Defining Breach of a Fiduciary Duty Under New York Law September 1, 2009

In my experience, there are few legal phrases that are more misunderstood or misapplied than “fiduciary duty.” Within the confines of this limited post, I hope to clarify this concept.

Before we can approach a fiduciary’s obligations, we must define what a fiduciary is – and what it is not. A fiduciary relationship is characterized as one where there is inherently and significantly greater trust and confidence than that which exists between two companies that are dealing at arms’ length. The more common examples of this relationship include the following: employee/employer, agent/principal, partners/co-venturers and officers and directors/corporation. The existence (or lack) of a fiduciary relationship is, generally speaking, a fact-specific inquiry; in other words, there is no bright-line test. However, some relationships have been held too attenuated to be considered “fiduciary,” such as arms’ length transactions between an owner and contractor, or a condominium seller and purchaser.

Since the relationship between fiduciaries is based on heightened trust, there are correspondingly greater responsibilities, namely, to act in the best interests of that fiduciary. These responsibilities are with fairly strict limitations, however.

One important example is that of the employee who seeks to start a competing business. Although the employee may not actively solicit or divert his employer’s clients (or proprietary information) while still employed, he may form  a competing business even before leaving his job so long as he does so on his own time, in his own place and on his own nickel. And, strange as it sounds, that will not constitute a breach of fiduciary duty.

On the other hand, that employee can be held liable – even post-termination – if his employment contract had a non-compete agreement that is both reasonable in duration and geographic scope, and bars solicitation, or poaching of his employers’ clients or other employees.

Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.

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