Greg Klass

The Restatement of Consumer Contracts and Quantitative Caselaw Studies — Greg Klass

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Post by Greg Klass

I hope those interested in contract law are aware of the ALI’s project for a Restatement of the Law of Consumer Contracts. It is a major undertaking, both in its attempt to synthesize existing law in this area and as a statement about how common law courts can best address business-consumer transactions.

There is a lot to say on the substance of current draft (which the ALI doesn’t seem to have on its website). The Reporters’ core move is give up on robust ex ante consumer assent—shrinkwrap and browsewrap are both ok, as are notice-only business-side modifications—and to protect consumers through stronger ex post judicial review for substantive unconscionability. I’m not sure this is the all-things-considered best way to go. Mandatory terms crafted by regulators might provide businesses more certainty and consumers more protection. The Reporters’ approach might be the best common law courts can do. But I worry that enshrining it in a Restatement could deter regulatory innovation. That said, I am a big fan of draft sections 6, 7 and 8, which together would limit businesses’ ability to integrate standard terms. The logic of the parol evidence rule falls apart when we know one side hasn’t read the writing in question.

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On Plain Meaning and Pacific Gas — Greg Klass

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Judge Traynor’s opinion in Pacific Gas & Electric v. Thomas Drayage & Rigging is a bête noire of textualist judges and contracts scholars. Judge Kozinski’s assessment is typical:

Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California. As this case illustrates, even when the transaction is very sizeable, even if it involves only sophisticated parties, even if it was negotiated with the aid of counsel, even if it results in contract language that is devoid of ambiguity, costly and protracted litigation cannot be avoided if one party has a strong enough motive for challenging the contract.

Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564, 569 (9th Cir. 1988).

The objection is that permitting extrinsic evidence significantly increases the probability that a court will find ambiguity. The facts in Pacific Gas appear to illustrate the worry. Whereas the scope of the indemnification clause at issue was clear, covering “all loss, damage, expense and liability resulting from * * * injury to property, arising out of or in any way connected with the performance of this contract,” the defendant wanted to introduce extrinsic evidence that in fact the parties meant it to cover only third-party losses. Permitting that evidence in created ambiguity where none existed before.

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More on Fraud in the Performance, this time from the Supreme Court — Greg Klass

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Post by Greg Klass

A few weeks ago I posted on the Second Circuit’s decision in US ex rel. O’Donnell v. Countrywide Home Loans, which held that Countrywide’s knowing delivery of effectively worthless loans to Fannie Mae and Freddie Mac, without disclosing that fact, was not fraudulent. One way to read the decision is as affirming the well established, and to some baffling, rule that a party to a contract has no duty to disclose its breach of the contract, no matter how knowing or material. (For more evidence of bafflement on this count, see Brandon Garrett’s fine post on the case.)

I mentioned in my post that the result might have been different had the Countrywide plaintiffs’ False Claims Act claim not been dismissed. Those who are interested in that road not taken in Countrywide might take a look at the Supreme Court’s decision last Thursday in Universal Health Services v. United States ex rel. Escobar, which addressed the implied certification doctrine under the FCA. In its most robust form (and oversimplifying a bit), the implied certification rule says that the mere act of submitting a claim for payment on a covered contract represents compliance with the contracts material terms, as well as with other governing laws and regulations. Or what is functionally equivalent: If the contract, a law or a regulation requires compliance, there is a duty to disclose any material noncompliance when requesting payment. Had this rule applied, Countrywide would have almost certainly been subject to the FCA’s treble damages and per-claim fines.

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The Second Circuit Polices the Contract-Tort Boundary — Greg Klass

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Post by Greg Klass

On Monday the Second Circuit released its decision in US ex rel. O’Donnell v. Countrywide Home Loans. This is a major case—in terms of dollar amounts (the trial court had assessed a $1.27 billion penalty against Countrywide), for understanding the law’s ability to deal with the wrongs that caused the subprime mortgage crisis, and with respect to the legal question of where to draw the line between contracts and torts. There’s much more going on in the case than I can summarize here. But here are some initial thoughts on it. Some of them also appear in Dan Fisher’s excellent piece in Forbes.

The legal framework is a little complex, but the basic thrust of the decision is that there was no evidence that Countrywide ever made a false representation to Freddie Mac and Fannie Mae about the quality of the mortgages it was selling. The initial contract of sale promised to deliver “investment quality mortgages,” but that was just a promise. There was no evidence that at the time Countrywide made it the company intended to do anything else—that it committed promissory fraud. It is clear that Countrywide subsequently intentionally breached that promise by delivering lots and lots mortgages that it knew were crap. (If you haven’t seen or read The Big Short, you might be shocked by Judge Rakoff’s post-verdict summary of the bullshit Countrywide trafficked in.) But, according to the Second Circuit, there was no evidence that it ever made any additional representations—after the initial contract to sell—as to the quality of those mortgages. No lie, no fraud.

A few observations:

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Efficient Breach? — Greg Klass

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I just read Robert Scott’s 2015 Boden Lecture at Marquette Law School, “Contract Design and the Shading Problem.” For anyone interested in what’s happening in the economic, instrumental and empirical analysis of business-to-business contracts, this is a great place to start.

There is a lot of interesting stuff in this piece, but here I want to mention only Scott’s argument that we’ve all been paying too much attention to the theory of efficient breach. This is a remarkable claim from the scholar who, together with Charles Goetz on 1977, coined the term “efficient breach,” and did as much as anyone to promote the theory early on. Scott now considers it unsatisfactory for an empirical reason: the theory does not describe most breaches. Rather than one party deciding it is in its interest to breach and pay damages, most breach of contract cases involve disputes—sincere or opportunistic—as to what the contract requires. The breach did not increase the size of the pie, but resulted from disagreement about how the pie was supposed to be divided. Theories that emphasize efficient breach therefore ignore what parties, at the time of contracting, really care about: avoiding disagreement in the gray zone, or what Scott calls “shading.” Scott concludes that, “while we meant well, Goetz and I are probably primarily responsible for leading a generation of scholars down the wrong garden path.”

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First Do No Harm: The DIRECTV v. Imburgia Decision — Greg Klass

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Yesterday the Supreme Court released its decision in DIRECTV v. Imburgia. DIRECTV won. If Amy Imburgia wants to sue DIRECTV under its 2007 contract, she will have to go to bilateral arbitration. Once again: no class action. I think this is the wrong outcome in this case, for reasons I articulated here, here and here, and for many of the reasons Justice Ginsburg gave in her dissent. That said, Breyer wrote a majority opinion that should make critics of the Court’s recent arbitration decisions happy.

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Interpretation and construction 3: Arthur Linton Corbin — Greg Klass

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In this third post on the interpretation-construction distinction, I introduce the hero of my story: Arthur Linton Corbin. Corbin builds on Francis Lieber’s and Samuel Williston’s work (which I have discussed here and here) to articulate more perspicacious conceptions of interpretation and construction. Whereas both Williston and Lieber viewed construction as supplementing interpretation, Corbin sees the two activities as complementary. He gets there by collapsing Williston’s three categories of rules into two.

Corbin’s 1951 treatise on contract law provides, as far as I know, the first clear articulation of the complementary conception. Corbin describes interpretation and construction as interlocking activities, both necessary to determine what the law requires. It is worth quoting the relevant passage in full:

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Interpretation and Construction 2: Samuel Williston — Greg Klass

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In my last post on the interpretation-construction distinction I described Francis Lieber’s supplemental view of construction, which can be found in his 1839 book, Legal and Political Hermeneutics. Lieber’s view is characterized by two claims. First, construction is supplemental: it steps in only when interpretation runs out. Second, the activity of construction is for the most part continuous with that of interpretation. “Construction is the building up with given elements, not the forcing of extraneous matter into a text.” (144) That said, Lieber also recognizes that sometimes construction departs from the spirit of the text, such as when the text yields to a superior legal principle.

It would be interesting to trace the influence of Lieber’s distinction between interpretation and construction throughout the next century of legal thought. Theophilus Parsons, for example, discusses the categories in his 1855 Law of Contract. James Bradley Thayer, in his 1898 Treatise on Evidence, expressly declines to adopt Lieber’s distinction, arguing that “neither common usage nor practical convenience in legal discussions support [it]”. (411 n.2) For my purposes, things get interesting with the 1920 first edition of Samuel Williston’s The Law of Contracts. In section 602, “Construction and interpretation,” Williston makes what I view as two improvements on Lieber’s theory.

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Interpretation and Construction 1: Francis Lieber — Greg Klass

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In several posts on DIRECTV v. Imburgia (here, here and here), I suggested that the interpretation-construction distinction illuminates some of the Supreme Court’s recent arbitration cases. The interpretation-construction distinction has recently been receiving more attention from con law theorists than from contract theorists. (See, e.g., here, here and here.) I’ve been working on a larger project on contract interpretation and construction, and want to use a few posts here to share some of what I’ve learned about the history and development of the distinction. What I have only scratches the surface. The history is a rich vein waiting to be mined. These posts describe only the outlines of the story as I currently understand it. In my telling, it has three protagonists: Francis Lieber, Samuel Williston and Arthur Linton Corbin.

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The Supreme Court vs. Contract Law — Greg Klass

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My last two posts on DIRECTV v. Imburgia [post one, post two] were on relevant rules of construction: (1) the FAA presumption in favor of arbitration and (2) the common law tradition of reading against the drafter. But those rules should come into play only if the Supreme Court agrees with the California Court of Appeal that the phrase “the laws of your state” is, as it appears in the contract, ambiguous. At oral argument several justices explored an alternative holding: finding that “the laws of your state” had only one contractual meaning, and that the California Court of Appeal’s conclusion that it was ambiguous was so unreasonable as to be (presumptively?) hostile to arbitration. This post discusses what it would take to reach such a conclusion, and a few of the weirder things the Justices said at oral argument.

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DIRECTV v. Imburgia and Interpretation vs. Construction — Greg Klass

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I don’t know whether anyone else has noticed, but many of the Supreme Court’s recent arbitration cases raise the distinction between interpretation and construction. I do not think that the Court, which is not especially strong on contract doctrine, has noticed. But it’s lurking in the background. The distinction is especially relevant to understanding what is going on in DIRECTV v. Imburgia, which I blogged about last week.

If you’re not familiar with the interpretation-construction distinction, here’s Corbin’s summary, from the first edition of his treatise:

By “interpretation of language” we determine what ideas that language induces in other persons. By “construction of the contract,” as the term will be used here, we determine its legal operation—its effect upon the action of courts and administrative officials. If we make this distinction, then the construction of a contract starts with the interpretation of its language but does not end with it; while the process of interpretation stops wholly short of a determination of the legal relations of the parties.

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SCOTUS, Arbitration and Contra Proferentem — Greg Klass

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The Supreme Court heard oral argument yesterday (October 6th) in DIRECTV v. Imburgia (full transcript here). The case involves the meaning of “the law of your state” in an arbitration clause. DIRECTV argues that it means “the law of your state as limited by preempting federal law,” whereas the plaintiffs argue that it means “the law of your state without regard to any preempting federal law.” Because the phrase does not appear in a choice of law clause, the plaintiff’s have a decent argument for their reading—or that the words read in light of the contract as a whole are at least ambiguous. The reasons are complicated, but if the phrase means what DIRECTV says, then the arbitration clause kicks in and the plaintiffs lose their class action. If it means what the plaintiffs say, their class action remains in state court.

DIRECTV has argued that if the words “the law of your state” are ambiguous, the presumption in favor of arbitration means that they win. That would be a very weird result.

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Interpretation in Omnicare v. Laborers District Council Construction Industry Pension Fund – Greg Klass

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In this first post, I’d like to point readers to opinions in Omnicare v. Laborers District Council Construction Industry Pension Fund, 575 U.S. ___ (2015). Though a securities fraud case, the Omni opinions raise more general questions about the private law of deception.

The issue in Omni was whether a company could be held liable under 15 U.S.C. § 77k(a) for so-called statements of opinion, such as “We believe that our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.” Slip op. at 3. The Sixth Circuit had held that such statements were actionable if the company’s beliefs were “objectively false.” The Supreme Court reversed, based on the common law rule that a statement of belief is (in most cases) actionable only if the speaker does not actually hold the belief. It is not enough to show that the belief was false. A plaintiff must show that it was not actually held.

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Fuller & Perdue: The Gap Between Motive and Measure — Greg Klass

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Lon Fuller and William Perdue’s The Reliance Interest in Contract Damages: 1, 46 Yale L.J. 52 (1936), is best known for its analytic claim that there are three basic measures of contract damages: restitution, reliance and expectation. Also familiar are the article’s normative and descriptive theses: that that the reason for judicial intervention decreases as one moves from restitution to reliance and then from reliance to pure expectation, and that in many cases courts calculate damages with an eye to compensating reliance rather than fulfilling the promisee’s expectation. Often overlooked is the article’s methodological claim, which Fuller and Perdue label “the divergence of measure and motive” (66). “Measure” here stands for the remedial measure that attaches to the violation of a legal duty and “motive” designates the duty’s purpose or raison d’être. The divergence of measure and motive claims that the tie between rights and remedies is looser than is commonly thought. It follows that remedies are the wrong place to start when constructing an interpretive theory of legal duties.

Fuller and Perdue offer two arguments. First, practical considerations such as difficulties in proof or measurement often recommend an alternative remedy. “[E]ven where it is reasonable to suppose that a single interest furnishes the exclusive raison d’être of legal intervention it is still possible for reasons of convenience and certainty the court may choose a measure of recovery which differs from that suggested by the interested protected” (66-67). An example can be found in Fuller and Perdue’s explanation of the expectation measure as designed to protect the nonbreaching party’s reliance interest. The expectation measure captures opportunity costs, which are often difficult to prove. And the expectation measure facilitates reliance by dispensing with its proof. More generally, administrative costs, problems of proof, the possibility of error and other practical pressures can all push remedies in directions that might not correspond to the best explanations of the associated duties.

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