2006-14

California Supreme Court Finds That Termination Upon Completion Of A Specific Employment Period Qualifies As A "Discharge."

In Smith v. Superior Court, 39 Cal. 4th 77 (July 10, 2006)(1), Plaintiff Amanza Smith was working in a Beverly Hills boutique when a representative of defendant L'Oreal USA, Inc., ("L'Oreal") asked if she wanted to be a "hair model" at an upcoming show featuring L'Oreal products and a hair stylist. L'Oreal agreed to pay Smith $500 for one day's work. At the show, Smith's hair was colored and styled as she sat on a stage in front of an audience. She walked the runway several times and was then told to leave. Two months elapsed before L'Oreal compensated her for the work.

Smith filed the suit against L'Oreal on behalf of herself and other similarly situated models who worked for the defendant. The causes of action included conversion, fraud and deceit, breach of contract, negligent misrepresentation, and violation of California Labor Code section 201 for failing to pay employees immediately upon discharge from employment. Pursuant to Labor Code section 203, Smith sought $15,000 in damages and penalties for each similarly situated model.

The relevant language in section 201 states: "If an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately." The relevant language in section 203 states: "If an employer willfully fails to pay, without abatement or reduction, ... any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefore is commenced; but the wages shall not continue for more than 30 days...."

While L'Oreal conceded that Smith was its employee, it argued that Smith could not recover penalties under section 203 because the job termination did not constitute a "discharge" or "layoff' that triggered sections 201 and 203. The trial court agreed and granted the employer's motion for summary adjudication. The appellate court initially issued an order to show cause why Smith's petition for writ of mandate should not be granted, then denied Smith's petition. In limiting the definition of "discharge" to the termination of an employee from ongoing employment, the appellate court relied in part on Romano v. Rockwell Internat., Inc., 14 Cal. 4th 479, 493 (1996), which held that the "usual and ordinary meaning of the term 'discharge' is to terminate employment."

The California Supreme Court distinguished Romano, noting that it did not involve a wage related claim. Instead, Romano discussed a "discharge" in the context of determining when the statute of limitations begins to run in a wrongful termination under the Fair Employment and Housing Act. As such, the case did not purport to equate a discharge with a firing. Ultimately, the Supreme Court reversed the Court of Appeal's decision, holding that discharges qualify under section 201 and 203 of the Labor Code when an employer releases an employee upon his completion of a particular job assignment or specific time period.

The court reasoned that sections 201 and 203 recognize that a "public policy in favor of full and prompt payment of an employee's earned wages is fundamental and well established: 'delay of payment or loss of wages results in deprivation of the necessities of life, suffering inability to meet just obligations to others, and, in many cases, may make the wage-earner a charge upon the public.'" Since this was a case of statutory construction, the court then examined the commonly understood meanings of "discharge." Although the term often refers to the employer's dismissal of an employee from ongoing employment, the court noted that another common meaning includes the formal release of an employee from a particular job or for a specific term of service when the job or service term is complete. Thus, sections 201 and 203 could reasonably encompass a situation where an individual agrees to one day's work and is released at the end of that day.

The court found support for extending the meaning of discharge beyond the context of formal or ongoing employment within other sections of the Labor Code. For example, section 201 provides an exemption for an employer "who lays off a group of employees by reason of the termination of seasonal employment in the curing, canning, or drying of any variety of perishable fruit, fish or vegetable." Section 201.5 also provides an exemption for the motion picture industry when the terms of employment require "special computation." The exceptions pertain to employment relationships where the employees are limited to a particular job assignment (such as the motion picture industry) or period of services (such as seasonal canning). Consequently, the court reasoned that it would make little sense if sections 201 and 203 did not generally apply to employment limited to a job assignment or period of time when the Labor Code provides specific exceptions within the category.

The court also determined that its holding comported with the legislative history and objectives behind sections 201 and 203. It concluded that the "plain purpose of sections 201 and 203 is to compel the immediate payment of earned wages upon a discharge."

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Proposition 64 Applies To Pending Cases.

In Californians for Disability Rights v. Mervyn's, 39 Cal. 4th 223 (July 24, 2006)(2), Plaintiff Californians for Disability Rights, a nonprofit corporation, sued defendant Mervyn's, LLC ("Mervyn's"), for alleged violations of California's unfair competition law ("UCL") before the passage of Proposition 64. Plaintiff alleged that Mervyn's violated unfair competition laws because the pathways between fixtures and shelves in their stores were too close to permit access by persons using wheelchairs, scooters, crutches and walkers. Plaintiff did not allege that it suffered any harm as a result of Mervyn's violations and sued on behalf of the general public under former Business & Professions Code section 17204. It sought an order declaring Mervyn's practice unlawful, an injunction barring the practices and requiring remedial action, costs and expenses of the suit, and attorney's fees.

The UCL previously gave "any person acting for the interests of itself, its members or the general public" standing to file a civil action for relief without showing an injury or damages. In 2004, California passed Proposition 64, which sought to limit the abuses of the UCL by revoking the standing of uninjured plaintiffs bringing unfair competition. Specifically, the measure amends section 17204 by deleting the language that formerly authorized suits by persons "acting for the interest of itself, its members or the general public" and replacing it with the phrase, "who has suffered injury in fact and has lost money or property as a result of unfair competition." It also amends section 17203, which authorizes courts to enjoin unfair competition, by adding: "Any person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of Section 17204 ... but these limitations do not apply to claims brought under this chapter by the Attorney General, or any district attorney, county counsel, city attorney, or city prosecutor in this state." The proposition did not state whether the changes applied to pending cases.

The trial court entered judgment for Mervyn's. While the case was on appeal, Proposition 64 took effect. Mervyn's moved to dismiss the appeal, arguing that the Plaintiff no longer had standing to pursue the action. The Court of Appeal denied the motion, holding that Proposition 64 did not apply to cases pending when the measure took effect. The California Supreme Court granted Mervyn's petition for review to resolve the issue of whether Proposition 64 applied prospectively or retroactively.

The court found that Proposition 64 applies to cases pending at the time of its passage. When, as in this case, a party challenges the retroactive application of a statute, the court begins with a presumption that "statutes operate prospectively absent a clear indication that the voters of Legislature intended otherwise." However, the court first had to determine whether an application of the contested law to pending cases is prospective or retroactive. An application of new laws to pending cases is not retroactive simply because it draws upon facts that existed before its enactment. Instead, the court considered whether the law "change[d] the legal consequence of past conduct by imposing new or different liabilities based upon such conduct" and whether it "substantially affect[ed] existing rights and obligations." Using that standard, the court found that Proposition 64 would not have retroactive effect if they applied to the instant matter. The measure does not change the substantive rules governing business and competitive conduct - conduct that was previously lawful has not been made unlawful and conduct that was previously unlawful has not been made lawful. The measure also does not change anyone's recovery rights - a private person may only recover damages if the defendant has unfairly obtained something from the person.

The court noted that the law does prevent uninjured private persons from suing for restitution on behalf of others. However, the effect on an uninjured plaintiff's standing cannot be considered retroactive. Standing must exist at all times and the lack of standing can be grounds for jurisdictional challenges at any point during the suit.

Plaintiff argued that application of Proposition 64 to pending cases would impair the rights and expectations of the parties to prosecute their actions. The court rejected the argument, holding that the imposition "hardly bear[s] comparison with the important right the presumption of prospective operation is classically intended to protect, namely, the right to have liability-creating conduct evaluated under the liability rules in effect at the time the conduct occurred." The court also argued that suing on another's behalf is not a property right beyond statutory control and "the validity of a judgment concerning injunctive relief must be determined on the basis of the current statutory provisions, rather than on the basis of the statutory provisions that were in effect at the time the injunctive order was entered." The court remanded the case for further proceedings consistent with its opinion.

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Proposition 64 Has Not Changed The Rules Governing Amendment And Relation Back of Pleadings.

In Branick v. Downey Savings & Loan Assn., 39 Cal. 4th 235 (July 24, 2006)(3), a companion case to Californians for Disability Rights, the California Supreme Court addressed the issues of: (1) whether a plaintiff whose standing was revoked by Proposition 64 may amend its complaint to substitute a new plaintiff who does enjoy standing, and (2) whether such an amendment relates back for the purposes of the statute of limitations to the date on which the original complaint was filed.

Before Proposition 64 passed, Plaintiffs Thomas Branick and Ardra Campbell filed a complaint against Defendant Downey Savings & Loan Association ("Downey") under the unfair competition and false advertising laws. Plaintiffs alleged that Downey misrepresented and overcharged customers for fees charged by the government to record official documents used in real estate transactions. Plaintiffs did not allege that they had done business with Downey or suffered an injury in fact. Instead, Plaintiffs sought to sue on behalf of the general public and sought restitution, interest, injunctive relief, costs and attorneys fees. Downey moved for judgment on the pleadings on the ground that the Federal Home Owners' Loan Act preempted plaintiff's claims. The superior court granted the motion and entered judgment for Downey. While the case was on appeal, Proposition 64 passed and took effect. The appellate court revoked the plaintiffs' standing, remanded the matter to trial court to determine if plaintiffs could amend the complaint to substitute a new plaintiff, and dismissed the case. Downey petitioned the Supreme Court for review. The Supreme Court granted the petition and upheld the appellate court's ruling that Proposition 64 did not affect the ordinary rules governing amendment of complaints and relation back.

Downey argued that allowing a substitution of plaintiffs would contradict the proposition's public policy objectives of preventing the UCL from "being misused by some private attorneys who 'file frivolous lawsuits as a means of generating attorney's fees without creating a corresponding public benefit'" and "file frivolous lawsuits where no client has been injured." Allowing the substitution of plaintiffs, Downey contended, would allow the party to benefit from their impermissible actions. The court rejected the argument because barring "a meritorious action prosecuted by a substituted plaintiff 'who has suffered injury in fact and has lost money or property as a result of unfair competition or false advertising serves none of the voters' articulated objectives."' Furthermore, the substitution of plaintiffs does not allow the plaintiffs' attorney to benefit from impermissible actions since the former law expressly conferred standing to "any person acting for the interests of ... the general public."

Downey also alleged that Plaintiffs should not be permitted to substitute a new plaintiff because their failure to name the new plaintiff in their original complaint was not a mistake. The court rejected the argument because courts have long permitted plaintiffs to substitute another plaintiff when the original plaintiff lacked standing or lost its standing. The limitation on the rules is that the substituted plaintiff may not require the defendant to answer a wholly different legal liability or obligation from those originally stated in the complaint. The relation-back doctrine also requires that the amended complaint must rest on the same general set of facts, involve the same injury, and refer to the same instrumentality as the original.

Lastly, Downey argued that plaintiffs who never had standing may not substitute plaintiffs with standing. The court noted that such an argument is not applicable to the present situation because the plaintiffs did have standing to sue at the time they filed their complaint. Even if such an argument were applicable, the court noted that California does not take such a narrow view on the substitution of plaintiffs.

Having concluded that Proposition 64 does not forbid the substitution of plaintiffs, the court turned to the question of whether plaintiffs in the instant case could amend their complaint. The court cited Code of Civil Procedure section 473, which states that leave to amend a complaint is within the sound discretion of the trial court and the exercise of that discretion will not be disturbed unless there is a clear showing of abuse. The court noted that Plaintiffs did not have the opportunity to file a motion in the trial court for leave to amend because the proposition passed while the case was on appeal. Given the circumstances, the court upheld the appellate court's decision to remand the matter to superior court to decide whether to grant leave to amend (if Plaintiffs move to amend their complaint).

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1. Opinion by Baxter, J., joined by George, C.J. and Kennard, Werdegar, Chin, Moreno and Corrigan, JJ.

2. Opinion by Werdegar, J., joined by George, C.J., and Baxter, Kennard, Chin, Moreno and Corrigan, JJ.

3. Opinion by Werdegar, J., joined by George, C.J., and Baxter, Kennard, Chin, Moreno and Corrigan, JJ.