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Workers who transferred to subsidiary based on assurances it wouldn’t be sold can’t bring fraud claims, must sue under CBA

By Brandi O. Brown, J.D.

The Texas Supreme Court answered two certified questions from the Fifth Circuit related to fraudulent inducement claims brought by a group of former DuPont employees who contended that they were induced to move to a newly formed subsidiary based on  DuPont’s assurances, made after it had already discussed selling the subsidiary to a potential buyer, that it would not sell the new company. The employees moved, DuPont sold the subsidiary, and the employees’ benefits were reduced. The Texas Supreme Court concluded that although there were some situations where an at-will employee could sue an employer for fraud, an illusory promise, such as that found in an at-will employment relationship, could not form the basis of such a claim. And although the collective bargaining agreement modified the at-will employment relationship, employees covered by the CBA were limited to remedies contained in that contract and could not bring a fraud action (Sawyer v E.I. DuPont de Nemours and Co, April 25, 2014, Hecht, N).

Subsidiary spun off. In February 2002, DuPont announced its intention to spin off the operations of a Texas plant to form a wholly owned subsidiary. Fifty-nine of the employees in the unit set to be transferred were covered by a collective bargaining agreement. They were worried that DuPont would sell the subsidiary, which they feared would adversely affect their compensation and retirement packages. DuPont, however, wanted the employees to go to the subsidiary in order to avoid significant training expenses and layoffs that would otherwise result. To resolve the problem, DuPont and the union agreed to a deadline by which unit employees had to choose whether to stay with DuPont or move to the new company. DuPont allegedly assured the employees that it would keep the subsidiary, although it had already been discussing sale of the company with a potential buyer.

In February 2003, almost all of the unit employees moved to the subsidiary. Just a few weeks later, DuPont announced that it was negotiating a sale with the potential buyer. The buyer thereafter reduced the employees’ compensation and retirement benefits. Subsequently, they brought state law claims alleging that DuPont fraudulently misrepresented that the subsidiary would not be sold and that they relied on those misrepresentations and suffered damages as a result.

Questions certified. DuPont contended that the employees were at-will employees and thus were foreclosed from bringing fraud claims. The employees who were covered by the CBA argued that they were not at will because they could only be discharged for “just cause.” On appeal, the Fifth Circuit certified two questions to the Texas court. The first was whether under Texas law, at-will employees could bring fraud claims against their employers for loss of their employment? The second was whether, if that question was answered in the negative, could the employees covered under a 60-day cancellation-upon-notice collective bargaining agreement, which limits an employer’s ability to discharge employees only for just cause, bring fraud claims against their employer based on allegations that it fraudulently induced them to terminate their employment?

At-will employment. Although the court concluded that an at-will employee could sue an employer for fraud in some situations, that situation was not presented here. By way of background, it noted that the Texas legislature had created a few narrow exceptions to the at-will doctrine, but that the court had repeatedly refused to recognize exceptions or to impose duties on those employers, such as the duty of good faith and fair dealing. However, the court had not previously determined whether an at-will employee could sue his or her employer for fraud. Nevertheless, it noted, the appeals courts have almost all had held that a fraud claim could not be based on “illusory promises of continued at-will employment.” Case law in the state was so consistent, the court noted, that the employees had even conceded that allowance of such claims was “unlikely.”

The court pointed out that there could be situations where at-will employees could sue for fraud, such as in the case of recovery of expenses. But it noted that an illusory promise, such as existed where an employer or employee could “avoid performance of a promise by exercising a right to terminate the at-will relationship,” could “no more support an action for fraud than one for breach of contract.” In order to recover for fraud, the employee would have to prove “justifiable reliance on material misrepresentation” and “[a] representation dependent on continued at-will employment cannot be material because employment can terminate at any time.” To hold otherwise, the court opined, “would mock the refusal of enforcement in a suit for breach of contract” and significantly impair the at-will rule” by allowing an employee who is foreclosed from pursuing a breach of contract claim to pursue, instead, a fraud claim.

“Just cause” discharge. Under the CBA, 59 of the employees in the suit could only be discharged for “just cause.” DuPont had not attempted to terminate the CBA. The question presented to the court was whether the “just cause” provision modified those employees’ at-will status. The court held that it did. The CBA treated the concept as “assertable, determinable, and consequential,” the court explained, and provided a grievance procedure that included a final and binding arbitration decision. In other words, the parties had agreed that “the requirement that discharge be only for ‘just cause’ can be given the force of law among all those affected.” Therefore, it modified the at-will employment relationship.

However, the court answered “no” to the question of whether the employee subject to the CBA could sue for fraudulent inducement based on DuPont’s assurances that it would not sell the subsidiary. The employees, the court opined, “over-read” its 1996 decision in Johnson & Johnson Medical, Inc. v. Sanchez. In that case, the court held that the employee, who was covered by a CBA, could not recover for fraud because she had not presented evidence of detrimental reliance on the employer’s representation. Contrary to the employees’ contention, the court had not in that case considered “the general availability of a fraud action to an employee covered by a CBA,” but had instead limited its analysis to assessment of the evidence. In particular, the court had not considered in Johnson & Johnson whether the employee had any contractual remedy.

Fraud action foreclosed. In this case, the CBA-covered employees did have a contractual remedy. DuPont argued that their complaint of fraudulent inducement was one for constructive discharge and that discharge without just cause was covered in the CBA. As such, DuPont argued, the CBA foreclosed an action for fraud. The court agreed, rejecting the employees’ argument to the contrary (that DuPont had wanted them to stay in their jobs and had not discharged them). If termination of the appellants’ employment was fraudulently induced, then that was “tantamount to discharge, which DuPont concedes would have been without just cause.” The CBA outlined remedies for such discharges — reinstatement and up to six months’ lost wages. “To allow a fraud action when the Employees had a contractual remedy would not only be unnecessary, it would defeat the parties’ bargain.” Under the CBA, if an employee had been discharged for refusing to go to the subsidiary, he or she would have “clearly been limited to his remedies under the CBA.” To instead allow employees “fooled into” going to the subsidiary to sue would “defeat” the bargained-for CBA.