ContractsProf Blog

Don't just stand there, let's get to it: Second Circuit orders payment of "Vogue" royalties (aside, I hadn't listened to "Vogue" in a while, and it totally started my week off right!)

A recent case out of the Second Circuit, Pettibone v. WB Music Corp., 18-1000-cv, caught my eye because I teach the underlying copyright dispute driving this contractual dispute. You can listen to the case's oral argument here.

Pettibone composed the song "Vogue" with Madonna and entered into a contract with Warner where Warner collected the royalties for the song and split them with Pettibone. In 2012, Pettibone and Warner were sued for copyright infringement. They each had their own counsel and each bore their own costs in successfully defending the lawsuit, both in the trial court and on appeal. (You can read the appellate court decision here. We talk about it in my Transformative Works and Copyright Fair Use class when we do a unit on music.)

After the conclusion of the copyright suit, Warner withheld over $500,000 worth of royalties from Pettibone, claiming that under Section 8.1 of the agreement between Warner and Pettibone, it was allowed to withhold the royalties to pay for its defense of the copyright infringement suit. Section 8.1 read in part, "Each party will indemnify the other against any loss or damage (including court costs and reasonable attorneys' fees) due to a breach of this agreement by that party which results in a judgment against the other party . . . ." 

Pettibone sued, arguing that he had never breached the agreement and therefore Section 8.1 did not permit Warner to withhold any royalties. The district court found that Section 8.1 "unambiguously requires Pettibone to indemnify Warner for the attorneys' fees and costs," and dismissed Pettibone's complaint. 

In another example of ambiguous understandings of ambiguity, the appellate court here reversed the district court's holding, instead finding that Section 8.1 is "pock-mocked with ambiguity." In the Second Circuit's opinion, a better reading of the section was that, if there was no breach, each party should carry its own attorneys' fees and costs. In fact, Section 8.1 went on to read that "each party is entitled to be notified of any action against the other brought with respect to [the song 'Vogue'], and to participate in the defense thereof by counsel of its choice, at its sole cost and expense" (emphasis added). A fair reading of the section, the Second Circuit said, was that it required Pettibone to indemnify Warner if Pettibone breached the contract, but not otherwise.

Warner was the party that drafted the contract, and could easily have stated that indemnification happened in the event of any allegations, not just any breach. That was not, though, how the contract was drafted. 

The effect of Warner's argument would be to shift a million dollars' worth of attorneys' fees onto Pettibone, just because there was a lawsuit, "regardless of merit or frivolousness." The Second Circuit found that to be "an extraordinary result" not justified by the section's ambiguous language. Therefore, the Second Circuit ordered reversal of the district court's dismissal, judgment for Pettibone, and calculation of the royalties improperly withheld from Pettibone, as well as consideration of Pettibone's request for attorneys' fees in connection with the instant action and appeal. 

Reminder: unconscionability requires both procedural and substantive

A recent case out of the Northern District of California, Sanchez v. Gruma Corporation, Case No. 19-cv-00794-WHO, is a good case to point to to remind students that unconscionability has both procedural and substantive sides, and you need to have both. In the case, the court admits that the plaintiff's account of the signing of the contract raised procedural unconscionability issues: the plaintiff alleged that he was given no choice, was told if he did not sign the contract he could not work at the company, was not told what the contract really meant, and was given no opportunity to review the contract. However, this procedural unconscionability ultimately didn't matter, because the court ruled the contract was not substantively unconscionable. There was one provision the court found unenforceable but the court severed that provision and enforced the rest of the agreement. 

 

 

Consideration in California contracts

A recent case out of the Central District of California, Chromadex, Inc. v. Elysium Health, Inc., Case No. SACV 16-02277-CJC(DFMx) (behind paywall), discusses consideration allegations under California law. I never practiced in California and don't teach in California, so I didn't realize that California has a statute, Cal. Civ. Code § 1614, that provides that "[a] written instrument is presumptive evidence of consideration." The defendants argued that the contract in question did not have consideration because the consideration was an offer of employment to Morris but Morris left that employment the same day he signed the agreement. However, the court pointed out that the plaintiff alleged the agreement was a written instrument and attached it to the complaint, which raised the presumption that it had adequate consideration, so the court refused to dismiss the claim. 

Some express condition language for you

When I teach express conditions, we talk a lot about the language that you use to create them. A recent case out of the Northern District of Ohio, Health and Wellness Lifestyle Clubs, LLC v. Raintree Golf, LLC, Case No. 1:17CV2189 (behind paywall), has some examples. The agreement in question read that it was "contingent upon Purchaser's obtaining and delivering to Seller a written unconditional commitment or commitments," and continued that "the obligations of Seller to consummate the transaction . . . shall be subject to the fulfillment on or before the date of Closing of all of the following conditions," both of which created an express condition that a written unconditional commitment needed to be delivered. Because there was never any such written unconditional commitment in this case, the dependent obligations never became due.  

An interesting case about reformation...and tricking ourselves about our pasts

Reformation is one of those doctrines that I love to have class discussions over, really interrogating when (and whether) courts should employ it. A recent decision out of Delaware, In re 11 West Partners, LLC, C.A. No. 2017-0568-SG, has a nice reformation discussion in clear, straightforward language that I think could be useful in class. I especially like the Court's remarks about "the conclusions of social scientists and psychologists that witnesses may come to believe in factual scenarios beneficial to them . . . ." It's a gentle and sympathetic decision regarding "honorable" men whose recollections of the truth all differ. 

h/t to Eric Chiappinelli at Texas Tech for forwarding us this case!

When ambiguity is ambiguous

I am always fascinated by cases where the courts can't agree whether a contract is ambiguous or not. The very fact of there being disagreement should probably point to the contract being ambiguous, right? A recent case out of Pennsylvania, SBA Towers II LLC v. Wireless Holdings, LLC, No. 325 WDA 2018, gives us another example. The lower court and the majority on appeal found that the clause in question was ambiguous. A partial concurrence/dissent, however, would have held that the contract was unambiguous. The dissent argued that the majority was finding ambiguity in the contract's silence, and that in this case ambiguity should have been rooted in something about the contract itself:

"In sum, although an ambiguity could, in another scenario, arise from the silence in a contract as to a particular term, Appellees in this case have failed to articulate a basis for finding ambiguity in Paragraph 18 of the lease, e.g., unclear wording or punctuation, the impossibility of enforcement of the contract term as written, or language in another paragraph that would make Paragraph 18 confusing or unworkable."

The majority opinion is here, the partial concurrence/dissent is here. 

If your contract says you'll provide notice of modifications, then you can't modify without notice

A class action in the Southern District of New York, Pisarri v. Town Sports International, No. 18 Civ. 1737 (LLS) (behind paywall), has breach of contract claims that survived a motion to dismiss based on the notice requirement to make modifications. The class action has been brought on behalf of a number of members of a chain of gyms. The contract between the gyms and their members stated that the gyms could modify the contract at any time but it also stated that the gyms would notify members of any modifications. The members alleged that they were not notified of the modifications to the contract. This was a plausible allegation of breach of contract and so survived the motion. 

However, the members' other breach of contract claim based on the gyms' revocation of their memberships did not survive. The contract allowed the gyms to revoke membership at any time if it was in the gyms' best interest. The court concluded that it was well within the gyms' best interest to revoke the memberships of people who were suing them. Since the members had other gym alternatives available to them, the court found the gyms' actions reasonable and dismissed this breach of contract claim. 

(Previous decisions on the preliminary injunction in this case can be found here, and the complaint is here. Some additional stories on the case are here and here.)

An employer isn't bound by a policy unless the employee is aware of and relies upon the policy (e.g., reads the handbook!)

A recent case out of Illinois, Brown-Wright v. East St. Louis School District 189, NO. 5-18-0311 (behind paywall), finds that in order for an employee policy to operate as a binding contract, the employee has to have read the policy.

In the case, the plaintiff was suing based on an alleged violation of the sick leave payout policy. The plaintiff, however, did not find out about the policy her case was relying upon interpreting until after her employment ended. Therefore, it was not the case that she learned of the policy and continued to work as acceptance of and consideration for that policy. Because the plaintiff did not read the policy before terminating employment, she could not rely upon it now. 

This is a lesson to all of us to read those policies our employers send around. 

An issue spotter of a case

A recent case out of New York, Neumann v. Sotheby's, Inc., 652170/2018, has so many issues it reads like an exam question. (You can read the complaint here, and a more general write-up here.)

First. the court had to tackle the question of when a contract was formed and which of the many interactions between the parties was the governing contract. That involved the court reading emails closely to determine if there was ever an offer and acceptance. The court concluded there was not, because the parties always spoke in terms of "fine tuning" the agreement, contemplated a subsequent written document would happen, and did not intend to be bound until then. There was also a consideration issue, because basically in the emails the parties were just agreeing to discuss entering into an agreement. 

Subsequent written contracts between the parties on the subject contained merger clauses that in and of themselves would have superseded the emails, even if the emails had constituted binding contracts. The emails also did not satisfy the statute of frauds, as they contemplated a three-year term but did not contain all the material terms nor a signature from the party to be bound. Finally, the plaintiff had not been damaged because the plaintiff did not actually have the rights he was claiming were violated. 

 

At the intersection of illegal contracts, immigration policy, and fast food restaurants

When I teach about illegal contracts, I often find myself talking about paid assassins, because for some reason it's the only example I can come up with on the fly (let's not psychoanalyze that too much). A recent case out of California, Lin v. Chiu, B285053, has a different illegality analysis. The case involved a contract concerning an investment of money into the opening of a fast food restaurant franchise. Chiu alleged that Lin used the contract to apply for permanent residency in the United States, even though the contract did not fulfill the requirements for such an application, and therefore the contract was illegal and unenforceable. 

The court disagreed. Even if Lin's attempt to use the contract as the basis for residency might be questionable, the central purpose of the contract itself was a straightforward investment, not anything illegal. Nothing about the alleged illegal use of the contract had anything to do with Lin's contractual rights to repayment of his investment, and there were no allegations that the contract was merely a sham to defraud the U.S. government. It was a bona fide contract in and of itself, with the objective of receiving a return on investment, and not the objective of winning Lin permanent residency. Maybe Lin had an illegal motive underlying his actions, but that did not change the fact that his actions were a legitimate business transaction. Enforcing the investment contract, the court found, would not encourage others to use such contracts as an illegal basis for permanent residency. 

Texas court finds economic development corporations don't receive governmental immunity from suit

A recent case out of Texas, Rosenberg Development Corp. v. Imperial Performing Arts, Inc., No. 17-0660, tackles the question of whether economic development corporations are protected by the sovereign immunity doctrine, concluded that they are not. Interesting for its analysis of how to treat economic development corporations in this breach of contract suit. 

The disputes around the "To Kill a Mockingbird" play could fill a whole contracts exam

I have already blogged about one contract dispute over the new stage adaptation of "To Kill a Mockingbird."

Now, with that dispute settled, the former adversaries (Harper Lee's estate and the producers of the current stage adaptation) have joined forces to shut down small productions across the country of the previous stage adaptation of the novel. As the New York Times reports, the problem seems to have arisen from the conduct of Dramatic Publishing Company, which has the right under a contract signed with Harper Lee in 1969 to license theater companies to produce the original stage adaptation of the novel. The problem is that, allegedly, those rights were limited in times when a "first-class dramatic play" of "To Kill a Mockingbird" was playing in New York or on tour. However, Dramatic has apparently continued to license the play's production without adhering to the restrictions that the current play's producers argue should have kicked into place. Many small theater companies have found themselves caught in the fallout of this contractual dispute, through no fault of their own. 

h/t to Eric Chiappinelli, Professor of Law at Texas Tech!

Arkansas court refuses to enforce overbroad non-compete

Sometimes it can seem so tempting to draft the broadest possible non-competition provision, but a recent case out of the Western District of Arkansas, Foster Cable Services v. Deville, Case No. 1:18-cv-1049, reminds us of why that can be dangerous.

In the case, Deville, a former employee, had signed a contract that classified "all information" given to Deville by the plaintiff as a trade secret and/or confidential, with no time or geographical limitations. Deville left the plaintiff's employment and the plaintiff sued that Deville had breached his employment agreement because he had disclosed confidential information to his new employer. 

The court agreed with Deville's contention that the agreement he signed was unenforceable. The contract prohibited Deville from disclosing any information he learned while employed by the plaintiff, forever. The court found this unreasonable. Covenants not to compete should be reasonably drawn to protect genuine confidential information, whereas this agreement was broad enough to cover all experience and knowledge that Deville gained during his employment, forever. Therefore, the court refused to enforce it as an unreasonable restraint on trade.  

Call for Papers: Obligations X - Private Law Inside and Out

From our friends at Harvard Law:

The Tenth Biennial Conference on the Law of Obligations will be held at Harvard Law School from July 14–17, 2020. The conference will be co-hosted by Harvard Law School and Melbourne Law School, and will be co-convened by John Goldberg, Andrew Robertson and Henry Smith. The biennial Obligations Conferences bring together scholars and practising lawyers from across and beyond the common law world to discuss current issues in private law. Obligations X will be the first conference in the Obligations series to be held in the United States.

The conference theme is intended to provoke discussion about the inside and outside of private law. The conference will focus on the contrast between ‘internalist’ and ‘externalist’ perspectives on the law in this field. It will also consider the boundaries and relationships between private law and morality, private law and economic efficiency, and private law and other policy goals. A central aspiration of this iteration of Obligations is to give private law scholars working in different intellectual traditions an opportunity to identify previously underappreciated overlaps and synergies, and thereby help to break down methodological barriers to an improved understanding of the field.

Both established and early-career legal scholars are invited to submit proposals to present papers addressing the conference theme, either at a general level or in relation to any aspect of the law of obligations broadly conceived – contract, property (including intellectual property), torts, unfair competition, and unjust enrichment, as well as equity and other topics within or closely related to private law. Papers exploring relevant issues from a civil law perspective are also welcome. Anyone wishing to offer a paper should submit a working title and an abstract (of no more than 500 words) by email to obligationsx@lists.law.harvard.eduby August 15, 2019. Papers will be selected on the basis of quality, originality, engagement with the conference theme and fit with other papers being presented at the conference. Those proposing papers will be notified by October 1, 2019 whether their papers have been accepted. A waiting list may be established, depending on the level of interest. Late submissions will be considered for inclusion in the waiting list.

Speakers will be asked to submit fully written draft papers by June 15, 2020 for distribution to conference participants via a password-protected website. It is expected that a small number of selected papers closely focused on the conference theme will be published in an edited collection following the conference.

Presenters whose offers of papers are accepted will be expected to meet their own travel and accommodation costs and pay a discounted registration fee. A small number of travel grants are available to support the attendance of scholars travelling from countries that have been underrepresented at previous Obligations conferences. Those wishing to apply for a travel grant should include a short statement with their paper proposals indicating that they wish to be considered for a travel grant, setting out an indicative budget and detailing all available sources of institutional financial support.

Again, make sure you keep good records of notifying your employees of your arbitration clause

I just blogged about a case in which failure to keep proper records meant there wasn't enough proof of agreement to the arbitration clause, and here's another one out of Texas, Stagg Restaurants, LLC v. Serra, No. 04-18-00527-CV. Stagg tried to compel arbitration, but the employee denied ever receiving notice of the clause or the agreement it was contained in. There was no signature on that particular agreement and none of Stagg's records indicated that it had ever been provided to the employee, even though the records indicated many other documents had been provided to him. Once again: make sure you keep good records. 

Be careful in drafting your NDA while negotiations are ongoing, if you want it to also cover information exchanged after those negotiations end

Among other disputes in this recent case out of Idaho, Dickinson Frozen Foods, Inc. v. J.R. Simplot Co., Docket No. 45580, is a dispute over whether or not a nondisclosure agreement between the parties was violated. There was no dispute that the information in question was confidential. The only dispute was whether it was covered by the NDA. The court ruled that it was not, because the NDA had been drafted while the parties were in the process of negotiating their business relationship with each other. For that reason, it covered information disclosed "in connection with a proposed business relationship," and that the information was only to be used for "discussions relating to a possible vendor relationship." Once the parties had finished negotiating their relationship, it was no longer "proposed" or "possible"; it was fact. Therefore, there needed to be another NDA to cover information exchanged during the fact of the business relationship (of which the information in dispute was some).  

A purported class of influencers sufficiently alleges contract interference

There's a lot of really interesting things at stake in this recent case out of the Northern District of California, Batra v. POPSUGAR, Inc., Case No. 18-cv-03752-HSG, including a contract angle. The case concerns an alleged class of influencers suing POPSUGAR for altering their postings in various ways. In addition to copyright and publicity right violations, the purported class alleges contract interference, because influencers can enter into contracts to receive a cut of the revenue generated by the links on their sites, but POPSUGAR's alleged alterations stripped the monetized links from the postings. Therefore, the class alleged that POPSUGAR was interfering with their contracts with the website linked to. The court found that the class's allegations on this count (and every other count in the complaint) were sufficient to survive a motion to dismiss. 

I'm fascinated by this case and can't wait to see where it goes, especially as we get further into the class action allegations. (But probably it'll settle before we get to the good stuff.)

Keeping records on when and how your employees sign their arbitration agreements could be helpful if there's ever a dispute over them

I just blogged about an arbitration case, and here's another one out of California, Garcia v. Tropicale Foods, Inc., E069024. In the last case I blogged about, arbitration was compelled, but in this one, the court reaches a different conclusion, finding that the employer Tropicale failed to prove that Garcia signed the arbitration agreement. The case serves as a lesson to employers hoping to enforce arbitration agreements against their employees: They need to be able to offer information about the circumstances of the employee signing the agreement. Garcia maintained that she never signed the agreement, and in response Tropicale offered a declaration of an employee saying that Garcia did sign the agreement. But that bare declaration wasn't enough, according to the court. It did not offer any sense of the timing or circumstances of the signature, which were important in this case, since the date on the agreement looked like September 2015, but Garcia had been terminated in August 2015. Therefore, the court did not compel arbitration.

An arbitration clause that allows you to pursue injunctive relief in the court system still requires arbitration of the underlying claims

A recent case out of the District of Oregon, Sixel, LLC v. Penning, No. 6:17-cv-01846-AA, has a fairly typical fight over whether or not a claim needs to be arbitrated, but in this case it's the employer who doesn't want to arbitrate and the employees who are fighting to enforce the arbitration clause. 

The case involves allegations of trade secret theft, and Sixel relies on the fact that the arbitration clause permits it to pursue injunctive relief in the court. However, the employees maintain that that is limited to the pursuit of relief and does not allow the litigation of the underlying claim in court. The court sides with the employees, finding that the exception to the arbitration clause is explicitly in its plain language only in terms of remedies, not any cause of action. The court therefore finds that Sixel can seek injunctive relief in court and pursue the underlying claims in arbitration. The claims in question fall squarely under the arbitration clause, and given the law's preference for enforcing arbitration provisions, the court chooses to enforce the provision. 

Contract dispute between university and its former president goes to jury trial

I had previously blogged about this case involving a dispute between a university and its retired president over his retirement contract during its motion to dismiss phase. Now it's completed its trial, and the jury verdict is in. The jury ruled against the former president Taylor and in favor of the university, finding that the university did not have to pay Taylor under the asserted contract. It seems from the press coverage of the closing arguments that there were two warring versions of the facts: Taylor asserted that the board of trustees approved the contract as a reflection of Taylor's worth to the university. The university, however, asserted that Taylor drafted the contract himself and then had his friend, who happened to be the chairman of the university's board, sign it, meaning that it was never reviewed by university attorneys and never approved by the board of trustees. 

You can read more about the case here and here. 

h/t to Eric A. Chiappinelli of Texas Tech University School of Law for passing this one along!