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PERSONAL and CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE General Counsel Re: Indemnification of Employee Attorney Fees Dear : You have asked for information about an employer’s obligation to defend or indemnify a former employee for attorney’s fees incurred by the employee in responding to disciplinary charges brought by a state licensing agency. We previously sent you a copy of the March 3, 2000 decision of the California First District Court of Appeal in Jacobus v. Krambo Corporation. Your inquiry raises two issues. (1) Under California law, must an employer defendan employee in an action brought against that employee, or is the obligation simply one to indemnify the employee for his or her defense costs? (2) Under what circumstances must an employer defend or indemnify an employee or former employee? Analysis of the issue begins with California Labor Code section 2802, which provides: An employer shall indemnify his employee for all that the employee necessarily expends or loses in direct consequence of the discharge of his duties as such, or of his obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying such directions, believed them to be unlawful. 1. Does the employer have a duty to defend? In Douglas v. Los Angeles Herald-Examiner(1975) 50 Cal.App.3d 449, the court held under Section 2802 an employer may have a duty not just to indemnify but to defendan employee who is sued by a third party for acts arising in the scope of the employee’s employment. In Douglas, a newspaper reporter defended an invasion of privacy suit brought against him by the subject of several news articles. After obtaining dismissal of the third party action, the reporter sued his employer for indemnification of the costs and fees the reporter had incurred in defending the third party’s suit. The Douglascourt found, “We have no doubt that Labor Code section 2802 requires an employer to defend or indemnifyan employee who is sued by third persons for conduct in the course and scope of his employment.” 50 Cal.App.3d at 461 (emphasis supplied). The Fourth District Court of Appeal’s decision in Grissom v. Von’s Companies, Inc.(1991) 1 Cal.App.4th 52, found the Second District’s Douglasdecision overstated the requirements of Section 2802. In Grissom, the plaintiff, a truck driver for Von’s, sued persons he alleged were responsible for his injuries in an accident; the defendants in that matter brought cross-claims against the plaintiff. The plaintiff demanded Von’s defend him from the cross-claims. Von’s provided counsel who happened to be the same lawyers defending Von’s against the plaintiff’s workers’ compensation claim arising out of the accident. When plaintiff learned his law firm represented his employer in his workers’ comp. claim, he fired that firm and demanded that Von’s provide him “independent counsel.” The Grissomcourt found the employer’s duty under Section 2802 is to indemnify the employee for what the employee necessarily expends. The court found the statute to include a reasonableness factor; there may be no duty to indemnify where the employer provides competent counsel at no cost to the employee. In criticizing Douglas, the Grissomcourt declared: The statement in Douglas, however, is too broad. 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 indemnifythe employee for all that the employee necessarily expendsin direct consequence of the discharge of the employee’s duties. 1 Cal.App.4th at 57 (emphases in original). [Note that Grissomdoes not address the question of what activity falls within the scope of employment to trigger the Section 2802 indemnification duty.] The court’s decision in Jacobusprovides some clarification of an employer’s asserted obligation to defend. Thus: Section 2802 requires an employer to indemnify an employee for all expenses and losses incurred “in direct consequence of the discharge of his duties.” The statute requires the employer not only to pay any judgment entered against an employee for conduct arising out of his employment but also to defend an employee who is sued for such conduct. Unlike an insurer, the employer need not defend whenever there is a mere potential for liability. However, if the employer elects to run a risk and refuses to defend, the employer must indemnify the employee for his attorney fees and costs in defending the underlying action if the employee was sued for acts within the scope of his employment. Slip op. at p. 3 ( citing Douglas) (emphasis supplied). The California Supreme Court has not addressed this issue. The older case, Douglas, states that a duty to defend as well as indemnify exists. The more recent cases, Grissomand Jacobus, find the employer has an election: it may defend, but it must indemnify an employee’s costs of defending suits arising out of acts in the scope of the employee’s employment. 2. Under what circumstances must an employer defend or indemnify? In Douglas, the court made no finding as to whether the reporter acted in the scope of employment, but remanded that issue to the trial court. The Douglascourt noted: the right of recovery is derived from a statute rather than an insurance policy. Since the statutory right is based upon a state of fact (if he is sued in direct consequence of the discharge of his duties as such, or of his obedience to the directions of the employer etc.) it must logically follow that if the statutorily defined state of facts do not exist, then the statutory rights do not arise. Consequently an employer does not have a duty to defend an employee who is sued solely because he was off on a frolic of his own not within the scope of his employment and not in obedience to the directions of his employer. 50 Cal.App.3d at 464. The Second District’s decision in Devereaux v. Latham & Watkins(1995) 32 Cal.App.4th 1571, 1583, provides more guidance. The court there applied the principle of respondeat superiorto determine whether activity in the course and scope of employment triggered the indemnification duty: the test of whether an employee’s conduct is within the scope of the employment has been defined for purposes of respondeat superior as whether that conduct was so unusual or startling that it would be unfair to include the loss as a cost of the employer’s doing business. [citation omitted] … Labor Code section 2802 requires indemnity for an employee’s legal expenses only when the expenses are related to employee conduct within the course and scope of his or her employment. 32 Cal.App.4th at 1583-1584. In Devereaux, the court found a litigation paralegal who had improperly removed documents on termination of her employment by the law firm had not, in so doing, acted within the scope of her employment. Consequently, the law firm had no obligation to indemnify her for expenses she had incurred in testifying against the firm in collateral lawsuits. The Jacobuscourt applied the same respondeat superioranalysis, and noted: An employer is not vicariously liable for an employee’s misconduct if the employee substantially deviates from his course of duty so as to amount to a complete departure. [citations]. However, acts that are necessary to the comfort, convenience, health, and welfare of the employee while at work, though personal and not acts of service, do not take the employee outside the scope of his employment. [citations]. Moreover, an employee’s conduct may fall within the scope of his employment even though the act may violate the employer’s direct orders or policies. ( citing Mary M. v. City of Los Angeles(1991) 54 Cal.3d 202, 209, where a police officer raped a woman he had stopped for a traffic violation; Mary M.may be distinguishable because it involved a police officer acting under authority of law.) Slip op. at p. 5. We have found no California case under Labor Code Section 2802 addressing an employee’s request for defense or indemnification of attorney’s fees in responding to disciplinary action by a state licensing board. Nor have we located such a case in the parallel Tort Claims Act section requiring public entities to defend or indemnify public employees in suits against them arising from acts in their employment. See, e.g., Stone v. Regents of the University of California(1999) 00 Calif. Daily Op. Svc. 477, ___ Cal.App.4th ___, construing Calif. Gov’t Code �� 995.2 and 996.4 [no obligation to defend or indemnify public employee for acts outside scope of employment]. The courts construing the duty imposed by Section 2802 apply the respondeat superiorprinciple to determine whether the employee’s loss arose in the scope of employment. Respondeat superioris a doctrine whereby one injured by an employee’s negligence, or even by intentional or malicious torts, may obtain recovery from the employee’s employer. See generally Farmers Ins. Group v. Santa Clara County(1995) 11 Cal.4th 992, 1003. A licensing agency’s disciplinary proceeding against an individual license holder does not strike us as an action whereby an injured person seeks to recover for a loss occasioned by an employee’s negligence. Nevertheless, we cannot accurately apply the principles of the cases construing Section 2802 to the situation you described without knowing more specifically the nature of the disciplinary charges brought by the licensing agency. We trust the foregoing information is helpful to you. Please contact us with any questions or for further information. Very truly yours, JACKSON, LEWIS, SCHNITZLER & KRUPMAN Robert M. Pattison

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