301423 N Atl 50 Text r2.pdf

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Husson University

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For the

NORTH ATLANTIC REGIONAL BUSINESS LAW

ASSOCIATION

EDITORS-IN-CHIEF

William B. Read

Husson University

Marie E. Hansen

Husson University

BOARD OF EDITORS

Michelle D. Bazin

University of Massachusetts-Lowell

Robert C. Bird

University of Connecticut

Elizabeth A. Brown

Bentley University

Margaret T. Campbell

Husson University

Gerald R. Ferrera

Bentley University

Stephanie M. Greene

Boston College

William E. Greenspan

University of Bridgeport

Anne-Marie G. Hakstian

Salem State University

Stephen D. Lichtenstein

Bentley University

Carter H. Manny

University of Southern Maine

Christine N. O’Brien

Boston College

Lucille M. Ponte

Florida Coastal School of Law

Patricia Q. Robertson

Arkansas State University

David Silverstein

Suffolk University

David P. Twomey

Boston College

Thomas L. Wesner

Boston College

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iii

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HISTORY OF THE BUSINESS LAW REVIEW

In Fall 1968, the first edition of the Business Law Review was

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The law, written and unwritten, guides men in all pursuits

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experienced legal practitioners from Arkansas, Connecticut, Florida,

Rhode Island, Maine, and Massachusetts.

vii

TABLE OF CONTENTS

A Glass Half Full? Enduring Small Business Frustrations Under

the Consumer Review Fairness Act of 2016

Lucille M. Ponte ................................................................................... 1

Public Toes in Private Sand: Public Prescriptive Easements and How

the Presumption of Permission Supports Tourism and Recreation on

Maine Beaches

Margaret T. Campbell ....................................................................... 21

Traps for the Unwary Commercial Drone User

Chantalle R. Forgues ......................................................................... 41

Stick ‘Em Up This Is a Breach: A Case for Punitive Damages for

Contract Holdups

Scott Thomas, David Missirian and Mystica Alexander ................. 67

The Developing Law of Employee Non-Competition Agreements:

Correcting Abuses; Making Adjustments to Enhance Economic

Growth

David P. Twomey ............................................................................... 87

A GLASS HALF FULL? ENDURING SMALL BUSINESS

FRUSTRATIONS UNDER THE CONSUMER REVIEW

FAIRNESS ACT OF 2016

by Lucille M. Ponte

With the rise of social media, brand communications have become

more interactive with an ever-growing number of crowdsourced review

sites.

Businesses quickly learned that generating positive consumer

ratings and reviews often translated into enhanced brand reputation

and increased revenues.

In light of these incentives, some companies

bought glowing reviews from pay-to-post blog farms or secretly

compensated legitimate bloggers in hopes of receiving positive ratings.

Associate Professor of Law Florida Coastal School of Law.

Approximately 89 percent of consumers believe that online reviews are trustworthy

in evaluating products and services. Game Changer: Cone Survey Finds 4-out-of-5

Consumers Reverse Purchase Decisions Based on Negative Online Reviews, Cone

Communications, Inc. (Aug. 30, 2011), http://www.conecomm.com/stuff/contentmgr/files/

0/286c351989671ae74994fec139863bb2/files/2011_cone_online_influence_trend_tracker

_release_and_fact_sheet.pdf, archived at http://perma.cc/VA8H-4GMM.

Paresh Dave, Small businesses struggle to manage online image, L.A. Times, Aug.

9, 2013, http://www.latimes.com/business/la-fi-tech-savvy-online-reviews-20130810-

story.html, archived at https://perma.cc/7SJQ-6WD7?type=source. Research, including

Harvard Business School and University of California, Berkeley studies, indicate that

ratings, positive and negative, can directly and substantially impact business revenues.

Dave, supra. The Harvard study found that even a scant one-star rise in Yelp ratings

corresponded to a five to nine percent increase in revenues for local restaurants. Id.

Alternatively, a single negative online review may result in a twenty-five percent or more

decline in revenues. Id.

Sonia K. Katyal, Stealth Marketing and Antibranding: The Love that Dare Not

Speak Its Name, 58 B

UFF. L. REV. 795, 833-34; Kendall L. Short, Note: Buy My Vote:

2 / Vol. 50 / Business Law Review

In 2009, the Federal Trade Commission’s Revised Endorsement Guides

set strict disclosure rules for those compensating reviewers and

undertook some high-profile enforcement actions to try to prevent

sponsored ads from masquerading as ordinary consumer opinions.

Other businesses, from wedding photographers

to hotels

to e-

commerce sites,

took aggressive steps to suppress negative customers

through a range of adhesive speech suppression or “gag” contracts.

These speech suppression agreements relied upon inappropriate

intellectual property claims, empty privacy promises, exorbitant

monetary penalties, and other vague threats to silence online

critiques.

Certain businesses defended these gag contracts as

necessary to protect their brand in a social media environment filled

with dishonest consumers, unprincipled competitors, and lackadaisical

review sites.

In 2014, California enacted the first, but flawed, “Yelp” Law aimed

at protecting the ability of consumers to freely post their opinions about

products, services, and merchant experiences.

On December 14,

2016, President Obama signed the Consumer Review Fairness Act of

2016 (CRFA or “Act”) into law.

This first-of its kind federal law voids

Online Reviews for Sale, 15 VAND. J. ENT. & TECH. L. 441, 443, 437 (Winter 2013); Robert

Sprague & Mary Ellen Wells, Regulating Online Buzz Marketing: Untangling a Web of

Deceit, 47 A

M. BUS. L.J. 415, 420-24 (2010); 2011 Emerging Issues 592, Insurance

Coverage Implications of Internet, Technology and Social Media, 7, 9 (MB Sept. 29, 2011).

Guides Concerning the Use of Endorsement and Testimonials in Advertising, 74

Fed. Reg. 53,124, 53,126 (Oct. 15, 2009) (to be codified at 16 C.F.R. pt. 255). See Jessica

Godell, Consumer-Generated Media and Advertising—Are They One and the Same? An

Analysis of the Amended FTC Guides Concerning the Use of Endorsements and

Testimonials in Advertising, 10 J.

MARSHALL REV. INTELLECTUAL PROP. L. 205, 207–09

(2010); Lucille M. Ponte, Protecting Brand Image or Gaming the System? Consumer 'Gag'

Contracts in an Age of Crowdsourced Ratings and Reviews 7 WM. & MARY BUS. L. REV.

59, 121 (2016).

Ponte, supra note 4, at 78; Eric Goldman, Fining Customers For Negative Online

Reviews Isn’t New... Or Smart, Forbes.com Tech (Aug. 8, 2014, 10:47 AM),

http://www.forbes.com/sites/ericgoldman/2014/08/07/fining-customers-for-negative-

online-reviews-isnt-new-or-smart/, archived at http://perma.cc/C5MG-DZEL.

Ponte, supra note 4, at 78; Christopher Elliott, New confidentiality clauses can influence

vacation rental reviews (Apr. 14, 2012), http://elliott.org/blog/new-confidentiality-clauses-can-

influence-vacation-rental-reviews/, archived at http://perma.cc/GNS9-HBCW.

Ponte, supra note 4, at 78; Elliott, supra note 5.

See generally, Ponte, supra note 4, at 71-88 (discussing wide range on speech

suppression contracts).

Id. at 68. See infra Part I.

Id. See infra Part II.

CAL. CIV. CODE §1670.8 (2014). See generally Ponte, supra note 4, at 115-18.

Consumer Review Fairness Act of 2016, Pub. L. No. 114-258, 130 Stat. 1355 (2016),

https://www.congress.gov/114/plaws/publ258/PLAW-114publ258.pdf. [hereinafter CRFA]

See also Bryan Cave, Congress Passes “Consumer Review Fairness Act of 2016” to Protect

2017 / A Glass Half Full? / 3

contract provisions that seek to prohibit, restrict or penalize online

customer reviews.

While the CRFA provides valuable and needed

protections for online consumer expression, small businesses were still

left without new options, outside of costly litigation, to protect

themselves from fake negative reviews.

Even in cases where

businesses press legitimate legal claims, they can face a viral storm of

online criticism that further worsens their reputation.

This paper will consider the typical types of speech suppression

clauses

that led to the passage of California’s Yelp law.

The paper

will also provide an overview of the key provisions of the CRFA,

including, what communications are covered, what protections are in

place for review sites seeking to effectively police third party postings,

and the permissible public and private causes of actions under the new

law.

This article will address how the Act does little to aid small

businesses

and recommends self-help remedies, outside of litigation,

that should be available to provide assistance to small businesses

victimized by social media trolls and bogus negative reviews.

I. THE NATURE OF GAG CLAUSES IN CONSUMER

CONTRACTS

The increasing importance of social media and crowd-sourced review

sites drastically changed the business marketing landscape, moving

away from the one-way presentation of sponsored advertising to an

interactive dialogue between merchants and consumers. Some

businesses adapted quickly to this dramatic disruption by collecting

and responding to consumer concerns as a direct method for improving

customer satisfaction and building business goodwill. Other

businesses, especially small businesses, seemed ill-prepared to deal

Online Reviews (Dec. 5, 2016) https://www.bryancave.com/en/thought-leadership/congress-

passes-consumer-review-fairness-act-of-2016-to-protect.html; Ashlee Kieler, Speak Freely

America: New Federal Law Outlaws Gag Clauses That Punish You For Negative Reviews,

(Dec. 14, 2016, 9:30 am EDT) https://consumerist.com/2016/12/14/consumer-review-freedom-

act/ (provides overview of legal issues and prior congressional proposals leading to final act).

The law takes effect in March 2017 with enforcement actions permitted as of January 2018.

CRFA, at §2(b). See H. Rep. No. 114-731 (2016). [hereinafter CRFA Report]

CRFA, at §2(b)(2)(B).

L. David Russell, Christopher C. Chiou & Zain A. Shirazi, Fake It Until You Make

it? Battling Fake Online Reviews, LAW360 (June 9, 2014, 12:17 PM),

http://www.law360.com/articles/545366/fake-it-until-you-make-it-battling-fake-online-

reviews.

See infra Part I.

See infra Part II.

See infra Part III.

See infra Part IV.

See infra Part V.

4 / Vol. 50 / Business Law Review

with the technological demands and real world impact of consumer

concerns broadcast over the Internet. This loss of control led some

businesses to use adhesive gag contracts to try to game the outcomes

of online reviews by allowing only positive evaluations and prohibiting

negative reviews from being posted online. Other businesses held

legitimate grievances about faked negative reviews written by

competitors and consumers trying to eke out unfair concessions and

viewed form gag clauses as an inexpensive way to fend off unfair

reviews.

Regardless of the reasons for the use of gag contracts, these

agreements were aimed at chilling all negative consumer speech online

and punishing those who dared to complain online. A variety of

methods were typically utilized in gag contracts. One approach

involved consumer contracts that relied on intellectual property claims

to forbid negative reviews and to goad crowd-source review sites to

quickly remove offending content. In some cases, these contracts

included copyright assignment clauses that stated that the consumer

was transferring all of their copyright rights to the merchant in any

online content about their experiences with that business. If a

consumer tried to post negative feedback, the business would send a

takedown notice to the website and threaten to sue the customer for

Similarly, these contract often asserted trademark rights in the

company’s name and logo and threatened to sue consumers who

included them in negative online postings. While fair use would

protect consumer postings of honestly-held beliefs, many consumers

received cease and desist letters and removed any negative remarks

out of fear of a trademark infringement lawsuit.

In addition, some

crowd-sourced review sites immediately removed negative feedback

once they received the copyright or trademark takedown notice to avoid

a costly legal battle over the posted review.

Another approach tried to ward off negative reviews through

confidentiality provisions in consumer contracts. These confidentiality

clauses typically require consumers to seek prior written approval of

any posting exploring their customer experience. This type of clause

Ponte, supra note 4, at 88-101.

Id. at 88-101; Ann Marie Marciarille, “How’s My Doctoring?” Patient Feedback’s

Role in Assessing Physician Quality, 14 D

EPAUL J. HEALTH CARE L. 361, 395–97 (2012).

Id. at 82; Genelle I. Belmas & Brian N. Larson, Clicking Away Your Speech

Rights: The Enforceability of Gagwrap Licenses, 12 C

OMM. L. & POL’Y 37, 39 (2007).

Id. at 123: Marciarille, supra note 22, at 395, 397; Center for Democracy &

Technology Complaint & Request for Investigation, Injunction and Other Relief before

the Federal Trade Commission, In the Matter of Medical Justice Corp. 1, 15 (Nov. 9,

2011) [hereinafter CDT Complaint].

2017 / A Glass Half Full? / 5

allows the businesses to approve of glowing positive reviews while

having veto power over any negative ones. In these cases, if a

consumer posts an evaluation without prior consent, the merchant can

bring suit for breach of contract.

In addition, certain medical providers used “mutual privacy”

contracts to impede critical patient reviews.

These privacy contracts

supposedly offer added privacy safeguards to patients if the patient

does not post negative feedback online.

Typically the claimed added

protections for the patient involve the medical professional not

disclosing or selling personal information to third parties for

marketing purposes.

What some patients may not know is that

medical professionals already have both legal and ethical obligations

to protect patient confidentiality.

In essence, these agreements

provide no added privacy benefits to patients and are only aimed at

protecting the doctor or dentists from negative critiques.

These types of agreements may also contain a liquidated damages

clause that allows the merchant to collect a specified dollar amount for

each day the unapproved posting remains online.

The case of Lee v.

Makhnevich

is an example of these various clauses at work along

with financial penalties to suppress derogatory speech about a

Ponte, supra note 4, at 78; CDT Complaint, supra note 24, at 6-7.

Marciarille, supra note 22, at 362-63; Ponte, supra note 4, at 82-83; CDT Complaint,

supra note 24, at 3-8.

Marciarille, supra note 22, at 362-63; Ponte, supra note 4, at 80-86; CDT Complaint,

supra note 24, at 3-8.

See supra note 27.

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, OFFICE FOR CIVIL RIGHTS

ANNUAL REPORT TO CONGRESS ON HIPAA PRIVACY RULE AND SECURITY RULE

COMPLIANCE FOR CALENDAR YEARS 2009 AND 2010 15 (2010),

http://www.hhs.gov/ocr/privacy/hipaa/enforcement/compliancerept.pdf. See 45 C.F.R. §

164.530(h) (individuals may not be required to waive their rights as a condition of

treatment, payment, health plan enrollment or benefits eligibility). See Marciarille,

supra note 22, at 391-92; Ponte, supra note 4, at 82-83; Sean D. Lee, “I Hate My Doctor”:

Reputation, Defamation, and Physician-Review Websites, 23 H

EALTH MATRIX 574, 579-

80 (2013); CDT Complaint, supra note 24, at 11-13, 17.

Ponte, supra note 4, at 79. See Tim Cushing, Online Retailer Says If You Give It A

Negative Review It Can Fine You $3,500, TECHDIRT (Nov. 14, 2013, 8:58 AM),

http://www.techdirt.com/articles/20131113/06112425228/online-retailer-slaps-unhappy-

customers-with-3500-fee-violating-non-disparagement-clause.shtml; Can Nondisparagement

Clauses Silence Negative Online Reviews?, THE LEGAL INTELLIGENCER (June 26, 2014),

http://www.blankrome.com/index.cfm?contentID=37&itemID=3352.

2013 U.S. Dist. LEXIS 43760 (S.D.N.Y. Mar. 27, 2013). See Complaint, Civil Action

No. 11-civ-8665 (S.D. N.Y. Nov. 29, 2011), http://www.citizen.org/documents/Lee-v-

Makhnevich-complaint.pdf [hereinafter Lee Complaint]. See also Gergana Koleva,

Dentist to the Stars Sued for Suppressing Bad Reviews Online, F

ORBES (Dec. 8, 2011,

1:10 PM) http://www.forbes.com/sites/gerganakoleva/2011/12/08/dentist-to-the-stars-

sued-for-suppressing-bad-reviews-online/; Ponte, supra note 4, at 84-86.

6 / Vol. 50 / Business Law Review

consumer’s experience. In that case, Lee sought emergency dental care

from Dr. Makhnevich,

who required patients to sign a contract with

a copyright assignment clause, a mutual privacy clause,

and a

liquidated damages clause to enforce the gag contract.

When Lee

posted critical remarks about her services online, the dentist sent him

a warning letter about breach of their contract

and started billing Lee

one-hundred dollars per day for infringing her claimed copyright to his

content.

The dentist also sent take down notices to various review

sites demanding the removal of Lee’s posts and disclosing personal

information in violation of HIPAA.

II. CALIFORNIA’S “YELP” LAW LEADS THE WAY

It is not surprising that the home of Silicon Valley and the

headquarters of Yelp yielded the first state statute to prohibit gag

clauses in consumer contracts, commonly nicknamed the “Yelp Law.”

This California law makes it illegal to provide contracts of adhesion in

which consumers must waive their rights to post an online review or

rating.

This provision includes both non-disparagement and

confidentiality clauses which would be voided as against public policy

in California.

Under this state law, businesses that offer or try to enforce such

clauses are subject to civil fines,

starting at $2,500 for a first violation

to $5,000 for each subsequent violation. These fines may be hiked up

to a $10,000 fine for any willful, intentional, or reckless conduct

and

are not the sole remedies for such aggressive contract behavior.

The

primary enforcers are the state Attorney General, district attorneys or

Lee Complaint, supra note 31, at 2.

Marciarille, supra note 22, at 362-63; CDT Complaint, supra note 78, at 3-8.

Lee Complaint, supra note 31, at 2, 8.

Id. at 7-8.

Lee, 2013 U.S. Dist. LEXIS at *5. See Lee Complaint, supra note 31, at 8; Koleva,

supra note 112.

Lee, 2013 U.S. Dist. LEXIS at *6. See Lee Complaint, supra note 31, at 8. Under

the terms of the CRFA, such contracts would be void from the outset. CRFA, at §2(b)(2).

See supra note 29 and accompanying text.

CAL. CIV. CODE § 1670.8 (2014). See Songmee L. Connolly, Don’t Disregard Cal.’s

Non-Disparagement Clause Ban, L

AW360 (OCT. 8, 2014, 10:44 AM),

http://www.law360.com/articles/585252/don-t-disregard-calif-s-non-disparagement-

clause-ban. See generally Ponte, supra note 4, at 115-18.

CRFA, at §1670.8(a)(1), (2)(b) (West 2014).

Id. at §1670.8(a), (2)(b).

Id. at §1670.8 (2)(c).

Id. at §1670.8 (2)(c–d).

Id. at §1670.8 (e).

2017 / A Glass Half Full? / 7

city attorneys.

However, the law also explicitly allows consumers to

bring private causes of action.

The California statute recognizes the right of crowd-sourced review

sites to reject and delete postings that are not legally protected, such

as obscene and defamatory content, or compensated reviews that do

not comply with the requisite disclosure demands of the FTC’s

Endorsement Guidelines.

Under this statute, non-disparagement

and confidentiality clauses in consumer agreements would be illegal

and could be voided as against public policy in California.

In the

wake of California’s enactment of this law, numerous other states

began to formulate state statutes to deal with these adhesive consumer

gag contracts.

Yet this hastily-drafted law is flawed in several ways. First, that

statute broadly prohibits contracts that require consumers to

contractually waive any online statement.

In some instances,

consumers may not have a legal right to post anything they wish

online, such as trade secrets, proprietary information, confidential

records or fraudulent or defamatory content.

Secondly, this wide-

ranging statutory language could also impact the ability of websites

hosting third party reviews, like Yelp, to control otherwise lawful

online speech that violates the site’s terms of use,

such as abusive,

lewd, pornographic, harassing or discriminatory speech.

This statute

may, in part, be inconsistent with broad Section 230 immunity for

websites under the federal Communications Decency Act.

Subsequent judicial review will likely need to narrow this statute’s

expansive scope in line with existing state-specific contract and tort

law as well as federal laws and regulations.

Id. at §1670.8 (c).

Id.

See supra note 4.

CAL. CIV. CODE §1670.8(a), (2)(b).

See Connolly, supra note 38.

Id.; Ponte, supra note 4, at 117.

Connolly, supra note 38; Ponte, supra note 4, at 117.

Ponte, supra note 4, at 117-18. See Terms of Service ¶4 (B), 5(A), 6(A), Yelp, (Nov.

27, 2012), http://www.yelp.com/static?p=tos, archived at http://perma.cc/39GM-9XPY.

47 U.S.C. § 230(c)(1). The provision states that, “[n]o provider or user of an

interactive computer service shall be treated as the publisher or speaker of any

information provided by another information content provider.” Id.

Ponte, supra note 4, at 117.

8 / Vol. 50 / Business Law Review

III. KEY FEATURES OF THE CONSUMER REVIEW

FAIRNESS ACT OF 2016 (CRFA/“ACT”)

In the wake of California’s statue, two California representatives

proposed an initial federal version for safeguarding consumer free

speech in online reviews in 2014.

Considering the typical glacial pace

of federal legislation, Congress acted quickly to address growing

concerns about efforts adhesive speech suppression contracts. The

subsequent final version of the new Act tracks much of this earlier

proposal and provides a national approach to these adhesive

contractual concerns. The Act is relatively short, but strikes directly

at the main questionable aspects of consumer gag contracts.

A. Covered and Exempted Communications

The Act voids any adhesive contract that restricts a contracting

party from posting a “covered communication”.

The term broadly

protects a wide range of communications by a party who entered into

a contract of adhesion for goods and/or service. The protected

communications include any written, oral, pictorial, or other

performance assessments of goods and/or services.

This broad

definition captures traditional written reviews on discussion boards to

growing number of audio podcasts and videos and pictorial reviews on

such sites as YouTube and Instagram.

Despite this broad language, the Act does exempt various forms of

communications. The CRFA affirms that the covered communications

do not include speech suppression provisions in form contracts between

employers and employees or contracts with independent contractors.

Clearly, Congress sought to protect the duty of confidentiality that an

employer may require from employees under agency principles as well

as from independent contractors.

This exception does not address

other forms of protected employee speech that may be critical of an

employer, such as concerted action under the National Labor Relations

Consumer Review Freedom Act of 2014, H.R. 5499, 113

Cong. (Sept. 15, 2014),

http://swalwell.house.gov/wp-content/uploads/SWALWE_046_xml1.pdf. [hereinafter CRFA

2014] California Democratic Representatives Eric Swalwell and Brad Sherman introduced

the first version of the proposed CRFA 2014 in September of that year. See also Eric Goldman,

Congress May Crack Down On Businesses' Efforts To Ban Consumer Reviews, Forbes.com

(Sept. 24, 2014, 1:05 PM), http://www.forbes.com/sites/ericgoldman/2014/09/24/congress-may-

crack-down-on-businesses-efforts-to-ban-consumer-reviews/.

CRFA 2014, supra note 55.

The final Act is an improvement over the covered communications definition in the

initial 2014 proposal which only dealt primarily with online communications, and not

offline reviews. See CRFA 2014, supra note 55.

CRFA, at §2(a)(3)(B).

Id. at §2(b)(2)(A).

2017 / A Glass Half Full? / 9

Act, or whistle-blower protections that may contravene confidentiality

duties.

The law also excludes contract terms that forbid the disclosure of

trade secrets, proprietary information, personnel, medical and law

enforcement records that violate individual rights of privacy, or other

unlawful content.

Unlike California’s Yelp law, the new federal law

explicitly prohibits abuses of copyright law to transfer intellectual

property rights in consumer postings to the merchant or service

provider.

In addition, adhesive terms of use on review websites often reserve

the right of the site to remove or refuse to post content under a broad

category of illegal content as well as unacceptable content under the

site’s community standards.

The CRFA expressly upholds the right

of review sites to monitor or control content on their sites that may be

legally unprotected, such as libelous, false, deceptive, or obscene.

Further, the law permits adhesive terms that prohibit content that

contains computer viruses, worms, and other damaging code.

Furthermore, the law also upholds a site’s right to delete or reject

postings that are legally protected, but viewed as inappropriate or in

violation of a site’s community standards of conduct, such as vulgar,

sexually explicit, harassing or inappropriate hate speech.

These

CRFA terms mesh well with existing website immunity for user-

generated content under Section 230 of the Communications Decency

Act.

While the congressional report emphasizes the importance of

protecting truthful consumer reviews,

nothing in the covered

communications language expressly indicates that the law only

protects honestly held beliefs about products or services the reviewer

actually used.

It is unclear whether or not a merchant can include a

contract provision that prohibits a consumer’s posting of false and/or

defamatory content which are not protected forms of free speech.

Ponte, supra note 4, at 133.

Id. at §2(b)(3).

Id. at §2(b)(1)(C).

Id. at §2(b)(2)(C).

Id. at §2(b)(2)(B),(C)(iii).

Id. at §2(b)(3)(E).

Id. at §2(b)(2)(C)(i).

See supra note 53.

CRFA Report, supra note 13, at 5, 7.

Id. at §2(a)(2).

10 / Vol. 50 / Business Law Review

B. CFRA Prohibitions under Consumer Contracts of Adhesion

The CFRA indicates that adhesive contracts that seek to impede

consumer reviews are void from the start in one of three ways. All

three provisions seek to address aggressive business contracts and

associated enforcement tactics that resulted in a host of consumer legal

actions. First, a contract that either forbids or limits consumers from

engaging in covered communications is not permitted under the

CFRA.

Second, any form contract that imposes a penalty or fee

against an individual for covered communications.

Lastly, efforts to

suppress negative reviews through copyright assignment clauses on

consumer reviews embedded in goods and services contracts is also

prohibited under the CFRA.

For example, the congressional report points to Palmer v.

KlearGear.com,

as an example that will be rooted out under the

CFRA. In that case, the plaintiff John Palmer ordered Christmas gifts

from KlearGear.com.

When the items were not delivered and efforts

to contact KlearGear.com went unanswered, his spouse posted a

negative review on RipoffReport.com.

Subsequently, KlearGear.com

billed Palmer $3,500 for breaching its nondisparagement clause.

Refusing to pay, KleraGear.com then reported Palmer’s refusal as an

Id. at §2(b)(1)(A).

Id. at §2(b)(1)(B).

Id. at §2(b)(1)(C).

Case No. 1: 13-cv-00175 (N.D. Utah, filed Dec. 18, 2013). See Connolly, supra note

38; Cushing, supra note 30; L

EGAL INTELLIGENCER, supra note 30.

Connolly, supra note 38; Cushing, supra note 30; LEGAL INTELLIGENCER, supra note

30.

Id.

Id. The KlearGear.com provision stated as follows:

Non-Disparagement Clause

In an effort to ensure fair and honest public feedback, and to prevent the

publishing of libelous content in any form, your acceptance of this sales contract

prohibits you from taking any action that negatively impacts KlearGear.com, its

reputation, products, services, management or employees.

Should you violate this clause, as determined by KlearGear.com in its sole

discretion, you will be provided a seventy-two (72) hour opportunity to retract the

content in question. If the content remains, in whole or in part, you will

immediately be billed $3,500.00 USD for legal fees and court costs until such

complete costs are determined in litigation. Should these charges remain unpaid

for 30 calendar days from the billing date, your unpaid invoice will be forwarded

to our third party collection firm and will be reported to consumer credit reporting

agencies until paid.

Cushing, supra note 30.

2017 / A Glass Half Full? / 11

unpaid debt to credit reporting agencies.

Palmer disputed the report,

but were unable to have it removed from their credit report, hurting

his ability to obtain credit.

In a default judgment, a Utah district

court ultimately invalidated this clause

declaring that no debt was

ever owed to KlearGear.com under the liquidated damages clause,

awarding the plaintiff over $300,000 in compensatory and punitive

damages as well as costs and attorney fees.

C. Public Enforcement Actions and Penalties

The CRFA states that any violations are considered unfair methods

of competition or deceptive consumer practices under the Federal

Trade Commission Act.

The FTC is provided with primary

enforcement responsibilities for the CRFA.

Once the FTC institutes

a civil or administrative action, state attorneys general are not

permitted to bring actions while that FTC matter is pending.

The

CRFA does not identify specific penalty amounts, but the FTC is

permitted to determine appropriate civil penalties under its current

statutory powers.

The Act also calls upon the FTC to undertake

education and outreach programs on the new law within sixty (60) days

of the law’s enactment.

However, the CRFA is not intended to limit the existing authority

of state attorneys general to undertake investigations of potential

CFRA violators.

Absent a pending FTC action, state attorneys

general or authorized consumer protection official may bring CFRA

actions in the relevant federal court with advance notice to the FTC.

The notice includes a copy of the complaint that the state

representatives plan to file in federal court.

The FTC is then given

the authority to intervene and participate in any CFRA civil action

Connolly, supra note 38; Cushing, supra note 30; LEGAL INTELLIGENCER, supra note

30.

Connolly, supra note 38; Cushing, supra note 30; LEGAL INTELLIGENCER, supra note

30.

Case No. 1: 13-cv-00175 (N.D. Utah, filed May 5, 2014). See Connolly, supra note

38; Cushing, supra note 30; Legal Intelligencer, supra note 30.

Id.

Connolly, supra note 38; Cushing, supra note 30; Legal Intelligencer, supra note 30.

Id. at §2(d)(1).

Id. at §2(d)(2).

Id. at §2(e)(4).

Id. at §2(d)(2).

Id. at §2(f).

Id. at §2(e)(3).

Id. at §2(e)(1), (6).

Id. at §2(e)(2)(A).

12 / Vol. 50 / Business Law Review

brought by state officials.

In emergency cases, state official may act

without prior notice to the FTC, but must promptly notify the FTC of

the CFRA filing.

Furthermore, state officials are not prevented from

bringing actions under existing state civil and criminal laws.

But

considering the massive size and complexity of the consumer

blogosphere, governmental enforcement is likely to remain focused on

the most egregious examples of speech suppression in the online world.

D. Private Causes of Action

Private causes of actions under the CFRA are not allowed.

Consumers must rely on vigilant federal or state officials to file CFRA

cases on their behalf. However, individual consumers may still bring

other non-CFRA actions under relevant laws.

Therefore, states could

also determine whether or not to permit private actions for

nondisparagement clauses under their state contract and consumer

protection law. For example, California’s Yelp statute allows

individual consumers to bring legal actions regarding

nondisparagement clauses along with state consumer protection

officials.

These actions would not be disturbed under the CFRA.

Although businesses are prohibited from suppressing consumer

reviews, they may still bring breach of contract actions for employee

and independent contractor violations of confidentiality and

proprietary information under state laws. The CFRA does not disrupt

the enforcement of other adhesive contract terms, only excluding the

enforcement of gag provisions that contravene CFRA’s protections.

For fake or fraudulent reviews by consumers or competitors, the CFRA

only states that businesses retain their right to bring legal actions for

defamation (libel or slander) and other similar causes of action.

IV. CONTINUING CHALLENGES FOR SMALL BUSINESS

The underlying reasons for the development and use of these kinds

of gag clauses may go beyond a mere superficial desire to tamp down

negative posts. While the CFRA provides much needed protection to

consumer free speech rights, it does little to aid merchants,

particularly small business owners, from the damaging effects of

Id. at §2(e)(2)(B).

Id. at §2(e)(2)(A)(ii).

Id. at §2(e)(6)(B).

Id. at §2(g).

See supra note 45.

CFRA, at §2(g).

Id.

Id. at §2(b)(2)(B).

2017 / A Glass Half Full? / 13

fraudulent or fake reviews.

Some businesses resorted to these

aggressive tactics for a variety of reasons that remain unaddressed

under the CFRA. There is a need to recognize a more complete picture

of the driving forces behind these types of agreements in order to

effectively deal with the unaddressed business concerns.

First, the CFRA seems to assume that all consumers wish only to

post truthful reviews of their experiences. However, this approach fails

to recognize that competitors may be masquerading as consumers or

paying individuals to post negative reviews about their commercial

rivals. In other instances, devious consumers may use the threat of bad

online reviews to ring unfair concessions out of honest merchants.

With about one-third of all reviews being fake,

100

it is no wonder that

small businesses consider themselves to be the victims of many

consumers and competitors on crowdsourced rating sites.

101

Second, the CFRA envisions that owners of crowd-sourced review

sites will play an active role in monitoring their sites and removing

fake or fraudulent reviews.

102

Yet it is often difficult or costly for a

business to pursue the removal of a false review from a website.

103

Some businesses think that a site’s ineffectual filtering efforts often

delete hard-earned positive reviews while failing to remove inaccurate

or defamatory postings.

104

Other merchants complain that these site

operators have failed to properly police and verify consumer discussion

postings, either through carelessness or deliberate intention.

105

While

still others suspect that review sites actively highlight disapproving

Ponte, supra note 4, at 89.

Id.

100

Kaitlin A. Dohse, Note, Fabricating Feedback: Blurring The Line Between Brand

Management and Bogus Reviews, 13 U.

ILL. J.L. TECH. & POL’Y 363, 385 (2013); David

Streitfeld, The Best Book Reviews Money Can Buy, N.Y.

TIMES, Aug. 26, 2012, at BU1.

101

See Andrea Chang, Tempers flare at Yelp’s town hall for small business owners in L.A.,

L.A.

TIMES (Aug. 21, 2013), http://articles.latimes.com/2013/aug/21/business/la-fi-tn-yelp-

town-hall-reviews-20130820 http://articles.latimes.com/2013/aug/21/business/la-fi-tn-yelp-

town-hall-reviews-20130820; Dave, supra note 2.

102

See supra notes 63-67.

103

Kathleen Richards, Yelp and the Business of Extortion 2.0 (Feb. 18, 2009),

http://www.eastbayexpress.com/oakland/yelp-and-the-business-of-extortion-20/Content?oid=

1176635&showFullText=true; Tuttle, supra note 17.

104

Ponte, supra note 4, at 95.

105

Id. at 96. See, e.g., Demetriades v. Yelp, 228 Cal. App. 4th 294 (2014) (unsuccessful

challenge to Yelp’s advertising claims about its filtering program under unfair

competition and false advertising action); Reit v. Yelp, 907 N.Y.S.2d 411 (N.Y. Sup. Ct.

2010) (action alleging removal of positive reviews and highlighting negative ones to

coerce businesses into advertising on Yelp).

14 / Vol. 50 / Business Law Review

reviews in order to leverage these bad postings to sell more remedial

advertising to impacted businesses.

106

Third, small businesses may lack the time, ability and resources to

effectively monitor social media and to be responsive to truthful online

reviews.

107

With the growing number of cellphone applications for

review sites, consumers can instantly critique a merchant experience

before a business even has a chance to become aware of or seek to

handle a customer’s concerns. The negative review is posted and

efforts to address the matter or improve the outcome may go unnoticed

by other consumers sifting through a mass of website postings. A small

business can be rapidly overwhelmed by the unrelenting daily

demands of social media and the need to comb through and address

legitimate customer concerns.

108

Unlike major corporations, a local

business or professional are unlikely to be able to afford marketing

professionals or reputation management programs to aid them against

the social media onslaught.

109

Lastly, the CFRA does little to expand options for honest merchants

trying to protect their business goodwill. The Act permits businesses

to bring defamation actions to address false customer reviews and to

protect their goodwill.

110

This perspective oversimplifies the complex

challenges of suing for claims of libel and/or slander under the tort of

defamation. Bringing a defamation action can be an expensive and

arduous process. Initially, the merchant must wrangle with the

website through the subpoena process to uncover the identity of the

offending poster. For example, in Yelp, Inc. v. Hadeed Carpet Cleaning,

a carpet cleaning service grew increasingly concerned about a series of

anonymous negative reviews on Yelp.

111

The company was unable to

match up existing customer information with the claimed service

dates. The cleaning service had to first win a legal dispute with Yelp

over subpoenaing reviewer identities which had promised anonymity

to Yelp reviewers.

112

Only after spending time and money on

unmasking its detractors was the company then able to bring a

defamation lawsuit.

106

Id. at 97-98. See, e.g., Levitt v. Yelp, 765 F.3d 1123 (9th Cir. 2014) (court rejected

alleged extortion claim based on assertions of review manipulation and efforts to sell

ameliorative advertising, but left open other possible causes of action).

107

Dave, supra note 2.

108

Dave, supra note 2; Dohse, supra note 3, at 372-73; Short, supra note 3, at 452.

109

Ponte, supra note 4, at 88-89. See Chang, supra note 101; Dave, supra note 2.

110

See Dohse, supra note 3, at 381-82; LEGAL INTELLIGENCER, supra note 30, at 10, 11.

111

Yelp, Inc. v. Hadeed Carpet Cleaning, Inc., 752 S.E.2d 554, 557 (Va. Ct. App. 2014).

112

See e.g., Doe v. Individuals, 561 F. Supp. 2d 249, 253-56 (denies motion to quash

subpoena to unmask anonymous posters as plaintiffs made our prima facie case of libel

and First Amendment rights to anonymity not absolute).

2017 / A Glass Half Full? / 15

But defamation is difficult to prove and collecting any damages

awarded may be problematic, even if the merchant is successful.

113

Most small businesses do not have either the access or ability to pay

for legal assistance to tread this likely long and costly path.

114

A good

example of this legal quandary is Dietz Dev., LLC v. Perez.

115

In that

case, Dietz, a residential contractor sued a customer, Jane Perez, for

defamation claim regarding a scathing online review of the contractor’s

services and conduct.

116

Perez’s review stated that she was billed for

uncompleted services and that the contractor had trespassed on her

property. She further insinuated that the contractor had stolen jewelry

from her home.

117

Dietz responded online claiming that Perez had

actually stolen from him by refusing to pay what she owed on the

renovation project.

118

Subsequently, he filed a defamation action

against Perez for $300,000 in business losses and $750,000 in

damages.

119

After a costly and time-consuming legal battle, a jury

determined that both plaintiff and defendant had defamed each other

online. No damages were awarded to either Deitz or Perez.

120

Although defamation is an avenue for redress, its problematic outcome

makes it difficult for merchants, especially small businesses, to see this

approach as a viable option.

113

Matt Kellogg & Simon Frankel, Trends in Defamation Cases Involving Online Reviews,

LAW360 (Nov. 27, 2013, 5:55 PM), http://www.law360.com/articles/490334/trends-in-

defamation-cases-involving-online-reviews; Lee, supra note 29, at 583; Lyrissa Barnett

Lidsky, Silencing John Doe: Defamation & Discourse in Cyberspace, 49 DUKE L.J. 855, 872-

76 (2000); D

ANIEL J. SOLOVE, THE FUTURE OF REPUTATION: GOSSIP, RUMOR, AND PRIVACY ON

THE

INTERNET 118 (2007); Joanna Schorr, Note: Malicious Content On The Internet:

Narrowing Immunity under the Communications Decency Act, 87 S

T. JOHN'S L. REV. 733, 737-

38, 751-52 (2013).

114

Ponte, supra note 4, at 77. See RESTATEMENT (SECOND) OF TORTS § 558.

115

Case No. 2012-16249 (Fairfax Co., Va. Cir. Ct., filed Dec. 7, 2012).

116

Justin Jouvenal, Fairfax jury declares a draw in closely watched case over ‘Yelp’ reviews,

THE WASH. POST, Feb. 1, 2014, http://www.washingtonpost.com/local/in-closely-watched-yelp-

case-jury-finds-dual-victory/2014/01/31/2d174580-8ae5-11e3-a5bd-844629433ba3_story.html;

Justin Jouvenal, In Yelp suit, free speech on Web vs. reputations, THE WASH. POST, DEC. 4, 2012,

http://www.washingtonpost.com/local/crime/2012/12/04/1cdfa582-3978-11e2-a263-f0ebffed2f15_

story.html; Aditi Mukherji, Yelp Defamation Lawsuit Ends in a Draw, FINDLAW (Feb. 3, 2014

11:54 AM), http://blogs.findlaw.com/free_enterprise/2014/02/yelp-defamation-lawsuit-ends-in-a-

draw.html.

117

See supra note 116.

118

See supra note 116.

119

Jouvenal, supra note 116.

120

See supra note 116.

16 / Vol. 50 / Business Law Review

V. PROPOSING A NEW WAY FORWARD FOR VICTIMIZED

BUSINESSES

Under both the California law and the CFRA, the operators of

crowd-sourced review sites are now the primary gatekeepers for what

does and does not appear online. It makes sense to focus on self-

regulatory measures to help balance the voices of consumers with the

legitimate concerns of beleaguered businesses.

121

Mutual cooperation

will be needed to decrease competitive tensions and simmering

mistrust between businesses and crowd-sourced review websites.

122

These proposals are aimed at decreasing costly and time-consuming

lawsuits over reviews while improving the online experience for

consumers and businesses alike.

123

A. Improve Enforcement of Site’s Terms of Use

While the CFRA properly moves to protect online truthful consumer

opinions, it is vital for crowd-sourced review sites to do a better job of

policing and handling fake and false reviews by consumers and

competitors.

124

Most review sites terms of use already prohibit users

from posting bogus or defamatory reviews.

125

Based on anecdotal

business stories and the language in business legal complaints, it

appears that some sites are quite apathetic about enforcing their own

126

Improved enforcement of these site’s existing terms

will help alleviate some of the business concerns about illegitimate

reviews. In addition, websites can improve their own reputations with

users by rooting out false or bogus reviews that detract from the site’s

overall benefits to consumers seeking helpful information about

products and services.

There are a number of ways to approach this issue. First, a site can

seek to verify actual consumer use of the product or service before

121

Ponte, supra note 4, at 144-49. See also, Lucille M. Ponte, Mad Men Posing as

Ordinary Consumers: The Essential Role of Self-Regulation and Industry Ethics in

Decreasing Deceptive Online Consumer Ratings and Reviews, Fourth Annual Intellectual

Property Symposium, IP Rights, Ownership and Identity in Social Media, 12 J.

MARSHALL REV. OF INTELL. PROP. L. 462, 503-04 (2013).

122

Justin Malbon, Taking Fake Online Consumers Seriously, 36 J. CONSUM. POL’Y 139,

140, 151 (2013).

123

Ponte, supra note 4, at 144-49; Ponte, supra note 121, at 505. See Ellen P.

Goodman, Stealth Marketing and Editorial Integrity, 85 T

EX. L. REV. 83, 140-41 (2006).

124

Dohse, supra note 3, at 389–390.

125

Dohse, supra note 3, at 389.

126

Short, supra note 3, at 452–53.

2017 / A Glass Half Full? / 17

allowing the post to appear online.

127

Sites like Angie’s List

128

and

Expedia

129

tout the fact that there reviews have been verified before

they are posted to provide consumers with real opinions about

consumer experiences and preventing businesses from reviewing

themselves or their competitors.

130

Alternatively, Amazon.com allows

consumers to post, but clearly identifies verified purchaser reviews on

its discussion boards for customer consideration.

131

Secondly, sites could decide to ban users who have been found to

consistently post false or defamatory materials about businesses.

132

This method is borrowed from the “three strikes” approach applied by

some sites hosting user-generated content to persistent copyright

infringers in order to avoid secondary copyright infringement liability

under the safe harbor provisions of the Digital Millennium Copyright

Act.

133

A review site could also tamp down bogus reviews through

limits on the number of reviews a consumer may post about the same

business

134

and adopt reasonable waiting periods between the initial

review and any follow-up update.

135

Lastly, review sites have the technological tools to crack down on

individual users and reputation management companies that

consistently post fake reviews either in favor of their clients or against

competitors. To uphold their own terms of service, the use of filtering

technologies can help sniff out these bad actors through various data

points, text patterns and IP addresses.

136

It is estimated that well-

designed filtering algorithms can effectively detect about ninety

percent of fake reviews.

137

Once identified, these users and companies

127

Dohse, supra note 3, at 389; Ponte, supra note 121, at 503-04; Short, supra note 3,

at 467, 470–71.

128

Angie’s List, How it works, https://www.angieslist.com/how-it-works.htm.

129

Press Release, Expedia.com, Expedia Overhauls Hotel Reviews, Consumers Can

Now Sort Verified Reviews by Shared Interest (Mar. 8, 2012),

https://viewfinder.expedia.com/ news/expedia-overhauls-hotel-reviews-consumers-can-

now-sort-verified-reviews-by-shared-interest/.

130

Dohse, supra note 3, at 389; Short, supra note 3, at 467, 470–71. See supra note

129.

131

Verified Purchase Reviews, Amazon.com, http://www.amazon.com/gp/community-

help/amazon-verified-purchase, archived at https://perma.cc/87WQ-PVU3?.

132

Ponte, supra note 4, at 142.

133

17 U.S. CODE § 512 (d) (2017). See id. at 123.

134

Dohse, supra note 3, at 389–90.

135

Dohse, supra note 3, at 379.

136

See, e.g., TripAdvisor Content Integrity Policy, https://tripadvisor.mediaroom.com/us-

content-integrity-policy; Angie’s List, How it works, https://www.angieslist.com/how-it-

works.htm. See also, CDT Complaint, supra note 53, at 8 (consistent use of same IP addresses

often leads back to same sender of bogus reviews).

137

Ott, et al, supra note 13, at 309, 316.

18 / Vol. 50 / Business Law Review

can have their access blocked and their postings removed. Yelp and

Edmunds.com have brought legal actions against companies engaging

in these deceptive and fraudulent activities.

138

B. Provide Litigation Alternatives to Disputed Reviews

As previously noted, litigation seldom benefits any of the

stakeholders in online review situations. This it seems logical for

review sites to provide mechanisms that enhance the accuracy of their

postings without simply giving in to business demands for removal of

reviews. Sites should adopt easy ways for businesses to flag suspicious

postings and provide appropriate staffing to review and make

appropriate determinations about inaccurate or fake reviews.

139

If a

review is inaccurate or fake, a site should not charge fees for prompt

removal of the offending evaluation.

140

Currently, a number of review

sites permit merchants to directly respond to consumer postings online

which can facilitate dialogue between the consumer and the business,

and those sites that do not offer this option should do so.

141

In addition, review sites could offer online dispute resolution options

for their users and businesses over the potential removal of negative

feedback.

142

Review sites could create their own dispute resolution

program or reach out to organizations, such as the Better Business

Bureau,

143

to administer their programs. The sites could initially

employ automated complaint programs that allow either party to

initiate an online dialogue with the other party.

144

If the parties are

unable to reach an agreement, then online mediators or arbitrators

could try to facilitate a resolution of the matter between the consumer

and the business through e-mail, teleconference, or in person if both

parties are in the same community. These dispute resolution programs

could be focused narrowly on resolving disputed reviews or branch out

to deal more broadly with the consumer-merchant problem that led to

the contested review.

138

Dave, supra note 2.

139

Russell, et al., supra note 15.

140

See Dohse, supra note 3, at 374–75; Short, supra note 3, at 470.

141

See, e.g., Chang, supra note 153; Dohse, supra note 3, at 391.

142

Ponte, supra note 121, at 505. See eBay, Can I get Feedback changed or removed?,

http://pages.ebay.com/help/feedback/questions/remove.html.

143

Better Business Bureau, Dispute Resolution Processes and Guides,

http://www.bbb.org/bbb-dispute-handling-and-resolution/dispute-resolution-rules-and-

brochures/dispute-resolution-processes-and-guides/.

144

See eBay Resolution Center, http://resolutioncenter.ebay.com/.

2017 / A Glass Half Full? / 19

C. Establish Best Practices for Review Sites

Review sites have matured to a point where it may be time for the

establishment of best practices to guide their conduct. These best

practices could address accepted norms around broad-based content

integrity standards that both protect truthful consumer expression as

well as respect the concerns of honest merchants. These best practices

could include the bases for review, rejection and removal of consumer

evaluations, approaches to handling persistent offenders of site terms

of use, appropriate uses of filtering systems, and effective options for

business dialogue with unhappy consumers. It would also be

important to address conflicts of interest issues for sites that write or

promote influential reviewers as well as sell advertising or charge for

review removal fees to those businesses being reviewed.

145

The best practices could also address better education programs for

both consumers and businesses about their content guidelines. Review

sites or their industry organizations could develop FAQs pages and/or

video tutorials about appropriate feedback rules, the bases for deleting

or removing postings, and the importance of truthful opinion speech by

both consumers and businesses participating on review sites.

146

CONCLUSION

The CFRA has provided important protections to consumers offering

their opinions about products and services online. The Act voids

aggressive contracts of adhesion that seek to impinge upon consumer

speech through improper intellectual property claims, excessive

liquidated damages clauses, and other privacy and financial

contractual risks meant to stifle negative reviews. However, aside

from not blocking defamation actions, the Act did not help businesses

bedeviled by unfair consumer and competitor reviews. The Act did not

fully address the underlying concerns that led some businesses to take

these drastic steps.

At this point in time, it makes sense that review sites step up and

try to help support a more equitable balance between consumers and

businesses. It benefits all of the stakeholders for review sites to

improve the accuracy and integrity of their review content complaints

and to reduce the number of bogus or false online reviews. Sites can

ameliorate the impact on businesses from faked reviews by better

enforcing their own terms of use, providing dispute resolution options

for contested reviews, and establishing sensible best practices to guide

their industry.

145

Chang, supra note 153; Ponte, supra note 4, at 145-46. See supra notes 121-26.

146

See Dohse, supra note 3, at 389–90.

20 / Vol. 50 / Business Law Review

PUBLIC TOES IN PRIVATE SAND: PUBLIC

PRESCRIPTIVE EASEMENTS AND HOW THE

PRESUMPTION OF PERMISSION SUPPORTS

TOURISM AND RECREATION ON MAINE BEACHES

by Margaret T. Campbell*

“A silent possession accompanied by no act which can amount to an

ouster or give notice to the cotenant that his possession is adverse,

ought not, we think to be construed into an adverse possession.” Chief

Justice John Marshall, McClung v. Ross, 18 U.S. 116, 5 L. Ed. 46

(1820).

I. INTRODUCTION

This article will explore the cases whereby the public has sought to

establish prescriptive easements to coastal beaches in Maine, and the

impact which the encouragement of tourism commerce has had on this

issue. The first part will introduce the unique historical laws

pertaining to tidal land in Maine, under which many landowners hold

title to the “low tide mark.” Thus, these landowners are in a position to

block public access to many beaches. The second part of this article will

examine the traditional presumption in Maine under which public use

of private land is considered to be permissive, thus making it difficult

for the public to establish prescriptive easements. It will then consider

recent litigation in which various groups have attempted to obtain

public prescriptive easements to beaches, concluding in 2016 with

Cedar Beach/Cedar Island Supporters, Inc. v. Gables Real Estate LLC

* Assistant Professor, School of Legal Studies, Husson University.

Cedar Beach/Cedar Island Supporters, Inc. v. Gables Real Estate LLC (Cedar

Beach), 2016 ME 114, 145 A.3d 1024.

22 / Vol. 50 / Business Law Review

decided by the Maine Supreme Judicial Court. There the court

affirmed the efficacy of the traditional presumption of prescriptive use

when the public accesses private land for recreational uses. The

reasoning in that case recognizes the importance of access for the

enjoyment of these lands by the general public, as well as those

attracted by Maine’s tourism industry.

II. HISTORICAL TITLE TO TIDAL LAND IN MAINE

A. Land Below the “High Tide Mark”

In many states, coastal parcels are described as being bounded by

the “high tide mark”

and with respect to those states, the United

States Supreme Court has “established thus far that the private title

of littoral landowners remains subject to the public trust beneath the

ordinary high water mark.”

As a result of its unique history as part of

the Massachusetts Colony, the coastal land in Maine has a different

history.

However, while Massachusetts was still a colony, littoral (or upland

property owners) were granted title to the “low tide mark” pursuant to

the Colonial Ordinance of 1641:

Every Inhabitant that is an howse holder shall have free fishing and

fowling in any great ponds and Bayes, Coves and Rivers, so farre as

the sea ebbes and flowes within the presincts of the towne where they

dwell, unlesse the free men of the same Towne or the Generall Court

have otherwise appropriated them, provided that this shall not be

extended to give leave to any man to come upon others proprietie

without there (sic) leave.

The rationale for this ordinance was to provide “private ownership

of intertidal lands to promote commerce by encouraging the

construction of wharves at private expense.”

This purpose was further

described by the Massachusetts Supreme Judicial Court:

When our ancestors emigrated to this country, their first settlements

were on harbors or arms of the sea; and commerce was among the

earliest objects of their attention. For the purposes of commerce,

wharves erected below high water mark were necessary. But the

“The soils under tidewaters within the original states were reserved to them

respectively, and the states since admitted to the Union have the same sovereignty and

jurisdiction in relation to such lands within their borders as the original states

possessed.” (citations omitted). Borax Consol. v. City of Los Angeles, 296 U.S. 10, 15, 56

S. Ct. 23, 26, 80 L. Ed. 9 (1935).

Glass v. Goeckel, 703 N.W. 2d 58, 73 (Mich. 2005).

Margaret T. Campbell, The Business of Beaches: Public Access to Beaches on Private

Coastal Property, 48 B

US. L. REV. 11 (Spring 2015).

Massachusetts Body of Liberties § 16 (December 10, 1641).

McGarvey v. Whittredge, 2011 ME 97, ¶ 27, 28 A.3d 620, 629.

2017 / Public Toes in the Sand / 23

colony was not able to build them at the public expense. To induce

persons to erect them, the common law of England was altered by an

ordinance, providing that the proprietor of land adjoining on the sea

or salt water, shall hold to low water mark, where the tide does not

ebb more than one hundred rods, but not more where the tide ebbs to

a greater distance.

Massachusetts Courts have consistently upheld this grant, and have

ruled that “The Massachusetts Colony Charter conveyed to the

grantees all public and private rights in the seashore between high and

low water mark.”

After Maine became a separate state, its courts

continued to recognize that “The colonial ordinance of 1641, extending

the title of riparian proprietors to low-water mark, though originally

limited to the Plymouth colony, is part of the common law of Maine;

and is applicable wherever the tide ebbs and flows, though it be fresh

water, thrown back by the influx of the sea.”

Recently, the Maine Supreme Judicial Court summarized the

historical title to intertidal lands:

The historical development of the fee simple private ownership of

intertidal lands has been much discussed in our jurisprudence. Key to

private ownership of intertidal lands in Maine and Massachusetts was

the enactment of the Massachusetts Bay Colony's Colonial Ordinance

of 1641–47. Specifically, the upland owner's property right in the

intertidal zone was articulated in the Colonial Ordinance of 1647. See

The Book of the General Lauus and Libertyes Concerning the

Inhabitants of the Massachusetts (1648), reprinted in The Laws and

Liberties of Massachusetts 35 (1929) (“[T]he Proprietor of the land

adjoyning shall have proprietie to the low water mark where the Sea

doth not ebb above a hundred rods, and not more wheresoever it ebbs

farther.”).

In Maine, the rights of the public are dependent upon “which of the

three zones of property that lead into the ocean is being used—the

submerged land below the mean low-water mark; the wet sand of the

intertidal zone, which is the shore and flats between the mean high-

and low-water marks, but not exceeding 100 rods; and the dry upland

sand.”

It has been well established that “The State of Maine owns

the submerged land below the mean low-water mark and holds that

land in trust for public uses”

and that “[o]n the dry upland side, the

upland owner holds the fee title to the property above the mean high-

water mark. When oceanfront property includes dry sand, the upland

Storer v. Freeman, 6 Mass. 435, 438 (1810).

Commonwealth v. City of Roxbury, 75 Mass. 451, 451 (1857).

Lapish v. President, etc., of Bangor Bank, 8 Me. 85, 85 (1831).

McGarvey v. Whittredge, 2011 ME 97, 28 A.3d 620. (citations omitted).

Id. (citing Britton v. Donnell (Britton II), 2011 ME 16, ¶ 6, 12 A.3d 39, 42.).

Id.

24 / Vol. 50 / Business Law Review

owner, in Maine, owns the dry sand portion of the beach in fee.”

Most

litigation has focused either upon the third “wet sand” zone (or

intertidal zone) or upon dry land road access.

Thus, the upland property owners have title to the intertidal land

unless they have lost their title through one of the recognized methods

of conveyance: eminent domain, adverse possession or prescriptive

easement.

This grant of land in the intertidal zone was initially

intended to aid in commerce, and such an inducement granted to a

predecessor in title cannot be taken from a subsequent owner without

just compensation.

B. Property Rights as a “Bundle of Sticks”

Despite the fact that the conveyance of land was originally

evidenced by a ceremony which included the symbolic act of placing a

clump of dirt in the hand of the new owner,

property ownership is

more akin to holding a bundle of sticks (or rights) than it is to holding

a clump of dirt.

That bundle of “sticks” may include a great many

rights including possession and the right to convey; however there will

always be some rights which are held by others such as those held by

the government which allow it to place zoning and land use restrictions

on property.

Other limitations on property use include those “sticks,

or rights, acquired by individuals either through purchase or adverse

possession.

As discussed previously, title to the intertidal zone was originally

granted to the upland owners subject to the “sticks” which were

retained by the public for fishing, fowling and navigation.

Recent

Id.

“Under the common law, the land of the intertidal zone belongs to the owner of the

adjacent upland property, subject to certain public rights. Bell II, 557 A.2d at 173;

Matthews v. Treat, 75 Me. 594, 598 (1884); Duncan v. Sylvester, 24 Me. 482, 486 (1844).

The ownership of the intertidal zone is “as land and not a mere easement.” Donnell, 85

Me. at 119, 26 A. at 1018. Ownership of the intertidal zone may be separated by deed

from ownership of the adjacent upland. Dunton v. Parker, 97 Me. 461, 467, 54 A. 1115,

1118 (1903). The submerged land below the low-water mark is owned by the State, which

has the authority, pursuant to 12 M.R.S. § 1862(2)(A)(6), to lease it. See Britton I, 2009

ME 60, ¶¶ 2, 10 n. 5, 974 A.2d at 305, 307.” Britton v. Donnell, 2011 ME 16, ¶ 7, 12 A.3d

39, 42.

McGarvey, 28 A.3

at 638.

2 FREDERICK POLLOCK & FREDERIC WILLIAM MAITLAND, THE HISTORY OF ENGLISH

LAW, 51 - 55 (2d ed. 1898).

Id.

Supra note 5.

2017 / Public Toes in the Sand / 25

efforts to expand upon those rights have focused on attempts to

establish public rights by adverse possession, claiming that years of

public use of the intertidal zone have resulted in the acquisition of

additional public rights.

Although “the law disfavors the transfer of land

by adverse possession,”

clear guidelines have been established for

such claims and “[t]itle by adverse possession may be established

either pursuant to the common law or statutory provisions.”

While a

claim of adverse possession attempts to obtain title to the land, a claim

of a prescriptive easement is an attempt to establish an easement, or

“right of use over the property of another.”

Similar to the analysis of a claim of adverse possession, a claim of a

prescriptive easement requires that “the party seeking to establish the

easement must prove “(1) continuous use; (2) by people who are not

separable from the public generally; (3) for at least twenty years; (4)

under a claim of right adverse to the owner”; and either “(5) with the

owner’s knowledge and acquiescence; or (6) a use so open, notorious,

visible, and uninterrupted that knowledge and acquiescence will be

presumed.”

This recognizes that such claims by the public are

inherently different from claims by individuals. The next section will

discuss this distinction.

III. PRESUMPTION OF PERMISSION IN PUBLIC USE OF

PRIVATE LAND

A. Maine as “Vacationland” Encouraging Tourism

The Maine tourism industry has set record numbers in recent years,

with Portland, and the southern coastal areas and Bar Harbor leading

this surge.

Coastal areas have always been coveted vacation

destinations, and tourism became a significant economic factor when

wealthy summer visitors began flocking to areas like Bar Harbor in the

1880s.

The value of coastal area resources in attracting tourists has

long been recognized, and many efforts such as the Maine Coastal

Bell v. Town of Wells (Bell I), 510 A.2d 509 (Me. 1986); Bell v. Town of Wells (Bell

II) 557 A.2d 168 (Me. 1989).

Striefel v. Charles-Keyt-Leaman P'ship, 1999 ME 111, ¶ 4, 733 A.2d 984, 988.

Id.

Stickney v. City of Saco, 2001 ME 69, ¶ 31, 770 A.2d 592.

Cedar Beach 145 A.3d at 1027.

J. Craig Anderson, Maine Summer Tourism Revenue on Track to Break all Records,

ORT. PRESS HER., (Oct. 10, 2016), http://www.pressherald.com/2016/10/10/maine-

summer-tourism-revenue-on-track-to-break-all-records/.

THE BAR HARBOR HISTORICAL SOCIETY, https://www.barharborhistorical.org/new/

wordpress/town-history/ (last visited March 25, 2017).

26 / Vol. 50 / Business Law Review

Program have been established to coordinate their management for the

benefit of the public and encourage tourism.

Beach access is essential to coastal tourism, and in an effort to

ensure such access, the Public Trust in Intertidal Land Act was

enacted in 1985.

This Act (parts of which were later found to be

unconstitutional)

provided that “the intertidal lands of the State are

impressed with a public trust and that the State is responsible for

protection of the public's interest in this land.”

It described uses of

the land:

which uses include but are not limited to, fishing, fowling, navigation,

use as a footway between points along the shore and use for

recreational purposes. These recreational uses are among the most

important to the Maine people today who use intertidal land for

relaxation from the pressures of modern society and for enjoyment of

nature's beauty.

While this language is similar to that found in the original Colonial

Ordinance of 1641, it significantly adds “a footway between points

along the shore and use for recreational purposes.”

This legislation

was part of efforts which began in the mid 1980s to establish a public

right of access to Maine’s beaches, and culminated in several

contentious cases before the Maine Supreme Judicial Court. However,

this “establishment of a public easement that exceeds uses within the

scope of fishing, fowling, and navigation is an unconstitutional taking

of private property without just compensation, whether the easement

is created by the Legislature or the judiciary.”

In recognizing that the public has certain rights to “fishing, fowling

and navigation”

in the intertidal lands, and that expansion of this

easement to include recreation would constitute an unconstitutional

taking, it would appear that the public may be blocked from private

beaches. However, there is a tradition of presumed permission in

public access to private land in Maine, which has provided a solution

to the beach access dilemma.

MAINE DEPARTMENT OF AGRICULTURE, CONSERVATION AND FORESTRY, About the

Maine Coastal Program,

http://www.maine.gov/dacf/mcp/about/index.htm (last visited

March 25, 2017).

ME. REV. STAT. ANN. tit. 12 § 571-573.

Bell II, 557 A.2d at 177-179.

Id.

Bell II, 557 A.2d 177-79, 180, See also Opinion of the Justices, 313 N.E.2d 561, 569–

71 (1974) (declaring that proposed legislation creating a footpath along privately-owned

intertidal land would constitute an unconstitutional taking).

Id.

2017 / Public Toes in the Sand / 27

B. Presumption of Permissive Use of Private Land

Maine has extensive undeveloped land and natural resources such

as forests, mountains, lakes, rivers and beaches, including over 5,300

miles of shoreline.

The courts have long recognized that the public

has certain rights to access and use of the ocean, and as the court

recently stated “[a]s was written long ago, ‘It will not be disputed that

the sea, which has been called the ‘Great highway of the world,’ is

common to all.’”

In support of these rights, as well as of various

recreational uses of land, Maine has established a “presumption of

permission” when the public is using “wild and uncultivated land” for

recreational purposes.

The rationale for this presumption is twofold. First, it fulfills the

need for “public recreational use of private property” that is essential

to Maine’s tradition for its residents and tourism industry,

and,

secondly, it “in no way diminishes, the rights of the owner in his

land.”

This presumption of permission “serves an important societal

purpose in that it allows for greater access to Maine's renowned

natural features by permitting landowners to rely on the presumption

of permission to protect their ownership interests, rather than

encouraging them to take steps to restrict recreational use of their

lands.”

IV. RECENT LITIGATION IS COUNTERPRODUCTIVE

Tensions between beach owners and the public have always existed,

however, the Bell I and Bell II cases from the 1980s are generally

viewed as the starting salvo in the legal war pitting private beach front

owners against a public seeking “all access” to what they view as public

natural resources.

Although at first blush these litigation efforts

appear to be laudable, they have actually caused an escalation in the

animosity between beach owners and the public, with the owners

viewing these efforts as a hostile taking of property rights for which

they have paid dearly through high purchase prices and property

taxes.

MAINE DEPARTMENT OF AGRICULTURE, supra note 19.

McGarvey v. Whittredge, 2011 ME 97, ¶ 12, 28 A.3d 620, 625, (citing Blundell v.

Catterall, 106 Eng. Rep. 1190, 1194 (1821) (Opinion of Best, J.)).

Lyons v. Baptist Sch. of Christian Training, 2002 ME 137, ¶ 36, 804 A.2d 364, 375.

Id.

Id., citing Town of Manchester v. Augusta Country Club, 477 A.2d 1124 at 1130

(Me.1984).

Cedar Beach 145 A.3d at 1028.

Bell I, 510 A.2d 509; Bell II 557 A.2d 168.

MAINE'S WATERFRONT REAL ESTATE NEWS, http://maineswaterfront.blogspot.com/

28 / Vol. 50 / Business Law Review

Recent litigation to establish public prescriptive easements over

private land has become contentious, with many posturing it as being

between wealthy people “from away” whose “acquisition of oceanfront

land has eroded the access rights of working families.”

Public

reactions to the Maine courts blocking efforts to acquire public

easements has been strong, with many expressing sadness and

outrage.

Many groups have been formed to support ongoing efforts

to establish public access, including “Preserve Goose Rocks

Beach”

and “Save Cedar Beach” Facebook pages.

Supporters of litigation to assert a public right of access over private

land to beaches are convinced that if courts grant such access it will be

beneficial to the public. It may be counterintuitive, but such efforts

have resulted in a reduction in public access. Since the Bell I and Bell

II litigation began in the 1980s, the public has argued that “the public

has been walking in the intertidal zone in Maine as long as anybody

can remember, and that they did so up until recently without

objection.”

However, it was not until this litigation started that the

landowners had any need to object. Maine law has allowed landowners

to feel secure in not objecting to public recreational use of land and “[t]o

promote and continue Maine's tradition of presumptive landowner

permission for public access for recreational uses of open fields and

woodlands, the legislature has adopted limitations on landowner

liability for injuries to the public that may occur in the course of such

recreational uses.”

Such long-standing legal support has encouraged

private landowners to allow access to the public, and that “beachfront

owners who objected in the past were seen as eccentrics.”

Increased

efforts by public groups to litigate prescriptive easements may well

increase the number of landowners who feel the need to object, even

though they may be viewed as “eccentrics.” Thus, this litigation may

have the opposite of the intended effect, with more landowners closing

their property to the public.

(last visited March 25, 2017).

Maine Supreme Court overturns ruling that gave public access to Bailey Island beach,

ORT. PRESS HER., (Jul. 19, 20160, http://www.pressherald.com/2016/07/19/maine-supreme-

judicial-court-vacates-ruling-on-bailey-island-beach-access/.

Id.

FACEBOOK, Preserve Goose Rocks Beach, https://www.facebook.com/groups/

172580274889/ (last visited March 25, 2017).

FACEBOOK, Save Cedar Beach – Maine, https://www.facebook.com/search/top/

?q=Save%20Cedar%20Beach%20Maine (last visited March 25, 2017).

Id.

Lyons 804 A.2d at 372, citing 14 M.R.S.A. § 159–A.

See supra note 19.

2017 / Public Toes in the Sand / 29

The effects of this reduction in public access to coastal land could

have negative effects upon tourism as the “Maine Beaches region

continues to be the State’s main draw during the summer season, with

25% of overnight visitors and 39% of day visitors listing this region as

their primary destination in Maine.”

Tourism in Maine is a

substantial aspect of its economy, and accounting for a record $5.65

billion in 2015.

It is well established that “[a]ccess to the shore is

vital to all of Maine's coastal communities, whether for commercial

fishing, water-dependent businesses or for tourism and recreation.”

Other recreation industries also recognize the impact of litigation

that could encourage landowners to close their property to public

recreation use. Coastal landowners have received support in their

defense against public prescriptive easements from organizations

representing users of the 14,500 miles of snowmobile trails and

forests.

As Bob Meyers, Executive Director of the Maine Snowmobile

Association, stated, “Landowners in Maine are incredibly generous,

and we do have this great tradition of access to private land for

recreation,”

A. Moody Beach Cases

In the 1980s two landmark cases, Bell I and Bell II, involving

disputes to the intertidal zone at “Moody Beach” in Wells, Maine

were brought by landowners against the Town of Wells. In this

litigation, the landowners sought an injunction limiting the use of the

beach by the public.

The court recognized changes in the uses to

which the modern public puts beaches,

but firmly reiterated that

“[l]ong and firmly established rules of property law dictate that the

plaintiff oceanfront owners at Moody Beach hold title in fee to the

intertidal land subject to an easement, to be broadly construed,

permitting public use only for fishing, fowling, and navigation

MAINE OFFICE OF TOURISM, Visitor Summer Tourism Tracking Summer 2016,

https://visitmaine.com/assets/downloads/2016_Summer_Topline_Report.pdf.

Maine tourism spending in 2015 topped $5.65 billion, a record, PORT PRESS HER.,

(Mar. 22, 2016), http://www.pressherald.com/2016/03/22/tourism-spending-in-2015-

topped-5-6-billion/.

See supra note 19.

Kevin Miller, Maine high court ruling on land access sends out tremors, PORT.

PRESS HER., (Feb. 9, 2014), http://www.pressherald.com/2014/02/09/ruling_on_

land_access_sends_out_tremors_/.

Id.

Bell I, 510 A.2d 509; Bell II, 557 A.2d 168.

Id.

30 / Vol. 50 / Business Law Review

(whether for recreation or business) and any other uses reasonably

incidental or related thereto.”

In reaffirming that the public has only those limited rights to the

intertidal land, the court firmly stated that “[e]ver since the 1810

decision in Storer v. Freeman, as well as long before, the law on this

point has been considered as perfectly at rest; and we do not feel

ourselves at liberty to discuss it as an open question.”

Despite the

fact that the court indicated that the law is “perfectly at rest,”

substantial litigation has ensued in efforts to expand upon public

rights.

In addition to reaffirming the limited public rights to the intertidal

land, the court clarified that establishing public rights by custom and

prescription are also limited.

It stated that the statutory provision

allowing for acquisition of rights-of-way and easements by adverse

possession

also included “the acquisition of easements by ‘custom, use

or otherwise . . . merely [as] a legislative exercise in overabundant

caution.”

The court went on to state that “[t]here is a serious question

whether application of the local custom doctrine to conditions

prevailing in Maine near the end of the 20th century is necessarily

consistent with the desired stability and certainty of real estate

titles.”

Thus, the court recognized the importance of “certainty” in

real estate titles with respect to the marketability of such property.

It was allowances for language suggesting that the uses were to be

“broadly construed”

which encouraged subsequent litigation, and

attempted to establish some public uses beyond the historical “fishing,

fowling and navigation.”

The court recognized that extending the

public uses of beaches to include modern recreational uses would

“result in a much greater burden upon the fee owner.”

The court was

reluctant to establish a public recreational easement, and stated that:

[w]e can find no principled basis for allowing bathing, sunbathing, and

walking on privately owned intertidal land, and not allowing picnics

and frisbee-throwing and the many other activities people regularly

engage in on the beach. But there is no basis in law or history for

declaring a public easement for general recreation. That would turn

Id. at 169.

Id. at 171 (emphasis in original).

Id.

ME. REV. STAT. tit. 14, § 812.

Bell II, 557 A.2d 168.

Id.

Id. at 169.

See supra note 5.

Bell II, 557 A.2d 168.

2017 / Public Toes in the Sand / 31

the intertidal zone of Moody Beach into a public recreational area

indistinguishable from the adjacent Ogunquit Beach, which the

Village of Ogunquit acquired in its entirety by eminent domain.

Many articles have championed the efforts of the groups in the Bell

I and Bell II cases,

however, little consideration has been given to the

potential fallout of a decision allowing the public to acquire a

prescriptive easement over private property based on public usage over

a term of years. Based on Maine’s historical and statutory predilection

to encourage private owners to allow the general public to access their

property for a variety of recreational uses,

landowners were

encouraged to allow free access, without concern about losing their

property rights. Thus, large landowners, such as the owners of vast

timberlands as well as lake and coastal landowners, were secure in not

posting or closing their land to public use. Any eroding of this principle

would, by necessity, require these landowners to close their land to

public use, or risk losing their property rights. If a landowner has

record title

and has purchased property rights for full market value,

it is unconstitutional to take those property rights from them without

compensation.

While the Maine Supreme Judicial Court affirmed landowners’

property rights, it also ignited a firestorm between the public and

landowners, with many of the public calling for “coastal justice.”

Relations between landowners and the public have changed since that

decision for several reasons, including the public perception that they

lost something to which they felt entitled,

rising property and

taxation values,

as well as increases in the number of visitors to

Id. at 176.

Bell I, 510 A.2d 509; Bell II, 557 A.2d 168; see also Bill Trotter, Judge to Rule on Dispute over

Access to Gouldsboro Beach, P

ORT. PRESS HER.,(Aug. 12, 2015), Seth Koenig, Maine’s High Court

Revisits Nearly 370-year-old Question of Public Access to Private Beaches, B

ANGOR DAILY NEWS

(Apr. 9, 2014). shttp://bangordailynews.com/2015/08/12/news/hancock/judge-to-rule-on-

dispute-over-access-to-gouldsboro-beach/, http://bangordailynews.com/2014/04/09/news/

portland/maines-high-court-revisits-nearly-370-year-old-question-of-public-access-to-private-beaches/

“We have long recognized the rebuttable presumption that public recreational uses

are undertaken with the permission of the landowner.” Almeder v. Town of

Kennebunkport, 2014 ME 139, ¶ 29, 106 A.3d 1099, 1111–12, as corrected (Apr. 16, 2015).

Maine State Bar Association Standards of Title (2016), See generally Paul G.

Creatu, M

AINE SUPPLEMENT TO PRINCIPLES OF REAL ESTATE LAW 12–6 (1978).

U.S. CONST. amend. V.

Chris Chase, Maine’s high court hears arguments in beach access case in Harpswell,

PORT. PRESS HER., (Apr. 11, 2015), http://www.pressherald.com/2015/11/04/maines-

high-court-hears-arguments-in-beach-access-case-in-harpswell/.

Id.

MAINE'S WATERFRONT REAL ESTATE NEWS, supra note 44.

32 / Vol. 50 / Business Law Review

Maine beaches.

Beach owners have reported an increase in the

disrespectful use of their properties such as loud parties and littering,

which may be the result of a combination of the public reaction to the

court’s blocking efforts to establish public access,

and the general

increase of beach usage.

While much of the historic public usage

described in litigation has been essentially by “locals,”

increasing

numbers of those “from away”

are now seeking access to these private

beaches. As a result, landowners are more inclined to block public

access

, and the public is more inclined to force public access.

The

fact that rising property values have resulted in much coastal property

being purchased by non-Maine residents, and thus many of these

battles pit locals against people “from away.”

The court later expanded the permitted uses to include scuba

divers,

but most other efforts to expand the public use have met with

resistance.

Many of the subsequent cases have focused on efforts to

establish prescriptive easements, as opposed to expanding on the

definition of the established “fishing, fowling and navigation” rights.

B. Eaton v. Wells

The next major case before the Maine courts was Eaton v. Wells

which the court explored whether continuous maintenance by the town

of a beach, contrary to the wishes of the landowners, was sufficient to

establish a prescriptive easement by the town (and thus for use by the

MAINE OFFICE OF TOURISM supra note 52.

Brief of Appellants at 7, Cedar Beach/Cedar Island Supporters, Inc. et al. v. Gabels

Real Estate LLC, et al., 2015 WL 12746156 (Me.).

See generally supra notes 48, 49 and 55.

Id.

“’Just because a cat has her kittens in the oven don't make them biscuits’. This odd

little analogy heard throughout Vermont and Maine emphasizes the value they place on

native status. If you were born in New England, but your parents are originally from

out-of-state, you can fuhggedabout claiming to be a true New Englander. Harsh. One

might also say someone is ‘from away,’ indicating he isn't a native of Maine” Melia

Robinson, 13 Sayings Only People From New England Can Understand,

http://finance.yahoo.com/news/13-sayings-only-people-england-150500033.html.

“From Away adj., People who are not native Mainah's.” THE WICKED GOOD GUIDE

MAINAH ENGLISH, http://webpages.charter.net/lorilady/glossary.html.

Cedar Beach, .185 A.3d 1024.

Id.

See generally supra notes 48, 49 and 55.

See supra note 6.

SURFRIDER FOUNDATION, Maine High Court Ruling,(Aug. 25, 2011),

http://www.surfrider.org/coastal-blog/entry/maine-high-court-ruling-scuba-diving-6-

exclusive-intertidal-zone-0

See generally supra notes 48, 49 and 55.

Eaton v. Town of Wells, 2000 ME 176, 760 A.2d 232.

2017 / Public Toes in the Sand / 33

public).

In that case, the court began with an extensive discussion of

the historical title to the property and found that “the court did not err

in its interpretation of the deeds and its conclusion that they conveyed

the subject premises.”

The court then stated that the elements of an

adverse possession or a prescriptive easement as set forth by the court

were that “[t]he party seeking title by adverse possession must prove

by a preponderance of the evidence ‘possession for a 20–year period

that is actual, open, visible, notorious, hostile, under a claim of right,

continuous, and exclusive.’”

In evaluating this claim, the court found

that “[t]he claim of right must be an ‘intent to claim the land as [its]

own, and not in recognition of or subordination to [the] record title

owner.’ ”

While adverse use through beach maintenance was

established, the town had acknowledged the landowners’ record

interest so the town’s claim of right to the fee was negated.

This

reasoning follows that of most Maine cases, where it is required that

the adverse possessor must prove “use and enjoyment of the property .

. . in kind and degree as the use and enjoyment to be expected of the

average owner of such property.”

Thus, the adverse possessor must

show that they used the land as an owner would use that type of

property (such as the maintenance of a road), not just that they

accessed the property.

C. Lyons v. Baptist School of Christian Training

The 2002 case of Lyons v. Baptist Sch. of Christian Training

further established the “adversity necessary to establish a public,

prescriptive easement.”

In that case, neighbors had attempted to

establish a prescriptive easement based on use of a road across the

landowners woodlot, but the court found that the evidence was

insufficient to establish a prescriptive easement.

The court reasoned

that the evidence established that those using the lot knew that they

were using the property of another but did not feel that they were using

it “against their wishes.”

100

This was an important follow up to the

Id.

Id. at 242.

Id. at 243.

Id. citing Striefel v. Charles–Keyt–Leaman Partnership, 1999 ME 111, ¶ 14, 733

A.2d 984, 991 (quoting black's Law Dictionary 248 (6th ed.1990)).

Id.

Maine Gravel Servs., Inc. v. Haining, 1998 ME 18, ¶ 3, 704 A.2d 417, 418, citing

Howe v. Natale, 451 A.2d 1198, 1200 (Me.1982).

Lyons v. Baptist Sch. of Christian Training, 2002 ME 137, ¶ 1, 804 A.2d 364

Id. at 366.

Id.

100

Id. at 368.

34 / Vol. 50 / Business Law Review

Eaton v. Town of Wells

101

case, in that it clarified that more than casual

usage was needed to divest owners of rights, and that some action, such

as that an owner would take, would be necessary to rebut the

presumption of permission.

102

D. Almeder v. Town of Kennebunkport

In the 2014 Almeder v. Town of Kennebunkport

103

case, also referred

to as the “Goose Rocks Beach case,”

104

the court again examined the

question of what actions by the town or the public were necessary to

overcome the presumption of permissive use.

105

In that case, the public

had been using the Goose Rocks Beach, both the dry sand and

intertidal zone, for recreational purposes for the requisite prescriptive

period.

106

However, one essential issue which the trial court had

ignored was that the elements of prescriptive use must be determined

on a parcel-by-parcel basis, evaluating the acts of the public on each

parcel and the respective landowners’ responses to those actions.

107

The court acknowledged “the public's access to scarce resources such

as sandy beaches in Maine is a matter of great importance and

extraordinary public interest.”

108

It also recognized that “the

Beachfront Owners have already incurred considerable expense and

expended significant effort in responding to the Town's arguments.”

109

Thus the case was remanded for further findings, to “address one of

the elements necessary for a successful prescriptive easement claim—

adversity.”

110

The court went on to explain that “[e]ssential to our

consideration of adversity in cases involving public recreational

easements is the presumption of permission. We have long recognized

the rebuttable presumption that public recreational uses are

undertaken with the permission of the landowner.”

111

Since the case was based on use of a long section of beach, which

transected several different property owners, and since the different

property owners dealt with the public’s use in different ways,

112

it was

101

Eaton 760 A.2d at 243.

102

Id.

103

Almeder v. Town of Kennebunkport, 2014 ME 139, ¶ 29, 106 A.3d 1099, as corrected

(Apr. 16, 2015).

104

Id.

105

Id.

106

Id.

107

Id.

108

Id. at 1111

109

Id.

110

Id.

111

Id.

112

Almeder 106 A.3d at 1115.

2017 / Public Toes in the Sand / 35

impossible for the court to issue a blanket ruling on all properties.

113

therefore remanded the case for the trial court to make a determination

on a parcel-by-parcel basis, taking into account the actions of each

individual property owner with respect to the public use of their

land.

114

While this ruling makes legal sense as to the elements required

to establish an easement by prescription, it creates the practical

problem of potentially establishing a public easement to only portions

of the beach. Such a checkerboard beach is not what the public

envisioned and would be difficult to enforce, thus putting an onus on

both the public and the landowners.

This unsettled landscape has clearly had an effect upon both the

public and landowners, with tensions escalating

115

and both land

values and marketability of property being affected.

116

As land values

in Maine are slowly recovering from the real estate crisis of 2008,

117

adding to those difficulties by making ownership rights to coastal

land uncertain will only add to economic concerns. Also, because

Maine is dependent to such a large extent on the tourism industry,

118

making beach access by tourists uncertain will challenge that industry

and its growth. Thus, certainty is essential to the economic stability of

the Maine economy.

E. Cedar Beach Case

The Maine courts made a move toward this needed certainty in the

recent Cedar Beach Case.

119

This case saw all the elements of the

earlier cases, with locals incensed at being blocked from beaches they

had used for generations,

120

and landowners equally incensed by

disrespectful use of their land,

121

litigation expenses,

122

and

marketability issues as a result of these challenges.

123

Through the

113

Id.

114

Id.

115

See generally supra notes 48, 49 and 55.

116

MAINE OFFICE OF TOURISM, supra note 52.

117

William Hall, New index predicts ‘slow, steady’ recovery for Maine real estate, BANGOR

DAILY NEWS, (May 28, 2013), https://bangordailynews.com/2013/05/28/business/new-index-

predicts-slow-steady-recovery-for-maine-real-estate/?ref=relatedBox.

118

FUTUREMETRICS, Maine and Tourism, Maine’s Largest Industry, (July, 2013),

http://futuremetrics.info/wp-content/uploads/2013/07/Tourism-White-Paper.pdf.

119

Cedar Beach, 145 A.3d 1025.

120

See generally supra notes 48, 49 and 55.

121

Id.

122

Defendant in lawsuit over public access to private Harpswell beach makes deal to buy road

‘to keep it private’, B

ANGOR DAILY NEWS,(June 19, 2014), http://bangordailynews.com/2014/

06/19/news/midcoast/defendant-in-lawsuit-over-public-access-to-private-harpswell-beach-

makes-deal-to-buy-road-to-keep-it-private/.

123

See supra note 55.

36 / Vol. 50 / Business Law Review

long history of public use at Cedar Beach, landowners had welcomed

public access, with one landowner even selling ice cream to children on

the beach.

124

Partly in response to the litigation which began with the Bell I and

Bell II cases,

125

the public began to feel the need to establish a legal

right to use the beach, beyond the historical permissive use.

126

Perhaps

due to the notion of the necessity of adverse use,

127

and perhaps due to

societal changes or the increased number of people using the

beaches,

128

the public’s use became more objectionable to the owners.

129

Loud parties, littering and destruction of fences and other property

made owners reconsider allowing the public to use their land.

130

The

Cedar Beach case

131

actually focused on an attempt to obtain a

prescriptive easement over a private road to access a public beach.

132

Thus, the objectionable loud parties and littering on the beach were not

considered by the court to be relevant adverse acts

133

to establish a

prescriptive easement to the road, as those acts occurred on the

beach.

134

The record in the Cedar Beach

135

case is replete with evidence of a

long history of permissive public use, interrupted by blockages

resulting from concerns over the public acquiring prescriptive rights

over the road leading to the beach.

136

Other than concerns over littering

and vandalism, the owners of the road had no objection to the public

using the road to access the beach. However, concerns that the public

would assert rights by prescription over the road caused owners to post

the property

137

, and at various times put chains across the road and

124

Bell I, 510 A.2d 509; Bell II, 557 A.2d 168.

125

Id.

126

See generally supra notes 48, 49 and 55.

127

Cedar Beach, 145 A.2d 1025 at 1027.

128

PUBLIC SHORELINE ACCESS IN MAINE, Maine Department of Agriculture,

Conservation and Forestry, August, 2016, http://www.maine.gov/dacf/parks/docs/public-

shoreline-access-in-maine.pdf.

129

Id.

130

MAINE OFFICE OF TOURISM supra note 52.

131

Cedar Beach, 145 A.3d 1025.

132

Id.

133

“Similarly, although litter may be unpleasant to find on one's property, littering is

not the type of hostile action that shows disregard of the owner's claims entirely and use

of the land as though the claimant owned the property.” Cedar Beach, 145 A.3d at 1029.

134

Id.

135

Id.

136

Id. at 1026.

137

In Maine, “posting” property refers to posting “no trespass” signs, as opposed to the

historical “tradition of landowner acquiescence in public recreational uses of open,

unposted fields and woodlands.” See Lyons, 804 A.2d 372.

2017 / Public Toes in the Sand / 37

erect fences.

138

In response to these actions by the landowners,

members of the public caused vandalism on the property, including one

fence being “’mowed down by a pickup truck’ driven by Scott Allen, a

member of the public” and other such acts.

139

In that case, although

the landowners originally welcomed the public, the dispute between

the landowners and the public became so acrimonious that the public

use turned destructive:

Charlie Abrahamson, the owner of the Road from 1999 to 2014

welcomed pedestrian access over his land to the beaches, including the

Small Beach which is located next to Cedar Beach and which he also

owned. He even sold ice cream to children who used the beaches.

However, public use began to become more and more objectionable.

Mr. Abrahamson cleaned up more and more litter, including diapers,

trash, and other items. He personally witnessed users urinating on

his property and began to sense a change in people's attitude toward

using the beach. After repeated warnings and confrontations, Mr.

Abrahamson had had enough and blocked the path leading from the

end of the Road to the Small Beach. People ignored that effort and

Mr. Abrahamson received numerous threats to his family and

property. As a result, Mr. Abrahamson closed the Road to public use.

In return, Mr. Abrahamson received hate mail, threatening phone

calls, and anti-Semitic slurs. In October 2012, Plaintiffs in this action

filed suit against the Abrahamsons asserting a public prescriptive

easement exists over the Road. Defendant Gables Real Estate LLC

joined the action as a party defendant on April 8, 2013.

140

Changes in the level of respect by the public in their use of private

land has led to increased litigation over access to the shore. This

litigation has drawn strong arguments from the opposing sides, both

legal and emotional, and continuing what has been termed The War for

Maine’s Shore,

141

which does not serve either side.

The court also examined the essential requirement of adversity, and

what constitutes the requisite adversity. While the court

acknowledged that loud parties, littering and acts of vandalism are

“adverse to the landowner,”

142

the actual requirement of adversity is

looking for acts that show “use of the land as a landowner would use

the land,”

143

as opposed to acts which have been defined as “criminal

acts”

144

by State law. Since a landowner’s use of his land does not

138

Id.

139

Id.

140

Supra note 79 at 8-9 (references omitted).

141

Colin Woodward, War for Maine’s shore, PORT. PRESS HER. (Dec. 2, 2012),

http://www.pressherald.com/2012/12/01/war-for-maine-shore_2012-12-02/.

142

MAINE OFFICE OF TOURISM supra note 52.

143

Maine Gravel, 704 A.2d at 418.

144

Cedar Beach, 145 A.3d at 1029.

38 / Vol. 50 / Business Law Review

typically include destructive criminal acts, those actions should not

constitute the requisite “treatment of land as their own”

145

to vest

property rights in the adverse user (i.e. the public). In addition to this

analysis following the purpose of the legal elements of adverse or

prescriptive use, it serves a public purpose of not encouraging (or

rewarding) criminal acts on land owned by others.

F. Alternatives for Resolving Public Access Disputes

In re-affirming the presumption of permissive use, and thus making

it difficult for the public to obtain a prescriptive easement over private

land, the court is encouraging private landowners to continue to allow

public recreational use of the thousands of acres of Maine’s natural

resources, and encouraging towns and public groups to pursue other

avenues to establish a public right to access. There are several other

ways the public can acquire a “right” to access as opposed to simply

“permission,” which both recognize that property owners have record

title to this land and that any taking of those property rights without

due process and compensation are unconstitutional.

146

Methods such as purchase of easements, negotiated licenses or a

taking through eminent domain all respect the landowners’ rights to

due process and compensation. Many prescriptive easement cases may

be resolved by these means, and such resolutions are not only more

expeditious and less expensive than litigation, they also preserve the

marketability of the properties and can encourage tourism.

Some may consider eminent domain as a viable method to establish

a public recreational easement or title to a beach, however it is most

likely the least attractive option. While the United States Supreme

Court has affirmed that the scope of permitted public purposes for

eminent domain may be extended to “economic purposes,”

147

it is

widely expected that this standard may be reexamined by the Court in

the future.

148

In addition, the eminent domain litigation process is

expensive for both towns and property owners, due to the litigation

costs, marketability issues and ultimate cost of compensation from the

town (and corresponding loss of value to the landowner).

149

145

Maine Gravel, 704 A.2d at 418.

146

Bell I, 510 A.2d 509; Bell II, 557 A.2d 168.

147

The United States Supreme Court found that a taking of private residential

property for private commercial development constituted “a “public use” within the

meaning of the Fifth Amendment to the Federal Constitution.” Kelo v. City of New

London, Conn., 545 U.S. 469, 490, 125 S. Ct. 2655, 2668, 162 L. Ed. 2d 439 (2005).

148

LINCOLN INSTITUTE OF LAND POLICY, After “Kelo”, (April, 2010),

http://www.lincolninst.edu/publications/articles/after-kelo.

149

Id.

2017 / Public Toes in the Sand / 39

The most promising avenue for establishing public rights for access

to beaches or other land will be by voluntary negotiation of easements

or licenses. Many reasons could bring both landowners and the public

to the negotiating table, including rising property values

150

and rising

property tax burdens.

151

For current landowners, annual property taxes can be crippling,

especially if property values have risen significantly during the period

of ownership.

152

This increased tax burden is particularly of concern for

land which may have been in a family for generations, and burdensome

property taxes may force owners to sell their property.

153

In such cases,

negotiated public easements can reduce the assessed value of the

property, and thus reduce the property tax burden,

154

allowing the

family to retain their property while at the same time assuring the

public a right of access.

In addition, when property values rise exponentially, frequently

only a select number of wealthy individuals may be able to afford to

purchase the property.

155

If property is encumbered with a public

access easement, the market value of the land would be reduced thus

opening more land to purchase by those of more modest means.

156

The most recent development in the Cedar Beach case was just such

a resolution. On March 11, 2017 at the Town of Harpswell Town

Meeting, the town approved a negotiated license which allows access

over the Cedar Beach Road to the beach.

157

This license was negotiated

between the town and the landowners, and contains provisions

benefitting both.

158

The license addresses the landowners’ concerns

regarding disrespectful public use, and use by non-residents, as well as

providing for a monitoring system.

159

It addresses the concerns of the

150

MAINE REAL ESTATE NETWORK, Maine Oceanfront Real Estate,

http://www.themainerealestatenetwork.com/popular-maine-real-estate-

searches/maine-oceanfront-real-estate/(last visited March 25, 2017).

151

Id.

152

MAINE COAST HERITAGE TRUST, Property Taxes, http://www.mcht.org/land_

protection/options/property_taxes/,

(last visited March 25, 2017).

153

Id.

154

Id.

155

Id.

156

Id.

157

License Agreement approved at Town of Harpwell Town Meeting March 11, 2017

can be found at: http://www.harpswell.maine.gov/vertical/sites/%7B3F690C92-5208-

4D62-BAFB-2559293F6CAE%7D/uploads/2017_03_02_Cedar_Bch_Rd_License_Agmt_

(FINAL).pdf.

158

Id.

159

Id.

40 / Vol. 50 / Business Law Review

local residents by ensuring access by residents, including tourists at

the local bed and breakfast inns, and other visitors and guests.

160

V. CONCLUSION

While litigation efforts by public groups to establish prescriptive

access rights are well-intentioned, they may end up being counter-

productive and cause more landowners to block public use out of fear

of the establishment of public rights. The recent Cedar Beach case

161

is a good example of these concerns, as well as of the best solution to

this issue. While many groups supporting public prescriptive

easements over private land feel that they are championing the best

interests of the public, they may actually be setting in motion a

movement which causes landowners to restrict public recreational use.

This would have negative impacts on the enjoyment of natural

resources by both Maine residents and tourists. Negotiated easements

or licenses, such as in Cedar Beach,

162

will benefit landowners, locals,

and visitors who wish to enjoy Maine’s beautiful natural resources, as

well as the Maine tourism industry. Hopefully, members of the public,

local governments and landowners will see the value of resolving their

disputes through negotiation, rather than litigation, and the Cedar

Beach case

163

will serve as an example to all parties for the best course

of action for moving forward.

160

Id.

161

Cedar Beach 145 A.3d at 1028.

162

Id.

163

Id.

TRAPS FOR THE UNWARY COMMERCIAL DRONE

USER

by Chantalle R. Forgues*

I. INTRODUCTION

Recent changes to aviation regulations have made it realistic for any

business to use small Unmanned Aircraft Systems (sUAS), colloquially

referred to as “drones,” to benefit their operations. The commercial use

of sUAS was previously prohibited unless the user: (1) was a Federal

Aviation Administration (FAA) certificated pilot; (2) obtained from the

FAA a Certificate of Waiver or Authorization (COA) wherein the FAA

enumerated specific use limits for low-risk operation; (3) obtained a

“Section 333 determination and exemption” whereby the Secretary of

Transportation made a determination on the airworthiness of the

sUAS and granted appropriate exemptions to FAA operational or

maintenance regulations; and, (4) registered the sUAS with the FAA.

In response to pressure from a diversity of business and other

interests, the FAA eased its restrictions on commercial sUAS use as of

August 29, 2016. Now a business that seeks to deploy an sUAS need

only obtain a remote pilot certification with an sUAS rating, and

The FAA certificated pilot, COA, and Section 333

determination and exemption are no longer necessary.

* Assistant Professor of Business Law, College of Business Administration, Plymouth

State University.

See 49 U.S.C. § 44711 (2012); 49 U.S.C. § 44101 (1994); FAA Modernization and

Reform Act of 2012, Pub. L. No. 112-95, 126 Stat. 11 (2012) (codified as amended in

scattered sections of 49 U.S.C.).

See FAA Air Traffic and General Operating Rules, 14 C.F.R. § 107 (2017)

[hereinafter FAR].

42 / Vol. 50 / Business Law Review

Now that businesses have a real opportunity to use sUAS, it is

important for them to understand the pertinent legal and aeronautical

responsibilities associated with sUAS use. The laws related to privacy,

nuisance, trespass, and other torts implicated with commercial sUAS

use are complex. The newly promulgated aviation regulations

governing sUAS also present complexities. Regrettably, the

aeronautical knowledge test for sUAS user certification lacks rigor in

certain areas, and may not adequately prepare an sUAS user for proper

and compliant use of his sUAS. As such, sUAS users must exercise

legal and aeronautical prudence.

Accordingly, this paper offers a survey of current laws, regulations,

and aeronautical issues that pose potential hazards for commercial

sUAS users. Specifically, this paper examines the laws and regulations

of which commercial sUAS users are most likely to run afoul, as well

as the potentially troubling areas of aeronautical knowledge that

commercial sUAS users are likely to encounter, and offers guidance for

avoiding the associated legal and aeronautical traps.

II. THE sUAS MARKET

Even with the previous regulatory barriers, the market for

commercial sUAS in the United States has been impressive. Industry

experts estimated that sales of commercial sUAS generated $200-$400

million in annual revenue in 2015.

The FAA predicted sales of

commercial sUAS to reach 600,000 units by the end of 2016.

Furthermore, the United States market is expected to grow to over four

billion dollars by the year 2020.

By that time, the FAA predicts that

the national airspace system (NAS) will need to accommodate 2.7

million commercial sUAS.

In fact, just in the few months from the date

the new FAA regulation took effect through November 3, 2016, the

FAA has granted more than 18,000 sUAS remote pilot certificates, and

about 23,000 airplane and helicopter pilots (hereinafter “private

DELOITTE TOUCHE TOHMATSU LIMITED, DRONES: HIGH PROFILE AND NICHE, at 1

(2015), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Technology-

Media-Telecommunications/gx-tmt-pred15-drones-high-profile.pdf (last visited Jan. 30,

2017).

FAA, Aerospace Forecasts Fiscal Years 2016-2036 prepared by the Forecasts and

Performance Analysis Division (APO-100), Office of Aviation Policy and Plans at 31

(2016), available at https://www.faa.gov/data_research/aviation/ [hereinafter FAA

Forecast].

BILL CANIS, CONG. RESEARCH SERV., R44192, UNMANNED AIRCRAFT SYSTEMS

(SUAS): COMMERCIAL OUTLOOK FOR A NEW INDUSTRY, at 31 (2015).

FAA Forecast, supra note 4, at 31.

2017 / Traps for the Unwary Commercial Drone User / 43

pilots”) have taken the FAA Safety Team online course to qualify to fly

sUAS.

If the data on the sUAS users who were granted a Section 333

determination and exemption prior to the change of law are predictive,

ninety percent of the 2.7 million commercial sUAS users expected to

operate by 2020 will be small business owners. The vast majority of

small business owners who are expected to use sUAS will report less

than one million in annual revenue and have fewer than ten

employees.

A significant number of these businesses will have just one

employee.

Based on the early data, only around half of the remote

sUAS pilots will have aviation experience.

As it becomes easier,

cheaper, and more beneficial for novices to use sUAS, it is foreseeable

that most commercial sUAS users will lack both the legal and aviation

knowledge necessary to avoid the regulatory and aeronautical traps

discussed herein.

Indeed, the cost of sUAS are now within the reach of small

businesses. A basic, non-toy, sUAS costs approximately $300-$500 and

includes a modest camera and a Global Positioning System (GPS).

The basic model can fly horizontally about fifteen kilometers per hour

(km/h), or about nine miles per hour (mph), for approximately twenty

minutes.

Users with a higher level of professional interest may pay

$750-$2,000 for an sUAS that will fly at fifty km/h, or thirty-one mph,

and remain airborne for up to twenty-five minutes.

Enterprise

models cost $10,000 or more, and can carry a load of more than three

kilograms (or about six and a half pounds) for up to an hour at even

faster speeds.

Almost all sUAS models have enough thrust to fly up

to several thousand feet above sea level.

It is reasonable to assume,

moreover, that sUAS capabilities at every level will greatly improve in

the future.

Jim Moore, Thousands of Drone Pilots Certified, AIRCRAFT OWNERS AND PILOTS ASS’N

(Nov. 3, 2016), https://www.aopa.org/news-and-media/all-news/2016/november/03/thousands-of-

drone-pilots-certified?utm_source=ePilot&utm_medium=Content&utm_content=adv&utm_

campaign=161103epilot

See Geoffrey Smith, Here Comes the Latest Drone Army, FORTUNE, May 9, 2016

available at http://fortune.com/2016/05/09/here-comes-the-latest-drone-army/.

See id.

See supra note 8.

DELOITTE, supra note 3, at 1.

Id.

Henry H. Perritt, Jr. & Albert J. Plawinski, One Centimeter Over Back Yard: Where

Does Federal Preemption of State Drone Regulation Start?, 17 N.C. J.L. & T

ECH. 307,

317 (2015).

44 / Vol. 50 / Business Law Review

The potential uses of commercial sUAS seem limitless. Some of the

earliest adopters of sUAS technology were industries requiring

inspection of large structures. Small UAS can easily inspect wind

turbines, bridges, power lines, oil rigs, and other perilous settings.

Smaller businesses are following their lead: landlords, building

maintenance providers, pest services, and building contractors can also

easily deploy sUAS to examine structures like roofs, chimneys, ducts,

wires, attics, and trees in a safer and more efficient manner. The FAA

estimates that approximately twenty-two percent of current

commercial sUAS use is for aerial photography

furthering both the

marketing and the operational efforts of many businesses, such as real

estate, construction, surveying, engineering, outdoor recreation,

professional sports, music, and journalism. Insurance, agriculture,

and even restaurants

have made creative and beneficial use of sUAS.

Certainly many other businesses will use sUAS to benefit their

operations in the future.

III. LEGAL TRAPS

With millions of new commercial sUAS users, lawsuits are

inevitable. What are the likely sources of litigation? Commercial sUAS

users are most likely to encounter tort and property claims. It is

foreseeable that a commercial sUAS user may commit a trespass,

nuisance, or privacy invasion, and potentially contravene other

pertinent laws. Upon promulgating the new commercial sUAS

regulations, the FAA specifically declined to address privacy and

related tort issues, which it contends is beyond the scope of its

authority.

Rather, the FAA “strongly encourages all sUAS pilots to

FAA Forecast, supra note 4, at 33.

Agricultural use of sUAS involves the gathering of “detailed data on soils, crops,

nutrients, pests, moisture, and yield to increase farm productivity.” A

M. FARM BUREAU,

FACT SHEET: QUANTIFYING THE BENEFITS OF DRONES IN PRECISION AGRICULTURE (July

2015) available at http://www.measure.aero/wp-content/uploads/2015/07/AFBF-Fact-

Sheet.pdf (study done in coordination with Measure, an aerospace industry specialist

and sUAS retailer). The American Farm Bureau predicts that farmers using sUAS

technology could see a return on investment of $12 per acre for corn, $2.60 per acre for

soybeans, and $2.30 per acre for wheat. Id. sUAS are also very effective at finding lost

livestock and herding sheep. D

ELOITTE, supra note 3, at 1 (providing entertaining footage

of drones herding cows here: https://www.youtube.com/watch?v=kK9gVzSYjJM#t=21).

Corinne Dowling Burzichelli, Note & Comment, Delivery Drones: Will Amazon Air

See the National Airspace, 42 RUTGERS COMPUTER & TECH. L.J. 162, 163 (2016) (citing

Jeanette Settembre, TGI Fridays Launches Flying Mistletoe Drones for the Holidays,

N.Y.

DAILY NEWS (Nov. 19, 2014), http://m.nydailynews.com/life-style/eats/tgi-fridays-

launches-mistletoe-drones-article-1.2016401.

FAA, Fact Sheet – Small Unmanned Aircraft Regulations (Part 107), June 21, 2016,

available at https://www.faa.gov/news/fact_sheets/news_story.cfm?newsId=20516. The

2017 / Traps for the Unwary Commercial Drone User / 45

check local and state laws.”

These existing laws are based in

traditional common law and can be complicated, particularly as they

apply to sUAS. It is important, then, for commercial sUAS users to

develop a basic understanding of applicable tort, property, and other

related laws, and to create conservative strategies to avoid legal

transgressions.

A. Trespass

How can a commercial sUAS user avoid a trespass lawsuit?

Trespass is most basically defined as the intrusion on the land of

another without privilege.

The easiest way to avoid a trespass claim,

therefore, is to refrain from flying over the land of another. Another

easy way to avoid a trespass lawsuit is to obtain consent to overfly the

land of another.

There are many occasions, however, when it is

impossible or impractical to avoid flying over the land of another

(including inadvertent overflight), or to obtain permission to do so. As

such, sUAS users should be sensitive to the disposition of the law of

trespass.

State laws on aerial trespass vary, but most are based on

fundamental common law principles. Section 159 of the Restatement

(Second) of Torts (“Restatement”), Intrusions Upon, Beneath and

Above the Surface of the Earth, provides that: “Flight by aircraft

the air space above the land of another is a trespass if, but only if, (a)

It enters into the immediate reaches of the air space next to the land,

and (b) It interferes substantially with the other’s use and enjoyment

of his land.”

The Restatement does not define precisely what

constitutes, “immediate reaches,” but it does provide that, “In the

ordinary case, flight at 500 feet or more above the surface is not within

the ‘immediate reaches,’ while flight within 50 feet, which interferes

FAA, however, does recommend that sUAS pilots follow the National

Telecommunications and Information Administration’s “Best Practices” for privacy,

which provides a few practical tips on how to be “neighborly,” among other advice. Id.

According to the FAA, these guidelines are not intended to set the legal standard. Id.

Id.

RESTATEMENT (SECOND) OF TORTS §§ 158, 163, 164 & 165 (1965).

Id. at §167.

In the FAA Modernization and Reform Act of 2012, Congress defined an sUAS as

“an aircraft that is operated without the possibility of direct human intervention from

within or on the aircraft.” Sec. 331(8), Pub. L. 112-95 (2012). In Administrator v. Pirker,

the National Transportation Safety Board (NTSB) unanimously determined that sUAS

are “aircraft,” for the purpose of regulatory liability. NTSB Order No. EA-5730 (Nov. 17,

2014) available at http://www.ntsb.gov/legal/alj/Documents/5730.pdf. It follows that

sUAS should also be considered “aircraft,” for the purpose of tort liability.

RESTATEMENT, supra note 22, at § 159 (emphasis added).

46 / Vol. 50 / Business Law Review

with actual use, clearly is, and flight within 150 feet, which also

interferes, may present a question of fact.”

The concept of “immediate reaches” stems from the seminal case on

aerial trespass by aviation, United States v. Causby.

In Causby, the

Court explained that, “It is obvious that if the landowner is to have full

enjoyment of the land, he must have exclusive control of the immediate

reaches of the enveloping atmosphere.”

According to the Causby

Court, the landowner “owns at least as much of the space above the

ground as he can occupy or use in connection with the land.”

Conversely, it seems, the Court established that there are no private

property rights to the land beyond the “immediate reaches.” Upon

remand, the Court of Claims awarded damages to the landowners for

flights that occurred up to 365 feet, which was 300 feet above the tallest

object on the property.

At that time, the Civil Aeronautics Authority

had set 300 feet as the minimum safe altitude at which an aircraft

could fly over any sort of terrain.

Courts have found trespass by aircraft flying anywhere between

fifty feet

above ground level (AGL)

to 999 feet AGL over the property

of another.

Aircraft flying less than 100 feet AGL are frequently held

Id. at cmt. l.

328 U.S. 256 (1946). Prior to Causby, common law had long recognized the concept

of aerial trespass through means other than aviation. See, e.g., Whittaker v. Stangvick,

100 Minn. 386 (1907) (shooting over another's land); Butler v. Frontier Telephone Co. 186

N.Y. 486 (1906) (wires strung over land twenty or thirty feet above surface); Barnes v.

Berendes, 139 Cal. 32 (1903) (walls leaning over property); Ellis v. Loftus Iron Co. (1874)

L.R. 10 C.P. 10 (U.K.) (horse kicking into another’s space).

Causby, 328 U.S. at 264.

Id.

Causby v. U.S., 109 Ct. Cl. 768 (1948). The tallest object on the property was a sixty-

five foot tree.

The Civil Aeronautics Authority was the precursor agency to the FAA. FAA, A Brief

History of the FAA, (page last modified on Feb. 19, 2015) available at

https://www.faa.gov/about/history/brief_history/.

See Causby, 109 Ct. Cl. at 770.

See, e.g., Brandes v. Mitterling, 67 Ariz. 349 (1948).

In aviation, AGL altitude is the absolute height measured against the underlying

ground surface, and it distinguished from altitude above mean sea level (MSL), which is

the measurement of the height of an aircraft above the average sea level. J

EPPESEN,

GUIDED FLIGHT DISCOVERY: PRIVATE PILOT 2-56 & 2-58 (2007).

See Brandes, 67 Ariz. at 356-57 citing Mohican & Reena, Inc., v. Tobiasz, 1938

U.S.Av.Rep. 1 (master's report filed in Super.Ct. Hampden, Mass., 1938) (injunction

granted for children’s summer camp owner prohibiting flight below 1,000 feet within 500

feet of property). It should be noted that common law cases, including Brandes, often

muddle the laws of trespass and nuisance. This is particularly true in aviation cases

where courts have a history of labelling trespassory actions as nuisance claims. See

Henry E. Smith, Exclusion and Property Rules in the Law of Nuisance, 90 V

A. L. REV.

965, 984 (2004).

2017 / Traps for the Unwary Commercial Drone User / 47

liable pursuant to trespass law suits,

although many courts have

decided that 500 feet AGL is the limit for aerial trespass.

The FAA’s

civil air regulations now provide that 500 feet AGL is the minimum

safe flight altitude for aircraft over non-congested areas,

and 1000

feet AGL is the minimum safe flight altitude over congested areas.

Flight at or above these limits constitutes publically “navigable

airspace”

and may constitute a reasonable marker for determination

of liability.

Notwithstanding the FAA’s declaration on minimum safe

altitudes, some courts have determined that the altitude of overflight

has no determinative impact on liability, finding that, “although the

navigable airspace has been declared to be in the public domain,

regardless of any congressional limitations, the land owner, as an

incident to his ownership, has a claim to the superjacent airspace to

the extent that a reasonable use of his land involves such space.”

A trespass claim, regardless of the altitude of the trespass, further

requires a substantial interference with another’s use and enjoyment

of land.

There must be interference with actual, as distinguished from

potential, use.

Notably, an otherwise nonharmful -even beneficial-

intentional intrusion, will still subject an sUAS user to liability if the

intrusion interferes with the use and enjoyment of land.

Courts have

been more likely to find interference when the invasion occurs over

“cultivated” land that is occupied and used, rather than land covered

in dense brush or woods.

Most aircraft produce offensive noise, dust,

light, vibration, and other air pollution. For these reasons, there

appears to be little difficulty for a court to find that most low-flying

See, e.g., Vanderslice v. Shawn, Del. Ch., 27 A.2d 87 (1942); Smith v. New England

Aircraft, 270 Mass. 511 (1930); Dlugos v. United Air Lines, 1944 U.S.Av.Rep.

(Ct.Comm.Pl.Pa. Lehigh Co., May 27, 1944).

See, e.g., Burnham v. Beverly Airways, Inc., 311 Mass. 628 (1942); see also

RESTATEMENT, supra note 22, at § 159 cmt. 2(l).

FAR, supra note 2, at § 91.119(c).

Id. at § 91.119(b) (such flight is unsafe within horizontal distance of 2,000 feet from

congested area).

FAR, supra note 2, at § 1.1.

See, e.g., Brenner v. New Richmond Regional Airport Com’n, 816 N.W.2 291, 306

(2012). While helicopters, powered parachutes, and weight-shift control aircraft are

permitted to operate at less than these minimum altitudes under certain circumstances,

FAR §91.119(d), this does not mean that such operation is conducted within navigable

airspace. People v. Sabo, 185 Cal. App. 3d 845, 852 (1986); nor is this always considered

best practice.

Palisades Citizens Ass’n, Inc. v. C.A.B, 420 F.2d 188, 192 (D.C. Cir. 1969) (internal

quotations omitted) (citing US v. 15,909 Acres, 176 F.Supp. 447, 448 (1958)).

RESTATEMENT, supra note 22, at § 159 (2)(b).

Id. at cmt. k.

Accord id. at § 163.

Smith, 270 Mass. at 531.

48 / Vol. 50 / Business Law Review

aircraft substantially interfere with the use and enjoyment of occupied

land. This is particularly true if the flights are frequent and occur at

times unsuitable to the landowner.

It is important to note that intrusions over land by mistake will also

subject an sUAS user to trespass liability.

An sUAS user who acts

under a mistaken belief of law or fact, however reasonable his belief,

will be liable to a landowner for an overflight.

Under the

Restatement, an sUAS user would be liable for a mistaken intrusion

over the land of another even if he acted pursuant to “the advice of the

most eminent counsel,” or pursuant to a lawful statute that was

subsequently determined unconstitutional.

An sUAS user, therefore,

would be liable for a good-faith but mistaken belief about a boundary

line.

For several reasons, the “mistaken belief” provision is

particularly perilous for sUAS users. As discussed more fully below in

this section and in section IV.D, there are many ways an sUAS user

could have a mistaken belief about his location, and therefore be liable

in trespass.

Trespass offers strong remedies for plaintiffs. Courts award a full

range of damages against trespassers, including nominal,

compensatory, consequential, and even punitive damages for

intentional conduct.

This can include the diminution of market value

of the land at issue, the cost of restoration of the land, the loss of use

of the land, and emotional distress damages, even when there is no

physical injury to the person or land.

A court may also order

injunctive relief against a trespasser for both current and future

threatened harm.

Accordingly, a defendant in trespass may be liable

for damages that are far beyond those normally imposed in a

negligence action.

Small UAS users, therefore, may be liable for flying too low and

interfering with the use and enjoyment of another’s land. Although

sUAS may not produce as much dust or vibration as the aircraft

involved in traditional aerial trespass cases, sUAS can be very

intrusive at lower altitudes. Small UAS move slower, fly nearer to

individuals, and typically remain over property for a longer period of

time than most aircraft. They can follow people closely and look in their

RESTATEMENT, supra note 22, at § 164.

Id.

Id. at cmt. a.

Id. at cmt. c.(2).

See 75 AM. JUR. 2D Trespass §§ 86-127 (2011).

See generally id.

See id. at §§ 86-90.

See id. at §§ 100 & 130.

2017 / Traps for the Unwary Commercial Drone User / 49

windows. Small UAS can even record, store, and broadcast an

individual’s activities (or lack thereof). Small UAS also tend to provoke

the ire of dogs.

If a dog owner who permits excessive or untimely

barking is liable for interfering with another’s use and enjoyment of

land,

it follows that anyone who causes such barking, including by

means of sUAS, has also interfered with a landowner’s use and

enjoyment of land, and would be liable for trespass.

Overflying sUAS seem innately to incite fear and anger in many

humans. As such, its very presence may automatically disturb the use

and enjoyment of land. If flown at a low enough altitude, say, within

gunshot range, overflying sUAS would necessarily interfere with the

immediate reaches of land. Indeed, flying an sUAS at a low enough

altitude may get one’s sUAS shot down. For example, it appears that

such physical force to prevent a trespass may be justified under

Kentucky law,

notwithstanding the federal statute that could be

construed to the contrary.

One Colorado town has even considered

passing an ordinance to issue hunting licenses to shoot down sUAS and

establish a bounty system rewarding the hunters.

It is clear then,

that sUAS users may be readily subject to trespass liability, which can

trigger either a costly damage award, or a costly abatement.

Accord Perritt & Plawinski, supra note 16, at 310.

See, e.g., City of Belfield v. Kilkenny, 729 N.W.2d 120, 128 (2007).

Ky. Rev. Stat. Ann. § 503.080(1)(a) (2006) (physical force justified for protection of

property from trespass). In one Kentucky case, a man shot down an sUAS that he claimed

was observing his daughter who was sunbathing in his yard. There was disputed evidence

concerning whether the sUAS was flying below tree level, but a trial court determined that

shooting down the sUAS in response to the invasion did not constitute criminal mischief.

Elisha Fieldstadt, Case Dismissed against William H. Merideth, Kentucky Man Arrested for

Shooting Down Drone, NBC N

EWS (Oct. 27, 2015, 1:28 PM), http://www.nbcnews.com/

news/us-news/case-dismissed-against-william-h-merideth-kentucky-man-arrested-shooting-

n452281. Compare Massachusetts law, Commonwealth v. Haddock, 46 Mass. App. Ct. 246,

248 n.2 & 249 (1999) (reasonable, nondeadly force permitted to defend property from

trespass). See also Ashley Codiannia, CNN Exclusive: Snapchat Interview with Senator Rand

Paul, CNN, http://www.cnn.com/2015/01/28/politics/rand-paul-snaphat-interview/ (last

updated Jan. 28, 2015, 11:32 AM) (quoting Rand Paul: "drones should only be used according

to the Constitution. But if they fly over my house, they better be aware because I've got a

shotgun.")

Anyone who shoots at an “aircraft,” may be sentenced for up to twenty years in

federal prison, 18 U.S.C. § 32(a) (2016), in addition to facing a fine of up to $250,000. Id.

at 3571(b). Merely threatening to down an aircraft is punishable by up to five years in

prison and the same steep fine. Id. at §32(c) & 3571(b).

Ryan Grenoble, Drone Hunting in Deer Trail, Colorado? Town Considers Bounty for

Unmanned Aerial Vehicles, H

UFFINGTON POST (Jul. 17, 2013, 4:02 PM),

http://www.huffingtonpost.com/2013/07/17/drone-hunting-deer-

trailcolorado_n_3611806.html, archived at http://perma.cc/6ZE2-P4WP.

50 / Vol. 50 / Business Law Review

What guidance can be gleaned for sUAS users from the state of

trespass law? First, common law suggests that when flying over the

land of another, it would be prudent to fly at an altitude of at least 500

feet AGL over non-congested land and 1000 feet AGL over congested

land, which is the FAA’s minimum safe altitude for most aircraft. The

new sUAS regulations, however, restrict sUAS flight to no more than

400 feet AGL.

Ideally, sUAS users should fly as close to 400 feet AGL

as possible when flying over the land of another, particularly when that

land is occupied and in use. One scholar suggests a “rule of thumb” that

sUAS users fly at the treetop or powerline level,

but this is not ideal.

The Causby court found tort liability for aircraft flying 300 feet above

the tree level.

If it is necessary to fly an sUAS lower, and oftentimes

it is,

an sUAS user should remain higher than 150 feet AGL because

the Restatement comments that flying at 150 feet may present a

“question of fact” for liability. Small UAS users should certainly refrain

from overflying the land of another at less than 100 feet AGL, given

the case law favoring landowners at that altitude. Retailers such as

Google, who are testing delivery sUAS as low as 130 feet AGL, should

probably adjust their operations accordingly.

Second, sUAS users should fly in a way that avoids interfering with

another’s use and enjoyment of his land. While this seems like a

common sense standard, current newsworthy use of sUAS suggests

that common sense does not prevail.

It is advisable, therefore, for

sUAS users to refrain from excessive noise-making, dust-causing, and

light-generating activity, particularly over congested and cultivated

land. Operators should also avoid hovering, repeated overflying,

following, “peeping” on, and recording individuals. And, while some

sUAS users innocently, or even beneficially, engage in some of these

FAR, supra note 2, at §107.51(b).

Perritt & Plawinski, supra note 16, at 347-348.

See Causby, 109 Ct. Cl. at 770.

For example, an sUAS user may have to fly lower to avoid clouds pursuant to FAR

§ 107.51(d).

Alistair Barr & Greg Bensinger, Google Is Testing Delivery Drone System:

Amazon.com, Domino’s Pizza Have also Tested Delivery Drones, W

ALL ST. J. (Aug. 29,

2014, 4:04 AM), http://www.wsj.com/articles/google-reveals-delivery-drone-project-

1409274480.

See, e.g., Fieldstadt, supra note 57 (observing sunbathing teenager); Aaron West,

Redmond Exploring whether Drone Spying Violates Nuisance Law, W

ASH. TIMES (June 17,

2016), http://www.washingtontimes.com/news/2016/jun/17/redmond-exploring-whether-

drone- spying-violates-nu/ (repeated overflying of home); Michael Rosenfield, New Hampshire

Residents Report Seeing Drones Hover Over their Skylights, N.

E. CABLE NEWS (Jan. 11, 2017),

http://www.necn.com/news/new-england/New-Hampshire-Residents-Report-Seeing-Drones-

Hovering-Over-Their-Skylights-410339885.html?_osource=taboola-recirc (hovering over

skylights in house).

2017 / Traps for the Unwary Commercial Drone User / 51

activities, these users should obtain permission from the pertinent

landowner(s) to do so in order to avoid trespass and other liability.

It is also very important for sUAS users to take the time to develop

and maintain proficiency in operating sUAS. Small UAS can be

difficult to fly at first, and they do require self-training to operate.

Surprisingly, the testing required to obtain an sUAS remote pilot

certificate does not require practical training or aeronautical

experience. Small UAS users, therefore, are responsible for their own

flight proficiency. There is a similar learning curve with respect to

understanding sUAS software applications,

and how to undertake

contemporaneous physical and software operations in-flight. Lack of

proficiency could cause a trespass, subjecting an sUAS user to tort

liability.

It is equally important for sUAS users to study the operating

limitations of their particular sUAS. Small UAS users must

understand the performance capabilities of their particular sUAS,

including specific speed and maneuverability limitations; function and

capacity limitations with respect to weight, load, and balance issues;

overall visual limitations; weather limitations, likely operational

failures;

and performance limitations inherent to all possible weather

scenarios. Failure to adjust to differing operating circumstances could

cause the sUAS to intrude into the immediate reaches of another’s air

space and interfere with the use and enjoyment of land, thereby

triggering trespass liability.

There are, moreover, many circumstances under which an sUAS

user could misapprehend his location,

making it more likely he would

cause a trespass. For example, a commercial sUAS user may not

understand topography, navigation, weather conditions, mapping,

location data, speed issues, load effects, balance calculations,

maneuverability, and other operating issues associated with his sUAS.

Given that trespassers are liable for unintentional intrusions, sUAS

users should spend some time self-educating on these subjects and take

plenty of practice before operating the sUAS near the land of another.

This includes a duty to update sUAS software regularly as well as install anti-hacking

and anti-hijacking software. See, e.g., Bryant Jordan, Hacker Releases Software to Hijack

Commercial Drones, DEFENSETECH (Dec. 9, 2013), http://defensetech.org/2013/12/

09/hacker-releases-software-to-hijack-commercial-drones/.

While most sUAS have autonomous safety features, it is not uncommon for an sUAS

to fly away or ignore sUAS operator commands, including ascending or descending

beyond desired heights or flying beyond commanded distances. Perritt & Plawinski,

supra note 16 at 320. Indeed, whereas most aircraft have built in redundancies to

reinforce safe flight, sUAS generally lack such safety redundancies.

See generally section IV.D. infra.

52 / Vol. 50 / Business Law Review

B. Private Nuisance

Commercial sUAS users must also be wary of committing private

nuisance. A private nuisance is the “nontrespassory invasion of

another’s interest in the private use and enjoyment of land” that causes

“significant harm.”

One is generally subject to liability if his invasion

is “intentional and unreasonable,” or if it is “unintentional or otherwise

actionable under the rules controlling liability for negligent or reckless

conduct . . . .”

Like trespass, this tort claim protects an individual’s free enjoyment

of land, but unlike trespass, no physical intrusion is required. Nuisance

also requires that the tortfeasor manifest tortious intent and cause

significant harm, which are not requirements of trespass. The two

claims often overlap, as the same action may constitute both a trespass

and nuisance. As such, a plaintiff may sue in either tort or both.

Specifically, nuisance requires significant current or potential harm

“of a kind that would be suffered by a normal person in the community

or by property in normal condition and used for a normal purpose.”

There must be a “real and appreciable” interference with a plaintiff’s

interest before he may recover for nuisance.

The duration and

frequency of the harm is a significant factor for determining liability.

Liability for nuisance also requires some level of tortious intent,

such that the tortfeasor’s action, or omission,

must be (1) intentional

and unreasonable, or (2) otherwise negligent or reckless.

determining liability under either standard of intent, a court will

balance the gravity of the harm against the utility of the activity at

issue.

The factors for balancing include, the malicious or indecent

intent of the tortfeasor, the avoidability of the harm, the character of

the harm, the nature of the locality in which the harm is caused, the

social value of the conduct, and the financial burden on the tortfeasor

in compensating for continuing harm.

For conduct that is negligent

or reckless, courts balance an additional factor by considering the

magnitude of the risk of harm caused by the conduct.

This test

RESTATEMENT, supra note 22, at §§ 821D & F.

Id. at § 822 (emphasis omitted).

Id. at § 821D cmt. e.

RESTATEMENT, supra note 22, at § 821F.

Id.

Id. at § 824.

Id. at § 822.

Id. at cmt. k; id. at §§ 826-831.

Id. at §§ 826-828.

Id. at § 822 cmt. k.

2017 / Traps for the Unwary Commercial Drone User / 53

provides courts with broad discretion in determining the liability of an

sUAS user.

Remedies for nuisance include damages for a wide spectrum of

losses, including compensation for physical injury, impairment of

health, personal discomfort, annoyance and inconvenience, cost of

repair of real or personal property, diminished market value of real or

personal property, and lost productivity and rent.

Courts will also

award punitive damages and injunctive relief as necessary.

This

scheme presents a rich range of judicial choices in balancing outcomes

and awarding relief.

A victim may also be entitled to abate the nuisance.

Abatement

possibilities are limited, however, and must be reasonable.

Self-help

remedies are permitted only when the nuisance is imminent.

person must not take abatement actions that are unreasonably

destructive or intrusive.

Any mistake about the facts giving rise to a

nuisance, even if reasonable, will not protect a person who acts in

abatement.

Small UAS users, therefore, may take some comfort in

the fact that abatement by gunshot will probably not lie for their

nontrespassory sUAS use, even if such use does constitute a nuisance.

Understanding legal precedent for aircraft-related nuisance may be

helpful for sUAS users. Successful aircraft nuisance claims typically

involve aircraft causing dust, noise, light, and vibration, all with

frequency. An sUAS may present the same problems depending on its

use. Small UAS also have distinct capabilities from aircraft and even

remote-controlled airplanes, such as the ability to hover over, follow,

peep on, and record individuals, which make sUAS uniquely intrusive.

In weighing the harm of an sUAS use against its utility, a trier of fact

may find that frequent or long-lasting overflights (or adjacent-flights)

of quiet, residential land during the sleepy hours of the morning

amounts to a nuisance. Small UAS use that periodically frightens

children, startles chickens,

or provokes dog barking would likely

subject the user to liability. A trier of fact may also find it particularly

harmful if the sUAS is used to follow an individual, or record video,

sound, or other data concerning a landowner without permission. Such

conduct may be considered contrary to the common standards of

See VINCENT R. JOHNSON, STUDIES IN AMERICAN TORT LAW 909 (5th ed. 2013).

See id.

Id. at 910.

Id.

Cf. Causby, 328 U.S. 256 (aircraft bothering chickens interfered with use and

enjoyment of land).

54 / Vol. 50 / Business Law Review

decency, an important factor in the harm-utility balance.

Small UAS

users, therefore, should be cognizant of the amount of noise and light

they generate, the type of land they fly over or around, the frequency

with which they fly over or around a parcel of land, the duration of

flight over or around a parcel of land, and in-flight conduct such as

following an individual or data recording.

It is also important for a commercial sUAS user to remember that

he may be liable for unintentional conduct. This means that he may be

liable for failure to understand the operating limitations of his sUAS,

failure to maintain the physical or software integrity of his sUAS, or

for failure to develop and maintain flight knowledge and proficiency;

any of which could cause a harmful interference with another’s use and

enjoyment of land.

And, while a commercial sUAS user must cause significant harm to

be liable for nuisance, any harm is unlikely to be outweighed by the

social utility of commercial sUAS use under the pertinent legal

balancing test. Courts have generally found little social utility in profit-

making enterprises absent clear public benefit.

Small UAS may

someday confer a clear benefit on the public, but until then, they are

perhaps more like Supreme Court Justice Alexander George

Sutherland’s “pig in a parlor” nuisance,

for which the unwary user

will be liable.

C. Invasion of Privacy

If anything, sUAS use challenges society’s sense of privacy, and a

commercial sUAS user may face liability for invading another’s

privacy. Causes of action for privacy invasion have “been useful chiefly

to fill in the gaps left by trespass, nuisance, the intentional infliction

of mental distress, and whatever remedies there may be for the

invasion of constitutional rights.”

Privacy invasion consists of four

individual torts: (1) intrusion upon seclusion; (2) appropriation of

another’s name or likeness; (3) public disclosure of private facts; and

(4) false light publicity.

While one may easily use an sUAS to

appropriate the name or likeness of another, to obtain and disclose

private facts, or to place another in a false light, it seems that an sUAS

user is most likely to commit the tort of intrusion upon seclusion.

RESTATEMENT, supra note 22, at § 829.

See section III.A., supra.

See, e.g., Esposito v. New Britain Baseball Club, Inc., 49 Conn.Sup. 509, 520 (2005)

(fireworks from profit-making entertainment enterprise found less socially beneficial).

Vill. of Euclid v. Ambler Realty Co., 272 U.S. 365, 388 (1926).

William L. Prosser, Privacy, 48 CAL. L. REV. 383, 392 (1960).

RESTATEMENT, supra note 22, at § 652A.

2017 / Traps for the Unwary Commercial Drone User / 55

The Restatement describes a cause of action for intrusion upon

seclusion: "One who intentionally intrudes, physically or otherwise,

upon the solitude or seclusion of another or his private affairs or

concerns, is subject to liability to the other for invasion of his privacy,

if the intrusion would be highly offensive to a reasonable person."

The

comments to the Restatement provide that for this tort, (a) there must

be an intentional intrusion; (b) the intrusion may or may not be

physical, may involve the use of senses, with or without mechanical

aids, or may involve some other form of investigation into private

concerns; (c) must involve something that is private; and (d) must be

substantial.

This common law tort has been adopted in some form by

most jurisdictions.

Under this tort, there is generally no liability for observation while

in public “since [one] is not then in seclusion, and his appearance is

public and open to the public eye.”

Certain instances of highly

offensive surveillance in public, however, such as “upskirting”

recording a victim of a motor vehicle accident,

are actionable.

Additionally, close or continued following of an individual, even if that

individual is in public, will subject an sUAS user to privacy liability.

100

In general, intrusion upon seclusion is when someone “interrupts

one’s activities through unwanted [] presence or activities.”

101

For

example, the act of photographing a person at home without his

permission, even when the victim invites the photographer to enter the

home, is an intrusion upon seclusion.

102

In fact, the simple act of

information gathering can constitute intrusion.

103

In some states, no

Id. at § 652(B).

Id. at cmt. a.-d.

Eli A. Meltz, No Harm, No Foul?: “Attempted” Invasion of Privacy and the Tort of

Intrusion upon Seclusion, 83 F

ORDHAM L. REV. 3431 (2015).

RESTATEMENT, supra note 22, at § 652(B) cmt. c

See id.

Shulman v. Group W Productions, Inc., 955 P.2d 469 (Cal. 1998) (television program

on emergency response violated privacy rights of victims of motor vehicle accident for

filming accident on scene and in rescue helicopter).

100

See ALISSA M. DOLAN & RICHARD M. THOMPSON II, CONG. RESEARCH SERV., R42949,

NTEGRATION OF DRONES INTO DOMESTIC AIRSPACE: SELECTED LEGAL ISSUES, at 19-21

(2015) (citing Galella v. Onassis, 487 F.2d 986, 991-92 (2d Cir. 1973) and noting that

First Amendment will not protect journalists from such invasion of privacy claims); cf.

United States v. Jones, 132 S. Ct. 945, 963 (2012) (law enforcement placing GPS tracking

device on vehicle to follow individual violated reasonable expectation of privacy under

Fourth Amendment).

101

See id.

102

Dietemann v. Time, Inc., 449 F.2d 245, 249 (9th Cir. 1971).

103

See Alexander v. Fed. Bureau of Investigation, 971 F. Supp. 603 (D.D.C. 1997)

(prima facie case for intrusion made against First Lady Hillary Clinton and others based

on gathering of personal information from Federal Bureau of Investigation files).

56 / Vol. 50 / Business Law Review

observation or actual recording of the information is even necessary for

a cause of action.

104

Mere intent to intrude is sufficient to give rise to

liability.

105

Anyone who intrudes upon the seclusion of another will be liable for

damages for the deprivation of the victim’s seclusion, damages for the

victim’s related emotional distress, and any special damage the victim

can prove.

106

A particularly intrusive sUAS user may be subject to

additional punitive damages.

107

As with other torts, liability for

invasion of privacy case be quite costly, and is something about which

an sUAS user should be keenly aware.

Accordingly, an sUAS user who observes the person, affairs,

concerns, or property of another inside a home or a place reasonably

expected to be private, or just merely intends to do so, is subject to

liability under privacy laws if the invasion is unreasonably offensive.

Similarly, an sUAS user who records data concerning another that is

reasonably expected to be private, or just merely intends to, is subject

to privacy liability. This includes observing or gathering data on an

individual’s physical or virtual whereabouts. As such, it is not difficult

to imagine how the Facebook sUAS,

108

for example, which records an

individual’s internet activity, including imagery, would be liable for a

privacy invasion.

Furthermore, an sUAS user should be careful not to fly too close to

an individual. Such activity, even if well-intentioned, could give rise to

liability, as close flight is more likely to reveal something intimate

about an individual, and the closeness itself may constitute an

intrusion. A commercial sUAS user should also refrain from following

individuals. This includes news media, surveyors, inspectors, and the

like whose activities may inadvertently, or not-so-inadvertently,

amount to nuisance.

Indeed, while liability for intrusion requires an intentional act, even

an “innocent” act could subject the actor to liability. For example, a

building owner may use an sUAS equipped with infrared technology to

inspect a structure. This type of inspection would likely produce a

picture of people inside the building, which may be intrusive.

109

104

See Meltz, supra note 96, at 3454-64.

105

See id.

106

RESTATEMENT, supra note 22, at § 652(H).

107

See, e.g., Pulla v. Amoco Oil Co., 882 F. Supp. 836 (S.D. Iowa 1994); see also Prosser,

supra note 92, at 409.

108

See Cade Metz, Facebook’s Giant Internet-Beaming Drone Finally Takes Flight,

IRED (July 21, 2016, 12:00 PM), https://www.wired.com/2016/07/facebooks-giant-

internet-beaming-drone-finally-takes-flight/.

109

See Kyllo v. US, 533 US 27, 38 (2001) (According to Supreme Court Justice Antonin

Scalia, law enforcement’s use of heat mapping camera is unconstitutional invasion of

2017 / Traps for the Unwary Commercial Drone User / 57

sUAS user, moreover may be liable even if the intrusion is done with

the intent to benefit the victim.

110

Accordingly, even a well-intentioned

sUAS user should be wary of invading the privacy of another.

D. Other Legal Traps

There are countless other ways in which a commercial sUAS user

could face legal liability. Considering human nature, it is inevitable

that commercial sUAS users will act negligently and cause person

injury or property damage.

111

Indeed, as discussed in sections III.A.

and III.B. supra, a user’s failure to develop and maintain flight

knowledge and proficiency could constitute negligence. It is also

foreseeable that a commercial sUAS user could commit a multitude of

torts ranging from intentional infliction of emotional distress to theft

of trade secrets. In fact, many states and municipalities have enacted

their own specific tort laws addressing sUAS use, increasing an sUAS

user’s potential liability.

112

Some of these states criminalize pertinent

torts. Additional public safety and criminal laws further apply to sUAS

use. Stalking, harassment,

113

voyeurism, assault, battery, smuggling,

computer intrusions, distracting motor vehicle drivers, and

wiretapping are also all real, and likely, applications of an sUAS,

114

and commercial sUAS users should be apprised thereof as well.

Small UAS users should also be wary of “drone zoning,” and other

similar municipal regulations.

115

With the increased use of sUAS, local

regulators may begin to control sUAS use in certain geographic areas.

Localities may regulate the altitude, time, hovering duration, location,

reasonable expectation of privacy, because, among other things, it could reveal whether

the “lady of the house [was taking] her daily . . . bath.”).

110

See, e.g., Huskey v. Nat'l Broad. Co., 632 F. Supp. 1282 (N.D. Ill. 1986)

(documentary crew filming prisoner with intent to improve prison conditions liable for

invasion of prisoner’s privacy.)

111

See, e.g., Kirk Enstrom, Women Sue Groom over Drone Injuries at Wedding

Reception, WMUR (Dec. 8, 2016), http://www.wmur.com/article/women-sue-groom-over-

drone-injuries-at-wedding-reception/8480649 (wedding guests sued photographer for

negligence after being hit by sUAS); Reuters, Drone Crashed into Famed Hot Spring at

Yellowstone National Park (Aug. 7, 2014), http://www.cnbc.com/2014/08/07/drone-

crashes-into-famed-hot-spring-at-yellowstone-national-park.html (negligent sUAS user

loses sUAS in Yellowstone hot spring ).

112

See, e.g., Perritt & Plawinski, supra note 16 at 364-374; Meltz, supra note 96, at

3440-64; Burzichelli, supra note 19 at 182-87.

113

See John Villasenor, Observations from Above: Unmanned Aircraft Systems and

Privacy, 36 H

ARV. J.L. & PUB. POL’Y, 457, 505-06 (2013) (providing interesting discussion

on sUAS stalking and harassment).

114

DOLAN & THOMPSON, supra note 100, at 29.

115

See Troy A. Rule, Airspace in an Age of Drones, 95. B.U.L REV. 155, 203-07 (2015);

Michael N. Widener, Local Regulating of Drone Activity in Lower Airspace, 22 B.U. J.

CI. & TECH. L. 239, 252-60 (2016).

58 / Vol. 50 / Business Law Review

flight period, flight distance, recording usage, purpose,

116

and other

circumstances of sUAS flight. Some local regulators may ban sUAS

flight within city limits altogether.

117

The multitude of variables

involved in the municipal regulation of sUAS use may present a

complicated algorithm of rules to which an sUAS user must carefully

attend.

IV. AERONAUTICAL TRAPS

Commercial sUAS users must also attend to the recently

promulgated FAA regulations governing sUAS operations. The sUAS

regulations consist of nearly one-hundred provisions, and present a

rich regulatory scheme controlling sUAS use. It is foreseeable that

commercial sUAS users, particularly those who have not undertaken

FAA certificated private pilot training as required under prior law, will

violate any number of regulations. Indeed, the test required obtain an

sUAS remote pilot certificate is much less rigorous than the test

required to obtain a private pilot certificate, and fails prepare

commercial sUAS pilots for proper and compliant use of their aircraft.

As such, unwary sUAS users may be susceptible to violating a handful

of regulations, as highlighted below.

A. Small UAS Aircraft Specifications

Any business that wishes to use an sUAS to enhance its operations

must first register its sUAS,

118

primarily to ensure owner

accountability for legal and regulatory violations. The sUAS itself must

weigh less than fifty-five pounds, including everything that is on board

or attached to it,

119

and may not carry hazardous material.

120

Before

every use, the user must undertake a preflight inspection of the sUAS,

which includes requirements to assess weather conditions, local

airspace, flight restrictions, and potential hazards associated with the

flight.

121

Preflight inspection further requires the sUAS user to ensure

that the sUAS is in proper working order.

122

Small UAS users must

116

For example, a municipality may ban the use of sUAS for aerial advertising. Cf.

Skysign International, Inc. v. City and County of Honolulu, 276 F.3d 1109 (9th Cir. 2002)

(local regulation of signage could be applied to banner-towing aircraft).

117

Evanston, Illinois has banned commercial sUAS use within city limits and St.

Bonaficius, Minnesota has banned all types of sUAS use within city limits, including

recreational use. Robert H. Gruber, Commercial Drones and Privacy: Can We Trust

States with “Drone Federalism”?, 21 R

ICH. J.L. & TECH. 14, 21 (2015).

118

FAR, supra note 2, at § 107.13.

119

Id. at § 107.3.

120

Id. at § 107.36.

121

Id. at § 107.49(a).

122

Id. at § 107.15 & § 107.49(c)-(e).

2017 / Traps for the Unwary Commercial Drone User / 59

also advise anyone participating in the operation of the operating

conditions, emergency procedures, roles and responsibilities, and

potential hazards related thereto prior to flight.

123

Failure to comply with any of these specifications would subject an

sUAS user to regulatory liability. The required assessment of weather,

airspace, flight restrictions, and hazards is particularly complicated

and time-consuming, and is an area where a commercial sUAS user

would be highly vulnerable to liability. Weather is a sophisticated

science, and a proper assessment of weather conditions will require the

user to identify and interpret specially published aviation weather

charts and data. Similarly, the NAS is complex, and an sUAS user

must decode current aeronautical charts, airport facility directories,

and other supplements and apply them to his planned flight. An sUAS

user must also obtain recent Notices to Airmen, which include time-

critical aeronautical information concerning potential airspace

hazards and restrictions, including Temporary Flight Restrictions

(TFRs),

124

that may be relevant to their flight path. Flight planning

takes time, and it is easy to see how a commercial sUAS user, whose

time is quantifiable in money, may be tempted to check weather.com

and Google Maps to prepare for flight, and neglect the other, more

onerous, requirements. An sUAS user must not succumb to such

temptation, however, as it would subject him to both regulatory and

tort liability.

125

B. Small UAS User Specifications

To operate an sUAS, a user must be at least sixteen years of age,

126

and pass an aeronautical knowledge test to obtain a remote pilot

certificate with an sUAS rating.

127

The user must also pass recurrent

knowledge tests every twenty-four months.

128

The regulations further

provide that no person may operate an sUAS if he has a physical or

123

Id. at § 107.49(b).

124

A TFR defines a certain area of airspace where air travel is limited because of

temporary hazardous conditions, such as a wildfire or rescue operation; a security-

related event, like air travel by the US President; or other special situation, like a Super

Bowl. J

EPPESEN, supra note 34, at 4-77. TFRs are updated perpetually throughout a day,

and a pilot must always check them immediately prior to flight. See generally id. at 7-

45.

125

For example, failure to understand airspace could easily cause a trespass. Failure

to consult appropriate weather sources would constitute negligence. Both situations

could also present a nuisance.

126

FAR, supra note 2, at §107.61.

127

Id.

128

Id. at §107.65.

60 / Vol. 50 / Business Law Review

mental condition that would interfere with its safe operation.

129

And,

an sUAS user may be surprised to learn that he may not fly an sUAS

within eight hours of having even a taste of alcohol.

130

Other than an occasional, but predictable, user neglecting his

recurrent testing requirement, the primary concern with respect to the

sUAS user specifications is the requirement that the user not have a

compromising medical condition. This regulation is unlike the medical

requirements for a private pilot, which provide a list of medical

conditions that would disqualify a candidate for a licensing

certificate.

131

For sUAS operation, a user would have to self-validate

his safe medical condition, which, if done imprudently, would subject

him to regulatory liability. An imprudent self-evaluation of an sUAS

user would further subject him to tort and other liability if his medical

condition led him to trespass, cause nuisance, invade privacy, operate

his sUAS negligently, or commit some other legal transgression.

C. Small UAS Timing Specifications

FAA regulations specify that a user must not operate an sUAS at

night, and require special anti-collision lighting during civil twilight.

132

In addition, an sUAS user may only fly when there is minimum flight

visibility of no less than three statute miles as observed from the

location of his control station.

133

Visibility is measured by the average

slant distance from the control station at which prominent objects may

be identified.

134

While these specifications present easy compliance, it may be

challenging for an sUAS user to measure visibility. Aviation weather

sources provide data with respect to horizontal visibility, which may

differ from the slant visibility that sUAS users must assess. While

private pilots are specifically trained to measure visibility, as well as

to identify when visibility becomes diminished, sUAS users lack this

training and could easily miscalculate visibility. Flying under

conditions with compromised visibility is not only a regulatory

violation, but, for all the reasons stated herein, could also effect a

trespass, nuisance, negligence, or other tort violation.

129

Id. at § 107.17.

130

Id. at § 91.17. An sUAS user must also not have a concentration of 0.04 or greater

grams of alcohol per deciliter of blood or per 210 liters of breath. Id.

131

Id. at §§ 67.1 – 67.415.

132

Id. § 107.29. Except for in Alaska, civil twilight is a period of time that begins thirty

minutes before official sunrise and ends at official sunrise, and a period of time that

begins at official sunset and ends thirty minutes after official sunset. Id. at § 107.29(c).

133

Id. at § 107.51.

134

Id. at § 107.51(c).

2017 / Traps for the Unwary Commercial Drone User / 61

D. Small UAS Location Specifications

An sUAS user must operate his aircraft within his visual line-of-

sight.

135

This means that an sUAS must always remain within sight of

the remote pilot or designated visual observer. Small UAS users must

refrain from flying over any person not participating in the

operation.

136

In addition, an sUAS may not be flown higher than 400

feet AGL or the highest point of a structure,

137

and must remain 500

feet below clouds and 2,000 feet horizontally from clouds.

138

A remote

sUAS pilot must also not enter “controlled,”

139

prohibited or

restricted

140

airspace without permission from Air Traffic Control, and

must not operate in the vicinity of an airport in manner that interferes

with its operations.

141

An sUAS flight carrying property for

compensation must remain intrastate.

142

Of all sUAS regulations, it seems that for a variety of reasons, sUAS

users are most likely to violate location specifications. First, the test

for sUAS pilot certification does not require practical training or

aeronautical experience. It is easy to see how an inexperienced remote

pilot could violate any one of the location specifications without

training or experience on how to aviate.

Second, it may be impossible for an sUAS user to refrain from flying

over any people. This is particularly true if an sUAS operation is being

conducted in a congested or urban area. An sUAS user may obtain from

the FAA a waiver of this requirement, but must follow a specified

procedure including providing a complete description of the proposed

operation, and establishing that the operation can safely be conducted

in the event of a waiver.

143

Given the difficulties of avoiding flight over

any people at all times, sUAS users may have to request multiple

waivers to avoid violating this regulation. Multiple requests may

become overly burdensome, and lead to risky noncompliance.

Third, the knowledge test for the remote pilot certificate with an

sUAS rating fails to prepare a user to assess sufficiently his location.

The knowledge test does not test pilotage or “dead reckoning” skills.

135

Id. at § 107.31.

136

Id. at § 107.39.

137

Id. at § 107.51(b).

138

Id. at § 107.51(d).

139

Id. at § 107.41. This means that an sUAS may not operate in Class B, C, or D

airspace, or within the lateral boundaries of the surface area of Class E airspace

designated for an airport.

140

Id. at § 107.45.

141

Id. at § 107.43.

142

See 49 U.S.C. 40102(a)(2) (defining “air carrier”) and (a)(5) (defining “air

transportation”).

143

Id. at § 107.200.

62 / Vol. 50 / Business Law Review

Pilotage is the skill of understanding aircraft location by reading an

aeronautical chart or supplement and comparing it with the

surrounding terrain.

144

Dead reckoning is the process by which pilots

determine their location and effect navigation using time, speed,

distance, and direction without the aid of advanced technology, such as

a GPS or other computer-assisted information system.

145

While most

popular commercial sUAS have GPS and other systems to inform the

user of its location, it is not uncommon for such systems to fail. In such

a case, an sUAS user without pilotage and dead reckoning skills would

likely be unable to determine accurately his location, and make him

vulnerable to violating several of the aforementioned FAA regulations.

Furthermore, the sUAS test fails to prepare users to assess their

altitude independent of a GPS or other similar system. While most

commercial sUAS provide the user with altitude data, and some even

verbally alert the user when nearing a maximum specified altitude, not

all sUAS have altitude-encoding equipment. Without training, an

sUAS user must estimate his altitude, which is a challenging

assignment with a device at hundreds of feet in the air. Private pilots

also learn that there are also many atmospheric, weather, topographic,

lighting, and other conditions that can lead one to misgauge the

altitude of an object in the air. Without training or experience, sUAS

pilots are not likely to be able to determine the precise altitude of their

sUAS without a GPS. Further, the sUAS altitude requirement is given

in AGL, whereas aeronautical charts and aids provide many altitudes

in MSL. While the sUAS knowledge test does briefly discuss the

difference in altitude measurements, this disparity can still pose

problems for a novice pilot.

The sUAS knowledge test, moreover, fails to prime a user on in-

flight weather observation and data-gathering. Private pilots are

trained on how to identify and obtain flight-altering weather conditions

during the course of flight. Weather conditions can change abruptly,

and ultimately force an aircraft to run outside of its operating

limitations. Private pilots are therefore trained on how to interpret in-

flight weather data and observations to avoid potentially dangerous

conditions. Remote sUAS pilots, however, are not required to develop

these skills, even though they may also encounter adverse weather

conditions. Adverse weather can cause a pilot to misunderstand his

location (e.g., upon entering fast-advancing clouds), or worse, be unable

to operate his sUAS safely, thereby posing a danger to people and

property on the ground.

144

JEPPESEN, supra note 34, at 9-7.

145

Id. at 9-7, – 9-8.

2017 / Traps for the Unwary Commercial Drone User / 63

For the same reasons, sUAS users will initially lack the ability to

gauge their distance from the clouds. This may cause the sUAS to enter

the clouds errantly, which is an instant violation of several FAA

regulations.

146

Once in the clouds, the sUAS user may easily lose his

understanding of his location. More significantly, however, an sUAS

user that misgauges his distance from the clouds presents a serious

collision danger to other aircraft that may be flying in the clouds or

exiting from the clouds at high rates of speed. Other aircraft may be

unable to see an sUAS that is operating in the clouds, and vice versa,

and neither may have time to avoid the other.

The sUAS knowledge test also fails to prepare an sUAS user on

many other aspects of flight that would enhance his understanding of

his location and remote piloting in general. For example, an sUAS user

is not tested on subjects like obstacle clearance requirements,

principles of flight, aerodynamics, and electrical theory. Private pilots

are tested on all of these subjects, the knowledge of which aid in their

regulatory and legal compliance.

Thus, for a variety of reasons, an sUAS user could misapprehend his

location, and violate any number of FAA regulations. Misgauging

location could cause an sUAS user to wander over people, above a

permitted altitude, too close to clouds, into busy controlled airspace, in

prohibited or restricted airspace, in the vicinity of an airport

interfering with its operations, and across state lines. A lost sUAS user

could also errantly wander into warning areas, military operation

areas, alert areas, controlled firing areas, low altitude Military

Training Routes, areas subject to special TFRs, Parachute Jump

Operations, National Security Areas, Visual Flight Rule Routes, and

Instrument Flight Rule Routes. Such wandering also presents a risk of

tort liability, which includes not just the obvious exposure to trespass

and nuisance claims, but also the serious danger of collision with other

aircraft that could cause significant personal injury and property

damage.

E. Small UAS Operational Specifications

The FAA also provides a list of operational prohibitions about which

sUAS users should be informed. In particular, a user should not

operate an sUAS in a careless or reckless manner,

147

including

operating over eighty-seven knots, or one-hundred miles-per hour.

148

user may not operate more than one sUAS at a time,

149

and may

146

See, e.g., id. at §§ 107.51(d); 107.31.

147

Id. at § 107.23(a).

148

Id. at § 107.51(a).

149

Id. at § 107.35.

64 / Vol. 50 / Business Law Review

generally not operate an sUAS from a moving vehicle or aircraft.

150

the sUAS is involved in an accident, a user must report it to the FAA

within ten days if the accident resulted in serious personal injury or

property damage over $500.

151

A commercial sUAS user should be able to comply easily with most

operational specifications, although the “careless or reckless” operation

standard is ostensibly vague. Failure to undertake a thorough preflight

examination, failure to ascertain weather conditions, failure to become

proficient in flight skills and knowledge or maintain proficiency

thereof, failure to maintain the sUAS, as well as failure to update, and

understand updates of, sUAS software might all constitute careless or

reckless operation. It may also be difficult for an untrained sUAS user

to comply with groundspeed restrictions, particularly if his sUAS does

not provide groundspeed data, or its groundspeed systems become

dysfunctional. Absent practical training, it is difficult to determine the

groundspeed of an object in the air, and one can imagine a situation in

which a novice commercial sUAS user would miscalculate his speed

and violate this and other related regulations, as well as face potential

tort liability therefrom.

F. Penalties for Regulatory Violations

Violation of any of the aforementioned sUAS regulations could

subject an sUAS user to significant sanctions. It should be noted that

the FAA has indicated its intention to promulgate addition regulations

governing sUAS, which would further expose sUAS users to potential

sanctions.

152

Small UAS users are also subject to numerous other FAA

regulations by virtue of being an “aircraft,” which may subject them to

additional sanctions.

153

In determining sanctions for any regulatory violation, the FAA

weighs several factors, including, but not limited to, the severity of the

safety risk involved, the number of pre- and co-existing regulatory and

legal violations, whether the violation involved careless or reckless

conduct, aggravating and mitigating circumstances, the ability of the

violator to absorb the sanction, and the consistency of the sanction.

154

Sanctions include administrative actions such as a “Warning Notice”

150

Id. at § 107.25.

151

Id. at § 107.9.

152

Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed.

Reg.42063 at 27-28 & 37 (2016) (to be codified at 14 C.F.R. pts. 21, 43, 61, 91, 101, 107,

119, 133, & 183) [hereinafter Part 107 Preamble].

153

Id. at 39-42.

154

See FAA, Compliance and Enforcement Program, F.A.A. Order No. 2150.3B, at ch.

7 & app. B. (2015) [hereinafter Enforcement Handbook].

2017 / Traps for the Unwary Commercial Drone User / 65

or a “Letter of Correction,”

155

certificate suspensions or revocations,

and civil penalties that range from $100 to $500,000 per violation.

156

Commercial sUAS users should be wary of violating FAA

regulations, particularly given the FAA’s recent aggressive

enforcement action against SkyPan International, Inc. (“SkyPan”).

SkyPan is an aerial photographer who apparently flew an sUAS above

private property, mostly consisting of dirt, grass, or paved lots, to assist

land developers with design plans for new buildings.

157

The FAA

accused SkyPan of flying without a Section 333 exemption (under

previous law), and violating Class B airspace, among other things, and

proposed a civil penalty against SkyPan of $11,000 per violation for a

total of $1.9 million.

158

A regulatory violation may not only demand prohibitive fines; it may

also constitute negligence per se, subjecting an sUAS user to automatic

tort liability in addition to administrative liability. Even if a violation

is not negligence per se, it is likely that activities that violate FAA

regulations would also amount to the commission of any number of

torts for which an sUAS user would be additionally liable. And, while

a sUAS user may successfully defeat FAA enforcement and coincident

tort liability, the user will likely have to spend tens of thousands of

dollars, or more, in defense costs. It is best, therefore for sUAS users

to be mindful of FAA regulations.

V. CONCLUSION

The market for commercial sUAS use is exploding, and there are

likely to be millions of commercial sUAS flying around by the year

2020. Commercial sUAS are becoming more affordable and more

useful, and the recent changes to the law make it easier to obtain a

remote pilot license for sUAS operation. Most commercial sUAS users,

however, will lack understanding of both law and aviation, and many

unwary users will face the legal and aeronautical traps discussed

herein. Tort and property lawsuits are inevitable, as are regulatory

violations.

155

FAR § 13.11. A “Letter of Correction” states the necessary corrective action the

alleged violator agrees to take. If the agreed corrective action is not fully completed, legal

enforcement action may be taken.

156

See Enforcement Handbook, supra note 154.

157

See SkyPan International Inc., Docket No. FAAï2014ï1102 at 1 (FAA Apr. 17, 2015),

available at https://www.faa.gov/uas/beyond_the_basics/section_333/333_authorizations/

media/skypan_international_11352.pdf.

158

Press Release, FAA, FAA Proposes $1.9 Million Civil Penalty Against SkyPan

International for Allegedly Unauthorized Unmanned Aircraft Operations (Oct. 6, 2015),

available at https://www.faa.gov/news/press_releases/news_story.cfm?newsId=19555.

66 / Vol. 50 / Business Law Review

Liability risks for sUAS users, moreover, are likely to grow in the

future. There will be more state and local laws governing sUAS, and

the FAA intends to promulgate additional regulations relative to

sUAS. Significantly, businesses should not assume that insurance will

cover any liability associated with their sUAS use.

159

It is important, therefore, for a commercial sUAS user to understand

the applicable legal and regulatory hazards. To avoid liability,

commercial sUAS users should spend time with competent legal

counsel to discuss the legal and regulatory issues discussed above. And,

in addition to the FAA recommended twenty hours of self-study,

160

sUAS users should spend some time with a Certified Flight Instructor

to review the NAS, weather, pilotage and dead reckoning, performance

issues, airport operations, aeronautical decision-making, common

safety practices, and the culture of aviation. Responsible attention to,

and careful study of, all the aforementioned issues should mitigate the

risk of the potentially costly tort and regulatory liability associated

with commercial sUAS use.

159

Cf. Tom Schrimpf & Russ Klingaman, Recreational Drones: Do Homeowners’

Insurance Policies Provide Coverage?, C

LAIMS J. (Aug. 4, 2015)

http://www.claimsjournal.com/news/national/2015/08/04/264918.htm (noting policies

exclude coverage for damage associated with “aircraft” use).

160

Part 107 Preamble, supra note 152, at 551.

STICK ‘EM UP THIS IS A BREACH: A CASE FOR

PUNITIVE DAMAGES FOR CONTRACT HOLDUPS

by Scott Thomas,

David Missirian

and Mystica Alexander

***

I. INTRODUCTION

Consider the following fact pattern. After lengthy negotiations, the

parties finally arrive at terms to a contract. Before the parties

complete their obligations under the contract, one party makes a

midterm demand to renegotiate the contract using the threat of a

breach of contract to increase her bargaining power in negotiating a

new contract or modifications to an existing contract. We see these

scenarios repeatedly. Superstar athletes hold out in a demand for

contract renegotiation, a consumer of services withholds payment after

services have been provided in the hope of getting a price reduction, or

a vendor decides to sell promised goods to a third party unless the

customer pays a higher price. Corbin has used the phrase “holdup” to

refer to these types of situations.

Holdup is a fitting term for this

behavior, since the behavior, in its own right, justifies the term and the

victims are often limited to recovery of foreseeable compensatory

damages.

Traditionally, courts have held the purpose of contract damages is

to compensate the victim of a breach for injury. These damages often

address three different interests held by the nonbreaching party:

expectation interest, reliance interest, and restitution interest.

Lecturer, Bentley University

Assistant Professor, Bentley University

***

Assistant Professor, Bentley University

IA A. CORBIN, CORBIN ON CONTRACTS § 171, at 105 (1963).

68 / Vol. 50 / Business Law Review

Protecting the plaintiff’s restitution interest means the defendant

should return any benefit the plaintiff conferred. Protecting the

plaintiff’s reliance interest requires the reimbursement of the plaintiff

for losses sustained in reliance on the contract, returning the plaintiff

to her position prior to the contract. This paper focuses on the

awarding of expectation damages to put the nonbreaching party where

she would have been if the contract had been performed and concludes

these damages are insufficient.

In the awarding of damages,

expectation damages usually exceed reliance damages, which often

exceed damages awarded for restitution. Courts have generally been

reluctant to provide a plaintiff with an award beyond these three

measures of damages. More specifically, punitive damages have

generally not been available in contract actions. As stated in Section

355 of the Restatement (Second) of Contracts: “Punitive damages are

not recoverable for a breach of contract unless the conduct constituting

the breach is also a tort for which punitive damages are recoverable.”

However, in cases of a willful breach of contract, in which the

breaching party seeks to better her position through the breach, the

traditional measure of damages seems to fall short, and punitive

damages could serve as a well-needed deterrent to such behavior.

Unfortunately, dismissing or ignoring ethical reasons for deterring

holdups, the courts and commentators have often justified limiting

recovery to expectation damages using economic theory, social policy,

and existing commercial law doctrine.

This paper explores these economic, social, and ethical theories. Part

II provides a more detailed look at typical holdup scenarios. Part III

discusses the economic theories and social theories used by courts

when limiting damage awards. Part IV explores the ethical

dimensions of contractual agreements and the ethical implications of

“bad behavior.” Ultimately, this paper concludes that justice is best

served by the awarding of punitive damages to victims of a holdup.

II. UNDERSTANDING HOLDUPS IN THE COMMERCIAL

SETTING

A holdup can occur in many forms and ultimately leads to the

encouragement of breaches when courts limit their awards to

expectation damages. Consider more closely the impact of the

superstar athlete and the service recipient engaging in a willful breach.

A superstar athlete is in his third year of a four-year contract.

Hoping for a contract extension, the superstar refuses to attend

Robert Cooter and Melvin Aron Eisenberg, Damages for Breach of Contract, 73 CAL.

L. REV. 1432 (1985), http://scholarship.law.berkeley.edu/facpubs/1449 .

RESTATEMENT (SECOND) OF CONTRACTS § 355 (1981).

2017 / Stick ‘Em Up This is a Breach / 69

practices and to play in exhibition games until his contract is

renegotiated. Faced with this predicament, ownership stands in the

shoes of the holdup victim and often finds little relief from the courts.

One commentator has explained the mechanics and bargaining power

of a holdout as follows:

Owners will sign a marquee player to a long-term deal to please fans

and promote team stability. However, certain players elect to try to

coerce ownership into renegotiating existing contracts before the

contractual term has expired. These players, usually perennial all-

stars at the prime of their careers, will announce, likely during the

off-season, that they will “hold out” from training camp and the

upcoming season unless their contract is modified to reflect their “true

value.” When negotiations reach a stalemate, the player will follow

through on his threat and refuse to participate with the team.

One of the reasons a player’s threat to hold out is so powerful is that

the legal remedies available to a team against a superstar are sorely

lacking.

At best, a team can secure a “negative injunction” to prevent

a player from playing professionally for another sports franchise. It is

“exceedingly burdensome to establish what the loss of one player, even

a superstar player, will have on the club’s performance and its financial

condition.”

As a result of these limitations, owners have not

successfully litigated a claim for damages against an athlete.

The

difficulty of reaching a suitable calculation of damages also undercuts

the likely effectiveness of some of the more creative solutions to the

holdout problems proposed by commentators, such as the use of

tortious breach of contract litigation.

The punitive damages proposed

have often relied on the establishment of an independent tort.

As a

result, these superstars better their positions for the remaining years

on their contracts with no adequate damages left for the nonbreaching

owners. Left with the burden of proving damages and disappointed

fans, the owner becomes a victim of the holdup. The player’s

opportunistic behavior increases his slice of the pie, and the owner

receives no compensation. Punitive damages for breach of contract

Basil M. Loeb, Comment, Deterring Player Holdouts: Who Should Do It, How to Do

It, and Why It Has to be Done, 11 M

ARQ. SPORTS L. REV. 275, 275 (2001).

See generally Alex M. Johnson, Jr., The Argument for Self-Help Specific

Performance: Opportunistic Renegotiation of Player Contracts, 22 C

ONN. L. REV. 61

(1989).

Id. at 78.

Id. at 81.

Kevin Yeam, New Remedial Developments in the Enforcement of Personal Services

Contracts for the Entertainment and Sports Industries: The Rise of Tortious Bad Faith

of Contract and the Fall of the Speculative Damages Defense, 7 L

OY. L.A. ENT. L.J. 27

(1987).

Id.

70 / Vol. 50 / Business Law Review

could level the playing field and discourage this type of opportunistic

breach.

Another frustrating opportunistic breach is a bad faith refusal to

pay. A service provider spends months learning the business of a

client, presents the client with a contract that is negotiated by the

attorneys for several weeks, the services occur over a year, and the

client accepts the services as fully in compliance with the contract.

However, the client, fully aware of its negotiating leverage, refuses to

pay. This could occur when the client has other contracts with the

organization, leaving the service provider fearful those contracts could

suffer. This could also occur in situations where suing clients in a

small professional community could damage the service provider’s

reputation, despite the strong validity of the claim. When considering

these types of breaches, one court has expressly held that an “obstinate

and willful refusal to pay . . . is a ground upon which punitive damages

may legitimately be granted.”

But this is highly unusual, and even

some states that generally allow punitive damages for breach of

contract deny such damages for willful refusal to pay a debt.

III. CHARACTERIZING THE BREACH AND RATIONALIZING

THE LIMITATION OF DAMAGES

Analyzing the appropriate damage award for a willful breach

requires consideration of the economic and social implications of such

a breach. After describing the types of willful breaches of contracts and

the legal history, this part explores each of these areas and the unique

considerations applicable to each type of willful breach.

A. Types of Willful Breach

Commentators have divided willful breaches into two categories:

opportunistic and efficient. “A breach is opportunistic if the breaching

party attempts to get more than he bargained for at the expense of the

nonbreaching party.”

An opportunistic breach would include the

holdup described above where a party refuses to pay for properly

performed services merely to obtain a price reduction. The breaching

party improves her position at the expense of the nonbreaching party.

An efficient breach improves the position of the breaching party but

gives the benefit of the contract to the nonbreaching party through the

payment of expectation damages. An efficient breach example would

DynaSteel Corp. v. Aztec Indus., 611 So. 2d 977, 984 (Miss. 1992).

See, e.g., Vann v. Nationwide Ins. Co., 185 S.E.2d 363, 364 (S.C. 1971) (“Punitive

damages are not recoverable for the mere failure or refusal to pay a debt.”).

See William S. Dodge, The Case for Punitive Damages in Contracts, 48 DUKE L. J.

629, 652 (1999).

2017 / Stick ‘Em Up This is a Breach / 71

include finding another customer willing to pay more for your product

and breaching your contract for the sale of those goods to the

nonbreaching party, but paying expectation damages to the

nonbreaching party. Therefore, proponents of efficient breaches would

argue that it creates a “Pareto improvement” whereby the breaching

party is better off and neither party suffers from the breach.

In other

words, an opportunistic breach slices the pie into different size

portions, while an efficient breach increases the overall size of the pie.

Despite placing these two breaching parties in different camps, where

one is being labelled as an opportunistic breacher, the presumably bad

seed, and the other as merely being an efficient breacher, the

presumably good seed, let it not be lost that both of these parties broke

their promise to perform.

B. Damages for a Willful Breach

Although punitive damages have traditionally been awarded in tort

actions, the long-standing presumption of lawyers and scholars alike

is that punitive damages should not be awarded for a breach of

contract.

What are the origins of this presumption and is this

presumption, in fact, accurate? To understand the law’s approach to

punitive damages, it is necessary to view this in the context of the

origin of contracts, the origin of punitive damages, and the objectives

served by the award of such damages.

1. Historical Background:

Our modern understanding of contracts has its origins in the

nineteenth century.

While the medieval understanding of

contractual relationships was rooted in the idea of “inherent injustice”

or “fairness of an exchange” that prevailed through the eighteenth

century, the nineteenth century witnessed a departure from this

approach as courts and jurists both in England and the United States

established that “the source of obligation of contract is the convergence

of the wills of the contracting parties.”

Traditionally, contract

remedies seek to compensate a non-breaching party for harm suffered,

and do not seek to compel the breaching party to perform.

E. FARNSWORTH, CONTRACTS §1.2 at 7, note 1 (1982).

Timothy J. Sullivan, Punitive Damages in the Law of Contract: The Reality and the

Illusion of Legal Change, 61 M

INN. L. REV. 207 (1977).

Morton J. Horwitz, The Historical Foundations of Modern Contract Law, 87

ARVARD L. REV. 917 (1974).

Id.

Dodge, supra note 12, at 630.

72 / Vol. 50 / Business Law Review

A look at the system of justice in Medieval England indicates that

by the end of the reign of King Henry III in 1272, the King’s Court had

not yet developed a doctrine of contract law.

A loose notion of

contract law indicated that it was limited to cases in which a defendant

had received either something tangible or services from a plaintiff for

which he failed to pay.

In this early time period we see the court

either imposing punishment for crimes committed, or providing

specific relief to a plaintiff for harm suffered.

“The plaintiff’s

objective was not to receive a judgment for some pecuniary sum but

rather to obtain a judicial declaration establishing his entitlement to

the return of some species of property of which he had been deprived.”

It was only gradually during the thirteenth century that there arose a

suggestion that it may be possible to recover a “double remedy.”

“This

can be attributed to the rise of trespass actions which would set the

law on a path to making “the award of pecuniary compensation

commonplace in Anglo-American law.”

Interestingly, punitive damages trace their origins in English law to

juror sentiment rather than to any specific legislative or judicial

actions. Although there was precedent for setting the amount of

damages based on some fixed schedule,

the King’s Court rejected this

approach in the assessment of damages, choosing instead to vest

responsibility for this in the jury.

For example, punitive damages

were awarded in 1769 to an individual whose unmarried daughter was

impregnated by the defendant. The court made note that the jury was

right to award liberal damages, and that the court would have

approved of an even greater amount because the plaintiff received this

insult from the defendant “in his own house.”

English law did not prescribe rules for juries on how a damage

award can/should be assessed, and so jury assessments were

sometimes excessive and sometimes inadequate.

In the absence of

substantive law, the courts found procedural means to control damage

F. POLLOCK & F. MAITLAND, THE HISTORY OF ENGLISH LAW 194 (2d. ed. 1898).

http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/maitland/HistoryEnglishLaw2.pdf

(Cambridge University Press, Cambridge).

Pollock, supra note 18, at 222.

Id. at 523.

Sullivan, supra note 14, at 208.

Pollock, supra note 18, at 524.

Sullivan, supra note 14, at 208-209.

Pollock, supra note 18, at 457-458.

Sullivan, supra note 14, at 209.

Tullidge v. Wade, 95 Eng. Rep. 909 (K.B. 1769).

Sullivan, supra note 14, at 210.

2017 / Stick ‘Em Up This is a Breach / 73

awards.

For example, in the thirteenth century the “writ of attaint”

was developed. This could be used to either set aside an erroneous

verdict but also punish any jury that rendered a false verdict. This

short-lived approach gradually gave way to other methods of

controlling a jury verdict, so that in 1655, in the case of Wood v.

Gunston,

the court ruled a new trial could be awarded to a defendant

solely as a result of an excessive damage award.

Although in this case

the King’s Court established the authority of the court to grant a new

trial on the ground of excessive damages, it is important to note this

rule was not applied equally to tort and contract cases. Judges were

less likely to interfere with damage awards for tortious conduct than

for contract damages.

So here we see the beginning of a distinction

for damages in contracts actions as opposed to those involving tortious

behavior.

By the early nineteenth century, punitive damages, especially in

tort actions, were an accepted part of English law. This sentiment

carried over to the American legal system. By the mid-nineteenth

century punitive damages in tort were well-settled law, although not

without some controversy and disparity as to the limitations of such

awards.

Much like their English predecessors, early American jurists

generally did not provide jury instructions on damages awards, nor did

they ordinarily take action to adjust a damage award they found

disagreeable.

Such action confirmed the early view of contracts cases

as equitable in nature, ruled by the prevailing standard of the

“community’s sense of fairness.”

Early court decisions in colonial

Virginia and South Carolina illustrate the jurist’s deference to the

jury’s award of damages.

As time progressed, a different approach to

contract law began to be adopted, the effects of which we see in The

Restatement (First) of Contracts description of the purposes of

contracts damages: “Where a right of action for breach exists,

compensatory damages will be given for the net amount of the losses

caused and gains prevented by the defendant’s breach.”

There is a

Id.

82 Eng. Rep. 867 (K.B. 1655).

Sullivan, supra note14, at 212.

Id. at 212-213.

Id. at 215.

Horwitz, supra note 15, at 925.

Id.

Id., citing Pledger v. Wade, 1 Bay 35, 37 (S.C. 1786) (South Carolina Supreme Court

will not award a new trial even though the jury verdict was for a lesser amount that the

contract price), and Waugh v. Bagg, 1 Virginia Colonial Decisions 77, 78 (Va., 1731)

(excess damages awarded by a jury was not grounds for a new trial).

RESTATEMENT OF CONTRACTS §329 (1932).

74 / Vol. 50 / Business Law Review

movement away from the notion of fairness and justice to one of putting

a party back to where one started absent the breach. The simplistic

notion of putting a party back to its position before the breach has

inherent appeal, but can an action ever truly be undone or reversed as

to all of its consequences and ramifications?

2. Contemporary Understanding of Contract Damages:

The Restatement (Second) of Contracts makes clear the prevailing

approach with regard to availability of punitive damages: “Punitive

damages are not recoverable for a breach of contract unless the conduct

constituting the breach is also a tort for which punitive damages are

recoverable.”

There are a few exceptions to the rule barring punitive

damages for breach of contract: breach of a contract by a public service

company,

breach of a contract that is also a breach of a fiduciary

duty,

breach of a contract to marry,

and bad faith breach of an

insurance contract.

For a brief period of time, in the 1970s and 1980s, the U.S. witnessed

a more liberal approach to punitive damages awards with various

jurisdictions “allowing plaintiffs to recover punitive damages directly

in contract actions and others achieving the same result by

characterizing some contractual breaches as torts.”

However, since

the end of the 1980s courts have generally retreated from this

expansion of punitive damage awards to once again focus on the

compensatory nature of contract damages.

Although rarely allowed in contract cases, the U.S. Supreme Court

has defined the contemporary function of punitive damages as

punishment and deterrence.

RESTATEMENT (SECOND) OF CONTRACTS §355 (1981).

See, e.g., Stevenson v. John J. Grier Hotel Co., 251 S.W. 355, 355 (Ark. 1923); Milner

Hotels v. Brent, 43 So. 2d 654, 656 (Miss. 1949).

See, e.g., Brown v. Coates, 253 F.2d 36, 40 (D.C. Cir. 1958); Newton v. Hornblower,

Inc., 582 P.2d 1136, 1149 (Kan. 1978); Balsemides v. Perle, 712 A.2d 673, 685 (N.J.

Super. Ct. App. Div. 1998).

Coryell v. Colbaugh, 1 N.J.L. 90, 91 (N.J. 1791).

At least 45 states recognize bad faith breach of an insurance contract as a tort in

third-party cases. See Douglas R. Richmond, An Overview of Insurance Bad Faith Law

and Litigation, 25 S

ETON HALL L. REV. 74, 80 n.33 (1994) (listing cases).

Dodge, supra note 12, at 638. See, for example Barry Perlstein, Crossing the

Contract-Tort Boundary: An Economic Argument for the Imposition of

Extracompensatory Damages for Opportunistic Breach of Contract, 58 B

ROOKLYN L. REV.

877 (1992) (discussing a line of California cases that have concluded that acting in bad

faith is a breach of the implied covenant of fair dealing in a contract).

Dodge, supra note 12, at 642.

Smith v. Wade, 461 U.S. 30 (1983).

2017 / Stick ‘Em Up This is a Breach / 75

Punitive damages are awarded in the jury’s discretion “to punish [the

defendant] for his outrageous conduct and to deter him and others like

him from similar conduct in the future.” Restatement (Second) of

Torts Sec. 908(1) (1979). The focus is on the character of the

tortfeasor’s conduct – whether it is of the sort that calls for deterrence

and punishment over and above that provided by compensatory

awards. If it is of such a character, then it is appropriate to allow a

jury to assess punitive damages … To put it differently, society has an

interest in deterring and punishing all intentional or reckless

invasions of the rights of others, even though it sometimes chooses not

to impose any liability for lesser degrees of fault.

C. Economic Rationale for Limiting Damages:

We find little discussion regarding the reluctance of our courts to

award damages that go beyond expectation damages. Instead, the

courts appear to have avoided any discussion of the benefits that

punitive damages could bring in maintaining the sanctity of contracts.

[O]ne of the principal impediments to analysis of contract cases

treating the question of punitive damages is the consistent absence,

particularly in the early cases, of any meaningful judicial discussion

of the philosophy of damage law.... Whatever the explanation, we

must begin without any firm idea of why, beyond adherence to

traditional English standards, American courts have held, as a

general rule, that punitive damages should not be awarded for breach

of contract.

In Iron Mountain Security Storage v. American Specialty Foods,

Inc.,

a federal district court provided insight with respect to damage

limitations involving contracts. Although this case involved a tort

lawsuit for a violation of the implied covenant of good faith and fair

dealing, it gave us a sense of the thinking of the courts at that time.

The court refused to extend tort liability beyond insurance contracts,

concluding that most contract violators would be subject to tort liability

since “the violation of most contracts involves a breach of faith.”

other words, the court seemed to believe that because contract

violations are common, they should not be subject to tort liability and

potential punitive damages. But the court did not explain why bad

faith breaches do not justify tort liability and the imposition of punitive

damages.

In the absence of meaningful discussions of punitive damages,

judges have relied, in part, on economic theories to support the denial

of punitive damages in a holdup. As explained in part IIIA,

Id. at 54-55.

Sullivan, supra note 14, at 221.

457 F. Supp. 1158 (E.D. Pa. 1978).

Id. at 1165 n.7.

76 / Vol. 50 / Business Law Review

opportunistic behavior does not create wealth or enlarge the size of the

economic pie, but simply redistributes wealth from the nonbreaching

party to the breaching party.

Opportunistic breaches may go further

and actually reduce the size of the pie because “potential opportunists

and victims expend resources perpetrating and protecting against

opportunism.”

The opportunist may spend time and money looking

for loopholes in a contract and the victim may spend its own time and

money protecting itself from the opportunist’s behavior.

Thus, as Judge Posner recognizes, the law should discourage

opportunistic breaches of contract:

If a promisor breaks his promise merely to take advantage of the

vulnerability of the promisee in a setting (the normal contract setting)

where performance is sequential rather than simultaneous, we might

as well throw the book at the promisor. An example would be where

A pays B in advance for goods and instead of delivering them B uses

the money in another venture. Such conduct has no economic

justification and ought simply to be deterred.

As Judge Posner’s quote illustrates, no economic efficiency results

and the breaching party is rewarded for the holdup. If courts restrict

their awards to expectation damages in holdups, the stickup man will

ultimately learn that breaching contracts is a profitable venture.

Judge Posner stated the argument for damages beyond expectation

damages when a promisor breaches opportunistically, “we might as

well throw the book at the promisor. . . . Such conduct has no economic

justification and ought simply to be deterred.”

Punitive damages

would provide the appropriate deterrence.

A “holdup” that could be characterized as an efficient breach finds

only flawed support in the theory of creating a Pareto improvement

through an efficient breach. Support for the encouragement of an

efficient breach seems to find its roots in Justice Holmes’ The Common

Law:

The only universal consequence of a legally binding promise is, that

the law makes the promisor pay damages if the promised event does

not come to pass. In every case it leaves him free from interference

George M. Cohen, The Negligence Opportunism Tradeoff in Contract Law, 20

OFSTRA L. REV. 941, 973 (1992).

Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65 MINN. L.

REV. 521, 524 (1981).

Id.

RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 131 (5th ed. 1998).

Id. at 130.

2017 / Stick ‘Em Up This is a Breach / 77

until the time for fulfilment has gone by, and therefore free to break

his contract if he chooses.

Judge Posner, in favor of punitive damages for opportunistic

breaches does not find the same need for punitive damages with an

efficient breach:

Even if the breach is deliberate, it is not necessarily blameworthy.

The promisor may simply have discovered that his performance is

worth more to someone else. If so, efficiency is promoted by allowing

him to break his promise, provided he makes good the promisee’s

actual losses. If he is forced to pay more than that, an efficient breach

may be deterred, and the law doesn’t want to bring about such a

result.

Judge Posner has also commented that “Holmes’s dictum . . .

contains an important economic insight. In many cases it is

uneconomical to induce completion of performance of a contract.”

Continuing on this point, “The modern theory of efficient breach is an

extension of Holmes’ outlook on contractual remedy.”

In other words,

the rationale underlying the encouragement of efficient breach is that

expectation damages due to the promise will ensure the promisor will

breach only when the gains from breach exceed the legal damages.

Conversely, the promisor will be discouraged from breaching when

gains from the breach do not exceed the legal damages.

There are a number of problems with this analysis. The efficient

breach argument assumes that the breaching party willingly agrees to

compensate for the nonbreaching party’s actual losses and does not try

to take advantage of the costs of litigation to avoid paying damages or

settle for a lesser amount. The efficient breach argument also assumes

that expectation damages do, in fact, put the nonbreaching party in as

good a position as performance. However, this argument ignores the

fact that nonbreaching parties may not recover for emotional distress,

negative public speculation regarding the reason the breaching party

backed out, potential secondary business clients who are now leery of

contracting with the non-breaching party, attorneys’ fees, or

OLIVER WENDELL HOLMES, JR., THE COMMON LAW 301 (1881).

Patton v. Mid-Continent Sys., 841 F.2d 742, 750 (7th Cir. 1988).

POSNER, supra note 53.

Daniel Friedmann, The Efficient Breach Fallacy, The Journal of Legal Studies, Vol.

18, No. 1. (Jan. 1989), pp. 1-24, 2.

Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just

Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient

Breach, 77 COLUM. L. REV. 554, 558 (1977).

78 / Vol. 50 / Business Law Review

prejudgment interest leaving the nonbreaching party in a hole dug by

someone else and as a result without adequate expectation damages.

The promisor often finds breach attractive not because anticipated

gains from the breach exceed anticipated losses, but because she never

intends to pay damages.

For example, one who contracts to sell goods

at a specified price has no incentive to breach a contract when market

price rises, since the gains derived by selling to an alternative

purchaser at the higher rate will be offset by the promisee’s legal

damages. But if the seller never intends to compensate the promisee

for her legal damages, there is nothing to discourage a breach. In a

system in which a breach, coupled with a refusal to pay resulting

damages, is often its own reward, it is not surprising that intentional

breach often occurs.

Ultimately, if the breaching party is not responsible for the

nonbreaching party’s full losses or has no intention of compensating

the nonbreaching party for losses, then there is an incentive to breach

even when the breach would not be efficient.

In addition, the doctrine

suffers from its own logic in that the breach allocates the benefit of the

breach to the breaching party. Klass illustrates the improper

distribution of gains under our current legal system using the following

fact pattern.

The original contract promised $4 per unit in net gains from

performance, $2 profit to Seller and $2 profit to Buyer. Third Party’s

offer to pay $13 for the goods created the opportunity for the parties

to realize between them a $5 per unit gain ($13 price - $8 Seller costs

= $5). If, as the efficient breach theory recommends, Seller breaches,

pays expectation damages, and sells the goods to Third Party, Seller

pockets the $1 difference ($3 profit vs. $2 profit) and buyer comes out

even ($2 expectation damages). If, on the contrary, Seller delivers the

goods, Buyer might sell them to Third Party. Now, as compared to the

first transaction, Seller comes out even ($2 profit), whereas Buyer

receives the extra $1 from the sale to Third Party ($13 resale price -

$10 contract price = $3). The theory of efficient breach is morally

problematic not only because it encourages a moral wrong, but also

See, e.g., C. Delos Putz, Jr. & Nona Klippen, Commercial Bad Faith: Attorney Fees—

Not Tort Liability—Is the Remedy for “Stonewalling”, 21 U.S.F. L. R

EV. 419, 452-60

(1987); (arguing that awarding attorneys’ fees is preferable to awarding punitive

damages).

Thomas A. Diamond, The Tort of Bad Faith Breach of Contract: When, If At All,

Should It Be Extended Beyond Insurance Transactions? 64 M

ARQ. L. REV. 425 (1981).

Available at: http://scholarship.law.marquette.edu/mulr/vol64/iss3/1 .

See, e.g., John A. Sebert, Jr., Punitive and Nonpecuniary Damages in Actions Based

upon Contract: Toward Achieving the Objective of Full Compensation, 33 U.C.L.A. L.

REV. 1565, 1573. (1986). (“By systematically undercompensating plaintiffs, we risk

encouraging too much breach rather than too little.”).

2017 / Stick ‘Em Up This is a Breach / 79

because it would allocate all the gains from that wrong to the

wrongdoer.

Dual performance hypothesis attempts to support our current legal

system and the concept of an efficient breach. In short, the hypothesis

postulates that no breach has occurred if the breaching party pays

expectation damages because those damages fulfill the obligation to

the nonbreaching party. To reach this result, the dual performance

hypothesis holds that the typical promisor makes a promise to deliver

goods or services in return for consideration or to pay damages when

the promisee chooses not to deliver or perform. Therefore, the promisor

“breaches” only when she fails to deliver and refuses to pay.

This

theory assumes that the promisee receives “the equivalent of the

promised performance” when the promisor merely pays expectation

damages. This transfer is “the exact scope of what was promised in the

event” that the promisor does not tender.

The logic of the dual performance hypothesis requires us to assume

that parties enter into contracts with this theory in mind. In other

words, the parties interpret their contract as including a promise to

either perform or pay expectation damages.

Supporters would argue

that the pricing of the contract relies on this assumption. In other

words, the promisor charges less for the goods or services assuming

that a breach would require only the payment of expectation

damages.

Therefore, permitting punitive damages, specific

performance, disgorgement or other remedies would require a

corresponding increase in the price. Because of the price advantage

received by the promisee, the promisee will often be the beneficiary of

contract gains resulting from the logic of the dual performance

hypothesis.

A normative analysis of dual performance has found few supporters.

Frederick Pollock, critical of this logic, wrote the following in 1891:

A man who bespeaks a coat of his tailor will scarcely be persuaded

that he is only betting with the tailor that such a coat will not be made

Gregory Klass, Efficient Breach, in the Philosophical Foundations of Contract Law

(G. Klass, G. Letsas & P. Saprai, eds., Oxford University Press, forthcoming).

http://scholarship.law.georgetown.edu/facpub/1185/.

Note that dual performance assumes an efficient breach and does not address

inefficient breaches.

Alan Schwartz and Daniel Markovits, The Myth of Efficient Breach (2010). Faculty

Scholarship Series. Paper 93. http://digitalcommons.law.yale.edu/fss_papers/93 .

Id.

80 / Vol. 50 / Business Law Review

and delivered to him within a certain time. What he wants and means

to have is the coat, not an insurance against not having the coat.

More recently, Stephen Smith wrote “[i]t just seems implausible, as

a matter of fact, to regard contracting parties as having agreed, in the

typical case, to disjunctive obligations to perform or compensate.”

Others have more generally dismissed the theory. Andrew Gold wrote

that “as a general description of what parties intend, or even as an

interpretation of the public meaning of contract language, [the dual

performance hypothesis] seems inadequate.”

Indeed, the Uniform

Commercial Code notes that “the essential purpose of a contract

between commercial [parties] is actual performance and they do not

bargain merely for a promise, or for a promise plus the right to win a

lawsuit.”

The dual performance hypothesis fails to adequately

support limiting damages for an efficient breach. Rather, it seems to

constitute a contrived attempt to support existing law by proposing a

change to the interpretation of the bargain by the parties to the

contract.

The social argument for encouraging efficient breaches of contract

begins with a recognition that if breaches are too harshly sanctioned,

there will be deterrence not only of breach but of the execution of

contracts.

“[I]f damages are awarded to secure expectation interest in

order to encourage the making of contract promises, to introduce

damage measuring law which goes beyond the value of expectations

may introduce a deterrent to the very contract making behavior to be

encouraged.” Therefore, damages must not be so oppressive as to

discourage the formation of binding commercial agreements.”

Our current legal system in which a breach, often coupled with a

refusal to pay resulting damages, seems to encourage willful breaches

or holdups. Without an effective deterrent to holdups, the system

encourages service hold outs, and bad faith refusals to pay. When

balanced against these defects, damages going beyond expectation

damages are warranted and far outweigh the need to encourage the

execution of contracts.

FREDERICK POLLOCK, PRINCIPLES OF CONTRACT XIX (London, Stevens &

Sons rev. 3d ed. 1881).

STEPHEN A. SMITH, CONTRACT THEORY 402 (2004).

Andrew S. Gold, A Property Theory of Contract, 103 NORTHWESTERN UNIV. L. REV.

1, 54 (2009).

8UCC § 2-609 cmt. 1 (2003).

Hartzler, The Business and Economic Functions of the Law of Contract Damages, 6

MER. BUS. L.J. 387, 392 (1968).

Gardner, An Inquiry Into the Principles of the Law of Contracts, 46 HARV. L. REV.

1, 29 (1932).

2017 / Stick ‘Em Up This is a Breach / 81

III. CAN EXISTING ECONOMIC THEORY WITHSTAND ETHICAL

SCRUTINY

As explained in Part II, there is little to no support to be found in

either legal or economic theories for opportunistic breaches of contract.

Efficient breaches, however, have found some support in economic

theories. This Part III explores willful breaches, and more specifically,

efficient breaches, from an ethical perspective.

A. Introduction to Ethical Behavior

The theory of “efficient breach” has by its very name curb appeal.

Its name states categorically that it is efficient, a presumably good

outcome.

It is an economic theory and given the contractual backdrop

of the discussion, has certain legitimacy. After all economics is: “a

social science concerned chiefly with description and analysis of the

production, distribution, and consumption of goods and services.”

These are areas in which contracts abound: Article 2 of the Uniform

Commercial Code deals with the sale of goods

and common law

contracts deals with the sale of services. Therefore isn’t economics the

proper point of our analysis? What could be better than efficiency?

Yet the definitions of efficiency seem to vary depending on the

discipline. In economics it means: “an economic state in which every

resource is optimally allocated to serve each individual or entity in the

best way while minimizing waste and inefficiency.”

In investments,

efficiency means: “a level of performance that describes a process that

uses the lowest amount of inputs to create the greatest amount of

outputs.”

If we view contracts as an integral part of our society one

need ask what we are attempting to achieve through the use of

contracts in our society. Are we attempting to create the greatest

amount of outputs? Are we attempting to minimize waste? Or are we

attempting to increase social welfare?

So, if we presume that the purpose of contracts is to improve society,

then it follows that we should mold our contract law to maximize this

benefit or good to society. But what do we mean by something which

is good for society or a benefit to society? To evaluate the overall value

2017 Daniel Seth Lewis, Is Efficiency a Good Thing, (March 23, 2017)

http://www.danielsethlewis.com/2013/09/is-efficiency-good-thing.html.

Merriam-Webster, Definition of Economics, (March 23, 2017) https://www.merriam-

webster.com/dictionary/economics.

Article 2 of the UCC: Definition & Terms, Study.com (March 23, 2017)

http://study.com/academy/lesson/article-2-of-the-ucc-definition-terms.html.

Economic Efficiency, Investopedia, http://www.investopedia.com/terms/e/economic_

efficiency.asp, (March 23, 2017).

Id.

82 / Vol. 50 / Business Law Review

to society of efficient breach as a concept we must first understand the

notion of what it means to act in a good or beneficial way. To do this

we need to look at the ethics of our society. Ethics can be thought of

as, “a set of moral principles, or an area of study that deals with ideas

about what is good and bad behavior.”

Morality (as differentiated

from morals) can be looked at as “conformity to ideals of right human

conduct.”

In everyday life most people would agree that acting

ethically is a benefit to society. In the business setting many people

also espouse acting ethically for various reasons. Amy Rees Anderson,

founder and managing partner of ReesCapital and prior CEO of

MediConnect Global, Inc., offers the following advice on achieving

success: “Do the right thing and let the consequences follow.”

Others

believe that, “a business must keep in tune with the wishes of the

societies it serves or it runs the risk of alienating its shareholders,

stakeholders and customers. This would be bad for business, reducing

growth and potentially affecting profit.”

Ms. Anderson’s comments

tend more towards the inspirational while the latter comment tends

more towards a nod to ethical conduct being necessary to garner more

profits.

Regardless of which of these justifications for ethical behavior is

correct, the question still remains what is the right thing to do? Is the

right thing or the ethical thing or the good thing always the same in

all circumstances? Is the proper behavior the same regardless of

position, station, and circumstance? Am I always my brother’s keeper?

B. Common Ethical Theories Outlining Good Behavior

Philosophers have grappled with the concepts of good and evil, right

and wrong, for centuries. Despite the vastness of ethical theories on

the subject, a review of some of the more prevalent ones will be helpful

in answering some of the questions posed. As a very general premise,

most ethical theories can be divided into either duty based systems

(deontology) or consequence based systems (teleology).

A duty based

system chooses conduct based on what ought to be done regardless of

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY, Eleventh Edition, available at

http://www.merriam-webster.com/dictionary/.

Id.

Amy Rees Anderson, Do the Right Thing, Amy Rees Anderson Blog (March, 23,

2017), http://www.amyreesanderson.com/blog/do-the-right-thing/.

Business Ethics and Corporate Social Responsibility, and Anglo American Case

Study (March 23, 2017) http://businesscasestudies.co.uk/anglo-american/business-

ethics-and-corporate-social-responsibility/why-should-a-business-act-ethically.html.

GERALD R. FERRARA, MYSTICA M. ALEXANDER, WILLIAM P. WIGGINS, CHERYL

KIRSCHNER AND JONATHAN DARROW, THE LEGAL AND ETHICAL ENVIRONMENT OF

BUSINESS, (2014) p. 47.

2017 / Stick ‘Em Up This is a Breach / 83

the consequences of that conduct whereas a consequence based system

demands conduct based on the outcome of the conduct.

Some ethical

theories contain elements of both duty based systems and consequence

based systems.

Saint Thomas Aquinas can be viewed as one of those

philosophers whose theory may delve into both camps.

St. Thomas Aquinas viewed law or rules designed to circumscribe

our conduct as “a rule or measure of human acts, whereby a person is

induced to act or is restrained from acting”

It is a boundary for our

conduct which was related to and rooted in reason.

Where might this

reason begin? Aquinas would say in being or in the beginning of life.

Aquinas felt that all reason was directed towards achieving good.

“Good is to be done and evil is to be avoided.”

For Aquinas this “good”

or natural state is one which originates from the eternal law and is

endowed within us from the very beginning of life, giving us an innate

internal sense of good.

Yet if we have this internal sense of the good

why do we as a people deviate from that direction. For Aquinas the

answer is clear: our skewed behavior has its roots in original sin.

Despite the significant influence of original sin on human behavior, St

Thomas Aquinas does believe that our actions are driven for the most

part by the influence of God.

His approach highlights the conflict of

desires which individuals sometimes feel within. For Aquinas, the

actions of the opportunist

are incongruous with the nature of the

good: “Whoever walks in integrity walks securely, but whoever takes

crooked paths will be found out.”

Another approach which attempts to clarify right and wrong which

has endured the test of time is Utilitarianism. Utilitarianism is an

outcome based system.

Originated by Jeremy Bentham and further

refined by John Stuart Mill, Utilitarianism according to Jeremy

Religious Studies Online, Natural Law Theory (March 23, 2017)

http://www.rsrevision.com/Alevel/ethics/natural_law/.

Id.

ST Ia IIae 90.1, cited in Thomas Aquinas: Moral Philosophy, INTERNET

ENCYCLOPEDIA OF PHILOSOPHY (March 23, 2017) http://www.iep.utm.edu/aq-moral/#H4.

Thomas Aquinas: Moral Philosophy, INTERNET ENCYCLOPEDIA OF PHILOSOPHY,

http://www.iep.utm.edu/aq-moral/#H4, (March 23, 2017).

William S. Brewbaker III, Thomas Aquinas and the Metaphysics of Law, 58

ALABAMA L. REV. 575, 585 (2007).

Id. at 602.

Id. at 595.

Id. at 610.

Id. at 586.

The opportunist here is equivalent to our stickup man in the holdup.

Proverbs 10 NIV.

FERRARA, et. al., supra note 88, at 52.

84 / Vol. 50 / Business Law Review

Bentham looked at whether the act produces pleasure or happiness

and prevented pain and suffering.

John Stuart Mill in refining

Bentham’s ideas stated: “actions are right in proportion as they tend

to promote happiness; wrong as they tend to produce the reverse of

happiness. By happiness is intended pleasure and the absence of pain;

by unhappiness, pain and the privation of pleasure.”

Additionally,

Mills believed that our actions should strive to be those which benefited

society as a whole in addition to benefiting ourselves.

Mill’s felt that

it was in our nature to be nurturing to society as a whole, and that by

seeking happiness for our fellow man we too would thus be benefited.

One can see how Mills links positive outcomes for society with positive

actions for self. Also, the instinctive nature of man’s desire to act in

furtherance of society seems to resonate with concepts espoused by St

Thomas Aquinas above of having some pre-ordained notion of acting

towards the good of society.

Yet when we are looking towards choosing our actions in a way

which maximizes the good or the beneficial outcome to society, how far

does that obligation extend? The answer to this depends on how one

defines society. Webster defines it as: “the people of a particular

country, area, time, etc., thought of especially as an organized

community.”

100

So if we pick our community as society, what if our

actions are viewed by some in our society as producing happiness while

others do not? The difficulty faced by Bentham and Mills’ theory is

that it presupposes an understanding of what is beneficial and good.

This lack of clarity can make its application in practice very difficult.

Thus in an effort to add clarity to these theories some proponents of

Utilitarianism looked to Christian religious ideals as a way of

harmonizing the interests of the individual, who are motivated by their

own happiness with the interests of society as a whole.

101

Consider the

holdup of the star athlete in the light of Utilitarianism. One wonders

if the Star Player thinks that he is acting with integrity when he holds

his team up for more money by breaking his word to play. Utilitarians

would look at his actions and say the greatest good can be achieved

only by following the moral path, rather than worldly desires (such as

economic efficiency).

Id.

John Stuart Mill (1806-1873), INTERNET ENCYCLOPEDIA OF PHILOSOPHY (MARCH 23,

2017) http://www.iep.utm.edu/milljs/#SH2d.

Id.

100

Merriam-Webster, (March 23, 2017) https://www.merriam-webster.com/dictionary/society.

101

John Stuart Mill (1806-1873), INTERNET ENCYCLOPEDIA OF PHILOSOPHY (March 23,

2017) http://www.iep.utm.edu/milljs/#SH2d.

2017 / Stick ‘Em Up This is a Breach / 85

The final theory we will examine is that stated by Emmanuel Kant

in his categorical imperative. “Act only on that maxim whereby thou

canst at the same time will that it [your action] should become a

universal law.”

102

The categorical imperative can be stated simply by

using the following approach. Take whatever action you are

contemplating and then universalize it. Or to put it differently, would

you consider your action to have a good result if everyone were to follow

the same conduct. The method advanced by Kant is a duty based

system where doing the correct thing is the best choice regardless of

the outcome. So for Kant we should consider doing the right thing

regardless of its consequences.

103

The right course of conduct being

determined by having everyone act in the same way and presumably

multiplying any negative effect of the conduct. Thus if after

universalizing the action it is still viewed as good then it must be so.

Looking at Kantian philosophy, there is a sort of symmetry between

parts of his philosophy and the proverb, “do unto others as you would

have them do unto you.”

104

For Kant acting in a moral way was paramount regardless of the

outcome. For example, Kant felt that, lying is something which is to

be avoided, “as it was contrary to our moral dignity.”

105

Both the

opportunist and the efficient breacher are telling a lie if they entered

the contract knowing that they would consider breaching the contract

in the event something better comes along.

While no one philosophical method has the perfect solution to what

is a good or beneficial result, each put acting in a way which is good

ahead of acting in a self-centered way. There seem to be no ethical

theorists who espouse a theory of good centering itself on economic

efficiency or on economics at all. Some theories attempt to make

morality a simple matter by reducing good conduct to imperatives

without considering consequences. Others give us vague generalities

to maximize the good without telling us what specifically is the good.

And others tell us to do that which is innately within us. Nonetheless,

all theories seem to search for something more. They center the good

or acting in a good way around an idea which is beyond that for which

men, who lack integrity, strive. They all see one’s word as a priceless

thing, rather than something which can be dismissed and compensated

with the latest coin of the realm. “When a man makes a vow…or takes

an oath to obligate himself by a pledge, he must not break his word but

102

FERRARA, supra note 88, at 50.

103

Id.

104

Luke 6:31(New International Version).

105

Tim C. Mazur, Lying, ISSUES IN ETHICS, (v.6, n.1, Fall 1993),

https://www.scu.edu/ethics/publications/iie/v6n1/lying.html.

86 / Vol. 50 / Business Law Review

must do everything he said.”

106

Let us be a society of people whose laws

help us along the straight and narrow moral path rather than one

which dispenses morality for economic efficiency.

IV. CONCLUSION

It seems the faster we move, and the more sophisticated we believe

our society to be, the more we lose track of our origins. We want to

prove we know best and that morality, contracts, and law need to be

kept distinct. Yet there was a time in our history when a sense of

fairness was part of the law.

107

What happened to the time when we

listened to our conscience, and economics and morality did not sleep in

the same bed? As the Blue Fairy in Pinocchio said, “a conscience ought

to be Lord High Keeper of the knowledge of right and wrong, counselor

in moments of temptation, and a guide along the straight and narrow

path.”

108

The straight and narrow has no room for the holdup artist,

the Star Athlete who can sink a basket at will but who has no integrity,

or the supplier who can be economically efficient but who has no

morality.

Rather than deter holdups, our current legal system actually

encourages such breaches. These holdups serve no societal function,

find no support in economic theory, and violate the sanctity of our

promises and our moral concepts of justice. Damages going beyond

expectation damages are warranted. Punitive damages seem to be a

fitting consequence of a holdup in that they were designed with exactly

such a deterrent effect in mind. In the words of Posner, “[i]f a promisor

breaks his promise merely to take advantage of the vulnerability of the

promisee . . . we might as well throw the book at [him].”

109

Let punitive

damages be that book.

106

Numbers 30:2 NIV.

107

Morton J. Horwitz, supra note 15, at 925 (citing Pledger v. Wade, 1 Bay 35, 37 (S.C.

1786)).

108

https://ohmy.disney.com/movies/2013/04/05/we-wish-jiminy-cricket-was-our-conscience/.

109

POSNER, supra note 48, at 105.

THE DEVELOPING LAW OF EMPLOYEE NON-

COMPETITION AGREEMENTS: CORRECTING

ABUSES; MAKING ADJUSTMENTS TO ENHANCE

ECONOMIC GROWTH

by David P. Twomey

I. INTRODUCTION:

Non-compete employment contracts prohibit employees from

working for a competing employer for a set period of time after leaving

their employment.

Today, non-compete agreements not only affect

chief executive officers, managers, engineers, scientists and

information technology specialists,

but also lower wage earners such

as fast food employees and hair stylists.

The U.S. Department of the

Treasury recently issued a report raising concerns about the misuse of

non-competes across education, occupation and income groups and the

resulting adverse implications for worker bargaining power, job

Note. This paper deals with non-compete employment contracts. Restrictions in a

contract of sale of a business prohibiting the seller from going into the same or similar

business again within a certain geographic area, for a certain period of time are enforced

in all states. Even California, which prohibits all employee non-compete agreements in

section 16600 of its Business Professional Code has statutory exceptions that cover and

protect sales of a business whether effected through the sale of the business’s assets, the

sale of shares in a corporation, or the sale of a partnership interest. See Cal. Bus. & Prof.

Code § 16601 (2016) (sale of goodwill or corporation shares; agreement not to compete);

id. §16602 (partners; dissolution, dissociation, or sale; agreement not to compete).

See EMC Corporation v. Clesle, 2016 Mass. Super. LEXIS 124 (May 13, 2016).

See Hair Club for Men, LLC v. Ehson, 2016 U.S. Dist. LEXIS 118069 (E.D. Va. May

6, 2016).

88 / Vol. 50 / Business Law Review

mobility and economic growth.

Developing law through court

decisions and state legislative activity continues to weigh, balance and

adjust protections for legitimate employer interests while not unduly

burdening employees and the economic growth of regional economies.

II. LEGAL TRENDS IN SELECTED STATES

The Restatement (Second) of Contracts sets forth the general

principles for states to enforce non-compete agreements considering:

(1) whether “the restraint is greater than needed to protect the

[employer’s] legitimate interests; (2) the hardship to the [employee];

and (3) the likely injury to the public.

The employer’s legitimate

business interests may include confidential information, trade secrets

and customer good will.

Overly broad geographic and time restrictions

are unenforceable.

While the majority of states reflect the

Restatement’s principles, they do so guided by the rule of reason,

resulting however in somewhat different, evolving formulations in

different states.

A. Massachusetts Case Law: Blue Penciling Overbroad Restrictions:

Banning Restrictions on Ordinary Competition for Conventionally

Skilled Service Providers

When an employer discovers that a former employee is working for

a competitor in violation of a non-compete agreement, through counsel

it may notify the new employer and threaten litigation;

and, if not

successful, the former employee may seek a preliminary injunction in

state or federal court prohibiting the violation of the non-compete

agreement.

Motions for preliminary injunctions are heard

expeditiously by the courts and are ordinarily used to preserve the

status quo pending trial on the merits. However, in non-compete cases

the validity of the time limitation in the non-compete agreement is

Office of Economic Policy, U.S. Department of the Treasury, “Non-Compete

Contracts: Economic Effects and Policy Implications” www.treasury.gov, p.6 (March

2016).

Restatement (Second) of Contracts § 188 (1981).

DAVID TWOMEY, MARIANNE JENNINGS & STEPHANIE GREENE, BUSINESS LAW,

PRINCIPLES FOR TODAY’S COMMERCIAL ENVIRONMENT. pp. 277, 278 (5th ed. 2017).

Id.

In Socko v. Mid-Atlantic Systems of CPA, Inc. 126 A. 3d 1266 (Pa. 2015) the

employer notified the new employer and threatened litigation resulting in Socko’s

termination. Socko successfully challenged this action, with the court deciding that the

agreement was unenforceable for lack of consideration because it was entered into after

the commencement of Socko’s employment with his former employer, Mid-Atlantic.

See EMC Corporation v. Clesle, 2016 Mass. Super. LEXIS 124 at *7 (May 13, 2016).

2017 / Developing Law of Employee Non-Competition Agreements / 89

clothed with immediacy. Decisions at the preliminary injunction stage

become, in effect, a determination on the merits.

In order to obtain a preliminary injunction a plaintiff must show: (1)

a likelihood of success on the merits; (2) that irreparable harm will

result from denial of the injunction; and (3) that, in light of the

plaintiff’s likelihood of success on the merits, the risk of irreparable

harm to the plaintiff outweighs the potential harm to the defendant in

granting the injunction.

Regarding Massachusetts technology

industries, state and federal courts enforce non-compete and non-

disclosure agreements to protect against inevitable or even inadvertent

disclosure.

In SimpliVity Corp. v. Moran, the court allowed a

preliminary injunction against Keith Moran, enjoining him from

working for a competing start up, Nutanix, or any other firm in the

data storage industry for a year even though he promised not to solicit

the customers of his former employer, SimpliVity.

The court

determined that he would inevitably use the SimpliVity confidential

information in his brain memory in selling Nutanix’s products and

competing against SimpliVity.

In Massachusetts, rather than declining entirely to give effect to an

unreasonable non-competitive clause, a court may modify its terms so

as to make it reasonable.

Partial enforcement is sometimes called

“blue penciling” – a throwback to the days when lawyers edited written

work with a blue pencil.

In Perficient, Inc. v. Priore, the court found

that the two year restriction in the non-compete clause was longer than

reasonably necessary to protect the employer, Perficient, from a 23

year old college graduate who had only worked for the client at issue

for nine months.

The court revised the restrictions to a one year

period.

Enforcement of non-competition clauses in Massachusetts is limited

to the extent they serve a legitimate business interest of the employer

such as protection of trade secrets, confidential business information

Horner International Co. v. McCoy, 754 S.E. 2d 852 (2014).

SimpliVity Corp. v. Moran, 2016 Mass Super. LEXIS 297 at *21 (Aug. 14, 2016).

Id. See also SimpliVity Corp. v. Bondranko, 2016 U.S. Dist. LEXIS 117448 at *10

(D. Mass. Aug. 31, 2016).

Moran, 2016 Mass. Super. LEXIS 297 at *33.

Id.

Kroeger v. Stop & Shop Companies Inc., 13 Mass. App. Ct. 310, 312 (1982).

See Turnell v. Centimark Corp., 796 F.3d 656, 662 (7

Cir. 2015) for a discussion of

the origin of the term “blue penciling.”

Perficient, Inc. v. Priore, 2016 U.S. Dist. LEXIS 56704, at *20 (D. Mass April 26,

2016).

Id. at *19.

90 / Vol. 50 / Business Law Review

and customer good will.

An employer is not entitled to a preliminary

injunction to enforce a non-compete agreement against former

employees who possess no more than the conventional job knowledge

and skill readily obtainable from publicly available sources.

Elizabeth Grady Face First, Inc. v. Garabedian, the employer was not

entitled to a preliminary injunction on a non-compete agreement

against two former employees who operated a day spa nine miles from

the plaintiff’s shop.

The court found that there was no evidence that

the defendants were possessed of or exploiting bona fide trade secrets,

confidential information, or customer good will belonging to the

Company, rather the court stated it was evident that Elizabeth Grady’s

true motivation was to thwart ordinary competition from

conventionally skilled service providers. The court determined that

this was not permissible under Massachusetts law.

B. Virginia Case Law: No Reforming Overbroad Non-Compete

Agreements

Covenants that restrain trade are disfavored by Virginia courts.

The employer must show that the restraint in a non-compete clause is

necessary to protect a legitimate business interest, is not unduly harsh

in curtailing an employer’s ability to earn a livelihood and is reasonable

in light of sound public policy.

The courts analyze the restrictions in

terms of function, geographic scope and duration.

Unlike Massachusetts courts, Virginia courts have no authority to

“blue pencil” or otherwise reform or rewrite overly broad restrictions in

a non-compete contract.

In Home Paramount Pest Control v. Shaffer

the non-compete provision prohibited Shaffer from “engag[ing]

indirectly or concern[ing] himself… in any manner whatsoever” in pest

control “as an owner, agent, servant, representative, or employee

and/or as a member of a partnership and/or as an officer, director or

stockholder of any corporation, or in any manner whatsoever.”…

Because the non-compete provision did not confine the “function’

element to those activities Shaffer actually engaged in for the

See Elizabeth Grady Face First, Inc. v. Garabedian et al, 2016 Mass. Super. LEXIS

34 at *5 (Mar. 25, 2016).

See id. at *7.

See id. at *13.

Id. at *11.

Hair Club for Men, LLC v. Ehson, 2016 U.S. Dist. LEXIS 118069 at *7 (E.D. Va.

Aug. 31, 2016). See also Modern Environments, Inc. v. Stinnett, 263 Va 491 (2002).

Id.

Simmons v. Miller, 261 Va. 561,581 (2001).

Landmark Tech, Inc. v. Canales, 454 F. Supp. 2d 529 (E.D. Va. 2006).

Home Paramount Pest Control v. Shaffer, 282 Va. 412, 416 (2011).

2017 / Developing Law of Employee Non-Competition Agreements / 91

employer, the court found the non-compete provision was overbroad

and unenforceable.

In NVR Inc. v. Nelson the court determined that the geographic

scope of the non-compete provision was indefinite and could possibly

extend to at least fourteen states.

Accordingly, the court found the

geographic scope of the non-compete provision overbroad and thus not

valid.

C. Washington State Case Law Protecting Low Wage Workers

Like most other states, Washington law disfavors restraints on

trade regarding covenants not to compete and other restrictive

covenants such as non-solicitation clauses.

This is especially true

when low wage, at-will employees are involved. In Genex Cooperative,

Inc. v. Contreras, the court refused to enforce a non-compete clause

against a low-level agricultural worker with an employment-at-will

relationship with the employer.

It determined that the restrictive

covenant was unreasonable because the at-will employee may be

terminated without any cause and then be prohibited from seeking new

employment in his line of work.

Regarding another former Genex

bovine inseminator, the court stated that it appeared to the court that

the employer actually used restrictive covenants to eliminate

competition or to strong-arm employees to accept ever-dwindling

wages and restrict their freedom to work.

The court determined that

the non-competition agreement was unenforceable as a matter of law

and would not be reformed.

D. Illinois Law: Protecting Low Wage Workers

Illinois follows the general rule that covenants not to compete are

valid if they are reasonable in purpose and scope and are supported by

adequate consideration.

In 2016 the state took action against a fast

Id. at 418.

NVR Inc. v. Nelson, 2017 U.S. Dist. LEXIS 21829 at *21 (Feb. 14, 2017).

Id.

See Knight, Vale & Gregory v. McDaniel, 37 Wash. App. 366, 370 (1984).

Genex Cooperative, Inc. v. Conteras, 2014 U.S. Dist. LEXIS 141417 at *21 (E.D.

Wash. Oct. 3, 2014).

Id at *18.

Id.

For a discussion of Illinois law on adequate consideration see McInnis v. OAG

Motorcycle Ventures, LLC, 35 N.E.3d 1076, 1083 (Ill. App. 2015) (employment alone of

an at-will employee is not considered adequate consideration to support enforcement of

a non-compete clause; an employer’s promise of continued employment may be an

illusory benefit where the employment is at-will; the court determined that continued

employment for super motorcycle salesman Chris McInnis of eighteen months was

92 / Vol. 50 / Business Law Review

food franchise for requiring low wage workers to sign non-compete

agreements. Illinois Attorney General Lisa Madigan filed a lawsuit on

June 8, 2016 against Jimmy John’s Sandwich Shops seeking injunctive

and other equitable relief contending:

… that Jimmy John’s use of non-compete agreements for at-will, low

wage workers limits the ability of employees to find new employment,

… hinders upward mobility of workers looking for higher wages or

advancement with new employment using skills obtained in their

current employment, and suppresses wages for employees who have

limited negotiating power with both current and potential new

employers when they are limited by a non-competition agreement.

…

All store employees are employees at-will, and all store employees in

Illinois were required to sign a non-competition covenant,

which

stated in part:

Non-Competition Covenant. Employee covenants and agrees that,

during his or her employment with Employer and for a period of two

(2) years after… he or she will not have any direct or indirect interest

in or perform services for (whether as an owner, partner, investor,

director, officer, representative, manager, employee, principal, agent,

advisor, or consultant) any business which derives more than ten

percent (10%) of its revenue from selling submarine, hero type, deli-

style, pita and/or wrapped or rolled sandwiches and which is located

within three (3) miles of either (1) ________ [Insert address of

employment], or (2) any such other JIMMY JOHN’S Sandwich Shop

operated by JJF, one of its authorized franchisees, or any of JJF’s

affiliates....

Costs and Attorney’s Fees. Employee agrees to reimburse

Employer and JJF for all costs and expenses, including attorney’s fees,

that Employer or JJF incur to enforce this Agreement against

Employee.

On December 7, 2016 the parties announced a settlement with

Jimmy John’s, in which the company, among other things, is required

to notify all current and former employees that their non-compete

agreements are unenforceable and that Jimmy John’s does not intend

to enforce them.

insufficient consideration).

Complaint, Illinois v. Jimmy John’s Enterprise, LLC., 2016 CCH 07746 at 17.

Id. at 5.

Id. at Exhibit A.

“Illinois Attorney General Madigan Announces Settlement With Jimmy John’s For

Imposing Unlawful Non-Compete Agreements,” http://www.illinoisattorneygeneral.gov/

pressroom/2016_ 12/20161207.

2017 / Developing Law of Employee Non-Competition Agreements / 93

Effective January 1, 2017 the Illinois Freedom to Work Act bans the

use of non-compete agreements for those earning less than $13.50 per

hour.

E. California: Continuing Its Ban on Non-Competes

California does not follow the general rule that covenants not to

compete are valid if they are reasonable in purpose and scope.

California Business and Professions Code section 16600 states, “Except

as provided in this chapter, every contract by which anyone is

restrained from engaging in a lawful profession, trade or business of

any kind is to that extent void.

The policy behind California’s rule as

expressed by the California Supreme Court states:

Every individual possesses as a form of property the right to pursue

any calling, business or profession he may choose. A former employee

has the right to engage in a competitive business for himself and to

enter into competition with his former employer provided such

competition is fairly and legally conducted.

However, agreements not to disclose an employer’s trade secrets

during or after the term of employment are fully enforceable.

Even though non-compete agreements are not enforced in

California, still California employers often require that workers sign

non-compete agreements there, with some 19 percent of workers

currently working under unenforceable non-compete agreements.

Applying to contracts entered into after January 1, 2017, California

law now prohibits the litigation outside of California of most

employment-related issues including non-compete and trade secret

matters affecting California based employees.

Illinois Freedom to Work Act, Public Act 099- 0860, Effective, January 1, 2017.

CAL. BUS. & PROF. CODE §16600 (2017).

Cont’l Car-Na-Var Corp. v. Mosely, 24 Cal.2d 104, 110 (Cal. 1944).

See, e.g. Muggill v. Reuben H. Donnelly Corp. 62 Cal.2d 239 (Cal. 1965).

Office of Economic Policy, U.S. Department of the Treasury “Non-compete Contracts

Economic Effects and Policy Implementations” (March 2016) p. 12.

CAL. LAB. CODE § 925 (2016) states:

(a) An employer shall not require an employee who primarily resides and works in

California, as a condition of employment, to agree to a provision that would do

either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in

California.

(2) Deprive the employee of the substantive protection of California law with

respect to a controversy arising in California.

94 / Vol. 50 / Business Law Review

III. ADJUSTING NON-COMPETE LAW TO ATTRACT NEW HIGH

TECH VENTURES: MASSACHUSETTS AND CALIFORNIA

APPROACHES

Derived from the U.S. Department of the Treasury’s recent report

on “Non-Compete Contracts: Economic Effects and Policy

Implications,”

a recent White House paper summarized the position

that non-compete agreements can affect the mobility of workers,

clearly affecting a region’s growth as follows:

When firms in a given industry are clustered, it makes it easier for

their workers to share expertise and discoveries, some of which may

not be protected by trade secret or intellectual property legal

provisions. Economists refer to geographic clustering effects of factors

like a large, deep pool of skilled workers, a more competitive market

of suppliers, and information spillovers across workers and firms as

“agglomeration effects.”

While not necessarily in the interest of an individual firm, more rapid

dissemination of ideas and technology improvements can have

significant positive impacts for the larger regional economy in terms

of innovation, entrepreneurship, and attracting more businesses and

jobs to a region. Non-competes that stifle mobility of workers who can

disseminate knowledge and ideas to new startups or companies

moving to a region can limit the process that leads to agglomeration

economies. Overly broad non-compete provisions could prevent

potential entrepreneurs from starting new businesses in similar

sectors to their current employer, even if they relocate.

The research history for the positions set forth in the White House

paper on information spillovers across workers and firms as

“agglomeration effects” goes back to Professor Ronald Gilson’s 1999

article comparing the growth of California’s Silicon Valley and the

Route 128 corridor outside of Boston.

The post-employment non-

compete agreements applicable to Massachusetts employees presented

a barrier to the second-stage agglomeration economy that sustains a

high technology district by allowing it to reset its product life cycle, an

economy that did not develop on Route 128 but did in Silicon Valley.

With the idea of becoming more competitive with California in terms

of venture capital investments in new high tech enterprises and to

continue to invigorate its start-up community, Massachusetts

legislators recently set out to enact comprehensive legislation relating

Supra note 45, p. 22.

“Non-compete Agreements: Analysis of the Usage, Political Issues and State

Responses” The White House, May 5, 2016. p. 22.

Ronald J. Gilson, “The Legal Infrastructure of High Technology Industrial Districts:

Silicon Valley, Route 128, and Covenants Not to Compete”, 74 N.Y.U.L. REV. 575 (1999).

Id. at 607.

2017 / Developing Law of Employee Non-Competition Agreements / 95

to non-compete agreements. In the summer of 2016 it proposed passage

of the Massachusetts Non Competition Agreement Act,

containing the

following major revisions:

The non competition agreement must be provided to the employee

by the earliest of a final offer of employment or 10 business day before

starting work.



y If signed after employment it must be supported by fair and

reasonable consideration in addition to continued employment.

y It must be tailored to protect legitimate business interests such as,

trade secrets, confidential business information and good will.

y It must not exceed one year in duration.

yIt must be reasonable in geographic territory, limited to areas where

the employee provided services in the last 2 years of employment.

y It must be reasonable in scope of prescribed activities, relating to

work activities the affected employee has performed over the last 2

years of employment.

y It may be judicially reformed.

y It will not apply to employees who have been terminated without

cause or laid off, or to student interns.

The proposed legislation contained a “garden leave” provision which

would require an employer to pay a worker a half year’s salary if the

worker could not take a new job due to the one year non-compete

provision.

Interest groups and legislators ran out of time with the ending of

the legislation session on July 31, 2016 without the necessary

H.B. 4434, § 24 L. (June 27, 2016) https://masslegislature.gov/bills/189/H.B.4434.html.

§ 24L (b)(i).

§ 24L (b)(ii).

§ 24L (b)(iii).

§ 24L(b)(iv).

§ 24L(b)(v).

§ 24L(b)(vi).

§ 24L(d). A May 19, 2016 version of the proposed legislation, H.B.4323, had stated

in subsection (d) that a non-compete agreement may not be judicially reformed.

§24L(c).

§ 24L(b)(vii). The subsection also contained the option of “other mutually-agreed upon

considerations between the employer and the employee” but this option did not soften the

opposition to the bill. Id. The chief executive of the Greater Boston Chamber of Commerce,

Jim Rooney commented, “It creates a dynamic in which one employer would have to basically

pay someone for not working… this does not feel right.” See Jon Chesto, “Bill to Limit Non-

compete deals includes a surprise catch”. https://www.bostonglobe.com/business/2016/05/16/

bill-limiting-noncompete-agreements-advances-with-contentious-provision/bfGSYp0oCW6U

VSQH4LMaBM/story.html

96 / Vol. 50 / Business Law Review

compromises needed for the Massachusetts House and Senate to pass

new legislation. The “garden leave” provision was difficult for

employers and some legislators to accept.

Proponents are now

waiting to go forward in next year’s legislative session.

The vibrancy of California’s Silicon Valley innovation economy due

in part to information sharing facilitated by worker mobility unfettered

by non-compete agreements is well established.

It has been

encumbered somewhat however, by practices where major employers

including Google and Apple allegedly agreed with each other not to hire

away each other’s employees, a factor contradicting the mobility of

employees in high tech firms in Silicon Valley.

Metropolitan Boston has enormous core strengths in technology

derived from MIT, Harvard, its other major universities and its world

class research based hospitals. Boston leads the world in start-up

activity in biotech, and there is solid growth in tech industries as well.

Moreover, there is a surge in innovation in Intelligence Systems, where

start-ups are building out infrastructure for practical applications of

Intelligence Systems.

Appropriate adjustments to its non-compete

legal infrastructure will enhance Boston’s future growth.

IV SUGGESTED GUIDANCE AND CONCLUSIONS

A case can be made to ban employee non-compete agreements like

California, North Dakota and Oklahoma,

however all other states

provide some measure of enforcements of non-compete agreements to

protect legitimate business interests of employers.

Recent court

decisions previously presented have exposed the misuse of non-

competes and their adverse impact on employees ability to bargain for

better pay and find new better paying jobs. Aware of the abuses and

accepting in part the California experience that banning non-competes

See Jon Chesto, “Bill Limiting Non-compete Agreements Advances With

Contentious Provisions” https://www.bostonglobe.com/business/2016/05/16.

See supra note 45, p. 22.

See U.S. v. Adobe Systems, Inc.; Apple Inc.; Google Inc.; Intel Corp.; Intuit Inc. and

Pixar, 2011 U.S. Dist. LEXIS 83756 at *5 (D. D.C. Mar. 17, 2011) where defendants

agreed that they participated in at least one agreement in violation of the Sherman Act

and each defendant was enjoined from attempting to enter into, any agreement with any

other person to in any way refrain from soliciting, cold calling, recruiting, or otherwise

competing for employees of the other person. See also Steve Musil “Apple/Google offer

$415 million to Settle Anti-pouching Suit – SNET”, Jan. 15, 2015, www.CNET.com.

Todd Hickson “The Boston Tech Startup Ecosystem Is Making a Strong Comeback”,

April 8, 2016, www.forbes.com.

Id.

RUSSELL BECK, EMPLOYMENT NONCOMPETES A STATE BY STATE SURVEY (July 31,

2016).

Id.

2017 / Developing Law of Employee Non-Competition Agreements / 97

advances the innovation economy of a region, many states are looking

to update their non-compete laws. Some trends may be found in the

cases previously set forth in this paper.

A. Misuse of Non-compete By Employers

The Jimmy Johns Sandwich Shops non-competes are a clear abuse

of a legal framework meant to protect employers legitimate business

interests, by limiting the mobility of its at-will low wage workers and

locking them into their current employment.

While Jimmy Johns

asserts that it does not enforce these agreements, the clear agreement

language calling for the employer to assess all costs and attorney fees

on employees to enforce the agreement, has a chilling and restrictive

effect on employees and is a misuse of the non-compete framework.

The Genex Cooperative, Inc. enforcement cases from Washington

state identified the misuse of restrictive covenants by an employer to

eliminate competition and to strong arm at-will, low wage agriculture

employees to accept ever-dwindling wages and restrict their freedom

to work.

In the Elizabeth Grady Massachusetts case the court refused to

grant a preliminary injunction because the employer’s true motivation

was to thwart ordinary competition from conventionally skilled service

providers.

The trouble and expense of the litigation itself was an

abuse suffered by low wage workers and should be corrected by

legislation.

B. Strict Applications of the Non-compete Agreements Regarding

Functions, Geographic Scope and Duration.

Avoiding competition is not a legitimate business interest, while

protecting business plans and methods and other confidential

information can properly support a non-compete agreement.

Reasonable restrictions on occupational functions (job duties) and

geographic and duration restrictions vary depending on each

individual businesses circumstances and the employees in question.

Unreasonable restrictions will not be well received by a court at the

preliminary injunction stage as seen in the two Virginia cases

previously presented, one involving an overbroad “function” and the

other overbroad in geographic scope.

Virginia courts have declined

Madigan, supra note 40.

Id.

Genex, 2014 U.S. Dist. LEXIS at *18.

Elizabeth Grady, 2016 Mass. Super LEXIS 34 at *11.

NVR Inc. 2017 U.S. Dist. LEXIS 21829 at * 21.

98 / Vol. 50 / Business Law Review

to “blue pencil” overbroad non-compete agreements.

In the Genex

case the court stated it had the equitable power to modify an

unreasonable covenant to enforce its basic purpose but refused to do so

based on the facts of record in the case before it.

Employers should not risk relying on the courts to blue pencil

overbroad non-compete agreements and should customize non-

competes for the various categories of high level employees in its

workforce as to functions, geography and duration.

C. Garden Leave

“Garden leave” should not have been an obstruction to reaching

legislative accord on a non-compete bill as happened in Massachusetts.

Such unusual contractual arrangements are best left to the contracting

parties to work out.

In a “garden leave clause” in an employment contract, the employee

must give a certain amount of notice to the employer in advance of the

employee’s resignation from employment. In exchange, the employer

does not require the employee to come into work during the period of

the leave, and the employee will receive full wages and benefits, and

can spend his or her time “in the garden”.

During the leave the

employee cannot work for a competitor. However, on leave the

employee also cannot access confidential records and will be unable to

directly solicit clients or co-workers.

Given the costs to the employer

of paying salary and benefits during the period of garden leave, the

employer must carefully identify the type of employee that warrants a

garden leave, such as senior executives, key technical employees and

employees who have access to confidential information. Enforceability

of garden leaves are also in doubt.

See Lanmark Tech. Inc., v. Canales, 454 F.Supp 2d 524, 529 (E.D. Va. 2006). Better

Living Components, Inc. v. Coleman, 62005 WL 771592 at *5 (Va. Cir. Ct. Apr.6, 2005).

Genex, 2014 U.S. Dist. LEXIS at *17.

See Wis. Stat. § 103465, where the state of Wisconsin applies an “all or nothing”

reading of noncompete agreements.

See Jeffrey S. Klein and Nicholas Pappas, “Garden Leave” Clauses in Lieu of Non-

competes, www.NYLJ.com, vol. 241 No. 24 (Feb 5, 2009).

Id.

See Bear, Stearns v. Sharon, 550 F.Supp. 2d 174 (D. Mass. 2008) where such a

clause was denied enforcement because the balance of hardship weighed to the

individual employee and his clients.