Clarkson-11E: Case Problem with Sample Answer s1

Cross-7e: Case Problem with Sample Answer Chapter 18: Corporations—Formation and Financing

18–6. Case Problem with Sample Answer

Thomas Persson and Jon Nokes founded Smart Inventions, Inc., in 1991 to market household consumer products. The success of their first product, the Smart Mop, continued with later products, which were sold though infomercials and other means.

Persson and Nokes were the firm’s officers and equal shareholders, with Persson responsible for product development and Nokes in charge of day-to-day operations. By

1998, they had become dissatisfied with each other’s efforts. Nokes represented the firm as financially “dying,” “in a grim state, . . . worse than ever,” and offered to buy all of

Persson’s shares for $1.6 million. Persson accepted. On the day that they signed the agreement to transfer the shares, Smart Inventions began marketing a new product— the Tap Light—which was an instant success, generating millions of dollars in revenues.

In negotiating with Persson, Nokes had intentionally kept the Tap Light a secret.

Persson filed a suit in a California state court against Smart Inventions and others, asserting fraud and other claims. Under what principle might Smart Inventions be liable for Nokes’s fraud? Is Smart Inventions liable in this case? Explain. [Persson v. Smart

Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist. 2005)]

Sample Answer:

A corporation can be liable under the doctrine of respondeat superior for the torts of its agents or employees committed while they are acting within the scope of their employment. In this case, Nokes was acting on behalf of Smart Inventions, which would thus be liable for Nokes’s fraud. Nokes knew about the Tap Light and could have disclosed it any time during the negotiations with Persson before they signed the agreement for the sale of Perrson‘s shares. Nokes’s continued concealment of the Tap

Light was the act of an officer of Smart Inventions within the scope of his employment for which Smart Inventions is liable.