ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Tuesday, May 7, 2024

Teachers Bring Breach of Contract Suit Against the Oklahoma Department of Education

Ryan_WaltersKeeping with this week's theme of Oklahoma news, we have a day in the life of the Oklahoma State Department of Eduction (OSDE) under the leadership of Ryan Walters (right). Mr. Walters is the State Superintendent of Schools.  I have never before known who the superintendent of schools was for the state in which I lived, but Mr. Walters manages to grab headlines almost every day.  The headlines are not about how much Oklahoma schools have improved or about the successes those schools have had in recruiting new teachers.  Rather, they tend to be about banning books, shutting down D.E.I. programs, partnering with providers of conservative educational materials, losing employees, including the entire legal team, and difficulties in accounting for federal funds allocated to Oklahoma.

Two teachers are suing Mr. Walters.  The two teachers allege that they signed a contract in November, 2023, in exchange for a $50,000 signing bonus.  In January 2024, the OSDE demanded repayment of the bonus, and according to the complaint in Bojorquez v. State of Oklahoma, Mr. Walters claimed that the only reason they had been paid the bonuses was that they lied on their applications.  As a result of that statement, plaintiffs are suing not just for breach of contract but also for defamation.  

Stay tuned.

May 7, 2024 in Current Affairs, Government Contracting, In the News, Recent Cases | Permalink | Comments (0)

Monday, May 6, 2024

For Every New FTC Rule, There Is a Reaction in the Form of Regressive Legislation in Oklahoma

Oklahoma in the "progressive" camp on non-competes, along with California, Minnesota, and . . . North Dakota.  Well, it was in the motley crew of states that, for one reason or another, ban non-competes.

Oklahoma_State_Capitol
Image © Caleb Long, CC BY-SA 2.5 
via Wikimedia Commons

But Oklahoma's non-compete law, 15 O.S. § 219A, allows for competition, "as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer."  So the statute brought protection from non-competes, with a pretty narrow carve-out.  Apparently, there was some dissatisfaction with the terms "directly" and "established."

This year, with SB 1543, our legislature attempted to address that dissatisfaction, by making the carve out so broad as to pretty much swallow the rule.  According to the bill's sponsors, at least as represented here, the revisions enable entities to "protect[] their legitimate businesses interests" and resist "unfair competition."  How?  Well, here's the new version of the law, with additions highlighted and deletions in bold cross-out.

A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit, directly or indirectly, actively or inactively, the sale of goods, services or a combination of goods and services from the established customers or independent contractors of the former employer.

This change is purportedly necessary because the language of the original statute was "vague" and caused "confusion." 

But Oklahoma courts had not so found.  Part B of the statute provides  "Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable."  In Howard v. Nitro-Lift Techs., L.L.C., Oklahoma's Supreme Court read the statute to empower a court to strike down in its entirety any non-compete or non-solicitation provision that exceeded the limits permitted under the statute.  In Autry v. Acosta, the Oklahoma Court of Appeals similarly set aside an injunction in favor of an employer.  The employer could not succeed on the merits, as its non-solicitation provision, which purported to prohibit an employee from indirect solicitation of her employer's former clients, both current and previous, exceeded what was permissible under § 219A. A and was therefore unenforceable under § 219A. B.

Courts did not find the language of § 219A vague or confusing.  Perhaps the problem with the statutory provision lies elsewhere. Perhaps the law was too effective in prohibiting restraints on trade and employee mobility.

Kevin_StittI am at a loss to understand what would remain of the ban on non-competes if the legislation became law.  I suppose that it still might offer some protections for people who just work for a competitor but are in no way involved in the solicitation of business.  However, "directly or indirectly, actively or inactively" could mean and likely is intended to mean that if your name even appears on your new
employer's website, you are engaged in a prohibited act of solicitation.  And because the word "established" has been eliminated, any solicitation of customers within the industry could be treated as a solicitation of the former employer's "customers," past, current, future, or potential.

In shocking news, although the reform bill sailed through the Oklahoma legislature, Oklahoma's Governor Stitt (left) vetoed the bill.  Here is his veto message:

Senate Bill 1543 would significantly expand employers' power to impede employees' ability to compete with their employer, post-employment, and worse, it would allow employers to restrict individuals' ability to earn a living, especially while using a learned trade or skillset. For these reasons, I have vetoed Enrolled Senate Bill 1543.

By the Governor of the State of Oklahoma
/s/ Kevin Stitt

Thanks, Governor Stitt.  This is something to keep an eye on for the next legislative session, but Governor Stitt will remain in office until 2027, so if he sticks to his guns, Oklahoma's workers are relatively safe from non-competes for a while.

May 6, 2024 in Commentary, In the News, Labor Contracts, Legislation | Permalink | Comments (0)

Friday, May 3, 2024

SCOTUS Decides Contractual Issue in a Maritime Law Case!

KavanaughThe issue in Great Lakes Insurance SE v. Raiders Retreat Realty Co. LLC was whether two parties to a contract governed by admiralty law can agree to a choice of law provision that conflicts with the substantive public policy of the state in which the case is to be heard.  The general answer, provided in an opinion by Justice Kavanaugh (right), is that choice-of-law provisions in maritime contracts are generally enforceable, with certain narrow exceptions not applicable on the facts before the Court.

The case is about insurance for a boat.  Raiders Retreat is a Pennsylvania Business that purchased insurance for its boat from Great Lakes, which is a Germany company headquartered in the UK.  The instance contract was governed by New York Law.  When the boat ran aground in Florida and Raiders Retreat sought coverage, Great Lakes denied the coverage due to a Raider Retreat's failure to maintain its fire suppression system, which had nothing to do with the boat running aground.  

Raiders Retreat sued in a Pennsylvania District Court, bringing claims under Pennsylvania contracts law.  The District Court enforced the parties' choice-of-law provision, which meant that it dismissed the Pennsylvania claims.  Raiders Retreat appealed to the Third Circuit, which refused to apply New York law if doing so would violate Pennsylvania public policy and remanded for a determination of whether it would do so.  To resolve a Circuit split, SOCTUS granted an interlocutory appeal.   

220px-Clarence_Thomas_official_SCOTUS_portraitFederal maritime law is all about uniformity, and there is a clear rule that choice-of-law provisions in maritime contracts are presumptively enforceable.  Okay, so how is the presumption overcome?  The parties agreed that "courts should disregard choice-of-law clauses in otherwise valid maritime contracts when the chosen law would contravene a controlling federal statute . . .  or conflict with an established federal maritime policy" or if the parties can provide no reasonable justification for the chosen jurisdiction.

That seems pretty straightforward and workable.  Raiders Retreat wanted either a rule that courts should not enforce the choice-of-law clause if doing so would violate the public policy with the state with the closest connection to the transaction.  Justice Kavanaugh responded with a hard no.  What part of uniformity does Raiders Retreat not understand?

Justice Thomas (left) concurred to emphasize how much he doesn't like a case called Wilburn Boat.  Justice Kavanaugh had concluded that Wilburn Boat did not apply on these facts.  Justice Thomas needed to send a clear signal to potential litigants: I dare you to cite Wilburn Boat to me.  I double dare you!

May 3, 2024 in Recent Cases | Permalink | Comments (0)

Thursday, May 2, 2024

Various Problems with Liquidated Damages

Posner_richard_08-2010I use Judge Posner's opinion in Lake River Corp. v. Carborundum Co. to teach liquidated damages and penalties.  It's a typical Judge Posner (left) opinion.  He provides policy arguments for and against the enforcement of liquidated damages provisions, even if they impose a penalty on the breaching party.  Judge Posner makes the compelling freedom of contract/anti-paternalist arguments in favor of enforcement of penalties, assuming relative sophistication and comparable bargaining power.  Against these arguments, he offers the theory that deterring opportunistic breach prevents efficient breaches that produce better outcomes for most of the parties involved and do not produce worse outcomes for any of them (assuming no transactions costs).  He then heaves a sigh, says, "Illinois, ya basic!" and applies the applicable state law prohibiting the enforcement of penalties. 

Some of my students wanted to outflank Judge Posner.  Yes, the liquidated damages clause in the contract was absurd, but why should a court come to the rescue of a well-resourced party that entered into a bad deal with eyes wide open?  Carborundum apparently valued access to Lake River's bagging and distribution capabilities so highly that it was willing to take on a high penalty for breach.  My students could have cited another Judge Posner case that I also teach, NIPSCO v. Carbon County Coal.  There, NIPSCO entered into a long-term contract to buy coal whether or not it needed the coal.  NIPSCO assumed that it would need the coal when it entered into the contract, but then it became significantly less expensive to get electricity from other sources. The state regulatory authority would not allow NIPSCO to pass on to its customers the costs it incurred through its lack of foresight, and so it sought to get out of its contractual obligations.  Judge Posner would not allow it to do so, even though the effect was quite similar to a penalty clause.  NIPSCO had to pay an inflated price for coal it didn't need.  Indeed, according to Judge Posner, nobody wanted the coal, which was why the mine shut down once NIPSCO stopped accepting shipments.  

So, Judge Posner would not force Carborundum to pay for bagging and distribution services it no longer needed, but he did force NIPSCO to pay for coal it didn't need.  The cases are reconcilable as a matter of legal doctrine.  In both cases, I find Judge Posner's legal reasoning entirely persuasive. And yet, their outcomes seem hard to square with both economic theory and the principles of freedom of contract.  Perhaps the solution is that Judge Posner, if unconstrained by the Erie doctrine or precedent, would simply allow the parties' terms, no matter how ill-conceived, to govern in both cases.

SepinuckProfessor Stephen Sepinuck (right), a keen-eyed scanner of the legal horizon, noticed another liquidated damages conundrum.  Ne. Ill. Reg'l Commuter R.R. Corp v. Judlau Contracting, Inc., involved a $17 million contract for construction work on Chicago's Metra line.  Judlau did not complete the project within the time specified in the contract, running over by 500 days.  Metra alleged a right to choose between enforcing the contract's liquidated damages provision and seeking actual damages.  District Judge Mary Rowland of the Northern District of Illinois, noted that Illinois law does not permit parties to choose between actual and liquidated damage, and she rejected Metra's attempt to distinguish between a right to collect liquidated damages an option to choose between liquidated and actual damages. 

Metra acknowledged the Illinois prohibition on clauses that permit a party to choose between liquidated and actual damages, citing Karimi v. 401 North Wabash Venture, LLC.  The Illinois rule struck Professor Sepinuck as unusual.  Learned commentary ensued.  Indeed, Colorado reached the opposite conclusion in Ravenstar, LLC v. One Ski Hill Place, LLC.  The Illinois rule seems to be motivated by a horror of penalty clauses.  Confronted with little or no actual damages, the non-breaching party can nonetheless profit from a liquidated damages clause.  Facing actual damages well in excess of liquidated damages, the party might choose to jettison the limits imposed by the liquidated damages clause.  It creates a win/win for the non-breaching party and also eliminates one of the primary advantages of a liquidated damages provision -- the ability to settle a claim quickly without the need to prove actual damages.

Which brings us back to Judge Posner's dilemma.  These option clauses seem ill-advised.  Why agree to a liquidated damages clause designed to  minimize litigation costs while also giving the other party the option to choose to impose litigation costs on you?  However, if sophisticated parties agreed to an ill-advised clause  why not allow them to be hoist by their own petard?  In Judlau, the court faced no such dilemma, Judge Rowland concluded that "the plain language of the contract here does not create an option between liquidated and actual damages."  Metra did not include an ill-advised option clause in its contract.  It just seems to have pursued an ill-advised litigation strategy that involved arguing without much of a textual basis that it had negotiated for an advantageous option which, it acknowledged, was foreclosed in any case by governing law.

May 2, 2024 in Commentary, Contract Profs, Famous Cases, Recent Cases, Teaching | Permalink | Comments (5)

Wednesday, May 1, 2024

David Beckham Sued Fitness Brand F45 in 2023, and It's Suddenly News

BeckhamAh, the frustrations of being a contracts law blogger.  According to Zachary Folk who covers "breaking news" for Forbes, David Beckham (right) first tried to sue F45, a company in which Mark Wahlberg owns a large stake, in 2022.  A judge dismissed that suit, in which Mr. Beckham joined forces with golfer Greg Norman, advising the plaintiffs to file separately. 

Mr. Beckham refiled his suit in March, 2023, but as such things go, everybody is covering the case now, although nobody is linking to any filings from the case, so I neither really know what is going on nor why the media are suddenly interested in the "breaking news" of a case that is already one-year into its existence.  I wonder if some publicist for one of the parties decided that some media attention might speed up the settlement process.

The essence of the case seems to be that Mr. Beckham did promotional work for the brand beginning in 2020 in exchange for "tradable shares" of the company when it went public, which was supposed to happen in July 2021.  The share price quickly tanked after the company's initial public offering in January 2022, and Mr. Beckham alleges that the company delayed delivery of his shares.  During the delay, Mr. Beckham alleges, the value of his shares dropped by $9.3 million.  He also alleges entitlement to another $5 million in shares that were supposed to be transferred to him in July 2022.  

The current valuation of the company appears to be about the same as what Mr. Beckham claims he is owed.  But he is not the only party suing the company, so there may not be much left for Mr. Beckham at the end of the day.

Mr. Beckham is no stranger to the world of contracts disputes.  In December 2022, we blogged about his agreement to help promote the World Cup in Qatar.  Apparently, that deal worked out pretty well, although Mr. Beckham was paid bucketloads of money and did relatively little to promote the World Cup, unless being vilified by his LGBTQ+ fans counts as fulfillment of contractual obligations.

May 1, 2024 in Celebrity Contracts, Sports | Permalink | Comments (0)