Atwood, Haiman & Westerberg

Legal Topics April, 1999

Conflict Over Conflict Creates Conflict:
California Courts Are Split Over Whether Federal Law Preempts State Law Employment Discrimination Claims By Bank Officers.
By Eric S. Haiman
Court In Peatros v. Bank of America NT&SA (1998) 68 Cal.App.4th 1284, the California Court of Appeal held that a provision of federal law that provides that officers of national banks serve at the pleasure of the Board of Directors bars claims by such officers for employment discrimination under California's Fair Employment and Housing Act ("FEHA"). The Court rejected contrary decisions in Marques v. Bank of America, NT&SA (1997) 59 Cal.App.4th 356 and Lavelle v. BankAmerica Corp. (1998) 66 Cal.App.4th 1368. The California Supreme Court has granted review in the Lavelle and Peatros cases and can be expected to issue decisions on the issue raised in these cases later this year. Before Peatros, national banks could be sued by their officers for discrimination under FEHA. Until the conflict in the Court of Appeal decisions is resolved, it will remain uncertain whether this is the law, now and in the future.¹
The split in the Courts of Appeal arises from disagreement over the application of the doctrine of conflict preemption. Under the Supremacy Clause of the U.S. Constitution, federal law may "preempt" state law, meaning that the state law is not enforceable. There are three kinds of federal preemption. First, Congress can expressly preempt state law by clearly providing that a statute preempts state laws. Second, federal law preempts state law where federal law "occupies the field." If federal law pervasively regulates a matter, it displaces state laws concerning that matter. Third, if enforcement of state law would undermine federal law, it is preempted under the doctrine of conflict preemption. The Court of Appeal opinions discussed here agree that federal law does not preempt FEHA expressly or by occupation of the field. The issue in these cases is whether FEHA is preempted under the doctrine of "conflict preemption."
The courts finding no preemption concluded that FEHA serves the same purpose as federal discrimination laws. They held that because federal discrimination law applies to national bank officers, FEHA claims are not preempted where federal discrimination claims are allowed. In Peatros, the Court reasoned that there are significant differences between FEHA and federal discrimination statutes, including statutes of limitations and rules regarding punitive damages. The Court concluded that subjecting national banks to suit under FEHA would frustrate the full effectiveness of federal law and that such claims are, therefore, preempted.
The National Bank Act ("NBA") gives a national banking association the power to "elect or appoint directors, and by its board of directors to appoint a president, vice president, cashier and other officers, define their duties, require bonds of them and fix the penalty thereof, dismiss such officers at pleasure and appoint others to fill their places." 12 U.S.C. �24. In Marques, the Court held that this provision did not bar a claim for discrimination under FEHA as to the subjects of discrimination dealt with in federal discrimination laws. Noting that federal cases have held that the "at pleasure" provisions of the NBA do not bar claims based on federal discrimination laws, the Court held that the enactment of these laws eliminated any conflict between federal law and FEHA, at least as to the subjects of discrimination dealt with by both federal and state law. The Court reasoned that the enactment of Title VII and other federal anti-discrimination laws eliminated a national bank's power to dismiss at pleasure an officer who can show that the termination was discriminatory and that the "congressional goal of eliminating workplace discrimination is not frustrated, but facilitated, by state antidiscrimination law such as FEHA." Marques, 59 Cal.App.4th at 363. In Lavelle, the Court followed the decision in Marques holding that FEHA does not stand as an obstacle to the accomplishment of the full objectives of Congress, which must be determined by looking not just at the purpose of the "at pleasure" provision of the NBA, but at the purpose behind federal discrimination laws as well.
In Peatros, the Court, rejecting the reasoning in Marques and Lavelle, concluded that FEHA claims by national bank officers are preempted by the NBA. The Court reasoned that FEHA and federal discrimination laws are significantly different. The Court stated as follows:
. . . the state and federal laws are not composed solely of prohibitions on discrimination. Instead they forbid discrimination, set out methods through which allegations of discrimination can be brought to the attention of governmental agencies and perhaps ultimately litigated, and establish penalties if allegations of discrimination are proved. In these respects, they are far from identical.
Emphasizing that different remedies and procedures may have a significant effect on behavior in the real world, the Court concluded that the remedies and procedures available under state law would place restrictions on the power of national banks to fire officers at pleasure that are not placed by federal law and that such restrictions would frustrate the full effectiveness of federal law. The Court specifically discussed differences in statutes of limitation and punitive damages provisions which are more favorable to plaintiffs under FEHA than under federal law. The Court illustrated its reasoning by pointing out that the possibility of large punitive damages might well lead a bank to hesitate in removing an officer on suspicions of faithlessness or negligence where it would not balk at such decisive action if it did not face such a risk.
In resolving the split between the Court of Appeal decisions, the California Supreme Court will have to decide how much weight to accord to the practical consequences of differences in such matters as the availability of punitive damages under state law as compared to federal law, and how much to accord to the fact that the conduct prohibited by both sets of laws (to the extent that state law is not preempted) is the same.

¹ While the cases discussed in this article deal only with the preemptive effect of the "at pleasure" provisions of the National Bank Act, employees of Federal Reserve Banks and federally chartered thrift institutions are covered by similar provisions. See 12 U.S.C. � 341 for Federal Reserve Banks and 12 U.S.C. � 1432(a) for federally chartered thrift institutions. There is no logical reason why the analysis discussed in this article will not be applied equally to these provisions and the institutions which they govern.