This is the second of two parts of our outline of the law of fiduciary obligations and its expansion beyond the traditional fiduciary relationship.
We return to the case, mentioned at the beginning of the first part of this series, of the medical equipment distributor who was suddenly terminated by the manufacturer. On appeal to the intermediate appellate court of New York State from the lower court’s denial of the defendant’s request for summary judgment in that case (Zimmer-Masiello, Inc. v. Zimmer, Inc.),1 the appellate court affirmed and rejected the defendant’s application for the immediate dismissal of plaintiff’s claim of breach of fiduciary relationship and the case proceeded to trial. That decision on appeal followed precisely the blueprint of Rampell and determined that the dominance-dependence relationship which existed between the supplier and distributor, together with the exploitation by the supplier of the relationship of trust and confidence between the parties, was sufficient to move the case to trial where the parties’ proof was required to be demonstrated. Notably the appellate court, without comment, expressly found the existence of these elements in Zimmer-Masiello, not in the agreement between the parties but in their activities, more precisely, the activities of the supplier in connection with the operation of their relationship.
Nevertheless, after a trial of more than a week wherein the plaintiff’s proof was essentially uncontested that it invested in its own business, developed customers through its own efforts, funds and facilities, undertook all risks of business failure including customer credit failure and expended special efforts and money in training customers in the use of the complex surgical devices, the trial judge, sitting without a jury rendered a verdict for the defendant.2 Although it was in possession of the appellate court’s decision constituting a template for the application of the Rampell analytical framework, the trial court’s perception allowed for virtually no consideration of that framework or the elements of essential unfairness arising from the activities of the defendant.
Effectively, the defense was that this framework and the doctrine of fiduciary obligations was not applicable because the distributor was really a sales agent and, accordingly, it had no goodwill in the business of the sale of the product which required protection under the law. It was not a true distributor since the principle products of the business resulting from the relationship, the medical prosthesis and other surgical and medical devices, were designed, created and built by the defendant, the trademark was the defendant’s, the customers, i.e., the medical profession, purchased the devices because of the defendant’s name and notoriety, the quality of the devices and the defendant’s national advertising. The result at trial necessarily implies a perversion of the Rampell analytical framework. The very factors existent in Zimmer-Masiello that constitute the essential elements requiring the application of the framework are inverted by the trial court and become the rationale for the court’s finding that no fiduciary relationship existed. The dominance of the supplier arising from its overwhelming economic superiority and its inherently absolute control of the source of supply of the products of the business, as well as the corresponding dependence and the trust and confidence placed by the distributor in the supplier as a result of the coercive conduct at the inception of and throughout the relationship, become the bases for the decision at trial that the distributor had no good will to protect and, therefore, no business. The absence of a written agreement, the collection of the distributor’s accounts receivable by the supplier, the supplier’s continuing control of the inventory content of the distributor, as well as other features urged by the supplier to be evidence of the distributor’s non-independence, are found by the trial court to be the result of the distributor’s volition, not of the dominance and exploitation by the supplier of its position in relation to the distributor. This outcome stems precisely from the failure of the trial court to perceive from the underlying circumstances of the case the applicability at law of the Rampell analytical framework, and to perceive the underlying demands of equity requiring that that framework be applied. It is precisely this failure of perception that renders the analytical framework evolved under the case law difficult to apply.
Given, as is too often the case, a fixed judicial perception that the existence of an agreement in a commercial context, especially a complex one, provides the sole basis for determining the rights of the parties, and adding to it the almost sclerotic rigidity developed over years of exposure to the postulate that fiduciary obligations arise essentially from plainly identifiable traditional contexts, the application of an analytical framework that requires the interpretation of facts and the exercise of judgment presents a daunting problem in the progress of the law and its struggle to achieve equity. In recent years the legislatures of many states have dealt with this problem through the adoption of statutory laws. These statutes, spawned of a political rather than judicial process, are invariably aimed at remedying what is perceived to be specific practices in limited commercial situations. Thus, the statutes are “fair dealer” and/or “franchise practice” statutes, designed to protect against suppliers and/or franchisors possessing inherently superior bargaining power from utilizing that power in unrestricted ways to terminate dealership or franchise arrangements.3 The legislative enactments prevent termination of the dealership and/or franchise relationship based upon external market conditions, external strategy, or any other reasons unrelated to bad acts by the dealer/franchisee. In fact, the prohibition against termination (except for good cause) under some of these statutes, e.g., Wisconsin, is without limit, so that, theoretically, the supplier or franchisor may be required to continue the relationship perpetually. The statutory approach serves to more clearly circumscribe the areas in which the doctrine of fiduciary obligations should be applied and to popularize and educate the judiciary as to the applicability of the doctrine. Therefore, the statutory approach is salutary. However, it suffers from many of the same defects as does the application of the doctrine in the traditional context and, at the same time, it presents similar problems in application as does the development of the case law judicially created analytical framework.
Since they are the product of a political response to a specifically identified problem, the franchise practices and fair dealer statutes are limited and fixed in scope; they apply only to the specific situations that they were designed to remedy. For example, they would have no applicability to a long term service relationship, not involving the sale of product, wherein the service provider was compelled to reveal information pertaining to its business and developed at its expense which enabled the other party to terminate and absorb the service business. What would be the outcome if the circumstances of Wally v. Saks were brought in one of the statutory states? Further, the perceived indelibility of a statute often leads to rigidity in its interpretation and inclines toward a mechanical and simplistic application. Accordingly, the employment of statutory rules in this area tends to result in a more fixed and limited obligation of the doctrine of fiduciary obligations. On the other hand, there is invariably inherent in the application of these statutes a significant element requiring judicial interpretation and judgment. This is generally found in the commonly present statutory requirement that there be a shared business relationship, often referred to as a “community of interest”. What constitutes such a community of interest as will justify the imposition of fiduciary obligations upon the parties may be made concrete only through judicial decisions on a case-by-case basis. The concept of the existence of a community of interest is somewhat akin to portions of the combined elements in the judicially created framework that there must be a relationship of dominance-dependence and of justifiable trust and confidence. In this respect the “bright line” objective of the legislative approach is blurred and made indistinct.
The reality is that the very nature of the problem of the applicability of the doctrine of fiduciary obligations demands, especially in the context of complex commercial transactions, a rich and sophisticated analytical framework requiring the interpretation and counterbalancing of the relative importance of competing facts and considerations including the necessity of affording due importance to considerations of fairness and justice. No simple linear bright line rule or set of rules will do justice to such an inherently variegated situation. Decisional law developing and expanding the already existing framework is essential in this area; it is vital even within the statutory solution to these problems.
Even within today’s fairly well recognized commercial relationships such as dealerships, franchises, joint ventures, factoring and other financial arrangements, construction development agreements and other more common service providing relationships, there remains much to be done in the development of the law of fiduciary obligations. The analytical framework evolved through the case law requires further elaboration; Rampell and Zimmer-Masiello should not be the last word. What justifies the ability of one party to rely upon the trust and confidence of another occupying a dominant position requires greater precision. For example, is it sufficient if the trust and confidence is compelled by the dominant party, as in Rampell, through the provisions of an agreement, or, will it depend upon how such a provision is employed in practice in the relationship between the parties? Suppose the circumstances compelling the dependent party to place trust and confidence upon the dominant party is not contained in any agreement but is imposed by the dominant party, as in Zimmer-Masiello, within the activities of the relationship? Likewise, the essential underpinnings for the kind of dominance-dependence relationship that will suffice as an element for the finding of a fiduciary relationship requires further elaboration. It would appear from the case law in this area that this element may arise from a disparity of economic circumstances between the parties, from the inherent position of the parties within the relationship, (e.g., a supplier providing the essential products for sale in the relationship) from greater knowledge or training as well as from other contexts. But knowing this is often not enough. An economic disparity between the parties alone is plainly insufficient, otherwise, many, if not most contracts, could be disregarded under the rationale of this doctrine. The sole factor that one party has relied upon the confidence of the other by virtue of its having surrendered its business secrets to the other should fall short of achieving the necessary justification for concluding that this element exists. On the other hand, if a dominant party exercises its control in the negotiation of a contract that requires the other party to divulge such secrets, and, within the ongoing operation of the relationship, coerces that party to yield those secrets on a regular and systematic basis, it would appear that the requirement of the existence of these elements has been satisfied. Further, what is the yardstick by which dominance should be measured? The suggestion here is that the existence of the ability to dictate or substantially control the outcome of issues between the parties arising from the relationship should be the gauge. In all events these and other issues remain open even within the context of currently well recognized, but nevertheless, often complex, modern commercial arrangements.
The necessity for the development of a sophisticated judicial arsenal of precepts in the area of fiduciary relationships for the dissection of fast evolving new business structures is perhaps even more urgent. With the advent of the development of new technologies the variety of business relationships is expanding and becoming more complex. As an illustration, the formerly well-identified ties between employer and employee have loosened and the rights and obligations generated by them blurred. A former software engineer may have been an employee; now he chooses to define his relationship with the software distributor as that of an independent contractor so that he is responsible for and assumes the risk of the financing, operation and direction of his business. At the same time, many of the same lines of connection existent in an employer-employee relationship are still present. He may become privy to much information respecting the software developer-distributors business and technical software information. On the other hand, he may himself have developed much proprietary information respecting software technology and indeed his own business operations. As a pure employee, absent specific contractual conditions to the contrary, all of the software engineers’ technical and business information would be subsumed by the software developer-distributor. Now his independence dictates a different result the legal ramifications of which are not clearly and readily determinable.
In a different commercial context, are the obligations of the managers of a mutual fund to their investors to be measured solely by the investment contract, which is virtually dictated by management, or, by the currently existing precepts of common law; is the current state of the law of fiduciary obligations adequate to deal with the issues that evolve from the mutual fund structure, e.g., the ever more subtle issues of conflicts of interest, self dealing and elements of insider trading? Contractual provisions often-times provide a fine and realistic solution. Commonly, however, contracts are insufficient: they are incomplete, relationships and problems unforeseen at the time of the contract often arise, the relationship itself may be redolent with an overriding dominance-dependence element that skews the direction of its growth notwithstanding the contractual context. Without question the liberal application of negotiated contracts in resolving issues is and will continue to be the primary mechanism for the arrangement of conflicting demands in a commercial context of ever increasing complexity. Nevertheless, the very nature of the doctrine of fiduciary obligations and its development and usage over years of juridical effort teaches us that there are indeed relationships and situations wherein contractual solutions fall short of the fair resolution of disputes. In those situations – those where there is inherent in the relationship the elements of dominance-dependence and justifiable trust and confidence, the doctrine of fiduciary obligations is essential, not as a substitute for contractual solutions but as an enhancement of those solutions, in achieving essential justice.
In all events, the area of the law dealing with fiduciary relationships distinctly requires further elaboration and refinement. The doctrine contains within it the potential for providing the implements for the juridical treatment of many issues, not only in currently commonplace yet complex commercial arrangements, but with respect to the rapidly evolving business structures generated by our new technologies and rapidly expanding economy. It is our view that the only mechanism that can provide the necessary depth and reach for this evolutionary process is the pragmatic case-by-case process provided by the common law. The inherent nature of the problems dealt with by the doctrine of fiduciary obligations, their very subtlety, complexity and variety, changing in import with even the slightest factual alterations, demands the attention to detail and the richness of results that can only be provided by an empirical approach. Ultimately, it is this approach that will reward the judiciary in uplifting its awareness and incisiveness when confronted with circumstances which are instinct with the need to do equity.
- Zimmer-Masiello, Inc. v. Zimmer, Inc., 159 A.D.2d 363 (1st Dept. 1990). ↩
- Under the law in the state of New York an action for breach of fiduciary obligations is one in equity and, therefore, there is no right to trial by jury. ↩
- States that have enacted such legislation include Arkansas, California, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, Virginia, Washington, Wisconsin, Puerto Rico and the Virgin Islands. ↩