After reviewing the case briefs (attached), answer the questions that follow in 500 words, or as thoroughly as possible. Already provided answers to the questions only need to elaborate to get it to 500 words all over.
CASE BRIEF 16.2
Lucini Italia Co. v. Grappolini
2003 WL 1989605 (N.D. Ill. 2003)
FACTS: Mr. Frigo hired Mr. Grappolini as a consultant for his Lucini company, a company that developed high-end olive oils for sale in the United States. Mr. Grappolini was to negotiate a supply contract with Vegetal for its olive oil, one that was necessary for use in creating a flavored olive oil Frigo was developing (the LEO project).
With the LEO product launch approaching, and no copy of the alleged Vegetal supply contract available, Mr. Frigo had Lucini’s lawyer in Italy contact Vegetal directly for a copy. The lawyer learned that Vegetal had a supply contract, but the contract was with Mr. Grappolini’s company and that it was not transferable to Lucini. Mr. Frigo then confronted the officers of Vegetal they acknowledged that they had negotiated with Mr. Grappolini for his company, not for Lucini and were not aware of Lucini’s needs or Mr. Grappolini’s representation of Lucini. The officers at Vegetal said that Grappolini had been a “bad boy” in negotiating the contract for himself. Vegetal agreed to supply Lucini with olive oil in the future, but could not deliver it in time for the launch of Lucini’s new line. The soonest it could deliver would be after the next harvest, a time that meant the marketing and sales plans of Lucini for its new product had been wasted.
Mr. Frigo and Lucini filed suit against Mr. Grappolini and his company (defendants) for breach of fiduciary duty.
ISSUE: Did Mr. Grappolini breach his fiduciary duty?
DECISION: As agents, Defendants owed Lucini general duties of good faith, loyalty, and trust. In addition, Defendants owed Lucini “full disclosure of all relevant facts relating to the transaction or affecting the subject matter of the agency”.
Defendants were Lucini’s agents and owed Lucini a fiduciary duty to advance Lucini’s interests, not their own. When Defendants obtained an exclusive supply agreement with Vegetal for the Grappolini Company instead of for Lucini, they were disloyal and breached their fiduciary duties. Lucini suffered substantial damages as a result of this breach.
As a proximate result of Defendants’ breach of their fiduciary duties, Lucini suffered lost profit damages of at least $4.17 million from selling its grocery line of LEO products from 2000 through 2003. The Court will award Lucini its lost profits of $4,170,000, together with its $800,000 of development costs for LEO project. Defendants engaged in willful and malicious misappropriation as evidenced by their use of the information for directly competitive purposes and their efforts to hide the misappropriation and, accordingly, the Court will award $1,000,000 in exemplary damages. Such an award is necessary to discourage Defendants from engaging in such conduct in the future.
Answers to Case Questions
1. Explain how Mr. Grappolini breached his fiduciary duty.
a. He did not disclose his negotiations with Vegetal.
b. He breached his duty by usurping an opportunity that Mr. Frigo had discovered.
c. He withheld information from Mr. Frigo.
d. He delayed a product and acted in his own best interests, not those of his principal’s.
2. What lessons can you learn about contracts, suppliers, and product launches from the case?
a. Make sure contracts are in place prior to committing resources to marketing, production.
b. Be sure that consultants in the same business have restrictions on their activities.
c. A face-to-face meeting to finalize agreements probably ensures that a contract exists. Without it, one does not know.
3. Evaluate the ethics of Mr. Grappolini’s conduct. Why did Vegetal’s officers refer to Mr. Grappolini as a “bad boy”? The breaches of fiduciary duty here were so blatant and the misrepresentations so ongoing and the damages that resulted so extensive that the court felt there was a need to deter future conduct on the part of this agent. The law is one standard of measuring behavior, but looking at the ethics here, there was just a dishonesty and unfairness about what was done – the agent capitalized on all the work and effort of his principal and took the profits from it whilst depriving the principal of the chance to execute his plans and see through to sales.
CASE BRIEF 17.1
Blumberg v. Ambrose
2015 WL 5604474 (E.D. Mich. 2015)
FACTS: During the summer of 2004, Roberta Blumberg (plaintiff) and Michael Ambrose (with LLC referred to as defendants) worked together at the health clinic of Tamarack Camps. Blumberg was a registered nurse and the Director of Health and Safety at Tamarack, while Ambrose was an undergraduate student and a clinical assistant. Blumberg and Ambrose collaborated to create and market a for-profit web-based electronic medical records program called “CampDoc” that would allow camps to input and access the medical records of their campers. This program was expanded to allow parents the ability to fill out health forms and medical histories on-line, as well as electronically submit information regarding allergies and medications. Blumberg participated in both the design and the development of the CampDoc system, including its prototype, and Ambrose wrote the code for the CampDoc software.
In the summer of 2009, Blumberg and Ambrose were able to pilot the software program at Tamarack. With the success of the pilot program, the two decided to market and sell the CampDoc program to other camps across the county.
In October 2009, Ambrose filed articles of incorporation for CampDoc as a Michigan limited liability company and, unbeknownst to Blumberg, included himself as the sole member. As part of organizing the company, Ambrose told Blumberg that she needed to sign several documents, including an employment agreement, which she did in May 2010. However, Blumberg did not believe that these documents altered her relationship as a partner with Ambrose. Ambrose also had conversations with Blumberg in 2011 about her interest in the profits of CampDoc, and he told her that “she would receive some percentage of the profits from the business.”
From 2010 to March 2012, Blumberg attended conferences for CampDoc. Blumberg “brought several dozen camps on board in 2011,” but she was not paid for that work. In 2012, Blumberg quit her job “as a registered nurse to devote [her] attention to CampDoc.” Blumberg never received compensation for her services in 2009. Blumberg was paid $100 in 2010, $1,000 in 2011, $6,250.02 in 2012, and $18,750.06 in 2013. Ambrose believed Blumberg’s services in 2010 and 2011 were worth more than what she actually received, and that it was his intention to make Blumberg “a millionaire.”
In September 2012, Ambrose provided Blumberg with four more documents to sign − a consulting agreement, a participation plan agreement, a non-compete/non-disclosure agreement, and a confidentiality agreement. Although Blumberg claims that Ambrose considered her a “co-founder,” and called her “the heart and face of the company,” Ambrose’s lawyers advised him that she should not be listed as an owner of CampDoc. Rather, Ambrose suggested that Blumberg own a “phantom” interest in the company, which would be “the equivalent of real equity.”
After reviewing the documents, Blumberg informed Ambrose that she intended to seek legal advice. Ambrose then terminated Blumberg’s “employment” with CampDoc the following day.
Blumberg filed suit seeking to have the association between herself and Ambrose declared a partnership under Michigan’s Uniform Partnership Act.
ISSUE: Had the parties created a partnership?
DECISION: There were enough factual issues that the court could not grant summary judgment. The parties worked together as a team. They intended to share profits from the company. Blumberg worked without compensation. They had formed the idea together and worked to develop it and then sell it.
Answer to Case Questions
1. If an LLC was created, how is this case about the formation of a partnership? The LLC was formed unilaterally by Ambrose, without permission. The issue is the interest that Blumberg holds and whether the intention was to create a partnership.
2. What are the indications that there was a partnership created? The two had talked about sharing and making millions. Blumberg went without compensation as they built the business. They split the work assignments between administration and selling and marketing, but they both participated equally.
3. What list of lessons could you develop for two people who are starting a business based on what happened in this case? Put your interests in writing. Determine what type of entity you want and create it together. Don’t do too much business before you have properly formed an entity. Watch employment agreements and other documents between the two of you before the entity is created.
Brehm v. Eisner
746 A.2d 244 (Del. 2000)
FACTS: Michael Eisner, then-CEO and Chairman of Disney, hired Michael Ovitz as his second-in-command at Disney. Mr. Eisner had a history of not working well with powerful second-in-commands, and Mr. Ovitz was a powerful Hollywood talent agent and producer. In less than one year, Mr. Ovitz and Mr. Eisner were at such odds, that Mr. Eisner and the board agreed to pay Mr. Ovitz over $38,000,000 in cash compensation and 3,000,000 in Disney stock to leave the company. The shareholders brought suit against the Disney board alleging that the board’s supervision of Eisner was lax, that the hiring was a poor business decision, and that the amount paid to end the arrangement constituted waste. The board says it just made a mistake.
The Delaware Court of Chancery dismissed the shareholders’ complaint because of the business judgment rules. The shareholders appealed
ISSUE ON APPEAL: Was the decision to hire and terminate Mr. Ovitz protected under the business judgment rule?
DECISION: Yes. The pay-out was outrageous, the processes of the board were not crackerjack, and the shareholders were justifiably upset, but they had not established that the board did not have its reasons for just getting rid of Ovitz with the pay-out. There were downsides to litigating with Ovitz and dragging the company through the process.
Answers to Case Questions
1. What must the shareholders prove to recover? They must prove that there was not sufficient consideration of the issue and that no reasonable person could have reached that decision or would have reached that decision if they had put in sufficient time in considering the pros and cons of the severance package for Ovitz.
2. What does the court say is the relationship between good corporate governance, liability, and business judgment? A company need not have perfect corporate governance processes in order to enjoy the protection of the business judgment rule. Aspirational is the description for perfect corporate governance, but a board need not be there in order to enjoy the liability protections of the business judgment rule.
3. What alternatives to litigation do shareholders have? The court notes that shareholders can sell shares or vote out management, but the standard for liability is high enough that the processes of a company are both disrupted by courts second-guessing their decisions.