In a unique twist from the garden-variety breach of fiduciary duty claim, Justice Scarpulla (New York County Commercial Division) recently refused to expand the scope of viable “faithless servant” claims in Pozner v. Fox Broadcasting Company, ((New York County Supreme Court Index No. 652906/2017.)) concluding that sexual harassment is not within the realm of employee misconduct that violates an employee’s duty of loyalty to an employer and violates the “faithless servant” doctrine.
Fiduciary Duties of Employees
It is well established that employees owe their employers a fiduciary duty of loyalty. See, e.g., Qosina Corp. v. C & N Packaging, Inc., 96 A.D.3d 1032 (2d Dep’t 2012). Pursuant to such duty, an employee may not act in any manner inconsistent with his or her agency or trust and must always act with the utmost loyalty and good faith in dealing with an employer. See CBS Corporation v. Dumsday, 268 A.D.2d 350, 353 (1st Dep’t 2000). One of the remedies available to an employer for breach of the duty owed by an employee to an employer is disgorgement of compensation paid during the period of the employee’s disloyalty. Trimarco v. Data Treasury Corporation, 146 A.D.3d 1004, 1007-1008 (2d Dep’t 2017).
Procedural History of Pozner
On April 19, 2017, Cliff Pozner (“Pozner”) sued Fox Broadcasting Company (“Fox”) in New York County Supreme Court asserting claims for breach of his employment contract and religious discrimination in violation of New York Executive Law 296 and New York City Administrative Code 8-107. Fox answered and asserted two counterclaims for breach of contract (based upon Pozner’s violations of Fox’s written standards and protocols) and breach of fiduciary duty (specifically, breach of the duty of care and loyalty) seeking to recover, among other things, all compensation Fox paid to Pozner from the first date of his alleged disloyalty. Shortly thereafter, Pozner moved to dismiss the counterclaims pursuant to CPLR 3211(a)(7).
Pozner began working for Fox in 1994 and held a number of executive positions within the company, including Senior Vice President, Pricing, Planning and Inventory Management (his position at the time of his termination in September 2016). At the time of his termination, Pozner was earning a base salary in excess of $500,000, plus bonuses and stock awards.
Fox alleged that in mid-August 2016, it received an unsolicited complaint from one of its female employees regarding Pozner’s sexual harassment of her and soon thereafter received additional correspondence on behalf of a second female employee. During its investigation of the employees’ complaints, Fox reviewed numerous allegations of inappropriate conduct relating to female subordinates, and ultimately determined that Pozner violated Fox’s written standards and protocols by “repeatedly making unwelcome and inappropriate sexually explicit comments in the workplace” and terminated Pozner in September 2016.
Fox filed its breach of fiduciary duty counterclaim based upon its assertion that, during his employment, Pozner owed Fox a fiduciary duty of care and loyalty that “included a duty to refrain from conduct inconsistent with [Fox’s] policies.” According to Fox, such policies prohibited sexual harassment and expressly required Pozner to report harassment in the workplace. Thus, Fox alleged that “[b]y engaging in conduct plainly inconsistent with [Fox’s] expectations concerning a harassment-free workplace, Pozner failed to meet the duty he owed to [Fox].”
The Court’s Determination
First, the Court denied Pozner’s motion to dismiss Fox’s first counterclaim for breach of contract because Pozner explicitly agreed to comply with Fox’s written standards and protocols which were incorporated into Pozner’s employment agreement with Fox.
Justice Scarpulla then determined that Fox’s breach of fiduciary duty counterclaim should be dismissed. Citing CBS Corp. v. Dumsday, supra, the Court explained, as a threshold matter, that as an executive and employee of Fox, Pozner indisputably owed Fox a duty of loyalty requiring him to “exercise ‘the utmost good faith and loyalty in the performance of his duties’” and could not act “‘in any manner inconsistent with his agency [citations omitted].’” Nevertheless, the Court found that such a claim required an employee to act directly adverse to his employer’s interests: “This duty of loyalty, however, has only been extended to cases where the employee ‘act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer or usurping business opportunities [citations omitted].’”
After failing to uncover New York authority holding that sexual harassment by an employee, without more, constituted a breach of fiduciary duty to the employer, the Court declined to create new law, and explicitly distinguished cases cited by Fox from non-controlling jurisdictions which the Court characterized as involving circumstances where the employee acted “directly against the company’s interests.” Significantly, during oral argument, after inquiring whether Fox was requesting that the Court extend the faithless servant doctrine “to a circumstances that it has never been applied,” the Court secured a concession from counsel for Fox that he was unaware of any New York state case on point.
While the “faithless servant” doctrine is undoubtedly a highly effective remedy for employers, careful consideration must be given to the misconduct at issue in order to determine whether there is a sufficient nexus between the misconduct and the traditional direct interest of the employer. Indeed, a Court may be reluctant to apply the faithless servant doctrine where an employee’s misconduct may ultimately have an adverse incidental effect on the employer, but is not directly against the employer’s interests (such as in embezzlement or misappropriation of business opportunity cases).