978-1285427003 Chapter 25 Lecture Note Part 1

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Suggested Additional Assignments

Personal Experiences: Agency

Ask students to prepare a list of five instances in which they have acted as an agent for someone else, or

someone else has acted as an agent for them.

Sports Agents

For many students, agency law will immediately conjure images of the Tom Cruise film Jerry Maguire

and the relationship among professional athletes, their agents, and their teams. Some students may be

interested in sports agency as a career. Ask them to describe what they believe to be the nature of the legal

relationship between athletes and agents. Are they surprised by what they learn in this chapter?

Writing Exercise: Apparent Authority

Apparent authority is often a difficult concept for students to understand. Ask students to prepare and

bring to class a two-paragraph example of apparent authority.

Research: Straw Buyers

Have students research ways in which “straw buyers” are used in real estate transactions. They will find

many examples of straw buyers in fraudulent transactions, so ask them to search specifically for

transactions in which straws, i.e. undisclosed principals, serve a legitimate business purpose.1 They should

prepare a brief summary to share in class, describing one use of straw buyers that was abusive and one

that was legitimate.

Chapter Overview

Chapter Theme

Once again, the subject is trade-offs. You can accomplish more if other people do things for you. On the

other hand, you also face liability for their actions. Being a manager means getting things done through

other people; but other people make mistakes. In this chapter, we look at how agency relationships are

created and then we look at liability issues. It is virtually impossible to run a business without using

agents. But using an agent dramatically increases the risk of liability–in both contract and tort. Because of

this increased risk, it is important to understand agency law. It affects virtually everyone at some point in

his or her life.

Creating an Agency Relationship

Let us begin with two important definitions:

Principal: A person who has someone else acting for him.

Agent: A person who acts for someone else.

To create an agency relationship, there must be:

A principal and

An agent

Who mutually consent that the agent will act on behalf of the principal and

Be subject to the principal’s control

1 “Playing Secret Agent for Mickey Mouse; Lawyers Ran Dummy Companies, Bought Real Estate for Disney,” by

Tim O’Reiley, Legal Times, January 10, 1994; see also “The ‘Public Use’ Requirement in Eminent Domain Law:A

Rationale Based on Secret Purchases and Private Influence,” by Daniel B. Kelly, John M. Olin Center for Law,

Economics, and Business Fellows Discussion Paper Series, Discussion Paper #5, Jul. 2005, pp. 3-5

http://www.law.harvard.edu/programs/olin_center/

Thereby creating a fiduciary relationship.

Consent and Control

To create an agency relationship, the principal and agent must agree that the agent will act for the princi-

pal and under his control.

Example: Consider the following examples from the Restatement of Agency (2nd). Is there an agency

relationship?

Question: Antonia wants to buy a car. The dealer permits her to take an automobile home to

show her mother. On the way home, she gets into an accident. Is Antonia an agent for the dealer?

(If she is, the dealer is liable for the damage she caused.)

Question: Suppose that Martin asks Beverly to return a shirt to the store where he recently

purchased it. Is she an agent for Martin? Does it matter that he is not paying her?

Question: Are the directors of a corporation agents of the shareholders?

Answer: No, because they are not under any obligation to do what the shareholders tell them —

Question: What about a truck driver who agrees to make a detour to take a hitchhiker to her

destination? Is the truck driver an agent of the passenger?

Additional Case: Taylor v. Gill2

Kenny Willis and his neighbors, Rick and Joyce Taylor, were good friends. Rick helped Kenny repair his

truck and Kenny cut the Taylors’s yard because they did not own a lawnmower. One day, while the

Taylors were out, Kenny began to cut their grass. Joyce returned home and saw what he was doing but

made no effort to stop him. Kenny negligently ran the mower over a stretch of gravel. A piece of the

gravel shot through the air and struck Jackie Gill in the eye. She filed suit against both Kenny and the

Taylors. A jury found the three defendants jointly and severally liable. The Taylors appealed.

Question: Why would the Taylors be liable for Kenny’s negligence?

Question: Why?

Question: No, but an agency relationship may be implied from the conduct of the parties even

without an explicit agreement.

Question: Did the Taylors have control over their yard? Could Joyce have asked Kenny to stop

mowing her yard?

Question: Was Kenny acting as an agent for the Taylors?

Answer: The Supreme Court of Arkansas held that he was not an agent because the Taylors did not

2 934 S.W.2d 919; 1996 Ark. LEXIS 714.

Example: DEA Agent?

A Federal Express employee in West Palm Beach noticed that a package smelled like laundry soap.

Cocaine is often packed in laundry products to mask its smell. The employee checked the telephone

directory and did not find the shipper’s name. He called the local Drug Enforcement Administration

(DEA). While a DEA officer watched, the Federal Express employee opened the package and discovered

cocaine. The package was addressed to Lacy Koenig. After obtaining a search warrant for Koenig’s

residence, the DEA searched it and discovered other drugs. At her trial, Koenig asked the court to

suppress the evidence, arguing that it was the fruit of an illegal search. She asserted that the Federal

Express employee was acting as an agent of the government at the time he opened the package. Therefore,

the search was illegal because the employee did not first obtain a search warrant, as the government

would have been required to do. (The exclusionary rule applies only to searches by the government.)3

Question: Was the Federal Express employee an agent of the DEA?

Answer: The court ruled against Koenig on the grounds that the government had not influenced the

Note: If students prepared a list of five instances in which they have acted as an agent for someone else or

someone else has acted as an agent for them, this is a good time to discuss their examples.

Fiduciary Relationship

In a fiduciary relationship, a trustee acts for the benefit of the beneficiary, always putting the interests of

the beneficiary before his own. Agents have a fiduciary duty to their principals. A fiduciary relationship is

a special relationship, with high standards.

Additional Case: Elson v. Koehr4

Facts: During a layover at the St. Louis Airport, Rose Elson was injured in a fall at the Southwest

Airlines ticket counter. She filed suit against Southwest for negligence. Elson was a resident of Texas and

Southwest is a Texas corporation, but she filed the case in St. Louis. Southwest’s only connection with St.

Louis was that passenger reservations and ticket sales for Southwest flights were made through

independent travel agents located in the city.

Under Missouri state law, suit could be filed against a corporation in “any county where the

corporations shall have or usually keep an office or agent. ..” The trial court dismissed Elson’s case on the

grounds that the ticket sellers were not true agents under agency law.

Issues: Could Elson file suit against Southwest in St. Louis? Were the workers behind the Southwest

counter agents of Southwest?

Holding: The ticket sellers were agents of Southwest and, therefore, Elson could file suit in St. Louis.

Southwest and the independent travel agencies agreed in writing to establish an agency relationship in

which the agents were given the express authority to sell and promote air travel on the airline. All three

essential agency characteristics were present: consent, control and a fiduciary relationship.

Question: What three elements must be present to establish an agency relationship?

Question: In this case, was there consent?

3 United States v. Koenig, 856 F.2d 843, 1988 U.S. App. LEXIS 12655 United States Court of Appeals

for the Seventh Circuit, 1988.

4 856 S.W.2d 57; 1993 Mo. LEXIS 77 Supreme Court of Missouri, 1993.

Question: Was there control?

Question: Was there a fiduciary relationship?

Question: But is that enough to establish a fiduciary relationship?

Question: Is there one activity in particular that often indicates a fiduciary relationship?

Duties of Agents to Principals

There are four elements to the fiduciary duty that agents owe to their principals: duty of loyalty, duty to

obey instructions, duty of care, and duty to provide information.

Case: Otsuka v. Polo Ralph Lauren Corporation5

Facts: Justin Kaiser and Germania became friends while working together at a Ralph Lauren Polo store.

When Germania left the store, Kaiser allowed Germania to buy clothing using merchandise credits made

out to fake people, and he also allowed her to use his employee discount. Both of these activities were

against store policy.

Polo sued Kaiser alleging that he had violated his duty of loyalty. Kaiser filed a motion to dismiss on the

grounds that he was such a low-level employee, he had no duty to the company.

Issue: Do all employees owe a duty of loyalty to their employer?

Holding: Yes, all employees owe a duty of loyalty to their employer, Kaiser’s motion to dismiss is

denied. According to the court, Polo argues that there is a duty of loyalty akin to a fiduciary duty that all

employees owe to their employer. While the cases cited by Polo address fiduciary duty with respect to

higher-ranking employees, according to the Third Restatement, all employees are agents, and that “[a]s

agents, all employees owe a duty of loyalty to their employers.” This is true regardless of how ministerial

or routinized a work assignment may be.

Question: Does it make sense to hold low-level employees to the same standard as high-ranking

employees?

Answer: The court thinks so. Applying different standards regarding a fiduciary duty of two different

level employees will create confusion among employees and employers, and among courts. In

Duty of Loyalty

During their careers, students will inevitably face issues involving the duty of loyalty to an employer. In

determining whether an action would violate this duty, they may find the Ethics Checklist in Chapter 2

helpful. For instance, under the Light of Day test, they should consider whether they would want their

boss to know what they are about to do. If not, they may be violating their duty of loyalty. Of course,

when in doubt about the duty of loyalty, they could always protect themselves by informing their

principal of the activity, and obtaining his permission to engage in it. If they are afraid to tell, that is a bad

sign.

5 2007 U.S. Dist. LEXIS 86523, United States District Court for the Northern District of California,

2007.

After all, the purpose of an agency relationship is to benefit the principal. Who knows better than the

principal whether an activity benefits him? If the principal does not object, then a court will not either

(unless, of course, the activity is illegal).

Outside Bene&ts

An agent may not receive profits unless the principal knows and approves.

Con&dential Information

Agents can neither disclose nor use for their own benefit any confidential information they acquire during

their agency.

Case: ABKCO Music, Inc. v. Harrisongs Music, Ltd.6

Facts: Bright Tunes Music Corp. (Bright Tunes) owned the copyright to the song “He’s So Fine.” The

company sued George Harrison, a Beatle, alleging that the Harrison composition “My Sweet Lord”

copied “He’s So Fine.” At the time the suit was filed, Allen B. Klein handled the business affairs of the

Beatles.

Klein (representing Harrison) met with the president of Bright Tunes to discuss possible settlement of the

So Fine.” Shortly thereafter, Klein’s management contract with the Beatles expired. Without telling

Harrison, Klein began negotiating with Bright Tunes to purchase the copyright to “He’s So Fine” for

himself. To advance these negotiations, Klein gave Bright Tunes information about royalty income for

“My Sweet Lord”—information that he had gained as Harrison’s agent.

The trial judge in the copyright case ultimately found that Harrison had infringed the copyright on “He’s

So Fine” and assessed damages of $1,599,987. After the trial, Klein purchased the “He’s So Fine”

Issue: Did Klein violate his fiduciary duty to Harrison by using confidential information after the agency

relationship terminated?

Holding: Yes, Klein was in violation because an agent has a duty not to use confidential knowledge

acquired in his employment to compete with his principal. This duty continues after the agency

terminates.

Excerpts from Judge Pierce’s Decision: There is no doubt that the relationship between Harrison and

[Klein] prior to the termination of the management agreement was that of principal and agent, and that the

relationship was fiduciary in nature. [A]n agent has a duty not to use confidential knowledge acquired in

his employment in competition with his principal. This duty exists as well after the employment is

terminated as during its continuance. On the other hand, use of information based on general business

knowledge or gleaned from general business experience is not covered by the rule, and the former agent is

permitted to compete with his former principal in reliance on such general publicly available information.

The evidence presented herein is not at all convincing that the information imparted to Bright Tunes by

Klein was publicly available.

While the initial attempt to purchase [the copyright to “He’s So Fine”] was several years removed from

the eventual purchase on [Klein]’s own account, we are not of the view that such a fact rendered [Klein]

unfettered in the later negotiations. Taking all of these circumstances together, we agree that [Klein’s]

conduct did not meet the standard required of him as a former fiduciary.

Question: What did Klein do wrong?

Answer:

6 722 F.2d 988, 1983 U.S. App. LEXIS 15562 United States Court of Appeals for the Second Circuit,

1983.

Question: Klein felt he had been unfairly fired by the Beatles. What if he had simply told Bright

Tunes information about “My Sweet Lord” out of spite, not to benefit himself?

Question: Suppose that, during his employment by the Beatles, Klein develops relationships with all

the top music industry executives. After he leaves the Beatles, he represents other music groups,

negotiating contracts, etc. If it weren’t for his relationship with the Beatles, no one would return his

phone calls, but now he has a thriving business. Has he violated his fiduciary duty to the Beatles by

using information he learned while working for them to represent other groups?

Answer: The court in ABKCO says that an agent can “use information based on general business

Competition with the Principal

Agents are not allowed to compete with their principal in any matter within the scope of the agency

business.

Example

While serving as outside auditors for the consulting firm of Stern, Stewart & Co., KPMG discovered how

much money Stern, Stewart was earning from its financial management and incentive compensation

consulting practice. KPMG sent six of its employees to a Stern, Stewart seminar to learn about this

consulting practice. It then hired two of Stern, Stewart’s consultants and started its own competing

business.7

Question: Did KPMG do anything wrong?

Question: What is a fiduciary duty?

Question: If KPMG wanted to start a consulting business, what should it have done?

Answer: KPMG should have resigned from its position as Stern, Stewart’s outside auditors and then

Conflict of Interest Between Two Principals

Unless otherwise agreed, an agent may not act for two principals whose interests conflict.

Additional Case: Reading Radio, Inc. v. Fink8

Facts: David Kline was the station manager and sales manager for Reading Radio, Inc., a/k/a WAGO

Radio. As manager, Kline was in charge of supervising the station’s sales representatives. Molly Fink and

Isaac Ulrich, two of WAGO’s top sales representatives, had both signed non-compete agreements with

WAGO that prohibited them from taking a radio or television broadcasting job, within fifty miles of

Reading, Pennsylvania, for six months after leaving WAGO. Kline did not have a covenant not to

compete.

7 Elizabeth MacDonald, “KPMG Is Dealt Setback in Fiduciary Case,” Wall Street Journal, July 16, 1997,

p. B9.

8 2003 PA Super 353; 833 A.2d 199; 2003 Pa. Super. LEXIS 3181 Superior Court of Pennsylvania, 2003.

Reading Eagle Company approached WAGO about possibly buying the station. The sale fell through

but Eagle offered Kline a job as manager of its station, WEEU. Kline accepted the position and resigned

from his job at WAGO. Kline agreed to stay at WAGO for 30 days to smooth the transition, but the

transition was not smooth. Kline cancelled programming without notice, transferred to Eagle a significant

advertising account that also gave him personal benefits, and offered jobs at Eagle to Fink and Ulrich

despite their non-competition agreements with WAGO. After Fink and Ulrich left, sales revenue at

WAGO fell by $1.6 million dollars.

WAGO sued both Kline and Eagle. The jury returned a verdict for WAGO for $1,105,000. Defendants

appealed.

Issue: Did Kline violate his duty of loyalty to his employer, WAGO?

Holding: Judgment for WAGO affirmed. While still employed by WAGO, Kline actively encouraged

Fink and Ulrich to leave WAGO and go to work at WEEU. He also refused to enforce their

covenants-not-to-compete. These acts were clear violations of his duty of loyalty.

Question: Kline showed how not to move from one job to another. What did he do wrong?

Answer:

Question: What should he have done?

Question: Kline knew that Fink and Ulrich were good at their jobs. Why couldn’t he hire them to

work at his new station?

Answer: Because it was disloyal. Kline offered them jobs at the new station while he was still their

Question: Why does that make it worse?

Answer: The non-compete agreements protected WAGO. It was Kline’s job as station manager to

Example: Taking Client Lists

Stockbroker Ronald Waitemeyer left Merrill Lynch to go to work for Dean Witter. Merrill Lynch sued to

prevent him from taking his client list with him. Fortunately, for him, a heavy snowstorm on the day he

left Merrill Lynch shut the Baltimore federal court for three days. This interlude gave him the

opportunity to sign up his old clients before Merrill Lynch could obtain a restraining order against him.9

Question: Was Waitemeyer violating his duty of loyalty when he solicited clients after leaving Merrill

Lynch.

Question: Some brokerage houses offer clients a reduced commission rate if they will stay with their old

firm instead of following their broker when she leaves. Are there any limits to what the firm can do to

keep clients?

Question: Who owns the client lists?

Answer: Merrill Lynch argued that the clients belonged to the firm because the firm made such a heavy

9Michael Siconolfi, “Brokers and the Firms They Leave Battle To Keep Clients,” Wall Street Journal, March 18, 1996, p. 1.

Secretly Dealing with the Principal

If a principal hires an agent to arrange a transaction, the agent may not become a party to the transaction

without the principal’s permission.

Other Duties of an Agent

Duty to Obey Instructions

An agent must obey her principal’s instructions unless the principal directs her to behave illegally or

unethically.

Duty of Care

An agent has a duty to act with reasonable care.

Duty to Provide Information

An agent has a duty to provide the principal with all information in her possession that she has reason to

believe the principal wants to know. She also has a duty to provide accurate information.

Principal’s Remedies when the Agent Breaches a Duty

A principal has three potential remedies when an agent breaches her duty:

The principal can recover from the agent any damages the breach has caused.

If an agent breaches the duty of loyalty, he must turn over to the principal any profits he has

earned as a result of his wrongdoing.

If the agent has violated her duty of loyalty, the principal may rescind the transaction.

Duties of Principals to Agents

In a typical agency relationship, the agent agrees to perform tasks for the principal, and the principal

agrees to pay the agent. Primarily, the principal must reimburse the agent for reasonable expenses and

cooperate with the agent in performing agency tasks. The respective duties of agents and principals can be

summarized as follows:

Duties of Agents to Principals Duty of Principals to Agents

Duty of loyalty Duty to compensate as provided by the agreement

Duty to obey instructions Duty to indemnify (i.e., reimburse) for reasonable

expenses

Duty of care Duty to cooperate

Duty to provide information

Terminating an Agency Relationship

Termination by Agent or Principal

Either party has the power to terminate an agency relationship; they may not, however, have the right. The

relationship may be terminated at the completion of a term agreement, whenever desired in an agency at

will, or wrongfully terminated at another time. If the agent is a gratuitous agent (i.e., is not being paid), he

has both the power and the right to quit any time he wants, regardless of the agency agreement.

Question: Oliver and Campbell signed a contract agreeing that Campbell would represent Oliver in

his divorce. Near the end of the trial, Oliver decided he would handle the case himself and fired

Campbell. Does Oliver have the right to fire Campbell? Campbell wanted to finish the case because a

“big win” would enhance his reputation.

Answer: Oliver had the right to fire Campbell, but Oliver had to pay the balance owing on the

contract. In other words, Oliver had to pay Campbell as if Campbell had done all the work, but Oliver

had the right to choose who would represent him.10

Principal or Agent Can No Longer Perform Required

Duties

If the principal or the agent is unable to perform the duties required under the agency agreement, the

agreement terminates.

Change in Circumstances

If, after the agency agreement is negotiated, changes to circumstances occur that are significant enough to

undermine the purpose of the agreement, the relationship ends automatically. Changes in law and loss or

destruction of subject-matter also affect the agency relationship.

Additional Case: You Be The Judge: Gagnon v. Coombs11

Facts: Eighty-five year-old Francis Gagnon and his wife lived on a farm in Shelburne, Massachusetts.

They also owned land in Hillsborough, New Hampshire. They had two children: Joan Coombs, who lived

20 miles from Shelburne, and Frank Gagnon who lived in a trailer on a far corner of the farm. Joan

suggested that her parents sign powers of attorney appointing her as their agent so that she could take care

of them and their property.

Frank found out about the power of attorney when he checked his mother into a nursing home. Frank

then moved his trailer in to the main house and convinced his father to revoke the power. Francis did so,

but never told Joan explicitly. Two months later, Mrs. Gagnon died and Mr. Gagnon signed a purchase

and sale agreement for the Shelburne farm. He gave the property in Hillsborough to Frank.

When Mr. Gagnon told Joan about the sale of the land and his intention to move to Hillsborough to

live with Frank, she crafted her own plan. Not realizing that her power of attorney had been revoked, she

used it to transfer the Shelburne property to a trust that she had created and that she controlled. Francis’s

lawyer wrote to Joan demanding that she return the Shelburne property to him. She refused.

The trial court found that Joan had the authority under the power of attorney to convey the Shelburne

property to the trust. Francis appealed.

You Be The Judge: Did Joan have the right to convey the Shelburne farm to a trust that she had

established? Does the property belong to the trust or to Francis?

Holding: Judgment for Joan reversed. The court ruled that Joan had violated her fiduciary duties to

Francis by acting in her interest, not his. In addition, he had “lost” the property when he signed a P&S on

it and, therefore, her power of attorney did not permit her to transfer it.

Question: What is a power of attorney?

Question: When does it expire?

Answer: It expires when the principal revokes it, when the principal dies or if the principal becomes

10 Based on Oliver v. Campbell, 273 P.2d 15 California Supreme Court, 1954.

11 39 Mass. App. Ct. 144; 654 N.E.2d 54; 1995 Mass. App. LEXIS 545 Massachusetts Appeals Court

1995.

Question: Francis never told Joan that he revoked her power of attorney. If Joan did not know, how

could her authority be revoked?

Answer: Francis told Joan indirectly. When she found out that he had signed a purchase and sale

Question: But even after Francis signed the P&S, he still owned the property. Couldn’t Joan transfer

it to the trust?

Question: Was Joan really doing what was best for Francis?

Question: What is the moral of this story?

effect of Termination

Once an agency relationship ends, the agent no longer has the authority to act for the principal. However,

the principal’s duty to indemnify the agent for expenses incurred before the agency ended continues.

Likewise, an agent is not entitled to use confidential information even after the agency relationship

terminates.

Principal’s Liability for Contracts

The principal is liable for the acts of an agent if (1) the agent had authority, or (2) the principal ratifies the

acts of the agent.

Authority

A principal is bound by the acts of an agent if the agent has authority. There are three types of authority:

express, implied, and apparent.

Express Authority

The principal grants express authority by words or conduct that, reasonably interpreted, cause the agent to

believe the principal desires her to act on the principal’s account.

Implied Authority

Unless otherwise agreed, authority to conduct a transaction includes authority to do acts that are

reasonably necessary to accomplish it.

Apparent Authority

A principal can be liable for the acts of an agent who is not, in fact, acting with authority, if the principal

does something that causes a third party reasonably to believe that the agent is authorized. The issue for

apparent authority is what the principal has done, not the agent, as viewed from the perspective of a third

party who dealt with the agent.