Environmental Engineering Chapter 16 Agency law will immediately conjure images of

Chapter 16

AGENCY LAW

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

Writing Exercise: Apparent Authority

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

Research: Straw Buyers

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

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

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.

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

2 Unit 3 Agency and Employment Law

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

• 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?

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

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?

Answer: The jury found that Kenny was an agent acting for the Taylors.

Question: Why?

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

Chapter 16 Agency Law 3

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?

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

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

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. 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.

4 Unit 3 Agency and Employment Law

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?

authorized to sell tickets for Southwest.

Question: Was there control?

Answer: The agreement between Southwest and the agencies was full of conditions and restrictions

on their activities.

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.

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

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

Chapter 16 Agency Law 5

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

Confidential Information

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

copyright lawsuit. Klein suggested that Harrison might be interested in purchasing the copyright to “He’s

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

Question: What did Klein do wrong?

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

6 Unit 3 Agency and Employment Law

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?

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

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.

Chapter 16 Agency Law 7

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?

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:

• He hired away two of the WAGO’s top salespeople.

them.

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?

Answer: Offering a reduced commission rate is fine, but some brokerage houses have (untruthfully)

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.

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

8 Unit 3 Agency and Employment Law

• 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. The respective duties of agents and principals can be summarized as follows:

Duties of Agents to Principals

Duty of Principals to Agents

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.

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

Change in Circumstances—Loss or Destruction of Subject

Matter

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

Chapter 16 Agency Law 9

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

Question: What is a power of attorney?

Answer: It is a document authorizing someone to be an agent.

Question: When does it expire?

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

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?

Answer: It didn’t matter if he still owned the property. Joan knew that he had taken control of it and

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

Answer: Joan didn’t tell him that she had transferred the property. Also, she tried to transfer the

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.

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.

10 Unit 3 Agency and Employment Law

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

Apparent Authority

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

Role Play: Apparent Authority

This skit requires no rehearsal; any three students can play the roles. Provide a copy to each of the

students a few minutes before class so that they have an opportunity to read it in advance. (Use

highlighter to indicate their lines.)

Anne Dawson, to class: Hello, my name is Anne Dawson. I am a salesperson for the Pure Brush

Company.

James Fraser to Anne Dawson:

I’m terribly afraid, Anne, that we will have to let you go. You have missed your sales quota three out

of the last four months. Frankly, I just don’t think you are working hard enough. I’m terribly sorry,

but my boss, Franklin, is breathing down my neck to get sales up, and you are simply not pulling your

weight.

Anne Dawson (looking sneaky):

I’ve used up all my forms and my sample case was stolen out of my car last week. I’m out of here

now. You guys are going to regret this. [She stomps off.]

James Fraser: You’re probably right. I’m sorry and good luck.

Chapter 16 Agency Law 11

Anne Dawson: We’ve got this fabulous new product you’ll just love–it’s a brush for

cleaning blinds. I remember last time you told me that your husband has asthma. Did you know that

Connie Lynch (hesitating):

Well, it seems like a good idea. How much is it?

Anne Dawson: Normally, it’s $99, but right now we’re having a super special. It’s

Anne Dawson: Just sign this form right here.

Question: Does Anne Dawson have express authority to act for the Pure Brush Company?

Question: Does she have implied authority?

Question: Does Dawson have any authority?

Answer: Apparent authority. This means that the principal has not authorized her to act but the

principal has done something to make an innocent third party believe she was authorized.

Question: What has Pure Brush Company done to make Connie Lynch believe that Dawson was

authorized to act?

Answer: It did not retrieve her samples and forms. Many companies require their sales staff to put

Additional Case: Dickinson v. Charter Oaks12

Facts: Marlee and Richard Snowdon bought a house next door to Hal and Carol Dickinson. Carol had

owned the house for 30 years; Hal had moved in 10 to 15 years later when he and Carol married. Hal had

no ownership interest in the property.

The Snowdons decided to clean out an area of overgrowth adjacent to the Dickinson land. Richard

spoke with Hal, who okayed the work. Marlee hired Charter Oaks for the project. Hal expressed

12 2003 Ohio 2055; 2003 Ohio App. LEXIS 1940 Court of Appeals of Ohio, 2003