ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Monday, May 20, 2024

The Endless Debate over Sandwiches May Now End, at Least in Indiana

Meredith MillerWe have covered this topic before. The topic is almost as old as this Blog, with our first post on the subject dating from 2006. We covered the sandwich debate here in 2008, when a Massachusetts court ruled that a burrito is not a sandwich. We did it again when Taco Bell turned the issue into a commercial. I wish I didn't have to cover it again, but at least this time we have something of a resolution. Moreover, Blogger Emerita, Meredith Miller (left) shared the story with me, and when Meredith feeds me stories, I rush to post in the hope that she will feel bad that I have to do so and maybe she'll come back and post her own stuff.

As reports in The Washington Post (yes, this is national news), Allen County Superior Court Judge Craig J. Bobay has ruled that burritos and tacos are, in fact, sandwiches. The are "Mexican-style sandwiches," to be precise.  Ms. Somasundaram took a deep dive in reporting the case, noting: the 2006 Massachusetts decision; Justice Ginsburg's view, voiced to Stephen Colbert on The Late Show in 2018, that hot dogs served on buns are sandwiches; and the "cube rule," according which a taco (and a hot dog for that matter) is a taco, and a burrito (as well as a corn dog) is a calzone.  It all turns on the location of the starch.

Judge Bobay broke out of the box, or the cube, ruling that tacos are not tacos, but sandwiches.  Burritos are not calzones.  They too are sandwiches.  But resolving whether tacos and burritos are sandwiches did not necessarily resolve the case.  It involved a zoning restriction, which prohibited fast-food restaurants, but carved out an exception for made-to-order sandwich shops, so long as they do not serve alcohol, have outdoor speakers or drive-throughs, or provide outdoor seating. Presumably, the Famous Taco franchise that Judge Bobay allowed made its tacos and burritos to order.  

You may be wondering what any of this has to do with contracts.  If I were on the job market, I think I would say, "the relationship is orthogonal."  Ilya Somin provides a more straightforward and interesting take on the case on The Volokh Conspiracy, focusing on issues of interpretation and zoning restrictions.  Like a talk-show guest, he deftly pivots at the end to hawk his latest scholarship, co-authored with Joshua Braver on The Constitutional Case Aaainst Exclusionary Zoning.

Would Burger King fit the exception, or it is no longer the case that you can "have it your way" at Burger King?

May 20, 2024 in About this Blog, Commentary, Recent Cases, Television | Permalink | Comments (2)

Thursday, May 16, 2024

Chicago Bears Rookie Sought to Avoid Contract with Big League Advance

We missed this one when the case was filed last September, and there hasn't been much news since then.  Plaintiff took a voluntary dismissal in November, but nobody has covered the story, so I don't quite know what to make of it.  The best sources I could find on this story were on law blogs written by law students.  I have noticed that a lot of law students are very interested in writing their Notes about name, image, and likeness agreements (NILs), so it makes sense that students will be all over this case. Here's what I've pieced together.

Florida_Gators_football_logo.svgStuart Moore, writing for Villanova Law's Sports Law Blog, reports that Chicago Bears Rookie Gervon Dexter sued Big League Advance (BLA), seeking to avoid a contract he entered into as junior at the University of Florida.  According to Mr. Moore, Mr. Dexter agreed to pay BLA fifteen percent of his pre-tax NFL earnings for twenty-five years in exchange for an up-front payment of $436,485, a peculiarly precise number.  Matthew Bereche, writing for the Brooklyn Sports & Entertainment Law Blog, adds that, once Mr. Dexter entered into a four-year, $6.72 million contract with the Chicago Bears, BLA would be entitled to over $1 million under that contract alone.

BLA was started in 2016 by Michael Schwimer, who had a brief career as a major league pitcher and then started BLA, with the idea of investing in undervalued major-league prospects early in their careers in exchange for large pay-outs over time.  Enjoying success with baseball players, BLA then started to court college football players, and Mr. Dexter was among the first.  Many have denounced BLA's deals as "predatory" and "usurious," and there have been cases filed before, but none have proceeded to judgment, as far as I can tell.  

Chicago_bearsMr. Dexter's case is the first against BLA involving an NIL or at least a contract that purports to be an NIL.  According to Mr. Moore's reading of the contract, the up-front payment was in exchange for BLA's ability to use Mr. Dexter's name, image and likeness during his eligibility to play NCAA football.  But BLA also was entitled to its fifteen percent payment for twenty-five years after that eligibility ended.  Mr. Dexter claimed that the contract violated Florida's NIL statute, which, Mr. Bereche notes, provides that NIL agreements "may not extend beyond [a student's] participation in an athletic program at a postsecondary educational institution.” 

BLA would thus have to characterize its agreement with Mr. Dexter as really consisting of two contracts: an NIL that applies while he is in college, and a more typical BLA agreement, which is just a speculative investment vehicle and kicks in after the NIL lapses.  BLA would thus argue that the second half of the contract was not an NIL agreement at all and thus that Florida's statute does not apply.

The  contract apparently had an arbitration clause, which means, among other things, that we will have a very hard time learning about how these cases are resolved.  Mr. Moore notes that BLA's response to the lawsuit was to file a motion to compel arbitration.

Mr. Bereche notes that, after Mr. Dexter entered into his deal with BLA, Florida amended its NIL statute to remove the restriction on the duration of such agreements.  Mr. Bereche argues, quite plausibly, that the amendment was motivated by Florida's desire to better position itself to recruit students.  Other states had no such restriction, and student athletes attending college in other states could thus get more lucrative NIL deals than student athletes attending Florida schools. 

Perhaps.  However, Mr. Dexter's contract suggests that Florida just joined the race to the bottom, removing one provision that protected student athletes from potentially predatory practices to which they are uniquely susceptible.

May 16, 2024 in Commentary, Current Affairs, Recent Cases, Sports, True Contracts | Permalink | Comments (0)

Wednesday, May 15, 2024

California District Court Dismisses Constitutional Challenge to Los Angeles' Eviction Moratorium

I'm very excited to be able to write about a case arising under the Federal Constitution's Contracts Clause, U.S. Const. art. I, § 10, cl. 1.. Unfortunately, the resolution of the case turns on facts. 

US ConstIn Iten v. County of Los Angeles, plaintiff landlord had been having problems with his tenant, including failure to pay rent and unauthorized changes to the property which resulted in building code violations, going back to 2015.  In March, 2020, Los Angeles imposed a moratorium on commercial real estate evictions that protected any tenant that claimed that it was adversely affected by the COVID-19 pandemic.  Plaintiff's tenant gave notice in April 2020 that it was "very adversely affected" by the epidemic and would not be able to pay rent.  The lease ended in August 2020.

Plaintiff then entered into a new, five-year lease with his tenant.  Tenant was obligated to pay base rent, plus $3200/month in past-due rent. A year later, tenant was still unable to pay rent and was $30,000 in arrears.  Plaintiff sued alleging that the moratorium on commercial evictions violated the Contracts Clause.

The U.S. Supreme Court has noted that, while the language of the Contracts Clause facially prohibits states from any impairment of contractual obligations, courts in fact weigh the private contracts against the states' inherent police powers.  Courts first determine whether state action effects a substantial impairment of contractual obligation.  If so, they look to whether the state has adopted a reasonable means of advancing a significant and legitimate public purpose.

In the context of a challenge to Los Angeles moratorium on residential evictions, the same court had found that the moratorium did constitute a substantial impairment for Contracts Clause purposes in Apartment Ass'n of Los Angeles Cnty., Inc. v. City of Los Angeles, 500 F. Supp. 3d 1088, 1094 (C.D. Cal. 2020), aff'd, 10 F.4th 905 (9th Cir. 2021). However, the court found this case distinguishable. The moratorium on residential leases was unforeseeable in its dramatic scope at the time the parties entered into their else agreement in Apartment Ass'n.  But here, plaintiff was on notice that such moratoria might apply, and in fact, one did apply at the time they entered into the contract.  The moratorium was extended on the very day the parties entered into their new lease.  The issue was whether plaintiff had a reasonable expectation that no moratorium would apply to the new lease, and the court held that plaintiff had no such reasonable expectation.  Finding that plaintiff could not have been surprised by the extension of the moratorium, the court ruled that there had been no impairment of a contractual obligation and dismissed the suit with prejudice.

May 15, 2024 in Recent Cases | Permalink | Comments (0)

Tuesday, May 14, 2024

NJ Appellate Court Finds Verizon's Arbitration Provision Unconscionable

Arbitration
Image by DALL-E

In February, 2022, twenty-eight New Jersey Verizon Wireless customers filed a putative class action against the company, claiming that Verizon's failure to disclose a $1.95 monthly administrative fee violated New Jersey's Consumer Fraud Act and other statutes.  Verizon moved to compel arbitration.  

Verizon's arbitration clause gave customers 180 days to file a claim, limited all claims to direct damages, and prohibited treble damages. In addition, the arbitration provisions prohibited class claims.  Rather, they provided for coordinated "bellwether" proceedings.

If twenty-five or more claimants made "similar claims," the claims would proceed in groups of five until all claims are resolved. Claimants are prohibited from initiating arbitrations of their individual claims until the bellwether proceedings are completed.

Verizon is not hiding the ball; the target of this provision is mass arbitration: "A COURT WILL HAVE AUTHORITY TO ENFORCE THIS CLAUSE, AND IF NECESSARY, TO ENJOIN MASS FILING OF ARBITRATION DEMANDS AGAINST VERIZON." Noting that the average arbitration takes about seven months, plaintiffs' attorneys calculated that, with over 2500 claims already brought, the wait for arbitration of new claims was then 145 years.  

Verizon's contract provides that its arbitration provisions are, for the most part, severable. It also warns customers not to rely on representations of sales or customer service representatives. Again, not hiding the ball: Verizon will exploit the parol evidence rule to evade responsibility for its agents' misrepresentations.The trial court struck the limitation on damages but, noting the severability provision, otherwise granted Verizon's motion to compel arbitration. 

In Achey v. Cellco Partnership, a New Jersey appellate court affirmed the trial court's determination on limitation of damages but also struck Verizon's arbitration clause in its entirety because it was permeated with unconscionability.  In so doing, the court followed a decision from the District Court for the Northern District of California in McClelland v. Cellco P'ship, in which the court identified five unconscionable elements in Verizon's arbitration provisions.

The New Jersey court specifically found Verizon's bellwether provision unconscionable, because it allows Verizon to exercise unlimited discretion as to how the arbitrations can proceed. The court also noted the 180-day, contractually-imposed statute of limitations and the absence of tolling provision in the bellwether process. These features allowed Verizon to argue that all claimants not invited to participate in the very first bellwether proceeding had failed to timely bring their claims.  In addition, the invocation of the parol evidence rule is inconsistent with New Jersey's consumer protection laws.  Finally, the court found that the 180 day limitation on claims was, at least to some degree, substantive unconscionable and violative of New Jersey's public policy in the context of consumer contracting.

Ultimately, the court found that Verizon's arbitration provisions are cumulatively unconscionable and unenforceable for lack of mutual assent. The case is remanded to the trial court for further proceedings.

Thanks, New Jersey.  Take us out, Bruce.

May 14, 2024 in Music, Recent Cases | Permalink | Comments (0)

Tuesday, May 7, 2024

Teachers Bring Breach of Contract Suit Against the Oklahoma Department of Education

Ryan_WaltersKeeping with this week's theme of Oklahoma news, we have a day in the life of the Oklahoma State Department of Eduction (OSDE) under the leadership of Ryan Walters (right). Mr. Walters is the State Superintendent of Schools.  I have never before known who the superintendent of schools was for the state in which I lived, but Mr. Walters manages to grab headlines almost every day.  The headlines are not about how much Oklahoma schools have improved or about the successes those schools have had in recruiting new teachers.  Rather, they tend to be about banning books, shutting down D.E.I. programs, partnering with providers of conservative educational materials, losing employees, including the entire legal team, and difficulties in accounting for federal funds allocated to Oklahoma.

Two teachers are suing Mr. Walters.  The two teachers allege that they signed a contract in November, 2023, in exchange for a $50,000 signing bonus.  In January 2024, the OSDE demanded repayment of the bonus, and according to the complaint in Bojorquez v. State of Oklahoma, Mr. Walters claimed that the only reason they had been paid the bonuses was that they lied on their applications.  As a result of that statement, plaintiffs are suing not just for breach of contract but also for defamation.  

Stay tuned.

May 7, 2024 in Current Affairs, Government Contracting, In the News, Recent Cases | Permalink | Comments (0)

Friday, May 3, 2024

SCOTUS Decides Contractual Issue in a Maritime Law Case!

KavanaughThe issue in Great Lakes Insurance SE v. Raiders Retreat Realty Co. LLC was whether two parties to a contract governed by admiralty law can agree to a choice of law provision that conflicts with the substantive public policy of the state in which the case is to be heard.  The general answer, provided in an opinion by Justice Kavanaugh (right), is that choice-of-law provisions in maritime contracts are generally enforceable, with certain narrow exceptions not applicable on the facts before the Court.

The case is about insurance for a boat.  Raiders Retreat is a Pennsylvania Business that purchased insurance for its boat from Great Lakes, which is a Germany company headquartered in the UK.  The instance contract was governed by New York Law.  When the boat ran aground in Florida and Raiders Retreat sought coverage, Great Lakes denied the coverage due to a Raider Retreat's failure to maintain its fire suppression system, which had nothing to do with the boat running aground.  

Raiders Retreat sued in a Pennsylvania District Court, bringing claims under Pennsylvania contracts law.  The District Court enforced the parties' choice-of-law provision, which meant that it dismissed the Pennsylvania claims.  Raiders Retreat appealed to the Third Circuit, which refused to apply New York law if doing so would violate Pennsylvania public policy and remanded for a determination of whether it would do so.  To resolve a Circuit split, SOCTUS granted an interlocutory appeal.   

220px-Clarence_Thomas_official_SCOTUS_portraitFederal maritime law is all about uniformity, and there is a clear rule that choice-of-law provisions in maritime contracts are presumptively enforceable.  Okay, so how is the presumption overcome?  The parties agreed that "courts should disregard choice-of-law clauses in otherwise valid maritime contracts when the chosen law would contravene a controlling federal statute . . .  or conflict with an established federal maritime policy" or if the parties can provide no reasonable justification for the chosen jurisdiction.

That seems pretty straightforward and workable.  Raiders Retreat wanted either a rule that courts should not enforce the choice-of-law clause if doing so would violate the public policy with the state with the closest connection to the transaction.  Justice Kavanaugh responded with a hard no.  What part of uniformity does Raiders Retreat not understand?

Justice Thomas (left) concurred to emphasize how much he doesn't like a case called Wilburn Boat.  Justice Kavanaugh had concluded that Wilburn Boat did not apply on these facts.  Justice Thomas needed to send a clear signal to potential litigants: I dare you to cite Wilburn Boat to me.  I double dare you!

May 3, 2024 in Recent Cases | Permalink | Comments (0)

Thursday, May 2, 2024

Various Problems with Liquidated Damages

Posner_richard_08-2010I use Judge Posner's opinion in Lake River Corp. v. Carborundum Co. to teach liquidated damages and penalties.  It's a typical Judge Posner (left) opinion.  He provides policy arguments for and against the enforcement of liquidated damages provisions, even if they impose a penalty on the breaching party.  Judge Posner makes the compelling freedom of contract/anti-paternalist arguments in favor of enforcement of penalties, assuming relative sophistication and comparable bargaining power.  Against these arguments, he offers the theory that deterring opportunistic breach prevents efficient breaches that produce better outcomes for most of the parties involved and do not produce worse outcomes for any of them (assuming no transactions costs).  He then heaves a sigh, says, "Illinois, ya basic!" and applies the applicable state law prohibiting the enforcement of penalties. 

Some of my students wanted to outflank Judge Posner.  Yes, the liquidated damages clause in the contract was absurd, but why should a court come to the rescue of a well-resourced party that entered into a bad deal with eyes wide open?  Carborundum apparently valued access to Lake River's bagging and distribution capabilities so highly that it was willing to take on a high penalty for breach.  My students could have cited another Judge Posner case that I also teach, NIPSCO v. Carbon County Coal.  There, NIPSCO entered into a long-term contract to buy coal whether or not it needed the coal.  NIPSCO assumed that it would need the coal when it entered into the contract, but then it became significantly less expensive to get electricity from other sources. The state regulatory authority would not allow NIPSCO to pass on to its customers the costs it incurred through its lack of foresight, and so it sought to get out of its contractual obligations.  Judge Posner would not allow it to do so, even though the effect was quite similar to a penalty clause.  NIPSCO had to pay an inflated price for coal it didn't need.  Indeed, according to Judge Posner, nobody wanted the coal, which was why the mine shut down once NIPSCO stopped accepting shipments.  

So, Judge Posner would not force Carborundum to pay for bagging and distribution services it no longer needed, but he did force NIPSCO to pay for coal it didn't need.  The cases are reconcilable as a matter of legal doctrine.  In both cases, I find Judge Posner's legal reasoning entirely persuasive. And yet, their outcomes seem hard to square with both economic theory and the principles of freedom of contract.  Perhaps the solution is that Judge Posner, if unconstrained by the Erie doctrine or precedent, would simply allow the parties' terms, no matter how ill-conceived, to govern in both cases.

SepinuckProfessor Stephen Sepinuck (right), a keen-eyed scanner of the legal horizon, noticed another liquidated damages conundrum.  Ne. Ill. Reg'l Commuter R.R. Corp v. Judlau Contracting, Inc., involved a $17 million contract for construction work on Chicago's Metra line.  Judlau did not complete the project within the time specified in the contract, running over by 500 days.  Metra alleged a right to choose between enforcing the contract's liquidated damages provision and seeking actual damages.  District Judge Mary Rowland of the Northern District of Illinois, noted that Illinois law does not permit parties to choose between actual and liquidated damage, and she rejected Metra's attempt to distinguish between a right to collect liquidated damages an option to choose between liquidated and actual damages. 

Metra acknowledged the Illinois prohibition on clauses that permit a party to choose between liquidated and actual damages, citing Karimi v. 401 North Wabash Venture, LLC.  The Illinois rule struck Professor Sepinuck as unusual.  Learned commentary ensued.  Indeed, Colorado reached the opposite conclusion in Ravenstar, LLC v. One Ski Hill Place, LLC.  The Illinois rule seems to be motivated by a horror of penalty clauses.  Confronted with little or no actual damages, the non-breaching party can nonetheless profit from a liquidated damages clause.  Facing actual damages well in excess of liquidated damages, the party might choose to jettison the limits imposed by the liquidated damages clause.  It creates a win/win for the non-breaching party and also eliminates one of the primary advantages of a liquidated damages provision -- the ability to settle a claim quickly without the need to prove actual damages.

Which brings us back to Judge Posner's dilemma.  These option clauses seem ill-advised.  Why agree to a liquidated damages clause designed to  minimize litigation costs while also giving the other party the option to choose to impose litigation costs on you?  However, if sophisticated parties agreed to an ill-advised clause  why not allow them to be hoist by their own petard?  In Judlau, the court faced no such dilemma, Judge Rowland concluded that "the plain language of the contract here does not create an option between liquidated and actual damages."  Metra did not include an ill-advised option clause in its contract.  It just seems to have pursued an ill-advised litigation strategy that involved arguing without much of a textual basis that it had negotiated for an advantageous option which, it acknowledged, was foreclosed in any case by governing law.

May 2, 2024 in Commentary, Contract Profs, Famous Cases, Recent Cases, Teaching | Permalink | Comments (5)

Tuesday, April 30, 2024

Once Again, the Mistaken Party Pays. This Time, I Don't Think They Should.

Screenshot 2024-04-27 at 5.45.40 AMLast week, Emily Schmall reported in The New York Times about a Mexican man who found Cartier Earrings on sale on the company's Mexican website for 237 pesos, which is about thirteen dollars.  He knew that the earrings, described as "slender studded 18-carat rose-gold cuffs lined with diamonds," were worth far more than that, so he jumped at the offer.  He bought two pairs. Cartier noticed the mistake and corrected it, adjusting the price to 237,000 pesos. 

Cartier attempted to cancel the order. It attempted to buy off the purchaser with freebies.  He wouldn't budge.  He availed himself of Mexico's consumer protection laws and filed a complaint with the Matamoros branch of the federal consumer protection agency.  However, as one corporate attorney interviewed by the Times noted, the consumer does not win when the price quote is clearly a mistake.  But the buyer had mounted a social media campaign, and Cartier decided to save itself a prolonged legal battle and the potential attendant negative publicity.  The company filled the order, and the buyer dismissed his complaint.

Jeffrey-Lipshaw_960x860I'm not happy for him.  He was not fooled by a misleading advertisement.  Cartier was not offering a lost leader.  It was an obvious mistake, and he knew it was a mistake.  These things are going to be happening more and more often as AI takes over website management.  There will be simple transcription or calculation errors, and there is no scrivener to blame.  

But scrivener's error doctrine should still apply.  Neither party really thought that the designer gold and diamond earrings were being offered for the cost of shipping and handling.  Reformation is the right result here, and if the buyer is not interested in paying what he knew to be the actual price of the earrings, then the contract should be avoided.  Jeff Lipshaw (left) shared with us a similar case of a scrivener's error being treated as a unilateral mistake back in 2022.  That case is still, shockingly, working its way through the courts and may result in an $11 million windfall for a wholly undeserving litigant.  Rule 11 sanctions for the attorney and a "don't piss on my leg and tell me that it's raining" screed from the bench seem like a better outcome.

April 30, 2024 in Commentary, Contract Profs, In the News, Recent Cases | Permalink | Comments (1)

Friday, April 26, 2024

The FTC's Rule Banning Non-Competes and the Response

FTCThe Federal Trade Commission (FTC) this week announced a new Final Rule on non-competes.  I was hoping for a short document that clearly and concisely lays out the new rule.  Instead, we got a a 570-page document that, truth be told, I will never read.  Here's the summary, which I did mange to read:

The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.

According to the FTC's website, the new rule will "will generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation."  

Well, that sounds great.  Surely, nobody would oppose all that.

Well, nobody except Ryan, LLC, which was the first to file a federal lawsuit challenging the new rule in Ryan, LLC v. FTC.  The main argument relies on a favored weapon in the anti-regulatory arsenal, the newly minted "major questions doctrine."  The FTC lacks the authority, Ryan argues, under congressional statutes, to issue so sweeping a regulation.  In fact, Ryan argues, the FTC lacks power to regulate unfair competition.  It did not do so until 1962, and it never sought to regulate non-competes until 2022.

As to substance, Ryan argues, "Workers, firms, and the economy all benefit from reasonable non-compete agreements."  The key term here is "reasonable."  Ryan contends that courts have long assessed the reasonableness of non-compete agreements.  Regulation here is unnecessary, as the courts have already struck the right balance among competing interests. 

The causes of action are predictable.  Count I, citing the major questions doctrine, alleges that the FTC lacks authority to adopt the new rule.  Count II, citing the non-delegation doctrine, Schechter Poultry (that old chestnut!), and Justice Gorsuch's dissent in Gundy, alleges that allowing the FTC to regulate in this area would be an unconstitutional delegation of legislative powers to the executive branch.  Count III, citing the Vesting Clause thesis and the unitary executive, alleges that the FTC Act violates Article II, because its commissioners can only be terminated by the President for cause.  Count IV seeks a declaration: vacating the new rule; finding that the FTC has no authority to regulate unfair competition; that the FTC claim of authority to issue the rule violates the non-delegation doctrine; and that the structure of the FTC violates Article II.  

Sounds crazy right?  Not to these folks.

SCOTUS 2022

I mean, should the courts strike down an entire agency because they don't like one rule, for which the agency provided a 570-page explanation?  Needless to say, if an agency got out over its skis, Congress could yank it back by issuing its own clarifying instructions.  But in our world, apparently, the power to do so is vested not through Article I, and not through Article II, but through Article III.  We the people, in order to form a perfect juristocracy . . . 

April 26, 2024 in Current Affairs, In the News, Labor Contracts, Legislation, Recent Cases | Permalink | Comments (0)

Monday, April 15, 2024

Nancy Kim, on SCOTUS, the Federal Arbitration Act, and Wonder Bread

Nancy-kimThe blog covered this case after oral argument.  Now that the case has been decided, Nancy Kim (left) reports on the outcome.

The U.S. Supreme Court weighed in on a matter today involving some yummy things* – baked goods, contracts and arbitration (okay maybe the last one not so much).  In Bissonnette v. LePage Bakeries Park Street, the petitioners were franchisees and distributors for Flowers Foods, a multi-billion-dollar producer and marketer of baked goods that I’ve never even heard of but that owns brands that I eat regularly, including my favorite, Dave’s Bread (which I just had for breakfast).  It also makes the suspiciously delicious Wonder Bread which is almost the exact opposite of Dave’s Bread.  Anyway, Bissonnette and Wojnarowski signed Distributor Agreements that gave them rights to certain territories to pick up these delicious “bread and buns” and distribute them to various outlets.  They spent at least forty hours delivering these delectable treats and engaged in other activities promoting these products.  The Distributor Agreements incorporated an Arbitration Agreement that required that “any claim, dispute, and/or controversy” be arbitrated under the Federal Arbitration Act.

In 2019, they sued claiming that Flowers had unlawfully deducted from their wages, failed to pay them overtime, and engaged in other types of ungenerous activities.  SCOTUS noted that the FAA provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  There is a notable exception:  “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  (9 USC §1)  Bissonnette and Wojnarowski argued that they fell into this exception.  The District Court dismissed the case and compelled arbitration, finding that Bissonnette and Wojnarowski were required to arbitrate because their jobs were “much broader in scope” and so they were not just transportation workers.  The Second Circuit affirmed but on the grounds that the FAA exemption was only for transportation workers, and they were “in the bakery industry.”

SCOTUS noted a split between the Second Circuit and the First Circuit and resolved the conflict by finding that the Second Circuit erred; there was no requirement that a transportation worker work for a company in the transportation industry in order to be exempt under §1 of the FAA. 

*With apologies to the gluten-free and the hungry.

April 15, 2024 in Food and Drink, Recent Cases | Permalink | Comments (0)

Richard Frankel on the Corporate Response to Mass Arbitration

Frankel_bio_v2We have touched on this topic a few times before. We noted a challenge in the Seventh Circuit to mass arbitration here, and we provided Roku’s terms of service, which provide an illustration of the new practice of “batch arbitration.”  Richard Frankel (right) has undertaken the first large empirical study, as far as I know, of the corporate response to mass arbitration. Batch arbitration is just one of the tools in the new corporate arsenal. The article, Fighting Mass Arbitration: An Empirical Study of the Corporate Response to Mass Arbitration and Its Implications for the Federal Arbitration Act is available on SSRN here.

Professor Frankel looks at 82 arbitration clauses that corporations have introduced in response to mass arbitration. The new clauses introduce three innovations. First, over 80% of the clauses require pre-dispute mediation before a customer can bring an arbitration action, and failure to mediate may lead to dismissal of the arbitration claims.  Second, about 40% of the corporations in Professor Frankel’s data set are experimenting with variations on batch arbitration, in which a few claims are selected for arbitration.  The outcomes in those cases creates a baseline. The corporation then settles the remaining suits through mediation and only pays arbitration fees for a handful of cases.  Finally, corporations are seeking out arbitral bodies that charge low fees.

Arbitration
Image by DALL-E

Professor Frankel makes two very important points with respect to these corporate responses to  mass arbitration.  First, unsurprisingly, the effect of these new corporate measures is to suppress claims and make the arbitration process more procedurally complex and time consuming.  Second, Professor Frankel contends that the new forms of arbitration that corporations have made part of their terms of service are not covered under the Federal Arbitration Act (FAA).  That means that states can regulate in this area to prevent corporations from using new forms of arbitration to suppress claims. Indeed, Professor Frankel argues, the rise of mass arbitration illustrates that the FAA is ill-suited to address the claims affecting large groups of people. 

The Article traces the development of the FAA from "sleepy law" (7) to the primary mechanism that has allowed corporations to evade liability through class action bans, "even where such provisions impede injured parties from pursuing claims." (13) Plaintiffs' attorneys responded with mass arbitrations, a subject that we have covered, most recently, here.  That background sets the stage for Professor Frankel's empirical study of the corporate response.

Guess what! Nearly 90% of corporations in the study still use mandatory arbitration provisions.  The most popular response to mass arbitration, employed by 80% of corporations with mandatory arbitration provisions, has been to require some sort of pre-arbitration procedures, some of which toll the statute of limitations, some of which don't.  About 40% of the corporations have introduced batch arbitration requirement.  Batch arbitration can be combined with a bellwether approach, in which a few representative claims are heard and then become the basis for negotiations of a global settlement.  National Arbitration and Mediation and ADR Services are favored arbitration providers among the companies that do impose batch arbitration requirements on their customers or employees. Excerpt from a retreat for partners and associates who came up with these plans captured on video below.

The study includes lots of nuance and particularized evaluation of the techniques involved, explaining the processes and advantages to corporations of the various mechanisms adopted.

The next section of the Article weighs the effects of corporate responses to mass arbitration on access to justice.  Professor Frankel summarizes the effects of pre-arbitration exhaustion requirements as follows:

While pre-arbitration exhaustion carries the appeal of helping to resolve a dispute through informal mediation and thus avoiding the need to go through arbitration, it also leads to delay and erects additional hurdles for plaintiffs seeking to vindicate their rights. (36)

The new pre-arbitration mediation requirements differ from earlier versions of the same mechanism in that it appears that their primary goal "is simply to make it harder for claimants to file suit." (37). Moreover, "some pre-arbitration requirements seem to have no clear purpose other than to make mass arbitration more difficult or to lay traps for claimants."  Third, despite corporations' descriptions of pre-arbitration mediations as "informal," they sometimes impose onerous production burdens on claimants beyond what a court might require. (39) Finally, the pre-arbitration requirements provides corporations with a ready defense, as they can allege that claimants failed to exhaust alternatives to arbitration or litigation. (40-43)

The main effect of batching is delay, and at least two courts have cited that delay in striking batching requirements as unconscionable. (44) Batching and bellwether approaches reveal the duplicity of the class-action waiver strategy. Corporations attacked class arbitration on the ground that arbitral bodies are ill-suited to handle mass claims. Now they seek to force claimants to adjudicate their claims in batches, but on terms that the corporations control. (46-47). That same duplicity underlies corporate approaches to fees. Corporations defended class-action waivers by claiming that individual arbitrations were still convenient for claimants, as the corporations paid the fees. Then came mass arbitration, and it because clear that the corporations always assumed that class-action waivers would deter claims, because mass arbitration revealed that corporations did not anticipate paying fees for all of claimants who availed themselves of the arbitration mechanism.  In response to mass arbitration, corporations sought to defer paying fees through new mechanisms, batching and bellwether strategies that are designed to make most of the claims, and their attendant fees, disappear. (48-49)

In the final substantive section of the paper, Professor Frankel argues that many of the responses to mass arbitration fall outside of the FAA, mostly because they do not further the FAA's aim of speedy dispute resolution. That does not render them unlawful, but it does eliminate the preemption doctrine that has prevented states from regulating arbitration clauses that do fall within the FAA. Professor Frankel explains why both pre-arbitration mediation requirements and batching are not the sort of proceedings covered by the FAA. (50-55).

Professor Frankel discusses various legislative interventions that could strike down pre-arbitration mediation requirements as well as batching or bellwether schemes. (55-58) More radically, he suggests that batch arbitration exposes the doctrinal error at the heart of the SCOTUS rulings, culminating in Concepcion and Italian Colors, that treated class action waivers as enforceable under the FAA.  "[T]he Supreme Court’s notion of what makes a proceeding an arbitration under the FAA—that it is speedy, bilateral and procedurally simple—cannot be squared with mass harm." (59)

So, to sum up. The corporate response to mass arbitration reveals corporate ingenuity in seeking to throw up barriers to the vindication of contractual rights.  At the same time, it reveals their duplicity, claiming to leave open paths to justice that they have intentionally foreclosed.  The Supreme Court has indulged this duplicity, as Justice Kagan put it, "admirably flaunted rather than camouflaged" in opinions that made clear that the FAA, as interpreted by the Court, encourages the adoption of class-action waivers as a means of escaping accountability for contractual and statutory violations. The response to mass arbitration makes that duplicity impossible to ignore and opens a path, both to renewed state regulation of arbitration clauses and to the reconsideration of the Court's precedents that now, more clearly than ever, stand between claimants and the opportunity to vindicate their rights.

The Court's conservative majority is stuck between two fitting statements of its ethos.  As Justice Kagan noted, it wants to tell claimants "too darn bad."  But you guys are legends!  Don't follow precedents that have proved themselves unworkable!  Which brings us to our second statement about the ethos of the Roberts Court's super-majority.

Screenshot 2024-04-13 at 11.26.50 AMYou can buy the t-shirt here.

Congratulations to Professor Frankel!  It's not just a law review article; it's a legislative agenda and a litigation strategy!

April 15, 2024 in Recent Cases, Recent Scholarship | Permalink | Comments (0)

Thursday, April 11, 2024

Sportsball: Clemson Sues the ACC over $140 Million Exit Fee

Clemson_Tigers_logo.svgThe nerve! Clemson University (Clemson) has filed a complaint against the Atlantic Coast Conference (the ACC) because the ACC claims ownership of media rights over home games at member institutions and because the ACC claims entitlement to a $140 million payment should members leave the conference. The audacity! And all this just because Clemson arguably agreed to those terms when it joined the ACC. The impudence!

How can a public educational institution fulfill its mission if saddled with this onerous financial burden?  Or, as Clemson puts it, "Each of these erroneous assertions separately hinders Clemson's ability to meaningfully explore its options regarding conference membership, to negotiate alternative revenue-sharing proposals among ACC members, and to obtain full value for its future media rights." Yeah! Basic science, medical research, training future educators, social workers, professionals, and others who can serve South Carolina and the region. You can do a lot of worthwhile things with $140 million.

And this really is all about money. The complaint details an alleged "revenue gap." The SEC and the Big Ten entered into more lucrative contracts with media companies than did the ACC.  As a result, universities in those leagues get a media share that can be as much as $20 million higher than what Clemson gets through the ACC.

ACC
As to the media rights, that is a matter of differing interpretations of this contractual language.  Clemson points out that it granted the ACC only those media rights "necessary for the Conference to perform the contractual obligations of the Conference expressly set forth" in separate agreements between the ACC and ESPN.  Those obligations apply only to members, Clemson alleges, not to former members. I think we'd need to see the language of those other agreements to know whether this is a plausible construction of Clemson's obligations. Alas, the parts of the complaint relating to ESPN have been redacted, apparently into response to ESPN's hissy fit when the details of the ACC's arrangement with ESPN were disclosed in a similar case involving Florida State University, as Chapel Fowler and Ted Clifford explain in The State.

As to the $140 million, the ACC characterizes the amount as "liquidated damages," while Clemson says it is -- you guessed it! -- an unenforceable penalty, and an unconscionable one at that. Much of the complaint is dedicated to showing that the withdrawal fee is too high. It is pegged at three times the ACC's annual operating budget, and that operating budget has grown tremendously in the last decade. But if Clemson's media rights are valued at somewhere north of $40 million/year and the ACC is claiming entitlement to those rights through 2036, $140 million hardly seems disproportionate.  Clemson has an argument for why the ACC is not harmed, but much of it is redacted.

Clemson says the that withdrawal fee arose through a "purported" 2012 Amendment to its rules. The complaint does not clarify in what sense this amendment was merely "purported." Seems hard to imagine that Clemson did not somehow agree to this amendment, and it may even have profited from it when other universities withdrew. Clemson's complaint seeks declaratory judgment under a South Carolina statute. Is that an equitable remedy despite being codified? Unclean Tiger paws?

Contracts are risk-allocation devices. Is there anything more to say here?

April 11, 2024 in Current Affairs, In the News, Recent Cases, Sports | Permalink | Comments (0)

Wednesday, April 10, 2024

Breach of K Claim for Denial of Tenure Can Proceed Against Harvard University

Benjamin Edelman, who taught at Harvard Business School for eleven years, is suing Harvard University for wrongful denial of tenure. He has set up a website explaining his reasons for suing and tracking the progress of his case. His complaint is here.  He alleges breach of contract, breach of the duty of good faith and fair dealing, and promissory estoppel. 

HBSIt seems that there were no obstacles to Mr. Edelman's tenure that related directly to his teaching and scholarship. Rather, Mr. Edelman ran into trouble based on his extracurricular activities, concerns about his undisclosed consulting activities, and some anonymous complaints. In one notorious episode, Mr. Edelman launched a campaign against a local Chinese restaurant that charged prices higher than those it advertised online. Apparently, the University objected to Mr. Edelman's zeal in remonstrating over a $4 overcharge, and Mr. Edelman apologized for his conduct.

Hypothetically, one can imagine that a university might not want to grant tenure to someone whose abrasive conduct might reflect poorly on the institution or who is routinely disrespectful of students or staff (making no assumptions as to the nature of the anonymous complaints in Mr. Edelman's case). Mr. Edelman seems to have been a Wunderkind, and the dispute is not about either his credentials (pure Harvard) or his professional performance. Still, nobody should be compelled to receive a life sentence to have a jerk as a colleague. Of course, these processes are opaque, so it is understandable that Mr. Edelman is miffed, and of course, the rest of us are left to guess about what motivated Harvard's decision.  People can be nice geniuses. I've worked with many people who combined extraordinary intelligence and drive with outsized humility and humanitas.

However, Mr. Edelman alleged procedural irregularities aplenty. Harvard moved to dismiss.

Last month, the Massachusetts Superior Court denied Harvard's motion to dismiss. The opinion references both Harvard Business School's Policies and Procedures with Respect to Faculty Appointments and Promotions ("Tenure Policy") and the Principles and Procedures for Responding to Matters of Faculty Conduct ("P&P"). However, it seems that Mr. Edelman's claims arise under the P&P alone. Disappointingly for this Blog, Harvard did not contest whether the P&P constituted a contract for the purposes of its motion to dismiss. With that impediment removed, the court had no difficulty concluding that Mr. Edelman's factual allegations sufficed to state claims on all three of his causes of action.

April 10, 2024 in Recent Cases | Permalink | Comments (0)

Wednesday, April 3, 2024

Extraterritorial Reach of Securities Laws: Crypto Edition

It's crytpo week on the blog!  On Monday, we wrote about recent smash-hit scholarship, Debt Tokens. In our latest episode on crypto, like in every episode, courts struggle to apply laws that the crypto world seeks to evade to financial instruments that judges and blog editors struggle to comprehend.   

Binance_Logo.svgA putative class accused Binance and its principals of selling a crypto-asset known as a token without registering the tokens as securities in violation of the §12(a) of the 1933 Securities Act, §29(b) of the 1934 Exchange Act, and state Blue Sky laws.  The class sought rescission of their contracts with Binance.  In 2022, the district court dismissed the action in JD Anderson v. Binance, on the ground that the laws in question did not have extraterritorial reach.  The district court also dismissed the federal claims as untimely.

In March, 2024, nearly a year after oral argument, the Second Circuit reversed in Williams v. Binance.  The case is a puzzler, but I'm not sure that justifies  the long gap between dismissal and reinstatement of claims.  Here's the problem.  Binance purports to be the world's largest online exchange for crypto-assets.  It also claims that it doesn't exist.  That is, although its titular headquarters are in Malta, it denies that it is a "Malta-based cryptocurrency company."  Rather, it exists in a decentralized manner so as to service its users in 180 countries.  

Well, one of those countries is the U.S.  Binance has servers, employees, and customers here.  Plaintiffs are among those U.S. based customers, and they placed orders for the tokens at issue in the case by accessing electronic platforms from the U.S. or U.S. territories.  At least at this stage in the litigation, there is no dispute that the tokens that plaintiffs purchased are securities.  However, while the tokens enable their creators to raise capital, they do not (ah, cyrpto) entitle the token holders to any interest, either as creditor or as owner, in the underlying venture.  The investment is in the tokens themselves.  So, the idea is a no-doubt sophisticated version of betting on a roll of the dice. The initial offerings raised $20 billion.  Some genius. . . .

The plaintiffs bought these tokens without the benefit of registration statements that the SEC would require prior to the issuance of new securities.  Instead, plaintiffs got a "white paper," that was part advertisement and part "technical blueprint."  Plaintiffs then sought rescission in a 327-page complaint stating 154 causes of action.

Second Circuit
The big issue in the case is the extraterritorial reach of U.S. securities laws.  The controlling case is Morrison v. Australia Nat'l Bank, Ltd. To cut to the chase, the transactions at issue were domestic under Morrison. They became irrevocable in the United States, both because, under Binance's terms of service, plaintiffs' orders were irrevocable when sent within the United States and because plaintiffs plausibly alleged that those orders "matched" on servers located in the United States. 

Matching is tricky.  It involves something like a meeting of minds and the "clearing" of a transaction.  It seems that Binance wants to argue that, because it operates everywhere and nowhere, matching does not occur in the United States.  The Second Circuit rejected the argument that matching occurs nowhere.  Rather, plaintiffs plausibly alleged that matching occurred on Binance's infrastructure located within the United States. 

The alternative ground for the applicability of U.S. securities laws seemed a slam dunk.  While there is case law suggesting that merely sending orders within the United States does not render the transaction irrevocable, here Binance's own terms of service so provide.

As to the timeliness of the complaint, the Second Circuit allowed plaintiffs' claims to proceed only with respect to tokens purchased within one year of the filing of the complaint.  That  reasoning applied to plaintiffs' claims under both §12(a)(1) and § 29(b).  The analysis is a bit different with respect to each claim, but this is the ContractsProf Blog, so you can either read the opinion yourself or see what our friends over at the EquitableTollingofSecuritiesLawClaimsProf Blog have to say on the issue.

April 3, 2024 in E-commerce, Recent Cases, Web/Tech | Permalink | Comments (0)

Tuesday, April 2, 2024

Two University of Pennsylvania Professors Sue the University for Breach of Contract

HudaProfile1 copyTwo tenured faculty members, Huda Fakhreddine (left), an associate professor of Arabic literature, and Troutt Powell (below right), a professor of Africana studies and history, as well as an organization, Faculty for Justice in Palestine (PFJP), are suing the University of Pennsylvania for engaging in McCarthyism.  McCarthyism is not a cause of action, so they have brought their claims in the U.S. District Court for the Eastern Distrct of Pennsylvnia under the First and Fourteenth Amendments, and for breach of contract

They allege that the country is facing a new form of McCarthyism, in which people who are critical of Israel or Zionism face accusations of anti-Semitism.  I don't think I've seen a complaint like this before.  The complaint does not strike me as a competent bit of legal craftsmanship, but I suspect that the aim of the suit is not to win a legal claim.  Still, it alleges a breach of contract, so here we are.

Much of the complaint is taken up with a criticism of the U.S. House of Representatives and the House Committee on Education and the Work Force (the Committee).  The House passed House Resolution 894 in December 2023, which contained language that the plaintiffs claim violates First Amendment principles.  Among other things, the Resolution equated anti-Zionism with anti-Semitism.  I agree; that's reductive.  Plaintiffs allege that the sentence is "ontologically, and even epistemologically absurd." 

Lawyers, do not let university professors assist in the drafting of your complaint. 

Eve troutt powellThe complaint also alleges FERPA violations. That claim relates to an information letter sent to Penn in January, demanding sixteen categories of documentation to be returned in two weeks.  The letter names Professor Fakhreddine and accuses her of anti-Semitism.  

Although the letter was not a subpoena, the complaint alleges that Penn is beginning to produce the requested documents. Doing so, plaintiffs allege, would violate FERPA rights including the rights of student members of PFJP.  It would also subject plaintiffs to allegations of anti-Semitism, harassment and doxxing at the hands of outside actors.  Plaintiffs accordingly seek an order enjoining the University from cooperating with the Committee.  Plaintiffs further characterize Penn's cooperation with the Committee as rendering them complicit in a First Amendment violation. They allege claims  under both the Fourteenth Amendment  and the Pennsylvania constitution for violations of students' and faculty members' privacy rights.

The breach of contract claim is quite short.  It alleges the University made various promises to plaintiffs on which they relied.  The promises, not specified in the complaint, relate to freedom of speech, diversity, academic freedom, and good faith and fair dealing.  Cooperation with the Committee and complying with the information letter allegedly violate the University's contractual obligations. 

Without knowing what the University has shared with the Committee, it is hard to know whether any of these claims have any legs.  However, based on what I have seen from the COVID cases, it is hard to imagine that these allegations suffice to establish any legally binding promises that the University made to the plaintiffs.  In those cases, courts required specific evidence of contractual promises (express or implied), and plaintiffs' generalized allegations probably are not enough.

April 2, 2024 in Current Affairs, In the News, Recent Cases | Permalink | Comments (0)

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)

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)

Monday, February 26, 2024

SCOTUS Takes Another FAA Case

Arbitration
Image by DALL-E

A couple of years ago, we wrote about the Arbitration for All approach to the Federal Arbitration Act (FAA), which was given extreme expression in a recent Judge Easterbrook opinion.  That opinion builds on a series of SCOTUS cases from a decade ago (we barely took notice of Stolt-Nielsen; here's a guest post on Rent-A-Center; here's our post on Concepcion, and here's our post on Italian Colors).  Now, arbitration is in retreat on a number of fronts.

First, the Consumer Finance Protection Bureau attempted to prohibit class-action waivers in consumer lending agreements.  That regulation was nixed by the Republican-controlled Congress soon after Donald Trump took office.  Second, mass arbitration has lead some companies to remove compulsory arbitration from the their terms and conditions, a development that we most recently covered here.  Finally, SCOTUS recently issued two unanimous opinions limiting business entities' ability to compel arbitration on employees once the litigation has progressed for a while or if the employees are transportation workers.

Pooler -judge-rosemary_croppedThe Supreme Court will now take another crack at the latter issue, having granted cert. in Bissonnette v. LePage Bakeries.  That case is a putative class action by people who deliver baked goods.  They are suing the company that makes those goods.  Defendant LePage Bakeries moved to dismiss the suit and compel arbitration.  Like the plaintiffs in Saxon, which SCOTUS decided in 2022, plaintiffs claimed that they are exempt from the FAA, because Section 1 of the FAA exempts workers involved in interstate commerce.  The district court granted the motion to compel.  A panel of the Second Circuit first decided the case in 2022 and affirmed over a dissent from the late Judge Rosemary Pooler (right).  

The majority opinion kept things simple.  Following the Supreme Court precedent of Circuit City Stores v. Adams, the Court noted that only "transportation workers" come within the Section 1 exemption from the FAA.  The Second Circuit agreed with the district court that delivery workers are not "transportation workers."  Then, after SCOTUS decided Saxon, the panel reconsidered its opinion but arrived at the same conclusion.   

The Second Circuit first elected not to take the off-ramp available through arbitration under state law because the availability of arbitration under Connecticut law in this instance is unsettled.  Turning to the FAA, the majority noted that not everybody who works in the transportation industry is a transportation worker, but more to the point, just because you drive a truck to deliver baked goods does not mean that you are in the transportation industry.  Judge Pooler, citing courts from other jurisdictions, drew a different conclusion, "“[A] trucker is a  transportation worker regardless of whether he transports his employer’s goods or the goods of a third party.”  She sprinkled citations from Saxon liberally throughout her opinion, and she makes a compelling case that, if people who merely load baggage onto planes are "transportation workers," clearly a truck driver is a "transportation worker."  

In February, 2023, the Second Circuit denied rehearing en banc over the dissents of three judges.  Judge Jacobs, who wrote for the majority in the panel decision, and Judge Pooler take the gloves off in their statements regarding the denial of rehearing.  SCOTUS granted cert. back in September 2023.  The issue is "Whether, to be exempt from the Federal Arbitration Act, a class of workers that is actively engaged in interstate transportation must also be employed by a company in the transportation industry."

KavanaughAccording to , writing on SCOTUSblog, Justice Kavanaugh (left) took the lead in oral argument, making the case for a narrow reading of Section 1.  Somehow, Justice Kavanaugh believes that the Congress that passed the FAA didn't want anybody to be outside of arbitration.  Workers in the transportation industry were exempt because there was a separate arbitration scheme for them.   But look, if Congress intended for employees to be exempt from the FAA for any reason, including another arbitration scheme, then it intended them to be exempt from the FAA.  If Congress changed its mind about that, it is for Congress to amend the FAA to make it applicable to employees.  It is not for the courts to revise legislation.  SCOTUS should not update the non-delegation doctrine in the guise of the "major questions doctrine" while arrogating to itself the power to decide major questions of statutory interpretation through reference to non-textual sources. 

Moreover, I'm not sure what arbitration scheme he is referring to.  Counsel for the employees, Jennifer Bennett, ably showed that Justice Kavanaugh was just wrong about why seamen and transportation workers were exempted from Section 1. The arbitration schemes that he references were nothing like the FAA.  They provided only an option for arbitration as an alternative to litigation after a dispute arises.  She then goes on to argue that the FAA has no requirement that "transportation workers" be employed in the "transportation industry."

I have a different take.  On my reading of the legislative history of the FAA, the drafters expected it to apply exclusively among business people.  They never wanted it to apply to employment agreements and they never expected arbitration agreements to come in the form of contracts of adhesion.  As the drafters explained the purposes of the FAA to the Senate, “It is purely an act to give the merchants the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it.  Now, that is all there is in this.”

Justice Kavanaugh is right that the drafters of the FAA assumed that there would be an alternative arbitration scheme for employment agreements.  It was state arbitration statutes such as Connecticut's.  Congress had no power in the 1920s to legislate on the subject of employment agreements that did not implicate interstate commerce as that phrase was understood at the time.  At the time, it was quite narrow.  So the exemption in Section 1 was not meant to protect employees in the transportation industry from arbitration in unique ways.  It addresses the only category of workers whose employment agreements might be subject to arbitration and provides that they are exempt.  Nobody thought in 1925 that the FAA would apply to other employment agreements.  That was a matter for state arbitration statutes.

However, if, as may be the case here, the employer has not properly provided for arbitration consistent with the state statute, well then, litigation it is!  Even if arbitration under state law is appropriate, not all states permit employers to ban class representation through arbitration clause bootstrapping, so a return to the original public meaning of the FAA (see what I did there!) could effect a substantive change in the arbitration law landscape.

Roberts_8807-16_CropJustice Kavanaugh worries that protecting employees from mandatory arbitration would be a major shift.  Indeed.  However, as SCOTUS recently recognized, sometimes a court has to revise its decisions when those decisions were "egregiously wrong from the start."  From that perspective, it should be very telling that the earliest cases that the employer's counsel can cite in support of their narrow understanding of the Section 1 exemption date from the 1970s.  To make matters worse, Chief Justice Roberts (right) asks where the test applied in those 1970s test came from.  He expresses his intuition, which seems spot on, that "they just kind of made [it] up."

February 26, 2024 in Labor Contracts, Legislation, Recent Cases, Weblogs | Permalink | Comments (0)

Wednesday, February 21, 2024

Damages in Occidental Petroleum v. Wells Fargo

OccidentalIn May, 1995, the predecessor of Occidental Petroleum Corp. (Occidental) established a rabbi trust through the predecessor of Wells Fargo Bank (Well Fargo).  The parties in December 2019 or January 2020 agreed that Wells Fargo would sell 381,420 shares each day from January 6 until January 10, 2020.  For typical too-big-to-fail reasons, this did not occur.  The people responsible for Occidental's account did not really understand the transactions that they were to oversee (and I don't blame them!),  and there was miscommunication or non-communication between Wells Fargo and its transfer agent, Equiniti.  As a result, most of the shares did not get liquidated until March 20th, by which time the value of the shares had declined by eighty percent.

In a prior opinion, the District Court for the Southern District of Texas had granted summary judgment for Occidental on its breach of contract claim and denied Wells Fargo's motion for summary judgment on the quite reasonable ground that "Wells Fargo ha[d] not recited the elements of its affirmative defenses, nor pointed to evidence supporting its affirmative defenses."  Ouch.  To big to bother with elementary pleading standards.  

Wells FargoIn May, 2023 (yes, I'm that far behind!), the same court ruled on damages in Occidental Petroleum Corp. v. Wells Fargo Bank.  Occidental sought $38 million in damages, representing the difference between what it would have gotten had Wells Fargo done what it promised to do and what it got for its shares when Wells Fargo finally got around to selling them.  Wells Fargo estimated damages at between $ 9.764 and $18.5 million.  Guess what!  The court once again sided with Occidental, awarding it just over $38 million in damages.

Given that we recently posted on new scholarship on consequential damages, I thought it interesting that Wells Fargo's main argument in its brief on damages was that "Occidental failed to identify whether the damages it seeks are direct or consequential."  The Authors of the piece we discussed last week find evidence that transactional lawyers do not really know the difference between direct and consequential damages, but they expect litigators to be able to make that distinction.  Not so, apparently.  Wells Fargo argued that the damages arose as a consequence of a sharp and unforeseeable decline in stock prices (thanks once again, COVID-19!).  Very clever, said the court. However, "Damages can directly and foreseeably flow from a breach, even if the exact amount cannot be foreseen."  I may use this case to teach damages, because it does a great job clarifying, for the benefit of Wells Fargo's learned counsel, how to calculate expectation damages.

The court also rejects a more serious but still erroneous argument from Wells Fargo.  Wells Fargo wanted damages to be adjusted to reflect Occidental's obligation to reinvest the proceeds of the sales.  Had Occidental done so, whatever it bought also would have declined in value, because everything declined in value in March 2020.  The facts did not support Wells Fargo's contention; Occidental was permitted and did retain the funds as cash.  However, even if it had been obligated to reinvest, the consequences of that reinvestment were speculative and could not be taken into consideration when calculating expectation damages.

In August, 2023, the parties were back before the District Court for a ruling on attorneys fees.  it is not clear what Occidental asked for, but it looks like it pretty much got everything.  The court awarded $1.5 million in attorneys fees.

February 21, 2024 in Recent Cases | Permalink | Comments (1)

Tuesday, February 20, 2024

Air Canada Bound by Its Chatbot

CanadaHooray for Canada!  First you gave us the emoji-as-signature case; now this!

Just last week, I was complaining to my students that I don't like the way the Restatement lays out the elements of misrepresentation.  It says that misrepresentation has to be either fraudulent or material, but it is hard to come up with a fact pattern in which a plaintiff could establish the requisite scienter for a misrepresentation that was not fraudulent.  Air Canada, can you prove me wrong?

Plaintiff Jake Moffat, who apparently uses "Mr." but also they/them pronouns, went onto Air Canada's website to book a flight.  They were looking for a bereavement fare, and Air Canada's chatbot told them not to worry.  They could get the ticket recategorized as a bereavement fare retroactively so long as they applied to do so within ninety days of travel.  Air Canada's human employees were less accommodating, and Mr. Moffat sued to recover the difference between the fare they paid and the bereavement fare; a difference of $880 (Canadian, I assume). 

Air-Canada-Logo
In Moffat v. Air Canada, the Civil Resolution Tribunal (CRT) allowed Mr. Moffat's claim for negligent misrepresentation.  The claim is brought in tort, but that's only a product of a factual variable.  Mr. Moffat had paid for his ticket and was seeking a refund.  Had they not paid, Air Canada would be going after them for breach of contract, and they would be alleging negligent misrepresentation as an affirmative defense to their obligation to pay.  The elements of the claim seem to be same, except that Mr. Moffat had to establish that Air Canada owed him a duty.  No problem here.  In addition, Mr. Moffat had to show an untrue, inaccurate or misleading representation, negligence, reasonable reliance, and damages.  

The chatbot indicated that Mr. Moffat could fly first, provide evidence of bereavement later.  However, it also provided a hyperlink to Air Canada's bereavement policy, which does not allow for requests for bereavement fares after travel.  The rest follows as expected.  Mr. Moffat traveled.  Mr. Moffat sought a bereavement fare.  This being Air Canada, they said "sorry" about the misinformation provided by the chatbot and thanked Mr. Moffat for allowing them the opportunity to address the problem.  Air Canada did not offer a refund, instead it offered Mr. Moffat a $200 coupon towards future flights.  Mr. Moffat refused.

Mr. Moffat was able to how by a preponderance of the evidence that all elements of a claim for negligent misrepresentation were met.  The CRT rejected Air Canada's affirmative defense based on the terms and conditions of the applicable tariff because Air Canada described those terms and conditions but did not provide evidence of them.  Seems odd that Air Canada would bother to fight this claim but then not bother to provide evidence necessary to its defense.  as a result of Air Canada's half-hearted litigation strategy, we can't know whether other plaintiffs could follow in Mr. Moffat's path.  It may be that Air Canada has a powerful defense.  However, when a big corporation goes up against a pro se litigant, the CRT is not inclined to cut it any slack.  The CRT engaged in a careful and detailed calculation of damages and ordered Air Canada to pay Mr. Moffat $812.02, plus post-judgment interest.  

Chatbot1 Chatbot2Now I know what you are thinking.  It's easy to blame the overworked chatbot for messing up.  But I asked a chatbot its opinion about what could have caused the negligent misrepresentation in question.  It sent me a before and after picture of the chatbot in question, who apparently started its career as "cht boot?" but then decided to take on the moniker "CHBoT?", which like BONG HiTs 4 JESUS, just seems right to me.  At left we have the Air Canada chatbot pictured the day that it started work.  At right, we have it three weeks into its new career.  Images generated by DALL-E.  As you can see, like most airline employees, it was attracted by the allure and mystique of air travel.  Like some, it quickly learned that it was a glorified server on a greyhound bus trip to hell.  I'm not saying that all of the airlines' customer service people end up hitting the sauce hard.  I'm just saying I would not blame them for doing so.

Hat tip to my former student, Don Dechert, who shared the case with me!

February 20, 2024 in E-commerce, Recent Cases, Travel, Web/Tech | Permalink | Comments (0)