Brophy v. Cities Service Co.

Delaware Court of Chancery · 1949 · Corporations

CorporationsFiduciary dutiesConstructive trustMisuse of confidential informationemployee fiduciary-like dutyconfidential informationconstructive trusteeaccounting for profits

Facts

The complaint alleged that Kennedy was employed in an executive capacity and as confidential secretary to W. Alton Jones, a director and officer of Cities Service Company, and that through that employment he had access to confidential information about the company and its subsidiaries. It alleged that Kennedy learned in advance when Cities Service or its subsidiaries intended to purchase shares of Cities Service stock on the open market in amounts sufficient to raise the market price. Kennedy allegedly bought shares for himself or nominees before the company's purchases and then sold them at a profit after the market price rose because of the company's buying. The complaint sought to make him account as a constructive trustee for those profits.

Issue

Does an amended complaint state a cause of action against a corporate employee who, though not alleged to be an agent responsible for the stock purchases, used confidential information acquired through his employment to trade in the corporation's stock for personal profit? Must the complaint also allege that the corporation suffered loss from the employee's conduct?

Rule

Although a mere employee ordinarily does not stand in a position of trust and confidence toward the employer as to all matters, an employee who acquires secret information relating to the employer's business in the course of employment occupies a position of trust and confidence analogous in most respects to that of a fiduciary with respect to that information. Such a person may not use that confidential information for personal gain to the injury of the employer, and if he does so he is accountable for the profits obtained. In equity, when relief is sought for breach of a confidential relation by requiring an accounting of profits, the complaint need not allege or show loss to the corporation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz worked in Phoenix as executive assistant to the chief financial officer of Desert Crest Energy, a fictional Nevada corporation. Through internal scheduling materials she learned that the company secretly planned to begin large open-market purchases of its own shares the following week, a move expected to push the price upward; before the plan became public, Lena bought shares for herself and sold them after the company’s purchases raised the market price.

If Desert Crest sues Lena in equity for an accounting of her trading profits, which is the strongest argument that the complaint states a claim?

Explanation. The majority held that a mere employee is not a fiduciary in all respects, but an employee who acquires secret information relating to the employer’s business in the course of employment occupies a position of trust and confidence analogous to a fiduciary as to that information. Using that information for personal gain supports an equitable accounting of profits. The rule does not require that the employee be the agent carrying out the stock purchases, and it does not make every employee a fiduciary for all purposes. (Derived from Brophy v. Cities Service Co. (1949).)