Cowen's Faithless Servant -- FINRA Arbitration Panel Says Gimme a Break

October 12, 2010

In a FINRA Arbitration Statement of Claim filed in December 2008, Claimant Betsy Van Hees alleged that Respondent Cowen & Company LLC had acted in bad faith when the firm deprived her of bonus payments. Claimant Van Hees asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of California Labor Code Section 201. Claimant sought $191,694.00 in damages for the unpaid bonus, $10,000 for waiting-time penalties (penalites imposed under California Labor Code for the untimely payment of compensation); interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Betsy Van Hees, Claimant, versus Cowen & Company, LLC, Respondent (FINRA Arbitration 08-04521, October 11, 2010).

Faithless Servant

Respondent Cowen generally denied the allegations, asserted various affirmative defenses, and filed its own Counterclaim against Van Hees seeking $82,692.00 in damages plus interest and costs. Apparently, those damages -- I'm guessing that they constituted payments made or purportedly owed to Claimant -- were based upon the New York State  "faithless servant doctrine."  (See below for discussion).

California Here I Come

Notwithstanding that the Employment Agreement at issue contained a New York State choice-of-law provision, the FINRA Arbitration Panel determined that Califomia law applies to this arbitration . The Panel noted that Claimant had worked and lived in California for the entire time of her employment with Respondent and, as such, concluded that California had a "materially greater interest in this matter than New York."

In reaching the threshold issue of liability, the Panel provides its rationale in fairly succinct and instructive language:

The Panel finds that Respondent breached the covenant of good faith and fair dealing, implied in every contract, by falling to provide Claimant an adequate opportunity to respond to the charges made against her; and by falling to conduct a fair investigation of Claimant's alleged transgressions. The Panel further finds that Respondent's "rush to judgment" had the effect of denying her the full 2007 bonus that would have been due her the very next day after her termination.

Accordingly , the Panel found that Respondent Cowen was liable to and ordered it to pay to Claimant $191,694.00 in compensatory damages plus interest at the rate of 10% per annum from February 14, 2008 until the day the Award is paid. Claimant's request for waiting-time penalties was denied. Respondent's Counterclaim was denied based upon the inapplicability of New York law.

Bill Singer's Comment

An interesting case with some oddball aspects.

The FINRA Panel's findings were set forth in fairly stark, biting terms -- there's nothing subtle in what comes off as a condemnation.  For starters, the Panel found breaches of both good faith and fair dealing.  You know that once you've gotten to that conclusion, it's going to be downhill from there. Then the Panel found that Respondent Cowen did not give its former employee an "adequate opportunity to respond to the charges." On top of that, the Panel did not find that Respondent conducted a fair investigation of whatever allegations were made against Claimant.  As if to ensure that there was no doubt, whatsoever, as to how shoddy Respondent's conduct was, the FINRA Panel characterized it as a "rush to judgment." Ouch!

Respondent Cowen appears to have sought damages against Claimant based upon the New York State "faithless-servant doctrine," which imposes good-faith obligations of loyalty by an employee to his/her employer. The breach of such loyalty may result in the right of the employer to recover compensation, salary, commissions, etc. that were paid during periods when there was a breach of the doctrine.  In finding California law controlling for this case, the Panel apparently did not believe it needed to address the claims that cited New York State law and,accordingly, denied the damages sought per those claims. Perhaps, if Respondent Cowen had additionally pled similar claims under California law, the FINRA Panel might have more fully addressed that claim.  Given my understanding that the faithless-servant doctrine has been adopted by California, I'm going to infer that the more pointed reason for the Panel's denial of that claim was because the Counterclaim only sought damages pursuant to the New York State faithless-servant doctrine  and did not separately assert a basis in California law.

See, California Labor Code Section 201 at