A California appellate court has carved out an exception to the general rule that employers in California have a duty to reimburse legal expenses of employees whenever they are sued over conduct engaged in during the course and scope of their employment. No such duty exists, the court held, when the employer sues the employee—even if the employee is ultimately successful in defending the case.

In Nicholas Laboratories LLC v. Christopher Chen, the Fourth Appellate Division of the California Court of Appeal rejected a former employee’s argument he was entitled to an award of attorney fees under Section 2802 of the California Labor Code.

The court looked to the “more expansive fabric of the law,” noting that fee awards to prevailing defendants are either barred or discouraged under numerous provisions of statutory and common law. As a result, the court said, “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.”

Nicholas Laboratories sued Christopher Chen, its former IT Director, alleging various claims, including that he had engaged in a competing business during his employment and had stolen or misused company property. Chen filed a cross-complaint seeking indemnification of attorney fees under Section 2802. On the eve of trial, Nicholas Laboratories agreed to dismiss its complaint if Chen would submit his cross-complaint for decision by the court. The trial judge rejected each of Chen’s arguments, holding that Section 2802 does not apply to employer-employee disputes. Chen appealed.

In upholding the trial court’s decision, the Court of Appeal looked to the common meaning of the term “indemnify,” as used in the context of litigation. A duty of indemnification, the court found, usually refers to “an obligation to pay for judgments suffered and/or expenses incurred in a lawsuit brought by a third party against the indemnitee, not a one-sided attorney fee provision in a dispute between the indemnitor and the indemnitee.”

The Court of Appeal concluded that if the California Legislature had intended to depart from the standard meaning of the word “indemnify,” it would have done so. As a result, the appellate panel said, “disputes between employers and employees are subject to the ordinary rules applying to the recovery of attorneys fees in California litigation,” meaning that parties are to pay their own attorney fees unless an applicable statute or contract specifically provides otherwise.

Chen's lawyer argued that without indemnification, some employers may file frivolous lawsuits against former employees for the purposes of harassment or intimidation. But the Court of Appeal said “this concern is true of every lawsuit,” and that the law already provides remedies to combat such bad faith litigation tactics, e.g., motions for sanctions or actions for malicious prosecution. “That these tools are often difficult to utilize does not militate in favor of stretching the reach of Section 2802.8,” the court stated.

Although the Nicholas Laboratories decision will have no impact on a California employer's duty to indemnify employees for litigation costs arising out of claims brought by third parties, it will limit the scope of Section 2802 so that California employers generally will not be obligated to indemnify those costs if they sue an employee.