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Court of Appeal, Second District, Division 1, California.

Ralph COTRAN, Plaintiff and Respondent, v. ROLLINS HUDIG HALL INTERNATIONAL, INC., et al., Defendants and Appellants.

No. B092285.

Decided: September 26, 1996

Shand S. Stephens, Margaret L. Parker, Littler, Mendelson, Fastiff, Tichy & Mathiason, Steven B. Berlin, Douglas D. Mandell and Robert T. Landau, San Francisco, for Defendants and Appellants. Thomas Kallay and Richard Knickerbocker, Los Angeles, for Plaintiff and Respondent.

 In this wrongful termination action tried solely on a breach of contract theory, we hold that the critical issue was whether the employer reasonably and in good faith believed that the terminated employee had sexually harassed other employees, not whether such harassment actually occurred.   Because the jury was instructed that termination was improper unless the jury was satisfied that sexual harassment actually occurred, we reverse a verdict rendered in favor of the employee and remand for a new trial.


The Employment Contract

In 1987, Rollins Hudig Hall International, Inc. (RHH) recruited Ralph Cotran, a vice president at a competing firm, to head the new international department at RHH's West Coast office.   Although the position promised an increase in stature, responsibility and salary for Cotran, he was concerned the change would be too “risky” because other brokerage houses had fired managers when international business did not prove as lucrative as anticipated.   For this reason, Cotran had three demands—a contract, a high salary, and “assurances [that] in the event that the international department did not work out, [he] would still have permanent employment with the company.”

There were telephone conferences and meetings and letters from Cotran to RHH, with Cotran sticking by his demands and, ultimately, a formal offer from RHH in which Cotran's proposed salary and benefit package were described and the following response was offered to address Cotran's concerns:  “[RHH] is committed to the development of our international business․   We expect you to make this happen and are prepared to provide you with the necessary tools, including staff, when warranted.   We recognize this will not happen overnight and that it could take [three] or more years for [RHH] to become a factor on the West Coast.   If, for some unforeseen reason, this should not happen and we decide to move away from this position, other opportunities in our organization will be made available to you.”

On this basis, Cotran began working for RHH in January 1988, as Senior Vice President and Western Regional International Manager.   For the reasons explained below, he was terminated in 1993.1

The Sexual Harassment Allegations

In March 1993, an employee in RHH's international department reported to Deborah Redmond, RHH's Director of Human Resources, that Cotran was sexually harassing two other employees, Carrie Dolce and Shari Pickett.   On March 24, Redmond called both women to her office and, in separate interviews, asked if they had been harassed.   Both women said yes, and both identified Cotran as the one doing the harassing.   On March 26, Dolce and Pickett gave written statements to Redmond and Redmond, in turn, sent copies to the RHH Equal Employment Opportunity Department (EEO) in Chicago.2

The Investigation

Cotran's supervisor, Fred Feldman, was contacted by RHH's EEO department and given copies of Dolce's and Pickett's statements.   Initially, Feldman did not believe the charges but he was required to and did follow up.   Cotran was invited to a meeting at RHH's Chicago office (with Feldman, Bob Hurvitz, an RHH lawyer and head of its EEO department, and Susan Held, RHH's manager of EEO compliance), where Feldman explained to Cotran that Dolce and Pickett had accused him of exposing himself in the office, masturbating in the car, and making obscene phone calls.   Cotran denied everything.   Feldman said there would be an investigation and explained that it was going to be a question of credibility.   Held read the Dolce and Pickett statements to Cotran, asked Cotran for the names of people he wanted her to interview, and explained how the investigation would proceed.   At no time during this meeting did Cotran say anything about having consensual intimate relations with either Dolce or Pickett.

Cotran was suspended pending resolution of the investigation, and given the opportunity to explain his absence as he saw fit (e.g., vacation, family problems or whatever).   The investigation lasted about two weeks, during which time Held interviewed 21 people who worked with Cotran, including the five people Cotran asked her to interview.   Pickett and Dolce related the incidents described in their written statements, and both women appeared credible to Held.   No one else told Held they had been harassed by Cotran at RHH.  However, an RHH account executive (Gail Morris) reported that Cotran had made obscene phone calls to her when they both worked for another company, after an intimate relationship between them had ended.   Susan Randall, one of the individuals Cotran had asked Held to interview, told Held that Cotran was a “perfect gentleman,” but then called Held back and related “a strange early morning phone call” she had received from Cotran which “was not for any business purpose.”   Randall said she “couldn't figure out what [Cotran] wanted, ․ yelled at him, told him to leave her alone, and never call her in the middle of the night again.”   From phone records, Held confirmed that Cotran had called Pickett and Dolce at home.   In April 1993, Dolce and Pickett signed affidavits under penalty of perjury, each of which recited in detail the charges made in their original written statements (fn.2, ante ).

Based on her assessment of Pickett's and Dolce's credibility, on the fact that no one said it was “impossible” to believe that Cotran committed the offensive acts, and on her extensive investigation, Held concluded that it was more likely than not that sexual harassment had occurred.   Held met with Feldman and Hurvitz, presented her conclusions, and gave Feldman copies of Dolce's and Pickett's affidavits.   Gail Morris had also given Held an affidavit, and it too was given to Feldman.3

Based on the information gathered during the investigation, Feldman decided to and did terminate Cotran.

The Evidence at Trial

Cotran sued RHH and the case went to trial in January 1995.   Although Cotran had originally pled six causes of action, the only one actually tried was his claim for damages for breach of an implied contract.

At trial, Cotran testified that he met Dolce in December 1990 when she was working at RHH on a temporary basis.   After she left RHH, Dolce called Cotran and said she wanted to get together socially.   Although Dolce was married and Cotran “didn't want any problems,” they had lunch several times.   Dolce asked Cotran for a job as a temporary secretary in his department and, ultimately, he agreed.   Dolce started work at the end of February and became a full time employee in April.   In May, Cotran and Dolce began an on-again, off-again intimate relationship (depending upon whether Dolce was separated from her husband or reunited with him), which continued through February 1993.   According to Cotran, they had sex between six and ten times, first at Cotran's house, three times in a hotel room Cotran reserved for their lunch hour, and several times in the showers at a health club.   Cotran produced credit card receipts from the hotel for rooms rented during this period of time.

As to Pickett, Cotran testified that he had a brief relationship with her, from January to April 1992.   Cotran's mother testified that in January 1992, while she was staying with her son, Pickett came to Cotran's house, visited for about half an hour, then left with Cotran (who took pillows and a blanket with him).   When Cotran returned two hours later, he told his mother he had been to his nearby empty condominium.   Cotran testified that this was the first time he had sexual relations with Pickett.   Marc Aboujade (Cotran's Tae Kwon Do training partner) testified that he met Pickett at Cotran's house in February 1992.   According to Cotran, he and Pickett had sex that night (and on other occasions they too had sex in the shower at the health club and at the hotel).   This relationship ended because Cotran “was not really attracted” to Pickett and she started seeing someone else (the son of RHH's chief financial officer).

Cotran testified that in February 1992, he met his wife-to-be, Melissa.   In June, they began a sexual relationship.   In July, Melissa moved in with Cotran—but (according to Cotran) he continued to have sex with Dolce (twice in the health club showers), but not with Pickett.   Cotran married Melissa in October 1993.   Cotran presented other evidence suggesting that Dolce had been “flirtatious” with him in the presence of others, that what she was really after was a raise, and that both Dolce and Pickett were mad at him because the women had become friends and learned that they both were sleeping with Cotran.

RHH called Dolce as a witness, and she testified in detail about the incidents at the office and in the car, and the obscene phone calls described in her statement and affidavit.   Although Dolce had not told anyone at RHH about these incidents at the time they happened, she did tell her friend Patricia Estrin, and Estrin corroborated Dolce's testimony at trial.   In late October or early November 1992, Dolce discovered that Cotran had been “doing exactly the same thing[s]” to Pickett.   Dolce testified she never had sex with Cotran, never went to his house, and was never with him in a hotel room.   Pickett also testified about the incidents described in her statement and affidavit, and the obscene phone calls, and she too denied that she had ever had sexual relations with Cotran, and testified that she had never been to his house.   Employees involved in RHH's investigation of these charges testified about the investigation.

The Instructions and the Verdict

From the outset, RHH's theory of the case turned on its good faith belief at the time it terminated Cotran's employment, not on whether the acts of sexual harassment actually occurred.   Cotran repeatedly objected, however, and the trial court repeatedly rejected RHH's theory.4  At the conclusion of trial, the jury was instructed (1) that Cotran's conduct, if it occurred, would constitute good cause for termination;  (2) that the jury “must decide whether [Cotran] engaged in any of the conduct alleged; ”  and (3) that in determining the issue of “good cause,” the jury should consider whether Cotran's termination was “based on a fair and honest cause or reason,” balancing “the employer's interest in operating [its] business efficiently and profitably with the interest of the employee in maintaining [his] employment.”   The trial court refused to give RHH's proposed instruction, which would have (among other things) told the jury that it must not substitute its opinion for that of the employer.

By special verdict, the jury was asked whether Cotran “engaged in any of the behavior on which RHH based its decision to terminate [his] employment,” to which the answer was “no.”   That left only the question of the “present cash value” of Cotran's loss of compensation, which the jury fixed at $1,783,549.   RHH appeals from the judgment thereafter entered.5


RHH contends (1) the trial court improperly ruled as a matter of law that there existed an implied contract that Cotran's employment could not be terminated without “good cause,” (2) the jury was improperly instructed that good cause to terminate Cotran existed if, and only if, Cotran had actually engaged in the specified acts of sexual harassment, (3) certain evidence was improperly excluded, and (4) the award of damages was based upon inadmissible and speculative evidence.   We agree with RHH on the first three issues, which means the case must be retried, and we therefore do not reach the damages issue.


Before the case was submitted to the jury, the trial court stated its view that Cotran had “a contract for life,” refused to consider the presumption of at-will employment created by Labor Code section 2922, and found that “the evidence establishes as a matter of law the contract that existed between [Cotran] and [RHH] was one for a term that did not specify duration;  however the parties referred to that as a life or career term, and one wherein [RHH] could terminate only for good cause.”   RHH contends this was error, and we agree.

 The statutory presumption is that an employment having no specified term may be terminated at the will of either party on notice to the other.  (Lab.Code, § 2922.)   Although that presumption may be rebutted by evidence of an express or implied agreement to limit the employer's power to terminate the employee only for good cause (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 677–680, 254 Cal.Rptr. 211, 765 P.2d 373), the presumption itself is evidence disproving the existence of an implied contract.   What this means is that where there is no formal written contract of employment, the existence of an implied contract to discharge only for good cause is a question of fact for the jury—and this is so even where the statutory presumption is the only evidence suggesting the employment was at will.  (Haycock v. Hughes Aircraft Co. (1994) 22 Cal.App.4th 1473, 1490–1491, 28 Cal.Rptr.2d 248.)

Contrary to Cotran's reading of the record, this issue was not submitted to the jury in this case.   Although the jury was instructed that Cotran had the burden of proving that he could only be terminated for good cause, the trial court's ruling that, “as a matter of law,” Cotran could be terminated only for good cause was followed by the court's modification of the special verdict form so that the question, “Do you find there existed an implied contract not to terminate but for good cause?” was deleted.   Clearly, this was error.   (Haycock v. Hughes Aircraft Co., supra, 22 Cal.App.4th at pp. 1490–1495, 28 Cal.Rptr.2d 248.)   In light of our conclusion in Part II, post, that prejudicial instructional error requires a new trial, we need not decide whether the alteration of the verdict form, by itself, would have required a reversal.   On remand, however, the issue must be submitted to the jury.


RHH contends that, assuming there existed a contract to terminate Cotran only for good cause, the jury should have been instructed that RHH's “good cause” did not depend upon a jury finding that Cotran had, in fact, sexually harassed the women.6  Instead, RHH contends (as it did in the trial court), that the question should have been whether RHH had a “fair and honest” or “good faith” belief that Cotran had harassed Dolce and Pickett.   The trial court rejected RHH's argument, concluded that RHH had to prove that Cotran actually did the things that resulted in his termination, and that RHH's good faith belief about what Cotran did or didn't do was not at issue, and the jury was so instructed.   Although support for the trial court's view can be found in Wilkerson v. Wells Fargo Bank (1989) 212 Cal.App.3d 1217, 261 Cal.Rptr. 185, we do not believe that approach is proper.


 “Good cause” to terminate does not require perfect certainty of the underlying facts.   An employer acts with good cause when it acts with “ ‘a fair and honest cause or reason, regulated by good faith․’   Care must be taken, however, not to interfere with the legitimate exercise of managerial discretion.”  (Pugh v. See's Candies, Inc. (1981) 116 Cal.App.3d 311, 330, 171 Cal.Rptr. 917 (Pugh I ).)   Where the employee occupies a sensitive management or confidential position, the employer must of necessity be allowed substantial scope for the exercise of subjective judgment.   (Ibid.;  see also Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 467, 46 Cal.Rptr.2d 427, 904 P.2d 834;  Stokes v. Dole Nut Co. (1995) 41 Cal.App.4th 285, 293, 48 Cal.Rptr.2d 673;  Walker v. Blue Cross of California (1992) 4 Cal.App.4th 985, 994, 6 Cal.Rptr.2d 184;  Moore v. May Dept. Stores Co. (1990) 222 Cal.App.3d 836, 839–840, 271 Cal.Rptr. 841.)


In Pugh v. See's Candies, Inc. (1988) 203 Cal.App.3d 743, 767–768, 250 Cal.Rptr. 195 (Pugh II ), Division Three of the First District held that, in a case tried on a breach of contract theory, the employer's declaration that the employee was discharged for unsatisfactory work is subject to judicial review, and is a question of fact for the jury.   In Pugh II, the employer's declared “good cause” for termination was a lengthy history of unsatisfactory performance at a management level.   In that context (and in affirming a judgment in favor of the employer), the court held that “[t]he employer does not ․ have a right to make an arbitrary or unreasonable decision about terminating an employee when there is a contract to terminate only for good cause.   In deciding whether the employee's termination was for ‘a fair and honest cause or reason regulated by the good faith of the employer,’ the jury ․ scrutinize[s] the employer's business judgment and determines whether the discharge was justified under all the circumstances.   If the reasons advanced by the employer for the discharge are trivial, capricious, unrelated to business needs or goals, or pretextual, the jury may properly find that the stated reason for termination was not a ‘fair and honest cause or reason’ regulated by good faith.   In this sense, the employer does not have an unfettered right to exercise discretion in the guise of business judgment.”   (Id. at pp. 769–770, 250 Cal.Rptr. 195.)

The court warned, however, that in “any free enterprise system, an employer must have wide latitude in making independent, good faith judgments about high-ranking employees without the threat of a jury second-guessing its business judgment.   Measuring the effective performance of such an employee involves the consideration of many intangible attributes such as personality, initiative, ability to function as part of the management team and to motivate subordinates, and the ability to conceptualize and effectuate management style and goals.   Unlike the employee with routine or mechanical duties whose performance can be measured by an objective standard, a management employee's unsatisfactory performance is often difficult to pinpoint precisely, and the reasons for his or her discharge may be difficult to articulate.  [Citations.]   Although the jury must assess the legitimacy of the employer's decision to discharge, it should not be thrust into a managerial role.”  (Pugh II, supra, 203 Cal.App.3d at p. 769, 250 Cal.Rptr. 195.)

 We think the Pugh court would agree with us that ours is an a fortiori case—that where, as here, the employer's evaluation of an employee's conduct must take into account not merely his ability to motivate subordinates or otherwise demonstrate an effective management style, but the probability that he has sexually harassed at least two female employees and demonstrated a penchant for more of the same conduct (or worse) in the future, the employer's good faith judgment that there exists good cause for termination should be given great weight.


In Wilkerson v. Wells Fargo Bank, supra, 212 Cal.App.3d 1217, 261 Cal.Rptr. 185, Division Three of our court reversed a summary judgment in a wrongful termination case prosecuted (in part) on a breach of contract theory.   According to the employer, the employee in Wilkerson was terminated because of specific irregularities—accepting a gift in violation of the Bank's policy and approving an overdraft for his personal gain.  (Id. at p. 1222, 261 Cal.Rptr. 185.)   According to Division Three, the summary judgment was improperly granted because the evidence created a triable issue of fact as to whether the employee's conduct “constituted good cause for termination, and whether the Bank complied with its own policies and acted in good faith.”   (Id. at p. 1229, 261 Cal.Rptr. 185.)   More specifically, Division Three said the “Bank's defense that it acted in good faith applies only to [the] claimed breach of implied covenant of good faith and fair dealing, not to [the claimed] breach of contract.”  (Id. at p. 1230, 261 Cal.Rptr. 185.)

Relying exclusively on Pugh II, supra, 203 Cal.App.3d 743, 250 Cal.Rptr. 195, Wilkerson cites not to that portion of Pugh II that resolves the employee's breach of contract claim (Pugh II, supra, 203 Cal.App.3d at pp. 769–770, 250 Cal.Rptr. 195) but to that portion of Pugh II that quotes from a Michigan case relied on by the employee (Toussaint v. Blue Cross & Blue Shield of Mich. (1980) 408 Mich. 579 [292 N.W.2d 880]).  (Pugh II, supra, 203 Cal.App.3d at pp. 766–768, 250 Cal.Rptr. 195.)   What this means is that Wilkerson is based on Toussaint, not on Pugh II. Having said that, this is what Wilkerson holds:  “[I]n contract law the belief of the breaching party does not determine whether a breach of the contract has occurred.   Obviously, a defaulting borrower's good faith belief he or she has repaid a loan is not a defense to a lender's claim for payment.   Similarly, an employer's subjective belief it possessed good cause does not dispose of a wrongfully discharged employee's claim for breach of contract.   Such employee is entitled to recover for breach of contract notwithstanding the employer's state of mind.”

“Because an employer has wide latitude in making personnel decisions, the test for good cause is not whether the jurors would have fired the employee, but rather, whether the discharge was within the bounds of the employer's discretion, or instead, was trivial, capricious, unrelated to business needs or goals, or pretextual.  [Citation.]   For instance, while the jurors themselves might not have fired [the employee] for approving a $77 overdraft, the jury may conclude such reason was within the Bank's discretion and constituted good cause for termination.  [¶] However, an employer's belief is not a substitute for good cause.   For that reason, the employer's broad latitude does not extend to being factually incorrect.   If an employer claims the employee was discharged for specific misconduct, and the employee denies the charge, the question of whether the misconduct occurred is one of fact for the jury.  [Citation.]   For example, should the jury find [the employee] did not knowingly approve [his friend's] overdraft, then the Bank would have erred in concluding [the employee's] violation was willful;  then, good cause for termination would be lacking, and the Bank would have breached the contract, irrespective of any good faith belief.

“In contrast, because the implied covenant of good faith and fair dealing requires the employer to act fairly and in good faith, an employer's honest though mistaken belief that legitimate business reasons provided good cause for discharge, will negate a claim it sought in bad faith to deprive the employee of the benefits of the contract.  [Citation.]”  (Wilkerson v. Wells Fargo Bank, supra, 212 Cal.App.3d at pp. 1230–1231, 261 Cal.Rptr. 185, most emphasis added.)

 In our view, Wilkerson is wrong.   Aside from the fact that we can easily distinguish objectively verifiable wrongdoing (such as approving an overdraft) from a claim of sexual harassment or other similar misconduct, we do not think the validity of an employer's business judgment ought to turn on whether it happens to be sued for breach of contract or breach of the implied covenant of good faith and fair dealing.   That there no longer exists a tort cause of action for breach of the implied covenant of good faith and fair dealing (Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373) does not affect our conclusion that Division Three's reasoning was and remains flawed.


We do not mean to suggest that an employer must be given free rein or permitted to decide for itself whether it acted in good faith, and the courts of other states have been able to resolve this problem without going that far.   In fact, our research shows that every state that has addressed this issue save California has concluded that the “good cause” standard in a breach of employment contract action is not to be evaluated by a jury's decision as to whether the acts giving rise to the termination actually occurred, but whether the employer reasonably and in good faith believed they occurred.7  (Simpson v. Western Graphics Corp. (1982) 293 Or. 96 [643 P.2d 1276]; 8  Kestenbaum v. Pennzoil Co. (1988) 108 N.M. 20 [766 P.2d 280]; 9  Baldwin v. Sisters of Providence in Washington (1989) 112 Wash.2d 127 [769 P.2d 298];  Gaglidari v. Denny's Restaurants, Inc. (1991) 117 Wash.2d 426 [815 P.2d 1362]; 10  Southwest Gas v. Vargas (1995) 111 Nev. 1064 [901 P.2d 693]; 11  Sanders v. Parker Drilling Co. (9th Cir.1990) 911 F.2d 191.)12

 As the Court explained in Baldwin v. Sisters of Providence in Washington, supra, 112 Wash.2d at page 139 [769 P.2d at page 304], where a respiratory therapist terminated for an alleged sexual assault upon a female patient sued for breach of contract:  “ ‘[J]ust cause’ is a fair and honest cause or reason, regulated by good faith on the part of the party exercising the power.   We ․ hold a discharge for ‘just cause’ is one which is not for any arbitrary, capricious, or illegal reason and which is one based on facts (1) supported by substantial evidence and (2) reasonably believed by the employer to be true.”


 In our view, the majority rule is more sound than the rule articulated in Wilkerson.   We therefore hold that an employer's claim of good cause to terminate an employee is subject to judicial review, and that resolution of the issue by the trier of fact must take into account (1) the employee's position, (2) the reason given to the employee for his or her termination, (3) the information the employer knew or should have known at the time the employee was terminated (which would require an evaluation of the investigation conducted by the employer), (4) the employer's apparent good faith or lack thereof, and (5) such other circumstances as may be appropriate in any given case.   We believe this approach satisfies the concerns expressed in Wilkerson.   Although our approach permits the jury to consider what must necessarily be a subjective decision, we do not suggest that, standing alone, an employer's subjective belief that it possessed good cause is sufficient.  (Wilkerson v. Wells Fargo Bank, supra, 212 Cal.App.3d at p. 1230, 261 Cal.Rptr. 185.)   By its consideration of the factors we have listed, the trier of fact “checks the subjective good faith of the employer with an objective reasonable belief standard” and therefore “strikes a balance between the employer's interest in making needed personnel decisions and the employee's interest in continued employment.”  (Baldwin v. Sisters of Providence in Washington, supra, 112 Wash.2d at p. 139 [769 P.2d at p. 304].) 13

To require an employer to be “right” about the facts on which it bases its decision to terminate an employee (as suggested by Wilkerson) is to interfere with the “wide latitude” an employer must have “in making independent, good faith judgments about high-ranking employees without the threat of a jury second-guessing its business judgment.”  (Pugh II, supra, 203 Cal.App.3d at p. 769, 250 Cal.Rptr. 195.)   To do what Wilkerson suggests is to require management to have a signed confession, or an eyewitness report from every co-worker before it can feel confident in discharging an employee accused of sexual harassment, or risk a jury determination that the factual basis for its personnel decision was the wrong one, a prospect we find “immensely troubling.”  (Sanders v. Parker Drilling Co., supra, 911 F.2d at p. 211, dis. opn. of Kozinski, J.)

The facts of the case before us illustrate graphically the employer's need to walk a tightrope when charges such as those made against Cotran are not dispelled by what appears to us to have been a reasonably thorough investigation.14  Sexual harassment in the workplace is heavily regulated by state and federal legislation (42 U.S.C. § 2000e–2(a)(1);  Gov.Code, § 12940, subd. (h)-(i)), and an employer presented with a claim of sexual harassment must take prompt corrective action reasonably calculated to end the harassment, or risk suit by a governmental agency or the victim of the harassment or both.  (29 C.F.R. § 1604.11(d) & (f);  Ellison v. Brady (9th Cir.1991) 924 F.2d 872, 881–883;  Intlekofer v. Turnage (9th Cir.1992) 973 F.2d 773, 778–779;  Flait v. North American Watch Corp. (1992) 3 Cal.App.4th 467, 476, 4 Cal.Rptr.2d 522.) 15  Had RHH decided not to terminate Cotran's employment and had another female RHH employee thereafter claimed sexual harassment by Cotran, RHH would have found itself in the unenviable position of having retained someone it had every reason to believe had done this before and would do it again.   The choice between the lawsuit it got and the ones it arguably avoided is a choice that cannot be arbitrarily made but can and must be viewed with both feet firmly planted in the real world.16

 As Judge Kozinski put it in Sanders (where the majority said it was up to the jury to determine whether the terminated employees had in fact smoked marijuana on the oil rig where they were working), an employer has both the right and the obligation to take decisive action when it obtains reliable information that one employee poses a threat to other employees.   Judge Kozinski continued:  “This is the unhappy tale of a company that did just that.   Company officials reasonably believed that three employees had used drugs on the job, not once but repeatedly.   Two eyewitnesses fingered the drug-using employees;  the company pursued the matter promptly, but not precipitously, obtaining confirmation from yet a third eyewitness before discharging the violators.   The personnel action was taken in a balanced, detached, professional manner, free from any hint of rancor or personal animosity.   Had the company acted less decisively, it would have betrayed its responsibility to other employees and the environment we all share.   Yet when all is said and done, the fingered employees walk off with a cool third of a million dollars, while the company is left to pick up the tab, pay its lawyers and scratch its head wondering what it could have done differently.   It is a question we all might ponder․”  (Sanders v. Parker Drilling Co., supra, 911 F.2d at pp. 204–205, dis. opn. of Kozinski, J.)

We reject Cotran's contention that any approach other than the one taken at his trial will undermine job security, the view adopted by a concurring opinion in Sanders.  (Sanders v. Parker Drilling Co., supra, 911 F.2d at pp. 196–197, conc. opn. of Reinhardt, J.)   We have not taken the issue from the jury, nor have we insulated an employer from liability when the evidence shows unreasonable, illegal or bad faith conduct resulting in an unjustified termination.   We see no threat to job security by instructing a jury to base its determination of liability on all of the relevant facts, including the employer's vigorous investigation of a complaint of employee misconduct before it concluded, albeit erroneously in the jury's view, that misconduct justifying termination occurred.   Once again, Judge Kozinski's dissent in Sanders hits the mark:  “To say it is very bad policy to have twelve randomly selected men and women second-guess good-faith, honest judgments made by management personnel acting out of genuine concern for worker safety, is not to trumpet a ‘counter-revolution against worker's rights.’ ”  (Id. at p. 212, fn. 11, dis. opn. of Kozinski, J.)

Where, as here, we are dealing with charges of sexual harassment, we believe the most we can reasonably ask of employers under these difficult circumstances is that they act responsibly and in good faith.  (Sanders v. Parker Drilling Co., supra, 911 F.2d at p. 215, dis. opn. of Kozinski, J.) 17


The judgment is reversed and the cause is remanded for a new trial.   The parties are to pay their own costs of appeal.


1.   At trial, the issue was whether there was an implied contract that (as Cotran understood it) he “would have a job as long as [he] wanted it,” that he had a “guarantee” or, in legal terms, that he could be terminated only for good cause.

2.   Both statements are excruciatingly detailed.   Dolce's statement explained that she had started working for RHH in February 1991 as a temporary employee.   After she attained permanent status, there were “instances” where she would have to drive somewhere and Cotran “would suggest [she] drive with him.”   She described incidents in an underground parking lot where Cotran tried to kiss her, explaining that each time she told him she was married and asked him to stop, “perhaps not forcefully enough (because [she] didn't want to embarrass him or lose [her] job) but forcefully enough that [they] would eventually get into his car and ․ would go [wherever they were headed].”  Dolce described another instance when she and Cotran, joined by another female employee, drove back from a department luncheon.   Cotran stopped on a sidestreet, tried to kiss the other woman, and told her he wanted her to make love with him while Dolce watched.   Dolce and the other woman ultimately persuaded Cotran to take them back to the office.   On another occasion when Dolce and Cotran were driving to a meeting, Cotran found a secluded spot, parked the car, masturbated in front of Dolce, and asked her to touch him.   She told him to stop and take her to the meeting.   Dolce's statement related obscene calls from Cotran to her, both at the office and at home, including his specific statements and requests.   She described instances where he would call her into his office and expose himself.   She explained that her method of dealing with Cotran was “bad judgment” but “it made more sense to [her] because [she] didn't know what to do and [her] job was a consideration.”   Dolce explained that she would not have volunteered this information and was providing it because she was asked about it.   She “was dealing with this on [her] own, but [she] underst[ood] the company's position․   Cotran does an excellent job and he is a very nice man and has been a good friend.  [She] never would have made a complaint because [she] was learning how to deal with this.  [She did not] want to lose [her] job or have to work in a tense or hostile environment.”Pickett's statement was similar.   She began working for RHH in August 1991.   In December, Cotran started making obscene phone calls to her at home, and she too provided the details of these calls.   Pickett described several occasions when Cotran would summon her into his office, make sexual statements and gestures, and ask her if she wanted to get a room at the Sheraton Hotel at lunch.   At first, she didn't know if he was serious, or just wanted to see how she would react.   When he began exposing himself, she knew he was serious and would leave his office.   She once asked Cotran why he did these things since he had a steady girlfriend, and his answer was that “she didn't totally satisfy him sexually.   She wasn't into anything other than regular sex.”   As had Dolce, Pickett described incidents where they would be out in a car together and Cotran would park so he could masturbate.   Pickett did not discuss these things with others at the office.

3.   Gail Morris' affidavit explained that, before she started working for RHH (while she was working at Johnson & Higgins, where Cotran had also worked), she had had “a professional and social relationship” with Cotran.   After she had gone out socially with Cotran, she “started getting phone calls at all hours of the night from him.   These were perverted phone calls of a sexual nature.”   She provided details and said she had “received a great number of these phone calls.”   She also said she “remember[ed] talking to other women at J & H about these matters and they told me that they had had the same experience with Cotran as well.”

4.   For example, at a bench conference just before opening statements, Cotran's trial counsel objected to any reference to Gail Morris' affidavit.   RHH's trial counsel explained that the affidavit was relevant to RHH's “state of mind” at the time Cotran was fired, but the objection was sustained.   That this was RHH's theme throughout the case is evidenced by the trial court's comments at a mid-trial chambers conference:  “As I understand [RHH's] claim, ․ all the defense has to establish in this case is that the defense had a good faith belief that Mr. Cotran committed the acts that resulted in his termination.   That may be the case in reference to the wrongful termination [claim that was not submitted to the jury].   I suspect that is not the case law in reference to the breach of contract claim.”   After a further discussion of the admissibility of the Morris affidavit, the trial court again noted that RHH was asserting it was relevant because “it goes to their belief regarding the acts claimed in this case, that it added additional credence to [Dolce's and Pickett's] statements.”   During a bench conference the next day concerning the admissibility of Feldman's notes about the investigation, RHH's trial counsel repeated her refrain, explaining that Feldman's state of mind was in issue.   Cotran's objection was nevertheless sustained.   Later that day, the trial court reminded counsel that it was RHH's burden to prove that Cotran “committed this offense, that he's guilty of the masturbation that is being claimed․”   Still later, at about the time it became clear the case would go to the jury solely on the breach of contract claim, the court stated again that RHH's good faith belief about what Cotran did was relevant, if at all, only to some theory other than breach of contract.   After all claims except the one for breach of contract were in fact dropped, the court again noted the parties' dispute about whether RHH's good faith belief was enough, and ultimately foreclosed further discussion by noting that, since this was now nothing more than a “contract dispute,” it was RHH's burden to prove that Cotran did the things RHH claimed resulted in his termination, and that “good faith [was] not an issue.”

5.   In his Respondent's Brief, Cotran spends substantial time arguing that RHH was attempting, on this appeal, to change the theory of its case vis-à-vis the existence of a contract of employment.   At oral argument, Cotran argued vigorously that RHH was attempting, on this appeal, to change the theory of its case vis-à-vis the issue of RHH's good faith belief that Cotran had committed acts of sexual harassment.   (Part II, post.)   On the contract issue, RHH's only point is that the terms of the implied contract should have been submitted to the jury.  (Part I, post.)   On the good faith belief issue, Cotran's view of RHH's theory of the case is not supported by the record.   As shown by the discussions noted in footnote 4, ante, RHH tried repeatedly to present its theory to the court and to the jury, without success.   RHH also raised its good faith belief as an affirmative defense, and listed it as an issue to be determined at trial in a statement of issues filed on the first day of trial.   Whatever merit there may be to Cotran's assertion that RHH could have done more (by submitting additional instructions and alternative verdict forms, all of which would have been rejected), we are satisfied that it did enough to preserve the issue for appeal, and there is no way that Cotran could claim surprise or any prejudice by RHH's pursuit of this issue on appeal.

6.   This entire discussion assumes that, on retrial, the jury will find that there existed an implied contract to the effect that Cotran would be terminated only for good cause.   Should the jury conclude otherwise, it obviously would not have to decide whether RHH had good cause to terminate Cotran.

7.   Michigan appears to apply a flexible test.   In Toussaint v. Blue Cross & Blue Shield of Mich., supra, 408 Mich. 579 [292 N.W.2d 880] (the case discussed at length in Pugh II), the court held that the “role of the jury will differ with each case.   Where the employer claims that the employee was discharged for specific misconduct—intoxication, dishonesty, insubordination—and the employee claims that he did not commit the misconduct alleged, the question is one of fact for the jury:  did the employee do what the employer said he did?  [¶] Where the employer alleges that the employee was discharged for one reason—excessive tardiness—and the employee presents evidence that he was really discharged for another reason—because he was making too much money in commissions—the question also is one of fact for the jury.   The jury is always permitted to determine the employer's true reason for discharging the employee.  [¶] Where an employee is discharged for stated reasons which he contends are not ‘good cause’ for discharge, the role of the jury is more difficult to resolve.   If the jury is permitted to decide whether there was good cause for discharge, there is the danger that it will substitute its judgment for the employer's.   If the jurors would not have fired the employee for doing what he admittedly did, or they find he did, the employer may be held liable in damages although the employee was discharged in good faith and employer's decision was not unreasonable.  [¶] While the promise to terminate employment only for cause includes the right to have the employer's decision reviewed, it does not include a right to be discharged only with the concurrence of the communal judgment of the jury.”   (Toussaint v. Blue Cross & Blue Shield of Mich., supra, 408 Mich. at pp. 621–622 [292 N.W.2d at p. 896].)

8.   In Simpson, the Oregon Supreme Court, sitting en banc, upheld the trial court's conclusion that to “constitute ‘just cause,’ the employer ․ must make a good faith determination of a sufficient cause for discharge based on facts reasonably believed to be true and not for any arbitrary, capricious, or illegal reason.   It is not necessary that the alleged reason for discharge (intentional threats against fellow employee) actually in fact occurred, but only that the evidence of threats existed which the employer reasonably believed in good faith after an investigation.”  (Simpson v. Western Graphics Corp., supra, 293 Or. at p. 98 [643 P.2d at p. 1278].)

9.   In Kestenbaum, an employee was terminated for alleged sexual harassment of female employees.   The New Mexico Supreme Court approved a jury instruction defining “good cause” as “reasonable grounds to believe that sufficient cause existed to justify [the] termination,” an instruction the court described as “an objective standard of reasonable belief.”   (Kestenbaum v. Pennzoil Co., supra, 108 N.M. at pp. 27–28 [766 P.2d at pp. 287–288].)

10.   In Gaglidari, where an employee was fired for fighting, the court held that “[w]hether [the employee] actually fought on company premises is collateral to the issue of proper discharge,” and the termination was justified if, “prior to dismissing plaintiff, [the employer] reached the good faith and reasonable conclusion plaintiff was fighting on company premises and that conclusion was supported by substantial evidence.”  (Gaglidari v. Denny's Restaurants, Inc., supra, 117 Wash.2d at pp. 437–438 [815 P.2d at pp. 1368–1369].)

11.   In Southwest Gas, where the employee was terminated for alleged sexual harassment, the court explained that employers must “act in good faith and upon a reasonable belief that good cause for terminating a for-cause employee exists.   Genuine issues of material fact casting a strong doubt on the purported good-faith of the employer are ripe for a jury's consideration.”  (Southwest Gas v. Vargas, supra, 111 Nev. at p. –––– [901 P.2d at p. 700].)

12.   In Sanders, the Ninth Circuit applied its view of Alaska law (and cited Wilkerson) to hold that three employees terminated because their employer concluded they had smoked marijuana on the job (working on an oil rig) were entitled to have a jury determine whether they had actually smoked marijuana on the job.  (Sanders v. Parker Drilling Co., supra, 911 F.2d at p. 193.)   In Braun v. Alaska Com. Fishing & Agr. Bank (Ala.1991) 816 P.2d 140, 142, the Alaska Supreme Court adopted the majority rule.

13.   We do not mean to suggest that this is always a jury issue.   In those situations where there are no triable issues of material fact, we see no reason why summary judgment would not be available.  (Code Civ.Proc., § 437c.)

14.   We recognize that the trial court viewed it differently, and suggested at the time it denied RHH's motion for a new trial that the investigation was flawed.   All this proves is that reasonable minds will differ, and (on the disputed facts of this case) the question is one for the jury, not for the trial court or us.

15.   Cotran seems to think that RHH cited these authorities for the proposition that it was required to terminate his employment.   Not so.   RHH's point is that it had a duty to take appropriate corrective action, that it did so in good faith, and that the issue for the jury should have been whether it in fact acted in good faith, not whether in fact Cotran sexually harassed Dolce and Pickett.

16.   In Southwest Gas v. Vargas, supra, 111 Nev. 1064 [901 P.2d 693], where an employee terminated because co-workers charged him with sexual harassment sued for wrongful termination on a breach of contract theory, the Nevada Supreme Court noted that “charges of sexual harassment present significant problems to employers, not only in terms of their contractual relationship with their employees, but in terms of federal law․   Allowing a jury to second guess an employer's good-faith determination that sexual harassment has occurred would thrust employers into an extremely difficult, Catch–22 predicament.  [Because employers may be liable to employees for failing to promptly remedy a hostile environment created by sexual harassment,] employers [must] take accusations of sexual harassment very seriously.   Public policy therefore requires that employers be given broad discretion to determine what types of speech and conduct fall within the prohibited category of sexual harassment when determining whether to terminate an employee, and such determinations are entitled to deference when the discharged employee seeks to recover for breach of an implied contract.”  (Id. at p. ––– [901 P.2d at p. 702, fn. 5];  see also Williams v. Maremont Corp. (10th Cir.1989) 875 F.2d 1476, 1485.)

17.   RHH's claim of evidentiary error is based on the trial court's exclusion of the Morris affidavit, which was offered to show that RHH considered it as part of its investigation.   Since the scope of the investigation will be an issue when the case is retried, this evidence is admissible.  (Evid.Code, § 352.)

MIRIAM A. VOGEL, Associate Justice.

ORTEGA, Acting P.J., and MASTERSON, J., concur.

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