January 30, 2015

“Honest Belief” Defense Remains Unresolved In California

The California Supreme Court refused to decide whether the “honest belief” defense to discrimination and retaliation claims is valid under California law.  Instead, in Richey v. Autonation, Inc., the Court punted on the decision and found that an arbitrator’s underlying decision was based on “overwhelming” evidence of an employee’s misconduct and that the arbitrator’s application of the “honest belief” defense was “not prejudicial,” if error at all.  While underscoring the importance of well-crafted arbitration agreements, the decision leaves the lower courts free to reach inconsistent holdings on that important issue.

The “honest belief” defense – which I blogged about earlier – absolves employers of liability for discrimination or retaliation when an adverse decision about an employee is based on an honest, but mistaken belief about conduct by an employee’s misconduct.  The Richey case seemed like the perfect occasion to decide the viability of the rule.  In that case, an employee took leave under the California Family Rights Act (CFRA) for a back injury he suffered while moving furniture in his house.  Autonation’s CFRA policy prohibited Richey from working while on CFRA leave and it reminded him of that policy in a letter and asked him to call with any questions.  Richey never did that.  Instead, during his leave, he actively worked on opening a new restaurant.  Employees of Autonation who investigated the matter, observed Richey sweeping, hanging a sign with a hammer and working the front counter of this restaurant – physical activities which undermined the veracity of his claim that he needed leave for a back injury.   Autonation then terminated Richey based on its belief that he was working when he should not have been, despite the fact that he was on an approved CFRA leave.

Richey filed for arbitration of various claims, including a claim that Autonation violated the CFRA by terminating him before his CFRA leave expired.  The arbitrator reached two critical findings: (1) Autonation had an “”honest belief” that Richey violated its CFRA policy while working during an active leave; and (2)  there was “overwhelming” evidence that Richey was fired for “non-discriminatory reasons.”  Richey filed a motion to vacate the arbitrator’s award in court and he maintained that the arbitrator’s application of the “honest belief” defense was an incorrect legal standard.  The trial court confirmed the award, but the Court of Appeal agreed and vacated it.

The California Supreme Court, however, found unanimously that even if the arbitrator’s application of that rule was error, it was not sufficient to overturn an arbitrator’s award.  In the absence of an arbitration agreement which allows judicial review for “legal error,” the California Arbitration Act (CAA) only allows for review of an arbitral award in very narrow circumstances, such as when the arbitrator is “corrupt,” when he engages in “prejudicial misconduct,  when he exceeds his powers, or when the award is “procured by corruption, fraud or undue means.”  The Court recognized that the general rule is that arbitral awards cannot be reviewed for legal or factual errors, provided that an arbitrator issues a written decision that reveals the essential findings on which it is based and does not “ignore a statutory mandate.”

This was not such a case.  While the Court recognized that there is debated as to the validity of the “honest belief” defense in California, the evidence was clear in this case that Richey violated Autonation’s CFRA policy and, as a result, the validity or invalidity of that defense was irrelevant.  Stated otherwise, the arbitrator “would likely have made that finding [that Richey was properly terminated] regardless of the . . . employer’s honest belief.”

The Take-Away

So, what does this mean for California employers.  For one thing, employers will have to wait to see if the “honest belief” defense is validated under California law.  Federal courts deciding the issue under federal discrimination and retaliation laws have generally upheld the defense, though there are some decisions which have not.  But given the speed at which California courts move, it could well be another five years or more before this issue is resolved.  Until then, the lowers courts will be free to reach inconsistent decisions on the issue.

The most important takeaway for California employers is that arbitration agreements have to be checked to ensure that they do not allow for review by a court based on “legal error” or anything akin to that.  The value of arbitration (and the danger at times) is that arbitrator’s decisions can rarely, if ever, be challenged.   If an arbitration agreement allows courts to second-guess the arbitrator’s decision-making process, that significant benefit is lost.