ContractsProf Blog

On Twitter and Links to Two Recent Cases Holding Class Action Waiver = Unconscionable

First, a recent SDNY (Griesa) decision holding that an arbitration clause in a student loan agreement was unconscionable.  The arbitration clause included a class action waiver.  Fensterstock v. Education Finance Partners.

Second, a recent 9th Circuit decision holding unconscionable the class action waiver in T-Mobile's service agreement with wireless card customers.  Chalk v. T-Mobile.

Somewhat related: I learned of the Chalk decision from Ross Runkel via Twitter.  I thought Twitter would be a good way to broadcast to my students current links about Contracts, Business Organizations and other law stuff (coincidentally, if you are so inclined, you can follow my links on these topics @Prof_Miller).  The students don't seem much interested (yet?), but I am coming to realize that, yes, there are other good uses for Twitter (including, if you are in L.A., keeping tabs on your favorite Korean taco truck).

[Meredith R. Miller]

AIG Bonuses: Enter Force Majeure -- Stage Left

While lots of folks are scrambling around looking for contract-law defenses to retention payments such as those given employees at failed AIG, Congress is looking at resolving the issue by introducing a new player: force majeure.  The Pay for Performance Act of 2009 would amend the Emergency Economic Stabilization Act of 2008 (which authorized the Troubled Assets Relief Program), to retroactively ban payments of non-performance-related bonuses and "excessive cmpensation" for firms that receive TARP payments.  The rules govern not just executives, but all employees at such firms.  Here's the key language:

PROHIBITION:  No financial institution that has received or receives a capital investment under [TARP] or with respect to the Federal National Mortgage Association, the Federal Home Loan Montage Corporation, or a Federal home loan bank . . . , may, while that capital investment remains outstanding, make a compensation payment to any executive or employee under any pre-existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement--

(A) provides for compensation that is unreasonable or excessive, as defined in standards established by the Secretary in accordance with paragraph (2); or

(B) includes any bonus, retention payment, or other supplemental payment that is not directly based on performance-based measures set forth in standards established by the Secretary in accordance with paragraph (2).

The law directs the Treasury Secretary to develop standards for deciding whether compensation is excessive and to set up guidelines for what types of performance bonuses are reasonable.

That will take some help.  Treasury is looking for data and mapping analyists, financial analysts, financial economists, and risk analyists.  Pay goes as high as $133,000.  Details here.

[Frank Snyder]

Over at our sister ship . . . .

Over at Legal Profession Blog, Jeff Lipshaw (Suffolk) uses the AIG implosion to meditate on contract theory.  As usual, he's got his own unique take on things.  Check out My Iconoclastic Approach to Contract Theory (or Its Ultimate Failure) - The Financial Crisis Edition.

The same blog also has a story (with a link) to a new New York Court of Appeals decision on the role of contract language in dealing with disputes among attorneys over contingent fees.

[Frank Snyder]

Contracts Can Be Rewritten, Says NY Times

Today's New York Times has a headline that would not have been news to Karl Llewellyn, "Contracts Now Seen as Being Rewritable."  But this is probably news and definitely fit to print because it provides space on page 1 of Business Day (above the fold!) for contracts prof David A. Skeel (left) to point out that it is now employment contracts that are viewed as "eminently rewritable."  The article goes on to discuss additional wrinkles in the path of contracts law: in the current financial crisis, the federal government is re-writing contracts, and municipal governments filing bankruptcy under Chapter 9 are being excused from performing their union contracts.  

Law students and recent graduates are also learning that employment contracts can be re-written.  I have now heard from many quarters of recent graduates who are being told by BigLaw that they will have to start late and take a salary cut.  And those recent graduates are the lucky ones.  Other offers of employment are being rescinded entirely.

[Jeremy Telman]

Behind the scenes at AIG

One of the interesting thing about the AIG explosion is how little most of us who are chattering in the media about the bailout and the bonuses (including me) actually know about why the whole thing blew up.  If you haven't read it (and I don't think we've remarked on it here yet), a great place to start is The AIG Bailout by Bill Sjostrom (No. Kentucky).

Unlike most of us (we?) contract law types, Bill understands "credit default swaps" and he takes the reader through the decisions that led The World's Largest Insurance Company into the abyss.  He also takes a crack at what needs to be done to salvage what's there.  Here's the abstract:

On February 28, 2008, American International Group, Inc. (AIG), the largest insurance company in the United States, announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at $50.15 per share. Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an $85 billion loan. Government aid has since grown to $200 billion. AIG's stock currently trades at less than $1.00 per share.

The Article explains why AIG, a company with $1 trillion in assets and $95.8 billion in shareholders' equity, suddenly collapsed. It then details the terms of the government bailout, explores why it was undertaken, and questions its necessity. Finally, considering a likely legacy of AIG is increased regulation of credit default swaps, the Article describes the current regulatory landscape for CDSs, advocates restoring Securities and Exchange Commission power to regulate them, but cautions against regulating before the CDS market has had a chance to self-correct. 

[Frank Snyder]

Weekly Top 10

After a long hiatus, we’re back with the Weekly Top 10. It's a little heavy on commercial law this week, but there are some very nice contracts pieces that have hit the web in the last couple of months.  Following are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending March 30, 2009).

1 Rethinking Free Speech and Civil Liability, Daniel J. Solove (Geo. Washington) & Neil M. Richards (Washington U.).

2 Bankruptcy Reform and the Financial Crisis, Melissa B. Jacoby (No. Carolina).

3 Limitation of Sales Warranties as an Alternative to Intellectual Property Rights: An Empirical Analysis of iPhone Warranties' Deterrent Impact on Consumers, Marc Lane Roark (Missouri)

4 A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, Debra Pogrund Stark (John Marshall) & Jessica M. Choplin (DePaul).

5 True Sale of Receivables: A Purposive Analysis, Kenneth C. Kettering (New York LS).

6 Intent to Contract, Gregory Klass (Georgetown).

7 Rational Ignorance, Rational Closed-Mindedness, and Modern Economic Formalism in Contract Law, Shawn J. Bayern (Duke)

8 Analytical Jurisprudence and the Concept of Commercial Law, John Linarelli (La Verne).

9 The Sale of the Century and its Impact on Asset Securitization: Lehman Brothers, Stephen J. Lubben (Seton Hall) & Chip Bowles (Greenebaum Doll & McDonald).

10 Public Procurement: Focus on People, Value for Money and Systemic Integrity, Not Protectionism, Steven L. Schooner & Christopher R. Yukins (Geo. Washington).

[Frank Snyder]

Business Associations Limerick of the Week: Cheff v. Mathes

Cheff has great facts, although the facts do not really affect the opinion.  Holland Furnace, it turns out, was a thoroughly corrupt business that was also losing money.  Its means of selling furnaces was to send a crew over to people's houses to "inspect" the furnaces.  The inspectors would often find (or perhaps create) problems and then sell the unsuspecting homeowner a new furnace.  Arnold Maremont, who owned a muffler business (and a lot of modernist art), took an interest in taking over Holland furnace and started buying up shares.

Maremont had a reputation for buying corporations and then liquidating them.  The principals of Holland feared he would do the same to them or at least streamline their business model by selling furnaces the way he sold mufflers -- through retailers -- thus eliminating much of Holland's workforce.  Incumbent Holland management decided to use corporate funds to buy back Holland's stock from Maremont, a defensive measure known as greenmail.  Dissatisfied shareholders filed a derivative action, claiming the payments were improper because motivated by a desire to maintain control of the corporation rather than by the best interests of its shareholders.  

The trial court bought this argument, but its finding was reversed on appeal.  Although the trial court applied the right standard, management's conduct in this case was justified, in the court's view, by the real threat to the corporation's well-being posed by the prospect of Maremont's takeover.  The court deferred to Holland's management's business judgment as to the long-term best interests of the firm.  The deference was misplaced in this instance, because the fraudulent scheme described was discovered, leading to the demise of Holland Furnace.  

Cheff v. Mathes

Cheff, who controlled Holland Furnace,

Said, "Pay Maremont greenmail to spurn us."

The court was not peeved

Because Cheff believed

"That Maremont will buy us and churn us."

[Jeremy Telman]

Sanctity of contract . . . .

AIG Talk

Deborah Post (Touro) and I were guests on a Legal Talk Network segment discussing (what else?) the AIG bonuses.  For those who can't get enough of hearing law professors talk to each other, you can access the podcast here.

One of the most interesting moments came, I thought, with Deborah's suggestion that the current meltdown is something far bigger in scope and effect than previous recessions, and that it has (I'm trying to say it as clearly as she did) essentially changed the lives of all of us in ways that were entirely unexpected a year or two ago.  She suggests that not even AIG insiders, who were ostensibly thinking about future risks, could have really understood the calamity that was about to come about, and thus the doctrine of changed circumstances might justify a court in modifying the contracts

Her point was broader than simply AIG, though; she argued that nearly everyone in America has been touched by this unexpected event.  If that's so, and if this is potentially a valid theory, it might apply to a lot more situations than the employment contracts of bailed-out financial institutions, potentially affecting all kinds of contracts where the meltdown has caused the economics of deals to change.  It's an ineresting idea.

[Frank Snyder] 

For Those Who Did Not See Today's NY Times: More on AIG

The Times today posted this letter of resignation from an AIG executive.  He makes the case in defense of at least some of those executives.  I have yet to see how this letter is received in the blogosphere.  I do not expect a backlash against AIG bashing.

I just want to highlight what is for me the money shot:

I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.
That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.
On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

To me, there is a tremendous tension, even cognitive dissonance, between the first sentence and the second.  On the whole, the main point of the letter is that its author has done nothing wrong, and yet his willingness to donate his bonus (in the face of government threats to take it from him) is presented as a recognition that not all of his earnings are earned.  

This is certainly a very rich text.

[Jeremy Telman]

Business Associations Limerick of the Week: Stuparich v. Harbor Furniture

This is a case about a family-owned close corporation.   The father, Malcolm, Sr. gave a controlling share to his son, Malcolm, Jr., leaving two sisters, Candi and Ann, as minority shareholders.  The siblings disagreed about the direction of the business.  The main business, which involved furniture was stagnating, so the sisters wanted to expand the family's side business in trailer parks. 

But Malcolm had a controlling interest, and while the sisters had the ability to voice their opinions, Malcolm never paid them any heed, and he ran the business according to his own lights.  One of the disputes allegedly involved Malcolm hitting one of the sisters, but the court did not give any weight to that fact. 

The sisters claimed that they were being improperly frozen out and deprived of the benefits of ownership, so they sought a court-ordered dissolution of the company.  The court sided with Malcolm.  The sisters still got their dividends, so their ownership interest in the company was not frustrated.

Stuparich v. Harbor Furniture

Two sisters, Candi and Ann,
Preferred trailers to chairs of rattan.
Dividends they receive
And so they must leave
It to Malcolm the business to plan.

[Jeremy Telman]

Now in Print

Paula D. Baron, The Doctrine of Penalties and the Test of Commercial Justification, 34 U.W. Austl. L. Rev. 42 (2008).

Ashleigh L. Boggs, Note, Interpretation of Oil and Gas Lease Habendum Clauses in Texas and Why Oklahoma Should Maintain its Divergent Approach to Keep Leases Alive (Anadarko Petroleum Co. v. Thompson, 94 S.W.3d 550 (Okla. 2002)), 61 Okla. L. Rev. 341 (2008).

J.W. Carter, Commercial Construction and Contract Doctrine, 25 J. Contract L. 83 (2009).

Adri du Plessis, Pre-contractual Misrepresentation, Contractual Terms, and the Measure of Damages When the Contract is Upheld, 125 S. African L.J. 413 (2008).

Howard Hunter, Good Faith and the Construction of Terms in Commercial Contracts: The American Perspective, 25 J. Contract L. 39 (2009).

Glenda Labadie-Jackson, The Reproductive Rights of Latinas and Commercial Surrogacy Contracts (English Translation), 14 Tex. Hispanic J.L. & Pol'y 49 (2008).

Eric Michael Liddick, Give Me Freedom of Contract or Give Me Death: The Obscurity of Article 44(A) of the Louisiana Code of Civil Procedure, 54 Loy. L. Rev. 602 (2008).

David McLauchlan, Plain Meaning and Commercial Construction: Has Australia Adopted the ICS Principles?, 25 J. Contract L. 7 (2009).

Elisabeth Peden, "Implicit Good Faith" -- or Do We Still Need as Implied Term of Good Faith?, 25 J. Contract L. 50 (2009).

Michael Risch, Virtual Third Parties, 25 Santa Clara Computer & High Tech. L.J. 415 (2009).

Donald Roberston, Force Majeure Clauses, 25 J. Contract L. 62 (2009).

John Tarrant, Partial Failure of Consideration, 34 U.W. Austl. L. Rev. 59 (2008).

Cory S. Winter, Comment, The Rap on Clickwrap: How Procedural Unconscionability is Threatening the E-Commerce Marketplace, 18 Widener L.J. 249 (2008).

R. George Wright, Your Mileage May Vary: A General Theory of Legal Disclaimers, 7 Pierce L. Rev. 85 (2008).

[Keith A. Rowley]

Is the iPhone Actionably Slow?

A New Jersey man is suing Apple, claiming that its network speed is not all it was advertised to be, according to this article in PC World. Plaintiff alleges breach of contract, among other things, because he claims that the service is unreliable, as he is unable to stay connected to the 3G network from his iPhone. In addition, he alleges that Apple misrepresented its network's "speed, strength, and performance."  This is just the latest in a string of lawsuits that the company has faced over the network issues related to the otherwise stupendous iPhone.  

I don't see the need for lawsuits when parody is such an obvious alternative.  For example, a collection of the allegedly misleading real iPhone ads can be found here.*  A parody illustrating real speed can be found here.  Parodies illustrating the bizarre apps proliferation can be found here

and here.

[Jeremy Telman]

*Typepad has rolled out a new editing platform, which is very nice. Unfortunately, I have yet to be 

able to figure our how to embed videos on the new system.

New From the UN: Convention on Contracts for the International Carriage of Goods

 After nearly six years of negotiation, on December 12, 2008, the U.N. General Assembly adopted the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea.  It will be open for signature on September 23, 2009.  According to this press release from the United Nations Commission on International Trade Law (UNCITRAL), the new Convention "aims to create a modern and uniform law concerning the international carriage of goods which include an international sea leg, but which is not limited to port-to-port carriage of goods."  UNCITRAL further notes that "[i]t is expected that harmonization and modernization of the legal regime in this area, which in many countries dates back to the 1920s or earlier, will lead to an overall reduction in transaction costs, increased predictability when problems are encountered, and greater commercial confidence when doing business internationally." 

The full text of the Convention can be found here.

[Jeremy Telman]

More on AIG: The Employee Contracts

The House of Representatives' Legal Services Committee has made the agreements about which everyone is talking available on its website.  The documents can be accessed here.

[Jeremy Telman]

Thanks to AIG, Contract Drafting is Topic of Late Night Talk

Finally, contract drafting becomes a topic of late night television:

Enjoy!

[Meredith R. Miller]

More on the AIG Bonus Contracts

A forum on the NYT site "Room for Debate" includes short reactions from Tom Baker, Charles Fried, Frank Snyder, Glenn Greenwald, James P. Tuthill and Deborah W. Post: check it out here.

The NY Times also has an op-ed by Lawrence Cunnhingham: AIG's Bonus Blackmail.

A Q&A from the WSJ.

[Meredith R. Miller]

Now in Print (Hither and Yon Combined)

A number of interesting-looking pieces have made their way over the transom in recent weeks; and, now that spring break is upon me (yeah!), and several outside promotion and tenure reviews are behind me (yeah!!), I have time to pass news of these items along to you.

I am also combining recent U.S.-based and recent non-U.S. publications on the theory that my annoyance at otherwise well-researched books and articles published outside the U.S. for not citing relevant works in U.S. publications might be more righteous if I stopped segregating the lists of new publications.

Allan Beever, Agreements, Mistakes, and Contract Formation, 20 King's L.J. 21 (2009).

Robert B. Bennett, Jr., Trade Usage and Disclaiming Consequential Damages: The Implications of Just-in-Time Purchasing, 46 Am. Bus. L.J. 179 (2009).

J. Zach Burt, Comment, Playing the "Wild Card" in the High-Stakes Game of Urban Drilling: Unconscionability in the Early Barnett Shale Gas Leases, 15 Tex. Wesleyan L. Rev. 1 (2008).

Gilles Cuniberti, Beyond Contract -- The Case for Default Arbitration in International Commercial Disputes, 32 Fordham Int'l L.J. 417 (2009).

Francesco Giglio, Pseudo-Restitutionary Damages: Some Thoughts on the Dual Theory of Restitution for Wrongs, 22 Can. J.L. & Juris. 49 (2009).

Will Hendrick, Comment, Pay or Play?: On Specific Performance and Sports Franchise Leases, 87 N.C. L. Rev. 504 (2009).

Allen Kamp, No Compensation for Slave Traders: Some Implications, 14 Tex. Wesleyan L. Rev. 289 (2008).

Pedro Barasnevicius Quagliato, The Duty to Negotiate in Good Faith, 50 Int'l J.L. & Mgmt. 213 (2008).

Adam Ship, The Primacy of Expectancy in Estoppel Remedies: An Historical and Empirical Analysis, 46 Alberta L. Rev. 77 (2008).

Dan Jerker B Svantesson, Codifying Australia's Contract Law -- Time for a Stocktake in the Common Law Factory, 20 Bond L. Rev. 92 (2008).

Joel Rothstein Wolfson, An Intellectual Property Lawyer's Reading of UCC § 2-312, 126 Banking L.J. 141 (2009).

[Keith A. Rowley]

Business Associations Limerick of the Week: Pedro v. Pedro

Pedros was a family business run by three brothers.  Alfred discovered that his brothers, Carl and Eugene were embezzling from the business, and he wouldn't shut up about it.  After two investigations, some funds could not be accounted for.  Carl and Eugene repeatedly warned Alfred to move on, but he refused.  Eventually, they were forced to tell employees that poor Alfred had suffered a nervous breakdown and would no longer be able to work.  I mean really -- what choice did they have?  He was also frozen out of the decision-making process and otherwise deprived of the benefits of his ownership share in the corporation. 

They court found that Carl and Eugene had violated their fiduciary duties to Alfred and ordered damages, including his reasonable expectation of lifetime employment, without any requriement that Alfred show that his brothers' misconduct caused actual harm to the corporation,

Pedro v. Pedro

Alred loved Carl and Eugene,
Though they thought him off his bean.
Their breaches frenetic
Made judges splenetic
So they paid for their freeze-out routine.

[Jeremy Telman]

More on Madoff Mistake Case

We previously mentioned a NYT article about a lawsuit to unravel a divorce settlement that included a payout from husband to wife for the right to keep the $5.4 million (or so they thought) Madoff account.  As part of the settlement husband had paid wife $2.7 million in cash, and he now wants the money returned.  From the news article, it appeared that the husband would argue mutual mistake.  We now have a copy of the complaint, and that is, indeed, the husband's argument: count one seeks reformation based on mutual mistake as to the value of the "account."  There is also a count for restitution/unjust enrichment.

[Meredith R. Miller][h/t Isaac Samuels]