ContractsProf Blog

Did Somebody Mention Chicken?

Meredith Miller posted a little clip to accompany the teaching of Frigaliment, Judge Friendly's great chicken coup. I suppose we all have our favorite visual tools to aid in conveying the import of that case. For the last couple years, I've been sharing this video with my students, although I must admit, neither my students nor I find it as funny as do the people who heard it live. If you lose patience, you should skip to the end, because the Q & A is one of the funnier bits.

The pdf version of the paper is also available.

[Jeremy Telman]

I am Chicken (Hear Me Squawk...)

I am teaching Frigaliment tomorrow. While I am not going to class in costume, I did "happen upon" this priceless clip, which I intend to share. Perfect at the end of a Friday class:

Best lyric: "No, I am no dumb cluck..."

[Meredith R. Miller]

Of Miles and Hair Styles

First it was the battling dog walkers. Now the hair stylists. Non-competes turn up in the most interesting of places. This in Michigan news via the AP:

The Michigan appeals court says Annie Keegan broke a no-compete clause by cutting hair 4.16 miles from her former employer, Lockworks.

Keegan's agreement with Lockworks barred her from working within 5 miles for a year after leaving the salon in 2006. An Ingham County judge said 4.16 miles seemed far enough away. But the appeals court this week overturned that decision, saying 5 miles means 5 miles.

[Meredith R. Miller]

Brandeis University Art Collection on the Blocks?

Last year, we reported on legal battles swirling around Fisk University's (thus far unsuccessful) attempt to sell its collection of Georgia O'Keeffe paintings. It seems Fisk was a bit of a trend setter. As The New York Times reports, now Brandeis University is seeking to sell the entire holdings of its Rose Art Museum. The Times reports that Massachusetts' Attorney General is reviewing wills and agreements between donors and the Museum and/or the University to see if such a sale violates the terms on which donations were made. As the Times and other reports have noted, it is a bad time to be selling art, but Brandeis seems to be especially hard-hit by the current economic downturn, as several of its reliable donors had invested money with Bernard Madoff.

[Jeremy Telman]

Welcome, 600,000th Visitor!

Yes, it seems only yesterday that we were marking the 500,000th visitor milestone (actually it was May 14th). But today, if form holds, our blog will host its 600,000th visitor. And, as you can see, our many German readers are as elated as they would be if, say, I don't know, their soccer team had won the FIFA cup or something. Well, to all our readers around the world, we take this opportunity to welcome you anew.

[Jeremy Telman]

Pay for Performance: Would It Work in Professional Sports?

Harvard's Lucien Bebchuk has done great work to advocate that corporate executives' pay be linked to their actual performance. His 2004 book, co-authored with Jesse Fried, Pay Without Performance has had a huge impact in the academy, in the halls of government and even in board rooms. Today, I read a New York Times article that reported that the Yankees' Andy Pettitte is going to return for one season for a measly $5.5 million. His contract is loaded with incentives that could boost his annual salary to $12 million. And this set me to thinking . . . . Why not structure all sports contracts this way, but do so even more aggressively?

After all, we posted earlier about rookies being signed to large contracts so that their teams could avoid having to pay megabucks to keep them later. And one often hears of players working hard in seasons when their contracts are due for renewal and then becoming less focused once the pressure is off. Well, how about paying all players a basic based salary and then giving them huge financial incentives for reaching certain individual and team goals. These goals can vary widely, but there could be standard items on the menu, which would obviously vary from sport to sport. And then there can be some tailor-made incentives. For Alex Rodriguez: clutch hitting. For Shaq: free throw percentage over 55%, over 60%, over 65%, etc. I would advocate paying the Bulls' Ben Gordon not to shoot at the end of quarters or when the game is on the line. It's an opportunity to get creative and also an opportunity to motivate players in very focused ways.

[Jeremy Telman]

Business Associations Limerick of the Week: Lovenheim v. Iroquois Brands

This case always generates a lively discussion. It addresses the limitations on a corporation's obligations to distribute proposals of ordinary shareholders along with proxy materials in advance of a shareholder meeting. In this case, Lovenheim, the shareholder, proposed that the corporation investigate the processes by which its suppliers of pâté de fois gras produced their product. Lovenheim was concerned for the well-being of French waterfowl and wanted to make certain that they lived happy lives before they were slaughtered so that American gourmands could gorge themselves on their distended livers.

SEC Rule 14a-8(i)(5) permits a corporation to refuse to distribute a shareholder proposal if it relates to operations that account for less than 5% of the firm's assets earnings or sales or it not otherwise significantly related to the firm's business. Pâté actually accounted for a tiny portion of the firm's business -- well below the 5% threshold -- so the only question was whether it was otherwise significantly related to the firm's business. The court held that the phrase "significantly related" is not limited to economic significance. A policy issue may also be raised through a shareholder proposal. So, the question becomes: is force-feeding of geese and ducks a sufficiently significant policy issue that a corporation must be required to circulate a proposal relating to that issue as part of its proxy materials? The court, citing regulations intended to prevent cruelty to animals dating back to colonial times, found that it is.

Lovenheim v. Iroquois Brands, Ltd.

Does Iroquois have to police
Whether pâté requires force-fed geese
Yes, western culture protects
Fish, beasts and insects.
The proposal is no mere caprice.

[Jeremy Telman]

PETA and Michael Vick Won't Be Working Together After All

I know it sounds improbable, but the Associated Press reports that the People For the Ethical Treatment of Animals (PETA) and Michael Vick, former professional football player currently serving a 23-month sentence for criminal animal cruelty in connection with his dog-fighting sideline, were negotiating the broadcast of an anti-cruelty public service announcement. Michael Vick was going to speak out against dog fights on behalf of PETA. Negotiations broke down when Vick's attorneys sought assurances from PETA that the organization would support his return to professional football. Far from doing so, the AP reports, PETA has written to the NFL suggesting that Vick should undergo tests to determine whether or not he is a psychopath before being permitted to return to professional football. As this blog post indicates, support for PETA is far from overwhelming in the sports community.

[Jeremy Telman]

New Scholarship: Alan White on Rewriting Contracts

My colleague, Alan White, has a new greatest SSRN hit. Yes, for those of you who thought he couldn't top Behavior and Contract, Literacy and Contract, The Case for Banning Subprime Mortgages, or Risk-Based Mortgage Pricing, think again! His new article, Rewriting Contracts, Wholesale, Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, is putting up some gaudy download numbers over at SSRN.

Here's the abstract:

The 2007 subprime mortgage crisis resulted in home foreclosures at unprecedented levels, and calls for government action. The Bush Administration's response relied primarily on exhorting the mortgage industry to voluntarily modify the terms of existing mortgages to help struggling homeowners reduce their debt burden and bring mortgage debt in line with declining home values. Industry reports have tallied the rapid increase in voluntarily negotiated workouts, without specifying what the terms of those workouts have been.

To better understand the effectiveness of the voluntary mortgage crisis resolution plan, this paper reports detailed empirical information from a newly-created database. Loan-level information on the number and type of negotiated mortgage modifications was compiled from monthly servicer remittance reports from July 2007 through June 2008 for twenty-six mortgage loan pools.

The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.

The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.

[Jeremy Telman]

Flight Delays Could Lead to Suit for Breach of Contract

This from the WSJ:

Passengers may be able to sue airlines for breach of contract if flights are delayed too long on the tarmac, according to rules proposed by the Department of Transportation.

The agency published details last month on the proposed rules, originally developed in response to worsening delays and high-profile incidents -- perhaps most notably a 2007 Valentine's Day ice storm that left some JetBlue Airways passengers stranded on planes at New York's Kennedy International for upward of 10 hours.

If adopted, the rules would require airlines to develop contingency plans for lengthy tarmac delays -- including time limits for such delays. Those contingency plans and limits would become part of each airline's contract of carriage, a legally binding agreement that outlines an airline's responsibilities to passengers.

Also under the proposed rules, the agency would declare flights that remain "chronically delayed" to be an "unfair and deceptive practice," opening carriers up to possible civil penalties. The Department of Transportation would require carriers to publish flight-delay data on their Web sites.

Carriers are likely to be wary of changes to their contracts of carriage. "We agree with the emphasis placed on consumer protections, and we think that this proposal is an improvement over the prior one," said Elizabeth Merida, a spokeswoman for the Air Transport Association, a trade group representing airlines. "However, there are a number of issues raised by this proposal which have yet to be resolved, including items relating to the contents of carriers' contracts of carriage."

Passengers have sued carriers for tarmac delays in the past, but those suits normally don't cite a breach of contract, said David Hayes, an aviation lawyer who primarily represents airlines.

Kate Hanni, executive director of Flyersrights.org, a passengers' rights group, says that the proposed rules lack strength because they neither levy new fines nor would they require DOT approval of airlines' contingency plans for tarmac delays.

[Meredith R. Miller - h/t Sheila Scheuerman at TortsProf]

Business Associations Limerick of the Week: Rosenfeld v. Fairchild Engine

The issue in Rosenfeld is whether a corporation must pay for expenses incurred in connection with a proxy fight when the insurgent group wins the proxy fight and gains control of the leadership positions in the corporation. The general rule is that the corporation pays the expenses of the incumbent leadership so long as those expenses are reasonable and the proxy fight relates to issues not to personalities (a meaningless distinction, in my view). Rosenfeld establishes that victorious insurgents are also entitled to reimbursement of reasonable expenses on the same conditions, if the shareholders approve. Board approval is a given, since the insurgents now control the Board and will certainly vote to reimburse themselves.

In this case, the dissent pointed out that neither part of the test for reimbursement was really satisfied in this proxy fight. The key issue in the proxy fight was a generous employment contract that the incumbent board approved for a former officer. That seems like a clash of personalities rather than a substantive difference. In addition, many of the expenses were incurred in wining and dining key shareholders. That may stretch the bounds of reasonable reimbursement. The latter topic makes for interesting class discussions. How far should management go to win the votes of key shareholders? Can the company's private jet be used to fly key players to corporate headquarters? How much should be spent on food? On entertainment? And what kind of entertainment is appropriate?

Rosenfeld v. Fairchild Engine and Airplane Corp.

Should a contest for proxies arise
Over insider deals in disguise,
Shareholders may pay
For both sides in the fray
If the shareholders deem payment wise.

[Jeremy Telman]

Environmentalism Through Breach of Contact

Over at Concurring Opinions, fellow contracts prof and fellow Sidley & Austin alum, Nate Oman (pictured) [at this point we exchange the secret S&A signal of recognition across cyberspace], has an interesting commentary on a Washington Post news story about an environmentalist who bid on land contracts in Utah in order to postpone their exploitation by the oil and gas industries.  University of Utah economics student, Tim DeChristopher ended up buying leaseholds on 22,000 acres.  Unfortunately, he has no means of paying the $1.8 million he bid on the 13 properties he won at auction. 

De Christopher is represented by Pat Shea, who headed the Bureau of Land Management under President Clinton.  Shea describes DeChristopher as virtuous and the legal system as Kafkaesque.  This explains the fate of Joseph K during the 1990s.  Professor Oman has some sympathy for the DeChristopher, but ultimately, I think DeChristopher is better off with his current attorney, Professor Oman thinks DeChrisopher ought to pay for what he bid on, and since he lacks capital, his only means of doing so is with"moderate" jail time, just enough to deter other potential DeChristophers out there from pulling the same stunt.  By the way, Professor has no problem with environmentalists with means who enter into good faith agreements to purchase land in order to prevent them from being used for oil and gas exploration.

[Jeremy Telman]

Business Associations Limerick of the Week: Waltuch

This case arose in the aftermath of a set of lawsuits against Waltuch which related to his speculative trades in silver while a vice president at Conticommodity Services,Inc.  The silver market collapsed in 1980, and Conticommodity's clients sued Waltuch and the corporation in connection with Waltuch's activities.  In addition, the Commodities Futures Trading Commission (CFTC) brought an enforcement action.  Waltuch spent $2.2 million defending himself in these actions and he sought reimbursement of those expenses under the 9th Article of Conticommodity's Articles of Incorporation, which provided, inter alia, for indemnification of officers for expencses incurred in connection with litigation.

The claims brought by Conticommodity's clients were dismissed as to Waltuch, after Conticommodity paid $35 million in settlement of all claims.  The CFTC proceeding was also settled, with Waltuch agreeing to pay a $100,000 and to a six-month hiatus in his futures trading activities.

The case addresses the extent to which Delaware law requires corporations to indemnify officers who have claims against them dismissed and the extent to which it permits indemnification with respect to claims that resulted from bad faith conduct. The answers, provided are that: a) corporations must indemnify officers who are successful regardless of the reasons for their success but that b) corporations may not indemnify oficers who act in bad faith.  In Waltuch's case, he was entitled to reimbursement of expenses in the action brought by Conticommodity's clients, because he was dismissed as a defendant in that case after Conticommodity paid a settlement.  However, in the CFTC proceedings, he was not "successful," and so that action is governed by Delaware's General Corporation Law s. 145(a), which requires that an officer entitled to reimbursement act in "good faith."  Because Waltuch conceded that his actions were not in good faith, he was not entitled to reimbursement of expenses incurred defending himself in the CFTC proceeding.  The Court thus refused to enforce the 9th Article of Conticommodity's Articles of Incorpration to the extent of the conflict with the Delaware statute.

Waltuch v. Conticommodity Services, Inc.

Delaware's state legislation
Precludes indemnification
Where good faith's omitted
Even though it's permitted
By the Articles of Incorporation.

[Jeremy Telman]

Is Law Her Strong Suit or Is She Bluffing?

In what appears to be an exclusive, FlopTurnRiver.com reports that Full Tilt Poker has filed a motion to dismiss a law suit brought in November by former Full Tilt employee and professional poker player, Clonie Gowan (pictured, sporting Full Tilt logos). According to Gowan's Wikipedia entry, Full Tilt is an online poker site based in Aruba. Gowan's suit alleges that she was promised 1% ownership of Tiltware, the company that provides Full Tilt's software, in return for promoting Full Tilt as a celebrity representative. Since Gowan estimates Tiltware's value at $4 billion, her suit seeks $40 million in damages.

Gowan's claim seems to be based on an oral agreement entered into in 2004. The relationship soured in 2007 when Gowan, according to the suit, was excluded from a payment made to all members of the Full Tilt team. She entered negotiations with Full Tilt, which offered her $250,000, but she rejected that offer as inadequate. She was dropped from Full Tilt's "roster of pros" in November 2008, and the suit followed. The suit names a number of Gowan's professional poker rivals. One of these rivals is quoted in the FlopTurnRiver.com report saying, in a manner rather flushed, that he did not appreciate Gowan's conduct and that she should go straight back whence she came before her entire career collapsed like a house of cards.

[Jeremy Telman]

Dow Chemical v. Kuwait's Petrochemical Industries Company

As reported in the Times of London, Dow Chemical is seeking up to $2.5 billion in a suit filed against the government of Kuwait for breach of contract. Dow claims entitlement to the damages after Kuwait pulled out of a planned $17.4 billion joint venture. Forbes describes the $2.5 billion as a "break up fee" included in the agreement that set up the joint venture. Dow CEO Andrew Liveris, whose job may be on the line according to Forbes, explains the lawsuit in this interview with the Wall Street Journal. Clearly, the stakes are high, as Dow depends on its business relationships in the region but is also in need of the cash it was expecting this deal to generate so that it could pursue its other business objectives.

[Jeremy Telman]

Stephen Colbert's Misconceptions about Contracts

Stephen Colbert (pictured before he discovered that he is a Winter) has done the world of contracts a tremendous favor by mentioning contracts on his television show, The Colbert Report, which is fast becoming America's favorite source for fake news commentary. Unfortunately, much of what he has to say about contracts is (dare I say it?) wrong! And this is the first time that I can recall that Stephen has been wrong about anything. Well, I'm a loyal viewer, but still, I have to stand up for what I believe in -- or teach -- or something like that. So, here we go.

The episode in question can be found here. About six-minutes into the episode, right after the bit about reports that Sanjay Gupta might become Surgeon General and change the shape of our food pyramid to reflect his own eating habits, comes a report on the Obama transition. According to Colbert, the Obama website says "We need to update the social contract." Colbert objects in the following terms:

I have negotiated a great social contract for myself. I'm famous, I'm rich, and I've got dental. . . [*ching*]. Besides, the main point of a contract is that you can't change it. That's why I had to fake my own death to get out of my endorsement deal with "GOOD- on-Ya" Australian cologne: "Splash It 'Down Under'" . . . . I was starting to attract dingoes.

There are many problems with this statement. First, it's not clear that the social contract is really a contract at all. Second, Restatement s. 89 permits the modification of an existing contract without additional consideration in circumstances that might apply to the social contract, if it is a contract. The UCC's s. 2-209 is more permissive still on the subject of modifications. Stephen, it's like you've never heard of Karl Llewellyn! Third, contracts doctrine provides many excuses other than faking one's own death to permit celebrities to get out of their endorsements. Most celebrities choose the DUI route, but there are plenty of other activities that can trigger a morals clause. Finally, faking one's own death is rarely effective when one announces having done so on national television -- even if it is cable.

Stephen, obviously your show needs a writer with some genuine legal expertise. You know where to reach me. Just check the caller ID from when I called you at 1-800-OOPSJEW last Yom Kippur.

[Jeremy Telman]

Minnesota Bridge Collapse Victims Sue Consultant and Contractor for Breach of Contract

A bridge collapse sounds like an foray into tort law. And the attorneys for victims of the Interstate 35W bridge collapse in Minneapolis are suing two private companies (a consultant who anlyzed the bridge and the contractor) for negligence. But they are apparently also suing for breach of contract. According to the Minneapolis Star-Tribune:

The victims' attorneys say the companies' contracts with the Minnesota Department of Transportation required them to protect the public, and those hurt by the collapse have standing to sue over the breach of that protection.

Sounds like an intended third party beneficiary analysis. Actually, while not squarely analogous, it sounds like Illustration 10 to Restatement Second section 302:

10. A, the operator of a chicken processing and fertilizer plant, contracts with B, a municipality, to use B's sewage system. With the purpose of preventing harm to landowners downstream from its system, B obtains from A a promise to remove specified types of waste from its deposits into the system. C, a downstream landowner, is an intended beneficiary under Subsection (1)(b).

See, in contract law, it all comes back to the chickens.

[Meredith R. Miller]

Business Associations Limerick of the Week: Deutschman v. Beneficial Corp.

There's not really much reason to teach this case, except that it helps students learn the difference between a put and a call and that options are securities for 10b-5 purposes. If you have troubles remembering the difference between put and call, this Limerick might help:

Deutschman v. Beneficial Corp.

An option, be it put, be it call,
Gives you standing a fraud to forestall.
A call is a bet
A stock hasn't peaked yet;
Buy a put when the stock's gonna fall.

[Jeremy Telman]

Reminder: Annual Meeting Panel

For those of you attending this week's AALS annual meeting, please remember the Contracts Section's program Friday, January 9, 2009, at 8:30 am in Marina Salon G, South Tower/Level 3, San Diego Marriott Hotel & Marina.  The program features a panel of speakers -- Kenneth Ayotte (Northwestern), Robert P. Bartlett, III (Georgia), and Tom Joo (UC-Davis) -- addressing "Immutable Rules and Contract Law."  Click here for more details.  A brief business meeting will follow the panel.

[Keith A. Rowley]

Interesting At-Will Employment Case from West Virginia

As reported in the West Virginia Record, Williamson Memorial Hospital hired Crystal Hatfield in 2005 as a benefits and special projects coordinator. Her wage -- $14/hour -- angered other employees who had not applied for the position because they were told it would pay only $7-9/hour. Rumors swirled that Hatfield lacked the requisite qualifications for the job and that her hiring was the result of nepotism. The hospital administration was facing a mutiny and so the responsible parties decided to fire Hatfield after she had worked at the hospital only four days. She sued, claiming breach of contract, among other things.

On December 12th, in a per curiam opinion, the West Virginia's Supreme Court of Appeals, affirmed the dismissal of Hatfield's claims based on its view that Hatfield was an at-will employee. Ms. Hatfield alleged a promise for long-term employment based on an offer letter citing an annual salary of $29,120 and informing Ms. Hatfield of the hospital's employee benefits program. The court found nothing in the letter suggesting anything other than an offer of at-will employment and thus dismissed Ms. Hatfield's breach of contract claim. The court dismissed her claim for breach of the duty of good faith and fair dealing in a few brief paragraphs, noting that West Virginia does not recognize any such duty in the context of at-will employment. And since Ms. Hatfield was apprised of her at-will status, the court also rejected her claim based on detrimental reliance.

In order to take the position with Williamson Memorial, Ms. Hatfield had resigned a position at a firm in Charleston that paid her $12/hour. After she lost her position at Williamson, she was unemployed for five months before her old firm re-hired her. Unless Ms. Hatfield was somehow a party to a scheme to hire her for a position for which she was unqualified, it seems clear that an injustice was done to her, but it may well be the sort of injustice that law courts cannot address.

[Jeremy Telman]