ContractsProf Blog

Terms and Conditions: You Agree to What You've Agreed To

Watching terms and conditions litigations continue to play out is an interesting exercise. One of the things we learn is that the terms and conditions mean what they say, which should be obvious, but of course ignores the fact that basically nobody reads what they say. Consumers seem to be consistently caught off-guard by some of the terms. A recent Ninth Circuit decision, Geier v. M-Qube Inc., No. 13-36080, reinforces this (you can watch the oral argument here).

Geier sued m-Qube based on a mobile game it marketed called Bid and Win. m-Qube was not the provider of the game; rather m-Qube merely marketed the game. The other defendants in the case were all similarly removed from the actual content of the game, serving as "intermediaries" and "gateways." The game's actual content provider, Pow! Mobile, was not sued by Geier. 

The dispute in the case was over whether m-Qube and the other defendants were third-party beneficiaries of the terms and conditions of the game. Allegedly, when signing up for the game, subscribers, under the terms and conditions, waived all claims against Pow! Mobile's "suppliers." Despite this clause, Geier was attempting to sue m-Qube, et al., over text message abuses in violation of Washington law. (Geier, incidentally, was not alone in suing over this. A class action in the District of Nebraska was complaining about the same behavior.)

The Ninth Circuit's decision in this case is a matter of straightforward contract law: If you are an intended third-party beneficiary of the contract, you can enforce the contract. There is no real surprise there, except maybe to the consumer here, because it may sink Geier's entire case, which now hinges on whether m-Qube and the other defendants are Pow! Mobile's "suppliers." If they are, then they are intended third-party beneficiaries of the terms and conditions' waiver clause and can seek to enforce it. We may not be reading those terms and conditions, but we may be waiving lots of our rights nonetheless.  

Scholarship Spotlight: What We Buy When We 'Buy Now' (Aaron Perzanowski - Case Western & Chris Jay Hoofnagle - Cal-Berkeley)

Contracts in the digital age continue to raise novel issues of mutual assent and interpretation, and misunderstanding by individual users crosses over into consumer law as well.  In What We Buy When We 'Buy Now, authors Aaron Perzanowski (Case Western) and Chris Jay Hoofnagle (California - Berkeley) generate and analyze empirical data on consumer understanding of contracts for digital wares, concluding that this area is ripe for action by the Federal Trade Commission. Here is the authors' abstract:

Retailers such as Apple and Amazon market digital media to consumers using the familiar language of product ownership, including phrases like “buy now,” “own,” and “purchase.” Consumers may understandably associate such language with strong personal property rights. But the license agreements and terms of use associated with these transactions tell a different story. They explain that ebooks, mp3 albums, digital movies, games, and software are not sold, but merely licensed. The terms limit consumers' ability to resell, lend, transfer, and even retain possession of the digital media they acquire. Moreover, unlike physical media products, access to digital media is contingent — it depends on shifting business models, the success and failure of platforms, and often on the maintenance and availability of DRM authentication systems years after the consumer clicked “buy now.”

This article presents the results of the first-ever empirical study of consumers' perceptions of the marketing language used by digital media retailers. We created a fictitious Internet retail site, surveyed a nationally representative sample of nearly 1300 online consumers, and analyzed their perceptions through the lens of false advertising and unfair and deceptive trade practices. The resulting data reveal a number of insights about how consumers understand and misunderstand digital transactions. A surprisingly high percentage of consumers believe that when they “buy now,” they acquire the same sorts of rights to use and transfer digital media goods that they enjoy for physical goods. The survey also strongly suggests that these rights matter to consumers. Consumers are willing to pay more for them and are more likely to acquire media through other means, both lawful and unlawful, in their absence. Our study suggests that a relatively simple and inexpensive intervention — adding a short notice to a digital product page that outlines consumer rights in straightforward language — is an effective means of significantly reducing consumers’ material misperceptions.

Sales of digital media generate hundreds of billions in revenue, and some percentage of this revenue is based on deception. Presumably, if consumers knew of the limited bundle of rights they were acquiring, the market could drive down the price of digital media or generate competitive business models that offered a different set of rights. We thus turn to legal interventions, such as state false advertising law, the Lanham Act, and federal unfair and deceptive trade practice law as possible remedies for digital media deception. Because of impediments to suit, including arbitration clauses and basic economic disincentives for plaintiffs, we conclude that the Federal Trade Commission (FTC) could help align business practices with consumer perceptions. The FTC’s deep expertise in consumer disclosures, along with a series of investigations into companies that interfered with consumers’ use of media through digital rights management makes the agency a good fit for deceptions that result when we “buy now.”

Professors Perzanowski's and Hoofnagle's article is forthcoming in the University of Pennsylvania Law Review in 2017, but you can download their current draft here.

Book Review: Drafting and Analyzing Contracts: A Guide to the Practical Application of the Principles of Contracts Law

Carolina Academic Press has just released the fourth edition of the above title by Professor Scott J. Burnham. I got a chance to review it and, although I have not used it in a classroom setting yet, share my impressions with you here.

The book is well organized into twenty clearly defined chapters. Each chapter boils the relevant contract law into nicely terse “blackletter” law segments with no cases (a plus!) or irrelevant matter. This may serve the dual function of reminding students taking a contract drafting class about the applicable law for purposes of such a class, but also to refresh their memories again before taking the bar.

The exercises alter between reading/understanding-style problems and actual drafting problems. For example, some problems will ask the students pointed questions about contract clauses (“Is nonperformance excused?,” “What does the company have to pay [an injured worker],?” “Which of the following clauses are enforceable?” Many more, though, ask for more student involvement and deeper analysis while drafting. For example, several exercises give students a range of objectives to be accomplished and ask the students to draft the appropriate language, others ask students to identify ambiguities and improving them, some deliberately provide overly complicated “legalese” clauses, asking students to modernize them without compromising the legal objectives, and yet others ask students to rely on certain passages in the book in order to draft certain clauses, taking into consideration certain concerns.

The book also asks students to address various ethical concerns, which is a plus.

The only activity that I saw that I personally do not care for is one asking the students to “research the law in your jurisdiction” to be draft a certain problem. For me, that is too open-ended. I would fear questions about substantive law provisions with which I am not personally familiar and the potential surprise when students find out that we do not know “everything” about the law. However, that was just one of many great, diverse exercises.

In short: this book contains much good substantive information and features a wealth of different types of exercises. I highly recommend that you examine this book for your potential classroom or other use.

Weekly Top Ten SSRN Contracts Downloads (May 26, 2016)

SSRN Top Downloads For
Contracts & Commercial Law eJournal

1	2,708	Contract as Empowerment Robin Bradley Kar University of Illinois College of Law
2	467	What We Buy When We 'Buy Now' Aaron Perzanowski and Chris Jay Hoofnagle Case Western Reserve University School of Law and University of California, Berkeley - School of Information
3	187	How Do LLC Owners Contract Around Default Statutory Protections? Peter Molk Willamette University - College of Law
4	124	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
5	119	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
6	90	Understanding Privacy Policies: Content, Self-Regulation, and Markets Florencia Marotta-Wurgler New York University School of Law
7	84	(In)Efficient Breach of Contract Daniel Markovits and Alan Schwartz Yale Law School and Yale Law School
8	83	Immoral Promises Enrique Guerra-Pujol University of Central Florida
9	80	Probate Lending David Horton and Andrea Cann Chandrasekher University of California, Davis - School of Law and University of California, Davis - School of Law
10	70	Noncompetes in the U.S. Labor Force Evan P Starr, Norman Bishara and J.J. Prescott University of Maryland Robert H Smith School of Business, The Stephen M. Ross School of Business at the University of Michigan and University of Michigan Law School

 

SSRN Top Downloads For
LSN: Contracts (Topic)

Rank	Downloads	Paper Title
1	412	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	147	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	136	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	125	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
5	115	(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	114	Contract as Empowerment Robin Bradley Kar University of Illinois College of Law
7	111	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
8	89	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	75	The Common Law of Contract and the Default Rule Project Alan Schwartz and Robert E. Scott Yale Law School and Columbia University - Law School

31 Plus Hours of App Reading

The Norwegian consumer council spent over 31 hours reading the terms and condition of 33 apps (the number that an average consumer has).  It was all to prove the point that there's a good reason nobody reads those T&Cs - and that businesses should do something about it.  What does the council want?  Shorter, clearer terms and a common standard.  Sounds good to me.

Scholarship Spotlight: Freedom of Contract Under the Federal Arbitration Act (Steven W. Feldman)

For a topic that--superficially, at least--is a dry matter of procedure, arbitration provokes a great amount of spirited debate from both its proponents and detractors. I freely admit to falling on the side of the detractors, but that is not necessarily the home for all of our readers. A recently-published article in the Michigan State Law Review by Steven W. Feldman (U.S. Army Corps of Engineers) not only provides a welcome perspective from a blog reader outside the bubble of academia, but he also articulates a position far more favorable to the current state of Supreme Court jurisprudence under the Federal Arbitration Act than do some of us who frequently find the sky to be falling.  Here is Feldman's abstract:

In her article, Disappearing Claims and the Erosion of Substantive Law, published in the June 2015 issue of the Yale Law Journal, J. Maria Glover argues that the Court’s recent arbitration decisions reflect a “fundamental shift” in the normative prerogatives that support “the Court’s freedom-of-contract conception of arbitration.” The Court, she asserts, has devised the view that “such freedom enabled private parties to change the mechanisms of adjudication, but not to change the scope of obligations under substantive law.” Glover is especially critical that the Court’s recent decisions have “[a]bandoned [the] descriptive and normative premise that freedom of contract was justified in the arbitration context because it would result in more cost-effective procedures for ‘settling’ disputes.”

This Article responds that Glover’s key premises and conclusions are unsupported. Instead, the Court has endorsed the major principles of freedom of contract in its arbitration jurisprudence. The better view is that (1) freedom of contract in arbitration cases properly construed is not limited to devising streamlined cost-effective procedures but is broadly construed to allow parties the leeway to select the terms governing the arbitration; (2) the need to enforce the parties’ mutual assent exists independently from arbitral efficiency, and the enforcement of mutual assent takes priority over arbitral efficiency when there is a conflict; (3) pure freedom of contract (which Glover says is the current state of the law) does not exist because many limits from law and public policy (largely unmentioned by Glover) maintain the integrity of the arbitral process; and (4) Italian Colors is a legitimate evolution, and not a revolution, in FAA practice and procedure.

The complete article, Steven W. Feldman, Italian Colors and Freedom of Contract under the Federal Arbitration Act: Has the Supreme Court Enabled Disappearing Claims and the Erosion of Substantive Law?, is now in print at 2016 MICH. ST. L. REV. 109 and is available for download here.

 

No Implied Warranty of Fitness for a Particular Purpose With Regard to Architectural and Design Services in Michigan...for Now

A recent case out of the Court of Appeals of Michigan, Albion College v. Stockade Buildings Inc., No. 322917 (behind paywall), gives us an example of a case where precedent was obeyed but one of the judges worried the precedent might provide the wrong result, setting up the potential for further examination by Michigan's Supreme Court. 

Plaintiff hired Defendant to build an equestrian facility. Defendant allegedly informed Plaintiff that it had "the necessary experience and expertise" to build the facility that Plaintiff required and promised it would be backed by a warranty. 

Because this is a case I'm writing up here, we all know that the story of this equestrian center does not go smoothly. The roof leaked badly. The problem was evident during construction and theoretically repaired but the roof continued to leak badly even after construction was completed. Reviews of the structure blamed the persistent problem on poor design of the facility by Defendant. 

The crux of the case was whether the agreement between Plaintiff and Defendant contained an implied warranty of fitness for a particular purpose. In Michigan, such an implied warranty is found in sales of goods governed by the UCC and sales of electricity. The court was reluctant to extend such a warranty to the architectural and design services at issue here. 

A concurrence, however, expressed hesitation with the conclusion. While reasonably correct as a matter of simple legal precedent, the concurrence had policy concerns and thought that Michigan's supreme court should review the case and extend the warranty to this situation because of the "egregious facts" of this case.  Stay tuned for what happens next!

How Bad Can a New Law Graduate’s Representation Be?

Pretty darned bad! Imagine this: A law student starts giving professional legal advice while still in law school. The advice is rendered to a 78-year-old Chinese-American with limited English skills and experience with the American legal system. The student renders the advice in person, over the phone, and in extensive e-mail exchanges. He even persuades the client to “assign” the lawsuit to the student so that the student would be “better able to control the suit and properly advise” the client. In doing so, the student promises to “minimize any legal costs to [the client] before [the student] getting [sic] his license by doing all the work he can carry on for said case.” The students subsequently graduates (from a California law school not accredited by the ABA, according to the website of the State Bar of California), passes the bar, and becomes the formally retained lawyer for the client.

The new graduate sues a party on behalf of his client. The graduate also names his own client on a lawsuit for an unrelated matter “only as a matter of legal procedure.” Additionally, the graduate sues his client’s defendants! The advice he renders is thought to be legally incorrect by a mediator. The client thus fires the graduate. The State Bar of California brings disciplinary proceedings against the new graduate for conflict of interest matters as well as the unauthorized practice of law. The graduate stipulates to the charges and is suspended for some time.  Trial is brought against the graduate by his former client for professional negligence, breach of fiduciary duty, unlawful business practice, breach of contract, and fraud. The client wins a judgment of $552,412.

You guessed it! The graduate does not pay. Rather, he appears in some subsequent judgment debtor proceedings, but disputes the court’s personal jurisdictions (that argument is waived once an appearance has been made, by the way). He submits briefs to the court misciting passages from outdated Matthew Bender Civil Procedure practice treaties. He refuses to produce tax returns to show his income. The court has to order him to do so. He goes bankrupt, and produces a “myriad” of inconsistent stories in the case. As the court said, “a few examples should suffice:

• Yan testified he sold his membership in an LLC to two persons for $650,000, but could not remember their names.
• Yan testified that his mother provided him checks, but could not remember: whether the checks numbered more than a hundred; when the most recent check was received; or when his mother last worked or her last job.
• Yan testified that he was the sole support for his children, supported solely by his income, which for 2014 was “less than [$]10,000.” The support included rent, which included $8,400 in 2014, but he refused to provide the identity of the person to whom the rent was paid. Yan was asked the source of the money to pay his children's rent, and he said it was from his “income.” Asked if that was from legal fees, Yan said, “I don't know.”
• Enough is enough.”

The monetary judgment against the graduate was affirmed. Years later, at least one other disciplinary matter has been brought against the graduate.

The question is: is this just one example of an unusually rotten apple? Or does this point to the assertion made by many that California really does not need a number of unaccredited law schools on top of the already large amount of ABA-accredited ones? (But note too that even the trial court record contains “no evidence of anything, only assertions as to what occurred, though [the plaintiff’s] assertions are supported by various exhibits” and not disputed by the defendant. There were, for example, “no reporter’s transcript, nor any real evidence – that is, sworn evidence….”

Comment below! The case is Charles Li v. Demas Yan, 2016 WL 1757283.

Wait a Minute, George Zimmerman is Not a Man of His Words?

Is it unthinkable to you that George Zimmerman would seek to profit from killing Trayvon Martin? No? How about reneging on one contract if he were to get an even more lucrative one?

The latter has recently been shown to be the case. The former Florida neighborhood watchman who shot the unarmed teenager in 2012 has confirmed that he has accepted an auction bid for $250,000 for the gun with which he killed Mr. Martin. Before that, he had accepted a bid for $150,000 from a Florida bar owner for the same gun, but backed out of that deal when he got a better one. Says the bar owner, “I thought [Mr. Zimmerman] was a man of his word.”

The sale drew heavy criticism from people claiming that Mr. Zimmerman was seeking to profit from the sale. Gun rights advocates claim that Mr. Zimmerman is simply exercising his legal rights under the law.

Meanwhile, Mr. Zimmerman has displayed his apparent usual lack of social skills by accusing one gun auction website that refused to sell the gun of being “Nazi loving liberal liars ” (Huh? How would that work?). At least he promises to give some of the proceeds of the sale to “fight Black Lives Matter violence against law enforcement officers”…

No further comments are needed for this story.

 

From a Colonial Cemetery to a World War II Factory to Condos and a Spa: Environmental Concerns, Contract Releases, and Secret Underground Containers Are Just the Latest Chapter

(Photo from northjersey.com)

I use a lot of hypos in my class based on undiscovered buried containers of environmental hazards, and I feel like sometimes my students wonder if this is a thing that actually happens. Unfortunately, yes, as a recent case out of New Jersey, North River Mews Associates v. Alcoa Corp., Civil Action No. 14-8129, proves. 

The case centers around a piece of land on which Alcoa had operated a manufacturing facility from 1917 to 1968, a facility once so central to East Coast industry that it had actually been placed on the National Register of Historic Places. The piece of land had been vacant since 1978 and became a popular site for people looking to photograph "modern ruins." It was eventually sold to North River Mews Associates and 38 COAH Associates (the Plaintiffs). Twenty years ago, the New York Times reported optimistically that the development deal would be a "win-win" the would help clean up the Hudson River shoreline. The site, however, has been plagued by a number of challenges and tragedies (several fires, workman injuries from freak accidents, etc.) that have led some people to talk about curses. (Well, it apparently had been built on an old graveyard dating back to colonial times.) The latest obstacle has now emerged in the form of, yes, previously undiscovered buried containers of environmental hazards.  

The parties were well aware that the land would have environmental contamination, as the Times article makes clear. But the Plaintiffs had worked with the New Jersey Department of Environmental Protection and believed that the property had been remediated. In 2013, however, the Plaintiffs discovered two previously unknown underground storage tanks filled with hazardous materials. The property around the tanks seemed to indicate that at one point the tanks had attempted to be burned instead of properly disposed of. The presence of these tanks, needless to say, was never disclosed by Alcoa to the Plaintiffs. 

Alcoa's stance, however, is that the purchase contracts for the land released them from liability for various claims brought against them. The court disagreed at this motion to dismiss stage, finding that the language was ambiguous. The release in the contract stated that the Plaintiffs waived the rights "to seek contribution from [Alcoa] for any response costs or claims." The court said that it was unclear whether the contribution language modified only response costs or whether it modified both response costs and claims. Was this a blanket release of all claims, or only a release of the right to seek contribution? This question, the court concluded, could not be determined on a motion to dismiss. 

At any rate, the Plaintiffs also alleged that Alcoa concealed the presence of the underground tanks, fraudulently inducing them to enter into the contracts, and the court concluded that, if true, that would be grounds for the release to be vitiated. 

This case is a great example of how long environmental issues, development deals, and contractual disputes can drag on. In 1997, the parties signed the purchase contract. Today, the parties are still trying to clean up the site and fighting over which of them ought to pay for it, with language drafted twenty years ago taking center stage. As the case continues, it will of course likely become relevant who knew about the storage tanks and when, and I am curious to see if the tanks can be dated. Since Alcoa apparently ceased using the site for manufacture in the 1960s, it will be interesting to see how much knowledge from that time period still exists. It's the latest chapter in the history of a plot of land that seems to have been a busy place for centuries. 

Attempt to Pass on the Hot Potato Nixed

In a perhaps somewhat unsurprising but good holding, the Seventh Circuit has nixed a company’s attempt to not live up to its contractual promises regarding the technical functions and warranties of one of its products.

The plaintiff bought an industrial refrigeration system. The contract provided that if the system “does not meet the [contractually stipulated] requirements, defendants shall immediately, upon notice, replace or repair same or remedy any deficiency without expense to [plaintiffs].” When it came to living up to that promise, however, defendants produced a slew of other excuses for the problem such as installation errors, problems with the conditions at the facility where the system was installed, flawed wiring performed by other parties, etc.

The court found that even though defendant had presented evidence of a number of equally plausible causes, it had not provided proof that those alternative causes in fact caused the problem. Defendant, said the court, had promised to “meet requirements [sic] of plan and specifications.” Since the system did not work, defendants were liable for fixing the problem under the plain language of the contract.

It’s nice to see that at least some courts do not let contractual parties get away with such attempted, after-the-fact shirking of responsibility after the fact. A contractual promise is a promise. Surely, major industrial companies have internalized the costs of potentially having to do an odd repair here and there that they don’t believe is their fault (if that truly were the case here…). It’s somewhat amazing to see the lengths some companies will go to in order not to live up to their ends of the bargain. In this case, that attempt was nixed.

The case is Dual Temp of Illinois v. Hench Control, Inc., 2016 WL 2642030.

Implied Warranties of Habitability on Houses Do Not Apply to Second Buyers If the First Buyers Waived Them

A recent case out of Illinois, Fattah v. Bim, Docket No. 119365 (behind paywall), allowed the court to clarify whether an initial home buyer's waiver of the implied warranty of the house's habitability applied to subsequent buyers, or whether the second purchaser of the house could nevertheless assert a breach of warranty claim against the builder of the home. The Supreme Court of Illinois concluded that a waiver of the warranty on the part of the first buyer eliminated the second buyer's ability to exert such a claim, overturning an appellate court decision that had sent reactionary ripples through the home-building blogosphere.

In 2005, Masterklad built a house that contained a brick patio. In 2007, Masterklad sold the house to Beth Lubeck. The sale of the house included a "Waiver and Disclaimer of Implied Warranty of Habitability" in which Lubeck "knowingly, voluntarily, fully and forever" waived the implied warranty of habitability that the State of Illinois reads into all contracts involving newly constructed houses. In exchange for the waiver of the implied warranty, Masterklad provided Lubeck with an express warranty on the house. The express warranty was limited to a one-year term. There was no allegation in the case that Lubeck's waiver of the implied warranty wasn't effective and enforceable, and there were also no allegations that Masterklad hadn't complied fully with the terms of the express warranty. 

In 2010, a couple of years after the expiration of Masterklad's express warranty on the house, Lubeck sold the house to John Fattah. The sale of the house stated that it was "as is." A few months later, the brick patio that Masterklad had installed collapsed. Fattah sued Masterklad, alleging that the patio had had latent defects that violated the implied warranty of habitability. 

At the trial court level, Fattah lost, with the court concluding that the policy that permitted knowing waivers of the implied warranty would be frustrated if subsequent buyers could resurrect the claims. The appellate court, as has been mentioned, reversed, though, finding that Fattah could assert breach of the implied warranty. 

Illinois' Supreme Court disagreed with the appellate court's decision. While Illinois has previously determined that the implied warranty extends to subsequent purchasers of a house where the first purchaser has not waived the warranty, this was a different situation: Fattah was seeking to recover damages that the first buyer would not have been entitled to. Allowing Fattah to do this alters Masterklad's risk exposure in an unfair way. Masterklad sought to manage its level of financial risk by providing an express warranty with a clear termination date, as it was permitted to do under Illinois precedent. It was unfair to switch everything up on Masterklad at this late date. In fact, allowing Fattah to bring this claim would effectively mean that the implied warranty of habitability could never be waived, as it could be resurrected by any subsequent buyer--which was the opposite of what Illinois had decided when it concluded that the implied warranty could be waived. 

The disagreements within the Illinois court system about this come down very explicitly to a policy decision. The appellate court seemed uneasy with waivers of the implied warranty because of public policy concerns, and one can see its point: You like to assume the houses you buy can generally be lived in. But the supreme court's point here also makes sense: If you buy a house "as is," you've usually gotten some kind of discount. If your gamble doesn't pay off, the courts are reluctant to revive arguments you bargained away. This might boil down to, much of the time, the maxim that a deal that seems too good to be true might, indeed, be untrue, and wariness should be employed.  

Scholarship Spotlight: "The Arbitration Bootstrap" (Christopher R. Leslie, UC-Irvine)

The federal law of arbitration has become an increasingly prominent intruder into the state law of contracts over the last few decades, largely because of the Supreme Court's interpretive morphing of the Federal Arbitration Act into a super-statute that elevates contractual arbitration clauses to a privileged and practically unassailable realm. In a recently published article in the Texas Law Review, Christopher R. Leslie (University of California - Irvine) posits--correctly, in my opinion--that courts have overreached in construing congressional intent behind the FAA. He also proposes specific limitations on otherwise unconscionable contract terms that have been "bootstrapped" onto an arbitration clause in the post-Concepcion era. Here is the abstract:

Arbitration clauses in contracts require consumers to waive their rights to bring litigation in court. The clauses are often unavoidable because firms include arbitration clauses in contracts of adhesion. In recent years, firms have begun to load their arbitration clauses with unconscionable terms unrelated to arbitration itself. For example, firms insert terms that shorten statutes of limitations, reduce damages, or prohibit injunctive relief. These contract terms are considered unconscionable – and, thus, unenforceable – in many states. However, the Supreme Court has interpreted the Federal Arbitration Act (the FAA) to require judicial deference to arbitration clauses. Consequently, many courts allow firms to bootstrap unenforceable contract terms into an enforceable arbitration clause in order to make those unconscionable contract terms enforceable.

The Supreme Court has invoked the legislative intent of the 1925 Congress in order to assert that the FAA applies to consumer contracts. Courts have further suggested that Congress intended arbitration clauses to be enforced as written and that this requires deference to anti-consumer terms that would otherwise be found unconscionable under state law. Finally, the Supreme Court has asserted that the FAA preempts all state efforts to police arbitration clauses, including basic notification requirements.

This Article examines the actual legislative history of the FAA and explains that Congress never intended the FAA to apply to consumer contracts. Congress was exclusively concerned with the enforceability of arbitration agreements between sophisticated businesses in commercial disputes. Congress never considered the possibility that retailers would impose mandatory arbitration clauses on their customers, let alone that these arbitration clauses would be structured to limit damages, to truncate statutes of limitation, or to otherwise remove procedural protections from consumers. The congressional intent that courts should enforce anti-consumer terms in arbitration clauses is an imagined one.

The Article concludes that courts should stop asserting that the FAA mandates enforcement of unconscionable terms so long as they reside in an arbitration clause. When confronting unconscionable terms in arbitration clauses, courts can take one of three actions: enforce the unconscionable terms; sever the unconscionable terms; or strike the arbitration clause as a whole because it is so overrun by unconscionable terms. The Article explains why only the latter two options are consistent with Congressional intent and good public policy.

The Arbitration Bootstrap is available for SSRN download here, and it is in print as 94 Texas L. Rev. 265 (2016).

Settlement Agreements "in Principle" Are Not Enforceable Settlement Agreements

Negotiating a settlement can be a tricky business, with drafts going back and forth and language tweaking continually occurring. All of that document tweaking means that there's plenty of opportunity for the whole thing to fall apart, as a recent case out of Connecticut, AREH Windsor Locks, LLC v. Tops Markets, LLC, Docket Number HDSP172841 (behind paywall), reminds us. 

In the case, the parties had reached a settlement agreement "in principle," in the words used in an e-mail by one of the defendants' attorneys. The "in principle" language underlined the fact that, in fact, no true meeting of the minds had ever actually occurred. Defendants' attorneys' e-mails had warned of additional changes that would be made to the settlement agreement draft--even if those e-mails did characterize those changes as "a few" and "very minor." The last e-mail sent by defendants' attorneys before the agreement fell apart referred to the draft as "final" but explicitly noted that it was subject to the plaintiff's approval and that it needed the plaintiff's "green light." 

The court concluded that the defendants never received the requested "green light." So, although the defendants' attorneys seemed to view the agreement as "final," there had in fact never been a final agreement between the party. The defendants, it turns out, may have been counting the settlement chickens before they hatched. 

Gasgate

Another one bites the dust. GM is the most recent car company having to admit that it has reported overly optimistic figures about the gas mileage of, in this case, some of its 2016 SUVs sold in retail trade. Before GM, there was obviously VW, but also Mitsubishi, Hyundai, and Ford, all in the span of the past two years.

GM is temporarily halting sales of about 60,000 new 2016 SUVs because the vehicles' labels overstated their fuel efficiency. The 1-2 miles per gallon mileage overstatement was the result of improper calculations, according to GM. The company plans to compensate owners for the difference in miles per gallon and announce the program in the coming week.

Does this suffice as a remedy? Arguably, no one buys an SUV because of its low gas mileage, so in this case in contrast to the VW “dieselgate,” an argument that a customer bought a car because of its fuel efficiency is less plausible. But should that let GM off the hook in this case simply by saying that it will compensate for the fuel difference? How can an accurate prediction of what that will be over the time the SUV owners keep the car even be made? - For presumably, GM is not only planning to compensate the owners for the past difference, thinking that owners can now simply sell the cars if they are no longer satisfied with them? That seems unfair to the buyers as it is common knowledge that one cannot recover the value paid for a brand new case as with these 2016 models. Should criminal liability lie? OK, perhaps not for the 1-2 mile difference, but what about the systematic fraud committed by VW? Shouldn’t someone be held criminally liable for that?

Of course, a class-action lawsuit has been brought by some buyers. Has time come for everyone – the EPA, car makers, and car buyers – to realize that there is really only so much that can be done with the fuel efficiency of regular-engine cars? After all, hybrids and now electric cars are widely available and will probably cover the needs of the vast majority of car buyers, few of whom really need an SUV. They get much better “fuel” mileage than cars with traditional engines. Still, extreme consumer fraud is committed by at least some (or one…) of these car makers. Reckoning time seems to have come.

Weekly Top Ten SSRN Contracts Downloads (May 19, 2016)

SSRN Top Downloads For
Contracts & Commercial Law eJournal

Rank	Downloads	Paper Title
1	423	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	180	How Do LLC Owners Contract Around Default Statutory Protections? Peter Molk Willamette University - College of Law
3	167	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
4	138	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
5	119	(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	118	Contract as Empowerment Robin Bradley Kar University of Illinois College of Law
7	118	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
8	116	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	83	Understanding Privacy Policies: Content, Self-Regulation, and Markets Florencia Marotta-Wurgler New York University School of Law
10	78	(In)Efficient Breach of Contract Daniel Markovits and Alan Schwartz Yale Law School and Yale Law School

 

SSRN Top Downloads For
LSN: Contracts (Topic)

Rank	Downloads	Paper Title
1	412	Major League Soccer as a Case Study in Complexity Theory Steven A. Bank University of California, Los Angeles (UCLA) - School of Law
2	147	Algorithmic Contracts Lauren Henry Scholz Yale University - Information Society Project
3	136	The Logic of Contract in a World of Treaties Julian Arato Brooklyn Law School
4	125	Contracts Without Terms Tess Wilkinson‐Ryan University of Pennsylvania Law School
5	115	(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	114	Contract as Empowerment Robin Bradley Kar University of Illinois College of Law
7	111	Illegality as a Defence in Contract Andrew Burrows University of Oxford - Faculty of Law
8	89	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	75	The Common Law of Contract and the Default Rule Project Alan Schwartz and Robert E. Scott Yale Law School and Columbia University - Law School

Overtime Pay Regulations Expanded

The Department of Labor is finalizing a rule that will extend overtime pay to 4.2 million more Americans currently not eligible for such pay under federal law. This is expected to increase wages for workers by $12 billion over the next ten years and thus contribute to the relatively stagnant wages experienced by the majority of American workers in spite of six years of continual job growth and, now, solid profits by many companies.

The earnings situation did not use to be so poor for so many people. In fact, in 1975, 62% of full-time workers qualified for overtime pay. Today, only a measly 7% do.

As Henry Ford and others knew a long time ago: more money to more people will boost the economy for everyone, including businesses.

Read more about the ruling here
.

Materiality, Reliance and Causation All Intertwined Elements of Fraud

Jury instructions that cause a jury to answer questions indicating that a defendant has made a negligent misrepresentation, that the plaintiff reasonably relied on this statement, but that this did not cause harm to plaintiff are not so “hopelessly irreconcilable” as to be inconsistent under at least California law.

In a breach of contracts case with a cross-complaint, the jury answered “yes” to whether a cross-defendant had negligently misled cross-plaintiff, further found that the misrepresentation was indeed material and that the cross-plaintiff had reasonably relied on the statements pertaining to incentive agreements and construction permits inducing the cross-plaintiff to enter into a gas station purchase and related agreements. However, the jury also found that the misrepresentation did not “substantially” influence the buyer to buy the gas station in the first place. Cross-defendant seller appealed, seeing to have the jury verdict set aside for inconsistency.

The court did not agree that the jury verdict was inconsistent to the point of being hopelessly irreconcilable. “Reliance and causation are intertwined concepts … Reliance must be thought of as the mechanism of causation in an action for breach.” However, by answering “no” to the question of whether the representations were “substantial factors” in causing harm to the cross-defendant, the jury “clearly must not have believed this to be the case,” said the court. Thus, no causation was found in spite of reliance on a fraud. In other words, the jury must have thought that the buyers would enter into the agreement anyway despite the misrepresentations.

Of course, clearer jury instructions would resolve a matter such as this in a more satisfactory way for clients than having courts of appeals second-guess what the jury must have thought. This case again shows the importance of careful linguistic drafting in the contracts context. Easier said than done, apparently…

The case also shows that contracts for pre-specified amounts of gas still exist.

The case is Anabi Oil Corporation v. fry’s 57 Freeway Investment LLC, 2016 WL 1749459.

Scholarship Spotlight: The Role of The CISG in U.S. Contract Practice: An Empirical Study (John F. Coyle, UNC)

Ongoing globalization and increasing importance of international trade has led to calls for a greater international component to the Contracts curriculum in U.S. law schools. The United Nations Convention on the International Sale of Goods (CISG) has been one of the chief beneficiaries of those calls. CISG coverage in a Contracts course, after all, singlehandedly adds treaties, international trade, and comparative law perspectives to the traditional course materials. A fair question, however, is to what extent the CISG has become relevant to the actual businesses in America--future clients of many of our students. Fortunately, John F. Coyle of the University of North Carolina has analyzed and written about some enlightening empirical evidence on that question.  Here is the abstract:

The United Nations Convention on Contracts for the International Sale of Goods (CISG) operates as an “international” version of UCC Article 2 — it supplies the governing law when a U.S. company enters into a contract for the sale of goods with a foreign counterparty. Scholars have long debated the role that the CISG plays in contract practice in the United States. Some argue that the CISG has come to be embraced, if slowly, by U.S. lawyers. Others contend that the CISG has yet to achieve widespread acceptance within the U.S. legal community. Prior studies have sought to resolve this debate by looking to surveys of practicing attorneys. This Essay seeks to shed light on this question by looking to actual contracts entered into by U.S. companies.

The Essay draws upon a hand-collected dataset of more than 5,000 contracts — along with interviews with several lawyers who had a hand in their drafting — in an attempt to better understand the role that the CISG plays in U.S. contract practice. The Essay shows that: (1) many U.S. companies reflexively exclude the CISG without inquiring as to whether it would apply of its own force, (2) U.S companies virtually never select the CISG as the law to govern their agreements, (3) there is no industry or geographic location within the United States where the CISG has been affirmatively embraced, (4) some U.S. companies that had selected the CISG in the past now have a policy of excluding it from their contracts, and (5) U.S. companies are frequently unaware that selecting the law of a U.S. state can result in the application of the CISG.

These findings suggest a number of important insights. First, they show that past surveys of U.S. lawyers dramatically overstate the extent to which the CISG has gained acceptance within the U.S. legal community. Second, they indicate that contract practice with respect to the CISG can and does vary from nation to nation. The dataset contracts show that Chinese solar companies, in contrast to their U.S. counterparts, have embraced the CISG. Third, and finally, they highlight the potential unfairness of requiring unsophisticated U.S. companies to litigate international contract disputes under a set of treaty rules that are routinely avoided by their more sophisticated brethren.

Professor Coyle's article, The Role of The CISG in U.S. Contract Practice: An Empirical Study is available as an SSRN download here and is forthcoming in the University of Pennsylvania Journal of International Law.

Removing Confidential E-Files When Quitting: Not a Good Idea

If you and I worked in an industry with highly sensitive information (assuming that we do not), it might be one thing if we thought we could email confidential information to our private email accounts and copy such information to a memory stick without finding out. But if a C-level employee at a high-tech company does so, does such conduct not rise to an entirely different level of at least naivety, if not deliberate contractual and employment misconduct?

A court will soon have to answer that question. Louis Attanasio, former head of global sales for an IBM cloud computing unit has been sued by IBM for breach of a contractual confidentiality clause, misappropriation of trade secrets, and violation of a non-compete agreement when he left – information in hand – to work for direct competitor Informatica.

In 2016, Attanasio allegedly started sending confidential information to his private email account, including draft settlement agreements between other IBM employees who had left to work for competitors. Before leaving IBM, Attanasio was asked to return a laptop to the company, which claims that he cpied files to a USB storage device.

Once again, the extent of the traceability of our electronic actions at work has become apparent. I continually remind my students of this to help them avoid “traps” such as the above or, frankly, simply to remind them that they should not spend much, if any, time on their computers not working (most seem to use their own electronic devices anyway these days, but still… and doing so is also very visual in an office setting.). Employers frequently complain about the work ethics of new college graduates, so it might be worthwhile to remind our students of what seems obvious to us.