In October 2009 Massachusetts' highest court corrected a lower court's interpretation of the New York faithless servant doctrine. In Astra USA Inc v Bildman(1) the employer sought forfeiture of a former employee's compensation for the employee's period of disloyalty. The lower court ruled that the employer was entitled to recover only the amount of compensation paid to the employee that was in excess of the value of the services he provided. However, the Supreme Judicial Court of Massachusetts overturned the decision, explaining that New York law requires that disloyal employees forfeit all compensation earned during the period of disloyalty, regardless of whether the employee also performed valuable services.

This case may encourage employers to seek disgorgement of compensation paid to senior employees that engaged in misconduct. The executive in this case was ordered to return $6.8 million to his former employer after allegations surfaced regarding his pervasive sexual harassment of female employees and other serious improprieties. While New York state courts are not bound by this decision, it sends a signal to executives that a breach of their duty of loyalty could prove costly.

For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (kleblang@kramerlevin.com or rholtzman@kramerlevin.com).

Endnotes

(1) 914 NE2d 36 (Mass 2009).