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The Corporations Code Can Make Suing Your Former Employees Costly

Supreme Court Justice Felix Frankfurter once told the following story about Oliver Wendell Holmes, Jr. and Ralph Waldo Emerson.   When Holmes at the urging of his father visited the great author, Emerson asked "Young man, have you read Plato?"  When Holmes said no, Emerson said:

You must. You must read Plato.  But you must hold him at arm's length and say, "Plato, you have delighted and edified mankind for two thousand years.  What have you to say to me?"

Holmes dutifully completed the assigned reading "and then wrote a piece doing in Mr. Plato".  Some time later, Holmes and Emerson met again and Emerson had this to say about Holmes' paper: "Holmes, when you strike at a king, you must kill him."  Felix Frankfurter Reminisces (1960) p. 58-59.

According to a recent unpublished decision by the Fourth District Court of Appeal, the same principle holds for lawsuits by corporate employers against their employees.  Parcell Steel Co., Inc. v. Sauer, Cal. Dist. Ct. Appeal No. G043444 (Feb. 12, 2012) involved an employer who sued several former employees after they quit and went to work for a company owned by one of the employees.  The employer contended that the employees had breached duties owed to it while still employed, misused confidential information to compete, and interfered with ongoing economic relationships with clients.  After a trial, the jury returned special verdicts finding in the defendants' favor on all causes of action and the court granted the defendants' motions for costs and attorneys' fees. 

On appeal, the employer argued that the trial court had erred in awarding attorneys' fees under Corporations Code Section 317.  In upholding the trial court's award, the Court of Appeal noted that Section 317(d) provides that an agent of a corporation must be indemnified against expenses actually and reasonably incurred to the extent that the agent has been successful on the merits in defense of any proceeding by or in the right of the corporation (Section 317(c)).  The appellate court further noted that indemnification under Section 317 is not limited to third party lawsuits.  The court did note that a successful defendant moving for attorneys' fees under Section 317(d) must establish that the alleged acts for which they were made parties were performed in connection with their corporate functions, and not with respect to purely personal matters. 

The decision was costly for the employer, the trial court awarded the employees attorneys fees and costs totaling hundreds of thousands of dollars.  The Court of Appeal then added the costs and fees incurred on appeal.

Readers may recall that in a decision last year, the Court of Appeals held that Labor Code Section 2802 does not require an employer to reimburse its employee for attorneys' fees incurred in the employee's successful defense of the employer's action against the employee.  Nicholas Laboratories, LLC v. Chen, 199 Cal. App. 4th 1240 (2011).  See Court of Appeal Holds That Employee Indemnification Statute Does Not Reach “First Party” Lawsuits for why Section 317 was not applied in that case. 

The Parcell Steel case is unpublished and the California rules of court generally prohibit courts and parties from citing or relying on unpublished opinions.  Nonetheless, it may serve as a cautionary tale to corporate employers - if you sue your former employees based on allegations that they breached duties owed to the corporation while carrying out their specific duties as employees, you had better win.

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
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