Scott v. Pacific Gas & Electric Co.

• Decision Date: 13 November 1995
• Docket Number: No. S042601,S042601
• Citation: 904 P2d 834,11 Cal.4th 454,46 Cal.Rptr.2d 427
• Court: California Supreme Court
• Parties: , 904 P.2d 834, 64 USLW 2384, 131 Lab.Cas. P 58,045, 11 IER Cases 161, 95 Cal. Daily Op. Serv. 8712, 95 Daily Journal D.A.R. 15,073 C. Byron SCOTT et al., Plaintiffs and Appellants, v. PACIFIC GAS AND ELECTRIC COMPANY, Defendant and Appellant.

Page 427

46 Cal.Rptr.2d 427

11 Cal.4th 454, 904 P.2d 834, 64 USLW 2384,

131 Lab.Cas. P 58,045, 11 IER Cases 161,

95 Cal. Daily Op. Serv. 8712,

95 Daily Journal D.A.R. 15,073

C. Byron SCOTT et al., Plaintiffs and Appellants, v. PACIFIC GAS AND ELECTRIC COMPANY, Defendant and Appellant.

No. S042601.

Supreme Court of California.

Nov. 13, 1995.

Wylie, McBride, Jesinger, Sure & Platten and Christopher E. Platten, San Jose, for plaintiffs and appellants.

Joseph Posner, Quackenbush & Quackenbush and William C. Quackenbush, San Mateo, as Amicus Curiae on behalf of plaintiffs and appellants.

Howard V. Colub, J. Michael Reidenbach, Deborah S. Shefler, Maureen L. Fries and Bruce R. Worthington, Pacific Gas & Electric Company, San Francisco, for defendant-appellant.

McCuthen, Doyle, Brown & Enersen, Jonathan H. Sakol, Denise M. Derose, Mitchell, Silberberg & Knupp, Lawrence A. Michaels and Adam Levin as Amici Curiae on behalf of defendant and appellant.

MOSK, Justice.

C. Byron Scott and Al Johnson were engineers employed by Pacific Gas and Electric Company (PG & E) in a senior managerial capacity when they were demoted. The demotion resulted in an approximately 25 percent reduction in salary and benefits, as well as a loss of all supervisorial authority. They sued, claiming, among other things, that PG & E had breached an implied-in-fact contract term not to demote their employees except for good cause. The jury, in special findings, found in fact that such a contract existed and had been breached, and awarded each plaintiff a substantial amount in compensatory damages for past and anticipated future lost earnings. The trial court entered judgment for Scott and Johnson, but the Court of Appeal reversed, holding that courts should not recognize or enforce such agreements for various reasons of law and public policy. Because the Court of Appeal's conclusion contravenes well-established principles of law relating to employment contracts recognized in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 (Foley ), and in numerous cases preceding and following Foley, we conclude that judgment must be reversed.

I.

At the time of trial Scott and Johnson had been employed by PG & E as engineers for 24 years and 20 years, respectively. Both had worked, before they were demoted, in PG & E's technical and ecological services unit (TES), an in-house engineering consulting service for other departments within PG & E. Scott had been director of technical services, directly below the head of the TES division, and had supervisory responsibility for 250 employees. Johnson was a supervisory engineer immediately below Scott, and supervised 56 employees.

In 1977, Scott and Johnson started S & J Engineering (S & J), a subchapter S corporation. The company consults on stress analysis, installation of strain gauges, and performs installation and calibration services. Ray Cayot, Carl Weinberg, and R.C. Thornberry, the successive managers of TES, were all informed of the existence of the company. Scott's and Johnson's involvement with S & J was well known throughout PG & E. A copy of Johnson's S & J corporate stock certificate hung on his office wall at PG & E. Employment policies at TES permitted outside consulting work, and several engineers in TES owned outside businesses. There is no PG & E rule, practice, or policy which prohibits company employees from engaging in outside businesses so long as such activity does not precipitate a conflict of interest with PG & E.

Work was done for S & J in the evenings, on vacation days and on the weekends. Much of the work was performed in Johnson's home. Some jobs were more extensive and were done on location, such as projects undertaken for the NASA Ames Research facility at Moffett Field. Some technicians who worked with Scott and Johnson at PG & E were employed on S & J's NASA projects, but they performed this work during their off-hours. There is no company policy against PG & E employees hiring fellow employees in their outside businesses.

Near the end of 1988, PG & E's internal auditing department (IA) began investigation into Scott's and Johnson's supervisorial practices and outside business interests. There are conflicting explanations as to why the investigation commenced. PG & E claimed that an investigation of time card fraud earlier that year among some technicians in Scott's and Johnson's department had pointed to irregularities in their conduct. Scott and Johnson claimed that their successful intervention on behalf of one of the employees accused during the time card fraud investigation had incurred the hostility of one of the IA investigators, Ralph Stewart, who then sought to retaliate against them. In any event, IA conducted an extensive query into Scott's and Johnson's business and personal financial records.

The charges that finally emerged from the investigation fell into two categories: (1) Scott and Johnson were negligent supervisors, failing to establish controls on employee abuses of such matters as overtime work and expense account reimbursement; (2) Scott's and Johnson's dual positions as the proprietors of S & J and as PG & E employees gave rise to a number of conflicts of interest that they resolved to PG & E's disadvantage. They were accused of using their influence to have PG & E hire and promote persons who had been employed by S & J, and also of favoring PG & E vendors who had referred business to S & J. They were also accused of misleading PG & E about the nature of S & J's activities.

On August 9, 1989, Scott and Johnson were suspended with only a brief explanation of the charges against them. They were finally permitted, on September 6, 1989, to read the IA report outlining the charges, but were not allowed to obtain copies of it. They were given three days to respond to the charges. This they did at length, and with extensive documentary support. They contended that they had used only established supervisorial practices in monitoring their employees, and that they had not, in fact, shown any favoritism toward PG & E employees or vendors. In spite of this response, Scott and Johnson were demoted in October of 1989. At trial, personnel supervisors testified that the decision to demote them had been made in July of 1989, and that their response to the IA report had not been considered in that decision. They were placed in positions they last held in 1975 and 1973 respectively, and were relieved of all supervisory authority. Their salaries and benefits were accordingly reduced by approximately 25 percent.

Scott and Johnson sued, alleging among other matters that PG & E had breached an implied contract term not to demote employees without good cause. ¹ Scott's and Johnson's contract theory was based largely on PG & E's detailed personnel policies. At the time of the demotion, PG & E had a system in place termed "Positive Discipline," as set forth in a document entitled "Pacific Gas and Electric Company: Positive Discipline Guidelines," which was introduced into evidence. Positive discipline refers to a system of progressively more serious, but constructively oriented, responses to employee misconduct. As the guidelines provide: "If an employee has a conduct, attendance or work performance problem, disciplinary action may be necessary to correct the situation. Positive Discipline is designed to provide the opportunity to correct deficient performance and build commitment (not merely compliance) to expected performance in a manner that is fair [and] equitable to all employees. Each step is a reminder of expected performance, stressing decision-making and individual responsibility, not punishment." These steps include an initial "coaching and counseling" by supervisors, followed by an oral reminder and a written reminder. The culmination of the process is a "decision making leave," in which the employee is given a paid one-day leave to consider whether he or she can make the commitment necessary to comply with PG & E's standards of conduct. Each of the disciplinary steps is to be extensively documented.

Termination occurs when "Positive Discipline has failed to bring about a positive change in an employee's behavior." Termination may also occur immediately "in those few instances when a single offense of such major consequence is committed that the employee forfeits his/her right to the Positive Discipline process," such as theft or striking a member of the public. The system is applied to all nonprobationary employees. Demotion is discussed as an intermediate disciplinary step short of discharge, particularly appropriate when the employee shows an "ability deficiency."

There was uncontradicted evidence introduced at trial that PG & E intended to bind itself to these disciplinary policies. First, the policy manual itself, of which Scott and Johnson had knowledge, enunciates the principle that the disciplinary process is intended to be uniformly applied to all employees. Second, the testimony of one of PG & E's personnel managers affirmed that PG & E expected "employees to rely on company [discipline] policies as being what the company will follow" and that one of the purposes of the disciplinary process is to "let employees know what the company expects and what employees can expect from the company." No evidence was produced that suggested the disciplinary policy was merely followed at the discretion of PG & E management.

Scott and Johnson argued at trial that PG & E had not followed its own personnel policies when it summarily demoted them without cause. The testimony of a number of witnesses showed that Scott and Johnson had not, in fact, been responsible for any favorable treatment of PG & E employees who had been employed by S & J, and that PG & E managers were unable to point to any specific instance of Scott's and Johnson's acting on a conflict of interest to PG & E's detriment. The evidence also showed...