Storti v. University of Washington

330 P.3d 159, 181 Wash. 2d 28

• Court: Washington Supreme Court
• Decided: July 24, 2014
• Docket: No. 88323-8
• Status: Published

Opinions

¶1 At issue is whether a university may suspend an annual merit-based raise when the university’s promise warned faculty that the raise scheme may be reevaluated in response to changing financial conditions. Petitioners, a class of University of Washington (U.W. or the university) professors, allege that this suspension breached a unilateral contract they held with the university because the professors had substantially performed meritorious work in the year the policy was suspended and therefore were entitled to a raise in the following year. Alternatively, petitioners contend that res judicata requires entry of judgment in favor of the class in light of prior litigation involving a similar suspension in the 2002-2003 academic year. The Court of Appeals ruled for the U.W., reasoning that no breach of contract had occurred. We affirm.

Madsen, C. J.

FACTS AND PROCEDURAL HISTORY

¶2 The facts of this case center on a policy instituted by the U.W. in 2000 that awarded an annual two percent raise to all faculty who had performed meritoriously in the year prior. The U.W. introduced this policy to address concerns that they were focusing on acquiring faculty “stars” at the expense of retaining high-performing existing faculty. The U.W. president outlined the new policy in Executive Order (EO) 64, which was later incorporated into the university faculty handbook. Specifically, EO 64 provided:

All faculty shall be evaluated annually for merit and for progress towards reappointment, promotion and/or tenure, as appropriate. A faculty member who is deemed to be meritorious in performance shall be awarded a regular 2% merit salary increase at the beginning of the following academic year. Higher levels of performance shall be recognized by higher levels of salary increases as permitted by available funding.

Clerk’s Papers (CP) at 1242. The text of EO 64 also included a “Funding Cautions” provision, which outlined:

This Faculty Salary Policy is based upon an underlying principle that new funds from legislative appropriations are required to keep the salary system in equilibrium. Career advancement can be rewarded and the current level of faculty positions sustained only if new funds are provided. Without the infusion of new money from the Legislature into the salary base, career advancement can only be rewarded at the expense of the size of the University faculty. Without the influx of new money or in the event of decreased State support, a reevaluation of this Faculty Salary Policy may prove necessary.

Id. at 1243.

¶3 The university has twice suspended this merit raise provision, both times prompting litigation. First, the university suspended the policy for the 2002-2003 academic year, which formed the basis for the litigation in Storti v. University of Washington, No. 04-2-16973-9 (King County Super. Ct., Wash. 2004) (Storti I). In that instance, the U.W. did not follow the applicable procedure but instead simply excluded the raises from its 2002-2003 budget when the legislature did not appropriate funds for the university to pay salary increases. Following the Storti I litigation, the university reinstated the salary policy until 2009, when it was again suspended. This second suspension forms the basis for the current Storti v. University of Washington, noted at 172 Wn. App. 1029, 2012 WL 6554827, at *3, 2012 Wash. App. LEXIS 2898, at *3 (Storti II) suit, as well as for related litigation in Nye v. University of Washington, 163 Wn. App. 875, 260 P.3d 1000 (2011). In contrast to the first suspension, this second suspension followed complex procedures. Faced with a deep recession and major budget cuts, the university president and the faculty senate chair appointed faculty and administrative personnel to a “Committee to Re-Evaluate Executive Order No. 64.” CP at 1226. This committee, in turn, proposed and submitted to the faculty for review an EO suspending the merit raise. The faculty reviewed this proposed order and consulted with the university president about their proposed revisions. Then, on March 31, 2009, the university president issued EO 29, an order suspending the merit raise instituted in EO 64 until the conclusion of the 2009-2011 biennium.¹ Because several arguments stem from the related litigation that preceded Storti II, it is important to review the history.

¶4 The Storti I litigation concerned the identical faculty salary policy at issue here and involved the identical class representative, Professor Duane Storti. In Storti I, Professor Storti challenged the U.W.’s first suspension of the merit raise policy for the 2002-2003 academic year, alleging breach of contract. The class was defined as “[a]ll University of Washington faculty who worked in the 2001-02 academic year and the 2002-03 academic year, and who were not found unmeritorious for their service in the 2001-02 academic year.” CP at 491. The superior court entered summary judgment for Storti based on the plain language of the faculty salary policy. The court did not consider whether the U.W. followed the proper process for “reevaluation” of the policy because the university simply withheld funds from the university budget. After summary judgment was granted, the parties entered into a settlement under which the U.W. reinstated its annual merit raise policy and agreed to pay $17.45 million in back pay, interest, and attorney fees to the faculty class.

¶5 In Nye, Professor Peter Nye challenged the university’s 2009 suspension of the two percent merit increase policy, the same action that Professor Storti challenges here. Nye filed suit in October 2009 and never sought class certification. Professor Nye argued that the university’s suspension breached a bilateral contract and that even if the U.W. did have the power to suspend the policy, it did not follow the proper procedure to do so. The superior court denied Nye’s motion for summary judgment and entered summary judgment for the university. Nye appealed, but the Court of Appeals affirmed the trial court, reasoning that the express terms of the handbook policy allowed for modification of the merit raise provision and specified that executive orders are effective immediately when entered. Nye, 163 Wn. App. at 886.

¶6 In the current litigation Professor Storti challenges the same April 2009 suspension as did Professor Nye, but he raises different arguments. According to Storti, the university has the power to suspend the policy but cannot. do so retroactively by retracting its promise after faculty had substantially performed. This retroactive retraction, Storti argues, constitutes a breach of a unilateral contract between the university and the faculty. A proper “reevaluation” would have suspended the policy effective for the 2010-2011 academic year, 15 months after passage of EO 29. Here the class is defined as “[a] 11 University of Washington faculty who served in the 2008-09 academic year and the 2009-10 year, and who were not found unmeritorious for their service in the 2008-09 academic year.” CP at 1485. Storti seeks an award of back pay for lost wages stemming from the breach.

¶7 Storti filed his class action complaint in King County Superior Court on December 21, 2010. The superior court granted the U.W.’s motion for summary judgment on June 24, 2011. Storti then moved for direct appeal in this court, but we transferred the appeal to the Court of Appeals. Division One affirmed in an unpublished opinion. Storti II, 2012 WL 6554827, at *4-7, 2012 Wash. App. LEXIS 2898, at *18-21. The Court of Appeals reasoned that the suspension did not breach any contract because EO 29 was effective when signed, the funding cautions provision notified faculty that the policy could be modified, and contracts are defined by specific language contained therein. The court also cited its earlier published decision in Nye as support for its holding. Finally, the court explained that res judicata did not apply because neither the evidence presented nor the facts relied on in Storti II were identical to those in Storti I. Storti petitioned for review, which we granted on June 6, 2013. Storti v. Univ. of Wash., 177 Wn.2d 1015, 306 P.3d 960 (2013).

DISCUSSION

Standard of Review

¶8 We review a trial court’s summary judgment decision dé novo. Hearst Commc’ns, Inc. v. Seattle Times Co., 154 Wn.2d 493, 501, 115 P.3d 262 (2005). Summary judgment is appropriate only where, viewing the facts in the light most favorable to the nonmoving party, there are no genuine issues of material fact and accordingly the moving party is entitled to judgment as a matter of law. CR 56(c). Here, we consider de novo whether the trial court erred by concluding that the U.W. had satisfied the CR 56(c) standard and was entitled to judgment as a matter of law.

Unilateral Contract

¶9 In any breach of contract action, the first question a reviewing court must answer is whether an enforceable contract has been created. Petitioners here urge that a unilateral contract was created when the university promised a raise for meritorious work and the faculty substantially performed. Because the contract requisites of offer, acceptance, and consideration are established, we find an enforceable unilateral contract.

¶10 Contracts come in two forms: bilateral and unilateral. The vast majority of contracts are bilateral, where two parties exchange reciprocal promises and one party’s promise provides consideration for that of the other party. Cook v. Johnson, 37 Wn.2d 19, 23, 221 P.2d 525 (1950). In a unilateral contract, however, only one party makes a promise. The second party may accept that promise and establish a unilateral contract only through performance of her end of the bargain. Id.

¶11 This court has recognized that employee handbook provisions may form the basis for unilateral contracts between employers and employees. Thompson v. St. Regis Paper Co., 102 Wn.2d 219, 228-29, 685 P.2d 1081 (1984) (reasoning that “an employee and employer can contractually obligate themselves concerning provisions found in an employee policy manual and thereby contractually modify the terminable at will relationship”); cf. Govier v. N. Sound Bank, 91 Wn. App. 493, 499-500, 957 P.2d 811 (1998) (showing the Court of Appeals’ adoption of this concept); Simon v. Riblet Tramway Co., 8 Wn. App. 289, 291-92, 505 P.2d 1291 (1973) (same). Even in this employment context, however, unilateral contracts are defined by traditional contract concepts of offer, acceptance, and consideration. Thompson, 102 Wn.2d at 228.

¶12 An offer must evidence an intent to be bound by the terms of a proposal. See Restatement (Second) of Contracts § 24 (Am. Law Inst. 1981). The U.W.’s institution of a merit raise policy in EO 64 unambiguously satisfies the requirements of an offer. EO 64 proclaimed that faculty “shall” undergo yearly evaluations and “shall” be awarded a two percent raise if found meritorious. CP at 1241-43. This language clearly shows the university’s intent to be bound by its promise of annual raises for meritorious work.

¶13 The university’s offer, moreover, was accepted by the faculty class.

¶14 As noted, unilateral contracts can be accepted only through performance and not by the making of a reciprocal promise. Petitioners contend that substantial, as opposed to full, performance is enough to constitute acceptance of a unilateral contract offer. Specifically, petitioners argue that because the faculty class had worked for most of the 2008-2009 academic year in reliance on the university’s promise of a raise in salary for the 2009-2010 academic year, they had substantially performed and thereby accepted the university’s offer.

¶15 Pointing to our decision in Navlet v. Port of Seattle, 164 Wn.2d 818, 194 P.3d 221 (2008), petitioners urge that this court has adopted the substantial performance doctrine. But Navlet did not decide the issue presented in terms of unilateral contract. Indeed, this court has not yet considered whether substantial performance suffices for acceptance of a unilateral contract. However, petitioners correctly point out that the Court of Appeals addressed substantial performance in Knight v. Seattle-First National Bank, 22 Wn. App. 493, 498-99, 589 P.2d 1279 (1979). Relying on the Restatement, Knight held that the performance in that case was mere preparation, rather than substantial performance. Id. Under the Restatement, substantial performance by the offeree precludes withdrawal by the offeror. Id. at 496. The Restatement reasons that substantial performance in effect creates an option contract mandating that the offeror keep the offer open. Restatement § 45. Hence, substantial performance indirectly creates acceptance of the offer. Because it makes sense to recognize the reliance interest of an offeree who begins performance and because contract law in this state generally tracks national common law, we now adopt the Restatement approach articulated by the Court of Appeals in Knight. Accordingly, we find that the faculty class accepted the university’s offer of a raise by their substantial and meritorious performance.

¶16 Finally, petitioners must identify consideration for the U.W.’s unilateral contract. Consideration exists in any bargained-for legal detriment, no matter how seemingly small. See Restatement § 71. Consideration thus may be established where employees continue in employment when they otherwise would not be required to do so. As long as the employees incur some legal detriment — by continuing to work, for example — the requirement of consideration is met. This court has so held in the context of employer promises for bonuses. Powell v. Republic Creosoting Co., 172 Wash. 155, 160, 19 P.2d 919 (1933); Scott v. J.F. Duthie & Co., 125 Wash. 470, 472, 475, 216 P. 853 (1923). Although our prior cases concerned promises of a bonus rather than a promise of a raise, that difference is irrelevant to the question of consideration. Here, petitioners have established the requisite consideration by showing that the faculty class agreed to work for the entire year and not pursue positions elsewhere.

¶17 We hold that petitioners have established an enforceable unilateral contract based on the university’s promise to extend raises for meritorious performance.

Breach of Contract

¶18 Next, we must determine whether the suspension by the U.W. of its merit raise provision constituted a breach of this contract. It is a fundamental precept of contract law that contracts must be interpreted in accordance with all of their terms. E.g., Wagner v. Wagner, 95 Wn.2d 94, 101-02, 621 P.2d 1279 (1980). Here, the terms of the contract included a funding cautions provision that warned faculty of potential “reevaluation” of the merit raise policy. Both parties agree that this language gives the university the power to alter or repeal the merit salary increase scheme, but they disagree on how that power must be effectuated. The crux of the issue, then, is the meaning of the word “reevaluate” as used in the funding cautions language.

¶19 Petitioners argue that “reevaluate” contemplates only prospective change to the policy and that the university’s suspension after faculty had substantially performed constitutes a breach. Br. of Appellants at 25-26; Suppl. Br. of PL Faculty Class at 10-11. The university’s suspension, they argue, could properly take effect only for the 2010-2011 year because the faculty had not yet begun meritorious performance in anticipation of a raise in that year.

¶20 This court gives contract terms their ordinary meaning where possible. E.g., Lawrence v. Nw. Cas. Co., 50 Wn.2d 282, 285, 311 P.2d 670 (1957). Although the term “reevaluate” indicates a procedural requirement, it does not connote the 15-month waiting period that petitioners advocate. See Hearst, 154 Wn.2d at 503. Moreover, the contract terms must be interpreted in light of the entire faculty handbook. Here, the university faculty handbook establishes a specific procedure for implementing executive orders and provides that these orders are effective when enacted. In particular, section 12-21(B) of the handbook outlines the president’s power to issue executive orders, provides that a proposed order must be sent to the faculty senate for review, and mandates that the president consult with the faculty senate chair regarding proposed revisions. CP at 1234. Additionally, this provision explicitly states that executive orders “become effective on the day signed by the President.” Id. The university followed this mandated procedure when it suspended the faculty merit raise scheme in 2009. The faculty were on notice of the potential for reevaluation, and the policy was properly reevaluated in accordance with the terms of the contract and the broader faculty handbook. Contrary to the dissent’s suggestion, we do not credit the U.W.’s argument that the funding caution’s language made the merit raise policy contingent on legislative funding. Dissent at 43-46. Instead, we hold that the term “reevaluate” must be interpreted in light of the entire faculty handbook, which specifies procedures for implementing and enforcing executive orders. Because the U.W. followed these procedures for reevaluation, its suspension of the merit raise policy did not breach its contract with faculty.

Res Judicata

¶21 Petitioners argue that this court should not even reach the merits of contract formation and breach because the trial court granted summary judgment for the petitioners in Storti I, binding this court under principles of res judicata. In Storti I, a similar class of faculty challenged the U.W.’s suspension of the faculty merit raise policy for the 2002-2003 academic year. In ruling for Storti, the trial court reasoned that the faculty raise policy created a mandatory duty that was not contingent on legislative funding and the U.W.’s suspension without any “reevaluation” process constituted a breach. Petitioners here claim that Storti II “involves the same facts and same evidence as Storti I” because the U.W. breached the same duty to provide merit-based raises when it again suspended the policy in 2009. Suppl. Br. of PL Faculty Class at 18-20. Further, they argue that the court’s ruling in Storti I applies here despite the fact that the university did not engage in any reevaluation process in 2002, pointing to the trial court’s comment that “ ‘the court need not reach the question of what process would have been utilized to repeal, evaluate, or modify the Faculty Salary Policy.’ ” Id. at 19; CP at 776.

¶22 Res judicata — or claim preclusion — applies where a final judgment previously entered and a present action are so similar that the current claim should have been litigated in the former action. In this way, res judicata promotes judicial economy, efficiency, and fairness to litigants. This court has enumerated specific prerequisites to application of res judicata. Most relevant here, res judicata applies only where the current and prior case involve identical causes of action. Schoeman v. N.Y. Life Ins. Co., 106 Wn.2d 855, 860, 726 P.2d 1 (1986). As the Court of Appeals correctly reasoned, this requires that the two cases involve substantially the same evidence and the same transactional nucleus of fact. Storti II, 2012 WL 6554827, at *7, 2012 Wash. App. LEXIS 2898, at *20 (citing Kuhlman v. Thomas, 78 Wn. App. 115, 122, 897 P.2d 365 (1995)). Here, neither the same evidence nor the same facts underlie Storti I and Storti II. Storti I concerned facts that transpired in 2002 and 2003, whereas Storti II involves events from 2009 and 2010. Specifically, in Storti I, the university repealed the faculty raise policy without any process for reevaluation. In Storti II, the university complied with the requirement for reevaluation contained in the funding cautions provision as well as other provisions of the faculty handbook requiring use of a reevaluation procedure. Res judicata does not resolve this case.

CONCLUSION

¶23 We hold that the university’s promise of an annual two percent raise to meritorious faculty did create an enforceable unilateral contract. However, the university’s 2009 suspension of that raise did not constitute a breach of that contract. Contracts are defined first and foremost by their terms, and the terms of this contract warned faculty that the policy could be reevaluated in response to changing economic conditions. Unlike in Storti I, here the university followed proper procedures to effect a reevaluation. There is no requirement that the university’s policy change be delayed until the subsequent academic year. Finally, res judicata does not apply because Storti I and Storti II state different claims based on separate facts and evidence. The trial court properly granted summary judgment to the university. We affirm the Court of Appeals.

Owens and Fairhurst, JJ., and J.M. Johnson and Siddoway, JJ. Pro Tem., concur.

1 Specifically, EO 29 suspended four portions of EO 64:

1. The phrase “regular merit” in the first sentence of the subsection entitled Allocation Categories.

2. The sentence that reads, “A faculty member who is deemed to be meritorious in performance shall be awarded a regular 2% merit salary increase at the beginning of the following academic year.”

3. The sentence that reads, “If deemed meritorious in the next year’s review, the faculty member shall receive a regular 2% merit increase at the beginning of the following academic year.”

4. The phrase, “In addition to regular merit salary allocations,” in the sentence in the subsection entitled Promotion.

CP at 1244.