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Business Associations/Corporations
Wayne State University Law School
Davidoff, Steven M.


THEORY OF THE FIRM: nexus of contracts organized to lower transaction costs to a tolerable level.
Risk and Return

Expected Return = Possible return ($) x Probability (%) + Possible return ($) x Probability (%)
*Probability must equal 100%

i. Risk: degree to which the various possible outcomes will differ from the expected returns
1. risk can be minimized by diversifying portfolio

Organizational Forms

a. Sole proprietorship: One owner
b. Partnership: Joint ownership w/ shared management; 2 people come together that agree together contractually or come together by state’s default rules
i. Liability
1. limited: general partners are liable (confines liability w/in partnership itself)
2. general: partners are jointly and severally liable
c. Corporation: range in size from large publicly-traded companies to small, closely-held businesses
d. Hybrid Entities: blend partnership and corporate rules
i. LLC: closed corporations (for tax reasons—shielded from liability, but get tax breaks)
ii. LLP: form of LLC, but pure partnership (most state laws require law firms to be partnerships)



Agency Law: set of std form rules that provide a backdrop for K’s or mkt transactions among team members and between the firm and outsiders

fiduciary duty – contractual device that obliges fiduciary to act in best interest of his client or beneficiary and to refrain from self-interested behavior not specifically allowed by the employment K (not explicit in law); agent must put principal’s interest above his own

Principal-Agent Relationship

Principal ——————————à Agent

(Employer) ß—(Fiduciary Duty)—— (Employee)

Default: Agents owe a lot of duties to principal; principals owe almost no duties to à if agents want differently, they should K

Restatement § 1 [513]: Agency: fiduciary relation from manifestation of consent by one person to another that the other shall act on his behalf and subject to his control (àno consideration req’d)

Restatement § 13 [515]: agent is a fiduciary for matters within the scope of his agency.
Restatement § 387 [520]: Unless otherwise agreed, agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.

How to Leave: Fiduciary Duty and the Departing Employee (when does fiduciary duty end?):

BRIGHT LINE RULE: you can’t take the [customer/pricing] list, but if you remember it, you can use it.
COMMUNITY COUNSELLING SERVICE, INC. v. REILLY (1963, p.16): D employee (campaign mgr) cannot use secrets learned while working for P employer against P while still working for P b/c owes a fiduciary duty; ruling for P.

i. Issue: whether ee’s actions of soliciting er’s clients before termination was consistent w/ ee’s fiduciary duties owed to er? à no, b/c ee must put er’s interests first and cannot withhold info which would be useful to the er in order to protect ee’s own interests
ii. Agent under fiduciary duty: owes loyalty, duty of candor, duty to inform er of updates
1. “Employment as a sales representative demands of the employee the highest duty of loyalty.”
2. “Until the employment relationship is finally severed however, the employee must prefer the interests of his employer to his own.” [18] iii. Post-employment non-compete: A former ee, after termination of employment, may compete w/ his former er
1. EXCEPT: he may not use confidential information or trade secrets obtained from the former er, appropriating, in effect, to his competitive advantage what rightfully belongs to his er
iv. à avoid problem by soliciting termination or sign non-compete agreement

HAMBURGER v. HAMBURGER (1995, p.19): fiduciary duty ends when relationship ends – can K if company wants to change rules; ee allowed to use publicly available information, general knowledge, experience, memory and skill after resignation

i. P (Ted, er) cannot collect from D (Dav

y already know background of er embezzler)
3. Prof disagrees—today, whistleblowers have more protection under SOX
a. Not just public policy issue, duty as agent includes duy of candor
b. RST 381 – Duty to Give Information (p.520): unless otherwise agreed, agent is subject to a duty to use reasonable efforts to give his principal info which is relevant to affairs entrusted to him which, as the agent has notice, the principal would desire to have and which can be communicated w/o violating a superior duty to a 3rd person
iii. Issue #2: Breach of Employment K à Whether P had an implied or oral employment K that he would not be fired w/o good cause despite his at-will employment K?—Yes.
1. Freedom of K to enter employment at-will K’s—will be enforced; at-will employment can be trumped by other employment security agmts, from which both parties may benefit, not just ee (as in this case)
2. employments K’s to be considered along with other factors
a. acts and conduct of parties, interpreted w/ other circumstances (er had 7-step policy re termination, but was not followed here)
b. trier of fact can determine ee’s reasonable reliance
c. P provided valuable consideration by signing non-compete
3. BUT, Labor Code §2922: employment having no specified term may be terminated at the will of either party on notice to the other
a. à ct may be reaching to take P’s side here (says there was a K, even though there is no specified term)
4. at-will employment is efficient (ordering rts)
Issue #3: Breach of Implied covenant of good faith and fair dealing—if ct found tort damages for breach of K here, floodgates would open and at-will employment K’s would be implicated