Court Opinion

ID: 9532927
Source: CourtListenerOpinion
Date Created: 2023-08-07 04:26:20.344898+00
Date Added: 2024-06-11T13:28:52.299824
License: Public Domain

KENNARD, J., Concurring and Dissenting.
In 1988, defendant, an insurance brokerage firm, hired plaintiff as its senior vice-president and western *111regional manager. Although there was no express agreement as to the conditions under which plaintiff could be terminated, plaintiff contends he had an implied agreement with defendant that his employment could be terminated only for “good cause.” In 1993, two women employees accused plaintiff of sexual harassment. After conducting an investigation, defendant concluded that the allegations of harassment were true, and it terminated plaintiff’s employment for this misconduct. Plaintiff sued for wrongful termination, alleging that he had not harassed the women and that in terminating his employment based on false accusations defendant had breached the implied “good cause” provision. The case was tried to a jury, which expressly found that plaintiff had not engaged in the alleged sexual harassment and awarded plaintiff damages of some $1.78 million for wrongful termination.
At issue here is the precise meaning or content of the “good cause” condition of the parties’ implied agreement. The majority treats this issue as essentially one of law, without pausing to consider what the parties might have intended. In my view, however, the issue is one of contract interpretation that should be resolved, if possible, by determining what the parties understood their agreement to be when they entered into it. To determine the parties’ intent, a court or jury must examine all evidence relating to the formation of the implied agreement. Only if the court or jury concludes that the parties’ intent cannot be determined from this evidence should it undertake to bridge this gap by supplying the meaning that comports with community standards of fairness and public policy.
Moreover, if the court must flesh out the meaning of an implied “good cause” limitation, it should choose the meaning that achieves the fairest and most workable result consistent with the normal practices and expectations of employers and employees in modem society. In my view, the meaning that best satisfies these requirements is one that permits the employer to discharge the employee only for specific acts of misconduct that the employee actually committed. Recognizing that a limitation of this kind puts the employer in a difficult position, and that it may impose liability even on employers who have used their best efforts to determine the truth of misconduct allegations fairly and accurately, I would hold that if an employer agrees to reinstate a falsely accused and wrongfully discharged employee, it should be liable in damages only for backpay.
I
Employment relationships are fundamentally contractual. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 696 [254 Cal.Rptr. 211, 765 P.2d *112373].) Because this case involves a dispute between an employer and an employee about the terms of their employment agreement (maj. opn., ante, at p. 99), it should be decided by the application of contract law. Although this case involves an implied rather than an express contract (see Civ. Code, §§ 1620 [“An express contract is one, the terms of which are stated in words.”], 1621 [“An implied contract is one, the existence and terms of which are manifested by conduct.”]), both forms of contract “ ‘are based upon the expressed or apparent intention of the parties’ ” (Varni Bros. Corp. v. Wine World, Inc. (1995) 35 Cal.App.4th 880, 888 [41 Cal.Rptr.2d 740], quoting 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 11, p. 46).
It is axiomatic that contract interpretation is governed by the contracting parties’ intent. “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code, § 1636; accord, Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 677; Rest.2d Contracts, § 201, com. c, p. 84.) If the terms of the contract are ambiguous or uncertain, as is often true of implied contracts, determining the contract’s terms is a question of fact for the trier of fact (here the jury), based on “all credible evidence concerning the parties’ intentions . . . .” (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165 [6 Cal.Rptr.2d 554]; accord, WYDA Associates v. Merner (1996) 42 Cal.App.4th 1702, 1710 [50 Cal.Rptr.2d 323]; see also BAJI No. 10.75 (8th ed. 1994).) Contract law provides an extensive set of rules to guide the jury in using the available evidence to construe the agreement. (See, e.g., Civ. Code, §§ 1635-1657; 1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 684-698, pp. 617-632.)
Here, plaintiff employee claims that he had an implied contract under the terms of which defendant employer could terminate him only for specific acts of misconduct. Defendant contends that the employment relationship was terminable at will or, in the alternative, that if the contract was not terminable at will, defendant could terminate it based upon its own honest and reasonable belief that plaintiff had committed acts of misconduct serious enough to warrant termination. Thus, assuming there was an implied agreement with some form of “good cause” condition, the essence of the dispute concerns whether defendant could terminate plaintiff’s employment only for actual misconduct (plaintiff’s position) or whether defendant could terminate plaintiff’s employment if it reasonably believed, based on its own investigation, that plaintiff had committed misconduct (defendant’s position).
The first step in applying the general principles of contract law to this dispute is for the trier of fact to determine whether an implied contract *113existed between defendant employer and plaintiff employee restricting defendant’s ability to terminate plaintiff’s employment. Here, the trial court ruled that there was such a contract, but the Court of Appeal held that the trial court had erred in making that ruling because the issue should have been submitted to the jury. This court has elected not to review this portion of the Court of Appeal’s decision, and the case will be remanded to the trial court to permit the jury to decide that question. If the jury finds on remand that there was no implied contract to terminate plaintiff’s employment only for good cause, then plaintiff’s employment was terminable at will, and he is not entitled to any relief. (See Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 677 [noting that Labor Code section 2922 establishes a presumption of at-will employment if the parties have not agreed otherwise].) If the jury, finds, instead, that there was an implied contract to terminate plaintiff’s employment only for good cause, then its next task should be to ascertain the meaning of the good cause condition—that is, what limits the parties intended to impose on the employer’s power to terminate the employee for specific acts of misconduct.
I see three possible outcomes to this inquiry. First, the jury might find, as plaintiff employee contends, that defendant employer could terminate plaintiff’s employment only if he actually committed misconduct. Second, the jury might find, as defendant contends, that actual misconduct by plaintiff is unnecessary, and defendant may terminate plaintiff’s employment based on its own determination that the misconduct had occurred. Third, the available evidence might be insufficient to permit the jury to ascertain what the parties intended when they agreed to the good cause condition. I will discuss each of these potential outcomes.
A. Parties Intended That Actual Misconduct Would Be Required
Were the jury to decide on remand that plaintiff employee and defendant employer intended, when they entered into the implied agreement, that defendant could terminate plaintiff’s employment for misconduct only if he actually committed that misconduct, then whether defendant breached the agreement by discharging plaintiff for misconduct would depend upon whether plaintiff committed the alleged acts of sexual harassment and, if so, whether this misconduct was serious enough to constitute good cause for termination. But because a jury has already found in this action that plaintiff did not commit the alleged acts of sexual misconduct, there is no need, on remand, for a new jury finding on these issues. Accordingly, a finding by the jury on remand that defendant could discharge plaintiff only for actual misconduct, considered with the prior finding that the misconduct allegations are false, would mean that defendant did breach the implied agreement *114by discharging plaintiff. In this event, plaintiff would be entitled to a judgment in his favor awarding damages for breach of contract. The appropriate measure of these damages is a question I address below.
B. Parties Intended That Employer Determination of Actual Misconduct Would Be Sufficient
Were the jury to decide on remand that plaintiff employee and defendant employer intended, when they entered into the implied agreement, that actual misconduct by plaintiff would be unnecessary and that defendant could discharge plaintiff based on its own determination that misconduct had occurred, the jury would then need to decide what restrictions, if any, the parties intended to impose on defendant’s power to make that determination. There is a fairly broad range of possible answers to this question. The jury might find, for example, that the parties intended that defendant could discharge plaintiff based merely upon defendant’s belief, in good faith, that plaintiff had committed misconduct. Or, the jury might find that the parties intended that defendant could discharge plaintiff only if defendant’s belief that plaintiff had committed misconduct was both objectively reasonable and arrived at after a reasonable investigation in which plaintiff was notified of the misconduct allegations and given a reasonable opportunity to respond.
Another possibility arises at this point. The jury might find that the parties intended that actual misconduct by plaintiff would be unnecessary and that defendant could discharge plaintiff based on its own detefmination that the misconduct had occurred, but the jury might be unable to ascertain from the available evidence what restrictions the parties intended to impose on the defendant’s power to make the “good cause” determination. If the jury cannot ascertain the parties’ intent in this regard, this uncertainty should be resolved by interpreting the employment contract in a way that “comports with community standards of fairness and policy . . . .” (Rest.2d Contracts, § 204, com. d, p. 98.) In my view, when it has been ascertained that an implied good cause condition does not require actual employee misconduct but instead allows the employer to discharge the employee based on the employer’s determination of misconduct, the interpretation of that condition that best comports with community standards of fairness and sound policy is as follows: the employer may discharge the employee based on its own determination of employee misconduct only if (1) the employer conducts a reasonable investigation, notifies the employee of the charges, and gives the employee a reasonable opportunity to respond to those charges; (2) the employer’s investigation discloses substantial evidence that the employee *115committed the misconduct; and (3) as a result of its investigation, the employer reasonably believes that the misconduct took place.1
Once the jury has ascertained—from the available evidence of the parties’ intent if possible and otherwise by supplying the interpretation that best comports with community standards of fairness and sound policy—what limitations the implied agreement imposed on defendant employer’s power ■to determine whether plaintiff employee committed misconduct, the jury would then proceed to decide whether defendant observed these limitations when it determined that plaintiff had committed the alleged acts of sexual harassment. If the jury finds that defendant acted within the limits that the implied agreement imposed, then defendant did not breach the implied agreement by terminating plaintiff’s employment, and defendant is entitled to a judgment in its favor. If, however, the jury finds that the employer did not observe the limits that the implied agreement imposed, then defendant did breach the implied agreement by discharging plaintiff.2 Accordingly, plaintiff would be entitled to a judgment in his favor awarding damages.
C. No Evidence of Parties’ Intent
Finally, the jury on remand might be unable to ascertain whether the parties intended that defendant employer could discharge plaintiff employee only for actual misconduct or whether, instead, they intended that defendant’s determination of misconduct would be sufficient. Were the jury to reach this juncture on remand, there again would be a gap in the interpretation of the agreement that would have to be filled by drawing on community standards of fairness and sound policy. (Rest.2d Contracts, § 204, com. (d), p. 98.)
In my view, consideration of community standards of fairness and sound policy leads to the conclusion that when parties have agreed that an employment relationship is terminable only for “good cause,” but the meaning of this condition cannot be further ascertained from the available evidence of *116the parties’ intent, the “good cause” condition should be construed to require actual misconduct by the employee, and not merely the employer’s determination of misconduct. I base this conclusion primarily on two interrelated considerations.
First, in our society the usual and expected means of resolving contract disputes are through trial by jury in an action at law. The right to a trial by jury is guaranteed by both the federal and state Constitutions. (U.S. Const., Amend. VII; Cal. Const., art. I, § 16 [“Trial by jury is an inviolate right and shall be secured to all . . . .”].) Although it is increasingly common for contracting parties to provide in their agreements for dispute resolution in an alternative forum, such as by arbitration, it is highly unusual to give one of the contracting parties, rather than a jury or other neutral arbiter, a unilateral right to resolve a factual dispute about the existence of a material breach of the agreement.
Second, the involuntary discharge of an employee for misconduct is a matter of great consequence to the employee. Termination of employment may deprive the employee of his or her only source of income, resulting in economic ruin. The hardship to the employee is greatly magnified when the termination is predicated on specific acts of misconduct, because the resulting stigma may preclude further employment and render the employee a social outcast. Accordingly, absent evidence sufficient to persuade the trier of fact that the parties intended otherwise, an implied condition that employment may be terminated only for good cause should be interpreted to permit the employer to discharge an employee for specific acts of misconduct only if the employee actually committed those acts.
Both the majority and Justice Mosk (in his concurring opinion) reach the opposite conclusion. As they see it, an implied condition that employment may be terminated only for good cause should be interpreted to permit the employer to discharge an employee for specific acts of misconduct that the employee did not actually commit, if the employer believed, erroneously, that the employee did commit them. They reason that to allow a jury, rather than the employer, to determine whether the employee committed misconduct would unduly interfere with an employer’s managerial discretion and business judgment, resulting in excessive burdens on the business community. Although I share these concerns, in my view they are more appropriately addressed by limiting the damages that an employee can recover for a wrongful discharge resulting from the employer’s good faith but erroneous determination that the employee committed misconduct.
II
As the facts of this case demonstrate, allowing a jury to second-guess an employer’s determination that an employee committed specific acts of misconduct may place employers in a difficult position. If credible allegations of *117serious misconduct are made against an employee, as occurred here, the employer must investigate the allegations and determine their truth. The employer’s determination of the truth of the allegations will often, as it did here, require resolution of close factual questions involving difficult evaluations of witness credibility and hard choices among conflicting inferences. If the employer is persuaded that the misconduct occurred, but a jury redetermining the same close factual questions is persuaded otherwise, the result may be a judgment imposing crushing monetary damages on an employer who acted reasonably and in good faith. In this case, for example, defendant employer, after receiving allegations that plaintiff employee had committed serious acts of sexual harassment, conducted an investigation that included interviews of 21 persons who had worked with plaintiff. Defendant terminated plaintiff only because it believed, based on the results of this apparently thorough investigation, that plaintiff had committed the alleged acts. Later, a jury awarded plaintiff $1.78 million in damages based upon its contrary finding that plaintiff did not actually commit those acts.
But, as I have explained, the difficulty of the employer’s position is matched or exceeded by the plight of a falsely accused and wrongfully terminated employee who is denied all legal redress. False accusations may destroy the employee’s reputation and social standing as well as his or her ability to earn a living. The majority and Justice Mosk give insufficient consideration to the effect their decision will have on these employees.
Recognizing the potentially difficult positions of both the employer and the employee, I would define the measure of contract damages recoverable by the employee to better balance the competing interests. I would do so by adapting to private employment the well-established civil service remedy of awarding only reinstatement with backpay for wrongful termination. A wrongfully terminated public employee is entitled to reinstatement with the full amount of salary and benefits from the date of termination until the date of reinstatement, less any amounts the employee earned or reasonably could have earned from employment during that period, but no more. (City of Ukiah v. Fones (1966) 64 Cal.2d 104, 107 [48 Cal.Rptr. 865, 410 P.2d 369].)
In general, a private employer may not be ordered to reinstate an employee it has wrongfully terminated. (Civ. Code, § 3390, subd. 2; Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 473 [46 Cal.Rptr.2d 427, 904 P.2d 834].) Therefore, the civil service measure of damages may not be applied to the private sector without some modification. This is achieved by requiring both the employee and the employer to make an election regarding reinstatement of the employment. If a wrongfully terminated private-sector employee elects reinstatement, and the employer agrees to reinstate the employee, the employee’s recovery would be limited to the amount of lost *118salary and benefits, less any sums that the employee earned or reasonably could have earned, between the date of termination and the date of reinstatement. If a wrongfully terminated private-sector employee refuses reinstatement, essentially the same measure of damages would apply and the employee’s recovery would be limited to the amount of lost salary and benefits, less any sums that the employee earned or reasonably could have earned, between the date of termination and the date of election. Thus, an employee who rejects reinstatement, for whatever reason, would thereby forfeit any claim to compensation for loss of employment income for the period following the employee’s election. Finally, if a wrongfully terminated private-sector employee elects reinstatement, but the employer refuses reinstatement, the employee’s recovery would not be limited to backpay but would include the agreed salary and benefits for the entire period of service, both past and future, less the amounts the employee earned or reasonably could have earned during the same period. (Parker v. Twentieth Century-Fox Film Corp. (1970) 3 Cal.3d 176, 181 [89 Cal.Rptr. 737, 474 P.2d 689, 44 A.L.R.3d 615]; see Scott v. Pacific Gas & Electric Co., supra, 11 Cal.4th at p. 468.) Thus, an employer who refuses, for whatever reason, to reinstate a falsely accused and wrongfully terminated employee to his or her former position thereby chooses to incur a larger damage award.
Application of this modified measure of damages to private employment would best accommodate the competing interests of the employer and the employee. The employee would receive compensation for the loss actually suffered by the wrongful termination. The employer, unless it chose to do so, would not risk potentially crushing liability for a good faith but erroneous determination of employee misconduct.
I would remand this case for further proceedings consistent with the views I have here expressed.
Respondent’s petition for a rehearing was denied February 25, 1998. Kennard, J., was of the opinion that the petition should be granted.

Although the majority adopts the same standard, the majority applies this standard in a broader context. Unlike the majority, I would not apply this interpretation of the implied “good cause” limitation when the jury is unable to ascertain whether the parties intended that defendant employer could discharge plaintiff employee only for actual misconduct or whether, instead, they intended that defendant’s determination of misconduct would be sufficient. This difference is explained, post, in part I.C. of this opinion, at pages 115-116.

Had the jury in the prior trial not already determined that plaintiff did not commit the alleged acts of sexual harassment, the jury on remand would be required to decide that question at this juncture. When an employer discharges an employee who actually committed acts of misconduct warranting dismissal, the employee is not damaged by any defects in the procedure that the employer used to make the “good cause” determination, and any breach by the employer would not be material.