ContractsProf Blog

Tamar Meshel on the Revisions to the FAA

We are delighted to welcome Tamar Meshel (right) back as a guest blogger!

Dr. Tamar Meshel is an Associate Professor at the University of Alberta Faculty of Law. She researches, teaches, and consults primarily in the areas of domestic and international arbitration and her work has been cited by the Supreme Court of Canada, the Supreme Court of Israel, and the Delaware Court of Chancery, as well as by numerous scholars.

The New Chapter in the Life of the FAA

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (aka EFASASHA, EFASA, or EFAA)—codified at 9 U.S.C. §§ 401–02 (Chapter 4 of the FAA)—came into effect on March 3, 2022. It is the first substantive limit placed by Congress on the scope of the FAA since the statute was enacted nearly 100 years ago. The Act provides that “at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute . . . no predispute arbitration agreement . . . shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute” (§ 402(a)).

The Act also renders three arbitration principles inapplicable in sexual assault and sexual harassment disputes. First, it permits the unilateral revocation of a “joint, class, or collective action” waiver (§ 402(a)), which would otherwise be enforceable pursuant to AT&T Mobility LLC v. Concepcion. Second, it requires courts to decide the validity and enforceability of an arbitration agreement even where a party challenges the underlying contract rather than the arbitration clause (§ 402(b)), a challenge that would otherwise be decided by the arbitrator pursuant to the severability principle and Prima Paint Corp. v. Flood & Conklin Mfg. Co. Third, it requires courts to decide the validity and enforceability of an arbitration agreement even where the parties intended to delegate this determination to the arbitrator (§ 402(b)), a delegation that would otherwise be enforced pursuant to Rent-A-Center, West, Inc. v. Jackson.

At the same time, the Act gives rise to many questions that courts must now grapple with:

1. Chapter 4’s application to non-employment disputes

The most obvious context to which Chapter 4 applies is employment. Indeed, out of about two dozen cases that have considered Chapter 4 (that I’ve examined), all but two were in the employment context. In the two non-employment cases the plaintiffs were a patient in a care facility (Ferrell v. Imperial Care Center LLC) and a college student. In the former the court explicitly held that Chapter 4 applies to sexual assault/harassment claims that are not work-related or that do not arise from employment contracts. In the latter the court did not consider this question, because it found Chapter 4 temporally inapplicable (see below).

While the congressional record suggests a focus on employment disputes, nothing in the language of Chapter 4 restricts it to that context. So it is likely to be applicable in any case involving a sexual assault and/or sexual harassment dispute.

2. Chapter 4’s temporal application

Section 3 of the Act provides that it “shall apply with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act,” which is March 3, 2022. The courts have unanimously interpreted this provision to mean that Chapter 4 does not apply retroactively. Creative attempts to establish an “accrual” date post-March 3, 2022—for instance, when the defendant filed its motion to compel arbitration or when the Equal Employment Opportunity Commission issued a notice of right to sue—have failed. Courts have also rejected the following arguments: 1) that Chapter 4 eliminates the FAA’s pre-emption of state law that prohibits arbitration of sexual assault/harassment claims even if these “accrued” prior to March 3, 2022; 2) that Chapter 4 evidences a public policy that disfavours arbitration of sexual harassment/assault claims accruing before this date; 3) that Chapter 4 renders agreements to arbitrate such claims per se unconscionable; and 4) that individual claims accruing before March 3, 2022 may be saved by asserting class-wide claims on behalf of potential plaintiffs who may have been harmed after that date.

However, there is disagreement over when would be latest “accrual” date possible for the purpose of applying Chapter 4. Some courts have found the latest possible date to be when the plaintiff filed the lawsuit, while others have found that date to be when the alleged conduct occurred. In one case, Chapter 4 was found applicable to an alleged continuing violation (hostile work environment and retaliatory conduct) that spanned both before and after March 3, 2022. The U.S. District Court of the Eastern District of New York held that pursuant to the “continuing violation” doctrine, the plaintiff’s claims “accrue on the day of the last act in furtherance of the violation,” which in the context of the hostile work environment and retaliatory conduct claims continued after March 3, 2022.   

It also remains unclear what, if any, is the difference between a “dispute” and a “claim” and between “arises” and “accrues” in § 3. For instance, the U.S. District Court for the Southern District of New York found no meaningful difference and suggested that the Act refers to both “claims” and “disputes” simply “in order encompass various kinds of proceedings.” The U.S. District Court for the Southern District of Florida (in Hodgin v. Intensive Care Consortium Inc.) disagreed and separately considered whether the plaintiff’s “claim” had “accrued” (meaning she had a “complete and present cause of action”) before March 3, 2022 and whether her “dispute” had “arisen” (meaning there was a “disagreement, not just the existence of an injury) before that date.

While the “accrual” date has been hotly contested in the courts, as time passes this issue will become less relevant to the application of Chapter 4.

3. Standard for pleading a sexual assault/harassment dispute

In three cases, the U.S. District Court for the Southern District of New York has considered the standard that a plaintiff must meet in order for § 402(a) to invalidate an arbitration agreement. The court in some of these cases also considered whether meeting this standard should prohibit arbitration of the entire “case” or only of the sexual assault/harassment claims.  

Johnson v. Everyrealm and Yost v. Everyrealm involved claims brought by two former employees against the same employer for sexual harassment under the New York State Human Rights Law and the New York City Human Rights Law (which the court found to qualify as “state law” under § 402(a)), as well as for whistleblower retaliation and intentional infliction of emotional distress. Mera v. SA Hospitality Group involved claims for sexual harassment under the same New York laws as well as wage and hour claims brought under the Fair Labor Standards Act and the New York Labor Law on behalf of a group of employees.   

In all three cases, the district court held that the plaintiffs were required to meet the FRCP Rule 12(b)(6) standard of plausibility with respect to their sexual harassment claims, and that once that standard was met, all “related” claims in the action would also be non-arbitrable.

In Johnson, Judge Engelmayer held that the plaintiff had plausibly pled a claim of sexual harassment under the New York City Human Rights Law and therefore Chapter 4 applied. Judge Engelmayer acknowledged that the FAA permits the splitting of arbitrable from non-arbitrable claims. Yet he also found a “contrary congressional command” in § 402(a), which makes a pre-dispute arbitration agreement invalid and unenforceable “with respect to a case which is filed under Federal, Tribal, or State law and relates to the ... sexual harassment dispute.” Therefore, Judge Engelmayer concluded that a well-pled sexual harassment claim makes an arbitration clause unenforceable “as to the other claims in the case.” He noted, however, that because the plaintiff’s claims all arose from his employment, he was not considering whether “claim(s) far afield might be found to have been improperly joined with a claim within the EFAA so as to enable them to elude a binding arbitration agreement.”   

Applying these principles in Yost, Judge Engelmayer found that the plaintiff’s factual allegations in support of a claim of sexual harassment were “threadbare” and failed to allege a “plausible claim” of sexual harassment under the New York City Human Rights Law. Judge Engelmayer therefore dismissed the plaintiff’s sexual harassment claims. He then held that, as a result, Chapter 4 could not prevent the arbitration of the remaining claims.  

Finally, in Mera, Judge Aaron found that the plaintiff had plausibly pled a claim of sexual harassment under the New York State Human Rights Law, and therefore that claim could not be arbitrated. However, he found that § 402(a) rendered arbitration agreements unenforceable “only with respect to the claims in the case that relate to the sexual harassment dispute.” Unlike in Johnson, the plaintiff’s wage and hour claims in Mera did not “relate in any way to the sexual harassment dispute.” Therefore, the plaintiff was compelled to arbitrate those claims. The action was stayed with respect to the wage and hour claims pending arbitration, while the sexual harassment claims proceeded in court.

The fate of claims joined with a sexual assault/harassment dispute may thus turn on how “related” they are to that dispute. This means that claims that are not directly sexual assault/harassment claims but are related to the underlying conduct may become non-arbitrable as long as the sexual assault/harassment claims are plausibly plead in the same “case”. In contrast, plaintiffs may not be able to easily bootstrap claims that are entirely unrelated to the underlying conduct or to the plaintiff’s sexual assault/harassment dispute in order to render them non-arbitrable.

These are still early days for FAA Chapter 4, and some of the cases discussed above are currently pending appeal. It is also important to note that neither the Act nor Chapter 4 of the FAA address other mechanisms that are used to avoid the litigation and/or the publication of conduct underlying sexual assault/harassment disputes, such as settlement agreements, confidentiality agreements, and NDAs.

Court Grants Preliminary Approval to Settlement of Class Claims Against Trump Campaign

Last week I defended Donald Trump against allegations that he had broken a promise to buy "food for everyone."  That gives me the credibility I need to cover the settlement of a class-action lawsuit against the enforcement of the 2016 Trump campaign's standard non-disclosure agreement (NDA).  We are nothing if not fair and balanced at the ContractsProf Blog.

We have covered Trump NDAs before here, here, here, here, here, here, here, and here.  In sum, I think there are two main takeaways.  First, Donald Trump and organizations associated with him love NDAs.  Second, they tend to draft NDAs that are so preposterously overbroad as to be unenforceable.  The litigation does not go well for Mr. Trump and affiliated entities, and they do not seem to learn any lessons from the experience.  They keep losing and losing and yet never get tired of losing. 

Maggie Haberman reported in The New York Times back in February that the Trump campaign had agreed to pay $450,000 to settle claims brought by Jessica Denison on behalf of herself and all others similarly situated.  Ms. Denison is to receive $25,000, and the rest will go to cover attorneys and court costs.  Ms. Denison alleged abusive treatment and sexual discrimination by a member of the campaign team.  The aim of settlement was to invalidate the NDA and free others to speak about their experiences as part of the Trump team during the 2016 campaign, and Ms. Denison is bringing her claims in a separate suit.  

In a June 7, 2023 order, the District Court noted its earlier order, invalidating the NDA as to Ms. Denison.  She sought an order invalidating it as to at least 422 potential class members.  That proved unnecessary, as the Campaign agreed in writing to release everyone associated with the Campaign from obligations created by the NDAs.  The Court further certifies the class and sets out procedures for notice to class members and a schedule for final approval of the settlement.

Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent

This is the ninth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the eighth chapter of RLCD, which revisits scholarly takes on Judge Cardozo's opinion in Jacob & Youngs v. Kent, a case about which we have previously posted here, here, and here.

I admit it, I was worried about this chapter.  It is possible for me to listen to people criticize Judge Cardozo and still part friends, but only because I "will not visit venial faults with oppressive retribution."  Fortunately, Professor Goldberg has come not to bury Judge Cardozo but to praise him.  Despite some commentaries going back to 2003 criticizing Judge Cardozo's opinion in Jacob and Youngs for "material misrepresentations of fact and law," Professor Goldberg thinks that Judge Cardozo's result was correct at the time and still today (RLCD, 142).  Whew. 

As most readers of this blog know, the case involved a contract for the construction of a mansion in New York State. The contract called for Reading pipes, but the contractor installed a lot of comparable pipes manufactured by other companies.  Judge Cardozo found the mistake to be inadvertent and ruled that the builders had substantially performed.  They were entitled to full payment, less the difference in value between the house contracted for and the house as built.  Because the pipes installed were of the same quality as Reading pipe, that difference was effectively zero.

The difference between the four judges, including Judge Cardozo (right), who found that Jacob and Youngs had substantially performed and the three who disagreed was really about facts, not law.  The dissenting judges thought the mistake could not be the product of mere inadvertence.  The trial court record provided few facts, because the trial court did not let in Kent's evidence, so it seems that, given the differing views of the facts, a remand would have been appropriate.  But as Professor Goldberg notes, there had been a previous trial at which the facts were presented to the jury.  The jury found for Jacob and Youngs, but the trial court set that verdict aside.  After a second trial and appeal, Kent had stipulated that, if the Court of Appeals upheld the Appellate Division's ruling, it should render judgment absolute in favor of the plaintiff.  Judge Cardozo just did what Kent asked him to do (RLCD, 143-44).  

Another interesting point that Professor Goldberg mentions is that the contract in fact allowed for substitutions of materials contingent on approval of the architect.  That being so, the breach was not the substitution of pipes but failure of notice to the architect.  That provision in the contract would seem to make the case easier, as the damages for failure of notice would be nominal (RLCD 144-45).

Professor Goldberg thinks that most contracts professors assume that Jacob and Youngs owes its prominence to legal innovation (RLCD, 145).  I can't speak for other contracts professors, but thanks to NYU Law's outstanding lawyering program, I had an assignment as a 1L about substantial performance, and so I knew that Judge Cardozo had a lot of precedent to work with when he wrote Jacob and Youngs.  Professor Goldberg summarizes this material (RLCD, 146-49).  

But I must take issue with Professor Goldberg on one point.  He complains that "Cardozo's rationale was phrased in rather flowery language that somewhat obscured the reasoning"  (RLCD, 157).  The language in question is as follows:

Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable.  If something else is in view, it must not be left to implication.  There will be no assumption of a purpose to visit venial faults with oppressive retribution.

Flowery?  Obscure?  I would say that Judge Cardozo wrote in the manner to which we should all inspire -- his writing invites and rewards re-reading -- and once one has appreciated his meaning, a satisfying feat, easily obtained, one can also appreciate why he expressed himself as he did.  His meaning is clear enough, and its manner of expression is unmatched among American jurists.  I have always assumed that his opinions owe their prominence to Judge Cardozo's reputation, which in my view, at least in the realm of contracts law, derives from his peerless prose style rather than from unique innovations in the law.  Professor Goldberg provides his translation of Judge Cardozo's language quoted above (RLCD157-58).  He has captured the meaning precisely but in considerably more space and without the glory.  Why listen to Salieri (left) when you can hear Mozart (right)?  I intend no slight to Professor Goldberg.  No American legal authority writes on a par with Cardozo.  He is honor alone; the rest of us must make do with the punctilio of an honor most sensitive.

You disagree?  Read the mug (right).  Sidebar, I actually would be interested to see comments on the subject: what unique innovations did Judge Cardozo introduce (or further) in contracts law?

Professor Goldberg proceeds methodically, eliminating the mysteries underlying the case. He reviews New York precedent for leniency regarding architects' refusals to award certificates where the work was completed in good faith and the diminution in value or cost of completion was relatively small (RLCD, 150-52).  There too, Jacob and Youngs did not depart from prior caselaw, but Professor Goldberg also addresses the question of whether the issuance of an architect's certificate was a condition precedent to Kent's obligation to make a final payment in this case.  The parties had taken that issue off the table. By the time the case reached the Court of Appeals, the sole issue was whether Jacob and Youngs had substantially performed (RLCD, 154-55). 

Judge Cardozo notes that the options for recovery are either costs of completion or diminution in value, but Kent was not seeking to recover cost of completion in his appeal.  Why not?  He had originally counterclaimed for $10,000, perhaps a rough estimate of what it would have cost to rip out and replace the non-Reading pipes.  He dropped that counterclaim, likely because the contract did not provide for that remedy.  Rather, Kent could refuse the final progress payment.  He could recover the costs of completion if he were actually going to pay somebody to do the work, but he chose not to do so. (RLCD, 156-57).  I find that fact significant.  Perhaps Kent didn't really care that much about Reading pipes but did care about having a reason to refuse to make the final payment.

Judge Cardozo's results are consistent with industry standards to this day.  Professor Goldberg reviews contemporary construction contracts and finds that they generally encourage outcomes akin to what Judge Cardozo laid out in Jacob and Youngs.  There are some nuances.  Whereas Judge Cardozo treated willfulness as a bar to substantial performance, the modern standard seems to treat it as a factor to be weighed.  Professor Goldberg thinks Judge Cardozo would have been fine with that (RLCD, 159).  I concur.  I think he stressed Jacob and Youngs' lack of willfulness in response to determined opposition from his dissenting brethren.  In most situations, standard contracts provide for cost of completion as the standard remedy if such costs are actually incurred or were not incurred for good reason.  Where costs of completion significantly exceed the benefits, diminution in value is the contractually pre-determined measure of damages (RLCD 159-60).   Standard contracts now direct disputes as to an architect's good faith refusal to issue a certificate to mediation or arbitration.  Such disputes now seldom result in litigation (RLCD, 160-61).  

The trick here is to find the right balance.  If we treat the contract right as akin to a property right and order specific performance, it gives the owner too much leverage over the contractor.  If a liability rule provides too little protection to the property owner, a moral hazard arises, and unscrupulous contractors will get away with as much deviation as the substantial performance doctrine will allow.  A great deal turns on the willfulness/inadvertence analysis, and modern contracts draw the line pretty much as Judge Cardozo did (RLCD, 161-63).  

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

Tuesday Top Ten - Contracts & Commercial Law Downloads for June 27, 2023

The Top Ten is back after a week away due to the slings and arrows of the irregular summer schedule. Let's check out movement and new activity on the charts, shall we?

 

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 28 Apr 2023 - 27 Jun 2023

Rank	Paper	Downloads
1.	Big Data on Contract Interpretation Farshad Ghodoosi and Tal Kastner California State University, Northridge, Nazarian School of Business & Economics, and Touro University, Jacob D. Fuchsberg Law Center	252
2.	Unjust Enrichment by Algorithm Ayelet Gordon-Tapiero and Yotam Kaplan Georgetown University and Bar-Ilan University - Faculty of Law	146
3.	Amazon's Pricing Paradox Rory Van Loo and Nikita Aggarwal Boston University - School of Law and UCLA School of Law	138
4.	Exit Engineering Rachel Landy Yeshiva University - Benjamin N. Cardozo School of Law	136
5.	FRAND Dispute Resolution under the Data Act and the SEP Regulation Tilman Dr. Niedermaier and Peter Georg Picht CMS Hasche Sigle and University of Zurich - Institute of Law	136
6.	Damages Without Loss Sandy Steel University of Oxford	125
7.	Choice of Law Meets Private Law Theory Hanoch Dagan and Sagi Peari Tel Aviv University - Buchmann Faculty of Law and The University of Western Australia	123
8.	Reexamining Enron's Regulatory Consequences Steven L. Schwarcz Duke University School of Law	107
9.	Standards and the Law Cary Coglianese University of Pennsylvania Carey Law School	103
10.	Opportunistic Breach of Contract Francesco Parisi, Ariel Porat and Brian Bix University of Minnesota - Law School, Tel Aviv University and University of Minnesota Law School	86

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 28 Apr 2023 - 27 Jun 2023

Rank	Paper	Downloads
1.	Big Data on Contract Interpretation Farshad Ghodoosi and Tal Kastner California State University, Northridge, Nazarian School of Business & Economics, and Touro University, Jacob D. Fuchsberg Law Center	252
2.	Laws Applicable to International Smart Contracts and Decentralized Autonomous Organizations (DAOS) Luís de Lima Pinheiro University of Lisbon - Faculdade de Direito	175
3.	Damages Without Loss Sandy Steel University of Oxford	125
4.	Reexamining Enron's Regulatory Consequences Steven L. Schwarcz Duke University School of Law	107
5.	Even Lawyers Don't Like Legalese Eric Martínez, Frank Mollica and Edward Gibson Massachusetts Institute of Technology (MIT), University of Edinburgh and Massachusetts Institute of Technology (MIT)	89
6.	Class Action Settlements as Contracts? Howard M. Erichson and Ethan J. Leib Fordham University School of Law and Fordham University School of Law	77
7.	Pluralism Aditi Bagchi Fordham University School of Law	75
8.	Unifying Status and Contract Kaiponanea T. Matsumura Loyola Law School Los Angeles	71
9.	Private Law and Public Discourse Aditi Bagchi Fordham University School of Law	71
10.	Consent and Disagreement Aditi Bagchi Fordham University School of Law	68

SCOTUS Returns to Form with a Pro-Arbitration Decision, but J. Thomas Joins the Dissenters

It seems that the debate over what it means to treat arbitration neutrally is back on.  While five conservative Justices think that neutrality requires the staying of proceedings in the district court pending appeal of a denial of a motion to compel arbitration, the three liberal Justices, joined in part by Justice Thomas, think that staying proceedings creates a special rule favoring arbitration.

In Coinbase, Inc. v. Bielski, the U.S. Supreme Court faced the simple question of whether a district court must stay its pre-trial and trial proceedings while the moving party appeals an unsuccessful motion to compel arbitration.  Five Justices said yes, concurring in an opinion by Justice Kavanaugh (right).  Tamar Meshel previewed the case for us previously.

The underlying facts are interesting, but they do not really matter for the purposes of deciding the legal issue before the court.  Plaintiffs sued, alleging that Coinbase had failed to replace funds fraudulently removed from Coinbase users' accounts.  Coinbase moved to compel arbitration, but the District Court denied that motion.  It also denied Coinbase's motion to stay the proceedings while it appealed, but the District Court denied the stay, and the Ninth Circuit, following its own precedent, deferred to the District Court.  Other Circuit Courts have held that district courts must stay proceedings pending appeal of the denial of the motion to compel. 

The majority opinion first looks to the Federal Arbitration Act (FAA) for guidance but finds none.  It therefore relies on  Griggs v. Provident Consumer Discount Co., which states the "Griggs principle" that interlocutory appeals divest "the district court of its control over those aspects of the case involved in the appeal."  That principle decides the case and it also accords with common sense, according to the majority.  

If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost—even if the court of appeals later concluded that the case actually had belonged in arbitration all along. 

Allowing a stay also preserves judicial resources.  Given the Griggs principle, there is no need for the FAA to address whether or not proceedings are stayed.  

According to Justice Jackson's dissent, joined by Justices Sotomayor and Kagan in full and by Justice Thomas as to its Parts II, III, and IV, there is no general Griggs principle.  Rather, the majority creates a special rule that district court proceedings must be stayed when there is an interlocutory appeal of a denial of a motion to compel arbitration.  

Justice Thomas does not join Part I of the dissenting opinion, which sounds in textualism.  We are left to ponder his reasons for sitting out this debate.  In that section, Justice Jackson (left) observes that Congress expressed its will to stay proceedings pending interlocutory appeals in another part of the 1988 law that created § 16 of the FAA and yet was silent on the issue in § 16 itself.  Section 3 of the FAA also provides for stays pending appeal, but there is no parallel language in § 16.  Applying basic textualist principles, the dissenters conclude that Congress intended for no per se rule on stays in connection with § 16.  

In Part II, Justice Jackson and the dissenters argue that there was no "background rule" to fill in the silence of § 16 on the subject of stays pending interlocutory appeals.  In Part III, the dissenters characterize Griggs, the 1982 case that provides the doctrinal basis for the majority's reasoning, as standing for a very narrow rule: two courts should not exercise jurisdiction over the same  issue simultaneously.  But in this case, the only issue on appeal would be whether to compel arbitration.  Consistent with Griggs, the district court can proceed to the merits of the case, so long as it does not re-visit its ruling on the motion to compel arbitration.  That seems consistent with everything quoted in the majority opinion about Griggs. It is also notable that when the majority cites to Griggs as "a longstanding tenet of American procedure," its only citation is to a three-person dissent from a denial of certiorari.  Hardly compelling.

In Part IV, Justice Jackson pokes holes in the majority's policy-based reasoning.  After all, the majority requires a stay in all cases, even when appellant's likelihood of success on the merits is vanishingly small.  That is hardly efficient.  It is much more efficient to allow the lower courts to police their own dockets and make their own determinations about when a stay is appropriate.  Staying the proceedings can serve the interests of pro-arbitration parties.  

While Justice Jackson begins by saying that she "respectfully" dissents, in Part V, not joined by Justice Thomas, she observes that the Court "ventures down an uncharted path—and that way lies madness."  Strong stuff.  I wonder what she says when she does not respectfully dissent.  The madness that she is concerned about is that stays of proceedings might now be necessary whenever an interlocutory appeal raises jurisdictional questions, such as a challenge to a forum-selection clause.  Indeed, from that perspective, Justice Jackson makes a strong argument that the majority is not treating arbitration provisions neutrally; rather, it is granting special protections for pro-arbitration parties.

The OceanGate Liability Waiver and Exculpatory Agreement

The five people who perished when their submersible imploded on its way to providing them a view of The Titanic's undersea remains signed an exculpatory agreement and liability waiver.  On the relationship between waivers and exculpatory agreement, see Nancy Kim's earlier post.  The passengers aboard the submersible acknowledged that they were aware that the vehicle was experimental and had not been approved or certified by any regulatory body.  They also acknowledged that they were aware that the vessel was constructed out of materials that had not been used in submersible vehicles occupied by human beings.   

Image by Steve Jurvetson,
CC BY 2.0, via Wikimedia Commons

This was a rather cryptic reference to criticisms of the OceanGate submersible leveled by Titanic director James Cameron (right), among others. According William J. Broad reporting in The New York Times, the vessel was constructed out of carbon fiber which is not designed to withstand the extreme pressures to which it would be subjected in the ocean deeps.  Although the vessel was equipped with a warning system, that system would be ineffective, according to Mr. Cameron.  By the time the warning light comes on, the vessel is about to implode, and there would be no time to surface.  

Notwithstanding these risks, before they could participate in the voyage, the passengers had to waive, on behalf of themselves and their heirs, all claims against OceanGate and its employees, discharging and releasing those persons and entities from any potential liability, including liability for harms caused by the negligence of OceanGate or its employees.  The document designates the Bahamas in both choice of law and choice of forum clauses.

Now, people are speculating as to whether this agreement is enforceable.  I am not familiar with the law of the Bahamas and so will not speculate about that, beyond noting that such agreements are pretty routine.  I have had my say about that here.  Jeff Sovern previously posted his thoughts on liability waivers, especially in the context of COVID.  I will note that, as with everything pertaining to these five tragic deaths, the attention devoted to the event seems disproportionate to its magnitude, when one considers other recent stories relating to deaths at sea.  For example, as Chantal Da Silva reported for NBC news, hundreds are missing and feared dead after a fishing boat crowded with migrants sank in Greek waters last week.  Earlier this month, about 300 people died in India's worst rail disaster in decades.  According to Sameer Yasir, Mujib Mashal and Hari Kumar writing in The New York Times, almost all of the dead were in the train's first three cars.  Those cars are packed with poor people who are not even recorded on the rail service's official register of passengers.  A week after the crash, one hundred bodies still lay in the morgue, unclaimed, unidentified.

It is not clear that the OceanGate exculpatory agreement will protect that company, given that the conduct of the company and its leadership may have been reckless and not merely negligent.  It is not clear to me that it matters much in this case.  Unlike the migrants who died in Greek waters and the Indian laborers, all of the people aboard the OceanGate vessel were very, very wealthy.  They have access to life insurance.  Their heirs will be well provided for.  As to OceanGate itself, it seems hard to imagine that the company will survive this catastrophe, and so suing a soon-to-be bankrupt entity seems like a fool's errand.  Regulatory bodies can do their work and hold any surviving entities and the natural persons involved in them to account.  The survivors of the victims of this tragedy may console themselves in the knowledge that their loved-ones died doing something they loved enough to do notwithstanding the disclosed risks.  In any case, adding to their wealth through litigation, if that is the result, will change very little.

This may cause some to wonder whether the survivors and surviving family members of voyagers on The Titanic (left) had recourse against the ship's owners and operators.  Susan Taylor provides some answers on the Library of Congress Blogs.  Apparently, the passengers on The Titanic were not required to sign exculpatory agreements.  Hundreds sued.  However, their claims may have been limited by operation of law.  After litigation that began in the New York's Southern District and was appealed to the U.S. Supreme Court, the parties settled for $664,000.  The shipping line had argued that damages should have  been capped at $91,000.  Plaintiffs had sought $16 million.  

Fourth Circuit Reverses Arbitral Award Because Award "Failed to Draw Its Essence" from the Arbitration Agreement

Sarah Black, a union-represented employee, worked at a nursing care facility for military veterans operated by plaintiff Advantage Veterans Services of Walterboro (AVSW).  AVSW terminated Black for discrimination, harassment, or bullying, and for falsifying records.  The union protested on Black's behalf, and the dispute was sent to arbitration.  The arbitration was governed by a collective bargaining agreement (CBA), Article 13 of which provided that in “all discipline cases, the arbitrator shall determine whether AVSW had a reasonable basis for concluding that the employee engaged in the conduct for which he/she is being disciplined.”

In Advantage Veterans Services of Walterboro v. Industrial and Service Workers Int'l, Local 7898, the Fourth Circuit referred to this language as requiting a "reasonable basis determination."  The arbiter interpreted Article 14 of the CBA to require "strong, convincing evidence" of the violation.  The arbiter determined that this standard was not met and that AVSW had failed to provide the required notice to Ms. Black.  The arbiter ordered that Black be reinstated.

AVSW brought suit in District Court pursuant to the federal Labor Management Act seeking to vacate the award on the ground that the arbiter had failed to apply the appropriate "reasonable basis" standard and thus its award was not consistent with the CBA.  The District Court upheld the award, finding that the standard had been properly applied, and even if it had not been, review of arbitral awards was limited.  It was enough that that the arbiter's reading of what the CBA required was plausible.  

While the Fourth Circuit noted the narrow scope of review of an arbitral award in the labor law context, an award is illegitimate if it “fails to draw its essence” from the agreement.  Although the arbiter recited facts relevant to assessment of whether AVSW had a reasonable basis for its action, and although arbiters are not required to provide the reasoning for their decisions, the Fourth Circuit nonetheless found that found that the arbiter never made the required reasonable basis determination, and thus her ruling failed to draw its essence from the CBA.    

This was no mere procedural hiccup.  Rather, the arbiter ignored the substantive rules that were to govern her analysis.  It would be paradoxical, the court noted, to use the highly deferential standard of review, which is rooted in principles of contract, "to look past the arbitrator’s failure to follow contractually agreed-upon procedural rules for the arbitration."  If this goes back to the same arbiter, it is hard to imagine a different conclusion on the merits.

A Louisiana Battle of the Forms Case!

It's a fact pattern just like we draw them up in law school!  Plaintiff Axiall Canada, Inc. (Axiall) purchased de-misters for its chlor-alkalai facility in Quebec from Defendant MECS, Inc., presumably based in Louisiana.  There was a series of de-mister transactions.  Generally, MECS issued a proposal to Axiall. Axiall then sent a Purchase Order, and MECS sent an Order Acknowledgement before shipping the de-misters.  MECS's documents included arbitration clauses, and the court states that the forms expressly limited MECS's "acceptance of any purchase orders to MECS’s standard terms and conditions of sales." Axiall's form was silent about arbitration, but it contained the following language:

Purchaser . . . hereby objects to and rejects any additional or modified terms proposed by Seller on which this sale would be rejected and any such proposed terms shall be deemed void.

Axiall accepted the de-misters but was than dissatisfied with them and sued for breach of contract, breach of warranty and redhibition, which is apparently a Louisiana term for rescission.  MECS first moved the case to federal court and then sought to have the case dismissed and to compel arbitration.  In Axiall Canada, Inc. v. MECS, Inc., the Fifth Circuit affirmed the District Court's denial of the motion to compel arbitration.

There is no question that the parties had a contract.  They performed.  The question is when that contract was formed and which party's terms govern.  Axiall argued that MECS's proposals were offers and that its purchase order was the acceptance.  MECS argued that the contract was only formed upon Axiall's acceptance of the goods. 

This is a tough Battle of the Forms problem that is not made any easier by Louisiana's idiosyncratic version of the UCC or by the court's cursory reasoning.  One issue unaddressed in the case is the role of the UN Convention on the International Sale of Goods (CISG).  This is an international sale of goods between two business entities, so one would expect the CISG to govern.  Perhaps the parties thought that they had contracted around the CISG by specifying that Louisiana law would govern.  That ought not to have been enough, given that federal law (including treaty law) is a part of Louisiana law.  Perhaps the parties did not raise the issue, perhaps because the parties did in fact expressly contract around the CISG.

A Battle of Forms, Image by DALL-E

The court rejects Axiall's argument that its purchase orders were acceptances.  Its reasons for doing so are pretty conclusory.  Louisiana's version of the UCC's § 2-207(1) is Article 2601, which states that “[a]n expression of acceptance of an offer to sell a movable thing suffices to form a contract of sale if there is agreement on the thing and the price . . . unless acceptance is made conditional on the offeror’s acceptance of the additional or different terms.”  The court seems to think that the language quoted above is consistent with the language of Article 2601, but that is not clearly the case.  Axiall has stated its terms; it has not made its acceptance expressly conditional on MECS's acceptance of its terms.  The rejection in advance of additional or different terms would be relevant to a § 2-207(2) if we treat Axiall as the offeror, but the court does not do so and provides no discussion of the Louisiana analog to § 2-207(2).

The court gives only slight consideration to treating Axiall's purchase order as the offer.  It cannot act as the offer because, the court tells us, MECS's confirmation form explicitly conditions acceptance on an additional arbitration clause.  That may be true, but the court has not provided the language at issue, and Article 2601 requires not just conditional acceptance but acceptance made conditional on the offeror’s acceptance of the additional or different terms.  Without the language from MECS's forms, we cannot know if they fall within Article 2601's exception to the general rule treating expressions of acceptance as sufficient. 

If there is no contract formed through communications under Article 2601, Article 2602, which is just like the UCC's 2-207(3), applies: the contract consists of the terms on which the parties agreed and any additional terms provided by "applicable provisions of the suppletive law."  In this case, that means that the arbitration clause drops out and plaintiff is free to bring its litigation in court.

For all my quibbling, I think the result is likely correct. I can't see only one way to do a battle of the forms analysis the result of which would be the inclusion of the arbitration clause.  If it came in the offer, it would only survive if the court were to conclude that the language in Axiall's purchase order did not properly condition acceptance on assent to its terms.  If it came in the acceptance, it is clearly precluded by the language in Axiall's purchase order.  

 

Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

This is the eighth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the seventh chapter of RLCD, which visits an issue related to that covered in the previous chapter (and previous post): does it affect damages in a sale between A and B when B entered into a separate agreement to sell to C?

The issue in this chapter is similar to the issue in the middleman cases covered in Chapter 6 of RLCD and the previous post.  In the US context, recovery is sometimes limited in the middleman cases.  In the English cases on sub-sales, things could go either way.  Professor Goldberg's position is that courts should consider sub-sales when the parties design contracts so as to incorporate sub-sales.  Otherwise, sub-sales should not effect the calculation of damages.

Sometimes, the courts reach what Professor Goldberg thinks is the right rule by applying the Hadley rule -- they ignore sub-sales that were not in the contemplation of the parties at the time of contracting.  More generally, in the first fifty years of cases considering the matter, courts did not take sub-sales into account in calculating damages (RLCD, 124-27).  But beginning with Hall v. Pim, courts returned to the Hadley rule and took sub-sales into account when they determined that the contract contemplated that the buyer would re-sell (RLCD 127-30).  

The contract at issue in Hall v. Pim was a string contract.  A sold to B who sold to C who sold to D etc.  It makes no sense for each party in the string to worry about some contract deep up or down the line.  Subsequents sales should have no effect.  The relevant trade association felt the same way and overruled the House of Lords through private legislation, creating form contracts that limited the remedy to direct damages from the breach (RLCD, 130-32).  Courts have ignored this development and continue to apply the Hall v. Pim rule (RLCD, 132-35).  Professor Goldberg sums up his view as follows:

If A contracts with B and B contracts with C, and A breaches, the B-C contract should have no bearing on A's damages.  That simple rules does not require the court to speculate about what the parties might have contemplated.  If A and B truly contemplated that the B-C contract be taken into account, it would be easy enough for them to make that explicit in their contract.  The market measure should, therefore apply irrespective of sub-sales -- subject to the parties' ability to contract out of that rule. 

The chapter then moves on to discuss two warranty cases, in which A sells defective products to B, which then sub-sells to C.  Courts struggle with the question of whether the consequential damages on the sub-sale (or the lack thereof) should be taken into account in determining the remedy for breach of warranty.  Again, the first step should be to look at the contract and figure out whether then parties addressed the issue.  The courts do not do so; rather they try to determine what was in the contemplation of the parties (RLCD, 135-38).   If the parties have not addressed the issue, the default rule should simply be that damages are the difference between the market price of the goods as warranted and the goods as delivered (RLCD, 139).  Where there are exceptions that is because they are expressly written into the contracts (RLCD 139-40).

In his conclusion, Professor Goldberg notes that UK courts have recognized two exceptions to the general rule that the contract-market differential is the standard measure of damages such cases.  First, the courts distinguished between cases involving non-delivery and delayed delivery.  Second, in string contracts, sub-sales could be taken into account if contemplated by the parties and not too remote.  Neither exception made any sense, and the courts persisted in the second exception despite clear evidence that the commercial actors whose contracts were governed by these decisions revised their standard forms to expressly reject the exception to the general damages rule.  Courts similarly relied on their own sense of  what was within the contemplation of the parties in ruling that sellers should indemnify buyers for harms to their sub-buyers.  There is no need for courts to speculate on what the parties contemplate.  Commercial parties make their intentions clear with contractual provisions (RLCD, 140-41).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

Teaching Assistants: Victor Goldberg on the Middleman's Damages

University of Delaware Settles Its COVID Suits

As Randall Chase reports for the AP, the University of Delaware has agreed to settle a class-action lawsuit brought by students seeking recovery of tuition and fees in connection with the University's decision to close its campus in Spring 2020.  The University agreed to pay $6.3 million to a class of 21,000 students, which comes out to $300 per student, but 1/3 of the $6.3 million goes to the attorneys, and the class representatives get $5000 each, and then there are $250,000 in reimbursements for expenses as well.  So, the typical class member might see something like $200.  

The settlement agreement was apparently reached in April, less than a month after the judge denied the university's motion to dismiss and certified the class.

Hat tip, John Wladis.

. . . In Which I Defend Donald Trump

As you may have heard, immediately following his latest arraignment, this in connection with his indictment on 37 federal criminal charges, Donald Trump visited Miami's Versailles restaurant.  There, he was heard to shout, "Food for everyone!"  According to The Guardian (and innumerable other sources), this was a "promise that the former US president did not keep."  Mr. Trump did not pay for anybody's food.

Shane Goldmacher and Maggie Haberman, who should have better things to do with their time, reported in The New York Times that Mr. Trump did not even eat any of the food his staff purchased at Versailles.  Once aboard his plane and headed to New Jersey, Mr. Trump instead dined on McDonald's.  Maggie Haberman may have won a Pulitzer Prize, but the New York Post's Josh Christenson provides better coverage on this story, reporting that, according to an unnamed spokesperson for the Trump Campaign, “Campaign advance team members paid for the to-go meals purchased, and there were no unpaid tabs.”  In addition, the spokesperson reportedly said, "At the end of President Trump’s visit he offered to buy food for the group of attendees inside the restaurant, but when President Trump left, the attendees followed him outside and did not place orders themselves."

When I represent Trump in this breach of contract action, I'm going to have to have some words with this spokesperson (or perhaps by then former-spokesperson) before we head to depositions.  The spokesperson mis-spoke and will have to clarify what really happened.

First, The Guardian draws legal conclusions without a factual basis.  Mr. Trump promised nothing, nor did he offer to buy food for anyone.  He simply said, "Food for everyone!"  The statement is ambiguous.  The man is campaigning for President, so he may have been making a chicken-in-every-pot type statement about how, once America is great again, there will be food for everyone.  He might have been remarking on the wonders of Versailles and the variety of offerings on hand.  His statement might have been a shorthand for "This place is amazing; you have food for everyone!"  Remember, the man built a political legacy on Twitter.  He understands that brevity is the soul of wit.  It might have been a general observation equivalent to saying "Food is great!"  

It would be absurd to characterize his statement as an offer to buy food for everyone.  At the very most, as the soon-to-be former spokesman suggested, Mr. Trump was encouraging his staff to patronize Versailles.  Some did so, buying meals to-go and paying for them.  Only a deranged media would try to create a story out of some staffers buying food at a restaurant during a campaign stop.  Nobody else took Mr. Trump up on his offer, and so he made no promise, broke no promise, and is the victim of the biggest witch hunt in the annals of contracts law.  

Moreover, even if his statement were mistakenly construed as a promise, it was not a binding one, as the attendees gave no consideration in exchange for it.  Like the word "covfefe" and many other things that Mr. Trump has bestowed upon us, this was, if anything, a gift.  Nor could anybody plausibly bring a promissory estoppel claim against Mr. Trump, because there was no reliance.  The people who heard the words "food for everyone" were in a bakery.  They did need any inducement to buy baked goods.  That's what they were there for in the first place.

So to sum up.  No promise.  No breach.  No contract.  No reliance.  Witch hunt.

SCOTUS Decided a Case That Purported to Be About Contracts!

The issue in the case was whether nursing home residents could vindicate their rights under the Federal Nursing Home Reform Act (FNHRA) in court.  At issue in the case were the rights to be free from unnecessary physical or chemical restraints and to be discharged or transferred only when certain preconditions are satisfied.  Ms. Talevski believed that 42 U.S.C. § 1983 provided the jurisdictional hook to get her to court because it provides for a cause of action for any person deprived of rights secured by the Constitution and laws "under the the color of state law;" that is, through state action.  Of note to contracts junkies, the petitioners in the case, Valparaiso Care and Rehabilitation's nursing home (VCR), claimed that laws that derive from Congress's Spending Power are not "laws" for the purposes of § 1983.  Rather, they are "contracts," and people like Ms. Talevski are third-party beneficiaries of those contracts.  Hence, the argument goes, § 1983 does not provide a basis for individual enforcement of the FNHRA.

In Health and Hospital Corporation of Marion County v. Talevski, the U.S. Supreme Court, per Justice Jackson (right) rejected VCR's arguments in a 7-2 ruling.  Ms. Talevski brought her action, alleging mistreatment of her husband, whose dementia progressed with shocking rapidity once he became one of VCR's residents in 2016.  According to the allegations of the complaint, VCR medicated Mr. Talevski into heightened dementia.  When Ms. Talevlski discovered the problem and had his medication tapered until his mental condition was restored, VCR accused him of harassing female staff and eventually used this as grounds to have him transferred to a separate facility 90 minutes removed from his family and kept him there, in violation of a court order.  

When Ms. Talevski brought her case on behalf of her husband in 2019 against VCR and related entities, known collectively in the litigation as HHC.  The District Court granted HHC's motion to dismiss, holding that no party could enforce the FNHRA through a § 1983 action.  The Seventh Circuit reversed.  

The case comes down to a dispute over the continued force of the Court's statement in Maine v. Thiboutot, 448 U. S. 1 (1980) that "laws" in § 1983 means "laws."  Building on dictum in Pennhurst State School and Hospital v. Halderman, 451 U. S. 1, 17 (1981), HHC and the dissenters argue that laws passed pursuant Congress's spending powers are not laws.  In Halderman, the Court noted that such laws are “much in the nature of a contract,” because, “in return for federal funds, the States agree to comply with federally imposed conditions.”  If FNHRA is a contract, then Ms. Talevski is a third-party beneficiary of that contract, and under the common law of third-party beneficiaries at the time that § 1983 was adopted, third-party beneficiaries could not sue to enforce contractual rights.  

Justice Jackson disposes of this syllogism with a one-two punch.  First, relying on an amicus brief from contracts scholars, led by Friend of the Blog, Mel Eisenberg(!), Justice Jackson attacked HHC's factual claim that the common law did not recognize the rights of third-party beneficiaries to sue to enforce contractual rights.  Second, she noted that the claim arises in tort, not in contract, and so the entire notion that contracts law might apply here is "at the very least, perplexing." 

Justice Thomas, writing in dissent, does not find the notion perplexing.  He argues that treating rights arising under laws enacted pursuant to Congress's Spending Clause power creates problems with the anti-commandeering doctrine.  Although Justice Gorsuch concurred in the majority opinion, he wrote separately to note the anti-commandeering issue, which the parties did not raise in this case.  Storm clouds gather on the horizon.

Two Florida COVID Cases Decided in Landlords' Favor

Both cases involved LA Fitness and attempts to invoke force majeure clauses in connection with COVID restrictions in order to be excused from responsibilities under a lease agreement.  In both cases, Florida intermediate appellate courts decided in favor of the landlords.

In Fitness International, LLC v. 93 FLRPT, LLC, LA Fitness sought a refund from its landlord for fifteen weeks during which it had to either close of limit access to its facilities pursuant to government ordered restrictions related to the COVID-19 pandemic.   The trial court granted summary judgment for the landlord and the Court of Appeals for the Second District affirmed.  

LA Fitness argued that its performance was excused under the lease's force majeure clause, but just for good measure, it also invoked common-law doctrines of impossibility, impracticability, and frustration of purpose.  The landlord, not surprisingly, argued that neither the clause nor the common-law doctrines excused LA Fitness from its obligation to pay rent.  Moreover, paying rent was neither impractical nor impossible.  In fact, LA Fitness did pay rent.  Frustration of purpose is a better fit here, but the lease did not provide that LA Fitness would operate as a fitness center throughout the lease term.  

The trial court held that the force majeure clause applied where a party has been delayed, hindered, or prevented "from the performance of any act required" by the lease.  Both parties were able to perform, notwithstanding the COVID restrictions.  The force majeure clause covered "restrictive laws," and the trial court treated that as precluding any common-law defense to LA Fitness's obligation to pay.  

On appeal, LA Fitness's arguments hinged on its claim that the landlord had warranted that it would have the right to operate a health club on the premises continuously throughout the term of the lease.  The appellate court found no such warranty.  The key language was provided in § 1.9 of the lease:

1.9 PRIMARY USES. The "Primary Uses" of the Building shall be for the operation of a full service health club and fitness facility which may include, without limitation, weight and aerobic training, exercise dancing, yoga, Pilates, Zumba, racquetball, personal training, health and fitness related programs, free weights, spinning/cycling, boxing, basketball, swimming pool, swim lessons, racquetball lessons, sauna and whirlpool facilities. . . . Landlord hereby represents, warrants and covenants to Tenant that Tenant's operation of business from the Building in accordance with this Lease for a health club and fitness facility . . . does not and will not violate any agreements respecting exclusive use rights or restrictions on use within the Project or any portion thereof. . . . Tenant shall have the right throughout the Term to operate the Building, or any portion thereof, for uses permitted under this Lease.

Although the court found that the meaning of the term was ambiguous, it also found that it could not constitute a warranty.  It guaranteed that use of the premises as a fitness center would not violate "any agreements respecting exclusive rights," but landlord had made no warranties with respect to government actions. Tenant was not required to operate the premises as a health club, and so there was no warranty from the landlord with respect to such operations. 

Landlord's obligation was to provide possession of the premises and Tenant's obligation was to pay rent and use the premises in the manners permitted by the lease. Landlord was not obligated to ensure Tenant's particular use of the premises, and the government-mandated restrictions did not prevent Tenant from paying rent.

The court further reasoned that the lease's force majeure clause was not triggered because both parties could fulfill their obligations notwithstanding government restrictions.  The landlord did not warrant that LA Fitness would be able to use the premises as a health club, and so it was not hindered in any obligation it had under the lease.  LA Fitness could pay, and thus its obligations also were not excused.  It had assumed the risk that Tenant's "primary use" of the premises as a health club could become difficult or impossible to achieve.

LA Fitness's performance was not rendered impossible or impractical due to the government restrictions. Because the force majeure clause specifically contemplated "restrictive laws" that might hinder or delay performance, the COVID restrictions were not unforeseeable, thus precluding any frustration of purpose argument.  

One week after losing in the Second District, LA Fitness lost again in the Third District in Vereit Real Estate, LP v. Fitness International, LLC.  In this case, LA Fitness had won in the trial court, but the appellate court reversed and remanded with instructions to grant summary judgment in favor of the landlord.  Here again, the language turned on the language of the force majeure clause (with pertinent language in bold):

22.3 FORCE MAJEURE. If either party is delayed or hindered in or prevented from the performance of any act required hereunder because ofstrikes, lockouts, inability to procure labor or materials, failure of power, restrictive laws, riots, insurrection, war, acts of terrorism, fire, severe inclement weather such as snow or ice or other casualty or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed, financial inability excepted (any "Force Majeure Event"), performance of such act shall be excused for the delay caused by the Force Majeure Event. Delays or failure to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.

The reasoning is very similar to that of the Second District.  Although the parties anticipated that LA Fitness would operate a health club, that was not a requirement of the lease.  Its obligation was to pay rent, and the restrictive laws did not hinder it from doing so.  In any case, even if LA Fitness could not pay, the force majeure clause's second sentence excludes inability to pay from coverage.  The possibility of a restrictive law was expressly contemplated in the force majeure clause and thus could not be the basis of a common-law excuse, as excuses are triggered by unforeseen occurrences.  

I find this reasoning annoyingly formalistic but I'm not sure it is wrong.  Tenants will have to review these cases and come up with better language if they want to gain any protection under force majeure clauses.  Under Florida law, force majeure clauses are not to be treated as "opt-out" provisions and are narrowly construed.  Still, I think it takes some mental gymnastics to conclude that LA Fitness's purpose was not frustrated by the restrictive laws in question.  Yes, operating a health club was the "primary" but not the exclusive purpose of the lease.  But has any LA Fitness franchise ever operated anything else under a lease for one of its health clubs?  Sometimes it makes sense to give limited effect to boilerplate language that bears no relation to actual conduct or expectations.  The courts also could just as easily have concluded that the unprecedented COVID restrictions of March 2020 were not what the parties contemplated when they agreed to the "restrictive laws" language in the force majeure clause.  

NY Supreme Court, Bronx County on Waiver of a Right to Arbitrate

Last year, we reported on Morgan v. Sundance, Inc., in which the U.S. Supreme Court unanimously adopted what was then the minority position on waiver of the right to arbitrate under the Federal Arbitration Act (FAA).  That position entails no special treatment for arbitration provisions; they can be waived like any other provision without a requirement that the non-waiving party demonstrate that the it was prejudiced by reliance on the purported waiver.  

In Worbes Co. v. Sebrow, New York's Supreme Court, Bronx County addressed the same issue not under the FAA but under New York's CPLR § 7503(a).  The underlying facts are complicated and probably don't matter much.  In short, Worbes is a corporation created by members of the Sebrow family.  The family members had equal shares in the corporation, whose sole asset was a property, 815 East 135 Street, Bronx, NY (below), and whose sole purpose was to own, manage and operate the property.  After some deaths, the property was split between Zvi and Debbie Sebrow.  Zvi determined that the property could no longer operate profitably, and he entered into an agreement to sell the property to a third party.  Selling the property was crucial, because the family members apparently did not have the funds to pay the taxes on the property and so it could become subject to a tax lien foreclosure.

Both parties initiated actions, going back to 2019.  Plaintiffs (Zvi and the corporation) filed their complaint in January 2022, but they now sought to compel arbitration.  The court noted that waiver of a right to arbitrate is analyzed under the same standard as any other waiver: there must be evidence of the relinquishment of a known right and/or an intent to abandon the right to arbitrate.  The initiation of an action in court generally results in a waiver of the right to arbitrate.  

The court goes through multiple factors relevant to the analysis: (1) whether the party seeking to arbitrate had sought out the judicial rather than the arbitral arena; (2) whether it sought judicial remedies, as opposed to just injunctive relief to preserve the status quo; (3) the extent the claims raised in litigation overlap with claims to resolved in arbitration; (4)  the amount of litigation that has occurred; (5) the length of time between the start of the litigation and the arbitration request and whether there was undue delay; and (6) whether prejudice has been established.  But this was not a hard case.  Plaintiffs had "significantly availed themselves of the litigation process in this action," and had as a result waived the right to arbitration.

It was not just that plaintiffs had initiated the action, because they needed an injunction or declaratory judgment so as to clear title to the property they were trying to sell.  However, plaintiffs also brought a motion for summary judgment.  It seems that they were hoping to win on papers, and only when they were unsuccessful did they move to compel arbitration.  The court found this conduct cavalier and egregious.  Moreover, there is no indication that the issues to be arbitrated are any different from those that the parties had been litigating for some time.  Defendants showed prejudice in the form of litigation costs in excess of $136,000 as of December 31, 2022.  

So it seems that under New York law, courts can take prejudice into account but only as one of many factors to be considered in determining whether a party has voluntarily relinquished a known right to request arbitration.  Although that seems to be a difference between New York law and the FAA, it seems that a court would likely find evidence of prejudice in situations where the other factors are satisfied.  Still, there is some tension between the court's statement that waivers of arbitration are treated like any other waivers and the consideration of prejudice as one factor in determining whether there was a waiver.

Teaching Assistants: Victor Goldberg on the Middleman's Damages

This is the seventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the sixth chapter of RLCD, which is about the correct measure of damages when there is a middleman, "B," and goods are sold from A to B in one contract, and then from B to C in a second contract. 

The chapter in some way typifies Professor Goldberg's approach.  There is a basic problem with a straightforward solution.  The middleman's damages should be the difference between the price of the breached contract and the market price.  The cases discussed often get it wrong, and scholarship, following the cases, justifies the mistaken approach to damages.  The interesting part is trying to figure out where the courts go wrong.

But the chapter is unusual, if not unique, in that the key problem with the case law and scholarship is doctrinal.  Economic principles and the logic of the transaction play a role, but the key mistake that Professor Goldberg identifies is that the cases and the scholarship lose track of the basic principle of privity of contract.  As a result, they fail to distinguish between cases where the middleman acts as a broker and those in which there are two independent contracts, both involving the middleman and no contract at all between A and C. 

Were the middleman a broker, a breach would deprive it only of its brokerage fee and perhaps some incidental damages.  But the cases handled in this chapter involve situations where the transaction between A and B and that between B and C are clearly distinct.  B has exposure to market risks on both ends.  For example, imagine that A agrees to sell 1 million units to B at a rate of 100,000 units per year over ten years.  B also buys units from other sources. In year three of its contract with A, B enters into a five-year contract with C to supply it with 50,000 units per year.  B has other contracts with other buyers.  The two contracts are completely independent, and the damages if A breaches can be determined without any need to consider the contract with C.  Similarly, if C breaches, B’s damages are not affected by its obligation to buy units from A.

When courts get the damages calculation wrong, they often fear giving the middleman a “windfall.”  In part, they fear windfalls because of a problem of statutory interpretation.  Some scholars think that the general provision in UCC § 1-305 limits recovery to putting the aggrieved party in as good a position as they would have been in had the counterparty performed. Because they perceive these middleman transactions as involving brokers, they think it is a windfall if the broker recovers more than its expected brokerage fee.  But these are not brokerage agreements.  As a result, there is no windfall and no problem with damages in excess of what § 1-305 permits.

In Professor Goldberg's view, where the middleman (B) is exposed to market risk if the seller (A) breaches, allowing the difference between contract and market under § 2-713 is the appropriate remedy.  If the buyer (C) breaches in a situation where the middleman is exposed to market risk, the appropriate remedy is similarly provided in § 2-708. The courts sometimes reach that conclusion based on the canon of construction that specific terms trump general terms.  They reason that § 2-708 or 2-713 is more specific than § 1-305.  But from Professor Goldberg's perspective, there is no tension between the provisions, because §§ 2-708 and 2-713 merely grant the non-breaching party its expectation.

Cases discussed in the chapter include:

• Allied Canners & Packers v. Victor Packing Co.
• Tongish v. Thomas
• TexPar Energy v. Murphy Oil)
• KGM Harvesting v. Fresh Network
• H-W-H Cattle v. Schroeder
• NHF Hog Marketing v. Pork-Martin
• Cargill, Inc. v. Fickbohm
• Unlimited Equipment Lines v. Graphic Arts Centre
• Nobs Chemical U.S.A. v. Koppers Co.
• Union Carbide Corp. v. Consumers Power
• Diversified Energy v. Tennessee Valley Authority
• Purina Mills v. Less
• Westlake Petrochemicals v. United Polychem

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

Tuesday Top Ten - Contracts & Commercial Law Downloads for June 13, 2023

Welcome back to the Tuesday Top Ten after yours truly was on the lam last week. Let's see what has been incubating amongst our favorite topics over at SSRN!

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Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 14 Apr 2023 - 13 Jun 2023

Rank	Paper	Downloads
1.	From Cannabis to Crypto: Federal Reserve Discretion in Payments Julie Andersen Hill University of Alabama - School of Law	266
2.	Big Data on Contract Interpretation Farshad Ghodoosi and Tal Kastner California State University, Northridge, Nazarian School of Business & Economics, and Touro University, Jacob D. Fuchsberg Law Center	182
3.	Bankruptcy's Identity Crisis David A. Skeel University of Pennsylvania Carey Law School	149
4.	Unjust Enrichment by Algorithm Ayelet Gordon-Tapiero and Yotam Kaplan Georgetown University and Bar-Ilan University - Faculty of Law	134
5.	Amazon's Pricing Paradox Rory Van Loo and Nikita Aggarwal Boston University - School of Law and UCLA School of Law	133
6.	Exit Engineering Rachel Landy Yeshiva University - Benjamin N. Cardozo School of Law	129
7.	FRAND Dispute Resolution under the Data Act and the SEP Regulation Tilman Dr. Niedermaier and Peter Georg Picht CMS Hasche Sigle and University of Zurich - Institute of Law	115
8.	Damages Without Loss Sandy Steel University of Oxford	110
9.	Choice of Law Meets Private Law Theory Hanoch Dagan and Sagi Peari Tel Aviv University - Buchmann Faculty of Law and The University of Western Australia	107
10.	Reexamining Enron's Regulatory Consequences Steven L. Schwarcz Duke University School of Law	103

 

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Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 14 Apr 2023 - 13 Jun 2023

Rank	Paper	Downloads
1.	Big Data on Contract Interpretation Farshad Ghodoosi and Tal Kastner California State University, Northridge, Nazarian School of Business & Economics, and Touro University, Jacob D. Fuchsberg Law Center	182
2.	Laws Applicable to International Smart Contracts and Decentralized Autonomous Organizations (DAOS) Luís de Lima Pinheiro University of Lisbon - Faculdade de Direito	120
3.	Damages Without Loss Sandy Steel University of Oxford	110
4.	Reexamining Enron's Regulatory Consequences Steven L. Schwarcz Duke University School of Law	103
5.	Agreement N. W. Sage London School of Economics - Law Department	75
6.	Class Action Settlements as Contracts? Howard M. Erichson and Ethan J. Leib Fordham University School of Law and Fordham University School of Law	71
7.	Consent and Disagreement Aditi Bagchi Fordham University School of Law	68
8.	Unifying Status and Contract Kaiponanea T. Matsumura Loyola Law School Los Angeles	64
9.	Private Law and Public Discourse Aditi Bagchi Fordham University School of Law	61
10.	Exploring Blockchain-Based Alternative Dispute Resolution: Limitations of Traditional Methods and Prospects for Further Research. Jamilya Kamalova CNRS-University of Paris 2	60

Human Beings Are Still Better than Bots

Two weeks ago, I reported on a decision by the National Eating Disorders Association (NEDA) to replace its Helpline, staffed by actual human beings, including six recently-unionized workers, with an AI bot named Tessa. 

Tessa has been unplugged.

As Chris Morris reports in Fortune, NEDA took down the bot after receiving complaints that it was responding in ways that promote eating disorders.  NEDA, which really needs to do some soul-searching, first responded by claiming on social media that the reports were a lie.  However, once it saw evidence of the "lie" in the form of screenshots, it shut down the bot and launched an investigation -- or so it says.  I'll have to see screenshots to believe it.  

In related news, today I beat the Wordle Bot.  It's a sore loser and protests that my third guess was lucky.  Hey, Wordle Bot, you have ONE JOB!

Ninth Circuit Affirms District Court's Denial of Amazon's Attempt to Compel Arbitration

Amazon Flex drivers make deliveries of food and other goods, using their own vehicles, for Amazon.com.  In February 2021, Drickey Jackson sued Amazon, seeking to represent a class of Amazon Flex drivers and alleging privacy violations.  He claimed that Amazon wiretapped and monitored off-hours conversations among the drivers in private Facebook chat groups.  The District Court held that, because the drivers did not have adequate notice of a 2019 update to Amazon Flex's terms of service (ToS), the parties were bound by the 2016 ToS.  The arbitration provision in the 2016 ToS do not cover this dispute, and so the District Court denied Amazon Flex's motion to compel arbitration.  In Jackson v. Amazon.com, Inc., the Ninth Circuit affirmed.

The 2016 ToS provided that Amazon Flex could modify the terms at any point simply by giving notice to drivers that it was doing so.  By continuing to serve as drivers, the drivers accepted new terms. 

Amazon may modify this Agreement, including the Program Policies, at any time by providing notice to you through the Amazon Flex app or otherwise providing notice to you . . . . If you continue to perform the Services or access Licensed Materials (including accessing the Amazon Flex app) after the effective date of any modification to this Agreement, you agree to be bound by such modifications.

The most relevant difference between the 2019 ToS and the 2016 ToS is that the former provided that questions of arbitrability were to be determined by the arbiter.  Because Amazon provided neither the e-mail that purported to alert Mr. Jackson to the new ToS nor evidence that it was delivered to Mr. Jackson, the District Court held that the 2016 ToS applied.  Amazon had the burden of showing that Mr. Jackson had assented to the new terms, and it did not meet its burden.  The Ninth Circuit agreed. 

The Ninth Circuit, per Senior Judge Schroeder (left), also rejected Amazon's alternative argument that Mr. Jackson was bound because the new ToS were on the Amazon Flex app, and he was obligated under the 2016 ToS to check the app for updates.  Citing the new Restatement of Consumer Contracts Law and its prior decisions, the Ninth Circuit  noted that assent requires both reasonable notice of a term and a reasonable opportunity to reject.  Generalized notice that new terms might be coming are not enough.  This is the first citation to the new Restatement that I have seen, and it is exciting to see it!

The District Court then determined that the conduct alleged was not covered by the arbitration provision, which covered that "any dispute or claim . . . arising out of or relating in any way to this Agreement, including . . . participation in the program or . . . performance of services."  The Ninth Circuit again agreed.  

If first noted that the complaint did not make any claims relating to the drivers' contractual relationship with Amazon.  Rather, it alleged violations of federal and state law.  Attentive readers might here be expecting a reference to  David Horton and his article, Infinite Arbitration Clauses, which, as we noted, was relevant to the Southern District's decision in Davitashvili v. Grubhub.  You will be disappointed.  C'mon Ninth Circuit, he's in your jurisdiction!  Nevertheless, the same reasoning applies.  Even when an arbitration provision is very broad, in order to be applicable, the factual allegations of the complaint must "touch matters covered by the contract containing the arbitration clause."  Here they don't.  People who were not Amazon Flex drivers were allowed to join the Facebook groups.  According to the complaint, Amazon violated those non-drivers' state and federal privacy rights as well.  The factual allegations do not relate to the contract that contains the ToS.

Image by Fmuzzio, CC BY-SA 4.0, via Wikimedia Commons

Senior Judge Graber (right) who was born in Oklahoma City dissented from the denial of the motion to compel arbitration, arguing that the broad arbitration clause in the 2016 ToS did indeed cover the dispute.  In her view, the only requirement is that the dispute "touch matters" covered by the 2016 agreement.  According to the complaint, Amazon was motivated by its desire to monitor its drivers and to learn what it could about their conversations relating to work conditions, unionizing, and strikes, among other things.  The dissent does not seem to believe that anybody other than drivers were able to access the chat group and dismisses as speculative the idea that non-driver union officials or spouses might have been on the chat.  The majority responds that this reasoning confuses Amazon's motives with the nature of plaintiffs' claims. 

Moreover, it is not entirely clear to Judge Graber that the claims do not raise claims of contractual interpretation.  It is entirely possible that the ToS entail some sort of consent that Amazon engage in some monitoring of its drivers .  As creepy and unsettling as she acknowledges the alleged conduct is, Judge Graber would dismiss the suit and compel arbitration.

Seventh Circuit Vacates Class Certifications in a Student v. University COVID Case

A district court certified two classes of students, one for tuition and one for fees, in connection with Bradley University's move to remote classes in Spring 2020.  One week of classes was cancelled and not rescheduled, producing a fourteen-week semester rather than the fifteen-week semester promised in Bradley's 2019-20 Academic Catalog.  The catalog also stated, "This catalog serves as a contract between a student and Bradley University." 

People!  Why?

That's really all I have to say about the case.  In Eddlemon v. Bradley University, the Seventh Circuit reversed both class certifications, but for civ. pro. reasons.  Precedent requires that a court undertake "rigorous analysis" to ascertain all of the requirements listed under F.R.C.P. 23 are satisfied before it certifies a class.  Here, the district court relied on the allegations of the complaint and cursory reasoning or conclusory statements with respect to commonality and predominance, so the case is remanded so that the district court can try again.

Glacier Northwest: Why Did SCOTUS Bother to Issue an Opinion?

Back in January, I provided a preview of Glacier Northwest v. International Brotherhood of Teamsters.  The Court granted cert in order to address whether the National Labor Relations Act (NLRA) preempts a state tort claim against a union for failing to take reasonable precautions to prevent the destruction of an employer’s property in the course of a labor dispute?  In an 8-1 opinion authored by Justice Barrett (right), the Court decided . . . . well, not very much actually.

The applicable standard is that, in order to avail itself of what is called "Garmon preemption," the union must undertake reasonable precautions to protect the employer's property from foreseeable harm.  If Garmon preemption applies, the state proceedings are stayed pending a determination by the National Labor Relations Board (NLRB) of whether the union activity is permissible under the National Labor Relations Act (NLRA). 

The company alleged that the workers had gone on strike without notice, leaving cement in trucks.  Although the company could not claim that any trucks were  damaged, it did allege that at least some of the cement dried and became unusable.  Accepting the facts as alleged in the employer's complaint, the majority found that the workers had not taken the necessary reasonable precautions, and thus the company's state tort claim was not subject to Garmon preemption.

Big whoop.  Why decide this case?  When the case goes back down, the facts as alleged in the complaint may not be provable.  And then what do we have?  We have a spot of mischief: a SCOTUS opinion that offers employers the possibility of holding unions responsible for economic harms attendant to a strike, based on mere allegations.  Justice Barrett's majority opinion adopts the complaint's tone of moral outrage before the veracity of any of the facts of the complaint have been established.  So the entire case is a hypo.  Sounds a lot like an advisory opinion.

Justice Barrett has advice for the unions about how to take reasonable precautions:

It could have initiated the strike before Glacier’s trucks were full of wet concrete—say, by instructing drivers to refuse to load their trucks in the first place.  Once the strike was underway, nine of the Union’s drivers abandoned their fully loaded trucks without telling anyone—which left the trucks on a path to destruction unless Glacier saw them in time to unload the concrete. Yet the Union did not take the simple step of alerting Glacier that these trucks had been returned. Nor, after the trucks were in the yard, did the Union direct its drivers to follow Glacier’s instructions to facilitate a safe transfer of equipment. 

In short, the union, which had no legal obligation to provide notice to the company of its strike, is here expected not to take "reasonable precautions" but to take every precaution, including instructing striking workers to follow the employer's instructions.  It's almost as if none of the Justices who joined in the judgment have ever been in a union.

Justice Kagan, who joined the majority for reasons about which I speculate below, was persuasive on this issue during oral argument.

. . . [W]orkers unions do things all the time intentionally to maximize economic harm. You know that if there is a seasonal component of a business, workers will try to time their strike in order to maximize the economic harm because, you know, more of the business is conducted in the summer than in the winter and things like that, that there are all kinds of things which are perfectly intentional to maximize economic harm. . . . 

The point of a strike is to bring economic pressure to bear on the company so as to induce a settlement.  Allowing tort cases against unions seeking to recover the economic costs of the strike shifts the balance of power in the bargaining relationship.   As Jenny Hunter explained on this week's Strict Scrutiny podcast, the Court's approach is not even-handed.  Labor law permits employers to lock out workers.  The issue was not raised in this case but it is hard to imagine the Court imposing a reciprocal duty on employers to take "reasonable precautions" to insure that the timing of a lockout does not have foreseeable negative economic consequences for the workers and their families.  

The majority opinion does significantly less harm than it might have done.  It is incredibly narrow and fact-specific.  It expressly does not hold that workers can be liable whenever the strike will foreseeably cause harm to perishable goods.  It acknowledges that workers are not legally obligated to provide notice of a strike.  It acknowledges that workers may sometimes elect to strike during the workday.  Most importantly, the majority dodges the administrative law question raised by the case.  Because the Court found that the conduct alleged was not subject to Garmon preemption, it did not address whether the National Labor Relations Board or the state courts should decide the tort issue in the first instance.

Justice Thomas, joined by Justice Gorsuch, concurred to signal their hostility to the scope of Garmon preemption, which pauses state tort claims whenever union activities are arguably protected under the NLRA.  That, the concurring Justices signal, is too much preemption.  Justice Alito, joined by Justices Thomas and Gorsuch concurred to emphasize that the conduct alleged clearly was not protected under Garmon.  I thought that's what the Justice Barrett's opinion said, but whatever.

Frankly, the whole case should have been dismissed because the petition was improvidently granted.  The Court likely took cert. because there were at least four Justices who do not like Garmon and wanted to make it easier for state courts to rule on tort claims in connection with union activities rather than allowing a federal agency, with relevant expertise, to address such claims.  But the posture is inopportune.  All we have are allegations, and it makes no sense for SCOTUS to rule on this case before the facts are fully developed.  That is especially so in this case because, as Justice Jacksons dissent rightly emphasizes, the NLRB's general counsel filed a complaint alleging that the NLRA does indeed protect that union activities at issue here.   Justice Alito's concurring opinion includes a footnote in which he states that if the Washington state courts were to adopt Justice Jackson's view of Garmon on remand, he would vote to hear the case again, presumably so that he and his like-minded colleagues could summarily reverse.

Justice Jackson (right) also points out that what the other opinions all cass "Garmon preemption" is really just a hiatus.  State tort claims are suspended until the NLRB makes a determination on the facts.  If the NLRB determines Garmon is not implicated, the case proceeds.  In this case, Justice Jackson seems confident that if one looks beyond the facts as alleged in the company's complaint, the allegedly tortious union activities were likely protected strike activities.

In this context, I think it makes sense that Justices Kagan and Sotomayor joined Justice Barrett's very narrow opinion rather than writing with Justice Jackson.  Justice Jackson's dissent makes clear that Garmon was implicated in this case, because the NLRB action against Glacier means that the union's challenged activities clearly met the standard of being "arguably protected."  If Justice Kagan and Sotomayor had joined Justice Jackson, the conservative Justices might have felt compelled to address Garmon, and I'm pretty sure they would have killed it in favor of letting state courts rule on tort issues in the first instance.  Justices Kagan and Sotomayor may have elected to join Justice Barrett's opinion because that opinion allowed Garmon to live to fight another day.