Facts: ABC Company Is A Publicly Traded Company ✓ Solved

Facts: ABC Company is a publicly traded company. It has abou

t 200,000 shareholders; some 150,000 of those shares are owned by large pension funds. The bank for ABC Company is No Fraud National Bank. ABC’s President, Big Bucks, is also on the board of No Fraud National. ABC’s Chief Financial Officer, Time Value, is also on the board of ABC and No Fraud.

ABC went public two years ago in an IPO. At that time, Time Value was the CPA who handled the accounting functions for the IPO since he was a senior partner in the CPA firm of Spreadsheet, Calculator and Itemization. Time Value provided an audit of the financial statements of ABC for this IPO and this audit report had no exceptions. Time Value had been aware of several pending lawsuits but he considered them to be frivolous claims so he made no allowance for them and listed them in the footnotes as claims against the company which had no merit. It is now 2 years later and the financial results of ABC have been terrible.

The stock has lost 95% of its IPO value and many of the shareholders are quite unhappy with these results. One factor which led to this reduction in stock value was that one of those “frivolous claims” ended up with the largest product liability jury verdict in history and the company did not have sufficient assets to pay for the appeal bond that was required to appeal the jury verdict. Because of this, they entered into a settlement agreement with the plaintiffs which requires them to pay the plaintiffs 50 million dollars each year for the next 20 years. ABC has made these payments, but has then not had the cash to pay their unsecured creditors. What led to this jury verdict was a product ABC has made for many years — a nail polish remover.

In 2000, it was discovered that this nail polish remover was causing skin cancer in many of the persons who used the product frequently. ABC denied that their product was dangerous. At the trial, a memo from the chemical engineers at ABC set forth the fact that the product was dangerous and could cause an increased risk of skin cancer if it was used frequently. The CEO of ABC refused to issue a product recall and he also testified at a Congressional hearing that the product had been thoroughly tested and it was “safe enough to use on a newborn baby’s skin and would cause no damage to such sensitive skin.” He then fired the chemical engineers who had written the memo and he advised the Board of ABC that the product was safe and that the engineers had been fired because they wanted too much money for the work they did.

Questions:

1. Describe and explain one of each of the following types of agency relationships from the facts of this case; principal/agent; independent contractor.

2. Under what agency theories will Time Value, Big Bucks, ABC Company and No Fraud be liable for payment of the jury verdict? What duties did each have that they did not meet?

3. Explain any action the chemical engineers may have against ABC, the CEO of ABC and the CPA firm known as Spreadsheet, Calculator and Itemization for wrongful termination. What arguments would these parties make to defend themselves from this wrongful termination suit?

Paper For Above Instructions

Introduction

This analysis identifies agency relationships in the facts, evaluates potential liability of identified parties for the product liability verdict, and analyzes wrongful termination claims by the chemical engineers. The discussion applies general principles of agency, vicarious liability, fiduciary duties, accountant liability, and wrongful discharge law (Restatement (Second) of Agency; Restatement (Second) of Torts §402A) (Restatement (Second) of Agency, 1958; Restatement (Second) of Torts §402A, 1965).

1. Agency Relationships: Principal/Agent and Independent Contractor

Principal/Agent: A principal-agent relationship exists where the principal manifests consent and the agent acts on the principal’s behalf subject to the principal’s control (Restatement (Second) of Agency §1). In the facts, ABC (the corporation) and its shareholders/prior board create an agency relationship with its officers: Big Bucks (President) and Time Value (CFO) are agents of ABC acting on its behalf and under the company’s authority. Their board roles and corporate titles reflect authority to make binding operational decisions (e.g., product safety decisions, public statements), so they qualify as agents of ABC (Restatement (Second) of Agency §14).

Independent Contractor: An independent contractor performs work without being subject to the hiring party’s detailed control over methods and manner. The CPA firm Spreadsheet, Calculator and Itemization (and Time Value in his CPA capacity during the IPO) functioned as independent auditors at the IPO stage: the firm provided auditing services under contract, generally controlling methods of audit performance while delivering results to ABC. If the engineers were hired as consultants rather than employees, they could be independent contractors; however, here they appear to be in-house chemical engineers (employees/agents), not contractors (Restatement (Second) of Agency §220).

2. Agency Theories of Liability for the Verdict

ABC Company: ABC is primarily liable under strict products liability and negligence for harm caused by its product (Restatement (Second) of Torts §402A). Corporate liability for defective products is direct — the manufacturer is responsible for injuries caused by unsafe products irrespective of agent status. ABC breached duties to consumers (duty to manufacture safe products, warn, and recall hazards) and failed to address engineers’ warnings.

Big Bucks (President): As an agent and corporate officer, Big Bucks may be personally liable if he engaged in wrongdoing outside his corporate role (e.g., fraud, personal participation in misrepresentations) or if courts pierce the corporate veil. If Big Bucks personally made false public statements and suppressed safety actions, he may be directly liable for fraudulent misrepresentation or for tortious conduct (Guth v. Loft; fiduciary duty principles) (Guth v. Loft, 1939). He also breached duties of loyalty and care to the corporation and its shareholders by placing company interests or reputation over safety.

Time Value (CFO and former CPA): Time Value has multiple potential bases for liability. As CFO and director, he is an agent of ABC and owes fiduciary duties; if he participated in concealing hazards, he may be directly liable for breach of fiduciary duty. Separately, in his prior role as auditor/CPA, he may face liability for negligent misrepresentation or professional negligence in the audit that failed to account for material contingent liabilities (Ultramares; Credit Alliance) (Ultramares v. Touche, 1931; Credit Alliance v. Arthur Andersen, 1985). Under modern law and Sarbanes-Oxley-era regulatory expectations, accountants can face civil and regulatory exposure for materially misleading audit reports (Sarbanes-Oxley Act, 2002; AICPA standards).

No Fraud National Bank: The bank’s potential liability depends on whether it exercised control over ABC or participated in wrongdoing. Mere share ownership or board representation does not automatically create liability; however, if the bank (through board control, instructions, or financing conditions) directed corporate decisions that caused harm, the bank could be liable as a de facto controller or joint tortfeasor (Restatement (Third) of Agency; Coffee, Gatekeepers). Additionally, if No Fraud benefited from misleading statements and had knowledge, it may face claims for aiding and abetting or for wrongful conduct (Restatement (Third) of Agency).

Duty Failures: ABC failed statutory and common-law duties to ensure product safety and to warn/recall. Big Bucks breached loyalty and care by refusing recall and misleading regulators. Time Value breached professional and fiduciary duties by minimizing contingent liabilities and issuing an unqualified audit despite material litigation risks. No Fraud, if it exercised controlling influence or ignored red flags, failed any duty to monitor or refrain from assisting tortious corporate conduct.

3. Chemical Engineers’ Wrongful Termination Claims and Defenses

Potential Claims: The engineers likely have wrongful termination claims under public-policy or whistleblower protections for discharging employees who reported product safety risks. For public companies and corporate insiders, statutory protections (including SOX whistleblower provisions) and state wrongful discharge doctrines protect employees who report safety or fraud risks (Sarbanes-Oxley Act §806). The engineers can allege retaliatory discharge in violation of public policy, wrongful discharge in violation of implied contract or covenant of good faith, and possibly tort claims for interference with employment relations or defamation if the firing was accompanied by false statements.

Against the CPA Firm: If the CPA firm (or Time Value in his firm role) was involved in advising termination or concealing evidence, engineers might allege aiding and abetting wrongful termination or concerted action. More plausibly, they could sue the CPA firm for negligent misrepresentation if the firm’s audit reports induced reliance that harmed the engineers’ employment or for participating in a cover-up.

Defenses: ABC and the CEO will likely assert at-will employment doctrine (most employees serve at-will), claiming a legitimate business reason for termination (e.g., insubordination, cost disputes). They will also invoke the business judgment rule for directors and officers, arguing the decision not to recall was a corporate judgment. The CPA firm will assert lack of employer status, lack of causation, and professional standards compliance; accountants may invoke privity and Ultramares-type limits on third-party liability for negligent audits (Ultramares, 1931; Credit Alliance adjustments). ABC may contend no protected whistleblowing occurred (e.g., internal memo not reported to regulators) or that the engineers demanded excessive compensation, giving a bona fide economic reason for termination.

Conclusion

In sum, ABC bears primary liability for the defective product and its failure to act on engineers’ warnings. Big Bucks and Time Value face exposure for direct participation in misrepresentations and breaches of fiduciary duties; Time Value may also face professional liability for prior audit conduct. No Fraud National Bank may be exposed if it exerted controlling influence or participated in wrongdoing. The engineers have plausible wrongful termination/whistleblower claims, while defendants will raise at-will employment, business judgment, and professional-liability defenses. The outcome will turn on evidence of knowledge, control, and causation, as well as the procedural scope of whistleblower protections and accountant liability doctrines (Prosser & Keeton; ALI Restatements).

References

• American Law Institute, Restatement (Second) of Agency (1958).
• American Law Institute, Restatement (Second) of Torts §402A (1965).
• American Law Institute, Restatement (Third) of Agency (2006).
• Prosser, W. Page, Keeton, D. B., et al., Prosser and Keeton on Torts (5th ed.).
• Ultramares Corp. v. Touche, 255 N.Y. 170 (1931).
• Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985).
• Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 (whistleblower and accountant oversight provisions).
• AICPA, Code of Professional Conduct (accountant standards and ethical obligations).
• Guth v. Loft, Inc., Del. Ch. (1939) (fiduciary duty of corporate officers/directors).
• Coffee, J.C., Gatekeepers: The Professions and Corporate Governance (Oxford Univ. Press, 2006).