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July 25, 2014

California Court Decides Employer Had No Obligation To Pay Employee’s Attorney

Mention indemnification to a corporate lawyer, and you’re like to hear about Section 317 of the Corporations Code, the articles of incorporation and bylaws.  But a corporate agent’s indemnification rights are not necessarily cabined by the Corporations Code.  If the agent is an employee, she may have a right to indemnification by her employer pursuant to Labor Code Section 2802, which provides in relevant part:

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.

The statute does not explicitly impose a duty to defend.  Nonetheless, an employee’s retention of counsel may be considered necessary in some circumstances and thereby subject to the employer’s statutory obligation to indemnify.

Earlier this week, the Third District Court of Appeal decided the question of whether an employee was entitled to indemnification for his attorney’s fees and costs when his employer had arranged through its insurer to provide a different attorney free of charge. Carter v. Entercom Sacramento, LLC, 2013 Cal. App. LEXIS 701 (Aug. 3, 2013).  The employee worked for a radio station that had conducted a “Hold Your Wee for a Wii” contest.  Tragically, one of the contestants, a 28 year old mother of three, succumbed from polydipsia.  See Woman Dies After Water-Drinking Contest.  The woman’s husband sued the radio station and the employee, among others.  The District Attorney also opened a criminal investigation.  Although the employer’s insurance company accepted the employee’s tender of defense, the employee continued with his own counsel who ended up billing for over $800,000 in fees and costs.  The trial court found that none of the fees and costs incurred after the insurer had appointed counsel were necessary expenditures under Section 2802.

On appeal, the employee argued that he was entitled to a counsel of his own choosing and invoked Civil Code Section 2778  (See How To Interpret An Indemnity Agreement andShould Your Articles of Incorporation Include A Choice of Law Provision?).  Justice Ronald B. Robie, writing for the court, held that even under Section 2778 an indemnitee doesn’t have an absolute right to conduct his own defense at the expense of his indemnitor.

The employee also argued that his legal fees were necessary because the plaintiff had sought punitive damages and a criminal investigation was opened.  The Court of Appeal held that necessity was a question of fact and reviewed the trial court’s decision under the “substantial evidence” standard.  With respect to punitive damages, the Court found that the employee had pointed to no reason why it would have been in the insurer’s interest to pursue a theory that would have subjected the employee to punitive damages and that the insurer had an interest in vigorously defending the compensatory damages claim.  As to the criminal investigation, the Court found that the employee “points to absolutely nothing in his offer of proof that has any tendency to show that he needed representation in connection with the criminal investigation”.  The court specifically noted that the employee “points to no evidence of what that investigation entailed, no evidence that he was ever contacted or interviewed in the course of that investigation, and no evidence that the attorney he hired ever did a single thing connected to the criminal investigation”.  In fact, the District Attorney had announced that it would not file criminal charges less than two months after the insurance company had accepted the employee’s tender of defense.  See No Charges Will Be Filed Against Radio Station in Deadly Water-Drinking Contest.

In 2009, a Sacramento jury awarded over $16 million in damages against the employer. See Jury Rules Against Radio Station After Water-Drinking Contest Kills Calif. Mom.

Was Junipero Serra Really Catalan?

Earlier this week, Governor Jerry Brown issued this proclamation declaring September, 2013, as California Wine Month in the State of California.  In reading the proclamation, I was surprised to see the Governor describe friar Junípero Serra as a ”Catalan”.  As every California fourth grader should know,  Junípero Serra was the founder of the first of California’s 21 missions (San Diego).  He was from Majorca, an island in the Mediterranean sea, not Catalonia, a region in the northeast corner of Spain.

© 2010-2014 Allen Matkins Leck Gamble Mallory & Natsis LLP

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About this Author

Keith Paul Bishop, Business Attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients on compliance,...

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