Opinion ID: 1172244
Heading Depth: 2
Heading Rank: 2

Heading: Course and scope for purposes of indemnification

Text: The second issue on which we granted review was whether the state must indemnify Heinze because his actions were within the course and scope of his employment. This does not quite state the issue briefed and argued. Because Heinze was found liable in the tort action and the state has satisfied its direct liability to Schallock under the settlement agreement, the correct issue in the declaratory judgment action is whether the state must indemnify Heinze for the judgment against him. At this point, the state is evidently a self-insurer providing coverage under A.R.S. § 41-621(D), which provides for self-insurance for losses arising out of state... liability ... [as] prescribed by subsection A of this section. As both the trial judge and court of appeals correctly saw it, the central issue is whether Heinze's conduct was within the coverage extended by subsection A, which provides indemnity for an officer acting within the course and scope of employment or authorization. Of course, when the officer acts in that manner, the state ordinarily will be vicariously liable. See RESTATEMENT (SECOND) OF AGENCY (hereinafter RESTATEMENT) § 219 et seq. The insurance statute thus understandably provides coverage for the officer in those situations in which the state itself could be held liable.
We turn, as did the court of appeals and trial court, to the nature of Heinze's actions. On this issue, the trial judge in the tort case instructed the jury as follows: If you find that Defendant Heinze intentionally inflicted emotional distress upon Plaintiff, then you must determine if Defendant APAAC is responsible for his actions. 1. Defendant APAAC is subject to liability for the actions of Defendant Heinze committed while acting in the scope of his employment. To hold an employer liable, an employee must: a) have acted within the scope of his employment; b) be subject to the employer's control or right of control; c) have acted in furtherance of the employer's business. An employee's conduct is within the scope of employment if and only if; a) it is the kind he is employed to perform; b) it occurs substantially within authorized time and space limits; and c) it is motivated, at least in part, by a purpose to serve the employer. 2. Defendant APAAC is subject to liability for the actions of Heinze acting outside the scope of his employment, if; a) Defendant APAAC intended the conduct or the consequences; or b) Defendant APAAC was negligent or reckless; or c) Defendant Heinze purported to act or speak on behalf of Defendant APAAC and he was aided in accomplishing his misconduct by the existence of the agency relationship. (Emphasis added.) The instruction, taken almost verbatim from RESTATEMENT § 219, contains two separate theories of vicarious liability. Part 2(c) paraphrases the words of § 219(2)(d), which, as we shall see later, deals with the master's vicarious liability for torts a servant was empowered to commit because of the master's delegation of authority. The court of appeals noted the state correctly asserts that `Heinze is provided coverage [by the statute] only if his acts were performed ... in the course and scope of employment or authorization.' Schallock and Saunders respond that `so long as the tort complained of was caused incidental to the exercise of the supervisory power, Heinze must be deemed as acting within the course and scope of his employment.' Schallock, 185 Ariz. at 219, 914 P.2d at 1310. In concluding that Schallock's position was incorrect, the court of appeals relied on its prior decision in Smith v. American Express Travel Related Services Co., which held the employer was not vicariously liable for a supervisor's harassment and sexual assaults on an employee because the supervisor's acts were not expressly or impliedly authorized by the employer or in furtherance of its business. 179 Ariz. 131, 136, 876 P.2d 1166, 1171 (1994). The language of Smith, standing alone, would mean that an employer is never vicariously liable for an intentional tort. We believe this sweeps much too broadly. In addition, we note that in Smith the evidence did not establish the employer's actual or constructive knowledge of the supervisor's conduct. Thus, even if correctly decided, Smith is much different than the case before us, as can be seen from the court's language: [N]o evidence exists from which a reasonable juror could conclude that [the employer] knew about [the supervisor's] sexual misconduct and ratified it.... Finally, no evidence exists in this record from which a reasonable juror could conclude that [the employer] knew or should have known that [the supervisor] had created a sexually offensive working environment and thus was capable of sexual assault. Id. at 137, 876 P.2d at 1172. We do not believe Smith is applicable here and turn therefore to an analysis of agency law.
In Schallock the court of appeals stated, [f]ollowing Smith and the RESTATEMENT (SECOND) OF AGENCY, we hold that Heinze did not act in the course and scope of employment.... Though Heinze used his broad supervisory authority as a license for sexually predatory acts, these acts were not intended to serve APAAC but himself. Schallock, 185 Ariz. at 218, 914 P.2d at 1310. The court then rejected Schallock's contrary argument because it confuses elements of independent and vicarious liability [4] and obscures the traditional lines of course and scope. Id. We disagree with the court of appeals on several grounds. First, given the facts of this case, we do not believe it can be said as a matter of law that Heinze was outside the course and scope of authority with regard to many or most of the incidents alleged by Saunders and Schallock. Second, the court has overlooked entirely the question of authorization: the statute grants indemnity for acts done within course and scope or authorization. A.R.S. § 41-621(A)(3) (emphasis added). Finally, the court has conflated principles required to establish a master's direct liability in tort with those necessary to find vicarious liability. Before addressing these issues, it is important to note four special factual and legal considerations in cases of the present type. First, this case involves claims of a managing officer's sexual harassment of subordinate employees over whom he had power to hire and fire, promote and demote, instruct and control. This distinguishes the case from the great majority of cases involving torts committed by a servant against either a non-employee or co-employee. Language used in such cases is sometimes inapplicable to cases involving a managing officer's harassment of a subordinate. See David Benjamin Oppenheimer, Exacerbating the Exasperating: Title VII Liability of Employers for Sexual Harassment Committed by Their Supervisors, 81 CORNELL L.REV. 66, 71 (1995). Second, the law of agency governs both commercial relations and master-servant relations. We must be careful to apply only those rules that pertain to the latter situation. Id. Third, phrases such as course and scope of employment and scope of authority carry the gloss of historical meaning and policy considerations much more complex than the words themselves indicate. See Doe v. Samaritan Counseling Center, 791 P.2d 344, 349 (Alaska 1990) (quoting Fruit v. Schreiner, 502 P.2d 133, 140-41 (Alaska 1972)). Finally, in determining course and scope in a sexual harassment case, we must realize that employers never adopt resolutions authorizing sexual harassment. Nor do they grant such authority in job descriptions or employment manuals. Oppenheimer, supra, 81 CORNELL L.REV. at 84; Faragher v. City of Boca Raton, 111 F.3d 1530, 1541 (11th Cir.1997) (Barkett, J., concurring in part, dissenting in part). In the absence of written controls, a firm's policies set the limits both on what is tolerated or permitted and on the authority given its supervisors. With these considerations in mind, we address the specifics of the present case.
We believe the court of appeals erred in concluding the RESTATEMENT compelled them to grant summary judgment to the state. The principles expressed by the RESTATEMENT do not permit judgment for the state as a matter of law. Conduct within the scope of employment may be either of the same nature as that authorized or incidental to that authorized. RESTATEMENT § 229(1). Many factors are to be considered in determining whether conduct not expressly authorized is so incidental as to be within course and scope, including time and place of the conduct. Id. § 229(2)(b). Almost all of Heinze's improper acts took place at APAAC's office or a related location, such as a seminar site or training session, and were within or incidental to business hours or sessions. Another factor is the previous relation between master and servant. Id. § 229(2)(c). Taking Schallock's case at its strongest, as we must on summary judgment, APAAC was aware for close to a decade that Heinze, the person managing its affairs, was engaged in egregious improprieties and did little or nothing to call a halt. A jury might well choose not to believe claims that these acts were unauthorized and outside the course of employment when the employer permitted them to occur and recur over a long period at its place of business and during business hours. In addition to evidence of Council members' actual knowledge, there is considerable evidence that the abusive working conditions created by Heinze were so pervasive that a jury could infer APAAC was aware of the way Heinze ran its business and by permitting such conditions to continue authorized his abusive acts. See Faragher, 111 F.3d at 1538, and cases cited. A third relevant factor is whether the master has reason to expect that such an act will be done. RESTATEMENT § 219(2)(b). One can hardly be surprised when sexual harassment that has occurred for years continues. A jury might well find that if APAAC was aware of the work environment Heinze created, it should have anticipated even the final sexual assaults and rapes with which Heinze is charged in these cases. Some aspects of this case seemingly favor a finding that Heinze's actions were not in the scope and course of employment. One is the purpose of the acts: to be within the course and scope, the act must be, at least in part, motivated by a purpose to serve the master rather than solely to serve personal motives unconnected to the master's business. RESTATEMENT § 235. But here again, and particularly in a sexual harassment case, the act in question is not the ultimate tortious act but rather conduct related to the tort. In fondling the file clerks and offering advancement for sex, Heinze was both serving the master by running the officea task he was explicitly authorized to doand serving his personal desires. That his motives were mixed is of consequence, but the mixed motives cut both ways. See RESTATEMENT §§ 235 & 236. In Doe, the Alaska Supreme Court reviewed the cases and concluded that an improper sexual relationship initiated by a pastoral counselor during therapy sessions with a patient satisfied the motivation to serve test because it was incidental to the servant's legitimate work activitytherapy. 791 P.2d at 347-48; see also Perez v. Van Groningen & Sons, 41 Cal.3d 962, 227 Cal. Rptr. 106, 719 P.2d 676 (Cal.1986) (while driving master's equipment, servant gave plaintiff ride for personal reasons); Samuels v. Southern Baptist Hospital, 594 So.2d 571, 573-74 (La.App.1992) (rape of patient by nursing assistant); Oppenheimer, supra, 81 CORNELL L.REV. at 66, 82-84. The relevant purpose to be ascertained is not whether Heinze had authority to harassno supervisor has that authoritybut whether he had authority to run and was running APAAC's business. See RESTATEMENT § 235, cmt. b. This principle has been recognized in Arizona. In State v. Pima County Adult Probation Department, several probation officers sought coverage under A.R.S. § 41-621(A)(3) against a damage claim asserted because a probationer under the department's supervision had been allowed contact with juveniles, in direct violation of the superior court's order. The state argued that because the probation officers intentionally violated the court's express instructions, they were not acting within the course and scope of employment and thus were not entitled to coverage. The court of appeals rejected that claim, holding that in supervising the probationer, the officers acted in the course and scope of their employment because the act of supervision was their employer's business. The fact that they violated express instructions was an element to be considered but not conclusive on the question of course and scope. 147 Ariz. 146, 149, 708 P.2d 1337, 1340 (App. 1985). So long as the officers were subject to the department's control or right of control and were in general acting in furtherance of the department's business, they were within the course and scope. Id. at 149-50, 708 P.2d at 1340-41. See Faragher, 111 F.3d at 1536 (If the act was the agent's way of accomplishing some authorized purpose, then the master cannot avoid liability even if he has given specific, detailed and emphatic instructions to the contrary.); [5] W. PAGE KEETON, ET AL., PROSSER & KEETON ON THE LAW OF TORTS § 70, at 507 (5th ed.1984) (describing tendency in later cases to find course and scope when the employment has provided a peculiar opportunity and even incentive for servant's intentional tort). Other factors to be considered include the seriously criminal nature of the acts and extent of departure from normal methods of operation. See RESTATEMENT § 229(2)(i) & (j). But acts may be found in the scope even if forbidden or done in a forbidden manner, and even if consciously criminal or tortious. RESTATEMENT §§ 230 and 231. The acts complained of here were part of or incidental to Heinze's employment by APAAC, even though done to satisfy Heinze's aberrant desires. Heinze was in complete charge of APAAC's day-to-day operation. Conduct done with no intention to perform it as part of a service for which the servant is employed is ordinarily outside the scope. RESTATEMENT § 235. Heinze's conduct, however, was incidental to his position and authority as APAAC's executive director. We therefore conclude that the court of appeals' reliance on the RESTATEMENT OF AGENCY to support summary judgment on the issue of course and scope was misplaced. Under RESTATEMENT principles, the RESTATEMENT factors that apply to the facts of this case create a jury question. But we do not rely on the RESTATEMENT alone. We believe analysis of case law dealing with similar situations leads to the same conclusion.
In Smith, the court of appeals discounted the federal cases, reasoning that liability under cases dealing with Title VII [6] is much broader than common law tort liability. Smith, 179 Ariz. at 135, 876 P.2d at 1170. We again disagree with Smith, believing the United States Supreme Court's decision in Meritor Savings Bank v. Vinson instructed federal courts to take agency law as a guide in determining employer liability for a supervisor's acts of sexual harassment when deciding a Title VII case. 477 U.S. 57, 71-72, 106 S.Ct. 2399, 2408, 91 L.Ed.2d 49 (1986). Chief Justice Rehnquist, writing for the Court, proclaimed no unique rule for determining vicarious liability in cases dealing with a supervisor's sexual harassment. Instead, the Court rejected the administrative agency's view that an employer is absolutely or strictly liable for a supervisor's actions and directed the district courts as follows: Congress wanted courts to look to agency principles for guidance in this area. While such common law principles may not be transferrable in all their particulars to Title VII, Congress' decision to define employer to include any agent of an employer,... surely evinces an intent to place some limits on the acts of employees for which employers under Title VII are to be held responsible. For this reason, we hold that the court of appeals erred in concluding that employers are always automatically liable for sexual harassment by their supervisors. See generally RESTATEMENT (SECOND) OF AGENCY § 219-237 (1958). For the same reason, absence of notice to an employer does not necessarily insulate that employer from liability. Id. at 72, 106 S.Ct. at 2408. Following Meritor, most if not all circuit court decisions dealing with Title VII sexual harassment actions have applied the common law of agency to determine the employer's vicarious liability. See Katherine Philippakis, Comment, When Employers Should be Liable for Supervisory Personnel: Applying Agency Principles to Hostile-Environment Sexual Harassment Cases, 28 ARIZ. ST. L.J. 1275, 1279 (1997). For that reason, we believe post- Meritor Title VII cases apply common-law agency principles and should be considered. The federal cases cover both quid pro quo and hostile work environment situations. A quid pro quo claim is one in which the offender conditions job benefits or advancements on the employee's performance of sexual favors, while a hostile-environment claim is one in which the offender creates a sexually hostile or offensive working environment. Id. at 1276; Meritor, 477 U.S. at 65, 106 S.Ct. at 2404. Given these definitions, both types of claims are raised by the facts here. In quid pro quo cases, applying traditional agency principles, many courts have held an employer liable because a quid pro quo harasser is able to grant such job benefits or detriments only because he has actual or apparent authority to do so delegated to him by his employer.... Under traditional agency principles the exercise of such actual or apparent authority gives rise to liability on the part of the employer under a theory of respondeat superior. See RESTATEMENT (SECOND) OF AGENCY § 219(2)(d) (1958). Nichols v. Frank, 42 F.3d 503, 514 (9th Cir. 1994) (collecting cases). Some hostile environment cases have found a jury question with regard to vicarious liability. In a case similar to ours, the plaintiff had both hostile environment and quid pro quo claims. The harasser was not only her immediate supervisor but the corporate vice president in charge of managing the hotel property where the plaintiff worked. He had full authority to determine employee benefits and to hire, fire, promote, and discipline the employees. Martin v. Cavalier Hotel Corp., 48 F.3d 1343, 1348 (4th Cir. 1995). The circuit court affirmed judgment against the employer, stating that it was following Meritor and applying the common law of agency in determining the question of vicarious liability. Id. at 1350. In applying those principles in the context of this case, the court stated: [W]hether an employee's acts are within the scope of his employment requires an examination of when the act took place, where it took place, and whether it was foreseeable. See generally RESTATEMENT (SECOND) OF AGENCY §§ 210 to 245 (1958). (Emphasis in original.) An employer may be liable for an employee's acts even if the employee's motive is not to benefit the employer, to advance his self interest rather than the interest of his employer.... A forbidden or even consciously criminal or tortious act may still be within the scope of employment.... Indeed an employer may be liable for its employee's unauthorized use of force if such use was foreseeable in view of the employee's duties.... The test of the liability of the employer for the tortious act of the employee is not whether the tortious act itself is a transaction within the ordinary course of the business of the employer or within the scope of the employee's authority, but whether the service itself in which the tortious act was done was within the ordinary course of such business or within the scope of such authority .... Here Bachelor's assaults took place in the work place, during working hours, on an employee whom he had authority to hire, fire, promote, and discipline. There is no question that such sexual assaults were foreseeable;.... Thus, under common law agency principles Bachelor was acting within the scope of his employment with Cavalier and so Cavalier is liable for Bachelor's assaults on Martin. To be sure, ... Bachelor's assaults on Martin were outrageous and violative of his employer's rules. Nonetheless, those assaults arose out of Bachelor's management of the hotel,.... At the very least, because Bachelor's willful and malicious acts were committed while he was performing his employment duties there is here ... sufficient evidence to present a jury issue as to whether Bachelor was acting within the scope of his employment with Cavalier. Id. at 1351-52 (citations omitted, emphasis added) (quoting Commercial Business Systems, Inc. v. Bellsouth Services, Inc., 249 Va. 39, 453 S.E.2d 261, 266 (Va.1995)); see also Fields v. Sanders, 29 Cal.2d 834, 180 P.2d 684 (1947); Philappakis, supra, 28 ARIZ. STATE L.J. at 1288 (any other interpretation of motive to serve the employer would be unduly constrained and antithetical to the RESTATEMENT position). Many other federal cases have reached the same conclusion on more or less the same analysis, applying the RESTATEMENT and common law agency cases in both quid pro quo and hostile environment cases. See, e.g., Kauffman v. Allied Signal, Inc., 970 F.2d 178, 183-84 (6th Cir.1992) (court should look at when the act took place, where it took place, and whether it was foreseeable to determine whether supervisor's harassment occurred within course and scope of employment). Kauffman holds the employer is relieved of liability if the company learns of the hostile work environment created by its supervisor and takes prompt remedial action. Id. at 184. This part of the decision has been cogently criticized on the ground that prompt remedial action could insulate against direct liability for negligence and against punitive damage claims, but not against vicarious liability. Oppenheimer, supra, 81 CORNELL L.REV. at 132. We need not concern ourselves with this issue because the present record contains no evidence of remedial action prior to Schallock's filing her damage action. Some federal cases have rejected employer course and scope liability absent evidence that the employer also knew or should have known of the hostile work environment created by the supervisor. See, e.g., Nichols, 42 F.3d at 508; Henson v. City of Dundee, 682 F.2d 897, 905 (11th Cir.1982). These cases have also been cogently criticized as confusing elements necessary for a finding of direct liability with those required for vicarious, course and scope responsibility. See Phillipakis, supra, 28 ARIZ. STATE L.J. at 1285; Oppenheimer, supra, 81 CORNELL L.REV. at 133-35 (citing cases). Again, though the criticism seems logical, we need not solve this problem because the partial record of the tort case indicates quite clearly that APAAC had either actual knowledge of the hostile work environment or at worst constructive knowledge because the conditions were so widespread and prevalent. See Faragher, 111 F.3d at 1538; E.E.O.C. v. Mitsubishi Motor Mfg. of Am. Inc., 102 F.3d 869, 870 (7th Cir.1996) (where hostile work environment is pervasive, employer's knowledge may be imputed or inferred). Notwithstanding the confusion and debate among the federal circuits, we conclude APAAC is not entitled to summary judgment on the course and scope issue in Schallock's and Saunders' hostile environment claims. The court of appeals thus erred in instructing the trial court to enter judgment for the state.