Kelly v. Stamps.com Inc.

Facts

Megan Kelly’s first amended complaint pleaded claims under the Fair Employment and Housing Act (Gov. Code, § 12900 et seq.; FEHA) and for discharge in violation of public policy, alleging that Stamps.com fired her from her position as vice-president of marketing on February 6, 2001, “because she was seven months pregnant and was planning on taking her promised paid maternity leave in connection with the birth of her child in April of 2001.” (Kelly v. Stamps.com Inc. (2005) 135 Cal.App.4th 1088, 1091.) Four further causes of action grew out of a retention bonus: breach of an implied contract of continued employment through the bonus’s second installment date, breach of the covenant of good faith and fair dealing, nonpayment of the bonus as earned wages in violation of Labor Code sections 201 and 2926, and termination in violation of the public policy requiring prompt payment of wages due. (Id. at p. 1091.)

The company’s story was economic. Stamps.com, an Internet postage seller, hired Kelly as vice-president of direct marketing on October 20, 1999, at a base salary of $130,000, later raised to $150,000; she signed an employment agreement and a confidentiality agreement, each providing that her employment was at will. (Kelly, supra, 135 Cal.App.4th at p. 1092.) The year she was hired, the company’s stock lost over 93 percent of its value amid continual capital losses, and in October 2000 it laid off roughly 240 of its approximately 540 employees. (Ibid.) Kelly — who, per the complaint, had disclosed her pregnancy and April 2001 maternity-leave plans the month before — was not among them. To the contrary, she received stock options and a cash retention bonus of 35 percent of her salary ($52,500), payable one-third in 90 days and two-thirds in 180 days, provided she remained employed on the payment dates. (Ibid.)

Also in October 2000, a new CEO, Bruce Coleman, arrived and brought in Kathy Brush, a marketing consultant and self-styled turnaround specialist, to recommend cost cuts; according to Brush and chief financial officer Kenneth McBride, upper management “had become generally dissatisfied with the performance of the marketing group in the Small Business Unit.” (Kelly, supra, 135 Cal.App.4th at p. 1092.) In early 2001 management decided on a second reduction of about 150 employees for early February and a consolidation of the company’s three business units — and their separate sales and marketing functions — into one. (Id. at pp. 1092–1093.) Coleman directed Brush to evaluate the marketing employees and tell him whom to retain. Brush declared she evaluated Kelly on the merits and without regard to her pregnancy; at least once in December 2000 or January 2001, however, Coleman told McBride he believed Kelly’s attendance was poor, using the term “checked out” to refer, per McBride, “to her poor attendance and attitude.” (Id. at p. 1093.) On February 2, 2001, Brush submitted her retention list to McBride; Kelly was not on it. Coleman approved the recommendations, and Kelly was terminated on February 6, 2001, with the rest of the layoff group, receiving 60 days’ severance ($25,000). (Ibid.)

Brush’s written evaluation of Kelly stated that Kelly’s direct-marketing programs had been cut and were scheduled for further cuts (the marketing budget had fallen from $20.5 million in the third quarter of 2000 to $4.3 million in the first quarter of 2001), that the post-restructuring vice-president position “will be assumed by a generalist” with qualifications Kelly lacked, and that Kelly showed “inflexibility,” ineffective leadership, and “limited motivation,” often arriving late. (Kelly, supra, 135 Cal.App.4th at p. 1093.) After the consolidation, Brush — still an outside contractor — assumed supervision of the combined sales and marketing group and took Kelly’s old title, vice-president of marketing, while declaring that Kelly’s position had been “eliminated entirely” in the restructuring and that Kelly “was not replaced.” (Id. at pp. 1093–1094.)

Kelly’s opposition painted a different picture. Her former supervisor Doug Walner declared that her duties ran well beyond direct marketing — online, television, print, general, and brand marketing — that she was excellent in all respects, and that her commitment never flagged; his formal October 2000 assessment rated her “Above Expectations” in five of six categories and answered “yes” to whether she was indispensable to the business. (Kelly, supra, 135 Cal.App.4th at p. 1094.) Asked by Coleman for a retention list, Walner included Kelly, telling Coleman she was the only person capable of managing the group after his own departure. Coleman responded that Kelly had mentally “checked out,” and — in Walner’s account — “made intonations about [plaintiff] being pregnant, saying she had mentally ‘checked out,’ and questioning whether she was really doing her job.” Walner answered, “You know that is not true.” (Ibid.) Ian Siegel, the vice-president for web development, testified to a parallel exchange: asked who in marketing should be kept, he told Coleman, “You absolutely have to … start with [plaintiff], she is the heart and soul of that team”; Coleman replied “Megan has checked out,” repeating it “in a definitive, end-of-conversation type of way.” (Id. at p. 1095.) Siegel disagreed point by point with Brush’s written evaluation and testified that after Kelly left, Brush took over “all of the things that Megan had done.” (Ibid.)

Kelly herself testified that, alarmed at being kept in the dark while other vice-presidents were consulted, she met with in-house counsel Mike Zuercher on the afternoon of February 5, 2001, and told him she feared Coleman thought she had “checked out” because she was pregnant and about to take maternity leave. (Kelly, supra, 135 Cal.App.4th at p. 1095.) Zuercher said he would share her concerns with Coleman and later that day told her, “I talked to Bruce [Coleman].” (Id. at p. 1096.) That evening at 7:41 p.m., Brush e-mailed her employee evaluations to McBride, writing that the position-elimination document was “[h]opefully … all that will be needed if anything is needed”; a copy of Brush’s evaluation of Kelly ended up in Kelly’s personnel file. (Id. at p. 1100.) At a post-termination meeting on February 12, 2001, Coleman denied that Kelly had been on Walner’s retention list and told her that her position had been eliminated. (Id. at p. 1096.)

Procedural history

Stamps.com moved for summary judgment or, alternatively, summary adjudication of each cause of action, contending the pregnancy claims failed because Kelly was terminated in a reorganization and further reduction in force and could not show pretext, and that the remaining claims failed because her employment was at will and she was terminated for good cause. (Kelly, supra, 135 Cal.App.4th at pp. 1091–1092.) At the hearing, the trial court’s initial tentative was to deny: it observed that the case was triable, that “her firing, if it was not done for discriminatory purposes, was very inartfully executed,” and that the record “does lead one to believe that a company in financial trouble was looking to get rid of an employee for whom they were going to have to keep on the books because they promised her maternity leave … .” (Id. at p. 1096.) The next day the court reversed course, reasoning that if Brush had “subsumed” Kelly’s duties along with others, the stated reason was not pretextual. (Ibid.) It granted summary judgment, issuing “findings” that Kelly had made a prima facie case but had not shown the restructuring rationale to be pretextual, and that the four bonus-related claims failed for good-cause termination. (Id. at pp. 1096–1097.)

After judgment, Stamps.com moved for more than half a million dollars in attorney fees, invoking Labor Code section 218.5 as prevailing party on the wage claims and Government Code section 12965, subdivision (b), on the FEHA claims. The trial court denied the motion — the FEHA claims had not been frivolous, unreasonable, or groundless, and the wage claims were not factually distinct from the discrimination claims. (Kelly, supra, 135 Cal.App.4th at p. 1104.) Kelly appealed the judgment (B167287); Stamps.com appealed the fee denial (B171369). The Court of Appeal reversed the judgment except as to two causes of action and affirmed the fee order, awarding Kelly costs on both appeals. (Id. at pp. 1091, 1105.) The opinion, filed December 21, 2005, was ordered published as modified on January 20, 2006; the Supreme Court denied review on April 12, 2006. (Id. at p. 1105.)

Issue

Three questions controlled. First, on the discrimination claims: what must an employer moving for summary judgment on a legitimate-reason theory show to shift the burden to the employee — and did Kelly’s evidence of falsity and discriminatory motive raise a triable issue notwithstanding an undisputed company-wide restructuring and reduction in force? (Kelly, supra, 135 Cal.App.4th at pp. 1097–1098.) Second, on the bonus-related claims: did the two-installment retention bonus imply a contract of continued employment until the second payment date, and could the wage claims survive once the “good cause” premise underlying their adjudication fell? (Id. at pp. 1102–1104.) Third, could the employer’s attorney fee award survive the reversal of the summary judgment on which its prevailing-party status rested? (Id. at pp. 1104–1105.)

Holding

Reasoning

The framework: Guz’s three stages, and how a defense summary judgment motion reorders them. Reviewing de novo, the court took the parties’ substantive burdens from Guz v. Bechtel National Inc. (2000) 24 Cal.4th 317, 354–357: a plaintiff ordinarily must make a prima facie case — protected class, competent performance, termination, “plus some other circumstance suggesting discriminatory motive” — raising a presumption that the employer can dispel by producing evidence of a legitimate reason, whereupon the employee, “who retains the overall burden of persuasion,” may still prove discrimination through evidence of falsity, pretext, and any other evidence of discriminatory motive. (Kelly, supra, 135 Cal.App.4th at p. 1097.) The critical doctrinal contribution follows: “A defendant employer’s motion for summary judgment slightly modifies the order of these showings. If, as here, the motion for summary judgment relies in whole or in part on a showing of nondiscriminatory reasons for the discharge, the employer satisfies its burden as moving party if it presents evidence of such nondiscriminatory reasons that would permit a trier of fact to find, more likely than not, that they were the basis for the termination.” (Id. at pp. 1097–1098, citing Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850–851.) Only then must the employee respond: “To defeat the motion, the employee then must adduce or point to evidence raising a triable issue, that would permit a trier of fact to find by a preponderance that intentional discrimination occurred.” (Id. at p. 1098.) And throughout, the court “must view the evidence in the light most favorable to plaintiff, as the nonmoving party, liberally construing her evidence while strictly scrutinizing defendant’s.” (Ibid., citing Aguilar, at p. 856.) The court found the initial burden met here: the economically induced February 2001 restructuring and reduction in force could be “deemed a legitimate, nondiscriminatory reason, sufficient to shift to plaintiff the burden of showing a triable issue of its falsity, with respect to her, and ultimately of discriminatory motive instead.” (Ibid.)

An admitted downsizing is not an admitted motive. The court rejected what it called a “preemptive argument”: because Kelly’s separate statement admitted that the February 2001 restructuring and layoffs occurred, Stamps.com argued she could not dispute the reason for her own discharge. But Kelly “did not admit, there or ever, that this had been the actual, motivating reason for her discharge.” (Kelly, supra, 135 Cal.App.4th at p. 1098.) Quoting Guz, the court explained that “[D]ownsizing alone is not necessarily a sufficient explanation, under the FEHA, for the consequent dismissal of [a protected] worker. An employer’s freedom to consolidate or reduce its work force, and to eliminate positions in the process, does not mean it may ‘use the occasion as a convenient opportunity to get rid of [protected] workers.’ [Citations.] Invocation of a right to downsize does not resolve whether the employer had a discriminatory motive for cutting back its work force, or engaged in intentional discrimination when deciding which individual workers to retain and release.” (Ibid., quoting Guz, supra, 24 Cal.4th at p. 358, italics omitted.) The company’s fallback — that it had retained Kelly, bonus and all, through the October 2000 layoffs despite knowing of her pregnancy — failed for a decisionmaker mismatch: “neither Coleman nor Brush, the alleged decision makers in plaintiff’s firing, was involved with the October layoffs and bonuses.” (Ibid.)

The falsity showing: endorsements overridden by a peremptory “checked out.” The court then catalogued the circumstances casting doubt on the genuineness of the explanation. Kelly was let go “despite a record of excellence in her executive responsibilities,” attested by both her supervisor and another senior executive who worked with her daily; both men, when asked by Coleman whom to retain, “proffered plaintiff”; and Coleman “dismissed this advice, with the peremptory expression that plaintiff had ‘checked out.’” (Kelly, supra, 135 Cal.App.4th at p. 1099.) That reaction, the court held, was “not, as the trial court suggested, unamenable to signifying a discriminatory animus” — in at least one instance Coleman “also referred in some fashion to her pregnancy” — and even if facially neutral, Coleman’s “manifest attitude toward plaintiff’s retention was bluntly negative, in vivid contrast to the views and assessments of those executives who worked with her.” (Id. at p. 1099.) The court dispatched in a footnote the contention that Brush, not Coleman, was the decisionmaker: Brush was an outside consultant who advised the CEO, and “[t]he evidence supports if not mandates a finding that Coleman was the decision maker.” (Id. at p. 1099, fn. 7.)

A decisionmaker’s lie supports the dissembling inference. There was also “evidence that Coleman lied to plaintiff when she asked him to explain her termination” — he denied she had been on Walner’s retention list when, per Walner, she not only was on it but was the first person Walner commended. (Kelly, supra, 135 Cal.App.4th at p. 1099.) “As is the case with evidence of false reasons, a finding that Coleman was knowingly untruthful here could give rise to an inference that ‘the employer [wa]s dissembling to cover up a discriminatory purpose.’” (Ibid., quoting Reeves v. Sanderson Plumbing Products, Inc. (2000) 530 U.S. 133, 147.) The court noted, per Guz, that California courts look to pertinent federal precedent given the similarity of the state and federal discrimination statutes. (Id. at p. 1099, fn. 8.)

“Position elimination” was itself triable — and the burden of proving it belonged to the employer. Coleman’s second explanation at the February 12 meeting, repeated by the company on appeal, was that Kelly’s position had been eliminated. The court found this claim genuinely disputed: a new — and not pregnant — individual, Brush, assumed Kelly’s title of vice-president of marketing, and Kelly and Siegel effectively testified that Brush thereafter performed Kelly’s former functions as the “operational head of marketing.” (Kelly, supra, 135 Cal.App.4th at pp. 1099–1100.) That some programs were discontinued “would not establish that plaintiff’s position was eliminated, as opposed to her having been replaced” (id. at p. 1100, citing Barnes v. GenCorp Inc. (6th Cir. 1990) 896 F.2d 1457, 1465), and the company’s complaint that Kelly had not negated Brush’s performance of additional duties inverted the burden: “it was defendant’s burden to show that plaintiff’s position was eliminated, the essence of defendant’s espoused legitimate, nondiscriminatory reason for dismissing her.” (Ibid.) Nor was Brush a preexisting employee absorbing extra duties in a consolidation — she “was an independent consultant, who was not assigned to perform marketing duties for defendant until plaintiff was fired.” (Ibid.)

The paper trail’s timing spoke for itself. Brush’s written evaluation drew independent suspicion, both because her negative opinions “conflicted with those of defendant’s managers who were more familiar with plaintiff and her performance” and because of when it surfaced: Brush e-mailed it to McBride at 7:41 p.m. on February 5, 2001 — hours after Kelly complained to in-house counsel Zuercher that Coleman might be targeting her for her pregnancy, and after Zuercher reported back that he had spoken to Coleman. (Kelly, supra, 135 Cal.App.4th at p. 1100.) “In short, within a day, plaintiff complained of possible discrimination, Coleman was notified, Brush sent her evaluation of plaintiff to top management, and plaintiff was discharged. From this it could be inferred that the evaluation was either prepared or at least transmitted the night before the layoffs in an effort to preempt or rebut plaintiff’s incipient claim of discriminatory discharge.” (Id. at p. 1101.)

Falsity plus motive: the same evidence did double duty, and there was direct evidence besides. Having concluded that “plaintiff presented a triable issue that the reason or reasons defendant gave for her termination were false,” the court turned to the remaining element — evidence of pregnancy-discriminatory motive — citing Guz, Reeves, and St. Mary’s Honor Center v. Hicks (1993) 509 U.S. 502, 511, and holding that Kelly “established this element of her case as well.” (Kelly, supra, 135 Cal.App.4th at p. 1101.) Much of the falsity evidence “also supported an inference that the actual reason for plaintiff’s termination was the discriminatory one she alleged” — and the same evidence could complete the prima facie case and defeat summary judgment at once. (Ibid. & fn. 10.) Beyond inference, there was direct evidence: given that Kelly “was about seven months pregnant and was expected to take her allotted three months’ pregnancy leave, Coleman’s ‘checked out’ comments could reasonably be understood as referring to some combination of plaintiff’s commitment to take the leave, and a temporary diversion of her attention attendant to her condition. In other words, Coleman could be seen as saying that plaintiff’s pregnancy and upcoming leave disqualified her for retention. And of course, Walner testified that Coleman directly connected his ‘checked out’ remarks to plaintiff’s pregnancy.” (Ibid.) The company’s counterattacks failed seriatim: the not-the-decisionmaker claim was “extremely tenuous”; the vagueness argument “ignores the context”; and the remarks could not be labeled “stray” as a matter of law, being connected to the very retention process at issue. (Id. at pp. 1101–1102.) Finally, even if Kelly’s exact position had been eliminated, “defendant could still face liability if plaintiff was removed from employment because of her pregnancy.” (Id. at p. 1102, citing Guz, supra, 24 Cal.4th at pp. 357–358.)

The bonus claims: no implied promise of continued employment, but the wage claims revive. The four remaining causes rose or fell with the trial court’s good-cause finding, which the reversal unsettled — “the presence or absence of such cause is now an open, triable question.” (Kelly, supra, 135 Cal.App.4th at p. 1102.) The court nonetheless affirmed adjudication of the implied-contract and covenant counts on an independent ground: the bonus memo, which conditioned payment on Kelly’s being “employed with the company on each of the respective dates,” may have been an offer of a unilateral contract for the bonus, “[b]ut by no means can it be said, or read, to have included a promise by defendant of continued employment” — as Kelly’s own deposition conceded. (Id. at pp. 1102–1103 & fn. 12.) The wage claims were different. The trial court had rejected them only because Kelly was “terminated for good cause prior to the bonus date,” a premise no longer sustained; and although Kelly was concededly not employed on April 20, 2001, “should plaintiff establish that she was unlawfully terminated in February 2001, she could assert that that termination excused fulfillment of the condition of employment on April 20, and rendered the bonus payable upon termination.” (Id. at p. 1103, citing Civ. Code, § 1440.) The sixth cause — termination to avoid paying wages due — likewise had to stand. (Id. at p. 1104.) Along the way the court flagged, in a footnote, the answer to the company’s at-will refrain: “an at-will employee may not lawfully be discharged in violation of FEHA, and whether that occurred here is the ultimate issue.” (Id. at p. 1102, fn. 11.)

Fees fall with the judgment. The court affirmed the denial of the employer’s half-million-dollar fee request without extended analysis: with summary adjudication of the discrimination and wage claims reversed, Stamps.com “was not entitled to a fee award under either Government Code section 12965 or Labor Code section 218.5,” because it was “no longer the prevailing party entitled to claim them.” (Kelly, supra, 135 Cal.App.4th at pp. 1091, 1104–1105.)

Significance

Kelly is one of the Court of Appeal’s cleanest statements of the employer’s initial burden on a FEHA summary judgment motion built on a legitimate-reason theory. Guz described the three-stage McDonnell Douglas framework at trial but expressly reserved how the burdens map onto a defense motion; Aguilar supplied the general summary judgment standard. Kelly welded them: the moving employer “satisfies its burden as moving party if it presents evidence of such nondiscriminatory reasons that would permit a trier of fact to find, more likely than not, that they were the basis for the termination” — a preponderance-calibrated production burden, not a mere pleading exercise — after which the employee must present evidence permitting a finding of intentional discrimination. (Kelly, supra, 135 Cal.App.4th at pp. 1097–1098.) Later decisions have repeatedly invoked that formulation as the operative test for the first step of an employer’s motion, which makes Kelly a foundation case for any brief attacking a motion whose “legitimate reason” rests on conclusory declarations.

Three further contributions give the case its staying power. First, it operationalizes Guz’s warning that “[i]nvocation of a right to downsize does not resolve” the discrimination question (Kelly, supra, 135 Cal.App.4th at p. 1098): admitting that a RIF occurred concedes nothing about why a particular protected employee was selected. Second, it treats “position elimination” as a factual claim the employer must prove — and holds that where a new (and not pregnant) person takes the plaintiff’s title and functions, the elimination story is triable, especially when the replacement is an outside consultant rather than a colleague absorbing duties. (Id. at pp. 1099–1100.) Third, it is a vivid illustration of timing as pretext evidence: an evaluation transmitted to management hours after the plaintiff’s internal discrimination complaint, then placed in her personnel file, supports an inference that the document was created or deployed “to preempt or rebut plaintiff’s incipient claim.” (Id. at pp. 1100–1101.) The opinion also confirms the practical stakes of reversal for fee exposure — the employer’s Labor Code section 218.5 and Government Code section 12965 theories evaporated with its prevailing-party status — and preserves, for the wage bar, the Civil Code section 1440 theory that an unlawful termination excuses a bonus’s continued-employment condition. (Id. at pp. 1103–1105.)

Key quotes

“If, as here, the motion for summary judgment relies in whole or in part on a showing of nondiscriminatory reasons for the discharge, the employer satisfies its burden as moving party if it presents evidence of such nondiscriminatory reasons that would permit a trier of fact to find, more likely than not, that they were the basis for the termination.” (Kelly, supra, 135 Cal.App.4th at pp. 1097–1098.)

“To defeat the motion, the employee then must adduce or point to evidence raising a triable issue, that would permit a trier of fact to find by a preponderance that intentional discrimination occurred.” (Kelly, supra, 135 Cal.App.4th at p. 1098.)

“In short, within a day, plaintiff complained of possible discrimination, Coleman was notified, Brush sent her evaluation of plaintiff to top management, and plaintiff was discharged. From this it could be inferred that the evaluation was either prepared or at least transmitted the night before the layoffs in an effort to preempt or rebut plaintiff’s incipient claim of discriminatory discharge.” (Kelly, supra, 135 Cal.App.4th at p. 1101.)

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Practice pointer

Open questions

Kelly decided only that the claims were triable, so the merits questions all remained open on remand: whether Coleman’s “checked out” remarks in fact expressed pregnancy bias, and whether the restructuring or discrimination actually motivated the discharge, were for the jury. The court likewise left “the presence or absence of such cause” — good cause for the termination — “an open, triable question” bearing on the surviving wage claims. (Kelly, supra, 135 Cal.App.4th at p. 1102.) The court reserved whether the sixth cause of action (public-policy termination to avoid wage payment) is subject to Labor Code section 218.5’s two-way fee provision at all, noting only that “plaintiff may well be correct” that it is not. (Id. at p. 1104, fn. 14.) It did not decide whether the bonus ultimately qualifies as earned wages recoverable with waiting-time penalties, only that adjudication was “premature.” (Id. at p. 1103.) And because the court found the employer’s initial burden satisfied here, the opinion does not explore what quantum of proof a moving employer must offer where its legitimate-reason showing rests on thinner declarations — it holds only that once that burden is met, evidence of falsity, replacement, suspicious timing, and decisionmaker dishonesty will carry the opposition across the triable-issue line.