28 February 2006

The Best(?) Policy

Professor Ribstein notes a fascinating case in corporation and contract law that has some interesting implications for authors. In Abry Partners V, lp v. F & W [sic] Acquisition llc, C.A. No. 1756–N (Del. Ch. Feb. 14, 2006) (misnamed PDF file—right-click, save as, then change the file name to ".pdf" instead of ".aspx"), Chancellor Strine asks

[T]o what extent may a contract exculpate a contracting party from a rescission or damages claim based on a false representation of fact made within the contract itself? May parties premise a contract on defined representations but promise in advance to accept a less-than-adequate remedy if one of them has been induced by lies about one of those material facts?

Id., slip op. at 46. This question was raised when a prospective buyer and prospective seller of a company that, in turn, publishes a number of specialized trade periodicals—yes, authors, your ears should indeed be pricking up now—negotiated a contract for sale that attempted to insulate the seller from liability for any misrepresentation (purposeful or not), both in the general negotiations and in the contract for sale itself. Chancellor Strine was not too impressed by this attempt.

To the extent that the Stock Purchase Agreement purports to limit the Seller's exposure for its own conscious participation in the communication of lies to the Buyer, it is invalid under the public policy of this State. That is, I find that the public policy of this State will not permit the Seller to insulate itself from the possibility that the sale would be rescinded if the Buyer can show either: 1) that the Seller knew that the Company's contractual representations and warranties were false; or 2) that the Seller itself lied to the Buyer about a contractual representation and warranty.

Professor Ribstein pithily summarizes the question before Chancellor Strine as "Should a court enforce a contract that permits lying?" Who is F+W Publications, and what does it publish? I described its products as "specialized trade periodicals" above. That is, the Cincinnati-based company (authors' ears should be getting even more pricked up) distributes its magazines through the ordinary means of the periodicals trade—news stands, book stores, etc.—and through subscription. The periodicals (and associated books), though, are not "general interest" materials. They include magazines on fine arts, crafts, antiques, and collectibles; on games, hobbies, and recreation; on gardening and homeowner/homebuilder matters; … and on writing for publication. F+W Publications publishes Writer's Digest and owns the Writer's Digest Book Club.

The American publishing industry historically hasn't been a paragon of virtue, forthrightness, and clarity.1 Just try making sense of the returns-against-reserves or editorial-discretion clauses in a book contract… and let's not even consider that greatest piece of fantasy in American letters, the royalty statement. Over the last quarter of a century, WD has all too often been an enabler (in the substance-abuse context) by providing just enough information for prospective authors for various traps to bite them, whether in its editorial content or its advertisements. And here we have a contract for sale of its parent corporation that attempts to disclaim lies within the contract. The irony light is now lit.

  1. Three words suffice here: Jonathan Livingston Guano Seagull.