2006-16

Ninth Circuit Revives $256,000 Jury Verdict For Officer Alleging Discrimination And Constructive Discharge Related to His Military Service.

In Wallace v. City of San Diego, 2006 DJDAR 2024 (9th Cir. Aug. 25, 2006)(1), the Ninth Circuit reinstated a jury verdict in favor of a San Diego police officer who claimed that he was constructively discharged from his position because of discrimination under the Uniformed Services Employment and Reemployment Rights Act, 38 U.S.C. ?? 4301 et seq. (USERRA), even though he was given a favorable transfer shortly before he quit the force.

Plaintiff James Wallace joined the San Diego Police Department in 1975 and was promoted to sergeant in 1984, two years after he became an officer in the Naval Reserve. In 1991, Wallace was called to active duty and served seven months in Operation Desert Storm. Following his return to the police department from military service, Wallace applied numerous times for promotions beyond the level of sergeant, but was never considered.

After serving several additional tours of military duty from 1994 to 1996, Wallace alleged that he received an undesirable assignment by the SDPD with reduced responsibilities at a division that was far from his home. Wallace argued that the assignments were evidence of discriminatory animus since his seniority should have qualified him for more favorable postings.

In December 1996, after serving 97 additional days of active duty, he returned to the SDPD and was assigned to report to Police Lieutenant Jorge Guevara. Shortly thereafter, the department launched an investigation questioning Wallace's conduct with a female officer. Three days after Wallace left again for military duty, Guevara issued Wallace a reprimand and disciplinary transfer.

Later that year, Wallace investigated a complaint about a subordinate officer, James Needham. Guevara was unhappy with the report and asked for a number of changes. Wallace was unable to complete the report because he was called for an extended tour of active duty. Prior to leaving on his military leave, Wallace gave his draft report and investigative materials to Needham (the officer being investigated), in violation of SDPD regulations. Wallace claimed to believe Needham had a right to see a copy of the report, and that this purported right trumped department regulations.

After returning from active duty, Wallace faced an investigation and disciplinary proceedings relating to his conduct in giving Needham a copy of the report. He also received an annual performance review that resulted in a "below standard" evaluation, the first in his career. Due to this unfavorable evaluation, Wallace was placed on a 90-day supplemental performance review. However, because he was once again on military leave, Wallace did not get the supplemental review before his next annual evaluation in 1998, where he was again given a "below standard" based primarily on the investigation from the previous year.

In August 1999, after Wallace had been away on military leave for over four months, and at the time his tour was extended for a further 60 days, Guevara initiated an investigation of Wallace for teaching at the police academy on his day off without approval. In the same disciplinary package, Guevara initiated disciplinary action for Wallace's failure to provide documentation from his naval reserve commanding officer that he had attended his weekend drills.

While still on military leave, Wallace received notice that a disciplinary investigation had begun over his alleged failure to notify the department about the leave. When he returned from duty and a military leave at home, he learned that he had been called to Bosnia and was to report immediately. Because Guevara was not in his office, Wallace left the military leave notice with Guevara's assistant. Guevara, however, refused to approve the leave request, purportedly for Wallace's failure to formally notify the department of his whereabouts. Guevara later admitted he did not have the authority to disapprove the leave request.

Shortly before Wallace returned from Bosnia in March 2000, Guevara began termination proceedings against him based upon three disciplinary complaints filed while Wallace was away on active duty. An assistant police chief later rescinded the termination, and granted Wallace a favorable transfer to a station near his home with increased responsibilities, effective July 1, 2000. Wallace welcomed this transfer, primarily because it meant he no longer would be working under Guevara.

On August 17, 2000, Wallace received yet another "unacceptable" performance appraisal from Guevara for the previous year and was placed on another 90-day supplemental performance review. The following month, Wallace investigated a citizen's complaint against one of Wallace's officers. The citizen, who Wallace described as mentally unbalanced, threatened to file a discrimination complaint against Wallace if he refused to substantiate the citizen's complaint against the officer. On October 10, 2000, more than one month before the expiration of his latest supplemental performance review, Wallace resigned.

At trial in the U.S. District Court for the Southern District of California, a jury found that Wallace's resignation constituted a constructive discharge and that this, and a number of the city's other adverse employment actions, were undertaken in retaliation for exercising his rights as a military reservist. The jury awarded damages of $256,800. However, the District Court set aside this verdict and granted the SDPD's motion for judgment as a matter of law on the basis that Wallace's favorable transfer sufficiently reversed any previously discriminatory action taken by the SDPD and negated his ability to succeed on his USERRA claim.

The Ninth Circuit reversed the District Court's decision, holding that Wallace's transfer did not necessarily negate the alleged USERRA discrimination he experienced relating to his military service in Desert Storm and Bosnia. In the Ninth Circuit's view, a jury could reasonably find that the favorable transfer did not adequately repair the discriminatory conduct. "The jury could have concluded that a reasonable person in Wallace's position legitimately would have feared being subjected to such proceedings again, and that the potential for such retaliatory conduct was high."

The court stated that although the transfer to a station near Wallace's home would appear to smooth the situation with his supervisor and department management, Wallace still lived under the threat that the transfer could be rescinded. "[A]lthough evidence of an improvement in working conditions supported a conclusion contrary to that reached by the jury, it did not require such a conclusion. Accordingly, the district court should not have usurped the jury's basic fact-finding authority, including the authority to weigh evidence and draw inferences from it." According to the court, the threat of future discrimination was magnified by the prior treatment, including unfavorable evaluations and disciplinary acts that were timed with this departure and returns from active duty with the Naval Reserves.

The court emphasized that while the evidence could have been viewed two ways, that did not mean that the jury's view of the evidence was wrong or inadequate. Saying that the evidence "did not compel" the jury to conclude that some of the conduct against Wallace was not discriminatory, the court said the evidence could be viewed in favor of Wallace's position:

Wallace presented evidence of a continuing pattern of hostile and discriminatory conduct that went largely unaddressed by the SDPD. This evidence was sufficient to permit the jury to conclude that the intolerable situation had not abated at the time of Wallace's resignation, and therefore, that a reasonable person in his position would have felt compelled to quit.

In his dissenting opinion, Judge Jay S. Bybee argued there was too much time between the last alleged act of discrimination and Wallace's resignation, and that the police department's decision to give him a favorable transfer demonstrated Wallace could not show that things were so bad that he had no other alternative but to quit:

The fact that Wallace's working conditions were favorable for three months before he resigned vitiates any claim he may have had for constructive discharge. Furthermore, the fact that SDPD had attempted to accommodate Wallace by transferring him to his desired work assignment, where Wallace admitted he enjoyed his work environment, establishes that Wallace was not being constructively discharged when he quit. The majority's assertion to the contrary belies the law of this circuit as well as California's law governing constructive discharge.

Bybee specifically disagreed with the majority's conclusion that federal law, rather than California law, governed Wallace's claim for constructive discharge.

Bybee argued that despite Wallace's "checkered past," the department was trying to accommodate his concerns when they transferred him to a more favorable assignment. These efforts should not be punished by allowing Wallace to get damages despite the department's efforts to make things better after some conflicts. "The majority has given Wallace a free ticket to complain at any time after the actions taken against him.... In effect, there was nothing SDPD could have done to correct the situation."

Bybee also said there was not enough evidence to support the "intolerable conditions" necessary to prove constructive discharge. Although there were complaints in his personnel file, those complaints were not enough to make Wallace's situation intolerable. According to Bybee:

Wallace cannot claim constructive discharge based on what he thinks his employer might do; an employer is responsible for its own actions and not for all the bad things an employee can imagine might happen. For an employee to succeed on a constructive discharge claim, the employer must be the party responsible for the employee's intolerable work environment.

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Exhaustion of Administrative Remedies Under Private Attorney General Act is Not Required Where the Penalties Sought are Recoverable Under Other Labor Code Provisions.

In Dunlap v. Superior Court, 2006 DJDAR 11490 (Cal.App. July 27, 2006) (published Aug. 28, 2006) (2), the California Court of Appeal (Second District, Division Three) permitted plaintiff Omar Dunlap to pursue his wage claims under various provisions of the Labor Code, even though he had not exhausted the administrative remedies required by the Private Attorney General Act of 2004, Cal. Labor Code ?? 2698 et seq. (PAGA).

Dunlap filed a first amended proposed class action complaint individually and on behalf of current and former Bank of America employees and the general public. The complaint sought damages and statutory penalties for various Labor Code violations, including overtime compensation (Labor Code ?? 510 and 1198), record keeping requirements (? 226(a)), immediate payment of wages upon discharge, layoff or resignation (?? 201 and 202), duty to pay wages semimonthly (? 204) and meal and rest period violations (? 512(a)). The complaint also alleged claims for conversion and theft of labor, and unlawful business acts and practices under Cal. Bus. & Prof. Code ? 17200.

Defendant Bank of America filed a motion to strike certain portions of the complaint on the ground that the trial court lacked jurisdiction over those claims since plaintiff had failed to exhaust the administrative remedies necessary for him to pursue penalties through the PAGA. The trial court agreed and granted the motion, but the Court of Appeal granted Dunlap's petition for a writ of mandate.

The appellate court looked to the legislative intent behind the PAGA. It concluded that the PAGA "was adopted to empower aggrieved employees ... [and] does not purport to be the exclusive remedy for addressing Labor Code violations." Thus, the court found that plaintiffs need not be constrained by the PAGA when simultaneously pursuing other Labor Code violations. The court quoted a portion of the PAGA (Labor Code ? 2699(g)(1)) which states: "Nothing in this part shall operate to limit an employee's right to pursue or recover other remedies available under state or federal law, either separately or concurrently with an action, taken under this part."

The court noted that the August 2004 amendments to the PAGA required the exhaustion of administrative remedies in certain situations. However, these remedies need not be exhausted when the statutory penalties sought by a plaintiff were recoverable prior to the existence of the PAGA. In the Dunlap case, the causes of action (and penalties sought therein) disputed by defendant's motion to strike would have been recoverable prior to the adoption of the PAGA. Thus, Dunlap was not required to comply with the PAGA's administrative prerequisites to filing suit. The defendant's motion to strike, previously granted by the trial court, was vacated and the trial court was directed to enter an new order denying the motion.

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California Court of Appeal Refuses to Overturn Arbitrator's Award Based on Alleged Failure To "Correctly" Apply California Law, And Upholds Post-Arbitration Order Adding Another Company As Judgment Debtor On "Alter Ego" Theory.

In Baize v. Eastridge Companies, 2006 DJDAR 11430 (Cal.App. Aug. 25, 2006)(3), the California Court of Appeal upheld the trial court's refusal to vacate an arbitrator's award, holding that the arbitrator followed the requirements of the arbitration agreement by applying California law, even though he arguably applied that law incorrectly. The appellate court also affirmed the trial court's order amending the judgment to add as a defendant another corporation which was allegedly an alter ego of the named defendant.

Defendant The Eastman Companies, LLC ("TEC") hired plaintiff Jeffrey Baize to create business models for so-called "public/private" education projects. Essentially, Baize would create the financial outlook and planning for school pilot projects during the planning phases. The parties agreed that Baize would receive, as part of his compensation package, an ownership interest in any of the entities created for the projects he developed.

In 2003, Baize obtained a contract to develop a school. However, rather than create a new entity in which Baize would have an ownership interest, TEC elected to assign the project to an already-existing TEC entity. It became quickly evident to Baize that TEC intended to use its existing entities in a similar manner for most projects planned by Baize. As a result, the relationship between Baize and TEC deteriorated considerably thereafter until, ultimately, TEC terminated Baize.

Baize sued TEC, alleging that he was entitled to the compensation he was denied by not having been granted an ownership interest in the school project. The parties ultimately agreed to submit the matter to binding arbitration pursuant to a written arbitration agreement. This agreement contained the following clauses:

(1) "The Arbitrator shall have the authority of a sitting judge with respect to handling this matter and shall apply California law."

(2) "The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state of California, as applicable to the issues presented in this case. The arbitrator is without jurisdiction to apply any different substantive law or the law of remedies."

(3) "Notwithstanding any provision to the contrary that may be contained in the Rules [which were not further specified], the Arbitrator shall be constrained by the rule of law and any arbitration award shall be based thereon."

After a 10-day arbitration, the arbitrator awarded Baize $894,479 plus prejudgment interest and costs. When Baize sought to confirm the arbitration award, TEC moved to vacate the award. TEC claimed that the arbitrator exceeded his authority because the arbitration agreement specifically provided that the arbitrator only had jurisdiction to apply California law. TEC believed that an improper application of California law was an act in excess of the arbitrator's jurisdiction and therefore subject to court review. The trial court disagreed and confirmed the award, stating that it lacked jurisdiction to overturn the arbitrator's decision on the merits. The trial court also granted Baize's motion to amend the judgment by adding TECLA Development Corporation as an "alter ego" debtor of TEC. TEC and TECLA appealed, but the Court of Appeal affirmed.

Arbitration Awards Generally Are Not Reviewable For Errors Of Fact Or Law

As the court noted, absent extreme circumstances, an arbitrator's award will not be overturned by a court, since a court's refusal to do so "... vindicates the intentions of the parties that the award be final and because an arbitrator is not ordinarily constrained to decide according to the rule of law." In Baize, the arbitration agreement expressly limited the arbitrator to the application of California law, but it did not expand the scope of judicial review. This was a critical distinction. The court followed the principle that "judicial review [is] barred under the arbitration agreement specifically provided for expanded judicial review." (Italics in original.)

The court also drew a distinction between the arbitrator's purported incorrect application of California law versus a refusal to apply California law. While the arbitrator might have incorrectly applied the law, there was no evidence to show that he failed to apply California law itself as required by the arbitration agreement. Thus, the court concluded that the arbitrator's decision was not subject to review since there was no suggestion that the arbitrator purported to apply any law other than that of California. On that basis, the court refused to overturn the trial court's rejection of TEC's motion to vacate the arbitrator's award.

TECLA Was Properly Joined As A Debtor On An "Alter Ego" Theory

Defendants also argued that the trial court improperly permitted Baize to include TECLA as a joint debtor under an alter ego theory. Under this equitable doctrine, Baize had to prove there was: (1) a unity of interest and ownership such that the separate personalities of the corporations no longer exist; and (2) a resulting inequity of result if the acts are treated as belonging to one entity alone. Further, to add an additional judgment debtor, the joining debtor must have been "virtually represented" during the litigation process.

Defendants did not dispute that the trial court's alter ego finding was supported by substantial evidence. Instead, they argued that the trial court improperly based its finding solely on common ownership. However, the appellate court concluded that the trial court's findings were based on much more than "common ownership, officers and/or directors." Indeed, the evidence showed that the two entities shared employees, the same offices, and the same attorneys. Additionally, the businesses' accounting entries showed that revenue profits were freely shifted between TEC and TECLA for tax and corporate purposes, such that they would benefit the entities and their owners. Defendants ignored and failed to dispute this evidence. The Court of Appeal thus upheld the trial court's decision to include TECLA as a joint debtor.

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1. Opinion by Browning, J., joined by Fisher, J. Dissent by Bybee, J.

2. Opinion by Klein, P.J., joined by Croskey and Kitching, JJ.

3. Opinion by Croskey, J., joined by Klein, P.J. and Kitching, J.