Hidden Recovery Opportunities in Commercial Litigation: Consequential Damages

July 1, 2019

Article, ABA GP Solo eReport, July 2019

The following scenario is common: A buyer purchases equipment from a seller. The purchase order includes a warranty and a consequential damages limitation clause. The buyer expects to avoid consequential damages through the device of the repair-and-replace remedy.

After delivery, the machines do not work, and the buyer asks for repairs under the warranty. The seller repeatedly promises to fix the equipment, but the machines are never repaired. The time period under the warranty ends, and the seller refuses a refund.

Now the buyer files a lawsuit for breach of contract, seeking the amount of the purchase order plus all business losses that are causally related to the equipment failure. This includes buying replacement equipment, using hand labor instead of machines, and lost return on investment caused by the delay in production. These damages are all considered consequential and should be recovered to make the buyer whole.

The seller inevitably responds that damages were contractually limited to the amount of the purchase order. It might surprise you to learn that the buyer can recover consequential damages, even when it explicitly agreed to limit these damages in the contract. Here’s why:

A warranty is a significant inducement to a buyer. The buyer purchased the equipment because of the safeguard of the warranty. The buyer also agreed to a consequential damages limitation because of the safeguard of the warranty.

The buyer is particularly vulnerable to the seller’s bad faith once the buyer has given up all rights to consequential damages. The buyer expects to avoid consequential damages through the device of the repair and replace remedy. If the seller then creates consequential damages by willfully failing to perform the expected repair and replace remedy, the buyer ought not to be bound by the exclusion. (“When to Apply the Doctrine of Essential Purpose to an Exclusion in Consequential Damages: An Objective Approach,” 25 Duguesne L.Rev. 551, 554 n. 11 (1988), cited by New York State Elec. & Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919 (Pa. Super. 1989))

A buyer is entitled to consequential damages because the warranty failed in its essential purpose (IdGen. Instrument Corp., F. W. Sickles Div. v. Pennsylvania Pressed Metals, Inc., 366 F. Supp. 139 (M.D. Pa. 1973)).

Many courts will also hold that under the Uniform Commercial Code, the consequential damages clause is “unconscionable” when it prevented the buyer from an adequate remedy. Put another way, the damages limitation operated in an unconscionable manner after the contract’s formation (Tokyo Ohka Kogyo America, Inc., v. Huntsman Propylene Oxide, LLC., 35 F.Supp.3d 1316 (Dist. of Or. 2014); U.C.C. § 2–719 cmt. 3):

[A] court should attempt to discern the essential purpose of the exclusive or limited remedy when it was first agreed-upon by the parties, i.e., the bargain of the parties with respect to their allocation of risks and remedies, and the court should not concern itself with whether the agreed-upon limitation on remedy was wise, fair, or oppressive at the time of contract formation, but simply ask what was the limitation’s essential purpose at that time. (Id.)

In the above hypothetical, the equipment never worked. The seller was repeatedly notified and promised to repair. In the end, the machines were not repaired, and no refund was provided. The warranty and consequential damages clauses failed in their essential purpose. Therefore, the buyer was entitled to large consequential damages.

A party who suffers a loss due to a breach of contract generally has a duty to make reasonable efforts to mitigate his losses (Ecksel v. Orleans Constr. Co., 519 A.2d 1021, (1987)). The burden is on the breaching party to show how losses could have been avoided (Id.).

In the above hypothetical, the seller must present a viable alternative that buyer could have taken to mitigate its damages. The seller would not offer a refund. But let’s assume the buyer could sell the faulty equipment for scrap value at 30 percent of the fair market value of the original purchase order. The seller will argue that the buyer should have done so to mitigate its losses.

The buyer should argue this would not have reasonably mitigated its damages. After all, the buyer purchased replacement equipment, paid additional labor expenses, and suffered lost return on investment from delay. Recovering these large consequential damages truly makes the buyer whole. Under the law, the seller did not meet its burden to show a realistic alternative the buyer could have taken to avoid these consequential damages.

Employing the above arguments can mean the difference between receiving a small partial recovery or being awarded significant consequential damages well above the value of the purchase order. While case law is state-specific, all venues no doubt follow these same trends.

Have you had a similar experience? Please share your thoughts: dberlin@weisberglawoffices.com

Commercial litigation attorney David Berlin is a problem solver for businesses of all sizes, navigating contractual disputes and litigation strategy. He can be reached at dberlin@weisberglawoffices.com or 484/432-1073.

Counseling the Client Intending to Engage in Civil Disobedience

September 1, 2018

Article, ABA GP Solo eReport, September 2018

Before doing something incendiary, it is a good idea to think about the legal consequences. Supreme Court Justice Oliver Wendell Holmes Jr. said: “A employee may have a constitutional right to talk politics, but he has no constitutional right to be employed.” Put another way, protestors can potentially be fired from their jobs or denied admission to school, and police officers are often immune from punishment for their actions during chaotic situations.

What behavior may likely constitute a violation of civil and criminal laws and how does one avoid crossing the line from lawful to unlawful conduct?

When a protester is intentionally breaking the law (which is what civil disobedience is all about), the cards are stacked against them in any subsequent legal proceeding.

In civil lawsuits (as opposed to criminal cases), police officers’ liability is decided by a legal doctrine called qualified immunity (QI), which is a legal defense that allows government actors to make reasonable mistakes because of the dangerous and difficult nature of their jobs. It makes sense, for example, that police officers need to make quick decisions with limited information for public safety.

In practice, however, QI is applied too often when mistakes are not reasonable. This defense extends to everything from excessive force, to wrongful search and seizure, to false arrest and malicious prosecution cases. See my previous article on this topic for a more thorough discussion. Here are some examples:

Excessive force

Uses of force range from Tasers to batons, handcuffs, police dogs, tear gas, and firearms (deadly force). The propriety of each depends on every unique situation. In a civil lawsuit, the critical question will be whether an officer used just enough force to keep people safe or whether the officer doled out punishment, which is never allowed.

Think about it this way: in a crowded and chaotic situation, where a person admits he or she intended to break the law through civil disobedience, police officers are going to argue they needed to use force to gain control. Conversely, a protestor will successfully argue that the police acted for some reason other than to keep people safe. I often tell juries that even rapists and murders have a constitutional right not to be subjected excessive force. It is not the police’s role to act as a judge, jury, and executioner.

False arrest/imprisonment

Just as with excessive force, a false arrest needs to be objectively unreasonable in order to win a civil rights lawsuit. A lot of headlines focus on whether “stop and frisk” practices go too far, but police commonly win these arguments in court by explaining that they were under “exigent circumstances.” An emergency situation such as chaotic protests gives police the leeway to do more than would be allowed on a calm city street.

Police officers do not need to prove guilt beyond a reasonable doubt to lawfully detain someone. Despite my vigorous and aggressive representation of people who had been in prison for years before their criminal charges were dismissed, courts have found that if police had any reasonable suspicion whatsoever that my clients committed a crime (even if later found to be totally untrue), the police officers had no civil liability.

In a protest situation, just standing near other people who are committing crimes might be enough to create probable cause to justify an arrest. With a valid search warrant, police can lawfully detain and search anyone at the premises without any justification. It’s the same as going to the airport and going through the TSA security line.

Freedom of speech

This comes in many forms, and the law continues to evolve with technology. A recent case in the Third Circuit (where I practice) established the right to record police activity on cell phones. The court held that the First Amendment right of access to information encompasses the right to record police officers’ conducting official police activity in public. Fields v. City of Philadelphia, 862 F.3d 353 (3d Cir. 2017).

Unfortunately, the Third Circuit also found that the right to record police was so unknown by most police officers that the officers in Fields were entitled to immunity and not liable for preventing people from recording police activity.

What are the potential impacts on current employment?

Federal laws such as Title VII, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and analogous state laws protect people from workplace discrimination based on things such as race, national origin, gender, age, and disability. Political viewpoints, however, are usually not protected.

If a person enters into an employment contract with a private employer, the company has the right to take adverse action for conduct they feel is detrimental to the business. A good example was the recent suspension by ESPN of its employee, Jemele Hill. Another example is former NFL quarterback, Colin Kaepernick. In both instances it was not unlawful for the employers to make business decisions about what they felt was best for the organization.

Some states do have laws that protect “off-duty” conduct. These states include California, Colorado, Illinois, Minnesota, Missouri, Montana, Nevada, New York, North Carolina, North Dakota, Tennessee, and Wisconsin. The laws in each state are different and do not provide blanket protections, so it’s safest to assume that if you do something controversial, there could be job implications.

Are union activities protected?

Union activities are an exception to a private employer’s broad power to make employment decisions. If an employer takes action because an employee files a union grievance, that is considered unlawful retaliation under the First Amendment. Justice v. Danberg, 571 F. Supp. 2d 602, 611 (D. Del. 2008). See Thomas v. Collins, 323 U.S. 516, 532 (1945) (“Free discussion concerning the conditions in industry and the causes of labor disputes appears to us indispensable to the effective and intelligent use of the processes of popular government to shape the destiny of modern industrial society”); United Federation of Postal Clerks v. Blount, 325 F.Supp. 879, 883 (D.D.C. 1971), aff’d per curiam, 404 U.S. 802 (1971) (“The right [of public employees] to organize collectively and to select representatives for the purposes of engaging in collective bargaining is . . . a fundamental right”); Labov v. Lalley, 809 F.2d 220, 222–23 (3d Cir. 1987).

Can activism affect applications for employment?

Many states prevent employers from considering arrests when making hiring decisions. The idea is that someone should not be penalized if their arrest results in a dismissal or not-guilty verdict. Not all states prevent employers from considering convictions and a criminal record.

Further, about a quarter of the workforce in the United States have a license or certificate. Licensing boards commonly require disclosure of a criminal record. A criminal record in and of itself does not necessarily prevent certification. Boards typically have discretion depending on the severity of an infraction. Failing to disclose a criminal record can be more serious than the record itself.

What are the potential impacts for school and college?

As discussed above, failing to disclose is often a bigger issue than the conviction itself. While schools and colleges do have the right to ask about criminal records, that usually does not automatically disqualify applicants. Importantly, criminal records can also prevent financial aid, including federal loans.

Can civil servants in government refuse to obey the law they are charged with enforcing?

Recently, Kim Davis made news as a local government clerk in Kentucky who would not issue marriage licenses to same-sex couples. Davis was found in contempt of court and jailed. Interestingly, Davis eventually returned to work and issued licenses without adding her name to the license. Perhaps the lesson is that instead of outright refusal to comply (which could land you in jail), civil servants can find a way to obey the law without violating their core values.

When counseling clients who may engage in civil disobedience, the thorough attorney will focus on: (1) employment issues, (2) police interactions, and (3) the broad ramifications of a criminal record. While not foolproof, chances of adverse consequences will be greatly lessened.

Have you had a similar experience? Please share your thoughts: dberlin@weisberglawoffices.com.

Civil rights attorney David Berlin helps people who have had their constitutional rights violated. He can be reached dberlin@weisberglawoffices.com or 484/432-1073.

Why Banks Should Embrace Consumer Protection

October 1, 2017

Article, ABA GP Solo eReport, October 2017

The following scenario is unfortunately common for people in foreclosure: Homeowners experience a financial hardship, default on their mortgage, and the lending bank files a lawsuit. Then the homeowners’ situation improves and they apply for a loan “modification,” which basically just allows people to restart their mortgage payments and keep their homes. The homeowners repeatedly apply but never have their applications even reviewed. They are given various explanations from someone in a call center in another country: The homeowners did not submit certain documents; the homeowners earn too little money; another representative contrarily says the homeowners make too much money to qualify.

The bottom line is people have money and want to pay, but the banks refuse. It happens all the time. Once a bank starts the foreclosure process, it has no duty to let homeowners resume their mortgage.

My first trial was a mortgage foreclosure defense case, and we were faced with similar facts. Our client handed us copies of the checks he sent the lender for the months that were allegedly unpaid. The checks had been cashed by the bank. Still, the lender would not reverse the foreclosure process.

That’s when I learned that bureaucracy and irrationality define behemoth financial institutions. Consumer protection attorneys around the country are faced with:

  • foreclosures when there were no missed payments;
  • denied modification applications despite being overqualified;
  • ejectment lawsuits where the bank has no evidence it even owns the loan.

These experiences appear to be the industry standard. Earlier this year Wells Fargo made headlines for having deceptive practices. The allegations were that Wells Fargo was opening accounts for customers who never consented. This kind of behavior is obvious fraud, also known by attorneys as malfeasance.

Nonfeasance is more subtle conduct than malfeasance but can be just as damaging. Nonfeasance simply means failing to take actions required by law. Foreclosing on someone because of mistaken documentation is not intentional fraud—but it is deceptive when a bank fails even to investigate its mistake.

Most states (including Pennsylvania and New Jersey, where I practice) have laws that protect consumers against systemic, deceptive behavior in addition to fraud.

During my first trial, the bank flew in its key witness from across the country. He was a “records custodian” who testified about the homeowner’s late payments. All we had to do in response was bring in the dated checks that were cashed by the bank, and we won the trial.

My amazing attorney skills are not the reason we won. It was because the bank’s procedures were so sloppy that it was foreclosing on a person who had actually paid. The homeowner went on to sue his lender for filing a frivolous foreclosure action. Now that company is facing hundreds of thousands of dollars in litigation exposure when it could have accepted our client’s money long ago.

The reality is that banks operate in ways that make no financial sense. Banks are not charities, but it is particularly egregious when they refuse “win-win” deals where families keep their homes and the banks make money.

Have you had a similar experience? Please share your thoughts: dberlin@weisberglawoffices.com.

Civil rights attorney David Berlin helps people who have had their constitutional rights violated. He can be reached at dberlin@weisberglawoffices.com or 484/432-1073.

Qualified Immunity: How Unreasonable Force Goes Unpunished

July 1, 2017

Article, ABA GP Solo eReport, July 2017

Would it surprise you to learn that when a person is found not guilty in a criminal court after spending years in prison, the police officer that made the arrest is often immune from civil liability? The defense is called Qualified Immunity (“QI”) which is a legal doctrine that allows government actors to make reasonable mistakes because of the dangerous and difficult nature of their jobs.

It makes sense, for example, that police officers need to make quick decisions with limited information for public safety. They should be given the benefit of the doubt.  Unfortunately QI is applied much more broadly.  It extends to everything from excessive force, to wrongful search and seizure, to false arrest and malicious prosecution cases.

A federal district judge once admonished me that QI is so broad that a police officer in Seattle was found immune after applying a taser to a pregnant woman. “Counselor, I suggest you go back and read the Supreme Court jurisprudence on QI,” he lectured.

I have since lost several civil rights cases for plaintiffs who went to prison for years before their criminal charges were dismissed.   Courts found that if detectives had any reasonable suspicion whatsoever that my clients committed a crime (even if later found to be totally untrue), the police officers had no civil liability.

The critical question in a QI analysis is “whether it would be clear to a reasonable officer that his conduct was unlawful in the situation he confronted.”  Saucier v. Katz, 533 U.S. 194, 201 16 (2001).  This inquiry “must be undertaken in light of the specific context of the case.”  Id.

The cards are stacked against civil plaintiffs because of QI – but the U.S. Supreme Court will soon have an opportunity to reconsider.

In a case called Hernandez v. Mesa, a border agent shot and killed a boy near the U.S. border wall in Texas.  The boy was a Mexican citizen.  The Supreme Court will now be asked to decide several important questions including whether the agent is entitled to a QI defense because it was not “clearly established” that a noncitizen was protected under the Fourth and Fifth Amendments.

Under the Saucier test (above), the boy’s citizenship should not automatically give the border agent immunity.  No reasonable officer would even consider the boy’s citizenship when deciding whether to act.  A reasonable agent would only consider whether the circumstances were dangerous enough to warrant deadly force.  Therefore, citizenship should be irrelevant to the QI analysis.

The Supreme Court’s decision is crucial because it will either limit the QI test to consider the reasonable minds of officers (which is the current test), or it will force courts to consider whether officers contemplate complex and unclear legal questions – which is unrealistic.  The latter would broaden QI even more.

My prediction is that the Supreme Court will not grant the border agent qualified immunity.  How do you think the case will turn out? How do you think the case should turn out? Please share your thoughts: dberlin@weisberglawoffices.com

Civil Rights Attorney, David Berlin works with people that have had their constitutional rights violated. He can be reached at dberlin@weisberglawoffices.com or 484-432-1073.