Disgorgement of Employee’s Compensation May be Awarded Even Where Breach of Duty of Loyalty to Employer Does Not Cause Damage

Kaye v. Rosefielde, 223 N.J. 218 (2015).  Kaye v. Rosefielde, 432 N.J. Super. 421 (App. Div. 2013), discussed here, seemed destined for Supreme Court review.  The Court did grant review, but limited to the issue of whether a court may order an employee who has breached a duty of loyalty to his employer, but without causing the employer any damages, to disgorge the employee’s compensation, in whole or in part.  Today, in a unanimous opinion by Justice Patterson, the Court ruled that courts have the ability to award that relief as an equitable remedy in proper cases.  The Court applied the de novo standard of review to the purely legal issue at hand.  The result reversed the Appellate Division and remanded the case to the trial court to determine whether the remedy was appropriate here.

Justice Patterson found the issue to be largely governed by Cameco, Inc. v. Gedicke, 157 N.J. 504 (1999).  Both sides seized on elements of Cameco in their arguments, but the Court, after a detailed analysis of Cameco, concluded that the case supported the discretion of trial level judges to award disgorgement in appropriate circumstances even where the breach of the duty of loyalty did not damage the employer.  Citing the Restatements (Second) and (Third) of Agency, Justice Patterson distilled the disgorgement remedy for breach of the duty of loyalty as follows: “if the employee breaches the duty of loyalty at the heart of the employment relationship, he or she may be compelled to forego the compensation earned during the period of disloyalty.  The remedy is substantially rooted in the notion that compensation during a period in which the employee is disloyal is, in effect, unearned.”  Disgorgement could involve all of the employee’s compensation or only a part, depending on the facts.

The Court found that Cameco decided the issue, and that Cameco had “implicitly abrogated” Joseph Toker, Inc. v. Cohen, 67 N.J. Super. 68 (App. Div. 1961), upon which the defense had relied.  Justice Patterson also observed that substantial out-of-state authority approved of disgorgement as an equitable remedy in proper circumstances, irrespective of whether the employer was damaged.

Justice Patterson’s opinion contains an excellent discussion of the duty of loyalty, and a detailed review of the nature and purpose of equitable remedies.  The latter will be a guidepost going forward for anyone involved with Chancery or other equitable issues.