Court Opinion

ID: 9478916
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:02:24.816209+00
Date Added: 2024-06-11T17:46:41.825496
License: Public Domain

KOZINSKI, Circuit Judge,
concurring:
Nowhere but in the Cloud Cuckooland of modern tort theory could a case like this have been concocted. One large corporation is complaining that another obstinately refused to acknowledge they had a contract. For this shocking misconduct it is *315demanding millions of dollars in punitive damages. I suppose we will next be seeing lawsuits seeking punitive damages for maliciously refusing to return telephone calls or adopting a condescending tone in interoffice memos. Not every slight, nor even every wrong, ought to have a tort remedy. The intrusion of courts into every aspect of life, and particularly into every type of business relationship, generates serious costs and uncertainties, trivializes the law, and denies individuals and businesses the autonomy of adjusting mutual rights and responsibilities through voluntary contractual agreement.
I
In inventing the tort of bad faith denial of a contract, Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal.3d 752, 686 P.2d 1158, 206 Cal.Rptr. 354 (1984), the California Supreme Court has created a cause of action so nebulous in outline and so unpredictable in application that it more resembles a brick thrown from a third story window than a rule of law. Seaman’s gives nary a hint as to how to distinguish a bad faith denial that a contract exists, from a dispute over contract terms, from a permissible attempt to rescind a contract, or from “a loosely worded disclaimer of continued contractual responsibility.” Quigley v. Pet, Inc., 162 Cal.App.3d 877, 890, 208 Cal.Rptr. 394 (1984).
Small wonder: It is impossible to draw a principled distinction between a tortious denial of a contract’s existence and a permissible denial of liability under the terms of the contract. The test — if one can call it such — seems to be whether the conduct “offends accepted notions of business ethics.” Seaman’s, 36 Cal.3d at 770, 206 Cal.Rptr. 354, 686 P.2d 1158. This gives judges license to rely on their gut feelings in distinguishing between a squabble and a tort. As a result, both the commercial world and the courts are needlessly burdened: The parties are hamstrung in developing binding agreements by the absence of clear legal principles; overburdened courts must adjudicate disputes that are incapable of settlement because no one can predict how — or even by what standard— they will be decided.
Seaman’s throws kerosene on the litigation bonfire by holding out the allure of punitive damages, a golden carrot that entices into court parties who might otherwise be inclined to resolve their differences. Punitive damages once were reserved for truly outrageous conduct; even then, awards were relatively small. See, e.g., Lanigan v. Neely, 4 Cal.App. 760, 89 P. 441 (1907) (punitive damages awarded for breach of promise of marriage when plaintiff’s reliance on the promise resulted in pregnancy); Scheps v. Giles, 222 S.W. 348 (Tex.Civ.App.1920) (punitive damages awarded for wrongful discharge where employer publicly called employee a liar and ordered her out of his sight). Today punitive damages are obtained in cases involving fairly innocuous conduct, see, e.g., April Enters., Inc. v. KTTV, 147 Cal.App.3d 805, 195 Cal.Rptr. 421 (1983) (plaintiff sued defendant for erasing videotapes of television shows, although the contract explicitly authorized such erasure; jury awarded $14 million in punitive damages); Klimek v. Hitch, 124 Ill.App.3d 997, 80 Ill.Dec. 289, 464 N.E.2d 1272 (1984) (landowner sued his neighbor for trespass and destruction of a hedgerow; court awarded $10 compensatory damages and $14,500 punitive damages), often in amounts that seem to be limited only by the ability of lawyers to string zeros together in drafting a complaint.
This tortification of contract law — the tendency of contract disputes to metastasize into torts — gives rise to a new form of entrepreneurship: investment in tort causes of action. “If Pennzoil won $11 billion from Texaco, why not me?” That thought must cross the minds of many enterprising lawyers and businessmen. A claim such as “defined” by Seaman’s is a particularly attractive investment vehicle: The potential rewards are large, the rules nebulous, and the parties unconstrained by such annoying technicalities as the language of the contract to which they once agreed. Here, for example, the contract was largely beside the point. Microtech instead relied on statements in Oki’s plead*316ings, rumors racing through the Oki grapevine, and a letter in which Oki’s president offers his interpretation of the contract. On the basis of these minutiae, Mic.rotech stakes its claim to $600,000 of compensatory damages and $2.5 million in punitive damages. And why not? Evenga one in ten chance of winning would justify an investment of over $300,000 in attorney's fees.
As this case illustrates, business relationships are complex organisms, not always as neatly structured as one could wish for. The record presents plausible support for both sides insofar as the contract dispute is concerned. That issue settled early in the litigation, everyone presumably having learned a valuable lesson on the need to tidy up business relationships.
But the case drags on, kept alive by Microtech’s vain hope of parlaying a business squabble into a $3.1 million gold mine. The judicial machinery keeps churning, fueled by the energies of the lawyers, the parties, a district judge, three appellate judges, their respective staffs and other myriad components of the judicial process. One shudders to imagine the resources that would be consumed in adjudicating a more colorable Seaman’s case. We surely have more pressing claims on our limited resources — safeguarding the environment, protecting the rights of the accused, preventing encroachments on constitutionally protected liberties, to name a few — than helping Microtech soothe its bruised feelings over a quarrel with its supplier.
II
The eagerness of judges to expand the horizons of tort liability is symptomatic of a more insidious disease: the novel belief that any problem can be ameliorated if only a court gets involved. Not so. Courts are slow, clumsy, heavy-handed institutions, ill-suited to oversee the negotiations between corporations, to determine what compromises a manufacturer and a retailer should make in closing a mutually profitable deal, or to evaluate whether an export-import consortium is developing new markets in accordance with the standards of the business community. See generally Snyder-man, What’s So Good About Good Faith? The Good Faith Performance Obligation in Commercial Lending, 55 U.Chi.L.Rev. 1335, 1361 (1988).
Moreover, because litigation is costly, time consuming and risky, judicial meddling in many business deals imposes onerous burdens. It wasn’t so long ago that being sued (or suing) was an unthinkable event for many small and medium-sized businesses. Today, legal expenses are a standard and often uncontrollable item in every business’s budget, diverting resources from more productive areas of entrepreneurship. Nor can commercial enterprises be expected to flourish in a legal atmosphere where every move, every innovation, every business decision must be hedged against the risk of exotic new causes of action and incalculable damages. See generally P. Huber, Liability: The Legal Revolution and its Consequences 153-71 (1988).
Perhaps most troubling, the willingness of courts to subordinate voluntary contractual arrangements to their own sense of public policy and proper business decorum deprives individuals of an important measure of freedom. The right to enter into contracts — to adjust one’s legal relationships by mutual agreement with other free individuals — was unknown through much of history and is unknown even today in many parts of the world. Like other aspects of personal autonomy, it is too easily smothered by government officials eager to tell us what’s best for us. The recent tendency of judges to insinuate tort causes of action into relationships traditionally governed by contract is just such overreaching. It must be viewed with no less suspicion because the government officials in question happen to wear robes.
Ill
Fortunately, the tide seems to be turning. The California Supreme Court is once again leading the way. Foley v. Interactive Data Corp., 47 Cal.3d 654, 765 P.2d 373, 254 Cal.Rptr. 211 (1988), has taken a bite out of Seaman’s by holding that tort *317remedies are not available for breach of the implied covenant of good faith and fair dealing in an employment contract. Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal.3d 287, 758 P.2d 58, 250 Cal.Rptr. 116 (1988), revived the common sense rule that third parties cannot sue insurers for unfair insurance practices, overruling Royal Globe Ins. Co. v. Superior Court, 28 Cal.3d 880, 592 P.2d 329, 153 Cal.Rptr. 842 (1979).
But much remains to be done. As this case demonstrates, Seaman’s is a prime candidate for reconsideration. Others come to mind: Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 442 P.2d 641, 69 Cal.Rptr. 561 (1968) (rejecting the notion that a contract can ever have a plain meaning); Casey v. Proctor, 59 Cal.2d 97, 109, 378 P.2d 579, 28 Cal.Rptr. 307 (1963) (holding that a release of unknown claims has no effect in the absence of evidence “apart from the words of the release”); and April Enters., Inc. v. KTTV, 147 Cal.App.3d 805, 195 Cal.Rptr. 421 (1983) (holding that a party can be liable in tort for actions authorized by the contract). At long last, however, we seem to be moving in the right direction.