A dispute arose between plaintiff Bruce Kaye and defendant Alan Rosefielde, an attorney Kaye initially retained as outside counsel and later employed directly. For 2 years, Rosefielde served as COO of some of Kaye’s timeshare businesses and as to those entities General Counsel. During this time period, Rosefielde committed serious misconduct by acting on his own behalf, instead of for his employer’s benefit, which led to his dismissal and litigation. In Kaye v. Rosefielde, 223 N.J. 218 (2015), the New Jersey Supreme Court was asked to decide whether a court may order the equitable remedy of disgorgement of the employee’s compensation when the employee breached his duty of loyalty to his employer, yet the employer suffered no economic loss as a result.
After a bench trial, the trial court judge found that Rosefielde engaged in egregious misconduct and breached his duty of loyalty, breached his fiduciary duty, committed legal malpractice and civil fraud. The trial court rescinded Rosefielde’s interest in several entities and awarded compensatory damages, punitive damages, and legal fees. However, it did not order the equitable disgorgement of Rosefielde’s salary as a remedy for his breach of duty of loyalty on the ground that the plaintiff sustained no damages as a result of that breach. The Appellate Division affirmed that decision.
On certification to the Supreme Court, the plaintiff argued that if disgorgement is not available as a remedy for a breach of duty of loyalty, if an employer does not incur damages, the employer’s claim would be rendered meaningless. The Supreme Court noted that loyalty owed to an employer obligates the employee not to act contrary to the employer’s interest during the period of employment.
The Court stated the general rule that courts exercising their equitable powers are charged with formulating fair and practical remedies. Disgorgement may be a remedy if a court finds in favor of an employer’s claim for an employee’s disloyalty. It is based upon a principle of contract law that if the employee breaches the duty of loyalty, he may be compelled to forego the compensation earned during the period of disloyalty.
When an employee abuses his position and breaches the duty of loyalty, he fails to meet the employer’s expectation in the performance of his job duties for which he is being paid. Also, disgorgement may have a valuable deterrent effect because of the adverse consequences that may follow.
Thus, the Supreme Court held that an employer may seek disgorgement of a disloyal employee’s compensation with or without a finding of economic loss. If the trial court finds a breach, then it must consider the following: the employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to which those acts jeopardized the employer’s business, and the degree of planning to undermine the employer taken by the employee. The trial court should also apportion the employee’s compensation, rather than ordering a wholesale disgorgement that may be disproportionate to the misconduct at issue. If there is a finding of disloyalty, then the trial court should apportion the employee’s compensation, ordering disgorgement only for the monthly pay periods in which the employee committed acts of disloyalty.
