Second District Reverses Judgment in a Class Action of $99,000 and Attorneys Fees of $881,715

by charlesjung

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The Second District reversed a trial court’s judgment in favor of employees in a class action trial.  Pearline Zalewa v. Tempo Research Corporation, B210429, 2010 WL 3735240 (Cal. Ct. App. 2d Dist. Sept. 27, 2010).  Defendant  fiber-optic equipment manufacturer was sued in a class action by its former employees who claimed 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.  Id. The court concluded 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.”  Id.

The Trial Court’s Judgment

The trial court conducted a bench trial in January 2008, finding that plaintiffs were entitled to recover a direct bonus under theories of breach of contract, promissory estoppel, accounting, and unfair business practices. Id. The court deemed the bonus payments to be “wages” under the Labor Code. Id. And because the bonus payments are wages, plaintiffs were awarded prejudgment interest and attorney fees under the Labor Code. Id. The court enumerated the amount of the award for each employee, less offsets for monies already paid by defendants, plus interest. Id. The total amount of the award, including interest, was approximately $99,000, and plaintiffs’ counsel was awarded attorney fees of $881,715.  Id.

Plaintiffs appealed from the judgment, challenging the trial court’s refusal to apply collateral estoppel, or award a residual bonus and waiting time penalties, among other things. Id. Defendants cross-appealed, challenging 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. Id.


The court rejected plaintiff’s contention that Labor Commissioner judgments for unpaid bonuses by certain of defendants’ former employees should have collateral estoppel effect in the present litigation.  “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.”

Defendants contended that certain class members were 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.”  The Court of Appeal agreed with defendants:

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.

Defendants further challenged 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. This Court of Appeal reversed the trial court:

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. . . . 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.

Thus reversing the judgment of the trial court, the Court of Appeal also reversed the award attorney fees.  “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.”

Judges and Attorneys

Presiding Justice Roger W. Boren wrote the opinion for the court.  Justices Kathryn Doi Todd and Judith M. Ashmann-Gerst concurred.

Appeal was from a judgment of the Superior Court of Los Angeles County, Hon. Charles C. Lee and Hon. Phrasel L. Shelton

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.