RETIRED EMPLOYEES ASSOCIATION OF ORANGE COUNTY, INC., Plaintiff and Appellant, v. COUNTY OF ORANGE, Defendant and Respondent.
No. S184059
Supreme Court of California
Nov. 21, 2011.
52 Cal.4th 1171
Rosen Bien & Galvan, Ernest Galvan; Moscone, Emblidge & Sater, G. Scott Emblidge, Rachel J. Sater; Law Office of Michael P. Brown and Michael P. Brown for Plaintiff and Appellant.
Law Offices of Robert J. Bezemek, Robert J. Bezemek and Patricia Lim for The California Federation of Teachers, The California Community College Independents Organization and The Fresno Unified Retirees Association as Amici Curiae on behalf of Plaintiff and Appellant.
Lewis, Feinberg, Lee, Renaker & Jackson, Jeffrey Lewis, Bill Lann Lee, Andrew Lah and Sacha Crittenden Steinberger for California Retired County Employees Association, Sonoma County Association of Retired Employees and Retiree Support Group of Contra Costa County as Amici Curiae on behalf of Plaintiff and Appellant.
Nicholas S. Chrisos, County Counsel, Teri L. Maksoudian, Deputy County Counsel; Meyers, Nave, Riback, Silver & Wilson, Arthur A. Hartinger, Jennifer L. Nock and J. Scott Smith for Defendant and Respondent.
Renne Sloan Holtzman Sakai, Jonathan V. Holtzman, K. Scott Dickey and Steve Cikes for League of California Cities and California State Association of Counties as Amici Curiae on behalf of Defendant and Respondent.
Hanson Bridgett, Raymond F. Lynch, Sarah D. Mott and Caroline B. Burnett for the County of Sonoma and the County of Contra Costa as Amici Curiae on behalf of Defendant and Respondent.
OPINION
BAXTER, J.-At the request of the United States Court of Appeals for the Ninth Circuit,1 we address the following abstract question: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.” For the reasons that follow, we conclude that a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance. (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 246 [74 Cal.Rptr. 398, 449 P.2d 462].) Although
I
The backdrop for the question of California law presented by the Ninth Circuit is a lawsuit filed in 2007 by the Retired Employees Association of Orange County, Inc. (REAOC), against the County of Orange (County) contesting the validity of certain changes County has made to health benefits for retired employees.
In 1966, County began offering group medical insurance to retired County employees. County initially calculated premiums separately for active and retired employees. In 1985, County began combining active and retired employees into a single unified pool for purposes of calculating health insurance premiums. Retired employees, as a group, are on average older and more expensive to insure than active employees; if pooled separately, retirees normally would pay higher premiums. The single unified pool thus had the effect of subsidizing health insurance for retirees, in that it lowered retiree premiums below their actual costs, while raising active employee premiums above their actual costs. County paid a large portion of the premiums for active employees, but retired employees paid the majority of their own premiums. County pooled active and retired employees into a single unified pool without interruption from 1985 through 2007.
Due to budgetary concerns, County passed a resolution in 2007 splitting the pool of active and retired employees, effective January 1, 2008. Before passing the resolution, County negotiated changes to health benefits with labor unions representing the active employees. County did not negotiate with the retirees.
On November 5, 2007, REAOC filed suit in federal court against County on behalf of approximately 4,600 retired County employees and sought an injunction prohibiting County from splitting the pool of active and retired employees. REAOC conceded that the express provisions of the various memoranda of understanding (sometimes hereafter MOU) and the Orange County Board of Supervisors (Board) resolutions were silent as to the duration of the unified pool. But REAOC nonetheless alleged that County‘s action constituted an impairment of contract in violation of the federal and state Constitutions, in that County‘s long-standing and consistent practice of
The district court granted summary judgment for County on all claims. (Retired Employees Assn. v. County of Orange (C.D.Cal. 2009) 632 F.Supp.2d 983.) As to the claims of breach of contract and impairment of contract, the court held that County cannot, as a matter of state law, be liable for any obligation it did not undertake explicitly through a resolution by the Board.
REAOC appealed to the Ninth Circuit. The federal appellate court recognized that REAOC‘s impairment-of-contract claim required a showing “that the County entered into an enforceable contract” to continue a single unified pool for the lifetimes of the retirees and noted further that “federal courts look to state law to determine the existence of a contract.” (Retired Employees Association of Orange County, Inc. v. County of Orange, supra, 610 F.3d at p. 1102.) The Ninth Circuit thus asked us for a decision whether, as County contends, “an implied contract to which a county is one party cannot confer . . . vested rights” to health benefits in California. (Id. at p. 1101.)
II
A contract is either express or implied. (
Even when a written contract exists, ” ‘[e]vidence derived from experience and practice can now trigger the incorporation of additional,
All contracts, whether public or private, are to be interpreted by the same rules unless otherwise provided by the Civil Code. (
The certified question from the Ninth Circuit asks us to decide whether California law prohibits a county and its employees from agreeing, by means of an implied contract, to confer vested rights to health benefits on retired county employees. County contends that California law does contain such a prohibition, and presents in this proceeding a three-pronged argument: (1) that a county government and its employees cannot form an implied contract; (2) that even if implied contracts are cognizable in the public employment context, such contracts cannot create vested rights; and (3) that even if vested contractual rights for county employees may be implied, such rights cannot include health benefits. We examine each argument in turn.
A
In Youngman, the plaintiff employees of the Nevada Irrigation District claimed they were entitled to merit salary increases under the terms of a salary schedule that it was the district‘s ” ‘announced practice’ ” to use. (Youngman, supra, 70 Cal.2d at p. 245.) The plaintiffs claimed, inter alia, that there was an implied contract between plaintiffs and the district requiring the district to review and advance employees one step in their respective classifications on or about their employment anniversary date each year. (Id. at
County contends that Youngman does not apply here. It relies on a separate line of authority, exemplified by Markman v. County of Los Angeles (1973) 35 Cal.App.3d 132 [110 Cal.Rptr. 610] (Markman). In that case, Markman, a deputy sheriff, brought an action to recover compensation for overtime he was ordered to work by his superiors over a period of several years. A Los Angeles County ordinance granted equivalent time off to employees who were compelled to work overtime, but required that most of this compensatory time off be taken in the same calendar year in which it was earned.2 Alternatively, the ordinance authorized monetary payment for overtime, but only with the advance approval of the county‘s chief administrative officer. Markman had not obtained prior approval from the chief administrative officer, nor had he been able to take equivalent time off for nearly 1,200 hours of overtime. (Markman, supra, at pp. 133-134.) The Court of Appeal recognized that without compensation for the overtime already worked, Markman “will be penalized for something beyond his control,” in that “during the working years at issue he would have taken time off equivalent to the overtime hours had he been permitted to do so by his superiors,” yet the court still denied any recovery as barred by the local ordinance. (Id. at p. 134.) It was in that context that Markman offered the analysis on which County now relies: “The terms and conditions relating to employment by a public agency are strictly controlled by statute or ordinance, rather than by ordinary contractual standards; and one who accepts such employment, thereby benefiting in ways denied an employee of a private employer, must in
County argues that the italicized language directly answers the certified question. In its view, public employee compensation is strictly limited to that which is expressly provided in a statute or ordinance. County deduces, therefore, that a county and its employees can never form an implied contract for any kind of compensation, including postretirement health benefits. County is mistaken; Markman did not announce such a broad holding. It held simply that a public employee who had failed to take equivalent time off within the period specified in the ordinance or to obtain authorization for overtime pay in the manner specified in the ordinance was not entitled to recover “under the provisions of the subject ordinance . . . regardless of the obvious hardship of such a result.” (Markman, supra, 35 Cal.App.3d at p. 134.)
Subsequent cases that have reiterated the italicized language (or its equivalent) have similarly focused on the conflict between the public employee‘s particular claim and the governing statute or ordinance. In Association for Los Angeles Deputy Sheriffs v. County of Los Angeles (2007) 154 Cal.App.4th 1536 [65 Cal.Rptr.3d 665], for example, there was a conflict between the county code and the written policies of the sheriff‘s department and the district attorney‘s office as to the type of vacation hours for which employees could obtain a cash payout. The Court of Appeal quoted the language from Markman and then concluded “that to the degree the department policies did not accurately reflect [the county ordinance], they were invalid and the employees were entitled only to that compensation set forth in the ordinance.” (Association for Los Angeles Deputy Sheriffs, supra, 154 Cal.App.4th at p. 1549; see also Seymour v. Christiansen (1991) 235 Cal.App.3d 1168, 1177 [1 Cal.Rptr.2d 257] [classified employee was not entitled to payment for unused vacation over a period of 21 years;
More broadly, we wish to caution that our “often quoted language that public employment is not held by contract” has limited force where, as here, the parties are legally authorized to enter (and have in fact entered) into bilateral contracts to govern the employment relationship. (Olson v. Cory (1980) 27 Cal.3d 532, 537 [178 Cal.Rptr. 568, 636 P.2d 532]; see also White v. Davis (2003) 30 Cal.4th 528, 565-566 [133 Cal.Rptr.2d 648, 68 P.3d 74]; cf. Kemmerer v. County of Fresno (1988) 200 Cal.App.3d 1426, 1434 [246 Cal.Rptr. 609] [distinguishing Youngman on the ground “the district was expressly granted powers to contract with employees“].) Under the Meyers-Milias-Brown Act (
Here, County negotiated and approved MOU‘s with its employee bargaining units during the relevant period. “When agreements of employment between the state and public employees have been adopted by governing bodies, such agreements are binding and constitutionally protected.” (Olson v. Cory, supra, 27 Cal.3d at p. 538; see also Shaw v. Regents of University of California (1997) 58 Cal.App.4th 44, 55 [67 Cal.Rptr.2d 850] [“When a public employer chooses instead to enter into a written contract with its employee (assuming the contract is not contrary to public policy), it cannot later deny the employee the means to enforce that agreement.“]; cf. Professional Engineers in California Government v. Schwarzenegger (2010) 50 Cal.4th 989, 1041 [116 Cal.Rptr.3d 480, 239 P.3d 1186] [a state employer‘s unilateral authority to impose a furlough on represented employees “is governed by the terms of the applicable MOU, rather than by any general statutory provision that applies in the absence of an MOU“].) Thus, where the employment relationship is governed by contract, a public employee‘s
The contractual right alleged in this case, then, does not necessarily depend on whether there is express language in a statute or ordinance granting REAOC members the right to a single unified insurance pool during their lifetimes. The parties here entered into valid bilateral contracts governing compensation. Whether those contracts (or any other circumstances) established an implied right to a single unified pool of active and retired employees for purposes of setting health insurance premiums cannot be answered by resort to the language of Markman, which describes the procedures for analyzing a claim concerning public employee compensation in the absence of a contract between the parties. Where the relationship is governed by contract, a county may be bound by an implied contract (or by implied terms of a written contract), as long as there is no statutory prohibition against such an agreement. (Youngman, supra, 70 Cal.2d at p. 246.)
We thus return to the initial question: Does such a prohibition exist? County identifies a number of potential candidates, beginning with
The legislative history of
REAOC contends that its members’ entitlement to a single unified pool for purposes of setting health premiums represents deferred compensation. (See Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 780 [183 Cal.Rptr. 846, 647 P.2d 122]; accord, Chemical Workers v. Pittsburgh Glass (1971) 404 U.S. 157, 180 [30 L.Ed.2d 341, 92 S.Ct. 383] [“the future retirement benefits of active workers are part and parcel of their overall compensation“].) County is therefore correct that a court must look to Board resolutions, including those resolutions approving or ratifying MOU‘s (see
A resolution by a county board does not only-or even primarily-establish contract rights. A resolution is also one of the means by which a board of supervisors exercises its authority to effect policy. (Marquez v. Medical Bd. of California (2010) 182 Cal.App.4th 548, 557-558 [105 Cal.Rptr.3d 835]; Pinewood Investors v. City of Oxnard (1982) 133 Cal.App.3d 1030, 1039 [184 Cal.Rptr. 417].) The judicial determination whether a particular resolution was intended to create private contractual or vested rights or merely to declare a policy to be pursued until the legislative body shall ordain otherwise requires sensitivity to “the elementary proposition that the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the [governmental body]. [Citation.] Policies, unlike contracts, are inherently subject to revision and repeal, and to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body.” (National R. Passenger Corp. v. A. T. & S. F. R. Co. (1985)
California courts have regularly applied this presumption, albeit using verbal formulations that have varied in minor ways.
In Taylor v. Board of Education (1939) 31 Cal.App.2d 734 [89 P.2d 148], the plaintiff teacher challenged the applicability to him of a new state law terminating permanent tenure for teachers reaching the age of 65. In holding that permanent tenure was a creature of statute and not of contract (and thus could be modified), the Court of Appeal observed that ” ‘[o]rdinarily it is the function of a Legislature to make laws and not contracts. It is true, however, that legislative enactments may contain provisions which, when accepted as the basis of action by individuals, become contracts between them and the state. It is also equally well established that the intention of the Legislature thus to create contractual obligations, resulting in extinguishment to a certain extent of governmental powers, must clearly and unmistakably appear . . . .’ ” (Id. at p. 746, quoting Campbell v. Aldrich (1938) 159 Or. 208 [79 P.2d 257, 259].)
California Teachers Assn. v. Cory (1984) 155 Cal.App.3d 494 [202 Cal.Rptr. 611], which enforced an implied contract concerning the administration of a retirement fund, clarified that, despite the presumption, “a clear manifestation of intent to contract does not require explicit statutory acknowledgement.” (Id. at p. 509.) “In California law, a legislative intent to grant contractual rights can be implied from a statute if it contains an unambiguous element of exchange of consideration by a private party for consideration offered by the state.” (Id. at p. 505.) Indeed, numerous cases “have implied contractual obligations from the particular texts and contexts of the statutes at issue.” (Ibid.)
Claypool v. Wilson (1992) 4 Cal.App.4th 646 [6 Cal.Rptr.2d 77] declined to recognize an implied promise concerning the allocation of investment earnings in a retirement fund. Claypool nonetheless acknowledged that contractual obligations could be implied from a statute, but cautioned “that the implication of suspension of legislative control must be ‘unmistakable.’ ” (Id. at p. 670, quoting California Teachers Assn. v. Cory, supra, 155 Cal.App.3d at p. 509; see also Board of Administration v. Wilson (1997) 52 Cal.App.4th 1109, 1135 [61 Cal.Rptr.2d 207] [upholding a finding of an implied vested right to an actuarially sound public retirement system].)
Amici curiae League of California Cities and California State Association of Counties contend the doctrine of implied contractual rights has no application where, as here, the mode of contracting is established by law. Amici curiae rely on Reams v. Cooley (1915) 171 Cal. 150 [152 P. 293], which said, “Where the statute prescribes the only mode by which the power to contract shall be exercised the mode is the measure of the power. A contract made otherwise than as so prescribed is not binding or obligatory as a contract and the doctrine of implied liability has no application in such cases.” (Id. at p. 154; see also Miller v. McKinnon (1942) 20 Cal.2d 83, 91-92 [124 P.2d 34] [quoting Reams].) The “doctrine of implied liability” at issue in Reams, though, was “an implied contract in an action on quantum meruit.” (Reams, supra, at p. 153.) Reams thus held simply that “no implied liability to pay upon a quantum meruit could exist where the prohibition of the statute against contracting in any other manner than as prescribed is disregarded.” (Id. at pp. 156-157.) In this proceeding, we are presented with a claim of an implied-in-fact contract, not an implied-in-law or quasi-contract. (Cf. Katsura v. City of San Buenaventura (2007) 155 Cal.App.4th 104, 109-110 [65 Cal.Rptr.3d 762].) Moreover, REAOC, unlike the plaintiff in Reams, does not seek to recover “under a contract made in violation of the particularly prescribed statutory mode” (Reams, supra, at p. 154 [a contract not awarded through a competitive bid process]; see also Miller v. McKinnon, supra, 20 Cal.2d at pp. 87-88 [same]), but claims instead it has contractual rights that are implied in resolutions duly approved by County. Reams is therefore inapposite.
The same analysis disposes of
Amici curiae League of California Cities and California State Association of Counties raise legitimate concerns that retiree health insurance benefits, unlike pensions, are not funded during the retiree‘s working years; that most of these benefits have been funded on a pay-as-you-go basis; and that the cost of providing health insurance benefits has skyrocketed in recent years. Amici curiae further contend that the changes effected by County in 2007 were a measured and thoughtful response to an ever-increasing unfunded liability. The certified question, however, is one of law, not of policy. Whether a contractual right for the continuation of a single unified pool for purposes of setting health insurance premiums for retired Orange County employees can be implied from Board resolutions, including those resolutions approving the memoranda of understanding, is beyond the scope of the certified question, and we do not purport to decide it here. A court charged with deciding whether private contractual rights should be implied from legislation, however, should “proceed cautiously both in identifying a contract within the language of a . . . statute and in defining the contours of any contractual obligation.” (National R. Passenger Corp. v. A. T. & S. F. R. Co., supra, 470 U.S. at p. 466.) The requirement of a “clear showing” that
B
County argues next that even if contractual rights can be implied from legislation under certain circumstances, it is nonetheless impermissible to infer vested contractual rights.3 Neither County nor amici curiae, though, offer any legal authority for this distinction. (Cf. National R. Passenger Corp. v. A. T. & S. F. R. Co., supra, 470 U.S. at p. 466 [describing the circumstances in which a statute may be interpreted to create contractual or vested rights].) In the cases they have cited, the courts found that the particular benefits at issue were not vested, not that vesting was categorically barred. Vesting remains a matter of the parties’ intent.
In San Bernardino Public Employees Assn. v. City of Fontana (1998) 67 Cal.App.4th 1215 [79 Cal.Rptr.2d 634] (San Bernardino Public Employees), the plaintiff labor organization challenged the City of Fontana‘s proposal during negotiations on a new MOU to reduce longevity pay and accrual of personal leave, claiming that these were vested contractual rights. The Court of Appeal held that these benefits “could not have become permanently and irrevocably vested as a matter of contract law, because the benefits were earned on a year-to-year basis under previous MOU‘s that expired under their own terms.” (Id. at p. 1224.) The plaintiff did not argue-and the Court of Appeal did not consider-whether such rights could be created by implication. Indeed, the court noted that “no outside statutory source gives the employees additional protection or entitlement to future benefits” in that particular case (id. at p. 1225), while acknowledging that a vested right could be ” ‘conferred by statute or other valid regulation’ ” (id. at p. 1223, quoting Butterworth v. Boyd (1938) 12 Cal.2d 140, 150 [82 P.2d 434]) ” ‘when the statutory language and circumstances accompanying its passage clearly “... evince a legislative intent to create private rights of a contractual nature enforceable against the State” ’ ” (San Bernardino Public Employees, supra, 67 Cal.App.4th at p. 1223).
In Sappington v. Orange Unified School Dist. (2004) 119 Cal.App.4th 949 [14 Cal.Rptr.3d 764], the retiree plaintiffs claimed a vested right to free health insurance through a preferred provider organization (PPO) health benefits plan. The school district had offered a free PPO plan for a period of years but, in 1998, instituted a ” ‘buy-upcharge’ ” for the PPO plan, while continuing to offer a health maintenance organization plan at no cost. (Sappington, supra, at pp. 951-952.) The Court of Appeal determined that the policy adopted by the board of education, which had stated only that the district ” ‘shall underwrite the cost of the District‘s Medical and Hospital Insurance Program’ for eligible retirees” (id. at p. 954), did not grant the retirees a vested right to free PPO coverage. In reaching its conclusion, the court relied on dictionary definitions and common understandings of the word “underwrite,” extrinsic evidence of the parties’ course of conduct, and the absence of any evidence that the retirees had a reasonable expectation of free lifetime PPO coverage. (Id. at pp. 954-955.) The Sappington court thus did not hold that vested benefits could never be implied in the public employee context. Indeed, its analytical approach belies any such interpretation.
REAOC asserts that the single unified pool, which reduces the cost of health insurance premiums as compared to those based on a pool of retirees
C
Finally, County argues that even if vested contractual rights may be implied from legislation, no such rights may be implied with respect to health benefits. County relies on the California Employees Retirement Law of 1937 (
REAOC contends that the antivesting language in
County, which does not grapple with the difference in language between
The interrelationship of these various provisions is not immediately apparent. However, we need not decide the precise scope of benefits contemplated by
It is true that County, during the relevant period, entered into MOU‘s with active employees under which County agreed to pay a large portion of the premiums for active employees-and thus effectively subsidized a portion of the retiree premiums. But, as County acknowledges, REAOC has never claimed a vested right to this contribution. Indeed, REAOC does not argue that County must continue to make any contributions toward the payment of active employee premiums. Rather, REAOC argues that health premiums for active and retired employees, however they are paid, must be equal. Accordingly,
In response to the Ninth Circuit‘s inquiry, we conclude that, under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution. Whether those circumstances exist in this case is beyond the scope of the question posed to us by the Ninth Circuit.
Cantil-Sakauye, C. J., Kennard, J., Werdegar, J., Chin, J., Corrigan, J., and Liu, J., concurred.