Hawaii Real Estate
Hawaii Real Estate
Loyalty
Agency comes in many forms. Don’t get lost in the complexity. At the core of every agency relationship are three fundamental principles that are as simple as ABC.
LOYALTY
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Introduction
Welcome to Hawaiʻi Real Estate, a podcast by the Hawaiʻi Association of REALTORS®. Our podcast airs the first Wednesday of each month. Each episode includes a Real Data Report, which describes Hawaii pricing, inventory, and market conditions, as well as a special focus piece, which comments on a current legal issue in the buying, selling, renting, leasing, or managing of property in Hawaii.
Today is Wednesday, June 7, 2023, our focus piece for this episode simplifies the rules governing agency. We explain how three fundamental principles can be applied to understand any agency relationship.
But first we turn to our monthly real data report.
Real Data Report
Median home listing prices throughout the islands remained largely stead last month. The City and County of Honolulu reported a median listing price in May 2023 of $811,500 (up over the previous month by 1.45%). The other counties reported slight declines in their May 2023 median listing prices. Hawaii County Reported a 4.19% decline, Kauai County reported a 1.53% decline, and Maui County a 0.25% decline. Overall, the state saw a monthly decline in median listing prices of -0.29%.
Average and median year-over-year monthly data for last month rose and fell together in all counties but the City and County of Honolulu, which saw a 4.41% decline in average monthly year-over-year listing price while at the same time it saw a 0.31% increase in average monthly year-over-year listing price. The mismatch in data trends could indicate that the City and County of Honolulu is experiencing a modest increase in the number of lower-priced properties sold compared to higher priced-properties, a decrease in demand for higher-priced properties, or an uptick in foreclosures or short sales.
The state as a whole also experienced opposing monthly year-over-year median and average listing price data, but in mirror image of that of the City and County of Honolulu. The state saw average monthly year-over-year listing price data increase while its median monthly year-over-year figure decreased. Each change was modest. So, in opposite manner to the city and county, the state might be experiencing a modest increase in the number of higher-priced listings or a modest reduction in demand for lower priced homes.
Active listing counts last month were down throughout the state. The City and County of Honolulu reported 1,777 total active listings (down from April 2023 by 1.55%); Hawaii County reported 638 active listings (down 3.47%); Kauai County reported 174 active listings (down 4.91%); and Maui County reported 477 active listings (down 3.63%). Overall, active listings in the state were down last month 2.25%.
A look at the month-year-over-year data suggests that active listings could continue to decline. Although active listings were significantly higher last month than they were in May 2022, monthly year-over-year active listings have since March 2023 been on an general and steep downward trajectory. It appears that the downward trajectory in active listings will continue into next month, unless additional inventory becomes available or interest rate hikes decline.
New private housing units authorized by building permits are usually a helpful indicator of expanding inventory. Hawaii’s building permit data has always swung wildly and—to my eye—unpredictably. Walter White offers a more steady line.
So building permits are out as a useful tool. That brings us to interest rates.
The Federal Reserve meets June 13th through 14th to discuss whether to raise the target range for federal funds (i.e., the interest rate). Usually the Personal Consumption Expenditure Price Index is the best single indicator of whether the Fed. will raise interest rates—if that indicator is higher than last month, the Fed is more likely to conclude that inflation is rising and decide to fight it by raising interest rates.
The Personal Consumption Expenditure Price Index was up at last report by 0.2%. That may not sound like much, but a rise in the Personal Consumption Expenditure Price Index of approximately that amount has frequently occasioned with a Fed decision to raise interest rates.
A decision to raise the target benchmark rate on June 14th, however, would constitute the tenth consecutive interest rate hike—a large number. Also, some drips and drabs of information seem to be leaking from unofficial channels within or adjacent to the Fed suggesting that the a 10th rate hike is, though perhaps indicated by the data, unlikely. Instead, it appears more likely that the Fed will hold the line on interest, preserving the current target benchmark range of 5-5.25%.
That would certainly be good news for mortgage rates. Average mortgage rates in the United States since our last real data report on May 3rd have increased measurably. The 30-year fixed rate mortgage increased from May 4th to June 1st by 0.42 points (or 7.29%) and the 15-year fixed rate mortgage during that same time increased 0.4 points (or 6.25%).
For the latest pricing, inventory, and market condition data and analysis, download our next podcast real property report on the first Wednesday of next month. Now it’s time for our legal focus piece, Loyalty.
Focus Piece: Loyalty
Introduction
Real estate agents are—of course—agents. They represent their clients in the purchase or sale of real estate. Simple.
It’s the rules governing agency that have a tendency to confound. Agency can seem like it’s governed by ephemeral, mysterious concepts. Worse yet, those concepts can seem at times to misalign and directly contract.
But get the rules wrong, and you can open yourself to civil liability, or provide the basis for your client’s deal to fall apart. So it’s important to command this tricky` subject.
I’m here to tell you not to worry. Agency is as simple as ABC.
What Is Agency?
When you’re having trouble getting your thinking straight go to a simple case. That’s the advice that Harvard Kennedy School Professor Richard Zeckhauser gives his students when they’re facing a complex problem.
It’s good advice. Reducing complex problems to their prime components helps avoid analysis paralysis, which occurs when we become so overwhelmed by a problem’s complexity that we unable to make any progress. Reducing a problem to its essential constituent parts also reduces our cognitive load, allowing us to focus on the problem’s most important aspects.
Albert Einstein once said, “Everything should be made as simple as possible, but no simpler.” And he took his own advice to heart when he distilled the complex relationship between all energy and mass in the universe to just three terms: E=MC2.
But what is the process by which we reduce a complex problem to its fundamental components? Maybe it’s easy for Einstein, but we could use some advice. For that, we turn to another gigantic thinker: Sir. Arthur Conan Doyle, as expressed through his famous literary character Sherlock Holmes.
Like Zeckhauser and Einstein, Holmes recommends that we tackle complex mysteries by starting with the basics. “Before turning to those moral and mental aspects of the matter which present the greatest difficulties,” Holmes counsels, “let the enquirer begin by mastering more elementary problems.” Holmes is urging those of us who are vexed by some bewildering complexity—like real estate agency—to observe the very basis of how the thing works and what makes it what it is.
If our task is to understand agency, Holmes, Einstein, and Zeckhauser—all great thinkers—would recommend that we look for its elementary principles by simply observing it. There are many forms of real estate agency: an agent that works exclusively for the seller, an agent that works exclusively for the buyer, an agent that works in cooperation with the seller’s agent to find a buyer, and an agent that works for both the seller and buyer (a so-called dual agent). Don’t get lost in the complexity. At the core of each of these relationships is a legally enforceable agreement between two parties in which one party is to work for the other party’s benefit, subject to that other party’s control.
And so we’ve distilled all agency relationships to their fundamental parts. Like Einstein who reduced all matter and energy in the universe to E=MC2, we’ve reduced all agency relationships to ABC: assent, benefit, and control.
Because all agents agree to work for their principal’s benefit and subject to their control, the law considers all agents to have a duty of loyalty to their principal. This duty of loyalty prohibits an agent from gaining a material benefit from a third party or acting in a manner adverse to their principal’s bests interests, without first obtaining their principal’s consent. It also requires all agents to protect their client’s confidential information and provide material information relating to the agency that the agent knows, should know, or has reason to know their principal would want and information that is material to the agent’s duties to the principal, unless the principal instructs their agent otherwise.
We flesh out all these rules—material benefit, adverse interest, confidentiality, and competition—in the examples that follow and apply each rule to real estate agency in Hawaii. If you get stuck along the way, remember that each of these examples and the rules they represent emanate from the elementary principles of agency law that we just discovered together: all agents have a duty to loyally advance their client’s best interests and to follow their client’s instructions.
Finally, before we get in the thick of it, understand that everything that follows is supported by Hawaii law. We don’t cite specific statutes, regulations, case law, or persuasive authorities because we don’t want to bog down this podcast with unnecessary detail or take away from what we think could prove to be entertaining examples that could usefully reinforce the rules governing Hawaii real estate agency.
OK, that’s it. Buckle up. Here we go.
Material Benefit (Love v. Geffen)
An agent’s duty of loyalty to their principal prohibits the agent from receiving a material benefit in connection with the agency without first obtaining their principal’s consent. A multimillion dispute between Courtney Love and her band’s record company helps explain why an agent cannot accept a material benefit from a third party without first obtaining their principal’s consent.
Courtney Love and Eric Erlandson formed the grunge rock band “Hole” in 1989, releasing their debut album “Pretty on the Inside” in 1991 on Caroline and City Slang, two independent labels. But the band’s critical acclaim and record sales soon garnered the attention of major record labels.
When Hole released “Pretty on the Inside” Geffen Records was a music industry powerhouse. Its clients included the stadium rock bands Guns ‘N Roses, Aerosmith, and what seemed like half the Billboard Top 100. Most Americans listened to a Geffen track every day.
Hole was particularly drawn to Geffen because of Geffen’s instrumental role in grunge rock. Remember: Hole was a grunge rock band, and it knew that Geffen had elevated grunge rock to the American Zeitgeist.
The quintessential grunge band Nirvana was a Geffen client. Its breakthrough album “Nevermind” shook Generation X at its faultline. That generation listened to Nirvana, dressed like Nirvana, and heralded Nirvana’s single “Smells Like Teen Spirit” as their anthem. So Hole happily signed with Geffen.
Here it’s helpful to step back for a moment. The standard recording contract is an exclusive contract between a recording artist and a record label. The contract typically lasts for a set number of albums or a set period of time, during which the artist agrees to record and release music exclusively with the label. In exchange, the label provides the artist with financial and promotional support, such as advances on royalties and marketing and distribution services.
The arrangement is remarkably similar to the arrangement found in most real estate listing agreements. Like an artist under the standard recording contract, who promises to only sell their music through their record label, the seller under a standard listing contract agrees to only sell their property through their listing brokerage. Both the listing brokerage and record company promote their client’s property and receive income when their client’s property sells.
The most important similarity between the contracts, however, is that neither represents an arm’s length transaction. In neither contract is one party selling their property to the other. In the listing agreement, the property owner is not selling their property to their broker; their broker is agreeing to represent the seller in selling their property. In the recording contract, the artist is not selling their music to the recording company, the recording company is agreeing to represent the artist in the sale of their music. Neither contract represents an arm’s length transaction because in each one party is placing their trust and confidence in the other, who in turn has agreed to work for their benefit and subject to their control.
Courtney Love alleged that Geffen and the company that succeed it, UMG Recordings, received improper material benefits by secretly selling licenses to Hole’s albums. According to Love, Geffen and UMG received secret flat fee payments from record clubs for the right to press albums with Hole’s music.
Again, it might be helpful to take a step back. When you were born and where you’ve lived largely determines if you’ve heard of a record club. They were popular in the 80s a 90s, the period when Love’s band released its albums. If you lived in a rural community during that time you may have purchased her album or another album through a record club. Record clubs sold albums directly through the mail, often to consumers in rural communities who had no practical means to purchase an album from a record store. The Recording Industry of America estimated that record club album sales at that time amounted to about $1 billion.
The clubs paid large upfront fees to record companies for the right to press albums containing music created by artists represented by the record companies. Importantly, these licensing deals were negotiated in secret between the record companies and record clubs, and the payments that the record clubs paid for the licensing rights were not reported to the artists, nor were the record company’s share of those payments reported to the artists.
The artists did receive a commission for the sale of their work to the recording clubs, but as was learned through discovery, the amount the artists earned through the licensing of their work was about half their standard royalty rates.
Giving Hole’s record company the benefit of the doubt, one could find themselves convinced that the secret licensing agreements that the recording company entered into with the recording clubs didn’t reduce Love’s total royalties. The record clubs purchased the licensing rights to sell Hole’s music through the mail to consumers in mostly rural communities who didn’t have record stores near where they lived or have any other practical means to purchase Hole’s music. Yes, the upfront fee that the record club paid for the right to sell Hole’s music would result in lower royalty rates for Love’s albums. And, yes, the record club would receive an unknown cut of the licensing fees. But because one could see these licensing arrangements as a means to expand Hole’s music to an otherwise unavailable market, one could be convinced that the licensing fee agreements actually increased—not decreased—Love’s royalties.
If this argument demonstrates anything, though, it’s that measuring an injury to a principal is often more difficult than measuring the benefit to an agent. Whether Love received less total royalties because consumers who would have purchased her band’s albums in a record store purchased her band’s albums through a record club instead, is debatable. Whether her band’s record company received a material benefit for licensing her band’s music is not. Record clubs wrote a checks to her band’s record company for stated amounts.
In the same way, it is difficult to prove that a seller reduced the selling price of their home or made some other concession in their sale of their home because their agent received a commission for representing the buyer. But it is not difficult to show that agent received a commission from the buyer.
Also, because an agent’s interest in acquiring a benefit from a third party may supersede their commitment to obtain the best terms for their principal, the law refuses to allow agents to decide whether the benefit they receive hurts their client or impedes the agent’s ability or desire to pursue their client’s best interests.
So the law outright bans agents from receiving benefits from third parties in connection with the agency without first receiving their principal’s consent.
This is in part why the Hawaii Supreme Court ruled in Property House v. Kelley that a dual agency—a kind of agency in which an agent earns a commission from the buyer and seller in the same transaction—is only permissible when the real estate agent obtains the consent of both principals after full disclosure. “[T]he court recognized that, absent full disclosure to the client, it was a breach of [the agent’s] fiduciary duty for a real estate broker to sell [their] client’s property to a party in which the broker had a pecuniary interest.”
No Adverse Interest (Easterbrook)
As a fiduciary, an agent has a duty to always act loyally in their principal’s interests in all matters connected with the agency relationship. An agent cannot act adverse to their principal’s best interest in any matter connected with the agency, nor can the agent aid other in acting adverse to the principal’s best interests in any matter connected to the agency.
A recent CEO of McDonald’s flagrantly violated this rule. As a consequence, the CEO forfeited cash and stock valued over $100 million.
Stephen J. Easterbrook was hired to fix McDonald’s. The corporate conglomerate’s sales revenues had declined for the first time in 12 years, and a new officer had to be placed at the helm to right the ship.
Easterbrook was the natural choice. He had a long history with the company and had held leadership positions as its senior vice president for the U.K. and Northern Europe, as well as its executive vice president and chief brand officer. His knowledge of international markets and his focus on innovation and technology was seen by many as McDonald’s best chance to adapt to changing consumer preferences and to compete with new, more innovative fast-food chains.
He also carried a reputation for fostering a positive culture and encouraging collaboration among team members. The board believed that Easterbrook's leadership style would help improve morale and productivity among McDonald's employees, which would ultimately benefit the company as a whole.
Easterbrook was seen as the man who could right the ship. And so, in March 2015, he was installed as McDonald’s chief executive officer.
Less than five years later, in October 2017, the board of directors learned that Easterbrook had violated company policy by engaging in a prohibited, but consensual, sexual relationship with a subordinate. After directing the company’s outside legal counsel to investigate, the company’s board decided to terminate Easterbrook. He left the company in 2019 with a severance agreement valued at $128.8 million.
But the severance agreement doesn’t end the story; it starts it. A few years after Easterbrook left, McDonald’s received a report that he had another prohibited sexual relationship with a subordinate employee during his CEO tenure. The report prompted McDonald’s to aggressively investigate Easterbrook’s romantic liaisons during his time as McDonald’s CEO. Eventually the company would discover that Easterbrook had at least four prohibited sexual relationships with subordinates and that he and those subordinates had used McDonald’s issued electronics to exchange sexually explicit photos and videos of themselves.
Although “[t]he standard of loyalty is measured by no fixed scale,” there is no duty that Easterbrook violated his duty of loyalty to McDonald’s by placing his interests in having a prohibited sexual relationship with an employee subordinate over McDonald’s interest in maintaining a safe and respectful workplace. McDonald’s filed a civil complaint in August 2020 seeking to claw back Easterbrook’s $128.8 million severance package, arguing that the severance package was now voidable by McDonald’s because Easterbrook violated his duty of loyalty. The parties would ultimately agree to a settlement agreement by which Easterbrook would forfeit cash and stock worth $105 million.
Unlike Courtney Love’s band’s record company, which sold the license to her band’s music to record clubs for a fee, Easterbrook’s sexual dalliances resulted in no pecuniary benefit for him—nor certainly did he intend to receive a pecuniary benefit. He violated his duty of loyalty by using the position of trust and confidence given to him by his principle to advance a self-interest that he knew was not in his principal’s best interests. As a fiduciary, an agent has a duty to always act loyally in their principal’s bests interests in all matters connected with the agency relationship.
It appears that Easterbrook learned that the hard way, as his pursuit of self-interest caused him to lose $105 million.
Duty to Disclose (Fairhurst)
Stephen J. Easterbrook presided over a corporate culture at McDonald’s from 2015-2019 that many have argued condoned or ignored widespread allegations of sexual harassment and abuse. Much of the blame for that alleged corporate culture during that time, however, is often levied at McDonald’s former executive vice president and global chief people officer, David Fairhurst.
As McDonald’s global chief people officer, Fairhurst was charged with promoting and overseeing a safe and respectful workplace. Reports of the time indicated, however, that Fairhurst and McDonald’s CEO Easterbrook promoted and participated in a “party atmosphere” at the company’s Chicago headquarters. Weekly happy hours with an open bar were held on the eighth floor of the office and employees would often leave the office for drinking excursions with corporate executives. Male employees, including senior corporate executives, reportedly engaged in inappropriate behavior at these happy hours and drinking excursions, routinely making female employees feel uncomfortable.
Fairhurst himself was the subject of reports of sexual harassment. During a human resources party in November 2018, over 30 McDonald's employees witnessed Fairhurst pulling a female employee onto his lap, and several reported what they saw to McDonald's Compliance Department. The Compliance Department evaluated the reports and "concluded that Fairhurst behaved and put himself in a position inconsistent with McDonald’s Standards of Business Conduct." Despite this finding, Fairhurst was allowed to continue in his role after forfeiting 50% of his bonus payment.
McDonald’s employees did not trust that Fairhurst, the company’s global chief people officer charged with promoting and overseeing a safe and respectful workplace, had overseen charges of sexual harassment against him, his fellow executives, and other McDonald’s workers in good faith. He was credibly accused of engaging in sexual misconduct himself, and reports continued to described his management technique as one that condoned or ignored the very sexual misconduct of which he was accused.
So, in 2021, McDonald’s shareholders filed a lawsuit in Delaware’s Court of Chancery on behalf of their corporation alleging that Fairhurst breached his duty of loyalty to the corporation by failing to oversee its employee complaints of sexual harassment in good faith. Evidence raised in the pleadings and considered by the court showed that “three out of every four female non-managerial McDonald’s employees have personally experienced sexual harassment at McDonald’s, ranging from unwelcome sexual comments to unwanted touching, groping, or fondling, to rape and assault,” and that “over 70% of those who reported sexual harassment they witnessed or experienced faced some form of retaliation, with 42% reporting loss of income . . . .” In a landmark order issued in January 2023, the highly influential Delaware Court of Chancery ruled that the McDonald’s shareholders stated a claim for breach of loyalty by alleging that Fairhurst failed to provide the McDonald’s board of directors with all material facts regarding rampant sexual harassment and misconduct claims. The court reasoned that an agent has a duty to provide their principal with all material facts and all facts that the agent knows, has reason to know, or should know that their principal would wish to have, as well as facts that are material to the agent’s duties to their principal.
This rule of disclosure does have exceptions. It's important to note that the agent's duty to provide material facts does not extend to information when the agent owes a superior duty to another not to disclose it to the principal. In such cases, the agent must fulfill their duty to the other party, while keeping in mind the best interests of the principal.
Confidentiality (Gupta)
An agent cannot use or communicate confidential information that they’ve learned from their principal for their own benefit of for the benefit of a third party. To see why, I direct you to the largest, most egregious, and dramatic violation of this rule, outside the world of foreign espionage
The world financial markets in September 2008 were in crisis, but Goldman Sachs had a lifeline. The Oracle of Omaha, Warren Buffet, had decided he wanted his company, Berkshire Hathaway, to invest $5 billion in Goldman Sachs.
In exchange for the investment, Berkshire would receive 50,000 shares of preferred stock and warrants to purchase common stock at $10 below the closing market price. To prevent a massive divesture of Goldman’s stock value, Goldman’s top four executives would agree to hold 90% of their Goldman stock. Berkshire’s investment would fortify Goldman’s cash reserves and clot its stock from bleeding more value.
With banks and investment companies collapsing up and down Wall Street, Berkshire’s investment signaled the Oracle of Omaha’s strong vote of confidence in Goldman Sachs. His company’s massive $5 billion investment could restore market confidence in Goldman’s stability and return its long-term prospects.
Goldman’s board of directors met on September 23, 2008 to discuss Berkshire’s potential investment. I’ve never been offered $5 billion, but the decision on whether to accept Berkshire’s $5 billion investment was probably not that difficult. The board agreed to the investment that day.
But the board agreed to withhold announcement of the investment until the markets closed at 4:00 p.m. In that delay between the board agreeing to accept Berkshire’s investment and the markets closing, Rajat K. Gupta, a Goldman director, saw an opportunity.
At approximately 3:54 p.m., 16 seconds after Gupta left the board meeting and 6 minutes before the closing bell announcement, Gupta’s assistant called Raj Rajaratnam.
Gupta and Rajaratnam had a long personal and business relationship. For many years, they had joined forces to form private equity funds and pool their money in the same offshore accounts. Now, on September 23, 2008, at 3:58 p.m., 8 minutes after Gupta’s call and just two minutes before the closing bell announcement, Rajaratnam ordered the purchase of approximately 350,000 shares of Goldman Sachs common stock for approximately $43 million.
Gupta had tipped his friend and business associate.
The next day, Goldman’s stock opened at $128.44 per share, up $3.39 over its previous day’s closing price. Before the end of the day, Rajaratnam would order 217,200 Goldman shares sold, netting him a one-day profit of nearly a million dollars ($840,000).
Unbeknownst to Gupta or Rajaratnam, the FBI had been wiretapping Rajaratnam’s phone for several months. Rajaratnam was under investigation for insider trading, following a tip the FBI received from an informant in 2007. So, on September 23, 2008, when Gupta called Rajaratnam to tip him of Berkshire Hathaway’s $5 billion investment, the FBI was listening.
And it soon would be watching Gupta. It began surveying Gupta’s daily movements and monitoring his email and phone records.
Then the dragnet expanded to his friends and colleagues. The FBI interviewed several witnesses who had knowledge of Gupta’s and Rajaratnam’s activities, including employees of Goldman Sachs and Rajaratnam’s hedge fund, the Galleon Group, as well as Gupta’s and Rajaratnam’s friends and associates. The witness testimony corroborated the FBI’s wiretaps and surveillance.
Gupta was indicted in U.S. District Court for the Southern District of New York on October 25, 2011 on one count of conspiracy to commit securities fraud and five counts of substantive securities fraud. He was found guilty less than a year later, on June 15, 2012, on one count of conspiracy to commit securities fraud and three counts of substantive securities fraud.
At the sentencing hearing, the judge noted that Gupta’s did not gain any material advantage from disclosing Berkshire’s confidential investment to Rajaratnam. It was Rajaratnam who traded on the information and reaped the profit. Gupta, in the courts words, “did not in any direct sense receive one penny.” The “heart of Mr. Gupta’s offense” the judge announced in open court on the day it announced Gupta’s sentencing was “his egregious breach of trust . . . . In the eye of the law, Gupta’s crime was to breach his fiduciary duty of confidentiality to Goldman Sachs . . . .”
Remember your ABCs: assent, benefit, and control. Because all agents promise to advance their principal’s best interests in connection with the agency, an agent that possess their principal’s property has a duty to use it only on the principal’s behalf. An agent has a duty not to use or communicate confidential information from their principal for their own purposes or for those of a third party.
Compete (Waymo)
(Robot) Driver's Paradise
Drivers in Phoenix have it made. Driving there couldn’t be easier.
The place is a desert. So the sun brightly illuminates all roads and the drivers need not concern themselves with hydroplaning into a ditch any more than they need to concern themselves with catching a patch of black ice into a neighboring motorist’s tailpipe.
Nor need Phoenix drivers concern themselves with devastating blindside collisions. Phoenix is hyper flat and its streets are straight. Thera are few opportunities while driving in Phoenix to be surprised.
Or lost. Phoenix boasts the nation’s best road infrastructure. Despite frequently finding itself on the list of America’s fastest growing major cities, Phoenix has the country’s best roads, signage, and mapping.
So drivers in Phoenix have it made, and ironically that is in part why Phoenix may become the first major city in America without any drivers.
Beta Testing
There is no better place in the country to provide proof of concept for self-driving technology than Phoenix. Its weather and roads make it a superb early technical proving ground. And its large and growing population supply a large, growing, and diverse customer base. So Google selected Phoenix to beta test its self-driving Waymos.
You can actually—right now—download Google’s Waymo ride hailing app. and, if you’re in Phoenix, hail a car that will take you anywhere in metro Phoenix without a human driver.
Need a car to catch a flight at Sky Harbor International Airport or a Diamondbacks game at Chase Field? Waymo can drive you to either location in an electric Jaguar I-PACE self-driving Waymo car.
When you first get into a Waymo, you notice that there is no steering wheel or pedals. Instead, there is a large screen in the center of the dashboard that displays information about the car’s surroundings, such as speed, direction of travel, and other vehicles on the road.
To start you ride, you simply tap the “Start Ride” button. The car then pulls away from the curb and begins driving to your destination. Along the way, the car automatically navigates through traffic, stops for red lights and stop signs, and even changes lanes.
If you need to make a change to your destination, you can do so by tapping on the “Change Destination” button on the screen. The car will then recalculate its route and continue driving to your new destination.
During your ride, you can completely relax and enjoy the passing scenery.
When you arrive at your destination ,the car will automatically pull over to the curb and come to a stop. You can then get out of the car and go about your day.
The technology that makes all this possible is a system called LiDAR. LiDAR, or Light Detection and Ranging, is a powerful laser-based scanning and mapping technology that enables self-driving vehicles to "see" their surroundings and navigate the world. By reflecting laser beams off objects, LiDAR creates a real-time 3D image of the environment around the car that can be used to detect traffic, pedestrians, bicyclists, and any other obstacles a vehicle must be able to see to drive safely.
Google spent over seven years to develop Waymo’s LiDAR system. Developing the system cost Google tens of millions of dollars and tens of thousands of engineer hours. Hundreds of engineers worked on the LiDAR effort, led by Anthony Levandowski.
Levandowski joined Google in 2007 and was one of the founding members of Project Chauffeur, the precursor to Waymo. As the manager of the LiDAR program, Levandowski had access to material nonpublic information about the company’s cutting edge LiDAR technology.
Levandowski abruptly left Google in January 2016 to form Ottomotto, a competing self-driving car company. Within one month, Uber offered a term sheet to purchase Ottomotto and its LiDAR self-driving car technology for $680 million.
Google spent over seven years developing that same technology. How could Ottomotto have it ready to sell in one month?
Obviously, Google suspected that Levandowski stole its trade secrets and confidential information, but it could not halt Uber’s purchase of Ottomotto. In August 2016, Uber purchased Ottomotto for $680 million. Levandowski was appointed to lead Uber’s self-driving car project.
Two months later, on October 28, 2016, Google filed two arbitration demand letters, instituting arbitration proceedings against Levandowski for breach of contract and breach of his fiduciary duty of loyalty, each claim arising from his alleged use of Google’s trade secrets and confidential information to start a competing self-driving car company.
In a separate action filed by Google against Uber, Google revealed that it had uncovered evidence that one month before Levandowski left Google to found the competing Ottomotto, Levandowski “downloaded more than 14,000 highly confidential and proprietary files” from Google’s protected servers, including files detailing “Waymo's LiDAR circuit board designs.” Those files would appear to be the basis for Ottomotto’s rapid LiDAR moonshot, which would ultimately be successful and form the basis for Uber’s acquisition of Ottomotto for $680 million.
Eventually, federal criminal charges were brought against Levandowski. The federal criminal court deciding Levandowski’s sentencing corroborated Google’s earlier account of events. In the federal criminal court sentencing memorandum, it found that:
• Levandowski downloaded over 14,000 Chauffer files on December 11, 2015, including LiDAR engineering schematics, from Google's SVN server to his Google-issued laptop
• Three days later, on December 14, 2015, he transferred all 14,000 SVN files from his Google-issued laptop to his personal MacBook
• After New Year’s Day, Levandowski against met with Uber executives at Uber regarding Uber’s acquisition of Ottomoto and then held a mutlipe meeting at his home in Palo Alto to solicit Google employees to cone work for him. Google employees receive offer letters at this meeting.
• Two days after his last meeting to recruit Google employees, he resigned from Google without notice.
• Less than a month later, Uber and Ottomotto signed a draft Term Sheet for Uber's acquisition of Ottomotto.
• Uber completes its purchase later than year for $680 million.
The court described Levandowski’s conduct as “brazen and shocking.”
Again, remember your ABCs: Because all agents promise to act for their principal’s benefit in all matters connected to the agency, no agent can compete against their principal or aid any third party in doing so during the duration of the agency. But that’s exactly what Levandowski did when, while still working for Google, he stole Google’s confidential LiDAR schematics and used them to form a competing company.
Importantly, although Levandowski stole confidential information, that was necessary for a finding that he breached his duty of loyalty by competing with his principle.
An agent that simply competes with their principal is in violation of their fiduciary duty because by competing with their principal they are acting against their principal’s best interests.
Conclusion
And that’s our episode. There are many forms of agency, but don’t get lost in the complexity. At the core of every agency relationship is an agreement between two parties in which one party agrees to loyally advance the other party’s best interest in all matters connected with the agency. Because all agents pledge loyalty to their principals, no agent can, without their principal’s consent, receive a material benefit from a third party in any matter connected with the agency, act in a manner that’s adverse to their principal’s interest in any matter that’s connected with the agency, compete with their principal in any manner connected with the agency, or use or disclose the principal’s confidential for the principal’s [sic] own benefit or the benefit of some third party.
An agent’s duty of loyalty to their principal also requires the agent to provide their principal with all the information that the agent knows, should know, or has reason to know their principal would want, as well as all material information relating to the agency.
A principal can consent to their agent violating any of these duties of loyalty, but for the consent to be effective, it must be informed, and the agent must always treat their principal fairly and honestly.
As a natural consequence of these rules, a dual agency is permissible only where the real estate agent obtains the consent of both principals after full disclosure.
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A hui hou!
