ThisisRelationshipsbetweenPrincipalandAgent,chapter11fromthebookTheLegalEnvironmentandBusinessLaw:ExecutiveMBAEdition(v.

1.0).Fordetailsonit(includinglicensing),clickhere.
Formoreinformationonthesourceofthisbook,orwhyitisavailableforfree,pleaseseetheproject'shomepage.Youcanbrowseordownload
additionalbooksthere.YoumayalsodownloadaPDFcopyofthisbook(8MB)orjustthischapter(429KB),suitableforprintingormostereaders,
ora.zipfilecontainingthisbook'sHTMLfiles(foruseinawebbrowseroffline).

Hasthisbookhelpedyou?Considerpassingiton:

HelpCreativeCommons

HelpaPublicSchool

CreativeCommonssupportsfreeculturefrommusic
toeducation.Theirlicenseshelpedmakethisbook
availabletoyou.

DonorsChoose.orghelpspeoplelikeyouhelpteachers
fundtheirclassroomprojects,fromartsuppliesto
bookstocalculators.

Chapter11
RelationshipsbetweenPrincipalandAgent
LEARNINGOBJECTIVES
Afterreadingthischapter,youshouldunderstandthefollowing:
1. Whyagencyisimportant,whatanagentis,andthetypesofagents
2. Whatanindependentcontractoris
3. Thedutiesowedbytheagenttotheprincipal
4. Thedutiesowedbytheprincipaltotheagent

11.1IntroductiontoAgencyandtheTypesofAgents
LEARNINGOBJECTIVES
1. Understandwhyagencylawisimportant.
2. Recognizetherecurringlegalissuesinagencylaw.
3. Knowthetypesofagents.
4. Understandhowtheagencyrelationshipiscreated.

IntroductiontoAgencyLaw
WhyIsAgencyLawImportant,andWhatIsanAgent?
Anagentisapersonwhoactsinthenameofandonbehalfofanother,havingbeengivenandassumed
somedegreeofauthoritytodoso.Mostorganizedhumanactivityandvirtuallyallcommercialactivity
iscarriedonthroughagency.Nocorporationwouldbepossible,evenintheory,withoutsucha
concept.WemightsayGeneralMotorsisbuildingcarsinChina,forexample,butwecantshake
handswithGeneralMotors.TheGeneral,aspeoplesay,existsandworksthroughagents.Likewise,
partnershipsandotherbusinessorganizationsrelyextensivelyonagentstoconducttheirbusiness.
Indeed,itisnotanexaggerationtosaythatagencyisthecornerstoneofenterpriseorganization.Ina
partnershipeachpartnerisageneralagent,whileundercorporationlawtheofficersandallemployees
areagentsofthecorporation.

Theexistenceofagentsdoesnot,however,requireawholenewlawoftortsorcontracts.Atortisno
lessharmfulwhencommittedbyanagentacontractisnolessbindingwhennegotiatedbyanagent.
Whatdoesneedtobetakenintoaccount,though,isthemannerinwhichanagentactsonbehalfofhis
principalandtowardathirdparty.

RecurringIssuesinAgencyLaw

Severalproblematicfactscenariosrecurinagency,andlawhasdevelopedinresponse.

JohnAlden
ConsiderJohnAlden(15991687),oneofthemostfamousagentsinAmericanliterature.Heissaidto
havebeenthefirstpersonfromtheMayflowertosetfootonPlymouthRockin1620hewasa
carpenter,acooper(barrelmaker),andadiplomat.Hisagencytaskofinterestherewascelebrated
inHenryWadsworthLongfellowsTheCourtshipofMilesStandish.HewastowooPriscillaMullins
(d.1680),theloveliestmaidenofPlymouth,onbehalfofCaptainMilesStandish,avaliantsoldier
whowastooshytoproposemarriage.StandishturnedtoJohnAlden,hisyoungandeloquentprotg,
andbeseechedAldentospeakonhisbehalf,unawarethatAldenhimselfwasinlovewithPriscilla.
Aldenacceptedhiscaptainsassignment,despitetheknowledgethathewouldthuslosePriscillafor
himself,andsoughtoutthelady.ButAldenwassotonguetiedthathisvauntedeloquencefellshort,
turnedPriscillacoldtowardtheobjectofAldensmission,andeventuallyledhertoturnthetablesin
oneofthemostfamouslinesinAmericanliteratureandpoetry:Whydontyouspeakforyourself,
John?Johneventuallydid:thetwoweremarriedin1623inPlymouth.

RecurringIssuesinAgency
Letsanalyzethissequenceofeventsinlegaltermsrecognizing,ofcourse,thatthisexampleisan
analogyandthatthelaw,eventoday,wouldnotimposeconsequencesonAldenforhisfailuretocarry
outCaptainStandishswishes.Aldenwasthecaptainsagent:hewasspecificallyauthorizedtospeakin
hisnameinamanneragreedon,towardaspecifiedend,andheacceptedtheassignmentin
considerationofthecaptainsfriendship.Hehad,however,aconflictofinterest.Heattemptedtocarry
outtheassignment,buthedidnotperformaccordingtoexpectations.Eventually,hewoundupwiththe
prizehimself.Herearesomequestionstoconsider,thesamequestionsthatwillrecurthroughoutthe
discussionofagency:

HowextensivewasJohnsauthority?CouldhehavemadepromisestoPriscillaonthecaptains
behalfforexample,thatStandishwouldhavebuiltherafinehouse?
Couldhe,ifhecommittedatort,haveimposedliabilityonhisprincipal?Suppose,forexample,
thathehadriddenatbreakneckspeedtoreachPriscillassideandwhileenrouteranintoand
injuredapedestrianontheroad.CouldthepedestrianhavesuedStandish?
SupposeAldenhadinjuredhimselfonthejourney.WouldStandishbeliabletoAlden?
IsAldenliabletoStandishforstealingtheheartofPriscillathatis,fortakingtheprofitsofthe
enterpriseforhimself?

Asthesequestionssuggest,agencylawofteninvolvesthreepartiestheprincipal,theagent,andathird
party.Itthereforedealswiththreedifferentrelationships:betweenprincipalandagent,between
principalandthirdparty,andbetweenagentandthirdparty.Theserelationshipscanbesummedupin
asimplediagram(seeFigure11.1"AgencyRelationships").

Figure11.1 AgencyRelationships

Inthischapter,wewillconsidertheprincipalagentsideofthetriangle.Inthenextchapterwewillturn
torelationshipsinvolvingthirdparties.

TypesofAgents
Therearefivetypesofagents.

GeneralAgent
Thegeneralagentpossessestheauthoritytocarryoutabroadrangeoftransactionsinthenameand
onbehalfoftheprincipal.Thegeneralagentmaybethemanagerofabusinessormayhaveamore
limitedbutneverthelessongoingroleforexample,asapurchasingagentorasalifeinsuranceagent
authorizedtosignupcustomersforthehomeoffice.Ineithercase,thegeneralagenthasauthorityto
altertheprincipalslegalrelationshipswiththirdparties.Onewhoisdesignatedageneralagenthasthe
authoritytoactinanywayrequiredbytheprincipalsbusiness.Torestrictthegeneralagentsauthority,
theprincipalmustspelloutthelimitationsexplicitly,andevensotheprincipalmaybeliableforanyof
theagentsactsinexcessofhisauthority.

Normally,thegeneralagentisabusinessagent,buttherearecircumstancesunderwhichanindividual
mayappointageneralagentforpersonalpurposes.Onecommonformofapersonalgeneralagentis
thepersonwhoholdsanotherspowerofattorney.Thisisadelegationofauthoritytoanothertoactin
hissteaditcanbeaccomplishedbyexecutingasimpleform,suchastheoneshowninFigure11.2
"GeneralPowerofAttorney".Ordinarily,thepowerofattorneyisusedforaspecialpurposefor
example,tosellrealestateorsecuritiesintheabsenceoftheowner.Butapersonfacingalengthy
operationandrecuperationinahospitalmightgiveageneralpowerofattorneytoatrustedfamily
memberorfriend.

Figure11.2 GeneralPowerofAttorney

SpecialAgent
Thespecialagentisonewhohasauthoritytoactonlyinaspecificallydesignatedinstanceorina
specificallydesignatedsetoftransactions.Forexample,arealestatebrokerisusuallyaspecialagent
hiredtofindabuyerfortheprincipalsland.SupposeSam,theseller,appointsanagentAlbertatofind
abuyerforhisproperty.Albertascommissiondependsonthesellingprice,which,Samstatesina
lettertoher,inanyeventmaybenolessthan$150,000.IfAlbertalocatesabuyer,Bob,whoagrees
topurchasethepropertyfor$160,000,hersignatureonthecontractofsalewillnotbindSam.Asa
specialagent,Albertahadauthorityonlytofindabuyershehadnoauthoritytosignthecontract.

AgencyCoupledwithanInterest
Anagentwhosereimbursementdependsonhiscontinuingtohavetheauthoritytoactasanagentis
saidtohaveanagencycoupledwithaninterestifhehasapropertyinterestinthebusiness.A
literaryorauthorsagent,forexample,customarilyagreestosellaliteraryworktoapublisherinreturn
forapercentageofallmoniestheauthorearnsfromthesaleofthework.Theliteraryagentalsoactsas
acollectionagenttoensurethathiscommissionwillbepaid.Byagreeingwiththeprincipalthatthe
agencyiscoupledwithaninterest,theagentcanpreventhisownrightsinaparticularliterarywork
frombeingterminatedtohisdetriment.

Subagent
Tocarryoutherduties,anagentwilloftenneedtoappointherownagents.Theseappointmentsmayor
maynotbeauthorizedbytheprincipal.Aninsurancecompany,forexample,mightnameageneral
agenttoopenofficesincitiesthroughoutacertainstate.Theagentwillnecessarilyconductherbusiness
throughagentsofherownchoosing.Theseagentsaresubagentsoftheprincipalifthegeneralagent
hadtheexpressorimpliedauthorityoftheprincipaltohirethem.Forlegalpurposes,theyareagentsof
boththeprincipalandtheprincipalsgeneralagent,andbothareliableforthesubagentsconduct
althoughnormallythegeneralagentagreestobeprimarilyliable(seeFigure11.3"Subagent").

Figure11.3 Subagent

Servant
Thefinalcategoryofagentistheservant.Untiltheearlynineteenthcentury,anyemployeewhose
workdutiesweresubjecttoanemployerscontrolwascalledaservantwewouldnotusethattermso
broadlyinmodernEnglish.TheRestatement(Second)ofAgency,Section2,definesaservantasan
agentemployedbyamaster[employer]toperformserviceinhisaffairswhosephysicalconductinthe
performanceoftheserviceiscontrolledorissubjecttotherighttocontrolbythemaster.

IndependentContractor
Noteverycontractforservicesnecessarilycreatesamasterservantrelationship.Thereisanimportant
distinctionmadebetweenthestatusofaservantandthatofanindependentcontractor.According
totheRestatement(Second)ofAgency,Section2,anindependentcontractorisapersonwhocontracts
withanothertodosomethingforhimbutwhoisnotcontrolledbytheothernorsubjecttotheothers
righttocontrolwithrespecttohisphysicalconductintheperformanceoftheundertaking.Asthe
nameimplies,theindependentcontractorislegallyautonomous.Aplumbersalariedtoabuilding
contractorisanemployeeandagentofthecontractor.Butaplumberwhohireshimselfouttorepair
pipesinpeopleshomesisanindependentcontractor.Ifyouhirealawyertosettleadispute,that
personisnotyouremployeeoryourservantsheisanindependentcontractor.Thetermsagentand
independentcontractorarenotnecessarilymutuallyexclusive.Infact,bydefinition,an
independentcontractorisanagentinthebroadsenseoftheterminundertaking,attherequestof
another,todosomethingfortheother.Asageneralrulethelineofdemarcationbetweenan
independentcontractorandaservantisnotclearlydrawn.1.Flickv.Crouch,434P.2d256,260(OK,
1967).

Thisdistinctionbetweenagentandindependentcontractorhasimportantlegalconsequencesfor
taxation,workerscompensation,andliabilityinsurance.Forexample,employersarerequiredto
withholdincometaxesfromtheiremployeespaychecks.Butpaymenttoanindependentcontractor,
suchastheplumberforhire,doesnotrequiresuchwithholding.Decidingwhoisanindependent
contractorisnotalwayseasythereisnosinglefactorormechanicalanswer.InRobinsonv.NewYork
CommoditiesCorp.,aninjuredsalesmansoughtworkerscompensationbenefits,claimingtobean
employeeoftheNewYorkCommoditiesCorporation.Robinsonv.NewYorkCommoditiesCorp.,396

N.Y.S.2d725,App.Div.(1977).Butthestateworkmenscompensationboardruledagainsthim,citinga
varietyoffactors.Theclaimantsoldcannedmeats,makingroundsinhiscarfromhishome.The
companydidnotestablishhoursforhim,didnotcontrolhismovementsinanyway,anddidnot
reimbursehimformileageoranyotherexpensesorwithholdtaxesfromitsstraightcommission
paymentstohim.Hereportedhistaxesonaformfortheselfemployedandhiredanaccountantto
prepareitforhim.Thecourtagreedwiththecompensationboardthatthesefactsestablishedthe
salesmansstatusasanindependentcontractor.

Thefactualsituationineachcasedetermineswhetheraworkerisanemployeeoranindependent
contractor.Neitherthecompanynortheworkercanestablishtheworkersstatusbyagreement.Asthe
NorthDakotaWorkmensCompensationBureauputitinabulletintorealestatebrokers,Ithascome
totheBureausattentionthatmanyemployersarerequiringthatthosewhoworkforthemsign
independentcontractorformssothattheemployerdoesnothavetopayworkmenscompensation
premiumsforhisemployees.Suchformsaremeaninglessiftheworkerisinfactanemployee.
Vizcainov.MicrosoftCorporation,discussedinSection11.3.2"EmployeeversusIndependent
Contractor",examinesthedistinction.

Inadditiontodeterminingaworkersstatusfortaxandcompensationinsurancepurposes,itis
sometimescriticalfordecisionsinvolvingpersonalliabilityinsurancepolicies,whichusuallyexclude
fromcoverageaccidentsinvolvingemployeesoftheinsureds.GeneralAccidentFire&LifeAssurance
Corpv.ProGolfAssociationGeneralAccidentFire&LifeAssuranceCorpv.ProGolfAssociation,
352N.E.2d441(Ill.App.1976).involvedsuchasituation.Theinsurancepolicyinquestioncovered
membersoftheProfessionalGolfersAssociation.GeraldHall,agolfproemployedbythelocalpark
department,wasaffordedcoverageunderthepolicy,whichexcludedbodilyinjurytoanyemployeeof
theinsuredarisingoutofandinthecourseofhisemploymentbytheinsured.Thatis,noemployeeof
Hallswouldbecovered(rather,anysuchpersonwouldhavecoverageunderworkerscompensation
statutes).BradleyMartin,agethirteen,wasatthegolfcourseforjuniorleagueplay.AtHallsrequest,
heagreedtoretrieveorshaggolfballstobehitduringalessonHallwasgivinghewasasHallputit
tobecompensatedeitherthroughgolfinstructionsormoneyorhotdogsorwhatever.Duringthe
courseofthelesson,agolfballhitbyHallhityoungMartinintheeye.IfMartinwasanemployee,the
insurancecompanywouldbeliableifhewasnotanemployee,theinsurancecompanywouldnotliable.
Thetrialcourtdeterminedhewasnotanemployee.Theevidenceshowed:sometimestheboyswho
shaggedballsgotpaid,gotgolfinginstructions,orgotfood,sothequestionofcompensationwas
ambiguous.Martinwasnotdirectedinhowtoperform(theadmittedlysimple)taskofretrievinggolf
balls,nocontrolwasexercisedoverhim,andnoequipmentwasrequiredotherthanabagtocollectthe
balls:Webelievetheevidenceissusceptibleofdifferentinferences.Wecannotsaythatthedecision
ofthetrialcourtisagainstthemanifestweightoftheevidence.

CreationoftheAgencyRelationship
Theagencyrelationshipcanbecreatedintwoways:byagreement(expressly)orbyoperationoflaw
(constructivelyorimpliedly).

AgencyCreatedbyAgreement
Mostagenciesarecreatedbycontract.ThusthegeneralrulesofcontractlawcoveredinChapter8
"Contracts"governthelawofagency.Butagenciescanalsobecreatedwithoutcontract,byagreement.
Therefore,threecontractprinciplesareespeciallyimportant:thefirstistherequirementfor
PreviousChapter
TableofContents
consideration,thesecondforawriting,andthethirdconcernscontractualcapacity.

Consideration
Agenciescreatedbyconsentagreementarenotnecessarilycontractual.Itisnotuncommonforone
persontoactasanagentforanotherwithoutconsideration.Forexample,AbeasksByrontorunsome
errandsforhim:tobuysomelumberonhisaccountatthelocallumberyard.Suchagratuitous
agencygivesrisetonodifferentresultsthanthemorecommoncontractualagency.

Formalities
Mostoralagencycontractsarelegallybindingthelawdoesnotrequirethattheybereducedtowriting.
Inpractice,manyagencycontractsarewrittentoavoidproblemsofproof.Andtherearesituations

NextChapter

whereanagencycontractmustbeinwriting:(1)iftheagreedonpurposeoftheagencycannotbe
fulfilledwithinoneyearoriftheagencyrelationshipistolastmorethanoneyear(2)inmanystates,an
agreementtopayacommissiontoarealestatebroker(3)inmanystates,authoritygiventoanagent
tosellrealestateand(4)inseveralstates,contractsbetweencompaniesandsalesrepresentatives.

Evenwhentheagencycontractisnotrequiredtobeinwriting,contractsthatagentsmakewiththird
partiesoftenmustbeinwriting.ThusSection2201oftheUniformCommercialCodespecifically
requirescontractsforthesaleofgoodsforthepriceoffivehundreddollarsormoretobeinwritingand
signedbythepartyagainstwhomenforcementissoughtorbyhisauthorizedagent.

Capacity
Acontractisvoidorvoidablewhenoneofthepartieslackscapacitytomakeone.Ifbothprincipaland
agentlackcapacityforexample,aminorappointsanotherminortonegotiateorsignanagreement
therecanbenoquestionofthecontractsvoidability.Butsupposeonlyoneortheotherlackscapacity.
Generally,thelawfocusesontheprincipal.Iftheprincipalisaminororotherwiselackscapacity,the
contractcanbeavoidedeveniftheagentisfullycompetent.Thereare,however,afewsituationsin
whichthecapacityoftheagentisimportant.Thusamentallyincompetentagentcannotbinda
principal.

AgencyCreatedbyOperationofLaw
Mostagenciesaremadebycontract,butagencyalsomayariseimpliedlyorapparently.

ImpliedAgency
Inareasofsocialneed,courtshavedeclaredanagencytoexistintheabsenceofanagreement.The
agencyrelationshipthenissaidtohavebeenimpliedbyoperationoflaw.Childreninmoststatesmay
purchasenecessaryitemsfoodormedicalservicesontheparentsaccount.Longstandingsocial
policydeemsitdesirablefortheheadofafamilytosupporthisdependents,andthecourtswillputthe
expenseonthefamilyheadinordertoprovideforthedependentswelfare.Thecourtsachievethis
resultbysupposingthedependenttobethefamilyheadsagent,thusallowingcreditorstosuethe
familyheadforthedebt.

Impliedagenciesalsoarisewhereonepersonbehavesasanagentwouldandtheprincipal,knowing
thattheagentisbehavingso,acquiesces,allowingthepersontoholdhimselfoutasanagent.Suchare
thebasicfactsinWeingartv.DirectoireRestaurant,Inc.inSection11.3.1"CreationofAgency:
LiabilityofParentforContractsMadebyAgentChild".

ApparentAgency
SupposeArthurisPaulsagent,employedthroughOctober31.OnNovember1,Arthurbuysmaterials
atLumberYardashehasbeendoingsinceearlyspringandchargesthemtoPaulsaccount.Lumber
Yard,notknowingthatArthursemploymentterminatedthedaybefore,billsPaul.WillPaulhaveto
pay?Yes,becausetheterminationoftheagencywasnotcommunicatedtoLumberYard.Itappeared
thatArthurwasanauthorizedagent.ThisissueisdiscussedfurtherinChapter12"LiabilityofPrincipal
andAgentTerminationofAgency".

KEYTAKEAWAY
Anagentisonewhoactsonbehalfofanother.Manytransactionsareconductedbyagentssoacting.
Allcorporatetransactions,includingthoseinvolvinggovernmentalorganizations,aresoconducted
becausecorporationscannotthemselvesactuallyact;theyarelegalfictions.Agenciesmaybecreated
expressly,impliedly,orapparently.Recurringissuesinagencylawincludewhethertheagentreally
issuch,thescopeoftheagentsauthority,andthedutiesamongtheparties.Thefivetypesofagents
include:generalagent,specialagent,subagent,agencycoupledwithaninterest,andservant(or
employee).Theindependentcontractorisnotanemployee;heractivitiesarenotspecifically
controlledbyherclient,andtheclientisnotliableforpayrolltaxes,SocialSecurity,andthelike.Butit
isnotuncommonforanemployertoclaimworkersareindependentcontractorswheninfacttheyare
employees,andthecasesareoftenhardfoughtonthefacts.

EXERCISES
1. Whyisagencylawespeciallyimportantinthebusinessandgovernmentcontext?
2. Whatarethefivetypesofagents?
3. Whatdistinguishesanemployeefromanindependentcontractor?
4. Whydoemployersfrequentlytrytopassoffemployeesasindependentcontractors?

11.2DutiesbetweenAgentandPrincipal
LEARNINGOBJECTIVES
1. Understandthattheagentowestheprincipaltwotypesofduties:aspecialdutythefiduciary
dutyandothergeneraldutiesasrecognizedinagencylaw.
2. Recognizethattheprincipalowestheagentduties:contract,tort,andworkerscompensation.

AgentsDutytoPrincipal
Theagentowestheprincipaldutiesintwocategories:thefiduciarydutyandasetofgeneralduties
imposedbyagencylaw.Butthesegeneraldutiesarenotuniquetoagencylawtheyaredutiesowedby
anyemployeetotheemployer.

FiduciaryDuty
Inanonagencycontractualsituation,thepartiesresponsibilitiesterminateattheborderofthe
contract.Thereisnorelationshipbeyondtheagreement.Thisliteralistapproachisjustifiedbythe
moregeneralprinciplethatweeachshouldbefreetoactunlesswecommitourselvestoaparticular
course.

Buttheagencyrelationshipismorethanacontractualone,andtheagentsresponsibilitiesgobeyond
theborderofthecontract.Agencyimposesahigherdutythansimplytoabidebythecontractterms.It
imposesafiduciaryduty.Thelawinfiltratesthecontractcreatingtheagencyrelationshipand
reversesthegeneralprinciplethatthepartiesarefreetoactintheabsenceofagreement.Asafiduciary
oftheprincipal,theagentstandsinapositionofspecialtrust.Hisresponsibilityistosubordinatehis
selfinteresttothatofhisprincipal.Thefiduciaryresponsibilityisimposedbylaw.Theabsenceofany
clauseinthecontractdetailingtheagentsfiduciarydutydoesnotrelievehimofit.Thedutycontains
severalaspects.

DutytoAvoidSelfDealing
Afiduciarymaynotlawfullyprofitfromaconflictbetweenhispersonalinterestinatransactionandhis
principalsinterestinthatsametransaction.Abrokerhiredasapurchasingagent,forinstance,maynot
selltohisprincipalthroughacompanyinwhichheorhisfamilyhasafinancialinterest.Thepenaltyfor
breachoffiduciarydutyislossofcompensationandprofitandpossibledamagesforbreachoftrust.

DutytoPreserveConfidentialInformation
Tofurtherhisobjectives,aprincipalwillusuallyneedtorevealanumberofsecretstohisagenthow
muchheiswillingtosellorpayforproperty,marketingstrategies,andthelike.Suchinformationcould
easilybeturnedtothedisadvantageoftheprincipaliftheagentweretocompetewiththeprincipalor
weretoselltheinformationtothosewhodo.Thelawthereforeprohibitsanagentfromusingforhis
ownpurposesorinwaysthatwouldinjuretheinterestsoftheprincipal,informationconfidentially
givenoracquired.Thisprohibitionextendstoinformationgleanedfromtheprincipalthoughunrelated
totheagentsassignment:[A]nagentwhoistoldbytheprincipalofhisplans,orwhosecretlyexamines
booksormemorandaoftheemployer,isnotprivilegedtousesuchinformationathisprincipals
expense.Restatement(Second)ofAgency,Section395.Normaytheagentuseconfidential
informationafterresigninghisagency.Thoughheisfree,intheabsenceofcontract,tocompetewith
hisformerprincipal,hemaynotuseinformationlearnedinthecourseofhisagency,suchastrade
secretsandcustomerlists.Section11.3.3"BreachofFiduciaryDuty",Baconv.VolvoServiceCenter,

Inc.,dealswithanagentsbreachofthedutyofconfidentiality.

OtherDuties
Inadditiontofiduciaryresponsibility(andwhateverspecialdutiesmaybecontainedinthespecific
contract)thelawofagencyimposesotherdutiesonanagent.Thesedutiesarenotnecessarilyuniqueto
agents:anonfiduciaryemployeecouldalsobeboundtothesedutiesontherightfacts.

DutyofSkillandCare
Anagentisusuallytakenonbecausehehasspecialknowledgeorskillsthattheprincipalwishestotap.
Theagentisunderalegaldutytoperformhisworkwiththecareandskillthatisstandardinthe
localityforthekindofworkwhichheisemployedtoperformandtoexerciseanyspecialskills,ifthese
aregreaterormorerefinedthanthoseprevalentamongthosenormallyemployedinthecommunity.
Inshort,theagentmaynotlawfullydoasloppyjob.Restatement(Second)ofAgency,Section379.

DutyofGoodConduct
Intheabsenceofanagreement,aprincipalmaynotordinarilydictatehowanagentmustlivehis
privatelife.Anoverlyfastidiousfloristmaynotinstructhertruckdrivertosteerclearofthelocalbar
onhiswayhomefromdeliveringflowersattheendoftheday.Buttherearesomejobsonwhichthe
personalhabitsoftheagentmayhaveaneffect.Theagentisnotatlibertytoactwithimproprietyor
notoriety,soastobringdisreputeonthebusinessinwhichtheprincipalisengaged.Alectureratan
antialcoholclinicmaybedirectedtorefrainfromfrequentingbars.Abankcashierwhobecomesknown
asagamblermaybefired.

DutytoKeepandRenderAccounts
Theagentmustkeepaccuratefinancialrecords,takereceipts,andotherwiseactinconformityto
standardbusinesspractices.

DutytoActOnlyasAuthorized
Thisdutystatesatruismbutisoneforwhichtherearelimits.Aprincipalswishesmayhavebeenstated
ambiguouslyormaybebroadenoughtoconferdiscretionontheagent.Aslongastheagentacts
reasonablyunderthecircumstances,hewillnotbeliablefordamageslateriftheprincipalultimately
repudiateswhattheagenthasdone:Onlyconductwhichiscontrarytotheprincipalsmanifestationsto
him,interpretedinlightofwhathehasreasontoknowatthetimewhenheacts,subjectstheagentto
liabilitytotheprincipal.Restatement(Second)ofAgency,Section383.

DutyNottoAttempttheImpossibleorImpracticable
Theprincipalsaystotheagent,Keepworkinguntilthejobisdone.Theagentisnotobligatedtogo
withoutfoodorsleepbecausetheprincipalmisapprehendedhowlongitwouldtaketocompletethe
job.Norshouldtheagentcontinuetoexpendtheprincipalsfundsinaquixoticattempttogain
business,signupcustomers,orproduceinventorywhenitisreasonablyclearthatsucheffortswouldbe
invain.

DutytoObey
Asageneralrule,theagentmustobeyreasonabledirectionsconcerningthemannerofperformance.
Whatisreasonabledependsonthecustomsoftheindustryortrade,priordealingsbetweenagentand
principal,andthenatureoftheagreementcreatingtheagency.Aprincipalmayprescribeuniformsfor
variousclassesofemployees,forinstance,andamanufacturingcompanymaytellitssalesforcewhat
salespitchtouseoncustomers.Ontheotherhand,certaintasksentrustedtoagentsarenotsubjectto
theprincipalscontrolforexample,alawyermayrefusetopermitaclienttodictatecourtroomtactics.

DutytoGiveInformation
Becausetheprincipalcannotbeeveryplaceatoncethatiswhyagentsarehired,afterallmuchthatis
vitaltotheprincipalsbusinessfirstcomestotheattentionofagents.Iftheagenthasactualnoticeor
reasontoknowofinformationthatisrelevanttomattersentrustedtohim,hehasadutytoinformthe

principal.Thisdutyisespeciallycriticalbecauseinformationinthehandsofanagentis,undermost
circumstances,imputedtotheprincipal,whoselegalliabilitiestothirdpersonsmayhingeonreceiving
informationintimelyfashion.Serviceofprocess,forexample,requiresadefendanttoanswerwithina
certainnumberofdaysanagentsfailuretocommunicatetotheprincipalthatasummonshasbeen
servedmaybartheprincipalsrighttodefendalawsuit.Theimputationtotheprincipalofknowledge
possessedbytheagentisstrict:evenwheretheagentisactingadverselytotheprincipalsinterestsfor
example,bytryingtodefraudhisemployerathirdpartymaystillrelyonnotificationtotheagent,
unlessthethirdpartyknowstheagentisactingadversely.

ShopRightsDoctrine
InGripNutCo.v.Sharp,SharpmadeadealwithGripNutCompanythatinreturnforasalaryand
bonusesascompanypresident,hewouldassigntothecompanyanyinventionshemade.GripNutCo.v.
Sharp,150F.2d192(7thCir.1945).Whenthefiveyearemploymentcontractexpired,Sharpcontinued
toserveaschiefexecutiveofficer,butnonewcontractwasnegotiatedconcerningeitherpayorrightsto
inventions.Duringthenexttenyears,Sharpinventedanumberofnewproductsanddevelopednew
machinerytomanufacturethempatentrightswenttothecompany.However,hemadeoneinvention
withtwootheremployeesandtheyassignedthepatenttohim.Athirdemployeeinventedasafety
deviceandalsoassignedthepatenttoSharp.Atonetime,Sharpssoninventedaleakproofboltanda
processtomanufactureitthese,too,wereassignedtoSharp.Theseinventionsweredevelopedinthe
companysplantsatitsexpense.

WhenSharpdied,hisfamilyclaimedtherightstotheinventionsonwhichSharpheldassignmentsand
suedthecompany,whichusedtheinventions,forpatentinfringement.Thefamilyreasonedthatafter
theexpirationoftheemploymentcontract,Sharpwasemployedonlyinamanagerialcapacity,notas
aninventor.Thecourtdisagreedandinvokedtheshoprightsdoctrine,underwhichaninvention
developedandperfectedin[acompanys]plantwithitstime,materials,andappliances,andwhollyat
itsexpensemaybeusedbythecompanywithoutpaymentofroyalties:Becausetheservantuseshis
masterstime,facilitiesandmaterialstoattainaconcreteresult,theemployerisentitledtousethat
whichembodieshisownpropertyandtoduplicateitasoftenashemayfindoccasiontoemploysimilar
appliancesinhisbusiness.Thecompanywouldhavebeengivencompleteownershipofthepatentshad
therebeenanexpressorimplied(e.g.,theemployeeishiredtomakeinventions)contracttothiseffect
betweenSharpandthecompany.

PrincipalsDutytoAgent
Inthiscategory,wemaynotethattheprincipalowestheagentdutiesincontract,tort,andstatutorily
workerscompensationlaw.

ContractDuties
Thefiduciaryrelationshipofagenttoprincipaldoesnotruninreversethatis,theprincipalisnotthe
agentsfiduciary.Nevertheless,theprincipalhasanumberofcontractuallyrelatedobligationstoward
hisagent.

GeneralContractDuties
Thesedutiesareanaloguesofmanyoftheagentsdutiesthatwehavejustexamined.Inbrief,a
principalhasadutytorefrainfromunreasonablyinterferingwith[anagents]work.Restatement
(Second)ofAgency,Section434.Theprincipalisallowed,however,tocompetewiththeagentunless
theagreementspecificallyprohibitsit.Theprincipalhasadutytoinformhisagentofrisksofphysical
harmorpecuniarylossthatinhereintheagentsperformanceofassignedtasks.Failuretowarnan
agentthattravelinaparticularneighborhoodrequiredbythejobmaybedangerous(afactunknownto
theagentbutknowntotheprincipal)couldundercommonlawsubjecttheprincipaltoasuitfor
damagesiftheagentisinjuredwhileintheneighborhoodperformingherjob.Aprincipalisobligedto
renderaccountsofmoniesduetoagentsaprincipalsobligationtodosodependsonavarietyof
factors,includingthedegreeofindependenceoftheagent,themethodofcompensation,andthe
customsoftheparticularbusiness.Anagentsreputationisnolessvaluablethanaprincipals,andsoan
agentisundernoobligationtocontinueworkingforonewhosulliesit.

EmploymentatWill

Underthetraditional
employmentatwill
doctrine,anemployeewhoisnothiredforaspecificperiod
canbefiredatanytime,foranyreason(exceptbadreasons:anemployeecannotbefired,forexample,
forreportingthathisemployer
spapermillisillegallypollutinggroundwater).Thisdoctrinehasbeen
muchcriticized.

DutytoIndemnify
Agentscommonlyspendmoneypursuingtheprincipalsbusiness.Unlesstheagreementexplicitly
providesotherwise,theprincipalhasadutytoindemnifyorreimbursetheagent.Afamiliarformof
indemnityistheemployeeexpenseaccount.

TortandWorkersCompensationDuties
Theemployerowestheemployeeanyemployee,notjustagentscertainstatutorilyimposedtortand
workerscompensationduties.

BackgroundtoWorkersCompensation
Andy,whoworksinadynamitefactory,negligentlystoresdynamiteinthewrongshed.Andywarnshis
fellowemployeeBillthathehasdoneso.Billlightsupacigaretteneartheshedanyway,asparklandson
theground,thedynamiteexplodes,andBillisinjured.MayBillsuehisemployertorecoverdamages?
Atcommonlaw,theanswerwouldbenothreetimesno.First,thefellowservantrulewouldbar
recoverybecausetheemployerwasheldnottoberesponsiblefortortscommittedbyoneemployee
againstanother.Second,BillsfailuretoheedAndyswarningandhisdecisiontosmokenearthe
dynamiteamountedtocontributorynegligence.Henceevenifthedynamitehadbeennegligently
storedbytheemployerratherthanbyafellowemployee,theclaimwouldhavebeendismissed.Third,
thecourtsmighthaveheldthatBillhadassumedtherisk:sincehewasawareofthedangers,itwould
notbefairtosaddletheemployerwiththeburdenofBillsactions.

Thethreecommonlawrulesjustmentionedignitedintensepublicfurybytheturnofthetwentieth
century.Inlargenumbersofcases,workerswhoweremutilatedorkilledonthejobfoundthemselves
andtheirfamilieswithoutrecompense.Unionpressureandgrassrootslobbyingledtoworkers
compensationactsstatutoryenactmentsthatdramaticallyoverhauledthelawoftortsasitaffected
employees.

TheSysteminGeneral
Workerscompensationisanofaultsystem.Theemployeegivesuptherighttosuetheemployer(and,
insomestates,otheremployees)andreceivesinexchangepredeterminedcompensationforajob
relatedinjury,regardlessofwhocausedit.Thistradeoffwasfelttobeequitabletoemployerand
employee:theemployeelosestherighttoseekdamagesforpainandsufferingwhichcanbeasizable
portionofanyjuryawardbutinreturnhecanavoidthetimeconsuminganduncertainjudicial
processandassurehimselfthathismedicalcostsandaportionofhissalarywillbepaidandpaid
promptly.Theemployermustpayforallinjuries,eventhoseforwhichheisblameless,butinreturnhe
avoidstheriskoflosingabiglawsuit,cancalculatehiscostsactuarially,andcanspreadtherisks
throughinsurance.

Mostworkerscompensationactsprovide100percentofthecostofaworkershospitalizationand
medicalcarenecessarytocuretheinjuryandrelievehimfromitseffects.Theyalsoprovidefor
paymentoflostwagesanddeathbenefits.Evenanemployeewhoisabletoworkmaybeeligibleto
receivecompensationforspecificinjuries.Partofthetableofbenefitsforspecificinjuriesunderthe
KansasstatuteisshowninNote11.16"KansasWorkersCompensationBenefitsforSpecificInjuries".

KansasWorkersCompensationBenefitsforSpecificInjuries
Article5.WorkersCompensation

44510d.Compensationforcertainpermanentpartialdisabilitiesschedule.Ifthereisanawardof
permanentdisabilityasaresultoftheinjurythereshallbeapresumptionthatdisabilityexisted
immediatelyaftertheinjuryandcompensationistobepaidfornottoexceedthenumberofweeks

allowedinthefollowingschedule:

(1)Forlossofathumb,60weeks.

(2)Forthelossofafirstfinger,commonlycalledtheindexfinger,37weeks.

(3)Forthelossofasecondfinger,30weeks.

(4)Forthelossofathirdfinger,20weeks.

(5)Forthelossofafourthfinger,commonlycalledthelittlefinger,15weeks.

(6)Lossofthefirstphalangeofthethumborofanyfingershallbeconsideredtobeequaltothe
lossof1/2ofsuchthumborfinger,andthecompensationshallbe1/2oftheamountspecified
above.Thelossofthefirstphalangeandanypartofthesecondphalangeofanyfinger,which
includesthelossofanypartoftheboneofsuchsecondphalange,shallbeconsideredtobeequalto
thelossof2/3ofsuchfingerandthecompensationshallbe2/3oftheamountspecifiedabove.The
lossofthefirstphalangeandanypartofthesecondphalangeofathumbwhichincludesthelossof
anypartoftheboneofsuchsecondphalange,shallbeconsideredtobeequaltothelossofthe
entirethumb.Thelossofthefirstandsecondphalangesandanypartofthethirdproximal
phalangeofanyfinger,shallbeconsideredasthelossoftheentirefinger.Amputationthroughthe
jointshallbeconsideredalosstothenexthigherschedule.

(7)Forthelossofagreattoe,30weeks.

(8)Forthelossofanytoeotherthanthegreattoe,10weeks.

(9)Thelossofthefirstphalangeofanytoeshallbeconsideredtobeequaltothelossof1/2ofsuch
toeandthecompensationshallbe1/2oftheamountabovespecified.

(10)Thelossofmorethanonephalangeofatoeshallbeconsideredtobeequaltothelossofthe
entiretoe.

(11)Forthelossofahand,150weeks.

(12)Forthelossofaforearm,200weeks.

(13)Forthelossofanarm,excludingtheshoulderjoint,shouldergirdle,shouldermusculatureor
anyothershoulderstructures,210weeks,andforthelossofanarm,includingtheshoulderjoint,
shouldergirdle,shouldermusculatureoranyothershoulderstructures,225weeks.

(14)Forthelossofafoot,125weeks.

(15)Forthelossofalowerleg,190weeks.

(16)Forthelossofaleg,200weeks.

(17)Forthelossofaneye,orthecompletelossofthesightthereof,120weeks.

Source:
http://www.kslegislature.org/li/statute/044_000_0000_chapter/044_005_0000_article/044
_005_0010d_section/044_005_0010d_k/.

Theinjuredworkeristypicallyentitledtotwothirdshisorheraveragepay,nottoexceedsome
specifiedmaximum,fortwohundredweeks.Ifthelossispartial(likepartiallossofsight),therecovery
isdecreasedbythepercentagestillusable.

Coverage

Althoughworkerscompensationlawsareonthebooksofeverystate,intwostatesNewJerseyand
Texastheyarenotcompulsory.Inthosestatestheemployermaydeclinetoparticipate,inwhichevent
theemployeemustseekredressincourt.Butinthosestatespermittinganemployerelection,theold
commonlawdefenses(fellowservantrule,contributorynegligence,andassumptionofrisk)havebeen
statutorilyeliminated,greatlyenhancinganemployeeschancesofwinningasuit.Theincentiveis
thereforestrongforemployerstoelectworkerscompensationcoverage.

Thosefrequentlyexcludedarefarmanddomesticlaborersandpublicemployeespublicemployees,
federalworkers,andrailroadandshipboardworkersarecoveredunderdifferentbutsimilarlaws.The
trendhasbeentoincludemoreandmoreclassesofworkers.Approximatelyhalfthestatesnowprovide
coverageforhouseholdworkers,althoughthethresholdofcoveragevarieswidelyfromstatetostate.
Someuseanearningstestotherstatesimposeanhoursthreshold.Peoplewhofallwithinthedomestic
categoryincludemaids,babysitters,gardeners,andhandymenbutgenerallynotplumbers,
electricians,andotherindependentcontractors.

PayingforWorkersCompensation
Therearethreegeneralmethodsbywhichemployersmaycomplywithworkerscompensationlaws.
First,theymaypurchaseemployersliabilityandworkerscompensationpoliciesthroughprivate
commercialinsurancecompanies.Thesepoliciesconsistoftwomajorprovisions:paymentbythe
insurerofallclaimsfiledunderworkerscompensationandrelatedlaws(suchasoccupationaldisease
benefits)andcoverageofthecostsofdefendinganysuitsfiledagainsttheemployer,includingany
judgmentsawarded.Sinceworkerscompensationstatutescutofftheemployeesrighttosue,howcan
suchalawsuitbefiled?Theansweristhattherearecertainexceptionstotheban:forinstance,aworker
maysueiftheemployerdeliberatelyinjuresanemployee.

Thesecondmethodofcompliancewithworkerscompensationlawsistoinsurethroughastatefund
establishedforthepurpose.Thethirdmethodistoselfinsure.Thelawsspecifyconditionsunderwhich
companiesmayresorttoselfinsurance,andgenerallyonlythelargestcorporationsqualifytodoso.In
short,workerscompensationsystemscreateataxonemployerswithwhichtheyarerequired(again,in
moststates)tobuyinsurance.Theamounttheemployerhastopayfortheinsurancedependsonthe
numberandseriousnessofclaimsmadehowdangeroustheworkis.Forexample,WashingtonStates
2011proposedhourlyratesforemployerstopurchaseinsuranceincludetheseitems:foreggand
poultryfarms,$1.16perhourshakeandshinglemills,$18.06perhourasphaltpaving,$2.87per
hourlawncaremaintenance,$1.22perhourplasticproductsmanufacturing,$0.87perhourfreight
handling,$1.81perhoursupermarkets,$0.76restaurants,$0.43entertainersanddancers,$7.06
collegesanduniversities,$0.31.WashingtonStateDepartmentofLabor&Industries,Ratesfor
WorkersCompensation,Proposed2011Rates,
http://www.lni.wa.gov/ClaimsIns/Insurance/RatesRisk/Check/RatesHistory.

RecurringLegalIssues
Thereareanumberoflegalissuesthatrecurinworkerscompensationcases.Theproblemis,fromthe
employerspointofview,thatthecostofbuyinginsuranceistiedtothenumberofclaimsmade.The
employerthereforehasreasontoasserttheinjuredemployeeisnoteligibleforcompensation.
Recurringlegalissuesincludethefollowing:

Istheinjuryworkrelated?Asageneralrule,onthejobinjuriesarecoverednomatterwhattheir
relationshiptotheemployeesspecificduties.Althoughinjuriesresultingfromdrunkennessor
fightingarenotgenerallycovered,therearecircumstancesunderwhichtheywillbe,asSection
11.3.2"EmployeeversusIndependentContractor"shows.
Istheinjuredpersonanemployee?Courtsareapttobeliberalinconstruingstatutestoinclude
thosewhomightnotseemtobeemployed.InBettsv.AnnArborPublicSchools,aUniversityof
Michiganstudentmajoringinphysicaleducationwasastudentteacherinajuniorhighschool.Betts
v.AnnArborPublicSchools,271N.W.2d498(Mich.1978).Duringafourmonthperiod,hetaught
twophysicaleducationcourses.Onthelastdayofhisstudentteaching,hewalkedintothelocker
roomandthirtyofhisstudentsgrabbedhimandtossedhimintotheswimmingpool.Thiswas
traditional,buthedidntfeellikegoinginthatmorningandputupastrugglethatendedwitha
whistleonanelasticbandhittinghimintheeye,whichhesubsequentlylostasaresultoftheinjury.
Hefiledaworkerscompensationclaim.Theschoolboardarguedthathecouldnotbeclassifiedas

anemployeebecausehereceivednopay.Sincehewasinjuredbystudentsnotconsideredagents
oftheschoolhewouldprobablyhavebeenunsuccessfulinfilingatortsuithencetheworkers
compensationclaimwashisonlychanceofrecompense.Thestateworkerscompensationappeal
boardruledagainsttheschoolonthegroundthatpaymentinmoneywasnotrequired:Plaintiff
waspaidintheformoftraining,collegecreditstowardsgraduation,andmeetingofthe
prerequisitesofastateprovisionalcertificate.Thestatesupremecourtaffirmedtheaward.
Howpalpablemusttheinjurybe?Adifficultissueiswhetheraworkerisentitledto
compensationforpsychologicalinjury,includingcumulativetrauma.Untilthe1970s,insurance
companiesandcompensationboardsrequiredphysicalinjurybeforemakinganaward.Claimsthat
jobstressesledtonervousbreakdownsorothermentaldisorderswererejected.Butmostcourts
haveliberalizedthedefinitionofinjuryandnowrecognizethatpsychologicaltraumacanberealand
thatjobstresscanbringiton,asshownbythediscussionofWolfev.Sibley,Lindsay&CurrCo.in
Section11.3.4"WorkersCompensation:WhatInjuriesAreCompensable?".

KEYTAKEAWAY
Theagentowestheprincipaltwocategoriesofduties:fiduciaryandgeneral.Thefiduciarydutyisthe
dutytoactalwaysintheinterestoftheprincipal;thedutyhereincludesthattoavoidselfdealingand
topreserveconfidentialinformation.Thegeneraldutyowedbytheagentencompassesthesortsof
obligationsanyemployeemighthave:thedutyofskillandcare,ofgoodconduct,tokeepandrender
accounts,tonotattempttheimpossibleorimpracticable,toobey,andtogiveinformation.Theshop
rightsdoctrineprovidesthatinventionsmadebyanemployeeusingtheemployersresourcesandon
theemployerstimebelongtotheemployer.
Theprincipalowestheagentdutiestoo.Thesemaybecategorizedascontractandtortduties.The
contractdutiesaretowarntheagentofhazardsassociatedwiththejob,toavoidinterferingwiththe
agentsperformanceofhisjob,torenderaccountsofmoneyduetheagent,andtoindemnifythe
agentforbusinessexpensesaccordingtotheiragreement.Thetortdutyowedbytheprincipaltothe
agentemployeeisprimarilythestatutorilyimposeddutytoprovideworkerscompensationfor
injuriessustainedonthejob.Inreactiontocommonlawdefensesthatoftenexoneratedtheemployer
fromliabilityforworkersinjuries,theearlytwentiethcenturysawtheriseofworkerscompensation
statutes.Theserequiretheemployertoprovidenofaultinsurancecoverageforanyinjurysustained
bytheemployeeonthejob.Becausetheemployersinsurancecostsareclaimsrated(i.e.,thecostof
insurancedependsonhowmanyclaimsaremade),theemployerscrutinizesclaims.Anumberof
recurringlegalissuesarise:Istheinjuryworkrelated?Istheinjuredpersonanemployee?What
constitutesaninjury?

EXERCISES
1. JudgeLearnedHand,afamousearlytwentiethcenturyjurist(18721961),said,Thefiduciary
dutyisnottheordinarymoralsofthemarketplace.Howdoesthefiduciarydutydifferfromthe
ordinarymoralsofthemarketplace?Whydoesthelawimposeafiduciarydutyontheagent?
2. Whatarethenonfiduciarydutiesowedbytheagenttotheprincipal?
3. Whatcontractdutiesareowedbytheprincipaltotheagent?
4. Whywereworkerscompensationstatutesadoptedintheearlytwentiethcentury?
5. Howdoworkerscompensationstatutesoperate,andhowarethecostspaidfor?

11.3Cases
CreationofAgency:LiabilityofParentforContractsMadebyAgentChild
Weingartv.DirectoireRestaurant,Inc.

333N.Y.S.2d806(N.Y.,1972)

KASSEL,J.

Theissuehereiswhetherdefendantrestaurantbypermittinganindividualtoparkpatronscars

therebyheldhimoutasitsemployeeforsuchpurposes.Admittedly,thisindividual,oneBuster
Douglas,isnotitsemployeeintheusualsensebutwiththeknowledgeofdefendant,hedidstation
himselfinfrontofitsrestaurant,woreadoormansuniformandhadbeenparkingitscustomersautos.
Thepartiesstipulatedthatifhewereheldtobedefendantsemployee,thiscreatedabailmentbetween
theparties[andtheemployerwouldhavetorebutapresumptionofnegligenceifthecustomers
propertywasnotreturnedtothecustomer].

OnApril20,1968,atabout10P.M.,plaintiffdrovehis1967CadillacCoupedeVilletothedoorofthe
DirectoireRestaurantat160East48thStreetinManhattan.StandinginfrontofthedoorwasBuster
Douglas,dressedinaselfsupplieduniform,comprisedofaregulardoormanscapandmatching
jacket.PlaintiffgavethekeystohisvehicletoDouglasandrequestedthatheparkthecar.Hegave
Douglasa$1.00tipandreceivedaclaimcheck.Plaintiffthenentereddefendantsrestaurant,remained
thereforapproximately45minutesandwhenhedeparted,Douglaswasunabletolocatethecarwhich
wasneverreturnedtoplaintiff.

Atthetimeofthisoccurrence,therestauranthadbeenopenforonlyninedays,duringwhichtime
plaintiffhadpatronizedtherestaurantonatleastoneprioroccasion.

Defendantdidnotmaintainanysignatitsentranceorelsewherethatitwouldprovideparkingforits
customers(nor,apparently,anysignwarningtothecontrary).

BusterDouglasparkedcarsforcustomersofdefendantsrestaurantandatleastthreeorfourother
restaurantsontheblock.Hestationedhimselfinfrontofeachrestaurantduringthecourseofan
eveningandwassoengagedduringtheeveningofApril20,1968.Defendantclearlyknewofanddidnot
objecttoDouglasactivitiesoutsideitsrestaurant.Defendantswitnesstestifiedatanexamination
beforetrial:

Q.Didanybodystandoutsideyourrestaurantinanycapacitywhatsoever?

A.Therewasamanoutthereparkingcarsfortheblock,buthewasinnowayconnectedwithusor
anythinglikethat.HeparkedcarsfortheTamburlaineandalsofortheChateauMadrid,Nepenthaand
afewplacesaroundtheblock.

Q.Didyouknowthatthisgentlemanwasstandingoutsideyourrestaurant?

A.Yes,Iknewhewasthere.

Q.Howdidyouknowthathewasstandingoutsideyourrestaurant?

A.Well,IknewthemansfacebecauseIusedtoworkinaclubon55thStreetandhewasthere.When
wefirstopeneduphere,wedidntknowifwewouldhaveadoormanorhaveparkingfacilitiesorwhat
weweregoingtodoatthattime.WejustletithangandItoldthisBuster,Busterwashisname,thatyou
areafreeagentandyoudowhateveryouwanttodo.Iamtendingbarintheplaceandwhatyoudoin
thestreetisuptoyou,Iwillnotstopyou,butwearenothiringyouoranythinglikethat,becauseatthat
time,wedidntknowwhatweweregoingtousetheparkinglotorgetadoormanandputonauniform
orwhat.

Thesefactsestablishtothecourtssatisfactionthat,althoughDouglaswasnotanactualemployeeofthe
restaurant,defendantheldhimoutasitsauthorizedagentoremployeeforthepurposeofparkingits
customerscars,byexpresslyconsentingtohisstanding,inuniform,infrontofitsdoortoreceive
customers,toparktheircarsandissuereceiptsthereforwhichserviceswererenderedwithoutcharge
totherestaurantscustomers,exceptforanygratuitypaidtoDouglas.Clearly,underthese
circumstances,apparentauthorityhasbeenshownandDouglasactedwithinthescopeofthisauthority.

PlaintiffwasjustifiedinassumingthatDouglasrepresentedtherestaurantinprovidinghisservicesand
thattherestauranthadplacedhimtherefortheconvenienceofitscustomers.Arestaurateurknows
thatthisistheimpressioncreatedbyallowingauniformedattendanttosoact.Facilityinparkingis
oftenacriticalconsiderationforamotoristinselectingarestaurantinmidtownManhattan,andthe
Directoirewaskeenlyawareofthisfactasevidencedbyitstestimonythatthemanagementwaslooking
intovariousotherpossibilitiesforsolvingcustomersparkingproblems.

Therewasnosuitabledisclaimerpostedoutsidetherestaurantthatithadnoparkingfacilitiesorthat
entrustingonescartoanypersonwasatthedriversrisk.Itisdoubtfulthatanyprudentdriverwould
entrusthiscartoastrangepersononthestreet,ifhethoughtthattheindividualhadnoauthorization
fromtherestaurantorcluborhadnoconnectionwithit,butwasmerelyanindependentoperatorwith
questionablefinancialresponsibility.

ThefactthatDouglasreceivednocompensationdirectlyfromdefendantisnotmaterial.Eachparty
derivedabenefitfromthearrangement:Douglasbeingwillingtoworkforgratuitiesfromcustomers,
andthedefendant,atnocosttoitself,presentingtheappearanceofprovidingtheconvenienceoffree
parkinganddoormanservicestoitspatrons.Inanycase,whateverprivatearrangementsexisted
betweentherestaurantandDouglaswereneverdisclosedtothecustomers.

Evenifsuchpersondidperformtheseservicesforseveralrestaurants,itdoesnotautomaticallyfollow
thatheisafreelanceentrepreneur,sinceasharedemployeeworkingforothersmallormoderately
sizedrestaurantsintheareawouldseemareasonablearrangement,innowaynegatingtheauthorityof
theattendanttoactasdoormanandreceivecarsforanyoneoftheseplacesindividually.

ThecasemostanalogoustotheinstantoneisKlotzv.ElMorocco[Citation,1968],andplaintiffhere
reliesonit.Thatcasesimilarlyinvolvedthetheftofacarparkedbyauniformedindividualstandingin
frontofdefendantsrestaurantwho,althoughnotemployedbyit,parkedvehiclesforitspatronswith
therestaurantsknowledgeandconsent.Defendanthereattemptstodistinguishthiscaseprincipally
uponthegroundthatthepartiesinElMoroccostipulatedthatthedoormanwasanagentoremployee
ofthedefendantactingwithinthescopeofhisauthority.However,thejudgemadeanexpressfindingto
thateffect:***therewassufficientevidenceinplaintiffscaseonwhichtofindDiGiovanni,themanin
theuniform,wasactingwithinthescopeofhisauthorityasagentofdefendant.Defendantherealso
pointstothefactthatinKlotzDiGiovanniplacedpatronscarkeysonarackinsideElMorocco
however,thisisonlyonefacttobeconsideredinfindingabailmentandis,tome,morerelevanttothe
issueofthedegreeofcareexercised.

Whendefendantsagentfailedtoproduceplaintiffsautomobile,apresumptionofnegligencearose
whichnowrequiresdefendanttocomeforwardwithasufficientexplanationtorebutthispresumption.
[Citation]Themattershouldbesetdownfortrialontheissuesofduecareandofdamages.

CASEQUESTIONS
1. BusterDouglaswasnottherestaurantsemployee.Whydidthecourtdeterminehisnegligence
couldneverthelessbeimputedtotherestaurant?
2. TheplaintiffinthiscasereliedonKlotz,verysimilarinfacts,inwhichthecarparkingattendant
wasfoundtobeanemployee.Thedefendant,necessarily,neededtoarguethatthecaseswere
notverysimilar.Whatargumentdidthedefendantmake?Whatdidthecourtsayaboutthat
argument?
3. Therestauranthereisabaileeithasrightfulpossessionoftheplaintiffs(bailors)property,the
car.Ifthecarisnotreturnedtotheplaintiffarebuttablepresumptionofnegligencearises.What
doesthatmean?

EmployeeversusIndependentContractor
Vizcainov.MicrosoftCorp.

97F.3d1187(9thCir.1996)

Reinhardt,J.

Largecorporationshaveincreasinglyadoptedthepracticeofhiringtemporaryemployeesor
independentcontractorsasameansofavoidingpaymentofemployeebenefits,andthereby
increasingtheirprofits.Thispracticehasunderstandablyledtoanumberofproblems,legaland
otherwise.Oneofthelegalissuesthatsometimesarisesisexemplifiedbythislawsuit.Thenamed
plaintiffs,whowereclassifiedbyMicrosoftasindependentcontractors,seektostripthatlabelofits

protectivecoveringandtoobtainforthemselvescertainbenefitsthatthecompanyprovidedtoallof
itsregularorpermanentemployees.Aftercertifyingthenamedplaintiffsasrepresentativesofa
classofcommonlawemployees,thedistrictcourtgrantedsummaryjudgmenttoMicrosoftonall
counts.Theplaintiffsnowappealastotwooftheirclaims:a)theclaimthattheyareentitledto
savingsbenefitsunderMicrosoftsSavingsPlusPlan(SPP)andb)thattheyareentitledtostock
optionbenefitsunderMicrosoftsEmployeeStockPurchasePlan(ESPP).Inbothcases,theclaims
arebasedontheircontentionthattheyarecommonlawemployees.

Microsoft,oneofthecountrysfastestgrowingandmostsuccessfulcorporationsandtheworldslargest
softwarecompany,producesandsellscomputersoftwareinternationally.Itemploysacorestaffof
permanentemployees.Itcategorizesthemasregularemployeesandoffersthemawidevarietyof
benefits,includingpaidvacations,sickleave,holidays,shorttermdisability,grouphealthandlife
insurance,andpensions,aswellasthetwobenefitsinvolvedinthisappeal.Microsoftsupplementsits
corestaffofemployeeswithapoolofindividualstowhomitrefusestopayfringebenefits.Itpreviously
classifiedtheseindividualsasindependentcontractorsorfreelancers,butpriortothefilingofthe
actionbeganclassifyingthemastemporaryagencyemployees.Freelancerswerehiredwhen
Microsoftneededtoexpanditsworkforcetomeetthedemandsofnewproductschedules.The
companydidnot,ofcourse,providethemwithanyoftheemployeebenefitsregularemployeesreceive.

Theplaintiffsperformedservicesassoftwaretesters,productioneditors,proofreaders,formatters
andindexers.Microsoftfullyintegratedtheplaintiffsintoitsworkforce:theyoftenworkedonteams
alongwithregularemployees,sharingthesamesupervisors,performingidenticalfunctions,and
workingthesamecorehours.BecauseMicrosoftrequiredthattheyworkonsite,theyreceived
admittancecardkeys,officeequipmentandsuppliesfromthecompany.

Freelancersandregularemployees,however,werenotwithouttheirobviousdistinctions.Freelancers
worebadgesofadifferentcolor,haddifferentelectronicmailaddresses,andattendedalessformal
orientationthanthatprovidedtoregularemployees.Theywerenotpermittedtoassigntheirworkto
others,invitedtoofficialcompanyfunctions,orpaidovertimewages.Inaddition,theywerenotpaid
throughMicrosoftspayrolldepartment.Instead,theysubmittedinvoicesfortheirservices,
documentingtheirhoursandtheprojectsonwhichtheyworked,andwerepaidthroughtheaccounts
receivabledepartment.

Theplaintiffsweretoldwhentheywerehiredthat,asfreelancers,theywouldnotbeeligiblefor
benefits.NonehascontendedthatMicrosofteverpromisedthemanybenefitsindividually.Alleight
namedplaintiffssigned[employmentagreements]whenfirsthiredbyMicrosoftorsoonthereafter.
[One]includedaprovisionthatstatesthattheundersignedagreestoberesponsibleforallfederaland
statetaxes,withholding,socialsecurity,insuranceandotherbenefits.The[otherone]statesthatasan
IndependentContractortoMicrosoft,youareselfemployedandareresponsibletopayallyourown
insuranceandbenefits.Eventually,theplaintiffslearnedofthevariousbenefitsbeingprovidedto
regularemployeesfromspeakingwiththemorreadingvariousMicrosoftpublicationsconcerning
employeebenefits.

In1989and1990,theInternalRevenueService(IRS)[,]applyingcommonlawprinciplesdefiningthe
employeremployeerelationship,concludedthatMicrosoftsfreelancerswerenotindependent
contractorsbutemployeesforwithholdingandemploymenttaxpurposes,andthatMicrosoftwould
thereafterberequiredtopaywithholdingtaxesandtheemployersportionofFederalInsurance
ContributionAct(FICA)tax.Microsoftagreed.

AfterlearningoftheIRSrulings,theplaintiffssoughtvariousemployeebenefits,includingthosenow
atissue:theESPPandSPPbenefits.TheSPPisacashordeferredsalaryarrangementunder401kof
theInternalRevenueCodethatpermitsMicrosoftsemployeestosaveandinvestuptofifteenpercent
oftheirincomethroughtaxdeferredpayrolldeductions.Microsoftmatchesfiftypercentofthe
employeescontributioninanyyear,with[amaximummatchingcontribution].TheESPPpermits
employeestopurchasecompanystock[withvariousrules].

Microsoftrejectedtheplaintiffsclaimsforbenefits,maintainingthattheywereindependent
contractorswhowerepersonallyresponsibleforalltheirownbenefits.

Theplaintiffsbroughtthisaction,challengingthedenialofbenefits.

Microsoftcontendsthattheextrinsicevidence,includingthe[employmentagreements],demonstrates
itsintentnottoprovidefreelancersorindependentcontractorswithemployeebenefits[.]Wehaveno
doubtthatthecompanydidnotintendtoprovidefreelancersorindependentcontractorswith
employeebenefits,andthatiftheplaintiffshadinfactbeenfreelancersorindependentcontractors,
theywouldnotbeeligibleundertheplan.Theplaintiffs,however,werenotfreelancersorindependent
contractors.Theywerecommonlawemployees,andthequestioniswhat,ifanything,Microsoft
intendedwithrespecttopersonswhowereactuallycommonlawemployeesbutwerenotknownto
Microsofttobesuch.ThefactthatMicrosoftdidnotintendtoprovidebenefitstopersonswhoit
thoughtwerefreelancersorindependentcontractorsshedslittleornolightonthatquestion.

Microsoftsargument,drawingadistinctionbetweencommonlawemployeesonthebasisofthe
mannerinwhichtheywerepaid,issubjecttothesameviceasitsmoregeneralargument.Microsoft
regardedtheplaintiffsasindependentcontractorsduringtherelevantperiodandlearnedoftheir
commonlawemployeestatusonlyaftertheIRSexamination.Theywerepaidthroughtheaccounts
receivabledepartmentratherthanthepayrolldepartmentbecauseofMicrosoftsmistakenviewasto
theirlegalstatus.Accordingly,Microsoftcannotnowcontendthatthefactthattheywerepaidthrough
theaccountsreceivabledepartmentdemonstratesthatthecompanyintendedtodenythemthebenefits
receivedbyallcommonlawemployeesregardlessoftheiractualemploymentstatus.Indeed,
Microsofthaspointedtonoevidencesuggestingthatiteverdeniedeligibilitytoanyemployees,whom
itunderstoodtobecommonlawemployees,bypayingthemthroughtheaccountsreceivable
departmentorotherwise.

WethereforeconstruetheambiguityintheplanagainstMicrosoftandholdthattheplaintiffsare
eligibletoparticipateunderthetermsoftheSPP.

[Next,regardingtheESPP]weholdthattheplaintiffsarecoveredbythespecificprovisionsofthe
ESPP.Weapplytheobjectivemanifestationtheoryofcontracts,whichrequiresustoimputean
intentioncorrespondingtothereasonablemeaningofapersonswordsandacts.[Citation]Throughits
incorporationofthetaxcodeprovisionintotheplan,Microsoftmanifestedanobjectiveintenttomake
allcommonlawemployees,andhencetheplaintiffs,eligibleforparticipation.TheESPPspecifically
provides:

ItistheintentionoftheCompanytohavethePlanqualifyasanemployeestockpurchaseplanunder
Section423oftheInternalRevenueCodeof1954.TheprovisionsofthePlanshall,accordingly,be
construedsoastoextendandlimitparticipationinamannerconsistentwiththerequirementsofthat
SectionoftheCode.(emphasisadded)

[T]heESPP,whenconstruedinamannerconsistentwiththerequirementsof423,extends
participationtoallcommonlawemployeesnotcoveredbyoneoftheexpressexceptionssetforthin
theplan.Accordingly,wefindthattheESPP,throughitsincorporationof423,expresslyextends
eligibilityforparticipationtotheplaintiffclassandaffordsthemthesameoptionstoacquirestockin
thecorporationasallotheremployees.

Microsoftnextcontendsthatthe[employmentagreements]signedbytheplaintiffsrenderthem
ineligibletoparticipateintheESPP.First,thelabelusedintheinstrumentssignedbytheplaintiffsdoes
notcontroltheiremploymentstatus.Second,theemploymentinstruments,ifconstruedtoexcludethe
plaintiffsfromreceivingESPPbenefits,wouldconflictwiththeplansexpressincorporationof423.
AlthoughMicrosoftmayhavegenerallyintendedtoexcludeindividualswhowereinfactindependent
contractors,itcouldnot,consistentwithitsexpressintentiontoextendparticipationintheESPPtoall
commonlawemployees,haveexcludedtheplaintiffs.Indeed,suchanexclusionwoulddefeatthe
purposeofincluding423intheplan,becausetheexclusionofcommonlawemployeesnototherwise
acceptedwouldresultinthelossoftheplanstaxqualification.

Finally,MicrosoftmaintainsthattheplaintiffsarenotentitledtoESPPbenefitsbecausethetermsof
theplanwerenevercommunicatedtothemandtheywerethereforeunawareofitsprovisionswhen
theyperformedtheiremploymentservices.Inanyevent,totheextentthatknowledgeofanofferof
benefitsisaprerequisite,itisprobablysufficientthatMicrosoftpubliclypromulgatedtheplan.In
[Citation],theplaintiffwasunawareofthecompanysseveranceplanuntilshortlybeforehis
termination.TheOklahomaSupremeCourtconcludednonethelessthatpublicationoftheplanwas

theequivalentofconstructiveknowledgeonthepartofallemployeesnotspecificallyexcluded.
Wearenotrequiredtorely,however,onthe[this]analysisorevenonMicrosoftsownunwitting
concession.Thereisacompellingreason,implicitinsomeoftheprecedingdiscussion,thatrequiresus
torejectthecompanystheorythattheplaintiffsentitlementtoESPPbenefitsisdefeatedbytheir
previouslackofknowledgeregardingtheirrights.Itiswellestablishedthatanoptionormaynotrely
onanoptioneesfailuretoexerciseanoptionwhenhehascommittedanyactorfailedtoperformany
dutycalculatedtocausetheoptioneetodelayinexercisingtheright.[Citation][T]heoptionormay
notmakestatementsorrepresentationscalculatedtocausedelay,[or]failtofurnish[necessary]
information.Similarly,[I]tisaprincipleoffundamentaljusticethatifapromisorishimselfthe
causeofthefailureofperformance,eitherofanobligationduehimorofaconditionuponwhichhis
ownliabilitydepends,hecannottakeadvantageofthefailure.[Citation]

Applyingtheseprinciples,weagreewiththemagistratejudge,whoconcludedthatMicrosoft,which
createdabenefittowhichtheplaintiffswereentitled,couldnotdefenditselfbyarguingthatthe
plaintiffswereunawareofthebenefit,whenitsownfalserepresentationsprecludedthemfromgaining
thatknowledge.BecauseMicrosoftmisrepresentedboththeplaintiffsactualemploymentstatusand
theireligibilitytoparticipateintheESPP,itisresponsiblefortheirfailuretoknowthattheywere
coveredbythetermsoftheoffer.Itmaynotnowtakeadvantageofthatfailuretodefeattheplaintiffs
rightstoESPPbenefits.Thus,werejectMicrosoftsfinalargument.

Conclusion

Forthereasonsstated,thedistrictcourtsgrantofsummaryjudgmentinfavorofMicrosoftanddenial
ofsummaryjudgmentinfavoroftheplaintiffsisREVERSEDandthecaseREMANDEDforthe
determinationofanyquestionsofindividualeligibilityforbenefitsthatmayremainfollowingissuance
ofthisopinionandforcalculationofthedamagesorbenefitsduethevariousclassmembers.

CASEQUESTIONS
1. Ina1993WallStreetJournalarticle,JamesBovardassertedthattheIRSiscarryingouta
sweepingcampaigntoslashthenumberofAmericanspermittedtobeselfemployedandto
punishthecompaniesthatcontractwiththemIRSofficialsindicatethatmorethanhalfthe
nationsselfemployedshouldnolongerbeabletoworkforthemselves.WhydidMicrosoftwant
theseemployeestobeabletoworkforthemselves?
2. Whydidtheemployeesacceptemploymentasindependentcontractors?
3. ItseemsunlikelythatthepurposeoftheIRSscampaignwasreallytokeeppeoplefromworking
forthemselves,despiteMr.Bovardsassumption.Whatwasthepurposeofthecampaign?
4. WhydidtheIRSandthecourtdeterminethattheseindependentcontractorswereinfact
employees?

BreachofFiduciaryDuty
Baconv.VolvoServiceCenter,Inc.

597S.E.2d440(Ga.App.2004)

Smith,J.

[Thisappealis]takeninanactionthatarosewhentwoformeremployeesleftanexistingbusinessand
begananew,competingbusiness.BaconandJohnson,twoformeremployeesofVolvoServiceCenter,
Inc.(VSC),andthenewcompanytheyformed,SouthGwinnettVolvoService,Ltd.(SGVS),appealfrom
thetrialcourtsdenialoftheirmotionforjudgmentnotwithstandingthejurysverdictinfavorofVSC.

VSCfiledsuitagainstappellants,alleginganumberofclaimsarisingfromtheusebyBacon,whohad
beenaservicetechnicianatVSC,ofVSCscustomerlist,andhissolicitingJohnson,aservicewriter,and
anotherVSCemployeetojoinSGVS.SGVSmovedforadirectedverdictoncertainclaimsatthecloseof
plaintiffsevidenceandatthecloseofthecase,whichmotionsweredenied.Thejurywasaskedto
respondtospecificinterrogatories,anditfoundforVSCandagainstallthreeappellantsonVSCsclaim

formisappropriationoftradesecrets.ThejuryalsofoundforplaintiffagainstBaconforbreachof
fiduciaryduty,tortiousinterferencewithbusinessrelations,employeepiracy,andconversionof
corporateassets.ThejuryawardedVSCattorneyfees,costs,andexemplarydamagesstemmingfrom
theclaimformisappropriationoftradesecrets.Judgmentwasenteredonthejurysverdict,and
appellantsmotionforj.n.o.v.wasdenied.Thisappealensued.WefindthatVSCdidnotmeetits
burdenofproofastotheclaimsformisappropriationoftradesecrets,breachoffiduciaryduty,or
employeepiracy,andthetrialcourtshouldhavegrantedappellantsmotionforj.n.o.v.

Construedtosupportthejurysverdict,theevidenceofrecordshowsthatBaconwasatechnicianatVSC
whenhedecidedtoleaveandopenacompetingbusiness.Beforedoingso,heprintedalistofVSCs
customersfromoneofVSCstwocomputers.Computeraccesswasnotpasswordrestricted,waseasyto
use,andwasusedbymanyemployeesfromtimetotime.

AboutayearafterheleftVSC,BacongaveJohnsonandanotherVSCemployeeanofferofemployment
athisnewVolvorepairshop,whichwasabouttoopen.BaconandJohnsonadvertisedextensively,and
thecustomerlistwasusedtosendflyerstosomeVSCcustomerswholivedclosetothenewshops
location.TheseactivitiesbecamethebasisforVSCsactionagainstBacon,Johnson,andtheirnewshop,
SGVS.

1.TheGeorgiaTradeSecretsActof1990,[Citation],definesatradesecretas

information,withoutregardtoform,including,butnotlimitedto,alistofactualorpotential
customersorsupplierswhichisnotcommonlyknownbyoravailabletothepublicandwhich
information:

(A)Deriveseconomicvalue,actualorpotential,fromnotbeinggenerallyknownto,andnotbeing
readilyascertainablebypropermeansby,otherpersonswhocanobtaineconomicvaluefromits
disclosureoruseand

(B)Isthesubjectofeffortsthatarereasonableunderthecircumstancestomaintainitssecrecy.

Ifanemployerdoesnotprovebothprongsofthistest,itisnotentitledtoprotectionundertheAct.Our
SupremeCourtheldin[Citation,1991]forinstance,thatinformationwasnotatradesecretwithinthe
meaningoftheActbecausenoevidenceshowedthattheemployermadereasonableeffortsunderthe
circumstancestomaintaintheconfidentialityoftheinformationitsoughttoprotect.

WhileaclientlistmaybesubjecttoconfidentialtreatmentundertheGeorgiaTradeSecretsAct,the
informationitselfisnotinherentlyconfidential.Customersarenottradesecrets.Confidentialityis
affordedonlywherethecustomerlistisnotgenerallyknownorascertainablefromothersourcesand
wasthesubjectofreasonableeffortstomaintainitssecrecy.

Here,VSCtooknoprecautionstomaintaintheconfidentialityofitscustomerlist.Theinformationwas
onbothcomputers,anditwasnotpasswordprotected.Moreover,thesameinformationwasavailable
tothetechniciansthroughtherepairorders,whichtheywerepermittedtoretainindefinitelywhile
Baconwasemployedthere.Employeeswerenotinformedthattheinformationwasconfidential.
NeitherBaconnorJohnsonwasrequiredtosignaconfidentialityagreementaspartofhisemployment.

BecausenoevidencewaspresentedfromwhichthejurycouldhaveconcludedthatVSCtookanysteps,
muchlessreasonableones,toprotecttheconfidentialityofitscustomerlist,amaterialrequirementfor
tradesecretstatuswasnotsatisfied.Thetrialcourtshouldhavegrantedappellantsmotionforj.n.o.v.

2.Toprovetortiousinterferencewithbusinessrelations,aplaintiffmustshowdefendant:(1)acted
improperlyandwithoutprivilege,(2)actedpurposelyandwithmalicewiththeintenttoinjure,(3)
inducedathirdpartyorpartiesnottoenterintoorcontinueabusinessrelationshipwiththeplaintiff,
and(4)causedplaintifffinancialinjury.[Citation]But[f]aircompetitionisalwayslegal.[Citations]
Unlessanemployeehasexecutedavalidnoncompeteornonsolicitcovenant,heisnotbarredfrom
solicitingcustomersofhisformeremployeronbehalfofanewemployer.[Citation]

NoevidencewaspresentedthatBaconactedimproperly,thatanyofVSCsformercustomers
switchedtoSGVSbecauseofanyimproperactbyBacon,orthatthesecustomerswouldhavecontinued

topatronizeVSCbutforBaconssolicitations.Therefore,itwasimpossibleforajurytocalculateVSCs
financialdamage,ifanyexisted.

3.WithregardtoVSCsclaimforbreachoffiduciaryduty,[a]nemployeebreachesnofiduciarydutyto
theemployersimplybymakingplanstoenteracompetingbusinesswhileheisstillemployed.Even
beforetheterminationofhisagency,heisentitledtomakearrangementstocompeteandupon
terminationofemploymentimmediatelycompete.[Citation]Hecannotsolicitcustomersforarival
businessordoother,similaractsindirectcompetitionwithhisemployersbusinessbeforehis
employmentends.Buthere,noevidencewaspresentedtorebuttheevidencegivenbyBaconand
JohnsonthattheyengagedinnosuchpracticesbeforetheiremploymentwithVSCended.Even
assuming,therefore,thatafiduciaryrelationshipexisted,noevidencewaspresentedshowingthatit
wasbreached.

4.ThesameistrueforVSCsclaimforemployeepiracy.Theevidencesimplydoesnotshowthatany
employeesofVSCweresolicitedforSGVSbeforeBaconleftVSCsemploy.

Judgmentreversed.

CASEQUESTIONS
1. Whywasitdeterminedthatthedefendantswerenotliableforanybreachoftradesecrecy?
2. Whatwouldhavebeennecessarytoshowtortiousinterferencewithbusinessrelations?
3. Theevidencewaslackingthattherewasanybreachoffiduciaryduty.Whatwouldhavebeen
necessarytoshowthat?
4. Whatisemployeepiracy?Whywasitnotproven?

WorkersCompensation:WhatInjuriesAreCompensable?
Wolfev.Sibley,Lindsay&CurrCo.

330N.E.2d603(N.Y.1975)

Wachtler,J.

Thisappealinvolvesaclaimforworkmenscompensationbenefitsfortheperiodduringwhichthe
claimantwasincapacitatedbyseveredepressioncausedbythediscoveryofherimmediatesupervisors
bodyafterhehadcommittedsuicide.

ThefactsasadducedatahearingbeforetheWorkmensCompensationBoardareuncontroverted.The
claimant,Mrs.DianaWolfe,beganheremploymentwiththerespondentdepartmentstore,Sibley,
Lindsay&CurrCo.inFebruary,1968.Afterworkingforsometimeasaninvestigatorinthesecurity
departmentofthestoreshebecamesecretarytoMr.JohnGorman,thesecuritydirector.Itappears
fromtherecordthatasheadofsecurity,Mr.Gormanwassubjectedtointensepressure,especially
duringtheChristmasholidays.Mrs.Wolfetestifiedthatthroughouttheseveralyearssheworkedat
SibleysMr.Gormanreactedtothisholidaypressurebybecomingextremelyagitatedandnervous.She
noted,however,thatthisanxietyusuallydisappearedwhentheholidayseasonwasover.Unfortunately,
Mr.Gormansnervousconditionfailedtoabateafterthe1970holidays.

DespitethefactthathefollowedMrs.Wolfesadvicetoseeadoctor,Mr.Gormansmentalcondition
continuedtodeteriorate.Ononeoccasionheleftworkathersuggestionbecauseheappearedtobeso
nervous.ThisconditionpersisteduntilthemorningofJune9,1971whenaccordingtotheclaimant,Mr.
Gormanlookedmuchbetterandevensmiledandtousledherhairwhenshesoremarked.

AshorttimelaterMr.Gormancalledherontheintercomandaskedhertocallthepolicetoroom615.
Mrs.WolfecompliedwiththisrequestandthentriedunsuccessfullytoreachMr.Gormanonthe
intercom.Sheenteredhisofficetofindhimlyinginapoolofbloodcausedbyaselfinflictedgunshot
woundinthehead.Mrs.Wolfebecameextremelyupsetandwasunabletocontinueworkingthatday.

Shereturnedtoworkforoneweekonlytolockherselfinherofficetoavoidthequestionsofherfellow

workers.Herprivatephysicianperceivingthatshewasbesetbyfeelingsofguiltreferredhertoa
psychiatristandrecommendedthatsheleavework,whichshedid.Whileathomesheruminatedabout
herguiltinfailingtopreventthesuicideandremainedinbedforlongperiodsoftimestaringatthe
ceiling.Theresultwasthatshebecameunresponsivetoherhusbandandsufferedaweightlossof20
pounds.Herpsychiatrist,Dr.Grinolsdiagnosedherconditionasanacutedepressivereaction.

AfterattemptingtotreatherinhisofficeDr.Grinolsrealizedthattheseverityofherdepression
mandatedhospitalization.Accordingly,theclaimantwasadmittedtothehospitalonJuly9,1971where
sheremainedfortwomonthsduringwhichtimeshereceivedpsychotherapyandmedication.Aftershe
wasdischarged,Dr.Grinolsconcludedthattherehadbeennosubstantialremissioninherdepression
andruminativeguiltandsohadherreadmittedforelectroshocktreatment.Thesetreatmentslastedfor
threeweeksandwereinstrumentalinherrecovery.Shewasagaindischargedand,inmidJanuary,
1972,resumedheremploymentwithSibley,Lindsay&Curr.

Mrs.Wolfesclaimforworkmenscompensationwasgrantedbytherefereeandaffirmedbythe
WorkmensCompensationBoard.OnappealtheAppellateDivisionreversedcitingitsopinionsin
[Citations],[concluding]thatmentalinjuryprecipitatedsolelybypsychictraumaisnotcompensable
asamatteroflaw.Wedonotagreewiththisconclusion.

Workmenscompensation,asdistinguishedfromtortliabilitywhichisessentiallybasedonfault,is
designedtoshifttheriskoflossofearningcapacitycausedbyindustrialaccidentsfromtheworkerto
industryandultimatelytheconsumer.InlightofitsbeneficialandremedialcharactertheWorkmens
CompensationLawshouldbeconstruedliberallyinfavoroftheemployee[Citation].

Liabilityundertheactispredicatedonaccidentalinjuryarisingoutofandinthecourseofemployment.
Applyingtheseconceptstothecaseatbarwenotethatthereisnoissueraisedconcerningthecausal
relationshipbetweentheoccurrenceandtheinjury.TheonlytestimonyonthismatterwasgivenbyDr.
Grinolswhostatedunequivocallythatthediscoveryofhersuperiorsbodywasthecompetent
producingcauseofhercondition.Noristhereanyquestionastotheabsenceofphysicalimpact.
Accordingly,thefocusofourinquiryiswhetherornottherehasbeenanaccidentalinjurywithinthe
meaningoftheWorkmensCompensationLaw.

Sincethereisnostatutorydefinitionofthistermweturntotherelevantdecisions.Thesemaybe
dividedintothreecategories:(1)psychictraumawhichproducesphysicalinjury,(2)physicalimpact
whichproducespsychologicalinjury,and(3)psychictraumawhichproducespsychologicalinjury.Asto
thefirstclassourcourthasconsistentlyrecognizedtheprinciplethataninjurycausedbyemotional
stressorshockmaybeaccidentalwithinthepurviewofthecompensationlaw.[Citation]Casesfalling
intothesecondcategoryhaveuniformlysustainedawardstothoseincurringnervousorpsychological
disordersasaresultofphysicalimpact[Citation].Astothosecasesinthethirdcategorythedecisions
arenotasclear.

Weholdtodaythatpsychologicalornervousinjuryprecipitatedbypsychictraumaiscompensableto
thesameextentasphysicalinjury.Thisdeterminationisbasedontwoconsiderations.First,asnotedin
thepsychiatrictestimonythereisnothinginthenatureofastressorshocksituationwhichordains
physicalasopposedtopsychologicalinjury.Thedeterminativefactoristheparticularvulnerabilityof
anindividualbyvirtueofhisphysicalmakeup.Inagivensituationonepersonmaybesusceptibletoa
heartattackwhileanothermaysufferadepressivereaction.Ineithercasetheresultisthesamethe
individualisincapableoffunctioningproperlybecauseofanaccidentandshouldbecompensatedunder
theWorkmensCompensationLaw.

Secondly,havingrecognizedthereliabilityofidentifyingpsychictraumaasacausativefactorofinjuryin
somecasesandthereliabilitybyidentifyingpsychologicalinjuryasaresultantfactorinothercases,we
seenoreasonforlimitingrecoveryinthelatterinstancetocasesinvolvingphysicalimpact.Thereis
nothingtalismanicaboutphysicalimpact.

Wewouldnoteinpassingthatthisanalysisreflectstheviewofthemajorityofjurisdictionsinthis
countryandEngland.[Citations]

Accordingly,theorderappealedfromshouldbereversedandtheawardtotheclaimantreinstated,with
costs.

CASEQUESTIONS
1. WhydidtheappealscourtdenyworkerscompensationbenefitsforWolfe?
2. OnwhatreasoningdidtheNewYorkhighcourtreverse?
3. Therewasadissentinthiscase(notincludedhere).JudgeBreitelnotedthattheevidencewas
thatMrs.Wolfehadapsychologicalconditionsuchthathertraumacouldneverhaveoccurred
unlessshe,tobeginwith,wasextraordinarilyvulnerabletosevereshockatorawayfromher
placeofemploymentoroneproducedbyaccidentorinjurytothoseclosetoherinemployment
orinherprivatelife.Thejudgeworriedthatonecaneasilycallupamyriadofcommonplace
occupationalpursuitswhereemployeesareoftenexposedtothemisfortunesofotherswhich
mayinthementallyunstableevokepreciselythesymptomswhichthisclaimantsuffered.He
concluded,Inaneramarkedbyexamplesofoverburdeningofsociallydesirableprogramswith
resultantcurtailmentordestructionofsuchprograms,arealisticassessmentofimpactofdoctrine
isimperative.Anoverburdeningofthecompensationsystembyinjudiciousandopenended
expansionofcompensationbenefits,especiallyforcostly,prolonged,andoftenonlyameliorative
psychiatriccare,cannotbutthreatenitssoundnessorthatoftheenterprisesuponwhichit
depends.Whatistheconcernhere?

11.4SummaryandExercises

Summary
Anagentisonewhoactsonbehalfofanother.Thelawrecognizesseveraltypesofagents,including
(1)thegeneralagent,onewhopossessesauthoritytocarryoutabroadrangeoftransactionsinthe
nameofandonbehalfoftheprincipal(2)thespecialagent,onewithauthoritytoactonlyina
specificallydesignatedinstanceorsetoftransactions(3)theagentwhoseagencyiscoupledwithan
interest,onewhohasapropertyinterestinadditiontoauthoritytoactasanagent(4)the
subagent,oneappointedbyanagentwithauthoritytodosoand(5)theservant(employeein
modernEnglish),onewhosephysicalconductissubjecttocontroloftheprincipal.

Aservantshouldbedistinguishedfromanindependentcontractor,whoseworkisnotsubjecttothe
controloftheprincipal.Thedifferenceisimportantforpurposesoftaxation,workers
compensation,andliabilityinsurance.

Theagencyrelationshipisusuallycreatedbycontract,andsometimesgovernedbytheStatuteof
Frauds,butsomeagenciesarecreatedbyoperationoflaw.

Anagentoweshisprincipalthehighestdutyofloyalty,thatofafiduciary.Theagentmustavoid
selfdealing,preserveconfidentialinformation,performwithskillandcare,conducthispersonal
lifesoasnottobringdisreputeonthebusinessforwhichheactsasagent,keepandrender
accounts,andgiveappropriateinformationtotheprincipal.

Althoughtheprincipalisnottheagentsfiduciary,theprincipaldoeshavecertainobligations
towardtheagentforexample,torefrainfrominterferingwiththeagentsworkandtoindemnify.
Theemployerscommonlawtortliabilitytowardhisemployeeshasbeenreplacedbytheworkers
compensationsystem,underwhichtheemployeegivesuptherighttosuefordamagesinreturnfor
promptpaymentofmedicalandjoblossexpenses.Injuriesmusthavebeenworkrelatedandthe
injuredpersonmusthavebeenanemployee.Courtstodayallowawardsforpsychologicaltrauma
intheabsenceofphysicalinjury.

EXERCISES
1. Awomanwasinvolvedinanautomobileaccidentthatresultedinthedeathofapassengerinher
car.Aftershewaschargedwithmanslaughter,herattorneyagreedtoworkwithherinsurance
companysclaimsadjusterinhandlingthecase.Asaresultoftheagreement,thewomangavea

statementabouttheaccidenttotheclaimsadjuster.Whentheprosecutingattorneydemandedto
seethestatement,thewomansattorneyrefusedonthegroundsthattheclaimsadjusterwashis
theattorneysagent,andthereforethestatementwascoveredbytheattorneyclient
privilege.Istheattorneycorrect?Why?
2. Alocalhoteloperatedunderafranchiseagreementwithamajorhotelchain.Severalcustomers
chargedthebanquetdirectorofthelocalhotelwithmisconductandharassment.Theysuedthe
hotelchain(thefranchisor)foractscommittedbythelocalhotel(thefranchisee),claimingthat
thefranchiseewastheagentofthefranchisor.Isanagencycreatedunderthesecircumstances?
Why?
3. Aprincipalhiredamortgagebankingfirmtoobtainaloancommitmentof$10,000,000froman
insurancecompanyfortheconstructionofashoppingcenter.Thefirmwaspromisedafeeof
$50,000forobtainingthecommitment.Thefirmwassuccessfulinarrangingfortheloan,andthe
insurancecompany,withouttheprincipalsknowledge,agreedtopaythefirmafindersfee.The
principalthenrefusedtopaythefirmthepromised$50,000,andthefirmbroughtsuittorecover
thefee.Maythefirmrecoverthefee?Why?
4. BasedonhisexperienceworkingfortheCIA,aformerCIAagentpublishedabookaboutcertain
CIAactivitiesinSouthVietnam.TheCIAdidnotapproveofthepublicationofthebookalthough,
asaconditionofhisemployment,theagenthadagreednottopublishanyinformationrelatingto
theCIAwithoutspecificapprovaloftheagency.Thegovernmentbroughtsuitagainsttheagent,
claimingthatalltheagentsprofitsfrompublishingthebookshouldgotothegovernment.
Assumingthatthegovernmentsufferedonlynominaldamagesbecausetheagentpublishedno
classifiedinformation,willthegovernmentprevail?Why?
5. Upongraduationfromcollege,Edisonwashiredbyamajorchemicalcompany.Duringthetime
whenhewasemployedbythecompany,Edisondiscoveredasyntheticoilthatcouldbe
manufacturedataverylowcost.Whatrights,ifany,doesEdisonsemployerhavetothe
discovery?Why?
6. AUScompanyhiredMacDonaldtoserveasitsresidentagentinBolivia.MacDonaldenteredintoa
contracttosellcarstoBoliviaandpersonallyguaranteedperformanceofthecontractasrequired
byBolivianlaw.ThecarsdeliveredtoBoliviaweredefective,andBoliviarecoveredajudgmentof
$83,000fromMacDonald.MusttheUScompanyreimburseMacDonaldforthisamount?Explain.
7. AccordingtothelateProfessorWilliamL.Prosser,Thetheoryunderlyingtheworkmens
compensationactsneverhasbeenstatedbetterthanintheoldcampaignslogan,Thecostofthe
productshouldbearthebloodoftheworkman.Whatismeantbythisstatement?
8. AnemployeeinaRhodeIslandfoundryinsertedtwocoinsinacoinoperatedcoffeemachinein
thecompanycafeteria.Onecoinstuckinthemachine,andtheworkerproceededtowhackthe
machinewithhisrightarm.Thearmstruckagratenearthemachine,rupturingthebicepsmuscle
andcausinga10percentlossintheuseofthearm.Istheworkerentitledtoworkers
compensation?Explain.
9. PaulsonengagedArthurtosellPaulsrestored1948PackardconvertibletoByersfor$23,000.A
fewdayslater,ArthursawanadvertisementshowingthatCollectorwaswillingtopay$30,000for
a1948Packardconvertibleinrestoredcondition.ArthursoldthecartoByers,andsubsequently
PaulsonlearnedofCollectorsinterest.Whatrights,ifany,hasPaulsonagainstArthur?

SELFTESTQUESTIONS
1.

Onewhohasauthoritytoactonlyinaspecificallydesignatedinstanceorinaspecifically
designatedsetoftransactionsiscalled
a. asubagent
b. ageneralagent
c. aspecialagent
d. noneoftheabove

2.

Anagencyrelationshipmaybecreatedby
a. contract
b. operationoflaw
c. anoralagreement
d. alloftheabove

3.

Anagentsdutytotheprincipalincludes
a. thedutytoindemnify
b. thedutytowarnofspecialdangers
c. thedutytoavoidselfdealing
d. alloftheabove

4.

Apersonwhoseworkisnotsubjecttothecontroloftheprincipal,butwhoarrangesto
performajobforhimiscalled
a. asubagent
b. aservant
c. aspecialagent
d. anindependentcontractor

5.

Anemployersliabilityforemployeesonthejobinjuriesisgenerallygovernedby
a. tortlaw
b. theworkerscompensationsystem
c. SocialSecurity
d. noneoftheabove

SELFTESTANSWERS
1.c
2.d
3.c
4.d
5.b

Previous
Chapter

TableofContents

NextChapter