Demasse v. ITT Corp.

• Decision Date: 25 May 1999
• Docket Number: No. CV-97-0177-CQ.,CV-97-0177-CQ.
• Parties: Roger DEMASSE; Maria A. Garcia; Billy W. Jones; Viola Munguia; Greg Palmer; Socorro Soza, Plaintiffs-Appellants. v. ITT CORPORATION, a Delaware Corporation dba ITT Cannon, Defendant-Appellee.
• Court: Arizona Supreme Court

984 P.2d 1138

194 Ariz. 501

Roger DEMASSE; Maria A. Garcia; Billy W. Jones; Viola Munguia; Greg Palmer; Socorro Soza, Plaintiffs-Appellants. v. ITT CORPORATION, a Delaware Corporation dba ITT Cannon, Defendant-Appellee.

No. CV-97-0177-CQ.

Supreme Court of Arizona, En Banc.

May 25, 1999.

Jack Levine, Phoenix, Attorney for Plaintiffs-Appellants.

Bryan Cave L.L.P. By: John Alan Doran, Teresa D. Forst, Sherin S. Vitro, Merritt L. Bingham, Phoenix, Attorneys for Defendant-Appellee.

Ryley, Carlock & Applewhite By: Michael D. Moberly, Phoenix, Attorneys for Amicus Curiae Phelps Dodge Corporation.

Quarles & Brady By: Jon E. Pettibone, Phoenix, Attorneys for Amicus Curiae Cyprus Climax Metals Company.

David C. Larkin, P.C. By: David C. Larkin, Tempe, Attorney for Amici Curiae Sharon Dick, Dianne Aragon, and Elizabeth Prior.

The Langerman Law Offices By: Amy G. Langerman, Richard W. Langerman, Phoenix, Attorneys for Amicus Curiae Arizona Employment Lawyers Association.

OPINION

FELDMAN, Justice.

¶ 1 The United States Court of Appeals for the Ninth Circuit certified to us two questions of Arizona law. We have jurisdiction pursuant to article VI, § 5(6) of the Arizona Constitution, A.R.S. § 12-1861, and Rule 27, Arizona Rules of the Supreme Court.

¶ 2 The certified questions are:

1. Once a policy that an employee will not be laid off ahead of less senior employees becomes part of the employment contract under Leikvold v. Valley View Community Hospital, 141 Ariz. 544, 688 P.2d 170 (1984), as a result of the employee's legitimate expectations and reliance on the employer's handbook, may the employer thereafter unilaterally change the handbook policy so as to permit the employer to layoff employees without regard to seniority?

2. In order to sue for breach of contract on the ground that an employer is bound by representations made in its handbook, must employees exhaust the complaint procedure described in the same handbook?

¶ 3 The questions certified posit that the layoff seniority provision has become part of the employment contract. See Leikvold, 141 Ariz. at 546,

688 P.2d at 172. Using this assumption, we respond to each question in the negative.

FACTS AND PROCEDURAL HISTORY

¶ 4 ITT Cannon ("ITT") is a Delaware corporation primarily engaged in defense contracting in the Phoenix area. ITT hired Roger Demasse, Maria A. Garcia, Billy W. Jones, Viola Munguia, Greg Palmer, and Socorro Soza (collectively "Demasse employees") as hourly workers at various times between 1960 and 1979. Although it is unclear when ITT first issued an employee handbook, evidently there have been five editions, the most recent in 1989.

¶ 5 Because the complete handbooks are not part of our record, we decide this case in the context of the limited provisions before us, using the certified question's predicate that the seniority layoff promise became part of the Demasse employees' contract. Thus the questions of which terms in the manual and what additional circumstances, if any, formed the implied-in-fact contract are left for the federal court. See Leikvold, 141 Ariz. at 548,

688 P.2d at 174 (holding that whether any particular manual provision modifies any particular employment-at-will relationship and becomes part of the particular employment contract is a question of fact). Given the question certified, we take as a fact that the seniority layoff provision was contractual.¹

¶ 6 We note, however, that all five handbooks apparently included the seniority layoff provision. The earliest version provided simply that layoffs within each job classification would be made in reverse order of seniority. Later versions also gave more senior employees the ability to "bump" less senior employees. The issues presented focus on the 1989 handbook, which included two new provisions. First, a disclaimer added to the first page "Welcome" statement provided that "nothing contained herein shall be construed as a guarantee of continued employment.... ITT Cannon does not guarantee continued employment to employees and retains the right to terminate or layoff employees." ITT Cannon Handbook for Hourly Employees 1989, Appellant's Brief, Appendix V, at 24. Second, this Welcome statement included a new modification provision, which read:

Within the limits allowed by law, ITT Cannon reserves the right to amend, modify or cancel this handbook, as well as any or all of the various policies, rules, procedures and programs outlined in it. Any amendment or modification will be communicated to affected employees, and while the handbook provisions are in effect, will be consistently applied.

Id. The 1989 edition also provided that "specific provisions of policies, rules, procedures and programs supersede[] the contents of this handbook," thus apparently allowing ITT to modify specific provisions through methods other than issuing a new handbook. Id. When the 1989 handbook was distributed, ITT employees signed an acknowledgment that they had received, understood, and would comply with the revised handbook. Demasse v. ITT Corp., 915 F.Supp. 1040, 1043 (D.Ariz.1995).

¶ 7 Four years passed before ITT notified its hourly employees that effective April 19, 1993, its layoff guidelines for hourly employees would not be based on seniority but on each employee's "abilities and documentation of performance." Demasse, Soza, and Palmer were laid off ten days after the new policy went into effect, Munguia five days later, and Jones and Garcia almost nine months later. All were laid off before less senior employees but in accordance with the 1993 policy modification.

¶ 8 The Demasse employees brought an action in federal district court alleging they were laid off in breach of an implied-in-fact contract created by the pre-1989 handbook provisions requiring that ITT lay off its employees according to seniority. The parties filed cross-motions for summary judgment. The court first examined ITT's handbook disclaimer statements and, as a matter of law, found them not clear and conspicuous enough to prevent formation of an implied-in-fact contract. Id. at 1043-44. Instead, the judge found the language "could be read to mean that termination or layoff will always be completed according to the terms provided in the handbook." Id. at 1044. Thus, whether an implied-in-fact contract covering layoff seniority rights had been created remained a question of fact precluding summary judgment on that issue. Id. (citing Wagenseller v. Scottsdale Mem'l Hosp., 147 Ariz. 370, 382, 710 P.2d 1025, 1037 (1985); Leikvold, 141 Ariz. at 548,688 P.2d. at 174).

¶ 9 As a second, dispositive matter, however, the judge ruled that even if an implied-in-fact contract had been created, only the provisions of the most recent handbook provided its presently enforceable terms. See id. (citing Chambers v. Valley Nat'l Bank, 721 F.Supp. 1128, 1131 (D.Ariz.1988)). Under this interpretation, the terms of the Demasse employees' implied-in-fact contract with ITT at any given time were those of ITT's most recently published handbook. Id. at 1044-45. Consequently, the judge found that when ITT modified the handbook in 1989, the newly added and amended terms automatically became part of the contract, including the modification provision authorizing subsequent unilateral changes. Id. at 1045. As a result, when ITT distributed the 1993 "revised layoff policy," which removed seniority rights and stated that it superseded previous handbooks, ITT validly and unilaterally modified the contract. Id. Because only the 1989 terms, as amended by the 1993 notice, were in effect when the Demasse employees were laid off, the judge held as a matter of law that ITT "did not breach the contract." Id. at 1046. The judge thus allowed ITT to unilaterally alter its contract with the Demasse employees.

¶ 10 On appeal, the Ninth Circuit agreed that Leikvold controls the issue of whether the older handbooks' seniority provisions became part of the employment contract. Demasse v. ITT Corp., 111 F.3d 730, 733 (9th Cir.1997). But unlike the district court, the circuit court recognized that the truly difficult question was "whether ITT could unilaterally change layoff policies which were an enforceable part of the Demasse employees' contract of employment by simply issuing the 1989 handbook declaring that it could amend its handbooks and policies—and then [implementing that provision] by modifying its layoff policy in 1993." Id. at 734. ITT argued that as a matter of Arizona law it was "free" to "discard a layoff selection methodology that had become outdated."² Id. at 733. The Demasse employees responded that ITT could not remove its contractual seniority layoff provision without additional consideration. Id. The circuit court recognized that the federal district courts had concluded that Arizona law recognized continued employment alone as sufficient consideration to modify the contract terms so that when employees continued to work after a new handbook was distributed, the new edition superseded prior editions. Id. at 734-35. The circuit court then observed that although the district courts have so construed Arizona law, no Arizona appellate court has directly addressed this issue. Thus, the court certified the question to us. Id. at 735-36.

QUESTION 1

A. The implied-in-fact contract

¶ 11 Because we answer the first question on its premise that a contract exists, we discuss the implied-in-fact contract term only to distinguish the present situation from a complete at-will agreement. The difference is dispositive with regard to methods necessary for modification.

¶ 12 Complete at-will employment is for an indefinite term, and American courts have come to hold it can be terminated at any time for good cause or no cause at the will of either party. See, e.g., Wagenseller, 147 Ariz. at 375-76,

710 P.2d at 1030-31. At-will employment contracts are unilateral and typically start with an employer's offer of a wage in exchange for work...