4th Cir. - Court Affirms Use of “After Acquired Evidence” Rule In ERISA Claim

[Rob Hoskins]

When the District Court ruled in Rinaldi v. CCX, Incorporated, I thought it interesting enough to post the decision because it was the first time I had ever seen a court employ the “after acquired evidence” rule with an ERISA claim. The court applied the doctrine, but held that the employer had failed to meet all of the necessary elements. The court awarded plaintiff over $800,000.00 in severance benefits. (Click here to read the prior post.) On July 16, 2010, the Fourth Circuit affirms the verdict in favor of the plaintiff and the District Court’s use of the “after acquired evidence” rule and the ultimate rejection of its applicability from a factual standpoint.

Although we have not previously considered an after-acquired evidence defense in an ERISA case, we have considered this defense in other types of civil cases. In our decisions in those cases, we have applied a three-part test that is essentially the same as the test employed here by the district court. See, e.g., Dotson v. Pfizer, Inc., 558 F.3d 284, 298 (4th Cir. 2009) (involving alleged violations of the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601-2654); Miller v. AT&T Corp., 250 F.3d 820, 837 (4th Cir. 2001) (same); Russell v. Microdyne Corp., 65 F.3d 1229, 1240 (4th Cir. 1995) (involving alleged violations of Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e-2000e-17). The three-part test used by the district court also is essentially the same as the Supreme Court’s test for after-acquired evidence set forth in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 362-63 (1995), a case arising under the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C. §§ 621-634.

The parties do not dispute the applicability of this test. Therefore, in reviewing the district court’s holding that CCX failed to establish the first and third elements of the after-acquired evidence test, we must determine whether the district court clearly erred in finding that CCX failed to establish that:

(1) Rinaldi was guilty of some misconduct of which CCX was unaware; [and]
. . .
(3) []CCX would have discharged Rinaldi for cause had it known of the misconduct.

CCX was required to prove every element of its defense in order to prevail. Because we conclude that the district court did not err in finding that CCX failed to establish element three above, we need not review the district court’s finding on element one.

With regard to element three, the district court found that Rinaldi’s travel reimbursement requests were “dishonest on [their] face.” We decline to disturb this factual finding. The grounds for termination for cause stated in the Employment Agreement include “[a]cts of dishonesty (including but not limited to theft or embezzlement) in connection with the Company’s business.” Therefore, the conduct at issue plainly was a ground for termination with cause under the Employment Agreement.

Although CCX proved that it could have discharged Rinaldi under the Employment Agreement, CCX also was required to prove that it would have done so. In concluding that CCX did not prove that it would have discharged Rinaldi had it known of his dishonest conduct, the district court was influenced by its opinion of the witnesses’ credibility. The district court was not persuaded by “the self-serving statements of McGillicuddy that had he known of the misconduct, he would have terminated Rinaldi for cause.” Thus, the district court simply did not believe that Rinaldi’s actions would have caused CCX to discharge him. Because the district court’s conclusion was informed by its opinion that McGillicuddy lacked credibility, that conclusion is entitled to the “highest degree of appellate deference.” Thompson, 554 F.3d at 452 (citing Fed. R. Civ. P. 52(a)(1)(6)). For this reason, we will not disturb the district court’s determination, and we hold that the district court did not err in concluding that CCX failed to establish the third required element of the after-acquired evidence defense. We therefore affirm the district court’s holding that Rinaldi was entitled to severance benefits under the Employment Agreement.

Our holding is not altered by CCX’s additional argument that the district court impermissibly burdened McGillicuddy’s testimony with a “heavy cloak of skepticism” in violation of our decision in Smallwood v. United Air Lines, Inc., 728 F.2d 614 (4th Cir. 1984). We conclude that this argument lacks merit.

In Smallwood, a case decided under the ADEA, we held that the district court erred in rejecting an employer’s “after-the-fact rationale” based on the district court’s statement that it had a “duty” to view the employer’s “after-the-fact” evidence with skepticism. Id. at 623. We emphasized that the district court “made no specific findings of fact of [its] own” on the after-acquired evidence issue and doubted whether the after- acquired evidence was admissible. Id. We explained that, rather than burdening such “after-the-fact” evidence with a “heavy cloak of skepticism,” courts should weigh this type of evidence by the same standards as other testimony. Id.

This principle expressed in Smallwood, however, is inapposite to the facts of this case. Although the district court characterized McGillicuddy’s testimony as “self-serving,” the district court did not “burden” such testimony with skepticism or otherwise hold CCX to a higher standard of proof. Instead, unlike the district court in Smallwood, the district court here made specific factual findings, supported by the record, that justified its application of the after-acquired evidence doctrine. Moreover, any degree of skepticism expressed by the district court likely was derived in part from its express findings that McGillicuddy lacked credibility on other key issues. Therefore, we conclude that the district court, consistent with our decision in Smallwood, considered the testimony relating to CCX’s after-acquired evidence defense according to the same standards that the district court applied throughout the trial.

A copy of the decision is attached.