Errors or omissions by employers, their employees and agents often result in damage to others. An employer is always responsible for its own acts or omissions, and, under some circumstances, it may also be responsible for acts or omissions of its employees and agents. To determine an employer’s liability, you may need to brush up on your Latin.
Respondeat superior is a Latin term that means “let the superior make answer.” Legally, it refers to the concept that an employer should be liable for an employee or agent’s wrongful acts or omissions committed within the scope of their employment or agency relationship. In pari delicto is a Latin term that means “in equal fault,” which represents the concept that one who participates in a wrongful act should not be entitled to recover damages resulting from the wrongdoing. It is often asserted as a defense to a damage claim. The recent Illinois case of Williams Electronics Games, Inc. v. Garrity illustrates application of these principles.
Williams, the manufacturer of Mortal Kombat and other video games, brought fraud and related claims against two of its component suppliers, Arrow and Milgray, who allegedly bribed one of Williams’ buyers, Greg Barry, to buy components from them. Williams also sued James Garrity, an Arrow salesman. Milgray countersued, claiming that Williams conspired with two of Milgray’s employees, Gnat and Slupik, to defraud Milgray by purchasing components from Microcomp, a company that Gnat and Slupik created and operated in violation of their duties to Milgray.
Barry received over $100,000 in cash bribes from Arrow and Milgray over a four-year period during which they sold approximately $100 million in components to Williams. Williams fired Barry after discovering the bribes. Arrow and Milgray claimed Williams knew or should have known of Barry’s actions, but turned a blind eye because of favorable pricing and service. Williams denied knowledge of Barry’s wrongdoing. It said that all of its buyers, including Barry, were prohibited from accepting gifts. It admitted, however, that suppliers often made gifts ranging from $25 to $500 to Williams’ employees at Christmas time and that employees were permitted to accept such gifts, provided that any gift of $100 or more was subject to prior disclosure and approval by Williams.
The trial court instructed the jury that if Williams had known or should have known of the defendants’ bribes to Barry, it should find that Williams had ratified the fraud and could not recover damages. It also instructed the jury that if Williams had been in pari delicto with the defendants, because it was aware of a general practice of bribery of its buyers by its suppliers, or because it knew or was recklessly indifferent to Barry’s acceptance of bribes, it could not recover. The jury concluded that Williams had been defrauded, but also concluded that recovery was barred because Williams had ratified Barry’s acts or was in pari delicto with the defendants. On appeal, the Illinois Appellate Court considered the trial court’s jury instructions erroneous.
If an employee or agent acts entirely on his own behalf, doing things that could not be interpreted as merely overzealous or ill-judged performance of his duties, he is acting outside the scope of his employment. In this hypothetical respondeat superior would not apply to impose fault on the employer. If the employer actually knows of the acts, it may be held to have ratified them and, therefore, may be accountable for damages or barred from recovery. Mere negligence in failing to uncover the wrongful acts of an employee or agent will not constitute a ratification. By instructing the jury that it should return a verdict for the defendants if it found that Williams “should have known” that Barry was taking bribes, the judge allowed the jury to exonerate the defendants on the basis of the carelessness of their victim in failing to discover that it was a victim.
The defense of in pari delicto applies where the victim participates in the misconduct giving rise to his claim. Actual knowledge of the wrongful acts or omissions of the employee or agent must be shown to establish the defense. Williams’ recovery could not be barred by an assertion that it should have known or was recklessly indifferent to the fact that Barry was accepting bribes or that Milgray was harmed by Barry’s purchases placed through Microcomp in violation of Gnat and Slupik’s duties to Milgray. Barry doubtlessly harmed Milgray by buying through Microcomp, and Milgray could have sued him for that harm; however, the fact that Barry was bribed not only by Milgray, to Milgray’s benefit, but also by two of Milgray’s employees, to Milgray's detriment, does not establish fault on the part of Williams. An agent’s knowledge is not imputed to his principal when the agent is acting adversely to the principal, as Barry was. Williams could be liable to Milgray under one theory or another, but it was not a participant in the fraud against Milgray, especially when Williams lost, and Milgray on balance benefitted, from Barry’s wrongful conduct.
To summarize, an employer may be liable for a wrongful act or omission of an employee or agent that occurs within the scope of the employment or agency relationship (respondeat superior), or where the employer knows and participates in the wrongful act or omission (in pari delicto). It may also be liable for any negligence resulting in damage to another. However, if an act or omission is outside the scope of employment, application of a negligence standard (i.e., the employer “should have known”) will not establish liability. In such cases, proof of actual knowledge will be necessary to establish a ratification claim.