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BUS 393 BUSINESS AND THE LAW CASEBOOK Summer 2020 MODULE FOUR: CONTRACTS

CASE ONE: Arbitration Clauses and Unconscionability: Supreme Court allows Uber driver to sue for minimum wage and benefits Globe and Mail, Sean fine and Josh );Kane, Published June 26 2020 updated June 27 2020 Gig workers have won a major victory in the Supreme Court of Canada, in a ruling that allows Uber workers to sue in Ontario for benefits and vacation pay. David Heller, an UberEats driver in Toronto earning $400 to $600 a week for up to 50 hours of work, launched a $400-million proposed class-action lawsuit in 2017. He contended that Uber drivers are employees, not contractors, and that Uber owed them vacation pay and minimum wage under Ontario’s employment standards law. Uber replied that Mr. Heller had signed a contract requiring any disputes be resolved individually, and through arbitration – in Amsterdam, where the company has its headquarters. But the contract Mr. Heller signed said nothing about the cost of applying for arbitration – US$14,500, up front, in administrative fees. Taking into account the costs of flying to the Netherlands, lost income, and the taxes and expenses that Mr. Heller pays from his Uber income, the arbitration was a losing proposition for the driver, the Supreme Court said. That, said the court, was “unconscionable.” Mr. Heller had had no choice but to sign the standard-form 14-page contract if he wanted the job; the terms were not negotiable; and there was a “gulf in sophistication” between the food deliveryman and Uber, a large multinational corporation. Mr. Heller could not be expected to appreciate international arbitration law, especially since no information on the process was attached to the contract, the court said. “When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all,” Justice Rosalie Abella and Justice Malcolm Rowe wrote for seven judges in the 8-1 ruling. (Justice Russell Brown wrote a separate concurring opinion, while Justice Suzanne Côté was the sole dissenter.) In a statement, an Uber spokesman said the company will abide by the ruling. “Going forward, dispute resolution will be more accessible to drivers, bringing Uber Canada closer in line with other jurisdictions. We are proud to offer a 1 of 14

flexible earning opportunity to tens of thousands of independent drivers throughout Ontario,” it read. The ruling has wide importance for gig workers, a growing proportion of the Canadian work force who usually lack the benefits of traditional employment because they are often seen as freelancers, and not employees. In 2016, a labour force survey found that 8.2 per cent of the work force are gig workers. “Gig workers have made it clear that the status quo doesn’t work any more, and CUPW is pleased to see the country’s highest court agrees,” said Jan Simpson, national president of the Canadian Union of Postal Workers. But the ruling’s importance is broader still, said David Doorey, who teaches labour law at York University in Toronto. “It means employers cannot block access to class action lawsuits by employees alleging employment standards violations by forcing employees into arbitration. That possibility was one of the greatest threats to access to justice posed by mandatory arbitration clauses.” Such clauses are often used in the United States, he said. Marina Pavlovic, who teaches law at the University of Ottawa, said companies “will have to be more careful in drafting their contracts not to unduly disadvantage the gig workers.” The biggest impact may be ahead, she added, if the class action receives certification and ultimately a ruling that the workers are employees. The ruling was the latest by the Supreme Court to assert Canadians’ right to access their own courts in disputes with a global dimension. In 2017, the court allowed a class-action lawsuit against Facebook to proceed in British Columbia, despite a clause in the company’s terms of use stipulating all lawsuits must be heard in California. The court said Internet companies cannot require their members to sign away their right to be heard in Canadian courts when basic rights are at stake. The Uber ruling has wide importance for all Canadian workers, according to Lior Samfiru, a lawyer for Mr. Heller. “A ruling in Uber’s favour would have meant employers could have done whatever they want, pay employees, not pay employees, abide by laws, not abide by laws, without any repercussions. Employment laws have no value if you don’t have a mechanism to enforce those laws and rights,” he said. At least a dozen major multinationals employing gig workers have arbitration provisions, including Lyft, DoorDash and Postmates, said Michael Wright, another of Mr. Heller’s lawyers. Not all arbitration clauses are as “draconian” as Uber’s, he added. (For instance, Lyft’s website says that any arbitration hearings would take place in the area in which a driver provides services.) And Uber has a different contract in California, which makes arbitration a choice, not a requirement, and sets California as the location for the hearing, Mr. Wright said. Thomas McKechnie, a former Foodora courier who helped its workers organize before the company left Canada this year, praised the Supreme Court’s ruling,

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and described companies such as Uber as “weaponizing the power imbalance between them … and individuals who are seeking to have a decent life.” Uber had won at a lower court, when Ontario Superior Court Justice Paul Perell ruled that the arbitrator in the Netherlands should decide whether it had jurisdiction. The Ontario Court of Appeal dismissed that ruling, saying that the contract was unconscionable, and that companies couldn’t contract out of provincial labour law.

CASE TWO: Contracts, COVID and Enforceability Alberta court case to test whether pandemic can nullify deal to buy company CHRISTINE DOBBYCORPORATE LAW REPORTER PUBLISHED APRIL 29, 2020 An Alberta court is set to consider a rarely invoked term of contract law in a case over whether the COVID-19 pandemic and economic downturn amount to a material change that can be used to back out of a recent deal to acquire a company. Lawyers say the business community – and especially anyone who signed a contract to buy or sell a business in the months before the pandemic – will be closely watching the case, scheduled for a full-day hearing Friday at the Court of Queen’s Bench of Alberta in Calgary. What’s at stake is whether the buyer can rely on a material adverse effect or MAE clause to terminate the deal before closing, essentially by arguing that circumstances now affecting the target company have fundamentally changed the nature of the intended agreement. Such terms, also known as material adverse change or MAC clauses, are usually carefully negotiated and have almost never made it to court in Canada, meaning this case could provide some welcome guidance for others. “The jurisprudence in Canada is quite sparse on this. … It will be very interesting, first of all, to have a Canadian case on point, and secondly, a Canadian case that’s dealing with the current pandemic,” said Bryan Haynes, a partner with Bennett Jones LLP in Calgary. He said that from what case law there is, buyers typically face an “uphill battle” in successfully invoking such clauses to terminate deals. “I think the court’s got a hot potato to deal with here.” The Alberta case revolves around the $25.5-million sale of Red Deer-based Rifco Inc., an alternative auto financing company that trades on the TSX Venture Exchange. Toronto-based CanCap Group Inc. – the privately owned parent of AutoCapital Canada Inc., another auto finance company – announced a deal to buy Rifco on Feb. 3, about five weeks before the World Health Organization declared a pandemic.

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The agreement proceeded by way of a plan of arrangement, which requires court and shareholder approval. Rifco shareholders voted to approve the transaction on April 3 even though days earlier, on March 27, CanCap sent Rifco a letter purporting to terminate the deal. According to a court filing made by Rifco, CanCap claimed there had been an MAE because of “one or more” of a list of about 10 factors. Those included the outbreak of the pandemic, the collapse in oil prices, business closings, a decline in available funding and prospective customers, and payment defaults by Rifco customers. Rifco has applied for a final order approving the plan of arrangement, which would make the deal binding on CanCap. Lawyers for both Rifco and CanCap declined to comment. Rifco said in a press release it “categorically disagrees” with the buyer’s claim that “recent events” constitute an MAE. David Madsen, a commercial litigation partner with Borden Ladner Gervais LLP in Calgary, said numerous clients have inquired in recent weeks about MAC or MAE clauses. “There had been robust deal flow across Canada until recently, so lots of deals were signed,” Mr. Madsen said. He added that in deals that proceed by way of a plan of arrangement, court and shareholder approval is required, which means they can take several months to finalize, leaving a number of deals in an in-between stage. “I would expect that everyone who has recently signed a contract but hasn’t yet completed that transaction is considering what the effects of COVID-19 are and then reviewing the contractual provisions to see if they provide any sort of out or an opportunity to renegotiate the terms.” MAE or MAC clauses can also be found in financing agreements, Mr. Madsen said, adding that lenders and borrowers are also taking a close look at their contract terms. In an interview in early April, shortly after the pandemic upended the economy, Stephen Kelly, national head of business law at Norton Rose Fulbright Canada LLP, said for many deals, he noticed the period between announcing a binding agreement and closing a transaction was getting longer. But he said at the time, "We’re not seeing loads of open deals where people are calling MAE or trying to wiggle out.” Legal experts caution that most MAC or MAE clauses are unique and many contain carveouts, for example creating an exception such that a purchaser cannot rely on general economic conditions as a reason to terminate a deal. Determining whether MAC clauses apply will be a fact-specific exercise in every case. For some recent guidance, many corporate lawyers point to Akorn v. Fresenius, a 2018 case on the subject from the Delaware Court of Chancery, which is a 4 of 14

well-regarded authority on business law even in Canada where its rulings are not binding. In that case, the court ruled that the MAE clause was properly invoked to terminate a deal. In the Akorn case, the court noted that buyers will face a heavy burden when seeking to use an MAE clause and that the material change in question must be “durationally significant,” not a short-term setback. Whether the COVID-19 crisis qualifies could be up for debate. “With the pandemic, we’ve seen the lockdown of the economy and a very sharp, dramatic downturn, but there’s a big question mark as to how long this will last,” said Mr. Haynes, the Calgary lawyer. “Probably over the course of the summer or early fall, the economy will be opened up. … That will be an obstacle the buyer will have to overcome.” CASE THREE: The Importance of Contracts for Business Relationships and Protecting Ideas The Social Network (The Movie) In 2003, Harvard University student Mark Zuckerberg (Jesse Eisenberg) is dumped by his girlfriend Erica Albright (Rooney Mara) at a bar. He returns to his dorm drunk and writes a scathing blog entry about her while drinking beer. This inspires him to create an on-campus website called Facemash which allows users to rate the attractiveness of female students using photographs pilfered from various university systems while simultaneously blogging about how to hack the sites. Mark receives six months of academic probation after traffic to the site crashes parts of Harvard's network. Facemash's popularity and the fact that Mark created it in one night while drunk brings him to the attention of Cameron and Tyler Winklevoss (both portrayed by Armie Hammer) and their business partner Divya Narendra (Max Minghella). The Winklevoss twins invite Mark to their final club, where Mark accepts a job as programmer for a proposed dating website they call Harvard Connection which will be exclusive to Harvard alumni. Mark approaches his friend Eduardo Saverin (Andrew Garfield) and tells him of his idea for what he calls "Thefacebook", an online social networking website exclusive to Harvard University students. He explains that this would mimic the popularity of FaceMash but since signing up would be consensual it would avoid the ethical problems of the earlier site. Eduardo agrees to help Mark, providing $1,000 to help start the site. They distribute the link to Eduardo's connections at the Phoenix S-K final club, and it becomes popular throughout the student body. When they learn of Thefacebook, the Winklevoss twins and Narendra believe Zuckerberg has stolen their idea while stalling on their website. Tyler and Divya want to sue Mark for intellectual property theft, but Cameron convinces them to settle the matter as "Gentlemen of Harvard". 5 of 14

During a visiting lecture by Bill Gates (Steve Sires), fellow Harvard University student Christy Lee (Brenda Song) introduces herself and her friend Alice (Malese Jow) to Eduardo and Mark and asks the boys to "Facebook me". Christy's use of this phrase impresses both of them. Christy invites them to a bar, where Mark runs into Erica, who is not aware of Thefacebook because she is not a Harvard student. Mark decides to expand the site to Yale University, Columbia University and Stanford University as Thefacebook grows in popularity, while the Winklevoss twins and Narendra watch "their idea" advance without them. Cameron refuses to sue them, instead accusing Mark of violating the Harvard student Code of Conduct. Through their father Howard's (John Hayden) connections, they meet with Harvard President Larry Summers (Douglas Urbanski), who is dismissive towards the twins and sees no potential value in either a disciplinary action or in Thefacebook website itself. Through Christy, now Eduardo's girlfriend, Eduardo and Mark arrange a meeting with Napster co-founder Sean Parker (Justin Timberlake). Eduardo becomes skeptical, noting Sean's problematic personal and professional history. Sean presents a vision for Facebook very similar to that of Mark, which earns Mark's instant admiration. In a parting comment, Sean suggests they drop the "The" from Thefacebook, saying it looks cleaner without the 'The'. At Sean's suggestion, Mark moves the company to Palo Alto while Eduardo remains in New York seeking advertising support. Sean advises Mark to keep hold of his ownership of Facebook to ensure that Mark does not lose control of a potentially lucrative business venture. After Sean promises to expand Facebook to two continents, Mark invites Sean to live at the house he is using as the company headquarters. While competing in the Henley Royal Regatta for Harvard, the Winklevoss twins discover Facebook has expanded to a number of English universities and footage of their lost rowing race final against the Hollandia Roeiclub is posted on it. Cameron relents and they decide to sue. When Eduardo visits from New York, he is angered to find Sean living in their house and making business decisions for Facebook. Eduardo argues with Mark, with Mark making a demeaning remark regarding Eduardo's failed attempts to find advertisers. Eduardo freezes the company's bank account out of anger and returns to New York. Eduardo has been dismayed to learn that his girlfriend Christy is "psychotic," as he terms it. Upon his return to New York, Christy angrily confronts Eduardo about his Facebook profile, which lists him as "single". She refuses to believe Eduardo when he reluctantly explains that he does not know how to change his profile. She accuses him of cheating on her and sets fire to a scarf he gave to her. While Eduardo extinguishes the fire she caused, Mark reveals on the phone that although he was upset that Eduardo almost jeopardized Facebook by freezing 6 of 14

the bank account, they have secured $500,000 from angel investor Peter Thiel (Wallace Langham). Eduardo breaks up with Christy and returns to California. While visiting the new headquarters for a meeting, Eduardo discovers the deal he signed with Sean's investors has allowed them to dilute his share of the company from 34 percent to 0.03 percent, while maintaining the ownership percentage of all other parties. He confronts Mark and announces his intention to sue him. During a party celebrating Facebook's one millionth member, Sean and a number of underage Facebook interns are arrested for possession of cocaine. Sean tries deceiving Mark into believing that he had nothing to do with the incident and that Eduardo stashed the cocaine, but Mark does not believe him and tells him to "go home". The story is intercut with scenes from depositions taken in lawsuits against Mark and Facebook—one filed by the Winklevoss twins, the other by Eduardo. The Winklevoss twins claim that Zuckerberg stole their idea, while Saverin claims his shares of Facebook were diluted when the company was incorporated. At the end, Marylin Delpy (Rashida Jones), a junior lawyer for the defense, informs Mark they will be settling with Eduardo, since the sordid details of Facebook's founding and Mark's callous attitude will make a jury highly unsympathetic. After everyone leaves, Mark sends a friend request to Erica Albright on Facebook, and refreshes the page every few seconds waiting for a response. An epilogue reveals the following information: Cameron and Tyler Winklevoss received a settlement of $65 million dollars, signed a non-disclosure agreement, and rowed in the 2008 Beijing Olympics, placing sixth; Eduardo Saverin received a settlement of an unknown amount and his name was restored to the Facebook masthead as the Co-founder of Facebook; the website has over 500 million members in 207 countries and is valued at 25 billion dollars; and Mark Zuckerberg is the world's youngest billionaire.

Commentary on legal issues: Harvard Law School professor Lawrence Lessig wrote in The New Republic that Sorkin's screenplay does not acknowledge the "real villain" of the story: The total and absolute absurdity of the world where the engines of a federal lawsuit get cranked up to adjudicate the hurt feelings (because "our idea was stolen!") of entitled Harvard undergraduates is completely missed by Sorkin. We can't know enough from the film to know whether there was actually any substantial legal claim here. Sorkin has been upfront about the fact that there are fabrications aplenty lacing the story. But from the story as told, we certainly know enough to know that any legal system that would allow these kids to extort $65 million from the most successful business this century should be ashamed of itself. Did Zuckerberg breach his contract? Maybe, for which the 7 of 14

damages are more like $650, not $65 million. Did he steal a trade secret? Absolutely not. Did he steal any other "property"? Absolutely not – the code for Facebook was his, and the "idea" of a social network is not a patent. It wasn't justice that gave the twins $65 million; it was the fear of a random and inefficient system of law. That system is a tax on innovation and creativity. That tax is the real villain here, not the innovator it burdened.[53] CASE FOUR: What is a Contract? Justin Bieber has party guests sign contracts Justin Bieber threw a party on Friday (Nov. 15) and he made all his guests sign a confidentiality agreement. In a formal contract obtained by TMZ, everyone in attendance “agreed not to tweet, text, phone, Facebook, record, write or in any other manner spill the beans on what went on inside” at risk of paying the petit Canadian $3 million — “no trial, no arguing, just pay up.” If that doesn’t sound fun enough, TMZ also reported that “sheriff’s deputies” (not cops, sheriff’s deputies) were called three times and one of Bieber’s neighbours said the authorities smelled marijuana. T...