Richey v. Autonation, Inc.

Filed 1/29/15

IN THE SUPREME COURT OF CALIFORNIA

AVERY RICHEY, )

)

Plaintiff and Appellant, )

) S207536

v. )

) Ct. App. 2/7 B234711

AUTONATION, INC., et al., )

) Los Angeles County

Defendants and Respondents. ) Super. Ct. No. BC408319

____________________________________)

An employer terminated an employee who was absent on approved medical

leave, but engaged in outside employment in violation of company policy. After

an 11-day arbitration hearing, the arbitrator relied on the federal ―honest belief‖

defense and rejected the employee‘s claim that the employer violated the

employee‘s right to reinstatement under the Moore–Brown–Roberti Family Rights

Act (CFRA) (Gov. Code, §§ 12945.1, 12945.2) and its federal counterpart, the

Family and Medical Leave Act of 1993 (FMLA) (29 U.S.C. §§ 2601–2654). The

trial court confirmed the arbitrator‘s award, but the Court of Appeal vacated the

award in the employer‘s favor.

We granted review to determine whether, in the absence of an express

agreement between the parties, courts may review and vacate (or correct) an

arbitration award involving both an employee‘s unwaivable statutory rights and an

employer‘s written policy forbidding outside employment while on leave. We

conclude that although the arbitrator may have committed error in adopting a

defense untested in our court, any error that may have occurred did not deprive the

employee of an unwaivable statutory right because the arbitrator found he was

dismissed for violating his employer‘s written policy prohibiting outside

employment while he was on medical leave. Accordingly, we reverse the Court of

Appeal‘s judgment.

FACTS AND PROCEDURAL BACKGROUND

In 2004, defendant Power Toyota Cerritos (Power Toyota), part of the

AutoNation, Inc., consortium of automobile dealerships, hired plaintiff Avery

Richey (plaintiff) as an at-will employee. Plaintiff received an employment

manual noting that outside work while on approved CFRA leave was prohibited.

There was also a general understanding at Power Toyota that outside employment

of any kind, including self-employment while on approved leave, was against

company policy and that others had been fired for violating this rule.

As a condition of his hiring, plaintiff signed an agreement requiring that

any employment dispute be settled by arbitration. All disputes between Power

Toyota and its employees were decided this way. In relevant part, the arbitration

agreement stated: ―Resolution of [disputes] shall be based solely upon the law

governing the claims and defenses set forth in the pleadings and the arbitrator may

not invoke any basis (including, but not limited to notions of ‗just cause‘) other

than such controlling law.‖ The agreement did not include an express provision

stating that courts could review any arbitration award for legal error. (See Cable

Connection, Inc. v. DIRECTTV, Inc. (2008) 44 Cal.4th 1334, 1355 (Cable

Connection) [parties to arbitration may agree that an award is reviewable for legal

error].) The agreement did require the arbitrator to include a ―written reasoned

opinion‖ with his decision, which ―shall be final and binding upon the parties.‖

Around October 2007, plaintiff began work on plans to open a local

seafood restaurant. He bought equipment and leased a site for the restaurant,

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which opened in February 2008. Plaintiff marketed his restaurant with sample

menus and business cards while still working full time at Power Toyota.

Plaintiff‘s supervisors at Power Toyota, concerned that the restaurant was

distracting him, met with him in February 2008 to discuss performance and

attendance issues. The supervisors testified that plaintiff had become distracted

and was ―a bit off his game.‖

On March 10, 2008, plaintiff injured his back while moving furniture at his

home. Plaintiff‘s physician informed Power Toyota that plaintiff was medically

unable to work. On March 21, 2008, plaintiff filed for leave under the CFRA and

FMLA. Power Toyota granted plaintiff‘s medical leave and extended it on

multiple occasions.

On April 11, 2008, a supervisor sent plaintiff a letter stating that employees

were not allowed to pursue outside employment while on leave and that plaintiff

should call if he had any questions. Plaintiff ignored the letter, never called his

employer, and thus never explained how his activity was consistent with his

medical leave. Despite his employer‘s expression of concern, plaintiff claims that

he chose to ignore the letter‘s invitation to communicate with his employer

because he felt that it misstated company policy. Plaintiff also contends that the

policy did not apply to him because he had not accepted employment with another

company, but rather was working as the owner of his own business.

On April 18, 2008, in response to information that plaintiff was working at

his restaurant while on leave, Power Toyota dispatched an employee to observe

the restaurant. The employee testified seeing plaintiff sweeping, bending over,

and hanging a sign using a hammer. Other Power Toyota employees testified that

plaintiff was working the front counter. Plaintiff himself admitted to having

handled orders and answering the phone at the restaurant while on leave, but

claimed that these tasks were within the limited light duties his doctor authorized.

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Power Toyota terminated plaintiff on May 1, 2008. Plaintiff‘s medical

leave was set to expire on May 28, 2008. In its termination letter, Power Toyota

stated that it dismissed plaintiff for engaging in outside employment while on a

leave of absence, in violation of company policy.

After receiving a right-to-sue letter from the Department of Fair

Employment and Housing, plaintiff filed a complaint in superior court against

Power Toyota and its parent companies, including AutoNation, Inc., Webb

Automotive Group, Inc., and Mr. Wheels, Inc., and his direct supervisor, Rudy

Sandoval (defendants), alleging multiple claims under the California Fair

Employment and Housing Act (FEHA) (Gov. Code § 12900 et seq.) and the

CFRA. The claims included racial discrimination, harassment, retaliation for

taking approved leave under the CFRA, and failure to reinstate following CFRA

leave. The trial court granted defendants‘ motion to compel arbitration.

The arbitrator, a retired judge with 20 years of experience on the bench,

conducted an 11-day arbitration hearing. He rejected each of plaintiff‘s

contentions in a 19-page written order. First, he denied plaintiff‘s claims of racial

discrimination and harassment, finding the conditions of plaintiff‘s employment

did not constitute a hostile work environment. Plaintiff did not appeal the

arbitrator‘s decision as to those claims. With regard to the plaintiff‘s claims under

the CFRA and the FMLA at issue here, the arbitrator framed the legal issue under

both statutes as ―whether the law provides a protective shell over [plaintiff] that

bars his termination until he is cleared to return to work by his physician, or does

the law allow an employer to let an employee go, while on approved leave, for

other non-discriminatory reasons?‖ (Italics omitted.) The arbitrator found that

although the employee manual was ―poorly written,‖ ―there was a general

understanding at Power Toyota that outside employment was against company

policy and others had been terminated for violating this rule.‖ He concluded that

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―case law . . . allows Power Toyota to terminate Mr. Richey if it has an ‗honest‘

belief that he is abusing his medical leave and/or is not telling the company the

truth about his outside employment.‖ He also found that ―the weight of the

evidence is overwhelming that Power Toyota fired Mr. Richey for non-

discriminatory reasons. His CFRA/FMLA status is not an absolute bar to

termination. His medical leave status does not protect Mr. Richey from smart

decisions, or bad ones, made by Power Toyota, so long as the basis for the

decision is legally proper.‖

Plaintiff sought to vacate the award in part. His asserted limited ground

was that the arbitrator committed reversible legal error because he exceeded his

powers when he accepted defendants‘ honest belief defense as to plaintiff‘s

medical condition. Defendants moved to confirm the award. The trial court

denied plaintiff‘s motion to vacate the award, finding that ―[t]he fact that the

arbitrator may have applied the wrong legal standard does not constitute grounds

to vacate the Final Award.‖ Plaintiff appealed, alleging that Power Toyota

violated his right to be reinstated in the same or a comparable employment

position following his leave, as the CFRA required.

The Court of Appeal reversed the trial court‘s judgment, concluding that

the arbitrator violated plaintiff‘s right to reinstatement under the CFRA when he

applied the honest belief defense to plaintiff‘s claim. We granted defendants‘

petition for review.

DISCUSSION

California law favors alternative dispute resolution as a viable means of

resolving legal conflicts. ―Because the decision to arbitrate grievances evinces the

parties‘ intent to bypass the judicial system and thus avoid potential delays at the

trial and appellate levels, arbitral finality is a core component of the parties‘

agreement to submit to arbitration.‖ (Moncharsh v. Heily & Blase (1992) 3

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Cal.4th 1, 10 (Moncharsh).) Generally, courts cannot review arbitration awards

for errors of fact or law, even when those errors appear on the face of the award or

cause substantial injustice to the parties. (Id. at pp. 6, 28.) This is true even

where, as here, an arbitration agreement requires an arbitrator to rule on the basis

of relevant law, rather than on principles of equity and justice. (Cable Connection,

supra, 44 Cal.4th at p. 1360 [―A provision requiring arbitrators to apply the law

leaves open the possibility that they are empowered to apply it ‗wrongly as well as

rightly.‘ ‖]; see City of Richmond v. Service Employees Intern. Union, Local 1021

(2010) 189 Cal.App.4th 663, 669, fn.1 [―The arbitration provision here, reciting

generally that the arbitrator ‗shall . . . make no decisions in violation of existing

law‘ is a standard arbitration provision that does not provide for [judicial]

review.‖].)

The California Arbitration Act (Code Civ. Proc., § 1280 et. seq.) and the

Federal Arbitration Act (9 U.S.C. § 10 et seq.) provide limited grounds for judicial

review of an arbitration award. Under both statutes, courts are authorized to

vacate an award if it was (1) procured by corruption, fraud, or undue means; (2)

issued by a corrupt arbitrator; (3) affected by prejudicial misconduct on the part of

the arbitrator; or (4) in excess of the arbitrator‘s powers. (Code Civ. Proc.,

§ 1286.2, subd. (a); 9 U.S.C. § 10 (a).) An award may be corrected for (1) evident

miscalculation or mistake; (2) issuance in excess of the arbitrator‘s powers; or (3)

imperfection in the form. (Code Civ. Proc., § 1286.6; 9 U.S.C. § 11.) Our

analysis concerns whether the arbitrator acted in excess of his powers when he

rejected plaintiff‘s claim. (Code Civ. Proc., § 1286.2, subd. (a)(4).)

Arbitrators may exceed their powers by issuing an award that violates a

party‘s unwaivable statutory rights or that contravenes an explicit legislative

expression of public policy. (See, e.g., Board of Education v. Round Valley

Teachers Assn. (1996) 13 Cal.4th 269, 272-277 [arbitrator exceeded powers by

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giving effect to collective bargaining provisions that violated statutory rights in

Ed. Code]; California Dept. of Human Resources v. Service Employees Internat.

Union, Local 1000 (2012) 209 Cal.App.4th 1420, 1434 [arbitrator lacked power to

make an award that violated explicit public policy favoring legislative oversight of

state employee contracts when he interpreted a memorandum of understanding

between union and state to require salary increases the Legislature did not

approve].) However, ― ‗[a]rbitrators do not ordinarily exceed their contractually

created powers simply by reaching an erroneous conclusion on a contested issue of

law or fact, and arbitral awards may not ordinarily be vacated because of such

error . . . .‘ ‖ (Cable Connection, supra, 44 Cal.4th at p. 1360.)

We first explored ―narrow exceptions‖ to the ―general rule that . . . an

arbitrator‘s decision cannot be reviewed for errors of fact or law‖ in Moncharsh,

supra, 3 Cal.4th at page 11. Moncharsh noted that judicial review may be

warranted when a party claims that an arbitrator has enforced an entire contract or

transaction that is illegal. (Id. at p. 32, citing Loving & Evans v. Blick (1949) 33

Cal.2d 603, 609 [arbitrator could not enforce contract that otherwise would have

been void under state law because contractor was unlicensed] and All Points

Traders, Inc. v. Barrington Associates (1989) 211 Cal.App.3d 723, 738 [holding

that arbitrator could not enforce contract awarding commission to unlicensed real

estate broker in violation of state law].) Moncharsh observed that in the absence

of an express written accord in the arbitration agreement, arbitrators may decide

cases based on ― ‗broad principles of justice and equity.‘ ‖ (Moncharsh, supra, 3

Cal.4th at p. 10.) The court acknowledged that there may be ―exceptional

circumstances justifying judicial review of an arbitrator‘s decision when a party

claims illegality affects only a portion of the underlying contract. Such cases

would include those in which granting finality to an arbitrator‘s decision would be

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inconsistent with the protection of a party's statutory rights.‖ (Moncharsh, supra,

3 Cal.4th at p. 32.)

In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24

Cal.4th 83 (Armendariz), we considered the judicial review of arbitration awards

involving parties‘ unwaivable statutory rights. An employee seeking to avoid

arbitration argued that the limited scope of judicial review of arbitration awards

rendered the vindication of rights under the FEHA illusory because ―the arbitrator

is essentially free to disregard the law.‖ (Armendariz, supra, 24 Cal.4th at p. 106.)

Because Armendariz arose from a Court of Appeal decision compelling the parties

to arbitrate, and not from an actual arbitration award, we decided that it was not

the ―occasion to articulate precisely what standard of judicial review is ‗sufficient

to ensure that arbitrators comply with the requirements of [a] statute.‘ [Citation.]‖

(Id. at p. 107.) We simply stated that ―for such judicial review to be successfully

accomplished, an arbitrator . . . must issue a written arbitration decision that will

reveal, however briefly, the essential findings and conclusions on which the award

is based.‖ (Ibid.)

Most recently, we revisited the standard of review for arbitration awards

involving unwaivable statutory rights in Pearson Dental Supplies, Inc. v. Superior

Court (2010) 48 Cal.4th 665 (Pearson Dental). There, an arbitrator committed a

―clear error of law‖ by misapplying a relevant tolling statute and incorrectly

holding that an employee‘s claim was time-barred, thus depriving the plaintiff of a

hearing on the merits. (Id. at p. 670.) Pearson Dental recognized that the tolling

provision of Code of Civil Procedure section 1281.12 applied to the case. We held

that when ―an employee subject to a mandatory employment arbitration agreement

is unable to obtain a hearing on the merits of his FEHA claims, or claims based on

other unwaivable statutory rights, because of an arbitration award based on legal

8

error, the trial court does not err in vacating the award.‖ (Pearson Dental, at p.

680.)

Pearson Dental, however, recognized its limited application. Despite being

―faced precisely with the question that was prematurely posed in Armendariz, i.e.,

the proper standard of judicial review of arbitration awards arising from

mandatory arbitration employment agreements that arbitrate claims asserting the

employee‘s unwaivable statutory rights‖ (Pearson Dental, supra, 48 Cal.4th at p.

679), we observed that the legal error that occurred actually denied the plaintiff a

hearing on his claim‘s merits. The arbitrator ―misconstrued the procedural

framework under which the parties agreed the arbitration was to be conducted,

rather than misinterpreting the law governing the claim itself‖ (id. at pp. 679-680),

a distinction that explained the narrow application of our holding and one that also

guides the scope of our review here. Pearson Dental emphasized that its legal

error standard did not mean that all legal errors are reviewable. (Id. at p. 679.)

The arbitrator had committed clear legal error by (1) ignoring a statutory mandate,

and (2) failing to explain in writing why the plaintiff would not benefit from the

statutory tolling period. The error addressed in Pearson Dental therefore kept the

parties from receiving a review on the merits. Its narrow rule was sufficient to

resolve the case. (Ibid.) Plaintiff here has not advocated for a greater scope of

judicial review in cases involving unwaivable statutory rights, and thus, there is no

reason to go beyond the framework Pearson Dental established. Before

discussing the arbitrator‘s decision, however, we first provide background on the

right plaintiff seeks to vindicate under the CFRA. 1

1 As the Court of Appeal recognized, the question whether the arbitrator

exceeded his powers and thus whether we should vacate his award on that basis is

generally reviewed on appeal de novo. (Reed v. Mutual Service Corp. (2003) 106

(Footnote continued on next page.)

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1. The CFRA

The CFRA was enacted in 1991 as a state counterpart to the FMLA. Its

purpose is to allow employees to take leave from work for certain personal or

family medical reasons without jeopardizing their job security. (See Nelson v.

United Technologies (1999) 74 Cal.App.4th 597, 606.) The CFRA has two

principal components: a right to leave of up to 12 weeks in any 12-month period

to care for a family member or for the employee‘s own medical condition (Gov.

Code, § 12945.2, subds. (a), (c)(2)(A)), and a right to reinstatement in the same, or

a comparable, position at the end of the leave. (Gov. Code, § 12945.2, subd. (a).)

The right to reinstatement is unwaivable but not unlimited. Employers

must not deny employees reinstatement ―unless the refusal is justified by the

defenses stated in section 11089(c)(1) and (c)(2).‖ (Cal. Code Regs., tit. 2,

§ 11089, subd. (a).) Section 11089, subdivision (c)(1) states in part : ―An

employee has no greater right to reinstatement or to other benefits . . . of

employment than if the employee had been continuously employed during the

CFRA leave period.‖ This defense is qualified, however, by the requirement that

―[a]n employer has the burden of proving, by a preponderance of the evidence,

that an employee would not otherwise have been employed at the time

reinstatement is requested in order to deny reinstatement.‖ (Cal. Code Regs., tit.

(Footnote continued from previous page.)

Cal.App.4th 1359, 1365 [whether arbitrator exceeded contractual powers in

making award is a question of law].) We decline to rule on defendants‘ suggestion

that this court adopt the ―manifest disregard‖ standard of review recognized by

some federal courts in reviewing arbitration awards, given the limited nature of

our holding here. (See, e.g., Collins v. D.R. Horton, Inc. (9th Cir. 2007) 505 F.3d

874, 879-880 [manifest disregard of the law means that arbitrator recognized

applicable law and ignored it].)

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2, § 11089, subd. (c)(1).) Section 11089, subdivision (c)(2), relating to ―key

employees,‖ does not apply here.

These provisions mirror the FMLA. (See 29 U.S.C. § 2614 (a)(1)

[providing employees with right ―to be restored‖ to same or comparable position];

29 C.F.R. § 825.216 (a) [stating that employee has no greater right to

reinstatement or to other benefits than if employee had been continuously

employed during leave period, and that ―[a]n employer must be able to show that

an employee would not otherwise have been employed at the time reinstatement is

requested in order to deny restoration to employment.‖].) Like the parties and the

Court of Appeal here, courts use language from the FMLA and the CFRA

interchangeably. (Xin Liu v. Amway Corp. (9th Cir. 2003) 347 F.3d 1125, 1132,

fn. 4 [―CFRA adopts the language of the FMLA and California state courts have

held that the same standards apply‖]; see Pang v. Beverly Hosp., Inc. (2000) 79

Cal.App.4th 986, 993 [CFRA incorporates federal regulations interpreting the

FMLA ―to the extent they are not inconsistent with [CFRA] or other state

laws‖].)2

In addition, courts have distinguished between two theories of recovery

under the CFRA and the FMLA. ―Interference‖ claims prevent employers from

wrongly interfering with employees‘ approved leaves of absence, and ―retaliation‖

or ―discrimination‖ claims prevent employers from terminating or otherwise

taking action against employees because they exercise those rights. (See Smith v.

2 For the first time in his answer brief, plaintiff claims that defendants‘ policy

on leave did not give him sufficient notice that it applied to CFRA leave, because,

at one point, it used the term ―FMLA leave‖ instead of ―CFRA leave.‖ However,

plaintiff‘s complaint and his other briefing throughout this case assume the

opposite, and he uses the terms interchangeably. In any event, because this issue

was not previously raised, and is not necessary to decide the question presented,

we do not address it here. (Cal. Rules of Court, rule 8.516(b)(1).)

11

Diffee Ford-Lincoln-Mercury, Inc. (10th Cir. 2002) 298 F.3d 955, 960; 29 U.S.C.

§ 2615 (a)(1), (a)(2).)

2. The Arbitration Award

The Court of Appeal here vacated the arbitration award because it believed

the arbitrator had committed legal error by adopting the honest belief equitable

defense that is available mostly in federal Seventh Circuit interference cases.

(See, e.g., Kariotis v. Navistar Intern. Transp. Corp. (7th Cir. 1997) 131 F.3d 672,

677 [providing FMLA defense to employer who honestly, but mistakenly, relies

on a nondiscriminatory reason in making its challenged employment decision].)

However, we need not decide whether that defense is viable in California

employment law. Even if the arbitrator erred, and even if such an error could

serve as a basis for vacating an arbitration award, plaintiff has not shown that the

error was prejudicial.

Here, the arbitrator found plaintiff was fired because he violated Power

Toyota‘s employment policy against outside work while on approved CFRA

medical leave, not because he was on approved leave. 3 The evidence to support

that finding, as reflected in the arbitrator‘s factual findings, was overwhelming.

Power Toyota explicitly warned plaintiff that its policy prohibited any outside

employment, including self-employment, while on leave. Plaintiff knowingly

ignored the warnings. Power Toyota invited plaintiff to communicate regarding

his outside employment, and he deliberately avoided any such communication.

3 Plaintiff argues that Power Toyota‘s employment provision forbidding

outside employment in this context is an illegal restraint on his CFRA leave. He

has forfeited the argument, however, for failing to raise it in the trial court.

(Delaney v. Dahl (2002) 99 Cal.App.4th 647, 660.) We express no opinion in this

case on the employment provision‘s legality in other contexts.

12

Even if Power Toyota‘s employment manual could have more clearly stated

the rule about outside employment, the award indicates plaintiff blatantly ignored

his superiors‘ clear instructions not to work at the restaurant while on CFRA leave.

To ignore this fact and to hold that Power Toyota could not have fired plaintiff

under any circumstances for violating company policy while on leave would

ignore the rule that plaintiff had ―no greater right to reinstatement or to other

benefits and conditions of employment than if [he] had been continuously

employed‖ during the statutory leave period. (29 C.F.R. § 825.216(a).) The

arbitrator found plaintiff‘s firing was based on a clear violation of company

policy — a legally sound basis for upholding the arbitrator‘s award — and would

likely have made that finding regardless of the evidence or findings as to the

employer‘s honest belief plaintiff was misrepresenting his medical condition.

Thus, even if the arbitrator was mistaken in relying on an honest belief defense,

plaintiff was not prejudiced thereby and the arbitrator‘s award in defendants‘ favor

will stand.

CONCLUSION

Whether the honest belief defense applies when an employer terminates an

employee based on a reasonable belief that the employee is violating company

policy while on CFRA or FMLA leave is an unsettled question of law. We need

not resolve that question in finding that the arbitrator here made no legal error that

deprived the plaintiff of an unwaivable statutory right when it relied upon the

substantial evidence that plaintiff violated company policy.

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For this reason, we reverse the Court of Appeal‘s judgment.

CHIN, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.

WERDEGAR, J.

CORRIGAN, J.

LIU, J.

BAXTER, J.*

DUARTE, J.**

_____________________________

* Retired Associate Justice of the Supreme Court, assigned by the Chief

Justice pursuant to article VI, section 6 of the California Constitution.

** Associate Justice of the Court of Appeal, Third Appellate District, assigned

by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

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See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Richey v. AutoNation, Inc.

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 210 Cal.App.4th 1516

Rehearing Granted

__________________________________________________________________________________

Opinion No. S207536

Date Filed: January 29, 2015

__________________________________________________________________________________

Court: Superior

County: Los Angeles

Judge: Malcolm H. Mackey

__________________________________________________________________________________

Counsel:

Scott O. Cummings for Plaintiff and Appellant.

Law Office of David J. Duchrow, Duchrow & Piano and David J. Duchrow for California Employment

Lawyers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

The deRubertis Law Firm David M. deRubertis, Helen U. Kim; Pine & Pine and Norman Pine for

Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Snell & Wilmer, Richard A. Derevan, Christopher B. Pinzon, Frank Cronin, Erin Denniston Leach and

Todd E. Lundell for Defendants and Respondents.

Fred J. Hiestand for The Civil Justice Association of California as Amicus Curiae on behalf of Defendants

and Respondents.

1

Counsel who argued in Supreme Court (not intended for publication with opinion):

Scott O. Cummings

1025 W. 190th Street, Suite 200

Gardena, CA 90248

(310) 295-2195

David J. Duchrow

Duchrow & Piano

501 Santa Monica Boulevard, Suite 505

Santa Monica, CA 90401-2443

(310) 395-5511

Todd E. Lundell

Snell & Wilmer

600 Anton Boulevard, Suite 1400

Costa Mesa, CA 92626

(714) 427-7000

2