9th Cir. C.D. Cal. No. CV-07-1301-AG
The opinion of the court was delivered by: Baxter, J.
At the request of the United States Court of Appeals for the Ninth Circuit,*fn1 we address the following abstract question: "Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees." For the reasons that follow, we conclude that a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance. (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 246.) Although Government Code section 25300 does require that compensation of county employees be addressed in an ordinance or resolution, the statute does not prohibit a county from forming a contract with implied terms, inasmuch as contractual rights may be implied from an ordinance or resolution when the language or circumstances accompanying its passage clearly evince a legislative intent to create private rights of a contractual nature enforceable against the county. Whether an implied term creates vested rights, in the absence of a legislative bar, is a matter of the parties' intent.
The backdrop for the question of California law presented by the Ninth Circuit is a lawsuit filed in 2007 by the Retired Employees Association of Orange County, Inc. (REAOC), against the County of Orange (County) contesting the validity of certain changes County has made to health benefits for retired employees.
In 1966, County began offering group medical insurance to retired County employees. County initially calculated premiums separately for active and retired employees. In 1985, County began combining active and retired employees into a single unified pool for purposes of calculating health insurance premiums. Retired employees, as a group, are on average older and more expensive to insure than active employees; if pooled separately, retirees normally would pay higher premiums. The single unified pool thus had the effect of subsidizing health insurance for retirees, in that it lowered retiree premiums below their actual costs, while raising active employee premiums above their actual costs. County paid a large portion of the premiums for active employees, but retired employees paid the majority of their own premiums. County pooled active and retired employees into a single unified pool without interruption from 1985 through 2007.
Due to budgetary concerns, County passed a resolution in 2007 splitting the pool of active and retired employees, effective January 1, 2008. Before passing the resolution, County negotiated changes to health benefits with labor unions representing the active employees. County did not negotiate with the retirees.
On November 5, 2007, REAOC filed suit in federal court against County on behalf of approximately 4,600 retired County employees and sought an injunction prohibiting County from splitting the pool of active and retired employees. REAOC conceded that the express provisions of the various memoranda of understanding (sometimes hereafter MOU) and the Orange County Board of Supervisors (Board) resolutions were silent as to the duration of the unified pool. But REAOC nonetheless alleged that County's action constituted an impairment of contract in violation of the federal and state Constitutions, in that County's long-standing and consistent practice of pooling active and retired employees, along with County's representations to employees regarding a unified pool, created an implied contractual right to a continuation of the single unified pool for employees who retired before January 1, 2008. REAOC noted, for example, that a booklet entitled "Health Plan Choices," which was distributed to active employees, stated that "[w]hen you retire from the County you will be eligible to continue with the health insurance plans" and that "[r]etiree rates are based on the full monthly premiums for each plan, with adjustments for [M]edicare enrollment." County, on the other hand, relied on the annual motions and resolutions of the Board setting health premiums during the relevant period, each of which specified health insurance rates only for that plan year.
The district court granted summary judgment for County on all claims. (Retired Employees Ass'n v. County of Orange (C.D.Cal. 2009) 632 F.Supp.2d 983.) As to the claims of breach of contract and impairment of contract, the court held that County cannot, as a matter of state law, be liable for any obligation it did not undertake explicitly through a resolution by the Board.
REAOC appealed to the Ninth Circuit. The federal appellate court recognized that REAOC's impairment-of-contract claim required a showing "that the County entered into an enforceable contract" to continue a single unified pool for the lifetimes of the retirees and noted further that " 'federal courts look to state law to determine the existence of a contract.' " (Retired Employees Association of Orange County, Inc. v. County of Orange, supra, 610 F.3d at p. 1102.) The Ninth Circuit thus asked us for a decision whether, as County contends, "an implied contract to which a county is one party cannot confer . . . vested rights" to health benefits in California. (Id. at p. 1101.)
A contract is either express or implied. (Civ. Code, § 1619.) The terms of an express contract are stated in words. (Civ. Code, § 1620.) The existence and terms of an implied contract are manifested by conduct. (Civ. Code, § 1621.) The distinction reflects no difference in legal effect but merely in the mode of manifesting assent. (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 102, p. 144.) Accordingly, a contract implied in fact "consists of obligations arising from a mutual agreement and intent to promise where the agreement and promise have not been expressed in words." (Silva v. Providence Hospital of Oakland (1939) 14 Cal.2d 762, 773.)
Even when a written contract exists, " ' "[e]vidence derived from experience and practice can now trigger the incorporation of additional, implied terms." ' " (Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 463.) "Implied contractual terms 'ordinarily stand on equal footing with express terms' " (ibid.), provided that, "as a general matter, implied terms should never be read to vary express terms." (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 374.)
All contracts, whether public or private, are to be interpreted by the same rules unless otherwise provided by the Civil Code. (Civ. Code, § 1635; see also M. F. Kemper Const. Co. v. City of L.A. (1951) 37 Cal.2d 696, 704 ["California cases uniformly refuse to apply special rules of law simply because a governmental body is a party to a contract"].) In the private sector, it is well understood that collective bargaining agreements are intended to govern " 'a myriad of cases which the draftsmen cannot wholly anticipate' " (Consol. Rail Corp. v. Railway Labor Executives (1989) 491 U.S. 299, 311-312); that resort may be had, in appropriate circumstances, to the parties' practice, usage, and custom in interpreting the agreement (ibid.); and that such agreements "often contain implied, as well as express, terms" (id. at p. 309, fn. 7). Our precedents similarly find, in the public employment context, that "[g]overnmental subdivisions may be bound by an implied contract if there is no statutory prohibition against such arrangements." (Youngman v. Nevada Irrigation Dist., supra, 70 Cal.2d at p. 246 (Youngman).)
The certified question from the Ninth Circuit asks us to decide whether California law prohibits a county and its employees from agreeing, by means of an implied contract, to confer vested rights to health benefits on retired county employees. County contends that California law does contain such a prohibition, and presents in this proceeding a three-pronged argument: (1) that a county government and its employees cannot form an implied contract; (2) that even if implied contracts are cognizable in the public employment context, such contracts cannot create vested rights; and (3) that even if vested contractual rights for county employees may be implied, such rights cannot include health benefits. We examine each argument in turn.
In Youngman, the plaintiff employees of the Nevada Irrigation District claimed they were entitled to merit salary increases under the terms of a salary schedule that it was the district's " 'announced practice' " to use. (Youngman, supra, 70 Cal.2d at p. 245.) The plaintiffs claimed, inter alia, that there was an implied contract between plaintiffs and the district requiring the district to review and advance employees one step in their respective classifications on or about their employment anniversary date each year. (Id. at pp. 245-246.) The district, on the other hand, urged that the demurrer to this cause of action be sustained on the ground the district had only such powers as were expressly granted by statute (or necessarily included therein), and no specific authority permitted the district to enter into an implied contract. (Id. at p. 246.) We held, unanimously, that the general provisions giving the district the power to hire employees and fix their salaries (Wat. Code, § 21185), to enter into such contracts as necessary to carry out its purpose (id., § 22230), and "to perform all acts necessary to carry out fully" its assigned function (id., § 22225) included the ability to enter into implied contracts as well as express contracts, "since the only significant difference between the two is the evidentiary method by which proof of their existence and terms is established." (Youngman, supra, 70 Cal.2d at p. 246.) We then concluded: "Governmental subdivisions may be bound by an implied contract if there is no statutory prohibition against such arrangements." (Ibid.)
County contends that Youngman does not apply here. It relies on a separate line of authority, exemplified by Markman v. County of Los Angeles (1973) 35 Cal.App.3d 132 (Markman). In that case, Markman, a deputy sheriff, brought an action to recover compensation for overtime he was ordered to work by his superiors over a period of several years. A Los Angeles County ordinance granted equivalent time off to employees who were compelled to work overtime, but required that most of this compensatory time off be taken in the same calendar year in which it was earned.*fn2 Alternatively, the ordinance authorized monetary payment for overtime, but only with the advance approval of the county's chief administrative officer. Markman had not obtained prior approval from the chief administrative officer, nor had he been able to take equivalent time off for nearly 1,200 hours of overtime. (Markman, supra, at pp. 133-134.) The Court of Appeal recognized that without compensation for the overtime already worked, Markman "will be penalized for something beyond his control," in that "during the working years at issue he would have taken time off equivalent to the overtime hours had he been permitted to do so by his superiors," yet the court still denied any recovery as barred by the local ordinance. (Id. at p. 134.) It was in that context that Markman offered the analysis on which County now relies: "The terms and conditions relating to employment by a public agency are strictly controlled by statute or ordinance, rather than by ordinary contractual standards; and one who accepts such employment, thereby benefiting in ways denied an employee of a private employer, must in turn relinquish certain rights which are enjoyed by private employees [citation], one such disability being that the public employee is entitled only to such compensation as is expressly provided by statute or ordinance regardless of the extent of services actually rendered." (Id. at pp. 134-135, italics added.)
County argues that the italicized language directly answers the certified question. In its view, public employee compensation is strictly limited to that which is expressly provided in a statute or ordinance. County deduces, therefore, that a county and its employees can never form an implied contract for any kind of compensation, including postretirement health benefits. County is mistaken; Markman did not announce such a broad holding. It held simply that a public employee who had failed to take equivalent time off within the period specified in the ordinance or to obtain authorization for overtime pay in the manner specified in the ordinance was not entitled to recover "under the provisions of the subject ordinance . . . regardless of the obvious hardship of such a result." (Markman, supra, 35 Cal.App.3d at p. 134.)
Subsequent cases that have reiterated the italicized language (or its equivalent) have similarly focused on the conflict between the public employee's particular claim and the governing statute or ordinance. In Association for Los Angeles Deputy Sheriffs v. County of Los Angeles (2007) 154 Cal.App.4th 1536, for example, there was a conflict between the county code and the written policies of the sheriff's department and the district attorney's office as to the type of vacation hours for which employees could obtain a cash payout. The Court of Appeal quoted the language from Markman and then concluded "that to the degree the department policies did not accurately reflect [the county ordinance], they were invalid and the employees were entitled only to that compensation set forth in the ordinance." (Association for Los Angeles Deputy Sheriffs, supra, 154 Cal.App.4th at p. 1549; see also Seymour v. Christiansen (1991) 235 Cal.App.3d 1168, 1177 [classified employee was not entitled to payment for unused vacation over a period of 21 years; Ed. Code, §45197, subd. (d) permitted the employee to carry over unused vacation "for just one year"]; California School Employees Assn. v. New Haven Unified School Dist. (1979) 91 Cal.App.3d 919, 923-924 [classified employees were not entitled as of right to holiday pay where the governing statute gave the district board the authority to elect between monetary compensation and compensating time off].) These cases are simply instances of the broader principle that "the law does not recognize implied contract terms that are at variance with the terms of the contract as expressly agreed or as prescribed by statute." (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 412, emphasis omitted; see also Shoemaker v. Myers (1990) 52 Cal.3d 1, 23-24 [" 'insofar as the duration of [public] employment is concerned, no employee has a vested contractual right to continue in ...