Why it matters

An employer that induces an employee to enter into an employment contract by intentionally promising compensation terms the employer never intended to honor may not avoid tort liability for fraudulent inducement of contract, a California appellate court has ruled. David Lacagnina worked for Comprehend Systems as director of business development for about one year until he was terminated. Lacagnina alleged he was fraudulently induced to enter into an employment agreement because of false representations made by Comprehend’s founders. A jury awarded the plaintiff a total of $556,446 in damages, including $226,446 for fraud and $75,000 for emotional distress. But the trial court then granted the employer’s motion for judgment notwithstanding the verdict (JNOV) on the fraud claim, throwing out that part of the award. The appellate panel reversed, ruling that including an at-will provision in an employment contract that allows the employer to fire the employee at any time, for any reason, does not permit an employer to avoid tort liability for fraudulent inducement of contract where the employer induces the employee to enter into the contract by intentionally promising compensation terms it never intended to honor. However, the panel refused to accept Lacagnina’s argument that an employee who recovers a judgment against an employer for lost compensation has suffered a “theft” of “labor” for which he or she is entitled to recover treble damages and attorneys’ fees under the state’s Penal Code.

Detailed discussion

In 2010, Richard Morrison and Jud Gardner founded a company called Comprehend Systems. After selling Comprehend’s software product as an independent contractor with his own company, David Lacagnina was asked by Morrison and Gardner to work full time for Comprehend.

Although interested, Lacagnina had concerns, which resulted in the parties engaging in extensive negotiations. Lacagnina’s initial salary was low because Comprehend wasn’t making a lot of money, but he was promised that he would receive commissions “on all accounts.” Morrison emailed Lacagnina that the hope was to hire additional salespeople and split up some accounts, writing that “you will obviously be involved in all of these decisions and help us figure out how best to navigate.”

Lacagnina thereafter signed a written employment agreement with Comprehend and joined the company as director of business development. Over the next year, he made some key sales, and during his review, Morrison and Gardner told him “we love what you’re doing” and had nothing negative to say about his performance.

Not long after that, the three met to discuss a new employment contract for Lacagnina that was required in order to close a deal with an investor to secure more than $5 million in financing for Comprehend. The amended contract contained preconditions for Lacagnina to obtain commissions and omitted any reference to the repayment of a $250,000 investment Lacagnina had made in the company.

Concerned about the terms, Lacagnina reached out to Morrison and Gardner. Morrison told Lacagnina that he didn’t have time to have an attorney review the contract because the financing deal needed to close and told Lacagnina, “You’ve got to trust me.” Lacagnina signed the contract. But the next month, a new vice president of sales was hired without Lacagnina’s knowledge or input, and Lacagnina was instructed to “transition” his accounts to the new hire.

When Lacagnina resisted, he was terminated. He sued, asserting fraud, violation of California’s Penal Code and breach of contract, among many other claims. Following a ten-day jury trial, jurors found in favor of Lacagnina and awarded him damages due to fraud and deceit in the amount of $226,446, economic damages due to breach of contract for $5,000 (which included stock options in Comprehend), $250,000 in economic damages due to breach of the covenant of good faith and fair dealing, and emotional distress damages in the amount of $75,000.

The trial court granted the defendant’s motion for JNOV as to the fraud claim, agreeing with the company that Lacagnina was an at-will employee entitled to commissions only on sales he closed and that, therefore, he suffered no harm by signing the employment contract, reducing the judgment to $255,000.

Lacagnina appealed, arguing that the jury verdict in his favor was supported by substantial evidence and should not have been reversed. The California appellate panel agreed.

“Here, viewing the facts in the light most favorable to the jury’s verdict, there was substantial evidence from which the jury could have found that Lacagnina was harmed as a result of misrepresentations or concealment by respondents,” the court wrote. “In particular, the jury could have found that Lacagnina was induced to join and remain at Comprehend, and to execute the amended offer letter, by respondents’ representations that he would be fairly compensated for sales for which he was responsible, and that they would ‘revisit’ the terms of that letter, which stated that Lacagnina would not be entitled to commissions unless he remained employed by Comprehend. It could also have found, as Lacagnina argued, that respondents had a concealed plan to replace Lacagnina with [the new vice president of sales], at which point he was compelled to ‘transition’ his accounts … thereby depriving him of the opportunity to earn commissions on sales to those customers, and was then summarily terminated.”

Thus, there was substantial evidence for the jury to find that Comprehend had engaged “in actionable fraud or concealment resulting in harm to Lacagnina,” the panel held. The court found no merit in the company’s position that the agreements prevented Lacagnina from recovering any damages on his claims.

An employer that induces an employee to enter into an employment contract by intentionally promising compensation terms the employer never intended to honor may not, as a matter of law, avoid tort liability for fraudulent inducement of contract because the contract contains an at-will provision that allows the employer to fire the employee at any time, for any reason, the court stated.

However, the court was not as impressed by Lacagnina’s attempt to recover damages under Section 496 of the California Penal Code, which permits treble damages and attorneys’ fees, based on his argument that Comprehend and its executives engaged in the “theft” or “receipt” of “stolen property” in the form of his labor.

Although the novel theory was creative, “we find it inconsistent with the plain language and structure of the Penal Code, the legislative purpose, and the likely consequences of Lacagnina’s interpretation,” the panel explained. Section 496 makes no reference to labor; instead, it is limited by its terms to property, the court said, adding that “significant adverse consequences would likely follow from Lacagnina’s proposed interpretation of the statute.”

“If every plaintiff in an employment or contract dispute could also seek treble damages and attorneys’ fees on the ground that the defendant received ‘stolen property,’ such claims would become the rule rather than the exception, parties would more frequently assert claims for ‘theft’ in run-of-the-mill commercial disputes, and cases would be harder to settle,” the court wrote. “We cannot believe the Legislature contemplated, much less intended, those consequences when it enacted [S]ection 496.”

To read the opinion in Lacagnina v. Comprehend Systems, Inc., click here.