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Category: Contract Law & Beyond

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Article Stub: Finding Offerors under 2-207

Boxing-Winner

[I'm planning to write a series of posts I'll call article stubs - the germs of papers I'll likely never write. Dan Markel might - or more likely might not - approve. I used to talk about these pre-draft ideas with him, and he mercifully steered me off most of them before they saw the light of day. In his honor, here's a bad idea. Feel free to tell me so.]


 

UCC 2-207, the battle-of-the-forms provision, is famously a mess.  White and Summers describe it as “an amphibious tank that was originally designed to fight in swamps, but was sent to fight in the desert.” That’d be even more accurate if you replaced “tank” with “Ford Pinto.”  Complexities about.  (Check out this fabulous flowchart produced by one of my students, which provides one path through the maze.) But even if you work  your way through the various intricacies of the provision, resolving debates about the meaning of “expressly made conditional,” and the “knock-out rule,” a deep policy problem lurks: who, exactly, is the offeror?

The question is important because, although the provision was designed to account for a flurry of forms, it clearly privileges those forms which come first-in-time, typically finding the first mover to be an offeror. Unfortunately for the second mover (which can be a nano-second slower online) the merchant offeree’s additional terms are incorporated into the contract only if they are immaterial. Most terms that you’d care to litigate about are material. Summers and White point out that avoiding first form favoritism is an important policy goal, but proceed by privileging that first form as the offer anyway.  (See the 4th edition of their Hornbook, p. 32, n.3)  We can see the importance of the choice clearly by pairing Hill (offeror is the firm) with Klocek (offeror is the consumer). But the cases stand uneasily against each other, because the key analytic move (who goes first and why) is buried — to be fair, less so in Klocek than in Hill. (I’m sweeping broadly here, and avoiding knock-out complications.)

At some level, this confusion is unavoidable – 2-207 is a badly drafted mess.  But in particular here, the problem is that although important consequences flow from making one or the other party the offeror, the Code provides no guidance in making that choice – it doesn’t even use the word offeror in the section.  Doctrine would be marginally  more clear if we made the decision as to who is the offeror explicitly a policy choice. Courts might, for example, make sellers offerors because they bear default liability burdens (warranty, nondelivery) under the UCC. Or courts could empower buyers because they typically initiate transactions, thereby spurring commerce.  Or make the choice depend on some kind of rough information-forcing default allocation.  The key realization is that 2-207 buries the lede, and that courts which simply follow the provision leave us in the dark.

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Evolving Contract Schemas

A Meeting of the Minds

A Meeting of the Minds?

With co-authors, I’ve been working on a series of experimental papers about contract law that appear to be converging on a theme: what individuals think “contract” means has purchase in the real-world, and that contractual schema is evolving.

A schema is nothing more than a mental model – a framework – to help us organize and process information. A contract schema is the set of background assumptions that we fill in when we think about a legally operative bargain. For those of us who grew up in a largely off-line world, our contract schema involve “doing the paperwork,” “getting it in writing,” and “signing on the dotted line.” (See this article for details). Indeed although most contracts law professors make fun of the metaphor of the meeting of the minds, it captures a real heuristic for a certain segment of society. That so even though form contracts have been part of modern life since the 50s, and almost none of us ever actually negotiate contracts that could end up in court. Indeed, when I started teaching in 2004, students routinely would say “she signed it, she must be bound to it,” even in cases like Specht.  Since this mental model is quite a ways from the reality of online contract, consumers may think they are in contracts when they aren’t, and visa versa.

But what happens when contracts widely explored in pop culture – and presented to you in your formative years – were never signed, never reduced to writing, never negotiated.  The cheerios arbitration debacle, facebook’s demystified terms, your cellphone contract, your cable company’s impossible-to-escape relationship.  What happens when every time you think “contract,” you don’t call up the mental image of a “signature on vellum” but instead “loki on steroids.”  And when companies, realizing this, increasingly pushed “no contract” plans that were actually contracts, just without penalty clauses attached.

Perhaps citizens born after 1980 will have dramatically different attitudes toward contract than those born before. If that’s true, we’ll increasingly find cohort effects in contracting behavior online, as lay intuitions about how to respond to “contract” increasingly turn on the age of the promisee. For those coming of age offline, “click to agree” calls up memories of signature, and consequently infuses bargains with personal honor; for those born digital, “click to agree” means “nothing good is about to happen to me.” Those attitudes toward contract will play out in behavior – in likelihood to breach, to shirk, and to behave opportunistically.

At some point we expect to have direct evidence worth sharing in support of this argument! For now, I thought start discussion by fast forwarding fifteen years, when many judges born in the digital age will have assumed the bench. What changes in contract doctrine follow from changes in contract’s schema? Then again, will there be any contract cases left to decide, or will they all been sucked into arbitration’s black hole?

 

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On National Ice Cream Day, Thanks Dairy Queen

DQIn honor of National Ice Cream Day (July 20), here is a brief celebration of Dairy Queen, an institution of American culture—entrepreneurial, legal, literary, and familial—that helped put this cold concoction on the national calendar. I developed these reflections when researching my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia U. Press 2014), which provides deep looks at the corporate culture of Berkshire Hathaway’s fifty-plus subsidiaries, including Dairy Queen.

While full treatment must await publication of the book (which can be pre-ordered now), here are a few passages along with many outtakes—i.e., sections that did not make it into the final book because they are too technical, but may appeal to readers of this blog interested in the history of franchising businesses and intellectual property rights.

Dairy Queen’s roots date to 1927’s founding of Homemade Ice Cream Company by John F. (“Grandpa”) McCullough (1871‒1963) and his son Alex near the Iowa-Illinois border. Innovative ice cream makers, they experimented with temperatures and textures and eventually pioneered soft ice creams. One discovery: ice cream was frozen for the convenience of manufacturers and merchants, not for the delight of consumers.

At first, the McCulloughs were unable to interest any manufacturer in building the necessary freezers and dispensers to serve soft ice cream. Luckily, however, Grandpa happened to see a newspaper ad in the Chicago Tribune describing a newly-patented continuous freezer that could dispense soft ice cream. Grandpa answered the inventor/manufacturer, Harry M. Oltz, and the two made a deal in the summer of 1939.

The McCullough-Oltz agreement entitled Oltz to patent royalties equal to two cents per gallon of soft ice cream run through the freezer; the agreement also granted the McCulloughs patent licensing rights in the Western U.S., while Oltz retained them for the Eastern part of the country. The agreements that McCullough and Oltz made with licensees seemed to cover only the patent, rather than the DQ trademark, and contained few quality controls.

After World War II, DQ stores hit their stride, drawing lengthy lines of increasingly loyal customers enjoying the cooling effects of soft ice cream all sultry-summer long. The customer throngs at one store in Moline, Illinois caught the attention of Harry Axene. An entrepreneurial farm equipment salesman for Allis-Chalmers, Axene wanted to invest in the business. He contacted the McCulloughs and acquired both the rights to sell the ice cream in Illinois and Iowa as well as an interest in the McCullough’s ice cream manufacturing facility. Read More

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Maya Angelou’s Multi-Million Dollar Bout with Butch Lewis

Maya cardThe number one best-selling book on in this week’s New York Times best seller list is one first published in 1969: “I Know Why the Caged Bird Sings,” by Maya Angelou, the renowned poet and professor at Wake Forest University who passed away three weeks ago. Since she published that autobiography, Angelou’s acclaimed poetry has been published widely by Random House and initially reached a distinguished, though small, audience.

How that audience grew to a multi-million dollar phenomenon, and how her book is again number one, includes a fascinating story of entrepreneurship and law of general interest and especially for those interested in contract law. As a tribute to the distinguished author for literary, commercial and spiritual success, herewith an account of that saga, from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

In 1994, Butch Lewis, the former prize fighter and promoter of famous boxers such as Muhammad Ali and Joe Frazier, conceived the idea of popularizing Angelou’s poetry by including it in Hallmark greeting cards and similar media. Lewis first met Angelou in early 1994 when the scrappy fighter asked the elegant poet to take a trip to Indiana with him to visit his boxing client, Mike Tyson, in prison. During the trip, Angelou and Lewis discussed how she might expand her readership by publishing her works in greeting cards. After negotiations, the two signed an informal letter agreement on November 22, 1994.

Angelou promised to contribute poetry exclusively to Lewis and he promised to promote its publication in greeting cards. The exclusivity feature was important, since it meant Angelou could not market her poetry without Lewis and Lewis need not fear that his efforts would be undercut by a last-minute switch to a competing promoter.  Aside from exclusivity, the letter recited only basic terms, such as how they would later agree on what poetry to include, that Lewis would fund promotion, and how revenues would be shared—first to reimburse Lewis’ investment and expenses, then to split the rest equally. The letter said it would be binding until the two drew up a formal contract. Though Lewis prepared one in March 1997, it was never signed.

Lewis began marketing efforts immediately, though it took until March 1997 for Lewis and Hallmark to finalize terms—a three-year deal, covering any new poem Angelou produced during that time. In exchange, Hallmark would pay Angelou and Lewis a $50,000 advance against royalties, which would be paid at a flat 9% rate of total sales, with a guaranteed minimum of $100,000. Angelou’s greeting cards would be administered through Hallmark’s Ethnic Business Center, targeted to an African-American audience.

Lewis sent Angelou the proposed Hallmark agreement. By then, however, Angelou’s views of Lewis had curdled. For the Hallmark pitch, Lewis prepared sample cards and brought these for Angelou’s approval. Angelou found the display of caricatures of African-Americans distasteful and unreflective of her poetry’s meaning. Her impression of Lewis worsened when the two crossed paths in Las Vegas in 1997, where Angelou was appalled by Lewis’s behavior, which included punctuating his conversations by “grabbing his crotch.” Read More

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The Impossible Donald Trump Puts Big Name on Chicago Tower

Chicago’s skyline is now polluted by the letters T R U M P adorning a showy luxury building the egomaniacal scion put up during the financial crisis.   While locals led by Mayor Rahm Emanuel recoil at the Donald’s bad taste in design, lawyers and citizens alike should recall some of the poor judgment, tone deafness, and ignorance of the law he displayed during the long construction process.  As told in my book aimed at new or aspiring law students, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, Donald Trump thought the so-called “Great Recession” of 2008-09 so calamitous to count as an “Act of God.” He was in the midst of building what would be one of Chicago’s tallest skyscrapers, rivaling the old Sears (now Willis) Tower, a combination luxury hotel and condominiums.

To finance the project, Trump borrowed $640 million from lenders led by Deutsche Bank in February 2005. By the end of 2008, Trump had only sold condos netting him $204 million along with others under contract that would yield another $353 million. That left him facing a shortfall of nearly $100 million when he was obligated to repay his lenders $40 million per month. Trump cited the Great Recession as an excuse to delay making monthly payments. The banks refused to accept the excuse from timely payment, so Trump, a prolific litigant, went to court.

Circumstances had changed, he observed, and law has long recognized excuse from contract for some kinds of surprising supervening events loosely called forces majeure, from the French meaning “superior forces,” or Acts of God.   If you rent a banquet hall for your wedding, and it burns down with no one at fault, you and the hall are both excused from the agreement; when Hurricane Katrina destroyed New Orleans in September 2005, contracts to buy or sell homes and businesses there were excused.   Recognized forces majeure include fire, flood, lightening, famine, and deep freezes that destroy the subject matter of a contract. Death excuses promises made to render personal service to others. People are not held to deals when it becomes objectively impossible to perform them, at least so long as they did not have reason to foresee the risk and did not address it in their contract.

Trump would stress that man-made calamities can also excuse bargains when, though something is possible to perform, it would be idle to perform it given a deal’s purpose. A rental agreement for a hotel room to watch a parade can be excused if the parade is cancelled, though the room could be occupied, under the aptly-named doctrine “frustration of purpose”—unless, of course, the contract states otherwise.  [See Comments this post below.] Read More

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Tesla encourages free use of its patents—but will that protect users from liability?

Tesla Motors made big news yesterday with an open letter titled, “All Our Patent Are Belong to You.”

The gist of the letter was that Tesla Motors had decided that, in the interest of growing the market for electric vehicles and in the spirit of open source, it would not enforce its patents against “good faith” users. The key language was at the end of the second paragraph:

Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.

Tesla made clear it was not abandoning its patents, nor did it intend to stop acquiring new patents. Rather, it just wanted clear “intellectual property landmines” that it decided were endangering the “path to the creation of compelling electric vehicles.”

The announcement, made on the company’s website, immediately attracted laudatory media attention. (International Business Times, Los Angeles Times, San Jose Mercury News, Wall Street Journal, etc.) As one commentator for Forbes wrote:

[H]anding out patents to the world is smarter still when you think how resource-sapping the process is. Engineers want to build not fill out paperwork for nit-picking lawyers. Why bog them down with endless red tape form-filling only to end up having to build an expensive legal department to have to defend patents that would likely be got around anyway?

Patents are meant to slow competition but they also slow innovation. In an era when you can invent faster than you can patent, why not keep ahead by inventing?

That’s a pretty concise summary of the general response: Patents are bad, Tesla is good, and all friction in technological innovation would be solved if others followed Tesla’s lead.

Setting aside a pretty loaded normative debate, I had a practical concern. Just how legally enforceable would Tesla’s declaration be? That is, if a technologist practiced one of Tesla’s patents, would they really be free from liability?

The answer isn’t clear. (At least, it wasn’t to a number of us on Twitter yesterday.) Certainly, Tesla could enter into a gratis licensing arrangement with every interested party; a prudent GC should demand that Tesla do so, but it’s unlikely Tesla would want to invest the time and money. In a nod to the vagueness of Telsa’s announcement, CEO Elon Musk also told Wired that “the company is open to making simple agreements with companies that are worried about what using patents in ‘good faith’ really means.”

But assuming Tesla offers nothing more than a public promise not to sue “good faith” users, this announcement may be of little social benefit. Worse, it seems to me that such public promises could provide a new vehicle for trolling.

Sure, Tesla may be estopped from enforcing its patents—though estoppel requires reasonable reliance and this announcement is so vague that it’s difficult to imagine the reliance that would be reasonable—and Tesla isn’t in the patent trolling business anyway. (Sorry, patent-assertion-entity business). But what if Tesla sold its patents or went bankrupt. Could a third party not enforce the patents? If it could, patents promised to be open source would seem a rich market for PAEs.

Tesla is not to first to pledge its patents as open source. In fact, as Clark Asay pointed out, IBM has already been accused of reneging the promise. (See: “IBM now appears to be claiming the right to nullify the 2005 pledge at its sole discretion, rendering it a meaningless confidence trick.”) The questions raised by the Tesla announcement are, thus, not new. And, given enough time, courts will have to answer them.

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Lawsuit: Resentful Daughter versus Dad for Law School Tuition

If a father tells his daughter he will pay her law school tuition, and she accordingly matriculates and completes her studies, and the father then repudiates, saying he lied, does the daughter have legal recourse against the father? That is the supposed real-life situation reported over at Above the Law, commenting on the anonymous daughter’s query to Slate’s Dear Prudence. The latter, in turn, says she consulted Prof. Randy Barnett of Georgetown, who reportedly opined that the daughter would have no claim.  I am not so sure.

The case reminded me of Zimmerman v. Zimmerman,* where a daughter sued her father to recover college tuition incurred (to attend Adelphi University) and future law school tuition to be incurred.  A New York state appellate court suggested four alternative routes for a daughter to recover tuition bills already incurred (though rejecting all claims for future tuition): contract, promissory estoppel, maintenance & support, or fraudulent representation.

The contract claim failed in Zimmerman, however, as the promised performance would extend beyond one year, putting it within the statute of frauds. In New York, as in most states, that requires such a promise to be in writing. Prudence reports that this was the same conclusion Prof. Barnett reached, as this father’s promise was not memorialized in writing either.

But the Zimmerman court upheld the daughter’s claim under promissory estoppel, which took the case out of the statute of frauds.  A writing was required if the daughter had also contractually committed to complete college.  But the jury found that the father made his promise without any return promise from the daughter.  So the father had the right to terminate his obligations upon reasonable notice. Under that view of the case, which is by no means inevitable in promissory estoppel cases, his promise was capable of performance within one year and therefore no writing was required.

A concurring judge in Zimmerman, not eager to embrace those two rationales, supposed that the father’s promise to cover his daughter’s college tuition might have reflected his acceptance of his duty to provide her maintenance and support (citing Matter of Roe v. Doe, 29 N.Y.2d 188). If so, the daughter’s obligation to Adelphi was his obligation to Adelphi.  Even if college tuition is part of such parental obligations, however, the Dear Prudence case concerns law school, almost certainly outside that ambit.

But perhaps the most compelling theory of recovery is one the dissent in Zimmerman picked up on as an alternative to contract, which is the tort of fraudulent misrepresentation.  If the Dear Prudence father is to be believed today that his promise was a lie, then this theory is a strong one, though the dissent in Zimmerman rejected both this tort route to recovery as well as the other grounds.

Prof. Barnett reportedly told Dear Prudence that the daughter might threaten suit to induce a settlement. I would not give that advice if I also concluded that the suit would be frivolous. But based on Zimmerman, I think there is a credible basis for suit.  Were I a litigator rather than a deal lawyer, I might even take the case on a contingency basis.

___

* 86 A.D. 525, 447 N.Y.S.2d 675 (1st Dept. 1982).

 

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A Toast to 50 Cent’s New Series: Power

The rap artist 50 Cent, whose real name is Curtis Jackson, is producing a new series on STARZ called Power. Famed for his entrepreneurial skills in hip-hop and business, not to be overlooked is his important contribution to contract law and knowledge.  Thanks to an intense dispute with his girlfriend a decade ago, students and lawyers have been treated to a saga 50 Cent endured that illuminates the nature of contracts—of legally enforceable bargains. In a tribute to his latest venture, herewith an account of this case from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012).

Jackson secured his first recording contract in October 2003. It came with a $300,000 advance.  To boost his professional image as a rapper, he bought a Hummer and a Connecticut mansion once owned by boxer Mike Tyson. The mansion boasted a state-of-the-art recording studio and the rapper hired a full-time caretaker and professional cleaning crew to maintain it.    In 2004 Jackson bought another house in Valley Stream, the small village in New York’s Nassau County where his grandmother lived; in December 2006, he added to his real estate holdings a $2 million house at 2 Sandra Lane, Dix Hills, on Long Island, New York. By then, he had sold tens of millions of recordings, toured the world, and amassed hundreds of millions of dollars in net worth, as chronicled in his 2005 autobiographical film, “Get Rich, or Die Tryin.”  

This success came after hard knocks. Jackson had dealt crack cocaine as a teenager. In 1995, at age 20, he was released from jail and became involved with Shaniqua Tompkins in his hometown of Jamaica in Queens, New York. The two had a son, Marquise, out of wedlock in 1996. Jackson and Tompkins had no money and no real home—living with his grandmother or hers.     In May 2000, Jackson nearly died when he was shot nine times during a gangland ambush. He was in the hospital for weeks, followed by months of rehab spent at his mother’s house, near the Pocono Mountains in Pennsylvania. Though before the shooting Jackson had been negotiating with Columbia Records, the record company stopped returning his calls.

Jackson, however, persevered. In November 2001, he launched a recording company, Rotten Apple Records. The rising rap star Eminem brought Jackson’s 2002 self-produced record to the industry’s attention.  As a result, Interscope Records offered Jackson the 2003 deal that propelled him to fame and fortune. With money flowing in and Jackson leading the high life, Tompkins asserted her right to a share. But Jackson’s relationship with Tompkins was tumultuous. They did not always live together and fought often, sometimes physically.

When Jackson bought the Dix Hills house in 2006, both agreed it was the best place to raise Marquise, then almost 10-years-old, and Tompkins pled with Jackson to put it in her name. Though Jackson promised to do so, he never did. After the relationship soured, Jackson tried to evict Tompkins from the Dix Hills house.  During that battle, the house burned to the ground under circumstances that authorities considered suspicious. The house had been insured against fire, but the policy lapsed for non-payment of the premium a few weeks before. In response to Jackson’s eviction lawsuit, Tompkins asserted a claim of her own: that the two had a contract entitling her to $50 million. Read More

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Judge, Jury, and Arbitrator: The NBA Constitution

nba-releases-its-formerly-secret-constitutionThe NBA has finally made its constitution available online. Notwithstanding the grand title, the document styles itself as a mere contract: “This Constitution and By-Laws constitutes a contract among the Members of the Association . . . The Association and each of its Members shall be subject to the oversight and control of the Board of Governors of the Association as set forth herein and shall be governed by the Constitution and By-Laws, rules, regulations, resolutions, and agreements of the Association, as they may be modified or amended from time to time.”

The justification for Commissioner Silver’s actions turns on this document. Article 24 vests in the Commissioner the power to suspend members, though Don Sterling is permitted an evidentiary contest (which didn’t make the news today):

“Following an opportunity for the affected party to submit evidence and be heard, all actions duly taken by the Commissioner pursuant to this Article 24 or pursuant to any other 39 Article or Section of the Constitution and By-Laws, which are not specifically referable to the Board of Governors, shall be final, binding and conclusive, as an award in arbitration, and enforceable in a court of competent jurisdiction in accordance with the laws of the State of New York. In connection with all actions, hearings, or investigations taken or conducted by the Commissioner pursuant to this Article 24, (i) strict rules of evidence shall not apply, and all relevant and material evidence submitted may be received and considered, and (ii) the Commissioner shall have the right to require testimony and the production of documents and other evidence from any Member, Owner, or Referee, any employee of any Member or Owner, and/or any employee of the Association, and any person or Entity not complying with the requirements of the Commissioner shall be subject to such penalty as the Commissioner may assess.”

Article 13(a) then permits the Commissioner to force a sale:

“The Membership of a Member or the interest of any Owner may be terminated by a vote of three fourths (3/4) of the Board of Governors if the Member or Owner shall do or suffer any of the following: (a) Willfully violate any of the provisions of the Constitution and By-Laws, resolutions, or agreements of the Association. [If 13(a) is triggered, the league will conduct an evidentiary hearing, at which] the Member or Owner so charged  shall have the right to be represented by counsel. Strict rules of evidence shall not apply, and all relevant and material evidence submitted prior to and at the hearing may be received and considered . . . The affirmative vote of three-fourths (3/4) of all the Governors shall be required to sustain the charges.”

Importantly, “The decisions of the Association made in accordance with the foregoing procedure shall be final, binding, and conclusive, and each Member and Owner waives any and all recourse to any court of law to review any such decision.”

Professor Michael McCann has argued that this last “waiver of recourse” clause is probably enforceable in a breach of contract case.  I don’t think that’s right — or at least, I don’t think it’s a home-run of a claim. But what’s even more mysterious to me – and maybe readers can help – is the idea that the contract clause stating that the Commissioner’s decision on the suspension will be treated  “as an award in arbitration” is sufficient to trigger the FAA’s arbitration privilege.

I would have thought that to take advantage of the FAA, there needs to be clear cut language which sends a dispute to arbitration, before an arbitrator who is distinct from the “prosecuting” party. After all, if the NBA can create a self-preserving and self-executing arbitration process, which can’t your credit card company!  But perhaps there’s something special about the NBA’s constitution which suspends the normal rules?

(All of this, obviously, is merely about the procedural merits.  Substantively, the Commissioner’s remarks were correct, nicely delivered and proportionate.)

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Misunderstanding General Mills

On April 15, General Mills added language to its website which purported, “in exchange for benefits, discounts,” to subject consumers’ claims for use of General Mills products to arbitration and a class-waiver. General Mills, notably, was free to sue in court at will. When the Times noted the change, General Mills reversed course, stating:

[W]e never imagined this reaction. Similar terms are common in all sorts of consumer contracts, and arbitration clauses don’t cause anyone to waive a valid legal claim. They only specify a cost-effective means of resolving such matters. At no time was anyone ever precluded from suing us by purchasing one of our products at a store or liking one of our Facebook pages. That was either a mischaracterization – or just very misunderstood.

 Like Jeremy Telman, I found the emphasized sentence to be mysterious. There are only two ways to square the historic facts with “mischaracterization — or just very misunderstood” claim:

(1) General Mills thinks that “suing us” and “brining a claim in our bespoke arbitral forum” are the same thing; or

(2) General Mills believes that liking “one of our Facebook pages” isn’t the same as “joining our sites as a member [or] joining our online community.”

The first claim is sophistry, the second is frivolous. Roderick Palmore, GC of General Mills, Chicago Law grad, and head of compliance, had a bad week.

But what’s triply irritating about this whole saga is the lack of precision in the Times and elsewhere as to what, exactly, is wrong with the terms. General Mills is right to point out that many consumer contracts contain arbitral class action waivers, though many do not.  Contrary to the other speculation, there’s nothing per se illegal about provisions which shift costs in litigation. General Mills’ arbitration proceeding is actually quite generous about cost shifting, waiving a filing fee for disputes under $5000, and paying for the arbitrators themselves. Though proceduralists generally recoil from arbitration trumping procedure, what’s obviously at stake here isn’t individuals losing “their” right to sue, it’s class action lawyers losing their right to act as private attorneys general in quasi-regulatory cases. The ultimate question here – are class actions in federal court required for consumer protection – is harder than the commentariat has acknowledged.

But there is a legal problem with these particular Terms.  I don’t think they create a contract which binds consumers. Here’s the now-deleted triggering paragraph:

In exchange for the benefits, discounts, content, features, services, or other offerings that you receive or have access to by using our websites, joining our sites as a member, joining our online community, subscribing to our email newsletters, downloading or printing a digital coupon, entering a sweepstakes or contest, redeeming a promotional offer, or otherwise participating in any other General Mills offering, you are agreeing to these terms.

The problem is that most people who participate in such activities are probably not actively required to click to agree to these terms, and consequently aren’t bound to them under traditional (or Principles of Software Contracts) doctrinal rules. They will lack notice, and consequently not be contractually engaged. Even the FAA requires a contractually enforceable arbitration clause to subject claims to binding arbitration – such terms can’t be imposed absent agreement. That is, the terms are unenforceable not because of their content but because of the process of their adhesion.

General Mills obviously knows this. Indeed, I bet that Mr. Palmore has a memo in his file from some aGC, or associate at a law firm, saying so.  But he proceeded with the term rollout anyway because he knows that the issue will be required to be presented to an arbitrator first under the FAA. [Update: I'm informed that assent issues are instead usually reserved to courts in the first instance.]  Maybe that arbitrator will ignore the law!  And, he hopes, the in terrorem effects of the purported class-waiver of the clause will sufficiently deter plaintiffs in large false-labeling cases so as to make the terms’ eventual defeat cost-justified.

Or, to put it differently, contract law provides a clear path to enforceability of terms just like these. General Mills attempt to shortcut that path should be seen as an attempt to leverage consumers’ ignorance of the law, and lawyers’ risk aversion, to drive down claims. It’s bad – not good – news for consumer advocates that General Mills withdrew this sally. It would have been a excellent test case of the limits of Carnival Cruise and Concepcion.