New Jersey High Court Clarifies Disgorgement as Remedy for Breach of Duty of Loyalty
The absence of actual economic loss to an employer as a result of an employee’s breach of the duty of loyalty does not preclude the employer from being awarded the equitable remedy of disgorgement, a unanimous New Jersey Supreme Court has ruled. Kaye v. Rosefielde, No. A-93-13 (Sept. 22, 2015).
Defendant Alan Rosefielde, an attorney, was initially retained by plaintiff Bruce Kaye to act as outside counsel in connection with Kaye’s management of several timeshare business entities. Thereafter, Rosefielde was hired, at an annual salary of $500,000, as Chief Operating Officer of some of the timeshare businesses managed by Kaye.
The evidence showed that over the course of two years, Rosefielde committed serious misconduct by acting in his own interest for purely personal gain rather than in the interest of his employer. In addition to increasing his personal interest in a newly formed entity beyond the interest agreed to by Kaye, Rosefielde exposed his employer to potential liability on many occasions. For example, rather than pursue foreclosure proceedings against defaulting timeshare unit holders, Rosefielde arranged for the defaulting owners’ signatures to be forged on false quitclaim deeds. In addition, he misrepresented independent contractors’ employment statuses when applying for health insurance, causing the insurance company to issue policies to the independent contractors. The Supreme Court noted Rosefielde also put his employer at risk of liability for sexual harassment claims because he had made many inappropriate sexual advances toward two women.
Upon discovering Rosefielde’s misconduct, Kaye terminated his employment.
After determining that Rosefielde’s “egregious conduct” constituted a breach of his duty of loyalty, among other things, the trial court declined to order disgorgement of Rosefielde’s salary, reasoning his breach had not resulted in actual damages to his employer.
The Appellate Division affirmed this decision, commenting only “that the trial court’s findings of fact were grounded in the record and that its legal analysis was ‘unassailable.’”
Supreme Court Decision
The New Jersey Supreme Court ruled that, in an appropriate case, the remedy of disgorgement may be available to an employer, even in the absence of actual loss. It cited its earlier Cameco, Inc. v. Gedicke, 157 N.J. 504 (1999), as well as comments contained in the Restatement (Second) Agency, section 469, and Restatement (Third) Agency, section 8.01.
The Court explained, “[T]he equitable remedy of disgorgement is derived from a principle of contract law.” Indeed, compensation paid to an employee during periods in which he or she is disloyal is, effectively, unearned. Recognizing the broad discretion afforded to trial courts when crafting equitable remedies, the Court stated that it was for trial courts to determine the “appropriate” case in which to grant such relief.
Offering guidance to trial courts, the Court instructed that the following non-exclusive list of factors should be considered when determining whether disgorgement is an appropriate remedy:
the employee’s degree of responsibility and level of compensation;
the number of acts of disloyalty;
the extent to which those acts placed the employer’s business in jeopardy; and
the degree of planning that is undertaken by the employee to undermine the employer.
Further, the Court stated that if the remedy of disgorgement is found to be appropriate, the breaching employee’s compensation should be apportioned such that only compensation received during periods in which the employee was acting in violation of his or her duty of loyalty would be subject to disgorgement.
Finally, the Court noted that if the trial court determined the employee had been disloyal during all pay periods, the employee’s entire salary may be subject to disgorgement.