As a general matter, a faithless servant is one who acts contrary to the interests of his/her employer. When an employee or agent acts faithlessly, he/she must forfeit the compensation earned (whether wages or commissions) as a result of the wrongful act.
A question that sometimes arises is whether an at-will employee is subject to the faithless servant doctrine. In TMT Entertainment Group, Inc. v. Gasparro, 2019 N.Y. Slip Op. 30542(U) (Sup. Ct., N.Y. County Mar. 4, 2019) (here), Justice Andrew Borrok of the Supreme Court, New York County, answered the question in the affirmative.
[Freiberger Haber LLP wrote about the Faithless Servant Doctrine here, here and here.]
The Faithless Servant Doctrine Discussed
It is well settled that, under certain circumstances, an employee owes a fiduciary duty to his/her employer during the course of the employment. Markowits v. Friedman, 144 A.D.3d 993, 996 (1st Dept. 2016) (citing Lamdin v. Broadway Surface Advertising Corp., 272 N.Y. 133, 138-39 (1936)). This means that the employee is “‘at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’” W. Elec. Co. v. Brenner, 41 N.Y.2d 291, 295 (1977) (quoting Lamdin, 272 N.Y. at 138).
An employee who violates his/her fiduciary duty of loyalty is deemed a “faithless servant” and forfeits the right to any compensation earned during the period of disloyalty. Visual Arts Found., Inc. v. Egnasko, 91 A.D.3d 578, 579 (1st Dept. 2012). An employer states a claim under the faithless servant doctrine by alleging that a former employee, during the period of his/her employment and using company resources, acts directly against the employer’s interests such as, by embezzling money, improperly competing with the current employer, or usurping business opportunities. Veritas Capital Mgt., LLC v. Campbell, 82 A.D.3d 529, 530 (1st Dept. 2011); Pozner v. Fox Broadcasting Co., 59 Misc. 3d 897, 900 (Sup. Ct., N.Y. County, Apr. 2, 2018); CBS Corp. v. Dumsday, 268 A.D.2d 350, 353 (1st Dept. 2000) (citing Maritime Fish Prod., Inc. v. World-Wide Fish Prods., Inc., 100 A.D.2d 81, 88 (1st Dept. 1984)).
The courts have applied the foregoing rules to at-will employees. E.g., Veritas Capital, 82 A.D.3d at 530; Beach v. Touradji Capital Mgt., LP, 144 A.D.3d 557, 562 (1st Dept. 2016).
To establish a breach of fiduciary duty claim, a plaintiff “must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party’s misconduct.” Pokoik v. Pokoik, 115 A.D.3d 428, 429 (1st Dept. 2014); Castellotti v. Free, 138 A.D.3d 198, 209 (1st Dept. 2016). “A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” Roni LLC v. Arfa, 18 N.Y.3d 846, 848 (2011) (internal quotation marks and citations omitted); see also EBC I v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19 (2005). “Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions. EBC I, 5 N.Y.3d at 19.
TMT Entertainment Group, Inc. v. Gasparro
In September 2005, the plaintiff, TMT Entertainment Group, Inc. (“TMT”), hired the defendant, Michael Gasparro (“Gasparro”), as a talent manager and producer. TMT agreed to compensate Gasparro through a a base salary, benefits and a discretionary portion of the management fees he generated. However, any fees that Gasparro received in connection with his role as a producer were to be remitted to TM TMT sued Gasparro, among others, for, inter alia, breach of fiduciary and usurpation of corporate opportunities. In particular, TMT alleged that Gasparro: (i) surreptitiously exploited TMT’s time, resources and reputation in order to establish the defendant, Gasparro Management LLC (“GM LLC” and together with Gasparro, the “Gasparro Defendants”), while working at TMT; (ii) induced the actor defendants to breach their management agreements with TMT; (iii) misappropriated management fees due TMT to GM LLC; (iv) misappropriated producer fees from TMT to GM LLC; and (v) interfered with TMT’s existing business relations.
Defendants moved to dismiss the complaint.
With regard to the breach of fiduciary duty/faithless servant cause of action, the defendants argued that Gasparro did not owe TMT a fiduciary duty because he was neither a corporate officer, or director of TMT nor an employee with an employment agreement that defined the terms and conditions of his employment (e.g., restrictive covenants). Absent such a relationship, argued the defendants, the breach of fiduciary duty/faithless servant cause of action should be dismissed.
The Court rejected the defendants’ argument. In a terse holding, the Court found that even though Gasparro did not have an employment agreement with TMT (i.e., he was an employee at will) and did not serve as an officer or director of the company he was, nevertheless, “under a duty to act and give advice for the benefit of [TMT] on matters within the scope of their relationship.” Slip Op. at *2 (quoting EBC I, 5 N.Y.3d at 19) (internal quotation marks omitted). Thus, “[t]aking the allegations … in the Complaint as true,” the Court denied the defendants’ motion to dismiss the breach of fiduciary duty/faithless servant cause of action. Id.
With regard to the usurpation of a corporate opportunity cause of action, which the Court considered to be related to the breach of fiduciary duty/faithless servant cause of action, the Court denied the motion to dismiss.
Having found that TMT adequately alleged the breach of a fiduciary duty, the Court held that TMT stated a cause of action for the usurpation of a corporate opportunity. Slip Op. at *2. In doing so, the Court rejected the defendants’ argument that only a corporate actor could usurp a corporate opportunity:
As explained above, Mr. Gasparro was in a fiduciary relationship with the plaintiff. The plaintiff asserts that Mr. Gasparro advised TMT of two projects where he would work as a producer: the “Kalief Project” and the “Trayvon Project.” The plaintiff alleges that Mr. Gasparro and other parties then entered into separate agreements to provide production services for these projects, and Mr. Gasparro would receive producer’s fees of $50,000 for the Kalief Project and $375,000 for the Trayvon Project. The plaintiff asserts that Mr. Gasparro then advised that the Kalief Project producer’s fee was only $10,000 and paid $5,000 to plaintiff. The plaintiff seeks the remaining $45,000 balance for Mr. Gasparro’s work on the Kalief Project. Regarding the Trayvon Project, the plaintiff alleges that Mr. Gasparro claimed exclusive entitlement to the associated producer’s fee on the same date that he resigned from employment with the plaintiff in July 2017. The pleaded facts sufficiently allege that the plaintiff could expect to receive producer’s fees from the two projects and that Mr. Gasparro diverted fees that should have been treated as an asset of the plaintiff’s management company.
Accordingly, the Court denied the defendants’ motion to dismiss the cause of action for usurpation of a corporate opportunity against Gasparro.
Takeaway
TMT Entertainment shows that the faithless servant doctrine remains a potent weapon for employers faced with an employee who allegedly acts disloyal during his/her employment. Perhaps, more importantly, TMT Entertainment confirms that the doctrine will be applied to at-will employees who act faithlessly and in breach of their fiduciary duty to their employer.
Tagged with:
At-Will Employee, Breach of Fiduciary Duty, Commercial Litigation, Faithless Servant Doctrine
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