On June 16, 1998, the Pennsylvania Supreme Court determined that the factual findings of unemployment compensation referees do not bind parties in subsequent civil litigation. This is an extremely important decision for Pennsylvania employers who are considering fighting claims for unemployment compensation benefits.
The Case
The facts of the case are as follows. Patricia Rue worked for Kmart Corporation in one of its distribution centers. Kmart terminated Rue's employment, informing her that security personnel had observed her taking a bag of potato chips from inventory and eating the chips. After Rue's dismissal, other employees at the distribution center began to discuss her termination, causing a slowdown in productivity. To address the situation, Kmart informed the distribution center employees that Rue had been terminated for taking and eating a bag of potato chips.
Rue applied for and was granted unemployment compensation benefits by a local Job Center. Kmart appealed the Job Center's determination to a Referee, arguing that Rue had committed willful misconduct and therefore should be denied benefits. At the Referee's hearing, Kmart presented testimony in support of its position that Rue had taken and eaten a bag of potato chips. The Referee, however, found that Rue did not take or eat the potato chips, and was therefore entitled to benefits. Kmart did not appeal the Referee's decision.
Subsequently, Rue sued Kmart for defamation, arguing that Kmart defamed her by telling her former co-workers that she had "stolen" the potato chips. Prior to trial, the court ruled that Kmart would not be permitted to offer any evidence that Rue had, in fact, taken the potato chips. The trial court held that the doctrine of "collateral estoppel" precluded Kmart from disputing the Referee's factual finding that Rue had not taken and eaten the chips. The doctrine of collateral estoppel can act to prevent parties from relitigating issues that have been previously decided by a valid judgment in another case between the parties.
The jury found Kmart liable for defamation and awarded Rue $90,000 in compensatory damages and $1.4 million in punitive damages. Kmart filed a motion to have the trial court reconsider its decision, but that motion was denied. Kmart then appealed to the Superior Court, which originally upheld the trial court's decision. Later, however, the Superior Court, sitting en banc, reversed the trial court's decision. The Superior Court held that collateral estoppel did not apply and that Kmart should have been permitted to introduce evidence about whether Rue took the bag of chips.
The Appeal
Rue appealed that decision to the Pennsylvania Supreme Court. Although the Supreme Court agreed with Rue that the factual issue decided by the Referee -- whether Rue took and ate the potato chips - was identical to the issue in the defamation case, the Court concluded that Kmart did not have a "full and fair opportunity to litigate the issue in the prior action," an essential precondition before collateral estoppel will apply. The Court wrote that "proceedings before a Referee clearly do not allow parties to litigate issues in the manner available in a court of record."
In addition, the Court noted that unlike civil lawsuits, the unemployment compensation system is specifically designed to decide matters quickly. Also, the amount of money at issue in most unemployment compensation proceedings is, from the employer's perspective, quite small. In light of such minimal exposure, the employer often has little incentive to litigate vigorously, or even to hire a lawyer or attend the hearing. In contrast, as this case demonstrated, there might be much at stake in a subsequent civil lawsuit.
Because of the fast and informal nature of the proceedings before the Referee, as well as the negligible economic consequences of those proceedings, the Supreme Court concluded that the Referee's factual finding that Rue did not take a bag of potato chips should not have been determinative in the defamation action.
Employers should always take unemployment compensation claims seriously, and should not hesitate to vigorously contest unemployment compensation claims if it is in their best interest to do so. After the decision in Rue v. Kmart, however, employers no longer need to worry about whether the Referee's decision will interfere with their defense of future lawsuits involving defamation, discrimination, or wrongful discharge.