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24745 - Douglas Lewis v. Fisher Service Company

Davis Adv. Sh. No. 3
S.E. 2d

THE STATE OF SOUTH CAROLINA

In The Supreme Court

Douglas Lewis,      Plaintiff,

V.

Fisher Service

Company,     Defendant.

On Certification from

the United States District Court,

District of South Carolina

Joseph F. Anderson, Jr.,

United States District Judge

Opinion No. 24745

Heard October 7, 1997 - Filed January 12, 1998

CERTIFIED QUESTIONS ANSWERED

Herbert W. Louthian and Herbert W. Louthian, Jr.,
both of Louthian & Louthian, of Columbia, for
plaintiff.
Leigh M. Nason and Charles T. Speth, II, both of
Haynsworth, Baldwin, Johnson and Greaves, P.A.,
of Columbia, for defendant.

TOAL, A.J.: This matter is before the Court on certification from the

United States District Court to answer questions related to the defense of

after-acquired evidence in employee handbook breach of contract cases.

p. 54


LEWIS v. FISHER

Factual/Procedural Background

In 1984, Douglas Lewis was hired as a machinist by Fisher Service

Company ("Employer"). On the day Lewis began working for Employer, he

received a copy of a manual entitled "Practices and Policies." The manual

provided for a progressive discipline policy, but also contained an override

provision stating that when an employee's conduct violated "very serious and

widely-recognized behavior standards," the employee could be terminated on

the first offense.

In April 1991, Lewis applied for a position as a quality control inspector

and was interviewed by supervisor Andy Simpson. Using a pocket tape-

recorder, Lewis tape-recorded his meeting with Mr. Simpson. The tape of the

interview was later played in the break area for other employees. When

Employer learned of the taping incident, it determined that Lewis had

violated "very serious and widely-recognized behavior standards." Employer

terminated him without engaging in progressive discipline.

As a result, Lewis brought a breach of contract action against

Employer. In his complaint, Lewis contended that Employer demoted and

then discharged him in violation of the progressive discipline policies

contained in Employer's employee handbook. See Small v. Springs Industries,

Inc., 292 S.C. 481, 357 S.E.2d 452 (1987). The case was initially tried in

June 1993.

At trial, Lewis contended that he told Simpson the interview would be

taped. Lewis further claimed that a fellow employee had played the tape in

the break area for other employees to hear. Employer asserted that the

taping was done surreptitiously and that it was Lewis who played the tape

in the break area.

The jury returned a verdict in favor of Lewis in the amount of $400,000

actual damages, representing back pay and front pay. For reasons unrelated

to this certification, the Court set aside the first verdict and ordered a new

trial on both liability and damages. The case was tried again in June 1994,

and the second jury awarded Lewis $355,000.

After the second verdict, Employer moved for a judgment as a matter

of law, or, alternatively, for a new trial. Employer argued that the

surreptitious taping of an interview with a superior, coupled with the later

playing of that tape for other employees, justified Lewis's immediate

termination. The Court found that the surreptitious taping of an employee

p. 55


LEWIS v. FISHER

interview was sufficiently serious to warrant a bypass of the progressive

discipline policy contained in Employer's employee handbook. The Court,

viewing the evidence in the light most favorable to Lewis, determined that

(1) the jury could have found that Lewis told Simpson the tape was being

made, and (2) the jury could have found that another employee, and not

Lewis, played the tape for other employees.

After determining that the verdict should not be disturbed, the Court

was then called upon to address the after-acquired evidence doctrine.

Subsequent to Lewis's initiation of this action, Employer learned during a

deposition that Lewis had engaged in other acts of misconduct justifying his

termination. Specifically, Lewis admitted in his deposition that he had

surreptitiously taped one or perhaps two other interviews with members of

management. Unlike the Simpson episode, however, it is undisputed that

Lewis never told the other parties to these conversations that they were

being taped. Lewis admitted that before his termination he had secretly

recorded a conversation with general manager David Suk, without Suk's

knowledge, and had "probably" surreptitiously recorded a conversation with

shop manager Jeff Klatt. At trial, Suk testified that the act of secretly tape-

recording a member of management constituted serious misconduct. He

further testified that he was unaware Lewis had recorded conversations with

him and that had he known Lewis was making the surreptitious recordings,

he would have immediately terminated Lewis.

A determination of whether, and to what extent, South Carolina

recognizes the after-acquired evidence doctrine in employee handbook cases

would enable the federal District Court to dispose of the post-trial motion

now pending before it. Accordingly, the following questions have been

certified to this Court:

1. Does South Carolina recognize the after-acquired evidence doctrine

as a defense to an action brought by an employee terminated in violation of

the progressive discipline policy of an applicable employee handbook?

2. If the answer to question one is in the affirmative, in what form and

to what extent is the defense of after-acquired evidence recognized in South

Carolina? Specifically, may the doctrine be used to avoid liability altogether,

or to avoid liability from the date of discovery forward (thus allowing a back

pay award from the date of termination until the date of discovery), or to

avoid liability from the date of judgment forward (thus allowing a recovery

of back pay from the date of termination until the date of judgment)?

p. 56


LEWIS v. FISHER

Law/Analysis

The questions certified in this action ask us to determine whether, and

to what extent, the after-acquired evidence doctrine implies in employee

handbook breach of contract actions. The answers to these questions need

to be sought within the context of the historical development of the after-

acquired evidence doctrine and the rationales underlying its application.

A. Development of the After-Acquired Evidence Doctrine

Summers v. State Farm Mutual Automobile Insurance Company, 864

F.2d 700 (10th Cir. 1988) provides a starting point for consideration of the

after-acquired evidence doctrine. In this seminal case, an employee brought

an action against State Farm for discrimination on the basis of age and

religion. In the course of discovery, State Farm found evidence of 150

instances where the employee had falsified records. It sought to have this

evidence admitted against employee. On appeal, the Tenth Circuit held that

such after-acquired evidence could be admitted to bar relief for the employee.

In reaching its conclusion, the Court gave the following analogy that has

since been often cited in discussions about the after-acquired evidence

doctrine: "The present case is akin to the hypothetical wherein a company

doctor is fired because of his age, race, religion, and sex and the company,

in defending a civil rights action, thereafter discovers that the discharged

employee was not a 'doctor.' In our view, the masquerading doctor would be

entitled to no relief ......" Summers, 864 F.2d at 708.

In Wallace v. Dunn Construction Company, 968 F.2d 1174 (11th Cir.

1992), the Eleventh Circuit rejected the Summers rule that after-acquired

evidence may "effectively provide an affirmative defense to Title VII liability."

Wallace, 968 F.2d at 1181. Wallace declared that the Summers rule was

"antithetical to the principal purpose of Title VII -- to achieve equality of

employment opportunity by giving employers incentives to self-examine and

self-evaluate their employment practices and to endeavor to eliminate, so far

as possible, employment discrimination." Wallace, 968 F.2d at 1180 (internal

citations omitted). Instead, the Eleventh Circuit held that after-acquired

evidence may be allowed on the issue of damages.

In 1995, the split between the federal circuits was resolved by the

United States Supreme Court in McKennon v. Nashville Banner Publishing

Company, 513 U.S. 352, 115 S. Ct. 879, 130 L. Ed. 2d 852 (1995). McKennon

involved an action brought under the Age Discrimination in Employment Act

of 1967 ("ADEA"). The Supreme Court noted that the ADEA and Title VII

p. 57


LEWIS v. FISHER

share common substantive features and also a common purpose: the

elimination of discrimination in the workplace. Deterring discrimination and

compensating for injuries caused by prohibited discrimination are two

objectives of these statutes. The McKennon Court wrote that "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." McKennon, 513 U.S. at 358,, 115 S. Ct. at

884, 130 L. Ed. 2d at 861. The Supreme Court unanimously reversed the

lower court, which had allowed after-acquired evidence to serve as a complete

bar to recovery.

McKennon rejected the use of after-acquired evidence on the issue of

liability; however, it did consider the evidence relevant to the remedy to be

ordered: "The employee's wrongdoing must be taken into account, we

conclude, lest the employer's legitimate concerns be ignored."1 McKennon,

513 U.S. at 361, 115 S. Ct. at 886, 130 L. Ed. 2d at 863. The Supreme

Court set the following threshold standard for admitting after-acquired

evidence:

Where an employer seeks to rely upon after-acquired evidence of
wrongdoing, it must first establish that the wrongdoing was of
such severity that the employee in fact would have been
terminated on those grounds alone if the employer had known of
it at the time of the discharge.

McKennon, 513 U.S. at 362-63, 115 S. Ct. at 886-87, 130 L. Ed. 2d at 864.

We adopted the McKennon standard in Baber v. Greenville County, __

S.C. __, 488 S.E.2d 314 (1997) in the context of a whistleblower's suit.

Baber had brought an action, under the Whistleblower's Act, alleging he was

terminated as a result of his refusal to delete portions of an audit report he

had prepared detailing the County Tax Collector's waiver of penalties for

certain parties. The trial court allowed the County to introduce evidence

acquired during discovery concerning Baber's poor job performance on the tax

audit; however, the court charged the jury not to consider the after-acquired


1 The Court stated that although as a general rule reinstatement and

front pay would not be appropriate, backpay is possible in instances of

employee misconduct discovered after termination. The calculation of the

backpay is from "the date of the unlawful discharge to the date the new

information was discovered." McKennon, 513 U.S. at 362, 115 S. Ct. at 886,

130 L. Ed. 2d at 864.

p. 58


LEWIS v. FISHER

evidence. On appeal, we accepted the McKennon test for determining

whether after-acquired evidence may be used to limit employee damages. We

concluded that the wrongdoing was not of such severity that the employee in

fact would have been terminated on those grounds alone if the employer had

known of it at the time of the discharge.

A number of other jurisdictions have also followed the McKennon

approach of allowing, in certain cases, after-acquired evidence on the issue

of damages. Recently, the Texas Supreme Court adopted the McKennon test,

holding that after-acquired evidence can serve as a limitation on an

employee's recovery for a retaliatory discharge claim brought under the Texas

Workers' Compensation Act. Trico Technologies Corp. v. Montiel, 949 S.W.2d

308 (Tex. 1997). Likewise, in Walters v. United States Gypsum Company,

537 N.W.2d 708 (Iowa 1995), the Iowa Supreme Court adopted the McKennon

standard for purposes of retaliatory discharge/discrimination actions. The

employee had claimed that she had been discharged from her employment

because she had filed a civil rights complaint against her employer. In an

action involving sexual harassment, constructive discharge, and retaliation,

the Michigan Court of Appeals recently reaffirmed its rule that an employee

is not barred from all relief as a matter of law for after-acquired evidence of

misconduct, but that any wrongdoing could be reflected in the nature of the

relief awarded to him. Horn v. Dep't of Corrections, 548 N.W.2d 660 (Mich.

Ct. App. 1996). See also Thompson v. Better-Bilt Aluminum Prods. Co., 927

P.2d 781 (Ariz. Ct. App. 1996)(finding that public policy does not preclude,

in action involving wrongful termination for filing of a workers' compensation

claim, an employer from presenting after-acquired evidence of application

fraud when the jury is instructed as to the significance of such evidence on

the measure of damages); Barlow v. Hester Industries, Inc., 479 S.E.2d 628

(W. Va. 1996)(adopting the McKennon standard for employment discrimina-

tion cases).

Courts, however, have not been unanimous in their adoption of the

McKennon approach. Some jurisdictions have held that after-acquired

evidence can serve as a complete bar to employee claims. In Crawford

Rehabilitation Services, Inc. v. Weissman, 938 P.2d 540 (Colo. 1997)(en banc),

the Colorado Supreme Court declined to apply the limitations placed on the

after-acquired evidence doctrine by McKennon to claims for breach of implied

contract and promissory estoppel. It held that after-acquired evidence of

resume fraud may provide an employer with a complete defense to such

claims. Similarly, in Gassman v. Evangelical Lutheran Good Samaritan

Society, Inc., 933 P.2d 743 (Kan. 1997), the court held that as to ordinary

wrongful discharge breach of employment contract cases not involving any

p. 59


LEWIS v. FISHER

overriding governmental interest, the limits placed on the after-acquired

evidence doctrine by McKennon are not applicable, and the employee is not

entitled to any relief if the employer can establish after-acquired evidence

sufficient for termination. See also Camp v. Jeffer, Mangels, Butler &

Marmaro, 41 Cal. Rptr. 2d 329 (Cal. Ct. App. 2 Dist. 1995')(finding employees'

misrepresentations about their felony convictions related directly to their

wrongful termination claims; since they were not lawfully qualified for their

jobs, they cannot be heard to complain that they improperly lost them.).

B. Application to Certified Questions

Analysis of the cases cited above reveals a clear distinction between

those allowing after-acquired evidence on the issue of liability and those that

have not. The cases that have allowed use of after-acquired evidence to bar

recovery by the employee have involved causes of action, such as breaches of

contract, which implicate purely private concerns. See, e.g., Crawford

Rehabilitation Servs., Inc., 938 P.2d 540 (breach of implied contract and

promissory estoppel); Gassman, 933 P.2d 743 (breach of employment

contract). On the other hand, cases disallowing use of after-acquired evidence

on the issue of liability have implicated major public policy concerns, such as

prevention of discrimination or preservation of workers' compensation rights.

See, e.g., Trico Technologies Corp., 949 S.W.2d 308 (retaliatory discharge

under workers' compensation act); Walters, 537 N.W.2d 708 (retaliatory

discharge/discrimination actions); Horn, 548 N.W.2d 660 (sexual harassment,

constructive discharge, and retaliation); Thompson, 927 P.2d 781 (wrongful

termination for filing workers' compensation claim); Barlow, 479 S.E.2d 628

(employment discrimination).

The court in Crawford Rehabilitation Services observed that the

employee's breach of implied contract and promissory estoppel claims did not

implicate the McKennon-type public-policy interests of elimination of

discrimination in the work-place. See Crawford Rehabilitation Servs., 938

P.2d at 549. Similarly, the New Jersey Supreme Court has stated that "The

policy concerns that are at stake in applying the after-acquired evidence

defense to an unlawful discharge based on invidious discrimination differ

from those that are implicated in private-employment-contract actions ..."

Nicosia v. Wakefem Food Corp., 643 A.2d 554, 563 (N.J. 1994); see also

Schuessler v. Benchmark Marketing & Consulting, 500 N.W.2d 529, 541

(Neb. 1993)("Breach of a contract does not give rise to the same concerns or

demand the same protections as does an action based on discrimination.").

We find this distinction persuasive.

p. 60


LEWIS v. FISHER

McKennon disallowed the use of after-acquired evidence on the issue

of liability in order to serve the public policy reasons underlying ADEA and

Title VII, which include deterrence of discrimination, and compensation for

injuries caused by prohibited discrimination. We adopted the same approach

in Baber in an action involving the Whistleblower's Act. Baber, __ S.C.__,

488 S.E.2d 314. An action brought under the Whistleblower's Act is a suit

against a public employer by a public employee claiming to have been subject

to adverse personnel action in retaliation for having exposed governmental

wrongdoing. The Act is remedial and seeks to foster good government for the

benefit of the people of South Carolina by affording protection to

governmental employees, the most obvious and important sources of

information on the conduct of government. See Spencer v. Bamwell County

Hosp., 314 S.C. 405, 444 S.E.2d 538 (Ct. App. 1994). Clearly, a whistle-

blower's action implicates major public policy concerns. Such public policy

concerns, however, are not so prominently present in employee-employer

contract disputes, which simply involve the rights of private parties in

relation to one another. Accordingly, we conclude that the rationales

underlying McKennon and Baber are inapplicable in employment contract

cases. As such, there should not be an absolute bar to the use of after-

acquired evidence on the issue of liability in employee handbook breach of

contract actions.

Although we find that after-acquired evidence should be admissible on

the issue of liability, we recognize the potential dangers of allowing employers

unrestricted use of such evidence. If free reign were given, then in defending

breach of employment contract actions, less-than-principled employers (or

their attorneys) may be tempted to "rummage the file" in order to "discover"

any and all evidence that would permit them to escape liability. For

example, an employer that has been inclined to overlook his employees'

peccadillos (e.g. occasional tardiness), might suddenly claim, in response to

a breach of contract action, that the employee would have been fired had the

employer been aware of the tardiness. Thus, we conclude that although

after-acquired evidence should be allowed on the issue of liability, certain

limitations must be put into place so as to prevent abuse by employers. This

can be achieved by restricting use of after-acquired evidence in two ways.

First, the employer must prove that the wrongdoing was significant, that it

was of "such severity that the employee in fact would have been terminated

on those grounds alone if the employer had known of it at the time of the

discharge." See Baber, __S.C. at__, 488 S.E.2d at 320 (quoting

McKennon). Thus, evidence of employee wrongdoing that would not have

resulted in termination would not be admissible. Second, this proof must be

established, not by a preponderance of the evidence, but by clear and

p. 61


LEWIS v. FISHER

convincing evidence. We believe that these two limitations will serve to

exclude doubtful or insignificant evidence of employee wrongdoing, while

allowing evidence of very severe wrongdoing that should properly be

considered.

CONCLUSION

Therefore, in response to the certified questions, we reply that South

Carolina recognizes the after-acquired evidence doctrine as a defense to an

action brought by an employee terminated in violation of the progressive

discipline policy of an applicable employee handbook. Within this context,

the evidence may serve to allow the employer to avoid liability altogether, if

by clear and convincing evidence it is proven that the employee's wrongdoing

was of such severity that the employee in fact would have been terminated

on those grounds alone if the employer had known of it at the time of the

discharge.

CERTIFIED QUESTIONS ANSWERED.

FINNEY, C..J., MOORE, WALLER and BURNETT, JJ., concur.

p. 62