I propose, in this series of papers, to discuss the following interesting particulars:
In the progress of this discussion, and in the tradition of Alexander Hamilton, John Jay, and James Madison, I shall endeavor to give a satisfactory answer to all the objections which shall have made the appearance and application of the fiduciary standard, that may seem to have any claim to your attention.
It will be of use to begin by examining the vital role of the fiduciary standard of conduct, the certain evils arising from its diminution, and the probable dangers which exist from its inappropriate application. Fashioning effective, sensible regulation in this and in future years will require consideration of the state of current rules of conduct and their effectiveness, along with examination of alternatives for future legislative and regulatory action.
February 11, 2022
#1. Fiduciary vs. Arms-Length Relationships
In the era that lies ahead, the trusted businessman, the prudent fiduciary, and the honest steward must again be the paradigms of our great American enterprises. It won’t be easy, but if we all work long enough and hard enough at the task, we can build … a fiduciary society in which the citizen-investors of America will at last receive the fair shake they have always deserved from our corporations, our investment system, and our mutual fund industry.
– John Bogle[1]
My personal journey to study fiduciary law, as applied to financial services, began long ago. Please join me as I further undertake an exploration of these topics. We begin this venture with an examination of the two forms of relationships that exist in commerce today – arms-length and fiduciary.
Two Types of Relationships Exist under the Law
Understanding fiduciary duties begins with an understanding of the two general types of relationships between product and service providers and their customers or clients under the law – “arms-length relationships” and “fiduciary relationships.”[2] “Arms-length” relationships apply to the vast majority of service provider–customer engagements.[3] In arms-length relationships, the doctrine of “caveat emptor”[4] generally applies,[5] although there are many exceptions made to this doctrine which effectively compel affirmative disclosure of adverse material facts in diverse contexts.[6] In other words, non-fiduciaries who contract with each other can engage in “conduct permissible in a workaday world for those acting at arm’s length.”[7]
Arms-Length Relationships, Generally
In arms-length, commercial relationships, the level of trust or confidence reposed by the customer in the other party is not exceptional. “Mere subjective trust does not transform arms-length dealing into a fiduciary relationship.”[8] “Absent express agreement of the parties[9] or extraordinary circumstances, however, parties dealing at arms-length in a commercial transaction lack the requisite level of trust or confidence between them necessary to give rise to a fiduciary obligation.”[10] Ordinary “buyer-seller relationships” do not give rise to the imposition of fiduciary duties upon the seller.[11]
Yet, commercial good faith is always required in contract performance. Actors in arms-length relationships are always subject to the requirement of “mere good faith and fair dealing”[12] in the performance of their obligations; this doctrine is fundamental to all commercial transactions.[13] Good faith requires that each party perform their respective obligations and enforce their rights honestly and fairly.[14]
While there is no general duty to disclose material facts in arms-length transactions, actual or “common law” fraud is prohibited in the formation of commercial relationships.There is generally no duty to undertake full disclosure of material facts in the negotiation of commercial contracts,[15] except where one party’s superior knowledge renders non-disclosure of an essential fact inherently unfair[16] or a “special relationship” exists.[17] Instead, actors in commercial relationships generally possess a duty to undertake diligent inquiry in order to ascertain facts.[18] However, if disclosures are undertaken by a party, the statements made must be truthful and complete[19] or actual fraud[20], also called “common law fraud,” exists. Hence, while commercial good faith does not automatically extend to the area of contract negotiations, misrepresentations made during the formation of a contract may constitute either actual fraud or breach of contract.[21] To put it much more simply, don’t lie, cheat, deceive or steal – even in commercial arms-length relationships.
No fiduciary obligations exist in most arms-length relationships. “An arms-length relationship can support no implied-in-law fiduciary obligations.”[22] Instead, the standard of conduct expected of the actors in arms-length relationships has been described by the courts as the “morals of the marketplace.”[23]
Modification of the Caveat Emptor Doctrine, Short of the Imposition of Broad Fiduciary Duties, through Legislation and Rulemaking for Consumer Protection
While some often think of our society as “free” and capitalism as best undertaken when it is “unfettered,” not all arms-length relationships are free from government intervention. Though not arising to the level of fiduciary protections, specific statutes or regulations may nevertheless protect consumers.[24] In essence, the “caveat emptor” doctrine has been legislatively modified by the imposition of specific rules or doctrines which seek to provide government (public) redress for certain bad acts, provide enhanced disclosures, or provide additional rights which can be privately enforced, in recognition that unfettered capitalism[25] can have ill effects.
Future blog posts will examine these forms of consumer protection, which include mandatory disclosures, absolute prohibitions, and other restraints on conduct via rules-based regimes. And the effectiveness, or lack thereof, of various legislation or rules, will likewise be examined.
Understanding Fiduciary Relationships
In contrast to arms-length relationships, the law imposes upon one party to some relationships the status of a fiduciary. This form of relationship is called the “fiduciary relationship” or “fiducial relationship.” One upon whom fiduciary duties are imposed is known as the “fiduciary” and is said to possess “fiduciary status.” The fiduciary standard of conduct is consistently described by the courts as the “highest standard of duty imposed by law.”[26]
The term “fiduciary” comes to us from Roman law and means “a person holding the character of a trustee, or a character analogous of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires.”[27] Indeed, the Latin root of the word fiduciary – fiduciarius – means one in whom trust – fiducia – reposes. Legal usage in many jurisdictions also developed an overlay – an implication of a particular relationship of confidence between the fiduciary and those who had placed their trust in that person.
At the beginning of the nineteenth century, in Gibson, 31 Eng. Rep. 1044 (1801), the court, while explaining the decision to rescind the sale of an annuity by an attorney to his client, announced that “[one] who bargains in matter of advantage with a person placing confidence in him is bound to sh[o]w, that a reasonable use has been made of that confidence; a rule applying to trustees, attorneys or anyone else.” The courts eventually settled on “fiduciary” to denominate relationships of trust and confidence and denominated the doctrine (applied in Gibson) regulating these confidential relationships as “constructive fraud.” By the mid-nineteenth century, the doctrine of constructive fraud was said to arise from some peculiar confidential or fiduciary relation between the parties.
In more recent times, Justice Philip Talmadge of the State of Washington Supreme Court summarized the core aspects of current fiduciary relationships:
A fiduciary relationship is a relationship of trust, which necessarily involves vulnerability for the party reposing trust in another. One’s guard is down. One is trusting another to take actions on one’s behalf. Under such circumstances, to violate a trust is to violate grossly the expectations of the person reposing the trust. Because of this, the law creates a special status for fiduciaries, imposing duties of loyalty, care, and full disclosure upon them. One can call this the fiduciary principle.[28]
Fiduciaries Possess a Much Higher Standard of Conduct under the Law
“There is a crucial distinction between surrendering control of one’s affairs to a fiduciary or confidant or party in a position to exercise undue influence and entering an arms length commercial agreement, however important its performance may be to the success of one’s business.”[29] The “fiduciary relationship” is distinct from arms-length relationships, as those whom the law classifies as fiduciaries must carry on their dealings with beneficiaries at a level high above ordinary commercial standards. Perhaps the most famous judicial expression of fiduciary duties is Justice Cardozo’s lines expressing a lofty vision of the duties owed by fiduciaries. “Generations of corporate lawyers have been schooled in its memorable language finding broad fiduciary obligations on managers of other peoples’ money.”[30]
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions … Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. [31]
More recently the much higher standard of conduct that results from the application of fiduciary status has been said to flow from the requirement of the fiduciary “to adopt the principal’s goals, objectives, or ends.”[32] “It is what makes fiduciary law unique and separates fiduciaries from other service providers.”[33] As Professor Arthur J. Laby explains:
Some even use the phrase ‘alter ego’ to reference the fiduciary norm. This personalizes the duty in a particular way. The fiduciary must appropriate the objectives, goals, or ends of another and then act on the basis of what the fiduciary believes will accomplish them – a happy marriage of the principal’s ends and the fiduciary’s expertise. The fiduciary does not eliminate its own legal personality, rather it must consider the principal’s delegation of authority to the fiduciary from the perspective of fidelity to the principal’s objectives as the fiduciary understands them.[34]
In essence, a fiduciary “steps into the shoes” of the client, with full loyalty to the client’s interest as if the fiduciary became the client. But, during this process, the fiduciary retains the superior knowledge, skill and wisdom, and through his or her application of same fulfills the requisite duty of due care.
In Fiduciary Paper #2, forthcoming, I explore the public policy rationale behind the application of the fiduciary standard. The justifications for the imposition of fiduciary status is essential to the understanding of the nature of the fiduciary duties themselves, which are explored in later papers.
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Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is an Associate Professor of Finance within its Gordon Ford College of Business.
Called “Dr. Bear” by his students, Dr. Rhoades is also a financial and investment adviser with Scholar Financial, LLC. To request further information about Scholar Financial, LLC’s fees and services, please email AdvisorINFO@ScholarFinancial.com. Thank you.
[1] John C. Bogle, Reflections on Markets, Ethics, and Careers, Remarks at The Stern School of Business, New York University (March 23, 2007).
[2] “The legal system provides for only two levels of trust and their differentiation is necessary for them to be useful tools for parties setting up relationships … In essence, legal systems provide only two levels of loyalty between contracting parties, arm’s-length and fiduciary relationships. The difference in the degree of trust that the two levels of loyalty entitle the parties is dramatic. Fiduciary relations impose a pure duty of loyalty, according to which the fiduciary must place the interests of his employer before his own. Arm’s-length relations, by contrast, allow exploitation within the parameters of good faith.” Georgakopoulos, Nicholas L., “Meinhard v. Salmon and the Economics of Honor” (April 1998, revised Feb. 8, 1999).
[3] See, for example, Hartman v. McInnis, No. 2006-CA-00641-SCT (Miss. 11/29/2007) ([O]rdinarily a bank does not owe a fiduciary duty to its debtors and obligors under the UCC … the power to foreclose on a security interest does not, without more, create a fiduciary relationship … a mortgagee-mortgagor relationship is not a fiduciary one as a matter of law.”). “[T]he significant weight of authority holds that franchise agreements do not give rise to fiduciary … relationships between the parties.” GNC Franchising, Inc. v. O’Brien, 443 F.Supp.2d 737, 755 (W.D. Pa., 2006).
[4] Caveat emptor is Latin for ‘Let the buyer beware.’ In its purest form at common law, in the absence of fraud, misrepresentation or active concealment, the seller is under no duty to disclose any defect; it therefore provides a safe harbor to a seller to not to disclose any information to a buyer. See Alex M. Johnson, Jr., “An Economic Analysis Of The Duty To Disclose Information: Lessons Learned From The Caveat Emptor Doctrine” (2007). It means that a customer should be cautious and alert to the possibility of being cheated. The doctrine supports the idea that buyers take responsibility for the condition of the items they purchase and should examine them before purchase. This is especially true for items that are not covered under any warranty. See, e.g. SEC v. Zandford, 535 U.S. 813 (2002).
[5] “When parties deal at arm’s length the doctrine of caveat emptor applies, but the moment that the vendor makes a false statement of fact, and the falsity is not palpable to the purchaser, he has an undoubted right to implicitly rely upon it. That would indeed be a strange rule of law which, when the seller has successfully entrapped his victim by false statements, and was called to account in a court of justice for his deceit, would permit him to escape by urging the folly of his dupe was not suspecting that he (the seller) was a knave.” Holcomb v. Zinke, 365 N.W.2d 507, 511 (N.D., 1985).
[6] It is well settled that fraud may occur without the making of a false statement. Dvorak v. Dvorak, 329 N.W.2d 868 (N.D.1983). The suppression of a material fact, which a party is bound in good faith to disclose, is equivalent to a false representation. Verry v. Murphy, 163 N.W.2d 721 (N.D.1969).
[7] Meinhard v Salmon, 249 NY 458, 464 (N.Y. 1928).
[8] Exxon Corp. v. Breezevale Ltd., 82 S.W.3d 429 (Tex. App., 2002).
[9] Pension Committee v. Banc of America Securities, 592 F.Supp.2d 608, 624 (S.D.N.Y., 2009) (“a fiduciary relationship may arise where the parties to a contract specifically agree to such a relationship ….”).
[10] Pension Committee v. Banc of America Securities, 592 F.Supp.2d 608, 624 (S.D.N.Y., 2009) (“no fiduciary duties arise where parties deal at arm’s length in conventional business transaction”); Henneberry v. Sumitomo Corp. of America, 415 F.Supp.2d 423, 460 (S.D.N.Y., 2006), citing Nat’l Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 679 (S.D.N.Y.1991) (“Where parties deal at arms length in a commercial transaction, no relation of confidence or trust sufficient to find the existence of a fiduciary relationship will arise absent extraordinary circumstances.” (citing, inter alia, Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 738-39 (2d Cir.1984); Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, N.A., 731 F.2d 112, 122 (2d Cir. 1984))), aff’d, Yaeger v. Nat’l Westminster, 962 F.2d 1 (2d Cir.1992) (table); Beneficial Commercial Corp. v. Murray Glick Datsun, Inc., 601 F.Supp. 770, 772 (S.D.N.Y. 1985) (“[C]ourts have rejected the proposition that a fiduciary relationship can arise between parties to a business transaction.” (citing Grumman Allied Indus., Inc., 748 F.2d at 738-39; Wilson-Rich v. Don Aux Assocs., Inc., 524 F.Supp. 1226, 1234 (S.D.N.Y.1981); duPont v. Perot, 59 F.R.D. 404, 409 (S.D.N.Y.1973))); WIT Holding Corp. v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66, 68 (App.Div.2001) (“Under these circumstances, where the parties were involved in an arms-length business transaction involving the transfer of stocks, and where all were sophisticated business people, the plaintiff’s cause of action to recover damages for breach of fiduciary duty should have been dismissed.”).
[11] In re Prudential Ins. Co. of America Sales Prac., 975 F.Supp. 584 (D.N.J., 1996), where, in a case involving sales by life insurance agents of variable appreciable life insurance products as “investment plans,” the court stated: “An essential feature and consequence of a fiduciary relationship is that the fiduciary becomes bound to act in the interests of her beneficiary and not of herself. Obviously, this dynamic does not inhere in the ordinary buyer-seller relationship. Thus, ‘the efforts of commercial sellers — even those with superior bargaining power — to profit from the trust of consumers is not enough to create a fiduciary duty. If it were, the law of fiduciary duty would largely displace both the tort of fraud and much of the Commercial Code.’ Committee on Children’s Television, Inc., v. General Foods Corp., 35 Cal.3d 197, 221, 197 Cal.Rptr. 783, 789, 673 P.2d 660, 675 (1983) (en banc).” In re Prudential Ins. Co. of America Sales Prac. At 616.
[12] See GNC Franchising, Inc. v. O’Brien, 443 F.Supp.2d 737, 755 (W.D. Pa., 2006) (“A party bound by a fiduciary duty must advance the interests of the cestui que trust above its own and act scrupulously in the other’s interests. Imposition of this degree of duty—i.e., selfless service as opposed to merely good faith and fair dealing—would generally be inapplicable as between parties to a commercial relationship knowingly entered into for each party’s own profit”).
In arms-length relationships, the burden of proof of lack of fair dealing rests on the person alleging that the other party acted in such manner. This contrasts with the burden of proof where a fiduciary relationship exists, where the burden of proof of fair dealing rests with the fiduciary. See ABN Amro Mortgage Group, Inc. v. Pristine Mortgage, LLC, No. CV 04-4005389 (CT 9/8/2005) (CT, 2005) (“The significance of the establishment of a fiduciary relationship is twofold. First, the burden of proving fair dealing shifts to the fiduciary. Secondly, the standard of proof for establishing fair dealing is not the ordinary standard of fair preponderance of evidence but requires proof of clear and convincing evidence.”)
[13] The doctrine of good faith requires that the parties also perform their respective obligations and enforce their rights honestly and fairly. See Restatement (Second) Contracts (1981) at §205, “Duty of Good Faith and Fair Dealing,” stating: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” The Comment to this section adds: “Good faith is defined in Uniform Commercial Code § 1-201(19) as ‘honesty in fact in the conduct or transaction concerned.’ ‘In the case of a merchant’ Uniform Commercial Code §2-103(1)(b) provides that good faith means ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.’ The phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness. Failure to abide by the duty of good faith may constitute fraud (in the event of intentional misrepresentation) or breach of contract.”
[14] For example, the Uniform Commercial Code, adopted by every state except Louisiana, explicitly imposes a good faith obligation on the performance and enforcement of every contract falling within its scope. UCC § 1-304, as amended (2003). Essentially, the Restatement of Contracts adopts the view that “bad faith in performance” is a violation of the good faith obligation. As stated by Professor Emily S.H. Hough: “The subcategories of bad faith in performance further delineated by Summers include ‘evasion of the spirit of the deal,’ ‘lack of diligence and slacking off,’ ‘willfully rendering only ‘substantial performance,’’ ‘abuse of power to determine compliance,’ and ‘interfering with or failing to cooperate in the other party’s performance.’” All of these subcategories contemplate cases in which judges would feel comfortable using their discretionary and equitable powers to find a breach of good faith where the express language of the contract might not otherwise support a claim for breach of contract.” Houh, Emily, “The Doctrine of Good Faith in Contract Law: A (Nearly) Empty Vessell?” Utah Law Review, 2005.
[15] See Southern Intermodal Logistics, Inc. v. Smith & Kelly Co., 190 Ga.App. 584, 379 S.E.2d 612, 613-4 (1989) (“While concealment of material facts may amount to fraud when the concealment is of intrinsic qualities the other party could not discover by the exercise of ordinary care … in an arms-length business or contractual relationship there is no obligation to disclose information which is equally available to both parties”).
[16] Henneberry v. Sumitomo Corp. of America, 415 F.Supp.2d 423 (S.D.N.Y., 2006), stating: “Even absent the existence of a fiduciary relationship, however, a party’s duty to disclose a material fact to another party it is negotiating with is triggered where ‘one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge.’ Grumman Allied Indus., Inc., 748 F.2d at 739 (quoting Aaron Ferer & Sons Ltd., 731 F.2d at 123; Jana L. v. W. 129th St. Realty Corp., 22 A.D.3d 274, 802 N.Y.S.2d 132, 134 (App.Div.2005) (‘It is well established that, absent a fiduciary relationship between the parties, a duty to disclose arises only under the `special facts’ doctrine `where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’’ (quoting Swersky v. Dreyer & Traub, 219 A.D.2d 321, 643 N.Y.S.2d 33, 37 (App.Div. 1996).” Henneberry at 461.
[17] See Giles v. General Motors Acceptance Corp., 494 F.3d 865, 881 (9th Cir., 2007) (“Nevada also recognizes “special relationships” giving rise to a duty to disclose, such that ‘[n]ondisclosure . . . become[s] the equivalent of fraudulent concealment.’ Mackintosh v. Jack Matthews & Co., 109 Nev. 628, 855 P.2d 549, 553 (1993). In order to prove the existence of a special relationship, a party must show that (1) ‘the conditions would cause a reasonable person to impart special confidence’ and (2) the trusted party reasonably should have known of that confidence. Mackintosh v. Cal. Fed. Sav. & Loan Ass’n, 113 Nev. 393, 935 P.2d 1154, 1160 (1997) (per curiam). ‘[T]he existence of the special relationship is a factual question . . . .’ Id.)
[18] See Burger King Corp. v. Austin, 805 F.Supp. 1007, 1019 (S.D. Fla., 1992) (“Florida law additionally charges a claimant with knowledge of all facts that he could have learned through diligent inquiry … In absence of a fiduciary relationship, mere nondisclosure of material facts in an arm’s length transaction is ordinarily not actionable misrepresentation unless some artifice or trick has been employed to prevent the representee from making further independent inquiry, though non-disclosure of material facts may be fraudulent where the other party does not have an equal opportunity to become appraised of the facts.”), citing Taylor v. American Honda Motor Co., 555 F.Supp. 59, 64 (M.D.Fla.1982).
[19] See Playboy Enterprises v. Editorial Caballero, 202 S.W.3d 250, 260 (Tex. App., 2006), stating: “In addition to situations where there is a fiduciary or confidential relationship … a duty to speak may arise in an arms-length transaction in at least three other situations: (1) when one voluntarily discloses information, he has a duty to disclose the whole truth; (2) when one makes a representation, he has a duty to disclose new information when the new information makes the earlier representation misleading or untrue; and (3) when one makes a partial disclosure and conveys a false impression, he has the duty to speak.”
[20] “Actual fraud is where one person causes pecuniary injury to another by intentionally misrepresenting or concealing a material fact which from their mutual position he was bound to explain or disclose.” Charles Sweet, A Dictionary of English Law (1883).
[21] Waller, Spencer Weber and Brady, Jillian G., “Consumer Protection in the United States: An Overview; Strengthening the Consumer Protection Regime” (2007). Private actions alleging actual fraud form an important, though often expensive and difficult, avenue for protection of the rights of a contracting party. “A consumer may file a lawsuit for deceit or fraud when a vendor intentionally conceals a material fact or makes a false representation of a material fact, knows that the representation is false, and meant to induce the consumer to act based on the misrepresentation. In order for the consumer to be successful in court, a plaintiff must also reasonably rely on the misrepresentation and suffer damage as a result of the reliance. Deceit can occur when a vendor makes a direct false statement, or when a misrepresentation is achieved through silence, concealment, half-truths, or ambiguity about a good. While misrepresentation of product facts may bring legal action, mere puffery and sales representative opinions are generally not subject to lawsuits for deceit.” Id. at p. 13.
[22] Marine, Inc. v. Brunswick Corporation, No. 07-13907 Non-Argument Calendar (11th Cir. 5/14/2008) (11th Cir., 2008) , at p.5; see Taylor Woodrow Homes Florida, Inc. v. 4/46-A Corp., 850 So.2d 536, 541 Fla. 5th DCA 2003 (“When the parties are dealing at arm’s length, a fiduciary relationship does not exist because there is no duty imposed on either party to protect or benefit the other.”). See also Greenberg v. Chrust, 198 F.Supp.2d 578, 585 (S.D.N.Y., 2002) (“parties to arms length commercial contracts do not owe each other a fiduciary obligation”).
[23] In re Auto Specialties Mfg. Co., 153 B.R. 457, 488 (Bankr. W.D. Mich., 1993) (Courts have described the standard of conduct to which a non-fiduciary will be held in the vernacular as the ‘morals of the marketplace’”).
[24] There always exists a tension between calls for “freedom and independence” in commercial relations and “consumer protection.”“In a contract society, individuals can provide for their basic needs, and can gain by exchanging the surplus they produce. In addition, such a society offers many options for its members to satisfy their needs. A contract society values freedom and independence highly, but it provides little security for its members.” Tamar Frankel, “Fiduciary Law,” 71 Calif. L. Rev. 795 (1983). “Freedom” and “competition” in contract societies provide substantial opportunities for innovation and profit. However, as seen during the recent financial crisis of 2007-2009, unfettered capitalism can also lead to abuses – and dangers – not only to those individuals who seek out service providers, but to entire financial and economic systems. Hence, at times legislatures or the courts have seen fit to provide certain protections to one of the contracting parties, typically the consumer of a product or service, through either the imposition of certain disclosure regimes, mandating certain contract formats or terms, or other consumer protection measures. When circumstances dictate the need for greater security for consumer members of society, and to combat forces that transform opportunism into greed, the law applies fiduciary status upon the service provider.
[25] The undeniable truth is that capitalism runs on opportunism. In his landmark work, The Wealth of Nations, Adam Smith described an economic system based upon self-interest. This system, which later became known as capitalism, is described in this famous passage:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
(Smith, p. 14, Modern Library edition, 1937). As Adam Smith pointed out, capitalism has its positive effects. Actions based upon self-interest often lead to positive forces which benefit others or society at large. As capital is formed into an enterprise, jobs are created. Innovation is spurred forward, often leading to greater efficiencies in our society and enhancement of standards of living. However, as Adam Smith also noted, a person in the pursuit of his own interest “frequently promotes that of the society more effectually than when he really intends to promote it.” (Smith, p. 423)
Taken to excess, however, the self-interest which is so essential to capitalism can lead to opportunism, defined by Webster’s as the “practice of taking advantage of opportunities or circumstances often with little regard for principles or consequences.” A stronger word exists when consequences to others are ignored – “greed.” We might define “greed” in this context as the selfish desire for the pursuit of wealth in a manner which risks significant harm to others or to society at large. Whether through actions intentional or neglectful, when ignorance of material adverse consequences occurs, the term “greed” is rightfully applied.
Gordon Gekko in the film Wall Street, who famously declared that “Greed, for lack of a better word, is good,” got it wrong. Greed is not good in society. However, opportunism itself – acting in pursuit of one’s self-interest – does not always lead to greed. Rather, it is only when the pursuit of wealth causes significant undue harm to others does such activity arise to the level of greed, and in such circumstances, greed is not “good.”
[26] See, generally Black’s Law Dictionary 523 (7th ed. 1999) (“A duty of utmost good faith, trust, confidence, and candor owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer’s client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another.”); also see F.D.I.C. v. Stahl, 854 F.Supp. 1565, 1571 (S.D. Fla., 1994) (“Fiduciary duty, the highest standard of duty implied by law, is the duty to act for someone else’s benefit, while subordinating one’s personal interest to that of the other person); and see Perez v. Pappas, 98 Wash.2d 835, 659 P.2d 475, 479 (1983) (“Under Washington law, it is well established that ‘the attorney-client relationship is a fiduciary one as a matter of law and thus the attorney owes the highest duty to the client.’”), cited by Bertelsen v. Harris, 537 F.3d 1047 (9th Cir., 2008); also see Donovan v. Bierwirth, 680 F. 2d 262, 272, n.8 (2nd Cir., 1982) (fiduciary duties are the “highest known to law”).
[27] Black’s Law Dictionary, 5th Edition (1979)].
[28] Von Noy v. State Farm Mutual Automobile Insurance Company, 2001 WA 80 (WA, 2001) (J. Talmadge, concurring opinion).
[29] Ettol, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 23 (Pa. Super. Ct., 2002), stating: “Most commercial contracts for professional services involve one party relying on the other party’s superior skill or expertise in providing that particular service. Indeed, if a party did not believe that the professional possessed specialized expertise worthy of trust, the contract would most likely never take place. This does not mean, however, that a fiduciary relationship arises merely because one party relies on and pays for the specialized skill or expertise of the other party. Otherwise, a fiduciary relationship would arise whenever one party had any marginally greater level of skill and expertise in a particular area than another party. Rather, the critical question is whether the relationship goes beyond mere reliance on superior skill, and into a relationship characterized by “overmastering influence” on one side or “weakness, dependence, or trust, justifiably reposed” on the other side. Basile v. H & R Block, 777 A.2d 95, 101 (Pa.Super.2001). A confidential relationship is marked by such a disparity in position that the inferior party places complete trust in the superior party’s advice and seeks no other counsel, so as to give rise to a potential abuse of power.” Id.
[30] Georgakopoulos, Nicholas L.,Meinhard v. Salmon and the Economics of Honor(April 1998). Available at SSRN: http://ssrn.com/abstract=81788 or DOI: 10.2139/ssrn.81788.
[31] Meinhard vs. Salmon, 164 N.E. 545 (N.Y. 1928). “Justice Cardozo held that a nonmanaging partner could share in a deal that the owner of the property the partnership managed had offered to the managing partner although the deal would begin after the termination of the partnership’s 20-year term and included significant property beyond what the partnership had managed. Meinhard provides a workable definition of fiduciary duties as requiring the obligated party to act with the ‘finest loyalty’ to the owner’s interests.” Ribstein, Larry E., “The Structure of the Fiduciary Relationship” (January 4, 2003). U Illinois Law & Economics Research Paper No. LE03-003. Available at SSRN: http://ssrn.com/abstract=397641 or DOI: 10.2139/ssrn.397641
[32] A fiduciary is “a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking.” Restatement (2d) Agency § 13 comment (a) (1958). “[T]he general fiduciary principle requires that the agent subordinate the agent’s interests to those of the principal and place the principal’s interests first as to matters connected with the agency relationship.” Restatement (3d) Agency § 8.01 cmt. b (2007). See also Laby, Arthur B., “The Fiduciary Obligation as the Adoption of Ends,” Buffalo L. Rev 99, 103 (2008). See also Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), in which the U.S. Supreme Court, applying ERISA, stated that: “There is more to plan (or trust) administration than simply complying with the specific duties imposed by the plan documents or statutory regime; it also includes the activities that are “ordinary and natural means” of achieving the “objective” of the plan. Bogert & Bogert, supra, § 551, at 41-52. Indeed, the primary function of the fiduciary duty is to constrain the exercise of discretionary powers which are controlled by no other specific duty imposed by the trust instrument or the legal regime. If the fiduciary duty applied to nothing more than activities already controlled by other specific legal duties, it would serve no purpose.” Id. (Emphasis added.)
[33] Laby, Arthur B., “The Fiduciary Obligation as the Adoption of Ends,” Buffalo L. Rev 99, 103 (2008), at 130.
[34] Id., at 135.