Instructions:

1. The exam consists of 6 pages, including this cover sheet. Please check now that your copy is complete.
   
   
2. Your exam is due 8 hours after you pick it up, or at 6 pm of the day you pick it up, whichever is earlier. You must return your exam in person, and must return your copy of the exam questions at the same time. If during the exam you have any questions regarding its administration, you should contact the office of Registration Services.
   
   
3. The exam is open book; you are free to consult any written or electronic materials and are expected to have all assigned course materials available. Additional research is discouraged, and is unlikely to improve your exam performance
   
   
4. Please follow the instructions for each question carefully. If your answers depend on facts not provided in the question, say so; and state clearly any additional assumptions you are making.
   
   
5. There are two questions on the exam, each with a separate 1500-word limit. To ensure compliance with the word limit, you must provide a word count for each question. You may not use any leftover space from one question in answering another; any attempt to use shorthand or nonstandard abbreviations will be counted as if full words were used. Answers exceeding the word limit will be penalized by reducing their score in proportion to the excess.
   
   
6. To ensure that you receive full credit for your answers, please be sure to
   
   • write or print your exam number on each page of your exam;
   • begin your answer to each question on a new sheet of paper;
   • use double spacing and adequate margins, so that I have enough room to make notations when grading your exam.
   
   
7. I recommend that you spend about 2 hours reading the exam, thinking about your answer, and outlining your response. Writing the exam should take no more than 4 hours. This leaves 1 hour to edit and proofread your answer and 1 hour for eating, traveling, etc.
   
   
8. I will notify you when grades are ready and will post model answers on the class website as soon as possible after that.
   
   
9. Good luck on the exam, and have a good holiday.
   
   

QUESTION 1:  (50% of exam, 1500 word limit).

Greg Gloucester designed and built small sailing craft. His boats were well known among racing sailors and had won several prizes for design. By 2006, he was president of a family boat-building business whose principal shareholders were his parents and brother as well as himself. The company was located in Portland, Maine, where he had grown up and lived with his wife and two young children. The company paid him $250,000 per year, and plowed most of the profits back into the business, paying no dividends.

In early 2006, a senior officer of Baywatch Industries, Inc., a large manufacturer of boats and other marine equipment, contacted Gloucester and tried to persuade him to come to work in Bayonne, New Jersey as a boat designer. Through that officer and, later, through Elena Eagle, its chief executive officer, Baywatch intensively recruited Gloucester through the spring of 2006. Eagle told Gloucester that Baywatch was looking to expand its recreational boat division into new lines of sailing craft and was looking for someone with a reputation for design to head the division. Baywatch brought Gloucester and his wife to Bayonne to visit Baywatch's offices and to look over the area. Gloucester was interested because he thought that with the financial and marketing backing of a major sports company, he could be relieved of the administrative and financial tasks of presiding over a business, freeing up his time to work on new boat designs.

On one of these recruitment visits, Gloucester told Eagle he was concerned about relocating to New Jersey, as the move would entail giving up a secure job as president of a family company where he had worked all his adult life, separating his children from their friends and family at an important time of their lives, and leaving his home town of 40 years. Also, he had no financial assets except for his house and retirement plan; all the company's capital was tied up in the business and his family could not afford to buy out his share without dissolving the company. As a condition of agreeing to relocate, Gloucester said, he needed Baywatch's assurances that his job would be secure, would deliver regular and significant increases in pay, and would allow him to devote most of his time to boat design.

Eagle responded that: "I can tell you this. So long as you do your job competently, and help the company achieve its goals, you will have a secure long-term future with the Baywatch family, and will advance within the organization. In fact, the current head of the entire boat division is going to retire soon, and you will be able to assume her title and pay, while leaving the management work to her deputy." Eagle also told Gloucester that the company was strong financially and anticipated solid growth and a stable, profitable future; and in particular, that the department in which Gloucester would work was a growth division within the company and that Baywatch had plans to expand it further. Eagle also said Baywatch would pay Gloucester $300,000 annually to start, that Gloucester would receive annual reviews and that if these were positive his yearly income would "quickly" rise to $400,000.

Gloucester asked for a written offer of employment. Eagle said, "We do business based on trust around here, and our word is our bond." But she dictated and signed a letter headed "Offer of Employment", which read:

"Baywatch Industries, Inc. offers Greg Gloucester the position of Manager of Baywatch's recreational boat division, at an initial salary of $300,000 per year, for so long as his work is satisfactory, with promotions and pay to be adjusted according to performance."

In June 2006, Gloucester accepted Baywatch's offer of employment. He resigned from his family business and began work at Baywatch. He sold his Portland home for $600,000, realizing a net of $400,000 after paying off the mortgage, and used the $400,000 to make a down payment on a house with a total sales price of $1,200,000 near Bayonne in Bergen County, NJ, where the cost of living is among the highest in the country.

In his first year at Baywatch, Gloucester produced several new boat designs, which experts in the field predicted would be greeted as aesthetically and technologically innovative and (once they caught on) commercially successful. By law, these designs became the property of the employer, Baywatch. In that first year his department recorded almost no earnings, though Gloucester's careful management reduced its operating costs.

In that first year Gloucester also gradually found out that in the period immediately preceding his employment, Baywatch had experienced its worst economic performance in recent history, and the company's long-term financial outlook was gloomy. By expanding its recreational boat and other divisions, Baywatch was making a last-minute gamble to rescue the company's fortunes. Its senior executives were also betting that the expansion would at least temporarily boost the stock price of the company, which would raise their compensation for that year even if the company were later to collapse. The stock market did at first respond favorably to the hiring of Gloucester and other expansion plans; and Eagle and the other top executives at Baywatch each made almost $1 million more in 2006 as a result.

By summer, 2007, however, it was becoming public knowledge that Baywatch was in deep financial trouble, despite the boost from its expansion programs. Its stock price fell by 20 per cent in June. On July 1, Eagle told Gloucester that the company needed to retrench and that his job would accordingly be terminated. Gloucester protested that his contract gave him job security. Eagle responded that was a misinterpretation of their agreement; and that in any case Gloucester's division had not been profitable. She also warned that if Gloucester asserted any legal claims against Baywatch, word would likely leak out that Gloucester was an incompetent designer and manager, resulting in damage to his professional reputation. Eagle then suggested that Gloucester could instead leave the company with dignity by signing a letter of resignation, in which he would agree to forego any and all legal claims he might have against Baywatch. In return he could keep his regular position at the company (and all the appearance of job stability) for three months so that he could better search for a new job. Gloucester, with great misgivings, signed the letter and release.

Subsequently, Gloucester was given a desk in Baywatch's warehouse, where noise from forklifts made use of the telephone impossible. The fact Gloucester was leaving Baywatch was not kept secret. He approached his family about returning to the Portland business, but his parents had retired from the business and his brother, who had always been jealous of Gloucester, refused to let him return. Gloucester has so far been unable to find comparable employment and is burdened with payments of almost $5000 a month on a house he can no longer afford. (There has been a slight downturn in housing markets, so the likely selling price of the house is still what he paid for it, $1,200,000.) He has become so despondent that his wife is talking about leaving him, taking the children with her.

You are an associate at a law firm that Gloucester has now consulted. The partner you work for sends you a note: "Please give me a short memo by the end of business assessing the strength of our client's case. Specifically, assuming the story related by our client is true, what legal options could he pursue? What arguments could he make supporting possible claims against Baywatch; what would be Baywatch's likely counterarguments; and how could we best respond to them? Finally, what remedies would be available to our client under these various claims?"

Write the memorandum.

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QUESTION 2:  (50% of exam, 1500 word limit)

Morgan Mint is the owner and proprietor of Mint Condition, a collectible coin retailer based in Hempstead, Long Island, that has been conducting an increasing amount of its business over the Internet. Mint’s customers include both amateur collectors and investors looking to diversify their financial portfolios with hard assets. Occasionally, Mint also trades or sells coins to other dealers for the purpose of keeping a balanced inventory.

The market for collectible coins distinguishes between two main types: rare historic coins, and modern gold and silver coins (known in the trade as “bullion”). Both rare and bullion coins can fluctuate significantly in value over time, rare coins, for which there is a relatively fixed supply, have a more stable value. The value of bullion coins, which are manufactured in large numbers every year, depends primarily on their precious metal content, and thus closely tracks price movements in international commodity markets. Accordingly, coins (and especially bullion coins) are not suitable investments for investors who seek current income or who are unable to assume price fluctuation risk.

On the other hand, bullion coins can be assessed on a relatively objective basis depending on their weight and on commodity prices. Rare coins vary more substantially within their category, and require professional appraisal. Thus, the coin industry uses a number of standard grading systems and recognizes several independent services as expert in appraising coins along these standards. Because of the subjective nature of appraisal and because there are a number of grading systems in use (for example, the traditional system using qualitative grades such as “Fine,” “Very Good,” etc.; and more modern systems using more precise numerical scores), a given coin may be valued differently by different appraisers; and many buyers prefer to conduct their own appraisal before finalizing a purchase. For this reason, it is customary for dealers to ship rare coins and then allow customers a fixed period (ranging from a few days to a month) to determine whether the coins are satisfactory, accepting returns within that period.

In addition, when coins are graded by a certified service, they are typically sealed in a tamper-apparent container known as a “slab,” which ensures that the coin being traded is the same coin that was graded. Standard, or “unslabbed” coins are referred to as "raw" coins. Most coin investors prefer slabbed coins; but most pure collectors prefer raw coins to slabbed. Mint Condition deals in both rare and bullion coins; most of its rare coin sales are slabbed, but some are raw.

Mint originally developed its online terms by updating forms it had used in its “brick-and-mortar” business, with the assistance of a professional Web designer. Based on information received from fellow dealers and industry trade journals, however, Mint has heard that there may be special legal problems that arise from buying and selling over the Internet, and has come to you for more systematic legal advice. In particular, Mint wants your opinion on any or all of the following terms, which have been posted online for the last eighteen months without leading to any legal disputes:

SALES SUBJECT TO AVAILABILITY: Although Mint Condition maintains a an extensive inventory, many times there are circumstances where orders placed ahead of yours can produce shortages, or even render an item completely sold out. If this happens, you will be billed only for the items shipped. Back orders on coins will be filled only by special request.

MONEY-BACK GUARANTEE: All rare coins are sold on the internet are backed by a 14-Day Money-back Guarantee. If for any reason you are not 100% satisfied, you may return your order within 14 days of receipt for a full refund including shipping charges both ways. Due to the extremely volatile nature of the bullion market, all gold, silver, and platinum bullion purchases are final once accepted by the company.

LAY-AWAY SALES: Lay-away plans are available with in which you may pay 1/3 of the price of your purchase at the time of order, 1/3 in 30 days and 1/3 in 60 days. All lay-away orders are kept in our safe deposit boxes and are shipped as soon as we receive your final payment. Due to the length of time given, there is a no return policy on any coins purchased on lay-away. Lay-away purchases not paid in full within the 60 day time period will be cancelled and the pre-paid funds forfeited.

LIMITATIONS ON CLAIMS: No claim may be filed by a customer in connection with a particular coin more than one year after that coin was purchased by the customer regardless of when the customer became aware of the claim.

ARBITRATION AND APPLICABLE LAW: This agreement is performable in and subject to the laws of New York State. Any controversy or claim arising out of transactions between you and Mint Condition Coins shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association conducted in Nassau County, New York. Judgment upon the award rendered by the Arbitrator may be entered in any court having jurisdiction thereof.

Please write a letter to Mint in which you identify the main risks presented by these terms, and any ways in which you recommend that they be altered. If you see any risks beyond those he has identified, be sure to mention them. To the extent that it bears on your legal advice, you may also wish to discuss and critique any business practices that affect Mint’s legal position.

 

END OF EXAM