Question/Answer for January 22, 2008

1. Going back to Jacque v. Steenburg Homes, I have a question about the "sunbursting" issue and whether Steenburg should have been entitled to have relied upon the "no punitive damages without actual damages" precedent. The court (on page 18) seems to say it wouldn't be good enough for a defendant to argue that he relied on the old precedent (and would suffer great harm if the new rule were applied to him), but that the defendant would also have to show that a "substantial number of persons" also had relied and would suffer similar harm if the rule was retroactively applied.

Does the court mean that literally, or only figuratively? Would it be incumbent on a defendant to in fact identify specific persons who had similarly relied, or can the court just take notice that there are probably lots of other people similarly situated to the defendant?

Good question. I don't think the court meant it literally, at least the way your question seems to use the term "literally." I think what the court is saying is that the reliance has to be of the sort that it was likelly replicated by other persons. In some cases, this will be obvious. For example, suppose that a court was being asked to rule that damages for breach of contract would automatically include attorneys' fees, even if the contract was silent. That would overrule the traditional American common law rule that each party bears its own attorneys' fees, absent a contractual allocation of the fees or a statute that expressly imposes liability for attorneys' fees. In that case, if the court changed the law and applied it retroactively, every other party that had previously entered into a contract that was silent about attorneys' fees would face potential liability in case of breach that they probably hadn't bargained for at the time they contracted. Thousands, if not millions, of contracts are agreed to every day in which the parties assume that they would bear their own attorneys' fees, or which they expressly contract around that result. That sort of change would have such profound consequences that the court would simply take notice of those consequences. The defendant wouldn't actually have to identify specific contracts. The court would "sunburst" and only apply its holding prospectively --- i.e., to contracts entered into after the ruling.

The defendant in Jacque has several problems with its sunbursting argument. First, there's no evidence that Steenburg Homes actually relied on the old precedent, or even that it knew at the time of its conduct that Barnard was the law in Wisconsin. And regardless of the remedy, the broader background legal principle --- thou shalt not trespass --- was pretty clear. Steenburg knew that its conduct was illegal. The Barnard case didn't stand for the principle that one person could trespass on another's land without consequences.

2. In the U.S. Steel case, I'm not sure I understand why the workers were asking the court to allow them to purchase an obsolete steel plant. Why would they ask the court for that relief, given that the union could hardly expect to make the investment necessary to be able to operate the plant profitably?

A couple of responses. First, we don't have any evidence about what price the plants could have brought if sold. If the plants were really a money loser, U.S. Steel might have sold it for a very small amount (actually, they probably wouldn't have done so, because they wouldn't have wanted the competition). My point is that if the price was low enough, the purchaser could perhaps operate the plant profitably, either in its existing condition or after making a separate investment.

More importantly, however, I'm pretty sure the workers didn't actually WANT to purchase the plant. All they wanted was for the court to rule that the workers had a property interest (or a reliance interest capable of being protected by estoppel) that would prevent U.S. Steel from closing the plant without the consent or approval of the workers or without compensation to the workers.

I suspect that ultimately, the union appreciated that eventually these plants were going to close, and that they'd probably be unable to prevent that from happening, but they could in good faith bring a lawsuit based upon the "promises" of the company not to close the plants while profitable. This was a plausible investment by the union, as it allowed them to "stretch out" the closing of the plant for as long as possible — thus giving the union workers as much time as possible to adjust (finding new jobs, relocating, etc.) to the disruption that would ultimately be caused by the plant closings.

3. What if the employees of U.S. Steel already were shareholders in the company (suppose the union/employees owned shares through their pension fund)? Would this have changed the analysis of the court in terms of the employee's "property" argument? Would the court have been more likely to accept the reallocation argument if the employees already owned some portion of the company?

No, I don't believe so. If the employees were also shareholders of U.S. Steel, this would give them the right to speak and vote at shareholders' meetings, to attempt to use their rights as shareholders to influence the company's policy, and it would have given them a "property" claim against the residual value of the assets of the corporation — not any property claim against specific corporate assets, but against the residual value of those assets after payment of all creditor claims against the company. Almost certainly, some of the actual affected employees in the U.S. Steel case probably did small shareholdings in the company, either as part of a pension fund or through direct market purchases.

But unless the employees had a sufficient ownership to be able to control the company's decisions — corporations function like most democracies, by majority rule — the employees could be "owners" and yet not be able to prevent the plant closing under corporations law. [The response of corporations law is that if the employees were dissatisfied with the company's decisions, they could sell their shares in the company and re-invest in some other company that they felt was a better investment.]

The court's concern in U.S. Steel — its reluctance to reallocate property rights to the employees based on their reliance — would be the same even if the employees already had some share ownership and were simply asking for more. The effect of such a reallocation would still be to dilute the ownership of the nonemployee shareholders, and the court seems to be concerned (reading between the lines of the opinion) about being unable to predict the potential negative consequences of such a dilution on how companies raise equity funds in the capital markets. That concern would be exactly the same if the employees were also shareholders. Thus, I still think the court would be inclined to direct this broader social problem back toward the legislature for a solution.