KETCHU v. SEARS ROEBUCK AND CO (1986)

After almost 23 years of continuous employment at Sears, Roebuck and Co., respondent Donald L. Ketchu was fired for striking a fellow employee.   Thereafter he initiated a civil action against Sears, based on theories of breach of employment contract and bad faith discharge.¹  A jury returned a verdict of $200,000 in his favor.   Although the verdict was general in form, the jury responded to written questions submitted by the parties.   The jury found that Sears (a) was not liable for breach of an implied contract of employment terminable only for cause, but (b) was liable for breach of the implied covenant of good faith and fair dealing.

Sears moved for a judgment notwithstanding the verdict.   The motion was denied.   Sears appeals from the judgment and from the order denying its motion.

On appeal Sears points to several alleged errors which, in its opinion, compel a reversal of the judgment.   We conclude that the trial court committed prejudicial error in rejecting a proffered defense instruction, and we therefore reverse.

I. EMPLOYMENT HISTORY

On November 30, 1956 Ketchu signed an application for employment with Sears.   The application form contained a printed reservation, in approximately two-point type, just above the signature line.   The reservation read as follows:  “In consideration of my employment, I agree to conform to the rules and regulations of Sears, Roebuck and Co., and my employment and compensation can be terminated, with or without cause, and with or without notice, at any time, at the option of either the Company or myself.   I understand that no store manager or representative of Sears, Roebuck and Co., other than the president or vice-president of the Company, has any authority to enter into any agreement for employment for any specified period of time, or to make any agreement contrary to the foregoing.   A duplicate copy of this application has been made available to me as required by the California State Labor Code.” ²

Shortly thereafter Ketchu was hired as a part-time automobile parts installer at a Sears store in San Francisco.   Within a month he was working full time.   In 1958 he was promoted to the sales staff in the automotive department.   He sold small automotive parts for about four years.   Then in 1962 he was promoted again, this time to the position of tire and battery salesman.

In 1971 Ketchu transferred to a Sears store in San Jose.   There he sold a wider line of automobile parts, including engines, transmissions, air conditioning units, stereos, and tuneup equipment.   He continued as a salesman until June 7, 1979, when he was suspended without pay.   A week later he was fired.

II. THE INCIDENT

The evidence was in conflict as to what actually happened on June 7, 1979.

Ketchu's version was this:  A fellow salesman named Willard Roth confronted Ketchu on the sales floor and started asking questions about the sale of an air conditioning unit.   The sale had been credited to Ketchu, and Roth felt it should not have been.   When Ketchu tried to explain what had transpired during the sale, Roth flew into a rage and called Ketchu a “fucking liar.”   Ketchu tried two or three times to step around Roth, but the latter blocked Ketchu's path.   Roth pointed his finger in Ketchu's face and said, “I am going to shove this finger right up your ass in about two minutes.”   From the look on his face Ketchu thought Roth was going to strike him.   So he hit Roth first, on the jaw.   Roth fell to the floor.   When he attempted to get up Ketchu shoved him down again, and then walked around him.   At that moment the manager of the automotive department, Jack Tretheway, came out of his office.   Tretheway asked Ketchu if he had hit Roth, and Ketchu replied that he had.

Roth's version was different.   He had originally dealt with the customer who had ordered the air conditioner, and he could not understand why the sale had been credited to Ketchu.   Roth approached Ketchu and asked, “What's the story on the air conditioning unit?”   Ketchu got “very defensive and very noisy, raised his voice considerably.”   Roth raised his own voice in kind.   Roth could not remember exactly what was said, but he acknowledged that “we had a few words.”   Then without warning Ketchu hit Roth in the jaw.   As he fell Roth knocked over a standing ashtray.   Then Ketchu picked him up and threw him down again.   Roth denied having tried to block Ketchu's path.   He admitted pointing his finger at Ketchu, but insisted that the finger was at least a foot away from Ketchu's face.³

The only other witness to the affray was Dale Berninghausen, another salesman.   According to Berninghausen, Roth was angry when he approached Ketchu.  “He asked Don [Ketchu] why Don had taken this sale from Bill [Roth], and when Don would try to reply Bill would get a little bit more angry and dispute what Don had to say.”   Fearing that a fight was about to start, Berninghausen turned and headed out the door.   Then, in his words, “I heard scuffling going on and I immediately turned around towards them and I saw Mr. Ketchu had Mr. Roth in a bear hug and threw him to the floor.”   Then Jack Tretheway came out of his office.

Tretheway escorted Ketchu and Roth to the office of the assistant store manager, Wayne Pounds.   Pounds had each man write out a statement of what had happened.   While they were so engaged Pounds telephoned Sears' regional personnel office in Alhambra.   He was instructed to suspend both Ketchu and Roth without pay, and to forward their statements and personnel files to the Alhambra office.

When Ketchu and Roth had completed their respective statements Pounds read them both.   Apparently Ketchu made no mention of self-defense in his written statement.   The document itself was not offered in evidence, but a portion of it was quoted to the jury.   The quoted portion read thus:  “I finally reached the boiling point and exploded, hitting him once in the face.   As for myself, I hate a thief and a liar.”

After he had read both statements Pounds told Ketchu and Roth that they were both suspended without pay.   According to Pounds, Roth “said something to the effect that, ‘Well, I think we can work this out.’   Don Ketchu said something to the effect—I don't remember exact words, but, ‘I can't work with the guy.   I'm not working with the guy.   If it happened again, I'd do the same thing.’ ”   Pounds' testimony on this point was corroborated by that of Tretheway and Roth, but Ketchu flatly denied having made those statements.

Ketchu and Roth were sent home.   Before leaving the store Ketchu stopped to retrieve some personal items from a drawer.   According to Tretheway, Ketchu said, “This is a hell of a way to end a career.”

III. COMPANY POLICY AND REVIEW

A. Policy

At the time of the incident and at the time of trial Sears had no specific written policy regarding discipline for striking a fellow employee.   The only relevant document produced was an excerpt from a Sears Personnel Manual.

In section 2301, subdivision b, the Manual provides in pertinent part:  “[¶] The Company may terminate an individual's employment at any time that his/her work, deportment, or attitude are not satisfactory, (s)he does not measure up to company standards, or the Company does not have work for him/her.   Company policy, however, requires that the reasons for such termination be clearly explained to the employe.   Reasons for release should be documented.”   Section 2302, subdivision a.1, provides in pertinent part:  “[¶] The Territorial Vice President must approve any termination of employment by the Company where the employe has 10 or more years of service or is being terminated with retirement benefits ․ prior to his/her mandatory retirement age.”   Subdivision a.2 of the same section requires approval of the Territorial Vice President for the discharge of “[a]ny employee being released because of willful misconduct as defined in paragraph 7203.”   Under section 2303, subdivision b, “[a]n employe is never released” for willful misconduct “unless the unit has a written statement signed by the employe admitting the act, or there is other conclusive evidence of the act.”

The relevant portion of section 7203 defines “willful misconduct” as follows:  “[¶] Willful misconduct includes but is not limited to:  ․ [¶] 6. Reporting for work under the influence of, or consuming on Company premises, intoxicants, other stimulants, or drugs, or disorderly conduct on Company premises or while on Company business if repeated after corrective review․”  The excerpt from the Personnel Manual was admitted in evidence.

The evidence was in conflict as to whether Sears had an unwritten policy on striking a fellow employee.   Several sales employees testified that an employee who struck another employee would automatically be fired.   On the other hand Wayne Pounds, the assistant store manager, testified that fighting “was certainly grounds for termination,” but that “each situation would be looked at.”   Pounds also said, “I think that each case, I think that willful misconduct guideline is a common sense guideline that is used to apply to situations as they come up, and you take each case on its own details and make a decision from there.”   Stephen Thorpe, the territorial personnel director, testified that “within the company generally the practice is to terminate for an employee purposely inflicting harm on another employee,” but “[i]t depends on the circumstances.”

Evidence was adduced concerning an altercation that took place between two Sears automotive mechanics after Ketchu had been fired.   On that occasion one mechanic threw a rubber bushing at the other, striking him on the head.   The second mechanic hit the first with his fist.   Before matters could proceed further the mechanics were separated by a parts clerk.   Both mechanics were taken to the office of the store manager.   Neither mechanic was fired because of the incident.   Before this evidence was produced the trial judge admonished the jury to consider it only for a limited purpose, viz., “that the defendant Sears does not have a policy of automatic termination when employees are involved in physical altercations.   That is the only issue upon which this next evidence of this altercation may be considered by you.”

B. Review

The written statements of Ketchu, Roth, Berninghausen, and Tretheway were sent to the territorial personnel office in Alhambra.   Wayne Pounds recommended that Ketchu be terminated for willful misconduct.   At trial Pounds explained his recommendation this way:  “Not only was it a serious physical act that was dangerous to everybody, but then after the act took place and the details had been written up and reported to me Mr. Ketchu's attitude was one that his mind was made up, he told me that I can't work with the guy, I'm not working with the guy, if it happened again I would do the same thing.  [¶] So I felt as I considered the entire event and what took place that that determined, forceful, firm, matter of fact attitude really left me no choice but to recommend his termination.”

Pounds' recommendation was concurred in by Stephen Thorpe, the territorial personnel manager, and by Thorpe's assistant, Patrick Hickson.   Thorpe considered “striking another employee with the intent to inflict bodily harm as gross misconduct.”   Hickson felt that “Mr. Ketchu was totally the aggressor,” because “[t]here was no indication that Mr. Roth had laid a hand on Mr. Ketchu, either in his own statement, Ketchu's or the witness.”

Accordingly about a week after the incident Ketchu was summoned to the office of the store manager, Ted Hujar.   Pounds was present.   Hujar told Ketchu that the territorial personnel department had decided to terminate him for willful misconduct, specifically for the assault on Willard Roth.

Roth was reinstated.   At the time of trial he was still employed by Sears as an automotive parts salesman.

IV. THE GOOD FAITH INSTRUCTION

The case was submitted to the jury on theories of breach of employment contract (i.e., breach of an implied agreement not to terminate except for good cause, alleged in Ketchu's second cause of action) and bad faith discharge (i.e., violation of the implied covenant of good faith and fair dealing, alleged in Ketchu's fourth cause of action).   In connection with the latter theory Sears offered a defense instruction which read as follows:

“An employer who acts in good faith on an honest but mistaken belief that discharge of an employee was warranted by a legitimate business reason has not breached a covenant of good faith and fair dealing.   If you find that defendant honestly believed that the termination of plaintiff was for a legitimate business reason, you must find for defendant even if you find that defendant was mistaken in that belief.”

The trial court rejected the instruction.   The record does not reveal why.⁴  We think the instruction should have been given.

 “It is well settled that, in California, the law implies in every contract a covenant of good faith and fair dealing.  [Citations.]  Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement.”  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 768, 206 Cal.Rptr. 354, 686 P.2d 1158, emphasis in original.)  “The covenant of good faith and fair dealing imposes obligations on the contracting parties separate and apart from those consensually agreed to;  the obligations stemming from the implied covenant ․ are imposed by law as normative values of society.   [Citations.]”  (Koehrer v. Superior Court, supra, 181 Cal.App.3d at p. 1169, 226 Cal.Rptr. 820.)   Proof of breach of the implied covenant gives rise to a cause of action which “sounds in both contract and in tort,” entitling the plaintiff to an award of compensatory damages and, in the appropriate case, punitive damages.  (Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443, 456, 168 Cal.Rptr. 722.)

“[I]n appropriate circumstances an action for ‘bad faith’ discharge based on breach of the implied covenant of good faith and fair dealing will lie in the employment context.”  (Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, 1168, 226 Cal.Rptr. 820.)   In an action for bad faith discharge the plaintiff employee has the ultimate burden of proving that he was terminated wrongfully.  (Pugh v. See's Candies, Inc. (1981) 116 Cal.App.3d 311, 329–330, 171 Cal.Rptr. 917.)   The defendant employer may defend on the ground that he acted in good faith and for good cause.  “The terms ‘just cause’ and ‘good cause,’ ‘as used in a variety of contexts ․ have been found to be difficult to define with precision and to be largely relative in their connotation, depending upon the particular circumstances of each case.’  [Citation.]  Essentially, they connote ‘a fair and honest cause or reason, regulated by good faith on the part of the party exercising the power.’  [Citation.]”  (Id., at p. 330, 171 Cal.Rptr. 917, citing and quoting from R.J. Cardinal Co. v. Ritchie (1963) 218 Cal.App.2d 124, 144–145, 32 Cal.Rptr. 545.)  “In articulating ‘good cause,’ the court must balance the employer's interest in operating his business efficiently and profitably with the interest of the employee in maintaining his employment and the interest of the public in maintaining a proper balance between the two.”  (Crosier v. United Parcel Service, Inc (1983) 150 Cal.App.3d 1132, 1139, 198 Cal.Rptr. 361.)

 The employer may also demonstrate that he entertained a good faith belief that good cause for discharge existed.  “If the employer merely disputes his liability under the contract by asserting in good faith and with probable cause that good cause existed for the discharge, the implied covenant is not violated and the employer is not liable in tort.  [Citation.]  If, however, the existence of good cause for discharge is asserted by the employer without probable cause and in bad faith, that is, without a good faith belief that good cause for discharge in fact exists, the employer has tortiously attempted to deprive the employee of the benefits of the agreement, and an action for breach of the implied covenant of good faith and fair dealing will lie.”  (Koehrer v. Superior Court, supra, 181 Cal.App.3d at p. 1171, 226 Cal.Rptr. 820, italics added.)

In this case, at the time of Ketchu's termination, there was evidence from which a reasonable employer could have entertained a good faith belief that good cause for discharge existed.   Ketchu's own written statement revealed that he had “reached the boiling point and exploded,” and had struck Roth first.   Ketchu's statement made no mention of his fear for his own safety.   The statements of Roth and Berninghausen disclosed that Ketchu threw Roth to the floor.   Pounds and Tretheway testified that after the incident was over, Ketchu remained adamant in referring to Roth as a thief and a liar, and a man with whom Ketchu could not and would not work.   They also testified that Ketchu threatened to act in the same way should the occasion ever arise again.   In his argument to the jury Sears' counsel mentioned this evidence, but he was unable to argue that the jury had a duty to consider whether Sears had a good faith belief in the existence of probable cause to discharge Ketchu.

On the theory of the implied-in-law covenant of good faith and fair dealing, the jury was given the following instructions:

“Now, with respect to liability for the implied covenant of good faith, there is in every contract an implied covenant or promise of good faith and fair dealing.   This includes employment contracts.   This is to the effect that neither party will do anything which will injure the right of the other party to receive the benefits of the contract between them.

“Now, liability for the employer's violation of the duty of good faith and fair dealing is imposed for failure of the employer to act in good faith and to deal fairly in the performance of its obligations under an employment contract so as not to frustrate the purpose of the employment contract or to deny the plaintiff—excuse me—the employee the benefits of such a contract.

“Thus, an employer may violate the duty of good faith and fair dealing if it terminates an employee who has established longevity of service, and in the process arbitrarily fails to follow established policies and procedures.

“That completes the definition of liability on the second claim.”

Further instructions were given on proximate cause and on damages, but no instruction was given concerning a good faith belief in probable cause for discharge.

 “It is well settled that ‘a party has a right to instructions on his theory of the case, if it is reasonable and finds support in the pleadings and evidence or any inference which may be properly drawn from the evidence.’ ”   (McCary v. John Hancock etc. Life Ins. Co. (1965) 236 Cal.App.2d 501, 504, 46 Cal.Rptr. 121 emphasis in original;  7 Witkin, Cal. Procedure (3d Ed.1985), Trial, § 240, pp. 246–247, and cases there cited.)  “The evidence necessary to justify the giving of an instruction need not be overwhelming ․ [but] may be slight, inconclusive, or even opposed to the preponderance of the evidence.”   (Byrne v. City and County of San Francisco (1980) 113 Cal.App.3d 731, 737, 170 Cal.Rptr. 302.)   In this instance Sears' theory was that it had a good faith belief, based upon the evidence submitted at the time, that good cause existed for the discharge of Ketchu.   The question of whether a party acted in good faith can only be determined in the light of the facts known to the party at the time.   Certainly the company could not afford to retain an employee who, having struck a fellow employee, expressed a firm intent to do the same thing again.   Consequently the proffered instruction was reasonable and supported by the evidence, and therefore Sears had a right to have the instruction given.

“Refusal to give a requested instruction is reversible error where the omission misleads and confuses the jury and it is reasonably probable a result more favorable to the requesting party would have been reached in the absence of the error.”  (Canavin v. Pacific Southwest Airlines (1983) 148 Cal.App.3d 512, 523–524, 196 Cal.Rptr. 82.)   It seems to us reasonably probable that the jury, had it been properly instructed to consider the question of good faith belief in good cause for discharge, would have reached a result more favorable to Sears.  (Cal.Const., art. VI, § 13;  People v. Castro (1985) 38 Cal.3d 301, 319, 211 Cal.Rptr. 719, 696 P.2d 111;  People v. Watson (1956) 46 Cal.2d 818, 836, 299 P.2d 243.)   Therefore we reverse.

Having discerned one reversible error, we need not address Sears' other contentions on appeal.

V. DISPOSITION

The appeal is from the whole judgment.   Therefore our reversal “may permit the trial court's determination of certain issues to stand but direct the retrial of a particular issue or issues.”  (9 Witkin, Cal.Procedure (3d Ed.1985), Appeal, § 643, p. 625.)  “[¶] The appellate courts have power to order a retrial on a limited issue, if that issue can be separately tried without such confusion or uncertainty as would amount to a denial of a fair trial.  [Citations.]  Whether it can or not depends upon the circumstances of each case.”  (Brewer v. Second Baptist Church (1948) 32 Cal.2d 791, 801, 197 P.2d 713;  accord, Gyerman v. United States Lines Co. (1972) 7 Cal.3d 488, 505, 102 Cal.Rptr. 795, 498 P.2d 1043.)

 Here, no error infected the jury's resolution of the issues posed in the second cause of action, namely that Sears was not liable for breach of an implied-in-fact contract for continuous employment.   Therefore on retrial the sole issue to be determined is whether Sears violated the implied-in-law covenant of good faith and fair dealing pleaded in the fourth cause of action.

The judgment is reversed.   Costs on appeal to appellant.

FOOTNOTES

1.   We utilize here the nomenclature recommended in Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 226 Cal.Rptr. 820.  “Appropriate nomenclature might be ‘breach of employment contract’ for the true breach of contract cases, ‘tortious discharge’ for the public policy cases and ‘bad faith discharge’ for the cases involving breach of the implied covenant of good faith and fair dealing.”  (Id., at p. 1163, 226 Cal.Rptr. 820.)

2.   In a deposition before trial Ketchu stated that he was sure he had read this condition before he signed the application form.   But at trial he testified that he could not recall having read it.

3.   According to Roth there were no customers on the sales floor when the scuffle occurred.   Jack Tretheway, manager of the automotive department, concurred.   The testimony of these two witnesses provided the only evidence on the point.

4.   The record discloses that the trial judge and counsel spent the better part of a day and part of an evening considering proffered instructions.

BRAUER, Associate Justice.

AGLIANO, P.J., and BONNEY, J.*, concur.