Georgetown University Law Center
Examination in Contracts
(24 Hours)
Professor Avery Katz
December 17–18, 1998
Instructions:
1. The exam consists of 7 pages. Please check now to ensure your copy is complete.
2. Your exam is due 24 hours after you pick it up, or at 6 PM on Friday, December 18, whichever is earlier. You must also return your copy of the exam questions at that time. No extensions will be given for computer failures (such as accidental erasure, dead batteries, etc.), so you should be sure to take sufficient precautions to allow you to meet this deadline.
3. You may not communicate with any person about the contents of the exam while it is being administered, even if you have turned in your own copy. If during the exam you have any questions regarding its administration, you should contact the registrar's office and they will contact me if necessary; this will preserve the Law Center's policy of anonymous grading.
4. The exam is open book; you are free to consult any written materials, and you should have available to you all the assigned course materials.
5. There are two questions having equal weight in determining your grade. Each question has a 1500–word limit. To ensure compliance with this limit, you must provide a word count for each question. The easiest way to do this is to have your word processor program perform the count, but if you do not use a word processor, you may make a good faith estimate by counting the words in a sample paragraph or page and extrapolating to the length of the entire exam.
Any attempts to use shorthand or nonstandard abbreviations will be counted as if full words were used. You may not use any leftover space from one question in answering the other. Answers exceeding the length limit will be penalized by reducing their score in proportion to the extent of the excess.
6. Please type your exam if it is convenient; otherwise, please write legibly. If you do write your exam by hand, you may submit a typed transcript of it to the registrar by 5 PM on Monday, December 21. In any event, I will not read any material that appears on scrap paper or the question sheets.
7. To ensure that you receive full credit, please: (a) write or type your exam ticket number on all exam pages; (b) begin your answer to each question on a new sheet of paper, or if you are writing in a bluebook, in a separate bluebook; (c) use double spacing and 1-inch margins, so that I have enough room to make notations. I would also appreciate it if you could staple each answer separately, so that I can more easily separate them for grading.
8. I will provide a feedback memo on the exam after I am done with the grading. Good luck on the exam, and have a good holiday.
HONOR STATEMENT
On my honor and aware of the student disciplinary code, I swear or affirm that I have neither given nor have I received any unauthorized aid from any other person or persons, nor have I used any unauthorized materials in writing my answers to this examination.
Exam #
(please sign with exam number only)
Date
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QUESTION 1: 50% of exam; limit of 1500 words
You have just finished meeting with your clients, Gerald and Lawrence Frank. They have related to you the following facts. Together with their father, Harold Frank, the Franks used to own a 50% interest in Twin Cities Liquor Company, Inc., a wholesale liquor distributorship located in Minneapolis, MN. The other 50% was owned by Harold's brother-in-law, Henry Shenkman, and Henry’s son, Victor Shenkman. Twin Cities distributed the products of a variety of manufacturers, but its largest supplier by far was LoCardi Brothers, Inc., a distiller and bottler of alcoholic beverages. While Twin Cities did not have an exclusive dealing arrangement with LoCardi, it carried numerous LoCardi brands and a majority of its sales were generated by LoCardi lines.
The relationship between LoCardi and Twin Cities had long been close. In fact, up until 1982, LoCardi had owned a half interest in Twin Cities. In that year, Harold Frank purchased from LoCardi its holdings of Twin Cities stock in order to introduce his sons into the liquor distribution business, and also to satisfy LoCardi's desire to have a strong and friendly distributor for LoCardi products in Minneapolis. Harold was regarded by LoCardi as such a distributor because he had enjoyed the friendship and confidence of LoCardi’s principals for many years. He had served the LoCardi organization for twenty-six years in various positions of responsibility before acquiring the half interest in Twin Cities; and from 1978 to 1986, he was chief executive officer of Calgon Distillers, a wholly-owned subsidiary of LoCardi.
By 1994, however, both Harold and Henry were ready to retire, and the Frank family wanted to sell their interests in the business. In May of that year, accordingly, Harold Frank discussed the possible sale of Twin Cities with Philip Younger, then Executive Vice President (and now President) of LoCardi, whom he had known for over twenty years. According to Gerald and Lawrence, Harold orally offered to sell Twin Cities to LoCardi at this time, but conditioned the offer on LoCardi's agreement to find Harold and his sons a new distributorship of their own in a different city as soon as one became available. Though the precise location, purchase price, and sales volume of the new distributorship were not specified, Harold understood (and he believed that Younger also understood) that the location was to be one that was acceptable to the Franks and that the price would require roughly an amount equal to that obtained by the Franks in exchange for the sale of their 50% interest in Twin Cities. At the conclusion of the meeting, Younger assented to this condition, and he and Harold Frank shook hands on the deal.
About a month later, another officer of LoCardi, Edward McCarty, Younger’s assistant, visited the Franks in Minneapolis and began negotiations for the purchase of the assets of Twin Cities by LoCardi on behalf of a new distributor who would take it over after the purchase. The purchase of the assets of Twin Cities was consummated on September 30, 1994 pursuant to a written agreement. This written agreement did not contain an integration clause, even though a good part of it (relating to warranties and covenants not to compete) was boilerplate. The promise to relocate Harold and his sons, however, was never reduced to writing.
It is now four years later, Harold is now deceased, and in all this time LoCardi never offered the Franks a new distributorship. In November 1995, shortly after Harold’s death, there were some limited discussions between Younger and Gerald Frank regarding the possibility of a distributorship in Saskatoon, Saskatchewan, but this possibility was never followed up, as the Franks were not interested. The Saskatoon market, as measured by sales volume, was only about one-third the size of the Twin Cities market, and competition from other wholesalers and regulations and taxes imposed by the Canadian government made it less profitable than other LoCardi distributorships in US markets of comparable size. Additionally, the Frank family did not wish to move outside of the United States.
In the Franks’ view, LoCardi breached an agreement to relocate them to another distributorship. They feel particularly betrayed by Younger, claiming that he had opportunities to procure another location for them but refused to do so after they reacted negatively to the idea of moving to Saskatoon. They also feel sure that he never would have behaved in this way if their father Harold were still alive.
The Franks have also showed you their records of the earnings and revenues of the Twin Cities distributorship for the ten years prior to 1994, which they brought to your meeting with them. While they have no information regarding what happened at Twin Cities after they sold out to LoCardi, they do have an estimate of their losses, prepared by their accountant, Ernest Winters. Winters, a certified public accountant, bases the estimate on profits earned by Twin Cities in the last full fiscal year before the sale, on the theory that profits for the previous five years showed an upward trend. He has compared one-half of the profits of Twin Cities in its last fiscal year (corresponding to the share of the business owned by Harold Frank’s side of the family) with the amount that the Franks earned on investments in bonds in the year succeeding the sale. He finds that one-half of the Twin Cities pre-tax profits, based on one-half the sales price, amounted to 14.6% of capital. The return on the bond investments was 7.9%. He then subtracted the percentage return on the investment bonds from the percentage return of the Twin Cities operation, which gave him a percentage figure for the loss occasioned by the breach, of 6.7%. This figure, applied to one-half the sales price, came to $223,800 per annum before taxes. Multiplying this figure by ten years —Winters’ assumed minimum measure for the life of the new distributorship — makes a total loss of $2,238,000.
The Franks have asked you to prepare to bring suit on their behalf against LoCardi. Before you do, however, you need to advise them of the range of consequences that may follow. Accordingly, you should draft a letter to the Franks that discusses the legal and practical merits of their position, and that advises them whether it is worth pursuing any claim.
QUESTION 2: 50% of exam; limit of 1500 words.
You are an associate in a small law firm that specializes in rendering contract-related advice to persons doing business in the entertainment and publishing industries. Your firm represents performers, graphic artists, writers and their agents, as well as the occasional publisher and producer. One day you get a memo from one of the partners in your firm that reads as follows:
“I just received a call from Lucille Duffy, a literary agent and publicist that our firm has worked with from time to time, though we have not had a client relationship with her in the past several years. During that time, Duffy has come to specialize in a particular type of material — specifically, she represents writers who offer a sensational and often sharply critical perspective on current events or on personalities from the worlds of entertainment, politics, or organized crime. Her most successful book projects have included ‘unauthorized’ biographies of such celebrities and ‘inside’ memoirs ostensibly written their supposed confidantes (but actually ghost-written). The more established publishing houses have tended to look down on such projects as down-market, and many elites in the industry regard this segment of the trade with disdain, but the fact remains that some of Duffy’s writers have sold extremely well and have earned very high royalties in the process.”
“One of the disadvantages of doing business in this submarket, however, is that one has to deal with less well-established publishers. This is both because of the controversial nature of the material, and because the premium on timeliness demands an expedited production schedule (and the mass market requires compromises in quality and price) that the major publishing houses are unprepared to meet. Unfortunately, according to Duffy, operating ‘on the cutting edge’ entails certain risks: namely that many of the publishers she deals with have not developed much of a reputation for contractual reliability. For instance, in the last several years she has encountered publishers who used accounting trickery to understate the revenues on which author’s royalties are based, who dropped certain authors without warning when the authors became, in the view of the publisher, too controversial, and who simply refused to pay royalties when due. Duffy has learned the hard way to avoid the worst of these offenders and to protect her clients through tough bargaining when dealing with others, but the fact remains that publishing is a fiercely competitive market undergoing reorganization at the industry level; and many small and midsize companies are simply in marginal financial condition.”
“The impetus for Duffy’s recent call is that she has acquired a new and potentially lucrative client. This new client, Trina Lott, has worked as chief administrative assistant to two prominent Congressmen, and purports to be able to provide a tell-all account of the ‘sordid underbelly of Capitol Hill.’ Lott would not actually write her own book — it would be ghosted, of course — but the prospect that she would provide the underlying material and publicize the book by going on the interview circuit was enough to interest Duffy in the project.”
“What makes Lott’s proposal so promising from a marketing standpoint is that she possesses a set of audiotapes, surreptitiously recorded over her years of employment, that document her former bosses making some very embarrassing statements about politics, their own personal behavior, and that of their colleagues. The existence of Lott’s tapes and some of their content have been widely reported in the media, but she has not had the chance to tell her story in full. If the various legal questions regarding her right to use taped conversations are resolved in Lott’s favor, and if she is not obliged to reveal the more provocative aspects of her narrative in judicial and legislative proceedings, this book could be Duffy’s biggest seller yet. On the other hand, Lott has already been the subject of substantial unfavorable publicity (much of it orchestrated by her former employers and co-workers); and if the public’s view of her turns too negative it could cut into Duffy’s ability to market her story.”
“Because of these uncertainties, Duffy has only been able to find one company that is willing to sign Lott to a book contract and pay her a significant advance. This company is Pendant Publishing. Duffy has successfully dealt with Pendant in the past, but she has heard troubling things from other agents and writers about Pendant’s failure to pay royalties in a timely fashion. The word on the street is that Pendant is underfunded; that it has at times used one writer’s royalties to pay another’s advance; and that it has manufactured disputes with authors and agents as a pretext to delay or avoid making royalty payments on books that did not sell as well as expected. Again, Duffy has not experienced any of these difficulties with Pendant herself, but she has heard of them from people whose reliability she credits. She would like to go ahead with the deal; and thinks that her own reputation and recent successes may be enough to deter such opportunistic behavior, but she wonders whether she can do anything more in the contract to protect herself and her client against any wrongful withholding of royalties in the future.”
“Ordinarily, I would have recommended that Duffy include a clause in Lott’s contract providing for arbitration of disputes in accordance with the standards of the local publishers’ trade association, and another clause authorizing punitive damages should the publisher withhold royalties in bad faith. The effectiveness of such clauses, however, has been called into question by a recent decision of the New York Court of Appeals, which held that it violates public policy for an arbitrator to award punitive damages in a private contracts case. The New York court stated in dicta that punishment is a power reserved to the state and that allowing private tribunals to assess such damages entails too great a risk of overreaching and abuse. While this opinion has been criticized by other courts (and while it prompted a spirited dissent that stressed the outrageousness of the defendant’s behavior), courts in this jurisdiction have tended to give substantial weight to New York case law; and I consider it more likely than not that our own supreme court would reach the same conclusion. Furthermore, Duffy worries that the local trade arbitrators, oriented as they are toward the practices of the large traditional publishing houses, will not understand the special problems of the submarket in which she deals, and will lack sympathy both toward her and toward her controversial client. (In Duffy’s words, the ‘Establishment would love for us to take a fall,’ though in my view this is just hyperbole on her part. It must be admitted, however, that since Lott has already been the subject of controversy in connection to her story, it would be even more advisable than usual for her to stay out of court.)”
“In addition, Duffy is troubled by two specific provisions that appear in the contract that Pendant has proffered. The first provision states that in the event of labor disputes, significant increases in Pendant’s cost of labor or other critical inputs, or other business setbacks that threaten Pendant’s solvency, Pendant shall have the temporary right to suspend royalty payments for a period not to exceed six months; and that if such conditions continue for more than six months, Pendant shall have the right to renegotiate the royalty rate. The second provision states that Lott agrees to hold Pendant harmless against any third-party claims (including invasion of privacy, libel, breach of contract, copyright infringement, or other common-law and statutory rights) that may arise out of Pendant’s use of Lott’s manuscript. Both of these seem to be boilerplate terms, rather than terms prepared specifically for use in Lott’s contract; and Duffy wonders whether they are suited to this particular project and whether it is worth trying to write them out of the agreement.”
“Could you please write me a short memo, no more than 1500 words, offering your analysis of these problems and suggesting some alternate approaches to addressing them? It doesn’t have to be particularly polished, since I don’t plan to show it to Duffy or to her client, but it will help me in offering them further advice if they ask for it.”
Write the memo.