Farnham v. Superior Court (Sequoia Holdings, Inc.)

• Decision Date: 18 December 1997
• Docket Number: No. B113880,B113880
• Citation: 70 Cal.Rptr.2d 85,60 Cal.App.4th 69
• Court: California Court of Appeals Court of Appeals
• Parties: , 97 Cal. Daily Op. Serv. 9487, 97 Daily Journal D.A.R. 15,498 Donald W. FARNHAM, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; SEQUOIA HOLDINGS, INC., et al., Real Parties in Interest.

Page 85

70 Cal.Rptr.2d 85

60 Cal.App.4th 69, 97 Cal. Daily Op. Serv. 9487,

97 Daily Journal D.A.R. 15,498

Donald W. FARNHAM, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent SEQUOIA HOLDINGS, INC., et al., Real Parties in Interest.

No. B113880.

Court of Appeal, Second District, Division 1, California.

Dec. 18, 1997.

Rehwald Rameson Lewis & Glasner and William Rehwald, Woodland Hills, for Petitioner.

R.Q. Shupe and William D. Schuster, Santa Ana, for Real Parties in Interest.

No appearance for Respondent.

MIRIAM A. VOGEL, Associate Justice.

Although the policy of the law supposedly frowns upon all contracts that exempt a party from responsibility for his own "fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent" (Civ.Code, § 1668), ¹ that policy is not enforced in every context, and contractual releases of future liability for ordinary negligence, as well as contractual indemnity provisions, insurance contracts, and other limitations on liability are generally enforceable. Conversely, however, contractual releases of future liability for fraud and other intentional wrongs are invariably invalidated. In this case, we are presented with a hybrid contractual waiver that preserves an employee's claims against his corporate employer but waives his right to sue the corporation's officers, directors and shareholders for damages arising out of the employment agreement. When the employee sued the corporation and two directors for defamation, he arbitrated his claim against the corporation and won. Relying on the contractual waiver, the directors then sought and obtained dismissal of the action against them, and the employee now contends his waiver is against public policy and unenforceable. In response to the employee's writ petition, we hold that his retention of his rights against his corporate employer validates his waiver of his right to sue the corporation's directors and officers for defamation, and that the waiver is not per se unenforceable.

FACTS

In 1994, Donald W. Farnham sued Sequoia Holdings, Inc. (his former employer) and two individuals, Edward R. Whitehurst and Joseph H. Brown, both of whom are shareholders, officers and directors of Sequoia. ² Farnham alleges that, pursuant to a written agreement, he went to work for Sequoia in July 1991 as its Executive Vice President and Chief Operating Officer. In January 1993, by which time Farnham had become Sequoia's Chief Executive Officer, a new contract was executed by Farnham and Sequoia. As did the 1991 agreement, the nine-page 1993 contract included the following provision:

"Sole Remedy. In the event that [Sequoia] breaches any term or provision of this Agreement, and fails to cure said breach ..., then [Sequoia] shall be deemed to be in default under this Agreement. Any dispute, controversy or claim arising from, in connection with or related to this Agreement or the making, performance or interpretation thereof, the same shall be submitted to binding arbitration in Los Angeles, California, in accordance with rules of the American Arbitration Association then existing, and judgement on the arbitration award may be entered in any court having jurisdiction over the subject matter of the controversy. [Farnham] further waives any right he may have for a lawsuit for damages against any shareholder, director, officer, or employee of [Sequoia] for any claim, cause of action, damage, cost, or expense, arising from, in connection with, or in relating to, the terms and provisions of this Agreement or any breach thereof." (Italics added.)

For present purposes, the dozen causes of action originally pled have been pared down to a claim of defamation against Whitehurst and Brown in which Farnham alleges that Whitehurst, Brown and others were involved in some sort of "penny stock fraud" (from which they "financially prospered") which was discovered as the result of an investigation spearheaded by Farnham. When Farnham then suspended trading of Sequoia's stock, Whitehurst and Brown were "upset" and undertook a campaign "to harm [his] reputation and impair his ability to operate efficiently and effectively" as Sequoia's president. To that end, Whitehurst and Brown wrote and sent an allegedly libelous letter to Sequoia's shareholders, employees, vendors and customers.

After Farnham filed suit, he filed a petition for arbitration by the American Arbitration Association. In the trial court (either just before or just after Farnham filed his petition), Sequoia filed a motion to compel arbitration of Farnham's claims, including defamation. Sequoia's motion was granted (at which time the claims against Whitehurst and Brown were severed because they were not parties to the employment agreement and, therefore, not bound by the arbitration provision) and Farnham's claims were arbitrated as required by his employment agreement. In April 1997, the arbitrator awarded about $1.5 million to Farnham (including $500,000 for the defamation claim), and the award against Sequoia was thereafter reduced to a judgment. ³ Whitehurst and Brown then demurred to Farnham's first amended complaint (an earlier demurrer had been taken off-calendar while the arbitration was pending), contending that Farnham, by agreeing to the "sole remedy" provision in his employment contract, had waived "all his rights for a lawsuit for damages" against Sequoia's directors. As a practical matter, Whitehurst and Brown contended Farnham had no remedy against them because they were not bound by the arbitration agreement and because Farnham had waived his right to bring a "lawsuit." Farnham opposed the demurrer, contending Whitehurst and Brown were acting in their individual capacities at the time they defamed Farnham.

The trial court sustained without leave to amend Whitehurst's and Brown's demurrer to Farnham's defamation cause of action, rejecting Farnham's claim that Whitehurst and Brown were acting in their individual capacities and finding that (by the terms of his employment agreement) Farnham had "expressly waived these claims against [Whitehurst and Brown]." Farnham then filed this writ petition, contending his contractual waiver is against public policy and unenforceable because it releases the individuals from liability for their future intentional acts. Alternatively, Farnham contends the waiver does not apply to Whitehurst and Brown because they were acting in their individual capacities when they defamed Farnham. We issued an order to show cause, set a briefing schedule and set the matter for argument.

DISCUSSION

Farnham contends his contractual waiver is unenforceable because it is contrary to California's public policy or, if enforceable, that the waiver issue is incapable of resolution by demurrer because wrongful acts by directors unrelated to their positions with the corporation would not in any event be covered by the waiver. Whitehurst and Brown contend the waiver is enforceable and point to the arbitration proceedings to show the claim against them is "identical" to the defamation claim Farnham has already arbitrated against Sequoia. For the reasons explained below, we conclude the "sole remedy" provision is compatible with California's public policy and, therefore, not unenforceable per se--but that its enforceability in this case cannot be resolved on demurrer.

A.

Section 1668 declares that "[a]ll contracts which have for their object, directly or indirectly to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." Farnham says this is both the beginning and the end of the discussion because, the way he sees it, the "sole remedy" provision is an impermissible attempt to exempt Sequoia's directors from liability for their own "willful" conduct. We disagree.

Section 1668 is not strictly applied. Despite its prohibition of an exemption from liability for future acts of "negligence," section 1668 does not per se prohibit a contractual release of future liability for ordinary negligence unless the "public interest" is involved or unless a statute expressly forbids it. (Henrioulle v. Marin Ventures, Inc. (1978) 20 Cal.3d 512, 517, 143 Cal.Rptr. 247, 573 P.2d 465; Nunes Turfgrass, Inc. v. Vaughan-Jacklin Seed Co. (1988) 200 Cal.App.3d 1518, 1534, 246 Cal.Rptr. 823.) Despite its purported application to "[a]ll contracts," section 1668 does not bar either contractual indemnity or insurance, notwithstanding that (aside from semantics) the practical effect of both is an "exempt[ion]" from liability for negligence. (Goldman v. Ecco-Phoenix Elec. Corp. (1964) 62 Cal.2d 40, 48-49, 41 Cal.Rptr. 73, 396 P.2d 377; Sacramento-Yolo Port Dist. v. Cargill of California, Inc. (1970) 4 Cal.App.3d 1004, 1012, 84 Cal.Rptr. 822.)

Although exemptions from all liability for intentional wrongs, gross negligence and violations of the law have been consistently invalidated (Baker Pacific Corp. v. Suttles (1990) 220 Cal.App.3d 1148, 1151, 1154, 269 Cal.Rptr. 709 [invalidating release covering "all risks in connection with potential exposure of asbestos"]; ⁴ Halliday v. Greene (1966) 244 Cal.App.2d 482, 488, 53 Cal.Rptr. 267 [otherwise valid exculpatory lease clause cannot cover violation of industrial safety order]; Klein v. Asgrow Seed Co. (1966) 246 Cal.App.2d 87, 100, 54 Cal.Rptr. 609 [invalidating disclaimer of warranty where there was fraud] ), we have not found any case addressing a limitation on liability for intentional wrongs, gross negligence or violations of the law. (See Wheeler v. Oppenheimer (1956) 140 Cal.App.2d 497, 499, 295 P.2d 128 [a provision restricting recovery to actual "costs and expenses" is a limitation on liability, not a provision for liquidated damages, because it is "not intended to prescribe a definite liability," only to impose a "limitation within...