Thefaithless servantdoctrine 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]It is under the laws of a number of states in the United States, and most notablyNew York State law.
The faithless service doctrine is a very oldcommon law doctrine that springs out ofagency law.[6][7][2] It is a doctrine under the laws of a number of states in the United States, most notablyNew 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 'afiduciary may be required to disgorge any ill-gotten gain even where theplaintiff has sustained no direct economic loss'."[8]
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), theNew York Court of Appeals held that a broker could not recover commissions from his employer: "An agent is held touberrima 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]
InAstra 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 was the case even if the employee "otherwise performed valuable services," and 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, inMorgan 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 theSouthern District of New York,United States District JudgeShira Scheindlin held that ahedge fund's employee engaging ininsider trading in violation of his company'scode 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 aportfolio 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 inMahn 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 forkickbacks. She was required to pay back her employer more than $2.7 million.[6][16][10]
The faithless servant doctrine has also been applied by courts in California, Maryland, Georgia, Missouri, New Jersey, and Oregon.[17][18][19] Courts in other states have chosen to apply the doctrine in part, and Connecticut, Florida, and Rhode Island have chosen not to adopt the doctrine.[18]