Are there, within the ambit of normal arms-length business transactions, situations in which the law will impose upon one of the parties in a continuing relationship, a criterion of dealing with the other party that is higher than the standard of the marketplace, and even higher than the standard selected by the parties themselves in their negotiated arrangements?
A distributor of medical equipment in New York City selling, for over eleven years, the products of a major medical equipment manufacturer and supplier under an exclusive territorial arrangement covering New York and Bronx counties is visited one day by several executives of the supplier who arrive at the distributor’s office without notice and inform the distributor’s founder and sole shareholder that his successful distributorship, cultivated by him over that eleven year period has been terminated, effective immediately. The termination is without cause, the supplier having admittedly chosen this course because it has singled out this distributor’s territory for direct sale. Since the distributor has been prohibited by the supplier from handling competing products for the eleven-year period of their relationship, it has effectively been put out of business. The distributor’s founder has no choice but to acquiesce in the takeover of his business, its books, records of all accounts, and sales and customer records – in short, all records and information pertaining to the distributor’s business, and virtually all of the distributor’s salesmen and administrative staff. Peremptorily and without notice, the supplier has appropriated the entire business of the distributor, its goodwill, confidential information, know-how, assets, records, employees and location, and arrogated all of this intact to itself so as to continue that business, effectively, uninterrupted. There is no written contract term inhibiting the distributor’s actions. The arrangement governing the relationship between the parties is entirely oral and, therefore, effectively, at will. Eleven years of customer cultivation and consistent geometric business growth is thereby usurped by the supplier under the auspices that it has the perfect right to do so.
The distributor operated entirely as an independent business, purchasing the supplier’s medical equipment in expectation of achieving a profit, incurring and paying all the ordinary and regular expenses attendant upon the operation of such a business and, in every way, undertaking all normal risks associated with such a business, including the non-sale of inventory, absence of profit, customer credit risks, and the risk of its entire business investment. While the supplier’s brand on the medical equipment was well known and engendered goodwill, the market was highly competitive with a number of other large suppliers selling similarly well-known brands of equal quality. Since most of the supplier’s and distributor’s dollar volume of sales of medical products was generated by the sale of the supplier’s highly technical, expensive, high-margin medical prostheses, i.e., artificial knees, elbows, limbs, etc., customer cultivation was highly dependent upon the time, efforts and promotional expenses contributed by the distributor through the special care and attention devoted by the distributor’s staff to the teaching and training of surgeons and nurses in the techniques applicable to the use of these complex devices in surgical procedures.
These circumstances were the actual subject of litigation1 and, as a general course of conduct, are not uncommon; the termination without cause of successful distributorships of long-term duration, unsupported by anything but oral, at-will agreements is familiar and frequent. One perception of these facts would be that the distributor, as an independent party to the relationship, was governed by the normal rules applicable to the marketplace, that is, it was, and should be, responsible for its own protection, and the effect of its failure to adequately guard against the supplier terminating the relationship and benefiting thereby from the distributor’s efforts, must, ultimately, be borne by the distributor alone. Bad deals are common in commerce; they are the pitfalls of the marketplace. There is another view, however: even on a superficial level, the circumstances here, portray an aura of unfairness; there is at least the suggestion of foul play. Deeper than the windfall benefit obtained by the supplier from the efforts of the distributor exists something at the core of these circumstances that requires the intervention of the law and the imposition of a remedy.
The inquiry into the nature of the underlying reasons demanding that the courts act to prevent the occurrence of circumstances such as these, must begin with an understanding of the status of the law with regard to fiduciary relationships as it existed at the beginning of the 20th century. Fiduciary obligations springing from traditionally well-recognized relationships had been clearly defined by years of decisional law throughout the United States. These traditionally recognized fiduciary relationships include such as those between a trustee, executor or administrator and beneficiaries, the officers and directors of a corporation and its shareholders, partners, a lawyer and his client, an agent and his principal, and an employee and his employer. The fiduciary in each instance of the traditional relationship occupies a position which, by its very nature, enables him to substantially affect, either beneficially or detrimentally, the other party who is largely or entirely dependent upon the special position of the fiduciary in that relationship. The fiduciary’s special position and his attendant power to affect the other party is inherent in the relationship.
Moreover, the traditional fiduciary relationship is easily recognized, bearing, as it does, a well-known, plainly identifiable, legal stamp. Little analysis of facts and circumstances are required to recognize it, and, usually, to circumscribe its scope and effect. The scope of a traditional fiduciary obligation is normally defined by the ambit of the fiduciary’s authority and activities. In terms of time, the fiduciary’s obligations are usually coterminous with the duration of that authority and those activities. Further, the usual touchstone for the imposition of sanctions upon the fiduciary in the traditional context is the failure to make full disclosure to his beneficiary of all relevant information pertaining to that relationship, including the exploitation of information available to the fiduciary as a result of his special position. Thus, in the traditional context, the fiduciary relationship is usually readily identifiable, its scope plainly circumscribed and the test as to fiduciary compliance, simply applied. This simplicity of identification and scope resulted in a somewhat mechanical and, therefore, limited application of the underlying doctrine giving rise to a tendency to consider its use only in circumstances involving a readily recognizable traditional fiduciary relationship.
The advent of more complex business transactions presented the courts with new challenges in the area of fiduciary obligations. The time-line of the development of the law in this area may be traced through the evolution of the case law throughout the United States. Here several key decisions in the New York State courts will be used as illustrative highlights. In the 1920’s New York’s highest court rendered a decision2 in a lawsuit between two joint venturers who held the tenant’s rights (in the name of the defendant only) under a long-term lease to valuable Manhattan real estate. Shortly before the lease term expired, the owner of the property made a proposal to the defendant, the active joint venturer and the only party to the venture that the owner knew, to enter into an entirely new lease to a much larger parcel of realty, encompassing, however, the realty subject to the old lease about to expire and which required by its terms substantial demolition and construction work by the tenant. The defendant chose not to disclose this new business opportunity to the plaintiff, his co-venturer, and entered into the new lease solely in his own behalf. The Court of Appeals upheld the judgment for the plaintiff impressing a judicially created constructive trust upon one-half of the entire business opportunity – all of the rights and obligations of the tenant under the new lease.
Despite what may appear superficially to be an unimportant decision (joint venturers are, after all, closely akin to the traditional fiduciary relationship of partners and the case involved a common place failure to disclose) Meinhard represents a landmark in the development of the law of fiduciary obligations. The relief affirmed by the court was imposed upon what was, in form, an entirely new and different transaction than that encompassed by the old lease and joint venture. The old lease was at its end; the new arrangement extended, potentially, some 80 more years. The new business opportunity was proffered by the landlord to the defendant; not the joint venturers. The parcel of realty which was the subject of the old lease constituted only a small portion of that which was incorporated in the new deal and this new opportunity involved construction activities, investments, risks and rewards of a type and magnitude not existing under the old expiring joint venture. Nevertheless, the court’s perception and determination as it stated was that: “[The defendant] was much more than a co-venturer. He was a managing co-venturer.” Accordingly, it provided a remedy concomitant with the perceived wrong; it afforded the plaintiff the opportunity to participate in the new business arrangement to the same extent and with the same risks and rewards as if it had initially been brought to the old joint venture. Thus, Meinhard is a watershed in the law in that it extended the scope and applicability of the doctrine of fiduciary obligations beyond that which would ordinarily have been imposed in the traditional context; it did this without regard, and even in contravention to, the written terms of the joint venture agreement; and, finally, it forged a remedy, radical for its time, that reached out beyond a slavish attachment to details and did substantial equity in the light of the entirety of the circumstances with which it was presented.
Some 15 years later an intermediate appellate court dealing with, what was then, a unique set of circumstances upheld a judgment at trial imposing relief upon the basis of the kind of conceptual analysis and perception dealt with here.3 The case involved an early version of a credit or charge card relationship between a large retail department store and a company which, during the depths of the 1939 depression, hit upon and initiated with the department store an arrangement whereby it developed and selected, at its own expense, a list of customers whose credit it, and its president personally, guaranteed to the department store in return for a 10% commission. The agreement that governed the relationship between the parties was expressly terminable at will upon six months notice. After about 7 years the department store terminated the relationship and notified the company and its customers that, thereafter, the customers were to be solicited, and would be entitled to purchase, directly on credit from the department store. Without ever mentioning the term “fiduciary relationship,” the appellate court’s analysis demonstrated that it was moved by the same principles of fairness, and that it employed many of the same analytical tools in arriving at its decision, as are used by the courts in weighing the application of the doctrine of fiduciary obligations. The court’s decision emphasized the long-term relationship of the parties, that the customer list was selected and obtained at the plaintiff’s efforts and expense, that the defendant should not, in fairness, be permitted to take advantage of the knowledge it acquired of the identity of the customers, and that the defendant should not be entitled to appropriate to its own use the names of these customers obtained at plaintiff’s expense and thereby destroy plaintiff’s business. The court tailored its remedy (an injunction against the department store soliciting these customers and an accounting as to damages sustained by the plaintiff) to fit its perception of the wrongdoing; it ignored the express agreement between the parties; it imposed a standard of conduct which went beyond that employed in customary arms-length dealings; and it did this notwithstanding the absence of any element of non-disclosure.
In the 1950s the New York Court of Appeals expressly applied, as a matter of first instance, the doctrine of fiduciary obligations under circumstances involving the termination by a manufacturer of trucks, cranes and parts of a distributor in New York and New Jersey.4 The relationship had existed for some 15 years and was the subject of a written distribution agreement expressly providing that it was terminable by either party at will. The court upheld the complaint against a motion to dismiss finding, in effect, that the relationship gave rise to a level of rights and obligations between the parties that transcended the normal standard of marketplace dealings and even the agreement between the parties. Its express analysis was notably unique and keenly perceptive. The circumstance of the dominant position of the manufacturer or supplier and the correlative dependent position of the distributor created the threshold for the application of extraordinary judicial intervention. Another element, however, the court declared, was necessary: the relationship must be imbued with an element of trust and confidence justifiably reposed by the dependent party in the dominant one. This element was to be found in the agreement between the parties requiring the distributor to disclose to the manufacturer lists and records of customers, customer information and the distributor’s financial information. The combination of the dominance-dependence relationship together with the element of trust and confidence, provided the appropriate mix, engendering the fiduciary relationship with its attendant obligations. Again, the circumstances of this case were novel in that they clearly did not involve the traditional fiduciary context, the factor of non-disclosure did not exist, judicial intervention was called for which would override the express terms of the written agreement between the parties, and the court’s analysis plumed the roots and source of the need compelling the interposition of the judiciary to do equity expressly under circumstances involving a disparity of power within a context of trust and confidence.
Rampell provided the analytical framework for the future judicial examination of relationships extending beyond the limitations of the traditional fiduciary context to a wide variety of commercial transactions, regardless of complexity. The doctrine of fiduciary obligations under the aegis of Rampell is rendered pertinent to any continuing relationship where one party is placed in a position of dominance in relation to the other party and, concomitantly, there exists within that relationship circumstances whereby the dependent party may justifiably repose trust and confidence in the dominant party. Where these elements are present, and the dominant party exploits its position to the detriment of the dependent party, the courts will act to prevent and remedy the wrongdoing and, presumably, restore the parties to their rightful status. This analysis is applicable to any business relationship; what matters are the circumstances, not the label attached to them. Moreover, applying this analysis the courts will provide a remedy whether or not the element of non-disclosure exists; if the wrongdoing, as in Rampell, involves the usurpation by the dominant party of the business or property of the dependent party within this context, the remedy afforded will be an injunction and damages properly reflective of the dependent party’s loss. The courts will provide this relief even if the actions of the dominant party have been precisely in accordance with the express agreement between the parties governing the relationship and otherwise (except for the application of the doctrine) in accordance with the law. However, Rampell was a decision before trial testing the legal validity of the complaint; there remained untested the application of the Rampell concepts in the crucible of a trial.