The faithless servant doctrine is a doctrine under the laws of a number of states in the United States, and most notably New York State law, pursuant to which employees who act unfaithfully towards their employers must forfeit to their employers all compensation received during the period of disloyalty.[1][2][3][4][5]

History and application

The faithless service doctrine is a very old common law doctrine that springs out of agency law.[6][7][2] It is a doctrine under the laws of a number of states in the United States, and most notably New York State law, pursuant to which an employee who acts unfaithfully towards his or her employer must forfeit all of the compensation received during the period of disloyalty.[1][2][3][4][5] That period of disloyalty during which equitable forfeiture of all compensation is calculated is the period "from the date of the agent’s first disloyal act, and 'a fiduciary may be required to disgorge any ill-gotten gain even where the plaintiff has sustained no direct economic loss'."[8]

Application in New York State

In a case from the 19th century that is still referred to today, Murray v. Beard, 7 N.E. 553, 554-55 (N.Y. 1886), the New York Court of Appeals held that a broker could not recover commissions from his employer, holding that "An agent is held to uberrima fides in his dealings with his principal; and if he acts adversely to his employer in any part of the transaction ... it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services."[7][9][10][11]

In Astra USA v. Bildman, 914 N.E.2d 36 (Mass. 2009), applying New York's faithless servant doctrine, the court held that a company's employee who had engaged in financial misdeeds and sexual harassment must "forfeit all of his salary and bonuses for the period of disloyalty."[1] The court held that this was the case even if the employee "otherwise performed valuable services," and that the employee was not entitled to recover restitution for the value of those other services.[1][12] The decision attracted a good deal of attention by legal commentators.[11]

Similarly, in Morgan Stanley v. Skowron, 989 F. Supp. 2d 356 (S.D.N.Y. 2013), the leading case by a New York federal district court applying New York's faithless servant doctrine in Manhattan in the Southern District of New York, United States District Judge Shira Scheindlin held that a hedge fund's employee engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.[1][13][14][15] Judge Scheindlin called the insider trading the "ultimate abuse of a portfolio manager's position."[13] The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."[13]

The doctrine was applied as well in Mahn v. Major, Lindsey, & Africa, 2018 N.Y. App. Div. LEXIS 1713 (1st Dep’t Mar. 20, 2018), which involved a legal recruiter accused of disseminating proprietary information to competitors in return for kickbacks, who was required to pay back her employer more than $2.7 million.[6][16][10]

Application in other states

The faithless servant doctrine has also been applied by courts in the states of California, Maryland, Georgia, Missouri, New Jersey, and Oregon.[17][18][19] Courts in other states have chosen to apply the doctrine in part, while Connecticut, Florida, and Rhode Island have chosen not to adopt the doctrine.[18]

References

  1. 1 2 3 4 5 Glynn, Timothy P.; Arnow-Richman, Rachel S.; Sullivan, Charles A. (2019). Employment Law: Private Ordering and Its Limitations. Wolters Kluwer Law & Business. ISBN 9781543801064 – via Google Books.
  2. 1 2 3 Annual Institute on Employment Law. Vol. 2. Practising Law Institute. 2004 – via Google Books.
  3. 1 2 New York Jurisprudence 2d. Vol. 52. West Group. 2009 – via Google Books.
  4. 1 2 Labor Cases. Vol. 158. Commerce Clearing House. 2009 – via Google Books.
  5. 1 2 Ellie Kaufman (May 19, 2018). "Met Opera sues former conductor for $5.8 million over sexual misconduct allegations". CNN.
  6. 1 2 Saxe, David B.; Lesser, Danielle C. (May 29, 2018). "The Ancient Common Law Faithless Servant Rule: Still Relevant in New York". New York Law Journal.
  7. 1 2 Manning Gilbert Warren III (2010). "Equitable Clawback: An Essay on Restoration of Executive Compensation," Archived 2021-03-07 at the Wayback Machine 12 University of Pennsylvania Journal of Business Law 1135.
  8. ↑ "The Common-Law Tort of Breach of Fiduciary Duty: The Total Package".
  9. ↑ Bonell, Michael Joachim; Meyer, Olaf (2015). The Impact of Corruption on International Commercial Contracts. Springer. ISBN 9783319190549 – via Google Books.
  10. 1 2 Chaya F. Weinberg-Brodt (April 3, 2009). "The Faithless Servant Doctrine in New York State". www.martindale.com.
  11. 1 2 Sullivan, Charles A. (March 4, 2011). "Mastering the Faithless Servant? Reconciling Employment Law, Contract Law, and Fiduciary Duty". Seton Hall Public Law Research Paper No. 1777082. SSRN 1777082.
  12. ↑ Carroll, James R.; Weida, Jason Collins (January 1, 2010). "Faithless Servants Beware: Massachusetts Forfeiture Law is More Severe than Astra USA, Inc. v. Bildman Might Suggest". Boston Bar Journal, Winter 2010. SSRN 1775205.
  13. 1 2 3 Jerin Matthew (December 20, 2013). "'Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer". International Business Times UK.
  14. ↑ Henning, Peter J. (December 23, 2013). "The Huge Costs of Being a 'Faithless Servant'". New York Times DealBook.
  15. ↑ "Morgan Stanley seeks $10.2 million from convicted former trader". GreenwichTime. January 15, 2013.
  16. ↑ Riia O'Donnell (March 29, 2018). "Recruiter must pay former employer $2.7M, court says". HR Dive.
  17. ↑ Bernstein, Robert H.; Lurie, Mark D.; Slocum, Michael J. (November 4, 2015). "NJ Supreme Court Reaffirms 'Faithless Servant' Doctrine". New Jersey Law Journal.
  18. 1 2 Robert B. Fitzpatrick. "Faithless Servant Doctrine: Employer's Right to Recover Compensation from Disloyal Employees" (PDF).
  19. ↑ Warren, Manning G. (2010). "Equitable Clawback: An Essay on Restoration of Executive Compensation". University of Pennsylvania Journal of Business Law. 12. SSRN 1407129.
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