Archive for the ‘Contract Law & Beyond’ Category

Barney Frank’s Bad Idea

posted by Nate Oman

Last month Barney Frank unveiled the House plans to fix the financial services industry. One of the provisions (section 1501) will require that any creditor who originates a loan to retain some of the ultimate risk of non-repayment of the loan. The provision is an apparently sensible response to the pathologies in the originate-to-distribute (OTD) model of mortgage lending that we saw at the height of the subprime boom. The basic idea is that originators were insufficiently incentivized to monitor the credit worthiness of applicants, and therefore manufactured a huge volume of ultimately toxic financial assets. The idea is to fix the problem of agency costs by aligning the incentives of loan originators with loan holders. Despite the plausibility of the proposal, I think that it is ultimately a bad idea.

First, it is a bad idea because it addresses a symptom rather than a cause of financial rot. The problem with the mortgage-brokers-as-villains narrative is that it fails to explain why the brokers could do a land office business selling toxic junk to a voracious secondary market. One explanation – the one implicit in section 1501 – is that brokers were taking advantage of purchasers, selling them supposedly sound financial assets that the purchasers were too unsophisticated or blinded by greed to realize were junk. To state this assumption explicitly is to see its limitations. The purchasers of mortgages were not unsophisticated consumers or little old ladies entrusting their savings to fast talking swindlers. These were a bunch of extremely wealthy, extremely sophisticated, extremely large financial institutions. It is rather unlikely that these guys were “fooled” by the mortgage brokers.

A more plausible story, in my opinion, looks at the underlying supply and demand for credit. First, why did the mortgage brokers go into the subprime market? At least in part the answer is that they could afford to do so. With the short term wholesale funding on which they relied to originate loans costing them essentially nothing, it was extremely inexpensive to originate loans. At the same time, the massive subsidization of the subprime market through implicit guarantees to the Fannie and Freddie, the so-called “Greenspan Put” on which Wall Street relied, and various (admittedly much smaller) direct subsidies created a massive demand for the assets churned out by the mortgage brokers. Add to this the impact of monetary and Chinese balance of payments factors on asset prices, and the notion that the subprime crisis was really the result of agency costs in the OTD model looks implausible. Absent macro-economic and regulatory distortions, I suspect that market competition and reputational sanctions are sufficient to keep the OTD brokers honest. Given those distortions, we have seen spectacular examples of those who did have skin in the game responding perversely to the perverse incentives with which they were presented. Read the rest of this post »

  November 11, 2009 at 2:53 pm   Posted in: Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Uncategorized   Print This Post   5 Comments

Boastful Contract Lawsuit Is Dismissed

posted by Dave Hoffman

I’ve  posted on a lawsuit out of Texas, in which a law student plaintiff sued a lawyer defendant for failing to live up to a “promise” to pay $1,000,000 to any television viewer who could prove him wrong about his theory of a case.  I opined the case was a classic example of puffery, unlikely to reach the merits on that ground.   I challenged readers to prove me wrong.

Louis K. Bonham, counsel to the defendant, has done so.  He reports that the case has now been dismissed – but for want of personal jurisdiction.  According to the docket, Judge Miller’s decision issued on October 23.  It rests on the observation that the only contact that the defendant had with Texas was the airing of a television broadcast: personal jurisdiction on these grounds would make him subject to national jurisdiction where it wasn’t otherwise anticipated.

Incidentally, the underlying motion documents suggest that plaintiff’s claim was even weaker on the merits than I’d argued, as the unedited transcript of of the boast is different than the version in the complaint.  Here’s what plaintiff asserted was said:

NBC’s Ann Curry asked whether there was enough time for [Mason's client] to commit [a crime]. An unidentified person said, “The defense says no.”

“I challenge anybody to show me,” Mason said. “I’ll pay them a million dollars if they can do it.”

But here’s what was actually said:

… And from there to be on the videotape in 28 minutes. Not possible. Not possible. I challenge anybody to show me, and guess what? Did they bring in any evidence to say that somebody made that route, did so? State’s burden of proof. If they can do it, I’ll challenge ‘em. I’ll pay them a million dollars if they can do it.

NBC Transcript, p. 3

This kind of qualifying language makes it even more obvious that the statement was a mere puff. Congrats to Mr. Bonham on his win!

  November 9, 2009 at 9:58 am   Posted in: Contract Law & Beyond, Current Events, Law Practice, Law and Psychology   Print This Post   One Comment

Doe v. Wal-Mart: Must Common Law be Reformed to Protect Workers?

posted by Michael Zimmer

Outsourcing, with or without offshoring, through extended supply chains of goods and services has come to be a common way to organize a business. Using contract law to divide and subdivide what was once a single enterprise (or start one from scratch) into separate legal entities is ever more useful to businesses as they try to cut their costs to become ever more competitive. If vertical integration was once the norm – e.g., Ford’s River Rouge plant where iron ore, coal, sand, rubber came in one end and Ford cars came out the other – the norm is now to have flat and horizontal relation-based groups of legally independent entities that can stretch around the world. The business entities farthest from the core of the enterprise frequently are almost ephemeral in to their organization, ownership and even life span. These frequently operate at the fringe of the formal economy and often in the informal economy where they escape coverage by the domestic labor and employment laws of the place where the work is performed. “Middlemen” operated as a bridge between the core enterprise and the far end of the supply chain where the productive work is actually performed.

The common law generally favors this type of private ordering in part because it looks at so many issues through a lens that sees only the two parties immediately involved in the transaction. The common law does not generally take too much account of the effects on third parties, including workers participating in the full enterprise from one end of the supply chain to the other. What is becoming ever more clear is that the common law leaves labor and employment interests in the dust, unable to keep up, incapable of protecting workers.

A recent common law case demonstrates the freedom enterprise has to organize its affairs to its own interests while escaping any obligation to workers down line in the supply chain. In Doe v. Wal-Mart Stores, Inc., plaintiffs were employees of enterprises located around the world that make and sell goods to Wal-Mart. Wal-Mart’s contracts with plaintiff’s employers all incorporate Wal-Mart’s Code of Conduct obliging these suppliers to provide basic labor standard protections to their employees and allowing Wal-Mart to monitor compliance including canceling contracts if the suppler “fails or refuses to comply” with the Code. Requiring suppliers to agree to the Code shields Wal-Mart from attack, including consumer boycotts, for selling goods made by child labor or under other sweatshop conditions. Nevertheless, the workers at the ends of the supply chain were in fact not provided the labor protections the Code claimed to mandate. Claiming injury from their employers’ mistreatment, plaintiffs sued Wal-Mart because it failed to either monitor or enforce compliance with its Code. The Ninth Circuit, applying traditional common law, rejected all four of plaintiffs’ claims. First, plaintiffs were not third party beneficiaries of the contracts between plaintiffs’ employers and Wal-Mart. Second, Wal-Mart was not a joint employer of these employees with their employers. Third, Wal-Mart owned no duty to plaintiffs and so it could not to be held to be negligent. Fourth, Wal-Mart was not unjustly enriched by the employers’ mistreatment of the plaintiffs. In short, independent contractor law allows Wal-Mart to arrange its legal relationship with its supplier to their mutual advantage while also cutting off the claims of the employees of the suppliers. As has been true from the earliest sweatshop days in the garment business, the actual producers are completely contingent, ready to disappear and to reappear in a new format at a new location at a moment’s notice in order to avoid any obligations owed the workers. Sweatshop conditions have grown far beyond the garment industry to include electronics and many other labor intensive businesses.

So, ironically, those interested in workers’ rights might need to start thinking about reforming the common law, at least as it applies to employees, if law is to be relevant to worker protections. For the purposes of worker protection, enterprises may have to be reconceptualized so that the Wal-Marts of this world are viewed as a single enterprise from the beginning to the end of the supply chains, without regard to the private ordering they engage in to divide the whole into many parts. In fact, if not law, they do form a functional whole, despite the present law that separates them into many independent legal entities. The normative basis for such a new approach is that, if the Wal-Marts of this world are not responsible for labor standards to workers to the very end of the supply chain, then no one is.

If enacting the Employee Free Choice Act and the various civil rights bills pending in Congress face tremendous challenges to be enacted, the question is whether legislation to reconceptualize workers’ rights in these subdivided enterprises has any chance at passage. In the recent era, the common law courts have also retreated from the advances made when what we call “employment law” was just beginning to blossom.

  November 7, 2009 at 3:08 pm   Posted in: Civil Rights, Contract Law & Beyond, Employment Law   Print This Post   One Comment

Prediction Correct in NY Damages Case

posted by Lawrence Cunningham

As I predicted last month, the New York Court of Appeals last week reversed an Appellate Division decision denying any damages to buyers of real property from sellers who admitted breach of contract to purchase and sell real property. The Appellate Division had denied sought damages measured by lost profits, the contract-market differential and reliance expenses. The Court of Appeals agreed as to lost profits and contract-market differential but reversed as to reliance expenses.

It did so, however, in an opinion void of any analysis of the lower court opinions. As to the lost profits claim, in particular, the Court of Appeals merely said it agreed with the lower courts that the assertion was “speculative.” It did not explain why and did not confront or correct patently erroneous statements in those opinions that the buyers could not recover because they were pursuing a new business enterprise.  More responsibly, though still without analysis, the Court rejected the contract-market claim, by referencing evidence showing that the property value at breach did not exceed the contract price.

Most important, on the reliance branch, the Court of Appeals reversed the lower court rulings that simply failed to see that reliance damages are a standard alternative to expectancy damages (whether lost profits or the contract-market differential), especially when the latter cannot be determined with reasonable certainty.  The Court cited Section 349 of the Restatement (Second) of Contracts, and numerous New York Court of Appeals cases, including the classic Freund v. Washington Square Press, all of which allow recovery of reliance losses incurred in preparing to perform a contract, so long as these are foreseeable and ascertainable.

But what of those incorrect lower court statements about lost profits?  Should the Court not have addressed them?   Affirming by saying it agreed that the lost profits claim was ”speculative” does not exactly reject erroneous statements in the lower court opinion, such as that new businesses face a different burden or hurdle in recovering lost profits.    Reversal as to reliance damages does not disturb them.   While I concur with the Court on all its results in all three damages holdings, does it promote judicial economy to leave clearly erroneous lower court statements about a recurring issue in contract law uncorrected?

  October 27, 2009 at 5:40 pm   Posted in: Contract Law & Beyond   Print This Post   2 Comments

What Factors Correlate With Veil Piercing Success?

posted by Dave Hoffman

If you’ve made it through the content of complaints, some data about who gets sued, and descriptive statistics about wins and losses, you basically are pot committed to this veil piercing project. In this post, I’m going to exploit that commitment by describing the results of our statistical analysis of two different kinds of success that plaintiffs may achieve in veil piercing cases: (1) on motions; and (2) at the case level. If you don’t care to follow me beyond the jump, here’s the bottom line (from our abstract):

“Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing claims than corporations; undercapitalization is strongly associated with success while conclusory grounds like “façade” and “sham” are not; and defendants’ legal sophistication is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than plaintiffs suing companies employing many workers. This results holds even when controlling for legally-relevant variables. Contrary to both theory and previous empirical work, we also find that judicial liberalism is inversely related to the likelihood of plaintiff success.”

Read the rest of this post »

  October 9, 2009 at 6:51 am   Posted in: Contract Law & Beyond, Corporate Law, Economic Analysis of Law, Empirical Analysis of Law, Law School (Scholarship)   Print This Post   One Comment

What Does Veil Piercing Success Mean Anyway?

posted by Dave Hoffman

If you look at opinions, winning in a veil piercing case is pretty easy to define: did the court agree to pierce the veil, reaching through an entity to its shareholders. If you were inclined, you could model success at those terminal moments in cases, asking which factors (described in the opinions) correlated with courts agreeing to pierce.

There’s value in this approach, not least because opinions shape reality. But there’s a problem too.  Not only are opinions unrepresentative, but they come late in cases.  The result is an extreme form of selection.  It’s not clear (to me, anyway) what the null hypothesis regarding the effect of independent variables  ought to be for late-stage dispositions.

Dockets offer the promise of a different approach: asking which factors correlate with success or failure early in cases.  Further, assuming that adjudicated motions teach the parties about the strength of their cases, and that they settle strategically, we can even start to learn from the timing and incidence of settlement.

In this post, I’m going to relay some descriptive statistics about the veil piercing successes that plaintiffs achieved in our data. (I’m continuing to pull the data and some text from our paper.)  To those who are getting annoyed by all of these posts, I’m sorry!  I’ve been living with this project for a long time — I’m excited to finally share it publicly.

Read the rest of this post »

  October 8, 2009 at 7:24 am   Posted in: Contract Law & Beyond, Corporate Law, Economic Analysis of Law, Empirical Analysis of Law, Law Practice, Law School (Scholarship)   Print This Post   2 Comments

“Wages of Spin” (Some Contract Law Issues)

posted by Lawrence Cunningham

Suppose the host of a show like American Idol insisted that, in exchange for putting participants on air and gaining publicity, participants had to sign agreements transferring copyright and all future royalties from songs they perform on the show to the host. Suppose further that these participants signed such contracts, and ensuing royalty streams generated millions of dollars for the host, nothing to the performer. Would these agreements be enforceable? Under what legal theories could they be challenged?

Facts like these appear at the heart of longstanding, though little known, allegations against Dick Clark, host of the wildly popular arbiter of successful commercial music decades ago, American Bandstand. Though Clark faced Congressional hearings over such allegations back in the 1960s, they never went anywhere and legal claims do not appear to have been pursued. This quiescent state of affairs may reignite amid the new documentary on the subject, Wages of Spin, which suggests that artist and producer reticence to pursue legal claims is due to lack of knowledge or capacity or to how the power Clark wields in the industry has made many potential witnesses and other adversaries reluctant to challenge him.

The film, made by Shawn Swords (who, in the interest of full disclosure, is a friend of mine and high school classmate), is not so much an expose of Clark’s moral compass as an exploration of the tactics he used to run the show. As a documentary, it adopts an objective tone and viewpoint, though undoubtedly does not provide the adversarial forum to explore or test all assertions and counter-assertions that adjudication of disputes provides.

Accordingly limited, the skeletal facts may permit considering, in broad outlines, issues from the common law of contracts concerning the enforceability of such agreements. I mention four below: lack of consideration, unconscionability, illegal bargain and duress. Comments are open to add to this list—or subtract from or qualify it. (Of course, any inquiry like this skirts potentially applicable statutes of limitations, which raise additional issues concerning tolling, discovery, diligence and others that would require considerably more facts to evaluate.)

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  October 5, 2009 at 9:29 am   Posted in: Contract Law & Beyond   Print This Post   5 Comments

Are Cell Service Early Termination Fees Too High or Too Low?

posted by Lawrence Cunningham

What happened to debate about cell phone subscriber contracts containing early termination fees? Companies and subscribers sign multi-year term contracts, exchanging service for monthly and other fees. Contracts provide that customers terminating early breach and owe damages, usually a flat fee of between $150-225. Companies claim these fees partly compensate them for costs like subsidizing handsets to customers, but customers assert these fees coerce them to continue in an unwanted relationship.

Debate manifested in numerous class action lawsuits, state attorney general investigations under state consumer protection laws, federal legislators circulating bills to curtail the fees, and July 2008 Federal Communications Commission hearings and suggestions for compromise. Much of this energy has dissipated, perhaps partly because some companies have modified some of their contracts, including by adjusting the fee according to when in the term a customer terminates. But not all companies have adjusted and not all contracts have been changed.

Lawsuits continue to wind their way through courts, involving issues ranging from subscriber assertions of unjust enrichment to violation of consumer protection laws. A particularly interesting issue concerns whether the clauses are enforceable under the general common law of contracts. One of the few cases to have resulted in a judicial opinion on the merits grappled extensively with this issue, which turns out to be more complex than one may suppose. Ayyad v. Sprint Spectrum (Cal. Super., Alameda County 2008.)

The court, in a class action, found the clauses unenforceable, though not because they charged subscribers too much, but mainly because the company’s losses from breach by early termination were greater (plus, more generally, the fees did not reflect a compensatory impulse, shown further by how they did not vary with the time of subscriber breach).

This result may be surprising for two reasons. First, as a matter of traditional contract law, concern focuses more on stipulated damages that overcompensate and thus penalize breach rather than those that under-compensate. Second, as a matter of fact, is it likely that company losses from subscriber breach exceed $150-225 per subscriber, on average or on particular contracts?

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  October 3, 2009 at 2:00 pm   Posted in: Contract Law & Beyond   Print This Post   No Comments

Amendable, Illusory, Contracts

posted by Dave Hoffman

A set of golf club membership contracts provide that they “may be amended from time to time.”  Signatories, who plunked down $185,000 refundable deposits to join once the clubs were operational, want to exercise the refund clause.  The clubs respond that they can exercise their amendment ability and keep the deposits.  Lawsuits result.

This seems clearly wrong.  The amendment clause should be interpreted in light of commercial reasonableness, or the contracts are voidable as illusory.  If “may be amended from time to time” means that the Club has the sole discretion to change both signatories’ obligations to the detriment of the members, then we’ve got a pretty clear example of a contract in name only.  Rather, I imagine that the amendment language, reasonably interpreted in light of commercial norms, is limited to non-material terms -which would not include the refundability of the deposits.  Indeed, the members argue that refundability was a “relatively unusual stipulation [that] was a big part of the appeal of joining.”

What do you think?

(H/T Atrios)

  September 27, 2009 at 10:26 am   Posted in: Contract Law & Beyond   Print This Post   3 Comments

Hot Contract Damages in New York

posted by Lawrence Cunningham

Suppose a partnership of two individual real estate developers agrees to buy raw land from a local government authority to develop a retail factory outlet in a special trading zone of upstate New York across the St. Lawrence River from Canada.   A trial court found that the Seller breached this contract “in bad faith.”  

To what damages is the Buyer entitled? According to an intermediate appellate court in New York, which affirmed that Seller breached in bad faith, Buyer is entitled to neither expectancy damages (lost profits) nor reliance damages (as a matter of summary judgment).

Is this likely to be upheld by the New York Court of Appeals, which heard oral argument in the case last week? For the following reasons, I doubt it, but either way look forward to the Court’s opinion.

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  September 22, 2009 at 4:05 pm   Posted in: Contract Law & Beyond   Print This Post   One Comment

Remedies for Breach of Season Ticket Contracts

posted by Lawrence Cunningham

Nationally, and lately here in Washington, DC, sports fans are learning hard lessons in contract law. When franchises, like the Washington Redskins football team, built expensive new stadiums during the economic boom of the mid-2000s, they supported funding with multi-year ticket sales. Partly to get long-term construction loans, teams sold season tickets for up to 10 years, promising designated season tickets in exchange for fan promises to make stated annual payments during the term.

Amid today’s economic recession, many fans, unable to afford the luxury they promised to pay for in flusher times, breached those promises, not paying for tickets. In response, teams have taken self-help measures and sued fans, for breach of contract, seeking damages.

Self-help includes reselling this season’s tickets to other fans, usually at lower prices or, when tickets cannot be sold, using seats for other purposes, like promotional or charitable events. Teams also resold future seasons’ seats, again usually at lower prices, or hold them, hoping for future increases in market price. Measured today, what are a team’s damages?

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  September 12, 2009 at 12:36 pm   Posted in: Contract Law & Beyond   Print This Post   3 Comments

UCLA Law Review 56:6 (August 2009)

posted by UCLA Law Review

Volume 56, Issue 6 (August 2009)

Articles

Overcoming Overdisclosure: Toward Tax Shelter Detection (pdf)
Joshua D. Blank

First Amendment Enforcement in Government Institutions and Programs (pdf)
Gia B. Lee

Ezra Pound’s Copyright Statute: Perpetual Rights and the Problem of Heirs (pdf)
Robert Spoo

Comments

Nonwaiver Agreements After Federal Rule of Evidence 502: A Glance at Quick-Peek and Clawback Agreements (pdf)
Jessica Wang

Narrowing the Definition of “Dwelling” Under the Fair Housing Act (pdf)
Karen Wong

Addressing Youth Bias Crime (pdf)
Jordan Blair Woods

  September 2, 2009 at 3:17 pm   Posted in: Constitutional Law, Contract Law & Beyond, Corporate Law, Intellectual Property, Law Rev (UCLA), Race   Print This Post   No Comments

A Breach Born Every Minute

posted by Dave Hoffman

In the Spring, I asked you folks for some help thinking of examples of true Holmesian agreements, “contracts which, when breached, have a similar psychological profile to a speeding ticket.”  It turned out to be pretty hard to identify such agreements, since most people believe breach to be a morally wrongful activity – not simply an option to pay damages at will.  As Jonathan Baron and Tess Wilkinson-Ryan previously have found, the degree to which individuals find breach to be “bad” is quite manipulable:  breaches to gain are worse than breaches to avoid loss, liquidated damages ameliorate feelings of reprehensibility, etc.  Missing from this research has been a psychological theory of what makes breach so aversive.

Tess and I came up with a working hypothesis: breach is seen as a form of interpersonal exploitation that makes the breachee a sucker.  We’ve put together a paper that reports on a series of experiments supporting this hypothesis, titled (naturally) “Breach Is For Suckers.“  Check out the abstract, after the jump.

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  August 15, 2009 at 9:41 am   Posted in: Behavioral Law and Economics, Contract Law & Beyond, Law and Psychology   Print This Post   6 Comments

BestBuy’s $9.99 HDTV Contracts

posted by Lawrence Cunningham

On Wednesday morning, BestBuy.com, the consumer products seller, advertised 52-inch Samsung HDTVs, usually sold for thousands of dollars, for sale at $9.99. Many buyers ordered at that price, with the seller processing the orders and charging respective credit cards.

Later that day, the seller called the ad a mistake, withdrew it, cancelled associated orders and reversed the credit card charges. It credibly denies any binding agreements were formed.

But is that stance air tight? Basic principles of contract law generally support the seller’s bottom line, though not exactly its reasoning, providing some basis for a buyers’ contract claim.

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  August 14, 2009 at 8:26 am   Posted in: Contract Law & Beyond   Print This Post   2 Comments

Latvian Twist on Faust

posted by Lawrence Cunningham

Is a usurious cash loan secured solely by the borrower’s immortal soul enforceable, as a matter of mortal law?

Fantastic as it seems, a report proliferating on the Web says a new company in Latvia is using that business model, successfully. Two-month old Kontora Loan Company of Latvia, brainchild of a 34-year old entrepreneur, offers cash loans up to about €700 (about $500) with daily interest rates of 1% (and some opacity on the frequency of compounding).
The soul part aside, requirements are modest: borrowers must be Latvian residents and provide name and signature. The company has low overhead, foregoing collection staff or policy, reasoning the soul is security enough. Business is off to a good start, with 200 customers on board, a demographic heavily populated by poor drunks recently in bar room brawls.
Regulators in Latvia reportedly do not object, except that its Consumer Rights Protection Center questions the business from “a humanistic standpoint.” It would not take our nascent Consumer Financial Product Safety Commission much effort to find the loans objectionable in the US, although mere excuse from mortal legal obligation may leave risks that human judges cannot exonerate.

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  July 13, 2009 at 4:53 pm   Posted in: Contract Law & Beyond, Humor   Print This Post   3 Comments

On Spec: Corporate Waste and Contract Law

posted by Lawrence Cunningham

Extravagant corporate expenditures are among salacious details revealed during the  economic crisis, from executive compensation, celebratory parties, office renovations and naming sports stadiums. A few courts, even in Delaware, indicate willingness to police extravagance under the hoary corporate law doctrine of waste, and some observers call for reinvigorating that doctrine.

Reinvigoration would be necessary because use of the doctrine of waste to upset corporate transactions is nearly as rare as hen’s teeth. Students of contract law, when beginning to study corporate law, find this rarity strange. They are told corporate law is anchored in fiduciary principles that contrast with contract law’s operating assumption of arms’-length transactions warranting extraordinary judicial deference.

True, standard talk in corporate law jurisprudence concerning both fiduciary duty and waste expresses similar interest in judicial deference, though emphasizing greater willingness to review corporate transactions to evaluate whether officials act in good faith, with due care, and without promoting self-interest over corporate interest. It may be odd, then, that judicial willingness to police corporate transactions under the doctrine of waste is weaker than within traditional law of contracts, such as its doctrine of substantive unconscionability.

Put differently, the issue can be expressed as what kinship exists or should exist between corporate law’s doctrine of waste and contract law, especially substantive unconscionability. The following notes some familiar ways the two show remarkable kinship and the surprising ways they depart from one another. For those looking to corporate law’s doctrine of waste to promote greater corporate accountability, a modest way would simply take more meaningful lessons from the law of contracts.

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  June 26, 2009 at 8:47 am   Posted in: Contract Law & Beyond, Corporate Law   Print This Post   4 Comments

I’ll Pay You $1,000,000 if this Blog Post is Wrong

posted by Dave Hoffman

Contract professors are excited by this lawsuit out of Texas, in which law student Dustin Kolodziej sued Orlando attorney Cheney Mason for failing to pay up on a boast he made while being interviewed on Dateline.

NBC’s Ann Curry asked whether there was enough time for [Mason's client] to commit [a crime]. An unidentified person said, “The defense says no.”

“I challenge anybody to show me,” Mason said. “I’ll pay them a million dollars if they can do it.”

Kolodziej did it, though some quick driving, and he now wants his million dollar reward, under a theory of a breach of a unilateral contract.

The case isn’t frivolous per se, but it is unlikely that Kolodziej will make it past summary judgment.  This seems like a textbook example of a boastful puff which no reasonable person in Kolodziej’s shoes would believe constituted an offer.  As in the new casebook classic Leonard v. Pepsico, Inc., 88 F. Supp.2d 116 (S.D.N.Y. 1999), a judge will likely note that the setting (directed at the world, not to a particular person), the offeror’s role (hyperbolic advocacy), the nature of the communication (a  “challenge”), and the amount involved (disproportionate to any gain to the offeror) all combine together to destroy the requisite seriousness & formality that distinguish offers from puffs.

Throwing the case out is the right result.  Ordinarily courts rely puffery doctrine too often – harming  consumers who have relied to their detriment on sellers’ optimism.  But here, as in Pepsico, Kolodziej seeks to force a contract on Mason, or at least a settlement.  Gotchya contracts like this don’t fit well in any theory justifying enforcement.  As an extra weight on the scale here, contractual enforcement would chill a defense lawyer’s efforts on behalf of his client.

This isn’t to say that all publicized rewards are unenforceable.  Kodak has just offered $5,000 to some poor kid who failed to meet Megan Fox.  Unlike Kolodziej’s case, there is only one potential offeree, the offer is accompanied by a way to communicate acceptance, the amount is reasonable, and Kodak’s goal (to document how a “photograph can connect and change the lives of two complete strangers”) is commercial and understandable.

In the event that you do disagree with me, either about the specifics of the post or about puffery more generally, you are on notice that the title of this post is a joke.

  June 24, 2009 at 7:22 pm   Posted in: Contract Law & Beyond, Weird   Print This Post   6 Comments

Contracts, Confidentiality, and Speech: Connecticut Supreme Court Upholds Agreement Not To Speak

posted by Deven Desai

I am sure that free speech, First Amendment gurus/junkies will have more to say about this one, but a recent case out of the Connecticut Supreme Court, Perricone v. Perricone, seems to merit a mention here. As the title of the case indicates, it is a divorce case. Apparently the husband runs a skin care company and millions of dollars are at stake. According to The Connecticut Law Tribune, the New York Post covered the divorce. Nonetheless, during the case Ms. Perricone “signed a confidentiality agreement to prevent pretrial discovery documents from being publicized. In it, she agreed that Perricone’s lucrative skin care business ‘may be severely harmed’ if she made disparaging or defamatory statements about him.” When she wanted to talk to 20/20 about the case, however, Mr. Perricone obtained an injunction by arguing that the confidentiality agreement controlled and that an integration clause in the final settlement did not supersede that agreement. In short, Ms. Perricone was still prevented from talking about the divorce. The court agreed with Mr. Perricone.

As First Amendment matter, the Connecticut Supreme Court held that the agreement was not a prior restraint on speech. I am sure that there are articles about the problem of what is state action in this context and whether one can waive First Amendment rights via contract. The court in this case relied on Cohen v Cowles Media Co. and held: “that a party’s contractual waiver of the first amendment’s prohibition on prior restraints on speech constitutionally may be enforced by the courts even if the contract is not narrowly tailored to advance a compelling state interest.”

As I am not a First Amendment guru and/or junkie, all I can say here is that it seems that there are some continuing problems here. The idea “that a judicial restraining order that enforces an agreement restricting speech between private parties [does not] constitute[] a per se violation of the first amendment’s prohibition on prior restraints on speech” appears correct if non-disclosure agreements and other confidentiality agreements are to work. Indeed, as our own Dan Solove and Neil Richards discuss in Rethinking Speech and Civil Liability:

Since New York Times v. Sullivan, the First Amendment requires heightened protection against tort liability for speech, such as defamation and invasion of privacy. But in other contexts involving civil liability for speech, the First Amendment provides virtually no protection. According to Cohen v. Cowles, there is no First Amendment scrutiny for speech restricted by promissory estoppel and contract. The First Amendment rarely requires scrutiny when property rules limit speech. Both of these rules are widely-accepted. However, there is a major problem – in a large range of situations, the rules collide.

Although I am not sure I agree with the paper’s solution, I recommend the paper as a way to think not only about the Perricone case but the problems encountered when free speech and private law intersect.

  June 24, 2009 at 2:50 pm  Tags: contract, divorce, First Amendment, free speech, Perricone  Posted in: Contract Law & Beyond, First Amendment   Print This Post   No Comments

Immutable Terms?

posted by Dave Hoffman

Bob’s opening post about the ALI Principles of Software Contracts project alludes to commentators who criticized Section 3.05(b)’s purported immutability.   As a commentator to Bob’s post noted, a joint letter between rivals Linux and Microsoft is the most prominent example of this critique.  According to lawyers representing the software concerns, a “far better way” of addressing the implied warranty of no material hidden defects would be to make it disclaimable, since implied warranties are ordinarily disclaimable under the UCC.

As Bob’s post points out,  3.05 isn’t strictly speaking immutable at all: the vendor can “contract out” by simply disclosing the defect!  And even were that not true, contracts transferring goods with defects that are (i) material; (ii) known to the seller at the time of sale; and (iii) hidden would create a serious problem of good faith, which is not generally disclaimable under the common law or under the UCC.   Providing a good that the seller knows is materially defective — when the buyer can not learn that fact before the purchase is completed – would very likely be bad faith.  But why not permit such bad faith conduct to be disclaimed?  Can’t Microsoft simply come out and say

“There is an implied warrant out there that promises you that the copy of Windows you are about to buy isn’t materially defective.  Without admitting, or denying, that this particular copy of windows contains a material, hidden, defect, we hereby disclaim that warranty.  Go pound sand.”

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  June 2, 2009 at 9:20 pm   Posted in: Contract Law & Beyond, Cyberlaw, Economic Analysis of Law   Print This Post   2 Comments

American Law Institute approves the Principles of the Law of Software Contracts

posted by Bob Hillman

Thanks to Dave Hoffman, who just completed a very successful visit at Cornell Law School, for inviting me to be a guest blogger for the month. Maureen O’Rourke, the Associate Reporter on the Principles of the Law of Software Contracts, and I are posting the following to acquaint readers with the Principles and also to respond to some criticism of one section of the Principles that creates, under certain circumstances, an implied warranty of no known material hidden defects in the software.

On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address issues including contract formation, the relationship between federal intellectual property law and private contracts governed by state law, the enforcement of contract terms governing quality and remedies, the meaning of breach, indemnification against infringement, automated disablement, and contract interpretation.

The Introduction to the Principles explains further that “[b]ecause of its burgeoning importance, perhaps no other commercial subject matter is in greater need of harmonization and clarification. . . . [T]he law governing the transfer of hard goods is inadequate to govern software transactions because, unlike hard goods, software is characterized by novel speed, copying, and storage capabilities, and new inspection, monitoring, and quality challenges.” Many of the rules of Article 2 of the UCC therefore apply poorly to software transactions or not at all, and the Principles are intended to fill the void.

The Principles are not “law,” of course, unless a court adopts a provision. Courts can also apply the Principles as a “gloss” on the common law, UCC Article 2, or other statutes. Nor do the Principles attempt to set forth the law for all aspects of a transaction, but instead rely on sources external to the Principles in many areas.

The Principles apply to agreements for the transfer of software or access to software for a consideration, i.e., software contracts. These include licenses, sales, leases, and access agreements. The project does not apply to the exchange of digital media or digital databases. It applies a predominant purpose test to determine applicability to transactions involving embedded software or software combined in one transfer with digital media, digital databases, and/or services.

We are the Reporter and Associate Reporter of the software principles. We have been greatly aided by our advisors, consultative group members, ALI Council members, liaisons from the National Commissioners on Uniform State Law, Business Software Alliance, and the American Bar Association, and many additional lawyers from industry and other groups who, over the last five and one-half years, have met with us, talked with us on the phone, and exchanged e-mails with us. We believe the project moved along smoothly largely because of the efforts of all of these groups and individuals.

Nevertheless, in the two weeks leading up to approval in May, we received communications from a few software providers evidencing concern largely with one section of the Principles. Section 3.05(b) creates a non-excludable implied warranty that the software “contains no material hidden defects of which the transferor was aware at the time of the transfer.” The section only applies if the transferor receives “money or a right to payment of a monetary obligation in exchange for the software.” Because the section may be the most controversial provision, we devote the rest of this post to the issue.

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  June 2, 2009 at 8:12 am  Tags: American Law Institute, software contracts  Posted in: Consumer Protection Law, Contract Law & Beyond, Cyberlaw, Intellectual Property, Law Talk, Technology, Uncategorized   Print This Post   4 Comments

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