Vox Puffery, Vox Dei

There is a concept in the law called puffery and it’s great.

I cannot prove that to you that it’s great, however, because a legal concept’s greatness or lack of greatness is something entirely personal. And that is an excellent introduction to the concept.

 

The case that brings up “puffery” is Viggiano v. Hansen Natural Corp., decided by the U.S. District Court for the Central District of California, which is in Los Angeles. Although the case covers a number of important issues, the one I want to focus on is the claim that labeling the soda at issue with the word “premium” breached an express warranty under Section 2-313 of the Uniform Commercial Code. The court described the claim as follows:

 

Viggiano also alleges that Hansen’s statement that the beverage is a “premium soda” is a warranty that has been breached because the soda has “less than premium ingredients [due to the] presence of sucralose and acesulfame potassium.”

The court would have none of it. 

 

The term “premium,” however, is mere puffery; it has no concrete, discernable [sic] meaning in the diet soda context, and thus cannot give rise to a breach of warranty claim.

The court was almost entirely right. “Premium” clearly cannot give rise to a breach of warranty claim; it is not, as Section 2-313 requires, “An[] affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain . . . .” But it does have a “discernible” meaning and anyone reading this blog knows what that meaning is, instinctively. It means you’re going to pay a higher price. Why? Because the retailer, wholesaler and manufacturer all believe they can get you to pay a higher price. If they are right, you will pay the higher price whether there is any inherent extra value in the goods or not. If they are wrong, the price will be lowered. That is the unbending law of economics. 

 

(Parenthetically, I think it's quite likely that Hansen's called its diet soda, and also its club soda, which is pictured here, "premium" is be because its main line of sodas is marketed as "Natural Cane Soda" because it uses cane sugar instead of HFCS and they needed a word to fit in the same position on the logo of the sodas that don't use sugar.)

 

But why do I think puffery is great? Because it helps leaven the conversation. It allows us to use poetry in advertising, not bureaucratic double-speak. And it stops unworthy lawsuits in their tracks. 

 

Consider the world without puffery. I said we could never know that “puffery’ was “great”, but imagine if Kellogg’s could not have Tony the Tiger tell us that Frosted Flakes were "gr-r-reat!” 

 

Or imagine the lawsuit when a flex-fuel train, running out of coal or diesel crossing the mountains, sues Good ‘n’ Plenty because their engine would not run on candy-coated licorice. I don’t want to live in that world. 

Turn your Bar Bill Into a Federal Case

A guy walks into a bar . . .

No, seriously, a guy walks into a bar.  He orders a couple of beers and a couple of drinks. His bill comes.  He pays his bill.  He leaves.

Sounds like something that happens everyday, thousands of times a day, right?  Let's try it again.

A guy walks into a bar.  He orders a couple of beers and a couple of drinks.  He doesn't ask what the drinks will cost.  The person who waits on him does not tell him.  His bill comes.  He pays his bill.  He leaves.  He sues. 

If you're wondering what he's suing about, you're not alone. 

Learn what happened after the jump.

The bar is the Houlihan's in Brick, New Jersey and the case is Pauly v. Houlihan's Restaurants, Inc.  As far as can be told from the court's decision, Mr. Pauly's complaint is that the prices charged were unreasonable.  Since the prices of drinks were not on the menu, he claims, Section 2-305 of the Uniform Commercial Code declares that the price should be "a reasonable price." 

On a motion to dismiss for failure to state a claim, a federal district judge in New Jersey agrees.  Section 2-305(1)(a) of the UCC provides: 

The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:  (a) nothing is said as to price . . .

This is a basic principle of Article 2 of the UCC:  so long as the parties intended to create a contract, they can leave certain terms of the contract--price, certain aspects of quantity, delivery time and place, whether there is to be a warranty--open, and still have created an enforceable contract.  The UCC will fill in those terms they have left open with so-called "gap filler" provisions, such as 2-305, and such a contract is enforceable.  On a 12(b)(6) motion to dismiss, the judge is required to take all the facts in the complaint as true.  If it is true that "nothing was said as to price", then the UCC says the price should be a reasonable price.

That does not mean that the plaintiff will win his case.  He paid his bill, which he claimed he did under legal compulsion because New Jersey law makes it a crime to leave a bar or restaurant without paying your bill.  On the motion to dismiss, the court agreed, saying,

It would be unreasonable and inequitable to hold that a person must risk criminal exposure in order to challenge a restaurant's policy of omitting prices from their menus and ultimately charging unreasonable and discriminatory rates for their food and beverages.

I can sort of see this on a motion to dismiss, but seriously?  The complaint makes noise about "'menu engineering' - the deliberate and strategic construction of menus to exploit consumer psychology and manipulate customer perceptions."  Or, in other words, the restaurant would like to sell you stuff you may not have come in for.  This doesn't sound like a cause of action to me.

The defendant’s mistake, it seems to me, was to bring the motion to dismiss. In deciding a motion to dismiss, the court is required to accept all facts pled in the complaint as true. In the complaint, the plaintiff asserted, “Plaintiff’s order for beverages offered for sale on a menu that failed to disclose prices for those beverages manifested assent on behalf of Plaintiff to pay Defendant a good faith reasonable price for the beverages.” If this were true (and remember, the court had to assume it was true), then the plaintiff’s theory, that 2-305(1)(a) applies, would be generally correct.

I asked Professor Scott Burnham of Gonzaga Law School for his thoughts on the case. This is what he said, 

This is not a situation where the price is not agreed upon and defaults to a reasonable price. The price has been established by the seller and the customer knows that. The seller did not disclose the price and the buyer did not request it, but I don't think that is at all an unusual situation. Often parties, not just at bars and restaurants, think they know enough and treat their limited knowledge as sufficient. Unless the seller has not acted in good faith, I think the buyer bears the risk of being mistaken in its assumption about the price. If I go into a bar and order a beer, I don't ask the price because I have a reasonable expectation of what it will be. If it is a dive bar, I might expect to pay $2, and if it is the Plaza, I might expect to pay $10. If I get a bill for $25, then I think I have a claim that this was not within my reasonable expectations and the seller had a duty to point the price out to me when I ordered it.

To elaborate on Professor Burnham’s comment, the law that most likely will be found to apply to this situation after the dust settles is not 2-305(1), but 2-305(2): “A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.” Official Comment 3 to this section of the UCC elaborates on the principle:

Subsection (2), dealing with the situation where the price is to be fixed by one party rejects the uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes the observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. But in the normal case, a “posted price” or a future seller’s or buyer’s “given price,” “price in effect,” “market price” or the like satisfies the good faith requirement.

There are allegations in the complaint that the bar actually charged different prices to different customers for the same drink. If true, there is a real issue of good faith. But in the more usual circumstance, where there is a “stated price” listed in the computer that totals up the bill, and the wait staff simply presses the button for “Bud Light" or "Samuel Adams Utopia" (which sells for $190 a bottle) and it comes up on the bill at that fixed price, that is all 'good faith" requires. 

Professor Burnham pointed me to an article in the New York Times about a similar dispute, but one that was handled in a far different way.  Three people dined at a restaurant where the price of their meal, which included a special whose price was "market price" (just like the comment to 2-305 suggests), shocked them. Their bill was $400, $275 of which was this one pasta dish.  They complained to the manager, who knocked 25% off the tab, and then wrote to the New York Times "Haggler", and got another 25% knocked off.  No legal system was harmed in the handling of this complaint. 

The reason I contacted Professor Burnham in the first place is that in the back of my mind the fact that the plaintiff had paid the bill without complaint--despite the judge's position that he did so under some form of compulsion, although such a compulsion would never stop him from asking to see the manager to register a complaint--was material.  Professor Burnham, who is a world expert on the doctrine of accord and satisfaction, disagrees:

UCC 1-308 [which is 1-207 in New Jersey, which has not adopted the latest amendments to Article 1] provides a mechanism for accepting with reservation of rights. If the buyer disputed the bill, it would have been a good idea for him to make clear that he was preserving his defenses by writing something like "paid under protest" on the bill. But the fact that one accepts performance without a reservation of rights does not mean that he has waived those rights. If in fact he was overcharged (i.e. charged more than the price on the menu or an amount beyond reasonable expectations), he would still have a claim absent something like accord and satisfaction. I don't see anything here that would constitute an accord. There was payment of the price demanded, not an agreement to pay less to resolve a dispute.

How, then, did someone get a lawyer for this case, and how did it end up in federal court (where there is a minimum "amount in controversy" of $75,000 for diversity suits)?  Apparently by making this into a class action, they allowed the defendants to remove it.  We've blogged about class actions involving food in the past. Under the Class Action Fairness Act, you can get into federal court if the total claims of the class would be $5 million or more.  But, as one of my colleagues, when discussing this case, remarked, how would they find the class members?  If you paid for your meal with cash, Houlihan's has no record of you (or at least I hope they don't).  And the class is of people who were charged an unreasonable price for their drinks.  If no one ever complained (or any complaints were resolved in the time-honored way of talking to the manager), the plaintiff here may be a class of one.  And it's hard to get to $75,000, let alone $5 million, if that's the case.

Professor Burnham's final advice is:

The fact that this has come up a couple of times indicates that restaurants might do more to practice a bit of preventive law. They might make sure the customer is given a menu, or that one is placed on the table, or that a nearby wall displays the prices. When the waiter rattles of the non-menu specials, they should include the price. That kind of practice would be an inexpensive way to keep these problems from arising.

This is where he, as a law professor, and I, as a practitioner, must part ways.  Houlhan's, or any other restaurant, must balance legal issues like this against the restaurant experience they impart to their customers.  So long as the wait staff would give true information about the prices of drinks that are not listed on a menu (as, in a bar, they often are not), and complaints like this are rare, it is perfectly reasonable, when you order a beer, that the response remains, "I'll be right back with your Bud Light" rather than "that will be $2.75, are you sure you want it?"

So, a guy walks into a bar and a lawsuit ensues.  Makes you long for a rabbi, a minister or a priest on whose shoulder to cry.

Food Security Act Doesn't Apply to Proceeds

The Food Security Act of 1995 is part of a matryoshka of statutes.   In the center is the general rule of 9-320(a) of the UCC, that a buyer in the ordinary course of business takes free of a security interest created by its seller.  The next doll is the Farm Products Exception, which I wrote about here:  except, most notably, in California, the buyer in the ordinary course rule does not apply to a buyer of farm products.  The next doll is the Food Security Act itself:  if you fail to comply with its terms, then the Farm Products Exception does not apply.  Finally, if you do comply, then the Farm Products Exception does apply. 

If that's not entirely clear, don't blame the messenger.

An interesting case out of the U.S. Bankruptcy Court for the Central District of Illinois asked this question:  does the Food Security Act apply to proceeds?  Here are the basic facts of CNH Capital America LLC v. Trainor Grain & Supply Co.:  Both CNH and Trainor had financed crops for farmers named Printz, who are now in bankruptcy.  CNH had the earlier filed financing statement.  Trainor was also the grain elevator which bought the crops.  CNH did not comply with the notice provisions of the Food Security Act.  Trainor had therefore, there was no dispute, purchased the crops free and clear of CNH's lien.  But what about the proceeds?  Trainor simply offset them against its debt and paid nothing to the Printzes.  Would it be able to walk away without paying, despite CNH's earlier filed financing statement?

Your ordinary buyer, when it pays for the crops, is concerned about double payment, which is why it will check the Food Security Act filings or notices of its seller.  In essence, Trainor wasn't making any payment at all; no cash was changing hands.  If it was wrong, it still had its debt.  That probably isn't worth much without collateral and with the farmers in bankruptcy, but also, as a secured party, it was clearly in second position behind another creditor. 

And that, in essence, is what the court held.  The Food Security Act protects a buyer.  If a secured creditor does not comply with its notice provisions (which, in some states like Idaho and Oregon, are essentially the same as for filing a financing statement, while in others, like Washington and, presumably, Illinois, involve actually sending notice to known prospective buyers of the farm products), then the buyer gets full title to the goods.  But what it does not get is priority in proceeds as well. 

Think of it this way:  if there were no Farm Products Exception--the rule that applies to purchasers of every kind of goods except farm products--would a buyer who also had a second security interest be able to take the goods by setting off its debt against the interests of a first priority secured creditor?  I think not, and that is what the court ruled here.

What if Trainor had paid the farmers and the farmers had turned around and paid Trainor in cash?  Under 9-332 of the UCC, unless Trainor and the farmers had been in collusion, Trainor would, outside of bankruptcy, have taken good title to the funds.  Of course, in bankruptcy, this was likely to be a preference and thus recoverable just as the setoff in the actual case was. 

It's not boilerplate, it's part of the contract

At the back of most contracts are provisions that lawyers and parties often refer to as "boilerplate".  The Free Dictionary defines it as "inconsequential, formulaic or stereotypical language."  A recent decision of the Wisconsin Supreme Court supports the interpretation I've given my colleagues for years:  there is no such thing as inconsequential language in a contract.  Yesterday's boilerplate is today's most critical wording.

The case involved the standard guaranty required by federal law.  At the end of the guaranty form, the supplier had added, "This Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature nor shall it extend to the benefit of persons or corporations other than" buyer.  The goods that were shipped under this guaranty were found contaminated with E. coli and the buyer sued for, among other things, its consequential damages.  The Wisconsin Supreme Court affirmed the intermediate appellate court's decision that this language was ineffective to disclaim consequential damages.  After the jump, we'll discuss why.

The supplier's problem is that this was the only disclaimer in any of its documents.  As an Article 2 merchant (see my previous entry), the supplier was subject to another warranty, the implied warranty of merchantability.  That warranty is given unless disclaimed,  Here, it was not disclaimed, and thus was given.  Damages for breach of warranty may also be limited or excluded if not unconscionable.  So the question became whether the exclusion of consequential damages in the Guaranty applied to damages for breach of the implied warranty of merchantability. 

The court answered that question in the negative, and it relied on the express words used in the disclaimer in the Guaranty.  "The words, 'This Guaranty,' focus the limitation of damages on those damages that may flow from a breach of the express warranties set out in 'This Guaranty' . . . .  They say nothing about damages that may arise from the breach of an implied warranty . . . ." 

Exactly.  The standard "boilerplate" provision reads more like this:  "Under no circumstances may either party be liable to the other for any special, incidental, consequential or punitive damges in any action arising out of this contract, whether considered in contract, in tort of otherwise."  The words attached to the Guaranty were far more limited, and the words were given meaning by the Wisconsin Supreme Court.

There are many factors to consider in deciding whether to disclaim implied warranties and whether to limit damages.  In contracts related to food, implied warranties are disclaimed far less frequently than in other sales of goods.  Parties often exclude incidental damages without understanding what they are giving up.  But the lesson from the Wisconsin Supreme Court is always good:  the words you choose matter.  There is no "inconsequential" boiilerplate.