Plaintiff worked as the Vice President and Western Regional International Manager of the Company, an insurance brokerage firm, from 1988 to 1993. He alleged that he had been hired under an implied contract, that he would not be discharged absent just cause. In 1993, he was terminated for having allegedly sexually harassed two employees.

The events leading to his termination began when an employee in plaintiff’s department reported to the Company’s Director of Human Resources that the plaintiff had been sexually harassing two female employees. The Human Resources Director interviewed both employees–who confirmed that they had been sexually harassed. Two days later, they furnished written statements to the Company stating that plaintiff had exposed himself and masturbated in their presence more than once and that he had made repeated obscene telephone calls to them at home. Higher-level company officials were then brought in and plaintiff was told of the accusations. At that point, the Company launched an investigation–eventually speaking to 21 witnesses–five of whom were suggested by plaintiff. Eventually the Company concluded that it was a question of credibility and determined that they believed the alleged victims, and not plaintiff. Plaintiff’s employment was then terminated, and the lawsuit filed.

At trial, plaintiff stated, for the first time, that he had engaged in consensual sexual relations with both of his accusers. He said that the claims of sexual harassment were an attempt by those accusers to “get even” with him after they discovered that he was “two-timing” them. Thus, plaintiff claimed that he had not engaged in the misconduct of which he was accused. Because he was “innocent” of the misconduct, plaintiff claimed that the Company could not have just cause for his discharge. His implied contract, he claimed, was the same as any other contract. Thus the incidents leading to his discharge must actually be found to be true, in order for there to be no breach by the Company.

The Company argued based on Pugh v. See’s Candies, Inc., 116 Cal.App.3d 311, 171 Cal. Rptr. 917 (1981), that the question for the jury was simply whether the Company had a good faith, honest belief that the incidents were true. This was the only question for the jury to decide–not whether the incidents actually happened. Siding with plaintiff, the trial court instructed the jury that it was to decide whether the incidents actually took place. In a special verdict, the jury concluded that plaintiff had not engaged in misconduct. The appeal resulted.

The Court of Appeal, relying on the standard in Pugh v. See’s Candies, Inc., supra, overturned the trial court. The Supreme Court then granted review.

The Supreme Court began its analysis by posing the question–”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?” [Note that the question is not restricted to sexual harassment but "misconduct" in general.] The Court answered that the jury’s role was to decide whether the employer acted with a fair and honest cause or reason, regulated by good faith–not to decide whether the misconduct actually happened.

In choosing this “middle road approach,” the Court recognized that breach of implied contract situations in the employment context were different than normal breach of contract situations. Indeed, the opinion is expressly limited to situations involving an alleged breach of an implied contract in the employment context. The Court specifically declined to comment on whether the standard would apply to breach of an express employment contract. The Court concluded that it was the “employer that decides whether acts of an employee amounting to just cause have occurred–and that the role of the jury is to assess, through the lens of an objective standard, the reasonableness of this decision under the circumstances known to the employer at the time it was made. . . .” In part, this was based on the Court’s recognition of 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. If an employer is required to have in hand a signed confession or an eyewitness account of the alleged misconduct before it can act, the workplace will be transformed into an adjudicatory arena and effective decision-making will be thwarted.”

At the same time, the Court recognized that employers cannot be permitted to act “arbitrarily.” The Court concluded that the “rule we endorse today, carefully framed as a jury instruction and honestly administered, will not only not have the effects plaintiff claims [i.e., allowing for arbitrary dismissal],” but by balancing the interests of both parties, will insure that “good cause” dismissals continue to be scrutinized by courts and juries under an objective standard, without infringing more than necessary on the freedom to make efficient business decisions.

Thus, the Court held that the “proper inquiry for the jury. . .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.’”

As to the investigation itself, the Court recognized that the wrongful discharge is “largely a creature of the common law.” Thus, the Court found that it would be “imprudent” to specify in detail the essentials of an adequate investigation–that this must be decided on a case by case basis. Such an investigation, however, requires a “fair procedure” but does “not compel formal proceedings with all the embellishments of a court trial. . .nor adherence to a single mode of process.” Instead, what is required, is to “afford a fair opportunity” for the employee to present his or her position.

The effect of this decision is a substantial one, especially as it makes the investigation itself much more important. Thus, a proper investigation is not only required in sexual harassment situations, but also in any misconduct situations where the plaintiff has the potential for alleging breach of an implied contract.

Silva began working for Lucky in 1966 as an entry-level clerk. In 1974, after intervening promotions, Silva was made a store manager. He continued to work as a store manager until 1994, when two female employees reported that he had sexually harassed them. After a month-long investigation, Lucky’s internal review board concluded that Silva had violated the store’s sexual harassment policy and procedures and terminated his employment.

Mr. Silva’s problems began when, on October 7, 1994 courtesy clerk Leticia Barajas was taking an unscheduled restroom break from her job of bagging groceries at Lucky’s. As she ran through the double doors into the back room, Silva was standing near the entrance to the hallway that led to the restrooms. Ms. Barajas told Silva to move. Instead of moving, Silva crouched down and grabbed her buttocks. He then left the area. As a result, Ms. Barajas called the Head Clerk, who contacted Human Resources.

That same day, an individual from Human Resources came to the store and interviewed Ms. Barajas – who described the incident to him. When asked if she had heard any other women complain, Ms. Barajas said that checker, Rochelle Saldana had told her that Silva “slapped her on the butt.” Human Resources then interviewed Ms. Saldana later that night. Saldana told him that several weeks earlier, Silva had slapped her buttocks while she was bending into a melon bin. When Ms. Saldana told Silva she could charge him with sexual harassment, Silva smiled, removed his name badge and said, “I’m not on the clock.”

Human Resources interviewed Silva about the allegations the next morning. Silva admitted that he had crouched down as if he was going to tackle Ms. Barajas as she ran to the restroom. However, he said she bumped into him. He did not remember where his hands were but he denied touching her “butt.” Silva told Human Resources he had “smacked” Ms. Saldana on the back or side of her leg six to eight weeks earlier. She was reaching into the watermelon bin and Silva thought she would fall in and hurt herself.

Human Resources interviewed other Lucky employees regarding the allegations of sexual harassment. Witnesses to the Barajas and Saldana incidents corroborated that the physical contact had occurred. After the interviews, Human Resources spoke with Silva a third time to elicit his comments and explanations regarding the events reported

At the completion of his investigation, Human Resources concluded in a written report that it was reasonable to assume that both the Barajas and Saldana incidents took place. The events were corroborated by witnesses and Silva conceded he had physical contact with both women although he asserted it was not of a sexual nature. Human Resources acknowledged that some employees felt Ms. Saldana and Ms. Barajas had ulterior motives.

Based on the investigation, Lucky Stores’ review board concluded that Silva had violated Lucky’s sexual harassment policy and procedures. He improperly touched female employees in the workplace, made inappropriate comments of a sexual or offensive nature, intimidated subordinate employees, and demonstrated a willful disregard for Company policy regarding sexual harassment. These actions violated company policies as well as Silva’s job responsibilities. Silva was terminated on for violation of company policy and procedure.

Silva then sued for, among other things, wrongful termination in breach of an implied contract. Finding no triable issues of fact, however, the Trial Court granted Summary judgment.

First, the Court found that Silva failed to introduce admissible evidence to rebut the Labor Code section 2922 presumption and raise a triable issue of material fact that his employment by Lucky was other than at-will.

Second, Silva failed to introduce admissible evidence sufficient to raise a triable issue of material fact that Lucky’s decision to terminate his employment based on violation of the company’s sexual harassment policy, was not within the legitimate scope of its managerial discretion. Silva appealed that decision.

On appeal the Court considered the impact of the Cotran decision—a decision that had issued only after summary judgment had been granted.

The Court stated that Cotran set forth a new standard for good cause in termination decisions. Three factual determinations are relevant to the question of employer liability:

(1) Did the employer act with good faith in making the decision to terminate?

(2) Did the decision follow an investigation that was appropriate under the circumstances? and

(3) Did the employer have reasonable grounds for believing the employee had engaged in the misconduct?

All of the elements of the Cotran standard are triable to the jury. However, if the facts are undisputed or admit of only one conclusion, then summary judgment may be entered on issues that otherwise would have been submitted to the jury.

As to good faith: The Court stated that Silva does not claim that Lucky had a wrongful motive in determining there was good cause to terminate his employment. Moreover, he conceded in the trial court that Lucky did not breach the implied covenant of good faith and fair dealing because it determined honestly and in good faith that good cause existed for his discharge. “Silva’s concession constitutes an admission that there is no triable issue regarding Lucky’s good faith under the first element of the Cotran standard.”

As to an appropriate investigation: The Court stated that Cotran did not delineate the earmarks of an appropriate investigation but noted that investigative fairness contemplates listening to both sides and providing employees a fair opportunity to present their position and to correct or contradict relevant statements prejudicial to their case, without the procedural formalities of a trial. The Court then reviewed this investigation with the Cotran standards in mind.

First, the Court reviewed Lucky’s policies– “treat complaints seriously, investigate immediately, treat the matter confidentially, conduct interviews in a private area, listen to the allegations and make complete notes, attempt to identify all persons involved as well as possible witnesses, and interview the accused employee”.

Second, the Court reviewed (in detail) the investigation that the Human Resources had conducted. Third, the Court reviewed the conclusions reached as a result of the investigation. The Court summarized:

Lucky’s evidence demonstrates an appropriate investigation under the circumstances. Lucky utilized an uninvolved human resources representative, to investigate the charges. He had been trained by in-house counsel on how to conduct an investigation. He investigated the complaints promptly and memorialized his findings on Lucky’s witness interview forms. He had important witnesses provide their own written statement regarding the events at issue.

He asked relevant, open-ended, nonleading questions. He attempted to elicit facts as opposed to opinions or supposition. He maintained confidentiality by conducting a number of interviews off the store premises or by telephone. He encouraged those he interviewed to page him if they wanted to talk with him again. The record does not indicate how he determined which independent employees to interview. Apparently, various employee witnesses gave him additional names of persons who might provide pertinent information. His notes indicate those interviewed were generally happy with their jobs, i.e., they were not disgruntled employees.

Moreover, he notified Silva of the charges promptly and afforded him an opportunity to present his version of the incidents. He encouraged Silva to call him if he wanted to talk with him again and Silva called him the next day to provide more information.

He provided the critical witnesses with an opportunity to clarify, correct or challenge information provided by other witnesses which was contrary to their statements or which cast doubt on their credibility. After interviewing all the other witnesses, He gave Silva a final opportunity to comment on the information he had gathered. As such, Lucky’s investigation of the sexual harassment allegations meets Cotran’s fairness requirements. Lucky listened to both sides, advised Silva of the charges and provided him with ample opportunity to present his position and to correct or contradict relevant statements prejudicial to his case.

Silva, however, contended that there were triable issues of fact regarding the appropriateness of the investigation. He claimed that “the evidence shows that Lucky failed to interview key people, ignored substantial exculpatory evidence and was swayed by rumor, gossip and innuendo.” Reviewing each contention, the Court concluded that:

“None of Silva’s evidence raises a triable issue regarding the appropriateness of Lucky’s investigation under the Cotran standard. While the investigation was not perfect, it was appropriate given that it was conducted ‘under the exigencies of the workaday world and without benefit of the slow-moving machinery of a contested trial.’ ”

As to the objective reasonableness of Lucky’s factual determination of misconduct:

As a preliminary matter, the Court recognized that “Silva does not contend that Lucky’s reasons for terminating his employment were trivial, arbitrary, unrelated to business needs or pretextual.” Instead, “Silva conceded he was terminated for violation of Lucky’s policies and procedures, following an investigation of reports by two subordinate female employees that he had sexually harassed them. He also conceded that sexual harassment by a store manager of subordinate female employees constituted good cause to terminate the manager.”

Thus, the Court held, “the issue presented is whether Silva raised a triable issue of fact as to whether Lucky’s determination that he engaged in the alleged sexual harassment constituted a reasoned conclusion supported by substantial evidence. We find no triable issue of material fact for this Cotran element.

Ms. Barajas’ and Ms. Saldana’s reported conduct by Silva undisputedly constituted sexual harassment under Lucky’s policy. Both incidents were witnessed by other employees who corroborated that the conduct occurred. Silva admitted he had physical contact with both women, but denied its sexual nature. A number of other employees told the investigator that Silva engaged in conduct—sexual innuendo, suggestive comments, physical contact–which violated Lucky’s sexual harassment policy. These reports constitute substantial evidence which supports Lucky’s conclusion that Silva engaged in the sexual harassment of which he was accused.” Thus, summary judgment was affirmed.

As the Court stated, “Shortly after plaintiff anesthesiologist and defendant a surgeon engaged in an altercation over the wisdom of proceeding with a particular surgery, defendant medical group terminated plaintiff’s employment. The trial court non-suited plaintiff’s claims that defendants discharged him in violation of Cal. Bus. & Prof. Code § 2056. The jury determined that defendant breached its oral employment agreement with plaintiff, and both sides appealed.”

The Medical group claimed that the trial court had improperly failed to allow BAJI No. 10.37 in its instruction to the jury. BAJI 10.37 states that an employer is not liable for wrongful termination if it has an honest, but mistaken belief that discharge was required.

The Appellate Court held that the instruction was applicable to actions for breach of an implied contract. However, that was not the action brought by Khajavi here. Instead, his was an action for breach of a contract having a specified term—2 years. Thus, it was brought under Labor Code § 2924.

That section provides that a contract having a specified term may only be terminated for the employee’s willful breach of duty, habitual neglect of duty, or continued incapacity to perform. Allowing a termination of a contract for a specified term, for an honest, but mistaken belief, would treat a contract for a specified term no better than an implied contract. Thus, there would be no benefit to having a contract for a specified term. An employer could terminate an employee prior to the end of the contractual term even if the employee had complied with the terms of the contract. Thus, BAJI 10.37 did not apply.

The Court of Appeal held that a retrial was necessary in the case of a gay nurse who was fired after his employer investigated his claim that his supervisor (also gay) sexually harassed him. The jury had awarded him $238,328 in damages. The Court held that the trial court had provided improper jury instructions. Based on the California Supreme Court’s decision in Harris v. City of Santa Monica, 56 Cal. 4th 203 (2013), the jury should have been asked to decide whether the employee’s harassment complaint was a “substantial motivating factor”—not just “a motivating factor”—for the hospital firing him. Important here is what the Court said about the internal investigation.

In 1990, Mendoza was hired as a staff nurse by Western Medical Center Santa. By 2010, he was a supervisor for the overnight shift and occasionally worked as the house supervisor (in charge of the hospital). When he served as the house supervisor, Erdmann was his supervisor. In October 2010, Mendoza reported to the hospital that Erdmann was sexually harassing him.

“The gist of Mendoza’s accusation was that Erdmann, on numerous occasions, harassed Mendoza on the job with inappropriate comments (e.g., ‘I know you want me in your ass’), physical contact (e.g., Erdmann blowing air in Mendoza’s ear), and lewd displays (e.g., Erdmann showing his genitals to Mendoza). According to Mendoza’s testimony, this behavior began in August 2010 with words and culminated in October with Erdmann exposing himself.”

The Medical Center conducted an investigation. Both men were interviewed together and no other interviews took place. Erdmann claimed that he was a reluctant participant in conduct initiated by Mendoza. That “Mendoza consented to Erdmann’s conduct and participated in other mutual interactions (e.g., Mendoza would bend over provocatively in front of Erdmann, Mendoza requested that Erdmann display his genitals, Mendoza assisted Erdmann in exposing his genitals).”

As a result, the hospital believed Erdmann’s version of the incidents and fired both employees for “unprofessional conduct.” The decision-makers concluded that both Mendoza and Erdman “were complicit inappropriate in unprofessional behavior.”

Mendoza filed a lawsuit against the hospital claiming, among other things, wrongful termination in violation of public policy.

During the trial, Mendoza presented expert testimony about the investigation. The expert opined about the poor quality of the investigation:

The individual charged with completing the investigation was not a trained Human Resources employee but instead the supervisor of Erdmann and Mendoza.

• Defendants did not prepare a formal investigation plan;
• No written statements were taken from either party;
• The hospital did not immediately interview Erdmann;
• The investigation was suspended while Mendoza missed work for several weeks following a bicycle accident;
• When Mendoza returned to work, both men were interviewed together;
• No one else was interviewed (including coworkers who might have had insights as to the credibility of the parties);

Despite its ruling on the jury instructions, for technical reasons, the court also explored whether there was sufficient evidence in the record for the jury to conclude that a substantial motivating reason for Mendoza’s firing was his report of sexual harassment. Ultimately, the court found that there was sufficient evidence. In part this was based on “Mendoza’s expert witness [who] testified that there were numerous shortcomings in the investigation conducted by defendants following Mendoza’s complaint.” The court cited Nazir v. United Airlines, Inc., 178 Cal.App.4th 243, 278-283 (2009) for the proposition that an “inadequate investigation is evidence of pretext.”

“The lack of a rigorous investigation by defendants is evidence suggesting that defendants did not value the discovery of the truth so much as a way to clean up the mess that was uncovered when Mendoza made his complaint.”