MCLE Article and Self-Assessment Test
The U.S. Supreme Court has accepted, but limited, the role of after-acquired evidence in wrongful termination cases
By James C. Martin and Paul D. Fogel
With growing frequency, employers are justifying their termination decisions by relying on employee misconduct that the employer learns about only after the employee's termination—through discovery in the employee's lawsuit charging wrongful termination or unlawful employment discrimination. While most federal courts have long agreed that material evidence of such misconduct is admissible in an employment termination lawsuit, until last year there was a split of authority among the circuits on the scope of its permissible use. Some circuits found the evidence barred a wrongful termination claim altogether, while others held that such evidence served only as a limit on the employee's potential relief. The one California appellate court to face the issue avoided the controversy by finding, under the unique facts and claims raised, that such evidence was irrelevant—and by declining to offer a blanket rule (or limitation) in future cases.
Last year, in McKennon v. Nashville Banner Publishing Co., the United States Supreme Court sought to resolve the conflict among the federal circuits over the permissible uses of "after-acquired" evidence of employee misconduct. McKennon held that such evidence is generally not a defense to liability but can serve to limit the employee's recovery. The Court did not explain how after-acquired evidence should be treated in every situation, however, leaving that task to the lower courts in future cases.
California courts of appeal and the Ninth Circuit now have considered the import of after-acquired evidence in McKennon's wake. These decisions illustrate that while McKennon has created some uniformity in how federal courts use this evidence, it has not limited the discretion exercised by California's state courts. Rather, California's courts are continuing to look at the use of this evidence on a case-by-case basis, with the facts in controversy establishing whether the evidence will affect the employee's right to pursue a wrongful termination action or merely limit the available remedy.
Before McKennon, courts wrestled with whether they could rely on after-acquired evidence at all and, if so, for what purpose: as a complete defense to an employee's wrongful termination action, or merely as a limitation on the employee's recovery.
The analytical starting point for much of the federal law dealing with these issues was the Tenth Circuit's 1988 opinion in Summers v. State Farm Mutual Automobile Insurance Co., an age discrimination case. Summers involved an employer who discovered 150 instances of an employee's falsification of company documents, most of which the employer learned about after terminating the employee for other reasons, and any one of which would have justified termination if known before termination. Analogizing to a discharged doctor whom the employer later discovers is no doctor at all, the Tenth Circuit concluded that it would be "utterly unrealistic" to ignore the misconduct discovered after termination, and upheld summary judgment for the employer.
Four years later, the Sixth Circuit, following the reasoning in Summers, held in Johnson v. Honeywell Information Systems, Inc., that an employer was entitled to summary judgment on claims for wrongful discharge and violation of state civil rights because the employee misrepresented her education and employment experience on her application. The employee falsely claimed she had a college degree, exaggerated her job responsibilities, and claimed to have worked for herself managing her property when, in fact, she owned none. Even though the employer did not learn about these misrepresentations until the discovery stage of the lawsuit, the court determined under Michigan law that "just cause for termination of employment may include facts unknown to an employer at the time of dismissal, though obviously such facts would be neither the actual nor inducing cause for the discharge."
The court then found that because the misrepresentations indisputably were material, the employer was entitled to summary judgment, even if the employer had unlawfully terminated her. This was so even though the employee had received positive performance reviews for seven of the eight years she was on the job.
These pre-McKennon cases resolved the probative value of after-acquired evidence by looking at the materiality of the misconduct. If the misconduct would have prompted the employee's termination during the employment or, in the case of resume fraud, if the employer relied on false information to hire an applicant whom the employer otherwise would not have hired, then the evidence of misconduct was relevant and provided a complete defense to liability.
The materiality requirement thus prevented an employer from "combing a discharged employee's record for evidence of any and all misrepresentations, no matter how minor or trivial, in an effort to avoid legal responsibility for an otherwise impermissible discharge." This materiality safety net also guaranteed that a court would not grant judgment for the employer unless the after-acquired evidence itself would have constituted good cause for discharge.
The Seventh and Eleventh circuits, however, took a different tack. These courts did not consider after-acquired evidence of employee misconduct dispositive but deemed it relevant to the scope of the employee's potential relief. For example, in Smith v. General Scanning, Inc., the Seventh Circuit reasoned that such evidence was irrelevant to the lawfulness of the termination but was "highly relevant" to the available remedies. The court suggested that after-acquired evidence would not bar back pay up to the date on which the employer discovers the employee's fraud or misconduct, but would bar reinstatement, "front pay," and injunctive relief: "[I]t would hardly make sense to order Smith reinstated to a job which he lied to get and from which he properly could be discharged for that lie."
A sharply divided panel of the Eleventh Circuit followed the reasoning in Smith in Wallace v. Dunn Construction Co., Inc., adding that an employer can also escape liability for some back pay if it would have discovered the employee's fraud without the litigation and—even then—only for the period after which it would have been discovered.
California joined the fray in Cooper v. Rykoff-Sexton, Inc., with reasoning that headed in a different direction from either line of federal authority. In Cooper, Division Four of the Second District held that a dishwashing-equipment repairman's misrepresentations about the circumstances of his departure from two previous jobs more than 10 years before the events at issue were insufficient to warrant summary judgment for the employer in the employee's discrimination lawsuit. Summary judgment was not appropriate even though the employer submitted uncontroverted evidence that if it had known of the misrepresentations, the employee would never have been hired, and if it had discovered them during the employee's tenure, it would have terminated him for falsifying his application. The court of appeal nevertheless "decline[d] to adopt a blanket rule that material falsification of an employment application is a complete defense to a claim that the employer, while still unaware of the falsification, terminated the employment in violation of the employee's legal rights." As the court put it, "[a]utomatic forfeiture of all employment rights regardless of the circumstances can be too harsh a penalty in many cases." The court also declined to adopt the Seventh or Eleventh circuits' remedy-limiting approach, noting that the issue was not before it.
Thus, while Cooper declined to adopt a blanket rule permitting the use of post-termination evidence of an employee's resume fraud, the court did not prohibit an employer from using resume fraud as a defense to termination or as a limitation on the scope of recovery. On the facts before it, Cooper simply held that summary judgment on the basis of the after-acquired evidence was improper.
In McKennon, a 62-year-old, 30-year veteran of the Banner Publishing Company, sued the company for wrongful termination, claiming age discrimination under the Age Discrimination in Employment Act (ADEA). In discovery, the employee admitted that during her last year of employment, she had copied several confidential company documents bearing on the company's financial condition as "insurance" and "protection" in case she was ever discharged. The employer asserted that company policy gave it the right to discharge the employee for such misconduct and that, even though discovered after termination, the misconduct absolved the employer of all liability.
The Supreme Court disagreed, holding that although such after-acquired evidence does not immunize an employer from liability—a violation of the federal age discrimination statute cannot be "altogether disregarded"—it does affect the plaintiff's potential remedy. Invoking the equitable theory of unclean hands, the Court concluded that an employee's misconduct "must be taken into account...lest the employer's legitimate concerns be ignored." As a result, the "employee's wrongdoing becomes relevant not to punish the employee,...but to take due account of the lawful prerogatives of the employer in the usual course of its business and the corresponding equities that it has arising from the employee's wrongdoing." While the opinion interprets the ADEA, it draws from Title VII cases and equity principles.
McKennon did not explain how after-acquired evidence should be dealt with in every situation, preferring to leave that issue to be addressed "in the ordinary course of further decisions." It did suggest, however, that if the employer can establish that an employee's wrongdoing was of "such severity that the employee in fact would have been terminated on those grounds alone if the employer had known of it at the time of the discharge," and assuming proof of unlawful discrimination, equity generally permits the employee to recover only back pay "from the date of the unlawful discharge to the date the new information was discovered." Neither reinstatement nor front pay (nor back pay accumulated after the date when the misconduct was discovered) would be permissible. Under this rule, the employer has the burden of proving that it would have terminated the employee for the misconduct.
One of the first federal cases decided after McKennon immediately underscored the opinion's significance. In O'Day v. McDonnell Douglas Helicopter Co., the majority held that an employer only had to demonstrate by a preponderance of the evidence (rather than by clear and convincing evidence) that it could have and would have terminated the employee for misconduct the employer learned about after termination. Once the employer satisfies that burden, it may rely on such evidence—not to bar liability, as the district court had held—but to limit the employee's potential remedy. If the employee ultimately prevailed on liability, he or she could thus recover back pay from the date of the termination to the date that the employer learned of the wrongdoing, "as well as any other remedies not precluded under McKennon."
The O'Day majority also found that the employer met its burden on summary judgment based on a sworn affidavit of the company's human resources representative. Indeed, the court noted that the existence of company policy and employee testimony is "often the only proof an employer will have" on this issue. The majority nevertheless was compelled to reverse the grant of summary judgment, since the district court's finding that the after-acquired evidence of the employee's misconduct precluded liability was made pre-McKennon and was contrary to McKennon's holding.
McKennon, based on an interpretation of the ADEA and on equity principles, has obvious ramifications for employment actions brought under California common law (based on an express or implied contract or an alleged violation of public policy) or discrimination claims based on California's Fair Employment and Housing Act (FEHA). Significantly, the few California appellate courts that have considered issues related to after-acquired evidence have recognized McKennon's reasoning, but have not limited the use of the evidence to the employee's potential remedy.
For example, in Camp v. Jeffer Mangels, Butler & Marmaro, Division One of the Second District acknowledged the reasoning of the McKennon decision, but found that the after-acquired evidence of employee misconduct barred all liability. In Camp, a law firm hired two legal secretaries, a husband and wife, both of whom falsely stated on their employment applications that they had never been convicted of a felony. The law firm had a contract with the Resolution Trust Corporation (RTC) that required the firm to certify that no employee working on RTC matters had ever been convicted of a felony. The employees knew that the RTC imposed "certain fitness and integrity standards on all persons employed by the firm," and were told that their "truthful" completion of an employment application was a "condition of employment." The law firm later terminated the employees, allegedly because one of them had revealed to the firm's human resources director that one of the partners was engaging in "insider trading."
In affirming the summary judgment against the employees based in part on the post-termination discovery of the misrepresentations, Justice Masterson noted that "the nature of [their] misrepresentations and their potential detrimental impact on [the law firm] distinguish the case from prior decisions" such as Cooper. Unlike the dishwasher-repairman's misstatements in Cooper, the legal secretaries' misrepresentations "went to the heart of their employment relationship with [the law firm]," and to forbid the law firm from terminating them would thus place the firm in the "risky position of certifying to the federal government—inaccurately—that all of the firm's employees met the RTC's qualifications. [The employees] thus put [the law firm] not only in jeopardy of losing its contract with the RTC but also of being accused of making false statements itself." The misrepresentations also "relate[d] directly to [the employees'] wrongful termination claims" and meant that they were "not lawfully qualified" for their jobs. Thus, "[g]iven the nature of the misrepresentations, their potential damage to [the law firm], and the fact that [the employees] were disqualified from employment by means of government requirements, the public policies of the state are adequately served by barring [the employees'] claims and allowing them, if they so desire, to report [the law firm's] alleged wrongdoing to the appropriate authorities."
Since the employees indisputably were unqualified to serve as legal secretaries working on RTC matters, Camp's holding thus embodies the Tenth Circuit's hypothetical of the company doctor who is only masquerading as a doctor: if after-acquired evidence shows that the employee lacks the legal qualifications for the job, the evidence is a defense to liability.
Justice Miriam Vogel, also with Division One, took a narrower view of McKennon in Gonzalez v. Superior Court. Gonzalez was a sexual harassment case in which the employee, a female radio dispatcher for a local police department, alleged that male police officers had openly displayed photographs in the men's locker room of a "semi-nude woman" that bore a "striking resemblance" to the employee. After learning about the photographs and allegedly attempting to obtain them without success, the employee purportedly received them in an envelope. The police department strongly suspected that the employee or an "assistant"—a friend from the outside or another employee—had stolen the photographs from a detective/supervisor's file cabinet. The employee then refused to disclose who had given her the photographs—a refusal that violated departmental rules and subjected her to discipline—and continued to resist discovery requests on that subject, claiming privacy and a fear of retaliation.
After the trial court ordered the employee to disclose the identity of the person who gave her the photographs, the employee sought writ relief in the court of appeal. Division One upheld the trial court's disclosure order and denied the petition, noting the relevance of the evidence to the employee's credibility and the absence of any recognized privilege that prohibited its disclosure to the department. The court also noted that if the employee could establish sexual harassment, "evidence of [the employee's] misconduct (by her own theft or by encouraging her assistant's theft) would be admissible to limit the kind and quantity of damages recoverable in this action." The court appeared willing to accept the premise that the evidence would not of itself bar the action where the suit "'serves important public purposes'...."
Finally, in Hyatt v. Northrop Corp., the Ninth Circuit was called upon to decide how the California Supreme Court would treat the post-termination discovery of an employee's resume fraud in an employee's state-law action for wrongful termination in violation of public policy. In Hyatt, the employer discovered, after termination, that the employee had made false representations on his employment application regarding his employment history, an action that under company policy would have subjected the employee to dismissal. (The court did not disclose the nature of the misrepresentations.)
After reviewing Cooper and Camp, the Hyatt court held that "it appears that the California Supreme Court would make a fact-specific inquiry to determine whether [an employee] would be barred from recovering under the wrongful discharge statute [sic]." Turning to those "specific facts," the court noted that the employee had worked for the employer for almost five years with a satisfactory work performance. Because his misrepresentations on his resume did not "appear to have affected his work performance [and] did not cause any potential damage to [the employer]," the post-termination discovery of them did not bar his wrongful termination claim.
Addressing the issue of a remedy, the Ninth Circuit found that the employer was not entitled to limit the employee's back-pay remedy to the period between termination and the date on which the employer discovered the employee's resume fraud, noting that 1) the employer had failed to raise this issue in either its summary judgment motion or a proffered jury instruction; 2) the employer's post-trial motion, in which it did raise the issue, was untimely; and, in any event, 3) the district court "had no basis in the verdict on which to reduce [the employee's] recovery."
Hyatt is significant not only because it applies McKennon to a wrongful termination action based upon California common law, but because it follows Cooper, a pre-McKennon decision, and finds that wrongful termination in violation of public policy is at least as "serious" a "problem" as resume fraud. Hyatt also emphasizes the flexibility of the doctrine of after-acquired evidence under California law by predicting that the California Supreme Court would make a "fact-specific inquiry" to determine the applicability of McKennon in every case. In addition, Hyatt is rather demanding of employers who seek shelter under the theory of after-acquired evidence, requiring them to raise the argument in a timely fashion with an adequate factual basis, on pain of waiver.
At the same time, the Hyatt opinion is of limited use in analyzing the ramifications of the after-acquired evidence doctrine, because the court never disclosed the nature of the employee's misrepresentations. This lack of analysis stands in marked contrast to the opinion in Camp, where the prejudice to the employer from the misrepresentations was a principal focus of the court's analysis and, ultimately, the reason why it found the employer could avoid liability.
The handful of post-McKennon cases signals the continued importance of connecting the materiality of the employee's misconduct to his or her qualifications for the position and the impact that the misconduct—had it been discovered during employment—would have had in the workplace. In all likelihood, the Ninth Circuit in Hyatt correctly predicted how California courts will approach the issue: a fact-specific inquiry in every case. Camp also indicates a streak of independence, demonstrating that McKennon's seemingly outright ban on using after-acquired evidence as a complete defense will not always be the rule in this state.
While no pattern or trend in California's case law has yet developed, after-acquired evidence may still be urged, consistent with Camp, as a complete defense to a wrongful termination claim in cases involving significant misconduct that goes directly to the employee's qualifications. At the very least, consistent with McKennon, after-acquired evidence, if material, should affect the scope of the plaintiff's remedy.
In federal court, the outcome likely will depend on the nature of the case or controversy. Consistent with Hyatt, for diversity cases brought under California common law or the FEHA, relevant after-acquired evidence should have the same force and effect as it would in a California court. If the case is brought under the federal discrimination statutes, however, the impact of relevant after-acquired evidence, consistent with McKennon, generally will be limited to the plaintiff's available remedies.
- See, e.g., Summers v. State Farm Mut. Auto. Ins. Co., 864 F. 2d 700, 704-08 (10th Cir. 1988); Johnson v. Honeywell Info. Sys., 955 F. 2d 409, 412-16 (6th Cir. 1992).
- See, e.g., Smith v. General Scanning, Inc., 876 F. 2d 1315, 1319 & n.2 (7th Cir. 1989); Wallace v. Dunn Constr. Co., Inc., 968 F. 2d 1174, 1180-83 (11th Cir. 1992), reh'g granted en banc and opn. vacated, 32 F. 3d 1489 (11th Cir. 1994), new opn., 62 F. 3d 374 (11th Cir. 1995).
- Cooper v. Rykoff-Sexton, Inc., 24 Cal. App. 4th 614 (1994).
- McKennon v. Nashville Banner Publishing Co., 513 U.S.___, 115 S. Ct. 879, 130 L. Ed. 2d 852 (1995).
- Summers, 864 F. 2d 700.
- Id. at 708.
- Johnson, 955 F. 2d 409.
- Id. at 411-12.
- Id. at 412.
- Id. at 414-15.
- Id. at 414.
- Smith, 876 F. 2d at 1319 n.2.
- Id. Other cases from the Seventh Circuit followed Smith's approach. See, e.g., Kristufek v. Hussmann Foodserv. Co., 985 F. 2d 364, 369-71 (7th Cir. 1993) (no showing that misrepresentation would have caused termination, but court ordered downward modification of back-pay award "for time after the fraud was discovered").
- Wallace, 968 F. 2d at 1181-82.
- After the panel's opinion in Wallace, the Eleventh Circuit granted rehearing en banc and issued a new opinion last year that adhered to McKennon. Wallace, 62 F. 3d 374 (absent a showing of extraordinary equitable circumstances, the employee could be awarded only back pay, and even then only from the date of termination to the date the after-acquired evidence was discovered). Id. at 380.
- Cooper, 24 Cal. App. 4th 614.
- Id. at 618-19.
- Id. at 618.
- Id. at 617.
- Id. at 618.
- Id. at 619 n.1.
- Id. at 618.
- 29 U.S.C. §§621, et seq.
- McKennon, 115 S. Ct. at 883.
- Id. at 884-86.
- Id. at 886.
- 42 U.S.C. §§2000e, et seq.
- McKennon, 115 S. Ct. at 884-86.
- Id. at 886.
- Id. at 886-87. The Court recognized, however, that in formulating an appropriate order for relief, the district court may take "into account extraordinary equitable circumstances that affect the legitimate interests of either party." Id. at 886.
- Id. at 886.
- Id. at 886-87.
- O'Day v. McDonnell Douglas Helicopter Co., 79 F. 3d 756 (9th Cir. 1996).
- Id. at 761. Judge Betty Fletcher dissented on this point, chiding the majority for deciding the burden question when liability remained to be decided, and urging in any event the more rigorous standard of clear and convincing evidence for proof of materiality. Id. at 764-68 (Fletcher, J., concurring in part and dissenting in part).
- Id. at 764.
- Id. at 761-64.
- Id. at 764. Another panel of the Ninth Circuit reached a similar conclusion in a second post-McKennon decision brought under the ADEA, Schnidrig v. Columbia Machine, Inc., 80 F. 3d 1406 (9th Cir. 1996). The Schnidrig court reaffirmed that after-acquired evidence of a legitimate reason for the employee's discharge—the employee's unauthorized and impermissible copying and removal of confidential and personnel documents—affects the employee's remedy but is not a defense to liability. Unlike O'Day, however, Schnidrig did not discuss how the evidence of misconduct affected the employee's remedy but remanded for a trial on the employee's claim. Id. at 1412.
Two employment lawyers recently criticized both the O'Day and Schnidrig decisions for declining McKennon's invitation to define the proper boundaries for remedial relief in after-acquired evidence cases. See Angel Gomez III and Janette M. Redd, Raise The Banner: Summary Judgment After "O'Day" and "Schnidrig," Los Angeles Daily Journal, June 20, 1996, at 5, 7 (until courts take up McKennon's invitation and define those boundaries, summary judgment in most, if not all, after-acquired evidence cases will remain questionable).
- Gov't. Code §§12900, et seq.
- Camp v. Jeffer Mangels, Butler & Marmaro, 35 Cal. App. 4th 620 (1995).
- Id. at 627.
- Id. at 636. The court also read Cooper as having "left open the possibility that after-acquired evidence might bar recovery in some cases." Id. at 633.
- Id. at 637.
- Id. at 639.
- Id., citing Blain v. Doctor's Co., 222 Cal. App. 3d 1048, 1063-64 (1990) (barring legal malpractice claim on unclean-hands grounds but noting that attorney's suborning of perjury could be rectified in professional disciplinary or criminal proceedings).
- Summers, 864 F. 2d at 708.
- Gonzalez v. Superior Court, 33 Cal. App. 4th 1539 (1995). Justice Vogel was not a member of the Camp panel.
- Id. at 1542.
- Id. at 1543-45 & n.2.
- Id. at 1543-44.
- Id. at 1546-48.
- Id. at 1547 (citing McKennon).
- Id. (quoting McKennon, 115 S. Ct. at 886).
- Hyatt v. Northrop Corp., 80 F. 3d 1425 (9th Cir. 1996).
- Id. at 1427.
- Id. at 1433.
- Id. at 1433 n.3.
- Id. at 1433.
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