Business Organization

2 June

• Right now we're dealing with key concepts, not so much that they'll turn up on the exam, but that they underly everything that will.
• The triangle is key: Principal has duties to the third party, and vice-vera. Principal has duties to the Agent, and vice-versa. Agent has duty to 3rd party, but the third party goes to the principal if there are troubles, not the agent.
• Three elements that the court looks for in the agency relationship
  1. Consent
  2. Control (this is the focus of CyberHeat
  3. Benefit
• Food Lion: the duty of loyalty. (remember also that there can be whistleblower exceptions)
• So. Actual authority, apparent authority, and vicarious liability: the three grounds for attribution.
• Actual Authority: Restatement (Third) § 2.01: the court looks at the agent's reasonable belief. There are two flavors, related to the scope of authority:
  1. Express
  2. Implied
• Case Farms
  So, because Case Farms has the worst possible job, they are recruiting all over the place: Texas and Florida. And this was being done by ATC-- ATC found candidates and hired them. They were still employees of ATC when they got to Ohio.

  But of course, the actual conditions they encounter (provided by ATC) are way worse than what ATC promised. So they are recruited by ATC, hired by ATC, moved to Ohio by ATC, housed and fed by ATC, and yet they bring a claim against Case Farms.

  Why? Probably ATC doesn't have much money. Agency is often about finding the deeper pocket. ATC is the agent. So the employees are agents of ATC and therefore indirectly of Case Farms. How do we get there? It's a control issue. ATC isn't doing the job for itself: it's doing that job for Case Farms. It's not like just a temp agency farming employees out all over the place.

  So here, and this is unusual, the principal is being held liable for the agent's tort, even though it's not an employee relationship. That's because Case's relationship with ATC implies the authority to do all the things they did (hire people, transport them, etc.). But was this implied authority to commit a tort? Maybe so, because the economic position implies that conditions would be awful (and it's impossible for ATC to do this work without breaking the law).

  So maybe this is like Cyberheat, except that at least there, the principal expressly prohibited breaking the CAN SPAM law. And here, the statute is AWPA. So Case knew (because it was hard to get workers) that conditions would be bad, so they're kind of ratifying what ATC does.

• See § 7.03: principal's liability for an agent's conduct. § 7.03(1)(a) is pretty much what Case Farms seems to be: the tort is committed with actual authority.
• So vicarious liability is mostly about the unauthorized torts of the agent, but the authorized ones can get you also.
• Power vs. Authority: you might have the power to do something, but that doesn't mean you're authorized to do it.
• Apparent authority is when the agent has the power to do something (because the third party thinks the agent is authorized, e.g.), but not the authorization. See § 2.03: note that the definition does not include the principal's point of view. Why is it fair to hold the principal responsible? Because the principal has to have manifested to the third party to such an extent that the third party reasonably believes there's authorization. It's basically a fairness issue: we don't want 3rd parties always to have to go back to the principal every time they think there might be an agency relationship-- we want agents to be able to act on the behalf of principals.
• Appointing someone to a position creates apparent authority. You see this with partnership issues, officers of corporations, etc.
• Apparent authority also comes in two flavors:
  1. Person appears to be an agent, but is not
  2. Person is an agent, but exceeds their authority
• How does authority get terminated?
  • Actual Authority: either the principal or the agent can terminate it (agency requires the consent of both). Now they may have a contract, and terminating the relationship might be a breach of that contract, but no specific performance here. See § 3.06 for a list of ways the relationship might end.
  • Apparent Authority: this can persist (obviously) even though actual authority has ceased. It is terminated when it's no longer reasonable for the 3rd party to believe that the relationship exists (i.e., a manifestation by the principal). See § 3.11.
  • What is the scope of apparent authority? It's what the 3rd party reasonably believes it to be.
  • Note that just because the 3rd party can go after the principal doesn't mean the principal can't sue the agent. Of course, the latter probably doesn't have much money.
  • Courts generally try to protect 3rd parties acting in good faith.
  • 3rd parties doesn't have to rely on an agent's representation to their detriment (that would be estoppel). Apparent authority is enough to get attribution: detrimental reliance isn't an absolutely necessary element.
  • But sometimes the principal hasn't communicated anything to the 3rd party, and perhaps has not even been disclosed. That's the Beerhouse case: why is the principal liable? Because if you don't, principals will always claim there were secret limitations on the scope of authority-- that way they'll get the benefit and the control, but not the liability.
  • See also § 1.05(2): disclosed, undisclosed, and unidentified principals.
  • Bethany Pharmacal
    Janis just goes completely rogue. She doesn't work for QVC or NTC, but rather the IL DCCA. She's pretty awesomely irresponsible, and then the Bethany guy goes way overboard buying creme.

    There was nothing that made Janis QVC's apparent agent. In fact, QVC was pretty clear about all of this stuff. Janis's manifestations can't create apparent authority that makes QVC liable.

    Even if you think she's got some authority and she's exceeding its scope, QVC terminated that authority by sending the letter saying that only they could pick the winners.

  • The pest control problem (1-2, p. 31)
    "By accepting this fee you aggree to waive the arbitration fee." What a goofy approach. Plus, they're not acting in good faith: they renew the contract because they are mad, and smuggle these new terms in-- as soon as the check is cashed, they sue.

    So who, if anyone, accepted the contract on behalf of Cook's? Did that person have actual authority? Probably not. She can probably accept the form contract, but not negotiate terms. So this is a scope problem-- she is an agent of some sort.

    Is it reasonable for the clients to believe that she can do this? Well, shouldn't Cook's have taken steps to ensure that the amended contract wasn't accepted?

    So the Rebars are gaming the system, but Cook's leaves themselves open to it. In court, this is probably a question of facts: how bad were the Cook's folks, and how shifty were the Rebars?

  • Respondeat Superior. There used to be a difference between master/servant and principal/non-employee-agent relationships. But that got taken away with R2A.
  • There are good reasons for vicarious liability: employers have control over their employees.
  • Ware v. Timmons
    This really shouldn't be a hard case for anyone who understands vicarious liability. Was the doctor a principal (as a non-employer supervisor)? No. A supervisor who is not an employer isn't liable. You could claim a supervisor is negligent, but this is a claim that the supervisor did just fine, but the nurse's tort makes him liable.

    So is there control here? Over the activity, but probably not over the creation of the relationship. Consent is also weak: surgical teams are just assigned. And the supervisor isn't really benefiting from the relationship: the hospital is.

    We've really got a pretty weak case here, but yet there is a dissent.

4 June

• Remember the difference between power and authority: you can have one without the other.
• Note that for apparent authority, a manifestation must come from the principal to the 3rd party, but it need not be directly from the principal.
• An employee is distinguished from a non-employee or an independent contractor for the purposes of vicarious liability.
• R3A § 6.01: agent for disclosed principal, parties to contract.
• § 1.04(2)(a): disclosed principal. (2)(c) is unidentified principal; (2)(b) is undisclosed.
• Who is party to a contract, principal or agent? The R3A specifies, based on whether the principal is disclosed, undisclosed, or unidentified.
• § 7.01: agents are liable for their own torts.
• § 7.02: an agents breach of duty to a principal is not an independent basis for the agent's tort liability to a third party. The principal can sue, and the third party can sue the principal, but the third party can't sue the agent.
• § 7.03: principal's liability to a third party. (2) is vicarious liability (respondeat superior is (a), and torts under apparent authority is (b)).
• Sections 6 and 7 will recur for us, and they're very consistent with the UPA, e.g., and the Delaware corporation statutes.
• An employee is an agent where the principal has the ability to control the manner in which work is performed.
• So. Krispy Kreme. They're pretty controlling, they derive benefit, and they consent to franchisees representing themselves as ambassadors of thr Krispy Kreme product. But it works the other way too, at least part of the time. It's hard, sometimes, for courts to determine whether there's an agency relationship, and who is the principal vs. who is the agent.

  Courts are quick to find an agency relationship when there's an innocent 3rd party's interests at stake, but less so when it's a dispute between a putative agent and the principal.

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• Partnerships are the default business organization for 2 or more people on a business venture. Advantages: very easy to form (no work required), and not taxed as a separate entity. But: each of the partners is liable for the obligations of the partnership.
• Aggregate theory vs. Entity theory: do the partners own the property, or does the partnership? Entity is the current standard-- aggregate made lots of troubles. For example, who owns what. Or when a partner leaves, does it dissolve that partnership and then create a new one? No. We don't do things this way any more. But you'll see that stuff in older cases. Entity theory also allows us to convert from partnership to LLC or whatever.
• RUPA § 101(6) is very important-- definition of a partnership. "Association" indicates voluntaryness, intent. Partners don't need to intend to create a partnership in order for one to be created, but they do need to intend to voluntarily participate in this activity.

  There's no such thing as a 1-person partnership (there are 1-person LLCs, sole proprietorship, etc.).

  Business is defined in (1).

  Note that this is a little different from a joint venture: those tend to be more discrete project-oriented things.

  Co-ownership implies control and participation in management.

  And it has to be a business for profit. Dividing profits is one of the strongest indicia of partnership.

• Just co-owning property doesn't create a partnership. You need to be operating it for profit (see § 202(c)).
• § 201: a partnership is an entity distinct from its membershipp.
• § 202: formation. (c) lists some things that don't create a partnership. Paying a salesperson commission doesn't create a partnership, e.g., even though those might come out of profits.
• The lack of formalities surrounding formation sometimes makes it hard to know whether a partnership has been formed, and you sometimes see litigation about this. Courts aren't bound by statements of the parties disavowing the intent to create a partnership. Courts will find a partnership where it affects the recovery of a 3rd party, but will be more legalistic when its a dispute between putative partners.
• Partners are personally liable for obligations of the partnership (jointly and severally).
• Holmes v. Lerner
  You don't have to have profits (i.e., the business doesn't have to be actively profitable) in order to have a partnership.

  And it's clear that Holmes wasn't hired: she's doing all this without compensation. But she had been training horses for 6 months without pay after her contract expired, and there were indications all along that she wasn't being treated as a partner, but she let that continue.

  Good policy argument-- we want to encourage entrepreneurship; if everyone had to hammer out every last detail before beginning a venture, business would be stifled.

  But here the sophisticated parties let this situation linger on to the detriment of the person with the core idea for the company.

• See RUPA § 401, as we do the next reading.