Courts also decide business-related cases
Recent court decisions on gay marriage and home schooling have dominated recent headlines. But the courts have quietly been deciding some interesting and important business-related cases as well. This week, we will take a look at two such recent cases.
No antitrust class action without damages.
Last week, the Ninth Circuit Court of Appeals put an end to a lawsuit alleging that Amazon.com and Borders had entered into a marketing agreement that violated federal antitrust law. The Ninth Circuit’s decision should be of interest to everyone who buys books on line.
In the case of Gerlinger vs. Amazon.Com Inc. and Borders Group, Inc., one Gary Gerlinger, “individually, on behalf of all others similarly situated, and on behalf of the California general public, ” had brought a federal class action lawsuit against Amazon.com and Borders Group, challenging a 2001 agreement between Amazon and Borders. The trial court dismissed Gerlinger’s lawsuit for lack of standing, and he appealed to the Ninth Circuit.
The agreement challenged by Gerlinger arose from Borders’ lack of success in operating its own website. Borders made an agreement with Amazon under which Borders’ website would direct shoppers to a “mirror website “, hosted by Amazon. The books purchased through the mirror site were sold and shipped by Amazon, and Borders would receive a commission for each book sold.
As part of the agreement, Borders gave up its participation in the online market and agreed not to reenter the market. Gerlinger brought a class action lawsuit challenging that aspect of the agreement as a violation of federal antitrust law. Gerlinger claimed that the agreement reduced competition in the online bookselling market, in violation of the federal Sherman Act.
Gerlinger’s problem was that he couldn’t show any damage resulting from the agreement between Amazon aned Borders. In fact, the defendants submitted evidence which showed that the prices Gerlinger paid for books purchased from Amazon after the agreement became effective were the same as, or even lower than, the prices charged before the agreement. Gerlinger’s only response to that evidence was to allege that if there had been no agreement, prices would have been even lower.
The Ninth Circuit affirmed the trial court’s dismissal of Gerlinger’s claim. The appeals court said that Gerlinger lacked standing to sue, because he had not shown any injury caused by the Amazon-Borders agreement. The price of books had not gone up, and Gerlinger had not shown any reduced selection of titles, poorer service, “or any other potentially conceivable form of injury. ”
This decision will be welcomed by those who contend that our courts have become clogged with dubious or frivolous class action lawsuits.
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Stipulated judgment must be reasonable to be enforceable.
Frequently, businesses seeking to collect debts wind up settling their claims for a discount. Sometimes, as an incentive to the debtor to make timely payments, the settlement agreement provides that if the debtor defaults on the agreed payments, judgment may be entered against him in the full original amount that was claimed to be owed.
But as a recent California Court of Appeal decision points out, such a judgment may only be entered and enforced if the amount is reasonable.
In the case of Greentree Financial Group, Inc. vs. Execute Sports, Inc., Greentree had sued Execute Sports, Inc. ( “ESI “) for breach of contract. Greentree alleged in its lawsuit that ESI had failed to pay $45,000 due to Greentree for financial advisory services performed by Greentree.
On the day the case was to go to trial, the parties settled it. The settlement was memorialized in a written stipulation for entry of judgment. The stipulation provided that ESI would pay Greentree a total of $20,000, in two installments; and that if ESI defaulted on either of the installment payments, Greentree could have judgment entered against ESI for the full $45,000 debt originally sued upon, plus interest, attorney fees and court costs.
ESI defaulted on the first payment, and Greentree obtained judgment for $61,232.50 Ð consisting of the $45,000 sued upon, plus $13,912.50 in interest, $2,000 in attorney fees and $320 in costs.
ESI appealed from the entry of the judgment. ESI claimed that even though it had voluntarily agreed to the judgment, the amount was unreasonably high and, therefore, was an unenforceable “penalty ” . Greentree, on the other hand, countered that the amount was a valid “liquidated damages ” provision, especially given the $45,000 amount originally claimed in the lawsuit.
ESI’s appeal was based on a California Civil Code section under which a liquidated damages provision in a contract is invalid if its amount bears no reasonable relationship to the actual damages that the parties could have anticipated would result from a breach. Under that standard, the Court of Appeal ruled that the amount of the stipulated judgment was unreasonable Ð in other words, that $61,232.50 was an unreasonable penalty for failure to pay a $20,000 settlement, and was therefore unenforceable.
Greentree argued that the measure of reasonableness should be based on the amount originally sued for – $45,000 Ð and not the $20,000 settlement amount. The Court disagreed, and said that the reasonableness of the judgment amount must be based on the settlement amount, not the original claim amount. The $45,000 claim was disputed, and there was insufficient evidence that Greentree would have recovered the full amount had the case gone to trial. In fact, the settlement agreement actually said Ð as settlement agreements routinely do Ð that by entering into the agreement, neither side was admitting any wrongdoing or liability. In short, Greentree was trying to exact a penalty of more than $41,000 for failure to pay $20,000. This, the Court said, was far in excess of any reasonable “late charge ” for failure to pay the $20,000.
The moral of this story is that in agreeing to accept discounted time payments in settlement of a monetary claim, the creditor should make sure that any increased amount due if payments are missed is kept within reasonable limits. Or, as one of my law professors used to put it: It may be OK to be a pig, but be careful not to be a hog!
Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at firstname.lastname@example.org. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.
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