Lead Opinion
Opinion
After Interactive Data Corporation (defendant) fired plaintiff Daniel D. Foley, an executive employee, he filed this action seeking compensatory and punitive damages for wrongful discharge. In his second amended complaint, plaintiff asserted three distinct theories: (1) a tort cause of action alleging a discharge in violation of public policy (Tameny v. Atlantic Richfield Co. (1980)
The Court of Appeal affirmed on the grounds (1) plaintiff alleged no statutorily based breach of public policy sufficient to state a cause of action pursuant to Tameny, (2) plaintiff’s claim for breach of the covenant to discharge only for good cause was barred by the statute of frauds; and (3) plaintiff’s cause of action based on breach of the covenant of good faith and fair dealing failed because it did not allege necessary longevity of employment or express formal procedures for termination of employees. We granted review to consider each of the Court of Appeal’s conclusions.
Facts
Because this appeal arose from a judgment entered after the trial court sustained defendant’s demurrer, “we must, under established principles, assume the truth of all properly pleaded material allegations of the complaint in evaluating the validity” of the decision below. (Tameny v. Atlantic Richfield Co., supra,
According to the complaint, plaintiff is a former employee of defendant, a wholly owned subsidiary of Chase Manhattan Bank that markets computer-based decision-support services. Defendant hired plaintiff in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment defendant required plaintiff to sign a “Confidential and Proprietary Information Agreement” whereby he promised not to engage in certain competition with defendant for one year after the termination of his employment for any reason. The agreement also contained a “Disclosure and Assignment of Information” provision that obliged plaintiff to disclose to defendant all computer-related information known to him, including any innovations, inventions or developments pertaining to the computer field for a period of one year following his termination. Finally, the agreement imposed on plaintiff a continuing obligation to assign to defendant all rights to his computer-related inventions or innovations for one year following termination. It did not state any limitation on the grounds for which plaintiff’s employment could be terminated.
Over the next six years and nine months, plaintiff received a steady series of salary increases, promotions, bonuses, awards and superior performance evaluations. In 1979 defendant named him consultant manager of the year and in 1981 promoted him to branch manager of its Los Angeles office. His annual salary rose to $56,164 and he received an additional $6,762 merit bonus two days before his discharge in March 1983. He alleges defendant’s officers made repeated oral assurances of job security so long as his performance remained adequate.
The event that led to plaintiff’s discharge was a private conversation in January 1983 with his former supervisor, Vice President Richard Earnest. During the previous year defendant had hired Robert Kuhne and subsequently named Kuhne to replace Earnest as plaintiff’s immediate supervisor. Plaintiff learned that Kuhne was currently under investigation by the Federal Bureau of Investigation for embezzlement from his former employer, Bank of America.
In response, Earnest allegedly told plaintiff not to discuss “rumors” and to “forget what he heard” about Kuhne’s past. In early March, Kuhne informed plaintiff that defendant had decided to replace him for “performance reasons” and that he could transfer to a position in another division in Waltham, Massachusetts. Plaintiff was told that if he did not accept a transfer, he might be demoted but not fired. One week later, in Waltham, Earnest informed plaintiff he was not doing a good job, and six days later, he notified plaintiff he could continue as branch manager if he “agreed to go on a ‘performance plan.’ Plaintiff asserts he agreed to consider such an arrangement.” The next day, when Kuhne met with plaintiff, purportedly to present him with a written “performance plan” proposal, Kuhne instead informed plaintiff he had the choice of resigning or being fired. Kuhne offered neither a performance plan nor an option to transfer to another position.
I. Tortious Discharge in Contravention of Public Policy
We turn first to plaintiff’s cause of action alleging he was discharged in violation of public policy. Labor Code section 2922 provides in relevant part, “An employment, having no specified term, may be terminated at the will of either party on notice to the other. . . .” This presumption may be superseded by a contract, express or implied, limiting the employer’s right to discharge the employee. (Strauss v. A. L. Randall Co. (1983)
Petermann v. International Brotherhood of Teamsters (1959)
Similarly, Tameny v. Atlantic Richfield Co., supra,
Tameny arose from facts quite similar to Petermann-, in both cases, an employee was discharged for his refusal to violate a penal statute. The plaintiff in Petermann, however, had framed his complaint in contract, and sought only back wages; the Tameny plaintiff sought tort damages. In upholding the claim in Tameny, we explained that the cause of action was not dependent on an express or implied promise in the employment contract, “but rather reflects a duty imposed by law upon all employers in order to implement the fundamental public policies embodied in the state’s penal statutes.” (
Summarizing this authority, the Court of Appeal in Koehrer v. Superior Court (1986)
Other state courts have on occasion failed to draw the distinction between contract-based causes of action and those based on policies extrinsic to the terms of the agreement. For example, the Wisconsin Supreme Court adopted a “narrowly circumscribed public policy exception” to the employment-at-will doctrine. Nonetheless, it relied on the fact that the remedies usually available for wrongful discharge under the relevant statutes were limited to contractual remedies, such as reinstatement and backpay, to conclude that such contractual remedies “are the most appropriate remedies for public policy exception wrongful discharges since the primary concern in these actions is to make the wronged employee ‘whole.’ ” (Brockmeyer v. Dun & Bradstreet (1983)
This characterization of the nature of the action contrasts with our Tameny analysis, in which we deemed the public-policy-based cause of action as “ex delicto,” or arising “from a breach of duty growing out of the
In Tameny, because there was no statute specifically barring an employer from terminating an employee who refused to act illegally, the court was required to consider whether, without the authority of an express prohibition on the reasons for discharge, the plaintiff’s action could proceed. We concluded that “even in the absence of an explicit statutory provision prohibiting the discharge of a worker on such grounds, fundamental principles of public policy and adherence to the objectives underlying the state’s penal statutes require the recognition of a rule barring an employer from discharging an employee who has simply complied with his legal duty and has refused to commit an illegal act.” (
The employee in Tameny claimed his termination was based on his refusal to engage in statutorily forbidden conduct at his employer’s behest. We mentioned generally that an employer’s ability to discharge at will “ ‘may be limited by statute . . . or by considerations of public policy.’ ” (
At least three other Court of Appeal decisions addressing the issue of where policy giving rise to an action may be found have concluded in dicta that public policy, as a basis for a wrongful discharge action, need not be policy rooted in a statute or constitutional provision. (See Koehrer v. Superior Court, supra,
We do not decide in this case whether a tort action alleging a breach of public policy under Tameny may be based only on policies derived from a statute or constitutional provision or whether nonlegislative sources may provide the basis for such a claim. Even where, as here, a statutory touchstone has been asserted, we must still inquire whether the discharge is against public policy and affects a duty which inures to the benefit of the public at large rather than to a particular employer or employee. For example, many statutes simply regulate conduct between private individuals, or impose requirements whose fulfillment does not implicate fundamental public policy concerns. Regardless of whether the existence of a statutory or constitutional link is required under Tameny, disparagement of a basic public policy must be alleged, and we turn now to determining whether plaintiff has done so here.
In the present case, plaintiff alleges that defendant discharged him in “sharp derogation” of a substantial public policy that imposes a legal duty on employees to report relevant business information to management. An employee is an agent, and as such “is required to disclose to [his] principal all information he has relevant to the subject matter of the agency.” (2 Witkin, Summary of Cal. Law (9th ed. 1987) Agency & Employment, § 41, p. 53; see Loughlin v. Idora Realty Co. (1968)
Whether or not there is a statutory duty requiring an employee to report information relevant to his employer’s interest, we do not find a substantial public policy prohibiting an employer from discharging an employee for performing that duty.
We conclude that the Court of Appeal properly upheld the trial court’s ruling sustaining the demurrer without leave to amend to plaintiff’s first cause of action.
II. Breach of Employment Contract
Plaintiff’s second cause of action alleged that over the course of his nearly seven years of employment with defendant, the company’s own conduct and personnel policies gave rise to an “oral contract” not to fire him without good cause. The trial court sustained a demurrer without leave to amend on two grounds: that the complaint did not state facts sufficient to give rise to such contract, and that enforcement of any such contract would be barred by the statute of frauds. The Court of Appeal affirmed, relying on the latter ground alone. We consider both grounds, discussing the statute of frauds issue first.
A. Statute of Frauds Defense
Civil Code section 1624, subdivision (a), invalidates “[a]n agreement that by its terms is not to be performed within a year from the making thereof’ unless the contract “or some note or memorandum thereof, [is] in writing and subscribed by the party to be charged or by the party’s agent.” In White Lighting Co. v. Wolfson (1968)
Relying exclusively on its own decision in Newfield v. Insurance Co. of the West (1984)
Newfield is irreconcilable with the rule in White Lighting.
Our courts have consistently held that such contracts are not within the statute of frauds. (See, e.g., Plumlee v. Poag (1984)
Other courts have pointed out that within a year an employee such as plaintiff could have (1) been discharged for cause (see, e.g., Rowe v. Noren Pattern and Foundry Co. (1979)
Defendant attacks these precedents as performing “legalistic gymnastics,” and calls instead for enforcement of Civil Code section 1624 according to the fair import of its language. That proclamation ignores a considerable piece of history. More than 60 years ago a British court declared that “[i]t is now two centuries too late to ascertain the meaning of [the statute of frauds] by applying one’s own mind independently to the interpretation of its language. Our task is a much more humble one; it is to see how that section has been expounded in decisions and how the decisions apply to the present case.” (Hanau v. Ehrlich (1911) 2 K.B. 1056, 1069.)
The decision in White Lighting, supra,
The Legislature, which in 1872 enacted Civil Code section 1624, was aware of precedent limiting the reach of the one-year provision of the statute of frauds. The Code Commissioners’ notes specifically advised that “in a similar statute in New York these words have been construed as applying only to contracts which cannot possibly be executed within a year, under any contingency. ... To bring a contract within the statute relating to parol agreements, not to be performed within one year, it must appear to be necessarily incapable of performance within that time.” (Italics in origi
In sum, the contract between plaintiff and defendant could have been performed within one year of its making; plaintiff could have terminated his employment within that period, or defendant could have discharged plaintiff for cause. Thus, the contract does not fall within the statute of frauds and the fact that it was an implied or oral agreement is not fatal to its enforcement.
B. Sufficiency of the Allegations of Oral or Implied Contract
Although plaintiff describes his cause of action as one for breach of an oral contract, he does not allege explicit words by which the parties agreed that he would not be terminated without good cause. Instead he alleges that a course of conduct, including various oral representations, created a reasonable expectation to that effect. Thus, his cause of action is more properly described as one for breach of an implied-in-fact contract.
As noted, the Court of Appeal did not reach the question of the sufficiency of plaintiff’s allegations to state a cause of action for breach of an implied-in-fact contract term not to discharge except for good cause, because it disposed of the issue by erroneously applying the statute of frauds.
The plaintiff in Pugh had been employed by the defendant for 32 years, during which time he worked his way up the corporate ladder from dishwasher to vice president. (
Pugh has been followed in numerous decisions in this state. (See, e.g., Steward v. Mercy Hospital, supra,
We begin by acknowledging the fundamental principle of freedom of contract: employer and employee are free to agree to a contract terminable at will or subject to limitations. Their agreement will be enforced so long as it does not violate legal strictures external to the contract, such as laws aifecting union membership and activity, prohibitions on indentured servitude, or the many other legal restrictions already described which place certain restraints on the employment arrangement. As we have discussed, Labor Code section 2922 establishes a presumption of at-will employment if the parties have made no express oral or written agreement specifying the length of employment or the grounds for termination. This presumption may, however, be overcome by evidence that despite the absence of a specified term, the parties agreed that the employer’s power to terminate would be limited in some way, e.g., by a requirement that termination be based only on “good cause.” (Drzewiecki v. H & R Block, Inc., supra,
The absence of an express written or oral contract term concerning termination of employment does not necessarily indicate that the employment is actually intended by the parties to be “at will,” because the presumption of at-will employment may be overcome by evidence of contrary intent. Generally, courts seek to enforce the actual understanding of the parties to a contract, and in so doing may inquire into the parties’ conduct to determine if it demonstrates an implied contract. “[I]t must be determined, as a question of fact, whether the parties acted in such a manner as to provide the necessary foundation for [an implied contract], and evidence may be introduced to rebut the inferences and show that there is another explanation for the conduct.” (Silva v. Providence Hospital of Oakland (1939)
Defendant contends that courts should not enforce employment security agreements in the absence of evidence of independent consideration and an express manifestation of mutual assent. Although, as explained below, there may be some historical basis for imposing such limitations, any such basis has been eroded by the development of modern contract law and, accordingly, we conclude that defendant’s suggested limitations are inappropriate in the modern employment context. We discern no basis for departing from otherwise applicable general contract principles.
The doctrine that special limitations should be placed on the enforceability of employment security agreements arose during the late 19th century in the context of interpretation of contracts which promised “permanent” employment to the employee. In Lord v. Goldberg (1889)
The limitations on employment security terms on which defendant relies were developed during a period when courts were generally reluctant to look beyond explicit promises of the parties to a contract. “The court-imposed presumption that the employment contract is terminable at will relies upon the formalistic approach to contract interpretation predominant in late nineteenth century legal thought: manifestations of assent must be evidenced by definite, express terms if promises are to be enforceable.” (Note, Protecting At Will Employees, supra,
Similarly, 20 years ago, Professor Blumrosen observed that during the decades preceding his analysis, courts had demonstrated an increasing willingness to “consider the entire relationship of the parties, and to find that facts and circumstances establish a contract which cannot be terminated by the employer without cause.” (Blumrosen, Settlement of Disputes Concerning the Exercise of Employer Disciplinary Power: United States Re
In the employment context, factors apart from consideration and express terms may be used to ascertain the existence and content of an employment agreement, including “the personnel policies or practices of the employer, the employee’s longevity of service, actions or communications by the employer reflecting assurances of continued employment, and the practices of the industry in which the employee is engaged.” (Pugh, supra,
Finally, we do not agree with the Court of Appeal that employment security agreements are so inherently harmful or unfair to employers, who do not receive equivalent guaranties of continued service, as to merit
Defendant’s remaining argument is that even if a promise to discharge “for good cause only” could be implied in fact, the evidentiary factors outlined in Pugh, supra,
First, defendant overemphasizes the fact that plaintiff was employed for “only” six years and nine months. Length of employment is a relevant consideration but six years and nine months is sufficient time for conduct to occur on which a trier of fact could find the existence of an implied contract. (Cf. Gray v. Superior Court, supra,
Second, an allegation of breach of written “Termination Guidelines” implying self-imposed limitations on the employer’s power to discharge at will may be sufficient to state a cause of action for breach of an employment contract. Pugh, supra,
Finally, unlike the employee in Pugh, supra,
In sum, plaintiff has pleaded facts which, if proved, may be sufficient for a jury to find an implied-in-fact contract limiting defendant’s right to discharge him arbitrarily—facts sufficient to overcome the presumption of Labor Code section 2922. On demurrer, we must assume these facts to be true. In other words, plaintiff has pleaded an implied-in-fact contract and its breach, and is entitled to his opportunity to prove those allegations.
III. Breach of the Implied Covenant of Good Faith and Fair Dealing
We turn now to plaintiff’s cause of action for tortious breach of the implied covenant of good faith and fair dealing. Relying on Cleary,
The distinction between tort and contract is well grounded in common law, and divergent objectives underlie the remedies created in the two areas. Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate “social policy.” (Prosser, Law of Torts (4th ed. 1971) p. 613.) The covenant of good faith and fair dealing was developed in the contract arena and is aimed at making effective the agreement’s promises. Plaintiff asks that we find that the breach of the implied covenant in employment contracts also gives rise to an action seeking an award of tort damages.
In this instance, where an extension of tort remedies is sought for a duty whose breach previously has been compensable by contractual remedies, it is helpful to consider certain principles relevant to contract law. First, predictability about the cost of contractual relationships plays an important role in our commercial system. (Putz & Klippen, Commercial Bad Faith-Attorney Fees—Not Tort Liability—Is the Remedy for “Stonewalling” (1987) 21 U.S.F. L.Rev. 419, 432 [hereafter Putz & Klippen]). Moreover, “Courts traditionally have awarded damages for breach of contract to compensate the aggrieved party rather than to punish the breaching party.” (Note, “Contort”: Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing in Noninsur- anee, Commercial Contracts—Its Existence and Desirability (1985) 60 Notre Dame L. Rev. 510, 526, & fn. 94, citing Rest.2d Contracts, § 355, com. a [“The purpose[] of awarding contract damages is to compensate the injured party”].)
“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Rest.2d Contracts, § 205.) This duty has been recognized in the majority of American jurisdictions, the Restatement, and the Uniform Commercial Code. (Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith
An exception to this general rule has developed in the context of insurance contracts where, for a variety of policy reasons, courts have held that breach of the implied covenant will provide the basis for an action in tort. California has a well-developed judicial history addressing this exception. In Comunale v. Traders & General Ins. Co. (1958)
In Egan v. Mutual of Omaha Ins. Co., supra,
In addition, the Egan court emphasized that “the relationship of insurer and insured is inherently unbalanced: the adhesive nature of insurance contracts places the insurer in a superior bargaining position.” (
The first California appellate case to permit tort recovery in the employment context was Cleary, supra,
Similarly, Cleary's discussion of two previous California employment cases was insufficient. It found a “hint” in Coats v. General Motors Corp. (1934)
In fact, although Justice Broussard asserts that the weight of authority is in favor of granting a tort remedy (opn. by Broussard, J., at p. 714, fn. 15), the clear majority of jurisdictions have either expressly rejected the notion of tort damages for breach of the implied covenant in employment cases or impliedly done so by rejecting any application of the covenant in such a context.
Dictum in Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984)
Most of the other Court of Appeal cases following Cleary suffer from similar failures comprehensively to consider the implications of their holdings. These opinions either merely refused to find a breach of the implied covenant on the facts of the case, or relied uncritically on Cleary or the dicta in Tameny and Seaman’s. (See, e.g., Gray v. Superior Court, supra,
In Koehrer, supra,
Similarly, in Khanna, supra,
In our view, the underlying problem in the line of cases relied on by plaintiff lies in the decisions’ uncritical incorporation of the insurance model into the employment context, without careful consideration of the fundamental policies underlying the development of tort and contract law in general or of significant differences between the insurer/insured and employer/employee relationships.
The “special relationship” test gleaned from the insurance context has been suggested as a model for determining the appropriateness of permitting tort remedies for breach of the implied covenant of the employment context. One commentary has observed, “[jjust as the law of contracts fails to provide adequate principles for construing the terms of an insurance policy, the substantial body of law uniquely applicable to insurance contracts is practically irrelevant to commercially oriented contracts. . . . These [unique] features characteristic of the insurance contract make it particularly susceptible to public policy considerations.” (Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F. L.Rev. 187, 200-201, fns. omitted.) These commentators assert that tort remedies for breach of the covenant should not be extended across the board in the commercial context, but that, nonetheless, public policy considerations suggest extending the tort remedy if certain salient factors are present. (Id., at pp. 216-218.) “The tort of bad faith should be applied to commercial contracts only if four of the features characteristic of insurance bad faith actions are present. The features are: (1) one of the parties to the contract enjoys a superior bargaining position to the extent that it is able to dictate the terms of the contract; (2) the purpose of the weaker party in entering into the contract is not primarily to profit but rather to secure an essential service or product, financial security or peace of mind; (3) the relationship of the parties is such that the weaker party places its trust and confidence in the larger entity; and (4) there is conduct on the
Others argue that the employment context is not sufficiently analogous to that of insurance to warrant recognition of the right to tort recovery. (See, e.g., Miller & Estes, supra, 16 U.C. Davis L.Rev. 65, 90-91; Note, Defining Torts, supra, 34 Stan.L.Rev. at pp. 164-167.) They contend that (1) inequality in bargaining power is not a universal characteristic of employment contracts, standardized forms are often not used, and there is often room for bargaining as to special conditions; (2) employers do not owe similar fiduciary duties to employees who are themselves agents of the employer and obligated to act in the employer’s interests; and (3) unlike insurance companies, employers are not “quasi-public entities” and they “seldom have government-like functions, and do not serve primarily, if at all, to spread losses across society.” (Note, Defining Torts, supra, 34 Stan.L.Rev. at pp. 165-167; Miller & Estes, supra, 16 U.C. Davis L.Rev. at p. 91.)
In contrast to those concentrating on the match between insurance and employment relationships, yet another article suggests, “The fundamental flaw in the ‘special relationship’ test is that it is illusory. It provides a label to hang on a result but not a principled basis for decision. . . . The qualifying contracts cannot be identified until the issue has been litigated, which is too late.” (Putz & Klippen, supra, 21 U.S.F. L.Rev. at pp. 478-479.) The authors assert that “ ‘public interest, adhesion and fiduciary responsibility,’ are not sufficiently precise to provide a basis for reliable prediction.” (Id., at p. 479, fn. omitted.) Instead, they assert that, “While the ‘special relationship’ test purports to be only a modest extension of the tort of bad faith beyond insurance and employment, it opens the way for pleading a tort cause of action in nearly every contract case, leaving it ultimately to a jury to decide whether or not the parties had a ‘special relationship.’ ” (Id., at p. 480, fn. omitted.) Extension of the test to employment cases would similarly leave the door open to such a claim in every termination case, and
Similarly, another commentary argues that the special relationship model fails because (1) it does not explain why it “justifies tort liability” for otherwise legal conduct, or for conduct which may give rise to contract remedies (Comment, Reconstructing Breach, supra, 73 Cal.L.Rev. at p. 1299, fn. omitted), (2) use of the concept “is inadequate to define the scope and application of a tort duty of good faith and fair dealing” (id., at p. 1300), (3) use of the model “fails to distinguish between breach of the implied covenant of good faith and fair dealing and ‘bad faith breach of contract’ ” (ibid., fn. omitted), and (4) the model does not provide justification for imposition of punitive damages and thus “might serve to unfairly chill legitimate conduct” (id., at p. 1301).
After review of the various commentators, and independent consideration of the similarities between the two areas, we are not convinced that a “special relationship” analogous to that between insurer and insured should be deemed to exist in the usual employment relationship which would warrant recognition of a tort action for breach of the implied covenant. Even if we were to assume that the special relationship model is an appropriate one to follow in determining whether to expand tort recovery, a breach in the employment context does not place the employee in the same economic dilemma that an insured faces when an insurer in bad faith refuses to pay a claim or to accept a settlement offer within policy limits. When an insurer takes such actions, the insured cannot turn to the marketplace to find another insurance company willing to pay for the loss already incurred. The wrongfully terminated employee, on the other hand, can (and must, in order to mitigate damages [see Parker v. Twentieth Century-Fox Film Corp. (1970)
Finally, there is a fundamental difference between insurance and employment relationships. In the insurance relationship, the insurer’s and insured’s interest are financially at odds. If the insurer pays a claim, it diminishes its fiscal resources. The insured, of course, has paid for protection and expects to have its losses recompensed. When a claim is paid, money shifts from insurer to insured, or, if appropriate, to a third party claimant.
Putting aside already specifically barred improper motives for termination which may be based on both economic and noneconomic considerations,
We therefore conclude that the employment relationship is not sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies in view of the countervailing concerns about economic policy and stability, the traditional separation of tort and contract law, and finally, the numerous protections against improper terminations already afforded employees.
Our inquiry, however, does not end here. The potential effects on an individual caused by termination of employment arguably justify additional remedies for certain improper discharges. The large body of employment
The issue is how far courts can or should go in responding to these concerns regarding the sufficiency of compensation by departing from long established principles of contract law. Significant policy judgments affecting social policies and commercial relationships are implicated in the resolution of this question in the employment termination context. Such a determination, which has the potential to alter profoundly the nature of employment, the cost of products and services, and the availability of jobs, arguably is better suited for legislative decisionmaking. (See Wagenseller v. Scottsdale Memorial Hosp., supra,
Professor Gould asserts, “[t]he new common law of wrongful discharge has provided employer and employee with the worst of all possible worlds. . . . [Ejmployers are subject to volatile and unpredictable juries that frequently act without regard to legal instructions. Moreover, the employees who benefit are few and far between, first, because of the difficulties involved in staying the course of a lengthy and expensive judicial process, and second, because of limitations inherent in the legal doctrines adopted by
Professor Putz and coauthor Klippen also suggest “tort liability is not the answer to bad faith defense in commercial contract disputes. A more appropriate response is to make contract damages adequate by permitting a prevailing plaintiff to recover attorney fees where the breaching party is found to have denied liability unreasonably.” (Putz & Klippen, supra, 21 U.S.F. L.Rev. at p. 499.) Yet another commentator advocates expansion of recoverable contract damages. (Traynor, supra, 8 Bus.L.News at pp. 12-14.) Others would permit tort damages but would limit their application. (See, e.g., Louderback & Jurika, supra, 16 U.S.F. L.Rev. at pp. 220-223; Comment, Reconstructing Breach, supra, 73 Cal.L.Rev. at pp. 1315-1330.) These various approaches on the one hand suggest a widespread perception that present compensation is inadequate, but on the other hand vividly demonstrate substantial disagreement about the propriety or even the potential form of tort remedies for breaches of contractual duties of covenants. The multiplicity of solutions advanced underscores the caution with which any attempts to extend such relief must be viewed.
As we have reiterated, the employment relationship is fundamentally contractual, and several factors combine to persuade us that in the absence of legislative direction to the contrary contractual remedies should remain the sole available relief for breaches of the implied covenant of good faith and fair dealing in the employment context. Initially, predictability of the consequences of actions related to employment contracts is important to commercial stability.
The formulation advanced in Koehrer, supra,
Review of the Koehrer, Khanna and Huber formulations reveals that ultimately they require nothing “unusual” about the breach: under the approaches of those courts, an ordinary contract breach might give rise to a bad faith action. Resolution of the ensuing inquiry into the employer’s motives has been difficult to predict and demonstrates the imprecision of the standards thus far formulated. (See, e.g., Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at pp. 405-407.) This situation undermines the statutory mandate that neither compensatory tort damages nor exemplary damages are available in an action arising from the breach of a contract obligation. (Civ. Code, §§ 3333, 3294.)
Finally, and of primary significance, we believe that focus on available contract remedies offers the most appropriate method of expanding available relief for wrongful terminations. The expansion of tort remedies in the employment context has potentially enormous consequences for the stability of the business community.
We are not unmindful of the legitimate concerns of employees who fear arbitrary and improper discharges that may have a devastating effect on their economic and social status. Nor are we unaware of or unsympathetic to claims that contract remedies for breaches of contract are insufficient because they do not fully compensate due to their failure to include attorney fees and their restrictions on foreseeable damages. These defects, however, exist generally in contract situations. As discussed above, the variety of possible courses to remedy the problem is well demonstrated in the literature and includes increased contract damages, provision for award of attorney fees, establishment of arbitration or other speedier and less expensive
The diversity of possible solutions demonstrates the confusion that occurs when we look outside the realm of contract law in attempting to fashion remedies for a breach of a contract provision. As noted, numerous legislative provisions have imposed obligations on parties to contracts which vindicate significant social policies extraneous to the contract itself. As Justice Kaus observed in his concurring and dissenting opinion in White v. Western Title Ins. Co. (1985)
Conclusion
Plaintiff may proceed with his cause of action alleging a breach of an implied-in-fact contract promise to discharge him only for good cause; his claim is not barred by the statute of frauds. His cause of action for a breach of public policy pursuant to Tameny was properly dismissed because the facts alleged, even if proven, would not establish a discharge in violation of public policy. Finally, as to his cause of action for tortious breach of the implied covenant of good faith and fair dealing, we hold that tort remedies are not available for breach of the implied covenant in an employment contract to employees who allege they have been discharged in violation of the covenant.
Accordingly, that portion of the judgment of the Court of Appeal affirming the dismissal of plaintiff’s causes of action alleging a discharge in breach of public policy and a tortious breach of the implied covenant of good faith and fair dealing is affirmed. That portion of the judgment of the Court of Appeal affirming the dismissal of the cause of action alleging an implied-in-fact contract not to discharge except for good cause is reversed, and the case is remanded for action consistent with the views expressed herein.
Panelli, J., Arguelles, J., and Eagleson, J., concurred.
Notes
In September 1983, after plaintiff’s discharge, Kuhne pleaded guilty in federal court to a felony count of embezzlement.
Throughout its brief, defendant refers to a number of counterallegations. In particular, defendant alleges that plaintiff’s true motive was an “attempt to oust his supervisor” and that plaintiff rejected an “opportunity to transfer laterally to a new position at company headquarters” before his discharge. Since this appeal arises on demurrer, however, we must
For a discussion of the origin of the employment-at-will doctrine, and its subsequent evolution through legislation and judicial decision, see generally Blades, Employment At Will iv. Individual Freedom: On Limiting the Abusive Exercise of Employer Power (1967) 67 Colum. L. Rev. 1404, 1416-1419; Blumrosen, Settlement of Disputes Concerning the Exercise of Employer Disciplinary Power; United States Report (1964) 18 Rutgers L. Rev. 428, 432-433; Comment, Employment-At- Will—Employers May Not Discharge At- Will Employees For Reasons That Violate Public Policy (1986) Ariz. St. L.J. 161, 164-167; Note, Protecting At Will Employees Against Wrongful Discharge: The Duty to Terminate Only in Good Faith (1980) 93 Harv. L. Rev. 1816, 1824-1828 (hereafter Protecting At Will Employees').
Even where employment is at will, numerous federal and state statutes already impose express limitations on the right of an employer to discharge at will. Legislation, ranging from the National Labor Relations Act (29 U.S.C. § 158(a)(1),(3),(4) [precluding discharge for union activity, protected concerted activity, filing charges and testifying under the act]) to title VII of the Civil Rights Act of 1964 (42 U.S.C. §§ 2000e-2, 2000e-3(a) [prohibiting discharge on the basis of race, color, religion, sex or national origin or for exercising rights under the act]), and state statutes precluding discharge for filing workers’ compensation claims or in violation of state civil rights statutes, significantly circumscribe the at-will doctrine. (See Mauk, Wrongful Discharge: The Erosion of 100 Years of Employer Privilege (1985) 21 Idaho L. Rev. 201, 226-227, fns. 109-110 [hereafter Mauk].)
A number of California decisions have followed Petermann to bar discharge of at-will employees in violation of state policies governing labor-management relations. (Montalvo v. Zamora (1970)
We observed that courts in California and sister states had shown a willingness to grant tort damages in such instances. (See Tameny,
A comparison of the manner in which contracts for illegal purposes are treated is useful. (See e.g., Civ. Code, §§ 1441, 1598, 1608, 1667.) If an employer and employee enter into a contract in which the employee agrees to perform an illegal act, and either party breaches, the courts will not enforce the contract. In the Tameny situation, however, typically the employer requires the employee to perform an act in contravention of public policy and then terminates the employee for failure to do so, or penalizes the employee for acting in accordance with law. When such a termination occurs, the nature of the employee’s relationship with the employer, whether at will or contractual, is essentially irrelevant. What is vindicated through the cause of action is not the terms or promises arising out of the particular employment relationship involved, but rather the public interest in not permitting employers to impose as a condition of employment a requirement that an employee act in a manner contrary to fundamental public policy.
We also quoted with approval Petermann’s statement that “ *[t]he public policy of this state as reflected in the Penal Code sections referred to above would be seriously impaired if it were to be held that one could be discharged by reason of his refusal to commit perjury.’ ” (Petermann, supra,
Defendant disputes this characterization of plaintiff’s motives and conduct. In reviewing a judgment following the sustaining of a demurrer without leave to amend, however, we must accept the truth of the matters pleaded (see ante, pp. 662-663), and take into account the possibility of amendment consistent with that pleading. (Blank v. Kirwin (1985)
By contrast, Labor Code section 1102.5, subdivision (b) prohibits an employer from retaliating “against an employee for disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or violation or noncompliance with a state or federal regulation.”
As noted, Tameny insisted that the public policy basis for the cause of action must be “firmly established” (
The absence of a distinctly “public” interest in this case is apparent when we consider that if an employer and employee were expressly to agree that the employee has no obligation to, and should not, inform the employer of any adverse information the employee learns about a fellow employee’s background, nothing in the state’s public policy would render such an agreement void. By contrast, in the previous cases asserting a discharge in violation of public policy, the public interest at stake was invariably one which could not properly be circumvented by agreement of the parties. For example, in Tameny, supra,
The California case most closely in point is Read v. City of Lynwood (1985)
We have discovered no case upholding a cause of action on facts comparable to the present case.
We observe there is nothing intrinsically unfair or uncommon about a contract that permits the employee to leave at will, but limits the employer’s right of discharge. As explained in Pugh, supra,
Although the statute of frauds defense was not argued or even anticipated in Pugh, supra,
The Court of Appeal in Gray v. Superior Court, supra,
We also note that the Ninth Circuit recently held in Robarás v. Gaylord Bros., Inc. (9th Cir. 1988)
Compare, for example, our decision in Phillippe v. Shappell Industries (1987)
A second source of conflict with White Lighting concerns the Court of Appeal’s use of a retrospective analysis that infers the original intent of the parties from the ultimate duration of the employment at the time of the discharge. The applicability of the statute of frauds must be analyzed prospectively, based on the intentions of the parties and the terms of the agreement at the time it is made. “ ‘To fall within the words of the provision, therefore, the agreement must be one of which it can truly be said at the very moment it is made, “This agreement is not to be performed within one year”; in general, the cases indicate that there must not be the slightest possibility that it can be fully performed within one year.’ ” (White Lighting, supra,
Newfield, supra,
Plaintiff alleges defendant maintained written “Guidelines for Termination” that required good cause for discharge of an employee, and that plaintiff understood these guidelines applied to him. If he had further alleged that the parties expressly agreed that these guidelines governed his employment, he could state a cause of action for breach of an express oral contract. He has made no such allegation.
Comment (a) to Restatement Second of Contracts, section 4, explains, “[j]ust as assent may be manifested by words or other conduct, sometimes including silence, so intention to make a promise may be manifested in language or by implication from other circumstances. . . .” Comment (a) to Restatement Second of Contracts, section 19, adds, “there is no distinction in the effect of the promise whether it is expressed in writing, or orally, or in acts, or partly in one of these ways and partly in others.”
After discussing Lord and similar cases, the Michigan Supreme Court observed that the issue in those actions “was whether, assuming a contract for ‘permanent’ employment, that employment was terminable at the will of the employer.” (Toussaint, supra,
A few recent cases, including Shapiro v. Wells Fargo Realty Advisors, supra,
We need not here resolve questions concerning the measure of damages in a wrongful discharge action based on breach of contract. We do not know what damages plaintiff is seeking to recover nor what particular evidence he may present in support of such damages, and therefore the issue is not before us.
At times certain breaches of contract have been deemed economically desirable (see Putz, supra, 21 U.S.F. L.Rev. at pp. 430-432; Comment, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort (1985) 73 Cal.L.Rev. 1291, fn. 3 [hereafter Reconstructing Breach]). As the reporter’s notes to Restatement Second of Contracts, chapter 16, section 344 et seq., pages 101-102, state, “a breach of contract will result in a gain in ‘economic efficiency’ if the party contemplating breach evaluates his gains at a higher figure than the value that the other party puts on his losses, and this will be so if the party contemplating breach will gain enough from the breach to have a net benefit even though he compensates the other party for his resulting loss.”
In only three cases outside of California have courts held that a breach of the covenant of good faith and fair dealing gives rise to tort damages. In K Mart Corp. v. Ponsock (1987)
Finally, in Dare v. Montana Petroleum Marketing Co. (1984)
Hall v. Farmers Ins. Exchange (Okla. 1986)
Other states have explicitly rejected the notion of either tort damages for breach of the implied covenant or application of the implied covenant itself in the context of employment relationships (see, e.g., Arco Alaska, Inc. v. Akers (Alaska 1988)
Despite the concurring and dissenting justices’ contentions to the contrary, almost every court considering the issue outside of California has either totally rejected applying the convenant of good faith and fair dealing to employment contracts, or has limited recovery for breaches of the covenant to contract damages.
Contrary to Justice Broussard’s suggestion (see opn. by Broussard, J., post, at p. 704, our statements in Seaman’s were far from a definitive signal of approval for a tort remedy for breach of the covenant in employment cases. If anything, the reference highlighted the fact that this question remained to be decided by this court.
Justice Broussard suggests that “unanimous agreement” among Courts of Appeal and some commentators on the existence of tort liability for a breach of the covenant of good faith and fair dealing has led to reliance by the public which we should be loath to disturb. (See opn. by Broussard, J.,post at p. 706.) There has, however, clearly and indisputably, been no holding by this court that such a cause of action exists. If we were to follow the dissent’s urging that we should therefore leave this area of law untouched, we would be abdicating our role. Trial courts are of course bound by the decisions of the Court of Appeal. But decisions of the lower appellate court are in no way binding upon this court which is free at any time to overrule lower court interpretations of questions of law and reach a different conclusion. (Cf. INS v. Chadha (1983)
The Court of Appeal in Wallis v. Superior Court (1984)
In the employment relationship, the employer is already barred by law from, and the employee can obtain relief for, discriminatory discharges based on age, sex, race, and religion. Similarly, the employee is protected from discrimination based on the exercise of rights under the workers’ compensation laws or for engaging in union activities. He can gain relief if he is terminated in order for the employer to avoid payment of certain benefits. The employee may sue in tort for discharges based on breaches of public policy.
Legislatures, in making such policy decisions, have the ability to gather empirical evidence, solicit the advice of experts, and hold hearings at which all interested parties may present evidence and express their views, and legislatures in three jurisdictions have enacted
Many European and other western countries have job protection laws, some providing separate tribunals or alternative methods of dispute resolution to handle claims which arise. (See, Note, Protecting At Will Employees, supra, 93 Harv. L. Rev. at pp. 1836-1837; Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at pp. 408; Unfair Dismissal (1984) 20 Stan J.Internat.L., issue 2.)
“The principal goals of [legislation regulating the workplace in the last 75 years] have been first, to promote unionization as a countervailing force against employer power and control; second, to establish a minimum level of economic entitlement for workers; third, to combat discrimination against specific groups in hiring and dismissals; fourth, to protect employee health and safety; and fifth, to guarantee a minimum level of security for retirement and for the survivors of wage earners.” (Note, Protecting At Will Employees, supra, 93 Harv. L. Rev. 1816, 1827, fns. omitted.)
The generally predictable and circumscribed damages available for breaches of contract reflect the importance of this value in the commercial context. In the employment context specifically, Professor Gould observes, “[t]he cost of lawsuits that respond to a discharge, as measured by jury awards and settlements, has also increased geometrically and is beginning to draw concern from the business community. . . . [H] [T]he awards [in California wrongful termination suits] actually exceeded settlement demands by the employees’ lawyers by 187 percent.” (Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at pp. 405-406, fns. omitted, italics in original; see also Note, Protecting At Will Employees, supra, 93 Harv. L. Rev. 1816, 1834, 1835 [“employers may fear that imposition of liability threatens the fundamental prerogatives of management: to coiitrol the workplace and to retain only the best-qualified employees”; “[ajnother concern is that the threat of increased liability will impair firms’ ability to respond flexibly to changing economic conditions”].)
See Burton, supra, 94 Harv. L. Rev. 369, 403 (“The good faith performance doctrine, like contract law generally, functions to support the market”).
One attempt to formulate a test for tortious breach of the implied covenant demonstrates the problem. Under its proposed standard, the elements of a tortious breach which a plaintiff must prove are: “(1) assertion of a right or denial of an obligation (2) made in bad faith (with actual knowledge that the claim or denial has no foundation) and unreasonably (where a reasonable person under the circumstances would find the claim or denial groundless) (3) that obstructs the injured party’s ability to receive the substitutionary value of the agreement.” (Comment, Reconstructing Breach, supra, 73 Cal.L.Rev. at p. 1305.) The commentator describes the two prongs of his bad faith test as subjective and objective, and acknowledges, “[s]ubjective bad faith is difficult to distinguish from mere doubt about the legitimacy of an act or claim.” (Id., at pp. 1304-1305.) Unfortunately, even if the suggested test would have some restrictive value on the ability of plaintiffs to recover damages, it does not serve to limit initiation and prosecution of litigation based on almost any discharge.
Also interesting is the commentator’s recognition that punitive damages are inappropriate. His argument for imposition of tort liability is that it “provides more adequate compensation for victims of bad faith conduct.” (Id., at p. 1311.) As to punitive damages, however, he states, “they are not appropriate for breach of the implied covenant of good faith and fair dealing. Tort damages already remedy the inadequate compensation and deterrence of contract damages.. . . Additional punitive damages are unnecessary to redress undercompensation for harm caused by a breach of the implied covenant.” (Id., at pp. 1325-1326, fn. omitted.) Careful scrutiny thus reveals that the proposed approach is essentially a variant on proposals to expand contract damages in order to provide sufficient compensation.
Moreover, as Professor Gould observes, “Juries in these cases often impose liability and large damage awards according to their own standards of fairness rather than the legal instructions provided by the judge. ...[][] Jurors can easily identify with the worker who has received a pink slip.” (Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at pp. 406-407; see also Epstein, In Defense of the Contract At Will (1984) 51 U. Chi. L. Rev. 947, 970 [arguing juries are ill-suited to the task of determining an employer’s motive or purpose for discharge].)
Unlike collective bargaining agreements that contain “screening mechanisms” whereby “unions sift out grievances that are viewed as unmeritorious or less important” (Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at p. 423), the proposed tort action essentially has no entry-level limitation (cf. Huber, supra, 841 F.2d at pp. 985-986).
In a contract action asserting breach of a covenant not to discharge except for good cause, the plaintiif must demonstrate an agreement not to terminate except for good cause and that the employer lacked good cause for the discharge. The Khanna and Koehrer formulations add the element of “bad faith” but fail to explain how courts are to distinguish the “bad faith” giving rise to tort recovery, from the lack of “good faith” giving rise to contract damages.
Moreover, with regard to an at-will employment relationship, breach of the implied covenant cannot logically be based on a claim that a discharge was made without good cause. If such an interpretation applied, then all at-will contracts would be transmuted into contracts requiring good cause for termination, and Labor Code section 2922 would be eviscerated. This is not to say that the Legislature could not impose such a requirement in every employment contract. It has not done so, however, and the implied covenant should not be read as uniformly imposing such a contractual term. Thus, in Wagenseller v. Scottsdale Memorial Hosp., supra,
The court stated, “[w]hile the specific nature of the obligations imposed by the implied covenant. . . are dependent upon the nature and purpose of the underlying contract and the legitimate expectations of the parties arising from the contract [citations], those obligations are not the obligations that were consensually undertaken in the contractual provisions, and care must be taken in each case to determine whether the alleged breach is of an obligation imposed by law and thus a tort [citation] or breach of an obligation consensually created by the parties in the terms of the contract and thus simply a breach of contract.” (
As the Arizona Supreme Court recognized, “the implied-in-law covenant of good faith and fair dealing protects the right of the parties to an agreement to receive the benefits of the agreement that they have entered into. The denial of a party’s rights to those benefits, whatever they are, will breach the duty of good faith implicit in the contract. Thus, the relevant inquiry always will focus on the contract itself to determine what the parties did agree to.” (Wagenseller v. Scottsdale Memorial Hosp., supra,
Cleary, supra,
We do not reach the issue of the retroactive or prospective application of our opinion. The parties have not briefed or argued the question and we will deal with the matter in a later case when we have the benefit of the views of counsel.
Concurrence Opinion
I concur in part I of the majority opinion, which holds that plaintiff has not stated a cause of action for discharge in violation of public policy. I join fully in part II of the majority opinion, which upholds plaintiff’s cause of action for breach of contract, but add a note exploring the question of the damages recoverable in such an action. I respectfully dissent to part III of the majority opinion. Although written in conservative tones of deference to legislative action, it is in fact a radical attempt to rewrite California law in a manner which, as the majority themselves acknowledge, will leave the wrongfully discharged worker without an adequate remedy. The majority opinion does not preserve the status quo, leaving it to the Legislature to adopt innovative solutions. It uproots the status quo, leaving it to the Legislature to remedy the problems the opinion creates.
I.
Under the majority opinion, employees will no longer have a tort cause of action for bad faith discharge, but, absent some violation of public policy, can sue only in contract. The majority acknowledge that traditional contract damages may provide inadequate compensation (see ante, pp. 699-700). They recognize that a considerable number of commentators have suggested that the remedy for widely perceived inequities in the contract-damages realm may lie in an expansion of the nature of damages that may properly be recovered within a breach of contract action. (See, e.g., Tray-nor, Bad Faith Breach of a Commercial Contract: A Comment on the Seaman’s Case (Cal. State Bar, Fall 1984) 8 Bus. L. News 1 (hereafter Tray nor); Putz & Klippen, Commercial Bad Faith: Attorney Fees—Not Tort Liability—Is the Remedy for “Stonewalling” (1987) 21 U.S.F. L.Rev. 419.) They conclude, however, that we should not resolve questions concerning the measure of contract damages in the present case. (Ante, p. 682, fn. 24.) I agree that we should not resolve the issue in the present case. But I think it appropriate in a concurring and dissenting opinion to suggest a line of reasoning which may prove fruitful.
As a general rule, damages recoverable in contract actions have been limited to those within the contemplation of the parties at the time of the contract. (See Hadley v. Baxendale (1854) 9 Ex. 341 [156 Eng.Rep. 145]; Hunt Bros. Co. v. San Lorenzo Water Co. (1906)
In Allen v. Jones, supra,
These precedents have not yet been applied to wrongful discharge. But a review of the facts of the Court of Appeal cases overruled by the majority in part III of their opinion, and similar cases pending before this court, makes it clear that in many cases the employer is aware at the time of the contract that bad faith discharge will create great mental and emotional distress. In such cases, the application of existing precedent could serve to provide some redress for that injury.
II.
The majority’s discussion of the cause of action for wrongful discharge transposes the positions of plaintiffs and defendants, asserting, incorrectly,
I maintain that we should retain the well-recognized tort cause of action for bad faith discharge. To demonstrate the point, I propose to show (1) that a tort cause of action for bad faith discharge is an established feature of California common law, (2) that the analogy between the insurance cases, in which a tort cause of action has long been recognized, justifies tort recovery for bad faith discharge; (3) that the existance of a cause of action in contract for discharge in breach of contract does not exclude a tort action for bad faith; and (4) that it is fundamentally illogical to abolish a tort cause of action on the ground that radical change in existing remedies should be left to legislative action.
1. A tort remedy for bad faith discharge is well established in California law.
Prior to Tameny v. Atlantic Richfield Co. (1980)
That issue was first decided in Cleary v. American Airlines (1980)
The next case, Crosier v. United Parcel Service, Inc. (1983)
In Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984)
Shortly after Seaman’s was filed, the court in Rulon-Miller v. International Business Machines Corp. (1984)
The next two cases, Wallis v. Superior Court (1984)
Khanna v. Microdata Crop. (1985)
The other leading case, Koehrer v. Superior Court (1986)
Finally, the Court of Appeal in the present case adopted the most limited view of that cause of action of any of the California decisions. It claimed that to state a tort cause of action, the plaintiff must allege facts comparable to those in Cleary—18 years longevity, and the employer’s violation of specific employment guidelines. But, for cases within those facts, the Court of Appeal would permit a tort action.
In sum, there are eight unanimous Court of Appeal decisions permitting a tort action for bad faith discharge, plus dictum approving such an action
Many commentators have written summaries or analyses of California law in this area. (See Cal. Wrongful Employment Termination Practice (Cont.Ed.Bar 1987) § 2.42; Kornblum et al., Cal.Practice Guide: Bad Faith (1986) § 12.13; McCarthy, Punitive Damages in Wrongful Discharge Cases (1985) § 2.2; Brandon, From Tameny to Foley. Time for Constitutional Limitations on California’s Employment at Will Doctrine (1988) 15 Hastings Const. L.Q. 359, 371-372 (hereafter Brandon); Brody, Wrongful Termination as Labor Law (1988) 17 Sw. U.L. Rev. 434, 442.) All recent writings consider the existence of a tort cause of action for bad faith discharge an established part of the California common law.
Such unanimous agreement among justices and commentators generates reliance.
The majority do not deny the existence of prior precedent, or the consequent reliance thereon, but point out that there has been no decision by this court declaring a cause of action for bad faith discharge. They assert that “[i]f we were to follow the dissent’s urging that we should therefore leave this area of law untouched, we would be abdicating our role.” (Ante, p. 689,
2. Analogy to the cases upholding a tort cause of action for bad faith breach of a contract of insurance justifies a tort action for bad faith discharge of an employee.
The majority deride the prior cases for their uncritical incorporation of the insurance model into the employment context without considering the significant differences between the insurer-insured and employer-employee relationships. (Ante, p. 689.) But when we consider the differences noted by the majority, we find that they are not significant at all.
The majority find one fundamental difference between insurance and employment relationships: “[i]f an insurer pays a claim, it diminishes its fiscal resources . . . [while] as a general rule it is to the employer’s economic benefit to retain good employees.” (Ante, at p. 693.) But their comparison is not between insurers and employers, but between short-sighted insurers and far-sighted employers. In the short run, the insurer saves money by not paying claims, and the employer by not paying wages. (If the work cannot be deferred, he can hire less experienced but cheaper help.) In the long run, an insurer that never paid claims would be out of business, and an employer that always fired experienced help would not be much better off. Thus if we examine insurers and employers with the same lens, the difference the majority find fundamental simply disappears.
But the majority’s analysis leaves a lingering trace, for it betrays their misunderstanding of the problem. We need not be concerned about insurers that never pay claims or employers that fire all experienced help—the marketplace will take care of them. The concern is with the insurer or employer that acts arbitrarily some of the time—and can get away with it unless threatened with damages that, unlike traditional contract damages, exceed the short-term profit.
It is next suggested that the employer, unlike the insurer, is not performing a “public service.” I fail to understand the significance of the statement. Employment is even more important to the community than insurance; most people value their jobs more than their insurance policies. The public interest in deterring arbitrary breach of employment contracts is, I suggest, at least equal to that in deterring arbitrary breach of insurance contracts.
Finally, the majority reject the idea that an employee is like an insured because both contract for financial security. A business, they point out, may also seek financial security. They put the case of a business contracting to secure a reliable source of supply. But what emerges from the majority’s analysis is three propositions: a) that insureds generally buy insurance policies for financial security; (b) that employees generally seek financial security in their employment; (c) that businesses occasionally contract for financial security. These propositions should lead the majority to conclude that the employment contract is more analogous to an insurance contract than to a commercial contract.
The majority are focusing upon the exceptions, not upon the general rule. If we must argue analogies, the question is not whether the employment contract diifers from an insurance contract in one particular respect, or resembles a commercial contract in another. It is whether, as a whole, the
Because workers value their jobs as more than merely a source of money, contract damages, if limited to loss of income, are inadequate. (See K Mart Corp. v. Ponsock, supra,
In contrast, commercial contracts, generally speaking, are negotiated between parties of more nearly equal bargaining strength, and are entered
3. The existence of a contract action for discharge in breach of contract does not exclude a tort action for bad faith.
The majority also assert that the prior cases have not carefully considered the fundamental policies underlying the development of tort and contract law. (Ante, at p. 689.) Their argument, in essence, is that the covenant of good faith and fair dealing is simply one provision in the contract. When the employer acts in “bad faith,” they argue, he breaches the contract, and the appropriate remedy is an action for damages recoverable for breach of contract.
There are several objections to this reasoning. First, as pointed out by Justice Kaufman, the covenant is a duty imposed by law, not one arising from the terms of the contract. (Cone. & dis. opn. of Kaufman, J., ante, at p. 716).) Second, the majority’s reasoning was previously advanced in opposition to tort recovery in the insurance cases, and has there been rejected by this court. Finally, the majority mistake the distinction between a contract action for wrongful discharge and a tort action for bad faith discharge.
A suit in contract for wrongful discharge is not based directly upon the covenant of good faith and fair dealing, but upon some other provision limiting the right of the employer to discharge at will.
A tort action for bad faith discharge also requires that the discharge be wrongful—that is, in breach of contract. But once that prerequisite is sa
The majority attack a tort remedy because it is different than a contract remedy, as if tort law itself served no purpose. They argue, for example, that abolition of a tort remedy for bad faith discharge will enhance predictability of damages.
The majority then argue that it would be difficult if not impossible to formulate a rule to confine tort relief to “deserving” cases, apparently because the concept of “good faith” is subjective.
The majority particularly attack Koehrer v. Superior Court, supra,
4. It is fundamentally illogical for the majority to abolish an established tort remedy for bad faith discharge and then to argue that radical change in existing remedies is best left to the Legislature.
The majority in their concluding words recognize the need to provide wrongfully discharged workers with an adequate remedy. They also observe that traditional contract remedies may be inadequate. They assert, however,
But the majority do not clarify existing law. They repudiate it. They reject the guidance of the only cases by this court to discuss tort actions for wrongful discharge. They reverse the Court of Appeal decision in this case. They overrule seven other unanimous Court of Appeal decisions—every Court of Appeal decision to decide that issue.
Only after completely rewriting California law on the subject do the majority leave the matter to the Legislature. But two things have changed. First, the Legislature will face a problem—the inadequacy of damages in actions for bad faith discharge—which did not exist before. Second, the burden of seeking legislative change, which was previously on employers and insurers, two well-organized and financed groups, is now on the unorganized worker.
In fact, the Legislature has already considered this matter. In the 1985-1986 legislative session Senator Greene and Assemblyman McAllister both introduced bills which would have abolished a tort remedy for bad faith discharge, and provided for arbitration of contract claims. (See Sen. Bill No. 1348 and Assem. Bill No. 2800, summarized in Brandon, op. cit. supra, 15 Hastings Const. L.Q. 359, 373-374.) Neither bill was enacted. One cannot infer too much from the Legislature’s failure to enact a bill, but it seems safe to say that the Legislature was not contemplating abolishing a tort remedy without a suitable replacement.
The majority’s action in abolishing the tort remedy for bad faith discharge comes soon after its decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies, supra,
I have considerable respect for the doctrine of judicial restraint, but that doctrine must run both ways. Judicial restraint should not only restrain the court from creating new remedies, it should also restrain the court from dismantling existing ones.
Application of these precedents will not solve all the problems the majority create. There will be cases in which the probability of emotional distress is not present at the time of contracting, but becomes apparent only later, after the employee has put in years on the job and come to rely on it for his economic security. Most of the cases cited seem to limit recovery to damages foreseeable at the time of the contract. (But see Civ. Code, § 3300 [the measure of damages for breach of contract “is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom”]; Overstreet v. Merritt (1921)
Chief Justice Bird, in her concurring and dissenting opinion, wrote that tort remedies should have a broader scope in insurance and employment cases. She observed that “breach of an employment contract by the employer can, in some situations, cause severe harm to an employee’s reputation and ability to find new employment. The harm caused cannot be undone by an award of backpay. Thus, employees may be entitled to expect that their contracts will not be breached for frivolous or improper reasons.” (Seaman's, supra,
The majority do not decide whether their decision abolishing the tort cause of action for bad faith discharge is retroactive. A pattern of reliance similar to that present here led this court to make its decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988)
This court has granted review in 14 cases pending the decision of the present case. Most of those cases involve, among other issues, the question of a tort remedy for bad faith discharge, and in all such cases the Court of Appeal unanimously upheld the existence of a tort remedy.
Consider, for example, the case of K Mart Corp. v. Ponsock (1987)
Traditional contract damages would not compensate Ponsock for the loss incurred on the sale of a home, or for emotional suffering. In addition, such damages would do nothing to deter further arbitrary actions. The employer would be required to compensate Ponsock for the difference between his prior wage and his present wage, but since Ponsock could be replaced by a lower wage worker whose pension would not vest for many years, the employer might profit from his wrong.
A second significant similarity is that both insurance contracts and employment contracts arise from a context of disparity of bargaining power. Numerous cases have noted this disparity in insurance cases; it has led to the adoption of a general rule that insurance contracts are construed against the insurer. There are fewer cases in the employment context, but here the principle is embodied in a statutory finding that “the individual unorganized worker is helpless to exercise actual liberty of contract and to protect his freedom of labor, and thereby to obtain acceptable terms and conditions of employment.” (Lab. Code, § 923.)
All contracts, including contracts for employment at will, include a covenant of good faith and fair dealing, but the arbitrary discharge of an employee at will is not a breach of contract. (See discussion in maj. opn., ante, at p. 698, fn. 39.)
The importance of predictability of damages, as the majority note (see ante, p. 683, fn. 25), is that it facilitates economically efficient breach. A party who can calculate damages can determine whether he can profit by breaching his contract, accepting liability in return for the benefits of breach. This attitude may be appropriate in a commercial context. It should not be condoned in the employer-employee relationship, where breach may cause injury beyond that of mere loss of income, injury which cannot easily be mitigated. It is difficult to summon sympathy for the employer who needs predictability of damages so he can calculate whether he will profit by firing his employee in breach of the employment contract.
Of course, tort law is rife with subjective elements—“malice,” “willful misconduct,” “reckless disregard,” and, in insurance cases, “bad faith.”
Some cases and writers have suggested that the courts should also consider whether the employer acted reasonably. Since the majority abolish the entire cause of action, it is pointless now to decide that question. I would note only that the concept of reasonableness, like that of bad faith, is one familiar to tort law, and not generally considered so unpredictable or subjective as to justify denial of relief for injuries suflered.
The majority’s fear that plaintiffs will plead bad faith when they have no basis for that pleading seems exaggerated. I see no more reason to fear false pleading in this context than in any other cause of action. In any case, the majority’s decision will not limit initiation and prosecution of litigation since plaintiffs will retain a contractual remedy. At best, it prevents plaintiffs from including false and groundless tort claims in their complaint, but does so only by also preventing them from including true and meritorious claims.
Many of the commentators the majority cite to support their assertion that a tort remedy for bad faith discharge could have economic drawbacks are inapposite. A number of the articles deal solely with commercial contracts, and do not discuss a tort remedy for employees. (See Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F. L.Rev. 187; Putz & Klippen, Commercial Bad Faith: Attorney Fees—Not Tort Liability—is the Remedy for Stonewalling, supra, 21 U.S.F. L.Rev. 419; Traynor, op. cit. supra, 8 Bus. L. News 1; Comment, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort, supra, 73 Cal.L.Rev. 1291.) Others are primarily concerned with the rights of at-will employees, but the tort remedy for bad faith breach applies almost exclusively to cases involving employees with contractual protection against arbitrary discharge. (E.g., Gould, The Idea of the Job as Property in Contemporary America: The Legal and Collective Bargaining Framework, supra, B.Y.U. L. Rev. 885, 905.)
Most important, most of the commentators recognize the problem of inadequacy of contract damages and, if they do not support a tort remedy, support some alternative. I doubt that any would support the majority’s act of abolishing tort damages without providing an alternative.
The majority are not entirely consistent on this point, for they appear to leave open the possibility that the courts, without legislative action, could expand the measure of damages recoverable for discharge in breach of contract. I find it difficult to see why a common law court has greater ability to change the measure of damages in contract than to create a cause of action in tort.
But the practical problem with the majority’s suggestion is that while they abolish the cause of action in tort, they only suggest the possibility of expanded contract damages. This is to trade a bird in the hand for the hope there will be one in the bush next year. Employees lose an adequate remedy, and may or may not get a replacement sometime.
The majority disapprove Cleary v. American Airlines, Inc., supra,
The majority refer to decisions of other jurisdictions, but present a misleading count. Five decisions of other jurisdictions uphold a tort cause of action (Huber v. Standard Ins. Co., supra,
If we count all cases, including California decisions and those based on California law, the current count is 13 cases upholding a tort cause of action and 3 rejecting it. This figure does not include the 10 or so additional cases upholding the cause of action depublished by the grant of review by this court and held pending the present decision.
For the proposed legislation relating to wrongful discharge, see ante, page 714; for proposed legislation concerning insurance bad faith, see Moradi-Shalal v. Fireman’s Fund Ins. Companies, supra,
Concurrence Opinion
—Iconcur in parts I and II of the majority opinion. However, I respectfully dissent from part III dealing with breach of the implied duty of good faith and fair dealing. Contrary to the majority, I would hold that such a breach in the context of employment termination may give rise to tort remedies. The reasons which impel me to this conclusion are set forth below.
Breach of the Implied Duty of Good Faith and Fair Dealing
Thirty years ago, in Comunale v. Traders & General Ins. Co. (1958)
Because tort actions enforce “duties of conduct. . . imposed by law, and are based primarily upon social policy, and not necessarily upon the will or intention of the parties . . . .” (Tameny v. Atlantic Richfield Co., supra,
In the classic tradition of the common law, which adapts functional principles from precedent as changing social and economic conditions require, a number of courts and commentators have distilled from our holdings in the insurance context a relatively narrow but serviceable “bad faith” doctrine for application in other areas: Breach of the duty of good faith and fair dealing may give rise to an action in tort where the contractual relation manifests elements similar to those which characterize the “special relationship” between insurer and insured, i.e., elements of public interest, adhesion, and financial dependency. (Wallis v. Superior Court (1984)
Captured by the force of such reasoning, and fueled by dicta in Tameny and Seaman's suggesting that the employment relationship uniquely satisfies these several criteria (Tameny v. Atlantic Richfield Co., supra,
The majority is not unmindful of these numerous authorities which have concluded that the criteria which make the relationship between insurer
First, the majority asserts that a breach in the employment context “does not place the employee in the same economic dilemma that an insured faces” because the insured “cannot turn to the marketplace,” while an employee presumably may “seek alternative employment.” (Maj. opn. at p. 692.) Next, the majority argues that an employer, unlike an insurance company, does not sell economic “protection.” (Maj. opn. at p. 692.) The majority also rejects the insurance analogy because an employee, unlike an insured, allegedly does not seek a “different kind of financial security than those entering a typical commercial contract.” (Maj. opn. at p. 692.) Finally, the majority asserts that insurance and employment contracts differ “fundamentally]” because the insured’s and insurer’s interests are “financially at odds,” while the employer’s and employee’s interests allegedly are “most frequently in alignment.” (Maj. opn. at p. 693.)
Such conclusions, in my view, expose an unrealistic if not mythical conception of the employment relationship. They also reveal a misplaced reluctance to define the minimal standards of decency required to govern that relationship. The delineation of such standards is not, as the majority strongly implies, judicial legislation, but rather constitutes this court’s fundamental obligation.
It is, at best, naive to believe that the availability of the “marketplace,” or that a supposed “alignment of interests,” renders the employment relationship less special or less subject to abuse than the relationship between insurer and insured. Indeed, I can think of no relationship in which one party, the employee, places more reliance upon the other, is more dependent upon the other, or is more vulnerable to abuse by the other, than the relationship between employer and employee. And, ironically, the relative imbalance of economic power between employer and employee tends to increase rather than diminish the longer that relationship continues. Whatever bargaining strength and marketability the employee may have at the moment of hiring, diminishes rapidly thereafter. Marketplace? What market is there for the factory worker laid off after 25 years of labor in the same plant, or for the middle-aged executive fired after 25 years with the same firm?
Peace of mind? One’s work obviously involves more than just earning a living. It defines for many people their identity, their sense of self-worth, their sense of belonging. The wrongful and malicious destruction of one’s employment is far more certain to result in serious emotional distress than any wrongful denial of an insurance claim.
If everything this court has written concerning the relation between insurer and insured has any deeper meaning; if we have created a living principle based upon justice, reason and common sense and not merely a fixed, narrow and idiosyncratic rule of law, then we must acknowledge the irresistible logic and equity of extending that principle to the employment relationship. We can reasonably do no less.
Beyond, and perhaps underlying, its rejection of the special relationship analogy, the majority makes two additional arguments. The extension of tort remedies to the employment relation, the majority asserts, is a matter best left to the Legislature, for the decision involves “policy” choices which may “profoundly” affect social and commercial relations. (Maj. opn. at p. 694.) Additionally, the majority asserts that “bad faith” is a tort impervious to practical “delineation.” (Maj. opn. at p. 698.) Thus, the majority raises the familiar “floodgate-of-litigation” specter to warn of “potentially enormous consequences for the stability of the business community.” (Maj. opn. at p. 699.) These sorts of arguments have not fared particularly well with this court in the past, and this case presents no occasion for exception.
As to the contention that a recognition of tort remedies for breach of the duty of good faith and fair dealing is best left to the Legislature, the short answer was aptly summarized in People v. Pierce (1964)
“ ‘The inherent capacity of the common law for growth and change is its most significant feature. Its development has been determined by the social needs of the community which it serves. It is constantly expanding and developing in keeping with advancing civilization and the new conditions and progress of society ....”’ (Rodriguez v. Bethlehem Steel Corp. (1974)
“This flexibility and capacity for growth and adaptation is the peculiar boast and excellence of the common law.” (Hurtado v. California (1884)
“But that vitality can flourish only so long as the courts remain alert to their obligation and opportunity to change the common law when reason and equity demand it... . Although the Legislature may of course speak to the subject, in the common law system the primary instruments of evolution are the courts, adjudicating on a regular basis the rich variety of individual cases brought before them.” (Rodriguez v. Bethlehem Steel Corp., supra,
This court has adhered to these principles over the years, consistently rejecting claims that the reconsideration, expansion or abolition of settled common law rules should await action by the Legislature. In Muskopf v. Corning Hospital Dist. (1961)
Over the express objection that fundamental tort reform should be left to the Legislature, we judicially abandoned the long-standing distinctions among business invitees, social guests and trespassers in determining the standard of liability for dangerous conditions on land (Rowland v. Christian (1968)
Every one of these landmark decisions required a difficult choice among competing social and economic policies. It is hardly novel or surprising, therefore, to be confronted with conflicting arguments over the relative economic efficiency or political wisdom of allowing tort remedies for wrongful and malicious employment termination, or to find that competing policies have been advanced and adopted elsewhere. What is both novel and distressing is to find such arguments being cited by the majority as a justification for judicial abstention. The imposition of a tort duty is not contingent upon a consensus of so-called experts. The courts are the custodians of the common law—not the economists, or the legislators, or even the law professors. We abdicate that duty when we abjure decision of common law questions under the guise of “deference” to the political branches.
The second contention of the majority, that bad faith liability cannot adequately be delimited and therefore must be denied, has also been generally rejected by this court. As we explained in Dillon v. Legg (1968)
Contrary to the implication of the majority, the standard set forth in Koehrer v. Superior Court, supra,
As the majority candidly states, its concern is not so much with the workability of the foregoing standard as the fact that “any firing . . . could provide the basis for a pleading alleging the discharge was in bad faith under the cited standards.” (Maj. opn. at p. 699.) (Italics added.) In other words, such claims should be denied because otherwise courts would experience a “flood of litigation.” The floodgate argument is no more plausible now, however, than it was in Klein v. Klein, supra,
The majority’s views of the bad faith issue reflect one overriding concern—that of judicial overreaching. It is a familiar concern.
The power of the courts as both guardian and expositor of the common law is considerable. To be effective, such power must be exercised with restraint. Judge-made law must progress incrementally, “interstitially” as Justice Holmes said, filling the legislative gaps, neither too far ahead of nor too far behind the body politic.
Still, Justice Cardozo believed, as his landmark common law decisions attest, that the “fissures in the common law are wider than the fissures in a statute . . . .” (Cardozo, The Nature of the Judicial Process (1921) p. 71.) His point, it appears, is that within the framework of the traditional common law responsibilities of the judiciary, the courts may respond to changing social needs without deference to legislative action. As Professor Corbin said: “It is the function of our courts to keep the doctrines up to date with the mores by continual restatement and by giving them a continually new content. This is judicial legislation, and the judge legislates at his peril. Nevertheless, it is the necessity and duty of such legislation that gives to judicial office its highest honor; and no brave and honest judge shirks the duty or fears the peril.” (Corbin, The Offer of an Act for a Promise (1920) 29 Yale L.J. 767, 771-772, italics added.)
The majority’s implicit fears of judicial activism are unfounded. We overstep no institutional bounds or constitutional constraints in recognizing that a willful and malicious termination of employment is so offensive to community values that it may give rise to tort remedies. On the contrary, such a holding would be entirely consistent with our judicial function, and with the great common law tradition of this court.
As the commentators have noted, the very term “implied covenant” is misleading, since it “evokes the notion of contract, and therefore the term ‘duty’ might be more appropriate for treating the violation of good faith and fair dealing as a tort.” (Note, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort (1985) 73 Cal.L.Rev. 1291, 1307, fn. 76.) The Restatement Second of Contracts, section 205, has adopted the language of duty: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.”
In rejecting the doctrine of sovereign inmunity, we relied in part on earlier decisions in which we had abolished the doctrine of tort immunity of charitable institutions (Malloy v. Fong (1951)
Dissenting Opinion
I dissent.
I am in agreement with the opinions of Justices Broussard and Kaufman with one significant exception: I am unwilling to accept their concurrence in part I of the majority opinion.
When an employee learns that one in a supervisorial position is an embezzler, he has the choice of two immediate courses of action. He can remain silent and thus avoid the enmity of the embezzler and embarrassment to the employer. That apparently is the approach preferred by my colleagues in order to assure the employee’s retention of his job. Or, as a dutiful employee concerned with the image of his company, he can report
My colleagues insist that reporting the presence of an embezzler to an employer is solely to the benefit of the employer. While undoubtedly it is to the employer’s benefit, it is not exclusively so. It is my opinion that such action—i.e., advising a state-created corporation of the employ in a supervisorial position of a person chargeable with a potential felony—is in the best interests of society as a whole, and therefore covered by the public policy rule.
Under Labor Code section 1102.5, subdivision (b), an employer is prohibited from retaliating against an employee for disclosing information to a law enforcement agency when there is reasonable cause to believe a violation of state or federal laws has been committed. It seems incongruous to permit retaliation and discharge when the employee chooses to go directly to his employer with the information, rather than to circumvent the employer, go behind his back and directly to a public agency. In either event, it seems clear to me that the law and public policy are implicated.
With that one exception, I agree with the persuasive opinions of Justices Broussard and Kaufman.