ContractsProf Blog

Contracts Law Fallout from the Madoff Affair

The New York Times published a story today about Steven Simkin, a New York attoney who is trying to re-negotiate his divorce settlement because, although he and his wife Laura Blank split their assets evenly after a 2006 divorce, much of his portion of the divorce settlement was invested with Bernie Madoff (pictured).  Simkin wants Blank to pay back some of the millions he lost as a result of Madoff's fraud.  His claim sounds in the doctrine of mutual mistake.

When the parties divorced they split up $13.2 million in assets, $5.4 million of which was in a Madoff account.  Mr. Simkin now claims that there was no account, only a Ponzi scheme.  Ms. Blank counters that there was an account with an uncertain future value and thus the parties were not mistaken as to the crucial fact at issue in the case.  

Six judges have already weighed in on the case, and the Times suggests that a result that favors Mr. Simkin could require the revisiting of other divorce settlements as well as other types of contracts affected by a mutual mistake.  According to the Times, there already has been one copycat case in the divorce settlement context. 

The most recent opinion in the case, from New York's Appellate Division, 1st Department, can be found here.  Last month, that same court granted leave to appeal to New York's highest court, the Court of Appeal, after it ruled 3-2 in favor of Mr. Simkin on Ms. Blank's motion to dismiss on the pleadings.

Here is the heart of the reasoning underlying that conclusion:

Finally, defendant and the dissent ignore the allegations of mutual mistake as to the actual existence of the account itself. Both defendant and the dissent attempt to foreclose plaintiff's claims by transmogrifying the claim of mutual mistake into a claim of mistake in valuation.

The dissent states: "[a]t the time of the agreement, Steven had an account in his name with [Madoff]." Untrue. Steven never had an account in his name with Madoff; on Madoff's own admission there were no accounts within which trades were made on behalf of investors.

The dissent then states, "Steven liquidated part of the account to fund his payments to Laura." Untrue. In Madoff's Ponzi scheme what appeared to Steven and Laura to be a partial liquidation of an account was simply a payment to Steven that came from funds deposited by a more recent "investor" in what the "investor" believed was his own account.

The dissent further observes, "[Steven] did not liquidate the rest of the Madoff account . . . and he continued to invest in it." Untrue. There was no account which could be liquidated, as became apparent when Madoff received $7 billion worth of "liquidation" calls from investors in 2008. Nor was Steven "investing" in an account; his further contributions went directly to pay other "investors" in the scheme.

[JT]

Weekly Top Tens from the Social Science Research Network

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal  
March 31, 2011 to May 30, 2011

Rank	Downloads	Paper Title
1	266	FCPA Sanctions: Too Big to Debar?  Drury D. Stevenson, Nicholas J. Wagoner
2	264	Introduction, Rehabilitating Lochner: Defending Individual Rights Against Progressive Reform  David Bernstein
3	239	A Random Walk: The Federal Circuit’s 2010 Government Contracts Decisions  Steven L. Schooner
4	210	Choice of Court Agreements, Coordination of Proceedings and Provisional Measures in the Reform of the Brussels I Regulation  Christian A. Heinze
5	159	The Morality of Jingle Mail: Moral Myths about Strategic Default  Curtis Bridgeman
6	125	Managing Moral Risk in Contract  Aditi Bagchi
7	124	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz
8	116	Dead Contractors: The Un-Examined Effect of Surrogates on the Public’s Casualty Sensitivity  Steven L. Schooner, Collin D. Swan
9	109	Rhetoric versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts (and Why Contracts Teachers Need Not Teach the Cases)  Lawrence A. Cunningham
10	106	Digital Evolution in Law School Course Books: Trade-Offs, Opportunities, and Vigilance  Lawrence A. Cunningham

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  
March 31, 2011 to May 30, 2011

Rank	Downloads	Paper Title
1	124	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz
2	106	Digital Evolution in Law School Course Books: Trade-Offs, Opportunities, and Vigilance  Lawrence A. Cunningham
3	92	Property Law as the Infrastructure of Democracy  Joseph William Singer
4	81	Fixing Unfair Contracts  Omri Ben-Shahar
5	66	Delaware Dissolves the Glue of Capitalism: Exonerating from Claims of Incompetence Those Who Manage Other People’s Money  Daniel S. Kleinberger
6	62	Gambling by Another Name? The Challenge of Purely Speculative Derivatives  Timothy E. Lynch
7	56	The Promise Principle and Contract Interpretation  Juliet P. Kostritsky
8	53	The Sacred and the Profane Contracts Machine: The Complex Morality of Contract Law in Action  Jean Braucher
9	52	Off Contract Harms: The Real Effect of Liberal Rescission Rights on Contract Price  Michael Aikins
10	41	Equal Opportunity for Arbitration  Hiro N. Aragaki

[JT]

Curb Records Sues Tim McGraw

Country singer Tim McGraw (right) has been sued by his record label, Curb Records, over an alleged breach of contract.  Here is the complaint.  According to the complaint, McGraw has been recording with Curb since 1997.  The dispute relates to when McGraw recorded the master tracks for his new album.  According to this report on Taste of Country, the contract states that the new music must be delivered to the label, “no earlier than 12 months and no later than 18 months" after his prior album.  However, that timetable gets pushed back upon the release of a collection of McGraw's Greatest Hits.  The purpose of these term was to make certain that the music on the new album is "topical and new."  Curb Records claims that McGraw began recording the current album, Emotional Traffic, in 2008 but did not turn in the final cut of the album to the label until 2010.  That early start date renders the music as old as dirt and as stale as the corn bread from last year's Fourth of July parade.

In addition, since Curb recently released a McGraw Greatest Hits album, not only are the masters too old, they are also delivered too early, rendering them both as old as dirt and as premature as a Spring pig born in February.  Curb records alleges that McGraw is trying to fulfill his contractual obligations early and thus be free of them.

Curb seeks a judgment declaring McGraw to be in breach of his agreement with Curb, allowing it to enforce remedies provided in the agreement, and also in agreement of a 2001 settlement that reduced the number of albums McGraw was obligated to record with Curb from six to five.  As a result, if Curb is successful in its suit, McGraw would be obligated to provide yet another album on the terms specified -- or he'd have to somehow buy his way out of that agreement.  They are also seeking consequential damages and injunctive relief that would prevent McGraw from offering his services to anyone other than Curb records until he has completed the terms of his contract. 

As Reuters reports, all of this makes McGraw madder than a wet hen.  He has filed an Answer and Counterclaims against Curb.  He is seeking a declaration that he has delivered all the recordings that he was contractually obligated to deliver to Curb and is now free of further contractual obligations.  He also seeks advances, plus compensatory, consequential and special damages.  The heart of the dispute seems to surround the timing and frequency of Greatest Hits albums that Curb has released.  From McGraw's perspective, the releases prolong both the contract and the periods during which McGraw cannot release new material.  To date Curb has only released on track off the new album, the single “Felt Good on My Lips,” which spent several weeks at the top of the country charts.  If the album's release is delayed, fans will have to see McGraw perform them live, which he plans to do, claiming that the new material is "his best ever."  The whole thing is more complicated than one of Thomas Jefferson's plans for crop rotation.

[JT and Jared Vasiliauskas]

 

Guest Post from Neil O'Donnell on General Dynamics

Mr. O'Donnell is a shareholder in Rogers Joseph O'Donnell, a San Francisco law firm, and co-author, with his partner, Dennis Callahan, of a recent article on the General Dynamics case.  

Given the oral argument, it was not a surprise that Justice Scalia wrote the opinion in General Dynamics v. United States.  But who would have thought that this vigorous champion of applying what he dubbed the “go away principle of jurisprudence” to this nearly 20 year old case would be the author of a unanimous decision by the Court that created the distinct possibility that this litigation would go on for several more years.

For the most part the decision follows a path that could have been predicted by listening to the oral argument.  Scalia for the Court agreed with the Court of Federal Claims that determining whether the Government had violated its obligation to disclose superior knowledge to the contractors and therefore invalidated its termination of the contractors for default, could not be ascertained without probing several layers of facts, all at great risk to national security.  He posited, fairly enough, that each party to the litigation would have the incentive to go right up to the line of state secrets in trying to prove its case, and that, as a result, witnesses may inadvertently disclose secret information.  And he strongly supported, as a policy matter, the conclusion that these risks made the contractor’s superior knowledge defense nonjusticiable.

Faced with this situation, Justice Scalia adopted the approach he had suggested at argument.  First, he rejected the analysis on which the parties had devoted much of their energy in briefing and arguing the case.  He was uninterested in trying to determine who was the “moving party” under the rubric of the Supreme Court’s first (and last)  foray into the application of the state secrets privilege to civil litigation, United States v. Reynolds, 345 U.S. 1 (1953). Rather than prolonging this exercise akin to counting angels on the head of a pin, he sensibly observed that it was the “claims and the defenses together that establish the justification, or lack of justification, for judicial relief.”  And from there he concluded that the invocation of the state secrets privilege in this case made it impossible to determine who was right, whichever party was regarded as making the affirmative claim or asserting the defense.

Justice Scalia then invoked courts’ “common law authority to fashion contractual remedies in Government contracts.”  In so doing, he laid out the legal support for that proposition that neither side had been able to provide him at oral argument.  He used that authority to leave the parties in the position that they were in at the time that the dispute began.  That meant that the contractors did not have to pay back the $1.35 billion in progress payments that they had been paid but not yet earned.  And it meant that the Government did not have to pay the contractors another $1.2 billion in costs of performance that they had incurred but for which they had not yet been reimbursed.  Most outside observers would have agreed with the Court that it would have achieved what Scalia called “rough, very rough, equity” if this had been the final result of the case. 

 Unfortunately, it was not.  Instead, astonishingly, Justice Scalia, seemingly the advocate of finally bringing this decades long dispute to an end, added a paragraph late in the opinion which has every prospect of keeping the litigation going for several years more.  In remanding the case to the Federal Circuit, the Court specifically noted that no court had considered the Government’s claim that the well-established rule that the Government has an obligation to disclose superior knowledge to its contractors might not apply if the information was itself highly classified or if the contract had specified what information would be disclosed.  In this high stakes litigation (with interest, the swing between victory and defeat could be as much as $5 billion) this invitation to the Government to keep the litigation going at the Federal Circuit seems sure to be accepted.  So much for go away jurisprudence.

[Posted, on behalf of Neil O'Donnell, by JT]

 

Weekly Top Ten from the Social Science Research Network

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal  
March 24, 2011 to May 23, 2011

Rank	Downloads	Paper Title
1	1151	Keynote Address – Identifying and Managing Systemic Risk: An Assessment of Our Progress  Steven L. Schwarcz
2	255	FCPA Sanctions: Too Big to Debar?  Drury D. Stevenson, Nicholas J. Wagoner
3	240	Contract is Not Promise; Contract is Consent  Randy E. Barnett
4	233	A Random Walk: The Federal Circuit’s 2010 Government Contracts Decisions  Steven L. Schooner
5	227	Introduction, Rehabilitating Lochner: Defending Individual Rights Against Progressive Reform  David Bernstein
6	204	Choice of Court Agreements, Coordination of Proceedings and Provisional Measures in the Reform of the Brussels I Regulation  Christian A. Heinze
7	157	The Morality of Jingle Mail: Moral Myths about Strategic Default  Curtis Bridgeman
8	146	The Honor of Private Law  Nathan B. Oman
9	117	Managing Moral Risk in Contract  Aditi Bagchi
10	116	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  
March 24, 2011 to May 23, 2011

Rank	Downloads	Paper Title
1	240	Contract is Not Promise; Contract is Consent  Randy E. Barnett
2	116	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz
3	105	Digital Evolution in Law School Course Books: Trade-Offs, Opportunities, and Vigilance  Lawrence A. Cunningham
4	63	Delaware Dissolves the Glue of Capitalism: Exonerating from Claims of Incompetence Those Who Manage Other People’s Money  Daniel S. Kleinberger
5	60	Gambling by Another Name? The Challenge of Purely Speculative Derivatives  Timothy E. Lynch
6	50	Off Contract Harms: The Real Effect of Liberal Rescission Rights on Contract Price  Michael Aikins
7	49	The Promise Principle and Contract Interpretation  Juliet P. Kostritsky
8	48	The Sacred and the Profane Contracts Machine: The Complex Morality of Contract Law in Action  Jean Braucher
9	40	Equal Opportunity for Arbitration  Hiro N. Aragaki
10	40	Fixing Unfair Contracts  Omri Ben-Shahar

[JT]

Bobby Bonilla's Contract

Fascinating!  As reported here in the Wall Street Journal blog, the Mets are about to start paying Bobby Bonilla for doing nothing!  They are obligated to do so under the terms of their agreement with Bonilla from 2000 when they bought out the final year of his contract.  Beginning July 1st and continuing for another 25 years, the Mets will pay Mr. Bonilla $1.2 million/year.  

Although Bonilla had been a highly productive player for much of his career, he never lived up to the tough New York standards, and neither party seemed happy with the relationship.  In his last season with the Mets, Bonilla hit .160 in 60 games.  He then notoriously showed his disdain for the team and its prospects by playing cards with Rickey Henderson during the National League championship series.  The Mets thus agreed to defer his $5.9 million salary for the last season just in order to be rid of him.  

The deal was not unprecedented and seemed to be in the best interest of both parties at the time.  The Mets freed up enough room under the salary cap to lure some good players and become contenders in 2000.  However, long-term the deferred salary is a drain on the Mets' resources.  Because of the agreed-upon 8% interest, Bonilla will eventually collect $30 million from the Mets. Still, Adam Meshell of NJ.com provides an intelligent defense of the agreement here.  

All hail the power of contracts!

[JT]

Unanimous Decision in General Dynamics: Heads We Win; Tails You Lose!

Back in January, we hosted a roundtable discussion on the General Dynamics v. United States/Boeing v. United States case that was decided today by the U.S. Supreme Court.  The last post from our roundtable, which includes links to all the previous posts can be found here.  

Bobby Chesney provides an able synopsis of the case on the Lawfare blog here.  He also ventures a paragraph about the limited scope of the opinion, which is also highly persuasive.  

The issue in the case is what remedy is available to a government contractor when a court dismisses its prima facie valid affirmative defense on the ground that the issue cannot be litigated without posing a reasonable danger of the disclosure of national security secrets.  During oral argument, Justice Kagan noted that the government's position seemed to be that, when it comes to the invocation of the state secrets privilege, it can't lose.  It can rely on the state secrets privilege to withhold documents and thus prevent a party from making out a prima facie case or an affirmative defense, and it can also assert that the same privilege prevents it from asserting its own claims or affirmative defenses, all of which should result in the dismissal of the suit.  At the time, Justice Kagan seemed to be expressing incredulity at the government's position, but that is the position that the court has adopted -- unanimously -- in an opinion written by Justice Scalia.  Apparently, government contractors are like highwaymen.  The courts leave the parties in the state that it found them.  General Dynamics and Boeing are lucky they weren't hanged.

In upholding the lower courts' rulings on the application of the state secrets privilege, Justice Scalia invoked the Court's earlier rejection, in United States v. Reynolds of a proffered analogy to the criminal context in which the government must abandon any claims that it cannot make without recourse to secret evidence.  In the civil context, "the Government is not the moving party, but is a defendant only on terms to which it has consented."  And the government has not consented to civil trials that threaten the disclosure of national security secrets.  

But then Scalia proceeds to point out that Reynolds is not relevant in this context.  Reynolds simply involved an evidentiary ruling that allowed the government to refuse to produce certain documents.  In fact, Scalia acknowledged, the language he relied on in the preceding paragraphs was dicta -- and dicta from a case that is not really on point.  

The cases that are on point are the devastating one-two punch of Totten and Tenet v. Doe.  This case, like those, is simply non-justiciable to the extent that the resolution of any issues necessarily threatens the disclosure of national security secrets.  Justice Scalia acknowledges that this case is distinguishable from those others, which involved agreements that were secret by their very nature and ab initio, while secrecy only became an issue with respect to the set of agreements at issue in these cases when the government asserted the state secrets privilege.  Six of one, half-a-dozen of the other, says Justice Scalia.  

The Court of Federal Claims made a mess of things by allowing some claims to proceed while barring others.  The cleanest solution, the Court unanimously held, "is to leave the parties where they stood when they knocked on the courthouse door."  The petitioners take nothing on their claims and the government takes nothing on its claims.  Justice Scalia pronounces this "rough, very rough, equity."  

It's not really "heads I win; tails you lose" because the government's claims are also dismissed.  And now that the rule is clear, Justice Scalia contends that contractors can better protect themselves by demanding progress payments.  That may be true, and Justice Scalia and others may also be right that cases like this one are so unusual that the consequences of this decision may be limited to the parties to the case.  Still, given that the government alone has the power to invoke the state secrets privilege and bring an end to litigation, there is every reason for concern that it will do so opportunistically.

Thus ends[?] about twenty years of litigation.

Lyle Denniston provides a very different take on the case over at the SCOTUSblog.  He reads the opinion as leaving many questions undecided and remanding to the trial court to work out what parts of the case can proceed without involving state secrets.  

He suggests the following unresolved issues remain:

For General Dynamics and Boeing, the likelihood is that they will get to keep $1.35 billion that they were paid along the way (payments that the Pentagon does not dispute), but they have at most a diminished chance of holding on to another $1.35 billion paid for work that was not completed as they struggled, ultimately without success, to develop the so-called “A-12 Avenger,” a carrier-based plane that would have many of the enemy-evading detection characteristics of land-based “stealth” fighters.   Moreover, they may have next to no chance to collect another $1.2 billion they seek in damages for the Navy’s cutoff of the contract.

For the Pentagon, the decision gives it a new opportunity, in lower courts, to show that it never promised the contractors full access to highly classified data about “stealth” technology, so they cannot blame the Navy for the fact that they could not develop the know-how to complete the Avenger project on time.   If the Pentagon succeeds on that point, it could open the contractors to a new finding that they defaulted, and that cannot be excused.  Whether that would mean they must pay back the extra $1.35 billion is not clear at this point.

I read Scalia's "go away" message a bit more strongly and in any case hope that the parties are now so exhausted that they will walk away without throwing more good money after bad.  

[JT]

 

Hottest Download Ever!

The proceedings of the symposium held on March 25, 2011 at Suffolk University Law School, Contract as Promise at 30:  The Future of Contract Theory, are now available for free download from iTunes.

If you click on the link below, the Suffolk page will open in iTunesU.  Click on the icon for Continuing Legal Education, and you'll get a list of interesting podcasts for download, including the four panels, introduction, and closing session of the symposium.

http://itunes.apple.com/institution/suffolk-university/id388450120

The twelve minute segment contains Prof. Fried's opening remarks.

The other segments are:

How Moral Can a Contract Be?

Barbara Fried (Stanford), "What's Morality Got to Do With It?  The Limits of Non-consequentialism in Contract Theory"
Randy Barnett (Georgetown), "Contract is Not Promise; Contract is Consent"

Jean Braucher (Arizona), "The Sacred and the Profane Contract Machine:  The Complex Morality of Contract Law in Action"

Gregory Klass (Georgetown), “Promises, Etc.”

Commenter:  T.M. Scanlon (Harvard)  


Ethics and Economics of Promising

Richard Craswell (Stanford), "Promises, Prices, and Pluralism"
Avery W. Katz (Columbia), "Virtue Ethics and Efficient Breach"

Daniel Markovits/Alan Schwartz (Yale), "The Expectation Remedy and the Promissory Basis of Contract"

George Triantis (Harvard), "Promissory Autonomy, Imperfect Courts, and the Immorality of the Expectation Damages Default" 

Commenter:  Seana Shiffrin (UCLA)

Promise Theory, Extended, Applied, and Critiqued
Juliet Kostritsky (Case Western), "The Promise Principle and Contract Interpretation"

Lisa Bernstein (Chicago), "Merchant Contract as Promise"

John C.P. Goldberg (Harvard)/CurtisBridgeman (Florida State), "Contract, Tort, and Promise"

Rachel Arnow-Richman (Denver) "A Contract Theory of Employment"

Commenter:  Carol Chomsky (Minnesota)

The Future of Contract Theory

Henry E. Smith (Harvard), "The Equitable Dimension of Contract"

Roy Kreitner (Tel Aviv), "On the New Pluralism in Contract Theory"

Nathan Oman (William & Mary), "Promise and Private Law"

Commenter:  Robert Scott (Columbia)

The remaining segment is Prof. Fried's response/reaction at the end of the day.

[JT, w/ hat tip to Jeff Lipshaw]

Katy Perry's 45-page Contract Rider

We love celebrity contract riders here at ContractsProf blog.  Excerpts of Katy Perry's 45-page rider are available at thesmokinggun.com.  (If you don't know who Katy Perry is, you are reading too much of this blog and instead you could have learned that California Girls are scantily glad, wear stilettos on the beach and are, therefore, unforgettable.)  

Highlights of the rider include a ban on carnations, a 23-point "principle driver policy" for chauffeurs, and the requirement of a spacious dressing room "piped or draped in cream or soft pink."

Take that Van Halen!

[Meredith R. Miller] 

Weekly Top Ten from the Social Science Research Network

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal  
March 17, 2011 to May 16, 2011

Rank	Downloads	Paper Title
1	1140	Keynote Address – Identifying and Managing Systemic Risk: An Assessment of Our Progress  Steven L. Schwarcz
2	241	FCPA Sanctions: Too Big to Debar?  Drury D. Stevenson, Nicholas J. Wagone
3	228	Contract is Not Promise; Contract is Consent  Randy E. Barnett
4	227	A Random Walk: The Federal Circuit’s 2010 Government Contracts Decisions  Steven L. Schoone
5	213	Introduction, Rehabilitating Lochner: Defending Individual Rights Against Progressive Reform  David Bernstein,
6	186	Choice of Court Agreements, Coordination of Proceedings and Provisional Measures in the Reform of the Brussels I Regulation  Christian A. Heinze
7	154	The Morality of Jingle Mail: Moral Myths about Strategic Default  Curtis Bridgeman
8	136	Privacy Law Fundamentals  Daniel J. Solove, Paul M. Schwartz,  George Washington University Law
9	136	The Honor of Private Law  Nathan B. Oman,
10	114	Managing Moral Risk in Contract  Aditi Bagchi

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  
March 18, 2011 to May 17, 2011

Rank	Downloads	Paper Title
1	229	Contract is Not Promise; Contract is Consent  Randy E. Barnett,
2	109	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz
3	103	Digital Evolution in Law School Course Books: Trade-Offs, Opportunities, and Vigilance  Lawrence A. Cunningham
4	62	Delaware Dissolves the Glue of Capitalism: Exonerating from Claims of Incompetence Those Who Manage Other People’s Money  Daniel S. Kleinberger
5	51	Gambling by Another Name? The Challenge of Purely Speculative Derivatives  Timothy E. Lynch,
6	43	Off Contract Harms: The Real Effect of Liberal Rescission Rights on Contract Price  Michael Aikins
7	38	Equal Opportunity for Arbitration  Hiro N. Aragaki
8	38	The Sacred and the Profane Contracts Machine: The Complex Morality of Contract Law in Action  Jean Brauche
9	34	Beyond the Inevitable and Inadequate Regulation of Bankers: A Comment on Painter  Lyman Johnson
10	34	The Promise Principle and Contract Interpretation  Juliet P. Kostritsky

 

[JT]

SCOTUS Decides Schindler v. U.S. ex rel. Kirk

We blogged about this case one year ago when the Second Circuit ruled in favor of Mr. Kirk.  Here's how we described the case back then:

Daniel Kirk, a Vietnam War veteran, worked at Millar Elevator Industries beginning in the late 70s.  In 2002, Millar's operations were integrated into those of the Schindler Elevator Company.  In 2003, Millar was demoted and resigned.  Eight months later, Kirk sued, alleging that he had been fired in violation of VEVRAA, the VIetnam Era Veterans Readjustment Assistance Act.  That claim was dismissed and the dismissal was affirmed last year.  

Meanwhile, Kirk brought suit under the False Claim Act in the name of the U.S. government.   In 2007, the government elected not to intervene and Kirk pursued his claim as a relator.  His suit alleged that Schindler had entered into hundreds of contracts subject to VEVRAA requirements but that Schindler had failed to comply with those requirements.  Among other claims, Kirk alleged that Schindler failed to submit required VETS-100 reports in some years and had filed false VETS-100 forms in others.   The district court dismissed the action finding, among other things, that the claim was bared under the FCA, 31 U.S.C. s. 3730(e)(4), which provides that information that has been publicly disclosed cannot be a basis for a FCA claim.  The information at issue here related to the allegedly missing and/or falsified VETS-100 forms that Mr. Kirk had discovered through FOIA requests.  

The relevant section of the FCA provides:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 

The Second Circuit vacated and remanded. There was no question that Mr. Kirk was not the original source of the information, so the only question whether a FOIA request counts as "public disclosure" for the purposes of the statute.  The Third Circuit answered that question in the affirmative.  The Ninth Circuit concluded that only a FOIA request that results in the production of an "enumerated source;" that is, one of the types of sources expressly named in the statute, creates a jurisdictional bar to an FCA claim.  The Second CIrcuit followed the Ninth.  It was supported in its position by the U.S. government as amicus curiae.

At that time, we suggested that the rules regulating when the False Claim Act's jurisdictional bar precludes qui tam actions are complicated.  Mr. Kirk, the relator in the case, commented that, in his view, they are not complicated at all and the Second Circuit was obviously correct in its finding that the jurisdictional bar did not preclude his claim.

The Supreme Court split along party lines 5-3 (Justice Kagan did not participate) and reversed, with Justice Thomas writing for the majority.  The majority held that a government agency's response to a FOIA request constitutes a "report" and thus falls within the FCA's jurisdictional bar.  Justice Ginsburg wrote a short dissent, basically endorsing the Second Circuit's approach.  The opinion can be found here.  

SCOTUSblog provides coverage here.  

[JT]

Law and Ethics in International Transactions

Early in my practice career, I did a fair amount of white collar criminal work, usually involving contracts with the U.S. government. Later I spent a good deal of time doing internal investigations on behalf of clients who had stumbled over some in-house wrongdoing, to help determine what steps ought to be taken. I had the good luck to be mentored by (and later be a partner of) one of the most ethically upright and honest lawyers I've ever known. And I've always remembered his advice. "At the end of the day," he said, "if somebody is going to have to go to jail, make sure it's your client . . . not you." He was firmly of the opinion that the Allenwood Federal Correctional Complex (aka "Club Fed") was despite the name a much better place to visit than to live.

Now Mike Ross (left), another one of my former colleagues at my old firm -- who went on to a very successful career as an in-house counsel and then a lecturer at UVA and Berkeley -- has taken up the thread with a new book, Ethics and Integrity in Law and Business, out soon from Lexis/Nexis. It's a Professional Responsibility book that seems to be specially aimed at the perils transactioinal and other business lawyers face. I don't have a link yet, but I'm told you can get a review copyon its release in August through your friendly neighborhood Lexis/Nexis rep.

FGS

New Transnational Commercial Law Blog at NYU

The Center for Transnational Litigation and Commercial Law at NYU recently launched a new blog,dedicated to, well, litigation and commercial law around the globe. It's called Transnational Notes and is edited by Franco Ferrari, with assists from other NYU Law faculty and students. It also welcomes outside contributions.

The first month or so has already produced a number of interesting posts on such topics as the CISG, international arbitration, and cross-border mobility of European corporations. It bids fair to be a very popular and useful resource to keep up on new developments from one of the country's top commercial law centers.

FGS (via Clay Gillette)

Guest Post by Steven Feldman on the Horn Case

Our recent post on Horn v. United States elicited even more comments than our posts usually do -- i.e., more than none.  It has also generated this thoughtful response from friend of the blog and attorney for the U.S. Army Corps of Engineers, Steven Feldman (pictured), which we present below.

The Horn decision failed to mention that a conflict exists within the Federal Circuit's lower tribunals on whether Federal Acquisition Regulation (FAR) requirements contract clause 52.216-21 Alt I, analyzed in Horn, is valid. The Armed Services Board of Contract Appeals has explicitly rejected the Court of Federal Claims approach.  Disagreeing with Ralph Construction, Inc. v. United States, 4 Cl. Ct. 717 (1984), heavily relied on in Horn, the board said the following about this clause in Dynamic Science, Inc., ASBCA 29510, 85-1 BCA 17,710, 1984 WL 13911, 

In Maya Transit Co., ASBCA No. 20186, 75-2 BCA 11,552, the contract contained the same provision. We characterized the contract as a "limited form" requirements type. The limitation of the requirement to that portion that the Government did not choose to meet from its own capabilities did not render the promise illusory particularly because the Government was precluded from expanding its capabilities during contract performance at the expense of the contractor.

Later Board decisions also disapprove the Court of Federal Claims' reasoning.  See Operational Service Corp., ASBCA 37059, 93-3 BCA 26,190, 1993 WL 243152.  Because the Federal Circuit has not resolved the conflict, and because individual Court of Federal Claims judges are not bound by other decisions from the same court, it is puzzling why Judge Smith failed to consider contrary interpretations of FAR 52.216-21, Alt I. 

I also would like to bring to your attention another case from the Court of Federal Claims, Howell v. United States, 51 Fed. Cl. 516 (2002) that uses a Cardozo-like approach from the Restatement (Second) of Contracts to imply a missing consideration term in an Indefinite Delivery, Indefinite Quantity (ID,IQ) contract. As noted in Horn, Judge Smith considered the alternative that the contract could have been an ID, IQ contract rather than a requirements contract. The court in Horn did not cite the Howell decision, which is at odds with the Horn analysis. 

Here is what I have written about the Howell case (Tennessee Practice Services: Contract Law and Practice, Section 5:10):

In Howell v. U.S., 51 Fed. Cl. 516 (2002), the United States Court of Federal Claims analyzed a self-described IQ contract in a federal government contract that did not contain the requisite minimum quantity, although it did reflect the parties' established intent that there would be some minimum quantity.  The court noted that the inclusion of standard government contract clauses from the Federal Acquisition Regulation required the agency to purchase some minimum quantity of supplies or services, although the clauses were not filled in with the specific amounts. The court further noted that the parties' conduct after contract execution reflected their mutual belief that a binding arrangement existed. Accordingly, the court relied on the Restatement (Second) of Contracts, § 204, which permits a court to supply a missing term in a reasonable way where the record otherwise establishes a sufficiently definite and binding arrangement. The Howell court employed this theory to incorporate a minimum quantity term, which was more than a nominal amount, so that there would be mutuality of obligation.

The Howell decision reflects the courts' general dissatisfaction with technical consideration objections where the circumstances show the parties' intent to be bound. It bears emphasis, however, that the Howell court found an enforceable contract only because the record showed that these particular parties clearly intended to limit the buyer's freedom of choice. If the facts were that the buyer did have total discretion on whether it could purchase from the seller, then the Court of Federal Claims undoubtedly would have deemed the promises illusory for lack of consideration.

As Judge Smith ruled in Horn, both parties entered the arrangement with the intent to form a contract. The applicable clauses in Horn did limit the buyer's freedom of choice because the government promised to use Ms. Horn for services the government could not fulfill in-house. As in Howell, the record in Horn reflected a basis for determining a fair minimum obligation. Because the contract in Horn did not reserve the agency's total discretion to purchase all its needs from any other dental hygienists, Judge Smith should not have found the promise illusory for lack of consideration. 

Lastly, I disagree with your final thought that government lawyers either do not understand the FAR clauses or are willfully exploiting them "to take unfair advantage of their contracting partners." It was very unlikely that any government lawyers were involved in the award of this contract because the low dollar value ($49,920) is far below the legal review thresholds in most government agencies, which is typically $500,000. Further, I do not see any evidence of government overreaching in Horn and Judge Smith did not find any, either. As he commented, "[E]ven the government officials with whom she dealt did not seem to understand the document's lack of enforceability." Thus, I see some inadvertent oversights by both contracting parties that could have been resolved upfront with more attention to consideration issues.

[Posted, on behalf of Steven Feldman, by JT]

HuffPo on Schooner & Swan on Dead Contractors

Contracts Prof and friend of the blog, George Washington University Law School Professor Steven Schooner (pictured) has a new article up on SSRN that is making headlines in the nearly mainstream media.  Over at the Huffington Post, David Isenberg reports on Professor Schooner's new scholarship, co-authored with GWU Law student Collin D. Swan, called "Dead Contractors: The Un-Examined Effect of Surrogates on the Public's Casualty Sensitivity."  Here is the abstract from SSRN: 

Once the nation commits to engage in heavy, sustained military action abroad, particularly including the deployment of ground forces, political support is scrupulously observed and dissected. One of the most graphic factors influencing that support is the number of military soldiers who have made the ultimate sacrifice on the nation’s behalf. In the modern era, most studies suggest that the public considers the potential and actual casualties in U.S. wars to be an important factor, and an inverse relationship exists between the number of military deaths and public support. Economists have dubbed this the "casualty sensitivity" effect.

This article asserts that this stark and monolithic metric requires re-examination in light of a little-known phenomenon: on the modern battlefield, contractor personnel are dying at rates similar to - and at times in excess of - soldiers. The increased risk to contractors’ health and well-being logically follows the expanded role of contractors in modern governance and defense. For the most part, this "substitution" has taken place outside of the cognizance of the public and, potentially, Congress. This article explains the phenomenon, identifies some of the challenges and complexities associated with quantifying and qualifying the real price of combat in a modern outsourced military, and encourages greater transparency so that the public can more meaningfully participate in "the great American experiment."

The article is forthcoming the Journal of National Security Law & Policy.  As Isenberg notes, the article and its subject matter deserve our attention.

[JT]

Texas Criminal Lawyers Seek to Enforce Contract with Exonerated Defendants

Yesterday, the New York Times published a lengthy story about contracts between attorney and lobbyist Kevin Glasheen and his clients, exonerated prisoners who hired Mr. Glasheen to to sue municipalities and the state of Texas for wrongful imprisonment in return for a 25% contingency fee.  Instead of filing suit, Mr. Glasheen lobbied the legislature to increase the payout to the wrongfully imprisoned.  He was successful.  Instead of being statutorily entitled to $50,000/year, the exonerated are now entitled to $80,000/year.  

According to the Times, on that basis, Mr. Glasheen sent Steven C. Phillips, who had spent 25 years behind bars, a bill for over $1 million.  A hefty portion of the fee would go to the co-founder and chief counsel of the Texas Innocence Project, apparently as a referral fee.  Mr. Phillips sued, presumably seeking a declaration that he has no obligation to pay.  Another exonerated prisoner joined the suit.  In addition, the state bar association initiated a disciplinary action, as described here in the Lubbock Avalanch-Journal.  According to the Times, the bar association characterizes the fees as prohibited and unconscionable.  State legislation is in the works to prevent the collection of the such fees going forward.

Mr. Glasheen characterizes the controversy as a typical fee dispute and prognosticates dismissal.  "Meanwhile, I've got drug behind the pickup truck."  I'm not fluent in Texan, but that sounds to me like a reference to the horrific murder of James Byrd, Jr.  Wow.  

The contracts issue will depend on the actual contractual language, of course, which we do not have.  Was Glasheen to be compensated for filing a law suit on his clients' behalf (which he did not do) or for lobbying, (which he did)?  

Moreover, I don't get the math.  As the article points out, the exonerated get their annual payments until they die or are convicted of another felony.  But even in the best case, Mr. Glasheen should only be entitled to 25% of the difference between $80,000/year and $50,000/year multiplied by 25.  That comes to $187,500, which would then have to be discounted to present value.  In short, nothing like $1 million.

Mr. Glasheen claims he has already collected $5 million in fees from other exonerated prisoners.  The Innocence Project also rises to Mr. Glasheen's defense, arguing in essence that they partnered with him because he is the best at getting money for exonerated prisoners, and you have to pay to get that kind of representation.  Why doesn't Steven Phillips want to pay?  According to the Times, Glasheen has a simple explanation: Phillips is a sociopath conditioned by the prison system to lie to survive.  

He's the best alright.

[JT]

Court of Federal Claims Rules on Requirements Contract

In Horn v. United States, the plaintiff is a dental hygienist who claims that the U.S. Federal Bureau of Prisons (the BoP) breached a contract for the provision of dental hygiene services that it entered into in 2005 with her.  According to the complaint, Horn was to perform such services at a federal prison in Marion, Illinois.  Horn alleges that the BoP breached the contract by failing to utilize her in accordance with the contract's estimated quantity schedule and that it was negligent in estimating its needs when it issued the contract solicitation.  She sued for lost wages.  The government moved for summary judgment, arguing that it was not bound by its estimate of services needed, and on May 3, 2011, the Court of Federal Claims granted the government's motion to dismiss.

The contract provided that Horn would provide up to a maximum of 1,560 one-hour dental hygiene sessions over the term of the contract.  Horn was thus entitled to a fixed price of $49.920.  However, the contract was specifically designated a requirements contract and contained the following provision:

(a) This is a requirements contract for the supplies or services specified, and effective for the period stated, in the Schedule. The quantities of supplies or services specified in the Schedule are estimates only and are not purchased by this contract. Except as this contract may otherwise provide, if the Government’s requirements do not result in orders in the quantities described as “estimated” or “maximum” in the Schedule, that fact shall not constitute the basis for an equitable price adjustment.

The contract further specified that the purpose of the contract's schedule was simply to estimate the BoP's requirements in excess of the services it furnished itself with its own in-house hygienist.

One month after Horn was awarded the contract, the BoP informed her that it was hiring an in-house hygienist and would not longer need her services.  She had provided only 130 sessions.  While Horn regarded this as a breach of contract, the BoP believed otherwise since it was not bound by the estimates provided in the contract.  Horn pointed to deposition testimony and argued that the BoP was in the process of hiring an in-house hygienist before it awarded the contract to her.  She argued that the BoP had breached a duty of good faith in contracting by failing to provide a reasonable estimate of the services for which it was contracting.

The Court first determined that, despite the unambiguous boilerplate provision q uoted above, the contract in question was not a requirements contract because a requirements contract demands exclusivity and here the BoP committed itself only to use Horn for dental hygiene services beyond those that it could furnish itself.  According to the Court, the parties intended to form a requirements contract but failed to do so.  

The Court next considered whether the contract was enforceable as an indefinite quantities contract.  However, because the contract failed to specify a minimum quantity of services to be provided, it could not qualify as an indefinite quantities contract.  The Court thus concluded that the contract, being neither a requirements contract nor an indefinite quantities contract, was unenforceable for lack of mutuality and consideration.  The good news?  Horn gets to keep what she was paid for the 130 sessions she did perform. 

The Court then proceeds to lament the governments practice of continuing to use a standard form that appears to innocent third parties to be a contract when it is not.  According to the Court, the government has been on notice since 1929 that this kind of form contract is unenforceable.  

Oh, come on!!  Do justice, sir, do justice!  Cardozo would have no difficulty implying any terms necessary to render the contract enforceable.  It makes no sense to permit the government to use a form contract that will mislead people into thinking they are due a set wage -- the contract specified $49,920 -- and let it escape paying them that wage on the basis of legal doctrine so complex that the government's lawyers either cannot grasp it or are willfully exploiting it to take unfair advantage of their contracting partners. 

[JT]

Weekly Top Ten from the Social Science Research Network

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal  
March 10, 2011 to May 9, 2011

Rank	Downloads	Paper Title
1	1087	Keynote Address – Identifying and Managing Systemic Risk: An Assessment of Our Progress  Steven L. Schwarcz
2	227	FCPA Sanctions: Too Big to Debar?  Drury D. Stevenson, Nicholas J. Wagoner
3	224	Contract is Not Promise; Contract is Consent  Randy E. Barnett
4	217	A Random Walk: The Federal Circuit’s 2010 Government Contracts Decisions  Steven L. Schooner
5	199	Introduction, Rehabilitating Lochner: Defending Individual Rights Against Progressive Reform  David Bernstein
6	195	Trust, Expert Advice, and Realtor Responsibility  Brent T. White
7	172	Choice of Court Agreements, Coordination of Proceedings and Provisional Measures in the Reform of the Brussels I Regulation  Christian A. Heinze
8	141	The Morality of Jingle Mail: Moral Myths about Strategic Default  Curtis Bridgeman
9	130	The Honor of Private Law  Nathan B. Oman
10	125	Privacy Law Fundamentals  Daniel J. Solove, Paul M. Schwartz

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  
March 11, 2011 to May 10, 2011

Rank	Downloads	Paper Title
1	225	Contract is Not Promise; Contract is Consent  Randy E. Barnett
2	102	Digital Evolution in Law School Course Books: Trade-Offs, Opportunities, and Vigilance  Lawrence A. Cunningham
3	101	The Myth of Efficient Breach: New Defenses of the Expectation Interest  Daniel Markovits, Alan Schwartz
4	58	Delaware Dissolves the Glue of Capitalism: Exonerating from Claims of Incompetence Those Who Manage Other People’s Money  Daniel S. Kleinberger
5	41	Gambling by Another Name? The Challenge of Purely Speculative Derivatives  Timothy E. Lynch
6	39	Off Contract Harms: The Real Effect of Liberal Rescission Rights on Contract Price  Michael Aikins
7	37	Equal Opportunity for Arbitration  Hiro N. Aragaki
8	31	Beyond the Inevitable and Inadequate Regulation of Bankers: A Comment on Painter  Lyman Johnson
9	31	The Sacred and the Profane Contracts Machine: The Complex Morality of Contract Law in Action  Jean Braucher
10	28	Private Law Theory and Corrective Justice in Trade Secrecy  Eric R. Claeys

[JT]

South Park Explores Click-Through Contracts of Adhesion

South Park creators, Trey Parker and Matt Stone (pictured at left), have taken time out from their hit Broadway musical to lampoon two more mainstream religions: contracts doctrine and Apple.  

Mashable provides a nice excerpt from the April 27, 2011 episode of South Park, which is a send-up of both Apple's recently disclosed consumer surveillance activities and the terms and conditions that may or may not be included when you agree to a weekly update of your version of iTunes.  Most of the episode is in poor taste, even for South Park, but the over-the-top scatological humor may be justified as a means of demonstrating the absurdity of binding consumers on the basis of their having clicked "I agree." 

Still, if Parker and Stone could have exercised a little unwonted self-control, they would have done us contracts profs a big favor, as we could have covered e-contracts and contracts of adhesion simply by hitting the play button on our DVD players.

[JT]

Breaking Contracts News From Wisteria Lane

This blog has been subjected to searing criticism from certain quarters and has been dubbed "The People Magazine of Law Blogs."  Ouch.  Undeterred, we continue to bring our readers the good stuff.  If you want high-minded, wonky policy-oriented analysis, I suggest you try this blog -- and after you wake up drooling into your keyboard, you can move on to this one.  It won't be long before you come back to your famliar bookmark for the latest about Paris, Lady Gaga, Charlie Sheen and the remainder of our royal family. 

So, as we were saying.  Last year, Nicollette Sheridan sued Marc Cherry and various entities associated with the hit television series "Desparate Housewives."  Her first amended complaint can be found here.  As the New York Times reported today, some of the juicy allegations, including assault and battery and gender violence have been dropped, but the case is now set to proceed to trial on the juiciest allegations of all: wrongful and retaliatory termination.  Ahhh, that's the stuff!

Those who tend to confuse "Desperate Housewives" (DH) with the various "Real Housewives" reality television series might be confused by a lawsuit brought by a woman whose character, Edie Britt, was killed in a car crash during the show's fifth season, but Sheridan alleges that Cherry and the other people and entities behind the scenes at DH plotted to have her character -- not her, because she is desparate, not real -- killed off in breach of contract. 

The complaint alleges that Sheridan was guaranteed compensation on a per-episode basis through the show's seventh season.  However, Sheridan alleges that Cherry created a hostile work environment -- especially for her -- and that Cherry's hostility towards her culminated in September 2008 when he hit her with his hand across her head and face. She reported this conduct to ABC executives who concluded that Cherry "simply gave her a light tap on the side of her head for the sole purpose of privding direction for a scene they were rehearsing."  In February 2009, Sheridan was informed that her character was to be killed off.  She believes that this was a retaliatory act.   The judge found sufficient questions of fact on that issue to send the case to trial.

She alleges damages of $20 million.

[JT]