Tax Law Updates | New Judicial Opinions
February 25, 2009
Third Circuit Grants Additional Award to Offset Tax Burden in Agere Discrimination Suit
Eshelman v. Agere Systems Inc.
No. 05-4895, .S. Court of Appeals for the Third Circuit, 1/30/2009
Creating a new precedent in the federal circuit, the U.S. Court of Appeals for the Third Circuit has ruled that courts may grant a winning plaintiff in an employment discrimination case an additional award to compensate him for the increased tax burden of receiving a backpay award in one lump sum. In this appeal, the Third Circuit upheld a jury award of $200,000 against Agere Systems, Inc. in this discrimination case filed by Joan Eshelman under the Americans with Disabilities Act (“ADA”). In her suit, Eshelman claimed that she was terminated because Agere perceived her to be disabled due to a chemotherapy-related memory impairment. The U.S. District Court for the Eastern District of Pennsylvania denied Agere’s motion to overturn the jury verdict. Aside from affirming the jury award, the Third Circuit granted an additional $6,893 to the plaintiff to compensate her for the negative tax consequences a backpay award may create. In so doing, the Third District broke away from the District of Columbia Circuit’s ruling under Dashnaw v. Pena, 12 F.3d 1112 (D.C. Cir. 1994) that winning plaintiffs are not entitled to supplemental awards to make up for increased taxes. On the contrary, the Third Circuit wrote, trial judges have broad equitable powers under discrimination laws to fashion a remedy that truly makes the plaintiff whole. This type of an award, as with prejudgment interest, represents a recognition that the harm to a prevailing employee's pecuniary interest may be broader in scope than just a loss of back pay.
Plaintiff-appellee Eshelman instituted a lawsuit against her former employer, defendant-appellant Agere claiming, inter alia, that Agere discriminated against her in violation of the Americans with Disabilities Act (ADA), 42 U.S.C. §§ 12101-12213. At trial, Eshelman argued alternatively that Agere unlawfully discharged her because of her record of cancer-related disability, or because it regarded her as disabled. The jury found in Eshelman’s favor, and awarded her back pay and compensatory damages totaling $200,000.00.
In this appeal, Agere argued that there was insufficient evidence to sustain the jury verdict with respect to either theory of liability. Further, Agere argued that the U.S. District Court for the Eastern District of Pennsylvania improperly granted Eshelman’s post-trial motion to augment the jury’s award to offset the negative tax consequences Eshelman would incur from receiving a lump-sum back pay award.
By way of background, Eshelman was hired in 1981 by Western Electric, the predecessor company to Agere. Over the next twenty years, Eshelman advanced through the company, eventually attaining a position of supervisor of the Chief Information Office of Agere’s Reading, Pennsylvania facility. In 1998, Eshelman was diagnosed with breast cancer, and took a medical leave of absence from September 1998 until March 1999 while she was treated. Eshelman’s doctor regularly submitted documents about her health and treatment to Agere’s Health Services Department. Further, Eshelman herself kept both the Health Services Department and her supervisors, Joseph DiSandro and David Baily, informed about her condition.
Upon returning to Agere, Eshelman advised DiSandro and Baily that she was suffering from a cognitive dysfunction resulting from her chemotherapy treatment for her breast cancer. Eshelman informed DiSandro and Baily that as a result of her condition – colloquially known as “chemo brain”—she was struggling with short-term memory loss. Here, it is undisputed that Eshelman suffered from memory loss well after she returned to work following her chemotherapy-related leave of absence. Eshelman was able to cope with her memory deficiencies by carrying a notebook and taking more notes than she had prior to undergoing chemotherapy.
The parties agreed that upon her return to work, Eshelman excelled at her job, as evidenced by her outstanding performance appraisals, promotions, raises, and bonuses.
In October 2001, Agere suffered a substantial decline in profitability, and implemented a company-wide reduction in force almost immediately. Agere management apparently did not intend to close Agere’s manufacturing operations in Reading, Pennsylvania in the initial stages of the restructuring; rather, they hoped to staff it more leanly.
Ultimately, however, Agere’s “Force Management Program” (FMP) led to the closure of Agere’s Reading facility and the layoff of 18,000 employees worldwide. As part of Agere’s FMP, Eshelman was selected for layoff effective December 30, 2001. Agere’s administration of the FMP was the primary focus at trial.
Subsequent to her termination, Eshelman filed suit against Agere, alleging discrimination on the basis of age and disability. Eshelman’s disability claims asserted that Agere unlawfully slated her for termination based on its belief that her cancer-related memory problems would compromise her performance in the restructured company.
Following trial, the jury returned a special verdict form in which it determined: (i) that Agere did not discriminate against Eshelman on the basis of her age in violation of the Age Discrimination in Employment Act or the Pennsylvania Human Relations Act (PHRA); (ii) that Agere did not retaliate against Eshelman in violation of the ADA or the PHRA; but (iii) that Agere did discriminate against Eshelman in violation of the ADA and the PHRA. For these violations, the jury awarded Eshelman $170,000.00 in back pay and $30,000.00 in compensatory damages.
At the conclusion of Eshelman’s case-in-chief and at the conclusion of all the evidence, Agere moved for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(a), which the District Court denied. On October 20, 2005, the District Court granted Eshelman’s motion to augment her back pay award and denied Agere’s motion to set aside the jury verdict. This appeal followed.
In this appeal, the Third Circuit held that Eshelman had introduced sufficient evidence from which the jury could reasonably conclude that Agere regarded her as disabled. According to the Third Circuit, because Baily’s testimony afforded the jury a sufficient basis to conclude that Agere slated Eshelman for termination based on its perception—whether accurate or not—that her cancer-related memory problems rendered her unfit for any job in Agere’s restructured workforce, it affirmed the jury’s finding that Agere regarded Eshelman as disabled.
The Third Circuit likewise rejected Agere’s argument that the evidence did not support a verdict that Eshelman established a record of disability. The Third Circuit reasoned that the jury received extensive evidence from Agere’s medical department’s files on Eshelman, which documented her symptoms and treatment both before and after her time away from her job.
Moreover, a reasonable juror could have concluded, from the evidence adduced at trial, that Eshelman’s supervisors relied upon the record of Eshelman’s cancer and subsequent treatment as a factor in her termination.
On the basis of the foregoing, the Third Circuit held that the evidence was sufficient to find that Eshelman provided a record of being substantially limited in the major life activities of working and thinking, and that Agere relied upon those limitations in its decision to terminate her.
Likewise, the Third Circuit rejected Agere’s argument that the district court erred in granting Eshelman an additional monetary award to offset the negative tax consequences of the back pay award.
In affirming the district court’s additional monetary award, the Third Circuit held that a district court may, pursuant to its broad equitable powers granted by the ADA, award a prevailing employee an additional sum of money to compensate for the increased tax burden a back pay award may create.
This conclusion, stated the Third Circuit, is driven by the “make whole” remedial purpose of the antidiscrimination statutes. Without this type of equitable relief in appropriate cases, it would not be possible “to restore the employee to the economic status quo that would exist but for the employer’s conduct.” Opinion, p. 21, citing In re Continental Airlines, 125 F.3d 120, 135 (3d Cir. 1997).
The Third Circuit based this ruling on the now universal acceptance of another form of equitable relief—prejudgment interest on back pay awards. Id., citing Loeffler v. Frank, 486 U.S. 549, 558 (1988).
Similarly, an award to compensate a prevailing employee for her increased tax burden as a result of a lump sum award will, in the appropriate case, help to make a victim whole. The Third Circuit explained that this type of an award, as with prejudgment interest, represents a recognition that the harm to a prevailing employee’s pecuniary interest may be broader in scope than just a loss of back pay.
On the basis of the foregoing, the Third Circuit affirmed the district court’s decision in all respects.
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