562 Part 4 Business Management and Governance
16-3 The Principal–Agent Relationship
To this point, the focus of the discussion has been on the relationship between the
agent and the principal on the one hand and third parties on the other. However,
it is important to realize that a contractual relationship exists between the agent
and the principal, so that each has certain obligations and rights. This section of the
chapter covers that relationship.
16-3a The Agent’s Rights and Responsibilities
Principals and agents have a fiduciary relationship, which is characterized by loyalty, trust, care, and obedience. An agent in the role of fiduciary must act in the
principal’s best interests.
Duty of Loyalty: General
An agent is required to act only for the benefit of the principal, and an agent cannot represent both parties in a transaction unless each knows about and consents
to the agent’s representation of the other. Further, an agent cannot use the information gained or the offers available to or by the principal to profit personally.
For example, an agent hired to find a buyer for a new invention cannot interfere
with the principal’s possible sale by demonstrating his own product. Neither can
an agent hired to find a piece of property buy the property and then sell it (secretly
of course) to the principal. Lucini Italia Co. v Grappolini (Case 16.2) involves an issue
of an agent’s fiduciary duty in a sale transaction.
Benjamin Chavez served as executive director of the National Association for the
Advancement of Colored People (NAACP).
Mary Stansee, a former employee of the
NAACP executive offices, charged Mr.
Chavez with sexual harassment, and he
settled the claim for $332,400. The NAACP
was financially troubled at the time of the
settlement, with a deficit of $2.7 million, and
Mr. Chavez did not disclose the settlement
to the board until after it was completed.
Did Mr. Chavez have implied authority
to make the settlement? Did he have apparent authority?
Consider . . . 16.4
Lucini Italia Co. v Grappolini Luci
2003 WL 1989605 (N.D. III. 2003) 2003 3
A Slick Deal by the Olive Oil Agent
CASE 16.2
FACTS
Lucini Italia imports and sells premium extra-virgin olive
oil of Italy. Lucini was formed by Arthur Frigo, a Chicago
entrepreneur and adjunct professor of management and
strategy at Northwestern University’s Kellogg Graduate
School of Management. Giuseppe Grappolini, from
Loro Ciuffenna, Italy, served as a consultant to Lucini.
Under the terms of his consulting contract, Mr. Grappolini was to develop Lucini Premium Select extra-virgin
olive oil as well as other flavored olive oil products.
Mr. Frigo had discovered a market niche in the United
States for high-end olive oil ($10 to $12 per bottle).
© iStockPhoto.com/Ancika
CONTINUED
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Chapter 16 Management of Employee Conduct: Agency 563
Mr. Grappolini is also the sole owner of the Grappolini Company, an Italian limited liability company.
The Grappolini Company distributes small volumes
of extra-virgin olive oil in Chicago and other markets
throughout the United States, but it has much larger
sales volume in Europe. Between December 1997 (the
date of the Grappolini consulting contract with Lucini)
and June 2000, the Grappolini Company was Lucini’s
supplier of extra-virgin olive oil. The two companies
had signed a supply agreement for this arrangement
also in December 1997.
Mr. Frigo instructed Mr. Grappolini to try to negotiate an exclusive supply contract for Lucini with Vegetal, an Italian company with a unique olive oil that
Mr. Frigo needed to develop another premium brand
of olive oil that would have flavors such as lemon
and garlic added (called the LEO project). Vegetal was
the only company that could supply the type of olive
oil Mr. Frigo needed for the blending process with
the extra flavors. Mr. Grappolini led Mr. Frigo along
with promises of a deal with the Vegetal company for
nearly a year, through reports of meetings as well as
with faxes and memos appearing to detail terms, conditions, and dates for delivery. At the same time, Mr.
Grappolini was meeting with Mr. Frigo almost daily
as they discussed the plans for the new Lucini olive
oil. In the meetings, Mr. Frigo discussed the formulas,
the marketing, consumer profiles, and marketing strategies for the LEO project. Apparently, Mr. Grappolini
was impressed by the plans and entered into his own
exclusive supply contract with Vegetal. Mr. Grappolini
did not tell Mr. Frigo of the contract and continued to
work as a consultant. Mr. Grappolini also assured Mr.
Frigo that Lucini had a supply contract with Vegetal.
Mr. Frigo proceeded with all the contracts, ads, and
plans for the LEO product launch based on assurances
from Mr. Grappolini that it had the supply contract
with Vegetal. However, when pressed, Mr. Grappolini
could not deliver the paperwork. When Mr. Frigo
requested a meeting with the CEO of Vegetal, Mr.
Grappolini arranged for the meeting but cautioned Mr.
Frigo not to mention the supply arrangement because
such a discussion in a first-time meeting would be considered rude in the Italian culture.
With the LEO product launch approaching, and
no copy of the alleged Vegetal supply contract available, Mr. Frigo had Lucini’s lawyer in Italy contact
Vegetal directly for a copy. The lawyer learned that
Vegetal had a supply contract but that the contract was
with Mr. Grappolini’s company and that it was not
transferable to Lucini. Mr. Frigo then confronted the
officers of Vegetal, and they acknowledged that they
had negotiated with Mr. Grappolini for his company,
not for Lucini, and were not aware of Lucini’s needs or
Mr. Grappolini’s representation of Lucini. The officers
at Vegetal said that Grappolini had been a “bad boyâ€
in negotiating the contract for himself. Vegetal agreed
to supply Lucini with olive oil in the future but could
not deliver it in time for the launch of Lucini’s new
line. The soonest it could deliver would be after the
next harvest, a time that meant the marketing and sales
plans of Lucini for its new product had been wasted.
Mr. Frigo and Lucini filed suit against Mr. Grappolini and his company (defendants) for breach of
fiduciary duty.
JUDICIAL OPINION
DENLOW, Magistrate
As agents, Defendants owed Lucini general duties of
good faith, loyalty, and trust. In addition, Defendants
owed Lucini “full disclosure of all relevant facts relating to the transaction or affecting the subject matter of
the agency.â€
Defendants were Lucini’s agents and owed Lucini
a fiduciary duty to advance Lucini’s interests, not their
own. When Defendants obtained an exclusive supply
agreement with Vegetal for the Grappolini Company
instead of for Lucini, they were disloyal and breached
their fiduciary duties. Lucini suffered substantial damages as a result of this breach.
Punitive damages are appropriate where the
defendant has intentionally breached a fiduciary duty.
Defendants’ breach of their fiduciary duties was flagrant and intentional. Defendants deliberately usurped
a corporate opportunity sought by Lucini, which
Lucini had entrusted Defendants to secure on Lucini’s
behalf. Although Defendants explicitly accepted this
trust and ensured [sic] Lucini that Mr. Grappolini and
his company would do as Lucini requested, Defendants failed to do so and hid this fact from Lucini.
Defendants misappropriated Lucini’s valuable
trade secrets. Defendants acquired Lucini’s trade
secrets under circumstances giving rise to a duty to
maintain their secrecy. Defendants’ assistant Marco
Milandri testified that he understood that Lucini’s
Premium Select and LEO product formulations were
company secrets. Likewise, Grappolini testified that
he understood the secrecy of trade secret information
communicated to him. Indeed, his various contracts
specified that he would maintain the confidentiality
of Lucini’s research conclusions. After Defendants had
secretly secured their own exclusive supply contract
with Vegetal, they hid this fact from Lucini in order
to induce Lucini to continue sharing its trade secret
research, strategies, and plans with Grappolini.
CONTINUED
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
564 Part 4 Business Management and Governance
Lucini’s decision to focus its LEO project around
essential oils from Vegetal Progress was a closely
guarded trade secret. When Mr. Grappolini used this
information on behalf of the Grappolini Company to
allow it unfettered access to negotiate its own exclusive
arrangement with Vegetal, it is necessary to conclude
that the Grappolini Company “acquired†the information with full knowledge that: (i) Lucini had not consented to the use of the information by a competitor,
and (ii) Mr. Grappolini had no right to transmit or use
the information for his own purposes or on behalf of
the Grappolini Company.
As a proximate result of Defendants’ breach of
their fiduciary duties, Lucini suffered lost profits
damages of at least $4.17 million from selling its
grocery line of LEO products from 2000 through
2003. The Court will award Lucini its lost profits of
$4,170,000, together with its $800,000 of development
costs for LEO project. Defendants engaged in willful
and malicious misappropriation as evidenced by their
use of the information for directly competitive purposes and their efforts to hide the misappropriation
and, accordingly, the Court will award $1,000,000 in
exemplary damages. Such an award is necessary to
discourage Defendants from engaging in such conduct in the future.
CASE QUESTIONS
1. Explain how Mr. Grappolini breached his
fiduciary duty.
2. What lessons can you learn about contracts, suppliers, and product launches from the case?
3. Evaluate the ethics of Mr. Grappolini’s conduct.
Why did Vegetal’s officers refer to Mr. Grappolini
as a “bad boy�
Duty of Loyalty: Postemployment and Noncompete Agreements
Many companies have their employees sign contracts that include covenants
not to compete or covenants not to disclose information about their former
employers should the employees leave their jobs or be terminated from their
employment.
Downsizings in the high-tech industry have brought back the issue of noncompete and confidentiality agreements. When employees are recruited by upstart
firms and lured with stock options, it is often difficult for them to imagine a time
when the company would need to downsize or would no longer exist. As a result,
most of them signed fairly restrictive covenants not to compete.
In dealing with these covenants, courts are striking a balance between the
employees’ right to work and an employer’s right to protect the trade secrets,
training, and so forth that the former employee has and then transfers to another
company or to himself or herself for purposes of starting a business.
Requirements for Noncompete Agreements
1. The Need for Protection
The laws on noncompete agreements vary from state to state, with California
and a handful of states being the most protective of employees. However,
across all states, courts are clear in their positions that there must first be
an underlying need or reason for the noncompete agreement—that is, the
employee must have had access to trade secrets or be starting his or her own
business in competition with the principal/employer.
2. Reasonableness in Scope
The covenant must also be reasonable in geographic scope and time. These
factors depend on the economic base and the nature of the business. For example, a noncompete in a high-tech employee’s contract could be geographically
global but must be shorter in duration because technology changes so rapidly.
A noncompete for a collection agency could not be global but might be longer
in duration because the nature of that business is one of relationships.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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