Striking Out A-Rod: The Faithless Servant Doctrine

The following article was published in Employment Law 360 on February 14, 2014.

The Alex Rodriguez (“A-Rod”) saga is playing out like a classic Greek tragedy. With hubris-laced legal soliloquies and a sports media dutifully taking on its role as the Chorus, all that appears to be missing is the blind soothsayer.  But if justice is truly blind, then perhaps seeing the legal future for A-Rod merely requires referencing some ancient legal doctrines that are right before our eyes.

With a mix of metaphor, the world watched as A-Rod took his swings at Major League Baseball, the Players Union, the Yankees, and just about anyone else he could blame other than himself.  As A-Rod now contemplates his next proverbial at-bat, the Yankees, in particular, possess a little-known legal weapon that we have not heard anyone talking about.  It is a legal doctrine that could dramatically shift the playing field and require A-Rod to not only forfeit all future contractual monies, but also provide restitution to the Yankees for all compensation and benefits earned during the years of his disloyal acts.  Enter Faithless Servant Doctrine.

The mighty A-Rod, in a pure legal sense, is a New York employee like any other.  Every employee in New York owes a duty of loyalty to his/her employer.  The breach of that duty carries with it harsh, even Draconian consequences, including the forfeiture of all compensation, even deferred compensation that was paid to the employee during the period of disloyalty.  Consequently, A-Rod beware:  The Faithless Servant Doctrine, with its massive equitable forfeitures, may be centuries old, but it has recently seen a marked resurgence in New York with stunning results.

In William Floyd Union Free School District v. Wright, a Long Island school district (which was represented by Bond, Schoeneck & King) used the Faithless Servant Doctrine to sue a former assistant superintendent and a former treasurer.  Both defendants pleaded guilty to grand larceny, admitting that they used their positions as school district officials to embezzle.  The school district sought to recover the compensation paid to the two employees during the period of their theft, plus any deferred compensation that would have been owed to the defendants in retirement.

New York law regarding disloyal or faithless performance of employment duties allows the principal to recover “from its unfaithful agent any commission paid,” and “an employer is entitled to the return of any compensation that was paid to the employee during the period of his disloyalty.”  On the appeal of the William Floyd case, the Appellate Division affirmed the ordering of the full forfeiture of compensation paid to the employees during the time they were stealing from the school district.  The Appellate Division also ordered that the school district was permanently relieved of its obligation to pay contractual retirement benefits.  In language now cited in other cases, the Court held:  “Where, as here, defendants engaged in repeated acts of disloyalty, complete and permanent forfeiture of compensation, deferred or otherwise, is warranted under the Faithless Servant Doctrine.”  In addition to the benefits forfeiture and recovery of the stolen funds, the school district recovered more than $800,000 in previously paid compensation to one of the defendants.

The William Floyd decision has appeared to breathe a new vitality into the Faithless Servant Doctrine.  Two such cases are of particular note.  In Astra USA Inc. v. Bildman, the Massachusetts Supreme Court interpreted and applied New York law, holding that New York’s Faithless Servant Doctrine 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.  Under Astra, the doctrine can reach misconduct that does not involve theft or financial damages to the employer.  In upholding a multi-million dollar complete forfeiture the court aptly stated:  “For New York … the harshness of the remedy is precisely the point.”

Just a few weeks ago, in Morgan Stanley v. Skowron, a New York federal court ordered the defendant, a former portfolio manager, to forfeit $31,067,356.76.  In Morgan Stanley, the defendant engaged in insider trading, which violated the plaintiff corporation’s Code of Conduct as well as federal securities laws.  In applying the forfeiture, the Court noted that the Faithless Servant Doctrine applies when an employee has either “breached his/her duty of loyalty or has engaged in misconduct and unfaithfulness that substantially violates the contract of service such that it permeates the employee’s service in its most material and substantial part.”

Like the defendant in Morgan Stanley, A-Rod’s use of performance enhancing drugs – as found by an arbitrator with possible preclusive effect – substantially violated his contract of services in the “most material and substantial part.”  Put another way, insider trading – the ultimate unfair advantage in the securities industry – is no different in a legal sense than the use of performance enhancing drugs – the ultimate unfair advantage in professional baseball.  And the use of such drugs may not even be the sole extent of the disloyal conduct.

If and when A-Rod chooses to step up to the plate again, it will be interesting to see if the Yankees and/or Major League Baseball bring out their new “closer.”

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