≡ Menu

Announcement: The Common Draft contract clauses and worksheets are posted (in draft); I plan eventually to turn the clauses and commentary into a book. If you’d like to be notified of significant developments, please subscribe to updates at right. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

This past Friday, as expected, the state of Oregon filed a $3 billion lawsuit against Oracle Corporation and six Oracle employees personally, in the wake of the failed attempt to develop Oregon’s health-insurance exchange under the Affordable Care Act a.k.a. Obamacare. The six employees included the president/CFO; three vice presidents; one senior vice president; and one technical manager who was accused of having conducted a fraudulent demo of the new system’s capabilities. The state is seeking “only” some $45 million from the technical manager, as well as amounts ranging from $87 million to $267 million from various Oracle executives.

In high-dollar and high-profile cases like this, plaintiffs sometimes bring claims against company employees personally. My guess is that the reason often is to to try to rattle the employees and encourage them to cooperate as witnesses against their employers (sort of like the way criminal prosecutors bring charges against low-level employees).

Against that possibility, it’s not unheard-of for vendor companies to include, in their contract forms, language protecting employees from being sued in their personal capacities. See, for example, the model language to that effect in the Common Draft clause repository, along with the commentary following the language.

I don’t know whether the Oregon-Oracle contracts included such language. I wasn’t able readily to find the contracts in question, which according to news reports was Oracle’s standard license- and services agreement form, used as an umbrella agreement in conjunction with ordering through Dell. Oracle doesn’t appear to have posted that standard form (among others) on the Web. The closest thing I could find was a counterpart, apparently dating back to 2004, that seems to have been intended for use in Europe, the Middle East, and Africa (EMEA). I don’t recall seeing such language in any actual Oracle contracts.

High-profile lawsuits like this typically settle before trial, not least because the elected officials who bring them or authorize them would prefer to trumpet a “victory” instead of rolling the dice with the court.

But such cases don’t always settle; see, for example, the state of Indiana’s lawsuit against IBM for allegedly botching the building of a new system for administering the state’s welfare programs. IBM ended up winning a multi-million dollar judgment in the trial court. See Indiana v. IBM Corp., No. 49Dl0-1005-PL-021451 (Marion Cty Ind. Sup. Ct. July 18, 2012), affirmed in part, reversed in part, No. 49A02-1211-PL-875 (Ind. App.. Feb. 13, 2014) (holding that IBM had materially breached contract but was entitled to be paid, subject to offset).

Lesson: When embarking on a contract that could result in claims for big dollars being thrown around, a provider might want to think about including some protection for its employees. A court, especially a hometown court, might not give effect to such protection in cases of alleged fraud. But such protective language would be better than nothing.

In drafting and negotiating a formula for a contract — for example, a formula for computing damages — it’s important to consider how the computation might work under different factual scenarios. That’s because some courts take a laissez-faire attitude when contract provisions are agreed to by sophisticated parties represented by counsel. If such a formula ends up backfiring on one of the parties, that party might not get a sympathetic hearing.

For example, in a recent Seventh Circuit case:

  • A bank sold a package of distressed loans to an investment firm. The parties’ agreement included a representation about the status of the various assets that collateralized the loans in the package. That representation, however, turned out to be incorrect as to some of those assets, meaning that the bank had breached the agreement.
  • A limitation-of-liability clause in the parties’ agreement capped the investment firm’s damages at an amount to be determined by computing the result of a specified formula. On the facts of the case, that amount turned out to be a negative number, resulting in a zero damage award.

The investment firm claimed that the limitation-of-liability clause was unenforceable or waived, or that it failed of its essential purpose. The district court disagreed, and granted summary judgment for the bank.

The Seventh Circuit affirmed, saying:

Except in the most extraordinary circumstances, we hold sophisticated parties to the terms of their bargain. The terms of the parties’ bargain in this case results in zero recovery for [the investment firm]. The judgment of the district court is affirmed.

Southern Financial Group, LLC v. McFarland State Bank, No. 13-3378, part III (7th Cir. Aug. 15, 2014).

There’s a very real possibility that an exclusive forum-selection clause might be held to trump an arbitration clause in a prior or “background” agreement. For that reason, the Common Draft forum-selection clause makes it clear that the parties don’t intend that result.

At this writing there’s a split in the circuits on this point:

  • The Second and Ninth Circuits have held that an exclusive forum-selection clause does trump an arbitration provision. See Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, No. 13-797-cv (2d. Cir. Aug. 21, 2014), in which the appeals court affirmed a trial court’s grant of Goldman’s motion to enjoin FINRA arbitration, on grounds that the forum-selection clauses in the parties’ agreements superseded the arbitration provision (hat tip: Michael Oberman); see also Goldman, Sachs & Co. v. City of Reno, No. 13-15445, at part III-C, slip op. at 15-16, 19-28, 747 F.3d 733, 736 (9th Cir. 2014), where the appeals court reversed a denial of preliminary injunction and final judgment on the same grounds;
  • In contrast, the Fourth Circuit has held that an exclusive forum-selection clause does not trump an arbitration clause, on grounds that the forum-selection clause referred to litigation, not arbitration, and “we believe that it would never cross a reader’s mind that the [forum-selection] clause provides that the right to FINRA arbitration was being superseded or waived.” UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 329-30 (4th Cir. 2013); see also UBS Sec. LLC v. Allina Health Sys., No. 12–2090, 2013 WL 500373 (D. Minn. Feb. 11, 2013) (following Carilion Clinic).

Today the U.S. Court of Appeals for the Ninth Circuit (which covers California and other West Coast states, plus Hawai’i) came out with a ruling about the enforceability of “browse-wrap” license agreements, in Nguyen v. Barnes & Noble. The court affirmed a lower-court ruling that B&N’s terms of service were not enforceable against Nguyen. As a result, the arbitration agreement in the TOS didn’t apply, and so B&N must now defend a class-action lawsuit.

The court’s reasoning isn’t a model of clarity in some respects, but the main takeaways seem to be these (consult your lawyer, don’t rely on this as legal advice about your specific situation, etc.):

1. In a browse-wrap agreement, apparently it’s not enough to include just a link to the terms of service. The link should explicitly — and, preferably, conspicuously — warn the user that use of the Web page will constitute assent to a binding contract.

2. It’s best to put the link and its warning in close proximity to a button (or link) that the user must click to take action, e.g., create an account, place an order, etc.

Cellport Systems, Inc. won a lawsuit against Peiker, a German company, for unpaid patent royalties under a license agreement. The agreement included an audit provision that required Peiker to pay interest on past-due royalties at 1.5% per month.

The trial court, however, awarded Cellport interest at the (lower) statutory rate, on grounds that, in context, the contractual interest rates was intended to apply only to underpayments revealed in an audit. The Tenth Circuit agreed that the lower rate was proper:

According to Cellport, the License Agreement’s reference to the rate contains no limitations on its application.

As the district court explained, however, the sentence is in the middle of a paragraph devoted to Cellport’s right to verify the royalty payments it is owed through audits. And we must interpret this provision in its context.

We agree with the district court that the interest rate was contractually intended to apply only to accounting disputes. The application of the statutory rate was appropriate.

Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, No. 13-1029, slip op. at 21-22 (10th Cir. Aug. 5, 2014) (affirming trial-court judgment in part; emphasis and extra paragraphing added).

Lesson: As in the Common Draft contract terms, it’s a good idea to separate the interest clause from the audit clause.