ContractsProf Blog

If you don't pay for a raffle ticket, there's no contract for the prize

If you've already started thinking about gathering examples for your courses this fall, here's a consideration case for you out of Ohio, Forbes v. Showmann, Inc., Appeal No. C-180325. Forbes was an employee of Showmann, and at a holiday party Showmann gave its employees, including Forbes, raffle tickets. One of the prizes was what sounds like a pretty sweet cruise package, and Forbes won the cruise. Showmann terminated Forbes's employment a few weeks later and informed Forbes that the cruise package was conditioned on Forbes still being a Showmann employee when she took the cruise. 

Forbes sued for breach of contract but the problem was that it was undisputed that Forbes did not pay for the raffle ticket. Showmann simply distributed the raffle tickets for free to its employees. Therefore, there was no consideration with which to form a contract. Forbes tried to argue her employment by Showmann was the consideration for the ticket but Forbes's employment was not used to bargain for the raffle ticket in exchange, so therefore there was no contract. 

If you feel bad for Forbes, which I admit I kind of did based on these given facts, her conversion claim does survive, so there is some hope for her. 

The challenges of licensing music

This isn’t, strictly speaking, about contracts, I guess. But it is about a consent decree, which is at heart a document that binds parties to terms. The Department of Justice has announced that it is reviewing the antitrust consent decree that governs ASCAP and BMI, the two major performing rights organizations used by songwriters and music publishers. Because ASCAP and BMI control so much of the music licensing market, they have been governed by a consent decree for several decades, with the Department of Justice worried about the competitive effects of their near-monopoly over music licensing.

I thought, therefore, that maybe it was time for me to share my friend's Music Licensing Experience.

The music copyright holders keep noting that piracy is a major problem. However, piracy tends to decrease if you make it easier for people to gain legal access to the work in the question. For some time now, studies have shown that people will pay for content, if they are given a feasibly legal way to do it.

A friend of mine was starting a noncommercial podcast. Podcasts are all the rage now. They’re low-cost and have few barriers to entry, and recording equipment is so cheap and easy to come by these days, basically anyone can have a podcast. I am frequently asked by students for information about using music on podcasts. They’ve heard, of course, that any length of time less than thirty seconds is “automatic fair use.”

So my friend’s got this noncommercial podcast and they want to use, in a single episode, two separate clips of the same copyrighted song. Together, the clips total less than forty seconds. My friend, who is not a lawyer, was inclined to do what so many lawyers do, and just take the risk and use the song. “But no!” I protested. “You know me, a copyright lawyer! You should properly license the song!”

I had, in actuality, never licensed a song before. But, I thought, how hard can it be? It shouldn’t be hard, right? Wouldn’t it be in the best interest of the music copyright holders to make it relatively easy for this kind of use to be licensed? Especially given the apparent stance BMI takes that there is no way for you to use music without a license.

(Fair use? What fair use?)

I told my friend that either BMI or ASCAP would probably have the rights to the song, and they should just ask for a license through the right one. So they looked into it. BMI ended up being the organization to contact, and my friend found a literal tab for Podcasts on the BMI website, so they contacted BMI.

I thought that would be the end of it for my friend, but BMI’s response, unfortunately, was not very helpful. BMI said that the only license it offers is a blanket license, so my friend could not license a single work the way they wanted. The blanket license would be an annual license of almost four hundred dollars a year – a lot of money for a noncommercial podcast that wanted to use a grand total of forty seconds of music from a single song. But, BMI informed them, that license would get my friend access to fourteen million songs!

The problem: My friend didn’t want access to fourteen million songs. My friend wanted one song. Also, I’m pretty sure that BMI is actually required by that consent decree currently under review to offer per-song licensing rates. See Section IX.C ("[BMI] shall not, in connection with any offer to license by it the public performance of musical compositions by music users other than broadcasters, refuse to offer a license . . . for the performance of such specific (i.e., per piece) musical compositions, the use of which shall be requested by the prospective licensee."); see also United States v. Broad. Music, Inc., 275 F.3d 168, 178 n.2 (2d Cir. 2001) ("[T]he per piece license . . . is explicitly required in Section IX(C).”). My friend told me what BMI said, and I told my friend that maybe they should try again, maybe they weren’t clear the first time. So they wrote back to BMI, clarifying that they wanted a per-song rate.

BMI responded saying that it was not capable of providing my friend with the licensing rights they wanted. Despite the fact that it had been very willing to provide my friend with a license for several hundred dollars in the previous email, it now took the stand that it did not have the ability to provide rights for a song used within a podcast, and my friend had to contact a different entity. I don’t know if I’m more alarmed by BMI trying to sell my friend a license that wouldn’t actually cover their use, or BMI lying about whether it could sell them a license that would cover their use.

At any rate, BMI at least provided my friend with the contact information for another entity, which my friend contacted. But that entity wrote back and said it was not the right entity and provided the contact information for yet another entity. Which never wrote back to my friend’s request at all.

So, in the end, that’s how music licensing goes if you’re a little guy, I guess: It doesn’t. My friend lost a little bit of faith in the U.S. copyright legal system as a result of their experience, and that definitely harms all of us. And as we’re thinking about the music business in the context of the consent decree, maybe we should also think about the people who use music. Because, sometimes, as studies keep showing, they’d really love to pay the artist, they literally can’t find the way to do it.

(Could my friend’s use qualify as fair use? I am offering no legal opinion on that. What I will say is that, fair use doesn’t stop you from getting a DMCA notice.)

Was Leaving Neverland a breach of contract by HBO based on its airing of a 1992 Michael Jackson concert?

HBO's Leaving Neverland documentary, detailing the allegations of sexual abuse leveled at Michael Jackson, has resulted in an interesting lawsuit in the Central District of California, Optimum Prods. v. Home Box Office, CV 19-1862-GW(PJWx) (behind paywall).

Because Jackson is dead, there is no defamation claim to be brought; therefore, this lawsuit is grounded in a contract between Jackson and Optimum's predecessor entity and HBO regarding televising one of Jackson's concerts from his Dangerous world tour, which HBO aired in October 1992. The contract contained a provision prohibiting HBO from making "any disparaging remarks concerning" Jackson. Optimum alleges that HBO has breached this provision by airing the Leaving Neverland documentary. 

Naturally the contract also contained an arbitration provision, which provided that the parties would choose an arbitrator and, if they couldn't agree, eventually the Superior Court of the State of the California for the County of Los Angeles would select the arbitrator. Optimum initially filed its complaint in state court, but HBO removed it to federal court based on diversity jurisdiction. Optimum does not dispute the existence of diversity jurisdiction but argues that the arbitration provision also acts as a forum selection provision requiring the litigation be heard by California Superior Court in Los Angeles County. 

The court declines to construe the arbitration provision as conferring exclusive jurisdiction to California state court. The arbitration provision does not discuss exclusive jurisdiction at all. The plain language of the provision only provides the state court with one responsibility: choosing an arbitrator if the parties can't agree on one. That is not a conferral of exclusive jurisdiction. 

There is also a dispute between the parties over whether the suit needs to be arbitrated. The court is torn on that issue. The American Arbitration Association's rule that arbitrability of a contract be decided by the arbitrator came into effect after the parties had signed the 1992 contract, and the court is hesitant to apply it retroactively. There is precedent to support retroactive application but the court thinks it doesn't make sense to pretend that the parties "clearly and unmistakably" agreed to be bound by rules that did not even exist. None of the precedent provided to the court was binding, so the court requests that the parties discuss the issue further at an upcoming hearing. 

On this Memorial Day weekend, rethinking ever visiting any spa again...

A recent case out of New York, Leakey v. The Setai Group LLC, 151298/2014, concerns a tragic event. The plaintiff, Leakey, was allegedly sexually assaulted during a massage.

Leakey sued several entities, including the owners and operators of the spa, on theories of negligence, intentional infliction of emotional distress, and breach of contract. The negligence claims failed because the massage therapist acted outside of the scope of his employment in sexually assaulting Leakey and there was no evidence the spa operators knew of any propensity by the therapist for inappropriate sexual conduct (this also doomed the intentional infliction of emotional distress claim). As for the breach of contract claim, there was no promise that the spa or its employees would be safe, so there was nothing to breach. 

(You can read the complaint in the case here.)

About those added convention center fees...

I spent the past few days at a conference at the Boston Convention Center, a place so cavernous that at least I easily met my step targets every day walking between meeting rooms. The conference was an expensive one to attend (it would have been waaaay out of my price range if not for the academic rate), and enormously well-attended, and I found myself doing a lot of math: how much money in registration fees? but also, how much money to use this convention center? 

This post on extra convention center fees came across my social media just as I was musing on all of that. I know from other people who have dealt with convention centers that the extra fees are the real killer: You have to pay extra to use their catering, their AV equipment, etc. Even if all you've planned is a wedding, then you know how this goes with the add-ons. This is an arrangement that we seems to just be accepting, but maybe there should be more vocal outrage about it. 

Salmonella-infected Chicken is not a "Defective" Product

Salmonella-infected raw chicken meat is not “defective” under Maine law.  Anyone selling such meat also do not violate the implied warranties of merchantability or fitness for a particular purpose.  This is so even if tons of meat have been recalled by a manufacturer precisely because of a salmonella outbreak affecting the meat. Such held the United States Court of Appeals for the Tenth Circuit recently.

The result may seem both incredibly gross and grotesque, but in a strange way, makes sense.  In the case, a raw food manufacturer sold almost 2 million pounds of raw meat to a food processor preparing chicken products such as frozen chicken cordon bleu products.  The manufacturer recalled the meat, causing losses to the processor in excess of $10 million.  The processor filed suit for breach of contract.  Both the trial and appellate courts held that the processor had failed to state a claim under F.R.C.P. 12(b)(6).

Why?  Because salmonella is an “inherent, unavoidable, and recognized component of raw chicken that is eliminated by proper cooking methods.”  Even though the recall admitted that the recall was adulterated with salmonella, the complaint did not allege that the chicken was contaminated with a form of salmonella that could notbe eliminated by proper cooking.  The sick consumers could have contracted the infections from merely touching the raw meat.

This shows the relatively low level of sanitary integrity that can be expected in today’s meat market. Bon Appetit! 

The case is Scarlett v. Air Methods Corporation, 2019 WL 1828908

Information Asymmetries Lead to Women Being Underpaid

Democratic presidential candidate Kamala Harris has revealed a plan that would overhaul American discrimination laws to ensure that women and men are paid the same for the same work.

Under the plan, companies with 100 or more employees would, among other things, be required to obtain a federal certification showing they are not underpaying women.  If they fail to do so, they may be fined.  The burden would be on the employers to show that any pay gap is based on merit, performance, or seniority.  If companies discriminate, they would be fined 1% of their average daily profits for every 1% of their average daily profits for every 1% gap that exists between the gender-based pay differential.  The plan would also bar employers from asking job applicants about their salary history and ban forced arbitration in pay discrimination disputes.

But is this really necessary?  Can’t employees themselves contract around this problem in a free marketplace?

Sadly, the answer is no. Women who work full time are paid an average of 80 cents for every dollar paid to men.  For black women, the figure is 61 cents.  For Latinas: only 53 cents.  And we are talking about pay for the same jobs; not educational or other relevant differences.

Of course, this is just a proposal from a political candidate who at this point in time appears unlikely to win the race.  But it raises an important, yet sadly not new, contractual problem, namely that of disparity in bargaining positions.  As the situation is now, much of the burden of avoiding this problem is on the potential or actual employee.  If a woman needs a job, how is she going to ensure that she is, in effect, paid the same as her fellow male workers?  In other words, how would she even find out what males earn in a particular job?  She can’t. And the pressure of adding one’s salary history is also known to create a bargaining inequality.  This is an example of information asymmetry; a situation in which government action might help ensure a better situation for individuals who have proved unable to obtain that situation contractually.  This is a political issue that will, of course, have to be decided by legislators.  The free market is not producing an acceptable situation here as it is unacceptable that employers pay their employees differently simply because of gender. The fact that race makes the pay disparity even greater makes matters worse.

Contract damages measures can be super-complicated!

This recent case out of Delaware, Leaf Invenergy Co. v. Invenergy Renewables LLC, C.A. No. 11830-VCL, is a corporate disagreement that requires the court to interpret the contract and then establish the proper measure of damages. Which is very complicated, with the courts disagreeing on what the benefit of the bargain was, what needs to be considered to put the party in the position they would have been in but for the breach, and how the theory of efficient breach affects all of this. Damages is always a unit that makes my students' heads hurt, and this is a case that reminds me why!

h/t to Eric Chiappinelli from Texas Tech!

Adobe reminds everyone just how much power it has over end users

Very few of us actually read the terms and conditions of the many, many, many services we register for every day. It's not like we can negotiate them, anyway, so I think, as a matter of sheer efficiency, most of us just grin and bear it. We want or need the particular service in question, it comes with conditions we can't get out of, so we just click "OK" and move on with our lives. I think a lot of people think, well, how bad can it be? 

But these terms and conditions often give the licensor a great deal of power, leaving end users with very few rights to whatever they want to gain access to. A perfect illustration of this: As many outlets have reported (here's a link to just one), Adobe has told its users that it's discontinuing older versions of popular programs like Photoshop, and so users are no longer allowed to use those versions under the licenses they agreed to years ago when they gained access to the program. We've gotten blase about the lack of ownership we have over many things in our current economy, but this action is exposing the fact that, when you rent everything instead of owning it, then there's very little we can do to keep the things we like; all of the control over them always continues to rest with the original licensor, and we possess them only so long as the original licensor lets us. You might have preferred the older version of Photoshop, but that doesn't matter; Adobe's terms of service let Adobe choose when you are allowed access to Photoshop. 

Many of the terms and conditions we agree to have clauses that leave us exposed to the whims of the more powerful party in the transaction, and consumers therefore have very little recourse. A lot of social media websites have a lot of discretion over terminating accounts, for either no reason or vaguely worded reasons that leave them with a lot of leeway. So I would caution everyone to please be careful about what you're storing on social media accounts and make sure you have copies of anything you really care about elsewhere (preferably on a device that actually belongs to you), because the terms of use make clear that there's no guarantee that social media account (or even remote storage) will always be there. 

The Controversy over the Restatement of Consumer Contracts

As some readers of this blog may be aware, the American Law Institute will be voting on whether to approve the Restatement of Consumer Contracts at its upcoming Annual Meeting on May 21. The proposed Restatement is controversial for several reasons and was the subject of a recent Yale Journal on Regulation symposium. Concerns have been raised by contractsprofs Gregory Klass, Adam Levitin and others (including yours truly) regarding the Reporters' methodology and interpretation of case law.  Of particular note, is this post written by the preeminent contracts law scholar Melvin Eisenberg. As Prof. Eisenberg points out, the doctrinal problems are glaring, harmful to consumers, and will make it even harder to explain contract law to 1Ls.

In addition to the doctrinal inconsistencies, the proposed Restatement ignores the problems created by form and digitization and does nothing to address the problems created by ubiquitous digital contracts. As Colin Marks's study showed, retailers often have different and more onerous terms for online purchases than when customers make those same purchases in-store.  

The law is still developing when it comes to digital contracts and there are signs that courts in some jurisdictions, such as California, are inclined to move the law in a more consumer-friendly direction. This Restatement would impede that evolution. Furthermore, this proposed Restatement would create a different set of rules when the contract is between two businesses and between a business and a consumer. The result in some cases is that the Restatement would subject a consumer to more stringent contract terms than a business would be subjected to under common law. While this might seem like good news for businesses, it actually is not. In many cases, due to the problem of “contract creep” which Ethan Leib and Tal Kastner discuss in their forthcoming Georgetown Law Journal article, courts are likely to end up applying the law of “consumer contracts” to all contracts, including those between businesses.  The result?  The proposed Restatement of Consumer Contracts would harm both consumers and businesses.  Instead of helping courts make sense of the evolving law, it would cement law that is incoherent and inconsistent.  Contractsprofs should be particularly concerned because it will make contract law that much more difficult to explain to 1Ls. The ALI plans to vote on the proposed Restatement of Consumer Contracts on May 21. All readers of this blog who are members are encouraged to attend and provide input.

 

An arbitration clause means you're waiving your ability to go to court! Remember that!

A recent case out of New York, Umeh v. Checole, 159884/2018, reminded me of the first time I negotiated a publishing contract (sidenote: I happen to also be a published novelist). The dispute is a straightforward one: the publishing contract contained an arbitration clause, the plaintiff alleges she didn't realize the arbitration clause meant she was giving up her ability to go to court, the court decides that arbitration is favored and the plaintiff wasn't "naive" so her agreement to the contract represented "a clear and unmistakable intent by two willing parties to resolve disputes by arbitration." 

My publishing contract didn't have an arbitration clause, but this case reminded me of it nonetheless because, after the contract was sent to me by my editor, I asked for a couple of changes and sent it back, and my editor replied something along the lines of, "Hey, I was wondering actually if you could explain to me what that part of the contract means, I've never understood." And that was my introduction to the fact that so, so, so many people are entering into contracts that they have no idea what they mean. This was a contract the publishing company sent to me, but there wasn't enough of a communication to non-lawyers in the company what the contract meant. I write fiction for fun, but I think one of the biggest fictions is the one in which we pretend that people understand the contracts they're entering into.  

The difficulties in establish an oral agreement, the difficulties in establishing promissory estoppel

A recent case out of the Fifth Circuit, Mr. Mudbug, Inc. v. Bloomin' Brands, Inc., No. 18-30626 (behind paywall), reminds us that, in the case of establishing the existence of an oral agreement, it helps to have testimony that comes from a third party.

The plaintiff asserted that it had entered into an oral agreement with the defendant where the defendant promised to buy 28 million pounds of various dressings. However, all of the testimony about the existence of the oral agreement came from the plaintiff's executives. While it was true that the plaintiff and the defendant had a ten-year business relationship, that by itself did not establish the existence of the 28-million-pound contract, especially where the defendant had provided evidence that it consistently refused to commit to a specific volume of purchasing. 

Having failed to establish the existence of a contract, the plaintiff turned to promissory estoppel, but you can only have promissory estoppel where a promise exists. The plaintiff asserted that the defendant told it that it would have to "substantially enlarge its . . . facilities" if it wanted "to produce all of the food products" that the defendant would need. But this was a declaration of fact, not a promise that the defendant would enter into contracts with the plaintiff if it expanded. 

Border Wall Contractual Dispute

The loser of a bid to build part of Trump’s border wall has protested the bidding process leading to a rival winning the $1 billion contracts.  A complaint has been filed with the Government Accountability Office, which now has 100 days to resolve the complaint.

At issue is a questionnaire which asked what previous work any bidder had completed on the border wall within the last five years, which narrowed the qualifying bidders to just two firms. In effect, argues plaintiff Fisher Sand & Gravel, the process used by the United States Army Corps of Engineers suppressed competition by designating only two firms as sole source contractors, thus leading to a process where the end result was known ahead of time.

The construction of the highly controversial wall will thus be delayed.  Of course, everyone must observe the law, including government agencies. Contractual bidding processes involving no less than one billion taxpayer dollars should arguably be subject to particularly close scrutiny. 

Would we really say that Weinstein's company's directors didn't approve of his pattern of sexual misconduct?

This, strictly speaking, isn't really a contract case, although there is an employment contract at issue so I guess that's how it got caught in my filter. But I read it and thought that this case is raising important enough issues that we should be discussing them. 

The case is David v. The Weinstein Company LLC, 18-cv-5414 (RA), out of the Southern District of New York, and it's a case centering around the alleged sexual assault perpetrated by Harvey Weinstein on the plaintiff. The story the plaintiff tells is a familiar one to those who have read the Weinstein reporting, that "Weinstein asked her to meet him in his hotel room to discuss potential acting roles, and then, on one occasion, forcibly raped her." This decision isn't so much about Weinstein's conduct, though, as it is about the former directors of Weinstein's companies, who the plaintiff contends "enabled Weinstein's sexual misconduct, making them liable for general negligence and negligent retention or supervision." 

The court dismisses the claims against the directors, and the reasons why were what caught my eye about this case. Plaintiff's allegations were that the directors were aware of Weinstein's harassing behavior toward women, based on a number of things: a written communication within the company calling his behavior a "serial problem" the company had to deal with; the characterization by a company executive of Weinstein's female assistants as "honeypot[s]" to lure actresses into meetings with Weinstein; a formal complaint by an employee about Weinstein's behavior; an employee memo summarizing two years' worth of allegations of sexual harassment and misconduct by Weinstein and characterizing the company as a "toxic environment for women"; the settlement of many sexual misconduct claims against Weinstein; and at least one police investigation into Weinstein's behavior. 

None of the allegations established negligence on the part of the directors, according to the court. First of all, the directors did not owe the plaintiff a duty of care, and there is no case law that directors of a company can be held liable for an employee's tortious act. The plaintiff pointed to the fact that the directors renewed Weinstein's contract in 2015 with a provision that prevented Weinstein from being fired for sexual misconduct as evidence that they were enabling Weinstein's conduct, but the court found that this was "a far cry from them approving of Weinstein's sexual assault." While the court admitted that the directors "were not without moral culpability," their actions were not negligence as a legal matter. 

Nor did the plaintiff assert a claim for negligent retention or supervision. The plaintiff did not show that Weinstein's sexual assault took place on the company's premises, since she asserted it happened at a hotel not affiliated with the directors. While the plaintiff argued that Weinstein used company credit cards to pay to the hotel room and lured her to the hotel room under the guise of a business meeting regarding employment by the company, that was regarding the company, not the directors sued here. 

As a matter of law, the court's reasoning makes sense.

As a matter of recognition of how oppressive power structures work, this decision is terrible.

When I learned negligence way back in law school, I remember so many discussions about the policy behind it, about not wanting to hold people to a generalized duty to protect everyone on the planet, about how we decide proximate causation, about how it's really at heart about what we want to hold people liable for and what we don't. 

So this decision makes sense in terms of worrying about generalized duties, of not dismissing the culpability of those committing the intentional tortious act. But it doesn't make sense in terms of thinking about the type of society we want to live in. The Weinstein reporting tells a story of serial abuse that was systemically protected for years by the power structure around Weinstein. To say that nobody else in the power structure was sexually assaulting women is a true statement of legal fact, but also seems disingenuous at this point. Weinstein's abuse was so widespread and lasted so long not only because of Weinstein but also because of the entire operation around him deflecting culpability for it. 

The negligence analysis in this case feels like it's operating in a vacuum, which is kind of how we teach our students to think, presenting them with discrete hypotheticals, but might not be the best or most effective way to set up a fair legal system that protects the most vulnerable and least powerful in society. The societal discussion about the oppressive system that permitted Weinstein (and others) to perpetrate so much abuse has just begun, and maybe we should include how the legal system interacts with those power structures in the discussion. If negligence is all about policy decisions about who you need to protect and how much, then maybe we should have a policy discussion about how to make those decisions, especially if we're making them in the context of an abusive pattern that might be obscured by looking at things in isolation.  

The plaintiff's allegations in this case contain many damning examples that many people around Weinstein knew about the disturbing pattern of sexual misconduct, and made affirmative choices to find ways to use the power structure to protect Weinstein. I appreciate the court's statement that the directors might be morally culpable but not legally culpable, and I recognize that law and morals are two different things. But I don't know that I agree that the director's actions are "a far cry from them approving of Weinstein's sexual assault . . . ." Given the allegations about what the directors knew and how they reacted to that knowledge, I think we could read their actions as indicating that they were a far cry from disapproving of Weinstein's sexual assault.

Reminder: fraudulent inducment requires specificity in the allegations

A recent case out of the Southern District of New York, Optima Media Group Ltd. v. Bloomberg L.P., 17-cv-1898 (AJN), reminds us that fraud causes of action, including fraudulent inducement to enter into a contract, need to be pled with specificity.

In the case, Bloomberg alleged that it had been fraudulently induced to enter into the contract based on alleged misrepresentations made by "Optima's head, Rotimi Pedro, and his principal advisers" made "in a series of communications" "during [the] negotiations." This was not enough specificity. These allegations do not identify exactly: who provided these alleged misrepresentations, where they were made, how they were made, or when they were made. For instance, there was no indication whether the statements were made "in person, over the phone, or by email." Failure to specify the exact speakers was problematic in and of itself, and especially problematic in view of the failure to specify the location, method, or time frame of the alleged misrepresentations. Therefore, the court dismissed the claim. (Other of Bloomberg's claims survived.)

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!