ST. LOUIS • A St. Louis jury has awarded $8.5 million to a Danielle McGaughy, of St. Joseph, Mo., sued the gas company for racial discrimination.
After a two-week trial before St. Louis Circuit Judge Steven Ohmer, jurors found Thursday evening in favor of Danielle McGaughy, 47, of St. Joseph, Mo., a black woman who has worked for the gas utility since 2004.
McGaughy sued Spire in St. Louis Circuit Court in February 2016, claiming a hostile work environment, including coworkers’ referring to President Barack Obama as a monkey. She also claimed she was passed over for a promotion to a supervisor position in 2014 in favor of a younger, white female coworker whom McGaughy said had less education and work experience.
McGaughy’s lawsuit included other claims of racial discrimination: that she was denied five other promotions and forced to commute to Kansas City instead working at an office in St. Joseph where she lives.
McGaughy testified that although she encountered no direct racist comments at work, her managers and colleagues questioned her competence, her attorneys E.E. Keenan and Sonal Bhatia said. The trial, they said, focused on subconscious workplace bias — that employers treat workers of color differently through subtle microaggressions.
BRIEF OVERVIEW OF THE CASES THAT SHAPED THE YEAR IN EMPLOYMENT LAW
(WITH A BIT OF COLOR COMMENTARY)
During his first year or so in office, President Trump and his administration launched an all-out war on the American worker in every area touching upon the employment relationship. From wage and hour, to anti-discrimination, to workplace health and safety, to the unionized work place – the Trump government has begun to completely gut the rights and protections of the American worker.
In addition, President Trump has nominated to the Supreme Court, the Circuit Courts of Appeal, and the District Courts individuals who are extremely hostile to employee rights.
Sadly, the Democrats and Independents in Congress have been unable to stop the Trump administration. And Republicans, who should know better, have been cowed into a state of sycophantic submission. Fortunately, at least for those workers living in California, Governor Jerry Brown, Attorney General Xavier Beccera, and the Democrats in the California State Legislature have moved to beef-up protections for California workers.
This article attempts to “cherry-pick” and briefly summarize not just the most significant employment developments and cases of 2017 (and early 2018) but also those that are of the most utility to plaintiff employment practitioners.
The Trump administration’s anti-worker efforts
In a little over a year, the Trump administration has moved to eviscerate so many employee rights and protections that it is impossible to detail all of them.
Accordingly, what follows are just a few examples of the efforts by President Trump and his administration to curtail employee rights and protections.
While the Obama administration attempted to bolster employee wages by increasing the salary threshold for the White Collar Exemption from $455/workweek (or $23,660 for a full year worker) to $913/workweek (or $47,476 for a full year worker) so that more employees would be eligible for overtime, the Trump administration made clear its opposition to this Obama initiative. Likewise, while the Obama administration sought to benefit lower wage restaurant employees by establishing a “tip pooling” rule which limited the scenarios in which restaurant employers could force tipped workers to share their gratuities with others (including not just the traditionally non-tipped “back of the house” employees, but also managers and owners), the Trump administration has announced plans to undo the Obama-era “tip pooling” rule and allow restaurant owners and managers to steal the tips left for these workers.
Similarly, while the Obama administration took the position that Title VII protected LGBTQ employees from discrimination, harassment and retaliation, the Trump Justice Department has reversed course and taken the position that those employees are not entitled to Title VII protection and President Trump has taken the position that trans individuals should be kicked out of and not allowed to join the military.
The Trump EPA has argued in favor of repealing an Obama-era OSHA rule designed to protect workers from exposure to harmful silica dust (which is linked to lung cancer, kidney disease, and chronic obstructive pulmonary disease). Indeed, while the Obama administration issued a rule that reduced permissible exposure to beryllium from 2.0 micrograms per cubic meter of air to 0.2 micrograms per cubic meter of air over an eight-hour period, the Trump administration has proposed keeping beryllium exposure limits at the previous level for workers in the shipyard and construction industries. The Trump administration has also halted an Obama-era rule requiring employers to submit workplace injury and illness data for posting online.
The Trump administration has also taken affirmative steps to dramatically curtail the rights of unions and unionized workers. Indeed, on December 1, 2017, Peter B. Robb, the NLRB’s new Trump appointed General Counsel, issued an internal memorandum declaring that he would be rescinding seven “guidance memos” that were crafted by his Democratic predecessors and that he was freezing worker friendly reforms made under the Obama administration; that generally showed that he plans to take a much narrower view of worker rights than his predecessors. Similarly, while President Obama’s Solicitor General sided with the unions in Friedrichs v. California Teachers Association (2016) 136 S.Ct. 1083, and argued that public employee fair share fees were legal, President Trump’s Solicitor General sided against the unions on that precise issue in Janus v. American Federation of State, County, and Municipal Employees and argued that fair share fees are unconstitutional because they violated free speech rights.
Compare Obama Justice Department Brief of the United States as Amicus Curiae Supporting Respondents, p.11 (“Abood was correctly decided and should be reaffirmed.”), accessible at http://www.scotusblog.com/wpcontent/uploads/2015/11/14915_amicus_resp_US.authcheckdam.pdf with Trump Justice Department Brief of the United States as Amicus Curiae Supporting Petitioner, p.11 (“The court should overrule Abood and hold that the first amendment prohibits compulsory agency fees in public employment.”) accessible at https://www.supremecourt.gov/DocketPDF/16/161466/22919/20171206205129333_161466tsacUnitedStates.pdf.
U.S. Supreme Court
During 2017, the U.S. Supreme Court did not issue any major decisions impacting labor and employment law practitioners. It did, however, issue three decisions covering certain niche labor and employment law issues – Perry v. Merit Systems. Protection. Bd. (2017) 137 S.Ct. 1975 (holding that the proper review forum when the Merit Systems Protection Board dismisses a mixed case on jurisdictional grounds is district court, not the Federal Circuit); McLane Co. v. EEOC (2017) 137 S.Ct. 1159 (clarifying that the scope of review for employers facing EEOC administrative subpoenas is “abuse-of-discretion” rather than de novo review); and NLRB v. SW Gen., Inc. (2017) 137 S.Ct. 929 (holding that the Federal Vacancies Reform Act of 1998, which prevents a person who has been nominated to fill a vacant office requiring presidential appointment and Senate confirmation from performing the duties of that office in an acting capacity, applied to Lafe Solomon, who President Barack Obama directed to perform the duties of general counsel for the NLRB, once the President nominated him to fill that post; and as a result, an NLRB order charging an employer with an unfair labor practice was properly vacated).
In early 2018, the Supreme Court decided two important employment cases. In the first case, Artis v. D.C. (2018) 138 S.Ct. 594, the Supreme Court addressed an interesting procedural question involving tolling and, in the process, showed just how remarkably heartless some judges including, in particular, the conservatives on the Supreme Court can be. Stephanie Artis filed a lawsuit in federal district court alleging that her employer, the District of Columbia, violated Title VII and several District of Columbia laws. At the time she filed her lawsuit, she had two years remaining of the statutes of limitation applicable to her state law claims.
Her lawsuit languished in the District Court for two years before the Court granted the District of Columbia’s motion for summary judgment on her Title VII claims and declined to exercise supplemental jurisdiction over her state law claims.
In declining to exercise jurisdiction over her state law claims, the District Court expressly opined that Artis would not be prejudiced by the dismissal because, under the Federal Supplemental Jurisdiction Statute, 28 U.S.C. section 1367(d), her state law claims were tolled during the time period in which they were pending in federal court plus an additional 30 days. Fifty-nine days after the dismissal of her state law claims, Artis refiled those claims in the District of Columbia Superior Court. The Superior Court dismissed her state law claims holding that she filed them 29 days too late. The Superior Court bizarrely rejected Artis’s “stop the clock” interpretation of the word “tolled” in the Supplemental Jurisdiction Statute and concluded that she only had 30 days following the dismissal of her claims in federal court to refile.
On appeal, the District of Columbia Court of Appeals affirmed. On further appeal, the U.S. Supreme Court, in an opinion by Justice Ginsburg joined by Justices Breyer, Sotomayor, Kagan and Roberts, reversed, holding that “tolled” means what it says – to stop the clock. Notoriously hostile to employee rights, Justice Gorsuch filed a dissenting opinion in which Justices Kennedy, Thomas, and Alito joined, explaining that the word “tolled” can have two different meanings – to stop the clock or to not stop the clock – depending on context. And, in this case, where the Supplemental Jurisdiction Statute says that the statutes of limitation on claims are tolled during the time that the case is pending in federal court, it means that the running of the statutes of limitation is actually not tolled or stopped.
In the second case, Digital Realty Trust, Inc. v. Somers (2018) 138 S.Ct. 767, the Supreme Court oddly held that the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act only protects individuals who have reported a violation of the securities laws to the SEC. Strangely, in so holding, the Supreme Court rejected the interpretations of the Second and Ninth Circuit, which had cogently explained why an internal complaint was sufficient to invoke the protections of Dodd-Frank.
The Ninth Circuit
During 2017, the Ninth Circuit issued five important decisions in the areas of retaliation (Arias v. Raimondo (9th Cir. 2017) 860 F.3d 1185), sexual harassment (Zetwick v. County of Yolo (9th Cir. 2017) 850 F.3d 436), gender discrimination (Mayes v. WinCo Holdings, Inc. (9th Cir. 2017) 846 F.3d 1274), the Fair Credit Reporting Act (Syed v. MI, LLC (9th Cir. 2017) 846 F.3d 1034), and taxes (Clemens v. Centurylink Inc. (9th Cir. 2017) 874 F.3d 1113).
In Arias, the Ninth Circuit held that an employer’s outside counsel may be personally liable for violating the anti-retaliation provisions of the Fair Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. section 215(a)(3). The plaintiff, Jose Arias, who had sued his former employer, Angelo Dairy, in California State Court on behalf of himself and other employees under California’s Private Attorneys General Act of 2004, Cal. Labor Code section 2698 et seq., alleged that the Dairy’s outside counsel, Anthony Raimondo, set in motion an underhanded plan to derail Arias’s lawsuit by enlisting the services of U.S. Immigration and Customs Enforcement (“ICE”) to take him into custody at a scheduled deposition and then to remove him from the United States. Raimondo moved for summary judgment arguing that because he was never Arias’s actual employer, he could not be held liable under the FLSA for retaliation against someone who was never his employee. While the district court granted Raimondo’s motion, the Ninth Circuit reversed, holding that an employer’s attorney can be held liable for retaliating against his client’s employee because the employee sued his client for violations of workplace laws.
Preceding the dramatic rise of the #MeToo movement, Zetwick serves as a powerful reminder that some courts will no longer excuse sexually inappropriate conduct as being merely innocuous differences in the ways men and women routinely interact with members of the same sex and of the opposite sex. Victoria Zetwick alleged that her employer created a sexually hostile work environment in violation of Title VII by, among other things, greeting her with unwelcome hugs on more than one hundred occasions, and a kiss at least once, during a 12-year period. Opining that “hugging and kissing on the cheek in the workplace is not only insufficient to sustain a claim of hostile work environment, but overextends the intended scope of Title VII,” the District Court granted the employer’s motion for summary judgment. (Zetwick v. Cty. of Yolo, (E.D. Cal. 2014) 66 F.Supp.3d 1274, 1280.)
On appeal, the Ninth Circuit reversed, holding, “we cannot accept the conclusion that Zetwick did not state an actionable claim of a sexually hostile work environment . . . A reasonable juror could find, for example, from the frequency of the hugs, that [her supervisor’s] conduct was out of proportion to ‘ordinary workplace socializing’ and had, instead, become abusive.” (850 F.3d at 443444.) Importantly, the Ninth Circuit also highlighted several mistakes that the district court made (that are also commonly made by other courts): (1) the district court applied an incorrect standard for assessing hostile work environment claims – the standard is “severe or pervasive,” not “severe and pervasive”; (2) the district court completely overlooked legal recognition of the potentially greater impact of harassment from a supervisor versus a coworker; (3) the court improperly disregarded “me too” evidence showing that the alleged harasser also sexually harassed others – the sexual harassment of others, if shown to have occurred, is relevant and probative of a defendant’s general attitude of disrespect toward his female employees and his sexual objectification of them; (4) it was improper for the court to determine that Zetwick’s testimony that another woman was offended by the alleged harasser’s hugs, based on Zetwick’s firsthand observation, was somehow less credible than that other woman’s assertion in a post hoc declaration that she was not offended as a reasonable jury could conclude that the woman had reasons not to complain about the past treatment by her employer and to make a declaration, not subject to cross-examination, to support her employer’s position.
As in Zetwick, the Ninth Circuit reversed summary judgement granted to an employer in Mayes and highlighted multiple mistakes made by the district court (mistakes that are also commonly made by other courts). Katie Mayes sued her former employer, a grocery store, for gender discrimination after she was fired for taking a stale cake from the store’s bakery to the break room to share with fellow employees. The district court granted the store’s motion for summary judgment, finding that Mayes was unable to prove pretext. On appeal, the Ninth Circuit initially explained that an employee can prove pretext either: (1) directly, by showing that unlawful discrimination more likely motivated the employer; or (2) indirectly, by showing that the employer’s proffered explanation is unworthy of credence because it is internally inconsistent or otherwise not believable.
Then, the Ninth Circuit found that summary judgment was inappropriate because Mayes was able to establish pretext both directly and indirectly. With respect to the direct route of proving pretext, the Ninth Circuit found that unlawful discrimination more likely motivated the employer because Mayes put forward evidence that one of the individuals who participated in the decision-making process (but did not participate in the ultimate termination decision): (1) commented that a man “would be better” at leading one of the company’s committees; (2) commented that she did not like “a girl” running the company’s freight crew; and (3) criticized Mayes, but not her male counterpart, for leaving work early to care for her children. In this regard, the Ninth Circuit held that racist or sexist statements constitute direct evidence of discrimination and rejected the district court’s determination that these were so-called “stray remarks.”
The Ninth Circuit also rejected the district court’s view that direct evidence had to be “specific and substantial.” With respect to the direct route of proving pretext, the Ninth Circuit found that the employer’s proffered explanation for the termination was unworthy of credence because: (1) multiple employees testified that it was a common, accepted practice – rather than an offense punished by termination – for supervisors such as Mayes to take cakes to the break room; (2) the grocery replaced her with a less qualified male employee; the Ninth Circuit explained that evidence that an employer replaced a plaintiff with a less qualified person outside the protected class can be evidence of pretext.
Syed v. MI, LLC is a case of first impression in the federal appellate courts: whether a prospective employer may satisfy the Fair Credit Reporting Act’s (“FCRA”) disclosure requirements by providing a job applicant with a disclosure that a consumer report may be obtained for employment purposes which simultaneously serves as a liability waiver for the prospective employer and others. The Ninth Circuit held that a prospective employer violates the FCRA when it procures a job applicant’s consumer report after including a liability waiver in the same document as the statutorily mandated disclosure. The Ninth Circuit also held that in light of the clear statutory language that the disclosure document must consist “solely” of the disclosure, a prospective employer’s violation of the FCRA is “willful” when the employer includes terms in addition to the disclosure, such as a liability waiver, before procuring a consumer report or causing one to be procured.
Finally, in Clemens, the Ninth Circuit followed the Third, Seventh, and Tenth Circuits and held that Title VII authorizes district courts, in their sound discretion, to permit equitable gross-up adjustments to compensate successful plaintiffs for increased income-tax liability resulting from the receipt of a back-pay award in one lump sum.
One Ninth Circuit case, Perez v. City of Roseville (9th Cir. 2018) 2018 WL 797453, from thus far in 2018 merits discussion. Janelle Perez was a probationary police officer employed by the Roseville Police Department. Although she was married, she had an offduty affair with a fellow police officer – Shad Begley.
Begley’s wife learned about the affair and was not very happy about it. So, she reported Begley and Perez to the police department. The police department investigated the complaint, corroborated the affair between Perez and Begley, and issued to them a written reprimand. Perez appealed the Reprimand. At the hearing, the Department informed Perez that she had been fired. When Perez asked why, the Department refused to give a reason. Two weeks later, the Department issued a revised written Reprimand to Perez reversing the statements about Unsatisfactory Work Performance and Conduct and, instead, basing it on Perez’s inappropriate Use of Personal Communication Devices. Perez did not appeal this version of the Reprimand because she had already been fired. Instead, Perez sued the Department pursuant to 42 U.S.C. Section 1983, alleging that the Department’s decision to fire her violated her constitutional rights to privacy and intimate association. The Department filed a motion for summary judgment arguing that (1) the decision to fire Perez had nothing to do with her extramarital affair; and (2) even if her affair played a role in the decision, it didn’t do anything wrong as Perez had no constitutional right to not be fired for having an affair.
The district court agreed with the Department and granted its motion. On appeal, the Ninth Circuit reversed. Initially, the Ninth Circuit held that public employees such as police officers have a right to privacy in their private, off-duty sexual behavior. Then, the Ninth Circuit concluded that there was a genuine factual dispute about whether the Department fired her “in part” because of her affair. In so ruling, the Ninth Circuit focused on several critical pieces of evidence including: (1) a non-decision-maker – who played a role in contributing information in the decision-making process – morally disapproved of the affair and thought that Perez should be fired because of it; (2) the speed with which the Department “discovered” unrelated problems with Perez’s performance – within 8 weeks after it learned about the affair; and (3) the shifting explanations offered by the Department for firing Perez. When it first notified Perez that she had been fired, the Department refused to provide a reason. Next, well after her firing, the Department issued a new Reprimand to Perez reversing the findings of “Conduct Unbecoming” and “Unsatisfactory Work Performance” and substituting a new violation (“Use of Personal Communication Devices”). Then, when the litigation began, the Department put forth the three brand new reasons – failure to get along with women officers, citizen’s complaint, and bad attitude with supervisor – all of which differ from both the original and the belated reprimands issued by the Department after she was fired.
Two non-Ninth Circuit cases merit a brief discussion as they: (1) put the Ninth Circuit to shame and cast doubt on its reputation as the Nation’s leading progressive court; and (2) shed light on an absolutely fascinating internecine war between the Trump/Jeff Sessions Justice Department and, what for all intents and purposes is still, the Obama EEOC, having two Democratic Obama appointees, one Republican Obama appointee, and no General Counsel. In Zarda v. Altitude Express, Inc. (2nd Cir. 2018) 883 F.3d 100, the Second Circuit, in a 103 en banc decision, joined the Seventh Circuit and the EEOC in holding that Title VII prohibits discrimination on the basis of sexual orientation. In so holding, the Second Circuit rejected the arguments of the Trump/Jeff Sessions Justice Department which had filed an amicus brief stating that it, and not the EEOC, was speaking on behalf of the United States and that “discrimination because of sexual orientation is not discrimination because of sex under Title VII.” In EEOC v. R.G. & G.R. Harris Funeral Homes, Inc. (6th Cir. 2018) 2018 WL 1177669, the Sixth Circuit found persuasive the arguments of the EEOC and held that Title VII prohibits discrimination on the basis of an employee’s status as a transgender employee. Importantly, the Sixth Circuit also rejected an attempt by the Funeral Homes employer to argue that the federal Religious Freedom Restoration Act serves as an affirmative defense to a Title VII claim being prosecuted by the EEOC.
California Supreme Court
The most important employment law case issued by the California Supreme Court in 2017 involved California’s anti-SLAPP statute, Code of Civil Procedure section 425.161. California enacted the antiSLAPP statute in 1992 “out of concern over ‘a disturbing increase’” in civil suits “aimed at preventing citizens from exercising their political rights or punishing those who have done so.” (Simpson StrongTie Co., Inc. v. Gore (2010) 49 Cal.4th 12, 21.) The courts have recognized that “[t]he quintessential SLAPP is filed by an economic powerhouse to dissuade its opponent from exercising its constitutional right to free speech or to petition.” (Nam v. Regents of the University of California (2016) 1 Cal.App.5th 1176, 1193.)
Unfortunately, since its passage, “economic powerhouses” have perverted the anti-SLAPP statute and used it to quash the very people whom it was supposed to protect. For example, in Nesson v. Northern Inyo County Local Hospital Dist. (2012) 204 Cal.App.4th 65, DeCambre v. Rady Children’s Hospital San Diego (2015) 235 Cal.App.4th 1, Tuszynska v. Cunningham (2011) 199 Cal.App.4th 257, and Hunter v. CBS Broadcasting Inc. (2013) 221 Cal.App.4th 1510, employers used the anti-SLAPP statute to defeat FEHA discrimination claims.
In Park v. Board of Trustees (2017) 2 Cal.5th 1057, the California Supreme Court took an important first step toward restoring anti-SLAPP jurisprudence so that it is more closely aligned with the legislative intent by:
(1) disapproving of Nesson, DeCambre, and Tuszynska; (2) expressly taking no opinion regarding whether the terrible Hunter decision was correctly decided; and (3) specifically approving of the terrific pro-employee Nam v. Regents of the University of California case, supra, 1 Cal.App.5th 1176. Ultimately, the Supreme Court concluded: “a claim is not subject to a motion to strike simply because it contests an action or decision that was arrived at following speech or petitioning activity, or that was thereafter communicated by means of speech or petitioning activity. Rather, a claim may be struck only if the speech or petitioning activity itself is the wrong complained of, and not just evidence of liability or a step leading to some different act for which liability is asserted.” (2 Cal.5th at 1060.)
In Williams v. Superior Court (2017) 3 Cal.5th 531, the Supreme Court confirmed that broad discovery is available in claims brought under California’s Private Attorneys General Act (“PAGA”) and held that the contact information of those a plaintiff purports to represent is routinely discoverable as an essential prerequisite to effectively seeking group relief, without any requirement that the plaintiff first show good cause.
Mendoza addresses employees’ rest days
In Mendoza v. Nordstrom Inc. (2017) 3 Cal. 5th 531, the California Supreme Court turned in a homework assignment given to it by the Ninth Circuit, 865 F.3d 1261 (9th Cir. 2017), and addressed several questions regarding California Labor Code sections 551, 552 and 556 by stating the following:
A day of rest is guaranteed for each workweek. Periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited.
The exemption for employees working shifts of six hours or less applies only to those who never exceed six hours of work on any day of the workweek. If on any one day an employee works more than six hours, a day of rest must be provided during that workweek, subject to whatever other exceptions might apply.
An employer causes its employee to go without a day of rest when it induces the employee to forgo rest to which he or she is entitled. An employer is not, however, forbidden from permitting or allowing an employee, fully apprised of the entitlement to rest, independently to choose not to take a day of rest.
California Courts of Appeal
Ly v. Cty. of Fresno
One of the most surprising and, perhaps, troublesome cases of 2017 is Ly v. Cty. of Fresno (2017) 16 Cal.App.5th 134. In Ly, the Court of Appeal held that a decision in a workers’ compensation proceeding could have preclusive effects in an employee’s FEHA case. Three Laotian correctional officers filed suit against their employer, alleging that they were subjected to racial and national origin discrimination, harassment, and retaliation. The three simultaneously pursued workers’ compensation claims. The workers’ compensation judges denied the plaintiffs’ claims after finding their employers’ actions were nondiscriminatory, good faith personnel decisions. Subsequently, in the FEHA action, their employer moved for summary judgment based on the doctrines of res judicata and collateral estoppel, arguing the workers’ compensation decisions barred the plaintiffs’ FEHA claims. The trial court granted summary judgment, and the Court of Appeal affirmed. Unless this decision is depublished or overruled, there is a high degree of risk that the workers’ compensation system will be hijacked or militarized by plaintiff and defense employment attorneys to serve as a proxy for any employment claims that employees may bring in civil court. Such a development will be unfortunate not only for the workers’ compensation system but also employees and employers.
Bareno v. San Diego Cmty. Coll. Dist.
Bareno v. San Diego Cmty. Coll. Dist. (2017) 7 Cal.App.5th 546, is a terrific case for plaintiff employment practitioners handling summary judgment and/or claims involving the California Family Rights Act (“CFRA”). Leticia Bareno was employed by the San Diego Community College District. Bareno requested medical leave and provided a medical certification from her physician. After the time period identified in her request for leave expired and Bareno failed to report to work, the District informed her that it had accepted her voluntary resignation. Bareno immediately informed the District that she had not resigned and that she had emailed her supervisor an additional medical certification indicating her need for additional medical leave. The College, claiming that the supervisor never received the additional medical certification, refused to reconsider its position. Bareno sued, alleging that the District had retaliated against her for taking medical leave, in violation of CFRA. The College moved for summary judgment, and the trial court granted the motion. On appeal, Bareno argued that the trial court erred in granting summary judgment on her CFRA retaliation claim because there were triable issues of material fact in dispute. The Court of Appeal agreed, initially noting that:
When viewed as a whole, it is clear that CFRA and its implementing regulations envision a scheme in which employees are provided reasonable time within which to request leave for a qualifying purpose, and to provide the supporting certification to demonstrate that the requested leave was, in fact, for a qualifying purpose, particularly when the need for leave is not foreseeable or when circumstances have changed subsequent to an initial request for leave. (7 Cal.App.5th at 565.)
Accordingly, the Court of Appeal held that the question of whether notice is sufficient under CFRA is a question of fact. The court then reversed, finding the following three disputed issues of material fact. First, the court concluded that there was a triable dispute regarding whether Bareno’s supervisor had timely received the email providing notification of Bareno’s need for additional medical leave. Second, it concluded that even if Bareno’s supervisor had not received the email, there was a triable issue as to whether it fulfilled its obligations under CFRA, which obligates employers to make further inquiries of an employee if it requires additional information from that employee regarding the employee’s request for leave. Third, the court concluded that even if Bareno’s supervisor had not received the email, there was a triable issue as to whether the College decided to interpret Bareno’s absences as a “voluntary resignation,” despite evidence to the contrary, in retaliation for taking medical leave. In reversing summary judgment, the Court of Appeal reiterated that “[M]any employment cases present issues of intent, … motive, and hostile working environment, issues not determinable on paper. Such cases … are rarely appropriate for disposition on summary judgment, however liberalized [summary judgment standards may] be.” (7 Cal.App.5th at 561, quoting Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 286.) Husman v. Toyota Motor Credit Corp.
Husman v. Toyota Motor Credit Corp. (2017) 12 Cal.App.5th 1168, should serve as a sharp reminder to employment practitioners that not all employee oppositional conduct will qualify as protected activity. Husman affirmed a summary judgment on Joseph Husman’s FEHA retaliation claim against his former employer, Toyota Motor Credit Corporation, because his criticisms regarding Toyota’s commitment to diversity did not rise to the level of protected activity.
Husman, a gay man, ran Toyota’s diversity and inclusion program. After he was fired, he claimed that Toyota retaliated against him because of his protected activity in complaining that:
(1) Toyota would not include AIDS Walk LA on the list of the company’s automatic payroll deductions; and (2) while Toyota’s LGBT employees had made some progress, there was still work to be done. With respect to his first complaint, the Court of Appeal found that it did not constitute protected activity because the company’s denial of his request did not violate any FEHA prohibition. With respect to his second complaint, the court found that it fell “short of communicating a particularized complaint about discriminatory treatment of LGBT employees and, instead, was likely understood as an exhortation common among diversity advocates to the effect that, while progress has been made, much work remains to be done.” (Id. at 1194.)
Although Husman was a disappointing retaliation case for plaintiff employment practitioners, Husman is, on the other hand, a terrific summary judgment case for plaintiffs as it effectively hammers the final “nail in the coffin” of the socalled hirerfirer or sameactor inference as an argument on summary judgment. Initially, the Court of Appeal noted that while the sameactor inference was “once commonly relied on by courts affirming summary judgment against a plaintiff alleging discriminatory action, the sameactor inference has lost some of its persuasive appeal in recent years.” (Id. at 1188.) The court then went on to explain that “[p]sychological science on moral licensing reveals that, when a person makes both an initial positive employment decision and a subsequent negative employment decision against a member of a protected group, the second negative decision is more likely to have resulted from bias, not less.” (Id. at 1189.)
Andrew H. Friedman is a partner with Helmer Friedman LLP in Culver City. He received his B.A. from Vanderbilt University and his J.D. from Cornell Law School, where he was an Editor of the Cornell Law Review. Mr. Friedman clerked for the Honorable Judge John T. Nixon (U.S. District Court for the Middle District of Tennessee). Mr. Friedman represents individuals and groups of individuals in employment law and consumer rights cases. Mr. Friedman is the author of Litigating Employment Discrimination Cases (James Publishing 20052016). Mr. Friedman served as Counsel of Record in Lightfoot v. Cendant Mortgage Corp. et al. (Case No. 1056068) where he successfully convinced the U.S. Supreme Court to grant the petition for certiorari that he filed on behalf of his clients. In January 2017, the Supreme Court, in a unanimous decision authored by Justice Sotomayor, reversed the Ninth Circuit and ruled in favor of Mr. Friedman’s clients.
In Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016), a 6-2 opinion written by Justice Kennedy, the Supreme Court took a (small) step back from that draconian anti-class action bulwark – Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 131 S. Ct. 2541 (2011). The Supreme Court made clear that plaintiffs may use “representative evidence,” not specific as to each individual involved, to show that the group could have had the same legal claim, without having to prove it individually – “a representative or statistical sample, like all evidence, is a means to establish or defend against liability.” It is allowed into a trial, of a class action or other type of case, depending “on the degree to which the evidence is reliable in proving or disproving the elements” of the legal claim at stake, the opinion added. “It follows that the Court would reach too far were it to establish general rules governing the use of statistical evidence, or so-called representative evidence, in all class-action cases.”
“In many cases,” according to the Court majority, “a representative sample is ‘the only practicable means to collect and present relevant data’” to prove that the company or entity being sued was legally at fault. The opinion went on to provide some guidance to when such evidence would be allowed into a class action case: that is, when each member of the class could rely on the sample to establish that he would have won the case, if he had filed it individually, rather than along with others.
California passed a bevy of new employment laws in 2016. Here is a summary of the most important ones.
Minimum Wage Increases (SB 3)
Beginning on January 1, 2017, employers with 26 or more employees will have to pay a minimum wage of $10.50 per hour. This minimum wage rate will gradually increase to $15.00 per hour by 2022 as shown below:
January 1, 2017 – 10.50
January 1, 2018 – 11.00
January 1, 2019 – 12.00
January 1, 2020 – 13.00
January 1, 2021 – 14.00
January 1, 2022 – 15.00
January 1, 2023 – 15.00
Smaller employers (with 25 or fewer employees) will be required to pay the higher minimum wage rates starting in 2018 as shown below:
January 1, 2017 – 10.00
January 1, 2018 – 10.50
January 1, 2019 – 11.00
January 1, 2020 – 12.00
January 1, 2021 – 13.00
January 1, 2022 – 14.00
January 1, 2023 – 15.00
Equal Pay Act Expanded To Cover Race And Ethnicity (SB 1063)
In 2015, the California Legislature enacted and Governor Brown signed Labor Code Section 1197.5 into law which made it the Nation’s most protective equal pay act. Section 1197.5 didn’t just require employers to pay employees of opposite genders equal pay for equal work but, instead, required equal pay for substantially similar work. This year, the Legislature enacted and Governor Brown signed into law amendments to the Equal Pay Act which prohibit wage differences based upon race or ethnicity for substantially similar work when viewed as a composite of skill, effort, responsibility, and performed under similar working conditions. Exceptions include where the payment is made based on any bona fide factor other than sex/race/ethnicity, such education, training, or experience.
Employers Prohibited From Using An Employee’s Prior Salary To Justify Wage Differences (AB 1676)
Employers often try to justify differences in pay between men and women by explaining that they based the differences on the employees’ prior salaries. This new law prohibits employers from using an employee’s prior salary, by itself, to justify any compensation disparity.
Employer’s Required To Provide Employees With Notice Regarding Domestic Violence, Sexual Assault And Stalking Protections (AB 2337)
California law prohibits employers from terminating or in any other manner discriminating or retaliating against an employee who takes time off from work to address domestic violence, sexual assault, or stalking. This new law mandates that employers must inform each employee of his or her rights established under these laws by providing certain information in writing to new employees upon hire and to other employees upon request.
Settlement Agreements Can No Longer Prevent The Disclosure Of Information Regarding Certain Sex Offenses (AB 1682)
Existing law allows parties to enter into a settlement agreement requiring the nondisclosure of information regarding sex offenses. This new law now prohibits parties from entering into settlement agreements (on or after January 1, 2017) that would prevent the disclosure of factual information that establishes a cause of action for civil damages for a felony sex offense, an act of childhood sexual abuse, an act of sexual exploitation of a minor, or an act of sexual assault against an elder or dependent adult.
Employees Of Temporary Services Employers Must Be Paid Weekly (AB 1311)
Current law (Labor Code Section 201.3) requires that temporary services employers must pay their employees weekly and that a violation of these provisions is punishable as a misdemeanor. This new law extends this weekly pay requirement to security guards employed by those who are both private patrol operators and temporary services employers.
Employers Can Not Ask An Applicant To Disclose Certain Criminal History Information (AB 1843)
Section 432.7 of the Labor Code prohibits employers (both public and private) from asking applicants for employment to disclose, or from utilizing as a factor in determining any condition of employment, information regarding an arrest or detention that did not result in a conviction. Certain information concerning a referral or participation in any pretrial or post-trial diversion program is also prohibited from disclosure.
This new law now prohibits an employer from asking applicants for employment to disclose, or from utilizing as a factor in determining any condition of employment, information concerning or related to an arrest, detention, processing, diversion, supervision, adjudication, or court disposition that occurred in juvenile court. In addition, this law provides that “conviction,” as used in the statute, excludes an adjudication by a juvenile court or any other court order or action taken involving a person who is under the jurisdiction of the juvenile court.
Employers Prohibited From Engaging In Certain Unfair Immigration-Related Practices (SB 1001)
Employers are prohibited from: (a) request more or different documents than are required under federal law; (b) refuse to honor documents or work authorization based upon the status or term of status that accompanies the authorization to work; or (c) reinvestigate or reverify an incumbent employee’s authorization to work. Applicants are authorized to file a complaint with the Division of Labor Standards Enforcement.
California Employees Guaranteed Access To California Law And Forum (SB 1241)
This bill applies to contracts entered into, modified, or extended on or after January 1, 2017 and prohibits an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to adjudicate outside of California a claim (in either litigation or arbitration) arising in California or deprive the employee of the substantive protection of California law with respect to a controversy arising in California. The bill specifies that injunctive relief is available as a remedy and authorizes a court to award reasonable attorney’s fees. The bill exempts a contract with an employee who was represented by legal counsel.
On November 8, 2016, the U.S. Supreme Court heard oral argument in a case Helmer Friedman LLP successfully convinced the high court to hear. The case — Lightfoot v. Fannie Mae, Cendant Mortgage Corporation case (14-1055) — concerns whether individual homeowners who have been wrongly or fraudulently foreclosed upon by Fannie Mae have the right to sue the mortgage giant in the state courts.
According to the Supreme Court, approximately 7,000-8,000 petitions for a writ of certiorari are filed each Term and the Court grants and hears oral argument in merely 80 of those cases – about 1%.
If you want to check out our petition for a writ of certiorari which got the ball in motion for this oral argument, you can read it here http://www.helmerfriedman.com/docs/Petition-Writ_Crystal-Lightfoot-v-Cendant-Mortgage.pdf
If you care to read all of the documents and commentary about the case,you can check it out here http://www.helmerfriedman.com/us-supreme-court-grants-petition-certiorari/
The June 2016 edition of The Advocate Magazine – published by the Consumer Attorneys Association of Los Angeles – features an article which overviews the “best” and “worst” employment cases (from the perspective of the plaintiff employee). The article covers cases from 2015 (and early 2016) including four opinions from the U.S. Supreme Court — in three of which Justice Scalia surprisingly took the side of the employees. The article can read here – http://www.helmerfriedman.com/docs/Best-Worst-Employment-Law-Cases-June-2016-CAALA.pdf
In Green v. Brennan, 2016 WL 2945236 (U.S. May 23, 2016), the U.S. Supreme Court considered when the clock starts to run on a constructive discharge claim. Before discussing the Supreme Court’s decision, a little background information is in order.
Generally, employees only have limited amounts of time to bring their employment-related claims against their employers. How much time is determined by various laws called “statutes of limitation.” For example, in California, employees have one year to file a complaint of discrimination with the California Department of Fair Employment and Housing (“DFEH”). Then, employees have an additional year from the date of the DFEH’s Right-To-Sue Letter to file a lawsuit in court.
Under California state law, the statutes of limitation on a wrongful termination claim begin to run on actual termination date, rather than the date when employer informs the employee that discharge was inevitable. Romano v. Rockwell Internat., Inc., 14 Cal. 4th 479 (1996). Under federal law, the statutes of limitation begin to run when the employer notifies the employee that his or her employment will be ending. Delaware State Coll. v. Ricks, 449 U.S. 250, 259, 101 S. Ct. 498, 504 (1980).
But, when does the clock begin to run on a constructive discharge claim (a claim that the employer forced the employee to resign)? Say that on November 1st the employee gives her employer two weeks notice that she will be resigning on November 15th. Do the statutes of limitations begin to run on November 1st or November 15th? In Green v. Brennan, 2016 WL 2945236 (U.S. May 23, 2016), the U.S. Supreme Court examined this very issue. The Supreme Court concluded that the statutes begin to run on the date the employee gives notice of his or her intent to resign (rather than his or her last day of employment).
Green v. Brennan involved a former U.S. Postal Service Employee, Marvin Green, who claimed that he was discriminated against on the basis of his race (African-American). Green worked for the Postal Service for nearly 35 years. Green complained that he was denied a promotion because of his race. Not surprisingly, following his complaint, his relations with his supervisors crumbled. Relations hit a nadir on December 11, 2009, when two of Green’s supervisors accused him of intentionally delaying the mail—a criminal offense. On December 16, 2009, Green and the Postal Service signed an agreement whereby the Postal Service promised not to pursue criminal charges in exchange for Green’s promise to leave his post. The agreement gave Green a choice: effective March 31, 2010, he could either retire or report for duty in another location at a considerably lower salary. Green chose to retire. He submitted his resignation to the Postal Service on February 9, 2010, effective March 31.
Eventually, Green contacted an Equal Employment Opportunity (EEO) counselor to report an unlawful constructive discharge. He contended that his supervisors had threatened criminal charges and negotiated the resulting agreement in retaliation for his original complaint. He alleged that the choice he had been given effectively forced his resignation in violation of Title VII.
Subsequently, Green filed suit in the Federal District Court for the District of Colorado, alleging, inter alia, that the Postal Service constructively discharged him. The Postal Service moved for summary judgment, arguing that Green had failed to make timely contact with an EEO counselor within 45 days of the “matter alleged to be discriminatory,” as required by 29 CFR § 1614.105(a)(1). The District Court granted the Postal Service’s motion for summary judgment. The Tenth Circuit affirmed holding that Green’s claim was time-barred because the date Green signed the settlement agreement was the Postal Service’s last discriminatory act triggering the filing deadline that Green failed to meet.
In a 7-1 decision, the Supreme Court held the time period for filing a constructive discharge claim “begins running only after the employee resigns.” The Court explained that this means the clock begins to run when the employee gives definite “notice” of his or her resignation, not the date the resignation is effective. In other words, if an employee gives two weeks notice, the clock starts to run on the date of the notice, not two weeks later on the employee’s last day of work.
Employees considering resignation due to intolerable working conditions should consult with employment counsel before submitting their resignation. The courts have made it very difficult for employees to successfully bring a constructive discharge claim. Employment counsel can help employees properly place their employers on notice as to the intolerable working conditions.
Governor Jerry Brown tapped one of the state’s top young labor lawyers, Kevin Kish, 38, to be director of California’s Department of Fair Employment and Housing (DFEH), the largest civil rights agency in the nation. He replaces Phyllis Cheng, a 2008 Schwarzenegger appointee who resigned in October.
Kish graduated with a Bachelor of Arts degree in sociology/anthropology from Swarthmore College and graduated with a Juris Doctor from Yale Law School in 2004. He was admitted to the State Bar of California later in the year.
After graduating law school, Kish, a Democrat, joined Bet Tzedek Legal Services in Los Angeles, one of the nation’s premier public interest law firms. He left in 2005 to clerk for U.S. District Myron Thompson for the Middle District of Alabama for a year, but returned to the firm in 2006 after receiving a Skadden Fellowship. The Los Angeles Times described the Skadden Foundation as “a legal Peace Corps.”
Two years later, Kish became director of the firm’s Employment Rights Project, leading its employment litigation, policy and outreach initiatives. He focused on illegal retaliation against low-wage workers and cases involving human trafficking. But the firm handles a broad range of cases involving consumer rights, elder law, housing and public benefits.
In 2011, Kish was co-counsel in a class-action lawsuit that won a $1million settlement for Los Angeles carwash workers over wage theft. Four carwash company owners agreed to compensate around 400 workers for routinely working 10-hour days for less than half the minimum wage. Some of the workers toiled for just tips.
Kish and lawyers from two other firms won a $21 million settlement from Walmart contractor Schneider Logistics Transloading and Distribution Inc. in May over the retailer’s alleged abuse of minimum wage and overtime payments to warehouse workers in Eastvale, California. The National Law Review found the settlement amount “staggering” but said its true significance lay in the “courts’ willingness to untangle multi-level business operations and hold all involved entities liable for wage and hour violations.”
Kish has been an adjunct professor of law at Loyola Law School in L.A. since 2012. He developed and teaches a seminar and clinical course for students to “investigate, mediate and recommend outcomes for employment retaliation claims.” He speaks Spanish, Italian and French.
She tried to stay quiet, she really did. But after eight years of keeping a heavy secret, the day came when Alayne Fleischmann couldn’t take it anymore.
“It was like watching an old lady get mugged on the street,” she says. “I thought, ‘I can’t sit by any longer.'”
Fleischmann is a tall, thin, quick-witted securities lawyer in her late thirties, with long blond hair, pale-blue eyes and an infectious sense of humor that has survived some very tough times. She’s had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower.
Fleischmann is the central witness in one of the biggest cases of white-collar crime in American history, possessing secrets that JPMorgan Chase CEO Jamie Dimon late last year paid $9 billion (not $13 billion as regularly reported – more on that later) to keep the public from hearing.
Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as “massive criminal securities fraud” in the bank’s mortgage operations.
Thanks to a confidentiality agreement, she’s kept her mouth shut since then. “My closest family and friends don’t know what I’ve been living with,” she says. “Even my brother will only find out for the first time when he sees this interview.”
Six years after the crisis that cratered the global economy, it’s not exactly news that the country’s biggest banks stole on a grand scale. That’s why the more important part of Fleischmann’s story is in the pains Chase and the Justice Department took to silence her.
She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. “Every time I had a chance to talk, something always got in the way,” Fleischmann says.
This past year she watched as Holder’s Justice Department struck a series of historic settlement deals with Chase, Citigroup and Bank of America. The root bargain in these deals was cash for secrecy. The banks paid big fines, without trials or even judges – only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called “statements of facts,” which were conveniently devoid of anything like actual facts.
And now, with Holder about to leave office and his Justice Department reportedly wrapping up its final settlements, the state is effectively putting the finishing touches on what will amount to a sweeping, industry-wide effort to bury the facts of a whole generation of Wall Street corruption. “I could be sued into bankruptcy,” she says. “I could lose my license to practice law. I could lose everything. But if we don’t start speaking up, then this really is all we’re going to get: the biggest financial cover-up in history.”
Alayne Fleischmann grew up in Terrace, British Columbia, a snowbound valley town just a brisk 18-hour drive north of Vancouver. She excelled at school from a young age, making her way to Cornell Law School and then to Wall Street. Her decision to go into finance surprised those closest to her, as she had always had more idealistic ambitions. “I helped lead a group that wrote briefs to the Human Rights Chamber for those affected by ethnic cleansing in Bosnia-Herzegovina,” she says. “My whole life prior to moving into securities law was human rights work.”
But she had student loans to pay off, and so when Wall Street came knocking, that was that. But it wasn’t like she was dragged into high finance kicking and screaming. She found she had a genuine passion for securities law and felt strongly she was doing a good thing. “There was nothing shady about the field back then,” she says. “It was very respectable.”
In 2006, after a few years at a white-shoe law firm, Fleischmann ended up at Chase. The mortgage market was white-hot. Banks like Chase, Bank of America and Citigroup were furiously buying up huge pools of home loans and repackaging them as mortgage securities. Like soybeans in processed food, these synthesized financial products wound up in everything, whether you knew it or not: your state’s pension fund, another state’s workers’ compensation fund, maybe even the portfolio of the insurance company you were counting on to support your family if you got hit by a bus.
As a transaction manager, Fleischmann functioned as a kind of quality-control officer. Her main job was to help make sure the bank didn’t buy spoiled merchandise before it got tossed into the meat grinder and sold out the other end.
A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.
“I could lose everything. But if we don’t start speaking up, we’re going to get the biggest financial cover-up in history.”
“If you sent him an e-mail, he would actually come out and yell at you,” she recalls. “The whole point of having a compliance and diligence group is to have policies that are set out clearly in writing. So to have exactly the opposite of that – that was very worrisome.” One former high-ranking federal prosecutor said that if he were taking a criminal case to trial, the information about this e-mail policy would be crucial. “I would begin and end my opening statement with that,” he says. “It shows these people knew what they were doing and were trying not to get caught.”
In late 2006, not long after the “no e-mail” policy was implemented, Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Almost immediately, Fleischmann and some of the diligence managers who worked alongside her began to notice serious problems with this particular package of loans.
For one thing, the dates on many of them were suspiciously old. Normally, banks tried to turn loans into securities at warp speed. The idea was to go from a homeowner signing on the dotted line to an investor buying that loan in a pool of securities within two to three months. Thus it was a huge red flag to see Chase buying loans that were already seven or eight months old.
What this meant was that many of the loans in the GreenPoint deal had either been previously rejected by Chase or another bank, or were what are known as “early payment defaults.” EPDs are loans that have already been sold to another bank and have been returned after the borrowers missed multiple payments. That’s why the dates on them were so old.
In other words, this was the very bottom of the mortgage barrel. They were like used cars that had been towed back to the lot after throwing a rod. The industry had its own term for this sort of loan product: scratch and dent. As Chase later admitted, it not only ended up reselling hundreds of millions of dollars worth of those crappy loans to investors, it also sold them in a mortgage pool marketed as being above subprime, a type of loan called “Alt-A.” Putting scratch-and-dent loans in an Alt-A security is a little like putting a fresh coat of paint on a bunch of junkyard wrecks and selling them as new cars. “Everything that I thought was bad at the time,” Fleischmann says, “turned out to be a million times worse.” (Chase declined to comment for this article.)
When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes – an astronomically high defect rate for any pool of mortgages; Chase’s normal tolerance for error was five percent. One mortgage in particular that sticks out in Fleischmann’s mind involved a manicurist who claimed to have an annual income of $117,000. Fleischmann figured that even working seven days a week, this woman would have needed to work 488 days a year to make that much. “And that’s with no overhead,” Fleischmann says. “It wasn’t possible.”
But when she and others raised objections to the toxic loans, something odd started happening. The number-crunchers who had been complaining about the loans suddenly began changing their reports. The process she describes is strikingly similar to the way police obtain false confessions: The interrogator verbally abuses the target until he starts producing the desired answers. “What happened,” Fleischmann says, “is the head diligence manager started yelling at his team, berating them, making them do reports over and over, keeping them late at night.” Then the loans started clearing.
As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as “stated income unreasonable for profession,” meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.
Then, on December 15th, a Chase sales executive held a lengthy meeting with reps from GreenPoint and the diligence team to examine the remaining loans in the pool. When they got to the manicurist, Fleischmann remembers, one of the diligence guys finally caved under the pressure from the sales executive. “He had his hands up and just said, ‘OK,’ and he cleared it,” says Fleischmann, adding that he was shaking his head “no” even as he was saying yes. Soon afterward, the error rate in the pool had magically dropped below 10 percent – a threshold that itself had just been doubled to clear the way for this deal.
After that meeting, Fleischmann testified, she approached a managing director named Greg Boester and pleaded with him to reconsider. She says she told Boester that the bank could not sell the high-risk loans as low-risk securities without committing fraud. “You can’t securitize these loans without special disclosure about what’s wrong with them,” Fleischmann told him, “and if you make that disclosure, no one will buy them.”
A former Olympic ski jumper, Boester was such an important executive at Chase that when he later defected to the Chicago-based hedge fund Citadel, Dimon cut off trading with Citadel in retaliation. Boester eventually returned to Chase and is still there today despite his role in this affair.
This moment illustrates the most basic element of the case against Chase: The bank knowingly peddled products stuffed with scratch-and-dent loans to investors without disclosing the obvious defects with the underlying loans.
Years later, in its settlement with the Justice Department, Chase would admit that this conversation between Fleischmann and Boester took place (though neither was named; it was simply described as “an employee...told...a managing director”) and that her warning was ignored when the bank sold those loans off to investors.
Photo: Illustration by Victor Juhasz
A few weeks later, in early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.
Fleischmann assumed this letter, which Chase lawyers would later jokingly nickname “The Howler” after the screaming missive from the Harry Potter books, would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”
In February 2008, less than two years after joining the bank, Fleischmann was quietly dismissed in a round of layoffs. A few months later, proof would appear that her bosses knew all along that the boom-era mortgage market was rotten. That September, as the market was crashing, Dimon boasted in a ball-washing Fortune article titled “Jamie Dimon’s SWAT Team” that he knew well before the meltdown that the subprime market was toast. “We concluded that underwriting standards were deteriorating across the industry.” The story tells of Dimon ordering Boester’s boss, William King, to dump the bank’s subprime holdings in October 2006. “Billy,” Dimon says, “we need to sell a lot of our positions....This stuff could go up in smoke!”
In other words, two full months before the bank rammed through the dirty GreenPoint deal over Fleischmann’s objections, Chase’s CEO was aware that loans like this were too dangerous for Chase itself to own. (Though Dimon was talking about subprime loans and GreenPoint was technically an Alt-A pool, the Fortune story shows that upper management had serious concerns about industry-wide underwriting problems.)
The ordinary citizen who is the target of a government investigation cannot pick up the phone, call the prosecutor and have his case dropped. But Dimon did just that.
In January 2010, when Dimon testified before the Financial Crisis Inquiry Commission, he told investigators the exact opposite story, portraying the poor Chase leadership as having been duped, just like the rest of us. “In mortgage underwriting,” he said, “somehow we just missed, you know, that home prices don’t go up forever.”
When Fleischmann found out about all of this years later, she was shocked. Her confidentiality agreement at Chase didn’t bar her from reporting a crime, but the problem was that she couldn’t prove that Chase had committed a crime without knowing whether those bad loans had been sold.
As it turned out, of course, Chase was selling those rotten dog-meat loans all over the place. How bad were they? A single lawsuit by a single angry litigant gives some insight. In 2011, Chase was sued over massive losses suffered by a group of credit unions. One of them had invested $135 million in one of the bank’s mortgage–backed securities. About 40 percent of the loans in that deal came from the GreenPoint pool.
The lawsuit alleged that in just the first year, the security suffered $51 million in losses, nearly 50 times what had been projected. It’s hard to say how much of that was due to the GreenPoint loans. But this was just one security, one year, and the losses were in the tens of millions. And Chase did deal after deal with the same methodology. So did most of the other banks. It’s theft on a scale that blows the mind.
In the spring of 2012, Fleischmann, who’d moved back to Canada after leaving Chase, was working at a law firm in Calgary when the phone rang. It was an investigator from the States. “Hi, I’m from the SEC,” he said. “You weren’t expecting to hear from me, were you?”
A few months earlier, President Obama, giving in to pressure from the Occupy movement and other reformers, had formed the Residential Mortgage-Backed Securities Working Group. At least superficially, this was a serious show of force against banks like Chase. The group would operate like a kind of regulatory Justice League, combining the superpowers of investigators from the SEC, the FBI, the IRS, HUD and a host of other federal agencies. It included noted anti-corruption- investigator and New York Attorney General Eric Schneiderman, which gave many observers reason to hope that finally something would be done about the crimes that led to the crash. That makes the fact that the bank would skate with negligible cash fines an even more extra-ordinary accomplishment.
New York Attorney General Eric Schneiderman (L) speaks while Attorney General Eric Holder listens during a news conference at the Justice Department on January 27th, 2012. (Photo: Mark Wilson/Getty)
By the time the working group was set up, most of the applicable statutes of limitations had either expired or were about to expire. “A conspiratorial way of looking at it would be to say the state waited far too long to look at these cases and is now taking its sweet time investigating, while the last statutes of limitations run out,” says famed prosecutor and former New York Attorney General Eliot Spitzer.
It soon became clear that the SEC wasn’t so much investigating Chase’s behavior as just checking boxes. Fleischmann received no follow-up phone calls, even though she told the investigator that she was willing to tell the SEC everything she knew about the systemic fraud at Chase. Instead, the SEC focused on a single transaction involving a mortgage company called WMC. “I kept trying to talk to them about GreenPoint,” Fleischmann says, “but they just wanted to talk about that other deal.”
The following year, the SEC would fine Chase $297 million for misrepresentations in the WMC deal. On the surface, it looked like a hefty punishment. In reality, it was a classic example of the piecemeal, cherry-picking style of justice that characterized the post-crisis era. “The kid-gloves approach that the DOJ and the SEC take with Wall Street is as inexplicable as it is indefensible,” says Dennis Kelleher of the financial reform group Better Markets, which would later file suit challenging the Chase settlement. “They typically charge only one offense when there are dozens. It would be like charging a serial murderer with a single assault and giving them probation.”
Soon Fleischmann’s hopes were raised again. In late 2012 and early 2013, she had a pair of interviews with civil litigators from the U.S. attorney’s office in the Eastern District of California, based in Sacramento.
One of the ongoing myths about the financial crisis is that the government is outmatched by the legal talent representing the banks. But Fleischmann was impressed by the lead attorney in her case, a litigator named Richard Elias. “He sounded like he had been a securities lawyer for 10 years,” she says. “This actually looked like his idea of fun – like he couldn’t wait to run with this case.”
She gave Elias and his team detailed information about everything she’d seen: the edict against e-mails, the sabotaging of the diligence process, the bullying, the written warnings that were ignored, all of it. She assumed that it wouldn’t be long before the bank was hauled into court.
Instead, the government decided to help Chase bury the evidence. It began when Holder’s office scheduled a press conference for the morning of September 24th, 2013, to announce sweeping civil-fraud charges against the bank, all laid out in a detailed complaint drafted by the U.S. attorney’s Sacramento office. But that morning the presser was suddenly canceled, and no complaint was filed. According to later news reports, Dimon had personally called Associate Attorney General Tony West, the third-ranking official in the Justice Department, and asked to reopen negotiations to settle the case out of court.
It goes without saying that the ordinary citizen who is the target of a government investigation cannot simply pick up the phone, call up the prosecutor in charge of his case and have a legal proceeding canceled. But Dimon did just that. “And he didn’t just call the prosecutor, he called the prosecutor’s boss,” Fleischmann says. According to The New York Times, after Dimon had already offered $3 billion to settle the case and was turned down, he went to Holder’s office and upped the offer, but apparently not by enough.
A few days later, Fleischmann, who had by then moved back to Vancouver and was looking for work, was at a mall when she saw a Wall Street Journal headline on her iPhone: JPMorgan Insider Helps U.S. in Probe. The story said that the government had a key witness, a female employee willing to provide damaging testimony about Chase’s mortgage operations. Fleischmann was stunned. Until that moment, she had no idea that she was a major part of the government’s case against Chase. And worse, nobody had bothered to warn her that she was about to be effectively outed in the newspapers. “The stress started to build after I saw that news,” she says. “Especially as I waited to see if my name would come out and I watched my job possibilities evaporate.”
Fleischmann later realized that the government wasn’t interested in having her testify against Chase in court or any other public forum. Instead, the Justice Department’s political wing, led by Holder, appeared to be using her, and her evidence, as a bargaining chip to extract more hush money from Dimon. It worked. Within weeks, Dimon had upped his offer to roughly $9 billion.
In late November, the two sides agreed on a settlement deal that covered a variety of misbehaviors, including the fraud that Fleischmann witnessed as well as similar episodes at Washington Mutual and Bear Stearns, two companies that Chase had acquired during the crisis (with federal bailout aid). The newspapers and the Justice Department described the deal as a “$13 billion settlement,” hailing it as the biggest white-collar regulatory settlement in American history. The deal released Chase from civil liability. And, in what was described by The New York Times as a “major victory for the government,” it left open the possibility that the Justice Department could pursue a further criminal investigation against the bank.
But the idea that Holder had cracked down on Chase was a carefully contrived fiction, one that has survived to this day. For starters, $4 billion of the settlement was largely an accounting falsehood, a chunk of bogus “consumer relief” added to make the payoff look bigger. What the public never grasped about these consumer–relief deals is that the “relief” is often not paid by the bank, which mostly just services the loans, but by the bank’s other victims, i.e., the investors in their bad mortgage securities.
Moreover, in this case, a fine-print addendum indicated that this consumer relief would be allowed only if said investors agreed to it – or if it would have been granted anyway under existing arrangements. This often comes down to either forgiving a small portion of a loan or giving homeowners a little extra time to pay up in full. “It’s not real,” says Fleischmann. “They structured it so that the homeowners only get relief if they would have gotten it anyway.” She pauses. “If a loan shark gives you a few extra weeks to pay up, is that ‘consumer relief’?”
The average person had no way of knowing what a terrible deal the Chase settlement was for the country. The terms were even lighter than the slap-on-the-wrist formula that allowed Wall Street banks to “neither admit nor deny” wrongdoing – the deals that had helped spark the Occupy protests. Yet those notorious deals were like the Nuremberg hangings compared to the regulatory innovation that Holder’s Justice Department cooked up for Dimon and Co.
Instead of a detailed complaint naming names, Chase was allowed to sign a flimsy, 10-and-a-half-page “statement of facts” that was: (a) so short, a first-year law student could read it in the time it takes to eat a tuna sandwich, and (b) so vague, a halfway intelligent person could read it and not know anyone had done anything wrong.
The ink was barely dry on the deal before Chase would have the balls to insinuate its innocence. “The firm has not admitted to violations of the law,” said CFO Marianne Lake. But the deal’s most brazen innovation was the way it bypassed the judicial branch. Previously, federal regulators had had bad luck with judges when trying to dole out slap-on-the-wrist settlements to banks. In a pair of celebrated cases, an unpleasantly honest federal judge named Jed Rakoff had rejected sweetheart deals worked out between banks and slavish regulators and had commanded the state to go back to the drawing board and come up with real punishments.
Seemingly not wanting to deal with even the possibility of such a thing happening, Holder blew off the idea of showing the settlement to a judge. The settlement, says Kelleher, “was unprecedented in many ways, including being very carefully crafted to bypass the court system....There can be little doubt that the DOJ and JP-Morgan were trying to avoid disclosure of their dirty deeds and prevent public scrutiny of their sweetheart deal.” Kelleher asks a rhetorical question: “Can you imagine the outcry if [Bush-era Attorney General] Alberto Gonzales had gone into the backroom and given Halliburton immunity in exchange for a billion dollars?”
The deal was widely considered a good one for both sides, but Chase emerged with barely a scratch. First, the ludicrously nonspecific language surrounding the settlement put you, me and every other American taxpayer on the hook for roughly a quarter of Chase’s check. Because most of the settlement monies were specifically not called fines or penalties, Chase was allowed to treat some $7 billion of the settlement as a tax write-off.
Couple this with the fact that the bank’s share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal. What’s more, to defray the cost of this and other fines, Chase last year laid off 7,500 lower-level employees. Meanwhile, per-employee compensation for everyone else rose four percent, to $122,653. But no one made out better than Dimon. The board awarded a 74 percent raise to the man who oversaw the biggest regulatory penalty ever, upping his compensation package to about $20 million.
“The assumption they make is that I won’t blow up my life to do it. But they’re wrong about that.”
While Holder was being lavishly praised for releasing Chase only from civil liability, Fleischmann knew something the rest of the world did not: The criminal investigation was going nowhere.
In the days leading up to Holder’s November 19th announcement of the settlement, the Justice Department had asked Fleischmann to meet with criminal investigators. They would interview her very soon, they said, between December 15th and Christmas.
But December came and went with no follow-up from the DOJ. She began to wonder: If she was the government’s key witness, how was it possible that they were still pursuing a criminal case without talking to her? “My concern,” she says, “was that they were not investigating.”
The government’s failure to speak to Fleischmann lends credence to a theory about the Holder-Dimon settlement: It included a tacit agreement from the DOJ not to pursue criminal charges in earnest. It sounds outrageous, but it wouldn’t be the first time that the government used a wink and a nod to dispose a bank of major liability without saying so publicly. Back in 2010, American Lawyer revealed Goldman Sachs wanted a full release from liability in a dozen crooked mortgage deals, while the SEC didn’t want to give the bank such a big public victory. So the two sides quietly agreed to a grimy compromise: Goldman agreed to pay $550 million to settle a single case, and the SEC privately assured the bank that it wouldn’t recommend charges in any of the other deals.
As Fleischmann was waiting for the Justice Department to call, Chase and its lawyers had been going to tremendous lengths to keep her muzzled. A number of major institutional investors had sued the bank in an effort to recover money lost in investing in Chase’s fraud-ridden home loans. In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines in The Wall Street Journal and other major media outlets.
Photo: Spencer Platt/Getty
In response, Dorothy Spenner, an attorney representing Chase, told the court that Fleischmann was not a “relevant custodian.” In other words, she couldn’t testify to anything of importance. Federal Magistrate Judge James C. Francis IV took Chase’s lawyers at their word and rejected the Fort Worth retirees’ request for access to Fleischmann and her evidence.
Other investors bilked by Chase also tried to speak to Fleischmann. The Federal Home Loan Bank of Pittsburgh, which had sued Chase, asked the court to force Chase to turn over a copy of the draft civil complaint that was withheld after Holder’s scuttled press conference. The Pittsburgh litigants also specified that they wanted access to the name of the state’s cooperating witness: namely, Fleischmann.
In that case, the judge actually ordered Chase to turn over both the complaint and Fleischmann’s name. Chase stalled. Later in the fall, the judge ordered the bank to produce the information again; it stalled some more.
Then, in January 2014, Chase suddenly settled with the Pittsburgh bank out of court for an undisclosed amount. Months after being ordered to allow Fleischmann to talk, they once again paid a stiff price to keep her testimony out of the public eye.
Chase’s determination to hide its own dirt while forcing Fleischmann to keep her secret was becoming more and more absurd. “It was a hard time to look for work,” she says. All that prospective employers knew was that she had worked in a department that had just been dinged with what was then the biggest regulatory fine in the history of capitalism. According to the terms of her confidentiality agreement, she couldn’t even tell them that she’d tried to keep the bank from committing fraud.
Despite it all, Fleischmann still had faith that the Justice Department or some other federal agency would make things right. “I guess I was just a trusting person,” she says. “I wasn’t cynical. I kept hoping.”
One day last spring, Fleischmann happened across a video of Holder giving a speech titled “No Company Is Too Big to Jail.” It was classic Holder: full of weird prevarication, distracting eye twitches and other facial contortions. It began with the bold rejection of the idea that overly large financial institutions would receive preferential treatment from his Justice Department.
Then, within a few sentences, he seemed to contradict himself, arguing that one must apply a special sort of care when investigating supersize banks, tweaking the rules so as not to upset the world economy. “Federal prosecutors conducting these investigations,” Holder said, “must go the extra mile to coordinate closely with the regulators who oversee these institutions’ day-to-day operations.” That is, he was saying, regulators have to agree not to allow automatic penalties to kick in, so that bad banks can stay in business.
Fleischmann winced. Fully fluent in Holder’s three-faced rhetoric after years of waiting for him to act, she felt that he was patting himself on the back for having helped companies survive crimes that otherwise might have triggered crippling regulatory penalties. As she watched in mounting outrage, Holder wrapped up his address with a less-than-reassuring pronouncement: “I am resolved to seeing [the investigations] through.” Doing so, he added, would “reaffirm” his principles.
Or, as Fleischmann translates it: “I will personally stay on to make sure that no one can undo the cover-up that I’ve accomplished.”
That’s when she decided to break her silence. “I tried to go on with the things I was doing, but I just stopped sleeping and couldn’t eat,” she says. “It felt like I was trying to keep this secret and my body was literally rejecting it.”
Ironically, over the summer, the government contacted her again. A new set of investigators interviewed her, appearing to have restarted the criminal case. Fleischmann won’t comment on that investigation. Frustrated as she has been by the decisions of the higher-ups in Holder’s Justice Department, she doesn’t want to do anything to get in the way of investigators who might be working the case. But she emphasizes she still has reason to be deeply worried that nothing will be done. Even if the investigators build strong cases against executives who oversaw Chase’s fraud, Holder or whoever succeeds him can still make the whole thing disappear by negotiating a soft landing for the company. “That’s the thing I’m worried about,” she says. “That they make the whole thing disappear. If they do that, the truth will never come out.”
In September, at a speech at NYU, Holder defended the lack of prosecutions of top executives on the grounds that, in the corporate context, sometimes bad things just happen without actual people being responsible. “Responsibility remains so diffuse, and top executives so insulated,” Holder said, “that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of any single individual.”
In other words, people don’t commit crimes, corporate culture commits crimes! It’s probably fortunate that Holder is quitting before he has time to apply the same logic to Mafia or terrorism cases.
Fleischmann, for her part, had begun to find the whole situation almost funny.
“I thought, ‘I swear, Eric Holder is gas-lighting me,’ ” she says.
Ask her where the crime was, and Fleischmann will point out exactly how her bosses at JPMorgan Chase committed criminal fraud: It’s right there in the documents; just hand her a highlighter and some Post-it notes – “We lawyers love flags” – and you will not find a more enthusiastic tour guide through a gazillion-page prospectus than Alayne Fleischmann.
She believes the proof is easily there for all the elements of the crime as defined by federal law – the bank made material misrepresentations, it made material omissions, and it did so willfully and with specific intent, consciously ignoring warnings from inside the firm and out.
She’d like to see something done about it, emphasizing that there still is time. The statute of limitations for wire fraud, for instance, has not run out, and she strongly believes there’s a case there, against the bank’s executives. She has no financial interest in any of this, no motive other than wanting the truth out. But more than anything, she wants it to be over.
In today’s America, someone like Fleischmann – an honest person caught for a little while in the wrong place at the wrong time – has to be willing to live through an epic ordeal just to get to the point of being able to open her mouth and tell a truth or two. And when she finally gets there, she still has to risk everything to take that last step. “The assumption they make is that I won’t blow up my life to do it,” Fleischmann says. “But they’re wrong about that.”
Good for her, and great for her that it’s finally out. But the big-picture ending still stings. She hopes otherwise, but the likely final verdict is a Pyrrhic victory.
Because after all this activity, all these court actions, all these penalties (both real and abortive), even after a fair amount of noise in the press, the target companies remain more ascendant than ever. The people who stole all those billions are still in place. And the bank is more untouchable than ever – former Debevoise & Plimpton hotshots Mary Jo White and Andrew Ceresny, who represented Chase for some of this case, have since been named to the two top jobs at the SEC. As for the bank itself, its stock price has gone up since the settlement and flirts weekly with five-year highs. They may lose the odd battle, but the markets clearly believe the banks won the war. Truth is one thing, and if the right people fight hard enough, you might get to hear it from time to time. But justice is different, and still far enough away.