Foley v. Interactive Data Corp.

KAUFMAN, J.

—Iconcur in parts I and II of the majority opinion. However, I respectfully dissent from part III dealing with breach of the implied duty of good faith and fair dealing. Contrary to the majority, I would hold that such a breach in the context of employment termination may give rise to tort remedies. The reasons which impel me to this conclusion are set forth below.

Breach of the Implied Duty of Good Faith and Fair Dealing

Thirty years ago, in Comunale v. Traders & General Ins. Co. (1958) 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.

*716 In attempting to emphasize its contractual origins, the majority characterize the covenant of good faith and fair dealing 1 as “a contract term” (maj. opn. at p. 684) “aimed at making effective the agreement’s promises.” (Maj. opn. at p. 683.) That characterization is simply incorrect under the decisions of this court and the authorities on which they relied. It is true that the law implies in every contract a duty of good faith and fair dealing. (Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 768 [ 206 Cal.Rptr. 354 , 686 P.2d 1158 ]; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818 [ 169 Cal.Rptr. 691 , 620 P.2d 141 ].) The duty to deal fairly and in good faith with the other party to a contract, however, “is a duty imposed by law, not one arising from the terms of the contract itself. In other words, this duty of dealing fairly and in good faith is nonconsensual in origin rather than consensual.” (Richardson v. Employers Liab. Assur. Corp. (1972) 25 Cal.App.3d 232, 239 [ 102 Cal.Rptr. 547 ], italics added, quoted with approval in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [ 108 Cal.Rptr. 480 , 510 P.2d 1032 ]; accord Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 175-176 [ 164 Cal.Rptr. 839 , 610 P.2d 1330 , 9 A.L.R.4th 314 ].) While the nature of the obligations imposed by this duty is dependent upon the nature and purpose of the contract and the expectations of the parties, these obligations are not consensual, not agreed to in the contract; they are imposed by law and thus reflect the normative values of society as a whole. (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d at pp. 573-575; Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 1169 [ 226 Cal.Rptr. 820 ].) The interest which the duty of good faith and fair dealing is designed to preserve and protect is essentially not the parties’ interest in having their promises performed, but society’s interest in protecting its members from harm on account of nonconsensual conduct. (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d at pp. 573-574; Koehrer v. Superior Court, supra, 181 Cal.App.3d at pp. 1169-1171.)

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, *717 this court was among the first to recognize that the nature of the obligations, the purposes of the contract and the expectations of the parties all combine to impose a heightened duty upon insurers. As we explained in Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809 , “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 .... [T]he major motivation for obtaining disability insurance is to provide funds during periods when the ordinary source of the insured’s income—his earnings—has stopped. The purchase of such insurance provides peace of mind and security in the event the insured is unable to work.” ( 24 Cal.3d at p. 819 .) We also observed that “the relationship of insurer and insured is inherently unbalanced; the adhesive nature of insurance contracts places the insurer in a superior bargaining position.” {Id. at p. 820.)

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 *718 and insured suitable for tort remedies, apply with even greater force in the employment context. Indeed, the majority reviews the pertinent cases and authorities with considerable care. (Maj. opn. at pp. 685-692.) At the end of this lengthy prologue, however, the majority concludes that all of the arguments are deficient in comparative analysis, and proceeds to explain why it is “not convinced” that a relationship analogous to that between insurer and insured exists in the employment context. (Maj. opn. at p. 692.) That explanation, in its entirety, is as follows.

First, the majority asserts that a breach in the employment context “does not place the employee in the same economic dilemma that an insured faces” because the insured “cannot turn to the marketplace,” while an employee presumably may “seek alternative employment.” (Maj. opn. at p. 692.) Next, the majority argues that an employer, unlike an insurance company, does not sell economic “protection.” (Maj. opn. at p. 692.) The majority also rejects the insurance analogy because an employee, unlike an insured, allegedly does not seek a “different kind of financial security than those entering a typical commercial contract.” (Maj. opn. at p. 692.) Finally, the majority asserts that insurance and employment contracts differ “fundamentally]” because the insured’s and insurer’s interests are “financially at odds,” while the employer’s and employee’s interests allegedly are “most frequently in alignment.” (Maj. opn. at p. 693.)

Such conclusions, in my view, expose an unrealistic if not mythical conception of the employment relationship. They also reveal a misplaced reluctance to define the minimal standards of decency required to govern that relationship. The delineation of such standards is not, as the majority strongly implies, judicial legislation, but rather constitutes this court’s fundamental obligation.

It is, at best, naive to believe that the availability of the “marketplace,” or that a supposed “alignment of interests,” renders the employment relationship less special or less subject to abuse than the relationship between insurer and insured. Indeed, I can think of no relationship in which one party, the employee, places more reliance upon the other, is more dependent upon the other, or is more vulnerable to abuse by the other, than the relationship between employer and employee. And, ironically, the relative imbalance of economic power between employer and employee tends to increase rather than diminish the longer that relationship continues. Whatever bargaining strength and marketability the employee may have at the moment of hiring, diminishes rapidly thereafter. Marketplace? What market is there for the factory worker laid off after 25 years of labor in the same plant, or for the middle-aged executive fired after 25 years with the same firm?

*719 Financial security? Can anyone seriously dispute that employment is generally sought, at least in part, for financial security and all that that implies: food on the table, shelter, clothing, medical care, education for one’s children. Clearly, no action for breach of the covenant of good faith and fair dealing will lie unless it has first been proved that, expressly or by implication, the employer has given the employee a reasonable expectation of continued employment so long as the employee performs satisfactorily. (Koehrer v. Superior Court, supra, 181 Cal.App.3d at p. 1171.) And that expectation constitutes a far greater and graver security interest than any which inheres in the insurance context. Most of us can live without insurance. Few of us could live without a job.

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.”

*720 The responsibility to which we referred in Pierce, supra, 61 Cal.2d 879 , arises from the unique genius of the common law system and the critical role which the courts play in that system. “In California as in other jurisdictions of Anglo-American heritage, the common law ‘is not a codification of exact or inflexible rules for human conduct . . . but is rather the embodiment of broad and comprehensive unwritten principles, inspired by natural reason and an innate sense of justice, and adopted by common consent for the regulation and government of the affairs of men. . . .’

“ ‘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

*721 In Li v. Yellow Cab Co. (1975) 13 Cal.3d 804 [ 119 Cal.Rptr. 858 , 532 P.2d 1226 , 78 A.L.R.3d 393 ], this court judicially abolished the doctrine of contributory negligence as a total bar to recovery and adopted a rule of comparative negligence in direct proportion to fault. We did so despite the contention that “widespread disagreement among both the commentators and the states as to which [system was] best” rendered the matter more suitable for legislative action. (Id. at p. 833 (dis. opn. of Clark, J.).) “[L]ogic, practical experience, and fundamental justice,” we held, made judicial action imperative. (Id. at pp. 812-813.)

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 *722 p. 736.) The unreasoning fear that we cannot successfully adjudicate future cases of bad faith termination, pursuant to the guidelines already formulated and applied by the Courts of Appeal, should not be permitted to bar recovery in an otherwise meritorious case.

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: “ ‘[Cjourts 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 ] (cone, 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.

*723 Conclusion

The majority’s views of the bad faith issue reflect one overriding concern—that of judicial overreaching. It is a familiar concern.

The power of the courts as both guardian and expositor of the common law is considerable. To be effective, such power must be exercised with restraint. Judge-made law must progress incrementally, “interstitially” as Justice Holmes said, filling the legislative gaps, neither too far ahead of nor too far behind the body politic.

Still, Justice Cardozo believed, as his landmark common law decisions attest, that the “fissures in the common law are wider than the fissures in a statute . . . .” (Cardozo, The Nature of the Judicial Process (1921) p. 71.) His point, it appears, is that within the framework of the traditional common law responsibilities of the judiciary, the courts may respond to changing social needs without deference to legislative action. As Professor Corbin said: “It is the function of our courts to keep the doctrines up to date with the mores by continual restatement and by giving them a continually new content. This is judicial legislation, and the judge legislates at his peril. Nevertheless, it is the necessity and duty of such legislation that gives to judicial office its highest honor; and no brave and honest judge shirks the duty or fears the peril.” (Corbin, The Offer of an Act for a Promise (1920) 29 Yale L.J. 767 , 771-772, italics added.)

The majority’s implicit fears of judicial activism are unfounded. We overstep no institutional bounds or constitutional constraints in recognizing that a willful and malicious termination of employment is so offensive to community values that it may give rise to tort remedies. On the contrary, such a holding would be entirely consistent with our judicial function, and with the great common law tradition of this court.

As the commentators have noted, the very term “implied covenant” is misleading, since it “evokes the notion of contract, and therefore the term ‘duty’ might be more appropriate for treating the violation of good faith and fair dealing as a tort.” (Note, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort (1985) 73 Cal.L.Rev. 1291, 1307, fn. 76.) The Restatement Second of Contracts, section 205, has adopted the language of duty: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.”

In rejecting the doctrine of sovereign inmunity, we relied in part on earlier decisions in which we had abolished the doctrine of tort immunity of charitable institutions (Malloy v. Fong (1951) 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 *721 only the Legislature could change it.” (Muskopf v. Corning Hospital Dist., supra, 55 Cal.2d at p. 219 .)