Wednesday, October 8, 2014

Expression is the Better Part of Valor: Discretion and Good Faith in Entertainment Contracts

By Professor F. Jay Dougherty

It is not unusual for contracts in the entertainment industry to contain provisions leaving performance of an act to one party’s discretion. Often the other party’s attorney will request that such a provision also expressly require good faith. Sometimes, “good faith” is expressly added to the contractual language—after all, the client will act honestly in exercising its discretion. In the past, however, negotiators might reject the request, arguing that good faith and fair dealing is implied in all contracts anyway. In recent years, some courts have moved away from implying an obligation of good faith in a matter left to a party’s discretion. Other courts have implied the good faith obligation, even where a matter of subjective creative judgement is involved. Volatility and uncertainty in connection with implied covenants of good faith suggest that attorneys should be careful to draft such provisions clearly, leaving no ambiguity as to the intent of the parties.

In Third Story Music v. Waits[1], the plaintiff (“TSM”) had entered into an exclusive recording artist agreement with acclaimed singer-songwriter Tom Waits in the 1970’s, and had later transferred its rights under that agreement to Elektra/Asylum Records, a label in the Warner Communications family of record companies (“Warner”). Under the agreements, TSM would produce Waits’ records, and Warner would have the exclusive right to exploit and license those records. The agreement between TSM and Warner also specifically said that Warner “may at [Warner’s] election refrain from any or all of the foregoing.” TSM was to receive a percentage of amounts earned by Warner from the records, and a substantial advance for each album.

In 1993, an affiliate of TSM attempted to obtain a license from Warner to compile and exploit an album of some of the Waits recordings. Warner itself had no objection, but before it would agree to issue the license, it sought Waits’ approval, which he refused to give (assertedly to maximize the value of his later recordings made after the expiration of his agreement with TSM). When Warner refused to issue the license, TSM sued for damages for breach of the implied convenant of good faith and fair dealing. Warner demurred, asserting that the contract language expressly permitting it to refrain from licensing precluded application of the implied covenant. The demurrer was sustained, and affirmed on appeal.

In the appellate decision, the court attempted to reconcile the conflicting ideas that “a covenant of good faith should be applied to restrict exercise of a discretionary power”[2] but that “an implied covenant must never vary the express terms of the parties’ agreement.”[3] In doing so, the court applied the strict test for implying covenants, permitting such implication only only where (1) the implication arises “from the language used or is indispensable to effectuate the intention of the parties,” (2) it appears from the language used that the implication was “so clearly within the contemplation of the parties that they deemed it unnecessary to express it,” (3) the implication can be “justified on the grounds of legal necessity,” (4) “it can be rightfully assumed that [the implied promise] would have been made if attention had been called to it,” and (5) “the subject is [not] completely covered by the contract.”[4]

After reviewing precedents, the court concluded that: “[C]ourts are not at liberty to imply a covenant directly at odds with a contract’s express grant of discretionary poser except in those relatively rare instances when reading the provision literally would, contrary to the parties’ clear intention, result in an unenforceable illusory agreement. In all other situations where the contract is unambiguous, the express language is to govern…”[5] Because the TSM-Warner agreement guaranteed minimum compensation regardless of Warner’s efforts, it was not necessary to imply an undertaking to exploit the recordings in order to find consideration to support the contract. Hence, the court refused to imply a promise to actually exploit the records in good faith and issue licenses.

In its decision, the court recognized that judges routinely imply convenants to use good faith or even “best efforts” where a license grants exclusive rights in exchange for a royalty or a percentage of profits, but the licensee does not expressly promise to do anything.[6] In discussing this scenario, the court cited Zilg v. Prentice-Hall[7], without mentioning that it reached an arguably contradictory result to that reached here. In Zilg, an author had written a book highly critical of the Dupont family. The defendant publisher had been granted exclusive rights, but the contract expressly left to Prentice-Hall’s discretion printing and advertising decisions. The author’s compensation was a royalty, but the publisher had also agreed to pay an advance. Hence, the agreement was supported by consideration and was enforceable without implying an obligation to exploit in good faith. Still, the court found an implied obligation to make certain efforts in publishing the book; namely, “a good faith effort to promote the book including a first printing and advertising budget adequate to give the book a reasonable chance of achieving market success in light of the subject matter and likely audience…”[8] Although the publisher had greatly reduced the advertising budget and the size of the printing of the book after it received some pressure from the Duponts and the book was deleted from an expected book club, the court still found that Prentice-Hall had satisfied its obligation to use its good faith business judgement.

Indeed, the Waits court could have followed the Zilg approach and yet reached the same result. That is, it could have found that there was an implied convenant of good faith in the TSM-Warner contract, but that Warner’s efforts to exploit Waits’ albums had been adequate to satisfy good faith requirements and, perhaps, that Warner had exercised good faith business judgement when it nurtured its relationship with Waits by seeking his approval, even when not contractually required to do so. Instead, the Waits court took a very restrictive view of the circumstances in which a covenant of good faith will be implied.

In Locke v. Warner Bros.,[9] another California appellate court distinguished Waits and applied the more liberal approach to assessing when to imply a covenant of good faith where the decision of whether to exploit intellectual property is left to the discretion of one party. In that case, Warner had entered into a nonexclusive “first look” deal with Sandra Locke in connection with a settlement of a dispute between Locke and Clint Eastwood, her former lover. Warner failed to accept any projects for development under that deal, and Locke sued, alleging breach of the implied covenant of good faith a fair dealing, among other claims. The lower court granted summary judgement and Locke appealed.

The first look agreement apparently left to Warner’s discretion the decision whether or not to acquire Locke’s proposed projects, but did not expressly give Warner the right to refrain from working with Locke at all. The contract provided for a substantial payment to Locke and the provision of an office and an assistant. Hence, there was clearly consideration for the agreement and it was not necessary to imply an obligation to accept and exploit a project in order to preserve the enforceability of the agreement. Still, the appellate court reversed the grant of summary judgement, finding that there was an implied covenant of good faith and there were disputed issues of material fact as to whether Warner breached that covenant. The court said that “The trial court’s ruling missed the mark by failing to distinguish between Warner’s right to make a subjective creative decision, which is not reviewable for reasonableness, and the requirement the dissatisfaction be bona fide or genuine.”[10] Rather than limiting the convenant of good faith to those situations where it is necessary to preserve enforceability of a contract, the court took the broader view, “[W]here a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.”[11]

The Locke court did not ignore the conflict between the general rule that contract terms will not be implied to contradict the express language of a contract. Indeed, it observed that, “As to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct.”[12] It distinguished the Waits decision, since in that case, “the agreement expressly provided Warner Communications had the right to refrain from marketing the Waits recordings, [so] the implied covenant of good faith and fair dealing did not limit the discretion given to Warner Communications in that regard.”[13]

The history of contract law reflects a tension between conflicting values. On the one hand, contract law respects the autonomy of the parties to agree on whatever they desire, so long as the objective is legal. This goal is reflected in the “plain meaning” rule of contract interpretation: the language of the contract is the primary expression of their agreement, and if that language is clear and unambiguous, the plain meaning of the language prevails. On the other hand, modern contract law reflects certain social and commercial norms, including an expectation of honesty and fairness in transactions. The imposition of a duty of good faith and fair dealing in contracts is an example of that goal. The Restatement (Second) of Contracts[14] and the Uniform Commercial Code[15] each include a statement that “every contract” imposes a duty or obligation of good faith. Courts are increasingly caught in the conflict between those values, with a trend towards emphasizing the express language of the parties and reluctance to imply a covenant of good faith to limit the exercise of discretion by one party when such discretion is clearly and expressly permitted by the terms of the contract.[16] Still, the best way to resolve uncertainty and reduce the likelihood of expensive litigation in this area is to take special care to be clear about intention in the drafting of the contract. Accordingly, where the intention is that discretion will be exercised in good faith, such a term should be expressly included. By contrast, where discretion is not to be so limited, that intent should be clearly indicated in the contractual language, for example by use of terms such as “sole and unfettered discretion” and by stating expressly that the promissor will have the right to refrain from doing the act which is left to its discretion.

[1] 41 Cal.App.4th 798 (Ct.App. 2d Dist., 1996).
[2] 41 Cal.App.4th 798, 804.
[3] Id.
[4] Id.
[5] 41 Cal.App.4th 798, 808.
[6] 41 Cal.App.4th 798, 805. The classic case recognizing this is Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88 (1917).
[7] 717 F.2d 671 (2d Cir., 1983).
[8] 717 F.2d 671 ____.
[9] 57 Cal.App.4th 354 (Cal.App.2d Dist., 1997).
[10] 57 Cal.App.4th 354, 363.
[11] Id.
[12] 57 Cal.App.4th 354, 366 (emphasis in original, citations and internal quotations omitted).
[13] Id. (emphasis in original).
[15] Cal. Comm. Code §1203.
[16] See Michael P. Van Alstine, OF TEXTUALISM, PARTY AUTOMNOMY, AND GOOD FAITH, 40 Wm. & Mary L.Rev. 1223 (1999)(criticizing that trend and arguing that the obligation of good faith should always be presumed, even where a matter is expressly left to one party’s discretion, unless the contrary is both clearly expressed and the opposing party’s attention is directed to that expression).

Wednesday, October 1, 2014

Who Will Police the Police?

By Professor Priscilla Ocen

This op-ed originally appeared in the Los Angeles Daily Journal on Sept. 22.

In August, Ferguson, Mo. — a small, predominately black suburb of St. Louis — erupted in protest after the shooting death of Michael Brown, an unarmed black teenager, by a white police officer. Following the shooting, Brown’s body lay prone on the street for hours, visible to neighbors and passersby as a gruesome reminder of the violent end to his young life. Brown’s death at the hands of police, however, was only one of many this summer. In New York, Eric Garner, another unarmed black man, was killed after he was placed a chokehold by members of the New York Police Department. In Los Angeles, Ezell Ford, an unarmed, mentally disabled black man, was shot and killed by members of the Los Angeles Police Department.

The deaths of Brown, Garner and Ford are not isolated incidents. According to the FBI, police officers, on average, kill over 400 people per year in what were determined to be “justifiable homicides.” This figure, however, likely underrepresents the number of police killings as it only includes self reported data from less than 10 percent of police departments and only those killings that have been deemed justified. Nevertheless, it is clear that the burden of deaths in police custody has fallen disproportionately on African-Americans. Annually, nearly a quarter of the 400 killings involve African-Americans. This means that African-Americans are killed by police almost twice a week in the United States. Indeed, in a recent report by Mother Jones magazine, it was found that blacks are roughly four times as likely as whites to die during arrest or while in police custody.

While the killing of African-Americans by law enforcement officers is a tragically common event, criminal penalties for police officers accused of killing African-Americans are startlingly uncommon. In one study of 21 high-profile shootings of unarmed African-Americans, only three officers were successfully prosecuted. As both St. Louis County and federal officials investigate the shooting death of Michael Brown, what kind of outcome should we expect if a criminal case is ultimately filed?

Monday, September 15, 2014

Loyola's Civil Justice Program on 'Injury as Cultural Practice'

By Visiting Professor Anne Bloom
Assistant Director, Civil Justice Program

Last week, the Civil Justice Program was excited to host an international symposium on "Injury as Cultural Practice." The conference featured presentations from an interdisciplinary group of scholars including lawyers, social scientists, anthropologists and social theorists. I was thrilled to collaborate with David Engel, SUNY Distinguished Service Professor at SUNY Buffalo Law School, in organizing and directing the program.

The purpose of the symposium was to continue a dialogue that began last spring on how the meaning of legal injury is constructed through social and cultural practices. For the symposium, we broke the topic into four parts, with three panels on the first day of the symposium and a fourth on the second day.

The first panel on Day One discussed "What Counts as an Injury?" Mary Anne Franks, Associate Professor of Law at University of Miami, led things off with a presentation on "Injury Inequality." Franks argued that the kinds of injuries that affect more powerful members of society tend to be overstated. David Engel presented next with a paper on “Chairs, Stairs, and Automobiles: The Interpretation of Injury and the Absence of Claims.” (One of the many things I learned from this presentation is that chairs are not particularly good for our spines -- still, no one considers the pain that results an "injury").

I presented next with my co-author, the legendary Marc Galanter, Professor of Law Emeritus from the University of Wisconsin Law School. Our paper was called “Good Injuries” and examined the line between "injury" and "enhancement" in contexts like tattooing and plastic surgery. The symposium participants then heard from Sagit Mor, Assistant Professor of Law at Haifa University in Israel, who presented on how injuries are understood from a disability perspective. Loyola's own John Nockleby was next with a fascinating historical paper on the different ways that law has responded to the harm caused by natural disasters.

Tuesday, August 26, 2014

Prof. Berdejo Blogs About Forthcoming Article on the JOBS Act

By Professor Carlos Berdejo

This originally appeared on the CLS Blue Sky Blog, Columbia Law School's blog on corporations and the capital markets.

Congressional consideration of further deregulation of the federal securities laws, informally labeled by some as JOBS II, makes an evaluation of the impact of the JOBS Act of 2012 particularly timely. Several of the provisions of the JOBS Act relax the level of mandatory disclosures required of “emerging growth companies” (EGCs) during the IPO process and phase in certain ongoing regulatory requirements following the completion of an IPO. In a recent article, Going Public After the JOBS Act, I gather data on IPOs during the period 2010-2013 and perform an empirical assessment of the impact the JOBS Act has had on EGCs’ access to the public capital markets.

The evidence indicates that EGCs are not only taking advantage of the scaled disclosure requirements made available to them under the JOBS Act, but are also doing so with increasing frequency. For example, during the time period I studied, 87.3% of EGCs elected to file a confidential draft Form S-1 with the SEC. But in the first three quarters following the enactment of the JOBS Act, the percentage of issuers filing a confidential draft was about 72.7%, which is substantially lower than the percentage of issuers who chose to do so during the later quarters in the sample, 90.6%. There was also a considerable increase in the proportion of issuers that elected to include two rather than the standard three years of audited financial statements – from 27.3% in the first three quarters to 44.8% in the last three quarters (the overall sample average is 41.5%). Notably, EGCs that took advantage of the scaled financial disclosure available under the JOBS Act had lower revenues, were younger, and disproportionally belonged to R&D-intensive industries, such as pharmaceuticals. It is worth noting that these figures exclude IPOs in which the initial Form S-1 was publicly filed with the SEC before the JOBS Act became effective, as including these IPOs would merely inflate the reported inter-temporal differences.

Read the complete post.

Friday, August 22, 2014

Prof. Berdejo to Publish Going Public After the JOBS Act

Professor Carlos Berdejo's article, Going Public After the JOBS Act, will be published by the Ohio State Law Journal.


The Jumpstart Our Business Startups Act of 2012 (JOBS Act) represents one of the most comprehensive overhauls of the securities laws in recent years. One of the principal goals of the JOBS Act is to improve access to the capital markets for smaller issuers, referred to in the act as emerging growth companies, or EGCs. To accomplish this goal, the JOBS Act seeks to reduce the costs of conducting a public offering and complying with the ensuing reporting obligations by making certain disclosure requirements voluntary for EGCs.

This Article examines whether these scaled disclosure rules have increased the number of small issuers conducting an initial public offering (IPO) of their equity securities and the extent to which these issuers have taken advantage of the various exemptions available to them under the JOBS Act. The evidence presented in this Article shows that EGCs have increasingly taken advantage of several of the scaled disclosure provisions of the JOBS Act during their IPOs. EGCs that take advantage of these scaled disclosure provisions are smaller, younger and more likely to belong to the R&D-intensive pharmaceutical industry. Notably, despite the fact that EGCs are embracing these scaled disclosure provisions, there has not been a noticeable increase in the proportion of IPOs conducted by issuers that qualify as EGCs. The Article explores two interrelated explanations for these seemingly contradictory findings.

First, the evidence indicates that the benefits of the JOBS Act may not be as significant as may have been expected. While the direct costs of conducting an IPO have not decreased for EGCs following the enactment of the JOBS Act, indirect costs may have actually increased. In addition, by their second fiscal year, over forty percent of issuers that went public as EGCs no longer qualify for such status, a fact that limits the expected ongoing benefits of the JOBS Act at the going public decision stage. Second, certain issuers that qualify for EGC status may be choosing to pursue private offerings, which certain provisions of the JOBS Act facilitate. Changes in the mix of small issuers going public following the enactment of the JOBS Act suggest such a shift in the pattern of going public decisions across firms.

Thursday, August 21, 2014

Prof. Pollman to Publish A Corporate Right to Privacy

Professor Elizabeth Pollman will publish the article A Corporate Right to Privacy in a forthcoming edition of the Minnesota Law Review. Earlier this summer, she published a blog post about the article on the Conglomerate.


The debate over the scope of constitutional protections for corporations has exploded with commentary on recent or pending Supreme Court cases, but scholars have left unexplored some of the hardest questions, and the ones that offer the greatest potential for better understanding the nature of corporate rights. This Article analyzes one of those questions—whether corporations have, or should have, a constitutional right to privacy. First, the Article examines the contours of the question in Supreme Court jurisprudence and provides the first scholarly treatment of the growing body of conflicting law in the lower courts on this unresolved issue. Second, the Article examines approaches to determining the scope of corporate constitutional rights and argues that corporate privacy rights should be evaluated not by reference to the corporate form itself or a notion of corporate personhood, but rather by reference to the privacy interests of the various people involved in the corporation and their relationship to the corporation. Further, because corporations exist along a spectrum—from large, publicly traded corporations constituted purely for business purposes to smaller organizations with social, political, or religious purposes—the existence of a corporate privacy right will and should vary.

Thursday, August 7, 2014

Fifty Years After the Civil Rights Act: Celebrating the Latest Milestone on the Journey Toward Racial Equity in Health Care

By Professor Brietta Clark

Fifty years ago this July, President Lyndon B. Johnson signed into law the Civil Rights Act of 1964. The Civil Rights Act was viewed by many as a powerful symbol of the nation's commitment to racial equality. It was the most comprehensive civil rights law enacted up to that point - tackling discrimination in employment, education, voting, public accommodations, and federally funded programs, such as those financing health care. And although health care discrimination has not typically garnered as much attention as discrimination in other settings, inequality in health care was seen as a serious problem that the Civil Rights Act was needed to address.

People understood that good health was integral to one's ability to realize the other opportunities protected by the Act, such as finding employment, getting an education, and being an engaged citizen. In addition, discrimination in health care was pervasive and often had dire consequences. Many hospitals and physicians refused to treat Blacks because of their race; this included women in labor, patients with serious illnesses that could have debilitating effects, and even people in need of emergency, life-saving treatment. Indeed, civil rights leader Dr. Martin Luther King, Jr. is reported to have said that "Of all the forms of inequality, injustice in health care is the most shocking and inhumane."

Title VI of the Civil Rights Act, which prohibits discrimination on the basis of race, color, or national origin by recipients of federal funds, has been an important tool for fighting discrimination in health care. In theory, tying anti-discrimination protections to federal funding would give the government greater leverage to enforce Title VI against health care providers who wanted those funds. In reality, Title VI's power as an anti-discrimination tool depended on the federal government's willingness to devote significant resources to health care to ensure that this leverage existed.