Management Chapter 5 Adams Did Not Have Implied Permission Use

Chapter Five

Agency

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

To Disclose or Not to Disclose?

Issue Presented: (a) Should Danimark disclose Nelipern’s involvement to potential investors?

(b) Is disclosure in the marketing materials enough? (c)

(a) This fact pattern is based on an enforcement action brought by the Securities and

Exchange Commission against Goldman Sachs for failure to disclose John Paulson’s role in

choosing the subprime mortgages underlying the securities. Danimark should disclose the

the principal.

(b) The analysis changes if the investor is independently approving its own securities. In

that case, the investor is using its own methods to approve or disprove investment in a security

and is not depending on Danimark to provide advice in the selection process. This gives the

(c) If Danimark is an agent of the investor, then it owes a fiduciary duty of loyalty to the

investor and cannot, consistent with that duty, purchase for itself securities that would

QUESTIONS AND CASE PROBLEMS

Question 1

Issues Presented: What are an agent’s duties to a principal with respect to a business

opportunity?

Singer was an agent of GAMC and, consequently, owed GAMC a fiduciary duty, which

is the duty to exercise utmost good faith and loyalty with respect to the principal. Singer’s

sideline business, which was in direct competition with GAMC, was a clear violation of Singer’s

Question 2

Issue Presented: Can an agency relationship be established when a party merely represents

that it is acting as an agent for another company?

Although the existence of a formal licensing agreement does not create an agency

relationship, it also does not preclude the existence of apparent agency. Apparent authority is

established when a principal leads persons with whom his agent deals to believe that he has

Question 3

Issue Presented: Is an employer vicariously liable for violations of the Fair Credit Reporting

Act (FCRA) made by an employee?

Depending on the jurisdiction, an employer may be vicariously liable for violations of an

employee under either the apparent authority agency theory or the aided in the agency relation

doctrine. The theory of apparent authority is applied when an employee had the apparent, but

authority to obtain the credit report and therefore the Credit Union was liable pursuant to the

doctrine of respondeat superior, in addition to finding a willful violation.

The U.S. Court of Appeals for the Sixth Circuit found similarly in Jones v. Federated

Financial Reserve Corp., 144 F.3d 961 (6th Cir. 1998). There, a debt collector was talked into

getting a friend’s ex–wife’s credit report by filling out a request and giving it to the clerks who

operated Federated’s credit reporting system. The court found that the employer was

The U.S. District Court for the Northern District of Illinois found in Del Amora v. Metro

Ford Sales and Service, Inc., 206 F.Supp.2d 947 (N.D. Ill. 2002), that vicarious liability existed

under the aided in the agency relation doctrine when the defendant asked her brother, a

The U.S. District Court for the Southern District of Mississippi in Smith v. Sears, Roebuck

& Co., 276 F. Supp. 2d 603 (S.D. Miss. 2003), disagreed with these cases and found that there was

no vicarious liability under with the apparent authority theory or the aided in agency relation

doctrine. The first reason given by the court is that “these courts have, in effect, imposed strict

liability against employers for intentional wrongs committed by their employees for the

There is nothing to suggest that Sears was willful in assisting Ydonna in violating the

FCRA. Also, upon her hiring, Ydonna was provided personal training relating directly to the

permissible uses of the tracing program and was expressly instructed in the course of her

training that she was only authorized to retrieve information on existing Sears customers and

Question 4

Issue Presented: Did Adams have implied permission to use the truck, thereby qualifying

him as an insured under Goodyear’s insurance policy?

The Traveler’s insurance policy defines an insured as “[a]nyone else while using with

your permission a covered auto you own, hire, or borrow. . . .” It is uncontested that the truck

used was a “covered auto” for the purposes of the definition. “Permission” is “consent to use

the vehicle at the time and place in question and in a manner authorized by the owner, either

express or implied.” The Texas Supreme Court stated in Royal Indemnity Co. v. H.E. Abbott &

However, even if he had implied permission, was this outside the scope of that implied

permission? Texas courts apply the minor deviation rule when determining whether an

individual qualifies as an insured under a policy that covers permitted drivers. Under the minor

deviation rule, “a person may deviate from the permitted usage of an insured vehicle and still

be covered under an omnibus provision” if the use is not a material or gross violation of the

In analyzing these factors, the Court noted that the errand itself was personal in nature,

but the distance traveled was not so far so as to eviscerate Adams’ implied permission, as

Adams had permission to drive considerable distances daily between Houston and Bryan.

Although Adams had consumed alcohol and alcohol is an “other factor,” reasonable people

Question 5

Issues Presented: Was a fiduciary relationship created by the business relationship? Was

there a breach of contract?

Under Ohio law, a fiduciary relationship may be established by formal appointment or

contract, or may arise through a more informal confidential relationship. The Ohio Supreme

Court has explained that a fiduciary duty may arise from an informal relationship only if both

parties understand that a special trust or confidence has been reposed. An ordinary business

relationship or an agreement reached through arm’s-length negotiating cannot be turned into a

fiduciary one absent factors of mutual knowledge of confidentiality or the undue exercise of

power or influence.

The court found that Peters had done an excellent job running UForma Shelby and

Miami Systems. The court rejected the argument that Peters had an obligation to maximize

profits for the benefit of Richmond without regard to other factors. The court ruled that there

was no evidence that Peters failed to operate UForma Shelby and Miami Systems in accordance

with sound business practices, or that he breached any implied fiduciary duty.

Question 6

Issues Presented: Does a fiduciary relationship exist? If so, was it breached? If there was no

fiduciary duty, were H&R Block’s actions ethical?

(a) Green argued that H&R Block had a fiduciary duty to its customers in the form of an

agency relationship “to both explain and/or prepare . . . the various options, elections, forms

(b) “Agency is the fiduciary relation which results from the manifestation of consen by

one person to another that the other shall act on his behalf and subject to his control, and

consent by the other so to act.” The existence of an agency relationship turns on the intent of the

(c) The question is whether H&R Block was acting as the customer’s agent in the RAL

transaction or, if not, whether the scope of H&R Block’s status as its customer’s agent for

preparing and filing a tax return is broad enough to encompass its role in the RAL process. The

trial court determined there was no agency relationship between H&R Block and its customers

as a matter of law, finding that the above three “essential elements” had not been satisfied

because Green had failed to demonstrate either (1) or (3). The appellate court disagreed. The

court also found that Green’s allegations concerning the “control” and “legal relations” factors

The facts alleged allow for the reasonable inference that H&R Block and its

customers, through their objective manifestations, mutually consented and

intended to form a principal-agent relationship, the scope of which included

obtaining the maximum amount of tax refund quickly, and that H&R Block was

acting as its customers’ agent in matters pertaining to the refund loan.

Question 8

Issue Presented: Is Southern Pacific strictly liable? Should the government be liable? How

could Southern Pacific have protected itself against a lawsuit? What if, instead of bombs

exploding, chemicals were spilled while being transported?

(a) Southern Pacific moved to dismiss the case, which alleged strict liability for an

ultrahazardous activity. California has adopted a strict liability theory for those engaged in

activities that are “ultrahazardous.” Plaintiffs argue that Southern Pacific’s transporting of

bombs is “ultrahazardous” activity. Southern Pacific argued that California would except

Southern Pacific from strict liability under a common carrier duty exception.

Because California has not yet answered this question, the federal court must determine

if California would create such an exception. Previously, California adopted a “fairness”

Recently, California adopted a risk distribution theory of strict liability in lieu of the

“fairness” rationale. By indirectly imposing liability on those that benefit from the dangerous

activity, risk distribution benefits the social-economic body in two ways: (1) the adverse impact

of any particular misfortune is lessened by spreading its cost over a greater population and over

There is no direct authority indicating whether California courts would accept or reject

an exemption for common carriers based on some form of public authorization. However, the

results in a number of California ultrahazardous activity decisions, and consideration of the

current rationales for imposing strict liability in this context, indicate that California would

reject any such exemption. Public authorization of the ultrahazardous activity in the form of a

public contract afforded the defendant no protection from the burden of strict liability.

(b) According to this opinion, the only thing that Southern Pacific could have done to

avoid liability was either refuse to transport ultrahazardous materials, only transport the

materials in states that recognize the common carrier exception, or reroute to avoid transporting

hazardous materials through densely populated areas.

(c) Indiana Harbor Belt Railroad v. American Cyanamid Co., 916 F.2d 1174 (7th Cir. 1990),

involved a spill of acrylonitrile, a chemical used in large quantities in making acrylic fibers,

plastics, dyes, pharmaceutical chemicals, and other intermediate and final goods while being

transported. Acrylonitrile is one of a large number of chemicals that are hazardous in the sense

of being flammable, toxic, or both. Glickman & Harvey, Statistical Trends in Railroad Hazardous

would result in the application of strict liability in too many cases. As of 1983, Chicago was the

third largest railroad hub in the nation for transporting dangerous chemicals and St. Louis was

the second largest. It is not possible to reroute all transportation of chemicals through areas that

are not as populated. The court could not see how this could have been avoided at a reasonable

cost by a change in the activity in transporting the chemical. In this case, the Plaintiffs seek to