Legal Definitions - accounting for profits

Accounting for profits is a legal remedy that allows a court to compel someone who has breached a position of trust to hand over any financial gains they made as a result of that breach. It is designed to prevent "unjust enrichment," meaning it stops individuals from unfairly profiting from their wrongdoing, especially when they were in a special relationship of confidence and loyalty (known as a "fiduciary relationship") with another party.

Instead of merely compensating the victim for their direct losses, this remedy focuses on stripping the wrongdoer of the profits they unfairly acquired. It ensures that those who abuse a position of trust cannot benefit from their misconduct.

Here are some examples illustrating "accounting for profits":

• The Disloyal Business Partner

  Scenario: Alex and Ben are partners in an architectural firm. They have a fiduciary duty to act in the best interest of their partnership. Ben learns about a lucrative contract to design a new community center, which would be perfect for their firm. Instead of bringing this opportunity to the partnership, Ben secretly forms a separate company, bids on the project himself, and wins the contract, making a substantial personal profit.

  Explanation: Alex could pursue an "accounting for profits" against Ben. Ben breached his fiduciary duty by diverting a business opportunity that belonged to the partnership for his personal gain. The court could order Ben to hand over the profits he made from the community center contract, ensuring he does not benefit from his disloyalty to the partnership.

• The Self-Dealing Financial Advisor

  Scenario: Ms. Chen is a financial advisor managing a client's investment portfolio. She has a fiduciary duty to act solely in her client's best interest. Instead of recommending the best available investments, Ms. Chen steers a significant portion of her client's funds into a startup company in which she secretly holds a large ownership stake. The startup performs exceptionally well, and Ms. Chen sells her personal shares for a massive profit, far exceeding the returns her client's investment generated.

  Explanation: Ms. Chen breached her fiduciary duty by engaging in self-dealing and prioritizing her personal financial interest over her client's. The client could seek an "accounting for profits" to recover the personal profits Ms. Chen made from selling her shares in the startup, as those profits were unjustly acquired through her misuse of her position as a trusted advisor.

• The Corporate Director's Secret Venture

  Scenario: David is a director on the board of a pharmaceutical company. Through his position, he gains access to confidential research data indicating a breakthrough in a new drug compound. Knowing this information is highly valuable, David secretly resigns from the board, forms his own company, and quickly develops and patents a similar drug using the insights he gained, making millions before his former company can bring its own product to market.

  Explanation: As a director, David owed a fiduciary duty to the pharmaceutical company. By using confidential information gained through his position to launch a competing venture for personal profit, he breached that duty. The former company could seek an "accounting for profits" to recover the millions David made from his new company, as those profits were unjustly acquired through his breach of trust.