ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Monday, March 4, 2024

Musk v. Altman: The Breach of Contract Claims

RocketmanJust a quick one here.

Elon Musk rides again.  This one is much more up to his standards.  It is bold.  It is brash.  It seems pious and public-interested, yet also incredibly self-serving, hypocritical, self-aggrandizing, and vituperative.  He is suing OpenAI and its principals, Sam Altman and Greg Brockman, for breach of contract, promissory estoppel breach of fiduciary duty, unfair competition, and he is seeking an accounting.  I will limit myself here to the breach of contract and promissory estoppel claims.

According to the complaint, Mr. Musk provided tens of millions of dollars to OpenAI from 2015-2020 in return for a promise that the venture would be non-profit and open source.  It is now neither.*  Mr. Musk cites to various representations that OpenAI made over the years -- about how it was going to work for the betterment of humankind -- and it references a "Founding Agreement."  However, the three documents attached as exhibits to the complaint do not include any such agreement.  Rather, they include OpenAI's Certificate of Incorporation (in Delaware of all places!), an e-mail exchange that is clearly a statement of future intentions, and an OpenAI "blog" (whatever that is) from 2015.  If there was a contract between Mr. Musk and OpenAI setting out conditions for the use of his funds, one would expect it to be attached to the complaint.  Perhaps in the amended complaint?

With respect to this claim and his promissory estoppel claim arising out of the same factual allegations, Mr. Musk seeks unspecified damages but also specific performance of the alleged contractual or non-contractual promises.  The former seems like a doable settlement offer.  OpenAI and its buddies at Microsoft could refund Mr. Musk his paltry tens-of-millions-of-dollars investment and neither party would notice it any more than a shift in the breeze from the north to north-northwest.  As to specific performance, that's a big ask.  I don't see a court ordering a company to work for the betterment of humankind.  

If any court were to do so, it would be nice (but really surprising) if SCOTUS did so in about an hour by allowing states to take insurrectionists off their ballots.

*Technically, OpenAI is still a non-profit, but it created a wholly-owned subsidiary, OpenAI Global, LLC, which at one point had a valuation of $86 billion, and which expects to produce returns on investments for both employees and outside investors.

March 4, 2024 in Commentary, In the News, Recent Cases, Web/Tech | Permalink | Comments (0)

Friday, March 1, 2024

Friday Frivolity: Elon Musk, This Is Not up to Your Standards

 RocketmanSeveral of my students shared the same story with me.  Ariel Zilber, writing in The NY Post, provides the basics:

  • Corporation places a large order with a bakery for mini pies.
  • Corporation then contacts the bakery to double the order. 
  • Corporation then cancels the order by text  just as the pies are about to be sent out.
  • Bake shop claims $16,000 in losses on the order
  • CEO of the corporation (depicted at right, image by DALL-E) promises to "make things good" with the bakery.

Not much to add, beyond the fact that the corporation is Tesla, and the CEO is Elon Musk.

At first, I didn't see much potential in the hypo.  Tesla made a contract; Tesla breached the contract.  Tesla must pay damages.  Making things good with the bakery is a simple matter of paying for the pies that Tesla ordered, less any mitigation.  And since you are Tesla and this is a local bakery, why not just pay $16,000? As contracts hypos go, Mr. Musk, I expect better from you.  Remember that time you promised to buy Twitter and then pretended that it was all just a ploy to get information about the percentage of bot accounts on Twitter? 

Ah, good times. 

A few wrinkles might make this into a worthy hypo.  First, let's assume (counterfactually, apparently) that the original order and the doubled order were done by telephone and there is no electronic record.  Is the text message a sufficient writing to evidence the transaction?  According to the Post, the text read as follows: "It unfortunately sounds like we will be changing plans and will not be needing this order. Thank you so much for your support. I appreciate it."  Seems like that message must be part of a text string that provides the referent for "this order."  If so, we likely have a writing.  If not, do we have specially manufactured goods?

On that point, and also relevant to mitigation, Richard Pollina, author of another NY Post article, adds the following information.  As news of Tesla's breach spread, local residents shows up "in droves" to snatch up the pies.  If she had 4000 pies at $4/pie, it seems like the owner could have mitigated her damages by re-selling those same pies at $6/pie.  The owner also said that her business has tripled since news of the breach got out.  Is that relevant to the calculation of her damages? She also said that, notwithstanding Mr. Musk's promise to 
"make things good," she has not heard from him.

Screenshot 2024-03-01 at 6.54.53 AMSide note on the efficient use of journalistic resources: Do we really need two NY Post reporters on the Tesla pie-order beat?  Even Taylor Swift only has one dedicated reporter per news outlet. 

UPDATE: David Propper, yes a third NY Post reporter, provides the following update.  Tesla paid the bakery $2000 and also offered to place an order for Women's History month.  The bakery responded that it was too booked up with orders to provide pies to Tesla.  Also, it asked, "Good Grief!  Who do you think I am?"

 

March 1, 2024 in Commentary, Current Affairs, In the News, Teaching | Permalink | Comments (0)

Thursday, February 29, 2024

Fridgewrap Rides Again!

Back in 2021, we reported on LG's charming habit of putting notice of mandatory arbitration inside its refrigerators

Screenshot 2024-02-29 at 6.20.23 AM

As you can see, the arbitration provision requires individual arbitration, meaning that each consumer dissatisfied with the product has to go one-on-one against a huge corporation.  And the corporation is not playing nice, as described in this piece by Chris Chmura, Stephanie Lucero, Alyssa Goard and Camille Lopez Rodriguez, reporting for NBC in the Bay Area.

It now appears that over 100 LG buyers are trying to bring a class action against LG for its faulty products. They allege that LG has sent out people to repair the refrigerators, but nothing works, as there is a faulty part that cannot be repaired.  Members of the purported class are done trying to get LG to repair the appliances.  They seek refunds and rescission.  They allege that LG is trying to use arbitration to avoid creating a public record of discovery, as they believe that such discovery will reveal that LG has long been aware of the problems with the faulty part and has tried to conceal that knowledge. 

LG claims that it provides notice to consumers of its arbitration provision in three ways.  First, the notice of arbitration is in the box in which the refrigerator is delivered.  Second, it is in the owners' manual, and third, fridgewrap. 

The problem with the notice in the box is that workers unbox the refrigerators before moving the appliances into homes.  Buyers never see the notice unless delivery people think it is their job to share that information with the end-user.  According to the NBC report, they don't do so.  Anna Han of the Santa Clara University School of Law suggests that the notice in the manual and in the refrigerator may provide adequate notice to consumers and thus that LG may not be able to establish that purchasers of LG products consented to arbitration.  Stay tuned.

Hat tip to my former student, Todd Williams!

February 29, 2024 in Contract Profs, Current Affairs, In the News, Recent Cases | Permalink | Comments (3)

Thursday, February 22, 2024

Gina Carano Strikes Back!

Gina_Carano_by_Gage_Skidmore
Image by Gage Skidmore
CC BY-SA 3.0

This case was brought to my attention by our blog's Founder and Editor Emeritus Frank Snyder.  He posted a link to the case on the AALS Listserv for contracts professors, and discussion ensued.  I acknowledge that what follows is indebted to that discussion, and I thank my colleagues for alerting me to the issues raised in the litigation.  

ADDENDUM:  Just learned via Riddhi Setty writing on Bloomberg.com that Gina Carano's suit is being funded by Elon Musk.  This makes sense, given Mr. Musk's earlier offer to pay the legal bills of anyone who claims that they were unfairly treated by an employer due to Twitter posts.  Musk v. Disney seems like a good match-up.

On February 6th, mixed martial arts fighter, actor, and professional bad-ass Gina Carano (Ms. Carano, right) filed her complaint against The Disney Company (Disney) and others.  The case is of interest not only because of Ms. Carano's success in her role in the Star Wars/Disney series, The Mandalorian, among other boundary-breaking performances, but also because of the interesting legal issues raised by her complaint.

The Complaint alleges that Disney wrongfully terminated Ms. Carano based on the political content of her social media posts made while away from work.  She further alleges that Disney discriminated against her as a woman, as men who posted similar things on social media did not suffer the same adverse employment decisions.

According to the Complaint, Ms. Carano's character, Cara Dune, was a key element in the success of The Mandalorian.  Undoubtedly, she had more rizz than the faceless protagonist, but nobody on that show could compete with the adorable muppet, Grogu, known to fans as "Baby Yoda" (below left).  She was paid only the applicable minimum salary of $25,000 per episode.  Late in 2020, Jon Favreau, who created The Mandalorian, allegedly represented to Ms. Carano that she would be featured in a new spinoff series, for which her compensation would increase as much as tenfold.

Then, in February 2021, Defendant Lucasfilm made the following announcement:

Gina Carano is not currently employed by Lucasfilm and there are no plans for her to be in the future. Nevertheless, her social media posts denigrating people based on their cultural and religious identities are abhorrent and unacceptable.

Carano characterizes this and other statements by defendants as calculated, malicious, false, and knowingly in violation of California statutes that protect employees from persecution for their political beliefs.  She alleges that, based on such false allegations, Disney not only terminated her but also refused to hire her for additional projects. 

Grogu Issues:

Was Ms. Carano an Employee?

Ms. Carano's first cause of action is for wrongful discharge under California Labor Code §§ 1101, et seq, which prohibits employers from "[c]ontrolling or directing, or tending to control or direct the political activities or affiliations of employees."  One issue that may arise in the case is whether she comes within the ambit of the statute.  She may have not have been an employee at the time that Disney announced that her "termination."  After all, according to the Complaint , in announcing Ms. Carano's termination, defendant Lucasfilm said that she was not "currently employed." 

While her employment status might be relevant to her first cause of action, her second cause of action is for both wrongful discharge and refusal to hire.  So even if Ms. Carano was not an employee for the purposes of here §1101 claim, she would not need to be for her claim under California Labor Code § 98.6.  That section prohibits adverse employment actions against "any employee or applicant for employment" for conduct protected under §§ 1101 et seq.  

Ms. Carano cites to various projects of which she was going to be a part.  The problem is that, with the possible exception of a Mandalorian movie, the projects she mentions do not seem to ever have been made.  I think that might move her alleged harm into the realm of speculation.  If I had a dime for every time someone has approached me with a movie treatment based on this blog, well . . . you can do the math yourself.

Her third claim is sex discrimination, because male employees who engaged in expression similar to hers were not subject to termination.  I think the challenge here will be to show that the other expression is similar in legally relevant ways and to show that Disney had no non-discriminatory ground for deciding to end its relationship with Ms. Carano.  Ms. Carano cites to a social media post by Mark Hamill in which he linked to something from J.K. Rowling and "liked" it.  When people objected to the allegedly transphobic content of Ms. Rowling's post, Mr. Hamill issued a retraction of his "like" to the extent that it extended to that message.  Ms. Carano, by contrasts, insists that she has never, ever engaged in expression that was remotely objectionable.  To a company that cares about its image and disagrees with Ms. Carano's characterization of her social media posts, her refusal to acknowledge poor judgment may be a ground for treating her differently from those willing to recognize error.

Was Her Speech Covered by the Statute?

Disney may claim that her conduct was not "political activity" in the sense of the statute.  Here, the Complaint has to walk a rather narrow line.  On the one hand, Ms. Carano insists that her social media posts did not have the meaning ascribed to them by her detractors.  She insists that there was nothing in her posts that was racist, anti LBGTQ+, or transphobic.  On the contrary, she communicated only messages of love and support for people who are targeted for bullying.  Based on her own account of the events, it is a little hard to identify her political activities. 

She notes that other Disney employees engaged in more overt political statements and suffered no adverse employment effects.  But that may be a product not of whether Ms. Carano or her co-workers were people who were associated with the Star Wars brand were engaging in political activity but whether they were engaging in speech that the audience for Star Wars found objectionable.  Which brings us to our next topic . . . .

If Her Contract Has a Morals Clause, What Impact Does that Have on the California Statute at Issue?

Screenshot 2024-02-22 at 12.47.21 PMThis was the topic that Frank Snyder first broached on the AALS Contracts Listserv, and I, having no expertise in employment law, admit that I do not know the answer.  One would think that a morals clause would have to be interpreted in a manner consistent with California's Labor Code.  My hunch is that the case should turn on whether Disney's interest in enforcing its morals clause involved reasons unrelated to the allegation that Ms. Carano was engaged in political activity.  She was attracting a lot of negative attention on social media at the same time as she was emerging as the human face of The Mandalorian. The series' eponymous character (right) never shows his face (except for that one time when he did).  He is, according to the actor who plays him, "of questionable moral character." We don't even learn his name until episode 8.  Grogu is cute and all, but he's not human.  Ms. Carano's notoriety on social media may just be bad for business, bad for the brand, and they may have distracted attention from the heartwarming story of an isolated intergalactic mercenary with an inexplicable attachment to a child of an alien species with potentially gnarly powers but, if his predecessor is any indication, no hope of ever mastering standard English usage.

The Style of the Complaint

The Complaint's Introduction begins as follows:

A short time ago in a galaxy not so far away, Defendants made it clear that only one orthodoxy in thought, speech, or action was acceptable in their empire, and that those who dared to question or failed to fully comply would not be tolerated. And so it was with Carano. After two highly acclaimed seasons on The Mandalorian as Rebel ranger Cara Dune, Carano was terminated from her role as swiftly as her character’s peaceful home planet of Alderaan had been destroyed by the Death Star in an earlier Star Wars film. 

I have two problems with this way of introducing legal claims to a court.  First, the lame jokes and references to Star Wars themes undermine the seriousness of the document and of Ms. Carano's claims.  Of course, this blog is not above lame jokes and references, but we're a blog.  There's a time and a place.  Second, by casting the defendants in the role of the evil "empire "seeking to enforce "orthodoxy in thought, speech, or action" Ms. Carano risks having this lawsuit dismissed (by the public, if not by the court) as a chapter in the culture wars rather than an attempt to vindicate her legal rights.

The problems go beyond the introduction.  Pages 10-25, 28-30 of the Complaint consist of long-winded  detours into alleged online harassment of Ms. Carano by people other than defendants.  As far as I can tell, all of this information serves only to show why Disney might have had apolitical concerns about Ms. Carano's activities on social media.  It is not clear that any of this is otherwise relevant to the legal narrative Ms. Carano is trying to tell if she is seeking to vindicate her legal rights. It is highly relevant to the narrative she is trying to tell if she is attempting to burnish her credentials as a victim of the culture wars.  I don't think it is helpful in a Complaint to make the court feel like it is a platform for an agenda.

What's Not in the Complaint

Given the allegations in the Complaint, I'm not sure why there aren't more causes of action.  It seems like Ms. Carano thinks that the defendants have said and published statements about her that she believes are malicious lies.  That seems like a claim right there.  She also alleges that defendants not only wrongfully terminated her and refused to hire her for future projects; they also interfered with her efforts to procure other employment in the industry, including perhaps by pressuring her agents to sever ties with her.  That too, seems like a claim.  Perhaps an amended complaint is coming.  Perhaps I don't know what I'm talking about.

February 22, 2024 in Celebrity Contracts, Current Affairs, In the News, Labor Contracts, Television | Permalink | Comments (0)

Thursday, February 8, 2024

Et tu, Trader Joe's?

SpaceX
SpaceX-Man, Image by DALL-E

We posted recently about an attempt by SpaceX (represented at left) to perpetuate its union-busting activities by throwing a hissy fit in a Texas District Court and screaming at the National Labor Relations Board (NLRB) and its administrative law judges (ALJs), "You're not the boss of me!"  Now, we learn, via , writing for Bloomberg News, that Trader Joe's has adopted SpaceX's arguments at an NLRB hearing in Connecticut. 

So first, I just can't believe that Trader Joe's is in a labor dispute.  I go to Trader Joe's to shop, sure, but mostly I go to hang out with the young, diverse, tattooed and pierced young people who work there.  The cashiers engage me in conversation.  The people stocking shelves are always happy to help me find stuff and to tell me how much they like the product I'm looking for and to recommend others.  The real happiest place on earth is a Trader Joe's at 8 AM on a Saturday morning.  Nobody is shopping then, so the workers have the store all to themselves, and they are loving it!  The tunes are cranked up, EVERYBODY in the building is wearing tie-dye, and they are working and gabbing, gabbing and working, talking about whatever young people talk about in their dialect that a boomer like me has little chance of following.  They are the happiest work force I have ever seen anywhere outside of Disneyland, but in this case I didn't think the Trader Joe's people were putting on an act.  Now I don't know what to think.  Does the store force them to pierce and color their hair in festive colors not found in nature?  Is that store-issued tie-dye? Are those even real tattoos?  Will I re-visit the childhood trauma of watching Micky Mouse remove his head the next time I visit my local Trader Joe's?

It turns out that Trader Joe's United has organized unions at four Trader Joe's stores.  Its attorney is quoted in Bloomberg as follows: “Customers of Trader Joe’s would have serious problems with a company that has rejected the New Deal.”  You got that right.  Trader Joe's concedes that the NLRB is unlikely to find itself unconstitutional.  The company is just preserving the argument for later proceedings.  Let's hope that the company comes to its senses and drops this nonsense.  It's fine.  I'll just shop at Sprouts.

February 8, 2024 in Commentary, Current Affairs, In the News, Labor Contracts, Recent Cases | Permalink | Comments (2)

Wednesday, February 7, 2024

Delaware Chancery Court Rescinds Elon Musk's $51 Billion Pay Package! TL;DR from Ann Lipton

Lipton-croppedOver on our sister blog, The Business Law Prof Blog, Ann Lipton (right) provides a handy synopsis of and commentary on Chancellor Kathaleen McCormick's 200-page opinion in Tornetta v. Musk. We are all grateful.

I taught Business Associations for roughly the first decade of my law teaching career.  Some of my early articles were on corporate law, and my very first law review publication as a law professor was on executive compensation.  It appeared in the law review of Professor Lipton's home institution, Tulane, which now seems so appropriate!

We learn from Professor Lipton's synopsis that the Chancery Court applied the "entire fairness" test rather than the business judgment rule to the decision of Tesla's Board to Directors to pay Elon Musk $51 billion.  She suggests that the Delaware Supreme Court might narrow the circumstances in which the fairness test will apply, but even if narrowing occurs, the fairness test will likely still apply to Mr. Musk's situation.  The most Mr. Musk can realistically hope for is a remand for further proceedings, unless he decides to re-incorporate in Texas.  Matthew Bultman, reporting on Bloomberg Law, suggests that litigation in a Delaware court would likely follow should Musk attempt to move Tesla to Texas.  Professor Lipton supplements here original post with thoughts on Texas here.

In my writing, and still today, I would go in the opposite direction from that contemplated in Delaware with respect to total fairness.  I argued that the business judgment rule should never apply to executive compensation schemes.  Board members are always motivated to overcompensate executives.  They are themselves corporate titans, and their compensation is determined by comparison to how other corporate titans are compensated.  As a result, they always have a situational conflict of interest, and they often have a more concrete conflict of interest. 

Fairness analysis should always apply.  What is fair?  My view is that corporate executives, like all workers, are entitled to a living wage.

February 7, 2024 in Commentary, Current Affairs, In the News, Recent Cases, Weblogs | Permalink | Comments (0)

Monday, January 29, 2024

New York Times Obituary for Charles Fried. . .

Fried Book. . . can be found here.  Like the Harvard Crimson obituary linked to here, it makes no mention of Charles Fried's seminal Contract as Promise.

January 29, 2024 in Contract Profs, In the News | Permalink | Comments (0)

Reefer Brief, Oklahoma Edition

Marijuana budWonder what contracts to move marijuana look like?  Nolan Clay writing in this week's Oklahoman newspaper provides some interesting details.  A prosecution witness testified that he was hired to drive a counterfeit Amazon truck from twenty different Oklahoma pot farms for shipment out of state.  He was paid $15 per pound.  He managed to load 150-200 pounds of marijuana into the truck each trip, so that amounts to up to $3000 per trip, and he took 10-15 such trips.  The witness brought the marijuana back to his business's warehouse where it was packed into a semi for out-of-state shipment.  That is where the bust took place.  The witness pled guilty and then gave testimony against other members of the conspiracy.  A later raid yielded nearly 20,000 plants and $100,000 in vacuum-sealed cash (just like in the movies!).  

The big fish in this sting were not all that big.  The alleged manager of the operation was paid $3000-$4000 a month.  His "intern" was paid $2500/month.  They face imprisonment of ten years to life.  The street value of the marijuana seized (it's not clear from the story whether this is the 20,000 plants of the contents being loaded onto the semi) is estimated at $6 million.  Seems like the bigger fish are still swimming.  The witness had only a last name to offer.  The government is seeking to seize the farms involved in the conspiracy.

I am reminded of the chapter in Freakanomics about why drug dealers live with their mothers.  The salaries of these relatively low-level employees in a drug-peddling operation were only enough to constitute a profitable side-gig.  Even the "manager" makes less than $50,000/year in exchange for the risk of an extended stay in prison and other risks associated with criminal activities.  Once again, I'm glad I decided to become a law professor rather than trying to claw my way to the top and become a drug kingpin.

January 29, 2024 in Current Affairs, In the News, True Contracts | Permalink | Comments (0)

Thursday, January 25, 2024

Charles Fried, 1935-2024

Charles FriedCharles Fried, whose Contract as Promise has served, since its publication in 1981, as a starting point for most discussions of contracts law theory, died this week at the age of 88.  You can read his obituary in The Harvard Crimson here.  It is a testament to his rich life that the Crimson does not reference Contracts as Promise.

I did not know Professor Fried, so I will leave it to others to share their appreciations of his work.  As I come across them, I will share links.

January 25, 2024 in Contract Profs, In the News | Permalink | Comments (0)

Thursday, January 4, 2024

TikTok Joins the Exodus from Mandatory Arbitration

Nancy-kimWay back in 2020, Nancy Kim (left) alerted us to the sea-change already begun in the world of Terms of Service (ToS).  As Nancy reported, both Door Dash and Uber were facing thousands of arbitration claims.  Under their ToS, which provided for mandatory arbitration, the companies were obligated to pay $11 million and $18 million respectively.  Welcome to the world of mass arbitration!  A year later, Nancy posted about Amazon's decision to remove mandatory arbitration from its terms of service.

Now, as Sapna Maheshwari reports in The New York Times, TikTok has joined the party, in a really charmless manner.  It has replaced arbitration with the requirement that claims be filed in one of two California courts, and it has shortened the statute of limitations to one year from the alleged harm.  It is not clear whether TikTok can make its new terms stick.  One problem is that minors make up a huge proportion of TikTok's Screenshot 2024-01-04 at 7.29.46 AMusers, and it is not clear how TikTok could make its terms stick against people under the age of 18.  Friend of the blog Omri Ben-Shahar is quoted in the article expressing skepticism that courts would enforce significant changes to ToS posted in an e-mail or some other electronic communications.  Given the requirement that claims be made exclusively in California courts, I would think the unconscionability doctrine might also come into play.

For those interested in learning more about mass arbitration.  Georgetown Law's Maria Glover (right) is the expert.  You can find her big article on subject on the Stanford Law Review's website.  A follow-up article is available on the Washington University Law Review Website.

January 4, 2024 in Contract Profs, Current Affairs, E-commerce, In the News, Web/Tech | Permalink | Comments (0)

Wednesday, January 3, 2024

Finally, a Sensible MLB Contact!

Shohei_Ohtani_(16735312258)_(cropped)I am often baffled by sports contracts.  Recently, there was the story of a public university paying a man $75 million not to coach its football team, but my interest in bad contracts (or contracts that seem bad to the outside observer) goes back to Bobby Bonilla In this case, Fabian Ardaya and Evan Drellich explain the Los Angeles Dodger's contract with  Shohei Ohtani (right) on The Athletic, and it seems pretty sensible.

The contract has been variously described as a ten-year deal for $700 million, a twenty-year deal for $700 million, and a $46 million/year contract.  The wrinkle is that, although Mr. Ohtani has contracted to pay for the Dodgers for the next ten years, 97% of his pay is deferred until after than time.  He will have to economize and live on $2 million/year for the next decade.   Thereafter, he will be paid $68 million/year for ten years.  All he had to do was sign.

Shohei SignagureGiven the discount rate, the $700 million deal is worth about $46 million/year in 2023 dollars.  Both parties seem to benefit from the arrangement.  Mr. Ohtani might derive certain tax benefits, especially if he leaves California before 2034.  The team gets to dodge (get it?) luxury taxes and have payroll flexibility to surround Mr. Ohtani with talented teammates.  One would think that the obligation to pay Mr. Ohtani buckets of money starting in 2034 would weigh on the team's prospects during that decade.  But perhaps in 2034 $68 million/year won't buy a chicken dinner.  Or a tsunami might wash Los Angeles into the sea. Or the rapture. . . . Optimism fuels baseball.

January 3, 2024 in Commentary, Current Affairs, In the News, Sports, True Contracts | Permalink | Comments (0)

Thursday, November 30, 2023

Of Windfalls from Mistake and Breaches of Auction Contracts

A few months back, we brought you the heartwarming story of a couple that purchased a small, valuable painting by N.C. Wyeth (self-portrait, Wyethleft) at a thrift shop for $4.  It was expected to fetch up to $250,000 at auction.  

Now, the bad news.  According to Matt Stevens writing in The New York Times, the painting sold for only $191,000 at auction.  And now the worse news.  The buyer never paid and never arranged for delivery of the painting.  The auction house sent the sellers a shrug emoji.  These things happen.  The buyer is located in Australia, a vast, lawless wasteland, where the inhabitants daily confront spiders the size of your face and more dangerous, venomous spiders that hide in your shoes.  Not to mention the pythons that hide in trees and then drop on unsuspecting passers-by (mostly tourists).  Breach of contract is nothing to such people.  A mere auction house is powerless in these circumstances.    

The sellers are philosophical.  They are not out any money, and the auction house returned the painting to them in a lovely cardboard box.  If they have a cat, that cat no doubt values the box at something around $191,000.  If they don't have a cat, they should get one, and then the family's hedonic sum will then equal what it would have been had the Australian paid up.  

[Editor's note: an earlier version of this post identified the painting as created by Andrew Wyeth, N.C.'s son.  Thanks to Jim Fishman for the correction!] 

November 30, 2023 in About this Blog, Current Affairs, In the News | Permalink | Comments (0)

Tuesday, November 14, 2023

China Southern Airlines Honors Tickets Sold for 10 Yuan ($1.37)!

Thanks to Wayne Barnes (below, demonstrating how one faces down an airline), we have another in our series of stories of people beating up on the airlines.  The others in this series include a couple that got a refund after being seated next to a gaseous, slobbering dog, a mother forced to sell her child into slavery when the airline would not allow the child to have a seat of her own (perhaps I exaggerate a bit), and a refund for a failed trip to Easter Island.

Barnes_waynes1This time it was a simple website glitch.  For two hours, as reported on CNN, through a story provided by Reuters, China Southern advertised trips for 10, 20 or 30 yuan when they should have cost 400-500 yuan.  Passengers still had to pay airport fees, but the airlines otherwise swallowed the loss.  Perhaps this AI thing isn't all bad.

The story was reported by Sophie Yu and Casey Hall, with editing by Bernadette Baum.

November 14, 2023 in About this Blog, In the News, Travel, Web/Tech | Permalink | Comments (0)

Thursday, November 2, 2023

Another Airline Settles With a Dissatisfied Passenger

Screenshot 2023-11-01 at 9.26.40 PMRecently, we brought you a story of people who gave up their premium seats rather than share an aisle with  a gassy slobbering dog.  They recovered the difference between the premium seats and coach and, they say, donated to a charity that matches up people with presumably non-gassy service animals.  Today, thanks to OCU 1L Taysia Stephens (left), we bring you another story of a consumer victory over the airlines, this time in small claims court.

According to Kathleen Wong writing in USA Today, Erika Hamilton, an Oregon lawyer, purchased two seats on an American Airlines flight, one for her and her 18-month-old daughter, who would sit in her lap, and another for the daughter's twin.  How did Ms. Hamilton choose which child got the lap and which one got the seat?  Was one of her daughters more of a lapchild?  Ms. Wong's reporting is silent on the subject.

In any case, Ms. Hamilton's preferred arrangement  is allowed under the airline's rules and FAA rules. A flight attendant told Ms. Hamilton that her second child needed to be in a car seat, and the flight attendant was not persuaded when Ms. Hamilton pulled up the airline's and the FAA's relevant rules and shared them with the stubborn employee.  Another passenger offered to travel with Ms. Hamilton's second child in her lap, and Ms. Hamilton felt she had no choice but to agree to the arrangement, even though she believed it was safer for the daughter to sit in her own seat with a seat belt.  

The flight attendant eventually relented and apologized, but Ms. Hamilton sued in small claims court seeking $3500.  The case settled, with American agreeing to award Ms. Hamilton 4500 miles.  It is unclear whether that means 4500 miles of free travel or 4500 miles on American's frequent flyer program.  Either way, it seems odd that the reward for a terrible experience on the airline is more time spent on the airline.  

There is a New Yorker cartoon that would be the perfect accompaniment for this article, if only I could find it and it weren't subject to copyright protection.  It depicts a father telling a child, "One day, you will grow up to hate all of the major airlines."  One can imagine Ms. Hamilton preparing her twins for what lies ahead for them with the same sage prediction.

November 2, 2023 in In the News, Recent Cases, Travel | Permalink | Comments (0)

Tuesday, October 31, 2023

Colorado Welding Company Resists Judgment by Paying Heavy Fine

Scales
Image by DALL-E

As

October 31, 2023 in In the News, Recent Cases | Permalink | Comments (0)

Monday, October 30, 2023

The Plea Deals in State of Georgia v. Trump

Nineteen were indicted in the Georgia election case.  Four have now pled guilty.  All four have agreed to cooperate with the prosecutors in the case against the remaining co-conspirators.  

A plea agreement is a contract.  Cooperation is offered in exchange for leniency in sentencing.  The terms of those agreements have been described in the media as generous, in that the defendants will all avoid jail time, assuming good behavior.  In some cases, they get to keep their law licenses, although state bars might determine otherwise down the road. Of interest beyond that are the specifics about what cooperation entails and the penalty for breach. If criminal plea agreements are reduced to writing somewhere, I have been unable to find online versions of the plea agreements in Georgia v. Trump, which is a shame.  I will have to cobble together the terms from news reports on the court proceedings on the matter. 

The first to enter a plea was bail bondsman Scott Hall (right)Screenshot 2023-10-26 at 5.44.40 PM, perhaps the least notorious of the alleged criminal conspirators.  According to Richard Fausset and e pled guilty to five misdemeanor counts of intentional interference with performance of election duties.  He had been charged with racketeering and felony conspiracy in connection with tampering with voting equipment in Coffee County, Georgia in January 2021 in an attempt to discover evidence of voting fraud at the behest of the Trump campaign.  

According to the plea deal, he will serve five years of probation.  He will pay a $5000 fine and apologize to the people of Georgia.  He will have to perform 200 hours of community service and surrender his license to carry a firearm.  He may not participate in activities relating to the administration of an election.  He agreed to testify against his co-conspirators, which is bad news for two other defendants, Misty Hampton and Cathy Latham, who allegedly participated in the Coffee County scheme.  Defendant David Shafer the former head of the Republican Party in Georgia, also seems to have ties to Mr. Hall through Mr. Hall's brother-in law, David Bossie.

Sidney PowellThe next to fall was Sidney “Release the Kraken” Powell (left).   and  provide in-depth coverage in The New Yorker on what led Ms. Powell to plead guilty. She pled guilty to six misdemeanor counts of election interference and will have to pay nearly $9000 in fines and serve six years of probation.  She has apologized the the people of Georgia and agreed to testify in the proceedings against her co-conspirators.

Ms. Powell was engaged in a lot of election fraud shenanigans, but she, like Mr. Hall, was convicted for allegedly tampering with voting machines in Coffee County.  Misty Hampton, the county's election supervisor, apparently bought into Ms. Powell's nutter idea that Dominion voting machines had been tampered with.  She refused to certify her county's election results.  The story in The New Yorker provides a lot of details I had not read elsewhere.  It took a long time to discover what happened in Coffee County, because Georgia's secretary of state blocked efforts to learn whether the voting records has been illegally accessed.  An election watchdog group investigated and was able to issue subpoenas.  Their forensic expert was able to confirm a breach, and the rest was expected to come out in Fani Willis's case.

The New Yorker obtained a copy of a 400-page report by the Georgia Bureau of Investigation (GBI).  It details what might have been the basis for Ms. Powell's rather surprising decision to plead guilty.  Among other things, it seems clear that Powell and her co-conspirators, including Ms. Hampton and Ms. Latham, represented to their hired forensics experts that they had permission to access election equipment when they did not.  Ms. Powell had pursued a litigation strategy of trying to persuade the court that her involvement in the alleged conspiracy could be limited to conduct in Coffee County on January 7th.  The fact that she paid the outside experts who were given illegal access to voting data suggests a larger role.  The New Yorker seems to suggest that she pled guilty when she did once it became clear that she was going to be implicated in wider illegality.

ChesebroNext came Kenneth Chesebro.  According to Richard Fausset and 

Jenna Ellis by Gage Skidmore
Image by Gage Skidmore, CC BY-SA 2.0, via Wikimedia Commons

And finally, yesterday, Jenna Ellis joined the ranks of those who have entered guilty pleas.  According to Richard Fausset and 

Richard Fausset and 

What's next, you might ask?  This is not my area of expertise, but from the perspective of my position as an armchair prosecutor, it seems that these Misty Hampton and Cathy Latham are left looking very exposed, and the noose also seems to be tightening around John Eastman's neck.  Rudy Giuliani has already confessed to lies in another Georgia case and is reportedly running out of funds to pay his attorneys.  I would be surprised if there weren't more plea agreements on the way to trial, unless the prosecutors, thinking they already have enough witnesses, are no longer interested in offering such generous terms.  They may not need to.

October 30, 2023 in Commentary, Current Affairs, In the News, Recent Cases | Permalink | Comments (0)

Tuesday, October 17, 2023

A Unilateral Offer from Ring

Screenshot 2023-10-14 at 11.07.18 AM
Not an Alien

When OCU law 1L Dubelza Galvan (left) shared this story with me, I thought it would make a good weekend frivolity post.  But then I saw the there are "Official Rules" that govern the offer, and reading those felt non-frivolous.  So here we are.  Thanks a lot, Dubelza.

So Ring is a company that makes doorbells with cameras attached so that you can see who is at your door and, if you live in the United States, arm yourself appropriately.  If you live in Canada, you can see who is at your door and decide whether you should offer your guest fresh-baked pastries or a Molson.

As announced on the company's website, Ring is offering $1 million to anyone who captures footage of an extraterrestrial on their indoor or outdoor device between now and November 3rd.   Clever participants might already be working on ideas.  After all, Halloween falls between now and November 3rd, so there is a non-negligible chance that some kid will earn me $1 million by showing up as ET or Mork or one of those nasty little guys from Mars Attacks or Boris the Animal ("It's just BORIS") from Men in Black III or that thing from Total Recall that advises Arnold Schwarzenegger, "Open your mind!" or . . . well, you get the idea.

Warhol
Perhaps an Alien?

Nope.  Ring is all over that.  The "Official Rules" define "extraterrestrial" as:

Any life in the universe originating or occurring outside Earth or its atmosphere. The Extraterrestrial must take up physical space in order to be perceived by humans or cameras and have sufficient technology to be capable of traveling to and surviving within Earth’s atmosphere.

So, what are the rules?

First, you have to be a U.S. resident to play.  Sorry, Canada.  Also, while no purchase is necessary in order to win, you have to own (or have shared access) to a Ring device in order to enter.  So, I guess they mean, no additional purchase necessary.  Once you enter, there are two options.  You can win the GRAND PRIZE by submitting scientific evidence of extraterrestrials recorded on a Ring device. It can't be longer than 1 minute.   "Scientific evidence" is also a defined term.

  • “Scientific Evidence” is defined as an unaltered video (with audio) recorded with a Ring device (maximum one (1) minute long) containing ALL of the following criteria (the contents of the unaltered video must be recorded during the Promotion Period with a Ring device without the use of computer graphics, digital effects and/or other artificial elements):
    • The Extraterrestrial exhibiting unusual, extraordinary, or unexplainable behavior (i.e. strange movement, velocity, pattern or other unique morphology).
    • An explanation, within the Promotion Entry Form (as defined below), of why the anomaly is necessarily extraterrestrial in origin (i.e., explanation based on theoretical predictions from the existing scientific literature, recovery and analysis of an Artifact or documentation of Extraterrestrial markings or symbols).
    • The Scientific Evidence must unequivocally rule out any known explanations or any new Earth-based phenomena as an explanation (e.g., equipment malfunction, known aerial objects, atmospheric phenomena, recently discovered terrestrial species)
    • The Scientific Evidence must demonstrate that there was no alteration or malfunction of the Ring device on which it was captured (“Corroboration") (e.g., including footage from an additional camera, correlating audio, or other simultaneously-captured data).

The $1 million grade prize will come in the form of an annuity paid out over twenty years.

Feeling uncertain about whether it is really possible to win the Grand Prize? I have some haunting advice for you:

There will also be five "Out of This World" prizes awarded to people who have some time on their hands or really want a $500 Amazon gift card.  

The criteria for these prizes are as follows:

To be eligible to win the Out of this World Prize, all eligible Option One and Option Two Entries, including any Grand Prize Eligible Entrants who do not win the Grand Prize, will be reviewed by the judging panel comprised of representatives from Ring and Hunter (“Judging Panel”) who will award points according to the following criteria:

  • Species
    Definitely an Alien
    “extraterrestrial(s)” with the most unique communication style (1-10 points)
  • “extraterrestrial(s)” that engaged with their Ring device in the most unique way (1-10 points)
  • “extraterrestrial(s)” with the most unique mode of transportation (1-10 points)
  • “extraterrestrial(s)” with the most unique costume and accessories (1-10 points)
  • “extraterrestrial(s)” that made the Judging Panel laugh the hardest (1-10 points)

In case of a tie, there are additional factors:

  • Creativity (1-10 points)
  • Visual appeal (1-10 points)
  • Humor (1-10 points)

I object, on the ground that the first and third additional factors are duplicative of the original factors and so it all comes down to looks.  Typical.

October 17, 2023 in Commentary, Film, Film Clips, In the News, True Contracts | Permalink | Comments (0)

Wednesday, October 11, 2023

Sid DeLong on Ethical Altruism and Sam Bankman-Fried

Defective Altruism: Reflections on Bankman-Fried
Sidney DeLong

As the long hand of the criminal law closes inexorably around the neck of Sam Bankman-Fried the disgraced founder of the bankrupt crypto exchange FTX, the insatiable Meaning Machine has already begun to Draw Conclusions from his fate.

Herein are mine.  This is posted during his criminal trial and may be amended.

Joseph-bankman Barbara-friedTo some law professors, the most interesting thing in the case is that, although Bankman-Fried is not a lawyer but a graduate of MIT, both his parents, Joseph Bankman (left) and Barbara Fried (right), are each respected members of the legal academic elite, professors at Stanford Law School. Bankman is an expert in tax policy; Fried is an expert in contracts and legal ethics. She is also the co-founder of Mind the Gap, a political fundraising organization that supports the Democratic Party.  Both parents are proponents of the philosophical approach of philosopher Peter Singer, known as “effective altruism,” and thoroughly imbued their son with this philosophy. Effective Altruism is said to have motivated him and several of his associates as they built the financial empire that became FTX.

Effective altruism is a modest approach to doing good that would appeal to people across the pollical spectrum in a saner world of ideas. Briefly stated, it challenges each person to maximize their effectiveness in mitigating inequality by careful application of their resources, getting the most bang for your charitable buck. For Bankman-Fried and his friends, it meant making a lot of money and giving a lot of it away to worthy causes, while keeping enough to lead the good life. Effective altruism apparently is not overly concerned with the first step in the program (making a lot of money) and so it seems not to have mattered that Bankman-Fried’s wealth came, directly or indirectly, from speculating in the wildly fluctuating values of bitcoin and other crypto currencies.

Bankman-Fried also established FTX, a cryptocurrency exchange permitting customers to buy and sell bitcoin. In the unregulated world of crypto-currency transactions, FTX offered those who wished to deal in bitcoin a trustworthy platform on which to buy and sell bitcoin with certainty that the trades would be executed and that the customer’s funds and bitcoin holdings were safe. Because it acquired a reputation as being exceptionally trustworthy, bolstered by Bankman-Fried’s celebrity, FTX grew at a prodigious rate and was soon said to be worth several billion dollars.

With the help of funding from ethically minded millionaires, Bankman-Fried and his friends also created Alameda Research, a hedge fund firm that traded and speculated in bitcoin and other crypto currencies. As a market maker, Alameda provided liquidity to some of FTX’s customers. Alameda’s trading profits were intended to be devoted to altruistic causes. During their operations both FTX and Alameda donated millions of dollars to causes their founders deemed worthy, including Democratic Party political campaigns and causes.

Under Bankman-Fried’s control, Alameda and FTX operated closely together with only casual attention to the corporate formalities. The FTX bankruptcy trustee has accused Bankman-Fried of improperly transferring customer funds back and forth from FTX to Alameda, whence they evaporated in the crypto crash, leaving FTX customers with billions of dollars of losses from their accounts. He is also accused of commingling assets, failure to maintain proper records of transactions, and a host of other breaches of fiduciary duty to the customers and creditors of FTX. He is accused of improperly using the funds of FTX for personal gain. His defense to some of these claims is much more difficult than it would be otherwise because of grossly inadequate record-keeping.

But if these allegations are true, What Does It Mean? To trace all of Bankman-Fried’s misbehavior to his parents’ training on Effective Altruism would be unjustified. Effective Altruism is not a call for a crypto-Robin Hood to take bitcoin from the rich and give it to the poor after extracting a handsome handling fee in the process. But it is predictable that the Singer philosophy is likely to become a scapegoat in the political press, especially when the altruism appears directed to Democrats rather than Republicans. One need not be a cynic to predict that teaching Effective Altruism will be banned in Florida schools.

Although Effective Altruism does not require the forms of misbehavior of which Bankman-Fried and his friends stand accused, it seems that they did not think that it excluded it either. Perhaps Effective Altruism should be recast as Ethical Altruism, limiting the raising of funds for charitable redistribution to ethical means. Ethical Altruism would disavow robber baron philanthropy as a form of secular simony in which one’s sins can be pardoned with a sufficiently large charitable foundation, But this is only a suggestion from a non-philosopher.

If Bankman-Fried had been educated at Stanford Law School, where his parents taught, instead of or after his stint at MIT, he might have avoided his present legal plight. At a general level, he would have been taught the legal constraints and fiduciary obligations that arise when dealing with other people’s money, along with the procedural ways in which to comply with them. Regrettably, in their zeal to convert Sam to the ultimate goals of altruism, his parents apparently failed to teach the less dramatic lawyer-virtues that underlie rules that they taught their law students, including those concerning fiduciary duty, commingling, conflicts of interest, breach of trust, and the other constraints one must observe when dealing with Other People’s Money.

FTX_logo.svg
On a more mundane level, if he had been trained as a lawyer, he would also have been forced to come to acknowledge his own ignorance of the legal and ethical relationships that were created by his novel and complex financial empire. A less self-confident Bankman-Fried would have sought legal advice on such questions as the following: What is the exact legal relationship between FTX and people who trade bitcoin on its platform? What are FTX’s record keeping obligations regarding their trades? What am I legally permitted to do and what am I prohibited from doing with regard to customer funds and bitcoin? Am I a trustee and if so to what extent? What may I do and what am I prohibited from doing with regard to transactions between FTX and Alameda? What is the best legal vehicle to achieve my goals?

I confess that the urge to speculate as to why Bankman-Fried failed to get detailed, expert advice on these and similar questions is irresistible. To me, his tragic flaw was that old Greek standby hubris, in this case induced by his having become a twenty-something billionaire who was proclaimed a genius by powerful and wealthy people who praised him for thinking outside the box. For one who was a hero in a culture that prizes recklessness (“Move fast and break things”), it would have been uncharacteristic for a genius to run all his business plays by his lawyers. And anyway, he was assured by ethical experts that his soul was pure because his motives were unimpeachable.

So that is the Meaning I have drawn from this sad tale, as we await the completion of his criminal trial. It is a modest, law school level observation that even masters of the crypto universe must know about professional and fiduciary responsibility and that altruism must be tempered by such responsibility.

As a postscript, however, as the lesser-known details of the FTX bankruptcy sadly illustrate, Bankman-Fried may conclude from this experience that merely training lawyers about their professional responsibility may not be enough to prevent ethical lapses of the sort he committed. His counsel and several other people have accused Sullivan and Cromwell, one of the largest and most prestigious law firms in the country, of a massive conflict of interest arising from its representation of both FTX, as it advised him to file for bankruptcy, and the FTX bankruptcy trustee who later attacked those transactions. The bankruptcy court has rejected these challenges after Sullivan supplemented its disclosure.

Nevertheless, Bankman-Fried might well conclude that the Sullivan firm appears to have reasoned its way around apparent ethical barriers that would have stymied less prestigious, less sophisticated lawyers: It seems to be a professional flaw that an unconscionable fee doth make casuists of us all.

October 11, 2023 in Current Affairs, In the News, Recent Cases, Web/Tech | Permalink | Comments (0)

Thursday, October 5, 2023

Training Repayment Agreements in the News

Just yesterday, we posted about the debate over the FTC's plans to rein in non-competes.  One response has been Training Repayment Agreements (TRAs) or better still, Training Repayment Agreement Provisions (TRAPs). Thanks to guest contributions from Jonathan Harris (below left) here and here, as well as Miriam Cherry's review of Jonathan's work over at Jotwell, we have already been able to introduce readers to the topic.  Last week, H. Claire Brown published an article in The New York Times indicating how TRAPs work.

HarrisThe article begins with an illustration.  A physician assistant signed a TRAP when she began work, as part of the first day of work ritual at which your employer presents you with the take-it-or-be-unemployed terms of your employment.  The TRAP provided that she would be required to reimburse her employer $50,000 for on-the-job trainings she received if she left the job before 2025.  She left, providing four-months notice, and her former employer sued, seeking to recover $38,000 in training fees (a ridiculous valuation for the training the employee received) plus $100,000 (a suspiciously round and therefore almost certainly made-up number) supposedly representing loss of business.   One wonders on what theory they think they can recover such lost profits.

In a second illustration, we learn of another medical professional who took a job that paid $35,000/year.  After more than two years on the job, she tried to leave, and her employer sued her for $30,000 in training costs.

According to The Times, nearly 40% of nurses who joined the profession in the last decade have to sign a TRAP.  In California, TRAPs are already unenforceable if they amount to an attempt to shift training costs to employees.  They are only enforceable if designed to allow employees to improve their skills sets in ways that will benefit them throughout their careers.  Even so, The Times notes, the FTC has proposed rules that will ban TRAPs to the extent that they function as non-compete clauses.    Some states have already banned TRAPs.  

Jonathan Harris's spidey sense must have been tingling, because he just shared with us news of this story about the National Labor Relations Board suing an employer that allegedly subjects its employees to unlawful confidentiality, non-disparagement, non-compete, no-solicitation, and training repayment provisions.

October 5, 2023 in Contract Profs, Current Affairs, In the News, Labor Contracts, Recent Cases | Permalink | Comments (0)

Wednesday, October 4, 2023

The Short and and the Long of the Debate on Non-Competes

Arnow-Richman_Rachel_500x500 LobelThe Federal Trade Commission has proposed a ban on virtually all non-compete agreements.  Similarly bans are already in effect in California and other states.  Back in January, Rachel Arnow-Richman (left) and Orly Lobel (right) published The Business Case for a Nationwide Ban on Noncompetes in The Hill.  The piece is now available on SSRN, and that's how I got wind of it. 

As their title suggests, Professors Arnow-Richman and Lobel argue that non-competes are bad for business. They cite to a decade's worth of empirical evidence to back their claim. Noncompetes suppress wages and exacerbate pay gaps based on race and gender.  But they are not just bad for workers; non-competes also stifle entrepreneurship and innovation.  It is no coincidence that Silicon Valley, a center for economic dynamism and technological innovation, is located in California, which bans non-competes.  Eliminating non-competes can be especially helpful as we emerge from the Great Resignation associated with the COVID economy.  Medical professionals in particular need to have the ability to offer their services where those services are needed, notwithstanding competition with past employers. 

That is the short.  Now for the long.  

MeeseAlan J. Meese (right) has posted on SSRN his 136-page article, Are Employee Noncompete Agreements Coercive? Why the FTC's Wrong Answer Disqualifies It from Rulemaking (For Now).  I will not attempt to summarize his work.  Here is the abstract: 

The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of the Federal Trade Commission Act. The proposed rule reflects two complementary pillars of an aggressive new enforcement agenda championed by Commission Chair Lina Khan, a leading voice in the NeoBrandeisian antitrust movement. First, such a rule depends on the assumption, rejected by most prior Commissions, that the Act empowers the Commission to issue legislative rules. Proceeding by rulemaking is essential, the Commission has said, to fight a “hyperconcentrated economy” that injures employees and consumers alike. Second, the content of the rule reflects the Commission’s repudiation of consumer welfare and the Sherman Act’s Rule of Reason as guides to implementing Section 5.

Affected parties will no doubt challenge the Commission’s assertion of authority to issue legislative rules. This article assumes for the sake of argument that the Commission possesses the authority to issue such rules enforcing Section 5. Still, prudence can counsel that an agency refrain from issuing rules before it has fully educated itself about the nature of the economic phenomena it hopes to regulate. Such prudence seems particularly appropriate when the Commission has very recently adopted an entirely new substantive standard governing such conduct. Deferring a rulemaking does not mean inaction. The Commission could develop competition policy regarding NCAs the old-fashioned way, investigating and challenging such agreements on a case-by-case basis.

The Commission rejected these prudential concerns and proceeded to ban nearly all NCAs, assuring the public that it had educated itself sufficiently about the origin and impact of NCAs to conduct a global assessment of such agreements. The Notice of Proposed Rulemaking (“NPRM”) offered three rationales for the proposed rule, drawn from a late 2022 Statement of Section 5 Enforcement Policy. First, the Commission opined that NCAs are “restrictive” because they prevent employees from selling their labor to other employers or starting their own business in competition with their employer. Second, NCAs result from procedural coercion, because employers use a “particularly acute bargaining advantage” to impose such agreements. Third, NCAs are substantively coercive, because they burden the employee’s right to quit and pursue a more lucrative opportunity.

The first rationale applied to all NCAs. The second and third applied to all NCAs except those binding senior executives. Such executives, the Commission said, bargain for such agreements with the assistance of counsel and presumably receive higher salary and/or more generous severance in return for entering such NCAs. Because NCAs also have a “negative impact on competitive conditions,” the NPRM also concluded that they are presumptively unfair methods of competition.

The Commission conceded that NCAs can create cognizable benefits. Nonetheless, the Commission concluded that such benefits do not justify NCAs, for two reasons. First, less restrictive means can “reasonably achieve” such benefits. Second, such benefits do not exceed the harms that NCAs produce.

The Commission also rejected the alternative remedy of mandatory precontractual disclosure of NCAs for two interrelated reasons. First, such disclosure would not prevent employers from using overwhelming bargaining power to impose such restraints. Second, disclosure would not alter the number or scope of NCAs and thus would not reduce their aggregate negative economic impact.

The procedural coercion rationale played an outsized role in the Commission’s Section 5 analysis, informing the findings that NCAs are also “restrictive” and substantively coercive. Moreover, the outsized emphasis on procedural coercion dovetailed nicely with the NeoBrandeisian claim that ordinary Americans are routinely helpless before large concentrations of private economic power. Indeed, when the Commission released the NPRM, Chair Khan separately tweeted that NCAs reduced core economic liberties.

Still, the Commission offered no definition of “coercion” or explanation of how to determine whether employers have used coercion to impose NCAs on employees. Instead, the Commission articulated several subsidiary determinations regarding the characteristics of employers and employees that, taken together, established that employers always possess and use an acutely overwhelming bargaining advantage to impose nonexecutive NCAs. Thus, the Commission emphasized that labor market power is widespread, due in part to labor market concentration, most employees are unaware of NCAs before they enter such agreements, NCAs generally appear in standard form contracts, employees rarely bargain over such agreements, most employees live paycheck-to-paycheck and thus have no choice but to accept NCAs, and individuals negotiating over terms of employment discount or ignore the possibility that they will depart from the job they are about to accept and thus downplay the potential impact of an NCA on their future employment autonomy.

This article contends that the Commission’s procedural coercion rationale for condemning nonexecutive NCAs does not withstand analysis. In particular, the Commission’s various subsidiary determinations that support the procedural coercion rationale have no basis in the evidence before the Commission, contradict such evidence and/or disregard modern economic theory regarding contract formation. For instance, a recent study by two Department of Labor economists finds that the average Herfindahl-Hirschman Index in American labor markets is 333, the equivalent of 30 equally-sized firms, each with a 3.33 percent market share, competing for labor in the same market. A previous version of the study was published on the Department of Labor’s website several months before the Commission issued the proposed rule. The NPRM offers no contrary evidence regarding the proportion of labor markets that are concentrated. “Hyperconcentration of labor markets” is apparently a myth.

Moreover, the NPRM ignores record evidence that 61 percent of employees know of NCAs before they accept the offer of employment. The NPRM’s failure to address these data is particularly strange, insofar as the NPRM cites the very same page of the academic article where these data appear three different times for other propositions. The Commission also erred when it assumed that employers with labor market power will use such power coercively to impose even beneficial NCAs. This assumption would have made perfect sense in 1965. However, since the 1980s, scholars practicing Transaction Cost Economics have explained how firms with market power, including labor market power, will not use that power to impose beneficial nonstandard agreements, including NCAs. The Commission was apparently unaware of this literature.

Nor does the lack of individualized bargaining and reliance on form contracts suggest that employers use power coercively to impose NCAs. Form contracts often arise in competitive markets and reduce transaction costs. Background rules governing contract formation, robust state court review of NCAs and exit by potential employees can constrain employers’ ability to obtain unreasonable provisions and induce employers to pay premium wages to compensate employees for agreeing to NCAs. These considerations may explain why a majority of employees who had advanced knowledge of NCAs considered the agreements reasonable, a finding the NPRM ignores.

Nor does it matter that most employees work paycheck-to-paycheck. The Commission ignored the possibility that such individuals may be employed when seeking a new job, bargain from a position of relative security and can thus “walk away” from onerous NCAs. The Commission also ignored economic literature establishing that the presence of some such individuals in a labor market can ensure that employers offer reasonable terms to all potential employees, including unemployed job seekers.

Refutation of the procedural coercion rationale for banning nonexecutive NCAs requires reconsideration of the other two rationales as well. For instance, nonexecutive NCAs are the result of voluntary integration and thus not procedurally coercive or substantively coercive, either. Moreover, because some nonexecutive NCAs are voluntary, the Commission must abandon its erroneous assumption that the beneficial impacts of NCAs necessarily coexist with coercive harms. Proper assessment of business justifications requires the Commission to ascertain the proportion of NCAs that constitute voluntary integration, revise downward its estimate of coercive harms and reassess NCAs’ relative harms and benefits. This revision could result in a determination that NCAs’ benefits in fact exceed their harms. Finally, recognition that beneficial NCAs are the result of voluntary integration requires the Commission to reconsider the mandatory disclosure remedy, which the Commission rejected based on the erroneous belief that employers use bargaining power to impose even fully-disclosed and beneficial NCAs. Such reconsideration could of course lead to revising the scope of the proposed ban or rejection of any ban.

The Commission may well be entirely capable of assessing the global impact of NCAs on economic variables such as price, output, and wages. However, the Commission rejected such a rule of reason approach in favor of a standard that turns in part on the process of contract formation. Thus, the Commission necessarily took on the task of gathering information regarding the process of forming NCAs and of assessing that data in light of applicable economic theory. The Commission’s demonstrably poor execution of this task reveals that it lacks the capacity to conduct a generalized assessment of NCAs under a governing standard that treats procedural coercion as legally significant.

Because it lacks the capacity to assess the process of forming nonexecutive NCAs, the Commission should withdraw the NPRM and start over. There are two alternative paths the Commission may take to develop well-considered competition policy governing NCAs. First, the Commission could revert to the rule of reason approach it rejected in 2021. The Commission could draw upon its considerable study of the impact of NCAs on wages, prices and employee training and promulgate a rule that bans those agreements the Commission believes produce net harm, after reconsidering regulatory alternatives such as mandatory disclosure.

Second, the Commission could continue to embrace its new Section 5 standard but take an “adjudication only” approach to implementation. The Commission could simultaneously take other steps through various forms of public engagement to educate itself about contract formation in general and the formation of NCAs in particular. The Commission could build on data it has to this point ignored regarding various attributes of employers, employees and labor markets more generally. Adjudication and self-education could be mutually reinforcing. Self-education could inform the Commission’s determination of which NCAs to challenge, while information generated in adjudication could improve the Commission’s knowledge base about NCAs. Ultimately this two-track approach could generate sufficient information to justify a well-considered rule governing NCAs.

October 4, 2023 in Commentary, In the News, Labor Contracts, Recent Scholarship | Permalink | Comments (0)