Lawyer Ralph Cassady
worked for the law firm of Morgan, Lewis & Bockius LLP for 13 months. A few
years later, Rallie Rallis, a client whom Cassady had represented for over 20
years, sued Cassady, Morgan Lewis, and a few other firms at which Cassady had worked
for malpractice by Cassady. Some of the conduct upon which the malpractice suit
was based allegedly occurred while Cassady worked for Morgan Lewis, and some of
the conduct allegedly occurred while Cassady practiced with other law firms.
Cassady spent a wad of
cash—about $280,000—to pay his own attorney’s fees and costs defending the malpractice
action. And he then demanded that Morgan Lewis reimburse him for those legal
expenses. Morgan Lewis refused, but now an appeals court has ruled that Cassady
can take his reimbursement claim to a jury. We’ll tell you why.
Who Has to Pay?
Cassady based his claim
for reimbursement on Labor Code section 2802, which requires employers to
indemnify employees for expenses or losses incurred as a consequence of
performing their job duties. Morgan Lewis asked the court to dismiss the indemnification
claim because Cassady couldn’t prove which portion of his legal fees were
incurred as a result of Cassady’s actions while working at Morgan Lewis.
Cassady countered that Morgan Lewis had to pay the full amount of his legal
expenses, unless Morgan Lewis could come up with a way to apportion the
expenses among the various firms Cassady had worked for. What’s more, Cassady
contended, because Morgan Lewis failed to defend him in the Rallis lawsuit, Morgan
Lewis was on the hook for full reimbursement for all defense costs.
Reimbursement Required
Now a California appeals
court has ruled that Cassady can have his day in court.1 Section 2802, explained
the court, requires an employer to reimburse an employee who is sued by a third
party for conduct in the scope of the employment. This includes reimbursement for
any judgment, plus attorney’s fees and costs.
However, Morgan Lewis
was only responsible for defense costs arising from Cassady’s representation of
client Rallis while Cassady was employed by Morgan Lewis. The court pointed out
that the plain language of section 2802—requiring indemnification only for acts
incurred in direct consequence of the discharge of the employee’s duties—would
be contravened by ordering Morgan Lewis to pay for costs of defense based on alleged
malpractice while Cassady was at other firms. The court said that Cassady had
the burden to prove that the expenses (or a portion of the expenses) were incurred
as a result of Cassady’s employment with Morgan Lewis.
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No Duty to Defend
The court then rejected
Cassady’s argument that Morgan Lewis had to indemnify him for all his defense expenses
because Morgan Lewis failed to defend Cassady in the Rallis lawsuit in the
first place (that is, provide him with a lawyer). The court emphasized that section
2802 does not impose a duty to defend on an employer. Rather, an employer
sometimes can obviate the need to indemnify for attorney’s fees by providing counsel,
but it isn’t required to do so.
Cassady will now have an
opportunity to prove which portion of his expenses defending the Rallis malpractice
suit were attributable to his work while at Morgan Lewis.
Practical Reminder
This decision is a
reminder that you will be required to indemnify an employee for the costs of
defense when the employee is sued in connection with performing their job. The
employee’s right to indemnity is for all “necessary expenditures or losses,”
which include attorney’s fees and related costs. Also, an employee who is
forced to sue you for reimbursement is entitled to recover costs and attorney
fees for that action, too.
You can find the new
case online at www.courtinfo.ca.gov/opinions/.
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1 Cassady v. Morgan,
Lewis & Bockius LLP,
Court of Appeals (Dist. 2) No. B177747, 2006