ContractsProf Blog

Will Blockchains End the Need for Specific Performance? [File this in: The Future]

An article by Andrew Hinkes at Inside Counsel begins:

Imagine a world where specific performance of contracts is no longer a cause of action because the contracts themselves automatically execute the agreement of the parties. Or where escrow agents are replaced by rule- and software-driven technology. Imagine instantaneous recording of property records, easements and deeds. Imagine a world where an auto owner who is late on his payment will be locked out of his car. While these scenarios may seem to come from a futuristic fantasy world, innovations offered by the Bitcoin 2.0 generation of technology may create a world where these seeming marvels are an every-day occurrence, and technology renders some contract causes of action obsolete.

How could that be?  Hinkes explains:

Bitcoin and other virtual currencies are powered by blockchain technology, which maintains and verifies all transactions in that virtual currency through a massive, publically available ledger. The transparency created by the blockchain eliminates the need for trusted third parties, like credit card processors or banks, to take part in these transactions. Because anyone can see the transactions, virtual currency cannot be transferred to more than one party, or “double spent,” which is a key feature that preserves the integrity of the blockchain system. This same blockchain technology can be purposed to facilitate, verify and enforce the terms of agreements automatically without the need for human interaction using what are termed “smart contracts.”

The blockchain, of course, cannot physically enforce a contract, or actually compel a person or entity to do anything. Instead, the blockchain can be used to enforce certain pre-determined rules that can move an asset from person to person by agreement. Ownership of goods could be associated with a specialized coin, which can be transferred between parties along with payment in a virtual currency system, or in a specialized implementation of blockchain technology.

Hinkes provides an example of how the technology can ensure performance:

Examining a simple real estate transaction can demonstrate how smart contracts could drastically alter the way business is conducted. Presently, Party A and Party B would enter into a contract that requires Party A to pay $200,000.00 to Party B in exchange for Party B agreeing to convey title to Party B’s condominium unit to Party A upon receipt of payment. If Party A pays the money, but Party B later refuses to convey title, Party A is required to hire an attorney to seek specific performance of that contract, or to obtain damages. The determination of the outcome will be made by a third party- a judge, jury, or arbitrator.

Using a smart contract, however, avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, Party A and Party B can agree to the same transaction, but structure it differently. In this scenario, Party A will agree to pay $200,000.00 worth of virtual currency to Party B, and Party B will agree to transmit the title to the condominium in a specialized type of coin on the blockchain. When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialized coin which signifies the title to the condominium at issue to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publically available record on the blockchain.

"Simply Incredible":

 

Well worth a read in its entirety.  Technology is posed to change contract performance in some pretty significant ways, ways that make what we've been doing for years look like a Tandy 2000.

 

Valparaiso University Law School Is Hiring!

FULL TIME, TENURE TRACK

VALPARAISO UNIVERSITY LAW SCHOOL (VULS) is seeking to fill a full-time, tenure track position with someone interested in teaching contracts and business courses.  Applications from entry level and experienced teachers are welcome.  Valparaiso University is located in Valparaiso, Indiana, a small college town near the southern shore of Lake Michigan that is approximately fifty miles from downtown Chicago.  The town has excellent schools and affordable housing.  VULS is an equal opportunity employer with a diverse student body; 47% of the members of the class entering in August 2013 are underrepresented minorities.  Please contact Professor Ivan E. Bodensteiner, Chair of the Appointments Committee, at Valparaiso University Law School, 656 Greenwich Street, Valparaiso, Indiana, 46383; e-mail:[email protected]

 

FULL TIME, TENURE TRACK, DIRECTOR OF EXTERNSHIPS 

VALPARAISO UNIVERSITY LAW SCHOOL (VULS) is seeking a full-time Director of its externship program.  This is a new, tenure track position.  Applicants should have practice experience, and teaching experience is preferred.  VULS intends to expand its externship program as part of its increasing emphasis on practical learning.  Valparaiso University is located in Valparaiso, Indiana, a small college town near the southern shore of Lake Michigan that is approximately fifty miles from downtown Chicago.  The town has excellent schools and affordable housing.  VULS is an equal opportunity employer with a diverse student body; 47% of the members of the class entering in August 2013 are underrepresented minorities.  Please contact Professor Ivan E. Bodensteiner, Chair of the Appointments Committee, at Valparaiso University Law School, 656 Greenwich Street, Valparaiso, Indiana, 46383; e-mail:[email protected]

Not OKCupid!

First it was Facebook, now it's OKCupid toying with its users who have no idea that they actually consented to being toyed with when they signed up with the service.  Like Facebook, they employ a one-two punch -- they use a contract to legitimize their actions and then social shaming to normalize their conduct as a business practice.  The rhetoric of contract and consent staves off irate users and deflects blame away from the company and onto the user (you agreed to let them use you in research, you fool!  It's your fault - if you had read the privacy policy, you would have known).  Here, OkCupid brazenly admits to their dubious tactics with a "we've-got-nothing-to-hide" attitude and then goes a step further by acting like there's something wrong with you if you have a problem with it.  In a post on the company's blog proudly proclaiming:  "We Experiment on Human Beings!", OkCupid's president writes that "if you use the Internet, you’re the subject of hundreds of experiments at any given time, on every site. That’s how websites work."  

Translation:  That's just how it is.  Get over it.  It's your fault for being so naive - OKStupid? 

Not OkCupid.

Pa. S. Ct.: Contract that is Unenforceable by Statute Does Not Preclude Claim for Quantum Meruit

The borderland between contract and quasi-contract can be murky.  For example: when failure to comply with a statutory requirement makes a contract unenforceable, can a party still recover under a theory of quantum meruit?  The Supreme Court of Pennsylvania recently addressed this question in the specific context of the state’s Home Improvement Consumer Protection Act (“HICPA”), holding that a contractor could pursue a cause of action sounding in quantum meruit.

Plaintiff construction corporation (“Shafer”) was hired by defendant homeowners (the “Mantias”) to build an addition on their home.  While the parties worked up an extremely detailed plan, the proposal did not comply with specific requirements of HICPA (for example, it did not contain approximate start and completion dates).  Notwithstanding, Shafer began construction but ran into problems because the excavation work for the foundation (completed by the Mantias) was not done properly.  The excavation was revised and, with that, the design for the construction was revised.  Shafer and the Mantias were unable to negotiate a modification of their agreement and agreed to discontinue the project.  Shafer sent a final invoice to the Mantias for almost $38,000 but the Mantias refused to pay it.

Shafer sued for breach of contract and quantum meruit.  The contract was not valid, however, because it failed to comply with some of the very specific requirements of HICPA.  The question remained whether Shafer could nevertheless seek recovery on a theory of quantum meruit.  The Supreme Court of Pennsylvania affirmed the intermediate appellate court and held that the restitution theory was not precluded.  The court reasoned:

It is well-settled at common law, however, that a party shall not be barred from bringing an action based in quantum meruit when one sounding in breach of express contract is not available. Zawada v. Pa. Sys. Bd. of Adjustment, 140 A.2d 335, 338 (Pa.1958). While the General Assembly, in its role as the policy-making branch of government, certainly may in “particular sets of circumstances” modify the structure of the common law, Program Admin. Servs., Inc. v. Dauphin County Gen. Auth., 928 A.2d 1013, 1018 (Pa.2007); see also Freezer Storage, Inc. v. Armstrong Cork Co., 382 A.2d 715, 720–21 (Pa.1978); Singer v. Sheppard, 346 A.2d 897, 902 (Pa.1975), there is no indication that the legislature has done so in the Act. Indeed, the Act “is silent as to actions in quasi-contract, such as unjust enrichment and quantum meruit—which, by definition, implicate the fact that, for whatever reason, no [valid] contract existed between the parties.” Durst, 52 A.3d at 361 (emphasis added)

With this understanding, it becomes self-evident and plain that Section 517.7(g) speaks only to the availability of remedies to a contractor who complies with Section 517.7(a).5 While traditional contract remedies may not be available due to the contractor's failure to adhere to Section 517.7(a) (thus, rendering the home improvement contract void and unenforceable), Section 517.7(g) does not contemplate the preclusion of common law equitable remedies such as quantum meruit when a party fails to comply with subsection (a). The Superior Court has already decided, and we now affirm, that this is the case when the contract at issue is oral (Durst), or noncompliant with the remaining sections of Section 517.7(a) (this case). If the General Assembly had seen it fit to modify the right of non-compliant contractors to recover in contract or quasi-contract, statutory or common law, or otherwise, it could have done so. Accord Freezer Storage, 382 A.2d at 720–21. Simply put, this Court cannot insert words into Section 517 .7(g) that are not there, especially words that would extinguish an otherwise cognizable common law action. Rieck Investment, 213 A .2d at 282.

Of course, this has the potential to undermine the purpose of the requirements of HICPA, but the message from the court to the legislature is: expressly negate other theories such as quantum meruit in the statute.

Shafer Electric & Construction v. Mantia, No. J-24-2014, (decided by Pa. S. Ct. on July 21, 2014).

Weekly Top Tens from the Social Science Research Network

SSRN Top Downloads For Contracts & Commercial Law eJournal
RECENT TOP PAPERS

Rank	Downloads	Paper Title
1	261	The Privatization of Compliance  Scott Killingsworth  Bryan Cave LLP
2	189	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
3	185	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
4	149	The Scope and Potential of FTC Data Protection  Woodrow Hartzog and Daniel J. Solove  Samford University - Cumberland School of Law and George Washington University Law School
5	130	Ending Class Actions as We Know Them: Rethinking the American Class Action  Linda S. Mullenix  University of Texas School of Law
6	129	Bankers and Chancellors  William W. Bratton and Michael L. Wachter  Institute for Law and Economics, University of Pennsylvania Law School and University of Pennsylvania Law School - Institute for Law and Economics
7	127	Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments  Albert H. Choi  University of Virginia School of Law
8	119	Bylaws Mandating Arbitration of Stockholder Disputes?  Claudia H Allen  Katten Muchin Rosenman LLP
9	95	What We Consent to When We Consent to Form Contracts: Market Price  Kenneth K. Ching  Regent University - School of Law
10	93	Nationalize the Clearinghouses!  Stephen J. Lubben  Seton Hall University - School of Law

SSRN Top Downloads For LSN: Contracts (Topic)
RECENT TOP PAPERS

Rank	Downloads	Paper Title
1	189	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
2	185	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
3	95	What We Consent to When We Consent to Form Contracts: Market Price  Kenneth K. Ching  Regent University - School of Law
4	68	'Selling Out' and the Impact of Music Piracy on Artist Entry  Joshua S. Gans  University of Toronto - Rotman School of Management
5	62	Alternative Entities in Delaware -- Reintroduction of Fiduciary Concepts by the Backdoor?  Douglas M. Branson  University of Pittsburgh School of Law
6	61	Of Priors and of Disconnects  Margaret Jane Radin  University of Michigan Law School
7	60	The Construction of Commercial Contracts  John Carter  University of Sydney - Faculty of Law
8	56	Behavioral Trade-Offs  Yuval Feldman and Orly Lobel  Bar-Ilan University - Faculty of Law and University of San Diego School of Law
9	54	Good Faith and Fair Dealing as an Underenforced Legal Norm  Paul MacMahon  London School of Economics - Law Department
10	53	A Eulogy for the EULA  Miriam A. Cherry  Saint Louis University - School of Law

 

Not Everything Is Arbitrable Says 2-1 Majority of the Fifth Circuit

In 2002, Shirley Douglas opened a checking account with Union Planters Bank.  In connection with that account, which she closed in 2003, Ms. Douglas signed a signature card that provided for binding arbitration and delegated the issue of arbitrability to the arbiter.  

That bank merged into Regions Bank (Regions) in 2005.

In 2007, Ms. Douglas was injured in a car accident.  She alleges that her attorney embezzled her $500,000 settlement, and she sued Regions and another bank at which the attorney maintained accounts.  Regions moved to compel arbitration based on Ms. Douglas's agreement with Union Planters Bank.  The District Court found that there was no ground for arbitration.

On appeal, in Douglas v. Regions Bank, two judges affirmed, while noting that the District Court had applied the wrong law.  While the District Court apparently believed that Regions had never become a party to the arbitration provision at issue, the Circuit Court found that it had, but that the arbitration provision is irrelevant because Ms. Douglas's claims do not relate to her account with Union Planters Bank.  As the Court noted:

The mere existence of a delegation provision in the checking account’s arbitration agreement, however, cannot possibly bind Douglas to arbitrate gateway questions of arbitrability in all future disputes with the other party, no matter their origin.

 

Mr. Bumble

In rejecting Regions' argument that the delegation clause in Ms. Douglas arbitration agreement with Union Planters Bank meant that the question of arbitrability had to be sent to an arbiter, the Fifth Circuit adopted the Federal Circuit's position, which is that the issue of arbitrability does not have to be sent to the arbiter when  the assertion of arbitrability “wholly groundless.” 

That seems like a reasonable rule, and dissenting Judge Dennis seemed to agree, except that Judge Dennis thought it impermissible for the Fifth Circuit to adopt the Federal Circuit's reasonable position when the Supreme Court adopted a less reasonable position in Rent-A-Center W. v. Jackson.   Indeed, in AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643 (1986), the Supreme Court made clear that when an issue is reserved for the arbiter, courts may not pronounce on the merits of the issue.  Thus a court must send the issue of arbitrability to an arbiter even when all are agreed that the arbitration agreement is inapplicable.

As Mr. Bumble might have put it, f the law supposes that the parties' interests are served by sending a claim to arbitration when there is no colorable claim that the parties have agreed to have the claim arbitrated, the law is a ass -- a idiot.

The ContractsProf Blog Welcomes Mirror of Justice to the LPBN Family

As Blog Emperor Paul Caron announced here on the Mother of All Blawgs, the TaxProf Blog, Mirror of Justice, a blog dedicated to the development of Catholic legal theory edited by Rick Garnett (Notre Dame) and 19 other prominent law professors of faith, has joined the Law Professor Blogs Network.  

Rick Garnett announced the move on MoJ here.

We are delighted to welcome this well-established and tremendously interesting blog to the LPBN family, and we marvel at Paul's remarkably expanding empire.

The MOOC

Several of us have participated in a MOOC of one kind of another.  I concede that I was a doubter. In fact, I may still be.  The attrition rates are huge and, at least in my case, the material presented at a fairly elementary level. My job was to give 25 ten minute lectures on contract law as a part of an 8 week course prepared by the UF College of Law. My colleages covered con law, criminal law, and a number of other basic topics.

I was surprised at how rewarding the experience was. We started with well over 10,000 students and ended up with a small fraction of that but it was fun in many ways. There were discussion groups and, in our case, groups sprouted up in several countries oftimes chatting with each other in their native language. Professors could join the groups, answer questions, pose new questions, or just listen in. Watching hundreds of students interact who would otherwise have no contract with each other was, from my standpoint, worth all the effort involved. I was even able to put aside my concerns about whether my lectures were making any sense.

At one point I told then about the history of Sherwood v. Walker. Many found it mind-boggling. How could a court just decide that it would have decided  the case differently a century later? It was a pleasure to see US contract law through the eyes of bright and curious people who were there voluntarily and not asking "what is the take away point."  

 

Weekly Top Tens from the Social Science Research Network

SSRN Top Downloads For Contracts & Commercial Law eJournal
RECENT TOP PAPERS 

Rank	Downloads	Paper Title
1	250	The Privatization of Compliance  Scott Killingsworth  Bryan Cave LLP
2	186	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
3	178	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
4	128	Bankers and Chancellors  William W. Bratton and Michael L. Wachter  Institute for Law and Economics, University of Pennsylvania Law School and University of Pennsylvania Law School - Institute for Law and Economics
5	106	Ending Class Actions as We Know Them: Rethinking the American Class Action  Linda S. Mullenix  University of Texas School of Law
6	85	Bylaws Mandating Arbitration of Stockholder Disputes?  Claudia H Allen  Katten Muchin Rosenman LLP
7	68	'Gap Filling' by Arbitrators  Alan Scott Rau  University of Texas at Austin School of Law
8	66	The Costs of Corporate Bankruptcy: How Little We Know  Stephen J. Lubben  Seton Hall University - School of Law
9	66	Fraud and Abuse in Mesothelioma Litigation  Lester Brickman  Yeshiva University - Benjamin N. Cardozo School of Law
10	60	Governing Law on Forum-Selection Agreements  Kevin M. Clermont  Cornell Law School

SSRN Top Downloads For LSN: Contracts (Topic)
RECENT TOP PAPERS

 

Rank	Downloads	Paper Title
1	186	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
2	178	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
3	68	'Gap Filling' by Arbitrators  Alan Scott Rau  University of Texas at Austin School of Law
4	67	'Selling Out' and the Impact of Music Piracy on Artist Entry  Joshua S. Gans  University of Toronto - Rotman School of Management
5	58	Of Priors and of Disconnects  Margaret Jane Radin  University of Michigan Law School
6	55	Behavioral Trade-Offs  Yuval Feldman and Orly Lobel  Bar-Ilan University - Faculty of Law and University of San Diego School of Law
7	53	Between Property Law and Contract Law: The Case of Securities  Matthias Haentjens  Leiden University - Leiden Law School
8	53	Alternative Entities in Delaware -- Reintroduction of Fiduciary Concepts by the Backdoor?  Douglas M. Branson  University of Pittsburgh School of Law
9	52	A Eulogy for the EULA  Miriam A. Cherry  Saint Louis University - School of Law
10	51	Good Faith and Fair Dealing as an Underenforced Legal Norm  Paul MacMahon  London School of Economics - Law Department

 

Fifth Circuit Sends Case to Arbitration 2 1/2 Years After Litigation Begins

In Al Rushaid v. Nat'l Oilwell Varco, Inc., plaintiffs sued eight entities for breach of contract.  The District Court found that the disputed contracts could result in damages in the hundreds of millions of dollars.  Discovery would have to take place on several continents.  Accordingly, although plaintiffs served all defendants except National Oilwell Varco Norway (NOV Norway) in August 2011, the District Court set a trial date in June 2013.

In August 2012, plaintiffs served NOV Norway, which invoked an arbitration clause in September 2012.  The District Court denied NOV Norway's motion to compel arbitration, finding that the dispute was not within the scope of the arbitration clause and that NOV Norway had waived its right to arbitrate.  

The Fifth Circuit rejected both the District Court's conclusion that there was no agreement to arbitrate and its conclusion that NOV Norway had waived its right to arbitrate.  On the first issue, the District Court's ruling was based on its finding that plaintiffs' claims against NOV Norway related to an NOV Norway price quotation that did not include an arbitration clause.  The Fifth Circuit concluded that the price quotation was merely a supplement to terms provided in a general agreement called the ORGALIME.  The Fifth Circuit concluded that the relationship between the two documents was sufficiently established so that the ORGALIME's arbitration clause should apply to disputes relating to the price quotation.

Under Fifth Circuit precedent, a party waives its right to arbitrate if it (1) “substantially invokes the judicial process” and (2) thereby causes “detriment or prejudice” to the other party.  The District Court found that this standard was met because NOV Norway's co-defendants engaged in extensive discovery and because all co-defendants are jointly owned and controlled and were represented by the same legal counsel.  The extent to which NOV Norway's codefendants' conduct could be imputable to it in a context such as this raised a question of first impression for the Fifth Circuit.  In this case, the Court found that, although NOV Norway might have benefitted from the discovery conducted by its co-defendants, it had not thereby invoked the judicial process, as this occurred before NOV Norway was served.  After it was served, discovery continued but NOV Norway did not participate.  

The District Court's denial of NOV Norway's motion to compel arbitration was vacated.  NOV Norway is the only defendant that may avail itself of arbitration.  The case was remanded for a determination of whether there should be a stay of proceedings in the District Court pending the outcome of arbitration between plaintiffs and NOV Norway.

Supreme Court of Ohio Rules in Condition Precedent Case

This is a edited version of a longer post from the Legally Speaking Ohio blog, written by Marianna Brown Bettman (pictured), a law professor at the University of Cincinnati College of Law, where she teaches torts, legal ethics, and a seminar on the Supreme Court of Ohio.  She is also a former Ohio state court of appeals judge.  

Professor Bettman's full blog post can be found here.

On July 17, 2014, the Supreme Court of Ohio handed down a merit decision in Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., Slip Opinion No. 2014-Ohio-3095. In a 5-2 opinion authored by Justice Kennedy, the Court held that a contract for work performed by a subcontractor for a general contractor which contains a provision that payment by the project owner to the general contractor is a condition precedent to payment by the general contractor to the sub is a pay-if-paid provision. Such a provision clearly and unequivocally shows the intent of the parties to transfer the risk of the owner’s nonpayment from the general contractor to the subcontractor.  Justice O’Neill dissented, for himself and Justice Pfeifer.  The case was argued November 5, 2013.

Case Background

A.E.M was the general contractor on the construction of a swimming pool at a Holiday Inn. A.E.M. entered into a subcontract with Transtar to perform electrical work on the project. Transtar fully performed the work under the contract, and was paid $142,620. A.E.M. did not pay Transtar the remaining balance of $44,088 because A.E.M. contended the owner failed to pay it for Transtar’s work.

Section 4 of the subcontracting agreement included this provision, which was in bold and in capital letters: “Receipt of payment by contractor from the owner for work performed by subcontractor is a condition precedent to payment by contractor to subcontractor for that work.”

. . .

Analysis of Merit Decision

Definitions: Pay-when-Paid versus Pay-if-Paid

The Court explains there are two types of contract provisions between general and subcontractors.  A pay-when-paid provision is one in which a general contractor makes an unconditional promise to pay the subcontractor, within a reasonable period of time to allow the general contractor to be paid.  A pay-when-paid provision is not affected by the owner’s nonpayment.

By contrast, a pay-if-paid provision is a conditional promise to pay that is enforceable only if a condition precedent has occurred.  Under this type of contract, the general contractor is only required to pay the subcontractor if the owner pays the general contractor.  Under a pay-if-paid contract, the risk of the owner’s nonpayment is shifted to the subcontractor.

The issue in the case is which kind of contract provision was this one? Short answer: pay-if-paid.

. . .

Application of the Rule to the Contract in this Case

The Court held that Section 4 of the contract between A.E.M. and Transfer is a pay-if-paid provision, and clearly and unequivocally shows that the parties intended to transfer the risk of the owner’s nonpayment from A.E.M. to Transtar.

Conclusion

The court of appeals is reversed and the judgment of the trial court granting summary judgment to A.E.M. is reinstated.

Dissent

Justice O’Neill, joined by Justice Pfeifer in dissent, would find the language in this particular contract inadequate as a matter of law to transfer the risk of nonpayment by the owner from A.E.M. to Transtar.  He would find the ambiguities in the wording create genuine issues of material fact that make summary judgment inappropriate.

 . . .

Overzealous or Legitimate Debt Collection Practices

By Myanna Dellinger

A woman owes $20 to Kohl’s on a credit card.  The debt collector allegedly started to “harass” the woman over the debt, calling her cell phone up to 22 times per week as early as 6 a.m. and occasionally after midnight.  What would a reasonable customer do?  Probably pay the debt, which the woman admits was only a “measly $20.”  What did this woman do?  Not to pay the small debt, telling the caller that they had “the wrong number,” and follow the great American tradition of filing suit, alleging violations of the 1991 Telephone Consumer Protection Act which, among other things, makes it illegal to call cell phones using auto dialers or prerecorded voices without the recipient’s consent.

Consumer protection rules also prohibit collection agencies from calling before 8 a.m. and after 9 p.m., calling multiple times during one day, leaving voicemail messages at a work number, or continuing to call a work phone number if told not to. 

Last year, Bank of America agreed to pay $32 million to settle claims relating to allegations of illegally using robo-debt collectors.  Discover also settled a claim alleging that they violated the rules by calling people’s cell phones without their consent.  Just recently, a man’s recorded 20-minute call to Comcast pleading with their representative to cancel his cable and internet service went viral online.

The legal moral of these stories is that companies are not and should, of course, not be allowed to harass anyone to collect on debt owed to them or refuse to cancel services no longer wanted.  However, what about companies such as Kohl’s who are presumably owed very large amounts of money although in the form of many small debts?  Is it reasonable that customers such as the above can do what she admits doing, simply saying “screw it” to the company and in fact reverse the roles of debtor and creditor by hoping for a settlement via a lawsuit on a questionable background?  Surely not. 

I once owned a small company and can attest to the difficulty of collecting on debts even with extensive accurate documentation.  The only way my debt collecting service or myself were able to collect many outstanding amounts was precisely to make repeat requests and reminders (although, of course, in a professional manner).  As a matter of principle, customers should not be able to get away with simply choosing not to pay for services or products they have ordered, even if the outstanding amounts are small.  If companies have followed the law, perhaps time has come for them to refuse settling to once again re-establish the roles of debtor and creditor.  This, one could hope, would lead irresponsible consumers to live up to their financial obligations, as must the rest of society.

American Apparel and Arbitration Clauses

It's been hard for me to avert my eyes from the train wreck happening at American Apparel.  Yes, I heard the rumors about the shocking behavior of its former CEO, but the revelations of some of the past accusations by former employees are news to me.  But, as Steven Davidoff Solomon points out in today's NYT, it's not surprising that the public didn't hear about the most egregious employee claims.  American Apparel required all its employees to sign agreements containing arbitration clauses.  Davidoff Solomon writes:

"The purpose of these clauses was clear: to ensure that any dispute was kept quiet and protect the company from excessive damages. It certainly didn’t appear to benefit employees.

American Apparel required that the entire proceeding — including the outcome — be kept confidential. Employees were also contractually barred from disparaging or otherwise say anything bad about Mr. Charney or American Apparel. As if this were not enough, employees also were required to agree not to speak to the news media without the approval of American Apparel."

It wasn't just employees - models had to sign egregious, one-sided contracts, too. These contracts also contained arbitration clauses and very broadly worded non-disparagement clauses. 

As Davidoff Solomon notes, American Apparel's board could ignore their CEO's misconduct because there was not much public outcry about it, and there was not much public outcry because the employees and models who brought claims, couldn't discuss what happened to them - their contracts prohibited it.  My guess is that these "contracts" were also "at will." 

All from a company whose public image was based, at least in part, on fair pay for workers. 

 

Warning: Burning Gasoline May Kill You

By Myanna Dellinger

The city of Berkeley, California, may become the first in the nation to require that gas stations affix warning stickers to gas pump handles warning consumers of the many recognized dangers of climate change.  The stickers would read:

Global Warming Alert!  Burning Gasoline Emits CO2

The City of Berkeley Cares About Global Warming

The state of California has determined that global warming caused by CO2 emissions poses a serious threat to the economic well-being, public health, natural resources, and the environment of California.  To be part of the solution, go to www.sustainableberkeley.com

Consumers not only in California, but worldwide are familiar with similar warnings about the dangers of tobacco.  The idea with the gas pump stickers is to “gently raise awareness” of the greenhouse gas impacts and the fact that consumers have alternatives.  In their book “Nudge,” Richard Thaler and Cass Sunstein addressed the potential effectiveness of fairly subtly encouraging individual persons to act in societally or personally improved ways instead of using more negative enforcement methods such as telling people what not to do.  Gas pump stickers would be an example of such a “nudge.”

But is that enough?  World scientists have agreed that we must limit temperature increases to approximately 2° C to avoid dangerous climate change.  The problem is that we are already headed towards a no less than 5° C increase.  To stop this tend, we must reduce greenhouse gas emissions by 80% or more (targets vary somewhat) by 2050.  Stickers with nudges are great, but in all likelihood, the world will need a whole lot more than that to reach the goal of curbing potentially catastrophic weather-related calamities.

Of course, the oil and gas industry opposes the Berkeley idea.  The Western States Petroleum Association claimsthat the labels would “compel speech in violation of the 1^st Amendment” and that “far less restrictive means exist to disseminate this information to the public without imposing onerous restrictions on businesses.”  Why this type of sticker would, in contrast to, for example, labels on cigarette packaging, be so “onerous” and “restrictive” is not clear.  Given the extent of available knowledge of climate change and its potential catastrophic effects on people and our natural environment, the industry is very much behind the curve in hoping for “less restrictive means.”  More restrictive means than labels on dangerous products are arguably needed.  Even more behind the curve is the Association’s claim that the information on the stickers is merely “opinion” that should not be “accorded the status of ‘fact’”.   The Berkeley city attorney has vetted the potential ordinance and found the proposed language to be not only sufficiently narrow, but also to have been adopted by California citizens as the official policy of the state. 

It seems that instead of facing reality, the oil and gas industry would rather keep consumers in the dark and force them to adopt or continue self-destructive habits.  That didn’t work in the case of cigarettes and likely will not in this case either.  We are a free country and can, within limits, buy and sell what we want to.  But there are and should be restrictions.  In this case, the “restriction” is actually not one at all; it is simply a matter of publishing facts.  Surely, in America in 2014, no one can seriously dispute the desirability of doing that.

The Berkeley City Council is expected to address the issue in September.

Ninth Circuit Finds that Nordstrom Gave Sufficient Notice of Its Class-Action Waiver

This is just a bad time to be an employee of a major department store on the West Coast.  In Davis v. Nordstrom, Inc. the same panel that decided Johnmohammadi v. Bloomingdale's, Inc., about which we blogged yesterday, granted Nordstrom's motion to compel individual arbitration, overturning the District Court's denial for that motion.  

In August 2011, Faine Davis filed a purported class action against Nordstrom, alleging nonpayment of wages, failure to provide meal periods and rest breaks, and unfair competition.  Nordstrom, in reliance on its employee handbook, moved to compel individual arbitration of Davis's claims.  Nordstrom had revised that handbook earlier in 2011 in response to the Supreme Court's decision in AT&T Mobility LLC v. Concepcion to prohibit employees from bringing most class action lawsuits.  

Davis had received a copy of the employee handbook when she was first employed by Nordstrom, and she acknowledged that she received notice each time that handbook was subsequently amended.  In June 2011, ahe was notified that Nordstrom would henceforth preclude most class action lawsuits.  Under California law, Nordstrom is permitted to amend the terms of its agreement with its employees upon due notice.  Since Davis received notice and continued to work for Nordstrom, she accepted the modified terms.  California law requires only reasonable notice, but Nordstrom's handbook specified that 30-days' advance notice is required.  

The District Court found Nordstrom's notice insufficient because the notice described the policy as the "current version," leading employees to believe that it was immediately effective.  The Ninth Circuit rejected this finding.  While noting that Nordstrom's notice was not a "model of clarity," it was sufficient to meet California's standards because Nordstrom did not seek to enforce the policy against any employees until at least 30 days after notice was given.

The District Court also found the notice insufficient because it did not inform Davis that her continued employment constituted acceptance of the new terms.  The Ninth Circuit found that California law imposes no requirement that employers notify employees that continued employment constitutes acceptance.  This seems a bit odd, since one would think that an offeree ought to be informed when conduct would be construed as acceptance.

But all is not lost for Ms. Davis.  The District Court did not rule on her claim that the class action waiver is unconscionable, and the Ninth Circuit refused to rule on the issue.  That part of the case was remanded for a determination by the District Court.

Weekly Top Tens from the Social Science Research Network

SSRN Top Downloads For Contracts & Commercial Law eJournal
RECENT TOP PAPERS

Rank	Downloads	Paper Title
1	235	The Privatization of Compliance  Scott Killingsworth  Bryan Cave LLP
2	177	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
3	171	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
4	124	Bankers and Chancellors  William W. Bratton and Michael L. Wachter  Institute for Law and Economics, University of Pennsylvania Law School and University of Pennsylvania Law School - Institute for Law and Economics
5	123	Personal and Proprietary Remedies for Breach of Confidence: Nearer to Breach of Fiduciary Duty or Breach of Contract?  Graham Virgo  University of Cambridge - Faculty of Law
6	82	Bylaws Mandating Arbitration of Stockholder Disputes?  Claudia H Allen  Katten Muchin Rosenman LLP
7	78	The First Sale Doctrine and the Economics of Post-Sale Restraints  Ariel Katz  University of Toronto - Faculty of Law
8	65	'Gap Filling' by Arbitrators  Alan Scott Rau  University of Texas at Austin School of Law
9	62	The Costs of Corporate Bankruptcy: How Little We Know  Stephen J. Lubben  Seton Hall University - School of Law
10	61	Ending Class Actions as We Know Them: Rethinking the American Class Action  Linda S. Mullenix  University of Texas School of Law

SSRN Top Downloads For LSN: Contracts (Topic)
RECENT TOP PAPERS 

Rank	Downloads	Paper Title
1	177	Beauty and Ugliness in Offer and Acceptance  Kenneth K. Ching  Regent University - School of Law
2	171	A Psychological Account of Consent to Fine Print  Tess Wilkinson‐Ryan  University of Pennsylvania Law School
3	123	Personal and Proprietary Remedies for Breach of Confidence: Nearer to Breach of Fiduciary Duty or Breach of Contract?  Graham Virgo  University of Cambridge - Faculty of Law
4	66	'Selling Out' and the Impact of Music Piracy on Artist Entry  Joshua S. Gans  University of Toronto - Rotman School of Management
5	65	'Gap Filling' by Arbitrators  Alan Scott Rau  University of Texas at Austin School of Law
6	57	Of Priors and of Disconnects  Margaret Jane Radin  University of Michigan Law School
7	53	Behavioral Trade-Offs  Yuval Feldman and Orly Lobel  Bar-Ilan University - Faculty of Law and University of San Diego School of Law
8	53	Between Property Law and Contract Law: The Case of Securities  Matthias Haentjens  Leiden University - Leiden Law School
9	49	A Eulogy for the EULA  Miriam A. Cherry  Saint Louis University - School of Law
10	49	Good Faith and Fair Dealing as an Underenforced Legal Norm  Paul MacMahon  London School of Economics - Law Department

 

Ninth Circuit Enforces Class-Action Waiver Despite Federal Statutes

Fatemeh Johnmohammadi was an employee of Bloomingdale's, Inc. (Bloomingdale's).  She sought to bring a state class-action claim alleging that she and others, similarly situated, were owed overtime wages.  Bloomindale's removed the case to federal court and then filed a motion to compel arbitration of Johnmohammadi's claims.  The District Court granted the motion and dismissed the case without prejudice.  Johnmohammadi appealed to the Ninth Circuit.

In Johnmohammadi v. Bloomingdale's, Inc., the Ninth Circuit affirmed the District Court's decision.  The Court found that there is no question that Johnmohammadi voluntarily agreed to Bloomingdale's arbitration agreement, which also included a class action waiver.  The arbitration agreement included an opt-out option of which Johnmohammadi did not avail herself.

On appeal, Johnmohammadi argued that the class-action waiver is unenforceable because its enforcement would violate the Norris-LaGuardia Act and the National Labor Relations Act both of which protect the rights of employees to engage in "concerted activities."  While the Court noted that there is some support for Johnmohammadi's position, the cases she cited applied only where an employer forces employees to waiver their rights as a condition of employment.  Here, because of the opt-out option, Johnmohammadi was held to have voluntarily agreed to Bloomingdale's terms.  

 

Court Finds that Party Who Signed "Flounder" Is Not Bound to New Employment Agreement

In Random Ventures, Inc. v. Advanced Armament Corp., the District Court for the Southern District of New York found that a party that wrote the word "flounder" on a signature line was not bound by the document on which he scribbled that word.

For the full context, you would have to read the 117-page District Court opinion.  Our highly-consdensed summary is as follows:

Kevin Brittingham formed a company, Advanced Armament Corp. (AAC) that designed and manufactured silencers for firearms.  AAC thrived and in 2009, a large firearms manufacturer, Remington Arms Company (Remington) acquired it.  Remington paid $10 million up front, and Brittingham was to get another $8 million if he was still around as an AAC employee (now Remington's subsidiary) in 2015.  He was terminated at the end of 2011 and his partner from the original business, Lynsey Thompson, was terminated one month later.  Both Brittingham and Thompson sued for breach of contract and breach of the covenant of good faith.  

The Court noted that Brittingham socialized with his clients by riding dirt bikes, engaging in aerial pig hunts and attending strip clubs.  He ran a successful business but, as the Court observed, he is nobody's idea of a perfect fit for a corporate culture.  Tensions arose in the relationship over AAC's compliance with federal regulations relating to the handling of firearms.  The Court concluded unequivocally that Remington (not Brittingham) bore responsibility for the compliance failures.  Nontheless, Remington suspended Brittingham and Thompson over compliance issues.

Remington offered Brittingham a new employment agreement.  The agreement was really an ultimatum: either sign this acknowledgment that we have grounds to terminate you for cause and then you can return to work on a probationary basis or consider yourself terminated for cause right now.  Of course, termination for cause would cost Brittingham $8 million.  The court characterized this document as an $8 million hold-up (with or without a silencer?), which Brittingham "consistently refused to execute."  Eventually Brittingham (or someone) scribbled "Flounder" on the signature line and faxed the agreement to Remington.   The Court seems to have found that the scribble did not bind Brittingham, since a sophisticated party like "Remington could not reasonably have been duped into believing Brittingham had adequately executed the proposed amended EA based on the scribbling on the last page."  But it is not clear that such a finding is necessary to the Court conclusion, since Remington never executed the new agreement.

It seems that the Court's finding that the agreement was not enforceable did not actually turn on the issue of signature.  The Court refused to enforce an agreement that Brittingham could be terminated for cause when, in fact, no grounds for termination for cause existed.  

To the extent that Brittingham and Thompson did agree to amended employment terms, however, the Court finds as a factual matter that they did so under false pretenses – as determined above, defendants did not have Cause to terminate either plaintiff at the time of their suspensions.

The Court rejected Remington's argument that by writing "Flounder" and by returning to work, Brittingham had waived any objection to the amended employment agreement.  The Court construed Brittingham's act as one of defiance rather than as one of waiver.  

Thanks to Professor Royce de Rohan Baronedes who blogged about the case here and alerted us to its existence.

Interesting aside related to Nancy Kim's post from February about Rocket from the Crypt and acceptance by tattoo.  Before it was acquired, Brittingham's company ran a promotion promsing a free silencer to anyone bearing a tattoo with his company's logo.  The promo cost the company $250,000.

Aereo Loses in Supreme Court and so do Consumers – for Now

By Myanna Dellinger

Recently, I blogged here on Aereo’s attempt to provide inexpensive TV programming to consumers by capturing and rebroadcasting cable TV operators’ products without paying the large fees charged by those operators.  The technology is complex, but at bottom, Aereo argued that they were not breaking copyright laws because they merely enabled consumers to capture TV that was available over airwaves and via cloud technology anyway. 

In the recent narrow 6-3 Supreme Court ruling, the Courts said that Aereo was “substantially similar” to a cable TV company since it sold a service that enabled subscribers to watch copyrighted TV programs shortly after they were broadcast by the cable companies.  The Court found that “Aereo performs petitioners’ works publicly,” which violates the Copyright Act.  The fact that Aereo uses slightly different technology than the cable companies does not make a “critical difference,” said the Court.  Since the ruling, Aereo has suspended its operations and posted a message on its website that calls the Court’s outcome "a massive setback to consumers."

Whether or not the Supreme Court is legally right in this case is debatable, but it at least seems to be behind the technological curve.  Of course the cable TV companies resisted Aereo’s services just as IBM did not predict the need for very many personal computers, Kodak failed to adjust quickly enough to the digital camera craze, music companies initially resisted digital files and online streaming of songs.  But if companies want to survive in these technologically advanced times, it clearly does not make sense to resist technological changes.  They should embrace not only technology, but also, in a free market, competition so long as, of course, no laws are violated.  We also do not use typewriters anymore simply to protect the status quo of the companies that made them.

It is remarkable how much cable companies attempt to resist the fact that many, if not most, of us simply do not have time to watch hundreds of TV stations and thus should not have to buy huge, expensive package solutions.  Not one of the traditional cable TV companies seem to consider the business advantage of offering more individualized solutions, which is technologically possible today.  Instead, they are willing to waste money and time on resisting change all the way to the Supreme Court, not realizing that the change is coming whether or not they want it. 

Surely an innovative company will soon be able to work its way around traditional cable companies’ strong position on this market while at the same time observing the Supreme Court’s markedly narrow holding.  Some have already started doing so.  Aereo itself promises that it is only “paus[ing] our operations temporarily as we consult with the court and map out our next steps.”

 

 

CNN's Crossfire Almost Takes a Position on Sex Contracts on College Campuses

Friend of the blog, Kenneth Ching, shared this with us.

So I hadn't really thought about Crossfire since Jon Stewart shut them down.  It was the pinnacle of Stewart's career thus far.

 

But I guess it's just hard to keep a terrible idea down when you have 24 hours of time to kill every day.  

I don't know what CNN's little segment on sex contracts is supposed to accomplish.  I guess it is intended to introduce its audience to one of its contributors, S. E. Cupp   No doubt, Ms. Cupp has lots of interesting ideas and is telegenic and all that, but this segment reads like a Ms. America question gone wrong. "Ms. Louisiana, do you think colleges and universities ought to require written assent from both (or all) parties to any sexual act in which a student participates?"

Ms. Cupp starts, because her brand is "smart conservative," by lashing out at a culture that "disarms" students on college campuses.  Her claim is that women can't protect themselves with pepper spray because of weapons bans on campuses.  Of course, most of those bans do not include defensive weapons and anyway, if a woman used her pepper spary defensively in defiance of such a ban, she would 1) escape an assault and 2) perhaps face reprimand.  It's not clear that the disarmament has occurred, nor does Ms. Cupp address the very real possibility that women are safer when men can't carry weapons on campus, but I digress.

Then she seems to complain about resources going to crisis centers and hotlines rather than to rape prevention but she is careful to say that crisis centers and hotlines are a good thing (way to give a  balanced perspective, Ms. Louisiana!).  Then comes the segue to the University of California's consideration of sex contracts.   This is not news.  Antioch College did it for years.  Even we  blogged about the subject two years ago.

What's Cupp's take?  The idea is silly, but good for California for at least trying!  Alright audience.  Ms. Louisiana!  Isn't she a great sport?

Cupp actually makes me feel nostalgic for the days when Camille Paglia would not just strike provocative intellectual poses but would actually take provocative intellectual positions on the right.  I didn't agree with Paglia, but she expressed her original and outlandish ideas with verve and panache.  She challenged her readers to consider their positions and think things anew.  If anyone actually watches the new Crossfire, let me know if you see any signs of an ability to do so over there.