Contracts
Avery Katz
University of Michigan Law School
Fall 1991
Final Examination
December 16-17, 1991
DIRECTIONS
QUESTION 1: 50% of exam; limit of 1500 words.
In the spring of 1987, the faculty at Sterling Law School voted to institute a new
financial aid program designed to assist students who took relatively low-paying legal
jobs in repaying their educational loans. The program, called the Sterling Educational
Loan Abatement Program, was adopted in response to three major concerns. First, many
students, faculty, and alumni contended that students' wealth at the time they apply to
law school is not an adequate measure of financial need. They argued that in order to
direct law school grant money to students who needed it the most, it was also necessary to
consider students' resources after graduation. Second, a significant number of students
and faculty had for several years expressed concern at the increasingly homogeneous career
choices of Sterling graduates. Over the past decade, the percentage of graduates who took
jobs in large big-city law firms had increased substantially, and the percentage who took
jobs in small firms, government service, and the non-profit sector had fallen off very
sharply. It was argued that a major reason for this was that many Sterling graduates felt
forced to choose large-firm jobs in order to earn enough money to repay their educational
loans. Third, the financial aid and admissions officers both argued that if Sterling could
develop a substantial loan abatement fund, it would prove a valuable selling point in
recruiting strong applicants away from other law schools.
The faculty voted to allocate a limited portion of the school's financial aid funds to the Loan Abatement Program, but left it to the financial aid office and to a faculty committee to develop the program's precise criteria. A brief description of the program appeared for the first time that fall in Sterling's law school bulletin, which is sent to all applicants for admission. The description read:
Educational Loan Abatement Program: The principal purpose of the School's loan abatement program is to assist its graduates in making job choices that encompass a wide range of employment opportunities, including public interest positions, in which salaries are typically lower than many potential alternatives.
Eligibility: A graduate working full-time in law-related work in a public-interest position, for a private firm, or in government service, whose income does not exceed $27,000, qualifies for the program. In determining the graduate's adjusted gross income, spousal income is added to that of the graduate.
Coverage: Loans covered under the program include those incurred during undergraduate education as well as those incurred in law school, such as the Guaranteed Student Loan, the National Direct Student Loan, and Sterling University loans.
The financial aid office, under the direction of the faculty committee, also prepared a longer description of the program that was distributed in November 1988, along with application forms for the program, to the student body and to recent graduates. The application forms asked for a wide variety of personal financial information of the sort required by Sterling's other financial aid programs, including income tax returns. Applicants were asked to project their total wage income for the following calendar year, the total value of any employer-paid benefits they anticipated, and all other taxable and untaxable income, including alimony, child support, and capital gains. The descriptive materials set out the procedures for application to the program, a more detailed statement of the criteria for eligibility, and a schedule of figures that related the amounts of assistance that the program would provide for graduates whose post-graduation earnings fell into various income brackets. Because the financial aid office was unsure how many students would want to apply for the program, and whether the applications would exceed the limited funds available, it included the following paragraph below the criteria for eligibility and above the schedule of figures:
Selection: Applicants whose income is significantly below the average salary for their graduating class will be deemed eligible for participation in the Program. However, if the number of eligible applicants is high, it may be necessary to select among them based on the applicants' comparative need and other appropriate factors.
The program attracted significant interest; the number of participants rose from eight in the first year to twenty-five in 1990-91. Over the first four years of the program, a variety of numerical adjustments in the payments schedule were made, and the income cap for eligibility was gradually raised from $27,000 per year to $33,000. The law school's total outlays on the program rose from $13,000 in its first year to almost $75,000 in its fourth year. This latter amount nearly equalled the amount originally allocated by the faculty. The 1990 application materials referred to this increase in student interest, stating toward the bottom of the first page: "Since 1987, the Law School has been successful in funding all eligible applicants to the Program. As with other financial aid programs, of course, success in future years will depend on the continued availability of resources."
Lawrence Bell entered Sterling Law School in the fall of 1988. He had since college been interested in the possibility of becoming a criminal defense attorney, and his interest was further piqued by his first-year criminal law class. In his second and third years of law school, he took a diverse variety of courses, including an advanced course and a seminar on the topic of criminal procedure. Like many of his classmates, he spent the summers after the first two years of law school interning at large law firms in Chicago, and in the fall of 1990 received an offer of permanent employment at Jasper and Blank, the law firm he had interned with after his second year of law school. He found this offer very tempting, in that the salary offered was generous, and he was nearly $35,000 in debt after three years of law school, which would mean annual repayments of over $6000 per year for the first several years following graduation. Bell thought on balance, however, that he would probably not want to take the offer. He was not quite ready to give up on the idea of criminal law practice, and thought if he were going to work for a large law firm, he would prefer not to work for this one in particular. He knew that much of Jasper and Blank's practice consisted of commercial litigation arising under the Uniform Commercial Code, a subject that he found to be stupefyingly dull during the summer he worked there.
Bell was therefore very glad when he was invited to interview in December 1990 with the Cook County Office of the Public Defender. This was exactly the job he had hoped for. He was somewhat discouraged upon calculating that after paying all federal, state, and local taxes on the posted salary of $27,500, he would net only about $18,000 per year, out of which he would have to pay back his $6000 in loan payments and support himself in the city of Chicago. As a result, he examined with interest the payments schedule that accompanied the 1990-91 application for the Loan Application Program, which he had obtained the previous month. The schedule read as follows:
Annual Available Income (AI) of
Applicant and Spouse*Up to $17,999
$18,000 - $22,999
$23,000 - $27,999
$28,000 - $32,999
Over $33,000Expected Annual Loan Repayment
$600
$600 + 10% of AI over $18,000
$1100 + 20% of AI over $23,000
$2100 + 30% of AI over $28,000
Ineligible for program
* For the purposes of this Program, Available Income is computed to be the Annual Adjusted Gross Income of the student and spouse minus a $4100 allowance for a spouse and $2000 for each dependent child.
Bell, who is unmarried and has no dependent children, calculated from the third line of the schedule that his expected annual loan repayments under the program would be reduced to $2000 [$1100 + 20% x ($27,500 - $23,000)] in his first year after graduation. The possibility of qualifying for a $4000 annual contribution toward his debts made the Public Defender job look substantially more attractive. Bell applied to the program immediately; at the time he applied he spoke to the Assistant Dean for Financial Aid, Madeline Upson, to check that his understanding of the program was accurate. Upson confirmed that Bell's numerical calculation was accurate, and that the Public Defender was an eligible employer under the program. Upson cautioned Bell, however, that she could not promise that Bell would be accepted as a participant in the program, since the financial aid office had to wait to see how many applicants there were for the year, and this would not be known until April. She also cautioned Bell that even if he were accepted for the program, his annual loan payments might be other than $2000, directing Bell's attention to a section of the informational materials, which read: "The Office of Financial Aid may adjust the cap on Available Income or the expected annual repayment to reflect individual circumstances such as geographical variations in cost of living or unusual and necessary expenses. We anticipate making adjustments to the Available Income to take into consideration, for example, the tuition payments, extraordinary work-related expenses, or the educational debt repayment obligations of a spouse."
Bell turned down his offer from Jasper and Blank and interviewed with the Public Defender; he also continued to interview with a number of private Chicago firms. In February 1991, he was invited to a second interview with the Public Defender and at the interview was offered a position, with the offer to be held open for one week. Upon returning to campus, Bell phoned Upson to find out about the eligibility situation for the Loan Abatement Program. Upson informed him that the number of applications were running only slightly ahead of the prior year, and it looked like the program would again be able to accept all eligible applicants. Bell also spoke with Professor David Peretz, who chaired the faculty committee that supervised the Loan Abatement Program, about the job offer, expressing both his excitement about the offer and his concern about his debts. Peretz, who had been one of the prime movers behind the Loan Abatement Program, was regarded as one of the strongest supporters of public-interest law at Sterling Law School. He encouraged Bell to take the job, saying, "this is the job you have wanted all along, and your debts ought not stand in the way of your taking it."
Bell took Peretz's advice and accepted the position; he wrote the firms with whom he had interviewed and told them he had accepted another job. He also canceled his remaining scheduled interviews. He was very surprised when, in May, two weeks before law school graduation and the week before final exams, he received a letter from Dean Upson stating that his application for the Loan Abatement Program had been denied because his income, when adjusted upwards by the amount of employer-paid benefits he was to receive, exceeded the program's annual cap of $33,000. Bell immediately contacted Upson, who told him that the employer-paid benefits at the Public Defender's office would total $6500 (broken down as $2600 in employer contributions to health, accident, and catastrophic illness insurance, $1500 in payments to a retirement plan that Bell would gain vested rights in after five years on the job, and $2400 in employer's contributions to Social Security). When this $6500 was added to the $27,500 salary, Bell was $1000 over the cap. Bell argued that this was unfair; he knew from his Taxation I class that "Adjusted Gross Income" was used as a term of art in the Federal income tax system and as such did not include any such nontaxable benefits. His arguments were unavailing. Following the meeting with Upson, Bell was extremely distraught; over the next several days he tried repeatedly to reach Professor Peretz. When he finally did, Peretz was unsympathetic; he said that Bell was not as needy as other applicants to the program who received no health care or retirement benefits from their employers. He also reminded Bell that the materials had been clear that there might not be enough money in the program to fund all applicants. When Bell asked how many other applicants had been rejected for the program, Peretz declined to answer. The discussion became an impasse and after several more minutes of arguing Peretz asked Bell to leave his office.
Bell finished exams and participated in graduation ceremonies; he has now come to you for legal advice. He thinks at this point he would still prefer to work for the Public Defender even without the assistance of the law school, but he is uncertain whether he can afford to do so for long. He has learned through contacts at Jasper and Blank that the job he was offered last fall might still be available. He does not particularly want this job, but feels substantially disadvantaged in starting to interview with other law firms at this late date. He also is concerned that his grade point average suffered in his final semester and that this will cause difficulty in finding alternative employment. After he accepted the job with the Public Defender, he spent rather less time on classes than he had in previous terms. Additionally, Bell feels he was substantially distracted during final exams by the dispute with the Financial Aid Office and by the emotional distress that accompanied that dispute; while he has not yet received his final grades, he is concerned that the distraction interfered with his exam performance.
Bell asks you what claims and obligations he might have in this situation. Advise him regarding his legal rights and duties.
QUESTION 2: 50% of exam; limit of 1500 words.
You have been retained as counsel for Ultimate Information Systems, Inc., a newly formed corporation organized for the purpose of producing and marketing a new type of microcomputer, tentatively called the Progeny. Both the Progeny and the Ultimate corporation are the brainchild of Kim Dysart, a brilliant but mercurial 30-year old computer engineer and venture capitalist. Dysart, together with a friend from graduate school, founded the Avocado Computer Corporation several years ago. Avocado combined innovative hardware design with an aggressive marketing strategy aimed at the secondary school and university market, and grew to become the third largest producer of microcomputers in the country until the point last year when it was acquired in a hostile takeover by International Telephone, a telecommunications company. Dysart, who had for some years opposed Avocado's gradual shift in focus toward commercial business users and had in recent years had a rocky relationship with Avocado's other co-founder, was forced out of Avocado management following the takeover. Dysart has spent the last year trying to put together a new company that would be built around a return to Avocado's original technological and marketing strategies, and has raised approximately half of the financing that will be necessary to begin developing the Progeny.
After an exhaustive investigation of rival designs, Dysart decided that the Progeny would be built around a new type of central microprocessor chip, the Extel K626. This was Ultimate's most important technological decision, since the choice of the central microprocessor will in large part determine the design of the computer as a whole. Ultimate has acquired the exclusive rights to use the K626 chip in its computers, but needs to establish a reliable source of supply, as it is not prepared to manufacture microprocessor chips on its own. Furthermore, Ultimate needs a supplier with whom it can deal flexibly and cooperatively, since the K626 chip has not been produced before in other than a prototype model, and Ultimate anticipates that in the course of bringing the Progeny to actual production it will be necessary to coordinate a number of design changes in both the K626 chip and the Progeny computer as a whole.
Recently, Ultimate has been engaged in intensive negotiations with Mnemtech, an independent producer of electronic components. These negotiations have taken place at a number of face-to-face meetings, in various letters and telephone calls, and, in encoded form, over electronic mail. Mnemtech is very eager to become the exclusive supplier of K626 chips for the Progeny computer, and Dysart and other key members of the Ultimate management team believe that Mnemtech is probably the best components supplier it is likely to find. Among their reasons for thinking so is the fact that Mnemtech and Ultimate have compatible management styles (Mnemtech's chief executive officer is also 30 years old, also highly independent in temperament, and also founded the company out of graduate school) and that Mnemtech, unlike alternate suppliers, is not tied by any long-term supply agreement to any of the major computer companies that Ultimate expects to be competing with.
The negotiations have reached a critical point. Dysart and Ultimate are not willing to enter into a binding exclusive supply agreement at this point, although they believe that Mnemtech would sign such an agreement. A nontrivial amount of additional research and development needs to be done by both Ultimate and Mnemtech to determine the precise production specifications for the K626 chip, and the outcome of this research, which may take over a year, will determine several important terms to be included in the contract, including the price that Ultimate will pay Mnemtech for the chips, and the expected time of delivery. Furthermore, Ultimate still needs to raise the other half of the financing for the company. At this point, Ultimate's major assets consist of its rights to the K626 chip and Dysart's personal reputation, and Ultimate does not yet know whether potential investors in Ultimate will feel that Mnemtech is a sufficiently established company to play such a central role in the production of the Progeny computer.
On the other hand, Dysart and Ultimate would like to establish some formal commitment with Mnemtech. Arranging the remainder of the financing for the Progeny will likely take from three to six months, and Dysart and Ultimate are worried that delaying any commitment will hurt the Progeny project. The further development of the K626 chip needs to be undertaken as soon as possible. Moreover, a substantial amount of technical information about the Progeny computer and about Ultimate's intended business strategy has unavoidably passed back and forth in the negotiations, and more will pass as negotiations continue. If Mnemtech were at this point to withdraw from the Progeny project, and establish a relationship with one of Ultimate's future rivals (especially with Avocado), the competitive disadvantage to Ultimate could be severe.
* * * * *
Describe how you would advise Ultimate to proceed in regard to its negotiations with Mnemtech. In your description, you should discuss:
(a) what additional information you would seek from your client before giving advice, and why;
(b) what contractual arrangements, if any, that you would recommend to your client, and why;
(c) the likely consequences, legal and practical, of the course of action you recommend.