2004-16

Inducing the termination of an at-will employment relationship may be actionable.

Reeves v. Hanlon, 2994 DAR 9991 (Cal. August 12, 2004)

In a case handled by the firm's own John Manier, the Supreme Court has ruled that inducing an at-will employee to terminate his employment relationship may be actionable under tort theory of intentional interference with prospective economic advantage.

Reeves formed his immigration law firm in 1980. He hired Hanlon and Greene as attorneys in 1995 and 1997, respectively. In early 1999, Hanlon and Greene covertly schemed to depart Reeves's firm without notice or warning, disrupt the firm's operations and divert business to their own new firm. They submitted their sudden resignations on June 30, 1999.

While still employed by Reeves's firm, Hanlon and Greene committed several acts of misconduct and disloyalty. These included downloading and printing the firm's secret list of over 2,000 clients; intentionally destroying multiple client documents and form files in the firm's computer system; and fomenting discontent among co-employees by various means, including the instigation of numerous meritless employee complaints about the firm to state and federal agencies. After leaving, Hanlon and Greene wrongfully withheld many items of firm property, including a BMW the firm had leased for Hanlon's use.

At the time of their resignations, Hanlon was responsible for over 500 active client matters, and Greene was the firm's litigation chairman. Despite admittedly owing fiduciary duties to Reeves's firm, Hanlon and Greene left without providing any status reports or list of matters or deadlines regarding these pending cases.

The night they left, Hanlon and Greene began soliciting several former co-employees to "jump ship." Over the next 60 days, nine employees left Reeves's firm, including six key staff members who defected to Hanlon & Greene.

In addition, Hanlon and Greene used the firm's trade secret client list to telephone and directly solicit scores of clients to shift their business, without even offering them a choice of counsel. They also mailed business announcements which did not mention Reeves's continuing legal practice and confused some clients ? many of whom were not fluent in English ? into believing that the firm was defunct or that Reeves had died (1). Reeves's firm lost 144 clients to Hanlon & Greene as a result of this unlawful solicitation campaign, vastly exceeding the firm's low client attrition rate. The firm was forced to conduct an expensive mail campaign to reassure clients the firm remained able to provide them legal services.

Reeves sued Hanlon, Greene and their law firm, asserting 14 causes of action, including intentional interference with contractual relationships, interference with prospective business opportunity, conspiracy to interfere with prospective economic advantage, misappropriation of confidential information in violation of the Uniform Trade Secrets Act, unauthorized use of a corporate car, and destruction of corporate property.

In a bench trial, the court found in favor of Reeves, and awarded $182,000 (later reduced to $150,000 pursuant to a stipulated damages cap). The Court of Appeal affirmed on all substantive issues, but reversed on an issue related to a Motion to Tax Costs. Defendants appealed to the Supreme Court.

At issue before the Supreme Court was the appellate court's conclusion that "an employer may recover for interference with the employment contracts of its at-will employees by a third party when the third party does not show that its conduct in hiring the employees was justifiable or legitimate."

Historically, the Court found, California has recognized that a third party's interference with an at-will contract is actionable interference with the contractual relationship because the contractual relationship is at the will of the parties, not at the will of outsiders. Significantly, the Court held:

"Where no unlawful methods are used, public policy generally supports a competitor's right to offer more pay or better terms to another's employee, so long as the employee is free to leave."

The Court also held:

"The interests of the employee is his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change."

The High Court held that an employer may recover for interference with at-will employment contracts under the same standard that applies to claims for interference with prospective economic relations. The plaintiff-employer must prove the defendant committed an independently unlawful act which induced the at-will employee to resign. The court stated this standard not only will "guard against unlawful methods of competition in the job market," but also "will promote the public policies supporting the right of at-will employees to pursue opportunities for economic betterment and the right of employers to compete for talented workers." The Court emphasized that it is not unlawful to merely solicit or hire "the at-will employee of another."

In affirming the damage award for interference with at-will relations, the court cited undisputed evidence "that Hanlon and Greene engaged in unlawful and unethical conduct in mounting a campaign to deliberately disrupt plaintiffs' business." These actions "crippled plaintiffs' business operations and caused plaintiffs' personnel to terminate their at-will employment contracts."

The Court also affirmed the judgment for plaintiffs on their claim for misappropriation of trade secrets. The Court had "no quarrel" with defendants argument that a mere announcement of a new business affiliation, without more, does not violate the Uniform Trade Secrets Act. However, the Court found the evidence supported the trial court's findings that the defendants used "the trade secret client data in an improper manner ?to directly solicit clients' and for defendants' ?own pecuniary gain to the detriment and damage of' plaintiffs." The court thus implicitly found that a law firm's client list may qualify as a protected trade secret.

This decision sets a major nationwide precedent for claims for interference with at-will contracts in general, and for lawyers leaving a law firm in particular. In the court's words, it "strike[s] the proper balance between society's interest in fostering robust competition in the job market and its interest in protecting against unlawful methods of competition."

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Recent amendments to FEHA are just that ? amendments ? and not clarification of existing law

Carter v. California Department of Veterans Affairs, 2004 Cal.App. Lexis 1350 (August 17, 2004).

Upon remand from the Supreme Court, the California Court of Appeal for the Fourth District has held that the 2003 legislation holding employers liable for failure to prevent sexual harassment by clients and customers created new law rather than clarified existing law. The Court found that an employer is not liable for alleged failure to prevent sexual harassment of its employees by its clients and customers unless such harassment occurred on or after the effective date of new legislation, and that while the Legislature clearly intended that amendments be retroactive, such application would violate substantive due process (2).

Plaintiff was a nurse at a Department of Veterans Affairs facility. She brought an action a alleging hostile work environment created by one of the patients at the facility (3). After a trial on the issues of sexual harassment and retaliation, defendant brought a Motion for a Judgment Notwithstanding the Verdict on the basis that the FEHA does not impose liability on an employer for harassment by third parties. The trial court denied defendant's Motion, and held that an employer may be liable for third party harassment (4). Defendant appealed. The first time the case was before the Court of Appeal, it reversed the judgment, holding that the FEHA did not impose liability for harassment by third parties. The Supreme Court granted review, and then the Legislature enacted legislation purporting to clarify ambiguities in the existing law. The Supreme Court remanded the case for reconsideration in light of the new legislation.

The Court found that the question of whether an employer was liable for third party harassment under the FEHA was one of statutory construction, and therefore was subject to review de novo. Plaintiff argued that the uncodified pre-amendment preamble to the FEHA stated that the legislative intent of the FEHA was, inter alia, to provide an environment free from harassment by agents, administrators and supervisors, as well as by nonsupervisors and clientele. In contrast, the employer pointed to the codified language of the statute, which only imposed liability for harassment by agents and supervisors, and by other employees if the employer knew or reasonably should have known of the harassment by another employee and did nothing about it. The Court found that the FEHA "does not appear to impose liability for harassment . . . on an employer/entity for failing to take corrective action as to any harasser except another (nonsupervisory) employee."

In reaching its conclusions, the Court did a virtual line-by-line analysis of portions of the pre-amendment FEHA. It also examined the legislative history of the Act. It found that, "the legislative history of 1984 amendments to former section 12940 showed that the Legislature had rejected a proposed amendment which expressly would have made an employer or other entity liable for harassment by clients or customers. This legislative history still supports the conclusion that employers and other named entities are generally not liable for harassment committed by clients." Thus the Court found that the pre-amendment FEHA did not impose liability for harassment by third parties. It next turned its attention to the 2003 amendments to the Act.

In the amendments, the Legislature declared that it was its intent that they "construe and clarify the meaning and effect of existing law, and to reject the interpretation given to the law in Salazar v. Diversified Paratransit, Inc. (2002) 103 Cal.App.4th 131." Having already found that the pre-amendment FEHA did not impose liability for third party harassment, the Court next examined whether the new law could create liability on a retrospective basis.

A statute is said to operate retrospectively if it substantially changes the legal consequences of past events. When a statute merely clarifies existing law, it is deemed not to operate retrospectively, even if applied to cases pending at the time of its enactment. This is because there has been no change to the true meaning of the statute. Statutes will only operate retrospectively if the Legislature specifically intends them to so operate. The Court found that the Legislature did not expressly declare that the amendment was to apply retrospectively. Despite the Legislature's failure to expressly declare retrospective application, the Court found that "the circumstances of the enactment here indicate a plain intent that, even if the amendment cannot be deemed declaratory of existing law, the Legislature nonetheless meant it to apply retroactively to this case; the amendment specifically states that its purpose is to alter the result in Salazar I, a parallel case. The statement itself that the amendment clarifies or declares existing law obviously is indicative of a legislative intent that the amendment apply to all existing causes of action from the date of its enactment . . ." The Legislative intent is not unfettered, however, as it is constrained by the Constitutionally guaranteed right to due process.

In this regard, the Court cited Bank of America v. Angel View Crippled Children's Foundation, (1999) 72 Cal. App.4th 451, 458-459, for the proposition that "[w]hen a legislative body clearly intends a statute or ordinance to operate retroactively, that intent must be enforced unless retroactivity is barred by constitutional constraints. Of course, a statute cannot be retroactively applied to the detriment of due process. A retroactive statute generally offends due process by impairing a contract or a vested property right with insufficient justification." With that analytical framework as a backdrop, the Court found that:

"[A]pplying the amendment retroactively is constitutionally objectionable. Constitutional considerations of due process require that citizens be apprised of laws affecting their conduct. Here, the import of the amendment is to impose substantial new obligations on employers, and to impose such liability, without clear notice, for conduct which was already completed in the past. Not only does the amendment impose new and significant liabilities for already-completed acts, it also does so in a way which is unfair to both employers and their employees."

The Court ultimately held that apply to the amendments retrospectively would violate due process, and wrote:

"To prevent fundamental unfairness of all these kinds ? imposition of substantial new liabilities without due notice, unequal treatment of employees, and unequal treatment of employers ? we conclude the amendment cannot constitutionally be applied retroactively to this case. If it is applicable at all, its effect must be prospective only."

Thus, at least according to this Court, the recently enacted legislation applies on a going-forward basis only.

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Public employee not required to exhaust administrative remedies for FEHA-related nonstatutory claims

Williams v. Housing Authority of the City of Los Angeles, (Cal.App., August 12, 2004)

The Court in Williams was asked to decide an issue left open in Schifando v. City of Los Angeles, (2003) 31 Cal.4th 1074 ? namely, whether a public employee is required to exhaust administrative remedies for FEHA-related nonstatutory causes of action. As set forth below, the Court ultimately concluded that exhaustion is not required when resolution of FEHA-related nonstatutory claims would have a preclusive effect on the FEHA claims (5).

Williams was employed by the Housing Authority of the City of Los Angeles ("HACLA"). He received a subpoena on short notice, compelling him to testify at an unrelated civil action. He was initially told he could attend the hearing in compliance with the subpoena. On the day before his scheduled appearance, however, HACLA's attorney told Williams he could not attend. Williams disregarded that directive, and went to the hearing.

Following his disregard of the attorney, Williams received a "Notice of Intent to Discharge" arising out of, among other things, his insubordination for failing to follow the attorney's advice. He ultimately was not discharged, but was instead demoted from print-shop supervisor to residence cleaner. He did not report to his new assignment, and was then terminated.

Williams initially sought to invoke the City's internal procedures with regard to appealing the actions taken concerning his employment. He later abandoned that appeal and proceeded with his lawsuit. He alleged three cause of action: Wrongful Demotion in Violation of Public Policy, Constructive Termination in Violation of Public Policy, and Retaliation in Violation of the FEHA (6). The demotion and termination causes of action were based upon actions taken by the City as a result of his failure to follow the attorney's advice. The FEHA cause of action alleged the City's conduct was retaliatory. HACLA demurred on the basis that plaintiff failed to exhaust his administrative remedies. After two "bites at the apple," the Court ultimately sustained the demurrer, without leave to amend. Williams appealed.

After reviewing the rationale behind requiring public employees to exhaust administrative remedies, the Court ultimately concluded:

"[W]here a FEHA-related nonstatutory claim, if unsuccessfully pursued to exhaustion in administrative proceedings, would have a preclusive impact on a FEHA claim, Schifando requires that it must also be exempt from the exhaustion requirement. . . . A contrary holding would impair a public employee's right to pursue a FEHA related claim because the administrative process might result in a finding that has a preclusive effect on the FEHA claim."

To illustrate the problem if it were to hold otherwise, the Court cited to a hypothetical situation where an employee contends he was subject to race discrimination under the FEHA, and was also terminated in violation of public policy, with the public policy being the FEHA's proscription against race discrimination. If, in those circumstances, the employee were required to exhaust his internal administrative remedies on the public policy claim, the result of the administrative process would necessarily have an impact on his pursuit of the FEHA claim both in the FEHA's administrative scheme and in court.

In the Williams case, the Court ultimately concluded that Williams was required to exhaust his internal remedies with regard to the termination and demotion causes of action, because those were related to his refusal to follow the attorney's advice regarding the subpoena, and were not related to his retaliation cause of action under the FEHA.

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Ministerial exception precludes pastor's reasonable accommodation.

Werft v. Desert S.W. Annual Conf. of the United Methodist Church, 2004 U.S. App. Lexis 15773 (9th Cir., July 30, 2004)

Pastor Werft of the Vista de la Montana United Methodist Church claimed that, despite his disabilities, he could perform the essential functions of his job with minor accommodations. The Church balked, and forced him to resign. Werft brought an action seeking damages and reinstatement, claiming the Church's conduct violated the ADA, Title VII and Section 503 of the Rehabilitation Act. The Church moved for summary judgment based on the ministerial exception. Werft argued that, even if his constructive discharge was not actionable due to the exception, the failure to accommodate was. The District Court granted summary judgment on the basis that the ministerial exemption relieved the Church of its obligation to accommodate Pastor Werft. Plaintiff appealed.

In upholding the District Court's decision, the Ninth Circuit found that not only does the ministerial exception apply to hiring and firing decisions, but also to decisions regarding reasonable accommodation. "The ministerial exception does not apply solely to the hiring and firing of ministers, but also relates to the broader relationship between an organized religious institution and its clergy . . . ," the Court wrote. It went on to hold, "a minister's working conditions and the church's decision regarding whether or not to accommodate an minster's disability, are a part of the minister's employment relationship with the church." On that basis, the Court found summary judgment in favor of the Church was proper.

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Transsexualism not protected by Title VII, but discrimination against cross-dressing may be prohibited sexual stereotyping .

Smith v. Salem, 2004 U.S. App. LEXIS 16114 (6th Cir., August 5, 2004)

The U.S. Court of Appeals for the Sixth has issued an amended decision in the case of a Salem, Ohio firefighter with Gender Identity Disorder. The male firefighter had self-identified as a transsexual, and had begun to manifest outward signs of femininity, though he had not undergone gender reassignment surgery. The District Court granted the City's Motion for Summary Judgment on the basis that Title VII does not protect transsexuals.

In its Order, the Sixth Circuit found that although transsexualism is not a protected category under Title VII, sexual stereotyping was actionable under the law (7). The Court, wrote, " After Price Waterhouse, an employer who discriminates against women because, for instance, they do not wear dresses or make-up, is engaging in sex discrimination because the discrimination would not occur but for the victim's sex. It follows that employers who discriminate against men because they do wear dresses and make-up, or otherwise act femininely, are also engaging in sex discrimination because the discrimination would not occur but for the victim's sex."

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1. Hanlon and Greene disregarded Formal Opinion No. 1985-86 of the State Bar Standing Committee on Professional Responsibility and Conduct, which states that departing lawyers should cooperate with their former employers to provide joint notices to clients.

2. This case will no doubt be applauded by our friends and clients at LAUSD, which took a $4.35 million judgment in 2002 after a jury found it liable for failing to stop the sexual harassment of a teacher by her students. That case is currently up on appeal, and awaiting a decision following oral argument.

3. The facts recited in the case are rather lengthy, and do not bear repeating here. In essence, however, one of the facility residents began making remarks to plaintiff such as "you've got nice breasts," or "you've got a nice ass" after he received a penile implant and while plaintiff was caring for him following surgery. (Query why our tax dollars are being used for penile implants, but that's a discussion for another day.) The patient also asked plaintiff to sleep with him, and chased her around the facility with his scooter.

4. The Court had previously denied a Motion for a Directed Verdict on the same basis.

5. The Supreme Court in Schifando held that a public employee is not required to exhaust internal administrative remedies with regard to FEHA claims.

6. The decision does not specify the specific basis for the retaliation cause of action.

7. In its original decision, the Court found that transsexualism was covered by Title VII. In its amended decision, the Court deletes that conclusion, but still finds that the employer's conduct actionable under Title VII.