Tuesday, March 23, 2010

Faithless Servant Doctrine

The Faithless Servant Doctrine is a New York state common law doctrine under which employers may refuse to pay employees for the time the employees were unfaithful to their duties. Courts have gone so far as to rule that employees must forfeit all compensation received after their first disloyal act. See, e.g., Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003) (applying New York law). Of particular note to attorneys practicing outside of New York – while the doctrine originated in and is primarily applied in the New York State court system, other courts (whether applying New York law or the law of another jurisdiction) have occasionally applied the doctrine, at least to some extent.

The original New York Case which established this doctrine was Murray v. Beard, 102 N.Y. 505, 508 (1886). In this case, which originally established the Faithless Servant Doctrine, an agent was held to uberrima fides in his dealings with his principal, and if he acts adversely to his employer in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services. Some recent New York cases applying the doctrine are William Floyd Union Free Sch. Dist. v. Wright, 61 A.D.3d 856, 2009 N.Y. App. Div. LEXIS 3067 (N.Y. App. Div. Apr. 21, 2009); Design Strategy, Inc. v. Davis, 469 F.3d 284 (2d Cir. 2006) (applying New York law); Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003) (applying New York law); and South Pierre Assocs. v. Meyers, 12 Misc.3d 955 (Civ. Nt. N.Y. Cty. 2006).

The Faithless Servant doctrine has been accepted or rejected to varying extents in other jurisdictions. Mark Jacoby has a detailed explanation and citations for most of these various state rules in his article “Disloyalty Doesn’t Pay: New York’s ‘Faithless Servant’ Doctrine” Mar. 2004.

States adopting the Faithless Servant doctrine include: California (J.C. Peacock, Inc. v. Hasko, 16 Cal. Rptr. 518, 522-24 (Cal. Ct. App. 1961)); the District of Columbia (Riggs Inv. Mgmt. Corp. v. Columbia Partners, L.L.C., 966 F. Supp. 1250, 1266 (D.D.C. 1997) (holding that “no compensation is owed an employee who has breached his duty of loyalty to his employer,” and that the employee must return to his employer compensation he earned following the disloyal act)); Maryland (Shipley v. Meadowbrook Club, Inc., 126 A.2d. 288, 291 (Md. 1956) (disloyal agents may be denied compensation, “particularly where there is a conflicting interest, concealment, or a willful and deliberate breach of his contract”)); Georgia (Vinson v. E.W. Buschman Co., 323 S.E.2d 204, 207 (Ga. App. 1984)); Illinois (ABC Trans Nat. Transport v. Aeronautics Forwarders, Inc., 413 N.E.2d 1299, 1314-15 (Ill. App. 1980)); Missouri (Zakibe v. Ahrens & McCarron, Inc., 28 S.W.3d 373, 385-86 (Mo. App. 2000) (collecting additional cases)); Oregon (Horton v. Whitehill, 854 P.2d 977, 980 (Or. App. 1993)).

States that have adopted some aspect of the doctrine include: Massachusetts (Meehan v. Shaughnessy, 535 N.E.2d 1255, 1266-67 (Mass. 1989); Chelsea Indus. v. Gaffney, 449 N.E.2d 320, 327 (Mass. 1983)); Delaware (Technicorp Int’l II, Inc. v. Johnston, No. 15084, 2000 Del. Ch. LEXIS 81, *196, *199 (Del. Ch. May 31, 2000); Citron v. Merritt-Chapman & Scott Corp., No. 3130, 1977 Del. Ch. LEXIS 183, *12 (Del. Ch. May 4, 1977)); Pennsylvania (Fidelity Fund, Inc. v. Di Santo, 500 A.2d 431, 439-40 (Pa. Super. Ct. 1985)); New Jersey (Cameco, Inc. v. Gedicke, 724 A.2d 783, 790-91 (N.J. 1999)); and Texas (Burrow v. Arce, 997 S.W.2d 229, 241-42 (Tex. 1999)).

Some states that have rejected the Faithless Servant Doctrine include: Connecticut (Dunsmore & Assocs., Ltd. v. D’Alessio, 2000 Conn. Super. LEXIS 114 (Conn. Super. Ct. Jan. 6, 2000) (unpublished)); Florida (Wallace v. Odham, 579 So. 2d 171, 175 (Fla. Dist. Ct. App. 1991)); and Rhode Island (Oken v. National Chain Co., 424 A.2d 234 (R.I. 1981).

Some interesting developments in the Faithless Servant doctrine were laid out in the following two cases. In Astra USA, Inc. v. Bildman, 914 N.E.2d 36 (Mass. 2009), the court, applying New York law, held that a CEO fired for sexual harassment and misappropriation of company funds must relinquish $7 million in salary and bonus paid to him by the former employer. The court in Bildman cited Feiger v. Iral Jewelry, Ltd., 363 N.E.2d 350 (N.Y. 1977), for the following: “One who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary . . . Nor does it make any difference that the services were beneficial to the principal, or that the principal suffered no provable damage as a result of the breach of fidelity by the agent.”

In Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184 (2d Cir. 2003), the court reversed S.D.N.Y. Judge Shira Scheindlin and held that the disloyal employee must disgorge all compensation received from the date of his first disloyal act. In so holding, the Second Circuit in Phansalkar did not extend its prior holdings in Musico v. Champion Credit Corp., 764 F.2d 102 (2d Cir. 1985) and Sequa Corp. v. GBJ Corp., 156 F.3d 136 (2d Cir. 1998), in which it held that a disloyal employee need not disgorge compensation received for transactions in which the employee had been loyal.

More information on the doctrine can be found in the following articles:

Ronald Minkoff, “Suing Disloyal Employees & Agents: Court Gives Employers a Powerful New Weapon”, April 2004, available here.

Mark A. Jacoby, “Disloyalty Doesn’t Pay: New York’s ‘Faithless Servant’ Doctrine”, March 2004, available at here.

Stephen M. Bainbridge, “The Faithless Servant Doctrine and Partner (or Agent) Compensation”, November 9, 2003, available here.

Gary J. Mennitt, “The Faithless Servant Doctrine – Developments in the Law”, March 2, 2001, available here.


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