Contracts II (Law 1-201)

Timothy J. Tracey
Spring 2019

MIDTERM EXAMINATION

MULTIPLE-CHOICE QUESTIONS (20 points, 20 minutes). Mark your answers to the following
multiple-choice questions on your computer or on the accompanying Scantron sheet. Choose
the best answer.

QUESTIONS 1 through 3 are based on the following facts:

Alphabet, Inc. is a large tech conglomerate headquartered in Mountain View, California. It is

the parent company for a number of subsidiary companies, including Google, Nest Labs,
DeepMind, and Jigsaw. Alphabet entered into a contract to sell one its subsidiaries--Waymo,
which specializes in the development of self-driving car technologies--to Fiat Chrysler
Automobiles, PLC, the world’s eighth largest automaker.

Fiat Chrysler viewed the acquisition of Waymo as a quick and easy way to gain a foothold in
the emerging industry of autonomous vehicles. A significant part of the appeal for Fiat
Chrysler was the large number of patents held by Waymo.

During contract negotiations, Alphabet represented to Fiat Chrysler that all the patents held
by Waymo were valid. Alphabet made this representation only after it first received
assurances from its patent attorneys that in fact all of Waymo’s patents were good. After
entering into the contract, however, Fiat Chrysler discovered that at least some of Waymo’s
patents related to self-driving technology were invalid.

QUESTION 1

Alphabet sues to rescind the contract and back out of the deal with Fiat Chrysler. Is Alphabet
likely to be successful?

(A) Yes, because Alphabet made a statement contrary to fact.

(B) Yes, because Alphabet’s material misrepresentation induced Fiat Chrysler into the
contract.
(C) No, because Alphabet had a sufficient factual basis for telling Fiat Chrysler that all of
Waymo’s patents were valid.
(D) No, because if any party was the victim of misrepresentation in this case, it was Fiat
Chrysler, not Alphabet.

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QUESTION 2

Assume that Fiat Chrysler, rather than Alphabet, sues to rescind the contract. Is Fiat Chrysler
likely to be successful in its suit?

(A) No, because Alphabet did not intentionally try to mislead Fiat Chrysler about the
validity of Waymo’s patents.
(B) Yes, because Alphabet’s misrepresentation, while not fraudulent, was material since
the company knew that Waymo’s patents on self-driving technologies were a
significant reason for Fiat Chrysler’s interest in purchasing Waymo.
(C) Yes, because Fiat Chrysler relied on Alphabet’s misrepresentation concerning the
validity of Waymo’s patents.
(D) No, because any misrepresentation Alphabet may have made concerning the validity
of Waymo’s patents was neither fraudulent nor material.

QUESTION 3

Assume that the only invalid patents Waymo held were unrelated to self-driving technology.
Would Fiat Chrysler still likely be successful in suing to rescind the purchase and sale
agreement with Alphabet?

(A) No, because Alphabet’s misrepresentation would now be neither fraudulent nor
material.
(B) No, because Fiat Chrysler surely was not induced into the contract because of a
misrepresentation about a handful of insignificant patents that had nothing to do
with the self-driving technology that was motivating its purchase.
(C) Yes, because Alphabet still made a misrepresentation. It clearly asserted that all of
Waymo’s patents were valid when they were not.
(D) Yes, because Fiat Chrysler was reasonable in relying on Alphabet’s representation
about the validity of Waymo’s patents since the representation was based on the
assurances of legal counsel.

QUESTIONS 4 and 5 are based on the following facts:

Janet is a seventy-four year old woman living alone in a small house in rural South Carolina.
She recently lost her husband, Charlie, to congestive heart failure.

When Charlie was alive, he handled the tech-related matters around the house. Indeed,
Janet almost never used computers of any kind and had little to no interest in learning. But
after Charlie’s death, things changed. Janet decided that she needed to use Facebook to keep
up with her sisters, to view pictures of her grandkids, and to communicate with her church
friends.

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So Janet signed up for Facebook. As part of the sign-up process, she had to agree to
Facebook’s Data Policy. As Facebook explains: “To provide these services, we must collect and
use your personal data. We detail our practices in the Data Policy, which you must agree to in
order to use our Products.”

The Data Policy is almost 5,000 words long. Anyone unfamiliar with the internet, and social
media in particular, like Janet, will find the policy incomprehensible. This is all the more true
for Janet since she never finished high school and doesn’t enjoy reading. The terms of
Facebook’s policy are non-negotiable. Without reading the policy, Janet ticked the box
expressing her agreement to it.

Janet later discovered that Facebook is collecting her personal data and using it to help
advertisers target her with ads. She is shocked to learn the sheer volume of personal data
Facebook collects. For instance, it maintains a listing for what it thinks Janet’s political views
are. It gleans this information from a mixture of the photos, videos and thoughts Janet has
posted on her timeline. It also grabs this data from her interactions with Facebook friends,
as well as the pages and posts she “likes.”

Janet tries changing her privacy settings to see if this will stop Facebook from collecting her
personal data. But while these settings impact who can view her timeline and her posts, they
do not affect what information Facebook--the company--has access to about her. Janet is
hesitant to leave Facebook since it is the only social network that her friends and family use
on a regular basis.

QUESTION 4

Janet sues Facebook arguing that its Data Policy is unconscionable. Is Janet likely to be
successful in her lawsuit?

(A) No, because Janet is not bound by Facebook’s Data Policy since she never read it.
(B) No, because Janet cannot make a showing of procedural unconscionability since
nothing requires her to use Facebook. If she does not like the Data Policy, she can
simply go elsewhere.
(C) Yes, because Janet may show procedural unconscionability due to the uneven
bargaining power, her inability to understand the Data Policy, and the complex and
difficult nature of the policy. Moreover, she may show substantive unconscionability
because of the disproportionately high cost she must pay--relinquishing her data
privacy--to use Facebook.
(D) Yes, because the risk that Facebook may misuse or lose Janet’s personal data is
allocated almost entirely to her.

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QUESTION 5

Assume the same basic fact pattern except that Janet took Benadryl twice before sitting
down to sign up for Facebook. Common side effects of Benadryl include drowsiness,
dizziness, blurred vision, and confusion. Janet suffered from all these side effects. So she
again sues Facebook but this time she argues that her agreement to the Data Policy should
be rescinded due to intoxication caused by the Benadryl. Janet claims that because of the
Benadryl, she was unable to understand the nature and consequences of the Data Policy. Is
Janet likely to be successful in her defense?

(A) Yes, because Janet failed to understand the full nature and consequences of her
agreement to the Data Policy.
(B) No, because Facebook did not know and could not have known of Janet’s intoxication.
(C) Yes, because Facebook became aware of Janet’s intoxication when she explained it to
company representatives and sought to rescind her agreement to the Data Policy.
(D) No, because it is not clear that the intoxication was the cause of her inability to
understand the Data Policy.

QUESTIONS 6 and 7 are based on the following facts:

Mary Founder developed a new software application for screening email to eliminate spam.
In 2009, she attained a federally-guaranteed loan from Bank to start a company in New York
City to formally develop and market the app.

Mary’s marketing efforts encountered considerable resistance at first but early in 2010
business took off and it appeared her app would be a huge success. Unfortunately, the
government guarantee on her loan expired in June 2010, and the loan from Bank came due
at that time. Bank refused to renew the loan and demanded payment.

Mary tried a number of other lending institutions, but none were willing to lend her the
money she needed to pay off the loan from Bank and to continue her new company’s
marketing efforts. She was repeatedly told that her lack of a real track record made her too
big of a risk.

Shark, however, agreed to give Mary the money she needed in exchange for a 51% ownership
interest in her company due to the risk he would be taking. Mary reluctantly agreed to the
deal with Shark.

Mary’s company is now doing well. She comes to you and asks if you can help her “get back
all that Shark has pressured me out of.”

QUESTION 6

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You suggest that Mary sue to rescind the deal with Shark because of duress. Do you really
think Mary will be successful with such a defense?

(A) Yes, because Mary had no real alternative to Shark to get the financing she needed to
keep her company alive.
(B) Yes, because Shark’s insistence on taking a 51% ownership interest in Mary’s
company was an improper threat.
(C) No, because while Shark may have driven a hard bargain, he did not make an
improper threat.
(D) No, because lenders--given the risks that they regularly take on--are not subject to
defenses like duress.

QUESTION 7

Assume that you rethink your approach and suggest that Mary consider suing for undue
influence instead. Do you in fact believe that Mary will be successful in rescinding her
contract with Shark because of undue influence?

(A) Yes, because Mary’s difficult financial position made her unduly susceptible to
Shark’s unfair persuasion.
(B) Yes, because Shark’s insistent on taking a majority ownership interest in Mary’s
company was unfair persuasion.
(C) No, because the result of the agreement with Shark was not inequitable given the risk
that he was taking by lending to Mary when she and her company had no track record
of success.
(D) No, because Shark did not engage in any conduct that looks like unfair persuasion.

QUESTIONS 8 and 9 are based on the following facts:

A world renowned operatic tenor and an elderly opera fan enter into an oral contract under
the terms of which the tenor will be paid $499 for performing at the fan’s 80th birthday
party. The fan is now 78 years old.

QUESTION 8

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Is this contract subject to the statute of frauds?

(A) Yes, because the world renowned operatic tenor will not perform the contract in this
case until more than one year from the date of formation of the contract.
(B) No, because only contracts for $500 or more are subject to the statute of frauds.
(C) Yes, because the opera fan is elderly, she is likely to forget about the contract unless it
is put in writing.
(D) No, because the elderly opera fan may die before the date of performance rolls
around.

QUESTION 9

Assume the same basic fact pattern except that the elderly opera fan pays the $499 up front.
Is the statute of frauds still violated in this case?

(A) No, because the completion of performance by one party--the elderly opera
fan--takes the contract outside the statute of frauds.
(B) No, because, with the elderly opera fan already having performed, we now have no
real concern that she will forget about the contract.
(C) Yes, because the contract still falls within the one-year provision of the statute of
frauds.
(D) Yes, because the contract is identified in the question as being “oral” and therefore it
does not satisfy the writing requirement of the statute of frauds.

QUESTION 10

Seller entered into a contract to sell her small hotel to Buyer. In the course of negotiations,
Seller deliberately overstated the profits in her attempt to induce Buyer to purchase the
hotel. In fact, Buyer was never concerned about the profits of the hotel. She was planning to
tear it down and use the land as part of a major resort she was developing.

Buyer’s plans have now fallen apart because she could not get adjoining landowners to sell
and therefore she could not put together a large enough parcel of land for her resort.

Can Buyer use Seller’s misrepresentation to rescind the contract to buy Seller’s property?

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 (A) Yes, because Seller made the misrepresentation with the intent to induce Buyer to
accept her offer to sell the hotel and Seller knew that her statement about profits did
not accord with the facts.
(B) No, because profits of the hotel were not material to the transaction with Buyer.
(C) No, because the Seller’s misrepresentation did not in fact induce Buyer to agree to
purchase the hotel.
(D) Yes, because Buyer was no doubt reasonable in relying on Seller’s misrepresentation
about hotel profits since she had no other way of knowing the profitability of the
hotel.

CONTINUE TO THE NEXT PAGE FOR THE ESSAY QUESTION

ESSAY QUESTION (40 points, 40 minutes). Answer the following essay question, including all
sub-questions, on your computer or in the accompanying bluebooks. Be sure to analyze all
relevant issues.

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On February 1, Farmer and Broker enter into an oral contract for the purchase and sale of
10,000 bushels of grain at a price of $5 per bushel. The same day, Broker sends Farmer a note
that reads in full:

My Dearest Farmer,

This will confirm our agreement that you will sell me 10,000 bushels of grain at
$4.75 a bushel.

Live long and prosper,

Broker
On February 4, Farmer mails the same note back to Broker with the following annotation on
the bottom of it:

The price was $5 per bushel -- you jerk.

Cheers,

Farmer

Broker receives the note back from Farmer on February 6. In the meantime, Farmer decides
she does not want to deal with someone whose word cannot be trusted, and she refuses to
deliver the grain to Broker. Broker sues, and Farmer defends on the basis that the statute of
frauds precludes enforcement of the contract.

(A) Analyze whether Farmer will be successful in her statute of frauds defense.

(B) Assuming Farmer is not successful in her statute of frauds defense, what price per
a bushel will Broker likely have to pay? Explain.

END OF EXAM
ENJOY YOUR MIDTERM BREAK!