Chapter 16, “The Hazards of Secret Commissions and the Duty to Disclose”1 by Carla J. Shapreau, from Violin Fraud: Deception, Forgery, Theft and Lawsuit in England, 2nd Edition, Brian W. Harvey and Carla J. Shapreau, Oxford University Press, 1997, by permission of Oxford University Press.
It is common practice in the USA for teachers to receive secret commissions from violin dealers in whose direction the student has been steered. This practice also occurs in England, as mentioned by Brian Harvey in Chapter 5 and in Appendix I. The harm of secret commissions is felt not just by the student, who may unknowingly be paying for his or her teacher’s commission through an inflated sales price. In addition, violin makers and dealers who refuse to engage in this industry custom may suffer competitive injury when teachers choose to send their students to those who pay such commissions.
Generally, students place special confidence and trust in their violin teachers, and teachers have great power to influence decisions made by their students. Students typically rely on their teacher’s expertise, superior knowledge, and training. In certain circumstances, there may be a special relationship of trust and confidence between teacher and student that may arguably give rise to an elevated duty of care by the teacher, or even a fiduciary duty. ‘A fiduciary relationship may exist or come into being whenever trust and confidence are reposed by one person in the integrity and fidelity of another… or when there is a reposing of faith, confidence and trust, and the placing of reliance by one person on the judgement and advice of another.’ 2 Whether or not a fiduciary relationship exists is a question of fact. The special relationship that exists between a student and his or her violin teacher, whether fiduciary or not, may expose the teacher to liability for accepting secret commissions when a conflict of interest exists between the teacher’s self-interest in obtaining commissions and his or her duty to the student.
Although no reported case in the USA has addressed the legality of secret commissions in this context, the practice of paying and receiving secret commissions may run afoul of state statutes. For example, California’s Unfair Practices Act arguably prohibits secret commissions under the appropriate factual scenario. Section 17045 of that Act provides that:
The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of competitor and where such payment or affordance tends to destroy competition, is unlawful.3
In addition, concealing a commission may constitute fraudulent concealment under the common law if the teacher’s special or fiduciary relationship with the student gives rise to a duty to disclose. For example, in California ‘nondisclosure or concealment may constitute actionable fraud: when the defendant is in a fiduciary relationship with the plaintiff; when the defendant had exclusive knowledge of material facts not known to the plaintiff; when the defendant actively conceals a material fact from the plaintiff; or when the defendant makes partial representations but also suppresses some material facts’.4 Even in the absence of a fiduciary relationship, a teacher may commit fraudulent concealment when he or she makes some representations relating to the sales transaction but suppresses the arguably material fact that he or she is receiving a commission from the seller.5
The payment of secret commissions by a violin dealer or maker to a teacher also may be an antitrust violation under section 7 13(c) of the Robinson-Patman Act, which provides that:
It shall be unlawful for any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares, or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid.6
In Stephen Jay Photography Ltd. v. Olan Mills Inc.,7 a photographer paid commissions to schools in exchange for the schools’ endorsement as the ‘official photographer’. Both the photographer and the schools disclosed to the students that an unspecified portion of the photograph price would be given by the photographer to each school to support various school activities.
When a competitor challenged this practice, the district court found that section 13(c) had not been violated. ‘Because secrecy is an essential element of Section 13(c) commercial bribery, the contractual arrangement at issue here is not illegal’8. The Fourth Circuit affirmed the district court’s ruling without addressing the secrecy issue. Instead, the Fourth Circuit concluded that the schools did not act as agents, representatives, or intermediaries on behalf of the students, as those terms are used in section 13(c).9
Similarly, in Harris v. Duty Free Shoppers,10the court found no antitrust violation when the operator of a duty-free store made secret payments to tour companies and tour guides to promote its shop. The court concluded that the tour operators and guides were not in an agency or fiduciary relationship with their passengers and did not serve as intermediaries subject to the passengers’ direct or indirect control as to the purchase of the store’s goods.11
The Ninth Circuit distinguished the facts in Harris from the agency relationship in McCollum v. Friendly Hills Travel Center.12In McCollum, the court held that a fiduciary relationship existed between a tourist and his travel agent because the travel agent ‘had arranged his trip and had vouched for the excellent condition of certain sporting equipment’, the defects of which later caused the plaintiff’s injuries.13
In contrast to the facts in Harris and Stephen Jay Photography, a violin teacher, much like the agent in McCollum, may act as a special agent for the student or as an intermediary for purposes of the purchase transaction. The teacher may arrange for the specific transaction and vouch for the condition and attributes of the violin, thereby arguably creating a relationship between the student and the teacher worthy of protection by the antitrust laws.
Although section 13(c) does make an exception for services rendered in connection with the sale or purchase of goods, the exception may not apply when the teacher receives a commission for services rendered to the seller but against the best interest of the buyer.14
One way to avoid potential liability for violation of state unfair trade practices statutes, for fraud, or for violation of the Robinson-Patman Act in connection with commissions is for teachers to be compensated openly for the valuable expert service that they can provide to their students in the instrument-selection process by candidly accepting payment for such expert services. In the absence of such a disclosure, violin teachers, dealers, and makers expose themselves to possible liability if the requisite degree of trust and confidence is reposed in the teacher by the student with respect to circumstances surrounding the student’s purchase of a violin.
|1||Portions of Chapter 16 are reprinted, in part, from an article written by the author in the Michigan Law Review. Carla J. Shapreau, “Strings Attached – Violin Fraud and Other Deceptions”, Vol. 92, No. 6, pp.1743-53, May, 1994.|
|2||See 36A C.J.S. Fiduciary 385, 387 (1961).|
|3||Cal. Bus. & Prof. Code § 17045 (emphasis added); see also United States v. Girolamo, 808 F. Supp. 1445,1450 – 2 (N.D. Cal. 1992) (finding that kickbacks paid to obtain a competitive edge violated California’s Unfair Practices Act).|
|4||See e.g. Heliontis v. Schuman, 226 Cal. Rptr. 509, 512 (1986) citing Bernard E. Witkin, 4 Summary of California Law 8th edn. (1974) §§ 459-64.|
|5||See e.g. Zinn v. Ex-Cello-O Corp., 306 P.2d 1017, 1025 (Cal. Dist. Ct. App. 1957) (‘[W]here the defendant, who has no duty to speak, nevertheless does so … he is bound to speak truthfully and to speak the whole truth’); see also Rogers v. Warden, 125 P.2d 7, 9 (Cal. 1942); Restatement (Second) of Torts (1977) § 551 cmt. g.|
|6||15 U.S.C. § 13 (c) (1988). See e.g. Rangen, Inc. v. Sterling Nelson & Sons, 351 F.2d 851 (9th Cir. 1965) (holding that a corporate defendant’s commercial bribes to a state employee to obtain competitive advantage violated § 13(c)), cert. denied, 383 U.S. 936 (1966).|
|7||713 F. Supp. 937 (E.D. Va. 1989), aff’d, 903 F.2d 988 (4th Cir. 1990).|
|8||713 F. Supp. at 941.|
|9||Stephen Jay Phootgraphy, Ltd. v. Olan Mills, Inc., 903 F.2d 988, 993 (4th Cir. 1990).|
|10||940 F.2d 1272 (9th Cir. 1991).|
|11||940 F.2d at 1275.|
|12||217 Cal. Rptr. 919 (Ct. App. 1985).|
|13||Harris, 940 F.2d 1274-5 (citing McCollum, 217 Cal. Rptr. at 923).|
|14||See e.g. Rangen, Inc. v. Sterling Nelson & Sons, 351 F.2d 851, 859 (9th Cir. 1965) ( refusing to construe the ‘services rendered’ exeption to include service performed by a buyer’s agent for the seller but against the interest of the buyer, because such an interpretation would undermine the fiduciary relationship between buyers and their agents), cert. denied, 383 U.S. 936 (1966); Modern Mktg. Serv., Inc. v. Federal Trade Commn., 149 F.2d at 970 (7th Cir. 1945) (finding that brokerage commissions could not be paid by sellers to the buyers’ agent for services that were incidental to the agent’s main activities on behalf of the buyers, even though the services were genuine and of benefit to the sellers). In Modern Marketing, the Seventh Cicuit noted that’ [t]he agent cannot serve two masters simultaneously rendering services in an arm’s length transaction to both’, 149 F.2d 978 (quoting Great Atl. & Pac. Tea Co. v. Federal Trade Commn., 106 F.2d 667 (3d Cir.), cert. denied, 308 U.S. 625 (1939)).|
|Even when a seller renders a service for the benefit of the student-buyer, when the actual services rendered are de minimis, the exception to § 13(c) will probably provide no refuge. Cf. Hennegan v. Pacifico Creative Serv., Inc., 674 F. Supp. 303, 306 (D. Guam 1987) (holding that § 13(c) does not prohibit payments by store owners to tour bus drivers for services rendered in bringing tourists to their store because such services are not de minimis).|
Chapter 16, “The Hazards of Secret Commissions and the Duty to Disclose”, by Carla J. Shapreau, from Violin Fraud: Deception, Forgery, Theft and Lawsuit in England, 2nd Edition, Brian W. Harvey and Carla J. Shapreau, Oxford University Press, 1997, by permission of Oxford University Press.
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