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Pugh v. See's Candies, Inc.
116 Cal. App. 3d 311 (Cal. Ct. App. 1981)
Grodin
After 32 years of employment with See's Candies, Inc., in
which he worked his way up the corporate ladder from dishwasher to vice president in
charge of production and member of the board of directors, Wayne Pugh was fired. Asserting
that he had been fired in breach of contract . . . he sued his former employer seeking
compensatory . . . damages for wrongful termination, . . .. The case went to trial before
a jury, and upon conclusion of the plaintiff's case-in-chief
the trial court granted defendants' motions for nonsuit, and this appeal followed.
. . . [W]e conclude that the trial court erred in granting the nonsuit
motions, and reverse.
Summary of the Evidence
We summarize the evidence presented to the
jury. The defendant employer is in the business of manufacturing fresh candy at its
plants in Los Angeles and South San Francisco and marketing the candy through its own
retail outlets. The South San Francisco plant is operated under the name See's Candies,
Inc., a wholly owned subsidiary corporation of See's Candy Shops, Inc., which operates the
Los Angeles plant as well. The stock of See's Candy Shops, Inc., was held by members of
the See family until 1972, when it was sold to Blue Chip Stamps Corporation. For
convenience, the designation "See's" will be used to refer to both companies.
Pugh began working for See's at its Bay Area plant (then in San
Francisco) in January 1941 washing pots and pans. From there he was promoted to candy
maker, and held that position until the early part of 1942, when he entered the Air Corps.
Upon his discharge in 1946 he returned to See's and his former position. After a year he
was promoted to the position of production manager in charge of personnel, ordering raw
materials, and supervising the production of candy. When, in 1950, See's moved into a
larger plant in San Francisco, Pugh had responsibility for laying out the design of the
plant, taking bids, and assisting in the construction. While working at this plant, Pugh
sought to increase his value to the company by taking three years of night classes in
plant layout, economics, and business law. When See's moved its San Francisco plant to its
present location in South San Francisco in 1957, Pugh was given responsibilities for the
new location similar to those which he undertook in 1950. By this time See's business and
its number of production employees had increased substantially, and a new position of
assistant production manager was created under Pugh's supervision.
In 1971 Pugh was again promoted, this time as vice president in charge
of production and was placed upon the board of directors of See's northern California
subsidiary, "in recognition of his accomplishments." In 1972 he received a gold
watch from See's "in appreciation of 31 years of loyal service."
In May 1973 Pugh travelled with Charles Huggins, then president of
See's, and their respective families to Europe on a business trip to visit candy
manufacturers and to inspect new equipment. Mr. Huggins returned in early June to attend a
board of director's meeting while Pugh and his family remained in Europe on a planned
vacation.
Upon Pugh's return from Europe on Sunday, June 25, 1973, he received a
message directing him to fly to Los Angeles the next day and meet with Mr. Huggins.
Pugh went to Los Angeles expecting to be told of another promotion. The
preceding Christmas season had been the most successful in See's history, the Valentine's
Day holiday of 1973 set a new sales record for See's, and the March 1973 edition of See's
Newsletter, containing two pictures of Pugh, carried congratulations on the increased
production.
Instead, upon Pugh's arrival at Mr. Huggin's office, the latter said,
"Wayne, come in and sit down. We might as well get right to the point. I have decided
your services are no longer required by See's Candies. Read this and sign it."
Huggins handed him a letter confirming his termination and directing him to remove that
day "only personal papers and possessions from your office," but
"absolutely no records, formulas or other material"; and to turn in and account
for "all keys, credit cards, et cetera." The letter advised that Pugh would
receive unpaid salary, bonuses and accrued vacation through that date, and the full amount
of his profit sharing account, but "No severance pay will be granted." Finally,
Pugh was directed "not to visit or contact Production Department employees while they
are on the job."
The letter contained no reason for Pugh's termination. When Pugh asked
Huggins for a reason, he was told only that he should "look deep within
[himself]" to find the answer, that "Things were said by people in the trade
that have come back to us." Pugh's termination was subsequently announced to the
industry in a letter which, again, stated no reasons.
When Pugh first went to work for See's, Ed Peck, then president and
general manager, frequently told him: "if you are loyal to [See's] and do a good job,
your future is secure." Laurance See, who became president of the company in 1951 and
served in that capacity until his death in 1969, had a practice of not terminating
administrative personnel except for good cause, and this practice was carried on by his
brother, Charles B. See, who succeeded Laurance as president.
During the entire period of his employment, there had been no formal or
written criticism of Pugh's work. No complaints were ever raised at the annual meetings
which preceded each holiday season, and he was never denied a raise or bonus. He received
no notice that there was a problem which needed correction, nor any warning that any
disciplinary action was being contemplated.
Pugh's theory as to why he was terminated relates to a contract which
See's at that time had with the defendant union. Prior to 1971, the union
represented employees of See's as well as employees of certain other candy manufacturers
in a multiemployer bargaining unit, and there existed a collective bargaining agreement
between the union and an employer association representing those manufacturers. In
addition, there existed for many years prior to 1971 a supplemental agreement between the
union and See's which contained provisions applicable to See's only.
In 1968 the supplemental agreement contained a new rate classification
which permitted See's to pay its seasonal employees at a lower rate. At a company meeting
prior to the 1968 negotiations, Pugh had objected to the proposed new seasonal
classification on the grounds that it might make it more difficult to recruit seasonal
workers, and create unrest among See's regular seasonal workers who had worked previously
for other manufacturers at higher rates. Huggins overruled Pugh's objection and (unknown
to Pugh) recommended his termination for "lack of cooperation" as to which
Pugh's objection formed "part of the reason." His recommendation was not
accepted.
The 1968 association and supplemental agreements expired in 1971.
Thereafter See's negotiated with the union separately, and not as a part of any employer
association.
The 1971 agreement expired in 1973. In April of that year, Huggins
asked Pugh to be part of the negotiating team for the new union contract. Pugh responded
that he would like to, but he was bothered by the possibility that See's had a
"sweetheart contract" with the union. In response, someone banged on the table
and said, "'You don't know what the hell you are talking about.'" Pugh said,
"Well, I think I know what I am talking about. I don't know whether you have a
sweetheart contract, but I am telling you if you do, I don't want to be involved because
they are immoral, illegal and not in the best interests of my employees." At the
trial, Pugh explained that to him a "sweetheart contract" was "a contract
whereby one employer would get an unfair competitive advantage over a competitor by
getting a lower wage rate, would be one version of it." He also felt, he testified,
that "if they in fact had a sweetheart contract that it wouldn't be fair to my female
employees to be getting less money than someone would get working in the same industry
under the same manager."
The union's alleged participation in Pugh's termination was in the form
of a statement attributed to Mr. Button (the individual who succeeded Pugh as production
manager) at a negotiating meeting between the company and the union in June 1973.
According to one witness, Mr. Button stated at the commencement of the meeting, "Now
we've taken care of Mr. Pugh. What are you going to do for us."
Discussion
A. Historical Background.
The law of the employment relationship has been, and perhaps still is,
in the process of continuing evolution. The old law of master and servant, which held sway
through the 18th century and to some extent beyond, viewed the relationship as primarily
one of status rather than of contract. While agreement gave rise to the relationship
and might establish certain of its terms, it was "custom and public policy, not the
will of the parties, [which] defined the implicit framework of mutual rights and
obligations." (Selznick, Law, Society and Industrial Justice (1969) p. 123.)
The essence of the relationship as so defined drew its contours from
the model of the household -- in which, typically, the servant worked, the master had
general authority to discipline the servant, and it was the servant's duty to obey. (Id.,
at pp. 124-125.) At the same time, the master had certain responsibilities for the
servant's general welfare. (Id., at p. 128.) The relationship was thus in a sense
paternalistic. And it was not terminable at will; rather, there existed a presumption (in
the absence of contrary agreement) that employment was for a period of one year. (Id., at
p. 125.)
With the industrial revolution in the 19th century the law of master
and servant underwent a gradual remodeling, primarily at the hands of the judiciary.
Primary emphasis came to be placed, through contract doctrine, upon the freedom of the
parties to define their own relationship. "The emphasis shifted from obligation to
freedom of choice." (Id., at p. 131.) The terms of the contract were to be sought in
voluntary agreement, express or implied, the employee being presumed to have assented to
the rules and working conditions established by the employer. (Ibid.)
In light of the generally superior bargaining power of the employer,
"the employment contract became [by the end of the nineteenth century] a very special
sort of contract -- in large part a device for guaranteeing to management unilateral power
to make rules and exercise discretion." (Ibid.) And management's unilateral power
extended, generally, to the term of the relationship as well. The new emphasis brought
with it a gradual weakening of the traditional presumption that a general hiring (i.e.,
one without a specific term) was for a year, and its replacement by the converse
presumption that "a general or indefinite hiring is prima facie a hiring at
will." (Wood, A Treatise on the Law of Master and Servant (1877) § 134, fn.
49.) In California, this presumption is reflected in Labor Code section 2922, which
provides: "An employment, having no specified term, may be terminated at the will of
either party on notice to the other. Employment for a specified term means an employment
for a period greater than one month."
The recognized inequality in bargaining power between employer and
individual employee undergirded the rise of the labor unions and the institutionalization
of collective bargaining. And through collective bargaining, unions have placed
limitations on the employer's unilateral right of termination. Under most union contracts,
employees can only be dismissed for "just cause," and disputes over what
constitutes cause for dismissal are typically decided by arbitrators chosen by the
parties. Collective bargaining agreements, however, cover only a small fraction of the
nation's work force, and employees who either do not or (as in the case of managerial
employees such as Mr. Pugh) cannot form unions are left without that protection.
In recent years, there have been established by statute a variety of
limitations upon the employer's power of dismissal. Employers are precluded, for example,
from terminating employees for a variety of reasons, including union membership or
activities, race, sex, age or political affiliation. Legislatures in this country
have so far refrained, however, from adopting statutes, such as those which exist in
most other industrialized countries, which would provide more generalized protection to
employees against unjust dismissal. And while public employees may enjoy job security
through civil service rules and due process, the legal principles which give rise to these
protections are not directly applicable to employees in private industry.
Even apart from statute or constitutional protection, however, the
employer's right to terminate employees is not absolute. "The mere fact that a
contract is terminable at will does not give the employer the absolute right to terminate
it in all cases." (Patterson v. Philco Corp. (1967) 252 Cal.App.2d 63, 65 [60
Cal.Rptr. 110].) Two relevant limiting principles have developed, one of them based upon
public policy and the other upon traditional contract doctrine. The first limitation
precludes dismissal "when an employer's discharge of an employee violates fundamental
principles of public policy" (Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167,
170 [164 Cal.Rptr. 839, 610 P.2d 1330]), the second when the discharge is contrary to the
terms of the agreement, express or implied. Appellant relies upon both these principles in
contesting his termination here.
B. Public Policy Limitation. [Court's discussion omitted]
C. Contract Limitations.
The presumption that an employment contract is intended to be
terminable at will is subject, like any presumption, to contrary evidence. This may take
the form of an agreement, express or implied, that the relationship will continue for some
fixed period of time. Or, and of greater relevance here, it may take the form of an
agreement that the employment relationship will continue indefinitely, pending the
occurrence of some event such as the employer's dissatisfaction with the employee's
services or the existence of some "cause" for termination. Sometimes this latter
type of agreement is characterized as a contract for "permanent" employment, but
that characterization may be misleading. In one of the earliest California cases on this
subject, the Supreme Court interpreted a contract for permanent employment as meaning
"that plaintiffs' employment . . . was to continue indefinitely, and until one or the
other of the parties wish, for some good reason, to sever the relation." (Lord v.
Goldberg, supra, 81 Cal. 596, 601-602, italics added.)
. . .
In determining whether there exists an implied-in-fact promise for
some form of continued employment courts have considered a variety of factors . . .
These have included, for example, the personnel policies or practices of the employer, the
employee's longevity of service, actions or communications by the employer reflecting
assurances of continued employment, and the practices of the industry in which the
employee is engaged.
A related doctrinal development exists in the application to the
employment relationship of the "implied-in-law covenant of good faith and fair
dealing inherent in every contract." (Tameny v. Atlantic Richfield Co., supra, 27
Cal.3d 167, 179,) The Supreme Court in Tameny took note of authorities in other
jurisdictions which have found an employer's discharge of an at-will employee violative of
that covenant, but considered it unnecessary to reach that issue in light of its holding
that the pleading stated a cause of action on other grounds. (Ibid.)
Recently one Court of Appeal has had occasion to confront the
applicability of that doctrine more directly. In Cleary v. American Airlines, Inc., supra,
111 Cal.App.3d 443, an employee who had been dismissed for alleged theft after 18 years of
allegedly satisfactory service brought suit claiming, among other things, that his
dismissal was in violation of published company policy requiring a "fair, impartial
and objective hearing" in such matters, and in breach of the covenant of good faith
and fair dealing. Holding that the complaint stated a cause of action on these grounds,
the court reasoned: "Two factors are of paramount importance in reaching our result .
. . . One is the longevity of service by plaintiff -- 18 years of apparently satisfactory
performance. Termination of employment without legal cause after such a period of time
offends the implied-in-law covenant of good faith and fair dealing contained in all
contracts, including employment contracts . . . . [ para. ] The second factor of
considerable significance is the expressed policy of the employer . . . set forth in [the]
regulation [referred to in the pleadings]. This policy involves the adoption of specific
procedures for adjudicating employee disputes such as this one. While the contents of the
regulation are not before us, its existence compels the conclusion that this employer had
recognized its responsibility to engage in good faith and fair dealing rather than in
arbitrary conduct with respect to all of its employees. In the case at bench, we
hold that the longevity of the employee's service, together with the expressed policy of
the employer, operate as a form of estoppel, precluding any discharge of such an employee
by the employer without good cause." (Id., at pp. 455-456.)
If "[termination] of employment without legal cause [after 18
years of service] offends the implied-in-law covenant of good faith and fair dealing
contained in all contracts, including employment contracts," as the court said in the
above-quoted portion of Cleary, then a fortiori that covenant would provide protection to
Pugh, whose employment is nearly twice that duration. Indeed, it seems difficult to defend
termination of such a long-time employee arbitrarily, i.e., without some legitimate
reason, as compatible with either good faith or fair dealing.
We need not go that far, however. In Cleary the court did not
base its holding upon the covenant of good faith and fair dealing alone. Its decision
rested also upon the employer's acceptance of responsibility for refraining from arbitrary
conduct, as evidenced by its adoption of specific procedures for adjudicating employee
grievances. While the court characterized the employer's conduct as constituting
"[recognition of] its responsibility to engage in good faith and fair dealing"
(111 Cal.App.3d at p. 455), the result is equally explicable in traditional contract
terms: the employer's conduct gave rise to an implied promise that it would not act
arbitrarily in dealing with its employees.
Here, similarly, there were facts in evidence from which the jury could
determine the existence of such an implied promise: the duration of appellant's
employment, the commendations and promotions he received, the apparent lack of any direct
criticism of his work, the assurances he was given, and the employer's acknowledged
policies. While oblique language will not, standing alone, be sufficient to establish
agreement (Drzewiecki v. H & R Block, Inc., supra, 24 Cal.App.3d 695, 703), it is
appropriate to consider the totality of the parties' relationship: Agreement may be
"'shown by the acts and conduct of the parties, interpreted in the light of the
subject matter and of the surrounding circumstances.'" (Marvin v. Marvin (1976) 18
Cal.3d 660, 678, fn. 16 [134 Cal.Rptr. 815, 557 P.2d 106]; see Note, Implied Contract
Rights to Job Security (1974) 26 Stan.L.Rev. 335.) We therefore conclude that it was error
to grant respondents' motions for nonsuit as to See's.
Since this litigation may proceed toward yet uncharted waters, we
consider it appropriate to provide some guidance as to the questions which the trial court
may confront on remand. We have held that appellant has demonstrated a prima facie case of
wrongful termination in violation of his contract of employment. The burden of coming
forward with evidence as to the reason for appellant's termination now shifts to the
employer. Appellant may attack the employer's offered explanation, either on the ground
that it is pretextual (and that the real reason is one prohibited by contract or public
policy (cf. Bondi v. Jewels by Edwar, Ltd. (1968) 267 Cal.App.2d 672, 676 [73 Cal.Rptr.
494])), or on the ground that it is insufficient to meet the employer's obligations under
contract or applicable legal principles. Appellant bears, however, the ultimate burden of
proving that he was terminated wrongfully.
By what standard that burden is to be measured will depend, in part,
upon what conclusions the jury draws as to the nature of the contract between the parties.
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." (R. J. Cardinal Co. v. Ritchie (1963) 218 Cal.App.2d 124, 144 [32 Cal.Rptr.
545].) Essentially, they connote "a fair and honest cause or reason, regulated by
good faith on the part of the party exercising the power." (Id., at p. 145.) Care
must be taken, however, not to interfere with the legitimate exercise of managerial
discretion. "Good cause" in this context is quite different from the
standard applicable in determining the propriety of an employee's termination under a
contract for a specified term. (Cf. Lab. Code, § 2924.) And where, as here, the employee
occupies a sensitive managerial or confidential position, the employer must of necessity
be allowed substantial scope for the exercise of subjective judgment. (See Note,
Protecting At Will Employees Against Wrongful Discharge: The Duty to Terminate Only in
Good Faith (1980) 93 Harv.L.Rev. 1816, 1840.)
. . .
Reversed.
[Because the judgment of nonsuit was reversed, the case would now have to be retried before a new jury. In such circumstances the parties will often settle to avoid continued time and expense and to hedge against the possibility of losing. The parties did not settle this case. A retrial occurred. The jury returned a verdict for See's and, based on the verdict, the trial court judge entered a judgment in favor of See's. Mr. Pugh appealed again, claiming that the evidence did not support the verdict and also claiming that the trial court judge gave the jury erroneous jury instructions. There was obviously a lot of bad blood and he was willing to spend more money pursuing vindication and damages. Below is a reprint of a small portion of the second appellate opinion in the case, which affirmed the trial court judgment. It paints quite a different picture. Mr. Pugh, still not willing to give up, filed a petition for review of this appellate decision by the California Supreme Court, but it was denied in November, 1988, ending his fight more than 15 years after he had been fired, and 7 years after his pyrrhic victory in his first appeal. I wonder how much he spent in attorney's fees, how the battle affected him or his family, and what settlement offers from See's, if any, he had declined.]
"See's counsel conceded in summation that See's had a
long-standing, unwritten policy that employees would not be discharged unless their work
performance was unsatisfactory, that is, without good cause. We are cited to no evidence
in the record, and we can find none, that See's denied the existence of an implied
contract to discharge appellant only for good cause. Instead, See's focused its evidence
on the issues of whether it acted in good faith and had good cause for the discharge.
"Charles Huggins, president and chief executive officer of See's,
testified that he started with the company in 1951 as an administrative assistant and
worked his way up through the ranks. He became general manager and president of See's in
1969 and of See's Candy Shops, Inc., in 1972, after the retirement of Edward Peck. Peck
had been a senior executive for over 31 years before he retired in 1972. Huggins
discharged appellant because of his good faith dissatisfaction with appellant's
performance as a member of the management team. Huggins's complaints about appellant
spanned almost 20 years and included insubordination, in that appellant failed to train
assistants as directed or to cooperate with other members of the administrative staff.
Directives to appellant to stop employees from giving him gifts (because of an element of
coercion) went unheeded. Huggins had recommended appellant's termination in 1953 and in
1968, but Laurence See had refused to take action. Charles "Harry" See, a former
owner, was unavailable as a witness and testified by deposition that appellant was
designated vice president in an effort to obtain his cooperation when he was passed over
for promotion. The new title did not change his responsibilities, duties, or compensation,
and it was given against the advice of Huggins and Edward Peck, the former president.
"Huggins testified that Charles See took control of the company in
1969 after the death of his older brother, Laurence, and began restructuring the
administrative staffs in both Los Angeles and San Francisco to meet the increased
competition from both foreign and domestic candy makers and to ready the company for sale.
This resulted in terminations, resignations, retirements, and new hirings. Huggins asked
appellant for his cooperation during this transition. The policy of restructuring
continued when the new owners took over in 1972 and made Huggins president of See's Candy
Shops, Inc. They told him to think like an owner, reward excellence rather than seniority,
and make the company grow.
"Huggins made it clear at meetings which appellant attended that
unsatisfactory performance would result in termination. Early in 1973, at a staff
meeting, Huggins told appellant that he had failed to do things requested of him, such as
training assistants, and was not performing his duties properly. Others who were present
testified that the message was "loud and clear." (Appellant admitted on
cross-examination that he knew of various terminations for nonperformance; he also
acknowledged that no one told him he would receive a warning before being discharged and
that he knew unsatisfactory performance was a ground for discharge.)
"In May 1973, appellant went with Huggins and others on a trip to
Europe to view operations of European candy makers; Huggins hoped that this would induce
appellant to start cooperating. Appellant was rude, argumentative, belligerent, and
uncooperative on the trip, and his poor attitude reinforced Huggins's inclination to
discharge him. After his return, Huggins thought quite a bit about his decision and then
met with other administrative staff members and discussed with them his thoughts about
discharging appellant; there was no opposition. He discussed with staff the best way to
discharge appellant. They agreed on the method used to avoid the negative way appellant
had handled criticism and confrontations in the past and to protect the company's secret
formulas. Huggins reported to the new owners in July 1973 that appellant's discharge
resulted from a combination of incompatibility and outright insubordination.
"See's expert, involved in the evaluation of employee work
performance as a teacher, author, and business executive, testified that employees have
three kinds of skills: technical (i.e., the doing of specific things); human (i.e., how
you get along with people); and conceptual (i.e., seeing the whole picture). Human and
conceptual skills become more important as an employee moves higher in the management
structure, and those skills are more difficult to evaluate than technical skills. The
chief executive officer (CEO) has the job of evaluating top-level managers to ensure that
they work together effectively as a team. How a CEO evaluates staff depends on his or her
style, and the top managers must fit and be sensitive to the style of the CEO. Appellant's
position placed him in that top-level group.
"Testimony was elicited from See's employees, former employees,
and business associates to the effect that appellant was disrespectful to his superiors
and subordinates, disloyal to the company, and uncooperative with other administrative
staff. The problems diminished in appellant's absence. The witnesses recounted specific
episodes of conflict with appellant during his years with the company."
Pugh v. See's Candies, Inc., 203 Cal. App. 3d 743 (Cal. Ct. App. 1988).