I. The Law of Agency
a. Creation of the Agency Relationship
i. Definition: Rst. (2d) of Agency §1: “Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act.”
1. § 387 Default Rule: “Act solely for the benefit of P” in all areas connected to duty
2. §12: “An agent or apparent agent holds a power to alter the legal relations between the principal and third persons and between the principal and himself.”
3. The parties DO NOT need to even have the intent to create the agency relationship.
ii. Basile v. H&R Block, Inc. (PA 2000) H&R Block has a program where they allow customers to get instant tax returns. They get a fee from this, but most goes to the lending agency. Some customers were upset because they weren’t told that H&R Block benefited from the arrangement. The court found there was no agency relationship between the customers and H&R Block because H&R did not have the authority to act on behalf of the customers in taking the loans i.e. to actually alter the principle’s legal relations; instead they presented a package of options (other JSs came out differently)
b. Agent’s Fiduciary Duties to Principal
i. A principal’s duties to the agent include: performance of K obligations; good conduct; noninterference; cooperation; indemnification (under certain circumstances)
ii. An agent has the following major duties to the principal.
1. Duty of care § 379 – standard skills for the locality + any special skills
2. Duty of disclosure §381 – reasonable efforts to inform P of any relevant info about entrusted duties and affairs
3. Duty to obey §385 – all reasonable directions regarding the contracted duty
4. Duty to act within the scope of Authority §383
5. Duty of LOYALTY
a. This is the most important duty; duty to act “solely for the benefit of the principal in all matters connected with [the] agency.” §387
b. §388: “An agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.”
c. There are other parts of this duty including
i. Not to compete concerning agency subject matter §393
ii. Not to act or agree to act for someone with competing interests §394
iii. Can’t use info acquired while working against P, or for A’s own benefit §395
iv. Not to disclose confidential information, lists or trade secrets including after termination of the relationship. §396
iii. Food Lion, Inc. v. Capital Cities/ABC, Inc. (4th Cir. 1999) Two reporters from ABC News went under cover and got hired as workers at Food Lion. They filmed and broadcast meat packaging stuff. Food Lion sued for breach of duty of loyalty. The appeals court said that this was the kind of breach of duty of loyalty that was tortious under NC and SC law. They usually only allowed tort claims for this when the employee directly competed with their employers, misappropriate their profits or breach its confidences. The appeals court felt that this was close enough in that the interests of ABC and Food Lion were diametrically opposed. Not a sweeping holding, just having two jobs and not doing one well is not enough.
c. Principles of Attribution
i. Actual Authority
1. Rst. §7 – Authority is A’s power to affect the legal relations of P by acts done in accordance with P’s manifestations of consent to A
a. “manifestation of consent” – conduct that expresses will
b. Express and Implied authority – may spell out minute details, but most authority is implied
2. Castillo v. Case Farms of Ohio, Inc. (TX 1999) A group of migrant farm workers was promised jobs through a labor agency in Texas. The jobs were at a chicken farm in Ohio. When they got there the housing that they were provided was horrible to the point of almost being unlivable. The workers sued for the misrepresentation. The farm did not really defend the claims of poor housing, etc. They defended on the legal basis that they cannot be responsible for the representations of the labor agency because there was no agency relationship – it only hired the labor agency to recruit workers. The workers contended that that agency relationship was enough to do things “proper, usual, and necessary to exercise that authority.” Finding housing and transportation for the workers is part of recruiting. As this was done improperly and against the Agricultural Worker Protection Act, the farm was liable for the actions of its agent, the labor agency.
ii. Apparent Authority
1. Rst (2d) §8 “Apparent Authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestation to such third persons.” When T assigns X as his agent in negotiations with Y, X has apparent authority if T tells Y directly that X is his agent.
2. There are two key points to finding apparent authority:
a. The manifestation must come from the principal and received by the third party, although it may be through an intermediary; and,
b. The scope of the authority is dependant on the reasonable interpretation of this manifestation.
3. Apparent Authority can be the basis for liability in two situations:
a. Where persons appear to be agents, even though they do not qualify as such;
b. Where agents act beyond the scope of their actual authority.
c. Tort claims: §§219-220; K claims: §140(c), §161
4. Bethany Pharmacal Co. v. QVC, Inc. (7th Cir. 2001) Bethany tried to assert that Janis, a state employee had some type of apparent authority for QVC. The court did not agree. In order to be the basis for liability, the people must either appear to be agents, even though they are not, or they must be agents acting beyond their authority. In order for it to qualify under the appearance, the Principal must make a manifestation of their approval. This can be done by “written or spoken words or other conduct if the [principal] has notice that another will infer such consent or intention from the words or conduct.” QVC’s letters spelled out the procedure; Janis’ letters can’t create apparent authority.
d. Review of Agency Concepts
i. Chart O’ Liability
1. A’s liability – K: liable for all but disclosed P (§§ 320-22); Tort: generally for all (§343)
2. P’s Liability – K: for all if A has actual or apparent authority (§140); T: all within A’s scope of duty (§219), some torts without (§219(2)), not liable for independent contractors (§220)
3. Third Party’s liability – liable for all tort and most K, though can get out of some Ks if undisclosed P is someone they hate
ii. Krispy Kreme Case Study
1. Normally there will not be any vicarious liabilities assigned by courts to the franchisor because the control that is exhibited is about the product.
a. But specific training in an area increases franchisor’s chance of being liable; long detours by franchisee increase liability, short one’s increase P’s liability.
b. One thing that might influence this is that the franchisor and franchisee have opposing goals.
i. The franchisee is not acting for the benefit of the franchisor. They are trying to maximize profits.
ii. The franchisor wants to maximize revenue because their royalties are from sales, not profits.
2. There may be a difference in contract or tort law. If there is a contract dispute, there would be little chance of holding the K invalid. In the case of a tort with a third party, there may be more of a chance. In the case of external contract claims, it is possible that the third party may rely on certain circumstances to think that the franchisor might be backing up the franchisee
II. General Partnerships
a. RUPA v. UPA
i. Advantages of General Partnership: Simplicity, No Double Taxation
ii. UPA – Created in 1914. All states but LA have adopted.
iii. RUPA
1. Adopted by 2/3 of states. Created in 1997
2. Partnership is a separate entity RUPA §201(a)
3. Major changes from UPA
a. Partnership property is the property of the entity.
b. Partnerships do not dissolve on the departure of a single partner.
c. Partnerships can be merged or converted to limited partnerships.
b. Formation
i. RUPA §202(a) “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intended to form a partnership.”
1. Under §202 of RUPA to form a partnership you must have:
a. Two or more persons, “person” can be a legal entity
b. Carry on business
c. Co-owners (management)
d. For profit
ii. RUPA §202(c)(3) “A person who receives a share of the profits of a business is presumed to be a partner in the business.” The exceptions are when the profits are received as payment for rent or debt or salary, etc.
iii. Because there is no formal requirement to create a partnership, many problems occur when an inadvertent partnership is created.
1. Courts strive for fairness rather than doctrinal integrity because of the ease with which partnerships can be formed.
2. A strong indication of formation is when profits are received, but this is not the only indicating factor.
iv. Holmes v. Lerner (CA 1999) A partnership was formed even though there was no discussi
ermination of partnership
ii. Under RUPA, dissociation does not necessarily mean the partnership will wind up and terminate. It is possible to buy-out the dissociating partner.
1. Dissociation is discussed in RUPA Article 6.
a. §601 – P is dissociated for several reasons: express will, event in agreement, judicial order, expulsion, death, termination
b. §602 – dissociation is only wrongful if it breaks express provision in agreement
c. §603(a) – if diss leads to winding up, article 8 applies; if not, article 7
d. §603(b) – at diss, duty of loyalty and non-compete end; but 404b1 & 2 and (c) still apply for stuff occurring before diss
2. The Buyout option is discussed in RUPA Article 7.
a. §701 – (a) Partnership must buy out diss-P’s interest; (b) amount that would have been distributed to P at liquidation + interest between diss and bu-out
b. §702 – diss-P can still bind Partnership for some acts for 2 years; but diss-P is liable for those acts
3. Dissolution is discussed in RUPA Article 8.
a. §801 – Partnership is dissolved and must wind up for certain events: express will of all partners, ending of term, death in definite term + at least half vote, event that makes continuing unlawful, judicial determination
iii. Liquidation Rights
1. Liquidation may be forced in some instances, but RUPA was created, in part, to help continue partnership businesses in the case of a dissociating event.
2. Creel v. Lilly (MD 1999) wife of dead partner wanted to force liquidation because cannot know exactly the true value without liquidation. Court said liquidation is not required.
III. Hybrid Entities
a. Limited Liability Partnerships
i. General partnership which has registered with the state.
ii. New development- 1991.
iii. No personal liability.
1. Partial shield- no liability unless assigned by own wrongful conduct or participation in wrongful conduct of another partner in cases of tort, but not from contracts. (TX statute)
2. Full shield- available in some states no liability except assigned by own wrongful conduct or participation in wrongful conduct of another partner. (DE Statute)
b. Limited Partnerships
i. Rarely used anymore, once was the only option of hybrids.
ii. Creation – filing certification with state, RULPA §201
iii. General partner – same duties and liabilities as a partner in a general partnership, RULPA §§ 403-404
iv. Limited partner – can’t bind partnership, ULPA §302; no liability in tort or K, §303
c. Limited Liability Companies
i. History
1. New development- 1988
2. Main advantage is limited liability and pass-through taxation without requirements of S-corporation, ULLCA §303 (p594 of statutes)
3. Originally, tax treatment was decided on case-by-case basis, had to meet 2 of 4 Kintner Factors (from a case)
a. Centralized management;
b. Continuity of life;
c. Free transferability of ownership;
d. Limited liability.
4. In 1997, the LLC was able to check-the-box as to how it wanted to be treated for tax purposes.
ii. Structure
1. Although registered with the state, the main governing document is the operating agreement, similar to a partnership agreement.
a. If the Articles of organization (registered with state) conflict with operating agreement, for involved parties, the operating agreement rules, for third parties, the Articles rule, ULLCA §203(c)
2. Members are the participants in the company (like shareholders)
3. Managers can be employed to run the company
iii. Management
1. LLC’s can be either member managed or manager-managed as decided in the organizing documents, ULLCA §203
a. Member managed is the default rule, ULLCA §103(a)
