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situation determine the authority of the agent to do business on behalf of the principal.

Unless the agency contract says otherwise, courts have generally allowed agents to:

1. Receive payments of money due the principal 2. Enter into contracts for incidentals 3. Employ or discharge employees 4. Buy equipment and supplies

In the following case, the court indicates the extent to which implied au- thority will be granted to an agent.

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C A S E 16-2 Penthouse International v. Barnes United States Court of Appeals 792 F.2d 943 (9th Cir. 1986)

Priscilla Barnes was a hostess at a club in Hollywood,California, when she was approached by a freelance photographer (Dunas) who sold nude photographs to Penthouse magazine. Dunas was an independent contrac- tor. He asked Barnes to pose nude. She agreed but did not want her actual name used. Dunas agreed to her terms, and Barnes signed a “Release, Authorization and Agreement Form” that gave Penthouse the right to “republish photo- graphic pictures or portraits.” Dunas added the term AKA (also known as) on the contract to indicate that the pho- tographs would not be published under her actual name but under a pseudonym. Penthouse did so in 1976.

Later, Barnes became a well-known television broad- caster for a station in Los Angeles. When Penthouse in- formed her, in 1983, that it wished to republish her nude photograph, she threatened to sue, claiming that Dunas had implied agency to write the term AKA and that Pent- house was thus bound by his actions and representations. Penthouse requested a declaratory judgment from the federal district court allowing it to republish a nude photo of the defendant. The district court found for Barnes and issued an injunction against Penthouse. Pent- house appealed.

Judge Boochever Under California law, questions regarding the existence of agency are questions of fact that we review for clear error. California Civil Code Section 2316 defines actual authority as “such as a principal intentionally confers upon the agent, or intentionally, or by want of ordinary care, allows the agent to believe himself to possess.” At issue is whether Dunas contracted to act on behalf of Penthouse.

Penthouse instructed photographers “to get a signed model release and not to alter the release in any way, without our permission.” However, Penthouse carried Dunas’s name on its masthead, gave him blank Penthouse contracts, may have given him business cards, and had him present contracts to models. Thus, although the record conflicts as to whether Dunas was an actual agent of Penthouse, on review, we cannot find that the district court clearly erred in finding Dunas to be a Pent- house agent.

Having found that the district court did not err in char- acterizing Dunas as an agent, we next turn to whether Dunas was acting within the scope of his authority by mod- ifying the contract. Barnes does not contend nor is there evidence that Dunas possessed express actual authority to modify the contract. Dunas, however, had implied actual authority. Implied actual authority requires that (1) Dunas believe he was authorized to modify the contract based on Penthouse conduct known to him or (2) such a belief was reasonable.

Circumstantial evidence exists that Dunas placed “AKA” on other contracts with no objection from Penthouse. In June 1974, a year and a half before Barnes posed, contracts prepared by Dunas had “AKA”on them. Further, Penthouse internal memoranda reflect an understanding among Pent- house employees that “AKA” added to a contract meant that Penthouse was to associate a fictitious name with a woman’s photograph. The evidence thus indicates that Dunas reasonably believed he was authorized to add “AKA” and modify the contract to require that only a fictitious name be used.

Affirmed in favor of Defendant, Barnes.

420 P A R T T W O ! Private Law and the Legal Environment of Business

AGENCY THROUGH RATIFICATION BY PRINCIPAL Agency by ratification occurs when a person misrepresents himself or herself as an agent and the principal accepts (ratifies) the unauthorized act. If the prin- cipal accepts the results of the agent’s act, then the principal is bound, just as if he or she had authorized the individual to act as an agent. Two conditions are necessary for the ratification to be effective: (1) the principal must have full knowledge of the agent’s action and (2) the existence of the principal must be clear to the third party at the time of the agent’s unauthorized act. For example, Max Black tells his friend Mary Ann Jones, a realtor, that if she ever finds any- one who is ready, willing, and able to sell a certain kind of computer franchise store, he will buy it. Jones finds such a store, cannot reach Black, and has never been his agent, but she enters into the agreement with the franchisor anyway and signs the contract “Mary Ann Jones, agent for Max Black.” Jones is not Black’s agent. If Black, however, decides to honor the contract, he will have rat- ified an agency relationship, and Jones will most likely be due a commission.

AGENCY BY ESTOPPEL OR APPARENT AUTHORITY If a third person is led by a principal to believe that a certain individual is the principal’s agent, then there appears to be authority for the agent to act and the principal is estopped from denying that the individual is an agent. It is the writ- ing, words, or acts, or some combination thereof, of the principal that create the agency by estoppel, or apparent authority for the agent to act; the third party relies on the principal’s conduct.

Duties of Agents and Principals PRINCIPAL’S DUTIES TO AGENT Through an evolution of case law and scholarly writing, it is now generally recognized that a principal (employer) owes four duties to an agent (employee): (1) a duty of compensation, (2) a duty of reimbursement and indemnification,

agency by ratification Agency relationship in which an unauthorized agent commits the principal to an agreement and the principal later accepts the unauthorized agreement, thus ratifying the agency relationship.

estoppel A legal bar to either alleging or denying a fact because of one’s own previous words or actions to the contrary.

agency by estoppel (apparent authority) An agency relationship in which the principal is estopped from denying that someone is the principal’s agent after leading a third party to believe that the person is an agent.

C R I T I C A L T H I N K I N G A B O U T T H E L AW

One of the primary purposes of a judge’s opinion is to explain the court’s reasoning in a particular case. A judge’s opin- ion is not arbitrary, in the sense that a judge must give due consideration to relevant facts and rules of law for any le- gal issue. From a judge’s opinion, we are, therefore, able to know not only a judge’s conclusion but also why the judge ruled for one party over another. These opinions provide the court’s rationale in a particular case, which may later be used as precedent for subsequent cases that contain similar fact patterns. In Case 16-2, the judge provided several rea- sons to support the conclusion. The next two questions relate to the judge’s reasoning in Case 16-2.

1. What reasons did the judge provide for ruling in favor of the defendant?

Clue: To ensure that you have found a reason, ask yourself whether what you have listed answers the question: “Why did the court rule for the defendant?”

2. What aspects of the court’s reasoning were particularly strong or weak? (Remember that just because reasons are given does not mean that these reasons are necessarily strong.)

Clue: Reverse the roles in this case and assume that you are the plaintiff’s lawyer. With which parts of the judge’s opinion would you still disagree based on the court’s reasoning? Would there be parts of the judge’s reasoning with which, even though you were the opposing party, you would agree?

C H A P T E R 1 6 ! Agency Law 421

(3) a duty of cooperation, and (4) a duty to provide safe working conditions. These duties are either part of a written contract or implied by law.

Duty of Compensation. In the absence of a written agreement, it is implied that a principal will compensate the agent for services rendered, either when services are contracted for or when they are completed. If the parties cannot agree on the amount, courts will usually indicate that the compensation should be calculated on the basis of what is reasonable or customary. For example, lawyers and real estate brokers are sometimes paid on a contingency fee (com- mission) basis.

Duty of Reimbursement and Indemnification. An indemnity is an obliga- tion on the part of an individual (principal) to make good (or reimburse) another person (agent) against any losses incurred when the latter is acting on behalf of the former. All necessary expenses can be recouped by the agent, but the agent is not entitled to expenses arising out of tortious conduct (e.g., negligence) or unlawful activities (e.g., bribes paid to suppliers).

Duty of Cooperation. The principal must do nothing to interfere with the rea- sonable conduct of an agent as agreed upon in an express or implied contract. For example, if a franchisor (principal) agrees with a franchisee (agent) that the latter has an exclusive right to sell a specific item within a geographic territory, the franchisor cannot legally compete with the franchisee by setting up another franchisee within that territory. If the franchisor does establish a competitive franchisee, the first franchisee can sue for breach of contract, asking either for lost profit, court costs, and attorney’s fees or for specific performance.

Duty to Provide Safe Working Conditions. The principal has a duty to its agent to provide safe working conditions. Federal legislation such as the Occu- pational Safety and Health Act (discussed in Chapter 18) set standards designed to create a safe working environment for employees. Employers who repeatedly violate those standards may be fined or imprisoned or both.

AGENT’S DUTIES TO PRINCIPAL Just as a principal has legal duties to an agent, the agent has legal obligations to- ward the principal: loyalty, obedience, accounting, and performance.

Duty of Loyalty. Courts have often indicated that the agent’s most important ob- ligation is fiduciary. The fiduciary obligation includes loyalty to the principal—that is, acting on behalf of one principal only to avoid conflicts of interest, communi- cating all material information to the principal, and refraining from acting in a manner that is adverse to the principal’s interest.

contingency fee Agent’s compensation that consists of a percentage of the amount the agent secured for the principal in a business transaction.

indemnity Obligation of the principal to reimburse the agent for any losses the agent incurs while acting on the principal’s behalf.

C A S E 16-3 Cousins v. Realty Ventures, Inc. Court of Appeals of Louisiana, Fifth Circuit 844 So. 2d 860 (2003)

Don Cousins acted as the representative/agent for EagleVentures, Inc., to find a real estate investment for the corporation to purchase. To do so, Cousins engaged the services of Leo Hodgins, a real estate agent/broker and owner of Realty Ventures, Inc. (RVI).

In March of 1991, Leo Hodgins learned that 3330 Lake Villa Drive, an 8,000-square-foot office building in Metairie, Louisiana, owned by Westinghouse Credit Corporation, was being sold for $125,000. In June 1991, Leo Hodgins first brought 3330 Lake Villa Drive to Cousins’s attention.