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Drafting tips from recent case law

Employers: Be sure your arbitration agreement is actually binding — it might not be if it's in a "policy"

Here's a drafting lesson from a California court of appeal:

The question in this case is whether an arbitration provision in an employee handbook is legally enforceable.

  • The employee handbook containing the arbitration provision included a welcome letter as the first page, which stated, “[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.”
  • The employee signed a form acknowledging she had received the handbook, which mentioned the arbitration provision as one of the “policies, practices, and procedures” of the company.
  • The acknowledgement form did not state that the employee agreed to the arbitration provision, and expressly recognized that the employee had not read the handbook at the time she signed the form.

Under these circumstances, we find that the arbitration provision in the employee handbook did not create an enforceable agreement to arbitrate.

We therefore affirm the trial court?s denial of the employer?s petition to compel arbitration.

Esparza v. Sand & Sea, Inc., No. B268420, slip op. at 2 (Cal. App. Aug. 22, 2016) (emphasis, extra paragraphing, and bullets added).

I've added this case to the commentary to the Common Draft arbitration provisions.

The client might not care about the other side's onerous contract term

In my contract-drafting class next week, I'll be using a prop that I've received in the U.S. Mail. The prop is a notice from the bank that issued the credit cards my wife and I use. The notice informed us that certain interest rates and fees would be increasing. For example:

  • The annual percentage rate (APR) for cash advances went from 19.49% to 25.24%. In the future, the APR would be determined by adding 21.74% (vice the former 15.99%) to the prime rate.
  • The up-front transaction fee for cash advances went from 3% to 5% of the amount of the cash advance (or $10, whichever is greater). This is in addition to the interest charges, mind you.

Leaving aside the political debate about high interest rates and fees, I plan to show the notice to my students to illustrate two points:

  1. My wife and I don't care what the bank charges for cash advances, because we never take cash advances. The notice could also have said that the interest rate would go to 100% if our minor children dropped out of school; we wouldn't have cared about that, either (because our kids are both adults and college graduates). This principle is worth remembering when reviewing another party's onerous contract draft.
  2. BUT: Circumstances can change, in which case (what used to be) a meaningless contract provision can become painfully relevant.

The parentheticals-generating machine runs wild …

See this portion of an 11th Circuit opinion:

Ex-Husband dodged, delayed, and opposed Ex-Wife’s unrelenting efforts to obtain discovery in support of her claim, and their red in tooth and claw feud played out in countries around the world, including Cyprus, Latvia, Switzerland, the British Virgin Islands (“BVI”), the Commonwealth of the Bahamas (“Bahamas”), and the United States of America. In the United States, Ex-Wife sought information from Gabriella Pugh (“Ms. Pugh”) and her employer in Atlanta, Georgia—Appellant Trident Corporate Services, Inc. (“Trident Atlanta”)—that she expected would reveal Ex-Husband’s beneficial ownership of Bahamian corporation, Tripleton International Limited (“Tripleton”). When met with resistance, Ex-Wife initiated a § 1782 action in the Atlanta division of the District Court on July 25, 2013. Ex-Wife filed substantial evidence in support of her “Ex Parte Application for Judicial Assistance” (“Application”), including a lengthy and detailed declaration from her attorney, Dmitry Lovyrev (“Lovyrev”). On referral, the Magistrate Judge granted the ex parte Application and authorized service of two subpoenas (“Ex Parte MJ Order”).

The subpoena issued to Trident Atlanta (“Subpoena”): (a) referenced Tripleton, and other Bahamian corporations, including Guardian Nominees (Bahamas) Limited (“Guardian Bahamas”) and Trident Corporate Services (Bahamas) Limited (“Trident Bahamas”); (b) ….

Hat tip: @Greg651 via Marilyn Bush LeLeiko ("@LawWriting"). As @Greg651 said, "Thank god for these parentheticals, otherwise I'd have no idea what Bahamas or Ms. Pugh were in reference to."

Ms LeLeiko adds: 'When NOT to use parenthetical defined term: "The subpoena issued to Trident Atlanta (“Subpoena”): . . .'

Botched idioms

See 7 (sic; Seven) idioms almost everyone gets wrong (hat tip: Marilyn Bush LeLeiko).

I'll add my own:  When people criticize (let's say) President Obama because of something they think he should have prevented, the correct term is that it happened on his watch (it's a Navy term), and not under his watch (which implies, probably incorrectly, that he was devoting any time and attention to it).

A new agreement can wipe out favorable provisions in an old agreement

In this case, the facts of the business transaction aren't especially important, but the result is a reminder that signing a new Contract B while Contract A is still in place can result in wiping out some or all of the legal rights in Contract A. That happened in HDRE Bus. Partners Ltd. Grp., L.L.C. v. RARE Hosp. Int'l, Inc., No. 15-30487 (5th Cir. Aug. 19, 2016):

  • A landlord brought suit against a tenant for al­leg­ed­ly violating the lease agreement.
  • The lease agreement stated in part that in any dispute, the pre­vail­ing party would be able to recover its attorney fees. (See the Common Draft attorney-fee provisions and commentary.)
  • The tenant was able to get the dist­rict court to dismiss the lawsuit and to award the tenant its attorney fees under the prevailing-party provision in the lease agreement.
  • The Fifth Circuit reversed the award of at­tor­ney fees to the ten­ant, because the jury had found that the parties had entered into a "novation"; the appeals court said that the parties' new agree­ment replaced the lease agreement and thereby wiped out the at­torney-fee provision in the latter.

For additional cases in which this occurred, see the Common Draft annotation.

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The rule (OK, a guideline): Don't ask the other side to agree to something that you wouldn't accept if the roles were reversed.

This week, I helped a client negotiate changes to a prospective cus­tomer's standard nondisclosure agreement [1]. The form included a statement that my client consented, in advance, to the entry of an in­junction if my client breached the NDA's confidentiality obligations; the form also waived any requirement that the customer post a bond as a prerequisite to obtaining an injunction against my client [2].

I asked that both provisions be deleted. The customer's lawyer (who was fairly junior but knew her stuff) and I went back and forth for a few minutes about those issues.

The customer's lawyer finally asked me: If I were representing her client, wouldn't I ask for a bond waiver too? I said no, I wouldn't; I explained that:

  • I un­der­stood why she wanted a bond waiver, but we can't know in ad­vance what the circumstances might be; a one-size-fits-all solu­tion would be too dangerous here;
  • That's why the law calls for judges to exercise discretion, taking all the circumstances into account, in deciding (A) whether or not to grant an injunction at all, and (B) if so, how much the bond should be.

So let's just allow the law to work, I argued.  Happily, the customer's lawyer tentatively agreed to delete the bond waiver (subject to checking with her business people).

Her question, about what I would do in her shoes, reminded me: As I've recounted before, when I was general counsel for a software com­pany, our standard software license agreement was quite cus­tomer-friendly, in ways that we knew we could sup­port. That paid off, not just in getting our deals closed more quickly, but also on a couple of occasions when we were acquiring soft­ware licenses from other companies. On each of those occasions, the other company agreed that, instead of negotiating their one-sided license agree­­ment form, we could just use our form, because with that form we were equally happy being on either side of the agreement. That worked for the other companies, and as a result, we were able to get to signa­ture much sooner [3].

Notes

[1] See the Common Draft confidentiality-agreement checklist, which links to contract clauses with extensive annotations and commentary.

[2] See the Common Draft injunctive-relief provisions, especially the bond waiver clause and its commentary.

[3] In 2009, it was reported [the link is now dead] that an unidenti­fied company had had its sell-side negotiators review the standard contract forms used by the company's buy-siders, and vice versa — and that each group of negotiators became “apoplectic" about the terms that their colleagues were demanding.

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Sign up now for IP & Licensing Basics, a great one-day course from the Licensing Executives Society USA/Canada, a non-profit association of lawyers and other professionals in technology transfer. The course is for lawyers and non-lawyers alike; it includes an enjoyable license-negotiation exercise. I'm on the Houston chapter's leadership team and will be teaching one segment of the course again.

Registration info

 

 

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It's quite common for vendors and customers to enter into "master" agreements that are intended to govern subsequent sales orders, statements of work for services, etc.  It's best for the subsequent contracts to state expressly that the master agreement's terms are to control.

Consider CEEG (Shanghai) Solar Science & Tech. Co. v. LUMOS LLC, No. 15-1256 (10th Cir. Jul. 19, 2016), affirming No. 14-cv-03118 (D. Colo. May 29, 2015). In that case:

  • A Chinese manufacturer of solar-panel products entered into a co-branding agreement with a U.S. retailer. That agreement called for the retailer to order solar-panel products from the manufacturer at stated prices.
  • The retailer's CEO testified, and the U.S. trial court accepted, that the parties had intended that the co-branding agreement would be a "master" agreement that would govern all sales contracts.
  • The co-branding agreement contained an arbitration provision, which expressly required that arbitration proceedings be in English.
  • The retailer also entered into specific written sales contracts with the manufacturer; the sales contract contained an arbitration provision, but that provision did not require English-language arbitration.
  • Apparently, neither the co-branding agreement nor the sales contract in question said anything about a master agreement. (The courts' opinions were not specific on this point.)
  • The manufacturer and the retailer communicated exclusively in English.
  • One shipment of goods had quality problems; the retailer refused to pay.
  • After negotiations went nowhere, the manufacturer filed a demand for arbitration with the Chinese arbitration institution designated in the earlier, co-branding agreement.
  • The Chinese arbitration institution sent the U.S. retailer a notice of arbitration, in Chinese. The U.S. retailer did not realize what the notice of arbitration was. Consequently, the retailer did not realize that under the agreed arbitration rules, a 15-day clock was ticking on the retailer's right to participate in selecting the members of the arbitration panel. That deadline passed, and the panel members were selected without input from the retailer.
  • The arbitration panel ruled that the so-called master agreement did not apply and that the sales contract controlled. The arbitration panel awarded damages to the manufacturer, which then sought to enforce the award against the retailer in a U.S. court.

The Colorado district court ruled that, contrary to the decision of the arbitration panel, the testimony of the retailer's CEO established that the co-branding agreement had indeed been a "master" agreement; this meant that the Chinese-language notice of arbitration had been insufficient, and that in turn meant that, under the New York Convention, the court could decline to enforce the damages award.

The Tenth Circuit reached the same result, but used a different route to get there. The appellate court noted that arbitration awards are virtually unreviewable by courts, even if the arbitral tribunal "gets it wrong."  So, the Tenth Circuit focused instead on whether the notice of arbitration, which was in Chinese, met the standard set out in the New York Convention. The court concluded that the notice standard had not been met, and that the U.S. retailer had been prejudiced as a result.  See id., slip op. at 10 & n.2.

DRAFTING LESSONS:

  1. When drafting a purchase order, statement of work, etc., that's to be governed by a "master" agreement, it's best for the draft to expressly identify the "master" agreement and state that its terms apply.
  2. When drafting a multi-national contract, consider specifying the language in which notices must be sent, especially notices concerning arbitration (and service of process for litigation, if applicable).

I'll be updating the Common Draft annotation about master agreements with a discussion of this case.

(A different question is: What should happen if the master agreement and the subsidiary agreement were to differ in some material respect?  Should the master agreement control, or the subsidiary agreement?  One approach might be to have the master agreement prevail unless the subsidiary agreement expressly and conspicuously states otherwise in the top half of its front page; that gives the parties flexibility while still alerting whoever signs the statement of work that there might be problems.

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I do a fair amount of arbitration work. In response to a suggestion from a colleague, I posted a response to a questionnaire published by an international arbitration group; the response indicates my general preferences for managing arbitration proceedings.

(In a nutshell:  In my view, an arbitration case should be managed as a joint business project, and not as an extended tennis match — or boxing match — between the lawyers. [This of course assumes that the parties feel that way too, which they might not.]  My response  to Item 16 summarizes some of my specific preferences about how to manage a case in that way.)

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