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California Appellate Court Considers Age Discrimination an Unfair Business Practice, Requires Disclosure of Verdict to Workforce

July 1, 2003

On June 12, 2003, the California Court of Appeal for the Second District affirmed a jury verdict of over $5 million, plus $1.7 million in attorneys' fees, in an age discrimination and unfair competition law ("UCL") case brought against Nestl é U.S.A. Herr v. Nestl é U.S.A., 2003 Cal. App. LEXIS 855, 2003 Cal. Daily Op. Service 5043, 2003 Daily Journal DAR 6362 (June 12, 2003). The Herr case is the first appellate decision in the state to hold that unlawful employment discrimination may form the basis of a UCL claim. The Court of Appeal also affirmed the injunctive relief ordered by the trial court, namely that the company repudiate a discriminatory memorandum by its chief executive officer and disseminate information about the verdict and repudiation to all 20,000 Nestl é U.S.A. employees.

Nestlé S.A., a Swiss company, acquired the Carnation Company in 1985, and allowed the subsidiary to continue to operate as it had in the past for about five years. The plaintiff, Richard Herr, was hired shortly before Nestlé S.A. consolidated its American holdings, including Carnation, into Nestlé U.S.A. In a 1990 management meeting, a Nestlé executive vice president said that it was Nestlé's policy to "promote young, energetic people in management positions," remarked that Carnation "had a lot of deadwood in it" and instructed the managers to "see about getting rid of the deadwood." The average Carnation employee at the time was 43 years old, with 15 to 17 years of experience. In 1993, Nestlé U.S.A. deleted "age" from the protected classifications listed in its equal employment opportunity policy, restoring it only after being sued for age discrimination. In December 1993, Nestlé's chief executive officer in Switzerland issued a memorandum entitled "Objectives 1994," which directed employees to "continue hiring, identifying and developing young people to have in the long-term enough resources for future management."

Herr was hired at Nestlé-owned Carnation in 1989 as an internal auditor and was assured that the company promoted from within. He was promoted to a managerial position the following year, and received positive performance evaluations. Despite his experience and successful job performance, Herr was passed over for promotion eight times in the next five years. The employees who were selected instead of Herr were aged 29 to 32, were significantly less qualified than Herr (and some failed even to meet the minimum requirements for the positions), and in some cases, had received less favorable performance evaluations. Herr presented substantial evidence that Nestlé declined to promote him based on his age, including the statement by a senior executive to Herr, "I knew you would [quit]; this is the straw that broke the camel's back."

Based on these egregious facts, the jury awarded Herr over $5.1 million in damages for age discrimination in violation of the California Fair Employment and Housing Act ("FEHA"), plus $1.7 million in attorneys' fees. In the second phase of the trial, the trial court determined that Nestlé had violated the state's unfair competition law (Business & Professions Code § 17200) by engaging in the unlawful employment practice of age discrimination. The trial court ordered injunctive relief, consisting of (1) a permanent injunction prohibiting age discrimination in promotions by Nestlé U.S.A.; (2) repudiation of the "Objectives 1994" memorandum by Nestlé S.A.'s chief executive officer; and (3) dissemination of the final judgment, including the repudiation, to all Nestlé U.S.A. employees.

In the published portion of the decision affirming the trial court's judgment, the Court of Appeal noted that the UCL is not limited to consumer actions, and its remedies are available in addition to those available under any other law of the state, including the FEHA. The UCL defines unfair competition to include "any unlawful, unfair, or fraudulent business act or practice," and authorizes injunctive relief among its remedies. Age discrimination is an unlawful business practice under the FEHA. (Cal. Gov't Code § 12940(a).) Accordingly, the Court of Appeal affirmed the injunction against Nestlé U.S.A. as an appropriate remedy for the unfair business practice of age discrimination. Citing the decision in Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000), which ordered restitution of unlawfully withheld overtime wages in a UCL action, the Herr Court stated:

The failure to pay statutorily mandated overtime wages constitutes unfair competition in that an employer which fails to pay overtime wages gains an unfair advantage over its competitors. [¶] By a parity of reasoning, age discrimination likewise implicates unfair competition. It is self-evident that older workers, who have worked their way up the ranks, frequently are more highly compensated than their younger colleagues. Thus, an employer which practices age discrimination may have an unfair competitive edge over employers who comply with the FEHA.

While this case is striking for its compelling facts and large verdict, what is perhaps most interesting is the use of the disparity in wages between older and younger workers as the basis for finding a violation of the UCL. It is easy to see the unfair competitive advantage an employer would have by discriminating against older, more highly-compensated workers, or by engaging in gender discrimination by paying female employees lower wages for the same work. It appears, however, that any unlawful employment practice under the FEHA can form the basis of a UCL claim—including discrimination based on race, color, religion, national origin, ancestry, physical and mental disability, medical condition, and marital status. Cases may well be brought, for example, alleging that an employer's refusal to provide domestic partner benefits to gay and lesbian employees not only constitutes sexual orientation discrimination, but also unfair competition because the employer incurs lower costs for health care benefits.

It was this violation of the UCL—the "unfair competitive edge" of age discrimination—that formed the basis of the Herr Court's decision to uphold the broad injunctive remedy fashioned by the lower court. One commentator has already likened the decision ordering Nestlé to disseminate the $5 million judgment and repudiation of its memorandum to all of its employees as "an engraved invitation to file suit." Although many plaintiffs' attorneys already routinely include UCL claims in their employment discrimination complaints, the Herr decision will undoubtedly make it a widespread practice, given that the remedies for UCL violations include restitution or disgorgement of money or property unlawfully obtained, in addition to injunctive relief. Most employers in California (and elsewhere) are well aware that the age discrimination is unlawful and will expose them to significant liability. Still, this decision is a helpful reminder to all employers, particularly foreign companies with U.S.-based operations, to be alert to differences between the employment laws of their own countries and those of California.