Tips for Determining Damages for Breach of Fiduciary Duty

Assessing the damages available for a claim for breach of fiduciary duty requires that a litigant carefully consider the question of which state’s law will apply to a breach of fiduciary duty claim.

Remedies available for claims for breach of fiduciary duty provide include:

• lost profits, as the natural and probable consequence of the breach;
• out-of-pocket losses, as the difference between the value paid and the value received;
• mental anguish damages, which must be separate from the consequence of economic losses and must be a foreseeable result, such as a mental anguish from a breach by a physician to his patient; and
• exemplary damages to punish rather than compensate, which are generally imposed only when actual damages are awarded and which may require a unanimous liability finding by the jury and unanimous agreement as to the amount.

Equitable relief also is available and includes:

• avoidance or rescission of a contract that is the basis of a breach of fiduciary duty claim (but note that rescission requires mutual restoration);
• profit disgorgement to obtain the defendants’ ill-gained profits resulting from breach;
• fee forfeiture (often confused with profit disgorgement) to protect fiduciary relationships by discouraging disloyalty through forfeiture of the fiduciary’s compensation;
• receivership;
• injunction;
• accounting;
• reformation; and
• constructive trust, which requires tracing of the property (including money) at issue.

In certain jurisdictions, such as Texas, exemplary damages are capped by statute. However, Texas allows for “cap-busting” by pleading certain other facts, such as misapplication of fiduciary property or forgery. It is therefore imperative to research whether the relevant jurisdiction limits this punitive award and if there are any options to increase that amount.

It is important to bear in mind the role of the conflict of laws in breach of fiduciary duty cases. In most jurisdictions, the law of the state that “has the most significant relationship to the occurrence and the parties under the principles” is the substantive law that determines the “rights and liabilities of the parties” in the breach of fiduciary duty context. See Restatement (Second) of Conflict of Laws § 145(1). In other words, the state law controlling the determination of the breach of fiduciary duty will be the state has the most significant relationship to the specific claim for breach of fiduciary duty rather than the entire case. This may result in one state’s law applying to breach of fiduciary duty and another state’s law applying to other claims in the case.

The Restatement also describes the procedure for determining which law applies where contracts do (not) have choice of law provisions, which may or may not cover tort claims such as a claim for breach of fiduciary duty. See Restatement §§ 187–188. Restatement section 133 provides that the forum state applies its own law concerning the burden of persuasion, “unless the primary purpose of the relevant rule of the state of the otherwise applicable law is to affect decision of the issue rather than to regulate the conduct of the trial.” See also Restatement §§ 122, 127. Such consideration is particularly important where, for example, a case is governed by a state’s laws that treat attorney fees as procedural but is tried in the forum state that treats attorney fees as substantive law. In that instance, the forum state’s law may determine the award of attorney fees because, there, it is a substantive claim.

Why does conflict of law analysis matter for damages? Arguably, damages affect the outcome of the case and are substantive law. Thus, “[t]he law selected by application of the rule of [Restatement section] 145 determines the measure of damages.” Restatement § 171. That same state’s law will also determine whether the plaintiff can recover interest and at what rate, exemplary damages, and apportionment or joint and several liability. Id. at cmts. c-e. But the method for determining damages and whether the award is excessive is based on the forum state’s laws. Id. at cmts. a & f. Remember that the state where the injury occurred may not be the state “primarily concerned with the measure of damages in a tort action,” meaning a case may apply State A law to the fiduciary claim but State B law to the damages portion. Id. at cmt. b.

Parting tip: Analyze which state’s law will apply to the claim and separately to damages before filing a case, if conflict of laws is possible.