978-1285860381 Chapter 28 Solution Manual 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 their lives.

Quotes of the Day

“If you want something done right, do it yourself.” “Many hands make light work.” –Anonymous folk

sayings.

“Let every eye negotiate for itself and trust no agent.” William Shakespeare (1564 – 1616), playwright, in

“Much Ado about Nothing,” Act 2 scene 1.

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.

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/

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

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?

Duties of Agents to Principal

Agents owe a fiduciary duty to their principals. There are four elements to this duty.

Duty of Loyalty

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the

agency relationship. The agent has an obligation to put the principal first, to strive to accomplish the

principal’s goals. The following case reveals the outcome of the opening scenario.

–

Case: Pure Power Boot Camp, Inc. v Warrior Fitness Boot Camp, LLC.

813 F. Supp. 2d 489

United States District Court for the Southern District of New York, 2011

Facts: Based on the facts in the opening scenario, Brenner filed suit against Belliard and Fell, alleging that

they had violated their duty of loyalty to the company.

Issue: Did Belliard and Fell violate their duty of loyalty to Pure Power?

Excerpts from Judge Katz’s Decision: An agent is obligated under the New York law to be loyal to his

employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all

times bound to exercise the utmost good faith and loyalty in the performance of his duties. This duty is

not dependent upon an express contractual relationship, but exists even where the employment

relationship is at-will.

When an employee uses an employer’s proprietary or confidential information when establishing a

competing business, the employee breaches his or her fiduciary duty to the employer. Although an

employee may, of course, make preparations to compete with his employer while still working for the

employer, he or she may not do so at the employer’s expense, and may not use the employer’s resources,

time, facilities, or confidential information; specifically, whether or not the employee has a signed

agreement not-to-compete, the employee, while still employed by the employer, may not solicit clients of

his employer, may not copy his employer’s business records for his own use, may not charge expenses to

his employer, which were incurred while acting on behalf of his own interest, and not actively divert the

employer’s business for his own personal benefit or the benefit of others. In addition, even in the absence

of trade secret protection, employees are not permitted to copy their employer’s client list, and such acts

have been deemed to be an egregious breach of trust and confidence.

This ongoing and deliberate conduct, transpiring over the course of several months, constitutes a clear

breach of the duty of loyalty owned by employees, Belliard and Fell, to their employer, Pure Power.

[Belliard and Fell must pay Brenner $245,000.] The various components of the duty of loyalty to follow.

Question: What is the duty of loyalty?

Question: In this case, is an express contractual relationship necessary for a duty of loyalty to arise?

Question: Besides the duty of loyalty, what additional area of the law likely protects an employer’s client

list?

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.)2

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. A fiduciary relationship is a special relationship, with high standards.

Additional Case: Elson v. Koehr3

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?

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?

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

for the Seventh Circuit, 1988

3 856 S.W.2d 57; 1993 Mo. LEXIS 77 Supreme Court of Missouri, 1993

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 Corporation4

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 to different

The Employee’s 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.

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).

Con2dential Information

4 2007 U.S. Dist. LEXIS 86523, United States District Court for the Northern District of California,

2007.

The ability to keep secrets is important in any relationship, but especially a fiduciary relationship. Agents

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

agency.

Case: ABKCO Music, Inc. v. Harrisongs Music, Ltd.5

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:

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?

5 722 F.2d 988, 1983 U.S. App. LEXIS 15562 United States Court of Appeals for the Second Circuit,

1983

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.6

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

Additional Case: Reading Radio, Inc. v. Fink7

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.

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 in the amount of

$1,105,000. The defendants appealed.

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

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

p. B9

7 2003 PA Super 353; 833 A.2d 199; 2003 Pa. Super. LEXIS 3181 Superior Court of Pennsylvania, 2003

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 noncompete 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.8

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

8Michael Siconolfi, “Brokers and the Firms They Leave Battle To Keep Clients,” Wall Street Journal, March 18, 1996, p. 1.