Lead Opinion
Opinion
We granted review in this matter to clarify, following our decisions in Foley v. Interactive Data Corp. (1988)
I. Background
Because this matter comes to us after the trial court sustained the 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. (1980)
Andrew Lazar alleged as follows:
Lazar was bom in New York in 1950. He lived and worked in Long Island, New York until 1990. From 1972 to 1990, he was employed with a family-owned restaurant equipment company. As of 1990, he was president of the company, earning $120,000 annually and living in New York with his wife of 21 years and his 2 children, ages 17 and 15.
In September 1989, a vice-president of real party in interest RykoffSexton, Inc. (Rykoff or defendant) contacted Lazar and tried to persuade him to come to work in Los Angeles as Rykoff’s West Coast general manager for contract design. Rykoff, through its vice-president and, later, through its president and its chief executive officer, intensively recmited Lazar through February 1990. For recruitment purposes, Rykoff brought Lazar and his wife to Los Angeles to visit Rykoff’s offices, to visit realtors and to see the city.
During this recmitment process, Lazar told Rykoff he was concerned about relocating to Los Angeles, as the move would entail relinquishing a secure job as president of the family company where he had worked all his adult life, separating his children from their friends at an important time of their lives and leaving his home of 40 years. As a condition of agreeing to relocate, Lazar required Rykoff s assurance that his job would be secure and would involve significant pay increases.
In response to Lazar’s concerns, Rykoff made representations to Lazar that led him to believe he would continue to be employed by Rykoff so long
Rykoff further represented that the company was very strong financially and anticipated solid growth and a stable, profitable future. In particular, Rykoff represented that the department in which Lazar would work was a growth division within the company and that Rykoff had plans to expand it. Rykoff also stated Rykoff would pay Lazar $130,000 annually to start and, if Lazar performed his job, his yearly income would quickly rise to $150,000. Rykoff told Lazar he would receive annual reviews and raises accordingly.
Lazar asked for a written employment contract, but was refused. Rykoff stated a written contract was unnecessary because “our word is our bond.” In or about February 1990, Lazar accepted Rykoff’s offer of employment on terms including the foregoing.
Rykoff’s representations to Lazar regarding the terms on which he would be retained, Rykoff’s financial health and Lazar’s potential compensation were false and, when making them, Rykoff’s agents knew they were false. Rykoff had in the immediately preceding period experienced its worst economic performance in recent history, and the company’s financial outlook was pessimistic. In fact, Rykoff was planning an operational merger that would eliminate Lazar’s position. Rykoff had no intention of retaining Lazar so long as he performed adequately. Instead, Rykoff secretly intended to treat Lazar as if he were an “at will” employee, subject to termination without cause. Rykoff knew the promised compensation increases would not be given, as company policy limited annual increases to 2 to 3 percent.
Based on Rykoff’s representations, Lazar resigned his New York position and, in May 1990, commenced employment at Rykoff. The following month, Lazar bought a home in California and moved his family there.
Lazar performed his job at Rykoff in an exemplary manner. He obtained sales increases in his assigned region, and soon after he commenced employment his West Coast region achieved its sales budget for the first time. Lazar accomplished continued improvement in sales and lowered overall operating costs within his department.
In April 1992, Rykoff failed to pay Lazar certain bonus compensation to which he had become entitled under a company incentive program. Subsequently, in July, Lazar was terminated. Rykoff told Lazar his job was being
The Rykoff vice-president further stated Lazar could leave the company with dignity by tendering a letter of resignation and by keeping his regular status (and all the appearances of job stability) for three months so that he could better search for a new job. In fact, Lazar was given a desk in Rykoff’s warehouse, where noise from forklifts made use of the telephone an absurdity. The fact Lazar was leaving Rykoff was not maintained as a secret and became common knowledge. Lazar has been unable to find comparable employment.
As a consequence of Rykoff’s conduct and Lazar’s reliance on Rykoff’s representations, Lazar lost past and future income and employment benefits. He lost contact with the New York employment market so that reemployment there is difficult or impossible. Lazar is burdened with payments on Southern California real estate he can no longer afford. Lazar and his family have experienced emotional distress, with both psychological and physical manifestations.
Lazar further alleged Rykoff acted with oppression, fraud, or malice within the meaning of Civil Code section 3294.
Based on these allegations, Lazar set forth causes of action for: (1) violation of Labor Code section 970 (false representations to induce relocation), (2) wrongful termination in violation of public policy, (3) fraud and deceit, (4) negligent misrepresentation, (5) breach of contract, (6) promissory estoppel, (7) intentional infliction of emotional distress, and (8) negligent infliction of emotional distress.
Rykoff demurred to all causes of action except the Labor Code and breach of contract claims. The trial court sustained Rykoff’s demurrer in its entirety without leave to amend, leaving Lazar with only the Labor Code section 970 and breach of contract causes of action. Lazar unsuccessfully sought reconsideration, then a writ of mandate. (Lazar did not seek review of the trial court’s sustaining of Rykoff’s demurrer to his cause of action for promissory estoppel.)
The Court of Appeal issued a writ of mandate directing the superior court to vacate its order, insofar as it sustained Rykoff’s demurrers to Lazar’s causes of action for wrongful termination in violation of public policy, fraud and deceit, negligent misrepresentation, and intentional infliction of emotional distress, and to enter a new order overruling the demurrers to those causes of action.
II. Discussion
A. Promissory fraud
“The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 676, p. 778; see also Civ. Code, § 1709; Hunter, supra,
“Promissory fraud” is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud. (Union Flower Market, Ltd. v. Southern California Flower Market, Inc. (1938)
An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract. (Chelini v. Nieri (1948)
Lazar alleges that Rykoff knew its representations regarding the terms upon which he would be retained in Rykoff’s employ, potential salary increases and the financial strength of the company were false at the time they were made. He also alleges that, at the time Rykoff represented to him his job would be permanent and secure, Rykoff was planning an operational merger likely to eliminate Lazar’s job, and Rykoff had no intention of retaining him so long as he performed adequately. Instead, Lazar alleges, Rykoff secretly intended to treat him as if he were subject to termination without cause. Lazar further alleges Rykoff knew the purported potential salary increases would not materialize, because company policy was to limit annual increases to 2 or 3 percent. These allegations adequately state a cause of action for promissory fraud as traditionally understood.
Rykoff and employers’ groups appearing as amici curiae in support of Rykoff contend Lazar’s fraud action is barred by our decisions in Foley, supra,
After cursory discussion, the Court of Appeal concluded, “Hunter did not preclude all fraud claims in the employment context. It merely bars the limited category of fraud claims arising from employer misrepresentations which are made to effect termination.” We agree with the Court of Appeal’s disposition permitting Lazar’s fraud claim, but believe an adequate explanation of that result requires a somewhat fuller explication and clarification of our rationale in Hunter. In addition, we believe Rykoff is mistaken about the degree to which the policy considerations underlying our decision in Foley apply in fraudulent inducement of contract cases.
B. Hunter
In Hunter, supra,
Analyzing these circumstances in light of Foley, supra, and of the traditional elements of fraud, we concluded wrongful termination of employment ordinarily does not give rise to a cause of action for fraud or deceit, even if a misrepresentation is utilized to effect the termination. (Hunter, supra,
Seizing upon language in Hunter indicating tort recovery is available only “when the plaintiff’s fraud damages cannot be said to result from [the] termination itself’ (Hunter, supra,
First, on its face Hunter does not preclude Lazar’s fraud claim. As Lazar correctly points out, we expressly left open in Hunter the possibility “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.” (Hunter, supra,
In Hunter, moreover, we specifically preserved promissory fraud claims. Indeed, despite this court’s division over the issue of tort recovery for
Looking deeper, it is clear the rationale for our decision in Hunter does not apply to this case. In Hunter, while we identified a situation in which a terminated employee was unable to plead all of the elements of fraud, we did not thereby intend to call into question generally the viability of traditional fraud remedies whenever they are sought by a terminated employee. Our decision in Hunter was not meant to alter fundamentally the law of fraud or to suggest it necessarily applies differently in the employment context than in other contexts. Rather, we applied traditional fraud analysis in the context of a termination “desired by the employer,” where misrepresentation was introduced only “in the course of’ effecting the desired termination, and where the employer “could have accomplished [the termination] directly.” (Hunter, supra, 6 Cal.4th at pp. 1179, 1184, 1185.) Under such circumstances, we concluded, the Court of Appeal had “erred in inferring” the employer had committed a fraud. (Id. at pp. 1184-1185.)
Hunter dealt with a situation atypical of the usual fraud situation, in that there the alleged perpetrator of the fraud (the defendant employer, Up-Right) was attempting to accomplish by deception something it actually had power to accomplish forthrightly—termination of the plaintiff’s employment. (See Hunter, supra, 6 Cal.4th at pp. 1184-1185.) Hunter's rationale does not readily extend beyond the termination context because, in the ordinary fraud case, the alleged perpetrator of the fraud lacks the power to accomplish his objective without resort to duplicity.
We reasoned in Hunter that “no independent fraud claim” arose from Up-Right’s “misrepresentation aimed at termination of employment” (Hunter, supra,
We noted, initially, that Hunter could not be said to have relied to his detriment on his employer’s misrepresentation, because his employer “simply employed a falsehood to do what it otherwise could have accomplished directly.” (Hunter, supra,
In short, because Up-Right had both the power and intention of discharging him in any event, Hunter was no worse off for being induced by Up-Right’s misrepresentation to resign. While Hunter may have relied on Up-Right’s misrepresentation, and while in reliance thereon he allegedly changed his position (from employed to unemployed), his reliance did not cause him any detriment, as the tort requires. (See Hull v. Sheehan (1952)
By contrast, as alleged, Lazar’s reliance on Rykoff’s misrepresentations was truly detrimental, such that he may plead all the elements of fraud. Lazar’s employer, Rykoff, did not have the power to compel Lazar to leave his former employment. Rykoff’s misrepresentations were made before the employment relationship was formed, when Rykoff had no coercive power over Lazar and Lazar was free to decline the offered position. Rykoff used misrepresentations to induce Lazar to change employment, a result Rykoff presumably could not have achieved truthfully (because Lazar had required assurances the Rykoff position would be secure and would involve significant increases in pay). Moreover, Lazar’s decision to join Rykoff left
In sum, Hunter’s core rationale (that a substantial fraud claim could not be pled because the element of detrimental reliance was absent) does not apply to this case. As alleged, Lazar’s reliance was truly detrimental.
Contrary to Rykoff’s arguments, our rationale for deciding Hunter does not preclude tort recovery in every case involving a termination. While in previewing our rationale in Hunter, we indicated it would support tort recovery “only” with respect to a misrepresentation that is “separate from the termination of the employment contract” (see Hunter, supra,
Here, Rykoff’s alleged misrepresentation was not made in the course of Lazar’s termination, but, rather, is separate from his termination. The damage Lazar alleges does not, moreover, “result from [the] termination itself’ (Hunter, supra, 6 Cal.4th at p. 1178, italics added), but from Rykoff’s misrepresentations (which allegedly came to light only at the time of termination). Absent its misrepresentations, Rykoff would not have been in the position to terminate Lazar, because Lazar allegedly would not have consented to the employment contract in the first place.
Thus, Hunter does not bar Lazar’s fraud claim.
C. Foley
Rykoff suggests our recognition, in Foley, supra, 47 Cal.3d 654, that the employment relationship is “fundamentally contractual” (Foley, supra, at p. 696), coupled with references in Hunter to economic policy considerations we invoked in Foley (see Hunter, supra, 6 Cal.4th at pp. 1180-1182), implies employees should generally be limited to contract damages for employment terminations. Rykoff argues that permitting tort remedies in the employment context is unnecessary and extraordinarily costly, and the policy reasons for which we declined to extend tort relief in Foley apply with equal force
Foley addressed whether tort remedies should be available for employment terminations that allegedly breach the implied covenant of good faith and fair dealing. At issue was whether the employment relationship was “sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies” for breach of the implied covenant of good faith and fair dealing in an employment contract. (Foley, supra,
Thus, the issue in Foley was whether to acknowledge the existence of a previously unrecognized cause of action (i.e., tortious breach of the implied covenant of good faith and fair dealing in the employment context). The issue in this case is whether we should restrict the availability of traditional tort remedies when they are sought in the employment context. In Foley, we recognized “the extension of . . . [available] tort remedies” proposed by plaintiffs had “the potential to alter profoundly the nature of employment, the cost of products and services, and the availability of jobs.” (Foley, supra,
In declining judicially to expand tort remedies for breaches of the implied covenant in Foley, we alluded to the need for courts to practice restraint when asked to fashion new remedies in areas of the law already governed by “numerous legislative provisions” and subject to a “diversity of possible solutions.” (Foley, supra,
Our concern in Foley not to create “potential tort recovery in every [discharge] case” (
Our decision in Foley does not provide authority for exempting employers from ordinary fraud rules that apply to Californians generally. In fact, Fole's entire thrust is to the contrary insofar as we held employers to ordinary, rather than special, standards. (Foley, supra,
Contrary to defendant’s arguments, fraudulent inducement of contract—as the very phrase suggests—is not a context where the “traditional separation of tort and contract law” (Foley, supra,
Defendant opines that barring claims for fraudulent inducement of employment contract, in light of “existing protections against improper terminations” (see Hunter, supra,
More fundamentally, it is a truism that contract remedies alone do not address the full range of policy objectives underlying the action for fraudulent inducement of contract. In pursuing a valid fraud action, a plaintiff advances the public interest in punishing intentional misrepresentations and in deterring such misrepresentations in the future. (Cf. Foley, supra,
It is true that in Hunter we buttressed our fraud analysis with references to some of the economic policy considerations reviewed in Foley. (See Hunter, supra, 6 Cal.4th at pp. 1180-1182 [reviewing the grounds for Foley's conclusion the employment relationship is fundamentally contractual]; id. at p. 1183 [reviewing restrictions on tort recovery for injuries covered by workers compensation].) Our Hunter opinion does contain some broad language suggestive of Rykoff’s position. (See, e.g., Hunter, supra,
Nevertheless, we reject Rykoff’s contention that, by citing Foley in Hunter, we restricted or abandoned traditional tort remedies in the employment context. Instead, our reference in Hunter to “the logic of Foley" (Hunter, supra,
This case is different. Here we are not dealing with allegations of breach of a contract provision, but with allegations of fraud. Foley was a contract case in which we declined to expand the availability of tort remedies for breach of contract; this is a tort case in which we are being asked by defendant to constrict traditional tort remedies.
Defendants fix upon our reference in Hunter to “Foley’s conception of the employment relation as fundamentally contractual, giving rise only to contractual damages in the event of [a] breach in the absence of some violation of a fundamental public policy.” (Hunter, supra,
Nevertheless, defendant argues that in Hunter we impliedly extended Foley to preclude recovery of tort damages in any case where the plaintiff fails to allege the discharge violated a fundamental public policy. Defendant points to Hine v. Dittrich (1991)
Defendant argues that, in referring to Hine and Soules in Hunter, we impliedly endorsed the proposition that an employee can never state a tort claim arising from employment termination, other than wrongful termination in violation of public policy. Defendant makes too much of our mention of these cases. Our references in Hunter simply buttressed, in general terms,
Hine v. Dittrich, supra,
While in Hunter we also approved in dictum the court’s conclusion in American Guar. & Liability v. Vista Medical Supply, supra,
In short, nothing in the logic of Foley, or our subsequent discussion in Hunter of the policy considerations underlying Foley, suggests California fraud doctrine should be revised judicially in the manner defendant advocates. Thus, Foley does not bar Lazar’s fraud claim.
III. Conclusion
Consistent with the foregoing, as to his fraud claim Lazar may properly seek damages for the costs of uprooting his family, expenses incurred in
Lazar, therefore, may proceed with his claim for fraud in the inducement of employment contract, properly seeking damages for “all the detriment proximately caused thereby” (Civ. Code, § 3333), as well as appropriate exemplary damages (Civ. Code, § 3294).
For the foregoing reasons, the judgment of the Court of Appeal is affirmed.
Lucas, C. J., Arabian, J., Baxter, J., and George, J., concurred.
Concurrence Opinion
I concur in the judgment. I also agree with much of the reasoning of the majority opinion. I continue to believe, however, that Hunter v. Up-Right, Inc. (1993)
The majority wisely repudiate Rykoff’s view that Hunter and Foley v. Interactive Data Corp. (1988)
Although I disagree with the majority’s interpretation of the facts of the Hunter case (see Hunter, supra,
Under what circumstances would an employer who has the ability and intention to discharge an employee nonetheless refrain from discharging him except by means of misrepresentation? The answer, surely, is that under some circumstances, the employer will refrain from discharging the employee outright because it is too costly to do so. Employers may, for example, resort to such fraudulent deception when they know that to terminate the employee straightforwardly will lead to a lawsuit in which the employee would likely prevail. This species of fraud may be especially common in those situations in which a manager superior to the employee seeks to be rid of the employee, but finds such a decision to be at variance with official company policy. In such a case, the manager may seek not only to avoid potential lawsuits, but also the employer’s internal disciplinary processes (see, e.g., Scott v. Pacific Gas & Electric Co. (1995)
In the present case, the majority rightly recognize that all the elements of fraud, including detrimental reliance in the traditional sense, have been properly alleged in this ordinary fraudulent inducement case. By framing the Hunter opinion in narrow terms, the majority move in the direction of acknowledging that the question whether an employee has detrimentally
Concurrence Opinion
I agree with the analysis and conclusions of the majority, with the following exception. The majority describes at some length the “rationale” underlying this court’s opinion in Hunter v. Up-Right, Inc. (1993)