DANIEL D. FOLEY, Plaintiff and Appellant, v. INTERACTIVE DATA CORPORATION, Defendant and Respondent.
L.A. No. 32148
Supreme Court of California
Dec. 29, 1988
47 Cal. 3d 654 | 254 Cal. Rptr. 211 | 765 P.2d 373
Gilbert & Sackman, Gilbert, Cooke & Sackman, Steven J. Kaplan and Robert W. Gilbert for Plaintiff and Appellant.
Proskauer, Rose, Goetz & Mendelsohn, Robert V. Kuenzel, Steven G. Drapkin, Jeffrey A. Berman and Harold M. Brody for Defendant and Respondent.
Latham & Watkins, Josel E. Krischer, Deanna P. George, Michael J. Breining, Paul, Hastings, Janofsky & Walker, Paul Grossman, Paul W. Crane, Jr., Mary Craig Calkins and Michele M. Dosoer as Amici Curiae on behalf of Defendant and Respondent.
OPINION
LUCAS, C. J.—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) 27 Cal.3d 167 [164 Cal.Rptr. 839, 610 P.2d 1330, 9 A.L.R.4th 314]), (2) a contract cause of action for breach of an implied-in-fact promise to discharge for good cause only (e.g., Pugh v. See‘s Candies, Inc. (1981) 116 Cal.App.3d 311 [171 Cal.Rptr. 917] [all references are to this case rather than the 1988 posttrial decision appearing at 203 Cal.App.3d 743]), and (3) a cause of action alleging a tortious breach of the implied covenant of good faith and fair dealing (e.g., Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443 [168 Cal.Rptr. 722]). The trial court sustained a demurrer without leave to amend, and entered judgment for defendant.
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, 27 Cal.3d 167, 170; Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496 [86 Cal.Rptr. 88, 468 P.2d 216].)
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.1 Plaintiff reported what he knew about Kuhne to Earnest, because he was “worried about working for Kuhne and having him in a supervisory position . . . , in view of Kuhne‘s suspected criminal conduct.” Plaintiff asserted he “made this disclosure in the interest and for the benefit of his employer,” allegedly because he believed that because defendant and its parent do business with the financial community on a confidential basis, the company would have a legitimate interest in knowing about a high executive‘s alleged prior criminal conduct.
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.2
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.
Petermann v. International Brotherhood of Teamsters (1959) 174 Cal.App.2d 184 [344 P.2d 25], first stated the foregoing principle. There,
Similarly, Tameny v. Atlantic Richfield Co., supra, 27 Cal.3d 167, 178, declared that a tort action for wrongful discharge may lie if the employer “condition[s] employment upon required participation in unlawful conduct by the employee.” In Tameny, the plaintiff alleged he was fired for refusing to engage in price fixing in violation of the Cartwright Act and the Sherman Antitrust Act. (Id., at p. 170.) We held the trial court erred in sustaining Atlantic Richfield‘s demurrer to plaintiff‘s tort action for wrongful discharge. Writing for the majority, Justice Tobriner concluded that “an employer‘s authority over its employee does not include the right to demand that the employee commit a criminal act to further its interests. . . . An employer engaging in such conduct violates a basic duty imposed by law upon all employers, and thus an employee who has suffered damages as a result of such discharge may maintain a tort action for wrongful discharge against the employer.” (Id., at p. 178.)
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.” (27 Cal.3d at p. 176.) We noted also that the existence of a contractual relationship would not bar an injured party from seeking relief
Summarizing this authority, the Court of Appeal in Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155 [226 Cal.Rptr. 820], stated at page 1166: “As Tameny explained, the theoretical reason for labeling the discharge wrongful in such cases is not based on the terms and conditions of the contract, but rather arises out of a duty implied in law on the part of the employer to conduct its affairs in compliance with public policy . . . [T]here is no logical basis to distinguish in cases of wrongful termination for reasons violative of fundamental principles of public policy between situations in which the employee is an at-will employee and [those] in which the employee has a contract for a specified term. . . . The tort is independent of the term of employment.”7
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) 113 Wis.2d 561 [335 N.W.2d 834, 840-841].)
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.” (27 Cal.3d at p. 174, fn. omitted.) The public policy to which we looked thus was one about which reasonable persons can have little disagreement, and which was “firmly established” at the time of discharge.8
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.’ ” (27 Cal.3d at p. 172.) Several subsequent Court of Appeal cases have limited our holding to policies derived from statute. (See Shapiro v. Wells Fargo Realty Advisors (1984) 152 Cal.App.3d 467, 477 [199 Cal.Rptr. 613]; Gray v. Superior Court (1986) 181 Cal.App.3d 813, 819 [226 Cal.Rptr. 570]; Tyco Industries, Inc. v. Superior Court (1985) 164 Cal.App.3d 148, 159 [211 Cal.Rptr. 540].) The Court of Appeal in the present case asserted, “[t]o successfully plead a cause of action under the [Tameny] theory, plaintiff must allege that he was terminated in retaliation for asserting his statutory rights, or for his refusal
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, 181 Cal.App.3d 1155, 1165, 1167; Garcia v. Rockwell Internat. Corp. (1986) 187 Cal.App.3d 1556, 1561 [232 Cal.Rptr. 490]; Dabbs v. Cardiopulmonary Management Services (1987) 188 Cal.App.3d 1437, 1443-1444 [234 Cal.Rptr. 129].)
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) 259 Cal.App.2d 619, 629 [66 Cal.Rptr. 747]; Jolton v. Minster Graf & Co. (1942) 53 Cal.App.2d 516, 522 [128 P.2d 101].) Thus, plaintiff asserts, if he discovered information that might lead his employer to conclude that an employee was an embezzler, and should not be retained, plaintiff had a duty to communicate that information to his principal.9
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.11 Past decisions recognizing a tort action for discharge in violation of public policy seek to protect the public, by protecting the employee who refuses to commit a crime (Tameny, supra, 27 Cal.3d 167; Petermann, supra, 174 Cal.App.2d 184), who reports criminal activity to proper authorities (Garibaldi v. Lucky Food Stores, Inc. (9th Cir. 1984) 726 F.2d 1367, 1374; Palmateer v. International Harvester Co., supra, 421 N.E.2d 876, 879-880), or who discloses other illegal, unethical, or unsafe practices (Hentzel v. Singer Co. (1982) 138 Cal.App.3d 290 [188 Cal.Rptr. 159, 35 A.L.R.4th 1015] [working conditions hazardous to employees]). No equivalent public interest bars the discharge of the present plaintiff.12 When
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
Relying exclusively on its own decision in Newfield v. Insurance Co. of the West (1984) 156 Cal.App.3d 440 [203 Cal.Rptr. 9], the Court of Appeal here nevertheless held that plaintiff‘s alleged employment contract, if modified to include a promise to discharge him for cause only, is barred by the statute of frauds. Neither Newfield nor the opinion below distinguishes, or even cites, the rule in White Lighting, supra, 68 Cal.2d 336. The rationale of both opinions is summed up in the following passage from Newfield: “[A]llegedly only [employee] had the right to terminate the contract. . . . Equality or justice between the parties would no longer exist in this alleged kind of oral contract.14 [¶] Appellant cannot have it both ways. Either his employment relationship was a contract in which both parties had equal rights to terminate at will (in which case it was not in violation of the statute of frauds), or it was a contract where the employer did not have the right to terminate at will, and there was a reasonable expectation of employment for more than one year (in which case the statute of frauds does apply, barring this action).” (156 Cal.App.3d at p. 446.)15
Newfield is irreconcilable with the rule in White Lighting.16 Even if the original oral agreement had expressly promised plaintiff “permanent”
Our courts have consistently held that such contracts are not within the statute of frauds. (See, e.g., Plumlee v. Poag (1984) 150 Cal.App.3d 541 [198 Cal.Rptr. 66]; Bondi v. Jewels by Edwar, Ltd. (1968) 267 Cal.App.2d 672 [73 Cal.Rptr. 494]; Wescoatt v. Meeker (1944) 63 Cal.App.2d 618 [147 P.2d 41]; Lloyd v. Kleefisch (1941) 48 Cal.App.2d 408 [120 P.2d 97].) Decisions from other states uniformly hold that a good-cause termination clause does not render an employment agreement unenforceable under the statute of frauds. (E.g., Weiner v. McGraw-Hill, Inc. (1982) 57 N.Y.2d 458 [457 N.Y.S.2d 193, 443 N.E.2d 441, 33 A.L.R.4th 1101]; Toussaint v. Blue Cross & Blue Shield of Mich. (1980) 408 Mich. 579 [292 N.W.2d 880]; Hardison v. A.H. Belo Corp. (Tex.Civ.App. 1952) 247 S.W.2d 167.) These authorities support the general rule that if a condition terminating a contract may occur within one year of its making, then the contract is performable within a year and does not fall within the scope of the statute of frauds. This is true even though performance of the contract may extend for longer than one year if the condition does not occur. (See generally, 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 282, p. 274.)
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) 91 Mich.App. 254 [283 N.W.2d 713]); (2) retired, died or voluntarily left employment (see, e.g., Martin v. Federal Life Ins. Co. (1982) 109 Ill.App.3d 596 [440 N.E.2d 998]); or (3) been terminated if declining profitability compelled a general layoff or cessation of business altogether (see, e.g., Stauter v. Walnut Grove Products (Iowa 1971) 188 N.W.2d 305). “Interpreting the allegations of the complaint liberally, as we must, we cannot say as a matter of law that the contract . . . could not be
performed within a year.” (Plumlee v. Poag, supra, 150 Cal.App.3d 541, 549.)
Defendant attacks these precedents as performing “legalistic gymnastics,” and calls instead for enforcement of
The decision in White Lighting, supra, 68 Cal.2d 336, follows a long line of precedent. In 1897, the Supreme Judicial Court of Massachusetts rejected an employer‘s contention that the statute of frauds invalidated an oral agreement for “permanent employment” so long as the plaintiff, an enameler, performed his work satisfactorily. The majority, including Chief Justice Field and Justice Holmes, rejected the employer‘s defense. “It has been repeatedly held that, if an agreement whose performance would otherwise extend beyond a year may be completely performed within a year on the happening of some contingency, it is not within the statute of frauds. [Citations.] In this case, we say nothing of other contingencies. The contract would have been completely performed if the defendant had ceased to carry on business within a year.” (Carnig v. Carr (1897) 167 Mass. 544 [46 N.E. 117, 118].)
The Legislature, which in 1872 enacted
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.19
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.20
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. (116 Cal.App.3d at p. 315.) When hired, he had been assured that “if you are loyal . . . and do a good job, your future is secure.” (Id., at p. 317.) During his long employment, the plaintiff received numerous commendations and promotions, and no significant criticism of his work. Throughout this period the company maintained a practice of not terminating administrative personnel without good cause. On this evidence, the Court of Appeal concluded that the jury could determine the existence of an implied promise that the employer would not arbitrarily terminate the plaintiff‘s employment. (Id., at p. 329.)
Pugh has been followed in numerous decisions in this state. (See, e.g., Steward v. Mercy Hospital, supra, 188 Cal.App.3d 1290, 1296; Robinson v. Hewlett-Packard Corp. (1986) 183 Cal.App.3d 1108, 1123 [228 Cal.Rptr. 591]; Hentzel v. Singer Co., supra, 138 Cal.App.3d 290, 304; Walker v. Northern San Diego County Hospital Dist. (1982) 135 Cal.App.3d 896, 904-905 [185 Cal.Rptr. 617]; cf. Shapiro v. Wells Fargo Realty Advisors, supra, 152 Cal.App.3d 467, 479-482 [confirming but distinguishing Pugh, supra, 116 Cal.App.3d 311].) A review of other jurisdictions also reveals a strong trend in favor of recognizing implied contract terms that modify the power of an employer to discharge an employee at will. (See, e.g., Hoffman-La Roche, Inc. v. Campbell (Ala. 1987) 512 So.2d 725, 729-733 [implied promise to abide by employee manual guidelines contractually enforceable]; Thompson v. St. Regis Paper Co., supra, 685 P.2d 1081, 1087-1088 [if employer “creates an atmosphere of job security and fair treatment with promises of specific treatment in specific situations and an employee is induced thereby to remain on the job” those promises will be enforced (italics in original)]; Pine River State Bank v. Mettille (Minn. 1983) 333 N.W.2d 622, 626-629; Toussaint v. Blue Cross & Blue Shield of Mich., supra, 292 N.W.2d 880, 892-893 [“contractual obligations can be implicit in employer policies and practices“]; see also Duldulao v. Saint Mary of Nazareth Hosp. (1987) 115 Ill.2d 482 [505 N.E.2d 314, 317] [listing 25 jurisdictions recognizing contractually binding force of employee handbooks]; but see Sabetay v. Sterling Drug, Inc. (1987) 69 N.Y.2d 329 [514 N.Y.S.2d 209, 506 N.E.2d 919, 923] [requiring express agreement to limit employer‘s “unfettered right to terminate at will“].) Thus the rule defendant asks us to disapprove is one that has achieved widespread acceptance in recent years.
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 affecting 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,
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) 14 Cal.2d 762, 774 [97 P.2d 798]; see Marvin v. Marvin (1976) 18 Cal.3d 660, 684 [134 Cal.Rptr. 815, 557 P.2d 106]; Hillsman v. Sutter Community Hospitals (1984) 153 Cal.App.3d 743, 753-756 [200 Cal.Rptr. 605]; Newberger v. Rifkind (1972) 28 Cal.App.3d 1070, 1074 [104 Cal.Rptr. 663, 57 A.L.R.3d 1232]; 1 Witkin, Summary of Cal. Law, Contracts, op cit. supra, § 119, p. 145.) Such implied-in-fact contract terms ordinarily stand
At issue here is whether the foregoing principles apply to contract terms establishing employment security, so that the presumption of
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) 81 Cal. 596, 601-602 [22 P. 1126], we held that language promising “permanent” employment created employment of no particular duration terminable only “for some good reason.”22 Later cases developed the rule that “a contract for permanent employment, for life employment, for so long as the employee chooses, or for other terms indicating permanent employment, is interpreted as a contract for an indefinite period terminable at the will of either party. . . .” (See, e.g., Ruinello v. Murray (1951) 36 Cal.2d 687, 689 [227 P.2d 251]; Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 39 [172 P.2d 867]; Shuler v. Corl (1918) 39 Cal.App. 195, 198 [178 P. 535].) This rule was not a substantive limitation on the parties’ right to contract, but rather a rule of construction that could be overcome by a showing that the employment security term of the contract was supported by consideration other than the services to be rendered or by “other terms indicating a contrary intention.” (Ruinello v. Murray, supra, 36 Cal.2d at p. 690; Drzewiecki v. H & R Block, Inc., supra, 24 Cal.App.3d at p. 704.)
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, 93 Harv. L. Rev. at p. 1825, fns. omitted.) In the intervening decades, however, courts increasingly demonstrated their willingness to examine the entire relationship of the parties to commercial contracts to ascertain their actual intent, and this trend has been reflected in the body of law guiding contract interpretation. (See Goetz & Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms (1985) 73 Cal.L.Rev. 261, 273-276 [“The (Uniform Commercial) Code, now joined by the Second Restatement of Contracts, effectively reverses the common law presumption that the parties’ writing and the official law of contract are the definitive elements of the agreement. Evidence derived from experience and practice can now trigger the incorporation of additional, implied terms“].)
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, 116 Cal.App.3d at p. 327; see Note, Implied Contract Rights to Job Security (1974) 26 Stan. L.Rev. 335, 350-366 [reviewing factors courts have used in implied contract analyses].) Pursuant to
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, 116 Cal.App.3d at page 329, and relied on by plaintiff, are inadequate as a matter of law. This contention fails on several grounds.
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, 181 Cal.App.3d 813, 821; Khanna v. Microdata Corp. (1985) 170 Cal.App.3d 250, 262 [215 Cal.Rptr. 860].) As to establishing the requisite promise, “oblique language will not, standing alone, be sufficient to establish agreement“; instead, the totality of the circumstances determines the nature of the contract. Agreement may be ” ‘shown by the acts and conduct of the parties, interpreted in the light of the subject matter and of the surrounding circumstances.’ ” (Pugh, supra, 116 Cal.App.3d at p. 329.) Plaintiff here alleged repeated oral assurances of job security and consistent promotions, salary increases and bonuses during the term of his employment contributing to his reasonable expectation that he would not be discharged except for good cause.
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, 116 Cal.App.3d 311, is not alone in holding that the trier of fact can infer an agreement to limit the grounds for termination based on the employee‘s reasonable reliance on the company‘s
Finally, unlike the employee in Pugh, supra, 116 Cal.App.3d 311, plaintiff alleges that he supplied the company valuable and separate consideration by signing an agreement whereby he promised not to compete or conceal any computer-related information from defendant for one year after termination. The noncompetition agreement and its attendant “Disclosure and Assignment of Proprietary Information, Inventions, etc.” may be probative evidence that “it is more probable that the parties intended a continuing relationship, with limitations upon the employer‘s dismissal authority [because the] employee has provided some benefit to the employer, or suffers some detriment, beyond the usual rendition of service.” (Pugh, supra, 116 Cal.App.3d at p. 326.)
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
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 Noninsurance 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“].)25 With these concepts in mind, we turn to analyze the role of the implied covenant of good faith and fair dealing and the propriety of the extension of remedies urged by plaintiff.
“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) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883], we stated, “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (See also Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 818.) Thereafter, in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 [58 Cal.Rptr. 13, 426 P.2d 173], for the first time we permitted an insured to recover in tort for emotional damages caused by the insurer‘s breach of the implied covenant. We explained in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575 [108 Cal.Rptr. 480, 510 P.2d 1032], that “[t]he duty [to comport with the implied covenant of good faith and fair dealing] is immanent in the contract whether the company is attending [on the insured‘s behalf] to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.” (Id., at p. 575.)
In Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, we described some of the bases for permitting tort recovery for breach of the implied covenant in the insurance context. “The insured in a contract like the one before us does not seek to obtain a commercial advantage by purchasing the policy—rather, he seeks protection against calamity.” (Id., at p. 819.) Thus, “As one commentary has noted, ‘The insurers’ obligations are . . . rooted
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.” (24 Cal.3d at p. 820.) This emphasis on the “special relationship” of insurer and insured has been echoed in arguments and analysis in subsequent scholarly commentary and cases which urge the availability of tort remedies in the employment context.
The first California appellate case to permit tort recovery in the employment context was Cleary, supra, 111 Cal.App.3d 443. To support its holding that tort as well as contract damages were appropriate to compensate for a breach of the implied covenant, the Cleary court relied on insurance cases (Egan, supra, 24 Cal.3d 809, and Comunale, supra, 50 Cal.2d 654) without engaging in comparative analysis of insurance and employment relationships and without inquiring into whether the insurance cases’ departure from established principles of contract law should generally be subject to expansion.
Similarly, Cleary‘s discussion of two previous California employment cases was insufficient. It found a “hint” in Coats v. General Motors Corp. (1934) 3 Cal.App.2d 340, 348 [39 P.2d 838], to support the proposition that “on occasion, it may be incumbent upon an employer to demonstrate good faith in terminating an employee” (111 Cal.App.3d at p. 453), but failed to acknowledge that in Coats, the employee sought recovery of only contract damages (Coats, supra, 3 Cal.App.2d at pp. 344-345; see also Zimmer v. Wells Management Corp. (S.D.N.Y. 1972) 348 F.Supp. 540 [employment case, also cited in Cleary, which did not involve tort damages]). Next, the Cleary court placed undue reliance on dictum in this court‘s Tameny decision, supra, 27 Cal.3d at page 179, footnote 12, which suggested that tort remedies might be available when an employer breaches the implied covenant of good faith and fair dealing. (111 Cal.App.3d at pp. 454-455.) The qualified Tameny dictum was based exclusively on precedent in insurance
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.26
Dictum in Seaman‘s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752 [206 Cal.Rptr. 354, 686 P.2d 1158] also is not helpful. There, the court focused on a standard commercial contract. We stated, “[w]hile the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established, the proposition advanced by Seaman‘s—that breach of the covenant always gives rise to an action in tort—is not so clear.” (Id., at p. 768.) We also observed that the propriety of a tort action for breach of the implied covenant in the insurance context was based on the “special relationship” of insurer and insured, and continued, “No doubt there are other relationships with similar characteristics and deserving of similar legal treatment.” (Id., at pp. 768-769.) In a footnote to the last statement, we referred to Tameny, observing that there “this court intimated that breach of the covenant of good faith and fair dealing in the employment relationship might give rise to tort remedies. That relationship has some of the same characteristics as the relationship between insurer and
a broad rule for damages recoverable for breach of employment contracts, the court ultimately limited the measure of damages to “the predictable, quantifiable amount of future income which [plaintiff] was entitled to receive as renewal premiums.” (Ibid.) 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) 753 P.2d 1150, 1153-1154 [expressly rejecting tort recovery of punitive damages and limiting awards to contract damages in cases involving breach of the covenant]; Morriss v. Coleman Co., Inc. (1987) 241 Kan. 501 [738 P.2d 841, 849-851] [implied covenant should not apply to at-will employment contracts]; Hillesland v. Federal Land Bank Ass‘n (N.D. 1987) 407 N.W.2d 206, 210-215 [same]; Wagenseller v. Scottsdale Memorial Hosp. (1985) 147 Ariz. 370 [710 P.2d 1025, 1040] [no tort action]; Hunt v. IBM Mid America Employees Federal (Minn. 1986) 384 N.W.2d 853, 858 [no implied covenant read into employment contracts]; Thompson v. St. Regis Paper Co., supra, 685 P.2d 1081, 1086 [same]; Martin v. Federal Life Ins. Co., supra, 440 N.E.2d 998, 1006 [no tort action]). Still others have impliedly denied tort damages by limiting recovery for breach of the implied covenant to benefits earned under the contract. (E.g., Cook v. Alexander and Alexander (1985) 40 Conn. Super. 246 [488 A.2d 1295, 1297], citing Magnan v. Anaconda Industries, Inc. (1984) 193 Conn. 558 [479 A.2d 781]; Maddaloni v. Western Mass. Bus Lines, Inc., supra, 438 N.E.2d 351, 356.) 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 covenant of good faith and fair dealing to employment contracts, or has limited recovery for breaches of the covenant to contract damages.
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, 181 Cal.App.3d 813, 820-821; Rulon-Miller v. International Business Machines Corp., supra, 162 Cal.App.3d at pp. 252-253; Shapiro v. Wells Fargo Realty Advisors, supra, 152 Cal.App.3d at pp. 478-479; Crosier v. United Parcel Service, Inc. (1983) 150 Cal.App.3d 1132, 1137 [198 Cal.Rptr. 361]; cf. Wayte v. Rollins International, Inc. (1985) 169 Cal.App.3d 1, 20 [215 Cal.Rptr. 59].) For example, the Court of Appeal decisions in Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, 1167-1171 and Khanna v. Microdata Corp., supra, 170 Cal.App.3d 250, 260-262, although engaging in some analysis, proceed from certain unexplored assumptions about the role of the covenant of good faith and fair dealing and the circumstances in which tort damages may be found permissible. The Ninth Circuit recently followed the path taken in the Koehrer and Khanna decisions, stating that their approach “is more compelling because it does not treat the implied covenant of good faith and fair dealing in employment contracts as a distinct area of the law.” (Huber v. Standard Ins. Co. (9th Cir. 1988) 841 F.2d 980, 984.) The Huber court, however, did not critically examine the underpinnings of the Court of Appeal decisions.
In Koehrer, supra, 181 Cal.App.3d 1155, the court acknowledged that we found it unnecessary to base our decision in Seaman‘s on the implied covenant of good faith and fair dealing, but nonetheless concluded that we essentially had done so. Despite the fact that we carefully limited our holding in Seaman‘s to instances in which a party “seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists” (36 Cal.3d at p. 769), the Koehrer court expansively concluded that, “If . . . the existence of good cause for discharge is asserted by the employer without probable cause and in bad faith, that is, without a good faith belief that good cause for discharge in fact exists, the employer has tortiously attempted to deprive the employee of the benefits of the agreement, and an action for breach of the implied covenant of good faith and fair dealing will lie.” (181 Cal.App.3d at p. 1171.) Koehrer thus extended the expressly circumscribed cause of action established in
Similarly, in Khanna, supra, 170 Cal.App.3d 250, the court used Tameny and Cleary as its starting point and focused primarily on the appropriate factual grounds on which an action for breach of the covenant could be brought without analyzing the propriety of the remedy itself. The court concluded that the correct inquiry was whether there was sufficient evidence to support a finding that the employer “engaged in bad faith action, extraneous to the contract, with the motive intentionally to frustrate respondent‘s enjoyment of his contract rights.” (Id., at p. 263.) It did not, however, focus on the fact that traditionally such a finding justified only contract damages. Finally, Huber, supra, 841 F.2d at pages 983-985, engaged in no additional exploration of the justification for tort remedies, simply selecting Koehrer and Khanna as presenting the better of two approaches to the necessary elements of the tort described in California cases.
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.28 When a court enforces the implied covenant it is in essence acting to protect “the interest
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, “[j]ust 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) 3 Cal.3d 176, 181-182 [89 Cal.Rptr. 737, 474 P.2d 689, 44 A.L.R.3d 615]]) make reasonable efforts to seek alternative employment. (See Mauk, supra, 21 Idaho L.Rev. 201, 208.) Moreover, the role of the employer differs from that of the “quasi-public” insurance company with whom individuals contract specifically in order to obtain protection from potential specified economic harm. The employer does not similarly “sell” protection to its employees; it is not providing a public service. Nor do we find convincing the idea that the employee is necessarily seeking a different kind of financial security than those entering a typical commercial contract. If a small dealer contracts for goods from a large supplier, and those goods are vital to the small dealer‘s business, a breach by the supplier may have financial significance for individuals employed by the dealer or to the dealer himself. Permitting only contract damages in
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,30 as a general rule it is to the employer‘s economic benefit to retain good employees. The interests of employer and employee are most frequently in alignment. If there is a job to be done, the employer must still pay someone to do it. This is not to say that there may never be a “bad motive” for discharge not otherwise covered by law. Nevertheless, in terms of abstract employment relationships as contrasted with abstract insurance relationships, there is less inherent relevant tension between the interests of employers and employees than exists between that of insurers and insureds. Thus the need to place disincentives on an employer‘s conduct in addition to those already imposed by law simply does not rise to the same level as that created by the conflicting interests at stake in the insurance context. Nor is this to say that the Legislature would have no basis for affording employees additional protections. It is, however, to say that the need to extend the special relationship model in the form of judicially created relief of the kind sought here is less compelling.
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, 710 P.2d 1025, 1040; Gould, The Idea of the Job as Property in Contemporary America: The Legal and Collective Bargaining Framework, 1986 B.Y.U. L. Rev. 885, 898, 908 [hereafter The Idea of the Job]; cf. Sabetay v. Sterling Drug, Inc., supra, 506 N.E.2d at p. 923.) Moreover, as we discuss, the extension of the availability of tort remedies is but one among many solutions posited to remedy the problem of adequately compensating employees for certain forms of “wrongful” termination while balancing the interests of employers in their freedom to make economically based decisions about their work force.31
It cannot be disputed that legislation at both the state and national level has profoundly affected the scope of at-will terminations. As noted, regulation of employment ranging from workers’ compensation laws to antidiscrimination enactments, fair labor standards, minimum compensation, regulation of hours, etc., all have significantly impinged on the laissez-faire underpinnings of the at-will rule. (See, ante, p. 665, fn. 4.) Moreover, unionization of a portion of the domestic workforce has substantial implications for the judicial development of employment termination law because the rights of such workers when terminated are often governed exclusively by the terms of applicable collective bargaining agreements.32 The slate we write on thus is far from clean.
Professor Gould asserts, “[t]he new common law of wrongful discharge has provided employer and employee with the worst of all possible worlds. . . . [E]mployers 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.33 In order to achieve such stability, it is also important that employers not be unduly deprived of discretion to dismiss an employee by the fear that doing so will give rise to potential tort recovery in every case.
The formulation advanced in Koehrer, supra, 181 Cal.App.3d at page 1171 (see ante, p. 688), affords no real restriction on the employee‘s ability to bring an action after termination.36 Nor did the Khanna court‘s approach
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. (
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) 40 Cal.3d 870, 901 [221 Cal.Rptr. 509, 710 P.2d 309], “our experience in Seaman‘s surely tells us that there are real problems in applying the substitute remedy of a tort recovery—with or without punitive damages—outside the insurance area. In other words, I believe that under all the circumstances, the problem is one for the Legislature. . . .”
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.42
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.43
Panelli, J., Arguelles, J., and Eagleson, J., concurred.
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., Traynor, 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 Traynor); 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) 150 Cal. 51, 56 [87 P. 1093].) Since the ordinary commercial contract does not contemplate damages for mental or emotional distress, this rule has led to the maxim that damages for mental suffering are generally not recoverable in an action for breach of contract. (Westwater v. Grace Church (1903) 140 Cal. 339, 342 [73 P. 1055]; Allen v. Jones (1980) 104 Cal.App.3d 207, 211 [163 Cal.Rptr. 445] and cases there cited.) But it has always been clear that this maxim is
In Allen v. Jones, supra, 104 Cal.App.3d 207, for example, defendant funeral home breached a contract to transport the cremated remains of plaintiff‘s brother. Because it was reasonably foreseeable that such breach would cause mental anguish to plaintiff, the court upheld a cause of action for mental distress. (Id. at pp. 214-215.) In Ross v. Forest Lawn Memorial Park (1984) 153 Cal.App.3d 988, 995 [203 Cal.Rptr. 468, 42 A.L.R.4th 1049], the court upheld a claim for mental distress occasioned by breach of a contract to protect a grave from vandalism. In Wynn v. Monterey Club (1980) 111 Cal.App.3d 789, 799-800 [168 Cal.Rptr. 878], plaintiff claimed that defendants’ breach of a contract to bar plaintiff‘s wife from their gaming tables led to the breakup of his marriage; the court found a triable issue of fact whether damages for mental suffering were reasonably foreseeable and within the contemplation of the contracting parties. Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844 [88 Cal.Rptr. 39] upheld recovery for emotional distress when defendant, in breach of a contract of bailment, lost jewelry of great sentimental value.
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.1
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.
- A tort remedy for bad faith discharge is well established in California law.
Prior to Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, California decisions had recognized a tort action for bad faith breach of insurance contracts. (See, e.g., Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 578 [108 Cal.Rptr. 480, 510 P.2d 1032].) In upholding a tort cause of action for wrongful discharge in violation of public policy, Tameny noted an alternative theory—breach of the employer‘s duty of good faith and fair dealing. “[P]ast California cases,” we said, citing the insurance cases, “have held that a breach of this implied-at-law covenant sounds in tort as well as in contract.” (Tameny, supra, 27 Cal.3d 167, 179, fn. 12.) In Tameny, however, we found it unnecessary to decide whether tort recovery would be available under that theory.
That issue was first decided in Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443 [168 Cal.Rptr. 722]. Plaintiff in Cleary pled that the employer, despite a written policy to the contrary, arbitrarily discharged him
The next case, Crosier v. United Parcel Service, Inc. (1983) 150 Cal.App.3d 1132 [198 Cal.Rptr. 361], endorsed Cleary, which it described as based on “present economic realities and the reasonable expectations of the parties” (p. 1137), but concluded that since the company was enforcing a general rule known to the employee, the discharge was not in bad faith. A subsequent case, Shapiro v. Wells Fargo Realty Advisors, (1984) 152 Cal.App.3d 467 [199 Cal.Rptr. 613], similarly applied the reasoning of Cleary, but found plaintiff‘s allegations insufficient to show bad faith.
In Seaman‘s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752 [206 Cal.Rptr. 354, 686 P.2d 1158], we concluded a tort action was available for breach of a commercial contract only when the breaching party denied in bad faith the existence of the contract. (P. 769.) We noted that tort remedies had a broader scope in insurance cases because of the special relationship between insurer and insured, and added that “no doubt there are other relationships with similar characteristics and deserving of similar legal treatment.” (P. 769.) The footnote to that sentence noted that in Tameny v. Atlantic Richfield Co., supra, 27 Cal.3d 167, 179, footnote 12, “this court intimated that breach of the covenant of good faith and fair dealing in the employment relationship might give rise to tort remedies. That relationship has some of the same characteristics as the relationship between insurer and insured.” (36 Cal.3d at p. 769, fn. 6.) Coming after published decisions in Cleary v. American Airlines, Inc., supra, 111 Cal.App.3d 443, Shapiro v. Wells Fargo Realty Advisors, supra, 152 Cal.App.3d 467, and Crosier v. United Parcel Service, Inc., supra, 150 Cal.App.3d 1132, this language signaled the court‘s approval of a tort remedy for bad faith discharge.2
Shortly after Seaman‘s was filed, the court in Rulon-Miller v. International Business Machines Corp. (1984) 162 Cal.App.3d 241 [208 Cal.Rptr. 524], considered whether defendant could fire an employee for “conflict of interest” because she was dating a fellow employee. The case was submitted to the jury under instructions based on Cleary v. American Airlines, Inc.,
The next two cases, Wallis v. Superior Court (1984) 160 Cal.App.3d 1109 [207 Cal.Rptr. 123], and Wayte v. Rollins International, Inc. (1985) 169 Cal.App.3d 1 [215 Cal.Rptr. 59], did not involve discharge. (Wallis concerned bad faith refusal of an employer to pay retirement benefits; Wayte concerned bad faith refusal of an employer acting as an insurer to pay medical benefits.) Both cases, however, affirmed the analogy of the employment relationship to insurance. As stated in Wallis, “the characteristics of the insurance contract which give rise to an action sounding in tort are also present in most employer-employee relationships.” (160 Cal.App.3d 1109, 1116, fn. 2.)
Khanna v. Microdata Corp. (1985) 170 Cal.App.3d 250 [215 Cal.Rptr. 860] is recognized by the majority as one of the two leading cases on bad faith discharge. In that case the employer refused to acknowledge a contract to pay plaintiff a commission, then fired the employee when he sued to enforce the contract. The opinion reviewed Cleary, supra, 111 Cal.App.3d 443, and other California decisions and concluded that a tort cause of action is stated whenever the employer engages in “‘bad faith action extraneous to the contract, combined with the obligor‘s intent to frustrate the [employee‘s] enjoyment of contract rights.‘” (Khanna, supra, at p. 262, quoting Shapiro v. Wells Fargo Realty Advisors, supra, 152 Cal.App.3d at pp. 478-479.) Gray v. Superior Court (1986) 181 Cal.App.3d 813 [226 Cal.Rptr. 570], relied on Khanna to find that a worker fired on the basis of a false performance report could state a cause of action in tort.
The other leading case, Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155 [226 Cal.Rptr. 820], was a decision by Justice Kaufman, now on this court. It is well summarized in his dissenting opinion here. As noted in Koehrer, a tort cause of action for bad faith discharge may arise if the employer asserts the existence of good cause for discharge without probable cause and in bad faith. (P. 1171.)
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.3 Employers have revised personnel policies and purchased insurance policies. Insurers have calculated and collected premiums. Attorneys have been hired and trained, even entire law firms have been established. Litigants have filed suits, accepted settlement offers, rejected other offers, gone to trial, and appealed. Hundreds of cases are proceeding before the trial courts in which both parties have based their strategy on the assumption that a tort action exists. Many others pending in the Court of Appeal await our decision. There are 10 or so such cases pending before this court.4
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,
- 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.5
The majority also point to some nonfundamental distinctions between the insurer-insured and the employer-employee relationships. They argue that the discharged employee may be able to mitigate damages while the insured generally cannot. But as we all know, in many cases the discharged worker cannot mitigate damages. As Justice Kaufman asks, “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?” (Con. and dis. opn., ante, at p. 718.) The ability of some persons to mitigate damages is no reason to deny a cause of action to those unable to mitigate them.
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 differs 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, 732 P.2d 1364, 1371; Comment, Reconstructing Breach, supra, 73 Cal.L.Rev. 1291, 1330; cf. Traynor, op. cit. supra, 8 Bus. L. News 1, 13.) Again the analogy to the insurance cases is close. Explaining the basis for tort damages in insurance cases, Wallis v. Superior Court, supra, 160 Cal.App.3d 1109, 1118, said that “[m]oney damages paid pursuant to a judgment years after . . . do not remedy the harm suffered . . . , namely the immediate inability to support oneself and its attendant horrors“—language which applies equally to a suit for wrongful discharge. As summarized in Miller & Estes, Recent Judicial Limitations On the Right to Discharge: A California Trilogy (1982) 16 U.C. Davis L.Rev. 65, 90-91, insureds and employees both depend on the contracts “for their security, well-being, and peace of mind. If insurance companies or employers act in bad faith, the consequences can be very severe, indeed much greater than those that result from a breach of contract.”
In contrast, commercial contracts, generally speaking, are negotiated between parties of more nearly equal bargaining strength, and are entered
- 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. (Conc. & 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.7 A provision may prohibit discharge without “good cause,” in which the employer‘s good faith may be relevant in deciding whether good cause exists. (Pugh v. See‘s Candies, Inc. (1981) 116 Cal.App.3d 311, 330 [171 Cal.Rptr. 917].) The provision may, instead, establish some other limitation on the employer‘s power to discharge the employee. It may, for example, prohibit the discharge of the worker before January 1, or so long as he produces 400 widgets per month, or without an opportunity for a grievance hearing—in which examples good faith would not be relevant. The point is that all such actions rest not on proof of the employer‘s bad faith, but of his breach of some contractual provision apart from the covenant.
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.8 The unpredictability of damages in a tort action for bad faith discharge is the consequence of allowing recovery for emotional distress. Damages in other torts permitting recovery for emotional distress, such as negligence, products liability, malpractice, intentional infliction of emotional distress, etc., are equally unpredictable. I see no reason why predictability is more important to employers in connection with wrongful discharge actions than, for example, in actions for injuries caused by defective products. Of course, one can enhance predictability by denying recovery for injuries suffered, but this is not a trade-off courts have generally been willing to make. It is a decision which, by the majority‘s own logic, is better left to the Legislature.
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.9 In fact, a suitable test is simple to describe: an employer acts in bad faith in discharging an employee if and only if he does not believe he has a legal right to discharge the employee.10 The majority assert that under similar tests employed by the courts “an ordinary contract breach might give rise to a bad faith action” (ante, p. 698) and that a requirement of bad faith “do[es] nothing . . . to differentiate between those cases properly and traditionally compensable by contract damages and those in which tort damages should flow” (ante, p. 699). But these assertions are obviously mistaken. A breach of contract does
The majority particularly attack Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, on the ground that “it failed, however, to recognize that in traditional contract law, the motive of the breaching party generally has no bearing on the scope of damages that the injured party may recover for breach of the implied covenant.” (Ante, p. 699, italics in original.) The argument seems misplaced in the majority opinion; it belongs in the dissent. The fact that traditional contract law draws no distinction between good faith and bad faith, between innocent breach and malicious breach, is a good reason for looking to tort law where such distinctions are recognized. Indeed, the majority argument on this point, and, one might say, on the entire issue of tort damages, makes no sense unless the majority believe that there should be no distinction between innocent and malicious breach—that the employer who maliciously and arbitrarily fires a worker knowing that he has no right to do so should pay no more in damages than the employer who believed in good faith that he had a right to fire the worker—and in particular that the bad faith employer should not pay for the suffering he knowingly and deliberately caused. That is not a belief which I share.
- 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.14 They will cause reversals in
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, 46 Cal.3d 287, which abolished the tort cause of action for bad faith settlement practices by insurers. In both cases the court has reached out to overturn precedent and to abolish a cause of action recognized by California law. The decisions abolish protections previously accorded consumers and workers; they extend protection to insurers and employers, giving them tort immunity not for innocent error but for bad faith breach of duty. In both cases, moreover, the California Legislature has considered abolishing the cause of action in question but refrained from so doing;16 the decisions of this court grant immunities which the Legislature has declined to give, and shift to the unorganized consumer and worker the burden of seeking legislative change. It is the function of the common law “to protect the weak from the insults of the stronger.” (3 Blackstone, Commentaries 3.) The majority‘s decision subverts that function.
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.
KAUFMAN, J.—I concur 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) 50 Cal.2d 654 [328 P.2d 198, 68 A.L.R.2d 883], this court first recognized that breach of the implied duty of good faith and fair dealing may give rise to a cause of action sounding in tort. I would not have thought, after these many years, that it was still necessary to defend and explain this basic principle. In purporting to trace its origins, however, the majority fundamentally misstates the nature of the tort, and thereby subverts the powerful impetus for its extension to the area of employment termination. A brief summary of familiar principles, therefore, may be useful.
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, 27 Cal.3d at p. 176, quoting Prosser, Law of Torts (4th ed. 1971) p. 613), it was quite natural that courts would eventually approve the extension of tort remedies, in appropriate circumstances, to violations of the duty of good faith and fair dealing. (See Note, supra, 73 Cal.L.Rev. at p. 1307.) Indeed,
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) 160 Cal.App.3d 1109, 1117-1119 [207 Cal.Rptr. 123]; Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contact (1981) 16 U.S.F. L.Rev. 187, 220-226; accord, Seaman‘s Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 768-769.)
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, 27 Cal.3d at p. 179, fn. 12; Seaman‘s Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 769, fn. 6), recent Court of Appeal decisions have unanimously recognized that willful and malicious discharge from employment may give rise to tort remedies. (See Koehrer v. Superior Court, supra, 181 Cal.App.3d at pp. 1167-1171; Gray v. Superior Court (1986) 181 Cal.App.3d 813, 820-821 [226 Cal.Rptr. 570]; Khanna v. Microdata Corp. (1985) 170 Cal.App.3d 250, 260-264 [215 Cal.Rptr. 860]; Shapiro v. Wells Fargo Realty Advisors (1984) 152 Cal.App.3d 467, 477-479 [199 Cal.Rptr. 613]; Rulon-Miller v. International Business Machines Corp. (1984) 162 Cal.App.3d 241, 251-253 [208 Cal.Rptr. 524].)
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 “fundamental[ly]” 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) 61 Cal.2d 879, 882 [40 Cal.Rptr. 845, 395 P.2d 893], “In effect the contention is a request that courts abdicate their responsibility for the upkeep of the common law. That upkeep it needs continuously, as this case demonstrates.”
““‘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) 12 Cal.3d 382, 393-394 [115 Cal.Rptr. 765, 525 P.2d 669].)
“This flexibility and capacity for growth and adaptation is the peculiar boast and excellence of the common law.” (Hurtado v. California (1884) 110 U.S. 516, 530 [28 L.Ed. 232, 237, 4 S.Ct. 111].)
“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, 12 Cal.3d at p. 394.)
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) 55 Cal.2d 211 [11 Cal.Rptr. 89, 359 P.2d 457], for example, we judicially abolished the doctrine of sovereign immunity from tort liability, overruling earlier decisions which had expressly held that “abrogation or restriction of this doctrine is primarily a legislative matter . . . .” (Vater v. County of Glenn (1958) 49 Cal.2d 815, 820 [323 P.2d 85]; see also Talley v. Northern San Diego Hosp. Dist. (1953) 41 Cal.2d 33, 41 [257 P.2d 22].) In so holding, we emphasized that the doctrine was “court made” (55 Cal.2d at p. 218), and finding no continued “rational basis” for it (id. at p. 216), we ended it.2
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) 69 Cal.2d 108, 121 [70 Cal.Rptr. 97, 443 P.2d 561, 32 A.L.R.3d 496]); recognized that a married person whose spouse is injured by the negligence of a third party has a cause of action for loss of consortium (Rodriguez v. Bethlehem Steel Corp., supra, 12 Cal.3d at pp. 389-404); and abrogated the rule of interspousal immunity for negligent torts. (Klein v. Klein (1962) 58 Cal.2d 692, 697-699 [26 Cal.Rptr. 102, 376 P.2d 70].)
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) 68 Cal.2d 728 [69 Cal.Rptr. 72, 441 P.2d 912], “The ‘contention that a rule permitting the maintenance of the action would be impractical to administer . . . is but an argument that the courts are incapable of performing their appointed tasks, a premise which has frequently been rejected.‘” (Id. at
Contrary to the implication of the majority, the standard set forth in Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, is fully adequate to distinguish between simple breach of contract for discharge without cause, and breach of the implied duty of good faith and fair dealing. “If the employer merely disputes his liability under the contract by asserting in good faith and with probable cause that good cause existed for discharge, the implied covenant is not violated and the employer is not liable in tort. (Seaman‘s, supra, 36 Cal.3d at p. 770.) If, however, the existence of good cause for discharge is asserted by the employer without probable cause and in bad faith, that is, without a good faith belief that good cause for discharge in fact exists, the employer has tortiously attempted to deprive the employee of the benefits of the agreement, and an action for breach of the implied covenant of good faith and fair dealing will lie.” (Id. at p. 1171; see also Khanna v. Microdata Corp., supra, 179 Cal.App.3d 250, 262, 263 [breach of good faith and fair dealing established by proof of employer‘s bad faith action extraneous to the contract coupled with intent to frustrate the employee‘s contract rights].) Thus, under the Koehrer standard no bad faith action would lie unless the wrongful discharge was both willful and malicious.
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, 58 Cal.2d 692, where this court, in abolishing the rule of spousal immunity for negligent torts, stated: “‘[C]ourts should not decline to entertain a meritorious action . . . because of the dubious apprehension that in some future case [frivolous claims] may become the subject of litigation.‘” (Id. at p. 694, quoting Spellens v. Spellens (1957) 49 Cal.2d 210, 241 [317 P.2d 613] (conc. and dis. opn. of Schauer, J.).) Courts must deal with each case on its merits, “whether there be few suits or many; the existence of a multitude of claims merely shows society‘s pressing need for legal redress.” (Dillon v. Legg, supra, 68 Cal.2d at p. 735, fn. 3.) That need has never been greater than in cases of malicious termination of employment.
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.
MOSK, J.—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
With that one exception, I agree with the persuasive opinions of Justices Broussard and Kaufman.
Notes
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 immunity, we relied in part on earlier decisions in which we had abolished the doctrine of tort immunity of charitable institutions (Malloy v. Fong (1951) 37 Cal.2d 356 [232 P.2d 241]; Silva v. Providence Hospital of Oakland (1939) 14 Cal.2d 762 [97 P.2d 798]), “an immunity that was also claimed to be so firmly imbedded that only the Legislature could change it.” (Muskopf v. Corning Hospital Dist., supra, 55 Cal.2d at p. 219.)
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.
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.
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 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, 841 F.2d 980; Carter v. Catamore Co., Inc. (N.D.Ill. 1983) 571 F.Supp. 94, 97 [R.I. law]; Dare v. Montana Petroleum Marketing Co. (Mont. 1984) 687 P.2d 1015, 1020; Gates v. Life of Montana Ins. Co. (1983) 205 Mont. 304 [668 P.2d 213]; K Mart Corp. v. Ponsock, supra, 732 P.2d 1364, 1369-1370); three reject that cause of action (Arco Alaska, Inc. v. Akers (Alaska 1988) 753 P.2d 1150, 1153-1154; Martin v. Federal Life Ins. Co. (1982) 109 Ill.App.3d 596 [440 N.E.2d 998, 1006]; Murphy v. American Home Products Corp. (1983) 58 N.Y.2d 293 [461 N.Y.S.2d 232, 238, 448 N.E.2d 86].) If we discount Huber as based on California law, the count stands at four to three. The majority compile a more extensive list of decisions by including cases involving quite different issues. A number of those decisions hold (contrary to California law) that there is no implied covenant of good faith in contracts for employment at will—a holding which says nothing about whether tort damages would be awarded for the breach, in bad faith, of a contract barring termination without good cause. 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, 46 Cal.3d 287, 300 and pages 295-296 (Mosk, J., dis.).
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.)
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.