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Category: Contract Law & Beyond

7

Netflix and “Throttling”

netflix1.jpgNetflix allows customers to rent movies online — as many as they want. According to the company’s website:

With Netflix you can rent as many DVDs as you want from the comfort of your home and have them delivered to your door in about 1 business day! There are no late fees and no due dates, and shipping is free both ways. Plans start at $9.99 plus any applicable tax. With our most popular plan, 3 at-a-time (Unlimited), you can rent as many DVDs as you want for just $17.99 a month plus any applicable tax. You keep a revolving library of up to 3 DVDs at a time and can exchange them for new available DVDs as often as you like.

Sounds like a great deal, right? Well, if you use it really well to your advantage, Netflix will penalize you. According to the AP:

Manuel Villanueva realizes he has been getting a pretty good deal since he signed up for Netflix Inc.’s online DVD rental service 2 1/2 years ago, but he still feels shortchanged. That’s because the $17.99 monthly fee that he pays to rent up to three DVDs at a time would amount to an even bigger bargain if the company didn’t penalize him for returning his movies so quickly.

Netflix typically sends about 13 movies per month to Villanueva’s home in Warren, Mich. — down from the 18 to 22 DVDs he once received before the company’s automated system identified him as a heavy renter and began delaying his shipments to protect its profits.

The same Netflix formula also shoves Villanueva to the back of the line for the most-wanted DVDs, so the service can send those popular flicks to new subscribers and infrequent renters.

The little-known practice, called “throttling” by critics, means Netflix customers who pay the same price for the same service are often treated differently, depending on their rental patterns.

“I wouldn’t have a problem with it if they didn’t advertise ‘unlimited rentals,’” Villanueva said. “The fact is that they go out of their way to make sure you don’t go over whatever secret limit they have set up for your account.”

Originally, Netflix kept its differential treatment of customers a secret, but after a class-action lawsuit, Netflix now warns about this in the fine print:

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2

The Regulatory Imagination

Gordon Smith has a nice post up on the ideological divide among biz org scholars, noting the way that the law professoriate is divided between free-marketeers and progressives, neither of whom seem to be doing a particularly good job at talking with one another. (Larry Ribstein has a similar lament here) In the comments, Scott Moss captures some of my feelings, saying:

I don’t always buy the free-marketeer argument that private institutions are always superior to government institutions — in part because when a private institution gets big enough, it can suffer from the same diseconomies of scale that we see in government institutions. But I certainly don’t agree with their [i.e. the progressives] unstated reverse assumption that government institutions surely will be effective at redressing the problems of private institutions.

Of course, there is a similar debate in contract law, with some insisting that contractual relations and the marketplace are inherently unaccountable, while government intervention represents a kind of deliberative empowerment.

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78

EBay Fraud

I appear to be the victim of EBay fraud. I purchased a Playstation 2 video game system for my older son — yeah, um, my son — and have not received it. A look into the seller’s feedback reveals that he/she fleeced a bunch of other people at the same time (Christmas and surrounding days) and is no longer a registered user.

I wonder if the people who study consumer issues more than I do have ideas as to (a) whether this sort of fraud is significantly hurting EBay in its quest to be the world’s marketplace, and (b) what EBay should do about it. Is it appropriate, for example, to require a bond be posted before selling items?

One never likes to blame the victim, particularly when one is the victim in question, but I could have avoided the whole mess by dealing only with clearly reputable sellers. On the other hand, such a limit would (I suspect) lessen the competitive advantages that a wide-open EBay market provides.

8

DRM, Copyright, and Contract

Cory Doctorow at BoingBoing discusses a post from a blogger about an insert in the new Coldplay CD from Virgin Records. The insert states that the CD contains extensive Digital Rights Management (DRM) restrictions:

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According to some of the restrictions, the CD cannot be copied onto a computer hard drive; songs cannot be converted into MP3 files; and it might not play in some CD players, such as portable CD players, car CD players, and others. I love the special rhetorical touches, such as that by purchasing the CD, you’re helping the anti-piracy cause and that the DRM is “special technology” added “for you to enjoy high quality music.” It reads as if the purchaser should be giddy with excitement that the CD contains this really cool technology that makes the CD less functional. Doctorow writes:

Coldplay’s new CD comes with an insert that discloses all the rules enforced by the DRM they included on the disc. Of course, these rules are only visible after you’ve paid for the CD and brought it home, and as the disc’s rules say, “Except for manufacturing problems, we do not accept product exchange, return or refund,” so if you don’t like the rules, that’s tough.

I’m not a contracts or commercial law expert, but since most CDs do not have such restrictions, it is reasonable for a purchaser to assume that the CD will have a similar level of functionality as other CDs. To the extent that a person is sold a CD with much less functionality, it would strike me that the purchaser would not be out of luck, but would have some potential legal remedies. Since the issue is beyond my range of expertise, I pose the question to readers more well-versed in this area of law: To what extent would a purchaser of the Coldplay CD have any right to return the CD notwithstanding the clause that prohibits returns absent a manufacturing defect?

7

The Gifts You Can No Longer Return

My-Date-With-Drew.jpgIn the fun and light documentary, My Date With Drew, an average guy named Brian Herzlinger chronicles his attempt to get a date with Drew Barrymore. The documentary was made on a shoestring budget of just $1100, and Brian cut costs by buying a video camera at Circuit City, using it until the 30-day return window was up, and then returning it to the store for his money back.

But Herzlinger’s documentary may one day be notable not for his quest to meet a celebrity but for capturing what might be a quaint piece of nostalgia — the easy and hassle-free ability to return merchandise.

Returning merchandise has become much harder these days. Those unwanted gifts you received this holiday season might be much more difficult to return. According to a WSJ article (don’t bother clicking the link, as the article can’t be accessed without paying a massive fee):

Retailers are further clamping down on return policies, imposing penalty fees and using sophisticated computer databases to flag serial returners trying to game the system. Some are also adding exceptions and caveats to their return policies — for instance, making it particularly hard to return certain kinds of products, such as electronics.

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1

The Contractual Freedom to Prohibit Football

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This buzzworthy newstory about celebrity pre-nups has a few examples of bizarre clauses that couples have agreed to before marriage:

• “Limiting the wife’s weight to 120 pounds or she must relinquish $100,000 of her separate property.”

• “Requiring a husband to pay $10,000 each time he is rude to his wife’s parents.”

• “Mandatory sexual positions”, “No mother-in-law sleepovers.” “Only one football game per Sunday.”

Attorneys quoted in the article suggest that all such provision are

“legal unless you’re dealing with custody of children or child support.” This might be right, but since these agreements are almost never evaluated in written opinions (the parties usually hired retired judges to ensure privacy) I’m not sure whether I’d be so definite. Of course it isn’t my area of law, but I usually teach my contract class that there are limits – public policy and otherwise – to what you can contract to, even in the pre-nup context. The one that really gets me here, of course, is “one football game per Sunday.” What kind of judge would enforce that kind of tyranny?

(Hat Tip: Huffington).

15

The Power of Shopping

shopping.jpgWith the holidays upon us, I figured that now would be a good time to do a post on shopping and its importance for contract theory. As everyone who survived a first year contracts course can tell you, one of the central problems for contract law is what has been variously labeled as boilerplate, contracts of adhesion, and fine print. What we are talking about here are all of those contracts that one is offered on a take-it or leave-it basis that no one ever reads. In true late-New-Deal-lets-find-a- new-frontier-for-saying-o h-my-heck- the-corporations- are- taking-over-the-world-FDR-come-and- save-us fashion Friedrich Kessler wrote an influential article (“Contracts of Adhesion — Some Thoughts About Freedom of Contract,” 43 Colum. L. Rev. 629 (1942)) arguing that boiler plate represented a form of private law making that corporations imposed on helpless consumers. Such private law making, he argued, was illegitimate in a democratic society, where law making ought to be democratically accountable (or at the very least accountable to the FTC). Shopping, however, leaves me somewhat doubtful about Kessler’s claim.

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2

Senator Specter on Terrell Owens

My state’s senior senator, Arlen Specter, who has lots on his plate, held a news conference this morning:

[He said that] it was “vindictive and inappropriate” for the league and the Eagles to forbid [their] all-pro wide receiver [Terrell Owens] from playing and prevent other teams from talking to him.

“It’s a restraint of trade for them to do that, and the thought crosses my mind, it might be a violation of antitrust laws,” Specter said, though some other legal experts disagreed.

“I am madder than hell at what he has done in ruining the Eagles’ season,” the Pennsylvania Republican said. “I think he’s in flagrant breach of his contract and I believe the Eagles would be within their rights in not paying him another dime or perhaps even suing him for damages.”

But Specter said, “I do not believe, personally, that it is appropriate to punish him (by forcing him to sit out the rest of the season). He’s not committed a crime, he’s committed a breach of contract. And what they’re doing against him is vindictive.”

There are several statements here that are interestingly wrong. One worth thinking about is the idea that the Eagles are punishing Owens by enforcing the contract’s “conduct detrimental” clause. On one level this can’t be right – the Eagles are paying their employee for not working, hardly an onerous result. But theory notwithstanding, reading the arbitrator’s decision, it sort of feels like punishment. Doesn’t it?

1

If only France could file for Chapter 11

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The Economist has a nice article on the Delphi bankruptcy. For those who don’t follow such things, Delphi is the largest car parts manufacturer in the country and it has just gone into Chapter 11. In doing so, it has availed itself of a process that would do much to help France out of its current economic malaise. Delphi in up against pension obligations entered into with union negotiators long ago. It thus has essentially the same problem as France — back in the day it promised more than it could realistically deliver. The difference is that ultimately Chapter 11 gives Delphi a way of rewriting its contracts in an orderly fashion. France has no such luxury.

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