O'Day v. McDonnell Douglas Helicopter Co.

• Decision Date: 26 May 1998
• Docket Number: No. CV-97-0274-CQ,CV-97-0274-CQ
• Citation: 191 Ariz. 535,959 P.2d 792
• Parties: , 13 IER Cases 1868, 270 Ariz. Adv. Rep. 23 Dennis V. O'DAY, Plaintiff. v. McDONNELL DOUGLAS HELICOPTER COMPANY, a foreign corporation, Defendant.
• Court: Arizona Supreme Court

Page 792

959 P.2d 792

191 Ariz. 535, 13 IER Cases 1868, 270 Ariz. Adv. Rep. 23

Dennis V. O'DAY, Plaintiff. v. McDONNELL DOUGLAS HELICOPTER COMPANY, a foreign corporation, Defendant.

No. CV-97-0274-CQ.

Supreme Court of Arizona,

En Banc.

May 26, 1998.

Francis G. Fanning, Tempe, for Dennis V. O'Day.

Snell & Wilmer, L.L.P. by Tibor Nagy, Jr., Tucson, for McDonnell Douglas Helicopter Company.

OPINION

MARTONE, Justice.

¶1 The United States District Court for the District of Arizona certified two questions on the proper use of after-acquired evidence in employment termination disputes. We accepted jurisdiction under A.R.S. § 12-1861, and Rule 27, Rules of the Supreme Court.

I. CERTIFIED FACTS

¶2 On June 8, 1990, McDonnell Douglas failed to promote Dennis O'Day to lead engineer at its helicopter plant in Mesa. He was laid off as part of a general work force reduction one month later. O'Day was 46 years old, had worked for the company for fourteen years, and believed he had been denied the promotion and laid off because of his age.

¶3 After exhausting his administrative remedies in the Equal Employment Opportunity Commission, O'Day filed an action against McDonnell Douglas challenging the denial of promotion and layoff. His complaint stated four causes of action:

1. Discrimination in employment under the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq.

2. Discrimination in employment under the Arizona Civil Rights Act, A.R.S. § 41-1481 et seq.

3. Breach of contract.

4. Wrongful discharge in violation of public policy.

¶4 The night after O'Day was denied his promotion, he returned to the plant and searched his supervisor's office. He took documents that he thought might be useful to his discrimination claim, copied them, and returned the originals to the supervisor's desk.

¶5 It was not until after discovery began in the action that McDonnell Douglas learned of O'Day's misconduct. McDonnell Douglas moved for summary judgment, asserting the "after-acquired evidence defense." The District Court granted judgment in favor of McDonnell Douglas on all counts.

¶6 On appeal, the United States Court of Appeals for the Ninth Circuit affirmed the finding that the after-acquired evidence defense had been established, but reversed the dismissal of the complaint based upon the principles articulated in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 115 S.Ct. 879, 130 L.Ed.2d 852 (1995). O'Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756 (9th Cir.1996). The Court of Appeals remanded the case for trial but reserved ruling on whether the "after-acquired evidence" defense applied to O'Day's state contract and tort claims. The court noted that we had not yet "determined the extent to which after-acquired evidence of wrongdoing limits an employee's recovery of compensatory and punitive damages on these causes of action." Id. at 764 n. 7.

II. CERTIFIED QUESTIONS

The certified questions are:

1. Whether the "after-acquired evidence" defense as delineated by the United States Supreme Court in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 115 S.Ct. 879, 130 L.Ed.2d 852 (1995) applies to limit recovery under Arizona law in a case of wrongful discharge from employment in violation of public policy, and, if the defense applies, how it limits or precludes recovery of damages.

2. Whether the "after-acquired evidence" defense applies in a case of breach of employment contract, and, if the defense applies, how it limits or precludes recovery of damages in such a case.

III.

A. After-Acquired Evidence in Federal Statutory Discrimination Cases: the McKennon Rule

¶7 McKennon resolved a conflict in the circuits on the proper role of after-acquired evidence in federal statutory discrimination cases. The Tenth Circuit, in Summers v. State Farm Automobile Insurance Co., 864 F.2d 700 (10th Cir.1988), had held that after-acquired evidence could serve as a complete bar to a plaintiff's cause of action under federal employment discrimination statutes if the defendant could demonstrate that the conduct would have resulted in the employee's discharge had it been discovered during the course of employment. The court presented a hypothetical that is often quoted in after-acquired evidence cases:

To argue, as Summers does, that this after-acquired evidence should be ignored is utterly unrealistic. The present case is akin to the hypothetical wherein a company doctor is fired because of his age, race, religion, and sex and the company, in defending a civil rights action, thereafter discovers that the discharged employee was not a "doctor." In our view, the masquerading doctor would be entitled to no relief, and Summers is in no better position.

Id. at 708. Four years later, the Eleventh Circuit, in Wallace v. Dunn Construction Co., 968 F.2d 1174 (11th Cir.1992), reh'g granted, op. vacated, 32 F.3d 1489 (11th Cir.1994), decision en banc, 62 F.3d 374 (11th Cir.1995), rejected this approach, and concluded that after-acquired evidence, while relevant, should operate only to limit damages. Id. at 1181. The court held that after-acquired evidence sufficient to warrant discharge precludes reinstatement or front pay. Id. The plaintiff's award of back pay would be reduced to the period between the actual discharge and the discovery of the evidence only if the employer could demonstrate that (1) the misconduct discovered would have resulted in the plaintiff's discharge and (2) the evidence would have been discovered in the absence of the alleged discrimination and the subsequent litigation. Id. at 1182.

¶8 The Supreme Court resolved the conflict in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 115 S.Ct. 879, 130 L.Ed.2d 852 (1995), and held that after-acquired evidence is not a bar to an employment discrimination action, but is relevant to the measure of damages. The Court's resolution reflected a balancing of the legitimate managerial interests of the employer and the "important claims of the employee who invokes the national employment policy mandated by the Act." Id. at 361, 115 S.Ct. at 886. The Court held that once an employer demonstrates that the after-acquired evidence would have led to the employee's discharge, the remedies of reinstatement and front pay are no longer appropriate. The Court concluded that the measure of back pay is the period between the termination and the date the employer discovers the after-acquired evidence. The Court expressly rejected the added prong of Wallace, and held that an employer need not show that it would have discovered the evidence in the absence of discrimination and subsequent litigation.

B. After-Acquired Evidence and State Common Law Claims

¶9 The question here is whether we should apply the McKennon rule to O'Day's state common law claims for breach of contract and wrongful termination in violation of public policy. As to the contract claim, O'Day argues that (1) employee misconduct after a valid employment relationship exists ought to be treated differently than a case of resume or application fraud, which implicates the doctrine of fraud in the inducement, (2) this court ought to consider how material O'Day's misconduct was to the contractual relationship, and (3) after-acquired evidence should only affect damages, not liability.

¶10 As to the tort claim, O'Day argues, inter alia, that any limitation on damages resulting from the admission of after-acquired evidence would violate both article II, section 31 and article XVIII, section 6 of our Constitution, which prohibit laws that limit the amount of damages to be recovered for injuries. O'Day also argues that the cutoff date for future lost earnings should not be the date the employer discovers the misconduct, but instead should be a date determined by a jury. Finally, O'Day argues that after-acquired evidence should have no bearing on punitive damages, or on compensatory damages for injury to personal and professional reputation, emotional distress, humiliation, and embarrassment.

¶11 McDonnell Douglas argues that the contract claim and the tort claim ought to be treated differently. It relies on Hampton v. Sandy Cowen Agency, Inc., 154 Ariz. 14, 739 P.2d 1331 (App.1987) and the Restatement (Second) of Contracts § 385 (1979) for the proposition that if a party has the power to avoid a contract by disaffirmance, that party's failure to perform is not a breach, even if the party is ignorant of his power of avoidance and believes that his refusal is a breach. The after-acquired evidence of O'Day's misconduct would, under this rule, constitute a "first breach" of the employment contract that would excuse McDonnell Douglas's later breach. The McKennon rule would not apply, because the purposes behind state and federal age discrimination statutes do not form the underpinnings of the law of contracts.

¶12 In contrast, McDonnell Douglas concedes that because the tort claim involves important public concerns, like those implicated by federal and state discrimination statutes, there is no bar. It argues that the McKennon rule should apply as to reinstatement, front pay and back pay, but that after-acquired evidence of employee misconduct ought to be a per se bar to the recovery of punitive damages and emotional distress damages.

1. Common Law Breach of Contract and After-Acquired Evidence

¶13 The overwhelming majority of courts hold that if an employer can demonstrate that it would have fired an employee had it known of prior misconduct, then the employee's claim for breach of contract is barred or, put differently, the prior misconduct excuses the employer's breach. This approach is supported by several sections of the Restatement of Contracts, leading treatises, and a century of case law. In Hampton v. Sandy Cowen Agency, 154 Ariz. 14, 739 P.2d 1331 (App.1987), the court of appeals held that a former employee's breach of contract claim was barred by the discovery of after-acquired evidence such...