Thursday, May 12, 2005

Morris v. Redwood Empire (Cal. Ct. App. - April 29, 2005)

This opinion by Justice Aronson is a bit troubling. The plaintiff signs up for a credit card service that helps to process credit card transactions and that costs something like $25/month. The service is for an indefinite term, but either party can terminate the service with 30 days notice. If the defendant terminates the service, nothing is due. But if the plaintiff terminates the service, she owes another monthly payment plus a separate $150 termination fee.

Plaintiff argues that this provision is an unreasonable liquidated damages provision and hence invalid under Civil Code sect. 1671. The Court of Appeal could potentially have said "Sure, it's a liquidated damages clause, but it's not unreasonable." If that was the approach, I wouldn't have a categorical problem with the opinion.

But that's not the approach that the Court of Appeal takes. Rather, Justice Aronson holds that the termination fee is not even a liquidated damages provision at all; instead, that it is "simply an alternative to performance." But that's true of every liquidated damages provision. The relevant clause says that you can breach (or terminate) the contract as long as you pay $X. That's precisely what liquidated damages provisions do. The basis for Justice Aronson's holding would mean that there's basically no such thing as a liquidated damages provision to which Section 1671 applies, since they're all alternatives to performance. So, for example, under Justice Aronson's view, I can write a contract that says "You agree to buy my house, but you're entitled not to buy it so long as you pay me $100,000." Under Morris, that's not a liquidated damages provision, but rather simply an alternative to performance. Which is wrong, and which I think everyone would recognize is wrong.

Sure, there are legitimate contracts that involve options. And the dividing line between true options and liquidated damages provisions is admittedly a bit fuzzy sometimes. Surely, for example, I could in some circumstances say that the buyer is obliged to pay me $100,000 for the right to buy my house at $X, and at some point, that's a legitimate options contract (rather than a liquidated damages provision). But that doesn't mean that every contract is an option, or that many contracts that say "If you don't buy my house, you owe me $100,000" aren't in fact invalid liquidated damages clauses. Plus, the contract at issue in Morris is clearly not an option contract; rather, it is a continuing contract with a separate (and one-sided) termination fee.

So I think that Justice Aronson messes up the law of liquidated damages here pretty severely.

P.S. - The mistake by Justice Aronson is particularly surprising since the counsel for the plaintiff were pretty good, and included both Jeffrey Wilens (a certified appellate law specialist) and an amicus brief on her behalf from the California Attorney General's Office. One random comment, though. One of the two attorneys listed for the plaintiff (and the first attorney listed on the docket sheet for her reply brief) is Kenneth Quat. But Mr. Quat doesn't appear to be a member of the California Bar (and instead appears to be a Massachusetts lawyer), nor does the docket sheet reflect his admission pro hac vice. Weird. (By the way, I don't mean to slight counsel for the defendant, who also appear to be pretty good and who, after all, won. They're John Hurlbut, Jr., Steven Goon, and Treg Julander, all from Rutan & Tucker.)