It is no secret that employees are often the most likely people to misappropriate an employer’s confidential information or valuable trade secrets. In this particular situation, employers have many options at their disposal, including asserting a claim under the faithless-servant doctrine. In a recent decision from the Manhattan Commercial Division, Justice Melissa A. Crane reminds us just how powerful the doctrines of faithless servant and res judicata can be against revenge-seeking faithless employees.
In Nichtberger v Paramount Painting Group, LLC, et al., the plaintiff, a commercial-painting contractor in the New York City area (“Plaintiff”), was seeking to keep his company afloat following the 2008 Recession. In 2009, Plaintiff entered into an employment agreement (the “Employment Agreement”) with defendants, also a commercial-painting company (“Defendants”), whereby Plaintiff would serve as president of defendant Paramount Painting Group, LLC (“PPG”). As part of the Employment Agreement, Plaintiff was paid an annual salary of $208,000, and entitled to 50% of the first $3 million in PPG’s net profits, as well as 25% of net profit above $4 million. From 2009 to 2019, Defendants paid Plaintiff more than $2 million in salary.
In March 2019, Defendants discovered that Plaintiff was engaging in a diversion scheme, whereby Plaintiff deposited checks from certain PPG customers into a separate checking account. As a result, Plaintiff immediately resigned from PPG. Soon after, Plaintiff was forced to defend himself in both a criminal lawsuit brought by the New York District Attorney’s Office and a civil lawsuit brought by Defendants, seeking claims for conversion, constructive trust, and faithless-servant doctrine.
In May 2021, Plaintiff pleaded guilty to Grand Larceny in the Second Degree. Pursuant to the plea agreement, Plaintiff was ordered to pay $1.4 million in restitution to PPG. Thereafter, in October 2021, Plaintiff entered into a stipulation with Defendants for approximately $3 million, which included his $1.4 restitution payment from the criminal proceeding.
Faced with a $3 million judgment, in or around March 2022, Plaintiff commenced an action against Defendants, alleging that Defendants breached their contractual obligations to Plaintiff by failing to fully compensate him his salary and bonus between 2011 through 2019. In response, Defendants filed a motion to dismiss the complaint, arguing that Plaintiff’s plea agreement and previous admission that he acted as a “faithless servant” barred all claims for compensation in the form of salary, bonus, and/or profit sharing. In response, Plaintiff argued that his previous admission, along with the doctrine of res judicata, did not prevent him from his entitlement to compensation prior to his first disloyal act.
Justice Crane rejected Plaintiff’s argument for two reasons. First, the Court acknowledged that Plaintiff’s claims for compensation for previous unpaid salary and bonuses was barred by the doctrine of res judicata due to the court’s previous ruling that Plaintiff could not recover compensation under the faithless-servant doctrine. Second, the Court stated that insofar as its previous decision was not res judicata, Plaintiff’s claims would be time-barred, since Plaintiff admitted that he “systematically” stole from Defendants from 2012 to 2019.
The Nichtberger decision serves as a reminder to litigators that the faithless-servant doctrine remains a potent weapon for employers faced with an employee who allegedly acts disloyally during his/her employment. Perhaps more importantly, Nichtberger may serve as valuable precedent for any “wayward and unruly agent” who seeks to take a second bite at victimizing their previous employer.