Articles Posted in Contract Disputes

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The Delaware Court of Chancery recently denied a motion to dismiss a breach of contract suit brought by former shareholders of a corporation, who alleged that the corporation’s buyers had failed to fulfill their obligations under a merger contract. Himawon, et al. v. Cephalon, Inc., et al, C.A. No. 2018-0075-SG, mem. op. (Del. Chanc. Ct., Dec. 28, 2018). Since Delaware law tends to influence businesses around the country, the ruling could be relevant to California business disputes. The case presents interesting questions about the use of highly subjective language to define a party’s obligations in a contract. In this case, the buyers agreed to use “commercially reasonable efforts” to develop a valuable product owned by the corporation, id. at 2, and the plaintiffs allege that they failed to do so.

Although the plaintiffs in Himawon are shareholders of the corporation, it is not a shareholder derivative suit. Instead, it is a suit for breach of contract, based on a merger contract in which the plaintiffs agreed to sell their shares. In California, a plaintiff claiming breach of contract must prove six elements by a preponderance of the evidence: (1) a valid and enforceable contract existed between the parties; (2) the plaintiff performed their duties under the contract, or was excused from doing so; (3) all conditions necessary for the defendant to perform their duties under the contract had either occurred or been excused; (4) the defendant either failed to do something required by the contract, or did something prohibited by the contract; (5) the plaintiff suffered harm; and (6) the defendant’s breach substantially caused the plaintiff’s harm.

The corporation in Himawon owned the intellectual property rights to an antibody, which is a type of protein used to fight diseases. Antibodies are a natural part of the human immune system, but they are also used in medical and pharmaceutical research to develop new treatments. The court notes that “bringing antibodies to market” involves a “long, arduous, and risky” process due to “rigorous governmental oversight for risk and efficacy.” Id. The corporation entered into a merger agreement with another corporation, which reportedly tried to divide the risk among the parties. The buyer agreed to pay an initial sales price, followed by earn-outs paid to the former shareholders based on “certain milestones in the approval of the antibody to treat two different conditions.” Id. It agreed to use “commercially reasonable efforts” to attain these goals.
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Businesses involved in legal disputes may choose to use alternative dispute resolution (ADR) instead of litigation. California and federal law encourage litigants to use ADR, in part to lessen the burden on the court system. Arbitration, mediation, and other types of ADR may offer advantages over litigation. For example, ADR may offer a faster resolution of a dispute, free from packed court schedules. Unlike litigation, ADR proceedings are not public record, and the parties are often barred from disclosing the details of an arbitration or mediation. Since the results of ADR proceedings are often binding on the parties, ADR practitioners must abide by legal standards that ensure fairness. A court in New York City recently granted a request to stay an arbitration proceeding, after one party alleged that a lack of racial diversity among available arbitrators rendered the proceeding unfair and discriminatory. Carter, et al v. Iconix Brand Group, Inc., et al, No. 655894/2018, petition (N.Y. Sup. Ct., N.Y. Cty., Nov. 28, 2018). If you are facing a similar issue in California, contact a California intellectual property attorney without delay.

An arbitration proceeding resembles a courtroom trial. The parties present their cases, including witnesses and other evidence, to one or more arbitrators, and the arbitrator(s) render a decision. Statutes like the Federal Arbitration Act and the California Arbitration Act hold that agreements to arbitrate disputes are generally “valid, irrevocable, and enforceable.” 9 U.S.C. § 2, Cal. Civ. Pro. Code § 1281. If the parties have agreed in advance to binding arbitration, then state and federal law strictly limit courts’ authority to vacate or revise an arbitrator’s decision to specific situations, such as “corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1), Cal. Civ. Pro. Code § 1286.2(a)(1).

The arbitration proceeding at issue in the Carter case arises from a rather lengthy series of intellectual property disputes between the plaintiff, a hip-hop artist and record producer, and the defendant, a clothing company. The plaintiff sold a clothing brand to the defendant in 2007, leading to several lawsuits and settlements involving trademark rights. A lawsuit filed by the defendant against the plaintiff in New York in 2017, for example, is still pending. The current arbitration is related to a settlement agreement between the parties from 2015. The defendant alleged breach of the 2015 agreement, and commenced a proceeding with the American Arbitration Association (AAA) in October 2018.
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Most businesses must maintain an online presence these days in order to succeed. Even if a business does not provide any kind of online service, consumers are still likely to look for a website or social media profile. Many consumers will look at websites like Yelp, which allow consumers to rate businesses and write reviews describing their experience. A negative review can damage a business’ reputation, so businesses must be vigilant about their online profile. Some businesses, rather than responding to bad reviews, have tried to prevent bad reviews from ever occurring by placing “non-disparagement” or “gag” clauses in form contracts. These clauses prohibit customers from writing negative online reviews and penalize any who do so. Congress passed the Consumer Review Fairness Act (CRFA) of 2016 in December. This new law prohibits these types of clauses and allows enforcement by federal and state consumer protection agencies.

The CRFA only addresses contractual provisions that penalize consumers for writing negative reviews without regard to whether the negative review is accurate. A customer who writes a false review of a business could be liable to the business for defamation. This requires the business to prove that one or more statements made by the customer were false, that the customer knew they were false, and that the publication of the statement caused actual, measurable harm to the business. A clear-cut example might be a person who completely fabricates a set of facts in order to disparage a business in an online review, leading to a damaged reputation and loss of revenue.

The type of gag clause covered by the CRFA is not uncommon in certain situations, but it is a relatively new phenomenon for consumers and online review sites. These clauses often appear in settlement agreements resolving a lawsuit, in which a plaintiff accepts a settlement payment in exchange for dismissing the case and agreeing not to disparage the defendant with regard to the subject matter of the lawsuit. Both parties have an opportunity to negotiate terms and to review the final agreement before signing.

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In almost any employer/employee relationship, an agreement between the parties governs the terms and conditions of employment, filling in the gaps not covered by local, state, and federal employment laws. These types of contracts rarely involve two parties with equal bargaining power. A longstanding legal principle holds that any provision in an employment contract that contradicts or violates an employment statute or regulation is unenforceable. The California State Legislature can enact laws targeting specific types of employment contract clauses. It recently enacted SB 1241, which takes effect at the beginning of 2017. This bill targets clauses that limit California employees’ ability to assert claims against their employers under California law, commonly known as “choice of law” or “forum selection” clauses.

In any lawsuit, a plaintiff must be able to establish that the court in which they have filed suit has jurisdiction over the defendant(s) and that the venue of the suit is proper. In most disputes filed in state court, a plaintiff must establish that the state of California has jurisdiction and that the county where the court sits is the correct venue. In a federal lawsuit, a plaintiff must establish the court’s personal jurisdiction over the defendant, its subject matter jurisdiction over the lawsuit, and the appropriateness of filing the case in that particular federal district. A defendant may object to the court’s jurisdiction, the venue of the case, or both.

Common jurisdictional questions include the jurisdiction of federal courts over disputes involving state law questions and the jurisdiction of a court in one state over a defendant who lives in another state. Choice of law clauses in written contracts allow the parties to agree in advance to both jurisdiction and venue in the event of a dispute that leads to litigation. For example, a choice of law clause might state that all disputes relating to the contract will be governed by California law and adjudicated in the courts of Alameda County. By entering into a contract with a choice of law clause, a party to a contract is generally deemed to have waived any and all objections to jurisdiction and venue, and to have agreed not to seek either in a different location.

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Businesses that sell goods and services to the general public must take care regarding how they advertise their products and themselves in order to avoid possible claims under state and federal consumer laws prohibiting false or misleading statements and other “unfair business practices.” Consumers may be able to assert claims in court for both intentional and negligent violations of these laws, as demonstrated by a lawsuit filed recently in a California federal court, Rose v. Zara USA, Inc., No. 2:16-cv-06229, complaint (C.D. Cal., Aug. 19, 2016). The plaintiff alleges that the defendant, a clothing retailer organized in New York and based in Europe, deceived consumers by listing prices in euros but charging customers “arbitrarily inflated amounts” in dollars. Id. at 9.

Most business torts, much like tort law pertaining to personal injuries, can be broadly divided into two categories:  intentional torts and negligence. Intentional torts typically require proof that a defendant acted willfully or intentionally. In some cases, a plaintiff must also prove that the defendant intended the harm to occur. Consumer protection statutes do not necessarily require a plaintiff to prove intent, but they may permit additional damages if a plaintiff can prove that a defendant acted willfully.

A claim for negligence does not require proof that a defendant had any particular mental state. It focuses instead on duties of care owed by a defendant. A plaintiff must establish four elements in order to prevail on a negligence claim:  (1) the defendant owed a duty of care to the plaintiff, or to the general public; (2) the defendant breached this duty; (3) the breach proximately caused the plaintiff’s harm; and (4) the plaintiff suffered measurable damages as a result.

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Disputes arising from maritime transactions, which often cross both state and national boundaries and involve numerous related business entities, can present difficult challenges for creditors. The Federal Rules of Civil Procedure include provisions to assist plaintiffs in the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (the “Supplemental Rules”). A recent New York court decision demonstrates the complexity of such transactions and the role of the Supplemental Rules. D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., No. 1:09-cv-07840, order (S.D.N.Y., Jul. 30, 2015). The case involved disputes ranging from Texas to England with 20 or more parties. The issues presented in D’Amico could be of particular interest to businesses involved in shipping in the Bay Area.

The Supplemental Rules address two common problems in maritime commercial claims. First, parties to a dispute may be located in different jurisdictions, either within the U.S. or across national borders, and any assets owned by a defendant may be highly mobile. Second, businesses engaged in maritime trade often use multiple shell businesses to protect assets, making the enforcement of existing judgments difficult.

Rule B of the Supplemental Rules allows a claimant to file an ex parte lawsuit to attach one or more assets owned by a defendant, if it states in a verified pleading that it cannot locate the defendant in the jurisdiction where the asset is located. This is a quasi in rem proceeding, which combines elements of both an in personam and an in rem lawsuit. The plaintiff’s claim is against an item of property, but in direct relation to a claim against its owner. In situations in which a plaintiff cannot locate assets owned by a defendant because other business entities hold title to all relevant assets, Rule B allows a plaintiff to assert a claim involving those other business entities if it can demonstrate that they operate as alter egos of the defendant.

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A corporate insider who personally guaranteed a loan, but also waived any right to indemnification by the company, was not subject to “preference liability” in the company’s Chapter 11 bankruptcy proceeding, according to the Ninth Circuit Court of Appeals. In re Adamson Apparel, Inc., No. 12-57059, slip op. (9th Cir., May 6, 2015). The Bankruptcy Code allows a bankruptcy trustee to avoid “preferences,” defined as certain types of transfers made by a debtor to a creditor before filing a bankruptcy petition. If the preference was made for the benefit of an insider, federal law states that the trustee may only recover avoided transfers from the insider in certain situations. The Ninth Circuit distinguished this case from prior decisions and ruled that the guarantor insider was not liable, finding the waiver of indemnification to be the key distinction.

The debtor, a clothing manufacturer, took out a large loan in 2002. The debtor’s president and CEO guaranteed the loan, stating that he would be personally liable for the loan if the company was unable to repay it in full. Normally, he would be entitled to indemnification, meaning the debtor would reimburse him for payments to the lender to settle the loan, but the guaranty agreements included waivers of that right.

In late 2003, the debtor received a very large order from a purchaser. It instructed the purchaser to pay the purchase price–slightly less than $5 million–directly to the lender. The guarantor paid the balance of the loan–more than $3.5 million–out of his own money in March 2004. In September 2004, nine months after directing the purchaser to make a payment on the loan, the debtor filed for Chapter 11 bankruptcy.
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Laws governing the formation of contracts, including the creation of an enforceable obligation, go back for centuries. The internet has changed many aspects of how businesses interact with their customers, but it has not changed the basic nature of contract formation. A California federal district court held that that an arbitration clause in a website’s Terms of Use (TOU) was unenforceable because the defendant business did not make the plaintiff adequately aware of the clause. The clause therefore lacked mutual assent. Nguyen v. Barnes & Noble, Inc. (“Nguyen I“), No. 8:12-cv-0812, order (C.D. Cal., Aug, 28, 2012). The Ninth Circuit Court of Appeals affirmed. Nguyen v. Barnes & Noble, Inc. (“Nguyen II”), No. 12-56628, slip op. (9th Cir., Aug. 18, 2014).

The defendant, Barnes & Noble, operates a nationwide chain of retail bookstores and a website. It advertised HP Touchpad Tablets, an unsuccessful competitor to Apple’s iPad tablet, for a “fire sale” price of $101.95 each. Nguyen II at 4. The plaintiff ordered two tablets, based on this advertisement, on August 21, 2011. Barnes & Noble allegedly sent him an email message the following day stating that it would not honor his order, “due to unexpectedly high demand.” Id. The plaintiff had to purchase substitute goods at a much higher price.

In April 2012, the plaintiff filed a putative class action in a California superior court against Barnes & Noble. He asserted causes of action for breach of contract and violations of various California and New York statutes, including California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., the False Advertising Law, Cal. Bus. & Prof. Code § 17500 et seq., and the Consumers Legal Remedies Act, Cal. Civ. Code § 1750 et seq. The defendant removed the case to federal court and then filed a motion to compel arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq.
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A federal judge in Oakland, California ruled in favor of a class of college athletes in a lawsuit against the National Collegiate Athletic Association (NCAA), finding that certain NCAA rules limiting compensation paid to players violated federal antitrust laws. O’Bannon, et al v. NCAA, No. 4:09-cv-03329, FFCL (N.D. Cal., Aug. 8, 2014). The dispute centered around the use of players’ likenesses by the NCAA and the Collegiate Licensing Company (CLC), which handles trademark licensing and marketing for the NCAA, without obtaining players’ permission or compensating them. The NCAA has faced multiple recent disputes with players involving issues of both commercial and employment law, which have generally gone in the players’ favor.

The NCAA and CLC use players’ names and likenesses in video games, photos sold in various forms, action figures, jerseys and other apparel, DVDs, rebroadcasts of games, and other media. The video game company Electronic Arts (EA) releases NCAA-branded video games through its label EA Sports on an annual basis. It sells more than one million units of its NCAA football games per year, according to the plaintiffs.

The original plaintiff in the present case, Ed O’Bannon, was the Final Four Most Outstanding Player for UCLA’s 1995 national championship basketball team. He reportedly agreed to be the lead plaintiff when he learned that a video game had used his likeness from the 1995 college basketball season, including his physical features, his jersey number, and his left-handed shot, without his permission.
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A lawsuit pitting two of the world’s most famous typeface designers against each other has brought a great deal of attention to an often obscure area of design. Choosing the right typeface has been an important part of marketing one’s business for about as long as printing has existed. Thanks to the internet and advances in digital technology, popular typefaces may generate millions of dollars in licensing fees. The parties in Frere-Jones v. Hoefler, No. 650139/2014, complaint (NY Sup. Ct., NY Co., Jan. 16, 2014), are considered superstars among typeface designers. The plaintiff is seeking $20 million in damages over an allegedly broken promise to share the business 50/50, and many valuable typefaces hang in the balance.

The words “typeface” or “font” refer to a set of symbols, including letters, numbers, and punctuation, with common design elements. Many well-known typefaces, such as Arial and Courier, are included with many computers and software applications. Typefaces are also available to license for use in marketing and other business publications. Licensing fees allow designers the opportunity to continue making money from their creations in much the same way that musicians receive income through royalty payments. Businesses may also commission typefaces for their own exclusive use. Copyright law generally protects typefaces, although trademark law may cover a specific use of a typeface in a logo or other design.

The plaintiff, Tobias Frere-Jones, claims in his complaint that he has designed more than eight hundred fonts during his career, which are used all over the world in more than 145 languages. The defendant, Jonathan Hoefler, is the founder of a New York design firm known as The Hoefler Type Foundry (HTF), which did business under the name Hoefler & Frere-Jones from 1999 until recently. Their firm has created fonts for newspapers like the Wall Street Journal, Barack Obama’s 2008 presidential campaign, and countless logos appearing on televisions, product packaging, and elsewhere. According to a description of the company in Bloomberg Businessweek, the two designers are like rock stars in the design world, with one colleague comparing their business partnership to the musical group Crosby, Stills, Nash & Young.
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