Wednesday, September 13, 2023
Manish Aggarwal and Mostafa el Bermawy owned Coinbase accounts. Both claim that hackers broke into Coinbase and drained their accounts of cryptocurrency. They may also have drained Coinbase's logo (right) of any spark of interest and originality, but that is not part of the case.
The plaintiffs brought an action on behalf of themselves and other Coinbase users who registered since April 1, 2021 and either lost access to their accounts or lost funds or cryptocurrency from those accounts. They alleged violations of the Electronic Fund Transfers Act and related regulations and of various California statues, but also breach of contract and unjust enrichment.
Coinbase moved to dismiss and to compel arbitration. In Aggarwal v. Coinbase, Inc., the District Court for the Northern District of California granted Coinbase's motion. The case provides a nifty overview of how modern contracts of adhesion work and or how to design a website so that the adhesive seals tightly.
Plaintiffs contended that their contracts with Coinbase are illusory because Coinbase reserves the right to amend the contract at any time. The court quickly dispenses with this argument, noting California law recognizing that the implied duty of good faith and fair dealing saves such contracts from being illusory. Ah, responded plaintiffs, but what if the amendments render nugatory claims that have already accrued or which the corporation was aware of at the time the amendments went into effect? The rule is that if a provision for unilateral amendment is silent as to pre-existing claims, it has no effect on those claims. Such is the case here, and so Coinbase's unilateral amendment agreement, read in light of the duty of good faith and fair dealing, is not illusory.
Plaintiffs next attacked the extent to which the Arbitration Agreement that they signed delegated threshold questions of arbitrability to the arbiter. The delegation clause at issue in this case reads as follows:
The arbitrator shall have exclusive authority to resolve any Dispute, including, without limitation, disputes arising out of or related to the interpretation or application of the Arbitration Agreement, including the enforceability, revocability, scope, or validity of the Arbitration Agreement or any portion of the Arbitration Agreement[.]
Very similar language has been construed by the Ninth Circuit and has been held to delegate all threshold issues of arbitrability to the arbiter. The court thus found that the parties had clearly and unmistakably delegated issues of arbitrability to the arbiter.
Doing so was not unconscionable. The court noted that there were some elements of procedural unsconscionability in the delegation, as there are in most contracts of adhesion, but those elements were minimal. However, plaintiffs' allegations of the delegation clause's substantive unconscionability were the same as their allegations of the substantive unconscionability of the arbitration clause as a whole. In such situations, under SCOTUS precedent and precedent from the Ninth Circuit, the issue must be assigned to the arbiter. Other courts have reviewed Coinbase's arbitration agreement and delegation clause and have not found them to be unconscionable.
The case is stayed pending arbitration.
Friday, June 2, 2023
Today, we welcome guest-blogger Guy Rub (right) to the blog. Professor Guy A. Rub is the Joanne Wharton Murphy/Class of 1965 and 1973 Professorship in Law at The Ohio State University Moritz College of Law. He is an expert in the intersection between intellectual property law, contract law, and economic theory. His work explores how markets shape and are being shaped by intellectual property law. His publications have appeared in the Chicago Law Review, UCLA Law Review, Yale Law Journal Forum, and Virginia Law Review, among others.
Professor Rub has studied law on three continents. He holds an SJD degree and an LL.M. degree from the University of Michigan Law School; a master’s degree in Law & Economics from the University of Madrid; a European Master in Law and Economics from the Erasmus University in Rotterdam, Netherlands; and an LL.B. degree from Tel-Aviv University.
Professor Rub also holds a bachelor’s degree in computer science from Tel-Aviv University and worked as a software programmer and engineer prior to pursuing a career in law.
Browsewrap Agreements and Federal Law
Standard form agreements have been a topic of high interest and controversy for decades. Still, in the abstract, most would agree that while important differences exist between negotiated contracts and form agreements, most courts most of the time treat them quite similarly. A few doctrines, like unconscionability, operate differently when form agreements are concerned, but, for most courts, once Alice signs the dotted line, a bilateral contract is formed, whether she spends ten months negotiating the terms or ten seconds skipping them. And, as we know, signing is overrated too. If Alice can accept a contract by signing a form she didn’t read, she can also do it by tearing a wrap or clicking on “I accept.”
But browsewrap agreements, contracts that are allegedly accepted by using a website, are trickier. To the degree that the offer and acceptance ceremony still matters (and it should, right?), most people probably perceive the act of signing a dotted line, clicking “I agree,” and browsing quite differently (although, for what it’s worth, over the last decade, more and more students are telling me that “everybody knows that by using a website you accept its terms.”). So are browsewrap forms binding? It depends a little on the jurisdiction and a lot on the website. Courts have developed tests that focus on what users actually knew and on how “conspicuous” the terms were. They explore the color of the link, where it was placed, how big the font was, and so on. Browsewrap agreements let judges play website designers.
While state law still struggles with browsewrap agreements, a new brief from the United States Solicitor General (left) suggests that federal law might have something to say about the issue. Genius.com is a popular website for music lyrics. Its browsewrap prohibits the copying and public display of those lyrics for commercial use. Google, however, allegedly did just that. If you google “the lyrics of little lies” (useful when teaching misrepresentation), you will get the results on Google itself, in what Google calls “an information box.” No need to spend time visiting Genius’s website for lyrics anymore. This can make the users happy and Google probably happier, but it is a disaster for Genius’s ad-centric business model. A breach of contract lawsuit followed.
Contract law might give Google quite a few tools to fight this lawsuit, but it chose federal preemption as its first line of defense. Google argued that Genius’s claim is expressly preempted by copyright law. Section 301(a) of the federal Copyright Act preempted rights under state law that are “equivalent” to rights under copyright. Courts disagree on whether contracts are ever equivalent to copyright. A minority of courts hold that contracts that regulate what copyright regulates, mostly the reproduction and distribution of information goods, are preempted. The majority of courts, however, hold that a contract, as a bilateral agreement, cannot be equivalent to a property right like copyright. The most famous articulation of that majority approach came in an opinion we know for other reasons—ProCD v. Zeidenberg. In Genius v. Google, however, the Second Circuit adopted the minority approach and held Genius’s browsewrap agreement preempted as a contract that regulates copying. Genius’s cert petition to the Supreme Court followed, and the Court invited the Solicitor General to file a brief on this matter.
In its brief, the Solicitor General acknowledges the circuit split and suggests that the Second Circuit approach is quite problematic (a view I share), but it nevertheless recommends denying the cert petition. At the heart of its brief, the Solicitor General argues that this case is not a good vehicle to address the copyright-contracts tension because browsewrap agreements are just different.
The Solicitor General claims that it is not clear that this case would have come out differently in any other circuit. It, quite creatively, partly relies on a much-quoted (and often misunderstood) sentence from ProCD, where Judge Easterbrook (right) explains that not everything “with the label ‘contract’ is necessarily outside the preemption clause.” I always assumed that if the Seventh Circuit had any specific example in mind, it was probably implied-in-law contracts, which, we know, are not contracts at all. But can’t we apply the same approach to browsewrap agreements? After all, if the heart of the Seventh Circuit argument is that the act of acceptance categorically distinguishes contracts from copyright, then maybe it is less than obvious that browsewrap agreements should be treated similarly.
To be clear, in this case, courts addressed the federal preemption question first and never decided whether a contract was even formed under New York law. But the Solicitor General suggests that even if a contract was formed, for preemption purposes, that contract “is quite different from the paradigmatic bargained-for exchange.”
Most of the implications of this brief and this case are beyond the scope of contract law, but contract professors will still find it interesting. Consider, for example, the following nuggets: First, while its argument is interesting, the Solicitor General’s brief completely ignores the fact that Genius repeatedly put Google on actual notice as to its terms and conditions, which is likely quite meaningful as a matter of state contract law. Shouldn’t it matter for federal law too? Second, contract professors might find it noteworthy that the Solicitor General distinguishes ProCD because there “the existence of a contract was apparent.” Third, the brief not only argues that browsewrap agreements are different, which they might be, but it implies that they are maybe less important, referring to them repeatedly as “atypical.” I’m not sure that claim is self-evident.
In any event, are we going to soon have the Supreme Court weighing in and telling us whether browsewrap terms and conditions are contracts, at least from a federal preemption perspective? I know better than to bet on anything that the Supreme Court does, especially on cert petitions. However, it is probably more likely than not that the Court will deny the petition. But if it surprises us, maybe Justice Sotomayor will get a chance to revisit the topic 20-something years after Specht v. Netscape.
Monday, April 10, 2023
There have been three excellent posts on the JOTWELL contracts page since last we checked in there. Taking them in reverse order:
In February, David Hoffman (right) published Waivers Are Some Crazy Stuff, reviewing Keith Hylton, Waivers (2022), available at SSRN. When you are done worrying about TOUs, you can start worrying about waivers, which are not exactly contracts, as they are unilateral and require no consideration, they are easily created and often easily reversed, they are subject to varying rules across jurisdictions, and they are ubiquitous. Professor Hylton provides an economic analysis of the law of waivers, acknowledging the concerns sounding in consumer protections about boilerplate waivers but argues that waivers are nonetheless welfare-enhancing and result from consumer choices about the goods and services they purchase even if consumers do not know what they have waived. Professor Hoffman recommends Professor Hylton's work because it is relevant to a general defense of boilerplate contracting, and it is short and relatively free from economics jargon.
Finally, in January, Daniel Barnhizer (left) posted Perceptions and Reality, reviewing J.J. Prescott and Evan Starr, Subjective Beliefs about Contract Enforceability __ J. Legal Stud. __ forthcoming 2023, available at SSRN. As presented by Professor Barnhizer, the article is an application of Roscoe Pound's observation of the divergence form law on the books and law in action, addressing the divergence between parties' perceptions of contract enforceability and legal doctrine. The article proposes ways to bridge that divide in the realm of employment agreements. The authors note at the start that non-compete clauses abound and influence mobility in states where they are unenforceable. According to the authors, 70% of employees in such states believe incorrectly that the non-compete clauses are enforceable. But educational outreach may affect their willingness to switch jobs notwithstanding the unenforceable non-competes.
So, to summarize these state of the world based on these three articles: terms of service and other boilerplate contracts, which might include waivers, are ubiquitous, powerful, and bind consumers who have not read and could not understand their terms. They shape real-world behavior regardless of their enforceability. But economic theory suggests that they may just reflect our preferences and are generally welfare-enhancing.
Friday, March 31, 2023
A great thing is happening in commercial law as I type these words: Musty corners of the Uniform Commercial Code are in the process of being brought up to date to deal with the realities of twenty-first century commerce. The 2022 UCC Amendments now being considered in state legislatures across the country are replacing the "writing" requirements baked into Article 2 (Sales), Article 3 (Negotiable Instruments) and elsewhere with the more flexible "record" that can be electronic or written and represents commercial reality. The comprehensive system of secured lending contained in Article 9 is being updated as well. These revisions will provide a stable system of rules that address once-unimagined electronic assets like NFTs (non-fungible tokens) and cryptocurrency to enable them be safer and more attractive forms of collateral because of the certainty with which a lender can secure its position.
So yes, that "electronic basketball card" NFT your cousin bought last year could actually end up being pledged as collateral that helps that cousin get a loan. As Yakov Smirnoff used to say, "What a country!"
But I digress. To this professor of payment systems law, the most exciting part of the package of 2022 UCC amendments is new Article 12, entitled "Controllable Electronic Records." Article 12 creates state commercial law rules to govern blockchain assets like bitcoin and other cryptocurrency, as well as any other technology (present or future) where a purely digital record is capable of being under exclusive control.
For those unfamiliar, the paradigm-changing innovation brought about by bitcoin circa 2009 was that, through blockchain programming methodology, it allowed for the creation of a digital token that could not be copied (or in currency terms, counterfeited). A thought experiment with paper currency will demonstrate how useful blockchain programming actually is. While counterfeiting is an occasional problem for paper currency like the U.S. dollar, imagine the disaster for the use of cash as a store of value if any trickster with a photocopier could make unlimited and undetectable copies. Eventually, no one would accept cash as payment. Why would you when you could just as easily print your own? Increased money supply facilitates inflation, which is bad enough, but an infinite increase in the money supply would eventually reduce its value to zero.
The trouble with digital files, then, is that they are susceptible to the infinite creation of perfect copies. Bitcoin changed all that through blockchain programming. Because of verification on a decentralized computer network, only one bitcoin token could demonstrably exist as the verified real thing, even in the face of dozens of ostensible duplicates. In payment system terms, this means that bitcoin solved the "double-payment" problem preventing the creation of a digital and decentralized asset. Yay for bitcoin!
But not quite. The creation of non-counterfeitable digital assets has spawned (and is continuing to spawn) numerous applications, such as "trading card" collectable NFTs, digital shareholder governance, smart contracts, and even the possibility of marketable electronic title for real property. Meanwhile, bitcoin and its crypto-progeny have fallen quite short on the original use case for blockchain: a mainstream payment system. Instead, cryptocurrency has become largely the province of high-risk speculative investment and hobbyists. The recent collapse of the FTX cryptocurrency exchange and some high profile crypto-heavy commercial banks suggests that pure speculation is ultimately not a viable path forward. What bitcoin-and-company are truly lacking is widely accepted use as a payment system.
UCC Article 12 is primed to change that. It creates the legal safeguards and commercial certainty that bitcoin needs break out of its niche. Article 12 does this by establishing a basic legal regime for the ownership and transfer of "controllable electronic records"—a category that includes all decentralized cryptocurrency. Rather than focus on physical concepts of possession, the UCC revisions focus on control, as shown in this excerpt from subsection (a) new section 12-105:
§ 12-105. Control of Controllable Electronic Record.
(a) [General rule: control of controllable electronic record.] A person has control of a controllable electronic record if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded:
(1) gives the person:
(A) the power to avail itself of substantially all the benefit from the electronic record; and
(B) exclusive power, subject to subsection (b), to:
(i) prevent others from availing themselves of substantially all the benefit from the electronic record; and
(ii) transfer control of the electronic record to another person or cause another person to obtain control of another controllable electronic record as a result of the transfer of the electronic record; and
(2) enables the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having the powers specified in paragraph (1).
This provision is technology neutral. It clearly covers blockchain assets like bitcoin while still leaving room for other technological innovation in the realm of decentralized digital assets. The only inquiry in connection with making a transaction occur is the existence of control, and the ability to transfer it to another. Article 12 gives bitcoin the legal certainty that existed for centuries in the world of commercial paper by establishing a clear and comprehensible regime of control to stand in the place of the (literally impossible for bitcoin) regime of physical possession.
And there is much more. What good is digital value as a cash substitute if you can't spend it? New Article 12 takes care of that by adapting the centuries-old regime that made a success of commercial paper: negotiability. While the musty negotiable instruments term of "holder in due course" does not appear in the statutory text of Article 12, the definition of a "qualified purchaser" is clearly inspired by it. Section 2-102(a)(2) provides:
“Qualifying purchaser” means a purchaser of a controllable electronic record or an interest in a controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.
What then is the result of being a qualified purchaser, of (for instance) taking bitcoin as payment in exchange for vale, in good faith, and without notice of a claim to asset? Article 12 provides that the party taking the bitcoin takes it free-and-clear as against anyone else in the world. Subsection (e) of section 12-104 provide for this important commercial law legal right:
§ 12-104. Rights in Controllable Account, Controllable Electronic Record, and Controllable Payment Intangible.
[* * *]
(e) [Rights of qualifying purchaser.] A qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.
Now,let's tie this all together. Based on the above statutes, a seller of goods or services now knows—from a legal perspective—exactly what it must do to accept cryptocurrency payments with the assurance that the transaction is not going to be undercut by an unknown party. If Joe's Hardware Store takes the steps necessary to obtain "control" of bitcoin and it does so as a "qualifying purchaser" of the bitcoin in exchanging its valuable goods and services for that bitcoin, then the transaction is complete. Period. No one else can show up on Joe's doorstep and claim a lien or other legal right to the bitcoin. The legal uncertainties that arise from taking this "mysterious" cryptocurrency as payment are now resolved. It works with as much certainty as credit cards, checks, or—dare I say it—cash.
The 2022 amendments to the Uniform Commercial Code are set to play a crucial role in "saving" bitcoin by empowering it and other cryptocurrency to live up to its original potential, not as some quirky, speculative investment, but as an actual payment system.
Tuesday, March 21, 2023
This post started out as one story, but when I started researching, I fell down a rabbit hole of alleged breaches of contract. They all fit the incredibly simple pattern: one of the parties to the Elon Musk/Twitter litigation hired some company to do work in connection with the Musk/Twitter transaction. Then, once Mr. Musk (below) owns Twitter, he doesn't pay.
First, on January 20th, Jon Brodkin reported for arstechnica, that Charles River Associates provided consulting services to Twitter in connection with its lawsuit that eventually forced Elon Musk to purchase the company. Brodkin previously reported that Twitter had not paid over $1 million to Imply Data, Inc. and apparently intended not to pay the remaining $7 million. Apparently, Twitter simply doesn't respond when its creditors inquire about unpaid invoices. At one point, it was impossible to reach Twitter for comment, Brodkin reported, because the PR department had been terminated. I don't know if that is still the case. We reported on earlier contract breaches here.
Next, on February 3rd, Lauren Hirsch and reported in The New York Times, Musk has also not paid Innisfree M&A Incorporated $1.9 million owed in connection with work it did for Twitter during the acquisition. The article details other contracts that the company is not honoring.
Finally, Laurel Brubaker Calkins reported in Bloomberg News on February 9th that Twitter was also not paying Analysis Group Inc. of Boston $2.2 million in fees for consulting services it provided in connection with the acquisition. Perhaps Mr. Musk doesn't want to pay the people who contributed to forcing him to buy Twitter, an acquisition he seems to be enjoying less and less these days as the bills come due, the platform degrades, and the route to profitability becomes ever more elusive. Fortunately, The Onion has a slideshow packed with inspired ideas for making the platform profitable, all suitable for a genius of Mr. Musk's calibre.
Friday, January 20, 2023
I've been thinking about re-starting the Blog's Twitter feed, which has been dormant since December. Blog traffic is down, I have been losing touch with academic news that I was getting through active LawTwitter folks, and Twitter remains an awesome news aggregator. And then I came across this latest evidence that the new Twitter is a dastardly, mean-spirited Saturn that devours its own children.
I learned today on Mastodon (of course) through Andy Baio that Twitter has "quietly changed its Developer Agreement today to retroactively justify their unannounced ban on third-party Twitter clients." The change is reflected in an update in Twitter's (you guessed it!) Terms of Service. Here is a track-change comparison that highlights the changes. These changes are really targeted at independent companies that greatly improved the user experience over at Twitter. I wasn't around for the early days of Twitter, and I'm not a person who thinks much about tech matters, so I don't really understand how it all worked, but here is an account of the effect on one such company, Twitterific. #Tweetbot is another such service that the New Twitter has killed off. I take it that these were Apps that you could download that would give you a better experience on Twitter than the actual Twitter App and which contributed mightily to Twitter's success.
As you can read here in reporting from Ivan Mehta, Twitter claimed that these Twitter clients violated its "longstanding rules," without identifying any such rules. The fact that it had to changes its ToS in order to justify its actions is, in a word, suss.
Still mulling a return to Twitter. Still hoping things change over there or that one of the alternative matures into a substitute. For now, please follow the Blog on Mastodon.
Tuesday, January 3, 2023
Ahh, the joys of cryptocurrency! It makes so many unsavory and illegal transactions possible, and it all comes with that heady soupçon of infantile rebellion, libertarianism, and susceptibility to conspiracy theories. Let's see what wonders cryptocurrency has brought us today!
On March 29, 2021, Yoshida Foods International (Yoshida) was the victim of a malware attack. Its entire data system was isolated and encrypted, rendering it inaccessible. The anonymous hacker offered to sell it a decryption key if it paid in cryptocurrency. Yoshida employed an IT company to assist it in responding. The IT company advised Yoshida to pay the ransom. Yoshida ultimately paid $100,000 for decryption keys. It did so using the Bitcoin account of its principal, Junki Yoshida. It also paid just over $7000 to the IT company, and so it sought to recover $107,000 from its insurer, Federal Insurance Company (Federal).
Yoshida's policy with Federal provided "Crime Coverage," including "Computer Fraud Coverage." Nonetheless, Federal denied the claim, alleging that Yoshida had suffered no permanent loss and that the loss from the ransom payment had not been "direct" as required by the policy. Mr. Yoshida suffered a loss due to fraud, but he was not covered by the policy, Federal contended. Yoshida's only loss came when it reimbursed an employee, and Yoshida did not allege that Mr. Yoshida was engaged in computer fraud (obviously). Federal also denied the payments to the IT company, because those were also not "direct," and as such payments require the insurer's advance written consent.
In deciding whether Federal could deny the claim in Yoshida Foods Int'l v. Fed'l Insurance Co., the Federal District Court for the District of Oregon refreshingly did not behave like a textualist bot and consult dictionaries and common usage. Rather, the court consulted precedent and context and noted that the phrase "direct" in the context of insurance contracts has been interpreted to mean "characterized by or giving evidence of a close esp. logical, causal, or consequential relationship." There was a California case that seemed helpful to Federal, but that case did not involve ransomware and it was affirmed on other grounds in the Ninth Circuit. That ruling turned on the specific language of the policy at issue, which was not the language of the policy at issue in the Yoshida case.
Having distinguished that case, the court concluded:
Both the ransom payment made by Mr. Yoshida and the reimbursement of that amount by Plaintiff were proximately caused by the hacker's computer violation directed against Plaintiff's computer system. There was no intervening occurrence between the ransomware attack, the ransom payment, and the reimbursement to Mr. Yoshida, which were all part of an unbroken sequence of events. Plaintiff's reimbursement of the $107,074.20 ransom payment was a foreseeable result of the attack.
Federal next argued that Yoshida's loss was not the result of a computer fraud but of a voluntary decision to pay the ransom. That reading of Federal's policy would require coverage only when a hacker was able to infiltrate a company's computer system and syphon off funds directly. The Ninth Circuit rejected such a narrow reading of such insurance coverages in Pestmaster. Ernst and Haas Mgmt. Co., Inc. v. Hiscox, Inc., 23 F. 4th 1195, 1199-1200 (9th Cir. 2022). There, an employee was fraudulently induced to wire $200,000 to a fraudster. The Ninth Circuit ruled on behalf of the insured, noting that "initiating a wire transfer is not the same as authorizing a payment" because that a volitional payment induced by fraud is, by definition, not authorized. Citing an Indiana case as persuasive authority, the court in Yoshida noted more generally that payments made under duress are not volitional in a way that undermines a fraud claim.
Finally, Federal argued that the policy's Fraudulent Instructions Exclusion applied. That policy excluded coverage for any transfer of money authorized or approved by an employee. Federal argued that either Mr. Yoshida was an employee who approved the transfer or that the company's account manager was the employee who authorized the payment to the hacker. The reasoning here is a bit elusive, but ultimately the court again relies on its reasoning that an approval of payment induced under duress is not "approva,l" and so the exclusion does not apply.
As to the written consent argument in connection with payments to the third-party IT consulting firm, the court found that language in the insurance contract requiring advance written consent did not apply to these facts. The district court granted Yoshida summary judgment on its breach of contract claim.
Yoshida also alleged breach of the duty of good faith and fair dealing. Because Federal's arguments, while ultimately unsuccessful, were not brought in bad faith, the court granted Federal summary judgment on Yoshida's good faith and fair dealing claim.
Monday, November 28, 2022
According to a report from Media Matters for America, Twitter has lost half of its top 100 advertisers in the last month. The 50 advertiser that have flown the bird coop account for $2 billion in revenue since 2020 and $750 million in revenue in 2022. Another seven advertisers, accounting for $255 million in 2020 and $118 million in 2022, have reduced their ad buys to a trickle. What once was a cash cow for Mr. Musk's fledgling business, is now mere chicken feed (pardon my mixed metaphor, but I'm trying to keep the bird theme going). Most of the departed advertisers are "quiet quitters," but seven have either issued statements that they were leaving the site or were publicly reported to have done so and those reports were confirmed.
How do we explain this? Here's how Media Matters explains it:
Elon Musk (who acquired the platform in late October) has continued his rash of brand unsafe actions — including amplifying conspiracy theories, unilaterally reinstating banned accounts such as that of former President Donald Trump, courting and engaging with far-right accounts, and instituting a haphazard verification scheme that allowed extremists and scammers to purchase a blue check. This last move, in particular, opened the platform up to a variety of fraud and brand imitations.
Halisia Hubbard, reporting on NPR adds that Eli Lilly stopped its ads on Twitter after a fake account purporting to be the pharmaceutical company tweeted on an account that featured a purchased "blue check" verification, "We are excited to announce insulin is free now." Eli Lilly asked that the post be removed, but Twitter is short on staff, and the post remained up for hours and garnered hundreds of retweets and thousands of likes. Eli Lilly's stock price took a hit as a result.
Some, citing its status as something like a public forum (an argument I don't buy) are calling for governmental regulation of Twitter. But private legislation can also do the trick. If enough advertisers exercise their free expression rights by withholding their money (money = speech, another argument I don't buy), perhaps that will discipline Musk and help save Twitter.
This blog does not account for very much of Twitter's revenue. Still, we prefer not to have our attention monetized to enhance Mr. Musk's unseemly wealth. You can find us over on Mastodon for now. It's actually a fun site, once you figure out how to connect to people over there. You can find us at this address.
Friday, November 11, 2022
David Segal of The New York Times reports here on a YouTube influencer for the aging Pepsi generation struggling to keep up with the world of cryptocurrency. As I struggle to understand the collapse of the FTX Crypto Exchange, a company I had never heard of, I decided to just let Mr. de Hec explain how crypto scams work. Brought to you straight from New Zealand!
Thursday, November 10, 2022
Kate Klonick (right) dropped in on David Schleicher and Digging a Hole, the legal theory podcast, to talk about Elon Musk's acquisition of Twitter. I highly recommend listening to this episode. Kate knows people, including people who know people, and she provides incomparable insights into what is going on at Twitter and why, most likely, Twitter will not change all that much, despite Mr. Musk's mercurial affect and incendiary Tweets.
David and Kate seem to take it as a given that Elon Musk never wanted to buy Twitter, but now he's stuck with it. Kate provides the hopeful insight that the one thing that Mr. Musk actually might at some point feel bad about is losing other people's money. As a result, he will not run Twitter into the ground, as he mostly bought it with other people's money. The thought occurs to me that, if he ends up losing money for his investors, he could just pay them back with some of his surplus billions, but I don't suppose you get to be a billionaire if that is your attitude. Anyhoo, Twitter will likely remain much as it is now, which is a relief, since I have become a regular user of the site. Mr. Musk would like to make it more profitable, but he doesn't really have any good ideas about how to do so. Maybe he should have thought more about that before he acquired the company.
Kate notes that Mr. Musk's skills set does not really match up well when it comes to solving Twitter's problems. There is no way to engineer his way into the right decision-making path about content moderation. The models he is floating for generating revenue, such as turning it into a subscription service or making people pay monthly fees for premium features, are all antithetical to Twitter's core concept, which is unwalled space in which all meet all. On Facebook and other social media platforms, you interact with your friends. Twitter you expose yourself erga omnes.
David makes the case for having a favorable opinion of Mr. Musk as compared with the other Internet Titans. Electric cars are a good thing, and rockets are, in David's view, "cool." I agree about electric cars, but I thought Tesla existed before Mr. Musk. I'm not sure what he did to make that company better. If you want an electric car, you can get a Nissan or a Chevy for $20,000 less than the cheapest Tesla, so I don't know how you save the planet by selling cars to the one percent. As for rockets, let's revisit this issue in thirty years, when I expect that we will all still be living on earth, not Mars, and we may have some regrets about all the space junk circling our planet. I consider it a colossal failure that our government lost control over rocket technology, and we are now dependent on a private person to launch what seems to be vital infrastructure into space.
Ultimately, Mr. Musk's goal with SpaceX is manned space flight. When I was in practice, a fellow associate was a former marine who idolized astronauts. He had signed copies of their memoirs in his office. After admiring them, I told him that I thought manned space flight was fine in the 1960s, but now it is just an unconscionable waste of resources. He did not hesitate to say, with as much self control as he could muster, "Dude, you're going to have to leave my office now." We remained good friends, and we steered away from the topic in future encounters. Nonetheless, whenever I encounter somebody with Mr. Musk's enthusiasm for manned space flight, my inner monologue has not changed: "Grow up," is what I think and sometimes what I write on a blog or somewhere.
It will be a relief if Twitter survives the Musk takeover. Yesterday, this Blog reached a new Twitter milestone, and we have come to count on Twitter as a mechanism for drawing eyes to the Blog.
The Digging a Hole website for the Kate Klonick eipsode links to the following recommended readings. I was pleased to hear that David Schleicher's opinion of Matt Levine accords with mine exactly: national treasure.
“Elon Musk’s Management Style Is a Threat to Global Democracy,” by Kate Klonick
“Elon Musk, Plus a Circle of Confidants, Tightens Control Over Twitter,” by Mike Isaac, Ryan Mac, & Kate Conger
“Twitter, Once a Threat to Titans, Now Belongs to One,” by Kevin Roose
“Elon Musk is Busy With Twitter,” by Matt Levine
“Inside the Making of Facebook’s Supreme Court,” by Kate Klonick
“Implications of Revenue Models and Technology for Content Moderation Strategies,” by Yi Liu, Pinar Yildirim, & Z. John Zhang
Thursday, September 29, 2022
I am delighted to introduce our readers to my former colleague, Michael D. Murray (left), now the Spears-Gilbert Associate Professor of Law and the University of Kentucky Rosenberg College of Law. Michael is a prolific author, having published 27 books and with 45 papers available on his SSRN site. He writes on a broad range of subjects, so it was only a matter of time before he would hit the jackpot and write something about contracts law. I invited him to share a summary of one of his recent pieces, with which followers of the blog will already have a passing familiarity from our weekly Top Ten from this week. But once the contracts scholarship spider bites you, it may have transformative effects, so this may not be the last we hear from Michael.
Transfers and Licensing of Copyrights to NFT Purchasers
6 Stan. J. Blockchain L. & Pol'y _____ (forthcoming, 2022)
This article seeks to educate non-fungible token (NFT) creators, purchasers, and the attorneys who counsel them regarding the question of what if any of the copyrights to the tokenized works should be transferred or licensed to NFT purchasers and bring clarification to the issues of copyright transfer and licensing in the world of NFTs and blockchains.
NFTs have introduced several wrinkles into the analysis of intellectual property rights in general and copyright law in particular. NFTs are a cryptography tool defined and operated by a “smart contract.” A smart contract is a small bit of code that makes up a simple computer program that runs the operation of an NFT. Smart contracts use blockchain technology to verify and record the existence and ownership of digital assets and physical three-dimensional assets. An NFT purchaser purchases control over the smart contract that defines and operates the functions of the NFT. The smart contract creates a registry entry on the blockchain that is understood in the NFT industry and crypto community to represent proof of ownership of the asset linked to the NFT, whether that be an artwork, a piece of real estate, or other asset. An NFT does not automatically provide ownership or control of the copyright to the artwork linked to the NFT, which leads to the topic of transfers of such rights to NFT purchasers.
Artists and creatives who mint NFTs and collectors and investors who purchase and use them often have very different understandings and expectations when it comes to the copyrights associated with the content linked to an NFT. The default rule of copyright law is that the copyright to creative works does not transfer to the purchaser of the works, so that unless the NFT creator does something to actively transfer or license the rights to the purchaser, the NFT purchaser will have no copyright rights to the works linked to the NFT.
An NFT creator may be very happy to transfer or license some or all of the copyrights to the purchaser of the NFT. In general, a transfer of all of the copyright rights to the purchaser is called an assignment of the copyright, and an assignment must be performed in writing, not orally or by implication from conduct of the parties. Transfer of fewer than all of the copyright rights is typically called a license of the rights.
With NFTs, there are several means discussed in the article to communicate license terms. They are presented here in order of their likely recognition as a valid legal license of part of the copyright intellectual property of the artwork:
- Bargained for exchange between seller and purchaser before purchase
- License terms coded into the smart contract of the NFT
- Pop-up clickwrap license terms (“Click here to accept these terms . . .”) at the point of purchase
- License terms provided in the listing and item description on the NFT sales platform
- License terms provided on the website of the NFT creator
The minter of an NFT who is the creator and owner of the copyright to the artwork linked to the NFT should carefully consider what rights might be transferred or shared with the purchaser of the NFT. If the artist routinely uses artworks in on-going commercial projects or plans to create derivative works or reproductions of existing works, then these rights should be protected and excluded from the purchaser and any other subsequent owners of the NFT. But if the minter and copyright owner is a follower of the open-source, cooperative, community-building philosophy that is surprisingly common in the crypto and metaverse world, then the creator may want to share, give away, or give up all of the rights to the artwork linked to the NFT. There are many options in between, but the drafter of a license should consider the following rights when designing the license terms:
- Right to Display
- Right to Copy for Specific Incidental Purposes
- Right to Create Derivative Works
- Right to Commercially Exploit the Artwork
- Sharing Everything—Use of Creative Commons Licenses
- Selling Everything—Assigning the Copyright to the Purchaser
Offering one right need not exclude any others, as any license could offer two or three or all of the possible uses. A bespoke license should be one that will satisfy a purchaser now but protect the creator’s rights on an ongoing basis into a distant future.
Licensing most often is a serious business decision of the artist and creator of a work because we tend to assume that the works we are trying to protect deserve to be protected from copying and uncontrolled distribution or exploitation. With traditional fine arts in their physical forms, it usually mattered greatly to the artists whether someone could copy their works, beat them to the intended marketplace or into new markets, make derivative works from their works, and out hustle them in exploiting the works until there was no point in claiming the works or attempting to control them. With highly complicated and labor-intensive ventures such as video game development, motion picture production, and building entire new worlds in the metaverse, it generally has been viewed as essential that the end product of years of work will not be duplicated and distributed freely with no compensation and control by those who expended the time, effort, and money to bring the work into existence. When it was more difficult to make a copy of the work in a painting or sculptural medium, there was a natural barrier that could slow down exploitation to a reasonable and policeable level. Digital artistic expression in the visual arts, film, and performing arts has changed the equation because it can be so easily duplicated and distributed with no perceivable loss in fidelity of content.
The developers of the metaverse currently contemplate using NFTs as a medium of exchange, a ticket to events, a calling card allowing entrance to gatherings, and, of course, as artist expression to literally and figuratively color in the alternative reality experience. Digital artistic expression will be ubiquitous in the metaverse, and one question to answer will be who will be able to exploit the value of these creations now and for the future. Copyright licenses are one answer to this question.
Wednesday, September 28, 2022
In May we posted about the Eleventh Circuit's ruling in NetChoice, LLC v. Attorney General, which struck down many provisions of a Florida statute that sought to regulate social media companies as common carriers engaged in "censorship." The Eleventh Circuit quoted from the language that animated the challenged legislation: The law was created to punish “the ‘big tech’ oligarchs in Silicon Valley” who “silenc[e]” “conservative” speech in favor of a “radical leftist” agenda. Subtle. Before that, we posted about Texas HB 20, which is similar. Judge Pitman of the District Court for the Western District of Texas had enjoined the enforcement of HB 20 in a 30-page opinion. The Fifth Circuit lifted that injunction, and then last week, it issued an opinion in the case, NetChoice v. Paxton.
It's a 113-page doozy. Fortunately, in a 6000-word post, Eric Goldman (right) has gone through the entire opinion carefully, and he provides not only a trenchant analysis but also links to sources so that readers can do their own deep dive into the case. That leaves little for us to say except to address to the contractual connection in this case. But first, an overview.
Professor Goldman's post begins helpfully with a synopsis of how HB 20 fared in the Fifth Circuit, an edited version of which appears below:
The Texas law has four main provisions. Here’s where they stand after the Fifth Circuit’s ruling:
mandatory editorial transparency requirements. . . . [unanimously upheld]
digital due process requirements, including an appellate process for aggrieved users. . . . [unanimously upheld]
restrictions on viewpoint-biased content moderation. The panel voted 2-1 to lift the injunction for multiple reasons. However, only one vote (Oldham) endorsed the common carriage justification. . . .
a ban on email service providers deploying anti-spam filters unless they give appellate rights to all filtered senders. No one has yet challenged this provision, so it was never enjoined and remains available for AG Paxton to enforce. . . .
The Fifth Circuit opinion begins by saying that HB 20 "generally prohibits large social media platforms from censoring speech based on the viewpoint of its speaker." Because, as Professor Goldman points out, the social media platforms are private actors who, as such, by definition, cannot engage in censorship, they are not lawfully susceptible to regulation on that basis. Indeed, as Professor Goldman notes as well, what is really going on here is government censorship of the social media companies' expression. One way to state the issue might have been "Can social media platforms be prohibited by statute from suppressing speech on the basis that they are state actors engaged in censorship? So posed, under current law, the answer is no. By defining content regulation as "censorship" the Fifth Circuit is making new law and deciding the case in advance by making words mean what it wants them to mean. It doesn't even pay them extra, as the equitable Humpty Dumpty does.
Having started with a faulty premise, the opinion continues:
But the platforms argue that buried somewhere in the person’s enumerated right to free speech lies a corporation’s unenumerated right to muzzle speech.
The implications of the platforms’ argument are staggering. On the platforms’ view, email providers, mobile phone companies, and banks could cancel the accounts of anyone who sends an email, makes a phone call, or spends money in support of a disfavored political party, candidate, or business . . .
That is almost certainly a mischaracterization of the platforms' arguments, because their argument is that they are not and should not be treated like "email providers, mobile phone companies," etc. And with that, the District Court's injunction is vacated.
But on to the contracts angle. I have been writing a lot lately about the interaction of First Amendment law and contracts law. The relationships between the social media platforms and their users are governed by a contract -- the platforms' terms of service. My co-blogger and co-author Nancy Kim has spent much of her career highlighting the dangers of expansive or exploitative terms of service. I am not unaware of the hazards. But terms of service are routinely enforced, and it is a huge problem when the government suddenly steps in to change contractual relations based on the wholly unsubstantiated claim that the social media companies discriminate against conservative voices. If the social media companies muzzle speech, they muzzle speech that violates their terms and conditions. As a frequent user of social media, I'm glad that they do it, and I hope they do it better, which means doing it more, as there are ever-new automated mechanisms for flooding popular sites with speech that has little to do with insight and everything to do with incitement of political violence.
The Fifth Circuit opinion surgically excerpts passages from the platforms' terms of service in order to make those platforms look like public fora or common carriers. What the opinion does not do is note the substantive components of those terms of service and community standards. Twitter's terms of service, for example, specifically prohibit posts that promote or encourage:
- Terrorism/violent extremism
- Child sexual exploitation
- Hateful conduct
- Perpetrators of violent attacks
- Suicide or self-harm
- Graphic violence and adult content
- Illegal or certain regulated goods or services
Facebook's community standards are broader but non-partisan and pretty damn thoughtful.
But the ultimate point is. These are private sites with private rules. Citing Justice Kennedy's dictum in Packingham, the Fifth Circuit calls the each platform a "monopolist"of the modern public sphere. But the very fluidity of these markets shows the opposite. Who had even heard of TikTok five years ago? My students are contemptuous of Facebook and prefer platforms like Snapchat and Instagram that I would never use. Alternatives to Twitter abound, and if they are less successful than Twitter, that is because they suck, and one of the main reasons that they suck is that they don't have the powerful algorithms that the best platforms have, which allow them, among other things, to enforce their terms of service effectively.
Let's hope that SCOTUS takes this case. It just about has to given the 5th Circuit/11th Circuit split and the global nature of the Internet. And let's hope that it enjoins these attempts at government censorship masquerading as regulating private censorship (which is not a thing).
Wednesday, August 31, 2022
Our very own Nancy Kim (left) published an op-ed in the L.A. Times last week on California's Age Appropriate Design Code Act (the Act). The purpose of the Act is to deter social media companies from creating features designed to addict children to their web products. The Act has yet to be come law. However, Nancy argues, it has already had some impact.
First, the Act raises awareness of the extent of which social media companies knowingly contribute to the problem of addition to social media sites. Second the Act pushes back against the tech giants' assertions that regulation of the industry stifles free speech rights and hampers technological development. The tech giants, as is well known, are not consistently on the side of free speech nor are technological innovation and regulation incompatible. Third, the Act highlights interests like privacy, autonomy, and safety that must be balanced against the social media platforms desire to remain free from regulation or oversight.
Nancy supports the proposed legislation, arguing that it will be good not only for children but for all users of the Internet. You can read the details of the enforcement mechanism in her op-ed.
Friday, July 15, 2022
John Patrick Hunt on Elon Musk and Twitter
Part III: Alternatives to the Specific Performance of Merger Agreements
As explored in the previous posts (1 & 2) in this series, Delaware law seems to provide for specific performance of merger agreements when the parties agree to it, which they often do. But, moving to the second major point of these posts, what if the court nevertheless decides not to order specific performance here? For example, commenters have suggested Musk might simply defy such an order, and that fear of that outcome might induce the court not to order specific performance in the first place. Setting aside any doubts about the plausibility of this scenario, we consider what would happen if the court actually did decline to order specific performance on the stated ground that damages are adequate or for other equitable reasons.
The conventional reading of the Musk-Twitter contract seems to be that any monetary damages would be capped at $1 billion, the amount of what the agreement calls the “Parent Termination Fee.” And the does say that in plain terms. For a “knowing and intentional” breach of the agreement, Twitter is “entitled to seek monetary damages, recovery, or award” from Musk or the acquiring companies “in an amount not to exceed the amount of the Parent Termination Fee, in the aggregate.” Agrmt. 8.3(c)(ii). In cases other than knowing and intentional breach, Twitter’s “right to receive payment from Parent of the Parent Termination Fee … shall constitute the sole and exclusive monetary remedy” of Twitter. Id. The same provision goes on to state that “in no event shall [Musk or the acquisition companies] be subject to an aggregate amount for monetary damages … in excess of an aggregate amount equal to the Parent Termination Fee.” Id. The specific-performance provision itself states, “in no event shall [Twitter] be permitted or entitled to receive aggregate monetary damages in excess of the Parent Termination Fee.” Agrmt. 9.9(b).
But these assertions have to be read against the general background assumption of the agreement that specific performance would be available. This assumption also appears repeatedly in the agreement, and it is stated emphatically: “[T]he parties hereto acknowledge and agree that the parties hereto shall be entitled to an injunction, specific performance, and other equitable relief … to enforce specifically the terms and provisions hereof, in addition to any other remedy to which they are entitled at law or in equity.” Agrmt. 9.9(a). Moreover, “Notwithstanding anything herein to the contrary, including the availability of the Parent Termination Fee or other monetary damages, remedy, or award, it is hereby acknowledged and agreed that [Twitter] shall be entitled to specific performance or other equitable remedy to enforce” the agreement against Musk and the acquisition companies, provided the conditions discussed above are met. Agrmt. 9.9(b). The word “acknowledge” seems significant here, as it communicates that each party not only agrees to be subject to specific performance, but also recognizes that each party contemplates that the remedy will in fact be granted -- that is, granted despite equitable considerations.
The contract documents do not address the case where a court denies specific performance for equitable reasons. A provision that Twitter can pursue specific performance and monetary relief simultaneously but cannot receive both, Agrmt. 9.9(b)(iii)(A), just appears to address the timing of election of remedies.
Assuming that the agreement does not cover the case where specific performance is unavailable, the “in no event” should also be interpreted not to cover that case, leaving a gap or omitted case in the contract. One possibility is that the gap is large enough to constitute a failure of assent, as in that 1L chestnut, the Peerless case, Raffles v. Wichelhaus, 159 Eng. Rep. 375 (1864) (or in the chicken case, Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960), which has been interpreted as a modern analogue). Or perhaps the denial of specific performance on extrinsic grounds would be the failure of a basic assumption that the court would award the remedy, so that mistake doctrines would come into play. See Fortis Advisors LLC v. Johnson & Johnson, 2021 WL 5893997, at *17 (Del. Ch. Dec. 13, 2021). These outcomes threaten the enforceability of the merger agreement and thus would be bad news for Twitter.
More likely, however, the court would try to fill the gap by interpretation. Delaware courts would receive extrinsic evidence, such as evidence of the parties’ negotiations, given the contract’s ambiguity, see, e.g., United Rentals, 937 A.2d at 834-35. We of course don’t know what that extrinsic evidence might show, but unless it leads to a clear outcome, it seems likely that the default contract remedy of expectation damages would come back into play. See AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, 2020 WL 7024929, at *100 (Del. Ch. Nov. 30, 2020) (“The common law has established a series of default rules governing the ability of a party to recover damages for a breach of contract. They form a backdrop to the negotiated provisions.”); Concord Real Estate CDO 2006-1, Ltd. v. Bank of America N.A., 996 A.2d 324, 332 (Del. Ch. 2010) (common law “provides a backdrop of standard default rules that supplement negotiated agreements and fill gaps when a contract is incomplete, whether by inadvertence of design. Parties can contract around virtually all common law rules. In a lengthy and sophisticated agreement … the terms of the agreement and not the common law will control many issues. But unless contradicted or altered by the parties’ agreement, the common law rules form an implied part of every contract.”).
Twitter’s expectation damages would be the amount needed to put the company in the financial position it would have been in if Musk had closed the transaction as agreed. They could vastly exceed the $1 billion termination fee, which, as Dean Afra Afsharipour (right) has noted, is a relatively small proportion of the deal price by M&A standards. This amount would certainly be litigated, but a reasonable candidate for an approximation would be the difference between the agreed acquisition price of its stock and the market price. The deal price is $54.20 per share, and at this writing, Twitter is trading at $34.28 per share and reportedly has 764 million shares outstanding. That works out to over $15 billion in expectation damages.
A counterargument could be that despite the contract language quoted above, the parties did not in fact assume that specific performance would be available. Instead, perhaps Twitter recognized that denial was a possibility, signed up for an undercompensatory $1 billion remedy in that circumstance, and lost its gamble. The strong Delaware precedents in favor of specific performance cut against this interpretation, but extrinsic evidence that the Twitter team recognized the possibility that specific performance would be denied despite the law could cut the other way. And Musk’s side would be able to take discovery and try to prove that, given Delaware’s rules on extrinsic evidence.
For example, if Twitter’s representatives discussed the possibility that a court would deny specific performance to avoid a confrontation with Musk out of fear that he would refuse to comply, that could weigh in favor enforcing the damages limitation should apply. But it raises a question: Should a powerful party be allowed to benefit from willingness to defy the law in this way?
The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024. Their work contributed significantly to these posts.
Thursday, July 14, 2022
John Patrick Hunt on Elon Musk and Twitter
Part II: Specific Performance of Merger Agreements
In yesterday’s post, I provided background on the availability of specific performance as a remedy in the context of acquisitions under Delaware law. In this post, we look at Delaware law in more detail.
Commenters have focused on In re IBP Shareholders Litigation, 789 A.2d 14, 82-84 (Del. Ch. 2001) (edted version available here) in which the court considered various equitable factors, including the adequacy of monetary remedies, before deciding to grant specific performance of a merger agreement to the seller. But, importantly, the opinion in IBP does not suggest that the parties agreed to specific performance. It would surprising if the parties had agreed to specific performance and the court simply decided not to mention it; the court did refer to the agreement’s choice-of-law provision in deciding the analogous question of what law to apply. Id. at 52-54. Thus, although IBP certainly stands for the proposition that the Court of Chancery is willing to order a buyer to go through with an M&A transaction, it may suggest more reluctance to do so than the court actually exhibits when the parties have agreed to specific performance.
When the parties do agree to specific performance, the Court of Chancery seems to give great weight to their choice. Indeed – again recognizing that the research for these posts has not been totally comprehensive – this author has found no merger or acquisition case in which the court denied on extrinsic grounds specific performance when it found that the parties’ agreement authorized the relief.
The Court of Chancery recognized the importance of respecting the parties’ choice to opt into specific performance in the related context of exercise of shareholder preemptive rights. Ordering specific performance per the parties’ agreement in Gildor v. Optical Solutions, Inc., 2006 WL 4782348 (Del. Ch. June 5, 2006), the court wrote, “If the Stockholder Agreement was silent as to the availability of specific performance, Gildor would bear the burden of showing that a legal remedy would be inadequate. … But, given Delaware’s policy of favoring freedom of contract, there is no need to make that inquiry. … Delaware courts do not lightly trump the freedom to contract and, in the absence of some countervailing public policy interest, courts should respect the parties’ bargain.” Id. at *11.
Moving to M&A cases, in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the court seems to have treated the parties’ agreement on specific performance as dispositive. It did not analyze the adequacy of damages or equitable factors that would favor or disfavor specific performance. Instead, it simply read the contract’s specific-performance provision and granted specific performance according to the contract’s express terms. Id. at 759-63. Although the court did not order the buyer to close the transaction, that was because it interpreted the contract’s specific-performance provision as not authorizing an order to perform that particular term. Id. at 759-61.
In last year’s Snow Phipps Group v. KCAKE Acquisition Corp., 2021 WL 1714202 (Del. Ch. April 30, 2021), now-Chancellor McCormick did order the transaction to close, basing the decision simply on the fact that the parties had agreed to that remedy: “The court has not hesitated to order specific performance in cases of this nature, particularly where sophisticated parties represented by sophisticated counsel stipulate that the specific performance would be an appropriate remedy in the event of breach.” Id. at *51. Again, the court did not address the adequacy of damages or other equitable factors.
Inversely, the Court of Chancery has also treated the parties’ decision to exclude specific performance as dispositive. When an agreement has been interpreted to bar specific performance, the court has denied the remedy. See Realogy Holdings Corp. v. SIRVA Worldwide, 2020 WL 4559519, at *1 (Del. Ch. Aug. 7, 2020) (claim for specific performance dismissed because “under the [purchase agreement], the unambiguous contractual conditions on that remedy failed”); United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 845 (Del. Ch. 2007) (claim for specific performance denied where plaintiff “failed to meet its burden of demonstrating that the common understanding of the parties permitted specific performance of the Merger Agreement”).
To be sure, in two recent cases in which the merger parties agreed to specific performance, the court has discussed equitable factors, suggesting that the parties’ decision is not dispositive. However, the court ordered the buyer to perform in both cases, and the opinions suggest that the agreement was the driving force. In Level 4 Yoga, LLC v. CorePower Yoga, LLC, 2022 WL 601862 (Del. Ch. March 1, 2022), the court twice mentioned Snow Phipps’s holding that Delaware typically “does not hesitate” to enforce merger parties’ specific-performance agreements, and it discussed equity only cursorily. It did not address adequacy of damages at all. See id. at *30-31.
In Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 WL 6896462 (Dec. 18, 2019), the court’s lead reason for finding that the balance of equities favored the target was that “the parties expressly agreed that a failure to perform under the Agreement would cause irreparable harm for which the remedy of specific performance would be available.” Id. at *39. The court observed that the provision “does not tie the court’s hands in fashioning appropriate equitable relief,” but noted that the parties’ contract “reflect[ed] the parties’ understanding that specific performance would be available in this circumstance, which would be entirely consistent with past Delaware cases granting specific performance for failure to perform under a merger agreement,” id. at *39.
So, while there are strong reasons to believe that the Court of Chancery could order specific performance of Elon Musk’s agreement to acquire Twitter, that conclusion is not foreordained. Tomorrow’s post explores what damages would be available if specific performance is denied.
The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024. Their work contributed significantly to these posts
Wednesday, July 13, 2022
John Patrick Hunt
Elon Musk and Twitter: Overview
Is Elon Musk is likely to be ordered to go through with his agreement to acquire Twitter if he unjustifiably fails to close the acquisition? This series of three posts analyzes the question and considers what damages might be awarded Twitter if specific performance is denied. The first post lays out the problem, the second addresses the issue of specific performance, and the third discusses damages in the absence of specific performance.
Although the Twitter merger agreement provides that Musk and his acquisition companies may be compelled to close the transaction, it’s been pointed out that the decision to grant such an order, one of “specific performance,” generally is a matter of judicial discretion rather than pure party choice. As Contracts teachers know, American courts generally will not order specific performance as a remedy for breach of contract if an award of damages provides “adequate” relief. See Rest. (2d) of Contracts § 359(1). Even if damages are inadequate, courts may weigh a variety of factors, such as the public interest and fairness between the parties, in deciding whether to grant the equitable remedy of specific performance. See Rest. (2d) of Contracts §§ 362-369. We will call the adequacy of damages and the application of these factors “equitable grounds” for denying specific performance or “equitable issues.”
The Restatement commentary specifically instructs that parties cannot simply opt into specific performance: “Because the availability of equitable relief was historically viewed as a matter of jurisdiction, the parties cannot vary by agreement the requirement of inadequacy of damages, although a court may take appropriate notice of facts recited in their contract.” Rest. (2d) of Contracts, § 359 cmt. a (1981).
These posts make two points. First, as M&A scholars know, the Delaware Court of Chancery has ordered specific performance of corporate merger agreements as a matter of course and has not extensively analyzed equitable factors as the Restatement suggests. Indeed, when merger parties address specific performance in their agreement, the court has treated the decision to grant specific performance or not primarily as a question of contract interpretation and has given little or no weight to equitable issues, including the adequacy of damages. Although the research for these blog posts has not been totally comprehensive, the author has located no case in which the court interpreted the parties’ contract to authorize specific performance but declined to order the remedy for equitable reasons.
Second, even in the apparently unlikely event that the Court of Chancery were to decide to exercise its equitable discretion not to grant Twitter specific performance, this particular merger agreement is drafted so that Twitter would have a reasonable argument for full expectation damages, which could far exceed the contract’s much-discussed $1 billion cap on monetary relief.
A note on assumptions. The agreement provides that specific performance is available only under particular conditions, as follows. Twitter’s shareholders must have approved the deal and regulatory conditions must be satisfied. Agrmt. 7.1. Debt financing (either the negotiated financing or an alternative) must be available. Agrmt. 9.9(b). Twitter must have materially performed its pre-closing obligations and confirmed that it will close if Musk is ordered to do so. Agrmt. 7.2(a), 9.9(b). Twitter must not have suffered a material adverse effect, Agrmt. 7.2(c). And its representations and warranties must be true (with some allowances for immaterial inaccuracies). Agrmt. 7.2(b).
Of course, Musk claims that Twitter has materially breached its obligations, made false and misleading representations, and is likely to suffer a material adverse effect. See Letter from Mike Ringler to Vijay Gadde, July 8, 2022. Twitter (and other commenters) have cast doubt on Musk’s claims, see, e.g., Matt Levine, Elon’s Out, Bloomberg, July 9, 2022, but these posts do not evaluate them. Instead, it assumes that the conditions for specific performance set forth in the agreement are met and addresses whether the court is likely to deny specific performance for equitable reasons.
The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024. Their work contributed significantly to these posts.
Saturday, July 9, 2022
As you all know, Elon Musk entered into an agreement to buy Twitter. Shortly thereafter, Twitter's stock price dropped, making the price Musk agreed to pay a bit high. As we covered here, he tried the poop emoji, then he learned that he had to allege a material breach in order to get out of the deal and avoid paying the $1 billion penalty fee.
Now, he has announced that he is "terminating" the deal. We have a recreation of how this came about, with Michael Scott recreating Musk's role and Creed Bratton playing the role of Musk's legal advisors (and Oscar Martinez playing his smarter advisors):
Wednesday, May 25, 2022
Last week, with some help from Eric Goldman, we reported on the Fifth Circuit's decision, lifting a stay on Texas's HB 20, which subjects social media platforms with more than 50 million monthly users (Platforms) to a highly intrusive and potentially punitive disclosure regime. This week, in NetChoice, LLC v. Attorney General, an 11th Circuit panel preliminary enjoined portions of a similar Florida law. If you follow such things, all three judges on the panel are Republican appointees. Two are senior judges who were on the 11th Circuit when I clerked there. I did not get to know Judge Tjoflat, but Judge Carnes (right) was my favorite judge on the court, other than my own Judge Barkett, of course. Sometimes, we had to draft dissents to Judge Carnes's opinions. I learned a lot from proximity to my Judge's exchanges with Judge Carnes. I am happy to see that he and Judge Tjoflat are still on the bench. The opinion comes from Judge Kevin Newsom, who has been on the Court only five years.
The Court begins by quoting from the language that prompted the law, citing the absurdly hyperbolic rhetoric that poisons political action today. The law was created to punish “the ‘big tech’ oligarchs in Silicon Valley” who “silenc[e]” “conservative” speech in favor of a “radical leftist” agenda. I know a radical leftist agenda when I see one, and it ain't Twitter or Facebook or YouTube, but whatever.
The holding comes on page 4 of the opinion
We hold that it is substantially likely that social-media companies—even the biggest ones—are “private actors” whose rights the First Amendment protects . . . , that their so-called “content-moderation” decisions constitute protected exercises of editorial judgment, and that the provisions of the new Florida law that restrict large platforms’ ability to engage in content moderation unconstitutionally burden that prerogative. We further conclude that it is substantially likely that one of the law’s particularly onerous disclosure provisions—which would require covered platforms to provide a “thorough rationale” for each and every content-moderation decision they make—violates the First Amendment. Accordingly, we hold that the companies are entitled to a preliminary injunction prohibiting enforcement of those provisions.
The court declined to enjoin the law's less burdensome disclosure provisions.
Judge Newsom begins with three basic points about the Platforms. First, they are private; second, they do not produce the content on their sites; and third, they are not "dumb pipes." Rather, they are successful because of their curatorial and editorial processes, which are a form of protected speech.
The Florida law is not identical to Texas HB 20. For one thing, it only applies to platforms with more than 100 million monthly users. That's still a low enough threshold to capture not only Twitter and Facebook but also Wikipedia, Etsy, and after the legislature changed its attitude towards one of the state's largest employers, Disney's website.
However, like HB 20, Florida seeks to regulate Platforms as "common carriers." The 11th Circuit demolishes this argument in two delightful steps. First, the court demonstrates that, as a matter of law, Platforms are not common carriers. Second, Florida (and Texas for that matter) may not strip the Platforms of the First Amendment protections to which they are entitled by labeling them common carriers.
The 11th Circuit reviewed a sweeping District Court injunction. In the District Court's rivew strict strutiny applied to the entire law because "was motivated by the state’s viewpoint-based purpose to defend conservatives’ speech from perceived liberal 'big tech' bias." The law came "nowhere close" to surviving such scrutiny. I like that approach, so it is worth exploring why the 11th Circuit pulled back from the District Court's sweeping injunction.
But first, a summary of the 11th Circuit's holdings:
The court found that the law's user-data access requirement and some of its less onerous disclosure provisions did not trigger First Amendment protections. The user-data access provision, which "requires social-media platforms to allow de-platformed users to access their own data stored on the platform’s servers for at least 60 days," neither burdens editorial judgment nor compels disclosure. Given the language quoted at the top of the opinion evidencing the clear political animus behind the legislation, why not affirm the District Court's injunction of the law in toto? Because 11th Circuit precedent prohibits a court from looking behind the neutral language in a statute to discern legislative purpose.
I can see the need for judicial caution in this area. And yet, as Justice Gorsuch recently pointed out in dissenting from yet another absurd government invocation of the state secrets privilege, "There comes a point where we should not be ignorant as judges of what we know to be true as citizens." Laws like HB 20 and this one, which particularly target "big tech" while excusing "small tech" rivals that cater to the political adherents of the governing party, are not content-neutral. Courts can take judicial notice of public statements explaining the purposes of such laws and strike them down as the politically-motivated attacks on speech and political process that they are.
Tuesday, May 10, 2022
In contracts-adjacent news, TurboTax's parent company, Intuit, has agreed to a $141 million settlement with attorneys general from all 50 states, plus DC. The settlement arises out of TurboTax's practice, documented in a series of reports from Pro Publica, which detailed a long-term company practice of attracting people to use Turbo Tax's products by signaling that the service would be provided for free. TurboTax would then charge taxpayers if the company determined that they did not meet its criteria for access to the free software. The company would charge taxpayers who were eligible for free tax assistance through federal programs.
As Pro Publica details here, taxpayers who qualified for free income tax assistance but paid TurboTax will receive refunds from the company of $30/year for 2016-2018. While Pro Publica contends that TurboTax's misconduct goes back well before 2016, some state statutes of limitations would have precluded further recovery. Intuit admits no wrongdoing and stands by its marketing. The company is estimated to have netted $3 billion in the 2016-18 time period.
Pro Publica also reports that Intuit has entered into settlement agreements to resolve the majority of 150,000 separate arbitrations initiated by individual consumers. A Federal Trade Commission investigation alleging unfair trade practices is ongoing. It is hard to tell what overall impact this settlement will have on the company, but as its stock price has declined 40% in the last six months, it seems like at least a few clouds remain on the horizon.
Monday, April 18, 2022
The law of wrap contracts continues to evolve. Last week, the Ninth Circuit issued a ruling in a case involving the Telephone Consumer Protection Act. In Berman v. Freedom Financial Network, a three-judge panel affirmed the district court’s order denying the defendants’ motion to compel arbitration. The informative concurring opinion, written by an International Trade Judge sitting by designation, may prove to be an important one which provides much needed guidance regarding the law of online contract formation in California.
The plaintiffs visited two different websites, each operated by the defendant Fluent, a digital marketing company that generates leads by collecting data from its website visitors. Fluent offers visitors gift cards and free product samples in exchange for contact information and answers to survey questions. It then uses this information in target ad campaigns for its clients.
The plaintiffs received phone calls and text messages which they claimed violated the TCPA. The defendants moved to compel arbitration, arguing that by clicking on the “continue” buttons, the plaintiffs had agreed to the terms and conditions, including the mandatory arbitration provision.
The district court denied the motion, finding that the content and design of the website did not conspicuously indicate to users that clicking the “continue” button meant agreeing to the terms and conditions.
The Ninth Circuit agreed, noting that there was a “spectrum” of contracts formed online with “clickwrap” agreements on one end and “so-called ‘browsewrap’ agreements” on the other. The Ninth Circuit cited a recent California case, Sellers v. Just Answer LLC, that because “online providers have complete control over the design of their websites,” the onus is on them to put users on notice. Significantly, the Ninth Circuit stated that the inquiry notice standard “demands conspicuousness tailored to the reasonably prudent Internet user, not to the expert user” and that the “design of the hyperlinks must put such a user on notice of their existence.” Furthermore, the manifestation of assent must be “unambiguous” and that merely clicking on a button, viewed in the abstract, does not signify assent; the user must be “explicitly advised that the act of clicking will constitute assent” to the T & Cs.
The defendants objected that the textual notice explicitly referenced mandatory arbitration but the court stated:
“This argument is unavailing, as it fails to appreciate the key issue in this appeal. The question before us is not whether Hernandez and Russell may have been aware of the mandatory arbitration provision in particular, but rather whether they can be deemed to have manifested assent to any of the terms and conditions in the first place. Because the textual notice was not conspicuous and did not explicitly inform Hernandez and Russell that by clicking on the ‘continue’ button they would be bound by the terms and conditions, the presence of the words ‘which includes mandatory arbitration’ in the notice is of no relevance to the outcome of this appeal.”
While the majority declined to decide whether New York or California law governed because the law dictated the same outcome, Judge Baker found it important to decide the choice-of-law issue and concluded that California law applied. Judge Baker, the International Trade Judge, concurring in the decision, stated that under California law ‘sign-in wrap’ agreements “tempt fate.”
Judge Baker noted that the California Supreme Court had yet to decide the issue of online contract formation, and relied upon two appellate court cases, Long v. Provide Commerce, 200 Cal. Rptr. 3d 117 (Ct. App. 2016) and Sellers v. Just Answer, 289 Cal. Rptr. 3d 1 (Ct. App. 2021).
Judge Baker carefully analyzed these two cases and concluded that, “pending further word from the California appellate courts, browsewrap agreements are unenforceable per se: sign-in wrap agreements are in a gray zone; and clickwrap and scrollwrap agreements are presumptively enforceable.” In the “gray zone” of sign-in wraps, enforceability requires “conspicuous textual notice that completing a transaction or registration signifies consent to the site’s terms and conditions.” Conspicuousness depends upon several factors including “transactional context, the notice’s size relative to other text on the site, the notice’s proximity to the relevant button or box the user must click to complete the transaction or register for the service, and whether the notice’s hyperlinks are readily identifiable. A court must consider “all these factors together.”
Judge Baker then painstakingly examined the design of the notice and concluded that it was “insufficiently conspicuous.” Furthermore, even if notice is conspicuous, the user must manifest “unambiguous” assent” which, in this case, required that the notices “expressly advise users that clicking ‘Continue’ signifies assent” to the arbitration provisions and the other terms and conditions. Thus, even if notice is conspicuous, the notice is not binding as a contract unless there is an “express warning” that a given action manifests assent to terms and the user takes that specified action.