Cases and Materials on Employment Law - The Field As Practiced [6 ed.] 9781647083724

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WEST ACADEMIC PUBLISHING’S EMERITUS ADVISORY BOARD ————— JESSE H. CHOPER Professor of Law and Dean Emeritus University of California, Berkeley

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JONATHAN R. MACEY Professor of Law, Yale Law School

DEBORAH JONES MERRITT Distinguished University Professor, John Deaver Drinko/Baker & Hostetler Chair in Law Emerita Michael E. Moritz College of Law, The Ohio State University

ARTHUR R. MILLER University Professor and Chief Justice Warren E. Burger Professor of Constitutional Law and the Courts, New York University

GRANT S. NELSON Professor of Law Emeritus, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles

A. BENJAMIN SPENCER Dean & Trustee Professor of Law William & Mary Law School

CASES AND MATERIALS ON

EMPLOYMENT LAW THE FIELD AS PRACTICED Sixth Edition ■■■ Samuel Estreicher

Dwight D. Opperman Professor of Law & Director, Center for Labor and Employment Law New York University

Michael C. Harper Barreca Labor Relations Scholar and Professor of Law Boston University

Zachary D. Fasman

Adjunct Professor of Law & Lecturer in Law University of Michigan New York University

AMERICAN CASEBOOK SERIES®

The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal o should seek the services of a competent attorney or other professional. American Casebook Series is a trademark registered in the U.S. Patent and Trademark Office. © West, a Thomson business, 2000, 2004, 2008 © 2012 Thomson Reuters © 2016 LEG, Inc. d/b/a West Academic © 2022 LEG, Inc. d/b/a West Academic 444 Cedar Street, Suite 700 St. Paul, MN 55101 1-877-888-1330 West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license. Printed in the United States of America ISBN: 978-1-64708-372-4

To Abby, my soulmate, muse, and life partner. . . SE To Marvis, silver to gold MH To Andrea ZF

PREFACE ————— This text is the sixth edition of a work that grew out of our initial text, Cases and Materials on the Law Governing the Employment Relationship. The book captures the breadth of expertise demanded of practitioners in our field. While employment lawyers can and do specialize, a working knowledge of the field is as critical for defense lawyers counseling an employer as it is for plaintiffs’ lawyers evaluating a case. Students exposed to the breadth of the field are best positioned to identify salient issues out of a complex fact pattern, and educate their future clients about available options. The notes and questions that follow the principal readings are designed to encourage students to gain a basic understanding of the material on their own, liberating instructors to spend more class time on rule application and advanced topics. They also explain important points of law not covered in the principal cases and explore policy questions and debates. The note material is intended primarily as a teaching tool rather than as a vehicle for expressing our particular viewpoints. In order to avoid excessive use of asterisks in our editing of cases and secondary material, we indicate ellipses only when our excerpt deletes substantive material from the original text. We do not typically indicate whether an excerpt comes from the middle of an opinion, or that its ending does not correspond with the end of the opinion. Although we have preserved case citations where appropriate, so that students can check the court’s authorities on their own, we have not included references to prior lower court opinions in the same case or to trial or appellate records and briefs or internal references to majority or dissenting opinions. We also often do not include subheadings. For Supreme Court decisions in which a majority of the Justices have not joined a single opinion, we include both the plurality and important separate opinions. As a general matter, however, we do not indicate the position taken by every single member of the Court. The authors wish to again express their debt to their spouses and significant others, and to their children. In addition to those students whom we have thanked in prior editions, we would like to thank the many students who provided research assistance for this edition. We also note that the text benefitted from the comments of students and instructors who used our predecessor texts. SAMUEL ESTREICHER MICHAEL HARPER ZACHARY FASMAN

SUMMARY OF CONTENTS ————— PREFACE TABLE OF CASES Introduction PART 1. THE EMPLOYMENT RELATIONSHIP Chapter 1. Defining Employee and Employer Status A. Employees or Independent Contractors? B. Joint Employers C. Employees or Employers? Chapter 2. Employment-at-Will and Its Contractual Exceptions A. The Default Rule of At-Will Employment B. Wrongful Termination: Contract Theories of Recovery C. Evaluating the Case for Wrongful Discharge Legislation PART 2. PROTECTION AGAINST RETALIATION Chapter 3. Retaliation for Assertion of Statutory Rights A. Express Antiretaliation Provisions: Participation Clause B. Express Antiretaliation Provisions: Opposition Clause and Self-Help Remedies C. Implied Antiretaliation Provisions Chapter 4. “Public Policy” Cause of Action; Protection of “Whistleblowers” A. Performance of Public Obligations B. Refusal to Perform Assignment in Contravention of Public Policy C. Refusal to Violate Professional Obligations D. Whistleblowers E. Statutory Protections for Whistleblowers Chapter 5. First Amendment Protection of Government Employee Expression and Association A. Freedom of Speech and Public Employment B. Freedom of Association and Public Employment PART 3. TORTS IN THE EMPLOYMENT RELATIONSHIP Chapter 6. Misrepresentation, Wrongful Interference, and Defamation A. Fraud and Deceit B. Wrongful Interference with Contractual Relations C. Defamation Chapter 7. Workplace Injuries A. Duty to Provide a Safe Workplace B. Preclusion by Workers’ Compensation Laws C. Intentional Torts D. Negligent Hiring and Supervision E. Occupational Safety and Health Act Chapter 8. Workplace Privacy A. Physical Intrusions B. Intrusions into Electronic “Locations” C. Informational Privacy D. Personal Autonomy Chapter 9. Employee Duties A. Common Law Duty of Loyalty B. Restrictive Covenants C. Employee Inventions PART 4. REGULATION OF COMPENSATION Chapter 10. Compensation A. Wage and Hour Laws

B. Exemptions from Minimum Wage and Overtime Coverage C. Compensation Disputes Arising from State Contract and Wage-Payment Laws PART 5. PROCEDURAL ISSUES IN EMPLOYMENT LAW Chapter 11. Remedies A. Claims Against Employers B. Claims Against Employees Chapter 12. Procedural Issues A. The Role of the Administrative Agency B. Administrative Filing Requirements C. Statutes of Limitations D. Class Actions Chapter 13. Problems of Coordination A. Relationships Among Federal Systems B. Relationships Among Federal and State Systems

TABLE OF CONTENTS ————— PREFACE TABLE OF CASES Introduction PART 1. THE EMPLOYMENT RELATIONSHIP Chapter 1. Defining Employee and Employer Status A. Employees or Independent Contractors? Nationwide Mutual Insurance Company v. Darden Secretary of Labor v. Lauritzen Restatement of Employment Law § 1.01 Notes and Questions Note: Volunteers and Interns B. Joint Employers Zheng v. Liberty Apparel Company Inc. Restatement of Employment Law § 1.04 Notes and Questions C. Employees or Employers? Clackamas Gastroenterology Associates, P.C. v. Wells Restatement of Employment Law § 1.03 Notes and Questions Chapter 2. Employment-at-Will and Its Contractual Exceptions A. The Default Rule of At-Will Employment Restatement of Employment Law § 2.01 Notes and Questions B. Wrongful Termination: Contract Theories of Recovery Restatement of Employment Law §§ 2.02–2.03 1. Agreements for a Definite or Indefinite Term a. Express Contracts Ohanian v. Avis Rent A Car System, Inc. Notes and Questions b. “Implied in Fact” Contracts Foley v. Interactive Data Corporation Notes and Questions Guz v. Bechtel National, Inc. Notes and Questions 2. Personnel Manuals/Employee Handbooks and Binding Employer Policy Statements Restatement of Employment Law §§ 2.05–2.06 Woolley v. Hoffmann-La Roche, Inc. Notes and Questions Note: Unilateral Modification/Rescission of Handbook Promises 3. What Constitutes “Cause” or “Good Cause”? Restatement of Employment Law § 2.04 Cotran v. Rollins Hudig Hall Int’l Notes and Questions C. Evaluating the Case for Wrongful Discharge Legislation 1. Is Legislation Warranted? Notes and Questions Note: Critique of the Employment-at-Will Doctrine 2. What Form Should the Legislation Take? Montana Wrongful Discharge from Employment Act Notes and Questions Note: The Model Employment Termination Act Samuel Estreicher, Unjust Dismissal Laws: Some Cautionary Notes Notes and Questions PART 2. PROTECTION AGAINST RETALIATION Chapter 3. Retaliation for Assertion of Statutory Rights A. Express Antiretaliation Provisions: Participation Clause Burlington Northern v. White Notes and Questions

B. Express Antiretaliation Provisions: Opposition Clause and Self-Help Remedies Crawford v. Metropolitan Government of Nashville Notes and Questions Hochstadt v. Worcester Foundation Notes and Questions Whirlpool Corp. v. Marshall, Secretary of Labor Notes and Questions C. Implied Antiretaliation Provisions Kelsay v. Motorola, Inc. Notes and Questions Chapter 4. “Public Policy” Cause of Action; Protection of “Whistleblowers” Restatement of Employment Law, §§ 5.01–5.03 Note: Evolution of Public Policy Cause of Action A. Performance of Public Obligations Nees v. Hocks Notes and Questions B. Refusal to Perform Assignment in Contravention of Public Policy Tameny v. Atlantic Richfield Co. Notes and Questions C. Refusal to Violate Professional Obligations Pierce v. Ortho Pharmaceutical Corp. Notes and Questions D. Whistleblowers Geary v. United States Steel Corp. Palmateer v. International Harvester Co. Notes and Questions E. Statutory Protections for Whistleblowers 1. State Legislation 2. Federal Legislation a. “Qui Tam” and Whistleblower Provisions of the False Claims Act b. Federal Health and Safety Legislation c. The Sarbanes-Oxley Act of 2002 d. Protection from Retaliation and Incentive Awards Under the Dodd-Frank Wall Street & Consumer Protection Act Digital Realty Trust, Inc. v. Somers Notes and Questions e. The Affordable Care Act of 2010 f. Federal Employee Whistleblowers Note: Interactions Between Statutory and Common Law Claims Chapter 5. First Amendment Protection of Government Employee Expression and Association Historical Note A. Freedom of Speech and Public Employment Pickering v. Board of Education Givhan v. Western Line Consolidated School District Notes and Questions Connick v. Myers Note: Rankin v. McPherson Notes and Questions Garcetti v. Ceballos Notes and Questions B. Freedom of Association and Public Employment McLaughlin v. Tilendis Notes and Questions PART 3. TORTS IN THE EMPLOYMENT RELATIONSHIP Chapter 6. Misrepresentation, Wrongful Interference, and Defamation A. Fraud and Deceit Restatement of Employment Law §§ 6.05–6.06 Hunter v. Up-Right, Inc. Notes and Questions B. Wrongful Interference with Contractual Relations Restatement of Employment Law §§ 6.03–6.04 Gruhlke v. Sioux Empire Fed. Credit Union, Inc. Notes and Questions C. Defamation Restatement of Employment Law §§ 6.01–6.02

Lewis v. Equitable Life Assur. Society Notes and Questions Chapter 7. Workplace Injuries A. Duty to Provide a Safe Workplace Restatement of Employment Law § 4.05 Notes and Questions B. Preclusion by Workers’ Compensation Laws Bowden v. Young Notes and Questions Note: Principles of Employer Liability Restatement of Employment Law §§ 4.01–4.03 Notes and Questions C. Intentional Torts 1. Intentional Infliction of Emotional Distress Restatement (Third) of Torts: Liability for Physical and Emotional Harm § 46 2. False Imprisonment Restatement (Second) of Torts § 35 3. Assault and Battery Restatement (Third) of Torts §§ 103, 101 D. Negligent Hiring and Supervision Restatement of Employment Law § 4.04 Yunker v. Honeywell, Inc. Notes and Questions E. Occupational Safety and Health Act National Federation of Business v. Department of Labor Notes and Questions Note: Nonwaivability of OSHA Protections Chapter 8. Workplace Privacy A. Physical Intrusions Restatement of Employment Law §§ 7.01–7.03, 7.06–7.07 Borse v. Piece Goods Shop, Inc. Notes and Questions Note: Investigations B. Intrusions into Electronic “Locations” Note: Regulating Interception of Communications C. Informational Privacy Restatement of Employment Law §§ 7.04–7.05 City of Ontario v. Quon Notes and Questions D. Personal Autonomy Novosel v. Nationwide Insurance Co. Restatement of Employment Law § 7.08 Notes and Questions Note: Private-Sector Employees Working Under a Collective Bargaining Agreement Note: Constitutional Privacy Protections for Public-Sector Employees Chapter 9. Employee Duties A. Common Law Duty of Loyalty Restatement of Employment Law § 8.01 Notes and Questions 1. Trade Secrets Restatement of Employment Law §§ 8.02–8.03 AMP Inc. v. Fleischhacker Notes and Questions Restatement of Employment Law § 8.05 PepsiCo, Inc. v. Redmond Notes and Questions 2. Competition with a Current or Former Employer Restatement of Employment Law § 8.04 Jet Courier Service, Inc. v. Mulei Notes and Questions B. Restrictive Covenants Restatement of Employment Law §§ 8.06–8.08 BDO Seidman v. Hirshberg Notes and Questions Note: Forfeiture-for-Competition Clauses

C. Employee Inventions Restatement of Employment Law § 8.09 Notes and Questions PART 4. REGULATION OF COMPENSATION Chapter 10. Compensation A. Wage and Hour Laws 1. Policy Debate on Economic Impact of Minimum Wage Notes and Questions 2. Defining Compensable Working Time Bright v. Houston Northwest Medical Center Survivor, Inc. Notes and Questions 3. Regular Rate and Overtime-Premium Pay Notes and Questions B. Exemptions from Minimum Wage and Overtime Coverage 1. “Salary Basis” Test Auer v. Robbins Notes and Questions 2. The “Duties” Test Davis v. J.P. Morgan Chase & Co. Notes and Questions C. Compensation Disputes Arising from State Contract and Wage-Payment Laws 1. Implied Covenant of Good Faith and Fair Dealing Restatement of Employment Law § 3.05 Fortune v. National Cash Register Co. Notes and Questions 2. Statutory Wage Claims Arising from Contract Truelove v. Northeast Capital & Advisory, Inc. Notes and Questions PART 5. PROCEDURAL ISSUES IN EMPLOYMENT LAW Chapter 11. Remedies A. Claims Against Employers 1. Contract Claims Restatement of Employment Law § 9.01 Shirley MacLaine Parker v. Twentieth Century-Fox Film Corp. Notes and Questions 2. Tort Claims Restatement of Employment Law § 9.05 Foley v. Interactive Data Corp. Notes and Questions 3. Statutory Claims Notes and Questions Kolstad v. American Dental Association Notes and Questions B. Claims Against Employees Restatement of Employment Law §§ 9.07–9.09 Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC Notes and Questions Chapter 12. Procedural Issues A. The Role of the Administrative Agency 1. Exclusive Reliance on Private Suits 2. Hybrid Systems 3. Availability of Jury Trials B. Administrative Filing Requirements C. Statutes of Limitations 1. Range of Limitations Periods 2. Timing of Violation National R.R. Passenger Corp. v. Morgan Notes and Questions Ledbetter v. Goodyear Tire & Rubber Co. Notes and Questions D. Class Actions General Telephone Company of the Southwest v. Falcon Notes and Questions Wal-Mart Stores, Inc. v. Dukes

Notes and Questions Note on EEOC Litigation Chapter 13. Problems of Coordination A. Relationships Among Federal Systems 1. The Civil Rights Statutes, the Constitution and Modern Administrative Systems Johnson v. Railway Express Agency, Inc. Great American Federal Savings & Loan Assn. v. Novotny Notes and Questions 2. Private Grievance Arbitration and Federal Statutory Claims Gilmer v. Interstate/Johnson Lane Corp. Notes and Questions Note: Class Action Waivers and Arbitration Note: Gilmer in the Union-Represented Section 14 Penn Plaza LLC v. Pyett Notes and Questions B. Relationships Among Federal and State Systems 1. Effect of State Adjudication on Federal Actions Kremer v. Chemical Construction Corp. Notes and Questions

TABLE OF CASES The principal cases are in bold type.

————— 14 Penn Plaza LLC v. Pyett, 507 Aaron v. City of Wichita, 372 Abbott v. Crown Motor Co., 120 Abner v. Kansas City Southern Railroad Co., 420 Abood v. Detroit Board of Education, 191 Accardi v. Shaughnessy, 85 Access Organics, Inc. v. Hernandez, 344 Adams v. Anne Arundel City Pub. Schs., 116 Adler v. Board of Education, 192 AFL-CIO, In re, 273 Agis v. Howard Johnson Co., 258 Agui v. T-Mobile USA, 362 Ahlmeyer v. Nevada Sys. of Higher Educ., 488 Aimable v. Long & Scott Farms, 36 Albemarle Paper Co. v. Moody, 115, 406, 417, 460, 496 Alexander v. Gardner-Denver Co., 480, 489, 494, 507, 519 Alexander v. Sandoval, 141, 186 Allen v. McCurry, 518 Allied Informatics, Inc. v. Yeruva, 429 Allied-Bruce Terminix Companies v. Dobson, 499 Almond v. Unified School District #501, 455 ALPA v. Northwest Airlines Inc., 516 Alyeska Pipeline Service Co. v. Wilderness Society, 410 Amarnare v. Merrill Lynch, 35 American Express Co. v. Italian Colors Restaurant, 504 American Federal Group, Ltd. v. Rothenberg, 425 American Pipe & Construction Co. v. Utah, 459 AMP Inc. v. Fleischhacker, 317, 327, 330 Andersen v. McCotter, 198 Anderson v. Marathon Petroleum Co., 18 Anderson v. Mt. Clemens Pottery Co., 357, 365 Anderson v. Pacific Maritime Ass’n, 37 Ansoumana v. Gristede’s Operating Corp., 35 Antenor v. D & S Farms, 36 Anthony v. Jersey Central Power & Light Co., 75 Application Group, Inc. v. Hunter Group, Inc., 344 Arabesque Studios, Inc. v. Academy of Fine Arts, Intern., Inc., 429 Armour & Co. v. Wantock, 357, 360 Armstrong Paint & Varnish Works v. Continental Can Co., 48 Armstrong v. Martin Marietta Corp., 438 Arrowhead School Dist. No. 75 v. Kylap, 429 Arthur Young & Co. v. Sutherland, 420 Aryain v. Wal-Mart Stores Texas LP, 116 Asmus v. Pacific Bell, 83 Association of Mexican-American Educators v. California, 38 Astoria Federal Savings and Loan Ass’n v. Solimino, 525 Astra USA Inc. v. Bildman, 428 AT&T Mobility LLC v. Concepcion, 498, 503 Atlas Roofing Co. v. Occupational Safety and Health Review Commission, 135 Auer v. Robbins, 367 Avitia v. Metropolitan Club of Chicago, Inc., 410 Azzaro v. County of Allegheny, 207 B & Y Metal Printing, Inc. v. Ball, 429 Baggett v. Bullitt, 192 Bakker v. Baza’r, Inc., 262 Balazs v. Liebenthal, 117 Ball v. British Petroleum Oil, 245 Balla v. Gambro, 163 Bankey v. Storer Broadcasting Co., 82, 85 Banks v. Wolfe County Bd. of Educ., 207 Bardzik v. County of Orange, 199 Barnhart v. Sigmon Coal Co., 514 Barr v. Kelso-Burnett Co., 308 Barrentine v. Arkansas-Best Freight System, Inc., 494 Bartels v. Birmingham, 16 Barton v. Zimmer Inc., 117 Batiste v. Furnco Constr. Corp., 519 Baughman v. Wal-Mart Stores, Inc., 288

Bazemore v. Friday, 450 BDO Seidman v. Hirshberg, 337 Beasley v. Semitool, Inc., 99 Beaton v. SpeedyPC Software, 474 Bechtel v. Competitive Technologies, Inc., 175 Belcher v. Little, 240 Bell v. Safety Grooving & Grinding, LP, 120 Bellin v. Kelley, 294 Benjamin v. B & H Educ., Inc., 25 Bennett v. Metropolitan Government of Nashville, 207 Benshoff v. City of Virginia Beach, 26 Berry v. Stevinson Chevrolet, 111 Bethel v. Jefferson, 438 Bias v. Eastern Associated Coal Corp, 251 Biden v. Missouri, 279 Biller v. U.S. Merit Systems Protection Bd., 221 Bimbo Bakeries USA, Inc. v. Botticella, 331 Bivens v. Six Unknown Federal Narcotics Agents, 215 Blake v. Voigt, 53 Blaylock v. U.S. Merit Systems Protection Board, 221 Blum v. Stenson, 410 BMW of North America v. Gore, 420 Board of County Commissioners v. Umbehr, 209 Board of Education of Community Unit School Dist. No. 2 v. Redding, 219 Board of Regents of State Colleges v. Roth, 49 Board of Regents v. Tomanio, 520 Bodewig v. K-Mart, Inc., 285 Body Electric Corp. of America, In re, 411 Bohach v. City of Reno, 297 Bonds v. Milwaukee County, 199 Bonn v. City of Omaha, 123 Bonnette v. California Health & Welfare Agency, 35 Boothby v. Texon, Inc., 62 Bordell v. General Electric Co., 171 Boresen v. Rohm & Haas, Inc., 232 Borrell v. United States International Communications Agency, 186 Borse v. Piece Goods Shop, Inc., 283 Borteck v. Riker, Danzig, Scherer, Hypand & Perretti LLP, 346 Bottijliso v. Hutchison Fruit Co., 140 Botz v. Omni Air International, 189 Bowden v. Young, 252 Bower v. AT&T Technologies, Inc., 57, 231 Bradley v. Pittsburgh Bd. of Educ., 488 Brady v. Maryland, 214 Bragdon v. Abbott, 121 Branche v. Airtran Airways, Inc., 189 Branti v. Finkel, 203, 220 Bray v. Alexandria Women’s Health Clinic, 486 Brennan v. Heard, 352 Bretz v. Mayer, 240 Brigham v. Dillon Companies, Inc., 153 Bright v. Houston Northwest Medical Center Survivor, Inc., 358 Broadrick v. Oklahoma, 220 Brock v. Mr. W Fireworks, Inc., 16 Brodie v. General Chemical Corp., 83 Brooks v. Martin Marietta Utility Services, Inc., 171 Brown & Root v. Donovan, 174 Brown v. GSA, 484, 487 Brown v. Nucor, 474 Brown v. Safeway Stores, Inc., 54 Brune v. Internal Revenue Service, 305 BST Holdings, L.L.C. v. Occupational Safety and Health Admin., 270 Buchanan v. Alexander, 218 Buck v. Billings Montana Chevrolet, Inc., 97 Buethe v. Britt Airlines, Inc., 174 Burgess v. United States, 181 Burkholder v. Hutchison, 308 Burlington Industries, Inc. v. Ellerth, 122, 415 Burlington Northern & Santa Fe Ry. Co. v. White, 108 Burlington Northern v. White, 245 Burrus v. Vegliante, 221 Burton v. Freescale Semiconductor, Inc., 37 Burzee v. Park Ave Ins. Agency, Inc., 346 Bush v. Lucas, 199 Calero v. Del Chemical Corp., 242 Campbell v. Ford Industries, Inc., 154

Campbell v. General Dynamics Government Systems Corp., 499 Campbell v. Husky Hogs, 189 Cannon v. University of Chicago, 141 Cargill v. Sears Petroleum & Transport Corp., 423 Carnemolla v. Walsh, 257 Carpenter v. Reed, 525 Carter v. Dutchess Community College, 27 Casas v. Conseco Finance Corp., 375 Cash v. Empire Gas Corp., 242 CBOCS West, Inc. v. Humphries, 140 Chamberlain v. Bissell, Inc., 232 Chandler v. Roudebush, 519 Chaplinsky v. New Hampshire, 202 Chapman v. Houston Welfare Rts. Org., 487 Charles v. Burton, 36 Chauca v. Abraham, 420 Chernoff Diamond & Co. v. Fitzmaurice, 345 Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 369 Chicago, etc., Education Association v. Board of Education of City of Chicago, 219 Childress v. City of Richmond, 123 Christiansburg Garment Co. v. EEOC, 410 Christopher v. SmithKline Beecham Corp., 378 Christopher v. Stouder Mem’l Hosp., 38 Cincinnati Tool Steel Co. v. Breed, 319, 320 Circuit City Stores, Inc. v. Adams, 498, 510 Cisco v. United Parcel Services, 288 Clackamas Gastroenterology Associates, P.C. v. Wells, 38 Clark County School Dist. v. Breeden, 117, 123 Clark v. Lauren Young Tire Center Profit Sharing Trust, 345 Cleary v. American Airlines, Inc., 67, 401 Cleveland Board of Educ. v. Loudermill, 49 Cleveland Newspaper Guild, Local 1 v. Plain Dealer Publishing Co., 436 Clover v. Total System Services, Inc., 118 Cloverleaf Realty of New York, Inc. v. Town of Wawayanda, 524 Coates v. Dish Network, LLC, 308 Cobb v. Pozzi, 220 Cohen v. California, 206 Cohen v. Illinois Institute of Technology, 433 Cole v. Board of I., 123 Cole v. Burns International Sec. Services, 501 Cole v. Kobs & Draft Advertising, Inc., 231 Coleman v. Graybar Elec. Co., 384 Collins v. Elkay Mining Co., 188 Colonial Stores, Inc. v. Barrett, 240, 244 Colpitts v. W.B. Mason Co., 288 Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 339 Coman v. Thomas Mfg. Co., 187 Comeaux v. Brown & Williamson Tobacco Co., 57 Communications Workers v. Beck, 509 Community for Creative Non-Violence v. Reid, 12 CompuCredit Corp. v. Greenwood, 505 Comunale v. Traders & General Ins. Co., 401 Connes v. Molalla Transport System, Inc., 265 Connick v. Myers, 200, 210 Connolly v. Covanta Energy Corp, 254 Consolidated Edison v. Donovan, 174 Consolidated Rail Corp. v. Railway Labor Executives’ Ass’n, 310 Cooper v. Federal Reserve Bank, 461, 467 Cooper v. Phillip Morris, Inc., 519 Coopers & Lybrand v. Livesay, 466 Copeco, Inc. v. Caley, 343 Corporate Express Delivery Systems v. NLRB, 21 Cort v. Ash, 140, 186 Cotran v. Rollins Hudig Hall International, 86 Cotto v. United Technologies Corp., 309 Coventry v. United States Steel Corp., 491 Cox v. American Cast Iron Pipe Co., 461 Craig v. Rich Township High School Dist. 227, 198 Cramp v. Board of Public Instruction, 192 Crawford v. Metropolitan Government of Nashville, 119 Crisci v. Security Ins. Co., 402 Crown, Cork & Seal Co. v. Parker, 438, 460 Cummings v. Premier Rehab Keller, 405, 410 Cush-Crawford v. Adchem Corp., 420 Cweklinsky v. Mobil Chemical Co., 244 D & N Boening, Inc. v. Kirsch Beverages, 53

D’sa v. Playhut, Inc., 344 Darboe v. Staples, Inc., 259 Daubert v. Merrell Dow Pharmaceuticals, Inc., 468 Davis v. J.P. Morgan Chase & Co., 373 Davis v. United States Steel Supply Corp., 524 Day v. Wayne Cnty. Bd. of Auditors, 488 Dean Witter Reynolds, Inc. v. Byrd, 489 DeCotis, Commonwealth v., 384 Delaware State College v. Ricks, 441, 447 Dellinger v. Science Applications Int’l Corp., 129 Demars v. General Dynamics Corp., 232 Demasse v. ITT Corp., 79, 83 Denardo v. Bax, 245 Deposit Guaranty National Bank v. Roper, 460 Desert Palace, Inc. v. Costa, 208 Design Strategy, Inc. v. Davis, 427 Deters v. Equifax Credit Information Services, Inc., 419 Detroit Edison Co. v. NLRB, 311 Deubert v. Gulf Fed. Sav. Bank, 487 Dickson v. Office of Personnel Management, 305 Digital Realty Trust, Inc. v. Somers, 176 Dillon v. Champion Jogbra, Inc., 79 Discover Bank v. Superior Court, 502 Disher v. Fulgoni, 319 Dister v. Continental Group, Inc., 107 Dixon v. Coburg Dairy, Inc., 308 Doctor’s Associates, Inc. v. Casarotto, 498 Doe v. City and County of San Francisco, 297 Doe v. City of Chicago, 258 Dombrowski v. Dowling, 487 Donlin v. Phillips Lighting Corp., 408 Doyle v. Holy Cross Hospital, 83 Dube v. Likins, 244 Duldulao v. St. Mary of Nazareth Hospital Center, 83 Dupont v. Aavid Thermal Tech., 250 Duryea, Borough of v. Guarnieri, 209 Dynamex Operations West, Inc. v. Superior Court, 22 E.I. DuPont de Nemours & Co. v. Pressman, 155 EarthWeb, Inc. v. Schlack, 331, 343 East Texas Motor Freight System, Inc. v. Rodriguez, 458 Eastman Kodak Co. v. Powers Film Products, Inc., 331 Edelman v. Lynchburg College, 438 Edmondson v. Shearer Lumber Products, 308 Edwards v. Arthur Andersen, 346 EEOC v. Alioto Fish Co., 439 EEOC v. Allstate Ins. Co., 118 EEOC v. Commercial Office Products Co., 435 EEOC v. Crown Zellerbach Corp., 129 EEOC v. Dowd & Dowd, Ltd., 39 EEOC v. Global Horizons, Inc., 37 EEOC v. Goodyear Aerospace Corp., 477 EEOC v. Great Atlantic & Pacific Tea Co., 439 EEOC v. Kallir, Philips, Ross, Inc., 127 EEOC v. Luce, Forward, Hamilton & Scripps, 497 EEOC v. Morgan Stanley & Co., Inc., 477 EEOC v. Navy Federal Credit Union, 123 EEOC v. Service News Co., 408 EEOC v. Shell Oil Co., 477 EEOC v. Sidley Austin Brown & Wood, 40, 44 EEOC v. Total System Services, Inc., 119 EEOC v. United Parcel Service, 476 EEOC v. United States Steel Corp., 477 EEOC v. Wackenhut Corp., 477 EEOC v. Waffle House, Inc., 476, 498, 515 EEOC v. Wal-Mart Stores, Inc., 419 EEOC v. Wyoming, 491 Egan v. Mutual of Omaha Ins. Co., 402 Ehling v. Monmouth-Ocean Hospital Svcs. Corp, 297 Eisen v. Carlisle & Jacquelin, 466 Electrical Workers (IUE) Local 790 v. Robbins & Myers, Inc., 438 Elfbrandt v. Russell, 192, 219, 220 Ellis v. Costco Wholesale Corp., 474 Elrod v. Burns, 203, 220 Encino Motor Cars v. Navarro, 378 English v. General Electric Co., 189 Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, In re, 35

Epic Systems Inc. v. Lewis, 506 Eshelman v. Rawalt, 140 Estrada v. FedEx Ground Package System, Inc., 21 Faniel v. Chesapeake and Potomac Telephone Co. of Maryland, 261 Faragher v. City of Boca Raton, 169, 419 Farris v. Hutchinson, 99 Federal Express Corp. v. Holowecki, 121 FedEx Home Delivery v. NLRB, 21 Feiger v. Iral Jewelry, Ltd., 426 Feinberg Bros. Agency, Inc. v. Berted Realty Co., Inc., 390 Fermino v. Fedco, Inc., 259, 260 Ferraro v. Koelsch, 79 Ferrett v. Gen. Motors Corp., 79 First National Bank of Boston v. Bellotti, 308 First State Bank of Corpus Christi v. Ake, 240 Fisher v. Myers, 242 Fitzgerald v. Chicago Title & Trust Co., 167 Flamand v. American International Group, 410 Flanigan v. Prudential Federal, 232 Fleming Sales Co. v. Bailey, 320 Flowers v. Columbia College Chicago, 129 Foley v. Interactive Data Corp., 57, 401 Folmsbee v. Tech Tool Grinding & Supply, Inc., 287 Food Fair Stores, Inc. v. Greeley, 346 Food Lion, Inc., In re, 461 Foote v. Simek, 249 Ford Motor Co. v. EEOC, 407 Ford Motor Credit Co. v. Milhollin, 134 Ford v. Revlon, 254 Forde v. Royal’s, Inc., 257 Fortune v. National Cash Register Co., 380 Foster v. Wyrick, 487 Frampton v. Central Indiana Gas Co., 150 Franchina v. City of Providence, 407 Frank v. Gaos, 476 Franklin, United States ex rel. v. Parke-Davis, Div. of Warner-Lambert, 173 Fraser v. Nationwide Mutual Ins. Co., 346 Frazier v. King, 525 Free Enterprise Fund v. Public Company Accounting Oversight Bd., 272 Funk v. Sperry Corp., 232 G.S. Enterprises, Inc. v. Falmouth Marine, Inc., 237 Gade v. Nat’s Solid Wastes Mgmt. Ass’n, 278 Garcetti v. Ceballos, 129, 170, 209 Garcia v. San Antonio Metropolitan Transit Authority, 368 Gardner v. Broderick, 312 Garner v. Giarrusso, 519 Garrison v. Louisiana, 202 Gassmann v. Evangelical Lutheran Good Samaritan Society, Inc., 409 Gateway Coal v. United Mine Workers, 136 Gayer v. Bath Iron Works Corp., 231 Geary v. United States Steel Corp., 163, 306 General Dynamics Corp. v. Superior Court of San Bernardino Co., 163 General Motors Corp. v. Mendicki, 245 General Telephone Co. of Northwest v. EEOC, 466, 476 General Telephone Co. of Southwest v. Falcon, 456, 465 George A. Fuller Co. v. Chicago College of Osteopathic Medicine, 237 Gibson v. Hummel, 246 Gilbert v. Homar, 49 Gilmer v. Interstate/Johnson Lane Corp., 488 Gilmore v. Enogex, 287 Givhan v. Western Line Consolidated School District, 197 Glatt v. Fox Searchlight Pictures, Inc., 25 GME v. Carter, 429 Gomez v. Bicknell, 425 Gomez-Perez v. Potter, 140 Gonsalves v. Alpine Country Club, 524 Gonzalez-Sanchez v. International Paper Co., 36 Goodman v. Lukens Steel Co., 440, 515 Gore v. Health-Tex, Inc., 244 Goss v. Exxon Office Sys. Co., 408 Graham Oil Co. v. ARCO Prods. Co., 500 Gram v. Liberty Mutual Ins. Co., 385 Great American Federal Savings & Loan Assn. v. Novotny, 482 Greathouse v. JHS Security Inc., 130 Green Tree Fin. Corp. v. Bazzle, 501 Green Tree Fin. Corp.-Al. v. Randolph, 497, 501, 515

Green v. Brennan, 445 Green v. Ralee Engineering Co., 154, 187 Greenway v. Buffalo Hilton Hotel, 408 Greenwood v. Taft, Stettinius & Hollister, 309 Griesi v. Atlantic General Hosp. Corp., 231 Griffin v. Breckenridge, 484 Griggs v. Duke Power Co., 469 Grinzi v. San Diego Hospice Corp., 308 Grist v. Upjohn Co., 240 Gross v. FBL Financial Services, 117 Gruenberg v. Aetna Ins. Co., 402 Gruhlke v. Sioux Empire Federal Credit Union, Inc., 233 GTE Products Corp. v. Stewart, 163 GTE Southwest, Inc. v. Bruce, 258 Guinn v. Applied Composites Engineering Inc., 237 Gulino v. New York State Educ. Dept., 38 Guy v. Travenol Labs., Inc., 187 Guz v. Bechtel National, Inc., 63 Hackett v. Lane County, 372 Haddock v. City of New York, 266 Hagen v. City of Eugene, 217 Halferty v. Pulse Drug Co., Inc., 360 Hall v. United Parcel Service, 389 Handicapped Children’s Education Board of Sheboygan County v. Lukaszewiski, 429 Hanover Shoe, Inc. v. United Shoe Machinery Corp., 454 Harless v. First Nat. Bank in Fairmont, 150 Harris by Harris v. Easton Publishing Co., 284 Harris v. Forklift Systems, Inc., 113, 442 Harris v. Union Pacific Railroad Co., 475 Hasten v. Phillips Petroleum Co., 245 Hatcher v. Board of Public Educ., 220 Haupt v. International Harvester Co., 237 Heffernan v. City of Patterson, 208 Heimgaertner v. Benjamin Electric Manufacturing Co., 139 Heller v. Ebb Auto Co., 525 Heltborg v. Modern Machinery, 232 Hennessey v. Coastal Eagle Point Oil Co., 288 Hennly v. Richardson, 262 Henry Schein Inc. v. Archer & White Sales, Inc., 500 Hewitt v. Hewitt, 167 Hibben v. Nardone, 254 Higgins v. New Balance Athletic Shoe, Inc., 123 Hilao v. Estate of Marcos, 465 Hill v. Coca Cola Bottling Co., 525 Hill v. National Collegiate Athletic Assn., 288 Hishon v. King & Spalding, 40, 45 Hobart v. Hobart Estate Co., 228 Hochstadt v. Worcester Foundation, 124 Hodgin v. Jefferson, 487 Hoffman-La Roche, Inc. v. Sperling, 461 Hoffmann v. Sbarro, Inc., 371, 461 Hogan v. Allstate Ins. Co., 375 Holien v. Sears, Roebuck and Co., 188 Holloway v. Skinner, 236 Holmes v. Continental Can Co., 461 Home Care Assn. of America v. Weil, 367 Hooters of America v. Phillips, 500 Hopkins v. Price Waterhouse, 45 Horn v. New York Times, 80, 386 Horodyskyj v. Karanian, 254 Hudacs v. Frito-Lay, Inc., In the Matter of, 392 Huegerich v. IBP Inc., 232 Humphrey v. Moore, 509 Hunter v. Allis-Chalmers Corp., 409 Hunter v. Up-Right, Inc., 226 Hy Vee Food Stores, Inc., State v., 235 Hyman v. IBM Corp., 230 IBP, Inc. v. Alvarez, 357 ILG Industries, Inc. v. Scott, 319 Ingersoll-Rand Co. v. Ciavatta, 347 INS v. Delgado, 289 Insulation Corp. of America v. Brobston, 344 Integrity Staffing Solutions, Inc. v. Busk, 357, 366 International Brotherhood of Teamsters v. Southwest Airlines, Inc., 310 International Paper Co. v. Suwyn, 388 Iskanian v. CLS Transp. L.A., LLC, 506

Jackson v. Birmingham Bd. of Educ., 140 Jackson v. Murphy Farm & Ranch, Inc., 249 Jacobson v. Massachusetts, 279 Jacron Sales Co. v. Sindorf, 242 Janus v. AFSCME, 220 Jarrett v. Jarrett, 167 Jasper v. H. Nizam, Inc., 154 Jefferson v. Ambroz, 198 Jennings v. Minco Technology Labs, Inc., 285 Jet Courier Service, Inc. v. Mulei, 333 Johnson v. General Motors Corp., 461 Johnson v. Georgia Highway Express, Inc., 411, 457 Johnson v. Kreiser’s Inc., 153 Johnson v. Multnomah County, Oregon, 198 Johnson v. Railway Express Agency, Inc., 406, 480 Johnson, United States v., 484 Joiner v. Benton Community Bank, 167 Jones v. Alfred H. Mayer Co., 485 Jones v. Local 520, International Union of Operating Engineers, 433 Jones v. R.R. Donnelley & Sons Co., 440 Jordan v. Alternative Resources Corp., 123 K Mart Corp. v. Ponsock, 404 Kale v. Combined Insurance Co. of America, 455 Kansas Gas & Electric Co. v. Brock, 174 Kansas v. Colorado, 444 Karnes v. Drs. Hosp., 80 Karr v. Strong Detective Agency, Inc., 16 Kassab v. Central Soya, 166 Kasten v. Saint-Gobain Performance Plastics, 130 Katz v. United States, 302 Keller v. Prince George’s Cnty., 488 Kelley v. Airborne Freight Corp., 408 Kelley v. TYK Refractories Co., 525 Kelsay v. Motorola, Inc., 137, 166, 255 Kempcke v. Monsanto Co., 129 Kenford Co., Inc. v. Erie County, 423 Kerr-Selgas v. American Airlines, Inc., 420 Kessler v. Westchester County Dept. of Social Services, 116 Kestell v. Heritage Health Care Corp., 97 Keyishian v. Board of Regents, 192, 218 Kidder v. AmSouth Bank, N.A., 231 Kimbrough v. Loma Linda Development, 419 Kirtley v. Abrams, 54 K-Mart Corp. Store No. 7441 v. Trotti, 285 Koehrer v. Superior Court, 153 Kolstad v. American Dental Association, 412 Konop v. Hawaiian Airlines, Inc., 296, 297 Koyen v. Consolidated Edison Co. of New York, Inc., 408 Kremer v. Chemical Construction Corp., 517 Krochalis v. Insurance Co. of North America, 260 LaFont v. Taylor, 231 Lamps Plus Inc. v. Varela, 502 Landgraf v. USI Film Products, 413 Landstrom v. Shaver, 234 Lane v. Franks, 170, 216 Laskey v. Rubel Corp., 54 Latch v. Gratty, Inc., 236 Latif v. Morgan Stanley & Co. LLC, 497 Laughlin v. Metropolitan Washington Airports Authority, 129 Lawson v. FMR LLC, 174, 177 Lazar v. Superior Court of Los Angeles Co., 230 Le Vick v. Skaggs Companies, Inc., 187 Leach v. Lauhoff Grain Co., 167 Ledbetter v. Goodyear Tire & Rubber Co., 445 Legal Aid Society of Alameda County v. Brennan, 433 Leikvold v. Valley View Community Hospital, 79 Lemmon v. Cedar Point, Inc., 384 Lemon v. Myers Bigel, 44 Lerohl v. Friends of Minnesota Sinfonia, 23 Lettieri v. Equant Inc., 117 Lewis v. City of Chicago, 456 Lewis v. Equitable Life Assurance Society, 239 Libertad v. Welch, 487 Linn v. Andover Newton Theological School, Inc., 409 Little Sisters of the Poor Saints Peter and Paul Home v. Pennsylvania, 274 Litton Systems, Inc. v. Sundstrand Corp., 320

Livadas v. Bradshaw, 513 Llampallas v. Mini-Circuits, Lab, Inc., 37 Loder v. City of Glendate, 287 Loeffler v. Frank, 409 Long Island Care at Home, Ltd. v. Coke, 367 Lopez v. Massachusetts, 38 Lopez v. Silverman, 29 Loral Corp. v. Moyes, 345 Lorance v. AT&T Technologies, Inc., 448, 455 Lorillard v. Pons, 434 Loughrin v. United States, 181 Loughry v. Lincoln First Bank, 405 Love v. Pullman Co., 436 Lowery v. Circuit City Stores, 419 Luedtke v. Nabors Alaska Drilling, Inc., 285, 288 Lumley v. Gye, 232 Lyes v. City of Riviera Beach, 487 Lyle v. Food Lion, Inc., 362 Lytle v. Household Mfg., Inc., 435 Mach Mining, LLC v. EEOC, 437 Mackenzie v. Miller Brewing Co., 231 Mackowiak v. University Nuclear Systems, 174 Magness v. Human Resource Services, Inc., 388 Maine v. Thiboutot, 487 Makovi v. Sherwin-Williams Co., 188 Marbury v. Madison, 167 Marks v. Bell Telephone Co., 284 Marquez v. Screen Actors, 514 Marrero-Rivera v. Department of Just., 488 Marrese v. American Acad. of Ortho. Surgeons, 525 Maryland Metals, Inc. v. Metzner, 332 Matima v. Celli, 129 Matthews v. City of New York, 217 Mattyasovszky v. West Towns Bus Co., 139 Mayer v. Monroe County, 218 McAuliffe v. Mayor of New Bedford, 192 McCann v. Texas City Refining, Inc., 409 McCown v. Hones, 251 McCullough v. Liberty Heights Health & Rehabilitation Center, 263 McDonald v. City of West Branch, 494 McDonnell Douglas Corp. v. Green, 111, 127, 129, 436, 519 McDonnell Douglas v. Green, 419, 438 McEvoy v. Spencer, 199 McGanty v. Staudenraus, 235, 236 McGinnis v. Honeywell, Inc., 80 McIlravy v. Kerr-McGee Corp., 83 McInerney v. Charter Golf, Inc., 56 McIntyre v. Jones, 245 McKennon v. Nashville Banner Publishing Company, 91, 408 McKenzie v. BellSouth Telecommunications, Inc., 172 McKenzie v. William J. Burns International Detective Agency, Inc., 243 McKinney v. County of Santa Clara, 240 McLaughlin v. DialAmerica Marketing, Inc., 364 McLaughlin v. Richland Shoe Co., 439 McLaughlin v. Seafood, Inc., 26 McLaughlin v. Tilendis, 218 MCP No. 165, In re, 271, 273 McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 474 Meade v. Cedarapids, Inc., 231 Meade v. Moraine Valley Community College, 207 Med+Plus Neck & Back Pain Center, S.C. v. Noffsinger, 429 Mednick v. Albert Enterprises, Inc., 16 Medtronic, Inc. v. Hedemark, 346 Meech v. Hillhaven West, Inc., 98 Mendoza v. Town of Ross, 24 Mendoza v. Western Medical Center Santa Ana, 188 Meritor Savings Bank, FSB v. Vinson, 415, 442 Mers v. Dispatch Printing Co., 80 Metcalf v. Intermountain Gas Co., 386 Middlesex County Sewerage Authority v. National Sea Clammers Ass’n, 487 Migra v. Warren City School Dist. Bd. of Educ., 523, 526 Miller v. Fairchild Industries, Inc., 228, 229 Miller v. Mount Sinai Medical Center, 237 Mine Workers v. Illinois Bar Assn., 202 Minor v. Bostwick Laboratories, Inc., 130 Mintz v. Bartelstein and Associates Inc., 297

Mitchell v. Connecticut General Life Ins. Co., 99 Mitchell v. Kentucky Finance Co., 365 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 490, 510 Mohasco Corp. v. Silver, 454 Monell v. Boston Pads LLC, 24 Montgomery v. Carr, 313 Moore v. City of Philadelphia, 116 Moore v. Freeman, 410 Moore v. Hannon Food Service, Inc., 371 Moore v. McGraw Edison Co., 491 Morely v. Crawford, 246 Morosetti v. Louisiana Land and Exploration Co., 80 Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 490 Mosley-Meacham v. Memphis Light, Gas & Water Div., 407 Mourning v. Family Publications Service, Inc., 135 Mt. Healthy City School Dist. Board of Ed. v. Doyle, 205, 208 Mummelthie v. City of Mason City, 488 Murphy v. American Home Products Corp., 386 Murray v. Beard, 427 Murray v. Commercial Union Insurance Co., 55 NAACP v. Alabama ex rel. Patterson, 313 NASA v. Nelson, 305, 312 National Federation of Business v. Department of Labor, 269 National R.R. Passenger Corp. v. Morgan, 440, 445, 453 National Treasury Employees Union, United States v., 199 Nationwide Mutual Insurance Company v. Darden, 11 Nees v. Hocks, 145, 150, 152 Nelson v. Cyprus Bagdad Copper Corp., 499 New York Times Co. v. Sullivan, 194, 198, 201, 243, 245 New York v. Ferber, 202 New York v. Scalia, 35 Nicholson v. CPC Int’l Inc., 493 Nicosia v. Wakefern Food Corp., 79, 80 Nixon v. Administrator of General Services, 312 NLRB v. City Disposal Systems, 136 NLRB v. Friendly Cab Co., 21 NLRB v. Hearst Publications, 13 NLRB v. Local 1229, IBEW, 127 NLRB v. Magnavox Co., 205 NLRB v. United Ins. Co. of America, 13, 42 NLRB v. United States Postal Service, 311 NLRB v. Washington Aluminum Co., 136 NLRB v. Western Temporary Services, 35 Noel v. Boeing Co., 455 Nolan v. Control Data Corp., 386 Normand v. Research Institute of America, 408 North Miami, City of v. Kurtz, 309 Novosel v. Nationwide Insurance Co., 305 Novotny v. Great American Federal Savings & Loan Assn., 117 Nurredin v. Northeast Ohio Regional Sewer Dist., 250 O’Brien v. New England Telephone & Telegraph Co., 79 O’Connor v. Ortega, 290, 301, 312 O’Hare Truck Service v. City of Northlake, 220 O’Neal v. Stifel, Nicolaus & Co., 231 Occidental Life Insurance Co. v. EEOC, 439 Ohanian v. Avis Rent A Car System, Inc., 50 Ohlson v. Brady, 217 Oncale v. Sundowner Offshore Services, Inc., 112, 419 Onstad v. Payless, 251 Ontario, City of v. Quon, 299 Otteni v. Hitachi America Ltd., 244 Overall v. University of Pennsylvania, 245 Overnight Motor Transp. Co. v. Missel, 365, 376 Owens v. Okure, 440 Pachter v. Bernard Hodes Group, Inc., 389 Padilla v. Metro-North Commuter R.R., 408 Paladino v. Avnet Computer Technologies, Inc., 500 Palardy v. Township of Millburn, 220 Palko v. Connecticut, 167 Palmateer v. International Harvester Co., 148, 166 Paolella v. Browning-Ferris, Inc., 154 Parisi v. Goldman, Sachs & Co., 506 Parker v. Twentieth Century-Fox Film Corp., 396, 403 Parklane Hosiery Co. v. Shore, 505 Parole Commission v. Geraghty, 460 Patsy v. Florida Bd. of Regents, 488

Patterson v. McLean Credit Union, 485 Pavolini v. Bard-Air Corp., 174 Peck v. Imedia, Inc., 57 Penaloza v. PPG Indus. Inc., 362 Pennsylvania State Police v. Suders, 113, 136, 445 Penson v. Terminal Transport Co., 461 PepsiCo, Inc. v. Redmond, 323 Perrin v. United States, 120 Perry v. Sindermann, 49, 211 Perry v. Thomas, 499 Petermann v. International Brotherhood of Teamsters, 149, 152 Pettus v. Cole, 304 Phansalkar v. Andersen Weinroth & Co., L.P., 425, 428 Phelps Dodge Corp. v. NLRB, 408 Phillips Petroleum Co. v. Shutts, 472 Phillips v. Sheriff of Cook Cty., 474 Phipps v. Clark Oil & Refining Corp., 187 Pickering v. Board of Education, 193 Pierce v. Ortho Pharmaceutical Corp., 72, 155 Pine River State Bank v. Mettille, 76 Pipas v. Syracuse Home Ass’n., 171 Pollard v. E.I. du Pont de Nemours & Co., 408 Ponticas v. K.M.S. Investments, 265 Post v. Merrill Lynch, Pierce, Fenner & Smith, 346 Potts v. UAP-Ga. Ag. Chem., Inc., 251 Preston v. Ferrer, 498 Price Waterhouse v. Hopkins, 45 Pugh v. See’s Candies, Inc., 67, 86, 89 Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 422 Pyett v. Pa. Bldg. Co., 509 Rachford v. Evergreen International Airlines, 187 Radzanower v. Touche Ross & Co., 519 Randi W. v. Muroc Joint Unified School Dist., 246 Rankin v. McPherson, 206 Real v. Driscoll Strawberry Associates, Inc., 16 Redgrave v. Boston Symphony Orchestra, Inc., 400 Reeb v. Economic Opportunity Atlanta, Inc., 454 Reed, Roberts Associates, Inc. v. Strauman, 338 Reeves v. Sanderson Plumbing Products, Inc., 113 Reich v. John Alden Life Ins. Co., 375, 377 Reich v. State of New York, 374 Reiter v. Center Consol. Sch. Dist., 488 Remba v. Federation Employment and Guidance Service, 171 Renfro v. City of Emporia, Kansas, 361 Rent-A-Center, West, Inc. v. Jackson, 499 Revere Transducers, Inc. v. Deere & Co., 332 Reyes v. Remington Hybrid Seed Co., 36 Richardson v. Commission on Human Rights & Opportunities, 516 Riddle v. Wal-Mart Stores, Inc., 409 Rivera v. Rochester Genesee Regional Transp. Auth., 116 RLM Associcates v. Carter Mfg. Corp., 384 Robel v. Roundup Corp., 257 Robinson v. Shell Oil Co., 112, 118 Rochon v. Gonzales, 111 Rode v. Dellarciprete, 207 Rodrigues v. EG Sys., Inc., 309 Rodriguez de Quijas v. Shearson/American Express, Inc., 490 Rogozinski v. Airstream by Angell, 245 Rojo v. Kliger, 188 Rooney v. Tyson, 56 Ropp, United States v., 296 Rosatone v. GTE Sprint Communications, 57 Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 497 Rosenberg v. MetLife, Inc., 245 Rosenberger v. Rector and Visitors of University of Virginia, 212 Rosenwasser, United States v., 16, 18 Ross v. Stouffer Hotel Co., 310 Roth v. United States, 201, 202 Rowe v. Montgomery Ward & Co., 79 Runyan v. National Cash Register Corp., 491 Runyon v. McCrary, 485 Rush v. Scott Specialty Gases, Inc., 420 Russello v. United States, 111 Rutherford Food Corp. v. McComb, 14, 17, 26, 29 Rye, City of v. Public Service Mut. Ins. Co., 342 Sabine Pilot, Inc. v. Hauck, 285

Sacks v. Commonwealth of Pennsylvania, Department of Public Welfare, 306 San Diego, City of v. Roe, 209 Sanchez v. Standard Brands, Inc., 437 Sands Regent v. Valgardson, 404 Sargent v. Central National Bank & Trust Co. of Enid, 189 Sarsha v. Sears, Roebuck & Co., 310 Savarese v. Pyrene Mfg. Co., 55, 72 Schachter v. Citigroup, Inc., 391 Scherk v. Alberto-Culver Co., 489 Schipani v. Ford Motor Co., 79 Schlesinger v. Reservists Committee to Stop the War, 458 Schmerber v. California, 289, 312 Schuler v. Pricewaterhouse Coopers, LLP, 455 Schumann v. Collier Anesthesia, P.A., 25 Schwartz v. Gary Community School Corp, 391 Schweiss v. Chrysler Motors Corp., 189 Scott v. Pacific Gas and Electric Co., 80, 86, 99, 152 Sea-Land Service, Inc. v. O’Neal, 231 Secretary of Labor v. Lauritzen, 14 Secretary of Labor v. Whirlpool Corp., 132 See’s Candy Shops, Inc. v. Superior Court, 363 Seminole Tribe of Florida v. Florida, 374 Seus v. John Nuveen & Co., 497 Shawgo v. Spradlin, 313 Shea v. County of Rockland, 148 Shea v. Galaxie Lumber & Construction Co., Ltd., 409, 410 Shearson/American Express Inc. v. McMahon, 490, 493, 513 Shelton v. Tucker, 192, 219, 220, 313 Sherman, City of v. Henry, 313 Shoemaker v. Myers, 254 Shovelin v. Central New Mexico Elec. Co-op., Inc., 308 Sibley Memorial Hospital v. Wilson, 37 Silberstein v. City of Dayton, 199 Silk, United States v., 13 Silkwood v. Kerr-McGee Corp., 189 Sillitti v. Liberty Travel, Inc., 254 Silva v. Providence Hospital of Oakland, 59 Silver v. CPC-Sherwood Manor, Inc., 409 Simpson v. Ernst & Young, 44 Simpson v. Reynolds Metals Co., 433 Sinnett v. Hie Food Products, Inc., 384 Sisco v. Fabrication Technologies, Inc., 257 Sitton v. Print Direction, Inc., 298 Skidmore v. Swift & Co., 41, 134, 360 Skinner v. Railway Labor Executives Association, 284, 287, 288, 312 Slagle v. County of Clarion, 117 Slaymaker v. Archer-Daniels-Midland Co., 251 Smith Oil Corp. v. Viking Chemical Co., 320 Smith v. Board of Education, 167 Smith v. Calgon Carbon Corp., 169 Smith v. Robinson, 487 Softchoice, Inc. v. Schmidt, 344 Solis v. Laurelbrook Sanitarium and School, Inc., 26 Sosna v. Iowa, 460 Sousa v. Roque, 207 Southard v. Texas Board of Criminal Justice, 488 Southland Corp. v. Keating, 499 Southwest Airlines Co. v. Saxon, 498 Souto v. Sovereign Realty Assoc., 391 Spherenomics Global Contact Centers v. Customer Corp., 424 Spokeo Inc. v. Robbins, 476 Spoljaric v. Percival Tours, Inc., 231 St. Onge Livestock Co., Ltd. v. Curtis, 235 Stafford v. Muscogee County Bd. of Educ., 439 Starceski v. Westinghouse Electric Corp., 409 State Div. of Human Rights v. New York State Drug Abuse Comm’n, 521 State Farm Mut. Auto Ins. Co. v. Campbell, 420 Steiner v. Mitchell, 357 Stewart v. Jackson & Nash, 230 Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 501 Strother v. Southern California Permanente Medical Group, 40 Stuempges v. Parke, Davis & Co., 243 Suchodolski v. Michigan Consol. Gas Co., 162 Sullivan v. Baptist Memorial Hosp., 244 Sunbelt Rentals v. Victor, 297 Suter v. Harsco Corp., 79

Sutherland v. Ernst & Young LLP, 497 Swinton v. Potomac Corp., 419 Szabo v. Bridgeport Machines, Inc., 467 Szymuszkiewicz, United States v., 297 Tallahassee Furniture Co. v. Harrison, 265 Tameny v. Atlantic Richfield Co., 148 Tatge v. Chambers & Owen, Inc., 344 TBG Ins. Services Corp. v. Superior Court, 297 Technical Aid Corp. v. Allen, 338 Tennessee Coal, Iron & R. Co. v. Muscoda Local No. 123, 357 Thiessen v. General Electric Capital Corp., 462 Thole v. U.S. Bank N.A., 476 Thomas v. Collins, 202 Thompson v. Cheyenne Mountain Sch. Dist. No. 12, 391 Thompson v. North American Stainless, LP, 116, 123 Thompson v. St. Regis Paper Co., 187 Ticor Title Ins. Co. v. Brown, 471 Tiernan v. Charleston Area Medical Center, Inc., 308 Timm v. Progressive Steel Treating, Inc., 420 Tischmann v. ITT/Sheraton Corp., 388 Tisdale v. Federal Express Corp., 419 TNS, Inc. v. NLRB, 136 Tolliver v. Xerox Corp., 438 Toltec Fabrics, Inc. v. August Inc., 423 Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 62, 83, 244 Torres-Lopez v. May, 36 Torres-Negron v. Merck & Co., 37 Toussaint v. Blue Cross & Blue Shield of Michigan, 75, 79 Townsend v. Benjamin Enterprises, Inc., 119 Trademark Research Corp. v. Maxwell Online, Inc., 423 Trans World Airlines, Inc. v. Thurston, 409, 411 Transunion LLC v. Ramirez, 475 Trigg v. Fort Wayne Cmty., Schs., 488 Trosper v. Bag ‘N Save, 153 Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 342 Truelove v. Northeast Capital & Advisory, Inc., 387 Trujillo v. County of Santa Clara, 524 Trump v. International Refugee Assistance Project, 276 Turner v. Konwenhoven, 427 Turner v. Memorial Medical Center, 168 Twigg v. Hercules Corp., 286 Tyco Industries, Inc. v. Superior Court, 232 Tyler v. City of Mountain Home, Arkansas, 198 Tyson Foods, Inc. v. Bouaphakeo, 474 United Air Lines, Inc. v. Evans, 441, 447 United Continental Tuna Corp., United States v., 519 United Public Workers of America v. Mitchell, 203, 220 United States Civil Service Commission v. Letter Carriers, 203, 220, 306 University of Tennessee v. Elliott, 523, 524 University of Texas Southwestern Medical Center v. Nassar, 117 Urnikis-Negro v. American Family Property Services, 365 Vaca v. Sipes, 514 Vail-Ballou Press, Inc. v. Tomasky, 171 Vaszlavik v. Storage Tech. Corp., 462 Vega v. Hempstead Union Free Sch. Dist., 116 Veno v. Meredith, 55 Vermont Agency of Natural Resources v. United States ex rel. Stevens, 172 Viking River Cruises, Inc. v. Moriana, 411, 506 Vitucci, People v., 147 Voigt v. Savell, 199 Volling v. Kurtz Paramedic Servs., 116 von Kaenal v. Armstron Teasdale, 44 Voutsis v. Union Carbide Corp., 519 Wagenseller v. Scottsdale Memorial Hospital, 386 Wakefield v. Northern Telecom, Inc., 385 Waldon Health Care Center, 279 Walker v. Cronin, 232 Wallace v. Benware, 220 Walling v. A. H. Belo Corp., 365 Walling v. Portland Terminal Co., 24, 25 Wal-Mart Stores, In re, 372 Wal-Mart Stores, Inc. v. Dukes, 462 Warner v. Texas and Pacific Railway, 53 Warshaw v. Concentra Health Services, 288 Warthen v. Toms River Hospital, 162 Washington v. Vogel, 246

Waters v. Churchill, 208 Watkins v. L.M. Berry & Co., 296 Watson v. Fort Worth Bank & Trust, 469 Webb v. Robert Lewis Rosen Associates, Ltd., 426 Webb v. Zern, 166 Webster v. Motorola, Inc., 287 Weiner v. McGraw-Hill, Inc., 55, 80 Weinrauch v. Kashkin, 423 Weintraub v. Board of Education, 217 West v. Gibson, 115 Whalen v. Roe, 312 Wheeler v. Hurdman, 44 Whipple v. Brown Brothers Co., 54 Whirlpool Corp. v. Marshall, 130 Whitaker v. Milwaukee County, 37 White v. Blue Cross and Blue Shield of Massachusetts, Inc., 244 White v. Davis, 288 White v. Ultramar, 405 Wholey v. Sears Roebuck, 169 Wieder v. Skala, 386 Wieman v. Updegraff, 192 Wild v. Rarig, 240 Williams v. Cigna Fin. Advisors, Inc., 497 Williams v. Valentec Kisco, Inc., 407 Willis v. Wyllys Corp., 76 Wilshin v. Allstate Ins. Co., 375 Wilson v. Garcia, 440 Wolinsky v. Standard Oil of Connecticut, Inc., 129 Wolk v. Saks Fifth Ave., Inc., 188 Wood v. Lucy, Lady Duff-Gordon, 379 Woolley v. Hoffmann-La Roche, Inc., 71 Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., 346 Wyatt v. Boston, 117 Yellow Freight System, Inc. v. Donnelly, 523 York v. Association of the Bar of the City of New York, 24 Yuhas v. Libbey-Owens-Ford Co., 310 Yunker v. Honeywell, Inc., 264 Zaccardi v. Zale Corp., 80 Zellner v. Conrad, 343 Zelnik v. Fashion Institute of Technology, 116 Zheng v. Liberty Apparel Company Inc., 27 Zimmer v. Wells Management Corp., 384 Zipes v. Trans World Airlines, Inc., 438 Zombro v. Baltimore City Police Dept., 488

CASES AND MATERIALS ON

EMPLOYMENT LAW THE FIELD AS PRACTICED Sixth Edition

1

INTRODUCTION ■■■

Frank Tannenbaum opened his 1951 work, A Philosophy of Labor, with the observation: “We have become a nation of employees” increasingly dependent on the job as the critical resource of our lives. The continuing contraction of American farming and other self-employment makes this even truer today. For most members of modern society, no public relationship is more important than their relation to the entity for which they work or would like to work. This book is an introductory exploration of the role of law in regulating the employment relationship. Organization of the Book The exploration focuses on the legal rules governing the commencement, development and termination of employment relationships. It does so by considering how American law affects decisions to hire, promote, compensate, otherwise reward, discipline, and fire employees. The opening chapter considers the threshold coverage question of whether the individual seeking the protection of the employment laws is an employee warranting that protection, and the related issue of whether claims may be asserted against not only the immediate employer but other firms that have an effective influence over employment terms and conditions. Part 1 then examines evolving developments in the legislatures and courts to move away from the “at will” premise of U.S. employment contracts: that absent an express contract for a definite term, the employment relationship can be terminated by either party at any time, with or without a nondiscriminatory cause. Part 2 considers the extent to which the law prevents employers from retaliating against employee activity that our society for one reason or another highly values or seeks to protect, perhaps because unrestrained employer authority may entail adverse effects on third-party interests. Part 3 explores torts that arise in the employment context. First, we examine torts that typically arise in the course of hiring and terminating employees—misrepresentation, tortious interference with contract, and defamation. Next, we examine the legal framework through which employees are compensated for workplace injuries, primarily consisting of workers’ compensation. Then we examine common law and statutory protections for employee privacy, with a particular focus on informational privacy and electronic intrusions. In Part 4, we examine statutory protections for employee compensation. The final chapters of the book (Part 6) take up the 2

procedural and remedial systems (and coordination issues) that apply in employment law. Identifying the Purposes of Regulation Some might suppose that the project of this book should primarily consist of determining how the force of law can be best employed to most quickly and effectively eliminate undesirable employer decision-making. Questions of regulatory efficacy are certainly an important part of this book. But they do not exhaust the range of issues that careful students of the law in this area must confront. We need, initially, to go beyond a statement of generally laudatory goals to define as precisely as possible the purposes of employment laws. Precise definition can illuminate critical regulatory choices. Social advancement of unfairly treated status groups, for instance, may require more than the elimination of employment decisions motivated by hostility or even lack of equal regard for members of the groups. Are all employment decisions that are not directly related to firm productivity and that have an unequal effect on particular groups to be prohibited? Similarly, the regulation of employer decisions affecting socially valued activity requires a consideration of the kinds of activity that should be protected, and why. For instance, should the law’s protection be confined to employee speech on matters of public interest or are there circumstances in which speech on matters of private interest also should be insulated from employer power? A similar inquiry is required for regulations that seek to curb arbitrary and intrusive decision-making by employers. Is the purpose of such rules to protect longevity of service, to check supervisory judgments, or to displace private judgments entirely with a regulated system akin to the civil service laws governing public employment? “Minimum terms” laws also must be evaluated in terms of their underlying purpose to avoid undesirable over-and under-regulation. Assessing the Justifications for Regulation

Thorough analysis of our society’s regulation of the employment relationship does not end with a determination of how precisely defined goals can be most effectively achieved through regulation. We also must confront the more fundamental question of whether such goals should or need to be achieved through particular forms of legal intervention rather than through passive reliance on market forces to curb undesirable behavior. 1. Traditional Economic Model of Labor Markets. To provide a basis for assessing this question, economists employ a model of individual decision-making that assumes that human beings, and the economic entities that they control, are rational actors who know their true preferences and generally act to further those preferences, never trading something that is more valuable to them for something less valuable. This 3

model, as conventionally formulated, also weighs equally everyone’s preferences, regardless of their content, and defines social welfare as the aggregation of individual welfare decisions. It is then argued that, given any particular distribution of wealth, human satisfaction can be maximized by permitting unregulated free trading. Free trading is said to ensure that any good, including rights to engage in or be protected from particular activity, will be allocated to those parties who value it most highly, and hence will make most productive use of that good. Regulation is thus said to be presumptively undesirable: it will tend to prevent trades from being made that would further the preferences of the contracting parties, or otherwise distort the outcomes that would be reached by private bargaining. Applied to the employment context, this perspective argues for allowing an employer to purchase, say, the right to be free of restrictions in personnel decision-making by giving its employees some good in exchange which is more valuable to them than a right to have the employer’s discretion limited in some matter, but is less valuable to the employer than the right to act with complete discretion. Such exchanges, because they reflect actual preferences, will presumably make both the employer and the employees better off than arrangements that prevent the parties from acting on their preferences. Regulation can only prevent such mutually beneficial exchanges from occurring in labor markets and thus can only detract from social welfare. The same analysis follows for any form of status or protected activity discrimination. For example, Gary Becker of the University of Chicago and other economists have posited that some employers may have a “taste for discrimination,” either because the employers personally hold such preferences or because they defer to the preferences of their existing employees or customers. If all preferences are to be considered equally worthy, the argument goes, the satisfaction of even such “tastes” should be part of a welfare calculus. Economists also may argue that competitive market forces adequately check preferences that are irrational in the sense that they obstruct maximization of profit. For instance, a discriminatory firm artificially limits the available supply of workers bidding for jobs and hence pays a premium for the workers it does employ. Nondiscriminatory competitors will then emerge to take advantage of the potentially lower labor costs and to offer the same product or service more cheaply. Similarly, a firm intent on treating its employees arbitrarily will be vulnerable to competition from other firms that fairly reward productive employee behavior and fairly penalize unproductive behavior. The economic argument concludes that firms that do not discriminate or treat their employees arbitrarily will earn higher profits and be able to raise more capital for expansion. Firms that 4

persist in engaging in unfair practices in the long run will be driven from the market. 2. Questioning the Premises of the Model. One form of counterargument is to question whether the assumptions underlying this economic model are applicable to the employment relationship. Several conditions are assumed: (1) employment decisions are made in the context of competitive markets, where there are many firms bidding for workers and many workers bidding for jobs; (2) such decisions are based on perfect knowledge, in that the parties know their preferences, can accurately value the various goods being exchanged, and are fully aware of alternative opportunities; (3) the parties to the relationship are mobile, in that if either party is dissatisfied with the proposed bargain, it can readily terminate the relationship and seek more advantageous terms elsewhere; and (4) there are no significant transaction costs to the making of beneficial trades. a. The Market for Human Capital. It may be argued that the market for human labor does not always satisfy these conditions. First, in some settings employers may enjoy a measure of monopoly (or monopsony) power, where they are relatively insulated from product market competition, or they function in somewhat isolated labor markets free of any real competition for the services of their employees. “Internal labor market” considerations often may be more important to employers and employees than external market forces; where both parties have made investments in firm-specific training, the employment relationship may be better viewed as a “bilateral monopoly.” Second, trades may be distorted when one or both

parties have less than perfect information about what they are trading. Employees may not, for instance, understand what it means to have no contractual protection against arbitrary discharge, because they make erroneous assumptions about what employers lawfully may do or fail accurately to assess the probability that they may be terminated unjustifiably. Third, mobility in labor markets may be questionable. Individuals often find it difficult to uproot their families to take advantage of better opportunities elsewhere. Moreover, a variety of forces, including investments in firm-specific training, bonuses for outstanding past services, and pension and other fringe-benefit policies, may bind the employee to the job. Firms often pay workers more than would be required by supply and demand because they want to attract and retain workers willing to compete to work more productively in order to avoid the risk of losing especially attractive employment. Finally, while the transactions costs of contract-making are, on one level, relatively low in the employment setting, the parties at the outset of a relationship may find it difficult to talk about and bargain for certain terms, such as job-security provisions governing the termination of the relationship. These aspects of the real economic world all suggest that there may be situations where private bargains between employers and employees do not in fact reflect a mutually advantageous exchange. 5

b. “Agency Costs” of Firms. Aspects of the real economic world also suggest that market forces might not be as effective in checking employer practices that have an adverse effect on firm productivity as a simple economic model might posit. While some discriminatory or arbitrary treatment of employees by agents of a firm may detract from firm profits, the costs to the firm in lost productivity may be lower than the costs entailed in identifying and eliminating such treatment. It may be a long time before firms see a pattern of terminations which may create a basis for questioning the judgments of particular supervisors. Economically rational owners of the firm who otherwise would be inclined to minimize unfair practices therefore may not do so because of the higher costs of discovering and controlling prejudiced or arbitrary agents. c. Attenuated Product Market Competition. Given the many market imperfections in the real world, the short run in which inefficient employment practices persist can become quite a long period for many employers and their employees. Any employer with a monopolistic position in its product market, for instance, would only detract from its monopoly profits by continuing inefficient discrimination; it would not be threatened with extinction. Market imperfections created by other government regulations, often in place perhaps for good independent justifications, might also serve to perpetuate inefficient discrimination. Minimum wage legislation, for example, may make it more difficult for nondiscriminatory employers to reduce their relative labor costs by hiring the disfavored and thereby undercutting the prices of discriminatory employers. “Prevailing wage” requirements for federal construction projects may affirmatively erect barriers to entry by new firms. Because businesses often adopt the personnel practices of other firms, product market competition may have to be quite vigorous before its influence filters down to the personnel department. Regulation might therefore be justified as a means of accelerating the elimination of persistent, albeit inefficient, employment practices. d. Do All Preferences Count Equally? Other arguments against the economic model question whether social welfare should be computed by an aggregation of individual welfare decisions. Society collectively may be quite willing to overcome scruples about judging some human preferences less worthy than others. We may, for instance, wish to exclude the satisfaction of human “tastes” for at least some forms of discrimination from the welfare calculus. Indeed, one role of law might be to reshape the preferences of even a majority of citizens in accord with deeper (or at least higher) social values. The purpose of regulation might also be avowedly redistributive, in contrast with an economic argument that accepts the existing distribution of wealth and bargaining power as a given. Regulation might be premised either on a society’s judgments that the marginal satisfaction of the desires of some of its less fortunate members is worth more than the marginal satisfaction of some of its more fortunate, or on a 6

recognition that employers often can afford to bid more for what is actually worth more to workers. The simplified economic model presented above also ignores the effects of trades on third parties such as the general community. To the extent the parties to an agreement do not bear fully the costs of their activity, there may be a need for the law’s intervention. Some regulation of employment decision-making may therefore be justified by the benefits it ultimately provides to society, rather than to the parties directly affected. Such arguments suggest further that society might wish to eliminate some discriminatory or arbitrary preferences even when they contribute to firm productivity. First, some discriminatory employment practices may be consistent with profitability only because of the prejudice of employees or customers. Members of socially favored groups may find it distasteful to work alongside, or especially under the supervision, of members of socially disfavored groups. If so, the socially favored groups might demand a wage premium which could increase a nondiscriminating employer’s labor costs and reduce its profits. Potential customers also might find certain goods or services less valuable if they are dispensed by members of disfavored

social groups. If so, the customers will be willing to pay less and profits could be reduced. Our society, however, may no more wish to include the discriminatory tastes of employees and customers in its welfare calculus than when similar tastes are indulged in by employers. As suggested, even if a prejudice pervades the culture, we may wish to attempt to transform that culture by forcing ourselves to live up to our higher values. Second, we may wish to prohibit reliance on some generalizations or stereotypes that are sufficiently accurate to be efficient, because their use is nonetheless unfair to many individuals or will have a cumulative deleterious social impact. An employer, for instance, might rationally conclude that membership in a particular social group or engagement in a particular activity is a good predictor of a job applicant’s potential productivity and indeed may be less costly than other means of assessing qualifications. Our society might insist, however, that such a screening device not be used because it penalizes even individuals who would be productive, and either aggravates the social disabilities of all members of the excluded group or discourages the activity even more than is warranted by productivity concerns. More generally, as suggested above, we might wish to regulate the employment relationship either to reduce third-party effects or to redistribute wealth to employees. Profit maximization may serve neither of these goals. An employer who threatens to discharge an employee for disclosing the firm’s price-fixing activity to public authorities in violation of the antitrust laws may be acting as a rational profit-maximizer; society may, however, wish to encourage such disclosure to avert harmful impact on the community. Similarly, from the standpoint of the individual firm, it 7

may be quite rational to discharge older workers who, because of seniority-based compensation policies, are paid at a level higher than the value they currently contribute to the firm; society may, however, wish to bolster the economic position of older workers because of the difficulties they confront in securing alternative employment. Even the intentional arbitrary discharge of easily replaced unskilled workers may be efficient for firms that wish to maintain unquestioned control of their workplace, but society may want to prevent such practices to provide a minimum level of dignity to all its workers. Assessing the Costs of the Regulation Analysis cannot stop, however, with a determination that some form of regulation to address a particular undesirable employment practice is warranted. The student must also consider the appropriateness of the particular systems of regulation that have been adopted, which in turn requires consideration of the costs of these systems as well as their benefits. Administrative, Litigation and Error Costs. The costs of regulation include the administrative, litigation and error costs of enforcement. This book should enable the reader to assess the efficacy of alternative systems of implementation. The sixth and final part of the text is devoted to a consideration of the processes by which the substantive regulations are to be achieved. Moreover, a consideration of the costs of enforcement and the merits of alternative schemes is a necessary part of the analysis of each area of substantive law treated below. Over-Enforcement? Other costs of regulation also need to be treated, however. One important set are the costs of overenforcement. Legal presumptions provide a good example. The most effective way to eliminate a particular practice may be to reduce the difficulty of proving that practice has occurred by establishing such presumptions. For instance, as a means of facilitating challenges to employment decisions motivated by prejudice against a particular status group, the law might erect a conclusive presumption that employment practices having a significant adverse effect on members of that group are tainted by prejudice. Such a presumption may effectively extirpate prejudicial decision-making, but it may also encourage other kinds of inefficient decision-making, such as absolute preferences for less qualified members of the particular status group, that we may not wish to encourage. Even rules precisely tailored to cover only that which we want to proscribe may have some overenforcement costs, as employers attempt to insure against costly litigation by compromising otherwise efficient practices. “Backlash” Costs? Two other kinds of costs of regulation ought also to be noted in this introduction. Both might be described as backlash costs. Political backlash can occur when those who are not included in groups directly benefited by the regulation, and who may even be adversely 8

affected by it, react against not only the regulation, but also its beneficiaries. Economic backlash can occur when employers forced to provide benefits to certain groups of workers respond by denying other benefits or even employment. For example, employers faced with costly litigation or regulatory oversight when they have members of a statutorily protected group on their payroll may seek to avoid those difficulties by not hiring members of the group, confident that lawsuits are not likely to be brought. Employers may even move work sites to towns or regions of the country where they are less likely to have job applications from members of a group more likely to generate litigation. Such a reaction may be economically rational, and depending on the nature of the labor market and the content and enforcement of other laws, a predictable response to regulation.

9

PART 1 THE EMPLOYMENT RELATIONSHIP ■■■

The laws dealt with in this book involve regulations of the employment relationship. With a few notable exceptions like 42 U.S.C. § 1981, which bars racial and certain forms of national origin discrimination in the making of any contract, these laws generally protect individuals only if they are employees of an employer. Customers or vendors of the employer are not regulated (although their conduct in the workplace may trigger employer liability). Nor are independent contractors who may provide services for the employer that resemble services provided by undisputed employees. Defining the employment relationship, moreover, has become increasingly important with the growth of temporary agencies, remote work, and the on-demand economy. Our first chapter thus deals with the threshold questions of whether the individual seeking the law’s protection is in an employment relationship, and if so, with which employers. In Chapter 2, we begin with a discussion of the American common law default rule of “employment at will,” and look at the growing statutory and decisional exceptions to the rule that have emerged in recent decades.

11

CHAPTER 1 DEFINING EMPLOYEE AND EMPLOYER STATUS ■■■

Introduction Most employment statutes cover only employees and impose obligations only on employers. These critical terms of coverage are generally not defined in the legislation, requiring resort to background principles, including the common law of agency and employment relations.

A. EMPLOYEES OR INDEPENDENT CONTRACTORS? NATIONWIDE MUTUAL INSURANCE COMPANY V. DARDEN Supreme Court of the United States, 1992. 503 U.S. 318, 112 S.Ct. 1344, 117 L.Ed.2d 581.

JUSTICE SOUTER delivered the opinion of the Court. In this case we construe the term “employee” as it appears in § 3(6) of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 834, 29 U.S.C. § 1002(6), and read it to incorporate traditional agency law criteria for identifying master-servant relationships. I From 1962 through 1980, respondent Robert Darden operated an insurance agency according to the terms of several contracts he signed with petitioners Nationwide Mutual Insurance Co. et al. Darden promised to sell only Nationwide insurance policies, and, in exchange, Nationwide agreed to pay him commissions on his sales and enroll him in a company retirement scheme called the “Agent’s Security Compensation Plan” (Plan). The Plan consisted of two different programs: the “Deferred Compensation Incentive Credit Plan,” under which Nationwide annually credited an agent’s retirement account with a sum based on his business performance, and the “Extended Earnings Plan,” under which Nationwide paid an agent, upon retirement or termination, a sum equal to the total of his policy renewal fees for the previous 12 months. Such were the contractual terms, however, that Darden would forfeit his entitlement to the Plan’s benefits if, within a year of his termination and 25 miles of his prior business location, he sold insurance for 12

Nationwide’s competitors. The contracts also disqualified him from receiving those benefits if, after he stopped representing Nationwide, he ever induced a Nationwide policyholder to cancel one of its policies. In November 1980, Nationwide exercised its contractual right to end its relationship with Darden. A month later, Darden became an independent insurance agent and, doing business from his old office, sold insurance policies for several of Nationwide’s competitors. The company reacted with the charge that his new business activities disqualified him from receiving the Plan benefits to which he would have been entitled otherwise. Darden then sued for the benefits, which he claimed were nonforfeitable because already vested under the terms of ERISA. 29 U.S.C. § 1053(a). Darden brought his action under 29 U.S.C. § 1132(a), which enables a benefit plan “participant” to enforce the substantive provisions of ERISA. The Act elsewhere defines “participant” as “any employee or former employee of an employer . . . who is or may become eligible to receive a benefit of any type from an employee benefit plan. . . .” § 1002(7). Thus, Darden’s ERISA claim can succeed only if he was Nationwide’s “employee,” a term the Act defines as “any individual employed by an employer.” § 1002(6). *** II We have often been asked to construe the meaning of “employee” where the statute containing the term does not helpfully

define it. Most recently we confronted this problem in Community for Creative Non-Violence v. Reid, 490 U.S. 730, 104 L. Ed. 2d 811, 109 S. Ct. 2166 (1989), a case in which a sculptor and a nonprofit group each claimed copyright ownership in a statue the group had commissioned from the artist. The dispute ultimately turned on whether, by the terms of § 101 of the Copyright Act of 1976, 17 U.S.C. § 101, the statue had been “prepared by an employee within the scope of his or her employment.” Because the Copyright Act nowhere defined the term “employee,” we unanimously applied the “well established” principle that “where Congress uses terms that have accumulated settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms. . . . In the past, when Congress has used the term ‘employee’ without defining it, we have concluded that Congress intended to describe the conventional master-servant relationship as understood by common-law agency doctrine. ***” While we supported this reading of the Copyright Act with other observations, the general rule stood as independent authority for the decision. So too should it stand here. ERISA’s nominal definition of 13

“employee” as “any individual employed by an employer,” 29 U.S.C. § 1002(6), is completely circular and explains nothing. As for the rest of the Act, Darden does not cite, and we do not find, any provision either giving specific guidance on the term’s meaning or suggesting that construing it to incorporate traditional agency law principles would thwart the congressional design or lead to absurd results. Thus, we adopt a common-law test for determining who qualifies as an “employee” under ERISA, a test we most recently summarized in Reid: “In determining whether a hired party is an employee under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the product is accomplished. Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.” 490 U.S. at 751–752 (footnotes omitted). Cf. Restatement (Second) of Agency § 220(2) (1958) (listing nonexhaustive criteria for identifying master-servant relationship); Rev. Rul. 87–41, 1987–1 Cum. Bull. 296, 298–299 (setting forth 20 factors as guides in determining whether an individual qualifies as a common-law “employee” in various tax law contexts). Since the common-law test contains “no shorthand formula or magic phrase that can be applied to find the answer, . . . all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.” NLRB v. United Ins. Co. of America, 390 U.S. [254,] 258 [(1968)]. In taking its different tack, the Court of Appeals cited NLRB v. Hearst Publications, Inc., 322 U.S. [111,] 120–129 [(1944)], and United States v. Silk, 331 U.S. [704,] 713 [(1947)], for the proposition that “the content of the term ‘employee’ in the context of a particular federal statute is ‘to be construed “in the light of the mischief to be corrected and the end to be attained.” ’ ” Darden, 796 F.2d at 706, quoting Silk, supra, at 713, in turn quoting Hearst, supra, at 124. But Hearst and Silk, which interpreted “employee” for purposes of the National Labor Relations Act and Social Security Act, respectively, are feeble precedents for unmooring the term from the common law. In each case, the Court read “employee,” which 14

neither statute helpfully defined,4 to imply something broader than the common-law definition; after each opinion, Congress amended the statute so construed to demonstrate that the usual common-law principles were the keys to meaning. *** * * * At oral argument, Darden tried to subordinate Reid to Rutherford Food Corp. v. McComb, 331 U.S. 722, 91 L. Ed. 1772, 67 S. Ct. 1473 (1947), which adopted a broad reading of “employee” under the Fair Labor Standards Act (FLSA). And amicus United States, while rejecting Darden’s position, also relied on Rutherford Food for the proposition that, when enacting ERISA, Congress must have intended a modified common-law definition of “employee” that would advance, in a way not defined, the Act’s “remedial purposes.” * * * But Rutherford Food supports neither position. The definition of “employee” in the FLSA evidently derives from the child labor statutes, see Rutherford Food, supra, at 728, and, on its face, goes beyond its ERISA counterpart. While the FLSA, like ERISA, defines an “employee” to include “any individual employed by an employer,” it defines the verb “employ” expansively to mean “suffer or permit to work.” 52 Stat. 1060, § 3, codified at 29 U.S.C. §§ 203(e), (g). This latter definition, whose striking breadth we have previously noted, Rutherford Food, supra, at 728, stretches the meaning of “employee” to cover some parties who might not qualify as such under a strict application of

traditional agency law principles. ERISA lacks any such provision, however, and the textual asymmetry between the two statutes precludes reliance on FLSA cases when construing ERISA’s concept of “employee.” * * * III While the Court of Appeals noted that “Darden most probably would not qualify as an employee” under traditional agency law principles, Darden, supra, at 705, it did not actually decide that issue. We therefore reverse the judgment and remand the case to that court for proceedings consistent with this opinion.

SECRETARY OF LABOR V. LAURITZEN U.S. Court of Appeals, Seventh Circuit, 1987. 835 F.2d 1529.

HARLINGTON WOOD, JR., J. This, as unlikely as it may at first seem, is a federal pickle case. The issue is whether the migrant workers who harvest the pickle crop of defendant Lauritzen Farms, in effect defendant Michael Lauritzen, are employees for purposes of the Fair Labor Standards Act of 1938 (“FLSA”), or are instead independent contractors not subject to the requirements of 15

the Act. The Secretary, alleging that the migrant harvesters are employees, not independent contractors, brought this action seeking to enjoin the defendants from violating the minimum wage requirements and to enforce the record-keeping and child labor provisions of the Act. * * * The district court granted the Secretary partial summary judgment, determining the migrants to be employees, not independent contractors. * * * On a yearly basis the defendants plant between 100 to 330 acres of pickles on land they either own or lease. The harvested crop is sold to various processors in the area. The pickles are handpicked, usually from July through September, by migrant families from out of state. Sometimes the children, some under twelve years of age, work in some capacity in the fields alongside their parents. Many of the migrant families return each harvest season by arrangement with the defendants, but, each year, other migrant families often come for the first time from Florida, Texas and elsewhere looking for work. The defendants would inform the families, either orally or sometimes in writing, of the amount of compensation they were to receive. Compensation is set by the defendants at one-half of the proceeds the defendants realize on the sale of the pickles that the migrants harvest on a family basis. Toward the end of the harvest season, when the crop is less abundant and, therefore, less profitable, the defendants offer the migrants a bonus to encourage them to stay to complete the harvest, but some leave anyway. Wisconsin law requires a form “Migrant Work Agreement” to be signed, and it was used in this case. It provides for the same pay scale as is paid by the defendants except the minimum wage is guaranteed. The Wisconsin Migrant Law invalidates agreements that endeavor to convert migrant workers from employees to independent contractors. Wis. Stat. Ann. § 103.90–.97 (West 1987); 71 Op. Att’y Gen. Wis. 92 (1982). Accompanying the work agreement is a pickle price list purporting to set forth what the processors will pay the defendants for pickles of various grades. This price list is the basis of the migrant workers’ compensation. The workers are not parties to the determination of prices agreed upon between the defendants and the processors. All matters relating to planting, fertilizing, insecticide spraying, and irrigation of the crop are within the defendants’ direction, and performed by workers other than the migrant workers here involved. Occasionally a migrant who has worked for the defendant previously and knows the harvesting will suggest the need for irrigation. In order to conduct their pickle-raising business, the defendants have made a considerable investment in land, buildings, equipment, and supplies. The defendants provide the migrants free housing which the defendants assign, but with regard for any preference the migrant families may have. The defendants 16

also supply migrants with the equipment they need for their work. The migrants need supply only work gloves for themselves. The harvest area is subdivided into migrant family plots. The defendants make the allocation after the migrant families inform them how much acreage the family can harvest. Much depends on which areas are ready to harvest, and when a particular migrant family may arrive ready to work. The family, not the defendants, determines which family members will pick the pickles. If a family arrives before the harvest begins, the defendants may, nevertheless, provide them with housing. A few

may be given some interim duties or be permitted to work temporarily for other farmers. When the pickles are ready to pick, however, the migrant family’s attention must be devoted only to their particular pickle plot. The pickles that are ready to harvest must be picked regularly and completely before they grow too large and lose value when classified. The defendants give the workers pails in which to put the picked pickles. When the pails are filled by the pickers the pails are dumped into the defendants’ sacks. At the end of the harvest day a family member will use one of the defendants’ trucks to haul the day’s pick to one of defendants’ grading stations or sorting sheds. After the pickles are graded the defendants give the migrant family member a receipt showing pickle grade and weight. The income of the individual families is not always equal. That is due, to some extent, to the ability of the migrant family to judge the pickles’ size, color, and freshness so as to achieve pickles of better grade and higher value. *** It is well recognized that under the FLSA the statutory definitions regarding employment5 are broad and comprehensive in order to accomplish the remedial purposes of the Act. See, e.g., United States v. Rosenwasser, 323 U.S. 360, 362–63, 89 L. Ed. 301, 65 S. Ct. 295 (1945); Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748, 754 (9th Cir.1979). Courts, therefore, have not considered the common law concepts of “employee” and “independent contractor” to define the limits of the Act’s coverage. We are seeking, instead, to determine “economic reality.” Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1043 (5th Cir.1987); Karr v. Strong Detective Agency, Inc., 787 F.2d 1205, 1207 (7th Cir.1986). For purposes of social welfare legislation, such as the FLSA, “ ‘employees are those who as a matter of economic reality are dependent upon the business to which they render service.’ ” Mednick v. Albert Enterprises, Inc., 508 F.2d 297, 299 (5th Cir.1975) (quoting Bartels v. Birmingham, 332 U.S. 126, 130, 91 L. Ed. 1947, 67 S. Ct. 1547 (1947)). 17

In seeking to determine the economic reality of the nature of the working relationship, courts do not look to a particular isolated factor but to all the circumstances of the work activity. Rutherford Food Corp. v. McComb, 331 U.S. 722, 730, 91 L. Ed. 1772, 67 S. Ct. 1473 (1947). Certain criteria have been developed to assist in determining the true nature of the relationship, but no criterion is by itself, or by its absence, dispositive or controlling. Among the criteria courts have considered are the following six: 1) the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed; 2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; 3) the alleged employee’s investment in equipment or materials required for his task, or his employment of workers; 4) whether the service rendered requires a special skill; 5) the degree of permanency and duration of the working relationship; 6) the extent to which the service rendered is an integral part of the alleged employer’s business. *** We cannot say that the migrants are not employees, but, instead, are in business for themselves and sufficiently independent to lie beyond the broad reach of the FLSA. They depend on the defendants’ land, crops, agricultural expertise, equipment, and marketing skills. They are the defendants’ employees. * * * EASTERBROOK, J., concurring. People are entitled to know the legal rules before they act, and only the most compelling reason should lead a court to announce an approach under which no one can know where he stands until litigation has been completed. * * * Consider the problems with the balancing test. These are not the factors the Restatement (Second) of Agency § 2(3) (1958) suggests for identifying “independent contractors.” The Restatement takes the view that the right to control the physical performance of the job is the central element of status as an independent contractor. My colleagues, joining many other courts, say that this approach is inapplicable because we should “accomplish the remedial purposes of the Act”: Courts, therefore, have not considered the common law concepts of “employee” and “independent contractor” to define the limits of 18

the Act’s coverage. We are seeking, instead, to determine “economic reality.”

This implies that the definition of “independent contractor” used in tort cases is inconsistent with “economic reality” but that the seven factors applied in FLSA cases capture that “reality.” In which way did “economic reality” elude the American Law Institute and the courts of 50 states? What kind of differences between FLSA and tort cases are justified? * * * *** We should abandon [the court’s] unfocused “factors” and start again. The language of the statute is the place to start. Section 3(g), 29 U.S.C. § 203(g), defines “employ” as including “to suffer or permit to work”. This is “the broadest definition ‘ . . . ever included in any one act.’ ” United States v. Rosenwasser, 323 U.S. 360, 363 n. 3, 89 L. Ed. 301, 65 S. Ct. 295, 297 n. 3 (1945), quoting from Sen. Hugo Black, the Act’s sponsor, 81 Cong.Rec. 7657 (1937). No wonder the common law definition of “independent contractor” does not govern. * * * Unfortunately there is no useful discussion in the legislative debates about the application of the FLSA to agricultural workers. This drives us back to more general purposes—those of the FLSA in general, and those of the common law definition of the independent contractor. Section 2 of the FLSA, 29 U.S.C. § 202, supplies part of the need. Courts are “to correct and as rapidly as practical eliminate”, § 2(b), the “labor conditions detrimental to the maintenance of the minimum standard of living necessary to health, efficiency, and general well-being of workers”, § 2(a) * * * . The purposes Congress identified * * * strongly suggest that the FLSA applies to migrant farm workers. [T]he statute was designed to protect workers without substantial human capital, who therefore earn the lowest wages. No one doubts that migrant farm workers are short on human capital; an occupation that can be learned quickly does not pay great rewards. The functions of the FLSA call for coverage. How about the functions of the independent contractor doctrine? This is a branch of tort law, designed to identify who is answerable for a wrong (and therefore, indirectly, to determine who must take care to prevent injuries). To say “X is an independent contractor” is to say that the chain of vicarious liability runs from X’s employees to X but stops there. This concentrates on X the full incentive to take care. It is the right allocation when X is in the best position to determine what care is appropriate, to take that care, or to spread the risk of loss. See Anderson v. Marathon Petroleum Co., 801 F.2d 936, 938–39 (7th Cir.1986); Alan O. Sykes, The Economics of Vicarious Liability, 93 Yale L.J. 1231 (1984). This usually follows the right to control the work. Someone who surrenders control of the details of the work—often to take advantage of the expertise (human capital) of someone else—cannot 19

determine what precautions are appropriate; his ignorance may have been the principal reason for hiring the independent contractor. Such a person or firm specifies the outputs (design the building; paint the fence) rather than the inputs. Imposing liability on the person who does not control the execution of the work might induce pointless monitoring. All the details of the common law independent contractor doctrine having to do with the right to control the work are addressed to identifying the best monitor and precaution-taker. The reasons for blocking vicarious liability at a particular point have nothing to do with the functions of the FLSA. * * * The migrant workers are selling nothing but their labor. They have no physical capital and little human capital to vend. This does not belittle their skills. Willingness to work hard, dedication to a job, honesty, and good health, are valuable traits and all too scarce. Those who possess these traits will find employment; those who do not cannot work (for long) even at the minimum wage in the private sector. But those to whom the FLSA applies must include workers who possess only dedication, honesty, and good health. So the baby-sitter is an “employee” even though working but a few hours a week, and the writer of novels is not an “employee” of the publisher even though renting only human capital. The migrant workers labor on the farmer’s premises, doing repetitive tasks. Payment on a piecework rate (e.g., 1 cents per pound of cucumbers) would not take these workers out of the Act, any more than payment of the sales staff at a department store on commission avoids the statute. The link of the migrants’ compensation to the market price of pickles is not fundamentally different from piecework compensation. Just as the piecework rate may be adjusted in response to the market (e.g., to 1 cents per 1.1 pounds, if the market falls 10%), imposing the market risk on piecework laborers, so the migrants’ percentage share may be adjusted in response to the market (e.g., rising to 55% of the gross if the market should fall 10%) in order to relieve them of market risk. Through such adjustments Lauritzen may end up bearing the whole market risk, and in the long run must do so to attract workers. There are hard cases under the approach I have limned, but this is not one of them. Migrant farm hands are “employees” under the FLSA—without regard to the crop and the contract in each case.

RESTATEMENT OF EMPLOYMENT LAW § 1.01 American Law Institute (2015).

§ 1.01 General Conditions for Existence of Employment Relationship (a) Except as provided in §§ 1.02 and 1.03, an individual renders services as an employee of an employer if 20

(1) the individual acts, at least in part, to serve the interests of the employer; (2) the employer consents to receive the individual’s services; and (3) the employer controls the manner and means by which the individual renders services, or the employer otherwise effectively prevents the individual from rendering those services as an independent businessperson. (b) An individual renders services as an independent businessperson and not as an employee when the individual in his or her own interest exercises entrepreneurial control over important business decisions, including whether to hire and where to assign assistants, whether to purchase and where to deploy equipment, and whether and when to provide service to other customers.

NOTES AND QUESTIONS 1. Darden’s Relevance for Other Federal Employment Statutes? Is the Darden decision relevant only to the ERISA or does it also govern other federal employment statutes that provide only a definition of employee that “is completely circular and explains nothing?” Note that the major federal employment discrimination statutes, unlike the FLSA considered in Lauritzen, provide only such circular definitions. Does Darden’s approach necessarily govern those statutes? See also the Clackamus decision at page 38 infra. 2. Origins of the Right-to-Control Test. As Judge Easterbrook points out in his concurrence in Lauritzen, courts originally developed the “right to control” test to determine when it is appropriate to impose respondeat superior, i.e., strict liability on a principal, as a “master,” for the torts of an agent, as a “servant.” See also Marc Linder, The Employment Relationship in Anglo-American Law: A Historical Perspective 133–70 (1989); Richard R. Carlson, Why the Law Still Can’t Tell an Employee When It Sees One and How It Ought to Stop Trying, 22 Berk. J. of Emp. & Lab. L. 295, 302–06 (2001). The test clearly makes sense in this context; only a principal that controls the details of an agent’s work should have the incentive of potential liability to closely monitor that work; it also furthers compensation objectives by making sure a finically solvent entity who benefited from the work will assume the bill for any damages. Consider in the course of reading this text whether the test serves equally well the purposes of antidiscrimination and employment laws. 3. “Right-to-Control” vs. “Economic Reality” Tests. Review the common-law “right to control” factors referenced in Darden and the “economic reality” test applied in Lauritzen. How are the tests different? Which way does each factor cut? For example, if the job involves a high level of skill, does that favor employee status or independent contractor status? How much weight should 21 be given to each of the factors? Does skill level provide a useful dividing line between employee and independent contractor? Would application of the “economic reality” test change the outcome in a case like Darden? Conversely, would application of the common-law control test have changed the outcome in a case like Lauritzen? Are there cases where the difference between the test might affect outcomes? 4. “Entrepreneurial Control” Test of Employment Restatement. The Restatement of Employment Law uses an “entrepreneurial control” test for assessing employment status. Is this test a break from the Restatement 2d of Agency § 220, discussed in Darden, or does it simply elaborate the non-physical-control factors in the § 220 formulation? Is “entrepreneurial capacity” or opportunity sufficient under the Restatement test or must the putative independent contractors actually make nontrivial entrepreneurial decisions? For decisions addressing entrepreneurial control, see, e.g., NLRB v. Friendly Cab Co., 512 F.3d 1090 (9th Cir. 2008) (placing “particular significance on [employer’s] requirement that its drivers may not engage in any entrepreneurial opportunities”); Corporate Express Delivery Sys. v. NLRB, 292 F.3d 777 (D.C. Cir. 2002) (finding employee status because of the absence of “entrepreneurial opportunity”). See also Estrada v. FedEx Ground Package System, Inc., 154 Cal.App.4th 1, 64 Cal.Rptr.3d 327 (2007) (drivers who lacked a “true entrepreneurial opportunity” were employees); FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009) (finding FedEx drivers to be independent contractors, applying an entrepreneurial-control test). See generally Michael C. Harper, Using the Anglo-American Respondeat Superior Principle to Assign Responsibility for Worker Statutory Benefits and Protections, 18 Wash. Univ. Global Stud. L. Rev. 161 (2019); and his Fashioning a General Common Law for Employment in an Age of Statutes, 100 Corn. L. Rev. 1281 (2015). 5. Department of Labor Guidance on the FLSA Economic Reality Test, Prior to the Trump Administration, the Department of Labor (DOL) had only issued opinion letters and “guidance” on the judicial interpretation of the “suffer and permit” language in the FLSA. In the waning days of the Trump administration, however, the DOL, after a formal notice and comments process, issued a final regulation for the stated purpose of “focusing the economic reality test.” 86 Fed. Reg. 1168 (Jan. 7, 2021). The regulation stated that employee or

independent contractor status under the FLSA would turn on two “core factors”: (1) the nature and degree of the worker’s control over work; and (2) the worker’s opportunity for profit or loss based on “initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.” The Biden administration DOL, after another formal notice and comment rulemaking process, withdrew this rule before it became effective. 86 Fed. Reg. 24303 (May 6, 2021). The DOL has stated that its prior guidance “remains in effect” instead. This guidance lists seven factors: “(1) The extent to which the services rendered are an integral part of the principal’s business; (2) The 22 permanency of the relationships; (3) The amount of the alleged contractor’s investment in facilities and equipment; (4) The nature and degree of control by the principal; (5) The alleged contractor’s opportunities for profit and loss; (6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; (7) The degree of independent business organization and operation.” See DOL Wage and Hour Division’s Fact Sheet # 13 (July, 2008). Is it clear on what the disagreement between the Trump and Biden administrations DOLs turns? Would the Trump Administration rule have made independent contractor classification easier for employers? If so, why? 6. ABC Test. At least a dozen states by statute or judicial decision now use some version of what is described as an “ABC test” in some of their employment laws. That test presumes that workers are employees and makes it more difficult for employers to classify workers as independent contractors. In Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903, 950 n.20, 965–66 (2018), the California high court applied this standard under the state’s minimum wage order and explained: This standard, whose objective is to create a simpler, clearer test for determining whether the worker is an employee or an independent contractor, presumes a worker hired by an entity is an employee and places the burden on the hirer to establish that the worker is an independent contractor. Under the ABC standard, the worker is an employee unless the hiring entity establishes each of three designated factors: (a) that the worker is free from control and direction over performance of the work, both under the contract and in fact; (b) that the work provided is outside the usual course of the business for which the work is performed; and (c) that the worker is customarily engaged in an independently established trade, occupation or business (hence the ABC standard). If the hirer fails to show that the worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor. The Dynamex court found that the employer’s delivery drivers could be treated as a certifiable class of employees under either part (b) or part (c) of the test: In the present case, Dynamex’s entire business is that of a delivery service. Unlike other types of businesses in which the delivery of a product may or may not be viewed as within the usual course of the hiring company’s business, here the hiring entity is a delivery company and the question whether the work performed by the delivery drivers within the certified class is outside the usual course of its business is clearly amenable to determination on a class basis. * * * Here the class of drivers certified by the trial court is limited to drivers who, during the relevant time periods, performed delivery services only for Dynamex. The class excludes drivers who performed 23 delivery services for another delivery service or for the driver’s own personal customers; the class also excludes drivers who had employees of their own. How does this three part ABC standard differ from the other tests considered above? Is the first part similar to the “right-to-control” test? Is the third part similar to the entrepreneurial control test? In what ways is the ABC standard different? California subsequently enacted the ABC standard as applied in Dynamex as the general test for independent contractor status under its employment law. The enacting statute, known as AB 5, exempted certain job classifications, primarily white collar professions, which continue to be governed by an older multifactor economic reality test. Another statute, AB 2257, exempted additional job classifications, primarily in creative work. Thereafter, large gig employers (like Uber and Lyft) successfully pressed a 200 million dollar referendum campaign—Proposition 22—and secured independent contractor status for workers who perform delivery services through an online platform. Which part of the ABC test would most clearly cover gig platform drivers? 7. Recurring Cases. How should the following economic relationships be treated under the various tests, “right-to-control,” “economic reality,” the Employment Restatement, and ABC? a. taxicab drivers who rent their cabs from fleet owners and charge fares as regulated by government, but are free to adopt any route they wish or work on any shift they wish;

b. owner-drivers of trucks who service a single customer, say, the area’s single large department store; c. registered nurses who perform home health-care services for elderly patients, but are not actively supervised by a referring organization; d. lawyers who “telecommute” at home drafting briefs and papers for a number of law firms, although 80% of their work is done for one major law firm; e. freelance musicians who as “regular players” for local orchestras must accept the majority of work offered, see Lerohl v. Friends of Minn. Sinfonia, 322 F.3d 486 (8th Cir. 2003); also Lancaster Symphony Orchestra, 357 N.L.R.B. No. 152 (2011); f. licensed real estate brokers who work exclusively for a real estate brokerage firm on a commission-only basis as independent contractors; who are required to obtain brokerage licenses; who are expected to attend training classes, take turns being in the office to handle calls and welcome off-the-street customers; who are not paid at all unless they help make a sale, in which the standard 6% commission shared with the brokerage firm and the broker on the other side of the transaction; and who are expected to develop their own clients but sometimes take on 24 clients on referral from the brokerage firm. See Monell v. Boston Pads LLC, 471 Mass. 566, 31 N.E.3d 60 (2015). 8. An Intermediate Category or Other Compromise? Some countries have developed in their statutes an intermediate category of workers, falling between the employee and independent contractor poles. German law, for instance, extends some labor and antidiscrimination protections to “employee-like persons” (“Arbeitnehmerahnliche Personem”) who may be technically self-employed, but are nonetheless economically dependent on the users of their services; unjust dismissal law protection, however, is not offered to this group. See Wolfgang Daubler, Working People in Germany, 21 Comp. Lab. L. & Pol. J. 77, 94–95 (1999). British law also now provides for two classes of workers, some of whom are not covered by law governing dismissal. See Harper, Using the Anglo-American Respondeat Superior Principle, supra note 4, at 175–176. Should U.S. statutes be framed to include an intermediate category, perhaps as a political compromise? Are there other ways to provide independent contractors certain employment law benefits and protections without creating an intermediate category? For instance, should antidiscrimination laws be amended to provide coverage for independent contractors? As an apparent political compromise, Proposition 22, the exemption of gig platform drivers from California’s ABC test described in note 6 supra, promises that full time drivers will receive certain benefits including a wage floor, guaranteed tips, a health care subsidy, and accident and disability insurance.

NOTE: VOLUNTEERS AND INTERNS Volunteers. Employment Restatement § 1.02 states that “[a]n individual is a volunteer and not an employee if the individual renders uncoerced services to a principal without being offered a material inducement.” Those who work voluntarily without compensation or prospect of material inducement are not generally treated as employees for purposes of employment laws. See, e.g., York v. Association of the Bar of the City of N.Y., 286 F.3d 122 (2d Cir. 2002) (prospect of future employment through networking in volunteer position not sufficient for employee status under Title VII); Mendoza v. Town of Ross, 128 Cal.App.4th 625, 27 Cal.Rptr.3d 452 (2005) (case holding the same under California Fair Employment and Housing Act, Cal. Gov. §§ 12900 et seq.). See generally Mitchell H. Rubinstein, Our Nation’s Forgotten Workers: The Unprotected Volunteers, 9 U. Pa. J. Lab. & Emp. L. 147 (2006). The exclusion of volunteers extends to the FLSA, notwithstanding its broad definition of “employ” as “to suffer or permit to work.” Cf. Walling v. Portland Terminal Co., 330 U.S. 148, 152, 67 S.Ct. 639, 91 L.Ed. 809 (1947) (brakemen not employees while in training and not compensated). Interns. As explained by the latest guidance from the Department of Labor (“DOL”), the courts have used a “primary beneficiary” test to determine whether an intern is considered an employee under the FLSA. The DOL states that the courts “have identified the following seven factors as part of the test: 25 1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa. 2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions. 3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit. 4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic

calendar. 5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning. 6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern. 7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.” See DOL Wage and Hour Division’s Fact Sheet #71—Internship Programs Under the Fair Labor Standards Act (Jan. 2018). This guidance replaced a prior guidance published during the Obama administration stating that each of six factors, including that the employer “derives no immediate advantage from the activities of the intern,” had to be met for an intern to be exempt. In support of its new list of seven factors, the Trump administration DOL cited several court of appeals decisions that had rejected the DOL six-factor test in favor of a test that considers whether the intern or the employer is the “primary beneficiary” of the relationship. See, e.g., Benjamin v. B & H Educ., Inc., 877 F.3d 1139 (9th Cir. 2017); Schumann v. Collier Anesthesia, P.A., 803 F.3d 1199 (11th Cir. 2015); Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2d Cir. 2015). See also Walling v. Portland Terminal Co., 330 U.S. 148, 152– 53 (1947). Consider the following fact patterns, and assess whether the workers would be considered volunteers, interns, independent contractors, or employees: a. Under the auspices of the Seventh Day Adventist church, Laurelbrook operates a boarding school for students in grades nine through twelve, an elementary school for children of staff members, and a 50-bed intermediate-care nursing home that 26 assists in the students’ practical training (the Sanitarium). The school has been approved and accredited by the Tennessee Department of Education since the 1970s. Students in Laurelbrook’s boarding school learn in both academic and practical settings, spending four hours of each school day in the classroom and four hours learning practical skills. Students learn practical skills, in part, so they can later serve as missionaries in foreign lands. Boarding students keep busy with “wholesome activities” that teach them practical skills about “work, responsibility, [and] the dignity of manual labor” and that contribute to maintaining Laurelbrook’s operations. See Solis v. Laurelbrook Sanitarium and School, Inc., 642 F.3d 518 (6th Cir. 2011) (applying a “primary benefit” standard). b. The city’s unpaid firefighters are required to be certified to render Basic Life Support (BLS) services to individuals they encounter in the performance of their duties. It is not uncommon for firefighters to be dispatched on emergency medical calls if they are able to arrive before a rescue squad. Rescue squads are separately organized non-profit entities that provide “Advanced Life Support” (ALS). The city itself does not possess an ALS license and does not require its firefighters to become certified to provide ALS care. Benshoff, a city firefighter, freely volunteered to join a rescue squad and now seeks compensation from the city for time he spends on rescue squad service rendered on occasions when he is dispatched on emergency calls. See Benshoff v. City of Virginia Beach, 180 F.3d 136 (4th Cir.1999). c. Defendant employs piece-rate workers to pick and peel the seafood it processes and packs. The workers provide their own hairnets, aprons, gloves and knives. Defendant enforces hygiene rules but otherwise does not regulate their work. The workers come and go as they please and are free to work for competitors (though few in fact do so). See McLaughlin v. Seafood, Inc., 867 F.2d 875, modifying 861 F.2d 450 (5th Cir.1988).

B. JOINT EMPLOYERS Where more than one entity exercises control over an individual, courts must assess whether each entity qualifies as a joint employer. The first Supreme Court decision to address the issue of joint employment was a 1947 FLSA decision, Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S. Ct. 1473, 91 L. Ed 1772 (1947). In that case, the meat company contracted with a “boning supervisor”, who was the nominal employer of all of the workers responsible for removing the meat from the bones. As boning supervisors left, the meat company replaced them with other supervisors under similar terms, while the workers performing the deboning remained at the slaughterhouse. 27

The Supreme Court concluded that the workers were jointly employed by the meat company and the boning supervisors but did not articulate a test for assessing joint-employer status. Rutherford generated several approaches. The case which

follows applies Rutherford to the garment industry.

ZHENG V. LIBERTY APPAREL COMPANY INC. U.S. Court of Appeals, Second Circuit, 2003. 355 F.3d 61.

CABRANES, J.: This case asks us to decide whether garment manufacturers who hired contractors to stitch and finish pieces of clothing were “joint employers” within the meaning of the Fair Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. § 201 et seq., and New York law. Plaintiffs, garment workers in New York City who were directly employed by the contractors, claim that the manufacturers were their joint employers because they worked predominantly on the manufacturers’ garments, they performed a line-job that was integral to the production of the manufacturer’s product, and their work was frequently and directly supervised by the manufacturers’ agents. The manufacturers respond that the contractors, who, among other things, hired and paid plaintiffs to assemble clothing for numerous manufacturers, were plaintiffs’ sole employers. Both plaintiffs and the manufacturers moved for summary judgment on the issue of joint employment. The United States District Court for the Southern District of New York * * * applying the four-factor test set forth in Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir. 1984), granted the manufacturers’ motion, and held that the manufacturers could not be held liable for violations of the FLSA or its New York statutory analogues. The District Court also declined to exercise supplemental jurisdiction over a surviving New York claim. *** Plaintiffs-Appellants are 26 non-English-speaking adult garment workers who worked in a factory at 103 Broadway in New York’s Chinatown. They brought this action against both (1) their immediate employers, six contractors doing business at 103 Broadway (“Contractor Corporations”) and their principals (collectively, “Contractor Defendants”), and (2) Liberty Apparel Company, Inc. (“Liberty”) and its principals, Albert Nigri and Hagai Laniado (collectively, “Liberty Defendants”). Because the Contractor Defendants either could not be located or have ceased doing business, plaintiffs have voluntarily dismissed their claims against those defendants with prejudice. Accordingly, plaintiffs now seek damages only from the Liberty Defendants. 28

Liberty, a “jobber” in the parlance of the garment industry, is a manufacturing company that contracts out the last phase of its production process. That process, in broad terms, worked as follows: First, Liberty employees developed a pattern for a garment, cut a sample from the pattern, and sent the sample to a customer for approval. Once the customer approved the pattern, Liberty purchased the necessary fabric from a vendor, and the vendor delivered the fabric to Liberty’s warehouse. There, the fabric was graded and marked, spread out on tables, and, finally, cut by Liberty employees. After the fabric was cut, Liberty did not complete the production process on its own premises. Instead, Liberty delivered the cut fabric, along with other essential materials, to various contractors for assembly. The assemblers, in turn, employed workers to stitch and finish the pieces, a process that included sewing the fabrics, buttons, and labels into the garments, cuffing and hemming the garments, and, finally, hanging the garments. The workers, including plaintiffs, were paid at a piece rate for their labor. From March 1997 through April 1999, Liberty entered into agreements with the Contractor Corporations under which the Contractor Corporations would assemble garments to meet Liberty’s specifications. During that time period, Liberty utilized as many as thirty to forty assemblers, including the Contractor Corporations. Liberty did not seek out assemblers; instead, assemblers came to Liberty’s warehouse looking for assembly work. In order to obtain such work, a prospective assembler was required by Liberty to sign a form agreement. Plaintiffs claim that approximately 70–75% of their work during the time period at issue was for Liberty. They explain that they knew they were working for Liberty based on both the labels that were sown into the garments and the specific lot numbers that came with the garments. Liberty’s co-owner, Albert Nigri, asserts that the percentage of the Contractor Corporations’ work performed for Liberty was closer to 10–15%. He derives that figure from individual plaintiffs’ handwritten notes and records. The parties do not dispute that Liberty employed people to monitor Liberty’s garments while they were being assembled. However, the parties dispute the extent to which Liberty oversaw the assembly process. Various plaintiffs presented affidavits to the District Court stating that two Liberty representatives—a man named Ah Sen and “a Taiwanese woman”—visited the factory approximately two to four times a week for up to three hours a day, and exhorted the plaintiffs to work harder and faster. In their affidavits, these plaintiffs claim further that, when they finished working on garments, Liberty representatives—as opposed to employees of the Contractor Corporations—inspected their work and gave instructions directly to the workers if

corrections needed to be made. One of the 29

plaintiffs also asserts that she informed the “Taiwanese woman” that the workers were not being paid for their work at the factory. *** Lopez v. Silverman, 14 F. Supp. 2d 405 (S.D.N.Y. 1998), [drawing on] the Supreme Court’s decision in Rutherford Food Corp. v. McComb, 331 U.S. 722, 91 L. Ed. 1772, 67 S. Ct. 1473 (1947), Judge Cote concluded that the following seven factors should be considered in determining whether garment workers are jointly employed by a “jobber”: (1) the extent to which the workers perform a discrete line-job forming an integral part of the putative joint employer’s integrated process of production or overall business objective; (2) whether the putative joint employer’s premises and equipment were used for the work; (3) the extent of the putative employees’ work for the putative joint employer; (4) the permanence or duration of the working relationship between the workers and the putative joint employer; (5) the degree of control exercised by the putative joint employer over the workers; (6) whether responsibility under the contract with the putative joint employer passed “without material changes” from one group of potential joint employees to another; and (7) whether the workers had a “business organization” that could or did shift as a unit from one putative joint employer to another. *** We conclude, for the reasons set forth below, that the District Court erred when * * * it determined that the Liberty Defendants were not, as a matter of law, joint employers under the FLSA. In our view, the broad language of the FLSA, as interpreted by the Supreme Court in Rutherford, demands that a district court look beyond an entity’s formal right to control the physical performance of another’s work before declaring that the entity is not an employer under the FLSA. * * * *** Rutherford confirmed that the definition of “employ” in the FLSA cannot be reduced to formal control over the physical performance of another’s work. In Rutherford, the Supreme Court held that a slaughterhouse jointly employed workers who deboned meat on its premises, despite the fact that a boning supervisor—with whom the slaughterhouse had entered into a contract—directly controlled the terms 30

and conditions of the meat boners’ employment. Specifically, the supervisor, rather than the slaughterhouse, (i) hired and fired the boners, (ii) set their hours, and, (iii) after being paid a set amount by the slaughterhouse for each one hundred pounds of de-boned meat, paid the boners for their work. Rutherford, 331 U.S. at 726, 730. In determining that the meat boners were employees of the slaughterhouse notwithstanding the role played by the boning supervisor, the Court examined the “circumstances of the whole activity,” id. at 730, but also isolated specific relevant factors that help distinguish a legitimate contractor from an entity that “suffers or permits” its subcontractor’s employees to work. First, the Court noted that the boners “did a specialty job on the production line”; that is, their work was “a part of the integrated unit of production” at the slaughterhouse. Id. at 729–30. The Court noted also that responsibility under the boning contracts passed from one boning supervisor to another “without material changes” in the work performed at the slaughterhouse; that the slaughterhouse’s premises and equipment were used for the boners’ work; that the group of boners “had no business organization that could or did shift as a unit from one slaughterhouse to another”; and that the managing official of the slaughterhouse, in addition to the boners’ purported employer, closely monitored the boners’ performance and productivity. Id. Based on its analysis of these factors, the Court imposed FLSA liability on the slaughterhouse. Like the case at bar, Rutherford was a joint employment case, as it is apparent from the Supreme Court’s opinion that the boners were, first and foremost, employed by the boning supervisor who had entered into a contract with the slaughterhouse. See id. at 724–25 (explaining that the boning supervisor exercised the prerogatives of an employer, including hiring workers, managing their work, and paying them). Rutherford thus held that, in certain circumstances, an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.

*** The factors we find pertinent in these circumstances, listed in no particular order, are (1) whether Liberty’s premises and equipment were used for the plaintiffs’ work; (2) whether the Contractor Corporations had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which plaintiffs performed a discrete line-job that was integral to Liberty’s process of production; (4) whether responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which the Liberty Defendants or their agents supervised plaintiffs’ work; and (6) whether plaintiffs worked exclusively or predominantly for the Liberty Defendants. See Rutherford, 331 U.S. at 724–25, 730; see also Lopez, 14 F. Supp. 2d at 416–18 (summarizing the factors considered in Rutherford). 31

*** The first two factors derived from Rutherford require minimal discussion. The first factor—namely, whether a putative joint employer’s premises and equipment are used by its putative joint employees—is relevant because the shared use of premises and equipment may support the inference that a putative joint employer has functional control over the plaintiffs’ work. Similarly, the second factor—namely, whether the putative joint employees are part of a business organization that shifts as a unit from one putative joint employer to another—is relevant because a subcontractor that seeks business from a variety of contractors is less likely to be part of a subterfuge arrangement than a subcontractor that serves a single client. Although neither shared premises nor the absence of a broad client base is anything close to a perfect proxy for joint employment (because they are both perfectly consistent with a legitimate subcontracting relationship), the factfinder can use these readily verifiable facts as a starting point in uncovering the economic realities of a business relationship. *** Rutherford * * * offers no firm guidance as to how to distinguish work that “in its essence, follows the usual path of an employee,” [331 U.S. at 730], from work that can be outsourced without attracting increased scrutiny under the FLSA. In our view, there is no bright-line distinction between these two categories of work. On one end of the spectrum lies the type of work performed by the boners in Rutherford—i.e., piecework on a producer’s premises that requires minimal training or equipment, and which constitutes an essential step in the producer’s integrated manufacturing process. On the other end of the spectrum lies work that is not part of an integrated production unit, that is not performed on a predictable schedule, and that requires specialized skills or expensive technology. In classifying business relationships that fall in between these two poles, we are mindful of the substantial and valuable place that outsourcing, along with the subcontracting relationships that follow from outsourcing, have come to occupy in the American economy. * * * Accordingly, we resist the temptation to say that any work on a so-called production line—no matter what product is being manufactured—should attract heightened scrutiny. Instead, in determining the weight and degree of factor (3), we believe that both industry custom and historical practice should be consulted. Industry custom may be relevant because, insofar as the practice of using subcontractors to complete a particular task is widespread, it is unlikely to be a mere subterfuge to avoid complying with labor laws. At the same time, historical practice may also be relevant, because, if plaintiffs can prove that, as a historical matter, a contracting device has developed in response to and as a means to avoid applicable labor laws, the prevalence of that device may, in particular circumstances, 32

be attributable to widespread evasion of labor laws. Ultimately, this factor, like the other factors derived from Rutherford is not independently determinative of a defendant’s status, because the mere fact that a manufacturing job is not typically outsourced does not necessarily mean that there is no substantial economic reason to outsource it in a particular case. However, as Rutherford indicates, the type of work performed by plaintiffs can bear on the overall determination as to whether a defendant may be held liable for an FLSA violation. The fourth factor the Court considered in Rutherford is whether responsibility under the contracts could pass from one subcontractor to another without material changes. * * * Under Rutherford, * * * this factor weighs in favor of a determination of joint employment when employees are tied to an entity such as the slaughterhouse rather than to an ostensible direct employer such as the boning supervisor. In such circumstances, it is difficult not to draw the inference that a subterfuge arrangement exists. Where, on the other hand, employees work for an entity (the purported joint employer) only to the extent that their direct employer is hired by that entity, this factor does not in any way support the determination that a joint employment relationship exists. The fifth factor listed above—namely, the degree to which the defendants supervise the plaintiffs’ work—also requires some comment, as it too can be misinterpreted to encompass run-of-the-mill subcontracting relationships. Although Rutherford indicates that a defendant’s extensive supervision of a plaintiff’s work is indicative of an employment relationship, see

Rutherford, 331 U.S. at 730 (noting that “the managing official of the plant kept close touch on the operation”), Rutherford indicates also that such extensive supervision weighs in favor of joint employment only if it demonstrates effective control of the terms and conditions of the plaintiff’s employment, see Rutherford, 331 U.S. at 726 (suggesting the slaughterhouse owner’s close scrutiny of the boners’ work played a role in setting the boners’ schedule); * * * By contrast, supervision with respect to contractual warranties of quality and time of delivery has no bearing on the joint employment inquiry, as such supervision is perfectly consistent with a typical, legitimate subcontracting arrangement. * * * Finally, the Rutherford Court considered whether the purported joint employees worked exclusively or predominantly for the putative joint employer. In describing that factor, we use the words “exclusively or predominantly” on purpose. * * * In those situations, the joint employer may de facto become responsible, among other things, for the amount workers are paid and for their schedules, which are traditional indicia of employment. On the other hand, where a subcontractor performs merely a majority of its work for a single customer, there is no sound basis on which to infer that the customer has assumed the prerogatives of an employer. *** 33

Although summary judgment might also be granted to plaintiffs even when isolated factors point against imposing joint liability, * * * the District Court’s conclusion that, in the present circumstances, the record cannot support summary judgment in plaintiffs’ favor, remains undisturbed. This case is quite different from Rutherford, in which the Supreme Court concluded that the slaughterhouse was a joint employer as a matter of law. In Rutherford, unlike in this case, every relevant factor described above weighed in favor of a joint employment relationship, and the record as a whole compelled the conclusion that the slaughterhouse exercised functional control over the boners. See Rutherford, 331 U.S. at 730. [Eds. The court’s discussion of the state law claims is omitted.]

RESTATEMENT OF EMPLOYMENT LAW § 1.04 American Law Institute (2015).

§ 1.04 Employees of Two or More Employers (a) An individual is an employee of two or more separate employers if (i) the individual renders services to each of the employers on a separate basis during a given day, week, or other time period and (ii) during such time period is subject solely to that employer’s control or supervision as provided in § 1.01(a)(3). (b) An individual is an employee of two or more joint employers if (i) the individual renders services to at least one of the employers and (ii) that employer and the other joint employers each control or supervise such rendering of services as provided in § 1.01(a)(3).

NOTES AND QUESTIONS 1. The appellate court distinguishes Rutherford on the ground that not every factor weighs in favor of joint employer status. Which factors in Zheng did not weigh in favor of joint employer status? 2. Consider again Judge Easterbrook’s criticism of the “economic reality” test in Lauritzen. Does the Zheng court’s multi-factor test provide a predictable and coherent guidepost for potential employers? 3. Reason for Joint Employment Liability Under the FLSA. The FLSA imposes a strict affirmative duty on each employer to meet minimum wage and overtime standards; a demonstration of fault is not necessary for liability. Zheng, like Rutherford, provides an example of why the liability of more than one employer may be required, however; garment workers may be employed by small, thinlycapitalized firms that are difficult to monitor and, even when caught violating the employment laws, may be judgment-proof as a practical matter. Does this mean that a joint employment standard should vary 34 depending upon the solvency of a primary employer? Can the statute be so interpreted? Alternatively, is a broad standard justified because the law can expect highly capitalized businesses to impose indemnification clauses in their contracts with associated businesses that might under pay their workers? Stronger Responses to Problem of Thin Capitalization and Risk of Insolvency?

Is even a broadly defined joint employment standard an adequate response to the problem illustrated by the Zheng case? Consider, for instance, a provision in New York State’s labor law that makes manufacturers and contractors jointly liable for unpaid wages owed contractors’ employees. See New York Labor Law §§ 340–45 & 348. Consider also § 15(a)(1) of the FLSA, the so-called “hot goods” provision, that prohibits the transportation of goods manufactured in violation of the FLSA. This prohibition can be enforced through a court order and was used during the Obama administration to negotiate robust compliance agreements with manufacturers, providing for better screening and oversight of contractor practices. See David Weil, Improving Workplace Conditions through Strategic Enforcement: A Report to the Wage and Hour Division at 29–30 (May 2020). For other legislative proposals, see, e.g., Michael C. Harper, Escaping the Allure of Joint Employment: Using Fault-Based Principles to Impose Liability for the Denial of Statutory Rights, 35 ABA Journal of Labor and Employment Law (forthcoming 2022) (advocating imposing a duty on businesses not to be negligent in their exercise of any level of control in their business relations with other businesses); Brishen Rogers, Toward Third-Party Liability for Wage Theft, 31 Berkeley J. Emp. & Lab. L. 1, 33, 46–47 (2011) (advocating imposing a duty of reasonable care on firms in supply chains to take affirmative steps to prevent foreseeable violations by domestic low wage firms in their supply chains). 4. Control over Essential Terms and Conditions of Employment. In 2020 the Trump administration DOL issued a regulation that adopted a control test for joint employment. 85 Fed. Reg. 2820 (Jan. 16, 2020). The test stated that joint employment status for purpose of determining potential liability for breaches of the FLSA would turn primarily on whether the putative joint employer “(i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.” The regulation specifically relied upon actual control rather than the right to control, asserting that “[t]he potential employer must actually exercise—directly or indirectly —one or more of these indicia of control to be jointly liable.” The regulation eschewed the economic reality test the courts had applied and largely ignored the “suffer or permit” 35 language in § 203(g). The regulation relied upon lower court rulings such as Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983) and In re Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, 683 F.3d 462 (3d Cir. 2012). The 2020 regulation was vacated as inconsistent with the FLSA in New York v. Scalia, 490 F.Supp. 3d 748 (S.D. N.Y. 2020), and while that ruling was on appeal the regulation was rescinded by the Biden administration DOL, after a further notice and comment rulemaking process. See 86 Fed. Reg. 40939 (July 30, 2021). 5. “Temp” Agencies. Temporary employment agencies and their clients often provide clear examples of joint employment when the agencies set and pay wages of employees supplied by the agencies while the clients control the details of the work. See, e.g., Ansoumana v. Gristede’s Operating Corp., 255 F.Supp.2d 184 (S.D. N.Y. 2003) (drug store was joint employer under FLSA of delivery workers provided by contractors); Amarnare v. Merrill Lynch, 611 F.Supp. 344 (S.D.N.Y. 1984) (temporary employment agency and client both employers under Title VII). When the temp agencies only refer the workers without maintaining any ongoing contact, however, there presumably is no continuing joint employment. 6. Franchises. Should franchisors be treated as joint employers of the employees of their franchisees? Generally, the courts require proof of franchisor control of the wages and working conditions of the franchisee’s workers. But should the approach be broader in scope, to turn on whether the franchisees operate essentially as agents of the franchisors, serving the franchisors’ goals as if they were denominated departments, or rather operate as independent businesses with economic goals not always fully aligned with those of their franchisors? Consider, for instance, the unaligned economic incentives in the typical franchise agreement in the fast food industry under which franchisors have a contractual right to a share of revenues, but not a share of the profits of franchisees. See Harper, supra page 35 Note 4, at 204–208 (explaining how different economic incentives mean that franchisees will not control their employees fully in the interests of franchisors). 7. Joint Employment of Farmworkers Under the FLSA and the Migrant and Seasonal Agricultural Workers Protection Act (MSPA). As suggested by the Lauritzen case, farm workers may be covered by the FLSA. In 1983, moreover, Congress passed the MSPA, which imposes certain obligations on agricultural employers to ensure the provision of promised wages and working conditions. The MSPA incorporated the definition of “employ” from the FLSA, and DOL regulations define the term to include “to suffer or permit to work.” 29 C.F.R. § 500.20(h)(1). The rescinded 2020 DOL joint employment regulation, however, did not purport to modify the coverage of employers under the MSPA. DOL guidance for the MSPA states that the “test of an employment relationship . . . is economic dependence” rather than “the traditional ‘right to control’ test.” 62 Fed. Reg. 11734 (Mar. 12, 1997). See also DOL Wage and Hour Div. Fact Sheet #35 (January, 2020) (listing multiple factors beyond control as part of an economic realities test). 36 Determining joint employment status in the agricultural sector may be critical because farm operator-growers often use thinly

capitalized labor contractors to recruit and supervise farm-laborers. Decisions finding farm operator-growers to be joint employers have emphasized not only the operators’ supervision of the laborers, but also the contractors’ limited capital investment. See, e.g., Reyes v. Remington Hybrid Seed Co., 495 F.3d 403 (7th Cir. 2007) (Easterbrook, J.); Charles v. Burton, 169 F.3d 1322 (11th Cir. 1999); TorresLopez v. May, 111 F.3d 633 (9th Cir. 1997); Antenor v. D & S Farms, 88 F.3d 925 (11th Cir. 1996). But see Aimable v. Long & Scott Farms, 20 F.3d 434 (11th Cir. 1994) (farm operator not an employer of workers provided by a contractor who also provided housing and transportation and had sole supervisory control); Gonzalez-Sanchez v. International Paper Co., 346 F.3d 1017 (11th Cir. 2003) (laborers who hand-planted seedlings in forests owned by International Paper were not IP’s employees where only contractors supervised and supplied housing, equipment and transportation). 8. “Horizontal” Joint Employment. Based on prior DOL administrative guidance, the rescinded 2020 regulation distinguished “horizontal” joint employment from the “vertical” joint employment that defines which employers are potentially liable for a failure to meet minimum wage and overtime standards for the same work. Horizontal joint employment, by contrast, exists when an employee is separately employed by, and works separate hours in a work week for more than one employer, but the employers are sufficiently associated with or related to each other with respect to the employee that the separate hours must be aggregated in determining overtime pay. The regulation stated that employers are sufficiently associated if “(i) there is an arrangement between them to share the employee’s service; (ii) one employer is acting directly or indirectly in the interest of the other employer in relation to the employee, or (iii) they share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.” 29 C.F.R. § 791.2(e)(2) (August, 2021). The 2020 regulation’s standard for defining horizontal joint employment for purposes of calculating hours worked for overtime pay repeated the standard in a prior DOL regulation and was not vacated by the district court in the Scalia case, see note 4 supra. The DOL’s explanation for its 2021 rescission of the 2020 rule did not criticize the horizontal standard, but the explanation stated that the Department would consider some reformulation in later rulemaking. See 86 Fed. Reg. 40939 (July 30, 2021). 9. Joint Employment Under the Antidiscrimination Laws. a. A Different Standard? Recall the assertion in the Darden decision, pages 12–13 supra, that a multifactor common law right-tocontrol test should govern the definition of employee in any federal statute that does not provide any special definitional direction. Does this common law default rule also govern the definition of joint employment under the anti-discrimination laws, which like the ERISA but unlike the FLSA and MSPA, do not provide any special definition of the employment relationship? 37 b. Is Joint Employment Sufficient for Liability Under the Antidiscrimination Laws? Unlike the FLSA, the anti-discrimination laws do not impose strict liability on employers, but rather are based on some showing of fault, either through an intent to discriminate or the use of practices or policies that disproportionately disadvantage protected groups without business justification. Should a joint user employer that supervises temp agency workers be subject to liability for the temp agency’s discriminatory assignment of workers about which the user-supervisory employer was unaware? Conversely, should the temp agency that hires and pays the workers be liable for undisclosed sexual harassment by a supervisor at the user employer’s workplace? Courts indeed have not imposed strict liability on joint employers under Title VII without consideration of fault. See, e.g., E.E.O.C. v. Global Horizons, Inc., 915 F.3d 631, 641 (9th Cir. 2019). “As our sister circuits have explained, even if a joint-employer relationship exists, one joint employer is not automatically liable for the actions of the other. . . . Liability may be imposed for a co-employer’s discriminatory conduct only if the defendant employer knew or should have known about the other employer’s conduct and “failed to undertake prompt corrective measures within its control.” Accord Burton v. Freescale Semiconductor, Inc., 798 F.3d 222, 228–29 (5th Cir. 2015); Whitaker v. Milwaukee County, 772 F.3d 802, 811–12 (7th Cir. 2014); Anderson v. Pacific Maritime Ass’n, 336 F.3d 924, 928–30 (9th Cir. 2003) (dicta); Llampallas v. MiniCircuits, Lab, Inc., 163 F.3d 1236, 1244–45 (11th Cir. 1988); Torres-Negron v. Merck & Co., 488 F.3d 34, 41 n.6 (2007) (“joint-employer liability does not by itself implicate vicarious liability”). c. Is Joint Employment Necessary for Liability Under the Antidiscrimination Laws? Can a business be liable for causing discrimination against the employees of another employer, even when the culpable employer is not a joint employer of the victimized employees? Can § 703(a) of Title VII of the 1964 Civil Rights Act, for instance, be read to authorize such liability? In Sibley Memorial Hospital v. Wilson, 488 F.2d 1338 (D.C. Cir. 1973), the court held that a hospital that made a sex-based decision not to refer a nurse for employment by a patient could be liable for sex discrimination under Title VII of the 1964 Civil Rights Act. Judge McGowan explained for the court: “To permit a covered employer to exploit circumstances peculiarly affording it the capability of discriminatorily interfering with an individual’s employment opportunities with another employer, while it could not do so with respect to employment in its own service, would be to condone continued use of the very criteria for employment that Congress has prohibited. . . . The Act defines “employee” as “an individual employed by an employer,” but nowhere are there words of

limitation that restrict references in the Act to “any individual” as comprehending only an employee of an employer. Nor is there any good reason to confine the meaning of “any individual” to include only former employees and applicants for employment, in addition to present employees. Those words should, therefore, be 38 given their ordinary meaning so long as that meaning does not conflict with the manifest policy of the Act. . . . The Act, in providing for the filing of complaints with EEOC and of eventual actions in the District Court, does not use the term “employee.” The phrase is, rather, the “person aggrieved;” and that term can certainly be taken as comprehending individuals who do not stand in a direct employment relationship with an employer.” Id. at 1341. See also, e.g., Ass’n of Mexican-American Educators v. California, 231 F.3d 572 (9th Cir. 2000) (disparate impact case against state for teacher credentialing test); Christopher v. Stouder Mem’l Hosp., 936 F.2d 870 (6th Cir. 1991) (hospital’s retaliation against scrub nurse by limiting private duty and thus employment opportunities). But see Lopez v. Massachusetts, 588 F.3d 69 (1st Cir. 2009) (rejecting “interference theory” and using only common law of agency in disparate impact challenge to state test used by local police departments); Gulino v. New York State Educ. Dept., 460 F.3d 361 (2d Cir. 2006) (refusing to apply Sibley in disparate impact challenge to a state test given to local school department employees). See generally Michael C. Harper, Escaping the Allure of Joint Employment: Using Fault-Based Principles to Impose Liability for the Denial of Statutory Rights, 35 ABA Journal of Labor and Employment Law (forthcoming 2022).

C. EMPLOYEES OR EMPLOYERS? CLACKAMAS GASTROENTEROLOGY ASSOCIATES, P.C. V. WELLS Supreme Court of the United States, 2003. 538 U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d 615.

JUSTICE STEVENS delivered the opinion of the Court. The Americans with Disabilities Act of 1990 (ADA or Act), 104 Stat. 327, as amended, 42 U.S.C. § 12101 et seq., like other federal antidiscrimination legislation, is inapplicable to very small businesses. Under the ADA an “employer” is not covered unless its workforce includes “15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year.” § 12111(5). The question in this case is whether four physicians actively engaged in medical practice as shareholders and directors of a professional corporation should be counted as “employees.” I Petitioner, Clackamas Gastroenterology Associates, P. C., is a medical clinic in Oregon. It employed respondent, Deborah Wells, as a bookkeeper from 1986 until 1997. After her termination, she brought this action against the clinic alleging unlawful discrimination on the basis of disability under Title I of the ADA. Petitioner denied that it was covered by the Act and moved for summary judgment, asserting that it did not have 15 or more 39

employees for the 20 weeks required by the statute. It is undisputed that the accuracy of that assertion depends on whether the four physician-shareholders who own the professional corporation and constitute its board of directors are counted as employees. The District Court, adopting the Magistrate Judge’s findings and recommendation, granted the motion. Relying on an “economic realities” test adopted by the Seventh Circuit in EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177, 1178 (1984), the District Court concluded that the four doctors were “more analogous to partners in a partnership than to shareholders in a general corporation” and therefore were “not employees for purposes of the federal antidiscrimination laws.” A divided panel of the Court of Appeals for the Ninth Circuit reversed. [Eds. The panel majority refused to engage in inquire into whether the physician-shareholders functioned as partners because they operated under a corporate form: “While the shareholders of a corporation may or may not be “employees,” they can never be partners in that corporation because the roles are “mutually exclusive.” Finding they were employees because they “actively participated in the management and operation of the medical practice and literally were employees of the corporation under employment agreements,” the panel concluded that Clackamas had sufficient employees to be a covered “employer” under ADA § 12111(5). 271 F.3d 903, 905–906 (9th Cir. 2000).] II

“We have often been asked to construe the meaning of ‘employee’ where the statute containing the term does not helpfully define it.” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 117 L.Ed. 2d 581, 112 S.Ct. 1344 (1992). The definition of the term in the ADA simply states that an “employee” is “an individual employed by an employer.” 42 U.S.C. § 12111(4). * * * In Darden * * * we adopted a common-law test for determining who qualifies as an “employee” under ERISA. * * * We explained that “ ‘when Congress has used the term ‘employee’ without defining it, we have concluded that Congress intended to describe the conventional master-servant relationship as understood by common-law agency doctrine.’ ” Darden, 503 U.S., at 322–323. Rather than looking to the common law, petitioner argues that courts should determine whether a shareholder-director of a professional corporation is an “employee” by asking whether the shareholder-director is, in reality, a “partner.” The question whether a shareholder-director is an employee, however, cannot be answered by asking whether the shareholder-director appears to be the functional equivalent of a partner. Today there are partnerships that include hundreds of members, some of whom may well qualify as “employees” because control is concentrated in a 40

small number of managing partners. Cf. Hishon v. King & Spalding, 467 U.S. 69, 80, n. 2, 81 L.Ed. 2d 59, 104 S.Ct. 2229 (1984) (Powell, J., concurring) (“An employer may not evade the strictures of Title VII simply by labeling its employees as ‘partners’ ”); EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696, 709 (CA7 2002) (Easterbrook, concurring in part and concurring in judgment); Strother v. Southern California Permanente Medical Group, 79 F.3d 859 (CA9 1996). Thus, asking whether shareholder-directors are partners—rather than asking whether they are employees—simply begs the question. Nor does the approach adopted by the Court of Appeals in this case fare any better. The majority’s approach, which paid particular attention to “the broad purpose of the ADA,” 271 F.3d at 905, is consistent with the statutory purpose of ridding the Nation of the evil of discrimination. See 42 U.S.C. § 12101(b).6 Nevertheless, two countervailing considerations must be weighed in the balance. First, as the dissenting judge noted below, the congressional decision to limit the coverage of the legislation to firms with 15 or more employees has its own justification that must be respected—namely, easing entry into the market and preserving the competitive position of smaller firms. See 271 F.3d at 908 (opinion of Graber, J.) * * * . Second, as Darden reminds us, congressional silence often reflects an expectation that courts will look to the common law to fill gaps in statutory text, particularly when an undefined term has a settled meaning at common law. Congress has overridden judicial decisions that went beyond the common law in an effort to correct “the mischief” at which a statute was aimed. See Darden, 503 U.S., at 324–325. Perhaps the Court of Appeals’ and the parties’ failure to look to the common law for guidance in this case stems from the fact that we are dealing with a new type of business entity that has no exact precedent in the common law. State statutes now permit incorporation for the purpose of practicing a profession, but in the past “the so-called learned professions were not permitted to organize as corporate entities.” 1A W. Fletcher, Cyclopedia of the Law of Private Corporations § 112.10 (rev. ed. 1997–2002). Thus, professional corporations are relatively young participants in the market, and their features vary from State to State. See generally 1 B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 2.06 (7th ed. 2002) (explaining that States began to authorize the creation of professional corporations in the late 1950’s and that the momentum to form professional corporations grew in the 1970’s). 41

Nonetheless, the common law’s definition of the master-servant relationship does provide helpful guidance. At common law the relevant factors defining the master-servant relationship focus on the master’s control over the servant. The general definition of the term “servant” in the Restatement (Second) of Agency § 2(2) (1958), for example, refers to a person whose work is “controlled or is subject to the right to control by the master.” * * * In addition, the Restatement’s more specific definition of the term “servant” lists factors to be considered when distinguishing between servants and independent contractors, the first of which is “the extent of control” that one may exercise over the details of the work of the other. Id., § 220(2)(a). We think that the common-law element of control is the principal guidepost that should be followed in this case. This is the position that is advocated by the Equal Employment Opportunity Commission (EEOC), the agency that has special enforcement responsibilities under the ADA and other federal statutes containing similar threshold issues for determining coverage. It argues that a court should examine “whether shareholder-directors operate independently and manage the business or instead are subject to the firm’s control.” According to the EEOC’s view, “if the shareholder-directors operate independently and manage the business, they are proprietors and not employees; if they are subject to the firm’s control, they are employees.” Specific EEOC guidelines discuss both the broad question of who is an “employee” and the narrower question of when

partners, officers, members of boards of directors, and major shareholders qualify as employees. See 2 Equal Employment Opportunity Commission, Compliance Manual §§ 605:0008–605:00010 (2000) (hereinafter EEOC Compliance Manual). With respect to the broad question, the guidelines list 16 factors—taken from Darden, 503 U.S., at 323–324—that may be relevant to “whether the employer controls the means and manner of the worker’s work performance.” EEOC Compliance Manual § 605:0008, and n. 71. The guidelines list six factors to be considered in answering the narrower question, which they frame as “whether the individual acts independently and participates in managing the organization, or whether the individual is subject to the organization’s control.” Id., § 605:0009. We are persuaded by the EEOC’s focus on the common-law touchstone of control, see Skidmore v. Swift & Co., 323 U.S. 134, 140, 89 L.Ed. 124, 65 S.Ct. 161 (1944), and specifically by its submission that each of the following six factors is relevant to the inquiry whether a shareholder-director is an employee: Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work Whether and, if so, to what extent the organization supervises the individual’s work 42

Whether the individual reports to someone higher in the organization Whether and, if so, to what extent the individual is able to influence the organization Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts Whether the individual shares in the profits, losses, and liabilities of the organization.” EEOC Compliance Manual § 605:0009.10 As the EEOC’s standard reflects, an employer is the person, or group of persons, who owns and manages the enterprise. The employer can hire and fire employees, can assign tasks to employees and supervise their performance, and can decide how the profits and losses of the business are to be distributed. The mere fact that a person has a particular title—such as partner, director, or vice president—should not necessarily be used to determine whether he or she is an employee or a proprietor. See ibid. (“An individual’s title . . . does not determine whether the individual is a partner, officer, member of a board of directors, or major shareholder, as opposed to an employee”). Nor should the mere existence of a document styled “employment agreement” lead inexorably to the conclusion that either party is an employee. See ibid. (looking to whether “the parties intended that the individual be an employee, as expressed in written agreements or contracts”). Rather, as was true in applying common law rules to the independent-contractor-versus-employee issue confronted in Darden, the answer to whether a shareholder-director is an employee depends on “ ‘all of the incidents of the relationship . . . with no one factor being decisive.’ ” 503 U.S., at 324 (quoting NLRB v. United Ins. Co. of America, 390 U.S. 254, 258, 19 L.Ed. 2d 1083, 88 S.Ct. 988 (1968)). III Some of the District Court’s findings—when considered in light of the EEOC’s standard—appear to weigh in favor of a conclusion that the four director-shareholder physicians in this case are not employees of the clinic. For example, they apparently control the operation of their clinic, they share the profits, and they are personally liable for malpractice claims. There may, however, be evidence in the record that would contradict those findings or support a contrary conclusion under the EEOC’s standard that we endorse today.11 Accordingly, as we did in Darden, we reverse the 43

judgment of the Court of Appeals and remand the case to that court for further proceedings consistent with this opinion. JUSTICE GINSBURG, with whom JUSTICE BREYER joins, dissenting. Are the physician-shareholders “servants” of Clackamas for the purpose relevant here? The Restatement defines “servant” to mean “an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.” Restatement (Second) of Agency § 2(2) (1958) (hereinafter Restatement). When acting as clinic doctors, the physician-shareholders appear to fit the Restatement definition. The doctors provide services on behalf of the corporation, in whose name the practice is conducted. See Ore. Rev. Stat. Ann. § 58.185(1)(a) (1998 Supp.) (shareholders of a professional corporation “render the specified professional services of the corporation” (emphasis added)). The doctors have employment contracts with Clackamas, under which they receive salaries and yearly bonuses, and they work at facilities owned or leased by the corporation. In performing their duties, the doctors must “comply with . . . standards [the organization has] established.” See Restatement, ch. 7, tit. B, Introductory Note, p. 479 (“Fully employed but highly placed employees of a corporation . . . are no less servants because they are not controlled in their day-to-

day work by other human beings. Their physical activities are controlled by their sense of obligation to devote their time and energies to the interests of the enterprise.”). The physician-shareholders, it bears emphasis, invite the designation “employee” for various purposes under federal and state law. The Employee Retirement Income Security Act of 1974 (ERISA), much like the ADA, defines “employee” as “any individual employed by an employer.” 29 U.S.C. § 1002(6). Clackamas readily acknowledges that the physician-shareholders are “employees” for ERISA purposes. Indeed, gaining qualification as “employees” under ERISA was the prime reason the physician-shareholders chose the corporate form instead of a partnership. Further, Clackamas agrees, the physician-shareholders are covered by Oregon’s workers’ compensation law, a statute applicable to “persons . . . who . . . furnish services for a remuneration, subject to the direction and control of an employer,” Ore. Rev. Stat. Ann. § 656.005(30) (1996 Supp.). Finally, by electing to organize their practice as a corporation, the physician-shareholders created an entity separate and distinct from themselves, one that would afford them limited liability for the debts of the enterprise. §§ 58.185(4), (5), (10), (11) (1998 Supp.). I see no reason to allow the doctors to escape from their choice of corporate form when the question becomes whether they are employees for purposes of federal antidiscrimination statutes. 44

RESTATEMENT OF EMPLOYMENT LAW § 1.03 American Law Institute (2015).

§ 1.03 Controlling Owners Are Not Employees for Purposes of Laws Governing Employment Relationship An individual is not an employee of an enterprise if the individual through an ownership interest controls all or a part of the enterprise.

NOTES AND QUESTIONS 1. What test does the Court instruct the lower court to apply on remand? 2. Is the position of the EEOC and that of the Court in Clackamas consistent with the Restatement of Employment Law? 3. Consistency with Common Law? Under the common law as stated in the Restatement (Second) of Agency (Agency Restatement) in 1958, “highly placed employees of a corporation, such as presidents and general managers, are not less servants because they are not controlled in their day-to-day work by other human beings. Their physical activities are controlled by their sense of obligation to devote their time and energies to the interests of the enterprise.” Restatement (Second) of Agency, introductory note, p. 479. Furthermore, working partners in some circumstances also can be employees: “When one of the partners is in active management of the business or is otherwise regularly employed in the business, he is a servant of the partnership.” Agency Restatement § 14A. Is the EEOC’s position in Clackamas consistent with that of the 1958 Agency Restatement? 4. Partners as Employees? Before Clackamas, the courts of appeals were split as to whether partners in a formal partnership should ever be treated as employees under the antidiscrimination laws. Compare Simpson v. Ernst & Young, 100 F.3d 436 (6th Cir. 1996) (treating individual denominated as a partner and charged with full liability for firm losses, as employee under federal antidiscrimination and employment laws), with Wheeler v. Hurdman, 825 F.2d 257 (10th Cir. 1987) (rejecting EEOC test and holding bona fide general partners are nonemployees under antidiscrimination laws). See also EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002) (discovery dispute turning on employee status; majority opinion by Judge Posner and partial concurrence by Judge Easterbrook). Since Clackamus the courts of appeals in employment discrimination cases have denied employee status to law firm equity partners who have voting rights in the setting of firm policy and control over their own work. See, e.g., Lemon v. Myers Bigel, P.A., 985 F.3d 392 (4th Cir. 2021) (partner had equal voting rights with other partners and had work reviewed by no other partners); von Kaenal v. Armstron Teasdale, 943 F.3d 1139 (8th Cir. 2020) (non-supervised equity partner with vote on firm management not protected by ADEA from mandatory retirement). Should typical equity partners be protected by the anti-discrimination laws? 45 The partnership-consideration process is covered by the antidiscrimination laws, even if once admitted into the partnership the plaintiff would then be excluded from the laws’ reach. See Hishon v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S.Ct. 1775, 104 L.Ed.2d 268 (1989). In the Price Waterhouse litigation, a Title VII violation was found and the court ordered that the plaintiff be admitted to the partnership. See Hopkins v. Price Waterhouse, 920 F.2d 967 (D.C.Cir.), affirming 737 F.Supp. 1202 (D.D.C.1990). 4 The National Labor Relations Act simply defined “employee” to mean (in relevant part) “any employee.” 49 Stat. 450 (1935). The Social Security Act defined the term to “include,” among other, unspecified occupations, “an officer of a corporation.” 49 Stat. 647.

5 The Act defines an employee simply as “any individual employed by an employer.” 29 U.S.C. § 203(e)(1). An “employer” is defined to include “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d). To “employ includes to suffer or permit to work.” 29 U.S.C. § 203(g). 6 The meaning of the term “employee” comes into play when determining whether an individual is an “employee” who may invoke the ADA’s protections against discrimination in “hiring, advancement, or discharge,” 42 U.S.C. § 12112(a), as well as when determining whether an individual is an “employee” for purposes of the 15-employee threshold. [citations omitted] Consequently, a broad reading of the term “employee” would—consistent with the statutory purpose of ridding the Nation of discrimination—tend to expand the coverage of the ADA by enlarging the number of employees entitled to protection and by reducing the number of firms entitled to exemption. 10 The EEOC asserts that these six factors need not necessarily be treated as “exhaustive.” We agree. The answer to whether a shareholder-director is an employee or an employer cannot be decided in every case by a “ ‘shorthand formula or magic phrase.’ ” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 324, 117 L.Ed. 2d 581, 112 S.Ct. 1344 (1992) (quoting NLRB v. United Ins. Co. of America, 390 U.S. 254, 258, 19 L.Ed. 2d 1083, 88 S.Ct. 988 (1968)). 11 For example, the record indicates that the four director-shareholders receive salaries, that they must comply with the standards established by the clinic, and that they report to a personnel manager.

47

CHAPTER 2 EMPLOYMENT-AT-WILL AND ITS CONTRACTUAL EXCEPTIONS ■■■

A. THE DEFAULT RULE OF AT-WILL EMPLOYMENT U.S. courts generally construe employment for an indefinite or unstated term as a relationship which may be terminated “at will” by either party, with or without cause or notice. In the absence of a contractual qualification or statutory limitation (of the sort set forth in Chapters 3 through 10 of this book), or a recognized common law exception (such as the “public policy” cause of action explored in Chapter 4), the employment relationship is terminable at the will of either party.

RESTATEMENT OF EMPLOYMENT LAW § 2.01 American Law Institute (2015).

§ 2.01 Default Rule of an At-Will Employment Relationship Either party may terminate an employment relationship with or without cause unless the right to do so is limited by a statute, other law or public policy, or an agreement between the parties, a binding employer promise, or a binding employer policy statement.

NOTES AND QUESTIONS 1. Consistent with General Contract Principles? Is the at-will default rule consistent with general contract principles? What is the basic exchange between the employer and the employee? Is there mutuality of obligation? Does there have to be? Consider the following analysis from a 1921 Illinois ruling: While consideration is essential to the validity of a contract, mutuality of obligation is not. Where there is no other consideration for a contract, the mutual promises of the parties constitute the consideration, and these promises must be binding on both parties or the contract fails for want of consideration, but, where, there is any other consideration for the contract, mutuality of obligation is not essential. If mutuality, in a broad sense, were held to be an essential element in every valid contract to the extent that both contracting parties could sue on it, there could be no such thing as a valid unilateral or option contract. 48 Armstrong Paint & Varnish Works v. Continental Can Co., 301 Ill. 102, 108, 133 N.E. 711, 714 (1921). See Mark Pettit, Jr., Modern Unilateral Contracts, 63 B.U. L. Rev. 551 (1983); Samuel Estreicher & Beverly Wolff, At-Will Employment and the Problem of Unjust Dismissal, 36 Rec. of Ass’n of Bar of City of N.Y. 170, 187–88 (Apr. 1981). 2. Policy Basis for the At-Will Rule? What is the basis for the American default rule of employment at-will? Is it merely an attempt to reflect the likely assumptions of the parties when they enter into employment relationship without a fixed term or cause limitation on termination? Alternatively, is it meant to encourage certain types of employment relationships in a dynamic economy? 3. Criticism of the At-Will Rule. Critics of the at-will default rule make two core points. First, they claim that the doctrine erects a virtually irrebuttable presumption of at-will status that may be at variance with the actual intentions of the parties. Second, the doctrine has been challenged, principally as a matter of policy, for providing an inadequate level of job security. The two criticisms lead to distinct modes of legal intervention. The response to the former criticism is to abandon any rigid presumption of at-will status and instead allow consideration of the available evidence as to the joint intentions of the parties. Such a program is in keeping with the traditional function of contract law—to facilitate private ordering. The response to the latter criticism is to mandate some form of job security irrespective of the agreement of the parties. This is not a traditional role for contract law but rather a call for legislative intervention. 4. The default rule stated in § 2.01 of the Employment Restatement is recognized in all U.S. jurisdictions save for Montana, see

Mont. Code Ann. § 39–2–901 et seq., and Puerto Rico, see P.R. Laws Ann. tit. 29, §§ 185a–185n, which have enacted statutes to deal with employment termination. See Employment Restatement § 2.01, App. A to Reporters’ Notes, at 54–60. A “cause” limitation on termination is characteristic of union-represented employment and government employment (under union contract or federal or state civil service laws). Most developed nations outside of the United States have enacted wrongful-termination laws, which are enforced in labor courts with relatively restricted remedies; these laws are evaluated against the U.S. system in Samuel Estreicher & Jeffrey M. Hirsch, Comparative Wrongful Dismissal Law: Reassessing American Exceptionalism, 92 N. Car. L. Rev. 343 (2014). The Canadian approach, which combines legislation and common law remedies, is described at 103 n.6 5. A Property Right in One’s Job? Some writers have suggested that contract law is the wrong starting point for analyzing the termination of the employment relationship. Rather, the employee should be viewed as having a property right in his job defeasible only upon “cause” for termination. See William B. Gould, IV, The Idea of the Job as Property in Contemporary America: The Legal and Collective Bargaining Framework, 1986 B.Y.U. L. Rev. 885; Jack Beermann & Joseph Singer, Baseline Questions in Legal Reasoning: The Example of Property in Jobs, 23 Ga. L. Rev. 911 (1989). On what basis 49 should the courts recognize such property rights? We are aware of no jurisdiction that has. 6. Procedural Due Process. Government workers may claim some protection under the Fourteenth Amendment’s due process clause’s command that “property” not be taken by the state without “due process of law.” The Supreme Court has held that the clause does not create property rights, but rather reaches only interests already recognized by state or other positive law, including in some cases interests in continued public employment absent “cause” for termination. See Board of Regents of State Colls. v. Roth, 408 U.S. 564, 92 S. Ct. 2701, 33 L. Ed. 2d 548 (1972); Perry v. Sindermann, 408 U.S. 593, 92 S. Ct. 2694, 33 L. Ed. 2d 570 (1972). Interests so recognized are due some process before they may be impaired; sometimes such process may be an appropriate combination of a limited hearing prior to termination of employment and a prompt post-termination hearing. See Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 105 S. Ct. 1487, 84 L. Ed. 2d 494 (1985); Gilbert v. Homar, 520 U.S. 924, 117 S. Ct. 1807, 138 L. Ed. 2d 120 (1997).

B. WRONGFUL TERMINATION: CONTRACT THEORIES OF RECOVERY The courts have mitigated the rigid presumption erected by early formulations of the employment at-will doctrine in two ways. One approach has been to show greater receptivity to finding express contractual promises of job security. Second, a minority of jurisdictions have recognized in particular circumstances implied promises restricting the employer’s at-will prerogative. The modern U.S. at-will default rule and its established contract-law exceptions are reflected in the Employment Restatement as set forth below and in the materials discussed in this Part of the Chapter.

RESTATEMENT OF EMPLOYMENT LAW §§ 2.02–2.03 American Law Institute (2015).

§ 2.02 Agreements and Binding Employer Promises or Statements Providing for Terms Other Than At-Will Employment The employment relationship is not terminable at will by an employer if: (a) an agreement between the employer and the employee provides for (i) a definite term of employment, or (ii) an indefinite term of employment and requires cause (defined in § 2.04) to terminate the employment (§ 2.03); or (b) a promise by the employer to limit termination of employment reasonably induces detrimental reliance by the employee (§ 2.02, Comment c); or 50

(c) a binding policy statement made by the employer limits termination of employment (§ 2.05); or (d) the implied duty of good faith and fair dealing applicable to all employment relationships (§ 2.07) limits termination of employment; or (e) other established principles recognized in the general law of contracts limits termination of employment (§ 2.02, Comment d). § 2.03 Agreements for a Definite or Indefinite Term (a) An employer must have cause (§ 2.04) for terminating (1) an unexpired agreement for a definite term of employment, or

(2) an agreement for an indefinite term of employment requiring cause for termination. (b) In the absence of an employee’s express agreement providing otherwise, the employee is under no reciprocal obligation to have cause to terminate the employment relationship.

1. AGREEMENTS FOR A DEFINITE OR INDEFINITE TERM a. Express Contracts

OHANIAN V. AVIS RENT A CAR SYSTEM, INC. United States Court of Appeals, Second Circuit, 1985. 779 F.2d 101.

CARDAMONE, J. Defendant Avis Rent A Car System (Avis) appeals from a judgment entered on a jury verdict in the Eastern District of New York (Weinstein, Ch.J.) awarding $304,693 in damages to plaintiff Robert S. Ohanian for lost wages and pension benefits arising from defendant’s breach of a lifetime employment contract made orally to plaintiff. *** Plaintiff Ohanian began working for Avis in Boston in 1967. Later he was appointed District Sales Manager in New York, and subsequently moved to San Francisco. By 1980 he had become Vice President of Sales for Avis’s Western Region. Robert Mahmarian, a former Avis general manager, testified that Ohanian’s performance in that region was excellent. During what Mahmarian characterized as “a very bad, depressed economic period,” Ohanian’s Western Region stood out as the one region 51

that was growing and profitable. According to the witness, Ohanian was directly responsible for this success. In the fall of 1980, Avis’s Northeast Region—the region with the most profit potential—was “dying.” Mahmarian and then Avis President Calvano decided that the Northeast Region needed new leadership and Ohanian was the logical candidate. They thought plaintiff should return to New York as Vice President of Sales for the Northeast Region. According to Mahmarian, “nobody anticipated how tough it would be to get the guy.” Ohanian was happy in the Western Region, and for several reasons did not want to move. First, he had developed a good “team” in the Western Region; second, he and his family liked the San Francisco area; and third, he was secure in his position where he was doing well and did not want to get involved in the politics of the Avis “World Headquarters,” which was located in the Northeast Region. Mahmarian and Calvano were determined to bring Ohanian east and so they set out to overcome his reluctance. After several phone calls to him, first from then Vice President of Sales McNamara, then from Calvano, and finally Mahmarian, Ohanian was convinced to accept the job in the Northeast Region. In Mahmarian’s words, he changed Ohanian’s mind[:] On the basis of promise, that a good man is a good man, and he has proven his ability, and if it didn’t work out and he had to go back out in the field, or back to California, or whatever else, fine. As far as I was concerned, his future was secure in the company, unless—and I always had to qualify—unless he screwed up badly. Then he is on his own, and even then I indicated that at worst he would get his [severance] because there was some degree of responsibility on the part of management, Calvano and myself, in making this man make this change. Ohanian’s concerns about security were met by Mahmarian’s assurance that “[u]nless [he] screwed up badly, there is no way [he was] going to get fired * * * [he would] never get hurt here in this company.” Ohanian accepted the offer and began work in the Northeast Region in early February 1981. In April 1981 Ohanian told Fred Sharp, Vice President of Personnel, that he needed relocation money that had been promised, but not yet received. Sharp subsequently sent two form letters to Ohanian: one from Sharp to Ohanian and the other, prepared by Avis, from Ohanian to Sharp. The second letter was a form with boxes for Ohanian to check to signify his choice of relocation expense plans. Ohanian checked one of the boxes, signed the form, and returned it to Sharp. 52

The following language appeared on the form that Ohanian signed and returned: I also hereby confirm my understanding that nothing contained herein or in connection with the change in my position with Avis shall be deemed to constitute an obligation on the part of Avis to employ me for any period of time, and both the company and I can terminate my employment at will.

There are no other agreements or understandings in respect of my change in position with Avis or the moving of my residence except as is set forth or referred to herein, and in your confirmation letter to me dated April 21, 1981, and the agreements and undertakings set forth therein cannot be modified or altered except by an instrument in writing signed by me and by an executive officer of Avis. At trial, Ohanian said that he did not believe he read the letter other than to check the relocation plan he desired. He testified that he did not intend this letter to be a contract or to change the terms of his prior agreement with Avis. Seven months after Ohanian moved to the Northeast Region, he was promoted to National Vice President of Sales and began work at Avis World Headquarters in Garden City, New York. He soon became dissatisfied with this position and in June 1982, pursuant to his request, returned to his former position as Vice President of Sales for the Northeast Region. A month later, on July 27, 1982, at 47 years of age, plaintiff was fired without severance pay. He then instituted this action. Within three months of termination, plaintiff obtained a job as Vice President of Sales for American International Rent A Car. His first year’s salary at American International was $50,000 plus a $20,000 bonus. When Ohanian was fired by Avis, his yearly salary was $68,400, and the jury found that he was owed a $17,100 bonus that he had earned before being fired. *** Avis does not challenge the jury’s finding that it had not proved that plaintiff was terminated for just cause. Neither has it appealed the awards for the bonus and relocation expenses. Both parties agree that New York law applies. Defendant’s principal argument is that the oral contract that the jury found existed is barred under the statute of frauds, § 5–701 (subd. a, para. 1) of the General Obligations Law. Section 5–701 provides in relevant part: Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking * * * [b]y its terms is not 53

to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime. It has long been held that the purpose of the statute is to raise a barrier to fraud when parties attempt to prove certain legal transactions that are deemed to be particularly susceptible to deception, mistake, and perjury. See D & N Boening, Inc. v. Kirsch Beverages, 63 N.Y.2d 449, 453–54, 483 N.Y.S.2d 164, 472 N.E.2d 992 (1984). The provision making void any oral contract “not to be performed within one year” is to prevent injustice that might result either from a faulty memory or the absence of witnesses that have died or moved. See id.; 2 Corbin on Contracts § 444 at 534 (1950). *** In fact, New York courts perhaps * * * believing that strict application of the statute causes more fraud than it prevents, have tended to construe it warily. The one-year provision has been held not to preclude an oral contract unless there is “not * * * the slightest possibility that it can be fully performed within one year.” 2 Corbin on Contracts § 444 at 535; Warner v. Texas and Pacific Railway, 164 U.S. 418, 434, 17 S.Ct. 147, 153, 41 L.Ed. 495 (1896) (“The question is not what the probable, or expected, or actual performance of the contract was; but whether the contract, according to the reasonable interpretation of its terms, required that it should not be performed within the year.”); Boening, 63 N.Y.2d at 455, 483 N.Y.S.2d 164, 472 N.E.2d 992. (“this court has continued to analyze oral agreements to determine if, according to the parties’ terms, there might be any possible means of performance within one year”). * * * When does an oral contract not to be performed within a year fall within the strictures of the statute? A contract is not “to be performed within a year” if it is terminable within that time only upon the breach of one of the parties. Boening, 63 N.Y.2d at 456, 483 N.Y.S.2d 164, 472 N.E.2d 992. That rule derives from logic because “[p]erformance, if it means anything at all, is ‘carrying out the contract by doing what it requires or permits’ * * * and a breach is the unexcused failure to do so.” Id. (citing Blake v. Voigt, 134 N.Y. at 72, 31 N.E. 256) [(1892)]. The distinction is between an oral contract that provides for its own termination at any time on the one hand, and an oral contract that is terminable within a year only upon its breach on the other. The former may be proved by a plaintiff and the latter is barred by the statute. Avis contends that its oral agreement with Ohanian is barred by the statute of frauds because it was not performable within a year. Avis claims that it could only fire plaintiff if he breached the contract, and breach of a contract is not performance. * * * What defendant fails to recognize is that under New York law “just cause” for termination may exist for reasons other than an employee’s breach. * * * 54

In the instant case, just cause for dismissing Ohanian would plainly include any breach of the contract, such as drinking on the job or refusing to work, since the agreement contemplates plaintiff giving his best efforts. But, as noted, just cause can be broader than breach and here there may be just cause to dismiss without a breach. To illustrate, under the terms of the contract it would be possible that despite plaintiff’s best efforts the results achieved might prove poor because of adverse market conditions. From defendant’s standpoint that too would force Avis to make a change in its business strategy, perhaps reducing or closing an operation. That is, there would be just cause for plaintiff’s dismissal. But if this is what occurred, it would not constitute a breach of the agreement. Best efforts were contemplated by the parties, results were not. Defendant was anxious to have plaintiff relocate because of his past success, but plaintiff made no guarantee to produce certain results. Thus, this oral contract could have been terminated for just cause within one year, without any breach by plaintiff, and is therefore not barred by the statute of frauds. *** Defendant next urges that any claims based on the oral agreement between Ohanian and Avis are barred by the parol evidence rule. Avis says that the clear and unambiguous letter of April 21, 1981 was signed by plaintiff, and it contradicts plaintiff’s assertion that he was promised lifetime employment and severance on termination. It is, of course, a fundamental principle of contract law “that, where parties have reduced their bargain, or any element of it, to writing, the parol evidence rule applies to prevent its variance by parol evidence.” Laskey v. Rubel Corp., 303 N.Y. 69, 71, 100 N.E.2d 140 (1951). Avis’s argument fails for a very basic reason: the jury found that the April 21st letter did not constitute a contract between it and Ohanian. The trial judge had correctly instructed the jury that if it found the letter to be a contract it could not find for plaintiff, and the jury found for plaintiff. Parol evidence is excluded only when used as an attempt to vary or modify the terms of an existing written contract. See Kirtley v. Abrams, 299 F.2d 341, 345 (2d Cir.1962) (the rule does not preclude a party “from attempting to show that there never was any agreement such as the writing purported to be”); Whipple v. Brown Brothers Co., 225 N.Y. 237, 244, 121 N.E. 748 (1919) (“One cannot be made to stand on a contract he never intended to make.”); 3 Corbin on Contracts § 577 at 385 (1960). *** Avis says that inasmuch as the evidence of an oral promise of lifetime employment was insufficient as a matter of law, that issue should not have gone to the jury. It relies on Brown v. Safeway Stores, Inc., 190 F.Supp. 295 (E.D.N.Y.1960), as support for this argument. Defendant can draw little solace from Brown. In that case the claimed assurances were made in 55

several ways including meetings of a group of employees—the purpose of which was not to discuss length of employment —or during casual conversation. Id. at 299–300. The conversations were not conducted in an atmosphere, as here, of critical one-on-one negotiation regarding the terms of future employment. Further, in Brown the district court found as a matter of fact that the alleged promise of lifetime employment was never made. In contrast, in the instant case the evidence was ample to permit the jury to decide whether statements made to Ohanian by defendant were more than casual comments or mere pep talks delivered by management to a group of employees. All of the surrounding circumstances—fully related earlier—were sufficient for the jury in fact to find that there was a promise of lifetime employment to a “star” employee who, it was hoped, would revive a “dying” division of defendant corporation.

NOTES AND QUESTIONS 1. Statute of Frauds. Ohanian’s claim is based on an oral agreement with Avis. New York’s statute of frauds provides that any unwritten agreement is void if “such agreement, promise or undertaking * * * [b]y its terms is not to be performed within one year from the making thereof.” How does the court overcome the statute of frauds? For a contrary view, see note 5 below. Is there a better approach for determining when an oral contract should be enforced? 2. Parol Evidence Rule. The parol evidence rule prohibits a party from introducing extrinsic evidence to alter the meaning of an integrated written contract. See Restatement (Second) of Contracts § 213 (1981). Why didn’t the April 1981 letter preclude Ohanian from introducing evidence of the prior oral agreement? 3. Promises of “Lifetime” or “Permanent” Employment. Modern courts generally have rejected the position of the early common law that express promises of “permanent” or “lifetime” employment are per se unenforceable either for want of consideration or mutuality of obligation. See, e.g., Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 457 N.Y.S.2d 193, 443 N.E.2d 441 (1982). The courts remain, however, wary of purported oral agreements of lifetime employment. See e.g., Woolley v. Hoffman La Roche, Inc., infra p. 71 (discussion of Savarese v. Pyrene Mfg. Co., 9 N.J. 595, 9 N.J. 595, 89 A.2d 237 (1952)); see also Murray v. Commercial Union Ins. Co., 782 F.2d 432 (3d Cir. 1986) (applying Pennsylvania law); Veno v. Meredith, 357 Pa. Super. 85, 515 A.2d 571 (1986). See generally Employment Restatement § 2.03 cmt. c.

4. Definiteness of Promise. At the beginning of Mike Tyson’s boxing career, he was placed under the supervision of Cus D’Amato, a renowned boxing figure and manager, who became Tyson’s legal guardian. In 1982 D’Amato and Kevin Rooney, a trainer, agreed they would train Tyson without compensation until he became a professional fighter. The two further agreed that when Tyson advanced to professional ranks, Rooney would be Tyson’s trainer “for as long as [Tyson] fought professionally.” Rooney trained Tyson for 28 months without compensation. After Tyson entered professional ranks in 56 1985, D’Amato died and James Jacobs became Tyson’s manager in 1986. To quell rumors, Tyson authorized Jacobs to state publicly that Rooney would be Tyson’s trainer “as long as Mike Tyson is a professional fighter.” In 1988, Tyson terminated his relationship with Rooney. The latter then sued Tyson in federal court claiming breach of the 1982 oral agreement. On certified questions from the Second Circuit, the New York Court of Appeals agreed that Rooney’s suit could proceed under New York law: A sensible path to declare New York law starts with these two steps: (1) if the duration is definite, the at-will doctrine is inapplicable[;] on the other hand, (2) if the employment term is indefinite or undefined, the rebuttable at-will presumption is operative and other facts come into the equation. * * *

*** When an agreement is silent as to duration * * * it is presumptively at-will, absent an express or implied limitation on an employer’s otherwise unfettered ability to discharge an employee. * * * Only when we discern no term of definiteness or no express limitation does the analysis switch over to the rebuttable presumption line of cases. They embody the principle that an employment relationship is terminable upon even the whim of either the employer or the employee. The agreement in this case is not silent and manifestly provides a sufficiently limiting framework.

*** * * * [A]lthough the exact end-date of Tyson’s professional boxing career was not precisely calculable, the boundaries of beginning and end of the employment period are sufficiently ascertainable. That is enough to defeat a matter-of-law decision by a judge, in substitution for resolution * * * by jury verdict. * * * The range of the employment relationship * * * is established by the definable commencement and conclusion of Tyson’s boxing career. Though the times are not precisely predictable and calculable to dates certain, they are legally and experientially limited and ascertainable by objective benchmarks. * * * Rooney v. Tyson, 91 N.Y.2d 685, 689–90, 692–93, 674 N.Y.S.2d 616, 697 N.E.2d 571 (1998). The court did not consider the applicability of the statute of frauds, which presumably would not have barred the action because Tyson’s professional career might have ended within a year. 5. Continuing Relevance of Statute of Frauds. In McInerney v. Charter Golf, Inc., 176 Ill. 2d 482, 223 Ill. Dec. 911, 680 N.E.2d 1347 (1997), the court rejected the approach taken in Ohanian, holding an oral promise of lifetime employment unenforceable under the statute of frauds: A “lifetime” employment contract is, in essence, a permanent employment contract. Inherently, it anticipates a relationship of long 57 duration—certainly longer than one year. In the context of an employment-for-life contract, we believe that the better view is to treat the contract as one “not to be performed within the space of one year from the making thereof.” To hold otherwise would eviscerate the policy underlying the statute of frauds and would invite confusion, uncertainty and outright fraud. Accordingly, we hold that a writing is required for the fair enforcement of lifetime employment contracts. 176 Ill. 2d at 490–91, 680 N.E.2d at 1351–52. 6. Promissory Estoppel. Can a promissory estoppel claim be pursued when the alleged promise is for employment-at-will rather than employment for a definite term? Section 2.02(b) of the Employment Restatement recognizes that the employment relationship is not terminable at will if “a promise by the employer to limit termination of employment reasonably induces detrimental reliance by the employee. . . .” See also id. § 2.02 cmt. c. For issues regarding remedies under this theory, see id. § 9.01(d). In Bower v. AT & T Technologies, Inc., 852 F.2d 361 (8th Cir. 1988), the federal court held that a claim under Missouri law was stated by employees alleging detrimental reliance on their employer’s promise that they would be rehired as clerical workers once their repair jobs were phased out as a result of the divestiture of AT&T subsidiaries. Subsequently, the Missouri Court of Appeals ruled that promissory estoppel theory was not available to enforce a promise for at-will employment. See Rosatone v. GTE Sprint Commc’ns & US

Telecom, Inc., 761 S.W.2d 670 (Mo. App. 1988). But cf. Peck v. Imedia, Inc., 293 N.J. Super. 151, 679 A.2d 745 (App. Div. 1996); Comeaux v. Brown & Williamson Tobacco Co., 915 F.2d 1264, 1272–73 (9th Cir. 1990) (damages under California law for detrimental reliance on withdrawn job offer). See also Cal. Lab. Code § 970 (prohibiting employers from inducing employees to relocate “by means of knowingly false representations”).

b. “Implied in Fact” Contracts

FOLEY V. INTERACTIVE DATA CORPORATION Supreme Court of California, en banc, 1988. 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373.

LUCAS, C.J. According to the complaint, plaintiff is a former employee of defendant, a wholly owned subsidiary of Chase Manhattan Bank that markets computer-based decision-support services. Defendant hired plaintiff in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment defendant required plaintiff to sign a “Confidential and Proprietary Information Agreement” whereby he promised not to engage in certain competition with defendant for one year after the termination of his employment for any reason. The agreement also contained a “Disclosure and Assignment of Information” provision that 58

obliged plaintiff to disclose to defendant all computer-related information known to him, including any innovations, inventions or developments pertaining to the computer field for a period of one year following his termination. Finally, the agreement imposed on plaintiff a continuing obligation to assign to defendant all rights to his computer-related inventions or innovations for one year following termination. It did not state any limitation on the grounds for which plaintiff’s employment could be terminated. Over the next six years and nine months, plaintiff received a steady series of salary increases, promotions, bonuses, awards and superior performance evaluations. In 1979 defendant named him consultant manager of the year and in 1981 promoted him to branch manager of its Los Angeles office. His annual salary rose to $56,164 and he received an additional $6,762 merit bonus two days before his discharge in March 1983. He alleges defendant’s officers made repeated oral assurances of job security so long as his performance remained adequate. Plaintiff also alleged that during his employment, defendant maintained written “Termination Guidelines” that set forth express grounds for discharge and a mandatory seven-step pretermination procedure. Plaintiff understood that these guidelines applied not only to employees under plaintiff’s supervision, but to him as well. On the basis of these representations, plaintiff alleged that he reasonably believed defendant would not discharge him except for good cause, and therefore he refrained from accepting or pursuing other job opportunities. The event that led to plaintiff’s discharge was a private conversation in January 1983 with his former supervisor, vice president Richard Earnest. During the previous year defendant had hired Robert Kuhne and subsequently named Kuhne to replace Earnest as plaintiff’s immediate supervisor. Plaintiff learned that Kuhne was currently under investigation by the Federal Bureau of Investigation for embezzlement from his former employer, Bank of America. Plaintiff reported what he knew about Kuhne to Earnest, because he was “worried about working for Kuhne and having him in a supervisory position * * * in view of Kuhne’s suspected criminal conduct.” Plaintiff asserted he “made this disclosure in the interest and for the benefit of his employer,” allegedly because he believed that because defendant and its parent do business with the financial community on a confidential basis, the company would have a legitimate interest in knowing about a high executive’s alleged prior criminal conduct. In response, Earnest allegedly told plaintiff not to discuss “rumors” and to “forget what he heard” about Kuhne’s past. In early March, Kuhne informed plaintiff that defendant had decided to replace him for “performance reasons” and that he could transfer to a position in another division in Waltham, Massachusetts. Plaintiff was told that if he did not accept a transfer, he might be demoted but not fired. One week later, in 59

Waltham, Earnest informed plaintiff he was not doing a good job, and six days later, he notified plaintiff he could continue as branch manager if he “agreed to go on a ‘performance plan.” Plaintiff asserts he agreed to consider such an arrangement. The next day, when Kuhne met with plaintiff, purportedly to present him with a written “performance plan” proposal, Kuhne instead informed plaintiff he had the choice of resigning or being fired. Kuhne offered neither a performance plan nor an option to

transfer to another position. *** Although plaintiff describes his cause of action as one for breach of an oral contract, he does not allege explicit words by which the parties agreed that he would not be terminated without good cause. Instead he alleges that a course of conduct, including various oral representations, created a reasonable expectation to that effect. Thus, his cause of action is more properly described as one for breach of an implied-in-fact contract. * * * The absence of an express written or oral contract term concerning termination of employment does not necessarily indicate that the employment is actually intended by the parties to be “at will,” because the presumption of at-will employment may be overcome by evidence of contrary intent. Generally, courts seek to enforce the actual understanding of the parties to a contract, and in so doing may inquire into the parties’ conduct to determine if it demonstrates an implied contract. “[I]t must be determined, as a question of fact, whether the parties acted in such a manner as to provide the necessary foundation for [an implied contract], and evidence may be introduced to rebut the inferences and show that there is another explanation for the conduct.” (Silva v. Providence Hosp. of Oakland (1939) 14 Cal.2d 762, 774, 97 P.2d 798; * * *). Such implied-in-fact contract terms ordinarily stand on equal footing with express terms. ([Restatement (Second) of Contracts] §§ 4, 19.) At issue here is whether the foregoing principles apply to contract terms establishing employment security, so that the presumption of Labor Code section 2922 [of at-will employment] may be overcome by evidence of contrary implied terms, or whether such agreements are subject to special substantive or evidentiary limitations. *** The limitations on employment security terms on which defendant relies were developed during a period when courts were generally reluctant to look beyond explicit promises of the parties to a contract. “The court-imposed presumption that the employment contract is terminable at will relies upon the formalistic approach to contract interpretation predominant in late nineteenth century legal thought: manifestations of assent must be evidenced by definite, express terms if promises are to be enforceable.” (Note, Protecting At Will Employees, 93 Harv.L.Rev. [1816, 60

1825 (1980)].) In the intervening decades, however, courts increasingly demonstrated their willingness to examine the entire relationship of the parties to commercial contracts to ascertain their actual intent, and this trend has been reflected in the body of law guiding contract interpretation. (See, Goetz & Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms (1985) 73 Cal.L.Rev. 261, 273–276 [“The (Uniform Commercial) Code, now joined by the Second Restatement of Contracts, effectively reverses the common law presumption that the parties’ writing and the official law of contract are the definitive elements of the agreement. Evidence derived from experience and practice can now trigger the incorporation of additional, implied terms”].) *** In the employment context, factors apart from consideration and express terms may be used to ascertain the existence and content of an employment agreement, including “the personnel policies or practices of the employer, the employee’s longevity of service, actions or communications by the employer reflecting assurances of continued employment, and the practices of the industry in which the employee is engaged.” * * * Pursuant to Labor Code section 2922, if the parties reach no express or implied agreement to the contrary, the relationship is terminable at any time without cause. But when the parties have enforceable expectations concerning either the term of employment or the grounds or manner of termination, Labor Code section 2922 does not diminish the force of such contractual or legal obligations. The presumption that an employment relationship of indefinite duration is intended to be terminable at will is therefore “subject, like any presumption, to contrary evidence. This may take the form of an agreement, express or implied, that * * * the employment relationship will continue indefinitely, pending the occurrence of some event such as the employer’s dissatisfaction with the employee’s services or the existence of some ‘cause’ for termination.” * * * Finally, we do not agree with the Court of Appeal that employment security agreements are so inherently harmful or unfair to employers, who do not receive equivalent guarantees of continued service, as to merit treatment different from that accorded other contracts. On the contrary, employers may benefit from the increased loyalty and productivity that such agreements may inspire. * * * Permitting proof of and reliance on implied-in-fact contract terms does not nullify the at-will rule, it merely treats such contracts in a manner in keeping with general contract law. * * * Defendant’s remaining argument is that even if a promise to discharge “for good cause only” could be implied in fact, the evidentiary factors * * * relied on by plaintiff are inadequate as a matter of law. This contention fails on several grounds. 61

First, defendant overemphasizes the fact that plaintiff was employed for “only” six years and nine months. Length of employment is a relevant consideration but six years and nine months is sufficient time for conduct to occur on which a trier of fact could find the existence of an implied contract. * * * Second, an allegation of breach of written “Termination Guidelines” implying self-imposed limitations on the employer’s power to discharge at will may be sufficient to state a cause of action for breach of an employment contract. * * * Finally, * * * plaintiff alleges that he supplied the company valuable and separate consideration by signing an agreement whereby he promised not to compete or conceal any computer-related information from defendant for one year after termination. The noncompetition agreement and its attendant “Disclosure and Assignment of Proprietary Information, Inventions, etc.” may be probative evidence that “it is more probable that the parties intended a continuing relationship, with limitations upon the employer’s dismissal authority [because the] employee has provided some benefit to the employer, or suffers some detriment, beyond the usual rendition of service.” In sum, plaintiff has pleaded facts which, if proved, may be sufficient for a jury to find an implied-in-fact contract limiting defendant’s right to discharge him arbitrarily—facts sufficient to overcome the presumption of Labor Code section 2922. On demurrer, we must assume these facts to be true. In other words, plaintiff has pleaded an implied-in-fact contract and its breach, and is entitled to his opportunity to prove those allegations.

NOTES AND QUESTIONS 1. How does the court in Foley reconcile its recognition of an “implied in fact” contract with the otherwise applicable (indeed, in California, statutorily grounded) presumption of at-will employment? 2. Role of Implied Terms? Implied terms are common in employment contract law. See Employment Restatement § 2.03 cmt. g (“In some cases, the parties to an otherwise enforceable employment agreement expressly or impliedly refer to stated policies or established practices of the employer or in the trade to supply omitted terms in the agreement.”). Is the Foley court going beyond recognition of certain terms implicit in the parties’ relationship to dispense with the need for express promises or other manifestations of the intention of both parties to enter into a binding agreement? 3. Implied-in-Fact Contract? What exactly does the court mean by the “implied-in-fact contract”? What are the elements of such a contract? Is it different from a traditional contract? How do the factors mentioned by the Foley court—six years of employment, termination guidelines intended presumably to guide supervisors, and trade secrets end employee inventions clauses—support a reasonable inference that the parties intended in fact a 62 relationship terminable only for cause? Consider Judicial Council of California Civil Jury Instructions, CACI No. 305 (2022 edition): In deciding whether a contract was created, you should consider the conduct and relationship of the parties as well as all the circumstances of the case. Contracts can be created by the conduct of the parties, without spoken or written words. Contracts created by conduct are just as valid as contracts formed with words. Conduct will create a contract if the conduct of both parties is intentional and each knows, or has reason to know, that the other party will interpret the conduct as an agreement to enter into a contract. How informative is this instruction? Does it provide adequate guidance for the trier of fact? 4. “Implied in Fact” Doctrine in Other Jurisdictions. In other jurisdictions, courts may invoke the language of “implied in fact” contracts to permit enforcement of indefinite oral obligations contained in unilateral employer promulgations or otherwise recognize implied terms in employment agreements negotiated between employers and employees. For example, in Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 234 Conn. 1, 662 A.2d 89 (1995) (Ellen Peters, J.), the court used the terminology of “implied contract” apparently in the belief that “express” contracts, at least in that jurisdiction, require a particular form of words. The case would appear to have involved sufficient evidence of an express agreement for indefinite employment containing a limit on termination of employment by the employer. As the state high court noted and held to be not clearly erroneous: “The trial court found that, in the circumstances of this case, the oral and written statements constituted promises to the plaintiff” and “that, by working for the defendant, the plaintiff accepted those promises.” 234 Conn. at 22, 662 A.2d at 98. The state supreme court reasoned: Pursuant to traditional contract principles . . . the default rule of employment at will can be modified by the agreement of the parties. Accordingly, to prevail on the . . . count of his complaint [that] alleged the existence of an implied agreement between the parties, the plaintiff had the burden of proving by a fair preponderance of the evidence that [the employer] had agreed,

either by words or conduct, to undertake [some] form of actual contract commitment to him under which he could not be terminated without just cause. 234 Conn. at 15, 662 A.2d at 97. See Employment Restatement § 2.03 cmts. g–h & Illus. 6–7. See also Boothby v. Texon, Inc., 414 Mass. 468, 608 N.E.2d 1028 (1993). Does the Tarosyan court’s reference to an agreement “by words or conduct” suggest the possibility of an “implied in fact” contract in Connecticut? 63

GUZ V. BECHTEL NATIONAL, INC. Supreme Court of California, En Banc, 2000. 24 Cal.4th 317, 100 Cal.Rptr.2d 352, 8 P.3d 1089.

BAXTER, J. This case presents questions about the law governing claims of wrongful discharge from employment as it applies to an employer’s motion for summary judgment. Plaintiff John Guz, a longtime employee of Bechtel National, Inc. (BNI), was released at age 49 when his work unit was eliminated and its tasks were transferred to another Bechtel office. Guz sued BNI and its parent, Bechtel Corporation (hereinafter collectively Bechtel), alleging * * * breach of an implied contract to be terminated only for good cause * * *. The trial court granted Bechtel’s motion for summary judgment and dismissed the action. In a split decision, the Court of Appeal reversed. The majority found that Bechtel had demonstrated no grounds to foreclose a trial on any of the claims asserted in the complaint. Having closely reviewed the Court of Appeal’s decision, we reach the following conclusions: First, the Court of Appeal used erroneous grounds to reverse summary judgment on Guz’s implied contract cause of action. The Court of Appeal found triable evidence (1) that Guz had an actual agreement, implied in fact, to be discharged only for good cause, and (2) that the elimination of Guz’s work unit lacked good cause because Bechtel’s stated reason—a “downturn in . . . workload”—was not justified by the facts, and was, in truth, a pretext to discharge the unit’s workers for poor performance without following the company’s “progressive discipline” policy. We acknowledge a triable issue that Guz, like other Bechtel workers, had implied contractual rights under specific provisions of Bechtel’s written personnel policies. But neither the policies, nor other evidence, suggests any contractual restriction on Bechtel’s right to eliminate a work unit as it saw fit, even where dissatisfaction with unit performance was a factor in the decision. The Court of Appeal’s ruling on Guz’s implied contract claim must therefore be reversed. The Court of Appeal did not reach the additional ground on which Guz claims a contractual breach—i.e., that Bechtel failed to follow its fair layoff policies when, during and after the reorganization, it made individual personnel decisions leading to Guz’s release. Accordingly, we leave that issue to the Court of Appeal on remand. *** Guz alleges he had an agreement with Bechtel that he would be employed so long as he was performing satisfactorily and would be discharged only for good cause. Guz claims no express understanding to this effect. However, he asserts that such an agreement can be inferred by combining evidence of several Foley factors, including (1) his long service; (2) assurances of continued employment in the form of raises, promotions, 64

and good performance reviews; (3) Bechtel’s written personnel policies, which suggested that termination for poor performance would be preceded by progressive discipline, that layoffs during a work force reduction would be based on objective criteria, including formal ranking, and that persons laid off would receive placement and reassignment assistance; and (4) testimony by a Bechtel executive that company practice was to terminate employees for a good reason and to reassign, if possible, a laid-off employee who was performing satisfactorily. During this time, Bechtel maintained Personnel Policy 1101, dated June 1991, on the subject of termination of employment (Policy 1101). Policy 1101 stated that “Bechtel employees have no employment agreements guaranteeing continuous service and may resign at their option or be terminated at the option of Bechtel.” Policy 1101 also described several “Categories of Termination,” including “Layoff” and “Unsatisfactory Performance.” With respect to Unsatisfactory Performance, the policy stated that “[e]mployees who fail to perform their jobs in a satisfactory manner may be terminated, provided the employees have been advised of the specific shortcomings and given an opportunity to improve their performance.” A layoff was defined as “a Bechtel-initiated termination [ ] of employees caused by a reduction in workload, reorganizations, changes in job requirements, or other circumstances. . . .” Under the Layoff policy, employees subject to termination for this reason “may be placed on ‘holding status’ if there is a possible Bechtel assignment within the

following 3-month period.” Guz understood that Policy 1101 applied to him. * * * Guz also submitted additional Bechtel documents discussing specific company personnel policies and practices, including those policies pertaining to laid-off employees. These documents included Bechtel’s 1989 Reduction-in-Force Guidelines (RIF Guidelines) and Bechtel’s Personnel Policy 302 (Policy 302). Policy 302 described a system of employee ranking (sometimes hereafter called force ranking), which was to be “used alone or in conjunction with other management tools in making personnel decisions in such areas as . . . [s]taffing.” Rankings were to be based on the fair, objective, and consistent evaluation of employees’ comparative job-relevant skills and performance. However, Policy 302 also provided that “[u]nique situations may occur in which employee ranking may be inapplicable based on the nature of the personnel decision or the limited size of the ranking group.” * * * The RIF Guidelines specified that when choosing among employees to be retained and released during a reduction in force, the formal ranking system set forth in Policy 302 was to be employed. For this purpose, the RIF Guidelines said, employees should “[i]deally” be ranked, by similarity of function or level of work activity, in groups of from 20 to 100. * * * 65

The RIF Guidelines also explained the term “holding status” and its benefits. According to the RIF Guidelines, this status could be granted upon layoff, for a renewable three-month period, while the employee awaited possible reassignment. The employee would not receive salary, but Bechtel would maintain his medical, dental, voluntary personal accident, and term life insurance. Bechtel should also provide the employee with “[t]ransfer and [p]lacement [a]ssistance.” *** As we shall explain, we find triable evidence that Bechtel’s written personnel documents set forth implied contractual limits on the circumstances under which Guz, and other Bechtel workers, would be terminated. On the other hand, we see no triable evidence of an implied agreement between Guz and Bechtel on additional, different, or broader terms of employment security. As Bechtel suggests, the personnel documents themselves did not restrict Bechtel’s freedom to reorganize, reduce, and consolidate its work force for whatever reasons it wished. Thus, contrary to the Court of Appeal’s holding, Bechtel had the absolute right to eliminate Guz’s work unit and to transfer the unit’s responsibilities to another company entity, even if the decision was influenced by dissatisfaction with the eliminated unit’s performance, and even if the personnel documents entitled an individual employee to progressive discipline procedures before being fired for poor performance. *** At the outset, Bechtel insists that the existence of implied contractual limitations on its termination rights is negated because Bechtel expressly disclaimed all such agreements. Bechtel suggests the at-will presumption of Labor Code § 2922 was conclusively reinforced by language Bechtel inserted in Policy 1101, which specified that the company’s employees “have no . . . agreements guaranteeing continuous service and may be terminated at [Bechtel’s] option.” As Bechtel points out, Guz concedes he understood Policy 1101 applied to him.9 This express disclaimer, reinforced by the statutory presumption of at-will employment, satisfied Bechtel’s initial burden, if any, to show that Guz’s claim of a contract limiting Bechtel’s termination rights had no 66

merit. But neither the disclaimer nor the statutory presumption necessarily foreclosed Guz from proving the existence and breach of such an agreement. *** Cases in California and elsewhere have held that at-will provisions in personnel handbooks, manuals, or memoranda do not bar, or necessarily overcome, other evidence of the employer’s contrary intent[.] * * * 10 We agree that disclaimer language in an employee handbook or policy manual does not necessarily mean an employee is employed at will. * * *Like any direct expression of employer intent, communicated to employees and intended to apply to them, such language must be taken into account, along with all other pertinent evidence, in ascertaining the terms on which a worker was employed. We examine accordingly the evidence cited by Guz in support of his implied contract claim. [I]t is undisputed that Guz received no individual promises or representations that Bechtel would retain him except for good cause, or upon other specified circumstances. * * * Nor does Guz seriously claim that the practice in Bechtel’s industry was to provide secure employment. Indeed, the undisputed evidence suggested that because Bechtel, like other members of its industry, operated by competitive bidding from project to project, its work force fluctuated widely and, in terms of raw

numbers, was in general decline. However, Guz insists his own undisputed long and successful service at Bechtel constitutes strong evidence of an implied contract for permanent employment except upon good cause. Guz argues that by retaining him for over 20 years, and by providing him with steady raises, promotions, commendations, and good performance reviews during his tenure, Bechtel engaged in “actions . . . reflecting assurances of continued employment.” (Foley, supra, 47 Cal. 3d 654, 680.) Bechtel responds that an individual employee’s mere long and praiseworthy service has little or no tendency to show an implied agreement between the parties that the employee is no longer terminable at will. *** We agree that an employee’s mere passage of time in the employer’s service, even where marked with tangible indicia that the employer approves the employee’s work, cannot alone form an implied-in-fact contract that the employee is no longer at will. Absent other evidence of the employer’s intent, longevity, raises and promotions are their own rewards for the employee’s continuing valued service; they do not, in and of 67

themselves, additionally constitute a contractual guarantee of future employment security. A rule granting such contract rights on the basis of successful longevity alone would discourage the retention and promotion of employees. *** Read in context, Foley, supra, 47 Cal. 3d 654, did not hold otherwise. In the first place, Foley’s reference to lengthy, successful service as evidence of an implied contract not to terminate at will was simply quoted, with little independent analysis, from Pugh [v. See’s Candies, Inc.,] 116 Cal. App. 3d 311, at page 328 [(1981)]. Pugh, in turn, had adopted wholesale the reasoning of Cleary v. American Airlines, Inc. (1980) 111 Cal. App. 3d 443, 168 Cal. Rptr. 722 that “ ‘termination of employment without legal cause [after long service] offends the implied-in-law covenant of good faith and fair dealing contained in all contracts, including employment contracts.’ ” (Pugh, supra, 116 Cal. App. 3d at p. 328, quoting Cleary, supra, 111 Cal. App. 3d at p. 455 * * * .) In other words, these cases suggested, because the arbitrary termination of a veteran employee is neither fair nor in good faith, such conduct violates the implied covenant contained in every employment contract, regardless of its terms. But Foley itself discredited this line of reasoning. There we “reiterated that the employment relationship is fundamentally contractual” (Foley, supra, 47 Cal. 3d 654, 696), and we made clear that the implied covenant of good faith and fair dealing cannot supply limitations on termination rights to which the parties have not actually agreed. * * * We therefore decline to interpret Foley as holding that long, successful service, standing alone, can demonstrate an implied-in-fact contract right not to be terminated at will. In the case before us, there is no indication that employee longevity is a significant factor in determining the existence or content of an implied contract limiting the employer’s termination rights. Guz claims no particular “actions or communications by [Bechtel]” (Foley, supra, 47 Cal. 3d 654, 680), and no industry customs, practices, or policies, which suggest that by virtue of his successful longevity in Bechtel’s employ, he had earned a contractual right against future termination at will. If anything, Bechtel had communicated otherwise. The company’s Policy 1101 stated that Bechtel employees had no contracts guaranteeing their continuous employment and could be terminated at Bechtel’s option. Nothing in this language suggested any exception for senior workers, or for those who had received regular raises and promotions. While occasional references to seniority appear in other sections of Bechtel’s personnel documents, the narrow context of these references undermines an inference that Bechtel additionally intended, or employees had reason to expect, special immunities from termination based on their extended or successful service. 68

*** Finally, Guz asserts there is evidence that * * * industry custom and written company personnel policies aside, Bechtel had an unwritten “policy or practice[ ]” (Foley, supra, 47 Cal. 3d 654, 680) to release its employees only for cause. As the sole evidence of this policy, Guz points to the deposition testimony of Johnstone, BNI’s president, who stated his understanding that Bechtel terminated workers only with “good reason” or for “lack of [available] work.” But there is no evidence that Bechtel employees were aware of such an unwritten policy, and it flies in the face of Bechtel’s general disclaimer. This brief and vague statement, by a single Bechtel official, that Bechtel sought to avoid arbitrary firings is insufficient as a matter of law to permit a finding that the company, by an unwritten practice or policy on which employees reasonably relied, had contracted away its right to discharge Guz at will.

In sum, if there is any significant evidence that Guz had an implied contract against termination at will, that evidence flows exclusively from Bechtel’s written personnel documents. It follows that there is no triable issue of an implied contract on terms broader than the specific provisions of those documents. In reviewing the Court of Appeal’s determination that Bechtel may have breached contractual obligations to Guz by eliminating his work unit, we must therefore focus on the pertinent written provisions. As noted above, Bechtel’s written personnel provisions covering termination from employment fell into two categories. The parties do not dispute that certain of these provisions, expressly denominated “Policies” (including Policies 1101 and 302), were disseminated to employees and were intended by Bechtel to inform workers of rules applicable to their employment. There seems little doubt, and we conclude, a triable issue exists that the specific provisions of these Policies did become an implicit part of the employment contracts of the Bechtel employees they covered, including Guz. Guz also points to another Bechtel document, the RIF Guidelines, that addressed procedures for implementing reductions in the workforce. Evidence suggesting the contractual status of this document is somewhat closer. On the one hand, the “Guidelines” label and evidence indicating this document was distributed primarily to supervisors for their use, weighs against an inference that Bechtel intended a widely disseminated policy on which employees might directly rely. * * * Moreover, there was some evidence that even some Bechtel managers were unaware of the force ranking system set forth in Policy 302 and the RIF Guidelines. On the other hand, the formality, tone, length, and detail of the RIF Guidelines suggests they were not intended as merely precatory. The RIF Guidelines comprised a minimum of six single-spaced pages, and were distributed under a cover letter suggesting that they represented 69

“corporate policy.” In some instances, the RIF Guidelines defined or supplemented terms and provisions directly set forth in Policies 302 and 1101, such as the holding status described in Policy 1101 and the formal personnel ranking system described in Policy 302. There was also some evidence that Bechtel employees, including Guz, were aware of RIF Guideline procedures such as force ranking, had observed that the company followed these procedures in the past, and believed them to be Bechtel’s policy. Goldstein, Guz’s supervisor at BNI-MI, declared that as a supervisor, he received and was “instructed to follow” the RIF Guidelines. On balance, we are persuaded a triable issue exists that the RIF Guidelines, like the formally denominated Policies, formed part of an implied contract between Bechtel and its employees. As Bechtel stresses, Policy 1101 itself purported to disclaim any employment security rights. However, Bechtel had inserted other language, not only in Policy 1101 itself, but in other written personnel documents, which described detailed rules and procedures for the termination of employees under particular circumstances. Moreover, the specific language of Bechtel’s disclaimer, stating that employees had no contracts “guaranteeing . . . continuous service” * * * and were terminable at Bechtel’s “option,” did not foreclose an understanding between Bechtel and all its workers that Bechtel would make its termination decisions within the limits of its written personnel rules. Given these ambiguities, a fact finder could rationally determine that despite its general disclaimer, Bechtel had bound itself to the specific provisions of these documents. In holding that Bechtel may have breached the terms of an implied contract with Guz by eliminating his work unit, the Court of Appeal relied on two premises. Focusing on one reason Guz was given for this decision—a “downturn in . . . workload”—the Court of Appeal concluded that even if this reason were taken at face value, the evidence permitted a determination that it was arbitrary and unreasonable, and thus without good cause, because it lacked support in the facts. Second, the Court of Appeal found triable evidence that this stated reason was pretextual, in that it masked Bechtel’s true purpose to dismiss BNI-MI’s workers on the basis of the unit’s poor performance, but without affording each member the benefit of the progressive discipline rules set forth in the company’s personnel documents. On the facts before us, we conclude that both these premises were in error. Bechtel’s written personnel documents—which, as we have seen, are the sole source of any contractual limits on Bechtel’s rights to terminate Guz—imposed no restrictions upon the company’s prerogatives to eliminate jobs or work units, for any or no reason, even if this would lead to the release of existing employees such as Guz. The RIF Guidelines set forth more detailed procedures for selecting individual layoff candidates, and for helping such persons obtain jobs 70

elsewhere within the company. But the RIF Guidelines, like the Policies, neither stated nor implied any limits on Bechtel’s freedom to implement the reorganization itself.

*** Guz, like the Court of Appeal, focuses on a separate section of Policy 1101, titled “Unsatisfactory Performance.” This section, the so-called progressive discipline provision, stated that “employees who fail to perform their jobs in a satisfactory manner may be terminated, provided the employees have been advised of the specific shortcomings and given an opportunity to improve their performance.” * * * Like the Court of Appeal, Guz cites BNI president Johnstone’s disclosure that he was unhappy with BNI-MI’s work product as evidence that the elimination of BNI-MI was a pretext for firing its individual members without resort to the progressive discipline policy. However, as Bechtel suggests, Policy 1101 cannot reasonably be construed to conflate the separate Unsatisfactory Performance and Layoff provisions in this manner. Whatever rights Policy 1101 gave an employee threatened with replacement on account of his or her individual poor performance, we see nothing in Bechtel’s personnel documents which, despite Bechtel’s general disclaimer, limited Bechtel’s prerogative to eliminate an entire work unit, and thus its individual jobs, even if the decision was influenced by a belief that the unit’s work would be better performed elsewhere within the company. Accordingly, we conclude the Court of Appeal erred in finding, on the grounds it stated, that Guz’s implied contract claim was triable. Insofar as the Court of Appeal used these incorrect grounds to overturn the trial court’s contrary determination, and thus to reinstate Guz’s contractual cause of action, the Court of Appeal’s decision must be reversed. The Court of Appeal did not address Guz’s second theory, i.e., that Bechtel also breached its implied contract by failing, during and after the reorganization, to provide him personally with the fair layoff protections, including force ranking and reassignment help, which are set forth in its Policies and RIF Guidelines. This theory raises difficult questions, including what the proper remedy, if any, should be if Guz ultimately shows that Bechtel breached a contractual obligation to follow certain procedural policies in the termination process. * * * On remand, the Court of Appeal should confront this issue and should determine whether Guz has raised a triable issue on this theory.

NOTES AND QUESTIONS 1. What argument does each party make based on Policy 1101? 71 2. In what respects has the Guz court narrowed the scope of the “implied in fact” contract doctrine in California; and in what respects does the doctrine continue to be viable in that jurisdiction? 3. Do you understand why the court agreed there was a triable issue of fact with respect to Bechtel’s RIF guidelines but not the other aspects of Guz’s implied-contract claims?

2. PERSONNEL MANUALS/EMPLOYEE HANDBOOKS AND BINDING EMPLOYER POLICY STATEMENTS RESTATEMENT OF EMPLOYMENT LAW §§ 2.05–2.06 American Law Institute (2015).

§ 2.05 Binding Employer Policy Statements Policy statements by an employer in documents such as employee manuals, personnel handbooks, and employment policy directives that are provided or made accessible to employees, whether by physical or electronic means, and that, reasonably read in context, establish limits on the employer’s power to terminate the employment relationship, are binding on the employer until modified or revoked (as provided in § 2.06). § 2.06 Modification or Revocation of Binding Employer Policy Statements (a) An employer may prospectively modify or revoke its binding policy statements if it provides reasonable advance notice of, or reasonably makes accessible, the modified statement or revocation to the affected employees. (b) Modifications and revocations apply to all employees hired, and all employees who continue working, after the notice is given and the modification or revocation becomes effective. (c) Modifications and revocations cannot adversely affect vested or accrued employee rights that may have been created by the statement, an agreement based on the statement (covered by § 2.03), or reasonable detrimental reliance on a promise in the statement (covered by § 2.02, Comment c).

WOOLLEY V. HOFFMANN-LA ROCHE, INC. Supreme Court of New Jersey, 1985. 99 N.J. 284, 491 A.2d 1257.

WILENTZ, C.J. Plaintiff, Richard Woolley, was hired by defendant, Hoffmann-La Roche, Inc., in October 1969, as an Engineering Section Head in defendant’s Central Engineering Department at Nutley. There was no 72

written employment contract between plaintiff and defendant. Plaintiff began work in mid-November 1969. Some time in December, plaintiff received and read the personnel manual on which his claims are based. In 1976, plaintiff was promoted, and in January 1977 he was promoted again, this latter time to Group Leader for the Civil Engineering, the Piping Design, the Plant Layout, and the Standards and Systems Sections. In March 1978, plaintiff was directed to write a report to his supervisors about piping problems in one of defendant’s buildings in Nutley. This report was written and submitted to plaintiff’s immediate supervisor on April 5, 1978. On May 3, 1978, stating that the General Manager of defendant’s Corporate Engineering Department had lost confidence in him, plaintiff’s supervisors requested his resignation. Following this, by letter dated May 22, 1978, plaintiff was formally asked for his resignation, to be effective July 15, 1978. Plaintiff refused to resign. Two weeks later defendant again requested plaintiff’s resignation, and told him he would be fired if he did not resign. Plaintiff again declined, and he was fired in July. *** The Appellate Division, viewing plaintiff’s claim as one for a “permanent or lifetime employment,” found that the company’s policy manual did not specifically set forth the term, work, hours or duties of the employment and “appear[ed] to be a unilateral expression of company policies and procedures * * * not bargained for by the parties,” this last reference being similar to the notion, relied on by the trial court, that additional consideration was required. Based on that view, it held that the “promulgation and circulation of the personnel policy manual by defendant did not give plaintiff any enforceable contractual rights.” * * * We are thus faced with the question of whether this is the kind of employment contract—a “long-range commitment”— that must be construed as one of indefinite duration and therefore at will unless the stringent requirements of Savarese [v. Pyrene Mfg. Co., 9 N.J. 595, 89 A.2d 193 (App. Div.1959)] are met, or whether ordinary contractual doctrine applies. In either case, the question is whether Hoffmann-La Roche retained the right to fire with or without cause or whether, as Woolley claims, his employment could be terminated only for cause. * * * This Court has clearly announced its unwillingness to continue to adhere to rules regularly leading to the conclusion that an employer can fire an employee-at-will, with or without cause, for any reason whatsoever. Our holding in Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58, 72, 417 A.2d 505 (1980), while necessarily limited to the specific issue of that case (whether employer can fire employee-at-will when discharge is contrary to a clear mandate of public policy), implied a significant questioning of that rule in general. 73

*** The rule of Savarese, supra, 9 N.J. 595, 89 A.2d 237, which the trial court and the Appellate Division transported to this case, was derived in a very different context from that here. The case involved an unusual transaction not likely to recur (promise by company officer, made to induce employee to play baseball with company team, for lifetime employment even if employee became disabled as a result of playing baseball). * * * What is before us in this case is not a special contract with a particular employee, but a general agreement covering all employees. There is no reason to treat such a document with hostility. *** Given the facts before us and the common law of contracts interpreted in the light of sound policy applicable to this modern setting, we conclude that the termination clauses of this company’s Personnel Policy Manual, including the procedure required before termination occurs, could be found to be contractually enforceable. Furthermore, we conclude that when an employer of a substantial number of employees circulates a manual that, when fairly read, provides that certain benefits are an incident of the employment (including, especially, job security provisions), the judiciary, instead of “grudgingly” conceding the

enforceability of those provisions, Savarese, supra, 9 N.J. at 601, 89 A.2d 237, should construe them in accordance with the reasonable expectations of the employees. *** In determining the manual’s meaning and effect, we must consider the probable context in which it was disseminated and the environment surrounding its continued existence. The manual, though apparently not distributed to all employees (“in general, distribution will be provided to supervisory personnel * * * ”), covers all of them. Its terms are of such importance to all employees that in the absence of contradicting evidence, it would seem clear that it was intended by Hoffmann-La Roche that all employees be advised of the benefits it confers. We take judicial notice of the fact that Hoffmann-La Roche is a substantial company with many employees in New Jersey. The record permits the conclusion that the policy manual represents the most reliable statement of the terms of their employment. At oral argument counsel conceded that it is rare for any employee, except one on the medical staff, to have a special contract. Without minimizing the importance of its specific provisions, the context of the manual’s preparation and distribution is, to us, the most persuasive proof that it would be almost inevitable for an employee to regard it as a binding commitment, legally enforceable, concerning the terms and conditions of his employment. Having been employed, like hundreds of his co-employees, without any 74

individual employment contract, by an employer whose good reputation made it so attractive, the employee is given this one document that purports to set forth the terms and conditions of his employment, a document obviously carefully prepared by the company with all of the appearances of corporate legitimacy that one could imagine. *** The mere fact of the manual’s distribution suggests its importance. Its changeability—the uncontroverted ability of management to change its terms—is argued as supporting its non-binding quality, but one might as easily conclude that, given its importance, the employer wanted to keep it up to date, especially to make certain, given this employer’s good reputation in labor relations, that the benefits conferred were sufficiently competitive with those available from other employers, including benefits found in collective bargaining agreements. The record suggests that the changes actually made almost always favored the employees. Given that background, then, unless the language contained in the manual were such that no one could reasonably have thought it was intended to create legally binding obligations, the termination provisions of the policy manual would have to be regarded as an obligation undertaken by the employer. It will not do now for the company to say it did not mean the things it said in its manual to be binding. Our courts will not allow an employer to offer attractive inducements and benefits to the workforce and then withdraw them when it chooses, no matter how sincere its belief that they are not enforceable. *** Many of these workers undoubtedly know little about contracts, and many probably would be unable to analyze the language and terms of the manual. Whatever Hoffmann-La Roche may have intended, that which was read by its employees was a promise not to fire them except for cause. Having concluded that a jury could find the Personnel Policy Manual to constitute an offer, we deal with what most cases deem the major obstacle to construction of the terms as constituting a binding agreement, namely, the requirement under contract law that consideration must be given in exchange for the employer’s offer in order to convert that offer into a binding agreement. We conclude that these job security provisions contained in a personnel policy manual widely distributed among a large workforce are supported by consideration and may therefore be enforced as a binding commitment of the employer. * * * In most of the cases involving an employer’s personnel policy manual, the document is prepared without any negotiations and is voluntarily distributed to the workforce by the employer. It seeks no return 75

promise from the employees. It is reasonable to interpret it as seeking continued work from the employees, who, in most cases, are free to quit since they are almost always employees at will, not simply in the sense that the employer can fire them without cause, but in the sense that they can quit without breaching any obligation. Thus analyzed, the manual is an offer that seeks the formation of a unilateral contract—the employees’ bargained-for action needed to make the offer binding being their continued work when they have no obligation to continue.

The unilateral contract analysis is perfectly adequate for that employee who was aware of the manual and who continued to work intending that continuation to be the action in exchange for the employer’s promise; it is even more helpful in support of that conclusion if, but for the employer’s policy manual, the employee would have quit. See generally M. Pettit, “Modern Unilateral Contracts,” 63 B.U.L.Rev. 551 (1983) (judicial use of unilateral contract analysis in employment cases is widespread). * * * In Toussaint [v. Blue Cross and Blue Shield of Michigan,] 408 Mich. 579, 292 N.W.2d 880 [1980,] one main issue was the contractual force of an oral assurance given to the employee when he was hired that he would not be discharged so long as he was “doing his job.” In addition to that assurance, Toussaint was at the same time handed a manual, which provided that an employee would not be discharged without cause and without following certain procedures. The court noted in dictum that the oral assurance was not necessary to its holding. The court’s discussion of the effect of distributing a manual is worth noting: * * * It is enough that the employer chooses, presumably in its own interest, to create an environment in which the employee believes that, whatever, the personnel policies and practices, they are established and official at any given time, purport to be fair, and are applied consistently and uniformly to each employee. The employer has then created a situation “instinct with an obligation.” [292 N.W.2d at 892 (footnotes omitted).] A footnote concluded that “[i]t was therefore unnecessary for Toussaint to prove reliance on the policies set forth in the manual.” Similarly, in Anthony v. Jersey Cent. Power & Light Co., 51 N.J.Super. 139, 143 A.2d 762 [(1958)], practically every contractual objection that could be made here was disposed of by the Appellate Division in the context of a claim for pension rights by supervisory personnel based on a company manual (entitled “General Rules”). There, the defendant-employer argued that its severance-pay rule was a mere gratuitous promise, not supported by consideration. The court responded, analyzing the promise as an offer of a unilateral contract and the employees’ continued services as sufficient acceptance and consideration therefor. Id. at 143, 143 A.2d 762. To the defendant’s argument that there was no evidence of reliance upon its 76

promise, the Anthony court responded that reliance was to be presumed under the circumstances. Id. at 145–46, 143 A.2d 762. We agree.10 The lack of definiteness concerning the other terms of employment—its duration,11 wages, precise service to be rendered, hours of work, etc., does not prevent enforcement of a job security provision. Realistically, the objection has force only when the agreement is regarded as a special one between the employer and an individual employee. There it might be difficult to determine whether there was good cause for termination if one could not determine what it was that the employee was expected to do. That difficulty is one factor that suggests the employer did not intend a lifetime contract with one employee. Here the question of good cause is made considerably easier to deal with in view of the fact that the agreement applies to the entire workforce, and the workforce itself is rather large. Even-handedness and equality of treatment will make the issue in most cases far from complex; the fact that in some cases the “for cause” provision may be difficult to interpret and enforce should not deprive employees in other cases from taking advantage of it. If there is a problem arising from indefiniteness, in any event, it is one caused by the employer. *** We therefore reverse the Appellate Division’s affirmance of the trial court’s grant of summary judgment and remand this matter to the trial court for further proceedings consistent with this opinion. Those proceedings should have the benefit of the entire manual that was in force at the time Woolley was discharged. The provisions of the manual concerning job security shall be considered binding unless the manual elsewhere prominently and unmistakably indicates that those provisions shall not be binding or unless there is some other similar proof of the 77

employer’s intent not to be bound. The ordinary division of issues between the court and the jury shall apply. If the court concludes that the job security provisions are binding (or submits that issue to the jury), it shall either determine their meaning or, if reasonable men could differ as to that meaning, submit that issue as well to the jury. If either the court or the jury under those circumstances concludes that the Personnel Policy Manual constituted a promise that an employee in Woolley’s position could not be fired except for good cause, the only issue remaining shall be Woolley’s damages. Woolley need not prove consideration—that shall be presumed. Furthermore, it shall not be open to defendant to prove that good cause in fact existed on the basis of which Woolley could have been terminated. If the court or jury concludes that the manual’s job security provisions are binding, then, according to those provisions, even if good cause existed, an employee could not be fired unless the employer

went through the various procedures set forth in the manual, steps designed to rehabilitate that employee in order to avoid termination. On the record before us the employer’s failure to do so is undeniable. If that is the case, we believe it would be unfair to allow this employer to try now to recreate the facts as they might have existed had the employer given to Woolley that which the manual promised, namely, a set of detailed procedures, all for Woolley’s benefit, designed to see if there was some way he could be retained by Hoffmann-La Roche. This is especially so in view of Woolley’s death. Hoffmann-La Roche chose to act without complying with those procedures. It would not be fair now to allow the employer to claim that these procedures, of which it wrongfully deprived him, would have done him no good, when the only party who could effectively counter that claim—Woolley—is dead. *** We are aware that problems that do not ordinarily exist when collective bargaining agreements are involved may arise from the enforcement of employment manuals. Policy manuals may not generally be as comprehensive or definite as typical collective bargaining agreements. Further problems may result from the employer’s explicitly reserved right unilaterally to change the manual. We have no doubt that, generally, changes in such a manual, including changes in terms and conditions of employment, are permitted. We express no opinion, however, on whether or to what extent they are permitted when they adversely affect a binding job security provision. *** All that this opinion requires of an employer is that it be fair. It would be unfair to allow an employer to distribute a policy manual that makes the workforce believe that certain promises have been made and then to allow the employer to renege on those promises. What is sought here is basic honesty: if the employer, for whatever reason, does not want the 78

manual to be capable of being construed by the court as a binding contract, there are simple ways to attain that goal. All that need be done is the inclusion in a very prominent position of an appropriate statement that there is no promise of any kind by the employer contained in the manual; that regardless of what the manual says or provides, the employer promises nothing and remains free to change wages and all other working conditions without having to consult anyone and without anyone’s agreement; and that the employer continues to have the absolute power to fire anyone with or without good cause. [Eds. The Appendix to the Woolley decision containing the termination provisions of the defendant’s personnel policy can be found in the Statutory Supplement.]

NOTES AND QUESTIONS 1. Traditional Contract Law? To what extent does Woolley depart from traditional contract principles? Consider the following key principles drawn from the Restatement (Second) of Contracts: Assent (§§ 18–19) “Manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance. . . . The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.” Consideration (§ 71) “To constitute consideration, a performance or a return promise must be bargained for. . . The performance may consist of an act other than a promise, or a forbearance, or the creation, modification or destruction of a legal relation”. Certainty (§ 33) “Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.” 2. Consider the following Handbook excerpt from Valve Corporation, a video game company: “Nobody has ever been fired at Valve for making a mistake. It wouldn’t make sense for us to operate that way. Providing the freedom to fail is an important trait of the company—we couldn’t expect so much of individuals if we also penalized people for errors. Even expensive mistakes, or ones which result in a very public failure, are genuinely looked at as opportunities to learn.” See Valve Corporation, Handbook for New http://www.valvesoftware.com/company/Valve_Handbook_LowRes.pdf.

Employees

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2012),

Is this language sufficient to support a breach of contract claim by an employee fired for accidentally introducing a bug to the software that caused 79

the game to crash? What if the handbook included an italicized disclaimer on the front page that all employees are at-will? What if all employees signed an acknowledgement of receipt of the handbook and disclaimer? 3. Effect on the Uniformity of Employer Terms? Under the Woolley court’s reasoning, could an employer argue that just as its unilateral contract offer to impose a job security term could be accepted by the employees’ continued performance, so could its new unilateral contract offer to remove the job security term be accepted by the employees’ continued performance? Consider three groups of employees: (1) one group hired during the earlier at-will era; (2) one group hired after the job security term was imposed; and (3) a third group hired after the job security term was rescinded. Do the rights of these employees differ? If employees in group (2) are terminated after the job security term was rescinded, are their rights based on the job security term or the revived at-will rule? Consider the Employment Restatement § 2.06. 4. Other “Handbook” Rulings. Virtually all jurisdictions that have considered the question have concluded that unilaterally promulgated personnel manuals and employee handbooks in appropriate circumstances can give rise to enforceable promises of job security. In addition to Woolley, see, e.g., Dillon v. Champion Jogbra, Inc., 175 Vt. 1, 819 A.2d 703 (2002); Demasse v. ITT Corp., 194 Ariz. 500, 984 P.2d 1138 (1999) (en banc); Leikvold v. Valley View Cmty. Hosp., 141 Ariz. 544, 688 P.2d 170 (1984); but cf. Ariz. Rev. Stat. Ann. § 23–1501(A)(2); O’Brien v. New Eng. Tel. & Tel. Co., 422 Mass. 686, 664 N.E.2d 843 (1996); Toussaint v. Blue Cross and Blue Shield of Mich., 408 Mich. 579, 292 N.W.2d 880 (1980). 5. Disclaimers. In keeping with the suggestion in the last paragraph of the Woolley opinion and similar invitations in other cases such as Toussaint, 408 Mich. at 610, 292 N.W.2d at 890–91 (as further confirmed in Lytle, supra), and Thompson, 102 Wash. 2d at 230, 685 P.2d at 1088, employers have revised their manuals and handbooks by inserting prominent disclaimers of any promise of job security. The courts have held that such disclaimers are generally sufficient to defeat a Woolley-type contract claim. See, e.g., Rowe v. Montgomery Ward & Co., Inc., 437 Mich. 627, 473 N.W.2d 268 (1991); Suter v. Harsco Corp., 184 W. Va. 734, 403 S.E.2d 751 (1991). Nevertheless, the employer’s disclaimer may be ineffective if the wording is ambiguous or if it has not been adequately communicated to the employee. See Schipani v. Ford Motor Co., 102 Mich. App. 606, 302 N.W.2d 307 (1981), disapproved on other grounds by Ferrett v. Gen. Motors Corp., 438 Mich. 235, 475 N.W.2d 243 (1991); Ferraro v. Koelsch, 124 Wis. 2d 154, 368 N.W.2d 666 (1985). In Nicosia v. Wakefern Food Corp., 136 N.J. 401, 643 A.2d 554 (1994), the employer’s manual contained the following disclaimer: This manual contains statements of Wakefern Food Corp. and its subsidiaries’ Human Resource policies and procedures. * * * The terms and procedures contained therein are not contractual and are subject to change and interpretation at the sole discretion of the Company, and without prior notice or consideration to any employee. 80 The New Jersey Supreme Court held the disclaimer to be ineffective both because it was not “set off in a way to attract attention” and its message did not make clear the employer’s reservation of at-will authority: Nicosia should not be expected to understand that Wakefern’s characterization of its manual as “not contractual” or “subject to change and interpretation at the sole discretion of the Company” meant that the employer, despite the discipline and termination provisions of its manual, reserved the “absolute power to fire anyone with or without cause” without actually changing those provisions. 136 N.J. 413–14, 643 A.2d at 560–61. Some courts have allowed juries to evaluate disclaimers in light of the employer’s actual practice. See McGinnis v. Honeywell, Inc., 110 N.M. 1, 791 P.2d 452, 457 (1990); Zaccardi v. Zale Corp., 856 F.2d 1473, 1476–77 (10th Cir. 1988), or on proof of detrimental reliance on the employer’s representations. See Karnes v. Drs. Hosp., 51 Ohio St. 3d 139, 555 N.E.2d 280 (1990) (“The doctrine of promissory estoppel is applicable and binding to oral at-will employment agreements. The test in such cases is whether the employer should have reasonably expected its representation to be relied upon by its employee and, if so, whether the expected action or forbearance actually resulted and was detrimental to the employee.” (quoting Mers v. Dispatch Printing Co., 19 Ohio St. 3d 100, 101, 483 N.E.2d 150, 152 (1985)). 6. Promissory Estoppel. Would the doctrine of promissory estoppel have provided a firmer basis for a handbook exception to the atwill rule? Some courts like the New York Court of Appeals effectively have limited the exception to circumstances that would support a promissory estoppel claim. Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 457 N.Y.S.2d 193, 443 N.E.2d 441 (1982); Horn v. New York Times, 100 N.Y.2d 85 (2003). 7. Distribution of Handbooks. In a post-Woolley ruling, the New Jersey Supreme Court seemed to reaffirm that dissemination of the personnel manual in its entirety or to the entire workforce is not required. See Nicosia v. Wakefern Food Corp., 136 N.J. 401, 408–12, 643 A.2d 554, 558–59 (1994) (entire manual was distributed to only 300 of 1500 nonunion employees; plaintiff received only eleven-page section of the manual dealing with discipline procedures but had to rest his claim on the manual as a whole). By contrast, the

Pennsylvania Supreme Court appears to require actual dissemination to employees before a handbook will create binding commitments. See Morosetti v. Louisiana Land & Expl. Co., 522 Pa. 492, 495, 564 A.2d 151, 152 (1989): “A handbook distributed to employees as inducement for employment may be an offer and its acceptance a contract. The employees here, however, could * * * show [only] an internal consideration of policy for what might be given, if and when they announced a policy for all employees. It is not sufficient to show only that they had a policy. It must be shown that they intended to offer it as a binding contract.” 8. “Wrongful Demotion”? Does the cause of action recognized in Woolley extend to adverse personnel decisions short of dismissal? In Scott v. Pacific Gas 81 & Electric Co., 11 Cal. 4th 454, 46 Cal. Rptr. 2d 427, 904 P.2d 834 (1995), Scott and Johnson were engineers employed by the defendant utility in a managerial capacity who were demoted for failure to properly supervise overtime and establishing a side business that gave rise to a number of conflicts of interest with their employer. The demotion resulted in a 25 percent reduction in salary and benefits, as well as loss of all supervisory authority. Plaintiffs claimed their demotion violated the employer’s implied “cause” promise gleaned in part from its discipline guidelines that stressed “positive,” i.e., progressive discipline. The California high court held: Conceptually, there is no rational reason why an employer’s policy that its employees will not be demoted except for good cause, like a policy restricting termination or providing for severance pay, cannot become an implied term of an employment contract. In each of these instances, an employer promises to confer a significant benefit on the employee, and it is a question of fact whether that promise was reasonably understood by the employee to create a contractual obligation. 11 Cal. 4th at 464, 904 P.2d at 839. See also Chapter 12, Note 4, following Tameny v. Atlantic Richfield Co.); Employment Restatement § 5.01 cmt. c, Reporters’ Notes. See generally Gregory Mark Munson, A Straightjacket for Employment At-Will: Recognizing Breach of Implied Contract Actions for Wrongful Demotion, 50 Vand. L. Rev. 1577 (1997). 9. Arbitration Provisions in Handbooks. When employers include binding arbitration provisions in handbooks, employees might challenge the provisions as unconscionable, or argue that they did not knowingly waive their right to a judicial proceeding. To decide these issues, courts must apply state contract law within the constraints of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., which establishes a strong federal policy favoring arbitration. See Chapter 21 (Private Grievance Arbitration and Federal Statutory Claims).

NOTE: UNILATERAL MODIFICATION/RESCISSION OF HANDBOOK PROMISES Consider the Woolley court’s reservation of the question whether the employer could unilaterally change the handbook in a manner that would “adversely affect a job security provision.” From the standpoint of traditional contract law, an employer cannot effect a midterm modification of a prior contractual commitment to employ an individual for a stated term (or under stated conditions) simply by announcing that it is changing the contract for the future. The employee’s continued performance of services in the face of such an announcement would not constitute an agreement to the change; and the employer’s continued provision of employment (albeit under different terms) would not provide consideration for the midterm modification because of the employer’s pre-existing duty. See generally E. Allan Farnsworth, Contracts, supra, §§ 4.21–.22 (1990) (questioning pre-existing duty rule). 82 By contrast, where employment is truly at will, each day provides the setting for a new contract. Below, is a summary of different positions states have taken on the issue of unilateral modification. 1. Michigan-California Position. In Bankey v. Storer Broadcasting Co., 432 Mich. 438, 443 N.W.2d 112 (1989) (en banc), the Michigan Supreme Court, responding to a certified question from the Sixth Circuit, rejected the implications of the “unilateral contract” theory utilized in Woolley. The court held that contractual rights based on the “handbook exception” to the “at will” rule recognized in Toussaint could be unilaterally modified by an employer even without explicit reservation at the outset of the right to do so: Without rejecting the applicability of unilateral contract theory in other situations, we find it inadequate [here]. We look, instead, to the analysis employed in Toussaint which focused upon the benefit that accrues to an employer when it establishes desirable personnel policies. Under Toussaint, written personnel policies are not enforceable because they have been “offered and accepted” as a unilateral contract; rather, their enforceability arises from the benefit the employer derives by establishing such policies. * * * Under the Toussaint analysis, an employer who chooses to establish desirable personnel policies, such as a discharge-for-cause employment policy, is not seeking to induce each individual employee to show up for work day after day, but rather is seeking to promote an environment conducive to collective productivity. The benefit to the employer of promoting such an environment, rather than the traditional contract-forming mechanisms of mutual assent or individual detrimental reliance, gives rise to a situation “instinct with an obligation.” When * * * the employer changes its discharge-for-cause policy to one of

employment-at-will, the employer’s benefit is correspondingly extinguished, as is the rationale for the court’s enforcement of the discharge-for-cause policy. * * * It is one thing to expect that a discharge-for-cause policy will be uniformly applied while it is in effect; it is quite a different proposition to expect that such a personnel policy, having no fixed duration, will be immutable unless the right to revoke the policy was expressly reserved. * * * Were we to [hold] that once an employer adopted a policy of discharge-for-cause, such a policy could never be changed short of successful renegotiation with each employee who worked while the policy was in effect, the uniformity stressed in Toussaint * * * would be sacrificed. If an employer had amended its policy from time to time * * * , the employer could find itself obligated in a variety of different ways to any number of different employees, depending on the modifications that had been adopted and the extent of the work force turnover. 432 Mich. at 453–57, 443 N.W.2d at 119–20. 83 The Bankey court stressed, however, that changes cannot be made in “bad faith,” giving the example of a temporary suspension of a for-cause policy for the purpose of facilitating the termination of a particular employee; and that “reasonable notice of the change must be uniformly given to affected employees.” 432 Mich. at 457, 443 N.W.2d at 120. For the California Supreme Court’s somewhat similar view, see Asmus v. Pacific Bell, 23 Cal. 4th 1, 96 Cal. Rptr. 2d 179, 999 P.2d 71, 73–79 (2000) (en banc) (on certified question from Ninth Circuit). 2. Illinois-Connecticut-Wyoming Position. The Illinois high court took a very different view in Doyle v. Holy Cross Hospital, 186 Ill. 2d 104, 237 Ill. Dec. 100, 708 N.E.2d 1140 (1999): * * * Given the contractual rationale of Duldulao [v. St. Mary of Nazareth Hospital Center, 115 Ill. 2d 482, 106 Ill. Dec. 8, 505 N.E.2d 314 (1987)], we find it difficult to reconcile defendant’s position with the requirements for contract formation and modification. Applying “traditional principles” of contract law, as Duldulao did, we conclude * * * that the defendant’s unilateral modification to the employee handbook lacked consideration and therefore is not binding on the plaintiffs. A modification of an existing contract, like a newly formed contract, requires consideration to be valid and enforceable. * * * Consideration consists of some detriment to the offeror, some benefit to the offeree, or some bargained-for exchange between them. * * * In the present case, we are unable to conclude that consideration exists that would justify our enforcement of the modification against existing employees. Because the defendant was seeking to reduce the rights enjoyed by the plaintiffs, it was the defendant, and not the plaintiffs, who would properly be required to provide consideration for the modification. But in adding the disclaimer, the defendant provided nothing of value to the plaintiffs and did not itself incur any disadvantage. * * * * * * [T]o accept the defendant’s reasoning, that the plaintiffs must supply consideration for a change in the contract to their detriment, and to locate consideration in the plaintiffs’ continued work, * * * would paradoxically require the plaintiffs to quit their jobs in order to preserve the rights they previously claimed under the employee handbook. 186 Ill. 2d at 111–15, 708 N.E.2d at 1144–46. The Connecticut and Wyoming supreme courts follow a similar approach. See Torosyan v. Boehringer Ingelheim Pharms., Inc., 234 Conn. 1, 662 A.2d 89 (1995) (Peters, C.J.; arguably prior “cause” term was based on bilateral agreement); Brodie v. General Chem. Corp., 934 P.2d 1263 (Wyo. 1997). See also Demasse v. ITT Corp., 194 Ariz. 500, 984 P.2d 1138 (1999) (on certified questions from the Ninth Circuit); McIlravy v. Kerr-McGee Corp., 119 F.3d 876 (10th Cir. 1997) (applying Arizona law). 84 Is the problem identified in Doyle one of lack of consideration for the sought-for modification or one of lack of adequate notice? The Arizona Supreme Court in Demasse, for example, left open the question whether continued employment could provide consideration for a rescission of an “implied in fact” job security term where the employee was given “adequate notice of the modification”: “An employee must be informed of any new term, aware of its impact on the pre-existing contract, and affirmatively consent to it to accept the offered modification.” 194 Ariz. at 508, 984 P.2d at 1146. What would be adequate consideration for changing a handbook-based job security term? The Wyoming high court in Brodie stated: “The question of what type of consideration is sufficient cannot be answered with specificity because we have long held that absent fraud or unconscionability, we will not look into the adequacy of consideration.” 934 P.2d at 1268 (citation omitted). Does the employer provide sufficient consideration by conditioning some improvement in benefits or a promotion on the employee’s continuing to work in accordance with the terms of the modified employee handbook? Are employees likely to change their position by quitting? If, say, a promotion is withheld on this basis, does the disappointed employee have a retaliation claim? What about the firm’s interest in uniform treatment of employees otherwise similarly situated: Does it make sense to have some of the workers covered by a “good cause”

agreement and others subject to “at will” status, when the terms and conditions of the workers are supposedly governed by the same underlying, ostensibly uniform, personnel manual/employee handbook? 3. Restatement of Employment Law Position. As noted, § 2.05 of the Employment Restatement recognizes that “[p]olicy statements by an employer in documents such as employee manuals, personnel handbooks, and employment policy directives that are provided or made accessible to employees, whether by physical or electronic means, and that, reasonably read in context, establish limits on the employer’s power to terminate the employment relationship, are binding on the employer until modified or revoked.” Such obligations can be revoked prospectively under § 2.06: § 2.06 Modification or Revocation of Binding Employer Policy Statements (a) An employer may prospectively modify or revoke its binding policy statements if it provides reasonable advance notice of the modified statement or revocation to the affected employees. (b) Modifications and revocations apply to all employees hired, and all employees who continue working, after the notice is given and the modification or revocation becomes effective. (c) Modification and revocations cannot adversely affect vested or accrued employee rights that may have been created by the statement, an agreement based on the statement (covered by § 2. 03), or reasonable detrimental reliance on a promise in the statement (covered by § 2.02, Comment c). 85 4. A Doctrine Akin to “Administrative Estoppel”? Woolley and similar cases can be understood as an instance of estoppel akin to the administrative law doctrine that agencies are bound to self-imposed restrictions on their discretionary authority until formally rescinded. See Accardi v. Shaughnessy, 347 U.S. 260, 74 S. Ct. 499, 98 L. Ed. 681 (1954). For a similar rationale, see Bankey v. Storer Broadcasting, discussed supra, note 1. In addition, see Employment Restatement § 2.05 cmt. b: Some courts have tried to fit this class of unilateral employer statements into a conventional contract-law framework, reasoning that employees “accept” or “rely on” these unilateral employer “offers” by continuing to provide services after the statements are disseminated. This has proved to be a conceptually awkward fit. . . . Against that background, other courts, and this Restatement, rest the binding effect of unilateral employer statements on general estoppel principles. Employers make certain unilateral statements about personnel policy to govern the operational decisions of their supervisors and managers. Employers do so to serve their own interests in advancing productivity, improving employee morale, or achieving some other organizational objective. Absent contrary language in the statement, the employer’s purpose in promulgating a unilateral policy statement is to have it govern operational decisions while the statement is in effect but not to bind the employer to continued adherence after changing the policy and giving reasonable notice to employees of the change[.] Such statements are analogous to rules of practice promulgated by administrative agencies to govern their operational decisions. As a matter of administrative law, such rules bind the agency until properly modified or revoked on a theory of “administrative agency estoppel,” even though no statute or regulation may have required their promulgation in the first place. Similarly, unilateral employer statements that, reasonably read in context, are intended to govern operational personnel decisions should be binding on the employer until properly modified or revoked.

3. WHAT CONSTITUTES “CAUSE” OR “GOOD CAUSE”? This section examines how courts interpret employment agreements that limit termination of employment except for “cause.” The next case, Cotran v. Rollins, considers whether a requirement of “cause” or “good cause” for terminating an employment relationship requires “cause in fact,” even if the employer acted on an erroneous, but reasonable, good faith belief that it had cause for the decision. 86

RESTATEMENT OF EMPLOYMENT LAW § 2.04 American Law Institute (2015).

§ 2.04 Cause for Termination of Employment Agreements Unless other provided for in the agreement: (a) An employer has cause for early termination of an agreement for a definite term of employment if the employee has materially breached the agreement, including by persistent neglect of duties; by engaging in misconduct or other malfeasance, including gross negligence; or by being unable to perform the duties of the position due to a

long-term disability. (b) In addition to the grounds stated in subsection (a), an employer has a ground for terminating an agreement for an indefinite term of employment requiring cause for termination when a significant change in the employer’s economic circumstances means that the employer no longer has a business need for the employee’s services.

COTRAN V. ROLLINS HUDIG HALL INT’L Supreme Court of California, 1998. 17 Cal.4th 93, 69 Cal.Rptr.2d 900, 948 P.2d 412.

BROWN, J. When an employee hired under an implied agreement not to be dismissed except for “good cause” is fired for misconduct and challenges the termination in court, what is the role of the jury in deciding whether misconduct occurred? Does it decide whether the acts that led to the decision to terminate happened? Or is its role to decide whether the employer had reasonable grounds for believing they happened and otherwise acted fairly? * * * * * * The better reasoned view, we conclude, prescribes the jury’s role as deciding whether the employer acted with “ ‘a fair and honest cause or reason, regulated by good faith.’ ” That language is from Pugh v. See’s Candies, Inc. (1981) 116 Cal. App. 3d 311, 330 [171 Cal. Rptr. 917] (Pugh I), the font of implied-contract-based wrongful termination law in California. Recently, in Scott v. Pacific Gas & Electric Co. (1995) 11 Cal. 4th 454, 467 [46 Cal. Rptr. 2d 427, 904 P.2d 834] (Scott), we elaborated on the content of good or just cause by enumerating what it is not: reasons that are “ ‘trivial, capricious, unrelated to business needs or goals, or pretextual.’ ” * * * 1 87

[Facts and Procedural Background] In 1987, Rollins Hudig Hall International, Inc. (Rollins), an insurance brokerage firm, approached plaintiff, then a vicepresident of a competitor, with a proposal to head its new West Coast international office. Following a series of telephone conferences, meetings and exchanges of letters, plaintiff joined Rollins in January 1988 as senior vice-president and western regional international manager. He held that position until 1993 when he was fired. The events leading to plaintiff’s termination began in March 1993, when an employee in Rollins’s international department reported to Deborah Redmond, the firm’s director of human resources, that plaintiff was sexually harassing two other employees, Carrie Dolce and Shari Pickett. On March 24, Redmond called both women to her office. In separate interviews, she asked each if they had been harassed. Both said yes; each accused plaintiff as the harasser. Two days later, both women furnished statements to Redmond stating that plaintiff had exposed himself and masturbated in their presence more than once; both also accused plaintiff of making repeated obscene telephone calls to them at home. Redmond sent copies of these statements to Rollins’s equal employment opportunity (EEO) office in Chicago. Rollins’s president, Fred Feldman, also was given copies. He arranged for a meeting with plaintiff at Rollins’s Chicago office, attended by Robert Hurvitz, the firm’s head of EEO, and Susan Held, Rollins’s manager for EEO compliance. At the meeting, Feldman reviewed the accusations made by Dolce and Pickett against plaintiff. He explained that an investigation would ensue and that its outcome would turn on credibility. After reading the Dolce and Pickett statements to plaintiff, Held explained how the investigation would proceed. Plaintiff said nothing during the meeting about having had consensual relations with either of his two accusers, and offered no explanation for the complaints. Pending completion of the EEO investigation, Rollins suspended plaintiff. Over the next two weeks, Held interviewed 21 people who had worked with plaintiff, including 5 he had asked her to interview. Held concluded that both Dolce and Pickett, who reiterated the incidents described in their statements, appeared credible. Her investigation failed to turn up anyone else who accused plaintiff of harassing them while at Rollins. One Rollins account executive, Gail Morris, told Held that plaintiff had made obscene telephone calls to her when they both worked for another 88

company, soon after a sexual relationship between the two had ended. Susan Randall, one of those plaintiff had asked to be interviewed and who had described plaintiff as a “perfect gentleman,” later called Held to relate “a strange early morning phone call” from plaintiff which “was not for any business purpose.” Randall “couldn’t figure out what [plaintiff] wanted, * * * yelled at him, told him to leave her alone, and never to call her in the middle of the night again.” Held’s investigation also confirmed that plaintiff had telephoned Dolce and Pickett at home. In April, both women signed sworn affidavits reciting in detail the charges made against plaintiff in their original statements.

On the basis of her investigation, her assessment of Dolce’s and Pickett’s credibility, and the fact that no one she interviewed had said it was “impossible” to believe plaintiff had committed the alleged sexual harassment, Held concluded it was more likely than not the harassment had occurred. She met with Feldman and Hurvitz to present her conclusions and gave Feldman copies of the affidavits of Dolce, Pickett, and Gail Morris. After reviewing Held’s investigative report and the affidavits, Feldman fired plaintiff on April 23, 1993. This suit followed. [The Trial] Rollins defended its decision to fire plaintiff on the ground that it had been reached honestly and in good faith, not that Rollins was required to prove the acts of sexual harassment occurred. Plaintiff objected to Rollins’s defense theory, and the trial court rejected it as not available in a breach of contract action, the only one of plaintiff’s claims to go to the jury. Boiled down, the trial judge remarked, the case was nothing more than “a contract dispute” and it was Rollins’s burden to prove plaintiff committed the acts that led to his dismissal; “whether [Rollins] in good faith believed [plaintiff] did it is not at issue.” The trial court told the jury: “What is at issue is whether the claimed acts took place. * * * The issue for the jury to determine is whether the acts are in fact true. * * * Those are issues that the jury has to determine.” The trial court also read * * * the standard instruction defining “good cause” in employment discharge litigation.2 It refused an instruction requested by Rollins directing the jury not to substitute its opinion for the employer’s. The jury returned a special verdict. Asked whether plaintiff “engaged in any of the behavior on which [Rollins] based its decision to terminate plaintiff’s employment,” it answered “no.” It set the present cash value of plaintiff’s lost compensation at $1.78 million. Rollins appealed from the judgment entered on the verdict. The Court of Appeal reversed. We granted review to clarify the standard juries apply in wrongful termination 89

litigation to evaluate an employer’s “good cause” defense based on employee misconduct. We decide, in other words, the question the jury answers when the discharged employee denies committing the acts that provoked the decision to terminate employment. The question of the jury’s role in resolving the related but separate issue of whether the reasons assigned by an employer for termination are legally sufficient to constitute good cause is one we leave for another case. [Discussion] * * * As several courts have pointed out, a standard permitting juries to reexamine the factual basis for the decision to terminate for misconduct—typically gathered under the exigencies of the workaday world and without benefit of the slowmoving machinery of a contested trial—dampens an employer’s willingness to act, intruding on the “wide latitude” the court in [Pugh v. See’s Candies, Inc., 203 Cal.App.3d 743, 250 Cal.Rptr. 195 (1988) (Pugh II),] recognized as a reasonable condition for the efficient conduct of business. We believe the [actual-cause] standard is too intrusive, that it tips unreasonably the balance between the conflicting interests of employer and employee that California courts have sought to sustain as a hallmark of the state’s modern wrongful termination employment law. * * * Equally significant is the jury’s relative remoteness from the everyday reality of the workplace. The decision to terminate an employee for misconduct is one that not uncommonly implicates organizational judgment and may turn on intractable factual uncertainties, even where the grounds for dismissal are fact specific. * * * *** The proper inquiry for the jury, in other words, is not, “Did the employee in fact commit the act leading to dismissal?” It is, “Was the factual basis on which the employer concluded a dischargeable act had been committed reached honestly, after an appropriate investigation and for reasons that are not arbitrary or pretextual?” The jury conducts a factual inquiry in both cases, but the questions are not the same. In the first, the jury decides the ultimate truth of the employee’s alleged misconduct. In the second, it focuses on the employer’s response to allegations of misconduct. * * * We give operative meaning to the term “good cause” in the context of implied employment contracts by defining it, under the combined Scott-Pugh standard * * * as fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual. A reasoned conclusion, in short, supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond. 90

The law of wrongful discharge is largely a creature of the common law. Hence, it would be imprudent to specify in detail the essentials of an adequate investigation. * * *

All of the elements of the governing standard are triable to the jury. [The Disposition] Because it was error to instruct that Rollins could prevail only if the jury was satisfied sexual harassment actually occurred, the case must be retried. On retrial, the jury should be instructed, in accordance with the views we have expressed, that the question critical to defendants’ liability is not whether plaintiff in fact sexually harassed other employees, but whether at the time the decision to terminate his employment was made, defendants, acting in good faith and following an investigation that was appropriate under the circumstances, had reasonable grounds for believing plaintiff had done so. * * * KENNARD, J. [dissenting in part]. * * * To determine the parties’ intent, a court or jury must examine all evidence relating to the formation of the implied agreement. Only if the court or jury concludes that the parties’ intent cannot be determined from this evidence should it undertake to bridge this gap by supplying the meaning that comports with community standards of fairness and public policy. Moreover, if the court must flesh out the meaning of an implied “good cause” limitation, it should choose the meaning that achieves the fairest and most workable result consistent with the normal practices and expectations of employers and employees in modern society. In my view, the meaning that best satisfies these requirements is one that permits the employer to discharge the employee only for specific acts of misconduct that the employee actually committed. Recognizing that a limitation of this kind puts the employer in a difficult position, and that it may impose liability even on employers who have used their best efforts to determine the truth of misconduct allegations fairly and accurately, I would hold that if an employer agrees to reinstate a falsely accused and wrongfully discharged employee, it should be liable in damages only for backpay.

NOTES AND QUESTIONS 1. Is the court’s standard only a “default” rule that the parties could modify by express contract terms? If so, what sort of language would suffice to give Cotran the protection of an objective standard? 2. Is the Cotran court suggesting that the “implied in fact” contract is not entitled to the full level of protection that would be accorded an express contract for a definite term requiring “cause” for mid-term dismissal? Consider in particular the Court’s statement in footnote 8. 91 3. Relevance of After-Acquired Evidence? How would the Cotran court treat a situation where an employer acquires post-discharge evidence of the employee’s resume fraud? Can the good-faith standard be met by an employer who did not know of the fraud at the time of its initial decision? Is there any reason to treat “implied in fact” contract cases differently from Title VII claims, where after-acquired evidence of misconduct may affect entitlement to reinstatement and other prospective relief but does not negate the underlying violation? See McKennon v. Nashville Banner Publish. Co., 513 U.S. 352, 115 S.Ct. 879 (1995). 4. Elaboration of “Cause” in the Employment Restatement RESTATEMENT OF EMPLOYMENT LAW § 2.04 Comments b–e (2015): (b) Definite-term agreements. Where the parties have entered into an express agreement for a fixed term, that agreement ordinarily provides for a special payout in the event of early termination without cause. Often the parties will also specify what constitutes “cause” for early termination without breach. Under this Section, if not defined in the parties’ agreement, “cause” refers to material breach of the agreement, such as persistent neglect of duties, misconduct or other malfeasance by the employee, including gross negligence; or inability to perform the duties of the position due to a long-term disability. Absent explicit language in the agreement, “cause” does not include changes in the employer’s economic condition, such as a downturn in demand for the employer’s product, a fall in the employer’s share price, or the sale of the business. (c) Indefinite-term agreements. When parties have negotiated an indefinite-term agreement containing a cause limitation on the employer’s power to terminate, the definition of cause to which the parties have agreed controls. However, if the agreement is silent on the question, then given the potential length of indefinite-term agreements, the reasonable assumption is that the parties intended, in addition to the grounds stated in § 2.04(a), to include significant changes in the employer’s economic circumstances. (d) Factual cause. When the parties agree to a definite term of employment or for an indefinite term with a cause limitation on the employer’s power to terminate, the reasonable assumption is that the parties intend any cause requirement to [include] proven employee material breach, misconduct or malfeasance, or inability to perform the work due to long-term disability; and do not intend also to permit termination based on the employer’s reasonable, good-faith but erroneous belief that there was cause for termination. This is in keeping with conventional views of cause as an objective concept. It is also

consistent with the understanding that a good-faith but erroneous belief that early termination of a definite-term contract is 92 justified, even if based on facts after an appropriate investigation, is not legally sufficient cause to terminate such an agreement. (e) Procedural dimension. The cause required to terminate an agreement under this Section also may have a procedural dimension. When the agreement specifies termination procedures, those terms control. If those terms, for example, require the terminated employee to exhaust certain internal remedies, such as an appeal to the board of directors, those remedies ordinarily —absent proof of futility—must be reasonably exhausted before the employee may bring a lawsuit claiming that the termination was not based on a proper cause. Even where the agreement is silent on termination procedures, the fact that the parties have provided a cause limitation on the employer’s power to terminate normally requires the employer to give reasons for the dismissal. The cause limitation also requires the employer to apply the grounds for termination in a regular and evenhanded manner.

C. EVALUATING THE CASE FOR WRONGFUL DISCHARGE LEGISLATION The preceding sections of this chapter have surveyed the various approaches the courts have taken to modify the employment-at-will doctrine in response to the job-security claims of employees who are not covered by collective bargaining agreements or civil service laws. However, judicial action, whether based on contract, tort or property principles, is not a likely (or arguably even legitimate) source for enduring “just cause” protection for all employees. Because of the limits of the common law both in working a radical change in background employment norms and in fashioning the necessary procedures and exceptions from coverage, general “just cause” protection requires legislation. The case for and against such legislation, and the form such measures might take, is treated in this section. Consider first Professor Epstein’s defense of existing arrangements.

1. IS LEGISLATION WARRANTED? Richard Epstein’s article, In Defense of the Contract at Will, 51 U.Chi. L. Rev. 947 (1984), makes four principle arguments in favor of an at-will system: 1. “Monitoring Behavior.” Epstein argues that it is difficult for employers to police employee misconduct and overcome employee incentives to work unproductively. “In order to maintain internal discipline, the firm may have to resort to sanctions against individual employees. It is far easier to use those powers that can be unilaterally exercised: to fire, to demote, to withhold wages, or to reprimand.” 93

2. “Reputational Losses. * * * The employer who decides to act for bad reason or no reason at all may not face any legal liability under the classical common law rule. But he faces very powerful adverse economic consequences. If coworkers perceive the dismissal as arbitrary, they will take fresh stock of their own prospects, for they can no longer be certain that their faithful performance will ensure their security and advancement.” 3. “Risk Diversification and Imperfect Information. * * * The at-will contract * * * allows both sides to take a waitand-see attitude to their relationship so that new and more accurate choices can be made on the strength of improved information.” 4. “Administrative Costs. There is one last way in which the contract at will has an enormous advantage over its rivals. It is very cheap to administer. Any effort to use a for-cause rule will in principle allow all, or at least a substantial fraction of, dismissals to generate litigation.”

NOTES AND QUESTIONS 1. Professor Epstein argues that the at-will doctrine offers advantages for both parties to the employment relationship. Is it likely that movement to a “cause” regime would make employers significantly less likely to hire at the margin, and to forestall hiring until completion of extensive pre-employment screening and satisfactory performance of a probationary period? 2. In the absence of, say, retaliation for whistleblowing or organizing a labor union, where existing law provides protection, is it ever in the interest of the employer to discharge long-term productive employees? Even if the firm as a whole may be considered a rational economic actor, can the same be said for line supervisors who may be acting out of pique or preservation of a power relationship and whose decisions are routinely deferred to by the firm?

3. Are reputational sanctions sufficient to deter employers from arbitrary termination—particularly in light of social media and employer rating sites like glassdoor.com? Is it likely new hires will learn of the underlying facts of prior employment terminations? For more on this issue, see Samuel Estreicher, Employer Reputation at Work, 27 Hofstra Lab. & Emp. L.J. 1 (2009). See also Note 4 below. 4. Employer Opportunism in Internal Labor Markets? A decision to fire a productive employee may be economically rational if the employee’s compensation exceeds his or her marginal productivity to the firm. Professors Wachter and Cohen suggest that a “backloaded” compensation structure may be characteristic of firms seeking to promote long-term commitment and investment by employees in “firmspecific skills” (which add value to the employer but do not enhance the employee’s portable skills). Such a 94 compensation structure is often referred in the economics literature as an “internal labor market” or “relational” contract. Although descriptions vary, the central feature of the arrangement is that after an initial training period, both the firm and the employee derive gains that they would not achieve in its absence. The employee’s productivity exceeds not only his wage but also what he could earn in the external labor market; and the firm reaps the benefit of a specially trained, committed workforce. During this phase, because both sides benefit, the arrangement is fully self-enforcing. However, because compensation is backloaded over the course of the employee’s career—in part to motivate long-term commitment and in part because employees derive satisfaction from a compensation structure that improves over time—there comes a point where the interests of the firm and the employee begin to diverge. The employee continues to enjoy a wage exceeding what he could obtain elsewhere, but his wage also exceeds his productivity contribution to the firm. See Michael L. Wachter & George Cohen, The Law and Economics of Collective Bargaining: An Introduction and Application to the Problems of Subcontracting, Partial Closure, and Relocation, 136 U. Pa. L. Rev. 1349, 1362–64 (1988). In bad times, employers may have an incentive to “cheat” on this relational contract; hence, candidates for staff reductions are likely to come from the ranks of long-term, usually older, workers who are being paid above their marginal value. Age discrimination laws may be animated by similar concerns. Professor Schwab applies such reasoning to explain California decisions like Pugh, See’s Candies, and Foley finding an “implied in fact” job security term in the case of long-service employee facing late-career discharges. See Stewart J. Schwab, Life-Cycle Justice: Accommodating Just Cause and Employment at Will, 92 Mich. L. Rev. 8 (1993). A similar analysis may apply as an explanation for age discrimination laws. Professor Ehrenberg has argued, on the other hand, that long-term employees do not need the law’s assistance because reputational costs would discourage firms from unjustly dismissing workers who were in the stage of their life-cycles in which marginal productivity falls below wages. In his view, the problem of unjust dismissal is largely confined to low-skilled workers in casual labor markets. For such workers, the appropriate legal response is not to increase marginal labor costs (through mandatory job security), but to prod state unemployment insurance systems to more rigorously examine dismissals for “misconduct” and to encourage the award of unemployment benefits without extra waiting periods. See Ronald Ehrenberg, Workers’ Rights: Rethinking Protective Labor Legislation, in Rethinking Employment Policy 137, 142–50 (D.L. Bawden & F. Skidmore eds., 1989). 5. Incidence of Wrongful Dismissal? Does the fact that arbitrators under collective bargaining agreements overturn approximately one-third of all discharges that go to arbitration suggest that unjust dismissal does in fact occur with some regularity? See Jack Stieber & Michael Murray, Protection Against Unjust Discharge: The Need for a Federal Statute, 16 U. Mich. J.L. Ref. 319 (1983); Jack Stieber, The Case for Protection of Unorganized 95 Employees Against Unjust Discharge, IRRA 32nd Ann. Proc. 155, 160–61 (1979). Estimates of the incidence of wrongful dismissal vary. Extrapolating from the labor arbitration experience, and on the assumption that the reversal rate in the arbitration setting would also hold true for nonunion firms under a statutory “cause” regime, Professor Peck estimated that approximately 300,000 discharge or discipline cases would be overturned annually. See Cornelius J. Peck, Unjust Discharges from Employment: A Necessary Change in the Law, 40 Ohio St. L.J. 1, 8–10 (1979). Professor Frug puts the figure at 150,000 cases a year. See Gerald E. Frug, Why Courts Are Always Making Law, Fortune, Sept. 25, 1989, at 247, 248. Professors Freed and Polsby estimate that a nonunion worker faces a probability of wrongful dismissal of no more than 0.5769% (under Peck’s estimate) or 0.2083% (under Frug’s): “All of these probabilities are low enough that a person who disregarded them would not be acting unreasonably.” Mayer Freed & Daniel Polsby, Just Cause for Termination Rules and Economic Efficiency, 38 Emory L.J. 1097, 1106–07 (1989). The methodology of the Stieber-Peck estimates is criticized in Andrew P. Morriss, Bad Data, Bad Economics, and Bad Policy: Time to Fire Wrongful Discharge Law, 74 Tex. L. Rev. 1901 (1996).

NOTE: CRITIQUE OF THE EMPLOYMENT-AT-WILL DOCTRINE An economist might defend Epstein’s position and the employment-at-will doctrine by arguing that employers and employees who

would benefit from checks on arbitrary terminations could freely contract for such checks without governmental regulation. To the extent that any such check is more valuable to a group of employees than its absence is valuable to their employer, they will “purchase” the check by trading other parts of the compensation package that their labor market position enables them to command. Such purchases do in fact occur, the economist might note, when employees support unions that negotiate “just cause” provisions in collective agreements and when some high-level management employees negotiate contracts for a definite term containing sanctions for termination without cause. Mandatory job security protection, however, may force employees to accept a benefit that is more expensive to their employers than it is valuable to them. Employers may respond by eliminating (or reducing) other compensation that the employees would have preferred or by hiring fewer employees because of increased marginal labor costs. Either way, under this view, private autonomy will be frustrated and net social welfare will be reduced. See Jeffrey L. Harrison, The “New” Terminable-at-Will Employment Contract: An Interest and Cost Incidence Analysis, 69 Iowa L. Rev. 327 (1984). There are two kinds of counterarguments that can be made to this kind of criticism of governmental regulation. First, a society may wish to reject the valuation that many individual workers are willing to give a particular good, such as job security. It may wish to do so because the rejected individual priorities offend certain fundamental values by which the society wishes to be defined, such as the importance of assuring some minimum level of dignity to 96 all who work, or the principle reflected in § 6 of the Clayton Act of 1914 that the labor of a human being is not a commodity to be dispensed with at will. A society may also reject certain individual values because it is convinced that requiring people to live under new societal values will transform their priorities, creating a different welfare calculus in accord with the new values. Such paternalistic justifications, however, may be more difficult to accept for a general mandatory job security law than for minimum employment terms such as those established by the Occupational Safety and Health Act and minimum wage legislation. Also, if imposing a “cause” limitation on termination of employees reduces employer willingness to hire new employees, does this mean that job applicants or transfers from other employers may bear the brunt of the job-security gain for incumbent employees. The second kind of counterargument questions some of the assumptions of the free market economist’s attack on regulation. Some would argue, for instance, that the grant of minimum benefits to workers, whether it be minimum job safety or job security, can help effect some redistribution of social wealth from the holders of capital to the contributors of labor. Employers operating in imperfect labor markets cannot necessarily recoup what they must grant workers by lowering other parts of the compensation package. Most economists would view unrestricted redistributions of social wealth in the form of tax and spending power subsidies as more efficient and therefore preferable vehicles. Those interested in pursuing wealth redistribution policies, however, may find that redistribution is socially acceptable only when it occurs as an incident to rules that accord with dominant social values. Furthermore, some would question the assumption that the rarity of individual employee bargaining for job-security protections proves that workers are not willing to incur the costs of such protections. The inclusion in almost all collective bargaining agreements of prohibitions of termination without “just cause” certainly suggests that many employees are willing to bargain and pay for job security. It may be that free bargaining over job security does not occur in most nonunionized labor markets—because of barriers to information about the availability of such protections, inaccurate assessments of the likelihood of unjust dismissal, difficulties in raising questions concerning termination at the outset of a relationship, obstacles to mobility, or employer monopsony. For an elaboration of this view, see Paul C. Weiler, Governing the Workplace: The Future of Labor and Employment Law 72–78 (1990).

2. WHAT FORM SHOULD THE LEGISLATION TAKE? As an example of how wrongful discharge legislation might be framed, consider the Montana Wrongful Discharge from Employment Act, the first of its kind in this country. 97

MONTANA WRONGFUL DISCHARGE FROM EMPLOYMENT ACT Mont.Code Ann. §§ 39–2–901 to –914.

Plaintiff Bar Opposition to the Montana Law The most vociferous opponents of the Montana Wrongful Discharge statute were plaintiffs’ attorneys, who disliked the legislation’s cap on damages. Prior to the 1987 statute, the Montana courts “steadily increased the scope of the implied covenant theory” and made punitive damages available for wrongful termination claims. The legislation sought to provide more predictability in resolving

employment disputes, and drew “wide support in the House, including from representatives whose support for it ‘shocked the hell’ out of the bill’s opponents.” Andrew Morriss, The Story of the Montana Wrongful Discharge from Employment Act: A Drama in 5 Acts, from Employment Law Stories (Samuel Estreicher & Gillian Lester eds. 2007).

NOTES AND QUESTIONS 1. “Good Cause” Standard. The substantive standard for wrongful termination—“good cause”—is defined only in general terms. Consider the previous discussion of the Employment Restatement § 2.04, pp. 86–92. Montana decisions suggest a fairly deferential standard. In Buck v. Billings Montana Chevrolet, Inc., 248 Mont. 276, 811 P.2d 537 (1991), the court held that a new purchaser of an automobile dealership had “a legitimate business reason,” within the meaning of the “good cause” concept as defined in the statute, to terminate the former manager and replace him with a manager from the purchaser’s other operations, even though the decision was admittedly not based on the prior work performance of the former manager. The Buck court defined a “legitimate business reason” as one that is neither false, whimsical or capricious, and it must have some logical relationship to the needs of the business. In applying this definition, one must take into account the right of an employer to exercise discretion over who it will employ and keep in employment. Of equal importance to this right, however, is the legitimate interest of the employee to secure employment. 248 Mont. at 281–82, 811 P.2d at 540. The court explained, however, that its holding was limited “to those who occupy sensitive managerial confidential positions,” and that the balance might tip the other way in the case of non-managerial employees. 248 Mont. at 283, 811 P.2d at 541. The Montana high court also apparently drew a distinction between decisions eliminating managerial positions and decisions replacing one employee with another. See Kestell v. Heritage Health Care Corp., 259 Mont. 518, 858 P.2d 3 (1993) 98 (setting aside summary judgment against former director of hospital’s chemical dependency unit). See generally Donald C. Robinson, The First Decade of Judicial Interpretation of the Montana Wrongful Discharge from Employment Act, 57 Mont. L. Rev. 375 (1996). 2. Montana’s Post-Dispute Arbitration Option. The Montana statute contemplates resort to a civil action and presumably a jury trial. However, final and binding arbitration is offered as an alternative and is creatively encouraged by fee-shifting provisions. See Mont. Code. Ann. §§ 39–2–914, 39–2–915. Are there advantages to this approach over either committing disputes exclusively to the courts or to arbitration? Does the Montana statute require that there must be an agreement to arbitrate before the attorney’s fees provisions are triggered? In 1993, the Montana legislature amended the statute to make clear that a unilateral offer to arbitrate that is refused triggers the attorney’s fees provisions. See Mont. Code Ann. § 39–2–915. 3. Implications of Damages Cap. Note that the Montana legislature placed a four-year “cap” on lost wages and fringe benefits, excluded recovery for emotional distress and compensatory damages, and limited punitive damages to cases of fraud or malice. In view of the statutory cap on recovery and the preemption of preexisting common law contract remedies, are plaintiffs as a class made less well off than they were under an at-will regime? Does the Montana measure, in effect, confer upon employees as a group some measure of job security in exchange for a ceiling on employer liability? Would it have been preferable from a policy standpoint, and fairer to employee interests, to have provided either for (i) a strict liability-based administrative process resembling workers’ compensation systems, or (ii) if a fault-based civil action were desired, authority to award attorney’s fees to prevailing claimants, as is true under Title VII and ADEA? The Montana Supreme Court rejected a challenge to the Montana statute brought under the state constitution’s guaranty of equal protection and “full legal redress for injury incurred in employment” in Meech v. Hillhaven West, Inc., 238 Mont. 21, 776 P.2d 488 (1989). 4. Exclusions from Coverage. Note that the act contains several exclusions from coverage. The “good cause” standard only applies to employees who have completed a probationary period, presumably to give employers time to determine the suitability of a new hire. In addition, the act exempts any discharge (i) that is remediable by any other state or federal statute; (ii) that affects employees covered by a collective bargaining agreement; or (iii) that affects employees “covered by a written contract for a specific term.” The first exemption avoids duplicative adjudication. The second exemption may do so as well, but it raises the question of whether the state should require unionized employees to expend bargaining leverage to extract protection that is granted as a statutory right to nonunion workers. What is the explanation for the third exclusion? Is the legislature effectively providing an opportunity for the parties to “contract out” of the statute? Will employees be better off if they are compelled to enter into written 99

contracts for two or one year, or even shorter terms, rather than open-ended indefinite employment arrangements? Montana decisions make clear that nonrenewal of specific-term contracts are not covered by the “good cause” requirement. See Farris v. Hutchinson, 254 Mont. 334, 838 P.2d 374 (1992). 5. Adverse Actions Short of Discharge. Note also that the statute covers constructive discharges, but this term does not generally include refusals to promote or improve wages or other working conditions. Some courts have applied the new common law “wrongful discharge” doctrine to constructive discharges. See, e.g., Scott v. Pacific Gas & Elec. Co., 11 Cal. 4th 454, 46 Cal. Rptr. 2d 427, 904 P.2d 834 (1995), discussed at note 8, p. 80 supra; Mitchell v. Connecticut Gen. Life Ins. Co., 697 F. Supp. 948 (E.D. Mich.1988) (applying Michigan’s Toussaint doctrine). 6. Preemption of Common Law Claims. Note also that implied-contract claims are barred by the preemption provision of the statute, Mont. Code Ann. § 39–2–913; however, contract claims bearing on matters other than discharge, such as compensation, are not barred. See Beasley v. Semitool, Inc., 258 Mont. 258, 853 P.2d 84 (1993).

NOTE: THE MODEL EMPLOYMENT TERMINATION ACT In August 1991, the National Conference of Commissioners of Uniform State Laws approved a “Model Employment Termination Act” and recommended its enactment in every state; for text, see the Statutory Supplement. The proposed model act embodies essentially the tradeoff reflected in the Montana law: certainty of a right of action to challenge wrongful termination in exchange for limitations on remedies, particularly the exclusion of punitive damages, compensatory damages, or other recovery for emotional distress and pain and suffering. Covered employees are granted a substantive right to “good cause” protections against discharge, which cannot be waived except by an individually executed agreement guaranteeing a minimum schedule of severance payments keyed to length of service. The proposed law contemplates that state-appointed arbitrators will adjudicate claims with authority to award reinstatement, with or without backpay, and severance pay if reinstatement is infeasible. Unlike the Montana law, attorney’s fees may be awarded to a prevailing claimant. To date, the proposed model act has not been adopted by any jurisdiction. 100

SAMUEL ESTREICHER, UNJUST DISMISSAL LAWS: SOME CAUTIONARY NOTES 33 Am.J.Comp.L. 310 (1985).*

III. Some General Characteristics of Unjust Dismissal Laws Abroad A. Reinstatement The most striking point about the foregoing schemes is that, irrespective of formal legal position, reinstatement is simply not an important feature in practice (at least outside of Canada, Italy and perhaps Germany). The measures surveyed here do not in fact vindicate a right to a job. At best, they provide a much needed transfer payment to cushion displacement and perhaps an opportunity to clear one’s name. The evidence from England and from studies of NLRB reinstatees, as compared with labor arbitration reinstatees, suggests that the reinstatement remedy is difficult to police effectively outside of the context of union representation. Germany’s works councils seem to play a supportive role, similar to that of a union, and Italy’s statute is aided by its labor movement’s willingness to assist nonmember dischargees (in the hopes of recruiting them). One may venture here the generalization that perhaps such protective support mechanisms are necessary to the success of the reinstatement remedy. B. Size of Awards Outside of Canada and possibly Italy, the monetary awards, while not insignificant, are at modest, predictable levels— certainly in comparison to American jury recoveries. The English awards are striking in this regard, which goes a long way toward explaining the English employers’ reluctance to reinstate and the high settlement rate prior to hearing.** Punitive damages are also not a significant feature, although punitive concepts explain the additional award in Great Britain’s statute and other similar provisions. C. Exclusions from Coverage and Fixed-Term Contracts None of the countries in question provides universal protection; throughout we find qualifying periods of continuous service (in Great Britain, now 52 continuous weeks and two years for small firms); and exclusions or special provision for small sized companies (again, in Great Britain, by nearly doubling the qualifying period). 101

Managerial employees apparently are not per se excluded from coverage. (Italy does provide a separate set of procedures.)

Great Britain’s exclusion of employees under fixed-term contract of at least one year’s duration may operate to disqualify most managers. Even if formally excluded, however, managerial employees may have common law rights to dismissal only upon notice. As to fixed-term contracts, Great Britain permits exclusion in the case of employees under a fixed-term contract of at least one year’s duration who sign a written waiver of statutory rights. On the other hand, Germany, France and Italy, sensing here a potentially significant evasive tactic, seek to discourage repeated renewal of fixed-term contracts. D. Delegation of “Just Cause” Criteria to the Tribunal None of the statutes here attempt to spell out the standards, the criteria of “just cause.” Rather, they are broad delegations to the tribunals to develop procedural and substantive criteria, usually without guidance from a well-developed body of labor arbitration law. The British model, as it has evolved, seems to be one of deferential review of managerial prerogative, rather than de novo review—similar in theory to our judicial review of administrative agency action. This model of thoroughgoing deference seems not to have taken hold elsewhere on the Continent. E. Use of Specialized Tribunals With the exception of Japan and Italy, the statutes in question all utilize specialized labor tribunals that, at least in theory, are thought to dispense a cheaper, quicker, more accessible and expert justice. These tribunals, while often tripartite, do not offer the same opportunity for party selection of decisionmaker as would U.S. labor arbitration. F. Absence of Labor Union Opposition Although at first unions were skeptical, even opposed, to these new statutes, the evidence strongly suggests that the European unions have not only made their peace but also have assisted nonmember utilization of the statutory procedures (as an organizing tactic). G. Relation to Redundancy Dismissal Legislation Virtually all of the countries under review have also enacted some protections against economic dismissals, individual or group. In Great Britain, redundancy laws preceded the unjust dismissal statute. Although I am not sure of the precise relationship between these schemes, I suspect that unjust dismissal laws appeared to many as at least logically inevitable once the inviolability of the at-will concept was breached by redundancy laws. Moreover, in many situations, both disciplinary and economic reasons may be potentially available to an employer bent on terminating 102

an employee. Effective policing of either scheme may well require enactment of the other.

NOTES AND QUESTIONS 1. By U.S. standards, U.K. employment tribunal awards would seem low, even in discrimination cases where caps are no longer imposed on awards. Might this be the basis of a desirable trade-off for the U.S.—relatively prompt recovery provided in employeefriendly employment tribunals but lower awards? 2. Under what conditions is an effective reinstatement remedy possible in a nonunionized environment or one without a support mechanism similar to an established labor union or the German works councils? Who would police post-reinstatement compliance? Should the law require the reinstatement of wrongly dismissed high-level executives or other employees whose jobs depend on maintenance of a high degree of employer trust and confidence? 3. Europeans tend to provide for special administrative tribunals or labor courts to handle employment cases, including discrimination claims. Would the U.S. need a similar set of institutions to administer a general unfair dismissal regime? Is the Canadian federal government’s use of “adjudicators” from the ranks of private labor arbitrators an attractive possibility for the U.S.? 4. Relationship Between Discrimination and Unfair Dismissal Claims. Because of the availability of unfair dismissal remedies in most of the European countries, there is less of an incentive to frame one’s case as a discrimination case where the gravamen of the claim is a challenge to the fairness of a termination decision. Thus, for example, only 18% of cases in the U.K. tribunal system in 2011–12 involved discrimination claims. See Government of the United Kingdom, Annual Employment Tribunal and Employment Appeal Tribunal Statistics (as of March 16, 2016). In the U.S., by contrast, given the absence of unfair dismissal legislation (outside of Montana), plaintiffs look to the anti-discrimination laws as their principal recourse. Over time, litigants in Europe may be more attracted to pursuing discrimination claims which, under EU law, cannot be subject to a maximum level of recovery. 5. Resistance to Change? Although many European observers believe that a greater measure of flexibility is needed in dismissal

laws to encourage employment growth, change to these laws faces considerable obstacles. See, e.g., John C. Reitz, Political Economy and Contract Law, in New Features in Contract Law (Reiner Schulze, ed., 2007): In April–May, 2006, French students and labor unions, joined by teachers, the jobless, and even retirees, took to the streets in an escalating series of actions to protest government proposals to amend the labor laws to give employers a limited right to terminate young, first-time permanent employees on an at will basis. The proposed law would have created a new two-year labor contract (the so-called contrat première embauche or C.P.E.) for businesses with over twenty 103 workers and for workers younger than twenty-six [when] employed for their first job. The new contract would have permitted employers to terminate without notice, severance pay, or the obligation to show that the employee has violated the contract. Over a two-month period of disruptions, the protestors managed to * * * shut down universities, threatened to hurt tourism and economy, and brought violent clashes between young people and police. Eventually, the French political leaders bowed to public opposition and rescinded the law that promulgated the C.P.E. contract. 6. Just Notice? For the view that instead of altering the at-will default rule as such, the approach taken in some Canadian provinces should be adopted, whereby employers should be required to give notice of termination, the length of which to be keyed to length of prior service, see Rachel Arnow-Richman, Re-Reforming Employment At-Will, 58 U.C.L.A. L. Rev. 1 (2010). 9 As noted, Bechtel’s disclaimer appears in Policy 1101, part of the general body of Bechtel personnel documents submitted by the parties in connection with the motion for summary judgment. The date on which Policy 1101 was promulgated is uncertain. However, we do not understand Guz to claim that he had an employment security agreement that predated and arose independently of Policy 1101 and therefore could not be rescinded or cancelled by virtue of Policy 1101’s belated disclaimer. On the contrary, Guz admits Policy 1101 (necessarily including its disclaimer) applied to him, and he premises his contractual claim on an amalgam of factors, significantly including certain language in Policy 1101 itself. (See discussion herein.) Hence, we may, and do, assume that the disclaimer included in Policy 1101 is a material factor in ascertaining the terms and conditions on which Guz individually was employed by Bechtel [(emphasis in original).] 10

On the other hand, most cases applying California law, both pre- and post-Foley, have held that an at-will provision in an express written agreement, signed by the employee, cannot be overcome by proof of an implied contrary understanding. * * * 10 If reliance is not presumed, a strict contractual analysis might protect the rights of some employees and not others. For example, where an employee is not even aware of the existence of the manual, his or her continued work would not ordinarily be thought of as the bargained-for detriment. See S. Williston, Contracts §§ 101, 102A (1957). But see A. Corbin, Contracts 59 (1963) (suggesting that knowledge of an offer is not a prerequisite to acceptance). Similarly, if it is quite clear that those employees who knew of the offer knew that it sought their continued work, but nevertheless continued without the slightest intention of putting forth that action as consideration for the employer’s promise, it might not be sufficient to form a contract. See S. Williston, Contracts § 67 (1957). But see Pine River [State Bank v. Mettille,] 333 N.W.2d at 622, 627, 630 [(Minn.1983).] In this case there is no proof that plaintiff, Woolley, relied on the policy manual in continuing his work. Furthermore, as the Appellate Division correctly noted, Woolley did “not bargain for” the employer’s promise. The implication of the presumption of reliance is that the manual’s job security provisions became binding the moment the manual was distributed. Anyone employed before or after became one of the beneficiaries of those provisions of the manual. And if Toussaint is followed, employees neither had to read it, know of its existence, or rely on it to benefit from its provisions any more than employees in a plant that is unionized have to read or rely on a collective-bargaining agreement in order to obtain its benefits. 11 The parties agree that Woolley’s employment was for an indefinite period. We therefore need not determine the impact of a job security clause where the employment is alleged to be for a fixed term, e.g., because of the stated salary period. See Willis v. Wyllys Corp., 98 N.J.L. 180, 119 A. 24 (E. & A. 1922) (when employment contract states annual salary, the term of employment is not indefinite, but by the year). 1 In this case, the contractual limitation on the employer’s at-will power of termination is implied, arising, as the trial judge apparently determined, from preliminary negotiations and the text of a letter defendants sent plaintiff in response to a request for additional assurances of “permanent employment” before accepting their employment offer. The letter stated that if plaintiff’s efforts to develop an international brokerage department failed to succeed, “other opportunities” within the organization would be “made available” to him. The Court of Appeal held it was error for the trial court to take from the jury the issue whether there was an implied contract not to terminate plaintiff except for good cause, a holding we do not review. Wrongful termination claims founded on an explicit promise that termination will not occur except for just or good cause may call for a different standard, depending on the precise terms of the contract provision. 2 [This standard instruction] states: “Where there is an employment agreement not to terminate an employee except for good cause, an employer may not terminate the employment of an employee unless such termination is based on a fair and honest cause or reason. In determining whether there was good cause, you must balance the employer’s interest in operating the business efficiently and profitably with the interest of the employee in maintaining employment.” * As updated in Global Issues in Employment Law 74–85 (Samuel Estreicher & Miriam A. Cherry eds. 2008). For a fuller treatment, see Samuel Estreicher & Jeffrey M. Hirsch, Comparative Wrongful Dismissal Law: Reassessing American Exceptionalism, 92 N.C. L. Rev. 342 (2014). ** [Eds. Under pressure from the European Union’s Court of Justice, the United Kingdom has amended its laws to provide for uncapped monetary recoveries in discrimination cases, and has raised its monetary cap for unfair dismissal cases to one year’s gross pay which cannot be more £93,878 (if dismissed on or after April 6,2022).]

105

PART 2 PROTECTION AGAINST RETALIATION ■■■

This Part shifts attention from employment regulations framed to prevent unfair treatment of individuals because of an immutable or otherwise prohibited status, to laws intended to protect certain kinds of employee conduct. Chapter 3 reviews legislative and judicially created rules designed to protect employees’ efforts to claim some substantive, government-conferred right, including the right to be free of status discrimination. Chapter 4 considers the emerging common law and statutory protection of the decisions of employees to discharge some duty that they owe, or that they believe they owe, society. Finally, Chapter 5 considers the protection afforded by the First Amendment to public employees’ choice of particular forms of expressive activity. Society may choose to protect particular forms of employee activity based on at least three instrumental justifications. First, society may recognize that the effective enforcement of substantive rights may require some protection of employee efforts to assert those rights. If employers can use their power over personnel decision-making to penalize such efforts with impunity, the underlying substantive rights may be robbed of all practical significance. Although some employee self-help may be disruptive and impose substantial costs, the protection of other efforts may require little more justification than the original justifications for the underlying rights. Second, society may determine that protecting certain employee self-help efforts is an effective way not only to protect rights granted by law, but also to promote a process for determining terms and conditions of employment that is thought to be preferable to direct government regulation. Such a determination in part underlies the National Labor Relations Act’s protection of employee efforts to organize unions and to bargain collectively with their employer. Unions might ensure the protection of rights more effectively than can governmental action because they have continuing and internal relationships with employers. Third, society might wish to protect employee activity because of its contribution to goals that are not related to employee, or employer, interests. The readiest justification for such regulatory protection is simply that employees cannot be expected to bargain for third parties, or for the general society. Employer-employee bargains will not account for the 106

external effects of certain types of employment decision-making. If society wants employees to engage in activity that will in some way be costly to employers, but will not directly benefit employees, it must offer employees a guarantee of protection against employer retaliation. This last instrumental reason for choosing particular activity to protect from retaliation, however, may be the most openended. It may warrant protection of a broad range of activity that would impose substantial costs on employers. In this section of the book, as in the previous section, our analysis must include consideration of the costs as well as the benefits of regulation. Our analysis in this Part may also have to consider some issues that were not salient in the previous section. Two should be noted here. First, the common law development of some of the regulations included in this section raises the legal process issue of whether protection of socially valued employee activity is best undertaken by legislatures or by courts. Second, the First Amendment chapter highlights the important issue of whether there are strong justifications for offering different protection to public-sector employees than to those in the private sector. Is regulation of the private sector likely to entail higher costs of enforcement and over-enforcement?

107

CHAPTER 3 RETALIATION FOR ASSERTION OF STATUTORY RIGHTS ■■■

Introduction Retaliation claims have become the most frequently filed charges before the EEOC. In 2018, retaliation charges comprised 51.6% of all charges received, the first year in which retaliation charges exceeded all other claims before the Commission. In 2019, EEOC received 39,110 charges of retaliation, 53.8% of all charges received. And in 2020, the pandemic year, retaliation charges amounted to 55.8% of all charges filed. Retaliation claims are not only prevalent under Title VII. Virtually every federal and most state employment laws contain some form of express antiretaliation provision. See, e.g., FLSA, § 15(a)(3), 29 U.S.C. § 215(a)(3); Occupational Safety and Health Act, § 11(c), 29 U.S.C. § 660(c); the Employee Retirement Security Act of 1974 (ERISA), §§ 502(a), 510, 29 U.S.C. §§ 1132(a), 1140. These provisions generally fall into three categories. Most statutes contain a “participation” clause, protecting individuals who invoke or participate in the formal processes of the statute. § 704(a) of Title VII prohibits discrimination against an employee or applicant “because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this title.” Some laws contain an opposition clause, protecting some forms of self-help opposition to unlawful practices. Section 704(a) also prohibits discrimination against an employee or applicant “because he has opposed any practice made an unlawful employment practice by this title.” Section 510 of ERISA, 29 U.S.C. § 1140, is a third type of antiretaliation provision. Section 510, in addition to protecting the assertion of statutory claims, also reaches a form of status discrimination—that which occurs for the purpose of interfering with employees obtaining contractual benefits regulated by ERISA. See, e.g., Dister v. Continental Grp., Inc., 859 F.2d 1108 (2d Cir. 1988) (employee fired on the eve of entitlement to enhanced pension benefits for the 108

retaliatory purpose of preventing the obtainment of such benefits). Each type of retaliation claim is discussed below.

A. EXPRESS ANTIRETALIATION PROVISIONS: PARTICIPATION CLAUSE BURLINGTON NORTHERN V. WHITE Supreme Court of the United States, 2006. 548 U.S. 53, 126 S.Ct. 2405, 165 L.Ed.2d 345.

JUSTICE BREYER delivered the opinion of the Court. I A This case arises out of actions that supervisors at petitioner Burlington Northern & Santa Fe Railway Company took against respondent Sheila White, the only woman working in the Maintenance of Way department at Burlington’s Tennessee Yard. In June 1997, Burlington’s roadmaster, Marvin Brown, interviewed White and expressed interest in her previous experience operating forklifts. Burlington hired White as a “track laborer,” a job that involves removing and replacing track components, transporting track material, cutting brush, and clearing litter and cargo spillage from the right-of-way. Soon after White arrived on the job, a co-worker who had previously operated the forklift chose to assume other responsibilities. Brown

immediately assigned White to operate the forklift. While she also performed some of the other track laborer tasks, operating the forklift was White’s primary responsibility. In September 1997, White complained to Burlington officials that her immediate supervisor, Bill Joiner, had repeatedly told her that women should not be working in the Maintenance of Way department. Joiner, White said, had also made insulting and inappropriate remarks to her in front of her male colleagues. After an internal investigation, Burlington suspended Joiner for 10 days and ordered him to attend a sexual-harassment training session. On September 26, Brown told White about Joiner’s discipline. At the same time, he told White that he was removing her from forklift duty and assigning her to perform only standard track laborer tasks. Brown explained that the reassignment reflected co-worker’s complaints that, in fairness, a “more senior man” should have the “less arduous and cleaner job” of forklift operator. 364 F.3d 789, 792 (CA 6 2004). On October 10, White filed a complaint with the Equal Employment Opportunity Commission (EEOC or Commission). She claimed that the reassignment of her duties amounted to unlawful gender-based 109

discrimination and retaliation for her having earlier complained about Joiner. In early December, White filed a second retaliation charge with the Commission, claiming that Brown had placed her under surveillance and was monitoring her daily activities. That charge was mailed to Brown on December 8. A few days later, White and her immediate supervisor, Percy Sharkey, disagreed about which truck should transport White from one location to another. The specific facts of the disagreement are in dispute, but the upshot is that Sharkey told Brown later that afternoon that White had been insubordinate. Brown immediately suspended White without pay. White invoked internal grievance procedures. Those procedures led Burlington to conclude that White had not been insubordinate. Burlington reinstated White to her position and awarded her backpay for the 37 days she was suspended. White filed an additional retaliation charge with the EEOC based on the suspension. B After exhausting administrative remedies, White filed this Title VII action against Burlington in federal court. As relevant here, she claimed that Burlington’s actions—(1) changing her job responsibilities, and (2) suspending her for 37 days without pay—amounted to unlawful retaliation in violation of Title VII. § 2000e–3(a). A jury found in White’s favor on both of these claims. It awarded her $43,500 in compensatory damages, including $3,250 in medical expenses. The District Court denied Burlington’s post-trial motion for judgment as a matter of law. See Fed. Rule Civ. Proc. 50(b). Initially, a divided Sixth Circuit panel reversed the judgment and found in Burlington’s favor on the retaliation claims. The full Court of Appeals vacated the panel’s decision, however, and heard the matter en banc. The court then affirmed the District Court’s judgment in White’s favor on both retaliation claims. While all members of the en banc court voted to uphold the District Court’s judgment, they differed as to the proper standard to apply. Compare 364 F.3d at 795–800, with id., at 809 (Clay, J., concurring). II Title VII’s anti-retaliation provision forbids employer actions that “discriminate against” an employee (or job applicant) because he has “opposed” a practice that Title VII forbids or has “made a charge, testified, assisted, or participated in” a Title VII “investigation, proceeding, or hearing.” § 2000e–3(a). No one doubts that the term “discriminate against” refers to distinctions or differences in treatment that injure protected individuals. * * * But different Circuits have come to different conclusions about whether the challenged action has to be employment or workplace 110

related and about how harmful that action must be to constitute retaliation. * * * A Petitioner and the Solicitor General both argue that the Sixth Circuit is correct to require a link between the challenged retaliatory action and the terms, conditions, or status of employment. They note that Title VII’s substantive anti-discrimination provision protects an individual only from employment-related discrimination. They add that the anti-retaliation provision should be read in pari materia with the anti-discrimination provision. And they conclude that the employer actions prohibited by the anti-retaliation provision should similarly be limited to conduct that “affects the employee’s compensation, terms, conditions, or privileges of employment.”

We cannot agree. The language of the substantive provision differs from that of the anti-retaliation provision in important ways. Section 703(a) sets forth Title VII’s core anti-discrimination provision in the following terms: “It shall be an unlawful employment practice for an employer— “(1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin; or “(2) to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin.” § 2000e–2(a) (emphasis added). Section 704(a) sets forth Title VII’s anti-retaliation provision in the following terms: “It shall be an unlawful employment practice for an employer to discriminate against any of his employees or applicants for employment . . . because he has opposed any practice made an unlawful employment practice by this subchapter, or because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter.” § 2000e–3(a) (emphasis added). The underscored words in the substantive provision—“hire,” “discharge,” “compensation, terms, conditions, or privileges of employment,” “employment opportunities,” and “status as an employee”—explicitly limit the scope of that provision to actions that affect employment 111

or alter the conditions of the workplace. No such limiting words appear in the anti-retaliation provision. Given these linguistic differences, the question here is not whether identical or similar words should be read in pari materia to mean the same thing. * * * Rather, the question is whether Congress intended its different words to make a legal difference. We normally presume that, where words differ as they differ here, “Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L. Ed. 2d 17 (1983). There is strong reason to believe that Congress intended the differences that its language suggests, for the two provisions differ not only in language but in purpose as well. The anti-discrimination provision seeks a workplace where individuals are not discriminated against because of their racial, ethnic, religious, or gender-based status. See McDonnell Douglas Corp. v. Green, 411 U.S. 792, 800–801, 93 S. Ct. 1817, 36 L. Ed. 2d 668 (1973). The anti-retaliation provision seeks to secure that primary objective by preventing an employer from interfering (through retaliation) with an employee’s efforts to secure or advance enforcement of the Act’s basic guarantees. The substantive provision seeks to prevent injury to individuals based on who they are, i.e., their status. The anti-retaliation provision seeks to prevent harm to individuals based on what they do, i.e., their conduct. To secure the first objective, Congress did not need to prohibit anything other than employment-related discrimination. The substantive provision’s basic objective of “equality of employment opportunities” and the elimination of practices that tend to bring about “stratified job environments,” id., at 800, 93 S. Ct. 1817, 36 L. Ed. 2d 668, would be achieved were all employment-related discrimination miraculously eliminated. But one cannot secure the second objective by focusing only upon employer actions and harm that concern employment and the workplace. Were all such actions and harms eliminated, the anti-retaliation provision’s objective would not be achieved. An employer can effectively retaliate against an employee by taking actions not directly related to his employment or by causing him harm outside the workplace. See, e.g., Rochon v. Gonzales, 438 F.3d at 1213 (FBI retaliation against employee “took the form of the FBI’s refusal, contrary to policy, to investigate death threats a federal prisoner made against [the agent] and his wife”); Berry v. Stevinson Chevrolet, 74 F.3d 980, 984, 986 (CA10 1996) (finding actionable retaliation where employer filed false criminal charges against former employee who complained about discrimination). A provision limited to employment-related actions would not deter the many forms that effective retaliation can take. Hence, such a limited construction would fail to fully achieve the anti-retaliation provision’s “primary purpose,” namely, 112

“maintaining unfettered access to statutory remedial mechanisms.” Robinson v. Shell Oil Co., 519 U.S. 337, 346, 117 S. Ct. 843, 136 L. Ed. 2d 808 (1997). *** [W]e conclude that Title VII’s substantive provision and its anti-retaliation provision are not coterminous. The scope of the anti-retaliation provision extends beyond workplace-related or employment-related retaliatory acts and harm. We therefore

reject the standards applied in the Courts of Appeals that have treated the anti-retaliation provision as forbidding the same conduct prohibited by the anti-discrimination provision and that have limited actionable retaliation to so-called “ultimate employment decisions.” * * * B The anti-retaliation provision protects an individual not from all retaliation, but from retaliation that produces an injury or harm. As we have explained, the Courts of Appeals have used differing language to describe the level of seriousness to which this harm must rise before it becomes actionable retaliation. * * * In our view, a plaintiff must show that a reasonable employee would have found the challenged action materially adverse, “which in this context means it well might have dissuaded a reasonable worker from making or supporting a charge of discrimination.” Rochon, 438 F.3d at 1219 (quoting Washington, 420 F.3d at 662). We speak of material adversity because we believe it is important to separate significant from trivial harms. Title VII, we have said, does not set forth “a general civility code for the American workplace.” Oncale v. Sundowner Offshore Services, Inc., 523 U.S. 75, 80, 118 S. Ct. 998, 140 L. Ed. 2d 201 (1998); see Faragher, 524 U.S., at 788, 118 S. Ct. 2275, 141 L. Ed. 2d 662 (judicial standards for sexual harassment must “filter out complaints attacking the ordinary tribulations of the workplace, such as the sporadic use of abusive language, gender-related jokes, and occasional teasing”). An employee’s decision to report discriminatory behavior cannot immunize that employee from those petty slights or minor annoyances that often take place at work and that all employees experience. See 1 B. Lindemann & P. Grossman, Employment Discrimination Law 669 (3d ed. 1996) (noting that “courts have held that personality conflicts at work that generate antipathy” and “snubbing by supervisors and co-workers” are not actionable under § 704(a)). The anti-retaliation provision seeks to prevent employer interference with “unfettered access” to Title VII’s remedial mechanisms. Robinson, 519 U.S., at 346, 117 S. Ct. 843, 136 L. Ed. 2d 808. It does so by prohibiting employer actions that are likely “to deter victims of discrimination from complaining to the EEOC,” the courts, and their employers. Ibid. And normally petty slights, minor annoyances, and simple 113

lack of good manners will not create such deterrence. See 2 EEOC 1998 Manual § 8, p. 8–13. We refer to reactions of a reasonable employee because we believe that the provision’s standard for judging harm must be objective. An objective standard is judicially administrable. It avoids the uncertainties and unfair discrepancies that can plague a judicial effort to determine a plaintiff’s unusual subjective feelings. We have emphasized the need for objective standards in other Title VII contexts, and those same concerns animate our decision here. See, e.g., [Pa. State Police v.] Suders, 542 U.S. [129,] 141, 124 S. Ct. 2342, 159 L. Ed. 2d 204 [(2004)] (constructive discharge doctrine); Harris v. Forklift Systems, Inc., 510 U.S. 17, 21, 114 S. Ct. 367, 126 L. Ed. 2d 295 (1993) (hostile work environment doctrine). We phrase the standard in general terms because the significance of any given act of retaliation will often depend upon the particular circumstances. Context matters. “The real social impact of workplace behavior often depends on a constellation of surrounding circumstances, expectations, and relationships which are not fully captured by a simple recitation of the words used or the physical acts performed.” Oncale, supra, at 81–82, 118 S. Ct. 998, 140 L. Ed. 2d 201. A schedule change in an employee’s work schedule may make little difference to many workers, but may matter enormously to a young mother with school age children. Cf., e.g., Washington, supra, at 662 (finding flex-time schedule critical to employee with disabled child). A supervisor’s refusal to invite an employee to lunch is normally trivial, a nonactionable petty slight. But to retaliate by excluding an employee from a weekly training lunch that contributes significantly to the employee’s professional advancement might well deter a reasonable employee from complaining about discrimination. See 2 EEOC 1998 Manual § 8, p. 8–14. Hence, a legal standard that speaks in general terms rather than specific prohibited acts is preferable for an “act that would be immaterial in some situations is material in others.” Washington, supra, at 661. *** III Applying this standard to the facts of this case, we believe that there was a sufficient evidentiary basis to support the jury’s verdict on White’s retaliation claim. See Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150–151, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000). The jury found that two of Burlington’s actions amounted to retaliation: the reassignment of White from forklift duty to standard track laborer tasks and the 37-day suspension without pay. Burlington does not question the jury’s determination that the motivation for these acts was retaliatory. But it does question the statutory significance of the harm these acts caused. The District Court instructed 114

the jury to determine whether respondent “suffered a materially adverse change in the terms or conditions of her employment,” and the Sixth Circuit upheld the jury’s finding based on that same stringent interpretation of the anti-retaliation provision (the interpretation that limits § 704 to the same employment-related conduct forbidden by § 703). Our holding today makes clear that the jury was not required to find that the challenged actions were related to the terms or conditions of employment. And insofar as the jury also found that the actions were “materially adverse,” its findings are adequately supported. First, Burlington argues that a reassignment of duties cannot constitute retaliatory discrimination where, as here, both the former and present duties fall within the same job description. We do not see why that is so. Almost every job category involves some responsibilities and duties that are less desirable than others. Common sense suggests that one good way to discourage an employee such as White from bringing discrimination charges would be to insist that she spend more time performing the more arduous duties and less time performing those that are easier or more agreeable. That is presumably why the EEOC has consistently found “retaliatory work assignments” to be a classic and “widely recognized” example of “forbidden retaliation.” 2 EEOC 1991 Manual § 614.7, pp. 614–31 to 614–32; see also 1972 Reference Manual § 495.2 (noting Commission decision involving an employer’s ordering an employee “to do an unpleasant work assignment in retaliation” for filing racial discrimination complaint); EEOC Dec. No. 74–77, 1974 EEOC LEXIS 2, 1974 WL 3847, *4 (Jan. 18, 1974) (“Employers have been enjoined” under Title VII “from imposing unpleasant work assignments upon an employee for filing charges”). To be sure, reassignment of job duties is not automatically actionable. Whether a particular reassignment is materially adverse depends upon the circumstances of the particular case, and “should be judged from the perspective of a reasonable person in the plaintiff’s position, considering all the circumstances.” Oncale, 523 U.S., at 81, 118 S. Ct. 998, 140 L. Ed. 2d 201. But here, the jury had before it considerable evidence that the track labor duties were “by all accounts more arduous and dirtier”; that the “forklift operator position required more qualifications, which is an indication of prestige”; and that “the forklift operator position was objectively considered a better job and the male employees resented White for occupying it.” 364 F.3d at 803 (internal quotation marks omitted). Based on this record, a jury could reasonably conclude that the reassignment of responsibilities would have been materially adverse to a reasonable employee. Second, Burlington argues that the 37-day suspension without pay lacked statutory significance because Burlington ultimately reinstated White with backpay. Burlington says that “it defies reason to believe that 115

Congress would have considered a rescinded investigatory suspension with full back pay” to be unlawful, particularly because Title VII, throughout much of its history, provided no relief in an equitable action for victims in White’s position. We do not find Burlington’s last mentioned reference to the nature of Title VII’s remedies convincing. After all, throughout its history, Title VII has provided for injunctions to “bar like discrimination in the future,” Albemarle Paper Co. v. Moody, 422 U.S. 405, 418, 95 S. Ct. 2362, 45 L. Ed. 2d 280 (1975) (internal quotation marks omitted), an important form of relief. Pub. L. 88–352, § 706(g), 78 Stat. 261, as amended, 42 U.S.C. § 2000e–5(g). And we have no reason to believe that a court could not have issued an injunction where an employer suspended an employee for retaliatory purposes, even if that employer later provided backpay. In any event, Congress amended Title VII in 1991 to permit victims of intentional discrimination to recover compensatory (as White received here) and punitive damages, concluding that the additional remedies were necessary to “help make victims whole.” West v. Gibson, 527 U.S. 212, 219, 119 S. Ct. 1906, 144 L. Ed. 2d 196 (1999) (quoting H. R. Rep. No. 102–40, pt. 1, pp. 64–65 (1991)); see 42 U.S.C. §§ 1981a(a)(1), (b). We would undermine the significance of that congressional judgment were we to conclude that employers could avoid liability in these circumstances. Neither do we find convincing any claim of insufficient evidence. White did receive backpay. But White and her family had to live for 37 days without income. They did not know during that time whether or when White could return to work. Many reasonable employees would find a month without a paycheck to be a serious hardship. And White described to the jury the physical and emotional hardship that 37 days of having “no income, no money” in fact caused. (“That was the worst Christmas I had out of my life. No income, no money, and that made all of us feel bad. . . . I got very depressed”). Indeed, she obtained medical treatment for her emotional distress. A reasonable employee facing the choice between retaining her job (and paycheck) and filing a discrimination complaint might well choose the former. That is to say, an indefinite suspension without pay could well act as a deterrent, even if the suspended employee eventually received backpay. Cf. Mitchell, 361 U.S., at 292, 80 S. Ct. 332, 4 L. Ed. 2d 323 (“It needs no argument to show that fear of economic retaliation might often operate to induce aggrieved employees quietly to accept substandard conditions”). Thus, the jury’s conclusion that the 37-day suspension without pay was materially adverse was a reasonable one. JUSTICE ALITO, concurring in the judgment. [omitted] 116

NOTES AND QUESTIONS 1. What is the Court’s holding in Burlington? Did the Court have to decide whether § 704 reaches “materially adverse” employer conduct that does not affect terms and conditions of employment? 2. How does the Court define “material adversity”? Is it different from the EEOC definition in the agency’s manual: whether a reasonable employee would be deterred from making or supporting a charge of discrimination or complaining about discrimination? What employer conduct would not meet that standard? 3. Burlington’s “Material Adversity” Standard in the Lower Courts. For applications, see, e.g., Volling v. Kurtz Paramedic Servs., 840 F.3d 378 (7th Cir. 2016) (plaintiffs’ failure to apply for positions not fatal; retaliatory failure to notify applicants of job openings is actionable); Vega v. Hempstead Union Free Sch. Dist., 801 F. 3d 72 (2d Cir. 2015) (teacher’s additional workload, assignment of worse students and negative performance evaluations could deter); Rivera v. Rochester Genesee Reg’l Transp. Auth., 743 F.3d 11, 26 (2d Cir. 2012) (threats of discharge and racial slurs sufficient to deter); ; Kessler v. Westchester County Dept. of Social Services, 461 F.3d 199 (2d Cir. 2006) (jury could find that transfer to job with same salary, but less prestige and power, could deter complaint); Moore v. City of Philadelphia, 461 F.3d 331 (3d Cir. 2006) (jury could find that transfer to different precinct, mandatory psychiatric evaluation, and negative evaluation could deter).But see Zelnik v. Fashion Inst. of Tech., 464 F.3d 217, 227 (2d Cir. 2006) (reasonable employee would not be dissuaded by denial of emeritus status carrying no benefits). 4. Retaliatory Harassment. Burlington makes clear that actionable retaliation for protected activity need not involve a “tangible employment action” as defined in Faragher and Ellerth. The Court thus rejects the view previously held by the Fifth Circuit that § 704(a) reaches only “ultimate” employment decisions—a position that effectively precluded § 704(a) protection for retaliatory workplace harassment not implicating formal employment decisions such as hiring, firing, promotion and pay. See Aryain v. Wal-Mart Stores Tex. LP, 534 F.3d 473, 484 n.9 (5th Cir. 2008) (recognizing Burlington’s abrogation of court’s “ultimate” decision doctrine). But see Adams v. Anne Arundel City Pub. Schs., 789 F. 3d 422 (4th Cir. 2015) (reprimands and poor performance evaluations insufficiently adverse even after Burlington). 5. Reprisals Against Third Parties. Are reprisals against spouses or others close to the employee who engaged in protected activity actionable under § 704? In Thompson v. North American Stainless, LP, 562 U.S. 170, 131 S. Ct. 863, 178 L. Ed. 2d 694 (2011), the Court held that Thompson could sue under § 704 for being discharged in retaliation for his fiancée’s filing of a charge of sex discrimination with the EEOC. The Court stated that it is “obvious that a reasonable worker might be dissuaded from engaging in protected activity if she knew that her fiancé would be fired.” The Court held that a plaintiff may sue if she “falls within the zone of interests sought to be 117 protected by the statutory provision but declined “to identify a fixed class of relationships for which third-party reprisals are unlawful.” The Court concluded “that firing a close family member will almost always meet the Burlington standard, and inflicting a milder reprisal on a mere acquaintance will almost never do so.” 562 U.S. at 175, 131 S. Ct. at 868. 6. But for Causation. Proving causation is critical to establishing retaliation under § 704(a), as it is to establishing discrimination under § 703. In University of Texas Southwestern Medical Center v. Nassar, 570 U.S. 338, 133 S.Ct. 2517, 186 L.Ed.2d 503 (2013), the Court held that § 704(a) retaliation claims must meet the “but-for” cause standard adopted in Gross v. FBL Financial Services, 557 U.S. 167, 129 S.Ct. 2343, 174 L.Ed.2d 119 (2009), for age discrimination claims, rather than the “motivating factor” standard set forth in § 703 for Title VII discrimination claims. The Court in Nassar explained that § 703(m), added by the 1991 amendments to Title VII, which provides that a complaining party can “demonstrate[ ] that race, color, religion, sex, or national origin was a motivating factor,” does not apply to § 704(a) actions. The Court concluded that the but-for standard set in Gross should be used as a default causation standard in the absence of any contrary statutory directive. How might plaintiffs prove but-for causation? Should a short time span between the protected activity and the adverse action raise an inference of § 704(a) retaliation sufficient to require some explanation from the employer? Cf. Clark County School Dist. v. Breeden, 532 U.S. 268, 273, 274, 121 S.Ct. 1508, 149 L.Ed.2d 509 (2001) (cases relying on temporal proximity alone suggest that such proximity must be “very close”; “[a]ction taken (as here) 20 months later suggests, by itself, no causality at all”). Yet lapses in time may not be determinative if the plaintiff can show a continuing pattern of hostility to establish retaliatory intent. Lettieri v. Equant Inc., 478 F.3d 640 (4th Cir. 2007) (numerous adverse events during seven months between filing of the complaint and termination). By contrast, favorable employment actions during the interim period can negate a conclusion of retaliatory motive. Barton v. Zimmer Inc., 662 F.3d 448 (7th Cir. 2011) (later favorable actions towards plaintiff negated retaliatory motive). 7. False or Baseless Accusation in EEOC Charges. Some courts have ruled that employees are not protected by the participation clause of § 704 when they file charges that are facially invalid or not legally cognizable because they fail to allege discrimination on the basis of one of the five Title VII categories. See, e.g., Slagle v. County of Clarion, 435 F.3d 262 (3d Cir. 2006) (Title VII charge alleging whistleblowing and invasion of privacy not protected under Title VII and thus not actionable); Balazs v. Liebenthal, 32 F.3d 151, 159–60 (4th Cir. 1994). The courts, however, have not required that a facially valid charge in fact be meritorious or have even a reasonable basis.

See, e.g., Wyatt v. City of Boston, 35 F.3d 13, 15 (1st Cir. 1994); Novotny v. Great Am. Fed. Sav. & Loan Ass’n, 539 F. Supp. 437 (W.D. Pa. 1982), on remand from 442 U.S. 366, 99 S. Ct. 2345, 60 L. Ed. 2d 957 (1979). See also EEOC Guidance on 118 Investigating, Analyzing Retaliation Claims, reprinted in (BNA) Daily Labor Report, No. 100, May 26, 1998, pp. E-3, E-6. 8. Former Employees. Section 704(a) proscribes any form of retaliation against “employees or applicants for employment.” Does Burlington confirm that it also proscribes retaliation, such as through a negative letter of reference, against former employees? In Robinson v. Shell Oil Co., 519 U.S. 337, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997), discussed in Burlington, the Supreme Court unanimously held that former employees are protected by § 704(a). 9. Retaliation for Refusing to Release Claims. As a condition of continued employment, can an employer require its at-will employees to sign releases of all past claims against the employer, including those under the anti-discrimination laws? Would the termination of an employee who refused to release claims constitute retaliation? Would the answer be different if the employer was converting employees to independent contractors and conditioned the conversion on the release of claims? In EEOC v. Allstate Ins. Co., 778 F.3d 444 (7th Cir. 2015), employee sales agents were terminated but offered the option of a continued relationship with Allstate as independent contractors, provided they signed a release. While the EEOC conceded that a release would be permissible had the employees been terminated, it argued that the agents were “not terminated in any normal sense” and the option to continue as contractors was insufficient consideration to support the release. The Seventh Circuit disagreed, noting the tangible benefits afforded by the continued relationship, that Allstate was not legally required to offer a continued relationship, and that the “financial pressure” associated with such offer was no more offensive than the pressure associated with an offer of severance pay. See also Employment Restatement § 5.02 (wrongful termination in violation of public policy claim available where employee “refuses to waive . . . a nonwaivable right when the employer’s insistence on the waiver as a condition of employment . . . would violate well-established public policy.”) 10. Scope of Participation Clause. Does the participation clause reach statements made by employees during an employer’s internal investigation of a discrimination or harassment complaint after or prior to the filing of an EEOC charge? The question is important because the participation clause, unlike the opposition clause, does not require that the alleged activity be “an unlawful employment practice.” Note that the Court in Crawford, the decision below, declined to rule on the applicability of the participation clause in that case. The Title VII participation clause refers to participation in proceedings “under this title.” Its protective reach presumably extends to filings with state civil rights deferral agencies, which constitute formal “participation” required by Title VII as a prelude to filing a charge with the EEOC. See Title VII, § 706 (b)–(d), 29 U.S.C. § 2000e–5(b)–(d). Some lower courts have held that participation in internal investigations following an EEOC charge are covered by the participation clause. See, e.g., Clover v. Total Sys. Servs., Inc., 176 F.3d 119 1346 (11th Cir. 1999) (§ 704(a) extends to an employer’s internal investigation when conducted in response to notice of an EEOC charge); Townsend v. Benjamin Enters, Inc., 679 F.3d 41, 48 n.6 (2d Cir. 2012) (declining to rule on whether the participation clause covers internal investigations following an EEOC charge). But courts have declined to extend the protection of the participation clause to internal investigations initiated prior to an EEOC charge. See, e.g., EEOC v. Total Sys. Servs., Inc., 221 F.3d 1171 (11th Cir. 2000).

B. EXPRESS ANTIRETALIATION PROVISIONS: OPPOSITION CLAUSE AND SELF-HELP REMEDIES CRAWFORD V. METROPOLITAN GOVERNMENT OF NASHVILLE Supreme Court of the United States, 2009. 555 U.S. 271, 129 S.Ct. 846, 172 L.Ed.2d 650.

JUSTICE SOUTER delivered the opinion of the Court. Title VII of the Civil Rights Act of 1964, 78 Stat. 253, as amended, 42 U.S.C. 2000e et seq. (2000 ed. And Supp. V), forbids retaliation by employers against employees who report workplace race or gender discrimination. The question here is whether this protection extends to an employee who speaks out about discrimination not on her own initiative, but in answering questions during an employer’s internal investigation. We hold that it does. I In 2002, respondent Metropolitan Government of Nashville and Davidson County, Tennessee (Metro), began looking into rumors of sexual harassment by the Metro School District’s employee relations director, Gene Hughes. 211 Fed. Appx. 373, 374 (CA6 2006). When Veronica Frazier, a Metro human resources officer, asked petitioner Vicky Crawford, a 30-year Metro

employee, whether she had witnessed “inappropriate behavior” on the part of Hughes, id., at 374–375, Crawford described several instances of sexually harassing behavior: once, Hughes had answered her greeting, “ ‘Hey Dr. Hughes, what’s up?,’ ” by grabbing his crotch and saying “ ‘[Y]ou know what’s up’ ”; he had repeatedly “ ‘put his crotch up to [her] window’ ”; and on one occasion he had entered her office and “ ‘grabbed her head and pulled it to his crotch,’ ” id., at 375, and n. 1. Two other employees also reported being sexually harassed by Hughes. Id., at 375. Although Metro took no action against Hughes, it did fire Crawford and the two other accusers soon after finishing the investigation, saying in Crawford’s case that it was for embezzlement. Ibid. Crawford claimed Metro was retaliating for her report of Hughes’s behavior and filed a charge of a Title VII violation with the Equal Employment Opportunity 120

Commission (EEOC), followed by this suit in the United States District Court for the Middle District of Tennessee. Ibid. The Title VII antiretaliation provision has two clauses, making it “an unlawful employment practice for an employer to discriminate against any of his employees . . . [1] because he has opposed any practice made an unlawful employment practice by this subchapter, or [2] because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter.” 42 U.S.C. 2000e–3(a). The one is known as the “opposition clause,” the other as the “participation clause,” and Crawford accused Metro of violating both. The District Court granted summary judgment for Metro. It held that Crawford could not satisfy the opposition clause because she had not “instigated or initiated any complaint,” but had “merely answered questions by investigators in an alreadypending internal investigation, initiated by someone else.” Memorandum Opinion, No. 3:03-cv-00996 (MD Tenn., Jan. 6, 2005), App. C to Pet. For Cert. 16a–17a. It concluded that her claim also failed under the participation clause, which Sixth Circuit precedent confined to protecting “ ‘an employee’s participation in an employer’s internal investigation . . . where that investigation occurs pursuant to a pending EEOC charge’ ” (not the case here). Id., at 15a (emphasis omitted) (quoting Abbott v. Crown Motor Co., 348 F.3d 537, 543 (CA6 2003)). The Court of Appeals affirmed on the same grounds, holding that the opposition clause “ ‘demands active, consistent “opposing” activities to warrant . . . protection against retaliation,’ ” 211 Fed. Appx., at 376 (quoting Bell v. Safety Grooving & Grinding, LP, 107 Fed. Appx. 607, 610 (CA6 2004)), whereas Crawford did “not claim to have instigated or initiated any complaint prior to her participation in the investigation, nor did she take any further action following the investigation and prior to her firing.” 211 Fed. Appx., at 376. Again like the trial judge, the Court of Appeals understood that Crawford could show no violation of the participation clause because her “ ‘employer’s internal investigation’ ” was not conducted “ ‘pursuant to a pending EEOC charge.’ ” Ibid. (quoting Abbott, supra, at 543). * * * II The opposition clause makes it “unlawful . . . for an employer to discriminate against any . . . employe[e] . . . because he has opposed any practice made . . . unlawful . . . by this subchapter.” 2000e–3(a). The term “oppose,” being left undefined by the statute, carries its ordinary meaning, Perrin v. United States, 444 U.S. 37, 42, 100 S. Ct. 311, 62 L. Ed. 2d 199 (1979): “to resist or antagonize . . . ; to contend against; to confront; resist; withstand,” Webster’s New International Dictionary 1710 (2d ed. 1958). Although these actions entail varying expenditures of energy, “RESIST frequently implies more active striving than OPPOSE.” Ibid.; see also 121

Random House Dictionary of the English Language 1359 (2d ed. 1987) (defining “oppose” as “to be hostile or adverse to, as in opinion”). The statement Crawford says she gave to Frazier is thus covered by the opposition clause, as an ostensibly disapproving account of sexually obnoxious behavior toward her by a fellow employee, an answer she says antagonized her employer to the point of sacking her on a false pretense. Crawford’s description of the louche goings-on would certainly qualify in the minds of reasonable jurors as “resist[ant]” or “antagoni[stic]” to Hughes’s treatment, if for no other reason than the point argued by the Government and explained by an EEOC guideline: “When an employee communicates to her employer a belief that the employer has engaged in . . . a form of employment discrimination, that communication” virtually always “constitutes the employee’s opposition to the activity.” Brief for United States as Amicus Curiae 9 (citing 2 EEOC Compliance Manual §§ 8–II– B(1), (2), p. 614:0003 (Mar. 2003)); see also Federal Express Corp. v. Holowecki, 552 U.S. 389, 128 S. Ct. 1147, 1156, 170 L. Ed. 2d 10, 21 (2008) (explaining that EEOC compliance manuals “reflect ‘a body of experience and informed judgment to which courts and litigants may properly resort for guidance’ ” (quoting Bragdon v. Abbott, 524 U.S. 624, 642, 118 S. Ct. 2196, 141 L. Ed. 2d 540 (1998))). It is true that one can imagine exceptions, like an employee’s description of a supervisor’s racist joke as hilarious, but these will be eccentric cases, and this is not one of them.

The Sixth Circuit thought answering questions fell short of opposition, taking the view that the clause “ ‘demands active, consistent ‘opposing’ activities to warrant . . . protection against retaliation,’ ” 211 Fed. Appx., at 376 (quoting Bell, supra, at 610), and that an employee must “instigat[e] or initiat[e]” a complaint to be covered, 211 Fed. Appx., at 376. But though these requirements obviously exemplify opposition as commonly understood, they are not limits of it. “Oppose” goes beyond “active, consistent” behavior in ordinary discourse, where we would naturally use the word to speak of someone who has taken no action at all to advance a position beyond disclosing it. Countless people were known to “oppose” slavery before Emancipation, or are said to “oppose” capital punishment today, without writing public letters, taking to the streets, or resisting the government. And we would call it “opposition” if an employee took a stand against an employer’s discriminatory practices not by “instigating” action, but by standing pat, say, by refusing to follow a supervisor’s order to fire a junior worker for discriminatory reasons. Cf. McDonnell, supra, at 262 (finding employee covered by Title VII of the Civil Rights Act of 1964 where his employer retaliated against him for failing to prevent his subordinate from filing an EEOC charge). There is, then, no reason to doubt that a person can “oppose” by responding to someone else’s question just as surely as by 122

provoking the discussion, and nothing in the statute requires a freakish rule protecting an employee who reports discrimination on her own initiative but not one who reports the same discrimination in the same words when her boss asks a question. Metro and its amici support the Circuit panel’s insistence on “active” and “consistent” opposition by arguing that the lower the bar for retaliation claims, the less likely it is that employers will look into what may be happening outside the executive suite. As they see it, if retaliation is an easy charge when things go bad for an employee who responded to enquiries, employers will avoid the headache by refusing to raise questions about possible discrimination. The argument is unconvincing, for we think it underestimates the incentive to enquire that follows from our decisions in Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 118 S. Ct. 2257, 141 L. Ed. 2d 633 (1998), and Faragher v. Boca Raton, 524 U.S. 775, 118 S. Ct. 2275, 141 L. Ed. 2d 662 (1998). * * * The possibility that an employer might someday want to fire someone who might charge discrimination traceable to an internal investigation does not strike us as likely to diminish the attraction of an Ellerth-Faragher affirmative defense. That aside, we find it hard to see why the Sixth Circuit’s rule would not itself largely undermine the Ellerth-Faragher scheme, along with the statute’s “ ‘primary objective’ ” of “avoid[ing] harm” to employees. * * * The appeals court’s rule would [ ] create a real dilemma for any knowledgeable employee in a hostile work environment if the boss took steps to assure a defense under our cases. If the employee reported discrimination in response to the enquiries, the employer might well be free to penalize her for speaking up. But if she kept quiet about the discrimination and later filed a Title VII claim, the employer might well escape liability, arguing that it “exercised reasonable care to prevent and correct [any discrimination] promptly” but “the plaintiff employee unreasonably failed to take advantage of . . . preventive or corrective opportunities provided by the employer.” Ellerth, supra, at 765, 118 S. Ct. 2257, 141 L. Ed. 2d 633. Nothing in the statute’s text or our precedent supports this catch-22. Because Crawford’s conduct is covered by the opposition clause, we do not reach her argument that the Sixth Circuit misread the participation clause as well. But that does not mean the end of this case, for Metro’s motion for summary judgment raised several defenses to the retaliation charge besides the scope of the two clauses; the District Court never reached these others owing to its ruling on the elements of retaliation, and they remain open on remand. [Eds. The opinion of JUSTICE ALITO, joined in by JUSTICE THOMAS, concurring in the judgment, is omitted.] 123

NOTES AND QUESTIONS 1. Why did Congress enact an opposition clause in addition to the participation clause in § 704(a) of Title VII? The legislative history on Section 704 is quite sparse. An interpretive memorandum submitted to the House of Representatives in connection with the legislation characterized the antiretaliation provisions as follows: “[it] prohibits discrimination by an employer or labor organization against persons for opposing discriminatory practices, and for bringing charges before the Commission or otherwise participating in proceedings under the title.” 110 Cong. Rec. 7213 (Apr. 8, 1964). 2. Under Crawford, are all communications by an employee to an employer concerning what the employee believes to be discrimination protected by § 704(a)? Does the Court suggest any limitations?

3. Opposition on Behalf of Third Parties. Under Crawford is an employee protected from retaliation for opposing discrimination against other employees? The courts had so held before Crawford. See, e.g., EEOC v. Navy Fed. Credit Union, 424 F.3d 397, 407 (4th Cir. 2005) (supervisor protected from retaliation for refusing to participate in scheme to discriminate against subordinate); Childress v. City of Richmond, 134 F.3d 1205 (4th Cir. 1998) (holding that White male employees opposing hostile work environment discrimination directed at Black coworkers were protected from retaliation under § 704(a)). See also Thompson v. North Am. Stainless, LP, 562 U.S. 170, 131 S. Ct. 863, 178 L. Ed. 2d 694 (2011) (employee fired after fiancé filed an EEOC charge had a cognizable retaliation claim even though employee did not himself engage in any protected conduct); Alex B. Long, The Troublemaker’s Friend: Retaliation against Third Parties and the Right of Association in the Workplace, 59 Fla. L. Rev. 931 (2007). 4. Erroneous, Good Faith Opposition. Given that protected opposition must be to a practice “made unlawful by this title,” is 704(a) protection limited to opposition to practices that in fact violate Title VII? In Clark County School District v. Breeden, 532 U.S. 268, 270, 121 S. Ct. 1508, 149 L. Ed. 2d 509 (2001), the Court left this question open, but held that Title VII’s opposition clause at least does not protect opposition to activity that the employee could not reasonably believe violated the statute. Most courts have held that reasonable, good-faith opposition is protected even if the underlying practice is found to be lawful. See, e.g., Jordan v. Alternative Res. Corp., 458 F.3d 332 (4th Cir. 2006), overruled on other grounds by Boyer-Liberto v. Fontainebleau Corp., 786 F.3d 264 (4th Cir. 2015); Higgins v. New Balance Athletic Shoe, Inc., 194 F.3d 252 (1st Cir. 1999). See generally Matthew W. Green Jr., What’s So Reasonable About Reasonableness?, 62 Kan. L. Rev. 759 (2014). But the oppositional activity must relate to a violation of Title VII; complaints about other matters are not protected because they are not “made unlawful by this title.” Cole v. Board of I., 838 F.3d 888 (7th Cir. 2016) (ethics complaint did not implicate Title VII); Bonn v. City of Omaha, 623 F.3d 587 (8th Cir. 2010) (complaint about policing tactics not about employment practices and not protected). 124

HOCHSTADT V. WORCESTER FOUNDATION United States Court of Appeals, First Circuit, 1976. 545 F.2d 222.

CAMPBELL, J. The Worcester Foundation for Experimental Biology is a nonprofit institution primarily committed to basic biomedical research, employing some 250 persons. The Foundation devotes $1.8 million of its annual budget to cancer research in what is known as the Cell Biology Program. The principal investigator is Dr. Mahlan Hoagland, who is also the Director of the Foundation. Dr. Hoagland has recruited other scientists to join the program since its inception, and in 1971 recruited Dr. Harvey Ozer, a virologist, to fill a specific need in the program. Dr. Ozer informed Dr. Hoagland of the availability and interest of his wife, Dr. Joy Hochstadt, in joining the Foundation. Dr. Hochstadt is a microbiologist, whose research into cell membrane functions, described by one scientist at the hearing as “pioneering”, fit into the Foundation’s research program. In September, 1971, Dr. Hoagland offered both Dr. Ozer and Dr. Hochstadt positions as senior scientists. Dr. Ozer’s salary was set at $24,000, while Dr. Hochstadt’s salary was set at $18,000. These salaries reflected the needs of the institution. Dr. Ozer and Dr. Hochstadt accepted the employment offers on October 1, but thereafter Dr. Hochstadt sought to renegotiate her salary, claiming it was discriminatory and illegal. The Foundation reluctantly acceded to readjust the salaries of Dr. Hochstadt and Dr. Ozer so that each would receive $21,000. After starting her employment in January, 1972, Dr. Hochstadt joined the small group of cell biologists and participated in the periodic meetings of the group held to discuss policies, recruitment, and direction of research. At these meetings, Dr. Hochstadt early began to interpose personal grievances and salary complaints, to discuss the inadequacy of the Foundation’s affirmative action program, and to criticize the Foundation’s administration and its director, Dr. Hoagland, and assistant director, Dr. Welsch. These complaints interfered with the meetings, disrupted the discussions, and eventually caused discontinuation of the meetings. In January, 1973, after they had been at the Foundation for over a year, Dr. Hochstadt and Dr. Ozer each sought from the Foundation $3,000 in lump sum back pay and a $3,000 salary increase to compensate for unanticipated moving expenses and the cost of living increase. In March, 1973, plaintiff was given a $1,500 (4.5%) increase as a result of the Foundation’s annual salary review. Dr. Hoagland indicated that she would receive a larger raise the following year “when you’ve effectively joined the team.” In July, 1973, Dr. Hochstadt filed formal charges with the Massachusetts Commission Against Discrimination (MCAD), the EEOC, 125

and the Department of Labor, alleging that the Foundation had discriminated against her by setting her starting salary much lower than that for male scientists starting work at the same time. One month later, she filed a class action complaint with the Department of Health, Education, and Welfare on behalf of all female employees at the Foundation. The complaint filed with HEW caused the Department to request the Foundation to implement an affirmative action plan. In June, 1974, the MCAD found reasonable cause to credit Dr. Hochstadt’s complaint, but deferred further consideration of the charge pending action by the EEOC. In September, 1974, Dr. Hochstadt filed suit against the Foundation pursuant to § 2000e–5(f)(1), removing the case from the jurisdiction of the EEOC. In December, 1974, the Foundation settled with Dr. Hochstadt for $20,000. Subsequent to her minimal increase and the filing of these charges, plaintiff sought to elicit salary information from other scientists and personnel at the Foundation, and on several occasions this conduct interfered with ongoing research and upset the other scientists and research assistants who were approached. Plaintiff also circulated rumors that the Foundation would lose much of its federal funding because it was not complying with regulations concerning affirmative action programs. To allay the apprehension created by these rumors, on at least three occasions the Foundation had to invite an official from HEW to assure scientists at the Foundation that they were in no danger of losing federal funding. In April, 1974, Dr. Hochstadt invited Dr. Helene Guttman, an officer of the Association of Women in Science, to conduct a covert affirmative action survey at the Foundation, ostensively [sic] while attending a scientific seminar. Dr. Guttman later wrote to Congressman Edwards indicating her findings that the Foundation was not in compliance with federal regulations and [was] critical of HEW’s handling of Dr. Hochstadt’s complaint of discrimination against the Foundation, and she sent copies of the letter to eight other members of Congress. Also in 1974, Dr. Hochstadt invited a reporter from the Worcester Telegram to examine her files containing confidential salary information for employees at the Foundation. The reporter wrote several articles in the Telegram. In mid-1974, the associate director, Dr. Welsch, complained to Dr. Hochstadt about her use of the Foundation’s telephone for personal calls to her lawyer and to Dr. Guttman amounting to over $950 and her misuse of secretarial assistance and Xeroxing services. In late 1974, two research assistants in Dr. Hochstadt’s laboratory left the Foundation because of their difficulties with Dr. Hochstadt. 126

Complaints from subordinates in other laboratories never reached the level of the complaints of Dr. Hochstadt’s research assistants. *** [The question in this case is] whether plaintiff’s overall conduct was so generally inimical to her employer’s interests, and so “excessive”, as to be beyond the protection of section 704(a) even though her actions were generally associated with her complaints of illegal employer conduct. We conclude that although plaintiff’s original salary complaint may have been justified, and although her later complaint over her poor rating—whether or not justified—was one which she was entitled to make in an appropriate way, still neither of these could insulate her deportment from adverse scrutiny insofar as it went beyond the pale of reasonable opposition activity. *** * * * Congress certainly did not mean to grant sanctuary to employees to engage in political activity for women’s liberation on company time, and an employee does not enjoy immunity from discharge for misconduct merely by claiming that at all times she was defending the rights of her sex by “opposing” discriminatory practices. An employer remains entitled to loyalty and cooperativeness from employees: “[M]anagement prerogatives * * * are to be left undisturbed to the greatest extent possible. Internal affairs of employers * * * must not be interfered with except to the limited extent that correction is required in discrimination practices.” Additional views on H.R. 7152, U.S.Code Cong. & Admin.News, p. 2516 (88th Cong., 2d Sess., 1964). On the other hand, section 704(a) clearly does protect an employee against discharge for filing complaints in good faith before federal and state agencies and for registering grievances through channels appropriate in the particular employment setting. It is less clear to what extent militant self-help activity falling between these two poles, such as particular types of on-thejob opposition to alleged discrimination, vociferousness, expressions of hostility to an employer or superior and the like, are protected. In the instant case, the issue is clouded by a sophisticated employment setting which lacks a rigid structure and within

which it is not always easy to assess when an employee—in this case a highly educated senior scientist—clearly oversteps the bounds. In such instances, we think courts have in each case to balance the purpose of the Act to protect persons engaging reasonably in activities opposing sexual discrimination, against Congress’ equally manifest desire not to tie the hands of employers in the objective selection and control of personnel. Allowing an employee to invoke the protection of section 704(a) for conduct aimed at achieving purely ulterior objectives, or for conduct 127

aimed at achieving even proper objectives through the use of improper means, could have an effect directly contrary to Congress’ goal, by discouraging employers from hiring persons whom the Act is designed to protect. The standard can be little more definitive than the rule of reason applied by a judge or other tribunal to given facts. The requirements of the job and the tolerable limits of conduct in a particular setting must be explored. The present case, therefore, raises the question, put simply, of whether plaintiff went “too far” in her particular employment setting. This approach is consistent with that taken by other courts when interpreting section 704(a). In EEOC v. Kallir, Philips, Ross, Inc., 401 F.Supp. 66 (S.D.N.Y.1975), a case cited by both parties, the plaintiff was discharged for discreetly obtaining from a customer of her employer a written description of her job which had been requested by the New York City Commission on Human Rights during its investigation of the employee’s charge of sex discrimination. Stressing the broad language of section 704(a) protecting an employee for assisting “in any manner” with a proceeding under Title VII, the court held that plaintiff’s solicitation of the letter was protected. Noting that plaintiff’s action had no negative effect on the client relationship, the court observed: “Under some circumstances, an employee’s conduct in gathering or attempting to gather evidence to support his charge may be so excessive and so deliberately calculated to inflict needless economic hardship on the employer that the employee loses the protection of section 704(a), just as other legitimate civil rights activities lose the protection of section 704(a) when they progress to deliberate and unlawful conduct against the employer.” Id. at 71–72. The Supreme Court too has made passing reference to the limits of protected conduct under section 704(a), stating that an employer may properly deny employment to a former employee who participated in an unlawful “stall-in” to protest the employer’s civil rights record. “Nothing in Title VII compels an employer to absolve and rehire one who has engaged in such deliberate, unlawful activity against it.” McDonnell Douglas Corp. v. Green, 411 U.S. 792, 803, 93 S.Ct. 1817, 1825, 36 L.Ed.2d 668 (1973). *** Cases discussing limitations upon the right of union employees to engage in “concerted activity” against their employer provide a helpful point of comparison. Even if the ends sought to be achieved by the employees are protected by the National Labor Relations Act, the means chosen by the employees may be excessive. For example, in NLRB v. Local 1229, IBEW, (Jefferson Standard Broadcasting Co.), 346 U.S. 464, 74 S.Ct. 172, 98 L.Ed. 195 (1953), the Court reinstated the Board’s order upholding an employer’s discharge of nine employees for distributing during lawful 128

picketing handbills accusing the employer television station of not serving the public interest. *** Under the principles of the labor cases, the district court was entitled to conclude that Dr. Hochstadt’s actions went beyond the scope of protected opposition because they damaged the basic goals and interests of the Foundation. * * * The district court was entitled to find that Dr. Hochstadt’s constant complaints to colleagues damaged relationships among members of the cell biology group and sometimes even interfered with laboratory research. Even if justified, they occurred upon some occasions when the employer was entitled to expect her full commitment and loyalty. Section 704(a) does not afford an employee unlimited license to complain at any and all times and places. *** Keeping in mind the legitimate interests both of Dr. Hochstadt and the Foundation, we face the ultimate question, whether the district court could properly on this record determine that Dr. Hochstadt “went too far” in her activities and deportment. We think it could. A permissible interpretation of the evidence was that the Foundation had wiped the slate clean in December, 1974, after its settlement with Dr. Hochstadt, and that the administration was willing to accept her as a member of the team. But Dr. Hochstadt’s extreme hostility toward Dr. Welsch, Dr. Gibbons,7 and Dr. Hoagland in response to the April, 1975, evaluation

indicated that there would be no change in her attitude or her behavior from that encountered since she was hired in 1972. The continuation of the general conflict forced the Foundation to make a critical choice: either it would retain Dr. Hochstadt and tolerate not only her complaints against the Foundation but also the complaints against Dr. Hochstadt’s behavior raised by other scientists and research personnel, or it would terminate her employment. We cannot disagree with the district court’s conclusion that the Foundation was justified in choosing the latter course.

NOTES AND QUESTIONS 1. Hochstadt involves the question of how far an employee may pursue self-help opposition while remaining within the protection of § 704(a). In what precise ways did the plaintiff go beyond the pale? 129 2. Disruptive Conduct as Basis for Termination. Courts of Appeals continue to cite Hochstadt for the proposition that excessively disruptive conduct is unprotected by Title VII. See e.g., Kempcke v. Monsanto Co., 132 F.3d 442 (8th Cir. 1998); Laughlin v. Metropolitan Wash. Airports Auth., 149 F.3d 253 (1998). Some courts, however, have been reluctant to decide the issue as a matter of law, and instead permit the employer to present a “mixed motive” defense to the jury. See, e.g., Matima v. Celli, 228 F.3d 68 (2d Cir. 2000); Wolinsky v. Standard Oil of Conn., Inc., 712 F. Supp. 2d 46 (D. Conn. 2010). The employer then must proffer evidence that it would have fired the employee for disruptive behavior regardless of the protected activity. 3. Public Opposition. Under what circumstances can an employee go public with her opposition? Note that Dr. Hochstadt invited assistance not only from an officer of the Association of Women in Science, but also from a newspaper reporter. Is it realistic to expect lone employees, not represented by unions, to engage in opposition without attempting to secure assistance from the outside community? See Wrighten v. Metropolitan Hosps., supra (Black nurse held press conference to charge employer with poor health care for Black patients); EEOC v. Crown Zellerbach Corp., 720 F.2d 1008 (9th Cir. 1983) (employees sent letter to local school board, which was a major customer of their employer, protesting manager’s receipt of affirmative action award). 4. Oppositional Activity in Violation of Other Laws. Can a Title VII court take into account that the oppositional activity contravenes other laws? Or does the congressional policy embodied in § 704(a) require a measure of protection even in such circumstances? Note that in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973), Green’s opposition activity took the form of a “stall-in” tactic whereby he parked his car on an access road to the plant causing serious traffic problems. Green’s § 704(a) claim was rejected by the district court, and he did not further appeal. The Supreme Court observed: “Nothing in Title VII compels an employer to absolve and rehire one who has engaged in * * * deliberate, unlawful activity against it.” 411 U.S. at 803, 93 S. Ct. at 1825. 5. When Can the Employer’s EEO Personnel Be Said to Engage in Oppositional Activity? The Company’s EEO/HR officers often provide advice regarding whether the employer is complying with regulatory requirements. How does such an employee signal protected opposition rather than merely the giving of advice as part of the employee’s job? Cf. Garcetti v. Ceballos, 547 U.S. 410, 126 S. Ct. 1951, 164 L. Ed. 2d 689 (2006); discussed p. 209 infra. See generally Deborah L. Brake, Retaliation in the EEO Office, 50 Tulsa L. Rev. 1 (2014). 6. Opposition to Practices of Prior Employer or Other Third-Party Employer. Does the entity charged with retaliation under § 704(a) have to be the same entity that was the object of the plaintiff’s opposition? Does § 704(a), for instance, protect employees who complain about discriminatory treatment by some other employer with whom their employer has a business relationship? Compare Flowers v. Columbia Coll. Chi., 397 F.3d 532 (7th Cir. 2005) (Easterbrook, J.) (finding § 704(a) coverage), with Dellinger v. Science 130 Applications Int’l Corp., 649 F.3d 226 (4th Cir. 2011) (FLSA’s anti-retaliation provision does not protect employees from discrimination by prospective employers for suing prior employer). 7. Implied Opposition Clause? Some statutes, like the Fair Labor Standards Act (FLSA), including the Equal Pay Act, 29 U.S.C. § 206(d), do not contain an express opposition clause. The anti-retaliation provision in the FLSA, 29 U.S.C. § 215(a)(3), provides that it is unlawful for any person to discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceedings under or related to this chapter, or has testified or is about to testify in any such proceeding * * * . In Kasten v. Saint-Gobain Performance Plastics, 563 U.S. 1, 131 S. Ct. 1325, 179 L. Ed. 2d 379 (2011), the Court held that oral complaints may be protected under § 215(a)(3). The Court vacated a lower court decision that held a discharged employee did not engage in FLSA-protected activity when he made several verbal efforts to inform his employer that the location of the employers’ time clocks

prevented employees from being paid for time doffing and donning their gear. The Supreme Court held that a complaint, whether written or oral, “must be sufficiently clear and detailed for a reasonable employer to understand it.” Although the Court left open whether a complaint to an employer rather than to the government was protected by § 215(a)(3), the decision has “impelled and guided” the Second Circuit to reverse prior precedent and join all sister circuits in finding oral complaints to an employer protected. See Greathouse v. JHS Sec. Inc., 784 F.3d 105, 111 (2d Cir. 2015). Accord, e.g., Minor v. Bostwick Labs., Inc. 669 F.3d 428 (4th Cir. 2012).

WHIRLPOOL CORP. V. MARSHALL, SECRETARY OF LABOR Supreme Court of the United States, 1980. 445 U.S. 1, 100 S.Ct. 883, 63 L.Ed.2d 154.

MR. JUSTICE STEWART delivered the opinion of the Court. The Occupational Safety and Health Act of 1970 (Act) prohibits an employer from discharging or discriminating against any employee who exercises “any right afforded by” the Act.2 The Secretary of Labor (Secretary) has promulgated a regulation providing that, among the rights that the Act so protects, is the right of an employee to choose not to perform his assigned task because of a reasonable apprehension of death or serious injury coupled with a reasonable belief that no less drastic alternative is 131

available.3 The question presented in the case before us is whether this regulation is consistent with the Act. I The petitioner company maintains a manufacturing plant in Marion, Ohio, for the production of household appliances. Overhead conveyors transport appliance components throughout the plant. To protect employees from objects that occasionally fall from these conveyors, the petitioner has installed a horizontal wire-mesh guard screen approximately 20 feet above the plant floor. This mesh screen is welded to angle-iron frames suspended from the building’s structural steel skeleton. Maintenance employees of the petitioner spend several hours each week removing objects from the screen, replacing paper spread on the screen to catch grease drippings from the material on the conveyors, and performing occasional maintenance work on the conveyors themselves. To perform these duties, maintenance employees usually are able to stand on the iron frames, but sometimes find it necessary to step onto the steel mesh screen itself. 132

In 1973, the company began to install heavier wire in the screen because its safety had been drawn into question. Several employees had fallen partly through the old screen, and on one occasion an employee had fallen completely through to the plant floor below but had survived. A number of maintenance employees had reacted to these incidents by bringing the unsafe screen conditions to the attention of their foremen. The petitioner company’s contemporaneous safety instructions admonished employees to step only on the angle-iron frames. On June 28, 1974, a maintenance employee fell to his death through the guard screen in an area where the newer, stronger mesh had not yet been installed.4 Following this incident, the petitioner effectuated some repairs and issued an order strictly forbidding maintenance employees from stepping on either the screens or the angle-iron supporting structure. An alternative but somewhat more cumbersome and less satisfactory method was developed for removing objects from the screen. This procedure required employees to stand on power-raised mobile platforms and use hooks to recover the material. On July 7, 1974, two of the petitioner’s maintenance employees, Virgil Deemer and Thomas Cornwell, met with the plant maintenance superintendent to voice their concern about the safety of the screen. The superintendent disagreed with their view, but permitted the two men to inspect the screen with their foreman and to point out dangerous areas needing repair. Unsatisfied with the petitioner’s response to the results of this inspection, Deemer and Cornwell met on July 9 with the plant safety director. At that meeting, they requested the name, address, and telephone number of a representative of the local office of the Occupational Safety and Health Administration (OSHA). Although the safety director told the men that they “had better stop and think about what [they] were doing,” he furnished the men with the information they requested. Later that same day, Deemer contacted an official of the regional OSHA office and discussed the guard screen. The next day, Deemer and Cornwell reported for the night shift at 10:45 p.m. Their foreman, after himself walking on some of the angle-iron frames, directed the two men to perform their usual maintenance duties on a section of the old screen.6 Claiming that the screen was unsafe, they refused to carry out this directive. The foreman then sent them to the

133

personnel office, where they were ordered to punch out without working or being paid for the remaining six hours of the shift.7 The two men subsequently received written reprimands, which were placed in their employment files. A little over a month later, the Secretary filed suit in the United States District Court for the Northern District of Ohio, alleging that the petitioner’s actions against Deemer and Cornwell constituted discrimination in violation of § 11(c)(1) of the Act. * * * Following a bench trial, the District Court found that the regulation in question justified Deemer’s and Cornwell’s refusals to obey their foreman’s order on July 10, 1974. * * * The District Court nevertheless denied relief, holding that the Secretary’s regulation was inconsistent with the Act and therefore invalid. The Court of Appeals for the Sixth Circuit reversed the District Court’s judgment. * * * II The Act itself creates an express mechanism for protecting workers from employment conditions believed to pose an emergent threat of death or serious injury. Upon receipt of an employee inspection request stating reasonable grounds to believe that an imminent danger is present in a workplace, OSHA must conduct an inspection. 29 U.S.C. § 657(f)(1). In the event this inspection reveals workplace conditions or practices that “could reasonably be expected to cause death or serious physical harm immediately or before the imminence of such danger can be eliminated through the enforcement procedures otherwise provided by” the Act,11 29 U.S.C. § 662(a), the OSHA inspector must inform the affected employees and the employer of the danger and notify them that he is recommending to the Secretary that injunctive relief be sought. § 662(c). At this juncture, the Secretary can petition a federal court to restrain the conditions or practices giving rise to the imminent danger. By means of a temporary restraining order or preliminary injunction, the court may then require the employer to avoid, correct, or remove the danger or to prohibit employees from working in the area. § 662(a).12 134

To ensure that this process functions effectively, the Act expressly accords to every employee several rights, the exercise of which may not subject him to discharge or discrimination. An employee is given the right to inform OSHA of an imminently dangerous workplace condition or practice and request that OSHA inspect that condition or practice. 29 U.S.C. § 657(f)(1). He is given a limited right to assist the OSHA inspector in inspecting the workplace, §§ 657(a)(2), (e), and (f)(2), and the right to aid a court in determining whether or not a risk of imminent danger in fact exists. See § 660(c)(1). Finally, an affected employee is given the right to bring an action to compel the Secretary to seek injunctive relief if he believes the Secretary has wrongfully declined to do so. § 662(d). In the light of this detailed statutory scheme, the Secretary is obviously correct when he acknowledges in his regulation that, “as a general matter, there is no right afforded by the Act which would entitle employees to walk off the job because of potential unsafe conditions at the workplace.” *** As this case illustrates, however, circumstances may sometimes exist in which the employee justifiably believes that the express statutory arrangement does not sufficiently protect him from death or serious injury. Such circumstances will probably not often occur, but such a situation may arise when (1) the employee is ordered by his employer to work under conditions that the employee reasonably believes pose an imminent risk of death or serious bodily injury, and (2) the employee has reason to believe that there is not sufficient time or opportunity either to seek effective redress from his employer or to apprise OSHA of the danger. Nothing in the Act suggests that those few employees who have to face this dilemma must rely exclusively on the remedies expressly set forth in the Act at the risk of their own safety. But nothing in the Act explicitly provides otherwise. Against this background of legislative silence, the Secretary has exercised his rulemaking power under 29 U.S.C. § 657(g)(2) and has determined that, when an employee in good faith finds himself in such a predicament, he may refuse to expose himself to the dangerous condition, without being subjected to “subsequent discrimination” by the employer. The question before us is whether this interpretative regulation constitutes a permissible gloss on the Act by the Secretary, in light of the Act’s language, structure, and legislative history. Our inquiry is informed by an awareness that the regulation is entitled to deference unless it can be said not to be a reasoned and supportable interpretation of the Act. Skidmore v. Swift & Co., 323 U.S. 134, 139–140, 65 S.Ct. 161, 164, 89 L.Ed. 124. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 100 S.Ct. 790,

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63 L.Ed.2d 22; Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318. The regulation clearly conforms to the fundamental objective of the Act—to prevent occupational deaths and serious injuries. *** To accomplish this basic purpose, the legislation’s remedial orientation is prophylactic in nature. See Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n, 430 U.S. 442, 444–445, 97 S.Ct. 1261, 1263–1264, 51 L.Ed.2d 464. The Act does not wait for an employee to die or become injured. It authorizes the promulgation of health and safety standards and the issuance of citations in the hope that these will act to prevent deaths or injuries from ever occurring. It would seem anomalous to construe an Act so directed and constructed as prohibiting an employee, with no other reasonable alternative, the freedom to withdraw from a workplace environment that he reasonably believes is highly dangerous. Moreover, the Secretary’s regulation can be viewed as an appropriate aid to the full effectuation of the Act’s “general duty” clause. That clause provides that “[e]ach employer * * * shall furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.” 29 U.S.C. § 654(a)(1). As the legislative history of this provision reflects, it was intended itself to deter the occurrence of occupational deaths and serious injuries by placing on employers a mandatory obligation independent of the specific health and safety standards to be promulgated by the Secretary. Since OSHA inspectors cannot be present around the clock in every workplace, the Secretary’s regulation ensures that employees will in all circumstances enjoy the rights afforded them by the “general duty” clause. The regulation thus on its face appears to further the overriding purpose of the Act, and rationally to complement its remedial scheme. [Eds. The Court’s discussion of the legislative history is omitted. For a general description of OSHA regulation, see p. 268 infra.]

NOTES AND QUESTIONS 1. Suppose that OSHA inspectors arrived immediately following Deemer and Cornwell’s call on July 7, 1974, and declared the screen safe. Deemer and Cornwell nevertheless refuse to perform the maintenance, based on their previously articulated objections. Would Deemer and Cornwell still have a claim under the standard articulated in Whirlpool? 2. Limits of Self-Help Remedy. The OSHA regulation, sustained in Whirlpool, does not create a general right to walk off the job whenever workers suspect a safety hazard. Rather, the workers must show that (i) they have a good faith, reasonably grounded fear of “a real danger of death or serious 136 injury”; (ii) “there is insufficient time due to the urgency of the situation, to eliminate the danger through resort to regular statutory channels”; and (iii) “where possible,” they “have sought from the employer, and been unable to obtain, a correction of the dangerous condition.” 29 C.F.R. § 1977.12(b)(2), quoted in footnote 3 of the Whirlpool opinion. 3. Self-Help Under Federal Labor Law. Federal labor law provides additional self-help protection. Workers have a statutory right to strike over safety issues, see NLRB v. Washington Aluminum Co., 370 U.S. 9, 82 S. Ct. 1099, 8 L. Ed. 2d 298 (1962), and under § 502 of the LMRA, 29 U.S.C. § 143, may even strike in the face of a contractual no-strike promise if they have an objective, good-faith fear of “abnormally dangerous conditions,” see Gateway Coal v. United Mine Workers, 414 U.S. 368, 385–86, 94 S. Ct. 629, 640–41, 38 L. Ed. 2d 583 (1974); see also TNS, Inc. v. NLRB, 296 F.3d 384 (6th Cir. 2002). The collective bargaining agreement may itself privilege refusals to perform work under unsafe conditions, thus creating an exception to a general “work now/grieve later” principle, see NLRB v. City Disposal Sys., 465 U.S. 822, 104 S. Ct. 1505, 79 L. Ed. 2d 839 (1984). 4. “Constructive Discharge” Doctrine. Are there circumstances where § 704(a) of Title VII protects oppositional activity taking the form of a refusal to work? Can an employee subjected to insufferably discriminatory working conditions refuse to work as long as those conditions continue? Courts have developed a “constructive discharge” doctrine to allow employees to quit their employment in circumstances where reasonable persons would not continue working without the quit being treated as a voluntary separation. See, e.g., Pennsylvania State Police v. Suders, 542 U.S. 129, 124 S. Ct. 2342, 159 L. Ed. 2d 204 (2004). See Restatement of Employment Law § 5.01, cmt. c (2015).

C. IMPLIED ANTIRETALIATION PROVISIONS

As noted above, most federal and state employment statutes now include some form of antiretaliation provision. As the next decision suggests, however, this is not universally the case. Furthermore, some federal and state statutes that do contain antiretaliation provisions expressly authorize only administrative or criminal enforcement; they do not expressly provide a private right of action to workers claiming to be victims of retaliation. When should courts both imply antiretaliation guarantees and also afford employees a right of action to enforce them? Does a statutory scheme that does not provide for such actions reflect a considered legislative judgment that they are inappropriate? May a court infer from the existence of substantive restrictions on employer action and the provision of some remedies a declaration of legislative policy permitting judicial implication of a private right of action? 137

KELSAY V. MOTOROLA, INC. Supreme Court of Illinois, 1978. 74 Ill.2d 172, 23 Ill.Dec. 559, 384 N.E.2d 353.

RYAN, J. Plaintiff, Marilyn Jo Kelsay, filed a complaint in the circuit court of Livingston County, seeking compensatory and punitive damages against her ex-employer, Motorola, Inc. The plaintiff alleged that her employment with defendant had been terminated as retaliation for her filing a workmen’s compensation claim. The trial court directed a verdict in plaintiff’s favor and the jury assessed damages in the amount of $1,000 compensatory damages and $25,000 punitive damages. The court remitted the compensatory damages to $749, which represents the wages plaintiff lost between the time she was discharged and the time she found a new job. On appeal, the Fourth District Appellate Court reversed the judgment of the trial court, holding that an employee has no cause of action against an employer for retaliatory discharge. *** The Workmen’s Compensation Act (Ill.Rev.Stat.1973, ch. 48, par. 138.1 et seq.) substitutes an entirely new system of rights, remedies, and procedure for all previously existing common law rights and liabilities between employers and employees subject to the Act for accidental injuries or death of employees arising out of and in the course of the employment. (37 Ill.L. & Prac. Workmen’s Compensation sec. 2 (1958).) Pursuant to the statutory scheme implemented by the Act, the employee gave up his common law rights to sue his employer in tort, but recovery for injuries arising out of and in the course of his employment became automatic without regard to any fault on his part. The employer, who gave up the right to plead the numerous common law defenses, was compelled to pay, but his liability became fixed under a strict and comprehensive statutory scheme, and was not subjected to the sympathies of jurors whose compassion for fellow employees often led to high recovery. (See 81 Am.Jur.2d Workmen’s Compensation sec. 1 et seq. (1976).) This trade-off between employer and employee promoted the fundamental purpose of the Act, which was to afford protection to employees by providing them with prompt and equitable compensation for their injuries. *** While noting that in 1975, subsequent to plaintiff’s discharge, the Workmen’s Compensation Act was amended making it unlawful for an employer to interfere with or to coerce the employee in the exercise of his rights under the Act (Ill.Rev.Stat.1975, ch. 48, par. 138.4(h)), the employer argues that as of the time of plaintiff’s discharge, the legislature had neither prohibited nor provided for any remedy for a discharge resulting 138

from the filing of a workmen’s compensation claim. As such, its authority to terminate the employee, whose contract was at will, was absolute. *** We are not convinced that an employer’s otherwise absolute power to terminate an employee at will should prevail when that power is exercised to prevent the employee from asserting his statutory rights under the Workmen’s Compensation Act. As we have noted, the legislature enacted the workmen’s compensation law as a comprehensive scheme to provide for efficient and expeditious remedies for injured employees. This scheme would be seriously undermined if employers were permitted to abuse their power to terminate by threatening to discharge employees for seeking compensation under the Act. We cannot ignore the fact that when faced with such a dilemma many employees, whose common law rights have been supplanted by the Act, would choose to retain their jobs, and thus, in effect, would be left without a remedy either common law or statutory. This result, which effectively relieves the employer of the responsibility expressly placed upon him by the legislature, is untenable and is contrary to the public policy as expressed in the Workmen’s Compensation Act. We cannot believe that the legislature, even in

the absence of an explicit proscription against retaliatory discharge, intended such a result. *** The employer argues that the exclusivity provision of section 11 of the Act, which provides that the provisions of the Act “shall be the measure of the responsibility of any employer” (Ill.Rev.Stat.1973, ch. 48, par. 138.11), precludes an action for retaliatory discharge. Motorola argues that this conclusion is compelled because the section clearly shows that the legislature intended that the Act should be exclusive in providing for employees’ rights and remedies. We do not agree. First, that section was meant to limit recovery by employees to the extent provided by the Act in regard to work-related injuries, and was not intended to insulate the employer from independent tort actions. Second, we cannot accept a construction of section 11 which would allow employers to put employees in a position of choosing between their jobs and seeking their remedies under the Act. *** The employer argues that the absence of any provisions for civil remedies for retaliatory discharge in the 1975 amendments, which make it a criminal offense for an employer to threaten or effect such a discharge (Ill.Rev.Stat.1975, ch. 48, par. 138.4(h)), is a conscious decision by the legislature that no such civil remedy shall exist. We do not agree. As we have noted, retaliatory discharge is offensive to the public policy of this State as stated in the Workmen’s Compensation Act. This policy can only be effectively implemented and enforced by allowing a civil remedy for 139

damages, distinct from any criminal sanctions which may be imposed on employers for violating the Act after 1975. The imposition of a small fine, inuring to the benefit of the State, does nothing to alleviate the plight of those employees who are threatened with retaliation and forgo their rights, or those who lose their jobs when they proceed to file claims under the Act. It is conceivable, moreover, that some employers would risk the threat of criminal sanction in order to escape their responsibility under the Act. Further, the fact that an act is penal in nature does not bar a civil remedy, and where a statute is enacted for the benefit of a particular class of individuals a violation of its terms may result in civil as well as criminal liability, even though the former remedy is not specifically mentioned. Heimgaertner v. Benjamin Electric Manufacturing Co. (1955), 6 Ill.2d 152, 128 N.E.2d 691. *** We now consider the award of $25,000 punitive damages. In this connection, two points merit consideration, first, whether punitive damages may generally be awarded in cases for retaliatory discharge, and second, whether the jury’s award for such damages was proper in the instant case. *** In the absence of the deterrent effect of punitive damages there would be little to dissuade an employer from engaging in the practice of discharging an employee for filing a workmen’s compensation claim. For example in this case, the plaintiff was entitled to only $749 compensatory damages. We noted above the very real possibility that some employers would risk the threat of criminal sanction in order to escape their responsibilities under the Act. The statute makes such conduct, as is involved in this case, a petty offense (Ill.Rev.Stat.1975, ch. 48, par. 138.26), which is punishable by a fine not to exceed $500 (Ill.Rev.Stat.1975, ch. 38, par. 1005–9–1(4)). The imposition on the employer of the small additional obligation to pay a wrongfully discharged employee compensation would do little to discourage the practice of retaliatory discharge, which mocks the public policy of this State as announced in the Workmen’s Compensation Act. In the absence of other effective means of deterrence, punitive damages must be permitted to prevent the discharging of employees for filing workmen’s compensation claims. *** However, under the facts of the present case, we are compelled to conclude that the award of $25,000 as punitive damages was improper. [T]he function of punitive damages is similar to that of a criminal penalty, i.e., as a punishment to the wrongdoer and as a means to deter such a wrongdoer and others from committing like offenses in the future. (See Mattyasovszky v. West Towns Bus Co. (1975), 61 Ill.2d 31, 330 N.E.2d 509.) 140

Because of their penal nature, punitive damages are not favored in the law, and the courts must take caution to see that punitive damages are not improperly or unwisely awarded. (See Eshelman v. Rawalt (1921), 298 Ill. 192, 197, 131 N.E. 675.) Adherence to this rule compels us to conclude that punitive damages should not be awarded where, as here, the cause of action forming the basis for their award is a novel one.

*** At the time of plaintiff’s discharge there was no provision in the Act making it unlawful to discharge an employee for seeking relief under its provisions. Also, at that time there was no decision of this court holding that a retaliatory discharge in such cases was actionable. [Eds. For a discussion of the role of Workers’ Compensation Laws, see pp. 250 ff. infra.]

NOTES AND QUESTIONS 1. Why might the Illinois legislature prior to 1975 have established a workers’ compensation scheme without making it unlawful for an employer to retaliate against an employee for filing a claim under that scheme? Is the case for an implied right of action stronger or weaker after 1975, when the Illinois legislature provided for criminal remedies? For an example of judicial reluctance to recognize a supplementary civil action, see Bottijliso v. Hutchison Fruit Co., 96 N.M. 789, 635 P.2d 992 (1981). 2. Are you persuaded by the Kelsay court’s refusal to sustain the award of punitive damages? Why or why not? 3. Implied Antiretaliation Protections. The Supreme Court has implied anti-retaliation protections for several federal antidiscrimination rights. For instance, in Jackson v. Birmingham Bd. of Educ., 544 U.S. 167, 174, 125 S. Ct. 1497, 161 L. Ed. 2d 361 (2005), the Court held that protection against retaliation for filing a complaint with the government could be implied from the prohibition of gender discrimination in Title IX of the Education Amendments of 1972, 20 U.S.C. § 1681 et seq.: “when a funding recipient retaliates against a person because he complains of sex discrimination, this constitutes intentional discrimination ‘on the basis of sex,’ in violation of Title IX.” The Court has also held that federal-sector employees have an implied retaliation claim under Section 15 of ADEA, 29 U.S.C. § 633a, Gomez-Perez v. Potter, 553 U.S. 474, 128 S. Ct. 1931, 170 L. Ed. 2d 887 (2008), and that plaintiffs have such a claim under 42 U.S.C. § 1981, CBOCS W., Inc. v. Humphries, 553 U.S. 442, 128 S. Ct. 1951, 170 L. Ed. 2d 864 (2008). 4. Implied Federal Causes of Action. The Court now seems more hesitant to supplement express public enforcement of regulations with implied private rights of action. The Supreme Court once articulated in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), a set of criteria for deciding whether to recognize an implied right of action: 141 First, is the plaintiff “one of the class for whose especial benefit the statute was enacted”—that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purpose of the legislative scheme to imply such a remedy? And finally, is the cause of action one traditionally relegated to state law, so that it would be inappropriate to infer a cause of action based solely on federal law? 422 U.S. at 78, 95 S. Ct. at 2088 (citations and emphasis omitted). Applying this test, the Court recognized an implied right of action under § 901(a) of Title IX of the Education Amendments of 1972, 42 U.S.C. § 681, in Cannon v. University of Chicago, 441 U.S. 677, 99 S. Ct. 1946, 60 L. Ed. 2d 560 (1979). But in post-Cannon decisions, the Court has stressed the second factor, insisting that Congress signal its intent to authorize private actions. See, e.g., Alexander v. Sandoval, 532 U.S. 275, 287, 121 S. Ct. 1511, 149 L. Ed. 2d 517 (2001) (“Like substantive federal law itself, private rights of action to enforce federal law must be created by Congress”). 7 Because Dr. Gibbons was the EEOC officer at the Foundation, there is some merit in the plaintiff’s argument that she was entitled to show a high degree of hostility towards the Foundation in her conversation with Dr. Gibbons charging that her low evaluation was discriminatory. Even assuming, however, that a higher degree of protection attaches to an employee’s contacts with her employer’s EEOC officer, Dr. Hochstadt’s hostile confrontation with Dr. Welsch, the assistant director of the Foundation, must be judged against the normal standard for protected opposition, and that confrontation, the precipitating factor of her discharge, went beyond the scope of protected activity. 2 Section 11(c)(1) of the Act, 84 Stat. 1603, 29 U.S.C. § 660(c)(1), provides in full: “No person shall discharge or in any manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to this Act or has testified or is about to testify in any such proceeding or because of the exercise by such employee on behalf of himself or others of any right afforded by this Act.” 3 The regulation, 29 CFR § 1977.12 (1979), provides in full: “(a) In addition to protecting employees who file complaints, institute proceedings, or testify in proceedings under or related to the Act, section 11(c) also protects employees from discrimination occurring because of the exercise ‘of any right afforded by this Act.’ Certain rights are explicitly provided in the Act; for example, there is a right to participate as a party in enforcement proceedings (sec. 10). Certain other rights exist by necessary implication. For example, employees may request information from the Occupational Safety and Health Administration; such requests would constitute the exercise of a right afforded by the Act. Likewise, employees interviewed by agents of the Secretary in the course of inspections or investigations could not subsequently be discriminated against because of their cooperation. “(b)(1) On the other hand, review of the Act and examination of the legislative history discloses that, as a general matter, there is no right afforded by the Act which would entitle employees to walk off the job because of potential unsafe conditions at the workplace. Hazardous conditions which may be violative of the Act will ordinarily be corrected by the employer, once brought to his attention. If corrections are not accomplished, or if there is dispute about the existence of a hazard, the employee will normally have opportunity to request inspection of the workplace pursuant to section 8(f) of the Act, or to seek the assistance of other public agencies which have responsibility in the field of safety and health. Under such circumstances, therefore, an employer would not ordinarily be in violation of section 11(c) by taking action to discipline an employee for refusing to perform normal job activities

because of alleged safety or health hazards. “(2) However, occasions might arise when an employee is confronted with a choice between not performing assigned tasks or subjecting himself to serious injury or death arising from a hazardous condition at the workplace. If the employee, with no reasonable alternative, refuses in good faith to expose himself to the dangerous condition, he would be protected against subsequent discrimination. The condition causing the employee’s apprehension of death or injury must be of such a nature that a reasonable person, under the circumstances then confronting the employee, would conclude that there is a real danger of death or serious injury and that there is insufficient time due to the urgency of the situation, to eliminate the danger through resort to regular statutory enforcement channels. In addition, in such circumstances, the employee, where possible, must also have sought from his employer, and been unable to obtain, a correction of the dangerous condition.” 4 As a result of this fatality, the Secretary conducted an investigation that led to the issuance of a citation charging the company with maintaining an unsafe walking and working surface in violation of 29 U.S.C. § 654(a)(1). The citation required immediate abatement of the hazard and proposed a $600 penalty. Nearly five years following the accident, the Occupational Safety and Health Review Commission affirmed the citation, but decided to permit the petitioner six months in which to correct the unsafe condition. Whirlpool Corp., 1979 CCH OSHD ¶ 23,552. A petition to review that decision is pending in the United States Court of Appeals for the District of Columbia Circuit. 6 This order appears to have been in direct violation of the outstanding company directive that maintenance work was to be accomplished without stepping on the screen apparatus. 7 11

Both employees apparently returned to work the following day without further incident.

These usual enforcement procedures involve the issuance of citations and imposition of penalties. When an OSHA inspection reveals a violation of 29 U.S.C. § 654 or of any standard promulgated under the Act, the Secretary may issue a citation for the alleged violation, fix a reasonable time for the dangerous condition’s abatement, and propose a penalty. §§ 658(a), 659(a), 666. The employer may contest the citation and proposed penalty. § 659(a), (c). Should he do so, the effective date of the abatement order is postponed until the completion of all administrative proceedings initiated in good faith. §§ 659(b), 666(d). Such proceedings may include a hearing before an administrative law judge and review by the Occupational Safety and Health Review Commission. §§ 659(c), 661(i). 12 Such an order may continue pending the consummation of the Act’s normal enforcement proceedings. § 662(b).

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CHAPTER 4 “PUBLIC POLICY” CAUSE OF ACTION; PROTECTION OF “WHISTLEBLOWERS” ■■■

Introduction Chapter 3 addressed rules protecting employee activity for its contribution to a statutory scheme that is intended to secure benefits for employees. In this chapter, we consider more generally the extent to which common law decisions and statutes protect employee activity that primarily benefits third parties, typically the general public. As reflected in the Employment Restatement provision below, the majority of states recognize a cause of action for wrongful termination in violation of public policy. The primary rationale for the “public policy” cause of action is that employers should not use their contractual right to terminate the employment relationship in a manner that might frustrate the third-party interests of the public. Such frustration is likely where a retaliatory termination discourages employee activity that may serve some public interest. Just as courts declare certain contracts void as a matter of public policy, recognition of a wrongful termination in violation of public policy claim is “aimed at controlling the external effects” of private employment decision-making. See Jeffrey L. Harrison, “New” Terminable-at-Will Employment Contract: An Interest and Cost Incidence Analysis, 69 Iowa L. Rev. 327, 349 (1984). The public policy cause of action also owes an intellectual debt to Lawrence Blades, Employment at Will vs. Individual Freedom: On Limiting the Abusive Exercise of Employer Power, 67 Colum. L. Rev. 1404 (1967), which argued that much like the French doctrine of abus de droit and the American tort doctrines of malicious prosecution and abuse of process, American employment law should restrict abusive exercise of employer power for a socially unjustified purpose.

RESTATEMENT OF EMPLOYMENT LAW, §§ 5.01–5.03 American Law Institute (2015).

§ 5.01 Wrongful Discharge in Violation of Public Policy

An employer that discharges an employee because the employee engages in activity protected by a well-established public policy as described in § 5.02 is subject to liability in tort for wrongful discharge in violation of public policy, unless the statute or other law forming the basis 144

of the applicable public policy precludes tort liability or otherwise makes judicial recognition of a tort claim inappropriate. § 5.02 Wrongful Discharge in Violation of Public Policy: Protected Activities

An employer is subject to liability in tort under § 5.01 for discharging an employee because the employee, acting in a reasonable manner, (a) refuses to commit an act that the employee reasonably and in good faith believes violates a law or other well-established public policy, such as a professional or occupational code of conduct protective of the public interest; (b) performs a public duty or obligation that the employee reasonably and in good faith believes the law imposes; (c) file a charge or claims a benefit in good faith under an employment statute or law, whether or not the charge or claim is meritorious; (d) refuses to waive a nonnegotiable or nonwaivable right when the employer’s insistence on the waiver as a condition of employment, or the court’s enforcement of the waiver, would violate well-established public policy; (e) reports or inquires about conduct that the employee reasonably and in good faith believes violates a law or an established principle of a professional or occupational code of conduct protective of the public interest; or (f) engages in other activity directly furthering a well-established public policy.

§ 5.03 Wrongful Discharge in Violation of Public Policy: Sources of Public Policy

Sources of public policy for the tort of wrongful discharge in violation of public policy under § 5.01 include: (a) federal and state constitutions; (b) federal, state, and local statutes, ordinances, and decisional law; (c) federal, state, and local administrative regulations, decisions, and orders; and (d) well-established principles in a professional or occupational code of conduct protective of the public interest. NOTE: EVOLUTION OF PUBLIC POLICY CAUSE OF ACTION The chapter starts by chronicling the evolution of the common law claim for wrongful termination in violation of public policy, starting with Nees v. Hocks and Tameny v. Atlantic Richfield Co. These two cases, along with Kelsay 145 v. Motorola (the concluding case in Chapter 11) represent three stages in the judicial recognition of the public policy cause of action. Kelsay involves judicial implication of a private civil remedy for employees who have been retaliated against for the assertion of a statutory claim. In Kelsay, the public policy is defined by the statute, and the court engages in the traditional enterprise of deciding whether a private right of action is necessary to effectuate the scheme and consistent with the legislative design. Nees involves a somewhat more difficult problem because the public policy is not centrally located in a particular statute, but must be gleaned from a variety of state statutory and constitutional provisions. Tameny requires the court to determine whether in some circumstances employee refusals to perform assigned work contravenes public policy. See Samuel Estreicher & Beverly Wolff, At-Will Employment and the Problem of Unjust Dismissal, 36 Record of the Assn. of the Bar of the City of N.Y. 170 (April 1981). The early cases in this chapter involve so-called “passive whistleblowers”—those forced to choose between their jobs and fulfilling a legal duty or complying with the law. Later cases examine the more complex case of “active whistleblowers”—those who oppose or complain about their employer’s unlawful activity on their own initiative. The chapter concludes with an overview of statutory protections for whistleblowers, and how those statutes may affect the availability of common law claims.

A. PERFORMANCE OF PUBLIC OBLIGATIONS NEES V. HOCKS Supreme Court of Oregon, 1975. 272 Or. 210, 536 P.2d 512. DENECKE, J. The jury found for plaintiff; therefore, we must consider the facts as established by the evidence most favorable to plaintiff. The plaintiff performed clerical duties for defendants. She started work in 1971. In 1972 she was called for jury duty; however, as she informed defendants, she requested and was granted a 12-month postponement because of her honeymoon. On February 2, 1973, plaintiff was again subpoenaed to serve on the jury. She told defendants and they stated that a month was too long for her “to be gone.” Defendants gave her a letter which stated defendants could spare plaintiff “for awhile” but not for a month and asked that she be excused. Plaintiff presented this letter to the court clerk and told the clerk that she had been called before and had to be excused, but she would like to serve on jury duty. The clerk told plaintiff she would not be excused. The plaintiff immediately came back to the office and told defendants that she would have to serve a minimum of two weeks’ jury duty. She did not tell defendants she had told the court clerk she really wanted to serve. 146

Plaintiff started her jury duty on February 26, 1973. On March 1, 1973, she received a termination letter from defendants. The letter stated, in part: “Although we asked you to request an excusal from Jury Duty and wrote a letter confirming the [defendants’] position, it has been brought to our attention you, in fact, requested to be placed on Jury Duty.” The letter went on to state the defendants also were not otherwise satisfied with plaintiff’s work. Based upon other evidence, however, the jury could have found plaintiff was not terminated because of dissatisfaction with the quality of plaintiff’s work. ***

We recognize, as defendants assert, that, generally, in the absence of a contract or legislation to the contrary, an employer can discharge an employee at any time and for any cause. Conversely, an employee can quit at any time for any cause. Such

termination by the employer or employee is not a breach of contract and ordinarily does not create a tortious cause of action. The question to us is, however, are there instances in which the employer’s reason or motive for discharging harms or interferes with an important interest of the community and, therefore, justifies compensation to the employee? ***

We conclude that there can be circumstances in which an employer discharges an employee for such a socially undesirable motive that the employer must respond in damages for any injury done. The next question is, does the evidence in this case permit a finding that such circumstances are present? There is evidence from which the jury could have found that the defendants discharged the plaintiff because, after being subpoenaed, and contrary to the defendants’ wishes, plaintiff told the clerk she would like to serve and she did serve on jury duty.2 Therefore, the immediate question can be stated specifically—is the community’s interest in having its citizens serve on jury duty so important that an employer, who interferes with that interest by discharging an employee who served on a jury, should be required to compensate his employee for any damages she suffered? Art. VII, § 3, of the Oregon Constitution provides that jury trial shall be preserved in civil cases. Art. I, § 11, provides a defendant in a criminal case has a right of trial by jury. Art. VII, § 5, provides: “The Legislative Assembly shall so provide that the most competent of the permanent citizens of the county shall be chosen for jurors.” 147

ORS 10.040 provides for certain exemptions from jury duty. ORS 10.050 provides for certain excuses from jury duty including health, age and “(c) When serving as a juror would result in extreme hardship to the person including but not limited to unusual and extraordinary financial hardship.” ORS 10.055 provides for deferment of jury duty “for good cause shown” for not more than one year. ORS 10.990 provides that if a juror “without reasonable cause” neglects to attend for jury service the sheriff may impose a fine, not exceeding $20 for each day the juror does not attend. People v. Vitucci, 49 Ill.App.2d 171, 199 N.E.2d 78 (1964), stated that an employer who discharged an employee who was absent because of jury duty was guilty of contempt of court. Massachusetts has a statute making such conduct contemptuous. 44 Mass.G.L.A., ch. 268, § 14A. These actions by the people, the legislature and the courts clearly indicate that the jury system and jury duty are regarded as high on the scale of American institutions and citizen obligations. If an employer were permitted with impunity to discharge an employee for fulfilling her obligation of jury duty, the jury system would be adversely affected. The will of the community would be thwarted. For these reasons we hold that the defendants are liable for discharging plaintiff because she served on the jury.

NOTES AND QUESTIONS 1. When representing an employee claiming wrongful termination in violation of public policy, an attorney, after collecting the facts, must identify sources of law that establish the public policy. Identify the types of legal sources that the Court in Nees recognizes to support the public policy at issue. Under which provision of the Employment Restatement § 5.02 would the plaintiff’s claim fall? 2. Why did the employer terminate Nees? Suppose the plaintiff had volunteered for jury duty. Does the reasoning of Nees bar an employer from advising his employee not to volunteer his or her availability for jury duty and then discharging the employee for volunteering such availability? What if the employer had a special need for the plaintiff’s services during a particular period? 3. In wrongful termination claims, courts typically expect plaintiffs to explain (a) how the cited legislation reflects a fundamental public policy interest, and (b) why common law protection of the plaintiff’s conduct is important to advancing or preserving that public policy interest. Suppose that you represent the plaintiff in Nees. Review the language in Ore. Rev. Stat. § 10.050 (quoted in the case),and explain how it reflects a fundamental public policy interest, why Nees’ actions advance or preserve that interest, and why a discharge would violate that policy. 4. Statutory Developments. The holding of Nees has now been codified. See Ore. Rev. Stat. § 10.090. Many states have comparable provisions. See, 148 e.g., Cal. Lab. Code § 230(a) (West); N.Y. Jud. Law § 519 (McKinney); Tex. Civ. Prac. & Rem. Code Ann. §§ 122.001–003 (West). Some statutes also expressly protect employees who leave work to testify as witnesses in court, see, e.g., Cal. Lab. Code § 230 (West); N.Y. Penal Law § 215.11 (McKinney), or before a legislature, see, e.g., Nev. Rev. Stat. § 50.070; Or. Rev. Stat. § 659A.236. The Federal Jury System Improvement Act, 28 U.S.C. § 1875, similarly prohibits penalizing employees who serve on a federal court jury. See Shea v.

County of Rockland, 810 F.2d 27 (2d Cir. 1987) (only lost wages, not compensatory damages, may be recovered). If the jury in Nees were a federal jury, what provision would the employer have violated? 5. “Citizen Crime Fighters.” How broadly does the Nees rationale extend? Law enforcement authorities in some sense rely on public cooperation in detecting and apprehending wrongdoers. Yet under current law, while citizens may be obligated to respond honestly to grand jury inquiries, in most states they are under no affirmative duty to report suspected wrongdoing. Palmateer v. International Harvester Co., p. 166 infra, examines whether employees who report illegal behavior by their fellow employees or employer should be protected from employer retaliation. 85 Ill. 2d 124, 52 Ill. Dec. 13, 421 N.E.2d 876 (1981). See the materials on “whistleblowers,” at p. 170 infra. Does the Employment Restatement § 5.02 have any relevance here?

B. REFUSAL TO PERFORM ASSIGNMENT IN CONTRAVENTION OF PUBLIC POLICY TAMENY V. ATLANTIC RICHFIELD CO. Supreme Court of California, 1980. 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330.

TOBRINER, J. Plaintiff Gordon Tameny instituted the present action against his former employer, Atlantic Richfield Company (Arco), alleging that Arco had discharged him after 15 years of service because he refused to participate in an illegal scheme to fix retail gasoline prices. Plaintiff sought recovery from Arco on a number of theories, contending, inter alia, that Arco’s conduct in discharging him for refusing to commit a criminal act was tortious and subjected the employer to liability for compensatory and punitive damages under normal tort principles. ***

Because this appeal arises from a judgment entered after the sustaining of a general demurrer, we must, under established principles, assume the truth of all properly pleaded material allegations of the complaint in evaluating the validity of the trial court’s action. *** 149

According to the complaint, plaintiff was hired by Arco as a relief clerk in 1960, received regular advancements, merit increases and commendatory evaluations in his initial years with the company, and, in 1966, was promoted to the position of retail sales representative, the position he held when discharged by Arco in 1975. His duties as a retail sales representative included among other matters the management of relations between Arco and the various independent service station dealers (franchisees) in his assigned territory of Bakersfield. The complaint alleges that beginning in the early 1970s, Arco, Arco’s district manager McDermott, and others engaged in a combination “for the purpose of reducing, controlling, stabilizing, fixing, and pegging the retail gasoline prices of Arco service station franchisees.” According to the complaint, defendants’ conduct in this regard violated express provisions of the Sherman Antitrust Act (15 U.S.C. § 1 et seq.), the Cartwright Act (Bus. & Prof.Code, § 16720 et seq.), and a specific consent decree which had been entered in a federal antitrust prosecution against Arco. The complaint further asserts that during the early 1970s, defendants increasingly pressured plaintiff to “threaten [and] cajole * * * the so-called ‘independent’ service station dealers in [his] territory to cut their gasoline prices to a point at or below a designated level specified by Arco.” When plaintiff refused to yield to his employer’s pressure to engage in such tactics, his supervisor told him that his discharge was imminent, and soon thereafter plaintiff was fired, effective March 25, 1975. Although at the time of the discharge Arco indicated in its personnel records that plaintiff was being fired for “incompetence” and for “unsatisfactory performance,” the complaint alleges that “the sole reason” for plaintiff’s discharge was his refusal to commit the “grossly illegal and unlawful acts which defendants tried to force him to perform.” ***

Under the traditional common law rule, codified in Labor Code section 2922,6 an employment contract of indefinite duration is in general terminable at “the will” of either party. Over the past several decades, however, judicial authorities in California and throughout the United States have established the rule that under both common law and the statute an employer does not enjoy an absolute or totally unfettered right to discharge even an at-will employee. In a series of cases arising out of a variety of factual settings in which a discharge clearly violated an express statutory objective or undermined a firmly established principle of public policy, courts have recognized that an employer’s traditional broad authority to discharge an at-will

employee “may be limited by statute * * * or by considerations of public policy.” (Petermann v. International Brotherhood of Teamsters (1959) 174 Cal.App.2d 184, 188, 344 P.2d 25, 27 150

(discharge for refusal to commit perjury); see, e.g., * * * Nees v. Hocks (1975) 272 Or. 210, 536 P.2d 512 (discharge for serving on jury); Frampton v. Central Indiana Gas Co. (1973) 260 Ind. 249, 297 N.E.2d 425 (discharge for filing worker’s compensation claim); Harless v. First Nat. Bank in Fairmont (W.Va.1978) 246 S.E.2d 270 (discharge for reporting violations of consumer protection laws).) Petermann v. International Brotherhood of Teamsters, supra, one of the seminal California decisions in this area, imposes a significant condition upon the employer’s broad power of dismissal by nullifying the right to discharge because an employee refuses to perform an unlawful act. In Petermann, the plaintiff, who had been employed as a business agent by defendant union, brought a “wrongful discharge” action against the union alleging that he had been dismissed from his position because he had refused to follow his employer’s instructions to testify falsely under oath before a legislative committee, and instead had given truthful testimony. Emphasizing that the employer’s instructions amounted to a directive to commit perjury, a criminal offense, plaintiff maintained that the employer acted illegally in discharging him for refusing to follow such an order. The Petermann court recognized that in the absence of contractual limitations an employer enjoys broad discretion to discharge an employee, but concluded that as a matter of “public policy and sound morality” the employer’s conduct, as alleged in the complaint, could not be condoned. The court explained: “The commission of perjury is unlawful. (Pen.Code, § 118). * * * It would be obnoxious to the interests of the state and contrary to public policy and sound morality to allow an employer to discharge any employee, whether the employment be for a designated or unspecified duration, on the ground that the employee declined to commit perjury, an act specifically enjoined by statute. * * * The public policy of this state as reflected in the penal code sections referred to above would be seriously impaired if it were to be held that one could be discharged by reason of his refusal to commit perjury. To hold that one’s continued employment could be made contingent upon his commission of a felonious act at the instance of his employer would be to encourage criminal conduct upon the part of both the employee and employer and serve to contaminate the honest administration of public affairs. * * * ” (174 Cal.App.2d at pp. 188–189, 344 P.2d at p. 27.) Thus, Petermann held that even in the absence of an explicit statutory provision prohibiting the discharge of a worker on such grounds, fundamental principles of public policy and adherence to the objectives underlying the state’s penal statutes require the recognition of a rule barring an employer from discharging an employee who has simply complied with his legal duty and has refused to commit an illegal act.8 151

As the statement of facts set out above demonstrates, the present case closely parallels Petermann in a number of essential respects. Here, as in Petermann, the complaint alleges that the defendant employer instructed its employee to engage in conduct constituting a criminal offense. Plaintiff, like the employee in Petermann, refused to violate the law and suffered discharge as a consequence of that refusal. Arco concedes, as it must in light of Petermann, that the allegations of the complaint, if true, establish that defendants acted unlawfully in discharging plaintiff for refusing to participate in criminal activity. Arco maintains, however, that plaintiff’s remedy for such misconduct sounds only in contract and not in tort. Accordingly, Arco asserts that the trial court properly sustained its demurrer to plaintiff’s tort causes of action, and correctly precluded plaintiff from recovering either compensatory tort damages or punitive damages. In support of its contention that an action for wrongful discharge sounds only in contract and not in tort, Arco argues that because of the contractual nature of the employer-employee relationship, an injury which an employer inflicts upon its employee by the improper termination of such a relationship gives rise only to a breach of contract action. California decisions, however, have long recognized that a wrongful act committed in the course of a contractual relationship may afford both tort and the contractual relief, and in such circumstances the existence of the contractual relationship will not bar the injured party from pursuing redress in tort. ***

[W]e conclude that an employee’s action for wrongful discharge is ex delicto and subjects an employer to tort liability. As the Petermann case indicates, an employer’s obligation to refrain from discharging an employee who refuses to commit a criminal act does not depend upon any express or implied “ ‘promises set forth in the [employment] contract’ ” * * * , but rather reflects a duty imposed by law upon all employers in order to implement the fundamental public policies embodied in the state’s

penal statutes. As such, a wrongful discharge suit exhibits the classic elements of a tort cause of action. * * * We hold that an employer’s authority over its employee does not include the right to demand that the employee commit a criminal act to further its interests, and an employer may not coerce compliance with such unlawful directions by discharging an employee who refuses to follow such an order. An employer engaging in such conduct violates a basic duty 152

imposed by law upon all employers, and thus an employee who has suffered damages as a result of such discharge may maintain a tort action for wrongful discharge against the employer. CLARK, J., dissenting. In the instant case the alleged actionable conduct is only contractual, that is, the alleged wrongful termination of an employment contract. In terminating that contract defendant did not also breach a duty giving rise to a cause of action in tort. (See Petermann v. International Brotherhood of Teamsters, supra, 174 Cal.App.2d 184, 344 P.2d 25.) As in Petermann there is no delictual breach in the termination itself, although it is alleged that defendants’ reason for the termination—plaintiff’s refusal to cooperate with defendants in committing acts contrary to public policy—was improper. There does not exist in the instant case * * * the least connection between defendants’ actionable conduct (breach of contract) and any tort.

NOTES AND QUESTIONS 1. Both Tameny and the Petermann decision on which it relies seek to relieve an employee from a pernicious Hobson’s choice: either comply with the employer’s directive and violate the law, or refuse to comply and suffer discharge. In both, to allow the employer to use the power of discharge to enlist employee intermediaries in unlawful conduct would be to permit the employer to do indirectly what it could not do directly. Revisit the facts in Nees v. Hocks. Did the plaintiff in that case face a Hobson’s choice? 2. Look at the statutory language cited in footnotes 6 and 8 (Cal. Lab. Code §§ 2922 and 2856 (West)). Could the plaintiff have brought a claim solely based on the statutory language? Which provision(s) of the Employment Restatement § 5.02 could have been invoked? 3. Reexamine the facts of Nees, Tameny and Petermann in light of the disruption the plaintiff’s actions created for the employer. Which plaintiff was most disruptive? Should disruption to the employer be a legitimate factor in weighing the plaintiff’s case? The next case, Pierce v. Ortho Pharmaceutical Inc., examines this question. 4. Adverse Actions Short of Discharge. Would Tameny have had a cause of action if instead of being discharged, he was reassigned to a less desirable position or was presented with a cut in salary? What reason(s) are there for limiting the public-policy cause of action to discharges rather than including other retaliatory personnel decisions? Cf. Scott v. Pacific Gas and Elec. Co., 11 Cal. 4th 454, 46 Cal. Rptr. 2d 427, 904 P.2d 834 (1995) (recognized implied-in-fact contract cause of action for “wrongful demotion”). The Employment Restatement does not take a position on whether the public-policy cause of action should be extended beyond discharges. See § 5.01, cmt. b, at 189. Many antidiscrimination statutes do cover “material adverse action” falling short of discharge. See, e.g., Burlington N. & Santa Fe Ry. v. White, 548 U.S. 53 (2006), supra p. 108 (Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e–3). As 153 of this writing, only two state high courts recognize a cause of action for wrongful demotion or discipline in violation of public policy. See Trosper v. Bag ‘N Save, 273 Neb. 855, 734 N.W.2d 704 (2007); Brigham v. Dillon Cos., Inc., 262 Kan. 12, 935 P.2d 1054 (1997). 5. Refusal to Perform Assignment Erroneously Believed to Be Unlawful. Should employees be protected from discharge for refusing to perform work that they sincerely and reasonably thought was illegal, even if it turns out that there was no illegality? See Employment Restatement § 5.02(a), (b), and (e). 6. Contract vs. Tort. Whether a claim sounds in contract, tort (or both) is a recurring issue in the cases. Why is it important that Tameny permits a plaintiff to sue in either contract or tort? In Foley v. Interactive Data Corp., 47 Cal. 3d 654, 254 Cal. Rptr. 211, 765 P.2d 373 (1988), reprinted in part at pp. 57–61 supra, the California high court offered the following explanation for why a Tameny claim affords a tort recovery: As Tameny explained, the theoretical reason for labeling the discharge wrongful in such a case is not based on the terms and conditions of the contract but rather arises out of duty implied in law on the part of the employer to conduct its affairs in compliance with public policy. * * * [T]here is no logical basis to distinguish in cases of wrongful termination for reasons violative of fundamental principles of public policy between situations in which the employee is an at-will employee and [those] in which the employee has a contract for a specified term. The tort is independent of the term of employment.

47 Cal. 3d at 667, 254 Cal. Rptr. at 215, 765 P.2d at 377 (quoting Koehrer v. Superior Court, 181 Cal. App. 3d 1155, 1166, 226 Cal. Rptr. 820, 826 (1986)). Most courts follow Tameny, Foley and Cloutier in permitting tort recovery. See Employment Restatement § 5.02; Jasper v. H. Nizam, Inc., 764 N.W. 2d 751 (Iowa 2009). But see Johnson v. Kreiser’s Inc., 433 N.W.2d 225 (S.D. 1988) (contract recovery only). When is it more advantageous to sue in contract? 7. “In Violation of Public Policy.” The key concept in most “public policy” cases is the source of the alleged public policy. Section 5.03 of the Employment Restatement establishes that many different sources of law can support a wrongful termination claim. Some courts initially read their mandate narrowly. In Gantt v. Sentry Insurance, 1 Cal. 4th 1083, 4 Cal. Rptr. 2d 874, 824 P.2d 680 (1992), the California Supreme Court held that an individual who claimed he was fired for supporting a fellow employee’s sexual harassment claim stated a wrongful termination public policy claim under California law. But the court noted that: [C]ourts in wrongful discharge actions may not declare public policy without a basis in either constitutional or statutory provisions. A public policy exception carefully tethered to fundamental policies that are delineated in constitutional or statutory provisions strikes the proper balance among the interests of employers, employees and the public. The employer is bound, at a minimum, to know the fundamental public policies of the state and nation as expressed in 154 their constitutions and statutes; so limited, the public policy exception presents no impediment to employers that operate within the bounds of law. Employees are protected against employer actions that contravene fundamental state policy. And society’s interests are served through a more stable job market, in which its most important policies are safeguarded. Yet a later California decision upheld a public policy tort based upon federal administrative regulations and overruled Gantt in Green v. Ralee Engineering Co., 19 Cal. 4th 66, 78 Cal. Rptr. 2d 16, 960 P.2d 1046 (1998), where an individual’s internal complaints about alleged violations of FAA safety standards was found sufficient to establish a wrongful discharge claim under California law. And see Jasper v. H. Nizam, Inc., 764 N.W. 2d 751 (Iowa 2009), as amended on denial for reh’g (Mar. 5, 2009) (allowing public policy tort under Iowa law based on state administrative regulation of nursing home staffing). 8. In all such cases, the plaintiff must articulate how that law (and the plaintiff’s actions) advances a public, rather than a private, interest, as listed in § 5.02. See Campbell v. Ford Indus., Inc., 274 Or. 243, 546 P.2d 141 (1976). One key question is whether internal reporting of alleged improprieties is enough to implicate public policy concerns. In Foley v. Interactive Data Corp., supra, plaintiff who worked as defendant’s product manager had learned that his new supervisor was under FBI investigation for embezzlement from his former employer, the Bank of America. Believing that corporate management would want to know of a high executive’s alleged prior criminal conduct, he disclosed this information to his former supervisor, and was allegedly fired for that reason. The California high court held that these facts did not state a claim under California law: In the present case, plaintiff alleges that defendant discharged him in “sharp derogation” of a substantial public policy that imposes a legal duty on employees to report relevant business information to management. * * * Whether or not there is a statutory duty requiring an employee to report information relevant to his employer’s interest, we do not find a substantial public policy prohibiting an employer from discharging an employee for performing that duty. * * * When the duty of an employee to disclose information to his employer serves only the private interest of the employer, the rationale underlying the Tameny cause of action is not implicated. 47 Cal. 3d at 669–71, 254 Cal. Rptr. at 217–18, 765 P.2d at 379–80. Yet the California Supreme Court reached the opposite conclusion with regard to internal complaints in Green v. Ralee Engineering, supra, joining many other states in protecting internal whistleblowing as suggested by Restatement § 5.02(e). In Paolella v. BrowningFerris, Inc., 158 F.3d 183 (3d Cir. 1998), the Third Circuit (applying Delaware law) held that an employee fired after making an accusation to company officers that his supervisors 155 fraudulently inflated client bills stated a “public policy” claim under state law. Acknowledging that retaliation for the “mere questioning of the propriety of a supervisor’s business practices” is not actionable under E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436 (Del. 1996), the appeals court emphasized that plaintiff’s accusation raised legal rather than merely ethical concerns; Paolella presented evidence that the supervisor’s billing practice “was illegally designed to defraud . . . customers by leading them to believe the increase in their monthly fees was due solely to a state imposed increase in . . . dumping costs and was therefore authorized under the terms of the service agreements.” Paolella, 158 F.3d at 191. See also N.J. Stat. Ann. § 34:19–3, subdiv. c (West). (protecting employee refusal to participate in violation of any law, rule or regulation “involving deception of, or misrepresentation to, any shareholder, investor. . . . ”). See also, Notes: The Sarbanes-Oxley Act of 2002, infra p. 174; and Incentive Awards Under the Dodd-Frank Wall Street and Consumer Protection Act, infra p. 176.

C. REFUSAL TO VIOLATE PROFESSIONAL OBLIGATIONS PIERCE V. ORTHO PHARMACEUTICAL CORP. Supreme Court of New Jersey, 1980. 84 N.J. 58, 417 A.2d 505.

POLLOCK, J. Ortho specializes in the development and manufacture of therapeutic and reproductive drugs. Dr. Pierce is a medical doctor who was first employed by Ortho in 1971 as an Associate Director of Medical Research. She signed no contract except a secrecy agreement, and her employment was not for a fixed term. She was an employee at will. In 1973, she became the Director of Medical Research/Therapeutics, one of three major sections of the Medical Research Department. Her primary responsibilities were to oversee development of therapeutic drugs and to establish procedures for testing those drugs for safety, effectiveness, and marketability. Her immediate supervisor was Dr. Samuel Pasquale, Executive Medical Director. In the spring of 1975, Dr. Pierce was the only medical doctor on a project team developing loperamide, a liquid drug for treatment of diarrhea in infants, children, and elderly persons. The proposed formulation contained saccharin. Although the concentration was consistent with the formula for loperamide marketed in Europe, the project team agreed that the formula was unsuitable for use in the United States. An alternative formulation containing less saccharin might have been developed within approximately three months. By March 28, however, the project team, except for Dr. Pierce, decided to continue with the development of loperamide. That decision was made 156

apparently in response to a directive from the Marketing Division of Ortho. This decision meant that Ortho would file an investigational new drug application (IND) with the Federal Food and Drug Administration (FDA), continuing laboratory studies on loperamide, and begin work on a formulation. FDA approval is required before any new drug is tested clinically on humans. 21 U.S.C. § 355; 21 C.F.R. §§ 310.3 et seq. Therefore, loperamide would be tested on patients only if the FDA approved the saccharin formulation. Dr. Pierce knew that the IND would have to be filed with and approved by the FDA before clinical testing could begin. Nonetheless, she continued to oppose the work being done on loperamide at Ortho. On April 21, 1975, she sent a memorandum to the project team expressing her disagreement with its decision to proceed with the development of the drug. In her opinion, there was no justification for seeking FDA permission to use the drug in light of medical controversy over the safety of saccharin. Dr. Pierce met with Dr. Pasquale on May 9 and informed him that she disagreed with the decision to file an IND with the FDA. She felt that by continuing to work on loperamide she would violate her interpretation of the Hippocratic oath. She concluded that the risk that saccharin might be harmful should preclude testing the formula on children or elderly persons, especially when an alternative formulation might soon be available. Dr. Pierce recognized that she was joined in a difference of “viewpoints” or “opinion” with Dr. Pasquale and others at Ortho concerning the use of a formula containing saccharin. In her opinion, the safety of saccharin in loperamide pediatric drops was medically debatable. She acknowledged that Dr. Pasquale was entitled to his opinion to proceed with the IND. On depositions, she testified concerning the reason for her difference of opinion about the safety of using saccharin in loperamide pediatric drops: Q. That was because in your medical opinion that was an unsafe thing to do. Is that so? A. No. I didn’t know. The question of saccharin was one of potential harm. It was controversial. Even though the rulings presently look even less favorable for saccharin it is still a controversial issue. After their meeting on May 9, Dr. Pasquale informed Dr. Pierce that she would no longer be assigned to the loperamide project. On May 14, Dr. Pasquale asked Dr. Pierce to choose other projects. After Dr. Pierce returned from vacation in Finland, she met on June 16 with Dr. Pasquale to discuss other projects, but she did not choose a project at that meeting. She felt she was being demoted, even though her salary would not be decreased. Dr. Pierce summarized her impression of that meeting in her 157

letter of resignation submitted to Dr. Pasquale the following day. In that letter, she stated:

Upon learning in our meeting June 16, 1975, that you believe I have not ‘acted as a Director’, have displayed inadequacies as to my competence, responsibility, productivity, inability to relate to the Marketing Personnel, that you, and reportedly Dr. George Braun and Mr. Verne Willaman consider me to be non-promotable and that I am now or soon will be demoted, I find it impossible to continue my employment at Ortho. The letter made no specific mention of her difference of opinion with Dr. Pasquale over continuing the work on loperamide. Nonetheless, viewing the matter most favorably to Dr. Pierce, we assume the sole reason for the termination of her employment was the dispute over the loperamide project. Dr. Pasquale accepted her resignation. In her complaint, which was based on principles of tort and contract law, Dr. Pierce claimed damages for the termination of her employment. Her complaint alleged: The Defendant, its agents, servants and employees requested and demanded Plaintiff follow a course of action and behavior which was impossible for Plaintiff to follow because of the Hippocratic oath she had taken, because of the ethical standards by which she was governed as a physician, and because of the regulatory schemes, both federal and state, statutory and case law, for the protection of the public in the field of health and human well-being, which schemes Plaintiff believed she should honor. However, she did not specify that testing would violate any state or federal statutory regulation. Similarly, she did not state that continuing the research would violate the principles of ethics of the American Medical Association. She never contended her participation in the research would expose her to a claim for malpractice. ***

As discussed below, our careful examination of Dr. Pierce’s allegations and the record reveals no genuine issue of material fact requiring disposition at trial. Although this case raises important policy considerations, all the relevant facts are before us, and there is no reason to defer a decision. Accordingly, we reverse the Appellate Division and reinstate the summary judgment in favor of defendant. ***

In recognizing a cause of action to provide a remedy for employees who are wrongfully discharged, we must balance the interests of the employee, the employer, and the public. Employees have an interest in knowing they will not be discharged for exercising their legal rights. Employers have an 158

interest in knowing they can run their businesses as they see fit as long as their conduct is consistent with public policy. The public has an interest in employment stability and in discouraging frivolous lawsuits by dissatisfied employees. Although the contours of an exception are important to all employees at will, this case focuses on the special considerations arising out of the right to fire an employee at will who is a member of a recognized profession. * * * Employees who are professionals owe a special duty to abide not only by federal and state law, but also by the recognized codes of ethics of their professions. That duty may oblige them to decline to perform acts required by their employers. However, an employee should not have the right to prevent his or her employer from pursuing its business because the employee perceives that a particular business decision violates the employee’s personal morals, as distinguished from the recognized code of ethics of the employee’s profession. See Comment, 28 Vand.L.Rev. 805, 832 (1975). We hold that an employee has a cause of action for wrongful discharge when the discharge is contrary to a clear mandate of public policy. The sources of public policy include legislation; administrative rules, regulations or decisions; and judicial decisions. In certain instances, a professional code of ethics may contain an expression of public policy. However, not all such sources express a clear mandate of public policy. For example, a code of ethics designed to serve only the interests of a profession or an administrative regulation concerned with technical matters probably would not be sufficient. Absent legislation, the judiciary must define the cause of action in case-by-case determinations. An employer’s right to discharge an employee at will carries a correlative duty not to discharge an employee who declines to perform an act that would require a violation of a clear mandate of public policy. However, unless an employee at will identifies a specific expression of public policy, he may be discharged with or without cause. ***

We now turn to the question whether Dr. Pierce was discharged for reasons contrary to a clear mandate of public policy. As previously stated, granting Ortho’s motion for summary judgment is appropriate at this juncture only if there is no genuine issue as to any material fact.

The material facts are uncontroverted. In opposing the motion for summary judgment, Dr. Pierce did not contend that saccharin was harmful, but that it was controversial. Because of the controversy she said she could not continue her work on loperamide. Her supervisor, Dr. Pasquale, disagreed and thought that research should continue. 159

As stated above, before loperamide could be tested on humans, an IND had to be submitted to the FDA to obtain approval for such testing. 21 U.S.C. § 355. The IND must contain complete manufacturing specifications, details of pre-clinical studies (testing on animals) which demonstrate the safe use of the drug, and a description of proposed clinical studies. The FDA then has 30 days to withhold approval of testing. 21 C.F.R. § 312.1. Since no IND had been filed here, and even giving Dr. Pierce the benefit of all doubt regarding her allegations, it is clear that clinical testing of loperamide on humans was not imminent. Dr. Pierce argues that by continuing to perform research on loperamide she would have been forced to violate professional medical ethics expressed in the Hippocratic oath. She cites the part of the oath that reads: “I will prescribe regimen for the good of my patients according to my ability and my judgment and never do harm to anyone.” Clearly, the general language of the oath does not prohibit specifically research that does not involve tests on humans and that cannot lead to such tests without governmental approval. We note that Dr. Pierce did not rely on or allege violation of any other standards, including the “codes of professional ethics” advanced by the dissent. Similarly, she did not allege that continuing her research would constitute an act of medical malpractice or violate any statute, including N.J.S.A. 45:9–16(h). In this case, Dr. Pierce has never contended that saccharin would necessarily cause harm to anyone. She alleged that the current controversy made continued investigation an unnecessary risk. However when she stopped work on loperamide, there was no risk. Our point here is not that participation in unethical conduct must be imminent before an employee may refuse to work. The more relevant consideration is that Dr. Pierce does not allege that preparation and filing of the IND was unethical. Further Dr. Pierce does not suggest that Ortho would have proceeded with human testing without FDA approval. The case would be far different if Ortho had filed the IND, the FDA had disapproved it, and Ortho insisted on testing the drug on humans. The actual facts are that Dr. Pierce could not have harmed anyone by continuing to work on loperamide. Viewing the matter most favorably to Dr. Pierce, the controversy at Ortho involved a difference in medical opinions. Dr. Pierce acknowledged that Dr. Pasquale was entitled to his opinion that the oath did not forbid work on loperamide. Nonetheless, implicit in Dr. Pierce’s position is the contention that Dr. Pasquale and Ortho were obliged to accept her opinion. Dr. Pierce contends, in effect, that Ortho should have stopped research on loperamide because of her opinion about the controversial nature of the drug. Dr. Pierce espouses a doctrine that would lead to disorder in drug research. Under her theory, a professional employee could redetermine the 160

propriety of a research project even if the research did not involve a violation of a clear mandate of public policy. Chaos would result if a single doctor engaged in research were allowed to determine, according to his or her individual conscience, whether a project should continue. Cf. Report of the Ad Hoc Committee on the Principles of Medical Ethics, American Medical Association 3 (1979). An employee does not have a right to continued employment when he or she refuses to conduct research simply because it would contravene his or her personal morals. An employee at will who refuses to work for an employer in answer to a call of conscience should recognize that other employees and their employer might heed a different call. However, nothing in this opinion should be construed to restrict the right of an employee at will to refuse to work on a project that he or she believes is unethical. In sum, an employer may discharge an employee who refuses to work unless the refusal is based on a clear mandate of public policy. PASHMAN, J., dissenting. Three * * * points made by the majority require discussion, for they reflect the majority’s failure to follow the wellestablished rule that the claims of a party opposing summary judgment are to be “indulgently treated” * * * . The first is the majority’s characterization of the effect of plaintiff’s ethical position. It appears to believe that Dr. Pierce had the power to determine whether defendant’s proposed development program would continue at all. This is not the case, nor is plaintiff claiming the right to halt defendant’s development efforts. Interpreted “indulgently,” yet realistically, plaintiff claims only the right to her professional autonomy. She contends that she may not be discharged for expressing her view that the clinical program is unethical or for refusing to continue her participation in the project. She has done nothing else to impede continued development of defendant’s proposal; moreover, it is undisputed that defendant was able to continue its program by reassigning personnel. Thus, the majority’s view that granting doctors a right to be free from abusive discharges would confer on any one of

them complete veto power over desirable drug development is ill-conceived. The second point concerns the role of governmental approval of the proposed experimental program. In apparent ignorance of the past failures of official regulation to safeguard against pharmaceutical horrors, the majority implies that the necessity for administrative approval for human testing eliminates the need for active, ethical professionals within the drug industry. * * * But we do not know whether the United States Food and Drug Administration (FDA) would be aware of the safer alternative to the proposed drug when it would pass upon defendant’s application for the more hazardous formula. The majority professes no such knowledge. We must therefore assume the FDA would have been left in ignorance. This highlights the need for ethically autonomous professionals within the 161

pharmaceutical industry—a need which the majority’s approach does nothing to satisfy. The final point to which I must respond is the majority’s observation that plaintiff expressed her opposition prematurely, before the FDA had approved clinical experimentation. * * * Essentially, the majority holds that a professional employee may not express a refusal to engage in illegal or clearly unethical conduct until his actual participation and the resulting harm is imminent. This principle grants little protection to the ethical autonomy of professionals that the majority proclaims. Would the majority have Dr. Pierce wait until the first infant was placed before her, ready to receive the first dose of a drug containing 44 times the concentration of saccharin permitted in 12 ounces of soda? The majority minimizes the scope of plaintiff’s ethical obligation. The “clear mandate of public policy” was no less clear when she made known her opposition and refusal to participate. A professional’s opposition to unethical conduct should not be considered untimely when its unethical nature is apparent. By contrast, the majority’s requirement that proposed conduct be imminent would require, for example, an associate in a law firm to withhold his opposition to the preparation of perjured testimony or false evidence, see DR 7–102(A)(4), (5) & (6), until he is actually ordered to begin the preparation. This narrow view of an employee’s duty to obey codes of ethics does little to promote such clear mandates of public policy. It will allow unscrupulous employers to forestall discussion on proposed unethical conduct, and to evade the spirit of the majority’s new principle by carefully timing such conduct to prevent meaningful dissent.

NOTES AND QUESTIONS 1. Given the New Jersey Supreme Court’s reasoning in Pierce, under what circumstances would Dr. Pierce have been protected by the public-policy cause of action when (i) expressing her concerns to her superiors; (ii) refusing to work further on a particular project; or (iii) reporting her objections to the FDA? Under the Employment Restatement §§ 5.02–5.03? 2. Policy Trade-Offs in Drug Research. Should Dr. Pierce have been protected from discharge if, while continuing work on the loperamide project, she informed the FDA that the company could have produced a safer alternative formula? On the one hand, government regulators are limited in their ability to assess independently the safety of a new drug or product and hence are critically dependent on the information they receive from regulated firms. Creation of a privilege of professional dissent might well aid the government’s regulatory objectives. On the other hand, protection of the confidentiality of internal company deliberations and research may help encourage the development of drugs that produce substantial benefits. A drug may promote the well-being of the vast majority of its intended users while causing great harm to a small subset of users whose characteristics may not be readily identifiable at the early stages of a drug’s development and use. See 162 generally Whistleblowing in Biomedical Research (J. Swazey & S. Scher eds., 1981). 3. Statutory Supersession. The cause of action recognized in Pierce led to the enactment of New Jersey’s “Conscientious Employee Protection Act,” N.J. Stat. Ann. §§ 34:19–1 to 19–8 (West) (Stat. Supp.). The New Jersey law protects a medical-licensed professional employee’s reports of, and refusal to participate in, any activity which constitutes “improper quality of patient care.” § 34–19–3, subdiv. c. Section 34:19–8 provides for an election of remedies but also states that “[n]othing in this act shall be deemed to diminish the rights, privileges, or remedies of any other federal or State law or regulation. . . .” 4. Professional Norms as Source of Public Policy vs. Internal Rules of the Profession? The Pierce court drew a distinction between professional norms that “contain an expression of public policy” and “a code of ethics designed to serve only the interests of a profession or an administrative regulation concerned with technical matters * * * .” What justification is there for incorporating private professional codes of ethics into the public policy of a state? Should such claims be limited to clear violations of an ethical or professional code? See General Dynamics Corp. v. Superior Ct., 7 Cal. 4th 1164, 32 Cal. Rptr. 2d 1, 876 P.2d 487 (1994) (limiting public policy claims to those grounded in explicit and unequivocal ethical norms embodied in the Rules of Professional Responsibility and statutes).

In Warthen v. Toms River Community. Memorial Hospital, 199 N.J. Super. 18, 488 A.2d 229, denying certification, 101 N.J. 255, 501 A.2d 926 (1985), a nurse claimed that ethical considerations in the Code for Nurses supported her refusal to dialyze a terminally-ill patient. The Code provided in relevant part: The nurse’s concern for human dignity and the provision of quality nursing care is not limited by personal attitudes or beliefs. If personally opposed to the delivery of care in a particular case because of the nature of the health problem or the procedures to be used, the nurse is justified in refusing to participate. Such refusal should be made known in advance and in time for other appropriate arrangements to be made for the client’s nursing care. The state intermediate appellate court held that this passage “defines a standard of conduct beneficial only to the individual nurse and not to the public at large. The overall purpose of the language cited by plaintiff is to preserve human dignity; however, it should not be at the expense of the patient’s life or contrary to the family’s wishes.” 199 N.J. Super. at 27, 488 A.2d at 233. 5. Relevance of Extensive Government Regulation of Employer? Of the Profession or Occupation? Should the claim of professional autonomy be rejected when government extensively regulates the conduct of the employer? See Suchodolski v. Michigan Consol. Gas Co., 412 Mich. 692, 316 N.W.2d 710 (1982) (rejecting public-policy cause of action based on Code of Ethics of Institute of Internal Auditors, in view of extensive state regulation of the 163 accounting systems of public utilities and fact that plaintiff did not allege he was discharged for falsifying reports to regulatory commission). But see Green v. Ralee Eng’g Co., supra, (allowing public policy claim based upon pervasive federal regulation of airline safety.) 6. Effect on Attorney-Client Privilege? Retaliation claims by in-house lawyers present difficult issues for courts because the underlying dispute often relates to privileged information. Courts are reluctant to allow such claims to proceed where such litigation would undermine the attorney-client privilege. See, e.g., Balla v. Gambro, Inc., 145 Ill. 2d 492, 164 Ill. Dec. 892, 584 N.E.2d 104 (1991) (attorney-client privilege bars retaliatory discharge suit even though in-house counsel had operational as well as legal responsibilities and his disclosures led to FDA removal of defective dialyzers from market); GTE Prods. Corp. v. Stewart, 421 Mass. 22, 30, 653 N.E.2d 161, 166–67 (1995) (retaliatory discharge claim lies “if it depends on (1) explicit and unequivocal statutory or ethical norms (2) [that] embody policies of importance to the public at large in the circumstances of the particular case, and (3) the claim can be proved without any violation of the attorney’s obligation to respect client confidences and secrets.”); General Dynamics Corp. v. Superior Ct., supra (cause of action can be maintained provided there is no breaching of attorney-client privilege or “unduly endangering the values lying at the heart of the professional relationship”). See also Note: The Sarbanes-Oxley Act of 2002, p. 174 infra.

D. WHISTLEBLOWERS GEARY V. UNITED STATES STEEL CORP. Supreme Court of Pennsylvania, 1974. 456 Pa. 171, 319 A.2d 174.

POMEROY, J. The complaint avers that appellant, George B. Geary, was continuously employed by appellee, United States Steel Corporation (hereinafter “company”), from 1953 until July 13, 1967, when he was dismissed from his position. Geary’s duties involved the sale of tubular products to the oil and gas industry. His employment was at will. The dismissal is said to have stemmed from a disagreement concerning one of the company’s new products, a tubular casing designed for use under high pressure. Geary alleges that he believed the product had not been adequately tested and constituted a serious danger to anyone who used it; that he voiced his misgivings to his superiors and was ordered to “follow directions”, which he agreed to do; that he nevertheless continued to express his reservations, taking his case to a vice-president in charge of sale of the product; that as a result of his efforts the product was reevaluated and withdrawn from the market; that he at all times performed his duties to the best of his ability and always acted with the best interests of the company and the general public in mind; and that 164

because of these events he was summarily discharged without notice. Geary asserts that the company’s conduct in so acting was “wrongful, malicious and abusive”, resulting in injury to his reputation in the industry, mental anguish, and direct financial harm, for which he seeks both punitive and compensatory damages.2 The case having been dismissed on a demurrer, all properly pleaded facts are taken as admitted for the purpose of testing

the sufficiency of the complaint.3 ***

* * * The facts alleged show only that there was a dispute over the merits of the new product; that Geary vigorously expressed his own point of view in the matter, by-passing his immediate superiors and taking his case to a company vicepresident, and that he was ultimately discharged. There is nothing here from which we could infer that the company fired Geary for the specific purpose of causing him harm, or coercing him to break any law9 or otherwise to compromise himself. According to his own averments, Geary had already won his own battle within the company. The most natural inference from the chain of events recited in the complaint is that Geary had made a nuisance of himself, and the company discharged him to preserve administrative order in its own house. * * * Appellant’s final argument is an appeal to considerations of public policy. Geary asserts in his complaint that he was acting in the best interests of the general public as well as of his employer in opposing the marketing of a product which he believed to be defective. Certainly, the potential for abuse of an employer’s power of dismissal is particularly serious where an employee must exercise independent, expert judgment in matters of product safety, but Geary does not hold himself out as this sort of employee. So far as the complaint shows, he was involved only in the sale of company products. There is no suggestion that he possessed any expert qualifications, or that his duties extended to making judgments in matters of product safety. In essence, Geary argues that his conduct should be protected because his intentions were good. No doubt most employees who are dismissed from their posts can make the same claim. We doubt that establishing a right to litigate every such case as it arises would operate either in the best interest of the parties or of the public. 165

[E]ven an unusually gifted person may be of no use to his employer if he cannot work effectively with fellow employees. Here, for example, Geary’s complaint shows that he by-passed his immediate superiors and pressed his views on higher officers, utilizing his close contacts with a company vice president.14 The praiseworthiness of Geary’s motives does not detract from the company’s legitimate interest in preserving its normal operational procedures from disruption.15 In sum, while we agree that employees should be encouraged to express their educated views on the quality of their employer’s products, we are not persuaded that creating a new non-statutory cause of action of the sort proposed by appellant is the best way to achieve this result. On balance, whatever public policy imperatives can be discerning here seem to militate against such a course. ROBERTS, J., dissenting. As a salesman, Geary was required to know intimately the products he was selling. He represented United States Steel and it was expected that he would be alert to protect his employer’s reputation. Likewise, it was natural that he would seek to shield himself and his employer from the consequences of a dangerous product. When he correctly recognized that the defective steel pipe had strong potential for causing injury and damage, he immediately notified his superiors. His reward for loyalty was dismissal. Of course, had Geary not informed his superiors of the defective product, he may well have been discharged for his failure to do so. Geary’s assessment of the danger of the steel pipe was correct, since after his notification, the corporation removed the steel pipe from the market. On these pleadings, it is manifestly clear that the employer realized Geary was right and that its interest lay in withdrawing from the market the dangerous product. Despite Geary’s candor in seeking within the corporation family to advance the corporation’s best interest, his employer fired him. There is no doubt that strong public policies of this Commonwealth have been offended by Geary’s discharge. First, the product asserted by appellant to be defective was, after appellant notified his superiors, withdrawn from the market. The manufacture and distribution of defective 166

and potentially dangerous products does not serve either the public’s or the employer’s interest. Our courts have granted relief to those injured by defective merchandise. E.g., Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848 (1968); Webb v. Zern, 422 Pa. 424, 220 A.2d 853 (1966). See Restatement (Second) of Torts § 402A (1965). The majority, however, fails to perceive that the prevention of injury is a fundamental and highly desirable objective of our society. Second, appellant as an employee was “subject to a duty to use reasonable efforts to give his [employer] information which is relevant to affairs entrusted to him, and which, as the [employee] has notice, the [employer] would desire to have and which can be communicated without violating a superior duty to a third person.” Restatement (Second) of Agency § 381 (1958). Had Geary refrained from notifying his superiors of the defective product, he could have been discharged for violating this duty to

come forward with information. No responsible policy is served which permits an employee to be discharged solely for obeying his legal duty to communicate information to his superiors. Indeed, the policy underlying this duty to communicate is frustrated by denying Geary the opportunity to present his case to the court.

PALMATEER V. INTERNATIONAL HARVESTER CO. Supreme Court of Illinois, 1981. 85 Ill.2d 124, 52 Ill.Dec. 13, 421 N.E.2d 876.

SIMON, J. The plaintiff, Ray Palmateer, complains of his discharge by International Harvester Company (IH). He had worked for IH for 16 years, rising from a unionized job at an hourly rate to a managerial position on a fixed salary. Following his discharge, Palmateer filed a four-count complaint against IH, alleging in count II that he had suffered a retaliatory discharge. According to the complaint, Palmateer was fired both for supplying information to local law-enforcement authorities that an IH employee might be involved in a violation of the Criminal Code of 1961 (Ill.Rev.Stat.1979, ch. 38, par. 1–1 et seq.) and for agreeing to assist in the investigation and trial of the employee if requested. The circuit court of Rock Island County ruled the complaint failed to state a cause of action and dismissed it; the appellate court affirmed in a divided opinion. We granted Palmateer leave to appeal to determine the contours of the tort of retaliatory discharge approved in Kelsay v. Motorola, Inc. (1978), 74 Ill.2d 172, 23 Ill.Dec. 559, 384 N.E.2d 353. ***

By recognizing the tort of retaliatory discharge, Kelsay acknowledged the common law principle that parties to a contract may not incorporate in it rights and obligations which are clearly injurious to the public. * * * But 167

the Achilles heel of the principle lies in the definition of public policy. When a discharge contravenes public policy in any way the employer has committed a legal wrong. However, the employer retains the right to fire workers at will in cases “where no clear mandate of public policy is involved” (Leach v. Lauhoff Grain Co., 51 Ill.App.3d 1022, 1026, 9 Ill.Dec. 634, 366 N.E.2d 1145 (1977)). But what constitutes clearly mandated public policy? There is no precise definition of the term. In general, it can be said that public policy concerns what is right and just and what affects the citizens of the State collectively. It is to be found in the State’s constitution and statutes and, when they are silent, in its judicial decisions. (Smith v. Board of Education (1950), 405 Ill. 143, 147, 89 N.E.2d 893.) Although there is no precise line of demarcation dividing matters that are the subject of public policies from matters purely personal, a survey of cases in other States involving retaliatory discharges shows that a matter must strike at the heart of a citizen’s social rights, duties, and responsibilities before the tort will be allowed. ***

It is clear that Palmateer has here alleged that he was fired in violation of an established public policy. The claim is that he was discharged for supplying information to a local law-enforcement agency that an IH employee might be violating the Criminal Code, for agreeing to gather further evidence implicating the employee, and for intending to testify at the employee’s trial, if it came to that. Because of the procedural posture of the case, these allegations must be accepted as true. (Fitzgerald v. Chicago Title & Trust Co. (1978), 72 Ill.2d 179, 187, 20 Ill.Dec. 581, 380 N.E.2d 790.) There is no public policy more basic, nothing more implicit in the concept of ordered liberty (see Palko v. Connecticut (1937), 302 U.S. 319, 325, 58 S.Ct. 149, 152, 82 L.Ed. 288, 292), than the enforcement of a State’s criminal code. (See Hewitt v. Hewitt (1979), 77 Ill.2d 49, 61–62, 31 Ill.Dec. 827, 394 N.E.2d 1204; Jarrett v. Jarrett (1979), 78 Ill.2d 337, 345, 36 Ill.Dec. 1, 400 N.E.2d 421.) There is no public policy more important or more fundamental than the one favoring the effective protection of the lives and property of citizens. See Ill. Const.1970, Preamble; Marbury v. Madison (1803), 5 U.S. (1 Cranch) 137, 163, 2 L.Ed. 60, 69. No specific constitutional or statutory provision requires a citizen to take an active part in the ferreting out and prosecution of crime, but public policy nevertheless favors citizen crime-fighters. “Public policy favors the exposure of crime, and the cooperation of citizens possessing knowledge thereof is essential to effective implementation of that policy. Persons acting in good faith who have probable cause to believe crimes have been committed should not be deterred from reporting them by the fear of unfounded suits by those accused.” (Joiner v. Benton Community Bank (1980), 82 Ill.2d 40, 44, 44 Ill.Dec. 260, 411 N.E.2d 229.) Although Joiner 168

involved actions for malicious prosecution, the same can be said for the citizen employee who fears discharge. Public

policy favors Palmateer’s conduct in volunteering information to the law-enforcement agency. Once the possibility of crime was reported, Palmateer was under a statutory duty to further assist officials when requested to do so. (Ill.Rev.Stat.1979, ch. 38, par. 31–8). Public policy thus also favors Palmateer’s agreement to assist in the investigation and prosecution of the suspected crime. The foundation of the tort of retaliatory discharge lies in the protection of public policy, and there is a clear public policy favoring investigation and prosecution of criminal offenses. Palmateer has stated a cause of action for retaliatory discharge. RYAN, J. * * * dissenting. Kelsay relied on the fact that the legislature had clearly established the public policy that injured workers had a right to file claims for compensation with the Industrial Commission. We there held that discharging the employee for filing such a claim violated that public policy. Here the public policy supporting the cause of action cannot be found in any expression of the legislature, but only in the vague belief that public policy requires that we all become “citizen crime-fighters” (85 Ill.2d at 132, 52 Ill.Dec. at 17, 421 N.E.2d at 880).

NOTES AND QUESTIONS 1. Geary’s Status Within Pennsylvania. Geary has been cited for the proposition that Pennsylvania recognizes a common law claim for wrongful termination in violation of public policy. See, e.g., Borse v. Piece Goods Inc., 963 F.2d 611 (1992), excerpted infra at pp. 283–286. Can you find any support for that interpretation in the Geary opinion? Why was Geary’s claim dismissed? 2. Palmateer is subject to multiple interpretations. On what grounds was Palmateer’s claim upheld? What is the broadest formulation of the holding consistent with its facts? The narrowest? Palmateer’s status as precedent within Illinois is not clear. See Turner v. Memorial Med. Ctr., 233 Ill. 2d 494, 331 Ill. Dec. 548, 911 N.E.2d 369 (2009) (public-policy cause of action is narrow exception to employment at-will rule and requires identification of “specific,” apparently statutory “expression of public policy”). 3. Recall the distinction between “passive whistleblowers” forced to choose between their job and compliance with the law and “active whistleblowers” who report employer illegality but have not been instructed by the employer to further the unlawful conduct. Which category does Geary’s conduct fall under? Does he fall under both? Does this distinction offer a proper line for common law decisions? Should it be followed when enacting a whistleblower-protection statute? 169 4. “Internal” Whistleblowing. Whistleblowing within an organization raises conflicting policy considerations. Employers generally prefer internal whistleblowing because it allows them to avoid government scrutiny in responding to the information. Recent federal legislation containing whistleblower provisions tends to protect internal disclosures. See, e.g., Sarbanes Oxley Act, § 806; Affordable Care Act § 1558, p. 185. See also 17 C.F.R. § 205 (attorneys “appearing and practicing before” the SEC must disclose securities violations internally to chief legal officer and CEO, and, if unsuccessful, to the board or audit committee); ABA Model Rule 1.13 (requiring lawyers to internally report legal violations “likely to result in substantial injury to the organization”, and only authorizing external disclosures where the highest authority in the organization refuses to address the violation or insists upon a clear violation of the law). See also note on Incentive Awards Under the Dodd-Frank Wall Street & Consumer Protection Act, infra. Some courts will not protect internal disclosures only, as we saw above in the discussion of Foley. See also Wholey v. Sears Roebuck, 370 Md. 38, 803 A.2d 482 (2002) (recognizing claim in principle based on criminal statute outlawing retaliation against those reporting crimes, but protecting only reports to appropriate law enforcement authorities). By contrast, some statutory schemes require exhaustion of internal remedies. Whistleblower claims can also fail where the employee fails to follow an established mechanism for complaining or disregards the chain of command. Cf. Faragher v. City of Boca Raton, 524 U.S. 775, 118 S. Ct. 2275, 141 L. Ed. 2d 662 (1998) (recognizing an affirmative defense in Title VII cases where supervisors engage in sexual harassment not resulting in a termination or other “tangible employment action”—in part to encourage plaintiffs to minimize harm by utilizing effective internal complaint procedure). What position does the Employment Restatement take on an exhaustion requirement? 5. Relevance of Expertise of Whistleblower? Should courts make some assessment of the expertise of the employee whistleblower? Note that in Geary, the plaintiff made disclosures about matters that were within the subject matter of his job. Was Geary, a salesman, nevertheless not sufficiently “expert”? See Smith v. Calgon Carbon Corp., 917 F.2d 1338 (3d Cir. 1990) (Geary extended to internal disclosure of plant operations causing environmental hazard by employee “not charged . . . with the specific responsibility of protecting the public’s interest in health and safety”); Elizabeth Tippett, The Promise of Compelled Whistleblowing: What the Corporate Governance Provisions of Sarbanes Oxley Mean for Employment Law, 11 Employee Rights & Employment Policy J. 1 (2007) (Sarbanes Oxley places whistleblower-like duties on certain employees most likely to understand and learn of financial discrepancies). 6. Erroneous, Good-Faith Whistleblowing. Should employees be protected for erroneous, good-faith, reporting of suspected

illegality? See Employment Restatement § 5.02(a). 170 7. First Amendment Protections for Public Employees. The public employee whistleblower enjoys substantial protection under the First Amendment for disclosures on matters of public interest but not if making of such disclosures is part of the employee’s job duties. See Garcetti v. Ceballos, infra at 209, 547 U.S. 410, 128 S. Ct. 1951, 164 L. Ed. 2d 689 (2006); Lane v. Franks, 573 U.S. 228, 134 S. Ct. 2369, 189 L. Ed. 2d 312 (2014).

E. STATUTORY PROTECTIONS FOR WHISTLEBLOWERS 1. STATE LEGISLATION Some state laws provide broad protection to whistleblowers, protecting refusals to violate state laws, as well as reasonable, good-faith disclosures of legal violations. For an example of a statute affording broad protections, the California Labor Code § 1102.5 provides: (b) An employer, or any person acting on behalf of the employer, shall not retaliate against an employee for disclosing information, or because the employer believes that the employee disclosed or may disclose information, to a government or law enforcement agency, to a person with authority over the employee or another employee who has the authority to investigate, discover, or correct the violation or noncompliance, or for providing information to, or testifying before, any public body conducting an investigation, hearing, or inquiry, if the employee has reasonable cause to believe that the information discloses a violation of a state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation, regardless of whether disclosing the information is part of the employee’s job duties. (c) An employer, or any person acting on behalf of the employer, shall not retaliate against an employee for refusing to participate in an activity that would result in a violation of [a] state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation.

See also N.J. Stat. Ann. §§ 34:19–1 et seq. (West) (similarly broad); 43 Pa. Cons. Stat. §§ 1421 et seq. (protects internal disclosures, and external disclosures if first reported internally). Other states protect only disclosures made to government agencies. See, e.g., Fla. Stat. § 448.102 (protecting disclosures to government agencies if the employee has first disclosed the practice internally and provided the employer with a reasonable opportunity to address the wrongdoing); Mich. Comp. Laws §§ 15.361–15.369; Minn. Stat. § 181.932. Some state statutes define protected activity more narrowly. New York’s statute is especially narrow, applying only to disclosures of 171

wrongdoing presenting “a substantial and specific danger to public health or safety”. See Remba v. Fed’n Empl. & Guidance Serv., 76 N.Y.2d 801, 559 N.Y.S.2d 961, 559 N.E.2d 655 (1990); Vail-Ballou Press, Inc. v. Tomasky, 266 A.D.2d 662, 698 N.Y.S.2d 98 (3d Dept.1999). The New York law also contains an election-of-remedies provision foreclosing other state-law claims. See Pipas v. Syracuse Home Assn., 226 A.D.2d 1097, 641 N.Y.S.2d 768 (4th Dept. 1996). Similarly, Ohio Rev. Code Ann. § 4113.52 requires a reasonable belief “that the violation either is a criminal offense that is likely to cause an imminent risk of physical harm to persons or a hazard to public health or safety or is a felony[.]” See Brooks v. Martin Marietta Util. Serv., 166 F.3d 1213 (6th Cir. 1998) (unpublished) (employee belief of a likely criminal violation, not simply a regulatory violation, required). Most of the laws protect erroneous whistleblowing as long as the plaintiff reasonably believed illegality had occurred. Compare, e.g., 43 Pa. Cons. Stat. § 1423(a), with N.Y. Lab. Law § 740(6) (McKinney). New York’s law has been interpreted, however, to require proof of actual violations. See Bordell v. General Elect. Co., 88 N.Y.2d 869, 644 N.Y.S.2d 912, 667 N.E.2d 922 (1996). State laws protecting whistleblowing in the public sector are even more common. See, e.g. 5 Tex. Gov’t. Code Ann. § 554.001 et seq. (West), excerpted in Statutory Supplement.

2. FEDERAL LEGISLATION While state legislation tends to cover a broad swath of whistleblowing, federal legislation has a piecemeal quality. Like the anti-retaliation provisions covered in Chapter 11, federal statutes protect only whistleblowing related to violations of that

statute. Federal statutes containing whistleblower provisions also tend to define the protected forms of disclosure (e.g. internal and/or external to a specific government agency). This section provides an overview of federal statutes containing whistleblower provisions, starting with the oldest statute —the 1863 False Claims Act. In recent years, whistleblowers have come into Congressional favor, with whistleblower provisions tacked onto major legislation.

a. “Qui Tam” and Whistleblower Provisions of the False Claims Act The civil False Claims Act (FCA), 31 U.S.C. §§ 3729–31, provides a means for whistleblowers (or others) to sue employers (or their agents) who present false or fraudulent claims to the government. The suit is in the nature of a qui tam action on behalf of the government (which has the right to assume primary responsibility for the suit or, with court approval, seek its dismissal). In 1986, the civil penalty was increased to “not less than $5,000 and not more than $10,000 plus 3 times the amount of damages 172

which the government sustains because of the act of that person,” id. § 3729, of which the private plaintiff can recover 15– 25%. As part of the 1986 amendments to the FCA, Pub. L. No. 99–562, 100 Stat. 3153 (1986) Congress provided affirmative protection for a limited category of employee whistleblowers: Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter. 31 U.S.C. § 3730(h). Most often, the employee-whistleblower invokes § 3730(h) in tandem with the qui tam recovery provisions. Whistleblower protection under § 3730(h) may be limited, however, to actions taken “in furtherance of an action” under the FCA or “in furtherance of efforts to stop” a violation of the FCA. The FCA protects internal reports of government fraud, provided that they are based on a reasonable, good faith belief. McKenzie v. BellSouth Telecomms., Inc., 219 F.3d 508, 516 (6th Cir. 2000). To ultimately prove retaliation, the employee must show that the employer knew about the protected activity. Id. Whether the underlying qui tam action can be brought will depend on (i) whether the information on which the action was brought was “publicly disclos[ed] * * * in a Federal criminal, civil, or administrative hearing * * * in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation, or from news media”; and (ii) if such “public disclosure” has occurred, whether the plaintiff nevertheless was “an original source of the information.” 31 U.S.C. § 3730(e)(4)(A)–(B). But § 10104(j)(2) of the 2010 federal healthcare reform legislation expands the definition of “an original source” under § 3730(e)(4)(A) of the FCA to include “individual who either (1) prior to a public disclosure under subsection (e) (4)(A), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.” In State of Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 120 S. Ct. 1858, 146 L. Ed. 2d 836 (2000), the Supreme Court held that qui tam relators have Article III standing to bring FCA suits because the FCA in effect makes a partial assignment of the Government’s claim to the private relator. 173

Some states have passed statutes modeled after the FCA. See Cal. Gov’t Code § 10548 (West), a part of the Reporting of Improper Government Activities Act of 1986, Stats. 1986, ch. 353, §§ 4–5. See Steve Seidenberg, Joining the Feds: States Passing Whistleblower Statutes, Nat’l L.J., Jan. 13, 2003, p. A24. Example of Qui Tam Litigation In 2004, whistleblower David Franklin received $24 million as part of a settlement over a qui tam claim against Warner-Lambert (a pharmaceutical company later acquired by Pfizer). As part of the settlement, the company pled guilty to criminal charges and agreed to pay $240 million in criminal penalties, and more than $100 million in civil damages. The qui tam suit alleged that Warner-Lambert defrauded the

government by illegally promoting off-label use of the drug Neurontin. Franklin’s lawsuit alleged that Warner-Lambert “suppressed study results, planted people in medical audiences to ask questions intended to put [the drug] in a good light, lavished perks on doctors, used ghostwriters . . . and used psychological profiling of doctors” to help promote the drug. Franklin was a microbiologist that worked for a subsidiary of Warner-Lambert. Warner-Lambert settled the case after a federal district court in Massachusetts denied the company’s motion for summary judgment on Franklin’s qui tam claim. Quoted from Jeanne Lenzer, Pfizer pleads guilty, but drug sales continue to soar, 328 British Medical Journal 7450 (2004); U.S. ex rel. Franklin v. Parke-Davis, Div. of Warner-Lambert, Case No. Civ.A. 96–11651PBS (D. Mass. 2003), 2003 WL 22048255; United States Department of Justice, Warner-Lambert to Pay $430 Million to Resolve Criminal & Civil Health Care Liability Relating to Off-Label Promotion, http://www.justice.gov/archive/opa/pr/2004/May/04_civ_322.htm.

b. Federal Health and Safety Legislation Virtually every federal health and safety law contains an antiretaliation provision. See generally Eugene R. Fidell, Federal Protection of Private Sector Health and Safety Whistleblowers, 2 Admin. L.J. 1 (1988). Courts have shown some reluctance to interpret these provisions to cover whistleblowing in the absence of an express protection to that effect. For example, the federal courts of appeals are split over whether nuclear facility inspectors who file intracorporate quality control reports without contacting federal authorities are covered by a provision protecting participation “in any other action to carry out the purposes of” 174

the Energy Reorganization Act, 42 U.S.C. § 5851(a)(3). Compare Brown & Root v. Donovan, 747 F.2d 1029 (5th Cir. 1984) (not protected), with Kansas Gas & Elec. Co. v. Brock, 780 F.2d 1505 (10th Cir. 1985); Mackowiak v. University Nuclear Sys., 735 F.2d 1159 (9th Cir. 1984); Consolidated Edison v. Donovan, 673 F.2d 61 (2d Cir. 1982). Rulings holding that flight officers complaining of a discharge for refusal to fly allegedly unsafe aircraft lack protection under the Federal Aviation Act or the regulations of the Federal Aviation Administration, see Buethe v. Britt Airlines, Inc., 749 F.2d 1235 (7th Cir. 1984); Pavolini v. Bard-Air Corp., 645 F.2d 144 (2d Cir. 1981), would seem superseded by the 1999 “Whistleblower Protection Program” (WPP) amendment to the Airline Deregulation Act, 49 U.S.C. § 42121. The WPP requires the filing of a complaint with the Secretary of Labor, § 42121(b)(1), and does not appear to authorize a private right of action.

c. The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley was passed in reaction to accounting scandals that resulted in the failure of Enron, a major public company, and significant regulatory problems for other corporations. Pub. L. No. 107–204, 116 Stat. 745 (enacted July 30, 2002), codified at 18 U.S.C. §§ 1513, 1514A. The Act contains two whistleblower provisions, sections 806 and 1107. Section 806 protects individuals who report or cooperate in the investigation of conduct alleged to violate certain federal securities and antifraud laws, and provides a private civil action. Section 1107 makes it a felony to intentionally retaliate against individuals who provide a law enforcement officer with “truthful information” concerning the actual or potential commission of “any Federal offense,” id. Section 806 complaints have to be lodged initially with the U.S. Department of Labor (DOL). 1. Section 806—Civil Whistleblower Provision a. Scope. Individuals employed by any public company, or its agents, are protected against retaliation “because of any act done” to provide information or assist in an investigation “regarding any conduct which the employee reasonably believes” to violate 18 U.S.C. §§ 1341 (mail fraud), 1343 (fraud by wire, radio or television), 1344 (bank fraud), 1348 (securities fraud), or “any rule or regulation of the Securities and Exchange Commission [(SEC)], or any provision of Federal law relating to fraud against shareholders. . . .” 18 U.S.C. § 1514(a)(1). In Lawson v. FMR LLC, 571 U.S. 429, 134 S. Ct. 1158, 188 L. Ed. 2d 158 (2014), the Court held that § 806 protects from retaliation for whistleblowing activity not only employees of publicly-traded companies but also employees of private companies, like law firms or accountants or investment advisors, that contract with public companies. The information or assistance has to be provided to an investigation conducted by a federal agency, a member of Congress or any committee of Congress, or “a person with supervisory 175

authority over the employee (or such other person working for the employer who has the authority to investigate, discover,

or terminate misconduct). . . . ” This whistleblower provision does not preempt other federal or state law retaliation claims or collectively bargained rights, 18 U.S.C. § 1514(A)(d). The Act requires an objectively reasonable belief that the activity in question violated federal law. Wallace v. Andeavor Corp., 916 F.3d 423 (5th Cir.), cert. denied, 140 S. Ct. 206, 205 L. Ed. 2d 124 (2019). The Act also contains a “participation” clause, § 1514(a)(2), protecting individuals who “file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation” of the enumerated federal statutes, rules and regulations. Section 806’s structure suggests that the reasonablebelief requirement applies only to § 1514(a)(1) disclosure or assistance, not participation activity under § 1514(a)(2). b. Procedure. An employee seeking relief under § 806 must file a complaint with OSHA within 180 days of the alleged violation or 180 from the time the employee becomes aware of the violation.29 C.F.R. § 1980.103(d). OSHA shares the complaint with the SEC but handles the investigation. Parties can appeal OSHA’s findings by requesting a hearing with an administrative law judge. The ALJ determination can then be appealed to the DOL’s administrative review board. 29 C.F.R. § 1980.106. The review board’s final order is appealable to a court of appeals. If the OSHA filing does not result in a final order within 180 days, through no fault of the employee, she or he may bring a claim directly in federal district court. If such an action is brought, the plaintiff is entitled to a jury trial. Pre-dispute arbitration agreements are barred for Sarbanes-Oxley whistleblower claims. 18 U.S.C. § 1514A(e)(2). c. Remedies. An employee prevailing in a § 806 action is entitled to “make whole” relief, including reinstatement, back pay, and “compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.” 18 U.S.C. § 1514A(c). There is no express provision for compensatory or punitive damages. The Act also authorizes a provisional reinstatement remedy. See generally Samuel Estreicher & Wendy C. Butler, Preliminary Reinstatement Under Sarbanes-Oxley, N.Y.L.J., May 9, 2006, p. 3. In Bechtel v. Competitive Techs., Inc., 369 F. Supp. 2d 233 (D. Conn. 2005), vacated, 448 F.3d 469 (2d Cir. 2006), the district court enforced an ALJ order under SarbanesOxley requiring preliminary reinstatement of former vice presidents of a technology company fired after complaining about corporate fraud. The Second Circuit, however, reversed, holding that the district court lacked jurisdiction because the statute did not authorize judicial enforcement of the Secretary’s preliminary reinstatement orders. 176

2. Section 1107—Criminal Sanctions Section 1107 of the Act makes it a felony to “knowingly, with the intention to retaliate, take[ ] any action harmful to any person, including interference with lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense.” 18 U.S.C. § 1513(e). Note that the criminal provision covers disclosures of any violations of federal law, not just employee reports of securities violations or shareholder fraud.

d. Protection from Retaliation and Incentive Awards Under the Dodd-Frank Wall Street & Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, like Sarbanes-Oxley, protects whistleblowers from retaliation. Unlike Sarbanes-Oxley, a covered individual whistleblower need not file with OSHA but may proceed directly to District Court and need not file within 180 days of the alleged retaliation, as the law contains a 6-year statute of limitations. Moreover, if successful, a plaintiff may recover double back pay, attorneys’ fees and costs and interest, and is entitled to a jury trial. Dodd-Frank, however, defines “whistleblower” more narrowly than Sarbanes-Oxley as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” § 78u–6(a)(6). The following case explains the relationship between the statutes.

DIGITAL REALTY TRUST, INC. V. SOMERS Supreme Court of the United States. 583 U.S. ___, 138 S.Ct. 767, 200 L.Ed. 2d 15 (2018).

JUSTICE GINSBURG delivered the opinion of the Court. Endeavoring to root out corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002, 116 Stat. 745

(Sarbanes-Oxley), and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376 (Dodd-Frank). Both Acts shield whistleblowers from retaliation, but they differ in important respects. Most notably, Sarbanes-Oxley applies to all “employees” who report misconduct to the Securities and Exchange Commission (SEC or Commission), any other federal agency, Congress, or an internal supervisor. 18 U. S. C. § 1514A(a)(1). DoddFrank delineates a more circumscribed class; it defines “whistleblower” to mean a person who provides “information relating to a violation of the securities laws to the Commission.”15 U. S. C. § 78u–6(a)(6). A whistleblower so defined is eligible for an award if original information he or she provides to the SEC leads to a successful enforcement action. § 78u–6(b)–(g). And, most 177

relevant here, a whistleblower is protected from retaliation for, inter alia, “making disclosures that are required or protected under” Sarbanes-Oxley, the Securities Exchange Act of 1934, the criminal anti-retaliation proscription at 18 U. S. C. § 1513(e), or any other law subject to the SEC’s jurisdiction. 15 U. S. C. § 78u–6(h)(1)(A)(iii). The question presented: Does the anti-retaliation provision of Dodd-Frank extend to an individual who has not reported a violation of the securities laws to the SEC and therefore falls outside the Act’s definition of “whistleblower”? Pet. for Cert. (I). We answer that question “No”: To sue under Dodd-Frank’s anti-retaliation provision, a person must first “provid[e] . . . information relating to a violation of the securities laws to the Commission.” § 78u–6(a)(6). I A “To safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation,” Congress enacted Sarbanes-Oxley in 2002. Lawson v. FMR LLC, 571 U. S. 429, ___ (2014) (slip op., at 1). Most pertinent here, Sarbanes-Oxley created new protections for employees at risk of retaliation for reporting corporate misconduct. See 18 U. S. C. § 1514A. Section 1514A prohibits certain companies from discharging or otherwise “discriminat[ing] against an employee in the terms and conditions of employment because” the employee “provid[es] information . . . or otherwise assist[s] in an investigation regarding any conduct which the employee reasonably believes constitutes a violation” of certain criminal fraud statutes, any SEC rule or regulation, or “any provision of Federal law relating to fraud against shareholders.” § 1514A(a)(1). An employee qualifies for protection when he or she provides information or assistance either to a federal regulatory or law enforcement agency, Congress, or any “person with supervisory authority over the employee.” § 1514A(a)(1)(A)–(C).1 To recover under § 1514A, an aggrieved employee must exhaust administrative remedies by “filing a complaint with the Secretary of Labor.” § 1514A(b)(1)(A); see Lawson, 571 U. S., at ___–___ (slip op., at 5–6). Congress prescribed a 180-day limitation period for filing such a complaint. § 1514A(b)(2)(D). If the agency “does not issue a final decision within 180 days of the filing of [a] com-plaint, and the [agency’s] delay is not due to bad faith on the claimant’s part, the claimant may proceed to federal district court for de novo review.” Id., at ___ (slip op., at 6) (citing § 1514A(b)). An employee who prevails in a 178

proceeding under § 1514A is “entitled to all relief necessary to make the employee whole,” including reinstatement, backpay with interest, and any “special damages sustained as a result of the discrimination,” among such damages, litigation costs. § 1514A(c). B 1 At issue in this case is the Dodd-Frank anti-retaliation provision enacted in 2010, eight years after the enactment of Sarbanes-Oxley. Passed in the wake of the 2008 financial crisis, Dodd-Frank aimed to “promote the financial stability of the United States by improving accountability and transparency in the financial system.” 124 Stat. 1376. Dodd-Frank responded to numerous perceived short-comings in financial regulation. Among them was the SEC’s need for additional “power, assistance and money at its disposal” to regulate securities markets. S. Rep. No. 111–176, pp. 36, 37 (2010). To assist the Commission “in identifying securities law violations,” the Act established “a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC.” Id., at 38. And recognizing that “whistleblowers often face the difficult choice between telling the truth and . . . committing ‘career suicide,’ ” Congress sought to protect whistleblowers from employment discrimination. Id., at 111, 112. Dodd-Frank implemented these goals by adding a new provision to the Securities Exchange Act of 1934: 15 U.

S. C. § 78u–6. Section 78u–6 begins by defining a “whistleblower” as “any individual who provides . . . in-formation relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” § 78u–6(a)(6) (emphasis added). That definition, the statute directs, “shall apply” “[i]n this section”—i.e., throughout § 78u–6. § 78u–6(a). Section 78u–6 affords covered whistleblowers both incentives and protection. First, the section creates an award program for “whistleblowers who voluntarily provid[e] original information to the Commission that le[ads] to the successful enforcement of [a] covered judicial or administrative action.” § 78u–6(b)(1). A qualifying whistleblower is entitled to a cash award of 10 to 30 per-cent of the monetary sanctions collected in the enforcement action. See § 78u–6(b)(1)(A)–(B). Second, § 78u–6(h) prohibits an employer from discharging, harassing, or otherwise discriminating against a “whistleblower” “because of any lawful act done by the whistleblower” in three situations: first, “in providing information to the Commission in accordance with [§ 78u–6],” § 78u–6(h)(1)(A)(i); second, “in initiating, 179

testifying in, or assisting in any investigation or . . . action of the Com-mission based upon” information provided to the SEC in accordance with § 78u–6, § 78u–6(h)(1)(A)(ii); and third, “in making disclosures that are required or protected under” either Sarbanes-Oxley, the Securities Exchange Act of 1934, the criminal anti-retaliation prohibition at 18 U. S. C. § 1513(e), or “any other law, rule, or regulation subject to the jurisdiction of the Commission,” § 78u–6(h) (1)(A)(iii). Clause (iii), by cross-referencing Sarbanes-Oxley and other laws, protects disclosures made to a variety of individuals and entities in addition to the SEC. For example, the clause shields an employee’s reports of wrongdoing to an internal supervisor if the reports are independently safeguarded from retaliation under Sarbanes-Oxley. See supra, at 2–3. The recovery procedures under the anti-retaliation provisions of Dodd-Frank and Sarbanes-Oxley differ in critical respects. First, unlike Sarbanes-Oxley, which contains an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline, see 18 U. S. C. § 1514A(b)(1)(A), (2)(D), Dodd-Frank permits a whistleblower to sue a current or former employer directly in federal district court, with a default limitation period of six years, see § 78u–6(h)(1)(B)(i), (iii)(I)(aa). Second, Dodd-Frank instructs a court to award to a prevailing plaintiff double backpay with interest, see § 78u–6(h)(1)(C)(ii), while Sarbanes-Oxley limits recovery to actual backpay with interest, see 18 U. S. C. § 1514A(c)(2)(B). Like Sarbanes-Oxley, however, Dodd-Frank authorizes reinstatement and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees. Compare § 78u–6(h)(1)(C)(i), (iii), with 18 U. S. C. § 1514A(c)(2)(A), (C).4 2 Congress authorized the SEC “to issue such rules and regulations as may be necessary or appropriate to implement the provisions of [§ 78u–6] consistent with the purposes of this section.” § 78u–6(j). Pursuant to this authority, the SEC published a notice of proposed rulemaking to “Implemen[t] the Whistleblower Provisions” of Dodd-Frank. 75 Fed. Reg. 70488 (2010). Proposed Rule 21F–2(a) defined a “whistleblower,” for purposes of both the award and antiretaliation provisions of § 78u–6, as one or more individuals who “provide the Commission with in-formation relating to a potential violation of the securities laws.” Id., at 70519 (proposed 17 CFR § 240.21F–2(a)). The proposed rule, the agency noted, “tracks the statutory definition of a ‘whistleblower’ ” by requiring information reporting to the SEC itself. 75 Fed. Reg. 70489. 180

In promulgating the final Rule, however, the agency changed course. Rule 21F–2, in finished form, contains two discrete “whistleblower” definitions. See 17 CFR § 240.21F–2(a)–(b) (2017). For purposes of the award program, the Rule states that “[y]ou are a whistleblower if . . . you provide the Commission with information . . . relat[ing] to a possible violation of the Federal securities laws.” § 240.21F–2(a)(1) (emphasis added). The information must be provided to the SEC through its website or by mailing or faxing a specified form to the SEC Office of the Whistleblower. See ibid.; § 240.21F–9(a)(1)–(2). “For purposes of the anti-retaliation protections,” however, the Rule states that “[y]ou are a whistleblower if . . . [y]ou possess a reasonable belief that the information you are providing relates to a possible securities law violation” and “[y]ou provide that information in a manner described in” clauses (i) through (iii) of § 78u–6(h)(1)(A). 17 CFR § 240.21F–2(b) (1)(i)–(ii). “The anti-retaliation protections apply,” the Rule emphasizes, “whether or not you satisfy the requirements, procedures and conditions to qualify for an award.” § 240.21F–2(b)(1)(iii). An individual may therefore gain antiretaliation protection as a “whistleblower” under Rule 21F–2 without providing information to the SEC, so long as he or

she provides information in a manner shielded by one of the anti-retaliation provision’s three clauses. For example, a report to a company supervisor would qualify if the report garners protection under the Sarbanes-Oxley anti-retaliation provision.5 C Petitioner Digital Realty Trust, Inc. (Digital Realty) is a real estate investment trust that owns, acquires, and develops data centers. See Brief for Petitioner 3. Digital Realty employed respondent Paul Somers as a Vice President from 2010 to 2014. See 119 F. Supp. 3d 1088, 1092 (ND Cal. 2015). Somers alleges that Digital Realty terminated him shortly after he reported to senior management suspected securities-law violations by the company. See ibid. Although nothing impeded him from alerting the SEC prior to his termination, he did not do so. See Tr. of Oral Arg. 45. Nor did he file an administrative complaint within 180 days of his termination, rendering him ineligible for relief under SarbanesOxley. See ibid.; 18 U. S. C. § 1514A(b)(2)(D). *** II “When a statute includes an explicit definition, we must follow that definition,” even if it varies from a term’s ordinary meaning. Burgess 181

v. United States, 553 U. S. 124, 130 (2008) (internal quotation marks omitted). This principle resolves the question before us. A Our charge in this review proceeding is to determine the meaning of “whistleblower” in § 78u–6(h), Dodd-Frank’s anti-retaliation provision. The definition section of the statute supplies an unequivocal answer: A “whistleblower” is “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” § 78u–6(a)(6) (emphasis added). Leaving no doubt as to the definition’s reach, the statute instructs that the “definitio[n] shall apply” “[i]n this section,” that is, throughout § 78u–6. § 78u–6(a)(6). The whistleblower definition operates in conjunction with the three clauses of § 78u–6(h)(1)(A) to spell out the provision’s scope. The definition first describes who is eligible for protection—namely, a whistleblower who provides pertinent information “to the Commission.” § 78u–6(a)(6). The three clauses of § 78u–6(h)(1)(A) then describe what conduct, when engaged in by a whistle-blower, is shielded from employment discrimination. See § 78u–6(h)(1)(A)(i)–(iii). An individual who meets both measures may invoke Dodd-Frank’s protections. But an individual who falls outside the protected category of “whistleblowers” is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages. Reinforcing our reading, another whistleblower-protection provision in Dodd-Frank imposes no requirement that information be conveyed to a government agency. Title 10 of the statute, which created the Consumer Financial Protection Bureau (CFPB), prohibits discrimination against a “covered employee” who, among other things, “provide[s] . . . information to [his or her] employer, the Bureau, or any other State, local, or Federal, government authority or law enforcement agency relating to” a violation of a law subject to the CFPB’s jurisdiction. 12 U. S. C. § 5567(a)(1). To qualify as a “covered employee,” an individual need not provide information to the CFPB, or any other entity. See § 5567(b) (“covered employee” means “any individual performing tasks related to the offering or provision of a consumer financial product or service”). “[W]hen Congress includes particular language in one section of a statute but omits it in another[,] . . . this Court presumes that Congress intended a difference in meaning.” Loughrin v. United States, 573 U. S. ___, ___ (2014) (slip op., at 6) (internal quotation marks and alteration omitted). Congress placed a government-reporting requirement in § 78u–6(h), but not elsewhere in the same statute. Courts are not at liberty to dispense with the condition—tell the SEC—Congress imposed. 182

B Dodd-Frank’s purpose and design corroborate our comprehension of § 78u–6(h)’s reporting requirement. The “core objective” of Dodd-Frank’s robust whistleblower program, as Somers acknowledges, Tr. of Oral Arg. 45, is “to motivate people who know of securities law violations to tell the SEC,” S. Rep. No. 111–176, at 38 (emphasis added). By enlisting whistleblowers to “assist the Government [in] identify[ing] and prosecut[ing] persons who have violated

securities laws,” Congress undertook to improve SEC enforcement and facilitate the Commission’s “recover[y] [of] money for victims of financial fraud.” Id., at 110. To that end, § 78u–6 provides substantial monetary rewards to whistleblowers who furnish actionable information to the SEC. See § 78u–6(b). Financial inducements alone, Congress recognized, may be insufficient to encourage certain employees, fearful of employer retaliation, to come forward with evidence of wrongdoing. Congress therefore complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation. While Sarbanes-Oxley contains an administrative-exhaustion requirement, a 180-day administrative complaint-filing deadline, and a remedial scheme limited to actual damages, Dodd-Frank provides for immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay. See supra, at 5–6. Dodd-Frank’s award program and anti-retaliation provision thus work synchronously to motivate individuals with knowledge of illegal activity to “tell the SEC.” S. Rep. No. 111–176, at 38. When enacting Sarbanes-Oxley’s whistleblower regime, in comparison, Congress had a more far-reaching objective: It sought to disturb the “corporate code of silence” that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.” Lawson, 571 U. S., at ___ (slip op., at 4) (internal quotation marks omitted). Accordingly, the Sarbanes-Oxley anti-retaliation provision covers employees who report fraud not only to the SEC, but also to any other federal agency, Congress, or an internal supervisor. See 18 U. S. C. § 1514A(a)(1). C In sum, Dodd-Frank’s text and purpose leave no doubt that the term “whistleblower” in § 78u–6(h) carries the meaning set forth in the section’s definitional provision. The disposition of this case is therefore evident: Somers did not provide information “to the Commission” before his termination, § 78u–6(a)(6), so he did not qualify as a “whistleblower” at the time of the alleged retaliation. He is therefore ineligible to seek relief under § 78u–6(h). 183

[Eds. The concurring opinions of JUSTICE SOTOMAYOR, joined by JUSTICE BREYER, and JUSTICE THOMAS, joined by JUSTICES ALITO and GORSUCH, are omitted.]

NOTES AND QUESTIONS 1. Congress intended to protect individuals from retaliation under both statutes but used different statutory schemes. What is the rationale for using two different schemes? What problems did Dodd-Frank address that Sarbanes-Oxley did not? 2. From the viewpoint of an employee, which statutes provides greater protection? If you were advising a whistleblower choosing between the two, how would you evaluate the alternatives? Note that Dodd-Frank’s remedies are different than those provided under Sarbanes-Oxley, and include a double back pay award; the statute also authorizes a jury trial for whistleblowers. 3. The SEC’s Bounty Program. As the Court states, Dodd-Frank offers a bounty program. On May 25, 2011, by a 3–2 vote, the SEC adopted final rules under Section 21F of the Securities Exchange Act of 1934, providing for whistleblower protections and an incentive award, or bounty, program. Enacted as Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 15 U.S.C. § 784–b, Section 21F requires the SEC to pay incentive awards, or bounties, “subject to certain limitations and conditions, to whistleblowers who provide the Commission with original information about violations of the federal securities laws.” The provision also expands protection against employer retaliation for employees who provide information regarding possible violations to the SEC or make disclosures “required or protected” under the Sarbanes-Oxley Act of 2002 and other securities laws. As of February 2021, the program has paid out more than $750 million to 136 individuals. One of the most controversial aspects of the rules is the agency’s determination that whistleblowers are under no obligation to first report violations through the applicable company’s internal compliance or legal programs in order to qualify for an award. Although the rules do not require internal disclosures, they provide some incentives for whistleblowers to report their complaints internally. Specifically, whether the whistleblower reported his complaint internally before going to the SEC will be a factor in determining the size of any incentive award. Additionally, when the whistleblower first reports internally and the company submits the information to the SEC leading to a successful enforcement action, the whistleblower will be fully credited for the award. In addition, a whistleblower who first reports to the company’s internal compliance program receives the benefit of a 120-day “lookback period,” meaning that information will be considered “original” for a period up to 120 days from the time the employee reported the information to the internal compliance program. Critics of Rule 21F argue that failure to require initial internal disclosures will undermine the ability of companies to promote internal compliance programs. 184

The criteria for whistleblower-award eligibility are: (i) an individual, alone or in conjunction with others, (ii) who voluntarily provides the SEC on or after July 21, 2010, (iii) with original information of a securities law violation, (iv) that leads to successful enforcement by the SEC of a federal court or administrative action, (v) where the SEC obtains monetary sanctions in an amount greater than $1 million. This includes DOJ agreeing to a non-prosecution or deferred prosecution agreement. Whistleblowers meeting these criteria are eligible for an award of 10 to 30 percent of the monetary sanctions. A submission of information to the SEC is made “voluntarily” if the information is provided “before a request, inquiry, or demand that relates to the subject matter” of the submission is directed to the whistleblower or his representative. Legally compelled disclosures, and information covered by reporting obligations or SEC agreements are not considered voluntary. Information obtained during a company’s internal investigation or gathered by the employer in response to a government inquiry is, however, considered voluntary. The SEC illustrates the distinction as follows: “An examination request directed to a broker-dealer or an investment adviser would not automatically foreclose whistleblower submissions related to the subject matter of the exam from all employees of the entity. However, if a firm employee were interviewed by examiners, the employee could not later make a ‘voluntary’ submission related to the subject matter of the interview.” The whistleblower seeking a bounty must provide “original information,” defined as (i) “[d]erived from [the individual’s] independent knowledge” or independent analysis; (ii) “[n]ot already known” to the SEC; and (iii) “[n]ot exclusively derived from” allegations in a government hearing or investigation or from the news media. Information obtained through a communication protected by the attorney-client privilege or from legal representation of a client is not considered original, unless the attorney is permitted to make the disclosure under SEC Rule 205 pursuant to the Sarbanes-Oxley Act or applicable state attorney conduct rules. Even if the information is not secret, a whistleblower may be eligible for an award based on disclosure of information derived from his or her “independent analysis,” which can include information based upon the whistleblower’s evaluation or analysis of publicly available sources. Neither company compliance officers nor legal personnel are per se excluded from protection as whistleblowers or from eligibility for a bounty award. Admittedly, information received in the course of legal representation of the client, obtained by an employee whose principal duties involve compliance or internal audit functions, or received by employees or consultants retained to conduct an investigation into possible violations of law or to perform public accountant services is not considered “original information.” However, the SEC has carved out areas of whistleblower eligibility for lawyers who make permitted disclosures under SEC Rule 205 and employees or consultants in the following circumstances: (A) You have a reasonable basis to believe that the disclosure of the information to the Commission is necessary to prevent the relevant 185 entity from engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors; (B) You have a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct; or (C) At least 120 days have elapsed since you provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or your supervisor, or since you received the information [under circumstances where any of the foregoing were already aware of the information]. A whistleblower’s original information can lead to a successful enforcement by the SEC of a federal court or administrative action in several ways. Specifically, (i) where the information is sufficiently specific, credible, and timely to enable the Commission to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation or (ii) where the conduct was already under investigation when the information was submitted, and the original information from the whistleblower “significantly contributed” to the success of the action. The proposed rules would have required a whistleblower to demonstrate both that the information would not have been otherwise acquired and that the information was essential to the success of the action. After soliciting comments and letters on the required standard for original information, the Commissioners were ultimately “persuaded by those commenters who stated that the [essential success of the action] standards . . . were too high.”

e. The Affordable Care Act of 2010 Section 1558 of the 2010 federal healthcare reform legislation, 124 Stat. 1991, codified at 29 U.S.C. § 218c (enacted March 23, 2010), amends the Fair Labor Standards Act of 1938 (see Chapter 18) to prohibit retaliation against an employee who provides or is about to provide to an employer, the federal government, or a state attorney general, information that the employee reasonably believes to be a violation of Title I of the law. Title I contains a broad range of rules governing health insurance, including a prohibition against denying coverage based upon preexisting conditions, policy and financial reporting requirements and prohibitions against discrimination based upon an individual’s receipt of health insurance subsidies. Section

1558 extends protection to individuals who participate in investigations or object to or refuse to participate in any activity that the employee reasonably believes to be a violation of Title I. The procedures, burden of proof, and remedies applicable to this new retaliation claim are set forth in the Consumer Product Safety Improvement Act of 2008, 15 U.S.C. § 2087(b). They include (1) a 180-day statute of limitations; (2) a requirement to initially file the complaint with 186

OSHA, which will investigate the complaint and can order preliminary reinstatement; (3) the option to litigate the claim before a Department of Labor ALJ or to file an action in federal court 210 days after filing the complaint; (4) a right to a jury trial; and (5) a broad range of remedies, including reinstatement, back pay, special damages, and attorney’s fees. The causation standard and burden-shifting framework is similar to Section 806 of the Sarbanes-Oxley Act.

f. Federal Employee Whistleblowers As a result of the Civil Service Reform Act of 1978 (CSRA), 5 U.S.C. § 2301 et seq., federal employees are protected from reprisals for whistleblowing. Title I of the CSRA provides: Employees should be protected against reprisal for the lawful disclosure of information which the employees reasonably believe evidences— (A) a violation of any law, rule, or regulation, or (B) mismanagement, a gross waste of funds, an abuse of authority, or a substantial danger to public health or safety. Id. § 2301(b)(9). “[P]rohibited personnel practices” include actions taken in retaliation for whistleblowing, id. § 2302(b)(8), and those taken as a reprisal “for the exercise of any appeal right granted by any law, rule, or regulation,” id. § 2302(b)(9). Challenges to adverse personnel decisions may be brought by individual employees to the Merit Systems Protections Board (MSPB) for final administrative determination. Alternatively, in the case of nontenured employees, the Special Counsel may petition the MSPB for “corrective action” against agencies or employees engaged in prohibited personnel practices. The courts have generally held that there is no private right of action; redress must be sought either through an appeal of agency-employer action to the MSPB or through a petition for corrective action with the Special Counsel. See Borrell v. United States Int’l Commc’ns Agency, 682 F.2d 981 (D.C. Cir. 1982), disapproved on other grounds by Spagnola v. Mathis, 859 F.2d 223 (D.C. Cir. 1988). This legislation is usefully described in Robert G. Vaughn, Statutory Protection of Whistleblowers in the Federal Executive Branch, 1982 U. Ill. L. Rev. 615.

NOTE: INTERACTIONS BETWEEN STATUTORY AND COMMON LAW CLAIMS 1. Implied Federal Causes of Action. Whether a court will recognize a federal civil action for discharge in violation of federal statutory norms will turn on whether Congress has signaled an intent to create a right of action. See, e.g., Alexander v. Sandoval, 532 U.S. 275, 287, 121 S. Ct. 1511, 149 L. Ed. 2d 517 (2001). The Court’s earlier approach in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), envisioned a more receptive inquiry into 187 whether private suits would promote the purpose of the legislation. For an illustration of the shift, see, e.g., Le Vick v. Skaggs Cos., Inc., 701 F.2d 777 (9th Cir. 1983) (overruling earlier decision that private right of action exists under 15 U.S.C. § 1674(a) for discharge of an employee because his wages had been subjected to garnishment). 2. State Common Law Claims Based on Federal Statutes. To what extent may or should the public policy of a state incorporate federal concerns? Compare, e.g., Guy v. Travenol Labs., Inc., 812 F.2d 911 (4th Cir. 1987) (claim of retaliatory discharge for refusing to falsify records required by federal law; federal diversity decision holding that North Carolina has no obligation to use its tort system to supplement federal scheme); Rachford v. Evergreen Int’l Airlines, 596 F. Supp. 384 (N.D. Ill. 1984) (state has general policy in favor of aviation safety, but it has no interest in enforcing FAA regulations), with Coman v. Thomas Mfg. Co., 325 N.C. 172, 381 S.E.2d 445 (1989) (discharge allegedly for refusing to violate federal safety and recordkeeping requirements); Phipps v. Clark Oil & Refin. Corp., 408 N.W.2d 569 (Minn. 1987) (service station employee discharged for refusing to violate federal law by pumping leaded gasoline into vehicle designed for only unleaded gasoline states claim); Thompson v. St. Regis Paper Co., 102 Wash. 2d 219, 685 P.2d 1081 (1984) (accountant fired for instituting accurate accounting system in compliance with Foreign Corrupt Practices Act of 1977). Is there a danger that state courts will misconstrue complex federal regulations? Consider Green v. Ralee Engineering Co., 19 Cal. 4th 66, 78 Cal. Rptr. 2d 16, 960 P.2d 1046 (1998), where the California high court held that the Tameny “public policy” cause of action

could be based on federal safety regulations of the Federal Aviation Authority (FAA) implementing the Federal Aviation Act of 1958 (FAA), 49 U.S.C. formerly § 1301 et seq., now § 40101 et seq. Justice Chin’s opinion for the majority states: Plaintiff performed the FAA-required inspections on the parts intended for use in Boeing aircraft to further a fundamental public policy: “to ensure that each article produced conforms to the type design and is in a condition for safe operation.” (14 C.F.R. § 21.143(a).) Therefore, this regulation-based fundamental public policy may serve as the foundation for plaintiff’s Tameny claim. * * * *** * * * By informing defendant that he believed it was shipping defective parts for use in passenger aircraft, plaintiff gave defendant adequate notice that his concern involved potentially significant public policy matters because the FAA requires manufacturers to establish quality control procedures for the component parts they produce (14 C.F.R. § 21.143.) Thus, unlike some cases where an employer’s violations of its own procedures does not implicate public policy, the internal quality control procedures at issue in this case are part of a statutory and regulatory scheme established by Congress and the FAA, designed to ensure the manufacture of safe aircraft. 188 *** To the extent defendant * * * claims that the FAA regulations do not even apply to its operations because it apparently never applied for certification under the FAA provisions, its argument * * * fails at the summary judgment stage of proceedings. If plaintiff’s allegations are true, then defendant arguably misinterpreted the safety of the parts shipped to prime manufacturers such as Boeing, on which information these manufacturers would foreseeably rely for their own certification program. * * * 78 Cal. Rptr. 2d at 24–26, 28–29, 960 P.2d at 1054–56, 1058–59. Justice Baxter’s dissent charges the majority with judicial activism, noting in part: [T]he majority never explains why a parts manufacturer such as defendant should have thought to focus upon a regulation pertaining to FAA certification and oversight of prime manufacturers. Indeed, the majority apparently are unable to identify any FAA regulation applicable to parts suppliers. 78 Cal. Rptr. 2d at 34, 960 P.2d at 1064. 3. Preclusion of Common Law Remedy by Available Administrative Remedy. The courts may have been receptive to the publicpolicy cause of action in Kelsay and Tameny in part because of the absence of any retaliatory discharge remedy in the statute that gave rise to the public policy claim. Should courts recognize an additional tort remedy even where the statute provides an administrative remedy? A private cause of action? Consider the Employment Restatement § 5.01(a), which recognizes the public-policy cause of action “unless the statute or other law forming the basis of the applicable public policy precludes tort liability or otherwise makes judicial recognition of a tort claim inappropriate.” For decisions on the question of statutory preclusion, compare, e.g., Makovi v. Sherwin-Williams Co., 316 Md. 603, 561 A.2d 179 (1989) (state antidiscrimination remedy precludes wrongful termination claim based on pregnancy); Wolk v. Saks Fifth Ave., Inc., 728 F.2d 221 (3d Cir. 1984) (exclusive remedy for sexual harassment is state civil rights statute), with Mendoza v. Western Medical Center Santa Ana, 222 Cal. App. 4th 1334 (Cal. App. 4th 2014) (citing Rojo v. Kliger, 52 Cal. 3d 65, 276 Cal. Rptr. 130, 801 P.2d 373 (1990)) (statutory remedy does not bar public policy tort action for workplace sexual harassment); Collins v. Elkay Mining Co., 179 W.Va. 549, 371 S.E.2d 46, 48 (W.Va. 1988) (failure to file charge under Federal Coal Mine Safety Act or West Virginia Mine Safety Act does not bar retaliatory discharge claim by coal mine foreman for refusing to falsify company safety reports); Holien v. Sears, Roebuck and Co., 298 Or. 76, 689 P.2d 1292 (1984) (same), superseded in other part by statute, Or. Laws 2007, ch. 903, as recognized in Espinoza v. Evergreen Helicopters, Inc., 359 Or. 63, 376 P.3d 960 (2016). 189 To what extent should the question of statutory preclusion turn on whether a common law action could provide more extensive remedies than the statutory claim? See, e.g., Campbell v. Husky Hogs, 292 Kan. 225, 236, 255 P.3d 1 (2011) (state wage payment statute does not bar a public policy suit challenging retaliatory discharge for filing a wage payment claim as “the wage claim redresses a different harm. The [wage payment] suit and its statutory remedy relate to Campbell’s claim that Husky Hogs did not pay him all earned wages. But the retaliatory discharge claim would redress the employment termination.”). 4. Federal Preemption. In English v. General Electric Co., 496 U.S. 72, 110 S. Ct. 2270, 110 L. Ed. 2d 65 (1990), the Supreme Court unanimously held that a state-law intentional infliction of emotional distress claim by a laboratory technician who was allegedly terminated for reporting violations of nuclear-safety standards was not preempted by the antiretaliation provision of § 210 of the Energy

Reorganization Act of 1974 (see Statutory Supplement). Relying on the Court’s easing of federal preemption principles for state-law claims in nuclear safety disputes in Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 104 S. Ct. 615, 78 L. Ed. 2d 443 (1984) (allowing punitive damages for plutonium radiation injuries), Justice Blackmun’s opinion notes: “Ordinarily, the mere existence of a federal regulatory or enforcement scheme, even one as detailed as § 210, does not by itself imply pre-emption of state remedies.” 496 U.S. at 80, 110 S. Ct. at 2279. See also Schweiss v. Chrysler Motors Corp., 922 F.2d 473 (8th Cir. 1990) (rejecting OSHA preemption argument in light of English); Sargent v. Central Nat’l Bank & Tr. Co. of Enid, 809 P.2d 1298 (Okla. 1991) (bank officer’s claim of discharge in retaliation for refusing to destroy or alter bank records not preempted by § 24 (Fifth) of National Bank Act’s authorization of bank directors to dismiss officers “at pleasure”). Federal preemption of state whistleblower protection may be an issue in cases where Congress so intends. See, e.g., Watson v. Air Methods Corp., 870 F.3d 812 (8th Cir. 2017) (Airline Deregulation Act does not preempt Missouri state public policy whistleblower claim); Wiersum v. U.S. Bank, 785 F. 3d 483 (11th Cir. 2015) (National Bank Act preempted claim under Florida Whistleblower Act); Branche v. Airtran Airways, Inc., 342 F.3d 1248 (11th Cir. 2003) (state retaliatory discharge action held not preempted by Airline Deregulation Act, 49 U.S.C. § 41713, whose preemptive force is limited to matters relating to airline prices, routes or services; 1999 WPP amendment to the Act, 49 U.S.C. § 42121, did not expand preemptive scope of the Deregulation Act). The general issue of coordination between federal and state remedies in this area is surveyed in Trystan Phifer O’Leary, Silencing the Whistleblower: The Gap Between Federal and State Retaliatory Discharge Laws, 85 Iowa L. Rev. 663 (2000). 2 If the only evidence was that the defendants would have suffered a substantial hardship if plaintiff served this particular month [and] defendants requested only a postponement of jury service but the plaintiff nevertheless asked to serve this particular month, we probably would regard the discharge as justifiable. 6

***”

Section 2922 provides in relevant part: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.

8 Although the Petermann court did not rely upon Labor Code section 2856, that statute provides additional support for the Petermann ruling. Section 2856 declares that “[a]n employee shall substantially comply with all the directions of his employer concerning the service on which he is engaged, except where such obedience is impossible or unlawful * * * ” (Italics added.) While this statute does not specifically refer to an employer’s authority to discharge an employee, the statute does reflect direct legislative approval of the basic proposition that an employer enjoys no authority to direct an employee to engage in unlawful conduct. 2 Following his discharge Geary filed a claim for unemployment benefits with the Bureau of Employment Security. The Unemployment Compensation Board of Review found that Geary was not guilty of willful misconduct in the company’s employ, and allowed the claim. * * * 3 The company in its brief denies that the new product was withdrawn from the market as a result of Geary’s efforts, and has offered to prove that it has been marketed successfully without incident for several years. This factual contention is irrelevant at the preliminary objection stage. 9 Appellant suggests in his brief that continued sale of the defective product might have entailed both criminal and civil liability. This is mere speculation, particularly since the product was allegedly withdrawn from the market. 14 “ * * * [T]he claimant was critical of the program and objected to his superiors * * * . [He] was ordered to follow directions and agreed that he would do so even though he was still opposed to the program * * * . [He] took the problem to a vice president of the company with whom he was in close contact and as a result of re-evaluation the program was withdrawn * * * .” Findings of Fact of Unemployment Compensation Board, attached to and made a part of the amended complaint as Exhibit “A”. In pursuing this course, Geary exceeded any duty imposed on him under the rule of the Restatement (Second) of Agency § 381: Duty to Give Information, cited in the dissenting opinion. We do not conceive that § 381 bears any relation to the case before us. 15 We see no basis for inferring that Geary’s discharge was a spiteful retaliatory gesture designed to punish him for noticing and calling attention to the asserted defect in the company’s product. This is particularly true in view of the fact that the product was withdrawn from the market. It does not follow that, because Geary’s motives were good, the company’s motives in discharging him were bad. In scrutinizing the complaint we are not required to put aside our common sense or attribute to parties a perversity which the facts alleged do not warrant. 1

Sarbanes-Oxley also prohibits retaliation against an “employee” who “file[s], . . . testif[ies], participate[s] in, or otherwise assist[s] in a proceeding filed or about to be filed . . . relating to an alleged violation of” the same provisions of federal law addressed in 18 U. S. C. § 1514A(a)(1). See § 1514A(a)(2). 4 Unlike Dodd-Frank, Sarbanes-Oxley explicitly entitles a prevailing employee to “all relief necessary to make the employee whole,” including “compensation for any special damages sustained as a result of the discrimination.” 18 U. S. C. § 1514A(c)(1), (2)(C). 5 In 2015, the SEC issued an interpretive rule reiterating that anti-retaliation protection is not contingent on a whistleblower’s provision of information to the Commission. See 80 Fed. Reg. 47829 (2015).

191

CHAPTER 5 FIRST AMENDMENT PROTECTION OF GOVERNMENT EMPLOYEE EXPRESSION AND ASSOCIATION ■■■

Introduction In addition to civil service laws and collective bargaining agreements, government employees enjoy an additional source of protection in the First Amendment’s guarantee of freedom of speech and assembly. Two dominant approaches help explain the reach of the First Amendment. The first posits that the primary purpose of the First Amendment is the protection of the preconditions for public debate. As originally formulated, this justification was thought limited to those matters of government and public affairs directly relevant to an informed citizenry intelligently exercising its franchise. See, e.g., Alexander Meikeljohn, Free Speech and Its Relation to Self-Government (1948). In time, the range of topics has been expanded to include “expression about philosophical, social, artistic, economic, literary, or ethical matters,” Abood v. Detroit Bd. of Educ., 431 U.S. 209, 231, 97 S.Ct. 1782, 1797, 52 L.Ed.2d 261 (1977), and indeed any matter of general interest. Under this view, the First Amendment values unrestrained debate for an instrumental reason: it is more likely to yield an enlightened public. In Justice Holmes’s famous formulation, the First Amendment assures a “marketplace of ideas” in which competing conceptions of the good are ventilated for citizens to digest, appraise and possibly act upon. Government’s role in this marketplace should be one of neutrality between competing viewpoints. A rival conception of the First Amendment holds that human expressive activity is valued not merely because it may contribute to enlightenment on political, or even more personal, questions, but also because such activity, like religious activity for many, may have intrinsic value. It may contribute to a sense of personal autonomy or to the full development of the human potential. This formulation of the purpose of the constitutional guarantee argues for even broader restrictions on personnel decisions, because it does not require that the communication make any contribution to public debate or enlightenment. 192

HISTORICAL NOTE The courts did not employ the First Amendment to impose restrictions on public employers’ personnel decisions until the 1950s. During the 1800s and the first half of the 1900s, the view prevailed that a citizen “may have a constitutional right to talk politics, but he has no constitutional right to be a policeman.” McAuliffe v. Mayor of New Bedford, 155 Mass. 216, 220, 29 N.E. 517 (1892) (Holmes, J.). This position made the First Amendment largely irrelevant as a legal limitation on the decisions of public employers, and it corresponded to the prevailing doctrine of employment “at will” that governed the decisions of their private counterparts (see Chapter 2). The Supreme Court adhered to this view as late as 1952. See Adler v. Board of Educ., 342 U.S. 485, 72 S.Ct. 380, 96 L.Ed. 517 (1952) (upholding a New York law barring from public school employment anyone who advocated the violent overthrow of the government or belonged to an organization found to advocate or teach such an overthrow). However, in the same year that Adler was decided, the Court began eroding the absolute position suggested by Holmes’s formulation. In Wieman v. Updegraff, 344 U.S. 183, 73 S.Ct. 215, 97 L.Ed. 216 (1952), it struck down on due process grounds an oath requiring public employees to affirm the absence of past affiliation with the Communist Party irrespective of whether the employee had knowledge of any unlawful or subversive activity by that organization. The erosion of the Holmes dictum continued apace in the 1960s. For instance, in Shelton v. Tucker, 364 U.S. 479, 81 S.Ct. 247, 5 L.Ed.2d 231 (1960), the Court invalidated as an impairment of First Amendment-protected associational rights an Arkansas statute that required public school teachers to make an annual disclosure of their organizational affiliations. Perhaps most importantly, in a series of cases invalidating state government loyalty oaths, the Court in the sixties elaborated on the implications of Wieman to expand the protection of public employees. See Cramp v. Board of Pub. Instruc., 368 U.S. 278, 82 S.Ct. 275, 7 L.Ed.2d 285 (1961); Baggett v. Bullitt, 377 U.S. 360, 84 S.Ct. 1316, 12 L.Ed.2d 377 (1964); Elfbrandt v. Russell, 384 U.S. 11, 86 S.Ct.

1238, 16 L.Ed.2d 321 (1966); Keyishian v. Board of Regents, 385 U.S. 589, 87 S.Ct. 675, 17 L.Ed.2d 629 (1967). These cases found oaths to threaten First Amendment-protected activity because they were excessively vague. Keyishian was the culminating decision. Not only did it reject the New York law originally upheld in Adler, but it also expressly repudiated the “major premise” of that opinion—“that public employment, including academic employment, may be conditioned upon the surrender of constitutional rights which could not be abridged by direct government action.” Id. at 605, 87 S.Ct. at 681. The repudiation of Holmes’s premise that public employment is a privilege that can be denied for any reason, forced the Court to confront more directly the extent to which the First Amendment should restrict public employers. What kinds of employee speech, or other expressive activity, should receive protection from adverse personnel decisions? What kinds of governmental 193 justifications should be adequate to warrant the inhibition of public-employee speech?

A. FREEDOM OF SPEECH AND PUBLIC EMPLOYMENT PICKERING V. BOARD OF EDUCATION Supreme Court of the United States, 1968. 391 U.S. 563, 88 S.Ct. 1731, 20 L.Ed.2d 811.

JUSTICE MARSHALL delivered the opinion of the Court. Appellant Marvin L. Pickering, a teacher in Township High School District 205, Will County, Illinois, was dismissed from his position by the appellee Board of Education for sending a letter to a local newspaper in connection with a recently proposed tax increase that was critical of the way in which the Board and the district superintendent of schools had handled past proposals to raise new revenue for the schools. *** In February of 1961 the appellee Board of Education asked the voters of the school district to approve a bond issue to raise $4,875,000 to erect two new schools. The proposal was defeated. Then, in December of 1961, the Board submitted another bond proposal to the voters which called for the raising of $5,500,000 to build two new schools. This second proposal passed and the schools were built with the money raised by the bond sales. In May of 1964 a proposed increase in the tax rate to be used for educational purposes was submitted to the voters by the Board and was defeated. Finally, on September 19, 1964, a second proposal to increase the tax rate was submitted by the Board and was likewise defeated. It was in connection with this last proposal of the School Board that appellant wrote the letter to the editor that resulted in his dismissal. *** The letter constituted, basically, an attack on the School Board’s handling of the 1961 bond issue proposals and its subsequent allocation of financial resources between the schools’ educational and athletic programs. It also charged the superintendent of schools with attempting to prevent teachers in the district from opposing or criticizing the proposed bond issue. The Board dismissed Pickering for writing and publishing the letter. Pursuant to Illinois law, the Board was then required to hold a hearing on the dismissal. At the hearing the Board charged that numerous statements in the letter were false and that the publication of the statements unjustifiably impugned the “motives, honesty, integrity, truthfulness, responsibility and competence” of both the Board and the school administration. The Board also charged that the false statements damaged 194

the professional reputations of its members and of the school administrators, would be disruptive of faculty discipline, and would tend to foment “controversy, conflict and dissension” among teachers, administrators, the Board of Education, and the residents of the district. * * * The Board found the statements to be false as charged. No evidence was introduced at any point in the proceedings as to the effect of the publication of the letter on the community as a whole or on the administration of the school system in particular, and no specific findings along these lines were made. *** The Board contends that “the teacher by virtue of his public employment has a duty of loyalty to support his superiors in attaining the generally accepted goals of education and that, if he must speak out publicly, he should do so factually and accurately, commensurate with his education and experience.” Appellant, on the other hand, argues that the test applicable to defamatory statements directed against public officials by persons having no occupational relationship with them, namely, that

statements to be legally actionable must be made “with knowledge that [they were] * * * false or with reckless disregard of whether [they were] * * * false or not,” New York Times Co. v. Sullivan, 376 U.S. 254, 280, 84 S.Ct. 710, 726, 11 L.Ed.2d 686 (1964), should also be applied to public statements made by teachers. * * * An examination of the statements in appellant’s letter objected to by the Board reveals that they, like the letter as a whole, consist essentially of criticism of the Board’s allocation of school funds between educational and athletic programs, and of both the Board’s and the superintendent’s methods of informing, or preventing the informing of, the district’s taxpayers of the real reasons why additional tax revenues were being sought for the schools. The statements are in no way directed towards any person with whom appellant would normally be in contact in the course of his daily work as a teacher. Thus no question of maintaining either discipline by immediate superiors or harmony among coworkers is presented here. Appellant’s employment relationships with the Board and, to a somewhat lesser extent, with the superintendent are not the kind of close working relationships for which it can persuasively be claimed that personal loyalty and confidence are necessary to their proper functioning. Accordingly, to the extent that the Board’s position here can be taken to suggest that even comments on matters of public concern that are substantially correct * * * may furnish grounds for dismissal if they are sufficiently critical in tone, we unequivocally reject it.3 195

We next consider the statements in appellant’s letter which we agree to be false. The Board’s original charges included allegations that the publication of the letter damaged the professional reputations of the Board and the superintendent and would foment controversy and conflict among the Board, teachers, administrators, and the residents of the district. However, no evidence to support these allegations was introduced at the hearing. So far as the record reveals, Pickering’s letter was greeted by everyone but its main target, the Board, with massive apathy and total disbelief. The Board must, therefore, have decided, perhaps by analogy with the law of libel, that the statements were per se harmful to the operation of the schools. However, the only way in which the Board could conclude, absent any evidence of the actual effect of the letter, that the statements contained therein were per se detrimental to the interest of the schools was to equate the Board members’ own interests with that of the schools. Certainly an accusation that too much money is being spent on athletics by the administrators of the school system (which is precisely the import of that portion of appellant’s letter containing the statements that we have found to be false) cannot reasonably be regarded as per se detrimental to the district’s schools. Such an accusation reflects rather a difference of opinion between Pickering and the Board as to the preferable manner of operating the school system, a difference of opinion that clearly concerns an issue of general public interest. In addition, the fact that particular illustrations of the Board’s claimed undesirable emphasis on athletic programs are false would not normally have any necessary impact on the actual operation of the schools, beyond its tendency to anger the Board. For example, Pickering’s letter was written after the defeat at the polls of the second proposed tax increase. It could, therefore, have had no effect on the ability of the school district to raise necessary revenue, since there was no showing that there was any proposal to increase taxes pending when the letter was written. More importantly, the question whether a school system requires additional funds is a matter of legitimate public concern on which the judgment of the school administration, including the School Board, cannot, in a society that leaves such questions to popular vote, be taken as conclusive. On such a question free and open debate is vital to informed decision-making by the electorate. Teachers are, as a class, the members of a community most likely to have informed and definite opinions as to how funds allotted to the operation of the schools should be spent. Accordingly, it is essential that they be able to speak out freely on such questions without fear of retaliatory dismissal. 196

In addition, the amounts expended on athletics which Pickering reported erroneously were matters of public record on which his position as a teacher in the district did not qualify him to speak with any greater authority than any other taxpayer. The Board could easily have rebutted appellant’s errors by publishing the accurate figures itself, either via a letter to the same newspaper or otherwise. We are thus not presented with a situation in which a teacher has carelessly made false statements about matters so closely related to the day-to-day operations of the schools that any harmful impact on the public would be difficult to counter because of the teacher’s presumed greater access to the real facts. Accordingly, we have no occasion to consider at this time whether under such circumstances a school board could reasonably require that a teacher make substantial efforts to verify the accuracy of his charges before publishing them.4 What we do have before us is a case in which a teacher has made erroneous public statements upon issues then currently the subject of public attention, which are critical of his ultimate employer but which are neither shown nor can be presumed to have in any way either impeded the teacher’s proper performance of his daily duties in the classroom5 or to have interfered with

the regular operation of the schools generally. In these circumstances we conclude that the interest of the school administration in limiting teachers’ opportunities to contribute to public debate is not significantly greater than its interest in limiting a similar contribution by any member of the general public. *** While criminal sanctions and damage awards have a somewhat different impact on the exercise of the right to freedom of speech from dismissal from employment, it is apparent that the threat of dismissal from public employment is nonetheless a potent means of inhibiting speech. * * * [I]n a case such as the present one, in which the fact of employment is only tangentially and insubstantially involved in the subject matter of the public communication made by a teacher, we conclude that it is necessary to regard the teacher as the member of the general public he seeks to be.6 197

GIVHAN V. WESTERN LINE CONSOLIDATED SCHOOL DISTRICT Supreme Court of the United States, 1979. 439 U.S. 410, 99 S.Ct. 693, 58 L.Ed.2d 619.

MR. JUSTICE REHNQUIST delivered the opinion of the Court. Petitioner Bessie Givhan was dismissed from her employment as a junior high English teacher at the end of the 1970–1971 school year. * * * In an effort to show that its decision was justified, respondent School District introduced evidence of, among other things, a series of private encounters between petitioner and the school principal in which petitioner allegedly made “petty and unreasonable demands” in a manner variously described by the principal as “insulting,” “hostile,” “loud,” and “arrogant.” After a two-day bench trial, the District Court held that petitioner’s termination had violated the First Amendment. Finding that petitioner had made “demands” on but two occasions and that those demands “were neither ‘petty’ nor ‘unreasonable,’ insomuch as all the complaints in question involved employment policies and practices at [the] school which [petitioner] conceived to be racially discriminatory in purpose or effect,” the District Court concluded that “the primary reason for the school district’s failure to renew [petitioner’s] contract was her criticism of the policies and practices of the school district, especially the school to which she was assigned to teach.” * * * Although it found the District Court’s findings not clearly erroneous, the Court of Appeals concluded that because petitioner had privately expressed her complaints and opinions to the principal, her expression was not protected under the First Amendment. * * * We are unable to agree that private expression of one’s views is beyond constitutional protection, and therefore reverse the Court of Appeals’ judgment and remand the case so that it may consider the contentions of the parties freed from this erroneous view of the First Amendment.4

NOTES AND QUESTIONS 1. Does the Court in Pickering engage in a multifactor balancing test? What factors were taken into account in determining that Pickering’s speech could not be the basis for his dismissal? How was each factor relevant? Is there some underlying principle? 198 2. Time, Place and Manner. Consider also the factor added in footnote 4 in the Givhan opinion. Why does the Court suggest that time, place, and manner of the expression are relevant to determining the protection of nonpublic, internal expressions of views? Are comments critical of a superior at general employee meetings more or less likely to be protected than comments in private, individual conferences with the superior? 3. Underlying Theory? Has the Court in Givhan adopted the personal autonomy, noninstrumental view of the First Amendment? Or is the decision better understood as holding that although speech must contribute to public debate, the relevant “public” may be the employer and coworkers in the restricted internal “polity” of the workplace? 4. Relevance of Truth or Falsity. Does the Pickering Court place sufficient weight on whether Pickering’s accusations were true or false? On the one hand, given New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964), which permits libel suits to proceed against speakers uttering knowing or intentionally false statements about public officials or public figures, is there any reason why such statements when uttered by public employees about their employer should ever receive the special protection of the Constitution? Justice White argued not, in a separate opinion in Pickering (not included above). Cf. also Johnson v. Multnomah County, Oregon, 48 F.3d 420, 423–24 (9th Cir.1995) (holding that even “recklessly false statements are not per se unprotected”, but noting split in circuits on issue.) 5. Can the Government Regulate Truthful Speech Without a Showing of Harm? Does the government have to show some harm that

derives from the manner of the speech, rather than its content? Harm to the “clients” of the government services being challenged, rather than on general public opinion? See generally Craig v. Rich Twp. High Sch. Dist. 227, 736 F.3d 1110, 1120 (7th Cir. 2013) (school had a sufficiently compelling interest in maintaining the integrity of its guidance program to discharge a guidance counselor who published a sexually-charged book on relationship advice); Andersen v. McCotter, 100 F.3d 723, 728 (10th Cir.1996) (government must show actual undermining of public confidence); Jefferson v. Ambroz, 90 F.3d 1291, 1297 (7th Cir.1996) (government could discharge probation officer for calling talk show and criticizing criminal justice system, in part because of effect on officer’s probationers’ confidence in system). 6. Threats to Working Relationships. The Court stresses that Pickering’s statements were not “directed towards any person with whom [he] would normally be in contact in the course of his daily work as a teacher.” Cases where an employee breaches a duty of confidentiality or publicly criticizes a superior for whom he or she serves as a close personal assistant seem easily distinguishable. But should all employee criticism of immediate superiors or coworkers be unprotected? Should a public employer at least be required to wait until the impairment of a working relationship harms its operations before disciplining an employee for making such statements? Compare Tyler v. City of Mountain Home, Arkansas, 72 F.3d 568 (8th Cir.1995) (no showing of harm required where police officer wrote an “argumentative” letter that 199 disregarded chain of command), with Voigt v. Savell, 70 F.3d 1552, 1560 (9th Cir.1995) (employee affidavits about the disruptive effect of plaintiff’s complaints on office harmony sufficient to establish harm under Pickering standard). 7. Prospective Prohibitions of Expressive Activity. In United States v. National Treasury Employees Union, 513 U.S. 454, 115 S.Ct. 1003, 130 L.Ed.2d 964 (1995), the Court applied the Pickering analysis to strike down a law that prohibited federal employees from accepting any compensation, including honoraria and traveling expenses, for making speeches or writing articles having nothing to do with their official duties. The Court held that the government’s burden under Pickering was especially “heavy” because the challenged ban applied prospectively to a broad range of speech, rather than just to that of particular individual employees, and that the “speculative benefits” of the ban were not sufficient “to justify this crudely crafted burden” on the speech of federal workers. Id. at 477. 8. Limited Protection for Policymaking Employees? Does Pickering apply to public officials in a policymaking position? Should elected public officials be able to demand unqualified loyalty from those with significant delegated policymaking authority? See, e.g., Bardzik v. Cnty. of Orange, 635 F.3d 1138, 1151 (9th Cir. 2011) (“plaintiff’s status as policymaker is dispositive” even though he accused superior of corruption); Silberstein v. City of Dayton, 440 F.3d 306 (6th Cir. 2006) (when employee is in policymaking position, there is a “presumption” that balance favors the government); Bonds v. Milwaukee County, 207 F.3d 969, 981 (7th Cir.2000) (policymaking exception does not apply to nonpolitical speech, but “policymaking status remains critical factor” in balance); McEvoy v. Spencer, 124 F.3d 92, 103 (2d Cir.1997) (“an employee’s policymaking role does not provide an employer with complete insulation for adverse employment action, but does weigh, normally heavily, on the employer’s side in the Pickering balance”). 9. Remedies for First Amendment Violations. In Bush v. Lucas, 462 U.S. 367, 103 S.Ct. 2404, 76 L.Ed.2d 648 (1983), the Court held that it would not create a damages remedy for nonprobationary federal employees in the civil service who are subjected to an adverse personnel action on account of protected First Amendment activity. The Court explained that the comprehensive civil service system established by Congress made it unnecessary to recognize an implied cause of action for the violation of First Amendment rights. 200

CONNICK V. MYERS Supreme Court of the United States, 1983. 461 U.S. 138, 103 S.Ct. 1684, 75 L.Ed.2d 708. JUSTICE WHITE delivered the opinion of the Court. I The respondent, Sheila Myers, was employed as an Assistant District Attorney in New Orleans for five and a half years. She served at the pleasure of petitioner Harry Connick, the District Attorney for Orleans Parish. During this period Myers competently performed her responsibilities of trying criminal cases. In the early part of October 1980, Myers was informed that she would be transferred to prosecute cases in a different section of the criminal court. Myers was strongly opposed to the proposed transfer1 and expressed her view to several of her supervisors, including Connick. Despite her objections, on October 6 Myers was notified that she was being transferred. Myers again spoke with Dennis Waldron, one of the First Assistant District Attorneys, expressing her reluctance to accept the transfer. A number of other office matters were discussed and Myers later testified that, in response to Waldron’s suggestion that her

concerns were not shared by others in the office, she informed him that she would do some research on the matter. That night Myers prepared a questionnaire soliciting the views of her fellow staff members concerning office transfer policy, office morale, the need for a grievance committee, the level of confidence in supervisors, and whether employees felt pressured to work in political campaigns. Early the following morning, Myers typed and copied the questionnaire. She also met with Connick who urged her to accept the transfer. She said she would “consider” it. Connick then left the office. Myers then distributed the questionnaire to 15 Assistant District Attorneys. Shortly after noon, Dennis Waldron learned that Myers was distributing the survey. He immediately phoned Connick and informed him that Myers was creating a “mini-insurrection” within the office. Connick returned to the office and told Myers that she was being terminated because of her refusal to accept the transfer. She was also told that her distribution of the questionnaire was considered an act of insubordination. *** 201

Myers filed suit under 42 U.S.C. § 1983 (1976 ed., Supp. V), contending that her employment was wrongfully terminated because she had exercised her constitutionally protected right of free speech. *** II * * * Our task, as we defined it in Pickering, is to seek “a balance between the interests of the [employee], as a citizen, in commenting upon matters of public concern and the interest of the State, as an employer, in promoting the efficiency of the public services it performs through its employees.” 391 U.S., at 568, 88 S.Ct., at 1734. The District Court, and thus the Court of Appeals as well, misapplied our decision in Pickering and consequently, in our view, erred in striking the balance for respondent. *** The District Court got off on the wrong foot in this case by initially finding that, “[t]aken as a whole, the issues presented in the questionnaire relate to the effective functioning of the District Attorney’s Office and are matters of public importance and concern.” Connick contends at the outset that no balancing of interests is required in this case because Myers’ questionnaire concerned only internal office matters and that such speech is not upon a matter of “public concern,” as the term was used in Pickering. Although we do not agree that Myers’ communication in this case was wholly without First Amendment protection, there is much force to Connick’s submission. The repeated emphasis in Pickering on the right of a public employee “as a citizen, in commenting upon matters of public concern,” was not accidental. This language, reiterated in all of Pickering’s progeny, reflects both the historical evolvement [sic] of the rights of public employees, and the common-sense realization that government offices could not function if every employment decision became a constitutional matter. *** In all of these cases, the precedents in which Pickering is rooted, the invalidated statutes and actions sought to suppress the rights of public employees to participate in public affairs. The issue was whether government employees could be prevented or “chilled” by the fear of discharge from joining political parties and other associations that certain public officials might find “subversive.” The explanation for the Constitution’s special concern with threats to the right of citizens to participate in political affairs is no mystery. The First Amendment “was fashioned to assure unfettered interchange of ideas for the bringing about of political and social changes desired by the people.” Roth v. United States, 354 U.S. 476, 484, 77 S.Ct. 1304, 1308, 1 L.Ed.2d 1498 (1957); New York Times Co. v. Sullivan, 376 U.S. 254, 269, 84 S.Ct. 710, 720, 11 L.Ed.2d 686 202

(1964). “[S]peech concerning public affairs is more than self-expression; it is the essence of self-government.” Garrison v. Louisiana, 379 U.S. 64, 74–75, 85 S.Ct. 209, 215–216, 13 L.Ed.2d 125 (1964). Accordingly, the Court has frequently reaffirmed that speech on public issues occupies the “ ‘highest rung of the hierarchy of First Amendment values,’ ” and is entitled to special protection. *** Pickering, its antecedents, and its progeny lead us to conclude that if Myers’ questionnaire cannot be fairly characterized as constituting speech on a matter of public concern, it is unnecessary for us to scrutinize the reasons for her discharge. When employee expression cannot be fairly considered as relating to any matter of political, social, or other concern to the community, government officials should enjoy wide latitude in managing their offices, without intrusive oversight by the judiciary in the name of the First Amendment.

*** We do not suggest, however, that Myers’ speech, even if not touching upon a matter of public concern, is totally beyond the protection of the First Amendment. “[T]he First Amendment does not protect speech and assembly only to the extent it can be characterized as political. ‘Great secular causes, with smaller ones, are guarded.’ ” Mine Workers v. Illinois Bar Assn., 389 U.S. 217, 223, 88 S.Ct. 353, 356, 19 L.Ed.2d 426 (1967), quoting Thomas v. Collins, 323 U.S. 516, 531, 65 S.Ct. 315, 323, 89 L.Ed. 430 (1945). We in no sense suggest that speech on private matters falls into one of the narrow and well-defined classes of expression which carries so little social value, such as obscenity, that the State can prohibit and punish such expression by all persons in its jurisdiction. See Chaplinsky v. New Hampshire, 315 U.S. 568, 62 S.Ct. 766, 86 L.Ed. 1031 (1942); Roth v. United States, supra; New York v. Ferber, 458 U.S. 747, 102 S.Ct. 3348, 73 L.Ed.2d 1113 (1982). For example, an employee’s false criticism of his employer on grounds not of public concern may be cause for his discharge but would be entitled to the same protection in a libel action accorded an identical statement made by a man on the street. We hold only that when a public employee speaks not as a citizen upon matters of public concern, but instead as an employee upon matters only of personal interest, absent the most unusual circumstances, a federal court is not the appropriate forum in which to review the wisdom of a personnel decision taken by a public agency allegedly in reaction to the employee’s behavior. Our responsibility is to ensure that citizens are not deprived of fundamental rights by virtue of working for the government; this does not require a grant of immunity for employee grievances not afforded by the First Amendment to those who do not work for the State. 203

Whether an employee’s speech addresses a matter of public concern must be determined by the content, form, and context of a given statement, as revealed by the whole record. In this case, with but one exception, the questions posed by Myers to her co-workers do not fall under the rubric of matters of “public concern.” We view the questions pertaining to the confidence and trust that Myers’ co-workers possess in various supervisors, the level of office morale, and the need for a grievance committee as mere extensions of Myers’ dispute over her transfer to another section of the criminal court. Unlike the dissent, we do not believe these questions are of public import in evaluating the performance of the District Attorney as an elected official. Myers did not seek to inform the public that the District Attorney’s Office was not discharging its governmental responsibilities in the investigation and prosecution of criminal cases. Nor did Myers seek to bring to light actual or potential wrongdoing or breach of public trust on the part of Connick and others. Indeed, the questionnaire, if released to the public, would convey no information at all other than the fact that a single employee is upset with the status quo. While discipline and morale in the workplace are related to an agency’s efficient performance of its duties, the focus of Myers’ questions is not to evaluate the performance of the office but rather to gather ammunition for another round of controversy with her superiors. These questions reflect one employee’s dissatisfaction with a transfer and an attempt to turn that displeasure into a cause celebre.8 To presume that all matters which transpire within a government office are of public concern would mean that virtually every remark—and certainly every criticism directed at a public official—would plant the seed of a constitutional case. While as a matter of good judgment, public officials should be receptive to constructive criticism offered by their employees, the First Amendment does not require a public office to be run as a roundtable for employee complaints over internal office affairs. One question in Myers’ questionnaire, however, does touch upon a matter of public concern. Question 11 inquires if assistant district attorneys “ever feel pressured to work in political campaigns on behalf of office supported candidates.” We have recently noted that official pressure upon employees to work for political candidates not of the worker’s own choice constitutes a coercion of belief in violation of fundamental constitutional rights. Branti v. Finkel, 445 U.S. [507,] 515–516, 100 S.Ct. [1287 (1980)]; Elrod v. Burns, 427 U.S. 347, 96 S.Ct. 2673, 49 L.Ed.2d 547 (1976). In addition, there is a demonstrated interest in this country that government service should depend upon meritorious performance rather than political service. CSC v. Letter Carriers, 413 U.S. 548, 93 S.Ct. 2880, 37 L.Ed.2d 796 (1973); Public Workers v. Mitchell, 330 U.S. 75, 67 S.Ct. 204

556, 91 L.Ed. 754 (1947). Given this history, we believe it apparent that the issue of whether assistant district attorneys are pressured to work in political campaigns is a matter of interest to the community upon which it is essential that public employees be able to speak out freely without fear of retaliatory dismissal. Because one of the questions in Myers’ survey touched upon a matter of public concern and contributed to her discharge, we must determine whether Connick was justified in discharging Myers. *** The Pickering balance requires full consideration of the government’s interest in the effective and efficient fulfillment of its responsibilities to the public.

*** We agree with the District Court that there is no demonstration here that the questionnaire impeded Myers’ ability to perform her responsibilities. The District Court was also correct to recognize that “it is important to the efficient and successful operation of the District Attorney’s office for Assistants to maintain close working relationships with their superiors.” Connick’s judgment, and apparently also that of his first assistant Dennis Waldron, who characterized Myers’ actions as causing a “miniinsurrection,” was that Myers’ questionnaire was an act of insubordination which interfered with working relationships.11 When close working relationships are essential to fulfilling public responsibilities, a wide degree of deference to the employer’s judgment is appropriate. Furthermore, we do not see the necessity for an employer to allow events to unfold to the extent that the disruption of the office and the destruction of working relationships is manifest before taking action. We caution that a stronger showing may be necessary if the employee’s speech more substantially involved matters of public concern. * * * Questions, no less than forcefully stated opinions and facts, carry messages and it requires no unusual insight to conclude that the purpose, if not the likely result, of the questionnaire is to seek to precipitate a vote of no confidence in Connick and his supervisors. Thus, Question 10, which asked whether or not the Assistants had confidence in and relied on the word of five named supervisors, is a statement that carries the clear potential for undermining office relations. 205

Also relevant is the manner, time, and place in which the questionnaire was distributed. * * * Here the questionnaire was prepared and distributed at the office; the manner of distribution required not only Myers to leave her work but others to do the same in order that the questionnaire be completed.13 Although some latitude * * * is to be allowed when professional employees are involved, and Myers did not violate announced office policy, the fact that Myers, unlike Pickering, exercised her rights to speech at the office supports Connick’s fears that the functioning of his office was endangered. Finally, the context in which the dispute arose is also significant. This is not a case where an employee, out of purely academic interest, circulated a questionnaire so as to obtain useful research. Myers acknowledges that it is no coincidence that the questionnaire followed upon the heels of the transfer notice. When employee speech concerning office policy arises from an employment dispute concerning the very application of that policy to the speaker, additional weight must be given to the supervisor’s view that the employee has threatened the authority of the employer to run the office. Although we accept the District Court’s factual finding that Myers’ reluctance to accede to the transfer order was not a sufficient cause in itself for her dismissal, and thus does not constitute a sufficient defense under Mt. Healthy City Board of Ed. v. Doyle, 429 U.S. 274, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977), this does not render irrelevant the fact that the questionnaire emerged after a persistent dispute between Myers and Connick and his deputies over office transfer policy. III Myers’ questionnaire touched upon matters of public concern in only a most limited sense; her survey, in our view, is most accurately characterized as an employee grievance concerning internal office policy. The limited First Amendment interest involved here does not require that Connick tolerate action which he reasonably believed would disrupt the office, undermine his authority, and destroy close working relationships. Myers’ discharge therefore did not offend the First Amendment. JUSTICE BRENNAN, with whom JUSTICE MARSHALL, JUSTICE BLACKMUN, and JUSTICE STEVENS join, dissenting. The Court seeks to distinguish Givhan on the ground that speech protesting racial discrimination is “inherently of public concern.” In so doing, it suggests that there are two classes of speech of public concern: statements “of public import” because of their content, form, and context, and statements that, by virtue of their subject matter, are “inherently of 206

public concern.” In my view, however, whether a particular statement by a public employee is addressed to a subject of public concern does not depend on where it was said or why. The First Amendment affords special protection to speech that may inform public debate about how our society is to be governed—regardless of whether it actually becomes the subject of a public controversy. * * * I would hold that Myers’ questionnaire addressed matters of public concern because it discussed subjects that could reasonably be expected to be of interest to persons seeking to develop informed opinions about the manner in which the Orleans Parish District Attorney, an elected official charged with managing a vital governmental agency, discharges his responsibilities. *** The Court’s adoption of a far narrower conception of what subjects are of public concern seems prompted by its fears that a broader view “would mean that virtually every remark—and certainly every criticism directed at a public official—would

plant the seed of a constitutional case.” Obviously, not every remark directed at a public official by a public employee is protected by the First Amendment.3 But deciding whether a particular matter is of public concern is an inquiry that, by its very nature, is a sensitive one for judges charged with interpreting a constitutional provision intended to put “the decision as to what views shall be voiced largely into the hands of each of us.” Cohen v. California, 403 U.S. 15, 24, 91 S.Ct. 1780, 1788, 29 L.Ed.2d 284 (1971).

NOTE: RANKIN V. MCPHERSON Rankin v. McPherson, 483 U.S. 378, 381, 107 S.Ct. 2891, 2895, 97 L.Ed.2d 315 (1987), involved a 19 year old clerical employee of a county law enforcement agency who reacted to news of an attempted assassination of President Reagan by remarking to her co-worker and apparent boyfriend “he’s cutting back Medicaid and food stamps * * * shoot, if they go for him again, I hope they get him.” The remark was overheard by another of McPherson’s co-workers and resulted in her discharge. The Court, in an opinion by Justice Marshall, held that the statement was on a matter of public concern protected by Pickering: Considering the statement in context, as Connick requires, discloses that it plainly dealt with a matter of public concern. The statement was made in the course of a conversation addressing the policies of the President’s administration. It came on the heels of a news bulletin 207 regarding what is certainly a matter of heightened public attention * * * . The inappropriate or controversial character of a statement is irrelevant to the question whether it deals with a matter of public concern. Id. at 386–87, 107 S.Ct. at 2897–98. Having found the Pickering threshold satisfied, the Court proceeded to inquire whether the statement impaired the effective functioning of the constable’s office. The defendant acknowledged that McPherson’s conduct had not interfered with the internal operations of its office. Nor was there any danger that the plaintiff had discredited the office by making her statement in public. Given her level of responsibility within the agency, the statement did not compromise the mission of the employer: “Where, as here, an employee serves no confidential, policymaking, or public contact role, the danger to the agency’s successful function from that employee’s speech is minimal.” Id. at 391–92, 107 S.Ct. at 2900. Justice Scalia, joined by Chief Justice Rehnquist and Justices White and O’Connor, dissented. Compare Bennett v. Metropolitan Government of Nashville, 977 F.3d 530 (6th Cir. 2020), where the court held the defendant city did not violate the first amendment rights of an emergency call operator who posted a racial slur on a social media site while praising the results of the 2016 presidential election. The court held that the termination of the operator was justified because the posting harmed her close working relationships with other operators and impaired the public’s perception of the neutrality of the emergency call system. Id. at 540–41.

NOTES AND QUESTIONS 1. Does Connick mean that public employee speech on matters not of “public concern” enjoys no protection under the First Amendment from injunctions, criminal prosecution, or other forms of state censorship? Does this “public concern” limitation apply to government in its role as law enforcement authority rather than as public employer? 2. Was Rankin consistent with Connick? Would the Court have protected McPherson’s speech had she said that “I hope they get” some private citizen who had been unkind to her family? 3. Do you agree with the Court’s conclusion that only one of Myer’s questions related to a matter of “public concern”? How are courts to determine what is a matter of public concern? 4. Relevance of Myers’s Motivation? Was Myers’s apparent motivation for distributing the questionnaire the critical fact in Connick? Should the level of First Amendment protection turn on the altruism or civic-mindedness of the speaker? Most courts have focused on the content, as well as form and context, of the speech, rather than on its motivation. See, e.g., Meade v. Moraine Valley Cmty. Coll., 770 F.3d 680, 685–86 (7th Cir. 2014); (Sousa v. Roque, 578 F.3d 164 (2d Cir. 2009); Banks v. Wolfe County Bd. of Educ., 330 F.3d 888 (6th Cir. 2003); Azzaro v. County of Allegheny, 110 F.3d 968, 978 (3d Cir. 1997) (en banc); Rode v. Dellarciprete, 845 F.2d 1195, 1201 (3d Cir.1988) (all cases 208 holding that an employee’s personal stake in a matter of public concern does not require Connick treatment). 5. Was Connick a “Mixed Motive” Case? Should the mode of proof for “mixed motive” § 1983 cases set out in Mt. Healthy City School Dist. Bd. of Educ. v. Doyle, 429 U.S. 274, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977), have been used in Connick? Under Mt. Healthy, if

a plaintiff proves that protected speech was a motivating factor in an adverse personnel decision, the defendant employer must prove that it would have made the same decision but for this illegitimate motive. Could Connick probably have demonstrated that he would have dismissed Myers had the questionnaire not contained question 11? Compare Desert Palace, Inc. v. Costa, 539 U.S. 90, 123 S.Ct. 2148, 156 L.Ed.2d 84 (2003) (mixed motive standard in Title VII context). 6. Misconstrued Speech. Does the Connick test turn on what the public employer thought was said, or on what the trier of fact determines was actually said? In Waters v. Churchill, 511 U.S. 661, 667, 114 S.Ct. 1878, 128 L.Ed.2d 686 (1994), the Supreme Court concluded that governmental managers could discharge an employee for making statements that they “reasonably found”, based on interviews with two witnesses, included comments that criticized her supervisor and discouraged transfers into her department and thus were not protected under Connick’s restatement of the Pickering balance (whether or not the comments also involved a matter of “public concern”). Justice O’Connor, writing for herself, Chief Justice Rehnquist, and Justices Souter and Ginsburg, held that an employer need only conduct an investigation that is reasonable in light of what the employee has been alleged to have said: “This need not be the care with which trials, with their rules or evidence and procedure, are conducted. It should, however, be the care that a reasonable manager would use before making an employment decision * * * of the sort involved in the particular case.” Id. at 677–78. Justice Scalia, joined by Justices Kennedy and Thomas, objected to requiring any investigation, contending that the First Amendment only demands that the employer not assert a legitimate reason as a pretext in bad faith. Justice Stevens, joined by Justice Blackmun, penned a strong dissent, arguing that the First Amendment is violated “when a public employee is fired for uttering speech on a matter of public concern that is not unduly disruptive of the operation of the relevant agency,” regardless of whether “the firing was based upon a reasonable mistake about what the employee said.” Id. at 698. In Heffernan v. City of Patterson, 578 U.S. 266, 136 S.Ct. 1412, 194 L.Ed. 2d 508 (2016), the Court, addressing a related question, held that an employee can sue his public employer for taking an adverse employment action against him because it mistakenly believed he had engaged in First Amendment-protected activity. 7. Protection of Artistic or Personal Expression? Under Connick can the writing of fictional works be protected from adverse personnel actions by the First Amendment? The presentation of photographs, paintings, music, or dance? Must the employee-artist first establish that his work somehow conveys 209 a “message” of “public concern”? In City of San Diego v. Roe, 543 U.S. 77, 125 S.Ct. 521, 160 L.Ed.2d 410 (2004), the Court held that a police officer’s videotapes featuring him performing sexual acts in a police uniform did not involve a matter of public concern under Connick. 8. Does Pickering Apply to Restrictions on Government Contractors? Do government contractors have the same protection as employees do? In Board of County Comm’s v. Umbehr, 518 U.S. 668, 116 S.Ct. 2342, 2348–49, 135 L.Ed.2d 843 (1996), the Court held that Pickering balancing provides the appropriate mode of analysis for claims of government retaliation against government contractors for engaging in protected speech activities. 9. Connick and the Petition Clause of the First Amendment. The First Amendment protects “the right of the people . . . to petition the Government for a redress of grievances.” In Borough of Duryea v. Guarnieri, 564 U.S. 379, 131 S.Ct. 2488, 180 L.Ed.2d 408 (2011), the Court held that the “matter of public concern” limitation recognized in Connick also applies to claims under the petition clause. Borough of Duryea involved a claim of public-employer retaliation for filing both a grievance under a collective bargaining agreement and a lawsuit claiming a contract violation. The Court assumed that each constituted a “petition” under the First Amendment, but decided that neither would be protected from employment retaliation if it concerned only a private matter.

GARCETTI V. CEBALLOS Supreme Court of the United States, 2006. 547 U.S. 410, 126 S.Ct. 1951, 164 L.Ed.2d 689. JUSTICE KENNEDY delivered the opinion of the Court. I Respondent Richard Ceballos has been employed since 1989 as a deputy district attorney for the Los Angeles County District Attorney’s Office. During the period relevant to this case, Ceballos was a calendar deputy in the office’s Pomona branch, and in this capacity he exercised certain supervisory responsibilities over other lawyers. In February 2000, a defense attorney contacted Ceballos about a pending criminal case. The defense attorney said there were inaccuracies in an affidavit used to obtain a critical search warrant. The attorney informed Ceballos that he had filed a motion to traverse, or challenge, the warrant, but he also wanted Ceballos to review the case. According to Ceballos, it was not unusual for defense attorneys to ask

calendar deputies to investigate aspects of pending cases. After examining the affidavit and visiting the location it described, Ceballos determined the affidavit contained serious misrepresentations. The affidavit called a long driveway what Ceballos thought should have been referred to as a separate roadway. Ceballos also questioned the affidavit’s statement that tire tracks led from a stripped-down truck to the premises covered by the warrant. His doubts arose from his conclusion that 210

the roadway’s composition in some places made it difficult or impossible to leave visible tire tracks. Ceballos spoke on the telephone to the warrant affiant, a deputy sheriff from the Los Angeles County Sheriff’s Department, but he did not receive a satisfactory explanation for the perceived inaccuracies. He relayed his findings to his supervisors, petitioners Carol Najera and Frank Sundstedt, and followed up by preparing a disposition memorandum. The memo explained Ceballos’ concerns and recommended dismissal of the case. On March 2, 2000, Ceballos submitted the memo to Sundstedt for his review. A few days later, Ceballos presented Sundstedt with another memo, this one describing a second telephone conversation between Ceballos and the warrant affiant. Based on Ceballos’ statements, a meeting was held to discuss the affidavit. Attendees included Ceballos, Sundstedt, and Najera, as well as the warrant affiant and other employees from the sheriff’s department. The meeting allegedly became heated, with one lieutenant sharply criticizing Ceballos for his handling of the case. Despite Ceballos’ concerns, Sundstedt decided to proceed with the prosecution, pending disposition of the defense motion to traverse. The trial court held a hearing on the motion. Ceballos was called by the defense and recounted his observations about the affidavit, but the trial court rejected the challenge to the warrant. Ceballos claims that in the aftermath of these events he was subjected to a series of retaliatory employment actions. The actions included reassignment from his calendar deputy position to a trial deputy position, transfer to another courthouse, and denial of a promotion. Ceballos initiated an employment grievance, but the grievance was denied based on a finding that he had not suffered any retaliation. Unsatisfied, Ceballos sued in the United States District Court for the Central District of California, asserting, as relevant here, a claim under Rev. Stat. § 1979, 42 U.S.C. § 1983. He alleged petitioners violated the First and Fourteenth Amendments by retaliating against him based on his memo of March 2. *** II *** * * * Government employers, like private employers, need a significant degree of control over their employees’ words and actions; without it, there would be little chance for the efficient provision of public services. Cf. Connick [v. Myers, 461 U.S. 138,] 143, 103 S. Ct. 1684, 75 L. Ed. 2d 708 (“[G]overnment offices could not function if every employment decision became a constitutional matter”). Public employees, moreover, often occupy trusted positions in society. When they speak out, they can express views 211

that contravene governmental policies or impair the proper performance of governmental functions. At the same time, the Court has recognized that a citizen who works for the government is nonetheless a citizen. The First Amendment limits the ability of a public employer to leverage the employment relationship to restrict, incidentally or intentionally, the liberties employees enjoy in their capacities as private citizens. See Perry v. Sindermann, 408 U.S. 593, 597, 92 S. Ct. 2694, 33 L. Ed. 2d 570 (1972). So long as employees are speaking as citizens about matters of public concern, they must face only those speech restrictions that are necessary for their employers to operate efficiently and effectively. See, e.g., Connick, supra, at 147, 103 S. Ct. 1684, 75 L. Ed. 2d 708 (“Our responsibility is to ensure that citizens are not deprived of fundamental rights by virtue of working for the government”). *** The Court’s decisions, then, have sought both to promote the individual and societal interests that are served when employees speak as citizens on matters of public concern and to respect the needs of government employers attempting to perform their important public functions. * * * Underlying our cases has been the premise that while the First Amendment invests public employees with certain rights, it does not empower them to “constitutionalize the employee grievance.” Connick, 461 U.S., at 154, 103 S. Ct. 1684, 75 L. Ed. 2d 708.

III With these principles in mind we turn to the instant case. Respondent Ceballos believed the affidavit used to obtain a search warrant contained serious misrepresentations. He conveyed his opinion and recommendation in a memo to his supervisor. That Ceballos expressed his views inside his office, rather than publicly, is not dispositive. Employees in some cases may receive First Amendment protection for expressions made at work. See, e.g., Givhan v. Western Line Consol. School Dist., 439 U.S. 410, 414, 99 S. Ct. 693, 58 L. Ed. 2d 619 (1979). Many citizens do much of their talking inside their respective workplaces, and it would not serve the goal of treating public employees like “any member of the general public,” Pickering [v. Board of Educ.], 391 U.S. [563,] 573, 88 S. Ct. 1731, 20 L. Ed. 2d 811, to hold that all speech within the office is automatically exposed to restriction. The memo concerned the subject matter of Ceballos’ employment, but this, too, is nondispositive. The First Amendment protects some expressions related to the speaker’s job. See, e.g., ibid.; Givhan, supra, at 414, 99 S. Ct. 693, 58 L. Ed. 2d 619. As the Court noted in Pickering: “Teachers are, as a class, the members of a community most likely to have informed and definite opinions as to how funds allotted to the operation of the schools should be spent. Accordingly, it is essential that they be able to 212

speak out freely on such questions without fear of retaliatory dismissal.” 391 U.S., at 572, 88 S. Ct. 1731, 20 L. Ed. 2d 811. The same is true of many other categories of public employees. The controlling factor in Ceballos’ case is that his expressions were made pursuant to his duties as a calendar deputy. That consideration—the fact that Ceballos spoke as a prosecutor fulfilling a responsibility to advise his supervisor about how best to proceed with a pending case—distinguishes Ceballos’ case from those in which the First Amendment provides protection against discipline. We hold that when public employees make statements pursuant to their official duties, the employees are not speaking as citizens for First Amendment purposes, and the Constitution does not insulate their communications from employer discipline. Ceballos wrote his disposition memo because that is part of what he, as a calendar deputy, was employed to do. It is immaterial whether he experienced some personal gratification from writing the memo; his First Amendment rights do not depend on his job satisfaction. The significant point is that the memo was written pursuant to Ceballos’ official duties. Restricting speech that owes its existence to a public employee’s professional responsibilities does not infringe any liberties the employee might have enjoyed as a private citizen. It simply reflects the exercise of employer control over what the employer itself has commissioned or created. Cf. Rosenberger v. Rector and Visitors of Univ. of Va., 515 U.S. 819, 833, 115 S. Ct. 2510, 132 L. Ed. 2d 700 (1995) (“[W]hen the government appropriates public funds to promote a particular policy of its own it is entitled to say what it wishes”). Contrast, for example, the expressions made by the speaker in Pickering, whose letter to the newspaper had no official significance and bore similarities to letters submitted by numerous citizens every day. Ceballos did not act as a citizen when he went about conducting his daily professional activities, such as supervising attorneys, investigating charges, and preparing filings. In the same way he did not speak as a citizen by writing a memo that addressed the proper disposition of a pending criminal case. When he went to work and performed the tasks he was paid to perform, Ceballos acted as a government employee. The fact that his duties sometimes required him to speak or write does not mean his supervisors were prohibited from evaluating his performance. This result is consistent with our precedents’ attention to the potential societal value of employee speech. Refusing to recognize First Amendment claims based on government employees’ work product does not prevent them from participating in public debate. The employees retain the prospect of constitutional protection for their contributions to the civic discourse. This prospect of protection, however, does not invest them with a right to perform their jobs however they see fit. 213

Our holding likewise is supported by the emphasis of our precedents on affording government employers sufficient discretion to manage their operations. Employers have heightened interests in controlling speech made by an employee in his or her professional capacity. Official communications have official consequences, creating a need for substantive consistency and clarity. Supervisors must ensure that their employees’ official communications are accurate, demonstrate sound judgment, and promote the employer’s mission. Ceballos’ memo is illustrative. It demanded the attention of his supervisors and led to a heated meeting with employees from the sheriff’s department. If Ceballos’ superiors thought his memo was inflammatory or misguided, they had the authority to take proper corrective action. Ceballos’ proposed contrary rule, adopted by the Court of Appeals, would commit state and federal courts to a new, permanent, and intrusive role, mandating judicial oversight of communications between and among government employees and

their superiors in the course of official business. This displacement of managerial discretion by judicial supervision finds no support in our precedents. When an employee speaks as a citizen addressing a matter of public concern, the First Amendment requires a delicate balancing of the competing interests surrounding the speech and its consequences. When, however, the employee is simply performing his or her job duties, there is no warrant for a similar degree of scrutiny. To hold otherwise would be to demand permanent judicial intervention in the conduct of governmental operations to a degree inconsistent with sound principles of federalism and the separation of powers. *** Proper application of our precedents * * * leads to the conclusion that the First Amendment does not prohibit managerial discipline based on an employee’s expressions made pursuant to official responsibilities. Because Ceballos’ memo falls into this category, his allegation of unconstitutional retaliation must fail. Two final points warrant mentioning. First, as indicated above, the parties in this case do not dispute that Ceballos wrote his disposition memo pursuant to his employment duties. We thus have no occasion to articulate a comprehensive framework for defining the scope of an employee’s duties in cases where there is room for serious debate. We reject, however, the suggestion that employers can restrict employees’ rights by creating excessively broad job descriptions. The proper inquiry is a practical one. Formal job descriptions often bear little resemblance to the duties an employee actually is expected to perform, and the listing of a given task in an employee’s written job description is neither necessary nor sufficient to demonstrate that conducting the task is within the scope of the employee’s professional duties for First Amendment purposes. 214

Second, Justice Souter suggests today’s decision may have important ramifications for academic freedom, at least as a constitutional value. There is some argument that expression related to academic scholarship or classroom instruction implicates additional constitutional interests that are not fully accounted for by this Court’s customary employee-speech jurisprudence. We need not, and for that reason do not, decide whether the analysis we conduct today would apply in the same manner to a case involving speech related to scholarship or teaching. IV Exposing governmental inefficiency and misconduct is a matter of considerable significance. As the Court noted in Connick, public employers should, “as a matter of good judgment,” be “receptive to constructive criticism offered by their employees.” 461 U.S., at 149, 103 S. Ct. 1684, 75 L. Ed. 2d 708. The dictates of sound judgment are reinforced by the powerful network of legislative enactments—such as whistle-blower protection laws and labor codes—available to those who seek to expose wrongdoing. See, e.g., 5 U.S.C. § 2302(b)(8); Cal. Govt. Code Ann. § 8547.8 (West 2005); Cal. Lab. Code Ann. § 1102.5 (West Supp. 2006). Cases involving government attorneys implicate additional safeguards in the form of, for example, rules of conduct and constitutional obligations apart from the First Amendment. See, e.g., Cal. Rule Prof. Conduct 5–110 (2005) (“A member in government service shall not institute or cause to be instituted criminal charges when the member knows or should know that the charges are not supported by probable cause”); Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). These imperatives, as well as obligations arising from any other applicable constitutional provisions and mandates of the criminal and civil laws, protect employees and provide checks on supervisors who would order unlawful or otherwise inappropriate actions. We reject, however, the notion that the First Amendment shields from discipline the expressions employees make pursuant to their professional duties. Our precedents do not support the existence of a constitutional cause of action behind every statement a public employee makes in the course of doing his or her job. JUSTICE STEVENS, dissenting. * * * The notion that there is a categorical difference between speaking as a citizen and speaking in the course of one’s employment is quite wrong. Over a quarter of a century has passed since then-Justice Rehnquist, writing for a unanimous Court, rejected “the conclusion that a public employee forfeits his protection against governmental abridgment of freedom of speech if he decides to express his views privately rather than publicly.” Givhan v. Western Line Consol. School Dist., 439 U.S. 410, 414, 99 S. Ct. 693, 58 L. Ed. 2d 619 (1979). We had no difficulty recognizing that the First Amendment applied when Bessie Givhan, an English teacher, 215

raised concerns about the school’s racist employment practices to the principal. See id., at 413–416, 99 S. Ct. 693, 58 L. Ed. 2d 619. Our silence as to whether or not her speech was made pursuant to her job duties demonstrates that the point was immaterial. That is equally true today, for it is senseless to let constitutional protection for exactly the same words hinge on

whether they fall within a job description. Moreover, it seems perverse to fashion a new rule that provides employees with an incentive to voice their concerns publicly before talking frankly to their superiors. JUSTICE SOUTER, with whom JUSTICE STEVENS and JUSTICE GINSBURG join, dissenting. * * * As all agree, the qualified speech protection embodied in Pickering balancing resolves the tension between individual and public interests in the speech, on the one hand, and the government’s interest in operating efficiently without distraction or embarrassment by talkative or headline-grabbing employees. The need for a balance hardly disappears when an employee speaks on matters his job requires him to address; rather, it seems obvious that the individual and public value of such speech is no less, and may well be greater, when the employee speaks pursuant to his duties in addressing a subject he knows intimately for the very reason that it falls within his duties. * * * Two reasons in particular make me think an adjustment using the basic Pickering balancing scheme is perfectly feasible here. First, the extent of the government’s legitimate authority over subjects of speech required by a public job can be recognized in advance by setting in effect a minimum heft for comments with any claim to outweigh it. Thus, the risks to the government are great enough for us to hold from the outset that an employee commenting on subjects in the course of duties should not prevail on balance unless he speaks on a matter of unusual importance and satisfies high standards of responsibility in the way he does it. The examples I have already given indicate the eligible subject matter, and it is fair to say that only comment on official dishonesty, deliberately unconstitutional action, other serious wrongdoing, or threats to health and safety can weigh out in an employee’s favor. If promulgation of this standard should fail to discourage meritless actions premised on 42 U.S.C. § 1983 (or Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388, 91 S. Ct. 1999, 29 L. Ed. 2d 619 (1971)) before they get filed, the standard itself would sift them out at the summary-judgment stage. My second reason for adapting Pickering to the circumstances at hand is the experience in Circuits that have recognized claims like Ceballos’s here. First Amendment protection less circumscribed than what I would recognize has been available in the Ninth Circuit for over 17 years, and neither there nor in other Circuits that accept claims like this one has there been a debilitating flood of litigation. For that matter, the majority’s position comes with no guarantee against factbound litigation over 216

whether a public employee’s statements were made “pursuant to . . . official duties,”. In fact, the majority invites such litigation by describing the enquiry as a “practical one,” apparently based on the totality of employment circumstances. Are prosecutors’ discretionary statements about cases addressed to the press on the courthouse steps made “pursuant to their official duties”? Are government nuclear scientists’ complaints to their supervisors about a colleague’s improper handling of radioactive materials made “pursuant” to duties? * * * JUSTICE BREYER, dissenting [omitted].

NOTES AND QUESTIONS 1. The Court in Garcetti adds a second threshold—in addition to the “matter of public concern” requirement from Connick—that public employees claiming First Amendment protection must cross before they can subject their employers’ personnel actions to the judicial balancing of Pickering. How does the Court articulate this threshold? 2. Would First Amendment protection have extended to Ceballos if he was retaliated against for a speech delivered to the MexicanAmerican Bar Association about misconduct in the Sheriff’s Department in the criminal case on which he wrote the disposition memorandum? For testifying in the hearing to suppress evidence in the case that the affidavit he investigated contained intentional fabrications? Consider Lane v. Franks, described in Note 4 below. 3. Relevance of Job Descriptions? Justice Kennedy, for the Court in Garcetti, rejects “the suggestion that employers can restrict employees’ rights by creating excessively broad job descriptions.” The majority states that “[f]ormal job descriptions” are not controlling, and that the “proper inquiry” is instead a “practical one” to determine whether “conducting the task is within the scope of the employee’s professional duties.” Would your answers to the questions in Note 2, above, be influenced by the description of Ceballos’s job in formal documents? By what was taken into account in his job evaluations? 4. Job-Required or Job-Related? In Lane v. Franks, 573 U.S. 228, 238, 134 S.Ct. 2369, 189 L.Ed. 312 (2014), the Court held that “[t]ruthful testimony under oath by a public employee outside the scope of his ordinary duties is speech as a citizen for First Amendment purposes . . . even when the testimony relates to his public employment or concerns information learned during that employment.” Lane, the plaintiff, had been dismissed from his position as head of a statewide program for underprivileged youth after testifying under subpoena at a trial concerning corruption he discovered during an audit of the program’s expenses. Lane alleged he was fired in retaliation for his testimony. The Court did not seem to rest on the employee’s speech being under oath; instead, it pronounced more generally that “the mere fact that a citizen’s speech concerns information acquired by virtue of his public employment does not transform that speech

into employee—rather than citizen—speech. The critical question under Garcetti is whether the speech at issue is itself ordinarily within the scope of an employee’s duties, not whether it merely 217 concerns those duties.” Id. at 240. In a footnote, the Lane Court stated that since Lane’s “ordinary job responsibilities did not include testifying in court proceedings,” it “need not address in this case whether truthful sworn testimony would constitute citizen speech under Garcetti when given as part of a public employee’s ordinary job duties.” Id. at 238 n.4. For a case posing this question, see Ohlson v. Brady, 9 F.4th 1156 (9th Cir. 2021). In this case, a blood analyst who regularly testified in court proceedings was charged with insubordination and suspended for continuing to testify, against his supervisors’ directions, that his government department should release to defendants’ counsel a full batch of blood alcohol testing results. The court held that the supervisors were protected by qualified immunity from the analyst’s § 1983 suit because the Lane decision did not clearly establish protection for the analyst’s testimony. 5. Internal Complaints. If Ceballos had filed a complaint with the office of Garcetti, the District Attorney, alleging that his superiors were colluding with the Sheriff’s Department to obtain evidence illegally, would Ceballos have been engaged in employee speech or citizen speech protected by the First Amendment? Should it matter whether Garcetti had required his subordinates to file any such complaints with him? Cf. Matthews v. City of New York, 779 F.3d 167, 174 (2d Cir, 2015) (complaint about arrest quota system was “policy-oriented speech . . . neither part of [plaintiff’s] job description nor part of the reality of his everyday work”); Hagen v. City of Eugene, 73 F.3d 1251, 1258 (9th Cir. 2013) (when police officer raises complaints up the chain of command about his job, including public safety, it ordinarily is part of performing his job); Weintraub v. Board of Education, 593 F.3d 196 (2d Cir. 2010) (speech in internal union grievance is not protected because no citizen analogue as with external complaints). 6. Constitutional Protection of “Whistleblowers”? After Garcetti and Lane, to what extent does the First Amendment provide employees’ protection for the public disclosure of potential wrongdoing by their public employer? Should any protection depend upon the allegations being accurate? Should protection depend on following “proper channels” before going public? Even if internal complaints are not protected under Garcetti? Congress has provided significant protections for federal-sector employees engaged in whistleblowing activity, and many state legislatures have provided comparable protections for state and local government employees. See the discussion of whistleblower protections in Chapter 4 supra. 7. Relevance of Alternative Legal Remedies? Is it relevant to the reach of the First Amendment that public employees who suffer retaliation for work-related expression may have alternative legal remedies like those noted at the end of Garcetti? Even if expression like that of Ceballos’s memorandum is not protected under some whistleblower law, might it be protected by an implied contractual covenant from an employer toward its employees that it will not terminate their employment for their good faith and effective performance of their jobs? This is the position of the Employment Restatement § 2.06(c)(2) (implied duty of good faith and fair dealing not to “retaliate against the 218 employee for performing the employee’s obligations under the employment contract or law”). See generally Cynthia Estlund, Harmonizing Work and Citizenship: A Due Process Solution to a First Amendment Problem, Sup. Ct. Rev. 2006, 115 (2007) (suggesting that such an interest could be protected under the due process clause and thus require that an employer provide “some kind of hearing” to insure against its deprivation). 8. Academic Freedom. Note the Garcetti Court’s reservation of whether its analysis “would apply in the same manner to a case involving speech related to scholarship or teaching.” Cf. Keyishian v. Board of Regents, 385 U.S. 589, 603, 87 S.Ct. 675, 17 L.Ed.2d 629 (1967) (academic freedom is a “special concern of the First Amendment”). But cf. Mayer v. Monroe County, 474 F.3d 477 (7th Cir. 2007) (teacher did not have a right to depart from curriculum of public school to express criticism of Iraqi war). The courts have not protected, even in college classrooms, speech that could have no academic purpose. See, e.g., Buchanan v. Alexander, 919 F.3d 847 (5th Cir. 2019) (not protecting use of profanity and discussion of teacher and student sex lives during instruction of pre-kindergarten to third grade teachers). Should application of Connick’s “public concern” threshold also limit the application of Pickering balancing to non-esoteric academic topics of general public interest? .See generally Richard H. Hiers, New Restrictions on Academic Free Speech, 2 J.C. & U.L. 217 (1995).

B. FREEDOM OF ASSOCIATION AND PUBLIC EMPLOYMENT MCLAUGHLIN V. TILENDIS United States Court of Appeals, Seventh Circuit, 1968. 398 F.2d 287.

CUMMINGS, J. This action was brought under Section 1 of the Civil Rights Act of 1871 (42 U.S.C. § 1983) by John Steele and James McLaughlin who had been employed as probationary teachers by Cook County, Illinois, School District No. 149. Each sought damages of $100,000 from the Superintendent of School District No. 149 and the elected members of the Board of Education of that District. Steele was not offered a second-year teaching contract and McLaughlin was dismissed before the end of his second year of teaching. Steele alleged that he was not rehired and McLaughlin alleged that he was dismissed because of their association with Local 1663 of the American Federation of Teachers, AFL-CIO. Neither teacher had yet achieved tenure. *** 219

It is settled that teachers have the right of free association, and unjustified interference with teachers’ associational freedom violates the Due Process clause of the Fourteenth Amendment. Shelton v. Tucker, 364 U.S. 479, 485–487, 81 S.Ct. 247, 5 L.Ed.2d 231. *** The trial judge was motivated by his conclusion that more than free speech was involved here, stating: “The union may decide to engage in strikes, to set up machinery to bargain with the governmental employer, to provide machinery for arbitration, or may seek to establish working conditions. Overriding community interests are involved. The very ability of the governmental entity to function may be affected. The judiciary, and particularly this Court, cannot interfere with the power or discretion of the state in handling these matters.” It is possible of course that at some future time plaintiffs may engage in union-related conduct justifying their dismissal. But the Supreme Court has stated that “Those who join an organization but do not share its unlawful purposes and who do not participate in its unlawful activities surely pose no threat, either as citizens or as public employees.” Elfbrandt v. Russell, 384 U.S. 11, 17, 86 S.Ct. 1238, 1241, 16 L.Ed.2d 321. Even if this record disclosed that the union was connected with unlawful activity, the bare fact [of] membership does not justify charging members with their organization’s misdeeds. A contrary rule would bite more deeply into associational freedom than is necessary to achieve legitimate state interests, thereby violating the First Amendment. Illinois has not prohibited membership in a teachers’ union, and defendants do not claim that the individual plaintiffs engaged in any illegal strikes or picketing.3 Moreover, collective bargaining contracts between teachers’ unions and school districts are not against the public policy of Illinois. Chicago, etc., Education Association v. Board of Education of City of Chicago, 76 Ill.App.2d 456, 222 N.E.2d 243 (1966). Illinois even permits the automatic deduction of union dues from the salaries of employees of local governmental agencies. Ill.Rev.Stats.1967, Ch. 85, Sec. 472. These very defendants have not adopted any rule, regulation or resolution forbidding union membership. Accordingly, no paramount public interest of Illinois warranted the limiting of Steele’s and McLaughlin’s right of association. 220

NOTES AND QUESTIONS 1. Protecting Freedom of Association. Although the First Amendment does not expressly mention freedom of association, the Supreme Court held in Shelton v. Tucker—relied upon in McLaughlin and in the loyalty oath cases, see, e.g., Elfbrandt v. Russell, 384 U.S. 11, 86 S.Ct. 1238, 16 L.Ed.2d 321 (1966)—that the amendment’s express protection of free speech, assembly and the right to petition government implicitly includes the guaranty of free association. The right of association also includes a right to avoid political associations. Thus, the Court has held that public employees who do not occupy policymaking or confidential positions have a constitutional right not to be discharged solely because of their failure to affiliate with a particular political party. Branti v. Finkel, 445 U.S. 507, 100 S.Ct. 1287, 63 L.Ed.2d 574 (1980); Elrod v. Burns, 427 U.S. 347, 96 S.Ct. 2673, 49 L.Ed.2d 547 (1976). But cf. Wallace v. Benware, 67 F.3d 655, 662 (7th Cir.1995) (finding Elrod’s policymaking exception not to extend to harassment for political affiliation). 2. Freedom of Association After Connick. Is McLaughlin still good law? Does Connick suggest that to be protected from adverse personnel actions, a public employee’s association must relate to an issue of “public concern”? Or does Connick limit only the protection of expression, without limiting the protection of association? Compare Cobb v. Pozzi, 363 F.3d 89 (2d Cir. 2004) (Connick applies to free

association claims), with Hatcher v. Board of Public Educ., 809 F.2d 1546, 1558 (11th Cir.1987) (Connick does not apply). Cf. also Palardy v. Township of Millburn, 906 F.3d 76 (3d Cir. 2018) (association with a public sector labor union in all cases touches upon a matter of public concern). In O’Hare Truck Service v. City of Northlake, 518 U.S. 712, 116 S.Ct. 2353, 135 L.Ed.2d 874, the Court distinguished cases like Pickering, and Umbehr, discussed in Note 8 at p. 209, where specific speech activity is punished and a balancing of governmental interests is required, from cases “where the raw test of political affiliation [is] suffic[ient] to show a constitutional violation, without the necessity of an inquiry more detailed than asking whether the requirement was appropriate for the employment in question.” 518 U.S. at 719. Cf. also, Janus v. AFSCME, Council 31, 138 S.Ct. 2448, 2472–73, 201 L.Ed.2d 924 (2018) (protection through Pickering balancing not applicable to compulsion of affiliation and support of speech of labor union). 3. Protecting Partisan Political Activity in the Workplace? Does the right of association include public employee participation in partisan political campaigns? The Court has broadly sustained civil service law restrictions on such participation. See United Public Workers of America v. Mitchell, 330 U.S. 75, 67 S.Ct. 556, 91 L.Ed. 754 (1947) (provision of federal Hatch Act, 5 U.S.C. § 7324(a)), reaffirmed in a pair of post-Pickering decisions, see Broadrick v. Oklahoma, 413 U.S. 601, 93 S.Ct. 2908, 37 L.Ed.2d 830 (1973); United States Civil Serv. Comm’n v. National Ass’n of Letter Carriers, 413 U.S. 548, 93 S.Ct. 2880, 37 L.Ed.2d 796 (1973). Justice White’s opinion for the Letter Carriers Court explains that Congress could act to ensure that “the rapidly expanding 221 Government work force should not be employed to build a powerful, invincible, and perhaps corrupt political machine,” and that government employees not be pressured to “vote in a certain way or perform political chores in order to curry favor with their superiors rather than to act out their own beliefs.” Id. at 565–66, 93 S.Ct. at 2890–91. Do these rulings effectively deprive public employees of the full rights of citizenship in the service of a sanitized conception of the political process? Do they permit bans on mere affiliation with political parties? Do they bar public employees from wearing partisan political buttons or displaying party propaganda in their lockers or on their bumper stickers? See Biller v. U.S. Merit Sys. Protection Bd., 863 F.2d 1079 (2d Cir.1988) (union president’s statement of support of a Presidential candidate does not violate Hatch Act absent showing of concerted action with campaign); Blaylock v. U.S. Merit Sys. Protection Bd., 851 F.2d 1348 (11th Cir.1988) (same); but cf. Burrus v. Vegliante, 336 F.3d 82 (2d Cir. 2003) (upholding United States Postal Service (USPS) removal from union bulletin boards in nonpublic areas of post offices, of posters comparing positions of candidates in the 2000 presidential election). 3 It is possible to conceive of some positions in public employment in which the need for confidentiality is so great that even completely correct public statements might furnish a permissible ground for dismissal. Likewise, positions in public employment in which the relationship between superior and subordinate is of such a personal and intimate nature that certain forms of public criticism of the superior by the subordinate would seriously undermine the effectiveness of the working relationship between them can also be imagined. We intimate no views as to how we would resolve any specific instances of such situations, but merely note that significantly different considerations would be involved in such cases. 4 There is likewise no occasion furnished by this case for consideration of the extent to which teachers can be required by narrowly drawn grievance procedures to submit complaints about the operation of the schools to their superiors for action thereon prior to bringing the complaints before the public. 5

We also note that this case does not present a situation in which a teacher’s public statements are so without foundation as to call into question his fitness to perform his duties in the classroom. In such a case, of course, the statements would merely be evidence of the teacher’s general competence, or lack thereof, and not an independent basis for dismissal. 6

Because we conclude that appellant’s statements were not knowingly or recklessly false, we have no occasion to pass upon the additional question whether a statement that was knowingly or recklessly false would, if it were neither shown nor could reasonably be presumed to have had any harmful effects, still be protected by the First Amendment. See also n. 5, supra. 4 Although the First Amendment’s protection of government employees extends to private as well as public expression, striking the Pickering balance in each context may involve different considerations. When a teacher speaks publicly, it is generally the content of his statements that must be assessed to determine whether they “in any way either impeded the teacher’s proper performance of his daily duties in the classroom or * * * interfered with the regular operation of the schools generally.” Private expression, however, may in some situations bring additional factors to the Pickering calculus. When a government employee personally confronts his immediate superior, the employing agency’s institutional efficiency may be threatened not only by the content of the employee’s message but also by the manner, time, and place in which it is delivered. 1 Myers’ opposition was at least partially attributable to her concern that a conflict of interest would have been created by the transfer because of her participation in a counseling program for convicted defendants released on probation in the section of the criminal court to which she was to be assigned. 8 This is not a case like Givhan, where an employee speaks out as a citizen on a matter of general concern, not tied to a personal employment dispute, but arranges to do so privately. Mrs. Givhan’s right to protest racial discrimination—a matter inherently of public concern—is not forfeited by her choice of a private forum. * * * 11 Waldron testified that from what he had learned of the events on October 7, Myers “was trying to stir up other people not to accept the changes [transfers] that had been made on the memorandum and that were to be implemented.” In his view, the questionnaire was a “final act of defiance” and that, as a result of Myers’ action, “there were going to be some severe problems about the changes.” Connick testified that he reached a similar conclusion after conducting his own investigation. “After I satisfied myself that not only wasn’t she accepting the transfer, but that she was affirmatively opposing it and disrupting the routine of the office by this questionnaire. I called her in * * * [and dismissed her].” 13 The record indicates that some, though not all, of the copies of the questionnaire were distributed during lunch. Employee speech which transpires entirely on the employee’s own time, and in nonwork areas of the office, bring different factors into the Pickering calculus, and might lead to a different conclusion. Cf. NLRB v. Magnavox Co., 415 U.S. 322, 94 S.Ct. 1099, 39 L.Ed.2d 358 (1974). 3 Perhaps the simplest example of a statement by a public employee that would not be protected by the First Amendment would be answering “No” to a

request that the employee perform a lawful task within the scope of his duties. Although such a refusal is “speech,” which implicates First Amendment interests, it is also insubordination, and as such it may serve as the basis for a lawful dismissal. 3 In Illinois, strikes and certain picketing by public employees are enjoinable. Board of Education of Community Unit School Dist. No. 2 v. Redding, 32 Ill.2d 567, 207 N.E.2d 427 (1965).

223

PART 3 TORTS IN THE EMPLOYMENT RELATIONSHIP ■■■

We have previously considered the “public policy” cause of action which is treated as a tort claim in many jurisdictions. Part 4 considers other torts that arise in the in the workplace. Chapter 6 addresses the torts of misrepresentation, tortious interference with contract, and defamation. In many cases, workplace injuries are subject to exclusive remedies provided through the applicable state workers’ compensation scheme. Chapter 7 examines how courts approach state workers’ compensation preclusion of common law (and some statutory) remedies. Chapter 8 takes up the issue of workplace privacy—an area of law that is fairly well-developed for government employees, but is still in its nascent stages for private-sector workers. The final chapter in this Part presents the law governing posttermination restraints: the common law duty of loyalty and restrictive covenants, and rights to employee inventions. Employee violations of the duty of loyalty and post-termination restraints may give rise to contract, tort, or fiduciary remedies (see Chapter 9).

225

CHAPTER 6 MISREPRESENTATION, WRONGFUL INTERFERENCE, AND DEFAMATION ■■■

Introduction This chapter addresses three important torts as they arise in the employment context. Because these torts do not deal with physical injury, they tend not to be excluded under the exclusivity provision of most workers’ compensation laws. These torts are not limited to those classified as employees. Each of these torts presents distinct issues.

A. FRAUD AND DECEIT RESTATEMENT OF EMPLOYMENT LAW §§ 6.05–6.06 American Law Institute (2015).

§ 6.05. Employer’s Fraudulent Misrepresentation Inducing the Initiation, Maintenance, or Cessation of an Employment Relationship An employer is subject to liability for intentionally inducing a current or prospective employee, through a knowingly false representation of fact, current intent, opinion, or law (1) to enter into, to maintain, or leave an employment relationship with the employer, or (2) to refrain from entering into or maintaining an employment relationship with another employer. § 6.06. Employer’s Negligent Provision of False Information to Employees (a) An employer has a duty to a current or prospective employee to exercise reasonable care not to provide false information on a topic about which the employer has special knowledge and that the employee may reasonably rely on in deciding whether to enter into or maintain an employment relationship. 226

(b) An employer is subject to liability for a current or prospective employee’s pecuniary loss if the employer intentionally induced the employee to enter into or to maintain an employment relationship with the employer by breaching this duty.

HUNTER V. UP-RIGHT, INC. Supreme Court of California, 1993. 6 Cal.4th 1174, 26 Cal.Rptr.2d 8, 864 P.2d 88.

PANELLI, J. We granted review in this case to determine whether Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654[, 254 Cal.Rptr. 211, 765 P.2d 373] (Foley) precludes recovery of tort damages for fraud and deceit predicated on a misrepresentation made to effect termination of employment. Foley made clear that the employment relationship is “fundamentally contractual,” and that —terminations in violation of public policy aside—contract damages are the appropriate remedy for wrongful termination. * * * Analyzing the circumstances of this case in light of Foley and of the traditional elements of fraud, we conclude that wrongful termination of employment ordinarily does not give rise to a cause of action for fraud or deceit, even if some misrepresentation is made in the course of the employee’s dismissal. Tort recovery is available only if the plaintiff can establish all of the elements of fraud with respect to a misrepresentation that is separate from the termination of the employment contract, i.e., when the plaintiff’s fraud damages cannot be said to result from termination itself. The record in this case does not support such recovery. Accordingly, we reverse the judgment of the Court of Appeal.

* * * Charles Hunter began working as a welder for Up-Right, Inc. (Up-Right) in January 1973. In 1980 he was promoted to welding supervisor and worked in that capacity until his employment was terminated on September 10, 1987. In August 1988 Hunter sued Up-Right and his former supervisor, Pat Nelson, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and various torts. After this court filed its decision in Foley v. Interactive Data Corp. 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 (1988) (Foley), Hunter sought and obtained permission to amend his complaint to allege a cause of action for fraud, based on the same facts as alleged in the original complaint. The evidence presented at trial was in conflict regarding the circumstances of Hunter’s termination. Hunter testified that he enjoyed his job at Up-Right, got along well with coworkers, and received excellent performance evaluations. He testified that at the end of the workday on September 10, 1987, he was called in to meet with Nelson. According to 227

Hunter, Nelson told him that there had been a corporate decision to eliminate his position and that if he did not resign he would be terminated. Hunter testified he asked Nelson for the opportunity to work in a lesser position within the company, but was refused. Hunter then signed a document setting forth his resignation. The next day he picked up his final paycheck, which included $5,200 in severance pay. Nelson testified to a different series of events. On several occasions during a period prior to September 9, 1987, Nelson testified he had admonished Hunter regarding excessive absences to attend to personal matters. On September 9, 1987, Nelson testified, Hunter told him he was thinking of resigning due to personal problems. Nelson told him to think about it overnight and come back the next day. Nelson directed his secretary, Catherine Olson, to prepare a resignation form for Hunter’s signature. On September 10, Hunter returned and told Nelson he had decided to resign. Hunter then signed the resignation form. Nelson had Olson prepare a final paycheck. Nelson testified that no corporate decision had been made to eliminate Hunter’s job. John Maricich, who had been plant superintendent for Up-Right for eight years until his resignation in January 1988, testified that Up-Right had a policy of terminating employees only for good cause. He testified that Hunter was an excellent employee. *** The jury found in favor of Hunter on three theories: breach of implied contract not to terminate employment without good cause, breach of implied covenant of good faith and fair dealing, and fraud. By special verdict, it awarded Hunter $38,013 on the contractual theories and $120,000 for misrepresentation. The parties agreed that the $120,000 figure represented the jury’s finding as to Hunter’s total damages, and thus included the $38,013 awarded as contractual damages. The trial court entered judgment in favor of Hunter in the amount of $120,000, and the Court of Appeal affirmed. *** The Court of Appeal erred in inferring that an employer that misrepresents a fact in the course of wrongfully terminating an employee has committed a fraud. The court contrasted Hunter’s testimony (that Nelson told him his job had been eliminated by corporate decision) with Nelson’s testimony (that no such corporate decision had been made and that Hunter would not have been dismissed had he not signed a resignation). From this, the court concluded that Hunter had proved a knowing misrepresentation (the supposed corporate decision) that was intended to defraud Hunter into resigning his job, Hunter’s detrimental reliance (in resigning), and his resulting damage. Thus, according to the Court of Appeal, Hunter established each of the elements of fraud: (a) 228

misrepresentation; (b) defendant’s knowledge of the statement’s falsity; (c) intent to defraud (i.e., to induce action in reliance on the misrepresentation); (d) justifiable reliance; and (e) resulting damage. (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 676, p. 778; Civ. Code, § 1709; Hobart v. Hobart Estate Co. (1945) 26 Cal.2d 412, 422[, 159 P.2d 958].) The problem with the Court of Appeal’s analysis is that the result of Up-Right’s misrepresentation is indistinguishable from an ordinary constructive wrongful termination. The misrepresentation transformed what would otherwise have been a resignation into a constructive termination. As the jury found that Up-Right lacked good cause to dismiss Hunter, the constructive termination was wrongful. Thus, Up-Right simply employed a falsehood to do what it otherwise could have accomplished directly. It cannot be said that Hunter relied to his detriment on the misrepresentation in suffering constructive dismissal. Thus, the fraud claim here is without substance. Moreover, it is difficult to conceive of a wrongful termination case in which a misrepresentation made by the employer to

effect termination could ever rise to the level of a separately actionable fraud. In essence, such misrepresentations are merely the means to the end desired by the employer, i.e., termination of employment. They cannot serve as a predicate for tort damages otherwise unavailable under Foley. If the termination itself is wrongful, either because it breaches the employment contract or because it violates some well-established public policy articulated in a statute or constitutional provision, then the employee is entitled to recover damages sounding in contract or tort, respectively. But no independent fraud claim arises from a misrepresentation aimed at termination of employment. Recognition of a fraud cause of action in the context of wrongful termination of employment not only would contravene the logic of Foley, but also potentially would cause adverse consequences for industry in general. Fraud is easily pleaded, and in all likelihood it would be a rare wrongful termination complaint that omitted to do so. Much harder, however, is the defense of such claims and their resolution at the summary judgment or demurrer stage of litigation. The resultant costs and inhibition of employment decisionmaking are precisely the sort of consequences we cited in Foley in disapproving tort damages for breaches of the implied covenant of good faith and fair dealing. We note, however, that a misrepresentation not aimed at effecting termination of employment, but instead designed to induce the employee to alter detrimentally his or her position in some other respect, might form a basis for a valid fraud claim even in the context of a wrongful termination. The Court of Appeals for the Ninth Circuit addressed such a situation in Miller v. Fairchild Industries, Inc. (9th Cir.1989) 885 F.2d 498, 509–510. 229

In that case, the employees had filed complaints against Fairchild with the Equal Employment Opportunity Commission, which resulted in negotiation of settlement agreements by which the employees gave up their right to sue under title VII of the 1964 Civil Rights Act (42 U.S.C. § 2000e–3(a)) in return for Fairchild’s promise to provide training opportunities. Soon after the settlement, however, the employees were laid off. They sued Fairchild, alleging, as one of their causes of action, that Fairchild fraudulently induced them to enter into the settlement agreements by concealing the fact that they were probable candidates for future layoff, and by making promises that Fairchild had no intention of keeping. The court concluded that Fairchild’s failure to provide the promised training opportunities supported an inference that it had not intended to perform when it signed the settlement agreements. (885 F.2d at p. 509.) Thus, the trial court’s entry of directed verdict on the fraud causes of action was improper. (Id. at p. 510.) In Miller v. Fairchild Industries, Inc., supra, the allegedly fraudulent settlement agreement was collateral to the employment contract itself. The Miller plaintiffs demonstrated that they had changed their position in reliance on Fairchild’s misrepresentations by foregoing their rights to sue under title VII. Miller is thus readily distinguishable from the present case, where plaintiff has shown only that Up-Right engineered his resignation without good cause by telling him his position had been eliminated. * * * Although tort damages are unavailable in this case, Hunter has established his claim to contractual damages for constructive wrongful termination, and on remand the judgment must be modified accordingly. MOSK, J. [dissenting]. * * * [W]hile the duty to treat a party with whom one enters into contract in good faith can be seen as only a contractual duty, the obligation to refrain from committing fraud is a duty imposed by society to govern commercial and other human relationships, regardless of whether those relationships are contractual. And, unlike the tortious breach of the covenant of good faith and fair dealing, the tort of fraud has never depended on the existence of a “special relationship” between the tortfeasor and the tort victim. * * * [I]n the promissory fraud cases, tort recovery is allowed, despite the fact that fraud and contract damages arise from the same set of facts, because the judicial system seeks to vindicate a social policy of preventing injurious, deliberate falsehoods. Although it is a fact of life that parties breach contracts because of changes in circumstance, the tort system is used to send a signal that the breach of a contract a party calculatingly never intended to fulfill is a different, and greater, wrong than an ordinary breach, and should receive greater sanction. 230

The circumstances in the present case are analogous to promissory fraud. Although plaintiff’s damages are presumably the same for being tricked into resigning as they would be if he had been simply wrongfully discharged outright, the former behavior involves a fraud for which the law of tort provides special disincentives. The purpose of the fraud in this case, as the jury fairly inferred, was to dupe plaintiff into forfeiting his contractual and employment rights by deceiving him into resigning. The corporation sought through this artful deception to extricate itself from its contractual obligations, rather than to straightforwardly discharge him and risk potential liability for breach of contract. The law of fraud is designed to deter the use

of such stratagems.

NOTES AND QUESTIONS 1. Identify the elements of a fraud claim. Did Hunter satisfy each element of the claim? 2. Is Hunter v. Up-Right consistent with §§ 6.05 and 6.06 of the Employment Restatement? 3. What public purpose would be served by allowing tort damages for a fraudulently induced resignation when a direct termination of employment would result only in a claim for contract damages? Justice Mosk asserts that an employee whose resignation is fraudulently induced is “in a different, and worse, position than an employee who is straightforwardly discharged.” Why? Rather than creating a tort cause of action, should the employer’s misrepresentation be a basis for tolling the applicable statute of limitations until the employee knew or should have known he was terminated without good cause? 4. The Detrimental Reliance Factor. Andrew Lazar, who worked for a family business in New York for 20 years, was lured to California by a new employer promising a long-term job in a thriving business. The California firm, however, was having serious financial problems when the representations were made, and, moreover, was planning a merger that eventually would result in the elimination of Lazar’s position. Two years after his move to California, Lazar’s position was eliminated. He sued for damages for lost income, loss of contact with the New York market, payments on his California home he could no longer afford, and emotional distress. The California Supreme Court held that his action could proceed, distinguishing Hunter on the ground that, in this case, the plaintiff detrimentally relied on the employer’s misrepresentations by taking actions (moving to California and resigning his prior employment) that placed him in a worse position. Lazar v. Superior Court of Los Angeles Co., 12 Cal.4th 631, 49 Cal.Rptr.2d 377, 909 P.2d 981 (1996); accord, Stewart v. Jackson & Nash, 976 F.2d 86, 88 (2d Cir. 1992) (plaintiff’s injuries, which involved damage to her career growth, “commenced well before her termination and were, in several respects, unrelated to it”; extended in Hyman v. IBM Corp., 2000 WL 1538161 231 (S.D.N.Y.2000); both applying New York law); Kidder v. AmSouth Bank, N.A., 639 So.2d 1361 (1994). See also the discussion of Miller in the Hunter decision. Like California, other states have recognized a fraud claim where an employee detrimentally relied on a promise of employment. See, e.g., Meade v. Cedarapids, Inc., 164 F.3d 1218 (9th Cir. 1999) (misrepresentation to induce employee to resign from secure job to take employment with defendant); Sea-Land Service, Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982) (action against employer for intentionally breaching promise of employment in a particular new position if she resigned from her present job with the company); O’Neal v. Stifel, Nicolaus & Co., 996 S.W.2d 700 (Mo. App. 1999) (same); cf. Bower v. AT&T Technologies, Inc., 852 F.2d 361 (8th Cir.1988) (damages for detrimental reliance on promise that employees would be rehired as clerical employees after their telephone repair jobs were phased out as a result of divestiture of subsidiaries). 5. Fraudulent Inducement to Continue Employment. Does the tort of fraudulent inducement also extend to misrepresentations that induce an at-will employee to continue employment? A number of courts have so held in cases where the employee gave up another employment opportunity in reliance on the misrepresentation. See, e.g., Cole v. Kobs & Draft Advertising, Inc., 921 F.Supp. 220 (S.D.N.Y. 1996); LaFont v. Taylor, 902 S.W.2d 375 (Mo. Ct. App. 1995); Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986). But see Mackenzie v. Miller Brewing Co., 241 Wis.2d 700, 623 N.W.2d 739 (2001) (rejecting claim as impermissible blurring of the line between contract and tort). What is the appropriate remedy in such cases? 6. Remedy for Fraudulent Inducement? If an employer fraudulently induces an employee to enter into an employment relationship, what should be the remedy? If an employee is fraudulently induced to leave his prior at-will employment, what is the appropriate remedy? See generally Employment Restatement Chapter 11. 7. Negligent Misrepresentation. The tort of negligent misrepresentation does not impose a “general duty to disclose information to employees or prospective employees, even if the employer knows the information might be material to their employment decisions[.]” Employment Restatement § 6.06, comment d. Rather, it arises only where the employer has “special knowledge” and disclosure of that information “is necessary to prevent the employer’s partial or ambiguous statement of material facts from being misleading[.]” Id. See e.g. Griesi v. Atlantic Gen. Hosp. Corp., 360 Md. 1, 756 A.2d 548 (2000) (negligent misrepresentation based on offer of employment that suggested the interview process was complete, and not subject to further approvals or processes); Gayer v. Bath Iron Works Corp., 687 A.2d 617, 621 (Me. 1996) (negligent misrepresentation where company officials extended offers for apprenticeship program despite knowledge that program would not be feasible). 8. Statutes Addressing Employer Misrepresentations. California Labor Code § 970 prohibits employers from inducing “employees to move to, from, or

232 within California by misrepresentation of the nature, length or physical conditions of employment.” Tyco Indus. v. Superior Court, 164 Cal.App.3d 148, 155, 211 Cal.Rptr. 540, 544 (1985); see Funk v. Sperry Corp., 842 F.2d 1129, 1133–34 (9th Cir.1988) (§ 970 claim requires proof of knowingly false representations). Does § 970 preclude common law actions for fraud, misrepresentation in California? 9. Tort of Negligent Breach. A few courts have used negligence concepts to permit tort recovery for breach of the employment contract. See, e.g., Flanigan v. Prudential Federal, 221 Mont. 419, 720 P.2d 257 (1986) (negligent failure to follow employer’s stated termination policies; tort recovery not barred by exclusivity of workers’ compensation law); Chamberlain v. Bissell, Inc., 547 F.Supp. 1067 (W.D.Mich.1982). Contra, Heltborg v. Modern Machinery, 244 Mont. 24, 795 P.2d 954, 962 (1990); Demars v. General Dynamics Corp., 779 F.2d 95, 99–100 (1st Cir.1985) (Massachusetts law); Boresen v. Rohm & Haas, Inc., 526 F.Supp. 1230, 1235–36 (E.D.Pa.1981) (Pennsylvania law). In Huegerich v. IBP Inc., 547 N.W.2d 216 (Iowa 1996), plaintiff argued that his discharge for violating IBP’s policy prohibiting onpremises possession of illegal drugs or “look-alike” drugs (having the same appearance or effect of an illegal drug) should be set aside because IBP was negligent in failing to specifically advise plaintiff that possession of “look-alike” drugs violated company policy. The Iowa high court set aside a damages verdict for “negligent discharge”: “To recognize a theory of negligent discharge would require the imposition of a duty of care upon an employer when discharging an employee. Such a duty would radically alter the long recognized doctrine allowing discharge for any reason or no reason at all.” Id. at 220.

B. WRONGFUL INTERFERENCE WITH CONTRACTUAL RELATIONS The wrongful-interference tort has a long lineage, beginning, interestingly, with the employment contract case of Lumley v. Gye, 2 El. & Bl. 216, 118 Eng.Rep. 749 (1853), in which a singer under contract to sing at plaintiff’s theater was induced by the defendant, who owned a rival theater, to break her contract with plaintiff in order to perform for defendant. Even though no violence, fraud or defamation was alleged, such enticement of another’s servants was held tortious. See also Walker v. Cronin, 107 Mass. 555 (1871) (union held liable for inducing its members to leave their jobs in the course of a strike). See generally Harvey S. Perlman, Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine, 49 U.Chi.L.Rev. 61 (1982). 233

RESTATEMENT OF EMPLOYMENT LAW §§ 6.03–6.04 American Law Institute (2015).

§ 6.03. Employer’s Wrongful Interference with an Employee’s Employment Relationship with Another Employer (a) An employer wrongly interferes with an employee’s employment or prospective employment with another employer when the employer, by improper means or without a legitimate business interest, intentionally causes another employer (i) to terminate its employment of the employee; or (ii) not to enter into an employment relationship with the employee. (b) An employer does not wrongly interfere with an employee’s employment with another employer by making a statement about the employee that is privileged under § 6.02. § 6.04. Employer Does Not Wrongfully Interfere with Its Own Employment Relationship (a) An employer is not subject to liability for wrongful interference with the employer’s own present or prospective employment relationships. (b) An employee may be subject to liability for wrongful interference with another employee’s employment relationship with the interfering employee’s employer only if the employer does not authorize or ratify the interfering employee’s actions and those actions are not within the scope of the employee’s employment.

GRUHLKE V. SIOUX EMPIRE FED. CREDIT UNION, INC. Supreme Court of South Dakota, 2008. 756 NW 2d 399.

KONENKAMP, J. CU Mortgage employed Becky Gruhlke as a senior mortgage underwriter. She was hired in January 2004, with an employment contract renewable annually. CU Mortgage renewed her contract in 2004 and 2005, but did not renew it thereafter.

The renewal clause stated: “This Agreement shall be renewed with the same provisions for additional one-year terms, unless either party gives written notice of termination thereof to the other party at least thirty (30) days prior to the end of any such term.” As Gruhlke’s complaint acknowledged, the “contract was essentially a one year employment-at-will agreement.” Gruhlke brought suit against Sioux Empire Federal Credit Union and CU Mortgage Direct alleging wrongful discharge and breach of contract. 234

She also sued David Bednar, the chief operating officer at CU Mortgage, alleging “wrongful interference with [her] business relationship/contract.” This appeal addresses only the suit against Bednar. In her complaint, Gruhlke averred that Bednar “acted intentionally and was unjustified in his actions” and “acted out of his personal interests” when he “advocated for the termination of Gruhlke’s business relationship with CU Mortgage.” According to Gruhlke, Bednar asked her to submit false and misleading information to investment mortgage companies in order to secure financing for certain home loans. When she refused, Bednar “yelled at her and tried to intimidate her into complying with his requests.” Gruhlke reported Bednar to her direct supervisor. In December 2006, CU Mortgage chose not to renew Gruhlke’s employment contract. * * * In general, the tort of intentional interference with contractual relations serves as a remedy for contracting parties against interference from outside intermeddlers. To prevail on a claim of tortious interference, “there must be a ‘triangle’—a plaintiff, an identifiable third party who wished to deal with the plaintiff, and the defendant who interfered with” the contractual relations. Id. ¶ 38 (quoting Landstrom v. Shaver, 1997 SD 25, ¶ 75, 561 N.W.2d 1, 16). * * * In this case, we must decide the narrower question: whether South Dakota will recognize a cause of action against a corporate officer for tortious interference with the corporation’s employment contract with another. Only then can we determine whether Gruhlke has adequately pleaded the action. * * * In the employment context, we think a claim of tortious interference with contractual relations may be made against a corporate officer, director, supervisor, or co-worker, who acts wholly outside the scope of employment, and who acts through improper means or for an improper purpose. Such individuals should not stand immune from their independently improper acts committed entirely for personal ends. * * * Because this tort could eclipse wrongful termination actions by the maneuver of simply pleading around at-will employment law, many courts place a heavy burden on plaintiffs. We believe the [Torts] Restatement formulation adequately protects the interests involved when its conditions are strictly complied with. Thus, to state a claim against a corporate officer for intentional interference with corporate contractual relations with another, a plaintiff must allege and prove each of the following elements: (1) the existence of a valid contractual relationship, (2) intentional interference with that relationship, (3) by a third party, (4) accomplished through improper means or for an improper purpose, (5) a causal effect between the interference and damage to the relationship, and (6) damages. See Tibke, 479 N.W.2d at 908 (following Restatement (Second) of Torts §§ 766, 766B). * * * 235

Third Party—Conduct Outside Scope of Employment A third party is an indispensable element in the tort of intentional interference with contractual relations. With interference suits against corporate officers, determination of such element precedes any further analysis. “Without the protection of the third party element of the tort, virtually every supervisory decision affecting employment status would be subject to judicial challenge through the Trojan horse of the intentional interference tort.” In what circumstances, then, will a corporate officer’s actions be considered the actions of a third party? In keeping with the principle of respondeat superior, when employees act within the scope of their employment, their acts are the acts of their company. State v. Hy Vee Food Stores, Inc., 533 N.W.2d 147, 149 (S.D.1995). A corporate entity cannot contractually interfere with itself. “[W]hen an employee is acting within the scope of the employee’s employment, and the employer, as a result, breaches a contract with another party, that employee is not a third party for the tort of intentional interference with economic relations.” McGanty [v. Staudenraus, 321 Or. 532, 901 P.2d 841, 846 (1995)]. Accordingly, when claiming tortious interference with a contractual relationship, the plaintiff must plead and prove that the officer acted outside the scope of employment. * * * “Generally, if an act is connected either directly or indirectly with the business of the employer (designed to benefit the employer’s business), that act is conducted within the scope of employment.” * * * The following considerations are relevant: (1) did the officer’s acts occur substantially within the time and space limits authorized by the employment; (2) were the actions motivated, at least in part, by a purpose to serve the employer; and (3) were the actions of a kind that the officer was hired to perform. See id.; see also McGanty, 901 P.2d at 846 n. 3. If the officer’s

actions were at least in part motivated by a purpose to serve the employer, then those actions cannot be the acts of a third party. *** “Improper” Means or Purpose After it is established that an intentional interference was committed by a third party, then it must be determined whether the interference was improper. The following elements from the Restatement (Second) of Torts § 767 should be considered in assessing whether a defendant’s interference with a contractual relation was improper: (a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the societal interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relations between the parties. St. Onge Livestock Co., Ltd. v. Curtis, 2002 SD 102, ¶ 16, 650 N.W.2d 537, 542 (quoting Restatement (Second) of Torts § 767 (1979)). *** 236

We now turn to Gruhlke’s complaint to determine whether she has sufficiently pleaded her claim against Bednar for intentional interference with her employment contract. * * * Gruhlke did not specifically assert that Bednar acted improperly, one of the required elements of proof, but she alleged that Bednar “acted intentionally and was unjustified in his actions in advocating the termination of Gruhlke’s business relationship with CU Mortgage.” She also gave a detailed recitation of the facts she believed supported her assertions. She alleged that Bednar “did not want Gruhlke at CU Mortgage because she would not sign off on fraudulent and misleading mortgages that Bednar originated . . . [and] because Gruhlke would not sign off on the fraudulent mortgages, Bednar lost commissions and/or had to sign off on the fraudulent mortgages himself.” * * * These assertions, as far as they go, are sufficient to form part of the elements required for the tortious interference action. * * * To establish that a corporate officer interfered as a third party in the company’s contract with another, the plaintiff must plead and prove that the officer “acted solely ‘in furtherance of [his or her] personal interests so as to preserve the logically necessary rule that a party cannot tortiously interfere with its own contract.” Latch v. Gratty, Inc., 107 S.W.3d 543, 545 (Tex.2003) (quoting Holloway v. Skinner, 898 S.W.2d 793, 796 (Tex. 1995)). * * *” Because we regard this type of action with high vigilance, we require strict adherence to the pleading requirements. * * * Although Gruhlke’s complaint does set forth detailed facts, it fails to contain a recitation of the required elements for a cause of action against a corporate officer for tortious interference. Thus, it fails to state a claim upon which relief can be granted.

NOTES AND QUESTIONS 1. If a corporate officer must act “solely” in his own interest to be a third party capable of tortiously interfering with a corporate employment contract, how can the officer be acting in part to serve the corporation’s interest? Does this mean that a successful interference claim against an employee/agent precludes respondeat superior liability for the employer? 2. How might Gruhlke amend her complaint to address the deficiencies identified by the court? 3. Third-Party Requirement. The third-party requirement included in Section 6.04(a) of the Employment Restatement reflects the nearly unanimous judicial position. Employees sometimes assert tortious interference claims against other employees as third parties. Supervisors acting in good faith within the scope of their authority in effecting a discharge will not be held liable under this tort. See, e.g., McGanty v. Staudenraus, 321 Or. 532, 538, 901 P.2d 841 (1995) (“when an employee is acting within the scope of the employee’s 237 employment, and the employer, as a result, breaches a contract with another party, that employee is not a third party for the tort of intentional interference with economic relations”). Individual employees, including supervisors, can be held liable for interference “to further their personal goals or to injure the other party [where] contrary to the best interest of the corporation.” George A. Fuller Co. v. Chicago Coll. of Osteopathic Med., 719 F.2d 1326, 1333 (7th Cir. 1983). See e.g., Haupt v. International Harvester Co., 582 F.Supp. 545 (N.D.Ill.1984) (denying summary judgment where supervisor planned employee’s termination to preserve “improper favoritism” towards a vendor); Miller v. Mount Sinai Medical Ctr., 288 A.D.2d 72 (2001) (no tortious interference claim based on negative reference unless supervisor’s “sole purpose” was to harm plaintiff). 4. Improper Means or Absence of Legitimate Business Justification. The Employment Restatement indicates that the interference tort requires proof that the defendant acted “by improper means or without a legitimate business interest.” The Restatement defines improper means and legitimate business justifications as follows:

Improper means include those defined by common or statutory law as wrongful. Intentional misrepresentation, whether or not defamatory, is an improper means. Legitimate business justifications include competition with other employers and anticipated business benefit from other employers, as when multiple employers exchange information about their employees. Legitimate business justifications, however, do not include a desire to retaliate against an employee out of spite or vindictiveness when the employer’s actions serve no legitimate business purpose. Employment Restatement § 6.03, comment b. 5. Privileged Conduct. Under the Employment Restatement § 6.03, employers have an affirmative defense where their conduct falls within a recognized privilege. Truthful statements to prospective employers for a legitimate business purpose are privileged. Id. § 6.02. Litigation or the threat of litigation is also privileged, unless made (1) without “probable cause to believe the suit will succeed” and (2) for a purpose other than to “properly adjudicate claims.” See, e.g., G.S. Enterprises, Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 571 N.E.2d 1363 (Mass 1991); Restatement (Second) of Torts § 767 (comment c). Cf. Guinn v. Applied Composites Eng. Inc., 994 N.E.2d 1256 (Ind. Ct. App. 2013) (also examining “the degree of coercion involved, the extent of harm that it threatens . . . and the general reasonableness” of former employer’s threat of litigation).

C. DEFAMATION Traditional formulations of the tort of defamation require “publication” as an essential element of the claim—meaning that the defendant made the defamatory statement to a third party. See Restatement (Second) of Torts § 577(1) (1977). The next case, Lewis v. 238

Equitable Life, addresses the question of whether a defamation claim can arise from a statement made only to the employee.

RESTATEMENT OF EMPLOYMENT LAW §§ 6.01–6.02 American Law Institute (2015).

§ 6.01. Employer’s Liability to Employee for Defamation (a) Subject to the privilege stated in § 6.02 and to other applicable privileges, an employer publishing a false and defamatory statement about an employee is subject to liability for the harm the publication causes. (b) An employer publishes a statement about an employee when the employer makes the statement: (1) to any third party, including prospective employers, regulatory authorities, or employment agencies; (2) to employees or others within the employer’s organization; or (3) to the employee, if the employer knows or should know that the employee will have to disclose the statement to prospective employers or others, the employee asks the employer to promise not to disclose the statement to any third party, and the employer refuses to promise. § 6.02. Employer Qualified Privilege to Publish Statements Concerning an Employee or Former Employee (a) Unless denied under (b), an employer has a privilege to publish statements about an employee to: (1) prospective employers and employment agencies; (2) public or private regulatory or licensing authorities; and (3) the employer’s own employees and agents. (b) An employer is denied this privilege when the employer abuses it by publishing a statement, described in subsection (a), that the employer either (i) knows is false or acts with reckless disregard of its truth or falsity, or (ii) knows or should know that neither the employer nor the recipient has a legitimate interest in the recipient receiving the statement. 239

LEWIS V. EQUITABLE LIFE ASSUR. SOCIETY Supreme Court of Minnesota, 1986. 389 N.W.2d 876.

AMDAHL, C.J. Plaintiffs, Carole Lewis, Mary Smith, Michelle Rafferty, and Suzanne Loizeaux, former employees of defendant, the Equitable Life Assurance Society of the United States (company), all hired for indefinite, at-will terms, were discharged for the stated reason of “gross insubordination.” They claim that they were discharged in breach of their employment contracts, as determined by an employee handbook, and that they were defamed because the company knew that they would have to repeat the reason for their discharges to prospective employers. A Ramsey county jury awarded plaintiffs compensatory and punitive damages. The Minnesota Court of Appeals affirmed the award but remanded on the issue of contract damages for future harm. We affirm in full the award of compensatory damages but reverse the award of punitive damages. *** In seeking new employment, plaintiffs were requested by prospective employers to disclose their reasons for leaving the company, and each indicated that she had been “terminated.” When plaintiffs received interviews, they were asked to explain their terminations. Each stated that she had been terminated for “gross insubordination” and attempted to explain the situation. The company neither published nor stated to any prospective employer that plaintiffs had been terminated for gross insubordination. Its policy was to give only the dates of employment and the final job title of a former employee unless specifically authorized in writing to release additional information. Only one plaintiff found employment while being completely forthright with a prospective employer about her termination by the company. A second plaintiff obtained employment after she misrepresented on the application form her reason for leaving the company. She did, however, explain the true reason in her interview. A third plaintiff obtained employment only when she left blank the question on the application form requesting her reason for leaving her last employment; the issue never arose in her interview. The fourth plaintiff has been unable to find full-time employment. All plaintiffs testified to suffering emotional and financial hardship as a result of being discharged by the company. *** Defamation Claim With regard to plaintiffs’ defamation claims, the company argues that the trial court’s conclusion of liability on the part of the company was erroneous because: (1) the only publications of the allegedly defamatory 240

statement were made by plaintiffs; (2) the statement in question was true; and (3) the company was qualifiedly privileged to make the statement. 1. Publication In order for a statement to be considered defamatory, it must be communicated to someone other than the plaintiff, it must be false, and it must tend to harm the plaintiff’s reputation and to lower him or her in the estimation of the community. * * * Generally, there is no publication where a defendant communicates a statement directly to a plaintiff, who then communicates it to a third person. Restatement (Second) of Torts § 577, comment m (1977). Company management told plaintiffs that they had engaged in gross insubordination, for which they were being discharged. This allegedly defamatory statement was communicated to prospective employers of each plaintiff. The company, however, never communicated the statement. Plaintiffs themselves informed prospective employers that they had been terminated for gross insubordination. They did so because prospective employers inquired why they had left their previous employment. The question raised is whether a defendant can ever be held liable for defamation when the statement in question was published to a third person only by the plaintiff. We have not previously been presented with the question of defamation by means of “self-publication.” Courts that have considered the question, however, have recognized a narrow exception to the general rule that communication of a defamatory statement to a third person by the person defamed is not actionable. See, e.g., McKinney v. County of Santa Clara, 110 Cal.App.3d 787, 168 Cal.Rptr. 89 (1980); Colonial Stores, Inc. v. Barrett, 73 Ga.App. 839, 38 S.E.2d 306 (1946); Belcher v. Little, 315 N.W.2d 734 (Iowa 1982); Grist v. Upjohn Co., 16 Mich.App. 452, 168 N.W.2d 389 (1969); Bretz v. Mayer, 1 Ohio Misc. 59, 203 N.E.2d 665 (1963); First State Bank of Corpus Christi v. Ake, 606 S.W.2d 696 (Tex.Civ.App.1980). These courts have recognized that if a defamed person was in some way compelled to communicate the defamatory statement to a third person, and if it was foreseeable to the defendant that the defamed person would be so compelled, then the defendant could be held liable for the defamation. *** The company presents two arguments against recognition of the doctrine of compelled self-publication. It argues that such recognition amounts to creating tort liability for wrongful discharge which, it asserts, has been rejected by this court. In Wild v.

Rarig, 302 Minn. [419,] 442, 234 N.W.2d [775, 790 (1975)], we held that bad-faith termination of contract is not an independent tort of the kind that will permit a tort recovery. The company, however, misreads our holding regarding tort liability for wrongful discharge. We did not hold that the harm resulting from a bad-faith termination of a contract could never give rise to a tort recovery. 241

Indeed, we recognized such a possibility by stating that a plaintiff is limited to contract damages “except in exceptional cases where the defendant’s breach of contract constitutes or is accompanied by an independent tort.” Id. at 440, 234 N.W.2d at 789. If plaintiffs here can establish a cause of action for defamation, the fact that the defamation occurred in the context of employment discharge should not defeat recovery. The company also argues that recognition of the doctrine of self-publication would discourage plaintiffs from mitigating damages. This concern does not appear to be a problem, however, if liability for self-publication of defamatory statements is imposed only where the plaintiff was in some significant way compelled to repeat the defamatory statement and such compulsion was, or should have been, foreseeable to the defendant. Also, the duty to mitigate can be further protected by requiring plaintiffs when they encounter a situation in which they are compelled to repeat a defamatory statement to take all reasonable steps to attempt to explain the true nature of the situation and to contradict the defamatory statement. In such circumstances, there would be no voluntary act on the part of a plaintiff that would constitute a failure to mitigate. This point is clearly illustrated by the present action. The company points to no reasonable course of conduct that plaintiffs could have taken to mitigate their damages. The trend of modern authority persuades us that Minnesota law should recognize the doctrine of compelled selfpublication. We acknowledge that recognition of this doctrine provides a significant new basis for maintaining a cause of action for defamation and, as such, it should be cautiously applied. However, when properly applied, it need not substantially broaden the scope of liability for defamation. The concept of compelled self-publication does no more than hold the originator of the defamatory statement liable for damages caused by the statement where the originator knows, or should know, of circumstances whereby the defamed person has no reasonable means of avoiding publication of the statement or avoiding the resulting damages; in other words, in cases where the defamed person was compelled to publish the statement. In such circumstances, the damages are fairly viewed as the direct result of the originator’s actions. *** In the present action, the record indicates that plaintiffs were compelled to repeat the allegedly defamatory statement to prospective employers and that the company knew plaintiffs would be so compelled. The St. Paul office manager admitted that it was foreseeable that plaintiffs would be asked by prospective employers to identify the reason that they were discharged. Their only choice would be to tell them “gross insubordination” or to lie. Fabrication, however, is an unacceptable alternative. 242

2. Issue of Truth Finding that there was a publication, we next turn to the issue of truth. True statements, however disparaging, are not actionable. * * * Since it is true that plaintiffs were fired for gross insubordination, the company argues, they cannot maintain an action for defamation. The company contends the relevant statement to consider when analyzing the defense of truth is the one that plaintiffs made to their prospective employers, that is, that they had been fired for gross insubordination. Plaintiffs counter that it is the truth or falsity of the underlying statement—that plaintiffs engaged in gross insubordination—that is relevant. Requiring that truth as a defense go to the underlying implication of the statement, at least where the statement involves more than a simple allegation, appears to be the better view. See Restatement (Second) of Torts § 581A, comment e (1977). Moreover, the truth or falsity of a statement is inherently within the province of the jury. This court will not overturn a jury finding on the issue of falsity unless the finding is manifestly and palpably contrary to the evidence. Thus, we find no error on this point because the record amply supports the jury verdict that the charge of gross insubordination was false. 3. Qualified Privilege *** The doctrine of privileged communication rests upon public policy considerations. As other jurisdictions recognize, the existence of a privilege results from the court’s determination that statements made in particular contexts or on certain occasions should be encouraged despite the risk that the statements might be defamatory. See Calero v. Del Chemical Corp., 68 Wis.2d 487, 498, 228 N.W.2d 737, 744 (1975). Whether an occasion is a proper one upon which to recognize a privilege is a question of law for the court to determine. Jacron Sales Co. v. Sindorf, 276 Md. 580, 350 A.2d 688 (1976); Fisher v. Myers, 339 Mo.

1196, 100 S.W.2d 551 (1936); Cash v. Empire Gas Corp., 547 S.W.2d 830, 833 (Mo.Ct.App.1976). In the context of employment recommendations, the law generally recognizes a qualified privilege between former and prospective employers as long as the statements are made in good faith and for a legitimate purpose. *** * * * A qualified privilege may be lost if it is abused. The burden is on the plaintiff to show that the privilege has been abused. While the initial determination of whether a communication is privileged is a question of law for the court to decide, the question of whether the privilege was abused is a jury question. Restatement (Second) of Torts, § 619 (1977). * * * The company * * * argues that the court’s instructions incorrectly stated the standard of malice which plaintiffs must prove if the existence 243

of a qualified privilege is demonstrated. The law recognizes essentially two definitions of malice in defamation cases: the “actual malice” definition as set forth in New York Times Co. v. Sullivan, 376 U.S. 254, 279–80, 84 S.Ct. 710, 726, 11 L.Ed.2d 686 (1964), and the common-law definition. See Stuempges [v. Parke, Davis & Co., 297 N.W.2d 252, 257 (Minn.1980)]. The common-law definition is more appropriate in the employer-employee situation because it focuses on the employer’s attitude toward the plaintiff. See id. at 258. Under the common-law definition, malice exists where the defendant “ ‘made the statement from ill will and improper motives, or causelessly and wantonly for the purpose of injuring the plaintiff.’ ” Id. at 257 (quoting McKenzie v. William J. Burns International Detective Agency, Inc., 149 Minn. 311, 312, 183 N.W. 516, 517 (1921)). In its instructions, the court informed the jurors that if they found that the company was entitled to a qualified privilege, plaintiff had to prove that the statement was made “with actual malice.” In defining malice for the jury, the court correctly set forth the common-law definition. We therefore find no error in the jury instructions. Damages 1. Compensatory Damages * * * Neither expungement of the company’s records nor vindication at trial eliminate all future harm to the plaintiffs’ earning capacity. The fact that plaintiffs brought suit against the company may itself have future detrimental effects. A person who brings suit against a former employer is likely to be a less attractive employment candidate to prospective employers. No amount of vindication with respect to the gross insubordination charge can eliminate this impact on plaintiffs’ future work lives. We conclude that there was no error in including damages for future harm in plaintiffs’ awards. The trial court awards of compensatory damages are supported by the evidence, and we therefore reverse the court of appeals directive remanding the issue of compensatory damages. 2. Punitive Damages * * * [W]e deny the imposition of punitive damages in defamation actions involving compelled self-publication. We are concerned that the availability of punitive damages may tend to encourage publication of defamatory statements in actions where the plaintiff, rather than the defendant, does the actual publication. More importantly, in the context of an employee discharge, the availability of punitive damages in such an action may significantly deter employer communication of the reason for discharge. 244

NOTES AND QUESTIONS 1. How does the court avoid the publication requirement in Lewis? Compare the court’s definition of self-publication to the articulation in Section § 6.01(b)(3) of the Employment Restatement. 2. How does the court in Lewis formulate the qualified privilege? Is it consistent with Section § 6.02 of the Restatement? 3. What would be the optimal regulatory regime for employment references? Consider the following possible regimes: (a) strict employer liability; (b) an absolute privilege; (c) a qualified privilege; (d) mandatory disclosure by the employer. See J. Hoult Verkerke, Legal Regulation of Employment Reference Practices, 65 U. Chi.L. Rev. 115 (1998). History of Self-Publication The “self-publication” concept originated in the wartime case of Colonial Stores, Inc. v. Barrett, 73 Ga.App. 839, 38 S.E.2d 306 (1946). Under the regulations of the War Manpower Commission, employers were required

to furnish discharged employees with written statements of availability, and prospective employees were required to display this certificate to prospective employers. Barrett’s former employer wrote on the certificate that he had been fired for “improper conduct toward fellow employees.” The writing violated the regulations’ prohibition of information “prejudicial to the employee in seeking new employment.” Id. at 841, 38 S.E.2d at 308. 4. Self-Publication. Most jurisdictions reject a broad doctrine of compulsory “self-publication.” See, e.g., Cweklinsky v. Mobil Chem. Co., 267 Conn. 210, 837 A.2d 759, 761–763 (2004); White v. Blue Cross & Blue Shield of Mass., Inc., 442 Mass. 64, 809 N.E.2d 1034 (2004); Sullivan v. Baptist Memorial Hosp., 995 S.W.2d 569, 570–575 (Tenn. 1999); Gore v. Health-Tex, Inc., 567 So.2d 1307, 1308–1309 (Ala. 1990). Compare Employment Restatement § 6.01(b)(3) & Comment d. 5. Internal Communications. In many jurisdictions, publication may be found in internal communications between employees or officers of the same corporation which exceed “need to know” strictures. See, e.g., Dube v. Likins, 216 Ariz. 406, 417–418, 167 P.3d 93 (2007) (finding a majority of jurisdictions in favor of recognizing intrafirm publication); Torosyan v. Boehringer Ingelheim Pharm., 234 Conn. 1, 27–28, 662 A.2d 89 (1995); Employment Restatement § 6.01(b)(2) & Comment b. Restatement (Second) of Torts § 577(1), Comment (i); Rodney Smolla, Law of Defamation Sec. 15.02 (1994). But see Otteni v. Hitachi America Ltd., 678 F.2d 146 (11th Cir.1982) (no publication if communication is limited to employer’s officers or members of their immediate staff). 245 6. Privileges. Privilege and malice are often central to employment-related defamation claims. a. Absolute Privilege. The “litigation privilege” affords an absolute privilege to statements made in judicial and quasi-judicial proceedings. See, e.g., Rogozinski v. Airstream by Angell, 152 N.J.Super. 133, 377 A.2d 807, 816 (1977) (statements mandated by an unemployment compensation commission are entitled only to qualified privilege because no judicial or quasi-judicial proceeding was pending at the time); Cal. Civ. Code § 47(2) (covering publication in “any (1) legislative or (2) judicial proceeding, or (3) in any other official proceeding authorized by law”). Some courts have extended an absolute privilege to statements required by collective bargaining agreements or arising out of grievance proceedings. See Hasten v. Phillips Petroleum Co., 640 F.2d 274 (10th Cir.1981); General Motors Corp. v. Mendicki, 367 F.2d 66 (10th Cir.1966). But see Overall v. University of Pennsylvania, 412 F.3d 492 (3d Cir.2005). b. Qualified Privilege. For statements made in the course of internal company investigations or in response to inquiries about the performance of former employees, only a qualified privilege is likely to be available. Such a privilege is defeated, as was the case in Lewis, on a showing of “malice.” As the Lewis court states, the Supreme Court’s First Amendment decision in New York Times Co. v. Sullivan, 376 U.S. 254 (1964), offered a definition of malice that differs from the common law definition adopted in Lewis. The Sullivan definition requires the publisher either to know that the defamatory statement is false or to have reckless disregard of its truth or falsity. This definition has been accepted by an increasing number of jurisdictions. See, e.g., McIntyre v. Jones, 194 P.3d 519, 530 (Colo. App. 2008); Denardo v. Bax, 147 P.3d 672, 679 (Alaska 2006); Ball v. British Petroleum Oil, 108 Ohio App.3d 129, 670 N.E.2d 289, 293, 295 (1995). 7. Retaliatory References. Former employees may have a claim under the discrimination laws if negative references are used as a means of retaliating against them for their prior claims or oppositional activity, even if the claimed retaliation occurs after employment is terminated. See Burlington Northern v. White, 548 U.S. 53 (2006). 8. Securities Industry Reporting. In the securities industry, employers are required by the stock exchanges to complete a Form U-5 setting forth the reasons for every termination of employment of a registered representative. Information contained in the Form U-5 is available to prospective employers and investors. Responding to a certified question from the Second Circuit, the New York Court of Appeals held in Rosenberg v. MetLife, Inc., 8 N.Y.3d 359, 834 N.Y.S.2d 494, 866 N.E.2d 439 (2007), that an employer’s statements on a National Association of Securities Dealers’ (NASD)’s, now the Financial Industry Regulation Authority (FINRA)’s, employee termination notice (Form U-5) are protected by an absolute privilege in defamation law suits. The court emphasized the public function of the Form U-5 reporting system: “The Form U-5 plays a significant role in the NASD’s self-regulatory process. * * * Upon receipt of the Form U-5, the NASD routinely investigates terminations for 246 cause to determine whether the representative violated any securities rules.” Id. at 367. 9. Reporting Child Abuse. Many jurisdictions have passed laws requiring individuals working in certain professions to report suspected child abuse, and impose civil or criminal penalties for failing to report. See Child Abuse Prevention and Treatment Act of 1988, Pub. L. 93–247, and subsequently amendments (federal funds seeking to promote state mandatory reporting laws). See generally Elizabeth Tippett, Child Abuse as an Employment Dispute, 17 Quinnipiac Health L. J. 16 (2014).

Employers can face substantial liability for failing to respond effectively to reports of potential abuse. See CNN.com, “Penn State paying $59.7 million to settle Sandusky cases” (Oct 28, 2013). See also Randi W. v. Muroc Joint Unified School Dist., 14 Cal.4th 1066, 60 Cal.Rptr.2d 263, 929 P.2d 582 (1997) (fraud and negligence claim by victim against school district that had no obligation to provide any reference but in fact provided an unqualified letter of reference for employee subject to numerous allegations of sexual impropriety).

States typically provide statutory immunity for reports to state child welfare agencies. See, e.g., N.Y. Social Svcs. Law § 419. However, accused employees sometimes bring defamation claims for statements to other employees or third parties. See, e.g., Washington v. Vogel, 2011 WL 2923862 (Tenn. Ct. App. 2011); Morely v. Crawford, No. 303466 (Mich. Ct.App., 2012). 10. Missouri’s “Service Letter” Statute. Missouri requires employers on request to furnish a written statement “setting forth the nature and character of service rendered by such employee * * * and truly stating for what cause, if any, such employee was discharged or voluntarily quit such service.” Inaccuracies in such a “service letter” may result in liability for compensatory but not punitive damages. Vernon’s Ann.Mo.Stat. § 290.140; see Neb.Rev.Stat. § 48–211; Vernon’s Texas Ann.Civ.St. art. 5196, subd. 3. For a decision under the Missouri statute, see Gibson v. Hummel, 688 S.W.2d 4 (Mo.App.1985). 11. Access to Personnel Files. Following the Federal Privacy Act, 5 U.S.C. § 552a, some states have also mandated employee access to personnel files and a right to correct inaccurate information in such files. See, e.g., Cal. Labor Code § 1198.5; Conn. Gen. Stat. Ann. § 21–128e (West 1997); Nev.Rev.Stat. 613.075; Wis.Stat.Ann. 103.13. See p. 294 for a discussion of the Fair Credit Reporting Act. 12. Anti-“Blacklisting” Laws. A few states also prohibit employers from “blacklisting” or from conspiring or acting to prevent a discharged employee from securing new employment. See, e.g., Cal. Labor Code § 1050; Nev.Rev.Stat. 613.210; Vernon’s Ann.Texas Civ.Stat. art. 5196. Typically, such provisions privilege “truthfully stating in writing, on request of such former employee or other persons to whom such former employee has applied for employment, the reason why such employee was discharged, and why his relationship to such company ceased.” Vernon’s Ann. Texas Civ.St. art. 5196, subd. 1. 247 13. “Qualified Immunity” Laws. In an effort to encourage employers to avoid “no comment” letters which may hamstring reemployment of the former employee and certainly deprive new employers of material information about the prospective employee they are not likely to acquire from interviews and background checks, a number of states have enacted statutes conferring a “good faith” immunity on those who provide employment references. See, e.g., Alaska Stat. § 9.65.10 (Michie 1996); Colo. Rev. Stat. § 8–2–114 (1997); Ill. Comp. Stat. Ann. 46/10 (West Supp. 1997); Mich. Comp. Laws Ann. 423.452 (West Supp. 1998) These laws typically take the form of a presumption of an employer’s good faith in providing a reference, to be rebutted on a showing of reckless, knowing or maliciously motivated disclosure of false or misleading information. Do these laws merely reflect common law standards? What should be done to encourage or require employers to provide references, at least when sought by the departing employee? Other than the child abuse situations referenced in Note 8 above, are there other circumstances where employers should face liability for not disclosing employee misconduct to prospective employers and government authorities?

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CHAPTER 7 WORKPLACE INJURIES ■■■

Employers have common law duties to provide a safe workplace and to warn of risks to employees (and other invitees). But few civil actions for workplace injuries are brought because in most states an employee’s exclusive remedy lies in the workers’ compensation system. These laws generally provide compensation on a no-fault basis, requiring only that the injury be otherwise covered by the workers’ compensation law and occur in the course and within the scope of employment. Awards cover medical expenses and partial wage replacement while the employee is unable to work. Wage replacement rates vary between 60% and 80% of the employee’s average weekly wage, depending on the state. Damages for pain and suffering are generally unavailable. See generally Samuel Estreicher, The Law of Employment, ch. 7 (2d ed. 2021).

A. DUTY TO PROVIDE A SAFE WORKPLACE RESTATEMENT OF EMPLOYMENT LAW § 4.05 American Law Institute (2015).

§ 4.05. Employer’s Duty to Provide Safe Conditions and to Warn of Risk Except to the extent precluded by a workers’ compensation statute or other law, an employer is subject to liability for harm caused to an employee by failing: (a) to provide a reasonably safe workplace, including reasonably safe equipment; or (b) to warn of the risk of dangerous working conditions that the employer, but not the harmed employee, knew or should have known.

NOTES AND QUESTIONS 1. Duty to Provide Safe Working Conditions. All states recognize a common law duty to provide a safe workplace. Employment Restatement § 4.05, Reporters’ Notes, Comment a. As with other common law negligence claims, recovery for breach of this duty requires the plaintiff to prove both the breach and that the breach caused the harm. See Foote v. Simek, 2006 WY 96 (Wyo. 2006); Jackson v. Murphy Farm & Ranch, Inc. 982 So.2d 1000 (Miss. 250 2008). The duty to provide safe working conditions also includes a duty to take reasonable precautions against the risk of criminal attacks on employees in the workplace. Employment Restatement § 4.05, Comment d. Lawsuits alleging a breach of the duty to provide a safe workplace or breach of the duty to warn of workplace hazards are uncommon because most negligence claims are precluded by a state workers’ compensation scheme. 2. Duty to Rescue. The employer’s duty to provide a safe workplace also includes a limited duty “to help employees who became vulnerable to harm in the workplace because of an injury or illness, even if the employer is not responsible for that injury or illness.” Employment Restatement § 4.05, Comment e. See Nurredin v. Northeast Ohio Regional Sewer Dist., 104 Ohio App.3d 672 (Oh. 1995) (employer had a duty to protect employee from imminent harm when it delayed calling an ambulance for an employee suffering from a heart attack); Dupont v. Aavid Thermal Tech., 798 A.2d 587, 147 NH 706 (N.H. 2002) (recognizing duty to protect employee from imminent harm where employer failed to contact the police when a coworker confronted an employee with a loaded handgun).

B. PRECLUSION BY WORKERS’ COMPENSATION LAWS Workers’ compensation legislation was developed in the early twentieth century. These laws replaced the employee’s common law negligence action against their employer with a no-fault insurance scheme funded by mandatory employer contributions. The legislation reflected a compromise between employees who were blocked from receiving compensation in

the common law courts because of several defenses to negligence liability (e.g., fellow-servant doctrine, assumption of risk, and contributory negligence) and employers (and their insurers) eager to avoid the risk of high or unpredictable jury awards. See generally Estreicher, Law of Employment, supra, ch. 7; Lawrence M. Friedman, A History of American Law, ch. 14 (1973); Richard A. Epstein, The Historical Origins and Economic Structure of Workers’ Compensation Law, 16 Ga.L.Rev. 775 (1982). Workers’ compensation provides for claimant-friendly no-fault recovery for covered injuries and medical expenses. The system is handled by administrators whose principal focus is to determine whether the injury is covered and the extent of the injury and medical expenses. In general terms, employees can file a workers’ compensation claim for injuries arising in the course and within the scope of their employment. (covered claims). Workers’ compensation is an exclusive remedy, meaning that employees cannot bring a common law cause of action for injuries covered by workers’ compensation. Employees cannot avoid the exclusivity of the workers’ compensation remedy by electing a tort remedy instead; covered claims, whether sounding in tort or otherwise, are barred as a matter of law. Larson’s Worker’s Compensation Law § 100.01 (2015) (Larson’s Workers Comp.). 251

The exclusivity of the workers’ compensation remedy applies to injuries covered by the workers’ compensation statute, which varies by state. If the plaintiff is a bona fide independent contractor, the contractor generally will not be covered by workers’ compensation and thus free to bring a civil action. See e.g. McCown v. Hones, 353 N.C. 683 (N.C. 2001). Depending on state law, if the employer is not covered by the workers’ compensation act, or has willfully failed to purchase workers’ compensation insurance, the injured employee will not be limited to a workers’ compensation remedy. See e.g. Mass. Gen. Laws ch. 152 §§ 66–67 (employees of uninsured employer may bring tort claims); 77 Pa. Stat. § 501 (same); Ala. Code § 25–5– 50 (domestic employees, farm laborers and casual employees excluded from coverage); Larson’s Workers Comp. § 102.02. Two states permit employers to opt out of the workers’ compensation scheme entirely. See Texas Lab. Code § 406.002; 85A Okla. Stat § 85A–202 (2014). See generally Alison D, Morantz, Rethinking the Great Compromise: What Happens When Large Companies Opt Out of Workers’ Compensation? (SSRN, Oct. 15, 2015). Where the workers’ compensation regime is limited to physical injuries, some states permit employees to assert tort claims based solely on mental injuries. See e.g. Onstad v. Payless Shoesource, 301 Mont. 259, 9 P.3d 38 (Mont. 2000) (permitting tort claim for posttraumatic stress caused by sexual assault from customers). But see Bias v. Eastern Assoc. Coal Corp, 220 W. Va. 190, 640 S.E.2d 540 (W.Va. 2006) (workers’ compensation statute barred tort claims arising from mental injuries, even though mental injuries are not compensable under the statute regime); Slaymaker v. Archer-Daniels-Midland Co., 540 N.W. 2d 459 (Iowa Ct. App. 1995) (intentional infliction of emotional distress claim barred when both mental and physical injuries are compensable). An employee may also have a tort remedy where the injury does not arise in the course or within the scope of employment. See e.g. Yunker v. Honeywell, infra (tort remedy available where employee murdered by co-employee at home); Potts v. Uap-Ga Ag. Chem., 270 Ga. 14, 506 S.E.2d 101 (Georgia 1998) (permitting fraud claim based on statement made outside of employment). Many states recognize an exception to workers’ compensation exclusivity for assault and battery (the “assault exception”) or more broadly, for intentional torts committed by the employer or its agents. See e.g. Ariz. Rev. Stat. § 23–1022 (exception for “willful misconduct” by the employer); Cal. Lab. Code § 3602 (assault exception); N.J. Stat § 34:15–8 (exception for “intentional wrong”). But see Potts, supra (claims based on intentional misconduct barred if arising in the course of employment). 252

BOWDEN V. YOUNG Supreme Court of Mississippi, 2013. 120 So.3d 971. KITCHENS, J. This is an interlocutory appeal from the trial court’s denial of the defendant Vaughn, Bowden, PA’s (V & B) (f/k/a Vaughn, Bowden & Wooten, PA) motion to dismiss for failure to state a claim upon which relief can be granted. * * * Cheri Blackmore and Diane Young were legal assistants at V & B. Blackmore worked at V & B from 2006 until December 2009. Young worked at the firm from August 2009 until December 2009. In 2006, Blackmore worked in one of the firm’s buildings on 23rd Avenue in Gulfport (Building A). Blackmore contends that her health deteriorated significantly during her time at that building as a result of exposure to toxic mold there. She alleges that several others at the office experienced similar symptoms, and that one employee was even fired for failing to show up for work on account of poor health. This led Blackmore

to fear that any complaints or excessive absences would cost her job. She alleges that the supervisors at the firm ignored her complaints and told the employees to stop whining. In February 2009, the firm moved all of its employees to a new building on 25th Avenue in Gulfport (Building B). * * * V & B admit that this building suffered from moisture intrusion. Blackmore claims that, when she moved to Building B, she continued to suffer the same mold-exposure symptoms she had suffered at Building A. The building also had a gas leak which exposed workers to natural-gas fumes. Several raw-sewage backups occurred in the women’s restroom, which flooded into the front of the office. The plaintiffs claim that Lowry Development and V & B were informed repeatedly about the presence of mold in Building B, but did nothing to remediate it. In June 2009, a “Mold Killer Spray” was applied to the surfaces of the office in Building B. The plaintiffs claim this also damaged the health of the V & B employees. In August 2009, Young began working at Building B. She claims that she immediately began to suffer health problems because of exposure to mold. Throughout the time the plaintiffs claim they were exposed to toxic mold at Building B, the partners who have been named defendants also worked in the same building. * * * The plaintiffs brought claims against V & B for battery, intentional infliction of emotional distress, aiding and abetting the maintenance of a public and private nuisance, and conspiracy. * * * This Court repeatedly has held that, “in order for a willful tort to be outside the exclusivity of the Mississippi Workers’ Compensation Act [(MWCA)], the employe[r]’s action must be done ‘with an actual intent to injure the employee.’ ” * * *] “[A] mere willful and malicious act is insufficient to give rise to the intentional tort exception to the exclusive 253

remedy provisions of the [MWCA]. . . . Reckless or grossly negligent conduct is not enough to remove a claim from the exclusivity of the [MWCA].” * * * As recently as 2009, this Court found that “Mississippi is in concurrence with an overwhelming majority of states in requiring an ‘actual intent to injure’ the employee.” * * * * * * We will examine each claim to determine whether it falls outside the exclusivity provision of the MWCA. A. Battery The plaintiffs allege that they were exposed intentionally to toxic mold, to a toxic Mold Killer Spray designed to get rid of the mold, and to poisonous fumes from a sewage leak. * * * With regard to the toxic mold, the plaintiffs contend that V & B battered the plaintiffs when it failed to remediate the mold conditions, and the plaintiffs thereafter inhaled the toxic mold. However, none of the claims asserts that V & B acted with “actual intent” to batter and injure the plaintiffs. Several of the alleged acts of battery involved the use of the Mold Killer Spray, which was being used to kill the mold that was causing injury to the plaintiffs. It is not possible that the defendants were allowing the mold to exist with the intent of injuring the plaintiffs while at the same time attempting to destroy the mold. Further, the application of the Mold Killer Spray clearly was not done with any “actual intent” to injure the plaintiffs. Rather, it was applied in an attempt to remediate the mold situation. Similarly, the plaintiffs contend that they were battered by toxic gas emanating from sewage backup. This claim must fail because there is no allegation that the defendants permitted the sewage backup to exist with the actual intent to injure the plaintiffs. * * * B. Intentional Infliction of Emotional Distress * * * Taking the allegations of the plaintiffs’ complaint as true, they have failed to state a claim upon which relief can be granted. V & B initially denied that there was any mold in the building. Management suggested other potential causes of the plaintiffs’ ailments. When it became apparent that mold was in fact present in the building, V & B attempted to remediate the situation by applying the Mold Killer Spray. Once the October Lab Report was received, V & B specifically informed the plaintiffs that it would search for new office space. While the defendants’ handling of the mold problem may have been negligent, the allegations do not rise to the level of outrageous and extreme conduct that is necessary to support a claim for intentional infliction of emotional distress. Further, the plaintiffs still must be able to show that the actions of the defendants were conducted with “actual intent” to injure the plaintiffs. The fact that V & B attempted to remediate the mold issue, and ultimately decided to relocate its offices due to the mold, leads to the inevitable conclusion that the actions of V & B 254

were not done with the actual intent to inflict emotional distress upon the plaintiffs. * * *

NOTES AND QUESTIONS 1. The Mississippi workers’ compensation statute in Bowden provided:

“Compensation shall be payable for disability or death of an employee from injury or occupational disease arising out of and in the course of employment, without regard to fault as to the cause of the injury or occupational disease. An occupational disease shall be deemed to arise out of and in the course of employment when there is evidence that there is a direct causal connection between the work performed and the occupational disease.” Miss. Code § 71–3–7. 2. Mold Cases. According to the U.S. Centers for Disease Control and Prevention, mold is found indoors and outdoors, in thousands of varieties. Mold does not affect everyone in the same way; some people are more sensitive to mold and may have more severe reactions. See Centers for Disease Control and Prevention, “Molds in the Environment” available at http://www.cdc.gov/mold/faqs.htm. Should mold-sensitive employees be able to recover under the workers’ compensation scheme? Compare Connolly v. Covanta Energy Corp, 123 A.D.3d 1394, 1 N.Y.S.3d 404 (N.Y. App. 3d Div. 2014) (plaintiff failed to prove mold exposure caused occupational disease because he “could have been exposed to it anywhere at any time”); to Sillitti v. Liberty Travel, Inc., 83 A.D.3d 1169, 920 N.Y.S.2d 477 (N.Y. App. 3d Div. 2011) (mold exposure compensable where it exacerbated preexisting pulmonary disease). 3. Intentional Wrong? The “intent” element of an intentional tort is be inferred from the facts and circumstances. Did the employer commit an intentional wrong in Bowden? 4. Tort Claims Arising from Sexual and Other Workplace Harassment. As a general matter, claims under state and federal antidiscrimination statutes are not precluded by workers’ compensation. See e.g., Horodyskyj v. Karanian, 32 P.3d 470 (Colo. 2001) (applying exclusivity principle to sexual harassment claim would undermine legislative purpose of eliminating discrimination in the workplace). In some jurisdictions, common-law sexual harassment claims may also be found to be implicitly exempt from the exclusivity provision, See, e.g., Shoemaker v. Myers, 52 Cal, 3d 1, 276 Cal. Rptr. 303 (1990); see also Ford v. Revlon, 153 Ariz. 38, 734 P.2d 580 (1987) (intentional infliction of emotional distress arising from sexual harassment not barred); but see, e.g., Konstantopoulos v. Westvaco Corp., 690 A.2d 936 (Del.1996) (no sexual-harassment or sexual-assault exception to exclusivity provision); Hibben v. Nardone, 137 F.3d 480 (7th Cir.1998) (exclusivity provision under Wisconsin law applies to emotional-distress claims even when such claims are based on sexual harassment by coworker), 5. Retaliation for Filing Workers’ Compensation Claims. As a general matter, employees discriminated against in their job conditions for filing a workers’ compensation claim have an action in the courts as a matter of statute 255 or common law. See Larson’s Workers’ Comp. § 104.07. See also Kelsay v. Motorola, Inc., 74 Ill.2d 173, 384 N.E.2d 358 (1978), p. 137.

NOTE: PRINCIPLES OF EMPLOYER LIABILITY If we assume that an employee’s claim is not barred by the workers’ compensation regime, an employee alleging a tort claim against their employer must prove that the employer is either directly or vicariously liable for the tortious conduct.

RESTATEMENT OF EMPLOYMENT LAW §§ 4.01–4.03 American Law Institute (2015).

§ 4.01. Scope of Employer’s Liability to Employees Generally Except to the extent precluded by a workers’-compensation statute or other law, an employer is subject to liability in tort to an employee for harm caused in the course of employment by: (a) the tortious conduct of the employer, as set forth in § 4.02; (b) the tortious conduct of the employer’s employees and nonemployee agents, to the extent set forth in § 4.03; and (c) the breach by the employer of its tort-based affirmative duties, including those set forth in §§ 4.04 and 4.05. § 4.02. Employer’s Direct Liability to Employees for Its Own Conduct Except to the extent precluded by a workers’-compensation statute or other law, an employer is subject to liability in tort to an employee for harm caused in the course of employment by the tortious conduct of the employer or controlling owner. § 4.03. Employer’s Liability to Employees for Acts of Employees or Agents Except to the extent precluded by a workers’-compensation statute or other law, an employer is subject to liability in tort to an employee for harm caused in the course of employment: (a) by an employee’s or nonemployee agent’s conduct authorized or ratified by the employer; (b) by an employee’s tortious conduct undertaken within the scope of employment;

(c) by the tortious abuse or threatened abuse of a supervisory or managerial employee’s authority, to the extent authorized by applicable law, even if the abuse or threatened abuse is not within the scope of employment, unless the employer can demonstrate that: 256

(1) the employer took reasonable care to prevent and promptly correct the actual or threatened abuse of authority; and (2) the employee unreasonably failed either to: (A) take advantage of any preventive or corrective opportunity the employer provided, or (B) otherwise avoid the harm.

NOTES AND QUESTIONS 1. Entity Liability for Acts of Controlling Owners. Under § 4.02, Comment e, an employer that is a legal entity is “also subject to liability for the tortious acts of an individual who owns or, through an ownership interest, controls all or a significant part of the entity.” Such individuals may also be liable in their own right. 2. Entity Liability for “Tangible Employment Decisions” and Other Corporate Acts. As the Supreme Court stated in Faragher v. Boca Raton, 524 U.S. 775, 118 S.Ct. 2275 (1998): “[T]here is nothing remarkable in the fact that claims against employers for discriminatory employment actions with tangible results, like hiring, firing, promotion, compensation, and work assignment, have resulted in employer liability once the discrimination was shown.” The employer is liable for the “racially motivated discharge by [a] lowlevel supervisor,’ even though its “record in race relations . . . is exemplary.” Such “tangible employment decisions” are made for the employer with delegated authority and thus are treated as acts of the employer for which the employer is subject to liability even if the decisions contravene well-established company policy. See Employment Restatement § 4.03(a). 3. Entity Liability for the Acts of Its Employees Within the Scope of Employment. As a general matter, employers are also derivatively liability for the torts of employees committed in the scope of their employment. Some workplace torts, including negligent breaches of duties, are not likely to involve “tangible” or “corporate” decisions made with delegated corporate authority, but they may be wrongs committed by employees within the scope of their employment. Such acts are “of the kind [an employee] is employed to perform,” occurring “substantially within the authorized time and space limits,” and “actuated, at least in part, by a purpose to serve the master[.]” Faragher, 524 U.S. at 793, quoting Restatement (Second) of Agency § 219(1). Employees are responsible for such acts (although they may be judgment-proof) but so is the employer under principles of derivative liability. See Employment Restatement § 4.03(b). 4. Faragher-Type Entity Liability. Section 4.03(c) introduces a Faragher-type of entity liability for torts committed by supervisory employees outside the scope of employment. Faragher involved sexual harassment by supervisors who abused their authority over subordinate employees. Should courts recognize Faragher-type liability in other circumstances? For an 257 argument that the Court’s interpretation of Title VII in Faragher should influence state common law, see Michael C. Harper, Fashioning a General Common Law of Employment in an Age of Statutes, 100 Cornell L. Rev. 1281, 1308 (2015).

C. INTENTIONAL TORTS This section provides the elements of intentional tort claims that commonly arise in the employment context, followed by a series of fact patterns. For each fact pattern, assess whether (a) the plaintiff satisfied the elements of the claim; and (b) the employer is directly or vicariously liable for the tortious conduct.

1. INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR PHYSICAL AND EMOTIONAL HARM § 46 American Law Institute (2012).

§ 46. Intentional (or Reckless) Infliction of Emotional Harm An actor who by extreme and outrageous conduct intentionally or recklessly causes severe emotional harm to another is subject to liability for that emotional harm and, if the emotional harm causes bodily harm, also for that bodily harm.

——————— A defendant’s conduct is “outrageous” when it is so extreme that it exceeds “all possible bounds of decency [and is] atrocious, and utterly intolerable in a civilized community.” Robel v. Roundup Corp., 148 Wash.2d 35 (Wash. 2002) (disputed issue of fact on whether calling plaintiff vulgar names in the workplace was outrageous); Carnemolla v. Walsh, 75 Conn.App. 319 (2003) (accusing employee of embezzling funds not outrageous). Some jurisdictions also require that the emotional distress is accompanied by physical injury. Compare Forde v. Royal’s, Inc., 537 F.Supp. 1173 (S.D.Fla.1982) (“plaintiff cannot recover damages for mental anguish and suffering absent physical injury or some other type of tortious conduct”), with Sisco v. Fabrication Tech., Inc. 350 F.Supp.2d 932 (D. Wyo. 2004) (mental injury sufficient). Applications 1. Debra Agis was employed by the Howard Johnson Company as a waitress in a restaurant known as the Ground Round. On or about May 23, 1975, the restaurant manager notified all waitresses that a meeting would be held at 3 P.M. that day. At the meeting, he informed the waitresses that ‘there was some stealing going on,’ but that the identity of the person or 258

persons responsible was not known, and that, until the person or persons responsible were discovered, he would begin firing all the present waitresses in alphabetical order, starting with the letter ‘A.’ The manager] then fired Ms. Agis, who became greatly upset, began to cry, sustained emotional distress, mental anguish, and loss of wages and earnings. Agis v. Howard Johnson Co., 371 Mass. 140, 355 N.E.2d 315 (1976). 2. Plaintiffs’ allege that defendants tested plaintiffs for the Human Immunodeficiency Virus (HIV) after they applied for positions as Chicago police officers. Plaintiffs claim that their applications were rejected after plaintiffs tested positive for HIV. Plaintiffs were required to take a physical examination. John Doe received a letter prior to the physical purporting to be a conditional offer of employment. The offer was conditioned on the completion of a background investigation and Doe passing both the physical examination and the Illinois law enforcement physical fitness test. [An agent] conducted HIV testing on both plaintiffs as part of the physical examination. Neither plaintiff gave consent to the HIV test or [was] provided counseling prior to or during the test. Plaintiffs were subsequently notified that they had tested positive for HIV. Defendants did not provide plaintiffs counseling regarding the results of the HIV test. Thereafter, the processing of plaintiffs’ employment applications stopped, and both candidates were denied employment by the police department. Doe v. City of Chicago, 883 F.Supp. 1126 (N.D. Ill. 1994) (applying Illinois law). 3. Several witnesses testified that supervisor Shields used the word ‘f–––’ as part of his normal pattern of conversation, and that he regularly heaped abusive profanity on the employees. Linda Davis testified that Shields used this language to get a reaction. Gene Martin, another GTE employee, testified that Shields used the words ‘f–––’ and ‘motherf–––er’ frequently when speaking with the employees. On one occasion when Bruce asked Shields to curb his language because it was offensive, Shields positioned himself in front of her face, and screamed, ‘I will do and say any damn thing I want. And I don’t give a s––– who likes it.’ * * * There was evidence that Shields was continuously in a rage, and that Shields would frequently assault each of the employees by physically charging at them. When doing so, Shields would bend his head down, put his arms straight down by his sides, ball his hands into fists, and walk quickly toward or ‘lunge’ at the employees, stopping uncomfortably close to their faces while screaming and yelling. The employees were exceedingly frightened by this behavior. GTE Southwest, Inc. v. Bruce, 998 S.W.2d 605 (Tx 1999). 4. “Upon Darboe’s return from sick leave on August 1, store manager Mullins invited Darboe into his office and closed the door. Mullins told Darboe of his demotion to Sales Associate, which became effective that day. Id. [The employer] alleges that Mullins called Darboe into his office to remind him of the demotion, which he had already informed Darboe of on 259

July 21. In contrast, Darboe claims that this was the first time that he learned of his demotion. Darboe further alleges that he told Mullins that he was the top selling salesman, to which Mullins responded: ‘Now you’re nothing,’ or ‘Now you’re nobody.’ ” Darboe v. Staples, Inc. 243 F.Supp.2d 5 (2003).

2. FALSE IMPRISONMENT RESTATEMENT (SECOND) OF TORTS § 35 American Law Institute (1965).

§ 35. False Imprisonment

(1) An actor is subject to liability to another for false imprisonment if (a) he acts intending to confine the other or a third person within the boundaries fixed by the actor, and (b) his act directly or indirectly results in such a confinement of the other, and (c) the other is conscious of the confinement or is harmed by it.

——————— Confinement need not be by physical force; it can also arise by threat of force, physical barriers or “any other form of unreasonable duress.” Fermino v. Fedco, Inc., 872 P.2d 559, 7 Cal.4th 701, 30 Cal. Rptr.2d 18 (Cal. 1994). Even a brief confinement satisfies the requirements for the tort. Id. Applications

1. Plaintiff Fermino was employed as a salesclerk in defendant’s department store, working in the jewelry department. The store’s personnel manager summoned her to a windowless room, and proceeded to interrogate her concerning her alleged theft of the proceeds of a $4.95 sale to a customer. The personnel manager was joined by the store’s loss prevention manager and by two security agents. One of the security agents stated that a customer and an employee, who were waiting in the next room, had witnessed the theft. He then demanded that Fermino confess. He told her that the interrogation could be handled in two ways: the ‘Fedco way’ or the ‘system way.’ The ‘Fedco way’ was to award points each time she denied her guilt. When 14 points were reached, she would be handled the ‘system’ way, i.e., handed over to the police. After each of plaintiff’s repeated and vehement denials, the security agent said ‘one point.’ The loss prevention manager ‘hurled profanities’ and demanded that Fermino confess. Fermino’s repeated requests to leave the room and to call her mother were denied. She was physically compelled to remain in the room for more than one hour. At one point Fermino rose out of her chair and walked toward the door of the interrogation room in an attempt to leave; however, 260

as soon as she made a move toward the door, one of the security guards slid in front of the door, threw up a hand and gestured her to stop. Finally, Fermino became hysterical, and broke down in tears. At this point her interrogators departed from the room. Upon returning, they admitted no employee or customer was waiting to testify against her. They further stated they believed her, and that she could leave. Fermino v. Fedco, Inc. 7 Cal.4th 701 (Cal. 1994). 2. William J. Krochalis worked for Insurance Company of North America (INA) as Director of Market Development. In 1981, INA’s Corporate Audit Department conducted an audit of the operations of the Marketing Department including the expense accounts of the employees in the Market Development Department, which was then headed by Krochalis. The audit revealed several irregularities in Krochalis’ expense reports, and, on February 1, 1982, Krochalis’ supervisor, James E. Malling, gave Krochalis the choice of resigning or being terminated. Krochalis resigned and informed the INA employees in his department of his decision to resign on February 1, 1982. Later that day, after he left the office, Krochalis apparently changed his mind about resigning and dictated two memoranda to his secretary over the telephone. One memorandum, addressed to Malling, stated that Krochalis was not resigning, despite his statements of that morning. The next morning, February 2, 1982, Krochalis came to work. Pat Hasson, Director of Personnel, requested that Krochalis come to see him in the Personnel Office. Under Hasson’s threat either to have security guards come and bring Krochalis to the Personnel Office or to have security guards remove Krochalis from the premises, Krochalis agreed to go to the Personnel Office to meet with Hasson. Hasson told him that his employment was terminated and instructed him to leave the premises. Krochalis left the building after this meeting with Hasson. Krochalis v. Ins. Co. of North Amer., 629 F.Supp. 1360 (E.D.Pa. 1985) (applying Pennsylvania law). 3. On August 20, 1976, a workday for Mrs. Faniel, a supervisor asked her to step into a conference room. There she was introduced to Mr. Aussem, who was identified as an AT&T security supervisor from New York, responsible for investigating misuse of equipment by AT&T employees. Mr. Aussem informed Mrs. Faniel that routine testing had revealed excessive electronic resistance on her line, suggesting the presence of an unauthorized telephone installation. When asked, Mrs. Faniel told Mr. Aussem she had two phones. Later she admitted having a third, unauthorized telephone, and signed a written statement to that effect. After signing the statement, Mrs. Faniel was told a trip to her home would be necessary to recover the equipment. She did not object, because, as she testified at trial, “I just assumed that I had to go.” Appellant testified that her request to call her husband first was denied by Mr. Aussem. 261

However, appellant’s supervisor, Mrs. Powell, testified that she placed a call to Mr. Faniel, at appellant’s request, from the conference room, and left a message that his wife would be leaving early. Accompanied by Mr. Aussem and Mrs. Powell, appellant was driven to her home, stopping briefly at a C&P facility in Maryland to pick up a C&P security officer. Mrs. Faniel testified that the stop came as a surprise, although Mr. Aussem testified that he advised her of the need to pick up the C&P security man who had the actual authority to recover the equipment. During the brief stop at the C&P building, Mrs. Faniel again asked to call her husband. According to appellant’s version of the facts, Mrs. Powell refused permission. The foursome proceeded to Mrs. Faniel’s home where they were greeted at the door by her husband. The telephone was found unplugged and lying on the floor. After recovering the equipment, the telephone company employees left. Faniel v. Chesapeake and Potomac Telephone Co. Of Maryland, 404 A.2d 147 (1979).

3. ASSAULT AND BATTERY RESTATEMENT (THIRD) OF TORTS §§ 103, 101 American Law Institute (Discussion draft April 3, 2014).

§ 103 Assault An actor is subject to liability to another for assault if: (a) the actor intends to cause the other to apprehend that a harmful or offensive contact with his or her person is imminent; (b) the actor’s conduct causes the other to apprehend that a harmful or offensive contact with his or her person is imminent; and (c) the actor does not actually consent to the apprehension or to the conduct causing the apprehension. § 101 Battery (1) An actor is subject to liability to another for battery if: (a) the actor intends to cause a contact with the person of the other; (b) the actor’s conduct causes such a contact; (c) the contact (i) is offensive or (ii) causes bodily harm to the other; and (d) the other does not actually consent to the contact [or to the conduct that causes the contact]. 262

(2) A contact is offensive if: (a) the contact offends a reasonable sense of personal dignity; or (b) the actor knows that the contact seriously offends the other’s sense of personal dignity, and it is not unduly burdensome for the actor to refrain from causing the contact.

——————— Applications 1. Plaintiff had a large J. C. Penney store sack containing a pantsuit she had brought from home and some T-shirts which she had purchased from a fellow employee. Plaintiff stopped to talk to another employee when the security officer came up to plaintiff and said, “What have we got here?” or, “What have we got in the sack?” According to plaintiff, the security officer had her feet between plaintiff’s, touching plaintiff. She reached over plaintiff’s shoulder, pulled out the top of the pantsuit and, in doing so, brushed against plaintiff. After removing part of the pantsuit, the security officer started to reach into the sack again. However, plaintiff pushed her hand away and removed the T-shirts, as well as the rest of the suit, and showed them to the officer. Plaintiff became extremely upset over the incident, both at the time it occurred and later. Her distress eventually caused her to secure medical treatment. Bakker v. Baza’r, Inc. 275 Or. 245, 551 P.2d 1269 (1976). 2. In 1987, Jim Hennly, the vice president of First Federal Savings and Loan Association (First Federal) and a pipe smoker, began working in an office close to the desk of Bonnie Richardson, a receptionist/switchboard operator at First Federal. [Plaintiff] Richardson has severe reactions to pipe smoke, and while the frequency and intensity of her exposure to Hennly’s

pipe smoke are disputed, it is undeniable that at the time of her termination by First Federal Richardson was experiencing physical illness because of the smoke, First Federal did not have a policy restricting or prohibiting smoking. Hennly v. Richardson, 264 Ga. 355, 444 S.E.2d 317 (1994). 3. McCullough was employed as a Unit Nursing Manage at Liberty Heights. Sometime in early June of 2010, McCullough began searching for a housekeeper, and a friend recommended Judith Chase. McCullough contacted Chase, and Chase began working for McCullough at McCullough’s residence. Soon thereafter a dispute arose between McCullough and Chase over the payment of wages. The morning of June 16, 2010, Chase telephoned McCullough to say that she was coming to McCullough’s office to discuss payment. McCullough objected, and protested that any such discussion 263

should take place over the phone. At no point did McCullough tell anyone at Liberty Heights about her dispute with Chase or Chase’s threat to show up there. McCullough never expressed concern or requested that Liberty Heights take measures to protect her against Chase, such as denying Chase entry to the building. At approximately 12:30 p.m. Karen Marshall, a Liberty Heights employee, was leaving the facility for a meeting when she noticed McCullough and Chase fighting in the parking lot. According to Marshall, Chase attempted to get into her car, on both the driver’s and passenger’s side, but McCullough repeatedly pulled her from the vehicle. When the confrontation degenerated into blows and hair pulling, Marshall went inside and informed Sandra Durham, Liberty Heights’ Executive Director. Durham went to investigate and found the two women yelling at one another. She stepped between the two, ordered McCullough to go back inside, and told Chase to leave the premises. Instead, Chase said something to the “effect of I want my money” and struck Durham in the forehead. Eventually he police were summoned and restored order. McCullough emerged with bruises and a bite to her right index finger. McCullough v. Liberty Heights Health & Rehabilitation Ctr. 830 F.Supp.2d 94 (D. Md. 2011) (applying Maryland law).

D. NEGLIGENT HIRING AND SUPERVISION Employers are liable under negligence principles for failing to exercise care in selecting, supervising, and retaining employees. If an employer knows or should know that an employee or agent currently in its service has been engaging in conduct unreasonably dangerous to coworkers, the employer has a duty to end the conduct. That may require the employer to discharge the employee or agent, move them to different positions, or limit their authority to act. This liability extends to customers and other third parties, as well as fellow employees injured by the conduct.

RESTATEMENT OF EMPLOYMENT LAW § 4.04 American Law Institute (2015).

§ 4.04 Employer’s Duty to Exercise Care in Selecting, Retaining, and Supervising Employees or Agents

Except to the extent precluded by a workers’ compensation statute or other law, an employer is subject to liability for the harm caused an employee by negligence in selecting, retaining, or supervising employees or agents whose tortious acts resulted in the harm. 264

YUNKER V. HONEYWELL, INC. Minnesota Court of Appeals, 1993. 496 N.W.2d 419.

LANSING, J. On motion for summary judgment, the district court held, as a matter of law, that an employer breached no ascertainable duty of care in hiring, retaining, and supervising an employee who shot and killed a coemployee off the premises. The employee had been rehired following imprisonment for the strangulation death of another coemployee. We affirm the district court’s ruling as it applies to the theories of negligent hiring and supervision, but reverse the summary judgment as it applies to negligent retention and remand that part of the action to the district court. * * * [Negligent Hiring and Supervision]

Honeywell employed Randy Landin from 1977 to 1979 and from 1984 to 1988. From 1979 to 1984 Landin was imprisoned for the strangulation death of Nancy Miller, a Honeywell coemployee. On his release from prison, Landin reapplied at Honeywell. Honeywell rehired Landin as a custodian in Honeywell’s General Offices facility in South Minneapolis in August 1984. Because of workplace confrontations Landin was twice transferred, first to the Golden Valley facility in August 1986, and then to the St. Louis Park facility in August 1987. Kathleen Nesser was assigned to Landin’s maintenance crew in April 1988. Landin and Nesser became friends and spent time together away from work. When Landin expressed a romantic interest, Nesser stopped spending time with Landin. Landin began to harass and threaten Nesser both at work and at home. At the end of June, Landin’s behavior prompted Nesser to seek help from her supervisor and to request a transfer out of the St. Louis Park facility. On July 1, 1988, Nesser found a death threat scratched on her locker door. Landin did not come to work on or after July 1, and Honeywell accepted his formal resignation on July 11, 1988. On July 19, approximately six hours after her Honeywell shift ended, Landin killed Nesser in her driveway with a close-range shotgun blast. Landin was convicted of first degree murder and sentenced to life imprisonment. Jean Yunker, as trustee for the heirs and next-of-kin of Kathleen Nesser, brought this wrongful death action based on theories of negligent hiring, retention, and supervision of a dangerous employee. Honeywell moved for summary judgment and, for purposes of the motion, stipulated that it failed to exercise reasonable care in the hiring and supervision of Landin. The trial court concluded that Honeywell owed no legal duty to Nesser and granted summary judgment for Honeywell. * * * 265

Minnesota first explicitly recognized a cause of action based on negligent hiring in [Ponticas v. K.M.S. Investments, 331 N.W.2d 907 (Minn. 1983)]. Ponticas involved the employment of an apartment manager who sexually assaulted a tenant. The supreme court upheld a jury verdict finding the apartment operators negligent in failing to make a reasonable investigation into the resident manager’s background before providing him with a passkey. The court defined negligent hiring as predicated on the negligence of an employer in placing a person with known propensities, or propensities which should have been discovered by reasonable investigation, in an employment position in which, because of the circumstances of the employment, it should have been foreseeable that the hired individual posed a threat of injury to others. 331 N.W.2d at 911 (emphasis added). Honeywell argues that under Ponticas it is not liable for negligent hiring because, unlike providing a dangerous resident manager with a passkey, Landin’s employment did not enable him to commit the act of violence against Nesser. This argument has merit, and we note that a number of jurisdictions have expressly defined the scope of an employer’s duty of reasonable care in hiring as largely dependent on the type of responsibilities associated with the particular job. See Connes, [v. Molalla Transp. Sys., 831 P.2d 1316, 1320–21 (Colo.1992)] (employer’s duty in hiring is dependent on anticipated degree of contact between employee and other persons in performing employment duties); Tallahassee Furniture Co. v. Harrison, 583 So.2d 744, 750 (Fla.Dist.Ct.App.1991) (employer’s responsibility to investigate an employee’s background is defined by the type of work to be done by the employee) * * *. Ponticas rejected the view that employers are required to investigate a prospective employee’s criminal background in every job in which the individual has regular contact with the public. Ponticas, 331 N.W.2d at 913. Instead, liability is determined by the totality of the circumstances surrounding the hiring and whether the employer exercised reasonable care. The court instructed that “[t]he scope of the investigation is directly related to the severity of the risk third parties are subjected to by an incompetent employee. Although only slight care might suffice in the hiring of a yardman, a worker on a production line, or other types of employment where the employee would not constitute a high risk of injury to third persons, * * * when the prospective employee is to be furnished a passkey permitting admittance to living quarters of tenants, the employer has the duty to use reasonable care to investigate his competency and reliability prior to employment (citations omitted).” Id. Applying these principles, we conclude that Honeywell did not owe a duty to Nesser at the time of Landin’s hire. Landin was employed as a maintenance worker whose job responsibilities entailed no exposure to the 266

general public and required only limited contact with coemployees. Unlike the caretaker in Ponticas, Landin’s duties did not involve inherent dangers to others, and unlike the tenant in Ponticas, Nesser was not a reasonably foreseeable victim at the time Landin was hired. * * * Honeywell did not breach a legal duty to Nesser by hiring Landin because the specific nature of his employment did not create a foreseeable risk of harm, and public policy supports a limitation on this cause of action. The district court correctly

determined that Honeywell is not liable to Nesser under a theory of negligent hiring. * * * [Negligent Retention] Although some jurisdictions apparently aggregate the theories of “negligent hiring” and “negligent retention” into a single doctrine, Minnesota case law refers to them separately, suggesting that they are related, but distinct theories of recovery. * * * The difference between negligent hiring and negligent retention focuses on when the employer was on notice that an employee posed a threat and failed to take steps to insure the safety of third parties. * * * The record contains evidence of a number of episodes in Landin’s postimprisonment employment at Honeywell that demonstrate a propensity for abuse and violence towards coemployees. While at the Golden Valley facility, Landin sexually harassed female employees and challenged a male coworker to fight. After his transfer to St. Louis Park, Landin threatened to kill a coworker during an angry confrontation following a minor car accident. In another employment incident, Landin was hostile and abusive toward a female coworker after problems developed in their friendship. Landin’s specific focus on Nesser was demonstrated by several workplace outbursts occurring at the end of June, and on July 1 the words “one more day and you’re dead” were scratched on her locker door. Landin’s troubled work history and the escalation of abusive behavior during the summer of 1988 relate directly to the foreseeability prong of duty. The facts, in a light favorable to Yunker, show that it was foreseeable that Landin could act violently against a coemployee, and against Nesser in particular. This foreseeability gives rise to a duty of care to Nesser that is not outweighed by policy considerations of employment opportunity. An ex-felon’s “opportunity for gainful employment may spell the difference between recidivism and rehabilitation,” Haddock v. City of New York, 553 N.E.2d 987, 992 (1990), but it cannot predominate over the need to maintain a safe workplace when specific actions point to future violence. Our holding is narrow and limited only to the recognition of a legal duty owed to Nesser arising out of Honeywell’s continued employment of 267

Landin. It is important to emphasize that in reversing the summary judgment on negligent retention, we do not reach the remaining significant questions of whether Honeywell breached that duty by failing to terminate or discipline Landin, or whether such a breach was a proximate cause of Nesser’s death. These are issues generally decided by a jury after a full presentation of facts. [Eds. The court concludes that the claim is not barred by workers’ compensation exclusivity because the assault did not occur “in the course of employment” and fell within the state “assault exception.”]

NOTES AND QUESTIONS 1. Compare the Yunker opinion to the Employment Restatement § 4.04. Is Yunker consistent with the Restatement? 2. What policy arguments does the court in Yunker provide to support its ruling on the negligent hiring claim? For more on the policy implications of criminal background checks, see Chapter 8, Note: Regulating Background Checks. 3. At what point in time should Landin’s behavior have triggered more aggressive intervention by the employer? What could or should the employer have done? 4. Prevalence of Workplace Violence. Homicide represents 10% of workplace fatalities. More than 40% of fatalities are transportation-related, and 30% are from slips, falls, or being struck by an object or equipment. Bureau of Labor Statistics, US Department of Labor, available at http://www.bls.gov/iif/oshwc/cfoi/cfch0011.pdf. Only a small proportion of homicides are committed by coworkers. More commonly, workplace homicides occur in connection with a crime by a third party. In those circumstances, preventative approaches such as lighting, surveillance, signage and employee training have been effective at reducing the risk. See Enforcement Procedures and Scheduling for Occupational Exposure to Workplace Violence (OSH Directive CPL 02-01-058 (Jan. 10, 2017); Centers for Disease Control, Workplace Violence Prevention Strategies and Research Needs (2004) available at http://www.cdc.gov/niosh/docs/2006–144/pdfs/2006–144.pdf. 5. Temporary Restraining Orders Against Employees. Many states authorize employers to file for an order that precludes the restrained individual from entering the workplace. See, e.g., Cal. Civ. Proc. Code § 527.8; Colo Rev. Stat. 13–14–102(4)(B); Nev. Rev. Stat. § 33.200–.360. Employers can seek a restraining order on an emergency basis in the form of a temporary restraining order (TRO), and subsequently seek an injunction upon the expiration of the TRO. Workplace restraining orders have been used against former employees who present a credible threat of violence. They can also serve to protect employees from certain third parties, such as abusive domestic partners or stalkers, who may present a violent threat at the workplace.

268 6. Effect of Employer Tort Liability and Risk of Violence on Willingness to Hire Former Convicts. State “ban the box” laws and other measures seek to minimize bias against ex-convict job applicants by delaying the point at which the employer learns of the applicant’s prior conviction until after a conditional offer of employment is made. These laws may be counterproductive because the applicant’s inability to account for the period of incarceration may be a significant disincentive to making an offer in the first place. For a proposal that addressing the hiring risk by providing for an extended probationary period to allow employers to learn whether concerns about hiring the ex-convict are borne out in practice, see Samuel Estreicher, Achieving Antidiscrimination Objectives Through “Safe Harbor” Rules in Cases of Chronic Hiring Aversion, 2 U. Pa. J. Law & Pub. Aff. 1 (May 2017).

E. OCCUPATIONAL SAFETY AND HEALTH ACT The Occupational Safety and Health Act of 1970 (OSHA), 29 U.S.C. § 651 et seq., requires every employer engaged in interstate commerce to adhere to minimum safety and health standards. OSHA imposes a general duty on a covered employer to “furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.” 29 U.S.C. § 654. The statute authorizes the Department of Labor to set specific health and safety standards. The standards, for instance, specify the types of protective equipment required, the level of ventilation, and, to minimize risk of hazards, the physical layout of the workplace. 29 C.F.R. § 1910 et seq. See generally Estreicher, Law of Employment, supra, ch.12. OSHA is enforced exclusively by the federal government; there is no private right of action. The Occupational Safety and Health Administration, located in the Department of Labor, is responsible for issuing regulations, conducting inspections and issuing citations. The adjudication of violations of the statute is committed to the Occupational Safety and Health Review Commission (OSHRC), an independent agency that acts as the adjudicatory body. Legislation like OSHA—which is common on the state level and in other countries—may have a number of justifications, some of which concern weaknesses in the operations of labor markets. OSHA’s standards for labeling hazardous materials, for example, attempt to address disparate access to information between employers and workers. Employers are usually better situated to know of hidden or long-term hazards and have little incentive to explain these hazards to their employees. See Mary Loring Lyndon, Information Economics and Chemical Toxicity: Designing Laws to Produce and Use Data, 87 Mich.L.Rev. 1795 (1989). 269

NATIONAL FEDERATION OF BUSINESS V. DEPARTMENT OF LABOR Supreme Court of the United States, 2022. 142 S.Ct. 661, 211 L.Ed.2d 448.

PER CURIAM. The Secretary of Labor, acting through the Occupational Safety and Health Administration, recently enacted a vaccine mandate for much of the Nation’s work force. The mandate, which employers must enforce, applies to roughly 84 million workers, covering virtually all employers with at least 100 employees. It requires that covered workers receive a COVID-19 vaccine, and it pre-empts contrary state laws. The only exception is for workers who obtain a medical test each week at their own expense and on their own time, and also wear a mask each workday. OSHA has never before imposed such a mandate. Nor has Congress. Indeed, although Congress has enacted significant legislation addressing the COVID-19 pandemic, it has declined to enact any measure similar to what OSHA has promulgated here. * * *Applicants now seek emergency relief from this Court, arguing that OSHA’s mandate exceeds its statutory authority and is otherwise unlawful. Agreeing that applicants are likely to prevail, we grant their applications and stay the rule. I A Congress enacted the Occupational Safety and Health Act in 1970. 84 Stat. 1590, 29 U. S. C. § 651 et seq. The Act created the Occupational Safety and Health Administration (OSHA), which is part of the Department of Labor and under the supervision of its Secretary. As its name suggests, OSHA is tasked with ensuring occupational safety—that is, “safe and healthful working conditions.” § 651(b). It does so by enforcing occupational safety and health standards promulgated by the Secretary. § 655(b). Such standards must be “reasonably necessary or appropriate to provide safe or healthful employment.” § 652(8) (emphasis added). They must also be developed using a rigorous process that includes notice, comment, and an opportunity for a public hearing. § 655(b). The Act contains an exception to those ordinary notice-and-comment procedures for “emergency temporary standards.”

§ 655(c)(1). Such standards may “take immediate effect upon publication in the Federal Register.” Ibid. They are permissible, however, only in the narrowest of circumstances: the Secretary must show (1) “that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards,” and (2) that the “emergency standard is necessary to protect employees from such danger.” Ibid. Prior to the emergence of COVID-19, the Secretary had used this power just nine 270

times before (and never to issue a rule as broad as this one). Of those nine emergency rules, six were challenged in court, and only one of those was upheld in full. See BST Holdings, L.L.C. v. Occupational Safety and Health Admin., 17 F. 4th 604, 609 (CA5 2021). B On September 9, 2021, President Biden announced “a new plan to require more Americans to be vaccinated.” Remarks on the COVID-19 Response and National Vaccination Efforts, 2021 Daily Comp. of Pres. Doc. 775, p. 2. As part of that plan, the President said that the Department of Labor would issue an emergency rule requiring all employers with at least 100 employees “to ensure their workforces are fully vaccinated or show a negative test at least once a week.” * * * After a 2-month delay, the Secretary of Labor issued the promised emergency standard. 86 Fed. Reg. 61402 (2021). Consistent with President Biden’s announcement, the rule applies to all who work for employers with 100 or more employees. * * * [With some narrow exceptions, [t]]he regulation otherwise operates as a blunt instrument. It draws no distinctions based on industry or risk of exposure to COVID-19. Thus, most lifeguards and linemen face the same regulations as do medics and meatpackers. OSHA estimates that 84.2 million employees are subject to its mandate. Id., at 61467. Covered employers must “develop, implement, and enforce a mandatory COVID-19 vaccination policy.” Id., at 61402. The employer must verify the vaccination status of each employee and maintain proof of it. Id., at 61552. The mandate does contain an “exception” for employers that require unvaccinated workers to “undergo [weekly] COVID-19 testing and wear a face covering at work in lieu of vaccination.” Id., at 61402. But employers are not required to offer this option, and the emergency regulation purports to pre-empt state laws to the contrary. Id., at 61437. Unvaccinated employees who do not comply with OSHA’s rule must be “removed from the workplace.” Id., at 61532. And employers who commit violations face hefty fines: up to $13,653 for a standard violation, and up to $136,532 for a willful one. 29 CFR § 1903.15(d) (2021). *** II The Sixth Circuit concluded that a stay of the rule was not justified. We disagree. A Applicants are likely to succeed on the merits of their claim that the Secretary lacked authority to impose the mandate. Administrative agencies are creatures of statute. They accordingly possess only the authority that Congress has provided. The Secretary has ordered 84 million Americans to either obtain a COVID-19 vaccine or undergo weekly 271

medical testing at their own expense. * * * The question, then, is whether the Act plainly authorizes the Secretary’s mandate. It does not. The Act empowers the Secretary to set workplace safety standards, not broad public health measures. See 29 U. S. C. § 655(b) (directing the Secretary to set “occupational safety and health standards” (emphasis added)); § 655(c)(1) (authorizing the Secretary to impose emergency temporary standards necessary to protect “employees” from grave danger in the workplace). Confirming the point, the Act’s provisions typically speak to hazards that employees face at work. See, e.g., §§ 651, 653, 657. And no provision of the Act addresses public health more generally, which falls outside of OSHA’s sphere of expertise. The dissent protests that we are imposing “a limit found no place in the governing statute.” * * * Not so. It is the text of the agency’s Organic Act that repeatedly makes clear that OSHA is charged with regulating “occupational” hazards and the safety and health of “employees.” See, e.g., 29 U. S. C. §§ 652(8), 654(a)(2), 655(b)–(c). The Solicitor General does not dispute that OSHA is limited to regulating “work-related dangers.” * * * Although COVID19 is a risk that occurs in many workplaces, it is not an occupational hazard in most. COVID-19 can and does spread at home, in schools, during sporting events, and everywhere else that people gather. That kind of universal risk is no different from the day-to-day dangers that all face from crime, air pollution, or any number of communicable diseases. Permitting OSHA to regulate the hazards of daily life—simply because most Americans have jobs and face those same risks while on the clock—

would significantly expand OSHA’s regulatory authority without clear congressional authorization. The dissent contends that OSHA’s mandate is comparable to a fire or sanitation regulation imposed by the agency. * * * But a vaccine mandate is strikingly unlike the workplace regulations that OSHA has typically imposed. A vaccination, after all, “cannot be undone at the end of the workday.” In re MCP No. 165, 20 F. 4th, at 274 (Sutton, C. J., dissenting). Contrary to the dissent’s contention, imposing a vaccine mandate on 84 million Americans in response to a worldwide pandemic is simply not “part of what the agency was built for.” * * * That is not to say OSHA lacks authority to regulate occupation-specific risks related to COVID-19. Where the virus poses a special danger because of the particular features of an employee’s job or workplace, targeted regulations are plainly permissible. We do not doubt, for example, that OSHA could regulate researchers who work with the COVID-19 virus. So too could OSHA regulate risks associated with working in particularly crowded or cramped environments. But the danger present in such workplaces differs in both degree and kind from the everyday risk of contracting COVID-19 that all face. OSHA’s indiscriminate approach fails to account for this crucial distinction—between occupational risk and risk 272

more generally—and accordingly the mandate takes on the character of a general public health measure, rather than an “occupational safety or health standard.” 29 U. S. C. § 655(b) (emphasis added). * * * In fact, the most noteworthy action concerning the vaccine mandate by either House of Congress has been a majority vote of the Senate disapproving the regulation on December 8, 2021. S. J. Res. 29, 117th Cong., 1st Sess. (2021). It is telling that OSHA, in its half century of existence, has never before adopted a broad public health regulation of this kind—addressing a threat that is untethered, in any causal sense, from the workplace. This “lack of historical precedent,” coupled with the breadth of authority that the Secretary now claims, is a “telling indication” that the mandate extends beyond the agency’s legitimate reach. Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U. S. 477, 505, 130 S. Ct. 3138, 177 L. Ed. 2d 706 (2010) (internal quotation marks omitted). B The equities do not justify withholding interim relief. We are told by the States and the employers that OSHA’s mandate will force them to incur billions of dollars in unrecoverable compliance costs and will cause hundreds of thousands of employees to leave their jobs. See Application in No. 21A244, pp. 25–32; Application in No. 21A247, pp. 32–33; see also 86 Fed. Reg. 61475. For its part, the Federal Government says that the mandate will save over 6,500 lives and prevent hundreds of thousands of hospitalizations. OSHA Response 83; see also 86 Fed. Reg. 61408. It is not our role to weigh such tradeoffs. In our system of government, that is the responsibility of those chosen by the people through democratic processes. Although Congress has indisputably given OSHA the power to regulate occupational dangers, it has not given that agency the power to regulate public health more broadly. Requiring the vaccination of 84 million Americans, selected simply because they work for employers with more than 100 employees, certainly falls in the latter category. *** The applications for stays presented to Justice Kavanaugh and by him referred to the Court are granted.* * * JUSTICE GORSUCH, with whom JUSTICE THOMAS and JUSTICE ALITO join, concurring. The central question we face today is: Who decides? No one doubts that the COVID-19 pandemic has posed challenges for every American. Or that our state, local, and national governments all have roles to play in combating the disease. The only question is whether an administrative agency in Washington, one charged with overseeing workplace safety, may mandate the vaccination or regular testing of 84 million people. * * * 273

The Court rightly applies the major questions doctrine and concludes that this lone statutory subsection does not clearly authorize OSHA’s mandate. See ante, at 5–6. Section 655(c)(1) was not adopted in response to the pandemic, but some 50 years ago at the time of OSHA’s creation. Since then, OSHA has relied on it to issue only comparatively modest rules addressing dangers uniquely prevalent inside the workplace, like asbestos and rare chemicals. See In re: MCP No. 165, 20 F. 4th 264, 276 (CA6 2021) (Sutton, C. J., dissenting from denial [*16] of initial hearing en banc). As the agency itself explained to a federal court less than two years ago, the statute does “not authorize OSHA to issue sweeping health standards” that affect workers’ lives outside the workplace. Brief for Department of Labor, In re: AFL-CIO, No. 20–1158, pp. 3, 33 (CADC 2020). Yet that is precisely what the agency seeks to do now—regulate not just what happens inside the workplace but induce individuals to

undertake a medical procedure that affects their lives outside the workplace. Historically, such matters have been regulated at the state level by authorities who enjoy broader and more general governmental powers. Meanwhile, at the federal level, OSHA arguably is not even the agency most associated with public health regulation. And in the rare instances when Congress has sought to mandate vaccinations, it has done so expressly. E.g., 8 U. S. C. § 1182(a)(1)(A)(ii). We have nothing like that here. JUSTICE BREYER, JUSTICE SOTOMAYOR, and JUSTICE KAGAN, dissenting. *** III A The applicants are not “likely to prevail” under any proper view of the law. OSHA’s rule perfectly fits the language of the applicable statutory provision. Once again, that provision commands—not just enables, but commands—OSHA to issue an emergency temporary standard whenever it determines “(A) that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards, and (B) that such emergency standard is necessary to protect employees from such danger.” 29 U. S. C. § 655(c)(1). Each and every part of that provision demands that, in the circumstances here, OSHA act to prevent workplace harm. * * * B *** The Court does not dispute that the statutory terms just discussed, read in the ordinary way, authorize this Standard. In other words, the majority does not contest that COVID-19 is a “new hazard” and “physically harmful agent”; that it poses a “grave danger” to employees; or that a testing and masking or vaccination policy is “necessary” to prevent those 274

harms. Instead, the majority claims that the Act does not “plainly authorize[ ]” the Standard because it gives OSHA the power to “set workplace safety standards” and COVID-19 exists both inside and outside the workplace. Ante, at 6. In other words, the Court argues that OSHA cannot keep workplaces safe from COVID-19 because the agency (as it readily acknowledges) has no power to address the disease outside the work setting. But nothing in the Act’s text supports the majority’s limitation on OSHA’s regulatory authority. Of course, the majority is correct that OSHA is not a roving public health regulator, * * * : It has power only to protect employees from workplace hazards. But as just explained, that is exactly what the Standard does. * * * And the Act requires nothing more: Contra the majority, it is indifferent to whether a hazard in the workplace is also found elsewhere. The statute generally charges OSHA with “assur[ing] so far as possible . . . safe and healthful working conditions.” 29 U. S. C. § 651(b). That provision authorizes regulation to protect employees from all hazards present in the workplace—or, at least, all hazards in part created by conditions there. It does not matter whether those hazards also exist beyond the workplace walls. The same is true of the provision at issue here demanding the issuance of temporary emergency standards. Once again, that provision kicks in when employees are exposed in the workplace to “new hazards” or “substances or agents” determined to be “physically harmful.” § 655(c)(1). The statute does not require that employees are exposed to those dangers only while on the workplace clock. And that should settle the matter. When Congress “enact[s] expansive language offering no indication whatever that the statute limits what [an agency] can” do, the Court cannot “impos[e] limits on an agency’s discretion that are not supported by the text.” Little Sisters of the Poor Saints Peter and Paul Home v. Pennsylvania, 591 U. S. ___, ___, 140 S. Ct. 2367, 207 L. Ed. 2d 819, 825 (2020) (alteration and internal quotation marks omitted). That is what the majority today does—impose a limit found no [*30] place in the governing statute. Consistent with Congress’s directives, OSHA has long regulated risks that arise both inside and outside of the workplace. For example, OSHA has issued, and applied to nearly all workplaces, rules combating risks of fire, faulty electrical installations, and inadequate emergency exits—even though the dangers prevented by those rules arise not only in workplaces but in many physical facilities (e.g., stadiums, schools, hotels, even homes). See 29 CFR § 1910.155 (2020) (fire); §§ 1910.302–1910.308 (electrical installations); §§ 1910.34–1910.39 (exit routes). Similarly, OSHA has regulated to reduce risks from excessive noise and unsafe drinking water—again, risks hardly confined to the workplace. See § 1910.95 (noise); § 1910.141 (water). A biological hazard—here, the virus causing COVID-19—is no different. Indeed, Congress just last year made this clear. It appropriated $100 million for OSHA “to carry out COVID-19 related 275

worker protection activities” in work environments of all kinds. American Rescue Plan Act of 2021, Pub. L. 117–2, 135

Stat. 30. That legislation refutes the majority’s view that workplace exposure to COVID-19 is somehow not a workplace hazard. Congress knew—and Congress said—that OSHA’s responsibility to mitigate the harms of COVID-19 in the typical workplace do not [*31] diminish just because the disease also endangers people in other settings. That is especially so because—as OSHA amply established—COVID-19 poses special risks in most workplaces, across the country and across industries. See 86 Fed. Reg. 61424 (“The likelihood of transmission can be exacerbated by common characteristics of many workplaces”). The majority ignores these findings, but they provide more-than-ample support for the Standard. OSHA determined that the virus causing COVID-19 is “readily transmissible in workplaces because they are areas where multiple people come into contact with one another, often for extended periods of time.” Id., at 61411. In other words, COVID-19 spreads more widely in workplaces than in other venues because more people spend more time together there. And critically, employees usually have little or no control in those settings. “[D]uring the workday,” OSHA explained, “workers may have little ability to limit contact with coworkers, clients, members of the public, patients, and others, any one of whom could represent a source of exposure to” the virus. Id., at 61408. The agency backed up its conclusions with hundreds of reports of workplace COVID-19 outbreaks—not just in cheek-by-jowl settings like factory assembly lines, but in retail stores, restaurants, medical facilities, construction areas, and standard offices. Id., at 61412–61416. But still, OSHA took care to tailor the Standard. Where it could exempt work settings without exposing employees to grave danger, it did so. See id., at 61419–61420; supra, at 3. In sum, the agency did just what the Act told it to: It protected employees from a grave danger posed by a new virus as and where needed, and went no further. The majority, in overturning that action, substitutes judicial diktat for reasoned policymaking. The result of its ruling is squarely at odds with the statutory scheme. As shown earlier, the Act’s explicit terms authorize the Standard. See supra, at 4–6. Once again, OSHA must issue an emergency standard in response to new hazards in the workplace that expose employees to “grave danger.” § 655(c)(1); see supra, at 2–4. The entire point of that provision is to enable OSHA to deal with emergencies—to put into effect the new measures needed to cope with new workplace conditions. The enacting Congress of course did not tell the agency to issue this Standard in response to this COVID-19 pandemic— because that Congress could not predict the future. But that Congress did indeed want OSHA to have the tools needed to confront emerging dangers (including contagious diseases) in the workplace. We know that, first and foremost, from the breadth of the authority Congress granted to OSHA. And we know that because of how 276

OSHA has used that authority from the statute’s beginnings—in ways not dissimilar to the action here. OSHA has often issued rules applying to all or nearly all workplaces in the Nation, affecting at once many tens of millions of employees. See, e.g., 29 CFR § 1910.141. It has previously regulated infectious disease, including by facilitating vaccinations. See § 1910.1030(f). And it has in other contexts required medical examinations and face coverings for employees. See §§ 1910.120(q)(9)(i), 1910.134. In line with those prior actions, the Standard here requires employers to ensure testing and masking if they do not demand vaccination. Nothing about that measure is so out-of-the-ordinary as to demand a judicially created exception from Congress’s command that OSHA protect employees from grave workplace harms. *** IV Even if the merits were a close question—which they are not—the Court would badly err by issuing this stay. That is because a court may not issue a stay unless the balance of harms and the public interest support the action. See Trump v. International Refugee Assistance Project, 582 U. S. ___, ___, 137 S. Ct. 2080, 198 L. Ed. 2d 643, 650 (2017) (per curiam [*35]) (“Before issuing a stay, it is ultimately necessary to balance the equities—to explore the relative harms” and “the interests of the public at large” (alterations and internal quotation marks omitted)); * * *. Here, they do not. The lives and health of the Nation’s workers are at stake. And the majority deprives the Government of a measure it needs to keep them safe. Consider first the economic harms asserted in support of a stay. The employers principally argue that the Standard will disrupt their businesses by prompting hundreds of thousands of employees to leave their jobs. But OSHA expressly considered that claim, and found it exaggerated. According to OSHA, employers that have implemented vaccine mandates have found that far fewer employees actually quit their jobs than threaten to do so. See 86 Fed. Reg. 61474–61475. And of course, the Standard does not impose a vaccine mandate; it allows employers to require only masking and testing instead. See supra, at 3. In addition, OSHA noted that the Standard would provide employers with some countervailing economic benefits. Many employees, the agency showed, would be more likely to stay at or apply to an employer complying with the [*36] Standard’s safety precautions. See 86 Fed. Reg. 61474. And employers would see far fewer work days lost from members of their workforces calling in sick. See id., at 61473–61474. All those conclusions are reasonable, and entitled to deference. More fundamentally, the public interest here—the interest in protecting workers from disease and death—overwhelms the

employers’ alleged costs. As we have said, OSHA estimated that in six months the emergency standard would save over 6,500 lives and prevent over 250,000 277

hospitalizations. See id., at 61408. Tragically, those estimates may prove too conservative. Since OSHA issued the Standard, the number of daily new COVID-19 cases has risen tenfold. See CDC, COVID Data Tracker (Jan. 12, 2022), https://covid.cdc.gov/covid-data-tracker/#trends_dailycases (reporting a 7-day average of 71,453 new daily cases on Nov. 5, 2021, and 751,125 on Jan. 10, 2022). And the number of hospitalizations has quadrupled, to a level not seen since the pandemic’s previous peak. CDC, COVID Data Tracker (Jan. 12, 2022), https://covid.cdc.gov/covid-data-tracker/#new-hospitaladmissions (reporting a 7-day average of 5,050 new daily hospital admissions on Nov. 5, 2021, and 20,269 on Jan. 10, 2022). And as [*37] long as the pandemic continues, so too does the risk that mutations will produce yet more variants—just as OSHA predicted before the rise of Omicron. See 86 Fed. Reg. 61409 (warning that high transmission and insufficient vaccination rates could “foster the development of new variants that could be similarly, or even more, disruptive” than those then existing). Far from diminishing, the need for broadly applicable workplace protections remains strong, for all the many reasons OSHA gave. See id., at 61407–61419, 61424, 61429–61439, 61445–61447. These considerations weigh decisively against issuing a stay. This Court should decline to exercise its equitable discretion in a way that will—as this stay will—imperil the lives of thousands of American workers and the health of many more. *** Underlying everything else in this dispute is a single, simple question: Who decides how much protection, and of what kind, American workers need from COVID-19? An agency with expertise in workplace health and safety, acting as Congress and the President authorized? Or a court, lacking any knowledge of how to safeguard workplaces, and insulated from responsibility for any damage it causes?

NOTES AND QUESTIONS 1. The Agency’s Authority? Who has the better of the argument on this issue in the OSHA vaccination case: the majority or dissent? Is mandating vaccines different from mandating the use of respirators, which can be taken off once the workday is done? Was it really a vaccination mandate, if the employers were given the option to require weekly testing for COVID at the employee’s expense? See generally Samuel Estreicher & Ryan Amelio, Substantial Questions of Statutory Authority Confronts OSHA’s COVID-19 Vaccination Emergency Temporary Standard, N.Y.L.J., November 15, 2021. 2. Final Standard? If the Department decides to promulgate a permanent standard, is the result likely to be different? Compare the statutory text on interim or permanent standards? 278 3. OSHA Preemption of State Law? If the interim standard had been upheld, would that have preempted state laws mandating vaccination? Section 18(a) of the OSA Act provides the statute does not “prevent any State agency . . . from asserting jurisdiction under State law over any occupational safety or health issue with respect to which no standard is in effect [under § 6].” 29 U.S.C. § 667(a). If a federal standard is in effect, OSHA establishes field preemption: “State laws are “not saved [from preemption], even if they merely supplement the federal standard.” Gade v. Nat’s Solid Wastes Mgmt. Ass’n, 505 U.S. 88, 100, 112 S. Ct. 2374, 2384, 120 L. Ed. 2d 73 (1992) (emphasis added). Did the COVID vaccination ETS have a similar preemptive effect? The Department of Labor thought it did but only with respect to inconsistent state laws. COVID-19 Vaccination and Testing Emergency Temporary Standard, 86 Fed. Reg. at 61,551. 4. “General Duty” Clause Adjudication? Could the Department have achieved approximately the same effect through OSHA’s “general duty clause,” In publishing the Vaccination and Testing ETS, OSHA explained why it concluded enforcement of the General Duty Clause was “an inadequate means to address hazards associated with COVID-19”: For General Duty Clause citations to be upheld, OSHA must demonstrate elements of proof that are supplementary to, and can be more difficult to show than, the elements of proof required for violations of specific standards, where a hazard is presumed. Specifically, to prove a violation of the General Duty Clause, OSHA needs to establish—in each individual case—that: (1) An activity or condition in the employer’s workplace presented a hazard to an employee; (2) the hazard was recognized; (3) the hazard was causing or was likely to cause death or serious physical harm; and (4) feasible means to eliminate or materially reduce the hazard existed. * * * [S]everal characteristics of General Duty Clause enforcement actions make them an inadequate means to address hazards associated with COVID-19. First, it would be virtually impossible for OSHA to require and enforce the most important worker-protective elements of the ETS (such as vaccination and testing) under the General Duty Clause. Second, OSHA’s

burden of proof for establishing a General Duty Clause violation is heavier than for standards violations. Third, promulgating an ETS will enable OSHA to issue more meaningful penalties for willful and egregious violations, thus creating effective deterrence against employers who intentionally disregard their obligations under the Act or demonstrate plain indifference to employee safety. *** Because the General Duty Clause requires OSHA to establish the existence and feasibility of abatement measures that can materially reduce a hazard, it is difficult for OSHA to use the clause to require specific control measures where an employer is doing something, but 279 not what the Secretary has determined is needed to fully address the serious hazard. See, e.g., Waldon Health Care Center, 16 BNA OSHC 1052, 1993 WL 119662 at * (No. 89–2804, 1993) (vacating OSHA citation requiring pre-exposure hepatitis B vaccination under General Duty Clause by finding that although vaccination would more fully reduce the hazard, the employer’s chosen means of abatement were sufficient); Brown & Root, Inc., Power Plant Div., 8 BNA OSHC 2140, 1980 WL 10668 at *5 (No. 76–1296, 1980) * * *. COVID-19 Vaccination and Testing Emergency Temporary Standard, 86 Fed. Reg. at 61,441–42. 5. What Can State and Local Governments Do? In the absence of an OSHA standard, what could the states or municipal governments do in this area, which might approximate the effect of the foiled emergency temporary standard? Consider also Jacobson v. Massachusetts, 197 U.S. 11 (1905) (upholding state’s authority to require vaccination against smallpox). 6. Retaliatory Discharge? If an at-will employer terminates employees for failure to demonstrate proof of vaccination, do the employees have any redress under the materials studied in this text? For example, can employers require vaccination even where employees have religious objections to vaccination? How far can the employer go in testing the sincerity of the religious objection? 7. In Biden v. Missouri, 595 U.S. ___, 142 S.Ct. 647 (2022), the Court, writing per curiam, overturned lower court injunctions and refused to stay an interim final rule issued by the Department of Health and Human Services requiring that facilities receiving Medicare or Medicaid funds “must ensure that their staff—unless exempt for medical or religious reasons—are vaccinated against COVID-19.” The Court found the rule within the Secretary’s authority to regulate healthcare facilities receiving federal funds and that the Secretary’s rule was neither arbitrary nor capricious. Justice Thomas, joined by Justices Gorsuch, Kavanaugh and Barrett, dissented, stating that in their view the rule was beyond the Secretary’s delegated authority.

NOTE: NONWAIVABILITY OF OSHA PROTECTIONS OSHA’s minimum safety and health standards cannot be waived by the employee irrespective of information availability. This suggests that the Act also rests on the assumption that even fully informed workers may not be able fully to appreciate long-term, probabilistic risk. See generally Cass R. Sunstein, Legal Interference with Private Preferences, 53 U.Chi.L.Rev. 1129 (1986). In addition, unregulated bargaining may not fully account for the external or public costs of declining worker health and safety. See Susan RoseAckerman, Progressive Law and Economics—And the New Administrative Law, 98 Yale L.J. 341, 356 (1988). Like the FLSA and child labor laws, OSHA may also express a collective social judgment that people should not be able where they will be exposed to serious risk of harm.

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CHAPTER 8 WORKPLACE PRIVACY ■■■

Introduction This chapter explores the growing protection of employee privacy interests in U.S. law. Unlike most of our European trading partners, the United States has no general privacy legislation or even a strong underlying common law framework. Most legislation, federal or state, deals with specific areas of concern. In 2015, the Restatement of Employment Law presented a framework for decisional law treating employee privacy.

A. PHYSICAL INTRUSIONS RESTATEMENT OF EMPLOYMENT LAW §§ 7.01–7.03, 7.06–7.07 American Law Institute (2015).

§ 7.01. Employee Right of Privacy Employees have a right not to be subjected to wrongful employer intrusions upon their protected privacy interests. Protected employee privacy interests are listed in § 7.02, and further defined in §§ 7.03–7.05. Employer intrusions into those interests are defined in §§ 7.03–7.05. The term “wrongful employer intrusion” is defined in § 7.06. § 7.02. Protected Employee Privacy Interests Protected employee privacy interests include: (a) the privacy of the employee’s person (including aspects of his physical person, bodily functions, and personal possessions) as well as the privacy of the physical and electronic locations, including work locations provided by the employer, as to which the employee has a reasonable expectation of privacy (as provided in § 7.03); (b) the privacy of the employee’s information of a personal nature (as provided in § 7.04); and (c) the privacy of the employee’s information of a personal nature disclosed in confidence to the employer (as provided in § 7.05). 282

§ 7.03. Protected Employee Privacy Interests in the Employee’s Physical Person and in Physical and Electronic Locations (a) An employee has a protected privacy interest against employer intrusion into: (1) the employee’s physical person, bodily functions, and personal possessions; and (2) physical and electronic locations, including employer-provided locations, as to which the employee has a reasonable expectation of privacy. (b) An employee has a reasonable expectation in the privacy of a physical or electronic work location provided by the employer if: (1) the employer has provided express notice that the location or aspects of the location are private for employees; or (2) the employer has acted in a manner that treats the location or aspects of the location as private for employees, the type of location is customarily treated as private for employees, and the employee has made reasonable efforts to keep the location private. (c) An employer intrudes upon an employee’s protected privacy interest under this Section by such means as an

examination, search, or surveillance into the locations discussed in subsection (a). § 7.06. Wrongful Employer Intrusions (a) An employer is subject to liability for a wrongful intrusion upon an employee’s protected privacy interest (see §§ 7.03–7.05) if the intrusion would be highly offensive to a reasonable person under the circumstances. (b) An intrusion is highly offensive under subsection (a) if the nature, manner, and scope of the intrusion are clearly unreasonable when judged against the employer’s legitimate business interests or the public’s interests in intruding. § 7.07. Discharge in Retaliation for Refusing Privacy Invasions An employer who discharges an employee for refusing to consent to a wrongful employer intrusion upon a protected employee privacy interest under this Chapter is subject to liability for wrongful discharge in violation of well-established public policy under Chapter 4 of the Employment Restatement. 283

BORSE V. PIECE GOODS SHOP, INC. United States Court of Appeals for the Third Circuit, 1992. 963 F.2d 611. BECKER, J. Plaintiff Sarah Borse brought suit against her former employer, Piece Goods Shop, Inc. (“the Shop”), in the district court for the Eastern District of Pennsylvania. She claimed that, by dismissing her when she refused to submit to urinalysis screening and personal property searches (conducted by her employer at the workplace pursuant to its drug and alcohol policy), the Shop violated a public policy that precludes employers from engaging in activities that violate their employees’ rights to privacy and to freedom from unreasonable searches. [T]he district court dismissed her complaint for failure to state a claim on which relief could be granted. * * * Because of the procedural posture of this case, we begin with a summary of the allegations of the complaint. Borse was employed as a sales clerk by the Piece Goods Shop for almost fifteen years. In January 1990, the Shop adopted a drug and alcohol policy which required its employees to sign a form giving their consent to urinalysis screening for drug use and to searches of their personal property located on the Shop’s premises. Borse refused to sign the consent form. On more than one occasion, she asserted that the drug and alcohol policy violated her right to privacy and her right to be free from unreasonable searches and seizures as guaranteed by the United States Constitution. The Shop continued to insist that she sign the form and threatened to discharge her unless she did. On February 9, 1990, the Shop terminated Borse’s employment. The complaint alleges that Borse was discharged in retaliation for her refusal to sign the consent form and for protesting the Shop’s drug and alcohol policy. It asserts that her discharge violated a public policy, embodied in the First and Fourth Amendments to the United States Constitution, which precludes employers from engaging in activities that violate their employees’ rights to privacy and to freedom from unreasonable searches of their persons and property. Plaintiff seeks compensatory damages for emotional distress, injury to reputation, loss of earnings, and diminished earning capacity. She also alleges that the discharge was willful and malicious and, accordingly, seeks punitive damages. *** Because the Pennsylvania Supreme Court has not addressed the question [of] whether discharging an at-will employee who refuses to consent to urinalysis and to searches of his or her personal property located on the employer’s premises violates public policy, we must predict how that court would resolve the issue should it be called upon to do so. * * * 284

In order to evaluate Borse’s claim, we must attempt to “discern whether any public policy is threatened” by her discharge. As evidence of a public policy that precludes employers from discharging employees who refuse to consent to the practices at issue, Borse primarily relies upon the First and Fourth Amendments to the United States Constitution and the right to privacy included in the Pennsylvania Constitution. As will be seen, we reject her reliance on these constitutional provisions, concluding instead that, to the extent that her discharge implicates public policy, the source of that policy lies in Pennsylvania common law. ***

Although we have rejected Borse’s reliance upon constitutional provisions as evidence of a public policy [Eds. in a portion of the opinion not reprinted here] allegedly violated by the Piece Goods Shop’s drug and alcohol program, our review of Pennsylvania law reveals other evidence of a public policy that may, under certain circumstances, give rise to a wrongful discharge action related to urinalysis or to personal property searches. Specifically, we refer to the Pennsylvania common law regarding tortious invasion of privacy. Pennsylvania recognizes a cause of action for tortious “intrusion upon seclusion.” Marks v. Bell Telephone Co., 460 Pa. 73, 331 A.2d 424, 430 (1975). The Restatement defines the tort as follows: One who intentionally intrudes, physically or otherwise, upon the solitude or seclusion of another or his private affairs or concerns, is subject to liability to the other for invasion of his privacy, if the intrusion would be highly offensive to a reasonable person. Restatement (Second) of Torts § 652B. Unlike the other forms of tortious invasion of privacy, an action based on intrusion upon seclusion does not require publication as an element of the tort. Harris by Harris v. Easton Publishing Co., 335 Pa. Super. 141, 483 A.2d 1377, 1383 (1984). The tort may occur by (1) physical intrusion into a place where the plaintiff has secluded himself or herself; (2) use of the defendant’s senses to oversee or overhear the plaintiff’s private affairs; or (3) some other form of investigation or examination into plaintiff’s private concerns. 483 A.2d at 1383. Liability attaches only when the intrusion is substantial and would be highly offensive to “the ordinary reasonable person.” Id. at 1383–84. We can envision at least two ways in which an employer’s urinalysis program might intrude upon an employee’s seclusion. First, the particular manner in which the program is conducted might constitute an intrusion upon seclusion as defined by Pennsylvania law. The process of collecting the urine sample to be tested clearly implicates “expectations of privacy that society has long recognized as reasonable,” Skinner v. Railway Labor Executives Association, 489 U.S. 602, 109 S. Ct. 1402, 1413, 103 L. Ed. 2d 639 (1989). In addition, many urinalysis programs monitor the collection of the urine specimen to ensure that the employee does not adulterate it or substitute a sample from another person. See, for example, 109 S. Ct. at 285

1413 (noting that in some cases, visual or aural observation of urination is required). * * * Second, urinalysis “can reveal a host of private medical facts about an employee, including whether she is epileptic, pregnant, or diabetic.” Skinner, 109 S. Ct. at 1413. A reasonable person might well conclude that submitting urine samples to tests designed to ascertain these types of information constitutes a substantial and highly offensive intrusion upon seclusion. The same principles apply to an employer’s search of an employee’s personal property. If the search is not conducted in a discreet manner or if it is done in such a way as to reveal personal matters unrelated to the workplace, the search might well constitute a tortious invasion of the employee’s privacy. See, for example, K-Mart Corp. Store No. 7441 v. Trotti, 677 S.W.2d 632 (Tex. App. 1984) (search of employee’s locker). See also Bodewig v. K-Mart, Inc., 54 Or. App. 480, 635 P.2d 657 (1981) (subjecting cashier accused of stealing to strip search). * * * Only a handful of other jurisdictions have considered urinalysis programs implemented by private employers. The majority of these decisions balance the employee’s privacy interest against the employer’s interests in order to determine whether to uphold the programs. See, for example, Luedtke v. Nabors Alaska Drilling, Inc., 768 P.2d 1123 (Alaska 1989). In Luedtke, two employees challenged their employer’s urinalysis program, alleging violation of their state constitutional right of privacy, common-law invasion of privacy, wrongful discharge, and breach of the covenant of good faith and fair dealing. (Under Alaska law, the public policy exception to the employment-at-will doctrine is “largely encompassed within the implied covenant of good faith and fair dealing.” 768 P.2d at 1130 * * * . After determining that the relevant provision of the Alaska constitution did not apply to private action, the Alaska Supreme Court concluded that a public policy protecting an employee’s right to withhold private information from his employer exists in Alaska and that violation of that policy “may rise to the level of a breach of the implied covenant of good faith and fair dealing,” 768 P.2d at 1130. *** Although most . . . jurisdictions have applied a balancing test to urinalysis programs conducted by private employers, not all have done so. In Jennings v. Minco Technology Labs, Inc., 765 S.W.2d 497 (Tex. App. 1989), for example, the Texas Court of Appeals upheld an employer’s random urinalysis program without balancing the employee’s interests against the employer’s. The court upheld the program for two reasons. First, the court reasoned that although the Texas Supreme Court had on one occasion recognized an exception to the employment-at-will doctrine based on public policy, see Sabine Pilot, Inc. v. Hauck, 687 S.W.2d 733 (Tex. 286

1985), the “lower courts are not free to create additional exceptions,” 765 S.W.2d at 501, particularly in the absence of a statute explicitly recognizing the public policy allegedly violated by the discharge, id. at 501 & 501 n.3. Second, the court reasoned that the employer’s urinalysis program would not violate plaintiff’s privacy because her urine would be tested only if she consented. Id. at 502. Jennings argued that her consent would be ineffective because if she did not consent, she would lose her job, which she could not afford to do. The court rejected her argument, however, because “there cannot be one law of contracts for the rich and another for the poor.” Id. * * * In view of the foregoing analysis, we predict that the Pennsylvania Supreme Court would apply a balancing test to determine whether the Shop’s drug and alcohol program (consisting of urinalysis and personal property searches) invaded Borse’s privacy. Indeed, determining whether an alleged invasion of privacy is substantial and highly offensive to the reasonable person necessitates the use of a balancing test. The test we believe that Pennsylvania would adopt balances the employee’s privacy interest against the employer’s interest in maintaining a drug-free workplace in order to determine whether a reasonable person would find the employer’s program highly offensive. We recognize that other jurisdictions have considered individualized suspicion and concern for safety as factors to be considered in striking the balance, see, for example, Twigg [v. Hercules Corp., 185 W. Va. 155, 406 406 S.E.2d [52,] 55 [(1990)] (allowing urinalysis based on individualized suspicion or when employee’s job implicates safety concerns). We do not doubt that, in an appropriate case, Pennsylvania would include these factors in the balance, but we do not believe that the Pennsylvania Supreme Court would require private employers to limit urinalysis programs or personal property searches to employees suspected of drug use or to those performing safety-sensitive jobs.* * * In sum, based on our prediction of Pennsylvania law, we hold that dismissing an employee who refused to consent to urinalysis testing and to personal property searches would violate public policy if the testing tortiously invaded the employee's privacy. The sketchy nature of Borse’s complaint makes it difficult for us to ascertain whether the Shop's drug and alcohol program would constitute a substantial and highly offensive intrusion upon Borse’s privacy, however. Although she alleges that the program violates her right of privacy, she fails to allege how it does so. [W]e will vacate the order of the district court dismissing the complaint, and we will remand the case to the district court with directions to grant Borse leave to amend. 287

NOTES AND QUESTIONS 1. How is an employee’s privacy invaded by an employer-required urinalysis when the urine specimen is given behind a closed stall with no one else present? Is it because the urine sample may reveal private medical information? What if the sample is analyzed not by the employer directly but by a laboratory and the employer is informed only of the presence of an illegal drug? The Supreme Court dealt with this issue in the public-employment context in Skinner v. Railway Labor Executive Assn., 489 U.S. 602, 109 S. Ct. 1402, 103 L. Ed. 2d 639 (1989). 2. In what sense is there an invasion of privacy where the employee refuses to give his or her consent and is discharged for that reason? See Employment Restatement § 7.07. Does such an employer response always constitute a violation? 3. What legitimate interests does an employer have in requiring a drug test as a condition of employment? Courts have been receptive to the argument that employees in safety-sensitive positions may be subjected to drug tests because impairment of the employee may imperil the safety of the employees, coworkers, or the public. See e.g. Webster v. Motorola, Inc., 637 N.E.2d 203, 418 Mass. 425 (1994) (driver’s privacy interest outweighed by employer’s interest in ensuring that its vehicle was not operated by a person under the influence of illegal drugs); Folmsbee v. Tech Tool Grinding & Supply, Inc., 417 Mass. 388, 630 N.E.2d 586 (1994) (rejecting public policy challenge to drug testing where workplace safety depended upon “extreme alertness and precision”). What interest did the store in Borse have for its drug-testing program? Is an interest in a drug-free workplace simpliciter sufficient? Some decisions do go that far. See, e.g., Gilmore v. Enogex, 878 P.2d 360 (Okl. 1994). See also Drug-Free Workplace Act of 1988, 41 U.S.C. § 81 (applicable to federal contractors and grantees). 4. Do employees have a stronger privacy interest than job applicants in resisting a drug test as a condition of continued employment? Is this in part because applicants, once offered a position, usually undergo a series of medical examinations? Put differently, do employers have a stronger interest in requiring such tests because they have not had an opportunity to evaluate job applicants over a significant period of time? See Loder v. City of Glendale, 14 Cal. 4th 846, 897, 59 Cal. Rptr. 2d 696, 728–29, 927 P.2d 1206, 1234 (1997). 5. What is the effect of employee consent to a drug test if it is obtained on threat of dismissal? See Employment Restatement § 7.06, Comment h. 6. Does the balancing test articulated in Borse provide sufficient guidance to employers or employees? Does § 7.06 of the Employment Restatement offer a better approach?

7. “Public Policy” Cause of Action for Invasion of Privacy. Borse involved a public policy cause of action where the source of the public policy was tort decisional law protecting a privacy right. A few other states have also 288 recognized a public-policy claim in the workplace privacy area. See, e.g., Baughman v. Wal-Mart Stores, Inc., 215 W. Va. 45, 592 S.E.2d 824 (2003) (state public policy permits pre-employment testing of applicants but not incumbent employees absent safety concerns or “good faith objective suspicion” of drug use); Hennessey v. Coastal Eagle Point Oil Co., 129 N.J. 81, 609 A.2d 11 (1992) (recognizing “public policy” cause of action in the drug-testing context; however, firing oil refinery employee in safety-sensitive position for failing urine test deemed permissible); Luedtke v. Nabors Alaska Drilling Inc., 768 P.2d 1123, 1133 (Alaska 1989) (recognizing that “there exists a public policy protecting spheres of employee conduct into which employers may not intrude”, but upholding monitoring of oil rig employees for off-duty drug use). 8. General Privacy Protections. Only a handful of states provide general privacy protection whether by statute, see Mass. Gen. Laws. ch. 214, § 1B, or state constitutional provision, see White v. Davis, 13 Cal. 3d 757, 120 Cal. Rptr. 94, 533 P.2d 222 (1975); Hill v. National Collegiate Athletic Assn., 7 Cal. 4th 1, 26 Cal. Rptr. 2d 834, 865 P.2d 633 (1994) (en banc) (recognizing a constitutional privacy interest for student athletes but finding that the NCAA’s interest in maintaining fair competition outweighed those interests). Most states reaching the issue have not interpreted their state constitutions to reach private-sector activity. See, e.g., Cisco v. United Parcel Services, 328 Pa. Super. 300, 476 A.2d 1340 (1984) (employer need not rehire former employee acquitted of suspected theft; state constitution does not extend to private-sector employees). 9. State Drug Testing Laws. A number of state laws regulate workplace drug testing programs. See, e.g., Conn. Gen. Stat., §§ 31– 51t to –51aa (permitting random testing of applicants only, where authorized by federal law or in positions that are “high-risk” or “safetysensitive”; otherwise, “reasonable suspicion” required); R.I. Gen. Laws § 28–6.5–1 (employer must have “reasonable grounds” for drug testing; e.g. Colpitts v. W.B. Mason Co., 227 A.3d 996, 997–98 (R.I. 2020) (“reasonable grounds existed because delivery worker engaged in unusual behavior, stating he had to puke, staggering, and [uttering] repeated obscenities”); Vt. Stat. Ann., tit. 21, §§ 511–19 (random testing permitted only of applicants and where required by federal law; otherwise, only probable cause testing is permitted and only where employer has an employee assistance program (EAP) and will not terminate employee unless employee tests positive after completion of EAP). Drug testing can also give rise to liability under the Americans with Disabilities Act (ADA) and cognate state law where a failed drug tests compels the employee to disclose an underlying medical condition for which the employee is receiving treatment with prescription drugs. See e.g. Warshaw v. Concentra Health Svcs., 719 F. Supp. 2d 484 (E.D. Pa. 2010) (employee removed from project after failing drug test for ADHD medication). 10. Supreme Court Law on Drug Testing. Skinner v. Railway Labor Executives’ Association 489 U.S. 602, 109 S. Ct. 1402, 103 L. Ed. 2d 639 (1989), addressed the constitutionality of a Federal Railroad Administration (FRA) regulation requiring blood and urine tests of railroad employees involved in 289 certain train accidents. The FRA also has adopted regulations that authorized railroads to administer breath and urine tests to employees who violate certain safety rules: Unlike the blood-testing procedure at issue in Schmerber [v. California, 384 U.S. 757 (1966),] the procedures prescribed by the FRA regulations for collecting and testing urine samples do not entail a surgical intrusion into the body. It is not disputed, however, that chemical analysis of urine, like that of blood, can reveal a host of private medical facts about an employee, including whether she is epileptic, pregnant, or diabetic. Nor can it be disputed that the process of collecting the sample to be tested, which may in some cases involve visual or aural monitoring of the act of urination, itself implicates privacy interests. *** By and large, intrusions on privacy under the FRA regulations are limited. To the extent transportation and like restrictions are necessary to procure the requisite blood, breath, and urine samples for testing, this interference alone is minimal given the employment context in which it takes place. Ordinarily, an employee consents to significant restrictions in his freedom of movement where necessary for his employment, and few are free to come and go as they please during working hours. See, e.g., INS v. Delgado, 466 U.S., at 218, 104 S.Ct., at 1763. Any additional interference with a railroad employee’s freedom of movement that occurs in the time it takes to procure a blood, breath, or urine sample for testing cannot, by itself, be said to infringe significant privacy interests. * * * The breath tests authorized by Subpart D of the regulations are even less intrusive than the blood tests prescribed by Subpart C. Unlike blood tests, breath tests do not require piercing the skin and may be conducted safely outside a hospital environment and with a minimum of inconvenience or embarrassment. Further, breath tests reveal the level of alcohol in the employee’s bloodstream and nothing more. * * *

A more difficult question is presented by urine tests. Like breath tests, urine tests are not invasive of the body and, under the regulations, may not be used as an occasion for inquiring into private facts unrelated to alcohol or drug use. We recognize, however, that the procedures for collecting the necessary samples, which require employees to perform an excretory function traditionally shielded by great privacy, raise concerns not implicated by blood or breath tests. While we would not characterize these additional privacy concerns as minimal in most contexts, we note that the regulations endeavor to reduce the intrusiveness of the collection process. The regulations do not require that samples be furnished under the direct observation of a monitor, despite the desirability of such a procedure to ensure the integrity of the sample. See 50 Fed.Reg. 31555 (1985). See also Field Manual B-15; id., at D-1. The sample is also collected in a medical environment, by personnel unrelated to the railroad employer, and is 290 thus not unlike similar procedures encountered often in the context of a regular physical examination. More importantly, the expectations of privacy of covered employees are diminished by reason of their participation in an industry that is regulated pervasively to ensure safety, a goal dependent, in substantial part, on the health and fitness of covered employees.

*** By contrast, the government interest in testing without a showing of individualized suspicion is compelling. Employees subject to the tests discharge duties fraught with such risks of injury to others that even a momentary lapse of attention can have disastrous consequences. * * * An impaired employee, the Agency found, will seldom display any outward “signs detectable by the lay person or, in many cases, even the physician.” 50 Fed.Reg. 31526 (1985). * * * While no procedure can identify all impaired employees with ease and perfect accuracy, the FRA regulations supply an effective means of deterring employees engaged in safety-sensitive tasks from using controlled substances or alcohol in the first place. 50 Fed.Reg. 31541 (1985). * * * By ensuring that employees in safety-sensitive positions know they will be tested upon the occurrence of a triggering event, the timing of which no employee can predict with certainty, the regulations significantly increase the deterrent effect of the administrative penalties associated with the prohibited conduct, * * * concomitantly increasing the likelihood that employees will forgo using drugs or alcohol while subject to being called for duty.

NOTE: INVESTIGATIONS Privacy issues commonly arise in the context of investigations into employee misconduct. Private employers face two sources of liability in conducting investigations—the common law tort of invasion of privacy, discussed supra, and statutory liability under federal and state law, which prohibit certain types of employer investigations. Invasion of Privacy Tort As reflected in in Sections 7.01–7.03 of the Employment Restatement, employees can bring common law privacy claims for wrongful intrusions into “work locations provided by the employer, as to which the employee has a reasonable expectation of privacy[.]” How do Courts determine whether an employee has a “reasonable expectation of privacy” in a particular location? Consider the following excerpt from the Supreme Court’s Fourth Amendment ruling in O’Connor v. Ortega, 480 U.S. 709, 107 S. Ct. 1492, 94 L. Ed. 2d 714 (1987): Dr. Magno Ortega, a physician and psychiatrist, held the position of Chief of Professional Education at Napa State Hospital (Hospital) for 17 years, until his dismissal from that position in 1981. As Chief of 291 Professional Education, Dr. Ortega had primary responsibility for training young physicians in psychiatric residency programs. In July 1981, Hospital officials, including Dr. Dennis O’Connor, the Executive Director of the Hospital, became concerned about possible improprieties in Dr. Ortega’s management of the residency program. In particular, the Hospital officials were concerned with Dr. Ortega’s acquisition of an Apple II computer for use in the residency program. The officials thought that Dr. Ortega may have misled Dr. O’Connor into believing that the computer had been donated, when in fact the computer had been financed by the possibly coerced contributions of residents. Additionally, the Hospital officials were concerned with charges that Dr. Ortega had sexually harassed two female Hospital employees, and had taken inappropriate disciplinary action against a resident. On July 30, 1981, Dr. O’Connor requested that Dr. Ortega take paid administrative leave during an investigation of these charges. * * *

Dr. O’Connor selected several Hospital personnel to conduct the investigation, including an accountant, a physician, and a Hospital security officer. Richard Friday, the Hospital Administrator, led this “investigative team.” At some point during the in the investigation, Mr. Friday made the decision to enter Dr. Ortega’s office. The specific reason for the entry into Dr. Ortega’s office is unclear from the record. The petitioners claim that the search was conducted to secure state property. Initially, petitioners contended that such a search was pursuant to a Hospital policy of conducting a routine inventory of state property in the office of a terminated employee. At the time of the search, however, the Hospital had not yet terminated Dr. Ortega’s employment; Dr. Ortega was still on administrative leave. Apparently, there was no policy of inventorying the offices of those on administrative leave. Before the search had been initiated, however, the petitioners had become aware that Dr. Ortega had taken the computer to his home. Dr. Ortega contends that the purpose of the search was to secure evidence for use against him in administrative disciplinary proceedings. The resulting search of Dr. Ortega’s office was quite thorough. The investigators entered the office a number of times and seized several items from Dr. Ortega’s desk and file cabinets, including a Valentine’s card, a photograph, and a book of poetry all sent to Dr. Ortega by a former resident physician. These items were later used in a proceeding before a hearing officer of the California State Personnel Board to impeach the credibility of the former resident, who testified on Dr. Ortega’s behalf. The investigators also seized billing documentation of one of Dr. Ortega’s private patients under the California Medicaid program. The investigators did not otherwise separate Dr. Ortega’s property from state property because, as one investigator testified, “[t]rying to sort State from non-State, it was too much to do, so I gave it up and boxed 292 it up.” Thus, no formal inventory of the property in the office was ever made. Instead, all the papers in Dr. Ortega’s office were merely placed in boxes, and put in storage for Dr. Ortega to retrieve. * * * Given the societal expectations of privacy in one’s place of work * * * , we reject the contention made by the Solicitor General and petitioners that public employees can never have a reasonable expectation of privacy in their place of work. Individuals do not lose Fourth Amendment rights merely because they work for the government instead of a private employer. The operational realities of the workplace, however, may make some employees’ expectations of privacy unreasonable when an intrusion is by a supervisor rather than a law enforcement official. Public employees’ expectations of privacy in their offices, desks, and file cabinets, like similar expectations of employees in the private sector, may be reduced by virtue of actual office practices and procedures, or by legitimate regulation. Indeed, in Mancusi itself, the Court suggested that the union employee did not have a reasonable expectation of privacy against his union supervisors. 392 U.S., at 369, 88 S.Ct., at 2124. The employee’s expectation of privacy must be assessed in the context of the employment relation. An office is seldom a private enclave free from entry by supervisors, other employees and business and personal invitees. Instead, in many cases offices are continually entered by fellow employees and other visitors during the workday for conferences, consultations, and other workrelated visits. Simply put, it is the nature of government offices that others—such as fellow employees, supervisors, consensual visitors, and the general public—may have frequent access to an individual’s office. * * * Given the great variety of work environments in the public sector, the question of whether an employee has a reasonable expectation of privacy must be addressed on a case-by-case basis. The Court of Appeals concluded that Dr. Ortega had a reasonable expectation of privacy in his office, and five Members of this Court agree with that determination. * * * Because the record does not reveal the extent to which Hospital officials may have had workrelated reasons to enter Dr. Ortega’s office, we think the Court of Appeals should have remanded the matter to the District Court for its further determination. But regardless of any legitimate right of access the Hospital staff may have had to the office as such, we recognize that the undisputed evidence suggests that Dr. Ortega had a reasonable expectation of privacy in his desk and file cabinets. The undisputed evidence discloses that Dr. Ortega did not share his desk or file cabinets with any other employees. Dr. Ortega had occupied the office for 17 years and he kept materials in his office, which included personal correspondence, medical files, and correspondence from private patients unconnected to the Hospital, personal financial records, teaching aids and notes, and personal gifts and mementos. The files on physicians in residency training were kept outside Dr. Ortega’s office. Indeed, the only items found by the investigators were apparently personal items because, with the exception 293 of the items seized for use in the administrative hearings, all the papers and effects found in the office were simply placed in boxes and made available to Dr. Ortega. Justice Scalia, concurring in the judgment stated: “I cannot agree, . . . with the plurality’s view that the reasonableness of the expectation of privacy (and thus the existence of Fourth Amendment protection) changes “when an intrusion is by a supervisor, rather than a law enforcement official.” The identity of the searcher (police v. employer) is relevant not to whether Fourth Amendment protections apply, but only to whether the search of a protected area is reasonable. . . The case turns, therefore, on whether the Fourth Amendment was violated—i.e., whether the governmental intrusion was

reasonable. It is here that the government's status as employer, and the employment-related character of the search, become relevant. While, as a general rule, warrantless searches are per se unreasonable, we have recognized exceptions when "special needs, beyond the normal need for law enforcement, make the warrant and probable cause requirement impracticable. . . .” Such “special needs” are present in the context of government employment. The government, like any other employer, needs frequent and convenient access to its desks, offices, and file cabinets for work-related purposes. I would hold that government searches to retrieve work-related materials or to investigate violations of workplace rules—searches of the sort that are regarded as reasonable and normal in the private employer context —do not violate the Fourth Amendment. . . . I agree with the plurality that the decision must be reversed and remanded.” O’Connor was decided under the Fourth Amendment which bars the government from engaging in unreasonable search and seizure. Nevertheless, the Court’s reasoning regarding an employee’s reasonable expectation of privacy is relevant to a common law tort claim as well. In which portions of the workplace did Ortega have a reasonable expectation of privacy? Is the Court’s reasoning consistent with Section 7.03(b)(2) of the Employment Restatement? State and Federal Statutes Relating to Investigations Surveillance. Several states prohibit employers from hiring detectives to spy on employees for any purpose, or at least for the purpose of interfering with the exercise of labor rights. See e.g., Cal. Pub. Util. Code § 8251 (West) (public agency may not terminate or discipline an employee based on “upon a report by such special agent, detective, or spotter”, involving a “question of integrity, honesty, or a breach of rules of the employer” without notice and a hearing); Kan. Stat. Ann. § 44–808(6) (unlawful to “employ any person to spy upon employees or their representatives respecting their exercise of any right created or approved by this act”, many of which relate to union organizing); Nev. Rev. Stat. § 613.160 (prohibits employers from hiring a “special agent, detective or person commonly known as a spotter for the purpose of investigating, obtaining and reporting to the employer . . . information concerning his or her employees”); N.Y. Lab. Law § 704(1) (McKinney) (unlawful “[t]o spy upon or keep under surveillance, whether directly or 294 through agents or any other person, any activities of employees or their representatives in the exercise” of labor rights). Lie Detectors. Under the Employee Polygraph Protection Act, 29 U.S.C. §§ 2001–09, private and government employers are generally restricted in their use of a “lie detector,” defined to include “a polygraph, deceptograph, voice stress analyzer, psychological stress evaluator, or any other similar device (whether mechanical or electrical) that is used . . . for the purpose of rendering a diagnostic opinion regarding the honesty or dishonesty of an individual. . . . ” Id. § 2001. Unless the employer provides security services or lawfully handles controlled substances, lie detectors are permitted only for testing of incumbent employees in connection with “an ongoing investigation involving economic loss or injury to the employer’s business.” The employee must have had access to the property in question and the employer must have a reasonable suspicion of the employee’s involvement. The employer must also provide a statement of the basis for its suspicion, and comply with other limitations in the questioning, subsequent documentation, and discipline on the basis of the results. Some state laws further restrict the use of polygraphs. See, e.g., D.C. Code § 32–902 (prohibiting all use of lie detector tests). Massachusetts law provides: “It shall be unlawful for any employer or his agent, with respect to any of his employees, or any person applying to him for employment, including any person applying for employment as a police officer, to subject such person to, or request such person to take a lie detector test within or without the commonwealth, or to discharge, not hire, demote or otherwise discriminate against such person for the assertion of rights arising hereunder. This section shall not apply to lie detector tests administered by law enforcement agencies as may be otherwise permitted in criminal investigations.” Mass. Gen. Laws ch. 149, § 19B; e.g., Bellin v. Kelley, 755 N.E.2d 1274 (Mass. 2001). Medical Examinations. The ADA, 29 U.S.C. § 12112(d), restricts an employer’s ability to conduct a pre-employment medical examination and also requires that post-employment examinations be job-related. The statute (§ 12112(d) 4 B) permits employers and other covered entities to “to “conduct voluntary medical examinations, including voluntary medical histories, which are part of an employee health program available to employees at that work site.” Biometric Identifiers. Employer use of facial, retina or eye scan has led to anew area of privacy protection. See Illinois Biometric Information Privacy Act, 740 ILL. COMP. STAT. ANN. 14/1 (prohibiting, collection, receipt or use for profit of biometric information.) “Background Checks.” a. Under the Fair Credit Reporting Act of 1970 (FCRA), 15 U.S.C. § 1681 et. seq., employers must obtain consent from the employee or applicant before “the collection of any information” for the purpose of requesting a “consumer report” or an “investigative consumer report.” Before taking adverse action based on a consumer report, the employer also must provide the 295 employee with a copy of the report and written explanation of the employee’s rights under the FCRA, § 1681b(b)(1)–(3).

Consumer reports have traditionally consisted of credit reports and criminal background checks. Investigative consumer reports have traditionally consisted of reference checks. However, the statutory definitions could encompass a broader array of employer inquiries: A “consumer report” is defined as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” 15 U.S.C. § 1681a(d). “Investigative consumer reports” refers to “a consumer report or portion thereof in which information on a consumer’s character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer reported on or with others with whom he is acquainted.” 15 U.S.C. § 1681a(e). “Credit reporting agencies” refers to entities that regularly “assembl[e] or evaluat[e] consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties” 15 U.S.C. § 1681a(f). 15 U.S.C. § 1681a(d)–(f). After the Federal Trade Commission took the position that third parties hired by employers to investigate harassment claims qualify as “credit reporting agencies,” Congress amended FCRA to exclude employer investigations of misconduct. Fair and Accurate Credit Transactions Act of 2003, Pub. L. 108–159, 15 U.S.C. § 1681a(y). b. A number of states have enacted “ban the box” laws prohibiting employers from inquiring about an applicant’s criminal history on the initial screening of employment applications. See Haw. Rev. Stat. § 378–2.5; 820 Ill. Comp. Stat. § 75/15; Mass. Gen. Laws ch. 151B, § 4 (9½). These statutes permit employers to inquire about an applicant’s criminal history later in the hiring process. Some laws restrict only public employers, and some require that adverse actions be job-related. Del. Code Ann. tit. 19, § 711(g)(2); Minn. Stat. § 364.03. Some states also prohibit employers from using credit checks unless the employee works in certain enumerated positions. Cal. Lab. Code § 1024.5 (West); Colo. Rev. Stat. § 8–2–126; 820 Ill. Comp. Stat. 70/10. In addition, several states ban inquiries into prior arrests and convictions not relevant to the jobs being sought; e.g., N.Y. Gen. Bus. L. § 380–J (2019) (credit reporting agencies may not report information about arrests not resulting in conviction unless pending); N.Y. Corr. L. § 752 (2019) (banning denial of employment or license based on convictions unless “(1) there is a “direct relationship” between the criminal offense and the specific employment or license being sought, or (2) the license or employment “would involve an unreasonable risk to property or to the safety or welfare of specific individuals or the general public.”). 296

B. INTRUSIONS INTO ELECTRONIC “LOCATIONS” NOTE: REGULATING INTERCEPTION OF COMMUNICATIONS Consistent with decisional and statutory developments, the Employment Restatement §§ 7.02–7.03 addresses employer intrusions into electronic locations in which employees have a reasonable expectation of privacy. An employer that violates that right may be liable for a common law tortious invasion of privacy claim. Wiretap Act Before the advent of digital technology, conversations on landlines were monitored through the physical placement of an electrical phone-line tap, which intercepted communications over the phone wires. The federal wiretapping statute, Title III of the Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. § 2510 et seq., prohibits “interceptions” of telephone calls and other communications without the consent of at least one party. See id. § 2511(2)(d). Some states like Maryland require the consent of both parties to a communication. See Md. Code. Ann., Cts. & Jud. Proc., § 10–401 to –410 (regulating willful interception of any wire, oral or electronic communication absent consent of all of the parties); Cal. Penal Code § 632 (monitoring of cellular communication requires consent of all parties). Some states also have anti-hacking statutes. See e.g. Cal. Penal Code § 502 (West). The courts are generally disinclined to find implied consent. See Watkins v. L.M. Berry & Co., 704 F.2d 577 (11th Cir.1983) (employer’s announced policy of intercepting sales calls did not establish consent to monitoring of personal calls beyond determining the nature of the call). Title III of the Omnibus Crime Control Act, 18 U.S.C. § 2510(5)(a)(i), contains an exception for interceptions resulting from use of equipment “in the ordinary course of business.” The Watkins court held that this exception applies only to intercepted business calls and to other calls only to determine whether the call was personal or not; “a personal call may be intercepted in the ordinary course of business to determine its nature but never its contents.” 704 F.2d at 583. Electronic Communications Privacy Act In 1986, Congress enacted the Electronic Communications Privacy Act (ECPA), 18 U.S.C. §§ 2510–20, which largely amended Title III of the Omnibus Crime Control Act, to address electronic communications. An ECPA violation requires an “interception” of the

communication, i.e., obtaining the contents of the communication during transmission—thus limiting the statute’s applicability to email systems where interception usually occurs after the message has been sent and stored. See, e.g., Konop v. Hawaiian Airlines, Inc., 302 F.3d 868 (9th Cir. 2002) (employer’s unauthorized access of an employee website not an “interception”); United States v. Ropp, 347 F. Supp. 2d 831 (C.D. Cal. 2004) (keystroke monitoring software did not intercept electronic communications). For a good discussion of what “intercept” means under the 297 ECPA, see United States v. Szymuszkiewicz, 622 F.3d 701 (7th Cir. 2010) (Easterbrook, J.). The ECPA contains an exception for service providers. 18 U.S.C. § 2701(c). Employers have successfully used this exception for accessing information stored on their own networks. Bohach v. City of Reno, 932 F. Supp. 1232, 1236 (D. Nev. 1996) (no ECPA violation where employer accessed pager messages stored on its network because the ECPA “allows service providers to do as they wish when it comes to accessing communications in electronic storage.”). The statute also contains an exception for authorized users. See Konop v. Hawaiian Airlines, Inc., 302 F.3d 868 (2002) (reversing summary judgment for employer that logged onto employee’s private website using credentials obtained from other employees); Ehling v. Monmouth-Ocean Hospital Svcs. Corp, 961 F.Supp.2d 659 (D.N.J. 2013) (no ECPA violation where employer passively received screenshots of employee’s private Facebook wall from co-worker “friend” authorized to access the posts). Stored Communications Act Unauthorized access to electronic communications while they are in electronic storage is addressed in the Stored Communications Act (SCA), which was enacted as Title II of the ECPA, 18 U.S.C. § 2701 et seq. SCA violations tend to arise in the context of unauthorized access of an employee’s personal email from a third party server. See, e.g., Doe v. County of San Francisco, No. C10– 04700, 2012 WL 2132398 (N.D. Cal. June 12, 2012) (upholding jury verdict against employer for opening and “sifting through” employee’s personal webmail inbox); Mintz v. Bartelstein and Assoc. Inc., 906 F. Supp. 2d 1017 (C.D. Cal. 2012) (privacy invasion when employer obtained temporary passwords to plaintiff’s Gmail account and read his email for “at least twenty minutes”). The statutory exception for an employer’s own network allows employers to recover any personal email stored locally on the employer’s computers. Computer forensics experts can often recover snippets of personal email stored in computer temp files, as well as internet browsing history. In Sunbelt Rentals v. Victor, 43 F. Supp. 3d 1026 (N.D. Cal. 2014), a former employee inadvertently synced a new iPad and iPhone with an old device in the possession of the prior employer. The prior employer, a competitor, thereby received all of the employee’s current text messages. The court ruled the employer did not violate the SCA in reading the text messages because it took no actions to download the messages from a third party server. Employees generally are treated as having a lesser expectation of privacy in company-owned equipment than in their own computers or other possessions. See Restatement § 7.03, cmt. g; e.g., Sunbelt Rentals, 43 F. Supp. 3d 1026 (dismissing privacy claim, noting the employer owned the device in question). Courts have allowed employers to search personal computers when (a) they were used for work-related purposes and (b) the employer had previously warned of a possible search. TBG. Ins. Svcs. Corp. v. Superior Ct., 117 Cal. Rptr. 2d 155 (Cal. App. 2002) (ordering employee to produce personal 298 computer for search where employee consented to monitoring of that computer in an employer policy); Sitton v. Print Direction, Inc., 718 S.E.2d 532 (Ga. App. 2011) (reviewing and printing personal email open on personal laptop at work not “offensive or objectionable to a reasonable person” given suspicion of misconduct and warning in Employee Handbook).

C. INFORMATIONAL PRIVACY RESTATEMENT OF EMPLOYMENT LAW §§ 7.04–7.05 American Law Institute (2015).

§ 7.04. Protected Employee Privacy Interest in Information of a Personal Nature (a) An employee has a protected privacy interest in information relating to the employee that is of a personal nature and that the employee has made reasonable efforts to keep private. (b) An employer intrudes upon this protected privacy interest by requiring that the employee provide information described in this subsection (a) or by obtaining the information through deceit. (c) An employer does not intrude upon the protected privacy interest stated in subsection (a) by requiring the employee to provide (i) personal information the employer is required by law to obtain from employees or (ii)

personal information that is relevant to the employer’s business needs and is customarily required by employers in the course of employment. § 7.05. Protected Employee Privacy Interest Against Employer Disclosure of Employee Personal Information (a) An employee has a protected privacy interest in personal information related to the employee that is provided in confidence to the employer in the course of the employment relationship. (b) An employer intrudes upon the privacy interest stated in subsection (a) by providing or allowing third parties access to such employee information without the employee’s consent. For purposes of this Section, third parties include an employer’s employees or agents who have no legitimate business reason to access the information. (c) An employer does not intrude upon the privacy interest stated in subsection (a) if the employer is compelled by law to provide or allow a third party access to the employee information described in the subsection. 299

CITY OF ONTARIO V. QUON Supreme Court of the United States, 2010. 560 U.S. 746, 130 S.Ct. 2619, 177 L.Ed.2d 216. KENNEDY, J. delivered the opinion of the Court. I A The City of Ontario (City) is a political subdivision of the State of California. The case arose out of incidents in 2001 and 2002 when respondent Jeff Quon was employed by the Ontario Police Department (OPD). He was a police sergeant and member of OPD’s Special Weapons and Tactics (SWAT) Team. The City, OPD, and OPD’s Chief, Lloyd Scharf, are petitioners here. As will be discussed, two respondents share the last name Quon. In this opinion “Quon” refers to Jeff Quon, for the relevant events mostly revolve around him. In October 2001, the City acquired 20 alphanumeric pagers capable of sending and receiving text messages. Arch Wireless Operating Company provided wireless service for the pagers. Under the City’s service contract with Arch Wireless, each pager was allotted a limited number of characters sent or received each month. Usage in excess of that amount would result in an additional fee. The City issued pagers to Quon and other SWAT Team members in order to help the SWAT Team mobilize and respond to emergency situations. Before acquiring the pagers, the City announced a “Computer Usage, Internet and E-Mail Policy” (Computer Policy) that applied to all employees. Among other provisions, it specified that the City “reserves the right to monitor and log all network activity including e-mail and Internet use, with or without notice. Users should have no expectation of privacy or confidentiality when using these resources.” In March 2000, Quon signed a statement acknowledging that he had read and understood the Computer Policy. The Computer Policy did not apply, on its face, to text messaging. Text messages share similarities with e-mails, but the two differ in an important way. In this case, for instance, an e-mail sent on a City computer was transmitted through the City’s own data servers, but a text message sent on one of the City’s pagers was transmitted using wireless radio frequencies from an individual pager to a receiving station owned by Arch Wireless. It was routed through Arch Wireless’ computer network, where it remained until the recipient’s pager or cellular telephone was ready to receive the message, at which point Arch Wireless transmitted the message from the transmitting station nearest to the recipient. After delivery, Arch Wireless retained a copy on its computer servers. The message did not pass through computers owned by the City. 300

Although the Computer Policy did not cover text messages by its explicit terms, the City made clear to employees, including Quon, that the City would treat text messages the same way as it treated e-mails. At an April 18, 2002, staff meeting at which Quon was present, Lieutenant Steven Duke, the OPD officer responsible for the City’s contract with Arch Wireless, told officers that messages sent on the pagers “are considered e-mail messages. This means that [text] messages would fall under the City’s policy as public information and [would be] eligible for auditing.” Duke’s comments were put in writing in a memorandum sent on April 29, 2002, by Chief Scharf to Quon and other City personnel. Within the first or second billing cycle after the pagers were distributed, Quon exceeded his monthly text message character allotment. Duke told Quon about the overage, and reminded him that messages sent on the pagers were “considered e-

mail and could be audited.” Duke said, however, that “it was not his intent to audit [an] employee’s text messages to see if the overage [was] due to work related transmissions.” Duke suggested that Quon could reimburse the City for the overage fee rather than have Duke audit the messages. Quon wrote a check to the City for the overage. Duke offered the same arrangement to other employees who incurred overage fees. Over the next few months, Quon exceeded his character limit three or four times. Each time he reimbursed the City. Quon and another officer again incurred overage fees for their pager usage in August 2002. At a meeting in October, Duke told Scharf that he had become “ ‘tired of being a bill collector.’ ” Scharf decided to determine whether the existing character limit was too low—that is, whether officers such as Quon were having to pay fees for sending work-related messages—or if the overages were for personal messages. Scharf told Duke to request transcripts of text messages sent in August and September by Quon and the other employee who had exceeded the character allowance. At Duke’s request, an administrative assistant employed by OPD contacted Arch Wireless. After verifying that the City was the subscriber on the accounts, Arch Wireless provided the desired transcripts. Duke reviewed the transcripts and discovered that many of the messages sent and received on Quon’s pager were not work related, and some were sexually explicit. Duke reported his findings to Scharf, who, along with Quon’s immediate supervisor, reviewed the transcripts himself. After his review, Scharf referred the matter to OPD’s internal affairs division for an investigation into whether Quon was violating OPD rules by pursuing personal matters while on duty. The officer in charge of the internal affairs review was Sergeant Patrick McMahon. Before conducting a review, McMahon used Quon’s work schedule to redact the transcripts in order to eliminate any messages Quon sent while off duty. He then reviewed the content of the messages 301

Quon sent during work hours. McMahon’s report noted that Quon sent or received 456 messages during work hours in the month of August 2002, of which no more than 57 were work related; he sent as many as 80 messages during a single day at work; and on an average workday, Quon sent or received 28 messages, of which only 3 were related to police business. The report concluded that Quon had violated OPD rules. Quon was allegedly disciplined. B Raising claims under Rev. Stat. § 1979, 42 U.S.C. § 1983; 18 U.S.C. § 2701 et seq., popularly known as the Stored Communications Act (SCA); and California law, Quon filed suit against petitioners in the United States District Court for the Central District of California. Arch Wireless and an individual not relevant here were also named as defendants. * * * Among the allegations in the complaint was that petitioners violated respondents’ Fourth Amendment rights and the SCA by obtaining and reviewing the transcript of Jeff Quon’s pager messages and that Arch Wireless had violated the SCA by turning over the transcript to the City. * * * II *** The [Court in O’Connor v. Ortega, 480 U.S. 709 (1987),] did disagree on the proper analytical framework for Fourth Amendment claims against government employers. A four-Justice plurality concluded that the correct analysis has two steps. First, because “some government offices may be so open to fellow employees or the public that no expectation of privacy is reasonable,” a court must consider “[t]he operational realities of the workplace” in order to determine whether an employee’s Fourth Amendment rights are implicated. On this view, “the question whether an employee has a reasonable expectation of privacy must be addressed on a case-by-case basis.” Next, where an employee has a legitimate privacy expectation, an employer’s intrusion on that expectation “for noninvestigatory, work-related purposes, as well as for investigations of workrelated misconduct, should be judged by the standard of reasonableness under all the circumstances.” * * * III A Before turning to the reasonableness of the search, it is instructive to note the parties’ disagreement over whether Quon had a reasonable expectation of privacy. The record does establish that OPD, at the outset, made it clear that pager messages were not considered private. The City’s Computer Policy stated that “[u]sers should have no expectation of privacy or confidentiality when using” City computers. Chief Scharf’s memo and Duke’s statements made clear that this official policy extended to text 302

messaging. The disagreement, at least as respondents see the case, is over whether Duke’s later statements overrode the

official policy. Respondents contend that because Duke told Quon that an audit would be unnecessary if Quon paid for the overage, Quon reasonably could expect that the contents of his messages would remain private. At this point, were we to assume that inquiry into “operational realities” were called for, it would be necessary to ask whether Duke’s statements could be taken as announcing a change in OPD policy, and if so, whether he had, in fact or appearance, the authority to make such a change and to guarantee the privacy of text messaging. It would also be necessary to consider whether a review of messages sent on police pagers, particularly those sent while officers are on duty, might be justified for other reasons, including performance evaluations, litigation concerning the lawfulness of police actions, and perhaps compliance with state open records laws. See Brief for Petitioners 35–40 (citing Cal. Public Records Act, Cal. Govt. Code Ann. 6250 et seq. (West 2008)). These matters would all bear on the legitimacy of an employee’s privacy expectation. The Court must proceed with care when considering the whole concept of privacy expectations in communications made on electronic equipment owned by a government employer. The judiciary risks error by elaborating too fully on the Fourth Amendment implications of emerging technology before its role in society has become clear. [I]n Katz v. United States, 389 U.S. 347, 353, 88 S. Ct. 507, 19 L. Ed. 2d 576 (1967)[,] the Court relied on its own knowledge and experience to conclude that there is a reasonable expectation of privacy in a telephone booth. It is not so clear that courts at present are on so sure a ground. Prudence counsels caution before the facts in the instant case are used to establish far-reaching premises that define the existence, and extent, of privacy expectations enjoyed by employees when using employer-provided communication devices. Rapid changes in the dynamics of communication and information transmission are evident not just in the technology itself but in what society accepts as proper behavior. * * * Even if the Court were certain that the O’Connor plurality’s approach were the right one, the Court would have difficulty predicting how employees’ privacy expectations will be shaped by those changes or the degree to which society will be prepared to recognize those expectations as reasonable. Cell phone and text message communications are so pervasive that some persons may consider them to be essential means or necessary instruments for self-expression, even self-identification. That might strengthen the case for an expectation of privacy. On the other hand, the ubiquity of those devices has made them generally affordable, so one could counter that employees who need cell phones or similar devices for personal matters can purchase and pay for their own. And employer policies concerning communications will of course shape the reasonable 303

expectations of their employees, especially to the extent that such policies are clearly communicated. A broad holding concerning employees’ privacy expectations vis-a-vis employer-provided technological equipment might have implications for future cases that cannot be predicted. It is preferable to dispose of this case on narrower grounds. For present purposes we assume several propositions arguendo: First, Quon had a reasonable expectation of privacy in the text messages sent on the pager provided to him by the City; second, petitioners’ review of the transcript constituted a search within the meaning of the Fourth Amendment; and third, the principles applicable to a government employer’s search of an employee’s physical office apply with at least the same force when the employer intrudes on the employee’s privacy in the electronic sphere. * * * Even if Quon had a reasonable expectation of privacy in his text messages, petitioners did not necessarily violate the Fourth Amendment by obtaining and reviewing the transcripts. Although as a general matter, warrantless searches “are per se unreasonable under the Fourth Amendment,” there are “a few specifically established and well-delineated exceptions” to that general rule. The Court has held that the “ ‘special needs’ ” of the workplace justify one such exception. O’Connor, 480 U. S., at 725 (plurality opinion); id., at 732 (Scalia, J., concurring in judgment); Von Raab, 489 U. S., at 666–667. Under the approach of the O’Connor plurality, when conducted for a “noninvestigatory, work-related purpos[e]” or for the “investigatio[n] of work-related misconduct,” a government employer’s warrantless search is reasonable if it is “ ‘justified at its inception’ ” and if “ ‘the measures adopted are reasonably related to the objectives of the search and not excessively intrusive in light of’ ” the circumstances giving rise to the search. 480 U. S., at 725–726. The search here satisfied the standard of the O’Connor plurality and was reasonable under that approach. The search was justified at its inception because there were “reasonable grounds for suspecting that the search [was] necessary for a noninvestigatory work-related purpose.” Id., at 726. As a jury found, Chief Scharf ordered the search in order to determine whether the character limit on the City’s contract with Arch Wireless was sufficient to meet the City’s needs. . . . As for the scope of the search, reviewing the transcripts was reasonable because it was an efficient and expedient way to determine whether Quon’s overages were the result of work-related messaging or personal use. . . . . . . Even if he could assume some level of privacy would inhere in his messages, it would not have been reasonable for Quon to conclude that his messages were in all circumstances immune from scrutiny. Quon was told

that his messages were subject to auditing. . . . Given that the City issued the pagers to 304

Quon and other SWAT Team members in order to help them more quickly respond to crises—and given that Quon had received no assurances of privacy—Quon could have anticipated that it might be necessary for the City to audit pager messages to assess the SWAT Team’s performance in particular emergency situations.

NOTES AND QUESTIONS 1. Recall that the City had a policy through which it “reserve[d] the right to monitor and log all network activity including e-mail and Internet use, with or without notice.” It also warned users that they “should have no expectation of privacy or confidentiality when using these resources.” What did the City do to undermine that policy? If this policy had been consistently maintained, would the police officers have had a valid invasion of privacy claim under the Fourth Amendment? 2. Should information obtained from employer-provided equipment be treated differently from information obtained by surveillance or background checks? Why is the Court hesitating here? 3. Review Employment Restatement Section § 7.01–7.03. Had Quon been a private-sector employee, would he have had a cognizable common law claim for invasion of privacy? Medical Records Privacy The Health Insurance Portability and Accountability Act of 1996 (HIPAA), 15 U.S.C. §§ 1681l–1681t, restricts the disclosure of individually identifiable information by health plans and health care providers. 45 C.F.R. § 160.103. In general, these regulations require that (1) all “protected health information” (identifiable health information provided by health care providers and insurers relating to the physical or mental health of individuals or payments for provision of health care) be held confidential, unless a specific exemption applies to the information; (2) all entities subject to the regulations treat such information as confidential; and (3) patients are given certain protections against the misuse or disclosure of their health record. See generally Matthew T. Bodie, HIPPA. Cardozo L. Rev. (2022, forthcoming); Kathryn L. Bakich, Countdown to HIPAA Compliance: Understanding EDI, Privacy, and Security, 15 Benefits L.J. 45 (Summer 2002). Employers and employment records are generally excluded from HIPAA unless the employer acts as a health care provider or health care insurer for its employees. HIPAA prohibits health care providers from releasing patient information directly to employers without an employee’s written authorization or a subpoena, as set forth in 45 C.F.R. §§ 164.508, .512. The regulations also contain an exception for employer-requested medical evaluations of work-related injuries. 45 C.F.R. § 164.512(b)(1)(v). Some state laws provide additional protections for health-related information. See Pettus v. Cole, 49 Cal. App. 4th 402, 57 Cal. Rptr. 2d 46 (1996) (employer requested psychiatric evaluation in connection with disability leave; psychiatrist violated California 305 Medical Information Act by disclosing report to employer without employee’s consent). Government Records Privacy Another important federal measure is the Privacy Act of 1974, 5 U.S.C. § 552(a), which grants certain rights and remedies to individuals who are the subject of records maintained by federal agencies, see, e.g., NASA v. Nelson, 562 U.S. 134 (2011); Dickson v. Office of Personnel Management, 828 F.2d 32 (D.C. Cir. 1987) (agency’s maintenance of record in violation of statutory fairness standard exposes agency to liability for damages); Brune v. Internal Revenue Service, 861 F.2d 1284 (D.C. Cir. 1988) (agency not required by Privacy Act to interview employees under investigation for possible misconduct before questioning third parties about the incident). Access to Personnel Records Some state laws provide a right for private sector employees to have access to their personnel files and the right to correct inaccurate information in such files. See, e.g., Mich. Comp. Laws §§ 423.501–.512. Data Breach Security Laws Some state laws require employers to notify employees if a network security breach has resulted in the disclosure of personal data, such as social security numbers. See, e.g., Cal. Civ. Code §§ 1798.80–.84 (West); N.Y. Gen. Bus. Law § 899–aa (McKinney).

D. PERSONAL AUTONOMY NOVOSEL V. NATIONWIDE INSURANCE CO.

United States Court of Appeals, Third Circuit, 1983. 721 F.2d 894.

ADAMS, J. Novosel was an employee of Nationwide from December 1966 until November 18, 1981. He had steadily advanced through the company’s ranks in a career unmarred by reprimands or disciplinary action. At the time his employment was terminated, he was a district claims manager and one of three candidates for the position of division claims manager. In late October 1981, a memorandum was circulated through Nationwide’s offices soliciting the participation of all employees in an effort to lobby the Pennsylvania House of Representatives. Specifically, employees were instructed to clip, copy, and obtain signatures on coupons bearing the insignia of the Pennsylvania Committee for No-Fault Reform. This Committee was actively supporting the passage of House Bill 1285, the “No-Fault Reform Act,” then before the state legislature. The allegations of the complaint charge that the sole reason for Novosel’s discharge was his refusal to participate in the lobbying effort and 306

his privately stated opposition to the company’s political stand. Novosel contends that the discharge for refusing to lobby the state legislature on the employer’s behalf constituted the tort of wrongful discharge on the grounds it was willful, arbitrary, malicious and in bad faith, and that it was contrary to public policy. *** Novosel’s tort allegations raise two separate issues: first, whether a wrongful discharge claim is cognizable under Pennsylvania law; second, if such a claim can go forward under state law, by what standard is a court to determine whether the facts set forth in the complaint present a sufficient basis for a successful tort action. *** Applying the logic of Geary [v. United States Steel Corp., 456 Pa. 171, 319 A.2d 174 (1974),] we find that Pennsylvania law permits a cause of action for wrongful discharge where the employment termination abridges a significant and recognized public policy. *** An extensive case law has developed concerning the protection of constitutional rights, particularly First Amendment rights, of government employees. *** In striking down the use of patronage appointments for federal government employees, the [Supreme Court has] noted that one of its goals was to insure that “employees themselves are to be sufficiently free from improper influences.” CSC v. Letter Carriers, 413 U.S. 548, 564, 93 S.Ct. 2880, 2890, 37 L.Ed.2d 796 (1973). It was not, however, simply the abuse of state authority over public employees that fueled the Court’s concern over patronage political appointments; no less central is the fear that the political process would be irremediably distorted. If employers such as federal, state or municipal governments are allowed coercive control of the scope and direction of employee political activities, it is argued, their influence will be geometrically enhanced at the expense of both the individual rights of the employees and the ability of the lone political actor to be effectively heard. We further note that the Pennsylvania Supreme Court has similarly voiced its concern over the threat posed by discharges to the constitutionally protected rights of employees. In Sacks v. Commonwealth of Pennsylvania, Department of Public Welfare, 502 Pa. 201, 465 A.2d 981 (Pa.Sup.Ct.1983), the court ordered a state employee reinstated following a discharge for public comments critical of his agency employer. *** 307

Although Novosel is not a government employee, the public employee cases do not confine themselves to the narrow question of state action. Rather, these cases suggest that an important public policy is in fact implicated wherever the power to hire and fire is utilized to dictate the terms of employee political activities. In dealing with public employees, the cause of action arises directly from the Constitution rather than from common law developments. The protection of important political freedoms, however, goes well beyond the question whether the threat comes from state or private bodies. The inquiry before us

is whether the concern for the rights of political expression and association which animated the public employee cases is sufficient to state a public policy under Pennsylvania law. While there are no Pennsylvania cases squarely on this point, we believe that the clear direction of the opinions promulgated by the state’s courts suggests that this question be answered in the affirmative. * * * The Pennsylvania Supreme Court’s rulings in Geary and Sacks are thus interpreted to extend to a nonconstitutional claim where a corporation conditions employment upon political subordination. * * *

RESTATEMENT OF EMPLOYMENT LAW § 7.08 American Law Institute (2015).

§ 7.08 Intrusions upon Employee Personal Autonomy (a) Employees have protected interests in personal autonomy outside of the employment relationship. Such interests include: (1) engaging in lawful conduct that occurs outside of the locations, hours, and responsibilities of employment and does not refer to or otherwise involve the employer or its business; (2) adhering to political, moral, ethical, religious, or other personal beliefs or expressing such beliefs outside of the locations, hours, and responsibilities of employment in a manner that does not refer to or otherwise involve the employer or its business; or (3) belonging to or participating in lawful associations when that membership or participation does not refer to or otherwise involve the employer or its business. (b) Unless the employer and employee agree otherwise, an employer is subject to liability for intruding upon an employee’s personal autonomy interests if the employer discharges the employee because the employee exercises a personal autonomy interest under § 7.08(a). 308

(c) The employer is not liable under § 7.08(b) if it can prove that it had a reasonable and good faith belief that the employee’s exercise of an autonomy interest interfered with the employer’s legitimate business interests, including its orderly operations and reputation in the marketplace.

NOTES AND QUESTIONS 1. In Novosel, the court uses First Amendment principles applicable to government employers as a source of public policy to support a common law claim against a private employer. Are there good reasons why political speech by government employees might be treated differently from political speech by private-sector employees? Did Nationwide have a legitimate interest in enlisting its employees to support its position on the no-fault legislation? Do employees have a right to resist being compelled to be spokesmen for employer policies when they have not been hired for that purpose? Would Novosel have had a claim under § 7.08 of the Employment Restatement? 2. Consider how the holding of Novosel might be applied to advocacy organizations such as the ACLU and the National Right to Work League. Would widespread adherence to Novosel undermine the raison d’etre of such organizations? Even where a corporation is principally concerned with the sale of goods or services, rather than advocacy of a cause, it has a First Amendment right to be a partisan on matters of concern to it (or at least to assert the public’s First Amendment right to receive such partisan views). See First National Bank of Boston v. Bellotti, 435 U.S. 765, 98 S.Ct. 1407, 55 L.Ed.2d 707 (1978). 3. Novosel’s Questionable Viability. The Third Circuit, sitting in diversity, may have gone beyond the position of the Pennsylvania courts in holding that the state’s public policy incorporated federal constitutional norms. See Burkholder v. Hutchison, 589 A.2d 721 (Pa. Super. Ct. 1991) (declining to follow Novosel). Most courts have rejected a direct application of public-sector speech protections to the private sector. See, e.g., Dixon v. Coburg Dairy, Inc., 330 F.3d 250, 262 (4th Cir. 2003) (applying S.C. law) reversed on other grounds, 369 F.3d 811 (4th Cir. 2004) (en banc); Grinzi v. San Diego Hospice Corp., 120 Cal. App. 4th 72, 14 Cal. Rptr. 3d 893, 900 (2004); Edmondson v. Shearer Lumber Products, 139 Idaho 172, 75 P.3d 733, 738–39 (2003); Shovelin v. Central New Mexico Elec. Co-op., Inc., 115 N.M. 293, 850 P.2d 996, 1010 (1993); Tiernan v. Charleston Area Medical Center, Inc., 203 W. Va. 135, 506 S.E.2d 578, 588–91 (1998); Barr v. Kelso-Burnett Co., 106 Ill. 2d 520, 478 N.E.2d 1354, 1356 (1985). 4. Statutes Protecting Lawful Off-Duty Conduct. A few states broadly protect employees for engaging in lawful off-duty conduct. See, e.g., Cal. Lab. Code § 98.6; N.Y. Lab. Law § 201–d (McKinney); Miss. Code. Ann. § 79–1–9; Colo. Rev. Stat. § 24–34–402.5. See also Coates v. Dish Network, LLC, 303 P.3d 147 (Colo. App. 2013) (medical use of marijuana not protected by lawful off-duty conduct statute because such use remains prohibited under federal law).

309 5. Statutes Protecting Political Activity. Several states have passed statutes expressly barring employers from using the threat of discharge or loss of job rights as a means of coercing or influencing employees “to adopt or follow or refrain from adopting or following any particular course or line of political action or political activity.” Cal. Lab. Code § 1102 (West). See Conn. Gen. Stat. § 31–51q (barring discharge on grounds violative of the First Amendment); La. Stat. Ann. §§ 23:961–962; Nev. Rev. Stat. § 614.040. 6. Use of “Public Policy” Cause of Action in the Absence of a “Political Activity” Law. Can an attorney in a law firm be discharged for representing an unpopular client that his firm finds unacceptable, Is the state-law “public policy” cause of action available in jurisdictions lacking express statutory protection for employee political activity? See Greenwood v. Taft, Stettinius & Hollister, 105 Ohio App. 3d 295, 663 N.E.2d 1030 (Ohio Ct. App. 1995), lv. denied, 75 Ohio St. 3d 1204, 662 N.E.2d 22 (1996) (denying attorney’s claim that he was fired for representing gay-rights organization because alleged public policy against discrimination in employment for participation in the political process not of requisite “uniform statewide application”). See generally Matthew T. Bodie, The Best Way Out is Always Through: Changing the Employment At-Will Default to Protect Personal Autonomy, 2017 U.Ill. L. Rev, 223. 7. Statutory Extension of Constitutional Protections. A Connecticut statute applies federal and state free-speech guarantees to the private sector, “provided such activity does not substantially or materially interfere with the employee’s bona fide job performance or the working relationship between the employee and the employer * * * .” Conn. Gen. Stat. § 31–51q. See Cotto v. United Technologies Corp., 251 Conn. 1, 738 A.2d 623 (1999) (statute provides remedy for private-sector employees, but court rejects employee’s challenge to requirement that American flags be placed at employee workstations because of absence of allegations that employee was directed to manifest his patriotism in a particular way or to affix the flag to his personal property). 8. Off-Duty Smoking and Other Health-Related Conduct. Some state laws protect smokers from adverse employment action for offduty tobacco use. See, e.g., Conn. Gen. Stat. § 31–40s; W. Va. Code § 21–3–19. For an anti-discrimination analysis, see Jessica Roberts, Healthism and the Law of Employment Discrimination, 99 Iowa L. Rev. 571 (2014). Absent statutory protections, employees who have suffered an adverse employment action for health-related conduct may have no redress in certain jurisdictions. See Rodrigues v. EG Sys., Inc., 639 F. Supp. 2d 131 (D. Mass. 2009) (no protected privacy interest in employee’s nicotine use); City of North Miami v. Kurtz, 653 So. 2d 1025 (Fla. 1995) (smoker refused to sign pre-employment statement that he had not smoked in previous two years; rejecting state constitutional challenge). Courts have also permitted employers to refuse employment on the basis of body mass index, unless the employee qualifies as disabled under the ADA. Michigan also protects employees from discrimination on the basis of “weight.” Mich. Comp. Laws § 37.2102. 310 9. Labor Law Protection for Internet Posts. The National Labor Relations Act, 29 U.S.C. § 157 (NLRA) protects employees for engaging in “concerted activity”—two or more employees working together to improve wages or working conditions. The National Labor Relations Board, the agency administering the NLRA, has ruled that Facebook discussions among coworkers about staffing levels and job performance qualifies as concerted activity. NLRB Office of the General Counsel, Memo OM 11–74 (August 18, 2011). 10. Anti-Fraternization Policies. Some employers prohibit dating among co-workers. Do anti-fraternization polices violate state laws barring discrimination on account of “marital status,” on the theory that married couples are more favorably treated under these policies? Do these laws protect only those who are married or do they also protect discrimination against the non-married? For a decision sustaining a challenge to an anti-fraternization policy alleging discrimination against the non-married, see Ross v. Stouffer Hotel Co., 72 Haw. 350, 816 P.2d 302 (1991). For Title VII challenges, see Sarsha v. Sears, Roebuck & Co., 3 F.3d 1035 (7th Cir.1993) (rejecting Title VII sex-discrimination challenge to no-dating policy applied to supervisory employees); Yuhas v. Libbey-Owens-Ford Co., 562 F.2d 496 (7th Cir. 1977) (finding employer’s “no spouse” policy had disparate impact on women under Title VII, but was job related as rule to minimize perception of favoritism among coworkers). See generally Timothy D. Chandler, Rafael Gely, Jack Howard & Robin Cheramie, Spouses Need Not Apply: The Legality of Antinepotism and Non-Spouse Rules, 39 San Diego L. Rev. 31 (2002).

NOTE: PRIVATE-SECTOR EMPLOYEES WORKING UNDER A COLLECTIVE BARGAINING AGREEMENT Union-represented private sector employees generally enjoy more protection of their privacy, as well as of their job security, than do their nonunionized counterparts. Unions can help protect employee privacy both by the negotiation of express contractual provisions and by encouraging arbitrators to find implied protections when construing labor agreements. The National Labor Relations Board (NLRB) has ruled that employers subject to the National Labor Relations Act of 1935 (NLRA), 29 U.S.C. §§ 151–169, have a duty to bargain with exclusive bargaining representatives before implementing a drug testing program for existing employees, see Johnson-Bateman Co., 295 N.L.R.B. No. 26 (1989), but need not bargain over the testing of applicants who are not yet part of the bargaining unit, see Minneapolis Star Tribune, 295 N.L.R.B. No. 63 (1989). The Supreme Court, however, has held that an employer subject to the Railway Labor Act could implement a drug testing program without bargaining when it had an “arguable” claim that it was authorized to initiate the program by the union’s acceptance of its past practices during periodic examinations. This claim was to be resolved by the Act’s grievance and

arbitration process as a “minor dispute.” See Consolidated Rail Corp. v. Railway Labor Executives’ Ass’n, 491 U.S. 299, 109 S. Ct. 2477, 105 L. Ed. 2d 250 (1989); see also Teamsters v. Southwest Airlines, Inc., 875 311 F.2d 1129 (5th Cir. 1989) (arguable justification for drug program in management rights clause). Even where unions have not negotiated explicit privacy-protective provisions, they have often been successful in persuading arbitrators to find in the labor agreement implied privacy guarantees. Such arbitrators have used as bases for such awards the same sources that have been invoked for construing the meaning of “just cause”: past firm or industry practice, negotiating history, or perhaps general social standards of fairness that the parties can be assumed to have accepted. There is a division among arbitrators over the extent to which the “just cause” standard incorporates constitutional norms limiting unreasonable searches and discipline for off-premises conduct. The majority of arbitrators reject per se application of constitutional doctrine, but some nonetheless refer to the doctrine as a guide for gauging past practice or accepted principles defining the “common law of the shop.” See generally Proceedings of the 23rd Annual Meeting of the National Academy of Arbitrators, Surveillance and the Labor Arbitration Process: Arbitration and the Expanding Role of Neutrals (G. Somers & B. Dennis, eds. 1970). Arbitration cases treating employee drug testing are illustrative. Although these cases evidence a division of authority, they also indicate that even in the absence of any specific restrictions on employer authority, many arbitrators have questioned both the institution of drug tests and discipline resulting from such tests. Arbitrators have sometimes demanded individualized suspicion of impairment or onthe-premises drug use; they have sometimes imposed a higher standard of proof for discipline based on positive test results; and they have sometimes required, under progressive discipline principles, an opportunity for rehabilitation before discharge. See generally Denenberg & Denenberg, Drug Testing from the Arbitrator’s Perspective, 11 Nova L. Rev. 377 (1987); Levin & Denenberg, How Arbitrators View Drug Abuse, 31 Arb. J. 97 (1976); Wynns, Arbitration Standards in Drug Discharge Cases, 34 Arb. J. 19 (1976). For arbitrator scrutiny of employer surveillance practices, see Edward Hertenstein, Electronic Monitoring in the Workplace: How Arbitrators Have Ruled, Dispute Resol. J. (Fall 1997), p. 36ff. In framing its disclosure requirements, the NLRB is obligated to balance employee privacy interests. See Detroit Edison Co. v. NLRB, 440 U.S. 301, 99 S. Ct. 1123, 59 L. Ed. 2d 333 (1979). In NLRB v. United States Postal Service, 660 F.3d 65 (1st Cir. 2011), the agency found that USPS violated the NLRA by refusing to turn over to the union the personal aptitude scores of 22 employees unless the union first obtained their consent. The First Circuit denied enforcement, finding that the employees had a sufficient confidentiality interest in their test scores to require the agency to balance that interest against the union’s interest in obtaining the information.

NOTE: CONSTITUTIONAL PRIVACY PROTECTIONS FOR PUBLIC-SECTOR EMPLOYEES 1. Fourth Amendment. Public sector employees are protected from unreasonable searches by their government employers under the Fourth 312 Amendment. Where an employee can establish a reasonable expectation of privacy in the area searched, courts will then assess whether the search was reasonable in inception and scope: * * * In sum, we conclude that the “special needs, beyond the normal need for law enforcement make the * * * probable-cause requirement impracticable,” * * * , for legitimate work-related, noninvestigatory intrusions as well as investigations of workrelated misconduct. A standard of reasonableness will neither unduly burden the efforts of government employers to ensure the efficient and proper operation of the workplace, nor authorize arbitrary intrusions upon the privacy of public employees. We hold, therefore, that public employer intrusions on the constitutionally protected privacy interests of government employees for noninvestigatory, work-related purposes, as well as for investigations of work-related misconduct, should be judged by the standard of reasonableness under all the circumstances. Under this reasonableness standard, both the inception and the scope of the intrusion must be reasonable. Ordinarily, a search of an employee’s office by a supervisor will be “justified at its inception” when there are reasonable grounds for suspecting that the search will turn up evidence that the employee is guilty of work-related misconduct, or that the search is necessary for a noninvestigatory work-related purpose such as to retrieve a needed file. O’Connor v. Ortega, 480 U.S. 709 (1987), p. 290. 2. Fifth Amendment Privilege Against Self-Incrimination. Because blood or urine samples do not violate the Fifth Amendment in the criminal context, they are likely permissible under the Fifth Amendment in the employment context. See Schmerber v. California, 384 U.S. 757, 86 S. Ct. 1826, 16 L. Ed. 2d 908 (1966). (Such tests are however, subject to Fourth Amendment scrutiny. See Skinner v. Railway Labor Executives’ Ass’n, 489 U.S. 602 (1989)). The self-incrimination clause may nevertheless restrict more traditional

employer investigations absent disallowance of use of any compelled employee statements in subsequent prosecution. See Gardner v. Broderick, 392 U.S. 273, 88 S. Ct. 1913, 20 L. Ed. 2d 1082 (1968) (reinstating police officer terminated for refusing to sign immunity waiver in grand jury proceeding). See also NASA v. Nelson, 562 U.S. 134 (2011) (questions in background investigation about illegal drug use permissible where applicant informed would not be used in subsequent criminal proceedings). 3. Due Process Right to Informational Privacy. In National Aeronautics and Space Administration v. Nelson, 562 U.S. 134, 131 S. Ct. 746, 178 L. Ed. 2d 667 (2011), the Court addressed the issue of government background checks in light of a constitutional privacy “interest in avoiding disclosure of personal matters” recognized in Whalen v. Roe, 429 U.S. 589, 599–600, 97 S. Ct. 869, 51 L. Ed. 2d 64 (1977); and Nixon v. Administrator of General Services, 433 U.S. 425, 457, 97 S. Ct. 2777, 53 L. Ed. 2d 867 (1977). In Nelson, federal contract 313 employees at a Government laboratory, claimed unsuccessfully that two parts of a standard employment background investigation violated their rights under Whalen and Nixon. The Court, per Justice Alito, writing for himself and five other Justices, assumed arguendo that the Constitution protects a privacy right of the sort mentioned in Whalen and Nixon. However, “the challenged portions of the Government’s background check do not violate this right in the present case. The Government’s interests as employer and proprietor in managing its internal operations, combined with the protections against public dissemination provided by the Privacy Act of 1974, 5 U.S.C. § 552a, satisfy any ‘interest in avoiding disclosure’ that may ‘arguably ha[ve] its roots in the Constitution.’ Whalen, supra, at 599, 605, 97 S. Ct. 869, 51 L. Ed. 2d 64.” 4. Due Process Right to Associational Privacy. Public-sector employees have challenged anti-fraternization policies on the basis of associational privacy. While courts recognize an associational privacy interest, they have generally applied rational basis scrutiny to such policies. Shawgo v. Spradlin, 701 F.2d 470 (5th Cir.1983) (police anti-fraternization policy survived rational basis scrutiny in associational privacy claim); also Montgomery v. Carr, 101 F.3d 1117 (6th Cir. 1996) (upholding school district’s anti-fraternization policy under rational basis scrutiny). Compare City of Sherman v. Henry, 39 Tex. Sup. J. 920, 928 S.W.2d 464 (1996) (rejecting constitutional privacy claim where police officer’s promotion was denied for affair with coworker’s spouse). 5. First Amendment. Questions unjustifiably probing into beliefs or associations are vulnerable to First Amendment challenges. See, e.g., Shelton v. Tucker, 364 U.S. 479, 81 S. Ct. 247, 5 L. Ed. 2d 231 (1960); NAACP v. Alabama ex rel. Patterson, 357 U.S. 449, 78 S. Ct. 1163, 2 L. Ed.2d 1488 (1958). First Amendment rights of government employees are the subject of Chapter 13.

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CHAPTER 9 EMPLOYEE DUTIES ■■■

Introduction The chapter explores the extent to which employees both during and after their employment are under a common law obligation not to divulge confidential information obtained from their employer; and whether agreements may restrict the freedom of departing employees to compete in the same business and/or to use information these employees acquired in their prior positions. The issues treated here have taken on greater saliency in recent decades as “knowledge” workers have become a growing segment of the U.S. workforce and employees change jobs with greater frequency.

A. COMMON LAW DUTY OF LOYALTY RESTATEMENT OF EMPLOYMENT LAW § 8.01 American Law Institute (2015).

§ 8.01. Employee Duty of Loyalty (a) Employees in a position of trust and confidence with their employer owe a fiduciary duty of loyalty to the employer in matters related to their employment. Other employees who come into possession of the employer’s trade secrets owe a limited fiduciary duty of loyalty with regard to those trade secrets. In addition, employees may, depending on the nature of the employment position, owe an implied contractual duty of loyalty to the employer in matters related to their employment. (b) Employees breach their duty of loyalty to the employer by (1) disclosing or using the employer’s trade secrets (as defined in § 8.02) for any purpose adverse to the employer’s interest, including after termination of the employment relationship (§ 8.03); (2) competing with the employer while employed by the employer (§ 8.04); or (3) misappropriating the employer’s property, whether tangible or intangible, or otherwise engaging in self316

dealing through the use of the employee’s position with the employer. (c) The employee’s duty of loyalty must be interpreted in a manner consistent with the employee’s rights and responsibilities as set forth in Chapter 5 [of the Employment Restatement] and under employment and other law, as well as with any right or privilege provided by law to cooperate with regulatory authorities.

NOTES AND QUESTIONS 1. Where does the “duty of loyalty” come from? Is it an implied term of every employment contract? Are employers under a reciprocal duty to their employees? What is entailed by the duty that is not already encompassed in most employment contracts? Are remedies for breach of the duty only contractual remedies or are some breaches subject to fiduciary sanctions? 2. Are all employees subject to fiduciary duties simply because they are employees? Or are only employees in a position of trust and confidence subject to fiduciary duties? What are examples of such positions? See generally Deborah A. DeMott, Relationships of Trust and Confidence in the Workplace, 100 Cornell L. Rev. 1255 (2015). 3. Does the Employment Restatement suggest there are only three categories of conduct that implicate the employee’s duty of loyalty? 4. What conduct is shielded by § 8.01(c)?

1. TRADE SECRETS RESTATEMENT OF EMPLOYMENT LAW §§ 8.02–8.03 American Law Institute (2015).

§ 8.02. Definition of Employer’s Trade Secret An employer’s information is a trade secret under this Chapter if (a) it derives independent economic value from being kept secret, (b) the employer has taken reasonable measures to keep it secret, and (c) the information is not (1) generally known to the public or in the employer’s industry; (2) readily obtainable by others through proper means; or (3) acquired by employees through their general experience, knowledge, training, or skills during the ordinary course of their employment. 317

§ 8.03. Disclosure or Use by Employee or Former Employee of Employer’s Trade Secrets (a) An employee or former employee breaches the duty of loyalty to the employer if, without the employer’s consent, the employee discloses to a third party or uses for the employee’s own benefit or a third party’s benefit the employer’s trade secrets, as that term is defined in § 8.02. (b) The duty stated in subsection (a) is not breached if the employee acts under a legal duty, legal protection, or other legal permission in making the disclosure or use. (c) The employee’s obligation not to disclose or use the employer’s trade secrets lasts as long as the information remains a trade secret under § 8.02, and continues beyond termination of the employment relationship regardless of the reason for termination.

AMP INC. V. FLEISCHHACKER U.S. Court of Appeals for the Seventh Circuit, 1987. 823 F.2d 1199. CUMMINGS, J. Plaintiff appeals the district court’s entry of final judgment in favor of the defendants after a bench trial. We affirm. The plaintiff, AMP Incorporated, brought this action against a former employee, James Fleischhacker, and one of its competitors, Molex, alleging unfair competition and misappropriation of trade secrets. AMP is the world’s leading producer of electrical and electronic connection devices. It is by far the largest company in the connector industry, with over 21,000 employees and 1983 reported sales of over one-and-one-half billion dollars and net income of about $163 million. AMP’s Components & Assemblies Division, headquartered in Winston-Salem, North Carolina, is one of its major divisions, generating in excess of $100 million in gross sales per year. Molex is a principal competitor of AMP’s Components & Assemblies Division and has its principal place of business in Lisle, Illinois. Molex’s annual sales are in excess of $250 million, with foreign sales accounting for over half of that total. A significant portion of Molex’s total sales is attributable to products that compete directly with products manufactured by AMP’s Components & Assemblies Division. The present controversy involves the 1984 hiring by Molex of defendant James Fleischhacker, formerly the Division Manager of AMP’s Components & Assemblies Division, to fill the position of Director of Marketing for Molex’s Commercial Products Division. Mr. Fleischhacker, who holds a Bachelor of Science degree from the University of Minnesota 318

and a Master’s degree from the Massachusetts Institute of Technology, joined AMP in 1973. He rapidly advanced through the corporation and in 1982 was named Manager of the Components & Assemblies Division, the position he held until he resigned in 1984. As Division Manager, Mr. Fleischhacker supervised approximately 1200 people who were responsible for the

manufacture and sale of 10,000 different component parts. His duties as Division Manager included reviewing and approving business programs, interfacing with group management, implementing strategic policies and plans, and developing personnel. *** In 1982 Molex decided to create a new position, Director of Marketing, in its Commercial Products Division. An executive search firm directed Molex to Mr. Fleischhacker, whom Molex found to be a desirable and highly qualified candidate for the position as a result of his background, education, skill, and ability, including demonstrated product management capabilities, and especially because of his knowledge of the connector industry. Molex made a written offer of employment to Mr. Fleischhacker at the end of 1983, which he accepted in February 1984. AMP has alleged that Molex’s hiring of Mr. Fleischhacker is part of a larger pattern of conduct by Molex involving the misappropriation and threatened misappropriation of AMP’s trade secrets and other confidential information, and the solicitation and hiring of AMP personnel. Given the nature of the competition between Molex and AMP, the nature of the respective positions held by Mr. Fleischhacker at AMP and Molex, and an alleged propensity on the part of Molex to misappropriate AMP’s internal information without regard to its proprietary nature, AMP maintains that it is inevitable that Mr. Fleischhacker and other AMP personnel hired by Molex will use and disclose AMP trade secrets and confidential information for the benefit and unjust enrichment of Molex. * * * [T]he initial question to be resolved is whether Mr. Fleischhacker was bound by a valid and enforceable restrictive covenant or was merely restricted by common law principles. The record indicates that he was not bound by a restrictive covenant not to compete. He did, however, sign a confidentiality agreement when he first became employed at AMP whereby he agreed inter alia: (3) To keep confidential during and subsequent to the period of said employment, except for those whom his authorized activities for the Company require should be informed, all information relating to the Company’s business, its research or engineering activities, its manufacturing processes or trade secrets, its sources of supply or lists of customers and its plans or contemplated actions. * * * The language of this confidentiality agreement purports to prohibit Mr. Fleischhacker from disclosing to any nonAMP personnel any information relating to AMP and its operations forever. The Illinois courts 319

have held unenforceable nearly identical provisions in confidentiality agreements because (1) they contain no limitation on the duration of the nondisclosure provision, instead restricting disclosure “during and subsequent to the period of said employment,” and (2) they contain no geographical limitation or other kind of limit on the parties to whom the employee is prohibited from disclosing information. See Cincinnati Tool Steel Co. v. Breed, 136 Ill. App. 3d [267,] 275–276, 482 N.E.2d [170,] 175 [(2d Dist. 1985)]; Disher v. Fulgoni, 124 Ill. App. 3d 257, 262, 464 N.E.2d 639, 643, 79 Ill. Dec. 735 (1st Dist. 1984). Confidentiality agreements without such limitations constitute, in the view of the Illinois courts, unreasonable restraints on trade which unduly restrict the free flow of information necessary for business competition. * * * Because Mr. Fleischhacker is not subject to any enforceable contractual restrictions, AMP was first required to establish the existence of genuine trade secrets in order for injunctive relief to be warranted. The Illinois Supreme Court has defined a trade secret as “a plan or process, tool, mechanism, compound, or informational data utilized by a person in his business operations and known only to him and such limited other persons to whom it may be necessary to confide it.” ILG Industries, Inc. v. Scott, 49 Ill. 2d 88, 92, 273 N.E.2d 393, 395 (1971). It is generally recognized in Illinois that at the termination of employment, an employee may not take with him confidential, particularized plans or processes developed by his employer and disclosed to him while the employer-employee relationship existed, which are unknown to others in the industry and which give the employer an advantage over his competitors. On the other hand, an employee is free to take with him general skills and knowledge acquired during his tenure with his former employer. * * * The district court initially found that AMP had failed to establish any protectable trade secrets with respect to the products manufactured by its Components & Assemblies Division. The court found that the electronic components produced were low technology commodity products which could be easily reproduced, and that much of the AMP product information possessed by Mr. Fleischhacker was already known to virtually all of AMP’s competitors and easily available from widely circulated public sources. AMP does not contest this finding on appeal, asserting that it never contended that its connectors themselves constituted trade secrets. * * * Rather AMP contends that it has protectible trade secrets in a host of confidential information to which Mr. Fleischhacker had access during the course of his employment at AMP. This information, it alleges, includes: business and strategic planning information for the Components & Assemblies Division; new product development information; manufacturing information, including equipment, processes, cost and capacity information; financial information, including product-line profit-margin, sales, and budget information; and marketing and customer information.

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AMP has consistently failed throughout this litigation to identify any particularized trade secrets actually at risk. Prior to trial, AMP submitted six single-spaced, typewritten pages listing by general item and category hundreds of pieces of AMP internal information. Other courts have warned plaintiffs of the risks they run by failing to identify specific trade secrets and instead producing long lists of general areas of information which contain unidentified trade secrets. See, e.g., Litton Systems, Inc. v. Sundstrand Corp., 750 F.2d 952, 954, 956–957, 224 U.S.P.Q. (BNA) 252 (1984). * * * Our examination of Illinois law reveals that the district court erred as a matter of law when it held that the general confidential information identified by AMP constituted protectible business secrets. As explained above, where the parties have entered into a restrictive covenant not to compete, the scope of protection afforded a former employer is quite broad and may extend to the type of generalized confidential business information to which AMP points. * * * Absent such a covenant, however, the plaintiff must demonstrate the existence of a genuine trade secret to obtain injunctive relief. As Judge Shadur noted in Fleming Sales Co. v. Bailey, 611 F. Supp. 507, 511 (N.D.Ill.1985), the “right to impose contractual restraints does not render the same knowledge ‘trade secrets’ in the absence of such restraints.” In marked contrast to those cases involving the enforceability of a restrictive covenant, the Illinois courts have not extended protection under the common law of trade secrets to the kind of generalized confidential business information on which AMP relies. In Cincinnati Tool Steel Co. v. Breed, 136 Ill. App. 3d 267, 482 N.E.2d 170, 90 Ill. Dec. 463, the plaintiff alleged that a former office manager/sales manager had misappropriated confidential pricing information, including cost, special discounts and supply information. The court refused to find that the plaintiff had a protectible interest in this information warranting injunctive relief. The defendant former manager had not taken any documents or other material with her when she left the plaintiff’s employ, and the court concluded that the fact that the defendant might be able to recollect pricing information that could potentially be used to the plaintiff’s detriment while later working for one of plaintiff’s competitors was simply too conjectural to establish a prima facie showing of a protectible interest. Similarly, in Smith Oil Corp. v. Viking Chemical Co., 127 Ill. App. 3d 423, 468 N.E.2d 797, 82 Ill. Dec. 250, the plaintiff alleged that former employees had misappropriated customer lists, customer orders, pricing information, cost information, sample formulas, product formulas, customer correspondence and other special customer information when they left to work for a competitor. Other than the exact formulas for the plaintiff’s products, the court held that the information which the plaintiff wanted protected fell into the category of “general skills and knowledge” which an employee is free to take with him when his employment is terminated. * * * 321

These cases are controlling here. The district court credited the testimony of Mr. Fleischhacker that after he tendered his resignation he hurriedly packed his personal papers and belongings under the surveillance of an AMP employee and did not deliberately take with him anything of a confidential nature. AMP has offered no proof to the contrary. See Smith Oil Corp., 127 Ill. App. 3d at 431, 468 N.E.2d at 802–803 (injunctive relief requires that plaintiff produce evidence that former employee actually took or possessed trade secret information)[.] * * * The record is similarly devoid of any evidence that Mr. Fleischhacker ever systematically recorded, copied, compiled, or even purposefully memorized any of AMP’s confidential business information while he was still employed at AMP for use in his new position at Molex. * * * This is not a case where the plaintiff can point to any tangible work product, such as blueprints, designs, plans, processes, or other technical specifications, at risk of misappropriation. * * * Nor is this a case, like many cited by AMP, involving a former employee who held a technical or engineering position and was responsible for distinct areas of technology and research. Mr. Fleischhacker was a high-level managerial executive who had broad supervisory responsibility for 1200 employees and over 10,000 different products at AMP. AMP now requests that we restrain him from in any way making use of or relying on his independent recollections of generalized business and technical information to which he had access while employed at AMP. Illinois law simply does not authorize such relief. *** * * * [T]he practical effect of any grant of injunctive relief in favor of AMP would be to prohibit Mr. Fleischhacker from working in the connector industry. In its brief AMP disingenuously claims that the injunctive relief requested would not deny Mr. Fleischhacker his choice of employer, i.e., Molex, but would only remove him from the conflicting position he now holds. Molex, however, obviously hired Mr. Fleischhacker as a result of his expertise, skill, and experience as a Director of Marketing in the connector industry. It is unlikely that Mr. Fleischhacker would be of much use to Molex in a position wholly unrelated to the duties he performed at AMP. The same would undoubtedly be true of any other company in the connector industry. Our holding by no means leaves an employer helpless against a former employee using the skills and knowledge he acquired during the course of employment to obtain an undue competitive advantage. An employer is always free to protect its interests through a reasonable, restrictive covenant not to compete.

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NOTES AND QUESTIONS 1. AMP was decided before Illinois’s adoption of the Uniform Trade Secrets Act (UTSA) in 1988. Forty-eight states have enacted the UTSA in one form or another since its promulgation in 1979; two states have not (Massachusetts and New York). Massachusetts has its own trade secrets law that is not based on the UTSA. See Mass. Ann. Laws ch. 93, §§ 42–42A. New York has developed decisional law based in part on § 757 of the Restatement (First) of Torts. See 2 Melvin F. Jager, Trade Secrets Law (1985). 2. Did Fleischhacker breach a duty of loyalty to AMP, as formulated in Employment Restatement § 8.01? 3. Consider the difficulty that AMP had in establishing the existence of any trade secrets (albeit under a common law definition). The Employment Restatement adopts the definition of “trade secret” articulated in the UTSA. Would AMP have had an easier time under the Employment Restatement? 4. Given the nature of the information AMP was concerned about, is a reasonable restriction on competition a needed supplement to simply that information as a trade secret? Always? 5. Some commentators have suggested that trade-secret protection should not extend to “research methods, marketing strategies, advertising campaigns, business plans, payroll and profit data, and pricing schemes” because such protection interferes with employee mobility. Orly Lobel, Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids and Free Riding 105–106 (2013). What legitimate interests would be undermined by this proposed regime? Are the limits on protection in § 8.02 of the Employment Restatement sufficient to protect legitimate employee interests? Which additional limits would you suggest? What steps would employers take to protect sharing or other dissemination of the items and information listed by Professor Lobel if trade secret information were withheld? Could such steps interfere with the process of innovation? 6. Defend Trade Secrets Act of 2016. The Defend Trade Secrets Act of 2016, Pub. L. 114–153, 130 Stat. 376 (May 11, 2016), codified at 18 U.S.C. § 1836, creates a private civil cause of action for trade secret misappropriation related to a product or service in interstate or foreign commerce. It draws its definition of “trade secret” from the Economic Espionage Act, Pub. L. 104–294, 110 Stat. 3488 (Oct. 11, 1996), codified at 18 U.S.C. § 1839. Equitable relief and damages are available. The statute of limitation is set at three years from the date of discovery of the misappropriation. A trade secret owner may apply for, and a court may grant, a seizure order to prevent dissemination of the trade secret if the court makes specific findings, including that an immediate and irreparable injury will occur if seizure is not ordered. Any party harmed by the order may move to dissolve or modify the order and may also seek relief against the applicant of the seizure order for wrongful or excessive seizure. The statute also provides that an employee is immune from liability under the Act for confidential disclosure of trade secrets to a government official or to an 323 attorney for the purpose of investigating a suspected violation or for such disclosure in a complaint or other litigation-related filing made under seal. 7. Preclusion of Common Law Claims by State Statutes Based on the Uniform Trade Secrets Act? The model UTSA, by its terms, does not preempt contract claims. UTSA § 7(b), (“This Act does not affect contractual remedies, whether or not based upon misappropriation of a trade secret.”) Thus, the UTSA presumably would not disturb the aspect of the employee’s duty of loyalty that bars use or disclosure of employer confidential information. See Employment Restatement § 8.01(b)(1). Most state versions of the UTSA do preempt certain tort claims. See UTSA § 7(a) (“this [Act] displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret”). See Charles Tait Graves & Elizabeth Tippett, UTSA Preemption and the Public Domain: How Courts Have Overlooked Patent Preemption of State Law Claims Alleging Employee Wrongdoing, 65 Rutgers L. Rev. 1 (2012).

——————— In the next case, an employer seeks an injunction against a former executive employee who has gone to work for its principal competitor on the grounds that the new employment will lead to “inevitable disclosure” of the prior employer’s confidential information.

RESTATEMENT OF EMPLOYMENT LAW § 8.05 American Law Institute (2015).

§ 8.05. Competition by Former Employee with Former Employer A former employee may compete with, or work for a competitor of, the former employer, including by soliciting customers

or recruiting employees, unless (a) the former employee is bound by an agreement not to compete (or not to solicit or recruit) enforceable under §§ 8.06 or 8.07; or (b) in doing so the former employee discloses, uses, or by words or conduct threatens to disclose or use, specifically identifiable trade secrets of the former employer in violation of § 8.03.

PEPSICO, INC. V. REDMOND U.S. Court of Appeals for the Seventh Circuit, 1995. 54 F.3d 1262. FLAUM, J. * * * William Redmond, Jr. worked for PepsiCo in its PepsiCola North America division (“PCNA”) from 1984 to 1994. Redmond became the 324

General Manager of the Northern California Business Unit in June, 1993, and was promoted one year later to General Manager of the business unit covering all of California, a unit having annual revenues of more than 500 million dollars and representing twenty percent of PCNA’s profit for all of the United States. Redmond’s relatively high-level position at PCNA gave him access to inside information and trade secrets. Redmond, like other PepsiCo management employees, had signed a confidentiality agreement with PepsiCo. That agreement stated in relevant part that he would not disclose at any time, to anyone other than officers or employees of [PepsiCo], or make use of, confidential information relating to the business of [PepsiCo] * * * obtained while in the employ of [PepsiCo], which shall not be generally known or available to the public or recognized as standard practices. Donald Uzzi, who had left PepsiCo in the beginning of 1994 to become the head of Quaker’s Gatorade division, began courting Redmond for Quaker in May, 1994. Redmond met in Chicago with Quaker officers in August, 1994, and on October 20, 1994, Quaker, through Uzzi, offered Redmond the position of Vice President—On Premise Sales for Gatorade. Redmond did not then accept the offer but continued to negotiate for more money. Throughout this time, Redmond kept his dealings with Quaker secret from his employers at PCNA. On November 8, 1994, Uzzi extended Redmond a written offer for the position of Vice President—Field Operations for Gatorade and Redmond accepted. Later that same day, Redmond called William Bensyl, the Senior Vice President of Human Resources for PCNA, and told him that he had an offer from Quaker to become the Chief Operating Officer of the combined Gatorade and Snapple company but had not yet accepted it. Redmond also asked whether he should, in light of the offer, carry out his plans to make calls upon certain PCNA customers. Bensyl told Redmond to make the visits. Redmond also misstated his situation to a number of his PCNA colleagues, including Craig Weatherup, PCNA’s President and Chief Executive Officer, and Brenda Barnes, PCNA’s Chief Operating Officer and Redmond’s immediate superior. As with Bensyl, Redmond told them that he had been offered the position of Chief Operating Officer at Gatorade and that he was leaning “60/40” in favor of accepting the new position. On November 10, 1994, Redmond met with Barnes and told her that he had decided to accept the Quaker offer and was resigning from PCNA. Barnes immediately took Redmond to Bensyl, who told Redmond that PepsiCo was considering legal action against him. True to its word, PepsiCo filed this diversity suit on November 16, 1994, seeking a temporary restraining order to enjoin Redmond from 325

assuming his duties at Quaker and to prevent him from disclosing trade secrets or confidential information to his new employer. * * * From November 23, 1994, to December 1, 1994, the district court conducted a preliminary injunction hearing on the same matter. At the hearing, PepsiCo offered evidence of a number of trade secrets and confidential information it desired protected and to which Redmond was privy. First, it identified PCNA’s “Strategic Plan,” an annually revised document that contains PCNA’s plans to compete, its financial goals, and its strategies for manufacturing, production, marketing, packaging, and

distribution for the coming three years. Strategic Plans are developed by Weatherup and his staff with input from PCNA’s general managers, including Redmond, and are considered highly confidential. The Strategic Plan derives much of its value from the fact that it is secret and competitors cannot anticipate PCNA’s next moves. PCNA managers received the most recent Strategic Plan at a meeting in July, 1994, a meeting Redmond attended. PCNA also presented information at the meeting regarding its plans for Lipton ready-to-drink teas and for All Sport for 1995 and beyond, including new flavors and package sizes. Second, PepsiCo pointed to PCNA’s Annual Operating Plan (“AOP”) as a trade secret. The AOP is a national plan for a given year and guides PCNA’s financial goals, marketing plans, promotional event calendars, growth expectations, and operational changes in that year. The AOP, which is implemented by PCNA unit General Managers, including Redmond, contains specific information regarding all PCNA initiatives for the forthcoming year. The AOP bears a label that reads “Private and Confidential—Do Not Reproduce” and is considered highly confidential by PCNA managers. In particular, the AOP contains important and sensitive information about “pricing architecture”—how PCNA prices its products in the marketplace. Pricing architecture covers both a national pricing approach and specific price points for given areas. Pricing architecture also encompasses PCNA’s objectives for All Sport and its new age drinks with reference to trade channels, package sizes and other characteristics of both the products and the customers at which the products are aimed. Additionally, PCNA’s pricing architecture outlines PCNA’s customer development agreements. These agreements between PCNA and retailers provide for the retailer’s participation in certain merchandising activities for PCNA products. As with other information contained in the AOP, pricing architecture is highly confidential and would be extremely valuable to a competitor. Knowing PCNA’s pricing architecture would allow a competitor to anticipate PCNA’s pricing moves and underbid PCNA strategically whenever and wherever the competitor so desired. PepsiCo introduced evidence that Redmond had detailed knowledge of PCNA’s pricing architecture and that he was aware of and had been involved in 326

preparing PCNA’s customer development agreements with PCNA’s California and California-based national customers. Indeed, PepsiCo showed that Redmond, as the General Manager for California, would have been responsible for implementing the pricing architecture guidelines for his business unit. PepsiCo also showed that Redmond had intimate knowledge of PCNA “attack plans” for specific markets. Pursuant to these plans, PCNA dedicates extra funds to supporting its brands against other brands in selected markets. To use a hypothetical example, PCNA might budget an additional $500,000 to spend in Chicago at a particular time to help All Sport close its market gap with Gatorade. Testimony and documents demonstrated Redmond’s awareness of these plans and his participation in drafting some of them. Finally, PepsiCo offered evidence of PCNA trade secrets regarding innovations in its selling and delivery systems. Under this plan, PCNA is testing a new delivery system that could give PCNA an advantage over its competitors in negotiations with retailers over shelf space and merchandising. Redmond has knowledge of this secret because PCNA, which has invested over a million dollars in developing the system during the past two years, is testing the pilot program in California. Having shown Redmond’s intimate knowledge of PCNA’s plans for 1995, PepsiCo argued that Redmond would inevitably disclose that information to Quaker in his new position, at which he would have substantial input as to Gatorade and Snapple pricing, costs, margins, distribution systems, products, packaging and marketing, and could give Quaker an unfair advantage in its upcoming skirmishes with PepsiCo. Redmond and Quaker countered that Redmond’s primary initial duties at Quaker as Vice President—Field Operations would be to integrate Gatorade and Snapple distribution and then to manage that distribution as well as the promotion, marketing and sales of these products. Redmond asserted that the integration would be conducted according to a pre-existing plan and that his special knowledge of PCNA strategies would be irrelevant. This irrelevance would derive not only from the fact that Redmond would be implementing pre-existing plans but also from the fact that PCNA and Quaker distribute their products in entirely different ways: PCNA’s distribution system is vertically integrated (i.e., PCNA owns the system) and delivers its product directly to retailers, while Quaker ships its product to wholesalers and customer warehouses and relies on independent distributors. The defendants also pointed out that Redmond had signed a confidentiality agreement with Quaker preventing him from disclosing “any confidential information belonging to others,” as well as the Quaker Code of Ethics, which prohibits employees from engaging in “illegal or improper acts to acquire a competitor’s trade secrets.” Redmond additionally promised at the hearing that should he be faced with a 327

situation at Quaker that might involve the use or disclosure of PCNA information, he would seek advice from Quaker’s inhouse counsel and would refrain from making the decision. * * *

On December 15, 1994, the district court issued an order enjoining Redmond from assuming his position at Quaker through May, 1995, and permanently from using or disclosing any PCNA trade secrets or confidential information. The court entered its findings of fact and conclusions of law on January 26, 1995, nunc pro tunc December 15, 1994. The court, which completely adopted PepsiCo’s position, found that Redmond’s new job posed a clear threat of misappropriation of trade secrets and confidential information that could be enjoined under Illinois statutory and common law. The court also emphasized Redmond’s lack of forthrightness both in his activities before accepting his job with Quaker and in his testimony as factors leading the court to believe the threat of misappropriation was real. This appeal followed. Both parties agree that the primary issue on appeal is whether the district court correctly concluded that PepsiCo had a reasonable likelihood of success on its various claims for trade secret misappropriation and breach of a confidentiality agreement. * * * The Illinois Trade Secrets Act (“ITSA”), which governs the trade secret issues in this case, provides that a court may enjoin the “actual or threatened misappropriation” of a trade secret. 765 ILCS 1065/3(a) * * * . A party seeking an injunction must therefore prove both the existence of a trade secret and the misappropriation. The defendants’ appeal focuses solely on misappropriation; although the defendants only reluctantly refer to PepsiCo’s marketing and distribution plans as trade secrets, they do not seriously contest that this information falls under the ITSA. The question of threatened or inevitable misappropriation in this case lies at the heart of a basic tension in trade secret law. Trade secret law serves to protect “standards of commercial morality” and “encourage[ ] invention and innovation” while maintaining “the public interest in having free and open competition in the manufacture and sale of unpatented goods.” 2 [Melvin F.] Jager, [Trade Secrets Law] § IL.03, at IL–12 [Clark Boardman rev. ed. 1994)]. Yet that same law should not prevent workers from pursuing their livelihoods when they leave their current positions. * * * This tension is particularly exacerbated when a plaintiff sues to prevent not the actual misappropriation of trade secrets but the mere threat that it will occur. While the ITSA plainly permits a court to enjoin the threat of misappropriation of trade secrets, there is little law in Illinois or in this circuit establishing what constitutes threatened or inevitable misappropriation. * * * In [AMP, Inc. v. Fleischhacker, 823 F.2d 1199 (7th Cir.1987)] we affirmed the denial of a preliminary injunction on the grounds that the 328

plaintiff AMP had failed to show either the existence of any trade secrets or the likelihood that defendant Fleischhacker, a former AMP employee, would compromise those secrets or any other confidential business information. * * * It should be noted that AMP, which we decided in 1987, predates the ITSA, which took effect in 1988. The ITSA abolishes any common law remedies or authority contrary to its own terms. 765 ILCS 1065/8. The ITSA does not, however, represent a major deviation from the Illinois common law of unfair trade practices. * * * The ITSA mostly codifies rather than modifies the common law doctrine that preceded it. Thus, we believe that AMP continues to reflect the proper standard under Illinois’s current statutory scheme.7 The ITSA * * * and AMP lead to the same conclusion: a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets. * * * Questions remain, however, as to what constitutes inevitable misappropriation and whether PepsiCo’s submissions * * * meet that standard. We hold that they do. PepsiCo presented substantial evidence at the preliminary injunction hearing that Redmond possessed extensive and intimate knowledge about PCNA’s strategic goals for 1995 in sports drinks and new age drinks. The district court concluded on the basis of that presentation that unless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about Gatorade and Snapple by relying on his knowledge of PCNA trade secrets. It is not the “general skills and knowledge acquired during his tenure with” PepsiCo that PepsiCo seeks to keep from falling into Quaker’s hands, but rather “the particularized plans or processes developed by [PCNA] and disclosed to him while the employeremployee relationship existed, which are unknown to others in the industry and which give the employer an advantage over his competitors.” AMP, 823 F.2d at 1202. The [plaintiff in] AMP * * * could do nothing more than assert that skilled employees were taking their skills elsewhere; PepsiCo has done much more. Admittedly, PepsiCo has not brought a traditional trade secret case, in which a former employee has knowledge of a special manufacturing process or customer list and can give a competitor an unfair advantage by transferring the technology or customers to that competitor. * * * PepsiCo has not contended that Quaker has stolen the All Sport formula or its list 329

of distributors. Rather PepsiCo has asserted that Redmond cannot help but rely on PCNA trade secrets as he help plots Gatorade and Snapple’s new course, and that these secrets will enable Quaker to achieve a substantial advantage by knowing exactly how PCNA will price, distribute, and market its sports drinks and new age drinks and being able to respond strategically. * * * Quaker and Redmond assert that they have not and do not intend to use whatever confidential information Redmond has by virtue of his former employment. They point out that Redmond has already signed an agreement with Quaker not to disclose any trade secrets or confidential information gleaned from his earlier employment. They also note with regard to distribution systems that even if Quaker wanted to steal information about PCNA’s distribution plans, they would be completely useless in attempting to integrate the Gatorade and Snapple beverage lines. The defendants’ arguments fall somewhat short of the mark. Again, the danger of misappropriation in the present case is not that Quaker threatens to use PCNA’s secrets to create distribution systems or coopt PCNA’s advertising and marketing ideas. Rather, PepsiCo believes that Quaker, unfairly armed with knowledge of PCNA’s plans, will be able to anticipate its distribution, packaging, pricing, and marketing moves. Redmond and Quaker even concede that Redmond might be faced with a decision that could be influenced by certain confidential information that he obtained while at PepsiCo. In other words, PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game. Quaker and Redmond’s protestations that their distribution systems and plans are entirely different from PCNA’s are thus not really responsive. The district court also concluded from the evidence that Uzzi’s actions in hiring Redmond and Redmond’s actions in pursuing and accepting his new job demonstrated a lack of candor on their part and proof of their willingness to misuse PCNA trade secrets, findings Quaker and Redmond vigorously challenge. * * * The facts of the case do not ineluctably dictate the district court’s conclusion. Redmond’s ambiguous behavior toward his PepsiCo superiors might have been nothing more than an attempt to gain leverage in employment negotiations. The discrepancy between Redmond’s and Uzzi’s comprehension of what Redmond’s job would entail may well have been a simple misunderstanding. * * * The court also pointed out that Quaker, through Uzzi, seemed to express an unnatural interest in hiring PCNA employees: all three of the people interviewed for the position Redmond ultimately accepted worked at PCNA. Uzzi may well have focused on recruiting PCNA employees because he knew they were good and not because of their confidential knowledge. Nonetheless, the district court, 330

after listening to the witnesses, determined otherwise. That conclusion was not an abuse of discretion. * * * Thus, when we couple the demonstrated inevitability that Redmond would rely on PCNA trade secrets in his new job at Quaker with the district court’s reluctance to believe that Redmond would refrain from disclosing these secrets in his new position (or that Quaker would ensure Redmond did not disclose them), we conclude that the district court correctly decided that PepsiCo demonstrated a likelihood of success on its statutory claim of trade secret misappropriation. *** For the same reasons we concluded that the district court did not abuse its discretion in granting the preliminary injunction on the issue of trade secret misappropriation, we also agree with its decision on the likelihood of Redmond’s breach of his confidentiality agreement should he begin working at Quaker. Because Redmond’s position at Quaker would initially cause him to disclose trade secrets, it would necessarily force him to breach his agreement not to disclose confidential information acquired while employed in PCNA. Cf. George S. May Int’l, 628 N.E.2d at 653 (“An employer’s trade secrets are considered a protectable interest for a restrictive covenant under Illinois law.”). Quaker and Redmond do not assert that the confidentiality agreement is invalid; such agreements are enforceable when supported by adequate consideration.

NOTES AND QUESTIONS Pepsi’s Motivation for the Lawsuit? Professor Alan Hyde’s later interview with Pepsi’s outside counsel suggests that the protection of trade secrets was not the primary motivation for the lawsuit. Pepsi wanted to “send a message to Quaker” and “to their own employees. . . . They wanted to get Quaker to stop [targeting their employees] and to signal strongly to those employees that they could not expect to depart to a rival without litigation.” Alan Hyde, The Story of PepsiCo., Inc. v.

Redmond: How the Doctrine of Inevitable Disclosure of the Trade Secrets of Marketing Sports Beverages Was Brewed, in Employment Law Stories ch. 5 (Samuel Estreicher & Gillian Lester eds. 2007). 1. Was a protectable trade secret at risk in Redmond? In AMP v. Fleischhacker, the court faulted AMP for its “fail[ure] to list any particular pieces or type of information that warranted protection.” Did PepsiCo in Redmond do a better job in that regard? If so, how? Consider also the reference 331 to “specifically identifiable trade secrets” in § 8.05(b) of the Restatement of Employment Law. 2. Review the excerpt from the Uniform Trade Secrets Act in the Statutory Supplement. Under UTSA § 1(2), was Redmond or Quaker guilty of actual or threatened “misappropriation” of PepsiCo’s trade secrets? Were the conditions set out in Employment Restatement § 8.05(b) met? 3. What inference can be drawn from Redmond’s misstatement of his future intentions at important corporate meetings? Consider Bimbo Bakeries USA Inc. v. Botticella, 613 F.3d 102, 118 (3d Cir.2010) (applying Pennsylvania law), where the court sustained a preliminary injunction on an “inevitable disclosure” rationale in part because of “evidence of Botticella’s suspicious conduct during his final weeks at Bimbo”: In the period between when Botticella accepted the Hostess offer on October 15, 2009, and when he ceased working for Bimbo on January 13, 2010, he continued to have all the access to Bimbo’s confidential and proprietary information befitting a trusted senior executive. For instance, Botticella attended a meeting with Bimbo’s present and other Bimbo officers in December 2009 at which the participants discussed confidential information regarding the company’s strategic plan for California. If you were representing an employee in Redmond’s or Bimbo’s situation who was planning to leave to work for a competitor, what advice would you give to avoid any misstatements of future intention or other conduct that may encourage a grant to grant an injunction? 4. What effect should be given to PepsiCo’s failure to obtain an enforceable no-compete agreement from Redmond? 5. “Inevitable Disclosure”. The theory of inevitable disclosure appeared in a New York decision as early as 1919 in Eastman Kodak Co. v. Powers Film Products, Inc., 189 A.D. 556, 179 N.Y.S. 325, 330 (4th Dept. 1919). However, the doctrine is in decline. Recent decisions invoking the doctrine as an independent basis for injunctive relief are rare. See Employment Restatement § 8.05, Comment b. For a decision questioning the “inevitable disclosure” doctrine, see EarthWeb, Inc. v. Schlack, 71 F.Supp.2d 299 (S.D.N.Y.1999), vacated and remanded (to clarify basis for denying plaintiff’s motion for preliminary injunctive relief), 205 F.3d 1322 (2d Cir.2000) (unpubl.). Schlack was responsible for overseeing the editorial content of the EarthWeb website, which licensed content from third parties. After less than a year with EarthWeb, Schlack left to join ITworld.com, which generated its own editorial content. Schlack’s agreement with EarthWeb included a broad confidentiality provision, and a narrow non-compete provision under which ITworld.com was not considered a competitor. The court refused to enjoin Schlack from working for ITworld. 332 6. Enforceability of Confidentiality Provisions. Contrary to the AMP ruling, the majority of states do not require a temporal limitation on confidentiality provisions. See M. Scott McDonald & Jacqueline C. Johnson, Unfair Competition and Intellectual Property Protection in Employment Law at 191 (2014). Does the Employment Restatement § 8.03(c) recognize such a limitation? The Illinois statute adopting the UTSA included a provision specifying that confidentiality agreements “shall not be deemed to be void or unenforceable solely for lack of durational or geographic limitation on the duty.” 765 Ill. Comp. Stat. Ann. 1065/8. (The Uniform Act itself does not contain that particular provision.) Likewise, many courts do not closely scrutinize the geographic scope of a confidentiality provision because a limited scope “would defeat the entire purpose of restricting disclosure, since confidentiality knows no temporal or geographic boundaries.” Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751 (Iowa 1999), quoting 2 Rudolf Callman, The Law of Unfair Competition, Trademarks & Monopolies § 14.04 (Supp. 1998). Note also that under the common law duty of loyalty the confidentiality of trade-secret information imparted to employee has no formal temporal limitation. From a practical standpoint, however, the confidentiality of information has a temporal limitation—the point at which the information becomes commonly known within an industry or public knowledge.

2. COMPETITION WITH A CURRENT OR FORMER EMPLOYER Even without an express agreement, employees are under a common law duty not to compete against their employer. In the

interest of facilitating the ability to pursue new employment, employees may engage in preparatory steps towards seeking new employment such as inquiring with prospective employers, and once they decide to leave, they may give notice of such departure to coworkers and clients of the employer. See, e.g., Maryland Metals, Inc. v. Metzner, 282 Md. 31, 382 A.2d 564, 568–69 (1978) (“A departing employee may not solicit his employer’s customers but he may advise the customers of his intention to leave and set up a competing business.”). This common law restriction does not apply to former employees.

RESTATEMENT OF EMPLOYMENT LAW § 8.04 American Law Institute (2015).

§ 8.04. Competition by Employee with Current Employer (a) Except as otherwise provided in subsections (b) and (c), an employee breaches the duty of loyalty to the employer if, without the employer’s express or implied consent, the employee, while employed by the employer, works for a competitor or otherwise competes with the employer. 333

(b) Competition with the employer under subsection (a) includes solicitation of the employer’s customers to divert their business to a competitor and recruitment of other employees to work for a competitor, but does not include reasonable preparation by an employee or group of employees to compete with the employer. (c) Absent an agreement with their first employer to the contrary, employees, other than employees in a position of trust and confidence with their first employer under § 8.01(a), may work for a competitor of the first employer as long as the work is not done during time committed to the first employer, does not involve the use or disclosure of the first employer’s trade secrets, and does not injure the employer to any greater extent than would any other individual working for the competitor.

JET COURIER SERVICE, INC. V. MULEI Supreme Court of Colorado, 1989. 771 P.2d 486.

Jet [Courier Service, Inc. (“Jet”)] is an air courier company engaged principally in supplying a specialized transportation service to customer banks. Jet provides air and incidental ground courier service to carry canceled checks between banks to facilitate rapid processing of those checks through the banking system. * * * [Eds. Jet was based in Ohio, and hired Anthony Mulei to open and manage its Denver office.] In the course of seeking other employment opportunities and while still employed by Jet, Mulei began to investigate setting up another air courier company that would compete with Jet in the air courier business. In January 1983, Mulei spoke with John Towner, a Kansas air charter operator who was in the business of supplying certain air transportation services, about going into business together. In February 1983, Mulei met with Towner and two Jet employees to discuss setting up this new business and obtaining customers. [Eds. Mulei and Towner named the new business American Check Transport, Inc. (ACT).] On February 27, 1983, Mulei, while still employed by Jet and on Jet business in Phoenix, talked to two of Jet’s customer banks to inform them he would be leaving Jet in mid-March and to tell them he “would try to give them the same service.” He engaged in similar discussions with two bank customers of Jet in Dallas while still employed by Jet. Early in March 1983, Mulei met with representatives of three of Jet’s Denver customers, First Interstate Bank of Denver, Central Bank of Denver, and United Bank of Denver, and discussed the new air courier company that Mulei and Towner were forming. Mulei told the United Bank of Denver float manager that “if they wished to give us [ACT] the business,” then ACT would be able to 334

serve them without any break in the service, and that ACT would be able to take over their business and fully satisfy their air courier service needs. Mulei further told United Bank of Denver that “by minimizing expenses, I would be in a position, sometime later, to reduce cost.” Mulei had similar conversations with representatives of First Interstate Bank of Denver. Prior to the termination of Mulei’s employment by Jet on March 10, 1983, Mulei met with nine pilots who were flying for Jet to discuss his formation of ACT. Before his termination, Mulei also met with Jet’s Denver office staff and with its ground couriers to discuss potential future employment with ACT. Mulei offered Jet’s office staff better working conditions, including health and dental insurance and part ownership of ACT, if they were to join ACT. Mulei did not inform [Jet management] of any of these activities with respect to Jet customers, contractors or employees.

ACT was incorporated on February 28, 1983. Mulei was elected president at the first shareholders meeting. [Jet] fired Mulei on March 10, 1983, when [the CEO] first learned of Mulei’s organization of a competing enterprise. On that same day Mulei caused ACT to become operational and compete with Jet. Five Denver banks that had been Jet customers became ACT customers at that time. Additionally, when Mulei was fired, three of the four other employees in Jet’s Denver office also left Jet and joined ACT. All of Jet’s ground carriers in Denver immediately left Jet and joined ACT. All nine of Jet’s pilots in Denver either quit or were fired. Jet was able to maintain its Denver operations only through a rapid and massive transfer of resources, including chartered aircraft and ground couriers, from Jet’s other offices. * * * The court of appeals affirmed the trial court’s holding that Mulei’s pre-termination meetings with customers did not violate a duty of loyalty since ACT did not become operational and commence competing with Jet until after Mulei left Jet’s employ. * * * This reasoning fails to accord adequate scope to the [employee’s] duty of loyalty. . . . * * * While still employed by Jet, Mulei was subject to a duty of loyalty to act solely for the benefit of Jet in all matters connected with his employment. * * * [T]he key inquiry is whether Mulei’s meetings amounted to solicitation, which would be a breach of his duty of loyalty. Generally under his privilege to make preparations to compete after the termination of his employment, an employee may advise current customers that he will be leaving his current employment. * * * However, any pre-termination solicitation of those customers for a new competing business violates an employee’s duty of loyalty.

NOTES AND QUESTIONS 1. “Preparing to Compete”. How does one draw the line between competition, which breaches the employee’s duty of loyalty, and taking 335 reasonable preparatory steps to compete, which does not? Can employees jointly agree to leave the employer’s business and form a competitive firm? Can they do so without giving reasonable notice and an opportunity to adjust quickly? Again, the Jet Courier Service court states: It is normally permissible for employees of a firm, or for some of its partners, to agree among themselves, while still employed, that they will engage in a competition with the firm. * * * However, a court may find that it is a breach of duty for a number of the key officers or employees to agree to leave their employment simultaneously and without giving the employer an opportunity to hire and train replacements. 771 P.2d at 497. See Employment Restatement § 8.04, Comment c. Does this elevate form over substance? If employees have agreed to leave to join a competitor, why can’t they do so at the same time? Is there an obligation to give notice to the prior employer? At what point is the harm to the employer from the employees’ departure sufficient to enable the prior employer to establish a breach of the duty of loyalty and/or obtain an injunction against the departure? See id. § 9.08. 2. Permissible “Moonlighting”? Does the common law duty of loyalty bar nonsupervisory employees from working for competitors on their own time? What if the harm to the first employer is no different than the harm from any other individual working for the competitor? See Employment Restatement Section 8.04, Comment b. 3. “Corporate Opportunities”. Does the employee’s common law duty of loyalty include an obligation not to use for the employee’s own benefit corporate opportunities that the employee becomes aware of only because of his employment relationship? See id., Comment e. Does this aspect of the duty apply only to corporate officers or, possibly, executive employees?

B. RESTRICTIVE COVENANTS All of the cases we have covered thus far involve an employer’s ability to restrain a former employee’s activities in the absence of a non-competition covenant. In some states, most notably California, covenants not to compete are unenforceable. See Cal. Bus. & Prof. Code §§ 16600–16602.5 (non-competes unenforceable, except in connection with the sale of a business, dissolution of a partnership, or disassociation of a member from the partnership). See also N.D. Cent. Code § 9–08–06 (same); D.C. Code § 32–581.01 et seq. (non-competes unenforceable, except in connection with the sale of a business, or the employment of medical doctors if certain conditions are met); Okla. Stat. tit. 15, § 219A (former employees subject to noncompetes may “engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.”); Colo. Rev. Stat. § 8–2–113 336

(non-competes unenforceable, except in connection with “[a]ny contract for the purchase and sale of a business or other

assets of a business,” “recovery of the expense of educating and training an employee who has served an employer for a period of less than two year,” and the employment of “[e]xecutive and management personnel and officers and employees who constitute professional staff to executive and management personnel.”). In others, statutes define the contours of permissible non-competes. See Oregon Rev. State § 653.295; Fla. St. § 542.335. Most states enforce covenants not to compete as a matter of decisional law, along the lines of the Restatement provisions below.

RESTATEMENT OF EMPLOYMENT LAW §§ 8.06–8.08 American Law Institute (2015).

§ 8.06. Enforcement of Restrictive Covenant in Employment Agreement Except as otherwise provided by other law or applicable professional rules, a covenant in an agreement between an employer and a former employee restricting the former employee’s working activities is enforceable only if it is reasonably tailored in scope, geography, and time to further a protectable interest of the employer, as defined in § 8.07, unless: (a) the employer discharges the employee on a basis that makes enforcement of the covenant inequitable; (b) the employer acted in bad faith in requiring or invoking the covenant; (c) the employer materially breached the underlying employment agreement; or (d) in the geographic region covered by the restriction a great public need for the special skills and services of the former employee outweighs any legitimate interest of the employer in enforcing the covenant. § 8.07. Protectable Interests for Restrictive Covenants (a) A restrictive covenant is enforceable only if the employer can demonstrate that the covenant furthers a legitimate interest of the employer. (b) An employer has a legitimate interest in protecting, by means of a reasonably tailored restrictive covenant with its employee, the employer’s: (1) trade secrets, as defined in § 8.02, and other protectable confidential information that does not meet the definition of trade secret, 337

(2) customer relationships, (3) investment in the employee’s reputation in the market, or (4) purchase of a business owned by the employee. § 8.08. Modification of Unreasonable Restrictive Covenant A court may delete or modify provisions in an overbroad restrictive covenant in an employment agreement and then enforce the covenant as modified unless the agreement does not allow for modification or the employer lacked a reasonable and good-faith basis for believing the covenant was enforceable. Lack of a reasonable and good-faith basis for believing a covenant was enforceable may be manifested by its gross overbreadth alone, or by overbreadth coupled with other evidence that the employer sought to do more than protect its legitimate interests.

BDO SEIDMAN V. HIRSHBERG Court of Appeals of New York, 1999. 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220.

LEVINE, J. BDO Seidman (BDO), a general partnership of certified public accountants, appeals from the affirmance of an order of the Supreme Court granting summary judgment dismissing its complaint against defendant, who was formerly employed as an accountant with the firm. The central issue before us is whether the “reimbursement clause” in an agreement between the parties, requiring defendant to compensate BDO for serving any client of the firm’s Buffalo office within 18 months after the termination of his employment, is an invalid and unenforceable restrictive covenant. The courts below so held. * * * BDO is a national accounting firm having 40 offices throughout the United States, including four in New York State. Defendant began employment in BDO’s Buffalo office in 1984, when the accounting firm he had been working for was merged into BDO, its partners becoming BDO partners. In 1989, defendant was promoted to the position of manager, apparently a step

immediately below attaining partner status. As a condition of receiving the promotion, defendant was required to sign a “Manager’s Agreement,” the provisions of which are at issue. In Paragraph “SIXTH” defendant expressly acknowledged that a fiduciary relationship existed between him and the firm by reason of his having received various disclosures which would give him an advantage in attracting BDO clients. Based upon that stated premise, defendant agreed that if, within 18 months following the termination of his employment, he served any former client of BDO’s Buffalo office, he would compensate BDO “for the loss and damages suffered” in an amount equal to one and one half times the fees 338

BDO had charged that client over the last fiscal year of the client’s patronage. Defendant was to pay such amount in five annual installments. Defendant resigned from BDO in October 1993. This action was commenced in January 1995. During pretrial discovery, BDO submitted a list of 100 former clients of its Buffalo office, allegedly lost to defendant, who were billed a total of $138,000 in the year defendant left the firm’s practice. Defendant denied serving some of the clients, averred that a substantial number of them were personal clients he had brought to the firm through his own outside contacts, and also claimed that with respect to some clients, he had not been the primary BDO representative servicing the account. * * * Concededly, the Manager’s Agreement defendant signed does not prevent him from competing for new clients, nor does it expressly bar him from serving BDO clients. Instead, it requires him to pay “for the loss and damages” sustained by BDO in losing any of its clients to defendant within 18 months after his departure, an amount equivalent to one and one half times the last annual billing for any such client who became the client of defendant. Nonetheless, it is not seriously disputed that the agreement, in its purpose and effect, is a form of ancillary employee anticompetitive agreement that is not per se unlawful but will be carefully scrutinized by the courts. * * * The modern, prevailing common law standard of reasonableness for employee agreements not to compete applies a threepronged test. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public (see, e.g., Technical Aid Corp. v. Allen, 134 N.H. 1, 8, 591 A.2d 262, 265–266 * * * ; Restatement [Second] of Contracts § 188). A violation of any prong renders the covenant invalid. New York has adopted this prevailing standard of reasonableness in determining the validity of employee agreements not to compete. “In this context a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee” (Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 353 N.E.2d 590). In general, we have strictly applied the rule to limit enforcement of broad restraints on competition. Thus, in Reed, Roberts Assocs. (supra), we limited the cognizable employer interests under the first prong of the common law rule to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from 339

competition by a former employee whose services are unique or extraordinary (40 N.Y.2d at 308). With agreements not to compete between professionals, however, we have given greater weight to the interests of the employer in restricting competition within a confined geographical area. * * * [However, t]his Court’s rationale for giving wider latitude to covenants between members of a learned profession1 because their services are unique or extraordinary does not realistically apply to the actual context of the anti-competitive agreement here. In the instant case, BDO is a national accounting firm seeking to enforce the agreement within a market consisting of the entirety of a major metropolitan area. Moreover, defendant’s unchallenged averments indicate that his status in the firm was not based upon the uniqueness or extraordinary nature of the accounting services he generally performed on behalf of the firm, but in major part on his ability to attract a corporate clientele. Nor was there any proof that defendant possessed any unique or extraordinary ability as an accountant that would give him a competitive advantage over BDO. Moreover, the contexts of the agreements not to compete in Karpinski and Gelder Medical Group were entirely different. In each case, the former associate would have been in direct competition with the promisee-practitioner for referrals from a narrow group of primary health providers in a rural, geographical market for their medical or dental practice specialty. Thus, our learned profession precedents do not obviate the need for independent scrutiny of the anti-competitive provisions of the Manager’s Agreement under the tripartite common law standard. Close analysis of Paragraph SIXTH of the agreement under the first prong of the common law rule, to identify the legitimate interest of BDO and determine whether the covenant is

no more restrictive than is necessary to protect that interest, leads us to conclude that the covenant as written is overbroad in some respects. BDO claims that the legitimate interest it is entitled to protect is its entire client base, which it asserts a modern, large accounting firm expends considerable time and money building and maintaining. However, the only justification for imposing an employee agreement not to compete is to forestall unfair competition (see, Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d at 499). It seems self-evident that a former employee may be capable of fairly competing for an employer’s clients by refraining from use of unfair means to compete. If the employee abstains from unfair means in competing for those clients, the employer’s interest in preserving its client base against the competition of the former 340

employee is no more legitimate and worthy of contractual protection than when it vies with unrelated competitors for those clients. * * * Protection of customer relationships the employee acquired in the course of employment may indeed be a legitimate interest. [Where employees work closely with clients or customers over a long period of time,] the employee has been enabled to share in the goodwill of a client or customer which the employer’s overall efforts and expenditures created. The employer has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment. It follows from the foregoing that BDO’s legitimate interest here is protection against defendant’s competitive use of client relationships which BDO enabled him to acquire through his performance of accounting services for the firm’s clientele during the course of his employment. Extending the anti-competitive covenant to BDO’s clients with whom a relationship with defendant did not develop through assignments to perform direct, substantive accounting services would, therefore, violate the first prong of the common law rule: it would constitute a restraint “greater than is needed to protect” these legitimate interests (Restatement [Second] of Contracts § 188[1][a]). * * * To the extent, then, that paragraph SIXTH of the Manager’s Agreement requires defendant to compensate BDO for lost patronage of clients with whom he never acquired a relationship through the direct provision of substantive accounting services during his employment, the covenant is invalid and unenforceable. By a parity of reasoning, it would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development. Because the goodwill of those clients was not acquired through the expenditure of BDO’s resources, the firm has no legitimate interest in preventing defendant from competing for their patronage. Indeed, enforcement of the restrictive covenant as to defendant’s personal clients would permit BDO to appropriate goodwill created and maintained through defendant’s efforts, essentially turning on its head the principal justification to uphold any employee agreement not to compete based on protection of customer or client relationships. Except for the overbreadth in the foregoing two respects, the restrictions in paragraph SIXTH do not violate the tripartite common law test for reasonableness. The restraint on serving BDO clients is limited to 18 months, and to clients of BDO’s Buffalo office. The time constraint appears to represent a reasonably brief interlude to enable the firm to replace the client relationship and goodwill defendant was permitted to 341

acquire with some of its clients. Defendant is free to compete immediately for new business in any market and, if the overbroad provisions of the covenant are struck, to retain his personal clients and those clients of BDO’s that he had not served to any significant extent while employed at the firm. He has averred that BDO’s list of lost accounts contains a number of clients in both categories. Thus, there is scant evidence suggesting that the covenant, if cured of overbreadth, would work an undue hardship on defendant. Moreover, given the likely broad array of accounting services available in the greater Buffalo area, and the limited remaining class of BDO clientele affected by the covenant, it cannot be said that the restraint, as narrowed, would seriously impinge on the availability of accounting services in the Buffalo area from which the public may draw, or cause any significant dislocation in the market or create a monopoly in accounting services in that locale. These factors militate against a conclusion that a reformed paragraph SIXTH would violate the third prong of the common law test, injury to the public interest. * * * [Severance or Partial Enforcement] We conclude that the Appellate Division erred in holding that the entire covenant must be invalidated, and in declining partially to enforce the covenant to the extent necessary to protect BDO’s legitimate interest. * * * Here, the undisputed facts and circumstances militate in favor of partial enforcement. The covenant was not imposed as a

condition of defendant’s initial employment, or even his continued employment, but in connection with promotion to a position of responsibility and trust just one step below admittance to the partnership. There is no evidence of coercion or that the Manager’s Agreement was part of some general plan to forestall competition. Moreover, no proof was submitted that BDO imposed the covenant in bad faith, knowing full well that it was overbroad. Indeed, as already discussed, the existence of our “learned profession” precedents, and decisions in other States upholding the full terms of this type of agreement, support the contrary conclusion. Therefore, partial enforcement of Paragraph SIXTH is warranted. The Appellate Division’s fear that partial enforcement will require rewriting the parties’ agreement is unfounded. No additional substantive terms are required. The time and geographical limitations on the covenant remain intact. The only change is to narrow the class of BDO clients to which the covenant applies. * * * [Damages] Since defendant does not dispute that at least some BDO clients to which the restrictive covenant validly applies were served by him during the contractual duration of the restraint, plaintiff is entitled to partial summary judgment on the issue of liability. Remittal is required in order 342

to establish plaintiff’s damages, including resolution of any contested issue as to which of BDO’s former clients served by defendant the restrictive covenant validly covers. As to those clients, the measure of plaintiff’s damages will depend in the first instance on the validity of the clause in paragraph SIXTH of the Manager’s Agreement requiring defendant to compensate BDO “for the loss and damages suffered” in an amount equal to one and one half times the fees charged each lost client over the last full year the client was served by the firm. This provision essentially represents a liquidated damages clause, as BDO conceded at nisi prius. Liquidated damages provisions, under our precedents, are valid if the “damages flowing from a breach are difficult to ascertain [and under] a provision fixing damages in advance * * * the amount is a reasonable measure of the anticipated probable harm” (City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 473, 358 N.Y.S.2d 391, 315 N.E.2d 458). On the other hand, if “the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced” (Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 361 N.E.2d 1015). The damages here are sufficiently difficult to ascertain to satisfy the first requirement of a valid liquidated damages provision. Because of the inability to project with any degree of certainty how long a given client would have remained with BDO if defendant had not made himself available as an alternative source of accounting services, BDO’s actual lost profits from defendant’s breach would be impossible to determine with any precision. In our view, however, the averment regarding the basis of the liquidated damages formula by no means conclusively demonstrates the absence of gross disproportionality. * * * We note that other courts have remitted on the issue of the validity of these types of liquidated damages provisions in accountant employee anti-competitive agreements when they found the record insufficiently developed to establish that the amount fixed in the agreement was not so excessive to actual damages as to constitute a penalty * * * . The sparse proof on this issue here persuades us that we, similarly, should remit for further development of the record on the liquidated damages formula.

NOTES AND QUESTIONS 1. Which aspect(s) of Seidman’s non-compete clause was overbroad? What does the court mean when it uses the term “goodwill”? 2. How might a court’s willingness to modify an agreement alter the way a covenant is drafted? Consider Section 8.08 of the Employment Restatement’s conditions on judicial modification of overbroad covenants. Do 343 they sufficiently curb incentives employers may have to insist on overbroad covenants? 3. Consider a number of possible justifications for restricting an employer’s ability to impose post-termination no-compete covenants altogether: a. “Employers should not be able to insulate themselves from competition by precluding highly-skilled employees from working for their competitors.” b. “Employees should not be able to bind themselves in a way that hampers their ability to exit the firm and thereby tempt

their employer to impose unreasonable terms during the employment relationship.” c. “Employees should not be able to bind themselves in a way that hampers their ability to exit the firm because employees will not be able properly to value the opportunity costs of such restraints, particularly at the stage when they are hired.” d. “Non-competes permits otherwise competitive businesses to not engage in competition with respect to the terms of employment of their workers, thus in effect creating a “monopsony,” or monopoly by buyers of labor.” Which of these justifications for regulation do you find persuasive? Do these justifications provide support for a per se rule barring no-compete covenants, or for something more akin to New York’s or the Employment Restatement’s approach? Do these justifications retain any force where the previous employer continues the employee’s salary during the no-compete period (what in the United Kingdom is called a “gardening leave”)? 4. Inquiry into Reasonable Scope of Constraint. Even where a protectable interest is found, courts will still inquire whether the geographical and durational limits of the no-compete clause are reasonable within the applicable business context. For a holding that a one-year limitation can be unreasonable in the IT industry, see EarthWeb, Inc. v. Schlack, 71 F.Supp.2d 299 (S.D.N.Y.1999): “When measured against the IT industry in the internet environment, a one-year hiatus from the workforce is several generations, if not an eternity.” 71 F.Supp.2d at 316 5. Consideration. Presumably, consideration is not a problem when new employees are required to sign no-compete agreements as a condition of obtaining employment. Is separate consideration required to support no-compete agreements signed by incumbent employees? Some courts hold that continued at-will employment beyond the date of signing of the agreement provides sufficient consideration. See, e.g., Copeco, Inc. v. Caley, 91 Ohio App.3d 474, 632 N.E.2d 1299 (1992). Other courts require that employment continue for a “substantial” or “reasonable” time before a no-compete promise will be enforced—a kind of ex post theory of consideration. See, e.g., Zellner v. Conrad, 183 A.D.2d 250, 589 N.Y.S.2d 903 (2d Dept. 1992). Still others require 344 separate consideration for incumbent employees, such as promise of continued employment, a raise, or a promotion. See Softchoice, Inc. v. Schmidt, 763 N.W.2d 660 (Minn. Ct. App. 2009) (applying Missouri law); Access Organics, Inc. v. Hernandez, 2008 MT 4, 175 P.3d 899 (Mont. 2008). Compare Employment Restatement § 8.06, Illus. 12 & Reporters’ Notes. 6. Involuntary Termination. Under § 8.06(a)–(c) of the Employment Restatement, courts will not enforce even otherwise reasonable covenants where the employer materially breaches the underlying employment agreement or the circumstances indicate that enforcement would be inequitable. When the employer decides that the employee is no longer a valuable asset to the company, it can be difficult for the employer to later explain why it has a legitimate business interest in restraining the employee from working for others. See Insulation Corp. Of America v. Brobston, 667 A.3d 729 (Pa. Super. Ct. 1995). 7. Wrongful Discharge for Refusing to Sign a No-Compete Agreement. Can an incumbent employee lawfully be fired for refusing to sign a no-compete agreement in a jurisdiction that enforces “reasonable” agreements? Under § 5.02(d) of the Employment Restatement, the employer does not violate public policy when it requires employees, as a condition of employment, to sign an agreement that is judicially enforceable, even if the agreement involves a waiver of modifiable rights. Courts differ where the employee is discharged for refusing to sign an agreement that would be unenforceable. Compare, e.g., Tatge v. Chambers & Owen, Inc., 219 Wis.2d 99, 579 N.W.2d 217, 224 (Wis.1998) (employees are protected from compliance with an unreasonable covenant “by rendering that covenant void and unenforceable. * * * The public policy is not to create a cause of action, but to void the covenant”), with D’sa v. Playhut, Inc., 85 Cal.App.4th 927, 102 Cal.Rptr.2d 495 (2000) (in view of state’s prohibition of no-compete covenants, discharge for failure to sign a confidentiality agreement containing such a covenant states “public policy” cause of action, despite severability provisions 8. Choice of Law Issues. AGI, a California corporation, and Hunter, a Maryland firm, are competitors providing computer consulting services for businesses that use human resources software. Pike, a Maryland resident, worked for Hunter for 16 months in Baltimore. Her employment agreement contained a one-year no-compete clause and a Maryland choice of law clause, both of which are lawful under Maryland law. AGI recruits Pike to work in California during the one-year period. Does California’s statute prohibiting nocompete agreements apply? See The Application Group, Inc. v. The Hunter Group, 61 Cal.App.4th 881, 892, 72 Cal.Rptr.2d 73, 86 (1998) (holding it does): We are * * * convinced that California has a materially greater interest than does Maryland in the application of its law to the parties’ dispute, and that California’s interests would be more seriously impaired if its policy were subordinated to the policy of Maryland. Accordingly, the trial court did not err when it declined to enforce the contractual conflict of law provision in Hunter’s employment agreements. To have done so would have been to allow 345 an out-of-state employer/competitor to limit employment and business opportunities in California.

9. “No-Solicitation” Agreements. Should the law treat differently agreements that allow the employee to enter into a competitive business but do not allow raiding of employees or customers of the previous employer? The California courts, for example, have held that restrictions on client solicitations are enforceable despite the statutory ban on no-compete covenants. See Loral Corp. v. Moyes, 174 Cal.App.3d 268, 219 Cal.Rptr. 836 (1985). In Chernoff Diamond & Co. v. Fitzmaurice, 234 A.D.2d 200, 203, 651 N.Y.S.2d 504, 505–506 (1996), a two-year bar on solicitation of an insurance agency’s clients was upheld but on an analysis that presumably also could have been used in evaluating a no-compete agreement: * * * [N]either the duration of the restriction, i.e., two years, nor its scope is unduly burdensome. The covenant does not prohibit defendant from pursuing his profession * * * or limit him geographically. Indeed, the only restriction imposed upon him is that he is not permitted to deal with [his previous employer’s] clients. There is no reason to suppose that this limitation will prevent defendant * * * from operating a successful insurance agency. Although, within the context of this case, the restriction imposed is relatively limited in scope, we are mindful that even such a restriction on defendant’s right to pursue his livelihood should not be enforced if it is not necessary to protect the employer’s “legitimate interests”. * * * In this regard, the issue is not only whether plaintiff’s client list was confidential (which it apparently was, but only in part) but also whether defendant obtained, while in plaintiff’s employ, invaluable and otherwise unobtainable information concerning the business practices and resulting insurance needs of these clients due to his position as their trusted professional advisor. 10. Biden Administration Initiative. On July 9, 2021, President Biden issued Executive Order 14036, 89 Fed. Reg. 36987 (Jul. 14, 2021), which urged greater scrutiny of non-compete agreements under the antitrust laws, stating the President “[e]ncourages the FTC to ban or limit non-compete agreements.” See generally Eric A. Posner, “The Antitrust Challenge to Covenants Not to Compete in Employment Contracts,” 83 Antitrust L.J. 165 (2020).

NOTE: FORFEITURE-FOR-COMPETITION CLAUSES Some agreements may provide that employees who violate an otherwise reasonable restrictive covenant forfeit bonuses or other benefits. To the extent the forfeited benefits are vested pension benefits, such clauses may violate ERISA, see Clark v. Lauren Young Tire Ctr. Profit Sharing Trust, 816 F.2d 480 (9th Cir.1987); cf. Nationwide v. Darden, supra p. 11. To the extent the benefits are earned compensation, such clauses may violate state wage-payment laws, see Chapter 10, Part C. 346 One important question is whether such forfeiture-for-compensation provisions should receive the same level of judicial scrutiny as a non-compete clause. Like Seidman, some courts treat contracts providing for a penalty or forfeiture as indistinguishable from a nocompete clause. See e.g. Edwards v. Arthur Andersen, 44 Cal.4th 937 (2008); Food Fair Stores, Inc. v. Greeley, 264 Md. 105 (1972); Medtronic, Inc. v. Hedemark, Case No. A08–0987, 2009 WL 511760 (Minn. Ct. App. 2009). Others may engage in somewhat more lenient scrutiny because, it is reasoned, a forfeiture clause restrains an employee’s ability to earn a livelihood in a more limited way than does a blanket prohibition on competition. See Fraser v. Nationwide Mutual Ins. Co., 334 F.Supp.2d 755 (2004) (applying Pennsylvania law). New Jersey scrutinizes forfeiture clauses as a form of liquidated damages clause. Borteck v. Riker, Danzig, Scherer, Hypand and Perretti LLP, 179 N.J. 246 (2004). See also Burzee v. Park Ave Ins. Agency, Inc., 946 So. 2d 1200 (Fla. 5th D.C.A. 2007). New York takes an unusual approach to forfeiture clauses in compensation and benefit-related agreements, known as the “employee choice” doctrine. If the employee quits voluntarily, New York courts will generally enforce the forfeiture clause without regard to its reasonableness. See Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358 (1979). However, if the employee was terminated without cause, the clause is evaluated for the presence of a protectable interest and reasonableness of scope and duration. See e.g., Wrigg v. Junkermier, Clark, Campanella, 362 Mont. 496, 505, 265 P.3d 646 (2011) (“an employer normally lacks a legitimate business interest in a covenant when it chooses to terminate the employment relationship.”)

C. EMPLOYEE INVENTIONS RESTATEMENT OF EMPLOYMENT LAW § 8.09 American Law Institute (2015).

§ 8.09. Rights of Employees to Inventions (a) Unless otherwise agreed between the employer and the employee (§ 8.11), when an employee has not been hired or assigned to do inventive work, the employee has the right to patent an invention the employee creates, even if the invention is created during working hours or with the use of the employer’s resources. (b) Unless otherwise agreed between the employer and the employee (§ 8.11), an employee hired or assigned to

do inventive work has presumptively assigned to the employer any patents on inventions relating to the work for which the employee was hired (compare § 8.11). 347

NOTES AND QUESTIONS 1. Different Default Rules in Copyright Law vs. Patent Law. Under U.S. copyright law, the employer is considered to be the author of a “work made for hire” when it is prepared by an employee in the scope of his employment. The default rule under U.S. patent law, however, is different: absent agreement, the invention belongs to the inventing party, whether the inventor be an employee or an independent contractor, unless the employee was hired to invent. “Unless the employee is hired to perform inventive work, the law assumes the employee is the rightful owner of any inventions the employee creates. An employee hired to perform inventive work, by contrast, is typically bound by an agreement to assign the patent rights to any resulting invention to the employer.” Employment Restatement § 8.09. Comment a. See Bruce H. Little & Craig W. Trepanier, Untangling the Intellectual Property Rights of Employers, Employees, Inventors, and Independent Contractors, 22 Employee Rels. 49, 56 (No. 4, Spring 1997); see also Samuel Estreicher & Kristina Yost, University IP: The University as Coordinator of the Team Production Process, 91 Indiana L. J. 4 (2016). 2. Statutory Restrictions on Assignment of Inventions. Employers often require their employees to assign their inventions to the firm. Some states restrict such assignments. For example, Cal. Labor Code § 2870 (1999) provides in relevant part: § 2870 Application of provision that employee shall assign or offer to assign rights to invention to employer (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights to an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. * * * 3. “Holdover” Agreements. Some employers also require employees to sign so-called “holdover” agreements, which purport to reach inventions conceived after termination of employment “if conceived as a result of and attributable to work done during such employment and [which] relate[ ] to a method, substance, machine, article of manufacture or improvements therein within the scope of business” of the employer. Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 615, 641, 542 A.2d 879 (1988). Recognizing the value of a company-sponsored culture of “creative brainstorming” and the legitimacy in some circumstances of providing protection to employers even in the absence 348 of trade secrets or other confidential information, the Ingersoll-Rand court declined to adopt a rule of per se invalidity but barred enforcement of the putative assignment in that case as a matter of state common law: The roofs and walls of underground mines]. * * * Ingersoll-Rand did not assign Ciavatta to a “think tank” division in which he would likely have encountered on a daily basis the ideas of fellow Ingersoll-Rand personnel regarding how the split set stabilizer could be improved or how a more desirable alternative stabilizer might be designed. More importantly, the information needed to invent the split set stabilizer is not that unique type of information that we would deem protectable even under our expanded definition of a protectable interest. All of the specifications and capabilities of the Ingersoll-Rand split set stabilizer were widely publicized throughout industry and trade publications. 110 N.J. at 609. See Catherine L. Fisk, The Story of Ingersoll-Rand v. Ciavatta: Employee Inventors in Corporate Research & Development: Reconciling Innovation with Entrepreneurship, Ch. 6 in Employment Law Stories (Samuel Estreicher & Gillian Lester eds. 2007). 7

The ITSA has overruled AMP’s implications regarding the durability of an agreement to protect trade secrets. AMP followed a line of Illinois cases questioning the validity of agreements to keep trade secrets confidential where those agreements did not have durational or geographical limits. AMP, 823 F.2d at 1202. The ITSA, in reversing those cases, provides that “a contractual or other duty to maintain secrecy or limit use of a trade secret shall not be deemed to be void or unenforceable solely for lack of durational or geographical limitation on the duty.” 765 ILCS 1065/8(b)(1). * * * 1 Law firm partnership agreements represent an exception to the liberality with which we have previously treated restraints on competition in the learned professions. Our decisions invalidating anti-competitive clauses in such agreements were not based on application of the common law rule, but upon enforcement of the public policy reflected in DR 2–108(A) of the Code of Professional Responsibility (see, 22 NYCRR 1200.13). There is no counterpart to DR 2–108(A) in the rules regulating the ethical conduct of accountants. * * *

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PART 4 REGULATION OF COMPENSATION ■■■

Until this point the book has treated two principal approaches of the American legal regime toward the regulation of employer decisions; first, the prohibition of decisions having particular “bad” reasons or unjustified “bad” effects; and second, the enforcement of contractual commitments, both express and implied. In general, U.S. employment law allows the parties to the relationship to write their own contracts, unlike the tradition in at least continental Europe of a significant government role in the process. In this chapter, we look at an area where the federal government has established minimum substantive standards that set a floor for private bargaining. Chapter 10 explores the federal requirement that employers pay specified minimum wages and overtime premiums to certain employees for work in excess of 40 hours in a workweek. We also consider state laws regulating the payment of wages as well as common law remedies involving compensation.

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CHAPTER 10 COMPENSATION ■■■

Introduction Compensation is, of course, a fundamental term of the employment contract. It is a subject determined by the agreement of the parties, subject to regulation. This chapter focuses on statutory systems that set the legal framework for bargaining over wages and salary.

A. WAGE AND HOUR LAWS The principal federal law regulating compensation and work hours is the Fair Labor Standards Act of 1938 (FLSA). The purpose of the FLSA, in President Franklin D. Roosevelt’s words, was to give “all our able-bodied working men and women a fair day’s pay for a fair day’s work. * * * A self-supporting and self-respecting democracy can plead no justification for the existence of child labor, no economic reason for chiseling workers’ wages or stretching workers’ hours.” Franklin D. Roosevelt, Message to Congress on Establishing Minimum Wages and Maximum Hours, May 24, 1937, quoted in Jonathan Grossman, Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage, 101 Monthly Lab. Rev. 22 (1978). The FLSA contains three core substantive obligations: (1) payment of a prescribed minimum wage (§ 206(a)); (2) payment of an overtime premium (1 1/2 times the employee’s basic rate of pay) for work in excess of 40 hours in any workweek (§ 207(a)); and (3) prohibition of employment of children under the age of 12, with special exceptions for certain types of agricultural work and child actors (§ 212). Other provisions impose on employers (4) recordkeeping (§ 211) and (5) nonretaliation (§ 215(a)(3)) duties. The Act is enforced by the Wage and Hour Division of the Department of Labor (DOL). DOL has authority to subpoena records and bring lawsuits for injunctive relief and for back-pay relief on behalf of present or former employees. Employees also may sue on their own, without any requirement to file a complaint with DOL, and can do so both individually and on behalf of others “similarly situated” (who consent to be represented in this manner).

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Generally the minimum wage, if applicable, must be paid in cash or negotiable instruments. However, under § 3(m) the “wage” paid can include “the reasonable cost, as determined by the Secretary of Labor, to the employer of furnishing such employee with board, lodging or other facilities, if such board, lodging or other facilities are customarily furnished by such employer to his employees * * * .” 29 U.S.C. § 203(m). An employer may not, however, set off against the required minimum wages the value of goods, including gas and supplies from the company store, furnished to employees. See, e.g., Brennan v. Heard, 491 F.2d 1 (5th Cir.1974). The FLSA acts as a wage floor, upon which state or local governments can build. As of March 2022, the federal minimum wage is $7.25. (The Department of Labor’s website provides the current minimum wage.) The minimum wage set in 1938 when the FLSA was enacted was $.25, or about $4.60 in 2020 dollars. The minimum wage peaked in 1968 at just over $12.00 in 2020 dollars. The period since the last revision to $7.25 in 2009 is the longest in the history of the FLSA. Until 1970, the minimum wage roughly tracked increases in labor productivity. Had it continued to do so for the next half century, while labor productivity doubled, the minimum wage would be over $24.00. The definition of “wage” in § 203(m) of the statute also allows employers in reaching the general statutory minimum wage ($7.25) for “tipped employees” to include “tips received” in addition to a much lower statutorily set minimum wage for such employees, now only $2.13. There has been considerable criticism of this special provision for tipped employees, who generally work in the hospitality and restaurant industry. There also has been a political debate about how to more specially define “tipped employee,” which the statute provides is “any employee in an occupation in which he customarily and regularly receives more than $30.00 a month in tips.” Department of Labor regulations, recognizing that some employees have dual jobs, only one of

which is tipped, have specified that tip credits may be assigned only for time in the tipped job, which may include time related to this occupation, such as “cleaning or setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” DOL guidance further stated, however, that such related time should not exceed 20% of the employee’s work week. The Trump administration’s DOL rescinded this 20/80 guidance and in 2020 proposed a rule allowing an employer to take a tip credit for the time a tipped employee performs related, non-tipped duties, as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after tipped duties. In June, 2021, the Biden administration DOL published a proposal to withdraw the Trump administration rule and replace it with a rule that states that to be tip credited any related time that “directly supports” tipped work must not be “substantial.” The rule would further provide that related work would be substantial if it “(1) exceeds, in the aggregate, 20 percent of the employee’s hours worked 353

during the workweek or (2) is performed for a continuous period of time exceeding 30 minutes.” A majority of states (30 plus the District of Columbia by 2022) have enacted minimum wages exceeding the federal minimum. Some states have passed laws providing for a gradual increase in the minimum wage over time or that indexes their minimum wage to the rate of inflation. In recent years, a national “fight for 15” movement has prompted at least seven states, including California and New York, and several major cities, to adopt laws that would result in a $15 per hour minimum wage within a few years. In recent years, bills also have been introduced in Congress, and passed in the House of Representative, to gradually impose a $15.00 minimum wage. For instance, the Raise the Wage Act of 2021 would have phased in the $15.00 minimum by 2025 and also would have gradually phased out the special treatment of tipped workers.

1. POLICY DEBATE ON ECONOMIC IMPACT OF MINIMUM WAGE Economists generally acknowledge that the minimum wage by lifting some workers’ wages, aims to redistribute income, and rescues some from poverty. Economists also maintain that raises in wages beyond those set in a competitive economy will at least at some point result in a decline in employment by encouraging the replacement of labor by machinery or labor from non-U.S. sources. Proposed increases to the minimum wage thus are often opposed on the ground that higher wages will cause employers to respond by reducing work hours or by declining to hire new workers. To test this argument, economists David Card and Alan Krueger devised an ingenious study of the labor effects of minimum wage increases. Before a planned 1992 increase in the New Jersey minimum wage from $4.25 to $5.05 per hour, they called fast food restaurants in both New Jersey and Pennsylvania, where the minimum wage remained flat. They called the restaurants again after the New Jersey increase. They observed a 10% rise in the starting wage in the New Jersey restaurants, and a small increase in the number and percentage of full-time employees. The average number of hours the restaurants were open was unaffected by the wage increase. See David Card and Alan Krueger, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, 84 Amer. Econ. Rev. 774 (1994); and their Myth and Measurement: The New Economics of the Minimum Wage (1997). The Card-Krueger study (described above) markedly influenced policy debates over the 1996–97 increase in the federal minimum wage. The study also prompted substantial debate. In a subsequent law review article, for instance, Professor Daniel Shaviro1 observed that the “widely shared view, based on empirical research concerning teenagers that was assumed to apply more generally, was that a 10 percent increase in the minimum wage would likely reduce the hours worked by low wage workers by 1 to 3 percent, while a 25 percent hike would reduce such hours by 3.5 to 5.5 percent.” Where increases in the minimum wage reduce available hours, “the resulting disemployment might be borne disproportionately by those who were both least skilled and least affiliated in the workplace. . . . Second, suppose that low-wage jobs are an important stepping stone to better work opportunities in the future. If the reduction in hours worked means fewer jobs, not just fewer hours per job, then a minimum wage increase might reduce the present value

of expected lifetime income for low-wage workers, even if upon enactment it increased their current-year income.” Consider also the contrary perspective of Jared Bernstein, President Biden’s former chief economist and policy advisor (from 2009–11)2: “[O]pponents of increases in the minimum continue to raise the same objection: the increase will lead to job loss. * * * The state of economists’ understanding of the issue was recently summarized by Nobel laureate Robert Solow, who noted that ‘the main thing about this research is that the evidence of job loss is weak. And the fact that the evidence is weak suggests that the impact on jobs is small.”

NOTES AND QUESTIONS 1. Some subsequent research generally supports the Card-Krueger results for certain levels of minimum-wage rise. See Hristos Doucouliagos and T.D. Stanley, Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis, 47 British J. Of Ind. Rel. 406 (2009) (meta-analysis finding no effect on employment from minimum wage increase); Arindrajit Dube, T. William Lester & Michael Reich, Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties, 92 Rev. of Econ. & Stat. 945 (2010) (comparing adjacent counties in different states and finding no effect on 355 employment rates); but see, e.g., David Neumark, J.M. Ian Salas & William Wascher, More on Recent Evidence on the Effects of Minimum Wages in the United States, NBER Working Paper 20619 (Oct. 2014) (questioning Dube et al.’s methodology). 2. Congressional Budget Office Report on the Raise the Wage Act of 2021. In order to determine the budgetary impact of legislation under consideration to phase in a $15.00 hourly minimum wage, Congressional leaders asked nonpartisan economists at the CBO to make an assessment. The report concluded that the legislation would have both benefits and costs. In an average week in 2025, twenty seven million workers would have higher wages and .9 million would rise above a poverty threshold. However, employment also would be reduced by 1.4 million. CBO, Report on the Budgetary Effects of the Raise the Wage Act of 2021, Feb., 2021. 3. Policy Goals of Minimum Wage Increases. What are the social benefits of a minimum-wage increase? Consider the following arguments: a. Wealth Redistribution. Professor Gottesman argues that minimum wage laws offer a politically feasible, if less than optimal, means of effecting progressive wealth redistribution to the less well-off, because political majorities will support “making work pay” where they will not vote for outright wealth transfers. Michael H. Gottesman, Whither Goest Labor Law: Law and Economics in the Workplace, 100 Yale L.J. 2767, 2790–93 (1991). In his view, the redistributive (and any job displacement) effects of a minimum wage increase are multiplied because pay structures in collective bargaining agreements (and even among nonunion employers that pay wages comparable to the union sector) are often keyed to a multiple of the statutory minimum wage. b. Strengthening Workplace Affiliation. A related argument for “making work pay” is that higher wages will improve incentives for marginal workers to leave welfare rolls and enter (and remain) in the workforce. Nobel laureate economist Edmund Phelps is prominently associated with this view. See Edmund S. Phelps, Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (1997). Phelps’s policy recommendation, however, is not to legislate increases in the minimum wage but, rather, to offer firms a subsidy for each low income worker they hire. 4. Accounting for Conditions of the Local Economy? One problem with a nationally uniform minimum wage is that it fails to reflect the diversity of local conditions; the FLSA permits “upward” variability—as states can enact higher minimum wages—but not “downward” variability below the FLSA “floor”. Would it be preferable, instead of the FLSA model, to adopt (i) the one-time British approach of allowing regional and local wage councils (comprised of workers’ and employers’ representatives with an odd number of independent members) to set wage minima (see David Metcalf, The Low Pay Commission and the National Minimum Wage, 109 Econ. J. F46 (No. 453, Feb. 1999)); or (ii) the former German approach of dispensing with statutory wage minima in 356 favor of collectively bargained standards that could be applied industry-wide once a certain percentage of the industry worked under collective agreements? 5. “Prevailing Wage” Laws. Entities that contract with the federal government on public projects are subject to federal “prevailing wage” statutes. See Davis-Bacon Act, 40 U.S.C. §§ 276a et seq. (requires prevailing wages and benefits for laborers and mechanics engaged in the construction, alteration or repair of a public work project pursuant to a federal contract in excess of $2000); Walsh-Healy Government Contracts Act, 41 U.S.C. § 35 et seq. (covers companies engaged in providing manufacturing services or supplies pursuant to federal contracts in excess of $10,000); Service Contract Labor Standards Act, 41 U.S.C. §§ 351 et seq. (covers all contracts for services

to the federal government in excess of $2500); Contract Work Hours and Safety Standards Act, 40 U.S.C. § 327 et seq. (overtime obligations for federal construction contractors). Unlike the federal minimum wage law, the “prevailing wage” is not a single federal rate, but a rate calculated at the state and county level that takes into account the type of service provided. (The applicable prevailing wage rates are available at www.dol.gov.) The federal agency seeking bids from contractors is responsible for providing applicable prevailing wage rates in soliciting bids. Many states impose similar or more demanding obligations on their contractors. See e.g., Cal. Labor Code § 1815.

2. DEFINING COMPENSABLE WORKING TIME The FLSA does not set a limit on the numbers of hours a day or week an individual can work, other than to require payment of the overtime premium for work in excess of 40 hours a week. California imposes an overtime premium for work beyond 8 hours a day and for the first 8 hours worked on the seventh consecutive day of work in a workweek; double pay for hours above this threshold. Cal. Labor Code § 510(a). New York has a “spread of hours” (i.e., the interval between the beginning and end of an employee’s workday, including time off for meals) law requiring an additional hour of pay for workdays that exceed 10 hours. See 12 NYCRR §§ 142–2.4(a) & 142–2.18. For employers to record, calculate and pay wages, they must first determine what does and does not qualify as working time. As you may recall from Chapter 1, the FLSA broadly defines “[e]mploy” to include “suffer or permit to work” (29 U.S.C. § 203(g)). In 1947, Congress amended the FLSA through the Portal-to-Portal Act, 61 Stat. 86, 29 U.S.C. § 254 et seq., in reaction to a series of Supreme Court decisions which held that the FLSA required compensation for time spent by employees traveling from “portal to portal” (the cases involved walking from iron ore portals to underground working areas and walking from time clocks located near the plant entrance to the areas where they began productive labor). In these rulings, the Court also defined 357

“workweek” for FLSA purposes to include all time the employee was required to be on the employer’s premises. See Tennessee Coal, Iron & R. Co. v. Muscoda Local No. 123, 321 U.S. 590, 64 S.Ct. 698, 88 L.Ed. 949 (1944); Armour & Co. v. Wantock, 323 U.S. 126, 65 S.Ct. 165, 89 L.Ed. 118 (1944); Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 66 S.Ct. 1187, 90 L.Ed. 1515 (1946). Under the Portal-to-Portal Act amendments, the following activities are generally non-compensable: (1) “walking, riding, or traveling to or from the actual place of performance of the principal activity activities which [the] employee is employed to perform”; and (2) “activities which are preliminary or postliminary to said principal activity or activities, which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities.” 29 U.S.C. § 254(a). In Steiner v. Mitchell, 350 U.S. 247, 76 S.Ct. 330, 100 L.Ed. 267 (1956), the question was whether workers in a battery plant must be paid as a part of their “principal” activities for the time incident to changing clothes at the beginning of the shift and showering at the end, where they must make extensive use of dangerous materials. The Court held that these activities were compensable; “activities performed either before or after the regular work shift, on or off the production line, are compensable. . . [T]hose activities are an integral and indispensable part of the principal activities for which covered workmen are employed and are not specifically excluded by [29 U.S.C. § 254 (a)(1)].” 350 U.S. at 256. See also IBP, Inc. v. Alvarez, 546 U.S. 21, 126 S.Ct. 514, 163 L.Ed.2d 288 (2005) (walking from changing area to place of production and waiting to take off required equipment held compensable but not walking to the changing area and waiting to put on required equipment). See also Integrity Staffing Sol. Inc. v. Busk, 574 U.S. 27, 135 S.Ct. 513, 190 L. Ed.2d 410 (2014) (time Amazon warehouse staffers waited to go through security held not compensable). Once work has begun, courts apply the concept of a “continuous workday.” The Court held in Alvarez that “any activity that is ‘integral and indispensable’ to a ‘principal activity’ is itself a ‘principal activity’ under [§ 254(a)]. Moreover, during a continuous workday, any walking time that occurs after the beginning of the employee’s first principal activity and before the end of the employee’s last principal activity is excluded from the scope of that provision, and as a result is covered by the FLSA.” 546 U.S. at 37. The next case, Bright v. Houston Northwest Medical Center Survivor, Inc. examines the related question of whether time spent “on call” qualifies as working time. 358

BRIGHT V. HOUSTON NORTHWEST MEDICAL CENTER SURVIVOR, INC.

U.S. Court of Appeals for the Fifth Circuit (en banc), 1991. 934 F.2d 671.

GARWOOD, J. This is a former employee’s suit for overtime compensation under section 7(a)(1) of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 207(a)(1). The question presented is whether “on-call” time the employee spent at home, or at other locations of his choosing substantially removed from his employer’s place of business, is to be included for purposes of section 7 as working time in instances where the employee was not actually “called.” The district court granted the motion for summary judgment of the employer, defendant-appellee Houston Northwest Medical Center Survivor, Inc. (Northwest), ruling that this on-call time was not working time and dismissing the suit of the employee. * * * We * * * affirm the district court’s summary judgment for the employer. Bright went to work for Northwest at its hospital in Houston in April 1981 as a biomedical equipment repair technician, and remained in that employment until late January 1983 when, for reasons wholly unrelated to any matters at issue here, he was in effect fired. Throughout his employment at Northwest, Bright worked a standard forty-hour week at the hospital, from 8:00 a.m. to 4:30 p.m., with half an hour off for lunch, Monday through Friday, and he was paid an hourly wage. Overtime in this standard work week was compensated at time and a half rates, and it was understood that overtime work required advance approval by the department head, Jim Chatterton. When Bright started at the hospital, his immediate supervisor was Howard Culp, the senior biomedical equipment repair technician. Culp had the same work schedule as Bright. However, throughout his off-duty hours, Culp was required to wear an electronic paging device or “beeper” and to be “on call” to come to the hospital to make emergency repairs on biomedical equipment. Culp, as Bright knew, was not compensated for this “on-call” time (although Culp apparently was compensated when he was called). In February 1982 Culp resigned, and Bright succeeded him as the senior biomedical equipment repair technician and likewise succeeded Culp in wearing the beeper and being on call throughout all his off-duty time. Bright remained in that role throughout the balance of his employment at Northwest. The only period of time at issue in this lawsuit is that when Bright had the beeper, namely from February 1982 to the end of his employment in January 1983. Bright was not compensated for his on-call time, and knew this was the arrangement with him as it had been with Culp. During the “on-call” time, if Bright were called, and came to the hospital, he was compensated by four hours [of] compensatory time at his then regular hourly rate (which apparently was some $9 or $10 per hour) for each such call. This 359

compensation was effected by Bright simply working that many less hours the following workday or days: for example, if Bright were called on a Monday evening, he might work in his regular workshift only from 8:00 a.m. until noon on the following Tuesday, but would be paid for the entire eight hours on that day. There is no evidence that these calls on average (or, indeed, in any given instance) took as much as two hours and forty minutes (two-thirds of four hours) of Bright’s time. This case does not involve any claim respecting entitlement to compensation (overtime or otherwise) for time that Bright actually spent pursuant to a call from Northwest received while he was on call. It is undisputed that during the on-call time at issue Bright was not required to, and did not, remain at or about the hospital or any premises of or designated by his employer. He was free to go wherever and do whatever he wanted, subject only to the following three restrictions: (1) he must not be intoxicated or impaired to the degree that he could not work on medical equipment if called to the hospital, although total abstinence was not required (as it was during the daily workshift); (2) he must always be reachable by the beeper; and (3) he must be able to arrive at the hospital within, in Bright’s words, “approximately twenty minutes” from the time he was reached on the beeper. Bright’s answer to interrogatories reflect that in February 1982, when he commenced wearing the beeper and being on call, he was living about three miles, on average a fifteen-minute drive, from the hospital, but that in about July 1982 he moved his residence to a location some seventeen miles, on average a thirtyminute drive, from the hospital, and continued living there throughout all the remaining some five or six months of his Northwest employment. * * * Bright admitted while on call he not only stayed at home and watched television and the like, but also engaged in other activities away from home, including his “normal shopping” (including supermarket and mall shopping) and “occasionally” going out to restaurants to eat. * * * Bright also testified on deposition that he was “called” on “average” two times during the working week (Monday through Friday) and “ordinarily two to three times” on the weekend. * * * At issue here is whether the time Bright spent on call, but uncalled on, is working time under section 7, which provides in relevant part as follows: “Except as otherwise provided in this section, no employer shall employ any of his employees * * * for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)

(1). *** Here, the undisputed facts show that the on-call time is not working time. In such a setting, we have not hesitated to so hold as a matter of law. * * * 360

Armour [& Co. v. Wantock, 323 U.S. 126, 65 S. Ct. 165, 89 L.Ed. 118 (1944)], and Skidmore [v. Swift & Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944)] clearly stand for the proposition that, in a proper setting, on-call time may be working time for purposes of section 7. But those decisions also plainly imply that that is not true of employer-required on-call time in all settings. In Skidmore the Court noted, with at least some degree of implied approval, the administrative interpretations that “in some occupations * * * periods of inactivity are not properly counted as working time even though the employee is subject to call. Examples are an operator of a small telephone exchange where the switchboard is in her home and she ordinarily gets several hours of uninterrupted sleep each night; or a pumper of a stripper well or watchman of a lumber camp during the off season, who may be on duty twenty-four hours a day but ordinarily ‘has a normal night’s sleep, has ample time in which to eat his meals, and has a certain amount of time for relaxation and entirely private pursuits.’ Exclusion of all such hours the Administrator thinks may be justified.” Id. 65 S. Ct. at 163–64. *** Bright’s case is wholly different from Armour and Skidmore and similar cases in that Bright did not have to remain on or about his employer’s place of business, or some location designated by his employer, but was free to be at his home or at any place or places he chose, without advising his employer, subject only to the restrictions that he be reachable by beeper, not be intoxicated, and be able to arrive at the hospital in “approximately” twenty minutes. During the period in issue he actually moved his home—as Northwest knew and approved—to a location seventeen miles and twenty-five or thirty minutes away from the hospital, as compared to the three miles (and some fifteen minutes) away that it had been when he started carrying his beeper. Bright was not only able to carry on his normal personal activities at his own home, but could also do normal shopping, eating at restaurants, and the like, as he chose. * * * [W]e have described “the critical issue” in cases of this kind as being “whether the employee can use the [on-call] time effectively for his or her own purposes.” Halferty [v. Pulse Drug Co., Inc.], 864 F.2d [1185,] 1189 [(5th Cir.1989)]. This does not imply that the employee must have substantially the same flexibility or freedom as he would if not on call, else all or almost all on-call time would be working time, a proposition that the settled case law and the administrative guidelines clearly reject. Only in the very rarest of situations, if ever, would there be any point in an employee being on call if he could not be reached by his employer so as to shortly thereafter—generally at least a significant time before the next regular workshift could take care of the matter—be able to perform a needed service, usually at some particular location. 361

Within such accepted confines, Bright was clearly able to use his on-call time effectively for his own personal purposes. *** The panel majority * * * placed crucial reliance on the fact that Bright throughout the nearly one year in issue never had any relief from his on-call status during his nonworking hours. * * * [T]he panel majority inferentially conceded that for any given day or week of on-call time, Bright was as free to use the time for his own purposes. * * * But the panel majority claims that a different result should apply here because Bright’s arrangement lasted nearly a year. We are aware of no authority that supports this theory, and we decline to adopt it. * * * Further, the FLSA is structured on a workweek basis. Section 7, at issue here, requires time and a half pay “for a workweek longer than forty hours.” What Bright was or was not free to do in the last week in September is wholly irrelevant to whether he worked any overtime in the first week of that month. As we said in Halferty, the issue “is whether the employee can use the time effectively for his or her own purposes,” and that must be decided, under the statutory framework, on the basis of each workweek at the most. JERRE S. WILLIAMS, J., with whom JOHNSON, J., joins, dissenting. Admittedly, there are jobs which because of location are in isolated areas. That is in the nature of the jobs. But the isolation is not the result of an employer’s direction requiring employee on-call availability during off-duty hours. The employer has nothing to do with the restricted recreational and living accommodations in an isolated job. That is not an on-call situation at all. In contrast, here it is the employer who is enforcing a unique restriction upon a particular employee as part of the particular on-

call work assignment. This is of the essence of the thrust of potential work time under the Fair Labor Standards Act.

NOTES AND QUESTIONS 1. Suppose that a firefighter’s job duties require him to be on call for 24 hours at a time. While on call, the firefighter must report to the firehouse within 20 minutes of being paged. The firefighter receives an average of 3 to 5 calls per on-call period. Applying the standard articulated in Bright v. Houston, is the firefighter’s on-call time compensable? See Renfro v. City of Emporia, Kansas, 948 F.2d 1529 (10th Cir.1991); 29 C.F.R. §§ 553.221, 785.17. 2. In 2009, a class of T-Mobile employees brought an FLSA claim for unpaid wages, alleging: Throughout the relevant period, Plaintiffs were provided with a Company Blackberry [smartphone] or other smart device and were required to review and respond to T-Mobile-related emails and text messages at all hours of the day, whether or not they were punched 362 into T-Mobile’s computer-based timecard system. Plaintiffs were also required to take and place telephone calls to other TMobile personnel and customers relating to store staffing, sales, and/or discounting of handsets, customer satisfaction concerns and other T-Mobile business. Plaintiffs were also required to participate on frequent conference calls, typically at least one time per week[.] See Agui v. T-Mobile USA, Case No. 1:09-cv-02955-RJD-RML (E.D.N.Y. filed July 7, 2009). The case settled in 2010 for an undisclosed amount. Was the time the T-Mobile employees spent after hours answering calls and responding to emails compensable? Was the time waiting for such calls or emails compensable? 3. An employer cannot avoid its obligations under the FLSA by adopting a policy prohibiting employees from working overtime when its work assignments effectively require overtime work. See Lyle v. Food Lion, Inc., 954 F.2d 984 (4th Cir.1992) (employer must pay for unauthorized overtime work). Suppose you represent an employer that has adopted a no-overtime policy, where an employee consistently works in excess of 40 hours per week. What advice would you give to that employer on how to (a) handle the employee that worked overtime, and (b) prevent the problem from recurring? Does the FLSA prohibit discharging the employee? 4. “Sleep Time”. The Labor Department’s regulations permit agreements between an employer and an employee on 24-hour duty to exclude not more than 8 hours for “a bona fide regularly scheduled sleeping period,” provided (i) adequate facilities are provided, (ii) the employee can usually enjoy an uninterrupted night’s sleep, (iii) sleep time interruptions are compensated, and (iv) the entire sleep period is compensated if the employee cannot receive at least 5 hours’ sleep during the scheduled period. 29 C.F.R. § 785.22. For employees residing at their employer’s premises on a permanent basis or “for extended periods of time,” the regulations take into account a reasonable agreement between the parties. Id. 785.23. 5. Live-In Domestic Workers. When an employee, such as a nanny or housekeeper, lives and works in a private residence, demarcations between working and non-working time can be unclear. As with other employees, the definition of working time depends upon the agreement between the parties. However, for free time to qualify as non-working, it must be of “sufficient duration to enable the employee to make effective use of time,” and the employee must have “complete freedom from all duties [and] may either leave the premises or stay on the premises for purely personal pursuits.” 29 C.F.R. § 552.102. See also id. § 530.1(d) (regulating “homework”—the industrial production of goods from one’s home). 6. Impact of Small Discrepancies. Seemingly small discrepancies in timekeeping can result in large damage awards when applied to many employees over a long period of time. In Penaloza v. PPG Indus. Inc., Case No. BC471369, 2013 WL 2917624 (Cal Super. Ct. May 20, 2013), an employer’s practice of rounding employee timecards at the start and end of a shift 363 underpaid employees nearly 80,000 hours in the aggregate, producing unpaid wage liability of $1.3 million. Cf. See’s Candy Shops, Inc. v. Superior Court, 210 Cal.App.4th 889 (2012) (rounding permissible where it produces no aggregate loss to employees). 7. Sending Workers Home Early Without Pay for the Full Day. The FLSA does not penalize employers for not providing advance notice of a change in scheduled work hours or sending workers home early. However, some state or local laws provide for “reporting time” pay, requiring employers to pay for a certain number of hours when they send an employee home early. See e.g. 12 N.Y.C.R.R. § 142–2.3, 8 Cal. Code Regs. § 11040. See generally Charlotte Alexander, Anna Haley-Lock & Nantiya Ruan, Stabilizing Low-Wage Work, 50 Harv. C.R.-C.L. L. Rev. 1 (2015).

3. REGULAR RATE AND OVERTIME-PREMIUM PAY

The FLSA requires employers to pay a premium rate of 1.5 times their regular rate for each hour worked in excess of 40 hours in a week. To calculate the overtime premium, an employer must first calculate the “regular rate” of an employee’s pay. See 29 U.S.C. § 207(e) (the “regular rate” includes “all remuneration for employment paid to, or on behalf of, the employee.”) In general, the overtime calculation—both the “regular rate” and hours worked—is based on each workweek. This calculation is straightforward for employees who are compensated on an hourly basis. Calculating an employee’s overtimepremium pay becomes more complicated when employees are paid additional amounts (such as a piece rate pay or commissions). Some forms of compensation are included in the regular rate and others are not. Non-discretionary bonuses, commissions, and piece rate pay are included in the “regular rate.” Bonuses awarded at the employer’s sole discretion, gifts, employee benefits, and stock options are not included in the regular rate. See 29 U.S.C. § 207(e); 29 U.S.C. § 203(t) (tips count towards minimum wage but are generally not included in the regular rate). To calculate the regular rate for non-hourly forms of compensation, the employer must add up the total weekly compensation, and then divide it by the number of hours worked. That provides a regular rate from which the overtime premium can be calculated. Suppose that a hotel cleaning employee gets paid $3 per room (a form of piece rate compensation). If the employee cleans 150 rooms over the course of 50 hours in a week, the employee’s regular rate is $9.00 per hour ($3 × 150/50). The employee is owed an overtime rate of $13.50, and the employer should pay the employee $495 (40 × $9 + 10 × 13.50) for that week’s work. In the case of a non-discretionary bonus, calculating the regular rate associated with the bonus can be difficult where the bonus is earned over many weeks or months. In such cases, the regulations permit the employer 364

to defer payment of the fractional increase in overtime premium until such time as the bonus is “ascertainable.” 29 C.F.R. § 778.209. Once ascertainable, “it must be apportioned back over the workweeks of the period during which it may be said to have been earned. The employee must then receive an additional amount of compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week.” Id.

NOTES AND QUESTIONS 1. Following the example above, suppose that a less productive hotel cleaning employee is paid $3 per room, but only cleans 100 rooms in 50 hours. How much must the employee be paid to comply with the FLSA’s minimum wage and overtime rules? See McLaughlin v. Dial America Mktg., Inc., 716 F.Supp. 812 (D.N.J.1989). 2. An investment bank provides its traders an annual “discretionary performance bonus” keyed to the profitability of the firm generally and the profits generated by the trading department. In existence for five years, the bank has awarded such a bonus, amounting to 25% of average compensation, in four of the years. Is the bonus part of “regular pay”? See 29 C.F.R. § 778.211(b). 3. Justifications for Overtime Regulation. Consider the following justifications for regulating overtime work. What assumptions does each make about the way employers and employees make decisions? a. Work-Sharing. A principal justification offered for requiring payment of an overtime premium is that employment levels should increase when it becomes more expensive for employers to use incumbent workers for work beyond the normal workweek. But see John T. Addison & Barry T. Hirsch, The Economic Effects of Employment Regulation: What Are the Limits?, 141–42 in Government Regulation of the Employment Relationship 145 (Bruce E. Kaufman ed., 1997). b. Expanding Leisure Time. A related justification for the overtime premium is that by creating a financial disincentive for work beyond the regular workweek, the FLSA expands the leisure time (with associated health benefits) available to workers. Note that the FLSA, unlike some of the European laws, does not prohibit employers from compelling employees to work overtime as long as the overtime premium is paid. See generally Todd D. Rakoff, A Time for Every Purpose: Law and the Balance of Life 65–66 (2002); Shirley Lung, Overwork and Overtime, 34 Ind.L.Rev. 51 (2005). c. “Making Work Pay”. Like the minimum wage requirement, the overtime premium requirement benefits incumbent workers who would not receive such a premium in the absence of a legal mandate. 4. “Comp” Time. The FLSA does not permit private employers to provide in lieu of overtime pay to provide “compensatory time,” i.e., paid time off 365 equivalent to the hours of overtime work. 29 U.S.C. § 207(o)(1) (compensatory time permissible only for state and local government

employees). 5. The “Fluctuating Work Week” Method. After Walling v. Belo Corp., 316 U.S. 624 (1992), the DOL has permitted use of a “fluctuating work week” method of calculating pay and overtime for nonexempt salaried employees with irregular schedules. See 29 C.F.R. § 778.114 (“An employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid him pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many.”) The employee receives for hours worked above forty hours in any week an additional half pay per hour beyond the straight time pay calculated for those hours by dividing the weekly salary and any bonuses by the total hours worked that week. In May, 2020 the DOL issued a final rule amending § 778.114, clarifying that employers can provide bonuses, premium payments, commissions, and hazard pay to employees compensated under the fluctuating work week method. See also Overnight Motor Transp. Co., Inc. v. Missel, 316 U.S. 572, 62 S. Ct. 1216, 86 L. Ed. 1682 (1942). The method may also be used in calculating damages in overtime misclassification cases. See, e.g., Urnikis-Negro v. American Family Property Services, 616 F.3d 665 (7th Cir. 2010).

B. EXEMPTIONS FROM MINIMUM WAGE AND OVERTIME COVERAGE The FLSA contains exemptions from minimum wage and/or overtime obligations for several categories of employees. Table 1, below, summarizes several of these exclusions, too numerous to list in complete form. The broadest and most complex of these are the so-called “white collar” exemptions, which we examine in detail. The employer bears the burden of establishing that an employee’s position satisfies the requirements for an exemption. Mitchell v. Kentucky Finance Co., 359 U.S. 290 (1959). The damages associated with misclassifying a position as exempt can be substantial, especially where the classification affects many employees and the employees are highly compensated. Employers do not in general track the hours worked by salaried employees; the employer will often lack documentation of hours worked when salaried employees have been found to be misclassified as overtime-exempt. As the Court held in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 66 S.Ct. 1187, 90 L.Ed. 1515 (1946), an employer’s violation of its recordkeeping obligations under 29 U.S.C. § 211(c), does not provide a defense to liability and indeed can give rise to a reasonable inference for the employee not properly paid. “[E]ven where the lack of accurate records grows out of a bona fide mistake as to whether certain activities or nonactivities constitute work, the employer, having received the benefits of such work, cannot object to the payment for the work on the most accurate basis possible under the circumstances. . . . Unless the 366

employer can provide accurate estimates, it is the duty of the trier of facts to draw whatever reasonable inferences can be drawn from the employees’ evidence as to the amount of time spent in these activities in excess of the productive working time.” 328 U.S. at 688, 694, superseded on other grounds by Integrity Staffing Solutions, Inc. v. Busk, 574 U.S. 27 (2014). Table 1. Some Major Exemptions from the FLSA’s Minimum Wage and Overtime Provisions Exempt from Minimum Wage and Overtime “White collar” exemptions for executive, administrative, professional, and computer employees, as well as outside salespersons § 213(a)(1) Highly-compensated workers paid a total annual compensation of $100,000 or more 29 C.F.R. § 541.601 Certain agricultural employees § 213(a)(6) Newspaper deliverers § 213(d) Casual babysitters § 213(a)(15) Domestic workers providing companionship to the aged or infirm § 213(a)(15) Seasonal amusement park, camp or recreational employees 29 U.S.C. § 213(a)(3) Workers paid an “opportunity wage” § 206(g) Learners, apprentices and disabled workers approved by Secretary of Labor § 213(a)(7) & 214 Exempt from Overtime but Not Minimum Wage Commissioned retail sales employees paid at least 1.5x the minimum wage

§ 207(i) Live-in domestic service workers § 213(b)(21) Tipped workers § 203(t) The exemptions have different explanations. The white collar exemptions reflected the view of the enacting Congress that only blue collar workers required the statute’s protections. The exemption of domestic and agricultural workers and tipped workers may reflect social bias. Some other exemptions seem to reflect little more than the political leverage of particular industries. See, for instance, the exemption for automobile car dealership service workers treated in Note 6 at page 378. Professional baseball was able to secure a specific exemption of baseball players in the one paragraph “Save America’s Pastime Act,” included in the 2,232-page 367

2018 Omnibus Budget Act, with one Congressional sponsor and without any committee hearing or other legislative history. The domestic-worker exemptions have generated litigation and political controversies. Strongly deferring to agency rulemaking in Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007), the Court upheld a DOL regulation that applied the domestic-companionship exemption to workers employed by a party “other than the family or household using their services.” In 2013, however, the DOL in the Obama administration issued a new rule that limited both domestic worker exemptions to those employed directly by home care recipients and their families. This regulation was sustained in Home Care Assn. of America v. Weil, 799 F.3d 1084 (D.C. Cir. 2015), cert. denied, 136 S.Ct. 2506 (2016). The Court of Appeals accepted the DOL’s rationale for the regulatory change: 799 at 1089.

——————— For most of the white-collar exemptions, the employer must establish that (1) the employee is paid on a “salary basis” (the so-called “salary basis” test), and (2) the employee’s work predominantly involves exempt duties (the so-called “duties” test).

1. “SALARY BASIS” TEST AUER V. ROBBINS Supreme Court of the United States, 1997. 519 U.S. 452, 117 S.Ct. 905, 137 L.Ed.2d 79. JUSTICE SCALIA delivered the opinion of the Court. I Petitioners are sergeants and a lieutenant employed by the St. Louis Police Department. They brought suit in 1988 against respondents, members of the St. Louis Board of Police Commissioners, seeking payment of overtime pay that they claimed was owed under § 7(a)(1) of the FLSA, 29 U.S.C. § 207(a)(1). Respondents argued that petitioners were not entitled to such pay because they came within the exemption provided by § 213(a)(1) for “bona fide executive, administrative, or professional” employees. Under regulations promulgated by the Secretary, one requirement for exempt status under § 213(a)(1) is that the employee earn a specified minimum amount on a “salary basis.” 29 CFR §§ 541.1(f), 541.2(e), 541.3(e) (1996). According to the regulations, “an employee will be considered to be paid ‘on a salary basis’ * * * if under his employment agreement he regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his compensation, which 368

amount is not subject to reduction because of variations in the quality or quantity of the work performed.” § 541.118(a). Petitioners contended that the salary-basis test was not met in their case because, under the terms of the St. Louis Metropolitan Police Department Manual, their compensation could be reduced for a variety of disciplinary infractions related to the “quality or quantity” of work performed. Petitioners also claimed that they did not meet the other requirement for exempt status under § 213(a)(1): that their duties be of an executive, administrative, or professional nature. See §§ 541.1(a)–(e), 541.2(a)–(d), 541.3(a)–(d). The District Court found that petitioners were paid on a salary basis and that most, though not all, also satisfied the duties

criterion. The Court of Appeals affirmed in part and reversed in part, holding that both the salary-basis test and the duties test were satisfied as to all petitioners. * * * II The FLSA grants the Secretary broad authority to “define and delimit” the scope of the exemption for executive, administrative, and professional employees. § 213(a)(1). Under the Secretary’s chosen approach, exempt status requires that the employee be paid on a salary basis, which in turn requires that his compensation not be subject to reduction because of variations in the “quality or quantity of the work performed,” 29 CFR § 541.118(a) (1996). Because the regulation goes on to carve out an exception from this rule for “penalties imposed * * * for infractions of safety rules of major significance,” § 541.118(a)(5), it is clear that the rule embraces reductions in pay for disciplinary violations. The Secretary is of the view that employees whose pay is adjusted for disciplinary reasons do not deserve exempt status because as a general matter true “executive, administrative, or professional” employees are not “disciplined” by piecemeal deductions from their pay, but are terminated, demoted, or given restricted assignments. The FLSA did not apply to state and local employees when the salary-basis test was adopted in 1940. See 29 U.S.C. § 203(d) (1940 ed.); 5 Fed. Reg. 4077 (1940) (salary-basis test). In 1974 Congress extended FLSA coverage to virtually all public-sector employees, Pub. L. 93–259, § 6, 88 Stat. 58–62, and in 1985 we held that this exercise of power was consistent with the Tenth Amendment, Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528, 83 L.Ed. 2d 1016, 105 S.Ct. 1005 (1985) * * * . (Respondents * * * contend * * * that the “no disciplinary deductions” element of the salary-basis test is invalid for public-sector employees because as applied to them it reflects an unreasonable interpretation of the statutory exemption. That is so, they say, because the ability to adjust public-sector employees’ pay—even executive, administrative or professional employees’ pay—as a means of enforcing compliance with work rules is a necessary component of effective government. In the public369

sector context, they contend, fewer disciplinary alternatives to deductions in pay are available [because of civil-service requirements]. Because Congress has not “directly spoken to the precise question at issue,” we must sustain the Secretary’s approach so long as it is “based on a permissible construction of the statute.” Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–843, 81 L.Ed.2d 694, 104 S.Ct. 2778 (1984). While respondents’ objections would perhaps support a different application of the salary-basis test for public employees, we cannot conclude that they compel it. The Secretary’s view that public employers are not so differently situated with regard to disciplining their employees as to require wholesale revision of his time-tested rule simply cannot be said to be unreasonable. * * * Respondents appeal to the “quasi military” nature of law enforcement agencies such as the St. Louis Police Department. The ability to use the full range of disciplinary tools against even relatively senior law enforcement personnel is essential, they say, to maintaining control and discipline in organizations in which human lives are on the line daily. It is far from clear, however, that only a pay deduction, and not some other form of discipline—for example, placing the offending officer on restricted duties—will have the necessary effect. Because the FLSA entrusts matters of judgment such as this to the Secretary, not the federal courts, we cannot say that the disciplinary-deduction rule is invalid as applied to law enforcement personnel. *** III A primary issue in the litigation unleashed by application of the salary-basis test to public-sector employees has been whether, under that test, an employee’s pay is “subject to” disciplinary or other deductions whenever there exists a theoretical possibility of such deductions, or rather only when there is something more to suggest that the employee is actually vulnerable to having his pay reduced. Petitioners in effect argue for something close to the former view; they contend that because the police manual nominally subjects all department employees to a range of disciplinary sanctions that includes disciplinary deductions in pay, and because a single sergeant was actually subjected to a disciplinary deduction, they are “subject to” such deductions and hence non-exempt under the FLSA. * * * The Secretary of Labor, in an amicus brief filed at the request of the Court, interprets the salary-basis test to deny exempt status when employees are covered by a policy that permits disciplinary or other deductions in pay “as a practical matter.” That standard is met, the Secretary says, if there is either an actual practice of making such deductions or an employment policy that creates a “significant likelihood” of such deductions. The Secretary’s approach rejects a wooden requirement of actual deductions, but in their absence it requires a clear and 370

particularized policy—one which “effectively communicates” that deductions will be made in specified circumstances. This avoids the imposition of massive and unanticipated overtime liability * * * (including the possibility of a doubling of economics losses as liquidated damages * * *) in situations in which a vague or broadly worded policy is nominally applicable to a whole range of personnel but is not “significantly likely” to be invoked against salaried employees. * * * The Secretary’s approach is usefully illustrated by reference to this case. The policy on which petitioners rely is contained in a section of the police manual that lists a total of 58 possible rule violations and specifies the range of penalties associated with each. All department employees are nominally covered by the manual, and some of the specified penalties involve disciplinary deductions in pay. Under the Secretary’s view, that is not enough to render petitioners’ pay “subject to” disciplinary deductions within the meaning of the salary-basis test. This is so because the manual does not “effectively communicate” that pay deductions are an anticipated form of punishment for employees in petitioners’ category, since it is perfectly possible to give full effect to every aspect of the manual without drawing any inference of that sort. If the statement of available penalties applied solely to petitioners, matters would be different; but since it applies both to petitioners and to employees who are unquestionably not paid on a salary basis, the expressed availability of disciplinary deductions may have reference only to the latter. No clear inference can be drawn as to the likelihood of a sanction’s being applied to employees such as petitioners. Nor, under the Secretary’s approach, is such a likelihood established by the one-time deduction in a sergeant’s pay, under unusual circumstances. * * * IV One small issue remains unresolved: the effect upon the exempt status of Sergeant Guzy, the officer who violated the residency requirement, of the one-time reduction in his pay. The Secretary’s regulations provide that if deductions which are inconsistent with the salary-basis test—such as the deduction from Guzy’s pay—are made in circumstances indicating that “there was no intention to pay the employee on a salary basis,” the exemption from the FLSA is “[not] applicable to him during the entire period when such deductions were being made.” 29 CFR § 541.118(a)(6) (1996). Conversely, “where a deduction not permitted by [the salary-basis test] is inadvertent, or is made for reasons other than lack of work, the exemption will not be considered to have been lost if the employer reimburses the employee for such deductions and promises to comply in the future.” Ibid. Petitioners contend that the initial condition in the latter provision (which enables the employer to take corrective action) is not satisfied here because the deduction from Guzy’s pay was not inadvertent. That it was not inadvertent is true enough, but the plain language of the regulation 371

sets out “inadvertence” and “made for reasons other than lack of work” as alternative grounds permitting corrective action. Petitioners also contend that the corrective provision is unavailable to respondents because Guzy has yet to be reimbursed for the residency-based deduction; in petitioners’ view, reimbursement must be made immediately upon the discovery that an improper deduction was made. The language of the regulation, however, does not address the timing of reimbursement, and the Secretary’s amicus brief informs us that he does not interpret it to require immediate payment. Respondents are entitled to preserve Guzy’s exempt status by complying with the corrective provision in § 541.118(a)(6).

NOTES AND QUESTIONS 1. Purpose of Test? What do you think is the policy justification for the salary-basis test and its exceptions? The assumption is that salaried workers have more leverage in the organization than do hourly workers. Is this always true? 2. Is the Auer Approach Sufficient? Is the standard adopted by the Court sufficient to deter employers from making regular deductions from an exempt employee’s salary and still retain the employee’s FLSA-exempt status? Note that the DOL regulations do not permit employers to avail themselves of the “window of correction” defense where there has been a pattern of improper deductions. See 29 C.F.R. § 541.603(a) (“An actual current practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.”); Hoffmann v. Sbarro, Inc., 982 F.Supp. 249, 256 (S.D.N.Y.1997) (deferring to DOL appellate counsel’s statement of agency policy that this defense is not “available in cases of multiple or recurring improper deductions or a longstanding policy permitting such deductions”). But see Moore v. Hannon Food Serv., Inc., 317 F.3d 489 (5th Cir.2003) (exempt status of fast-food restaurant managers retained despite employer’s deduction of cash register shortfalls from their paychecks for four months because employer repaid improper deductions and dropped the practice). 3. Exceptions to the “Salary Basis” Test. The regulations recognize several exceptions to the salary-basis rule: a. deductions for absences from work “for one or more full days for personal reasons, other than sickness or disability” (29 C.F.R. § 541.602(b)(1));

b. deductions for absences “of a day or more occasioned by sickness or disability” in accordance with a bona-fide plan or policy (§ 541.602(b)(2)); c. “[p]enalties imposed in good faith for infractions of safety rules of major significance,” i.e., “those relating to the prevention of serious danger in the workplace or to other employees” (§ 541.602(b)(4)); 372 d. employees “need not be paid for any workweek in which they perform no work” (§ 541.602(a)); e. full workweek or multiple-period suspensions for violations of non-safety-related work rule, see Hackett v. Lane County, 91 F.3d 1289 (9th Cir.1996); f. charging partial-day absences against accrued leave time, provided no salary deductions occur if accrued leave is exhausted, see Aaron v. City of Wichita, 54 F.3d 652 (10th Cir.1995); and g. partial-day deductions for intermittent or reduced-schedule leaves pursuant to the Family and Medical Leave Act (29 U.S.C. § 825.206(a)). 4. Prospective Salary Reductions. In In re Wal-Mart Stores, 395 F.3d 1177, 1184 (10th Cir.2005), the court held that prospective salary reductions do not violate the salary-basis test: “[A]n employer may prospectively reduce salary to accommodate the employer’s business needs unless it is done with such frequency that the salary is the functional equivalent of an hourly wage. . . . [W]e would read the regulation as prohibiting only reductions in pay made in response to certain events in a period for which the pay had been set, not salary reductions to take effect in future pay periods.”). 5. Erosion of the Salary Basis Test. In May, 2016, the Obama Administration DOL finalized a new regulation that raised the minimum full year salary threshold for the EAP exemptions from $23,660 to $47,476. The Obama Administration rule set this salary level at the 40th percentile of earnings of full-time salaried employees in the lowest wage census region, the South, and it included a provision that automatically updated the level every three years, based on this percentile. 81 Fed. Reg. 32391 (May 23, 2016). This significant revision of the salary threshold was the first since 1975. In 1975, more than 60% of full-time salaried workers earned below the threshold. In 2016, less than 7% of such workers earned below the threshold. 81 Fed. Reg. 32404. The Obama Administration rule would have raised the percentage of salaried workers who could not be excluded because of the salary threshold to about 33%. Id. Before the Obama administration rule could go into effect, however, the Trump administration replaced it in September, 2019 with a new final rule that currently sets the full-year salary threshold at an unindexed 20th rather than an indexed 40th percentile of earnings of full-time salaried employees in the lowest wage census region. 84 Fed. Reg. 51230 (Sept. 27, 2019). This resulted in a $35,568 threshold for 2020, compared to the roughly $51,000 salary that the indexed Obama rule would have reached by 2020, and the $58,000 the 1975 level would have reached if indexed for inflation. 373

2. THE “DUTIES” TEST DAVIS V. J.P. MORGAN CHASE & CO. U.S. Court of Appeals for the Second Circuit, 2009. 587 F.3d 529.

LYNCH, J. This appeal requires us to decide whether underwriters tasked with approving loans, in accordance with detailed guidelines provided by their employer, are administrative employees exempt from the overtime requirements of the Fair Labor Standards Act. Andrew Whalen was employed by J.P. Morgan Chase (“Chase”) for four years as an underwriter. As an underwriter, Whalen evaluated whether to issue loans to individual loan applicants by referring to a detailed set of guidelines, known as the Credit Guide, provided to him by Chase. The Credit Guide specified how underwriters should determine loan applicant characteristics such as qualifying income and credit history, and instructed underwriters to compare such data with criteria, also set out in the Credit Guide, prescribing what qualified a loan applicant for a particular loan product. Chase also provided supplemental guidelines and product guidelines with information specific to individual loan products. An underwriter was expected to evaluate each loan application under the Credit Guide and approve the loan if it met the Guide’s standards. If a loan did not meet the Guide’s standards, certain underwriters had some ability to make exceptions or variances to implement appropriate compensating factors. Whalen and Chase provide different accounts of how often underwriters made such exceptions. ***

At the time of Whalen’s employment by Chase, Chase treated underwriters as exempt from the FLSA’s overtime requirements. Whalen sought a declaratory judgment that Chase violated the FLSA by treating him as exempt and failing to pay him overtime compensation. Both Whalen and Chase filed motions for summary judgment. The district court denied Whalen’s motions and granted Chase’s motion, dismissing Whalen’s complaint. This appeal followed. *** The statute specifying that employees who work in “bona fide executive, administrative, or professional capacit[ies]” are exempt from the FLSA overtime pay requirements does not define “administrative.” 29 U.S.C. § 213(a)(1). Federal regulations specify, however, that a worker is employed in a bona fide administrative capacity if she performs work “directly related to management policies or general business operations” and “customarily and regularly exercises discretion and independent 374

judgment.” 29 C.F.R. § 541.2(a).2 Regulations further explain that work directly related to management policies or general business operations consists of “those types of activities relating to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work.” 29 C.F.R. § 541.205(a).3 Employment may thus be classified as belonging in the administrative category, which falls squarely within the administrative exception, or as production/sales work, which does not. Precedent in this circuit is light but provides the framework of our analysis to identify Whalen’s job as either administrative or production. In Reich v. State of New York, 3 F.3d 581 (2d Cir.1993), overruled by implication on other grounds by Seminole Tribe v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996), we held that members of the state police assigned to the Bureau of Criminal Investigation (BCI), known as BCI Investigators, were not exempt as administrative employees. BCI Investigators are responsible for supervising investigations performed by state troopers and conducting their own investigations of felonies and major misdemeanors. Applying the administrative versus production analysis, we then reasoned that because “the primary function of the Investigators . . . is to conduct—or ‘produce’—its criminal investigations,” the BCI Investigators fell “squarely on the ‘production’ side of the line” and were not exempt from the FLSA’s overtime requirements. *** The line between administrative and production jobs is not a clear one, particularly given that the item being produced— such as “criminal investigations”—is often an intangible service rather than a material good. Notably, the border between administrative and production work does not track the level of responsibility, importance, or skill needed to perform a particular job.4 * * * The Department of Labor has attempted to clarify the classification of jobs within the financial industry through regulations and opinion letters. In 2004, the Department of Labor promulgated new regulations discussing, among other things, employees in the financial services industry. Although these regulations were instituted after Whalen’s employment with Chase ended, the Department of Labor noted 375

that the new regulations were “[c]onsistent with existing case law.” 69 Fed. Reg. 22,122, 22,145 (Apr. 23, 2004). The regulation states: Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption. 29 C.F.R. § 541.203(b). The Department of Labor explained that the new regulation was sparked by growing litigation in the area and contrasted two threads of case law. On the one hand, some courts found that “employees who represent the employer with the public, negotiate on behalf of the company, and engage in sales promotion” were exempt from overtime requirements. 69 Fed. Reg. 22,122, 22,145 (Apr. 23, 2004), citing Hogan v. Allstate Ins. Co., 361 F.3d 621, 2004 WL 362378 (11th Cir.2004); Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir.1997); Wilshin v. Allstate Ins. Co., 212 F. Supp. 2d 1360 (M.D.Ga.2002). On the other hand, the Department cited a Minnesota district court, which found that “employees who had a ‘primary duty to sell [the company’s] lending products on a day-to-day basis’ directly to consumers” were not exempt. 69 Fed. Reg. 22,122, 22,145 (Apr. 23, 2004), quoting Casas v. Conseco Fin. Corp., No. Civ. 00–1512(JRT/SRN), 2002 WL 507059, at *9 (D.Minn.2002). The

regulation thus helped to clarify the distinction between employees performing substantial and independent financial work and employees who merely sold financial products. * * * We * * * turn to the job of underwriter at Chase to assess whether Whalen performed day-to-day sales activities or more substantial advisory duties. As an underwriter, Whalen’s primary duty was to sell loan products under the detailed directions of the Credit Guide. There is no indication that underwriters were expected to advise customers as to what loan products best met their needs and abilities. Underwriters were given a loan application and followed procedures specified in the Credit Guide in order to produce a yes or no decision. Their work is not related either to setting “management policies” nor to “general business operations” such as human relations or advertising, 29 C.F.R. § 541.2, but rather concerns the “production” of loans—the fundamental service provided by the bank. Chase itself provided several indications that they understood underwriters to be engaged in production work. Chase employees referred to the work performed by underwriters as “production work.” Within 376

Chase, departments were at least informally categorized as “operations” or “production,” with underwriters encompassed by the production label. Underwriters were evaluated not by whether loans they approved were paid back, but by measuring each underwriter’s productivity in terms of “average of total actions per day” and by assessing whether the underwriters’ decisions met the Chase credit guide standards. Underwriters were occasionally paid incentives to increase production, based on factors such as the number of decisions underwriters made. While being able to quantify a worker’s productivity in literal numbers of items produced is not a requirement of being engaged in production work, it illustrates the concerns that motivated the FLSA. The overtime requirements of the FLSA were meant to apply financial pressure to “spread employment to avoid the extra wage” and to assure workers “additional pay to compensate them for the burden of a workweek beyond the hours fixed in the act.” Overnight Motor Transp. Co., Inc. v. Missel, 316 U.S. 572, 577–78, 62 S. Ct. 1216, 86 L. Ed. 1682 (1942) * * * . While in the abstract any work can be spread, there is a relatively direct correlation between hours worked and materials produced in the case of a production worker that does not exist as to administrative employees. Paying production incentives to underwriters shows that Chase believed that the work of underwriters could be quantified in a way that the work of administrative employees generally cannot. We conclude that the job of underwriter as it was performed at Chase falls under the category of production rather than of administrative work. Underwriters at Chase performed work that was primarily functional rather than conceptual. They were not at the heart of the company’s business operations. They had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that in any way related to the business’s overall efficiency or mode of operation. It is undisputed that the underwriters played no role in the establishment of Chase’s credit policy. Rather, they were trained only to apply the credit policy as they found it, as it was articulated to them through the detailed Credit Guide. Furthermore, we have drawn an important distinction between employees directly producing the good or service that is the primary output of a business and employees performing general administrative work applicable to the running of any business. In Reich, for example, BCI Investigators “produced” law enforcement investigations. By contrast, administrative functions such as management of employees through a human resources department or supervising a business’s internal financial activities through the accounting department are functions that must be performed no matter what the business produces. For this reason, the fact that Whalen assessed creditworthiness is not enough to determine whether his job was administrative. The context of a job function matters: a clothing 377

store accountant deciding whether to issue a credit card to a consumer performs a support function auxiliary to the department store’s primary function of clothes. An underwriter for Chase, by contrast, is directly engaged in creating the “goods”—loans and other financial services—produced and sold by Chase. *** Accordingly, we hold that Whalen did not perform work directly related to management policies or general business operations. Because an administrative employee must both perform work directly related to management policies or general business operations and customarily and regularly exercise discretion and independent judgment, we thus hold that Whalen was not employed in a bona fide administrative capacity. We need not address whether Whalen customarily and regularly exercised discretion and independent judgment.

NOTES AND QUESTIONS

1. Purpose of Duties Test? What is the source of the production-administrative dichotomy? Is it in the statute? The DOL regulations? What are the policy reasons behind the dichotomy? Can there be administrative jobs that also involve some responsibility for production? 2. Salary Basis Alone? Would it make sense as a policy matter to abolish the duties test and make any exemption rest exclusively on the employee’s compensation? Such a change would reduce administrative costs and promote compliance by simplifying this area of the law. Should traditional hourly workers who work considerable amounts of regularly scheduled overtime be included in such an exemption? Note also the provision for highly-compensated employees in 29 C.F.R. § 541.601. 3. Applications. a. Is a night manager in a fast-food restaurant involved in production work as well as supervision? Can you be an effective night-shift supervisor without also engaging in some production work? Might any exemptions other than the administrative exemption apply? b. A law firm’s unit of production usually is the billable hour. Under which side of the production/administration dichotomy do associate attorneys fall? Do attorneys fall under any other FLSA exemption? 29 C.F.R. §§ 541.300–304. 4. Marketing Representatives. Insurance companies increasingly rely on contractors to sell insurance directly to customers. These marketing representatives are not directly involved in product design, generation, or sales of insurance. Assuming they satisfy the salarybasis requirement and are otherwise employees, do these representatives fall within the administrative exemption? See Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir.1997). 378 5. Pharmaceutical Representatives. Sales representatives for pharmaceutical companies spend most of their time traveling to doctors’ offices and attempting to persuade them to prescribe their company’s products. Because patients fill prescriptions for a drug, the doctor does not purchase the drug or place an order with the sales representatives. The FLSA defines sale as “sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. § 203(k). The DOL regulations refer to the FLSA’s definition, but further define “sales” to mean “the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.” 29 C.F.R. § 541.501. The regulations also provide that “promotion work” is “often performed by persons who make sales” and is considered exempt when made incidental to an employee’s own sales, but not to sales by others. 29 C.F.R. § 541.503. In Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 132 S.Ct. 2156, 183 L. Ed.2d 153 (2012), the Supreme Court decided that pharmaceutical sales representatives were overtime-exempt under the outside-sales exemption. The Court explained that “[t]he specific list of transactions that precedes the phrase “other disposition” [in the statute] represents an attempt to accommodate industry-byindustry variations in methods of selling commodities. Consequently, we think that the catchall phrase “other disposition” is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity. . . . Obtaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that [the sales representatives] were able to do [by law] to ensure the eventual disposition of the products that respondent sells.” 567 U.S. at 165. 6. Service Advisors. Should “service advisors” at a car dealership whose primary job responsibilities involve identifying service needs and selling service solutions to the dealership’s customers be exempt from overtime requirements under a statutory provision that exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” 29 U.S.C. § 213(b)(10)(A)? See Encino Motor Cars v. Navarro, 136 S. Ct. 2117 (2018) (closely divided Court holds the exemption covers the advisors).

C. COMPENSATION DISPUTES ARISING FROM STATE CONTRACT AND WAGEPAYMENT LAWS In addition to federal and state wage-hour laws, compensation disputes may also involve breach of contracts claims and actions under state wage-payment laws. 379

1. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING The implied covenant of good faith and fair dealing can be viewed as an example of contract law supplying the implied background rules which inform the expectations of the parties when they enter into a particular contract. Absent such implied terms, the parties would have to negotiate prolix documents setting forth all of the obligations underlying their proposed relationship. You may recall Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), from your first-year contracts class. In that case, a well-known creator of fashions gave the exclusive right to market her designs for a period of at

least a year to Wood in return for half of the proceeds he obtained from such marketing, but the agreement said nothing about Wood’s duty to market the designs. Lady Duff Gordon’s attempt to justify a breach of the agreement because of lack of consideration was rejected by the New York Court of Appeals. Judge Cardozo explained that in view of the “exclusive privilege” granted to Wood, the court would not “suppose that one party was to be placed at the mercy of the other,” and held that consideration was supplied by Wood’s implied promise to use “reasonable efforts to * * * market her designs * * * .” Id. at 90–91, 118 N.E. at 214.

RESTATEMENT OF EMPLOYMENT LAW § 3.05 American Law Institute (2015).

§ 3.05 Implied Duty of Good Faith and Fair Dealing (a) Each party to an employment relationship, including at-will employment, owes a nonwaivable duty of good faith and fair dealing to the other party, which includes a party’s obligation not to hinder the other party’s performance under, or to deprive the other party of the benefit of, their contractual relationship (§ 2.07). The duty applies whether the relationship is terminable at will (as set forth in subsection (b)) or only for cause. (b) The implied duty of good faith and fair dealing applies to at-will employment relationships in a manner consistent with the essential nature of such an at-will relationship. (c) The employer’s duty of good faith and fair dealing includes the duty not to terminate or seek to terminate the employment relationship or effect other adverse employment action for the purpose of (1) preventing the vesting or accrual of an employee right or benefit, or 380

(2) retaliating against the employee for refusing to consent to a change in earned compensation or benefits.

FORTUNE V. NATIONAL CASH REGISTER CO. Supreme Judicial Court of Massachusetts, 1977. 373 Mass. 96, 364 N.E.2d 1251.

ABRAMS, J. Orville E. Fortune (Fortune), a former salesman of The National Cash Register Company (NCR), brought a suit to recover certain commissions allegedly due as a result of a sale of cash registers to First National Stores Inc. (First National) in 1968. Counts 1 and 2 of Fortune’s amended declaration claimed bonus payments under the parties’ written contract of employment. The third count sought recovery in quantum meruit for the reasonable value of Fortune’s services relating to the same sales transaction. Judgment on a jury verdict for Fortune was reversed by the Appeals Court, and this court granted leave to obtain further appellate review. We affirm the judgment of the Superior Court. We hold, for the reasons stated herein, there was no error in submitting the issue of “bad faith” termination of an employment at will contract to the jury. The issues before the court are raised by NCR’s motion for directed verdicts. Accordingly, we summarize the evidence most favorable to the plaintiff. * * * Fortune was employed by NCR under a written “salesman’s contract” which was terminable at will, without cause, by either party on written notice. The contract provided that Fortune would receive a weekly salary in a fixed amount plus a bonus for sales made within the “territory” (i.e., customer accounts or stores) assigned to him for “coverage or supervision,” whether the sale was made by him or someone else.2 The amount of the bonus was determined on the basis of “bonus credits,” which were computed as a percentage of the price of products sold. Fortune would be paid a percentage of the applicable bonus credit as follows: (1) 75% if the territory was assigned to him at the date of the order, (2) 25% if the territory was assigned to him at the date of delivery and installation, or (3) 100% if the territory was assigned to him at both times. The contract further provided that the “bonus interest” would terminate if shipment of the order was not made within eighteen months from the date of the order unless (1) the territory was assigned to him for coverage at the date of delivery and installation, or (2) special engineering was required to fulfil the contract. In addition, NCR reserved the right to sell products in the 381

salesman’s territory without paying a bonus. However, this right could be exercised only on written notice. In 1968, Fortune’s territory included First National. This account had been part of his territory for the preceding six years;

he had been successful in obtaining several orders from First National, including a million dollar order in 1963. Sometime in late 1967, or early 1968, NCR introduced a new model cash register, Class 5. Fortune corresponded with First National in an effort to sell the machine. He also helped to arrange for a demonstration of the Class 5 to executives of First National on October 4, 1968. NCR had a team of men also working on this sale. On November 27, 1968, NCR’s manager of chain and department stores, and the Boston branch manager, both part of NCR’s team, wrote to First National regarding the Class 5. The letter covered a number of subjects, including price protection, trade-ins, and trade-in protection against obsolescence. While NCR normally offered price protection for only an eighteenmonth term, apparently the size of the proposed order from First National caused NCR to extend its price protection terms for either a two-year or four-year period. On November 29, 1968, First National signed an order for 2,008 Class 5 machines to be delivered over a four-year period at a purchase price of approximately $5,000,000. Although Fortune did not participate in the negotiation of the terms of the order,3 his name appeared on the order form in the space entitled “salesman credited.” The amount of the bonus credit as shown on the order was $92,079.99. On January 6, 1969, the first working day of the new year, Fortune found an envelope on his desk at work. It contained a termination notice addressed to his home dated December 2, 1968. Shortly after receiving the notice, Fortune spoke to the Boston branch manager with whom he was friendly. The manager told him, “You are through,” but, after considering some of the details necessary for the smooth operation of the First National order, told him to “stay on,” and to “[k]eep on doing what you are doing right now.” Fortune remained with the company in a position entitled “sales support.” In this capacity, he coordinated and expedited delivery of the machines to First National under the November 29 order as well as servicing other accounts. Commencing in May or June, Fortune began to receive some bonus commissions on the First National order. Having received only 75% of the applicable bonus due on the machines which had been delivered and installed, Fortune spoke with his manager about receiving the full amount of the commission. Fortune was told “to forget about it.” Sixty-one years old at that time, and with a son in college, Fortune concluded that it “was a good idea to forget it for the time being.” 382

NCR did pay a systems and installations person the remaining 25% of the bonus commissions due from the First National order although contrary to its usual policy of paying only salesmen a bonus. NCR, by its letter of November 27, 1968, had promised the services of a systems and installations person; the letter had claimed that the services of this person, Bernie Martin (Martin), would have a forecasted cost to NCR of over $45,000. As promised, NCR did transfer Martin to the First National account shortly after the order was placed. Approximately eighteen months after receiving the termination notice, Fortune, who had worked for NCR for almost twenty-five years, was asked to retire. When he refused, he was fired in June of 1970. Fortune did not receive any bonus payments on machines which were delivered to First National after this date. At the close of the plaintiff’s case, the defendant moved for a directed verdict, arguing that there was no evidence of any breach of contract, and adding that the existence of a contract barred recovery under the quantum meruit count. Ruling that Fortune could recover if the termination and firing were in bad faith, the trial judge, without specifying on which count, submitted this issue to the jury. NCR then rested and, by agreement of counsel, the case was sent to the jury for special verdicts on two questions: “1. Did the Defendant act in bad faith * * * when it decided to terminate the Plaintiff’s contract as a salesman by letter dated December 2, 1968, delivered on January 6, 1969? “2. Did the Defendant act in bad faith * * * when the Defendant let the Plaintiff go on June 5, 1970?” The jury answered both questions affirmatively, and judgment entered in the sum of $45,649.62.6 *** The contract at issue is a classic terminable at will employment contract. It is clear that the contract itself reserved to the parties an explicit power to terminate the contract without cause on written notice. It is also clear that under the express terms of the contract Fortune has received all the bonus commissions to which he is entitled. Thus, NCR claims that it did not breach the contract, and that it has no further liability to Fortune.7 According to a literal reading of the contract, NCR is correct. 383

However, Fortune argues that, in spite of the literal wording of the contract, he is entitled to a jury determination on NCR’s motives in terminating his services under the contract and in finally discharging him. We agree. We hold that NCR’s written

contract contains an implied covenant of good faith and fair dealing, and a termination not made in good faith constitutes a breach of the contract. We do not question the general principles that an employer is entitled to be motivated by and to serve its own legitimate business interests; that an employer must have wide latitude in deciding whom it will employ in the face of the uncertainties of the business world; and that an employer needs flexibility in the face of changing circumstances. We recognize the employer’s need for a large amount of control over its work force. However, we believe that where, as here, commissions are to be paid for work performed by the employee, the employer’s decision to terminate its at will employee should be made in good faith. NCR’s right to make decisions in its own interest is not, in our view, unduly hampered by a requirement of adherence to this standard. On occasion some courts have avoided the rigidity of the “at will” rule by fashioning a remedy in tort. We believe, however, that in this case there is remedy on the express contract. In so holding we are merely recognizing the general requirement in this Commonwealth that parties to contracts and commercial transactions must act in good faith toward one another. Good faith and fair dealing between parties are pervasive requirements in our law; it can be said fairly, that parties to contracts or commercial transactions are bound by this standard. See G.L. c. 106, § 1–203 (good faith in contracts under Uniform Commercial Code); G.L. c. 93B, § 4(3)(c) (good faith in motor vehicle franchise termination). *** In the instant case, we need not * * * speculate as to whether the good faith requirement is implicit in every contract for employment at will. It is clear, however, that, on the facts before us, a finding is warranted that a breach of the contract occurred. Where the principal seeks to deprive the agent of all compensation by terminating the contractual relationship when the agent is on the brink of successfully completing the sale, the principal has acted in bad faith and the ensuing transaction between the principal and the buyer is to be regarded as having been accomplished by the agent. Restatement (Second) of Agency § 454, and Comment a (1958). The same result obtains where the principal attempts to deprive the agent of any portion of a commission due the agent. Courts have often applied this rule to prevent overreaching by employers and the forfeiture by 384

employees of benefits almost earned by the rendering of substantial services. See, e.g., RLM Assocs. v. Carter Mfg. Corp., 356 Mass. 718, 248 N.E.2d 646 (1969); Lemmon v. Cedar Point, Inc., 406 F.2d 94, 97 (6th Cir.1969); Coleman v. Graybar Elec. Co., 195 F.2d 374 (5th Cir.1952); Zimmer v. Wells Management Corp., 348 F.Supp. 540 (S.D.N.Y.1972); Sinnett v. Hie Food Prods., Inc., 185 Neb. 221, 174 N.W.2d 720 (1970). In our view, the Appeals Court erroneously focused only on literal compliance with payment provisions of the contract and failed to consider the issue of bad faith termination. Restatement (Second) of Agency § 454, and Comment a (1958). NCR argues that there was no evidence of bad faith in this case; therefore, the trial judge was required to direct a verdict in any event. We think that the evidence and the reasonable inferences to be drawn therefrom support a jury verdict that the termination of Fortune’s twenty-five years of employment as a salesman with NCR the next business day after NCR obtained a $5,000,000 order from First National was motivated by a desire to pay Fortune as little of the bonus credit as it could. The fact that Fortune was willing to work under these circumstances does not constitute a waiver or estoppel; it only shows that NCR had him “at their mercy.” Commonwealth v. DeCotis, 366 Mass. 234, 243, 316 N.E.2d 748 (1974). NCR also contends that Fortune cannot complain of his firing in June, 1970, as his employment contract clearly indicated that bonus credits would be paid only for an eighteen-month period following the date of the order. As we have said, the jury could have found that Fortune was stripped of his “salesman” designation in order to disqualify him for the remaining 25% of the commissions due on cash registers delivered prior to the date of his first termination. Similarly, the jury could have found that Fortune was fired (or not assigned to the First National account) so that NCR could avoid paying him any commissions on cash registers delivered after June, 1970. Conversely, the jury could have found that Fortune was assigned by NCR to the First National account; that all he did in this case was arrange for a demonstration of the product; that he neither participated in obtaining the order nor did he assist NCR in closing the order; and that nevertheless NCR credited him with the sale. This, however, did not obligate the trial judge to direct a verdict.

NOTES AND QUESTIONS 1. Did National Cash Register breach the express terms of the “salesman contract”? 2. An Exception to Employment-at-Will? Does the implied covenant of good faith and fair dealing represent an exception to the employment-at-will rule? Consider Employment Restatement § 2.07, Comment b: “As in all

385 contracts, the implied duty of good faith and fair dealing serves as a supplementary aid in implementing the parties’ reasonable expectations and should not be read as a means of overriding the basic terms of, or otherwise undermining the essential nature of their contractual relationship. Jurisdictions that recognize the implied duty also recognize that the duty applies in at-will employment in a manner consistent with the essential nature of such an at-will relationship—namely, except to the extent provided by law or public policy, either party may terminate the relationship, with or without cause.” 3. Did National Cash Register Frustrate Fortune’s Reasonable Expectations to Its Advantage? Richard Epstein argues: The contractual provisions concerning commissions represent a rough effort to match payment with performance where the labor of more than one individual was necessary to close the sale. The case is not simply one where a strategically timed firing allowed the company to deprive a dismissed employee of the benefits due him upon completion of performance. Indeed, the firm kept none of the commission at all, so that when the case went to the jury, the only issue was whether the company should be called upon to pay the same commission twice. . Epstein, In Defense of the Contract at Will, 51 U.Chi.L.Rev. 947, 981–82 (1984). Do you agree with this characterization of the facts? 4. Recovery of Lost Commissions Only? Is Fortune seeking recovery only for commissions withheld or was he also seeking recovery for lost future compensation due to his alleged bad-faith termination? As interpreted by the Massachusetts courts, Fortune seems confined to situations involving forfeiture of compensation for past services on the eve of entitlement. See Gram v. Liberty Mutual Ins. Co., 384 Mass. 659, 666–67, 429 N.E.2d 21, 25–26 (1981). Moreover, the Fortune ruling has been construed to provide a basis only for securing the compensation withheld rather than for overturning the termination itself. See Wakefield v. Northern Telecom, Inc., 769 F.2d 109 (2d Cir.1985) (applying either New York or New Jersey law). Judge Winter observed in Wakefield: Wakefield may not * * * recover for his termination per se. However, the contract for payment of commissions creates rights distinct from the employment relation, and * * * obligations derived from the covenant of good faith implicit in the commission contract may survive the termination of the employment relationship.

*** A covenant of good faith should not be implied as a modification of an employer’s right to terminate an at-will employee because even a whimsical termination does not deprive the employee of benefits expected in return for the employee’s performance. This is so because performance and the distribution of benefits occur simultaneously, 386 and neither party is left high and dry by the termination. Where, however, a covenant of good faith is necessary to enable one party to receive the benefits promised for performance, it is implied by the law as necessary to effectuate the intent of the parties. Id. at 112. For rulings similar to Fortune and Wakefield, see Metcalf v. Intermountain Gas Co., 116 Idaho 622, 627, 778 P.2d 744, 749 (1989); Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025, 1040 (1985) (en banc); Nolan v. Control Data Corp., 243 N.J.Super. 420, 579 A.2d 1252 (App.Div.1990). The good-faith covenant plays a significant role in deferred compensation cases. See generally Samuel J. Samaro, The Case for Fiduciary Duty as a Restraint on Employer Opportunism Under Sales Commission Agreements, 8 U. Pa. L. Rev. J. of Lab. & Emp. L. 441 (2006). See Employment Restatement § 3.05. 5. The Good-Faith Covenant in New York. The New York courts have insisted that an implied good-faith covenant cannot be read so as to override an at-will employment contract: “[I]t would be incongruous to say that an inference may be drawn that the employer impliedly agreed to a provision which would be destructive of his right of termination.” Murphy v. American Home Products Corp., 58 N.Y.2d 293, 304–05, 461 N.Y.S.2d 232, 237, 448 N.E.2d 86, 91 (1983). In Wieder v. Skala, 80 N.Y.2d 628, 593 N.Y.S.2d 752, 609 N.E.2d 105 (1992), New York opened the door a crack, in a case involving a law firm’s discharge of an associate allegedly for reporting the professional misconduct of another associate to disciplinary authorities as required by the legal profession’s Code of Professional Responsibility. The high court held that the plaintiff stated a claim for breach of contract based on an “implied-in-law obligation” inherent in his relationship with his employer. Wieder’s potential reach was narrowed in Horn v. New York Times Co., 100 N.Y.2d 85, 790 N.E.2d 753, 760 N.Y.S.2d 378 (2003). 6. Securities Industry Arbitration. Arbitration disputes before the Financial Industry Regulatory Authority often involve impliedcovenant and industry-practice claims. For a plaintiff lawyer’s perspective in this context, see Ethan A. Brecher, Compensation Claims in Securities Industry Arbitration, ch. 13 in Compensation, Work Hours and Benefits; Proc. N.Y.U. 57th Ann. Conf. on Labor (Jeffrey M.

Hirsch & Samuel Estreicher eds. 2009). 387

2. STATUTORY WAGE CLAIMS ARISING FROM CONTRACT TRUELOVE V. NORTHEAST CAPITAL & ADVISORY, INC. Court of Appeals of New York, 2000. 95 N.Y.2d 220, 738 N.E.2d 770, 715 N.Y.S.2d 366.

LEVINE, J. Plaintiff William B. Truelove, Jr. brought this action against his former employer, defendant Northeast Capital & Advisory, Inc., under article 6 of the Labor Law to recover the unpaid balance of a bonus he was awarded in December 1997, payable in quarterly installments through the following year. His complaint alleges that his bonus constituted “wages” within the meaning of Labor Law § 190(1) and that, following his resignation after the first bonus payment, defendant violated Labor Law § 193 by enforcing an express condition in the bonus plan predicating payment of each quarterly installment on continued employment. We agree with Supreme Court and the Appellate Division that plaintiff’s bonus does not fall within the definition of wages protected by Labor Law article 6. Defendant, a small investment banking firm, hired plaintiff in June 1996 as a financial analyst in a non-revenue generating position. Plaintiff elected a compensation plan under which he was to receive an annual salary of $40,000 and be eligible to participate in a bonus/profit sharing pool. Plaintiff’s offer of employment stated that a “bonus, if paid, would reflect a combination of the individual’s performance and Northeast Capital’s performance.” The terms of the bonus plan were further clarified in two memoranda by defendant’s Chief Executive Officer. The memoranda explained that a bonus/profit sharing pool would be established only if the firm generated a certain stated minimum of revenues and that the pool, once established, would be calculated pursuant to a graduated percentage schedule of firm revenues. The memoranda further stipulated that bonus/profit sharing distributions would be allocated in the CEO’s sole discretion and would be paid in quarterly installments, with each payment contingent upon the recipient’s continued employment at the firm. Employees were required to have an “acceptable” performance rating to participate in the bonus/profit sharing pool. At the end of 1997, defendant established a bonus/profit sharing pool of $240,000 based upon firm revenues of approximately $1.6 million for that year. Defendant’s CEO allocated $160,000 of that pool to plaintiff. Defendant paid plaintiff an initial bonus installment of $40,000, but refused to make any further payments after plaintiff’s resignation. Plaintiff brought this suit under Labor Law article 6, alleging that his bonus fell within the definition of wages set forth in Labor Law § 190(1). 388

Plaintiff claimed that defendant’s failure to pay him the three remaining bonus installment payments for 1997 violated Labor Law § 193, which provides that “no employer shall make any deduction from the wages of an employee, except” under certain limited circumstances not relevant here. Supreme Court granted summary judgment to defendant on the ground that plaintiff’s bonus did not constitute wages within the meaning of Labor Law article 6. The Appellate Division affirmed. * * * Article 6 of the Labor Law sets forth a comprehensive set of statutory provisions enacted to strengthen and clarify the rights of employees to the payment of wages. * * * An employer who violates the requirements of Labor Law article 6 is subject to civil liability and criminal penalties (see, Labor Law §§ 198 and 198–a). The dispositive issue in this case is whether plaintiff’s bonus constitutes “wages” within the meaning of the Labor Law. Although New York has provided statutory protection for workers’ wages for more than a century * * * , the Legislature first defined the term “wages” in the 1966 enactment of Labor Law article 6 (L 1996, ch. 548). Labor Law § 190(1) defines “wages” as “the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis”. Courts have construed this statutory definition as excluding certain forms of “incentive compensation” that are more in the nature of a profit-sharing arrangement and are both contingent and dependent, at least in part, on the financial success of the business enterprise (see, International Paper Co. v. Suwyn, 978 F.Supp. 506, 514; Tischmann v. ITT/Sheraton Corp., 882 F.Supp. 1358, 1370; see also, Magness v. Human Resource Servs., Inc., 161 A.D.2d 418, 419, 555 N.Y.S.2d 347). We arrive at the same conclusion with respect to plaintiff’s bonus compensation arrangement.

The terms of defendant’s bonus compensation plan did not predicate bonus payments upon plaintiff’s own personal productivity nor give plaintiff a contractual right to bonus payments based upon his productivity. To the contrary, the declaration of a bonus pool was dependent solely upon his employer’s overall financial success. In addition, plaintiff’s share in the bonus pool was entirely discretionary and subject to the non-reviewable determination of his employer. These factors, we believe, take plaintiff’s bonus payments out of the statutory definition of wages. Unlike in other areas where the Legislature chose to define broadly the term “wages” to include every form of compensation paid to an employee, including bonuses (see Unemployment Insurance Law §§ 517, 518), the Legislature elected not to define that term in Labor Law § 190(1) so expansively as to cover all forms of employee remuneration. We therefore agree with those courts that have concluded that the more restrictive statutory definition of “wages,” as “earnings for labor or services rendered,” excludes incentive compensation “based on factors falling 389

outside the scope of the employee’s actual work” * * * . In our view, the wording of the statute, in expressly linking earnings to an employee’s labor or services personally rendered, contemplates a more direct relationship between an employee’s own performance and the compensation to which that employee is entitled. Discretionary additional remuneration, as a share in a reward to all employees for the success of the employer’s entrepreneurship, falls outside the protection of the statute. *** Finally, we reject plaintiff’s argument that he had a vested right to the bonus payments once defendant declared that a bonus would be paid and calculated the amount of that bonus. In Hall v. United Parcel Serv. (76 N.Y.2d 27, 36, 556 N.Y.S.2d 21, 555 N.E.2d 273), we held that an “employee’s entitlement to a bonus is governed by the terms of the employer’s bonus plan.” Here, the bonus plan explicitly predicated the continuation of bonus payments upon the recipient’s continued employment status. Because plaintiff resigned shortly after he received his first quarterly payment, he was not entitled to receive the remaining three payments.

NOTES AND QUESTIONS 1. Under current FLSA regulations, would Truelove likely have qualified as exempt from minimum wage and overtime? Under which provision? 2. Assume that Truelove would have been eligible for overtime. Should the bonus have been included in his “regular rate”? 3. Would the bonus payment in Fortune v. National Cash Register have qualified as a “wage” under the standard articulated in Truelove? 4. “Earned” Wages. Wage claims involving commissions often turn on whether the commission was “earned” under terms of the applicable contract or plan. These disputes become even more complex when the applicable provision does not define “earned”, as illustrated in the case of Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609 (2008), on certified questions from 505 F.3d 129 (2d Cir.2007): Pachter’s commission earnings were calculated using a formula. When a client of Hodes agreed to a media buy, Hodes would advance payment to the media company and the client would subsequently reimburse Hodes and pay a fee for Pachter’s services. When the client was billed, Pachter received a percentage of the amount billed minus particular charges that are central to the dispute in this case—client receipts were reduced by certain business costs, such as finance charges for late payments, losses attributable to errors in placing advertisements, uncollectible debts and Pachter’s travel and entertainment expenses. In addition, she chose to work with an assistant, and half of the assistant’s salary was deducted from 390 Pachter’s percentage of billings. Each month, Pachter received a commission statement that listed her total billings and the percentage of those billings that represented her gross commission. The expenses attributed to her activities and any advances she had drawn from her commission account were then deducted to reach the net amount of income she had earned for that period. Pachter concedes that she was aware of the charges Hodes subtracted from her gross commissions and acquiesced in the compensation scheme for over a decade. * * * . The lack of a specific written contract on when commissions were earned is not determinative because the record in the case— the evidence of the parties’ extensive course of dealings for more than 11 years and the written monthly compensation statements issued by Hodes and accepted by Pachter—provided ample support for the conclusion that there was an implied contract under which the final computation of the commissions earned by Pachter depended on first making adjustments for nonpayments by customers and the cost of Pachter’s assistant, as well as miscellaneous work-related expenses * * * . Notably,

Pachter understood the adjustments and acquiesced in them—the District Court found that Pachter consented to the compensation plan and that Hodes complied with it in all respects, thereby establishing that the parties mutually agreed to depart from the common-law rule, i.e., commissions are earned when the broker procures a customer “ready and willing to enter into a contract upon [the salesmen’s] employer’s terms,” Feinberg Bros. Agency, Inc. v. Berted Realty Co., Inc., 70 N.Y.2d 828, 830, 517 N.E.2d 1325, 523 N.Y.S.2d 439 (1987). We therefore conclude that neither section 193 nor any other provision of article 6 of the Labor Law prevented the parties in this case from structuring the compensation formula so that Pachter’s commission would be deemed earned only after specific deductions were taken from her percentage of gross billings. Consequently, we answer the second certified question by stating that, in the absence of a governing written instrument, when a commission is “earned” and becomes a “wage” for purposes of Labor Law article 6 is regulated by the parties’ express or implied agreement; or, if no agreement exists, by the default common-law rule that ties the earning of a commission to the employee’s production of a ready, willing and able purchaser of the services. 10 N.Y.3d at 618. 5. Vacation and Sick Pay. Employers typically structure their vacation policies to allow employees to accrue a certain number of days or hours of vacation pay over a period of months or years of service. Sick pay, by contrast, is often structured as an allotment of usable days over the course of a year to be used for specific purposes. 391 Some states characterize vacation pay as a wage, non-forfeitable once earned. Characterizing vacation pay as a wage limits an employer’s ability to erase an employee’s vacation balance from year to year, and requires an employer to pay out unused vacation upon termination. See Cal. Lab. § 227.3; Thompson v. Cheyenne Mountain Sch. Dist. No. 12, 844 P.2d 1235 (Colo. App. Ct. 1992) (unused vacation must be paid upon termination absent express agreement providing for forfeiture). Sick pay tends to be excluded from the definition of “wage” although states vary. See e.g. 7 D.C.M.R. § 3204.3 (D.C. sick leave statute does not require payout upon termination); Schwartz v. Gary Comm. Sch. Corp, 762 N.E.2d 192 (Ind. Ct. App. 2002) (sick pay is a wage where no restrictions are placed on its use); Souto v. Sovereign Realty Assoc., 23 Mass. L. Rptr. 386 (Ma. Super. 2007) (no right to sick pay upon termination absent express agreement). 6. Are Stock Options “Wages”? In Schachter v. Citigroup, Inc., 47 Cal.4th 610, 101 Cal. Rptr. 3d 2 (2009), the plaintiff signed a restricted stock agreement upon hire, which provided for a compensation reduction in exchange for discounted restricted stock, vesting over two years. The terms also provided that the employee would forfeit the stock if the employee they terminated employment voluntarily prior to vesting. When Schachter resigned prior to the vesting date, he brought a wage claim alleging that the stock represented a wage and could not be forfeited under California’s wage-payment statutes. The court agreed that stock qualified as a wage but treated Schachter’s stock as equivalent to incentive compensation. Like commissions and bonuses, California law permits employers to place conditions precedent upon “earning” incentive compensation. Because Schachter had not yet “earned” the stock under the restricted stock agreement, Citigroup did not violate wage laws by refusing to provide the stock. 7. Penalties for Delay in Paying Final Wages. Several states impose penalties on employers that fail to deliver a final paycheck within a specified period following termination or resignation (known as “waiting time” penalties). See e.g. Cal. Lab. Code § 203 (willful failure to pay final paycheck “immediately” upon termination or within 72 hours of a resignation, liable for 1 days’ wages for each day of delay, up to 30 days); Md. Lab & Emp Art. § 3–505 (liquidated damages of up to 3 times unpaid wage where employers fails to pay undisputed wages by next regular payday); Minn. Stat. § 181.14 (penalty of up to 14 days wages for delay in payment). 8. Improper Deductions from Wages. Many state wage-payment laws restrict an employer from making deductions from an employee’s paycheck, regardless of whether the employee is exempt. See e.g. N.Y. Labor Law § 193 (“no employer shall make any deduction from the wages of an employee, except” under certain specified circumstances); N.J. Stat. § 34:11–4.4 (“no employer may withhold or divert any portions of an employee’s wages” unless “required or empowered to do so by” state or federal law, or the contributions are used for certain permissible purposes). 392 Several state labor agencies have interpreted their wage-payment laws to prohibit deductions based on cash shortages or inventory shortfalls or damage. See e.g. Cal. Dep. of Ind. Rel., Deductions, available at www.dir.ca.gov/dlse/faq_deductions.html; But see Colo. Rev. Stat. § 8–4–105(e) (permits deductions for an employee’s failure to pay for or return property). 9. “Wages” vs. “Company Funds”? Consider In the Matter of Hudacs v. Frito-Lay, Inc., 90 N.Y.2d 342, 344–45, 660 N.Y.S.2d 700, 683 N.E.2d 322 (1997):

Respondent Frito-Lay, Inc. manufactures and distributes snack foods. As part of its distribution process, it employs route salespeople who pick up the snack food from the company’s wholesale distribution warehouses, deliver them to retailers and collect payments from those stores on behalf of the company. * * * When a salesperson picks up the product each morning from the Frito-Lay warehouse, the amount taken and the cost is verified by both the salesperson and a warehouse employee. The salesperson then delivers the product to various retail markets, and collects payment from the retailer for the product delivered. * * * The company requires cash receipts to be converted into either checks or money orders, which are then mailed directly to Frito-Lay along with checks from retailers and charge tickets. The company reimburses employees for the costs of money orders; however, the checks forwarded by employees come directly from their personal checking accounts. Every 20 business days, the company issues an accounting report to each employee. * * * The reports show any discrepancies between the amount of product taken by a salesperson, and the amount of money remitted to Frito-Lay. The salespeople are required to reimburse the company for any deficit shown on the report. * * * Frito-Lay provides the employees an opportunity to demonstrate that the deficit is the result of such things as damaged or stale product, bounced checks, or third-party theft of either product or cash. Frito-Lay does not attempt to recoup those types of losses from its employees. Moreover, wages are paid regardless of any outstanding account deficiencies existing at the time of payment, although the company does impose other sanctions [including discipline] for the failure to make up account deficits. Has Frito-Lay violated New York Labor Law § 193? Is the case distinguishable from that of more typical service workers such as supermarket cashiers or waiters whom the New York Legislature presumably intended to protect from payback schemes? 1

Daniel Shaviro, The Minimum Wage, the Earned Income Tax Credit, and Optimal Subsidy Policy, 64 U. Chi. L. Rev. 405 (1997).

2

The Minimum Wage: Reviewing Recent Evidence of Its Impact on Poverty, Hearing Before the U.S. House of Representatives Committee on Education and the Workforce (1999) (statement of Jared Bernstein, Economist, Economic Policy Institute, Washington, D.C. 2 The Department of Labor issued new regulations defining the administrative exemption in 2004. Unless otherwise specified, reference to the regulations is to the pre-2004 regulations. 3

Although there are other requirements to fall within the exemption, such as customarily and regularly exercising discretion, because we conclude that Whalen’s work was not “administrative,” we need not decide whether Whalen’s employment as an underwriter met those requirements. 4

Such considerations may be relevant to other, independent, requirements for exemption from the FLSA overtime provisions. The responsibility exercised by an employee, for example, would affect whether that employee “customarily and regularly exercise[d] discretion and independent judgment.” 29 C.F.R. § 541.2. Such a determination, however, is entirely separate from whether an employee’s function may be classified as administrative or production-related. 2

Apparently, NCR’s use of a “guaranteed territory” was designed to motivate “the salesman to develop good will for the company and also avoided a damaging rivalry among salesmen.” D. Boorstin, The Americans: The Democratic Experience at 202 (1973). 3 Fortune was not authorized to offer the price protection terms which appeared in the November 27 letter, as special covenant A, par. 3 of his contract prohibited him from varying the prices of items. 6 The amount apparently represented 25% of the commission due during the eighteen months the machines were delivered to First National, and which was paid to Martin, and 100% of the commissions on the machines delivered after Fortune was fired. 7

Damages were, by stipulation of the parties, set equal to the unpaid bonus amounts. Thus we need not consider whether other measures of damages might be justified in cases of bad faith termination. Nor do we now decide whether a tort action, with possible punitive damages, might lie in such circumstances. See, e.g., Blades, Employment at Will vs. Individual Freedom: On Limiting the Abusive Exercise of Employer Power, 67 Colum.L.Rev. 1404, 1421–1427 (1967). Although the order called for purchase of 2,008 Class 5 machines for a total sale of $5,040,080, at trial the parties stipulated that “1,503 machines were actually delivered and installed” under the First National order. The stipulated damages in the instant case were based on the number of registers actually delivered and installed.

393

PART 5 PROCEDURAL ISSUES IN EMPLOYMENT LAW ■■■

Part 5 discusses key procedural issues governing how employment claims are litigated and resolved. Chapter 11 explores the remedies available in both common law and statutory cases. Chapter 12 concentrates on procedural issues—including those arising in class and collective actions—that principally involve employment cases governed by statute. Finally, Chapter 13 addresses problems in coordination between federal and state enforcement schemes, and between arbitration and litigation, that complicate the remedial process.

395

CHAPTER 11 REMEDIES ■■■

Introduction Obtainable remedies usually are the principal motivation for a lawsuit. An understanding of available remedies also helps shape settlement negotiations. The discussion in this chapter of remedies in employment related actions is organized in terms of claims against employers and claims against employees and is further broken down between contract, tort, and statutory causes of action.

A. CLAIMS AGAINST EMPLOYERS 1. CONTRACT CLAIMS RESTATEMENT OF EMPLOYMENT LAW § 9.01 American Law Institute (2015).

§ 9.01. Damages—Employer Termination in Breach of an Agreement for a Definite or Indefinite Term of Employment or of a Binding Employer Promise of Employment (a) An employer who lacks cause for terminating the employment of an employee with an unexpired agreement for a definite term (§§ 2.03–2.04) is subject to liability to the discharged employee for (1) all compensation that the employee would have received under the remaining term of the agreement, less mitigation of losses (such as the compensation earned and that reasonably could have been earned from comparable alternative employment during the remaining term); (2) reasonably foreseeable consequential damages; and (3) the expenses of reasonable effort (whether or not successful) to mitigate losses. (b) An employer who lacks cause for terminating the employment of an employee with an agreement for an indefinite term requiring cause for termination (§§ 2.03–2.04) is subject to liability to the discharged employee for: 396

(1) all compensation that the employee would have received under that agreement, less mitigation of losses (such as the compensation earned and that reasonably could have been earned from comparable alternative employment); (2) reasonably foreseeable consequential damages; and (3) the expenses of reasonable effort (whether or not successful) to mitigate losses. (c) The employer and employee may specify in the agreement a reasonable amount to be paid by the employer for termination with or without cause in lieu of the measure of damages stated in (a) and (b). (d) An employer who breaches a promise that limits the employer’s right to terminate employment and that induces reasonable and detrimental reliance by the employee (§ 2.02, Comment c) is subject to liability to the discharged employee for: (1) damages (including reasonably foreseeable consequential damages) caused by the employee’s reasonable reliance on that promise; (2) less mitigation of losses (such as the compensation earned and that reasonably could have been earned

from comparable alternative employment during the period covered by the promise); and (3) the expenses of reasonable effort (whether or not successful) to mitigate losses.

SHIRLEY MACLAINE PARKER V. TWENTIETH CENTURY-FOX FILM CORP. Supreme Court of California, 1970. 3 Cal.3d 176, 89 Cal.Rptr. 737, 474 P.2d 689.

BURKE, J. Defendant Twentieth Century-Fox Film Corporation appeals from a summary judgment granting to plaintiff the recovery of agreed compensation under a written contract for her services as an actress in a motion picture. * * * Plaintiff is well known as an actress, and in the contract between plaintiff and defendant is sometimes referred to as the “Artist.” Under the contract, dated August 6, 1965, plaintiff was to play the female lead in defendant’s contemplated production of a motion picture entitled “Bloomer Girl.” The contract provided that defendant would pay plaintiff a minimum “guaranteed compensation” of $53,571.42 per week for 14 weeks 397

commencing May 23, 1966, for a total of $750,000. [Eds. In inflation adjusted figures, the contract would be worth $6.3 million today.] Prior to May 1966 defendant decided not to produce the picture and by a letter dated April 4, 1966, it notified plaintiff of that decision and that it would not “comply with our obligations to you under” the written contract. By the same letter and with the professed purpose “to avoid any damage to you,” defendant instead offered to employ plaintiff as the leading actress in another film tentatively entitled “Big Country, Big Man” (hereinafter, “Big Country”). The compensation offered was identical, as were 31 of the 34 numbered provisions or articles of the original contract. Unlike “Bloomer Girl,” however, which was to have been a musical production, “Big Country” was a dramatic “western type” movie. “Bloomer Girl” was to have been filmed in California; “Big Country” was to be produced in Australia. Also, certain terms in the proffered contract varied from those of the original.2 Plaintiff was given one week within which to accept; she did not and the offer lapsed. Plaintiff then commenced this action seeking recovery of the agreed guaranteed compensation. The complaint sets forth two causes of action. The first is for money due under the contract; the second, based upon the same allegations as the first, is for damages resulting from defendant’s breach of contract. Defendant in its answer admits the existence and validity of the contract, that plaintiff complied with all the conditions, covenants and promises and stood ready to complete the performance, and that defendant breached and “anticipatorily repudiated” the contract. It denies, however, that any money is due to plaintiff either under the contract or as a result of its breach, and pleads as an affirmative defense to both causes of action plaintiff’s allegedly deliberate failure to mitigate damages, asserting that 398

she unreasonably refused to accept its offer of the leading role in “Big Country.” Plaintiff moved for summary judgment under Code of Civil Procedure section 437c, the motion was granted, and summary judgment for $750,000 plus interest was entered in plaintiff’s favor. This appeal by defendant followed. * * * As stated, defendant’s sole defense to this action which resulted from its deliberate breach of contract is that in rejecting defendant’s substitute offer of employment plaintiff unreasonably refused to mitigate damages. The general rule is that the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment. * * * However, before projected earnings from other employment opportunities not sought or accepted by the discharged employee can be applied in mitigation, the employer must show that the other employment was comparable, or substantially similar, to that of which the employee has been deprived; the employee’s rejection of or failure to seek other available employment of a different or inferior kind may not be resorted to in order to mitigate damages. * * * In the present case defendant has raised no issue of reasonableness of efforts by plaintiffs to obtain other employment; the sole issue is whether plaintiff’s refusal of defendant’s substitute offer of “Big Country” may be used in mitigation. Nor, if the “Big Country” offer was of employment different or inferior when compared with the original “Bloomer Girl” employment, is there an issue as to whether or not plaintiff acted reasonably in refusing the substitute offer. Despite defendant’s arguments to the contrary, no case cited or which our research has discovered holds or suggests that reasonableness is an element of a wrongfully discharged employee’s option to reject, or fail to seek, different or inferior employment lest the possible earnings

therefrom be charged against him in mitigation of damages.5 Applying the foregoing rules to the record in the present case, with all intendments in favor of the party opposing the summary judgment motion—here, defendant—it is clear that the trial court correctly ruled that plaintiff’s failure to accept defendant’s tendered substitute employment could not be applied in mitigation of damages because the offer of the “Big Country” lead was of employment both different and inferior, and that no factual dispute was presented on that issue. The mere circumstance that “Bloomer Girl” was to be a musical review calling upon plaintiff’s talents as a dancer as well as an actress, and was to be produced in the City of Los 399

Angeles, whereas “Big Country” was a straight dramatic role in a “Western Type” story taking place in an opal mine in Australia, demonstrates the difference in kind between the two employments; the female lead as a dramatic actress in a western style motion picture can by no stretch of imagination be considered the equivalent of or substantially similar to the lead in a song-and-dance production. Additionally, the substitute “Big Country” offer proposed to eliminate or impair the director and screenplay approvals accorded to plaintiff under the original “Bloomer Girl” contract (see fn. 2, ante), and thus constituted an offer of inferior employment. No expertise or judicial notice is required in order to hold that the deprivation or infringement of an employee’s rights held under an original employment contract converts the available “other employment” relied upon by the employer to mitigate damages, into inferior employment which the employee need not seek or accept. * * *

NOTES AND QUESTIONS 1. How Unique is Parker? Is Parker a special case for high-end actors for whom each film project is viewed as a unique opportunity? Was it really unique? Why does uniqueness of the opportunity obviate any need to mitigate damages? Would any actor who agreed to perform in “Bloomer Girl,” but was similarly denied that opportunity also not be required to mitigate damages? Assume Jim Jones is a movie set cameraman who was initially offered work on “Bloomer Girl,” which did not materialize and was then offered work at the same pay and benefits for “Big Country, Big Man,” which he turns down? Would this be viewed by the California court as a failure to mitigate damages? See Employment Restatement § 9.01. From the movie producer’s perspective, how can this issue be dealt with contractually? Why was the language quoted in footnote 2 not sufficient? 2. Generally, courts rule that former employees act reasonably in declining job openings at lesser pay and status than the plaintiff enjoyed in her previous employment. At some point do these individuals have to lower their sights or be held not to have reasonably mitigated damages? See Employment Restatement § 9.01, comment g. 3. Applying the Employment Restatement provision above, outline plaintiff’s measure of damages. Note that the relevant California Civil Jury Instructions provide: “[Name of plaintiff] also must prove the amount of [his/her/its] damages according to the following instructions. [He/She/It] does not have to prove the exact amount of damages. You must not speculate or guess in awarding damages.” CACI No. 350, Judicial Council of California Civil Jury Instruction (June 2015 Supp.). 4. Future Economic Loss? What position does the Employment Restatement take on recovery of future economic losses? Consider § 9.05, Comment e: 400 Although some courts continue to be skeptical of claims of future economic harm, courts in a considerably larger number of jurisdictions, perhaps influenced by the availability of “front pay” in lieu of reinstatement for statutory employment-law violations (see § 9.04, Comment c), show increasing receptivity to allowing well-grounded claims of reasonably certain future economic loss to be submitted to the trier of fact. This Section adopts the view of the latter jurisdictions, that ordinarily the trier of fact should be allowed to consider whether claims of future economic loss are well-founded by assessing the injured party’s probable compensation over his likely work expectancy minus earnings the employee would, or could (through reasonable effort), obtain had he not been injured. These courts do not require expert vocational testimony in all cases but do insist on a reasonable factual basis for awarding damages for future economic loss. 5. Specific Performance of Employment Contracts? Could Ms. Parker have obtained an order requiring the defendant to place her in “Bloomer Girl”? As a general matter, courts will not grant specific performance of personal services contracts. Note in Ms. Parker’s case such an order might have been particularly infeasible because the court would be ordering the production of a film that the defendant had taken off the boards. In most employment terminations, reinstatement is not as infeasible but is still difficult when a replacement has been hired or there are continuing tensions between the plaintiff and the former employer. See Employment Restatement § 9.04. 6. Consequential Damages. Should Ms. Parker be able to recover consequential damages for harm to her reputation as a result of

losing the “Bloomer Girl” opportunity? Was the injury suffered by Ms. Parker’s one that her producer “did not have reason to foresee” would be “a probable result of the breach when the contract was entered into.” Restatement, Second, Contracts § 351(1). See Restatement of Employment Law § 9.01, Comment k; e.g., Redgrave v. Boston Symphony Orchestra, Inc., 855 F.2d 888 (1st Cir. 1988) (applying Massachusetts law).

2. TORT CLAIMS RESTATEMENT OF EMPLOYMENT LAW § 9.05 American Law Institute (2015).

§ 9.05. Damages—Employer Breach of Tort-Based Duty (a) An employer who breaches a tort-based duty to an employee is subject to liability in damages to the affected employee for foreseeable harms caused by the wrong. (b) To the extent not precluded by workers’-compensation law or other applicable law, available items of damages that may be sought under (a) include past and reasonably certain future 401

economic loss, noneconomic loss, the expenses of reasonable efforts to mitigate damages, and reasonably foreseeable consequential damages. An employee may also recover punitive damages if the employer was sufficiently culpable, or nominal damages if no actual damages are proven. (c) Unless otherwise provided by law, an employer who breaches a tort-based duty is not subject to liability for the attorney’s fees incurred by the employee in maintaining the employee’s claim.

FOLEY V. INTERACTIVE DATA CORP. Supreme Court of California, En Banc 1988. 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373.

[Eds. For previous excerpt from this decision, see p. 57 supra.] We turn now to plaintiff’s cause of action for tortious breach of the implied covenant of good faith and fair dealing. Relying on Cleary [v. American Airlines, Inc.,] (1980), 111 Cal.App.3d 443, 168 Cal.Rptr. 722, and subsequent Court of Appeal cases, plaintiff asserts we should recognize tort remedies for such a breach in the context of employment termination. The distinction between tort and contract is well grounded in common law, and divergent objectives underlie the remedies created in the two areas. Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate “social policy.” (Prosser, Law of Torts (4th ed. 1971) p. 613.) The covenant of good faith and fair dealing was developed in the contract arena and is aimed at making effective the agreement’s promises. Plaintiff asks that we find that the breach of the implied covenant in employment contracts also gives rise to an action seeking an award of tort damages. *** “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Rest.2d Contracts, § 205.) This duty has been recognized in the majority of American jurisdictions, the Restatement, and the Uniform Commercial Code. (Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith (1980) 94 Harv.L.Rev. 369.) Because the covenant is a contract term, however, compensation for its breach has almost always been limited to contract rather than tort remedies. * * * An exception to this general rule has developed in the context of insurance contracts where, for a variety of policy reasons, courts have held that breach of the implied covenant will provide the basis for an action in tort. California has a well-developed judicial history addressing this exception. In Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 402

658, 328 P.2d 198, we stated, “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (See also Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141.) Thereafter, in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173, for the first time we permitted an insured to recover in tort for emotional damages

caused by the insurer’s breach of the implied covenant. We explained in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, * * * . Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.” (Id., at p. 575, 108 Cal.Rptr. 480, 510 P.2d 1032.) *** * * * An allegation of breach of the implied covenant of good faith and fair dealing is an allegation of breach of an “ex contractu” obligation, namely one arising out of the contract itself. The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purposes. The insurance cases thus were a major departure from traditional principles of contract law. We must, therefore, consider with great care claims that extension of the exceptional approach taken in those cases is automatically appropriate if certain hallmarks and similarities can be adduced in another contract setting. With this emphasis on the historical purposes of the covenant of good faith and fair dealing in mind, we turn to consider the bases upon which extension of the insurance model to the employment sphere has been urged. The “special relationship” test gleaned from the insurance context has been suggested as a model for determining the appropriateness of permitting tort remedies for breach of the implied covenant of the employment context. One commentary has observed, “[j]ust as the law of contracts fails to provide adequate principles for construing the terms of an insurance policy, the substantial body of law uniquely applicable to insurance contracts is practically irrelevant to commercially oriented contracts * * * . These [unique] features characteristic of the insurance contract make it particularly susceptible to public policy considerations.” (Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F.L.Rev. 187, 200–201, fns. omitted.) These commentators assert that tort remedies for breach of the covenant should not be extended across the board in the commercial context, but that, nonetheless, public policy considerations suggest extending the tort remedy if certain salient factors are present. (Id., at pp. 216–218.) “The tort of bad faith should be applied to commercial contracts only if four of the features characteristic of insurance bad faith actions are present. The features are: (1) one of the parties to the contract enjoys a superior 403

bargaining position to the extent that it is able to dictate the terms of the contract; (2) the purpose of the weaker party in entering into the contract is not primarily to profit but rather to secure an essential service or product, financial security or peace of mind; (3) the relationship of the parties is such that the weaker party places its trust and confidence in the larger entity; and (4) there is conduct on the part of the defendant indicating an intent to frustrate the weaker party’s enjoyment of the contract rights.” (Id., at p. 227.) The discussion of these elements includes an assumption that a tort remedy should be recognized in employment relationships within the stated limitations. *** [W]e are not convinced that a “special relationship” analogous to that between insurer and insured should be deemed to exist in the usual employment relationship which would warrant recognition of a tort action for breach of the implied covenant. Even if we were to assume that the special relationship model is an appropriate one to follow in determining whether to expand tort recovery, a breach in the employment context does not place the employee in the same economic dilemma that an insured faces when an insurer in bad faith refuses to pay a claim or to accept a settlement offer within policy limits. When an insurer takes such actions, the insured cannot turn to the marketplace to find another insurance company willing to pay for the loss already incurred. The wrongfully terminated employee, on the other hand, can (and must, in order to mitigate damages [see Parker v. Twentieth Century-Fox Film Corp. (1970) 3 Cal.3d 176, 181–182, 89 Cal.Rptr. 737, 474 P.2d 689] make reasonable efforts to seek alternative employment. * * * Moreover, the role of the employer differs from that of the “quasi-public” insurance company with whom individuals contract specifically in order to obtain protection from potential specified economic harm. The employer does not similarly “sell” protection to its employees; it is not providing a public service. Nor do we find convincing the idea that the employee is necessarily seeking a different kind of financial security than those entering a typical commercial contract. If a small dealer contracts for goods from a large supplier, and those goods are vital to the small dealer’s business, a breach by the supplier may have financial significance for individuals employed by the dealer or to the dealer himself. Permitting only contract damages in such a situation has ramifications no different from a similar limitation in the direct employer-employee relationship. Finally, there is a fundamental difference between insurance and employment relationships. In the insurance relationship, the insurer’s and insured’s interest are financially at odds. If the insurer pays a claim, it diminishes its fiscal resources. The insured of course has paid for protection and expects to have its losses recompensed. When a claim is paid, money shifts from insurer to insured, or, if appropriate, to a third party claimant. 404

Putting aside already specifically barred improper motives for termination which may be based on both economic and noneconomic considerations, as a general rule it is to the employer’s economic benefit to retain good employees. The interests of employer and employee are most frequently in alignment. If there is a job to be done, the employer must still pay someone to do it. This is not to say that there may never be a “bad motive” for discharge not otherwise covered by law. Nevertheless, in terms of abstract employment relationships as contrasted with abstract insurance relationships, there is less inherent relevant tension between the interests of employers and employees than exists between that of insurers and insureds. Thus the need to place disincentives on an employer’s conduct in addition to those already imposed by law simply does not rise to the same level as that created by the conflicting interests at stake in the insurance context. Nor is this to say that the Legislature would have no basis for affording employees additional protections. It is, however, to say that the need to extend the special relationship model in the form of judicially created relief of the kind sought here is less compelling. * * * [I]n traditional contract law, the motive of the breaching party generally has no bearing on the scope of damages that the injured party may recover for the breach of the implied covenant; the remedies are limited to contract damages. Thus, recitation of the parameters of the implied covenant alone is unsatisfactory. If the covenant is implied in every contract, but its breach does not in every contract give rise to tort damages, attempts to define when tort damages are appropriate simply by interjecting a requirement of “bad faith” do nothing to limit the potential reach of tort remedies or to differentiate between those cases properly and traditionally compensable by contract damages and those in which tort damages should flow. Virtually any firing (indeed any breach of a contract term in any context) could provide the basis for a pleading alleging the discharge was in bad faith under the cited standards.

NOTES AND QUESTIONS 1. Bad Faith Breach? Does the Foley court persuasively distinguish the insurance law principle of “bad-faith breach,” which states a tort in California and other states? Only Nevada has applied the insurance precedent to certain employment cases. In K Mart Corp. v. Ponsock, 103 Nev. 39, 732 P.2d 1364 (1987), the court held that an employee discharged after nearly 10 years of service for the purpose of preventing the vesting of retirement benefits could recover in tort. Apparently, Nevada limits the bad-faith discharge theory recognized in K Mart to contexts where employers breach without justification a “contractual obligation of continued employment”. Sands Regent v. Valgardson, 105 Nev. 436, 777 P.2d 898, 899 (1989). Should tort damages be available in a case like Fortune, p. 380 supra? 2. Contract vs. Tort. What differences, if any, are there between recovery in tort and recovery under contract? As the Restatement provisions 405 indicate, in both cases mitigation of damages is required, see Employment Restatement § 9.05, Comment c, and recovery for nonspeculative future losses is possible. Punitive damages would not be available in a contract case. Would damages for emotional distress be available as an element of damages for a contract case? Would they be available in a tort case outside the parameters of the intentional infliction of emotional distress tort? See Employment Restatement, § 9.01, Comment j; and see Cummings v. Premier Rehab Keller, 596 U.S. ___, 142 S.Ct. 1562 (2022), discussed infra (emotional distress damages are not available in action under Rehabilitation Act or Affordable Care Act because such damages are not ordinarily available in contract claims.) 3. Punitive Damages. The commission of an otherwise actionable tort by an agent of the employer does not necessarily translate into employer liability for punitive damages. Calif. Civil Code Sec. 3294, subd. (a), for example, allows a plaintiff to seek punitive damages “for the breach of an obligation not arising from contract” when the plaintiff can show by “clear and convincing evidence” that a defendant “has been guilty of oppression, fraud or malice.” But subd. (b), added in 1980, states that an employer cannot be held liable for punitive damages unless the employer has advance knowledge of the unfitness of the employee and employed him with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud or malice. The statute also includes an additional requirement for corporate employers who will not be liable for punitive damages unless “the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice [is] on the part of an officer, director, or managing agent of the corporation.” See also White v. Ultramar, 21 Cal.4th 563, 88 Cal.Rptr.2d 19, 981 P.2d 944 (1999) (“ ‘managing agent’ [includes] only those corporate employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy.”) 21 Cal.App.4th at 566, 577, 981 P.2d at 947, 954. The New York rule can be found in Loughry v. Lincoln First Bank, 67 N.Y.2d 369, 494 N.E.2d 70, 502 N.Y.S.2d 965 (1986). The Efficacy of Reputational Sanctions Will reputational harms be sufficient to curb any tendency by employers

to contravene implied understandings with employees? In most employment settings, reliable information about the firm’s record of promise-keeping is not readily obtainable. Current employees are likely to be the best source of such information but, under real world conditions, they are not likely to transmit this information to job applicants. Moreover, they are unlikely to transmit clear informational signals by exiting employment, because it is difficult to evaluate why employees are leaving and, given the lock-in effect of the internal labor market contract, it is difficult to evaluate why they stay. Samuel Estreicher, Employer Reputation at Work, 27 Hofstra Lab. & Emp. L. J. 1 (2009). Have you ever looked up information about an employer’s reputation online, including “Best Employer” websites, before taking a job? What sort of information was there on its employment policies? Was it useful in assessing the likelihood of fair treatment on the job?

3. STATUTORY CLAIMS NOTES AND QUESTIONS 1. Reinstatement with Back Pay. In almost all federal (and many state) statutory employment cases, courts award reinstatement of the wronged employee to the position the employee would have had but for the employer’s wrongdoing, coupled with back pay for lost compensation during the period before reinstatement. Section 706(g) of Title VII explicitly provides: If the court finds that the respondent has intentionally engaged in or is intentionally engaging in an unlawful employment practice charged in the complaint, the court may enjoin the respondent from engaging in such unlawful employment practice, and order such affirmative action as may be appropriate, which may include, but is not limited to, reinstatement or hiring of employees, with or without back pay (payable by the employer, employment agency, or labor organization, as the case may be, responsible for the unlawful employment practice), or any other equitable relief as the court deems appropriate. Back pay liability shall not accrue from a date more than two years prior to the filing of a charge with the Commission. Interim earnings or amounts earnable with reasonable diligence by the person or persons discriminated against shall operate to reduce the back pay otherwise allowable. 42 U.S.C. 2000e–5(g). Back pay is available under the ADEA which, because it is enforced pursuant to the Fair Labor Standards Act, has a different statute of limitations than the 2-year Title VII back pay cutoff. See also Johnson v. Railway Express Agency, Inc., 421 U.S. 454, 460 (1975) (back pay awards under Section 1981 are not limited by Title VII’s 2-year cutoff.) Courts award back pay “as a matter of course” under Title VII to further the statute’s “make whole purpose.” Albemarle Paper Co. v. Moody, supra p. 115, 422 U.S. 405 (1975): 407 [G]iven a finding of unlawful discrimination, backpay should be denied only for reasons which, if applied generally, would not frustrate the central statutory purposes of eradicating discrimination throughout the economy and making persons whole for injuries suffered through past discrimination[.] * * * The District Court’s stated grounds for denying backpay * * * was that Albermarle’s breach of Title VII had not been in ‘bad faith.’ This is not a sufficient reason for denying backpay. See also Mosley-Meacham v. Memphis Light, Gas & Water Div., 883 F. 3d 595 (6th Cir. 2018) (back pay is required when a violation is found save in exceptional circumstances.) Back pay also generally includes compensation for lost fringe benefits, including vacation pay, health, life insurance and pension benefits. Complex issues beyond the scope of this chapter arise in cases where compensation includes stock options, restricted stock units, or bonus or profit-sharing plans. 2. Unconditional Offer of Reinstatement. Back pay liability can be terminated by an unconditional offer to reinstate a terminated employee, which generally cuts off back pay and front pay (see below) as of the date of the offer. Ford Motor Co. v. EEOC, 458 U.S. 219, 228, 102 S.Ct. 3057, 73 L.Ed.2d 721 (1982) ([T]he legal rules fashioned to implement Title VII should be designed . . . to encourage Title VII defendants promptly to make curative, unconditional job offers to Title VII claimants, thereby bringing defendants into ‘voluntary compliance.’ . . . The victims of job discrimination want jobs, not lawsuits.”)

3. Front Pay in Lieu of Reinstatement. While reinstatement is the preferred remedy, courts have recognized that it is not appropriate in all cases. In assessing the appropriateness of reinstatement in the Title VII context, courts consider the plaintiff’s situation, including subsequent employment, career goals, and ability to return to work. They also consider whether the employer remains in business, the availability of a comparable position, and the displacement of other employees. Equally important, they consider the parties’ feelings towards reinstatement, including hostility or animosity between the parties, hostility in the workplace, and the parties’ agreement as to the viability of reinstatement. Franchina v. City of Providence, 881 F. 3d 32, 58 (1st Cir. 2018) (enumerating factors to be considered.) In cases where reinstatement is not appropriate, front pay is an alternative equitable remedy that may be imposed in lieu of reinstatement. Courts do not consider awarding front pay until they are “assured that reinstatement is an infeasible or otherwise inappropriate remedy.” Williams v. Valentec Kisco, Inc., 964 F.2d 723 (8th Cir.), cert. denied, 506 U.S. 1014, 113 S.Ct. 635, 121 L.Ed2d 566 (1992). Where an employee has been working for an indefinite term, the court must determine the effect of the termination on the employee’s future wages. Front pay is also a helpful remedy in ADEA cases where an older plaintiff may face a lower likelihood of reemployment. Court awards may extend front pay for extended periods, sometimes for a decade or 408 more. Donlin v. Phillips Lighting Corp., 581 F. 3d 73 (3rd Cir.2009); Padilla v. Metro-North Commuter R.R., 92 F.3d 117, 126 (2d Cir.1996) (sustaining award to plaintiff in his 40s, “in the amount of the difference between his salary as a train dispatcher and the salary paid to the superintendent of train operations until he reaches the age of 67”); Kelley v. Airborne Freight Corp., 140 F.3d 335, 355–56 (1st Cir.1998) (sustaining $1 million award because plaintiff was six years away from becoming fully vested in pension plan). In Pollard v. E.I. du Pont de Nemours & Co., 532 U.S. 843, 121 S.Ct. 1946, 150 L.Ed.2d 62 (2001), the Court held that front pay is equitable relief authorized by § 706(g), not an element of compensatory damages under § 1981a and hence not subject to the damages “caps” in § 1981a(b)(3) of the 1991 Civil Rights Act. Because back pay and front pay are equitable remedies, neither requires a jury trial under the Seventh Amendment. 4. Mitigation of Economic Damages. Title VII’s remedial structure is based upon practice under the National Labor Relations Act (NLRA), 49 Stat. 449 (1935), as amended, 29 U.S.C. §§ 151–169. The Supreme Court early in the NLRA’s history declared that even though employees discriminated against for union activity have suffered a public wrong, reasonable mitigation of damages is required. See Phelps Dodge Corp. v. NLRB, 313 U.S. 177 (1941). Section 706(g) imposes a similar requirement. Interim earnings or amounts earnable with reasonable diligence by the person or persons discriminated against shall operate to reduce the back pay otherwise allowable. Although denominated a “duty,” failure to mitigate is more a basis for deduction from back pay, front pay, or damages rather than breach of an affirmative obligation as such. Although the plaintiff has the duty to mitigate, courts generally have placed the burden of proving that an employee has not mitigated damages on the defendant employer, Normand v. Research Institute of America, 927 F. 2d 857 (5th Cir. 1991). Generally speaking, a plaintiff must make a reasonably diligent search for a job, while an employer must show both that the search was not diligent and that jobs were available. Merely searching newspaper wants ads is not sufficient, EEOC v. Service News Co., 898 F. 2d 958 (4th Cir. 1990), and where the plaintiff’s job search is desultory some courts hold that the defendant has satisfied its burden based on that proof alone. Greenway v. Buffalo Hilton Hotel, 143 F. 3d 47 (2d Cir. 1998). Where an employee has obtained alternate but inferior employment, the court must estimate (often with the help of experts) the difference in earnings between the substitute employment and the original job. Goss v. Exxon Office Sys. Co., 747 F.2d 885 (3d Cir.1984) (awarding front pay for the estimated period it would take plaintiff to reach a compensation level equivalent to what she would have received absent discrimination); Koyen v. Consolidated Edison Co. of New York, Inc., 560 F.Supp. 1161 (S.D.N.Y.1983). 5. After-Acquired Evidence of Employee Misconduct. Recall Chapter 3’s discussion of McKennon v. Nashville Banner Publishing Co.513 U.S. 352, 115 S.Ct. 879, 130 L.Ed.2d 852 (1995), holding that evidence of terminable 409 misconduct uncovered during a lawsuit limits an employee’s back pay or front pay in a Title VII or ADEA case from the date of discovery forward. Although not accepted across all states, some state courts have invoked the doctrine to limit recovery in employment cases. See Silver v. CPC-Sherwood Manor, Inc., 2006 OK 97, 151 P.3d 127 (Okl.2006) (public-policy claim). See Riddle v. Wal-Mart Stores, Inc., 27 Kan.App.2d 79 (Kan. App.2000) (public-policy claim); Gassmann v. Evangelical Lutheran Good Samaritan Soc., Inc., 933 P.2d 743 (Kan.1997) (implied-contract claim). 6. Pre- and Post-Judgment Interest. The lower courts have held that an award of prejudgment interest, although routinely made, is discretionary, see, e.g., Hunter v. Allis-Chalmers Corp., 797 F.2d 1417 (7th Cir.1986), a position endorsed (in dicta) in Loeffler v. Frank, 486 U.S. 549, 108 S.Ct. 1965, 100 L.Ed.2d 549 (1988), and codified at 42 U.S.C. § 2000e–16(d) (“the same interest to compensate for delay in payment shall be available as in cases involving nonpublic parties,” where sovereign immunity is inapplicable).

Some decisions hold that in ADEA cases prejudgment interest on back pay awards is not available because the cost of delay is already accounted for by the provision of liquidated damages which amounts to a double recovery in and of itself. See Shea v. Galaxie Lumber & Construction Co., Ltd., 152 F.3d 729, 733–34 (7th Cir.1998); McCann v. Texas City Refining, Inc., 984 F.2d 667 (5th Cir.1993); Linn v. Andover Newton Theological School, Inc., 874 F.2d 1 (1st Cir.1989); but see Starceski v. Westinghouse Electric Corp., 54 F.3d 1089, 1099–1100 (3d Cir.1995) (liquidated damages are “punitive” under Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 105 S.Ct. 613, 83 L.Ed.2d 523 (1985), and do not foreclose prejudgment interest). 7. Compensatory Damages. Some employment statutes allow the recovery of non-economic damages, such as pain and suffering, humiliation, or out-of-pocket expenses. a. Title VII: The statute was amended in 1991 to permit plaintiffs to recover compensatory and punitive damages subject to a cap of up to $300,000 per case, based on the employer’s size. 42 U.S.C. § 1981(b)(3). Compensatory damages may be awarded for “future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses” and such awards do not include back pay, interest on back pay, front pay or other monetary relief available under Section 706(g) set forth above. Compensatory damage awards are often supported by expert testimony, and excessive awards are subject to reduction in appropriate cases through post-trial motions. In practice, courts often distinguish between so-called “garden variety” emotional distress claims (which include upset at termination and which have not required treatment by a professional) and more severe claims, in which the plaintiff claims to be severely injured and unable to work. The latter type of claim almost always requires proof from a physician or psychiatrist and may result in an independent physical/mental health examination under Fed. R. Civ. Pro. 35 and comparable state law provisions. 410 b. Section 1981: Claims of race discrimination under Section 1981 include compensatory and punitive damages and are not subject to any cap. Many state and local laws also allow recovery of non-economic damages without regard to the Title VII cap. For this reason, a Title VII claim often is joined with a § 1981 or analogous state law claim to allow a greater recovery. c. ADEA: Courts generally decline to award non-economic damages under the ADEA, principally because of the availability of liquidated damages, which amounts to a doubling of economic loss. See, e.g., Flamand v. American International Group, 876 F.Supp. 356 (D.P.R.1994). The Seventh Circuit takes the view that a 1977 amendment to the FLSA authorizes compensatory damage awards in FLSA and EPA retaliation cases. See Shea v. Galaxie Lumber & Constr. Co., 152 F.3d 729 (7th Cir.1998); Avitia v. Metropolitan Club of Chicago, Inc., 49 F.3d 1219, 1226 n. 2 (7th Cir.1995); see also Moore v. Freeman, 355 F.3d 558 (6th Cir. 2004). d. Disability claims under Title VI, Title IX, the Rehabilitation Act and the Affordable Care Act. In Cummings v. Premier Rehab Keller, 596 U.S. ___, 142 S.Ct. 1562 (2022), the Supreme Court held, 6-3, that emotional distress damages are not available under the statutes mentioned above, the majority reasoning that such damages are not normally recoverable in contract actions and that recipients of federal funding therefore cannot be assumed to have agreed to such a recovery in accepting federal funds. Punitive damages are also unavailable in actions against recipients of federal funding for the same reason. Barnes v. Gorman, 536 U.S. 181, 122 S.Ct. 2097, 153 L.Ed.2d 230 (2002) (punitive damages not available in actions under the ADA and Rehabilitation Act.) 8. Recovery of Attorney’s Fees. Absent a statutory provision awarding attorney’s fees, each party must pay its own attorneys’ fees (known as the “American Rule”). Alyeska Pipeline Co. v. Wilderness Soc’y, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). As a result, absent a special statutory provision, plaintiffs pursuing state law contract and tort claims ordinarily cannot recover attorney’s fees even if they prevail. Most employment statutes, by contrast, allow prevailing plaintiffs to recover such fees. See e.g. 29 U.S.C. § 216(b) (FLSA); 29 U.S.C. § 626(b) (ADEA); 29 U.S.C. § 2617(a)(3) (FMLA); 18 U.S.C. 1514(a)(c)(2)(C) (Sarbanes-Oxley Act). Plaintiffs in Title VII cases are eligible for a fee award under a “mixed motive” analysis, even where the employer can show that it would have made the same decision in any event. § 706(g)(2)(B)(i). By contrast, prevailing defendants cannot recover attorney’s fees unless the lawsuit was “groundless or without foundation” “frivolous” or “vexatiously brought.” Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 98 S.Ct. 694, 54 L.Ed.2d 648 (1978). Courts calculate attorney’s fees using the “lodestar” approach. Under this method, the “initial estimate of a reasonable attorney’s fee is properly calculated by multiplying the number of hours reasonably expended on the litigation times a reasonable hourly rate.” Blum v. Stenson, 465 U.S. 886, 888, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984). The reasonableness of an hourly rate 411 and of the hours expended may turn on a range of factors, including “the novelty and difficulty of the questions”; “the skill requisite to perform the legal service properly”; “the preclusion of employment * * * due to acceptance of the case”; “the customary fee”; “time limitations imposed by the client or the case”; “the amount involved and the results obtained”; “the experience, reputation, and ability of the attorneys”; “the ‘undesirability’ of the case”; “the nature and length of the professional relationship with the client”; and “awards in similar cases”. Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974). Expert testimony is commonly required.

9. Penalties. Employment statutes sometimes use penalties and liquidated damages to deter employer violations and encourage private enforcement. Penalties are especially prevalent in the wage and hour context. As noted above, the FLSA provides for liquidated damages equal to the amount of unpaid wages, doubling the plaintiff’s potential recovery. 29 U.S.C. § 216. Although punitive damages are not available in ADEA actions, the statute authorizes an award of liquidated damages (doubling the unpaid wages due) for “willful” violations. The Supreme Court in Trans World Airlines v. Thurston, 469 U.S. 111, 126, 105 S.Ct. 613, 624, 83 L.Ed.2d 523 (1985), held that such an award serves a punitive purpose and is available only where the employer “knew or showed reckless disregard . . . whether its conduct was prohibited by the ADEA.” Several states provide for penalties where the employer fails to deliver a terminated employee’s final paycheck within the statutory period, or where the employer does not provide employees with a statutorily required notice of wages. See, e.g., New York Wage Theft Protection Act, New York Labor Law § 195. Some statutes allow penalties to be assessed by government agencies, where penalties ultimately become a function of available government resources to investigate and enforce violations. Recently, more states have empowered state workers’ compensation and unemployment insurance agencies to assess fines for misclassifying independent contractors. See e.g. Ind. Code § 22–3–1–3(15); In re: Body Electric Corp of Amer., 89 A.D. 3d 1331 (N.Y.App.Div.2011) (upholding penalty and unpaid contributions assessed by state unemployment insurance agency). To mitigate the resource limitations of government agencies, the California Private Attorneys General Act provides a private right of action to enforce any penalty-bearing provision of the labor code. Cal. Lab. § 2698 et seq. The statute also imposes default penalties for all other labor code violations except posting and filing requirements, also recoverable through a private right of action. In Viking River Cruises, Inc. v. Moriana, 596 U.S. ___, 142 S.Ct. 1906 (2022), the Supreme Court held that aspects of PAGA effectively requiring collective proceedings were preempted by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. A number of employment-related statutes have criminal penalties, although employees are rarely prosecuted. See e.g. 29 U.S.C. § 216 (willful 412 violation of certain provisions of FLSA); 18 U.S.C. 1030 (Computer Fraud and Abuse Act); 43 Penn. Stat. § 933.1 et seq. (criminalizing independent contractor misclassification in the construction industry); Cal. Labor Code §§ 510, 1109 (misdemeanor to violate minimum wage order and overtime provisions); 18 U.S.C. § 1513(e) (up to 10 years imprisonment for retaliation against any person for providing truthful information to law enforcement officer regarding a possible federal offense). 10. Punitive Damages. Where available, punitive damages can “be awarded for conduct that is outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.” Restatement (Second) of Torts § 908(2). The standard for punitive damage awards under Title VII is discussed in the case below.

KOLSTAD V. AMERICAN DENTAL ASSOCIATION Supreme Court of the United States, 1999. 527 U.S. 526, 119 S.Ct. 2118, 144 L.Ed.2d 494.

JUSTICE O’CONNOR delivered the opinion of the Court. I A In September 1992, Jack O’Donnell announced that he would be retiring as the Director of Legislation and Legislative Policy and Director of the Council on Government Affairs and Federal Dental Services for respondent, American Dental Association (respondent or Association). Petitioner, Carole Kolstad, was employed with O’Donnell in respondent’s Washington, D.C., office, where she was serving as respondent’s Director of Federal Agency Relations. When she learned of O’Donnell’s retirement, she expressed an interest in filling his position. Also interested in replacing O’Donnell was Tom Spangler, another employee in respondent’s Washington office. At this time, Spangler was serving as the Association’s Legislative Counsel, a position that involved him in respondent’s legislative lobbying efforts. Both petitioner and Spangler had worked directly with O’Donnell, and both had received “distinguished” performance ratings by the acting head of the Washington office, Leonard Wheat. Both petitioner and Spangler formally applied for O’Donnell’s position, and Wheat requested that Dr. William Allen, then serving as respondent’s Executive Director in the Association’s Chicago office, make the ultimate promotion decision. After interviewing both petitioner and Spangler, Wheat recommended that Allen select Spangler for O’Donnell’s post. Allen notified petitioner in December 1992 that he had, in fact, selected Spangler to serve as O’Donnell’s replacement. Petitioner’s challenge to this employment decision forms the basis of the instant action.

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B The District Court denied petitioner’s request for a jury instruction on punitive damages. The jury concluded that respondent had discriminated against petitioner on the basis of sex and awarded her backpay totaling $52,718. Although the District Court subsequently denied respondent’s motion for judgment as a matter of law on the issue of liability, the court made clear that it had not been persuaded that respondent had selected Spangler over petitioner on the basis of sex, and the court denied petitioner’s requests for reinstatement and for attorney’s fees. Petitioner appealed from the District Court’s decisions denying her requested jury instruction on punitive damages and her request for reinstatement and attorney’s fees. [After the D.C. Circuit agreed to hear the case en banc] the court affirmed the decision of the District Court. The en banc majority concluded that, “before the question of punitive damages can go to the jury, the evidence of the defendant’s culpability must exceed what is needed to show intentional discrimination.” Based on the 1991 Act’s structure and legislative history, the court determined, specifically, that a defendant must be shown to have engaged in some “egregious” misconduct before the jury is permitted to consider a request for punitive damages. Although the court declined to set out the “egregiousness” requirement in any detail, it concluded that petitioner failed to make the requisite showing in the instant case. * * * II A Prior to 1991, only equitable relief, primarily backpay, was available to prevailing Title VII plaintiffs; the statute provided no authority for an award of punitive or compensatory damages. See Landgraf v. USI Film Products, 511 U.S. 244, 252–253, 128 L. Ed. 2d 229, 114 S. Ct. 1483 (1994). With the passage of the 1991 Act, Congress provided for additional remedies, including punitive damages, for certain classes of Title VII and ADA violations. The 1991 Act limits compensatory and punitive damages awards, however, to cases of “intentional discrimination”—that is, cases that do not rely on the “disparate impact” theory of discrimination. 42 U.S.C. § 1981a(a)(1). Section 1981a(b)(1) further qualifies the availability of punitive awards: “A complaining party may recover punitive damages under this section against a respondent (other than a government, government agency or political subdivision) if the complaining party demonstrates that the respondent engaged in a discriminatory practice or discriminatory practices with malice or with reckless indifference to the federally protected rights of an aggrieved individual.” (Emphasis added.) 414

The very structure of § 1981a suggests a congressional intent to authorize punitive awards in only a subset of cases involving intentional discrimination. Section 1981a(a)(1) limits compensatory and punitive awards to instances of intentional discrimination, while § 1981a(b)(1) requires plaintiffs to make an additional “demonstration” of their eligibility for punitive damages. Congress plainly sought to impose two standards of liability—one for establishing a right to compensatory damages and another, higher standard that a plaintiff must satisfy to qualify for a punitive award. The Court of Appeals sought to give life to this two-tiered structure by limiting punitive awards to cases involving intentional discrimination of an “egregious” nature. We credit the en banc majority’s effort to effectuate congressional intent, but, in the end, we reject its conclusion that eligibility for punitive damages can only be described in terms of an employer’s “egregious” misconduct. The terms “malice” and “reckless” ultimately focus on the actor’s state of mind. See, e.g., Black’s Law Dictionary 956–957, 1270 (6th ed. 1990); see also W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton, Law of Torts 212–214 (5th ed. 1984) (defining “willful,” “wanton,” and “reckless”). While egregious misconduct is evidence of the requisite mental state, * * * § 1981a does not limit plaintiffs to this form of evidence, and the section does not require a showing of egregious or outrageous discrimination independent of the employer’s state of mind. * * * The employer must act with “malice or with reckless indifference to [the plaintiff’s] federally protected rights.” § 1981a(b)(1) (emphasis added). The terms “malice” or “reckless indifference” pertain to the employer’s knowledge that it may be acting in violation of federal law, not its awareness that it is engaging in discrimination. *** There will be circumstances where intentional discrimination does not give rise to punitive damages liability under this standard. In some instances, the employer may simply be unaware of the relevant federal prohibition. There will be cases, moreover, in which the employer discriminates with the distinct belief that its discrimination is lawful. The underlying theory of discrimination may be novel or otherwise poorly recognized, or an employer may reasonably believe that its discrimination

satisfies a bona fide occupational qualification defense or other statutory exception to liability. See, e.g., 42 U.S.C. § 2000e–2(e) (1) (setting out Title VII defense “where religion, sex, or national origin is a bona fide occupational qualification”); see also § 12113 (setting out defenses under ADA). In Hazen Paper Co. v. Biggins, 507 U.S. 604, 616, 123 L. Ed. 2d 338, 113 S. Ct. 1701 (1993), we thus observed that, in light of statutory defenses and other exceptions permitting age-based decisionmaking, an employer may knowingly rely on age to make employment decisions without recklessly violating the Age Discrimination in Employment Act of 1967 415

(ADEA). Accordingly, we determined that limiting liquidated damages under the ADEA to cases where the employer “knew or showed reckless disregard for the matter of whether its conduct was prohibited by the statute,” without an additional showing of outrageous conduct, was sufficient to give effect to the ADEA’s two-tiered liability scheme. 507 U.S. at 616, 617. *** Egregious misconduct is often associated with the award of punitive damages, but the reprehensible character of the conduct is not generally considered apart from the requisite state of mind. * * * [U]nadir § 1981a(b)(1), pointing to evidence of an employer’s egregious behavior would provide one means of satisfying the plaintiff’s burden to “demonstrate” that the employer acted with the requisite “malice or * * * reckless indifference.” See 42 U.S.C. § 1981a(b)(1); see, e.g., 3 BNA EEOC Compliance Manual N:6085–N6084 (1992) (Enforcement Guidance: Compensatory and Punitive Damages Available Under § 102 of the Civil Rights Act of 1991) (listing “the degree of egregiousness and nature of the respondent’s conduct” among evidence tending to show malice or reckless disregard). Again, however, respondent has not shown that the terms “reckless indifference” and “malice,” in the punitive damages context, have taken on a consistent definition including an independent, “egregiousness” requirement * * * . B The inquiry does not end with a showing of the requisite “malice or * * * reckless indifference” on the part of certain individuals, however. * * * The plaintiff must impute liability for punitive damages to respondent. The en banc dissent recognized that agency principles place limits on vicarious liability for punitive damages. Likewise, the Solicitor General as amicus acknowledged during argument that common law limitations on a principal’s liability in punitive awards for the acts of its agents apply in the Title VII context. * * * While we decline to engage in any definitive application of the agency standards to the facts of this case, * * * it is important that we address the proper legal standards for imputing liability to an employer in the punitive damages context. * * * *** The common law has long recognized that agency principles limit vicarious liability for punitive awards. * * * We have observed that, “in express terms, Congress has directed federal courts to interpret Title VII based on agency principles.” Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 754, 141 L. Ed. 2d 633, 118 S. Ct. 2257 (1998); see also Meritor Savings Bank, FSB v. Vinson, 477 U.S. 57, 72, 91 L. Ed. 2d 49, 106 S. Ct. 2399 (1986) * * * . 416

* * * [O]ur interpretation of Title VII is informed by “the general common law of agency, rather than * * * the law of any particular State.” Burlington Industries, Inc., supra, at 754 (internal quotation marks omitted). The common law as codified in the Restatement (Second) of Agency (1957), provides a useful starting point for defining this general common law. * * * The Restatement of Agency places strict limits on the extent to which an agent’s misconduct may be imputed to the principal for purposes of awarding punitive damages: “Punitive damages can properly be awarded against a master or other principal because of an act by an agent if, but only if: “(a) the principal authorized the doing and the manner of the act, or “(b) the agent was unfit and the principal was reckless in employing him, or “(c) the agent was employed in a managerial capacity and was acting in the scope of employment, or “(d) the principal or a managerial agent of the principal ratified or approved the act.” Restatement (Second) of Agency, supra, § 217 C. See also Restatement (Second) of Torts § 909 (same). The Restatement, for example, provides that the principal may be liable for punitive damages if it authorizes or ratifies the

agent’s tortious act, or if it acts recklessly in employing the malfeasing agent. The Restatement also contemplates liability for punitive awards where an employee serving in a “managerial capacity” committed the wrong while “acting in the scope of employment.” Restatement (Second) of Agency, supra, § 217 C; see also Restatement (Second) of Torts, supra, § 909 (same). “Unfortunately, no good definition of what constitutes a ‘managerial capacity’ has been found,” 2 J. Ghiardi [& J. Kircher, Punitive Damages: Law and Practice], § 24.05, at 14 [(1998)], and determining whether an employee meets this description requires a fact-intensive inquiry. * * * Suffice it to say here that the examples provided in the Restatement of Torts suggest that an employee must be “important,” but perhaps need not be the employer’s “top management, officers, or directors,” to be acting “in a managerial capacity.” Ibid.; see also 2 Ghiardi, supra, § 24.05, at 14; Restatement (Second) of Torts, § 909, at 468, Comment b and Illus. 3. Additional questions arise from the meaning of the “scope of employment” requirement. The Restatement of Agency provides that even intentional torts are within the scope of an agent’s employment if the conduct is “the kind [the employee] is employed to perform,” “occurs substantially within the authorized time and space limits,” and “is actuated, at least in part, by a purpose to serve the” employer. Restatement 417

(Second) of Agency, supra, § 228(1), at 504. According to the Restatement, so long as these rules are satisfied, an employee may be said to act within the scope of employment even if the employee engages in acts “specifically forbidden” by the employer and uses “forbidden means of accomplishing results.” Id. § 230, at 511, Comment b; see also Burlington Industries, Inc., supra, at 756. * * * On this view, even an employer who makes every effort to comply with Title VII would be held liable for the discriminatory acts of agents acting in a “managerial capacity.” Holding employers liable for punitive damages when they engage in good faith efforts to comply with Title VII, however, is in some tension with the very principles underlying common law limitations on vicarious liability for punitive damages—that it is “improper ordinarily to award punitive damages against one who himself is personally innocent and therefore liable only vicariously.” Restatement (Second) of Torts, supra, § 909, at 468, Comment b. Where an employer has undertaken such good faith efforts at Title VII compliance, it “demonstrates that it never acted in reckless disregard of federally protected rights.” * * * ; see also Harris, 132 F.3d at 983, 984 (observing that, “in some cases, the existence of a written policy instituted in good faith has operated as a total bar to employer liability for punitive damages” and concluding that “the institution of a written sexual harassment policy goes a long way towards dispelling any claim about the employer’s ‘reckless’ or ‘malicious’ state of mind”). Applying the Restatement of Agency’s “scope of employment” rule in the Title VII punitive damages context, moreover, would reduce the incentive for employers to implement antidiscrimination programs. In fact, such a rule would likely exacerbate concerns among employers that § 1981a’s “malice” and “reckless indifference” standard penalizes those employers who educate themselves and their employees on Title VII’s prohibitions. * * * Dissuading employers from implementing programs or policies to prevent discrimination in the workplace is directly contrary to the purposes underlying Title VII. The statute’s “primary objective” is “a prophylactic one,” Albemarle Paper Co. v. Moody, 422 U.S. 405, 417, 45 L. Ed. 2d 280, 95 S. Ct. 2362 (1975); it aims, chiefly, “not to provide redress but to avoid harm,” Faragher, 524 U.S. at 806. With regard to sexual harassment, “for example, Title VII is designed to encourage the creation of antiharassment policies and effective grievance mechanisms.” Burlington Industries, Inc., 524 U.S. at 764. The purposes underlying Title VII are similarly advanced where employers are encouraged to adopt antidiscrimination policies and to educate their personnel on Title VII’s prohibitions. In light of the perverse incentives that the Restatement’s “scope of employment” rules create, we are compelled to modify these principles to avoid undermining the objectives underlying Title VII. * * * Recognizing Title VII as an effort to promote prevention as well as remediation, and 418

observing the very principles underlying the Restatements’ strict limits on vicarious liability for punitive damages, we agree that, in the punitive damages context, an employer may not be vicariously liable for the discriminatory employment decisions of managerial agents where these decisions are contrary to the employer’s “good-faith efforts to comply with Title VII.” * * * We have concluded that an employer’s conduct need not be independently “egregious” to satisfy § 1981a’s requirements for a punitive damages award, although evidence of egregious misconduct may be used to meet the plaintiff’s burden of proof. We leave for remand the question whether petitioner can identify facts sufficient to support an inference that the requisite mental state can be imputed to respondent. The parties have not yet had an opportunity to marshal the record evidence in support of their views on the application of agency principles in the instant case, and the en banc majority had no reason to

resolve the issue because it concluded that petitioner had failed to demonstrate the requisite “egregious” misconduct. Although trial testimony established that Allen made the ultimate decision to promote Spangler while serving as petitioner’s interim executive director, respondent’s highest position, * * * it remains to be seen whether petitioner can make a sufficient showing that Allen acted with malice or reckless indifference to petitioner’s Title VII rights. Even if it could be established that Wheat effectively selected O’Donnell’s replacement, moreover, several questions would remain, e.g., whether Wheat was serving in a “managerial capacity” and whether he behaved with malice or reckless indifference to petitioner’s rights. It may also be necessary to determine whether the Association had been making good faith efforts to enforce an antidiscrimination policy. We leave these issues for resolution on remand. CHIEF JUSTICE REHNQUIST, with whom JUSTICE THOMAS joins, concurring in part and dissenting in part. * * * I would hold that Congress’ two-tiered scheme of Title VII monetary liability implies that there is an egregiousness requirement that reserves punitive damages only for the worst cases of intentional discrimination. Since the Court has determined otherwise, however, I join that portion of Part II-B of the Court’s opinion holding that principles of agency law place a significant limitation, and in many foreseeable cases a complete bar, on employer liability for punitive damages.

NOTES AND QUESTIONS 1. To what extent does the Court adopt the principles in the Restatement Second of Agency that it cites? 2. On balance, is Kolstad a plaintiff victory (because the Court rejects an “egregiousness” standard, hence limiting occasions for court review of 419 punitive awards by juries) or a defense victory (because agency principles may insulate the employer from liability)? 3. Disparate Impact vs. Disparate Treatment Claims? Why do you think Congress excluded disparate impact claims from the greater damage recoveries provided by Section 1981(a)? Are disparate impact claims less severe or damaging than intentional discrimination claims? Consider the well-accepted proof paradigm for identifying intentional discrimination set forth in McDonnell Douglas v. Green, 411 U.S. 792 (1973). Do you think that paradigm in most cases proves intentional misconduct of the sort that would justify recovery of punitive damage under Title VII or state tort statutes? 4. “Managerial Capacity”. Does the reference to “managerial capacity” in Kolstad refer to all supervisors or only a more limited class of senior managers? Lower courts are more likely to deem low-level supervisors “managerial” where the company has failed to take preventative measures. See Lowery v. Circuit City Stores, 206 F.3d 431, 446 (4th Cir.2000) (punitive damages may be appropriate despite formal anti-discrimination policy where evidence of “top” executives’ bias and policy “to keep African-Americans in low level positions”); Tisdale v. Federal Express Corp., 415 F.3d 516 (6th Cir.2005) (“non-senior management employees can serve in a managerial capacity” for purposes of punitive damages in absence of “good-faith” company efforts); EEOC v. Wal-Mart Stores, 187 F.3d 1241 (10th Cir.1999) (punitive damages for ADA violation appropriate under Kolstad where discriminating store managers acted within scope of employment and company failed to disseminate or provide training on its antidiscrimination policy). 5. Punitive Damages for Discriminatory Harassment. As suggested by Faragher v. City of Boca Raton, 524 U.S. 775, 118 S.Ct. 2275, 141 L.Ed.2d 662 (1998) and Oncale v. Sundowner Offshore Services, Inc., 523 U.S. 75, 118 S.Ct. 998, 140 L.Ed.2d 201 (1998), harassment is generally considered outside the scope of employment when it does not result in a “tangible” employment decision such as a refusal to hire or promote or a termination. Plaintiffs in such cases must rely on other principles of agency law to obtain punitive damages. See Kimbrough v. Loma Linda Development, 183 F.3d 782 (8th Cir.1999) (finding ratification in manager’s approval of harassment); Swinton v. Potomac Corp., 270 F.3d 794, 811 (9th Cir.2001) (supervisor’s knowledge of harassment and failure to respond establishes lack of “good faith”); Deters v. Equifax Credit Information Services, Inc., 202 F.3d 1262 (10th Cir.2000) (no good faith defense available because of failure by “final decision-making authority” in plaintiff’s office to respond to complaints). For a criticism of decisions like Deters and Swinton holding that a rogue manager or supervisor’s failure to implement an anti-harassment policy is sufficient to establish a lack of corporate good faith, see Michael C. Harper, Eliminating the Need for Caps on Title VII Damage Awards: The Shield of Kolstad v. American Dental Association, 14 N.Y.U. J. of Leg. & Pub. Pol. 477, 496–596 (2011). 6. Proportionality of Punitive Awards. The Supreme Court has held that a punitive damages award may be an unconstitutional deprivation of property without due process, depending in substantial part on its proportionate 420 relationship to the compensable harm caused by the wrongdoer. See State Farm Mut. Auto Ins. co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2002); BMW of North America v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996). Does this mean that a Title VII court cannot approve the award of punitive damages in a case where the jury declines to award compensatory

damages? For cases holding that a punitive damage award is permissible without a compensatory damage award, see, e.g., Abner v. Kansas City Southern Railroad Co., 513 F.3d 154 (5th Cir.2008) (“combination of the statutory cap and high threshold of culpability for any award confines the amount of the award to a level tolerable by due process”); Cush-Crawford v. Adchem Corp., 271 F.3d 352 (2d Cir. 2001); Timm v. Progressive Steel Treating, Inc., 137 F.3d 1008 (7th Cir.1998); but see Kerr-Selgas v. American Airlines, Inc., 69 F.3d 1205, 1214 (1st Cir.1995) (Title VII award of compensatory or nominal damages is required; discounting damages allocated to claims under Puerto Rico law). 7. Punitive Damages Under State Law. Many state and local civil rights laws permit recovery of punitive damages, see, e.g., Rush v. Scott Specialty Gases, Inc., 914 F.Supp. 104 (E.D.Pa.1996) (43 Pa. Cons. Stat. Ann. §§ 951–63); Arthur Young & Co. v. Sutherland, 631 A.2d 354 (D.C.App.1993) (D.C. Human Rights Law); Chauca v. Abraham, 89 N.E.3d 475, 481 (N.Y. 2017) (punitive damages available under New York City Human Rights Law.)

B. CLAIMS AGAINST EMPLOYEES RESTATEMENT OF EMPLOYMENT LAW §§ 9.07–9.09 American Law Institute (2015).

§ 9.07. Damages—Employee Breach of Agreement (a) An employee who breaches any obligation that the employment agreement clearly states is a basis for damages liability is subject to liability for that breach of contract. The employer may recover damages for foreseeable economic loss that the employer could not have reasonably avoided, including any reasonably foreseeable consequential damages and the expenses of reasonable efforts to mitigate damages. (b) Economic loss under subsection (a) does not include lost profits caused by the employee’s breach unless the agreement expressly provides for such recovery or the employee knew or should have known that the employee would be held responsible for lost profits caused by the employee’s breach. (For employees who have breached a tort-based or fiduciary duty to the employer, see § 9.09(b).) 421

§ 9.08. Injunctive Relief—Employee Breach of Agreement (a) An employer may not obtain specific performance of the employee’s promise to work. (b) An employer may obtain injunctive relief to enforce any other obligation expressly stated in the employment agreement if the employer satisfies the traditional requirements for obtaining equitable relief. § 9.09. Damages and Restitution—Employee Breach of Tort-Based Duty or Fiduciary Duty (a) An employee who breaches a tort-based duty or any fiduciary duty the employee owes the employer (Chapter 8) is subject to liability for foreseeable harm to the employer caused by the breach, including the expenses of reasonable efforts to mitigate damages, less damages that the employer could reasonably have avoided. (b) Available items of damages that may be obtained under (a) include past and reasonably certain future economic loss and noneconomic loss, punitive damages, reasonably foreseeable lost profits, and reasonably foreseeable consequential damages. (c) Except to the extent the employer would obtain double recovery for the same loss, and subject to applicable state wage-payment legislation and other law, an employer may deny any compensation owed, and recover any compensation paid, to an employee who breaches the employee’s fiduciary duty of loyalty owed the employer (§ 8.01), where (1) the employee’s compensation cannot be apportioned between the employee’s disloyal services and the employee’s loyal services, and (2) the nature of the employee’s disloyalty is such that there is no practicable method for making a reasonable calculation of the harm caused the employer by the employee’s disloyal services. If the employee’s compensation can be reasonably apportioned between the employee’s loyal and disloyal services, then the employer may deny any compensation owed, and recover any compensation paid, for the disloyal services.

(d) If an employee personally profits from a breach of fiduciary duty, the employer can recover those profits from the employee. 422

(e) Unless otherwise provided by law, an employee who breaches a tort-based duty or a fiduciary duty owed to the employer (Chapter 8) is not subject to liability for the attorney’s fees incurred by the employer in maintaining the employer’s claim.

PURE POWER BOOT CAMP, INC. V. WARRIOR FITNESS BOOT CAMP, LLC United States District Court, S.D. New York, 2011. 813 F.Supp.2d 489.

KATZ, J. Plaintiffs Pure Power Boot Camp, Inc., Pure Power Boot Camp Franchising Corporation, Pure Power Camp Jericho Inc., and Lauren Brenner (collectively “Plaintiffs” or “Pure Power”), brought this action against Defendants Warrior Fitness Boot Camp, LLC, Alexander Kenneth Fell, Ruben Dario Belliard, Jennifer J. Lee, and Nancy Baynard (collectively “Defendants” or “Warrior Fitness”), accusing Defendants of stealing their business model, customers, and confidential and commercially sensitive documents, breaching contractual and employee fiduciary duties, and infringing Plaintiffs’ trade-dress. * * * Pure Power Boot Camp is modeled, in part, after United States Marine Corps training facilities. It is designed in military camouflage colors and decor and, unlike traditional gyms, does not have a membership fee; instead, clients sign renewable contracts for “tours of duty,” meaning that “recruits”—as Pure Power clients are called—sign up for a program to attend a certain number of sessions per week for a set number of weeks. If a recruit does not show up for a scheduled class, Pure Power personnel contacts them directly. * * * Pure Power was a unique concept and unlike most other exercise facilities. It was an immediate success, garnering attention from a variety of media outlets, including MSNBC and Inside Edition. Brenner personally appeared on a variety of television shows, including NBC’s The Today Show, the Donny Deutsch Show, and the Anderson Cooper Show on CNN. Brenner’s intent when she created Pure Power was not to have one location, but to develop a business plan that could be rolled out as a national franchise. In 2006, she took steps to franchise the Pure Power concept. * * * In preparation for Pure Power’s franchising roll-out, Brenner had the drill instructors sign an Employment Agreement as a condition of continued employment. With the exception of Fell, every drill instructor, Belliard included, admits to having signed an Employment Agreement. * * * 423

[Breach of Contract] The Employment Agreement contains a number of contractual provisions, including: * * * a non-disclosure provision[.] *** [Eds. The court found that Defendant Belliard breached the non-disclosure provision for stealing and disclosing the company’s “business plan, start-up manual, and operations manual” and customer list.] Plaintiffs argue that they are entitled to recover, as compensatory damages for Belliard’s breach of the non-disclosure provision, the lost profit Pure Power incurred as a consequence of the breach, from May 2008 to December 2010. Plaintiffs propose two alternative calculations. First, attributing all of Warrior Fitness’s revenue as properly belonging to Pure Power and applying Pure Power’s purported 58% profit margin, Plaintiffs claim $1,368,247.00 in lost profits from May 2008 to December 2010. Second, considering only the 147 allegedly solicited Pure Power clients, and assuming that Pure Power clients, on average, generate $2,655.00 per year in revenue, Plaintiffs calculate total lost profits from May 2008 through December 2010, in an amount of $354,177.00. Under New York law, the measure of damages for a violation of a restrictive covenant is the loss sustained by reason of the breach, including “the net profits of which the plaintiff was deprived” by the defendant’s acts. See Weinrauch v. Kashkin, 64 A.D.2d 897, 898, 407 N.Y.S.2d 885 (2d Dep’t 1978); see also Cargill v. Sears Petroleum & Transp. Corp., 388 F.Supp.2d 37, 70 (N.D.N.Y.2005) (stating that the proper measure of damages for breach of a non-disclosure agreement is the net profits of which plaintiff was deprived as a consequence of the breach). Lost profits may be recovered only if: (1) lost profits were “fairly within the contemplation of the parties to the contract at the time it was made;” (2) lost profits were caused by the defendant’s breach; and (3) damages are “capable of proof with reasonable certainty.” Kenford Co. v. Cnty. of Erie, 67 N.Y.2d 257, 261, 502

N.Y.S.2d 131, 132, 493 N.E.2d 234 (1986); * * * “[D]amages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” Kenford, 67 N.Y.2d at 261, 502 N.Y.S.2d at 132, 493 N.E.2d 234; see also Toltec Fabrics, Inc. v. August Inc., 29 F.3d 778, 784 (2d Cir.1994) (finding evidence of lost profits insufficient where there was no reasonable certainty of future sales and plaintiff failed to demonstrate “proof of a consistent pattern of frequent ordering by a specific customer”); Trademark Research Corp. v. Maxwell Online, Inc., 995 F.2d 326, 332–33 (2d Cir.1993) (finding no reasonable certainty of lost profits despite evidence of expert calculation of lost profits based on performance of comparable companies, market studies, business and promotional plans, subsequent sales, and earnings). Plaintiffs fail to satisfy all three necessary elements to recover lost profits for Belliard’s breach of contract. First, the Employment Agreement 424

does not make any reference to lost profits, and Plaintiffs failed to introduce any evidence into the record suggesting that the parties contemplated such damages. See, e.g., Spherenomics Global Contact Ctrs. v. Customer Corp., 427 F.Supp.2d 236, 252 (E.D.N.Y.2006) (finding that parties did not contemplate lost profits liability when the non-compete was silent as to such damages). Second, regardless of the alternative measures of lost profits offered by Plaintiffs, Plaintiffs failed to establish that lost profits were caused by Belliard’s breach of the non-disclosure provision. The preponderance of the evidence does not support the conclusion that, but for Belliard’s stealing and disclosing Pure Power’s business documents and the customer list, Warrior Fitness would not have opened. Indeed, Belliard and Fell already knew how to operate a gym. They were familiar with Brenner’s teaching methods and techniques. They learned how to do the training. They knew Pure Power’s pricing structure. And, Lee, their partner, had a business degree and business experience. There is no sound basis to conclude that information contained in the stolen business documents, or the client list itself, was necessary to open Warrior Fitness. Accordingly, it is not appropriate to consider all of Warrior Fitness’s revenues as Pure Power’s lost profits. Likewise, as discussed, Plaintiffs failed to prove that the disclosure or use of the client list was the reason why the 147 former Pure Power clients signed up for classes at Warrior Fitness. Moreover, there is no support for Plaintiffs’ contention that, had Belliard not breached the non-disclosure provision of the Employment Agreement, every one of these 147 Warrior Fitness clients would have enrolled in Pure Power. Third, and finally, Plaintiffs failed to establish lost profit damages with reasonable certainty. Plaintiffs’ lost profit calculation attributing all of Warrior Fitness’s revenue to Pure Power is overreaching, inherently speculative, and cannot be tied to the breach of the non-disclosure provision. Moreover, although the relevant information was available to Plaintiffs throughout the course of this litigation, Plaintiffs ignored the actual data in the case and chose, instead, to rely on the discredited “mass asset” theory of their damages expert—which was precluded by this Court. * * * Accordingly, for all these reasons, Plaintiffs failed to establish all of the required elements of their breach of contract claim against Defendants Belliard and Fell. Breach of the Duty of Loyalty Plaintiffs contend that Defendants Belliard and Fell breached the common law duty of loyalty owed to Pure Power as employees of Pure Power. * * * Here, the preponderance of the evidence establishes numerous breaches by Defendants Belliard and Fell of their duty of loyalty to Pure 425

Power. Defendant Belliard stole Pure Power documents, including Pure Power’s business plan, start-up manual, and operations manual. Belliard also stole personnel files from Brenner’s private office, and destroyed his and other employees’ signed Employment Agreements. After Belliard destroyed the original Employment Agreements, he sent an email to Fell, boasting that the “cat is in the bag,” to which Fell responded “hallelujah.” Belliard shared the other stolen materials with Fell, who did not return them to Pure Power, but, instead, destroyed them. Belliard also provided a copy of Pure Power’s business plan, operations manual, and start-up manual to Lee, who referred to these documents in drafting business documents for Warrior Fitness. Belliard and Fell were also aware that, on their behalf, Lee was soliciting current Pure Power clients to join Warrior Fitness, while she was still a member of Pure Power. Both Belliard and Fell collected and maintained Pure Power client contact information, while on Pure Power’s payroll and at the Pure Power facility, in anticipation of opening Warrior Fitness. In addition, Belliard, without permission, downloaded a

copy of Pure Power’s customer list onto a thumb-drive and disclosed the confidential contact information contained therein to, at a minimum, Baynard, with the intention that this information be used to solicit Pure Power customers to join Warrior Fitness. *** Plaintiffs seek as compensatory damages for Belliard and Fell’s breach of their duty of loyalty to Pure Power a disgorgement of all revenues earned by Warrior Fitness from 2008 through 2010, in the amount of $2,390,082.00. Under New York law, an employer alleging a breach of the common law duty of loyalty against an employee may choose whether to seek damages (1) through an accounting of the disloyal employee’s gain (profit disgorgement) or (2) as a calculation of what the employer would have made had the employee not breached his or her duty of loyalty to the employer. See Gomez v. Bicknell, 302 A.D.2d 107, 114, 756 N.Y.S.2d 209, 214–15 (2d Dep’t 2002); accord Phansalkar, 344 F.3d at 211 n. 23. If the plaintiff chooses profit disgorgement (i.e., restitution), then the plaintiff must also establish that the breach of duty by the defendant was a “substantial factor” contributing to the defendant’s profits. See Am. Fed. Grp., Ltd. v. Rothenberg, 136 F.3d 897, 907 n. 7 (2d Cir.1998) * * * . * * * New York courts generally find disgorgement of profits or restitution is appropriate only in “a straightforward case in which an employee makes a profit or receives a benefit in connection with transactions conducted by him on behalf of his employer.” Phansalkar [v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir.2003).] * * * As an initial matter, because Defendants Belliard and Fell opened Warrior Fitness after their employment by Pure Power had been terminated, the gross profit generated by Warrior Fitness from 2008 to 426

2010, which Plaintiffs now seek to have fully disgorged, was not earned by Defendants Belliard and Fell in connection with transactions conducted by them on behalf of Pure Power. Plaintiffs mistakenly conflate Defendants’ breaches of loyalty with the profit they earned by opening a competing business; however, opening the business was not a breach of the duty of loyalty. While Plaintiffs are of the view that Defendants would not have been able to open their business but for their breaches, the Court disagrees. As discussed in several other sections, the documents Defendants stole were not a substantial factor that enabled them to open Warrior Fitness. It was the knowledge Belliard and Fell gained as trainers at Pure Power that was key. In addition, Plaintiffs have failed to establish that they had a “tangible expectancy” in many of the Pure Power clients allegedly solicited by Defendants. Pure Power had no tangible expectancy in clients who merely chose not to renew their subscriptions at Pure Power. * * * Moreover, only approximately 20 of the allegedly solicited clients who joined Warrior Fitness were, in fact, enrolled in Pure Power as of 2008. But, even with respect to these 20 or so clients, in whose contracts Pure Power may have had a tangible expectancy for some subsequent period of time, Plaintiffs failed to establish that Defendants’ breach of their duty of loyalty was a “substantial factor” in contributing to the clients’ decisions to leave Pure Power and to enroll in Warrior Fitness. In any event, Plaintiffs failed to establish damages with respect to these 20 or so clients, and any reasonable estimate would surely not approach the $2,390,082.00 Plaintiffs presently seek in profit disgorgement. Accordingly, Plaintiffs have [ ] failed to establish that they are entitled to disgorgement of Warrior Fitness’s gross profit, or that a corporate opportunity of Pure Power’s has been usurped, on the basis of Defendant Belliard’s and Fell’s breach of their duty of loyalty. New York’s Faithless Servant Doctrine As an additional measure of compensatory damages for Defendants’ breach of their duty of loyalty to Pure Power, Plaintiffs contend that, pursuant to New York’s faithless servant doctrine, they are entitled to the compensation Belliard and Fell earned while working as fitness instructors at Pure Power. Unlike a traditional breach of fiduciary duty claim, which requires a showing of actual damages, to prove a violation of New York’s faithless servant doctrine, an employer is not obligated to show that it “suffered . . . provable damage as a result of the breach of fidelity by the agent.” Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 929, 394 N.Y.S.2d 626, 363 N.E.2d 350 (1977); see also Webb v. Robert Lewis Rosen Assoc., Ltd., No. 03 Civ. 4275(HB), 2003 WL 23018792, at *6 (S.D.N.Y. Dec. 23, 2003) (“[While] proving a breach of fiduciary duty claim requires a showing of damages . . . 427

the faithless servant doctrine [ ] provides an additional mechanism for relief, notwithstanding that [the employer] suffered no damage.”). * * * In determining whether an employee’s conduct warrants forfeiture under the faithless servant doctrine, New York courts continue to apply two alternative standards. See Phansalkar, 344 F.3d at 200–02. The first standard requires that “misconduct

and unfaithfulness . . . substantially violate [ ] the contract of service.” Id. at 201 (quoting Turner v. Konwenhoven, 100 N.Y. 115, 2 N.E. 637, 639 (1885)). The second standard requires only that an agent “act [ ] adversely to his employer in any part of [a] transaction, or omit [ ] to disclose any interest which would naturally influence his conduct in dealing with the subject of [his] employment.” Id. (quoting Murray v. Beard, 102 N.Y. 505, 7 N.E. 553, 554 (1886)). Here, the Court concludes that forfeiture is appropriate under either standard. In particular, forfeiture is warranted under the Murray standard because Defendants Belliard and Fell acted “adversely to [their] employer.” As discussed, among other such adverse actions taken by Belliard and Fell, Belliard destroyed Pure Power files and stole confidential business documents, and shared them with Fell, as well as Baynard and Lee. Belliard and Fell, in league with Baynard and Lee, caused negative rumors about Pure Power, and Brenner specifically. Defendants took affirmative steps to hamstring Pure Power and at no point disclosed their plans to open a competing business, using many of Pure Power’s ideas and concepts, a mere fifteen blocks away from Pure Power. Likewise, applying Turner, forfeiture is warranted on the grounds that Belliard and Fell committed a “substantial violation” of the terms of their employment. Although the Second Circuit has not provided express criteria for determining whether a given violation of an employee’s duty of loyalty is substantial, “[l]ower New York courts . . . have found disloyalty not to be ‘substantial’ only where the disloyalty consisted of a single act, or where the employer knew of and tolerated the behavior.” Phansalkar, 344 F.3d at 201–02. Here, in addition to the Court’s findings regarding Belliard’s and Fell’s disloyal conduct, Belliard and Fell cannot avoid forfeiture by contending that their disloyalty consisted of a “single act,” or that Brenner was aware of, or in any way approved of, Defendants’ ongoing disloyal conduct. * * * The forfeiture of Belliard’s and Fell’s compensation, however, is limited to the “time period of disloyalty.” Design Strategy, Inc. v. Davis, 469 F.3d 284, 301 (2d Cir.2006); [citations omitted]. The Court finds that the time period of disloyalty for both Belliard and Fell began in August 2007. On or about this time, Belliard stole Pure Power’s confidential business plan and shared it with Fell, as well as Lee, who relied upon the business plan to draft Warrior Fitness’s business plan. Belliard and Fell’s disloyal scheme to use or destroy stolen confidential Pure Power information in furtherance of their opening a competing gym continued throughout the duration of their employment at Pure Power. As 428

discussed, Belliard stole Employment Agreements, Pure Power’s customer list, and other confidential documents, all in furtherance of his and Fell’s plan to open a competing gym. Brenner fired Fell on March 16, 2008. Belliard quit Pure Power on April 1, 2008. Accordingly, the Court concludes that Belliard must forfeit $55,196.70 in total compensation ($20,280.00 (2008 salary) + $34,916.70 (42% of 2007 salary)). Likewise, Fell must forfeit $40,177.00 in total compensation ($14,200.00 (2008 salary) + $25, 977. 00 (42% of 2007 salary)). (See Pls.’ Exs. 162–63.) * * *

NOTES AND QUESTIONS 1. Is the District Court’s ruling in Pure Power as to the breach of the non-disclosure provision consistent with § 9.07 of the Employment Restatement? 2. The defendants in this case were subject to a non-compete covenant, which the court declared overbroad and unenforceable. Could the Pure Power court have enjoined the defendants from further disclosure or misuse of its confidential information? Could the court have enjoined the defendants from working for Warrior Fitness based on their misuse of its confidential information? Consider § 9.08 of the Employment Restatement. 3. Section 9.09(a) of the Employment Restatement provides that “an employee who breaches a tort-based duty . . . is subject to liability for foreseeable harm to the employer caused by the breach[.]” Did the court award damages for the harm caused by the breach of the duty of loyalty? Why or why not? 4. Apportionment of Losses? Section 9.09(c) of the Employment Restatement provides that the forfeiture of employee wages for breaches of the duty of loyalty should be “apportioned between the employee’s disloyal services and the employee’s loyal services” where practicable, otherwise the “employer may deny any compensation owed, and recover any compensation paid, for the disloyal services.” Did the Court attempt an apportionment of the defendants’ wages in applying the faithless servant doctrine? Applying § 9.09 of the Employment Restatement in its entirety, would the court have decided differently on the forfeiture issue? 5. New York’s “Faithless Service” Doctrine. If an employee performs disloyal acts, should he or she forfeit all compensation during the period of disloyalty, even if the company receives value from his or her services? In Astra USA Inc. v. Bildman, 455 Mass. 116, 130, 914 N.E.2d 36 (2009), the court held that “law of New York requires the disloyal employee to forfeit his compensation even if he otherwise performed valuable services for the principal” during the period of disloyalty. See also Phansalkar v. Andersen Weinroth & Co.,

LP, 344 F.3d 184, 205–207 (2d Cir. 2003) (applying New York law, declining to limit forfeiture to undisclosed board payments and instead ordering forfeiture of all compensation during period of disloyalty). Would the 429 court in Astra have reached the same result under the Employment Restatement Section 9.09(c)? 6. State Wage-Payment Laws and Forfeiture. Not all states permit employers to withhold or recover compensation associated with a period of disloyalty. See Employment Restatement § 9.09 (forfeiture principles “subject to state wage-payment legislation and other law”). Many states have strict wage and hour rules that forbid unauthorized deductions from employee paychecks, or that impose penalties where the employer fails to timely pay an employee’s final paycheck. See notes 7 & 8 on p. 391. 7. Damages Against Employees for Premature Quits. When an employee has a contractual duty to work for an employer for a definite period, the employee can be held liable for quitting prematurely. But damages are generally limited to the employer’s costs in connection with replacing the employee. See e.g. Handicapped Children’s Education Board of Sheboygan County v. Lukaszewiski, 112 Wis. 2d 197 (1983) (ordering employee to pay difference in salary between breaching employee and replacement); GME v. Carter, 120 Idaho 517, 817 P.2d 183 (1991) (employer suffered no damages where employee terminated contract prematurely but employer replaced him with someone at a lower salary). Where the contract specifies an amount of damages, courts will scrutinize them as liquidated damages provisions. Allied Informatics, Inc. v. Yeruva, 251 Ga.App. 404, 554 S.E.2d 550 (Ga. Ct. App. 2001) (refusing to enforce $5,000 liquidated damages clause associated with resignation prior to the end of the employment term); Arrowhead School Dist. No. 75 v. Kylap, 2003 MT 294, 318 Mont. 103, 79 P.3d 250, 267 (2003) (enforcing liquidated damages of 20% of teacher’s salary when teacher quit 2 weeks prior to the start of the school year). 8. Lost Profits. As Section 9.07(b) of the Employment Restatement suggests, courts generally decline to award lost profits to a former employer when an employee breaches a contract by resigning prematurely. See e.g. Med+Plus Neck & Back Pain Center, S.C. v. Noffsinger, 311 Ill.App.3d 853, 726 N.E.2d 687 (2d Dist. 2000). But courts have awarded lost profits where an employee breaches a noncompete agreement. See e.g. B & Y Metal Printing, Inc. v. Ball, 279 N.W.2d 813, 816 (Minn. 1979); Arabesque Studios, Inc. v. Academy of Fine Arts, Intern. Inc., 529 S.W.2d 564 (Tx. App. 1975). To recover lost profits, the plaintiff must prove that “(a) profits were lost, (b) the loss was directly caused by the breach of the covenant not to compete, and (c) the amount of such causally related loss is capable of calculation with reasonable certainty rather than benevolent speculation.” B & Y Metal Printing, 279 N.W.2d at 816. 2

Article 29 of the original contract specified that plaintiff approved the director already chosen for “Bloomer Girl” and that in case he failed to act as director plaintiff was to have approval rights of any substitute director. Article 31 provided that plaintiff was to have the right of approval of the “Bloomer Girl” dance director, and Article 32 gave her the right of approval of the screenplay. Defendant’s letter of April 4 to plaintiff, which contained both defendant’s notice of breach of the “Bloomer Girl” contract and offer of the lead in “Big Country,” eliminated or impaired each of those rights. It read in part as follows: “The terms and conditions of our offer of employment are identical to those set forth in the ‘BLOOMER GIRL’ Agreement, Articles 1 through 34 and Exhibit A to the Agreement, except as follows: “1. Article 31 of said Agreement will not be included in any contract of employment regarding ‘BIG COUNTRY, BIG MAN’ as it is not a musical and it thus will not need a dance director. “2. In the ‘BLOOMER GIRL’ agreement, in Articles 29 and 32, you were given certain director and screenplay approvals and you had preapproved certain matters. Since there simply is insufficient time to negotiate with you regarding your choice of director and regarding the screenplay and since you already expressed an interest in performing the role in ‘BIG COUNTRY, BIG MAN,’ we must exclude from our offer of employment in ‘BIG COUNTRY, BIG MAN’ any approval rights as are contained in said Articles 29 and 32; however, we shall consult with you respecting the director to be selected to direct the photoplay and will further consult with you with respect to the screenplay and any revisions or changes therein, provided, however, that if we fail to agree . . . the decision of . . . [defendant] with respect to the selection of a director and to revisions and changes in the said screenplay shall be binding upon the parties to said agreement.” 5 Instead, in each case the reasonableness referred to was that of the efforts of the employee to obtain other employment that was not different or inferior; his right to reject the latter was declared as an unqualified rule of law. * * *

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CHAPTER 12 PROCEDURAL ISSUES ■■■

Introduction In this chapter, we look at some significant procedural issues that cross many different theories of recovery—much as they would in litigation. These issues should be borne in mind by policymakers and students of the system.

A. THE ROLE OF THE ADMINISTRATIVE AGENCY Crafting a regulatory scheme requires making difficult policy choices in the resolution of procedural as well as substantive issues. Perhaps the most important procedural decision is the choice of enforcement vehicle: whether to rely exclusively on the private suit or on a specialized administrative agency, or a mixture of both. The private-suit model offers several advantages. First, because private suits by definition do not involve government prosecution, regulatory norms can be promulgated without allocation of scarce government agency resources. Second, assuming legal assistance is available, claimants enjoy direct access to the remedial scheme and can control their own litigation strategy. Third, where courts are receptive to the substantive claims, they may be quite vigorous enforcement agents; where jury trials are afforded, there also may be a distinctly pro-claimant tilt. Each of these advantages, however, has corresponding disadvantages. First, congestion in the courts may lead to multi-year delays. Second, even where attorney’s fees are recoverable by successful claimants, the availability of qualified legal counsel may be problematic. Most importantly, courts across the United States may not provide coherent development of the policy decisions that have to be made under any statutory scheme. Judicial agreement on particular issues may be long in coming, and disagreement between courts leads to disparate results across the country. Judges often do not have expertise with complex regulatory statutes; their answers to novel, difficult questions may resolve a particular dispute, but often without a full appreciation of competing considerations or of the effect of their ruling on the statutory scheme as a whole. 432

These difficulties can be avoided by administrative enforcement—if the administrative agency is given sufficient resources, is relatively free from political influence, and commands respect in the courts based upon the quality of its work and a consistent approach to the law. But this ideal is not always achieved. Reliance on agencies can result in under- enforcement of the statute due to budget cuts, poor internal management, or inconsistent rulings arising from policy variations based upon political changes within the agency. It can also result in over-enforcement when political criteria rather than fidelity to the statutory design are the basis for staffing and enforcement decisions.

1. EXCLUSIVE RELIANCE ON PRIVATE SUITS Examples of exclusive reliance on private suits include state-law private tort and contract actions and suits under 42 U.S.C. §§ 1981 and 1983. For the private tort/contract claimant or § 1981 plaintiff, there are no administrative exhaustion requirements; access to the courts requires only the securing of counsel. The action is often one for damages, and there is a right to a jury trial for disputed issues of fact. Broad-based, systemic litigation is possible with the advent of the modern class action. Judicial opinions elaborate regulatory norms in the course of litigation of private wrongs. In America, the private-suit model generally entails reliance on the civil courts, but this need not be so. European countries which have enacted “unjust dismissal” legislation have also provided for special labor courts to adjudicate privately-initiated and privately-prosecuted claims. See Samuel Estreicher & Jeffrey M. Hirsch, Comparative Wrongful Dismissal Law: Reassessing American Exceptionalism, 92 N.C. L. Rev. 342 (2014). In almost every state, unemployment compensation and workers’ compensation claims are initiated by private claimants but processed in administrative adjudications. Many state civil rights laws provide a choice between private suit in the courts and an administrative adjudication before a civil rights agency, with final agency orders reviewable in the courts.

The National Labor Relations Act of 1935, 29 U.S.C. § 151 et seq., presents a good example of exclusive reliance on an administrative agency. A worker seeking union representation or complaining of an unfair labor practice must bring their claim before the NLRB. Representation proceedings take place solely on the administrative level; a decision of the director of a regional office of the NLRB on matters of representation, unit determination or voter eligibility may be reviewed by the fivemember Board in Washington, D.C., but there is no direct recourse to the courts. See Michael C. Harper, The Case for Limiting Judicial Review of Labor Board Certification Decisions, 55 Geo. Wash. L. Rev. 262 (1987). Unfair labor practice proceedings occur only upon the issuance of a complaint by 433

the NLRB General Counsel; except for secondary boycott violations, there is no private right of action to secure relief from an alleged unfair labor practice. Once a complaint issues, an adjudicatory proceeding occurs before an administrative law judge. At this proceeding, an agent of the NLRB represents the Government; private charging parties may only intervene to supplement the Board’s presentation. The decision of the administrative law judge may be reviewed by the Board in Washington, D.C. Persons aggrieved by the Board’s order may seek judicial review in the U.S. Courts of Appeals. The nondiscrimination and affirmative action obligations of federal government contractors, particularly in connection with Executive Order 11246 and § 503 of the Rehabilitation Act, are also enforced through the agency model. Here, exclusive enforcement responsibility is lodged with the Office of Federal Contract Compliance Programs (OFCCP) of the Department of Labor. There is no private right of action, see, e.g., Cohen v. Illinois Inst. of Tech., 524 F.2d 818 (7th Cir. 1975) (Executive Order 11246); Simpson v. Reynolds Metals Co., 629 F.2d 1226 (7th Cir.1980) (§ 503), although some courts have permitted private parties to sue, in the nature of mandamus, to compel OFCCP enforcement of nondiscretionary duties, see, e.g., Legal Aid Soc’y of Alameda Cnty. v. Brennan, 608 F.2d 1319 (9th Cir. 1979), and as third-party beneficiaries of affirmative action agreements, see, e.g., Jones v. Local 520, International Union of Operating Engineers, 603 F.2d 664 (7th Cir. 1979).

2. HYBRID SYSTEMS In contrast, Title VII, the ADEA, and the ADA (§ 107 of the latter incorporates Title VII procedures) are “hybrid regulatory systems,” borrowing features from both the private suit and administrative enforcement models. Claimants ultimately have a private right of action in state or federal courts, and the courts (often guided by agency regulations) have been the principal formulators of the substantive policy choices left open by the statutes. Unlike the pure private-suit model, however, Title VII, the ADEA and the ADA also give administrative processes a prominent role. Claimants must first file charges with the EEOC, which is responsible for investigating each charge and attempting to conciliate a non-judicial resolution. (Charges under ADEA were processed by the Department of Labor until July 1, 1979, when the EEOC was given compliance responsibility under Reorganization Plan No. 1 of 1978, 43 Fed.Reg. 19,807.) Charge filings take advantage of the agency’s investigative capacity and permit an opportunity for informal conciliation. Prior to the 1972 amendments to Title VII, the EEOC did not have authority to file suit, although the Justice Department could institute “pattern and practice” litigation under § 707 of Title VII. Now, the EEOC can file suit on behalf of 434

individuals under § 706 and can file systemic actions under § 707. It enjoys comparable authority under the ADEA and the ADA, while the Justice Department retains authority for “pattern and practice” suits against state and local government employers. Issues arising under both private- and EEOC-initiated litigation are discussed below. Yet another approach is suggested by statutes like the FLSA, which authorizes a private cause of action without prior resort to administrative remedies but provides that a government enforcement suit in the courts, once filed, displaces a private suit. Significantly, the Department of Labor as well as the EEOC shape the regulatory scheme not only through litigation, but by issuing regulations and interpretive guidance through administrative procedures. As we have seen, EEOC and DOL interpretations often form the basis for judicial rulings.

3. AVAILABILITY OF JURY TRIALS Even where private suits are available, policymakers also must decide whether judges or juries will be the trier of fact. Jury trials are common in actions seeking damages under the various contract and tort theories explored earlier in this book; the Seventh Amendment to the Constitution preserves jury trials “in suits at common law.” Initially, because Title VII recoveries were limited to back pay/front pay and reinstatement—considered equitable remedies —jury trials were not available. The 1991 Civil Rights Act expanded relief to include compensatory and punitive damages in cases resulting from intentional discrimination in violation of Title VII, the ADA and the Rehabilitation Act of 1973, thus

requiring jury trials. The lower courts have also held that a jury trial is available for actions seeking compensatory and punitive damages under § 1981. Recovery of compensatory or punitive damages (and a jury trial) is not available for Title VII disparateimpact claims or failure of reasonable accommodation claims under the ADA or § 501 of the Rehabilitation Act (provided a good faith effort to accommodate has been made). The ADEA and the Equal Pay Act incorporate (to some extent) the FLSA’s enforcement provisions, and also require jury trials. In Lorillard v. Pons, 434 U.S. 575, 98 S. Ct. 866, 55 L. Ed. 2d 40 (1978), the Supreme Court held that Congress’s decision to utilize FLSA procedures required that a private action for unpaid wages under the ADEA be treated as a jury-tried action for unpaid wages under § 16(b) of the FLSA. Congress in 1978 amended § 7(c) of ADEA, 29 U.S.C. § 626(c)(2), to expressly provide for a right to a jury trial in private suits “regardless of whether equitable relief is sought by any party in such action.” A private EPA action for unpaid wages is similarly likened to a FLSA § 16(b) action and triable to a jury. Although EEOC actions under FLSA § 17 are viewed as bench-tried actions to redress a public offense even where unpaid wages are sought in addition 435

to equitable relief, see Lorillard, 434 U.S. at 580 n.7, 98 S. Ct. at 870 n.7, it remains unresolved whether EEOC-maintained ADEA or EPA actions on behalf of individuals under FLSA § 16(c) are triable before a jury. Significantly, even where a jury trial is not available under a particular cause of action, claimants may append jury-triable claims under Title VII, the ADA, the ADEA, the EPA, § 1981 or state laws, in order to obtain a jury trial on issues of fact common to the non-jury Title VII (or ADA) claim. See also Lytle v. Household Mfg., Inc., 494 U.S. 545, 110 S. Ct. 1331, 108 L. Ed. 2d 504 (1990) (plaintiffs securing a reversal on appeal of an erroneous dismissal of their § 1981 claim have a right to a jury trial on that claim free of any issue preclusive effect inhering in the adjudication of their Title VII claim before an appeal could be taken).

B. ADMINISTRATIVE FILING REQUIREMENTS Exhaustion of administrative remedies refers to a common statutory requirement that a claimant-plaintiff invoke (and sometimes complete) the administrative process before filing a civil claim in court. A plaintiff’s failure to exhaust administrative remedies can result in dismissal of the plaintiff’s lawsuit or, in some cases, a stay of the civil action until those remedies are pursued. State contract and tort actions can be brought directly without exhausting administrative procedures. State antidiscrimination laws tend to follow the approach of the FLSA in providing an administrative investigation and possible enforcement proceeding as an optional alternative to a private suit. See, e.g., N.Y. Human Rts. L., N.Y. Exec. L., § 297. Federal government employees face a somewhat similar choice. See Title VII, 42 U.S.C. § 2000e–16; ADEA, 29 U.S.C. § 633a(b)–(c). By contrast, employees of private employers and state and local government must file charges of discrimination before filing a lawsuit in federal court under Title VII, the ADA or the ADEA. Common issues relating to administrative-filing requirements are discussed below. 1. Statutory Prerequisites to Suit: Private Plaintiffs a. A Timely Administrative Charge Title VII, the ADEA and the ADA all specifically provide a 180-day period for filing a charge with the EEOC. In EEOC v. Commercial Office Products Co., 486 U.S. 107, 108 S. Ct. 1666, 100 L. Ed. 2d 96 (1988), however, the Supreme Court effectively extended the filing period to 300 days for claimants living in states with civil rights agencies approved as § 706 deferral agencies. The Court there approved “worksharing” agreements between the EEOC and the state agency whereby charges “filed” with the state agency can be “terminated” for § 706(c) purposes without sacrificing the state agency’s authority later 436

to reactivate those charges under state law. In Love v. Pullman Co., 404 U.S. 522, 92 S. Ct. 616, 30 L. Ed. 2d 679 (1972), the Court upheld the EEOC’s deferral procedure, under which the EEOC itself refers a charge to an appropriate state deferral agency, and then begins its own processing of the charge 60 days later or on termination of the state agency proceeding, whichever occurs first. By treating the EEOC filing as being in a state of “suspended animation” until the expiration of the deferral period, the Court enabled Title VII claimants, who are often unrepresented by counsel, to avoid having to make an independent filing with the state agency. Because most states have a “deferral agency”, most claimants have 300 days from the

occurrence of the unlawful employment practice to file charges. b. Filing of Suit within 90 Days of EEOC’s Right to Sue Letter The EEOC does not play a screening function in private lawsuits. Once EEOC concludes its investigation, whether it finds merit to a charge or not, it issues a “right to sue” letter, authorizing the charging party to file suit within 90 days. Section 706(f) (1) makes a right-to-sue letter a jurisdictional prerequisite to suit, a requirement that the Court in McDonnell Douglas also termed a “jurisdictional prerequisite.” Whereas EEOC must find “reasonable cause” before it can bring a lawsuit on its own, such a finding is not required for issuance of a right-to-sue letter authorizing a private suit. See McDonnell Douglas Corp. v. Green, 411 U.S. 792, 798–99, 93 S. Ct. 1817, 1822–23, 36 L. Ed. 2d 668 (1973). Indeed, the EEOC need not finish its administrative investigation before a private plaintiff files suit in federal court. Under § 706(f)(1), a Title VII claimant may request a right-to-sue letter from the EEOC at any time 180 days after filing a charge, meaning that a charging party who wishes to proceed in court need not wait for the conclusion of EEOC’s investigation or conciliation efforts. Should a claimant who does not make such a request and awaits the completion of a multi-year EEOC investigation and conciliation ever be barred from suit by laches? See, e.g., Cleveland Newspaper Guild, Local 1 v. Plain Dealer Publishing Co., 839 F.2d 1147 (6th Cir.1988) (en banc). 2. Statutory Prerequisites to Suit: EEOC Lawsuits a. Conciliation. The EEOC has the authority to file its own charge—called a Commissioner’s charge—which can itself serve as the basis for an investigation and further proceedings. Before the EEOC can bring suit under Title VII based on a Commissioner’s charge or a charge filed by a private party, it must investigate the discrimination charge and find “reasonable cause” to believe the charge has merit. The agency must then initially “endeavor to eliminate [the] alleged unlawful employment practice by informal methods of conference, conciliation and persuasion.” 42 U.S.C. § 2000e–5(b). To ensure candor during these discussions, the statute provides: “Nothing said or done during . . . such informal endeavors” may 437

be publicized by the agency or “used as evidence in a subsequent proceeding without the written consent of the persons concerned.” Id. Rebuffing lower-court decisions that allowed extensive discovery of the conciliation process to determine its adequacy, the Supreme Court in Mach Mining, LLC v. EEOC, 575 U.S. 480, 135 S. Ct. 1645, 191 L. Ed. 2d 607 (2015), unanimously ruled that although the EEOC’s conciliation activities are reviewable, the scope of judicial review is quite narrow. The employer must be given notice that “properly describes both what the employer has done and which employees . . . have suffered as a result.” The agency must then “try to engage the employer in some form of discussion (whether written or oral), so as to the give the employer an opportunity to remedy the allegedly discriminatory practice.” 575 U.S. at 494, 135 S. Ct. at 1655–56. If the court finds that the EEOC has not provided the requisite information or attempted to engage in informal conciliation discussions, “the appropriate remedy is to order the EEOC to undertake the mandated efforts to obtain voluntary compliance.” 575 U.S. at 495, 135 S. Ct. at 1656. b. EEOC “Cause” Determination. § 706(b) specifically requires that EEOC find “reasonable cause” prior to bringing its own lawsuit. 3. Scope of Charge vs. Scope of Suit. The scope of a Title VII-ADA-ADEA lawsuit, whether filed by the Commission or by a private individual, is only loosely determined by the allegations of the charge filed with the EEOC. Although additional parties cannot be named in the suit unless they were the subject of conciliation, the scope of the charge itself does not determine the substantive claims that can be raised in litigation. An influential liberal standard can be found in Sanchez v. Standard Brands, Inc., 431 F.2d 455, 466 (5th Cir. 1970): [T]he allegations in a judicial complaint filed pursuant to Title VII “may encompass any kind of discrimination like or related to allegations contained in a charge and growing out of such allegation during the pendency of the case before the Commission”. . . . In other words, the “scope” of the judicial complaint is limited to the “scope” of the EEOC investigation which can reasonably be expected to grow out of the charge of discrimination. In Sanchez, the suit added a new basis of discrimination (national origin) and a new incident (discharge) not recited in the charge. Should claimants be able to add entirely new theories of discrimination not recited in their charge? See Cervantes v. Ardagh Grp., 914 F.3d 560 (7th Cir. 2019) (retaliation claim in charge cannot support race and national origin claims in lawsuit). Although many Title VII claimants proceed pro se, some are represented by counsel even when filing a charge. Should this liberal approach be available to the counseled claimant? To cases initiated by a Commissioner’s charge? 438

In Edelman v. Lynchburg College, 535 U.S. 106, 122 S. Ct. 1145, 152 L. Ed. 2d 188 (2002), the Court upheld an EEOC

interpretation that deemed the requirement in § 706(b) that a charge of discrimination be “under oath or affirmation” to be satisfied by a later oath that had been omitted from what otherwise would have been a timely filing under § 706(e)(1). 4. Tolling of the 180/300 Day Charge-Filing Period The Court in McDonnell Douglas v. Green, 411 U.S. 792 (1973), used the term “jurisdictional prerequisite” in referring to the 180/300 day filing requirements in § 706(c). In Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 393, 102 S. Ct. 1127, 1132, 71 L. Ed. 2d 234 (1982), however, the Court stated that the time for filing a charge “is subject to waiver, estoppel and equitable tolling.” The issue in that case was whether a defendant waived its right to object to an untimely filing by failing to plead untimeliness. See Lincoln v. BNSF Ry. Co., 900 F.3d 1166 (10th Cir. 2018) (time for filing not jurisdictional and merely allows defendant to raise a timely objection.) Although the Court generally has given little guidance as to the kinds of situations in which tolling should be recognized, it has established at least two rules. First, recourse to the grievance procedure of a collective bargaining agreement will not toll the 180/300 day filing period. Electrical Workers (IUE) Local 790 v. Robbins & Myers, Inc., 429 U.S. 229, 97 S. Ct. 441, 50 L. Ed. 2d 427 (1976). Is this decision consistent with the solicitude for lay claimants and the Congressional emphasis on informal conciliation? Is it explainable as a means of preserving the independence of the Title VII cause of action? Second, the filing of a class action will toll the filing period for members of the class; if the class is not certified, class members who have not filed their own charges “may choose to file their own suits or to intervene as plaintiffs in the pending action.” Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 354, 103 S. Ct. 2392, 2398, 76 L. Ed. 2d 628 (1983) (addressing requirement to file suit within 90 days of receipt of EEOC “right to sue” letter). See also Tolliver v. Xerox Corp., 918 F.2d 1052 (2d Cir. 1990) (approving “single filing” ruling for ADEA representative action, thus permitting separate ADEA suits after decertification of representative action without requiring filing of separate, individually timely administrative charges). At what point does the tolling effect of a class action filing cease: (i) the entry of an order denying class certification or (ii) completion of an appeal from the order denying certification? See Armstrong v. Martin Marietta Corp., 138 F.3d 1374 (11th Cir. 1998) (en banc) (adopting the former position). Does the notion that Title VII filing periods are subject to “waiver, estoppel and equitable tolling” provide some allowance for erroneous filings with other federal agencies? See, e.g., Bethel v. Jefferson, 589 F.2d 631 439

(D.C. Cir. 1978) (filing with OFCCP); but see Stafford v. Muscogee County Bd. of Educ., 688 F.2d 1383 (11th Cir. 1982). 5. Statutory Cap on Backpay Liability The timing of the filing of a charge will also determine the scope of liability under Title VII. Under § 706(g) “[b]ack pay liability shall not accrue from a date more than two years prior to the filing of a charge with the Commission.” There is no similar provision under the ADEA, Section 1981 or the Rehabilitation Act.

C. STATUTES OF LIMITATIONS 1. RANGE OF LIMITATIONS PERIODS Aside from the charge filing requirements discussed above, Congress has not provided a traditional statute of limitations for claims under Title VII, the ADA or the ADEA. A timely charge of discrimination must be filed and a suit must be brought within 90 days of the EEOC’s issuance of a right-to-sue letter; no specific statute of limitations is provided. In EEOC suits, the Supreme Court held in Occidental Life Insurance Co. v. EEOC, 432 U.S. 355, 97 S. Ct. 2447, 53 L. Ed. 2d 402 (1977), that while the agency is free of any federal or state statute of limitations, it is subject to the unreasonable-delay and prejudice restraints of the doctrine of laches. Compare, e.g., EEOC v. Alioto Fish Co., 623 F.2d 86 (9th Cir. 1980) (finding prejudice in 62-month delay where key witnesses for the employer had retired or were deceased) with EEOC v. Great Atl. & Pac. Tea Co., 735 F.2d 69 (3d Cir. 1984) (nine-year delay held excusable). Congress has provided a statute of limitations for FLSA claims: a two-year period for filing suit, extended for an additional year for “willful” violations by § 6 of the 1947 Portal-to-Portal Act, 29 U.S.C. § 255(a). See McLaughlin v. Richland Shoe Co., 486 U.S. 128, 108 S. Ct. 1677, 100 L. Ed. 2d 115 (1988). In addition, some state wage-and-hour laws, like New York’s, provide a limitations period as long as six years, see N.Y. Lab. Law § 663 (McKinney). Initially, Congress utilized the FLSA limitations system for ADEA claims. Because of EEOC backlogs during the 1980s, ADEA claimants awaiting the outcome of the administrative process risked having their civil actions time-barred by the limitations period. The 1991 Civil Rights Act (§ 115) discarded the FLSA-based limitations period, and ADEA claimants, like Title VII (and ADA) claimants, face only the 180/300 day filing requirements and the same 90-day period (from receipt of the

EEOC’s right-to-sue letter) within which to file suit. But unlike Title VII (and ADA) claimants, individuals with ADEA claims are not expressly subject to the same 2-year limit on pre-charge backpay liability. 440

In 1990 Congress enacted a default four-year statute of limitations for actions arising under federal statutes enacted after December 1, 1990. See 28 U.S.C. § 1658(a). This statute posed a special issue for § 1981, which like § 1983, does not contain a statute of limitations, but whose scope was expanded by amendments included in the Civil Rights Act of 1991. In Goodman v. Lukens Steel Co., 482 U.S. 656, 107 S. Ct. 2617, 96 L. Ed. 2d 572 (1987), before the passage of § 1658, the Court had held that the courts should borrow “the most appropriate or analogous state statute of limitations” for claims based on alleged violations of § 1981. In Jones v. R.R. Donnelley & Sons Co., 541 U.S. 369, 124 S. Ct. 1836, 158 L. Ed. 2d 645 (2004), however, the Court held that § 1658’s four-year statute of limitations governs any § 1981 cause of action, such as those against racial harassment, made possible by the 1991 amendments’ expansion of § 1981’s scope. For other federal statutes affecting the employment arena, the Court has heeded the general directive of 42 U.S.C. § 1988, which requires resort to “not inconsistent” state laws to fill in gaps in the federal scheme. The Court in Wilson v. Garcia, 471 U.S. 261, 105 S. Ct. 1938, 85 L. Ed. 2d 254 (1985), held that the appropriate state statute of limitations for § 1983 claims was the statute for personal injury actions. In states having statutes of limitations for enumerated intentional torts and a residual statute for all other personal injury actions, the residual or general personal injury statute applies. See Owens v. Okure, 488 U.S. 235, 109 S. Ct. 573, 102 L. Ed. 2d 594 (1989). The residual statute at issue in Owens provided for a three-year period. The Court left open whether a residual statute providing a shorter period would be “inconsistent with federal interests.” 488 U.S. at 251 n.13, 109 S. Ct. at 582 n.13.

2. TIMING OF VIOLATION As we have seen, employment discrimination claims involve a multitude of substantive and systemic issues which may make it difficult to determine when a violation has occurred. The timing of a violation triggers the start of the period for filing a charge with an administrative agency; it may also start or be relevant to the period for filing a lawsuit.

NATIONAL R.R. PASSENGER CORP. V. MORGAN Supreme Court of the United States, 2002. 536 U.S. 101, 122 S.Ct. 2061, 153 L.Ed.2d 106.

JUSTICE THOMAS delivered the opinion of the Court. * * * I On February 27, 1995, Abner J. Morgan, Jr., a black male, filed a charge of discrimination and retaliation against Amtrak with the EEOC and cross-filed with the California Department of Fair Employment and 441

Housing. Morgan alleged that during the time period that he worked for Amtrak he was “consistently harassed and disciplined more harshly than other employees on account of his race.” The EEOC issued a “Notice of Right to Sue” on July 3, 1996, and Morgan filed this lawsuit on October 2, 1996. While some of the allegedly discriminatory acts about which Morgan complained occurred within 300 days of the time that he filed his charge with the EEOC, many took place prior to that time period. Amtrak filed a motion, arguing, among other things, that it was entitled to summary judgment on all incidents that occurred more than 300 days before the filing of Morgan’s EEOC charge. The District Court granted summary judgment in part to Amtrak, holding that the company could not be liable for conduct occurring before May 3, 1994, because that conduct fell outside of the 300-day filing period. * * * Morgan appealed. The United States Court of Appeals for the Ninth Circuit reversed, relying on its previous articulation of the continuing violation doctrine, which “allows courts to consider conduct that would ordinarily be time barred ‘as long as the untimely incidents represent an ongoing unlawful employment practice.’ ” * * * II *** [Eds. The Court discusses its prior decisions in Delaware State College v. Ricks, 449 U.S. 250, 101 S.Ct. 498, 66 L.Ed.2d 431 (1980), and United Air Lines, Inc. v. Evans, 431 U.S. 553, 97 S.Ct. 1885, 52 L.Ed.2d 571 (1977).] We derive several principles from these cases. [D]iscrete discriminatory acts are not actionable if time barred, even when they are related to acts

alleged in timely filed charges. Each discrete discriminatory act starts a new clock for filing charges alleging that act. The charge, therefore, must be filed within the 180- or 300-day time period after the discrete discriminatory act occurred. The existence of past acts and the employee’s prior knowledge of their occurrence, however, does not bar employees from filing charges about related discrete acts so long as the acts are independently discriminatory and charges addressing those acts are themselves timely filed. Nor does the statute bar an employee from using the prior acts as background evidence in support of a timely claim. *** Discrete acts such as termination, failure to promote, denial of transfer, or refusal to hire are easy to identify. Each incident of discrimination and each retaliatory adverse employment decision constitutes a separate actionable “unlawful employment practice.” Morgan can only file a charge to cover discrete acts that “occurred” within the appropriate time period.7 While Morgan alleged that he suffered from 442

numerous discriminatory and retaliatory acts from the date that he was hired through March 3, 1995, the date that he was fired, only incidents that took place within the timely filing period are actionable. Because Morgan first filed his charge with an appropriate state agency, only those acts that occurred 300 days before February 27, 1995, the day that Morgan filed his charge, are actionable. During that time period, Morgan contends that he was wrongfully suspended and charged with a violation of Amtrak’s “Rule L” for insubordination while failing to complete work assigned to him, denied training, and falsely accused of threatening a manager. All prior discrete discriminatory acts are untimely filed and no longer actionable.9 B Hostile environment claims are different in kind from discrete acts. Their very nature involves repeated conduct. See 1 B. Lindemann & P. Grossman, Employment Discrimination Law 348–349 (3d ed. 1996) (hereinafter Lindemann) (“The repeated nature of the harassment or its intensity constitutes evidence that management knew or should have known of its existence”). The “unlawful employment practice” therefore cannot be said to occur on any particular day. It occurs over a series of days or perhaps years and, in direct contrast to discrete acts, a single act of harassment may not be actionable on its own. See Harris v. Forklift Systems, Inc., 510 U.S. 17, 21, 126 L.Ed.2d 295, 114 S.Ct. 367 (1993) (“As we pointed out in Meritor [Savings Bank, FSB v. Vinson, 477 U.S. 57, 67, 91 L.Ed. 2d 49, 106 S.Ct. 2399 (1986)], ‘mere utterance of an . . . epithet which engenders offensive feelings in a[n] employee,’ ibid. (internal quotation marks omitted) does not sufficiently affect the conditions of employment to implicate Title VII”). Such claims are based on the cumulative effect of individual acts. In determining whether an actionable hostile work environment claim exists, we look to “all the circumstances,” including “the frequency of the discriminatory conduct; its severity; whether it is physically threatening or humiliating, or a mere offensive utterance; and whether it unreasonably interferes with an employee’s work performance.” Id., at 23. To assess whether a court may, for the purposes of determining liability, review all such conduct, including those acts that occur outside the filing period, we again look to the statute. It provides that a charge must be filed within 180 or 300 days “after the alleged unlawful employment practice occurred.” A hostile work environment claim is comprised of a series of separate acts that collectively constitute one “unlawful employment practice.” 42 U.S.C. § 2000e–5(e)(1). The timely filing provision only requires that a Title VII plaintiff file a charge within a certain number of days after the unlawful 443

practice happened. It does not matter, for purposes of the statute, that some of the component acts of the hostile work environment fall outside the statutory time period. Provided that an act contributing to the claim occurs within the filing period, the entire time period of the hostile environment may be considered by a court for the purposes of determining liability. That act need not, however, be the last act. As long as the employer has engaged in enough activity to make out an actionable hostile environment claim, an unlawful employment practice has “occurred,” even if it is still occurring. Subsequent events, however, may still be part of the one hostile work environment claim and a charge may be filed at a later date and still encompass the whole. It is precisely because the entire hostile work environment encompasses a single unlawful employment practice that we do not hold, as have some of the Circuits, that the plaintiff may not base a suit on individual acts that occurred outside the statute of limitations unless it would have been unreasonable to expect the plaintiff to sue before the statute ran on such conduct. The statute does not separate individual acts that are part of the hostile environment claim from the whole for the purposes of timely filing and liability. And the statute does not contain a requirement that the employee file a charge prior to 180 or 300 days “after” the single unlawful practice “occurred.” Given, therefore, that the incidents comprising a hostile work environment are

part of one unlawful employment practice, the employer may be liable for all acts that are part of this single claim. In order for the charge to be timely, the employee need only file a charge within 180 or 300 days of any act that is part of the hostile work environment. The following scenarios illustrate our point: (1) Acts on days 1–400 create a hostile work environment. The employee files the charge on day 401. Can the employee recover for that part of the hostile work environment that occurred in the first 100 days? (2) Acts contribute to a hostile environment on days 1–100 and on day 401, but there are no acts between days 101–400. Can the act occurring on day 401 pull the other acts in for the purposes of liability? In truth, all other things being equal, there is little difference between the two scenarios as a hostile environment constitutes one “unlawful employment practice” and it does not matter whether nothing occurred within the intervening 301 days so long as each act is part of the whole. Nor, if sufficient activity occurred by day 100 to make out a claim, does it matter that the employee knows on that day that an actionable claim happened; on day 401 all incidents are still part of the same claim. On the other hand, if an act on day 401 had no relation to the acts between days 1–100, or for some other reason, such as certain intervening action by the employer, was no longer part of the same hostile environment claim, then the employee can not recover for the previous acts, at least not by reference to the day 401 act. 444

*** With respect to Morgan’s hostile environment claim, the Court of Appeals concluded that “the pre- and post-limitations period incidents involved the same type of employment actions, occurred relatively frequently, and were perpetrated by the same managers.” To support his claims of a hostile environment, Morgan presented evidence from a number of other employees that managers made racial jokes, performed racially derogatory acts, made negative comments regarding the capacity of blacks to be supervisors, and used various racial epithets. Although many of the acts upon which his claim depends occurred outside the 300 day filing period, we cannot say that they are not part of the same actionable hostile environment claim. On this point, we affirm. C Our holding does not leave employers defenseless against employees who bring hostile work environment claims that extend over long periods of time. Employers have recourse when a plaintiff unreasonably delays filing a charge. * * * *** In addition to other equitable defenses, . . . an employer may raise a laches defense, which bars a plaintiff from maintaining a suit if he unreasonably delays in filing a suit and as a result harms the defendant. This defense “ ‘requires proof of (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting the defense.’ ” Kansas v. Colorado, 514 U.S. 673, 687, 131 L.Ed.2d 759, 115 S.Ct. 1733 (1995) * * * . [Eds. The partial dissent of JUSTICE O’CONNOR, joined in different parts by CHIEF JUSTICE REHNQUIST and JUSTICES SCALIA, KENNEDY and BREYER, is omitted.]

NOTES AND QUESTIONS 1. In determining timeliness, why does the Court treat acts that create a hostile work environment differently than “discrete acts,” like a continuing “failure to promote, denial of transfer, or refusal to hire,” that may be part of the same continuing course of discrimination? 2. Consider the Court’s second hypothetical: “Acts contribute to a hostile environment on days 1–100 and on day 401, but there are no acts between days 101–400.” Whether the employee can recover for acts between days 1–100 depends on whether the acts on day 401 are related to the earlier acts. Devise a hypothetical in which the acts would be related, and one where they would not. 3. When might prior non-discrete discriminatory acts not be part of the same hostile environment? Note the Court’s suggestion that “certain 445 intervening action” by the employer may indicate that prior conduct is “no longer part of the same hostile environment claim.” Note also the Court’s reference to the doctrine of laches. 4. Start of Filing Period for Constructive Discharge? Assume that Morgan had resigned from his position with Amtrak claiming that he should recover back pay from the time of his resignation because he faced a discriminatory hostile work environment so severe and pervasive that a reasonable person would have felt compelled to resign. This is the Title VII standard for “constructive discharge”

endorsed by the Court in Pennsylvania State Police v. Suders, 542 U.S. 129, 124 S.Ct. 2342, 159 L.Ed.2d 204 (2004). Would the filing period for this claim commence at the time of the last hostile discriminatory act or at the time of his resignation? See Green v. Brennan, 578 U.S. 547, 136 S. Ct. 1769, 195 L. Ed. 2d 44 (2016) (filing period for constructive discharge claims commences upon resignation).

LEDBETTER V. GOODYEAR TIRE & RUBBER CO. Supreme Court of the United States, 2007. 550 U.S. 618, 127 S.Ct. 2162, 167 L.Ed.2d 982.

JUSTICE ALITO delivered the opinion of the Court. This case calls upon us to apply established precedent in a slightly different context. We have previously held that the time for filing a charge of employment discrimination with the Equal Employment Opportunity Commission (EEOC) begins when the discriminatory act occurs. We have explained that this rule applies to any “discrete act” of discrimination, including discrimination in “termination, failure to promote, denial of transfer, [and] refusal to hire.” National Railroad Passenger Corporation v. Morgan, 536 U.S. 101, 114, 122 S. Ct. 2061, 153 L. Ed. 2d 106 (2002). Because a pay-setting decision is a “discrete act,” it follows that the period for filing an EEOC charge begins when the act occurs. Petitioner, having abandoned her claim under the Equal Pay Act, asks us to deviate from our prior decisions in order to permit her to assert her claim under Title VII. Petitioner also contends that discrimination in pay is different from other types of employment discrimination and thus should be governed by a different rule. But because a pay-setting decision is a discrete act that occurs at a particular point in time, these arguments must be rejected. We therefore affirm the judgment of the Court of Appeals. I Petitioner Lilly Ledbetter (Ledbetter) worked for respondent (Goodyear) at its Gadsden, Alabama, plant from 1979 until 1998. During much of this time, salaried employees at the plant were given or denied raises based on their supervisors’ evaluation of their performance. In March 1998, Ledbetter submitted a questionnaire to the EEOC alleging certain acts of sex discrimination, and in July of that year she filed a formal EEOC charge. After taking early retirement in November 1998, Ledbetter 446

commenced this action, in which she asserted, among other claims, a Title VII pay discrimination claim and a claim under the Equal Pay Act of 1963 (EPA), 29 U.S.C. § 206(d). The District Court granted summary judgment in favor of Goodyear on several of Ledbetter’s claims, including her Equal Pay Act claim, but allowed others, including her Title VII pay discrimination claim, to proceed to trial. In support of this latter claim, Ledbetter introduced evidence that during the course of her employment several supervisors had given her poor evaluations because of her sex, that as a result of these evaluations her pay was not increased as much as it would have been if she had been evaluated fairly, and that these past pay decisions continued to affect the amount of her pay throughout her employment. Toward the end of her time with Goodyear, she was being paid significantly less than any of her male colleagues. Goodyear maintained that the evaluations had been nondiscriminatory, but the jury found for Ledbetter and awarded her backpay and damages. On appeal, Goodyear contended that Ledbetter’s pay discrimination claim was time barred with respect to all pay decisions made prior to September 26, 1997—that is, 180 days before the filing of her EEOC questionnaire. And Goodyear argued that no discriminatory act relating to Ledbetter’s pay occurred after that date. The Court of Appeals for the Eleventh Circuit reversed, holding that a Title VII pay discrimination claim cannot be based on any pay decision that occurred prior to the last pay decision that affected the employee’s pay during the EEOC charging period. 421 F.3d 1169, 1182–1183 (2005). The Court of Appeals then concluded that there was insufficient evidence to prove that Goodyear had acted with discriminatory intent in making the only two pay decisions that occurred within that time span, namely, a decision made in 1997 to deny Ledbetter a raise and a similar decision made in 1998. Id., at 1186–1187. *** II *** In addressing the issue whether an EEOC charge was filed on time, we have stressed the need to identify with care the specific employment practice that is at issue. Morgan, 536 U.S., at 110–111, 122 S. Ct. 2061, 153 L. Ed. 2d 106. Ledbetter points to two different employment practices as possible candidates. Primarily, she urges us to focus on the paychecks that were issued to her during the EEOC charging period (the 180-day period preceding the filing of her EEOC questionnaire), each of

which, she contends, was a separate act of discrimination. Alternatively, Ledbetter directs us to the 1998 decision denying her a raise, and she argues that this decision was “unlawful because it carried forward intentionally 447

discriminatory disparities from prior years.” Both of these arguments fail because they would require us in effect to jettison the defining element of the legal claim on which her Title VII recovery was based. Ledbetter asserted disparate treatment, the central element of which is discriminatory intent. * * * However, Ledbetter does not assert that the relevant Goodyear decisionmakers acted with actual discriminatory intent either when they issued her checks during the EEOC charging period or when they denied her a raise in 1998. Rather, she argues that the paychecks were unlawful because they would have been larger if she had been evaluated in a nondiscriminatory manner prior to the EEOC charging period. Similarly, she maintains that the 1998 decision was unlawful because it “carried forward” the effects of prior, uncharged discrimination decisions. In essence, she suggests that it is sufficient that discriminatory acts that occurred prior to the charging period had continuing effects during that period. * * * This argument is squarely foreclosed by our precedents. In United Air Lines, Inc. v. Evans, 431 U.S. 553, 97 S. Ct. 1885, 52 L. Ed. 2d 571 (1977), we rejected an argument that is basically the same as Ledbetter’s. Evans was forced to resign because the airline refused to employ married flight attendants, but she did not file an EEOC charge regarding her termination. Some years later, the airline rehired her but treated her as a new employee for seniority purposes. Id., at 554–555, 97 S. Ct. 1885, 52 L. Ed. 2d 571. Evans then sued, arguing that, while any suit based on the original discrimination was time barred, the airline’s refusal to give her credit for her prior service gave “present effect to [its] past illegal act and thereby perpetuated the consequences of forbidden discrimination.” Id., at 557, 97 S. Ct. 1885, 52 L. Ed. 2d 571. We agreed with Evans that the airline’s “seniority system [did] indeed have a continuing impact on her pay and fringe benefits,” id., at 558, 97 S. Ct. 1885, 52 L. Ed. 2d 571, but we noted that “the critical question [was] whether any present violation existed.” Ibid. (emphasis in original). We concluded that the continuing effects of the precharging period discrimination did not make out a present violation. As Justice Stevens wrote for the Court: “United was entitled to treat [Evans’ termination] as lawful after respondent failed to file a charge of discrimination within the 90 days then allowed by § 706(d). A discriminatory act which is not made the basis for a timely charge . . . is merely an unfortunate event in history which has no present legal consequences.” Ibid. It would be difficult to speak to the point more directly. Equally instructive is Delaware State College v. Ricks, 449 U.S. 250, 101 S. Ct. 498, 66 L. Ed. 2d 431 (1980), which concerned a college librarian, Ricks, who alleged that he had been discharged because of race. In March 448

1974, Ricks was denied tenure, but he was given a final, nonrenewable one-year contract that expired on June 30, 1975. Id., at 252–253, 101 S. Ct. 498, 66 L. Ed. 2d 431. Ricks delayed filing a charge with the EEOC until April 1975, id., at 254, 101 S. Ct. 498, 66 L. Ed. 2d 431, but he argued that the EEOC charging period ran from the date of his actual termination rather than from the date when tenure was denied. In rejecting this argument, we recognized that “one of the effects of the denial of tenure,” namely, his ultimate termination, “did not occur until later.” Id., at 258, 101 S. Ct. 498, 66 L. Ed. 2d 431 (emphasis in original). But because Ricks failed to identify any specific discriminatory act “that continued until, or occurred at the time of, the actual termination of his employment,” id., at 257, 101 S. Ct. 498, 66 L. Ed. 2d 431, we held that the EEOC charging period ran from “the time the tenure decision was made and communicated to Ricks,” id., at 258, 101 S. Ct. 498, 66 L. Ed. 2d 431. This same approach dictated the outcome in Lorance v. AT&T Technologies, Inc., 490 U.S. 900, 109 S. Ct. 2261, 104 L. Ed. 2d 961 (1989), which grew out of a change in the way in which seniority was calculated under a collective-bargaining agreement. Before 1979, all employees at the plant in question accrued seniority based simply on years of employment at the plant. In 1979, a new agreement made seniority for workers in the more highly paid (and traditionally male) position of “tester” depend on time spent in that position alone and not in other positions in the plant. Several years later, when female testers were laid off due to low seniority as calculated under the new provision, they filed an EEOC charge alleging that the 1979 scheme had been adopted with discriminatory intent, namely, to protect incumbent male testers when women with substantial plant seniority began to move into the traditionally male tester positions. Id., at 902–903, 109 S. Ct. 2261, 104 L. Ed. 2d 961. We held that the plaintiffs’ EEOC charge was not timely because it was not filed within the specified period after the adoption in 1979 of the new seniority rule. We noted that the plaintiffs had not alleged that the new seniority rule treated men and women differently or that the rule had been applied in a discriminatory manner. Rather, their complaint was that the rule was adopted originally with discriminatory intent. Id., at 905, 109 S. Ct. 2261, 104 L. Ed. 2d 961. And as in Evans and Ricks,

we held that the EEOC charging period ran from the time when the discrete act of alleged intentional discrimination occurred, not from the date when the effects of this practice were felt. 490 U.S., at 907–908, 109 S. Ct. 2261, 104 L. Ed. 2d 961. We stated: “Because the claimed invalidity of the facially nondiscriminatory and neutrally applied tester seniority system is wholly dependent on the alleged illegality of signing the underlying agreement, it is 449

the date of that signing which governs the limitations period.” Id., at 911, 109 S. Ct. 2261, 104 L. Ed. 2d 961.2 Our most recent decision in this area confirms this understanding. In Morgan, we explained that the statutory term “employment practice” generally refers to “a discrete act or single ‘occurrence’ ” that takes place at a particular point in time. 536 U.S., at 110–111, 122 S. Ct. 2061, 153 L. Ed. 2d 106. We pointed to “termination, failure to promote, denial of transfer, [and] refusal to hire” as examples of such “discrete” acts, and we held that a Title VII plaintiff “can only file a charge to cover discrete acts that ‘occurred’ within the appropriate time period.” Id., at 114, 122 S. Ct. 2061, 153 L. Ed. 2d 106. *** A disparate-treatment claim comprises two elements: an employment practice, and discriminatory intent. Nothing in Title VII supports treating the intent element of Ledbetter’s claim any differently from the employment practice element.3 If anything, concerns regarding stale claims weigh more heavily with respect to proof of the intent associated with employment practices than with the practices themselves. For example, in a case such as this in which the plaintiff’s claim concerns the denial of raises, the employer’s challenged acts (the decisions not to increase the employee’s pay at the times in question) will almost always be documented and will typically not even be in dispute. By contrast, the employer’s intent is almost always disputed, and evidence relating to intent may fade quickly with time. * * * 4 450

III A In advancing her two theories Ledbetter * * * argues that our decision in Bazemore v. Friday, 478 U.S. 385, 106 S. Ct. 3000, 92 L. Ed. 2d 315 (1986) (per curiam), requires different treatment of her claim because it relates to pay. Ledbetter focuses specifically on our statement that “each week’s paycheck that delivers less to a black than to a similarly situated white is a wrong actionable under Title VII.” Id., at 395, 106 S. Ct. 3000, 92 L. Ed. 2d 315. She argues that in Bazemore we adopted a “paycheck accrual rule” under which each paycheck, even if not accompanied by discriminatory intent, triggers a new EEOC charging period during which the complainant may properly challenge any prior discriminatory conduct that impacted the amount of that paycheck, no matter how long ago the discrimination occurred. On this reading, Bazemore dispensed with the need to prove actual discriminatory intent in pay cases and, without giving any hint that it was doing so, repudiated the very different approach taken previously in Evans and Ricks. Ledbetter’s interpretation is unsound. Bazemore concerned a disparate-treatment pay claim brought against the North Carolina Agricultural Extension Service (Service). 478 U.S., at 389–390, 106 S. Ct. 3000, 92 L. Ed. 2d 315. Service employees were originally segregated into “a white branch” and “a Negro branch,” with the latter receiving less pay, but in 1965 the two branches were merged. Id., at 390–391, 106 S. Ct. 3000, 92 L. Ed. 2d 315. After Title VII was extended to public employees in 1972, black employees brought suit claiming that pay disparities attributable to the old dual pay scale persisted. Id., at 391, 106 S. Ct. 3000, 92 L. Ed. 2d 315. The Court of Appeals rejected this claim, which it interpreted to be that the “discriminatory difference in salaries should have been affirmatively eliminated.” Id., at 395. This Court reversed in a per curiam opinion, 478 U.S., at 386–388, 106 S. Ct. 3000, 92 L. Ed. 2d 315, but all of the Members of the Court joined Justice Brennan’s separate opinion, see id., at 388, 106 S. Ct. 3000, 92 L. Ed. 2d 315 (opinion concurring in part). Justice Brennan wrote: “The error of the Court of Appeals with respect to salary disparities created prior to 1972 and perpetuated thereafter is too obvious to warrant extended discussion: that the Extension Service discriminated with respect to salaries prior to the time it was covered by Title VII does not excuse perpetuating that discrimination after the Extension Service became covered by Title VII. To hold otherwise would have the effect of exempting from liability those employers who were historically the greatest offenders of the rights of blacks. A pattern or practice that would have constituted a violation of Title VII, but for the fact that the statute had not yet become effective, became a violation upon Title VII’s effective date, and to the extent an employer continued to

451

engage in that act or practice, it is liable under that statute. While recovery may not be permitted for pre-1972 acts of discrimination, to the extent that this discrimination was perpetuated after 1972, liability may be imposed.” Id., at 395, 106 S. Ct. 3000, 92 L. Ed. 2d 315 (emphasis in original). Far from adopting the approach that Ledbetter advances here, this passage made a point that was “too obvious to warrant extended discussion,” ibid.; namely, that when an employer adopts a facially discriminatory pay structure that puts some employees on a lower scale because of race, the employer engages in intentional discrimination whenever it issues a check to one of these disfavored employees. An employer that adopts and intentionally retains such a pay structure can surely be regarded as intending to discriminate on the basis of race as long as the structure is used. *** Bazemore stands for the proposition that an employer violates Title VII and triggers a new EEOC charging period whenever the employer issues paychecks using a discriminatory pay structure. But a new Title VII violation does not occur and a new charging period is not triggered when an employer issues paychecks pursuant to a system that is “facially nondiscriminatory and neutrally applied.” Lorance, 490 U.S., at 911, 109 S. Ct. 2261, 104 L. Ed. 2d 961. The fact that precharging period discrimination adversely affects the calculation of a neutral factor (like seniority) that is used in determining future pay does not mean that each new paycheck constitutes a new violation and restarts the EEOC charging period. Because Ledbetter has not adduced evidence that Goodyear initially adopted its performance-based pay system in order to discriminate on the basis of sex or that it later applied this system to her within the charging period with any discriminatory animus, Bazemore is of no help to her. Rather, all Ledbetter has alleged is that Goodyear’s agents discriminated against her individually in the past and that this discrimination reduced the amount of later paychecks. Because Ledbetter did not file timely EEOC charges relating to her employer’s discriminatory pay decisions in the past, she cannot maintain a suit based on that past discrimination at this time. B The dissent also argues that pay claims are different. Its principal argument is that a pay discrimination claim is like a hostile work environment claim because both types of claims are “based on the cumulative effect of individual acts,” but this analogy overlooks the critical conceptual distinction between these two types of claims. And although the dissent relies heavily on Morgan, the dissent’s argument is fundamentally inconsistent with Morgan’s reasoning. 452

Morgan distinguished between “discrete” acts of discrimination and a hostile work environment. A discrete act of discrimination is an act that in itself “constitutes a separate actionable ‘unlawful employment practice’ ” and that is temporally distinct. Morgan, 536 U.S., at 114, 117, 122 S. Ct. 2061, 153 L. Ed. 2d 106. As examples we identified “termination, failure to promote, denial of transfer, or refusal to hire.” Id., at 114, 122 S. Ct. 2061, 153 L. Ed. 2d 106. A hostile work environment, on the other hand, typically comprises a succession of harassing acts, each of which “may not be actionable on its own.” In addition, a hostile work environment claim “cannot be said to occur on any particular day.” Id., at 115–116, 122 S. Ct. 2061, 153 L. Ed. 2d 106. In other words, the actionable wrong is the environment, not the individual acts that, taken together, create the environment. *** [I]f a single discriminatory pay decision made 20 years ago continued to affect an employee’s pay today, the dissent would presumably hold that the employee could file a timely EEOC charge today. And the dissent would presumably allow this even if the employee had full knowledge of all the circumstances relating to the 20-year-old decision at the time it was made. The dissent, it appears, proposes that we adopt a special rule for pay cases based on the particular characteristics of one case that is certainly not representative of all pay cases and may not even be typical. We refuse to take that approach. IV In addition to the arguments previously discussed, Ledbetter relies largely on analogies to other statutory regimes and on extrastatutory policy arguments to support her “paycheck accrual rule.” A Ledbetter places significant weight on the EPA, which was enacted contemporaneously with Title VII and prohibits paying unequal wages for equal work because of sex. 29 U.S.C. § 206(d). Stating that “the lower courts routinely hear [EPA] claims challenging pay disparities that first arose outside the limitations period,” Ledbetter suggests that we should hold that Title VII

is violated each time an employee receives a paycheck that reflects past discrimination. The simple answer to this argument is that the EPA and Title VII are not the same. In particular, the EPA does not require the filing of a charge with the EEOC or proof of intentional discrimination. See § 206(d)(1) (asking only whether the alleged inequality resulted from “any other factor other than sex”). Ledbetter originally asserted an EPA claim, but that claim was dismissed by the District Court and is not before us. If Ledbetter had pursued her EPA claim, she would not face the Title VII obstacles that she now confronts. * * * 453

Ledbetter, finally, makes a variety of policy arguments in favor of giving the alleged victims of pay discrimination more time before they are required to file a charge with the EEOC. Among other things, she claims that pay discrimination is harder to detect than other forms of employment discrimination.10 * * * Ledbetter’s policy arguments for giving special treatment to pay claims find no support in the statute and are inconsistent with our precedents. We apply the statute as written, and this means that any unlawful employment practice, including those involving compensation, must be presented to the EEOC within the period prescribed by statute. JUSTICE GINSBURG, with whom JUSTICES STEVENS, SOUTER and BREYER join, dissenting. The Court’s insistence on immediate contest overlooks common characteristics of pay discrimination. Pay disparities often occur, as they did in Ledbetter’s case, in small increments; cause to suspect that discrimination is at work develops only over time. Comparative pay information, moreover, is often hidden from the employee’s view. Employers may keep under wraps the pay differentials maintained among supervisors, no less the reasons for those differentials. Small initial discrepancies may not be seen as meet for a federal case, particularly when the employee, trying to succeed in a nontraditional environment, is averse to making waves. * * * *** Ledbetter’s petition presents a question important to the sound application of Title VII: What activity qualifies as an unlawful employment practice in cases of discrimination with respect to compensation. One answer identifies the pay-setting decision, and that decision alone, as the unlawful practice. Under this view, each particular salary-setting decision is discrete from prior and subsequent decisions, and must be challenged within 180 days on pain of forfeiture. Another response counts both the pay-setting decision and the actual payment of a discriminatory wage as unlawful practices. Under this approach, each payment of a wage or salary infected by sex-based discrimination constitutes an unlawful employment practice; prior decisions, outside the 180-day charge-filing period, are not themselves actionable, but they are relevant in determining the lawfulness of conduct within the period. The Court adopts the first view, but the second is more faithful to precedent, more in tune with the realities of the workplace, and more respectful of Title VII’s remedial purpose. *** 454

Pay disparities, of the kind Ledbetter experienced, have a closer kinship to hostile work environment claims than to charges of a single episode of discrimination. Ledbetter’s claim, resembling Morgan’s, rested not on one particular paycheck, but on “the cumulative effect of individual acts.” Initially in line with the salaries of men performing substantially the same work, Ledbetter’s salary fell 15 to 40 percent behind her male counterparts only after successive evaluations and percentagebased pay adjustments. Over time, she alleged and proved, the repetition of pay decisions undervaluing her work gave rise to the current discrimination of which she complained. Though component acts fell outside the charge-filing period, with each new paycheck, Goodyear contributed incrementally to the accumulating harm. See Morgan, 536 U.S., at 117, 122 S. Ct. 2061, 153 L. Ed. 2d 106; Bazemore, 478 U.S., at 395–396, 106 S. Ct. 3000, 92 L. Ed. 2d 315; cf. Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 502, n. 15, 88 S. Ct. 2224, 20 L. Ed. 2d 1231 (1968). The problem of concealed pay discrimination is particularly acute where the disparity arises not because the female employee is flatly denied a raise but because male counterparts are given larger raises. Having received a pay increase, the female employee is unlikely to discern at once that she has experienced an adverse employment decision. She may have little reason even to suspect discrimination until a pattern develops incrementally and she ultimately becomes aware of the disparity. Even if an employee suspects that the reason for a comparatively low raise is not performance but sex (or another protected ground), the amount involved may seem too small, or the employer’s intent too ambiguous, to make the issue immediately actionable—or winnable.

NOTES AND QUESTIONS

1. Review the majority and dissenting opinions in Ledbetter. Are discriminatory pay decisions fully completed when implemented or do they continue with each paycheck received during the filing period? 2. How does the Ledbetter Court distinguish its earlier decision in Bazemore v. Friday? Is the distinction persuasive? Should employers be expected to counter plaintiffs’ allegations of covert discriminatory events that may stem from discrete events distant in time? 3. “Discovery” Rule? Would a “discovery” rule (a point left open in footnote 10 of the Court’s opinion) be preferable to the rule adopted by the majority? Under a “discovery” rule, the plaintiff’s claim would accrue when the plaintiff learns or should have known of the discriminatory pay practice. The Court earlier reserved decision on whether a “discovery” rule was appropriate in Mohasco Corp. v. Silver, 447 U.S. 807, 818 n.22, 100 S. Ct. 2486, 2493 n.22, 65 L. Ed. 2d 532 (1980). In Reeb v. Economic Opportunity Atlanta, Inc., 516 F.2d 924 (5th Cir. 1975), the plaintiff had been terminated on grounds of “limitations of funds” but subsequently learned that her previous position had been filled by a presumably less qualified male employee; the court held that 455 the filing period began with the subsequent discovery. Does Reeb provide support for a general “discovery” rule or is it an instance of equitable tolling because of defendant’s concealment of the true facts? See Kale v. Combined Insurance Co. of America, 861 F.2d 746 (1st Cir. 1988) (recognizing tolling because of “equitable estoppel” due to employer misrepresentations). 4. Lilly Ledbetter Fair Pay Act of 2009 (LLA). On January 29, 2009, President Obama signed legislation intended to overturn Ledbetter. The legislation, Pub. L. 111–2, 123 Stat. 5, amends § 706(e) of Title VII (with conforming amendments to ADEA, ADA, and the Rehabilitation Act), codified now as 42 U.S.C. § 2000e–5(e)(3)(A), to provide: An unlawful employment practice occurs, with respect to discrimination in compensation in violation of this title, when a discriminatory compensation decision or other practice is adopted, when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice. The Act was made retroactive to the date of the Ledbetter decision, May 28, 2007, and applies to all cases pending on that date. How would a case like that of Lilly Ledbetter’s now be decided? Might an employer still be able to assert the equitable doctrine of laches in an appropriate case? 5. Discharge and Promotion Decisions After the Lilly Ledbetter Act. To what extent does the amendment affect the beginning of the filing period in a discharge case like that of Ricks, discussed in the Ledbetter decision? What about a case where an employee claims discrimination in the denial of a promotion that would have been accompanied by a pay raise? See Noel v. Boeing Co., 622 F.3d 266 (3d Cir. 2010); Schuler v. Pricewaterhouse Coopers, LLP, 595 F.3d 370 (D.C. Cir. 2010) (both holding failure-to-promote claim does not fall within purview of Ledbetter Act because they are not “discriminatory compensation decision[s] . . . or practice[s].”). In Almond v. Unified School District #501, 665 F.3d 1174 (10th Cir. 2011), the court of appeals held that the LLA does not apply to claims involving transfer to lower-paying jobs absent allegations of “unequal pay for equal work”. 6. Intentionally Discriminatory Seniority Systems. The LLA was not the first time Congress reversed a decision of the Court that refused to start a new filing period with each application of a prior discriminatory decision. Note the Ledbetter Court’s discussion of Lorance v. AT&T Technologies, 490 U.S. 900, 954, 109 S.Ct. 2261, 104 L.Ed.2d 961 (1989).In § 112 of the Civil Rights Act of 1991, Congress overturned the holding in Lorance, by amending § 706(e) of Title VII to provide that timely challenges “to a seniority system that has been adopted for an intentionally discriminatory purpose in violation of this title (whether or not that discriminatory purpose is apparent on the face of the seniority provision), [may be brought] when the seniority system is adopted, 456 when an individual becomes subject to the seniority system, or when a person aggrieved is injured by the application of the seniority system or provision of the system.” 7. Adoption vs. Application of Practice with Disparate Impact. In Lewis v. City of Chicago, 560 U.S. 205, 130 S. Ct. 2191, 176 L. Ed. 2d 967 (2010), the Supreme Court addressed whether the filing period for a disparate-impact claim starts upon the adoption of a practice or whether it also starts upon the later application of that practice. In 1995, the Chicago Fire Department adopted a selection practice whereby applicants scoring above 89 on a written test would be eligible to be selected for a position, whereas those scoring between 65 and 88 were kept on a wait list. The plaintiffs filed a disparate impact claim challenging the city’s selection practices. The challenge to the 1995 adoption of the cutoff was untimely, but the Court found that subsequent application of the selection procedure could be challenged. The Court concluded that both the adoption and application of the practice gave rise to a cause of action: It may be true that the City’s January 1996 decision to adopt the cutoff score (and to create a list of the applicants above it)

gave rise to a freestanding disparate-impact claim. But it does not follow that no new violation occurred—and no new claims could arise—when the City implemented that decision down the road. If petitioners could prove that the City “use[d]” the “practice” that “causes a disparate impact,” they could prevail. [Our] cases establish only that a Title VII plaintiff must show a “present violation” within the limitations period. Evans, supra, at 558, 97 S. Ct. 1885, 52 L. Ed. 2d 571 (emphasis deleted). What that requires depends on the claim asserted. For disparatetreatment claims—and others for which discriminatory intent is required—that means the plaintiff must demonstrate deliberate discrimination within the limitations period. See Ledbetter, supra, at 624–629, 127 S. Ct. 2162, 167 L. Ed. 2d 982; Lorance, supra, at 904–905, 109 S. Ct. 2261, 104 L. Ed. 2d 961 * * * . But for claims that do not require discriminatory intent, no such demonstration is needed. 560 U.S. at 215.

D. CLASS ACTIONS GENERAL TELEPHONE COMPANY OF THE SOUTHWEST V. FALCON Supreme Court of the United States, 1982. 457 U.S. 147, 102 S.Ct. 2364, 72 L.Ed.2d 740.

JUSTICE STEVENS delivered the opinion of the Court. The question presented is whether respondent Falcon, who complained that petitioner did not promote him because he is a Mexican457

American, was properly permitted to maintain a class action on behalf of Mexican-American applicants for employment whom petitioner did not hire. I In 1969 petitioner initiated a special recruitment and training program for minorities. Through that program, respondent Falcon was hired in July 1969 as a groundman, and within a year he was twice promoted, first to lineman and then to linemanin-charge. He subsequently refused a promotion to installer-repairman. In October 1972 he applied for the job of field inspector; his application was denied even though the promotion was granted several white employees with less seniority. Falcon thereupon filed a charge with the Equal Employment Opportunity Commission stating his belief that he had been passed over for promotion because of his national origin and that petitioner’s promotion policy operated against MexicanAmericans as a class. In due course he received a right-to-sue letter from the Commission and, in April 1975, he commenced this action under Title VII of the Civil Rights Act of 1964, 78 Stat. 253, as amended, 42 U.S.C. § 2000e et seq. (1976 ed. and Supp. IV), in the United States District Court for the Northern District of Texas. His complaint alleged that petitioner maintained “a policy, practice, custom, or usage of: (a) discriminating against [Mexican-Americans] because of national origin and with respect to compensation, terms, conditions, and privileges of employment, and (b) * * * subjecting [MexicanAmericans] to continuous employment discrimination.” Respondent claimed that as a result of this policy whites with less qualification and experience and lower evaluation scores than respondent had been promoted more rapidly. The complaint contained no factual allegations concerning petitioner’s hiring practices. Respondent brought the action “on his own behalf and on behalf of other persons similarly situated, pursuant to Rule 23(b) (2) of the Federal Rules of Civil Procedure.” The class identified in the complaint was “composed of Mexican-American persons who are employed, or who might be employed, by GENERAL TELEPHONE COMPANY at its place of business located in Irving, Texas, who have been and who continue to be or might be adversely affected by the practices complained of herein.” After responding to petitioner’s written interrogatories, respondent filed a memorandum in favor of certification of “the employees who have been employed, are employed, or may in the future be employed and all those Mexican-Americans who have applied or would have applied for employment had the Defendant not practiced racial discrimination in its employment practices.” His position was supported by the ruling of the United States Court of Appeals for the Fifth Circuit in Johnson v. Georgia Highway Express, Inc., 417 F.2d 1122 (1969), that any victim of racial discrimination in employment may maintain an “across the board” attack 458

on all unequal employment practices alleged to have been committed by the employer pursuant to a policy of racial discrimination. Without conducting an evidentiary hearing, the District Court certified a class including Mexican-American employees and Mexican-American applicants for employment who had not been hired. Following trial of the liability issues, the District Court entered separate findings of fact and conclusions of law with respect first to respondent and then to the class. The District Court found that petitioner had not discriminated against respondent in hiring, but that it did discriminate against him in its promotion practices. The court reached converse conclusions about the class, finding no discrimination in promotion practices, but concluding that petitioner had discriminated against Mexican-Americans at its Irving facility in its hiring practices. *** Both parties appealed. The Court of Appeals rejected respondent’s contention that the class should have encompassed all of petitioner’s operations in Texas, New Mexico, Oklahoma, and Arkansas. On the other hand, the court also rejected petitioner’s argument that the class had been defined too broadly. For, under the Fifth Circuit’s across-the-board rule, it is permissible for “an employee complaining of one employment practice to represent another complaining of another practice, if the plaintiff and the members of the class suffer from essentially the same injury. In this case, all of the claims are based on discrimination because of national origin.” *** II *** We have repeatedly held that “a class representative must be part of the class and ‘possess the same interest and suffer the same injury’ as the class members.” East Texas Motor Freight System, Inc. v. Rodriguez, 431 U.S. 395, 403, 97 S.Ct. 1891, 1896, 52 L.Ed.2d 453 (quoting Schlesinger v. Reservists Committee to Stop the War, 418 U.S. 208, 216, 94 S.Ct. 2925, 2929– 2930, 41 L.Ed.2d 706.) *** We cannot disagree with the proposition underlying the across-the-board rule—that racial discrimination is by definition class discrimination. But the allegation that such discrimination has occurred neither determines whether a class action may be maintained in accordance with Rule 23 nor defines the class that may be certified. Conceptually, there is a wide gap between (a) an individual’s claim that he has been denied a promotion on discriminatory grounds, and his otherwise unsupported allegation that the company has a policy of discrimination, and (b) the 459

existence of a class of persons who have suffered the same injury as that individual, such that the individual’s claim and the class claims will share common questions of law or fact and that the individual’s claim will be typical of the class claims. For respondent to bridge that gap, he must prove much more than the validity of his own claim. Even though evidence that he was passed over for promotion when several less deserving whites were advanced may support the conclusion that respondent was denied the promotion because of his national origin, such evidence would not necessarily justify the additional inferences (1) that this discriminatory treatment is typical of petitioner’s promotion practices, (2) that petitioner’s promotion practices are motivated by a policy of ethnic discrimination that pervades petitioner’s Irving division, or (3) that this policy of ethnic discrimination is reflected in petitioner’s other employment practices, such as hiring, in the same way it is manifested in the promotion practices. These additional inferences demonstrate the tenuous character of any presumption that the class claims are “fairly encompassed” within respondent’s claim. * * * Without any specific presentation identifying the questions of law or fact that were common to the claims of respondent and of the members of the class he sought to represent, it was error for the District Court to presume that respondent’s claim was typical of other claims against petitioner by Mexican-American employees and applicants. If one allegation of specific discriminatory treatment were sufficient to support an across-the-board attack, every Title VII case would be a potential companywide class action. We find nothing in the statute to indicate that Congress intended to authorize such a wholesale expansion of class-action litigation. The trial of this class action followed a predictable course. Instead of raising common questions of law or fact, respondent’s evidentiary approaches to the individual and class claims were entirely different. He attempted to sustain his individual claim by proving intentional discrimination. He tried to prove the class claims through statistical evidence of disparate impact. Ironically, the District Court rejected the class claim of promotion discrimination, which conceptually might have borne a closer typicality and commonality relationship with respondent’s individual claim, but sustained the class claim of hiring discrimination. As the District Court’s bifurcated findings on liability demonstrate, the individual and class claims might

as well have been tried separately. It is clear that the maintenance of respondent’s action as a class action did not advance “the efficiency and economy of litigation which is a principal purpose of the procedure.” American Pipe & Construction Co. v. Utah, 414 U.S. 538, 553, 94 S.Ct. 756, 766, 38 L.Ed.2d 713. 460

NOTES AND QUESTIONS 1. In light of Falcon what must Title VII plaintiffs establish in order to satisfy the typicality and commonality requirements of Rule 23? 2. Why did the Falcon Court reject the Fifth Circuit’s “across the board” approach to Title VII certifications? Was the Court concerned about potential conflicts of interest between incumbent employees and disappointed applicants, or between past employees and current employees? 3. Advantages of Class Actions. Class actions have been lauded as important to antidiscrimination and wage-and-hour litigation because they enable individual claimants and advocacy organizations to mount systemic, high-impact challenges to employer decisionmaking. Class actions enable large numbers of victims of discrimination to obtain relief from the outcome of a single disparate impact or systemic disparate treatment suit. The filing of such actions offers other advantages to claimants. The Court held in Albemarle Paper Co. v. Moody, 422 U.S. 405, 95 S. Ct. 2362, 45 L. Ed. 2d 280 (1975), that a class action may be brought on behalf of individuals who have not themselves filed charges with the EEOC; in Crown, Cork and Seal Co. v. Parker, 462 U.S. 345, 103 S. Ct. 2392, 76 L. Ed. 2d 628 (1983), it held that the filing of such an action tolls Title VII filing periods for members of the class with viable claims at the time of filing who might wish to initiate or join in an individual suit if the class is not certified. Moreover, once a class action has been certified, it acquires a life of its own, surviving the death or resolution of the individual claims of the representative parties. See Sosna v. Iowa, 419 U.S. 393, 95 S. Ct. 553, 42 L. Ed. 2d 532 (1975). A denial of class certification may be reviewed on appeal even though the representative party’s claim has become moot. See Parole Comm’n v. Geraghty, 445 U.S. 388, 100 S. Ct. 1202, 63 L. Ed. 2d 479 (1980); Deposit Guar. Nat’l Bank v. Roper, 445 U.S. 326, 100 S. Ct. 1166, 63 L. Ed. 2d 427 (1980). 4. “Across the Board” Certifications After Falcon? Does Falcon rule out all “across the board” actions which allege discriminatory treatment of both applicants and incumbent employees? What about challenges to discriminatory systems? Consider footnote 15 of the decision in Falcon (not reprinted in the excerpt): If petitioner used a biased testing procedure to evaluate both applicants for employment and incumbent employees, a class action on behalf of every applicant or employee who might have been prejudiced by the test clearly would satisfy the commonality and typicality requirements of Rule 23(a). Significant proof that an employer operated under a general policy of discrimination conceivably could justify a class of both applicants and employees if the discrimination manifested itself in hiring and promotion practices in the same general fashion, such as through entirely subjective decisionmaking processes. 5. Notice and “Opt-Out” Rights in Discrimination Class Actions. Rule 23 class actions purport to have binding effect on the members of the class; if the 461 class loses, individual suits by class members generally cannot be brought. This raises concerns because many class actions are brought under Rule 23(b)(2) of the Fed. R. Civ. P., which, unlike Rule 23(b)(3), does not by its terms require that notice and an opportunity to opt out be furnished to class members. The Court mitigated somewhat the harshness of this rule in Cooper v. Federal Reserve Bank, 467 U.S. 867, 104 S. Ct. 2794, 81 L. Ed. 2d 718 (1984), by confining the binding effect of a Title VII class action to the issues actually litigated therein, and holding that a court’s rejection of a systemic disparate treatment case does not necessarily foreclose individual disparate treatment claims. The dilemma nevertheless remains to the extent the class action purports to resolve individual claims or will have that effect as a practical matter. Some courts have required notice to class members before foreclosure of their individual claims may occur. See, e.g., Johnson v. General Motors Corp., 598 F.2d 432 (5th Cir. 1979). 6. Class Action Settlements. How should settlements of Rule 23(b)(2) class actions be treated? Rule 23(e) requires notice to class members and a “fairness” hearing by the district court before approval of a settlement. At the hearing, class members opposed to the settlement may seek to intervene or simply voice their objections. The Fifth and Eleventh Circuits have held that while there is no absolute opt-out right, the trial court must be assured of the continuing homogeneity of interests between class representatives and passive class members at the settlement stage. See Cox v. American Cast Iron Pipe Co., 784 F.2d 1546 (11th Cir. 1986); Holmes v. Continental Can Co., 706 F.2d 1144 (11th Cir. 1983); Penson v. Terminal Transp. Co., 634 F.2d 989 (5th Cir. 1981). For data on employment class action settlements, see Samuel Estreicher & Kristina Yost, Measuring the Value of Employment Class Action Settlements: A Preliminary Assessment, 6 J. Empirical Legal Stud. 768 (Dec. 2009). 7. “Opt-In” Collective Actions Under FLSA, EPA and ADEA. Representative actions differ under the ADEA and the EPA. These

statutes utilize the enforcement procedures of the FLSA, rather than Rule 23, and thus permit only “opt-in” collective actions; individuals can be bound only if they have formally opted into the lawsuit. See 29 U.S.C. § 216(b). In Hoffman-La Roche, Inc. v. Sperling, 493 U.S. 165, 110 S. Ct. 482, 107 L. Ed. 2d 480 (1989), the Court held that district courts may facilitate notice of ADEA representative actions to potential plaintiffs by allowing discovery of names and addresses of similarly situated employees, provided the appearance of judicial endorsement of the merits of the action is avoided. FLSA-model collective actions may be brought only on behalf of employees who are “similarly situated” to the named plaintiffs. See 29 U.S.C. § 216(b). Some courts take the view that the “similarly situated” standard is “considerably less stringent than the requirement of Fed.R.Civ.P. 23(b)(3) that common questions ‘predominate.’ ” In re Food Lion, Inc., 151 F.3d 1029 (4th Cir. 1998) (unpublished); Hoffmann v. Sbarro, Inc., 982 F. Supp. 249, 261 (S.D.N.Y. 1997) (“[P]laintiffs can meet this burden by making a modest factual 462 showing sufficient to demonstrate that they and potential plaintiffs together were victims of a common policy or plan that violated the law.”). A court has two opportunities to decide whether to permit the collective action to proceed. First, upon the plaintiffs’ request to send a notice to the prospective class, it may “conditionally certify” a class using the fairly lenient approach to the “similarly situated” standard stated above. After discovery has been completed, the court may use a more demanding version of the “similarly situated” standard. See, e.g., Thiessen v. General Elec. Cap. Corp., 996 F. Supp. 1071, 1080 n.13 (D. Kan. 1998); Vaszlavik v. Storage Tech. Corp., 175 F.R.D. 672, 678–79 (D. Colo. 1997). This may result in the decertification of the collective action after individuals have opted in, presenting its own significant problems.

WAL-MART STORES, INC. V. DUKES Supreme Court of the United States, 2011. 564 U.S. 338, 131 S.Ct. 2541, 180 L.Ed.2d 374.

JUSTICE SCALIA delivered the opinion of the Court. We are presented with one of the most expansive class actions ever. The District Court and the Court of Appeals approved the certification of a class comprising about one and a half million plaintiffs, current and former female employees of petitioner Wal-Mart who allege that the discretion exercised by their local supervisors over pay and promotion matters violates Title VII by discriminating against women. In addition to injunctive and declaratory relief, the plaintiffs seek an award of backpay. We consider whether the certification of the plaintiff class was consistent with Federal Rules of Civil Procedure 23(a) and (b)(2). I A Petitioner Wal-Mart is the Nation’s largest private employer. It operates four types of retail stores throughout the country: Discount Stores, Supercenters, Neighborhood Markets, and Sam’s Clubs. Those stores are divided into seven nationwide divisions, which in turn comprise 41 regions of 80 to 85 stores apiece. Each store has between 40 and 53 separate departments and 80 to 500 staff positions. In all, Wal-Mart operates approximately 3,400 stores and employs more than one million people. Pay and promotion decisions at Wal-Mart are generally committed to local managers’ broad discretion, which is exercised “in a largely subjective manner.” 222 F.R.D. 137, 145 (ND Cal. 2004). Local store managers may increase the wages of hourly employees (within limits) with only limited corporate oversight. As for salaried employees, such as store managers and their deputies, higher corporate authorities have discretion to set their pay within preestablished ranges. 463

Promotions work in a similar fashion. Wal-Mart permits store managers to apply their own subjective criteria when selecting candidates as “support managers,” which is the first step on the path to management. Admission to Wal-Mart’s management training program, however, does require that a candidate meet certain objective criteria, including an aboveaverage performance rating, at least one year’s tenure in the applicant’s current position, and a willingness to relocate. But except for those requirements, regional and district managers have discretion to use their own judgment when selecting candidates for management training. Promotion to higher office—e.g., assistant manager, co-manager, or store manager—is similarly at the discretion of the employee’s superiors after prescribed objective factors are satisfied. B The named plaintiffs in this lawsuit, representing the 1.5 million members of the certified class, are three current or former

Wal-Mart employees who allege that the company discriminated against them on the basis of their sex by denying them equal pay or promotions, in violation of Title VII of the Civil Rights Act of 1964, 78 Stat. 253, as amended, 42 U.S.C. § 2000e–1 et seq. Betty Dukes began working at a Pittsburgh, California, Wal-Mart in 1994. She started as a cashier, but later sought and received a promotion to customer service manager. After a series of disciplinary violations, however, Dukes was demoted back to cashier and then to greeter. Dukes concedes she violated company policy, but contends that the disciplinary actions were in fact retaliation for invoking internal complaint procedures and that male employees have not been disciplined for similar infractions. Dukes also claims two male greeters in the Pittsburgh store are paid more than she is. Christine Kwapnoski has worked at Sam’s Club stores in Missouri and California for most of her adult life. She has held a number of positions, including a supervisory position. She claims that a male manager yelled at her frequently and screamed at female employees, but not at men. The manager in question “told her to ‘doll up,’ to wear some makeup, and to dress a little better.” The final named plaintiff, Edith Arana, worked at a Wal-Mart store in Duarte, California, from 1995 to 2001. In 2000, she approached the store manager on more than one occasion about management training, but was brushed off. Arana concluded she was being denied opportunity for advancement because of her sex. She initiated internal complaint procedures, whereupon she was told to apply directly to the district manager if she thought her store manager was being unfair. Arana, however, decided against that and never applied for management training again. In 2001, she was fired for failure to comply with Wal-Mart’s timekeeping policy. 464

These plaintiffs, respondents here, do not allege that Wal-Mart has any express corporate policy against the advancement of women. Rather, they claim that their local managers’ discretion over pay and promotions is exercised disproportionately in favor of men, leading to an unlawful disparate impact on female employees, see 42 U.S.C. § 2000e–2(k). And, respondents say, because Wal-Mart is aware of this effect, its refusal to cabin its managers’ authority amounts to disparate treatment, see § 2000e–2(a). Their complaint seeks injunctive and declaratory relief, punitive damages, and backpay. It does not ask for compensatory damages. Importantly for our purposes, respondents claim that the discrimination to which they have been subjected is common to all Wal-Mart’s female employees. The basic theory of their case is that a strong and uniform “corporate culture” permits bias against women to infect, perhaps subconsciously, the discretionary decisionmaking of each one of Wal-Mart’s thousands of managers—thereby making every woman at the company the victim of one common discriminatory practice. Respondents therefore wish to litigate the Title VII claims of all female employees at Wal-Mart’s stores in a nationwide class action. C [R]espondents moved the District Court to certify a plaintiff class consisting of “ ‘[a]ll women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices.’ ” 222 F.R.D., at 141–142, As evidence that there were indeed “questions of law or fact common to” all the women of Wal-Mart, as Rule 23(a)(2) requires, respondents relied chiefly on three forms of proof: statistical evidence about pay and promotion disparities between men and women at the company, anecdotal reports of discrimination from about 120 of Wal-Mart’s female employees, and the testimony of a sociologist, Dr. William Bielby, who conducted a “social framework analysis” of Wal-Mart’s “culture” and personnel practices, and concluded that the company was “vulnerable” to gender discrimination. 603 F.3d 571, 601 (CA9 2010) (en banc). Wal-Mart unsuccessfully moved to strike much of this evidence. It also offered its own countervailing statistical and other proof in an effort to defeat Rule 23(a)’s requirements of commonality, typicality, and adequate representation. Wal-Mart further contended that respondents’ monetary claims for backpay could not be certified under Rule 23(b)(2), first because that Rule refers only to injunctive and declaratory relief, and second because the backpay claims could not be manageably tried as a class without depriving Wal-Mart of its right to present certain statutory defenses. With one limitation not relevant here, the District Court granted respondents’ motion and certified their proposed class. 465

D A divided en banc Court of Appeals substantially affirmed the District Court’s certification order. 603 F.3d 571. The majority concluded that respondents’ evidence of commonality was sufficient to “raise the common question whether WalMart’s female employees nationwide were subjected to a single set of corporate policies (not merely a number of independent

discriminatory acts) that may have worked to unlawfully discriminate against them in violation of Title VII.” Id., at 612 (emphasis deleted). It also agreed with the District Court that the named plaintiffs’ claims were sufficiently typical of the class as a whole to satisfy Rule 23(a)(3), and that they could serve as adequate class representatives, see Rule 23(a)(4). Id., at 614– 615. With respect to the Rule 23(b)(2) question, the Ninth Circuit held that respondents’ backpay claims could be certified as part of a (b)(2) class because they did not “predominat[e]” over the requests for declaratory and injunctive relief, meaning they were not “superior in strength, influence, or authority” to the nonmonetary claims. Id., at 616 (internal quotation marks omitted).4 Finally, the Court of Appeals determined that the action could be manageably tried as a class action because the District Court could adopt the approach the Ninth Circuit approved in Hilao v. Estate of Marcos, 103 F.3d 767, 782–787 (1996). There compensatory damages for some 9,541 class members were calculated by selecting 137 claims at random, referring those claims to a special master for valuation, and then extrapolating the validity and value of the untested claims from the sample set. See 603 F.3d at 625–626. The Court of Appeals “s[aw] no reason why a similar procedure to that used in Hilao could not be employed in this case.” Id., at 627. It would allow Wal-Mart “to present individual defenses in the randomly selected ‘sample cases,’ thus revealing the approximate percentage of class members whose unequal pay or nonpromotion was due to something other than gender discrimination.” Ibid. at 628, n. 56 (emphasis deleted). * * * II * * * Rule 23(a) ensures that the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate. The Rule’s four requirements—numerosity, commonality, typicality, and adequate representation—“effectively ‘limit the class claims to those fairly encompassed by the named plaintiff’s claims.’ ” General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 156, 102 S. Ct. 2364, 72 L. Ed. 2d 740 466

(1982) (quoting General Telephone Co. of Northwest v. EEOC, 446 U.S. 318, 330, 100 S. Ct. 1698, 64 L. Ed. 2d 319 (1980)). A The crux of this case is commonality—the rule requiring a plaintiff to show that “there are questions of law or fact common to the class.” Rule 23(a)(2). That language is easy to misread, since “[a]ny competently crafted class complaint literally raises common ‘questions.’ ” Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 131– 132 (2009). * * * Quite obviously, the mere claim by employees of the same company that they have suffered a Title VII injury, or even a disparate-impact Title VII injury, gives no cause to believe that all their claims can productively be litigated at once. Their claims must depend upon a common contention—for example, the assertion of discriminatory bias on the part of the same supervisor. That common contention, moreover, must be of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. “What matters to class certification . . . is not the raising of common ‘questions’—even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers.” Nagareda, supra, at 132. Rule 23 does not set forth a mere pleading standard. A party seeking class certification must affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc. We recognized in Falcon that “sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question,” 457 U.S., at 160, 102 S. Ct. 2364, 72 L. Ed. 2d 740, and that certification is proper only if “the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied,” id., at 161, 102 S. Ct. 2364, 72 L. Ed. 2d 740; see id., at 160, 102 S. Ct. 2364, 72 L. Ed. 2d 740 (“[A]ctual, not presumed, conformance with Rule 23(a) remains . . . indispensable”). Frequently that “rigorous analysis” will entail some overlap with the merits of the plaintiff’s underlying claim. That cannot be helped. “ ‘[T]he class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action.’ ” Falcon, supra, at 160, 102 S. Ct. 2364, 72 L. Ed. 2d 740 (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 469, 98 S. Ct. 2454, 57 L. Ed. 2d 351 (1978); some internal quotation marks omitted).6 Nor is there anything unusual about that consequence: 467

The necessity of touching aspects of the merits in order to resolve preliminary matters, e.g., jurisdiction and venue, is a

familiar feature of litigation. See Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676–677 (CA7 2001) (Easterbrook, J.). In this case, proof of commonality necessarily overlaps with respondents’ merits contention that Wal-Mart engages in a pattern or practice of discrimination. That is so because, in resolving an individual’s Title VII claim, the crux of the inquiry is “the reason for a particular employment decision,” Cooper v. Federal Reserve Bank of Richmond, 467 U.S. 867, 876, 104 S. Ct. 2794, 81 L. Ed. 2d 718 (1984). Here respondents wish to sue about literally millions of employment decisions at once. Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored. B This Court’s opinion in Falcon describes how the commonality issue must be approached. There an employee who claimed that he was deliberately denied a promotion on account of race obtained certification of a class comprising all employees wrongfully denied promotions and all applicants wrongfully denied jobs. 457 U.S., at 152, 102 S. Ct. 2364, 72 L. Ed. 2d 740. We rejected that composite class for lack of commonality and typicality, explaining: “Conceptually, there is a wide gap between (a) an individual’s claim that he has been denied a promotion [or higher pay] on discriminatory grounds, and his otherwise unsupported allegation that the company has a policy of discrimination, and (b) the existence of a class of persons who have suffered the same injury as that individual, such that the individual’s claim and the class claim will share common questions of law or fact and that the individual’s claim will be typical of the class claims.” Id., at 157–158, 102 S. Ct. 2364, 72 L. Ed. 2d 740. Falcon suggested two ways in which that conceptual gap might be bridged. First, if the employer “used a biased testing procedure to evaluate both applicants for employment and incumbent employees, a class action on behalf of every applicant or employee who might have been prejudiced by the test clearly would satisfy the commonality and typicality 468

requirements of Rule 23(a).” Id., at 159, n. 15, 102 S. Ct. 2364, 72 L. Ed. 2d 740. Second, “[s]ignificant proof that an employer operated under a general policy of discrimination conceivably could justify a class of both applicants and employees if the discrimination manifested itself in hiring and promotion practices in the same general fashion, such as through entirely subjective decisionmaking processes.” Ibid. We think that statement precisely describes respondents’ burden in this case. The first manner of bridging the gap obviously has no application here; Wal-Mart has no testing procedure or other company-wide evaluation method that can be charged with bias. The whole point of permitting discretionary decisionmaking is to avoid evaluating employees under a common standard. The second manner of bridging the gap requires “significant proof” that Wal-Mart “operated under a general policy of discrimination.” That is entirely absent here. Wal-Mart’s announced policy forbids sex discrimination, and as the District Court recognized the company imposes penalties for denials of equal employment opportunity, 222 F.R.D., at 154. The only evidence of a “general policy of discrimination” respondents produced was the testimony of Dr. William Bielby, their sociological expert. Relying on “social framework” analysis, Bielby testified that Wal-Mart has a “strong corporate culture,” that makes it “ ‘vulnerable’ ” to “gender bias.” Id., at 152. He could not, however, “determine with any specificity how regularly stereotypes play a meaningful role in employment decisions at Wal-Mart. At his deposition . . . Dr. Bielby conceded that he could not calculate whether 0.5 percent or 95 percent of the employment decisions at Wal-Mart might be determined by stereotyped thinking.” 222 F.R.D. 189, 192 (ND Cal. 2004). The parties dispute whether Bielby’s testimony even met the standards for the admission of expert testimony under Federal Rule of Evidence 702 and our Daubert case, see Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993). The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. 222 F.R.D., at 191. We doubt that is so, but even if properly considered, Bielby’s testimony does nothing to advance respondents’ case. “[W]hether 0.5 percent or 95 percent of the employment decisions at Wal-Mart might be determined by stereotyped thinking” is the essential question on which respondents’ theory of commonality depends. If Bielby admittedly has no answer to that question, we can safely disregard what he has to say. It is worlds away from “significant proof” that Wal-Mart “operated under a general policy of discrimination.” C The only corporate policy that the plaintiffs’ evidence convincingly establishes is Wal-Mart’s “policy” of allowing discretion by local supervisors over employment matters. On its face, of course, that is just 469

the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy

against having uniform employment practices. It is also a very common and presumptively reasonable way of doing business— one that we have said “should itself raise no inference of discriminatory conduct,” Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 990, 108 S. Ct. 2777, 101 L. Ed. 2d 827 (1988). To be sure, we have recognized that, “in appropriate cases,” giving discretion to lower-level supervisors can be the basis of Title VII liability under a disparate-impact theory—since “an employer’s undisciplined system of subjective decisionmaking [can have] precisely the same effects as a system pervaded by impermissible intentional discrimination.” Id., at 990–991, 108 S. Ct. 2777, 101 L. Ed. 2d 827. But the recognition that this type of Title VII claim “can” exist does not lead to the conclusion that every employee in a company using a system of discretion has such a claim in common. To the contrary, left to their own devices most managers in any corporation—and surely most managers in a corporation that forbids sex discrimination—would select sex-neutral, performance-based criteria for hiring and promotion that produce no actionable disparity at all. Others may choose to reward various attributes that produce disparate impact—such as scores on general aptitude tests or educational achievements, see Griggs v. Duke Power Co., 401 U.S. 424, 431–432, 91 S. Ct. 849, 28 L. Ed. 2d 158 (1971). And still other managers may be guilty of intentional discrimination that produces a sex-based disparity. In such a company, demonstrating the invalidity of one manager’s use of discretion will do nothing to demonstrate the invalidity of another’s. A party seeking to certify a nationwide class will be unable to show that all the employees’ Title VII claims will in fact depend on the answers to common questions. Respondents have not identified a common mode of exercising discretion that pervades the entire company—aside from their reliance on Dr. Bielby’s social frameworks analysis that we have rejected. In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction. Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short. The statistical evidence consists primarily of regression analyses performed by Dr. Richard Drogin, a statistician, and Dr. Marc Bendick, a labor economist. Drogin conducted his analysis region-by-region, comparing the number of women promoted into management positions with the percentage of women in the available pool of hourly workers. After considering regional and national data, Drogin concluded that “there are statistically significant disparities between men and women at Wal-Mart . . . [and] these disparities . . . can be explained only by gender discrimination.” 603 F.3d at 604 (internal quotation marks omitted). 470

Bendick compared work-force data from Wal-Mart and competitive retailers and concluded that Wal-Mart “promotes a lower percentage of women than its competitors.” Ibid. Even if they are taken at face value, these studies are insufficient to establish that respondents’ theory can be proved on a classwide basis. In Falcon, we held that one named plaintiff’s experience of discrimination was insufficient to infer that “discriminatory treatment is typical of [the employer’s employment] practices.” 457 U.S., at 158, 102 S. Ct. 2364, 72 L. Ed. 2d 740. A similar failure of inference arises here. As Judge Ikuta observed in her dissent, “[i]nformation about disparities at the regional and national level does not establish the existence of disparities at individual stores, let alone raise the inference that a company-wide policy of discrimination is implemented by discretionary decisions at the store and district level.” 603 F.3d at 637. A regional pay disparity, for example, may be attributable to only a small set of Wal-Mart stores, and cannot by itself establish the uniform, store-by-store disparity upon which the plaintiffs’ theory of commonality depends. There is another, more fundamental, respect in which respondents’ statistical proof fails. Even if it established (as it does not) a pay or promotion pattern that differs from the nationwide figures or the regional figures in all of Wal-Mart’s 3,400 stores, that would still not demonstrate that commonality of issue exists. Some managers will claim that the availability of women, or qualified women, or interested women, in their stores’ area does not mirror the national or regional statistics. And almost all of them will claim to have been applying some sex-neutral, performance-based criteria—whose nature and effects will differ from store to store. In the landmark case of ours which held that giving discretion to lower-level supervisors can be the basis of Title VII liability under a disparate-impact theory, the plurality opinion conditioned that holding on the corollary that merely proving that the discretionary system has produced a racial or sexual disparity is not enough. “[T]he plaintiff must begin by identifying the specific employment practice that is challenged.” Watson, 487 U.S., at 994, 108 S. Ct. 2777, 101 L. Ed. 2d 827; accord, Wards Cove Packing Co. v. Atonio, 490 U.S. 642, 656, 109 S. Ct. 2115, 104 L. Ed. 2d 733 (1989) (approving that statement), superseded by statute on other grounds, 42 U.S.C. § 2000e–2(k). That is all the more necessary when a class of plaintiffs is sought to be certified. Other than the bare existence of delegated discretion, respondents have identified no “specific employment practice”—much less one that ties all their 1.5 million claims together. Merely showing that Wal-Mart’s policy of discretion has produced an overall sex-based disparity does not suffice. ***

471

In sum, we agree with Chief Judge Kozinski that the members of the class: “held a multitude of different jobs, at different levels of Wal-Mart’s hierarchy, for variable lengths of time, in 3,400 stores, sprinkled across 50 states, with a kaleidoscope of supervisors (male and female), subject to a variety of regional policies that all differed. . . . Some thrived while others did poorly. They have little in common but their sex and this lawsuit.” 603 F.3d at 652 (dissenting opinion). III We also conclude that respondents’ claims for backpay were improperly certified under Federal Rule of Civil Procedure 23(b)(2). Our opinion in Ticor Title Ins. Co. v. Brown, 511 U.S. 117, 121, 114 S. Ct. 1359, 128 L. Ed. 2d 33 (1994) (per curiam) expressed serious doubt about whether claims for monetary relief may be certified under that provision. We now hold that they may not, at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief. Rule 23(b)(2) allows class treatment when “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” One possible reading of this provision is that it applies only to requests for such injunctive or declaratory relief and does not authorize the class certification of monetary claims at all. We need not reach that broader question in this case, because we think that, at a minimum, claims for individualized relief (like the backpay at issue here) do not satisfy the Rule. The key to the (b)(2) class is “the indivisible nature of the injunctive or declaratory remedy warranted—the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.” Nagareda, 84 N. Y. U. L. Rev., at 132. In other words, Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class. It does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant. Similarly, it does not authorize class certification when each class member would be entitled to an individualized award of monetary damages. *** [W]e think it clear that individualized monetary claims belong in Rule 23(b)(3). The procedural protections attending the (b)(3) class—predominance, superiority, mandatory notice, and the right to opt out—are missing from (b)(2) not because the Rule considers them unnecessary, but because it considers them unnecessary to a (b)(2) class. When a class seeks an indivisible injunction benefitting all its members at once, there is no 472

reason to undertake a case-specific inquiry into whether class issues predominate or whether class action is a superior method of adjudicating the dispute. Predominance and superiority are self-evident. But with respect to each class member’s individualized claim for money, that is not so—which is precisely why (b)(3) requires the judge to make findings about predominance and superiority before allowing the class. Similarly, (b)(2) does not require that class members be given notice and opt-out rights, presumably because it is thought (rightly or wrongly) that notice has no purpose when the class is mandatory, and that depriving people of their right to sue in this manner complies with the Due Process Clause. In the context of a class action predominantly for money damages we have held that absence of notice and opt-out violates due process. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S. Ct. 2965, 86 L. Ed. 2d 628 (1985). While we have never held that to be so where the monetary claims do not predominate, the serious possibility that it may be so provides an additional reason not to read Rule 23(b)(2) to include the monetary claims here. Contrary to the Ninth Circuit’s view, Wal-Mart is entitled to individualized determinations of each employee’s eligibility for backpay. Title VII includes a detailed remedial scheme. If a plaintiff prevails in showing that an employer has discriminated against him in violation of the statute, the court “may enjoin the respondent from engaging in such unlawful employment practice, and order such affirmative action as may be appropriate, [including] reinstatement or hiring of employees, with or without backpay . . . or any other equitable relief as the court deems appropriate.” § 2000e–5(g)(1). But if the employer can show that it took an adverse employment action against an employee for any reason other than discrimination, the court cannot order the “hiring, reinstatement, or promotion of an individual as an employee, or the payment to him of any backpay.” § 2000e–5(g)(2)(A). We have established a procedure for trying pattern-or-practice cases that gives effect to these statutory requirements. When the plaintiff seeks individual relief such as reinstatement or backpay after establishing a pattern or practice of discrimination, “a district court must usually conduct additional proceedings . . . to determine the scope of individual relief.” Teamsters, 431 U.S., at 361, 97 S. Ct. 1843, 52 L. Ed. 2d 396. At this phase, the burden of proof will shift to the company, but it will have the right to raise any individual affirmative defenses it may have, and to “demonstrate that the individual applicant was denied an

employment opportunity for lawful reasons.” Id., at 362, 97 S. Ct. 1843, 52 L. Ed. 2d 396. The Court of Appeals believed that it was possible to replace such proceedings with Trial by Formula. A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised 473

by a master. The percentage of claims determined to be valid would then be applied to the entire remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery—without further individualized proceedings. 603 F.3d at 625–627. We disapprove that novel project. Because the Rules Enabling Act forbids interpreting Rule 23 to “abridge, enlarge or modify any substantive right,” 28 U.S.C. § 2072(b); . . . a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims. And because the necessity of that litigation will prevent backpay from being “incidental” to the classwide injunction, respondents’ class could not be certified even assuming, arguendo, that “incidental” monetary relief can be awarded to a 23(b)(2) class. *** JUSTICE GINSBURG, with whom JUSTICE BREYER, JUSTICE SOTOMAYOR, and JUSTICE KAGAN join, concurring in part and dissenting in part. *** Whether the class the plaintiffs describe meets the specific requirements of Rule 23(b)(3) is not before the Court, and I would reserve that matter for consideration and decision on remand. The Court, however, disqualifies the class at the starting gate, holding that the plaintiffs cannot cross the “commonality” line set by Rule 23(a)(2). In so ruling, the Court imports into the Rule 23(a) determination concerns properly addressed in a Rule 23(b)(3) assessment.

NOTES AND QUESTIONS 1. What was deficient in plaintiffs’ proof regarding whether Wal-Mart “operated under a general policy of discrimination”? To what extent should a trial court evaluate the merits of the claim in deciding class certification? 2. What was the nature of the plaintiffs’ expert testimony, what role did it play in the plaintiffs’ “commonality” showing, and what was the Court’s criticism of the testimony? 3. What is the significance of the Court’s unanimous holding that claims for individual backpay relief had to be brought, if it all, as a Federal Rule 23(b)(3) rather than (b)(2) class action? Will this significantly hamper plaintiff class actions? If so, why? Could actions be brought under (b)(2) for injunctive relief only? Or could there be a (b)(2)/(b)(3) hybrid action? 4. If you represented the plaintiffs, how would you replead or restructure the case to satisfy the Court’s strictures on the “commonality” requirement of Rule 23(a)? 5. Continued Viability of Cases Challenging Subjective Employment Practices? Dukes v. Wal-Mart is technically a Rule 23 case. But the 474 commonality standard articulated in Wal-Mart may present particular difficulty for plaintiffs challenging subjective employment practices; the effect of subjective practices can vary widely across worksites and individual managers. See Elizabeth Tippett, Robbing a Barren Vault: The Implications of Dukes v. Wal-Mart for Cases Challenging Subjective Employment Practices, 29 Hofstra Lab. & Emp. L.J. 433 (2012). Nevertheless, some plaintiffs have been successful in meeting Wal-Mart’s commonality standard in certain disparate impact challenges. See Brown v. Nucor, 785 F.3d 895 (4th Cir. 2015) (vacating decertification of disparate impact claim based on single employment site); McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482 (7th Cir. 2012) (reversing denial of class certification for issues-only (c)(4) disparate impact challenge to team-based compensation practices, which may have the effect of excluding minority brokers), abrogated by Phillips v. Sheriff of Cook Cty., 828 F.3d 541 (7th Cir. 2016), as recognized in Beaton v. SpeedyPC Software, 907 F.3d 1018 (7th Cir. 2018); Ellis v. Costco Wholesale Corp. 285 F.R.D. 492 (N.D. Cal. 2012) (applying Wal-Mart on remand from 657 F.3d 970 (9th Cir. 2011) (granting certification in challenge to subjective promotion practices where plaintiff identified a “pervasive company culture that, along with common policies and practices, guide” promotion decisions, and showed classwide effects across all regions). See generally Michael C. Harper, Class-Based Adjudication of Title VII Claims in the Age of the Roberts Court, 95 B.U. L. Rev. 1099, 1111–1113 (2015).

6. Managing a Large (b)(3) Class. Note that the “predominance” and “superiority” requirements for certification of a (b)(3) class include consideration of “the likely difficulties in managing a class action.” This “manageability” consideration may be particularly important in putative class actions where the individualized legal relief sought would require a jury to determine individual damages for each class member. Consider the Wal-Mart Court’s rejection, as a “Trial by Formula,” of the use of a “sample set of the class members” to determine the aggregate level of damages. Does this rejection pose a high barrier to the certification of many large (b)(3) employment discrimination classes seeking variant individualized legal damages before a jury? Some courts have addressed manageability concerns by invoking Rule 23(c)(4), which permits a court to issue certification for “a class action with respect to particular issues.” For instance, in McReynolds v. Merrill Lynch, supra, the Seventh Circuit ruled that certification should have been granted on the issue of whether the company’s team-based compensation practices violated Title VII. See also Harper, supra, at 1115–1122. In Tyson Foods, Inc. v. Bouaphakeo, 577 U.S. 442, 136 S. Ct. 2036, 194 L. Ed. 2d 124 (2016), a FLSA collective action involving claims for unpaid overtime, the Court limited the implications of its “Trial by Formula” language in Wal-Mart. The Court in Tyson Foods held that representative or statistical evidence—such as the average time needed for compensable donning and doffing in that case—that could be used to establish liability in an individual 475 action also could be used to establish liability for all class members in a collective or class action. 7. Collective Claims Unaffected by Wal-Mart. Wal-Mart does not directly affect group claims that are not based on Rule 23 of the FRCP. Following the FLSA enforcement model, claims brought under the FLSA, EPA and ADEA are brought as collective actions, rather than class actions. See supra note 7 at p. 31. Moreover, state-law discrimination class action claims brought in state court are not directly controlled by the Court’s interpretation of Rule 23. 8. Business Necessity on a Classwide Basis in ADA Claims. In Harris v. Union Pacific Railroad Co., 953 F.3d 1030 (8th Cir. 2020), the Eighth Circuit held, wholly apart from failure-to-accommodate inquiries, business necessity cannot be determined on a global basis in a claim under the ADA. This case addressed Union Pacific’s fitness-for-duty policy. Union Pacific required that “[e]mployees in some positions must report certain [personal health] events . . . so it could evaluate the employee’s fitness for duty.” Id. at 1032. Union Pacific claimed that it medically evaluated an employee with a “reportable health event” to “determine if the employee presents an unacceptably high risk of sudden incapacitation,” which it defined as above “a level of acceptable risk for sudden incapacitation of no greater than a 1% annual occurrence rate.” Id. at 1032–33. Based on this assessment, Union Pacific “may require ‘functional work restrictions,’ meaning ‘restrictions that focus on particular work functions or tasks rather than whether a person is qualified or disqualified for a particular job.’ ” Id. at 1033. After assessing functional work restrictions, Union Pacific “relied on the employee’s supervisors, who are intimately familiar with the particulars of the employee’s job, to determine whether the employee can perform the job with or without reasonable accommodation despite the restrictions.” Id. Harris and other Union Pacific employees who were disqualified from work because of their disabilities moved to certify a class, arguing that Union Pacific’s policy “has led to the systematic removal of workers with disabilities.” Id. The district court certified a hybrid class under Rule 23(b)(2) and (b)(3), “defin[ing] the class to include all employees who have been or will be subject to a fitnessfor-duty evaluation because of a reportable health event . . . .” Id. The Eighth Circuit reversed the class certification order, explaining that “[f]or a safety-based qualification standard, . . . the district court would have to consider whether Union Pacific’s policy is job-related and consistent with business necessity in light of the medical conditions to which it applies.” Id. at 1035–36. Because the plaintiffs had “varying conditions,” “determining whether the policy is job related and consistent with business necessity requires answering many individual questions,” which “cannot be addressed in a manner consistent with Rule 23.” Id. at 1035–36. 9. Standing and Class Claims. In Transunion LLC v. Ramirez, ___ U.S. ___, 141 S. Ct. 2190, 210 L.Ed.2d 568 (2021), the Court held 5–4 that part of a class that had been certified in a Fair Credit Reporting Act suit lacked standing to sue and that relief for members of that portion of the class had to be vacated. 476 The certified class consisted of two groups; 1) individuals who had been concretely injured by Transunion’s communication to third parties of mistaken damaging information about them (that they were on a government terrorist watchlist)—individuals who had suffered concrete reputational injury—as well as 2) individuals who Transunion had internally and erroneously identified as on the government terrorist list but about whom no information had been externally communicated. As to the latter group, the Court held that even though Congress had created a statutory remedy on their behalf by endowing them with a “right to sue,” they had not suffered a concrete injury so as to establish standing under Article III. Building on the decision in Spokeo Inc. v. Robbins, 578 U.S. 330, 340, 136 S.Ct. 1540, 194 L.Ed.2d 635 (2016), the Court held that plaintiffs had failed “to demonstrate a concrete and particularized injury caused by the defendant and redressable by the court” as to the group 2 portion of the class. While Congressional provision of a right to sue might be “instructive” as to standing, the Court held that it retained the authority under Article III to determine whether the plaintiffs—here the subclass

discussed above—had suffered a concrete injury sufficient to endow them with standing. See also Thole v. U.S. Bank N.A., ___ U.S. ___, 140 S.Ct. 1615, 207 L.Ed.2d 85 (2020) (ERISA plan participants lacked standing to prosecute a fiduciary breach claim because alleged breach did not jeopardize their benefits); Frank v. Gaos, ___ U.S. ___, 139 S.Ct. 1041, 203 L.Ed 2d 404 (2019) (remanding class action after settlement to determine “whether any of the named plaintiffs has standing to sue in light of . . . Spokeo . . . .”).

NOTE ON EEOC LITIGATION The 1972 amendments to Title VII transformed the EEOC from a predominantly investigative and conciliation body to an agency with substantial independent litigation authority. Responsibility for “pattern or practice” litigation under § 707, see, e.g., International Brotherhood of Teamsters v. United States, 431 U.S. 324, 97 S. Ct. 1843, 1865, 52 L. Ed. 2d 396 (1977), was transferred from the Justice Department to the Commission. In addition, the EEOC was expressly given the authority to sue on behalf of charging parties under § 706(f)(1). EEOC § 706 actions can be brought on behalf of both individuals and groups. The Supreme Court has held that an EEOC action seeking classwide relief is in the nature of a public action not governed by Rule 23 of the Federal Rules of Civil Procedure, and hence findings rejecting liability will not have binding effects on individual employees. See General Tel. Co. v. EEOC, 446 U.S. 318, 100 S. Ct. 1698, 64 L. Ed. 2d 319 (1980). The Court also has ruled that the EEOC may seek both prospective and victim-specific relief on behalf of individual employees who have entered into otherwise valid arbitration agreements that would require arbitration of their individual claims were they to bring suit on their own. See EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S. Ct. 754, 151 L. Ed. 2d 755 (2002). Moreover, the lower courts have held that settlements with individual charging parties do not moot the EEOC’s right of action to seek injunctive relief. See, e.g., EEOC v. United Parcel Serv., 860 F.2d 477 372 (10th Cir. 1988); EEOC v. Goodyear Aerospace Corp., 813 F.2d 1539 (9th Cir. 1987). As discussed above, under § 706(b), members of the Commission may file their own charges that form the basis of an EEOC suit under § 706(f)(1) or § 707. In EEOC v. Shell Oil Co., 466 U.S. 54, 104 S. Ct. 1621, 80 L. Ed. 2d 41 (1984), the Court sustained an EEOC subpoena issued in connection with a Commissioner’s “pattern or practice” charge that did not identify victims of discrimination or the precise manner in which they were injured. The Court did require that— Insofar as he is able, the Commissioner should identify the groups of persons that he has reason to believe have been discriminated against, the categories of employment positions from which they have been excluded, the methods by which the discrimination may have been effected, and the periods of time in which he suspects the discriminations to have been practiced. 466 U.S. at 73, 104 S. Ct. at 1633. Under § 706(f)(1), an EEOC suit against a respondent named in a charge cuts off the charging party’s right to bring an action, but the charging party has a statutory right to intervene. Similarly, an EEOC suit on behalf of a charging party under § 7(c)(1) of ADEA “terminates” the charging party’s right of action. See also EEOC v. United States Steel Corp., 921 F.2d 489 (3d Cir. 1990) (discussion of doctrine of “representative claim preclusion”). Can the EEOC file an independent ADEA action on behalf of an individual who has already brought suit? See EEOC v. Wackenhut Corp., 939 F.2d 241 (5th Cir. 1991). EEOC subpoena authority can also help private charging parties obtain far-reaching discovery of firm practices. See EEOC v. Morgan Stanley & Co., Inc., 1999 WL 756206, Civ. Action M 18–304 (DLC) (S.D.N.Y. 1999). 7

* * * There may be circumstances where it will be difficult to determine when the time period should begin to run. One issue that may arise in such circumstances is whether the time begins to run when the injury occurs as opposed to when the injury reasonably should have been discovered. But this case presents no occasion to resolve that issue. 9 We have no occasion here to consider the timely filing question with respect to “pattern-or-practice” claims brought by private litigants as none are at issue here. 2 After Lorance, Congress amended Title VII to cover the specific situation involved in that case. See 42 U.S.C. § 2000e–5(e)(2) (allowing for Title VII liability arising from an intentionally discriminatory seniority system both at the time of its adoption and at the time of its application). * * * For present purposes, what is most important about the amendment in question is that it applied only to the adoption of a discriminatory seniority system, not to other types of employment discrimination. Evans and Ricks, upon which Lorance relied, 490 U.S., at 906–908, 109 S. Ct. 2261, 104 L. Ed. 2d 961, and which employed identical reasoning, were left in place, and these decisions are more than sufficient to support our holding today. 3 Of course, there may be instances where the elements forming a cause of action span more than 180 days. Say, for instance, an employer forms an illegal discriminatory intent towards an employee but does not act on it until 181 days later. The charging period would not begin to run until the employment practice was executed on day 181 because until that point the employee had no cause of action. The act and intent had not yet been joined. Here, by contrast, Ledbetter’s cause of action was fully formed and present at the time that the discriminatory employment actions were taken against her, at which point she could have, and should have, sued. 4 [T]his case illustrates the problems created by tardy lawsuits. Ledbetter’s claims of sex discrimination turned principally on the misconduct of a single Goodyear supervisor, who, Ledbetter testified, retaliated against her when she rejected his sexual advances during the early 1980’s, and did so again in the mid1990s when he falsified deficiency reports about her work. His misconduct, Ledbetter argues, was “a principal basis for [her] performance evaluation in 1997.” Brief for Petitioner 6; see also id., at 5–6, 8, 11 (stressing the same supervisor’s misconduct). Yet, by the time of trial, this supervisor had died and therefore could

not testify. A timely charge might have permitted his evidence to be weighed contemporaneously. 10 We have previously declined to address whether Title VII suits are amenable to a discovery rule. National Railroad Passenger Corporation v. Morgan, 536 U.S. 101, 114, n. 7, 122 S.Ct. 2061, 153 L.Ed.2d 106 (2002). Because Ledbetter does not argue that such a rule would change the outcome in her case, we have no occasion to address this issue. 4 To enable that result, the Court of Appeals trimmed the (b)(2) class in two ways: First, it remanded that part of the certification order which included respondents’ punitive damages claim in the (b)(2) class, so that the District Court might consider whether that might cause the monetary relief to predominate. 603 F.3d at 621. Second, it accepted in part Wal-Mart’s argument that since class members whom it no longer employed had no standing to seek injunctive or declaratory relief, as to them monetary claims must predominate. It excluded from the certified class “those putative class members who were no longer Wal-Mart employees at the time Plaintiffs’ complaint was filed,” id., at 623 (emphasis added). 6 A statement in one of our prior cases, Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974), is sometimes mistakenly cited to the contrary: “We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.” But in that case, the judge had conducted a preliminary inquiry into the merits of a suit, not in order to determine the propriety of certification under Rules 23(a) and (b) (he had already done that, see id., at 165, 94 S. Ct. 2140, 40 L. Ed. 2d 732), but in order to shift the cost of notice required by Rule 23(c)(2) from the plaintiff to the defendants. To the extent the quoted statement goes beyond the permissibility of a merits inquiry for any other pretrial purpose, it is the purest dictum and is contradicted by our other cases. * * *

479

CHAPTER 13 PROBLEMS OF COORDINATION ■■■

Introduction This final chapter considers a special set of complicated procedural problems presented by the regulation of employment in America. The problems concern the relationships between the multiple and sometimes overlapping causes of action available to employees to challenge a particular personnel decision. Rational policymakers might have good reason to minimize overlapping, multiple regulation. Both efficiency and fairness would seem to be furthered by allowing complainants or public authorities to mount only a single proceeding against employers, or unions, on a particular set of facts. Multiple proceedings in multiple fora create the potential for compounded litigation costs, inconsistent determinations, and prolonging disputes. In addition, it may not seem fair that an employer or union must successfully defend a particular course of action in numerous tribunals, while a complainant can be victorious by winning in only one. Yet there may be several advantages to a system that provides multiple points of regulation of an employment decision. First, specialized enforcement structures permit legislators to intervene in labor markets in a manner tailored to specific problems thought to require regulation. For instance, different administrative structures offering different remedies may seem more appropriate for the regulation of status discrimination than for the protection of employee whistleblowing. Second, enforcement structures that do not claim exclusive regulation allow room for the private resolution of disputes, especially through collective bargaining and the grievance arbitration system that almost invariably emerges from such bargaining. There may be an interest in keeping separate private dispute resolution systems from any external regulatory system based on public law. Third, federalism values may be served. The division of authority between different levels of government, it is thought, helps preserve liberty by diffusing governmental authority. It also facilitates more direct citizen involvement in public decisionmaking processes and permits the states to function as a laboratories for regulatory innovation. None of these arguments, of course, necessarily establishes the desirability of multiple regulation or litigation. The benefits of specific schemes must be weighed against their costs. Policymakers must think carefully about how various regulatory structures should relate to each 480

other in order to ensure the fairest, most effective and efficient regulatory regime. The cases in this chapter reflect the complicated choices that Congress, state legislatures, and the courts have made in defining the relationships among American employment laws.

A. RELATIONSHIPS AMONG FEDERAL SYSTEMS 1. THE CIVIL RIGHTS STATUTES, THE CONSTITUTION AND MODERN ADMINISTRATIVE SYSTEMS JOHNSON V. RAILWAY EXPRESS AGENCY, INC. Supreme Court of the United States, 1975. 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295.

MR. JUSTICE BLACKMUN delivered the opinion of the Court. This case presents the issue whether the timely filing of a charge of employment discrimination with the Equal Employment Opportunity Commission (EEOC), pursuant to § 706 of Title VII of the Civil Rights Act of 1964, 78 Stat. 259, 42 U.S.C. § 2000e–5, tolls the running of the period of limitation applicable to an action based on the same facts, instituted under 42 U.S.C. § 1981.

*** Despite Title VII’s range and its design as a comprehensive solution for the problem of invidious discrimination in employment, the aggrieved individual clearly is not deprived of other remedies he possesses and is not limited to Title VII in his search for relief. “[T]he legislative history of Title VII manifests a congressional intent to allow an individual to pursue independently his rights under both Title VII and other applicable state and federal statutes.” Alexander v. Gardner-Denver Co., 415 U.S. [36, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974)], at 48, 94 S.Ct., at 1019. In particular, Congress noted “that the remedies available to the individual under Title VII are co-extensive with the indiv(i)dual’s right to sue under the provisions of the Civil Rights Act of 1866, 42 U.S.C. § 1981, and that the two procedures augment each other and are not mutually exclusive.” H.R.Rep. No. 92–238, p. 19 (1971), U.S.Code Cong. & Admin.News, 1972, pp. 2137, 2154. See also S.Rep. No. 92–415, p. 24 (1971). Later, in considering the Equal Employment Opportunity Act of 1972, the Senate rejected an amendment that would have deprived a claimant of any right to sue under § 1981. 118 Cong.Rec. 3371–3373 (1972). Title 42 U.S.C. § 1981, being the present codification of § 16 of the century-old Civil Rights Act of 1870, 16 Stat. 144, on the other hand, on its face relates primarily to racial discrimination in the making and enforcement of contracts. Although this Court has not specifically so held, 481

it is well settled among the federal Courts of Appeals—and we now join them—that § 1981 affords a federal remedy against discrimination in private employment on the basis of race. An individual who establishes a cause of action under § 1981 is entitled to both equitable and legal relief, including compensatory and, under certain circumstances, punitive damages. * * * And a backpay award under § 1981 is not restricted to the two years specified for backpay recovery under Title VII. Section 1981 is not coextensive in its coverage with Title VII. The latter is made inapplicable to certain employers. 42 U.S.C. § 2000e(b) (1970 ed., Supp. III). Also, Title VII offers assistance in investigation, conciliation, counsel, waiver of court costs, and attorneys’ fees, items that are unavailable at least under the specific terms of § 1981. *** We are satisfied * * * that Congress did not expect that a § 1981 court action usually would be resorted to only upon completion of Title VII procedures and the Commission’s efforts to obtain voluntary compliance. Conciliation and persuasion through the administrative process, to be sure, often constitute a desirable approach to settlement of disputes based on sensitive and emotional charges of invidious employment discrimination. We recognize, too, that the filing of a lawsuit might tend to deter efforts at conciliation, that lack of success in the legal action could weaken the Commission’s efforts to induce voluntary compliance, and that a suit is privately oriented and narrow, rather than broad, in application, as successful conciliation tends to be. But these are the natural effects of the choice Congress has made available to the claimant by its conferring upon him independent administrative and judicial remedies. The choice is a valuable one. Under some circumstances, the administrative route may be highly preferred over the litigatory; under others the reverse may be true. We are disinclined, in the face of congressional emphasis upon the existence and independence of the two remedies, to infer any positive preference for one over the other, without a more definite expression in the legislation Congress has enacted, as, for example, a proscription of a § 1981 action while an EEOC claim is pending. We generally conclude, therefore, that the remedies available under Title VII and under § 1981, although related, and although directed to most of the same ends, are separate, distinct, and independent. With this base established, we turn to the limitation issue. *** Since there is no specifically stated or otherwise relevant federal statute of limitations for a cause of action under § 1981, the controlling period would ordinarily be the most appropriate one provided by state law. *** 482

Petitioner argues that a failure to toll the limitation period in this case will conflict seriously with the broad remedial and humane purposes of Title VII. Specifically, he urges that Title VII embodies a strong federal policy in support of conciliation and voluntary compliance as a means of achieving the statutory mandate of equal employment opportunity. He suggests that failure to toll the statute on a § 1981 claim during the pendency of an administrative complaint in the EEOC would force a plaintiff into premature and expensive litigation that would destroy all chances for administrative conciliation and voluntary compliance.

We have noted this possibility above and, indeed, it is conceivable, and perhaps almost to be expected, that failure to toll will have the effect of pressing a civil rights complainant who values his § 1981 claim into court before the EEOC has completed its administrative proceeding. One answer to this, although perhaps not a highly satisfactory one, is that the plaintiff in his § 1981 suit may ask the court to stay proceedings until the administrative efforts at conciliation and voluntary compliance have been completed. But the fundamental answer to petitioner’s argument lies in the fact—presumably a happy one for the civil rights claimant—that Congress clearly has retained § 1981 as a remedy against private employment discrimination separate from and independent of the more elaborate and time-consuming procedures of Title VII. Petitioner freely concedes that he could have filed his § 1981 action at any time after his cause of action accrued; in fact, we understand him to claim an unfettered right so to do. Thus, in a very real sense, petitioner has slept on his § 1981 rights. The fact that his slumber may have been induced by faith in the adequacy of his Title VII remedy is of little relevance inasmuch as the two remedies are truly independent. * * * We find no policy reason that excuses petitioner’s failure to take the minimal steps necessary to preserve each claim independently.

GREAT AMERICAN FEDERAL SAVINGS & LOAN ASSN. V. NOVOTNY Supreme Court of the United States, 1979. 442 U.S. 366, 99 S.Ct. 2345, 60 L.Ed.2d 957.

MR. JUSTICE STEWART delivered the opinion of the Court. * * * In the case now before us, we consider the scope of 42 U.S.C. § 1985(3) (1976 ed., Supp. II), the surviving version of § 2 of the Civil Rights Act of 1871.1 483

I The respondent, John R. Novotny, began his career with the Great American Federal Savings and Loan Association (hereinafter Association) in Allegheny County, Pa., in 1950. By 1975, he was secretary of the Association, a member of its board of directors, and a loan officer. According to the allegations of the complaint in this case the Association “intentionally and deliberately embarked upon and pursued a course of conduct the effect of which was to deny to female employees equal employment opportunity * * *.” When Novotny expressed support for the female employees at a meeting of the board of directors, his connection with the Association abruptly ended. He was not re-elected as secretary; he was not re-elected to the board; and he was fired. His support for the Association’s female employees, he alleges, was the cause of the termination of his employment. Novotny filed a complaint with the Equal Employment Opportunity Commission under Title VII of the Civil Rights Act of 1964. After receiving a right-to-sue letter, he brought this lawsuit against the Association and its directors in the District Court for the Western District of Pennsylvania. He claimed damages under 42 U.S.C. § 1985(3) (1976 ed., Supp. II), contending that he had been injured as the result of a conspiracy to deprive him of equal protection of and equal privileges and immunities under the laws.4 The District Court granted the defendants’ motion to dismiss. It held that § 1985(3) could not be invoked because the directors of a single corporation could not, as a matter of law and fact, engage in a conspiracy.5 Novotny appealed. After oral argument before a three-judge panel, the case was reargued before the en banc Court of Appeals for the Third Circuit, which unanimously reversed the District Court’s judgment. The Court of Appeals ruled that Novotny had stated a cause of action under § 1985(3). It held that conspiracies motivated by an invidious animus against women fall within § 1985(3), and that Novotny, a male allegedly injured as a result of such a conspiracy, had standing to bring suit under that statutory provision. It ruled that Title VII could be the source of a right asserted in an action under § 1985(3), and that intracorporate conspiracies come within the intendment of the section. Finally, the court 484

concluded that its construction of § 1985(3) did not present any serious constitutional problem.6 *** Section 1985(3) provides no substantive rights itself; it merely provides a remedy for violation of the rights it designates. The primary question in the present case, therefore, is whether a person injured by a conspiracy to violate § 704(a) of Title VII of the Civil Rights Act of 1964 is deprived of “the equal protection of the laws, or of equal privileges and immunities under the laws” within the meaning of § 1985(3). ***

If a violation of Title VII could be asserted through § 1985(3), a complainant could avoid most if not all of [the] detailed and specific provisions of [Title VII]. Section 1985(3) expressly authorizes compensatory damages; punitive damages might well follow. The plaintiff or defendant might demand a jury trial. The short and precise time limitations of Title VII would be grossly altered. Perhaps most importantly, the complaint could completely bypass the administrative process, which plays such a crucial role in the scheme established by Congress in Title VII. The problem in this case is closely akin to that in Brown v. GSA, 425 U.S. 820, 96 S.Ct. 1961, 48 L.Ed.2d 402. There, we held that § 717 of Title VII provides the exclusive remedy for employment discrimination claims of those federal employees that it covers. Our conclusion was based on the proposition that “[t]he balance, completeness, and structural integrity of § 717 are inconsistent with the petitioner’s contention that the judicial remedy afforded by § 717(c) was designed merely to supplement other putative judicial relief.” 425 U.S., at 832, 96 S.Ct. at 1968. Here, the case is even more compelling. In Brown, the Court concluded that § 717 displaced other causes of action arguably available to assert substantive rights similar to those granted by § 717. Section 1985(3), by contrast, creates no rights. It is a purely remedial statute, providing a civil cause of action when some otherwise defined federal right—to equal protection of the laws or equal privileges and immunities under the laws—is breached by a conspiracy in the manner defined by the section. Thus, we are not faced in this case with a question of implied repeal. The right 485

Novotny claims under § 704(a) did not even arguably exist before the passage of Title VII. The only question here, therefore, is whether the rights created by Title VII may be asserted within the remedial framework of § 1985(3). This case thus differs markedly from the cases recently decided by this Court that have related the substantive provisions of last century’s Civil Rights Acts to contemporary legislation conferring similar substantive rights. In those cases we have held that substantive rights conferred in the 19th century were not withdrawn, sub silentio, by the subsequent passage of the modern statutes. * * * [The Court cited here its previous decisions in Johnson and Runyon v. McCrary, 427 U.S. 160, 96 S.Ct. 2586, 49 L.Ed.2d 415 (1976)]. *** This case, by contrast, does not involve two “independent” rights, and for the same basic reasons that underlay the Court’s decision in Brown v. GSA, supra, reinforced by the other considerations discussed in this opinion, we conclude that § 1985(3) may not be invoked to redress violations of Title VII. It is true that a § 1985(3) remedy would not be coextensive with Title VII, since a plaintiff in an action under § 1985(3) must prove both a conspiracy and a group animus that Title VII does not require. While this incomplete congruity would limit the damage that would be done to Title VII, it would not eliminate it. Unimpaired effectiveness can be given to the plan put together by Congress in Title VII only by holding that deprivation of a right created by Title VII cannot be the basis for a cause of action under § 1985(3). [Eds. The concurring opinion of Justice Stevens and the dissenting opinion of Justice White, joined in by Justices Brennan and Marshall, are omitted.]

NOTES AND QUESTIONS 1. Section 1981 and Private Employment Discrimination. Note that the Johnson Court’s assertion that § 1981 “affords a federal remedy against discrimination in private employment on the basis of race” was confirmed by § 101 of the Civil Rights Act of 1991, which also reversed the Court’s decision in Patterson v. McLean Credit Union, 491 U.S. 164, 109 S. Ct. 2363, 105 L. Ed. 2d 132 (1989) and confirmed that racial harassment was forbidden by the statute even though it may not involve the making or enforcement of a contract. 2. Judicial Power to Reconcile Statutes? Before the Court’s 1968 ruling in Jones v. Alfred H. Mayer Co., 392 U.S. 409, 88 S. Ct. 2186, 20 L. Ed. 2d 1189 (1968), the Civil Rights Act of 1866, of which § 1981 is a part, was not thought to apply to private action. When Congress enacted Title VII in 1964, it did so without awareness that there might be another federal statute covering racial discrimination in private employment. How should courts go about reconciling 486 the long dormant post-Civil War legislation with provisions of later legislation that focus specifically on employment discrimination? Do the two stand as entirely separate enactments irrespective of particularized policy judgments in the latter such as those found in § 703(h), or must such judgments be read into the earlier enactment in order to render coherent the body of federal employment discrimination law? Is there an implied judicial power to integrate statutes passed by different Congresses without any specific legislative statement concerning their reconciliation? See Samuel Estreicher, Note, Federal Power to Regulate Private Discrimination: The Revival

of the Enforcement Clauses of the Reconstruction Era Amendments, 74 Colum. L. Rev. 449, 473–500 (1974). What does Johnson hold respecting such accommodations? But cf. notes 8 and 9 below. 3. Johnson’s Rationale. Does the very availability of an independent § 1981 cause of action complicate the conciliation and settlement of a Title VII race discrimination claim? If so, why would Congress want to encourage the initiation of independent actions before the completion of the EEOC conciliation process? Which, if any, policies underlying statutes of limitation might support the holding in Johnson concerning tolling of § 1981 limitation periods? 4. Are Johnson and Novotny Consistent? Can the Johnson Court’s acknowledgment that there is an independent § 1981 cause of action for employment discrimination be reconciled with the decision in Novotny not to allow § 1985(3) actions that would circumvent the Title VII administrative scheme? Should it matter that the § 1981 cause of action asserted in Johnson, unlike the § 1985(3) action in Novotny, would exist in the absence of Title VII? 5. Does § 1985(3) Provide Only Remedies? The Novotny Court is surely correct to view § 1985(3) as being dependent on other rights-creating statutory or constitutional provisions, but is it also correct to assert that § 1985(3) is only a remedial provision? As § 704 of Title VII establishes a different right than that secured by § 703, does § 1985(3) also add an additional guarantee—the right to be free of injuries due to conspiracies to deprive others of their independent federal substantive rights? In his dissent not reproduced here, Justice White suggests that § 1985(3) would protect individuals who are not themselves protected from retaliation by § 704(a) of Title VII, such as a nonemployee director or customer, but who are penalized by firms for coming to the aid of employees denied rights under Title VII. Is this suggestion now foreclosed by the reasoning of the majority opinion? 6. Use of § 1985(3) in Employment Discrimination Litigation Based on the Constitution. Does Novotny leave any role for § 1985(3) in employment discrimination litigation? Does it preclude § 1985(3) actions against conspiracies to deprive a constitutional right, as well as a Title VII right, whenever those actions are based on the same set of facts that could have supported a Title VII action? In Bray v. Alexandria Women’s Health Clinic, 506 U.S. 263, 113 S. Ct. 753, 122 L. Ed. 2d 34 (1993), the Court confirmed that § 1985(3) requires proof 487 of animus against a class, like Blacks, defined by status. The Court reserved judgment on whether animus against women in general would be sufficient but held that animus against women who engage in a particular activity is not sufficient, even if the activity, such as abortions, is one in which only women can engage. The Bray Court also confirmed that § 1985(3) reaches private conspiracies only against those few rights, notably interstate travel and freedom from slavery, protected by the Constitution from private impairment. Since Bray a number of circuits have held that women are a protected class under § 1985(3). See, e.g., Lyes v. City of Riviera Beach, 166 F.3d 1332 (11th Cir. 1999) (en banc); Libertad v. Welch, 53 F.3d 428, 448–49 (1st Cir. 1995); but see, e.g., Deubert v. Gulf Fed. Sav. Bank, 820 F.2d 754, 757 (5th Cir. 1987) (dicta). 7. Intracorporate Conspiracies Under § 1985(3). Novotny might not have prevailed on his § 1985(3) claim in any event. It has been held that the conspiracy requirement in § 1985(3) cannot be satisfied by the participation in a discriminatory decision by two or more individuals acting as agents of the same employer. See, e.g., Dombrowski v. Dowling, 459 F.2d 190, 196 (7th Cir. 1972). But cf., e.g., Hodgin v. Jefferson, 447 F. Supp. 804, 807 (D. Md. 1978) (unauthorized acts of individuals employed by same corporation may constitute a § 1985(3) conspiracy). 8. Implications of Novotny for Use of § 1983 to Reach Government Employment Decisions that Violate Title VII Rights. The holding in Novotny raises questions concerning when employment discrimination claims not based on constitutional rights can be brought under 42 U.S.C. § 1983, the other surviving descendant of the Civil Rights Act of 1871. Section 1983, like § 1985(3), creates no substantive rights independent of those created by other statutes or the Constitution. See also Chapman v. Houston Welfare Rts. Org., 441 U.S. 600, 99 S. Ct. 1905, 60 L. Ed. 2d 508 (1979). In Maine v. Thiboutot, 448 U.S. 1, 100 S. Ct. 2502, 65 L. Ed. 2d 555 (1980), the Court held that § 1983 provides a cause of action to remedy the deprivation of federal statutory as well as constitutional rights. But a year later in Middlesex County Sewerage Authority v. National Sea Clammers Ass’n, 453 U.S. 1, 20, 101 S. Ct. 2615, 2626, 69 L. Ed. 2d 435 (1981), the Court narrowed Thiboutot by holding that the inclusion of a comprehensive remedial scheme in a statute “may suffice to demonstrate congressional intent to preclude the remedy of suits under § 1983” for violations of that statute. The Court’s effort in Novotny, as well as in Brown v. GSA, 425 U.S. 820, 96 S.Ct. 1961, 48 L.Ed.2d 402 (1976), on which it in part relied, to protect the policy judgments embodied in the Title VII remedial scheme strongly suggests that the Court, following the lead of the lower courts, would find congressional intent to preclude use of § 1983 to remedy the deprivation of Title VII rights by public sector employers. See, e.g., Foster v. Wyrick, 823 F.2d 218, 221–22 (8th Cir. 1987). 9. Use of § 1983 to Reach Government Employment Decisions That Violate Constitutional Rights? Should Title VII be read to preclude § 1983 causes of action based on a public employer’s alleged discrimination in violation of the equal protection clause of the fourteenth amendment? In Smith

488 v. Robinson, 468 U.S. 992, 104 S. Ct. 3457, 82 L. Ed. 2d 746 (1984), the Supreme Court held that a comprehensive federal regulatory scheme established by the Education of the Handicapped Act, 84 Stat. 175, precluded a disabled plaintiff’s equal protection claim to a publicly financed special education. Although Smith was overturned on its facts by Congress, see 20 U.S.C. § 1415(f), some district courts relied on its reasoning to hold that Title VII provides an exclusive remedy unless the plaintiff alleges a factual basis for the constitutional claim that could not support a Title VII claim. See, e.g., Reiter v. Center Consol. Sch. Dist., 618 F. Supp. 1458 (D. Colo. 1985). See also Marrero-Rivera v. Department of Just., 800 F. Supp. 1024, 1029–30 (D.P.R. 1992) (reading Civil Rights Act of 1991 to provide a more comprehensive remedial system that preempts § 1983). Several court of appeals decisions, relying on the 1972 Title VII legislative history, have held that § 1983 constitutional claims against public employers are not precluded. See, e.g., Southard v. Texas Bd. of Crim. Just., 114 F.3d 539 (5th Cir. 1997); Bradley v. Pittsburgh Bd. of Educ., 913 F.2d 1064, 1079 (3d Cir. 1990); Keller v. Prince George’s Cnty., 827 F.2d 952 (4th Cir. 1987); Trigg v. Fort Wayne Cmty. Schs., 766 F.2d 299 (7th Cir. 1985); Day v. Wayne Cnty. Bd. of Auditors, 749 F.2d 1199 (6th Cir. 1984). Is it relevant that the Supreme Court has held that § 1983 plaintiffs need not exhaust even adequate and appropriate state administrative remedies because § 1983 provides a direct right of action in the federal courts for the vindication of constitutional rights? See Patsy v. Florida Bd. of Regents, 457 U.S. 496, 102 S. Ct. 2557, 73 L. Ed. 2d 172 (1982). If the availability of Title VII does not preclude use of § 1983 for constitutional claims, should the availability of the ADEA bar § 1983 constitutional claims? The court of appeals decisions hold that ADEA does erect such a bar. See Ahlmeyer v. Nevada Sys. of Higher Educ., 555 F.3d 1051 (9th Cir. 2009); Zombro v. Baltimore City Police Dept., 868 F.2d 1364, 1370–71 n.5 (4th Cir. 1989) (unlike Title VII, there is “no comparable evidence of congressional intent to support § 1983 equal protection challenges concurrent * * * with the comprehensive remedial framework of the ADEA”); but see Mummelthie v. City of Mason City, 873 F. Supp. 1293 (N.D. Iowa 1995) (because Congress did not amend § 1983 by implication when establishing ADEA remedial scheme, independent constitutional actions should be allowed under § 1983).

2. PRIVATE GRIEVANCE ARBITRATION AND FEDERAL STATUTORY CLAIMS GILMER V. INTERSTATE/JOHNSON LANE CORP. Supreme Court of the United States, 1991. 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26.

JUSTICE WHITE delivered the opinion of the Court. Respondent Interstate/Johnson Lane Corporation (Interstate) hired petitioner Robert Gilmer as a Manager of Financial Services in May 1981. 489

As required by his employment, Gilmer registered as a securities representative with several stock exchanges, including the New York Stock Exchange (NYSE). His registration application, entitled “Uniform Application for Securities Industry Registration or Transfer,” provided, among other things, that Gilmer “agreed to arbitrate any dispute, claim or controversy” arising between him and Interstate “that is required to be arbitrated under the rules, constitutions or by-laws of the organizations with which I register.” Of relevance to this case, NYSE Rule 347 provides for arbitration of “any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative.” *** Interstate terminated Gilmer’s employment in 1987, at which time Gilmer was 62 years of age. After first filing an age discrimination charge with the Equal Employment Opportunity Commission (EEOC), Gilmer subsequently brought suit in the United States District Court for the Western District of North Carolina, alleging that Interstate had discharged him because of his age, in violation of the ADEA. In response to Gilmer’s complaint, Interstate filed in the District Court a motion to compel arbitration of the ADEA claim. In its motion, Interstate relied upon the arbitration agreement in Gilmer’s registration application, as well as the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. The District Court denied Interstate’s motion, based on this Court’s decision in Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974), and because it concluded that “Congress intended to protect ADEA claimants from the waiver of a judicial forum.” The United States Court of Appeals for the Fourth Circuit reversed. *** The FAA was originally enacted in 1925, 43 Stat. 883, and then reenacted and codified in 1947 as Title 9 of the United States Code. Its purpose was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English

common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219–220, and n. 6, 105 S.Ct. 1238, 1241–1242, and n. 6, 84 L.Ed.2d 158 (1985); Scherk v. Alberto-Culver Co., 417 U.S. 506, 510, n. 4, 94 S.Ct. 2449, 2453, n. 4, 41 L.Ed.2d 270 (1974). Its primary substantive provision states that “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA also provides for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, § 3, and for orders 490

compelling arbitration when one party has failed, neglected, or refused to comply with an arbitration agreement, § 4. These provisions manifest a “liberal federal policy favoring arbitration agreements.” Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983).2 It is by now clear that statutory claims may be the subject of an arbitration agreement, enforceable pursuant to the FAA. Indeed, in recent years we have held enforceable arbitration agreements relating to claims arising under the Sherman Act, 15 U.S.C. §§ 1–7; §§ 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq.; and § 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2). See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). In these cases we recognized that “by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Mitsubishi, supra, at 628, 105 S.Ct., at 3354. Although all statutory claims may not be appropriate for arbitration, “having made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” Ibid. In this regard, we note that the burden is on Gilmer to show that Congress intended to preclude a waiver of a judicial forum for ADEA claims. See McMahon, 482 U.S., at 227, 107 S.Ct., at 2337–2338. If such an intention exists, it will be discoverable in the text of the ADEA, its legislative history, or an “inherent conflict” between arbitration and the ADEA’s underlying purposes. See ibid. Throughout such an inquiry, it should be kept in mind that “questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.” Moses H. Cone, 460 U.S., at 24, 103 S.Ct., at 941. 491

*** As Gilmer contends, the ADEA is designed not only to address individual grievances, but also to further important social policies. See, e.g., EEOC v. Wyoming, 460 U.S. 226, 231, 103 S.Ct. 1054, 1057–1058, 75 L.Ed.2d 18 (1983). We do not perceive any inherent inconsistency between those policies, however, and enforcing agreements to arbitrate age discrimination claims. It is true that arbitration focuses on specific disputes between the parties involved. The same can be said, however, of judicial resolution of claims. Both of these dispute resolution mechanisms nevertheless also can further broader social purposes. The Sherman Act, the Securities Exchange Act of 1934, RICO, and the Securities Act of 1933 all are designed to advance important public policies, but, as noted above, claims under those statutes are appropriate for arbitration. “So long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.” Mitsubishi, supra, at 637, 105 S.Ct., at 3359. We also are unpersuaded by the argument that arbitration will undermine the role of the EEOC in enforcing the ADEA. An individual ADEA claimant subject to an arbitration agreement will still be free to file a charge with the EEOC, even though the claimant is not able to institute a private judicial action. Indeed, Gilmer filed a charge with the EEOC in this case. In any event, the EEOC’s role in combating age discrimination is not dependent on the filing of a charge; the agency may receive information concerning alleged violations of the ADEA “from any source,” and it has independent authority to investigate age discrimination. See 29 CFR §§ 1626.4, 1626.13 (1990). Moreover, nothing in the ADEA indicates that Congress intended that the EEOC be involved in all employment disputes. Such disputes can be settled, for example, without any EEOC involvement. See, e.g., Coventry v. United States Steel Corp., 856 F.2d 514, 522 (C.A.3 1988); Moore v. McGraw Edison Co., 804 F.2d 1026, 1033 (C.A.8 1986); Runyan v. National Cash Register Corp., 787 F.2d 1039, 1045 (CA6), cert. denied, 479 U.S. 850, 107 S.Ct. 178, 93 L.Ed.2d 114 (1986).3 * * * Gilmer also argues that compulsory arbitration is improper because it deprives claimants of the judicial forum provided for by the ADEA. Congress, however, did not explicitly preclude arbitration or other nonjudicial resolution of claims, even in its

recent amendments to the ADEA. * * * Moreover, Gilmer’s argument ignores the ADEA’s flexible approach to resolution of claims. The EEOC, for example, is directed to pursue “informal methods of conciliation, conference, and persuasion,” 29 492

U.S.C. § 626(b), which suggests that out-of-court dispute resolution, such as arbitration, is consistent with the statutory scheme established by Congress. In addition, arbitration is consistent with Congress’ grant of concurrent jurisdiction over ADEA claims to state and federal courts, see 29 U.S.C. § 626(c)(1) (allowing suits to be brought “in any court of competent jurisdiction”), because arbitration agreements, “like the provision for concurrent jurisdiction, serve to advance the objective of allowing [claimants] a broader right to select the forum for resolving disputes, whether it be judicial or otherwise.” Rodriguez de Quijas, 490 U.S., at 483, 109 S.Ct., at 1921. *** In arguing that arbitration is inconsistent with the ADEA, Gilmer also raises a host of challenges to the adequacy of arbitration procedures. * * * Gilmer first speculates that arbitration panels will be biased. However, “we decline to indulge the presumption that the parties and arbitral body conducting a proceeding will be unable or unwilling to retain competent, conscientious and impartial arbitrators.” Mitsubishi, supra, at 634. In any event, we note that the NYSE arbitration rules, which are applicable to the dispute in this case, provide protections against biased panels. The rules require, for example, that the parties be informed of the employment histories of the arbitrators, and that they be allowed to make further inquiries into the arbitrators’ backgrounds. In addition, each party is allowed one peremptory challenge and unlimited challenges for cause. Moreover, the arbitrators are required to disclose “any circumstances which might preclude [them] from rendering an objective and impartial determination.” The FAA also protects against bias, by providing that courts may overturn arbitration decisions “where there was evident partiality or corruption in the arbitrators.” 9 U.S.C. § 10(b). There has been no showing in this case that those provisions are inadequate to guard against potential bias. Gilmer also complains that the discovery allowed in arbitration is more limited than in the federal courts, which he contends will make it difficult to prove discrimination. It is unlikely, however, that age discrimination claims require more extensive discovery than other claims that we have found to be arbitrable, such as RICO and antitrust claims. Moreover, there has been no showing in this case that the NYSE discovery provisions, which allow for document production, information requests, depositions, and subpoenas, will prove insufficient to allow ADEA claimants such as Gilmer a fair opportunity to present their claims. Although those procedures might not be as extensive as in the federal courts, by agreeing to arbitrate, a party “trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” Mitsubishi, supra, at 628, 105 S.Ct., at 3354. 493

Indeed, an important counterweight to the reduced discovery in NYSE arbitration is that arbitrators are not bound by the rules of evidence. A further alleged deficiency of arbitration is that arbitrators often will not issue written opinions, resulting, Gilmer contends, in a lack of public knowledge of employers’ discriminatory policies, an inability to obtain effective appellate review, and a stifling of the development of the law. The NYSE rules, however, do require that all arbitration awards be in writing, and that the awards contain the names of the parties, a summary of the issues in controversy, and a description of the award issued. In addition, the award decisions are made available to the public. Furthermore, judicial decisions addressing ADEA claims will continue to be issued because it is unlikely that all or even most ADEA claimants will be subject to arbitration agreements. Finally, Gilmer’s concerns apply equally to settlements of ADEA claims, which, as noted above, are clearly allowed.4 It is also argued that arbitration procedures cannot adequately further the purposes of the ADEA because they do not provide for broad equitable relief and class actions. As the court below noted, however, arbitrators do have the power to fashion equitable relief. Indeed, the NYSE rules applicable here do not restrict the types of relief an arbitrator may award, but merely refer to “damages and/or other relief.” The NYSE rules also provide for collective proceedings. Id. at 2612(d) (Rule 612(d)). But “even if the arbitration could not go forward as a class action or class relief could not be granted by the arbitrator, the fact that the [ADEA] provides for the possibility of bringing a collective action does not mean that individual attempts at conciliation were intended to be barred.” Nicholson v. CPC Int’l Inc., 877 F.2d 221, 241 (CA3 1989) (Becker, J., dissenting.* Finally, it should be remembered that arbitration agreements will not preclude the EEOC from bringing actions seeking classwide and equitable relief. ***

An additional reason advanced by Gilmer for refusing to enforce arbitration agreements relating to ADEA claims is his contention that there often will be unequal bargaining power between employers and employees. Mere inequality in bargaining power, however, is not a sufficient reason to hold that arbitration agreements are never enforceable in the employment context. Relationships between securities dealers and investors, for example, may involve unequal bargaining power, but we nevertheless held in Rodriguez de Quijas and McMahon that agreements to arbitrate in that context are enforceable. See 490 U.S., at 484, 109 S.Ct., at 1921–1922; 482 U.S., at 230, 107 S.Ct., at 2339–2340. As discussed 494

above, the FAA’s purpose was to place arbitration agreements on the same footing as other contracts. Thus, arbitration agreements are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “Of course, courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds ‘for the revocation of any contract.’ ” Mitsubishi, 473 U.S., at 627, 105 S.Ct., at 3354. There is no indication in this case, however, that Gilmer, an experienced businessman, was coerced or defrauded into agreeing to the arbitration clause in his registration application. As with the claimed procedural inadequacies discussed above, this claim of unequal bargaining power is best left for resolution in specific cases. *** In addition to the arguments discussed above, Gilmer vigorously asserts that our decision in Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974), and its progeny—Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 101 S.Ct. 1437, 67 L.Ed.2d 641 (1981), and McDonald v. City of West Branch, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984)—preclude arbitration of employment discrimination claims. Gilmer’s reliance on these cases, however, is misplaced. *** There are several important distinctions between the Gardner-Denver line of cases and the case before us. First, those cases did not involve the issue of the enforceability of an agreement to arbitrate statutory claims. Rather, they involved the quite different issue whether arbitration of contract-based claims precluded subsequent judicial resolution of statutory claims. Since the employees there had not agreed to arbitrate their statutory claims, and the labor arbitrators were not authorized to resolve such claims, the arbitration in those cases understandably was held not to preclude subsequent statutory actions. Second, because the arbitration in those cases occurred in the context of a collective-bargaining agreement, the claimants there were represented by their unions in the arbitration proceedings. An important concern therefore was the tension between collective representation and individual statutory rights, a concern not applicable to the present case. Finally, those cases were not decided under the FAA, which, as discussed above, reflects a “liberal federal policy favoring arbitration agreements.” Mitsubishi, 473 U.S., at 625, 105 S.Ct., at 3353. Therefore, those cases provide no basis for refusing to enforce Gilmer’s agreement to arbitrate his ADEA claim. JUSTICE STEVENS, with whom JUSTICE MARSHALL joins, dissenting. 495

Section 1 of the Federal Arbitration Act (FAA) states: “[N]othing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. The Court today, in holding that the FAA compels enforcement of arbitration clauses even when claims of age discrimination are at issue, skirts the antecedent question of whether the coverage of the Act even extends to arbitration clauses contained in employment contracts, regardless of the subject matter of the claim at issue. *** There is little dispute that the primary concern animating the FAA was the perceived need by the business community to overturn the common-law rule that denied specific enforcement of agreements to arbitrate in contracts between business entities. The Act was drafted by a committee of the American Bar Association (ABA), acting upon instructions from the ABA to consider and report upon “the further extension of the principle of commercial arbitration.” Report of the Forty-third Annual Meeting of the ABA, 45 A.B.A.Rep. 75 (1920). At the Senate Judiciary Subcommittee hearings on the proposed bill, the chairman of the ABA committee responsible for drafting the bill assured the Senators that the bill “is not intended [to] be an act referring to labor disputes, at all. It is purely an act to give the merchants the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it. Now that is all there is in this.” Hearing on S. 4213 and S. 4214 before a Subcommittee of the Senate Committee on the Judiciary, 67th Cong., 4th Sess., 9 (1923). At the same hearing,

Senator Walsh stated: “The trouble about the matter is that a great many of these contracts that are entered into are really not [voluntary] things at all. Take an insurance policy; there is a blank in it. You can take that or you can leave it. The agent has no power at all to decide it. Either you can make that contract or you can not make any contract. It is the same with a good many contracts of employment. A man says, ‘These are our terms. All right, take it or leave it.’ Well, there is nothing for the man to do except to sign it; and then he surrenders his right to have his case tried by the court, and has to have it tried before a tribunal in which he has no confidence at all.” Ibid. Given that the FAA specifically was intended to exclude arbitration agreements between employees and employers, I see no reason to limit this exclusion from coverage to arbitration clauses contained in agreements entitled “Contract of Employment.” In this case, the parties conceded at oral argument that Gilmer had no “contract of employment” as such with respondent. Gilmer was, however, required as a condition of his 496

employment to become a registered representative of several stock exchanges, including the New York Stock Exchange (NYSE). *** Not only would I find that the FAA does not apply to employment-related disputes between employers and employees in general, but also I would hold that compulsory arbitration conflicts with the congressional purpose animating the ADEA, in particular. As this Court previously has noted, authorizing the courts to issue broad injunctive relief is the cornerstone to eliminating discrimination in society. Albemarle Paper Co. v. Moody, 422 U.S. 405, 415, 95 S.Ct. 2362, 2370, 45 L.Ed.2d 280 (1975). The ADEA, like Title VII, authorizes courts to award broad, class-based injunctive relief to achieve the purposes of the Act. 29 U.S.C. § 626(b). Because commercial arbitration is typically limited to a specific dispute between the particular parties and because the available remedies in arbitral forums generally do not provide for class-wide injunctive relief, see Shell, ERISA and Other Federal Employment Statutes: When is Commercial Arbitration an “Adequate Substitute” for the Courts?, 68 Texas L.Rev. 509, 568 (1990), I would conclude that an essential purpose of the ADEA is frustrated by compulsory arbitration of employment discrimination claims. * * * The Court’s holding today clearly eviscerates the important role played by an independent judiciary in eradicating employment discrimination. When the FAA was passed in 1925, I doubt that any legislator who voted for it expected it to apply to statutory claims, to form contracts between parties of unequal bargaining power, or to the arbitration of disputes arising out of the employment relationship. In recent years, however, the Court “has effectively rewritten the statute”, and abandoned its earlier view that statutory claims were not appropriate subjects for arbitration.

NOTES AND QUESTIONS 1. Predispute Waivers of a Judicial Forum for ADEA Claims. The principal holding of Gilmer is that predispute agreements to resolve ADEA claims through arbitration, rather than through litigation in court, are generally enforceable under the FAA. This holding follows from the Court’s premise that agreements to arbitrate statutory employment claims, like agreements to arbitrate other statutory claims, are enforceable under the FAA “unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issues.” Do you agree with the Court’s premise? Why should Gilmer have had the “burden” of showing “that Congress intended to preclude a waiver of a judicial forum for ADEA claims?” Is it because the FAA is read to establish a general presumption or “default” rule favoring arbitration? Do you agree with the Court’s application of its approach to the ADEA? How does the Court respond to Gilmer’s arguments that there is 497 an “inherent conflict” between compelling arbitration in a case like his and “the ADEA’s underlying purposes”? 2. OWBPA Applicability. Because of the date of the agreement and dispute, the Gilmer Court notes but does not consider the possible relevance of the amendments to the ADEA in Title II of the OWBPA of 1990. Should the amended § 7(f)(1)(C) of ADEA be read to evince a Congressional intention to preclude predispute waiver of the right to a judicial forum and jury trial for ADEA claims? Or does this section only protect from predispute waiver “substantive” rights to be free of discrimination, rather than “procedural” rights to press claims of substantive violations in court? Nearly all courts find that the OWBPA does not apply to a waiver of the right to judicial forum for arbitration. See Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 170 F.3d 1, 12–14 (1st Cir. 1999); Seus v. John Nuveen & Co., 146 F.3d 175, 181–82 (3d Cir. 1998), overruled on other grounds, Green Tree Fin. Corp.-Al. v. Randolph, 531 U.S. 79, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000), as recognized in Khan v. Dell Inc., 669 F.3d 350 (3d Cir. 2012); Williams v. Cigna Fin. Advisors, Inc., 56 F.3d

656, 660–61 (5th Cir. 1995) (all interpreting OWBPA not to affect Gilmer holding). 3. For the story behind the Gilmer decision, see Samuel Estreicher, The Story of Gilmer v. Interstate/Johnson Lane Corp.: The Emergence of Employment Arbitration, in Employment Law Stories, ch. 7 (Samuel Estreicher & Gillian Lester eds., 2007). 4. What are the grounds for the Court’s statement that “the burden is on Gilmer to show that Congress intended to preclude a waiver of a judicial forum for ADEA claims”? The lower courts have agreed that arbitration agreements are enforceable with respect to Title VII, see, e.g., EEOC v. Luce, Forward, Hamilton & Scripps, 345 F.3d 742 (9th Cir. 2003), and FLSA claims, see, e.g., Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013). 5. A Recent Exception to Enforcement of Predispute Arbitration Agreements. On March 3, 2022, President Biden signed the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021”, amending the Federal Arbitration Act to provide that predispute arbitration agreements (or pre-dispute joint action waivers) in cases alleging sexual assault or sexual harassment are not enforceable, at the option of the plaintiff or the class representative in a collective action. Sexual assault is defined as “a dispute involving a non-consensual sexual act or sexual contact,” while sexual harassment “means a dispute relating to conduct that is alleged to constitute sexual harassment under Federal, Tribal or State law.” The Act thus provides the plaintiff the option of avoiding arbitration of such claims if she so chooses. The Act is significant because state laws attempting to ban arbitration of sexual harassment claims have been found preempted under the FAA. For example, New York law banned mandatory private arbitration of sexual harassment claims, but that ban was held preempted by the Federal Arbitration Act. Latif v. Morgan Stanley & Co. LLC, No. 18CV11528 (DLC), 2019 WL 2610985 (S.D.N.Y. June 26, 2019). New York and several other states 498 have attempted to ban arbitration of all employment discrimination claims, but those efforts also are likely preempted. It remains to be seen whether Congress will expand the FAA exemption to encompass all employment discrimination claims, as opposed to only those involving sexual harassment and sexual assault. 6. Jury Trial Waivers. After the 1991 Title VII amendments, employees seeking damages have a right to a jury trial in actions brought in court. A jury trial is inconsistent with arbitration. The effect of enforcing an arbitration agreement on a damages claim thus is to foreclose a jury trial. On the effect of arbitration agreements, see Note on Class Action Waivers and Arbitration, infra. 7. “Save upon Such Grounds as Exist at Law or in Equity for the Revocation of Any Contract.” The FAA provides that arbitration agreements shall be enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. This provision authorizes review of such agreements under generally applicable contract law, but does not permit courts to craft special rules for arbitration agreements. See AT&T Mobility LLC v. Concepcion, p. 503 infra, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011); Preston v. Ferrer, 552 U.S. 346, 128 S. Ct. 978, 169 L. Ed. 2d 917 (2008); Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1996). 8. Exception for “Contracts of Employment if Seamen, Railroad Employees, or Any Other Class of Workers Engaged in . . . Commerce”? What does the FAA § 1 exception for “contracts of employment” mean? In Gilmer, the Court found that the arbitration agreement was a condition of registration with the NYSE, not an employment contract. But in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S. Ct. 1302, 149 L. Ed. 2d 234 (2001), the Court adopted a transportation-worker-only interpretation of the FAA § 1 exclusion, exempting only contracts of employment of seamen, railroad employees and any other class of workers similarly directly engaged in foreign or interstate commerce. For pre-Circuit City commentary, compare, e.g., Samuel Estreicher, Predispute Agreements to Arbitrate Statutory Employment Claims, 72 N.Y.U. L. Rev. 1344, 1369–71 (1997), with Matthew Finkin, “Workers’ Contracts” Under the United States Arbitration Act: An Essay in Historical Clarification, 17 Berkeley J. Emp. & Lab. L. 282, 298 (1996). In Southwest Airlines Co. v. Saxon, 596 U.S. ___, 142 S.Ct. 1783 (2022), the Court held that airline ramp loaders, who unload cargo from planes, are engaged in interstate commerce, are covered by the FAA and are not required to arbitrate their employment claims. 9. Applicability to EEOC. Is the EEOC bound by an arbitration agreement between the employee and the employer? See EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S.Ct. 754, 151 L. Ed. 2d 755 (2002) (EEOC is a third party to the agreement and represents the public interest, not simply the individual employee). 499 10. Preemption of State Law Barring Arbitration of State Statutory Claims. Can a state adopt a policy more restrictive of statutory claim arbitration than federal courts under the FAA? Can a state law bar the enforcement of predispute arbitration agreements for claims made under its own law? Such state law restriction of arbitration is preempted by the FAA under controlling Supreme Court precedent. See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984) (holding preempted a California law requiring claims brought under it to have judicial consideration); Perry v. Thomas, 482 U.S. 483, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987) (holding

preempted private employees’ wage payment claims despite the state’s declared policy that such actions “may be pursued without regard to private arbitration agreements”); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S. Ct. 834, 130 L. Ed. 2d 753 (1995) (confirming the Southland Court’s holding that “state courts cannot apply state statutes that invalidate arbitration agreements”) See generally Christopher R. Drahozal, Federal Arbitration Act Preemption, 79 Ind. L.J. 393 (2002). 11. “Knowing Waiver” of Right of Access to Judicial Forum. The Court in Gilmer holds that a “take-it-or-leave-it” employment agreement like that which Gilmer signed is sufficiently voluntary to be an effective waiver. Might a court still find an employee’s agreement to an arbitration system defective because it does not reflect a “knowing waiver”? In a series of cases the Ninth Circuit has held that “[a]ny bargain to waive the right to a judicial forum for civil rights claims * * * in exchange for employment or continued employment must at the least be express: The choice must be explicitly presented to the employee and the employee must explicitly agree to waive the specific right in question.” Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756, 762 (9th Cir. 1997). Is the Ninth Circuit position here consistent with Gilmer? With the FAA requirement that courts may apply only generally applicable principles for contract revocation in declining to enforce arbitration agreements? Most courts do not require arbitration agreements to spell out the particular statutory claims that are encompassed by the arbitration promise as long as employees are made aware that judicial remedies are being waived and that agreement encompasses employment disputes. In Campbell v. General Dynamics Government Systems Corp., 407 F.3d 546 (1st Cir. 2005), the court refused to compel arbitration of an ADA claim because the arbitration program had been distributed to employees by email without sufficiently alerting them that they were being asked to agree to a waiver of judicial remedies. Links were provided to the full text of the arbitration program but the cover email was held not to contain sufficiently clear notice, nor were employees asked to acknowledge receipt or take some other affirmative step that might have provided a basis for establishing notice. Id. at 555. 12. Delegating to the Arbitrator Power to Decide Arbitrability? In Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 177 L. Ed. 2d 403 (2010), the Court held that a challenge to the validity of an arbitration agreement that contains a clause delegating to the arbitrator the exclusive 500 authority to resolve threshold issues of validity, including unconscionability under state law, is to be decided by the arbitrator, not the court, unless the challenge is specifically directed to the validity of the delegation provision itself. See also Henry Schein Inc. v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524, 202 L. Ed. 2d 480 (2019) (reaffirming that principle applies even where the argument in favor of arbitration is wholly groundless), subsequent cert. dismissed as improvidently granted, 141 S. Ct. 656, 208 L. Ed. 2d 512 (2021). 13. Judicial Scrutiny of Fairness of Arbitration Procedure. Does a court have authority to refuse to compel arbitration if dissatisfied with the essential fairness of the arbitration’s procedures? Without clear articulation of the source of their authority, lower courts since Gilmer have been prepared to judge the adequacy of arbitration systems before compelling arbitration. Arbitration agreements that provide for lesser remedies than would be available in court for statutory violations would seem to contravene the Supreme Court’s insistence that arbitration involves the waiver of a judicial forum, not the waiver of any substantive right. See, e.g. Paladino v. Avnet Comput. Techs., Inc., 134 F.3d 1054 (11th Cir. 1998) (arbitration clause that does not authorize full statutory remedies is not enforceable); Graham Oil Co. v. ARCO Prods. Co., 43 F.3d 1244, 1248–49 (9th Cir. 1994) (arbitration agreement that denied statutory remedies and shortened statutory statute of limitations periods is unenforceable). Might a failure to provide for neutral selection of the arbitrator also be treated as a waiver of a substantive right? See, e.g., Hooters of Am. v. Phillips, 173 F.3d 933, 938–40 (4th Cir. 1999) (Hooters promulgated egregiously unfair arbitration rules, including selection procedures ensuring company control of membership of arbitration panel). The Due Process Protocol for Employment Arbitration A “Due Process Protocol for Arbitration of Statutory Disputes” has been developed and endorsed by the Labor & Employment Law Section of the American Bar Association as well as by major arbitration associations. See Disp. Resol. J. Oct.–Dec. 1995, at 37. The protocol posits seven minimum standards: (1) a jointly selected arbitrator who knows the applicable law; (2) simple but adequate discovery; (3) some cost-sharing between the parties to ensure arbitrator neutrality and to deter frivolous claims, though the employer should pay a higher percentage; (4) employee selection of own representative; (5) availability of all remedies provided by law; (6) opinion and award with reasoning from arbitrator; and (7) judicial review of legal issues. See generally Samuel Estreicher & Zev Eigen, The Forum for Adjudication of Employment Disputes, ch. 14 in Research Handbook on the Economics of Labor and Employment Law (Cynthia L. Estlund & Michael L. Wachter eds. 2012).

501 14. Cost-Sharing Provisions. As Due Process Protocol standard (3) indicates, “cost-sharing” can be viewed as a means of ensuring arbitrator neutrality, but the costs of arbitration—both the fees of the arbitration organization and the fees charged by the arbitrator—can erect a prohibitive barrier for claimants of average income. See, e.g., Cole v. Burns Int’l Sec. Serv., 105 F.3d 1465, 1483–85 (D.C. Cir. 1997) (an agreement that obligated the employee to pay all or part of the arbitrators’ fees would undermine substantive rights by creating costly barrier to assertion of claims). Can courts refuse to enforce arbitration agreements that impose costs on claimants higher than the nominal filing fees assessed in commencing a suit in the courts? In Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90–92, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000), involving a consumer dispute under the Truth in Lending Act, 15 U.S.C. § 1601 et seq., the Court held that a mere “risk” that a plaintiff “will be saddled with prohibitive costs” is insufficient to invalidate an arbitration agreement. Yet a party may prove that arbitrator fees would be prohibitive in his/her individual case. As of 2020, the American Arbitration Association (“AAA”) charges employees a $300 filing fee for disputes “arising out of employer-promulgated plans” (as opposed to “individually negotiated employment agreements”), and requires the employer to pay the arbitrator’s fees. AAA, Employment Arbitration Rules (Nov. 1, 2009), available at www.adr.org. Employees that individually negotiate their employment agreements, in contrast, must pay a filing fee ranging from $775 to $10,200, depending on the amount of their claim, and arbitrator fees “are subject to allocation by the arbitrator in an award.” Id. 15. Effect of Arbitration on Employee Outcomes. For the affirmative case for arbitration if properly designed, see, e.g., Zev J. Eigen & David Sherwyn, A Model of Dispute Resolution Fairness, in Beyond Elite Law: Access to Civil Justice in American (Samuel Estreicher & Joy Radice eds. 2016). David Sherwyn, Samuel Estreicher & Michael Heise, Assessing the Case for Employment Arbitration: A New Path for Empirical Research, 57 Stan. L. Rev. 1557 (2005); Samuel Estreicher, Saturns for Rickshaws: The Stakes in the Debate over Mandatory Employment Arbitration, 16 Ohio St. J. on Disp. Resol. 559 (2001). For the negative case, see, e.g., Judith Resnik, Diffusing Disputes: The Public in the Private of Arbitration, the Private in the Courts, and the Erasure of Rights, 124 Yale L.J. 2804 (2015); Alexander J.S. Colvin, An Empirical Assessment of Employment Arbitration: Case Outcomes and Processes, 8 J. Empirical Legal Studies 1 (2011).

NOTE: CLASS ACTION WAIVERS AND ARBITRATION 1. When an Agreement Is “Silent” or Ambiguous on the Issue of Class Arbitrability. The Supreme Court first ruled in 2003 that a state court lacks authority to compel classwide arbitration of claims where the underlying arbitration agreement is silent on the question; a plurality of Justices determined that the availability of classwide arbitration is an issue for the arbitrator to decide. See Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 123 S. Ct. 2402, 156 L. Ed. 2d 414 (2003). In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S.Ct. 1758, 176 L Ed.2d 605 (2010), the Court 502 held 5–3 that an arbitration agreement that the parties agree is “silent” on class arbitration may not proceed on a class basis. The arbitration panel below was held to have exceeded its authority in violation of the FAA when it determined, in an agreement that was silent on the issue, that the agreement permitted class arbitration. Justice Alito, writing for the Court, stated that the panel had acted according to its own sense of public policy, rather than within the scope of authority provided by the agreement. Because the parties acknowledged that the agreement was “silent” and there had been “no agreement” on class arbitration, there was no need to ascertain the parties’ intent on the subject. Instead, the panel’s proper task was to determine whether, in the face of that silence, class arbitration was permitted by an underlying default rule of law. The Court then considered the appropriate default rule under the FAA. Arbitration, the Court explained, has always been considered a matter of consent. Class arbitration “changes the nature of arbitration to such a degree” that consent to class arbitration cannot be presumed. Commonly touted benefits of arbitration such as speed, cost savings, efficiency, and privacy may be lost in a class setting, and new concerns added related to the greater potential for a multiplicity of claims, absent parties, and high stakes. Thus, the Court ruled “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Because the parties here conceded that there was no such agreement, there could be no mandated class arbitration. The Court remanded the case, but ruled that rehearing by the arbitration panel on the class issue was not warranted given the parties stipulation on “silence.” In Lamps Plus Inc. v. Varela¸ 587 U.S. ___, 139 S.Ct. 1407, 203 L.Ed.2d 636 (2019), the Court extended this principle to cases where the underlying agreement was ambiguous concerning class actions in arbitration. The Court held that only if the parties in fact agreed to resolve their arbitral dispute by using class procedures could a court order their use in arbitration, stating that “[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself” by using class procedures. 2. Class Action Waivers and State-Law Unconscionability Challenges. After the Supreme Court’s 2003 decision in Bazzle suggested that arbitrators could interpret silence in an arbitration agreement to authorize class proceedings, some companies responded by inserting provisions in their arbitration agreements waiving class actions or the consolidation of claims. Attorneys seeking to preserve the

availability of claim consolidation in the face of such provisions have used several kinds of arguments. First, the waiver provisions have been challenged under state-law unconscionability doctrine. This doctrine arguably is relevant under section 2 of the FAA, which allows invalidation or non-enforcement of arbitration agreements on “grounds as exist at law or in equity for the revocation of any contract.” Thus, the California Supreme Court in Discover Bank v. Superior Court, 36 Cal. 4th 148, 30 Cal. Rptr. 3d 76, 113 P.3d 1100 (2005), declared class 503 action waivers in arbitration agreement unconscionable when applied to consumer claims involving contracts of adhesion and small amounts of money. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), however, the Supreme Court held that the FAA precludes application of California’s Discover Bank unconscionability doctrine. It reasoned that the doctrine created barriers to the effectuation of arbitration agreements by conditioning enforcement of the arbitration agreement on the company’s consenting to a classwide arbitral proceeding. Vincent and Liza Concepcion had entered into an agreement with AT&T Mobility LLC, a wireless subsidiary of AT&T, (“AT&T”) in February 2002 for the sale and servicing of “free” wireless telephones. The Concepcions were not charged for the retail value of the phones, but were responsible for $30.22 in sales tax, a cost that was not disclosed in AT&T’s advertisement. The Concepcions filed a complaint in the United States District Court for the Southern District of California in March 2006 alleging violations of California consumer protection laws based on AT&T’s non-disclosure of the state sales tax. The Concepcions’ wireless service agreement incorporated a one-page statement of “Terms and Conditions,” which contained an agreement to arbitrate any disputes under the agreement and barred consolidation or class arbitration. The agreement also allowed unilateral amendments of the contract by AT&T at any time. AT&T exercised this right following initiation of the Concepcions’ lawsuit by adding a “premium payment clause” to the agreement, which provided for a minimum payment of $7,500 to a California customer if an arbitral award was greater than AT&T’s last written settlement offer prior to selection of an arbitrator. In March 2008, AT&T moved to compel individual arbitration. Relying on Discover Bank, the District Court denied AT&T’s motion and concluded that the class action ban in the parties’ arbitration agreement was both procedurally and substantively unconscionable under California law. The Ninth Circuit affirmed. 584 F.3d 849 (9th Cir. 2009). The U.S. Supreme Court, in a 5–4 decision, reversed. In the majority opinion, authored by Justice Scalia, the Court noted that arbitration is a matter of contract and a predominant purpose of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms.” Justice Scalia’s opinion explained [A]lthough [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives . . . [and] the overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms. . . . With respect to California’s Discover Bank rule, the majority concluded, “although the rule does not require classwide arbitration,” it interfered with the FAA’s objective of enforcing arbitration agreements according to their 504 terms because the Discover Bank rule “allows any party to a consumer contract to demand it ex post.” The Court reasoned that the Discover Bank rule conflicted with the congressional purpose in enacting the FAA in three principal ways. First, class arbitration “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” Class certification in the arbitration context adds additional obstacles that must be resolved before arbitration can begin. Next, class arbitration requires a level of procedural formality that, could not possibly have been envisioned by Congress when it passed the FAA in 1925. Particularly, the majority noted, “it is at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied.” Third, class arbitration poses a risk to defendants where, in the absence of the multilayered review available in court proceedings, errors are more likely to go uncorrected and in the class context their impact may increase exponentially. According to the majority, defendants are often willing to accept the costs of errors in arbitration given the size and possible damages of individual disputes. Conversely, “when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of error will often become unacceptable” to businesses. In addition, the majority rejected the argument that the California rule is a generally applicable defense to contract formation and therefore not preempted by the FAA. According to the majority, even a state contract law of general applicability will be preempted where it “stand[s] as an obstacle to the accomplishment of the FAA’s objectives.” Justice Breyer, with whom Justices Ginsberg, Sotomayor and Kagan joined, filed a dissenting opinion. The dissent argued that the Discover Bank rule is consistent with both the FAA’s language and the “purpose behind” the Act, and that Discover Bank cannot be

viewed as an attack on arbitration as the state law imposes comparable limitations on arbitration and court litigation. Further, under the express terms of the FAA Section 2, the dissent argued that “California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.” 3. Class Action Waivers as Waivers of Substantive Rights. Although the Concepcion decision concluded that California’s unconscionability doctrine contravened the FAA, the Court seemed to leave the door ajar for the argument that in cases involving small sums not likely to attract a competent lawyer in individual arbitrations, some further accommodation might be required. The Concepcions had maintained that their claim “was most unlikely to go unresolved” in the absence of a class or consolidated proceeding, but the Court noted that in the challenged agreement AT&T promised it would pay claimants “a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer.” In American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013), however, the Court seemingly closed the 505 door on the argument that class or consolidated proceedings were necessary to attract competent counsel given the size of average claims. Italian Colors and other merchants brought a class action in court against American Express, alleging that its credit card acceptance agreement violated antitrust law. The Court held that the merchants could not bring the action because the agreement included a commitment to arbitrate claims without use of class arbitration. The merchants contended that enforcing the class waiver would prevent the “effective vindication” of their rights because none of the merchants individually would have an adequate incentive to pay for the expert analysis necessary to prove the claim. The Court rejected the broadly framed “effective vindication” formulation of the Second Circuit in this case; it instead asserted that the doctrine applies only where there is an obstruction of access to a forum to vindicate the rights. The Court did note, however, that the arbitration agreements did not prevent plaintiffs from pooling their resources in mounting the costs of an expert witness in an individual arbitration. See 570 U.S. at 237 n.4; 133 S. Ct. at 2311 n.4. Furthermore, although the Court does not discuss the point, expert testimony in one arbitration presumably would be admissible evidence in another arbitration involving common facts. Cf. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L. Ed 2d 552 (1979) (nonmutual issue preclusion as federal common law rule). See Samuel Estreicher & Lukacz Swiderski, Issue Preclusion in Employment Arbitration after Epic Systems v. Lewis. 4 U. Pa. J. Law & Pub. Aff. 15 (No. 1, Nov. 2018); Zachary D. Fasman, Offensive Non-Mutual Collateral Estoppel in Arbitration, 34 ABA Journal of Labor and Employment Law 217 (2020). 4. Validity of Class Action Waivers Under the Federal Law Forming the Basis of the Plaintiff’s Claim. Class action waivers in arbitration agreements still could be ineffective in cases brought to enforce a federal statutory right that includes a guarantee of access to consolidated litigation in court. In CompuCredit Corp. v. Greenwood, 565 U.S. 95, 132 S. Ct. 665, 181 L. Ed. 2d 586 (2012), consumers filed a class action against a credit corporation and a bank, claiming that petitioners violated the Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq. The district court denied petitioners’ motion to compel arbitration on the ground that the CROA itself expressly contemplated, in the notice the statute required these organizations to provide consumers, a right to bring class actions to redress CROA violations. The Ninth Circuit affirmed. The Supreme Court reversed, finding no basis in the CROA to overcome Gilmer’s presumption of arbitrability. Writing for himself and five other Justices, Justice Scalia reasoned: Respondents suggest that the CROA’s civil-liability provision, § 1679g * * * demonstrates that the Act provides consumers with a “right” to bring an action in court. They cite the provision’s repeated use of the terms “action,” “class action,” and “court”—terms that they say call to mind a judicial proceeding. These references cannot do the heavy lifting that respondents assign them. It is utterly commonplace for statutes that create civil causes of action to describe the details of those causes of action, including the relief available, in the context of a court suit. If the mere formulation of the cause of action in this 506 standard fashion were sufficient to establish the “contrary congressional command” overriding the FAA, valid arbitration agreements covering federal causes of action would be rare indeed. But that is not the law. * * * [I]f a cause-of-action provision mentioning judicial enforcement does not create a right to initial judicial enforcement, the waiver of initial judicial enforcement is not the waiver of a “right of the consumer,” § 1679f(a). Given CompuCredit, do plaintiffs challenging a class action waiver have a viable argument that they cannot be forced to arbitrate their Title VII systemic disparate treatment claims because such claims contemplate a classwide vehicle? See Parisi v. Goldman, Sachs & Co., 710 F.3d 483 (2d Cir. 2013) (class or consolidated proceeding waiver in arbitration agreement did not prevent plaintiff from vindicating her Title VII statutory rights because employees can challenge discriminatory policies in an individual arbitration and there is no substantive Title VII right to bring a systemic disparate-treatment claim on a class basis). 5. Class Action Waivers Are Not Unlawful Under the NLRA. In Epic Systems Inc. v. Lewis, 584 U.S. ___, 138 S. Ct. 1612, 200 L. Ed. 2d 889 (2018), the Court held 5–4 that class action waivers were not forbidden as infringements upon protected concerted activity

under the NLRA. The Court majority reiterated that the FAA required it to enforce arbitration agreements as written, and that there was no conflict between the NLRA’s protection of the right to join and form unions and engage in collective bargaining and arbitration agreements requiring individual employees to arbitrate their claims on their own, stating further that nothing in the labor laws required that any particular procedure be applied in arbitration. Justice Ginsburg, writing for the dissenters, claimed that the majority was reviving “Yellow Dog” contracts by which workers were forced to waive their statutory rights as a condition of employment. 6. Does a Private Attorney General Claim Under State Law Change the Analysis? In Viking River Cruises, Inc. v. Moriana, 596 U.S. ___, 142 S.Ct. 1906 (2022), the Court held that the FAA preempted California law which purported to exempt Private Attorney General Act (PAGA) claims from arbitration. Resembling a class action, PAGA “authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations committed against the employee and fellow employees, with most of the proceeds of that litigation going to the state.” Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 360, 327 P.3d 129, 133, 173 Cal. Rptr. 3d 289, 294 (2014). The Supreme Court of California had held that individual and representative claims under PAGA could not be severed, and that “where . . . an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law”. 59 Cal. 4th 348, 384, 327 P.3d 129, 149, 173 Cal. Rptr. 3d 289, 313. The Supreme Court disagreed, and held that 1) the California rule which precluded the division of PAGA claims between individual and representative claims was preempted because it had the effect of requiring arbitration of 507 class/representative claims which exceeded the scope of the parties’ arbitration agreement; 2) the employer could require the arbitration of the individual claim; and 3) an individual who was required to arbitrate her own claim had no standing to bring a representative PAGA claim involving the rights of others.

NOTE: GILMER IN THE UNION-REPRESENTED SECTION What impact does Gilmer have in settings where employees are represented by unions? In an earlier decision, Alexander v. GardnerDenver Co., 415 U.S. 36, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (1974), the Court suggested that unions cannot negotiate waivers of an individual employee’s statutory entitlement. Part of the Alexander Court’s rationale was that contractual arbitration is institutionally unsuited to hear statutory claims. This view has been superseded by the Court’s mid-1980s FAA rulings, all of which are cited in Gilmer. A perhaps more important part of the rationale was that an individual’s non-NLRA statutory rights are an individual’s entitlements that cannot be bargained away by the collective bargaining agent. This last premise is the subject of the next reading.

14 PENN PLAZA LLC V. PYETT Supreme Court of the United States, 2009. 556 U.S. 247, 129 S.Ct. 1456, 173 L.Ed.2d 398.

JUSTICE THOMAS delivered the opinion of the Court. The question presented by this case is whether a provision in a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate claims arising under the Age Discrimination in Employment Act of 1967 (ADEA), 81 Stat. 602, as amended, 29 U.S.C. § 621 et seq., is enforceable. The United States Court of Appeals for the Second Circuit held that this Court’s decision in Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (1974), forbids enforcement of such arbitration provisions. We disagree and reverse the judgment of the Court of Appeals. I Respondents are members of the Service Employees International Union, Local 32BJ (Union). Under the National Labor Relations Act (NLRA), 49 Stat. 449, as amended, the Union is the exclusive bargaining representative of employees within the building-services industry in New York City, which includes building cleaners, porters, and doorpersons. See 29 U.S.C. § 159(a). In this role, the Union has exclusive authority to bargain on behalf of its members over their “rates of pay, wages, hours of employment, or other conditions of employment.” Ibid. Since the 1930’s, the Union has engaged in industry-wide collective bargaining with the Realty Advisory Board on Labor Relations, Inc. (RAB), a multiemployer bargaining association for the New York City real-estate industry. The 508

agreement between the Union and the RAB is embodied in their Collective Bargaining Agreement for Contractors and Building Owners (CBA). The CBA requires union members to submit all claims of employment discrimination to binding arbitration under the CBA’s grievance and dispute resolution procedures: “§ 30 NO DISCRIMINATION. There shall be no discrimination against any present or future employee by reason of

race, creed, color, age, disability, national origin, sex, union membership, or any other characteristic protected by law, including, but not limited to, claims made pursuant to Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the New York State Human Rights Law, the New York City Human Rights Code, . . . or any other similar laws, rules, or regulations. All such claims shall be subject to the grievance and arbitration procedures (Articles V and VI) as the sole and exclusive remedy for violations. Arbitrators shall apply appropriate law in rendering decisions based upon claims of discrimination.”1 Petitioner 14 Penn Plaza LLC is a member of the RAB. It owns and operates the New York City office building where, prior to August 2003, respondents worked as night lobby watchmen and in other similar capacities. Respondents were directly employed by petitioner Temco Service Industries, Inc. (Temco), a maintenance service and cleaning contractor. In August 2003, with the Union’s consent, 14 Penn Plaza engaged Spartan Security, a unionized security services contractor and affiliate of Temco, to provide licensed security guards to staff the lobby and entrances of its building. Because this rendered respondents’ lobby services unnecessary, Temco reassigned them to jobs as night porters and light duty cleaners in other locations in the building. Respondents contend that these reassignments led to a loss in income, caused them emotional distress, and were otherwise less desirable than their former positions. At respondents’ request, the Union filed grievances challenging the reassignments. The grievances alleged that petitioners: (1) violated the CBA’s ban on workplace discrimination by reassigning respondents on account of their age; (2) violated seniority rules by failing to promote one of the respondents to a handyman position; and (3) failed to equitably rotate overtime. After failing to obtain relief on any of these claims through the grievance process, the Union requested arbitration under the CBA. 509

After the initial arbitration hearing, the Union withdrew the first set of respondents’ grievances—the age-discrimination claims—from arbitration. Because it had consented to the contract for new security personnel at 14 Penn Plaza, the Union believed that it could not legitimately object to respondents’ reassignments as discriminatory. But the Union continued to arbitrate the seniority and overtime claims, and, after several hearings, the claims were denied. In May 2004, while the arbitration was ongoing but after the Union withdrew the age-discrimination claims, respondents filed a complaint with the Equal Employment Opportunity Commission (EEOC) alleging that petitioners had violated their rights under the ADEA. Approximately one month later, the EEOC issued a Dismissal and Notice of Rights, which explained that the agency’s “ ‘review of the evidence . . . fail[ed] to indicate that a violation ha[d] occurred,’ ” and notified each respondent of his right to sue. Pyett v. Pa. Bldg. Co., 498 F.3d 88, 91 (CA2 2007). Respondents thereafter filed suit against petitioners in the United States District Court for the Southern District of New York, alleging that their reassignment violated the ADEA and state and local laws prohibiting age discrimination. Petitioners filed a motion to compel arbitration of respondents’ claims pursuant to § 3 and § 4 of the Federal Arbitration Act (FAA), 9 U.S.C. §§ 3, 4. The District Court denied the motion because under Second Circuit precedent, “even a clear and unmistakable union-negotiated waiver of a right to litigate certain federal and state statutory claims in a judicial forum is unenforceable.” Respondents immediately appealed the ruling under § 16 of the FAA, which authorizes an interlocutory appeal of “an order . . . refusing a stay of any action under section 3 of this title” or “denying a petition under section 4 of this title to order arbitration to proceed.” 9 U.S.C. §§ 16(a)(1)(A)–(B). The Court of Appeals affirmed. 498 F.3d 88. * * * II A The NLRA governs federal labor-relations law. As permitted by that statute, respondents designated the Union as their “exclusive representativ[e] . . . for the purposes of collective bargaining in respect to rates of pay, wages, hours of employment, or other conditions of employment.” 29 U.S.C. § 159(a). As the employees’ exclusive bargaining representative, the Union “enjoys broad authority . . . in the negotiation and administration of [the] collective bargaining contract.” Communications Workers v. Beck, 487 U.S. 735, 739, 108 S. Ct. 2641, 101 L. Ed. 2d 634 (1988) (internal quotation marks omitted). But this broad authority “is accompanied by a responsibility of equal scope, the responsibility and duty of fair representation.” Humphrey v. Moore, 375 U.S. 335, 342, 84 S. Ct. 363, 11 L. Ed. 2d 370 (1964). The employer has a 510

corresponding duty under the NLRA to bargain in good faith “with the representatives of his employees” on wages, hours, and conditions of employment. 29 U.S.C. § 158(a)(5); see also § 158(d).

In this instance, the Union and the RAB, negotiating on behalf of 14 Penn Plaza, collectively bargained in good faith and agreed that employment-related discrimination claims, including claims brought under the ADEA, would be resolved in arbitration. This freely negotiated term between the Union and the RAB easily qualifies as a “conditio[n] of employment” that is subject to mandatory bargaining under § 159(a). * * * Respondents, however, contend that the arbitration clause here is outside the permissible scope of the collective-bargaining process because it affects the “employees’ individual, non-economic statutory rights.” We disagree. Parties generally favor arbitration precisely because of the economics of dispute resolution. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123, 121 S. Ct. 1302, 149 L. Ed. 2d 234 (2001) (“Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts”). As in any contractual negotiation, a union may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer. Courts generally may not interfere in this bargained-for exchange. * * * As a result, the CBA’s arbitration provision must be honored unless the ADEA itself removes this particular class of grievances from the NLRA’s broad sweep. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985). It does not. This Court has squarely held that the ADEA does not preclude arbitration of claims brought under the statute. See Gilmer, 500 U.S., at 26–33, 111 S. Ct. 1647, 114 L. Ed. 2d 26. *** The Gilmer Court’s interpretation of the ADEA fully applies in the collective-bargaining context. Nothing in the law suggests a distinction between the status of arbitration agreements signed by an individual employee and those agreed to by a union representative. This Court has required only that an agreement to arbitrate statutory antidiscrimination claims be “explicitly stated” in the collective-bargaining agreement. Wright, 525 U.S., at 80, 119 S. Ct. 391, 142 L. Ed. 2d 361 (internal quotation marks omitted). The CBA under review here meets that obligation. Respondents incorrectly counter that an individual employee must personally “waive” a “[substantive] right” to proceed in court for a waiver to be “knowing and voluntary” under the ADEA. 29 U.S.C. § 626(f)(1). As explained below, however, the agreement to arbitrate ADEA claims is not the waiver of a “substantive right” as that term is employed in the ADEA. Wright, supra, at 80, 119 S. Ct. 391, 142 L. Ed. 2d 361; see 511

infra, at 15–16. Indeed, if the “right” referred to in § 626(f)(1) included the prospective waiver of the right to bring an ADEA claim in court, even a waiver signed by an individual employee would be invalid as the statute also prevents individuals from “waiv[ing] rights or claims that may arise after the date the waiver is executed.” § 626(f)(1)(C). Examination of the two federal statutes at issue in this case, therefore, yields a straightforward answer to the question presented: The NLRA provided the Union and the RAB with statutory authority to collectively bargain for arbitration of workplace discrimination claims, and Congress did not terminate that authority with respect to federal age-discrimination claims in the ADEA. Accordingly, there is no legal basis for the Court to strike down the arbitration clause in this CBA, which was freely negotiated by the Union and the RAB, and which clearly and unmistakably requires respondents to arbitrate the agediscrimination claims at issue in this appeal. Congress has chosen to allow arbitration of ADEA claims. The Judiciary must respect that choice. B The CBA’s arbitration provision is also fully enforceable under the Gardner-Denver line of cases. Respondents interpret Gardner-Denver and its progeny to hold that “a union cannot waive an employee’s right to a judicial forum under the federal antidiscrimination statutes” because “allowing the union to waive this right would substitute the union’s interests for the employee’s antidiscrimination rights.” The “combination of union control over the process and inherent conflict of interest with respect to discrimination claims,” they argue, “provided the foundation for the Court’s holding [in Gardner-Denver] that arbitration under a collective-bargaining agreement could not preclude an individual employee’s right to bring a lawsuit in court to vindicate a statutory discrimination claim.” We disagree. 1 The holding of Gardner-Denver is not as broad as respondents suggest. The employee in that case was covered by a collective-bargaining agreement that prohibited “discrimination against any employee on account of race, color, religion, sex, national origin, or ancestry” and that guaranteed that “[n]o employee will be discharged . . . except for just cause.” 415 U.S., at 39, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (internal quotation marks omitted). The agreement also included a “multistep grievance procedure” that culminated in compulsory arbitration for any “differences aris[ing] between the Company and the Union as to the meaning and application of the provisions of this Agreement” and “any trouble aris[ing] in the plant.” Id., at 40–41, 94 S.

Ct. 1011, 39 L. Ed. 2d 147 (internal quotation marks omitted). 512

*** This Court reversed the judgment on the narrow ground that the arbitration was not preclusive because the collectivebargaining agreement did not cover statutory claims. As a result, the lower courts erred in relying on the “doctrine of election of remedies” to bar the employee’s Title VII claim. Id., at 49, 94 S. Ct. 1011, 39 L. Ed. 2d 147. “That doctrine, which refers to situations where an individual pursues remedies that are legally or factually inconsistent” with each other, did not apply to the employee’s dual pursuit of arbitration and a Title VII discrimination claim in district court. The employee’s collectivebargaining agreement did not mandate arbitration of statutory antidiscrimination claims. Id., at 49–50, 94 S. Ct. 1011, 39 L. Ed. 2d 147. “As the proctor of the bargain, the arbitrator’s task is to effectuate the intent of the parties.” Id., at 53, 94 S. Ct. 1011, 39 L. Ed. 2d 147. Because the collective-bargaining agreement gave the arbitrator “authority to resolve only questions of contractual rights,” his decision could not prevent the employee from bringing the Title VII claim in federal court “regardless of whether certain contractual rights are similar to, or duplicative of, the substantive rights secured by Title VII.” Id., at 53–54, 94 S. Ct. 1011, 39 L. Ed. 2d 147; see also id., at 50, 94 S. Ct. 1011, 39 L. Ed. 2d 147. The Court also explained that the employee had not waived his right to pursue his Title VII claim in federal court by participating in an arbitration that was premised on the same underlying facts as the Title VII claim. See id., at 52, 94 S. Ct. 1011, 39 L. Ed. 2d 147. Thus, whether the legal theory of preclusion advanced by the employer rested on “the doctrines of election of remedies” or was recast “as resting instead on the doctrine of equitable estoppel and on themes of res judicata and collateral estoppel,” id., at 49, n. 10, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (internal quotation marks omitted), it could not prevail in light of the collective-bargaining agreement’s failure to address arbitration of Title VII claims. See id., at 46, n. 6, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (“[W]e hold that the federal policy favoring arbitration does not establish that an arbitrator’s resolution of a contractual claim is dispositive of a statutory claim under Title VII” (emphasis added)). * * * [I]n Gilmer, this Court made clear that the Gardner-Denver line of cases “did not involve the issue of the enforceability of an agreement to arbitrate statutory claims.” 500 U.S., at 35, 111 S. Ct. 1647, 114 L. Ed. 2d 26. Those decisions instead “involved the quite different issue whether arbitration of contract-based claims precluded subsequent judicial resolution of statutory claims. Since the employees there had not agreed to arbitrate their statutory claims, and the labor arbitrators were not authorized to resolve such claims, the arbitration in those cases understandably was held not to preclude subsequent statutory actions.” Ibid.; see also Wright, 525 U.S., at 76, 119 S. Ct. 391, 142 L. Ed. 2d 361; 513

Livadas v. Bradshaw, 512 U.S. 107, 127, n. 21, 114 S. Ct. 2068, 129 L. Ed. 2d 93 (1994). Gardner-Denver and its progeny thus do not control the outcome where, as is the case here, the collective-bargaining agreement’s arbitration provision expressly covers both statutory and contractual discrimination claims. 2 We recognize that apart from their narrow holdings, the Gardner-Denver line of cases included broad dicta that was highly critical of the use of arbitration for the vindication of statutory antidiscrimination rights. That skepticism, however, rested on a misconceived view of arbitration that this Court has since abandoned. First, the Court in Gardner-Denver erroneously assumed that an agreement to submit statutory discrimination claims to arbitration was tantamount to a waiver of those rights. * * * The Court was correct in concluding that federal antidiscrimination rights may not be prospectively waived, see 29 U.S.C. § 626(f)(1)(C); see supra, at 9, but it confused an agreement to arbitrate those statutory claims with a prospective waiver of the substantive right. The decision to resolve ADEA claims by way of arbitration instead of litigation does not waive the statutory right to be free from workplace age discrimination; it waives only the right to seek relief from a court in the first instance. * * * Second, Gardner-Denver mistakenly suggested that certain features of arbitration made it a forum “well suited to the resolution of contractual disputes,” but “a comparatively inappropriate forum for the final resolution of rights created by Title VII.” 415 U.S., at 56, 94 S. Ct. 1011, 39 L. Ed. 2d 147. * * * These misconceptions have been corrected. For example, the Court has “recognized that arbitral tribunals are readily capable of handling the factual and legal complexities of antitrust claims, notwithstanding the absence of judicial instruction and supervision” and that “there is no reason to assume at the outset that arbitrators will not follow the law.” McMahon, supra, at 232, 107 S. Ct. 2332, 96 L. Ed. 2d 185; Mitsubishi Motors Corp., 473 U.S., at 634, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (“We decline to indulge the presumption that the parties and arbitral body conducting a proceeding will be unable or unwilling to

retain competent, conscientious, and impartial arbitrators”). An arbitrator’s capacity to resolve complex questions of fact and law extends with equal force to discrimination claims brought under the ADEA.* * *10 514

Third, the Court in Gardner-Denver raised in a footnote a “further concern” regarding “the union’s exclusive control over the manner and extent to which an individual grievance is presented.” 415 U.S., at 58, n. 19, 94 S. Ct. 1011, 39 L. Ed. 2d 147. The Court suggested that in arbitration, as in the collective-bargaining process, a union may subordinate the interests of an individual employee to the collective interests of all employees in the bargaining unit. * * * We cannot rely on this judicial policy concern as a source of authority for introducing a qualification into the ADEA that is not found in its text. * * * Until Congress amends the ADEA to meet the conflict-of-interest concern identified in the GardnerDenver dicta, and seized on by respondents here, there is “no reason to color the lens through which the arbitration clause is read” simply because of an alleged conflict of interest between a union and its members. Mitsubishi Motors Corp., supra, at 628, 105 S. Ct. 3346, 87 L. Ed. 2d 444. This is a “battl[e] that should be fought among the political branches and the industry. Those parties should not seek to amend the statute by appeal to the Judicial Branch.” Barnhart v. Sigmon Coal Co., 534 U.S. 438, 462, 122 S. Ct. 941, 151 L. Ed. 2d 908 (2002). The conflict-of-interest argument also proves too much. Labor unions certainly balance the economic interests of some employees against the needs of the larger work force as they negotiate collective-bargain agreements and implement them on a daily basis. But this attribute of organized labor does not justify singling out an arbitration provision for disfavored treatment. *** In any event, Congress has accounted for this conflict of interest in several ways. As indicated above, the NLRA has been interpreted to impose a “duty of fair representation” on labor unions, which a union breaches “when its conduct toward a member of the bargaining unit is arbitrary, discriminatory, or in bad faith.” Marquez v. Screen Actors, 525 U.S. 33, 44, 119 S. Ct. 292, 142 L. Ed. 2d 242 (1998). This duty extends to “challenges leveled not only at a union’s contract administration and enforcement efforts but at its negotiation activities as well.” Beck, 487 U.S., at 743, 108 S. Ct. 2641, 101 L. Ed. 2d 634 (citation omitted). Thus, a union is subject to liability under the NLRA if it illegally discriminates against older workers in either the formation or governance of the collective-bargaining agreement, such as by deciding not to pursue a grievance on behalf of one of its members for discriminatory reasons. See Vaca v. Sipes, 386 U.S. 171, 177, 87 S. Ct. 903, 17 L. Ed. 2d 842 (1967) (describing the duty of fair representation as the “statutory obligation to serve the interests of all members without hostility or discrimination toward any, to exercise its discretion with complete good faith and honesty, and to avoid arbitrary conduct” (emphasis added)). Respondents in fact brought a fair representation suit against the Union based on its withdrawal of support 515

for their age-discrimination claims. Given this avenue that Congress has made available to redress a union’s violation of its duty to its members, it is particularly inappropriate to ask this Court to impose an artificial limitation on the collectivebargaining process. In addition, a union is subject to liability under the ADEA if the union itself discriminates against its members on the basis of age. See 29 U.S.C. § 623(d); see also 1 B. Lindemann & P. Grossman, Employment Discrimination Law 1575–1581 (4th ed. 2007) (explaining that a labor union may be held jointly liable with an employer under federal antidiscrimination laws for discriminating in the formation of a collective-bargaining agreement, knowingly acquiescing in the employer’s discrimination, or inducing the employer to discriminate); cf. Goodman v. Lukens Steel Co., 482 U.S. 656, 669, 107 S. Ct. 2617, 96 L. Ed. 2d 572 (1987). Union members may also file age-discrimination claims with the EEOC and the National Labor Relations Board, which may then seek judicial intervention under this Court’s precedent. See EEOC v. Waffle House, Inc., 534 U.S. 279, 295– 296, 122 S. Ct. 754, 151 L. Ed. 2d 755 (2002). In sum, Congress has provided remedies for the situation where a labor union is less than vigorous in defense of its members’ claims of discrimination under the ADEA. III *** Respondents also argue that the CBA operates as a substantive waiver of their ADEA rights because it not only precludes a federal lawsuit, but also allows the Union to block arbitration of these claims. Petitioners contest this characterization of the CBA, and offer record evidence suggesting that the Union has allowed respondents to continue with the arbitration even though the Union has declined to participate. But not only does this question require resolution of contested factual allegations, it was not fully briefed to this or any court and is not fairly encompassed within the question presented, see this Court’s Rule 14.1(a). Thus, although a substantive waiver of federally protected civil rights will not be upheld, see Mitsubishi Motors Corp., 473

U.S., at 637, and n. 19, 105 S. Ct. 3346, 87 L. Ed. 2d 444; Gilmer, 500 U.S., at 29, 111 S. Ct. 1647, 114 L. Ed. 2d 26, we are not positioned to resolve in the first instance whether the CBA allows the Union to prevent respondents from “effectively vindicating” their “federal statutory rights in the arbitral forum,” Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 90, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000). Resolution of this question at this juncture would be particularly inappropriate in light of our hesitation to invalidate arbitration agreements on the basis of speculation. See id., at 91, 121 S. Ct. 513, 148 L. Ed. 2d 373. 516

IV We hold that a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law. The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion. [Eds. The dissenting opinion of Justice Souter, joined in by Justices Stevens, Ginsburg and Breyer, is omitted.]

NOTES AND QUESTIONS 1. Can a Union Preclude Arbitration and Litigation? Does the Court indicate whether the grievants could pursue their claims in court if the union had not allowed them to pursue arbitration? What if the Union was willing to take the case to arbitration but only if the grievant or his counsel assumed the costs of the arbitration? 2. Was Gilmer a More Difficult Case? If an employer can unilaterally require an employee to agree to arbitration of statutory claims as a condition of employment, as Gilmer and its progeny hold, doesn’t it follow that an employer and a union can agree to require an employee to accept such a condition in a collective agreement? 3. Viability of Pyett Clauses? Are unions likely to agree to Pyett clauses? The parties in the Pyett litigation have negotiated a protocol for handling individual discrimination claims. See Stat. Supp. If unions will not agree to such clauses, can employers in unionrepresented environments negotiate Gilmer agreements directly with their employees? See ALPA v. Northwest Airlines Inc., 199 F.3d 477 (D.C. Cir. 1999) (holding pre-Pyett that Gilmer arbitration agreements need not be negotiated with collective bargaining agent) modified 211 F.3d 1312 (2000). But see Ann C. Hodges, Arbitration of Statutory Claims in the Unionized Workplace: Is Bargaining with the Union Required?, 16 Ohio St. J. Disp. Res. 513 (2001). 4. Election of Remedies Provisions. Would employers and unions be equally or better suited with an election of remedies provision requiring the employee-grievant to choose either his or her statutory forum or an arbitral forum? See Richardson v. Commission on Human Rights & Opportunities, 532 F.3d 114 (2d Cir. 2008). 517

B. RELATIONSHIPS AMONG FEDERAL AND STATE SYSTEMS 1. EFFECT OF STATE ADJUDICATION ON FEDERAL ACTIONS KREMER V. CHEMICAL CONSTRUCTION CORP. Supreme Court of the United States, 1982. 456 U.S. 461, 102 S.Ct. 1883, 72 L.Ed.2d 262.

JUSTICE WHITE delivered the opinion of the Court. As one of its first acts, Congress directed that all United States courts afford the same full faith and credit to state court judgments that would apply in the State’s own courts. Act of May 26, 1790, ch. 11, 1 Stat. 122, 28 U.S.C. § 1738. * * * The principal question presented by this case is whether Congress intended Title VII to supersede the principles of comity and repose embodied in § 1738. Specifically, we decide whether a federal court in a Title VII case should give preclusive effect to a decision of a state court upholding a state administrative agency’s rejection of an employment discrimination claim as meritless when the state court’s decision would be res judicata in the State’s own courts. I Petitioner Rubin Kremer emigrated from Poland in 1970 and was hired in 1973 by respondent Chemical Construction Corp. (Chemico) as an engineer. Two years later he was laid off, along with a number of other employees. Some of these employees were later rehired, but Kremer was not although he made several applications. In May 1976, Kremer filed a

discrimination charge with the Equal Employment Opportunity Commission (EEOC), asserting that his discharge and failure to be rehired were due to his national origin and Jewish faith. Because the EEOC may not consider a claim until a state agency having jurisdiction over employment discrimination complaints has had at least 60 days to resolve the matter, § 706(c), 42 U.S.C. § 2000e–5(c), the Commission referred Kremer’s charge to the New York State Division of Human Rights (NYHRD), the agency charged with enforcing the New York law prohibiting employment discrimination. N.Y.Exec.Law §§ 295(6), 296(1) (a) (McKinney 1972 and Supp.1981–1982). After investigating Kremer’s complaint, the NYHRD concluded that there was no probable cause to believe that Chemico had engaged in the discriminatory practices complained of. The NYHRD explicitly based its determination on the findings that Kremer was not rehired because one employee who was rehired had greater seniority, that another employee who was rehired filled a lesser position than that previously held by Kremer, and that neither Kremer’s creed nor age was a factor considered 518

in Chemico’s failure to rehire him. The NYHRD’s determination was upheld by its Appeal Board as “not arbitrary, capricious or an abuse of discretion.” Kremer again brought his complaint to the attention of the EEOC and also filed, on December 6, 1977, a petition with the Appellate Division of the New York Supreme Court to set aside the adverse administrative determination. On February 27, 1978, five justices of the Appellate Division unanimously affirmed the Appeal Board’s order. Kremer could have sought, but did not seek, review by the New York Court of Appeals. Subsequently, a District Director of the EEOC ruled that there was no reasonable cause to believe that the charge of discrimination was true and issued a right-to-sue notice. The District Director refused a request for reconsideration, noting that he had reviewed the case files and considered the EEOC’s disposition as “appropriate and correct in all respects.” [Eds. Kremer then brought a Title VII action in a federal district court claiming national origin and religious discrimination. The district court dismissed the action on grounds of res judicata and the court of appeals affirmed.] *** II Section 1738 requires federal courts to give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State from which the judgments emerged. Here the Appellate Division of the New York Supreme Court has issued a judgment affirming the decision of the NYHRD Appeals Board that the discharge and failure to rehire Kremer were not the product of the discrimination that he had alleged. There is no question that this judicial determination precludes Kremer from bringing “any other action, civil or criminal, based upon the same grievance” in the New York courts. N.Y.Exec.Law § 300 (McKinney 1972). By its terms, therefore, § 1738 would appear to preclude Kremer from relitigating the same question in federal court. Kremer offers two principal reasons why § 1738 does not bar this action. First, he suggests that in Title VII cases Congress intended that federal courts be relieved of their usual obligation to grant finality to state court decisions. Second, he urges that the New York administrative and judicial proceedings in this case were so deficient that they are not entitled to preclusive effect in federal courts and, in any event, the rejection of a state employment discrimination claim cannot by definition bar a Title VII action. * * * Allen v. McCurry, 449 U.S. 90, 99, 101 S.Ct. 411, 417, 66 L.Ed.2d 308 (1980), made clear that an exception to § 1738 will not be recognized unless a later statute contains an express or implied partial repeal. There is no claim here that Title VII expressly repealed § 1738; if there has been a partial repeal, it must be implied. “It is, of course, a cardinal principle of 519

statutory construction that repeals by implication are not favored,” Radzanower v. Touche Ross & Co., 426 U.S. 148, 154, 96 S.Ct. 1989, 1993, 48 L.Ed.2d 540 (1976); United States v. United Continental Tuna Corp., 425 U.S. 164, 168, 96 S.Ct. 1319, 1322, 47 L.Ed.2d 653 (1976), and whenever possible, statutes should be read consistently. * * * *** No provision of Title VII requires claimants to pursue in state court an unfavorable state administrative action, nor does the Act specify the weight a federal court should afford a final judgment by a state court if such a remedy is sought. While we have interpreted the “civil action” authorized to follow consideration by federal and state administrative agencies to be a “trial de novo,” Chandler v. Roudebush, 425 U.S. 840, 844–845, 96 S.Ct. 1949, 1951–52, 48 L.Ed.2d 416 (1976); Alexander v. GardnerDenver Co., [415 U.S. 36,] 38, 94 S.Ct. [1011,] 1015; McDonnell Douglas Corp. v. Green, [411 U.S. 792,] 798–799, 93 S.Ct. [1817,] 1822–1823, neither the statute nor our decisions indicate that the final judgment of a state court is subject to redetermination at such a trial. Similarly, the congressional directive that the EEOC should give “substantial weight” to findings

made in state proceedings, § 706(b), 42 U.S.C. § 2000e–5(b), indicates only the minimum level of deference the EEOC must afford all state determinations; it does not bar affording the greater preclusive effect which may be required by § 1738 if judicial action is involved.7 To suggest otherwise, to say that either the opportunity to bring a “civil action” or the “substantial weight” requirement implicitly repeals § 1738, is to prove far too much. For if that is so, even a full trial on the merits in state court would not bar a trial de novo in federal court and would not be entitled to more than “substantial weight” before the EEOC. The state courts would be placed on a one-way street; the finality of their decisions would depend on which side prevailed in a given case. *** Nothing in the legislative history of the 1964 Act suggests that Congress considered it necessary or desirable to provide an absolute right to relitigate in federal court an issue resolved by a state court. While striving to craft an optimal niche for the States in the overall enforcement scheme, the legislators did not envision full litigation of a single claim in 520

both state and federal forums. Indeed, the requirement of a trial de novo in federal district court following EEOC proceedings was added primarily to protect employers from overzealous enforcement by the EEOC. *** It is sufficiently clear that Congress, both in 1964 and 1972, though wary of assuming the adequacy of state employment discrimination remedies, did not intend to supplant such laws. We conclude that neither the statutory language nor the congressional debates suffice to repeal § 1738’s long-standing directive to federal courts. *** Finally, the comity and federalism interests embodied in § 1738 are not compromised by the application of res judicata and collateral estoppel in Title VII cases. Petitioner maintains that the decision of the Court of Appeals will deter claimants from seeking state court review of their claims ultimately leading to a deterioration in the quality of the state administrative process. On the contrary, stripping state court judgments of finality would be far more destructive to the quality of adjudication by lessening the incentive for full participation by the parties and for searching review by state officials. Depriving state judgments of finality not only would violate basic tenets of comity and federalism, Board of Regents v. Tomanio, 446 U.S. 478, 488, 491– 492, 100 S.Ct. 1790, 1797, 1798–99, 64 L.Ed.2d 440 (1980), but also would reduce the incentive for States to work towards effective and meaningful antidiscrimination systems. III The petitioner nevertheless contends that the judgment should not bar his Title VII action because the New York courts did not resolve the issue that the District Court must hear under Title VII—whether Kremer had suffered discriminatory treatment— and because the procedures provided were inadequate. Neither contention is persuasive. Although the claims presented to the NYHRD and subsequently reviewed by the Appellate Division were necessarily based on New York law, the alleged discriminatory acts are prohibited by both federal and state laws. The elements of a successful employment discrimination claim are virtually identical; petitioner could not succeed on a Title VII claim consistently with the judgment of the NYHRD that there is no reason to believe he was terminated or not rehired because of age or religion. The Appellate Division’s affirmance of the NYHRD’s dismissal necessarily decided that petitioner’s claim under New York law was meritless, and thus it also decided that a Title VII claim arising from the same events would be equally meritless. The more serious contention is that even though administrative proceedings and judicial review are legally sufficient to be given preclusive 521

effect in New York, they should be deemed so fundamentally flawed as to be denied recognition under § 1738. We have previously recognized that the judicially created doctrine of collateral estoppel does not apply when the party against whom the earlier decision is asserted did not have a “full and fair opportunity” to litigate the claim or issue. * * * Our previous decisions have not specified the source or defined the content of the requirement that the first adjudication offer a full and fair opportunity to litigate. But for present purposes, where we are bound by the statutory directive of § 1738, state proceedings need do no more than satisfy the minimum procedural requirements of the Fourteenth Amendment’s Due Process Clause in order to qualify for the full faith and credit guaranteed by federal law. It has long been established that § 1738 does not allow federal courts to employ their own rules of res judicata in determining the effect of state judgments. Rather, it goes beyond the common law and commands a federal court to accept the rules chosen by the State from which the judgment is

taken. *** We have little doubt that Kremer received all the process that was constitutionally required in rejecting his claim that he had been discriminatorily discharged contrary to the statute. * * * Under New York law, a claim of employment discrimination requires the NYHRD to investigate whether there is “probable cause” to believe that the complaint is true. Before this determination of probable cause is made, the claimant is entitled to a “full opportunity to present on the record, though informally, his charges against his employer or other respondent, including the right to submit all exhibits which he wishes to present and testimony of witnesses in addition to his own testimony.” State Div. of Human Rights v. New York State Drug Abuse Comm’n, 59 A.D.2d 332, 336, 399 N.Y.S.2d 541, 544 (1977). The complainant also is entitled to an opportunity “to rebut evidence submitted by or obtained from the respondent.” 9 N.Y.C.R.R. § 465.6 (1977). He may have an attorney assist him and may ask the division to issue subpoenas. 9 N.Y.C.R.R. § 465.12(c) (1977). If the investigation discloses probable cause and efforts at conciliation fail, the NYHRD must conduct a public hearing to determine the merits of the complaint. N.Y.Exec.Law § 297(4)(a) (McKinney Supp.1981–1982). A public hearing must also be held if the Human Rights Appeal Board finds “there has not been a full investigation and opportunity for the complainant to present his contentions and evidence, with a full record.” State Div. of Human Rights v. New York State Drug Abuse Comm’n, supra, at 337, 399 N.Y.S.2d, at 542–543. Finally, judicial review in the Appellate Division is available to assure that a claimant is not denied any of the procedural rights to which he was entitled and that the NYHRD’s determination was not arbitrary and capricious. 522

We have no hesitation in concluding that this panoply of procedures, complemented by administrative as well as judicial review, is sufficient under the Due Process Clause. JUSTICE BLACKMUN, with whom JUSTICES BRENNAN and MARSHALL join, dissenting. The Court purports to give preclusive effect to the New York court’s decision. But the Appellate Division made no finding one way or the other concerning the merits of petitioner’s discrimination claim. The NYHRD, not the New York court, dismissed petitioner’s complaint for lack of probable cause. In affirming, the court merely found that the agency’s decision was not arbitrary or capricious. Thus, although it claims to grant a state court decision preclusive effect, in fact the Court bars petitioner’s suit based on the state agency’s decision of no probable cause. The Court thereby disregards the express provisions of Title VII, for, as the Court acknowledges, Congress has decided that an adverse state agency decision will not prevent a complainant’s subsequent Title VII suit. *** * * * The lesson of the Court’s ruling is: An unsuccessful state discrimination complainant should not seek state judicial review. If a discrimination complainant pursues state judicial review and loses—a likely result given the deferential standard of review in state court—he forfeits his right to seek redress in a federal court. If, however, he simply bypasses the state courts, he can proceed to the EEOC and ultimately to federal court. Instead of a deferential review of an agency record, he will receive in federal court a de novo hearing accompanied by procedural aids such as broad discovery rules and the ability to subpoena witnesses. Thus, paradoxically, the Court effectively has eliminated state reviewing courts from the fight against discrimination in an entire class of cases. Consequently, the state courts will not have a chance to correct state agency errors when the agencies rule against discrimination victims, and the quality of state agency decisionmaking can only deteriorate. It is a perverse sort of comity that eliminates the reviewing function of state courts in the name of giving their decisions due respect. JUSTICE STEVENS, dissenting. Both the text of Title VII and its legislative history indicate that Congress intended the claimant to have at least one opportunity to prove his case in a de novo trial in court. Thus, while I agree with the Court that Title VII did not impliedly repeal § 1738, I cannot accept the Court’s construction of § 1738 in this case. In New York, as Justice Blackmun demonstrates, the judicial review is simply a part of the “proceedings” that are entitled to “substantial weight” under Title VII. 523

NOTES AND QUESTIONS 1. Collateral Estoppel or Res Judicata? Conventionally understood, the doctrine of collateral estoppel, or issue preclusion, requires that (i) the issue sought to be precluded in the later action is the same as the issue litigated in the prior action; (ii) the issue in the prior action was actually litigated in that action; (iii) the determination of the issue in the prior action was necessary to the judgment in that

action; and (iv) an identity of parties in both actions (although in many jurisdictions, the party asserting preclusion in the second action need not have been a party to the prior action). The related doctrine of res judicata, or claim preclusion, applies where (i) the claim sued upon in the second action is the same as in the first; (ii) the first action involved an adjudication on the merits; and (iii) there is an identity of parties. The latter doctrine differs from the former in its preclusive effect on an entire claim whether or not a particular issue or legal theory was actually litigated in the first action. See Restatement (Second) of Judgments §§ 18–19 & 27 (1982). Is it clear which of the two doctrines was applied in Kremer? 2. Section 1738 and State Claim Preclusion Law? If the Kremer decision involved only issue preclusion, is there reason to think that its holding that Title VII claims are not exempt from § 1738 does not apply to state claim preclusion law as well? Assume, for instance, that Kremer had appealed to state court only the New York agency’s rejection of his religion discrimination claim, without also appealing its rejection of his national origin discrimination claim. Assume further that under New York res judicata law Kremer then would have been precluded from later pressing a charge of national origin discrimination in state court. The Supreme Court two years after Kremer held that under § 1738 the doctrine of res judicata, or claim preclusion, applies to bar a § 1983 claim that could have been litigated in an earlier state court proceeding. See Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 104 S. Ct. 892, 79 L. Ed. 2d 56 (1984). Litigation on the merits in state court was a critical element in Migra. But cf. discussion below on University of Tennessee v. Elliott, 478 U.S. 788, 106 S. Ct. 3220, 92 L. Ed. 2d 635 (1986). 3. Plaintiff’s Dilemma. As argued by Justice Blackmun, under Kremer Title VII claimants might be wise to forgo the opportunity to seek state judicial review of an unfavorable state agency determination on the merits of their charge. Seeking such review might result in the sacrifice of any opportunity to have their Title VII claims adjudicated in court, as the type of state appellate review involved in that case might not include authority to exercise the state’s concurrent jurisdiction over Title VII claims at that stage. See Yellow Freight System, Inc. v. Donnelly, 494 U.S. 820, 110 S. Ct. 1566, 108 L. Ed. 2d 834 (1990). On the other hand, a direct action in a federal court, which presumably would lack authority to review the state agency determination, also might not seem fully satisfactory to claimants who lack access to private counsel and would prefer, at least initially, to convince the state agency to prosecute their claims. See also note 6 below. 4. Does “Due Process” Provide the Only Limit on the Effect of State Preclusion Law in Federal Court? The Kremer Court holds that “state 524 proceedings need do no more than satisfy the minimum procedural requirements of the Fourteenth Amendment’s Due Process Clause in order to qualify for the full faith and credit guaranteed by federal law.” Does this mean that so long as state administrative proceedings satisfy due process standards and are given some level of review in state court, those proceedings preclude litigation of Title VII claims in federal court if state law would preclude litigation in state court? Does a state court’s dismissal for lack of timeliness of a plaintiff’s appeal of an adverse administrative ruling preclude a timely Title VII action in federal court? See Bray v. New York Life Ins., 851 F.2d 60 (2d Cir. 1988) (federal court action precluded where state res judicata law would preclude state action after untimely filing), but see Cloverleaf Realty of New York, Inc. v. Town of Wawayanda, 572 F.3d 93 (2d Cir. 2009) (disagreeing with Bray). 5. Defendant Appeals to State Courts? In Kremer the Title VII claimant initiated the state court’s review of the state administrative findings. As the Court confirmed in University of Tennessee v. Elliott, 478 U.S. 788, 106 S. Ct. 3220, 92 L. Ed. 2d 635 (1986) (see note 7 below), Title VII complainants who are unsuccessful in state administrative proceedings can bypass their state judicial remedies and proceed directly to federal court to obtain a de novo trial. It is likely that in light of Kremer such complainants will choose this bypass, at least where state law does not offer de novo state court review. Consider, moreover, a case in which the defendant, before the plaintiff has had an opportunity to file in federal court, has successfully moved a state court to overturn a state administrative decision favorable to the plaintiff. If this reversal would bar consideration of a parallel Title VII claim in the state’s courts, given Kremer’s reasoning, is there any basis for not precluding consideration of the claim in federal courts as well? The lower courts have found none. See, e.g., Trujillo v. County of Santa Clara, 775 F.2d 1359 (9th Cir. 1985); Gonsalves v. Alpine Country Club, 727 F.2d 27 (1st Cir. 1984); Davis v. United States Steel Supply Corp., 688 F.2d 166 (3d Cir. 1982). Does Kremer, as so interpreted, also encourage discrimination complainants to take steps to avoid an appealable final state administrative decision before they can proceed to a full trial in federal court? Is such pro forma treatment of the system of deferral to state administrative remedies it consistent with congressional purpose in Title VII? 6. A Federal Common Law of Preclusion Based on Unreviewed State Administrative Proceedings. In University of Tennessee v. Elliott, cited in note 5 above, the Court held that unreviewed state administrative proceedings do not have a preclusive effect on Title VII claims. The Court stressed that § 1738 does not by its terms apply to administrative proceedings, and that § 706(b) of Title VII makes clear that Congress did not intend that unreviewed state agency determinations would receive preclusive effect either in EEOC proceedings or in federal court. However, the Elliott Court also held, as a matter of federal common law, that issues determined in a state trial-type agency proceeding could be given preclusive effect in a later § 1983 action in federal court. The Court pronounced a general principle that in the absence of contrary congressional intent “when a state agency ‘acting in a judicial capacity

525 * * * resolves disputed issues of fact properly before it which the parties have had an adequate opportunity to litigate,’ * * * federal courts must give the agency’s factfinding the same preclusive effect to which it would be entitled in the State’s courts.” 478 U.S. at 799, 106 S. Ct. at 3227. Presumably, Elliot does not affect cases where the state administrative agency merely investigates but does not engage in any adjudicatory process. The Elliott decision leaves open a series of questions: a. Are actions under other modern antidiscrimination laws precluded by unreviewed state administrative adjudications? In Astoria Federal Savings and Loan Ass’n v. Solimino, 501 U.S. 104, 111 S. Ct. 2166, 115 L. Ed. 2d 96 (1991), the Court held that unreviewed state administrative adjudications of ADEA claims do not have a preclusive effect on suits in federal court. b. If the state would not attach preclusive effect to the administrative proceeding, is it correct to assume that federal common law principles under Elliott do not require that such effect be given in the federal action? See Marrese v. American Acad. of Ortho. Surgeons, 470 U.S. 373, 105 S. Ct. 1327, 84 L. Ed. 2d 274 (1985) (leaving question open); Frazier v. King, 873 F.2d 820, 825 (5th Cir. 1989) (§ 1983 claim not precluded where state law does not recognize collateral estoppel doctrine). c. What constitutes an “adequate opportunity to litigate” a claim of discrimination in state administrative proceedings? Some courts have held that there should be no preclusion where the issues before the state administrative body were different, see Kelley v. TYK Refractories Co., 860 F.2d 1188, 1198 (3d Cir. 1988), or where the state administrative body could not provide the same remedies, see Frazier v. King, supra, at 824–25. The courts also have found the procedures in certain types of state agencies to be deficient. See Hill v. Coca Cola Bottling Co., 786 F.2d 550 (2d Cir. 1986) (action not precluded by findings of unemployment compensation board); Heller v. Ebb Auto Co., 308 Or. 1, 774 P.2d 1089 (1989) (same); Pizzuto v. Perdue Inc., 623 F. Supp. 1167 (D. Del. 1985) (court not bound by findings of state industrial accident board). Can there be any preclusion of the federal claim if the administrative agency lacked authority under state law to entertain a discrimination claim? See Carpenter v. Reed, 757 F.2d 218 (10th Cir. 1985) (record unclear whether board had authority under state law to consider discrimination claim). What if the state agency could not award federal statutory remedies? Note that the findings reached in the state administrative proceeding may not always receive preclusive effect under state law. d. Are parties who could have raised discrimination claims in state administrative proceedings, but did not do so, precluded from 526 raising the claim in federal court actions? Although the Court has held that claim preclusive effect may attach to a state judicial proceeding under § 1738, see Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 104 S. Ct. 892, 79 L. Ed. 2d 56 (1984), are there reasons for not construing the federal common law of preclusion to attach claim preclusive effect to unreviewed state administrative proceedings? 1

Title 42 U.S.C. § 1985(c) [42 USCS § 1985(3)], Rev.Stat. § 1980, provides: “If two or more persons in any State or Territory conspire or go in disguise on the highway or on the premises of another, for the purpose of depriving, either directly or indirectly, any person or class of persons of the equal protection of the laws; or of equal privileges and immunities under the laws; * * * in any case of conspiracy set forth in this section, if one or more persons engaged therein do, or cause to be done, any act in furtherance of the object of such conspiracy, whereby another is injured in his person or property, or deprived of having and exercising any right or privilege of a citizen of the United States, the party so injured or deprived may have an action for the recovery of damages occasioned by such injury or deprivation, against any one or more of the conspirators.” 4 His complaint also alleged, as a second cause of action, that his discharge was in retaliation for his efforts on behalf of equal employment opportunity, and thus violated § 704(a) of Title VII of the Civil Rights Act of 1964. * * * 5

As to the Title VII claim, the District Court held that Novotny was not a proper plaintiff under § 704(a).

6

The Court of Appeals ruled that Novotny had also stated a valid cause of action under Title VII. It held that § 704(a) applies to retaliation for both formal and informal actions taken to advance the purposes of the Act. That holding is not now before this Court. We note the relative narrowness of the specific issue before the Court. It is unnecessary for us to consider whether a plaintiff would have a cause of action under § 1985(3) where the defendant was not subject to suit under Title VII or a comparable statute. Cf. United States v. Johnson, 390 U.S. 563, 88 S.Ct. 1231, 20 L.Ed.2d 132. Nor do we think it necessary to consider whether § 1985(3) creates a remedy for statutory rights other than those fundamental rights derived from the Constitution. Cf. Griffin v. Breckenridge, 403 U.S. 88, 91 S.Ct. 1790, 29 L.Ed.2d 338. 2 Section 1 of the FAA provides that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. Sec. 1. Several amici curiae in support of Gilmer argue that that section excludes from the coverage of the FAA all “contracts of employment.” Gilmer, however, did not raise the issue in the courts below, it was not addressed there, and it was not among the questions presented in the petition for certiorari. In any event, it would be inappropriate to address the scope of the Sec. 1 exclusion because the arbitration clause being enforced here is not contained in a contract of employment. The FAA requires that the arbitration clause being enforced be in writing. See 9 U.S.C. Secs. 2, 3. The record before us does not show, and the parties do not contend, that Gilmer’s employment agreement with Interstate contained a written arbitration clause.

Rather, the arbitration clause at issue is in Gilmer’s securities registration application, which is a contract with the securities exchanges, not with Interstate. * * * Consequently, we leave for another day the issue raised by amici curiae. 3 In the recently enacted Older Workers Benefit Protection Act, Pub.L. 101–433, 104 Stat. 978, Congress amended the ADEA to provide that “an individual may not waive any right or claim under this Act unless the waiver is knowing and voluntary.” See Sec. 201. Congress also specified certain conditions that must be met in order for a waiver to be knowing and voluntary. Ibid. 4

Gilmer also contends that judicial review of arbitration decisions is too limited. We have stated, however, that “although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute” at issue. Shearson American Express Inc. v. McMahon, 482 U.S. 220, 232, 107 S.Ct. 2332, 2340, 96 L.Ed.2d 185 (1987). 1 Article V establishes the grievance process, which applies to all claims regardless of whether they are subject to arbitration under the CBA. Article VI establishes the procedures for arbitration and postarbitration judicial review, and, in particular, provides that the arbitrator “shall . . . decide all differences arising between the parties as to interpretation, application or performance of any part of this Agreement and such other issues as the parties are expressly required to arbitrate before him under the terms of this Agreement.” 10 Moreover, an arbitrator’s decision as to whether a unionized employee has been discriminated against on the basis of age in violation of the ADEA remains subject to judicial review under the FAA. 9 U.S.C. § 10(a). “[A]lthough judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute.” Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 232, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987). 7

EEOC review of discrimination charges previously rejected by state agencies would be pointless if the federal courts were bound by such agency decisions. Batiste v. Furnco Constr. Corp., 503 F.2d 447, 450, n. 1 (C.A.7 1974), cert. denied, 420 U.S. 928, 95 S.Ct. 1127, 43 L.Ed.2d 399 (1975). Nor is it plausible to suggest that Congress intended federal courts to be bound further by state administrative decisions than by decisions of the EEOC. Since it is settled that decisions by the EEOC do not preclude a trial de novo in federal court, it is clear that unreviewed administrative determinations by state agencies also should not preclude such review even if such a decision were to be afforded preclusive effect in a State’s own courts. Garner v. Giarrusso, 571 F.2d 1330 (C.A.5 1978); Batiste v. Furnco Constr. Corp., supra; Cooper v. Phillip Morris, Inc., 464 F.2d 9 (C.A.6 1972); Voutsis v. Union Carbide Corp., 452 F.2d 889 (C.A.2 1971), cert. denied, 406 U.S. 918, 92 S.Ct. 1768, 32 L.Ed.2d 117 (1972).