COTRAN v. ROLLINS HUDIG HALL INTERNAT., INC

OPINION

BROWN, J.

When an employee hired under an implied agreement not to be dismissed except for "good cause" is fired for misconduct and challenges the termination in court, what is the role of the jury in deciding whether misconduct occurred? Does it decide whether the acts that led to the decision to terminate happened? Or is its role to decide whether the employer had reasonable grounds for believing they happened and otherwise acted fairly? The Courts of Appeal are divided over the question. The majority of California decisions suggest the jury's role is to decide whether the employer concluded misconduct occurred "fairly, honestly, and in good faith." That standard, or variations on it, appears to be the rule in most other jurisdictions as well. But at least one Court of Appeal opinion adopts a more expansive view. It holds the jury must decide whether the alleged misconduct occurred as a matter of fact, and places the burden of proving it on the employer.

We granted review to clarify the role of the jury in litigation alleging breach of an implied contract not to terminate employment except for good or just cause, and to resolve the conflict among the Courts of Appeal. The better reasoned view, we conclude, prescribes the jury's role as deciding whether the employer acted with "`a fair and honest cause or reason, regulated by good faith.'" That language is from Pugh v. See's Candies, Inc. (1981) 116 Cal.App.3d 311, 330 [171 Cal.Rptr. 917] ( Pugh I), the font of implied-contract-based wrongful termination law in California. Recently, in Scott v. Pacific Gas Electric Co. (1995) 11 Cal.4th 454, 467 [ 46 Cal.Rptr.2d 427, 904 P.2d 834] ( Scott), we elaborated on the content of good or just cause by enumerating what it is not: reasons that are "`trivial, capricious, unrelated to business needs or goals, or pretextual.'" (Quoting Wood v. Loyola Marymount University (1990) 218 Cal.App.3d 661, 670 [ 267 Cal.Rptr. 230].)

Today, we expressly adopt a governing standard that combines the formulations in both Scott, supra, 11 Cal.4th at page 467, and Pugh I, supra, 116 Cal.App.3d at page 330 (the Scott-Pugh standard), elaborating on its meaning and how it should be administered by trial judges to promote the policies underlying implied-contract-based wrongful discharge claims involving employee misconduct. And because the Court of Appeal relied on a substantially similar standard in overturning a jury verdict in favor of the plaintiff-employee in this case and ordering a new trial, we affirm its judgment as well. We disapprove Wilkerson v. Wells Fargo Bank (1989) 212 Cal.App.3d 1217 [ 261 Cal.Rptr. 185], the only published Court of Appeal decision adopting a broader view of the jury's function in this species of wrongful discharge litigation.

In this case, the contractual limitation on the employer's at-will power of termination is implied, arising, as the trial judge apparently determined, from preliminary negotiations and the text of a letter defendants sent plaintiff in response to a request for additional assurances of "permanent employment" before accepting their employment offer. The letter stated that if plaintiff's efforts to develop an international brokerage department failed to succeed, "other opportunities" within the organization would be "made available" to him. The Court of Appeal held it was error for the trial court to take from the jury the issue whether there was an implied contract not to terminate plaintiff except for good cause, a holding we do not review. (See post, at p. 109.) Wrongful termination claims founded on an explicit promise that termination will not occur except for just or good cause may call for a different standard, depending on the precise terms of the contract provision.

I. Facts and Procedural Background; Rollins's Investigation and the Decision to Terminate Plaintiff

In 1987, Rollins Hudig Hall International, Inc. (Rollins), an insurance brokerage firm, approached plaintiff, then a vice-president of a competitor, with a proposal to head its new West Coast international office. Following a series of telephone conferences, meetings and exchanges of letters, plaintiff joined Rollins in January 1988 as senior vice-president and western regional international manager. He held that position until 1993 when he was fired.

The events leading to plaintiff's termination began in March 1993, when an employee in Rollins's international department reported to Deborah Redmond, the firm's director of human resources, that plaintiff was sexually harassing two other employees, Carrie Dolce and Shari Pickett. On March 24, Redmond called both women to her office. In separate interviews, she asked each if they had been harassed. Both said yes; each accused plaintiff as the harasser. Two days later, both women furnished statements to Redmond stating that plaintiff had exposed himself and masturbated in their presence more than once; both also accused plaintiff of making repeated obscene telephone calls to them at home. Redmond sent copies of these statements to Rollins's equal employment opportunity (EEO) office in Chicago. Rollins's president, Fred Feldman, also was given copies. He arranged for a meeting with plaintiff at Rollins's Chicago office, attended by Robert Hurvitz, the firm's head of EEO, and Susan Held, Rollins's manager for EEO compliance. At the meeting, Feldman reviewed the accusations made by Dolce and Pickett against plaintiff. He explained that an investigation would ensue and that its outcome would turn on credibility. After reading the Dolce and Pickett statements to plaintiff, Held explained how the investigation would proceed. Plaintiff said nothing during the meeting about having had consensual relations with either of his two accusers, and offered no explanation for the complaints.

Pending completion of the EEO investigation, Rollins suspended plaintiff. Over the next two weeks, Held interviewed 21 people who had worked with plaintiff, including 5 he had asked her to interview. Held concluded that both Dolce and Pickett, who reiterated the incidents described in their statements, appeared credible. Her investigation failed to turn up anyone else who accused plaintiff of harassing them while at Rollins. One Rollins account executive, Gail Morris, told Held that plaintiff had made obscene telephone calls to her when they both worked for another company, soon after a sexual relationship between the two had ended. Susan Randall, one of those plaintiff had asked to be interviewed and who had described plaintiff as a "perfect gentleman," later called Held to relate "a strange early morning phone call" from plaintiff which "was not for any business purpose." Randall "couldn't figure out what [plaintiff] wanted, . . . yelled at him, told him to leave her alone, and never to call her in the middle of the night again." Held's investigation also confirmed that plaintiff had telephoned Dolce and Pickett at home. In April, both women signed sworn affidavits reciting in detail the charges made against plaintiff in their original statements.

On the basis of her investigation, her assessment of Dolce's and Pickett's credibility, and the fact that no one she interviewed had said it was "impossible" to believe plaintiff had committed the alleged sexual harassment, Held concluded it was more likely than not the harassment had occurred. She met with Feldman and Hurvitz to present her conclusions and gave Feldman copies of the affidavits of Dolce, Pickett, and Gail Morris. After reviewing Held's investigative report and the affidavits, Feldman fired plaintiff on April 23, 1993. This suit followed.

II. The Trial A. Plaintiff's Case; the Defense

At trial, plaintiff testified he met Dolce in December 1990 when she was employed temporarily at Rollins. After she left, Dolce telephoned plaintiff and suggested they meet socially. The two had lunch several times. Dolce asked plaintiff for a job as a temporary secretary in his department. Plaintiff agreed. Dolce began work at the end of February 1991, becoming a permanent employee in April. In May, plaintiff testified, he and Dolce began an intermittent affair that continued through February 1993. They had sex between six and ten times, including three times at a hotel room plaintiff had reserved for their lunch hour; he produced credit card receipts from the hotel for rooms rented during that period.

As for Pickett, plaintiff testified they had a brief affair from January to April 1992. Plaintiff's mother testified she saw Pickett at her son's house and leave with him a short time later. He was carrying bedding, she testified, and returned two hours later, explaining he had been to his unfurnished condominium nearby. This incident, plaintiff testified, was the first time he and Pickett had sex. Plaintiff's tae kwon do trainer testified he met Pickett at plaintiff's house in February 1992. According to plaintiff, he and Pickett had sex on several occasions before their relationship ended. He began a sexual relationship with his wife-to-be in June 1992. She moved in with him in July, and they were married in October. During this time, plaintiff continued his sexual liaison with Dolce, but not with Pickett. He had not disclosed these liaisons during the Chicago interview with Feldman because he was upset, "frightened," and felt "ambushed." Plaintiff presented additional evidence through several witnesses suggesting Dolce had been "flirtatious" in front of others, that both she and Pickett were angry because he had been "two-timing" them, and that Dolce's real motive was to force plaintiff to grant her a substantial raise in pay. Indeed, more than one of plaintiff's witnesses testified that on the same day plaintiff met in Chicago with Feldman and other Rollins executives to discuss the allegations against him, Dolce faxed him a proposal seeking a substantial pay increase.

Rollins called Dolce as a witness. She testified in detail about the masturbation incidents at the office and in plaintiff's car, and the obscene telephone calls described in her affidavit. In the fall of 1992, Dolce testified, she discovered plaintiff had been "doing exactly the same thing[s]" to Pickett. She never had sex with plaintiff, never went to his house, was never with him in a hotel room. Pickett testified to the similar incidents described in her affidavit; she denied ever having sex with plaintiff. Employees involved in Rollins's EEO investigation also testified. Rollins's president, Feldman, testified that in addition to the affidavits of Dolce and Pickett, he relied on Gail Morris's affidavit in deciding to discharge plaintiff. Over Rollins's objection, the trial court ruled Gail Morris's affidavit hearsay and inadmissible.

B. The Jury Instructions and Verdict

Rollins defended its decision to fire plaintiff on the ground that it had been reached honestly and in good faith, not that Rollins was required to prove the acts of sexual harassment occurred. Plaintiff objected to Rollins's defense theory, and the trial court rejected it as not available in a breach of contract action, the only one of plaintiff's claims to go to the jury. Boiled down, the trial judge remarked, the case was nothing more than "a contract dispute" and it was Rollins's burden to prove plaintiff committed the acts that led to his dismissal; "whether [Rollins] in good faith believed [plaintiff] did it is not at issue." The trial court told the jury: "What is at issue is whether the claimed acts took place. . . . The issue for the jury to determine is whether the acts are in fact true. . . . Those are issues that the jury has to determine." The trial court also read the jury BAJI No. 10.13, the standard instruction defining "good cause" in employment discharge litigation. It refused an instruction requested by Rollins directing the jury not to substitute its opinion for the employer's.

BAJI No. 10.13 states: "Where there is an employment agreement not to terminate an employee except for good cause, an employer may not terminate the employment of an employee unless such termination is based on a fair and honest cause or reason. In determining whether there was good cause, you must balance the employer's interest in operating the business efficiently and profitably with the interest of the employee in maintaining employment."

The jury returned a special verdict. Asked whether plaintiff "engaged in any of the behavior on which [Rollins] based its decision to terminate plaintiff's employment," it answered "no." It set the present cash value of plaintiff's lost compensation at $1.78 million. Rollins appealed from the judgment entered on the verdict. The Court of Appeal reversed. (1a) We granted review to clarify the standard juries apply in wrongful termination litigation to evaluate an employer's "good cause" defense based on employee misconduct. We decide, in other words, the question the jury answers when the discharged employee denies committing the acts that provoked the decision to terminate employment. The question of the jury's role in resolving the related but separate issue of whether the reasons assigned by an employer for termination are legally sufficient to constitute good cause is one we leave for another case.

III. Discussion A. The Law

We begin at the beginning. (2) The Court of Appeal opinion in Pugh I, supra, 116 Cal.App.3d 311, recognized that "[t]he terms `just cause' and `good cause,' . . . . [Citation.] . . . connote `a fair and honest cause or reason, regulated by good faith on the part of the party exercising the power.'" ( Id. at p. 330, quoting R.J. Cardinal Co. v. Ritchie (1963) 218 Cal.App.2d 124, 144, 145 [ 32 Cal.Rptr. 545].) "Care must be taken, however," the Pugh I opinion continued, "not to interfere with the legitimate exercise of managerial discretion. . . . [Citation.] And where . . . the employee occupies a sensitive managerial or confidential position, the employer must of necessity be allowed substantial scope for the exercise of subjective judgment." (116 Cal.App.3d at p. 330, fn. omitted.)

In Walker v. Blue Cross of California (1992) 4 Cal.App.4th 985 [ 6 Cal.Rptr.2d 184], the court described "good cause" as "relative. Whether good cause exists is dependent upon the particular circumstances of each case. [Citation.] [¶] In deciding whether good cause exists, there must be a balance between the employer's interest in operating its business efficiently and profitably and the employee's interest in continued employment. [Citations.] Care must be exercised so as not to interfere with the employer's legitimate exercise of managerial discretion. [Citation.] While the scope of such discretion is substantial, it is not unrestricted." ( Id. at p. 994; see also Crosier v. United Parcel Service, Inc. (1983) 150 Cal.App.3d 1132, 1139-1140 [ 198 Cal.Rptr. 361], disapproved on another point by Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 700, fn. 42 [ 254 Cal.Rptr. 211, 765 P.2d 373]; Moore v. May Dept. Store Co. (1990) 222 Cal.App.3d 836, 839-840 [ 271 Cal.Rptr. 841]; Malmstrom v. Kaiser Aluminum Chemical Corp. (1986) 187 Cal.App.3d 299, 321 [ 231 Cal.Rptr. 820]; Clutterham v. Coachmen Industries, Inc. (1985) 169 Cal.App.3d 1223, 1227 [ 215 Cal.Rptr. 795].)

In its posttrial opinion in the Pugh litigation — Pugh v. See's Candies, Inc. (1988) 203 Cal.App.3d 743 [ 250 Cal.Rptr. 195] ( Pugh II) — the Court of Appeal elaborated on the jurisprudential significance of employer discretion: "[A]n employer must have wide latitude in making independent, good faith judgments about high-ranking employees without the threat of a jury second-guessing its business judgment. Measuring the effective performance of such an employee involves the consideration of many intangible attributes such as personality, initiative, ability to function as part of the management team and to motivate subordinates, and the ability to conceptualize and effectuate management style and goals. . . . [Citations.] Although the jury must assess the legitimacy of the employer's decision to discharge, it should not be thrust into a managerial role." ( Id. at p. 769, italics added.)

(1b) These statements are helpful in the sense that, by articulating legal policies immanent in the employment relationship, they point the way to the appropriate standard. They do not, however, answer directly the question before us — what does the trier of fact decide in evaluating a defense based on employee misconduct? Before the Court of Appeal opinion in this case, California law on the point was comparatively undeveloped. A lone published Court of Appeal decision, however — Wilkerson v. Wells Fargo Bank, supra, 212 Cal.App.3d 1217 ( Wilkerson) — had wrestled directly with the issue. In Wilkerson, the court held that in a wrongful termination suit by an employee terminable only for good cause, the employer must prove, as part of its defense burden, that the misconduct leading to dismissal actually occurred. That is, Wilkerson directs the jury to reexamine the facts on which the employer relied in terminating the employee and, if it finds them erroneous, to award damages.

"[I]n contract law," the court in Wilkerson reasoned, "the belief of the breaching party does not determine whether a breach of the contract . . . occurred. Obviously, a defaulting borrower's good faith belief he or she has repaid a loan is not a defense to a lender's claim for payment. Similarly, an employer's subjective belief it possessed good cause does not dispose of a wrongfully discharged employee's claim for breach of contract. . . . [¶] . . . [¶] . . . [A]n employer's belief is not a substitute for good cause. For that reason, the employer's broad latitude does not extend to being factually incorrect. If an employer claims the employee was discharged for specific misconduct, and the employee denies the charge, the question of whether the misconduct occurred is one of fact for the jury. ( Pugh v. See's Candies, Inc., supra, 203 Cal.App.3d at p. 767.)" (212 Cal.App.3d at p. 1230, second italics added.)

This quotation from Wilkerson, supra, 212 Cal.App.3d at page 1230 — asserting a proposition central to plaintiff's contention that we should overturn the Court of Appeal's judgment — misreads the passage from Pugh II, supra, 203 Cal.App.3d 743, 767, on which it relies. More importantly, it suggests a misunderstanding of the policies identified in our cases as supporting implied-contract-based wrongful termination claims. The first point — that Wilkerson misreads the passage from Pugh II on which it relied for the proposition that "the employer's broad latitude does not extend to being factually incorrect" — was convincingly made in Justice Miriam Vogel's opinion herein for the Court of Appeal. She pointed out that although Wilkerson had relied exclusively on Pugh II, that part of the Pugh II opinion actually cited as authority is a quotation from a Michigan case — Toussaint v. Blue Cross § Blue Shield of Mich. (1980) 408 Mich. 579 [ 292 N.W.2d 880] ( Toussaint). "What this means," Justice Vogel concluded, "is that Wilkerson is based on Toussaint, not on Pugh II." We agree. (Compare Pugh II, supra, 203 Cal.App.3d at p. 767, with Wilkerson, supra, 212 Cal.App.3d at p. 1230; see also Toussaint, supra, 292 N.W.2d at p. 895.)

The decision of a sharply divided court, Toussaint, supra, 292 N.W.2d 880, is known and cited principally as Michigan's equivalent of California's Pugh I, supra, 116 Cal.App.3d 311, that is, the case in which the Michigan Supreme Court adopted the rule that an implied-in-fact "good cause" term can limit the common law at-will employment rule. ( Toussaint, supra, 292 N.W.2d at p. 885; cf. Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 676.) The Toussaint majority went further, however, and took up the question of who — employer or trier of fact — decides whether the misconduct leading to the decision to terminate employment occurred. ( Toussaint, supra, at pp. 895-896.) In concluding the issue of specific misconduct — "did the employee do what the employer said he did?" — was "one of fact for the jury," the Toussaint majority posits that a "promise to terminate employment for cause only would be illusory if the employer were permitted to be the sole judge and final arbiter of the propriety of the discharge. There must be some review of the employer's decision if the [good] cause contract is to be distinguished from the satisfaction contract." ( Toussaint, supra, 292 N.W.2d at pp. 896, 895, fn. omitted.)

Unlike the majority in Toussaint, we do not believe permitting juries to decide the factual basis for allegations of employee misconduct is the only way to give meaning and substance to an employer's promise to terminate for "good cause," or that barring such factfinding leaves for-cause provisions toothless. Judicial review of decisions to terminate employees subject to such provisions for misconduct is vital; however, de novo jury review of the factual basis supporting the employer's decision is neither the only alternative to a "no review" standard, nor the one best adapted to adjust the competing interests of employer and employee.

Instead of adopting the de novo rule set forth in Toussaint, supra, 292 N.W.2d 880, and followed by the Court of Appeal in Wilkerson, supra, 212 Cal.App.3d 1217, we adopt a different standard under which the jury assesses the factual basis for the decision to terminate employment. The standard crafted by a number of state high courts which have confronted the issue and rejected the Toussaint solution demonstrates that a middle ground — combining a balanced regard for the employee's interest in continuing employment with the employer's interest in efficient personnel decisions — exists. As we explain, these courts have arrived at a standard under which the jury's role is to assess the objective reasonableness of the employer's factual determination of misconduct.

In concluding it is the employer that decides whether acts of an employee amounting to just cause have occurred — and that the role of the jury is to assess, through the lens of an objective standard, the reasonableness of that decision under the circumstances known to the employer at the time it was made — these courts have relied for analytical support on the contract model of the employment relationship out of which contemporary limitations on the at-will doctrine arose. (See, e.g., Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, and cases cited at pp. 676-677.) An Oregon decision, Simpson v. Western Graphics Corp. (1982) 293 Or. 96 [ 643 P.2d 1276] ( Simpson), typifies the reasoning of these cases.

In Simpson, supra, 643 P.2d 1276, three employees were fired for allegedly threatening a fellow worker. They denied making the threats and filed suit. The trial court found the employer had acted in good faith after a reasonable investigation, refused to make a finding whether the threats had in fact been made, and entered judgment for the employer. The Oregon Supreme Court granted review "to consider whether by agreeing to discharge employees only for `just cause,' a private employer also relinquishes its right to determine whether facts constituting just cause exist." ( Id. at p. 1278.) Analyzing the contractual origin of the employment relationship, the Simpson opinion concluded there was no basis to infer that "the employer intended to surrender its power to determine whether facts constituting cause for termination exist. . . . In the absence of any evidence of express or implied agreement whereby the employer contracted away its fact-finding prerogative . . ., we shall not infer it." ( Id. at p. 1279, italics added.)

The reasoning of Simpson, supra, 643 P.2d 1276, was relied on by the Nevada Supreme Court in Southwest Gas v. Vargas (1995) 111 Nev. 1064 [ 901 P.2d 693] ( Vargas). There the plaintiff employee was fired for sexually harassing a coworker. After he prevailed at trial, the employer appealed. Addressing "the role of the trier of fact in determining whether an employer's stated reasons for terminating an employee with a long-term employment contract amount to good cause," ( id. at p. 698) the Nevada Supreme Court rejected the argument that the jury reviews de novo the factual basis for the employer's decision and reversed the trial court's judgment. Citing Simpson, the Vargas opinion discusses some of the concerns raised by an instruction directing the jury to reexamine the factual accuracy supporting the employer's decision to terminate employment.

"[A]llowing a jury to trump the factual findings of an employer that an employee has engaged in misconduct rising to the level of `good cause' for discharge, made in good faith and in pursuit of legitimate business objectives, is a highly undesirable prospect," the Nevada high court said. ( Vargas, supra, 901 P.2d at p. 699.) "In effect, such a system would create the equivalent of a preeminent fact-finding board unconnected to the challenged employer, that would have the ultimate right to determine anew whether the employer's decision to terminate an employee was based upon an accurate finding of misconduct. . . . This ex officio `fact-finding board,' unattuned to the practical aspects of employee suitability over which it would exercise consummate power, and unexposed to the entrepreneurial risks that form a significant basis of every state's economy, would be empowered to impose substantial monetary consequences on employers whose employee termination decisions are found wanting." ( Ibid.)

The opinion of the Washington Supreme Court in Baldwin v. Sisters of Providence in Washington (1989) 112 Wn.2d 127 [ 769 P.2d 298] ( Baldwin), demonstrates how these courts have both adopted the contract model of just cause analysis and conjoined with it a requirement that the employer adhere to — and juries apply — an "objective" good faith standard in deciding whether just cause exists to terminate employment. Baldwin was a wrongful termination case involving a hospital employee with a "just cause" contract fired for sexually abusing a patient. The high court first applied traditional contract principles. Finding no contract basis for concluding the employer's fact-finding prerogative had been transferred elsewhere, either unilaterally or by agreement, it held that "an employer's agreement to restrict discharges to those supported by just cause should not be followed by a further judicial implication which takes the determination of just cause away from the employer." ( Id. at p. 304.)

Although the Baldwin court thus endorsed the view that the power to decide whether acts amounting to misconduct had occurred continued to reside with the employer, it went on to apply a supplemental standard of "just cause." The court's opinion describes that standard as one which "checks the subjective good faith of the employer with an objective reasonable belief standard." (769 P.2d at p. 304, italics added.) "`[J]ust cause,'" the Baldwin opinion holds — echoing the formulation in Pugh I, supra, 116 Cal.App.3d at page 330 — is not only "a fair and honest cause or reason, regulated by good faith," but — presaging our subsequent formulation in Scott, supra, 11 Cal.4th at page 467 — is "one which is not for [an] arbitrary, capricious, or illegal reason and which is . . . based on facts (1) supported by substantial evidence and (2) reasonably believed by the employer to be true." (769 P.2d at p. 304; see also Gaglidari v. Denny's Restaurants, Inc. (1991) 117 Wn.2d 426 [ 815 P.2d 1362, 1369] [in wrongful discharge suit by employee with "just cause" contract "whether plaintiff was actually fighting is irrelevant . . ., the issue is whether at the time plaintiff was dismissed defendant reasonably, in good faith, and based on substantial evidence believed plaintiff had done so."].)

In Kestenbaum v. Pennzoil Co. (1988) 108 N.M. 20 [ 766 P.2d 280], the New Mexico Supreme Court adopted a standard much like the majority rule exemplified by Simpson, Vargas, and Baldwin. The trial court had refused an instruction offered by the employer that it need only show a "good faith belief" that employee misconduct had occurred. ( Id. at p. 287.) Although it rejected the unqualified "good faith belief" standard urged by the employer, the court framed a "middle position" between instructing that "an employer only is required to demonstrate a good faith belief that cause existed to terminate . . . [and instructing] that the employer must prove good cause in fact." ( Ibid., italics added.) According to the opinion in Kestenbaum, the jury had been properly instructed that the issue was whether the employer "had reasonable grounds to believe that sufficient cause existed to justify [the employee's] termination." ( Ibid., italics added.)

Because Pennzoil's proposed instruction suggested a jury "could find good cause from the employer's subjective good faith belief as opposed to an objective standard of reasonable belief," it would have been error to so instruct. (766 P.2d at p. 288, italics added.) On the other hand, the court said, "the jury could have absolved Pennzoil of liability under its implied contract . . . provided [it] had reasonable grounds to believe that sufficient cause existed to justify his termination." ( Id. at p. 287, italics added; see also Braun v. Alaska Com. Fishing Agr. Bank (Alaska 1991) 816 P.2d 140, 142 ["`[A] discharge for "just cause" is one which is not for any arbitrary, capricious, or illegal reason and which is one based on facts (1) supported by substantial evidence and (2) reasonably believed by the employer to be true.'"], citing Baldwin, supra, 769 P.2d at p. 304, and Simpson, supra, 643 P.2d at pp. 1277-1279.)

In addition to the answer yielded by formal contract principles, pragmatic considerations support what the Kestenbaum opinion calls the "middle position." As several courts have pointed out, a standard permitting juries to reexamine the factual basis for the decision to terminate for misconduct — typically gathered under the exigencies of the workaday world and without benefit of the slow-moving machinery of a contested trial — dampens an employer's willingness to act, intruding on the "wide latitude" the court in Pugh II recognized as a reasonable condition for the efficient conduct of business. (See, e.g., Vargas, supra, 901 P.2d at p. 699.) We believe the Wilkerson-Toussaint standard is too intrusive, that it tips unreasonably the balance between the conflicting interests of employer and employee that California courts have sought to sustain as a hallmark of the state's modern wrongful termination employment law. (See, e.g., Pugh II, supra, 203 Cal.App.3d at p. 769; see also cases cited, ante, at p. 100.)

Equally significant is the jury's relative remoteness from the everyday reality of the workplace. The decision to terminate an employee for misconduct is one that not uncommonly implicates organizational judgment and may turn on intractable factual uncertainties, even where the grounds for dismissal are fact specific. If an employer is required to have in hand a signed confession or an eyewitness account of the alleged misconduct before it can act, the workplace will be transformed into an adjudicatory arena and effective decisionmaking will be thwarted. Although these features do not justify a rule permitting employees to be dismissed arbitrarily, they do mean that asking a civil jury to reexamine in all its factual detail the triggering cause of the decision to dismiss — including the retrospective accuracy of the employer's comprehension of that event — months or even years later, in a context distant from the imperatives of the workplace, is at odds with an axiom underlying the jurisprudence of wrongful termination. That axiom, clearly enunciated in Pugh II, supra, 203 Cal.App.3d at page 769, is the need for a sensible latitude for managerial decisionmaking and its corollary, an optimum balance point between the employer's interest in organizational efficiency and the employee's interest in continuing employment.

Plaintiff argues that withdrawing from the jury the factual issue underlying the decision to terminate employment will destroy the protections afforded by the implied good cause contract term. It will permit the discharge decision to be based on subjective reasons, the argument runs, reasons that may be pretextual, and mask arbitrary and unlawful motives made practically unreviewable by a standardless "good faith" rule. But as we have tried to show, this argument is founded on a misunderstanding of the nature and effect of an objective good faith standard. The rule we endorse today, carefully framed as a jury instruction and honestly administered, will not only not have the effects plaintiff claims, but by balancing the interests of both parties, will ensure that "good cause" dismissals continue to be scrutinized by courts and juries under an objective standard, without infringing more than necessary on the freedom to make efficient business decisions. At least one state high court has reasoned that striking a fair balance between the interests of the parties to the employment contract through an objective just-cause standard will promote the continued use of such limitations on the at-will doctrine; imbalances, on the other hand, encourage employers to adopt defensive measures by "remov[ing] such [just-cause] provisions from their [employment] handbooks." ( Baldwin, supra, 769 P.2d at p. 304.)

Although "good faith" is commonly thought of as subjective in essence, the use of objectified mental states as a legal standard is a familiar feature of Anglo-American law. Juries are routinely asked, for example, to place themselves in the position of the "reasonable person" in resolving questions of negligence liability. The standard is not confined to tort law. We have previously applied an objective standard in the wrongful discharge employment context. (See Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 1248 [ 32 Cal.Rptr.2d 223, 876 P.2d 1022] [standard for determining constructive discharge is objective]; cf. People v. Machupa (1994) 7 Cal.4th 614, 618, fn. 1 [ 29 Cal.Rptr.2d 775, 872 P.2d 114] ["good faith" exception to search warrant requirement focuses on the "objective reasonableness" of the search].) Prosser and Keeton have described the reasonable person — "`this excellent but odious character'" — as "a personification of a community ideal of reasonable behavior, determined by the jury's social judgment." (Prosser Keeton (5th ed. 1984) Torts, § 32, pp. 174, 175, fn. omitted.) As the case law cited in the main text makes clear, coupling "good faith" with "objectivity" is intended to place the trier of fact in the position of the "reasonable employer" in deciding whether the defendant in a wrongful termination suit acted responsibly and in conformity with prevailing social norms in deciding to terminate an employee for misconduct.

The proper inquiry for the jury, in other words, is not, "Did the employee in fact commit the act leading to dismissal?" It is, "Was the factual basis on which the employer concluded a dischargeable act had been committed reached honestly, after an appropriate investigation and for reasons that are not arbitrary or pretextual?" The jury conducts a factual inquiry in both cases, but the questions are not the same. In the first, the jury decides the ultimate truth of the employee's alleged misconduct. In the second, it focuses on the employer's response to allegations of misconduct. Thus, to follow the Nevada Supreme Court in Vargas, we "reaffirm our . . . prior rulings . . . that employers are obligated to act in good faith and upon a reasonable belief that good cause for terminating a for-cause employee exists." (901 P.2d at p. 700; see also Pugh I, supra, 116 Cal.App.3d at p. 330 ["[t]he term . . . `good cause'" "connote[s] `a fair and honest cause or reason, regulated by good faith.'"].)

B. The Governing Standard

It was the precedents from other jurisdictions discussed above — Simpson, Vargas, Baldwin, and Kestenbaum — on which Justice Miriam Vogel based her opinion for the Court of Appeal, identifying a handful of considerations relevant to the jury's resolution of an employer's defense that an employee terminable only for good cause was properly dismissed for misconduct. We give operative meaning to the term "good cause" in the context of implied employment contracts by defining it, under the combined Scott-Pugh standard ( ante, at p. 96), as fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual. A reasoned conclusion, in short, supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond.

The law of wrongful discharge is largely a creature of the common law. Hence, it would be imprudent to specify in detail the essentials of an adequate investigation. It is better, we believe, to adhere to the common law's incremental, case-by-case jurisprudence, adjusting the standard as its sufficiency is tested in practice. Two descriptions, however — one from turn-of-the-century English common law, the other from an opinion of this court only a little over twenty years ago — provide a sense of what investigative fairness in this context contemplates. In Board of Education v. Rice (1911) App. Cas. 179, 182, Lord Halsbury, describing the duties of a school board in resolving a claim of salary discrimination, wrote: "I need not add that . . . [the board] must act in good faith and fairly listen to both sides, for that is a duty lying upon every one who decides anything. But I do not think they are bound to treat such a question as though it were a trial. . . . They can obtain information in any way they think best, always giving a fair opportunity to those who are parties in the controversy for correcting or contradicting any relevant statement prejudicial to their view."

Closer to home, Justice Tobriner wrote on behalf of a unanimous court in Pinsker v. Pacific Coast Society of Orthodontists (1974) 12 Cal.3d 541 [ 116 Cal.Rptr. 245, 526 P.2d 253], that "[t]he common law requirement of a fair procedure does not compel formal proceedings with all the embellishments of a court trial [citation], nor adherence to a single mode of process. It may be satisfied by any one of a variety of procedures which afford a fair opportunity for an applicant to present his position. . . . [T]his court should not attempt to fix a rigid procedure that must invariably be observed." ( Id. at p. 555; see also Friendly, "Some Kind of Hearing" (1975) 123 U. Pa. L.Rev. 1267, 1269-1270, fn. 10 ["The precise content of the common law `fair procedure' requirement is far more flexible than that which the Supreme Court has found to be mandated by due process. . . ."].)

All of the elements of the governing standard are triable to the jury.

IV. The Disposition

Because it was error to instruct that Rollins could prevail only if the jury was satisfied sexual harassment actually occurred, the case must be retried. On retrial, the jury should be instructed, in accordance with the views we have expressed, that the question critical to defendants' liability is not whether plaintiff in fact sexually harassed other employees, but whether at the time the decision to terminate his employment was made, defendants, acting in good faith and following an investigation that was appropriate under the circumstances, had reasonable grounds for believing plaintiff had done so.

We also conclude that a handful of additional issues resolved by the Court of Appeal which plaintiff seeks to reargue here — the admissibility of the Gail Morris affidavit, whether the existence vel non of an implied good cause term in plaintiff's employment agreement was an issue that should have gone to the jury, and whether the trial court erred in not instructing on the statutory presumption of employment at will — do not warrant review by this court. Although we have not formally limited the scope of our review in this cause, that does not affect our power to consider "any or all" of the issues addressed by the Court of Appeal. (Cal. Rules of Court, rule 29; cf. Southern Cal. Ch. of Associated Builders etc. Com. v. California Apprenticeship Council (1992) 4 Cal.4th 422, 431, fn. 3 [ 14 Cal.Rptr.2d 491, 841 P.2d 1011].)

The judgment of the Court of Appeal is affirmed.

George, C.J., Baxter, J., Werdegar, J., and Chin, J., concurred.