In Leek v. Cooper, (— Cal.Rptr.3d —-, Cal.App. 3 Dist., April 15, 2011), the court of appeal considered the issue of whether employees claiming age discrimination could recover against the sole shareholder of their corporate employer based on the degree to which the shareholder controls the employer. The court held the “proper method for determining whether the sole shareholder of a corporate employer is liable for the wrongdoing employer/corporation, is by the application of an alter ego theory.” The employees could not recover on the alter ego theory because they failed to properly plead the theory in their complaint or show they should be able to amend their complaint.
Facts
Donna Leek, John Borden, and Cindy Buschmann filed a lawsuit alleging they were employed by Auburn Honda, a California corporation, and Jay Cooper (“Cooper”) and that they were subjected to age discrimination in violation of the Fair Employment and Housing Act (“FEHA”). Larry Leonardo brought a separate lawsuit alleging that he was employed by Auburn Honda and Cooper and that he was the victim of age discrimination and that Auburn Honda and Cooper had violated the California Family Rights Act (“CFRA”). Both lawsuits alleged Cooper is the sole owner of Auburn Honda because he owns all of its stocks and makes all of its business decisions. At the time the employees were terminated they were all over 49 years of age. They allege Cooper replaced them with substantially younger employees and that “Cooper told Leonardo he planned to get rid of older employees in order to reduce payroll expenses.”
Leek, Borden, Buschmann, and Leonardo (collectively, “Employees”) acknowledged that only an employer may be liable to an employee for discrimination pursuant to the FEHA or for violation of the CFRA. However, the Employees assert that Cooper was an employer within the meaning of the applicable statutes because the proper test for determining who is an employer is the degree to which the person controls the employee. The Employees did not specifically plead the theory of alter ego in their complaint but they did raise the issue in response to Cooper’s motion for summary judgment. The Employees also filed motions to amend their complaints to add the alter ego theory as a ground for Cooper’s liability. The trial court denied their motions to amend. The trial court granted Cooper’s motions for summary judgment on the ground that only the corporation as the employer could be held liable for discrimination, and an alter ego theory was not pleaded in the complaint.
Decision
The court of appeal rejected the Employees’ claim that Cooper’s control over the Employees is the proper test to decide whether Cooper was the actual employer. The court held the “proper method for determining whether the sole shareholder of a corporate employer is liable for the wrongdoing employer/corporation, is by the application of an alter ego theory.” The court found that the “essence of the alter ego doctrine is not that the individual shareholder becomes the corporation, but that the individual shareholder is liable for the actions of the corporation.”
In response to the Employees’ lawsuits, Cooper filed a motion for summary judgment in which he alleged that both the FEHA and the CFRA limit “liability for discrimination to the employer, not to management personnel.” In their response to the motion, the Employees asserted Cooper could be held liable for the discrimination because he is the alter ego of Auburn Honda. The Employees alleged Cooper was the president of Auburn Honda, there were no other directors of Auburn Honda, Cooper “‘individually’ fired” Employees, Cooper “individually” made all decisions for the corporation, and Cooper “‘individually’ owns the land on which the dealership is located, and that he raises the rent as he sees fit.” The court rejected the Employees’ claim that Cooper should be held liable under the alter ego theory.
The California Supreme Court has “held that only the employer, not individual supervisory employees, may be held personally liable under FEHA for discriminatory hiring, firing, and personnel practices.” The court of appeal declined to extend liability in this case to Cooper under the alter ego theory. The court concluded that a determination that Cooper is the alter ego of Auburn Honda would not make Cooper an employer. Instead, it would only make Cooper liable for the obligations of the Auburn Honda.
In order to state a claim under the alter ego theory, the Employees were required to show “(1) such a unity of interest and ownership between the corporation and its equitable owner that no separation actually exists, and (2) an inequitable result if the acts in question are treated as those of the corporation alone.” The court held the Employees’ complaint did not contain sufficient factual allegations to inform Cooper that the Employees were seeking relief on the basis of Cooper’s liability as an alter ego. The trial court did not err in denying the Employees’ motion to amend because they failed to show that they could satisfy the second prong of the alter ego test. The court found the second prong was not satisfied because there is nothing to indicate the Employees, “if successful will not be able to collect on any judgment against the corporation.”
The court of appeal, however, reversed the decision of the trial court to award attorney fees to Cooper. Although Government Code section 12965, subdivision (b), authorizes a court to award attorney fees and costs to a prevailing party in an FEHA claim, California courts have interpreted this statute “to the effect that a prevailing defendant in an employment discrimination action cannot recover attorney fees unless the action was unreasonable, frivolous, meritless or vexatious.” The court found that the Employees’ actions were not unreasonable, frivolous, meritless or vexatious. Although the theory of recovery advanced by the Employees’ was not successful, their argument was legitimate. The court also denied Cooper’s motion for sanctions on appeal because there was no evidence the “appeal was taken solely to harass or delay.”
Questions
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