Lead Opinion
Opinion
We granted review in this case to determine whether Foley v. Interactive Data Corp. (1988) 47 Cal.Sd 654 [
Charles Hunter began working as a welder for Up-Right, Inc. (Up-Right) in January 1973. In 1980 he was promoted to welding supervisor and worked in that capacity until his employment was terminated on September 10, 1987.
In August 1988 Hunter sued Up-Right and his former supervisor, Pat Nelson, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and various torts. After this court filed its decision in Foley, supra,
The evidence presented at trial was in conflict regarding the circumstances of Hunter’s termination. Hunter testified that he enjoyed his job at Up-Right, got along well with coworkers, and received excellent performance evaluations. He testified that at the end of the workday on September 10, 1987, he was called in to meet with Nelson. According to Hunter, Nelson told him that there had been a corporate decision to eliminate his position and that if he did not resign he would be terminated. Hunter testified he asked Nelson for the opportunity to work in a lesser position within the company, but was refused. Hunter then signed a document setting forth his resignation. The next day he picked up his final paycheck, which included $5,200 in severance pay.
Nelson testified to a different series of events. On several occasions during a period prior to September 9, 1987, Nelson testified he had admonished Hunter regarding excessive absences to attend to personal matters. On September 9, 1987, Nelson testified, Hunter told him he was thinking of resigning due to personal problems. Nelson told him to think about it overnight and come back the next day. Nelson directed his secretary, Catherine Olson, to prepare a resignation form for Hunter’s signature. On September 10, Hunter returned and told Nelson he had decided to resign. Hunter then signed the resignation form. Nelson had Olson prepare a final paycheck. Nelson testified that no corporate decision had been made to eliminate Hunter’s job.
John Maricich, who had been plant superintendent for Up-Right for eight years until his resignation in January 1988, testified that Up-Right had a policy of terminating employees only for good cause. He testified that Hunter was an excellent employee.
The jury found in favor of Hunter on three theories: breach of implied contract not to terminate employment without good cause, breach of implied covenant of good faith and fair dealing, and fraud. By special verdict, it awarded Hunter $38,013 on the contractual theories and $120,000 for misrepresentation. The parties agreed that the $120,000 figure represented the jury’s finding as to Hunter’s total damages, and thus included the $38,013 awarded as contractual damages. The trial court entered judgment in favor of Hunter in the amount of $120,000, and the Court of Appeal affirmed.
Discussion
A discussion of the scope of remedies for wrongful termination appropriately begins with аn analysis of relevant portions of our decision in Foley, supra,
Our observations on this latter issue are significant for the present case. We noted in Foley that remedies for breach of the covenant of good faith, which is implied in every contract and aims to make effective the agreement’s promises, have almost always been limited to contract damages. (
In Foley we emphasized the distinctions between the insurance and employment contexts. In the insurer-insured relationship, the parties’ interests are financially at odds: if the insurer pays a claim, it diminishes its own fiscal resources. By contrast, the interests of employer and employee are typically aligned: if there is a job to be done, the employer must pay someone to do it. A breach in the employment relation 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. If 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. A terminated employee, on the other hand, can (and must, in order to mitigate damages) make reasonable еfforts to find alternative employment. In sum, we were not convinced that the employee necessarily seeks a different kind of financial security from a person entering into a typical commercial contract. (Foley, supra, 47 Cal.3d at pp. 692-693.)
We next looked to the likely practical effect of an extension of tort remedies for breach of the implied covenant of good faith and fair dealing. We expressed concern that introducing tort remedies in employment termination would unduly deprive employers of discretion to dismiss employees by raising fears that any dismissal might lead to tort recovery. (Foley, supra,
Accordingly, in view of the countervailing concerns about economic policy and stability, the traditional separation of tort and contract law, and
Decisions of the Court of Appeal in wrongful termination suits since Foley have adhered to Foley’s conception of the employment relation as fundamentally contractual, giving rise only to contractual damages in the event of breach in the absence of some violation of a fundamental public policy. In Hine v. Dittrich (1991)
The Hine court relied in part on American Guar. & Liability v. Vista Medical Supply (N.D.Cal. 1988)
In Soules v. Cadam, Inc. (1991)
Of further concern in the shaping of remedies for wrongful termination has been the existence of the workers’ compensation system, with its exclusive remedy provisions. (Lab. Code, §§ 3600 [workers’ compensation as exclusive remedy against employer for any injury sustained by an employee arising out of and in the course of the employment], 3601 [workers’ cоmpensation as exclusive remedy for the injury or death of an employee against fellow employee, with specified exceptions].) In Cole v. Fair Oaks Fire Protection Dist. (1987)
The present case does not require us to revisit the scope of the workers’ compensation system in the wrongful termination context; we expressly limited review to the question of Foley’s effect on a terminated employee’s cause of action for fraud and deceit. Nonetheless, the Cole-ShoemakerLivitsanos line of cases is instructive for its careful and consistent observance of legislated restrictions on civil tort recovery in the wrongful termination context when the employer’s conduct falls within the compensation bargain. We have not allowed workers to avoid the otherwise applicable statutory compensation system, whether to deter tortious conduct by employers or for other reasons. We are now asked, in somewhat analogous fashion, to determine whether the breach of what we have recognized as an
The Court of Appeal answered this question affirmatively, reasoning that different objectives underlie claims for fraud, on one hand, and breach of the implied covenant in an employment agreement, on the other. The Court of Appeal believed that enforcement of the implied covenant safeguards the parties’ interest in having promises performed—a traditional goal of contract law—while the fraud cause of action protects a general societal interest apart from the private interests of the contracting parties. The Court of Appeal hazarded that the breach of an employment contract usually does not entail fraud or deceit, and that there is no reason to shield from liability an employer who, in addition to breaching an employment contract, also engages in conduct “outside the bounds of the contractual provisions.”
The Court of Appeal erred in inferring that an emplоyer that misrepresents a fact in the course of wrongfully terminating an employee has committed a fraud. The court contrasted Hunter’s testimony (that Nelson told him his job had been eliminated by corporate decision) with Nelson’s testimony (that no such corporate decision had been made and that Hunter would not have been dismissed had he not signed a resignation). From this, the court concluded that Hunter had proved a knowing misrepresentation (the supposed corporate decision) that was intended to defraud Hunter into resigning his job, Hunter’s detrimental reliance (in resigning), and his resulting damage. Thus, according to the Court of Appeal, Hunter established each of the elements of fraud: (a) misrepresentation; (b) defendant’s knowledge of the statement’s falsity; (c) intent to defraud (i.e., to induce action in reliance on the misrepresentation); (d) justifiable reliance; and (e) resulting damage. (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 676, p. 778; Civ. Code, § 1709; Hobart v. Hobart Estate Co. (1945)
The problem with the Court of Appeal’s analysis is that the result of Up-Right’s misrepresentation is indistinguishable from an ordinary constructive wrongful termination. The misrepresentation transformed what would otherwise have been a resignation into a constructive termination. As the jury found that Up-Right lacked good cause to dismiss Hunter, the constructive termination was wrongful. Thus, Up-Right simply employed a falsehood to do what it otherwise could have accomplished directly. It cannot be said that Hunter relied to his detriment on the misrepresentation in suffering constructive dismissal. Thus, the fraud claim here is without substance.
Moreover, it is difficult to conceive of a wrongful termination case in which a misrepresentation made by the employer to effect termination could
Recognition of a fraud cause of action in the context of wrongful termination of employment not only would contravene the logic of Foley, but also potentially would cause adverse consequences for industry in general. Fraud is easily pleaded, and in all likelihood it would be a rare wrongful termination complaint that omitted to do so. Much harder, however, is the defense of such claims and their resolution at the summary judgment or demurrer stage of litigation. The resultant costs and inhibition of employment decisionmaking are precisely the sort of consequences we cited in Foley in disapproving tort damages for breaches of the implied covenant of good faith and fair dealing.
We note, however, that a misrepresentation not aimed at effecting termination of employment, but instead designed to induce the employee to alter detrimentally his or her position in some other respect, might form a basis for a valid fraud claim even in the context of a wrongful termination. The Court of Appeals for the Ninth Circuit addressed such a situation in Miller v. Fairchild Industries, Inc. (9th Cir. 1989)
In Miller v. Fairchild Industries, Inc., supra, the allegedly fraudulent settlement agreement was collateral to the employment contract itself. The
One additional point remains to be made. Foley and succeeding cases, as we have seen, reaffirmed the availability of tort damages for dismissal in violation of public policy. (See, e.g., Rojo v. Kliger (1990)
Although tort damages are unavailable in this case, Hunter has established his claim to contractual damages for constructive wrongful termination, and on remand the judgment must be modified accordingly.
The judgment of the Court of Appeal is reversed. The judgment entered in Fresno County Superior Court Case No. 387274-4 must be modified, in accordance with this opinion, to provide that judgment is rendered in favor of Charles R. Hunter against Up-Right, Inc., in the sum of $38,013 plus costs of suit.
Lucas, C. J. Baxter, J., and George, J., concurred.
I dissent. The record in this case reveals that plaintiff was deceived into resigning so that the employer could terminate his employment without the risk of a wrongful discharge lawsuit. Six months after his discharge, plaintiff aсcidentally discovered that the inducement to resign, based on representations his position was about to be eliminated, had been a ruse. The majority hold that the use of fraud in the termination of an employment contract under these circumstances is not actionable, and that only a breach of contract action lies.
Contrary to the majority’s reasoning, the result of this case is not dictated by the four-to-three decision in Foley v. Interactive Data Corp. (1988)
I.
The majority claim to base their opinion primarily on Foley. That case rejected the contention that an action for breach of an implied covenant of good faith and fair dealing in an employment contract could sound in tort. The court reasoned that the implied covenant of good faith and fair dealing “is a contract term” and “compensation for its breach has almost always been limited to contract rather than tort remedies.” (Foley, supra,
Foley recognized, however, that there was at least one important exception to this general rule: bad faith in the context of insurance contracts. In that
Foley nowhere held that actions for traditional intentional torts which might accompany a wrongful discharge are barred. The opinion did declare that “we believe that focus on available contract remedies offers the most appropriate method of expanding available relief for wrongful termination” because the “expansion of tort remedies in the employment context has potentially enormous consequences for the stability of the business community.” (Foley, supra,
Fraud, unlike breach of the implied covenant of good faith and fair dealing, has long been recognized as an independent tort which may arise together with, but is distinct from, a breach of contract. (See Prosser & Keeton, Torts (5th ed. 1984) § 105, p. 728 [the tort action for fraud, differentiated from contract actions for breach of warranty, emerged clearly in the late 18th century].) Thus, in cases of promissory fraud, where it is claimed that the defendant entered into an agreement with the knowledge that he intended to breach the agreement, both the breach and the fraud leading to the breach are separately actionable. (See Walker v. Signal Companies, Inc. (1978)
Consequently, while the duty to treat a party with whom one enters into contract in good fаith can be seen as only a contractual duty, the obligation
II.
A closer reading of the majority’s opinion reveals that their conclusion proceeds not so much from the dictates of Foley, but from the conviction that a fraud action in this case is conceptually indistinguishable from an ordinary breach of contract action. As the majority declare: “The problem with the Court of Appeal’s analysis is that the result of Up-Right’s misrepresentation is indistinguishable from an ordinary constructive wrongful termination. The misrepresentation transformed what would have otherwise have been a resignation into a constructive termination. . . . Up-Right simply employed a falsehood to do what it otherwise could have accomplished directly. It cannot be said that Hunter relied to his detriment on the misrepresentation in suffering constructive dismissal. Thus, the fraud claim is without substance.” (Maj. opn., ante, at p. 1184.)
The majority appear to suggest in this curious paragraph that plaintiff has no fraud cause because his claim lacks one of the necessary elements of fraud—plaintiff’s detrimental reliance. This concept is never developed, and understandably so. According to the evidence in this case, plaintiff would not have resigned from his job, which was terminable only for good cause, hut for his reliance on his supervisor’s false representations that the loss of his job due to the elimination of his position by the corporation was imminent.
Instеad, the majority base their holding on the determination that, since the fraud action is merely a constructive wrongful termination action in another guise, it should not give rise to tort damages. In rejecting the possibility that “a misrepresentation made by the employer to effect termination could ever rise to the level of a separately actionable fraud,” the majority declare that “such misrepresentations are merely the means to the end desired by the employer, i.e., termination of employment.” (Maj. opn.,
I disagree. The majority disregard the important difference between fraud and contract claims in this context, and the different wrongs they are designed to rectify. In ignoring this distinction, the majority inexplicably overlook common law fraud as it has developed in California and other jurisdictions.
As discussed above, fraud and contract claims are often brought conjointly, and plaintiffs have been allowed recovery bоth in tort and contract. (Walker v. Signal Companies, Inc., supra,
The reason for this dual recovery in tort and contract is to be found in the differing rationales behind the two bodies of law. “Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate ‘social policy.’ ” (Foley, supra,
Thus, in the promissory fraud cases, tort recovery is allowed, despite the fact that fraud and contract damages arise from the same set of facts, because the judicial system seeks to vindicate a social policy of preventing injurious, deliberate falsehoods. Although it is a fact of life that parties breach contracts because of changes in circumstance, the tort system is used to send a signal that the breach of a contract a party calculatingly never intended to fulfill is a differеnt, and greater, wrong than an ordinary breach, and should receive greater sanction.
The circumstances in the present case are analogous to promissory fraud. Although plaintiff’s damages are presumably the same for being tricked into resigning as they would be if he had been simply wrongfully discharged outright, the former behavior involves a fraud for which the law of tort provides special disincentives. The purpose of the fraud in this case, as the jury fairly inferred, was to dupe plaintiff into forfeiting his contractual and employment rights by deceiving him into resigning. The corporation sought through this artful deception to extricate itself from its contractual obligations, rather than to straightforwardly discharge him and risk potential liability for breach of contract. The law of fraud is designed to deter the use of such stratagems.
This conclusion is in accord with California case law. In the recent case of Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992)
Contrary to the majority’s conclusion, we should hold that the means of discharging an employee does matter. An employee, who because of a contractual agreement with his employer can only be fired for good cause, is tortiously defrauded when the employer not only breaches the contract by engineering the employee’s termination, but also uses deliberate falsehoods to cause the employee to forfeit his contractual rights. It does not matter that, in this case, the fraud was not completely successful, in that Hunter, six months after his discharge, accidentally learned the truth of the deception and sought proper legal remedies. A cause of action for the tort of fraud is designed to protect future victims of such deception as much as it is designed to compensate Hunter in this case. (See Ramey v. General Petroleum Corp. (1959)
It must also be recognized that the majority’s holding is in conflict with wrongful termination contract cases outside of the employment context. In Houston Cable TV v. Inwood W. Civic Ass’n (Tex.Ct.App. 1992)
Because the majority create a significant innovation in the doctrine of fraud, it is to be expected that some discussion of that body of law might possibly support its holding. But the majority make only passing reference to the law of fraud. Instead, other than their misplaced reliance on Foley, supra, Al Cal.3d 654, the majority cite in support two Court of Appeal cases not involving the tort of fraud. (Hine v. Dittrich (1991)
III.
Finally, the majority seem to rely for their holding on the speculative statement that to allow a fraud claim in this case would potentially “cause adverse consequences for industry in general. Fraud is easily pleaded, and in all likelihood it would be a rare wrongful termination complaint that omitted to do so. Much harder, however, is the defense of such claims and their resolution at the summary judgment or demurrer stage of litigation. The resultant costs and inhibition of employment decisionmaking are precisely the sort of consequences we cited in Foley in disaрproving tort damages for breaches of the implied covenant of good faith and fair dealing.” (Maj. opn., ante, at p. 1185.)
Although, unlike the majority, I lack the prescience to predict the effects our holding will have on industry, I would contest their conclusion that, were we to hold for plaintiff in this case, the floodgates of wrongful termination fraud claims would open. Similar scare tactics have been used often in recent years to defeat valid claims. On the contrary, however, the situation presented by this case is unusual. In order to survive summary judgment, a plaintiff would have to show at the outset that his employment contract is not terminable at will, an issue that itself is becoming increasingly amenable to resolution at the summary judgment stage. (See, e.g., Slivinslcy v. Watkins-Johnson Co. (1990)
Moreover, even if an employment contract terminable for good cause is established, representations likely to be made in the course of a termination may not be actionable as fraud. The reasonable employee fired without good cause generally will not forfeit contractual rights because of the employer’s statements; the employee will typically recognize in this situation that he and the employer are in an adversarial position, and the employee will have the opportunity to contest the employer’s position that good cause for termination existed via a breach of contract action. Without the element of detrimental reliance, the employer is at most guilty of bad faith, and a breách of contract action would be the employee’s only resort.
However, when the employer makes a faсtual misrepresentation which seeks to circumvent the good cause provisions of the employment contract by misleading the employee into resigning, thereby concealing the employer’s hostility to the employee’s contractual rights, that employer crosses the line from bad faith to outright fraud, and tort liability should be permitted.
In sum, it is unwarranted speculation—indeed, use of an all too common the-sky-is-falling theme—to conclude that allowance of the fraud action in this case will significantly expand the number of unmeritorious fraud/ wrongful termination actions. Using traditional analysis of the tort of fraud, many of the would-be tort plaintiffs, conjured up by the majority, the defendants, and the amici curiae in this case, would not in fact prevail. At
For all of the foregoing, I would affirm the judgment of the Court of Appeal, subject to the caveat expressed in footnote 1 of this dissenting opinion.
Arabian, J., concurred.
Notes
Justice Mosk's dissent predicates disagreement with our conclusion on a series of inapposite cases dealing with the doctrine of promissory fraud. This is not a case of promissory fraud, and nothing in this opinion affects the availability of tort damages in any case in which the elements of promissory fraud are pleaded and proved. And, contrary to Justice Mosk’s dissent, we do not believe there is a meaningful difference between the case of the employee who is wrongfully terminated by means of a misrepresentation that good cause exists (when in fact no such good cause exists), and that of the employee who is misled into resigning by means of a misrepresentation. Justice Mosk contends that in the latter situation the employer has “concealed” its “hostility to the employee’s contractual rights.” We doubt that any wrongfully terminated employee can be said to be unconscious of the former employer’s “hostility” to his or her contractual rights.
Contrary to the representation made at oral argument by counsel for Hunter, it is clear from the special verdict form completed by the jury in this case that those damages over and above the $38,013 awarded on the contractual claims represented the jury’s determination of the injury attributable to the fraud claim. Counsel’s representation as to the jury’s intention in returning the verdict of $120,000 in damages for misrepresentation is not supported by evidence in the record and we accord it no weight.
There is some ambiguity in the record as to whether plaintiff in this case was in fact entitled to the full damage award. It is correct, as the Walker court held, that double recovery for tort and contract compensatory damages is improper, though separate tort punitive damages may be granted. (See Tavaglione v. Billings (1993)
The Livett case involved a claim of conspiracy, rather than one of fraud, because the fraud claim was at that point clearly time-barred. (Livett, supra, at p. 418.) As is evident from the facts, the conspiracy in question was a conspiracy to defraud.
The court found that the award of punitive damages was independently justified by both the fraud and the tortious breach of the covenant of good faith and fair dealing claims. (See Houston Cable TV v. Inwood W. Civic Ass'n, supra,
The majority, while acknowledging that the question of workers’ compensation’s exclusivity is not before us, nonetheless conduct a cursory review of a recent line of сases to imply that this fraud cause of action would be barred by workers’ compensation exclusive remedy provisions (Lab. Code, § 3600 et seq.). But neither Cole v. Fair Oaks Fire Protection Dist. (1987)
Even more critically, plaintiff’s injury in this case was primarily economic, rather than physical or mental. As such, it is to be doubted that such injury would be barred by the worker’s compensation exclusive remedy provisions. (See Coca Cola Bottling Co. v. Superior Court (1991)
Nor should the рosition of this dissenting opinion be considered a blanket endorsement of all forms of tort recovery in wrongful termination cases. It is a separate question whether, for example, the tort of negligent misrepresentation, arising out of a wrongful termination will be independently actionable. Since double recovery for identical damages on tort and contract theories are not permitted, and since nonintentional torts will rarely give rise, as a matter of law, to punitive damages (see, e.g., Bell v. Sharp Cabrillo Hospital (1989)
Dissenting Opinion
Plaintiff Charles Hunter worked as a welder for defendant Up-Right, Inc., from January 1973 until September 1987. He was considered an excellent employee. On September 10, 1987, Hunter’s supervisor induced him to resign by falsely telling him that his position was being eliminated because of a corporate reorganization. Six months later, Hunter leаrned of the fraud. He then brought this action. The jury awarded Hunter damages of $38,013 for breach of contract and $120,000 for the fraud.
The issue is whether an employee may recover tort damages for fraud perpetrated by the employer for the purpose of concealing from the employee his or her rights under the employment contract. The majority, relying primarily on this court’s decision in Foley v. Interactive Data Corp. (1988)
Contrary to the majority’s conclusion in this case, the fraud that the employer perpetrated upon the employee cannot be deemed a constructive wrongful termination. Properly analyzed, fraud is readily distinguishable from constructive wrongful discharge. The latter occurs when an employee is forced to resign as a result of actions or conditions so intolerable that a reasonable person in the employee’s position would have resigned, and the employer—with actual or constructive knowledge of the intolerable actions or conditions and their impact on the employee—could have remedied the situation but did not. (Soules v. Cadam, Inc. (1991)
Constructive wrongful termination is the legal consequence of the employer’s conduct; it is not the conduct itself. No one would seriously contend that a physical assault—one of the many intolerable types of conduct by an employer that may cause a constructive discharge—is indistinguishable from a wrongful termination because the employer could have terminated the employee by other means. Characterizing the consequence of the employer’s conduct as constructive discharge, as the majority does here, does not address the question of whether the conduct itself is actionable in contract, in tort, or under other civil legal principles.
Detrimental reliance is an essential element of fraud. (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, §§ 676, 711, pp. 778, 810-811.) The facts of this case do not support the majority’s conclusion that Hunter did not detrimentally rely on his employer’s fraudulent misrepresentation in resigning. Because the employer might have accomplished the termination in another manner does not mean that Hunter did not detrimentally rely on the fraud. Hunter did rely on the fraud: he resigned.
In my view, there are two analytic approaches that may entitle the employee to recover in tort for the employer’s fraud. First, when, as here, an employer resorts to fraud to deprive an employee of his or her rights, the employer’s conduct is nоt within the scope of the contractual employment relationship. (See Johns-Manville Products Corp. v. Superior Court (1980)
I would affirm the judgment of the Court of Appeal.
Respondent’s petition for a rehearing was denied January 20, 1994. Mosk, J., and Kennard, J., were of the opinion that the petition should be granted.