ContractsProf Blog

Will Katie Perry Be Known for Music or the PERRY Act?

Today's post was another gift from Miriam Cherry, that Holmesian gatherer of rare gem-like contracts stories.  She is as indefatigable as Sherlock and as legally savvy as Oliver Wendell. 

Katy Perry, as far as I can recall, is famous for having been creative enough to coin a singular for "fireworks" but not creative enough to find a word that actually rhymed with "firework."  "Worth"?  Nope.  "Burst"?  Nope.  Here's one that might be coming to your minds now:  "Jerk."  She is also known for her "left shark" dancer below.  

But she also is very into real estate.  We reported before about her attempt to buy a convent. She won that case, and only one nun died in the process (that we know about).

More recently, according to TheRealDeal, she and her husband, Orlando Bloom, attempted to purchase the Montecito estate of Carl Westcott, of 1-800-FLOWERS fame.  The sale price was $15 million, but Mr. Westcott, who is now 84 years old and suffers from Huntington's Disease, claims that he was not of sound mind when he agreed to the sale, not necessarily because of age or disease, but because he had just undergone a six-hour back surgery, and he was on pain medication.  Three years later, the parties are still embroiled in litigation.  

In order to avoid such problems in the future, some have proposed the Protecting Elder Realty for Retirement Years Act, or Katy PERRY Act.  According to its website, 

The Katy PERRY Act addresses the risks of elder financial abuse, especially as it relates to property and real estate sales and transfers. The Act establishes a 72 hour cool-down period during which either party involved in a contract for conveyance of a personal residence, in which one party is over the age of 75, can rescind the agreement without penalty.

If that Act had existed a few years ago, it might have prevented a firework.

Tamar Meshel on the Revisions to the FAA

We are delighted to welcome Tamar Meshel (right) back as a guest blogger!

Dr. Tamar Meshel is an Associate Professor at the University of Alberta Faculty of Law. She researches, teaches, and consults primarily in the areas of domestic and international arbitration and her work has been cited by the Supreme Court of Canada, the Supreme Court of Israel, and the Delaware Court of Chancery, as well as by numerous scholars.

The New Chapter in the Life of the FAA

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (aka EFASASHA, EFASA, or EFAA)—codified at 9 U.S.C. §§ 401–02 (Chapter 4 of the FAA)—came into effect on March 3, 2022. It is the first substantive limit placed by Congress on the scope of the FAA since the statute was enacted nearly 100 years ago. The Act provides that “at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute . . . no predispute arbitration agreement . . . shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute” (§ 402(a)).

The Act also renders three arbitration principles inapplicable in sexual assault and sexual harassment disputes. First, it permits the unilateral revocation of a “joint, class, or collective action” waiver (§ 402(a)), which would otherwise be enforceable pursuant to AT&T Mobility LLC v. Concepcion. Second, it requires courts to decide the validity and enforceability of an arbitration agreement even where a party challenges the underlying contract rather than the arbitration clause (§ 402(b)), a challenge that would otherwise be decided by the arbitrator pursuant to the severability principle and Prima Paint Corp. v. Flood & Conklin Mfg. Co. Third, it requires courts to decide the validity and enforceability of an arbitration agreement even where the parties intended to delegate this determination to the arbitrator (§ 402(b)), a delegation that would otherwise be enforced pursuant to Rent-A-Center, West, Inc. v. Jackson.

At the same time, the Act gives rise to many questions that courts must now grapple with:

1. Chapter 4’s application to non-employment disputes

The most obvious context to which Chapter 4 applies is employment. Indeed, out of about two dozen cases that have considered Chapter 4 (that I’ve examined), all but two were in the employment context. In the two non-employment cases the plaintiffs were a patient in a care facility (Ferrell v. Imperial Care Center LLC) and a college student. In the former the court explicitly held that Chapter 4 applies to sexual assault/harassment claims that are not work-related or that do not arise from employment contracts. In the latter the court did not consider this question, because it found Chapter 4 temporally inapplicable (see below).

While the congressional record suggests a focus on employment disputes, nothing in the language of Chapter 4 restricts it to that context. So it is likely to be applicable in any case involving a sexual assault and/or sexual harassment dispute.

2. Chapter 4’s temporal application

Section 3 of the Act provides that it “shall apply with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act,” which is March 3, 2022. The courts have unanimously interpreted this provision to mean that Chapter 4 does not apply retroactively. Creative attempts to establish an “accrual” date post-March 3, 2022—for instance, when the defendant filed its motion to compel arbitration or when the Equal Employment Opportunity Commission issued a notice of right to sue—have failed. Courts have also rejected the following arguments: 1) that Chapter 4 eliminates the FAA’s pre-emption of state law that prohibits arbitration of sexual assault/harassment claims even if these “accrued” prior to March 3, 2022; 2) that Chapter 4 evidences a public policy that disfavours arbitration of sexual harassment/assault claims accruing before this date; 3) that Chapter 4 renders agreements to arbitrate such claims per se unconscionable; and 4) that individual claims accruing before March 3, 2022 may be saved by asserting class-wide claims on behalf of potential plaintiffs who may have been harmed after that date.

However, there is disagreement over when would be latest “accrual” date possible for the purpose of applying Chapter 4. Some courts have found the latest possible date to be when the plaintiff filed the lawsuit, while others have found that date to be when the alleged conduct occurred. In one case, Chapter 4 was found applicable to an alleged continuing violation (hostile work environment and retaliatory conduct) that spanned both before and after March 3, 2022. The U.S. District Court of the Eastern District of New York held that pursuant to the “continuing violation” doctrine, the plaintiff’s claims “accrue on the day of the last act in furtherance of the violation,” which in the context of the hostile work environment and retaliatory conduct claims continued after March 3, 2022.   

It also remains unclear what, if any, is the difference between a “dispute” and a “claim” and between “arises” and “accrues” in § 3. For instance, the U.S. District Court for the Southern District of New York found no meaningful difference and suggested that the Act refers to both “claims” and “disputes” simply “in order encompass various kinds of proceedings.” The U.S. District Court for the Southern District of Florida (in Hodgin v. Intensive Care Consortium Inc.) disagreed and separately considered whether the plaintiff’s “claim” had “accrued” (meaning she had a “complete and present cause of action”) before March 3, 2022 and whether her “dispute” had “arisen” (meaning there was a “disagreement, not just the existence of an injury) before that date.

While the “accrual” date has been hotly contested in the courts, as time passes this issue will become less relevant to the application of Chapter 4.

3. Standard for pleading a sexual assault/harassment dispute

In three cases, the U.S. District Court for the Southern District of New York has considered the standard that a plaintiff must meet in order for § 402(a) to invalidate an arbitration agreement. The court in some of these cases also considered whether meeting this standard should prohibit arbitration of the entire “case” or only of the sexual assault/harassment claims.  

Johnson v. Everyrealm and Yost v. Everyrealm involved claims brought by two former employees against the same employer for sexual harassment under the New York State Human Rights Law and the New York City Human Rights Law (which the court found to qualify as “state law” under § 402(a)), as well as for whistleblower retaliation and intentional infliction of emotional distress. Mera v. SA Hospitality Group involved claims for sexual harassment under the same New York laws as well as wage and hour claims brought under the Fair Labor Standards Act and the New York Labor Law on behalf of a group of employees.   

In all three cases, the district court held that the plaintiffs were required to meet the FRCP Rule 12(b)(6) standard of plausibility with respect to their sexual harassment claims, and that once that standard was met, all “related” claims in the action would also be non-arbitrable.

In Johnson, Judge Engelmayer held that the plaintiff had plausibly pled a claim of sexual harassment under the New York City Human Rights Law and therefore Chapter 4 applied. Judge Engelmayer acknowledged that the FAA permits the splitting of arbitrable from non-arbitrable claims. Yet he also found a “contrary congressional command” in § 402(a), which makes a pre-dispute arbitration agreement invalid and unenforceable “with respect to a case which is filed under Federal, Tribal, or State law and relates to the ... sexual harassment dispute.” Therefore, Judge Engelmayer concluded that a well-pled sexual harassment claim makes an arbitration clause unenforceable “as to the other claims in the case.” He noted, however, that because the plaintiff’s claims all arose from his employment, he was not considering whether “claim(s) far afield might be found to have been improperly joined with a claim within the EFAA so as to enable them to elude a binding arbitration agreement.”   

Applying these principles in Yost, Judge Engelmayer found that the plaintiff’s factual allegations in support of a claim of sexual harassment were “threadbare” and failed to allege a “plausible claim” of sexual harassment under the New York City Human Rights Law. Judge Engelmayer therefore dismissed the plaintiff’s sexual harassment claims. He then held that, as a result, Chapter 4 could not prevent the arbitration of the remaining claims.  

Finally, in Mera, Judge Aaron found that the plaintiff had plausibly pled a claim of sexual harassment under the New York State Human Rights Law, and therefore that claim could not be arbitrated. However, he found that § 402(a) rendered arbitration agreements unenforceable “only with respect to the claims in the case that relate to the sexual harassment dispute.” Unlike in Johnson, the plaintiff’s wage and hour claims in Mera did not “relate in any way to the sexual harassment dispute.” Therefore, the plaintiff was compelled to arbitrate those claims. The action was stayed with respect to the wage and hour claims pending arbitration, while the sexual harassment claims proceeded in court.

The fate of claims joined with a sexual assault/harassment dispute may thus turn on how “related” they are to that dispute. This means that claims that are not directly sexual assault/harassment claims but are related to the underlying conduct may become non-arbitrable as long as the sexual assault/harassment claims are plausibly plead in the same “case”. In contrast, plaintiffs may not be able to easily bootstrap claims that are entirely unrelated to the underlying conduct or to the plaintiff’s sexual assault/harassment dispute in order to render them non-arbitrable.

These are still early days for FAA Chapter 4, and some of the cases discussed above are currently pending appeal. It is also important to note that neither the Act nor Chapter 4 of the FAA address other mechanisms that are used to avoid the litigation and/or the publication of conduct underlying sexual assault/harassment disputes, such as settlement agreements, confidentiality agreements, and NDAs.

SCOTUS Decided a Case That Purported to Be About Contracts!

The issue in the case was whether nursing home residents could vindicate their rights under the Federal Nursing Home Reform Act (FNHRA) in court.  At issue in the case were the rights to be free from unnecessary physical or chemical restraints and to be discharged or transferred only when certain preconditions are satisfied.  Ms. Talevski believed that 42 U.S.C. § 1983 provided the jurisdictional hook to get her to court because it provides for a cause of action for any person deprived of rights secured by the Constitution and laws "under the the color of state law;" that is, through state action.  Of note to contracts junkies, the petitioners in the case, Valparaiso Care and Rehabilitation's nursing home (VCR), claimed that laws that derive from Congress's Spending Power are not "laws" for the purposes of § 1983.  Rather, they are "contracts," and people like Ms. Talevski are third-party beneficiaries of those contracts.  Hence, the argument goes, § 1983 does not provide a basis for individual enforcement of the FNHRA.

In Health and Hospital Corporation of Marion County v. Talevski, the U.S. Supreme Court, per Justice Jackson (right) rejected VCR's arguments in a 7-2 ruling.  Ms. Talevski brought her action, alleging mistreatment of her husband, whose dementia progressed with shocking rapidity once he became one of VCR's residents in 2016.  According to the allegations of the complaint, VCR medicated Mr. Talevski into heightened dementia.  When Ms. Talevlski discovered the problem and had his medication tapered until his mental condition was restored, VCR accused him of harassing female staff and eventually used this as grounds to have him transferred to a separate facility 90 minutes removed from his family and kept him there, in violation of a court order.  

When Ms. Talevski brought her case on behalf of her husband in 2019 against VCR and related entities, known collectively in the litigation as HHC.  The District Court granted HHC's motion to dismiss, holding that no party could enforce the FNHRA through a § 1983 action.  The Seventh Circuit reversed.  

The case comes down to a dispute over the continued force of the Court's statement in Maine v. Thiboutot, 448 U. S. 1 (1980) that "laws" in § 1983 means "laws."  Building on dictum in Pennhurst State School and Hospital v. Halderman, 451 U. S. 1, 17 (1981), HHC and the dissenters argue that laws passed pursuant Congress's spending powers are not laws.  In Halderman, the Court noted that such laws are “much in the nature of a contract,” because, “in return for federal funds, the States agree to comply with federally imposed conditions.”  If FNHRA is a contract, then Ms. Talevski is a third-party beneficiary of that contract, and under the common law of third-party beneficiaries at the time that § 1983 was adopted, third-party beneficiaries could not sue to enforce contractual rights.  

Justice Jackson disposes of this syllogism with a one-two punch.  First, relying on an amicus brief from contracts scholars, led by Friend of the Blog, Mel Eisenberg(!), Justice Jackson attacked HHC's factual claim that the common law did not recognize the rights of third-party beneficiaries to sue to enforce contractual rights.  Second, she noted that the claim arises in tort, not in contract, and so the entire notion that contracts law might apply here is "at the very least, perplexing." 

Justice Thomas, writing in dissent, does not find the notion perplexing.  He argues that treating rights arising under laws enacted pursuant to Congress's Spending Clause power creates problems with the anti-commandeering doctrine.  Although Justice Gorsuch concurred in the majority opinion, he wrote separately to note the anti-commandeering issue, which the parties did not raise in this case.  Storm clouds gather on the horizon.

Detroit Institute of Art Settles Dispute over Provenance of a Van Gogh

When I was in practice, one of the partners in my firm was a prominent art lawyer.  His cases were fascinating.  One involved a well-known art dealer who was given a painting to show at various galleries but then sold it and fled the country.  I can't remember whether he was covering gambling debts or paying for a divorce.  It was one of those.  The partner told me, in essence, "These things happen."  Even though the works of art are worth millions, people's livelihoods depend on their reputations, and so transactions are done based on handshakes and relationships.  The players all know each other, so the danger of conversion is thought to be small.  Until it isn't. 

When I teach Sales, I sometimes come across such cases, and they implicate the doctrine of entrustment under UCC § 2-403(2), which provides:  "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business."  I suspect there was an entrustment issue involved in the controversy between Brazilian collector Gustavo Soter and the Detroit Institute of Art (DIA) over Vincent Van Gogh's painting, Une liseuse de roman (above).   

Claire Voon reported for The Art Newspaper in January that the painting was on loan to DIA.  Mr. Soter alleged that the painting had been stolen from him.  Mr. Soter claimed that he had bought the painting for $3.7 million and then transferred it to an unnamed third party without relinquishing title to it.  That unnamed third party then allegedly absconded with the painting and its whereabouts were unknown for years. U.S. District Court Judge George Caram Steeh found that the museum was blameless but encouraged the parties to settle their dispute, and ordered DIA not to allow the painting to be moved until the matter was settled. The exhibit of which the painting is a part was set to close at the end of January, and so the court ordered DIA to hold onto the painting until the matter could be resolved

The museum took the position that, under the federal Immunity from Seizure Act, no court could tell it what to do with the painting, as it had exercised due diligence before accepting the painting for exhibition.   It argued that the complaint should be dismissed.  Otherwise, the argument goes, foreign lenders would not send their paintings to be exhibited in the United States.  Courts could issue injunctions, and the paintings could be held in limbo.  

Fortunately, as Ed White reported in Fortune, in March Mr. Soter and Brokerarte Capital Partners LLC, his sole-owned company, reached a deal with the unnamed entity that transferred the painting to DIA.  Now the painting can be released from captivity, but the details of the deal are otherwise unknown.  While Mr. Soter dropped his claim for injunctive relief.  However, as of March, DIA did not consider the matter resolved.  It wanted the District Court vacate its decision granting the injunction so as to deprive it of precedential value.  

. . . And Forty Pages Later, We Know What "From" Means in Texas

As a graduate student, I learned that, because of imperfections in the human mind and in language, we usually fail to express any one true meaning in words.  As litigators trying to win for my client on a motion to dismiss, my colleagues and I often tried to persuade courts that contractual language had only one true meaning.  We often succeeded.  In my work on constitutional law, I reverted to my graduate-student approach to language, with a helping hand from James Madison (right):

Besides the obscurity arising from the complexity of objects, and the imperfection of the human faculties, the medium through which the conceptions of men are conveyed to each other adds a fresh embarrassment. The use of words is to express ideas. Perspicuity, therefore, requires not only that the ideas should be distinctly formed, but that they should be expressed by words distinctly and exclusively appropriate to them. But no language is so copious as to supply words and phrases for every complex idea, or so correct as not to include many equivocally denoting different ideas. Hence it must happen that however accurately objects may be discriminated in themselves, and however accurately the discrimination may be considered, the definition of them may be rendered inaccurate by the inaccuracy of the terms in which it is delivered. And this unavoidable inaccuracy must be greater or less, according to the complexity and novelty of the objects defined. When the Almighty himself condescends to address mankind in their own language, his meaning, luminous as it must be, is rendered dim and doubtful by the cloudy medium through which it is communicated.

I would belatedly attach as Exhibit A to Federalist #37 a recent 40-page opinion.  In Apache Corporation v. Apollo Exploration, LLC, the Supreme Court of Texas ably rendered the word "from" intelligible.  It began by recalling the common law rule that, in a contractual context, if the parties say that that are bound for one year, beginning from June 30th, they are bound until June 30th the following year, not until June 29th.  Because of the complex factual context, however, it does indeed take forty page to establish that, in this context, in this jurisdiction, unless altered by the parties, the common-law meaning of "from" is fixed, or at least, as Madison put it farther up the same paragraph, "liquidated."

Well, maybe it doesn't take quite 40 pages to work out what "from" means.  The facts of the case are pretty complicated.  But there is a part of the opinion that will definitely have you humming "What a difference a day makes."  In this case, because of wildly fluctuating prices and land values, "according to Apache, approximately $180 million of potential damages rides on the answer to whether the North Block portion of the lease expired on New Year’s Eve or New Year’s Day." 

Because the lease's primary term end date was January 1, 2010, after various extensions, under the common law rule, the lease at issue would terminate on January 1, 2016.  The parties could have departed from the common law rule; however, the lease in question manifested no intention to do so.

Thanks to members of the AALS Contracts Listserv, from which I learned that New York addressed this in a statute, NY General Construction Law § 20. 

A number of days specified as a period from a certain day within which or after or before which an act is authorized or required to be done means such number of calendar days exclusive of the calendar day from which the reckoning is made.  If such period is a period of two days, Saturday, Sunday or a public holiday must be excluded from the reckoning if it is an intervening day between the day from which the reckoning is made and the last day of the period.  In computing any specified period of time from a specified event, the day upon which the event happens is deemed the day from which the reckoning is made.  The day from which any specified period of time is reckoned shall be excluded in making the reckoning.

New York's Court of Appeals then made clear that the rule in § 20 applies in contractual as well as statutory contexts.  Messina v. Lufthansa German Airlines, 390 N.E.2d 758 (N.Y. 1979). 

Georgia Court Enforces One-Year Statute of Limitations in a Wrongful Death Case

In BPG Inspection v. Omstead,  BPG agreed to a fee of $380 to conduct an inspection of the home that the Omstead's were considering purchasing.  The key contractual language at issue ran as follows:

YOU MAY NOT FILE A LEGAL ACTION, WHETHER SOUNDING IN TORT (EVEN IF DUE TO OUR NEGLIGENCE OR OTHER FAULT), CONTRACT, ARBITRATION OR OTHERWISE, AGAINST US OR OUR EMPLOYEES MORE THAN ONE YEAR AFTER THE INSPECTION, EVEN IF YOU DO NOT DISCOVER A DEFECT UNTIL AFTER THAT. THIS TIME LIMIT MAY BE SHORTER THAN THE LAW OTHERWISE PROVIDES.

A BPG employee undertook the inspection in February 2020 and provided a report that cautioned that the inspector's role was to identify material defects discovered upon visual examination.  "Latent, inaccessible, or concealed defects are excluded from this inspection."  The report mentioned a seven-foot tall retaining wall but observed that it seemed to be functioning as intended.  The inspector returned one month later in connection with some repairs that the Omstead's had requested of the sellers.  

The Omsteads later discovered that defects in the retaining wall was causing water to leak into their garage.  While they were attempting to address those defects in July 2021, the wall collapsed onto Mr. Omstead, and he died from his injuries. In September 2021, Mrs. Omstead filed suit against BPG and its inspector, alleging negligence, fraud, breach of contract, and breach of warranty.  The trial court denied summary judgment to defendants, finding its exculpatory clauses void as against public policy.  

In January, the Georgia Court of Appeals dismissed this case based on the one-year limitation on claims. Under Georgia law, such a limitation can be enforced, even in the case of a wrongful death suit.   The Court of Appeals stressed the courts' limited ability to find contractual provisions void for violating public policy.  The court canvassed Georgia statutes, including statutes that provide for the invalidity of some categories of contracts on public policy grounds.  It could find no statutory basis for invalidating the limitation at issue in this case, nor did it find any precedent that would permit it to do so consistent with Georgia law.  

Judge Barnes specially concurred.  Although she agreed that the majority had correctly applied existing law, she wrote separately to urge the legislature "to enact legislation prohibiting parties from contractually shortening the statute of limitation for bringing tort claims arising out of personal injury or wrongful death."  She noted that legislatures in Alabama, Mississippi, and South Carolina have already done so.  Hooray for inter-branch dialogue!  

And yet, I'm not sure if Alabama, Mississippi, and South Carolina have this one right.  Given the limited scope of the inspection and the low fee charged for it, limiting exposure to liability makes a lot of sense.  From the facts we have, it does not look like plaintiff would have a strong case, even if there were a way around the one-year limitation on claims.  These were latent defects, not discoverable without specialized expertise.  If the leak was substantial, there might have been evidence of water damage, but perhaps the problem was really that sellers concealed that damage.  So many possibilities.  And given that water slowly erodes at surfaces, I'm not sure how a trier of fact winds back to the clock to determine whether the problems that caused the wall to collapse should have been detectable fifteen months earlier.  

Saving Bitcoin (Yes, Really!): The 2022 Uniform Commercial Code Amendments

A great thing is happening in commercial law as I type these words: Musty corners of the Uniform Commercial Code are in the process of being brought up to date to deal with the realities of twenty-first century commerce. The 2022 UCC Amendments now being considered in state legislatures across the country are replacing the "writing" requirements baked into Article 2 (Sales), Article 3 (Negotiable Instruments) and elsewhere with the more flexible "record" that can be electronic or written and represents commercial reality. The comprehensive system of secured lending contained in Article 9 is being updated as well. These revisions will provide a stable system of rules that address once-unimagined electronic assets like NFTs (non-fungible tokens) and cryptocurrency to enable them be safer and more attractive forms of collateral because of the certainty with which a lender can secure its position.

So yes, that "electronic basketball card" NFT your cousin bought last year could actually end up being pledged as collateral that helps that cousin get a loan. As Yakov Smirnoff used to say, "What a country!"

But I digress. To this professor of payment systems law, the most exciting part of the package of 2022 UCC amendments is new Article 12, entitled "Controllable Electronic Records." Article 12 creates state commercial law rules to govern blockchain assets like bitcoin and other cryptocurrency, as well as any other technology (present or future) where a purely digital record is capable of being under exclusive control.

For those unfamiliar, the paradigm-changing innovation brought about by bitcoin circa 2009 was that, through blockchain programming methodology, it allowed for the creation of a digital token that could not be copied (or in currency terms, counterfeited). A thought experiment with paper currency will demonstrate how useful blockchain programming actually is. While counterfeiting is an occasional problem for paper currency like the U.S. dollar, imagine the disaster for the use of cash as a store of value if any trickster with a photocopier could make unlimited and undetectable copies. Eventually, no one would accept cash as payment. Why would you when you could just as easily print your own? Increased money supply facilitates inflation, which is bad enough, but an infinite increase in the money supply would eventually reduce its value to zero.

The trouble with digital files, then, is that they are susceptible to the infinite creation of perfect copies. Bitcoin changed all that through blockchain programming. Because of verification on a decentralized computer network, only one bitcoin token could demonstrably exist as the verified real thing, even in the face of dozens of ostensible duplicates. In payment system terms, this means that bitcoin solved the "double-payment" problem preventing the creation of a digital and decentralized asset. Yay for bitcoin!

But not quite. The creation of non-counterfeitable digital assets has spawned (and is continuing to spawn) numerous applications, such as "trading card" collectable NFTs, digital shareholder governance, smart contracts, and even the possibility of marketable electronic title for real property. Meanwhile, bitcoin and its crypto-progeny have fallen quite short on the original use case for blockchain: a mainstream payment system. Instead, cryptocurrency has become largely the province of high-risk speculative investment and hobbyists. The recent collapse of the FTX cryptocurrency exchange and some high profile crypto-heavy commercial banks suggests that pure speculation is ultimately not a viable path forward. What bitcoin-and-company are truly lacking is widely accepted use as a payment system.

UCC Article 12 is primed to change that. It creates the legal safeguards and commercial certainty that bitcoin needs break out of its niche. Article 12 does this by establishing a basic legal regime for the ownership and transfer of "controllable electronic records"—a category that includes all decentralized cryptocurrency. Rather than focus on physical concepts of possession, the UCC revisions focus on control, as shown in this excerpt from subsection (a) new section 12-105:

§ 12-105. Control of Controllable Electronic Record.

(a) [General rule: control of controllable electronic record.] A person has control of a controllable electronic record if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded:

(1) gives the person:

(A) the power to avail itself of substantially all the benefit from the electronic record; and

(B) exclusive power, subject to subsection (b), to:

(i) prevent others from availing themselves of substantially all the benefit from the electronic record; and

(ii) transfer control of the electronic record to another person or cause another person to obtain control of another controllable electronic record as a result of the transfer of the electronic record; and

(2) enables the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having the powers specified in paragraph (1).

This provision is technology neutral. It clearly covers blockchain assets like bitcoin while still leaving room for other technological innovation in the realm of decentralized digital assets. The only inquiry in connection with making a transaction occur is the existence of control, and the ability to transfer it to another. Article 12 gives bitcoin the legal certainty that existed for centuries in the world of commercial paper by establishing a clear and comprehensible regime of control to stand in the place of the (literally impossible for bitcoin) regime of physical possession.

And there is much more. What good is digital value as a cash substitute if you can't spend it? New Article 12 takes care of that by adapting the centuries-old regime that made a success of commercial paper: negotiability. While the musty negotiable instruments term of "holder in due course" does not appear in the statutory text of Article 12, the definition of a "qualified purchaser" is clearly inspired by it. Section 2-102(a)(2) provides:

“Qualifying purchaser” means a purchaser of a controllable electronic record or an interest in a controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record. 

What then is the result of being a qualified purchaser, of (for instance) taking bitcoin as payment in exchange for vale, in good faith, and without notice of a claim to asset? Article 12 provides that the party taking the bitcoin takes it free-and-clear as against anyone else in the world. Subsection (e) of section 12-104 provide for this important commercial law legal right:

§ 12-104. Rights in Controllable Account, Controllable Electronic Record, and Controllable Payment Intangible.

[* * *]   

(e) [Rights of qualifying purchaser.] A qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.

Now,let's tie this all together. Based on the above statutes, a seller of goods or services now knows—from a legal perspective—exactly what it must do to accept cryptocurrency payments with the assurance that the transaction is not going to be undercut by an unknown party. If Joe's Hardware Store takes the steps necessary to obtain "control" of bitcoin and it does so as a "qualifying purchaser" of the bitcoin in exchanging its valuable goods and services for that bitcoin, then the transaction is complete. Period. No one else can show up on Joe's doorstep and claim a lien or other legal right to the bitcoin. The legal uncertainties that arise from taking this "mysterious" cryptocurrency as payment are now resolved. It works with as much certainty as credit cards, checks, or—dare I say it—cash.

The 2022 amendments to the Uniform Commercial Code are set to play a crucial role in "saving" bitcoin by empowering it and other cryptocurrency to live up to its original potential, not as some quirky, speculative investment, but as an actual payment system.

Texas AG Ken Paxton Seeks to Scuttle Settlement With Whistleblowers

Image by Gage Skidmore

While I was in Texas for KCON, I came across this news article from James Barragán in The Texas Tribune.  In short, Texas Attorney General Ken Paxton (right) agreed to a $3.3 million settlement with eight whistleblowers who worked with him and were terminated or resigned after accusing him of corruption and abuse of office.  They agreed to pause their suit against General Paxton so that a payment of the settlement could be arranged. 

General Paxton now thinks the pause should to continue indefinitely, and plaintiffs have had to return to court to ask the court to allow the case to proceed.  The Texas legislature is refusing to approve the payment, and Paxton is now arguing that the whistleblowers, having agreed to a settlement that cannot be implemented, should walk away with nothing.  If the legislative session that ends on May 29th awards them nothing, they can wait, General Paxton avers in a legal filing, until the next legislative session . . . in 2025 and then 2027, and so on.

It seems an important commentary on our time that the incredibly powerful Attorney General of our second-most populous state should engage in corruption atop corruption and it doesn't even merit national news.  My quick Google search turned up no reporting on the issue in the national press.  General Paxton boasts on his website that he brought suit against the Obama Administration 27 times in two years.  Sixteen months into the Biden Presidency, General Paxton had already brought 25 challenges to that administration's policies.  It is hard to keep straight all of the cases that the U.S. Supreme Court has heard in the past few years that are captioned Texas v. United States.  And yet, news of significant corruption and abuse of legal process by a politician with a national impact merits little more than a shrug and a sigh.  I spoke with some friends from Texas about the story, but they could not disentangle this story about corrupt politicians from all the others and responded with hopeless resignation.

The settlement agreement included a provision for an apology from Paxton to his former subordinates.  There are no reports that General Paxton has issued the apology.  The Texas Legislature apparently has no interest in using taxpayer dollars to pay for a settlement that would resolve General Paxton's legal problems in this case.  People interested in learning about the other legal fixes for which General Paxton has never been held accountable, including two indictments for securities fraud which somehow, after seven years, still have not gone to trial, can read about them in the Texas Monthly.  

The Texas Montly also provides a litany of complaints about the inefficacy of General Paxton's office in fulfilling its primary mission -- addressing crime in Texas.  That's as may well be, but from this blog's perspective, there's just one legal delict that matters: breach of contract.

Sid DeLong on Loan Forgiveness and Injunctions (Preliminary and Nationwide)

NATIONWIDE IS ON OUR SIDE: LESSONS FROM THE STUDENT DEBT INJUNCTION
Sidney W. DeLong

In Nebraska v Biden, several states sued the Biden Administration to enjoin the Secretary of Education from implementation of the impending student debt “forgiveness” program under the under the Higher Education Relief Opportunities for Students Act (HEROES Act). The grounds were that that it was unauthorized by the Act and unconstitutional.

Plaintiffs sought a nation-wide preliminary injunction blocking implementation of the plan in a Texas district court, which denied relief on jurisdictional grounds, finding that the plaintiffs lacked standing to sue. In the linked opinion, the Eighth Circuit Court of Appeals unanimously reversed and granted an “injunction pending appeal.”[1] The opinion has several features of interest relating to so-called “nationwide preliminary injunctions.”  

Last month, the Supreme Court heard oral argument on the standing issue.  The Circuit Court held that the state of Missouri had standing to sue because a Missouri governmental agency, the Missouri Higher Education Loan Authority (“MOHELA”), obtained revenue as a result of “servicing” student debt, i.e. collecting loan payments.

The Supreme Court will probably rule in a way that renders the Eighth Circuit’s holdings on the injunction issues moot. But the reasoning that court used is of interest on the matter of nationwide preliminary injunctions.

Irreparable Injury

“It is alleged MOHELA obtains revenue from the accounts it services, and the total revenue MOHELA recovers will decrease if a substantial portion of its accounts are no longer active under the Secretary’s plan.” The Circuit Court held that such harm to MOHELA would irreparably harm the state of Missouri, either directly if MOHELA is part of the state for these purposes or indirectly because of its potential effect on state revenues.

The concept of injury here seems questionable. Who is injured when the government “forgives” a federally guaranteed student loan? Because of the guarantee, lenders and their assignees will be fully paid by the government (the taxpayers) in accordance with the loan guaranty program. Insofar as MOHELA is an assignee of student loans, it will be paid in full.

What about collection agencies whose income comes from the fees they obtain in servicing student loans? Presumably, if the loans are forgiven and the debts are repaid by the government and not by individual payments, there would be no further need to “service” the loans. As was acknowledged in the Supreme Court argument, this loss of fees would give collection agencies enough of an interest to have standing to sue. But since when does a collection agent have a legally enforceable right to the continuation of a debt it services? It seems unlikely that the contract be the creditor and the collection agent gives the agent such a right. Only if the “collection agent” is actually an assignee of the debt, which is not alleged in this lawsuit, then the assignor’s cancellation of the debt would certainly violate the assignee’s rights. But settlement did not affect the holders of the debt because the federal guarantee assures against any loss.

Even if a collection agent had a legally protectable interest in the servicing fees from a debt, violation of that interest would not cause an irreparable injury, giving the agent a general power to enjoin the settlement. An award of money damages would completely compensate for such financial loss. For the same reason, a damages award would compensate any entities, such as the state of Missouri, who derive benefits from the collection of those fees.

There is nothing irreparable about the threatened loss.

The sliding scale test for a preliminary injunction.

Ever since the decision in Winter v Natural Resources Defense Counsel, Inc., 555 U.S. 7 (2008), the Circuits have split on the correct test to apply in ruling on a preliminary injunction. The Winter majority propounded a four-part test in which each element must be established. Justice Ginsburg in dissent argued that courts could continue to use a “sliding scale” test, in which a strong showing of risk of harm might outweigh a weaker showing of likelihood of success on the merits.  In the years following Winter, circuits have split over which test to use.

The Circuit court applied a version of the sliding scale test, finding that a federal preliminary injunction is warranted: “where the movant has raised a substantial question and the equities are otherwise strongly in his favor, the showing of success on the merits can be less.”

But Nebraska seems to be a case like Winter, in which the party seeking the preliminary injunction has a strong case on the merits (given the Supreme Court’s likely resolution of the loan forgiveness validity question) but a weak case on irreparable harm (speculative losses of servicing fees).

Nationwide Injunctions. In a nationwide injunction, a court orders the U.S. government defendant to abate a national program even though the claim at issue is brought on behalf of only a few plaintiffs. But for a court to issue a nationwide injunction upon a showing of only localized harm violates a fundamental equitable principle of injunctive relief: An injunction order must be narrowly tailored to address only the specific irreparable injuries that the plaintiffs have demonstrated will result to them and the injunction must be justified by the balancing of the particular equities of the parties in the case. See generally, Laycock and Hansen, Modern American Remedies (5^th Ed.) Absent a class action, an individual plaintiff should rarely or never be entitled to enjoin a governmental defendant’s actions relating to other parties.

Despite these criticisms, and rather like the storied bumblebee that scientists proved was incapable of flight, the nationwide injunction is now a fact of life and has become the go-to strategy of both the Team Blue (e.g., in actions to enjoin Trump’s immigration policies) and Team Red (in the actions to enjoin the Affordable Health Care Act).

That is not to say that nationwide injunctions are not problematic from a practical basis. Because any district court can issue a nationwide injunction, forum shopping is an essential litigation strategy. Progressives typically file in New York hoping for an Obama judge; Conservatives typically file in Texas hoping for a Federalist Society judge. And the chance always remains that different district courts will issue conflicting temporary restraining orders or preliminary injunctions against an agency, making it impossible to comply with them all.

Members of the DC Mafia as imagined by Justice Kagan
Image by DALL-E

Although such a suggestion is fraught, perhaps the Court should consider issuing a rule that all actions seeking to enjoin a federal agency must be temporarily transferred to a single forum, e.g., a court sitting in the District of Columbia. They could be retransferred after disposition to the court where filed.

The Circuit Court held that a nationwide injunction was appropriate in Nebraska v Biden because the plaintiff obtained loans from around the nation and because it would have been unfeasible to tailor the order to block forgiveness of the specific loans as to which the plaintiff needed relief. The opinion states that “MOHELA is purportedly one of the largest nonprofit student loan secondary markets in America. It services accounts nationwide and had $168.1 billion in student loan assets serviced as of June 30, 2022.”

Nebraska thus adds another factor to be considered in issuing a nationwide injunctions, which is that they are warranted when the plaintiff’s claims are so numerous and geographically widespread that it is unfeasible to disentangle them from the government’s other activities. This factor certainly seems to distinguish Nebraska v Biden from the immigration cases where the orders could be limited to the plaintiffs.

Of course, as the Legal Realists will point out, the resolution of this case will not turn on the law of injunctions or of nationwide injunctions but upon the Supreme Court’s view of the legality of the debt forgiveness order, a question about which there seems to be little dramatic uncertainty.

[1] While the court appears to have granted the preliminary injunction, the exact effect of the ruling is unclear: (“We GRANT the Emergency Motion for Injunction Pending Appeal. The injunction will remain in effect until further order of this court or the Supreme Court of the United States.”) It is unclear to this author whether this is a stay pending the Circuit Court resolution of the preliminary injunction appeal or an injunction pending resolution of an eventual appeal on the merits of the substantive claim.)

Consumer Finance Protection Bureau Proposes Registry of Non-bank Entities Adhesive Boilerplate Terms

Back in January, the Consumer Finance Protection Board (CFPB) announced that it was creating a Registry of Supervised Nonbanks that Use Form Contracts to Impose Terms and Conditions that Seek to Waive or Limit Consumer Legal Protections.  The proposal and explanation run to 223 pages.

If you want the tl/dr version, CFPB Director Rohit Chopra (below, right) explains the reasons for the registry here.  The gist is that the CFPB does not like one-sided form contracts and terms of service.  One practice that Director Chopra highlights is "gag rules" that prohibit or even threaten to fine users who post negative comments about a product or website.    Another is contractual waivers that prevent consumers from suing companies, even thought those companies reserve their own right to sue their users or customers.  

Congress has already enacted the Consumer Review Fairness Act, which prohibited “gag clauses” in certain form contracts.  In so doing, Congress built on a tradition in U.S. law of ensuring that standard form contracts are free of coercive or onerous terms.  Similar regulation is in place Australia, Japan, the United Kingdom and the European Union.  The American Law Institute's new Restatement of Consumer Contracts Law recognizes the right of consumers to challenge not only unconscionable contracts but also the terms and conditions adopted as a result of a deceptive act or practice.

Director Chopra identifies the proposal as having three main features:

Our proposal has a number of key features:

First, the registry would help regulators and law enforcement more easily detect when companies are offering products and services using prohibited, void, and restricted contract terms described above. This would be especially useful to state and tribal regulators with limited resources to alert or take action against companies violating the law.

Second, the registry would assist the CFPB and the public to understand the types of terms and conditions that are in use in today’s marketplace, and their effect on the adequacy of underlying consumer financial protection laws that are being waived or limited. This would allow the CFPB and others to study the use of these terms, along with their risks and benefits, to inform our research, consumer education, and other functions.

Finally, the registry would inform how the CFPB conducts its supervision of nonbank financial companies. While banks and credit unions are subject to routine examination by regulators, many nonbank companies are not. The CFPB would use data from the registry to identify supervised nonbanks and the risks their terms and conditions pose, prioritize which firms to examine, and plan the scope of those exams.

Let's hope that SCOTUS allows the CFPB to continue its important work in the realm of consumer protection.

LPE Project on the Proposed FTC Ban on Non-Competes

We posted last week on the proposed new FTC rule that would impose severe limits on non-compete provisions in employment contracts.  

The Law and Political Economy Project has posted eight perspectives on the proposed rule.  It's a great collection.  Recommended reading!

 

FTC Puts the Kaibosh on Non-Competes

Lina Khan, FTC Chair

The Federal Trade Commission (FTC) has proposed a new rule limiting what it calls unfair methods of competition.  The rule, after some definitional mumbo-jumbo, is pretty straightforward and incredibly sweeping.  First the proposed rule provides:

(a) Unfair methods of competition. It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

Boom!

But wait, you say.  What about all currently existing non-competes?  The FTC is not done yet:

(b) Existing non-compete clauses.

(1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.

Boom!

The rest is notice requirements and narrow exceptions.  Employers would have 180 days from the effective date of the proposed rule to comply with the rescission requirement.

According to the FTC, non-competes suppress wages.  The FTC estimates that its proposed rule would increase workers’ earnings between $250 billion and $296 billion per year.

BOOOM!

Expect legal challenges.  Expect them to invoke the Supreme Court's recent invention, the major questions doctrine.

Eleventh Circuit: Sale of Life Insurance Policy By Terminally Ill Man Not Void

Modeling proper judicial modesty, the Eleventh Circuit, faced with a novel question of Georgia law, certified the question to the  Supreme Court of Georgia.  Having received the thorough and considered opinion of that body, the Eleventh Circuit thanked Georgia for its assistance and followed its guidance in what then became the easy case of Jackson National Life Insurance Co. v. Crum.

The question certified to the Supreme Court of Georgia was whether Georgia public policy forbids a person from taking out a life insurance policy and then selling that party to a third party with no insurable interest in the policyholder's life.  Jackson National Life Insurance Co. (Jackson) argued that the transaction entailed an illegal wagering contract, but the Supreme Court of Georgia found no support for that position in this case, where the buyer had played no role in procuring the original policy.  

In 1999, Kelly Couch (Couch) procured a $500,000 life insurance policy from Jackson.  At the time, Couch knew that he was HIV+ and had a shortened life expectancy.  He did not disclose those facts to Jackson.  His plan was to sell the policy through a brokerage agency.  Crum bought the policy, knowing that Jackson was HIV+ and that Jackson's life expectancy was shortened as a result.  After Crum learned that Couch had died in 2005, he sought to collect on the claim.  National declined the claim, citing the illegality of wagering on a human life.  National's policy with Couch apparently provided that it could not invalidate the policy based on Crouch's misrepresentations if they were not discovered within two years.

It seems clear that if Crum had induced Couch to conceal his illness from Jackson, procure the insurance, and sell it to Crum, that would violate Georgia law.  If Couch innocently procured the policy and then later became ill and sold the policy to Crum, that would not violate Georgia law.  This case fell somewhere in between, and so the Eleventh Circuit properly certified the question rather than engaging in Erie guessing.

The issue, according to the Supreme Court of Georgia, was to be determined through a narrow look at the statutory regulation of wagering contracts in the context of life insurance policies.  It turns out that the English, as far back as the 18th century, enjoyed making sport of human life, wagering on the expected demises of celebrities and people convicted of capital offenses.  The was really just gambling, not insurance.  Nonetheless, Parliament disapproved of the practice and created the "insurable interest" rule to prevent insurance policies from becoming vehicles for such speculation as sport.  That is, the owner of an insurance policy must expect some material benefit from the continued life of the insured.  

The Supreme Court of Georgia found that nothing in the Georgia statutory scheme prohibited the transaction between Couch and Crum.  Couch had an indisputable insurable interest in his own life when he took out the policy.  Georgia law does not require that the beneficiary of a policy have an insurable interest in the insured life, and so it is hard to see why the sale of the policy to a disinterested third party would run afoul of a Georgia public policy.

Jackson argued that prior case law in support of its position was part of the common law of Georgia unaffected by the current statutory scheme.  Not so, said the Georgia Supremes.  The case law in question interpreted the prior statutory scheme, but when Georgia reformed its insurance statutes, that case law remained relevant only to the extent that the new statutory regime incorporated it.  The new statutory regime does not incorporate the case law on which Jackson relied, and to the Supreme Court could discern no intention to adopt the rule that Jackson urged upon it.

Armed with this opinion, the Eleventh Circuit vacated the District Court's award of judgment in favor of Jackson and remanded for further proceedings.  The result troubles me a bit, but I suppose the real problem is that Jackson's policy excuses fraudulent concealment after two years.  I'm not sure why that language is in there, but it being there, Jackson would have had to pay out the policy to somebody independent of the challenged transaction.  The Georgia legislature could address transactions like that between Couch and Crum as a means to disincentivize people from raising money through insurance policies to fund their last remaining years, but it has not done so, and there would always be work-arounds it seems.

Some may find the Georgia opinion, appended to the Eleventh Circuit's, a useful teaching case on public policy analysis and on the strategy for reconciling common law opinions with an evolving statutory scheme.  

A Russian Threat to the New York Convention

Earlier this week, we noted a decision of the Cour de Cassation, which subjects arbitral awards to scrutiny for their consistency with international public policy.  That court attempts to achieve the right balance between respecting global anti-corruption efforts and insuring the finality of arbitral judgments.  Russia seems determined to evade arbitral judgments entirely.  

Sarah Bronkhorst reports in Eurasianet on yet another disturbing development out of Russia.  Back in 2020, the Russian Duma passed new legislation, On Introducing Changes to the Arbitration Procedure Code of the Russian Federation (Law No: 171-FZ), which protects Russian companies against arbitral judgments.  According to Sarah Bronkhorst, the new law signifies nothing less than Russia’s withdrawal from the 1958 New York Arbitration Convention.

The new law permits any Russian entity subject to international arbitration to shift the proceedings to the Russian judicial service.  Russia justified its action by pointing to international hostility to Russian interests since its 2014 occupation of Crimea.  More recent events have done little to improve Russia's standing abroad.  Russia's Supreme Court upheld the legality of the new law in an eight-page opinion in 2021.  

The good news?  The glass was already (more than) half empty.  Russian companies' compliance with arbitral decisions has been spotty for some time, as Russian courts have long applied exceptions to the New York Convention with liberality.  This was especially true for entities favored by the Kremlin or that could make the argument that their financial stability was of a matter of national concern.  Too big to fail?  But the law may also have limited effect on Russian companies with assets abroad.  One assumes that if a Russian company's right to withdraw from arbitration is not recognized, the arbitration will proceed in the foreign jurisdiction and the victorious party can proceed against the Russian company's foreign assets.

H/T to Ben Davis.

Speak Out Act Provides Some Protection Against Non-Disclosure Agreements

Last week, Congress passed and President Biden signed into law the Speak Out Act.  The Act is evidence that Congress can still pass meaningful legislation.  This one was introduced by New York Senator, Kirsten Gillibrand (right).  Co-sponsors included nine Democratic Senators, as well as  Republican Senators, Marsha Blackburn, John Cornyn, Lindsey Graham, Chuck Grassley, and Rob Portman.  The Act had unanimous support from Democrats, and Republicans in the House were pretty much evenly divided.  It passed the Senate by unanimous consent.

The key operational provision reads as follows:

With respect to a sexual assault dispute or sexual harassment dispute, no nondisclosure clause or nondisparagement clause agreed to before the dispute arises shall be judicially enforceable in instances in which conduct is alleged to have violated Federal, Tribal, or State law.

Keen readers will note that this Act is only a partial victory (but a victory nonetheless), as it only precludes the enforcement of nondisclosure or non-disparagement provisions entered into before the dispute arises from being introduced in connection with sexual assault or sexual harassment disputes.  

As Tom D'Agostino explains on HRmorning.com, there are four ways in which the Act falls short.  First, employers can still enter into NDAs with employees after a dispute as begun and thus shield themselves somewhat from the public disclosure of misconduct.  The Act will not end the tradition of paying hush money to employees to get them to drop their claims.  Second, to the extent that pre-dispute NDAs purported to prohibit the reporting of criminal activity, they likely were already unenforceable without the Act.  Third, the Act elevates sexual harassment above other forms of workplace misconduct.  One would hope that the next step would be a broader prohibition on pre-dispute NDAs relating to all forms of workplace harassment.  

Finally, there are state models for bars on NDAs that are already far more protective than the act.  As Tom D'Agostino's reporting notes:

In Maine, for example, employers cannot use nondisclosure agreements to block employees from talking about workplace discrimination and harassment. And in California, employers cannot use nondisclosure agreements in connection with settlement agreements that involve sexual assault or sexual harassment. These laws place a glaring spotlight on the absence of a broader measure of protection in the Speak Out Act.

So the glass if half full, but this is nonetheless a positive development in the realm of federal workplace protections.

HT to my colleague, Michael Gibson.

The Parol Evidence Rule and Ohio's Unconstitutional Electoral Maps

The Ohio Supreme Court struck down the Ohio GOPs gerrymandered electoral maps five times.  The GOP ran out the clock and then ultimately went to a federal court to get an order permitting the elections to go forward with one of their unconstitutional maps.  The story is told, among other places, in a recent episode of The American Life, called Mapmaker, Mapmaker, Make Me a Map. 

In sum, over the past decade, Ohio voters have leaned Republican.  In elections for statewide office, Republican candidates have averaged 54% of the vote, while Democrats get 46%.  True to form, J.D. Vance won election to the Senate with just over 53% of the vote.  Mike DeWine won re-election by a wider margin, likely the result of an incumbency boost.  The state constitution calls for electoral districts designed to reflect those election results, but in last month's elections, as a result of gerrymandering, Republicans won ten out of fifteen congressional seats, a percentage even higher than the percentage of votes won by Mike DeWine. 

And now to our parol evidence point.  In defending the GOP maps, Ohio GOP leader, Matt Huffman put forward the novel theory that when the Ohio constitution says that electoral maps are supposed to reflect "results," it meant the outcome of elections, not the percentage of votes for each side.  Republicans have won about 80% of statewide contests over the past decade and so, Huffman argued, votes that gave Republicans an advantage in less than 80% of the districts were consistent with the constitutional mandate.

The problem with that argument is that nobody else involved in the discussions of the recent amendment to the Ohio constitution thought that "results" meant "outcomes" rather than percentages of voters favoring one party or the other.  The entire point of the amendment was to achieve "proportional representation," so that Ohio's elected officials would reflect the political diversity among the electorate.  

Ira Glass, the host of This American Life interviewed the people who drafted the constitutional amendment, and all concurred:

Ira Glass

Richard Gunther said the same thing. Remember, he was one of the five negotiators who hammered out the terms of the amendment. He says, whenever they talked about election results, it was always about the number of votes, never about the number of races won.

Richard Gunther

No, that was never mentioned. And in fact, I've been a professional political scientist for five decades, and I've never seen election data used in that bizarre fashion.

Ira Glass

Matt Huffman totally sticks by his guns in this one. He told me the word in the constitution is "results." This notion that it means counting votes and not offices won--

Matt Huffman

Well, why does the results mean that? Well, because I want it to? Because it's better for me? Well, those aren't really reasons. Well, you know--

Ira Glass

But they're saying-- they're saying, just, that's what everybody talked about back then. Nobody talked about counting the number of offices.

Matt Huffman

Yeah, then it should be in the constitution. This is like the agreement, right? We enter into a settlement agreement to settle our lawsuit, and later on, you say, well, on the side, you said you were paying court costs. I never said that.

Ira Glass

Mm-hmm.

Matt Huffman

Or on the side, I was supposed to get an extra $10,000. Remember, you mentioned it to me just before we signed the document? No. And so that's why we have the constitution and the votes--

Ira Glass

And you're saying the language-- the language-- the language doesn't specify. So it could be either one.

Matt Huffman

Right.

I bring this all up as a nifty illustration of how the parol evidence rule works.  Mr. Huffman implies that, because there is an ambiguity in the document, we can't have recourse to its legislative history to resolve that ambiguity; the language of the text should govern.  But in fact, parol is admitted to clarify ambiguous language.  His analogies to paying court costs or an additional $10,000 are inapt.  Those would be additional terms that likely would be excluded because they would vary the terms of the agreement and are the sort of thing one would expect to be part of the written agreement, assuming integration.  But if there is parol to support the idea that "results" means counting votes and not offices, that evidence is admissible and should aid in interpretation.

Ohio's Supreme Court rejected Mr. Huffman's interpretation of "results" in Adams v. DeWine.  But that may change as a result of the last election.  The three dissenting Justices pointed out that the majority invalidated the proposed GOP maps under the principle of "proportional representation," but the Ohio constitution makes no mention of proportional representation.  The Brennan Center reports that the newly-elected  Ohio Supreme Court Justices may swing the majority of that court from 4-3 against to 4-3 in favor of allowing electoral gerrymandering to proceed.

GM to Pay $3.5 Million to Settle Claims Arising Under Servicemembers Civil Relief Act

Jordyn Grzelewski reports in The Detroit News that GM Financial has agreed to pay U.S military personnel $3.5 million to address breaches of lease agreements in violation of the Servicemembers Civil Relief Act (SCRA).  The SCRA prohibits auto financing and leasing companies from repossessing the vehicles of service members without a court order if the service members have made even one payment before entering the military.  It also allows service members to terminate their leases under certain conditions.

The Department of Justice began an investigation in 2018 and discovered that GM Financial had violated the SCRA in over 1000 cases, including 71 in which it unlawfully repossessed service members' vehicles.    

2022 Amendments to the UCC

The Uniform Law Commission (ULC) has unveiled its new amendments to the UCC on it website.  I am happy to report that the revisions to Articles 1, 2, and 2A seem to be quite modest.  Here are some that might matter to teaching:

• Conspicuousness is now to be determined by a totality of the circumstances, a highly sensible revision, especially since we now know that ALLCAPS are not helpful;
• The term "money" is now defined to exclude "an electronic record that is a medium of exchange recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by the government," which seems to cover cryptocurrencies but could also encompass broader technologies not yet in existence;

Shockingly, the ULC has not seen fit to change the Statute of Frauds threshold from the $500 amount that made sense when the UCC was drafted to something that makes sense today.  It is less shocking that the ULC did not see fit to eliminate the Statute of Frauds entirely, but its failure to do so remains disappointing.  

The most significant revision, it seems to me, from the perspective of teaching contracts and sales, is the following innovation in the realm of the predominant purpose test for hybrid transactions:

 

(2) In a hybrid transaction:

                        (a) If the sale-of-goods aspects do not predominate, only the provisions of this Article which relate primarily to the sale-of-goods aspects of the transaction apply, and the provisions that relate primarily to the transaction as a whole do not apply.

                        (b) If the sale-of-goods aspects predominate, this Article applies to the transaction but does not preclude application in appropriate circumstances of other law to aspects of the transaction which do not relate to the sale of goods.

            (3) This Article does not:

                        (a) apply to a transaction that, even though in the form of an unconditional contract to sell or present sale, operates only to create a security interest; or

                        (b) impair or repeal a statute regulating sales to consumers, farmers, or other specified classes of buyers. 

The revisions to Article 9 are more extensive.  Sucks to be people who teach Secured Transactions, but I've always thought that to be true.  The dramatic innovation of the revisions is a new Article 12 on Controllable Electronic Records.

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

In May we posted about the Eleventh Circuit's ruling in NetChoice, LLC v. Attorney General, which struck down many provisions of a Florida statute that sought to regulate social media companies as common carriers engaged in "censorship."  The Eleventh Circuit quoted from the language that animated the challenged legislation: The law was created to punish “the ‘big tech’ oligarchs in Silicon Valley” who “silenc[e]” “conservative” speech in favor of a “radical leftist” agenda.  Subtle. Before that, we posted about Texas HB 20, which is similar.  Judge Pitman of the District Court for the Western District of Texas had enjoined the enforcement of HB 20 in a 30-page opinion.  The Fifth Circuit lifted that injunction, and then last week, it issued an opinion in the case, NetChoice v. Paxton. 

It's a 113-page doozy.  Fortunately, in a 6000-word post, Eric Goldman (right) has gone through the entire opinion carefully, and he provides not only a trenchant analysis but also links to sources so that readers can do their own deep dive into the case.  That leaves little for us to say except to address to the contractual connection in this case.  But first, an overview.

Professor Goldman's post begins helpfully with a synopsis of how HB 20 fared in the Fifth Circuit, an edited version of which appears below:

The Texas law has four main provisions. Here’s where they stand after the Fifth Circuit’s ruling:

• mandatory editorial transparency requirements. . . . [unanimously upheld]

• digital due process requirements, including an appellate process for aggrieved users. . . . [unanimously upheld]

• restrictions on viewpoint-biased content moderation. The panel voted 2-1 to lift the injunction for multiple reasons. However, only one vote (Oldham) endorsed the common carriage justification. . . .

• a ban on email service providers deploying anti-spam filters unless they give appellate rights to all filtered senders. No one has yet challenged this provision, so it was never enjoined and remains available for AG Paxton to enforce. . . . 

The Fifth Circuit opinion begins by saying that HB 20 "generally prohibits large social media platforms from censoring speech based on the viewpoint of its speaker."  Because, as Professor Goldman points out, the social media platforms are private actors who, as such, by definition, cannot engage in censorship, they are not lawfully susceptible to regulation on that basis.  Indeed, as Professor Goldman notes as well, what is really going on here is government censorship of the social media companies' expression.  One way to state the issue might have been "Can social media platforms be prohibited by statute from suppressing speech on the basis that they are state actors engaged in censorship?  So posed, under current law, the answer is no.  By defining content regulation as "censorship" the Fifth Circuit is making new law and deciding the case in advance by making words mean what it wants them to mean.  It doesn't even pay them extra, as the equitable Humpty Dumpty does.

Having started with a faulty premise, the opinion continues:

But the platforms argue that buried somewhere in the person’s enumerated right to free speech lies a corporation’s unenumerated right to muzzle speech.

The implications of the platforms’ argument are staggering. On the platforms’ view, email providers, mobile phone companies, and banks could cancel the accounts of anyone who sends an email, makes a phone call, or spends money in support of a disfavored political party, candidate, or business . . . 

That is almost certainly a mischaracterization of the platforms' arguments, because their argument is that they are not and should not be treated like "email providers, mobile phone companies," etc.  And with that, the District Court's injunction is vacated.

But on to the contracts angle.  I have been writing a lot lately about the interaction of First Amendment law and contracts law.  The relationships between the social media platforms and their users are governed by a contract -- the platforms' terms of service.  My co-blogger and co-author Nancy Kim has spent much of her career highlighting the dangers of expansive or exploitative terms of service.  I am not unaware of the hazards.  But terms of service are routinely enforced, and it is a huge problem when the government suddenly steps in to change contractual relations based on the wholly unsubstantiated claim that the social media companies discriminate against conservative voices.  If the social media companies muzzle speech, they muzzle speech that violates their terms and conditions.  As a frequent user of social media, I'm glad that they do it, and I hope they do it better, which means doing it more, as there are ever-new automated mechanisms for flooding popular sites with speech that has little to do with insight and everything to do with incitement of political violence.

The Fifth Circuit opinion surgically excerpts passages from the platforms' terms of service in order to make those platforms look like public fora or common carriers.  What the opinion does not do is note the substantive components of those terms of service and community standards.  Twitter's terms of service, for example, specifically prohibit posts that promote or encourage:

• Violence
• Terrorism/violent extremism
• Child sexual exploitation
• Abuse/harassment
• Hateful conduct
• Perpetrators of violent attacks
• Suicide or self-harm
• Graphic violence and adult content
• Illegal or certain regulated goods or services

Facebook's community standards are broader but non-partisan and pretty damn thoughtful.

But the ultimate point is.  These are private sites with private rules.  Citing Justice Kennedy's dictum in Packingham, the Fifth Circuit calls the each platform a "monopolist"of the modern public sphere.  But the very fluidity of these markets shows the opposite.  Who had even heard of TikTok five years ago?  My students are contemptuous of Facebook and prefer platforms like Snapchat and Instagram that I would never use.  Alternatives to Twitter abound, and if they are less successful than Twitter, that is because they suck, and one of the main reasons that they suck is that they don't have the powerful algorithms that the best platforms have, which allow them, among other things, to enforce their terms of service effectively.

Let's hope that SCOTUS takes this case.  It just about has to given the 5th Circuit/11th Circuit split and the global nature of the Internet.  And let's hope that it enjoins these attempts at government censorship masquerading as regulating private censorship (which is not a thing). 

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

Our very own Nancy Kim (left) published an op-ed in the L.A. Times last week on California's Age Appropriate Design Code Act (the Act).  The purpose of the Act is to deter social media companies from creating features designed to addict children to their web products.  The Act has yet to be come law.  However, Nancy argues, it has already had some impact.

First, the Act raises awareness of the extent of which social media companies knowingly contribute to the problem of addition to social media sites.  Second the Act pushes back against the tech giants' assertions that regulation of the industry stifles free speech rights and hampers technological development.  The tech giants, as is well known, are not consistently on the side of free speech nor are technological innovation and regulation incompatible.  Third, the Act highlights interests like privacy, autonomy, and safety that must be balanced against the social media platforms desire to remain free from regulation or oversight.  

Nancy supports the proposed legislation, arguing that it will be good not only for children but for all users of the Internet.  You can read the details of the enforcement mechanism in her op-ed.