Title: Retired Employees Assoc. v. Co. of Orange

State: california

Issuer: California Supreme Court

Document:

1 
Filed 11/21/11 
 
 
 
IN THE SUPREME COURT OF CALIFORNIA 
 
 
 
RETIRED EMPLOYEES ASSOCIATION ) 
OF ORANGE COUNTY, INC., 
) 
 
 
) 
 
Plaintiff and Appellant, 
) 
 
 
) 
S184059 
 
v. 
) 
 
 
) 
   
COUNTY OF ORANGE, 
) 
9th Cir. No. 09-56026 
 
) 
C.D. Cal. No. 
 
 
Defendant and Respondent. 
) 
CV-07-1301-AG 
 
____________________________________) 
 
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.)  Although Government Code section 25300 does 
require that compensation of county employees be addressed in an ordinance or 
resolution, the statute does not prohibit a county from forming a contract with 
implied terms, inasmuch as contractual rights may be implied from an ordinance 
                                              
1  
Retired Employees Association of Orange County, Inc. v. County of Orange 
(9th Cir. 2010) 610 F.3d 1099; California Rules of Court, rule 8.548. 
2 
or resolution when the language or circumstances accompanying its passage 
clearly evince a legislative intent to create private rights of a contractual nature 
enforceable against the county.  Whether an implied term creates vested rights, in 
the absence of a legislative bar, is a matter of the parties‘ intent.   
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.   
3 
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 pooling active and retired 
employees, along with County‘s representations to employees regarding a unified 
pool, created an implied contractual right to a continuation of the single unified 
pool for employees who retired before January 1, 2008.  REAOC noted, for 
example, that a booklet entitled ―Health Plan Choices,‖ which was distributed to 
active employees, stated that ―[w]hen you retire from the County you will be 
eligible to continue with the health insurance plans‖ and that ―[r]etiree rates are 
based on the full monthly premiums for each plan, with adjustments for 
[M]edicare enrollment.‖  County, on the other hand, relied on the annual motions 
and resolutions of the Board setting health premiums during the relevant period, 
each of which specified health insurance rates only for that plan year.          
The district court granted summary judgment for County on all claims.  
(Retired Employees Ass’n 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 
4 
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.  (Civ. Code, § 1619.)  The terms of 
an express contract are stated in words.  (Civ. Code, § 1620.)  The existence and 
terms of an implied contract are manifested by conduct.  (Civ. Code, § 1621.)  The 
distinction reflects no difference in legal effect but merely in the mode of 
manifesting assent.  (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, 
§ 102, p. 144.)  Accordingly, a contract implied in fact ―consists of obligations 
arising from a mutual agreement and intent to promise where the agreement and 
promise have not been expressed in words.‖  (Silva v. Providence Hospital of 
Oakland (1939) 14 Cal.2d 762, 773.)   
Even when a written contract exists, ― ‗ ―[e]vidence derived from 
experience and practice can now trigger the incorporation of additional, implied 
terms.‖ ‘ ‖  (Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 463.)  
―Implied contractual terms ‗ordinarily stand on equal footing with express terms‘ ‖  
(ibid.), provided that, ―as a general matter, implied terms should never be read to 
vary express terms.‖  (Carma Developers (Cal.), Inc. v. Marathon Development 
California, Inc. (1992) 2 Cal.4th 342, 374.)   
All contracts, whether public or private, are to be interpreted by the same 
rules unless otherwise provided by the Civil Code.  (Civ. Code, § 1635; see also 
M. F. Kemper Const. Co. v. City of L.A. (1951) 37 Cal.2d 696, 704 [―California 
cases uniformly refuse to apply special rules of law simply because a 
5 
governmental body is a party to a contract‖].)  In the private sector, it is well 
understood that collective bargaining agreements are intended to govern ― ‗a 
myriad of cases which the draftsmen cannot wholly anticipate‘ ‖ (Consol. Rail 
Corp. v. Railway Labor Executives (1989) 491 U.S. 299, 311-312); that resort may 
be had, in appropriate circumstances, to the parties‘ practice, usage, and custom in 
interpreting the agreement (ibid.); and that such agreements ―often contain 
implied, as well as express, terms‖ (id. at p. 309, fn. 7).  Our precedents similarly 
find, in the public employment context, that ―[g]overnmental subdivisions may be 
bound by an implied contract if there is no statutory prohibition against such 
arrangements.‖  (Youngman v. Nevada Irrigation Dist., supra, 70 Cal.2d at p. 246 
(Youngman).) 
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 
6 
and advance employees one step in their respective classifications on or about 
their employment anniversary date each year.  (Id. at pp. 245-246.)  The district, 
on the other hand, urged that the demurrer to this cause of action be sustained on 
the ground the district had only such powers as were expressly granted by statute 
(or necessarily included therein), and no specific authority permitted the district to 
enter into an implied contract.  (Id. at p. 246.)  We held, unanimously, that the 
general provisions giving the district the power to hire employees and fix their 
salaries (Wat. Code, § 21185), to enter into such contracts as necessary to carry 
out its purpose (id., § 22230), and ―to perform all acts necessary to carry out fully‖ 
its assigned function (id., § 22225) included the ability to enter into implied 
contracts as well as express contracts, ―since the only significant difference 
between the two is the evidentiary method by which proof of their existence and 
terms is established.‖  (Youngman, supra, 70 Cal.2d at p. 246.)  We then 
concluded:  ―Governmental subdivisions may be bound by an implied contract if 
there is no statutory prohibition against such arrangements.‖  (Ibid.)   
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 (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 
                                              
2  
The ordinance did permit a maximum of 144 hours to be carried over, but 
only with the approval of the employee‘s superiors (and even then the time off had 
to be used within that next calendar year).  (Markman, supra, 35 Cal.App.3d at p. 
 
(footnote continued on next page) 
7 
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 turn relinquish certain rights which are enjoyed by 
private employees [citation], one such disability being that the public employee is 
entitled only to such compensation as is expressly provided by statute or 
ordinance regardless of the extent of services actually rendered.‖  (Id. at pp. 134-
135, italics added.)   
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 
                                                                                                                                                              
 
(footnote continued from previous page) 
 
133.)  According to the ordinance, overtime that was not converted into 
compensatory time off under this formula was ― ‗lost.‘ ‖  (Id. at p. 134.)   
8 
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, 
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 [classified employee was not entitled to payment for unused vacation 
over a period of 21 years; Ed. Code, §45197, subd. (d) permitted the employee to 
carry over unused vacation ―for just one year‖]; California School Employees 
Assn. v. New Haven Unified School Dist. (1979) 91 Cal.App.3d 919, 923-924 
[classified employees were not entitled as of right to holiday pay where the 
governing statute gave the district board the authority to elect between monetary 
compensation and compensating time off].)  These cases are simply instances of 
the broader principle that ―the law does not recognize implied contract terms that 
9 
are at variance with the terms of the contract as expressly agreed or as prescribed 
by statute.‖  (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 412, emphasis 
omitted; see also Shoemaker v. Myers (1990) 52 Cal.3d 1, 23-24 [― ‗insofar as the 
duration of [public] employment is concerned, no employee has a vested 
contractual right to continue in employment beyond the time or contrary to the 
terms and conditions fixed by law,‘ ‖ quoting Miller v. State of California (1977) 
18 Cal.3d 808, 813]; Martin v. Henderson (1953) 40 Cal.2d 583, 590-591 [― ‗The 
statutory provisions controlling the terms and conditions of civil service 
employment cannot be circumvented by purported contracts in conflict 
therewith‘ ‖].)  Inasmuch as County does not claim that any statute bars the 
granting of health benefits to retirees, these cases are inapposite.     
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; see also White v. Davis (2003) 30 Cal.4th 528, 565-566; cf. Kemmerer v. 
County of Fresno (1988) 200 Cal.App.3d 1426, 1434 [distinguishing Youngman 
on the ground ―the district was expressly granted powers to contract with 
employees‖].)  Under the Meyers-Milias-Brown Act (Gov. Code, §§ 3500-3510), 
local governments are authorized to meet and confer with their employees‘ 
authorized bargaining representative regarding wages, hours, and other terms and 
conditions of employment, and to enter into and approve written memoranda of 
understanding to memorialize their agreements.  (Gov. Code, §§ 3505, 3505.1.)  
As San Joaquin County Employees’ Assn., Inc. v. County of San Joaquin (1974) 
39 Cal.App.3d 83, 88, observed, ―the entire import of the Meyers-Milias-Brown 
Act is to permit as much flexibility in employee-governmental agency relations 
10 
with regard to all aspects in the employer-employee milieu as a voluntary system 
will permit.‖     
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 [―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 [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 ―breach of contract claim is not simply 
defeated by his status as a public employee.‖  (Sheppard v. North Orange County 
Regional Occupational Program (2010) 191 Cal.App.4th 289, 313.)  Indeed, ―all 
modern California decisions treat labor-management agreements whether in public 
employment or private as enforceable contracts (see Lab. Code, § 1126) which 
should be interpreted to execute the mutual intent and purpose of the parties.‖  
(Glendale City Employees’ Assn., Inc. v. City of Glendale (1975) 15 Cal.3d 328, 
339, fns. omitted.)  This principle has special force in the context of public 
employment, inasmuch as ―the bargaining power of public employees has been 
severely limited by statute.‖  (Chula Vista Police Officers’ Assn. v. Cole (1980) 
107 Cal.App.3d 242, 248.)    
11 
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 article XI, 
section 1, subdivision (b) of the California Constitution.  That provision states in 
pertinent part:  ―The Legislature shall provide for county powers, an elected 
county sheriff, an elected district attorney, an elected assessor, and an elected 
governing body in each county.  Except as provided in subdivision (b) of Section 4 
of this article, each governing body shall prescribe by ordinance the compensation 
of its members . . . .  The governing body shall provide for the number, 
compensation, tenure, and appointment of employees.‖  Although this provision 
does state that the county‘s governing body shall prescribe ―by ordinance‖ the 
compensation of its members, it does not specify any particular formality to be 
used in setting the compensation of its employees.  (Cal. Const., art. XI, § 1, subd. 
(b).)  It states merely that the ―governing body shall provide for‖ employee 
compensation.  There is no requirement that it do so by ordinance or any other 
particular method.  (Cf. Dimon v. County of Los Angeles (2008) 166 Cal.App.4th 
12 
1276, 1286 [finding no constitutional impediment to a county‘s approval of an 
MOU by resolution].)  Moreover, the purpose of this provision was ― ‗to give 
greater local autonomy to the setting of salaries for county officers and employees, 
removing that function from the centralized control of the Legislature,‘ ‖ not to 
constrain the method by which local governments were to set employee salaries.  
(County of Riverside v. Superior Court (2003) 30 Cal.4th 278, 286.)     
Government Code section 25300, on the other hand, does constrain a 
county‘s discretion.  It reads:  ―The board of supervisors shall prescribe the 
compensation of all county officers and shall provide for the number, 
compensation, tenure, appointment and conditions of employment of county 
employees.  Except as otherwise required by Section 1 or 4 of Article XI of the 
California Constitution, such action may be taken by resolution of the board of 
supervisors as well as by ordinance.‖  The first sentence of this statute closely 
tracks the final sentence of article XI, section 1, subdivision (b) of the state 
Constitution, and thus does not require any particular formality for the fixing of 
employee compensation.  The second sentence, though, states that except as 
otherwise provided by particular provisions of the state Constitution—an 
exception that neither party claims applies here—the fixing of employee 
compensation ―may‖ be taken by resolution or by ordinance.  Although we 
ordinarily construe the word ―may‖ as permissive, especially ― ‗[w]hen the 
Legislature has, as here, used both ―shall‖ and ―may‖ in close proximity in a 
particular context,‘ ‖ we have also said that ―in determining whether the 
Legislature intended a statute to be mandatory or permissive, use in the statute of 
‗may‘ or ‗shall‘ is merely indicative, not dispositive or conclusive.‖  (Tarrant Bell 
Property, LLC v. Superior Court (2011) 51 Cal.4th 538, 542.)  As part of the 
determination whether a statute is mandatory or permissive, ―we may properly 
13 
consider other indicia of legislative intent, including relevant legislative history.‖  
(Ibid.)   
  The legislative history of Government Code section 25300 plainly shows 
that the purpose of the provision‘s second sentence was to provide a county board 
of supervisors with an alternative to acting by ordinance.  At the time, some 
county counsel had believed that the terms or conditions of employment ―must be‖ 
addressed by ordinance.  (Sen. Local Gov. Com., Analysis of Assem. Bill No. 
4144 (1973-1974 Reg. Sess.) as amended June 18, 1974, p. 1.)  Section 25300 was 
enacted to expand counties‘ authority to regulate the terms and conditions of 
employment, including salaries, not just by ordinance but also by resolution.  
(Dimon v. County of Los Angeles, supra, 166 Cal.App.4th at p. 1284 [―the statute 
was amended in 1974 to enable a board of supervisors to address employee 
compensation by ordinance or resolution instead of by ordinance only‖].)  County, 
in particular, has mandated that these matters be addressed by resolution:  ―The 
regulation of the method of employment, terms of employment, conditions of 
employment, working hours, leaves of absence, compensation of officers and 
employees of the County of Orange, the Orange County Flood Control District 
and the Orange County Harbors, Beaches and Parks District shall, effective July 1, 
1965, be fixed by resolution of this Board.‖  (Orange County Code, tit. 1, div. 3, 
art. 1, § 1-3-2.)   
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; accord, Chemical 
Workers v. Pittsburgh Glass (1971) 404 U.S. 157, 180 [―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 Gov. Code, § 3505.1), to 
14 
determine the parties‘ contractual rights and obligations.  (Van Riessen v. City of 
Santa Monica (1976) 63 Cal.App.3d 193, 196 [where the municipal code stated 
that payment for unused sick leave ― ‗may be further regulated by resolution or 
Memorandum(s) of Understanding,‘ ‖ plaintiff‘s failure to identify a resolution or 
memorandum authorizing payment required denial of the claim].)  We need not 
decide whether County, in light of Government Code section 25300 and the 
County ordinance cited above, may form an implied contract with its employees 
on matters of compensation though, as REAOC assured us at oral argument that it 
was seeking recognition only of an implied term of an existing contract (and not 
the recognition of an implied contract).  That matters of compensation must be 
addressed by resolution does not necessarily bar recognition of implied terms 
concerning compensation.  Under California law, contractual rights may be 
implied from legislative enactments under limited circumstances, as described 
further below.   
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; Pinewood Investors v. City of 
Oxnard (1982) 133 Cal.App.3d 1030, 1039.)  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 
15 
Corp. v. A. T. & S. F. R. Co. (1985) 470 U.S. 451, 466; accord, Doe v. California 
Dept. of Justice (2009) 173 Cal.App.4th 1095, 1107.)  ―Thus, it is presumed that a 
statutory scheme is not intended to create private contractual or vested rights and a 
person who asserts the creation of a contract with the state has the burden of 
overcoming that presumption.‖  (Walsh v. Board of Administration (1992) 4 
Cal.App.4th 682, 697.)     
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, 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 (Or. 1938) 
79 P.2d 257, 259.)   
California Teachers Assn. v. Cory (1984) 155 Cal.App.3d 494, 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, 
16 
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 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 [upholding a finding 
of an implied vested right to an actuarially sound public retirement system].)  
From these cases, we conclude generally that legislation in California may 
be said to create contractual rights when the statutory language or circumstances 
accompanying its passage ―clearly ‗. . . evince a legislative intent to create private 
rights of a contractual nature enforceable against the [governmental body].‘ ‖  
(Valdes v. Cory (1983) 139 Cal.App.3d 773, 786, quoting United States Trust Co. 
v. New Jersey (1977) 431 U.S. 1, 17, fn. 14.)  Although the intent to make a 
contract must be clear, our case law does not inexorably require that the intent be 
express.  (Cf. Mo. Rev. Stat. § 432.070 [―No county . . . shall make any contract, 
unless . . . such contract, including the consideration, shall be in writing and dated 
when made, and shall be subscribed by the parties thereto‖].)  A contractual right 
can be implied from legislation in appropriate circumstances.  (E.g., California 
Teachers Assn. v. Cory, supra, 155 Cal.App.3d at p. 505.)  Where, for example, 
the legislation is itself the ratification or approval of a contract, the intent to make 
a contract is clearly shown. 
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 
17 
on Reams v. Cooley (1915) 171 Cal. 150, 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 [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.)  
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. 
County relies also on Government Code section 3505.1, which authorizes 
the representatives of a public agency and the representatives of a recognized 
employee organization, when they have reached an agreement, to prepare a written 
memorandum of understanding, which shall not be binding, and to present it to the 
governing body ―for determination.‖  County focuses on the proviso that the 
written memorandum of understanding is not ―binding‖ until it is presented to the 
governing body ―for determination.‖  But REAOC does not contend a contract for 
certain health benefits exists even though the contract was never presented to the 
18 
Board; rather, REAOC claims that that the contract was presented to the Board—
and approved by a majority of Board members (Gov. Code, § 25005)—but that it 
included terms that are not express.  (See Glendale City Employees’ Assn., Inc. v. 
City of Glendale, supra, 15 Cal.3d at pp. 339-340.)  Government Code section 
3505.1 does not categorically bar such a claim.  (See generally Gov. Code, § 
25207 [―The board may do and perform all other acts and things required by law 
not enumerated in this part, or which are necessary to the full discharge of the 
duties of the legislative authority of the county government‖].)   
The same analysis disposes of Government Code section 54953, which 
requires that a legislative body‘s meetings be open and public, and section 
54960.1, which describes the procedures required to nullify any action taken in 
violation of the Ralph M. Brown Act open meeting law.  REAOC does not seek to 
enforce a contract that was approved in violation of the Ralph M. Brown Act.  It 
seeks instead to enforce the implied terms of a contract that was assertedly 
approved in an open meeting. 
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 
19 
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 
legislation was intended to create the asserted contractual obligation (Parker v. 
Wakelin (1st Cir. 1997) 123 F.3d 1, 5) should ensure that neither the governing 
body nor the public will be blindsided by unexpected obligations.   
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.       
                                              
3  
A benefit is deemed ―vested‖ when the employee acquires an irrevocable 
interest in the benefit.  The ―vesting‖ of retirement benefits must be distinguished 
from the ―maturing‖ of those benefits, which occurs after the conditions precedent 
to the payment of the benefits have taken place or the benefits are otherwise within 
the control of the employee.  (In re Marriage of Fithian (1974) 10 Cal.3d 592, 
596, fn. 2, overruled on other grounds, In re Marriage of Brown (1976) 15 Cal.3d 
838, 851, fn. 14.)  In this proceeding, REAOC contends that a retiree‘s right to the 
benefits of a single unified pool vested at the time of retirement, and explicitly 
disavows any claim that the benefits vested when the employee began his or her 
service.    
20 
In San Bernardino Public Employees Assn. v. City of Fontana (1998) 67 
Cal.App.4th 1215 (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) ― ‗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).   
County‘s position is further undermined by California League of City 
Employee Associations v. Palos Verdes Library Dist. (1978) 87 Cal.App.3d 135, 
which implied vested rights to certain pay, vacation, and sabbatical benefits that 
were based on longevity.  The Court of Appeal upheld the trial court‘s finding that 
these benefits ―had been an inducement to remain employed with the district, and 
were a form of compensation which had been earned by remaining in 
employment.‖  (Id. at p. 140.)  Although we agree with the criticism by some state 
and federal courts that the California League analysis was deficient in failing to 
focus explicitly on ―the legislative body‘s intent to create vested rights‖ or the 
21 
plaintiff‘s ―heavy burden‖ to demonstrate that intent (see San Diego Police v. San 
Diego Retirement System (9th Cir. 2009) 568 F.3d 725, 740; accord, San 
Bernardino Public Employees, supra, 67 Cal.App.4th at pp. 1222-1223), none of 
this criticism purports to quarrel with the underlying theory in California League 
that public employee benefits, in appropriate circumstances, could become vested 
by implication.  (See San Diego Police, supra, at p. 740; San Bernardino Public 
Employees, supra, at p. 1223; see also Lawrence v. Town of Irondequoit 
(W.D.N.Y. 2002) 246 F.Supp.2d 150, 166-169 [whether the personnel policies and 
procedures manual, adopted by resolution, created a vested right to health benefits 
could not be determined on summary judgment].)      
In Sappington v. Orange Unified School Dist. (2004) 119 Cal.App.4th 949, 
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-
up-charge‘ ‖ for the PPO plan, while continuing to offer a health maintenance 
organization plan at no cost.  (Id. 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. 
22 
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 alone, 
is a form of deferred compensation and thus vested when its members retired.  
(See Suastez v. Plastic Dress-Up Co., supra, 31 Cal.3d at p. 780; accord, Navlet v. 
The Port of Seattle (Wn. 2008) 194 P.3d 221, 224, 231 [implying a vested right to 
lifetime health and welfare benefits for employees who reached retirement age 
during the term of the collective bargaining agreement].)  Whether that claim is 
valid and whether, in particular, REAOC‘s members had a contractual right to be 
part of a single unified pool with active employees for purposes of establishing 
health insurance premiums that vested when they retired, is beyond the scope of 
the certified question.  However, as with any contractual obligation that would 
bind one party for a period extending far beyond the term of the contract of 
employment, implied rights to vested benefits should not be inferred without a 
clear basis in the contract or convincing extrinsic evidence.         
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 (Gov. Code, 
§ 31450 et seq.; CERL) and focuses specifically on Government Code section 
31692, which provides in relevant part that ―[t]he adoption of an ordinance or 
resolution pursuant to Section 31691 shall give no vested right to any member or 
retired member . . . .‖  (Italics added.)  Section 31692 further provides that ―the 
board of supervisors or the governing body of the district may amend or repeal the 
ordinance or resolution at any time except that as to any member who is retired at 
the time of such an amendment or repeal, the amendment or repeal shall not be 
operative until ninety (90) days after the board or governing body notifies the 
member in writing of the amendment or repeal.‖   
23 
Government Code section 31692 is clear that no vested rights are created 
by ―the adoption of an ordinance or resolution pursuant to Section 31691,‖ which 
in turn authorizes a county board of supervisors by ordinance (or a specified 
district by ordinance or resolution) to ―provide for the contribution by the county 
or district from its funds . . . toward the payment of all or a portion of the 
premiums on a policy or certificate of life insurance or disability insurance . . . or 
toward the payment of all or part of the consideration for any hospital service or 
medical service corporation, including any corporation lawfully operating under 
Section 9201 of the Corporations Code, contract, or for any combination thereof, 
for the benefit of any member heretofore or hereafter retired or his or her 
dependents.  At least one of these plans shall include free choice of physician and 
surgeon.‖  (Gov. Code, § 31691, subd. (a).)  But the precise relationship between a 
―hospital service or medical service corporation . . . contract,‖ as specified in 
Government Code section 31691, subdivision (a), and ―health benefits,‖ as 
specified in the certified question from the Ninth Circuit, is less clear.  REAOC 
points out that a separate law, not mentioned by Government Code section 31692, 
authorizes the legislative body of a local agency, including a county, to provide 
―health and welfare benefits‖ to its employees and retired employees ―subject to 
conditions as may be established by it‖ (Gov. Code, § 53201, subd. (a), italics 
added) and to pay all or a portion of such premiums for ―any one or more of the 
following:  hospital, medical, surgical, disability, legal expense or related benefits 
including, but not limited to, medical, dental, life, legal expense, and income 
protection insurance or benefits, whether provided on an insurance or a service 
basis, and includes group life insurance . . . .‖  (Gov. Code, § 53200, subd. (d), 
italics added.)   
REAOC contends that the anti-vesting language in Government Code 
section 31692 therefore does not apply to health insurance benefits, since such 
24 
benefits are authorized by Government Code section 53201 and not by section 
31691.  (See California Physicians Service v. Garrison (1946) 28 Cal.2d 790, 810 
[a health service corporation is not engaged in the business of insurance]; see 
generally Songstad v. Superior Court (2001) 93 Cal.App.4th 1202, 1208-1209 
[―The use of a term in a statute addressing a subject, and omitting that term and 
using a different term in a similar statute addressing a related subject, shows a 
different meaning was intended in the two statutes‖].)  REAOC points out further 
that the nature and scope of health and welfare benefits under section 53201 are 
explicitly entrusted to the discretion of the local legislative body.  REAOC adds, 
moreover, that health insurance benefits provided under section 53201 have been 
found to be vested benefits, notwithstanding the anti-vesting language of section 
31692.  (See, e.g., Thorning v. Hollister School Dist. (1992) 11 Cal.App.4th 1598, 
1602 [upholding claim of retired district board members to vested rights to health 
insurance benefits provided under § 53201]; 67 Ops.Cal.Atty.Gen. 510 (1984) 
[school district may not discontinue health and life insurance benefits provided 
under § 53201 of retired board members or of current board members during their 
terms].)   
County, which does not grapple with the difference in language between 
Government Code sections 31691, subdivision (a) (―any hospital service or 
medical service corporation . . . contract‖) and 53200, subdivision (d) (―hospital, 
medical, surgical . . . benefits including . . . medical . . . insurance or benefits, 
whether provided on an insurance or a service basis‖), insists nonetheless that the 
anti-vesting language of Government Code section 31692 ―plainly applies‖ to the 
benefits here.  Moreover, neither party discusses what relationship, if any, exists 
between a ―hospital service or medical service corporation . . . contract,‖ as 
specified in Government Code section 31691, subdivision (a), and a ― ‗[h]ealth 
25 
care service plan,‘ ‖ as defined by Health and Safety Code section 1345, 
subdivision (f). 
The interrelationship of these various provisions is not immediately 
apparent.  However, we need not decide the precise scope of benefits 
contemplated by Government Code section 31691, subdivision (a), because 
County‘s reliance on the anti-vesting language in Government Code section 31692 
fails for a different reason:  the vested benefit REAOC is seeking to preserve in 
this proceeding is not a ―contribution by the county . . . from its funds . . . toward 
the payment of all or a portion‖ of the consideration for any hospital or medical 
service corporation contract.  (Gov. Code, § 31691, subd. (a).)  REAOC is seeking 
to preserve a particular methodology by which the health benefit premiums of 
active and retired employees are calculated.  That the pooling of active and retired 
employees may have the effect of elevating the insurance premiums for active 
employees over what they would be if the active employees were in a separate 
pool does not establish that County made a contribution from its funds toward the 
payment of any service corporation contracts.  Section 31691, subdivision (a) 
applies not to the mere provision of certain health benefits (cf. Gov. Code, 
§ 53201, subd. (a) [―The legislative body of a local agency . . . may provide for 
any health and welfare benefits for the benefit of its officers, employees, [and] 
retired employees . . . .‖ (italics added)]), but only to the ―contribution by the 
county . . . from its funds . . . toward the payment of all or a portion‖ of them.  A 
county‘s selection among permissible methods of calculating health insurance 
premiums, like its decision to allow retirees to participate in a group insurance 
plan, has certain effects on the level of premiums, but does not itself qualify as a 
contribution by the county from its funds toward payment of the premiums that are 
actually charged.   
26 
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, Government 
Code section 31692 does not compel an answer of ―no‖ to the certified question. 
 
III 
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.    
 
 
 
 
 
 
 
BAXTER, J. 
WE CONCUR: 
CANTIL-SAKAUYE, C.J. 
KENNARD, J. 
WERDEGAR, J. 
CHIN, J. 
CORRIGAN, J. 
LIU, J. 
 
 
See next page for addresses and telephone numbers for counsel who argued in Supreme Court. 
 
Name of Opinion Retired Employees Association of Orange County Inc. v. County of Orange 
__________________________________________________________________________________ 
 
Unpublished Opinion 
Original Appeal 
Original Proceeding XXX – on request pursuant to rule 8.548 Cal. Rules of Court 
Review Granted 
Rehearing Granted 
 
__________________________________________________________________________________ 
 
Opinion No. S184059 
Date Filed: November 21, 2011 
__________________________________________________________________________________ 
 
Court: 
County: 
Judge: 
 
__________________________________________________________________________________ 
 
Counsel: 
 
Rosen Bien & Galvan, Ernest Galvin; Moscone, Emblidge & Sater, G. Scott Emblidge, Rachel J. Sater and 
Michael P. Brown for Plaintiff and Appellant. 
 
Peter H. Mixon, Gina M. Ratto, Patricia K. McBeath, Howard L. Schwartz and Jennifer G. Krengel for 
California Public Employees‘ Retirement System as Amicus Curiae on behalf of 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 United 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. 
 
 
 
 
 
 
 
 
 
 
 
 
Counsel who argued in Supreme Court (not intended for publication with opinion): 
 
Ernest Galvan 
Rosen Bien & Galvan 
315 Montgomery Street, 10th Floor 
San Franicsco, CA  94104-1823 
(415) 433-6830 
 
Arthur A. Hartinger 
Meyers, Nave, Riback, Silver & Wilson 
555 12th Street, Suite 1500 
Oakland, CA  94607 
(510) 808)-2000 
 
Jonathan V. Holtzman 
Renne Sloan Holtzman Sakai 
350 Sansome Street, Suite 300 
San Francisco, CA  94104 
(415) 678-3800