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No. 3844 Supreme Court File No. S-3828
May 29 1992 Decided
Charles W. Coe and Michael Smith Anchorage for Appellant. Mary Poteet Winner & Associates Anchorage for Appellee.
Before: Rabinowitz Chief Justice Burke Matthews Compton and Moore Justices.
The Hon. Justice Compton

Paul M. Luedtke was suspended and then terminated from his employment with Nabors Alaska Drilling Inc. (Nabors) after testing positive for marijuana use in a urinalysis. This court upheld Nabors' termination of Luedtke in Luedtke v. Nabors Alaska Drilling Inc. 768 P.2d 1123 (Alaska 1989) (Luedtke I) but the case was remanded for a determination of whether Luedtke's suspension violated the covenant of good faith and fair dealing. On remand the superior court found that Nabors did not violate the covenant of good faith and fair dealing when it suspended Luedtke. Court also imposed sanctions against Luedtke and his Counsel pursuant to Alaska Civil Rules 11 and 95(a) and awarded Counsel's fees pursuant to Alaska Civil Rule 82. Luedtke appeals the judgment in its entirety. We reverse.


The facts leading up to Luedtke's suspension and termination are detailed in Luedtke I 768 P.2d at 1125-26 and will not be repeated. Our instructions to the superior court on remand left one issue to be decided:

The question whether Paul's suspension breached the covenant of good faith and fair dealing is for the trier of fact. On remand the trial court should determine whether the covenant has been breached taking additional evidence if necessary.

Id. at 1137 (citation omitted). We remanded the issue of Luedtke's suspension in part because it was based on different facts than the termination and the superior court had not applied the covenant of good faith and fair dealing to those facts.

After a failed attempt at settlement Nabors filed a motion in limine seeking an order limiting Luedtke's remedies on remand. Court entered an order which declared that Luedtke would not be entitled to reinstatement of employment or lost wages after November 30 1982 the date he was lawfully terminated. Court denied Luedtke's request for a four-day trial on the suspension and damages issue and instead ordered the parties to brief the issues of whether Luedtke's suspension violated the covenant of good faith and fair dealing and if so what damages would result.

In his later Position Memorandum on Remand Luedtke asked to present additional evidence that Nabors breached the covenant of good faith and fair dealing and asked that Court consider the appropriate remedy. Luedtke continued to assert that he was entitled to reinstatement and back pay as a remedy for breach. Nabors asserted in response that Luedtke had not been suspended in bad faith and simultaneously moved for costs and Counsel fees pursuant to Civil Rules 11 and 95(a) asserting that Luedtke's arguments were frivolous because he presented no evidence of bad faith and because the remedies he sought had been precluded when its Motion in Limine was granted.

The superior court held a hearing on September 21 1989. Luedtke again asked for an evidentiary hearing to prove damages and also to show that he was treated differently from other employees. Nabors opposed introduction of any new evidence and asserted that the only issues relevant to its good faith and fair dealing were the timing and notice of the test.

The superior court ruled in favor of Nabors on the good faith and fair dealing issue. Court also granted Nabors' motion for costs and Counsel's fees under Civil Rules 11 and 95(a) in the amount of $8 578.11 but issued no findings to support that award. Nabors then moved for Counsel's fees under Civil Rule 82(a)(1) which the superior court granted in the amount of $3 500.00.


A. Standard of Review.

Whether Luedtke's suspension breached the covenant of good faith and fair dealing is a question for the trier of fact. Luedtke I 768 P.2d at 1137. Normally we review such questions only for clear error. Alaska Civil R. 52(a). "However we may review the application of a legal doctrine to undisputed facts without the usual deference to the superior court." Foss Alaska Line Inc. v. Northland Servs. 724 P.2d 523 526 (Alaska 1986). While there are still disputed facts in this case the record on remand now reflects several undisputed facts relevant to Luedtke's suspension: Luedtke had no notice that his urine would be tested for drugs; Luedtke's drug test was not performed contemporaneously with his work schedule; and Luedtke was suspended after his urine tested positive for marijuana but before he was given the option of a retest or any other options. Thus we may review de novo the superior court's determination that these facts do not prove a violation of the covenant of good faith and fair dealing.

In finding that Luedtke's suspension did not violate the covenant the superior court reasoned that "Nabors had no other alternative but to suspend Mr. Luedtke immediately." It stated that sending Luedtke to the work site would have compromised the safety of Nabors' employees and compromised Nabors in any litigation that resulted from an accident involving Luedtke. However in reaching this conclusion the superior court misapplied the covenant of good faith and fair dealing and misconstrued our instructions on remand.

B. The Covenant of Good Faith and Fair Dealing.

We have recognized a covenant of good faith and fair dealing in all at-will employment contracts. Mitford v. de Lasala 666 P.2d 1000 1007 (Alaska 1983). ["This covenant does not lend itself to precise definition but it requires at a minimum that an employer not impair the right of an employee to receive the benefits of the employment agreement." Jones v. Central Peninsula Gen. Hosp. 779 P.2d 783 789 (Alaska 1989). The covenant is breached for example if an employee proves that the employer fired the employee "for the purpose of preventing him from sharing in future profits" to which the employee is entitled. Mitford 666 P.2d at 1007. In Hagans Brown & Gibbs v. First National Bank of Anchorage 783 P.2d 1164 (Alaska 1989) we held that an Counsel's client could be subject to liability for Counsel's fees "if it can be shown that the [client's] decision to settle or not settle [the case] was made with the intent of taking advantage of the Counsel." Id. at 1168. Mitford Jones and Hagans establish that if it is proved that an employer's motive in firing an employee is to deprive the employee of the economic benefits of the contract it is per se a bad faith termination. These decisions focus on the intent of the employer in evaluating whether bad faith exists and uphold a finding of bad faith when the record supports a finding of an improper employer motive.

Mitford Jones and Hagans however do not limit breach of the covenant of good faith and fair dealing to those circumstances. In Jones we noted that the covenant of good faith and fair dealing "also requires that an employer treat like employees alike." Jones 779 P.2d at 789 n.6. See also Rutledge v. Alyeska Pipeline Serv. Co. 727 P.2d 1050 1056 (Alaska 1986). We have held that proof that an employee was fired for an unconstitutional reason "amounts to unfair dealing as a matter of law." State v. Haley 687 P.2d 305 318 (Alaska 1984). In Luedtke I 768 P.2d at 1130 we also stated that proof that a private employer's violation of a public policy could constitute a breach of the covenant of good faith and fair dealing.

These cases rather than focusing on the intent of the employer indicate that the covenant of good faith and fair dealing also requires the parties to act in a manner which a reasonable person would regard as fair. Indeed in ARCO Alaska Inc. v. Akers 753 P.2d 1150 1156 (Alaska 1988) this court upheld a jury instruction in which the Court stressed that an employer's discretion must be "exercised reasonably and in good faith" and that the employer's decisions must be made "fairly and in good faith." (Emphasis added.) In Klondike Indus. Corp. v. Gibson 741 P.2d 1161 1168 (Alaska 1987) we cited with approval excerpts from the Restatement of Contracts:

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction and fair dealing may require more than honesty.

Restatement (Second) of Contracts SEC. 205 comment d (1981).

Thus our cases establish that the covenant of good faith and fair dealing includes multiple expectations about the behavior of the parties to a contract. The Uniform Commercial Code's requirement of good faith and fair dealing in the case of merchants contained in section 2-103 requires more than just absence of evil motive. "'Good faith' in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. U.C.C. SEC. 2-103(1)(b). *fn1 Courts and commentators which have addressed the issue say that this imposes an objective as well as a subjective standard. *fn2

C. Our Instructions on Remand.

In Luedtke I we considered the issue of whether Nabors' decision to fire Paul Luedtke (and his brother Clarence) violated the covenant of good faith and fair dealing based on the claim that Nabors' drug tests intruded upon their privacy:

We conclude that there is a public policy supporting the protection of employee privacy. Violation of that policy by an employer may rise to the level of a breach of the implied covenant of good faith and fair dealing. However the competing public concern for employee safety present in the case at bar leads us to hold that Nabors' actions did not breach the implied covenant.

Luedtke I 768 P.2d at 1130. We noted however that there are limits on the employer's right to invade the privacy of an employee even if the employer has a legitimate concern for the health and safety of other workers. We held that a "drug test must be conducted at a time reasonably contemporaneous with the employee's work time" and that "an employee must receive notice of the adoption of a drug testing program." Id. at 1136-37.

In the case of Luedtke's termination these considerations did not apply. Luedtke was fired after refusing to take a drug test for which he had ample notice and which would have been reasonably contemporaneous with his work schedule. However in remanding the case for consideration of whether Luedtke's suspension violated the covenant of good faith and fair dealing we suggested that the factors of timing and notice should have been taken into account by the superior court.

On remand the superior court did not take those factors into account. Indeed the superior court acknowledged that its analysis of Luedtke's suspension was little different from our analysis of Luedtke's termination:

The supreme court has held that the termination for refusal to take the drug tests did not violate the implied covenant of good faith dealing [sic] in this case because of the competing public concern for employee safety. . . . Whether suspension of Mr. Luedtke because of the discovery of cannabinoids in his blood is a violation of the covenant is a closely related but not precisely the same question.

Luedtke v. Nabors Alaska Drilling Inc. No. 3AN-83-9147 Civ. slip op. at 2 (Alaska Super. Nov. 7 1989). Court went on to conclude that suspending Luedtke was not a violation of the covenant of good faith and fair dealing because Nabors had a legitimate concern for the safety of its employees. While Court stated that the question of the suspension was "not precisely the same" as the question of the termination in fact it treated the questions as identical. This did not comport with our instructions. Had we concluded that the questions were identical we could have resolved the issue of the suspension when the case was first before us. Instead we must resolve that issue now.

D. Luedtke's Suspension.

Nabors argues that Luedtke's suspension did not violate the covenant of good faith and fair dealing because breach of the covenant requires subjective bad faith on the part of the employer and there is no evidence of subjective bad faith in the record with respect to the timing of or lack of notice prior to Luedtke's drug test. For this proposition Nabors relies on the California Supreme Court's discussion of the covenant of good faith and fair dealing in Foley v. Interactive Data Corp. 47 Cal. 3d 654 765 P.2d 373 (Cal. 1988 254 Cal. Rptr. 211). The issue decided by the sharply divided California court in Foley however was whether a breach of the covenant could give rise to tort damages an issue previously decided in Alaska. See Akers 753 P.2d at 1153-54. The Foley court was only peripherally concerned with the issue of what constitutes a breach of the covenant which is the issue in this case and for which there is Alaska precedent. Furthermore to the extent Foley does discuss that issue it recognizes that subjective bad faith is not always required. Foley 765 P.2d at 400. Thus Nabors' reliance on Foley is misplaced.

We agree that there is no evidence of subjective bad faith on Nabors' part but as we have already stated the covenant of good faith and fair dealing also requires that the employer be objectively fair. The superior court found that Luedtke was tested for drug use without prior notice that no other employee was similarly tested and that Nabors suspended Luedtke immediately upon learning of the results of the test. Nabors does not dispute these findings. We hold that as a matter of law these facts constitute a violation of the covenant of good faith and fair dealing.

As we stated in Luedtke I:

an employee must receive notice of the adoption of a drug testing program. By requiring a test an employer introduces an additional term of employment. An employee should have notice of the additional term so that he may contest it refuse to accept it and quit seek to negotiate its conditions or prepare for the test so that he will not fail it and thereby suffer sanctions. 768 P.2d at 1137 (footnote omitted). There is evidence in the record that Luedtke might have followed at least one if not more of these alternative paths had he received notice of the new drug testing program. Nabors insists that Luedtke would have refused to take the test and quit. However Luedtke presented evidence on remand to show that he has more recently taken several drug tests with negative results. Presumably those were tests for which he had notice and for which he prepared. Nabors' failure to give notice of the test was objectively unfair to Luedtke. *fn3

The superior court found that Luedtke did not have notice prior to being tested and Nabors does not dispute this. Luedtke and Nabors agree that this testing was the cause of Luedtke's suspension. The superior court should have concluded therefore that in suspending Luedtke Nabors breached the covenant of good faith and fair dealing.

E. Damages.

Breach of the covenant of good faith and fair dealing results in contract damages. Akers 753 P.2d at 1154. The goal of contract damages is to place the nonbreaching party in as good a position as if the contract had been fully performed. Alyeska Pipeline Serv. Co. v. H.C. Price Co. 694 P.2d 782 787 (Alaska 1985). In the case of wrongful discharge this generally means that the employee "is entitled to the total amount of the agreed upon salary for the unexpired term of his employment less what he could earn by making diligent efforts to obtain similar employment." Skagway City School Bd. v. Davis 543 P.2d 218 225 (Alaska 1975) overruled on other grounds Diedrich v. City of Ketchikan 805 P.2d 362 366 (Alaska 1991). Where the employee is wrongfully suspended rather than discharged the employee is still under contract to the employer and need not mitigate damages by seeking other employment. Thus Luedtke may be entitled to back pay.

However Luedtke was fired justifiably by Nabors for failing to take a drug test on November 30 1982. Luedtke I 768 P.2d at 1137. Any damages he may have suffered after that date were a result of his lawful termination and were caused by his own refusal to comply with reasonable company policy. Luedtke argues that he should be entitled to reinstatement as a remedy for the suspension apart from any remedies for his termination. This position if adopted would make it impossible for an employer to cure a wrongful act. Here Nabors impermissibly suspended Luedtke but then attempted to cure the problem by offering Luedtke a legitimate retest. Nabors was in a sense mitigating its own damages. We decline to hold that an employer may never mitigate damages.

Luedtke may not recover for damages not caused by Nabors' breach of the covenant of good faith and fair dealing. Further his damages may not exceed wages lost between November 5 1982 the date of his suspension and November 30 1982 the date of his lawful termination as well as any incidental damages he can prove. Because the superior court made no findings as to cause or damages we must remand the case for a determination of these two issues.


The superior court awarded Nabors costs and Counsel's fees in the amount of $8,578.11. Since the court did not specify under which rule it made this award we will treat the award as falling under Alaska Civil Rule 11. *fn4 This court normally reviews the award of sanctions under Rule 11 for abuse of discretion. Keen v. Ruddy 784 P.2d 653 658 (Alaska 1989). Here however the superior court's sanctions order was improperly entered without factual findings and without a hearing. Where sanctions are to be imposed, courts should, as a matter of sound practice, make a clear record concerning the reason for imposing the particular sanction and the authority relied upon to do so. Failure to do so may require a reversal and remand for entry of such findings. Esch v. Superior Court 577 P.2d 1039 1043 (Alaska 1978). Luedtke should have been given the opportunity to contest the sanction award at a hearing and the superior court should have indicated its reasons for imposing the sanction especially since the amount of the award was significant. *fn5 Thus our normal procedure would be to remand the award of sanctions to the superior court for entry of findings.

We decline to remand in this case however because we find no evidence in the record which could possibly support an entry of sanctions under Rule 11. At the time the superior court ordered the sanctions against Luedtke Alaska Civil Rule 11 was identical to Federal Rule of Civil Procedure 11. It provided in relevant part:

Every pleading motion and other paper of a party represented by an Counsel shall be signed by at least one Counsel of record. . . . The signature of an Counsel or party constitutes a certificate by him that he has read the pleading motion or other paper; that to the best of his knowledge information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension modification or reversal of existing law and that it is not interposed for any improper purpose; such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. . . . If a pleading motion or other paper is signed in violation of this rule Court upon motion or upon its own initiative shall impose upon the person who signed it a represented party or both an appropriate sanction which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleadings motions or other paper including a reasonable Counsel's fee. *fn6

Rule 11 "creates an objective standard of 'reasonableness under the circumstances ' and is intended to be more stringent than a mere 'good faith' formula. " Keen 784 P.2d at 658 (quoting Golden Eagle Distrib. Corp. v. Burroughs Corp. 801 F.2d 1531 1536 (9th Cir. 1986). It is not necessary to show willful misconduct or subjective bad faith in order to impose sanctions. Rather one must inquire whether there was a reasonable basis for the Counsel's signature at the time the paper was submitted. Alaska Fed. Sav. & Loan v. Bernhardt 794 P.2d 579 583 (Alaska 1990).

The sanction awarded was the full amount requested by Nabors to compensate Nabors for filing three documents: an opposition to Luedtke's request for trial a motion in limine regarding remedies and a position memorandum on remand. Nabors claimed that these filings were only necessary because Luedtke adhered to several frivolous arguments on remand. The arguments complained of included Luedtke's claim that he was entitled to reinstatement and back pay as a remedy for his suspension and Luedtke's claim that Nabors' discriminatory treatment of him constituted a violation of the covenant of good faith and fair dealing. Nabors asserts that these arguments were precluded by our prior decision in this case as well as by orders of the superior court. Nabors also argues that Luedtke's pursuit of this case on remand was not for any legitimate purpose because he rejected a settlement offer worth far more than his claim simply to harass Nabors. Nabors asserts that Luedtke purposely delayed the litigation so that he could refile bankruptcy in case he lost.

We disagree. First there is no evidence to support the allegation that Luedtke purposely delayed the litigation so that he could avoid liability by filing bankruptcy. The briefing schedule on all issues was established by the superior court and Luedtke's requests for extensions are supported by uncontroverted affidavits and resulted in a total delay of only a few weeks. Second nothing in our prior decision in this case could be read to preclude Luedtke from arguing that his suspension violated the covenant of good faith and fair dealing because he was treated differently than other employees. on the contrary consideration of such an argument was the express purpose of our remand. Finally Luedtke should not be sanctioned for seeking reinstatement and back pay as remedies for his suspension. Luedtke I never discussed damages for improper suspension. Luedtke had a reasonable basis for seeking these remedies because there is no Alaska case law defining the limits of damages for suspension from employment.

Nabors further argues that the purpose of its motion in limine was to refine the issues on remand so that after the superior court ordered that back pay after November 30 1982 and reinstatement were not possible remedies Luedtke should have ceased to argue for them. We agree that Luedtke might have followed a different course of action such as to petition for review of the superior court's order wait until final judgment to challenge it on appeal or waive the issue. We do not however find his behavior sanctionable. The record reflects that Luedtke's Counsel was engaging in zealous advocacy on behalf of his client not frivolity in continuing to press the issue of remedies. And to the extent that Nabors argues that any argument contrary to Court's order limiting remedies would be frivolous it is incorrect. The trial court always has the power to "revise or reverse interlocutory rulings deemed erroneous. C.J.M. Constr. v. Chandler Plumbing & Heating, 708 P.2d 60, 61 n.1 (Alaska 1985). The doctrine of law of the case" is a matter of judicial policy not law and "merely expresses the practice of courts generally to refuse to reopen what has been decided not a limit to their power." Stepanov v. Gavrilovich 594 P.2d 30 36 (Alaska 1979) (quoting Messenger v. Anderson 225 U.S. 436 444 56 L. Ed. 1152 32 S. Ct. 739 (1912) (opinion of Holmes J.)). Thus the award of sanctions is reversed.


The superior court awarded Nabors $3,500 in Counsel's fees under Alaska Civil Rule 82. Rule 82(a) allows for recovery of Counsel's fees by a "prevailing party." There is no assertion by Nabors that this request for fees covers anything but its work on remand of this case. Since we conclude that Nabors did violate the covenant of good faith and fair dealing in suspending Luedtke Nabors cannot be considered the prevailing party on remand. Thus the award of $3,500 in Counsel's fees under Rule 82 is vacated.


The judgment of the superior court is REVERSED. The case is REMANDED for further proceedings consistent with this opinion.


*fn1 Alaska has adopted this provision of the U.C.C. found at AS 45.02.103(a)(2).

*fn2 See In re Martin Specialty Vehicles 87 Bankr. 752 765-66 (Bankr. D. Mass. 1988) rev'd on other grounds 97 Bankr. 721 729 (D. Mass. 1989); Ledbetter v. Darwin Dobbs Co. 473 So.2d 197 201 (Ala. App. 1985); W. Hawkland Uniform Commercial Code Series SEC. 2-103:02 (1984 & Supp. 1991); J. White & R. Summers Uniform Commercial Code SEC. 6-3 at 286-87 (3d ed. 1988). Contra Richard Short Oil Co. v. Texaco 799 F.2d 415 422 (8th Cir. 1986) (requiring "prohibited motive" for breach under Arkansas law).

*fn3 Because we conclude that Nabors violated the covenant we need not address Luedtke's further argument that the superior court erred in not considering whether Luedtke was treated differently than other employees in similar circumstances. We do note however that the superior court should have addressed this argument. There was evidence that Luedtke was not given the same options after his drug test came up positive as were other employees. Luedtke wished to present additional evidence on this issue on remand. Nabors claims that the superior court did not err in refusing to take additional evidence on differential treatment because that would not be relevant to whether it acted fairly and in good faith. Nabors' position is inconsistent with our earlier cases on good faith and fair dealing. See Jones 779 P.2d at 789 n.6; Rutledge 727 P.2d at 1056.

*fn4 Nabors also requested an award of costs and Counsel's fees under Alaska Civil Rule 95(a). We have never had occasion to review this rule. However an award under Rule 95(a) must be based on a violation of another civil rule. In this case Nabors alleges only that Luedtke violated Rule 11. Thus regardless of whether the award is considered to be sanctions for a direct violation of Rule 11 or costs and Counsel's fees under Rule 95(a) as a result of a violation of Rule 11 this court must review whether a Rule 11 violation occurred.

*fn5 Nabors argues that a hearing was held on the sanctions in this case presumably referring to the superior court's hearing on the merits of Luedtke's claim. To the extent that the issue of sanctions was mentioned at all at that hearing it was raised only briefly by Nabors' Counsel. There is no indication in the record of the trial Court having considered the issue or of Luedtke being given the opportunity to address it. The record indicates that the only notice given Luedtke that the issue of sanctions might be considered at that hearing was mailed by Nabors' Counsel three days before the hearing itself making it untimely. See Alaska R. Civ. P. 77(d).

*fn6 Rule 11 has since been amended to delete the last sentence which had mandated sanctions for a violation of the rule.