2002-4

Supreme Court Grants Review Of Appellate Court Decision That Found "Faragher/Ellerth" Defense For Employers Inapplicable To Sexual Harassment Suits Under The FEHA

The California Supreme Court has granted review of Department of Health Services v. Superior Court⁽¹⁾, a decision concerning the applicability of the Faragher/Ellerth defense to a sexual harassment claim brought under the California Fair Employment and Housing Act ("FEHA"). An employer can assert the Faragher/Ellerth defense in a Title VII action for sexual harassment by a supervisor if no tangible employment action was taken against the employee and (1) the employer exercised reasonable care to prevent and promptly correct the sexually harassing behavior and (2) the plaintiff employee unreasonably failed to take advantage of the corrective or preventive opportunities provided by the employer or otherwise failed to avoid harm. In Department of Health Services v. Superior Court, the appellate court refused to apply this defense to a FEHA cause of action for sexual harassment, asserting that FEHA's legislative scheme is broader than that of Title VII because the FEHA expressly addresses sexual harassment, while Title VII does not. The Supreme Court's order granting review effectively depublishes the decision.

An Employee Coerced Into Signing An Arbitration Agreement Is Not Required To Arbitrate His Discrimination Claim

A California appellate court has held that the "special scrutiny" requirement for employment arbitration agreements articulated by the California Supreme Court in Armendariz v. Foundation Healthcare Services, Inc. (2000) 24 Cal. 4^th 83 is not confined to claims under the FEHA, but should also be applied to enforce rights under any statutes enacted for a public reason. (Mercuro v. The Superior Court, 2002 Daily Journal D.A.R., 1805 (Cal.App. 2d Dist., Div. 7, 2/15/02).)⁽²⁾ As a result, the California Court of Appeals issued a writ of mandate directing the trial court to vacate its earlier order requiring arbitration of plaintiff's lawsuit for various employment-related torts.

Plaintiff Fred Mercuro was a sales person for Countrywide Securities Corporation. When he first joined Countrywide, plaintiff was required to apply for a license from the National Association of Security Dealers ("NASD"). In so doing, he signed a form commonly known as "Form U-4" agreeing to arbitrate disputes between him and his firm in accordance with NASD's constitution, bylaws and rules. After he had been with Countrywide for about a year, plaintiff, along with all other sales personnel, was asked to sign a contract agreeing to arbitrate certain disputes. The agreement pertained to such claims as employment discrimination, but excluded others such as an injunctive or other equitable relief for unfair competition or unauthorized disclosure of trade secrets. The company offered its employees 25 shares of its stock or an extra vacation day as consideration for signing the agreement.

Mercuro had several discussions with Countrywide's upper management concerning the arbitration agreement and his decision not to sign it. The company's response, including that of the CEO, COO, and in-house counsel, was uniformly hostile. For example, he was told that he did not have the option of not signing the agreement. Plaintiff was also told that the company's CEO expected every sales person to sign off and if they did not, they would find it difficult to make a living at Countrywide. Plaintiff asserted that he only signed the agreement under duress and coercion in order to save his job at Countrywide and did not voluntarily consent to relinquish his rights to sue Countrywide for employment disputes, including statutory claims.

Plaintiff left Countrywide in March 2000 and filed a lawsuit asserting age and disability discrimination, fraud and wrongful termination in violation of public policy based on Labor Code section 230.8 - which provides unpaid time off to parents to volunteer at a child's school, and Labor Code section 970 - which prohibits employers from misrepresenting the terms and conditions of employment to induce a person to change residences to take the job. Countrywide filed a motion to compel arbitration of all the causes of action. The trial court granted the motion to compel and stayed plaintiff's lawsuit. The instant writ petition followed.

Under Armendariz Countrywide's arbitration agreement was found procedurally unconscionable for several reasons. Countrywide used oppressive tactics to obtain Mercuro's signature on the arbitration agreement. There were various comments by upper management that plaintiff claims left him no options but to sign the agreement. The court noted the economic pressure exerted on plaintiff was particularly acute since he was 52 years old at the time and had recently moved to California. In light of Countrywide's "highly oppressive" conduct, the court found that plaintiff only had to make a minimal showing of the agreement's substantive unconscionability.

As for substantive unconscionability, the court found that the agreement was unfairly one-sided in requiring arbitration of most claims of interest to the employees, but exempting from arbitration those of interest to Countrywide. The court also held that the agreement failed to guarantee a neutral arbitrator. The arbitration provision required that the claims be heard by the National Arbitration Forum ("NAF") and be held within the federal judicial district in which the employee was last employed by the company. The NAF, however, had only eight arbitrators in the relevant federal judicial district. Plaintiff asserted that the size of Countrywide and all its affiliates compared to the relatively few available NAF arbitrators meant that employees such as plaintiff would be victims of the "repeat player effect," i.e., employers who repeatedly appear before the same group of arbitrators enjoy advantages over the individual employees such as knowledge of the arbitrator's temperaments, procedural preferences, etc. While the court refused to say that the repeat player effect was enough to render an arbitration agreement unconscionable, given the low threshold of substantive unconscionability in this case, the court found the lack of mutuality as to arbitrable claims, together with the disadvantages in using NAF, rendered Countrywide's arbitration agreement substantively unconscionable.

In Armendariz, the California Supreme Court held that FEHA claims were arbitrable, but because the statutory rights under FEHA were "established for a public reason" and therefore not waivable, the arbitration agreements affecting those rights had to be subject to particular scrutiny and include provisions for: (1) neutral arbitrators; (2) adequate discovery; (3) a written award subject to limited judicial review; (4) the same types of relief which would be available from the court; and (5) limitations on the costs of arbitration to employees. Here, the court found that Armendariz's "special" scrutiny requirement was not limited to plaintiff's FEHA claims, stating "we see no reason why Armendariz's 'particular scrutiny' of arbitration agreements should be confined to claims under FEHA. Rather, under the Supreme Court's analysis, such scrutiny should apply to the enforcement of rights under any statute enacted 'for a public reason'." Thus, the court applied the Armendariz standard not only to arbitration of plaintiff's FEHA claim, but also to his claims under the Labor Code.

The court also found that the arbitration fee provision was unlawful, requiring the employee to pay an equal share of the cost. The court rejected Countrywide's proposed modification to the fee provision, finding that it only excused Mercuro from paying his share of arbitration costs up front but left him at risk for paying the entire cost of the arbitration, including the arbitrator's fee, should he lose. Back loading this cost to the employee still imposed a significant risk on the employee that he would have to bear large costs to vindicate a statutory right.

The court concluded that Countrywide's arbitration agreement was unenforceable because it was permeated with unconscionability and illegality and could not be cured by merely carving out the offending provisions. The threats by Countrywide Management to obtain plaintiff's signature on the arbitration agreement, together with the lack of mutuality as to arbitrable claims, the unlawful fee sharing provision and the disadvantages to the employee in using the NAF as the arbitrator showed a "'systematic effort to impose arbitration on an employee...as an inferior form that works to the employer's advantage.'" The court also rejected Countrywide's argument that plaintiff was required to arbitrate under the terms of the U-4 form, because it failed to produce any evidence showing that it was a member of NASD and, thus, entitled to compel arbitration under the NASD rules.

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Employee May Sue Religious Employer For Discrimination In Violation Of State Constitution And Federal Law

In Phillips v. St. Mary Regional Medical Center 2002 Daily Journal D.A.R. 1831 (Cal.App.4th Dist., Div. 2, 2/19/02),the California Court of Appeal has reversed, in part, a trial court's judgment of dismissal on demurrer and found that while plaintiff failed to state a claim under the California Fair Employment and Housing Act ("FEHA"), he could state a claim for wrongful termination in violation of public policy based on Article I, section 8 of the California Constitution ("Section 8") and Title VII of the Civil Rights Act of 1964 ("Title VII").⁽³⁾

Plaintiff, an African-American man, was a social worker at St. Mary Regional Medical Center. In January 1998, he filed a complaint with the Department of Fair Employment and Housing for race and sex discrimination because of pay raises, job duties, and family care and medical leave. Plaintiff and defendant entered a settlement agreement in August 1998 resolving the allegations of discrimination. The hospital terminated plaintiff in November 1998 for poor judgment in transferring a patient to another facility. He then filed another complaint with the DFEH alleging that he had been suspended and later terminated because of his earlier complaint. Plaintiff sued the hospital, asserting he was discharged in retaliation for filing complaints with the DFEH and EEOC for race and sex discrimination. Defendant's demurrer was sustained without leave to amend.

The Court of Appeal affirmed with respect to the FEHA claim. At the time plaintiff was terminated, the definition of the term "employer" under the FEHA did not include a nonprofit religious entity such as defendant. Although the statute was amended in 1999 such that hospitals operated by religious groups were included in the definition of an employer, the court stated that to support a wrongful discharge claim, "the public policy must be among other things, well established at the time of plaintiff's termination. Obviously, legislation enacted after plaintiff's termination neither existed, nor was well established at the pertinent time." Nor were the newly enacted provisions retroactive because: (1) the legislature made no express provision for a retroactive application; and (2) the amendment substantially affected the hospital's liability under the FEHA.

Section 8 of the California Constitution provides that "a person may not be disqualified from . . . pursuing . . . employment because of sex, race, creed, color, or national or ethnic origin." Defendant argued that while Section 8 stated a public policy against discrimination based on race and sex, it neither explicitly mentions the term "retaliation" nor implicitly prohibits an employer from retaliating against an employee who files a charge with a government agency. The court noted that while retaliation was not specifically enumerated in Section 8, "employment discrimination often manifests itself in retaliatory conduct." The court rejected the hospital's attempt to distinguish between retaliation and discrimination and reversed the trial court on this issue.

As for the Title VII claim, the defendant argued that because it directly conflicted with the California legislature's intent regarding the scope of the religious-entity exemption at the time of plaintiff's termination, Title VII could not serve as the policy basis for the wrongful discharge claim. The court, however, found no authority restricting the use of federal law as public policy for a wrongful discharge claim where a conflicting state law existed. The court stated that when the legislature enacted the FEHA, it intended to supplement existing state and federal remedies for employment discrimination. The court further found that nothing in the FEHA or Title VII prevented the plaintiff from raising alternative theories for a wrongful discharge claim. "California law allows a plaintiff to rely on alternative anti-discrimination remedies in order to afford [him] the maximum opportunity to vindicate his civil rights." Thus, plaintiff could rely on Title VII as a source of public policy for his state common law cause of action.

Deputy District Attorney Who Lost Promotional Opportunities After Complaining Of Gender And Pregnancy Bias Established A Case Of Retaliation

The California Court of Appeal has affirmed a verdict based on retaliation in violation of the California Fair Employment and Housing Act ("FEHA") and Labor Code section 1102.5 for a plaintiff who lost promotional opportunities after complaining of gender and pregnancy bias. (Akers v. County of San Diego, 2002 Daily Journal D.A.R. 1595 (Cal.App. 4^th Dist, Div. 1, 2/11/02.)⁽⁴⁾

Plaintiff Laura A. Akers joined the San Diego County District Attorney's Office in 1985. In 1993, she was assigned to the Family Protection Division prosecuting domestic violence cases. By all accounts, Akers developed an excellent reputation in this area. After a new district attorney was elected in January 1995, plaintiff was assigned a new supervisor, Luis Aragon. Aragon worked in the office's downtown San Diego headquarters, while Akers worked in the El Cajon breach. In December 1995, plaintiff notified the county that she was pregnant and was expecting in May 1996. In February 1996, Aragon told plaintiff he was concerned with the morale in El Cajon Family Protection Division and believed she was not doing her fair share of the unit's misdemeanor work. He told her he wanted to transfer her to the downtown office to satisfy her desire to work on felony and high profile cases, and to allow him to more closely supervisor her. Plaintiff said she wanted to stay in El Cajon to be close to her home after her baby was born.

Thereafter, plaintiff contacted Gregory Thompson, the second-in-command of the district attorney's office who reported directly to the district attorney. Plaintiff told Thompson that Aragon's criticisms of her were not justified and she did not want to work with Aragon any longer. Thompson transferred plaintiff to a misdemeanor rotation at the El Cajon branch that commenced on July 1996 after her baby's birth. Her supervisor there was someone with whom she had previously had personality conflicts and Akers asked for a transfer to the downtown office. The transfer was denied, but two months later she was transferred to another unit in El Cajon and given a new supervisor.

In October 1996, Akers' attorney wrote a letter to the district attorney claiming that Akers had been forced out of the El Cajon domestic violence unit because she was pregnant, because she is a woman and because she did not ascribe to the political views of certain managers in the D.A.'s office regarding who should be district attorney. The office investigated plaintiff's discrimination allegations and the resulting report supported Aragon's evaluation that plaintiff adversely affected morale in the domestic violence unit, did not do her fair share of work, and spent time reading the newspapers and attending to personal matters while work was neglected and ultimately had to be completed by others. When plaintiff told the district attorney that she did not agree with the opinions expressed in the witness statements, he purportedly told her "you will not be going back to domestic violence cases ever." Thereafter, the district attorney ordered an "improvement needed" performance evaluation be prepared for and given to plaintiff, along with a written counseling memorandum notifying plaintiff of her job deficiencies. Plaintiff complied with the memorandum and performed her job in an outstanding manner, but her request to transfer to an open elder abuse position was denied.

After a one year family leave of absence, plaintiff resigned and sued the county for gender/pregnancy discrimination, violation of family leave statutes, wrongful termination in violation of public policy and retaliation in violation of the FEHA and Labor Code section 1102.5. The jury found in favor of the county on the first three claims, but for Akers on the retaliation claim. The county appealed, contending that there was insufficient evidence to prove the adverse employment action prong of the retaliation claim.

The appellate court found that an adverse employment action was not limited to ultimate employment acts such as the specific hiring, firing, demotion or the failure to promote decision, but included intermediate retaliatory actions. The court held that where an employer reacts to a discrimination complaint by eliminating a reasonable potential for a promotion or materially delaying the promotion, there is a legally tenable basis for a jury to find the employer substantially and materially adversely affected the terms and conditions of the plaintiff's employment. Here, a jury could reasonably conclude that the negative evaluation and counseling memorandum were undeserved and retaliatory, that key decision makers in the D.A.'s office intended to obstruct her prosecutorial career, and had she remained in the office these would have taken effect. The court emphasized that the retaliation must result in a "substantial adverse change in the terms and conditions of the plaintiff's employment. A change that is merely contrary to the employee's interests or not to the employee's liking is insufficient." Moreover, "a mere oral or written criticism of an employee or transfer into a comparable position does not meet the definition of an adverse employment action under FEHA."

A Deputy District Attorney With A Checkered Work History Who Did Not Receive A Promotion Failed To Establish Discrimination Or Retaliation By Her Employer

The California Court of Appeal affirmed a judgment in favor of the County of Orange in a discrimination action brought by a former deputy district attorney. (Chen v. County of Orange, 2000 Daily Journal D.A.R. 1883 (Cal.App. 4^th Dist, Div. 3, 2/20/02).)⁽⁵⁾

Victoria Chen was hired by the Orange County District Attorney's office as a level I deputy district attorney in 1990 and, by 1993, had been promoted to a level III. During this time period she also met and began dating Devallis Rutledge. Rutledge, whom she later married, was a high level management attorney in the D. A.'s office and reputedly was at odds with the then-district attorney. In 1993, she was transferred to a felony assignment handling probation violation hearings. Plaintiff was frequently late to court, requiring her co-workers from other departments to cover her calendar. She was also criticized about her performance as a trial attorney. She went out on maternity leave in June 1995 and stayed out until April 1997, apparently in part for "medical reasons." During the time she was on leave, however, she earned over $100,000 per year working as a bond trader and also acted in commercials. Plaintiff returned to the District Attorney's office in April 1997, but was repeatedly late and undependable. She went out on stress leave in July 1997 and filed a complaint with the DFEH in October 1997. In November 1997, while still on stress leave, she applied for a promotion from level III to level IV, along with 42 other attorneys applying for ten positions. Chen told a senior deputy that she would return to work if she got the promotion, but if not, she would continue to be "stressed out for a while longer."

Plaintiff sued the county in March 1998. In November 1998, she was again turned down for a promotion to level IV and, a year later, filed a third amended complaint that included causes of action for violation of the Fair Employment and Housing Act and retaliation. At trial, the court granted non-suit motions as to plaintiff's claims for marital status discrimination and retaliation. The race and gender discrimination claims were tried and resulted in a defense verdict.

The appellate court considered plaintiff's marital status discrimination claim and found that her marriage to Rutledge was irrelevant to any alleged adverse action taken by the employer. Rather, the origin of any perceived animus against her was the political disfavor her husband was in at the time with the existing D.A.'s management, not the result of any animus toward plaintiff's status as a married or single person.

With respect to the retaliation claim the court found that she failed to state a prima facie case because she did not show any causal connection between an adverse employment action and her complaint of discrimination. The court concluded that given Chen's checkered work record, her willingness to subordinate her deputy district attorney's job to her bond trading and budding acting career, and the malleability of her purported stress, "the only rational conclusion is that a promotion over more senior and available attorneys would have been undeservedly favored treatment."

Ninth Circuit Affirms Dismissal Of Complaint For Breach Of Settlement Agreement, Finding That The Dispute Was Arbitrable Under The Terms Of The Collective Bargaining Agreement

In a case of first impression in the Ninth Circuit regarding the arbitrability of side agreements under a collective bargaining agreement ("CBA") arbitration clause, the Ninth Circuit affirmed a trial court's dismissal of an action finding that the plaintiff was required to arbitrate its breach of settlement agreement. (Inlandboatmens Union of the Pacific v. Dutra Group, 2000 Daily Journal D.A.R. 1545 (2/8/02.)⁽⁶⁾

The Inlandboatmens' Union of the Pacific (IBU) sued the Dutra Group, alleging that Dutra had violated the terms of a settlement agreement between the two parties. Dutra, a marine construction, towing, and dredging company, employed deck hands represented by the IBU on its barges. Dutra leased one of its barges to Masters Tug and Tow and subcontracted with Masters to complete work for Dutra. Under the CBA, Dutra was required to use IBU represented personnel to perform its work. Masters did not employ IBU members and, further, laid off the IBU members when it took over the operation of one of Dutra's barges. Thereafter, the IBU filed a grievance with Dutra regarding this subcontracting arrangement.

The CBA contained an arbitration clause governing "[a]ny dispute concerning . . . wages, working conditions, or any other matters referred to in this [CBA]." After the IBU filed its grievance, the parties arranged to arbitrate the dispute, as required by the CBA. Before the arbitration, however, a mediation occurred and resulted in settlement of the dispute. As part of the settlement agreement, Dutra agreed that it would subcontract work to Masters only if the subcontractor agreed to employ IBU members for labor to be performed on behalf of Dutra. IBU contends that shortly after the settlement agreement was concluded, Dutra breached this provision by again subcontracting with Masters, even though Masters continued to use the services of non-IBU members.

IBU sued Dutra under section 301 of the Labor Management Relations Act seeking enforcement of the settlement agreement's subcontracting provision. Dutra moved to dismiss the lawsuit, on the grounds that (1) the dispute is governed by the arbitration clause of the CBA and,(2) the IBU failed to exhaust its non-judicial remedies and the District Court lacked jurisdiction over the action. The District Court granted Dutra's motion to dismiss for lack of jurisdiction.

On appeal, the Ninth Circuit considered the issue of when disputes regarding side agreements not included in the parties' written CBA, such as the settlement agreement here, are covered by the CBA's arbitration clause. The Ninth Circuit held that disputes arising under a side agreement must be arbitrated if the dispute relates to a subject matter that is within the scope of the CBA's arbitration clause. In the instant case, the arbitration clause was reasonably broad. The subject matter of the side agreement in dispute was Dutra's subcontracting practices, a matter expressly referred to in the CBA and, thus, within the scope of the arbitration clause. The Ninth Circuit affirmed the dismissal on the ground that the IBU failed to exhaust its non-judicial remedies.

Federal Law Preempts State Law Claims That Are Inextricably Intertwined With The Meaning Of Terms In A Collective Bargaining Agreement

Denying a petition for rehearing, the Ninth Circuit has found that federal law preempts any state law claims that are "inextricably intertwined" with the interpretation of a collective bargaining agreement ("CBA"). (Firestone v. Southern California Gas Company, 2002 Daily Journal DAR 1733 (2/13/02).⁽⁷⁾ This lawsuit concerned a state law overtime claim in which the parties disagreed about which rate in the CBA was the "regular" rate, thus affecting whether plaintiffs received a "premium" for working overtime. The plaintiffs who filed the petition for rehearing contended that their overtime claim was a state law issue pursuant to the Ninth Circuit's recent opinion in Cramer v. Consolidated Freightways, Inc., 255 F.3d 683 (9^th Cir. 2001) and, thus, exempt from arbitration under the CBA. In Cramer, the Ninth Circuit stated that a state law claim is preempted if "it necessarily requires the court to interpret an existing [CBA provision] that 'can reasonably be said to be relevant to the resolution of the dispute.'" Here, the Ninth Circuit found that plaintiff's claim for overtime pay under state law could not be decided simply by referring to the unambiguous terms of the agreement. Rather, enforcement of the agreement would depend upon which party's interpretation of the CBA was accepted. Because the plaintiff's state claims were inextricably intertwined with the meaning of the terms in the CBA, they were preempted by federal labor law.

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Seventh Circuit Holds That Salts May Lie On Their Job Applications, But Not About Job Ability

In Hartman Brothers Heating and Air Conditioning, Inc. v. NLRB, 728 D.L.R. E-1 (2/6/02)⁽⁸⁾, the United States Court of Appeals for the Seventh Circuit addressed an issue left open by the United States Supreme Court in its decision in NLRB v. Town & Country Electric, Inc., 516 U.S. 85 (1995) - whether a salt can be terminated for lying on his employment application. Enforcing an order of the National Labor Relations Board ("NLRB"), the Seventh Circuit found that a salt may lie on an employment application about his union status or union organizing objective, but not about his job qualifications.

The term "salting" describes a practice whereby a union inserts its organizers into an employer's work force to attempt to organize it. In a prior United States Supreme Court case, NLRB v. Town & Country Electric, Inc., 516 U.S. 85 (1995), the Court held that salts are employees within the meaning of the NLRA, a status that renders a decision to fire or refuse to hire an otherwise qualified salt because of their union status as an unfair labor practice. In the instant case, Starnes applied for a job with Hartman Brothers Heating and Air Conditioning, Inc. Starnes stated on his job application that he had been laid off by a previous employer where he had been paid $11.00 an hour when, in truth, he had taken a leave of absence to try to organize Hartman. The job for which he applied required him to operate a vehicle and he represented on his application that he had only one speeding ticket. When the company hired him, Starnes immediately told Mr. Hartman that he was a union organizer and intended to organize the company, whereupon Hartman told him to leave the work place, but did not discharge him. A few hours after Starnes had been ordered off the premises, the company's insurer called to advise that their check of Starnes' driving record was negative and showed that he had two, not one, speeding tickets. Starnes was immediately discharged.

The Seventh Circuit concluded that a salt may lie on the application "if the lie concerns merely his status as a salt, union organizer or union supporter and not his qualifications for the job." A lie about an applicant's union status is not material to the hiring decision because, as Town and Country held, an employer cannot turn down a job applicant just because he is a salt or other type of union organizer or supporter. The court also addressed an Indiana statute that makes it a crime for a person to knowingly or intentionally make a false or misleading statement to obtain employment. The court stated that if the statute was interpreted to entitle an employer to turn down a job application because an applicant lies about his salt status, the statute would be preempted by the National Labor Relations Act "because it would interfere with union organizing activity without any justification consistent with the Act." The court also affirmed the Board's decision not to reinstate Starnes because his discharge was done pursuant to a company policy and applied to all applicants regardless of an applicant's attitude toward unions.

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1. This decision was reported in our Friday Morning Update of December 14, 2001.

2. Opinion by Acting P.J. Johnson; J. Woods and J. Perluss concurring.

3. Opinion by J. Gant; J. Hollenhorth and J. Richli concurring.

4. Opinion by acting P. J. Haller; J. McDonald and J. McIntyre concurring.

5. Opinion by J. Sills; J. Rylaarsdam and J. Moore concurring.

6. Opinion by J. Reinhardt; J. Hawkins and J. Rawlinson, concurring.

7. Opinion by C.J. Schroeder; J. Beezer and J. Graber concurring.

8. Opinion by J. Posner; J. Bauer and J. Evans concurring.

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