Category: Torts

Online Merchant Has No Duty to Protect Victims From Criminal Acts – Seventh Circuit 8.12.14

armslistThe Seventh Circuit recently examined the nature and scope of the legal duty owed by an Internet retailer to prevent a criminal attack on a third party.  In Vesely v. Armslist, LLC, (http://docs.justia.com/cases/federal/appellate-courts/ca7/13-3505/13-3505-2014-08-12.pdf) the plaintiff filed a wrongful death suit on behalf of his sister who was murdered by someone who purchased a handgun on Armslist.com (http://www.armslist.com), an electronic “firearms marketplace” that brokers gun sales between private parties.

The assailant (now serving a life sentence and not party to the civil suit) bought a gun off of Armslist from a private seller in Seattle, Washington.  He later shot the plaintiff’s sister after she spurned his (the gun buyer’s) advances.  Plaintiff sued the website operator, alleging wrongful death (predicated on negligence), statutory survival and a family expense claims.  All of plaintiff’s claims were premised on the allegation that the defendant had a duty to protect third parties from the criminal acts of users of the website.  The District court found there was no duty and granted the defendant’s motion to dismiss (12(b)(6) motion)).  The plaintiff appealed.

Held: Affirmed.  Gun selling site owes no duty to control the conduct of on-line purchasers.

Reasons:

The website operator didn’t owe the plaintiff a duty to protect third parties from the criminal acts of gun buyers.  In Illinois, the essential negligence elements are a duty of care owed by a defendant to the plaintiff, violation of that duty and an injury resulting from the violation.  Breach of duty and proximate cause are fact questions for a jury while the existence of a duty is a matter of law for the court to decide.

A private individual normally doesn’t owe a duty to affirmatively protect another from a criminal attack unless there is a ‘special relationship’ between the parties.  The four categories of special relationships are: (1) common-carrier and passenger (i.e. a train); (2) innkeeper and guest (i.e. hotel); (3) custodian-ward; and (4) business invitor and invitee.  (Armslist, p. 5).

Aside from the special relationship duty rule, courts can find a legal duty on public policy grounds.  The public policy factors that inform the court’s duty calculus are (1) reasonable foreseeability of the injury; (2) likelihood of the injury; (3) the magnitude of the burden of guarding against the injury; and (4) the consequences of placing the burden (of guarding against the injury) on the defendant. (p. 6).

A defendant also has a duty to refrain from “affirmative conduct” that creates a risk of injury to others and from actively assisting someone’s wrongful act.  But where the act that causes harm is criminal conduct (like the murder, here), there must be a special relationship for liability to attach. (p. 6).

The Court found the Armslist web operator had no legal duty to the plaintiff or his sister.  Since the operative act was a crime – a shooting – the special relationship rule applied.  The Court made a distinction between actively assisting gun buyers’ to commit crimes and simply serving as conduit for on-line gun purchases.  Since the defendant merely enabled consumers to use its site to buy guns, this didn’t equate to actively encouraging the buyers to commit illegal acts.  (p. 7).  And since there is no special relationship involving on-line merchants and consumers, there was no duty as a matter of law.

To bolster its holding, the Seventh Circuit noted that the Armslist site is a legal service and that the site contains profuse disclaimers that require the user’s acknowledgement that the defendant isn’t responsible for looking into whether parties to the on-line transaction have legal capacity to buy and sell guns.  Armslist’s standard terms also require the gun advertiser to certify that he/she will obey all applicable gun laws and will consult the ATF with firearms questions. (p. 2).  In light of these disclaimers and because there was no special relationship between Armslist and any of its users’ future crime victims, plaintiff was unable to establish that the defendant website operator owed a legal duty.

Afterwords:

A victory for on-line merchants who traffic in dangerous things and a corresponding  loss for gun control advocates.  The Court refused to saddle a classified advertising site with a legal duty to unknown third parties.  The Court enforced the defendant’s clear disclaimers that emphasized that it was not vetting either the gun seller’s or buyer’s qualifications for gun purchases or any red flags in their personal histories.

The Court solidifies the negligence law proposition that the existence and reach of a duty has limits – especially in the Internet sales context. If there is no recognized special relationship, there is no legal duty to protect against intervening criminal acts.

 

Non-Compete Signed 16 Years After Employment Start Date Is Too Late (To Be Enforced) – Says KY High Court

In prior articles, I’ve discussed how restrictive covenants (i.e., non-disclosure, non-solicitation and non-competition provisions) are staples of modern-day employment contracts and business sale agreements.  In Creech, Inc. v. Brown (http://law.justia.com/cases/kentucky/supreme-court/2014/2012-sc-000651-dg.html) the Supreme Court of Kentucky struck down a non-competition provision in a hay supplier’s written contract the supplier made a long-time employee sign several years after he started working there.

The defendant worked for the plaintiff in various capacities through the years.  Sixteen years into his tenure, plaintiff’s new management asked the defendant to sign a Conflict of Interest Agreement (the “Agreement”) that contained broad non-disclosure provisions and a non-competition clause.  The non-compete spanned three years and had no geographic boundaries.  Fearing job loss, defendant signed the Agreement.  The defendant continued to work for the plaintiff for a couple more years when he took a job with a rival supplier.  Plaintiff then sued to enforce the Agreement’s non-competition provision.  The trial court sided with the defendant and the appeals court reversed.  On remand, the trial court entered summary judgment for the plaintiff employer and found that the defendant violated the Agreement.  This time, the appeals court upheld the non-competition clause.  Both parties appealed to Kentucky’s Supreme Court.

Held: Reversed.  The non-competition provision is unenforceable because it lacks consideration.

Reasons:

The defendant worked for nearly two decades for the plaintiff hay supplier and wasn’t asked to sign a non-compete until more than sixteen years after his start date.  The plaintiff gave defendant nothing in exchange for defendant signing the Agreement.  It didn’t give the defendant a raise, didn’t change the defendant’s job duties and offered no training or other benefits.  There was no consideration flowing to the defendant to bind him to the non-competition provision’s three-year term.

Consideration means a benefit to the party making a promise and a loss to the party to whom the promise is made.  Each side gives and gets something.  Benefit means the promisor has gained something to which he is not otherwise entitled.  Detriment or loss means that the promisee has given up something in exchange for the promise.  (p. 12).

The Court rejected the plaintiff’s claim that the defendant’s continued employment was sufficient consideration.  The plaintiff didn’t give the defendant anything in exchange for him signing the Agreement.  The Agreement was silent on defendant’s job duties or rate of pay and as a result couldn’t be considered a “rehiring.”  Nor did the Agreement alter defendant’s employment terms.  He remained an at-will employee at the same pay rate. (p. 14).  The Agreement imposed a three-year restriction on defendant seeking alternative employment without giving him any corresponding benefit.  Since the Agreement didn’t require plaintiff to give up anything in exchange for the defendant signing the Agreement, the non-competition provision lacked consideration and wasn’t enforceable.  (p. 15).

Besides defendant’s job description and pay remaining static, the plaintiff hay supplier also didn’t offer any specialized training to the defendant after he signed the Agreement.  A contract law axiom posits that a promise devoid of a reciprocal flow of benefits and detriments can’t be enforced.  (pp. 15-17).  By not giving up anything in consideration for defendant executing the Agreement, the plaintiff’s offer of continued employment was illusory.

Afterword: I’ve never practiced in Kentucky but the case is relevant to Illinois restrictive covenant law since it’s congruent with Fifield’s (Fifield v. Premier Dealer Services, Inc., http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf) two-year rule. (Two years of continued employment is required for a non-compete to have adequate consideration.)  

The result in Creech seems fair.  An employer shouldn’t be able to unilaterally foist a non-compete on a long-time employee without providing some additional benefit to him.  For employers, the lesson is clear: if you’re going to have an employee sign a restrictive covenant after he’s started working, you should pay the employee a bonus, give him a raise or provide some other tangible benefit so that there is sufficient consideration – loss or detriment –  flowing to the employee so that you can bind him to a non-competition provision.

 

Case Summary: Star Forge v. F.C. Mason (Part 1 of 2): Breach of Fiduciary Duty and Corporate Opportunity Rule (IL Law)

A corporate officer’s fiduciary duties to his corporate employer and the monetary damages that flow from a breach of those duties are two of the key issues dissected and applied by the Second District appeals court in Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U.

Plaintiff was a steel company that sued its former President and some rival steel companies after he secretly entered into separate employment and sales commission agreements with those companies and even formed his own competing steel sales venture – all while employed by the plaintiff.  The plaintiff sued for breach of fiduciary, breach of contract and fraud and sought damages equal to about a decades’ worth of payments it made to the defendant.  After settling with the corporate competitor defendants, the plaintiff went forward on its claims against its former President.  The trial court granted summary judgment for the plaintiff and entered judgment of over $700K against the defendant.  Defendant appealed.

Held: Affirmed

Q: Why?

A:  The Court found that the defendant breached his duties of loyalty to his company (the plaintiff) by surreptitiously entering into deals with rival manufacturers and by forming a stealth sales representative entity that marketed towards plaintiff’s customers.

– In Illinois, to prevail on a breach of fiduciary duty claim, the plaintiff must show: (1) existence of a fiduciary duty, (2) breach of that duty, and (3) damages flowing from the breach;

– A corporate officer is a quintessential fiduciary of his company and has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (a) he tries to enhance his personal interests at the expense of the corporate interests, or (b) he hinders his corporate employer’s ability to carry on its business;

– Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing his company, he breaches his fiduciary duties to the company;

– To show breach of fiduciary duty by diversion of business opportunity, all that’s required is that the other companies benefitting from the officer’s actions are in the same line of businessas the plaintiff/employer; the companies don’t have to be direct competitors;

– Under the corporate opportunity doctrine, a fiduciary (like a corporate officer) can’t take advantage of business opportunities unless he first presents that opportunity to his employer;

– A business opportunity belongs to a plaintiff employer if it is “reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage”;

– A corporate officer can’t divert a business opportunity merely because he suspects that his employer lacks the legal or financial capability to take advantage of that opportunity.

(¶¶ 18-24).

The Court found that the defendant unquestionably breached his fiduciary duties by diverting business to plaintiff’s competitors and by forming a corporation that secretly sold to plaintiff’s customers.  Significantly, the defendant failed to first offer to his employer a lucrative deal involving John Deere – one of plaintiff’s largest customers.  The Court rejected defendant’s arguments that some of the business defendant steered from the plaintiff was outside the parameters of plaintiff’s capabilities.  It was enough that the diverted business was possibly or arguably within the scope of plaintiff’s business to establish defendant’s breach of his duties to his employer.  Id.

Take-aways: Though this case is unpublished, Star Forge provides clean synopsis of Illinois breach of fiduciary duty rules, the corporate opportunity doctrine and what a plaintiff must show to prove that an officer wrongfully usurped a business opportunity belonging to the plaintiff.  The case also shows that an officer’s belief as to whether or not his employer can “handle” or service a given opportunity doesn’t matter.  All that’s required for the employer to show a breach is that the diverted business opportunity falls within the possible range of the employer’s business, services and resources.