California Labor Code section 2802, subdivision (a), requires that an employer “indemnify” an employee for all necessary costs incurred as a direct consequence of the employee’s discharge of employment duties. Does the employer’s duty to indemnify include attorney fees incurred in defending an action brought by the employer, or only in an action instituted by a third party? In a case of first impression, the California Court of Appeal, Fourth Appellate District, Division Three, held this statute does not require an employer to pay the attorney fees incurred in the employee’s successful defense of employer’s action. [Nicholas Laboratories, LLC v. Chen (filed October 12, 2011) 2011 DJDAR 15153.]
Christopher Chen was employed as director of information technology for Nicholas Labs. Nicholas sued Chen primarily for competing against it and misusing its funds. Chen cross-complained for compensatory damages and indemnity, as well as attorney fees. After a bench trial, the Orange County Superior Court entered judgment for Chen on Nicholas’s complaint, and for Nicholas on Chen’s cross-complaint. Chen appealed.
The appellate court found that Chen’s interpretation of section 2802 (that because he was being sued by his employer for his actions as an employee, the statute required that he be indemnified for his attorney fees in successfully defending the lawsuit) conflicts with the common understanding of the word “indemnify”: applying to an obligation to pay the costs incurred in a lawsuit brought by a third party. The court acknowledged that this general rule does not apply if the parties to a contract use the term “indemnity” to include direct liability as well as third party liability or a statute expressly so provides.
In interpreting section 2802, the appellate court found that this case did not fall within the purview of the section. There was nothing to indicate that the Legislature intended to depart from the usual meaning of “indemnify” to address first party disputes. If that were the case, the Legislature could have specifically so provided as it did in the language of Corporations Code section 317, subdivision (b) (not applicable here as it applies to corporations, not to limited liability companies). Lack of such reference can only mean that ordinary rules apply here: that each party pays its own attorney fees and indemnity applies only to defending claims of third parties.
I find it interesting that while the term “indemnity” is commonly meant to apply to third party claims, parties frequently use the same term in their contracts to expressly require payments between the contracting parties for direct claims between them. You would think that the English language would have a more specific term to address this situation.