Settlements and Implied Warranties
Article 2 of the Uniform Commercial Code contains powerful tools for buyers and sellers of food and other goods. A recent case out of the Georgia Supreme Court emphasizes the critical gatekeeper function of the scope section of Article 2, Section 2-102. This section provides:
Unless the context otherwise requires, this Article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
Prior case law has generally distinguished between contracts whose primary purpose is the sale of goods or services. For instance, when you deal with a roofing contractor, are you buying the shingles or the installation services?
In Olé Mexican Foods, Inc. v. Hanson Staple Co. (Ga. April 28, 2009), the parties disputed whether certain packaging had met contract specifications. Without lawyers present, they negoiated a handwritten settlement agreement. The agreement included a provision whereby the buyer
would “purchase a minimum of $130,000 worth of current inventory from” [seller] and would “test the remainder of inventory and ... purchase additional inventory if it meets quality expectations.”
On a motion to enforce the settlement agreement, buyer got the court to agree that "that such purchases would “be governed by the Georgia Uniform Commercial Code [UCC], and [buyer] shall retain the right to reject [seller's product pursuant to the Georgia [UCC].”
The Georgia Court of Appeals reversed and the Georgia Supreme Court upheld the intermediate appellate court's decision. The reasoning was that the purpose of the settlement agreement was not the sale of goods, but the settlement of a dispute over the sale of goods.
The fact that the document at issue is labeled “agreement reached in settlement” “is a good barometer of the parties’ intentions. Though the label that contracting parties affix to an agreement is not necessarily determinative of the agreement’s predominant purpose, it can constitute potent evidence of that purpose.”
Citing a number of cases, the court held that where the purpose was settlement, it would be wrong to treat the case instead as a sale of goods, bringing in the implied warranties that the language of the parties' settlement indicated should not apply to the mandatory purchase of goods pursuant to the settlement.
As a UCC matter, the case is undoubtedly correct. Kristen David Adams, a professor at Stetson Law School and one of the few others who possess the cap that illustrates this entry, has written:
one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.
When settling a case involving goods that are alleged not to conform to the contract, then, it is often the case that the terms of the settlement might involve future shipments. It is therefore critical to recognize that the question of whether implied warranties and other Article 2 default terms should be addressed by the parties directly in the contract, and not left for later interpretation by a court. In this case, the parties settled without the benefit of counsel, and it is not inconceivable that each had a different take on whether the default warranties would apply. It is also conceivable that neither gave the question a moment's thought until their respective lawyers looked over their handiwork
Which is another reason to have the advice of counsel when settling a case.
Tips For Successful Multiparty Food Liability Mediation
Mediation has become a critical process for resolving large, multi-party consumer claims. Settlement of these claims is often complicated by insurance and third-party recovery. Often a brokered process is the only practical way to get to a meeting of the minds. Yet, in my experience mediations that can succeed fail because of the lawyers and mediators. Having been through a number of multiparty mediations (sometimes with more than 20 separately represented interests) and having been trained as a mediator, here are my top five tips entering into a multiparty mediation:
1. Bargain from Strength—Be Prepared to Try the Case. Go into the mediation with well-developed trial themes, a trial plan, an opening statement, prepared expert witnesses, and, if possible, jury research. Whether the mediation occurs early on in the case or on the eve of trial, your opponents will know whether you are prepared to try the case. If you are not prepared, settlement will be harder and your client will be asked to compromise more. While trial preparation is critical in any case, it is most critical where the liability and damages claims against your client are the strongest and your client is in a difficult position (i.e., those cases your client would least like to try). For these cases, any leverage your client can bring to the table is important. Creating the perception that your client is ready to go to trial will create leverage.
2. Make Sure the Right Players Are Present and Educated. Mediation cannot succeed unless each party includes a client/insurer representative with full settlement authority (or easy access to full settlement authority). For large multiparty claims, having those representatives physically present is critical. Perhaps more important is that those with authority be prepared in advance of mediation to exercise authority. It should go without mention that a lawyer should prepare his or her own client for mediation by providing a complete and honest assessment of the settlement value.
As or more important may be educating the opposing party, though this is easier said than done. Communicating your adversary’s weaknesses to your adversary is tricky. In most situations, a lawyer’s assessment of the opponent’s weaknesses is not considered credible and is written off as “chest-beating.” The only way a lawyer can succeed in communicating with an opponent about the opponent’s weaknesses is if the lawyer has worked in advance at building a relationship and credibility with the adversary.
3. Select the Right Mediator. For difficult multiparty cases, mediator selection is an important, though often overlooked, key to success. Look for a mediator who will work hard in advance of the mediation to understand the barriers to settlement (see number 4 below). Look also for a mediator who (1) has the ability to quickly grasp complex issues impeding settlement; (2) is not afraid to confront parties with difficult questions; and (3) understands the mediation process, possesses good people skills, and is creative. Avoid at all costs a mediator whose primary tool is to brow-beat, make rulings, or intimidate the parties (this never works unless the mediator also happens to be your trial judge).
4. Educate the Mediator (Well in Advance of the Mediation if Possible). If a mediator has waited until the morning of mediation to first meet with the parties, it may be too late. If there are more than a few interests represented, the entire mediation session may be consumed in educating the mediator about the relevant issues. Worse, the mediator may feel a need to take “short-cuts” and end up alienating the parties before negotiations have really begun. At minimum, the mediator should spend time well in advance of the mediation date, preferably in person, talking with counsel from each side. In advance of mediation, parties should also consider setting up a session for the mediator to hear directly from key expert witnesses. On the morning of the mediation, the mediator should have learned enough to understand the major settlement impediments and should come with a plan of action.
5. Diffuse Personality Conflicts and Emotions. If your client’s goal is to settle the case if at all possible, a trial lawyer must do what he or she can to set aside the skirmishes, grudges, or ill will that might have built up during discovery, motion practice, pretrial preparation, etc. While I’m a big proponent of setting aside ego and of building relationships in litigation, this may not always be possible. But mediation/settlement negotiations are the one time in the litigation process where consensus building is the objective. Lawyers should do what they can (swallow pride, move on, etc.) to extricate personality conflicts from the mediation.
Similarly, lawyers should assess during the mediation the degree to which personality conflicts and emotions among the parties are inhibiting consensus. When practical, lawyers should consider counseling their clients on setting aside ego and emotions. If a heart-felt apology or another message can bridge the difference between the parties, the client should be told and given the opportunity to make the apology or to communicate.
Kellogg Co. Agrees to Settle False Advertising Claims
Cereal maker Kellogg Company has entered into a consent agreement with the U.S. Federal Trade Commission to settle charges that certain Kellogg advertisements contain false or misleading statements.
At issue in the FTC’s complaint are statements from Kellogg’s advertising that eating a bowl of Kellogg’s Frosted Mini-Wheats cereal for breakfast is clinically shown to improve kids’ attentiveness by nearly 20 percent. The complaint also challenges a separate advertising claim that eating Frosted Mini-Wheats for breakfast was clinically shown to improve children’s attentiveness by nearly 20 percent when compared to children who ate no breakfast. The complaint alleges that both of the challenged claims are false and violate the Federal Trade Commission Act.
The proposed settlement would, among other things, bar Kellogg from making comparable claims about Frosted Mini-Wheats unless the claims are true and not misleading. The consent agreement will be subject to public comment through May 19, 2009. The FTC will then decide whether to make the agreement final.
