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The Duty to Make No Secret Profit in Pennsylvania
In our professional lives, most of us have encountered the opportunity to make “a little something on the side” as a result of our business relationships. We are sometimes faced with situations in which our positions afford us the chance to make money in excess of what we might make if we transact the business with full disclosure to all parties. Whether we are attorneys, real estate agents, corporate officers, or simply employees, in business we are often acting as agents of another, and therefore owe strict duties of loyalty to our principals. One of the duties we owe is to make no secret profit.
The common law duty of an agent to make no secret profit has been a fixture of modern jurisprudence. The Pennsylvania Supreme Court expounded on the subject in 1962, in the case of Sylvester v. Beck . In that case, our Court made it clear that “[t]here can be no doubt that an agent owes a duty of loyalty to his principal and in all matters, affecting the subject of his agency, he must act with the utmost good faith in the furtherance and advancement of the interests of his principal. This requires that he give the principal all information of the subject matter that comes to his knowledge. An agent who makes a profit in connection with transactions conducted by him on behalf of his principal is under a duty to give such profit to the principal.”
To put it bluntly, this means that anyone acting as an agent must always look out for her principal first, and herself second. Although one of the founding principles of capitalism is to make as much as possible by whatever legal means, the agent’s fiduciary duty to the principal overrides her freedom to conduct business in any manner she sees fit. She cannot profit by her relationship to the principal. This means that an attorney cannot use her relationship with her client to her personal advantage. A real estate agent cannot receive more from a transaction than the amounts to which her clients agreed. An officer of a corporation cannot cut a side deal with a supplier and profit thereby. An employee acting within the scope of her employment cannot use knowledge gained in her employment relationship to make a profit for herself.
A few examples are instructive. In Kribbs v. Jackson , a 1957 Pennsylvania Supreme Court case, the defendant had acted as an agent of the plaintiff for the purpose of collecting rent on property that the plaintiff owned. The trial court found that the defendant had fraudulently concealed the full amount of rent collected and had thereby earned a profit in excess of his commission. The court ordered the defendant to account for the fraudulently-earned profit. The Supreme Court affirmed the trial court, reasoning that “all profits made and advantage gained by the agent in the execution of the agency belong to the principal.” Similarly, in Graham v. Cummings , a 1904 Pennsylvania Supreme Court case, the shareholders of a corporation had authorized the defendant shareholder to sell their stock. The defendant secretly negotiated to receive a higher amount for his stock than for that of his fellow shareholders. The Court concluded that an agent “cannot make profits out of his principal in the business of his agency.”
Along these same lines, our Commonwealth Court in Smith v. Unemployment Compensation Bd. of Review (1977) confirmed that certain duties are imposed by the law of agency upon the employer-employee, or ‘master-servant,’ relationship. Ms. Smith was an in-house telemarketer who, while on her own time outside of work, became aware of a contact that was of interest to her employer – exactly the type of lead which she was expected to generate while at work. The company employed other salespersons who went door-to-door, and who were paid a higher commission for sales than telemarketers. Ms. Smith told her supervisors that she would give them the name of the contact only if she was paid the higher commission of the door-to-door salespeople. The company refused, and fired her. The Commonwealth Court, in the context of Ms. Smith’s unemployment claim, found that her “conduct was a violation of those standards of behavior that her employer could rightfully expect of her, and was a breach of duty so inimical to her employer’s best interests that discharge was a natural result.” Ms. Smith was “under a duty to disclose to her employer the prospective customer’s identity and her refusal to do so on request was a clear breach of that duty.”
However, the existence of an agency relationship alone does not render the agent liable for any income he or she earns above his or her compensation as an agent. If the agent makes a profit without taking advantage of the agency relationship, there is no breach of fiduciary duty. In 1987, our Superior Court instructed that “an agent can properly act freely on his own account in matters not within the field of his agency and in matters in which his interests are not antagonistic to those of the principal.” In Levy and Surrick v. Surrick , a lawyer in a professional corporation personally bought a mini-mall, although his law firm had drafted the lease between the sellers of the mini-mall and one of its tenants. The law firm sued the lawyer, alleging that the lawyer usurped for his private gain a business opportunity that rightfully belonged to the corporation. The Superior Court found that although the lawyer was an agent of the law firm, nevertheless in order to prevail the law firm must have shown some connection between the income and the “business of the agency.” Since it could not, it had no claim.
The moral of the story is that no matter what our status as agents of others, whether we are attorneys, agents, presidents of corporations, or the lowliest employees, we must be mindful of our duties to those who have put their trust in us. The duty to make no secret profit is quite real, and will be enforced by the courts of Pennsylvania.
If you require legal representation for an employment matter, the attorneys of Wolf, Baldwin & Associates, P.C. have the experience to represent you through court or arbitration. Click here now to contact us and to schedule an appointment. We will be happy to advise you about your employment rights under Pennsylvania law.
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