I.

INTRODUCTION

As employers receive and investigate an ever-increasing number of internal sexual harassment complaints, they face a corresponding increase in the risk of charges made by the accused harasser that he or she was unfairly treated in the course of the investigation and/or unfairly disciplined at the conclusion of that investigation. Indeed, we have witnessed a dramatic rise in lawsuits filed against employers by accused harassers terminated as the result of their employer’s internal investigation and determination that they engaged in the alleged sexual harassment.

This article, focuses on the accused in sexual harassment charges. The materials are divided into three sections. First, we set forth the employer’s legal burden of proving misconduct as part of its internal investigation. Second, we provide a step-by-step guide on how to conduct an internal investigation in a manner that will best achieve that legal standard. Finally, we discuss how to best defend a lawsuit brought against the employer by the accused harasser who has been terminated.

A.

An Employer’s Burden Of Proving Misconduct As Part Of An Internal Investigation

For most employers deciding whether to terminate an employee for alleged misconduct, "proving" in the judicial sense of the word (i.e., by establishing "beyond a reasonable doubt" or with a "preponderance of the evidence") that the misconduct actually occurred is neither practical nor plausible. Employers conducting internal investigations generally do not have the resources, time or experience to conduct the kind of extended discovery that occurs in litigation. Fortunately, the majority of courts recognize that imposing judicial-like burdens of proof on employers making decisions in the workplace is not legally required. The same courts agree, however, that an employer’s investigation and decision must be judged by some standard to ensure that its actions are not arbitrary, capricious or illegal.

The standard adopted by most jurisdictions for judging an employer’s decision to terminate an employee for alleged misconduct derives from the notion of "good cause." The standard can be paraphrased as follows: in order for an employer to terminate an individual for alleged misconduct, the employer must make a good faith determination that sufficient cause existed based on reasonable grounds.

The rationale behind this standard is best explained by the California Supreme Court’s decision in Cotran v. Rollins Hudig Hall International, Inc. The plaintiff, Ralph Cotran, was employed by Rollins Hudig Hall International, Inc., an insurance brokerage firm, as a senior vice president in charge of its west coast operations. In 1993, the firm received reports that Cotran was sexually harassing two female employees. The company's director of human resources investigated the reports. In separate interviews that they subsequently reduced to written statements, both women relayed a number of similar incidents, including allegations that Cotran had made obscene phone calls to them at home and work, exposed himself to them while in the office, and masturbated when he was alone with them in his car. The president of the company later met with Cotran to discuss the allegations. He explained that an investigation would be made and that its outcome would turn on credibility. Cotran denied the accusations. He said nothing during the meeting about having had consensual affairs with the two women and could not explain the basis for the complaints. Following the meeting, Cotran was suspended pending further investigation.

The company’s internal investigation lasted approximately two weeks. During this time, the employer interviewed more than 20 witnesses, including five that Cotran suggested. The company concluded that the two women appeared credible. Although no other employees accused Cotran of harassing them while at Rollins, two female employees stated that they had also received strange phone calls from Cotran. The two women who brought the complaints signed affidavits repeating the details in their original, unsigned statements. Based on the information gathered during the investigation, and the company’s credibility assessment, the company concluded that it was "more likely than not" that the harassment had occurred and terminated Cotran.

Cotran sued Rollins for wrongful discharge. He claimed that the company had impliedly agreed to discharge him only for just cause and that the company did not have cause since he did not harass anyone. Cotran claimed that he had consensual sexual relationships with the two accusers. He said that he had not disclosed this during the company’s internal investigation because he felt "ambushed." The trial court rejected Rollins’ defense that its decision was lawful because it had been reached honestly and in good faith. The court instructed the jury, "What is at issue here 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 jury found that Cotran had not engaged in any of the behavior on which his termination was based, and awarded him $1.78 million in damages.

On appeal, Rollins Hudig Hall argued that the jury verdict was improper because the jury should have been instructed that an employer who terminates an employee for misconduct need not prove the misconduct actually occurred. Rather, the firm argued, an employer need only reasonably and in good faith believe that the employee engaged in conduct that was inappropriate in the workplace. The California Supreme Court agreed and overturned the jury verdict. Relying on decisions from California and other states that define "just cause," the court ruled that "good cause" for termination does not depend on a jury finding that the fired employee actually engaged in the misconduct, but merely requires that the employer act with "a fair and honest cause or reason, regulated by good faith." To require the employer to be correct about the facts would interfere with the wide latitude an employer needs to make decisions involving high-ranking employees. The court stated:

Wrongful termination cases prior to Cotran have articulated similar standards for judging an employer’s decision to terminate an employee for misconduct. The only apparent distinction in the standards articulated by these cases is semantic. That is to say, some capture the objective arm of the standard with a phrase different from "reasonable grounds." For example, in one case, a district court uses the phrases "substantial evidence," and "credible support," and in another, the court uses the phrase "reasonable basis." All these cases agree that the employer need not be certain that the misconduct occurred in order to act.

As noted in Cotran, the "reasonable grounds" standard is an objective one. Furthermore, there is no set formula for evaluation so determining whether the employer’s decision was based on "reasonable grounds" must be evaluated on a case-by-case basis.

In evaluating whether an employer had reasonable grounds for terminating an employee for misconduct, the primary focus will be on the quality of the employer’s

investigation of the allegations. Based on the New Mexico Supreme Court’s early decision in Kestenbaum v. Pennzoil, it is clear that merely initiating and carrying out an internal investigation is not enough. Pennzoil investigated charges of sexual harassment against Kestenbaum by interviewing past and present female employees and giving him an opportunity to rebut the allegations. The court determined, however, that the investigation could not support a finding that Pennzoil acted on reasonable grounds in dismissing Kestenbaum for alleged sexual harassment. First, the court found the investigation deficient because investigators failed to "differentiate between firsthand knowledge, attributed hearsay, or mere gossip or rumor." Furthermore, the court found Pennzoil’s investigators did not observe the standards of good investigative practice and that Pennzoil made no efforts to evaluate how the investigation was handled. Thus, in conducting an internal investigation, employers must adhere to a policy of good investigative practices and take time to adequately review the credibility and weight given to the evidence gathered.

A successful internal investigation is illustrated by Maietta v. United Parcel Services Inc. The plaintiff in Maietta was one of 15 employees terminated for integrity violations, including allegedly falsifying and directing other employees to falsify production records. The terminations were a direct result of a district-wide investigation initiated by UPS. The internal UPS investigators interviewed over 70 UPS management- and supervisory-level employees over a one-month period. Employees were interviewed separately at an off-site location to ensure confidentiality. Employees also were asked to sign written statements based on their interviews. The investigation file developed on the plaintiff contained allegations from a number of sources implicating him in wrongdoing and signed statements from two employees directly implicating him in integrity violations. The plaintiff was interviewed and confronted with the allegations, which he denied. After reviewing his investigation file, interview statement, and the statements of the two employees, the district manager decided to terminate him. The court found that UPS’s investigation supported "a good faith determination that good cause existed to discharge Maietta as a matter of law."

As noted earlier, when an employee challenges an employer’s decision to terminate for alleged misconduct under a contract or statutory theory, the quality of the employer’s investigation into the alleged misconduct becomes the key issue. A growing number of cases by employees terminated for alleged misconduct actually assert negligent investigation as a distinct cause of action against employers. The case law on such claims is not well developed, but such claims are potentially viable. For example, in Chase v. Weight, et al., the district court denied the defendant’s motion to dismiss a claim of negligent investigation for failure to state a claim on which relief can be granted. Just months earlier, in a more lengthy discussion, an Arizona federal court reasoned that the public policy prohibition against sexual harassment in the workplace and the requirement that an employer investigate allegations of sexual harassment promptly creates an obligation that protects both the complainant and the accused. Furthermore, the court stated the duty to investigate could also be implied from the common law duty to use care to avoid or prevent injury to individuals. The court went on to state in dicta that an employer’s incorrect conclusion that an employee engaged in sexual harassment does not necessitate the conclusion that the employer’s investigation was inadequate. Thus, even if an employee can prove successfully that his employer incorrectly determined he engaged in misconduct, he will need to show something more to sustain a negligent investigation claim.

Defamation is also often claimed by employees terminated for alleged misconduct. Specifically, they claim the employer’s false accusations defamed them. Most jurisdictions maintain that an employer has a qualified privilege to make statements about employees in the workplace if the statements are made: (1) in good faith; (2) on a subject that the party communicating the information has an interest; and (3) to individuals having a corresponding interest.²⁰ The employee cannot prevail merely by showing that the statements were actually false; rather, the employee must show that the employer or investigator made them with malice — knowledge or reckless disregard as to the truth or falsity of the statements. While the malice standard uses different terminology from the good faith/reasonable grounds standard, it essentially holds an employer to a similar level of scrutiny. That is to say, employers need not prove that the allegations of misconduct are true. An employer can prevail by showing good faith in making the communication. This good faith is established by showing that the allegations were based on an adequate investigation.²¹ Certainly the best way to avoid these claims is to limit disclosure of allegations made and evidence gathered during the investigation strictly to those individuals with a legitimate need to know.

The majority of the cases surveyed indicate that, in order to justifiably terminate an employee for misconduct, an employer need not prove that an employee actually engaged in misconduct. Rather, the employer need only make a good faith determination that good cause existed based on reasonable grounds. Reasonable grounds is analogous to a "reasonable basis," and/or a "reasonable investigation," and needs to be supported by "credible support" or "substantial evidence."

An organization that wants to ensure that its investigations are carried out in good faith and that all determinations are supported by objectively reasonable grounds should at minimum:

• Develop and implement thorough investigation procedures;
• Identify and train all individuals who may carry out an internal investigation;
• Require thorough and complete documentation of the investigative process; and
• Ensure that the investigation contains:
  • Thorough interviews of the complainant, accused, and necessary witnesses;
  • Analysis of all relevant evidence;
  • Assessment of the credibility of the witnesses and strength of the evidence; and
  • A rational and defensible conclusion.

Summary Checklist

A.

Your Initial Meeting With The Employee Raising The Issue

1. Be sure the person raising the issue is comfortable with your handling any investigation.
2. When conducting your initial interview, get the facts - who, what, when, where, how, and why.

B.

Determining If A Formal Investigation Is Necessary

1. Will a single answer resolve the issue?
2. Are other employees involved?
3. Do you need more facts than the employee is able to provide?
4. Do you need the help of any other resource in order to reach a conclusion?

C.

Determining The Nature Of An Issue Before Initiating A Formal Investigation

1. Identify what the employee is complaining about (e.g., which company policy, guideline or procedure). Decide who else is necessary to assist you in resolving the issue.
2. Determine what the organization's obligation is with respect to resolving the issue.
3. Decide who else is necessary to assist you in resolving the issue.

D.

Planning The Investigation

1. Determine what policies, guidelines or practices apply to this situation.
2. Obtain all relevant documents that will assist you in conducting your investigation.
3. Determine who is suited to conduct this investigation.
4. Decide who you should interview.
5. Decide the order of your interviewees.
6. Determine if any interim actions are necessary before you initiate the investigation.
7. Outline the questions you will ask.

E.

Conducting The Investigation

1. Anticipate the questions that each of your interviewees will ask.
2. Before you begin the interview, be prepared to explain what you are investigating, why the interviewee is being interviewed and how the information obtained will be used.
3. Remember to stress that no conclusion has yet been reached.
4. Be sure to emphasize your organization's policy regarding confidentiality and reprisal.

F.

Conducting An Effective Interview

1. Give the person who is the focus of the investigation a detailed account of the claim.
2. Obtain the interviewee's detailed account of the events surrounding the claim.
3. Get as much information as possible from the interviewee.
a) Understand what policy or guideline forms the basis of the issue.
b) Understand what facts are necessary to reach a conclusion.
4. Use effective techniques for asking questions.
a) Draft a preliminary list of questions you want to ask.
b) Save unfriendly or embarrassing questions until the end of the interview.
c) Don't begin with hostile or tough questions.
d) Start with "broad" questions.
e) Do not put words into the interviewee's mouth.
f) Ask the tough questions.
g) Go beyond your pre-planned questions.
h) Ask questions designed to elicit relevant facts.
i) Ask who, what, when, where, why, and how type questions.

G.

Before Closing The Interview

1. Relate the seriousness of the investigation.
2. Remind the interviewee of the confidentiality of the investigation.
3. Ask if there is anyone else you should talk to.
4. Review the interviewee's answers with the interviewee.
5. Encourage the interviewee to come back with any additional information and/or documents.

H.

Assessing Credibility

1. Make notes that will help assess credibility as soon as the interviewee leaves.
2. Review the interviewee's chronology of events.
3. Note the interviewee's demeanor.
4. What, if any, admissions were made during the interview?
5. Did the interviewee deny anything?
6. Were conflicting statements made?
7. Was the interviewee's explanation plausible?

I.

Making A Recommendation After Completing Your Analysis

1. Were any of the employer's policies, guidelines or practices violated?
2. Is the violation serious or minor?
3. Do any local, state, or federal laws require you to take certain actions?
4. What is the employee's history at your organization regarding length of employment, prior complaints and/or problems, performance, etc.?
5. What, if any, factors would mitigate against instituting discipline in this case?
6. Follow-up as appropriate.

J.

Complying With The Employer's Policies Regarding Documentation

1. Review the documentation guidelines to be sure you have documented your investigation properly.
2. Distribute your findings and conclusions to appropriate people pursuant to your company's guidelines.
3. Be sure that the "personnel files" of the employee raising the issue and the employee who was the focus of the issue are appropriately documented.

K.

Utilizing And Consulting With Counsel

1. Should in-house counsel be consulted?
2. Will in-house counsel's role be as counselor or active investigator?
3. Should outside counsel be consulted?
4. Make a decision on attorney-client privilege and work product privilege.

TABLE 2

Attorney for Defendant and Cross-Complainant
ABC COMPANY, INC.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF SAN FRANCISCO

JOHN SMITH, Plaintiff, vs. ABC COMPANY, INC., AND DOES 1 THROUGH X, Defendants.	No. _________ CROSS-COMPLAINT FOR EQUITABLE INDEMNITY, BREACH OF CONTRACT AND BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
ABC COMPANY, INC., Cross-Complainant, vs. JOHN SMITH, AND ROES 1 THROUGH 10, inclusive, Cross-Defendants.

CROSS-COMPLAINANT ABC COMPANY, INC., ("ABC"), for causes of action against CROSS-DEFENDANT JOHN SMITH ("SMITH"), and CROSS-DEFENDANTS ROES ONE THROUGH TEN, inclusive ("ROE CROSS-DEFENDANTS"), alleges as follows:

1. ABC is a corporation duly organized and existing under the laws of the State of California, and having its principal place of business in San Francisco, California.

2. ABC is informed and believes, and thereon alleges, that SMITH resides in the State of California in the County of San Francisco.

3. At all relevant times, SMITH was employed by ABC in its San Francisco headquarters, located in the State of California in the County of San Francisco. SMITH was employed by ABC from April 1, 1989 until the time of his termination on September 1, 1997.

4. The true names and capacities, whether individual, corporate, associate or otherwise, of ROE CROSS-DEFENDANTS are presently unknown to ABC, and for that reason those ROE CROSS-DEFENDANTS are sued by such fictitious names. ABC is informed and believes, and thereon alleges, that each of the ROE CROSS-DEFENDANTS is in some way responsible for the damages alleged herein. ABC will seek leave of this Court to amend its complaint when the true names and capacities of said ROE CROSS-DEFENDANTS are known.

5. ABC is informed and believes, and thereon alleges, that at all times relevant hereto CROSS-DEFENDANTS were each acting as an agent, servant, or representative of each of said other CROSS-DEFENDANTS, were at all times mentioned herein acting within the course and scope of said agency, servitude or representation, and that all acts of said CROSS-DEFENDANTS and each of them, were authorized, directed and ratified by each of the remaining CROSS-DEFENDANTS.

6. The claims of ABC and SMITH arise out of the same transaction and determination of those claims in one proceeding is necessary and appropriate in order to avoid the multiplicity of actions that would result if ABC is required to defend SMITH’S claims and then bring a separate action against SMITH for indemnification of sums that ABC was compelled to pay as the result of damages it sustained due to SMITH’s unlawful conduct.

7. On or about July 1, 1997, JANE DOE ("DOE"), an employee at ABC’s San Francisco facility, complained to her supervisor that she had been sexually harassed by SMITH.

8. ABC immediately initiated an in-depth investigation into DOE’S allegations. During the investigation, ABC was informed by DOE and other female co-workers that they had been sexually harassed by SMITH.

9. ABC also interviewed SMITH. During the interview, SMITH acknowledged that he was aware of and understood ABC’S sexual harassment policy. Initially, SMITH vehemently denied engaging in any inappropriate conduct whatsoever. When confronted with the allegations of his female co-workers, SMITH acknowledged encounters with female co-workers, but claimed that they were consensual.

10. At the completion of the investigation, ABC concluded that SMITH had engaged in egregious behavior constituting sexual harassment. ABC determined that SMITH had made unwelcome and inappropriate sexual comments to female co-workers on several occasions. Further, ABC determined that SMITH engaged in unwelcome and inappropriate touching of three female co-workers.

11. On September 1, 1997, ABC terminated SMITH’S employment. The termination was premised on SMITH’S intentional violation of ABC’S sexual harassment policy which created a hostile and offensive work environment for SMITH’S co-workers.

12. DOE alleged that SMITH’S sexual harassment violated the California Fair Employment and Housing Act. DOE further alleged that she sustained serious emotional injuries as a result of SMITH’S sexual harassment and threatened to file a lawsuit against ABC.

13. As a result of SMITH’S unlawful conduct, ABC was compelled to enter into a settlement of DOE’S claims. In consideration for ABC’S payment of an amount in excess of this court’s jurisdiction, DOE agreed to release all her claims against ABC.

14. ABC realleges and incorporates herein by this reference each and every allegation set forth above in Paragraphs 1 through 13, inclusive.

15. ABC was compelled to settle DOE’S claims because of SMITH’S unlawful sexual harassment of DOE. Responsibility for these damages is entirely the responsibility of SMITH.

16. As a result, SMITH is obligated to fully indemnify ABC for the entire amount that ABC paid to DOE in settlement of her claims.

17. ABC desires a judicial determination of SMITH’S liability for DOE’S damages and a declaration of SMITH’S obligation to indemnify ABC for the all payments made to DOE in settlement of her claims.

18. As a direct and proximate result of SMITH’S unlawful conduct, ABC has been injured in an amount which is presently unascertainable, but which is in excess of the minimum jurisdiction of this Court. When the precise amount of these damages has been ascertained, ABC will seek leave of Court to amend this Complaint to reflect the amount of those damages.

19. ABC realleges and incorporates herein by this reference each and every allegation set forth above in Paragraphs 1 through 18, inclusive.

20. On April 1, 1989, ABC and SMITH entered into an implied employment agreement. SMITH was employed by ABC pursuant to this implied employment agreement until his employment was terminated on September 1, 1997.

21. ABC duly performed all terms and conditions precedent required of it under the above-referenced employment agreement, and was therefore entitled to performance by SMITH under the agreement.

22. SMITH breached his employment agreement with ABC by sexually harassing his female co-workers in direct contravention of ABC’S express policy prohibiting sexual harassment in the workplace.

23. As a direct and proximate result of SMITH’S breach of the above-referenced agreement, ABC has been injured in an amount which is presently unascertainable, but which is in excess of the minimum jurisdiction of this Court. When the precise amount of these damages has been ascertained, ABC will seek leave of Court to amend this Complaint to reflect the amount of those damages.

24. ABC realleges and incorporates herein by this reference each and every allegation set forth in Paragraphs 1 through 23, inclusive.

25. As set forth above, an implied employment agreement existed between ABC and SMITH. As part of the employment agreement, SMITH promised to abide by ABC’S express prohibition of sexual harassment.

26. This employment agreement contained an implied covenant of good faith and fair dealing, by which SMITH promised to give full performance required by the terms and conditions of the agreement, and to refrain from doing any act which would prevent or impede ABC from performing all the conditions of the agreement to be performed by ABC, or any act which would prevent or impede ABC’S enjoyment of the anticipated benefits of said agreement. Specifically, this agreement, through the covenant of good faith and fair dealing, required SMITH to fairly, honestly and reasonably perform the terms and conditions of the agreements.

27. SMITH intended to deprive ABC of the enjoyment of the anticipated benefits under said agreement, and by his conduct in breach of this agreement did in fact deprive ABC of the benefits thereunder.

28. Defendant SMITH’S denial of his obligations were performed in bad faith with the intent to frustrate the exercise of ABC’S rights under the aforementioned employment agreements.

29. As a direct and proximate result of SMITH’S breach of the implied covenant of good faith and fair dealing contained in the above-referenced agreements, ABC has been injured in an amount which is presently unascertainable, but which is in excess of the minimum jurisdiction of this Court.

WHEREFORE, CROSS-COMPLAINANT ABC COMPANY, INC. prays judgment against JOHN SMITH as follows:

1. For a judicial determination of SMITH’S responsibility for the damages claimed by JANE DOE resulting from SMITH’S sexual harassment;

2. For a declaration of the amount that SMITH is obligated to indemnify ABC for the sums it paid in settlement of claims against it resulting from SMITH’S unlawful conduct;

3. For costs of suit herein incurred; and

4. For such other and further relief as the Court may deem proper.

Dated: August 4, 1998