CAPLAN v. ST JOSEPH HOSPITAL (1987)

The present appeal stems from the dismissal of appellant Caplan's claim for tort damages, both general and punitive, in an employment dispute.

The pertinent facts may be summarized as follows:

In May, 1978, respondent, St. Joseph's Hospital, hired appellant to run the hospital's emergency room and to perform ward duties.   Appellant was to be responsible for hiring and supervising physicians to staff the emergency room, while respondent would provide non-professional staff and services.   For his services, appellant was to receive a fixed monthly salary plus compensation in an amount equal to his gross monthly billings less certain overhead expenses of the hospital.

On June 20, 1979, respondents gave appellant written notice of termination, effective in 90 days.   The notice stated that termination was necessitated by economic pressures.   Shortly thereafter, it was announced that the hospital was closed.   Many employees felt betrayed by this unexpected decision, and meetings were held to discuss the impending shut-down and ways to prevent it.

During this time, appellant learned that, contrary to California law, respondents had been withholding patient refunds.   That is, when a patient prepaid a portion of his bill, and the hospital was subsequently indemnified by the patient's insurance company, hospital practice was to keep the duplicate payment unless the patient specifically sought a refund.

When the closure became public, members of the news media requested an interview with appellant.   He agreed to an interview with a reporter from KPIX Channel 5, portions of which were broadcast.   In the interview, appellant told of his discovery of the hospital's illegal practices.

On September 7, 1979, St. Joseph's owed appellant approximately $10,411 in back wages.   Mr. Joseph Brandlin, chairman of the respondents' board, admitted in his deposition that one reason these wages were withheld was appellant's broadcast comment.

On appeal, Caplan first contends that respondents' refusal to pay back wages owed under the contract constituted a tortious breach of the implied covenant of good faith and fair dealing (hereafter the covenant).   We turn to a discussion of relevant authority.

In Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141, our high court defined the covenant as follows:  “[I]n addition to the duties imposed on contracting parties by the express terms of their agreement, the law implies in every contract a covenant of good faith and fair dealing.  [Citations.]  The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement.  [Citations.]  The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.”

Respondents cite Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158 and Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 208 Cal.Rptr. 394, for the proposition that under the facts of this case, the absence of a special relationship precludes tort remedies for the breach of the covenant.

In Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158, our high court considered the availability of a tort remedy for breach of the covenant in a commercial context.   The court first noted that tort remedies for breach of the covenant in the insurance setting were justified by the “special relationship” between insurer and insured, observing, however, that:  “[w]hen we move from such special relationships to consideration of the tort remedy in the context of the ordinary commercial contract, we move into largely uncharted and potentially dangerous waters.   Here, parties of roughly equal bargaining power are free to shape the contours of their agreement and to include provisions for attorney fees and liquidated damages in the event of breach.   They may not be permitted to disclaim the covenant of good faith but they are free, within reasonable limits at least, to agree upon the standards by which application of the covenant is to be measured.   In such contracts, it may be difficult to distinguish between breach of the covenant and breach of contract, and there is the risk that interjecting tort remedies will intrude upon the expectations of the parties.   This is not to say that tort remedies have no place in such a commercial context, but that it is wise to proceed with caution in determining their scope and application.”  (Fn. omitted.)  (Id., at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158.)

Relying on Seaman's, the court in Quigley v. Pet, Inc., supra, 162 Cal.App.3d 877, 208 Cal.Rptr. 394 reversed an award of tort damages based on what it perceived as a prejudicial instruction regarding breach of the covenant.   In so holding, the court discussed Seaman's and stated:  “[T]he position which distinguishes the majority from the dissent is its avoidance of a broad rule in breach of implied covenant cases which would not depend upon special relationships, justifiable expectations, and public policy.”  (Id., at p. 891, 208 Cal.Rptr. 394.)

 Respondent is correct in stating that no special relationship existed between the parties;  the subject relationship was not characterized by elements either of adhesion or of grossly disproportionate bargaining power.   (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 820, 169 Cal.Rptr. 691, 620 P.2d 141.)   Nevertheless, tort remedies for breach of the covenant are available when a contractual obligation is breached for purposes contrary to public policy.  (Quigley v. Pet, Inc., supra, 162 Cal.App.3d at p. 891, 208 Cal.Rptr. 394.)   Thus, in Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330, the plaintiff was fired for his refusal to participate in an illegal price-fixing scheme.   The trial court sustained the defendant's general demurrer to plaintiff's tort causes of action, ruling that the employee's remedy was limited to contract damages.   Our high court reversed, holding that when an employer's discharge of an employee violates fundamental principles of public policy, the discharged employee may maintain a tort action with all the traditional remedies thereunder.   In rejecting the contention that the dispute was merely contractual, rather than tortious, the court observed that “California decisions ․ have long recognized that a wrongful act committed in the course of a contractual relationship may afford both tort and contractual relief, and in such circumstances the existence of the contractual relationship will not bar the injured party from pursuing redress in tort.”  (Id., at pp. 174–175, 164 Cal.Rptr. 839, 610 P.2d 1330.)  “ ‘ “[I]f the cause of action arises from a breach of promise set forth in the contract, the action is ex contractu, but if it arises from a breach of duty growing out of the contract it is ex delicto.” ’  (Italics added.)  [Citations.]”  (Id., at p. 175, 164 Cal.Rptr. 839, 610 P.2d 1330.) ¹

Subsequently, in Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443, 168 Cal.Rptr. 722, the court, relying upon Tameny, established a cause of action for wrongful discharge based upon breach of the implied covenant.   The court held that Cleary had plead sufficient facts to state a cause of action for breach of the covenant, and, in so holding, it emphasized the longevity of Cleary's satisfactory service and the airline's failure to follow its own procedures for adjudicating employee disputes.  (Id., at p. 455, 168 Cal.Rptr. 722.)

“Several cases subsequent to Cleary have acknowledged the implied covenant of good faith and fair dealing is implied by law in employment contracts, and that a tort cause of action for wrongful discharge can be established by showing a breach of that covenant.  [Citations.]”  (Khanna v. Microdata Corp. (1985) 170 Cal.App.3d 250, 262, 215 Cal.Rptr. 860;  emphasis added.)

In Khanna v. Microdata Corp., supra, 170 Cal.App.3d 250, 215 Cal.Rptr. 860, Division Two of this court held that the determination of whether the implied covenant has been breached must be made on a case by case basis, thereby rejecting the claim that breach of the covenant is only demonstrated where a plaintiff can establish lengthy satisfactory service and failure of the employer to follow its own conflict resolution procedures.   Said the court:  “[T]he factors relied on by the court in Cleary are [not] the sine qua non to establishing a breach of the covenant of good faith and fair dealing implied in every employment contract.”  (Id., at p. 262, 215 Cal.Rptr. 860.) ²  Breach of the implied covenant occurs “whenever the employer engages in ‘bad faith action extraneous to the contract, combined with the obligor's intent to frustrate the [employee's] enjoyment of contract rights.’   [Citations.]”  (Khanna v. Microdata Corp., supra, 170 Cal.App.3d at p. 262, 215 Cal.Rptr. 860 quoting Shapiro v. Wells Fargo Realty Advisors (1984) 152 Cal.App.3d 467, 478–479, 199 Cal.Rptr. 613.)

 Respondents assert that no tortious breach of the covenant occurred, contending that any arguably bad faith actions which occurred were not “extraneous” to the contract, but were embraced within it, since the wages it withheld were explicitly due under the contract.   But, bad faith action “extraneous” to the contract, refers to action taken by the employer unrelated to alleged deficiencies in the employee's performance of contractual obligations.   In Khanna v. Microdata Corp., supra, 170 Cal.App.3d 250, 215 Cal.Rptr. 860, for example, the court considered it crucial to determine whether plaintiff's initiation of a lawsuit actually interferred with his ability to perform his job.   Concluding that plaintiff's job performance had not been impaired, the court found the employer's actions in discharging plaintiff to be in bad faith and extraneous to the contract.

 Here, we think the covenant was clearly breached by respondents' retaliatory refusal to pay appellant's back wages.   Such conduct violates public policy, under the principle defined in Petermann v. International Brotherhood of Teamsters (1959) 174 Cal.App.2d 184, 344 P.2d 25 as “ ‘ “that principle of law which holds that no citizen can lawfully do that which has a tendency to be injurious to the public or against the public good ․” ’ ”  (Id., at p. 188, 344 P.2d 25;  emphasis in original;  accord, Cleary v. America Airlines, Inc., supra, 111 Cal.App.3d 443, 450, 168 Cal.Rptr. 722.)   It cannot be doubted that retaliation against employees who disclose illegal business practices, particularly where they affect the public at large, has a tendency to be injurious to the public or against the public good.   (Petermann v. International Brotherhood of Teamsters, supra, 174 Cal.App.2d at p. 188, 344 P.2d 25.)   Because the retaliatory action taken against appellant violated public policy, tort remedies to redress such injury are entirely appropriate.

Respondents, however, assert that Tameny and Cleary are inapposite since they involved wrongful discharge, rather than refusal to pay back wages.   The rationale of Tameny and related cases seems equally applicable to the instant case.   In all such instances the court seeks to deter employers from wrongful retaliation against employees, and it is the nature of the employer's conduct rather than harm to the employee that determines whether the covenant has been breached.   That appellant was denied back pay, rather than wrongfully discharged, strikes us as a meaningless distinction.

In yet another attempt to distinguish Tameny and Cleary, respondents argue that, since appellant was an independent contractor, rather than an employee, the rule ought not to apply.   Again, the distinction seems trivial.   For all practical purposes, Caplan was an employee:  he was paid a monthly salary, required to follow hospital guidelines, and subject to discharge.   To constrict the principle laid down in Tameny and Cleary because of appellant's status as an independent contractor would be to exalt form over substance.   We accordingly conclude that respondents' retaliatory action constituted a breach of the duty imposed upon it by law to deal fairly and in good faith with Caplan, and gives rise to tort liability.

Appellant further contends that respondents' refusal to pay him back wages was malicious, thereby entitling him to seek an award of punitive damages.

 Mere breach of the covenant does not necessarily entitle the plaintiff to seek an award of punitive damages.  Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942, fn. 3, 132 Cal.Rptr. 424, 553 P.2d 584;  Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 462–463, 113 Cal.Rptr. 711, 521 P.2d 1103.  “In order to justify an award of exemplary damages, the defendant must be guilty of oppression, fraud or malice.  (Civ.Code., § 3294.)   He must act with the intent to vex, injure or annoy, or with a conscious disregard of the plaintiff's rights.  [Citations.]”  (Id., at p. 462, 113 Cal.Rptr. 711, 521 P.2d 1103;  see also Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922, 148 Cal.Rptr. 389, 582 P.2d 980.)

 Utilizing the standard just described, it is clear to us that respondents' retaliatory withholding of appellant's back wages, if proved, would raise an inference of malice.   The question is for the trier of fact.

The judgment is reversed.   Costs to appellant.

FOOTNOTES

1.   In a footnote the court observed that it was unnecessary on the Tameny facts to determine whether a wrongfully discharged employee could also state a cause of action for breach of the implied covenant although there was substantial evidence supporting such cause of action.  (Id., at p. 179, fn. 12, 164 Cal.Rptr. 839, 610 P.2d 1330.)

2.   Other courts have taken a more narrower view of what constitutes a breach of the covenant.   In Newfield v. Insurance Co. of the West (1984) 156 Cal.App.3d 440, 203 Cal.Rptr. 9, the court held that violations of the covenant “were always predicated upon other public policy grounds, statutory violations, or express (or clearly implied) contract grounds, or upon a combination of elements (e.g., especially longevity of service together with some added element․)”  (Id., at p. 445, 203 Cal.Rptr. 9, emphasis in original.)

NEWSOM, Associate Justice.

RACANELLI, P.J., and ELKINGTON, J., concur.