Faithless servant

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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]

Contents

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]

Related Research Articles

Insider trading is the trading of a public company's stock or other securities based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information, as the investor with insider information could potentially make larger profits than a typical investor could make. The rules governing insider trading are complex and vary significantly from country to country. The extent of enforcement also varies from one country to another. The definition of insider in one jurisdiction can be broad, and may cover not only insiders themselves but also any persons related to them, such as brokers, associates, and even family members. A person who becomes aware of non-public information and trades on that basis may be guilty of a crime.

<span class="mw-page-title-main">Morgan Stanley</span> American financial services company

Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the firm's clients include corporations, governments, institutions, and individuals. Morgan Stanley ranked No. 61 in the 2021 Fortune 500 list of the largest United States corporations by total revenue.

Respondeat superior is a doctrine that a party is responsible for acts of their agents. For example, in the United States, there are circumstances when an employer is liable for acts of employees performed within the course of their employment. This rule is also called the master-servant rule, recognized in both common law and civil law jurisdictions.

<span class="mw-page-title-main">Fiduciary</span> Person who holds a legal or ethical relationship of trust

A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

A legal doctrine is a framework, set of rules, procedural steps, or test, often established through precedent in the common law, through which judgments can be determined in a given legal case. A doctrine comes about when a judge makes a ruling where a process is outlined and applied, and allows for it to be equally applied to like cases. When enough judges make use of the process, it may become established as the de facto method of deciding like situations.

A code of conduct is a set of rules outlining the norms, rules, and responsibilities or proper practices of an individual party or an organization.

Remuneration is the pay or other financial compensation provided in exchange for an employee's services performed. A number of complementary benefits in addition to pay are increasingly popular remuneration mechanisms. Remuneration is one component of reward management. In the UK it can also refer to the automatic division of profits attributable to members in a Limited Liability Partnership (LLP).

<span class="mw-page-title-main">Shira Scheindlin</span> American judge

Shira A. Scheindlin is an American attorney and jurist who served as a United States district judge of the United States District Court for the Southern District of New York.

Leo Dennis Kozlowski is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former Tyco director. He served more than six years at the Mid-State Correctional Facility in Marcy, New York, before being transferred to the Lincoln Correctional Facility in New York City, from which he was granted conditional release on January 17, 2014. Separately, Tyco filed suit against Kozlowski and prevailed, with the court finding that the $500 million in compensation and benefits he received during his time of disloyalty, between 1997 and 2002, were forfeited back to the company under New York's "faithless servant" doctrine.

Uberrima fides is a Latin phrase meaning "utmost good faith". It is the name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine caveat emptor.

<span class="mw-page-title-main">Clawback</span>

The term clawback or claw back refers to any money or benefits that have been given out, but are required to be returned due to special circumstances or events, such as the monies having been received as the result of a financial crime, or where there is a clawback provision in the executive compensation contract.

Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are a common way to motivate and reward salespeople. Commissions can also be designed to encourage specific sales behaviors. For example, commissions may be reduced when granting large discounts. Or commissions may be increased when selling certain products the organization wants to promote. Commissions are usually implemented within the framework on a sales incentive program, which can include one or multiple commission plans.

Thomas Poole Griesa was a United States district judge of the United States District Court for the Southern District of New York from 1972 to 2017 and its Chief Judge from 1993 to 2000.

A portfolio manager (PM) is a professional responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. Clients invest their money into the PM's investment policy for future growth, such as a retirement fund, endowment fund, or education fund. PMs work with a team of analysts and researchers and are responsible for establishing an investment strategy, selecting appropriate investments, and allocating each investment properly towards an investment fund or asset management vehicle.

<span class="mw-page-title-main">Employee compensation in the United States</span>

Employer compensation in the United States refers to the cash compensation and benefits that an employee receives in exchange for the service they perform for their employer. Approximately 93% of the working population in the United States are employees earning a salary or wage.

In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employment has been terminated by the employer, where the termination breaches one or more terms of the contract of employment, or a statute provision or rule in employment law. Laws governing wrongful dismissal vary according to the terms of the employment contract, as well as under the laws and public policies of the jurisdiction.

<span class="mw-page-title-main">FrontPoint Partners</span> Former American hedge fund

FrontPoint Partners was a hedge fund that became well known for its bet against subprime mortgages during the 2008 financial crisis under Steve Eisman. It was based in Greenwich, Connecticut, with other offices in New York and London.

Sexual harassment in the workplace in US labor law has been considered a form of discrimination on the basis of sex in the United States since the mid-1970s. There are two forms of sexual harassment recognized by United States law: quid pro quo sexual harassment and behavior that creates a hostile work environment. It has been noted that a number of the early sexual harassment cases were brought by African American women and girls.

A company code of conduct is a document written up voluntarily by a company in which it sets out a set of principles that it commits itself to follow, or requires its employees to follow. In some cases, codes of conduct reach suppliers, subcontractors, and third parties. It is a type of code of conduct.

Joseph F. “Chip” Skowron III is an American former hedge fund co-portfolio manager of FrontPoint Partners LLC's health care funds. He was convicted of insider trading, for which he served five years in prison. He was also required to repay his hedge fund employer $32 million it had paid him in compensation, because he had been a “faithless servant.”

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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