ContractsProf Blog

No Contractual Duty of Good Faith in Texas

In spite of most jurisdictions reading a duty of good faith and fair dealing into all contracts, a Fifth Circuit Court of Appeals has held that it is unlikely that the Texas Supreme Court would find such a duty to exist in Texas. Wow. Additionally, the court found that no fiduciary relationship between a university student and his/her university faculty and other representatives.

Section 205 of the Restatement (Second) of Contracts states that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” See also Farnsworth, “Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code,” 30 U.Chi.L.Rev. 666, 670 (1963).

The seminal case in this area is Market Street Associates v. Frey, 941 F.2d 599 (7^th Cir. 1991). In that case, Judge Posner held that in spite of the somewhat “moralistic overtones of good faith,” not every contract signatory is expected to be his “brother’s keeper.” Nonetheless, “the essentials of the modern doctrine [are] well established in nineteenth-century cases.” “This duty is … halfway between a fiduciary duty (the duty of utmost good faith) and the duty merely to refrain from active fraud. Despite its moralistic overtones it is no more the injection of moral principles into contract law than the fiduciary concept itself is.” “The office of the doctrine of good faith is to forbid the kinds of opportunistic behavior that a mutually dependent, cooperative relationship might enable in the absence of rule. “

In the new Texas case involving a student at SMU who got fired from his part-time job as a Community Adviser for misconduct toward students and faculty, the circuit court held that “Texas law does not impose a generalized duty of good faith and fair dealing and, in fact, rejects it” in all circumstances apart from when 1) a formal fiduciary relationships exists or 2) a “special or confidential relationship” exists. Examples of the former are attorney-clients, trustee-beneficiary, and principal-agents. In Texas, the latter apparently only includes the relationship between an insurer and an insured. That’s it! Texas courts have, found this panel, refused to impose the duty on, for example, employer-employees (not too surprising), lender-borrowers, medical provider-patients (double wow!), mortgagor-mortgagees, and franchisor-franchisees. The court in the described case also said that an “ordinary student-professor relationship is no different;” in other words, there is no fiduciary or even “confidential” or “special” relationship between students and faculty in Texas.

The case does not show how the student’s allegation that a duty of good faith existed between SMU and the student would really have helped the student on the merits. SMU seemed to have a very good case for firing the student from his job. Nonetheless, it is surprising that the court would so categorically reject that such a duty even exists apart from in traditional fiduciary relationships. While it may make sense that “a purely unilateral, subjective” sense of trust in one’s contractual counterpart and that the other party will have one’s interests at heart is not enough to create a fiduciary relationship, there is a vast difference between that and reading out the duty of good faith and fair dealings from most contracts law in general in Texas. Of course, as contracts law is state law, it is true that it is the Texas courts who must change this line of thinking, but doing so seems to be highly warranted given how courts in other parts of the nation rule on the issue.

The case discussed is Hux v. Southern Methodist University, 2016 WL 1621720 (no free online copy available yet).

Weekly Top Ten SSRN Contracts Downloads (April 28, 2016)

 

SSRN Top Downloads For
Contracts & Commercial Law eJournal

Rank	Downloads	Paper Title
1	410	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	143	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	137	Contract, Consent, and Fiduciary Relationships Lionel Smith McGill University, Faculty of Law, Paul-André Crépeau Centre for Private and Comparative Law
4	134	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
5	122	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
6	111	(Mis)perceptions of Law in Consumer Markets Oren Bar-Gill and Kevin E. Davis Harvard Law School and New York University School of Law
7	109	How Do LLC Owners Contract Around Default Statutory Protections? Peter Molk Willamette University - College of Law
8	105	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
9	102	Contract as Empowerment: The Basic Theory Robin Bradley Kar University of Illinois College of Law
10	96	Realizing Rationality: An Empirical Assessment of International Commercial Mediation S.I. Strong University of Missouri School of Law

 

SSRN Top Downloads For
LSN: Contracts (Topic)

Rank	Downloads	Paper Title
1	410	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	143	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	134	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	122	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
5	111	(Mis)perceptions of Law in Consumer Markets Oren Bar-Gill and Kevin E. Davis Harvard Law School and New York University School of Law
6	105	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
7	102	Contract as Empowerment: The Basic Theory Robin Bradley Kar University of Illinois College of Law 2016
8	86	The Rise of the Platform Economy: A New Challenge for EU Consumer Law? Christoph Busch, Hans Schulte-Nölke, Aneta Wiewiórowska-Domagalska and Fryderyk Zoll University of Osnabrück - European Legal Studies Institute, European Legal Studies Institute Osnabrueck / Radboud University Nijmegen, Universität Osnabrück - European Legal Studies Institute and Universität Osnabruck
9	76	Farewell to Unjustified Enrichment? Nils Jansen University of Muenster
10	74	Immorality of Contracts in Europe Chantal Mak University of Amsterdam - Centre for the Study of European Contract Law (CSECL)

More on Prince and Bowie; the Masters of Badness

I echo Nancy’s tribute below to Prince. Not only was “His Royal Badness” an amazing musician, singer and dancer, he was also able to legally wrestle with and ultimately prevail over some of the really “big boys” in the entertainment industry on issues of contract law.

But even after his death, some companies sought to take financial advantage of him. For example, Cheerios tweeted “Rest in peace” on a simple purple background, but with the “i” replaced with a single Cheerio. After fans expressed their disappointment of this, the tweet was removed just a few hours later with the company acknowledging that their note m ay not have been appropriate. I would agree with that: In such a moment, who’d really think about promoting and buying cereal, of all things?!  A lengthier tweet by Hamburger Helper was also removed. Smart: folks, the guy was a vegan! Give the man a little respect.

In contrast, Chevrolet is applauded for a much more tasteful tribute simply stating, on a black background, “Baby That Was Much Too Fast, 1958-2016” and at the very bottom featuring an image of a classic red Corvette, a brand that the singer himself chose to immortalize with his big 1982 hit.

Why would companies so quickly resort to using a famous person’s death to make money? Apart from the Chevrolet ad (which the Chevrolet simply would have to post, it seems, given the song lyrics) Corporate America is rumored to have felt that they did not “bank sufficiently” on the death of another music icon: David Bowie. With Prince’s death, they felt they got a great second chance. (I can no longer find the link to the reputable business magazine where I read this, which shouldn’t matter as no official statement was, of course, made from any company stating this).

With this, let’s remember two great music and business talents who both understood the importance of the Internet on contractual issues (Prince once declaring it dead, Bowie taking the opposite stance and considering it the future of interaction between musicians and their fans). David Bowie even created his own Internet service, BowieNet, to be able to reach out to fans in ways he himself could control.

As law professors, I think we can sympathize with these music icons as we also know how relatively easily big corporations can cash in on the creative works of others. Just think of how little, I have heard, authors of legal casebooks earn on each book sold; not unlike the situation in the musical world.

Rest in peace, Prince and David Bowie

R.I.P. Prince

Prince’s fans are mourning Prince’s death last week and there have been many tributes to his life and career, including these two covers of Purple Rain – one from the New Yorker and the other from Bruce Springsteen.  As a Prince fan myself, I would like to pay tribute by writing this post about how Prince raised the issue of bargaining power on behalf of all artists.  

As blog readers of a certain age will remember, Prince changed his name to a symbol and became the artist formerly known as Prince (my keyboard won’t allow me to type the symbol) in protest over his contract with Warner Bros. which gave the company the rights to his master recordings.  (He ended up fulfilling his contract but let’s just say, it wasn’t his best work).  About a couple of years ago, Prince signed another contract with Warner Bros. which gave him the rights to his master recordings. Of course, a lot had changed during the two decades long interim but perhaps nothing changed things more than the Internet.  Large record companies no longer had the lock on distribution that they once did.  High profile clashes between artists and their distributors, like the one Prince had with Warner Bros, made younger musicians who otherwise might have been willing to sign it all away, think twice about what they were getting out of a record deal.

Prince, of course, had his own views about how the Internet benefited – and hurt – musicians.  As with his music, his views about the Internet and online distribution were ahead of their time.

 

 

Making an Option Irrevocable: The Mere Performance of Due Diligence Isn't Enough

A recent case out of California, Clever Hospitality, Inc. v. Patel, B264921, sheds light on the limits of due diligence to serve as consideration when it comes to making an offered option irrevocable. In that case, the Patels, the owner of a hotel, gave Clever, a prospective buyer, a 60-day option to buy the hotel. During that time, Clever indicated it was going to conduct due diligence. If, at the conclusion of its due diligence, Clever was interested in buying the hotel, it was supposed to exercise the option by depositing $150,000 into escrow. Clever used the 60-day period to perform significant amounts of due diligence, so much that Clever asked for an extension of the 60-day period. The Patels eventually refused the request and indicated to Clever once the 60-day period was over that, because Clever never deposited $150,000, the option had lapsed. However, the Patels and Clever continued to have contact regarding the hotel, although the Patels also told Clever that they were speaking to other potential buyers as well. Eventually, a few months later, the Patels sold the hotel to another buyer. Clever then sued the Patels for breach of contract. 

Clever's main argument was that its time, effort, and money invested in its due diligence acted as consideration to render the Patels' option irrevocable. The court, however, noted that the necessary consideration here had to be money or services that the Patels had bargained for. In this case, Clever's due diligence only benefited Clever, not the Patels. After all, the Patels would have been quite content if Clever had performed no due diligence at all and instead just bought the hotel. 

Clever then argued that promissory estoppel should save it and render the option irrevocable. However, the court could find no evidence that the Patels ever made any promise to Clever that it would keep the option open. In fact, the evidence seemed to show that the Patels had indicated the opposite to Clever: that the option had expired and that they were talking to other buyers. Therefore, there was no promise for Clever to reasonably rely upon and promissory estoppel was inappropriate. 

Clever never at any time placed any money in escrow the way it was supposed to under the terms of the option. It seems as if Clever assumed that the Patels had no other serious buyers and that maybe there would be plenty of time for Clever and the Patels to work out a deal, and so the lapsing of the option didn't seem to concern Clever all that much...until a sale to someone else had been consummated. This case serves as a warning: Due diligence alone might not be enough to save you from losing out on the object of that due diligence. 

Love It, List It, or Sue Over It

(Source: hgtv.com)

My love for HGTV is real and enduring. It started as a House Hunters addiction when I was a practicing lawyer looking for something mindless to watch when I got home at night and it has seriously spiraled out of control. I find something soothing about the formulaic nature of the shows; their familiarity is like a security blanket to me. And I've also realized that I've actually learned a lot about my taste. For what it's worth, I do feel like HGTV has made me think more about how I decorate my house, even if I can't afford a professional decorator. 

So I gobbled up with interest every single article I could find on the recent "Love It or List It" lawsuit. If you don't know the show, it's one of my favorites for the snark between the competing real estate agent and designer. One half of a home-owning couple wants to renovate their existing home; the other half wants to give up and move away. Enter the "Love It or List It" team, showing the couple houses they could buy while simultaneously renovating their home. The theory is that the couple can then decide to love it, or list it. 

I entertain no illusions about the "realness" of reality television (really, mostly I've learned from reality television that apparently an enormous number of people are tremendously good actors - while others are decidedly not), but this recent lawsuit attacks not just the "realness" of reality television but practically the *definition* of it: "Love It or List It," the homeowners accuse, were much more interested in making a television show than they were in renovating this couple's home. On at least some level, this lawsuit seems to be a challenge to what "Love It or List It" is: a television show or a general contractor. 

As a general contractor, the homeowners weren't too happy with the show's performance. They allege shoddy work on their house, including low-quality product, windows that were painted shut, and holes big enough for vermin to fit through. (They also allege their floor was "irreparably damaged," although I think they can't possibly mean that in the true legal sense of "irreparably," because surely the floor can be repaired?)

It seems to me this is going to come down to the contract between the parties. What did "Love It or List It"'s production company promise? I would love to see what the contract said about the work that was to be performed, how that work was to be performed, and what the financial arrangements were (since part of the couples' allegations is that a large portion of their money was diverted away from the renovations). However, for some reason, I have had an incredibly difficult time locating a copy of the complaint (never mind the contract). None of the stories I've found linked to it, and I have had zero luck finding it through Bloomberg Law's docket search. 

Airbnb Update

Airbnb Update

The City of Los Angeles is proposing rules for legalizing Airbnb. The rules would be less draconian than those in Santa Monica, which has entirely banned renting out full units for less than 30 days and which allows home-sharing (in which an occupant rents just a room or a couch) only if the occupant registers and pays taxes on the unit.

In Los Angeles, homeowners would be able to rent out their entire homes for up to ninety days a year. Home-sharing landlords would have to register with the City and, in that connection, submit information about “all hosting platforms to be used and the portion of the unit to be used for Home-Sharing.” Only rooms in one’s main house or guest houses could be rented out, and thus not tents, yurts, backyard RVs, garage spaces and the like.

This is good news for a lovely, modernizing, yet expensive city where many people struggle to make ends meet. With the minimum salary increasing to $15 an hour in 2020, things are improving slightly for the middle and lower classes... but will that be enough to set off rapidly increasing prices in other areas of life? I personally doubt it, but time will tell. At least the above is an improvement of people’s individual property and contracting rights.

Weekly (Usually) Top Ten SSRN Contracts Downloads (April 22, 2016)

SSRN Top Downloads For
Contracts & Commercial Law eJournal

Rank	Downloads	Paper Title
1	395	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	139	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	132	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	130	Contract, Consent, and Fiduciary Relationships Lionel Smith McGill University, Faculty of Law, Paul-André Crépeau Centre for Private and Comparative Law
5	117	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
6	107	(Mis)perceptions of Law in Consumer Markets Oren Bar-Gill and Kevin E. Davis Harvard Law School and New York University School of Law
7	98	Contract as Empowerment: The Basic Theory Robin Bradley Kar University of Illinois College of Law
8	96	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
9	94	Realizing Rationality: An Empirical Assessment of International Commercial Mediation S.I. Strong University of Missouri School of Law
10	92	The Culture of Private Law Amnon Lehavi Interdisciplinary Center Herzliyah - Radzyner School of Law

 

SSRN Top Downloads For
LSN: Contracts (Topic)

Rank	Downloads	Paper Title
1	395	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	139	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	132	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	117	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
5	107	(Mis)perceptions of Law in Consumer Markets Oren Bar-Gill and Kevin E. Davis Harvard Law School and New York University School of Law
6	98	Contract as Empowerment: The Basic Theory Robin Bradley Kar University of Illinois College of Law
7	96	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
8	85	The Rules of the Game and the Morality of Efficient Breach Gregory Klass Georgetown University Law Center
9	83	Revisiting the Penalty Rule John Eldridge University of Adelaide, School of Law, Students
10	76	The Rise of the Platform Economy: A New Challenge for EU Consumer Law? Christoph Busch, Hans Schulte-Nölke, Aneta Wiewiórowska-Domagalska and Fryderyk Zoll University of Osnabrück - European Legal Studies Institute, European Legal Studies Institute Osnabrueck / Radboud University Nijmegen, Universität Osnabrück - European Legal Studies Institute and Universität Osnabrück

Contracts for Health Benefits: Entire or Divisible?

To determine when the statute of limitations has run in relation to benefits contracts, the classification of the contract as “entire” or “divisible” may turn out to be crucial. If the contract is entire, the statute may start running on, for example, a certain date when the employer made a single contractually binding promise to provide health care for its employees, typically once a year. If the contracts is divisible, the contract may extend further into the future and run from, for example, ongoing times when the employee makes monthly premium payments under the plan.

The Eleventh Circuit Court of Appeals notes that in Georgia, a contract is entire if “the whole quantity, service, or thing, all as a whole, is of the essence of the contract, [] if it appears that the contract was to take the whole or none,” and if the contract “involves a single sum certain.” In contrast, a divisible contract is one that involves “successive performances” and is “for an indefinite total amount which is payable in installments over an uncertain period.” (See Wood v. Unified Government of Athens – Clarke County, Ga. 2016 WL 1376443. ).

In the dispute before the court, the panel found that although the employer had made a single contractual promise for retirement healthcare benefits, the contract was divisible because the employer could only perform its promise by successive performances throughout the uncertain span of each retiree’s life. This was furthermore the case because of the unpredictable fluctuations in each retiree’s healthcare costs, the contract requiring the payment of many successive payments, and because the employees had no immediate claim for the entirety of the contract if the contract were entire. Thus, the statute of limitations ran separately as to each premium payment when it became due.

SAVE THE DATE: Central States Law Schools Scholarship Conference

The Central States Law Schools Association 2016 Scholarship Conference will be held on Friday, September 23 and Saturday, September 24 at the University of North Dakota School of Law in Grand Forks, ND.  
CSLSA is an organization of law schools dedicated to providing a forum for conversation and collaboration among law school academics. The CSLSA Annual Conference is an opportunity for legal scholars, especially more junior scholars, to present working papers or finished articles on any law-related topic in a relaxed and supportive setting where junior and senior scholars from various disciplines are available to comment. More mature scholars have an opportunity to test new ideas in a less formal setting than is generally available for their work. Scholars from member and nonmember schools are invited to attend.
Registration will formally open in July. Hotel rooms are already available, and more information about the CSLSA conference can be found on our website at www.cslsa.us.​

The Perils of A Duty to Negotiate in Good Faith

I’ve recently finished writing a textbook on contract clauses which takes a different approach to teaching contracts.  The book, to be published in September, uses contract clauses and case excerpts to introduce doctrinal concepts and to teach students how to problem solve.  (I always thought it unfortunate that a typical 1L learns contract law without knowing what common contract clauses mean or how they relate to what they’ve been learning). One of the cases mentioned in my book is SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A. 3d 330 (Del. 2013).  I’ve been meaning to blog about this case for some time now because it’s an important one for readers of this blog and corporate lawyers everywhere and illustrates the importance of using the right words in a contract. 

SIGA and PharmAthene signed a term sheet for an eventual license agreement and partnership to further develop and commercialize an anti-viral drug for the treatment of small pox.  The term sheet was not signed and contained a footer on each page that stated “Non Binding Terms.”  Subsequently, the parties drafted a merger term sheet that contained the following provision:

“SIGA and PharmAthene will negotiate the terms of a definitive License Agreement in accordance with the terms set forth in the Term Sheet…attached on Schedule 1 hereto.  The License Agreement will be executed simultaneously with the Definitive [Merger] Agreement and will become effective only upon the termination of the Definitive Merger Agreement.”

 The license agreement term sheet was attached as an exhibit to the merger term sheet.  On March 10, 2006, the parties signed a merger letter of intent and attached the merger term sheet and the license agreement term sheet. 

On March 20, 2006, the parties entered into a Bridge Loan Agreement where PharmAthene loaned SIGA $3million for expenses relating to the merger and for costs related to developing ST-246.  It stated the following in Section 2.3:

“Upon any termination of the Merger Term Sheet….termination of the Definitive Agreement relating to the Merger, or if a Definitive Agreement is not executed…., SIGA and PharmAthene will negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in the License Agreement Term Sheet …and [SIGA] agrees for a period of 90 days during which the definitive license agreement is under negotiation, it shall not, directly or indirectly, initiate discussions or engage in negotiations with any corporations, partnership, person or other entity or group concerning any Competing Transaction without the prior written consent of the other party or notice from the other party that it desires to terminate discussions hereunder.”

On June 8, 2006, the parties signed the Merger Agreement which contained a provision nearly identical to section 2.3 of the Bridge Loan Agreement and provided that if the merger was terminated, the parties agreed to negotiate in good faith to enter into a license agreement with the terms of the License Agreement term sheet.  The Merger Agreement also stated that the parties must use their “best efforts to take such actions as may be necessary or reasonably requested by the other parties hereto to carry out and consummate the transactions contemplated by this Agreement.”

Shortly thereafter, SIGA terminated the Merger Agreement and announced that it had received a $16.5million NIH grant.  SIGA also proposed different licensing terms from those contained in the term sheet and argued that the license agreement term sheet was not binding because of the “Non-Binding” footer.  PharmAthene sued -- and won.  SIGA appealed and the Supreme Court of Delaware found that the “express contractual language” obligated the parties to “negotiate in good faith with the intention of executing a definitive License Agreement” with terms “substantially similar” to the terms in the license agreement term sheet. 

The damages to PharmAthene ended up being around $200million– in other words, expectation damages.   In order to stop PharmAthene from enforcing the judgment while undergoing the appeals process, Siga filed for Chapter 11 bankruptcy.   Siga subsequently lost its second appeal to the Delaware Supreme Court, which upheld the award of expectation damages.

Last week, the U.S. Bankruptcy Court for the Southern District of New York approved a reorganization plan that sets the stage for SIGA to exit from bankruptcy.  The judgment is expected to be satisfied by October 20, 2016.

A long and expensive road for SIGA which could have been avoided by paying more attention to the language used in the contract.

Contract as Empowerment

As a courtesy to Professor Kar, who is visiting with the University of Chicaco Law School, I promised to post a snippet about his new article, which addresses some of the issues we have discussed on this blog during my tenure as editor here:

Contract as Empowerment offers a novel view of contract law. The article pictures it neither as a mere mechanism to promote efficiency nor a mere reflection of any familiar moral norm — such as norms of promise keeping, property, or corrective justice. Contract law is instead a mechanism of empowerment: it empowers people to use legally enforceable promises as tools to influence other people’s actions and thereby meet a broad range of human needs and interests. It also empowers people in a special way, which reflects a moral ideal of equal respect for persons. This fact explains why contract law can produce genuine legal obligations and is not just a system of coercion. By blending philosophical, economic, and doctrinal insights, Kar offers a fundamental reinterpretation of modern markets and the basic principles that allow them to operate. Download the article here.

 

Gilmore Girls, Netflix, Derivative Works, and Contracts in a Changing Television Landscape

(image from IMDB)

Gilmore Girls fandom rejoiced when it was announced that the show would receive a revival on Netflix (and, even better, that it will include Sookie!). But, as often seems to be the case, developments that bring a fandom joy can come with legal entanglements. In this case, producer Gavin Polone's production company Hofflund/Polone has filed a lawsuit against Warner Bros., alleging breach of contract. The lawsuit, Hofflund/Polone v. Warner Bros. Television, Case No. BC616555 (behind paywall), was filed in the Los Angeles County, Central District, Superior Court of California. 

The case revolves around the agreement between the parties concerning the original production of Gilmore Girls. The parties agreed, according to Hofflund/Polone, to provide Hofflund/Polone with "$32,500 for each original episode of Gilmore Girls produced in any year subsequent to 2003," along with some percentage of the gross and with "executive producer" credit. With the news of the recent Netflix revival, Hofflund/Polone allegedly reached out to Warner Bros. seeking compensation under the agreement. According to the complaint, Warner Bros. took the position that the Netflix version of Gilmore Girls is a derivative work based on the original series, and so therefore does not trigger compensation to Hofflund/Polone. 

It's an interesting question that highlights one of the debates copyright scholars have: What, exactly, is a "derivative" work? Copyright owners have the exclusive right to reproduce their own works or works substantially similar to those works. They also have the right to produce derivative works based on those works, which, in the jurisprudence, has ended up using the same substantially similar standard to elucidate the "based on" language. Which means: what is the point of the derivative work right, if its standard seems the same as the reproduction right? This case has the potential to force confrontation with that problem: Where do we draw the line between infringement of the reproduction right and infringement of the derivative work right? When does a substantially similar work cross the line between reproduction and derivative work? 

One thing that's been noted about the derivative work right is it tends to be talked about when there's some kind of change in medium or other kind of adaptation different from the original form (book to film, or translation from one language to another). The definition in the statute points us to that focus.  Which raises the question: Is a Netflix revival more like a translation or adaptation of Gilmore Girls than it is like an exact copy of Gilmore Girls? Does this depend on how true it is to the original show? 

The "television" landscape has shifted dramatically since Gilmore Girls premiered. It'll be interesting to see how contracts formed pre-Netflix-and-Amazon-production-era function going forward. 

Insurance Policies: Making Fantasy Viable in the Real World

That's not usually a tagline you associate with insurance policies, but it nevertheless appears to be true. 

  

I feel like I've been doing a lot of blogging about insurance policies lately. So it almost seemed inevitable to me when I received my latest Rec Center e-mail (if you're not signed up, you totally should be!) that there would be a link to an article about insurance policies. However, this article is about how the growing willingness of insurance companies to insure fantasy live action role playing (LARP) events may be helping those events to become more common. As it becomes easier for the average person to get insurance for a LARP event, those events become simpler and less risky to host. So, if you've been wanting to set up your own quest and re-enact some fantasy combat, you can now make sure that people are covered by insurance if they fall during the battle and break an arm. The article notes, by the way, that injuries at LARP events are rare. One of the insurance companies hasn't received a single claim in five years. So this seems like a win-win for everyone. 

You should go read the article, it's really interesting, and a reminder that marijuana facilities aren't the only industry new-ish to the insurance area where policies need to be interpreted. Anything humans can dream up for fun can carry insurance policies with it. I guess they're kinda-sorta the equivalent of a healing spell or potion? (With a lot less magic.)

Shipping War (the package kind, not the fanfiction kind)

How far does a franchisor have to go to help out a franchisee? That was the question asked in a recent case out of the Southern District of New York, The UPS Store, Inc. v. Hagan, 14cv1210 (behind paywall). This particular dispute between UPS and its franchisees the Hagans attracted a fair amount of online attention when it first erupted back in 2014. Now, UPS has been granted partial summary judgment on the contractual disagreements. 

UPS and the Hagans entered into a variety of contract carrier agreements, franchise agreements, and promissory notes in connection with the Hagans' operation of eleven UPS franchises in the New York City area. The relationships between the parties eventually broke down, and accusations were flung back and forth between them. This federal lawsuit included trademark and trade secret allegations, in addition to breach of contract claims, and the Hagans counterclaimed alleging violations of New York's deceptive trade practices act.

With regard to the breach of contract claims, the Hagans conceded that they failed to perform under the contracts, but alleged that their breach was excused by impossibility, impracticability, or UPS's own breach of the implied covenant of good faith and fair dealing. The court, however, granted summary judgment to UPS, finding that the Hagans had impermissibly breached the contracts.

The Hagans' main allegations revolved around UPS's failure to police other franchisees, to allow the Hagans to bundle customer invoices, to provide the Hagans with better computer technology, and to negotiate with private investors who were funding the Hagans' businesses in order to soothe them about the businesses' profitability. But UPS was not required to do any of those things under the terms of the contract. Because they were not "basic assumptions" of the contract, the impractiability and impossibility defenses failed, and the alleged breach of the covenant of good faith and fair dealing was likewise doomed. The Hagans' arguments essentially boiled down to a desire for UPS to take "affirmative action" to save the Hagans' businesses as they began to fail. The Hagans termed this a "duty to cooperate" that was included in the covenant of good faith and fair dealing. But the court, applying California law, rejected this idea. Again, there was nothing in the contracts that required UPS to take the affirmative steps the Hagans desired, and the court declined to impose obligations on UPS beyond those agreed to under the contract. 

The franchise agreement between the parties contained a liquidated damages clause dictating that damages should be the amount of royalties paid to UPS the previous year multiplied by the number of years (not to exceed two) left in the contract term. The Hagans argued that this was an unreasonable estimate of UPS's damages because UPS would recoup the lost royalties from the Hagans' franchises through either issuing new franchises or increased business to the remaining UPS franchises in the area (which the Hagans showed were all less than half a mile from the Hagans' locations, this being New York City). The court, however, found that, although maybe the Hagans might be right, that didn't mean that the clause had been unreasonable at the time of execution of the contract, which was the relevant test. Therefore, the liquidated damages clause was enforceable.  

Weekly Top Ten SSRN Contracts Downloads (April 8, 2016)

SSRN Top Downloads For
Contracts & Commercial Law eJournal

Rank	Downloads	Paper Title
1	386	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	175	From Promise to Form: How Contracting Online Changes Consumers David A. Hoffman Temple University - James E. Beasley School of Law
3	156	The Abolition of Dysfunctional Contracts in Bankruptcy Reorganizations Jay Lawrence Westbrook and Kelsi M Stayart University of Texas at Austin School of Law and University of Texas at Austin, School of Law, Student 2015
4	121	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
5	117	Contract, Consent, and Fiduciary Relationships Lionel Smith McGill University, Faculty of Law, Paul-André Crépeau Centre for Private and Comparative Law
6	110	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
7	106	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
8	101	The New EU Proposal for Harmonised Rules for the Online Sales of Tangible Goods (COM (2015) 635): Conformity, Lack of Conformity and Remedies Jan M. Smits Maastricht University Faculty of Law - Maastricht European Private Law Institute (M-EPLI)
9	93	(Mis)perceptions of Law in Consumer Markets Oren Bar-Gill and Kevin E. Davis Harvard Law School and New York University School of Law
10	86	Realizing Rationality: An Empirical Assessment of International Commercial Mediation S.I. Strong University of Missouri School of Law

SSRN Top Downloads For
LSN: Contracts (Topic)

Rank	Downloads	Paper Title
1	386	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	174	From Promise to Form: How Contracting Online Changes Consumers David A. Hoffman Temple University - James E. Beasley School of Law
3	121	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	110	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
5	106	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
6	101	The New EU Proposal for Harmonised Rules for the Online Sales of Tangible Goods (COM (2015) 635): Conformity, Lack of Conformity and Remedies Jan M. Smits Maastricht University Faculty of Law - Maastricht European Private Law Institute (M-EPLI)
7	81	The Rules of the Game and the Morality of Efficient Breach Gregory Klass Georgetown University Law Center
8	73	Revisiting the Penalty Rule John Eldridge University of Adelaide, School of Law, Students
9	72	Smart Contracts: A Preliminary Evaluation Maria Letizia Perugini and Paolo Dal Checco University of Bologna - Research Center of History of Law, Philosophy and Sociology of Law, and Computer Science and Law (CIRSFID) and University of Turin - Interfaculty School of Strategic Science SUISS
10	70	The Future of Pre-Contractual Information Duties: From Behavioural Insights to Big Data Christoph Busch University of Osnabrück - European Legal Studies Institute

Cosby Files Breach Of Contract Lawsuit Against Rape Accuser

Bill Cosby has filed a lawsuit against a woman who settled a civil sexual abuse case against him for allegedly breaching a confidentiality clause in the settlement. That confidentiality clause allegedly barred the woman from voluntarily discussing the case with law enforcement agencies. She has cooperated with police after the criminal case against Cosby was opened. Cosby wants the settlement money paid by him repaid.

Just as you think this case could not sink any lower….

Marijuana Growing Facility Insurance Policies

By Rotational - Own work, Public Domain, https://commons.wikimedia.org/w/index.php?curid=3455706

Here's an area of law where we're going to need a lot more guidance over the coming years, I suspect: how exactly does the wording of specific insurance policies apply to (now legal in some places under some circumstances) marijuana growing facilities? 

A recent case out of the District of Colorado, The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, Civil Action No. 13-cv-03452-MSK-NYW, deals with that question. In that case, Green Earth, a marijuana growing facility, alleged that a wildfire sent so much smoke and ash into Green Earth's ventilation system that it ended up damaging the marijuana plants inside. Green Earth therefore made a claim under its insurance policy with Atain for this damage. 

This case contains an interesting discussion of how exactly marijuana plants are grown. The important takeaway is that Green Earth was making claims both for Green Earth's growing marijuana plants and for buds and flowers that had been harvested and were being prepared for sale. Green Earth argued that both the growing plants and the harvested buds and flowers were covered under the insurance policy's definition of "Stock." Atain maintained, however, that "Stock" did not apply to the growing plants, only to the buds and flowers that had already been harvested. 

The insurance policy defined "stock" as "merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping." Everyone agreed that the harvested buds and flowers qualified as "stock" so the debate centered entirely around whether the growing plants also qualified as "stock." There was no prior discussion between the parties as to this issue, so the court ended up relying heavily on dictionary definitions, especially of the term "raw materials." The court ended up concluding that this wasn't appropriate for summary judgment, because the court could see the definition as including growing plants or not. 

However, the court then turned its attention to another part of the insurance policy that specifically excluded "growing crops." Green Earth argued that its growing marijuana plants weren't "growing crops" because crops are grown outside, not in indoor facilities. But, once again looking at dictionaries, the court concluded that the exact location was not important to the definition of "crop." "Crops" referred to things growing out of soil and did not differentiate between outdoor soil and indoor soil. Therefore, even if the growing marijuana plants could be "raw material" under the definition of "stock," they were specifically excluded from coverage as a "growing crop." And, indeed, in correspondence proposing the policy, Atain wrote that it would not cover "growing...plants," supporting the court's more expansive reading of "crops" as just being a type of plant, whether inside or outside. 

Interestingly, Atain then tried to argue that, even though the harvested buds and flowers were technically "stock," they weren't covered because they were "contraband" and public policy was against insuring such forbidden goods. The court noted that the attitude of the federal government toward the legality of marijuana is "nuanced (and perhaps even erratic)" and focused on the fact that it was undisputed that Atain knew Green Earth was growing marijuana and agreed to insure it, so it wasn't fair to allow Atain to back out of that now. 

Hurricane Sandy and Art

Hurricane Sandy's flooding of the Red Hook section of Brooklyn damaged are in the Christie's warehouse located there, and provoked a rash of subrogation cases against Christie's, including AXA Art Insurance Corp. v. Christie's Fine Art Storage Services, Inc., 652862/13. 

All of the cases revolved around the same core set of facts: As Hurricane Sandy was approaching, the Mayor of New York warned that Red Hook was likely to be flooded, and eventually ordered its evacuation. Christie's sent an e-mail to its clients stating it would "take extra precautions" in the face of "significant inclement weather," and that "may include" making sure the generators were working, providing extra security, and raising all of the artwork up off the floor. Allegedly Christie's did none of these things. Shortly after Sandy went through, Christie's sent another e-mail assuring its clients that the artwork was safe, but a few days later Christie's corrected itself, contacting some of its client to inform them that flooding had damaged some of the artwork. 

Some insurance companies had to pay out millions of dollars in the wake of this news, and this insurance companies sought to collect the money from Christie's. AXA brought a typical case, that resulted in a typical failure, based on the fact that Christie's storage agreement contained a waiver of subrogation: Christie's clients were "responsible for arranging insurance cover" for the artwork stored at Christie's and "agree[d] to notify [the] insurance carrier/company of this agreement and arrange for them to waive any rights of subrogation against [Christie's] . . . with respect to any loss of or damage to the [artwork] while it remains in [Christie's] care, custody and control." 

The court held that this subrogation waiver acted to bar AXA's claims for gross negligence, negligent misrepresentation, breach of bailment, and breach of contract. AXA tried to argue that this was in violation of U.C.C. Section 7-204, but the court disagreed: The U.C.C. prevented Christie's from exempting itself from all liability, but this subrogation waiver, according to the court, merely allocated the risk of liability to the insurance companies. AXA also argued that Christie's breached the storage agreement in its actions (apparently no artwork was supposed to be stored on the ground floor, which had been represented to the clients as being used for "intake" before the artwork was move to more secure storage), but the court said those breaches didn't affect the enforceability of the subrogation waiver. 

Well, the appellate court has spoken, and claims like AXA's now live to be litigated another day. In the similar case XL Specialty Insurance Company v. Christie's Fine Art Storage Services, Inc., the appellate court held that the subrogation waiver did violate Article 7 of the U.C.C. and attempt to exempt Christie's from all liability, the lower court's characterization otherwise notwithstanding. Therefore, the fight will now shift to whether Christie's actions were reasonable. 

Unconscionable “Out-of-Network” Medical Service Charges

I recently blogged here about the healthcare insurance problem of patients not knowing ahead of time for what they will ultimately be charged and by whom. California is now introducing a bill (“AB 533”) seeking to prevent the problem of patients being unexpectedly charged out-of-network charges at in-network facilities when the facility subcontracts with doctors that are (allegedly) out-of-network.

The practice is widespread, at least in California. Nearly 25% of Californians who had hospital visits since 2013 have been very unpleasantly surprised with unexpectedly high bills after the fact for “out of network” services. This even after inquiring about the contractual coverage ahead of time and ensuring – or attempting to – that their providers were in network.

I personally had the same experience once as described in my recent blog. I also recently encountered a similar problem in South Dakota when, after asking about billing prices from an emergency room, was assured of one relatively modest price, only to be billed roughly ten times that amount a couple of months later for various unrecognizable items on the bill that the service provider, to add insult to injury, subsequently did not want to even discuss with me. (Yes, that is right: sick and in the emergency room, I was leery of hospital pricing and asked, only to still not get correct information.)

The onus of information-sharing should be on doctors and other medical provider. They should tell their patients if they are not in network, patients shouldn’t have to jump through an almost endless row of hoops just to find out their ultimate contractual obligations. Doctors will know immediately once you swipe your health insurance card, whereas patients have no way of knowing, as these stories show. Making matters even worse: what are patients supposed to do when they often don’t even see all the involved doctors ahead of time? Wake up during anesthesia and ask, “Oh, by the way, are you in network”? This practice is unconscionable and must stop. It is arguably an ethical obligation as well.

Because some hospitals, for instance, only accept employer-provided plans and not individual ones, some patients will always be out of network, thus allowing doctors to bill full charge. “This is a market failure. It allows doctors to exploit the monopoly that they have.”

Although it seems ridiculous, patients may, for now, have to turn the tables on the providers and scrutinize as many providers and facilities as they get in touch with 1) what the prices charged to the patients will be, and 2) if the providers are truly, actually, really in network (!).

Contractually, would patients win if they informed providers that they will only pay for in-network providers and only up to a certain amount? What else can a reasonable patient do in situations of such blatant greed and ignorance as these stories depict? Comment below!