In Kaye v. Rosefielde (A-93-13), the New Jersey Supreme Court recently held that an employer need not demonstrate that it suffered an economic loss in order to recoup the salary of a disloyal employee.  The Court explained that courts have the equitable power to require disgorgement for any pay periods during which the employee was disloyal.

Background

In 2002, Bruce Kaye hired Alan Rosefielde to serve as the Chief Operating Officer and General Counsel of several timeshare business entities which Kaye managed. Dissatisfied with Rosefielde’s performance, and upon discovering that Rosefielde had engaged in a pattern of unauthorized self-dealing and other actions that exposed Kaye’s businesses to potential liability, Kaye terminated Rosefielde’s employment in January 2005.

Kaye then sued Rosefielde for breach of fiduciary duty, fraud, legal malpractice, unauthorized practice of law, and breach of the duty of loyalty. Relying on evidence that Rosefielde engaged in unauthorized and fraudulent business transactions for his own benefit, made inappropriate sexual advances towards female employees and submitted a $4,000 non-business-related expense for a Las Vegas hotel stay with three adult film stars, a trial court determined that Rosefielde’s conduct constituted, among other things, a breach of his duty of loyalty.  Although the trial court awarded compensatory damages, it declined to order the disgorgement of Rosefielde’s $500,000 annual salary because his breach of the duty of loyalty did not cause any damage or loss to Kaye’s businesses.  After the Appellate Division affirmed the trial court’s decision, the New Jersey Supreme Court granted certification to determine whether disgorgement of a disloyal employee’s salary can be awarded absent a showing of economic loss.

The New Jersey Supreme Court’s Decision

The New Jersey Supreme Court unanimously ruled that equitable disgorgement is an available remedy in New Jersey even where there is no finding of economic loss to the employer. The Court explained that the “[t]he disgorgement remedy is consonant with the purpose of a breach of the duty of loyalty claim:  to secure the loyalty that the employer is entitled to expect when he or she hires and compensates an employee.”  Simply stated, an employee “is not entitled to be paid when he has not provided the loyalty bargained for and promised.”

Significantly, the Court pointed to “the valuable deterrent effect” of disgorgement because its availability may signal to potential bad actors that their breach of the duty of loyalty will result in “adverse consequences.”

The Court remanded the case to the trial court to determine whether Rosefielde’s conduct warrants disgorgement considering the following factors: (1) “the employee’s degree of responsibility and level of compensation;” (2) “the number of acts of disloyalty;” (3) “the extent to which those acts placed the employer’s business in jeopardy;” and (4) “the degree of planning to undermine the employer that is undertaken by the employee.”

The Court stated that if disgorgement is warranted, it should be ordered for all pay periods during which the employee was disloyal.  The Court noted that, in some cases, an employee’s entire salary may be clawed back.

Conclusion

The Court’s ruling is a welcome decision for New Jersey employers. It provides a potentially potent remedy against a disloyal employee, especially one entrusted with significant discretion and authority.  In addition to other available causes of action against a former employee who engaged in misconduct during employment, New Jersey employers should be sure to consider a breach of the duty of loyalty and a demand for equitable disgorgement.  Employers, however, should be mindful not to engage in self-help, as such conduct may expose the employer to legal claims from the disloyal employee.