General Practice, Solo & Small Firm DivisionTechnology & Practice Guide

New Ground Rules for Discrimination Disputes


Mark I. Schickman is partner in the San Francisco office of Fox and Grove, Chartered, a labor and employment law firm based in Chicago. He is chair of the General Practice Section's Labor and Employment Law Committee and president-elect of the Bar Association of San Francisco.

Two recent federal court cases will greatly influence how employment claims are resolved. The first, a decision of the Ninth Circuit Court of Appeals in Prudential Insurance Company of America v. Lai 1, sets conditions for requiring arbitration of employment disputes. The second, a decision of the Supreme Court, addresses situations in which a compelling reason for an employee's discharge first comes to light during the course of a lawsuit.

Arbitration of Employment Disputes
When the plaintiffs in the Prudential case were first employed by Prudential, they signed an agreement "to arbitrate any dispute, claim or controversy required to be arbitrated under the rules, Constitutions, or bylaws of the organizations with which I register." One of those organizations, the National Association of Securities Dealers, required arbitration for all disputes "arising in connection with the business" of its members.

Prior court decisions, most notably the Supreme Court's decision in Gilmer v. InterState/Johnson Lane Corporation 2, established that individuals may "contractually agree to arbitrate employment disputes and thereby waive the statutory rights to which they would otherwise be entitled." The 1991 amendments to the Civil Rights Act express a preference for arbitration to resolve employment disputes. Before Prudential, the federal and state courts also strongly favored arbitration to resolve employment disputes.

However, the Prudential trial court adopted the plaintiffs' argument that they did not know they were agreeing to give up their rights under antidiscrimination laws. The Ninth Circuit agreed, holding that an arbitration agreement is binding only when the "procedure was knowingly accepted." The court found:

[The plaintiffs] could not have understood that in signing [the arbitration form] they were agreeing to arbitrate sexual discrimination suits. The...form did not purport to describe the types of disputes that were to be subject to arbitration.... We therefore hold that [the employees] were not bound by any valid agreement to arbitrate these employment disputes, because they did not knowingly contract to forego their statutory remedies in favor of arbitration.
In sum, an agreement to enter arbitration must be knowing and informed, or it will not be enforced.

The message of the Prudential case is clear. Although discrimination claims, like other employment claims, can be the subject of an enforceable agreement to arbitrate, the agreement must be specific. Most likely, a broad reference to "arbitration of all disputes" or "arbitration of all disputes referred to in our rules and procedures" will be insufficient. Rather, the agreement should combine general language calling for arbitration of "all disputes arising out of the employment relationship that might otherwise be subject to litigation" with specific references to every type of statutory or common-law claim that will be subject to arbitration.

Such a provision is less "friendly" than most employers would like, and it appears more intimidating to employees. However, under the Prudential ruling, a detailed and comprehensive form of release provides the broadest possible protection from employment litigation.

After-Acquired Evidence of Reason for Discharge
In McKennon v. Nashville Banner Publishing Company 3, the Supreme Court addressed a common employment litigation issue: evidence acquired after a lawsuit has begun. After 30 years of employment with the Nashville Banner, 62-year-old Christine McKennon was terminated. The reason, according to the company, was a reduction in force. But according to McKennon, her termination resulted from age discrimination.

At her deposition, McKennon admitted that during her last year of employment, she had copied some of the company's financial records and showed them to her husband. She said she had done so for "insurance" and "protection" after she became concerned about her job. Right after those depositions, the Banner sent McKennon a letter declaring that removal of those records violated her job responsibilities. The letter advised her that if the company had known of the misconduct earlier, it would have discharged her at once, based on that independent ground for termination.

The trial court granted summary judgment in favor of the Banner, holding that McKennon's misconduct was grounds for her termination and that she was entitled to neither back pay nor any other remedy. The appeals court affirmed the trial court's reasoning and decision. The Supreme Court granted review to resolve a conflict among the circuits; it reversed the lower-court decision.

Justice Kennedy's opinion on behalf of a unanimous court included this policy statement:

[T]he private litigant [in discrimination cases] not only redresses his own injury but also vindicates the important Congressional policy against discriminatory employment practices. [Citations omitted.] It would not accord with this scheme if after-acquired evidence of wrongdoing that would have resulted in termination operates, in every instance, to bar all relief for an earlier violation of the Act.
The Court also expressed a practical reason for its ruling:
McKennon's misconduct was not discovered until after she had been fired. The employer could not have been motivated by knowledge it did not have and it cannot now claim that the employee was fired for the non discriminatory reason.
Of some solace to employers, the Court rejected the notion that "the employee's own misconduct is irrelevant to all the remedies otherwise available under the statute." Instead, if an employer can establish that the wrongdoing was so severe that the employer would have terminated the employee on those grounds alone, had the employer known of the wrongdoing, "[t]he beginning point in the trial court's formulation of a remedy should be calculation of backpay from the date of the unlawful discharge to the date the new information was discovered." Under such circumstances:
[N]either reinstatement nor front pay is an appropriate remedy. It would be both inequitable and pointless to order the reinstatement of someone the employer would have terminated, and will terminate, in any event and upon lawful grounds.
In sum, after-acquired evidence is not a bar to liability, but it might limit the right to reinstatement or front pay.

The Supreme Court's decision accords with the 1994 rulings of the Ninth Circuit Court of Appeal in EEOC v. Farmer Brothers Company 4 and the California Court of Appeal in Cooper v. Rykoff-Sexton, Inc. 5 Moreover, the earliest line of employment discrimination cases stemming from the Supreme Court's decision in McDonnell Douglas v. Green required the employer to spell out its "legitimate, non-discriminatory reason" for termination. Logically, an employer could never meet that burden by referring to a reason it had no inkling of when it terminated the employee. Therefore, such after-acquired evidence would not bar total recovery. However, the Supreme Court has now clarified that such evidence can be used to reduce the plaintiff's recovery period. Also, an employer probably can introduce after-acquired evidence related to the originally stated reason for termination in order to support the original "legitimate, non-discriminatory reason" for termination.


  1. ___ F.3d ___, 94 C.D.O.S. 9589 (Dec. 20, 1994).
  2. _ 580 U.S. 20 (1991).
  3. _ ___ U.S. ___ (95 C.D.O.S. 571).
  4. _ 31 F.3d 891.
  5. _24 Cal. App. 4th 614.

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