McGhee v. Arabian American Oil Co.

Decision Date28 April 1989
Docket NumberNo. 86-2798,86-2798
Citation871 F.2d 1412
PartiesWillis McGHEE; Carol McGhee; David Rudh; Chaweean Rudh, Plaintiffs-Appellants, v. ARABIAN AMERICAN OIL COMPANY, d/b/a ARAMCO, a corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

John F. Wells, Oakland, Cal., for plaintiffs-appellants.

William F. Hoefs, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN, * Chief Judge, FLETCHER and WIGGINS, Circuit Judges.

FLETCHER, Circuit Judge:

Willis McGhee and David Rudh and their spouses brought this diversity action against their former employer, the Arabian American Oil Company (Aramco), for wrongful termination of their employment contracts and for defamation, intentional infliction of emotional distress, fraud, and conversion. McGhee and Rudh were terminated by Aramco and expelled from Saudi Arabia for renting videotapes to fellow employees from their homes in Aramco's compounds, activity that Aramco viewed as violating Saudi restrictions on commercial enterprises in the compounds.

On the contract claim, we reverse the district court's judgment notwithstanding the verdict (judgment nov) for Aramco and order reinstatement of the verdict and entry of judgment thereon. On the tort claims, we affirm the grant of summary judgment for Aramco.

FACTS

Aramco is an oil-production company with extensive operations in the Middle East. Aramco is incorporated in Delaware; its largest operations are in Saudi Arabia. The company's wholly owned subsidiary, Aramco Services Company, operating out of Houston, Texas, conducts all of Aramco's recruiting in the United States.

In 1980, Willis McGhee, then residing in Oklahoma, and David Rudh, then residing in California, were hired by Aramco and sent, accompanied by their wives, to work in company compounds in the Kingdom of Saudi Arabia. Their employment contracts, executed in Texas, were governed by Texas law. The contracts expressly incorporated Aramco company rules which, as required by Saudi law, restated provisions of the Saudi Labor and Workmen Law (the Saudi Labor Law), including provisions making Aramco liable for terminating its employees without a "valid reason." Plaintiffs worked for Aramco until their termination on December 18, 1984. During their period of residence in Saudi Arabia, the McGhees and the Rudhs rented videotapes to fellow Aramco employees out of their homes. Plaintiffs' "video clubs" were two of many such enterprises, but theirs eventually numbered among the largest, with roughly 200 members each.

American expatriates living in Aramco's compounds were prohibited from operating commercial businesses. This prohibition derived both from Saudi commercial law and from directives that Saudi officials sent to Aramco managers. Saudi commercial law broadly proscribes the operation of any commercial business without a license. Because licenses are generally unavailable to non-Saudis, expatriates on the Aramco compounds were effectively foreclosed from operating commercial businesses. There was, however, considerable uncertainty on the compounds, and apparently within Aramco management, as to the defining characteristics of a commercial business. In January 1982, in response to a letter from the Ministry of Commerce, Aramco distributed a notice to its employees concerning the prohibition on commercial businesses. The notice included an illustrative list of prohibited activities and instructed employees to contact the Personnel Department if they had questions. Videotape rental was not listed as a prohibited activity.

A second notice, distributed to Aramco employees in February 1983, expanded the list of prohibited activities, but again made no mention of videotape rentals. In August 1983, the Saudi Deputy Minister of Petroleum and Mineral Resources sent Aramco a specific directive outlawing all videotape activities and directing Aramco to instruct its employees accordingly. However, through the time of McGhee's and Rudh's terminations, Aramco gave no further notice to its employees concerning prohibited activities, and, specifically, said nothing concerning videotape rentals.

On December 15, 1984, Aramco received an anonymous letter claiming that McGhee and Rudh were operating "very big" businesses making and lending videotapes, "many not too nice." Aramco officials met and considered various responses, including doing nothing. Concerned that a similar letter might reach Saudi authorities, they ultimately decided to inform the Chief of Police of the Eastern Province, General Othman, and to request permission to handle the matter themselves. Othman apparently agreed to let Aramco handle the matter internally, provided that plaintiffs were terminated from their positions with Aramco in Saudi Arabia and repatriated to the United States, and that their videotapes were confiscated.

On December 16, 1984, plaintiffs were detained by Aramco security officers and informed of the anonymous letter. Security officers searched the plaintiffs' homes for pornographic tapes but no tapes meeting those officers' definitions of pornography were discovered. Some 5,388 tapes belonging to the plaintiffs were confiscated and later destroyed by Aramco at the direction of the Saudi government. On December 18, 1984, Aramco terminated McGhee and Rudh for operating unlicensed commercial enterprises in violation of Saudi Arabian law. Aramco required them to leave the country within two days. Mrs. Rudh, who was visiting her family in Thailand at the time, was directed not to return to Saudi Arabia. She flew directly to the United States from Thailand.

Plaintiffs brought this action alleging that Aramco fired them without a valid reason in violation of Saudi labor law standards that were incorporated into their employment contracts. They also argued that Aramco breached a contractual duty to provide a warning and an opportunity for correction prior to terminating an employee for an offense of this nature. The plaintiffs also raised several tort claims: fraudulent misrepresentation of Saudi legal constraints applicable to Aramco employees, defamation and intentional infliction of emotional distress arising from the circumstances of the terminations and expulsions, and conversion of the videotapes.

Upon cross motions for summary judgment the district court granted partial summary judgment for Aramco on the tort claims, finding that Saudi law controlled and precluded recovery on all counts. The court also granted partial summary judgment for McGhee and Rudh on the choice-of-law aspect of the contract claims, finding that Texas law controlled the wrongful termination claim and that the contract incorporated tenets of Saudi employment law providing damages for employees fired without a valid reason.

The contract claims were tried before a jury. At the close of the evidence, the district court denied the defendants' motion for a directed verdict, stating that "there is sufficient significant probative evidence which, if believed by the jury, is sufficient for the jury to find for the plaintiffs." To resolve Aramco's liability in contract, the district court posed three special interrogatories to the jury, to be answered separately with respect to each plaintiff. The first asked whether Aramco had a valid reason, under the principles of Saudi employment law, to terminate the plaintiffs. The second, relevant only if a valid reason was found, asked whether Aramco was estopped, under Texas estoppel doctrine, from asserting its valid reason defense. The third interrogatory, addressed to an alternative common law defense raised by Aramco, asked whether the company had acted under compulsion of the Saudi government when it terminated the plaintiffs.

The jury found that Aramco did not have a valid reason for the terminations and that Aramco's conduct was not compelled by the Saudis; it therefore awarded damages to plaintiffs. The jury's rejection of Aramco's valid reason defense precluded it from considering the plaintiffs' estoppel argument, that Aramco's knowing toleration of videotape rentals and failure to inform its employees of what it knew, or should have known, about the Saudis' view of these activities estopped the company from using the plaintiffs videotape rentals as a reason for termination. Following the trial, plaintiffs filed a post-trial motion requesting a new trial on damages, amendment of the judgment and an award of attorney's fees. Aramco moved for a judgment nov and in the alternative for a new trial, see Fed.R.Civ.P. 50(b), on the grounds that the evidence did not support the jury's rejection of Aramco's defenses and would not have supported a determination that Aramco was estopped if the jury had reached the estoppel question. The district court denied plaintiffs' motion and granted Aramco's motion for judgment nov and alternative retrial motion. McGhee and Rudh now appeal the summary judgment on the tort claims, the judgment nov, certain jury instructions, and certain evidentiary rulings. Plaintiffs also assert that the district court abused its discretion in granting Aramco's alternative request for a new trial on the contract claims, but suggests that a new trial on all the issues would be the most sensible course "given their view that a trial is required on the tort issues." We have jurisdiction under 28 U.S.C. Sec. 1291.

ANALYSIS

Because the events and affiliations of the parties in this suit involve several jurisdictions, both the contract and tort claims present conflict-of-law questions. The conflicts issue with respect to the contract claims is conveniently resolved by the contract's express designation of Texas law as the law of decision; the tort claims present more difficult choice-of-law problems. We consider the...

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