February 4, 2010
Turning Arms-Length Contracts Into Fiduciary Relationships
Prof. Bainbridge has put up a nice post analyzing the SEC's brief in its appeal of the Mark Cuban insider trading decision. His comment that "a fiduciary relationship requires more than just an arms-length contract" caught my attention. This statement is obviously correct, and elsewhere in his post Bainbridge notes that this "something else" can be the presence of "discretionary authority and dependency". But I think one could also argue that the something else is simple necessity. In other words, if it seems likely that the relationship as formally contracted would quickly fall apart absent the imposition of fiduciary duties, the law may well impose them if the form of relationship seems to, for example, spur economic efficiency. So, I imagine typical parties to an employment contract would consider that contract to be the result of arms-length negotiations. Yet, the agency problem (together with the cost of trying to contract around the problem in all its forms) could well eliminate the employer's incentive to enter into such relationships if the law did not subsequently impose fiduciary duties on the employee. Seen in this light, I think the question quickly becomes one of efficiency. And since it seems easy enough for those who grant access to confidential information in connection with an arms-length transaction to include a non-use provision, I think viewing the issue from that perspective favors Cuban in this case.
I will admit that I did not expect to end up with that conclusion.