In Richey v. AutoNation, Inc., the California Supreme Court held that an arbitrator committed no legal error when he determined that an employer lawfully terminated an employee for engaging in outside employment while on FMLA/CFRA leave, but declined to adopt the arbitrator’s reliance on the “honest belief” defense.

Avery Richey was employed by Power Toyota, part of the AutoNation consortium of automobile dealerships, since 2004. In February 2008, Richey opened a seafood restaurant while working full-time at Power Toyota. That same month, Richey’s supervisors discussed their concerns about performance and attendance issues with Richey, as they were concerned that Richey was “a bit off his game” and that the restaurant was distracting him. There was a general understanding at Power Toyota that outside employment (including self-employment) was prohibited, and others were fired for violating this rule. The company’s employee manual also stated that outside work while on CFRA leave was prohibited.

In March 2008, Richey injured his back at home and went on CFRA/FMLA leave. In April, Power Toyota sent Richey a letter that informed him that employees were not allowed to pursue outside employment while on leave and asked Richey to call if he had any questions. Richey failed to respond to the letter. Later, Power Toyota sent an employee to Richey’s restaurant, who observed Richey working at the restaurant. Power Toyota then terminated Richey for engaging in outside employment while on leave in violation of company policy.

Richey file a lawsuit on various grounds, including violation of the CFRA, and eventually all claims were ordered to arbitration. The arbitrator ruled in favor of AutoNation on all claims, including the CFRA claim on the basis that Power Toyota was legally permitted to terminate Richey “if it has an ‘honest’ belief that he is abusing his medical leave and/or is not telling the company the truth about his outside employment.”

Richey attempted to vacate the arbitration award on the basis that, as applied by the arbitrator, the “honest belief” standard—which some courts have determined provides a defense to employers who honestly, but perhaps mistakenly, rely on a nondiscriminatory reason for termination—was incorrect and constituted reversible legal error. The trial court denied Richey’s motion, but an appellate court determined that Power Toyota violated Richey’s right to reinstatement under the CFRA and that the honest belief defense did not apply. The California Supreme Court then granted AutoNation’s petition for review.

The Court first recognized that courts grant substantial deference to arbitration awards, and there exist only limited grounds for judicial review of an arbitration award. One of these grounds is where a party is denied a hearing on the merits of a claim involving unwaivable statutory rights due to a legal error. However, the Court determined that, regardless of whether the “honest belief” defense applied in California, Richey was not deprived of an unwaivable statutory right because the arbitrator determined that Power Toyota terminated him for the lawful reason of violating company policy. The Court declined to opine as to whether the honest belief defense should be viable in California.