I got an interesting question in Business Associations yesterday: P is engaged in a criminal enterprise. A is one of P's agents. In connection with carrying out P's illegal activities, A receives a kickback from T. P is unaware of and has not consented to the kickback. Can P sue A for breach of the duty of loyalty?
Restatement (Third) § 8.02 provides that:
An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position.
Which is precisely what A has done. See U.S. v. Fagan, 821 F.2d 1002, 1010 (5th Cir. 1987) ("Riley plainly breached his duty to Texoma by secretly receiving and retaining the kickbacks.").
Where the principal is engaged in lawful conduct but the agent's conduct in receiving a kickback is a criminal violation of an anti-bribery or anti-corruption statute, the agent has breached his duty to the principal and the principal may recover the secret profits. See Twenty First Cent. L.P.I.. v. LaBianca, 19 F. Supp. 2d 35, 41 (E.D.N.Y. 1998) ("Malpiedi and Redzinski intentionally submitted inflated invoices in order to obtain kickbacks. ... They should be held liable for the direct consequences of their illegal action.").
Not surprisingly, I was unable to find any case law on the question of what happens when the principal's business is illegal. I note, however, that Restatement (Second) of Contracts § provides that, with certain minor exceptions, "[a] party to an illegal bargain can neither recover damages for breach thereof nor, by rescinding the bargain, recover the performance that he has rendered thereunder or its value." The commentary explains that:
When relief is denied it is because the plaintiff is a wrongdoer, and to such a person the law denies relief. Courts do not wish to aid a man who founds his cause of action upon his own immoral or illegal act. If from the plaintiff's own statement or otherwise it appears that the bargain forming the basis of the action is opposed to public policy or transgresses statutory prohibitions, the courts ordinarily give him no assistance. The court's refusal is not for the sake of the defendant, but because it will not aid such a plaintiff.
It seems likely that the same principle would apply to agency relationships, so that the plaintiff/criminal mastermind would not be allowed to sue.
