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“Is it Too Late?” What to do When You Discover Misconduct by an Executive or Key Employee.

March 08, 2017

By Ashtyn Saltz

If you’re the CEO, a board member, or other guardian of a company’s interests, your duties include assuring the company’s employees (current and former) are not acting against the company’s interests, in violation of his or her fiduciary duties. We frequently receive calls from board members, heads of business, and C-level executives who have discovered unfaithful conduct of an executive or trusted high level employee that has seriously damaged, or threatens to damage, the company.

Your Executives and Key Employees Have Duties to the Company

In many jurisdictions, certain managers, as well as select other employees in sensitive positions, are deemed to have a “fiduciary” relationship with their employer. These employees owe duties of candor, care, loyalty and good faith in his/her dealings with the company. A fiduciary can be found to have breached his/her duty when they use corporate assets to further personal goals at the expense of corporate interests, or misuses confidential business information for their own benefit—or for the benefit of a competitor. Significantly, this duty survives the termination of employment. Accordingly, conduct by a former employee months—or even years—after leaving the company may give rise to a claim for breach of fiduciary duty.

We always advise our clients to act quickly and decisively to remedy this type of misconduct. This requires the assistance of experienced counsel who can, for example, quickly seek a preliminary injunction or temporary restraining order to stop the employee from continuing to engage in the wrongful conduct.

For a Variety of Reasons, a Company May Not Immediately Respond to Misconduct

However, our experience with these types of cases has shown that sometimes the company may not discover the wrongful conduct for months, or even years, after the fact. Other times, the company may not immediately recognize the severity of the current or former employee’s conduct, or the impact it may have down the road on the company, and thus fail to immediately respond. Many times executives or key employees violate their duties by misappropriating confidential business information or misappropriating a business opportunity, they attempt to cover their tracks. Many clients upon discovering the wrongful conduct worry that their opportunity to pursue the wrongdoer and protect their interests has expired.

When a company, for whatever reason, fails to act quickly to address the wrongful conduct, is all hope lost? Perhaps not. Fortunately, in many jurisdictions, a claim for breach of fiduciary duty may be brought many years after the wrongful conduct occurred.

Under the Varying Statutes of Limitations, You May Still Have Time to Act

Statutes of limitations act to limit the amount of time to file a claim, including claims for breach of fiduciary duty. These statutes can vary widely from state to state and from claim to claim. The application of the statute of limitations is further complicated by various doctrines that may be used to “toll” (pause or delay) or even extend the statute of limitations, such as the “discovery rule.” Furthermore, in some cases there may be confusion as to what state’s law would apply to the claim. Experienced counsel is critical in helping a company determine how long it has to file its potential claims.

Let’s examine a few examples.

In Ohio, the statute of limitations for a claim of breach of fiduciary duty is four years, and no discovery rule applies. Accordingly, if Ohio law applies, a company has four years to from the time the wrongful conduct is committed to file its claims, regardless of when the conduct was discovered by the company.

In New York, the applicable statute of limitations for breach of fiduciary duty depends on the particular remedy being sought. Where the remedy sought is purely monetary in nature, New York courts apply a three-year limitations period. However, where the relief sought is equitable in nature (such as an accounting, injunction, or reformation of contract), a longer six-year limitations period may be in place. In addition, under the general New York rule on accrual, the statute of limitations may not begin to run when the wrongful conduct occurs; it may begin running instead when the company incurs damages as a result of the wrongful conduct. Accordingly, depending on the nature of the claim and the relief sought, the time period to in which a company may have to bring a breach of fiduciary duty claim under New York law could vary dramatically.

New York and Ohio are representative of the complicated and varied statutes of limitation for breach of fiduciary duty claims.

Prudence Dictates That You Act Promptly to Protect Your Rights

For you to protect the company from disloyal current or former employees, you must act quickly to respond to wrongful conduct, engaging counsel who understands the vagaries and differences in these laws in multiple jurisdictions. Experienced counsel can examine potential claims to determine if they are still timely under the various statutes of limitations, and your decision of who to call in this time of need may make all the difference.

If your company discovers—or even suspects—wrongful conduct on behalf of a current or former employee that may mean they are in breach of their fiduciary duties. Even if such conduct is discovered months or years after the fact, you may still have timely claims. We invite you to contact Kaufman & Company to learn more about how we help protect companies when employees violate their fiduciary duties.
Kaufman & Company, LLC