More on Faithless Servants

 

In Astra USA, Inc. v. Bildman, 914 N.E.2d 36 (Mass. 2009), the Supreme Judicial Court applied New York law to require a former chief executive officer to disgorge the compensation he had been paid during the period of his disloyalty. As I mentioned, Bildman was found to have conducted a pattern of sexual harassment and then covered up his conduct -- not only from a business magazine but also from the corporate parent. His derelictions included not just harassment but paying victims from corporate funds and also charging personal expenses to the corporation.

 

The SJC applied New York’s “faithless servant” rule, a doctrine that authorizes the forfeiture of the employee’s compensation when his breach of fiduciary duty is sufficiently severe. The doctrine allows the employer to recover not its damages, which may be hard to prove, but rather what it paid the employee during the period of his faithlessness. Strong medicine indeed.

 

Forfeiture is an equitable remedy, and the trial judge considered whether to award this relief  after the jury verdict finding Bildman had not only sexually harassed Astra employees and retaliated against those who had complained but also had failed to disclose material information to the corporation regarding his activities and had made converted Astra funds on a number of occasions. Nevertheless, the trial court refused to order forfeiture, an action that the Supreme Judicial Court reversed on de novo review.

 

It held that Bildman must “forfeit all of his salary and bonuses from Astra for the period of disloyalty and that the judge was without authority to rule otherwise.” This is true even if the faithless servant “otherwise performed valuable services for his principal.” This renders the doctrine a one-way restitution claim since the employee can’t seek to recover in quantum meruit the reasonable value of the services he did render.

 

The SJC explicit rejected three of the trial judge’s reasons for denying forfeiture, finding them all ill-based in New York law. Thus, the faithless servant doctrine reached not just compensation that had not yet been paid but also required disgorgement of compensation already paid. Second, the doctrine was not limited, as the trial judge had indicated, to lower-level employees. And, third, viewed as a whole, it would be fairer to use Massachusetts law, which uses a “task-by-task” approach to forfeiture. Substituting Massachusetts law on remedy when New York law determined the claim “would interfere with New York’s legitimate interest in regulating a corporation’s internal affairs.”

 

New York's rule seems unusual but not unique -- there are a scattering of other jurisdictions that seem to apply some version of it.  While the trial court believed it applied to only lower level employees (which seems perverse), the SJC seemed to think it reached every faithless servant, which means that rank-and-file employees could theoretically be subject to it.

 

While it's hard to have much sympathy for Mr. Bildman in the circumstances, the notion that an employer can recover whatever it paid the employee without any offset for the value of the work performed is pretty remarkable and, if applied generally, pretty dangerous.

 

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