A subagent is "a person appointed by an agent empowered to do so, to perform functions undertaken by the agent for the principal, but for whose conduct the agent agrees with the principal to be primarily responsible." "[T]he subagent stands in a fiduciary relation to the principal, and is subject to all the liabilities of an agent to the principal, except liability dependent upon the existence of a contractual relation between them."
Select Creations, Inc. v. Paliafito America, Inc.
MAI made a "Grip Ball" toy and sold the marketing and distribution rights to Paliafito for $1,000,000. Paliafito did not have any sales representatives of its own however, so it retained Select to act as its mass merchandising consultant and to contract with sales representatives to sell and promote Grip Ball. Select appointed Forman to do the job, and Paliafito paid commissions to both businesses.
Soon, Select began communicating directly with Lee, the owner of MAI. Lee wanted to terminate her arrangement with Paliafito and to instead distribute the product herself and have Select market them. Lee, Select's officers, Forman's president Composto, and others met without telling Paliafito. Lee told them that MAI filed suit to terminate its agreement with Paliafito and to switch their accounts to reflect that MAI and not Paliafito was then the vendor of Grip Ball.
Paliafito continued to pay Select and Forman. When it discovered that they had conspired with Lee, litigation ensued.
Did Forman owe and breach a fiduciary duty to Paliafito?
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The fiduciary duty owed by an agent to a principal includes the duty of undivided loyalty. Moreover, agents are prohibited from taking any action in competition with their principal or adverse to their principal's interests.
It is undisputed that Select was Paliafito's agent, and overwhelming evidence shows that Forman was Select's agent and that Paliafito controlled Forman's activities. Composto, as president of Forman, is an agent thereof. Thus Forman and Composto were both the subagents of Paliafito. The evidence overwhelmingly demonstrates that they knew they were acting on Paliafito's behalf in selling the Grip Ball products, so there is no genuine factual dispute that they owed Paliafito fiduciary duties.
Forman breached this duty in several ways:
- It met with Lee without Paliafito's knowledge or consent and offered to undercut Paliafito's offer thereat.
- It did not tell Paliafito that Select was meeting with Lee to discuss bypassing Paliafito.
- It participated in a sales meeting with Lee, excluding and not informing Paliafito.
- It was promised to be paid by Lee what Paliafito owed it.
- It was instructed to have vendor numbers switched from Paliafito to MAI.
- It delivered orders directly to MAI, instead of Paliafito.
All of these were adverse to Paliafito's interests and therefore breaches to its duty of loyalty. This duty existed independently of Paliafito's duty to MAI, so its discontinuation could not have affected it. Forman continued communicating with Paliafito and accepting commission payments, so its duty continued to exist and be breached. Also, regardless of what Select did, Forman had a duty to not act contrary to its principal's orders, even if its immediate principal itself did.
Yes, Forman owed a fiduciary duty to Paliafito and breached it many times.