Northwest Business Litigation

Retracting an at-will job offer puts employer at risk for a tort claim

The Oregon Supreme Court this month held that a person offered at-will employment may be able to state a claim for promissory estoppel and fraud when the prospective employer retracts the offer. 

In Cocchiara v. Lithia Motors, Inc., according to the facts put forward by plaintiff in response to a summary judgment motion, plaintiff was a long-time employee of defendant who, after suffering a heart attack, asked defendant for a transfer to a less stressful position.  Defendant offered plaintiff a transfer to a new position, and plaintiff as a result turned down a job offer from another prospective employer. Soon thereafter, and before plaintiff made the transfer, the employer retracted the offer.  Plaintiff sued for promissory estoppel and fraud.

The trial court and Court of Appeals held that plaintiff could not state a claim as a matter of law.  Because the employment offered to him was at-will and could have been terminated at any time, those courts concluded he could not prove either reasonable reliance on the promise or damages.  The Supreme Court disagreed, finding nothing in the law to support the conclusion that "a promisee's reliance is per se unreasonable if the underlying promise is for a contract at will."  Reasonableness is an issue for the jury, considering all relevant circumstances.  Likewise, the fact that the offered job was terminable at will does not mean as a matter of law that plaintiff cannot prove associated damages.

US Supreme Court: Federal Arbitration Act bars state court from ruling on contract's validity

This week the U.S. Supreme Court again affirmed the broad scope of the Federal Arbitration Act, holding that when a contract includes a valid arbitration provision, an arbitrator, and not a court, should decide in the first instance whether the contract is valid under state law.

In Nitro-Lift Technologies, LLC v. Howard, an employer sought to enforce an employee non-competition agreement containing an arbitration clause.  Two employees subject to the agreement asked the Oklahoma state court to hold that it was void under state law.  While the employer argued that the contract's enforceability should be decided by an arbitrator in the first instance, the Oklahoma Supreme Court refused to send the issue to an arbitrator and held that the noncompetition agreement was "void and unenforceable as contrary to Oklahoma's public policy."

On review, the U.S. Supreme Court rebuked the Oklahoma court for displaying the type of "judicial hostility toward arbitration" that is foreclosed by the FAA.  The Oklahoma court ignored longstanding precedent establishing that attacks on the validity of the contract as a whole, as distinct from attacks directed to the validity of the arbitration clause, must be resolved by the arbitrator. 

Oregon Supreme Court on apparent agency liability for personal injuries

The Oregon Supreme Court last month held that an LLC that leased office space to a physician could not be held liable on an apparent agency theory for physical injuries suffered by the physician's patient. 

In Eads v. Borman, the injured patient contended that the landlord, Willamette Spine Center, LLC, through signage on the building and other representations, created the appearance that the building housed a group medical entity of which the physician was an agent.  Plaintiff claimed that that the LLC thereby created an apparent agency relationship with the physician. 

The Supreme Court noted that an agency relationship can arise from the appearance of consent by one person to allow another to act on its behalf. And a principal can be vicariously liable for the negligence of an agent who is not an employee, but only if the principal actually or apparently had a right of control over the agent's injury-causing actions. 

The Court then surveyed other states' treatment of apparent agency in the context of medical malpractice.  The Court agreed with those authorities that a hospital or other entity can be held vicariously liable for a physician's negligence on an apparent authority theory if the entity held itself out as a direct provider of medical care, and if plaintiff relied on those representations by looking to the entity, rather than the physician, as the provider of care. 

In this case, the Court concluded that there was insufficient evidence that the landlord LLC held itself out as a provider of medical services that it delivered through agents such as its tenant, plaintiff's physician.  Further, there was insufficient evidence that plaintiff relied on any representation by the LLC to believe that the LLC was itself a medical provider.  On that basis, the Court found no apparent agency relationship and affirmed summary judgment for the LLC.

Ninth Circuit won't criminalize violations of computer use policies

The federal Computer Fraud and Abuse Act, 18 USC sec. 1030, imposes criminal liability for unauthorized access to a computer, or for exceeding authorized access. An en banc panel of the Ninth Circuit last month narrowly interpreted the CFAA, holding that it does not apply to violations of private computer use policies. The opinion sets up a conflict with other federal circuit courts that may end up being resolved by the US Supreme Court.

In US v. Nosal, the defendant was convicted of aiding and abetting a violation of the CFAA after he convinced employees of an executive search firm to give him confidential client information from the firm's database. While the employees were authorized to access the information, their employer's policy prohibited disclosing confidential information to persons outside the company. The validity of the conviction turned on the meaning of the phrases "without authorization" and "exceeds authorized access" in the CFAA.

Defendant argued that the CFAA was intended to criminalize hacking -- unauthorized access to computers -- but not unauthorized use of data that is obtained from a computer through authorized access. The Ninth Circuit agreed that persons with authorized access who violate private computer use policies should not be subject to criminal liability. Judge Alex Kozinski, writing for the majority, set out a "parade of horribles" to justify a narrow reading of the statute, noting that innocent violations of terms of use occur every day: "Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights. Such activities are routinely prohibited by many computer-use policies . . . [and] under the broad interpretation of the CFAA, such minor dalliances would become federal crimes."

The opinion acknowledges that the result creates a conflict with the Fifth, Seventh, and Eleventh Circuits. A dissent by Judge Barry Silverman and Judge Richard Tallman argues that the majority improperly ignores the plain wording of the statute. Further, according to the dissent, criminalization of innocent violations of corporate terms of use is unlikely because the CFAA explicitly requires an intent to defraud.

 

Failure to allege right to fees in a pleading or motion sinks attorney fee award

The Oregon Court of Appeals last week drew a hard line in enforcing the procedures for recovering attorney fees.  In Anderson v. Dry Cleaning To-Your-Door, Inc., the Court reversed a trial court award of more than $100,000 in attorney fees to plaintiffs who successfully defeated contempt sanctions, on the ground that plaintiffs failed to allege the right to fees in a pleading or motion as required by ORCP 68C(2). 

In Anderson, plaintiffs in a breach of contract case obtained a judgment against defendant which included a non-competition provision.  Defendant later claimed that plaintiffs violated the non-competition portion of the judgment, and initiated contempt proceedings against plaintiffs under ORS 33.055.  The trial court found plaintiffs were not in contempt, and requested that the parties prepare a proposed judgment.  

The trial court entered plaintiffs' proposed form of judgment, in which plaintiffs asserted for the first time an entitlement to recover their fees in the contempt proceeding.  Defendant objected that plaintiffs did not allege a right to attorney fees in a pleading or motion as required by ORCP 68C(2), but the trial court nonetheless awarded the requested fees in the amount of $115,980. 

On appeal, the Court of Appeals held that plaintiffs could not avoid the obligation to state in a pleading or motion the facts, statute or rule that entitled them to recover fees.  That obligation exists even though plaintiffs did not initiate the contempt proceedings.  Because plaintiffs did not comply with ORCP 68C(2), the Court reversed the award of fees.

Oregon Court of Appeals overrides contractual choice-of-law term

Last week the Oregon Court of Appeals applied Oregon law to a dispute between a credit card holder and an issuing bank, refusing to enforce the choice of Virginia law in the parties' cardholder agreement.  In Capital One Bank v. Fort, the parties' agreement provided that it would be controlled by Virginia law, and that in an action to recover sums owing under the agreement the bank was entitled to recover its attorney fees.  The bank sued the cardholder for breach of the cardholder's payment obligations.  The cardholder prevailed on a statute of limitations defense and sought attorney fees under ORS 20.096, which makes one-sided attorney fee clauses reciprocal.  The bank sought to apply Virginia law, which does not provide for reciprocal attorney fees.

The Court of Appeals noted that Oregon courts will enforce the parties' contractual choice of law unless to do so would violate a fundamental policy of the state.  Because ORS 20.096, designed to protect consumers like the cardholder in this case, is a fundamental policy, and because the cardholder resides in Oregon, Oregon has a greater interest than Virginia in applying its law.  On that basis, the court held that the right to recover attorney fees is reciprocal, and the cardholder, as prevailing party, is entitled to recover his fees.

Shareholder status can exist without corporate formalities, Oregon Court of Appeals holds

Last week the Oregon Court of Appeals held that an individual can be deemed a shareholder of a corporation even though the corporation neither formally recorded her status in its records nor issued stock certificates.  In Yeoman v. Public Safety Center, Inc., plaintiff sought a declaratory judgment that his late wife, Anita Yeoman, had been a shareholder in defendant corporation.  Plaintiff further requested inspection of corporate records under ORS Chapter 60. 

Mrs. Yeoman had been an employee of defendant coporation, and before she started work the corporation's sole officers and shareholders told her she would become a 10% shareholder, earning 2% ownership per year.  Her employment was terminated after nearly one year.  For three years after that, the corporation mailed annual checks to her, which plaintiff claimed represented dividends associated with the 2% ownership.

The corporation disputed Mrs. Yeoman's status as shareholder, contending that the corporation's records didn't show that she was a shareholder, and no stock certificates were issued to her.  The Court of Appeals reversed summary judgment for the corporation, holding that plaintiff had raised a genuine issue of material fact regarding whether she was a shareholder.  Under state law, shares are deemed to have "issued" once the corporation accepts payment in exchange for the authorized shares.  A factfinder could conclude that the corporate board of directors had authorized the issuance of the shares in exchange for her employment, and that Mrs. Yeoman was a shareholder even though she was never issued stock certificates.

However, according to the Court, plaintiff was not entitled to inspect corporate records because, under ORS Chapter 60, only shareholders whose interest is registered in the corporation's records have that right.  This means that, as a prerequisite to inspection of the records, plaintiff must first obtain an injunction requiring that corporate records reflect share ownership.

Oregon Court of Appeals upholds arbitration clause in employment contract

The Oregon Court of Appeals has again enforced an arbitration clause in an employment contract, rejecting the employee's claim that the clause is unconscionable.  In Livingston v. Metropolitan Pediatrics, LLC, the plaintiff, a pediatrician, took issue with the conduct of his employer and other doctor members and employees related to an investigation of the clinic's child vaccine program.  He alleged he was ultimately terminated because of the concerns he expressed to his employer and government authorities. 

Plaintiff filed common law and statutory employment claims against his employer and the others in court.  The employer moved to abate the claims and compel arbitration, citing a clause in the employment agreement that required arbitration of "[a]ny controversy, dispute or disagreement arising out of or relating to this Agreement, or the breach thereof."  The trial court denied the employer's motion, ruling that the arbitration clause is "unconscionable" and, therefore, unenforceable.  The employer appealed, and the Court of Appeals last week agreed with the employer and sent the case back for arbitration of all claims.

The test for "unconscionability" in Oregon has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

In this case, Plaintiff did not contend that the agreement was procedurally unconscionable; the Court of Appeals noted that, in any event, because plaintiff is a highly educated physician, any inequality in bargaining power was minimal.  The trial court, however, had found these aspects of the agreement substantively unconscionable:  (1)  the possibility that plaintiff would have to pay defendant's attorney fees and costs if plaintiff is unsuccessful on his "blacklisting" claim; (2)  excessive arbitration fees assessed against plaintiff; (3)  ambiguity about which set of American Arbitration Association rules would govern the arbitration; and (4) a requirement of confidentiality.  Before the Court of Appeals, plaintiff asserted these and other grounds for a finding of unconscionability and further argued that the arbitration clause should not apply to intentional torts, statutory claims, and claims against non-signatories to the employment agreement.  The Court of Appeals addressed the trial court's findings as well as the other arguments put forth by plaintiff, and held that none of the concerns arises to the level of substantive unconscionability or otherwise requires court litigation of the parties' disputes.  Central to the ruling of the Court of Appeals is the very broad language of the arbitration clause allowing for arbitration of "any controversy, dispute or disagreement."

Homeowner may sue for negligent construction, Oregon Court of Appeals holds

A homeowner who discovers construction defects may be unable to pursue the builder on a contract theory if too much time has passed and the statute of limitations has run.  And, even if the statute of limitations on a tort claim would be delayed by the homeowner's belated discovery of the defect, under the economic loss doctrine no negligence claim is available unless there is a "special relationship" between the builder and the homeowner.  (See our earlier discussion of the economic loss doctrine here.)  The lack of a special relationship associated with an ordinary construction contract typically makes it impossible for a homeowner to pursue a negligence claim.

But a panel of the Oregon Court of Appeals held earlier this month that an aggrieved homeowner may be able to pursue a negligence per se claim on the theory that the builder violated the Oregon Building Code.  In Abraham v. T. Henry Construction, Inc., the homeowners discovered the defects more than six years after construction, making a contract claim untimely under ORS 12.080(1).  The court observed that plaintiffs may nonetheless state a valid negligence claim it they can allege a breach of a standard independent of the terms of the contract.  Plaintiffs identified such a standard in the Building Code, and asserted that the purpose of that Code is to protect homeowners such as plaintiffs.  Based on the claim that the builder had caused damage to the home by violating the Building Code, the Oregon Court of Appeals reversed summary judgment for the builder and remanded the case for trial.

Ninth Circuit voids class action waiver in a consumer contract

Last week in Chalk v. T-Mobile USA, the Ninth Circuit Court of Appeals applied Oregon law to invalidate a contractual class action waiver.  The court held that, where individual damages from breach of a consumer contract are likely to be small, a waiver of the right to pursue a class action is substantively unconscionable and therefore unenforceable.

This case was filed in the federal district court in Oregon in 2006 by a plaintiff who bought a wireless internet plan and card from T-Mobile.  The service agreement provided for arbitration under the American Arbitration Association’s Wireless Industry Arbitration Rules.  The arbitration clause barred class-wide proceedings.  When the plaintiff could not get the wireless internet card to fit in her laptop, she commenced a putative class action against T-Mobile, alleging a violation of Oregon’s Unlawful Trade Practices Act (UTPA).  T-Mobile moved to compel arbitration pursuant to the service agreement.

In opposing the motion, the plaintiff argued that the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. The district court rejected this argument and upheld the waiver.  The plaintiff also argued that the costs of arbitration would be prohibitively expensive and preclude her from vindicating her statutory rights.  The Court rejected this argument because the plaintiff did not present any evidence to support her cost estimates.

The district court did find merit in the plaintiff's argument that the arbitration agreement was unconscionable because it would prevent the arbitrator from awarding her attorney fees pursuant to the UTPA.  Instead of invalidating the arbitration agreement, however, the Court severed those provisions that would prevent the arbitrator from awarding attorney fees to the plaintiff.

On appeal, the Ninth Circuit relied on Vasquez-Lopez v. Beneficial Oregon, Inc., an Oregon Court of Appeals case decided after the district court issued its ruling.  Applying Vasquez-Lopez, the court held the class action waiver was substantively unconscionable and unenforceable under Oregon law due to its one-sided nature.  Class action waivers unfairly prevent individuals from vindicating their rights when the cost of pursuing each claim individually outweighs the potential relief, according to the court.  The court was careful to note that it did not hold that all class action waivers are necessarily unconscioniable.  Finally, because the arbitration agreement prohibited severance of the waiver, the court ruled the agreement as a whole unenforceable.

See our January 2007 coverage of the Vasquez-Lopez case here.