Problem 1

Peggy was employed by Sterling Cooper, P.C. She had a written employment contract specifying a three year term of employment, during which Sterling Cooper could not terminate Peggy’s employment except for cause. The contract specifies that “cause for termination includes, but is not limited to, employee misconduct, dishonesty, or unsatisfactory performance of assigned duties.”

Before the contract term ended, Peggy was fired. Her boss, Don, told her the reason was poor performance, but Peggy believes the real reason was her rejection of Don’s repeated and unwelcome advances.

Peggy sues Sterling Cooper in federal court, asserting a claim for breach of contract under Hudson state law. Assume the court has personal and subject matter jurisdiction.

In her complaint, Peggy seeks compensatory damages for her loss of employment.

Part A

Under Hudson state law, compensatory damages for wrongful termination in breach of an employment contract are limited to an amount equal to three times the plaintiff’s annual earnings (wages or salary) in their last year of employment. In contrast, in cases for wrongful termination under federal law, there is no such cap on the amount of compensatory damages. Which rule should the federal court apply in this case?

Part B

Under Hudson state law, a complaint for breach of contract must include an itemized statement showing the basis and amount of compensatory damages sought. In contract, under FRCP Rule 8(a)(3), the “demand for relief sought” requires only a general statement that the plaintiff seeks compensatory damages.

Which rule should the federal court apply in this case?

Problem 2

The Carbolic Smoke Ball Company (“Carbolic”) runs an ad in the Pall Mall Gazette. The ad claims that the company’s Carbolic Smoke Ball is “clinically proven to prevent colds and flu when used as directed.” In fact, the product does nothing at all, other than emit foul-smelling smoke, and the company never conducted any tests, clinical or otherwise.

After reading the ad, Carlill buys a Carbolic Smoke Ball and uses it as directed three times a day for several weeks. She is chagrined when she contracts the flu anyway. It turns out to be an especially bad case of the flu, requiring hospitalization and expensive medical treatment.

Carlill sues Carbolic for fraud under Euphoria state law. Her complaint alleges that Carbolic’s ad made false claims about the health benefits of the Smoke Ball, that Carbolic knew those claims were false, and that Carbolic made those claims with an intent to induce consumers to buy the product. In the complaint, Carlill requests the following relief:

Carlill files her suit in the U.S. District Court for the District of Euphoria, which has subject matter jurisdiction based on diversity of citizenship.

Part A

FRCP Rule 8(a)(3) provides that a complaint must include “a demand for the relief sought, which may include relief in the alternative or different types of relief.” Under this rule, a plaintiff may request both legal remedies (usually money damages) and equitable relief (such as an injunction) in the same complaint.

In contrast, under Euphoria state law, a plaintiff who seeks both legal remedies and equitable relief must file two complaints, one seeking the legal remedy and another seeking the equitable relief. Both complaints will go to the same court, which will treat them as a single action for most purposes. If (either on summary judgment or at trial) the defendant is found liable, the court will then hold a separate hearing to determine whether the plaintiff is entitled to the injunction or other equitable relief sought.

Carbolic objects that Carlill’s request for both money damages and an injunction in the same complaint is improper under Euphoria law. Carlill argues that federal law, not state law, governs whether she may seek both types of relief in the same complaint.

Should the court apply state or federal law on this issue?

Part B

Under Euphoria state law, a consumer asserting a fraud claim based on an allegedly false advertisement must plead and prove the following elements:

  1. The defendant made false claims about the product
  2. The defendant knew the claims were false
  3. The defendant made the claims with the intent to induce consumers to buy the product
  4. The plaintiff reasonably relied on the claims in deciding to buy the product.

In contrast, under the FTC Act (a federal statute), an advertiser is liable for false advertising even if it was unreasonable for a consumer to have relied on the defendant’s false claims. The FTC Act authorizes the Federal Trade Commission to bring civil suits for false advertising, but does not give individual consumers a private right of action.

The Company moves to dismiss Carlill’s complaint for failure to state a claim, because the complaint fails to allege that Carlill reasonably relied on the claims in the ad regarding the supposed health benefits of the Carbolic Smoke Ball.

Should the federal court apply state or federal law on the issue of whether Carlill must allege and prove reasonable reliance?

Answers & Explanations

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