Foley v. Interactive Data Corp.
47 Cal. 3d 654, 765 P.2d 373, 254 Cal. Rptr. 211 (1988)
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Rule of Law:
A breach of the implied covenant of good faith and fair dealing in an employment contract gives rise to contract damages only, not tort damages. However, an implied-in-fact contract requiring good cause for termination is enforceable and not barred by the statute of frauds, while a tort action for wrongful discharge in violation of public policy requires the policy to benefit the public at large, not just the private interest of the employer.
Facts:
- In June 1976, Interactive Data Corporation (IDC) hired Daniel D. Foley as an assistant product manager.
- As a condition of employment, Foley signed a non-competition and proprietary information agreement that did not specify grounds for termination.
- Over approximately six years and nine months, Foley received consistent promotions, salary increases, bonuses, and superior performance evaluations, rising to branch manager.
- IDC's officers made repeated oral assurances to Foley of job security so long as his performance remained adequate.
- IDC maintained written "Termination Guidelines" that set forth express grounds for discharge and a mandatory seven-step pretermination procedure, which Foley understood applied to him.
- In January 1983, Foley informed his former supervisor, Richard Earnest, that his new supervisor, Robert Kuhne, was under investigation by the FBI for embezzlement from a previous employer, Bank of America.
- Earnest responded by telling Foley to forget what he had heard about Kuhne.
- In March 1983, Kuhne informed Foley he had the choice of resigning or being fired, and Foley was subsequently discharged.
Procedural Posture:
- Daniel D. Foley filed suit against Interactive Data Corporation in the trial court, alleging wrongful discharge based on three theories: tortious discharge in violation of public policy, breach of an implied-in-fact contract, and tortious breach of the implied covenant of good faith and fair dealing.
- After Foley filed two amended pleadings, the trial court sustained the defendant's demurrer without leave to amend and entered judgment for Interactive Data Corporation.
- Foley, as appellant, appealed the judgment to the Court of Appeal.
- The Court of Appeal affirmed the trial court's dismissal, holding that Foley failed to state a public policy claim, his contract claim was barred by the statute of frauds, and his implied covenant claim failed.
- The California Supreme Court granted review to consider the Court of Appeal's conclusions.
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Issue:
Does the breach of the implied covenant of good faith and fair dealing in an employment contract give rise to tort damages?
Opinions:
Majority - Lucas, C. J.
No, a breach of the implied covenant of good faith and fair dealing in an employment contract does not give rise to tort damages; remedies are limited to those available for breach of contract. The court reasoned that the employment relationship is not sufficiently analogous to the insurer-insured 'special relationship' where tort remedies are permitted. Unlike an insured who cannot find a new insurer to cover a past loss, a terminated employee can seek alternative employment. Furthermore, employers are not 'quasi-public' entities selling protection, and the interests of employers and employees are often more aligned than those of insurers and insureds. Extending tort remedies to employment would create economic instability and unpredictability, and such a significant policy change is better suited for the Legislature. The court also held that Foley's implied-in-fact contract claim was not barred by the statute of frauds because it could have been completed within one year. Finally, Foley's public policy claim failed because his reporting of a supervisor's past misconduct served only the private interest of the employer, not a fundamental public policy that benefits the public at large.
Concurring - Broussard, J.
Yes, a breach of the implied covenant of good faith and fair dealing in an employment contract should give rise to tort remedies. The majority's decision is a radical departure from established California common law, as numerous Court of Appeal decisions had unanimously recognized this tort cause of action, leading to significant public reliance. The analogy to insurance cases is strong because employment is central to an individual's financial security, status, and peace of mind, and the employment relationship is marked by a similar disparity of bargaining power. The majority illogically abolishes an established remedy and then suggests that such a radical change should be left to the Legislature, thereby shifting the burden of seeking legislative change from well-organized employers to the unorganized worker.
Concurring - Kaufman, J.
Yes, a willful and malicious discharge from employment may give rise to tort remedies for a breach of the implied duty of good faith and fair dealing. The majority mischaracterizes the implied covenant as a contract term when it is a duty imposed by law to protect society's interest against nonconsensual conduct. The 'special relationship' criteria from insurance cases—public interest, adhesion, and financial dependency—apply with even greater force in the employment context, where the employee is uniquely vulnerable and dependent on the employer. The majority's concerns about a 'flood of litigation' are unfounded and have been consistently rejected by this court as a reason to deny a meritorious cause of action.
Dissenting - Mosk, J.
Yes, a breach of the implied covenant should give rise to tort remedies, concurring with Justices Broussard and Kaufman on that point. However, the majority also erred in rejecting the public policy claim. Reporting the presence of an embezzler in a supervisorial position to an employer is not merely for the employer's private benefit; it serves the public interest by advising a state-created corporation of potential criminal activity within its management. Public policy should protect an employee who reports such information internally, as it implicates the law and societal interests.
Analysis:
This landmark decision significantly curtailed the expansion of tort remedies in wrongful termination law, reasserting the primacy of contract principles in the employment context. By rejecting the analogy to insurance 'bad faith' cases, the court drew a sharp line between breaches of contractual duties and torts that violate a fundamental public policy. The ruling increased predictability for employers by limiting potential damages for most wrongful discharges to contract-based remedies (e.g., lost wages), but it also reduced the potential recovery and deterrent effect against malicious employer conduct. This decision effectively shifted the responsibility for creating broader employee protections from the courts to the Legislature.
