Restitution Basic Premise: In cases where D has been unjustly enriched at P’s expense, D must return the amount of his/her unjust enrichment One of the biggest issues – How to measure unjust enrichment.

Olwell v. Nye & Nissen Co. D temporarily converted P’s egg washer (1 day/week for 156 weeks). P offered to sell but D refused to buy. P sued for benefit D gained while using converted egg washer. What are P’s damages if P sues for temporary conversion? What is the amount of compensation P is awarded as unjust enrichment for D’s conversion? Is there another way to measure unjust enrichment to D other than the measure used by the court?

Why did Olwell choose the measure for unjust enrichment that it did? In mistake cases, courts chose the lower measure of compensation as the appropriate measure of restitution. In Olwell, the Court chose the higher measure (aka it required D to disgorge its profits from use of P’s property). Why did the courts choose different measures? Do these reasons distinguish the outcomes in Edwards (p. 515) (award of profits) and Beck (p. 518) (award of rental value)?

Who are conscious wrongdoers? Under Rstmt (3d), misconduct = “tortious or otherwise wrongful” interference “w/ claimant’s legally protected interest” Note grounds defined as misconduct at p. 519 n.1 Disgorgement of profits/gain is appropriate for “misconduct” (aka conscious wrongdoers) Disgorgement = D must return to P the “net profit attributable to underlying wrong” (p.518 n. 9b) Profit = use/rental value of property taken, proceeds from sale/exchange of property taken & any consequential gains from use of property Note that Rstmt(3d)/courts recognize wrongdoers of lesser degree of culpability (p. 519 n.3) Courts adjust measure of restitution depending on whether they think D is closer to innocent or culpable D

Disgorging profits & breach of contract – Snepp Snepp, former CIA agent, published book about CIA activities in Vietnam w/out submitting it for prepublication review per his employment contract. SCT said appropriate remedy was imposition of a constructive trust, which requires disgorgement of all profits received from the book. Of what did Snepp wrongfully deprive the CIA? Does that justify an award of full profits? Wouldn’t he have earned those profits anyway if he had just submitted the book for review? Is there a justification for the award of full profits?

Disgorging profits & breach of contract – May S&B enter into contract for sale of land. Before closing, S sold fill to X for $240K significantly damaging the land and diminishing its value. Contract between S&B was then executed after which B discovers S’s perfidy. What are B’s damages if sues for breach of contract? What does the court award instead? Under what theory?

Disgorging profits & breach of contract – a summary Conventional Wisdom – NO disgorgement of profits for routine profitable breach of contract. But rule has broken down some and exceptions explain Snepp & May Exceptions Breach of non-compete or confidential information clause Snepp bears some similarity to these cases Breach of contract for sale of land (May?) Equitable conversion - doctrine holding that Buyer of land becomes the equitable owner the minute the contract is signed. Allows both specific performance and imposition of constructive trust Opportunistic Breach (?) – attempt by Rstmt(3d) to make law? Deliberate breach resulting in profit to breachor where available remedy affords inadequate protection to P’s contractual entitlement (Rstmt 3d p. 545)

Restitution mechanisms up to this point We have seen several mechanisms allowing P to force D to return unjust gain. All have essentially resulted in a simple money judgment measured by the amount of D’s gain (although the measurement of that gain may differ depending on the culpability of D (or P)). Mechanisms include: Quasi-Contact (Sauer, Olwell) Accounting For Profits (Maier Brewing p. 520 (not assigned)) Constructive Trust (Snepp)

Restitution mechanism specifics: Quasi-contract - court implies a promise by D to return benefit in situations where D “in good conscience” should not keep it. Mainly used when (1) underlying action is a tort or (2) P needs a substantive theory of restitution Legal remedy Accounting for Profits - court implies a duty to account for and disgorge profits made from “improper use of P’s property/entitlement.” Mainly used w/ (1) breach of fiduciary duty cases, (2) statutory claims (e.g., trademark & copyright infringement) Equitable remedy Constructive Trust - court declares D a constructive trustee who must disgorge any unjustly gained benefit. Mainly used w/ (1) breach of fiduciary duty, (2) fraud & (3) theft Equitable remedy

Rescission What is it: A restitution remedy used to reverse transactions resulting in a contract. Modern trend – courts treat as an equitable remedy Grounds for rescission: Fraud, substantial breach of K, mutual mistake, duress, certain unilateral mistakes, undue influence. How it works: Court reverses the transaction (disaffirms the K) & requires the parties to return any benefit conferred on them by the other party. Example - B & S contract for B to buy house for $150,000. After closing, B learns that the house has a reputation of being haunted, which S deliberately hid from B. What are B’s remedies? Damages: Rescission:

Rescission & changed circumstances – Mobil Oil Mobil entered into K w/ US where it promised $156 million in exchange for leases to explore/develop OCS off N.C. coast (conditional upon Mobil getting further gov’t permission). Due to later federal law, US w/held permission. SCT says US repudiated the contract. Rescission is a hugely important remedy for Mobil: Prior to the change in federal law, Mobil never secured drilling rights – it had only a CHANCE to get them given N.C.’s veto power under old law. But that chance was worth paying for. After the law forced US to breach, Mobil’s chance plummeted to zero. Mobil’s expectancy damages are $0 because court found that N.C. likely would have denied Mobil rights under the old law anyway BUT rescission undoes the contract and gets Mobil its money back in exchange for its return of exploration rights to the US

Rescission & election of remedies Rescission can be very attractive if circumstances have changed (or simply because it’s so easy to unwind a particular contract). BUT it has costs. Rescission is inconsistent with damages – i.e., P cannot seek both rescission & compensatory damages on a contract so she must ELECT one or the other An aside about timing and election: Modern trend allows P election between rescission or affirmation of the contract up to entry of judgment as long as P’s choice does not prejudice D BUT some jurisdictions require “notice” of rescission so choice should be made as early as possible Consequences of electing rescission: If P chooses rescission, she should lose her right to ALL damages – even punitive and consequential damages – because she has disaffirmed the contract.

Rescission & punitive or consequential damages What are the court trends? Trend with punitive damages – courts still reluctant to allow punitive damages Trend with consequential damages – majority of courts willing to allow consequentials if they don’t duplicate the unwinding of the contract Hypo re consequentials & rescission: P (a resident of Missouri) buys a house from D located in New York state. P moves to NY only to find that D lied about the house’s habitability – it’s haunted and nobody has able to spend the night in the house without going crazy. P is forced to stay in a motel for 2 weeks until he can find another house to purchase. P can seek rescission and recover consequential damages for hotel expenses in such circumstances even though damages look to P’s loss from the contract.

Rescission where there has been additional benefit Ps buy a house from D. After K is executed, Ps move in and build an addition. After living in the house for six months, Ps discover that it is haunted, which D fraudulently concealed from them. Upon rescission, P/D will have to return the house and purchase price to each other. Upon rescission of the contract, what do we do with the addition (how do we value it)? P can’t keep addition so D will have to compensate Ps for it in some way. Three commonly-used valuations: (1) Difference in market value before and after addition, (2) P’s cost of improvement, or (3) Value of improvement to D Upon rescission, what do we do about the fact that Ps have lived in the house for six months? Haven’t Ps lived in D’s house rent free for 6 months once Ps return the purchase price? Courts often require Ps in these situations to compensate D with rent.