ContractsProf Blog

Franchisee Gets Deep Fried in an Opinion from the Tenth Circuit

I love me a good franchise case.  We all encounter franchises with great frequency, and they involve us in interactions both with large multi-national corporations and with their local and often small-time agents.  The relationship between franchisees and franchisors is complicated and often vexed.  Franchising strategies can make or break large chains, and as this case illustrates, can also enrich the franchisees -- or do them great economic harm.  Here, the franchisee is also extremely well-to-do, but I suspect he worked his way, over decades, to his current station from a much more humble one.

As an added bonus, this case was decided by friend-of-the-blog Judge Harris Hartz (right) .  The case involves a claim that KFC (which now officially stands for KFC) breached an agreement with a Pueblo, Colorado franchisee, or at least the duty of good faith and fair dealing, by allowing for a second franchise in the town.  In Kazi v. KFC, US, LLC, the Tenth Circuit vacated a jury verdict in favor of the franchisee and remanded for an entry of summary judgment in favor of KFC.

Plaintiff Zubair Kazi has been the proud owner of a KFC franchise in South Pueblo since 1986.  He most recently renewed his franchise for ten years in 2017.  He owns a total of eighty franchise restaurants, which generate over $100 million in annual revenue.  In 2019, KFC licensed a new franchise in north Pueblo.  

The case provides a great history of the economic context in which the case arose.  In short, KFC downsized early in the 21st century, and during that time, Mr. Kazi lost three of his four Pueblo franchises.  In 2016, KFC was ready to start establishing new franchises again, but it did so through a cooperative agreement with franchisees to protect their profitability.  Before a new franchise was opened, a feasibility study had to be undertaken with an eye to the impact on existing franchises.  No new franchise could be built within a fixed radius of an existing franchise and the closest existing franchisee was to be offered an opportunity to own the new franchises.  The feasibility studies were undertaken by a firm designated in cooperation with the franchisees.

In this Pueblo case, the feasibility study indicated that the impact on Mr. Kazi's franchise would be within acceptable parameters.  Mr. Kazi did not seek the franchise for himself.  Instead,  he demanded a second feasibility study, which came out higher, but still within acceptable parameters.  Mr. Kazi then undertook his own study of the projected impact of the new franchise on his business.  According to KFC's agreement with its franchisees, anything above a 15% decline in revenue was unacceptable; Mr. Kazi's study indicated that the new franchise would cause his revenues to decline by 35%.  KFC ignored Mr. Kazi's study, and that seems fair, as the entity that undertook the original study was approved by KFC's franchisees.  

Then something procedurally messy occurred.  Real estate issues caused KFC to move the new franchise to a new location.  It was now farther away from Mr. Kazi's franchise.  KFC consulted the appraisers, and they advised that no new feasibility study was necessary.  If anything, the move would lessen the impact on Mr. Kazi's franchise.  And so KFC proceeded.  Mr. Kazi was not informed of the change.

Mr. Kazi brought his suit in November 2019.  The District Court dismissed most of his claims, but his claim for a breach of the implied duty of good faith and fair dealing went to the jury, and the jury found for Mr. Kazi, awarding him nearly $800,000 in damages.  On appeal, the Tenth Circuit found that the District Court erred.  Mr. Kazi could not state a claim for breach of the duty of good faith and fair dealing under Kentucky law.  

Following case law from Kentucky and the Sixth Circuit, the Tenth Circuit concluded that, in order to state a claim for a breach of the duty of good faith and fair dealing, a party must allege that the other party's bad faith defeated "an expectation created by the language of the contract."  Mr. Kazi could make no such allegation.  The KFC franchise agreement specifically addresses the issue of encroachment of new franchises on the domain of existing franchisees and provides a contractual solution.  The Tenth Circuit surveyed other case law involving franchise agreements and found near unanimity that "if the franchise agreement addresses encroachment, the franchisee cannot invoke the good-faith covenant to expand its protections against encroachment beyond the contract terms." The only circuit court to go the other way was the Ninth, which relied on a Florida case subsequently rejected by the Eleventh Circuit.  

Reefer Brief: Ignite International in Contract Dispute with Consulting Firm

FILMORA NEWS, CC BY 3.0, via Wikimedia Commons

According to Law360 (behind a paywall), a Nevada District Court has ordered Instagram Celebrity and CBD oil entrepreneur Dan Bilzerian (left) to pay $1.6 million and dismissed a breach of contract claim.  Prior to that decision, the case generated a lot more heat than light. 

There are some larger-than-life characters involved.  Dan Bilzerian is the son of Paul Bilzerian.  According to Wikipedia, Paul was a successful entrepreneur and takeover specialist until he ran into trouble with the SEC and was jailed in the early 199os.  After his release from prison, Paul launched a Utah-based software company, Cimetrex, but the government confiscated his ownership interest in that company in 2002.  Paul declared bankruptcy in 1991 and again 2001, but, according to Dan Bilzerian's Wikipedia entry, the government alleges that he concealed assets, passing some of them on to his two sons.  It is unclear whether Dan used those funds or his poker winnings to fund his companies, Ignite International Brands and affiliated entities (collectively Ignite).  Paul played a role in the negotiations between Ignite and a consulting firm, Consulting by AR (AR) .

Piecing together the nature of the dispute from redacted pleadings found on Westlaw, Alan Richardson, AR's principal, reached out to Dan Bilzerian in January 2021 to offer his consulting services in assisting Ignite in gaining a marketing foothold in Las Vegas.  Ignite, in case you were wondering, markets vaping products, spirits, apparel for people who prefer not to leave much to the imagination (based on the website), and at least at one point, a CBD-infused lip balm (hence its presence on the Reefer Brief).  AR hoped to link Ignite's products with Las Vegas's newest casino and resort, Resorts World Las Vegas (Resorts World, below right)).  The parties entered into a letter agreement in March 2021, providing that AR would be compensated with stock in Ignite should an agreement with Resorts World be completed by July 1, 2021.  

Problems arose according to AR's counterclaims, with Dan Bilzerian demanding a better deal than the one originally negotiated. AR claims that it successfully negotiated terms more generous to Ignite than those in the original letter agreement.  In April, 2021, the parties entered into a Letter of Intent, the terms of which provided for a strategic partnership between Ignite and Resorts World.  Dan Bilzerian then appeared at Resorts World's grand opening in June 2021, as required under the letter agreement.  Afterwards, AR claims that it facilitated an updated letter agreement, with terms still more favorable to Ignite than previous iterations had been.  

Logan Frick, CC BY-SA 4.0, via Wikimedia Commons

Thereafter, AR alleges that Ignite ceased to cooperate with AR, refused to pay any compensation to AR, and accused AR of poisoning its relationship with Resorts World.  After an exchange of letters relating to the possibility of arbitration, AR sent a demand letter.  Paul Bilzerian wrote to Alan Richardson, urging settlement.  Here are some excerpts from that letter as cited in AR's counterclaims;

Hi Alan, I understand that your lawyer sent a letter to Ignite that essentially said either Ignite accedes to your demands or suit will be filed next week. I know Ignite will not be happy with this response so it is pretty clear where this is headed at the moment. . . .  Of course your lawyer will tell you that you have a great case and can't lose. I have heard that speech so many times over the past 43 years I lost count decades ago. . . .  You do have some goodwill left on the Ignite side which is why Paul Holden [Ignite's general counsel] suggested binding arbitration. . . .  All you need to do is choose the path you want to follow: prompt, cost effective settlement or bitter, costly, scorched earth litigation with the only winners being the lawyers. I hope you make a good choice.

Notwithstanding this letter, it was Ignite that filed suit, seeking a declaratory judgement.  AR counterclaimed.  The parties have spent much of the intervening period in discovery disputes.  It did not go well for Ignite.  Here, for example is an August 2022 decision of the District Court ordering Ignite to file under seal 65 documents allegedly subject to claim of privilege.  Here is a March 2023 order, finding Ignite in contempt for its failure to do so.  The $1.6 million judgement followed just weeks later.  We will see if the Bilzerians pay for a quick end to the matter or, take Paul Bilzerian's road oft-traveled road of scorched-earth litigation with the only winners being the lawyers.  Either way, he will have been proven correct.

Ignite filed its appeal with the Ninth Circuit on April 28, 2023.  Perhaps they did so, like King Croesus, based on the advice of the Delphic oracle, who said, "If Ignite makes war upon AR Consulting, it will destroy a great empire." 

Food Delivery Giants Cannot Compel Arbitration of Antitrust Claims Based on Terms of Service on Their Apps

Davitashvili v. Grubhub is a putative class action brought by customers against Uber Eats, Grubhub and Postmates,  They allege that the three food delivery services entered into agreements with restaurants that restricted them through a "no price competition clause" (NPCC) from charging lower prices either when selling directly to customers or when using an alternative food delivery service, like Doordash.  Plaintiffs seek damages and injunctive relief under Section 1 of the Sherman Act in connection with direct purchases from restaurants and purchases through platforms other than defendants.  Defendants filed a motion with Judge Lewis Kaplan in the U.S. District Court for the Southern District of New York to compel arbitration based on arbitration clauses included in the terms of service on defendants' platforms.  

With respect to Uber and Postmates, which was acquired by Uber in December 2020, the terms of service did not put users on constructive notice of an agreement to arbitrate prior to the December 2021 terms of service.  The court thus concluded that Uber had failed to meet its burden of "demonstrating that an agreement to arbitrate was made" between itself or Postmates and the plaintiffs who sued the platform, except with respect to the December 2021 terms of service.  Because Grubhub's checkout page does not require users to click on or otherwise indicate assent to an arbitration agreement, and because Grubhub supplied no other evidence that plaintiffs were on notice, the court found that Grubhub could not demonstrate that an agreement to arbitrate was made between it and plaintiffs.  

Although Uber's terms of service provided that all threshold issues of arbitrability were to be decided by the arbitrator, plaintiffs raised fundamental challenges to arbitration clause itself.  In such cases, it is for a court to decide whether the dispute is arbitrable.  Grubhub's terms of service provided that decisions as to arbitrability were for a court to decide.  

Citing David Horton's Infinite Arbitration Clauses and Judge Posner's decision in Smith v. Steinkamp, Judge Kaplan (right) noted the defendants' ambitious aspirations for the reach of their arbitration clause. 

If enforced according to their terms, they would require arbitration of any claims between defendants and the Platform Plaintiffs, including claims without any nexus to the agreements containing the clauses — i.e., defendants' terms of use.

Judge Kaplan found no nexus in this case between the arbitration clauses at issue and the allegations of the complaint, and so he refused to enforce them against any plaintiffs.  In the alternative, Judge Kaplan ruled that it would be unconscionable to enforce the arbitration provisions "with respect to claims untethered to defendants' respective terms of use."  Finally, Judge Kaplan ruled that defendants' expansive class action waivers were no more enforceable against these plaintiffs with respect to these claims than were their infinite arbitration clauses.   

Defendants' motion to compel arbitration were denied.  Uber's motion to stay the action was denied as moot.

Flo Rida Wins $82 Million Judgment Against Celsius Energy Drinks

As Marisa Dellatto reports in Forbes, rapper Flo Rida prevailed in a jury trial on his claims against energy drink company, Celsius.  Being a man who can now count his age in decades, I had never heard of or taken note of this line of beverages or of Flo Rida, but my daughter went to Flo Rida concert last year, and now I am seeing Celsius ads every time I stream content on services that have ads.  Live and learn.

The suit arises out of an endorsement deal that Flo Rida (Flo? Mr. Rida?) signed with with Celsius.  The deal was renewed in 2016 and terminated in 2018,  Flo Rida claimed that he was entitled to shares in the company, and a jury agreed.  Celsius argued that the statute of limitations had lapsed, but the jury found(!) that Celsius was equitably estopped from making such an argument.  

The verdict consists, in part, of 250,000 shares in the company, which at the time of the verdict were selling for $110/share.   That accounts for $27 million of the verdict.   I'm not sure where the rest comes from. 

Flo, I've never tasted the stuff, but my advice is: liquidate your shares in a hurry, because this stuff has fad written all over it.  It's already down to $84.50/share, but as recently as May 2020, it was below $5/share, and those times may well return. 

The State of the Union and Non-Competes

I have been writing a lot lately about non-competes.  So I was a bit annoyed when that word showed up as a pangram on Saturday.  First off, I was annoyed because I think it's hyphenated, and Sam Ezersky doesn't usually allow us to use hyphenated words.  Worse, it was one of five pangrams on Saturday.  It was the only one that I didn't get, and my non-lawyer wife got it!!!  Argh.  She is the poet in the family, and of course I don't lord it over her when I find 'villanelle" or "iambic" any more than the situation requires, but I will never hear the end of this one.  Ugh. 

There was some consolation.

Segueing from the state of the Spelling Bee to the State of the Union, friend of the Blog, Timothy Murray shared with us the following excerpt from last week's State of the Union Address, which touches on a subject (non-competes) that we blogged about recently here and here:

fFor too long, workers have been getting stiffed, but not anymore.

We’re beginning to restore the dignity of work.

For example, I should have known this but I didn’t until two years ago: 30 million workers had to sign noncompete agreements with the jobs they take. Thirty million. So a cashier at a burger place can’t walk across town and take the same job at another burger place to make a few bucks more. It just changed — well, they just changed it because we exposed it. That was part of the deal, guys. Look it up.

But not anymore.

We’re banning those agreements so companies have to compete for workers and pay them what they’re worth.

Tim Murray wonders how many cashiers are going to benefit from the administration's plan to prohibit non-competes.  If they are subject to non-competes, are the burger joints of the world really enforcing them?  I have had encounters with hair stylists/barbers who work for places like HairCuttery or SuperCuts and are made to sign non-competes.  I think those might be enforced or they might have an in terrorem effect rendering enforcement unnecessary.   It will be interesting to see how service industries adjust if the new FTC rule goes into effect.

As we will see in Wednesday's post, the response has already begun.  

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.

Re-Post: Eric Goldman Reviews Netflix's "Pepsi, Where's My Jet?"

Review of the “Pepsi, Where’s My Jet?” Netflix Documentary
Eric Goldman
Technology and Marketing Law Blog

In the mid-1990s, at the height of the Cola Wars, Pepsi ran an ad to introduce its “Pepsi Stuff” loyalty program, including a featured prize of a Harrier Jet for 7M points–a ridiculously high number that was supposed to signal that it was a joke. Watch the ad. However, Pepsi also sold points for 10 cents each, putting a $700k price tag on a jet that was allegedly worth tens of millions of dollars (assuming it could be acquired at all–the US government frowns on individual citizens owning military equipment).

John Leonard, backed by a rich friend Todd Hoffman (who looks like George Carlin), tendered $700k and ordered 1 Harrier Jet. Pepsico declined; they sent him coupons for a couple of cases of Pepsi instead. Leonard retained a lawyer and made legal threats. Pepsi preemptively sued Leonard in its home court of SDNY. Judge Wood’s opinion concluded that the ad objectively did not communicate an offer due to its humor, so no contract ever formed and Leonard didn’t get his Harrier jet. Wood’s opinion is relatively dry, but it’s become a staple of the contracts law canon because of its fun facts and its precise analysis.

Because this case is so iconic, I was excited to see the new Netflix documentary, “Pepsi, Where’s My Jet?” The documentary interviews key figures in the case, many of whom are still alive, and it’s fabulous to hear them tell their stories in their own words.

Despite that, the documentary was disappointing overall. If you’re a contracts or advertising law nerd like I am, you’re going to watch it no matter what I say. But I had hoped the documentary might become a must-see pedagogical supplement for anyone reading the case, and I don’t think it gets there.

The documentary is framed around the cross-generational bromance between GenXer Leonard and his financial sponsor, Boomer Hoffman. Obviously that relationship is at the story’s heart because there was no case without Hoffman’s largesse. However, the filmmakers repeatedly steered the narrative into the bromance, such as seemingly irrelevant segments showing Leonard and Hoffman recently summitting Mt. Vinson in Antarctica (an impressive, but very expensive, accomplishment).

The documentary was split into four episodes, totaling over 2.5 hours. It would have been much better packed into a single 90 minute episode, but instead it felt like the filmmakers padded the narrative with tangents and dead-ends to reach the target length.

Also, the documentary includes many historical reenactments, many of which were unnecessary and not compelling. I am not a fan of recreations in documentaries.

The actual legal ruling gets surprisingly little airtime in the back half of the fourth episode, and the filmmakers did a poor job of contextualizing it. For example, long-standing contracts law doctrine says that advertisements ordinarily are an invitation to make an offer and not an offer themselves, which the documentary doesn’t mention. The documentary repeatedly mentions that many consumers, especially teens, would have taken the ad seriously, but the documentary only offers Team Pepsi’s rebuttals and a few words from the opinion to counter this view. The filmmakers surely could have interviewed some independent experts in contracts law or the advertising industry to supplement the parties’ self-interested statements, and many of them would have sided emphatically with Team Pepsi. By omitting the independent voice, the filmmakers betrayed their normative agenda.

Similarly, the filmmakers styled the case as a David v. Goliath battle. Indeed, it was, but the filmmakers didn’t aggressively question Leonard’s motives. (Instead, the documentary spent a minute or two indulging in overly speculative conspiratorial theories about Pepsi malfeasance that should have been cut). Sure, Pepsi is the big bad company, and surely Pepsi could have easily made safer legal choices in how it presented the jet. At the same time, it’s impossible not to feel like Leonard was an opportunist who used the law, and then media pressure, to improperly seek something he knew he wasn’t really entitled to. For every story of big companies squashing little consumers, there’s another story of little consumers gaming the legal system to extract undeserved cash from big companies and subtracting social value. Leonard’s story really could be told either way. A different filmmaker might have included some counternarrative material that Leonard’s legal efforts were a wasteful and venal abuse of the legal system, along the lines of Harris v. Time. The documentary suffers by not offering that self-reflective/critical perspective.

Some other details I learned:

• At one point, Pepsi considered sending Leonard a model of a Harrier jet. That reminded me of the Toyota/Toy Yoda case.
• Leonard turned down a $1M settlement offer because he really, really wanted the jet. Ah, youthful exuberance. I was shouting at the screen for him to take the cash.
• The ad designers had initially storyboarded a 700M point price tag for the Harrier jet, but during ad review, someone said that number was too hard to read, so two zeros got dropped to make it less cluttered. Oops.
• Pepsi simultaneously ran the same ad in Canada and put a “just kidding” disclaimer on the 7M point price.
• Now-disgraced lawyer Michael Avenatti was involved in the case, principally as a PR advisor/opposition researcher because he was still in law school at the time. Avenatti advised Leonard to launch an attack ad campaign against Pepsi that sounded similar to the scheme he deployed against Nike that sent him to jail. That part of the video was painful to watch.

Other things the documentary should have addressed but did not:

• How much money Leonard/Hoffman spent on the case and why they repeatedly doubled-down despite the adverse developments.
• Why they didn’t appeal the district court decision.
• What, if any, life lessons Leonard took away from his experiences. Knowing what he knows now, would he have made the same choices? He did say he perhaps regretted not taking the settlement offer, but I would have liked to hear more about his meta-reflections after 25 years of life experience.
• In 2014, a (non-functional) Harrier jet sold at auction for $200k. This datapoint makes Pepsi’s 7M point pricetag seem actually quite reasonable, not like a joke at all. Then again, if Leonard really wanted a Harrier jet, his $700k offer was above-market, and he could have fulfilled his dream at a lower cost. I’m disappointed the documentary filmmakers didn’t raise this development because it puts the case in a whole new light.

Though it was completely irrelevant to the story, the filmmakers had many of their interview subjects take the Pepsi Challenge. I won’t spoil the fun by revealing which soda won this completely nonscientific test, but I will note that both Coke and Pepsi have lost the war as consumer tastes have evolved and consumers now drink less sugary sodas overall.

Another Chicken Case: Is a Chicken Finger Chicken?

Chickens (fingers not pictured)

Thanks to OCU 1L Lacy Kelly, I have learned of a food fight near my old stomping grounds in Indiana.  As Joseph S. Pete, of the Northwest Indiana Times reports, Raising Cane's (RC) a fast-food chain, wanted to open a new location in Hobart, Indiana.  It entered into a fifteen-year lease with the owner of a strip mall near a major shopping center.  The owner did not disclose that its predecessor had granted McDonald's the exclusive right to sell chicken products at the shopping center.  

RC is alleging that it was fraudulently induced into the lease, and it has brought suit in the jurisdiction where its corporate headquarters are located, Dallas, Texas.  RC points out that its entire business model is built on selling chicken fingers.  It claims that it first learned of McDonald's exclusive chicken deal eight-months after the lease was executed and after RC had already expended over one million dollars on restaurant development.  According to the complaint, a 1994 lease agreement with a nearby McDonald's prohibits the owner from leasing or selling property to any rival “fast good or quick service restaurant which prepares, serves, or sells de-boned chicken products."  RC alleges that the owner knew of the McDonald's deal and nonetheless represented to RC that it could operate a chicken-finger based restaurant at the location.  RC's theory is that the owner did this in order to secure RC as an anchor tenant so that it could attract additional tenants to the location.  

The owners would have to be some dumb clucks to perpetrate such an obvious fraud, but there it is.  Under the Restatement approach, there should be liability, even if the misrepresentation was negligent but material, so somebody's head could be on the chopping block even if the nondisclosure or misrepresentation was the result of inattention, as seems likely in this case.  But I do wonder whether RC had a due diligence obligation in this context.  Surely the Hobart/Merrillville McDonald's is not the only one that has negotiated a restrictive covenant relating to chicken.  This restrictive covenant came to light when Chipotle wanted to open a restaurant, and the owner asked McDonald's to waive its exclusive chicken deal.  McDonald's refused and also pointed out that an RC franchise was right out.  Why did Chipotle know to ask when RC didn't?  Also, I know for a fact that there is a Chipotle in that shopping center, and I think it's been there since around the time we moved there in 2004.  Did Chipotle want to move?  Set up yet another location?  Would the RC franchise be okay if it were just on the south side of Route 30?  So many questions!

I have never eaten at an RC and do not expect to do so in this lifetime.  I suppose it would not be good for their brand to argue that chickens don't have fingers and that a chicken finger is really mostly breading, and so arguably RC would not really be selling chicken at all.

A Unilateral Contract for Ten Years of Free Meals at Balthazar?

By Ibsan73 - James Corden at the TV Baftas 2014, CC BY 2.0

Thanks to two students, I know that James Corden (left) exists and has recently earned a reputation for being abusive to servers.  The latter characteristic (well, both, I suppose, as he could not be obnoxious if he did not exist) got him banned from Balthazar, a popular Soho brasserie that opened in 1997.   My students shared with me this thread from Buzzfeed, a site I think I've known about for decades but have never before visited.  Its format is bewildering and a bit hard to take seriously as journalism.  

If we take Buzzfeed at its words, it appears that Mr. Corden was banned from Balthazar for abusive behavior.  He then apologized to the owner Keith McNally, but McNally apparently kept the ban in place, writing that "if James Corden lets [sic] me host his Late Late Show for 9 months, I’ll immediately rescind his ban from Balthazar. No, of course not."  But Mr. Corden also told the New York Times, "I haven’t done anything wrong, on any level."  Mr. Corden seems a bit baffled by the entire episode.  He has built up a reputation for years as an affable and cordial host.  He is not known to be petulant or high-maintenance.

Mr. McNally could have left things at that, but instead he served up the following mix of puerile insult and a potential offer to enter into a unilateral contract

I wish James Corden would live up to his Almighty initials and come clean. If the supremely talented actor wants to retrieve the respect he had from all his fans (all 4 of them) before this incident, then he should at least admit he did wrong. If he goes one step further and apologizes to the 2 servers he insulted, I’ll let him eat for free at Balthazar for the next 10 years.

Two OCU 1ls, Justine Sandoval, who really did all the work, and Melody Parra, who mostly just provided comic counterpoint to Justine's material, disagreed as to whether an offer had been made.  Based on what was originally presented, it seemed to me that Mr. McNally had made an offer that Mr. Corden could accept by providing the requisite public apology.  After all, Mr. McNally owns the restaurant, and he certainly has the ability to feed Mr. Corden for ten years if he so wishes.  Moreover, Mr. McNally might be playing up this little drama for all its worth in terms of free publicity for his restaurant, so perhaps ten years of enhanced notoriety is something Mr. McNally desires for his restaurant.  If Mr. Corden is indeed as mercurial as Buzzfeed would have us believe, tourists might flock to the restaurant in the hope of seeing the next episode in this food fight.  

On the other hand, this is not the first offer Mr. McNally has made in this exchange, and he quickly clarified that his first offer was a joke.  Does that make us more inclined to view this second offer as a joke, or should we read the absence of a disclaimer in the second offer as signaling sincere intent to enter into legal relations?

Now, the New York Times has weighed in, stressing that Mr. Corden has a reputation to maintain if he wants to enjoy continued success as a "relatable" host.  Mr. Corden has issued an apology.  Despite noting that his order was messed up three times, including in a way that would have triggered his wife's allergies, Mr. Corden uttered the magic words, "I made a sarcastic, rude comment . . . It was an unnecessary comment. . . . It was ungracious."  The Times story does not address the possible unilateral offer.  Mr. Corden likely will give Balthazar a wide berth.

I advise readers to exercise caution when ordering an egg-yolk omelette at Balthazar.

Mid-Week Frivolity: Dude, Where's My Harrier? The Documentary

I'm trying to abstain from blogging, but Netflix is making it too easy.  

One of my students thinks it should have been called Pepsi Done Me Dirty

I stand by my Limerick:

Intent to be bound is a barrier
To Leonard receiving a Harrier
Now he only drinks Coke
And he gets every joke,
But I would not say he's much merrier.

 

[Allegedly] Corrupt Government Contracts in Oklahoma

As reported here on nondoc.com, Oklahoma's Department of Tourism and Recreation has cancelled its contract with Swadley’s Foggy Bottom Kitchen, which provides food service in Oklahoma state parks “due to suspected fraudulent activity and questionable business practices.”  More specifically, in its termination letter, the Department noted that Swadley's seemed to be engaged in "highly questionable billing, invoicing, and record keeping practices."

Swadley's insists that it has done nothing wrong and that it has cooperated with state employees all along . Swadley's cause was not furthered when a 2018 video surfaced in which Swadley's founder Brent Swadley states, “I bootlegged barbecue. I wouldn’t be where I’m at today if I followed by the rules and satisfied all the permits and all the legalities and stuff out there. Sometimes you’ve just got to go out there and do it and don’t worry about it.”

Swadley's won the contract to provide food services in Oklahoma's state parks after a bid procedure in which it was the only bidder, and the reporting suggests that the terms of the contract changed significantly in Swadley's favor after it was awarded the contract.  Swadley's was allegedly paid $17 million in management fees and renovation costs, and there are suggestions that the  Department had not engaged in adequate oversight.  Swadley's was paid $1.3 million in management fees alone, a marked increase from the $0 paid to previous operators.  

In the meanwhile, the state is scrambling to provide food service and catering in its state parks.  You do not want to be around a hungry Oklahoman who can't find a barbecue joint.

Horizon and Organic Milk Contracts

As the New York Times reported yesterday. Horizon Organic gave notice to 89 small dairies in the Northeast that it would be discontinuing its contracts with them.  Horizon then granted the small dairies a reprieve, extending the contract until February 2023 and also agreeing to pay them more for their milk.  

Organic dairy farming is a niche, and Horizon plays a key role in that niche.  Low milk prices threatened to drive small dairies out of business at the start of the century.  Organic milk made it possible for small farms to survive if they could get certified.  Organic milk fetches a higher price and enables small dairy farms to stay afloat.  But now the organic milk market is also flooded (sorry) with milk from Western farms.  Dairy used to be a local or regional business.  But with ultra-pasteurization, the industry has gone national, making it harder for small dairies to compete.  One sentence from the Times report sums up the problem:

One company, Aurora Organic, has 27,000 dairy cows on four farms in Colorado and Texas, according to its website — the equivalent of about 500 small New England farms. 

The Northeastern farmers claim that these "factory farms," effectively the Wal*Marts of the organic dairy industry, are skirting federal regulations for organic certification.  The regulations relate to giving the cows access to pasture and to the cows' "heritage."  There are limits on the conversion of conventional diary cows for use on organic farms. Compliance with these regulations is costly, and so the Northeastern farmers claim unfair competition.  Appeals to the Biden Administration's Secretary of Agriculture, Tom Vilsack, have followed.

The story ends on a grim note.  One farming couple with thirty cows had been selling their milk to horizon.  Ms. Smith is 68; her husband is 77.  They were hoping to transfer the farm to their forty-year-old son.  Instead, given the uncertainty, they sold the herd. 

Weekend Frivolity: The Is-a-Taco-a-Sandwich Debate!

The following clip is full of things I hate:

1. Taco Bell
2. Formal debates
3. Popular culture parodying academic discourse
4. The debate over whether a taco (or a wrap or a reuben or an oreo cookie or an accordion or whatever) is a sandwich
5. TV commercials (unless they are GEICO commercials)

But when you combine all of these things, it somehow creates the ideal clip for frivolity!

By the way, the answer is that a sandwich has to be food, so sorry Taco Bell!

H/T Texas A&M School of Law Professor Wayne Barnes

Rexing Quality Eggs Fries in the 7th Circuit

This case, out of the 7th Circuit, comes to us from @NY_Contracts, which may evidence some sort of eggsistential crisis.  In the case, Rexing Quality Eggs v. Rembrandt Enterprises Rexing agreed to buy twelve loads of eggs per week from Rembrandt.  A load consists of no less than 25 pallets of eggs, with each pallet holding 900 dozen eggs.   That's a lot of eggs!  No wonder one of the parties bawked!

From the start, there were problems with the quality of Rembrandt's eggs.  Then, a party to which Rexing was selling a lot of eggs notified Rexing that it no longer needed them, depriving Rexing of a major customer for the eggs it was getting from Rembrandt.  But Rexing had nothing to squawk about, because their agreement with that other party was never formalized (oy!)  Rexing, apparently a hard-boiled sort, started refusing delivery, Rembrandt sought assurances of performance.  Rexing responded by alleging breach of express warranties of quality and alleging that its performance was excused under the contract's force majeure clause.  Not having received the assurances it sought, Rembrandt, clucked a bit, but attempted to mitigate its damages by selling its eggs elsewhere. 

Fearing the frying pan of Rembrandt's suit to collect on unpaid invoices, Rexing jumped into the fire, seeking a declaration that its performance was excused through force majeure and that its repudiation was a justified response to Rembrandt's breaches of warranty.  Rembrandt counterclaimed for breach of contract.  The district court granted Rembrandt summary judgment on Rexing's claims.  That part of the case was over easy.  The force majeure argument played no role in the appeal.  A jury awarded Rembrandt nearly $1.5 million in damages for eggs sold below the contract price and for eggs that it could not sell elsewhere.

The trial court denied Rembrandt's request for pre-judgment interest based on a contractual provision which the trial court struck as usurious.  The Seventh Circuit found that the challenged provision fell within the business credit exception to Iowa's anti-usury statute and remanded the case for calculation of contractual interest.

The court describes Rexing Quality Eggs as "the unincorporated trade name under which the Rexing brothers have bought and sold eggs for more than twenty years."  I hope for the brothers sake that this does not mean that they have no liability shield.  Otherwise, this judgment is going to make a hash of the brothers' personal finances, as well as their business.

Nancy Kim's Annual Wrap Contracts Update

We've got all your contracts needs covered here on the blog.  If you need a legal Limerick, we've got them here.  If you need to learn about wrap contracts, Nancy Kim's book covers the basics, and her recent article, "New Developments in Digital and Wrap Contracts," forthcoming in The Business Lawyer,  keeps you updated on the latest developments.  

Last year's update followed courts' articulation and refinement of a reasonable or constructive notice and manifestation of assent requirement.  This year's installment features three cases involving Uber which clarify that standard by specifying what indicia of notice and assent must be present and which, if absent, negate consent to a wrap or digital contract.  The article then explores the pitfalls that await companies that use multiple versions of their contracts, some electronic, some on paper.  Finally, Nancy discusses cases that shows the downside of class action and class representation waivers when a company gets hit with huge filing fees after lots of employees avail themselves of the company's mandatory arbitration provision.

In the Uber cases discussed in Part II of the article, the courts first determine whether the contract terms were “reasonably communicated” to the plaintiff.  That part of the test turns on whether the terms are "sufficiently conspicuous."  They next evaluate whether the terms were accepted and, if so, how.  Courts engage in both a "high-level contextual analysis” and “micro-analysis of particular elements of that context,” and so the outcomes of the cases turn on a very detailed analysis of website/digital design.  For example, in one case, an Uber rider was not subject to the company's arbitration clause.  When she registered with Uber, she received notice that by registering, she was agreeing to Uber's Terms of Service (ToS), but she was not required to read those ToS or separately agree to them.  She was thus unaware that the ToS included an arbitration clause and therefore could not be bound to it.  Nancy summarizes the cases:

First, terms accessible only via a hyperlink . . . should be clearly labeled and marked so that the user’s intent to agree to terms is clearly and unambiguously expressed. Furthermore, conspicuousness of terms alone is not sufficient to establish reasonable notice. Rather, conspicuousness is one factor in determining assent. Finally, the reasonableness of notice depends upon the nature of the transaction because the parties may expect certain terms in some transactions but may not expect them in others. Term that are unexpected given the nature of the transaction require specific notice, and blanket assent to terms may not suffice to establish assent to these unexpected terms.

After discussing a few non-Uber cases that raise similar issues, Nancy sums up the recent developments in this area:

 Increasingly, courts are incorporating screenshots into their opinions and engaging in micro-level analysis that depends not simply on the color of hyperlinks, but the color of the text and other design elements, the placement of hyperlinks, the text used to attract the user’s attention, and whether there is specific notice of terms that would otherwise be unexpected

In part III, Nancy discusses a couple of cases in which financial services companies claimed to have provided customers with notice of arbitration provisions both through electronic contracting and through notice by mail.  In both cases discussed, the courts found the digital notice to be inadequate and that the financial services companies failed to establish that their customers had actually received notice of mandatory arbitration by mail.

 

Finally, in part IV, bwahaha!!  Companies that require individual arbitration are finding that arbitration fees add up.  When 5000 Doordash drivers brought individual actions against the company, the fees added up to $12 million!  Postmates is facing claims from a similar number of couriers and may have to pay $9.36 million.  Hey food delivery services that insist on calling your employees independent contractors, you just got served with a piping hot dish of karma!

Judge Shaves the Foam off the Cold Brew Served up at Red Robin

I guess this is a breach of contract case.  As reported here (and elsewhere), a bunch of Stella Artois enthusiasts filed a nationwide class action against Red Robin, alleging that they had paid for sixteen-ounce beers but were served in fourteen-ounce glasses. If you multiply those two ounces by all the sales at the franchise-owned stores, you get yourself to the $5 million amount in controversy requirement and qualify to make a claim under the Class Action Fairness Act.  Or so Red Robin Claimed in trying to move the case to federal court.  U.S. District Judge Jennifer Dorsey rejected Red Robin's math and remanded back to state court.  Red Robin's calculations left out the inconvenient fact that  the issue was only two ounces of beer per each sixteen-ounce sale and that not all beer sales were for sixteen-ounce beer sales.

Judge Dorsey then lit up Red Robin with beer puns:

• Red Robin's figures are mostly foam 
• [Plaintiff's] remand motion takes the fizz out of those numbers
• Red Robin distills this number down further
• [T]emperance must be exercised
• Red Robin tries to tap into sales 
• Nor has Red Robin shown that a fee award will get it to the fill line
• Red Robin attempts to satisfy [its] burden with a strange brew
• Red Robin makes no effort to address that stout disparity

I'm generally not a fan of jokey legal opinions, as it denigrates the parties' claims.  But as this is only a ruling on a procedural motion in a case where not much seems to be at stake, I raise my glass to Judge Dorsey.

[h/t to OCU 1L Howard Hennessey]

 

Weekend Frivolity: Happy Chanukah!

Sorry, Nancy Kim, my wife already got me the gift you were thinking of getting me.

Tomorrow, we make latkes!

Weekend Frivolity: Where Does Almond Milk Come From?

My brother is a great source of zany humor.

Tyson Foods Succumbs to the Power of the ContractsProf Blog

On Thursday, we blogged about a wrongful death claim filed against Tyson Foods.  Plaintiff alleged, among other things, that managers at the plant established a betting pool to see who could come up with the best estimate of how many workers would get infected with COVID.  

On Friday, according to this CNBC report, Tyson announced that it was suspending without pay the managers named in the complaint and that it had hired former U.S. Attorney General Eric Holder to investigate alleged misconduct at its facility in Waterloo, Iowa.  The report makes no mention of the role the ContractsProf Blog's expose had in prompting Tyson's response, but the timing could not be coincidental.

A Follow-Up on Yesterday's Post

Yesterday, we linked to and summarized some of the findings of a New Yorker article by Eyal Press, highlighting Eugene Scalia's Labor Department's laissez faire approach to regulation of health and safety violations during the COVID pandemic.

Today, we noticed this related article from the Huffington Post  by Sanjana Karanth(h/t Ben Davis).  The article reports on a wrongful-death lawsuit filed by the family of a worker at a Tyson plant in Iowa who died from COVID, allegedly after exposure at work.  The plaintiff was one of five workers from the same factory who died from COVID; about 1000 employees -- over a third of the workforce -- were infected.  The complaint alleges that managers at the plant set up a betting pool in which managers would try to guess how many workers would become infected.  The complaint also alleges that the plant manager called COVID "a glorified flu" and instructed workers to show up, even if they had symptoms.  

And now the link to yesterday's post:  here is the closing paragraph of the article:

The Occupational Safety and Health Administration and the Centers for Disease Control and Prevention issued guidance at the beginning of the pandemic recommending that meatpacking companies put up physical barriers, enforce social distancing and install more hand-sanitizing stations, among other steps. But the guidance is not mandatory and is mostly unenforceable.