The “Faithless Servant Doctrine” Under New York Law

New York’s common-law “faithless servant doctrine” provides that “an agent that breaches its fiduciary duty of loyalty to its principal forfeits its right to compensation for the period of its disloyalty.” Supreme Showroom, Inc. v. Branded Apparel Group LLC, 2018 WL 3148357, at *8 (S.D.N.Y. June 27, 2018).

As one court explained:

New York law with respect to disloyal or faithless performance of employment duties is grounded in the law of agency, and has developed for well over a century.’ Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir. 2003) (citing Murray v. Beard, 102 N.Y. 505, 7 N.E. 553 (1886) ). ‘[A]n agent is obligated “to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’ ” Id. (quoting W. Elec. Co. v. Brenner, 41 N.Y.2d 291, 392 N.Y.S.2d 409, 360 N.E.2d 1091, 1094 (1977) ). A person who is found to be faithless in his performance of services generally is liable for all compensation from the date of the breach, and the faithlessness need not have caused damages. [Leighton v. Poltorak, 2018 WL 2338789, at *9 (S.D.N.Y. May 23, 2018)]

The remedy, assuming liability is established is “the forfeiture of [the disloyal party’s] compensation during the period of disloyalty.” Leighton, 2018 WL 2338789, at *9. See also Yukos Capital S.A.R.L. v. Feldman, No. 15 Civ. 4964, 2017 WL 481446 (S.D.N.Y. 2017) (“the faithless servant doctrine … holds that an agent who betrays the agent’s principal typically is entitled to no compensation, at least for the period of the agent’s disloyalty”).

In Morgan Stanley v. Skowrom, 989 F. Supp. 2d 356 (S.D.N.Y. 2013), the court discussed the “two alternative standards for determining whether an employee’s conduct warrants forfeiture under the faithless servant doctrine.” [Id. at 360.]

Specifically:

The first standard is met when the misconduct and unfaithfulness … substantially violates the contract of service such that it permeate[s] [the employee’s] service in its most material and substantial part. The second standard requires only misconduct [ ] that rises to the level of a breach of a duty of loyalty or good faith. In other words, it is sufficient that the employee 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. [Id.]

In the Morgan Stanley v. Skowrom case, for example, the court held that the defendant – who engaged in insider trading – was a faithless servant even under the more stringent standard. It rejected the defendant’s argument that “his misconduct did not substantially violate the terms of his employment contract such that it permeated his service as an employee,” noting (inter alia) that plaintiff’s “Code of Conduct, which was made a condition of Skowron’s employment, expressly prohibits insider trading and emphasizes the importance of preserving confidentiality.”