Court of Appeal: No Duty to Pay for Defendant Employee's Choice of Lawyer

Several years ago, a radio station conducted a contest that involved consuming water. The one who "held it in" the longest would win a prize.  Unfortunately, one contestant died from drinking too much.

Anyway, the contestant's representative sued the radio station as well as Matt Carter, an individual who helped with the contest.  Carter hired a lawyer and tendered his defense to his  employer's insurance company. The insurance company appointed its own defense counsel to represent Carter.  ]
Carter refused to change lawyers and sued his employer for indemnification under Labor Code Section 2802. Carter sought over $800,000 in attorney's fees for his attorneys' representation.

The insurance company settled with the plaintiff on behalf of all individuals.  The plaintiff recovered millions against the radio station.

Carter's indemnity claim went to trial to the court. The court decided that Carter's attorney's fees were not covered under Labor Code Section 2802, except for about $1980 he spent before the insurance company offered counsel.

The Court of Appeal clarified what Labor Code Section 2802 requires employers to do when individual employees are sued for actions undertaken within the course and scope of employment:

Subdivision (a) of section 2802 provides that “[a]n employer shall indemnify his  or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”
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As the court explained in Grissom v. Vons Companies,  Inc. (1991) 1 Cal.App.4th 52, “Section 2802 does not say that an employer must ‘defend’ an employee. The word ‘defend’ does not appear in section 2802. The statute merely requires the employer to indemnify the employee for all that the employee necessarily expends in direct consequence of the discharge of the employee’s duties. The focus of the actual words of the statute is on the employee’s expenditure. If that expenditure is necessarily in direct consequence of the discharge of the employee’s duties, then the employer must ‘indemnify’ (i.e., reimburse) the employee.” (Grissom, at pp. 57-58, fn. omitted; see also Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal.App.4th 220, 236 [“Section 2802 does not impose a duty to defend upon an employer”].)

The Court emphasized that an employer that does not offer to pay for counsel up front will be responsible for necessary expenses the employee incurs.  In this case, though, the employer did make that offer.

The Court rejected Carter's claim that he had a "right" to choose his own counsel.  True enough, said the court. In fact, Carter did so. The issue here, though, was whether the employer had to pay for that right.  The Court of Appeal also rejected Carter's argument that the insurance company's lawyer was insufficient because of the potential for punitive damages liability or criminal charges against Carter.

So, employers (and their carriers) may appoint a lawyer to defend an employee involved in employment litigation.  It may be that conflicts of interest or competence issues will cause disputes between employees and employers over whether the appointment is adequate to conduct the defense.  If representation is not adequate, employees likely can request different counsel or seek their own and argue that the related expense is "necessary."

This case is Carter v. Entercom Sacramento LLC and the opinion is here.

Employer Who Sues Ex-Employee Does Not Have to "Indemnify" Ex-Employee for His Attorney Fees

Nicholas Laboratories, LLC sued its former employee, Chen.  Ultimately, the parties resolved the case. Chen sought reimbursement of his fees under Labor Code Section 2802.

Section 2802, subdivision (a), states: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful."
Chen's claim was that the fees he incurred defending himsel was a business expense that arose because of my work for my former employer.

No sale.

Thus, we conclude the attorney fees incurred by Chen do not fall within the domain of section 2802. We are not persuaded that the Legislature, in drafting section 2802, intended to depart from the usual meaning of the word "indemnify" to address "first party" disputes between employers and employees. The Legislature could have specifically provided in section 2802 that attorney fees incurred defending an action by the employer were recoverable by a prevailing employee. The fact that the Legislature did not do so suggests disputes between employers and employees are subject to the ordinary rules applying to the recovery of attorney fees in California litigation.

The court also decided Corporations Code Section 317, containing another indeminification provision, does not apply to LLCs.

The case is Nichols Laboratories, LLC v. Chen and the opinion is here.

DGV