There are a number of claims that an employer can assert against an employee who has committed acts such as stealing trade secrets, embezzlement, or divulging confidential information. What damages can an employer recover from a former employee who has committed such acts?
Pursuant to the Faithless Servant Doctrine in New York, an employer can claw back all compensation paid to an employee (whether it was paid in the form of salary, bonus, or commissions) if the employer can demonstrate that the employee engaged in repeated acts of disloyal conduct during the course of their employment. The application of the doctrine has been applied in many cases in New York and has been upheld on appeal.
In Mahn v. Major, Lindsey & Africa, LLC, the New York County Supreme Court confirmed an arbitration award of $1,767,626.00 in damages against Petitioner, with 9% interest, and $945,765.39 in attorneys’ fees. Sharon Mahn was a former employee of Major, Lindsey & Africa, LLC (“MLA”) who was fired for allegedly disclosing MLA’s proprietary information to a competitor firm, in violation of her employment agreement. The parties commenced arbitration proceedings to resolve their disputes. MLA asserted claims for breach of the employment agreement, violation of Mahn’s duty of loyalty and breach of fiduciary duty, misappropriation of confidential information and trade secrets, unfair competition, post-termination breach of the employment agreement, and costs and attorneys’ fees. The arbitrator found in favor of MLA and awarded disgorgement, among other things, after finding that Mahn had stolen confidential information and trade secrets, and shared confidential job postings with MLA’s competitors.
Mahn filed a special proceeding seeking to vacate the arbitration award, which was denied. MLA’s cross-petition to confirm the award was granted. One of the arguments raised by Mahn was that disgorgement of her compensation and commission was barred by New York’s public policy. The Court disposed of that argument in confirming the award. Mahn filed an appeal with the Appellate Division, First Department. The First Department affirmed, finding that the $2.7 million arbitration award, which included disgorgement of salary and commissions, did not violate New York public policy. See Mahn v. Major, Lindsey & Africa, LLC, 2018 NY Slip Op 01888 (1st Dept. 2018).
In H. Roske & Assocs., LLP v. Burghart, 2020 N.Y. Slip Op. 30497 (N.Y. Sup. Ct. 2020), the New York County Supreme Court again found that the Faithless Servant Doctrine did not violate New York public policy. The Court noted that, “[u]nder the faithless servant doctrine, courts permit employers to disgorge an employee’s compensation if that employee has violated duties of loyalty.” H. Roske & Assoc., at 13. The Court further noted that even after the passage of New York Labor Law Sec. 193, which prohibits an employer from making any deductions from an employee’s wages unless authorized under the statute, New York courts have “continued to apply this doctrine and allow employers to disgorge an employee’s compensation when there is a breach of duty.” Id.
The case law cited here is a reminder that in the circumstances where an employer has alleged that an employee was disloyal in committing acts such as stealing trade secrets, embezzlement, conversion, or disclosing confidential information, the faithless servant doctrine is a powerful claim that the employer can use to disgorge compensation paid to the employee. The claim should be considered in addition to any other claims that the employer might have and should serve as a warning to any employee that engages in such conduct.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.