Sonoma Cnty. Ass'n of Retired Emps. v. Sonoma Cnty.

• Decision Date: 25 February 2013
• Docket Number: No. 10–17873.,10–17873.
• Citation: 708 F.3d 1109
• Parties: SONOMA COUNTY ASSOCIATION OF RETIRED EMPLOYEES, Plaintiff–Appellant, v. SONOMA COUNTY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

708 F.3d 1109

SONOMA COUNTY ASSOCIATION OF RETIRED EMPLOYEES, Plaintiff–Appellant,

v.SONOMA COUNTY, Defendant–Appellee.

No. 10–17873.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted June 13, 2012.

Filed Feb. 25, 2013.

Jeffrey Lewis, Sacha Steinberger and Andrew Lah, Lewis, Feinberg, Lee, Renaker & Jackson, P.C., Oakland, CA, for Plaintiff–Appellant.

Raymond F. Lynch, Hanson Bridgett LLP, San Francisco, CA, for Defendant–Appellee.

Appeal from the United States District Court for the Northern District of California, Claudia A. Wilken, Chief District Judge, Presiding. D.C. No. 4:09–cv–04432–CW.

Before: PROCTOR HUG, JR., JOHNNIE B. RAWLINSON, and SANDRA S. IKUTA, Circuit Judges.

Opinion by Judge IKUTA; Partial Concurrence and Partial Dissent by Judge RAWLINSON.

OPINION

IKUTA, Circuit Judge:

The Sonoma County Association of Retired Employees (Association) sued Sonoma County, alleging that the County had breached its obligation to provide certain vested healthcare benefits in perpetuity. Although the County had not expressly promised to provide these benefits, the Association alleged that it had implicitly done so. The California Supreme Court's recent decision in Retired Employees Ass'n of Orange County, Inc. v. County of Orange (REAOC II) recognized that a county may form a contract with implied terms under specified circumstances. 52 Cal.4th 1171, 134 Cal.Rptr.3d 779, 266 P.3d 287, 289 (2011). In light of REAOC II, the district court erred in dismissing the Association's complaint with prejudice.

I

This case arises from the County's efforts to reduce its liability for its retired employees' healthcare benefits, which it has subsidized since at least 1964. In 2007, the County became concerned about the rapidly rising costs of healthcare benefits, which had doubled since 2002. In August 2008, the County's Board of Supervisors enacted a resolution to limit the County's healthcare benefit contributions to $500 per month for retirees, with a five-year phase-in period. The Association, representing retired County employees, filed suit against the County in 2009 on the ground that the County's August 2008 resolution amounted to a breach of both express and implied contracts, and raised numerous other claims including breach of the covenant of good faith and fair dealing, violations of the Contract Clauses of the California and United States Constitutions, promissory estoppel, and violation of due process.

The Association's original complaint alleged that, in connection with providing healthcare benefits for retirees over the course of many decades, the County made two different promises to the retirees. First, beginning in at least 1964, the County promised to pay “all or substantially all” of the costs of post-retirement healthcare benefits for its retirees and their dependents. Second, in 1985, the County entered into a “tie agreement,” which promised that the County would treat retirees and their dependents the same as it treated the active management employees with respect to healthcare benefits and the County's payment of costs. The complaint alleged that these promises, and the employees' performance of services in exchange for these promises, created a legally binding contract. The Association further alleged that the County intended these promises to create healthcare benefits that would continue during the lives of the retirees and their dependents.

In its May 14, 2010 order, the district court dismissed the Association's complaint with leave to amend. The district court explained that as a matter of California law, oral promises and other extrinsic evidence standing alone could not contractually bind the County in the context of public employment. Accordingly, the district court rejected the Association's claim that the County's “set of promises over the years ... in writing, orally, and as applied through practice” created an implied contract. Because the Association had not identified resolutions or ordinances that created an express contract for healthcare benefits, the district court held that the Association's good faith and fair dealing claim, Contract Clauses claims, and due process claims also failed. Finally, the district court rejected the complaint's promissory estoppel claim on the ground that the Association could not have reasonably relied on the County's implied promises.

While this case was pending, another Ninth Circuit panel considered a case raising similar issues. See Retired Emps. Ass'n of Orange Cnty. Inc. v. Cnty. of Orange, 610 F.3d 1099 (9th Cir.2010) (REAOC I ). In that case, a group of retired county employees sued the county for changing its longstanding practice of subsidizing retiree healthcare benefits on the ground that the county's long-standing practice created an implied contract. The district court in that case granted summary judgment in favor of the county, because the county “cannot be liable for any obligation that it did not enter through explicit Board resolution.” Id. at 1101–02. Because the question whether the retired employees and the county had entered into an enforceable contract was a question of state law, the REAOC I panel certified the following question to the California Supreme Court: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.” Id. at 1101.

While the certified question from REAOC I was pending before the California Supreme Court, the Association filed an amended complaint in this case, asserting the same causes of action as in the original complaint, but adding more facts and attaching copies of the sixty-eight resolutions, memoranda of understanding (MOUs), and ordinances on which it relied. The Association also stated it would provide evidence of the County's intent to provide vested healthcare benefits through testimony of the employees who drafted the County's resolutions and policies, and through a member of the Board of Supervisors, who would testify as to the Board's promises and intent to provide benefits.

On November 23, 2010, the district court granted the County's motion to dismiss the Association's amended complaint, this time without leave to amend. The court noted that none of the documents adduced by the Association in connection with its complaint contained the County's express agreement to provide healthcare benefits to retirees in perpetuity, which the court had previously held was necessary to form a binding contract between the County and retirees in this context. Given the Association's failure on this second try to provide any evidence of an express agreement, the district court denied the Association leave to amend. In a footnote, the court acknowledged the certified question in REAOC I was pending before the California Supreme Court, but did not consider it because both parties had indicated that the certified issue was not relevant.

The Association appealed both the November 2010 order and the May 2010 order, which became final and appealable when the district court dismissed the case without leave to amend. See Montes v. United States, 37 F.3d 1347, 1351 (9th Cir.1994).

II

While this appeal was pending, the California Supreme Court issued an opinion responding to the certified question posed by the Ninth Circuit in REAOC I. In REAOC II, the court considered three different issues: (1) whether a county government and its employees can form an implied contract for compensation; (2) if such contracts are cognizable, whether implied contracts can create irrevocable or “vested” rights; and (3) if vested contractual rights for county employees can be implied, whether such rights can include healthcare benefits. See REAOC II, 134 Cal.Rptr.3d 779, 266 P.3d at 291.

Turning to the first question, the court held that “a county may be bound by an implied contract (or by implied terms of a written contract), as long as there is no statutory prohibition against such an agreement.” Id. 134 Cal.Rptr.3d 779, 266 P.3d at 294. The court decided that it need not determine whether the county “may form an implied contract with its employees on matters of compensation” because the retirees took the position that they had an express contract and were “seeking recognition only of an implied term.” Id. 134 Cal.Rptr.3d 779, 266 P.3d at 295 (first emphasis added). According to the court, implied terms “stand on equal footing with express terms,” so long as they do not conflict with the express terms. Id. 134 Cal.Rptr.3d 779, 266 P.3d at 290 (internal quotation marks omitted).

The court then considered the extent to which section 25300 of the California Government Code, which authorizes a public entity to enter into a compensation contract only by ordinance or resolution, constituted a “statutory prohibition” against implied agreements or implied terms in the public employment context.¹See id. 134 Cal.Rptr.3d 779, 266 P.3d at 294. According to the court, section 25300 did not completely prohibit implied agreements or terms, because “contractual rights can be implied from legislative enactments under limited circumstances.” Id. 134 Cal.Rptr.3d 779, 266 P.3d at 295. The court explained that an ordinance or resolution can create a contract when the legislation's text or the “circumstances accompanying its passage” clearly evince an intent to contract, as opposed to an intent to make policy. Id. 134 Cal.Rptr.3d 779, 266 P.3d at 296. Although the public entity's intent to create a contract must be clear, the intent need not be express. Id. The California Supreme Court gave some examples of when legislation may create a contract. For example, if “the legislation is itself the ratification or approval of a contract, the intent to make a contract is clearly shown.” Id. Alternatively, legislation creates a contract if it “contains an unambiguous element of exchange of consideration by a private p...