going forward.  And the world gets a consumer protection clinic funded the sort of business against whom consumers need to be protected.  

Congratulations to the attorneys who came up with this settlement and to the UC Irvine Conumser Protection Clinic on its new endowment.

June 19, 2014 in Commentary, In the News, Law Schools, True Contracts | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 17, 2014

Hardball Tactics by 7-Eleven or Franchisee Fraud?

Over the past few years, more than a dozen 7-Eleven franchisees have sued the company claiming that it operated in bad faith by untruthfully accusing the franchisees of fraud and by strong-arming them to “voluntarily” surrender their franchise contracts based on such false accusations.  The franchisees claim that the tactic, which is known in the franchise community as “churning,” is aimed at retaking stores in up-and-coming areas where the franchise can now be sold at a higher contractual value or from franchisees who are too outspoken against the company.

Franchisees split their gross profits evenly with 7-Eleven.  The chain claims that it has hours of in-store covert footage showing franchisees voiding legitimate sales and not registering others to keep gross sales lower than the true numbers in order to pay smaller profits to 7-Eleven.  Similarly, the chain uses undercover shoppers to spot-check the recording of transactions.  This level of surveillance is uncommon among similar companies, says franchise attorney Barry Kurtz.  A former corporate investigations supervisor for 7-Eleven calls the practice “predatory.”

Japanese-owned 7-Eleven asserts that a few of their franchisees are stealing and falsifying the sales records, thus depriving the company of its full share of the store profits.  It maintains in court records that its investigations are thorough and lawful.  It also complains that groups of franchisees often group together to create a “domino of lawsuits, pressuring the company to settle.”

It seems that a company installing hidden cameras to monitor not customers for safety reasons, but one’s own franchisees raises questions of whether or not these people had a reasonable expectation of privacy in their work-related efforts under these circumstances.  If not, the issue certainly raises an ethical issue: once one has paid not insignificant franchise fees and continue to share profits with the franchisor at no less than 50-50%, should one really also expect to be monitored in hidden ways by one’s business partner, as the case is here?  That has an inappropriate Big-Brother-is-Watching-You feel to it. 

In the 1982 hit Dire Straits song Industrial Disease, Mark Knopfler sings that “Two men say they're, Jesus one of them must be wrong.”  When it comes to this case, the accusations of “bogus” reasons asserted by the franchisees and returned fire in the form of theft accusations by 7-Eleven, somebody must not follow the contractual duty of good faith and fair dealings. 

This case seems thus to be one that could appropriately be settled… oh, wait, the company apparently perceives that to be inappropriate pressure.  Perhaps a fact finder will, then, have to resolve this case of mutual mud-slinging.  In the meantime, 7-Eleven prides its “good, hardworking, independent franchisees” of being the “backbone of the 7-Eleven brand.”  That is, until the company itself deems that not to be the case anymore, at which point in time it imposes a $100,000 “penalty” on those of its franchisees who do not volunteer to sign away their stores.  The company does not reveal how it imagines that its hardworking, but probably not highly profitable, franchisees will be able to hand over $100,000 to a company to avoid further trouble.

 

June 17, 2014 in Commentary, Food and Drink, In the News, Labor Contracts, True Contracts | Permalink | Comments (1) | TrackBack (0)

Thursday, June 12, 2014

Terms of Use as Entertainment

Miriam A. Cherry

(The next John Grisham?)

We here at the contracts prof blog are frequently in a lather over adhesive contracts.  Terms of use run amok, arbitration clauses are routinely enforced, and non-compete clauses prevent teenagers from seeking gainful employment.  Yet, where's the outrage from other quarters?  One problem, as John Oliver notes in this hilarious (and effective) bit on net neutrality, is that some things are just too BORING to grab consumers' attention.  Towards the end of the clip (about 10:10), he states this truth:  "If you want to do something evil, put it inside something boring."  He speculates that Apple could put the entire text of Mein Kampf inside its user agreement and we would just hit "Agree." 

That's really the problem with Terms of Use - they are just too boring that except for a few contracts profs, most people don't want to think about them.  They just want them to go away.  One solution is to make them more interesting.  John Oliver's approach to net neutrality - to make it ridiculously funny yet informative - is one way to awaken the sleeping consumer into righteous outrage.  Apparently the FCC's comment site temporarily shut down after he encouraged viewers to voice their displeasure.  Of course, South Park has already poked fun at the iTunes agreeement.  That didn't result in a boycott of Apple's products because there was no "call for action."  It did, however, raise the issue for many and has become a useful cultural reference point on the state of consumer helplessness in the face of TOS.

Another way to provoke interest in the subject might be to write an imaginative futuristic tale of a world controlled by EULAs, like Miriam Cherry has done here.  Her fast-paced story is a mashup of Girl with a Dragon Tattoo, Boilerplate and Ender's Game - beach reading for contracts profs!

June 12, 2014 in Miscellaneous, Recent Scholarship, True Contracts | Permalink | Comments (2) | TrackBack (0)

Wednesday, June 11, 2014

New York Times Editorial Board Weighs In on Non-Competes

Obviously persuaded by our coverage of their coverage, The New York Times today editorialized on the overuse of non-competes.  The Times makes strong economic arguments against non-competes:

  • they limit workers' opportunities to seek better jobs within their profession;
  • workers subject to non-competes change jobs less frequently and earn less money over time;
  • states like California that refuse to enforce non-competes create a better environment for entrepreneurship; and
  • low-level employees who are now being subjected to non-compete agreements have no bargaining power with which to challenge them and do not willingly consent to them.

There may be economic studies that dispute the first three bullet points.  On the blog, we have tended to emphasize the fourth bullet point.  The argument against that point is not empirical.  Rather, those who support the enforcement of one-sided boilerplate terms contend that it is generally more efficient to enforce such terms than to expect that each agreement will be negotiated on an individual basis.

As Nancy Kim has argued, that might be okay, so long as the creators of boilerplate contracts are subject to a duty to draft those agreements reasonably.  One interesting approach along similar lines is the solution proposed in Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014).

June 11, 2014 in Commentary, In the News, True Contracts | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 10, 2014

Your Kids as a Free Facebook Marketing Tool Against Your Will

By Myanna Dellinger

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

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

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

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

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

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

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

Monday, June 9, 2014

The Latest in One-Sided Boilerplate Terms

Summer Camp 1
Counselor Training, Part I: How to Be Drowned by the Campers

Today's New York Times reports on the extension of non-compete agreements to categories of employment not previously subject to them.  This isn't really news, but it is nice to see the Times giving serious space  to the issue, which I view as just another one-sided boilerplate term that employers are imposing on their employees.  The difference here is that courts don't enforce non-competes if they overreach.  However, the reality is that courts rarely get the opportunity to review non-competes, either because employees don't have the resources to fight them or because, as illustrated in the Times article, competitors are sometimes reluctant to risk a suit and so they do not hire people subject to non-competes, even if those non-competes might be unreasonable.

The over-the-top example with which the Times starts its story is about a woman whose job offer as a summer camp counselor was withdrawn because of a non-compete.  She had worked three previous summers at a Linx-operated summer camp, and her terms of employment there included a non-compete of which she was (of course) unaware.  Here is what Linx's founder had to say in defense of the non-compete:

 “Our intellectual property is the training and fostering of our counselors, which makes for our unique environment,” he said. “It’s much like a tech firm with designers who developed chips: You don’t want those people walking out the door. It’s the same for us.” He called the restriction — no competing camps within 10 miles — very reasonable.

A few points.  First, if your training and fostering of counselors creates a unique environment, then that training and fostering will not transfer when counselors switch to other camps that will presumably train and foster their counselors in other ways.  If that's not the case, then there is nothing special or unique about the way you train and foster your counselors and thus no reason (except throwing up barriers to competition) not to allow counselors to work elsewhere.

Summer Camp 2
Post Training: Wear Life Vests

Second, I just put my daughter on a bus for summer camp.  I was a counselor at a summer camp for two years.  Most camps now belong to a trade organization that sets down strict rules about safety and counselor training.  It is unlikely that what Linx does is unique, and again, to the extent that it is unique, it is not transferable.  

Third, a ten mile non-compete would be reasonable except that it is ten miles from any Linx camp, and Linx operates 30 camps in the area.  So seen, the rule means that counselors who work at Linx camps cannot then work at any other camp in the region.  There is no justification for this.  If Linx has intellectual property to protect, it can do so, but Linx's founder's comparison of his camps to a tech firm strikes me as farfetched.  I doubt that Linx has any intellectual property relating to its training of counselors.  It is not as if a 19-year-old camp counselor comes to her new camp and impresses the people there with her knowledge from her past counseling experience.  Each camp has its own traditions.  If she says it is better to discard the leeches one pulls off the campers after a lake swim, they are not going to listen to her if the camp tradition is to move the leeches to the infirmary so that they can be "repurposed."  What Linx is trying to do with this non-compete likely has less to do with protecting intellectual property than it does to establishing a stranglehold on the market of qualified camp counselors.  

The Times story contrasts the employment situation in California, which does not enforce non-competes with that of Massachusetts, which does.  But freedom of contract nad free enterprise still seem to have the upper hand in Massachusetts, as the following quote form the Times illustrates:

Michael Rodrigues, a Democratic state senator from Fall River, Mass., said the government should not be interfering in contractual matters like noncompetes. “It should be up to the individual employer and the individual potential employee among themselves,” he said. “They’re both adults.”

This is the typical nonsense underlying the enforcement of boilerplate.  The camp counselor in the story was 19 years old, which means she was actually an infant when she signed the non-compete.   But even if she could match the sophistication of the business that hired her, how does Mr. Rodrigues expect the negotiation to take place?  In his mind it would go something like this:

Business: Here's the contract.

Employee: Okay, let me read it over and strike out all the terms that I don't like.

Business: Sure, take as long as you like and then we can negotiate over each term to which you object.

And here's the reality:

Business: Here's the contract.

Employee: Okay, let me read it over and strike out all the terms that I don't like.

Business: Well, actually, this is a form contract, and it's take it or leave it.  Even if you wanted to object, I don't have any authority to change any of the terms.  Either you sign this or you don't work here.

But even that is an exaggeration of the amount of consideration that goes in to the signing of employment contracts.  They are not read at all and they are not expected to be read at all.  And not reading them is the rational thing to do as potential employees have no bargaining power that they could  deploy to challenge objectionable terms.  

June 9, 2014 in Commentary, In the News, True Contracts | Permalink | Comments (1) | TrackBack (0)

Friday, May 23, 2014

A Small Fish in a Big Game

By Myanna Dellinger

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

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

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

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

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

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

Sunday, May 18, 2014

More on the Structure of Cable Contracts

By Myanna Dellinger

Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few. 

Luckily, change may finally be on its way.  The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology.  The price?  About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves. 

How does this work?  Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations.  In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease.  In other words, Aereo records show for its subscribers so that they don’t have to. 

That sounds great, right?  Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows).  They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.

Of course, the great American tradition of filing suit was followed.  Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.

Stay tuned for the outcome in this case…

May 18, 2014 in About this Blog, Commentary, Current Affairs, E-commerce, Famous Cases, In the News, Recent Cases, Television, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 14, 2014

The Costs of Cancellation

Conference hotel
Conference Hotel (not subject to boycott)

Yesterday's New York Times features a story about the costs associated with hotel boycotts when an organization has booked a hotel to host a conference or meeting long in advance.  This issue ought to be a familiar to anyone who attended the 2011 annual AALS meeting in San Francisco, for which the conference hotel was a Hilton whose workers were on strike.

The article details the costs involved in cancellations.  Often the organization is contractually obligated to pay hundreds of thousands of dollars to the hotel even if the conference ulimately takes place at a different venue.  According to the Times, if the cancellation is on short notice, the organization is typically obligated to pay 90% of expected room costs and 90% of expected banqueting services.  And then there are, of course, the costs of finding an alternative venue in proxity to the original choice on relatively short notice.   Major conferences can be booked years in advance.  

Sometimes it is possible to mitigate the harm -- by booking at a related hotel or by promising to return to the original hotel if the policy that causes offenese is revoked.  The former is unlikely in cases where the problem is with the entity that owns the hotel.  But it is more likely in cases like those that arose in connection with anti-immigrant legislation passed in Arizona.  Organizations could punish the state by moving to related hotels in states that did not have similar legislation.

 

May 14, 2014 in Conferences, In the News, Travel, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, May 12, 2014

No Frequent Complaining Allowed about Frequent Flyer Programs

By Myanna Dellinger

The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg).  Contracts ProfBlog first wrote about the case on April 3.

In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel.  The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles.  According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer.  The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines.  He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.

The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement.  The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.

Really?  Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!..  The opinion may at first blush read as such and have that somewhat chilling effect.  However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.

The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.”  These days, that may be hard to do.  First, most airlines appear to have more or less similar frequent flyer programs.  Second, what airline these days has a  truly “good” reputation?  Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.   

One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable.  I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes.  A few times, I have had the good fortune to fly first or business class, but most times, I fly economy.  Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.”  - Guess what, the fares always had increased the times I asked for a change.  Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta.  I was told that it was impossible to change the ticket as it was “deeply discounted.”   I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors.  I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.”  Remember that these days, airfare often has to be bought months ahead of time to get the best prices.  In the meantime, life happens.  Unexpected, yet important events come about.  Changes to airline tickets should be realistically feasible, but are currently not on these conditions.

What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation.  My mother is elderly and lives in Europe.  I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services.  Such is life in a globalized world for many of us.  In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States.  Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently.  I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy.  It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.   

Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa.  For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist.  Two years ago, my father was passing and I was called to his deathbed.  Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…).  The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.

In the United States, “market forces” are said to dictate the pricing of airfare.  In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours).  Strange, since both markets are capitalist and offer freedom of contracting.  Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States.  A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms.  Under heavy criticism, that plan was soon given up.  In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies.  Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.

 

May 12, 2014 in Commentary, Current Affairs, Famous Cases, In the News, Recent Cases, Travel, True Contracts | Permalink | Comments (0) | TrackBack (0)

Dropbox Updates Its Terms of Service

A few months ago, I received an e-mail from Dropbox, on which I rely to back up all of my work.  The e-mail notified me that Dropbox was updating its privacy policy and Terms of Service.  "Uh oh," I thought.  Since I rely on Dropbox, I figured this was something I ought to look at carefully, but since the e-mail came during a hectic time in the semester, I just saved it to look at later. 

Today is later, and cleaning out my inbox is one way I take a break from term-end grading.  Here is part of the e-mail:

  • We’re adding an arbitration section to our updated Terms of Service. Arbitration is a quick and efficient way to resolve disputes, and it provides an alternative to things like state or federal courts where the process could take months or even years. If you don’t want to agree to arbitration, you can easily opt out via an online form, within 30-days of these Terms becoming effective. This form, and other details, are available on our blog.

D'oh.  If I had read this when I got it, I could have opted out of the arbitration policy!  Today, when I tried to click on the opt-out link, I got a screen that said, in effect, "Sorry sucker, you missed the boat!"  I had already accepted the new terms of service, including the arbitration clause, by using Dropbox for 30 days without reading the e-mail.  If anybody has attempted to opt out, please share your experience.  I really wonder how easy it is to opt out or if Dropbox is just counting on people not to bother.

Fortunately, most of Dropbox's terms are pretty reasonable as such things go.  Dropbox will pay all fees on claims under $75,000 and will pay a $1000 bonus to anybody who wins an arbitral award in excess of Dropbox's settlement offer.  Dropbox promises not to seek its own fees and costs unless the arbitrator determines that the claim is frivolous.   There are also exceptions to the arbitration provision for small claims and for injunctive relief, but the latter would have to be brought in San Francisco.  There is also the now-unavoidable ban on class actions, as well as consolidated or representative actions.  

Boo!

May 12, 2014 in Commentary, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Thursday, May 8, 2014

Vermont First State to Require Labeling of GMOs

By Myanna Dellinger

On May 8, 2014, Vermont became the first state in the nation to require foods containing GMOs (genetically modified organisms) to be labeled accordingly.  The law will undoubtedly face several legal challenges on both First Amendment and federal pre-emption grounds, especially since giant corporate interests are at stake.

Scientists and companies backing the use of GMOs claim that GMOs are safe for both humans and the environment.  Skeptics assert that while that may be true in the short term, not enough data yet supports a finding that GMOs are also safe in the long term.

In the EU, all food products that make direct use of GMOs at any point in their production are subjected to labeling requirements, regardless of whether or not GM content is detectable in the end product.  This has been the law for ten years. 

GMO stakeholders in the United States apparently do not think that we as consumers have at least a right to know whether or not our foods contain GMOs.  Why not, if the GMOs are as safe as is said?  A host of other food ingredients have been listed on labels here over the years, although mainly on a voluntary basis.  Think MSGs, sodium, wheat, peanuts, halal meat, and now gluten.  This, of course, makes perfect sense.  But why should GMOs be any different?  If, for whatever reason, consumers prefer not to eat GMOs, shouldn’t we as paying, adult customers have as much a say as consumers preferring certain other products? 

Of course, the difference here is (surprise!) one of profit-making: by labeling products “gluten free,” for example, manufacturers hope to make more money.  If they had to announce that their products contain GMOs, companies fear losing money.  So why don’t companies whose products don’t contain GMOs just volunteer to offer that information on the packaging?  The explanation may lie in the pervasiveness of GMOs in the USA: the vast majority (60-80%, depending on the many sources trying to establish certainty in this area) of prepared foods contain GMOs just as more than 80% of major crops are grown from genetically modified seeds.  Maybe GMOs are entirely safe in the long run as well, maybe not, but we should at least have a right to know what we eat, it seems.

Bon appétit!

 

May 8, 2014 in Commentary, Current Affairs, Food and Drink, In the News, Legislation, Science, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, May 5, 2014

Sperm Donors and Custody

Sperm-eggSunday's New York Times had a lengthy article on a custody battle that has raged for two years.  Danielle Schreiber, who runs a massage practice in California, and Jason Patric, a known but not well-known actor, conceived a child through articifial insemination in 2009.  The two had dated for a while, but they were not a couple at the time of the insemination, which resulted in a son named Gus.

Mr. Patric was a part of Gus's early life, as the baby rekindled the romance between the biological parents.  The couple never co-habited, but Mr. Partric claims that he played a parentral role until 2012 when the pair split up.  Mr. Patric filed a paternity suit and sought shared custody.  For a while thereafter, Ms. Schreiber allowed Mr. Patric to visit Gus, but then she cut off such visits.  

The Times story does not make especially clear what the case turns on.  California law is clear, according to the Times, that sperm donors are not treated as "natural fathers" unless a written agreement so provides.  The Times states that the parties had no such agreement, but did they have any agreement at all?  Both parties seem to have considered their options carefully, and both clearly have the means to consult attorneys when they need to.  Is it really possible that they did not imagine anything could possibly go wrong?  Did they not discuss the possibility that Mr. Patric would want to be invovled in his son's life, even if not as a father?  Not that a contract could eliminate all possible legal difficulties going forward, but they certainly could have used a writing to clarify their intentions at the time the child was conceived.

 In any case, it does not seem from the Times' account that Mr. Patric's custody and paternity claims are based solely on the fact that he was the sperm donor.  Rather, he seems to be claiming that he acted as a parent during the child's first years and that the child regarded him as his father.  Ms. Schreiber won at the trial level, and Mr. Patric has appealed; not only in the courts, but also through the media.

I'm have trouble embedding the videos, so you can follow this link to watch Mr. Patric tell his side of the story to Katie Couric and this link to watch Ms. Schreiber tell her side of the story on the Today Show.

May 5, 2014 in In the News, True Contracts | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 30, 2014

Handling Shipping and “Handling” Charges

By Myanna Dellinger

A class-action lawsuit filed recently against Amazon asserts that the giant online retailer did not honor its promise to offer “free shipping” to its Prime members in spite of these members having paid an annual membership fee of $79 mainly in order to obtain free two-day shipping.

Instead, the lawsuit alleges, Amazon would covertly encourage third-party vendors to increase the item prices displayed and charged to Prime members by the same amount charged to non-Prime members for shipping in order to make it appear as if the Prime members would get the shipping for free.  Amazon would allegedly also benefit from such higher prices as it deducts a referral fee as a percentage of the item price from third-party vendors. 

The suit alleges breach of contract and seeks recovery of Prime membership costs for the relevant years as well as treble damages under Washington’s Consumer Protection Act.  Most states have laws such as consumer fraud statutes, deceptive trade practices laws, and/or unfair competition laws that can punish sellers for charging more than the actual costs of “shipping and handling."  In some cases that settled, companies agreed to use the term “shipping and processing” instead of “shipping and handling” to be more clear towards consumers. 

On the flip side of the situation is how Amazon outright prevents at least some private third-party vendors from charging the actual shipping costs (not even including “handling” or “processing” charges).  For example, if a private, unaffiliated vendor sells a used book via Amazon, the site will only allow that person to charge a certain amount for shipping.  As post office and UPS/FedEx costs of mailing items seem to be increasing (understandably so in at least the case of the USPS), the charges allowed for by Amazon often do not cover the actual costs of sending items.  And if the private party attempts to increase the price of the book even just slightly to not incur a “loss” on shipping, the book may not be listed as the cheapest one available and thus not be sold. 

This last issue may be a detail as the site still is a way of getting one’s used books sold at all whereas that may not have been possible without Amazon.  Nonetheless, the totality of the above allegations, if proven to be true, and the facts just described till demonstrate the contractual powers that modern online giants have over competitors and consumers. 

A decade or so ago, I attended a business conference for other purposes.  I remember how one presenter, when discussing “shipping and handling” charges, got a gleeful look in his eyes and mentioned that when it came to those charges, it was “Christmas time.”  When comparing what shipping actually costs (not that much for large mail-order companies that probably enjoy discounted rates with the shipping companies) with the charges listed by many companies, it seems that not much has changed in that area.  On the other hand, promises of “free” shipping have, of course, been internalized in the prices charged somehow.  One can hope that companies are on the up-and-up about the charges.  Again: buyer beware.

April 30, 2014 in Commentary, Current Affairs, E-commerce, Famous Cases, In the News, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, April 7, 2014

No Contract! But There Is This Agreement

Cecelia HarperMy student, Cecelia Harper (pictured), recently ordered television service.  The representative for the service provider offered a 2-year agreement, which he said was “absolutely, positively not a contract.”  Learned in the law as she is, Cecelia asked the representative what he thought the difference was between a contract and an agreement.  He wasn't sure, but he did read her what he called "literature," which surprisingly enough was not a Graham Greene novel but the terms and conditions of the agreement, which included a $20/month "deactivation" fee should Cecelia terminate service before the end of the contract -- oops, I mean agreement -- term.  

I have seen said agreement, and it includes the following charming terms:

  • Service provider reserves the right to make programming and pricing changes;
  • Customer is entitled to notice of changes and is free to cancel her service if she does not like the changes, but then she will incur the deactivation fee;
  • Customer must agree in advance to 12 categories of administrative fees that may be imposed on her;
  • Service provider reserves right to change the terms of the agreement at any time, and continued use of the service after notice constitutes acceptance of new terms;
  • An arbitration clause that excludes certain actions that the service provider might bring; and 
  • A class action waiver

If the agreement had a $20/month deactivation fee in it, I could not find it.  All I see is a deactivation fee of "up to $15."  Rather, the "customer agreement" references a separate "programming agreement," and suggests that there are cancellation fees associated with termination prior to the term of the programming agreement.

So in what sense is this not a contract?  My guess is that this is service providers trying to emulate what cell phone service providers have done with their "no contract phone" campaigns.  For example, there's this one:

 

I'm guessing that the television service providers have learned that these ad campaigns have made "contract" into a dirty word.  They are now seeking to seduce new customers by insisting that they do not offer contracts.  Oren Bar-Gill will have to write a sequel to his last book and call it Seduction by Agreement.

If anyone has any other theories for why representatives for service providers are insisting that their contracts are really agreements, please share!

April 7, 2014 in Commentary, Television, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, March 31, 2014

More on the Fairness of Contractual Penalties

More on the Fairness of Contractual Penalties

By Myanna Dellinger

In my March 3 blog post, I described how the Ninth Circuit Court of Appeals just held that contractual liquidated damages clauses in the form of late and overlimit fees on credit cards do not violate due process law.  A new California appellate case addresses a related issue, namely whether the breach of a loan settlement agreement calling for the repayment of the entire underlying loan and not just the settled-upon amount in the case of breach is a contractually prohibited penalty.  It is.

In the case, Purcell v. Schweitzer (Cal. App. 4th Dist., Mar. 17, 2014), an individual borrowed $85,000 from a private lender and defaulted.  The parties agreed to settle the dispute for $38,000.  A provision in the settlement provided that if the borrower also defaulted on that amount, the entire amount would become due as “punitive damages.”  When the borrower only owed $67 or $1,776  (depending on who you ask), he again defaulted, and the lender applied for and obtained a default judgment for $85,000. 

Liquidated damages clauses in contracts are “enforceable if the damages flowing from the breach are likely to be difficult to ascertain or prove at the time of the agreement, and the liquidated damages sum represents a good faith effort by the parties to appraise the benefit of the bargain.”  Piñon v. Bank of Am., 741 F.3d 1022, 1026 (Ninth Cir. 2014).   The relevant “breach” to be analyzed is the breach of the stipulation, not the breach of the underlying contract.  Purcell.  On the other hand, contractual provisions are unenforceable as penalties if they are designed “not to estimate probable actual damages, but to punish the breaching party or coerce his or her performance.” Piñon, 741 F.3d at 1026. 

At first blush, these two cases seem to reach the same legally and logically correct conclusion on similar backgrounds.  But do they?  The Ninth Circuit case in effect condones large national banks and credit card companies charging relatively small individual, but in sum very significant, fees that arguably bear little relationship to the actual damages suffered by banks when their customers pay late or exceed their credit limits.  (See, in general, concurrence in Piñon).  In 2002, for example, credit card companies collected $7.3 billion in late fees.  Seana Shiffrin,  Are Credit Card Law Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).  Thus, although the initial cost to each customer may be small (late fees typically range from $15 to $40), the ultimate result is still that very large sums of money are shifted from millions of private individuals to a few large financial entities for, as was stated by the Ninth Circuit, contractual violations that do not really cost the companies much.  These fees may “reflect a compensatory to penalty damages ratio of more than 1:100, which far exceeds the ratio” condoned by the United States Supreme Court in tort cases. Piñon, 741 F.3d at 1028.  In contrast, the California case shows that much smaller lenders of course also have no right to punitive damages that bear no relationship to the actual damages suffered, although in that case, the ratio was “only” about 1:2. 

The United States Supreme Court should indeed resolve the issue of whether due process jurisprudence is applicable to contractual penalty clauses even though they originate from the parties’ private contracts and are thus distinct from the jury-determined punitive damages awards at issue in the cases that limited punitive damages in torts cases to a certain ratio.  Government action is arguably involved by courts condoning, for example, the imposition of late fees if it is true that they do not reflect the true costs to the companies of contractual breaches by their clients.  In my opinion, the California case represents the better outcome simply because it barred provisions that were clearly punitive in nature.  But “fees” imposed by various corporations not only for late payments that may have little consequence for companies that typically get much money back via large interest rates, but also for a range of other items appear to be a way for companies to simply earn more money without rendering much in return.

At the end of the day, it is arguably economically wasteful from society’s point of view to siphon large amounts of money in “late fees” from private individuals to large national financial institutions many of which have not in recent history demonstrated sound economic savvy themselves, especially in the current economic environment.  Courts should remember that whether or not liquidated damages clauses are actually a disguise for penalties depends on “the actual facts, not the words which may have been used in the contract.”  Cook v. King Manor and Convalescent Hospital, 40 Cal. App. 3d 782, 792 (1974).

March 31, 2014 in Commentary, Contract Profs, Current Affairs, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, March 3, 2014

Do Contractual Penalty Clauses Violate Notions of Due Process?

Contracts between credit card holders and card issuers typically provide for late fees and “overlimit fees” (for making purchases in excess of the card limits) ranging from $15 to $40.  Since these fees are said to greatly exceed the harm that the issuers suffer when their customers make late payments or exceed their credit limits, do they violate the Due Process Clause of the Constitution? 

They do not, according to the United States Court of Appeals for the Ninth Circuit (In re Late Fee & Over-Limit Fee Litig, No. 08-1521 (9th Cir. 2014)).  Although such fees may even be purely punitive, the court pointed out that the due process analyses of BMW of North America v. Gore and State Farm Mut. Auto Ins. Co. v. Campbell are not applicable in contractual contexts, but only to jury-awarded fees.  In Gore, the Court held that the proper analysis for whether punitive damages are excessive is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” and finding the award of punitive damages 500 times greater than the damage caused to “raise a suspicious judicial eyebrow”.  517 U.S. 559, 581, 583 (1996). The State Farm Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages … will satisfy due process. 538 U.S. 408, 425 (2003).

Contractual penalty clauses are also not a violation of statutory law.  Both the National Bank Act of 1864 and the Depository Institutions Deregulation and Monetary Control Act provide that banks may charge their customers “interest at the rate allowed by the laws of the State … where the bank is located.”  12 U.S.C. s 85, 12 U.S.C. S. 1831(d).  “Interest” covers more than the annual percentage rates charged to any carried balances, it also covers late fees and overlimit fees.  12 C.F.R.  7.4001(a).  Thus, as long as the fees are legal in the banks’ home states, the banks are permitted to charge them.

Freedom of contracting prevailed in this case. But should it?  Because the types and sizes of fees charged by credit card issuers are mostly uniform from institution to institution, consumers do not really  have a true, free choice in contracting.  As J. Reinhardt said in his concurrence, consumers frequently _ have to_ enter into adhesion contracts such as the ones at issue to obtain many of the practical necessities of modern life as, for example, credit cards, cell phones, utilities and regular consumer goods.  Because most providers of such goods and services also use very similar, if not identical, contract clauses, there really isn’t much real “freedom of contracting” in these cases.  So, should the Due Process clause apply to contractual penalty clauses as well?  These clauses often reflect a compensatory to penalty damages ratio higher than 1:100, much higher than the limit set forth by the Supreme Court in the torts context. According to J. Reinhardt, it should: The constitutional principles limiting punishments in civil cases when that punishment vastly exceeds the harm done by the party being punished may well occur even when the penalties imposed are foreseeable, as with contracts. Said Reinhardt: “A grossly disproportionate punishment is a grossly disproportionate punishment, regardless of whether the breaching party has previously ‘acquiesced’ to such punishment.”

Time may soon come for the Supreme Court to address this issue, especially given the ease with which companies can and do find out about each other’s practices and match each other’s terms.  Many companies even actively encourage their customers to look for better prices elsewhere via “price guarantees” and promise various incentives or at least matched, lower prices if customers notify the companies.  Such competition is arguably good for consumers and allow them at least some bargaining powers.  But as shown, in other respects, consumers have very little real choice and no bargaining power.  In the credit card context, it may be said that the best course of action would be for consumers to make sure that they do not exceed their credit limits and make their payments on time.  However, in a tough economy with high unemployment, there are people for whom that is simply not feasible.  As the law currently stands in the Ninth Circuit, that leaves companies free to virtually punish their own customers, a slightly odd result given the fact that contracts law is not meant to be punitive in nature, but rather to be a resource allocation vehicle in cases where financial harm is actually suffered.

March 3, 2014 in Commentary, Contract Profs, Legislation, Recent Cases, True Contracts | Permalink | Comments (1) | TrackBack (0)

Monday, February 17, 2014

Boilerplate and Children: O tempora o mores

Bumper CarsThis afternoon, since school is out (for reasons that are unclear to us), my daughter is going with a group to a "famly fun center" featuring laser tag, a laser maze, go carts, bumper cars and something called the Sky Trail.  The organization that is arranging the group outing sent me the fun center's standard waiver form which, not surprisingly these days, states that I waive any claims I might have against the fun center for, among other things,  serious  injury, including the death of my daughter while she does whatever one does on a Sky Trail, even if that serious injury or death is the result of the fun center's negligence.  

I took the liberty of crossing out the offensive language, which I would hope would be unenforceable in any case.  Since I will not be with my daughter when she hands in the waiver form, there will be nothing to do if the fun center refuses to accept it, but I am counting on them not noticing.  I guess I will find out when she gets home and either tells me how awesome the Sky Trail was or slams her door and doesn't speak to me for a week.

The truth is, if my daughter were killed due to the fun center's negligence, a law suit would not improve my life in any way, help me heal or make me feel somehow that justice had been done.  Wrangling over responsibility for her death would only prolong the agony of losing a child.  Still, I cannot sign the form as is and it seems farcical to me to suggest that any parents would  really want to turn their children over to the custody of strangers and then pardon those strangers in advance for their deadly negligence. 

February 17, 2014 in Commentary, True Contracts | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 11, 2014

Got It? The Challenges of Understanding “Legalese” and “Businessese”

If you applied for credit, but got turned down with the reason “Your worst bankcard or revolving account status is delinquent or derogatory,” would you understand what that means?

Probably not, at least not for sure.  Under the Dodd-Frank Act, lenders are required to send applicants written explanations of why they are denied credit outright or given less favorable terms than those for which they applied.  This requirement is aimed at helping consumers understand what they need to do to improve their credit scores.  But many of the explanations provided to consumers are drafted by the credit score developers themselves and use confusing terminology or are too short to be useful. 

What’s worse: lenders are aware of this problem, but apparently choose to do nothing about it.  According to one survey, 75% of lenders “worry” that consumers don’t understand the disclosure notices.  Only 10% of lenders said that their customers understand reason codes “well.”  This problem is, of course, not isolated to the credit industry, but also prevails in the health care industry and beyond.

Contracts law is not helpful for consumers in this respect either: there is a clear duty to read and understand contracts, even if they are written in a language (typically English) that one does not understand.  Perhaps that’s why only 10% of lenders bother to translate documents into Spanish with the effect that many Spanish-speaking monolingual applicants are unable to read the explanations at all.

Some companies offer websites offering “translations” into easier-to-understand and longer explanations of the codes behind credit refusals and what one can do to improve credit.  There’s a website for almost anything these days, but for that solution to be sufficiently helpful in the lending context, it must be presumed that these websites are relatively easy to find, free or inexpensive, and easy to use; all quite far from always the case. 

As law professors, most of us probably require our students to write in clear, plain English.  We don’t take it lightly if they write incomprehensible sentences.  The desirability of writing well should be obvious in corporate as well as academic contexts. 

February 11, 2014 in Contract Profs, Current Affairs, True Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, January 31, 2014

Sperm Donor Ordered to Pay Child Support Despite Agreement

I like to remind my 1Ls Contracts students that a contract is private law between two parties, but it doesn't override public law.  This story is last week's news, but I thought I'd blog about it anyway because it provides a pretty good example of this point.  In 2009, William Marotta responded to a Craigslist ad posted by two women for a sperm donor.  All three parties agreed - and signed an agreement to the effect - that Marotta waived his parental rights and responsibilities.  The Kansas Department for Children and Families sought to have Marotta declared the father and responsible for payments of $6,000 that the state had already paid and for future child support. 

Unfortunately for Marotta, a Kansas state statute requires a physician to perform the artificial insemination procedure.  The Shawnee County District Court Judge Mary Mattivi ruled that because the parties "failed to conform to the statutory requirements of the Kansas Parentage Act in not enlisting a licensed physician...the parties' self-designation of (Marotta) as a sperm donor is insufficient to relieve (Marotta) of parental rights and responsibilities."

Note that the couple was not seeking to invalidate the contract - it was the Kansas state agency. 

It's unclear whether the parties will appeal.

 

[Nancy Kim]

 

January 31, 2014 in Current Affairs, In the News, Miscellaneous, True Contracts | Permalink | Comments (0) | TrackBack (0)