The Dirty Dozen: Common Problem Areas in Principal–Agent Relationships Essay

Agency relationships in business occur between the principal and the agent. The agent is entrusted by the principal to conduct business transactions on his behalf. The agency may be formulated by oral or written agreement. It may also be formed by ratification of a non agent or by estoppels where the principal implies that a person is his agent. An agency may be formed by operation of the law as a social duty (Miller & Jentz, 2008).

The principal delegates the role of dealing with customers in different localities to an agent. The agent can then enter into legally binding contracts while acting on behalf of the principal (Miller & Jentz, 2008). This may create a potential crisis since it gives the employee considerable power over the employer. The law recognizes this power and ensures that the agent is held accountable for any breach of conduct.

The law mandates the agent to use his skills and efforts to perform the duty which he is given by the employer. The duty of notification compels the employee not to transact businesses on behalf of the company without notifying the employer. The employee is required to exhibit loyalty to the employer in regard to matters regarding to the company (Stokes & Peeples, 190). The relationship between the two is also governed by the duty of obedience which compels the employee to follow the instructions of the principal. Due to financial matters, the employee is also mandated to keep a separate track of all the accounting he has handled on behalf of the company and to avail these records whenever the principal requires (Miller & Jentz, 2008).

The principal-agent relationship should not be undermined if an organization is to grow in terms of money, customers and in productivity. The knowledge of business law enables employers to implement policies that facilitate the agents in fulfilling their duties accordingly. Ethical leadership must be used by the principal in order to prevent any chances of breach of duty (Miller & Jentz, 2008). There are various instances of breach of fiduciary duty by an agent;

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Competing with the Principal
The agent is forbidden from entering into direct competition with the principal. The law dictates that the agent should not move to be a competitor to the principal by using the knowledge, the contacts and the experience gained from the agency. This is not in the best interest of the principal. The agent should not prepare for a new job while still within the agency. The law allows the agent to implement a competing business but to refrain from competing with the principal until after the employment period (Stokes & Peeples, 192). Agents are prohibited from formulating a solicitation list for their new company while still in employment. Confidential information does not only arise with the existence of an agreement. The time of competition is therefore considered important as well as the scope of the competition. Advante v. McGinnis was an example of agent breach of conduct where the agent used the principals’ contacts as well as resources while still in employment (Miller & Jentz, 2008).

Solicitation of Customers
The law forbids the agent from soliciting the customer base of the principal while still in employment. Different courts have used different criteria to draw lines on solicitation and the duty of loyalty to the principal.  The duty of loyalty is very crucial in the principal agent relationship and the agent should steer clear of the customers of the principal (Miller & Jentz, 2008). The most an agent can do while still in employment is prepare to compete although in the case of  Lamorte Burns & Co. v. Walters, the court ruled that the collection of information on customers with the aim of competing later was a breach of fiduciary duty.  In Veco Corp. v. Babcock, the court stated that agents were liable of breaching fiduciary duties if they solicited the customers of the principals while still in employment with the aim of causing the customers to move after their employment is terminated (Stokes & Peeples, 192). In Planmatics, Inc. v. Showers, the court allowed a different level of customer solicitation by considering the fact that the customer was unhappy with the principals’ services and had already decided not to do business with the principal. In Advante v. McGinnis, the agent was restricted from engaging in a business venture while still in employment which though was not competing with the principals business was not in the principals’ interest (Miller & Jentz, 2008).

Solicitation of Employees
The law prohibits the agent from soliciting the employees of the principal and considers this a breach of fiduciary duty. In 1993, in Veco Corp. v. Babcock, the court charged two agents with breach of fiduciary duty for sourcing two employees from their former principal leaving the principal without key workers to a particular account (Stokes & Peeples, 192). In Dowd & Dowd, Ltd. v. Gleason, Gleason who was an agent was found guilty of arranging a mass exodus of all the employees of the principal (Miller & Jentz, 2008).

Theft of Property/Trade Secrets/etc
The law protects the acquisition of trade secrets and intellectual property from the agency for use by the agent. During the course of employment, the agent is supposed to work for the sole benefit of the principal. All profits that arise from the work of the agent during the term of contract belong to the principal (Miller & Jentz, 2008). To safeguard the interest of the principal, in the 2001 case of Lamorte Burns & Co. v. Walters, the court decided to define trade secrets based on the relationship between the principal and the agent as well as the purpose of obtaining and disclosing the information (Stokes & Peeples, 193).

The principal has to prove that the information which was obtained was used for against his interest. The agent is restricted from collecting and using customers’ business cards. These are viewed as the property of the principal. In instances where the agent collected them in the course of his duty to the principal he is prohibited from using them. The customer names which he can remember from memory are however not protected and can be used as long as the agent is not working for the agency. To safeguard these trade secrets the court may also bar the agent from working in the same industry as the principal for a number of years. This prevents unintentional disclosure of trade secrets of the principal.

·         Theft of Information

The use of an agencys’ information is also prohibited. In 1997, in DoubleClick Inc. v. Henderson, the court ruled that even though the information used was not trade secrets, it was still sensitive information and it was used by former agents to compete with Double Click Inc (Stokes & Peeples, 193).Any ideas which the agent comes up with during the time of employment belong to the principal and cannot be use by the agent (Miller & Jentz, 2008).

·         Disclosure of Confidential Information

Common law prohibits the agents from releasing confidential information in any principal agent relationship (Stokes & Peeples, 195).  Any information regarding the principal and their customers should not be disclosed under any circumstances. Agents who disclose any confidential information acquired while in employment can be fired or penalized (Miller & Jentz, 2008).

·         Theft of Time

While in employment, the agent is required to devote his time to the interests of the principal. The agent should not devote any of the agencys’ time in a competing venture with the principal or he is liable for charges for the breach of fiduciary duties. In most cases companies ignore the theft of time if the employee is within the company and is spending time in non competing activities. However, if this theft of time affects the principal directly in terms of loss of productivity, the agent can be penalized or his services terminated (Miller & Jentz, 2008).

·         Disparagement/Defamation of the Principal

The most common breach of loyalty is that of the employee defaming the principal. This defamation campaign is prohibited both while working for and after leaving the agency (Miller & Jentz, 2008). An agent who circulates rumors of the principal with the intent of ruining his reputation to fellow competitors or customers has breached his loyalty (Stokes & Peeples, 194).

·         Interference with Contract

The agent is prohibited from interfering with a contract which is made between the principal and a third party. This third party may be an employee of the principal (Stokes & Peeples, 195). In cases where the agents are terminating their employment, if the methods and timing used interfere with the new employees, the former agents can be charged for interfering with the contract between the principal and the new employees. The agent is also prohibited from interfering with the relationship between the principal and the customers when it is not in the best interest of the principal (Miller & Jentz, 2008).

·         Usurping a Corporate Opportunity

Agents are fully entrusted with the running of their duties within the agency on behalf of the principal. This exposure gives them opportunity to learn of potential business opportunities which the principals may be considering. The law compels the agent to only use corporate opportunity gained by the agent during the time of his employment for the sole interest of the principal (Stokes & Peeples, 196).  An agent cannot use information gained while employed, for his benefit even after the termination of employment. However, the agent can use any information if it is acquired or presented to him in his private capacity and not as an agent of the principal (Miller & Jentz, 2008).

·         Self-dealing, Dishonesty, or Lack of Fidelity

Any act by the agent which may attempt to deceive the principal is considered a breach of duty. The agent is compelled by law to keep separate accounting details regarding matters which are entered on behalf of the agency and to avail this information to the principal whenever they are requested (Miller & Jentz, 2008). Hiding pertinent information from the principal is considered unlawful in the presence or the absence of a code of conduct. Self dealing trade is prohibited while still in the employment of the agency. In Lamorte Burns & Co. v. Walters, the agents were found to breach duty when they falsely assured the principal that they were not leaving his agency (Stokes & Peeples, 194). The agent who plans to leave the firm and join a competitor firm is compelled to divulge information pertaining to his leaving to the principal and also on other employees who are planning to do so.

·         Breach of Contract

The agent is prohibited from breaching any contract entered into with their principals. These may include confidentiality contracts which forbid the agents from disseminating any information or intellectual property to competitors (Miller & Jentz, 2008). The agent may also enter into non- compete contracts which prohibit them from competing with their employers (Stokes & Peeples, 197). The breach of any contract entered to by the agent and the principal may lead to civil litigations where the principal is compensated for their losses or in criminal penalties in cases where there is violation of any statute.

REFERENCES

Miller, R., & Jentz, G. (2007). Business law today: The essentials (8th ed.). Mason: South Western Educational Publishing.

Stokes Pamela P. & Peeples Donna K. (2006). The Dirty Dozen: Common Problem Areas

In Principal–Agent Relationships. Employ Respons Rights J .18: 189–198