NJ Supreme Court Holds Employers May Seek Disgorgement of Disloyal Employee’s Pay Without Proof of Loss

In Kaye v. Rosefielde, the New Jersey Supreme Court held that disgorgement of a disloyal employee’s salary can be an appropriate remedy for breach of loyalty claims even in the absence of proof of actual economic loss. In an unanimous decision, the Court noted the trial court’s broad discretion to fashion equitable remedies, including disgorgement of an employee’s salary, and instructed lower courts that the amount of the disgorgement should be limited to the compensation that the employee received during the employee’s period(s) of disloyalty.

Factual Background
Plaintiff Bruce Kaye was the controlling principal of three entities that sold and managed several timeshare interests in properties in Atlantic County, New Jersey. In 2002, Kaye hired Defendant Alan Rosefielde and for about two years, Rosefielde served as Chief Operating Officer and General Counsel for two of Kaye’s timeshare entities. Approximately two years later, Kaye terminated Rosefielde after he discovered that Rosefielde had, among other things, engaged in numerous, egregious instances of “self-dealing,” including the diversion to himself and to several of his companies interests in a number of Kaye’s investment opportunities. Kaye then brought suit against Rosefielde and his companies, asserting claims for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of the duty of loyalty.

The trial court found in favor of Kaye on his breach of fiduciary duty, fraud, legal malpractice, and breach of duty of loyalty claims. The trial court awarded plaintiffs compensatory damages, punitive damages, and legal fees, which included more than $800,000 in counsel fees and costs and ordered rescission of Rosefielde’s interests in Kaye’s business entities. The trial court, however, declined to grant the remedy of disgorgement demanded by Kaye, finding that there was no evidence that Rosefielde’s breach of his fiduciary obligations to his employer resulted in any actual damage to Kaye. In reaching its decision, the trial court relied on Cameco, Inc. v. Gedicke, 157 N.J. 504 (1999), which it believed held that in order to compel disgorgement of a disloyal employee’s compensation, a court must first find that “the employee’s breach proximately caused the requested damages.”

Both parties appealed to the Appellate Division. The Appellate Division affirmed in part, and reversed in part, affirming the trial court’s determination that Kaye was not entitled to the remedy of disgorgement, reasoning that “[a]ny potential economic injury to Kaye was cured by the remedy of rescission.” The New Jersey Supreme Court granted certification on the specific issue of whether a court may award equitable disgorgement of a disloyal employee’s salary to an employer that has sustained no economic loss.

The Supreme Court’s Decision
The Supreme Court, reversing the Appellate Division, ruled that the remedy of disgorgement may be awarded in an appropriate case, even in the absence of a finding that the employer sustained economic loss as a result of the employee’s disloyal conduct. The Court began its opinion by noting that “[j]ust as the trial court’s determination of the disloyalty claim mandates a fact-sensitive inquiry, so does its fashioning of a remedy,” and that “[d]epending on the facts of the case, an employee’s breach of the duty of loyalty can give rise to either equitable or legal relief.” The Court also highlighted the fact that trial courts have “broad discretionary power to adapt equitable remedies to the particular circumstances of a given case,” and that the principle that a court may order disgorgement of an employee’s salary is “rooted in the notion that compensation during a period in which the employee is disloyal is, in effect, unearned.” The Court also took care to reassert its holding in Cameco, which, despite the trial court’s interpretation, “clearly stands for the principle that disgorgement is available as a remedy, even when there is no finding of economic loss to the employer.”

Because the trial court rejected the remedy of disgorgement on the improper premise that Cameco required a finding of economic loss to the employer, the Court remanded the matter for a determination of whether disgorgement of Rosefielde’s salary is warranted in light of the following factors:

  • the employee’s degree of responsibility and level of compensation;
  • the number of acts of disloyalty;
  • the extent to which those acts placed the employer’s business in jeopardy;
  • the degree of planning to undermine the employer that is undertaken by the employee; and
  • “other factors” that may “guide the court in the exercise of its discretion to impose an equitable remedy.”

Finally, in determining exactly how much of Rosefielde’s salary should be disgorged, the Court held that the trial court should endeavor to “apportion the employee’s compensation, rather than ordering a wholesale disgorgement that may be disproportionate to the misconduct at issue” and should order disgorgement “only for monthly pay periods in which [Rosefielde] committed acts of disloyalty.”

New Jersey law has long held that an employee owes his or her employer a duty of undivided loyalty and must not, while employed, act contrary to the employer’s interest. For employers, this duty offers some measure of protection to guard their interests and help ensure that their employees remain loyal even, in some cases, once they leave their position. And, while an employer’s measure of economic loss or damages for a disloyal employee’s conduct may be difficult to quantity, or even identify, the Rosefielde decision serves as an important reminder of the wide range of appropriate remedies for an employee’s breach of his duty of loyalty. In appropriate circumstances, such remedies now unequivocally may include the disgorgement of the disloyal employee’s compensation during his or her period(s) of disloyalty, with or without a finding of economic loss to the employer.

For answers to any questions regarding this blog please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.