Payback Time: Using the Faithless Servant Doctrine to Combat Trade Secret Theft

Employers know all too well that their own employees are often the most likely people to misappropriate their confidential and proprietary information and their valuable trade secrets.  Employers have plenty of weapons at their disposal to combat such wrongdoing, including the assertion of claims for misappropriation of trade secrets, breach of contract, breach of the duty of loyalty, unfair competition, and other common law or statutory claims.  Another little-used but powerful weapon is the so-called “faithless servant doctrine.”

The faithless servant doctrine is a state common law doctrine that requires employees who breach their duty of loyalty to repay to their employer all compensation earned during the period of disloyalty, regardless of whether the employer suffered any damages.  The faithless servant doctrine originated in New York and has been adopted in various forms in a number of other states including California, Massachusetts, Delaware, and Pennsylvania.

A recent decision by the U.S. District Court for the Southern District of New York in Morgan Stanley v. Skowron demonstrates just how powerful this doctrine can be.  The plaintiff Joseph F. “Chip” Skowron III, a former Morgan Stanley employee, pled guilty to conspiracy to commit insider trading during a two-and-half-year period of his employment with the firm.  At his sentencing hearing, Skowron was sentenced to five years in prison and was ordered to repay 20 percent of the salary and bonuses he had received from Morgan Stanley during the period of the conspiracy.  Morgan Stanley then filed a civil action against Skowron seeking, among other things, forfeiture of the remaining 80 percent of compensation paid during the conspiracy period under the faithless servant doctrine.  The district court ruled in favor of Morgan Stanley and required Skowron to return to Morgan Stanley all of his compensation beginning from the first disloyal act—a total of $31 million.

Although the doctrine is often applied in insider trading cases, it is something trade secret plaintiffs should consider as an additional enforcement tool.  The doctrine has been applied in at least one trade secrets case, and a faithless servant claim involving trade secret misappropriation survived a motion for summary judgment on the basis that an employee has a duty not to use confidential knowledge acquired during his employment.  The doctrine comes up in other similar contexts—for example, while there were no trade secret claims in Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, the faithless servant doctrine was applied to two defendants where one allegedly stole confidential business documents from their employer to share with the other in furtherance of their opening a competing gym.