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Tuesday, July 3, 2012

Nicholas Laboratories v. Chen: Labor Code Does Not Require Employer to Indemnify Employee in Action by Employer

This is an interesting case that I did not get around to blogging last year when it came down: Nicholas Laboratories, LLC v. Chen (10/12/11) 199 Cal.App.4th 1240.

Nicholas Labs employed Chen as its IT director. It filed suit against him, alleging breach of contract and other theories. Chen cross-complained, seeking indemnification for expenses incurred in the defense of the company's action. The company dismissed its action on the eve of trial, and the case went to trial on the cross-action only. The trial court (Orange County Superior, Judge Sheila Fell) entered judgment for the company, finding that it had no obligation to indemnify Chen.

The Court of Appeal affirmed.
[Labor Code] Section 2802 ... requires an employer to indemnify an employee who is sued by third persons for conduct in the course and scope of his or her employment, including paying any judgment entered and attorney's fees and costs incurred in defending the action. [Citations.] As long as the employee is acting within the scope of his or her employment, the right to indemnity is not dependent upon a finding that the underlying action was unfounded.” Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal.App.4th 220, 230.
The Court held that the text of 2802 is unclear as to whether an employer must indemnify an employee for costs incurred in the employer's action against the employee. However, taking into account the larger legal context, including California's default provision that parties pay their own way in litigation, the Court held: "Consideration of this more expansive fabric of the law suggests that any interpretation of section 2802 which would allow the statute to become a unilateral attorney fee statute in litigation between employees and employers would be incompatible with that larger body of law." 199 Cal.App.4th at 1251.

The Court considered several other points that I will not address, but for anyone who is interested, the opinion is available here.


  1. Wouldn't the contract Nicholas Labs was suing on typically have an attorney fees provision? Do you recommend attorney fee provisions in employment contracts? What about arbitration clauses?

  2. That is a good question. The Court addressed contractual indemnification as follows: "Here, the indemnity provision at issue covers NS Holdings and its agents, employees, and other legal representatives. The court found Chen was not an employee or agent of NS Holdings and therefore was not entitled to indemnification." The Court found substantial evidence for the trial court's conclusion and affirmed.

    I don't give advice on these issues one way or another. As a mediator, I just do my best to help people resolve their cases.


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