King v. U.S. Bank: 17.2 Million Reasons to Select the Right Investigator

On July 28, 2020, the California Court of Appeal in King v. U.S. Bank dramatically raised the stakes on an employer’s obligation to select a knowledgeable and experienced workplace investigator. Based largely on U.S. Bank’s inadequate investigation, the Court awarded the plaintiff an astounding $17.2 million in compensatory and punitive damages for defamation, wrongful termination, and breach of the implied covenant of good faith and fair dealing.

At first blush, this case appears to simply point out the obvious deficiencies of a clearly inadequate investigation. But the implications of King are, in fact, much more significant because of its analysis that U.S. Bank’s internal HR investigator was a “managing agent” for punitive damages purposes. In reaching that conclusion, King dramatically expands potential legal liability for the numerous employers who regularly call on their HR generalists to conduct internal workplace investigations.

1. Factual Background
Timothy King managed U.S. Bank’s commercial banking business for the Sacramento region. In November 2012, Kim Thakur, one of King’s direct reports whom King planned to place on a performance improvement plan, raised allegations of gender discrimination and harassment against King to Maureen McGovern, a human resources generalist. Thakur and John Flinn, another of King’s direct reports, made other allegations against King, including falsification of records. According to King, Flinn was upset with him about Flinn’s performance review rating and because King assigned a deal to Thakur instead of him.

McGovern conducted an internal investigation, which did not include an interview of King. Based on her investigation findings, U.S. Bank terminated King’s employment. King later sued U.S. Bank for defamation, wrongful termination in violation of public policy, and breach of the implied covenant of good faith and fair dealing.

2. The Jury’s $24.3 Million Verdict and Its Strong Criticism of the Investigation
The jury found in favor of King on all claims and awarded damages totaling $24.3 million, $15.6 million of which was allocated to punitive damages. Notably, jurors interviewed after the trial strongly condemned the bank’s inadequate investigation.¹ One juror told the Sacramento Bee, “I felt there was a lot of gossip that didn’t have any truth to it. I didn’t find substantial evidence to support any of [U.S. Bank’s] statements.” Similarly, another juror observed, “A lot of us felt strongly that the investigation wasn’t done correctly. Why didn’t they ask for his side of the story? You can’t make a decision based on a rumor out in the hallway. These were rumors taken as facts.”

3. The Court of Appeal’s Analysis
U.S. Bank and King both filed appeals relating to the trial court’s subsequent rulings reducing the damages awards. The Court of Appeal decided that King was entitled to $17.2 million, $8.5 million of which was allocated to punitive damages. It found King’s claims were supported by substantial evidence, including compelling evidence that McGovern had failed to investigate properly and reach well-reasoned conclusions based on reliable evidence. More notably, the Court found there was substantial evidence from which the jury could have concluded that McGovern was a managing agent of U.S. Bank and made the defamatory statements with malice, giving rise to punitive damages liability.

     a. Major Flaws in the Investigation
In finding that there was a “deliberate failure to investigate,” the Court identified several major flaws in the investigation. McGovern did not confront King with the allegations or allow him to identify any evidence to refute the allegations. In fact, McGovern testified that she did not know whether King had any facts, documents, or witnesses to refute the allegations and she “did not care” if he had any such contradictory evidence. McGovern also took no steps to determine whether Thakur or Flinn had any motive to lie, despite her knowledge that she had a duty to determine witnesses’ veracity and the existence of evidence that both Thakur and Flinn were biased and hostile towards King. Finally, the Court found there was substantial evidence that McGovern made a deliberate decision not to investigate facts that could have confirmed the falsity of the allegations.

     b. The Court’s Bombshell Holding: The HR Investigator Was a “Managing Agent”
Much more important, however, was the Court’s holding that McGovern was a “managing agent” for purposes of awarding punitive damages. Punitive damages may be awarded only where the jury finds “oppression, fraud, or malice” by clear and convincing evidence. “Malice” is defined in California’s Civil Code as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.”

A corporate employer is not liable for punitive damages based upon the acts of its employees unless the wrongful conduct was committed, authorized, or ratified by a corporate officer, director, or managing agent. The term “managing agent” includes only those corporate employees who exercise substantial independent authority and judgment in their corporate decision-making, such that their decisions ultimately determine corporate policy. A plaintiff seeking punitive damages must show that the employee exercised substantial discretionary authority over significant aspects of a corporation’s business.

Here, the Court held there was substantial evidence supporting the jury’s finding that McGovern made defamatory statements about King with actual malice.² The Court found that the jury could have reasonably concluded that McGovern had reason to believe the statements she made regarding her findings were false, she made them anyway, and she knew such statements would unjustly tarnish King’s reputation and would cause both emotional and economic hardship given her termination recommendation. Accordingly, the Court held that there was substantial evidence from which the jury could find such conduct “despicable.”

Moreover, the Court held that there was substantial evidence supporting the jury’s finding that McGovern was a managing agent. The Court noted that although U.S. Bank’s code of ethics provided that suspected acts of misconduct would be investigated “in a fair and thorough manner,” it did not have any “rules, policies, procedures, practices, or criteria in place for investigators to follow in performing investigations.” Investigators, like McGovern, “were given the discretion and judgment to determine what to do and how to do it, with appropriate support from their managers. It was up to investigators to determine if/when to consult with their managers on a case-by-case basis.”

The Court found there was “no evidence suggesting that McGovern’s ability to determine who to interview or how to perform an interview or investigation (e.g., whether to obtain written statements) was limited in any respect.” The Court reasoned that, “given the breadth of discretion delegated to her in determining how to fairly and thoroughly investigate suspected acts of dishonesty or unethical conduct (i.e., corporate policy) and what constituted a fair and thorough investigation—the results of which would determine (and in this case did determine) whether an employee would be disciplined or terminated—the jury could have reasonably inferred that she had the authority and discretion to interpret and apply the investigative policies for [U.S. Bank] as she saw fit, such that her decisions ultimately determined corporate policy.” Because an employee exercising authority that results in the ad hoc formulation of corporate policy is a managing agent, the Court determined there was substantial evidence from which the jury could have concluded that McGovern met that definition.

Notably, the Court also specifically rejected U.S. Bank’s arguments that McGovern was not a managing agent because she was a relatively low-level employee, she did not have the authority to terminate anyone’s employment, and she periodically consulted with her supervisor (the vice president and HR manager for the division) regarding the investigation, because these facts “[do] not negate the discretion delegated to her.”

4. U.S. Bank’s Petition for Review and Employer Advocacy Groups’ Sounding of the Alarm
On September 4, 2020, U.S. Bank filed a Petition for Review with the California Supreme Court. Subsequently, on September 28, 2020, the U.S. Chamber of Commerce filed a Request for Depublication of the Court of Appeal’s decision. The Supreme Court denied both the Petition for Review and the Request for Depublication on November 10, 2020.

Notably, two employer advocacy groups attempted to support U.S. Bank’s petition to review the King decision by providing amicus curiae letters to the California Supreme Court. The U.S. Chamber of Commerce, for example, noted the potentially dramatic consequences of the opinion: “Nearly any employee who exercises discretion in performing her duties could expose a company to punitive liability.” The Chamber also observed that this decision “discourages companies from giving employees reasonable discretion to perform important duties, like investigating harmful conduct within the company, given the countervailing threat of punitive liability for their errors.”

Similarly, the Association of Southern California Defense Counsel argued that it made no sense that an HR generalist conducting an investigation could be deemed a managing agent simply because she exercised discretion over how to conduct her own investigation: “Rather than focusing on the employee’s authority to set policies that would be followed by the organization over time, the court focused on the employee’s discretion regarding performance of her own investigations.”

5. Key Takeaways … and Open Questions
There are two major takeaways from this case. First, the case reminds employers of the importance of selecting a knowledgeable and experienced workplace investigator to conduct a fair and thorough investigation. Indeed, an inadequate investigation can mean disaster before a judge and a jury. Investigations are critical, and the threshold question of investigator selection cannot be taken lightly.

The second and more important takeaway, however, is the Court’s analysis that the HR investigator here was a managing agent. This is particularly significant given the fact that the vast majority of workplaces utilize HR investigators to conduct investigations in the same manner as U.S. Bank. Employers are now at a much higher risk for punitive damages because this case makes it significantly more difficult to argue that internal investigators are not managing agents.

Furthermore, the Court’s expansive interpretation of who constitutes a managing agent raises several questions. For example:

• How much investigatory discretion will trigger a determination that an HR investigator is a managing agent?
• Could limiting internal investigators’ discretion, perhaps by issuing written guidelines for such investigations, help reduce the risk of punitive damages (being mindful that written guidelines that are not followed consistently could pose their own litigation risk)?
• Would it be sufficient for an employer to require investigators to adhere to the California DFEH’s Workplace Harassment Guide and/or the Association of Workplace Investigators’ Guiding Principles?
• Should employers more strongly consider utilizing an independent, neutral workplace investigator for higher-risk investigations, given that outside investigators are less likely to be deemed a company’s managing agent?

While the answers to these questions remain unclear, it is abundantly clear that the risk of litigating the adequacy of internal investigations has dramatically increased. Indeed, King serves as a potent reminder of the importance of selecting the right investigator to conduct a fair and thorough investigation.

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¹ See https://www.sacbee.com/news/local/article148649379.html#storylink=cpy

² Although an employer’s republication of defamatory statements between an employer and its employees is generally privileged under the so-called common interest privilege, that privilege applies only if the communication was made without malice. The Court held that the evidence before the jury supported a finding of actual malice based on the flaws it identified in McGovern’s investigation.