When pursuing a (purportedly) disloyal employee, there is little doubt that the faithless servant doctrine is the an employer's most potent weapon - at least in New York. But in order to appreciate why this doctrine is so powerful, we first need to explain what it is.
What the Faithless Servant Doctrine Is
In broad terms, the Faithless Servant Doctrine really is what it sounds like - it affords an employer another avenue (beyond breach of an employment agreement, as an example) for recovering damages incurred as a result of their employee's disloyalty. While it should come as no surprise that this claim falls within the ambit of the "breach of fiduciary duty" type of claim, it remains distinct in the sense that while a breach of fiduciary duty claim will normally only lie where there is no contract governing the parties' relationship, that is not the case when it comes to a faithless servant claim.
Why the Faithless Servant Doctrine is Uniquely Powerful
Aside from the fact that the faithless servant claim can be added on to a breach of contract claim (as set forth above), the general rule is that the plaintiff's damages may include the disgorgement/forfeiture of all compensation paid to the defendants during the period of disloyalty.
In fact, New York's courts have been emphatic that The remedy of forfeiture is applicable even where the employee has otherwise performed in an exemplary manner. Binghamton v. Whalen, 141 AD3d 145, 32 NYS3d 727 (3d Dept 2016).
Where New York Courts Have Recognized a Narrow Exception to the Faithless Servant Doctrine
On the other hand, I would be remiss if I neglected to point out that there is a narrow line of cases where New York's courts have allowed an apportioning the forfeiture penalty by limiting it to the compensation allocable to the specific tasks as to which the employee was disloyal has been permitted, but only where the employee or agent was compensated on a task-by-task basis. G.K. Alan Assoc., Inc. v Lazzari, 44 AD3d 95, 840 NYS2d 378 (2d Dept 2007), aff’d, 10 NY3d 941, 862 NYS2d 855, 893 NE2d 133 (2008).
To that end, the Federal courts, applying New York law have allowed the relaxation of the broad-based rule of general forfeiture of compensation for the entire period of disloyalty only where the case met three very specific prongs, namely:
(1) the parties had agreed that the agent will be paid on a task-by-task basis (e.g., a commission on each sale arranged by the agent);
(2) the agent engaged in no misconduct at all with respect to certain tasks; and,
(3) the agent’s disloyalty with respect to other tasks “neither tainted nor interfered with the completion of” the tasks as to which the agent was loyal. Id. at 114.
Under those circumstances, the Second Circuit held that where these three criteria are met, a disloyal employee forfeits only compensation earned in connection with the specific tasks as to which he was disloyal; he retains compensation earned in connection with the specific tasks as to which he was loyal. Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003).
