ContractsProf Blog

Consultants Sue Twitter for Unpaid Fees

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 Kate Conger 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. 

Just When I Thought I Was Pulled Back In to Twitter, I'm Out Again

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.  

Insurer Must Cover Ransomware Payments

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.

Elon Musk Performs Magic on Twitter: Makes Advertisers Disappear!

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. 

Weekend Frivolity: Only Danny de Hec Can Save Us!!!

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!

 

The Digging a Hole Podcast: Kate Klonick on the Twitter Mess

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

Guest Post: Michael Murray on Transfers & Licensing of Copyrights to NFT Purchasers

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.

Contracts Aspects to the Fifth Circuit's NetChoice v. Paxton Ruling

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:

• Violence
• Terrorism/violent extremism
• Child sexual exploitation
• Abuse/harassment
• 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). 

Nancy Kim in the LA Times on CA's Age Appropriate Design Code Act

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.

Guest Post 3: John Patrick Hunt on Alternatives to Specific Performance in Twitter v. Musk

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.

Guest Post 2: John Patrick Hunt on Specific Performance in Delaware

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

Guest Post 1: John Patrick Hunt on Elon Musk and Twitter

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.

Weekend Frivolity Elon Musk Gets Legal Advice from Creed Bratton

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):

 

Social Media Platforms Fare Better in the Eleventh Circuit than the Fifth

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.

Radical Leftist Oligarch Yachtsman

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.

TurboTax Agrees to $141 Million Settlement

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.

The Ninth Circuit and Online Contract Formation

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. 

Hernandez visited a website that she had previously visited and was greeted with the first image (Figure 1).  I’m not sure whether you can see the phrase “I understand and agree to the Terms & Conditions which includes mandatory arbitration and Privacy Policy" from the screenshot, but it is between the “comparatively large box displaying the zip code and the large ‘green’ continue button” in “tiny gray font” rather than in blue, “the color typically used to signify the presence of a hyperlink.”

 

The other plaintiff, Russell, visited a website from a mobile phone which is the second image (Figure 2). The notice to the terms and conditions is “sandwiched between the buttons allowing Russell to select her gender and the large green ‘continue’ button” and is in “tiny gray font” which states “I understand and agree to the Terms & Conditions which includes mandatory arbitration and Privacy Policy.” 

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. 

Airbnb Host Spying on You? Tell it to the Arbitrator!

It’s April and many of us are looking forward to spring break or, further ahead, to summer where we might go on vacation and rent out a nice Airbnb someplace like Florida. Just in time to ruin what may be the best part of vacation – the anticipation – is this case involving a spying Florida condo owner and an unsuspecting Texas couple.   Since it’s behind a Bloomberg paywall, and some of you may not have subscriptions, here’s a brief summary of the disheartening facts.

The Texas couple decided to vacation in Longboat Key, Florida, renting a condominium unit through Airbnb.  The unit was owned by Wayne Natt who, the couple alleges, secretly recorded their entire three-day stay in the unit!  This included their “private and intimate interactions.”  After they somehow learned about the recording, they sued both Natt and Airbnb.

Their claims against Natt are obvious (intrusion, loss of consortium, being a %@)#( jerk!!, etc.)  Against Airbnb, they claimed that the company should have warned them that these types of privacy invasions have happened at other properties and that it should have ensured that this property did not have any electronic recording devices.  Readers of this blog can predict what happened next – Airbnb filed a motion to compel arbitration.  Yes, that old story.  It argued that pursuant to their Terms of Service, which the couple had agreed to by clicking, the couple had agreed to have an arbitrator decide the issue. 

The trial court had granted Airbnb’s request to allow the arbitrator to decide venue, but the intermediate court reversed, stating that the reference to arbitration rules was not “clear and unmistakable.”  The Florida Supreme Court last week quashed the intermediate court’s ruling and reinstated the lower court’s decision finding that the arbitration agreement “clearly and unmistakably evidences the parties’ intent to empower an arbitrator, rather than a court, to resolve questions of arbitrability.”

In so ruling, they focused on this language in the TOS:

The arbitration will be administered by the American Arbitration Association ("AAA") in accordance with the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes (the "AAA Rules") then in effect, except as modified by this "Dispute Resolution" section. (The AAA Rules are available at www.adr.org/arb_med or by calling the AAA at 1-800-778-7879.) The Federal Arbitration Act will govern the interpretation and enforcement of this section

Rule 7 of the AAA Rule states that the arbitrator has the power to rule on the arbitrability of any claim and on the arbitrator’s own jurisdiction.  Because Rule 7 was incorporated by reference, it became part of the TOS.

So the next time you plan your Airbnb vacation, especially if it’s in Florida, don’t forget to give it a full sweep for hidden cameras because apparently, spying hosts are not that unusual (and who wants to end up in arbitration?)  Or maybe next time, just check into a good old-fashioned hotel.

A Roseanna Sommers Two-Fer: Research that Will Change Your Views of Consent and Deception

Roseanna Sommers (right) is an Assistant Professor at the University of Michigan Law School.  She is on our radar for two reasons today.  First, over on Jotwell, our own Nancy Kim has published a comment on Professor Sommers' Contract Schemas, available on SSRN.  The article, as Nancy summarizes it, makes for depressing reading from the perspective of a contracts professor.  Professor Sommers draws on empirical research in which non-lawyers are asked about what they think of when they think of contracts.  It's not good. 

Ordinary people might hate contracts more than they hate the government.  More than they hate dentists.  More than they hate people who use "fulsome" to mean comprehensive.  According to Sommers' research, people associate contracts with dense, fine-print boilerplate that they will never understand but which they are bound by once they sign, even if they are deceived into signing.  Lay people are apparently not conversant with affirmative defenses to contracts liability.   

Sidebar: I think these lay instincts are not far off.  If you are deceived into a contractual commitment, you are not likely to be able to bring a successful suit avoiding the contract based on an affirmative defense.  Rarely is the suit worth the hassle and expense.  Still, in many cases, you could return the goods and get a refund, either because the vender knows that it would lose on the law, or (more likely) because it's bad business to allow ill will to fester in the consuming community.  However, in cases of real scams, the law is likely of little use, because the scammer is operating through shells, and even if you could identify them, they are likely judgment-proof.

Second, Professor Sommers is also featured on the latest episode of Felipe Jimenez's Private Law Podcast, about which we have blogged about before here and here.  In the episode, Professor Sommers discusses her forays into experimental jurisprudence.  That is, she does empirical work that uncovers lay people's understanding of legal terms, like "consent" or "reasonableness."  The approach is similar to that of Tess Wilkinson-Ryan and David Hoffman, back before they became podcast co-hosts and, and as a result, Kardashian-level international celebrities.

One shocking result of Professor Sommers' research is that people regularly consent to things to which similarly-situated people say that they would not consent.  That is, Professor Sommers' sweetly asks her research subjects, "Would you unlock your phone and let a researcher take it into another room to check on something?"  People say they would not.  But in the context of her IRB-approved research, she asks research subjects to do that very thing, and over 90% consent.  More alarming still, people are extremely reluctant to withdraw consent once they have given it.  Once in medias res, people do things that they would not agree to do if the full extent of what was being asked of them were disclosed ex ante.  As Nancy suggests in her review referenced above, Professor Sommers' research gives us additional reasons to regard with a jaundiced eye claims of consumer consent to boilerplate contractual terms.

As Professor Sommers and friend-of-the-blog, Meirav Furth-Matzkin argue in Consumer Psychology and the Problem of Fine-Print Fraud, lay people do not know that consent can be withdrawn.  They think that if they sign a contract they are bound, notwithstanding deception.  Manipulative venders rely on the in terrorum effect, and they can get away with it because consumers do not think they have any recourse when they are tricked into signifying assent to contractual terms. 

Professor Sommers' scholarship also reaches across doctrinal areas to test our notions of consent in very different contexts.   In Commonsense Consent, Professor Sommers looks at deception in the context of sexual relations, police investigation and interrogation, medical procedures, research with human subjects, and contracts.  Her research provides fascinating results, the fulls impact of which is a bit hard to sort out.  For example, feminists worked for decades to transform our understanding of rape from being associated exclusively with violence and threats of violence to being associated with power.  But courts (and common intuitions) do not treat people who are tricked into having sex, for example by people lying about their marital status, as sexual assault victims.  They do recognize sexual assault-by-deception in cases where the sex itself is misrepresented; for example, when medical professionals commit sex acts disguised as procedures or when people trick others into sex by concealing their identity.  We may have changed laws to eliminate use of force as an element of sexual assault, but the coercion/deception distinction makes it hard to prosecute sexual assault by deception.  When you couple that with Professor Sommers' results indicating that people do not realize that consent can be withdrawn, Antioch College's "infamous" sexual assault policy doesn't look so "ridiculous" after all, if it ever did.

Our tendency to think that deception does not negate legal consent is also relevant in many police contexts, as police can intentionally  engage in all sorts of deception, short of quid-pro-quo threats, and such chicanery will not invalidate inculpatory statements.  Similarly, Professor Sommers' research indicates that people do not think that consent to medical procedures is negated by medical professionals' misrepresentations in connection with those procedures.  Consumer protection faces difficult challenges when it bumps up against common-sense understandings of consent, which tend to be quite broad.

While scholars have puzzled about the distinction the law makes between fraud in the inducement and fraud in the factum, Professor Sommers' research suggests that the legal distinction builds on common-sense intuitions.  That insight does not justify giving legal effect to the distinction, but it does help explain its origins and longevity.

Give a listen to this podcast.  Whether you do contracts law, criminal law, sexual assault and workplace harassment law, or health law, you will find much to contemplate in Professor Sommers' contributions.  it will be an hour very well spent!

Guest Post from Ohad Somech: Incorporating Different Voices into Digital Platforms

Ohad Somech
Doctoral Student in the Zvi Meitar Center for Advanced Legal Studies in Tel-Aviv University

In a series of articles, Stephen Burgen of The Guardian reported on the struggle of chambermaids in Spanish hotels to encourage digital platforms, such as TripAdvisor and Booking.com, to factor working conditions into their hotel rankings. When the platforms ignored their appeals, the chambermaids resolved set up an independent booking platform. Work is already underway, with a crowdfunding campaign exceeding the €60,000 target.s

A Chambermaid

Reading of the chambermaids’ triumph I was delighted, not only for them, but also because this was a great instance of theory coming to life. In Voicing the Market, Roy Kreitner explores a new movement in contract theory. He begins with the observation that contract theory is divided into two bodies of scholarship that, as Judy Kraus has noted, “passed each other like ships in the night.” The first type of scholarship, associated with legal realism, is dedicated to the relation between contracts and markets. The second, originating with Charles Fried’s Contract as Promise, seeks to ground contract law in personal morality.

It is only recently, Kreitner suggests, that contract scholars began to envision the contract-markets-morality triangle as a single theory. Alan Brudner, Daniel Markovits, and Nathan Oman have each independently sought to incorporate both personal morality and markets into their theories of contracts. Kreitner identifies the common denominator in all three works to be markets, and the pricing mechanism in particular, as allowing contracting parties to enter into agreements without first having to discuss what makes the traded thing valuable. In Kreitner’s words “prices are the public, shared face of valuation, which can be conducted without discussion, without dissention, without politics.”

By aggregating information from dispersed transactions, markets represent the moral accomplishment of allowing mutual recognition and collaboration without requiring parties to share similar values and beliefs. But, Kreitner goes to ask, is bracketing our disagreement about values truly a virtue? His answer is that bracketing may be desirable in well-functioning, competitive, or ideal markets, but not in many real-world ones.

In bracketing values and fixating on price and quality, markets offer us the option of participating or exiting. But many market actors, such as the Spanish chambermaids, want their voices to be heard as well. Indeed, rather than bracket valuation of working conditions, the chambermaids want every tourist to be confronted by them. Some may shrug off the information, but for others – including, I suspect, many of the blog’s readers – staying at hotels that mistreat their staff would be a non-starter.

And there is an even bigger picture to consider. The relationship between platforms and their commercial users is notoriously complex, not least because of the multiple functions served by platforms. One such function, Rory Van Loo suggested, is as conscripted regulators of the market that they constitute (e.g., the hotel market). Thus, one lesson from the chambermaids’ story is that, at least when it comes to working conditions, platforms have dropped the ball (if not forgot all about it).

Guggenheim, Bilbao, image by PA

However, were the chambermaids to succeed, platform may be pressured to do what they initially refused to do and include working conditions in their ranking. Imagine Amazon requiring sellers on the platform to provide it with information on working conditions (or environmental impact) and incorporate that information into Amazon’s ranking system. Though this may seem like a pipedream at the moment, initiatives like that of the chambermaids in Spain may bring it closer to reality. The other lesson from the story, then, is that platforms are ideally placed to offer a voice to market actors who are rarely given one, and we should encourage the platforms to do so.  

So, whenever we can (safely) travel to Spain again, don’t forget to visit the chambermaids’ (forthcoming) website and make sure you are satisfied with the working conditions at the hotel where you are staying.

Arbitration and Amazon's Conditions of Use

Last week, the Wall Street Journal reported that Amazon quietly dropped its mandatory arbitration clause from its Conditions of Use.  In fact, the Conditions of Use were updated May 3, 2021.  The provision marked “DISPUTES” now states:

Any dispute or claim relating in any way to your use of any Amazon Service will be adjudicated in the state or Federal courts in King County, Washington, and you consent to exclusive jurisdiction and venue in these courts. We each waive any right to a jury trial.

Unfortunately, Amazon doesn’t have prior versions of its Conditions of Use on its website for the sake of comparison, but thanks to the amazing Wayback Machine (the Internet archive), the DISPUTES provision (at least the one updated May 2018) used to say:

Any dispute or claim relating in any way to your use of any Amazon Service, or to any products or services sold or distributed by Amazon or through Amazon.com will be resolved by binding arbitration, rather than in court, except that you may assert claims in small claims court if your claims qualify. The Federal Arbitration Act and federal arbitration law apply to this agreement.

There is no judge or jury in arbitration, and court review of an arbitration award is limited. However, an arbitrator can award on an individual basis the same damages and relief as a court (including injunctive and declaratory relief or statutory damages), and must follow the terms of these Conditions of Use as a court would.

To begin an arbitration proceeding, you must send a letter requesting arbitration and describing your claim to our registered agent Corporation Service Company, 300 Deschutes Way SW, Suite 208 MC-CSC1, Tumwater, WA 98501. The arbitration will be conducted by the American Arbitration Association (AAA) under its rules, including the AAA's Supplementary Procedures for Consumer-Related Disputes. The AAA's rules are available at www.adr.org or by calling 1-800-778-7879. Payment of all filing, administration and arbitrator fees will be governed by the AAA's rules. We will reimburse those fees for claims totaling less than $10,000 unless the arbitrator determines the claims are frivolous. Likewise, Amazon will not seek attorneys' fees and costs in arbitration unless the arbitrator determines the claims are frivolous. You may choose to have the arbitration conducted by telephone, based on written submissions, or in person in the county where you live or at another mutually agreed location.

We each agree that any dispute resolution proceedings will be conducted only on an individual basis and not in a class, consolidated or representative action. If for any reason a claim proceeds in court rather than in arbitration we each waive any right to a jury trial. We also both agree that you or we may bring suit in court to enjoin infringement or other misuse of intellectual property rights.

Quite a difference! 

So what caused this change of mega-corporate heart?  The WSJ article says that Amazon made the change after plaintiffs’ lawyers “flooded” the company with “more than 75,000 individual arbitration demands” on behalf of Echo users that were suing over privacy claims. 

This is just the latest example of how law firms with the resources to do so are leveraging the tools of efficiency to level the playing field made even more lopsided by wrap contracts.  This mass-arbitration filing tactic was first discussed on this blog with respect to Door Dash.  The big question is, will other companies follow Amazon’s lead?