Foley v. Interactive Data Corp.
765 P.2d 373 (Cal.1988).

Facts:
Foley started at Interactive in 1976 as an assistant product manager and eventually worked his way up to branch manager. His contract didn’t state any limitation on the grounds for which his employment could be terminated, and in 1983 he was fired.

  • The event that led to Foley’s discharge was a private conversation he had with his supervisor, VP Richard Earnest:
    • Robert Kuhne was named to replace Earnest, and Foley informed Earnest that Kuhnh was currently under investigation by the FBI for embezzlement from his former employer, Bank of America.
  • Foley then filed suit, seeking compensatory and punitive damages for wrongful discharge. He asserted three theories:

(1) A tort cause of action alleging a discharge in violation of public policy.
(2) A contract cause of action for breach of an implied-in-fact promise to discharge for good cause only.
(3) A cause of action alleging a tortious breach of the implied covenant of good faith and fair dealing.

History:

  • The trial court sustained defendant’s demurrer without leave to amend and dismissed all three causes of action.
  • The Court of Appeal affirmed the dismissal as to all three counts.

Issues:
(1) Was the discharge in violation of public policy?
(2) Was there an implied-in-fact contract?
(3) Can a breach of the implied covenant of good faith and fair dealing in employment contracts give rise to an action seeking an award of tort damages?

Holding:
(1) No.
(2) The court found that he had pleaded facts sufficient to establish, if proved, an implied-in-fact contract limiting the company’s right to dismiss him arbitrarily.
(3) No.

Reasoning:
(1) When the duty of an employee to disclose information to his employer serves only the private interest of the employer, the rationale underlying the public policy cause of action is NOT implicated.
(2) See above.
(3)

  • The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purposes.
  • There’s an exception for insurance cases, but courts that applied that reasoning to employment relationships improperly compared the two:
    • Insurance, by its nature, quasi-public – the insured is not seeking to obtain a commercial advantage.
    • Furthermore, a breach in the employment context does not place the employee in the same economic dilemma that an insured faces when an insurer in bad faith refuses to pay a claim or to accept a settlement offer within policy limits.
    • When an insurer takes such actions, the insured cannot turn to the marketplace to find another insurance company willing to pay for the loss already incurred. The wrongfully terminated employee, on the other hand, can (and must, in order to mitigate damages) make reasonable efforts to seek alternative employment.

Rule: The covenant of good faith and fair dealing does apply to employment contracts, but a breach of the covenant can only give rise to contract damages, NOT tort damages.