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Enterprise Organization
University of Michigan School of Law
Davis, Alicia J.

Prof. Davis, Winter 2010

Enterprise Organization

I. The Law of Agency___________________________________________

A. Creation of the Agency Relationship

(1) Generally – A is any person authorized to act on behalf of P; law of agency governs interactions among Ps, As, and Ts with whom As deal on behalf of Ps
(2) ASK:
a. Is there a principal agent relationship?
i. Look at consent, control, and benefit [see checklist below] ii. If no, there are no fiduciary duties/obligations and the analysis ends.
b. If yes, what are the fiduciary duties or obligations?
i. Note that the Restatement (Third) says that all default and common law duties attach; however, these can be contracted around.

Restatement 3d of Agency – Definition, Creation, and Attributes of Agency Relationships


Agency Defined

“Agency is the fiduciary relation which results from the manifestation of consent by one person (P) to another (A) that the other (A) shall act on his (P’s) behalf and subject to his (P’s) control, and consent by the other (A) so to act.”


Parties’ Labeling and Popular Usage Not Controlling

An agency relationship arises only when elements in §1.01 are present. Whether a relationship is characterized as agency in an agreement b/w parties or in the context of industry or popular usage is not controlling.



A person manifests assent or intention through written or spoken words or other conduct.

Economist’s Definition: Agent will use some degree of judgment for the principal’s benefit and the agent knows more about something than the principal. Potential problems include:
(1) Moral Hazard – party with discretion could act in a way that decreases the principal’s expected value.
a. To avoid this P should act to align A’s incentives with own – bonus tied to profits, stock options, etc.
(2) Risk Aversion – agents are less likely to take on risky projects because they usually only take on the downside without any benefits for taking a good risk

Agency costs = total expenditures to ameliorate moral hazard + any residual loss resulting when you weren’t able to eliminate moral hazard

3-Step Checklist: Has a P-A Relationship Been Created?


Both P and A must consent (this is the manifestation of assent as required by the Restatement
No contract/consideration is required as long as P’s conduct, reasonably interpreted, causes A to believe P wants A to act on P’s behalf (1.03 – manifestation)

Writing is not typically needed except in some cases where the Statute of Frauds applies (sale of land, etc.)
Can be implied by conduct, i.e. head nod; doesn’t need to be express
Objective standard! The subjective intent of P is not relevant à what’s important is what the agent reasonably believes.

Note that whether A acts according (or contrary) to P’s wishes does not bear on whether there’s a P/A relationship.


A must respond to the orders of P and can be penalized for failure to do so.

P must be able to change the conditions of the relationship – I’ll tell someone else and they’ll fire you isn’t enough, but I’ll fire you is.

A must be continually subject to P’s will.


A is acting primarily to benefit P (but agents can be paid)
This can be difficult to determine

EXAM – be aware of these three criteria; argue for/against existence – don’t necessarily take for granted that they are all there

Recap of Creation of Agency Relationship
Creating agency relationship does not require contract – P must consent, and A must consent to act on behalf of P and subject tot P’s control. This consent can be inferred from behavior, doesn’t need to be express.

U.S. v. Cyberheat (p. 3)

Facts: Affiliates drive traffic to Cuberheat’s website in exchange for commissions, 10 affiliates violated statute by sending unsolicited e-mails. Cyberheat didn’t screen affiliates, supplied them with the material that was in the e-mails, didn’t monitor, and didn’t terminate relationship after complaints.
Issue: Should Cyberheat be liable for the violations by the marketing affiliates? Is there a principal-agent relationship?
Holding: Issue of Material Fact existed as to whether Affiliates were Agents of Cyberheat.
Courts look to 3 factors in determining whether P-A relationship exists:

(1) P’s right to control the alleged agent

Affiliates could be defined as either (1) nonagents – this is just an arms length business transaction; (2) agents, but not employees – there was consent, control, and benefit; or (3) employees (and therefore agents) – hard to make the case that there is enough control over the physical conduct

(2) Alleged A’s duty to act primarily for the benefit of P
(3) Alleged A’s power to alter the legal relations of P.

AD: here, even if there’s an agency relationship, there isn’t enough physical control for tort liability to attach. Whether tort liability attaches is a matter of respondeat superior, so they would need to be classified as employees [see above].

B. Fiduciary Duties

Definition: FDs are legally enforceable norms of ethical behavior that compel the fiduciary to refrain from certain types of behavior (usually self-interested behavior); can sue for damages if breached.

Rstmt 3d of Agency §§8.01-15



General Fiduciary Principle

A has a fiduciary duty to act loyally for P’s benefit in all matters connected with the agency relationship. [DOL]



Material Benefit Arising Out of Position

A has a duty not to acquire a material benefit from a 3rd party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through A’s use of A’s position.


Acting As or on Behalf of an Adverse Party

A has a duty not to deal with the P as or on behalf of an adverse party in a transaction connected with the agency relationship



Throughout the duration of the relationship, A has a duty to refrain from competing with P and from taking action on behalf of or otherwise assisting P’s competitors.
During that time, A may take action, not otherwise wrongful, to prepare for competition after the termination of the relationship.


Use of Principal’s Property; Use of Confidential Information

A has a duty
(1) not to use P’s property for A’s own purposes or those of a third
party, and
(2) not to use or communicate confidential information of P for A’s
own purposes or those of a third party


Principal’s Consent

(1) Conduct that would otherwise breach 8.01-5 does not constitute a breach of A’s duties if P consents to the conduct, provided that
(a) in obtaining P’s consent, the agent
(i) acts in good faith,
(ii) discloses all material facts A knows, has reason to know, or
should know would reasonably affect P’s judgment unless P has
manifested that P already knows or does not wish to know such
(iii) otherwise deals fairly with the principal, and
(b) P’s consent concerns either a specific act/transaction, or acts or
transactions of a specific type that could reasonably be expected
to occur in the ordinary course of the agency relationship.
(2) An agent who acts for more than one principal in a transaction between or among them has a duty
(a) to deal in good faith with each P
(b) to disclose to each P
(i) the fact that A acts for the other P(s)
(ii) all other facts that A knows, or has reason to know, or should
know would reasonably affect P’s judgment unless P has

of Food Lion. The breach occurred at the time of application and at the time that they provided others with information about the business.

If they were only employees of Food Lion and gave an interview to Prime Time Live, would there have been a breach?

Hasn’t been a case on point, but it seems like they could still have been held liable for a breach of loyalty [note that this wouldn’t be whistle blowing] Videotaping also doesn’t matter. Breach occurs when the secret is revealed.

Prior to Food Lion: 3 circumstances under which employees could breach duty of loyalty

(1) employee directly competes with employer (on own or as agent of rival company)
(2) employee misappropriates employer’s profits, property, or business opportunities
(3) employee breaches employer’s confidences.

Here: didn’t do either of those 3 things, but breached duty of loyalty by promoting interests of one employer at the expense of the other.

Hotel Hypothetical
Owner/operator of hotel, owner is Embassy Suites, AD is operator with day-to-day control over the management/operations of the hotel property. Owner control includes final approval over budget, getting monthly financial statements, veto power over long-term hiring decisions, etc. Courts have held that this is an agency relationship. Price point competitor across the street is also operated by AD.
(1) Is there a breach of the duty of loyalty? No – as long as A obtains the consent of P.
(2) There is, however, still an inherent conflict of interest with the duty to provide info to each P.

Best Way to Handle a Situation where A wants to work for Competing Ps

It doesn’t matter which P you have first – same duty to all principals
Once you take on a fiduciary duty, you must fulfill your responsibility and abide by it even to your own detriment.

Conflicts between 8.05 (don’t disclose confidential information) and 8.11 (disclose everything material)

Deal with the conflict with a specific agreement – fiduciary duties are gap-fillers for where parties haven’t explicitly dealt with something. In this type of situation, you’d get a contract with what information must be disclosed, what information must be kept.
Sophisticated parties should have agreements spelling out duties, and Rstmt fiduciary duties fill the gaps (even the best planner can’t plan for everything).

Agent has an affirmative duty to disclose any information that principal may think is material

After agency relationship is terminated: A may compete with P, use general info from P he did not gain in course of agency relationship, but cannot use/disclose trade secrets or other confidential info. Non-compete agreements are usually enforceable if reasonable in time/geographical scope.
2. Principal’s Fiduciary Duties to Agent (Inward Looking)

Principal’s primary duties include the performance of contract obligations, good faith and fair dealing, and indemnification [see chart]. Can be contracted around.

C. Principles of Attribution (Outward Looking)

Generally, P can be held liable for torts of As and be required to fulfill contracts entered into by As (i.e. As can bind Ps).

Rationale: we need A to be able to bind and P to be held liable for modern commerce to work. A can accomplish far more than P can alone. A as extension of P. A also needs some independence to be effective à P liable not only for things P told A to do, but also for things P did not tell A to do.
If P is getting benefit of A’s work, then P should also bear costs of A’s work.

Restatement §1.01, official comment
The chief justifications for the principal’s accountability for the agent’s