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Business Organizations Outline 2 - Tort Liability, Apparent Agency, Scope of Employment, Fiduciary Obligation of Agents, Study notes of Commercial Law

University of Florida (UF)Commercial Law

Business Organizations Outline for Law School. Exam guide for Business Organizations at the University of Florida Levin College of Law specifically. In this section: Tort Liability, Apparent Agency, Scope of Employment, Fiduciary Obligation of Agents

Typology: Study notes

2011/2012

Uploaded on 04/27/2012

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Business'Organizations'Outline'

' ' us.docsity.com'

Humble'Oil'&'Refining'Co.'v.'Martin'

Facts:'

• Persons'were'injured'when'unoccupied'automobile'left'for'service'at'Humble'filling'station'

rolled'off'premises'and'struck'persons'

• Schneider'(station'operator)'ran'the'gas'station'and'his'employee,'Manis'was'an'employeeE'

who'was'the'only'employee'present'at'the'time'

Issue:'

Whether'Schneider'(who'operated'the'store)'should'be'held'liable'instead'of'Humble''

Findings:'

• The'court'found'numerous'pieces'of'evidence'that'amounted'to'a'masterEservant'

relationship,'thus'Humble'was'correctly'held'to'be'liable.'

• Evidence'examples:''

o Required(Schneider(to(do(many(things((make(reports,(pay(operational(

expenses,(hours(of(operation)(

o Advertising,'equipment,'location'controlled'by'Humble'

o Title'of'occupancy'terminable'at'will'of'Humble'

v Notes:(

• Does(this(satisfy(agency(theory?(Yes.(

o There'is'consentE'through'the'contract'(easy'to'establish)'

o Schneider'is'acting'on'behalf'of'Humbleà'agreeing'to'use'Humble’s'signage,'abide'

by'his'restrictions'

o Humble'is'exerting'control'over'Schneider.'

• How(would(you(argue(that(Humble(is(not(liable?((these(are(the(things(Lin(wants(us(to(

do(on(the(examF(how(is(each(set(of(facts(distinguishable,(how(can(you(argue(both(

sides?)(

o He'was'fixing'the'car'at'the'time'of'the'accidentà'Humble'Oil'is'only'liable'for'the'

parts'they'control,'this'was'outside'of'Humble’s'control'

o There'is'something'else'going'on'outside'the'scope'(two'separate'businesses'here'

Hoover'v.'Sun'Oil'Company'

Facts:'

• Fire'was'started'at'Hoover’s'car'by'alleged'negligence'of'Barone’s'(operator'of'station)'

employee'John'

• Hoover'brought'suit'against'John,'Barone'and'Sun'Oil'Company'(owner)'

Findings:'

Discover Study notes of Commercial Law University of Florida (UF)

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Humble Oil & Refining Co. v. Martin Facts:

Persons were injured when unoccupied automobile left for service at Humble filling station rolled off premises and struck persons
Schneider (station operator) ran the gas station and his employee, Manis was an employee-‐ who was the only employee present at the time Issue: Whether Schneider (who operated the store) should be held liable instead of Humble Findings:
The court found numerous pieces of evidence that amounted to a master-‐servant relationship, thus Humble was correctly held to be liable.
Evidence examples: o Required Schneider to do many things (make reports, pay operational expenses, hours of operation) o Advertising, equipment, location controlled by Humble o Title of occupancy terminable at will of Humble v Notes:
Does this satisfy agency theory? Yes. o There is consent-‐ through the contract (easy to establish) o Schneider is acting on behalf of Humbleà agreeing to use Humble’s signage, abide by his restrictions o Humble is exerting control over Schneider.
How would you argue that Humble is not liable? (these are the things Lin wants us to do on the exam-‐ how is each set of facts distinguishable, how can you argue both sides?) o He was fixing the car at the time of the accidentà Humble Oil is only liable for the parts they control, this was outside of Humble’s control o There is something else going on outside the scope (two separate businesses here Hoover v. Sun Oil Company Facts:
Fire was started at Hoover’s car by alleged negligence of Barone’s (operator of station) employee John
Hoover brought suit against John, Barone and Sun Oil Company (owner) Findings:

Barone operated business pursuant to a lease which was terminable by either party
Station and almost all of its equipment was owned by Sun
Dealer’s agreement-‐ Barone was to purchase petroleum products from Sun and Sun was to loan necessary equipment and advertising materials
Station had large sign with Sunoco name, advertising was under Sunoco and employees uniforms had logo
Weekly visits from Sun sales rep (Peterson-‐rep-‐ offered advice but Barone was under no obligation to follow advice)
Barone-‐ assumed overall risk of profit/loss, determined hours of operation, identity and pay scale of employees, his name was posted as proprietor
Court found that the findings made it clear that Barone was an independent contractor: o The lease contract and dealer’s agreement fail to establish any relationship other than L/T and independent contractor o Test to be applied : whether the oil company has retained the right to control the details of the day-‐to-‐day operation of the service station; control or influence over results alone being viewed as insufficient v Notes:
Which factors in this case tipped the scale in Hoover’s favor? o Setting the hours § Not a conclusive factor-‐ malls set hours, but that doesn’t make the stores in mall their agents o Product § Barone had a little more flexibility in regards to what he could sell o Pay scale for employees § Barone had this control o Mutual opt out of contract § In the Hoover case, only Hoover could terminate § This connotes more of a level playing field b/t Barone and Sun Oil Company o Suggestions § Barone-‐ discretionary § Humble-‐mandatory
On a whole all of these factors contribute to Barone being found to be an independent contractor
What arguments would you make that Barone is not an independent contractor? o Sun controlled the petroleum and this was what caused the accident o Sun oil outfits and signs-‐(Apparent agency-‐ the principal is “holding out”) § There is some notice/disclosure issues
If you want to limit liability-‐ o You can hire independent contractors, but this might not be the best thing to do for your company image b/c you can’t control the I.C. and therefore can’t control your reputation

o Plaintiff listed several provisions and rules which he said satisfied the control test and established the principal-‐agent relationship (p. 50) § Licensee did control architecture, signage, fees/credit cards, promote trade name § Licensor did not control maintenance, hiring and firing of employees, no profit sharing (Licensee controlled these things) o The court found this agreement was a franchise contract à the court also found the regulatory provisions in the agreement did not give the Holiday Inn “control or right to control the methods or details of doings the work.”-‐ No control over the day-‐to-‐day operation o So, no principal-‐agent or master-‐servant relationship

Vandemark -‐ o Some courts construe franchiser liability narrowly and find that the key question is whether or not the franchisor exercised control over the alleged “instrumentality” that caused the harm (i.e. whether they had control over security measures in a rape case) o Other courts seem to only apply the “right to control the daily operations” test which is broader in scope v Notes:
How does this case reconcile with the two gas/oil cases? o It has to do with the control over the “day-‐to-‐day operations”
Which type of authority is here? o It would be apparent authority, whether Holiday Inn held out Betsy-‐Lin as their agent
What is the benefit of Holiday Inn holding out Betsy Lin as their corporation? o That is how they make a lot of their money (reputational benefits for Holiday Inn) o You also get a lot of synergies in terms of doing things in bulk (i.e. buying tons of sheets)
If you were staying at a hotel, would it change your mind knowing the hotel was owned by the franchisor or the franchisee? o Most third parties do not care. So who should bear the risk? The franchisor or the franchisee

A. Tort Liability and Apparent Agency

Miller v. McDonald’s, Corp. Facts:

Miller sought damages from McDonald’s Corp. for injuries she suffered when she bit into a sapphire stone in her Big Mac, at the restaurant 3K owned and operated o The License Agreement described the way in which 3K was to operate the restaurant in considerable detail

§ Hours of operation § Employees appearance § Only could sell food/beverages designated by McDonald’s § McDonald’s periodically sent field consultants to the restaurant to inspect its operations § Failure to comply with the agreed standards could result in loss of the franchise

Despite these instructions, the Agreement provided that 3K was not an agent of defendants, but was rather an independent contractor
To the plaintiff it appeared to be owned and operated by McDonalds and she went to the restaurant based on this belief Rule : The agency relationship that would make defendant vicariously liable for 3K’s negligence requires that defendant have the right to control the method by which 3k performed its obligations under the Agreement Findings:
Court believed a jury could find McDonald’s retained sufficient control over 3K’s daily operations that an actual agency relationship existed
3K was apparent agent of McDonalds à o Crucial issues: § Whether the putative principal held the third party out as an agent, and § Whether the plaintiff relied on that holding out § Actual agency because McDonalds had the right to control the food, and this was the precise part of business that caused the harm to the plaintiff v Notes:
How does this case reconcile with the previous cases (gas station and hotel)? o Most liability cases turns on the issue of control o Absent enforcement of control, McDonald’s could still meet the control element because they had the “ability and intent” to control
How would you argue for the other side? o There are signs that indicate it is owned by a franchisee (not dispositive) o Independent Contractor k (also not dispositive, it depends on the parties actions) o If you are McDonald’s you should also require that the franchisee buy insurance o Could argue that it is was the employee who messed up in this case, we don’t control HR decisions, the franchisee dictates those decisions § The franchisor does not want to dictate HR decisions b/c it is an expansion of liability

B. Scope of Employment

Ira S. Bushey & Sons, Inc. v. United States

§ The screening process to be in the U.S. Coast Guard is a lot more rigorous than the screening process to get a job in the other cases § The more rigorous you are in the screening process, the more liable you will be for the employee’s actions ( however you will also be reducing your liability by making sure you have better employees)

Some practical tips for principals: o Have standards that are suggestive v. required o If you are a franchisor, you want to make sure your franchisee gets insurance (put in agreement), and also put in an indemnity provision into agreement (not dispositive-‐ but evidence) o Independent consultant for training o Be careful of the amount of oversight you have o Mutual opt out clause (shows less control) o Language that says “not a principal-‐agent relationship” (once again this is not dispositive)

I. Fiduciary Obligation of Agents

RS 8.01 General Fiduciary Principle-‐ an agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship RS 8.02 Material Benefit -‐ (duty of loyalty) an agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position RS 8.03 Duty not to Act as or on Behalf of an Adverse Party RS 8.04 Duty not to Compete with the Principal RS 8.05 Duty not to use Principal’s Property or Confidential Information for Agent’s Own Purposes or Those of a Third party RS 8.06 Conduct by an Agent does not breach a duty if Principal Consents to it (agent must act in good faith and disclose all material facts) RS 8.07 Duty of Care, Competence and Diligence

Standard -‐ Duty to exercise care, competence, and diligence normally exercised by agents in similar circumstances
Special skills/ knowledge/circumstances can be taken into account RS 8.09 Duty to Act Only Within Scope of Actual Authority

RS 8.10 Duty of Good Conduct RS 8.11 Duty to Provide Information Principal’s Dutiesà to indemnify agent and to deal with agent fairly and in good faith RS 8.14-‐ 15

A. Duties During Agency

Reading v. Regem Facts:

Reading (plaintiff) was a soldier who while in his uniform, accompanied a lorry so that the lorry could pass the civilian police officers (smuggling) Issue: Whether or not the Crown is entitled to the money Findings:
Rule: if a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies, are the real cause of his obtaining the money, than he is accountable for it to his master o The uniform of the Crown and the position of the P as a servant of the Crown were the only reasons why he was able to get this money, and that is sufficient to make him liable to hand it over to the Crown ( this is back to issue of apparent agency)
RS 8.02 Material Benefit -‐ an agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position (Unjust Enrichment Theory) v Notes:
What would the argument be for Reading? o He didn’t cost the Crown anything in terms of money o He was outside the scope of his employment (so he shielded the Crown from both liability and benefit) o Industry practice and custom (times were different back then) General Automotive Manufacturing Co. v. Singer Facts:

Town & Country House & Home Service, Inc. v. Newbery Facts:

Newbery was employed by Town & Country and then started their own company
T & C wants to stop them from engaging in the same business as P, from soliciting its customers, and using their business methods (P said there was a breach of confidential relationship resulting in the taking of trade secrets) Findings:
The only trade secret which could be involved in this case was P’s list of customers o Testimony showed that P’s customers were not and could not be obtained merely by looking up their names or going to advertised locations, but had to be screened from among many other housewives who did not want their services (lengthy process of locating neighborhoods and calling each home) v Notes :
- The employees in this case grabbed some trade secrets and left
- If they just took method for finding clients and not the client listà this probably would not rise to the level of a trade secret o But-‐for the principal-‐agent relationship, they would not have had the list
- What arguments could you make on the break-‐away groups behalf? o It is the customer’s choice
- What if the Bucs got the Dolphins assistant manager and the Dolphins sued the Bucs assistant manager for taking trade secrets (know methods of coaching)? o A lot has to do with custom and practice within the industry HP Articles: First Article à
HP chief executive (Mr. Hurd) was ousted for failing to disclose his use of company funds. o There were inaccurate expense reports that covered payments made to a woman (who was a contractor that helped with marketing for HP
The board urged Mr. Hurd to resign and eventually he agreed to do so. v Notes:
Argument for HP
As an employee of HP, Mr. Hurd had fiduciary obligations to HP during his employment
General Automotive-‐ duty to exercise good faith with disclosures made; fiduciary duty to act solely for the benefit of the principal (he was acting for his own benefit)

o “Singer was bound to the exercise of the utmost good faith and loyalty so that he did not act adversely to the interests of Automotive by serving or acquiring any private interest of his own”

RS 8.05 -‐ An agent has a duty not to use property of principal for the agent’s own purposes or those of a third party
HP should have put in a non-‐compete clause Second Article à
- HP filed a lawsuit against Mr. Hurd accusing Mr. Hurd of violating his severance agreement to protect HP’s confidential information by taking a job as co-‐president of Oracle-‐ an HP rival and partner
- There was no noncompete agreement
- Oracle recently acquired Sun Microsystems-‐ a longtime rival to HP v Notes :
Arguments for HP-‐ o Fiduciary Duty after you leave-‐ “Grabbing and Leaving” o Duty of loyalty-‐ an agent has a duty not to acquire a material benefit from a third party § Kickbacks, bribes, secret profits, farming out business, grabbing and leaving (situations when you see these problems pop up) o Severance moneyà was meant for him to not immediately find another job
Arguments for Hurd-‐ o The board strongly urged Hurd to resign-‐ this is distinguishable from other cases where employees have taken trade secrets from business and started own company (it is unreasonable to not allow Hurd to find new employment b/c there is some possibility he may know trade secrets without actual proof) o There was no non-‐compete agreement! o High-‐Tech Trade secrets-‐ can be protected with patents, trademark, copyrightà high-‐ tech industry o 13 th^ Amendment-‐ can’t force someone to work for you, but also cannot force someone not to work
What are some of the things HP could have done to protect themselves? o At the point of hiring-‐ (ex ante) § Should have put a non-‐compete in the contract - Why would we want to put this in if California is reluctant to enforce it? o B/c it is still helpful even if it is not determinative § Non-‐disclosure/non-‐inference-‐ highlight specific confidential information that can’t be disclosed

§ Promotions may make you a different type of agent (i.e. low-‐level employee to CEO)