MoFo News Item

Supreme Court Holds That a Reasonable Good Faith Belief That an Employee Engaged in Misconduct Is Sufficient Grounds for a Good Cause Termination

In a landmark decision, the California Supreme Court settled a dispute in lower courts on the standard for courts and juries to apply in determining whether an employer had good cause for terminating an employee for misconduct. In Cotran v. Rollins Hudig Hall International, Inc., 1998 Cal. LEXIS 1 (January 5, 1998), the Supreme Court joined the majority of other jurisdictions in holding that good cause existed for terminating an employee for misconduct if an employer had a reasonable and good faith belief that the employee engaged in misconduct. The employer does not have to convince the court or jury that the employee in fact committed the misconduct, only that the employer honestly believed that the employee engaged in misconduct based upon substantial evidence obtained through an adequate investigation that included a fair opportunity for the employee to respond to the charges. This ruling has important implications for how employers conduct investigations of alleged employee misconduct and make termination decisions.

Case Background

In January 1988, Rollins Hudig Hall International, Inc. (Rollins), hired Ralph Cotran as senior vice-president and western regional international manager. He held that position until 1993 when he was fired for sexual harassment.

The events leading to Mr. Cotran's termination began in March 1993 when an employee in the international department reported to the director of human resources at Rollins, Deborah Redmond, that Mr. Cotran was sexually harassing two other employees, Carrie Dolce and Shari Pickett. This prompted an investigation by the company which involved the following sequence of events:
  • Interviews with and Statements Provided by the Accusers: Ms. Redmond conducted separate interviews with Ms. Dolce and Ms. Pickett. Each of the women was asked whether she was harassed. Both said yes, identifying Mr. Cotran as the harasser. Two days after the interviews, both women provided statements to Ms. Redmond stating that Mr. Cotran had exposed himself and masturbated in their presence more than once and had made repeated obscene telephone calls to them at home.
  • Notification of Responsible Company Officials Including Upper Management: Ms. Redmond provided copies of these statements to the company's equal employment opportunity (EEO) office and to the company president, Fred Feldman.
  • Meeting with the Accused Employee: Mr. Feldman arranged for a meeting with Mr. Cotran in the presence of a number of company EEO officials. At this meeting, Mr. Feldman reviewed with Mr. Cotran the accusations made against him by Ms. Dolce and Ms. Pickett. He further explained how the company was planning to investigate these charges and that ultimately its outcome would turn on credibility. Mr. Cotran offered no explanation for the accusations. Significantly, he said nothing during the meeting about having had consensual relations with either of his accusers, an argument he subsequently made at trial. Pending completion of the investigation, Mr. Feldman suspended Mr. Cotran.
  • Interviews: Over the next two weeks, the company's EEO office interviewed twenty-one people who had worked with Mr. Cotran. Included in this number were five employees Mr. Cotran had requested be interviewed. These interviews failed to turn up anyone else who accused Mr. Cotran of harassment at Rollins. One of the employees Mr. Cotran had requested be interviewed, however, told the investigators that she had received a "strange" early morning phone call from Mr. Cotran which was not for any business purpose. Another employee, Gail Morris, stated in her interview that Mr. Cotran had made obscene phone calls to her when they both worked for another company, soon after a sexual relationship between the two had ended. The investigation confirmed that Mr. Cotran had telephoned Ms. Dolce and Ms. Pickett at home.
  • Sworn Statements by the Accused: In April 1993, Ms. Dolce and Ms. Pickett signed sworn affidavits reciting in detail the charges made against Mr. Cotran in their original statements. In addition, Ms. Morris also provided the investigator with a sworn statement.

The investigator concluded that it was more likely than not the harassment had occurred. She based her conclusion on her assessment of the credibility of Ms. Dolce and Ms. Pickett, and the fact that no one she interviewed had said that it was "impossible" to believe that Mr. Cotran had committed the alleged sexual harassment. The investigator met with Mr. Feldman and the head of the EEO office and presented to them her conclusions as well as the sworn affidavits of Ms. Dolce, Ms. Pickett and Ms. Morris. Upon review of this information, Mr. Feldman fired Mr. Cotran on April 23, 1993. Mr. Cotran sued Rollins for breach of an implied contract of employment alleging that Rollins lacked good cause for terminating him.

At trial, Mr. Cotran presented evidence that he had a consensual sexual relationship with both of his accusers. He further presented evidence suggesting that one of his accusers was seeking to use the investigation to obtain a substantial raise in pay from him. Mr. Cotran testified at trial that he had not disclosed this information to Feldman during their interview because he was upset, "frightened," and "felt ambushed."

The jury was instructed to determine whether Rollins had established that Mr. Cotran in fact committed the alleged acts of sexual harassment and that it was not important whether Rollins in good faith believed that Mr. Cotran had committed these acts. The jury found that Mr. Cotran had not committed the acts of which he was accused and returned a verdict in his favor in the amount of $1.78 million. Rollins appealed from the judgment entered on the verdict. The Court of Appeals reversed, finding that the instructions to the jury were improper. The Supreme Court upheld by the Court of Appeals decision.

The Court's Analysis

The Supreme Court held that the proper inquiry for the jury in an employee misconduct case 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 Court further defined the term "good cause" as a "reasoned conclusion … supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond."

Central to the Supreme Court's ruling was the recognition that any workable formulation of good cause needed to strike a balance between an employer's need to have sufficient latitude to operate its business efficiently and profitably, and the employee's interest in continued employment. The trial court's instruction requiring the jury to determine whether an alleged misconduct had in fact occurred placed the jury in the position of reexamining and questioning the facts on which the employer relied, and thereby unreasonably interfered with the employer's ability to operate its business. On the other hand, the Court reasoned that the employee's interest in continued employment was protected by an objective standard that required the employer to make an honest decision reasonably based upon substantial evidence after an adequate investigation with a chance for the employee to respond.

Implications For Employers

Cotran has many lessons on how to conduct an investigation of alleged wrongdoing by an employee but also leaves many unanswered questions. These lessons and questions include:

Reasonableness of Investigation
While absolved of the burden of having to prove in court that alleged misconduct in fact occurred, the employer has the burden of establishing that the investigation it conducted was reasonable under the circumstances and adequate. The significance of this burden should not be underestimated. Undoubtedly, the focus in misconduct lawsuits will now turn to whether the employer spoke with all the people it reasonably should have, whether it looked at all the documents it reasonably should have, … etc. The Supreme Court has not provided detailed guidance on how thorough or lengthy an investigation must be. It has left that judgment to employers and jurors based on their assessment of what seems reasonable under the circumstances.

Meeting with the Employee
While the Supreme Court refused to specify in full detail the essentials of an adequate investigation, the Court specifically required that such an investigation would include notifying an employee of the charges made against him or her, and affording the employee a fair opportunity to respond. The employer should make sure to follow-up on the employee's response, including meeting with persons identified as having relevant knowledge. It may be additionally helpful for the employer to inform the employee of how it proposes to proceed with its investigation. Subsequent meetings with the employee may be warranted if new facts come to light to which the employee must respond. In his concurring opinion, Justice Mosk emphasized that giving the employee an opportunity to respond should not be a sham to justify a decision already made.

Documentation of Investigation
Every stage of the investigation should be documented. This includes charges made by the accusing employee, the response provided by the accused employee, and information provided by other witnesses with relevant information. This documentation may be in the form of statements prepared by the employees themselves or notes taken or memoranda prepared by the investigator.

Apart from documenting the findings of the investigation, the employer should document its reasoning for taking a particular course of action in view of the information known to it at the conclusion of its investigation. The reasons for an employee's termination or other action taken by the employer should be accurate, factual and forthrightly described. Consider whether your reasons would be convincing to a third party, i.e., to a jury. Would a "reasonable" employer find that the employee committed the charged misconduct based on all the evidence before it? If not, rethink your decision. Also, if you are unable to articulate the factual reasons for your decision, this is good reason to rethink your decision.

Assessment of Credibility
Many investigations will ultimately end in an assessment of credibility--often of the accuser against the accused. You should be able to articulate a reasoned assessment of credibility. Why did you believe one side over the other? Are these reasons based upon facts? The document setting forth the grounds for termination or other action should include a discussion of credibility.

Legal Advice
Legal counsel may be involved in various stages of an investigation, starting with how an employer should proceed with an investigation and concluding with how it should respond to the findings of an investigation. The employer will have to balance the benefits of preserving the attorney-client privilege if counsel conducts the investigation, against its ability to establish the reasonableness of its investigation. In other words, does the employer keep secret its decision making process by using counsel and asserting the attorney-client privilege, or does it show that it acted reasonably either by not using counsel for the investigation or by revealing the work of its counsel? These choices should be considered before-hand. The employer should be prepared for the possibility that if legal counsel conducts an investigation, he or she may have to testify at trial and alternate counsel will have to represent the employer.

Confidentiality/Privacy Concerns
The duty to notify the alleged wrongdoer of the charges may conflict with concerns about the privacy or confidentiality of the employees who complain or provide information during the investigation. For example, an employee who fears retaliation may be reluctant to speak up unless he is assured that his identity will not be revealed to the alleged wrongdoer. However, the duty to give the accused employee notice and a fair opportunity to respond may require disclosing the identity of the accuser so the alleged wrongdoer can provide information about that person's credibility. There is not a clear-cut answer whether the identity of accusers needs to be made known, and it may be advisable to consult counsel.

Substantial Evidence
As indicated, a key element of the Supreme Court's test of good cause is whether the employer's decision is supported by substantial evidence. What does that mean? How much evidence is "substantial evidence"? Justice Mosk pointed out in his concurring opinion that this standard does not mean just "any" evidence. "The ultimate determination is whether a reasonable employer would have found that an employee committed the charged misconduct based on all the evidence before it." To demonstrate the existence of substantial evidence, it may be helpful to create a chart or form listing the reasons for the termination and the items of evidence supporting each reason.

The Supreme Court has issued a decision which should make summary judgment easier to obtain in misconduct cases by clarifying the standard to be used and by overturning a prior case which had often been used to defeat summary judgment when the employee denied the misconduct. However, obtaining summary judgment will only be possible when the employer has conducted a thorough, well-documented investigation.

For more information about our practice, please see our Employment and Labor page.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.





Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.