Also known as: duties of loyalty and confidentiality · loyalty and confidentiality duty · fiduciary duty of loyalty · attorney duty of confidentiality
Written by attorneys — see sources below.
A fiduciary obligation requiring a person in a position of trust to act solely in the interest of the beneficiary or principal and to refrain from using confidential information for personal advantage. The duty encompasses both the prohibition on self-dealing or competition and the protection of information obtained through the relationship.
Darius Dixon, a member of Dixon Foods LLC, learns of a supplier discount available only because of the company's bulk purchasing power. He routes the discount into a personal account without informing the other members. The company later discovers the diversion and requires Dixon to account for the benefit received.
Dustin Donovan, general partner of a limited partnership that owns Drake Logistics, negotiates a volume rebate from a carrier that serves the partnership. He deposits the rebate into his own entity instead of the partnership account. The limited partners sue to recover the amount as a partnership asset.
Darrell Duncan, a partner in a general partnership operating Decker Electronics, obtains a favorable component price solely through the partnership's order volume. He has the supplier pay the difference to a shell company he controls. The other partners demand that Duncan turn over the hidden margin.
Derek Douglas, outside counsel to Desert Oil, receives nonpublic details about an upcoming acquisition during the representation. He purchases shares in the target company before the information becomes public. The SEC brings an enforcement action alleging breach of the duty owed to the source of the information.
In July 1988 Grand Metropolitan PLC retained the Minneapolis law firm Dorsey & Whitney as local counsel in connection with a potential tender offer for the common stock of the Pillsbury Company. James Herman O'Hagan was a partner at Dorsey & Whitney but performed no work on the Grand Met matter. Both Grand Met and the firm took steps to keep the tender offer plans confidential. Dorsey & Whitney withdrew from the representation on September 9, 1988. On August 18, 1988, while the firm still represented Grand Met, O'Hagan began purchasing call options on Pillsbury stock. He continued buying options through September and ultimately held 2,500 unexpired Pillsbury call options. In September he also purchased approximately 5,000 shares of Pillsbury common stock at a price just under $39 per share. On October 4, 1988, Grand Met publicly announced its tender offer. The price of Pillsbury stock rose to nearly $60 per share. O'Hagan sold his options and shares, realizing a profit of more than $4.3 million. The Securities and Exchange Commission investigated the trading and obtained a 57-count indictment charging O'Hagan with mail fraud, securities fraud under § 10(b) and Rule 10b-5 on a misappropriation theory, fraudulent trading in connection with a tender offer under § 14(e) and Rule 14e-3(a), and money laundering. A jury convicted him on all counts and the district court imposed a 41-month prison sentence. A divided panel of the Eighth Circuit reversed all convictions, holding that the misappropriation theory does not support liability under § 10(b) and that Rule 14e-3(a) exceeds the Commission's authority under § 14(e). The Supreme Court granted certiorari.
View caseDamian Decker and other directors of a public corporation issue statements to shareholders that understate the company's liabilities. Shareholders who relied on the statements suffer losses when the true condition is revealed. The shareholders sue the directors for breach of the duty to communicate honestly.
Doran Malone, Joseph P. Danielle, and Adrienne M. Danielle filed an individual and class action in the Court of Chancery on behalf of themselves and all persons who owned common stock of Mercury Finance Company from 1993 through the present. The named defendants were the directors of Mercury, specifically John N. Brincat, Dennis H. Chookaszian, William C. Croft, Clifford R. Johnson, Andrew McNally IV, Bruce I. McPhee, Fred G. Steingraber, and Phillip J. Wicklander, along with KPMG Peat Marwick LLP. The complaint alleged that the director defendants knowingly and intentionally caused Mercury to disseminate materially false information about the company's earnings and financial condition in SEC filings and communications to shareholders since 1994. Mercury's 1996 earnings were reported as $120.7 million but were actually only $56.7 million. Mercury's 1995 earnings were reported as $98.9 million but were actually $76.9 million. Mercury's 1994 earnings were reported as $86.5 million but were actually $83 million. Mercury's 1993 earnings were reported as $64.9 million but were actually $64.2 million. Shareholders' equity on December 31, 1996, was reported as $353 million but was actually $263 million or less. All of the inaccurate information appeared in virtually every SEC filing and communication from the directors to shareholders during the period. The complaint further alleged that as a direct result of the false disclosures the company lost all or virtually all of its value, approximately $2 billion. The suit sought damages on behalf of the named plaintiffs and the putative class. The director defendants moved to dismiss on the ground that they owed no fiduciary duty of disclosure under the circumstances alleged. KPMG moved to dismiss the aiding and abetting claim asserted against it. After briefing and oral argument, the Court of Chancery granted both motions to dismiss with prejudice pursuant to Chancery Rule 12(b)(6). The plaintiffs appealed to the Supreme Court of Delaware.
View caseDevon Drake and the other directors of a closely held corporation propose charter amendments that restrict shareholder nomination rights. They send notice that omits material facts about the effect of the amendments. A shareholder challenges the amendments as the product of a breach of fiduciary duty.
Milliken Enterprises, Inc. is a privately held Delaware corporation and one of the largest textile businesses in the world. Its approximately 200 shareholders are mostly direct descendants of founder Seth Milliken. The ten-member board includes four directors who are Milliken family members or employees, while the remaining six are unaffiliated. Roger Milliken, Gerrish Milliken, and Minot Milliken own or control through trusts more than 50 percent of the preferred and common shares. Following the 1985 death of Mrs. W.B. Dixon Stroud, shares held in a trust controlled by Roger, Gerrish, and Minot Milliken were released to the Strouds, who now own or control close to 17 percent of the shares. Roger Milliken then proposed a General Option Agreement under which the Milliken family and the company would have a right of first refusal on any shares offered to unrelated persons. Nearly 75 percent of shareholders executed the agreement, but the Strouds and a few others did not. The board proposed charter and by-law amendments for consideration at the April 15, 1987 annual meeting. The Strouds filed suit in the Court of Chancery seeking to enjoin the meeting on grounds including inadequate notice and proxy materials. The trial court entered a temporary restraining order that was not contested. A few weeks later, the Milliken board reconvened, withdrew the challenged charter amendments and by laws, and replaced them with a series of new provisions. Further litigation followed, and the 1987 amendments were ultimately withdrawn. In early 1989 the board adopted new Amendments, including provisions on director qualifications and nomination procedures. On March 14, 1989, the company mailed notice of the April 24, 1989 annual meeting to shareholders along with copies of the current by-laws, the board resolution, and the certificate of incorporation. The notice indicated that the board would not solicit proxies. At the meeting, 93 percent of eligible voters attended in person and 78 percent of shares entitled to vote approved the Amendments. Roger Milliken answered questions about business condition but declined to release confidential information without a confidentiality agreement. After the meeting the Strouds filed individual and derivative actions in the Court of Chancery challenging the notice, the Amendments, and By-law 3. The Court of Chancery sua sponte granted summary judgment for the defendants on all claims except the challenge to By-law 3, which it invalidated.
View caseYes. An agent must account to the principal for any profit obtained through the agency relationship, even if the profit came from a third party and even if the principal suffered no loss. The duty prevents the agent from retaining benefits that belong to the principal.
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No. Model Rule 1.8(d) prohibits a lawyer from making or negotiating an agreement for literary or media rights to a portrayal based in substantial part on information relating to the representation before the representation concludes. The prohibition protects the duty of loyalty and confidentiality.
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Yes. Even when a third party compensates the lawyer, the duties of loyalty and confidentiality run exclusively to the client. The lawyer may not disclose client information to the payor without the client's informed consent.
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The partner must disclose the opportunity and may not appropriate it for personal benefit without the consent of the other partners. The duty of loyalty requires the partner to account to the partnership for any profit derived from the opportunity.
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