The March 2008 LEL Newsletter discussed one type of disloyal employee conduct – competing with the employee’s employer while still an employee of that employer. http://www.lera.illinois.edu/Pubs/newsletters/LELNewsletters/2008/March2008.htm As discussed there, disloyalty does not include all actions an employer might consider disloyal. It is a very narrow doctrine, limited to specific sorts of conduct. The employer’s remedy is forfeiture of all compensation received during the specific period of disloyalty. Again, not all conduct that might be considered disloyal in the general sense is found to be disloyal and requiring employee forfeiture of compensation.

A recent case involved a related sort of employee misconduct and a similar remedy – forfeiture of compensation during the period of employee misconduct under the “faithless servant” rule. In this case, the employee was the company’s chief executive, and the misconduct involved financial improprieties that included tax evasion, widespread sexual harassment of employees, and attempts to cover up the harassment. The facts found by the court are complex and highly disturbing in terms of level of sexual harassment, cover-ups, and general abuse of power. Astra USA, Inc. v. Bildman, Case No.SJC-10361 (Mass. Oct. 5, 2009).

http://www.cas.suffolk.edu/sjc/archive/opinions/SJC_10361.pdf

http://www.cas.suffolk.edu/sjc/archive/2009/SJC_10361.html

Among other things, the employee’s misconduct caused his employer to pay nearly $10 million as a result of the sexual harassment. During the period in which these improprieties occurred, the executive was paid approximately $7 million in salary and bonuses. The case included a number of other issues, including a finding that the executive could not enforce the right to attorney fees and costs under his employment contract.

Duty of loyalty and faithless servant law is state-based, so it varies from state to state. This case, for example, was tried under New York law, which required that all employee compensation received during the period of disloyalty be forfeited. A faithless employees fares better under Massachusetts law, which takes into consideration the value of the employee’s service in calculating the amount to be forfeited.

I mention these two laws, because, although, the case was tried in a Massachusetts court, New York law was applied. It may come as a surprise that a Massachusetts court would apply the law of a different state. However, this is a common occurrence. For example, many of us sign contracts in which we agree that a specific state’s law will apply to any dispute. For example, in writing this case analysis, I looked at a contract for participating in a Blockbuster Movie raffle. The contract says that Texas law will apply to all disputes. In the faithless servant case, the choice of New York law was based on rules developed by Massachusetts courts that required “‘applying the law of the State of incorporation to internal corporate affairs.’” The case involved internal corporate affairs, and the company was incorporated in New York. As a result, New York law applied. Choice of law rules are important in a country like the United States where transactions can involve more than one state.