Chapter 35 – The Agency Relationship


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  • Hyperlink is to the court’s opinion on the Colorado Bar Association webpage. The case concerned an insurer of ski resorts. Note that all employees are agents, but not all agents are employees. MDM Group Associates, Inc. v. CX Reinsurance Company Ltd.: Insurance broker MDM contended that CX, as the insurer, was the principal in an agency relationship with MDM, owed MDM a fiduciary duty, and breached its duty by handling insurance claims improperly. The jury found for MDM and awarded damages, but CX appealed. On appeal, the court stated: “The jury was wrongly instructed that there was a fiduciary duty as a matter of law if it found that an agency relationship existed. As a matter of law, a principal is not a fiduciary of an agent.”
  • Would people want the doctor to delegate duties to the pizza delivery man?
  • Court listed the “thirteen factors articulated by the Supreme Court in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). These so-called “ Reid factors,” which are culled from the federal common law of agency, are as follows: [1] the hiring party’s right to control the manner and means by which the product is accomplished . . .; [2] the skill required; [3] the source of the instrumentalities and tools; [4] the location of the work; [5] the duration of the relationship between the parties; [6] whether the hiring party has the right to assign additional projects to the hired party; [7] the extent of the hired party’s discretion over when and how long to work; [8] the method of payment; [9] the hired party’s role in hiring and paying assistants; [10] whether the work is part of the regular business of the hiring party; [11] whether the hiring party is in business; [12] the provision of employee benefits; and [13] the tax treatment of the hired party. Though no single factor is dispositive, the “greatest emphasis” should be placed on the first factor—that is, on the extent to which the hiring party controls the “manner and means” by which the worker completes his or her assigned tasks.”
  • Hyperlink is to the court’s opinion on the website. Court: “Turning to the individual Reid factors, it is plain that the fifth, seventh, and ninth factors must be disregarded. As to the fifth factor, it is not disputed that Eisenberg worked at Advance for only 28–35 days. A relatively short tenure such as Eisenberg’s ordinarily implies that a worker is an independent contractor. Here, however, the brevity of Eisenberg’s stint at Advance does not suggest much of anything…Eisenberg did not receive benefits such as medical insurance or vacation days, and Advance treated her as an independent contractor for tax purposes…remaining factors, however, suggest that Eisenberg was an Advance employee…Advance exercised a great deal of control over the “manner and means” by which Eisenberg accomplished her assigned tasks…. As to the second factor, Eisenberg’s job at Advance— loading and unloading trucks—was not one that required relatively specialized skills…. As to the third and fourth factors, the District Court found that “Advance supplied all of the [necessary] instrumentalities,” …As to the sixth factor, the District Court found that Eisenberg “was not hired for a specific move or project.” Instead, the District Court found that Eisenberg “was assigned to numerous moves or projects,”…As to the eighth factor, the District Court found that Eisenberg was paid on an hourly basis…. As to the ninth and tenth factors, the District Court found that Advance is “in the business of moving and storage” so that Eisenberg’s work was “in the regular business of Advance,” and that, “obviously, Advance is a business.” Each of these findings favors characterizing Eisenberg as an employee.” ,
  • Hyperlink is to the court’s opinion on the McGraw-Hill Higher Education website. In 1963, a song called “He’s So Fine” was a huge hit in the United States and Great Britain. In February 1971, Bright Tunes Music Corporation, the copyright holder of “He’s So Fine,” sued ex-Beatle George Harrison and Harrisongs, Music, Ltd. in federal district court. Bright Tunes claimed that the Harrison composition “My Sweet Lord” infringed its copyright to “He’s So Fine.” At this time, Harrison’s business affairs were handled by ABKCO Music, Inc., and Allen B. Klein, its president. Shortly after the suit began, Klein unsuccessfully tried to settle it by having ABKCO purchase Bright Tunes. Shortly thereafter, Bright Tunes went into receivership, and it did not resume the suit until 1973. At this time, coincidentally, ABKCO’s management contract with Harrison expired. In late 1975 and early 1976, however, Klein continued his efforts to have ABKCO purchase Bright Tunes. As part of these efforts, he gave Bright Tunes three schedules summarizing Harrison’s royalty income from “My Sweet Lord,” information he possessed because of his previous service to Harrison.
  • Throughout the 1973–76 period, Harrison’s attorneys had been trying to settle the copyright infringement suit with Bright Tunes. Because Klein’s activities not only gave Bright Tunes information about the economic potential of its suit but also gave it an economic alternative to settling with Harrison, Klein may have impeded Harrison’s efforts to settle. When the copyright infringement suit finally came to trial in 1976, the court found that Harrison had infringed Bright Tunes’ copyright. The issue of damages was scheduled for trial at a later date and this trial was delayed for some time. In 1978, ABKCO purchased the “He’s So Fine” copyright and all rights to the infringement suit from Bright Tunes. This made ABKCO the plaintiff in the 1979 trial for damages on the infringement suit. At trial, Harrison counterclaimed for damages resulting from Klein’s and ABKCO’s alleged breaches of the duty of loyalty. Finding a breach of duty, the district judge issued a complex order reducing ABKCO’s recovery. ABKCO appealed.
  • From the full opinion (internal citations omitted): “There is no doubt but that the relationship between Harrison and ABKCO prior to the termination of the management agreement in 1973 was that of principal and agent, and that the relationship was fiduciary in nature. The rule applicable to our present inquiry is that an 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 principal issue before us in the instant case, then, is whether the district court committed clear error in concluding that Klein (hence, ABKCO) improperly used confidential information, gained as Harrison's former agent, in negotiating for the purchase of Bright Tunes' stock (including HSF) in 1975-76.”
  • Excerpts from full court opinion (internal citations omitted): “The evidence presented herein is not at all convincing that the information imparted to Bright Tunes by Klein was publicly available.…Another aspect of the breach of duty issue concerns the timing and nature of Klein's entry into the negotiation picture and the manner in which he became a plaintiff in this action. In our view, the record supports the position that Bright Tunes very likely gave special credence to Klein's position as an offeror because of his status as Harrison's former business manager and prior coordinator of the defense of this lawsuit. See, e.g., letter from Barash to Sheldon, dated January 19, 1976 (‘Since Mr. Klein is in a position to know the true earnings of My Sweet Lord, his offer should give all of us an indication of the true value of this copyright and litigation.’). To a significant extent, that favorable bargaining position necessarily was achieved because Klein, as business manager, had intimate knowledge of the financial affairs of his client. Klein himself acknowledged at trial that his offers to Bright Tunes were based, at least in part, on knowledge he had acquired as Harrison's business manager…. Under the circumstances of this case, where there was sufficient evidence to support the district judge's finding that confidential information passed hands, or, at least, was utilized in a manner inconsistent with the duty of a former fiduciary at a time when this litigation was still pending, we conclude that the district judge did not err in holding that ABKCO had breached its duty to Harrison…. In this case, Klein had commenced a purchase transaction with Bright Tunes in 1971 on behalf of Harrison, which he pursued on his own account after the termination of his fiduciary relationship with Harrison. While the initial attempt to purchase Bright Tunes' catalogue was several years removed from the eventual purchase on ABKCO's own account, we are not of the view that such a fact rendered ABKCO unfettered in the later negotiations. Indeed, Klein pursued the later discussions armed with the intimate knowledge not only of Harrison's business affairs, but of the value of this lawsuit--and at a time when this action was still pending. Taking all of these circumstances together, we agree that appellant's conduct during the period 1975-78 did not meet the standard required of him as a former fiduciary. … (quoting the trial court) ‘The fact situation presented is novel in the extreme. Restated in simplest form, it amounts to the purchase by a business manager of a known claim against his former client where, the right to the claim having been established, all that remains to be done is to assess the monetary award.’ We find these facts not only novel, but unique. Indeed, the purchase, which rendered Harrison and ABKCO adversaries, occurred in the context of a lawsuit in which ABKCO had been the prior protector of Harrison's interests. Thus, although not wholly analogous to the side-switching cases involving attorneys and their former clients, this fact situation creates clear questions of impropriety. On the unique facts presented herein, we certainly cannot say that Judge Owen's findings and conclusions were clearly erroneous or not in accord with applicable law.” Note – does Judge Pierce sound annoyed? He was!!!
  • Hyperlink is to the opinion on the website.
  • Hyperlink is to the opinion in pdf on the website.
  • Actual notification would be a written or oral statement to specific third parties with whom the principal has dealt. Defamatory statements should be avoided, but factual statements are good business practice. Constructive notification generally is publication in a newspaper, but may also be removing the “accoutrements” of the cloak of agency: changing locks or business cards, making sure the former agent returns clothing or keys, etc.
  • True. False. All employees are agents, but not all agents are employees. A real estate agent for a home seller is not the seller’s employee. However, a realtor working for a real estate company will be the real estate company’s employee. True. This is why notification about termination is wise. True. This is why principals should be careful not to cloak a person with apparent authority or statements or actions indicating agency.
  • False. Certain duties are non-delegable, such as those that are unique. True. This is the point of the ABKCO case. False. Actual authority may be either express or implied . True.
  • The correct answer is (e).
  • The correct answer is (a).
  • Opportunity to discuss the world of work and agency.
  • Chapter 35 – The Agency Relationship

    1. 1. C H A P T E R 35The Agency Relationship I’ve got an ego and all that, but I know I need help. So I go and hire the very best people. H. Ross Perot, EDS founder Inc. magazine (Jan. 1989) 35-1
    2. 2. Learning Objectives• Know how an agency relationship is created and terminated• Distinguish employees from nonemployee agents• Recognize when an agent risks breaching a fiduciary duty 35-2
    3. 3. Overview• Agency is a two-party relationship in which one party (agent) is authorized to act on behalf of, and under the control of another party (principal) – MDM Group Associates, Inc. v. CX Reinsurance Co : agent owes a fiduciary duty to principal, but not vice versa Aspen, Colorado 35-3
    4. 4. Creation of Agency• Anybody may be an agent or principal, but the agreement is voidable by minors and the mentally incapacitated• Certain duties are non-delegable 35-4
    5. 5. Agency Authority• An agent can bind his principal only when the agent has authority to do so• Two forms: actual or apparent authority• Actual authority is express or implied – Express authority is created by the principal’s actual words (written or oral) • Example: “I want to hire you as my real estate agent to sell my house.” 35-5
    6. 6. Implied Authority• Agent has implied authority to do whatever it is reasonable to assume that the principal wanted the agent to do given principal’s statements and surrounding circumstances – Example: a person hired as general manager in a restaurant will have broad authority to run the business while a person hired as a cashier will have limited authority 35-6
    7. 7. Apparent Authority• Apparent authority arises when principal’s conduct leads a third party to believe that an agent (who lacks actual authority) is authorized to act a certain way and the third party reasonably relies on the appearance (cloak) of authority• To protect third parties, agency law allows agents to bind a principal on the basis of apparent authority 35-7
    8. 8. Employee or Independent Contractor?• An agency-based case may depend on whether a person who contracts with the principal is an employee (servant) or independent contractor• No clear distinction, but the “Reid” factors (listed in Eisenberg v. Advance Relocation & Storage, Inc.) aid in decision making: right to control physical details of the work, skill required, source of tools, location, schedule control, duration of relationship, payment method, benefits, tax treatment of hired party, uniqueness of work… 35-8
    9. 9. Employee or Independent Contractor?• In Eisenberg v. Advance Relocation & Storage, Inc. , the court disregarded Eisenberg’s short tenure and found that she was an employee: – She loaded trucks for a moving company that supplied all tools and paid her an hourly wage, and the company controlled the way she performed her assigned tasks• As an employee, Eisenberg had the right to file a sexual harassment lawsuit under Title VII of the Civil Rights Act of 1964 35-9
    10. 10. Duties of Agent to Principal• Since agency is a fiduciary relationship of trust and confidence, an agent has a duty of loyalty to the principal• Agent must (1) avoid conflicts of interest with the principal, (2) maintain confidentiality of information received from the principal – The duty of confidentiality survives agency 35-10
    11. 11. Duties of Agent to Principal• Conflicts of interest include self-dealing, competition with the principal, or acting for another party – These duties end after the period of agency 35-11
    12. 12. ABKCO Music Inc. v. Harrisongs Music, L • Facts: – 1971: George Harrison, managed by ABKCO Music (A.B. Klein), was sued by the copyright holder of hit song, “He’s So Fine” (Bright Tunes), which claimed Harrison’s song, “My Sweet Lord,” infringed on their copyright – Klein tried unsuccessfully to settle the suit, then his contract with Harrison expired – At the copyright trial in 1976, Harrison found liable for infringement, but damages issue remained 35-12
    13. 13. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Facts: – 1978: After agency termination, Klein (ABKCO) used Harrison’s information in negotiations to purchase Bright Tunes and all rights to lawsuit • ABKCO became the plaintiff in 1979 trial for damages – At trial, Harrison counterclaimed for damages from ABKCO’s breach of the duty of loyalty – Trial court found a breach of duty and reduced ABKCO’s recovery; ABKCO appealed 35-13
    14. 14. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Legal Reasoning and Issue: – An agent has a duty not to use confidential knowledge acquired in employment to compete with principal and the duty exists after the employment – However, using information based on general business knowledge is not covered by the rule – Did Klein use confidential information from his agency to purchase Bright Tunes? 35-14
    15. 15. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Holding: – Evidence showed that Klein gave Bright Tunes confidential earnings schedules belonging to Harrison and that Klein’s former position aided in his purchase of Bright Tunes pending litigation – Sufficient evidence exists to state that Klein’s conduct did not meet the standard of a former fiduciary – Judgment affirmed 35-15
    16. 16. Other Agent Duties• Agents must obey the principal’s reasonable instructions for agency business, exercise the degree of care and skill standard for the job, promptly communicate to the principal matters reasonably relevant or material to the agency business, and duty to account – No duty to obey illegal or unethical orders 35-16
    17. 17. Sanders v. Madison Square Garden L.P.• Employee (Sanders) sued former employer for discrimination and defendant employer responded with “faithless servant” doctrine, arguing that Sanders acted unethically by tax fraud or by operating a side business• Faithless servant doctrine applies if worker’s disloyal acts were related to performance of duties and employer suffered damages – Employer failed to prove either point 35-17
    18. 18. Duties of Principal to Agent• A written agency contract normally states the duties the principal owes the agent, but law implies certain duties on the principal: To compensate the agent To reimburse the agent for money spent in the principal’s service To indemnify the agent for losses suffered in conducting the principal’s business 35-18
    19. 19. Termination of Agency• Termination by act of the parties includes: – At a time or event stated in the agreement – When agency was created to achieve a special purpose and the purpose was achieved – By mutual agreement of the parties – At the option of either party 35-19
    20. 20. Termination of Agency• Termination by operation of law includes: – Serious breach of the agent’s duty of loyalty – Principal’s permanent loss of capacity or agent’s loss of capacity to perform agency business – Change in value of agency property or subject matter (including loss or destruction) – Changes in law making the agency illegal – Changed business conditions or outbreak of war 35-20
    21. 21. Termination of Agency• Termination by operation of law also includes: – Impossibility of performance by the agent – Death or bankruptcy of principal or agent• Exception: if agent’s power is coupled with an interest, agency does not terminate by the principal’s revocation, loss of capacity by principal or agent, or death of either principal or agent 35-21
    22. 22. Gniadek v. Camp Sunshine at Seba• Plaintiff attended summer camp and was assaulted by former camp counselor two months after summer season ended• Actual authority terminated at season’s end• Apparent authority ceased when plaintiff learned the counselor left camp’s employ• Therefore, defendant camp was not liable for former counselor’s assault on plaintiff 35-22
    23. 23. Effect of Agency Termination• After agency terminates, agent’s express and implied authority ends – Caution: ex-agents may retain apparent authority that could bind a former principal• Principals should reduce risk of liability for third parties relying on ex-agent’s apparent authority by actual or constructive notice to third parties about agency termination 35-23
    24. 24. Test Your Knowledge• True=A, False = B – Agency is a contract in which an agent is authorized to act on behalf of, and under the control of, a principal. – All employees are agents, and all agents are employees. – Agents may bind a principal on the basis of apparent authority. – Agency may be created unintentionally. 35-24
    25. 25. Test Your Knowledge• True=A, False = B – All duties are delegable. – An agent’s duty of confidentiality continues after the agency ends. – To be considered actual authority, the authority must be expressed in words orally or in writing. – Agency is a fiduciary relationship. 35-25
    26. 26. Test Your Knowledge• Multiple Choice – Principals have the following duties to agent: a) Duty to compensate b) Duty to reimburse for reasonable expenses for doing agency business c) Duty to indemnify the agent for losses suffered due to agency’s business d) Both A and B e) All of the above 35-26
    27. 27. Test Your Knowledge• Multiple Choice – Manuel asked his friend Sunil, a good salesman, to sell his car and Sunil agreed. Does an agency relationship exist? a) Yes, Sunil is an agent for Manuel b) Yes, but only if there is a written contract describing the agency’s purpose c) No, since friends cannot engage in an agency relatioship d) No, unless Sunil sells Manuel’s car 35-27
    28. 28. Thought Questions• Have you been an agent or a principal?• Do you think the agency rules of liability are fair?• What are the ethical issues involved in an agency relationship? 35-28