Breach of fiduciary duty claims frequently arise within the employment context. As a general matter, employees owe their employers basic fiduciary duties in certain circumstances. A potentially fertile area of litigation involves employees who are disloyal to their employers. A recent decision of the Appellate Division, First Department, contains an informative analysis of fiduciary-duty claims involving disloyal employees, including just how far employee fiduciary duties extend.
In Manipal Educ. Americas, LLC v. Taufiq, 203 A.D.3d 662 (1st Dep’t 2022), the court held that the plaintiff-employer stated a breach of fiduciary duty claim against its former marketing director, Zain Taufiq (“Taufiq”). Taufiq allegedly contracted on the employer’s behalf for video-editing services without properly disclosing that the video-editing company—in which Taufiq had an interest—was overcharging the employer and kicking back some of the proceeds to Taufiq as finder’s fees.
Again, Taufiq was the marketing director for the plaintiff, Manipal Education Americas, LLC (“Manipal”). While in Manipal’s employ, Taufiq entered into several contracts for video-editing services with a company called Exit Editorial, Inc. (“Exit”). Manipal sued Taufiq and Exit, as well as Exit’s principal (together with Exit, the “Exit Defendants”), alleging that Taufiq made false representations to Manipal. Specifically, Manipal alleged that Taufiq falsely claimed that he had negotiated at arm’s length with Exit for these video-editing services and that Exit’s prices were reasonable. In reality, however, Taufiq allegedly had an ownership interest in Exit, and Exit allegedly charged Manipal prices that were well above market rate. Taufiq also received a cash finder’s fee for every contract between Manipal and Exit.
As against the Exit Defendants, Manipal proceeded on the theory that they aided and abetted Taufiq’s breaches of fiduciary duty. The court dismissed this claim, however, holding that Manipal failed to sufficiently plead the critical element of aiding-and-abetting claims that the Exit Defendants knowingly induced or participated in Taufiq’s breaches. See Kaufman v. Cohen, 307 A.D.2d 113, 125 (1st Dep’t 2003) (“A claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach.”).
The lower court had dismissed Manipal’s breach of fiduciary duty claim against Taufiq. In its Decision and Order, that court appeared to rely on certain emails from Taufiq to Manipal where Taufiq wrote: “Yes, I have a vested interest in that [Exit] company.” Manipal Educ. Americas, LLC v. Taufiq, 2021 WL 1158015, at *2 (Sup. Ct. N.Y. Co. March 25, 2021). On that basis, the lower court held that “the 2010 emails between plaintiff and Taufiq put plaintiff on notice of Taufiq’s financial interest in Exit.” Id.
The Appellate Division rejected this reasoning, however, and reinstated Manipal’s breach of fiduciary duty claim against Taufiq. In his capacity as an agent of Manipal, Taufiq had a duty to fully disclose to Manipal any potential conflicts of interest in the transactions that Taufiq was negotiating between Manipal and Exit. The emails from Taufiq to Manipal were not sufficient for Taufiq to meet this disclosure obligation:
The breach of fiduciary duty claim against Taufiq should be reinstated, as an agent has a duty to make full disclosure to its principal of any conflicts of interest and there is no requirement of justifiable reliance for such a claim. Contrary to defendants’ argument, the 2010 emails were not sufficient to meet this disclosure obligation.
Manipal Educ. Americas, LLC, 203 A.D.3d at 664.
This is a powerful holding. Taufiq told Manipal directly and in writing that he had a financial interest in Exit, and that was enough to convince the lower court that Taufiq sufficiently notified Manipal of his conflict of interest. The Appellate Division disagreed, reasoning that Taufiq’s emails did not amount to the necessary “full disclosure” of Taufiq’s conflict of interest. As a result, Manipal’s claim survived.
This decision should serve as a warning to employers and employees alike. Employers must be vigilant when delegating responsibility to their employees to contract with other companies on their behalf, especially if the employee could benefit personally from such transactions. And employees should think twice before acting on behalf of their employers in any way that could be perceived as self-dealing.