Opinion
NOT TO BE PUBLISHED
APPEALS from a judgment of the Superior Court of Los Angeles County., Ct. No. BC319156, Charles C. Lee and Phrasel L. Shelton, Judges.
Altshuler Berzon, Michael Rubin, Eileen B. Goldsmith, Danielle E. Leonard; Law Offices of Joseph D. Tuchmayer, Joseph D. Tuchmayer; Law Offices of Todd Arron, Todd S. Arron for Plaintiffs and Appellants.
Bingham McCutchen, Arthur F. Silbergeld, Robert A. Brundage for Defendants and Appellants.
BOREN, P.J.
A fiber-optic equipment manufacturer is being sued in a class action by its former employees. The employees claim that the manufacturer breached an obligation to pay them annual bonuses, an obligation that allegedly continued for years after they were laid off from work during a business downturn. We conclude that the employees are not entitled to any recovery. All but two of the employees relinquished their right to sue when they were laid off, in return for compensation that exceeded their earned severance pay. In any event, there was no promise made to pay bonuses to the employees after they were laid off. We reverse the judgment in favor of the employees.
FACTS
In December 1999, a merger agreement was consummated between Textron Inc. and the owners of Rifocs Corporation, a fiber-optic equipment company. Neither Textron nor Rifocs intended for their employees to be third party beneficiaries of the merger agreement, or to be able to enforce any provision of the agreement. The merger agreement states, “Nothing in this Agreement is intended to confer any right on any person other than the parties to it... nor shall any provision give any third person any right of subrogation or action over or against any party to this Agreement.”
The source of conflict in this litigation is clause 11.5 of the merger agreement, entitled “Bonuses for Key Employees” (the Bonus Clause). It reads: “Parent agrees to pay, or cause the Surviving Corporation to pay, bonuses to key employees of the Company identified on Schedule 11.5 hereto for the calendar years 2000, 2001, 2002 and 2003. The aggregate bonuses paid with respect to each of the foregoing years shall not exceed $500,000. The key employees identified on Schedule 11.5 must be employed by the Surviving Corporation at the end of the applicable year to be eligible for a bonus for that year. If any key employees identified on Schedule 11.5 are not employed by the Surviving Corporation at the end of any applicable year, the bonus amount which otherwise would have been allocable to such key employee(s) shall be reallocated to the other employees identified on said Schedule 11.5 who are employed by the Surviving Corporation at the end of such applicable year. Bonus amounts shall be determined by Parent or the Surviving Corporation based on the job performance of the eligible employees.” Schedule 11.5 lists over 40 key employees eligible for bonuses, including plaintiffs Stanley Zalewa and Dara Laws.
The founder of Rifocs, Robert Rickenbach, indicated that when he negotiated the sale of Rifocs to Textron, he agreed to reduce the sale price by $2 million, with the understanding that the surviving corporation would pay this money as bonuses to key employees as an incentive to remain at the company. He said, “I knew I wanted to put something aside for these people, ” although the money was not literally set aside, but was paid from operating profits. In Rickenbach’s view, the company’s obligation to make the bonus payments arose on December 16 of each year (the anniversary of the merger). He conceded that the payout could be less than $500,000 in any given year because the company had “quite a lot of discretion on how much” to give employees as bonuses. The negotiator for Textron denied that the parties agreed to a $2 million set-aside; rather, there was an agreement to pay up to $500,000 annually, to a maximum of $2 million over four years, with the company having “total discretion... to decide the amount of the bonus....”
The purpose of including a bonus was twofold: to reward key employees for past performance, and to offer them an incentive to stay with the new owners. Personally, Rickenbach felt that the employees had “already earned” the bonus, but he did not want to give it to them in one lump sum. With the bonus being paid out over four years, employees were less likely to pursue job opportunities elsewhere. At the time of the merger, “it was an extremely hot market for employees in the field of fiber optics....”
At the time he negotiated the merger agreement, Rickenbach did not contemplate the possibility of employee layoffs. The issue of layoffs-or the effect of layoffs on employee bonuses-was not discussed by the parties to the merger; therefore, it was not addressed in the merger agreement. Rickenbach concedes that the Bonus Clause does not distinguish between layoffs, firing, or resignation, for purposes of determining bonus eligibility. Nevertheless, if it were up to him, Rickenbach would pay a bonus to employees who were laid off. Denying the full amount to laid-off employees was contrary to Rickenbach’s intent in establishing the employee incentive program. By contrast, the intent of Textron, the company purchasing Rifocs, was that the bonus would only be paid to current employees: any employee not present on the payroll at the end of the year for any reason would not be paid.
After the merger, Rickenbach prepared a letter to key employees dated January 3, 2000 (the Letter). The Letter states, in part, “The original shareholders of Rifocs Corp.... have reduced the negotiated sales price and asked Textron to provide an incentive to key employees instead. We have determined that your contributions are key to the success of Rifocs and we want [ ] to reward [you] and provide an incentive for you to stay on with Rifocs. [¶] You are granted a cash incentive which will be paid in four annual installments. To be eligible you must be employed at Rifocs at the maturity date of December 16 of each calendar year. If you elect to leave Rifocs voluntarily you will forfeit the outstanding incentive payment(s). If your employment is terminated for non-performance reasons, you will loose [sic] the outstanding incentive payment(s). This incentive is not part of your regular compensation plan and after four years of service you will not be paid additional salary to offset such incentive.”
Rickenbach was “very certain” that employees received an acknowledgement showing their receipt of the Letter. It reads, “I acknowledge receipt of the attached letter dated January 3, 2000. I understand that I am eligible for a cash incentive with respect to each of the 2000, 2001, 2002 and 2003 calendar years as described in the attached letter. I further understand and acknowledge that to receive the cash incentive for any one of the foregoing calendar years, I must be employed by Rifocs Corp. on December 16th of such year. [¶] I hereby execute this acknowledgement and certification intending to be legally bound as of the ____ day of January, 2000.” At trial, defendants did not produce signed copies of the acknowledgement letter.
Defendants did not authorize Rickenbach to write the Letter, and in Textron’s view, the Letter did not accurately describe the terms of the merger agreement. By the same token, defendants did not notify employees that Rickenbach lacked authority to write the Letter. Rickenbach met with each of the key employees to give them the Letter. During those meetings, he thanked employees for their services in building the company, and told them that they would receive a specific amount of money in four installments. He considered the Letter “a promise made to the employee.” Rickenbach told employees that they had to be employed on the anniversary date of December 16th to receive the bonus. But he never told them they would be eligible for a bonus if they were laid off, as this possibility never occurred to him.
The Letter does not discuss the possibility of a “residual bonus, ” i.e., a reallocation of money from employees who left the company (and forfeited the remainder of their bonus) to key employees who remained with the company. Although the concept of residual bonuses is addressed in the Bonus Clause, Rickenbach did not mention it to employees: he feared it would encourage “greedy” supervisors to “force out” subordinates, in order to have the subordinates’ bonuses reallocated to themselves.
Rickenbach described the residual bonus language in the merger agreement as a drafting error by his attorney. Rickenbach never intended that key employees listed in Schedule 11.5 would receive a residual bonus; rather, he intended that any money left over would go to new eligible employees. And that, in fact, is what happened when the company implemented the bonus program, with Rickenbach retaining discretion to determine which additional employees should receive a bonus as other employees resigned. Textron agreed with Rickenbach’s plan to add new employees to the eligibility list, despite contrary language in the Bonus Clause. The terms of the Bonus Clause were not disclosed to employees, because the merger agreement was confidential. Plaintiffs first learned about the residual bonus concept during the course of this litigation.
On December 16, 2000, Rifocs paid the first annual cash incentive to its key employees. The accompanying memorandum from Rickenbach read: “One year ago Rifocs Corp. was acquired by Textron Corporation and as part of this transaction you were promised a cash incentive for your past and future contributions to the business success of RIFOCS Corp. [¶] At this first anniversary date you will find a check attached to this letter that is your first installment of four incentive bonuses. Subsequent incentive checks will be due at the anniversary date and are based on continued satisfactory performance.” The memorandum adds that “this incentive is not part of your regular compensation plan. Not withstanding [sic] any other requirements, after a maximum of four payments, this incentive plan ceases and you will not be paid additional salary to offset any loss in income.” At the time he sent the December 16, 2000, memorandum, Rickenbach was no longer the company’s general manager, though he was still working in its technology department.
Rifocs was merged into Tempo Research Corporation. Greenlee Textron, Inc., is liable for debts incurred by Rifocs and Tempo. We refer to all of these entities as “defendants” in this opinion.
In June 2001, layoffs began at the company, because the market for fiber optics was declining. Rifocs declined from 125 employees in April 2001 to seven employees in June 2003. Among the laid-off employees were plaintiff Laws (September 2002) and plaintiff Zalewa (January 2003).
The company’s salaried employees were entitled to-and received-severance pay. Defendants’ separation agreements state that departing salaried employees are “entitled to receive severance pay.” In consideration for signing a release and waiver, defendants offered to pay salaried employees additional compensation, above and beyond earned severance pay. Hourly employees-who were not entitled to severance pay-were also offered compensation if they agreed to sign a release of claims. The additional compensation ranged from one month of base salary to 10 weeks of additional salary. By signing the release, employees agreed not to bring any claim or lawsuit against defendants arising from their employment or termination, including claims for breach of contract, wrongful termination, any unlawful or tortious acts, discrimination, and so on.
Defendants’ former human resources manager told some of the laid-off employees that they had to sign the release to obtain their earned severance pay. The manager misconstrued the separation agreements. For example, she thought that Laws was entitled to 18 weeks of severance pay. This was not the case: Laws was entitled to 14 weeks of severance. By signing a release, Laws was received an additional four weeks of pay, for a total of 18 weeks.
About 13 employees were laid off after the manager ceased working at the company.
Laws received bonuses in 2000 and 2001, a total of $10,000; Zalewa received a bonus of $25,000 in 2000, 2001, and 2002, totaling $75,000. After their separation from the company, plaintiffs did not receive any further bonuses. Laws did not receive the last two installments of her bonus ($10,000) and Zalewa did not receive the last installment of his bonus ($25,000). Defendants’ position was that a laid-off employee who was not working for them on December 16 was not entitled to a bonus for that year. In the company’s view, the bonus was not meant “to pay people for not working. It was... a bonus that was meant to... reward [people] for staying.” Laws and Zalewa brought suit on July 27, 2004. After multiple amendments, the latest version of their pleading asserts 22 causes of action, including Labor Code violations, unfair business practices, breach of contract, conversion, promissory estoppel, bad faith, and private attorney general penalties. A class was certified in February 2007.
In July 2005, while this lawsuit was pending, defendants offered additional payments to laid-off employees, most of whom accepted the offer. For example, Paula Adams accepted $55,038.60, Gary Brueckner accepted $19,615.20, Eric Newiger accepted $20,653.80, and Tami Nguyen accepted $14,348.80. The trial court credited defendants for these 2005 payments, finding that “Defendants voluntarily tendered to almost all of the Direct Bonus Class Members their complete outstanding Direct Bonus amounts as well as additional valuable compensation (which in some cases was more than adequate) to address potential related liability.”
THE TRIAL COURT’S JUDGMENT
The court conducted a bench trial in January 2008. It found that plaintiffs are entitled to recover a direct bonus under theories of breach of contract, promissory estoppel, accounting, and unfair business practices. The court deemed the bonus payments to be “wages” under the Labor Code. Because the bonus payments are wages, plaintiffs were awarded prejudgment interest and attorney fees under the Labor Code.
The court rejected plaintiffs’ claim for a residual bonus and waiting time penalties. The court concluded that plaintiffs did not prevail on their claims for conversion, breach of fiduciary duty, and bad faith, so they cannot recover punitive damages. Further, plaintiffs are not “private attorney generals” because they were not employed by defendants after January 1, 2004, the effective date of the private attorney general statute. The court wrote that awarding any penalties would be unjust, arbitrary, oppressive, and confiscatory because in 2005, defendants voluntarily tendered almost all of the outstanding direct bonus amounts to class members.
The court enumerated the amount of the award for each employee, less offsets for monies already paid by defendants, plus interest. The total amount of the award, including interest, was approximately $99,000. Plaintiffs’ counsel was awarded attorney fees of $881,715. The court entered judgment in favor of plaintiffs on June 16, 2008.
The awards are: Paula Adams $13,879.21; Maria Alvarez $0; Tim Aphayaraj $0; Wayne Brazele $0; Gary Brueckner $3,357.39; Edward Feten $0; Pamela Freeman $0; Michael Jalaty $0; John Kim $0; Dara Laws $14,804.10; David Mantanona $0; Allison Napp $0; Eric Newiger $2,318.79; Tami Nguyen $455.30; Heather Randles $14,287.68; Maria Romero $0; Annemarie Sacher $14,287.68; Thomas Woolston $0; and Stanley Zalewa $35,719.19. All of the employees who were awarded $0 actually received more money from defendants in July 2005 than they claimed they were still owed. For example, Edward Feten and John Kim each received $4,269.22 more than they were owed and Allison Napp received $6,256.17 more than she was owed.
DISCUSSION
Plaintiffs have appealed from the judgment. They challenge the court’s refusal to apply collateral estoppel, or award a residual bonus and waiting time penalties, among other things. Defendants have cross-appealed. They challenge the trial court’s award of a direct bonus, its invalidation of the releases signed by class members, and the court’s award of attorney fees.
1. Collateral Estoppel Effect of Prior Litigation
Plaintiffs urged the trial court to bar defendants from litigating the issues of plaintiffs’ right to a bonus and to “waiting time” penalties. Plaintiffs pointed to two prior litigations involving defendants. First, there was a 2004 judgment in DeWitt v. Tempo Research (Super. Ct. Ventura County, No. CIV220761). Second, there was a February 2005 decision by the State Labor Commissioner in Gantka v. Tempo Research Corp. (No.13-33799).
In DeWitt, two of defendants’ former employees (DeWitt and Devine) made a successful claim to the Labor Commissioner for their unpaid bonuses of $60,000 and $40,000. After defendants sought trial de novo, the Superior Court of Ventura County found that the employees were granted an irrevocable bonus for four years, subject only to their resignation or nonperformance. It awarded waiting time penalties and prejudgment interest. The employees did not seek residual bonuses.
In Gantka, one of defendants’ former employees sought a $45,000 bonus in a claim before the Labor Commissioner. The hearing officer concluded that the Letter created a nondiscretionary bonus plan: If an employee met the eligibility criteria, the offer to pay the bonus could not be revoked. Gantka did not resign and was not terminated for inadequate performance, so he was entitled to four years of bonus payments, plus waiting time penalties and interest. He did not request a residual bonus.
After reviewing Gantka and DeWitt, the trial court concluded that “it would be inequitable and unfair to apply against defendants the doctrine of collateral estoppel as requested by plaintiffs.” The court observed that the prior hearings were brief and only addressed Labor Code violations; the potential liability was “much smaller” than in the present litigation; and the prior litigation did not involve “residual bonus” claims. We review de novo the trial court’s collateral estoppel determination. (Smith v. ExxonMobil Oil Corp. (2007)153 Cal.App.4th 1407, 1414-1415; Roos v. Red (2005) 130 Cal.App.4th 870, 878.)
Collateral estoppel is an equitable doctrine, and its use must “comport[ ] with fairness and sound public policy.” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 835; Murphy v. Murphy (2008) 164 Cal.App.4th 376, 398.) A court may apply collateral estoppel when (1) a party against whom an issue is raised was a party or in privity with a party to a prior adjudication; (2) there was a final judgment on the merits in the prior action, and (3) the issue necessarily decided in the prior adjudication is identical to the one raised in the present action. (Smith v. ExxonMobil Oil Corp., supra, 153 Cal.App.4th at p. 1414.) Offensive use of the collateral estoppel doctrine occurs when, as here, “the plaintiff seeks to foreclose the defendant from litigating an issue the defendant has previously litigated unsuccessfully in an action with another party.” (Parklane Hosiery Co. v. Shore (1979) 439 U.S. 322, 326, fn. 4.)
“[A] particular danger of injustice arises when collateral estoppel is invoked by a nonparty to the prior litigation. [Citations.] Such cases require close examination to determine whether nonmutual use of the doctrine is fair and appropriate.” (Vandenberg v. Superior Court, supra, 21 Cal.4th at pp. 829-830.) The state Supreme Court has, on several occasions, cast doubt on “one-way intervention.” This refers to a strategy in which one plaintiff prevails against a defendant, thereby allowing all members of the plaintiff’s class “‘to intervene and claim the spoils; a loss by the plaintiff would not bind the other members of the class. (It would not be in their interest to intervene in a lost cause, and they could not be bound by a judgment to which they were not parties....)’” (Fireside Bank v. Superior Court (2007) 40 Cal.4th 1069, 1078.) The court has “gone so far as to attribute to defendants a due process right to avoid one-way intervention.” (Id. at p. 1083; Arias v. Superior Court (2009) 46 Cal.4th 969, 985.)
In determining whether to allow offensive collateral estoppel, the courts consider whether the defendant had a “‘full and fair’” opportunity to litigate the issue. (Parklane Hosiery Co. v. Shore, supra, 439 U.S. at pp. 332-333.) One example of unfairness cited by the Supreme Court occurs when a defendant is sued and found liable for $35,000, elects not to appeal, then is later sued by another plaintiff for $7 million, based on the same facts (specifically, an airplane crash). Under these circumstances, collateral estoppel can be denied because the defendant had “little incentive to defend vigorously” in the first action. (Id. at p. 330; Roos v. Red, supra, 130 Cal.App.4th at p. 880.)
Here, neither of the prior proceedings was a class action lawsuit. The claimant in Gantka sought a $45,000 direct bonus payment; the plaintiffs in DeWitt sought $60,000 and $40,000. Both matters alleged Labor Code violations, not contract or tort claims. In neither matter was a “residual bonus” requested. The hearings were brief: they began as grievances before the Labor Commissioner, a “‘speedy, informal, and affordable method of resolving wage claims.’” (Lolley v. Campbell (2002) 28 Cal.4th 367, 372; Lab. Code, § 98. See Mahon v. Safeco Title Ins. Co. (1988) 199 Cal.App.3d 616, 622 [a party to an administrative proceeding for unemployment benefits “might be unfairly sandbagged” if the results were given preclusive effect because the amount at issue in the hearing was “small in comparison to the costs of full blown litigation” and the administrative hearing “was intended to be speedy and informal”].)
By contrast, the instant case is a class action involving over 40 class members, a 100-page-long pleading with 22 causes of action and onerous monetary claims, including punitive damages. Plaintiffs assert tort, contract, and private attorney general claims in addition to Labor Code violations. Plaintiffs’ counsel brought both the DeWitt and Gantka matters, and he increased the amount of state resources devoted to this dispute by adopting a “‘wait and see’” approach. (See Parklane Hosiery Co. v. Shore, supra, 439 U.S. at pp. 329-330.) He first brought two Labor Commission grievances that were unlikely to invigorate a strong defense. After succeeding with the small cases, plaintiffs’ counsel brought this class action for umpteen millions, asserting that defendants are estopped from relitigating liability and damages issues. Like the trial court, we find it manifestly unfair to allow offensive collateral estoppel to be used in this case: two paltry prior Labor Code cases cannot be parlayed into a multi-million dollar class action judgment.
2. Effect of Releases on This Litigation
Defendants contend that class members are precluded from pursuing their claims in this litigation because they signed releases when they were laid off. The trial court found that “these releases are invalid because these employees were entitled to earned severance and direct bonus payments, and as a result could not trade away their release of claims for these payments.” Plaintiffs argue that “the Superior Court’s invalidation of the releases must be affirmed because the releases violated Labor Code §§206 and 206.5.”
Labor Code section 206 reads, “(a) In case of a dispute over wages, the employer shall pay, without condition and within the time set by this article, all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies he might otherwise be entitled to as to any balance claimed.”
Labor Code section 206.5 “simply prohibits employers from coercing settlements by withholding wages concededly due. In other words, wages are not considered ‘due’ and unreleasable under Labor Code section 206.5, unless they are required to be paid under Labor Code section 206. When a bona fide dispute exists, the disputed amounts are not ‘due, ’ and the bona fide dispute can be voluntarily settled with a release and a payment-even if the payment is for an amount less that the total wages claimed by the employee.” (Watkins v. Wachovia Corp. (2009) 172 Cal.App.4th 1576, 1587; Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 801-802.)
In this case, the trial court expressly found that “Defendants did not violate Labor Code Sections 206 or 206.5. [A] good faith dispute existed as to the Direct Bonus obligation to laid off employees. As such, these amounts were not concededly due and the Court finds no violation of Section 206.” The court reiterated this finding several times. For example, it wrote that “the evidence establishes that a good faith dispute existed as to whether employees were entitled to future Direct Bonus payments after they were laid-off. The presence of this good faith dispute precludes the granting of penalties for violation of [Labor Code] Section 216(a).” Elsewhere, the statement of decision reads, “The Court has also found that Defendants had a reasonable, good faith belief that they did not owe the Direct Bonus amounts to laid-off employees.”
The court’s factual finding of a good faith or bona fide dispute over the bonus is supported by substantial evidence. The Bonus Clause of the merger agreement states that key employees “must be employed... at the end of the applicable year to be eligible for a bonus for that year.” The Letter states, “To be eligible [for a cash incentive] you must be employed at Rifocs at the maturity date of December 16 of each calendar year.” Because the language in the Bonus Clause and the Letter appear on their face to relieve defendants of liability for bonus payments to employees not on the payroll on December 16, the trial court could find that defendants had a reasonable belief that they did not owe the bonus to laid-off employees, and there was a bona fide dispute over whether the bonus was owed at the time employees were presented with the release.
Once it made the finding of a bona fide dispute under Labor Code section 206, there was no basis for the court to invalidate the employee releases. To resolve a good faith dispute, defendants offered employees more money-in addition to their earned severance pay-in return for their release of all claims. The court made no finding that the employees’ agreement to these terms was coerced or improperly obtained.
Plaintiffs now assert an “economic duress” theory, but the claim is unavailing. To invalidate a settlement on the grounds of economic duress, plaintiffs must show, among other elements, that “‘(1) the debtor knew there was no legitimate dispute and that it was liable for the full amount; (2) the debtor nevertheless refused in bad faith to pay and thereby created the economic duress of imminent bankruptcy....’” (Perez v. Uline, Inc. (2007) 157 Cal.App.4th 953, 959.) Here, the trial court made repeated findings that defendants acted in “good faith” and reasonably believed that they owed no debt to employees who were laid off before the eligibility date of December 16. As discussed, the court had a sound basis for making these findings. Further, plaintiffs offered no proof of “imminent bankruptcy.” Lacking a job and needing money to pay bills “does not equate to economic duress. The same could be said of almost any case where an employee is discharged and offered severance pay.” (Id. at p. 960.)
The separation agreements were signed by 27 employees. There is no legal basis for the court’s conclusion that the employees could not “trade away” their right to sue in return for money. The employees could, and did, accept payments that exceeded their earned severance, in return for releasing all claims, when there was a bona fide dispute over the wages owing. This is proper, even if the payment made by defendants was less than the bonus amounts claimed by the employees. (Watkins v. Wachovia Corp., supra, 172 Cal.App.4th at p. 1587; Chindarah v. Pick Up Stix, Inc., supra, 171 Cal.App.4th at pp. 801-802.) The court erred by invalidating the releases signed by class members.
3. Plaintiffs’ Right to a Direct Bonus
Defendants challenge the trial court’s award of a direct bonus to class members. The trial court determined that defendants’ obligation to pay a direct bonus continued even if employees were laid off for economic reasons unrelated to their job performance. The court identified the source of this obligation as (1) the Bonus Clause of the merger agreement, or (2) the Letter and Rickenbach’s statements to the employees.
The class members who did not sign releases are Eric Newiger (awarded a direct bonus of $2,318.79) and Gary Brueckner (awarded $3,357.39). If other employees did not release their claims, this section of the discussion applies equally to them.
a. Employees’ Right to Enforce the Bonus Clause of the Merger Agreement
The trial court found that defendants’ employees are third party beneficiaries to the merger agreement. The Bonus Clause benefits key employees designated by name in the merger agreement. The key employees seemingly fall within Civil Code section 1559, which states that “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” The contract need not be exclusively for the benefit of the third party in order for him to enforce it. (Prouty v. Gores Technology Group (2004) 121 Cal.App.4th 1225, 1233 (Prouty).)
The merger agreement contains a clause relating to third party beneficiaries. It states that the agreement does not “confer any right on any person other than the parties to it” nor “give any third person any right of subrogation or action over or against any party to this Agreement.” The men who negotiated the agreement testified that they never intended for employees to be third party beneficiaries of the merger agreement, or to be able to enforce any provision of the agreement.
The question, then, is whether the “no third party beneficiary” clause in the merger agreement governs, in view of nonconflicting parol evidence establishing that the parties to the agreement did not intend to allow employees to sue to enforce the agreement. “In determining the meaning of a written contract allegedly made, in part, for the benefit of a third party, evidence of the circumstances and negotiations of the parties in making the contract is both relevant and admissible. And, ‘[i]n the absence of grounds for estoppel, the contracting parties should be allowed to testify as to their actual intention....’” (Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426, 437.)
There is no evidence that any employee acted in reliance on the Bonus Clause. The merger agreement is a confidential document, and its terms were not disclosed to defendants’ employees. The employees were unaware of the Bonus Clause until it came to light during litigation. Because the employees did not rely on the Bonus Clause, there is no basis for an estoppel. In addition, the Bonus Clause vests sole discretion in defendants to award (or not award) bonuses “based on the job performance of the eligible employees.” It makes no sense to allow an employee to sue to enforce the Bonus Clause: there is no absolute right to a bonus, because the clause itself permits defendants to deny a bonus based on job performance.
In sum, “when considering the contract as a whole, the contract is not ambiguous. The provisions of the contract make the intention of the parties clear: they intended to limit the rights under the contract to the parties to the contract....” (Ratcliff Architects v. Vanir Construction Management, Inc. (2001) 88 Cal.App.4th 595, 603 [applying a “no third party beneficiary” clause].) Here, the language of the “no third party beneficiary” clause, if it is ambiguous at all, was explained at trial with nonconflicting extrinsic evidence regarding the parties’ intent: their mutual intent was to prevent employees from enforcing the Bonus Clause. Accordingly, the express terms of the “no third party beneficiary” clause govern, and plaintiffs are barred from suing to enforce the Bonus Clause of the merger agreement.
Prouty does not compel a different result. In that case, an original stock purchase agreement contained a “no third party beneficiary” clause. Three months later, an amendment to the agreement conferred benefits on employees, giving them severance pay. In the amendment, the new parent company agreed to indemnify the merging company for any cost, expense, loss or liability recovered “by a third party” arising out of an employee termination. (121 Cal.App.4th at pp. 1227-1228.) Employees terminated after the merger sued for severance pay. The appellate court found that while the original agreement did “not provide any voluntary severance benefits... the amendment superseded the original agreement.” (Id. at p. 1233.) “The language of the contract [amendment] and the facts surrounding its negotiation demonstrate the parties expressly intended plaintiffs to be third party beneficiaries.” (Id. at p. 1234.)
Prouty is factually inapposite. In the present case there is only one agreement, with no amendment. The agreement expressly prohibits third party actions; further, it does not contemplate the possibility of third party actions because it does not provide for indemnity in the event of an employee lawsuit, unlike Prouty. The parties to the agreement in the present case testified that they intended to prohibit employee actions to enforce the terms of the agreement. The evidence explaining the purpose of the “no third party beneficiary” clause is uncontradicted. Because the parties intended that the terms of their merger agreement remain confidential and confer no rights on employees, this intent governs.
b. Right to a Direct Bonus Based on the Letter and Oral Statements
The trial court found an independent contractual right to a bonus “on the basis of the January 3 Letter and Mr. Rickenbach’s statements to the employees.” The court also found that the promises made by Rickenbach in the Letter and in his statements were relied upon by employees. This formed the basis for a promissory estoppel.
Plaintiffs maintain that the promissory estoppel basis of the trial court’s ruling was not argued in the cross-appeal and was thereby waived or forfeited. Nevertheless, plaintiffs discuss the issue in their response. As a result, they were not deprived of an opportunity to address the matter. (Jameson v. Desta (2009) 179 Cal.App.4th 672, 674, fn. 1.)
The language of a contract governs its interpretation (Civ. Code, § 1638.) That language is controlling, if it is clear and explicit. (Ibid.; Segal v. Silberstein (2007) 156 Cal.App.4th 627, 633.) “‘When a dispute arises over the meaning of contract language, the first question to be decided is whether the language is “reasonably susceptible” to the interpretation urged by the party. If it is not, the case is over.’” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 393.)
The disputed contractual language in the Letter plainly states that “To be eligible [for a cash incentive] you must be employed [on] December 16 of each calendar year.” (Italics added.) On its face, this language is not reasonably susceptible to the interpretation that “to be eligible you need not be employed” on December 16. The Letter continues on to state that forfeiture will occur if there is voluntary resignation or “non-performance.” It does not promise that the bonus will be paid if the employee is involuntarily laid off. The acknowledgement letter distributed by defendants further confirms that to receive a cash incentive in any one of the four years, key employees understand and acknowledgement that they “must be employed by Rifocs Corporation on December 16th of such year.”
As plaintiffs observe in their opening brief, only ambiguous contractual language needs to be explained with extrinsic evidence. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.) Extrinsic evidence may not be used to “flatly contradict the express terms of the agreement.” (Id. at p. 1167.) For example, an insurance policy covering “any employee” of the insured for injuries arising in the course of employment cannot reasonably be interpreted to apply to a nonemployee. (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912-915.) And a letter to a new hire stating that her employment is “at will”-then defining at will as meaning “at any time”-is not “susceptible of being interpreted as allowing for an implied agreement that [plaintiff] could be terminated only for cause, ” even though the employer’s letter neglected to mention that termination could occur without cause. (Dore v. Arnold Worldwide, Inc., supra, 39 Cal.4th at p. 392.)
Despite the unambiguous (and mandatory) language in the Letter regarding eligibility, the trial court looked at parol evidence outside the four corners of the Letter. In the extrinsic evidence, Rickenbach testified that word “non-performance” in the Letter does not mean a regular layoff. However, he also testified that when he drafted the Letter, he did not consider the possibility of layoffs. When he spoke to employees about the bonus and gave them the Letter, he did not discuss layoffs, as he still had not considered this possibility. The impact of layoffs on the bonus did not come to anyone’s mind until layoffs began in mid-2001. In December 1999 (when the merger was completed) and January 2000 (when the Letter was given to employees) the possibility of layoffs was not contemplated during the then-existing hot market for fiber optics.
According to plaintiffs, Rickenbach told employees they would receive the bonus unless they quit or were terminated for cause, citing pages 157-158, 160-161, 181 and 211 of the reporter’s transcript. Nowhere in the cited pages did Rickenbach testify to such a verbal promise.
Any intent formulated by Rickenbach regarding the effect of layoffs on bonuses was an afterthought, arising years after the merger agreement was negotiated and the Letter was drafted. Rickenbach’s belatedly formulated intent was never communicated to Textron or to employees. “[E]vidence of the undisclosed subjective intent of the parties is irrelevant to determining the meaning of contractual language.” (Winet v. Price, supra, 4 Cal.App.4th at p. 1166, fn. 3; Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 980.) The trial court could not use extrinsic evidence of Rickenbach’s belated intent regarding layoffs to smuggle in a new term to the contract. (Bionghi v. Metropolitan Water Dist. (1999) 70 Cal.App.4th 1358, 1365.)
At the time they received the Letter, plaintiffs did not think that a bonus was guaranteed following a layoff. Plaintiff Dara Laws agreed that the Letter “doesn’t state what happens to your bonus eligibility” in the event of layoffs. Based on the Letter she received, she had “no expectation of what would happen” to her bonus eligibility if laid off. Rickenbach told her that an incentive was being paid over four years because the company “wanted the employees to stick around.” He did not “mention anything of what would happen to [her] bonus if [she was] laid off.” Thus, neither the Letter nor Rickenbach’s statements caused plaintiffs to believe that they would be paid a bonus if they were laid off. There is no basis for finding promissory estoppel: plaintiffs did not rely on the Letter or on Rickenbach’s statements to form a belief that they should stay in defendants’ employ because they were guaranteed a bonus for four years, even if they were laid off due to legitimate workforce reductions during an economic downturn.
An employee who is terminated for cause before the specified maturity date of an incentive bonus cannot collect the bonus. Good cause to terminate an employee exists when an employer’s business is in a depressed condition and staffing must be reduced. (Clutterham v. Coachman Industries, Inc. (1985) 169 Cal.App.3d 1223, 1226-1227; Malmstrom v. Kaiser Aluminum & Chemical Corp. (1986) 187 Cal.App.3d 299, 321.) “Only when an employee satisfied the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination).” (Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610. 621. Compare Division of Labor Law Enforcement v. Transpacific Transportation Co. (1979) 88 Cal.App.3d 823, 826 [pro rata bonus had to be paid if “No conditions were stated to the employees... that [they] had to be on the payroll at the time the bonus was paid in order to receive it”].)
An incentive bonus requiring that plaintiff be employed on a certain date cannot “be said, or read, to have included a promise by defendant of continued employment.” (Kelly v. Stamps.com Inc. (2005) 135 Cal.App.4th 1088, 1103.) By the same token, if plaintiff could show at trial that “she was unlawfully terminated” due to pregnancy, she could recover the bonus because defendant’s unlawful act prevented her from being employed on the bonus eligibility date. (Ibid.) There is no claim by plaintiffs here that they were unlawfully terminated, or that defendants laid off employees because they were trying to avoid payment of a bonus. There is no dispute that defendants’ business industry was severely depressed and many people were legitimately laid off.
In one case, a laid-off employee sued for breach of contract because he did not receive an incentive bonus that was provided by his employer as part of its benefits plan. The court found that the employee “was terminated as a result of a legitimate reduction in force” and that the employee “was not entitled to an incentive bonus under the terms of the amended plan because he was not an employee at the end of the year as required for a payout under the incentive plan, and the terms of the plan did not provide him a prorated bonus.” (Chambers v. Metropolitan Property and Casualty Ins. (8th Cir. 2003) 351 F.3d 848, 854.) In another case, a bonus program stated: “‘An employee must be employed through the last working day of the quarter to be eligible for the bonus.’” The court found this eligibility language to be “unambiguous, ” foreclosing a bonus claimed by an employee terminated three days before the end of the quarter. (Guerrero v. J.W. Hutton, Inc. (8th Cir. 2006) 458 F.3d 830, 833-834. Accord: Lane v. Amoco Corp. (8th Cir. 1998) 133 F.3d 676, 677-678.)
In the present case, the Letter unequivocally states that “To be eligible you must be employed at Rifocs at the maturity date of December 16 of each calendar year.” This unambiguous language cannot be contradicted by extrinsic evidence of Rickenbach’s belated and undisclosed personal belief that defendants should pay a bonus even if an employee was not employed on December 16. The contracting parties did not have a meeting of the minds on the issue of layoffs: they never considered it. Plaintiffs were never told about the effect of layoffs on their bonuses and did not rely on the possibility of a bonus after a layoff as a reason to remain at their jobs.
4. Plaintiffs’ Right to a Residual Bonus
The concept of a residual bonus-a reallocation of bonus money from employees who resign to employees who remain-appears in only one place: the Bonus Clause. The residual bonus idea is not addressed in the Letter, and was not mentioned by Rickenbach when he gave employees the Letter. We have previously concluded that the employees are not entitled to sue directly on the merger agreement to enforce its terms. Because the employees cannot sue directly on the contract as third party beneficiaries, and the residual bonus concept appears only in the written contract, plaintiffs are foreclosed from suing to enforce the residual bonus language in the merger agreement.
5. Waiting Time and Other Labor Code Penalties, and Prejudgment Interest
In view of our determination that plaintiffs were not entitled to a bonus after they were laid off, the issues of waiting time penalties, other Labor Code penalties, and prejudgment interest are moot.
6. Attorney Fees Award
The award of attorney fees is reversed in light of our decision. Plaintiffs and class members voluntarily gave up their right to sue defendants when they signed separation agreements containing releases, and they were not entitled to bonuses after they were laid off, in any event.
DISPOSITION
The judgment is reversed. Defendants/cross-appellants may recover their costs on appeal.
We concur: DOI TODD, J., ASHMANN-GERST, J.
Former Labor Code section 206.5 reads, “No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. Any release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee and the violation of the provisions of this section shall be a misdemeanor.” (Minor amendments to the statutory language became effective in 2009.)