The 'Faithless Servant' Doctrine

In Astra USA Inc. v Bildman, 455 Mass. 116 (2009), the plaintiff Astra USA commenced a lawsuit against its former President and CEO Lars Bildman for fraud, breach of fiduciary duty and the duties of good faith and loyalty, waste of corporate assets, recession of an employment contract and conversion. According to the complaint, over a period of several years, Bildman engaged in multiple acts of sexual harassment involving Astra employees. Many of these employees had been given monetary compensation in exchange for keeping quiet about sexual harassment complaints they had made against Bildman.

Numerous settlement agreements had been entered into, after various charges of harassment had been filed with the EEOC and other governmental agencies. In fact, in 1996, Business Week published a cover story documenting what it maintained was a serious problem of sexual harassment at Astra USA. It stated that it had uncovered “a dozen cases of women who claimed they were either fondled or solicited for sexual favors by Bildman or other [Astra] executives.” Also, in February 1998, Astra was the subject of a “pattern and practice” complaint filed by the EEOC, which resulted in the company settling the case for almost $10 million. In March 1997, Bildman was indicted by a Federal grand jury for wire and mail fraud, filing false tax returns, and conspiracy for receiving various goods and services from Astra, which he failed to report as income. In January 1998, he pleaded guilty to three counts of willfully filing false Federal tax returns.

In its complaint, Astra sought to recover all of the monies it had spent or lost as a result of Bildman's conduct. This included all monies it paid to him while he had been employed at Astra. The company maintained that under the “faithless servant doctrine,” Bildman was not entitled to keep the compensation paid or owed to him during the period of time he had engaged in conduct that breached his fiduciary duty to his employer. After a seven-week trial, the jury found Bildman liable for fraud, conversion, waste, and breach of fiduciary duty. It also found that Bildman had engaged in sexual harassment of Astra employees and had retaliated against them. The trial court, however, found that Astra was not entitled to recover any amount by way of forfeiture of compensation because the value of Birdman's services was commensurate with his value to the company through 1996. Astra appealed this ruling, and the Massachusetts Supreme Judicial Court, applying New York law because Astra was incorporated in New York, reversed and held that forfeiture of all compensation was appropriate.

The Ruling

The court noted that:

[T]he law of New York requires the disloyal employee to forfeit his compensation even if he otherwise performed valuable services for the principal ' One who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary ' . Nor does it make any difference that the services were beneficial to the principal, or that the principal suffered no provable damage as a result of the breach of fidelity by the agent. 455 Mass. at 130.

Here, the court noted that the jury found that Bildman had committed numerous acts of misconduct, including engaging in sexual harassment of Astra employees and that he retaliated against Astra employees who exercised their rights to make complaints under Astra's sexual harassment policy. “The evidence heard by the jury was overwhelming that from 1991 through 1996, Bildman used Astra as his personal checkbook and his sexual fiefdom, in the process driving away employees, creating a corrosive corporate atmosphere, causing Astra actual loss, and leading to months of bad publicity about the company” Id. at 136, n. 30.

Based on these findings, the court concluded that Bildman forfeited all compensation during a five-year period.

Once it was determined that from 1991 to his termination on June 25, 1996, Bildman, a senior employee, officer, and director, had committed numerous and substantial breaches of his fiduciary duties to Astra, forfeiture is warranted of all of Bildman's compensation for the period of disloyalty, to the extent sought by Astra. Id. at 135-136.

Value of the Disloyal Employee

Significantly, in applying New York law, the court held that it could not consider the value that Bildman may have provided to the company during the years in question. That is, “[u]nder Massachusetts law, the value of the disloyal employee's faithful services is determinative; under New York law, it is irrelevant.” Accordingly, even if Bildman had contributed to the success of Astra during the period of 1991-1996, such was irrelevant and could not affect the conclusion that he must forfeit all salary during the period of disloyalty.

The forfeiture of compensation was not insignificant. During the relevant time period, Bildman received approximately $6 million in salary and over $1 million in bonuses. All of this now had to be repaid to Astra.

Analysis

The decision in Astra may send a wake-up call to both managers and employers. Individuals who engage in sexual harassment may not only be liable to their victims in the form of monetary damages, but they may additionally forfeit the compensation they received while employed. Employers may now wish to consider the “faithless servant” doctrine as a means of recouping some of their losses as a result of a sexual harassment lawsuit or simply utilize it to send a strong message to individuals that sexual harassment or other kinds of misconduct may be even more costly than they had thought. Even if the company picks up the damages of a discrimination lawsuit, or there are no provable damages, the faithless servant doctrine may prove a strong deterrent for inappropriate conduct.

The precise scope of Astra is not entirely clear. Will a single finding of sexual harassment be enough to invoke the “faithless servant” doctrine or must the employee, as in Astra, engage in continued harassment and/or criminal conduct over an extended period of time? If so, how much or how severe must the conduct be to permit forfeiture? While the scope of the doctrine may not be crystal clear, employers should nevertheless carefully consider using such a lawsuit as yet another method to ensure compliance with civil rights statutes.

Mark N. Reinharz, a member of this newsletter's Board of Editors, is a partner in the Garden City, NY, office of Bond, Schoeneck & King, PLLC and represents management in all areas of labor and employment law.

For decades, employers have been warned about the potential liability they face in defending against sexual harassment lawsuits. Much time and effort has been devoted to training management and all employees about the importance of reporting sexual harassment complaints, let alone not engaging in activity that may be viewed as inappropriate for the workplace. Yet despite these efforts, the number of sexual harassment complaints continues to be high. For example, in fiscal year 2008, 13,867 sexual harassment charges were filed with the EEOC and state or local agencies nationwide, an increase of 11% from the prior year.

Despite these increases, employers may have a bit more ammunition in their arsenals to prevent or even recover the costs associated with sexual harassment or other kinds of misconduct by its employees. Applying the “faithless servant doctrine,” the Massachusetts Supreme Judicial Court recently permitted an employer to recover compensation it had paid to a high-level executive who had been the subject of numerous sexual harassment complaints by other employees.

The Case

In Astra USA Inc. v Bildman, 455 Mass. 116 (2009), the plaintiff Astra USA commenced a lawsuit against its former President and CEO Lars Bildman for fraud, breach of fiduciary duty and the duties of good faith and loyalty, waste of corporate assets, recession of an employment contract and conversion. According to the complaint, over a period of several years, Bildman engaged in multiple acts of sexual harassment involving Astra employees. Many of these employees had been given monetary compensation in exchange for keeping quiet about sexual harassment complaints they had made against Bildman.

Numerous settlement agreements had been entered into, after various charges of harassment had been filed with the EEOC and other governmental agencies. In fact, in 1996, Business Week published a cover story documenting what it maintained was a serious problem of sexual harassment at Astra USA. It stated that it had uncovered “a dozen cases of women who claimed they were either fondled or solicited for sexual favors by Bildman or other [Astra] executives.” Also, in February 1998, Astra was the subject of a “pattern and practice” complaint filed by the EEOC, which resulted in the company settling the case for almost $10 million. In March 1997, Bildman was indicted by a Federal grand jury for wire and mail fraud, filing false tax returns, and conspiracy for receiving various goods and services from Astra, which he failed to report as income. In January 1998, he pleaded guilty to three counts of willfully filing false Federal tax returns.

In its complaint, Astra sought to recover all of the monies it had spent or lost as a result of Bildman's conduct. This included all monies it paid to him while he had been employed at Astra. The company maintained that under the “faithless servant doctrine,” Bildman was not entitled to keep the compensation paid or owed to him during the period of time he had engaged in conduct that breached his fiduciary duty to his employer. After a seven-week trial, the jury found Bildman liable for fraud, conversion, waste, and breach of fiduciary duty. It also found that Bildman had engaged in sexual harassment of Astra employees and had retaliated against them. The trial court, however, found that Astra was not entitled to recover any amount by way of forfeiture of compensation because the value of Birdman's services was commensurate with his value to the company through 1996. Astra appealed this ruling, and the Massachusetts Supreme Judicial Court, applying New York law because Astra was incorporated in New York, reversed and held that forfeiture of all compensation was appropriate.

The Ruling

The court noted that:

[T]he law of New York requires the disloyal employee to forfeit his compensation even if he otherwise performed valuable services for the principal ' One who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary ' . Nor does it make any difference that the services were beneficial to the principal, or that the principal suffered no provable damage as a result of the breach of fidelity by the agent. 455 Mass. at 130.

Here, the court noted that the jury found that Bildman had committed numerous acts of misconduct, including engaging in sexual harassment of Astra employees and that he retaliated against Astra employees who exercised their rights to make complaints under Astra's sexual harassment policy. “The evidence heard by the jury was overwhelming that from 1991 through 1996, Bildman used Astra as his personal checkbook and his sexual fiefdom, in the process driving away employees, creating a corrosive corporate atmosphere, causing Astra actual loss, and leading to months of bad publicity about the company” Id. at 136, n. 30.

Based on these findings, the court concluded that Bildman forfeited all compensation during a five-year period.

Once it was determined that from 1991 to his termination on June 25, 1996, Bildman, a senior employee, officer, and director, had committed numerous and substantial breaches of his fiduciary duties to Astra, forfeiture is warranted of all of Bildman's compensation for the period of disloyalty, to the extent sought by Astra. Id. at 135-136.

Value of the Disloyal Employee

Significantly, in applying New York law, the court held that it could not consider the value that Bildman may have provided to the company during the years in question. That is, “[u]nder Massachusetts law, the value of the disloyal employee's faithful services is determinative; under New York law, it is irrelevant.” Accordingly, even if Bildman had contributed to the success of Astra during the period of 1991-1996, such was irrelevant and could not affect the conclusion that he must forfeit all salary during the period of disloyalty.

The forfeiture of compensation was not insignificant. During the relevant time period, Bildman received approximately $6 million in salary and over $1 million in bonuses. All of this now had to be repaid to Astra.

Analysis

The decision in Astra may send a wake-up call to both managers and employers. Individuals who engage in sexual harassment may not only be liable to their victims in the form of monetary damages, but they may additionally forfeit the compensation they received while employed. Employers may now wish to consider the “faithless servant” doctrine as a means of recouping some of their losses as a result of a sexual harassment lawsuit or simply utilize it to send a strong message to individuals that sexual harassment or other kinds of misconduct may be even more costly than they had thought. Even if the company picks up the damages of a discrimination lawsuit, or there are no provable damages, the faithless servant doctrine may prove a strong deterrent for inappropriate conduct.

The precise scope of Astra is not entirely clear. Will a single finding of sexual harassment be enough to invoke the “faithless servant” doctrine or must the employee, as in Astra, engage in continued harassment and/or criminal conduct over an extended period of time? If so, how much or how severe must the conduct be to permit forfeiture? While the scope of the doctrine may not be crystal clear, employers should nevertheless carefully consider using such a lawsuit as yet another method to ensure compliance with civil rights statutes.

Mark N. Reinharz, a member of this newsletter's Board of Editors, is a partner in the Garden City, NY, office of Bond, Schoeneck & King, PLLC and represents management in all areas of labor and employment law.